CATCHWORODS BANKRUPTCY - application to declare composition void or terminate same - joint debtors - whether need for separate resolutions - whether uncertainty availiable as ground for termination after 21 days from resolution - supervening impracticality as ground for termination - relevance of improbability of benefit to applicant creditor from sequestration. Bankruptcy Act ss.187A, 195, 222, 239, 242 Bankruptcy Act rules 100C, 100C, 100F Re: Warren Thomas Brown Ex parte: Humes Limited Qld X128 of 1985 Re: Roslyn Una Brown Ex parte: Humes Limited Qld X127 of 1985 PINCUS J. BRISBANE. 17 JULY 1987 Vo ; ~N, a, X, f ' z= ra' {> aVED Ay q - Be tens fa 2001 337 \.« Feperal court or £12 ' AUSTRALIA ' re pa ' vee . IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION ) ~ BANKRUPTCY DISTRICT OF THE SOUTHERN )} DISTRICT OF THE STATE OF QUEENSLAND ) QLD X128 of 1985 RE: WARREN THOMAS BROWN Debtor EX PARTE: HUMES LIMITED Applicant WARREN THOMAS. BROWN Respondent QLD X127 of 1985 RE: ROSLYN UNA BROWN Debtor EX PARTE: HUMES LIMITED Applicant ROSLYN UNA BROWN Respondent MINUTES OF ORDER JUDGE MAKING ORDER: PINCUS J. DATE OF ORDER: 17 JULY 1987 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The composition entered into on 24 October 1985 be terminated. 2. A sequestration order be made against the estates of each debtor. Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. S.. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION ) ~ BANKRUPTCY DISTRICT OF THE SOUTHERN DISTRICT OF THE STATE OF QUEENSLAND ~ QLD X128 of 1985 RE: WARREN THOMAS BROWN EX PARTE: HUMES LIMITED WARREN THOMAS BROWN Debtor Applicant Respondent QLD X127 of 1985 RE: ROSLYN UNA_ BROWN EX PARTE: HUMES LIMITED ROSLYN UNA BROWN PINCUS J. 17 REASCNS FOR JUDGMENT Debtor Applicant Respondent SULY 1987 This 1S an application by a creditor te set aside a composition relating to these debtors, agreed meeting on 24 October 1985. The appiication grounds; 1t 1s convenient to deal with them in counsel for the applicant, Mr. Curran, did so to set out separately the facts necessary ground. 1. Separate Resolution to at a creditors' ralses a number of the order in which in his address and to deal with each It was contended for the applicant that the composition should be declared void under s.222, sub-s.(1) of which reads, so far as relevant, as follows: "Where there is a doubt, on a specific ground, »»». whether a 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)." The principal ground of the attack under this provision was that there was only one meeting and one resolution. The question arose whether the debtors, Mr. and Mrs. W.T. Brown, were or were not joint debtors. It was contended on behalf of the applicant that some debts were owed by Mr. Brown only, judgment having been obtained against him solely. Evidence was given that all the debts were incurred ain the course of carrying on an earth-moving business in Which Mr. and Mrs. Brown were partners (as they still are) and Iam satisfied that there was, in ali cases, joint liability. It was argued that, nevertheless, 1t was necessary that there be a separate resolution 1n respect of each debtor, and that the passing of a single resolution dealing with both debtors was invalid. For the purposes of determining this point, there 1s no need to set out the terms of the relevant resolution, whose effect may be stated generally to be that the creditors were to have the proceeds of certain claims being made by the debtors against persons said to be indebted to them. Reference was made to Re Pepper (1969) 14 F.L.R. 282 and Re Forbes (1974) 24 F.L.R. 87. In the former case, 1t was held that each of a number of joint debtors must present a separate petition against himself, and in the latter that each of a number of joint debtors must be the subject of a separate meeting of creditors, to found a valid 1 # resolution for acceptance of a composition; it was said that meetings might be held concurrently, but that a separate resolution must be passed in relation to each debtor: p.88. By s.187A, inserted in 1980, 1t was provided as follows: "(1) The provisions of this Part apply, subject to such modifications and adaptions (1f any) as are prescribed by the rules, in relation to joint debtors, whether partners or not. (2) In sub-section (1), 'modification' includes the addition or omission of a provision or the substitution of a provision for another provision." The "Part" mentioned in subs.(1) 1s of course Part XK. The modifications contemplated are in r.100E, which adds to 5.195 of the Act sub-s.1A: ""Jazrnt debtors shall submit both a statement of their joint affairs anda statement of the separate affairs of each debtor." Section 195(1) requires "the debtor" to attend a meeting of creditors called under Part X and to submit a statement of his affairs. In the absence of the modification just mentioned, it would presumably have been read, in its application to joint debtors, as if it required "the debtors" to submit a statement of their affairs. But should provisions of Part X referring to a meeting" and "a resolution" be read in the singular or plural, when applied to joint debtors? Section 187A leaves the answer to that question uncertain. However, the problem is, in my opinion, solved by r.100F, which applies the provisions of Division 1 of Part IX A of the rules to Part X meetings. Division 1 of Part IX ' We, eo A of the rules deals, in its terms, only with joint bankruptcies, but the effect of r.100F is to make 1t necessary to read it as applying also to steps taken with respect to joint debtors under Part X. Rule 100C, which is in Division 1 of Part IX A, is as follows: "At a meeting of joint and separate creditors - (a) separate creditors shall not vote on a resolution proposed 'for consideration by joint creditors; and (b) joint creditors shall not vote on a resolution proposed for consideration by separate creditors." This rule contemplates that there will be a single meeting of joint and separate creditors and that there 1s need for only one resolution of joint creditors; the expression "joint creditors" 1s defined by r.100A to mean "the creditors of joint debtors made bankrupt in a joint bankruptcy". Rule 100C implies that there need ope only one meeting and only one resotution, 1f there are "joint creditors" only. It should be mentioned that the problem just discussed ais different from that dealt with in Re Edwards, ex parte Edwards (1987) 71 A.L.R. 403, although the former 1s touched on at p.407 of the reasons in that case. Thus I arrive at the conclusion that the Act and rules enable a composition with respect to joint debtors to be resolved upon by a single resolution, as was done here. iA 2. Uncertainty During the course of oral argument (but not in his written outline), Mr. Curran made the point that the resolution in question 1s vague and incomplete; he suggested 1t is void for uncertainty. Mr. Gibson argued that that 1s a point which, if good, should have been taken within 21 days, the time limit prescribed by s.239 of the Act. Mr. Gibson's submission involved a comparison of s$.239 on which the applicant does not rely, with s.242, on which it does rely. The former permits an application within 21 days from the date of the special resolution accepting a composition for an order setting aside the composition on the ground - ".,. that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the composition ought to be set aside wee (s.239(2)). Section 242, without any time iimit, ailows application for an order terminating the composition on the following grounds: "(a) that the debtor, or, if the debtor has died, the debtor or the person administering the estate of the debtor, has failed to carry out or comply with a term of the composition; (b) that the composition cannot be proceeded with without injustice or under 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,". Mr. Gibson suggests that unless one reads down the power given by s.242 so as to catch only cases not within s.239, the time limit in s.239 would become, in practice, of no significance whatever - a result hardly likely to have been intended. Each section allows application on the ground of "any other reason" and if that is taken literally, the time limit might largely be ineffective. Tt appears to me that the way to reconcile the two provisions is to construe s.242(1) as relating generally, if mot universally, to supervening events -~-1.e. to grounds of challenge other than those based upon the resolution 1tself and the facts as they were at that time. If an attack on the basis of deficiencies in the resolution itself 1s now permitted, the intention of s.239(1) - that a composition shall be ordinarily treated as good if not challenged within 21 days - would be defeated. I am therefore not prepared to entertain the ground of uncertainty in the effect of the resolution, in the application under s.242. However, the terms of the resolution are discussed below, as relevant to the question whether ground 242(1)(b) 1s made out. 3. Misleading the Creditors The second ground taken in the applicant's submissions was that the debtor - "... omitted a material particular from the statement of his affairs under section 195 or included an incorrect and material particular in the statement" ~ s.222(4)(b). Six points were put forward as requiring consideration under this heading, but of those only four have substance and will be dealt with. It should be mentioned that the only unencumbered property disclosed was a half-interest, worth $17,500, in a house at Gympie. (a) It 1s said, and correctly, that the debtors owned in addition a motor vehicle worth about $4,000. I am satisfied that its omission was an honest mistake. (b) It is alleged that a sum of $2,275.54 was received by the solicitors for the debtors on 22 October 1985, but was not disclosed. The evidence does not make out the applicant's case. The letter sending the money was not shown to have been received before the meeting. (c) It 1s alleged that a sum of $40,917.03 paid into the Supreme Court on 1 October 1985 (over three weeks before the meeting) was not disclosed. The history of this sum 1s dealt with in detail in a judgment of Williams J. in the Full Court of the Supreme Court of Queensland, which became exhibit 2; the other members of that Court agreed with his Honour's reasons. Proceedings were brought under the Subcontractors' Charges Act 1974-1976, a Queensland statute designed to give subcontractors, in certain circumstances, security in respect of money due by the principal to their head contractor. The moneys in question were paid into Court by the principal, and were at ana first instance ordered to be paid out to the claimants. However, on appeal the sum paid in ($40,917.03) was ordered to be paid out to the debtors. Under the contract between the debtors and the principal, in the events which happened, security was provided by the debtors for the due and proper performance of the contract by means of an undertaking from a company called AMEV-UDC Finance Limited. That company undertook to pay on demand, up to a certain limit, amounts the principal required. Such a requirement was made and AMEV-UDC Finance Limited paid $40,917.03 to the principal on 1 October 1985; on the same day the money was paid into the Supreme Court of Queensland on account of the proceedings under the Subcontractors' Charges Act 1974-1976. It remained there as at the date of the meeting, 24 October, 1985. Under that Act, the subcontractor was not entitied tc any charge unless the relevant moneys were "money payable to the contractor" within the meaning of the statute. Williams Cc. held that the principal was not entitied to obtain the money under the contract at the time when it did so, and therefore it was not "money payable to the contractor" to which a charge could attach. As was pointed out before me, the entity from which the money was obtained was AMEV-UDC Finance Limited, but the Court ordered the money in question to be paid out to the debtors. (da) It seems clear enough, in these circumstances, that there was no non-disclosure. On no view did the debtors have ownership of or any anterest in the sum of $40,917.03 which was paid into Court on the 1 October 1985. It 1s said on behalf of the applicant that they ultimately succeeded in showing an entitlement to that money, as is evident by the order of the Full Court of the Supreme Court, which was made on 5 June 1987. The Court did not, however, decide that the debtors were entitled to the sum in question as against the entity from which it came (AMEV-UDC Finance Limited), nor could it have done so because AMEV-UDC Finance Limited was not a party to the proceedings, because no issue about the matter was raised and because there was nothing in the facts found by the Supreme Court to suggest that the debtors had a right to retain the money against AMEV-UDC Finance Limited. It 1s alleged that there was non-disclosure of a security packet and of moneys ina savings bank investment accourt at che Nundah Branch of the A.N.Z. Bank totalling $18,250.24. There was a security packet at the bank which was not disclosed in the statement of affairs, but (althcugh there was am opportunity to do so) no attempt was made before me to show that it contained anything of significance and 1t should therefore be ignored. As to the $18,250.24, I find that the sum in question was not disclosed, through inadvertence. In view of the parlous financial condition of the debtors at the time of the 10. creditors' meeting, it may seem strange that such a significant sum was overlooked. The explanation is that the sum had been lodged as security for an undertaking given by the bank, of the kind discussed by Williams J. in the case just mentioned. The debtors changed their bank and through an error the money was not transferred. It followed that there was omission of a material particular from the statement of affairs. Considering the size of the deficiency disclosed ($1.7 million), the sum in question, being about 1% of that, might not seem of great significance. As to materiality ain this context, see Re Morris; Ex parte Adams (1980) 48 F.L.R. 341 at 343, per C.A. Sweeney J. and Re Loukidis (unreported, 26 June 1985) at pp.5-7 per Toohey Cc. in the Particular circumstances, however, 1t was by mc snweans rnegligible, as there was notning much else, and I hoid that it gives rise tua ground for declaring the composition void under s.222(4)'b), subject to the inhibition in s.222(5), which 1s as follows: "The Court shall not make an order declaring a deea or composition, or a provision of a deed or composition to be void ona_ ground specified in sub-section (4) unless i1t 1s satisfied that it would be in the interests of the creditors to da so." It is convenient to defer further consideration of that point. It should be mentioned that during the course of the hearing, there was evidence relating to non-disclosure of assets of much greater amount, namely realty said to be of value ll. $395,000. The property in question was said to be security for sums due to AMEV-UDC Finance Limited and Associated Midland Corporation Ltd., totalling $1,242,421. Unexecuted copies of the Statement of affairs were distributed at the meeting, and I am satisfied that not all copies included a sheet setting out the full details of the property in question. In counsel for the applicant's written submissions, no point was taken about that, but in the circumstances it 1s desirable to make a finding: in my view, the existence of a property in question was sufficiently drawn to the attention of those present at the meeting. 4. Injustice and Undue Delay The relevant part of s.242(1) 18 para.(b) which is set out above. The applicant's contention wast in substance that the composition contemplated the taking of steps by the truste=s to recover large sums said to be due to tne debtors, but such recovery had proved not to be a practical passibility. There 1s a transcript of much of the discussion at the credtors' meeting, from which 1t appears that the means whereby the creditors were persuaded to pass the relevant resolution was as follows: it was said that there was a large sum due to the Commissioner of Taxation which would absorb moneys derived from the small amount of property disclosed, that the debtors had claims against others for sums due for earth-moving work done, that such claims would probably not be pursued by a trustee in bankruptcy unless creditors were prepared to fund that pursuit, and that a company owned by the debtors, Queensland Pavements Pty. Ltd., would pay the cost moneys in question 12. of the steps necessary to recover - that being the general body of only chance of obtaining any payment. the creditors' That line of thought was translated into two resolutions as follows: 1. 2. "That Queensland Pavements Pty. Limited fund the continued prosecution of claims by W.T. and R.U. Brown against (1) Jd. Sammon, (2) Delhi Petroleum Pty. Ltd. and (3) Queensland Electricity Commission." "That the creditors of Warren Thomas Brown and Roslyn Una Brown accept a Composition in the following terms: (a) That the proceeds of the pending actions against J. Sammon, Delhi Petroleum Pty. Ltd., Queensland Electricity Commission and the interest of Mr. and Mrs. Brown in the property at Gympie be placed in a fund with a Trustee for distribution to the creditors of Mr. and Mrs. Brown in satisfaction of their claims. (b) That the order of distribution of the proceeds of the aforesaid fund be. 1. Payment of Trustee and costs, thence 2. Reimbursement to Queensland Pavements Pty. Ltd. of legal costs contributed by that company to fund the actions referred to in (a) hereof, thence 3. Distribution to all the unsecured creditors exluding Queensland Pavements Pty. Ltd., thence 4. Distribution to Queensland Pavements Pty. Ltd." proposed as an ordinary resolution. The first resolution was carried unanimously, the face of 1t, very handsomely passed, but the bulk of although The second resolution was, on the amount 13. of alleged debt voted in favour was an amount said to be due to Queensland Pavements Pty. Ltd., the debtors' company. Nevertheless, it is not in dispute that the necessary majority was obtained. (a) (b) (c) The fate of the three claims has been as follows: That against J. Sammon has not yet produced any funds. At the time of the meeting, default judgment had been obtained in favour of the debtors, but that was subsequently set aside. The claim against Delhi Petroleum Pty. Ltd. was not one by the debtors, but, as was explained at the creditors' meeting, by an entity described as Clough Engineering Group. Clough's claim against Delhi was pursued on the basis that, as the creditors were told, the bulk of the money recovered was to go to the Browns. The proceedings were successful, but since the meeting the debtors have incurred liability to Clough in relation to matters unrelated to the claim against Delhi Further, there 1s a dispute as to the costs of the arbitration which is likely to be difficult to resolve. The probable outcome appears to be that some moneys will be recovered by the debtors from the amount awarded ($64,282.00), but it is difficult to say how much. The third clain, against the Queensland Electricity Commission, is set down for hearing in September 1987. It is chiefly a claim for a sum of $1.2 million, although there are mt 14. other claims as well, and 1s likely to be expensive to pursue properly. It appears, however, to be the creditors' only hope of recovering anything really substantial under the composition. There is not enough information before me to be able to form any opinion as to the debtors' chances of success against the Commission, but I find that they are likely to have difficulty in putting their solicitor in funds. Queensland Pavements Pty. Ltd. 1s in liquidation, having become insolvent since the creditors' meeting, with an estimated deficiency of $650,428. The transcript of the creditors' meeting reveals that it was said that "Mr. and Mrs. Brown" would fund the proceedirgs, so that 1t may be arguable that the liquidation of (Queensland Pavements Pty. Ltd. should not be held, as a matter of practicality, to be fatal to the composition; in my cpinion, that 1s to take too broad a view of the case. The composition having been accepted on the basis that Queensland Pavements Pty. Ltd. would fund the proceedings, the conclusion follows that a ground for terminating the composition has arisen; it does not fit neatly into ground (b), for the problem is not so much a matter of injustice or undue delay as impracticality. The source of funds contemplated by the resolution passed at the meeting has gone, and the substitute source of funds - the debtors - 1s very uncertain. A representative of AMEV-UDC, Mr. I.G. McNeil, gave evidence that the debtors are $152,000 1n arrears in their pavements due to that company. Exhibit 9, prepared by the debtors' solicitor, shows that the debtors have made fairly substantial payments towards the > 15. costs of pursuit of the claims against Q.E.C.; those payments amount to over $12,000. However, no indication has been given as to how the larger sums likely to be needed properly to fight the case against Q.E.C. could be obtained; on last Friday, Mr. Brown gave evidence that he had no money to pay his employees that day, but hoped to be able to borrow some from the bank. 5. Interests of Creditors and Exercise of Discretion . The two resolutions set out above were not expressly tied together; indeed, only the second one was regarded as being in itself a composition. There 1s room for argument as to whether Queensland Pavements Pty. Ltd., by its conduct at the meeting (through the directors), implicitly promised to fund the continued prosecution of the claims mentioned in the first resolution, but one thing 1s clear, that the funding 1n accordance with the first resolution was, in substance and as a matter of practicality, the basis cf the second resolution. I have so far held that two grounds for granting the application have been made out: omission of a material particular under s.222(4), empowering the Court to declare the composition void, and the ground just dealt with, empowering the Court to terminate the composition. As to each, however, proof of the ground gives rise to a discretion, not an obligation, to grant the application; further, there 1s no power under either provision to grant the application, unless the Court is satisfied that it would be in the interests of the creditors to do so. ' 16. It is convenient to consider both points together. On Mr. McNeil's evidence, $669,574 15 due to AMEV Finance Limited (formerly AMEV-UDC Finance Limited) and the value of the equipment leased is estimated to be $304,000, on a forced-sale basis. Mr. McNeil gave evidence that, because of failures of other earth~-moving contractors, many millions of dollars worth of equipment have been "dumped... on the market", making buyers of such equipment difficult to find. His company's estimate of the value of the realty on which security 1s held is $280,000, producing a deficiency, on those estimates, of about $86,000. If the matter worked out in that fashion, there would be nothing for the unsecured creditors but the following: A.N.Z. Bank $18,250.24 Half-interest in Gympie property $17,500.00 - $20,000.00 In addition, Mr. Curran says there are other advantages from bankruptcy, such as having an independent trustee and a thorough investigation of the debtor's affairs. I do not think, however, that those points add any weight to the applicants' case. There 1s reason to be doubtful as to the extent of the current trustee's enthusiasm for his task, but that has not caused any practical ill-effect. As to investigation, there is no reason to think that there are concealed assets. Mr. Brown, who was extensively cross-examined, appeared to me honest and open in his answers. 17. There would be some money available for the creditors, although not much when one considers the extent of the liabilities; nevertheless, in my opinion the test mentioned in $.222(5) and in s.242(2) is passed: Re Beames; ex parte Beneficial Finance Corporation Ltd. (1985) 7 F.C.R. 216 at 230, followed in Re Doukidis (above) at p.7 where Toohey J. said: "It 1s, I think, enough if the evidence justifies an inference that there are Jikely to have been assets and that the creditors may be better off 1f the composition is set aside." Mr. Gibson argued that 1f the trustee found that the proceedings against the Q.E.C. cannot be funded, then that wouid be an appropriate time for steps to be taken to terminate the composition; he said, in effect, that the present application is premature. There 1s some substance in that contention as there 1s in his further argument that the only creditor likely to gain from bankruptcy is the Commissioner of Taxation, who has displayed no interest in the matter. According to the statement of affairs, the Commissioner had $350,000 due to him as "group tax" at the date of the meeting, 24 October 1985. Although no details were given, I proceed on the assumption that the amount in question 15 one which has' the benefit of the priority given by s.221P(2) of the Income Tax Assessment Act 1936. I asked Mr. Curran at the end of the hearing, what was the commercial point of the application, since it appeared to me improbable that, if successful, 1t could benefit anyone but the Commissioner. His answer was that the valuation of a house forming part of the realty referred to above {mortgaged to AMEV Finance Limited) was "not conceded". The mortgagee estimate of the value of that house is $220,000; even if 18. it were to realise twice that sum when sold, the figures I have been given suggest that there would still not be nearly enough to pay the Commissioner of Taxation out. I have had considerable difficulty in determining how to exercise the discretion given by the provisions mentioned above. The matter has seemed to me finely balanced, as the only creditor who seems to have any prospect of benefiting from bankruptcy has taken no step to attack the composition. In the end, however, I have come to the conclusion that there should be a sequestration order. A major factor inclining me to that conclusion has been the liquidation of Queensland Pavements Pty. Ltd.; not only was there a large deficiency in that company - an important element in 1tself - but I think the continued existence of that company was a foundation of the composition. Although there is ground, as I have held, for making an order under s.222(4), I propose to act under s.242(1) and make an order terminating the composition, as well a sequestration order against both debtors. I shall hear counsel on costs. Le@ciy hat thic ard tre 17 proc. asons for ay i) r "es 3-2 atruasenve '"opeent horair of His oncur har Justice Pincus Ate? Q re) Associaté Dated I] July IFT Counsel for the Applicant: Mr. J.F. Curran Solicitors for the Applicant: Mr. A. Abaza Counsel for the Respondent: Mr. G.J. Gibson Solicitors for the Respondent: Messrs. Henderson Trout Dates of Hearing: 9, 10, 13 July 1987 IQ IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND ) QLD X128 of 1985 RE: WARREN THOMAS BROWN Debtor EX PARTE: HUMES LIMITED Applicant WARREN THOMAS BROWN Respondent QLD X127 of 1985 RE: ROSLYN UNA BROWN Debtor EX PARTE: HUMES LIMITED Applicant ROSLYN UNA BROWN Respondent CORRIGENODA Amendment to the judgment of his Honour Mr. Justice Pincus of 17 July 1987: Page 14, third last line: "pavements" should read "payments". yap ANNA BOOY ASSOCIATE TO PINCUS J. 27.7.87