ISL Basth)uploy - ubplasatzen foo Reushee sl pot dae ectiorn: - deed oof AaYeatigement cumbaiminy asSacdument ul peopee ty to Erustees - ahether deed in teukh one o, arrangement - property detined in deed to anclude arter-acaquitéed property - whether contrary to or nnconsistent with ferms of Bankruptcy Act - joint debtors - provision in deed purportina tu apporkion monevs otherwise than un accordance with s.110 otf the Act - whether statutory provision prevails Bankruptcy Act 1966 ss.110, 134(4), 187(1), 188, 190 RE: RONALD MUIRSON LEASK and BOZIDAR TRUMBICH - Debtors EX PARTE: FETER MICHAEL MELSOM and STANLEY FREDERIC ROBSON Trustees of the property of Ronald Muirson Leask and Bozidar Trumbich, Debtors - Applicants No. 107 of 1982% TOOHEY J. PERTH 13 MAY 1986 IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA No. 107 of 1982X% ~we ewer RE: RONALD MUIRSON LEASK and BOZIDAR TRUMBICH Debtors EX PARTE: PETER MICHAEL MELSOM and STANLEY FREDERIC ROBSON Trustees of the property of Ronald Muirson Leask and Bozidar Trumbich, Debtors Applicants MINUTE OF ORDER JUDGE MAKING ORDER: TOOHEY J. DATE OF ORDER: 13 May 1986 WHERE MADE: Perth THE COURT ORDERS THAT the answers to the questions asked in the application filed 13 January 1986 are as follows: 1. Question Does the sum of $8,298.91 being the net proceeds of the sale effected by the Applicants of Security Telephone Lines comprise part of the assets of the joint estate of Ronald Muirson Leask and Bozidar Trumbich. Answer Yes. Question Can the monevs contributed by the Debtors pursuant to the provision of Clause 3 of the Deeds of Arrangement pursuant to Part X of the Act dated the 20th of October 1982 ("the Deeds of Arrangement") be distributed to both the joint and several creditors of the Debtors in the proportions provided in Clause 6 of the said Deed of Arrangement made between the joint Debtors on the one part and the Applicants on the other part (as incorporated in the separate Deeds of Arrangement) notwithstanding that of the total monies held of $36,890.91 these moneys were contributed in the following manner:- Separate contribution by Ronald Muirson Leask $ 4,550.00 Separate contribution by Bozidar Trumbich $ 2,600.00 Profits from joint trading Realisation of joint estate assets $8,298.91 (Honeywell) Book Debts (pre-deed) $7,080.00 Witness Fee $ 12.00 $15,390.91 TOTAL $36,890.91 Answer Moneys contributed by the debtors from their joint estate must be applied in the first instance 1n payment of their joint debts. Moneys contributed by the debtor Mr. Leask from his separate estate must be applied in the first instance in payment of his separate debts. If, in either case, there a surplus, the moneys are to be applied in accordance sub-s.110(2) of the Bankruptcy Act 1966. Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. with IN THE FEDERAL COURT ! OF AUSTRALIA ! GENERAL DIVISION ) No. 107 of 1982% BANKRUPTCY DISTRICT ) OF THE STATE OF } , WESTERN AUSTRALIA RE: RONALD MUIRSON LEASK and BO4IDAR. TRUMBICH Debtors EX PARTE: PETER MICHAEL MELSOM and STANLEY FREDERIC ROBSON Trustees of the property of Ronald Muirson Leask and Bozidar Trumbich,. Debtors Applicants CORAM: TOOHEY J. 13 May 1986 REASONS FOR JUDGMENT Sub-section 134(4) of the Bankruptcy Act 1966 enables a trustee to apply to the Court for directions in respect of a matter arising in connection with the administration of the estate. Peter Michael Melsom and Stanley Frederic Robson are the trustees of a deed of arrangement relating to the joint property of Ronald Muirson Leask and Bozidar Trumbich and of a similar deed relating to the separate property of Mr. Leask. There is in existence a deed of arrangement relating to the separate property of Mr. Trumbich. But there was no relevant decision of a meeting of creditors requiring such a deed and it may be disregarded for the purposes of these proceedings. The trustees seek directions in regard to matters arising out of their trusteeships. "THAT RONALD MUIRSON LEASK, Debtor, and BOZIDAR TRUMBICH,. Debtor, execute a Deed of Arrangement under Part X of the Bankruptcy Act in favour of a Trustee or Trustees to be appointed". There was a further resolution that Mr. Leask execute a deed of arrangement, in respect of his separate estate. The two deeds of arrangement were entered into on 20 October 1982 pursuant to Part X of the Bankruptcy Act. One deed was between Messrs. Leask and Trumbich on the one hand and Messrs. Melsom and Robson on the other. The other deed was between Mr. Leask on the one hand and Messrs. Melsom and Robson on the other. Each deed conveys and assigns to the trustees all the divisible property of the debtors or debtor and that term is expressed to mean and include "all property that belonged to the Debtors both jointly and separately at the date of the execution of this deed and also all property acquired by the Debtors after the execution and during the operation of this deed ...". By cl1.8, each deed is expressed to operate for a period of two years unless terminated earlier. The first question asked of the Court by the trustees arises in this way. After 20 October 1982, but during the period of operation of the deeds, the debtors, as part of the security business they conducted, contracted with various persons for the supply of direct security telephone land lines. Under the supervision of the trustees, those land lines were sold at prices ta) which produced bo the trustees a sum of 38,238.91, This sincluded an amount of $674.49 relating to a land line which was held bv the debtors before 20 October 1982 and about which there is no issue. But, as to the balance. the trustees ask whether the proceeds of sale "comprise part of the assets of the 1oint estate of Ronald Muirson Leask and Bozidar Trumbich". Put another way, the question is whether the assets sold fell within the terms of the deed of arrangement executed by the debtors jointly. If they did so fall, a question then arises as to whether the deed might lawfully operate in this way. ,Counsel for the trustees submitted that the deed operated according to its tenor. Counsel for each of the debtors submitted that property acquired after 20 December 1982 could not form part of the debtors' joint estate. Nevertheless they were agreeable to a meeting of creditors being called at which the debtors would offer to contribute the proceeds of the sale of the land lines, so long as such a course was thought to be permissible by the Court. There is no doubt that, if the deed executed by the joint debtors operates according to its tenor, the money produced by the sale of the land lines forms part of the joint assets of the debtors. But the question is - having reqard to the terms of the Bankruptcy Act, can the deed effectively vest in the trustees assets acquired after the execution of the deed? 4. The term "divisible property" is defined by sub-5.187(1) ef the Act, in relation toa deed of assiaqnment, to mean 'the property, other than property that was acquired by, or devolved on. the debtor on or after the day on which he executed the deed, that would be divisible amongst his creditors under Part VI if he had become a bankrupt on that day". Section 116 of the Act identifies. as property divisible amonast the creditors of a bankrupt. "(a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him, or has devolved or devolves on him, after the commencement of the bankruptcy and before his discharae",. The property thus identified is qualified, in the case of a deed of assianment, by the exclusion in the definition of "divisible property" in sub-s.187(1) of after-acquired property. But the trustees arque that, in the case of a deed of arrangement, no such qualification exists and creditor and debtor may make an arrangement which includes the assianment of after-acquired property. As a step to resolving that arqument, it is necessary to determine whether the relevant deed is in truth a deed of arrangement and not a deed of assignment. Sub-section 187(1) defines "deed of assignment" to mean "a deed by which a debtor assigns all his divisible property for the benefit of his creditors". The same sub-section defines "deed of arrangement" to mean "a deed (not being a deed of assiaqnment mn »' Peon rar the ucranovement af the artaics of a debtar with a view to the payment, in whole or in part, of his debts". In my view, notwithstanding -hat the deed executed by the debtors purported to assian property to the trustees, 1t was a deed of arrangement and not a deed of assianment. That conclusion 1s supported by the tudqment of Barwick C.J. in Gee v. Schmutter (1970-1971) 123 C.L.R. 503, a audament concurred in by the other members of the court, McTiernan and Windever JJ. At p.509 Barwick C.J. commented: "A deed of assignment to satisfy the terms of the Act must contain an assianment to a trustee of the debtor's divisible property to be held upon trust to be dealt with un accordance with Pt K of the Act. But though a deed of assianment must contain such a transfer of the divisible property, I find no provision in the Act which provides that a deed of arrangement may not be so regarded if it contains an assignment of the debtor's divisible property. Indeed a close examination of Pt X rather suggests that the Act contemplates that a deed of arranagement may deal with the divisible property and contain an assignment of it". The deed under consideration in the present case does not, in terms, convey and assign to the trustees property of the debtors for the benefit of the creditors. But this is implicit when the deed is read in its entirety. And, of course, the deed assigns more than "divisible property" as defined in sub-s.187(1), for it includes after-acquired property. The deed is one of arrangement rather than one of assianment, not only because of what it assiaqns but also because it contemplates that the debtors continue to operate their business, that they make monthly contributions in repayment of their debts and that. so lona as repayments are made, the trustees will postpone the realization of the duvisiole prorerty. The deed also provides that, upon repavment of the debts and expenses of administration. anv property then remaining 15 ta be re-assiqned to the debtors. It does not purport to release the debtors from their debts - see sub-s.234(1) and cf. sub-s.230(1) in the case of deeds of assianment. The position of after-acquired property under a deed of arrangement has been mentioned in several decisions but in none to which I was referred or which I have been able to find has there been any close consideration of the matter. In Re Marshall (1973) 2 A.L.R. 172 at p.191 Sweeney J. said: "Tt has been clearly laid down that a deed of arrangement may validly qive creditors access both to the divisible property within the meaning of Pt X and to the continuing efforts of the debtor. It has not been held that a deed of arrangement may validly dive creditors access to what is expressly denied to them by the Act under a deed of assianment, namely, property acquired after the date of the deed and. in my opinion, it would be wrona to do so". In Re Venetoulis (1976) 13 A.L.R. 625 at p.633, Riley J. referred to the remarks of Sweeney J., adding without elaboration, "I respectfully agree with that view". However, a different view had been taken by the Supreme Court of Queensland in Re Beard's Deed of Arrangement £19701 Qd.R. 129. At p.139 Hanger J., speaking of a deed of arrangement that assianed Che debtcer at estate anecludina their atter-acquired property. said: "In view of the wide meaning to be attributed to the word 'arrangement', the document appears to be a deed of arrangement within the definition in s.187. It is true that it contains provisions which go beyond giving the trustee property of the debtors which would be divisible amonast creditors in bankruptcy. But there 1S no provision of the Act which specifically prohibits a debtor from agreeing that this shall be so. Nor do I find it difficult to envisage a situation in which it is so much to the advantage of the debtor to avoid bankruptcy that he is prepared to concede to creditors more than they could have obtained from him on bankruptcy". Referring to this conflict of authority, Irlicht, Assignments, Arrangements and Compositions by Debtors 2nd ed. para.503 comments "This most important matter has to await a euling of an appellate court". Such a ruling is desirable but [I must decide the matter before me. With reluctance, having regard to the experience of Sweeney J. and Riley J. in these matters, I am of opinion that rT should not follow the views expressed in Re Marshall and Re Venetoulis. The path which has led me to the conclusion that a deed of arrangement may include after-acquired property may be described in this way. Section 188 allows a debtor who desires that his affairs be dealt with under Part X to sign an authority authorizing a reqistered trustee to call a meeting of creditors and to take over control of his property. By s.189, the effect of an authority to a reaistered trustee is that the property of the debtor becomes subject to control under Division 2 of Part X and continues to be so subject until inter alia a deed of assignment or deed of [pa] arcranvement 1¢ oxcouted. Suo-sectiran 190°5) defines "debtor 5s property", om relation to a debtor wha has aiven an authoritv under s.188. ta mean the property of the debtor that would be divisible amongst his creditors under Part VI. However the sub-section continues: -.. but. if a deed of assianment or deed of arrangement is executed by him in pursuance of a resolution of a meeting of creditors called in pursuance of the authority ... does not include property that is acquired by, or devolves on, him on or after the day on which he executes the deed ...". It is arquable that sub-s.190(5) points to the limitation of property that may be included in a deed of assiaqnment or deed of arrangement. But the definition is expressed to be for the purposes of s.190 and is qiven no wider operation. Furthermore control under Division 2 ceases once inter alia a deed of arrangement is executed (sub-s.189(1)). Once a meeting of creditors is called, s.204 determines what the creditors may resolve. If they require the debtor to execute a deed of assianment, the definitions in sub-s.187(1) ensure that the property assianed does not include after-acquired property. "Divisible property" is given a specific meaning, but only in relation to deeds of assignment. If the creditors require the debtor to execute a deed of arrangement, that limitation and that specific meaning have no application. Sub-section 204(2) empowers a special resolution requiring a debtor to execute a deed of arrangement to "specify provisions to be included in the deed". It 1s true that the sub-section is expressed to operate "subject to this Act". But I can find nothing in the Act excluding after-acauired property from a deed of arrangement; nor can [ find anvthing in the Act inconsistent with such a provision, The Clyne Report (Report of the Committee Appointed by the Attorney-General of the Commonwealth to Review the Bankruptcy Law of the Commonwealth, 1962) speaks of a deed of assianment as "in substance, a private bankruptcy" (para.327). But, as to deeds of arrangement, the report comments: " 328. Because of the varying nature of the provisions that may be included in a deed of arrangement, the Committee does not think that any attempt should be made in the legislation to prescribe the form of such a deed." (para.328). It may be thought curious that the divisible property in relation to a deed of assignment is confined to the property of the debtor at the time he executed the deed but is not so confined in the case of a deed of arrangement though that deed may contain within it an assianment. But this, I think, is a consequence of the latitude that the legislature has conferred upon creditors and debtors who resolve their situation by a deed of arrangement. That 1s not to say that there are no constraints upon a deed of arrangement. Its provisions must not "subordinate, override or neutralize, any provision of the Act". See Lukin J. in Re Alam's Deed of Arrangement (1932) 4 A.B.C. 98 at 99; also Re Clonan (1963) 20 A.B.C. 245 at 248-249. In the course of his judgment in Gee v. Schmutter, Barwick C.J. commented at p.510: 10. "T am unable to see any fundamental reason, derived from the Act or any policy 1t expresses. why a deed of arrangement may not contain an assiaqnment of the divisible property of the debtor. Certainly, it does not seem to have been thought under earlier leqislation that there was an incompatability with, or opposition to, principle in the presence of such an assignment in a deed of arrangement: see, for example, Re Galvin (1952) 16 A.B.C. 38, at p.45." Neither Gee v. Schmutter nor Re Galvin was directly concerned with an assignment of after-acquired property. But it is of some importance that in Re Galvin at p.45 (the page referred to by Barwick C.J.), Clyne J. said: "I can see no objection to a debtor entering into a deed of arrangement by which he assigns, for the benefit of his creditors not only the property to which he is entitled, but also property to which he may at some future date become entitled". Nothing was said in Gee v. Schmutter to cast any doubt on that proposition, though Clyne J. was dealing with the Bankruptcy Act 1924, s.192 of which dealt in specific terms with the conditions with which deeds of arrangement must comply. Again, although not directly in point, reference should be made to In re Croom [1891] 1 Ch. 695, a case dealing with a scheme of arrangement under the English Bankruptcy Act 1883. Kekewich J. held that the scheme in question did not include after-acquired property of the debtor. But the question was one of construction of the deed itself and at p.705 his Honour commented: "... and it certainly is my view, on studying the Act for this purpose, that unless the creditors stipulate and the debtor assents, with the approval of the Court, that after-acquired property shall be brought in, ll. after-acquired property 1s not brought un. That contract may be made: 1f made it 1s unobiectionable and may be enforced: but if not - if there is no such provision - then what the debtor has and what he contracts to make over to the creditors is the same thing, and this is what the trustee takes." If I am wrong in the view I have taken, it does not follow that -he deed executed by the debtors is void by reason of the reference to after-acquired property. See Gee v. Schmutter at p.512. In any event s.222 of the Act qives the Court wide powers to declare a deed to be void or not void. I have not been asked to exercise those powers. Thus, the answer to the first question asked is that the proceeds of sale of the telephone land lines, other than the proceeds of the sale of the land line held by the debtors hefore 20 October 1982, comprise part of the assets of the joint estate of Ronald Muirson Leask and Bozidar Trumbich. The second question arises by reason of cl.6 of the deed of arrangement. That clause reads: "6. The Trustees shall apportion the moneys received by them pursuant to this Deed between each respective separate estate of the Debtors and the joint estate of the Debtors. The basis of apportionment as aforesaid shall be the ratio between the quantum in value of admitted proofs of debt in the joint estate and the quantum of value of the admitted proofs of debt in each respective separate estate of the Debtors. Save as aforesaid the Trustees shall apply the moneys received by them pursuant to this deed in making payment in the order prescribed by Sections 108-114 of the Act as modified by Section 237(2) thereof." While the trustees have made distributions in accordance with cl.6, they are concerned as to their justification for doing so, having regard to s.110 of the Act which reads: 12. " 116. (¢1) In the case of joint debtors, whether partners or not, the joint estate shall be applied in the first instance 1n payment of their joint debts, and the separate estate of each joint debtor shall be applied in the first instance in payment of his separate debts. (2) If there is a surplus in the case of anv of the separate estates, it shall be dealt with as part of the joint estate and if there 1s a surplus in the case of the joint estate, it shall be dealt with as part of the respective separate estates in proportion to the right and interest of each joint debtor in the joint estate." Counsel for the trustees and counsel for each of the debturs were in agreement that s.110 must prevail so that the joint estate of the debtors must be applied in the first instance in payment of their joint debts. It is only if there is a surplus that moneys may be applied in reduction of the separate estates of the debtors. This proposition is no doubt correct, so long as 5.110 1s applicable to arrangements made under Part X of the Act. Sub-section 237(2) applies a number of sections, including s.110, to deeds of arrangement. It follows that moneys contributed by the debtors from their joint estate should have been applied in the first instance in payment of their ioint debts. Any contribution from the separate estate of Mr. Leask should have been applied to his separate debts. If in either case there isa surplus, sub-s.110(2) prescribes the course to be followed. I certify that this and the preceding eleven pages are a true copy of the reasons for judgment herein of his Honour Mr. Justice Toohey. Associate Dated: 13 May 1986