"JUDGMENT No. 632.../, 8-1 BANKRUPTCY - deed o arrangement - deed to terminate after certain costs paid and distribution to creditors made - all payments made - proceedings pending in District Court between applicant and debtors - application under s.233(2)(b)(ii) Bankruptcy Act for leave to proceed with counterclaim - applicant contended that deed not terminated as terms not strictly complied with - technical and insubstantial argument - application dismissed. Bankruptcy Act 1966 ss.233, 234, 235, 236 ROBINSWOOD PTY LTD v BARRY STANLEY and LEE BERNADETTE HORSMAN and the Trustee of their estate ANTHONY HAYES DOUGLAS-BROWN NO. 101 OF 1984 X FRENCH J. PERTH "Vp 18 November 1987 Ro VED Z ONOV 1987 FEDERAL COURT OF IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION ee ee NO. 101 OF 1984 x BETWEEN: ROBINSWOOD PTY LTD Applicant and BARRY STANLEY and LEE BERNADETTE HORSMAN and the Trustee of their estate ANTHONY HAYES DOUGLAS-BROWN Respondents MINUTE OF ORDER JUDGE MAKING ORDER: FRENCH J. DATE OF ORDER: 18 November 1987 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The application 1s dismissed. 2. The applicant 1S to pay the respondents' costs to be taxed. Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. IN THE FEDERAL COURT ) OF AUSTRALIA ) WESTERN AUSTRALIA ) DISTRICT REGISTRY ) GENERAL DIVISION ) NO. 101 OF 1984 xX BETWEE Ne ROBINSWOOD PTY LTD Applicant and BARRY STANLEY and LEE BERNADETTE HORSMAN and the Trustee of their estate ANTHONY HAYES DOUGLAS-BROWN Respondents CORAM: FRENCH J. 18 November 1987 REASONS FOR JUDGMENT This is an application by Robinswood Pty Ltd for leave to proceed with a counterclaim against Barry and Lee Horsman in District Court proceedings commenced by the Horsmans against Robinswood. Leave is sought under' s.233(2)(b)(1i) of the Bankruptcy Act on the basis that a deed of arrangement between the Horsmans and their creditors is still in force. The District Court proceedings arise out of a contract made between the parties on 21 November 1983. Under the admitted terms of the contract, the Horsmans were to harvest crops from land owned by Robinswood at $5.50 per acre. It is common ground that 3,195 acres were harvested but, according to the Horsmans, they were short paid $8,887.00 and their claim is for that amount and for damages. 2. Robinswood has counterclaimed alleging a failure to commence the work on time and a failure to use the agreed number of harvester machines. It also alleges that the Horsmans negligently caused damage to a field bin while operating one of their machines. The total damages the subject of the counterclaim amount' to $17,550.00. The action was commenced on 16 May 1984. However on 2 October 1984 the Horsmans executed a deed of arrangement pursuant to a special resolution passed at a meeting of their creditors held on 13 September 1984. The controlling trustee is Anthony Hayes Douglas-Brown. The central provision of the deed was clause 5 whicn, in effect, required that the Horsmans would, on or before 31 March 1986, pay their creditors enough to yield a minimum dividend of 25 cents in the dollar. By clause 12 the deed was to terminate after payment of administration costs, priority debts and aé distribution of remaining funds pro rata among the unsecured creditors. Upon termination the debtors would be released from all provable debts. 3. The Horsmans and the trustee maintain that, the terms of the deed having been satisfied, the Court should find that it has terminated and no leave is required. They will, in that event, plead the release as a defence to Robinswood's counterclaim on the basis that it 1s, by force of sub-s.233(1) of the Act, bound by the terms of the deed. Robinswood contends that the deed was never terminated as 1ts terms were never strictly complied with. In considering these submissions it 1S necessary first to address in more detail the relevant provisions of the deed. The Deed of Arrangement The deed was made between the Horsmans, jointly and severally, and the trustee. By clause 2 they assigned to the trustee all their interest in their divisible property, save for certain plant and equipment and a school bus business. In lieu of the excluded property, they were to pay to him, within 30 days, a sum of $10,500.00 (clause 4). Clause 5 provided:- 4. "The Debtors shall pay to the Trustee on or before 3lst March, 1986 the sum (1f any) which 1s sufficient when aggregated with the moneys (if any) payable by the Debtors under clause 4 and 6 to pay to each unsecured creditor at least 25 cents in the dollar for each debt approved by the Trustee in the separate estates each of the Debtors and the joint estate to be dealt with by the Trustee in accordance with the provisions hereof." Clause 6 covered the contingency that the school bus business might be sold or assigned by the debtors prior to 31 March 1986 and required in that case that all proceeds of such sale or assignment were to be paid to the trustee. Clause 8 regulated the mode of payment to the trustee and his disposition of the funds received:- "Subject to clause 9 the proceeds of the realisation of assets in accordance with clauses 2 and 3 and the moneys payable by the Debtors in accordance with clause 4, 5 (1f any) and 6 (if any) and all other property and funds (if any) the subject of this Deed shall be paid into the account of the Trustee and shall be applied by the Trustee in making payments in the order prescribed by Sections 108-114 of the Act as modified by Section 237(2)." Under clause 1] the deed was to bind all creditors:- "This Deed shall bind the secured creditors of the Debtors as well as the unsecured creditors PROVIDED THAT nothing in this Deed shall affect the right of a secured creditor to realise or otherwise deal with their security." The termination provision, clause 12, was in the following terms:- 5. "This Deed shall terminate:~ (a) upon the payment in full of all costs' and disbursements of the administration of this Deed including the remuneration of the Trustee and payment ain full of all priority debts and the distribution of the balance of the funds' the subject of this Deed pro rata among the unsecured creditors whose debts have been admitted to proof by the Trustee; and (b) otherwise in accordance with Section 235 of the Act." The consequential release was provided for in clause 13:- "If this Deed of Arrangement is terminated in such a manner that the termination 1s not deemed to be an act of bankruptcy pursuant to any section of the Act then upon such termination the Debtors shall be released from all provable debts." Upon release under clause 13, clause 14 provided that the trustee's interest in any unrealised assets would cease and he was to re-transfer any such interest to the Horsmans. Statutory Framework The requirement for leave in respect of legal proceedings against a debtor under a deed of arrangement is imposed by s.233 of the Act which provides:- "233(1) A deed of arrangement that is entered into in accordance with this Part and complies with the requirements of this Part 1s, upon being duly executed by the debtor and the trustee, binding on all the creditors of the debtor. 6. (2) Subject to sub-sections (3) and (4), where a deed of arrangement has become binding on the debtor's creditors, it is not competent for a creditor, so long as the deed remains in force - (a) to present a creditor's petition against the debtor, or to proceed with such a petition presented before the deed became so binding, in respect of a provable debt; or (b) except with the leave of the Court and on such terms as the Court imposes - (1) to enforce any remedy = against the property or person of the debtor in respect of a provable debt; or (ii) to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding. (3) Nothing in this section affects the right of a secured creditor to realize or otherwise deal with his security. (4) Nothing in this section shall he taken to prevent a creditor from enforcing any - remedy against a debtor who has executed a deed of arrangement, or against any property of such a debtor that is not vested in the trustee of the deed, in respect of any liability of the debtor under a maintenance agreement or maintenance order {whether entered into or made, as the case may be, before or after the commencement of this sub-section) ." Statutory backing 1s given to the release clauses in deeds of arrangement by s.234:- "234(1) Except in so far as the deed provides for the release of the debtor from his debts, a deed of arrangement does not operate to release the debtor from any of his debts. (2) Where a deed of arrangement provides that the debtor is to be released from one or more of his debts, the release is binding on the creditor or creditors to whom that debt or those debts was or were owing." 7. Provision for termination of the deed is made in s.235:- "235. A deed of arrangement is terminated by - (b) the passing of a special resolution to that effect by a meeting of creditors called for the purpose; (c) an order of the Court to that effect under section 236; or (d) the occurrence of any circumstances or event on the occurrence of which the deed provides that it is to terminate." Whether the Deed is Terminated The requirement that Robinswood obtain leave to proceed with its counterclaim will only arise if the deed 1s still in force and has not been terminated. The trustee has given evidence in this case that the total amount of ordinary unsecured creditors admitted in the estate was $76,895.23. He produced a print-out which showed that as at 24 March 1986, with one exception, all creditors had been paid a dividend of 25 cents in the dollar. The exception was a firm of solicitors, Messrs. Bryant & Owen, who had submitted a late proof and were paid their dividend of $95.05 on 13 May 1986. 8. It 1s, however, apparent that all contributions necessary to enable that dividend and the preceding dividends to be paid, had been made long before 31 March, The trustee was cross-examined by counsel for Robinswood and reference was made to other payments made in May 1986 in connection with the trustee's remuneration and the administration of the estate. In his closing submissions, counsel contended that the 25 cent dividend on the total sum of $76,895.23 representing admitted creditors, would require a contribution of $19,223.80 on the part of the debtors. In fact, 1t was said, a summary of receipts and payments showed total debtor contributions of only $19,109.15. This alleged discrepancy was never put to the trustee in cross-examination, but only raised in final submissions. Whatever the explanation for the figure that appears in the summary of receipts and payments, it is apparent from the running list of cash book entries that the trustee had by 31 March 1986 received sufficient to pay out a 25 cent dividend to every creditor. It was further contended that some of the payments shown on the cash book summary came from sources other than the debtors and therefore did not accord with the provisions of clause 5. 9. Even 1f this contention had any merit in so far as the proper construction of clause 5 is concerned, it does not affect the operation of the termination provision, clause 12, which is concerned only with the fact of payment and not its source. Counsel further submitted that one payment to. the trustee had been made after 31 March 1986 and this somehow constituted a non-compliance with the requirements of the deed. As to that the record of receipts showed an amount of $500.00 received on 10 May 1986. This sum was received from Kekerwich Pty Ltd, a debtor of the Horsmans, and was brought into the estate after the creditors had been paid in order to cover excess costs incurred by the trustee. There was, under the deed, no time limit for the payment of the trustee's costs and while the timing of that payment might affect the date upon which the deed should be said to have terminated, it could not defeat the operation of the termination clause. The termination of the deed was not affected by the fact that a firm of solicitors submitted a late proof to receive payment of the 25 cent dividend on 13 May 1986. The provisions of clause 5 did not require payment of the dividend by 31 March. salad mma our PORTO ETF 10. Nor in its terms did the deed require payment of the trustee's costs and costs of administration of the estate before that date. It provided that the deed was to terminate when all such costs had been paid and a distribution to creditors effected. I am satisfied that that has happened and, in my opinion, the deed has terminated. The grounds upon which it was suggested that the deed has not terminated were of a technical and = insubstantial character. Had I felt obliged to accept that they defeated the operation of the termination clause I would, in any event, have declined to grant the leave sought and left the trustee to call a meeting of creditors to terminate the deed by special resolution. In that regard, I note that a meeting of creditors was called on 24 April 1986 and passed resolutions approving the trustee's fees and certain other costs of the estate. The meeting also resolved that the debtors had completed the terms of the deed of arrangement and should be released as having complied with the terms of the deed. These were not special resolutions and could not have any determining effect under s.235(b). In the result, the application for leave will be dismissed on the basis that the deed of arrangement has been terminated. os ll. The consequence of that termination in terms of any release binding on Robinswood will, I think, be a matter for the District Court, as will any question of mutual debts and credits that might arise under s.237(2) and s.86 of the Act. I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment of his Honour Justice French. Associate: Delse-olh Writs Date: ({% Nowento! 1457 Counsel for the Applicant: Mr B. Wheatley Solicitors for the Applicant: Corser & Corser Counsel for the Respondents: Mr R. Cullen Solicitors for the Respondents: McManus Cullen & Clements Date of Hearing: 2 September 1987 Date of Judgment: 18 November 1987 eR ee