a _ JUDGMENT No. VA BANKRUPTCY - composition ~- application for approval and for >_> annulment of bankruptcy - composition conditional on non-existence of undisclosed assets - contrary to general purposes of Act - composition not approved. Bankruptcy Act 1966 s.73, s.74, s.150 Re: Peter Leopold Clyne (1978) 44 ABB 3902 Re: Malcolm Thomas Wardle Ex_ parte: Malcolm Thomas Wardle No. 113 of 1986 an FRENCH J. PERTH 22 DECEMBER 1987 IN THF FEDERAL COLPT ) OF AUSTRALTA ) GENERAL DIVISION ) BANKRUTPCY DISTRICT ) OF THE STATE. OF ) WESTERN AUSTRALIA ) Mo. 113 of 1986 Re: MALCOLM THOMAS WARDLE Bankrunt FX parte: MALCOLM THOMAS WARDLE Applicant MINUTRF OF ORDOR JUDGE MAKING ORDER: FRENCH J. DATE OF ORDER: 22 DECEMBER 1987 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The application will be dismissed. Note: Settlement and entry of orders 1s dealt with in Rule 124 of the Bankruptcy Rules. IN THE FEDERAL COUPT ) OF AUSTRALIA ) GENFRAL DIVISION ) BANKRUTPCY DISTRICT ) OF THE STATF OF ) WESTERN AUSTRALIA ) No. 113 of 1986 Re: MALCOLM THOMAS WARDLE Bankrupt Ex parte: MALCOLM THOMAS WARDLF Applicant CORAM: FRENCH J. 22 December 1987 EX TEMPORE REASONS FOR JUDGMENT This is ar application to approve a composition pursuant to s.74 of the Bankruptcy Act. The applicant, Malcolm Thomas Wardle, became bankrupt on his own petition on 28 February 1986. He was then aged 39 years, with a wife and one child of 12 months dependent upon him for support. He was also required to maintain two children aged 17 and 15 years respectively from a previous marriage. Since 1981, under the terms of a maintenance agreement, he has been committed to paying $180.00 a month. He was, at the date of bankruptcy and still 1s, employed by Lombardo Marine Pty Ltd, as a fitter on a gross weekly wage of $310.00. Wardle was previously a director and shareholder of Chelam Pty Ltd which participated 1n a joint venture with another company, Avoca Holdings Pty Ltd, in the operation of the 2. Freemasons Hotel, Fremantle. Although not involved in the daily Management of the hotel he invested $27,900 in that venture. The hotel was initially successful but began to decline financially when the co-owner's representative became interested in another business. Ultimately 1t ceased operations. Wardle was employed out of the country between 1982 anc 1984 hut during that time became aware that the hotel had closed up. The principal debts disclosed in his' statement of affairs relate to his personal guarantees on behalf of Chelam Pty Ltd. He was unable to meet these and filed his debtor's petition on 28 February 1986. Hts statement of affairs showed assets of $955 and liabilities of $140,219. The principal creditors were the National Westminster Finance Australia Limited for $130,765 and the Swan Brewery Company Limited for $9,000. Those debts both arose out of guarantees. They have been admitted to rank for dividend in those amounts. There 1s also one other creditor for $454. Realisations in the estate have totalled $1,136.12. There have been no unrealised assets found and disbursements made by Mr T.J. Collinson, initially appointed as trustee, totalled $3,113.02. 3. On 12 June 19°7, Mr Wardle lodged with Collinson, a composition proposal which involved a payment of $€,000 to his creditors. With the pronosal was a cheque for $5,500. A further $500 was tendered on 28 August 1987. After payment of _ fees, funds available from the composition would yield a dividend of approximately 2.81 cents in the dollar. A meeting of the creditors was held on 14 July to consider the proposal. At that meeting the following special resolution was passed:- "That a Composition be and 1s hereby accepted from Malcolm Thomas Wardle (Fitter) based on the following:- l. Proceeds from the realisation of the Estate to the Gate of this meeting. 2. The sum of $5,500 being held by T.J. Collinson & Co. 3. The additional sum of $500 to be contributed by Mr. Malcolm Thomas Wardle. 4. Acceptance of costs and expenses in the Administration to the date of this meeting together with the settlement of Trustee's fees and expenses as approved but yet unpaid. 5. Subject however, to the assets of the Estate as described and referred to in the Trustee's report dated the 6th July, 1987." As Collinson reported to the meeting, the proposal offered the sum of $6,000 against possible known liabilities of $140,000.:;,4fhe composition was subject to costs but in order to estate he agreed, at the meeting of creditors, to of $1,500, representing approximately half of the 4. fees incurred, That would have left an amount available for creditors of $4,590, subject to the cost of the composition 1tself. Collinson recommended in his report to creditors that, having regard to the size of the composition, the Official Trustee should administer the estate from then on. The Official Trusteo in his report to the Court observes that all formalities provided under ss. 73 and 74 of the Bankruptcy Act have been complied with and that he 1S not aware of any conduct by Wardle prior to or Since the date of bankruptcy that has been other than satisfactory. He accepts that the causes of bankruptcy were the failure of the Freemasons Hotel venture and the reduction in Wardle's assets brought about by the failure of his first Marriage. He also attributes the bankruptcy, 1n part, to lack of business ability and acumen, and the failure to exercise some control of the business venture. There 1s no suggestion that any offences have been committed by Wardle and there are no matters of the kind specified under sub-s. 150(6) which would provide sufficient reason for the refusal or suspension of an order for discharge. All non-assenting creditors were advised of the application to approve the composition and none have appeared to oppose it. The report made by the previous trustee to creditors indicated that he had conducted intensive investigations into Wardle's affairs in respect of the period during which he was working ain Indonesia and atso ain relation to "rs Wardle's acguisitior ¢f a ferily home. He was able te trace thu tranefer o€ some funds in tke name of Wardle from a Singanore bank to Australia, but was unable to identify those Funds as bPaving been specifically used for the acquisition of the property. Wardle however, confirmed that those funds, totalling ahout $5,000, were utilized in the maintenance of his family. It was evident from the form of the composition proposal, as accepted by the creditors, and 1n particular para. 5 thereof, that there remained some doubt as to whether all available assets had been disclosed. Para. 5 in 1ts terms, simplv sayS:- "Subject however, to the assets of the Estate as described and referred to in the Trustee's report dated the 6th July, 1987." By itself this provision is meaningless. Some attempt is made to explain 1t in a letter to the Official Receiver from the previous trustee dated 21 December 1987, a copy of which has been placed on the file. In that letter 1t is said:- "Creditors accepted the Composition on the basis of the Assets of the estate as disclosed by Mr. Wardle. They were aware however of suggestions that Mr. Wardle may have invested some funds in a property registered in the name of his wife and as such, it could later be found that he may have an equity. The resolution therefore included a reservation that if the assets as disclosed by Mr Wardle were found to be wrong then the composition was restricted to the previously disclosed assets and not inclusive of any additional assets." ee 6. This, in my Opinion, Aiscloses a somewhat unsatisfactory position. When a court appreves a composition it should he reasonably satisfied that the composition 1S so far as possible intended to achieve finality in the disposition of the affairs of the bankrupt in relation to his existing creditors, and that it can provide a proper ground for the application for annulment which almost inevitably accompanies it. The exercise of the discretion to approve a composition is guided by principles which were set out by Deane J. in Re: Peter Leopold Clyne (1978) 44 ABB 3992, where His Honour said:- "Generally speaking, this court should be slow to refuse to approve a proposed composition or scheme of arrangement which has been duly approved by special resolution (1.e. by a majority in number and at least three quarters in value of those present, either personally or by attorney or proxy) at a properly convened meeting of creditors, in the absence of considerations which indicate the presence of one or more of the following factors: (1) That material was concealed from some or all of the creditors. (ii) That some or all of the creditors were unaware of material considerations which could conceivably have lead them to take a different view to the view expressed in their voting on the proposed scheme. (11i1)That some or all of the creditors were not given a proper opportunity of considering or voting upon the proposed composition or scheme. (iv) That the provisions of the proposed composition or scheme are unreasonable or clearly not in the interests of the creditors. (v) That the provisions of the proposed composition or scheme unfairly favour some class or classes of creditors over another class or classes or some creditor or creditors over another creditor or other creditors. ~ (vi) That some or all of the creditors voted in support of the prorose: comoaes 1t19N or scheme OF arrangement hy reason cf dishene st of collateral purposes or Orjects. (vi1)That the bankrupt has been guilty of such misconduct either leading to or in relation to the bankruptcy that, 1n all the circumstances including the period since the making of the sequestration order, 1t 1S necessary in the public interest to refuse to lend the sanction of the Court to the arrangement which he has reached with the ecreditors, or that the circumstances of the matter are such as to make 1t necessary for the court to refuse 1ts approval to the scheme for the reason that to give such approval would not be consistent with the general purposes of the Bankruptcy Act." I am conscious of the general principle that the court should be slow to refuse to approve a proposed composition which has been duly approved. I have very much in mind that the two Major creditors of the bankrupt support the proposed composition. There 1S no suggestion, or at least no proper evidence beyond doubts expressed by the previous trustee, of undisclosed assets. There 1s no suggestion of any class of creditors being favoured over another or of any failure to give creditors a proper opportunity of considering or voting upon the proposal. Nor 1S there any basis for saying that the votes in support of the proposed composition were made for dishonest or collateral purposes or objects. There 1s no suggestion that Wardle has been guilty of misconduct of any kind, and certainly not of such a kind as would of itself render the approval he seeks, contrary to the public interest. 8. However, it seems to me thet the form of the composition as 1t presently stands, with the qualification in para. 5, whether taken by itself or in the light of Collinson's letter, 15 inconsistent with the general purposes of the Bankruptcy Act with respect to compositions, In my opinion, a composition which 15 approved on the basis that 1t applies only to disclosed assets and purports to reserve the position of the creditors with respect to undisclosed assets 15 not consistent with those general purposes. In the circumstances, I am unable to give approval to the terms of the composition as presently proposed. I take that step with some regret because as Mr Wardle has pointed out, his continuing bankruptcy is blocking the opportunity that he might otherwise have to take up a management position with his present employer. It 1S a term of that employer's standard employment contract that at that level the position is not available to an undischarged bankrupt. It will be open to Mr Wardle should he wish to do so, to either reframe the terms of the composition in a way that 1s acceptable to the court, or alternatively, if that 1s thought to be impracticable, to consider making an application for discharge under the provisions of s.150 of the Bankruptcy Act. The application will be dismissed. I certify that the preceding eight (®) pages are a true comy of tho Peasons for Judgment ef bis Yoneur Justice French. Associate: mcberas. SKS Aa Recawtss \A&?. Date: Mr M.T. Wardle appeared on his own behalf. Mr F. D. O'Driscoll appeared on behalf of the Official Date of Hearing: 22 December 1987 Date of Judgment: 22 December 1987 Recelver.