Re Lockyer, P. & Ors Ex parte Thomson, L.A. & Ors [1995] FCA 410

CATCHWORDS BANKRUPTCY - debtors agree to proposals said to be "compositions" within the meaning of Bankruptcy Act 1966 - whether third party providing money to effect composition must be legally bound to provide it at time creditors accept composition - whether debtors released from their provable debts before final payment under composition made - whether creditors accepted composition - matters affecting exercise of Court's discretion.

Bankruptcy Act 1966, ss.187, 188, 189, 204, 213, 238-243A. Corporations Law, ss.9, 91A, 229

RE: LOCKYER & ORS No. X71 of 1995, No. X72 of 1995, No. X73 of 1995, No. X74 of 1995 CORAM: SHEPPARD J PLACE: SYDNEY DATE: 21 JUNE 1995

IN THE FEDERAL COURT OF AUSTRALIA) BANKRUPTCY DISTRICT OF THE STATE ) NEW SOUTH WALES AND THE ) AUSTRALIAN CAPITAL TERRITORY )

No. X71 of 1995 RE: PETER LOCKYER Debtor EX PARTE:LOUISE ANN THOMSON Applicant PETER LOCKYER First Respondent KEVIN SHIRLAW Second Respondent TPC SERVICES PTY LIMITED ACN 069 015 578 Third Respondent

No. X72 of 1995 RE: DOUGLAS ARTHUR TROOD Debtor EX PARTE:LOUISE ANN THOMSON Applicant DOUGLAS ARTHUR TROOD First Respondent KEVIN SHIRLAW Second Respondent TPC SERVICES PTY LIMITED ACN 069 015 578 Third respondent

No. X73 of 1995 RE: RICHARD SHUBRICK MARTIN Debtor EX PARTE:LOUISE ANN THOMSON Applicant RICHARD SHUBRICK MARTIN First Respondent KEVIN SHIRLAW Second Respondent TPC SERVICES PTY LIMITED ACN 069 015 578 Third respondent No. X74 of 1994 RE: IAN ROSS PRATT Debtor EX PARTE:LOUISE ANN THOMSON Applicant IAN ROSS PRATT First Respondent KEVIN SHIRLAW Second Respondent TPC SERVICES PTY LIMITED ACN 069 015 578 Third respondent

CORAM: SHEPPARD J PLACE: SYDNEY DATE: 21 June 1995 REASONS FOR JUDGMENT

HIS HONOUR: The applications in these matters are made pursuant to s.222 of the Bankruptcy Act 1966 ("the Act"). That section provides that, where there is a doubt, on a specific ground, whether a deed of assignment or a deed of arrangement was entered into in accordance with Part X of the Act or complies with the requirements of that Part, or whether a composition has been accepted by a special resolution of a meeting of creditors under s.204, the Inspector-General, a person authorised in writing by the Inspector-General, the Registrar, the trustee, a creditor or the debtor may apply to the Court for an order under subsec. (2). Subsection 222(2) provides that, upon the hearing of an application made under subsec. 222(1), the Court may, subject to the section, make an order declaring that the deed or composition or a provision thereo f is void, or that it is not void, on the ground specified in the application. The applicant in each matter has been authorised by the Inspector-General in Bankruptcy to bring the applications. The respondents are the debtors in each case, Mr Shirlaw, who was appointed trustee under a proposal which the debtors and the trustee claim to be compositions within the meaning of Part X of the Act, and TPC Services Pty Limited, which has assumed responsibility to pay a sum of $300,000 by instalments to the trustee for the benefit of creditors. The facts of the matters are as follows. On 28 April 1995 each of the debtors signed authorities under s.188 of the Act in favour of their solicitor, Mr B.Q. Williams. On 4 May 1995 a notice of a meeting of creditors, an amended proposal and certain other documents were sent to creditors. A meeting of creditors was held on 22 May 1995. In reality four meetings were held, one in relation to each debtor. The minutes in respect of each are, in substance, the same. Four special resolutions were passed at each meeting. In the case of Mr Lockyer, the resolutions were as follows: "Special Resolution (a): That the creditors resolved to accept by way of Composition the sum of Three Hundred Thousand Dollars ($300,000) payable by TPC Services Pty Limited (the Company) and payable by ten (10) equal six (6) monthly instalments of Thirty Thousand Dollars ($30,000) each, which sums are to be paid by the Company to Kevin Shirlaw whom it is proposed by the meeting as Trustee of the combined estates of the debtors the first of such payments to be made within twenty-eight (28) days from the date of the meeting of creditors and thereafter on the six monthly anniversary of that date until the total sum has been fully paid and satisfied but otherwise in the terms set forth in the Deed annexed to the proposal of the debtors and marked "A". Special Resolution (b): That the creditors resolve that Peter Lockyer execute the Deed annexed to the proposal of the debtor and marked "A" as Guarantor. Special Resolution (c): That the creditors resolve that the Trustee be directed that upon satisfaction of Resolutions (a) and (b) hereof and upon a request in writing by the creditors to furnish to the debtor a certificate that the debtor's property be no longer subject to control under Part X of the Bankruptcy Amendment Act 1991. Special Resolution (d): Appoint Kevin Richard Shirlaw, Trustee of the debtor's estate." The special resolutions in the other cases were in similar terms. The evidence discloses that the debtors owed a sum in excess of $7 million to some 23 unsecured creditors. Prior to their encountering financial difficulties, the debtors had carried on practice as a firm of chartered accountants under the name of Trood Pratt & Co. Their most substantial creditors were the Commonwealth Bank which had security for some of its indebtedness but which proved for an amount of $2.55 million over and above the value it attributed to its securities, a service company of Trood Pratt & Co. which was owed $2.7 million, the Deputy Commissioner of Taxation who was owed $675,000 and the State Bank of New South Wales which was owed $495,000. Two of the other creditors were owed sums exceeding $200,000. I was informed that Trood Pratt & Co Services did not seek to take any benefit under the proposal which the meeting approved. Twenty-one of the creditors voted in favour of the special resolutions. The State Bank of New South Wales voted against them. The Deputy Commissioner of Taxation abstained from voting. It may be observed at this point that the proposal, if implemented, will result in the eventual payment to each unsecured creditor of the sum of approximately 6 cents in the dollar. The deed mentioned in special resolutions (a) and (b) was executed on 29 May 1995. Because of uncertainty concerning the validity of its execution, the deed was subsequently ratified by a further deed entered into between the same parties. I shall say more of this matter later on. The parties to the deed were TPC Services Pty Limited, the trustee and the four debtors. The deed purports to have been made in pursuance of Part X of the Act. It recites that, at a meeting of creditors called pursuant to an authority executed by the debtors (in the deed described as "Guarantors") the creditors resolved: "1. To accept by way of composition from the Company payment of THREE HUNDRED THOUSAND DOLLARS [$300,000] payable by ten [10] equal instalments of THIRTY THOUSAND DOLLARS [$30,000] each to be paid by the Company to the Trustee. 2. That DOUGLAS ARTHUR TROOD; IAN ROSS PRATT; PETER LOCKYER AND RICHARD SHUBRICK MARTIN execute this Deed as Guarantors. 3. That upon the execution of this Deed by the Company and by the Guarantors and upon a request by the debtors in writing that the Trustee certify that the debtors' property be no longer under control of the (sic) Part X of the Bankruptcy Amendment Act 1991." The operative part of the deed then followed. The reference in recital 3 and resolution (c) to the Bankruptcy Amendment Act 1991 is inappropriate. That Act (No. 9 of 1992) made some amendments to Part X of the Act. These included the insertion of s.243A later to be mentioned. That section provides for the issue of a certificate to a debtor in the circumstances there mentioned. The certificate, if issued, would not make any statement to the effect of that contemplated by recital 3 and resolution (c). In the circumstances, I am prepared to read the reference to the Amendment Act as a reference to the Act itself. Clause 1 of the deed provided that TPC Services Pty Limited (in the deed described as "the company") in consideration of "these presents" and of the resolutions passed by the creditors at the meeting of creditors held on 22 May 1995 agreed to pay to the trustee the sum of $300,000 by ten equal instalments of $30,000, the first of such instalments to be paid upon the execution of the deed and thereafter on the 29th day of the months of November and May in each year until the total sum was fully paid and satisfied. The clause acknowledged receipt of the first instalment of $30,000 and provided that time should be of the essence in relation to the dates for payment of future instalments. Clause 2 of the deed provided that, should the company fail to pay on or before the times provided for, the whole of the amount then outstanding should become immediately due and payable. In the event of default the company was to pay interest at the rate of 12 per cent per annum calculated on a daily basis on the balance outstanding as at the date of default. No interest was otherwise payable. Clause 4 provided for the circumstances upon which the company should be regarded as being in default. I do not refer to each of these but they include a failure to pay any of the instalments within the time provided for, the presentation of a petition against the company for its winding up, the appointment of a receiver or manager to the company and the appointment of a liquidator of the company. Clause 8 of the deed was as follows: "UPON payment of the whole of the monies agreed to be paid by the Company to the Trustee the Trustee will issue to the Company and to the Guarantors a letter of satisfaction." Clause 9 was a clause in which the debtors indemnified the trustee against all claims and losses consequent or arising from the non-observance by the company of the payments agreed to be made by it to the trustee or in respect of the breach of any conditions contained or implied in the deed. By clause 11 the guarantee bound each of the debtors both jointly and severally. At this point it may be observed that there appears to be an inconsistency between recital 3 earlier quoted and special resolution (c) passed at the meeting which contemplates the issue of a certificate by the trustee to the debtors "upon satisfaction of Resolutions (a) and (b)". This suggests that the certificate was not to issue until the moneys provided for in resolutions (a) and (b) and in the deed had been paid. Recital 3 of the deed, on the other hand, plainly contemplates a certificate immediately upon the execution of the deed. During the argument, there was discussion concerning the question whether clause 8 of the deed was intended to give effect to what was stated in recital 3. I think that there is some doubt about this question but that the better view is that clause 8 was intended to do no more than provide for a letter from the trustee stating that the moneys agreed to be paid by the company to the trustee had been "satisfied", i.e. paid in their entirety. Counsel for the debtors submitted that the minutes of the meeting disclosed that the creditors had been informed that the moneys constituting the $300,000 would come from the future income of the debtors who proposed to engage in practice as chartered accounts. If the composition were not agreed to, there would be no moneys available to make any payment to unsecured creditors. The idea was to have a composition which would enable the debtors to practise as chartered accountants. If they were bankrupt, the Institute of Chartered Accountants would not permit them to carry on practice and there would be problems about their acting as auditors or directors of companies by reason of provisions of the Corporations Law. Counsel said that recital 3 was meaningless and that, in any event, it was ineffective without there being in the operative part of the deed any provision obliging the trustee to act in the manner contemplated by the recital. These various matters necessitate a reference to the detail of the relevant part of the minutes. The meeting was chaired by Mr Williams. Ms Thomson was present at it. Amongst those representing creditors were Mr Maxwell Donnelly who is a registered trustee in bankruptcy. Under a heading, "Discussion and The Alternatives Available to Creditors", it was recorded that Mr Williams referred to the options available to the creditors and outlined in the documents which they had before them. He said that the Commonwealth Bank of Australia had requested him to advise the meeting that in the event of the approval by the creditors of the debtors' proposal, the Bank would discharge the liability of Trood Pratt & Co. Services Pty Limited upon a payment of $450,000 but that the personal covenants would remain. Personal covenants by the debtors would be discharged in the event of the creditors approving the proposal, but the Bank did not intend to discharge other persons also liable under personal covenants from their liability. Mr Williams also said that the proposal by the Bank was subject to the debtors continuing in their accounting practice. This was something which had been recently approved by the Institute of Chartered Accountants. The minutes then proceeded as follows: "Max Donnelly advised that he believed the history of the matter to be alright but enquired as to when the debtors were being released. The Chairperson advised that the debtors were to be released upon execution of the Deed. Max Donnelly enquired as to what happened if the payments under the Deed went into default. The Chairperson advised that creditors rights reverted to rights under the Deed. At this point, Louise Thomson advised the meeting that while she had only read the documents on the meeting and proposal this morning she had formed the view that if creditors accepted the proposal then they would in fact abrogate all their rights under the Bankruptcy Act. The Chairperson advised that while he understood this to be the case, the debtors were to guarantee the performance of TPC Services Pty Limited under the Agreement. Max Donnelly enquired as to why a more usual procedure could not be followed for a Composition of this nature. The Chairperson advised that because the $300,000 to be paid to creditors was being sourced from future practice activities and the debtors needed to be able to continue in practice and take on directorships on behalf of clients,borrow monies, etc, there was a need for them to be able to practice free of problems and limitations which would otherwise exist. Max Donnelly expressed concern as to the recourse for creditors if the funds under the Agreement were not paid. He further enquired as to whether the debtors could allay the concerns of creditors in this regard in that under the present proposal the debtors were released upon payment of money and if this did not occur creditors claims would not be reinstated to their full amount. Louise Thomson advised that under the proposal, the debtors would not be subject to the Bankruptcy Act and that creditors would have no recourse against debtors if the funds were not forthcoming under the proposed Agreement." At the meeting, the Commonwealth Bank was represented by Mr Walsh who addressed the meeting. He is recorded as saying that the creditors would be better off accepting the $300,000 under the deed than the alternative which would result in the creditors receiving nothing in view of the Bank's security. He said that he understood that in the event of default, the deed provided a fund for the trustee to pursue the debtors as guarantors under the deed. This was a reference to clause 6 of the deed which provided for the retention by the trustee of $5,000 which was to be applied to the recovery of moneys due in the event of default by the company or the guarantors. It seems that the creditors were prepared to agree to the proposal because they had no choice but to do so. If they had rejected it, the likelihood was that the debtors would have been made bankrupt and no moneys would ever have become available for unsecured creditors. That was the reality of the situation with which the creditors were confronted. Before coming to the questions which need to be dealt with, there are some further provisions of the Act to which reference needs to be made. "Composition" is defined in subsec. 187(1) of the Act. Relevantly, it means an arrangement by which the creditors of a debtor 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. It is next necessary to notice s.189 which deals with the effect of an authority under s.188 of the Act to a registered trustee. Subsection 189(1) provides that, where a debtor has given an effective authority to a registered trustee under s.188, the property of the debtor becomes subject to control under Division 2 of Part X and continues to be subject thereto until the happening of one of a number of events to the detail of which it is unnecessary to refer. There is no similar provision where, as here, the authority is to a solicitor as distinct from a registered trustee. Section 204 of the Act empowers the creditors by special resolution to accept a composition; see para. (1)(c). There is also subsec. 204(4) which requires the creditors, by resolution, to nominate a registered trustee to be the trustee of a composition. Subsection 213(3) provides that, subject to Part X, a composition made by a debtor after the commencement of the Act, not being a composition accepted by a special resolution of a meeting of creditors under s.204, is void. The composition must of course be a composition as defined in s.187. I next mention ss.238 and 239. Section 238 provides that a composition accepted by a special resolution of a meeting of a debtor's creditors called in pursuance of an authority under s.188 is binding on all creditors. Subsection 238(2) provides for the consequential limitation on creditors' rights that follows as a consequence of this provision. Section 239 provides for some circumstances in which a creditor may set aside a composition. It is not relevant for present purposes. Subsection 240(1) of the Act is in the following terms: "240(1) Subject to this section, a composition under this Part operates, unless set aside, declared void or terminated under this Part, to release the debtor from all provable debts, other than those (if any) that would not be released by his discharge from bankruptcy if he had become a bankrupt on the day on which the composition was accepted." Section 241 of the Act provides for the termination of a composition by creditors. It says that, where a debtor has failed to carry out or comply with the term of a composition under Part X, the creditors may, by special resolution at a meeting called for the purpose, terminate the composition. Section 242 empowers the Court to terminate a composition. Subsections 242(1) and (3) are as follows: "242(1) The Court may, upon application by the trustee, a creditor or the debtor, or, if the debtor has died, the person administering the estate of the debtor, if it is satisfied: (a) that the debtor, or, if the debtor has died, the debtor or the person administering the estate of the debtor, has failed to carry out or comply with a term of the composition; (b) that the composition cannot be proceeded with without injustice or undue delay to the creditors, the debtor or, if the debtor has died, the estate of the debtor; or (c) that for any other reason the composition ought to be terminated; make an order terminating the composition. .................................................... (3) The trustee or a creditor may include in an application under subsection (1) an application for a sequestration order against the estate of the debtor and if the Court makes an order on the first-mentioned application terminating the composition, it may, if it thinks fit, forthwith make the sequestration order sought." Section 243 provides that the provisions of the Act relating to the proof of debts and the distribution of property apply in relation to a composition as if a sequestration order had been made against the debtor on the day on which the special resolution accepting the composition was passed and the trustee of the composition were the trustee in his bankruptcy. Section 243A of the Act is as follows: "243A(1) Where the trustee of a composition is satisfied that the terms of the composition have been carried out, the trustee shall, upon request in writing by the debtor, furnish to the debtor a certificate signed by him to that effect. (2) A certificate signed by a trustee under this section is prima facie evidence of the facts stated in it." With s.243A there needs to be read Rule 84A of the Bankruptcy Rules. It provides, so far as it is relevant, that a certificate by a trustee under s.243A of the Act shall be in accordance with Form 36D to the Rules. The Form provides for a certificate given by a trustee of a composition. The operative part of a certificate says that the trustee "hereby certify that I am satisfied that the terms of the composition have been carried out." The questions formulated by counsel for the applicant were: 1. Are the compositions void for uncertainty by reason of the absence of any binding contractual obligation on TPC Services Pty Limited at the time of the special resolution of creditors accepting the composition on 22 May 1995? 2. Are the compositions, or alternatively, is recital 3 to the deed (being annexure A to special resolution (a)), void by reason of: (a) being contrary to ss.222, 239, 240, 241 and 243A of the Bankruptcy Act; or (b) being inconsistent with the terms of special resolution (c)? 3. Alternatively, if recital 3 to the Deed is valid, are the compositions void in that they purport to constitute both a "deed of arrangement" and a "composition", contrary to the definition of each such term in s.187(1) of the Act? 4. Alternatively, if the compositions are effective to release the respective debtors immediately and unconditionally from all debts owing to creditors notwithstanding s.240 of the Act, are the compositions void by reason of being contrary to public policy?