SUDGMENT No. SIONS BANKRUPTCY - Controlling trustee under Part X Division 2 Special circumstances justifying Court releasing property from control. Bankruptcy Act 1966, ss.37, 188, 189, 205, 208 LAURENCE & ANOR. -V- CATCHWORDS MULRONEY & ANOR. W.354 of 1987 Burchett J. Sydney 18 September 1987 2 4SEP 1987 FEDERAL _GOURT OF AUSTRALIA PRINCIFAL REGISTRY ' . S eiein aetetcaatietantiatins tertenssemenaia wo vo. g Bg ort ee re "aaeeaeeen — IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION ) ) BANKRUPTCY DISTRICT OF THE STATE OF ) No. W.354 of 1987 NEW SOUTH WALES AND THE AUSTRALIAN ) CAPITAL TERRITORY ) BETWEEN: STEPHEN LAURENCE & TREVOR TIBOR REINER Applicants AND: PETER JOHN MULRONEY & THOMAS WILLIAM FREDERICK DIXON Respondents MINUTE OF ORDER OF THE COURT Judge Making Order: Burchett J. Where Order Made: Sydney Date of Order: 18 September 1987 THE COURT ORDERS THAT: (1) (2) (3) (4) NOTE: The property of the debtor Peter John Mulroney be released from control under Division 2 of Part X of the Bankruptcy Act 1966. The operation of Order 1 be suspended until 10-00AM 21 September 1987. Liberty to apply be reserved. Costs be reserved except that it is ordered that there be no order against the applicants as to the costs of the second respondent and no order against the second respondent as to the costs of the applicants. Settlement and entry of orders is dealt with in r.124 of the Bankruptcy Rules. TOS y cr eee eaten gate © tenes maupreae IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY ees ws BETWEEN: No. W.354 of 1987 STEPHEN LAURENCE & TREVOR TIBOR REINER Applicants AND: PETER JOHN MULRONEY & THOMAS WILLIAM FREDERICK DIXON Respondents REASONS FOR JUDGMENT BURCHETT J. This is an application in unusual circumstances pursuant to s.208 of the Bankruptcy Act 1966 which provides: "The Court may, by order, on the application of an interested person, release a debtor's property from control under this Division if- (a) a meeting of creditors called in pursuance of an authority under section 188 has not, within 4 months from the date for which the meeting was first called, passed one of the special resolutions referred to in sub-section 204(1); or (b) the Court is satisfied that there are special circumstances that justify its so doing." The first respondent is the debtor, and the second respondent is the controlling trustee of his property, pursuant eg ew me mee y ' YW! iemaeassaee Pansies. eee Shelia tek emer a taentae Vo 2. to s.189, by virtue of the fact that the debtor recently signed an authority under s.188 authorizing the second respondent, as a registered trustee, to call a meeting of his creditors and to take over the control of his property. The second respondent submits to such order as the Court may make, except an order against him in respect of costs, as to which I have been informed that it has been agreed between the applicants and the second respondent that no order for costs will be sought on behalf of either of those sides against the other. The matter has been contested between the applicants and the debtor. The debtor is an architect who has undertaken a number of business ventures involving very large sums of money, as a consequence of which he has incurred, at least contingently, large liabilities. However, no creditor has taken court proceedings against him, apart from the various proceedings with which the applicants have been concerned. Those proceedings date back a number of years, and involve orders made in the Supreme Court of New South Wales by Foster J. in 1985, an appeal against which was dismissed on 28 February 1986 by the Court of Appeal of the Supreme Court of New South Wales constituted by Kirby P. and Hope and Glass JJA. The matter came back before their Honours on a motion seeking variations of their orders on 6 June 1986, with the result that the debtor and also his wife were ordered, in variation of the original orders, (inter alia) to pay to the National Commercial Banking Corporation of Australia Limited, within twenty-eight days of a demand in writing being served upon them by the Bank, sums of money which total a little in excess of $100,000-00. The required moneys not having been paid, and there SL yy tee meen nee = ey eee , + ' ieee eee. oe 3. being a dispute raised by the debtor as to whether the demand mentioned in the order had been served upon him in accordance with the terms of the order, a motion was taken out in the Court of Appeal of the Supreme Court of New South Wales on 24 August 1987 seeking to have the debtor found guilty of contempt of court and to have a writ of sequestration issued in respect of his property. The contempt motion was adjourned by the Court of Appeal to 14 September 1987 to enable the debtor to file affidavits, and on that day was adjourned again until next Monday. No affidavits have as yet been filed on behalf of the debtor in the Court of Appeal, but on 10 September 1987 the debtor executed an authority under s.188 of the Bankruptcy Act 1966 authorizing the second respondent, as a registered trustee, to call a meeting of his creditors for the purposes of Part X of the Bankruptcy Act and to take over control of his property in accordance with that Part. The applicants claim that the statutory authority of the controlling trustee will, unless I make the order sought, inappropriately hamper the exercise by the Court of Appeal of its powers in relation to the matter. It 1s submitted on this basis that in all the circumstances I should be satisfied that there are "special circumstances that justify" my making an order under s.208. I do not think it 1s necessary for the purposes of this application to decide whether the applicants are creditors for the purposes of Part X of the Bankruptcy Act, since I am clearly "tw - wom preee oe er eon ~ . . ay v La ee eres ig ar re one 4. of the view that they are interested persons within the meaning of s.208. I am also satisfied that there are special circumstances, but the question is whether they justify the order sought. The debtor gave evidence and was cross-examined. In the course of his cross-examination, he said that he believed at the time the effect of his execution of the authority under s.188 would be that the Court of Appeal would not be able to sequestrate his assets. He was then asked whether that was the purpose with which he had executed the authority, and he replied: "Oh yes." In re-examination, he said that the purpose stated in cross~examination was not the sole purpose, and that the state of his affairs was such that he was "basically insolvent". This application is not brought to challenge' the validity, or decide the effect, of any resolution of creditors, and no creditors are represented other than the applicants. There has in fact as yet been no meeting of creditors called by the controlling trustee. I do not think it is necessary, in order to resolve the question raised by the terms of s.208, to reach a conclusion as to whether the debtor signed the authority for a purpose foreign to the nature of an authority under Part X (see Clyne v. Deputy Commissioner of Taxation (1984) 154 C.L.R. 589 at 599-600; Ex parte Hewitt; In Re Drinkwater [1862] 31 L.d. (NS) (Cases in Bankruptcy) 83 at 85; Ex parte Sterling Industries Limited; Re Jackson, unreported, Burchett J., 5 September 1986). For the applicants, reliance was placed on the facts that no other creditor had taken proceedings to enforce a claim, a ergmeem -=,5 tet ielioen tal 5. that there was arguably no present right in the applicants to proceed in bankruptcy or to vote at a meeting called under Part X, that the Supreme Court proceedings involved a matter of public concern in so far as contempt was alleged to have been committed, and that the effect of the authority (failing the making of an order under s.208) could be and admittedly was designed to be to stultify the contempt proceedings in the Supreme Court. It was argued that these considerations raised a case of special circumstances that justified an order under s.208. For the debtor, it was argued that he was clearly insolvent, and that any payment made as a result of the proceedings in the Supreme Court could be liable to be set aside as a preference. Although a creditor's petition presented by the applicants on 11 March 1987, in respect of a separate obligation imposed by the orders made in the Supreme Court, had been dismissed by a registrar on 26 May after payment of the debt the subject of the petition, account should be taken, it was submitted, of the possibility that the order of dismissal might be rescinded under s.37 and a sequestration order might be made, quite apart from the possible consequences of the authority under s.188. Attention was also directed to the terms of s.205, which, it was suggested, would apply to a sequestrator appointed by the Supreme Court by virtue of the inclusive definition of "sheriff" contained 1n s.5(1). The requirements of s.205 would, of course, have to be observed whether or not I make an order under s.208, and it 1s to be noted that it is a provision which applies, not only in the case where a debtor has signed an authority under s.188(1)(e), but also in the case where a debtor has signed an > i : i, i es eee mean 6. authority under s.188(1)(£), although there is then no controlling trustee, In the present case, and assuming the appointment of a sequestrator, the ultimate effect of s.205 will depend upon the unfolding in the future of presently unpredictable events. Whatever the impact of s.205 upon the decision of the Supreme Court, I do not think it is necessarily determinative of the question which I have to decide under s.208. It was submitted for the debtor that Part X provides protection for all creditors, and that the particular protection of a controlling trustee ought to be upheld in this case. In reply, the applicants pointed to the fact that the only opposition raised to the making of an order was raised by the debtor himself, no creditor having sought to take any action of any kind un respect of the debtor or his property. In my opinion, it is important to bear in mind the purpose served by a controlling trustee. As I have already observed, the mere signing of an authority to call a meeting of creditors does not necessarily entail the appointment of a controlling trustee. This only occurs where a_ registered trustee, and not a solicitor, is authorized to call the meeting. It appears plain that the legislature did not see the signing of an authority to call a meeting of creditors as in itself requiring that a controlling trustee be automatically brought into existence. I have been referred to no authority dealing with s.208 or with the role of a controlling trustee, but the well known report of the Clyne Committee, which led to the passing of the Bankruptcy Act 1966, explains in paragraphs shore ae Tr sn ee me eg we eee 7. 297-300 the purposes which the Committee saw the appointment of a controlling trustee as serving. As the Committee pointed out, the concept was entirely new. The Committee referred to the "hiatus" which occurred under previous procedures because of the "unavoidable delays that take place in the holding of meetings and in obtaining assents to deeds." The Committee continued: "During this hiatus, the debtor's affairs are out of control, assets are frequently dissipated and, where a business is involved, unnecessary losses are often incurred. In the situation described, neither the debtor nor the trustee is in a position to exercise effective control of the debtor's affairs." It seems to me that when special circumstances are shown, in order to determine whether they are sufficient to justify an order releasing the debtor's property from control under Division 2 of Part X, it is relevant to consider whether the existence of a controlling trustee is likely in the particular circumstances of the case, to serve the purposes suggested by the Clyne Committee. The present is not a case where the debtor's difficulties can be said to arise from any current dissipation of assets, or from the incurring of any current losses in the conduct of his business. On the contrary, the very substantial obligations which he claims to be under all emanate from past transactions. It is not suggested that any current business activities conducted by the debtor are incurring losses or that he is dissipating assets. So far as appears, but for the proceedings in the Supreme Court, the debtor would still be in control of his own affairs, and no creditor other than the applicants would be taking steps which would prevent his continuing in that state. 2 oes ee we f reer eR ee ern er ey > f te =, 3 pret: Nothing was put before me on behalf of the debtor which in my opinion suggests that there was a particular need to enlist the assistance of a controlling trustee pursuant to s.189, as a result of which s.188(1)(e) was utilized rather than s.188(1)(f£), apart from the debtor's admitted intention of seeking to prevent a possible exercise of powers by the Supreme Court. It is not, of course, appropriate that I should consider whether those powers will in fact be exercised by that Court, nor have I formed or attempted to form any view as to whether a contempt has been committed by the debtor; but in exercising the power reposed in me by s.208, I think it is proper to take into account the aspects of the situation to which -I have referred. I am satisfied that there are special circumstances that justify the Court releasing the debtor's property from control under Division 2 of Part X, and I shall make an order accordingly. As, however, the debtor has chosen to submit his property to statutory control under s.189, and the purpose of the present application is to ensure that the Supreme Court is not inappropriately hampered in the exercise of its jurisdiction, a purpose which will not require effect to be given to my order unless and until the Supreme Court sees fit to make an order of the kind envisaged by the applicants, I shall suspend the operation of my order (pursuant to s.37) until 10-0O0AM 21 September 1987. Should the result of the proceedings in the Supreme Court suggest the desirability of doing so, it would always be open to make further orders under s.37, and for that reason I shall also reserve liberty to apply. I shall reserve war oa rape mote Pop re ge or en 9. costs except that, in accordance with the agreement reached between the applicants and the second respondent, I shall order that there be no order against the applicants as to the costs of the second respondent and that there be no order against the second respondent as to the costs of the applicants. I certify that this and the preceding eight (8) pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Burchett. é ban Cele Associate Dated: 18 September, 1987. Counsel for the Applicants: Mr. J. Cohen Solicitors for the Applicants: Michael Dunkel & Co. Solicitors for the Debtor: Johnson & Co. Solicitors for the Second Respondent: S. Nash & Co. Dates of hearing: 16 and 17 September, 1987. eee mer 8 HD Ap Sp eens ee yt eee