JUDGMENT No. 74:9./,.8%... CATCHWORDS BANKRUPTCY - composition -— application to declare void or set aside - omission of material particulars in statements of affairs - whether in the interest of creditors to declare composition void - whether full payment of agreed sum to trustee by debtors means that "the final payment has been made under the composition" within the meaning of sub~s.222(6) of the Act — whether composition should be set aside "for any other reason" - relevant factors. Bankruptcy Act 1966 ss.187(1), 222 and 239 RE: JAMES IAN LOVE and DEBRA JANE LOVE EX PARTE: NATIONAL AUSTRALIA BANK LIMITED No. 564 of 1987 Woodward J 21 July 1988 Melbourne .Veocy crn ? ae ae ac IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION No. 564 of 1987 BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA RE: JAMES IAN LOVE and DEBRA JANE LOVE Debtors . and EX PARTE: NATIONAL AUSTRALIA BANK LIMITED a Creditor MINUTES OF ORDER COURT: Woodward J. DATE: 21 July 1988 PLACE: Melbourne THE COURT ORDERS THAT: 1. The compromise entered into on 21 January 1988 be set aside. 2. Sequestration orders be made against the estates of the debtors. Note: This order is to be settled and filed in accordance with rule 124 of the Bankruptcy Rules. ey, IN THE FEDERAL COURT OF AUSTRALIA) GENERAL DIVISION No. 564 of 1987 BANKRUPTCY DISTRICT OF THE ee ee STATE OF VICTORIA RE: JAMES IAN LOVE and DEBRA JANE LOVE Debtors and EX PARTE: NATIONAL AUSTRALIA BANK LIMITED a Creditor COURT: Woodward J. DATE: 21 July 1988 PLACE: Melbourne REASONS FOR JUDGMENT WOODWARD J. This is application to have a composition under Part X of the Bankruptcy Act 1966 ('the Act') either declared void pursuant to s.222 of the Act or set aside pursuant to $.239. Those sections, so far as they are relevant for present purposes, provide as follows: "222 (1) ..... (2) ....e (3) ...-- weer = me celal tiie el heat Rn ee Seeger carla ce (4) Where the Court, on the application of the trustee or a creditor, is satisfied that the debtor - (b) has omitted a material particular from the statement of his affairs under section 195 or included an incorrect and material particular in that statement, the Court may make an order declaring the deed or composition to be void or declaring any provision of the deed or composition to be void. (5) The Court shall not make an order declaring a deed or composition, or a provision of a deed or composition to be void on a ground specified in sub-section (4) unless it is satisfied that it would in the interests of the creditors to do (6) The Court shall not make an order under sub-section (2) or (4) unless the application for the order is made - one (c) in relation to a composition —- before the final payment has been made under the composition. (7) The trustee or a creditor may include in an application under sub-section (1) or (4) an application for a sequestration order against the estate of the debtor and if the Court, on the first-mentioned application, makes an order under sub-section (2) or (4) declaring the deed or composition to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought. (8) ...- (9) Phe making of an application by the trustee or a creditor for a sequestration order under this section shall, for the purposes of this Act, be deemed to be equivalent to the presentation of a creditor's petition against the debtor, but the provisions of sub-section 43(1), sections 44 and 47, sub-sections 52(1) and (2) and Part XIA do not apply in relation to such an application. so. a (10) .... 239 (1) A creditor may, within 21 says from the date on which the special resolution accepting a composition under this Part was passed, apply to the Court for an order setting aside the composition and may also apply for the making of a sequestration order against the estate of the debtor. (2) Tf the Court, on such an application, considers that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the composition ought to be set aside, it may make an order setting it aside and, L£ it thinks fit, may forthwith make the sequestration order sought. (3) .... (4) The making of an application for a sequestration order against the estate of a debtor under this section shall, for the purposes of this Act, be deemed to be equivalent to the presentation of a creditor's petition against the debtor, but the provisions of sub-section 43(1), sections 44 and 47, sub-sections 52(1) and (2) and Part XIA do not apply in relation to such an application." In 1987 the debtors, Mr & Mrs Love, were shareholders in two companies which ran a business buying and selling pallets and carrying goods on three leased trucks. The companies were Tobex Investments Pty Ltd (''Tobex') and D I Love Holdings Pty Ltd, as trustee for the J I and D J Love Family Trust. The business was carried on in the trade names of 'Wright Pallet Supply' and ''AA Aussie Pallets'. The debtors were the registered joint proprietors of three house properties. The first, at 4 Lumeah Place, West Melton, was mortgaged to the Challenge Bank and plays no significant part in these proceedings. The second, at 8 Outawood Drive, Gisborne was mortgaged to the applicant on'5 January 1987 as security for any advances from the applicant to the debtors and for any guarantees given by the debtors to the applicant. The third, at 23 Beresford Crescent, Bacchus Marsh, was the joint property of the debtors and two relatives, Andrew Love and his wife, who were also involved in the pallet business. The four joint proprietors mortgaged this property to the applicant, to provide security for advances and guarantees, also on 5 January 1987. On 25 June 1987 the debtors jointly guaranteed the borrowings of Tobex and D I Love Holdings up to a limit of $280,000. On 31 August 1987 they further jointly guaranteed the borrowings of D I Love Holdings to a limit of $6500. On or about 9 September 1987 the debtor James Ian Love had a bad fall at work and was seriously incapacitated. He was unable to attend to the affairs of the business, for which he had been largely responsible, and these were carried on by his brother Andrew. The business, over the weeks that followed, went deeper into debt than it had already been. By the end of November 1987 it was hopelessly insolvent. Meanwhile, about mid-November 1987, the applicant saw fit to issue James Ian Love with a fresh gold Mastercard, which enabled him to obtain cash of up to $5000 a time and also gave him an unlimited line of credit on purchases of up to $5000 at a time. Mr Love, who already owed over $5000 on sy Voce ce an ~ omen his National Australia Bank Bankcard {and over $8000 on Commonwealth Bank and Westpac cards) made extensive use of his credit facilities. He drew a total of $45,000 in cash between 25 November and 30 November. With this money he paid $35,000 to a man whom he says that he knows only as 'Wally', for used pallets supplied to the business. He said in evidence that Wally had threatened his life if he did not pay. $7000 was paid to Mercedes Benz for repairs to a truck which it would not release without payment. The remaining $3000 was paid to the Essendon Football Club in satisfaction of a company debt for sponsorship and advertising. Purchases using the Mastercard were made as follows: (a) $1,700 "paid to Brashs Pty Ltd for a stereo that was given to Jeffrey Patterson as part payment of a debt"; (b) $1,198 "paid to Myer for two TV sets ... given to Jeff Patterson in part repayment of a debt"; (c) $2,390 and $3,000 "paid to Myer for a TV and video camera which were given to Jeff Patterson in part repayment of a debt"; (d) $1,904 "paid to Brash Pty Ltd for a video and TV and prior to the meeting [of creditors] were given to J. Nicholson in repayment of a debt"; (e) $1,589.20 and $5,000 "paid to A Champion & Sons for tarpaulins for the company trucks"; (£) $5,000 "paid to Don N. Di's for paint for the company"; (g) $3,058 "paid to Myer for a computer for the company"; (h) $338 "paid to City Camper for a refrigerator for a company truck"; (i) $2,094 "paid to City Camper for two refrigerators for company trucks"; (j)} $5,000 "paid to Fas Bianco for petrol"; (k) $2,339 "paid to Load Restraint System for dogs and chain for the company trucks"; (1) $2,108 "paid to Stan Cash for a stove for 23 Beresford Crescent"; (m) $3,290 "paid to H.J. Reece for bathroom refitting to 23 Beresford Crescent"; (n) $2,000 and $5,000 "paid to Blue Seas Pools for heating and plumbing at 23 Beresford Crescent"; (o) $206 "paid to Clarke Rubble (sic) for an outdoors table"; (p) $2,800 "paid to Tony Barlow for purchases of clothes for myself [James Ian Love]"; (q) $199 "paid to McEwans for a Barbeque and was given as a Christmas present to my father". There were three other small purchases from Myer and three items totalling $15000 which were debited but later credited, because the goods concerned were not delivered, as a result of action by the applicant. It will be noted that, down to and including item (k), the payments were allegedly made for debts owing by, or purchases for, the pallet and carrying business. This was stated by Mr Love in his evidence, where it did not appear clearly in his affidavit. All the purchases other than item (p), which was dated 16 November 1987, were made between 24 November and 3 December 1987. In late November or early December 1987, Mr Love, urged by his brother Andrew, went toa see a firm of accountants to seek advice about the financial position of the companies and the four individuals concerned - Mr J I Love, his brother and their wives. As a result of this a letter was sent by the firm, Gordon Mason and Associates ('GMA') to Mr Raciti, the manager of the branch of the applicant at which three Loves banked. It was dated 7 December 1987 and, omitting formal parts, read: "Dear Sir, Tobex Investments P/L D.I. Love Holdings Pty. Ltd. Mr. & Mrs. J. I. Love and Mr. & Mrs. A. Love We refer to your letter of the 3rd of December, 1987, regarding the above and confirm as follows:- i. Tobex Investments P/L and D. I. Love Holdings P/L have sold the business Aussie Pallets to R. & E. Clarke as Trustees for a company to be formed. The proceeds to this sale which was calculated at book values will be handed to the eventual liquidator of the two (2) companies to distribute between Creditors. 2. Both Companies are completely insolvent and we have advised the Members to initiate a voluntary wind-up immediately and place the companies in the hands of a Court Liquidator. 3. As regards the Loves' personally, we now have signed s{188) Authorities under the Bankruptcy Act 1966 enabling a Meeting of their Creditors to be called. All enforcement procedures against the Loves are now halted until the date of the meeting at which either a settlement with Creditors will be agreed or they will be required to sign a Debtors Petition for full Bankruptcy. A statement of affairs will be provided for Creditors perusal at that meeting. We will arrange that all notifications or correspondence in-respect of the Liquidator or Bankruptcy meetings and proceedings will be forwarded to your Branch to your attention. We would advise that all accounts should now be closed." It was suggested, though not proved in evidence, that communication between Mr Racit1 and GMA began with a telephone call from GMA in late November, and Mr Raciti's letter of 3 December (mentioned above) referred to this call and sought further information. I find it difficult to reconcile Mr Love's frantic activities, paying debts of the business and making purchases for it, between 24 November and 3 December, with the fact that the business was sold on 1 December to R & E Clarke. It is no doubt significant that Mr Robert Anthony Clarke, who gave evidence, is the brother-in-law of Mr Love, being married to his sister, Mrs E. Clarke. The signed authorities under s.188 of the Act, referred to in the GMA letter, were apparently not acted upon. However I have no reason to doubt that they were in existence on 7 December 1987, as stated by GMA. wee ee oe On 22 December 1987 the debtors signed another authority under s.188, authorising their solicitor, Mr Shannon, to call a meeting of their creditors. Such a meeting was held on 21 January 1988. It was attended by the debtors, Mr Shannon, and Mr Kerr of Messrs Alex Kerr and Associates, a creditor of the debtors. Mr Shannon held proxies from two other debtors, Ambros Pty Ltd and J.B. Osgood Motors. : Also at the meeting, as an observer only, was a representative of the applicant. I was given no explanation as to why the applicant chose to take no part in the proceedings. Had it done so, it would have been in a position to control the meeting and all the present litigation could have been avoided. In the circumstances, there can be no sympathy for the applicant in the events that have occurred. a Statements of affairs were presented to the meeting on behalf of each of the debtors and a third statement dealt with their joint debts. Mr Love's statement showed unsecured debts to Westpac Bankcard - §3500 Commonwealth Bankcard - $2008 Commonwealth Mastercard - $4839, It showed no assets. - 10 - Mrs Love's statement showed an unsecured debt to Westpac Bankcard of $1600, and no assets. The joint statement, signed by both debtors, showed no assets and the "Particulars of my contingent liabilities" were shown as "NIL". The total deficiency of $361,475 was made up as follows: 1. Unsecured creditors, totalling $216,475 were shown as: Name Amount of debt . Alex Kerr & Ass. 1,200 National Aust. Bankcard 5,235 N.A.B. Mastercard 124,740 Ambros Pty. Ltd. 60,000 J.E. Osgood Motors 25,000 Shire of Gisborne 300 a 2. Secured creditors, with an estimated deficiency of $80,000 were shown as: Name of Amount Particulars of Estimated Estimated creditor of debt security value of deficiency security at present Challenge Bank 10,000 4 Lumeah Place, 75,000 25,000 W. Melton N.A.B. 115,000 8 Outawood Drive, 60,000 55,000 3. There was also an estimated $65,000 owing in debts to hire purchase firms in relation to motor vehicles. os wer eer er tee sean es = -il1- The minutes of the meeting of creditors show that a special resolution was passed that the debtors should enter into a composition with their creditors. The deed of composition which was approved provided for the payment by the creditors to their trustee of the sum of $15,000, payable by equal monthly instalments of $1,250. A registered trustee, David John Pratt, was appointed trustee. In fact the full sun of $15,000 was paid to the trustee at the end of the meeting, having been provided to the debtors by the same Robert Anthony Clarke who, with his wife, had purchased the pallet and carrying business from the Love companies a few weeks earlier. The applicant alleges that the debtors omitted several material particulars from their statements of affairs. These were: (a) Although the indebtedness arising from Mr Love's use of the gold mastercard was shown (and indeed increased by some $10,000) in the joint statement of affairs, nothing was said as to the use to which that money had been put. At least it meant that large sums of money had been paid on behalf of Tobex and D.I. Love Holdings Pty Ltd. And since a number of the payments were only made on 1 December 1987, the day that Mr Clarke and his wife took over the business, it may be that some of them were paid, in effect, on their behalf. Although it seems unlikely that any worthwhile part of the $96,000 actually dissipated could be recovered, the circumstances of this very recent expenditure - mostly on the pote prec e ween ee . " -12- business -— should have been disclosed. (b) There was no mention in the joint statement of affairs of the debtors' contingent liability for $280,000 on their guarantees of the debts of the failed companies. Contingent liabilities were said to be 'Nil', which was undoubtedly a mis-statement. (c) There was no mention of the debtors' half interest in the property at 23 Beresford Crescent, Bacchus Marsh; or of the mortgage of that property to the applicant as security for guarantees and advances. It was suggested that this omission was somehow related to the fact that Andrew Love and his wife were equally involved in the property and the mortgage and had also called a meeting of their creditors. Clearly the interest and the mortgage should have been disclosed. It is true that the total effect of these omissions would only have been to increase significantly the total amount of the debtors' indebtedness - since the Bacchus Marsh property is apparently worth a good deal less than the $280,000 now owing on the guarantees. It may be speculated that the result of the creditors' meeting would have been the same if this information had been disclosed, since the only creditor present in person and voting was Mr Kerr, who was only owed a comparatively small amount, and who had apparently known the debtors for some time. However I have no doubt that the debtors did omit the particulars mentioned from their statements of affairs -13- and they were ''material particulars' within the meaning of sub-s.222(4) of the Act. Whether it would be in the interest of creditors to make an order declaring the composition void {see sub-s.222(5)) is a much more difficult question. Having given the.matter careful consideration, I find that I am not satisfied that it would be in the interest of creditors to do so. It may be that a closer examination of the affairs of the debtors, and particularly the nature of the arrangement between them and Mr and Mrs Clarke for the taking over of the business, might disclose some additional assets which could be claimed for the benefit of their creditors, but I have no confidence that this would be so. Since the Act requires that I should be positively satisfied on this score before declaring the settlement void, this part of the application fails. Before leaving s.222 of the Act, I should say that it was argued for the debtors that the Court had no power to declare the composition void pursuant to that section because "the final payment has been made under the composition" within the meaning of sub-s.222(6) (above). It is clear that the debtors made the whole payment required of them by the composition on the same day that the composition was approved by the meeting of creditors. A trustee's certificate pursuant to s.243A of the Act was also -14- given the same day. That certificate, omitting formal parts, stated: "I .... hereby certify that I am satisfied that the terms of the Composition have been carried out." However it was not suggested by the solicitor for the debtors - who was chairman of the meeting and has continued to act for the debtors - that the monies paid by the debtors have been distributed to creditors. In view of the uncertainties surrounding the true extent of the present applicant's claims - especially the deficiencies likely to be revealed after securities have been realized - it is inherently unlikely that distribution has occurred. I am certainly not satisfied that it has, and the onus of establishing the point is clearly on the debtors. The solicitor for the debtors argued that the final payment referred to by the sub-section was the last payment » required of the debtors ~ which in this case has clearly been paid to the trustee. This point has been decided adversely to the debtor by Gray J in Re Honny Watkinson, ex parte the Registrar in Bankruptcy (unreported, 3 March 1986). In that case his Honour distinguished Re Doukidis (Toohey J, unreported, 26 June 1985) because there the only payment called for by the composition was one to the trustee, to cover his fees and out-of-pocket expenses. The trustee had transferred the money from his trust account to his office account, and paid his expenses, before the application under s.222 was made. No payment to creditors was required and so, ~y a" —~ 15 - naturally, Tochey J held that the final payment had been made. Nothing in his judgment assists the debtor's argument in this case. Indeed his reference to ".... the final payment, albeit the only payment and one made to the trustee ..." suggests that, in his Honour's view, the final payment will normally be one made to a creditor or creditors. In my view the clear meaning of sub-s.(6) is that the application to set aside must be made before action under the section is completed. Each of the subsections is to this effect. In the case of (a) the final dividend under the deed of assignment must not have been paid; in (b) all the terms of the deed of arrangement must not have been carried out; and in (c) the final payment required to complete the composition must not have been made. This reading is confirmed by a consideration of the definition of 'composition' in s.187 of the Act. It reads, a "187.{1) In this Part, unless the contrary intention appears-— 'composition' means an arrangement (not being an arrangement entered into for the purposes of a proclaimed law) by which the creditors of a debtor- (a) agree to accept payments of the debts due to them by instalments; or (b) agree to accept, in full satisfaction of the debts due to them, less than the full amount of those debts, whether in the form of money or other property and whether by instalments or otherwise;" a ee en me em ew 7 woo. eee ~ 16 - This shows that it is the acceptance by the creditors of delayed or reduced payments which is the essence of a composition. I have no doubt that these are the payments referred to in s.222(b). Pinally, it is consistent with the logic of the situation that deeds and compositions will not be declared void after they have run their course and nothing further remains to be done, If, however, a debtor has concealed assets, or failed to reveal debts, or if some other significant defect in the proceeding has emerged, there is no reason why remedial action should be denied simply because the debtor has been quick to make any payments required of him under the composition. I turn now to consider my decision under s.239 of the Act. The first point to be made is that, for the reasons already given under s.222, I am not satisfied that the composition should be set aside for the reasons that its terms are 'unreasonable' or 'not calculated to benefit the creditors generally' (see sub-s.239(2)). However the question whether it should be set aside 'for any other reason' I find much more difficult. The reasons which leads me to consider setting it aside are the extraordinary behaviour of Mr Love in the few days before he finally decided to authorise a meeting of creditors, and the suspicion I have that there may be a connexion between his profligate behaviour with his gold mastercard in paying off -17 - business debts that he did not owe personally, his sale of that business to his sister and brother~in-law at the same time, his authorising a meeting of creditors a few days later and the brother-in-law's production of $15,000 immediately following the meeting of creditor's. I accept that Mr Love was the victim of serious misfortune last September; but his behaviour in late November was, to put it kindly, very wrong. And his demeanour in the witness box did nothing to reduce my suspicions of the way in which this composition was arrived at. I believe that, in the light of this serious misconduct by the debtor, a possibility of collusion between him and the relatives supplying the funds for the composition payments, the non~disclosure of material facts in his statements of affairs, and the unsubstantiated nature of some of the payments allegedly made by him immediately before accepting his inevitable insolvency - particularly the payment of $35,000 to 'Wally' - this composition should be set aside. In saying this I have not overlooked the interests of creditors, who could finish up receiving nothing, instead of the few cents in the dollar which the composition would have given them. But I think it is more important that the debtors' affairs be fully investigated by the Public Trustee following the sequestration of their estates. The affairs of ny -~ 18 - Mrs Love are completely entangled with those of her husband and there is no way the composition, so far as she is concerned, could be separately preserved even if I were persuaded that there are grounds for doing so, which I am not. For the reasons given, it is ordered that the composition entered into on 21 January 1988 be set aside and that sequestration orders be made against the estates of the debtors. Because of the view I have expressed of the applicant's conduct in this matter I made no order as to costs. I certify that this and the seventeen (17) preceding pages are a true and accurate copy of the Reasons for Judgment herein of The Hon Mr Justice Woodward Associate Dated: 21 July 1988 Counsel for the Debtors: Mr I. Shannon Solicitors for the Debtors: Shannons Counsel for the Creditor: Mr I. Sutherland Solicitors for the Creditor: Mallesons Stephen Jaques Date of hearing: 16 June 1988 a? ee eee