IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 7936 of 1997 In the matter of : noel rodney kiely BETWEEN: ANTHONY NEVILLE HYDE Applicant AND: NOEL RODNEY KIELY First Respondent JOSEPH LOEBENSTEIN Second Respondent JUDGE: LINDGREN J DATE: 28 MAY 1998 PLACE: SYDNEY REASONS FOR JUDGMENT (ex tempore) INTRODUCTION The applicant creditor ("Mr Hyde') seeks the following substantive orders by his application filed on 6 August 1997: "1. An order that the Deed of Composition dated June or July 1997 between Noel Ronald Kiely as debtor and Joseph Loebenstein as trustee ('the Deed') is void. 2. In the alternative, an order prohibiting Noel Ronald Kiely as debtor and Joseph Loebenstein as trustee from entering into a Deed of Composition. 3. Further or in the alternative, an Order terminating the Deed. 4. A sequestration order against the Estate of Noel Ronald Kiely." In fact there is no "deed" of composition, but rather an acceptance of a composition proposed by the first respondent debtor ("Mr Kiely"). I granted leave to Mr Hyde to amend the application by filing an amended form of application, omitting the words "deed of" in pars 1 and 2 and the material "(the Deed)" in par 1 and substituting the word "composition" for the word "deed" in par 3. The second respondent ("Mr Loebenstein"), who is the trustee of the composition, did not appear. His solicitors wrote to the Registry on 18 February 1998 advising that their client neither consented to nor opposed the making of the orders. They advised that Mr Loebenstein would abide by any order of the Court except an order as to costs. Mr Hyde does not seek an order for costs against Mr Loebenstein. On the hearing today Mr S Bell of counsel has appeared for Mr Hyde, while Mr Kiely has appeared in person. RELEVANT LEGISLATIVE PROVISIONS AND RULES The relevant provisions of the Bankruptcy Act 1966 ("the Act") are sections 204, 222 and 242. As is well known, s 204 provides for, inter alia, the passing of a special resolution at a meeting of creditors called pursuant to an authority under s 188, accepting a composition proposed by a debtor. Subsections 222(4),(5) and (7) are as follows: "222(4) Where the Court, on the application of the Inspector-General, the trustee or a creditor, is satisfied that the debtor: (a) has given false or misleading information in answer to a question put to him or her with respect to any of his or her conduct or examinable affairs at the meeting of creditors at which the resolution requiring him or her to execute the deed or accepting the composition was passed; or (b) has omitted a material particular from the statement of the debtor's affairs given under subsection 188(2) 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 subsection (4) unless it is satisfied that it would be in the interests of the creditors to do so. .... (7) The trustee or a creditor may include in an application under subsection (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 subsection (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." Order 77 of the Federal Court Rules governs bankruptcy proceedings. Within that Order Division 11 (rr 53-58) relates to various applications touching arrangements under Part X of the Act. Rule 56 provides that unless the Court otherwise orders, at least five days before the date fixed for the hearing of an application under Division 11, the application and supporting affidavit must be served on, inter alia, the Official Receiver for the District in which the application is made. This was not done in the present case and I dispensed with compliance with the requirement. Rule 57 provides that at least five days before the date fixed for the hearing of an application under Division 11, the applicant must serve written notice of the time, date and place fixed for the hearing on each creditor named in the debtor's statement of affairs. The notice must be in accordance with Form 156. Form 156, as well as informing the creditor of the nature of the application including any application for a sequestration order, informs the creditor that if the creditor wishes to take part in the proceeding, a notice of appearance must be filed and served three days before the hearing. Rule 57 was also not complied with in the present case. I indicated that I would reserve my decision as to whether to dispense with compliance with that rule pending the conclusion of the hearing. I will deal with this question later. BACKGROUND FACTS Events from judgment to filing of present application Mr Hyde obtained judgment against Mr Kiely for $112,180 on 6 September 1996. Apparently, the parties had guaranteed to a bank payment of certain money and Mr Hyde, who claimed to have paid under the guarantee, sued Mr Kiely for contribution. On 9 April 1997, a bankruptcy notice was served on Mr Kiely. It allowed 21 days, that is, until 30 April, for compliance. On 29 April, Mr Kiely signed an authority under section 188 of the Bankruptcy Act 1996 in favour of Mr Loebenstein as controlling trustee. On 12 May, Mr Kiely signed his statement of affairs under section 188A of the Act. I presume that that statement of affairs was given to Mr Loebenstein as controlling trustee on the same day. On 13 May, Mr Kiely signed a statement proposing a composition. The proposal was that he would pay the trustee $10,000 in full and final satisfaction of his joint and several debts, payable as to $2000 within seven days of the date of acceptance of the composition by his creditors and the balance of $8000 within 90 days of the date of that acceptance. The moneys payable were to be applied, firstly, in payment of all disbursements and remuneration of the trustee of the composition and of the controlling trustee, and, secondly, in payment to creditors to be apportioned calculated on their admitted ordinary claims. On 23 May, Mr Loebenstein, as controlling trustee, made his report to creditors under section 189A of the Act. He convened a meeting of creditors which was held on 2 June. The meeting was informed that Mr Kiely would procure that one creditor, Mr J.E. Jensen, would not prove in the composition. In fact, a modification to this effect was included in the proposal on which the creditors voted. The creditors who voted on the issue of acceptance of the composition and the amounts for which they were admitted to vote were as follows: "For: Value Lewin Suhr Andrews Pty Ltd $32,421.00 Walsh Johnston & Co $7,750.00 J.E. Jensen $735,622.00 Against: A.N. Hyde $118,159.69" It was also resolved that Mr Loebenstein be the trustee of the composition and that the remuneration of Mr Loebenstein as controlling trustee, his partners and staff, for the period 29 April 1997 up to and including 1 June 1997, in a sum of $3,492.00 plus out of pocket expenses, be approved. Mr Hyde filed the present application on 6 August 1997. Mr Kiely's statement of affairs under section 188A of the Act. Mr Kiely's statement of affairs disclosed that he held certain shares including certain shares in "Halcyon Lake Pty Limited". It did not, however, disclose any shareholding in a company called Carlton Pacific Pty Limited, although, as noted later, he owned half the issued shares in that company. It stated the relevant unsecured creditors, that is, those relevant to the issues with which I have to deal, as follows: Carlton Pacific Pty Ltd & JE Jensen $735,622 A.N. Hyde $118,159 ANZ Banking Group $4,360 Lewin Suhr Andrews $32,421 Walsh Johnston & Co $7,550 ________ $898,112 The statement of affairs also disclosed the first respondent's residential address as being 72 Quarry Road, Mitcham, Victoria. Controlling trustee's - report I turn next to the report by Mr Loebenstein as controlling trustee. His report showed Mr Kiely's assets as being: cash at bank of $500 and shares in various companies of $36, making a total of $536. The estimated realisable value of these assets was said to be $500 and $2 respectively, making a total of $502. The liabilities were shown as $898,112 and the deficiency was shown as $897,576 and $897,610 respectively. Mr Loebenstein's report recorded that his searches had revealed no properties in Victoria in Mr Kiely's name and that Mr Kiely lived in the property at 72 Quarry Road, Mitcham which stood in the name of the Kiely Westbury Family Trust. In evidence this morning Mr Kiely has said that the trustee of that trust is Third Westbury Nominees Pty Limited of which he is a director. Mr Loebenstein's report as controlling trustee listed some seven companies of which Mr Kiely was a director and four companies of which he was a shareholder. In these respects the information which Mr Loebenstein had obtained and disclosed to creditors extended beyond that which Mr Kiely had disclosed in his statement of affairs. Mr Loebenstein's report gave an account of the composition proposed by Mr Kiely and advised creditors that acceptance of the proposal of payment of $10,000 would, after allowing remuneration of the trustee and of the controlling trustee and payment of statutory fees and miscellaneous disbursements, leave approximately $5000 for creditors. It also recorded that the creditors expected to rank in the administration would total approximately $162,490, on the basis that Mr J.E. Jensen did not prove in the composition, and that on that basis creditors would receive approximately three cents in the dollar. Under a bankruptcy, there would be virtually nothing for creditors other than Mr J E Jensen, since he would prove as a creditor. Mr Loebenstein's report contained a description of Mr Kiely's various shareholdings and the companies in which they were held and discussion of Mr Kiely's incapacity to contribute further. Mr Loebenstein's recommendation to creditors was that acceptance of Mr Kiely's proposal was in their best interests. Meeting of creditors I turn next to the meeting of creditors on 2 June 1997. Those creditors who were present, in person or by proxy or attorney, were Lewin Suhr Andrews Pty Ltd, Walsh Johnston & Co, Mr Jensen and Mr Hyde. In the course of the meeting, creditors who were present were invited to ask questions. Mr McLennan, representing Mr Hyde, asked Mr Kiely if he had any financial or legal interest in Carlton Pacific Pty Ltd. Mr Kiely said that he had no interest whatsoever in that company. Mr McLennan requested to know the value of that company's property Mr Kiely told those present that the value as per the balance sheet was approximately $800,000. Mr McLennan asked Mr Loebenstein if he had sighted Mr Kiely's tax returns for the last five years and Mr Loebenstein replied that the most recent return seen by him was for 1993. Mr Lewin, accountant, stated that Mr Kiely had not been required to lodge income tax returns for the preceding couple of years as he had had "minimal income". I have previously given an account of the special resolution that was passed in effect on the vote of Mr Jensen and against the opposition of Mr Hyde. REASONING The evidence establishes to my satisfaction the evidence of both conditions referred to in par (a) and (b) of s 224 of the Act set out earlier. Perhaps the most significant matter is the statement that Carlton Pacific Pty Ltd and J E Jensen were creditors to the extent of $735,622. In oral evidence today, Mr Kiely gave an account of how this supposed debt came into being. He had no documentation to support the debt and said that an agreement was made between himself and Mr Jensen in relation to land development at Merimbula. The alleged agreement was that after the development was concluded the two men would share equally any profit or loss. He claims that the joint venture, if I can use that expression, has resulted in a loss and that in some manner, which he did not make clear, this has resulted in his owing $735,622 to Mr Jensen. Mr Kiely conceded that in fact that the joint venture has not yet concluded. It was implemented through the company Carlton Pacific Pty Ltd. In evidence, Mr Kiely agreed that depending upon the ultimate amounts received from the realisation of the remaining land, he may or may not owe money to Mr Jensen and it is possible, if unlikely, that Mr Jensen will owe money to him. There is evidence in the form of title searches to the effect that at least as at 24 June 1997, Carlton Pacific Pty Ltd was the registered proprietor of the following land: Lot 6, section 6, DP240154 at Merimbula. Lot 18, section 6, DP240154 at Merimbula. Lot 19, section 6, DP240154 at Merimbula. Lot 82, DP845910 at Merimbula. Lot 2, DP858866 at Merimbula. In his evidence Mr Kiely said that the first three properties were vacant land and resulted from a subdivision. He said that there were also two holiday townhouses, although he was uncertain whether they were represented by the other two titles. As I said, the evidence as to the existence of the arrangement between Mr Jensen and Mr Kiely is not documentary. According to Mr Kiely's oral evidence given this morning, the most that can be said is that Mr Jensen is a possible future creditor of Mr Kiely. None of this was revealed in the statement of affairs or, of course, in the controlling trustee's report or at the meeting of creditors. Mr Jensen should not, on the basis of Mr Kiely's evidence given before me, have been admitted to vote. Another matter which was not disclosed in the statement of affairs is the fact that Mr Kiely is a director of, and a shareholder in, Carlton Pacific Pty Limited. According to a company extract in evidence, Mr Kiely and Mr Jensen have been directors of the company since 3 March 1988 and they each hold one share in the company. This is consistent with the evidence given orally today by Mr Kiely. In his answer to a question at the meeting of creditors he said specifically that he had no interest in the company. At the meeting, Mr Loebenstein as controlling trustee said that the value of property owned by the company was approximately $800,000. Accordingly Mr Kiely's statement to creditors at the meeting that he had no interest whatsoever in the company was a significant misrepresentation. Also, at the meeting Mr McLennan asked Mr Kiely if the debt to Mr Jensen had crystallised and Mr Kiely said that it had crystallised at the time of the passing of "the share" back to Mr Jensen. But, as I have already said, Mr Kiely's evidence today is inconsistent with this. A further matter which was not disclosed in the statement of affairs was that Mr Kiely was the beneficial owner of a share in a company called Halcyon-Lake Carpets Pty Limited. It is true that that company was subsequently dissolved on 24 June 1997, but what matters for present purposes is that there was a non-disclosure of the shareholding in the statement of affairs. The next matter is more significant. It relates to the positions of two of the other creditors, Lewin Suhr Andrews and Walsh Johnston & Co. It will be recalled that Lewin Suhr Andrews are accountants and were said in Mr Kiely's statement of affairs to be creditors to the extent of $32,421. In oral evidence today, Mr Kiely has said that nearly all of the accounting work which had given rise to the debt was done for one or other of the two Halcyon-Lake companies. Similarly, in relation to the sum of $7550 for which the solicitors Walsh Johnston & Co were admitted to vote, Mr Kiely's evidence was that the legal services which gave rise to that debt had been rendered to Carlton Pacific Pty Limited and one or other of the two Halcyon-Lake companies. The point is, of course, that the amounts owed by Mr Kiely personally to the firm of accountants and to the firm of solicitors may have been nil or very small, if one puts to one side the amounts owed to them by his companies. None of this was disclosed in the statement of affairs or at the meeting of creditors. In relation to the debt for accounting services, in particular, it will be recalled that at the meeting of creditors, in answer to a question, Mr Loebenstein advised that the most current tax return seen by him for Mr Kiely was a return for 1993 and Mr Lewin explained that Mr Kiely had not been required to lodge income tax returns for the previous couple of years as he had derived minimal income. This is consistent with the evidence of Mr Kiely in the witness box today that the accounting work had been done, not for him, but for his companies. The result of what I have found to be the position is that I am satisfied that Mr Kiely gave false and misleading information to a question put to him at the meeting of creditors and both omitted material particulars from his statement of affairs given under subsection 188(2) and included an incorrect and material particular in that statement. The next question which arises is whether the Court should make an order declaring the composition to be void. I think that it is desirable in the interests of creditors that there be an investigation by a trustee in bankruptcy of the true assets and liabilities position. Of course, I recognise that there may be not one cent in this for creditors, but this is not conclusive. It is in the public interest that the position be clarified to an extent which would not be possible if the matter proceeded as a composition under Part X. In any event, when I ask myself whether I am satisfied that it would be in the interest of creditors to declare the composition void, I have to bear in mind that the most substantial creditor by far is Mr Hyde, since, on the evidence given by Mr Kiely today in the witness box, Mr Jensen is not yet a creditor at all and the accountants and the solicitors may well not be either. I return now to the question of notice to creditors under O77 r 57. It is unfortunate that the Court's Rules were not complied with. The Rules are made for a purpose. It is important in all areas of the Court's jurisdiction, not least that of bankruptcy, that close attention be given to complying with them. None of the "creditors" named in Mr Kiely's statement of affairs have been notified of today's hearing. If I put to one side the alleged debt said to be owing to Mr Jensen, the debt owed to Mr Hyde being a judgment debt would, with interest accrued on it, now exceed 75 per cent of the amounts owed to all creditors. The position is a fortiori if the "debts" owed to Lewin Suhr Andrews and Walsh Johnston & Co are eliminated or substantially reduced. Perhaps it is futile in these circumstances to insist that persons named as creditors in Mr Kiely's statement of affairs be the creditors notified. However, I think the safe course to follow is to require Mr Hyde to notify those alleged creditors of the orders that I propose to make and of their right to be heard in opposition. The final matter to be mentioned is that Mr Kiely has said that he has fallen on hard times in the last two years. In fact, since this proceeding was commenced, apparently Halcyon Lake Carpet Pty Limited has entered into a deed of arrangement. Of course, one can understand and sympathise with Mr Kiely's efforts to avoid bankruptcy, but it is of the greatest importance when a composition is being put to creditors that there be a full and frank disclosure by the debtor to them of all circumstances touching his or her position. Unfortunately this did not occur in the present case. CONCLUSION The Court orders that: 1. Compliance with the rule requiring service on the Official Receiver be dispensed with. 2. Leave be granted to the applicant to amend the application by deleting the words "Deed of" in paragraphs 1 and 2 and the material "(the Deed)" in par 1 and substituting the word "Composition" for the word "Deed" in paragraph 3. 3. Leave be granted to the applicant to give effect to the amendments referred to in paragraph 2 of these orders by filing an amended application. 4. The proceeding be stood over to Friday 19 June 1998 at 9.30 am before Lindgren J. The Court notes that: 5. Being satisfied of the matters referred to in s 222(4) (a) and (b) of the Bankruptcy Act 1966, its present intention is, on Friday 19 June 1998 at 9.30 am, to make an order declaring that the composition proposed by Noel Raymond Kiely and accepted at a meeting of his creditors on 2 June 1997 is void and to make a sequestration order against the estate of Noel Raymond Kiely and to order that the costs of the applicant of the present proceeding rank, and be treated by the trustee in bankruptcy as if they had been incurred by the applicant as petitioning creditor on a creditor's petition and as if the sequestration order had been made on that petition. The Court directs that: 6. The applicant give to the second respondent, the Official Receiver for the State of New South Wales and Lewin Suhr Andrews Pty Limited, Walsh Johnston & Co and Jorn E Jensen notice of the foregoing together with notice in accordance with Bankruptcy Form 156 in the case of the last three, by sending such notices to those persons by pre-paid mail to their last known addresses, such notices to be sent in each case no later than tomorrow. I certify that this and the preceding nine (9) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren Associate: Dated: 3 June 1998 Counsel for the Applicant: Mr Stuart Bell Solicitor for the Applicant: Jacqueline Wall of Wall Associates The Respondent appeared in person Date of Hearing: 28 May 1998 Date of Judgment: 28 May 1998