NUDGMENT No. 2287-33 IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION ) LIMITED DISTRIBUTION BANKRUPTCY DISTRICT ) ) ) OF THE STATE OF WESTERN AUSTRALIA NO. 81 of 1986 RE: JOHN MICHAEL CROSS Bankrupt EX PARTE: JOHN MICHAEL CROSS Applicant MINUTE OF ORDER JUDGE MAKING ORDER: FRENCH J. DATE OF ORDER: 15 June 1988 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The composition proposed by the applicant and accepted by a meeting of his creditors held on 11 December 1987 is approved. 2. The applicant's bankruptcy be annulled. Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. 17 TOOIVYED en a ase 24 SUS FeueF AL COURT OF PoTPALIA bg ePAL ReCiolAY IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA LIMITED DISTRIBUTION eed No. 81 of 1986 RE: JOHN MICHAEL CROSS Bankrupt EX PARTE: JOHN MICHAEL CROSS Applicant CORAM: FRENCH J. 15 June 1988 REASONS FOR JUDGMENT On 12 February 1986 John Michael Cross became a bankrupt on his own petition. His statement of affairs disclosed assets of $30,000 by way of a book debt, since found to be irrecoverable. His disclosed liabilities totalled $199,650. However, six creditors not shown on the statement have lodged claims amounting to $34,753. Altogether 15 proofs of debt totalling $108,577 have been received and admitted. Nine known creditors who have not lodged proofs are owed $160,718. There have been no realisations and there are no unrealised assets. On 11 December 1987 a general meeting of creditors passed a special resolution accepting a proposal for a composition under which the bankrupt would pay to the Official Trustee $50,000 to be raised by loan from his prospective employer. That sum has now been paid to the Trustee and is held in his common investment fund. The bankrupt applies to the Court for approval of the composition and annulment of the bankruptcy. Circumstances of the Bankruptcy As appears from the report of the Official Trustee the bankrupt was born in the United Kingdom. In the ten years prior to 1981 he lived in South Africa and operated a ready-mixed concrete and earth-moving company. He sold his interest in that business in 1979 for what, he says, was a net return of $150,000. In 1981 he migrated to Western Australia. An initial business venture in oil and gas exploration in 1982 saw him bought out within the year for what he had invested, namely, $240,000. In February 1983 he bought a house in Dalkeith through his family trustee company for $310,000. He and his wife contributed $50,000 and borrowed a like amount from Churchill Energy Pty Ltd. The rest was borrowed from Perth Building Society and secured by a mortgage over the land. The bankrupt's financial difficulties seem to date from the time he tried to enter the video tape production and distribution business. In December 1982 he incorporated Prestige Video Productions Pty Ltd with his brother as a co-director to carry on a business of acquiring film rights, producing video cassettes from master tapes and distributing them. The company's borrowings were secured by personal guarantees given by the bankrupt and his brother. Another company, Prestige Video NSW Pty Ltd, was set up to distribute video tapes in New South Wales. Silverscreen Promotions Pty Ltd was incorporated to purchase film rights and sell them to Prestige Video Productions Pty Ltd. The 3. New South Wales company failed. Its financier, a merchant banker, F.J. Hawkes, had taken security over its assets and those of the bankrupt's corporate family trustee. Hawkes appointed a_ receiver and subsequently the bankrupt's house in Dalkeith was sold for $285,000. The New South Wales company went into liquidation and the Western Australian company was an unsecured creditor in that liquidation for $112,000. The straw that seems to have broken the camel's back was a demand for sales tax in the amount of $740,000 which sent Prestige Video Productions Pty Ltd into liquidation. The same fate was shared by Silverscreen Promotions. The deficiency in Prestige Video was over $im. The shortfall in the liquidation of Silverscreen Promotions is estimated at $60,000. Undeterred by these failures, the bankrupt incorporated a new company, Kingston Hughes Marketing Ltd, in New Zealand, to carry on a business of marketing and distribution of video tapes. He and his brother each had a 25% interest in that company. He provided to it certain master tapes acquired by Silverscreen Promotions. On that company's liquidation, however, film rights acquired by it reverted to their vendors. The bankrupt's claim for $30,000 is in respect of the debt allegedly owed to him by Kingston Hughes. That company is, however, no longer trading and has no assets. There is apparently no possibility of recovering the $30,000 even if the claim could be established. 4. The Composition Proposal The proposal as put to a general meeting of creditors was, in substance, as follows:- "1. That payment of all the proper costs, charges and expenses of and incidental to the proceedings and all fees payable to the Official Trustee in Bankruptcy shall constitute a first charge on the moneys referred to in paragraph 3 hereof. 2. That payment of all priority debts directed to be so paid under the Act in the distribution of the property of a bankrupt shall constitute a second charge on the moneys referred to in paragraph 3 hereof. 3. That the Composition shall be paid on all proved debts from the following funds: {a) From all moneys in my estate held by the Official Trustee in the Common Investment Fund. (b) From the sum of $50,000 to be provided as set out in paragraph 4 hereof. 4. That the payment of the composition be secured in the following manner: By Loan to J.M. Cross From Prospective Employers." Those voting in favour of the proposal were two representatives of creditors voting in person, and four creditors voting by proxy. The value of the assenting creditors' claims amounted to $77,537. Post-Bankruptcy Conduct As the Official Trustee reports, Mr Cross' conduct since becoming a bankrupt has not been satisfactory. In March 1988 he was convicted in the Perth Court of Petty Sessions of 8 counts of imposition for claiming unemployment benefits while actually employed. The offences were said to have been committed between January and March 1986. He was found guilty, fined $2,000 and ordered to pay restitution and $1,380 costs. He has also, since the bankruptcy, travelled overseas without the written consent of the Trustee as required by s.272(c) of the Act. The Trustee's report referred to some four occasions namely, September 1986, November 1986, March 1987 and April 1987. On 15 January 1988 he was convicted of a breach of s.272(c) of the Act and was' fined $300 and ordered to pay costs of $441. In his oral evidence Mr Cross told this Court that he had travelled overseas on a number of occasions, without knowing that he was in breach of the Act by doing so without the consent of the Trustee. The trips were funded by a company called Codica Pty Ltd whose directors are his brother and his wife. The company carried on the business of boat broking and was acting under a consultancy agreement with Marine and Leisure Ltd in Fremantle. That agreement was discontinued in 1987. It was evidently during the first few months of his employment by Codica that he continued to claim unemployment benefits, as that company did not receive its first commission cheque until April 1986. 6. The bankrupt is now employed by a company called Assurance Management Pty Ltd and has been employed by it since October 1987. The directors are his wife and brother. The sum of $50,000 comprising the composition has been advanced to him by Westmark Group Ltd. This company desires to engage him as managing director of a subsidiary called Satcomm Pty Ltd, in which Assurance Management Ltd has a 49% share. As managing director of Satcomm, the bankrupt will receive $4,000 per month plus bonuses. In his affidavit in support of the application, he says that he will repay the $50,000 out of his earnings. However he also says:- "If my bankruptcy is not annulled then I shall not be able to act as managing director of Satcom (sic) of the Westmark Group and nor shall I. be able to repay the $50,000 loan. I would respectfully ask this Honourable Court, if it was mindful not to annul my bankruptcy, to not approve the composition proposal. To do otherwise would mean that my responsibilities to my creditors would be transferred to the Westmark Group, my employer. I would have no prospect of ever repaying my employer and could not continue in its employ". It would be indeed surprising if the Westmark Group, having advanced the sum of $50,000, had not made some arrangement with the bankrupt's family to recover that amount in the event that he was not able to take up the position. 7. Application for Approval of the Composition The composition has been recommended by the Official Trustee to the creditors as being for their benefit and the creditors have resolved to accept it. The Court in deciding whether to approve the composition will need to be satisfied that the proposal is reasonable, is in accordance with the provisions of the Act and will benefit the creditors generally and to a greater extent than the continuing administration of the bankruptcy: Re Lewis; Ex parte Lewis (1987) 77 ALR 165, 173; Re Fryda (1964) 6 FLR 144, 152; Ex parte Bischoffscheim. In re Aylmer (1887) 19 QBD 33. And I refer generally to the criteria set out by Deane J. in Re Clyne (1978) 44 Australian Bankruptcy Bulletin 3902 at 3901 as cited in Re Lewis (supra) at 173-174. The composition in this case offers the creditors, who otherwise had little hope of any return, a recovery of between 16 and 20 cents in the dollar, depending upon the lodgment of proofs of debt by any of the outstanding creditors. One of the criteria set out by Deane J. in Re Clyne (supra) as a basis upon which approval of a proposed composition may be refused is that the bankrupt has been guilty of such misconduct, that in all the circumstances it is necessary in the public interest to refuse to lend the Court's sanction to the arrangement which he has'' reached with the creditors or that the circumstances of the matter would render any approval inconsistent with the general purposes of the Bankruptcy Act. Although the bankrupt has in this case been guilty of misconduct, I am not satisfied that it impinges in any significant way upon my discretion in relation to this proposed composition. To refuse to approve the composition would be to deny to the creditors any relief at all. In the circumstances, the public interest does not demand that drastic course. The composition as proposed will therefore be approved. Annulment of Bankruptcy The bankrupt in his supporting affidavit has asked that if the bankruptcy be not annulled then the composition be not approved. This linking of the approval of the composition to the annulment application is misconceived. The question whether a bankruptcy should or should not be annulled arises in the exercise of a discretion which is separate and distinct from the discretion to approve a composition. In the case of an application for annulment, the Court must consider not only the interests of the creditors and of the bankrupt but also those of the public and commercial morality - Re Groom (a bankrupt); Ex parte The Bankrupt (1977) 16 ALR 278, 283-284. The conduct of the bankrupt in this case has given cause for some disquiet about his readiness to ascertain and obey the law as it applies to him. On the other hand he has been punished for his breaches which were not the most serious of their respective kinds. He has been a bankrupt' for some 2 1/2 years. The Official Trustee does not oppose the proposed annulment and it will facilitate the discharge of his 9. obligation to Westmark in respect of the $50,000 advance. In all the circumstances I am prepared to order that the bankruptcy be annulled. The orders will be as follows:- 1. The composition proposed by the applicant and accepted by a meeting of his creditors held on 11 December 1987 is approved. 2. The applicant's bankruptcy be annulled. I certify that this and the preceding eight (8) pages are a true copy of the Reasons for Judgment of His Honour Justice French. Associate: Dolo mk WSK Date: |S Sun 1985 Counsel for the Applicant: Mr M. de Kerloy Solicitors for the Applicant: Messrs. Kott Gunning Mr I.K. Campbell appeared for the Official Receiver Date of Hearing: 13 June 1988 Date of Judgment: 15 June 1988