CATCHWORDS BANKRUPTCY - composition under Part X - terms of composition complied with - certificate issued by trustee under s.243A - application pursuant to 3.92, 2 years after terms of composition carried out, seeking leave to amend proof of debt - no steps taken to redeem or realise security prior to the carrying out of the terms of the composition - obligations of debtor under deed discharged. Bankruptcy Act 1966 - ss.90, 91, 92, 93, 153, 238, 240, 243A. RE _ GARY VINCENT MORTON: EX PARTE GARY VINCENT MORTON AND WESTPAC BANKING CORPORATION W.A. No. 112 of 1981X% SPENDER J. PERTH 21 SEPTEMBER, 1987. t DACA! EGISTRY IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISTON ) BANKRUPTCY DISTRICT OF THE STATE OF ) WESTERN AUSTRALIA ) W.A. NO. 112 of 1981X RE: GARY VINCENT MORTON Debtor EX PARTE: GARY VINCENT MORTON Applicant and WESTPAC BANKING CORPORATION Respondent MINUTE OF ORDER JUDGE MAKING OPDEP : SPENDER J. DATE OF ORDER: 21 SEPTEMBER, 1987 WHEPE MADE: PERTH THE COURT DECLARES THAT: By reason of the composition entered into by the Applicant with his creditors pursuant to Part ¥ of the Bankruptcy Act on the 12th day of January, 1982 the Applicant 1s indebted to the Respondent in the sum of $1,000.00 together with interest thereon in the sum of $1,697.00 plus an amount of $110.00 in respect of the settlement fee. THE COURT ORDERS THAT: (1) The Respondent is obliged to pay to the Applicant the sum of $13,147.53 less the sum referred to in Paragraph 1 above, together with any interest that may have accrued thereon since the 6th day of February, 1987 to date of payment. (2) Westpac Banking Corporation pay to G.V. Morton the costs of his motion and the Westpac Banking Corporation motion to be taxed, if not agreed. NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. ' IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISTON ) BANKRUPTCY DISTRICT OF THE STATE OF ) WESTERN AUSTRALIA ) W.A. NO. RE: GARY VINCENT MORTON Debtor EX PARTE: GARY VINCENT MORTON Applicant and WESTPAC BANKING CORPORATION Respondent SPENDER J. PERTH 21 SEPTEMBER 1987 REASONS FOR JUDGMENT These are two applications which raise 112 of 1981X% a question concerning the rights inter se of a debtor whose creditors have accepted a composition pursuant to Part X of the Bankruptcy Act 1966 ("the Act") and a secured creditor of that debtor. Mr. Morton (the debtor) seeks:- "1. A declaration that by reason of the composition entered into by the Applicant with his creditors pursuant to Part X of the Bankruptcy Act on the 12th day of January, 1982 the Applicant is indebted to the Respondent in the sum of $1,000.00 together with interest thereon less payments made in reduction thereof in the sum of $1,697.00 plus an amount of $110.00 being in respect of the settlement fee. ' wee Nw 2. An order that the Respondent is obliged to pay to the applicant the sum of §13,147.53 less the sum referred to in paragraph 1 above, together with any interest that may have accrued thereon since the 6th day of February, 1987 to date of payment." Westpac Banking Corporation, ("Westpac"), seeks an order that it be granted leave of the Court to amend its proof of debt dated 18 January 1985, pursuant to s.92(1) of the Bankruptcy Act 1966, by deleting from the first schedule of the proof of debt the figure $1,000.00 and inserting by way of substitution therefor the sum of $13,147.53. It asks also that there be no order as to costs. Westpac''s application is made pursuant to 3.92 of the Act, which provides:- "(1) Where a secured creditor has lodged a proof of debt in respect of the balance due after deducting the estimated value of his security, he may, at any time, apply to the trustee or the Court for permission to amend the proof of debt by altering the estimated value. (2) If the trustee or the Court is satisfied - 'a) that the estimate of the value of the security was made in good faith on a mistaken basis; or (b) that the value of the security has changed since the estimate was made, the trustee or the Court may permit the creditor to amend his proof of debt accordingly. (3) Where the Court permits a creditor to amend his proof of debt, it may do so on such terms as it thinks just and equitable." Section 93 provides that "Where a creditor who has amended a proof of debt under s.92 has received, by way of dividend, any amount in excess of the amount to which he would have been entitled under the amended proof of debt, he shall forthwith repay the amount of the excess to the trustee." Where a creditor who has go amended a proof of debt has received, by way of dividend, less than the amount to which he would have been entitled under the amended proof of debt, he is entitled to be paid, out of moneys for the time being available for distribution as dividend, the amount of the deficiency before those moneys are applied in the payment of future dividends, but 13 not entitled to affect the distribution of a dividend declared before the amendment of the proof of debt. It 1s also necessary to have regard to the provisions of ss. 90 and 91. Section 90 provides:- "(1) A secured creditor is entitled to prove the whole or a part of his secured debt in the debtor's bankruptcy in accordance with the succeeding provisions of this Division, and not otherwise. (2) A secured creditor who surrenders his security to the trustee for the benefit of creditors generally may prove for the whole of his debt. (3) A secured creditor who realizes his security may prove for any balance due to him after deducting the net amount realized, unless the trustee is not satisfied that the realization has been effected in good faith and in a _ proper manner. (4) A secured creditor who has not realized or surrendered his security may - (a) estimate its value; and (b) prove for the balance due to him after deducting the value so estimated. (5) A secured creditor to whom sub-section (4) applies shall state particulars of his security, and the value at which he estimates it, in his proof of debt." Section 91 gives the trustee power at any time to redeem the security on payment to the creditor of the value at which it has been estimated by the creditor. The trustee can, if dissatisfied with the value at which a security has been estimated by a creditor, require the property to be offered for sale at such times and on such terms and conditions as are agreed or, in default of agreement, as the Registrar directs. In the event that the property is offered for sale by public auction, the creditor or trustee is entitled to bid for, and purchase, the property. Section 91(4) entitles the creditor to give notice to the trustee requiring him to elect whether he will exercise his power of redeeming the security or of requiring 1t to be realized. These sections apply to a composition under Part X of the Act, by virtue of s.243 of the Act. The circumstances in which these provisions have to he applied are as follows. In 1980, the debtor and his wife borrowed moneys from Westpac, and as security caused to be registered a second mortgage in favour of Westpac in respect of certain property at 2 Marsden Way, Padbury, of which the debtor was the registered proprietor. On 12 January 1982, a meeting was held of the debtor's creditors pursuant to Part X of the Bankruptcy Act 1966. At that meeting a composition was proposed, which was duly accepted by the creditors. The deed of composition required the debtors to pay to the trustee, Maurice Levi, the sum of $20.00 per week for a period of three years from Tueday 19 January 1982, and also required the trustee to apply the sum of $3,019.89 held in trust by a firm of solicitors to the debtor's estate and to be made available to creditors, and for the trustee to distribute moneys received pursuant to that deed (after providing for the payment of costs, charges, remuneration and expenses) "at such time and in such manner as he shall in his absolute discretion think fit". The deed required the balance to be paid by the trustee to creditors in accordance with the priorities 1n 3.109 of the Act and, 1n particular, provided for unsecured creditors to be paid pro rata according to the amount of debts due and owing to them. The deed provided that:- "The amounts distributed, will at the end of 3 years be considered as full satisfaction for the debts owing." It further provided:- "This composition is binding on the creditors in accordance with section 233 of the said Act." Section 233, it may be noted, is concerned with the effect of a deed of arrangement. rd On or about 18 January 1985, Westpac tendered a proof of debt to the trustee. This is outside the three year period referred to in the "deed" of composition, but no submissions were directed at this circumstance. The debt claimed, as at the date of the composition, was $8164.23, from which was deducted "the estimated value of security" of $1,000.00 and proof of debt was lodged in the sum of $7,164.23. The proof of debt was in Form 15, the form referred to in 3.84(2)(b) and prescribed by rule 37, and the date, 12 January 1982, was referred to as the date on which the debtor became bankrupt. The instruction to cross out whether security is held or is not held had not been followed, and paragraph 3 of the Form 15 is in these terms:- "The following security is held by me/us for the payment of the whole of the sum specified in paragraph 1. T.L.A. Second Mortgage No.C78454 over C/T 1442/259." Pursuant to the composition, the trustee paid to the unsecured creditors an amount of 3.765 cents in the dollar on 20 August 1985. Westpac received an amount of $269.73, which was based on the amount for which 1t had proved in the composition. On 2 February 1987, the trustee issued a certificate pursuant to s.243A of the Bankruptcy Act 1966, certifying that the terms of the composition executed by the debtor and his wife on 12 January 1982 were carried out on 20 August 1985. At no time did the trustee redeem the security by paying $1,000.00 to Westpac nor did he require it to be realized. A notice requiring the trustee to elect under $.91(4) was never given by Westpac. On or about 18 January 1987, some seventeen months after the trustee's certificate, the debtor sold the property the subject of the second mortgage and settlement took place on 6 February 1987. At settlement, Westpac claimed to be entitled to the sum of 413,147.53, made up of principal debt of $6,534.91, accrued interest to 10 February 1987 of $6,502.62, and discharge and settlement fees of $110.00. The debtor says that Westpac is not entitled to recover any amount of excess of the sum of $1,000.00 at which it estimated its security, together with interest thereon, as well as the sum of $110.00 in respect of the discharge and settlement fees, less payments made by the debtor. Westpac maintains that it is entitled to the balance of the proceeds of the sale of the property under the mortgage, notwithstanding the events that have occurred as earlier outlined. To this end, it has sought to apply to the Court for permission to amend the proof of debt by altering the estimated value from $1,000.00 to $13,147.53. Affidavit evidence filed on behalf of Westpac establishes that the respondent valued the security in the proof of debt in the bona fide belief that, as second mortgagee, the value of security would not be greater than $1,000.00. In 1983 the property the subject of the mortgage was valued by Westpac at $31,000.00. In 1987, when the property was realized, the amount received by the debtor was substantially in excess of the amount which Westpac believed would be achieved upon realization. It is not disputed that it would have been competent for Westpac to apply, pursuant to,s.92, to amend the proof of debt by -* altering the estimated value, as it now seeks, at any time prior to the carrying out of the terms of the composition. See, by way of example, Ex parte Norris. In re Sadler C1886] 17 Q.B.D. 728, particularly at 731; In re Newton: Ex parte National Provisional Bank of England £1896] 2 Q.B. 403 at 405-6; In re Becher C1944] 1 Ch. 78 at 81-2; In re Fanshawe Ex parte Le Marchant £1905] 1 K.B. 170. It is submitted by the debtor, however, that where the terms of the composition have been complied with and the obligations of the debtor under the deed, and those of the trustee pursuant to the deed and the Act, have been fully discharged and a certificate furnished by the trustee to the debtor to this effect pursuant to s.243A of the Act, a creditor in the position of Westpac is not able to have the value of its estimate of the security amended pursuant to 5.92. It is said that the trustee 1s "functus officio". It 1s difficult not to accept the correctness of the submission that, if he is not functus officio, then he ought properly bea party to the application by Westpac. In ny opinion, even accepting as I do that the value of the estimate has changed since the estimate was made, it is now too Late for a secured creditor to apply to vary the value of his security. Section 238(1) provides:- "A composition that has been accepted by a special resolution of a meeting of a debtor's creditors called in pursuance of an authority under section 188 (in this Division referred to as a composition under this Part) is binding on all the creditors of the debtor." Section 238(3) provides:- "Nothing in this section - (a) affects the right of a secured creditor to realize or otherwise deal with his security; or (b) prevents a creditor, after the final payment has been made under a composition, from taking any proceeding or enforcing any remedy in respect of a provable debt from which the debtor 1s not released by the operation of the composition." Section 240 provides:- "(1) Subject to this section, a composition under this Part operates, unless set aside, declared void or terminated under this Part, to release the debtor from all provable debts, other than those (1f any) that would not be released by his discharge from bankruptcy if he had become a bankrupt on the day on which the composition was accepted. (2) Sub-section (1) does not affect the right of a secured creditor, or any person claiming through or under him to realize or otherwise deal with his security - (a) if the secured creditor has not proved in the composition for any part of the secured debt - for the purposes of obtaining payment of the secured debt; or (b>) if the secured creditor has proved in the composition for part of the secured debt - for the purposes of obtaining payment of the part of the secured debt for which he has not proved in the composition, 10. and, for the purposes of enabling the secured creditor or a person claiming through or under him so to realize or deal with his security, but not otherwise, the secured debt, or the part of the secured debt, as the case may be, shall be deemed not to have been released." In my opinion, the effect of 3.240(1) is that this composition (which has not been set aside, declared void or terminated under this Part) has the effect of releasing the debtor from all provable debts. The amount of $7,164.23 which Westpac proved in the composition was properly provable by them and the debtor was released from that provable debt. Westpac is entitled, by $.240(2) to realize or otherwise deal with the security "for the purposes of obtaining payment of the part of the secured debt for which 1t has not proved in the composition". Further, "for the purposes of enabling the secured creditor ..- to realize or deal with his security, but not otherwise", the secured debt, or the part of the secured debt, as the case may be, shall be deemed not to have been released. Shortly put, my view 13 that a secured creditor is entitled to amend his estimate of his security until such time as the obligations under the composition are concluded, but the Court has no power to amend an estimate of the value of the security when those obligations imposed on the debtor and trustee have been fully complied with, notwithstanding the use of the words "at any time" in s.92. I am fortified in my conclusion by a consideration of 3.153, concerning the effect of an order of discharge. Section 153(3) defines the rights of a secured creditor post discharge of a bankrupt. Those provisions are similar to those of s.240. I particularly refer to s.240(2). In my view, it is wrong to Ll. conclude that the rights of a secured creditor on discharge of a debtor from bankruptcy are less extensive than on performance of @ composition accepted by the debtor's creditors. Westpac accepts that it would be obliged to refund the Moneys paid pursuant to the composition to the trustee and subject to his charges (which would, in this case, exhaust that small amount) the trustee would be obliged to make a further distribution amongst the other unsecured creditors. There are practical considerations of this kind which support the conclusion to which I have come. Quite simply, it is still, as it always was, 1n the public interest that there be an end to litigation. There must, in my view, be a time when the process of insolvency comes to an end, and the subject of it can start anew. If the conclusion at which I have arrived is wrong, a composition involving one or more secured creditors might well be a never ending story, to the detriment of not only the debtor but of the public generally. Mistakes or incorrect estimates ought to be susceptible of correction, but not for eternity. As Lord Esher M.R. commented in Ex parte Norris. In re Sadler (supra), "It cannot be that the right is to go on forever". In my view, it is in this case too late for the secured creditor to make its application pursuant to 3.92 of the Act. In Couldery v. Bartrum (1881-82) 19 Ch.D. 394, a case, 1t should be noted, decided before the 1883 English Bankruptcy Act, Jessel M.R., (whose decision was affirmed by the Court of Appeal), held that a secured creditor was not entitled to amend after a composition had been taken and completed. oe 12. However, Westpac 1s entitled, pursuant to s.240(2), to realize or otherwise deal with the security for the purpose of obtaining payment of the $1,000.00. I will hear the parties as to the form of order I should make to give effect to my conclusions. I certify that this and+t 2 1) preceding pages are a true copy of the reasons for judgment herein of His Honour Mr Justice Spender N wht All 4187 {| Maid Q ee Dated Counsel and Solicitors for the Applicant: Mr. L. Christensen of Phillips Fox. Counsel and Solicitors for the Respondent: Mr. Odes of Parker & Parker Date of hearing: 15 September 1987 Place of hearing: Perth