JUDGMENT No. L224, F225 IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) BANKRUPTCY DISTRICT ) OF THE STATE OF NEW SOUTH WALES ) No. NX 146 of 1994 Re: JOHN CAMPBELL HAWKINS Debtor Ex parte: DEPUTY COMMISSIONER OF TAXATION Applicant/Creditor And: JOHN CAMPBELL, HAWKINS First respondent And: RODERICK GERARD CUNICH Second respondent REASONS FOR JUDGMENT EINFELD J SYDNEY 30 MARCH 1995 By application to the court filed on 18 November 1994, the Deputy Commissioner of Taxation seeks a series of orders concerning a meeting of the debtor's creditors called on 19 October 1994, following upon an authority signed by the debtor under section 188 of the Bankruptcy Act (the Act), to consider a deed of arrangement under Part X of the Act. The orders sought relate not particularly to that meeting but to the purported signing by the debtor of a second authority on 28 October 1994 calling a further meeting of creditors on 21 November 1994, by seeking a declaration that the second authority is invalid ang injunction to stop the November meeting. FEDERAL COURT OF AUSTRALIA 21 JAN 2nn3 LIBRARY Sooncoscenen - 2 - The circumstances of this matter are of some peculiarity but it is first necessary to state that the Deputy Commissioner issued notices of assessment to the debtor for the years ending 30 June 1989 to 30 June 1992 inclusive which, together with additional tax for late payment and presumably interest, now require the payment by the debtor to the Deputy Commissioner of a sum in the order of $700,000. In fact the total indebtedness of the debtor as at the time of the meeting held on 19 October was somewhere in the vicinity of $50 million. The meeting was called to consider a proposal that he pay to his trustee, for the benefit of his creditors, the sum of $300,000 by instalments, half of the money to be paid each 6 months of the first 18 months after the execution of the deed, and the remaining $150,000 within 24 months of its execution. There is no evidence before the Court at all as to how this money is intended to be obtained nor is there any security given or offered for its payment. The principal aim of the Deputy Commissioner's application is, however, actually to obtain a sequestration order pursuant to section 221(1) of the Act. The circumstances of that application, which is really the central point of the application before the Court, is that at the meeting on 19 October the Part X arrangement failed to obtain the statutory votes for acceptance by the creditors whereas a special resolution did pass calling upon the debtor to present a debtor's " partition. He having failed to do so, the Deputy Commissioner becomes: 'entitled under section 221(1)(b) to request and seek a * sequestration order subject to certain formalities. -~3- The peculiarity of this case is identified by the opposition that has been raised to the Deputy Commissioner's application. There is no application before the Court to challenge the meeting of 19 October or set it.aside but I am prepared, for the purposes of considering this issue, to put that failure to one side and to treat the matter as if such an application had been filed. In fact, it seems to me that the Deputy Commissioner does not need the declaration of invalidity of the second section 188 authority or the injunction to stop the second meeting. He can simply move for the sequestration order without any additional orders at all. The basis upon which the opposition: is mounted is that the meeting of 19 October miscarried. The controlling trustee was Mr Richard Brien but his employee Mr Brad Fowler, who has given evidence, was in fact the effective operator at the meeting. The claim is made that three decisions or actions either of the Chairman of the meeting or of the meeting itself led to a decision which did not properly reflect the spirit of the meeting. In the first instance it is said that a number of ereditors were admitted to participate and vote who should have been rejected. These were a series of companies that for present purposes can be described as the South Australian group who were actually provided with the capacity to vote in respect of one dollar each and whose vote, therefore, would have had little effect on the value of the votes but had a decisive result in relation to the number of votes. ~4- The submission is made that this group of creditors should not have been admitted to vote at all and reasons are given or advanced in that connection. It is, however, not necessary and appropriate for me to consider that matter. If this had been an application to invalidate the meeting of 19 October, it would have been necessary to serve those creditors who were present, and probably even those who were not present. The people whose votes are challenged would have then been entitled to mount whatever defence of their right to vote they wished or was appropriate. I have not been given the benefit, therefore, of any answer to the challenge to their admission to vote, and it is obvious that I cannot accept the untested allegations in this regard made by the debtor. The second alleged miscarriage of the meeting was the rejection by the Chairman of the voting proxy provided by the Hong Kong Bank of Australia Ltd. Evidence has been filed in these proceedings -- albeit late and after an adjournment was granted to permit it to be done -~ by the senior manager of the Special Assets Group of the Hong Kong Bank. This evidence is that following upon his receipt of the documents from Mr Brien in respect of this meeting, which included documents relating to the granting of proxies,. his manager, Mr Varnay, arranged for the common seal of the bank to be affixed to an appointment of a proxy and to forward that proxy to Mr Brien. There is also evidence that Mr Varnay discussed the bank's position with Mr Fowler and told him, in what I presume to be a -5- telephone conversation, that the bank was supporting the Part xX proposal. In fact, the proxy was a wholly deficient document. Under or over the common seal of the Hong Kong Bank, it purported to appoint Mr Richard Brien to be the proxy of the bank at the meeting "to vote on all matters arising at the meeting". It did not disclose whether Mr Brien or his representative was to vote in favour of or against any particular resolution. In particular it did not give any directions as to voting in respect of special resolutions. The proxy did not even state the value of the debt which the Hong Kong Bank claimed to be owed. It is now known to have been a very substantial sum indeed. The proxy was accordingly rejected and the vote of the Hong Kong Bank was not registered in favour of the Part X arrangement. The third attack on the meeting concerns a creditor named BAS Finance. This is the most extraordinary circumstance of all. The debtor, in an affidavit, provided entirely hearsay evidence that BAS Finance - or representatives of it who were in England informed him some time prior to the meeting that their company was intending to vote in favour of the Part X arrangement. Following upon the adjournment which I granted to the debtor to produce admissible evidence in this regard, he has produced an affidavit by a solicitor named John Reginald Cavell Harris who was at all relevant times, and apparently still is, the solicitor for BAS Finance. Mr Harris attended the meeting on behalf of the company to exercise its proxy vote. His affidavit of 29 March which was -~6- presented at the resumed hearing today deposes to the facts that his client was at various times undecided as to whether it would vote for or against the Part X arrangement, that his advice to the company had always been to vote against it, and that he received instructions shortly before the meeting on 19 October to vote in accordance with his advice, that is, against the Part X arrangement. That evidence is corroborated by the proxy apparently sent by BAS Finance to Mr Harris, and presumably presented at the meeting. Although the common seal of the company does not appear on the document, it apparently was the proxy on which Mr Harris and the meeting proceeded. It provided that the proxy was to vote against the Part X deed, and to vote for a resolution requiring the debtor to present a debtor's petition within seven days. The debt for which BAS Finance purported to prove was $18 million. Mr Harris' affidavit also deposes to the fact that he now has instructions to vote in favour of the debtor's Part X proposal, presumably should another meeting take place. No explanation from the company is given for this change of mind. Indeed, there is no evidence at all that the company actually told the debtor prior to the meeting that it was intending to vote in favour of the Part X arrangement, other than the inadmissible hearsay evidence from the mouth of the debtor. But if I assume for the purposes of argument that, in fact, a representative or director of the company did tell the debtor that it was proposing to vote against, the fact of the matter is -7J- that the company changed its mind when it gave instructions to its solicitor, indeed when it signed the proxy itself which purports to be dated before the meeting. In the hearsay evidence of the debtor, his conversations with the directors or principals of BAS were said to have taken place in September/early October 1994. The company's proxy and Mr Harris' instructions clearly postdated that information. Even if this evidence were admissible to prove the facts alleged, and the company itself has provided no evidence at all in the matter, there could be no possible sense of injustice arising from the conduct of a meeting: at which a duly authorised proxy attended with a written instruction from his client to vote as directed. The debtor conceded that, in order' to set aside the meeting, he really needs to succeed in respect of all these arguments. I can see nothing which would permit him to succeed on any of them. So far as concerns the South Australian companies, as I said, there is only the evidence of the debtor with no notice of which the Court has been made aware having been given to these companies to answer the assertions. There is therefore no basis at all on which the Court could conclude that the meeting miscarried by reason.of the decisions made in respect of these companies. So far as concerns the Hong Kong Bank, the decision of the Chairman to reject that creditor was clearly a correct decision in the circumstances. Proxies have to be given in accordance ~g- with the Act, a proxy was not given in respect of this company's debt in accordance with the Act, and what was produced was therefore properly rejected. A subsidiary argument was raised that an adjournment could or should have been granted, but the debtor did not ask for an adjournment at the meeting and neither did anyone else, so far as the minutes reveal. No challenge has been made by the Hong Kong Bank to the decision to reject the proxy or not to grant an adjournment. On an application by a creditor for a sequestration order, it is quite inappropriate to hold that the meeting miscarried in a material way by the failure to grant an adjournment of the meeting. So far as concerns the BAS Finance debt, Mr Harris and the Chairman had absolutely no option but to register the vote of that company against the proposal. It would be impossible to proceed efficiently under this Act if every time a creditor changed its mind in respect of its vote, a new meeting could he held. Particularly is that the case when the company itself, which is after all the creditor and the important figure in the whole matter, presents no evidence to the Court at all, presents no application to invalidate the meeting, and does not say anything about the circumstances under which it changed its mind from one to another and back again, if indeed that be the case. In the circumstances, I can find nothing at all to support the attack on the meeting, even if I make the assumption that there is before the Court a valid proceeding in which the meeting could legitimately be challenged. -9- The debtor presented another proposal to the Court which was perhaps even more extraordinary. It was that the debtor is prepared to give an undertaking to the Court that he would do his best to carry out the provisions of the Part X proposal to the creditors, and that if he failed to comply with any part of it, he would submit himself to a sequestration order. Even if it was possible to consider some form of informal Part X arrangement that was not under that Part at all, in that there would be no controlling trustee, no administration, no capacity for creditors to meet to discuss the matter, and no capacity for enforcement of the arrangement by creditors, that offer, as I pointed out in argument, is a completely unenforceable undertaking under the Bankruptcy Act. This is because even if all that was possible, which I do not believe it is, the only result of the failure to comply with the undertaking would be to subject the debtor to proceedings for contempt of court. A conviction for contempt would not bring about a sequestration order at all, but merely subject him to the risk of a fine or of incarceration at public expense. The Deputy Commissioner would simply have to commence separate proceedings by way of bankruptcy notice and creditor's petition. The delays involved in all that would be far too great to consider as possible even if there was a legal framework in which such matters could be contemplated. I should add that no authority was quoted for this form of approach to the matter and I do not believe myself that it is one contemplated by the statute. As it seems to me, if the Deputy Commissioner's debt ~ 10 - is correct, the public has done quite enough subsidising of this debtor for the time being. The final submission was that in the event that the Court rejected all the other arguments, it should exercise its discretion against the making of a sequestration order. There is such a discretion of course and there is considerable authority describing the circumstances in which such a discretion should be exercised: Radich v Bank of New Zealand [1993] 116 ALR 676. Although the discretion of the Court in this regard is unfettered by any statutory restriction, the usual circumstance is that the making of a sequestration order would be futile. I do not know of a case when such a submission has been upheld in relation to a debt as large as this one and where the debtor has offered but failed to have accepted a Part X proposal to pay some $300,000 to creditors. It seems to me that there is a degree of urgency, certainly of importance, in having this debtor's affairs administered by a trustee in public so that the whole of the circumstances of the bankruptcy and of his assets and liabilities can be properly and fully investigated. For those reasons I propose to make a sequestration order subject only to the formal evidence of debt and search being presented today. {After evidence] - ll - Noting that as at today the amount owing to the Deputy Commissioner is $679,394.44 as set out in the affidavit of Michelle Louise Rockliff, a clerk in the Taxation Office, and noting also the affidavit of search of today's date of Rebecca Ewe, an Australian public servant employed as a secretary in the office of the Australian Government Solicitor, that according to the appropriate records the debtor has not presented a debtor's petition and is not otherwise bankrupt, I pronounce a sequestration order under section 221(1)(b) of the Act against the estate of the debtor. I order that costs including reserved costs be taxed and paid in accordance with the Bankruptcy Act. [After discussion] I will grant a stay of the sequestration order until the completion of the proceedings to commence at 9.30am on Monday, 10 April. The debtor is to file and serve any application for a further stay or delay of the coming into operation of the sequestration order by not later than 4 pm on Thursday 6 April, together with any affidavit or affidavits in support. The Deputy Commissioner will have until the commencement of the proceedings on 10 April to present any affidavit in opposition but a draft or outline of any such proposed affidavit should be given to the solicitors or counsel for the debtor by not later than the close of business on Friday, 7 April, jf the affidavit itself is not then available. ''Z Certify that this and th | j e Ie F Preceding Pagas rowed wes Are a@ true copy of the j s for Judgment herein or om ustice Einfeiq : We Honout " AssoviatS" acy : Dated: LL 4/2 [46