FEDERAL COURT OF AUSTRALIA Bendeich v Andresen [2000] FCA 61 BANKRUPTCY -- validity of deed of arrangement committing debtor to present own petition or pay outstanding monies if certain conditions not met -- effect of s 188 authority empowering Trustee to call a meeting of creditors -- circumstances surrounding signing of deed and Trustee's authority -- where authority defective because procedures requiring the Trustee's consent to be witnessed not met -- deed following meeting called without valid authority also ineffective -- act of bankruptcy committed when ineffective authority signed -- whether act of bankruptcy avoided on basis that debtor did not comprehend consequences of signing authority and subsequent arrangements -- consequences of act of bankruptcy. Re Donovan; Ex parte ANZ Banking Group Ltd (1972) 20 FLR 50 approved Re Curry; Ex parte Goldsea Pty Ltd (1992) 40 FCR 32 considered Petelin v Cullen (1975) 132 CLR 355 cited Saunders v Anglia Building Society [1971] AC 1004 cited Re Moss; Ex parte Tyaraf Pty Ltd [1985] FCA 403 cited Bankruptcy Act 1966 (Cth) - ss 40(1), 188, 222, 236 GRAHAM ROSS BENDEICH v CAROLYN DOROTHY ANDRESEN Q7283 of 1999 KIEFEL J BRISBANE 7 FEBRUARY 2000 IN THE FEDERAL Court OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q 7283 OF 1999 BETWEEN: GRAHAM ROSS BENDEICH Applicant / Trustee AND: CAROLYN DOROTHY ANDRESEN Respondent / Debtor JUDGE: KIEFEL J DATE OF ORDER: 7 FEBRUARY 2000 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The trustee's application is dismissed. 2. It is declared that the authority signed by the debtor on 27 November 1997 was not effective for the purposes of Part X of the Bankruptcy Act 1966 (Cth). IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q7283 OF 1999 BETWEEN: GRAHAM ROSS BENDEICH Applicant / Trustee AND: CAROLYN DOROTHY ANDRESEN Respondent / Debtor JUDGE: KIEFEL J DATE: 7 FEBRUARY 2000 PLACE: BRISBANE REASONS FOR JUDGMENT 1 The trustee of Mrs Andresen's bankrupt estate applies to the Court for an order terminating a Deed of Arrangement made on 6 January 1998, pursuant to s 236 Bankruptcy Act 1966 (Cth). 2 Pursuant to the terms of the Deed, Mrs Andresen's husband was to transfer ownership of a motor vessel to the trustee within seven days of the date of acceptance of her proposal by her creditors. The trustee was then to sell the motor vessel within six months from the date of execution of the Deed for an amount not less than was necessary to pay the creditors in full and to enable the trustee's costs and remuneration to be met. It was further provided: "(c) If the sale is not effected within 6 months from the date of the execution of this Deed, the Trustee shall convene a further meeting which can pass a resolution requiring the debtor to present her own petition in Bankruptcy." In the event that insufficient funds were realised from the sale, the debtor was to make up the balance. 3 Mrs Andresen's husband did not transfer the title in the motor vessel to the trustee and has since declined to do so. 4 The trustee has received three proofs of debt. The principal debtor is the Australian Taxation Office which claims the sum of $64,159.83; Ms Polnicky who claims $902 and Mr Matijevic who claims $61,301. This latter debt is connected with the amount claimed by the Australian Taxation Office. The liability to the Australian Taxation Office is said to have arisen by reason of Mrs Andresen's position as a partner with Mr Matijevic in a business which failed to pay group tax. At the time the Deed of Arrangement was entered, the Australian Taxation Office was the only major unsecured creditor in attendance at the meeting. The only other person claiming to be a creditor at the meeting was a Mr Dwyer. 5 Mrs Andresen opposes the application on the grounds that the document purporting to be the Deed of Arrangement does not comply with the provisions of the Act. In particular, it is submitted on her behalf that it was not executed in accordance with the provisions of s 188 of the Act. Further, she alleges that she did not understand the nature and effect of the Deed of Arrangement executed by her and did not have a desire to have her property placed under the control of a trustee. She cross-applies for a declaration that the s 188 authority was not effective for the purposes of Part X of the Act and that the Deed of Arrangement entered into by her is void. Events leading to the Signing of the Deed 6 Mrs Andresen gave evidence that in September 1997 judgment had been entered against her by the Australian Taxation Office with respect to the debt referred to above. Indeed, it would seem that by the time she saw the solicitor and financial adviser, in connexion with the Deed of Arrangement, she had also received a bankruptcy notice and the time for compliance with it had expired. 7 In the first week of September 1997, she received a letter from Graeme A Dwyer & Associates Pty Ltd, a company which represented itself as able to provide financial advice. It was a proforma letter sent by Mr Dwyer to persons against whom a creditor had taken action or entered judgment. A subsequent letter from him resulted in Mrs Andresen contacting him in October 1997. Mr Dwyer advised her that he would negotiate on her behalf with the Australian Taxation Office if a sum of money and a signed authority were forwarded to him. She then attended upon him in Brisbane, at which time an arrangement was made to seek legal advice from Mr Craig Bax of the firm Baker Johnson Lawyers. This occurred on 27 November 1997. 8 Mr Dwyer confirmed that on these occasions Mrs Andresen was distressed, not only about the proceedings taken against her by the Australian Taxation Office, but also because her husband had been injured in a motor vehicle accident and she was obliged to make business decisions on her own. Mr Dwyer said that he believed, from advices he had previously obtained from persons in the office of the Australian Government Solicitor, that the Australian Taxation Office would not further cooperate with a person in Mrs Andresen's position, the inference being that negotiations were fruitless. He did not appear, however, to be of this view when Mrs Andresen first contacted him. He made no inquiry of the Australian Taxation Office, for example, as to a timetable for payment, given that Mrs Andresen advised him she had a business which was earning income in the order of $95,000 in the current financial year. Mr Dwyer did not believe she initially disputed the Deed although there appears to have been some discussion about this with Mr Bax. 9 At the meeting with Mr Bax and Mr Dwyer, Mrs Andresen was asked to provide information concerning her financial status and she did so. A statement of affairs was completed by Mr Dwyer. Mr Dwyer thought the meeting would have lasted between half an hour and an hour although it does not seem to me that his recollection about the meeting can be taken as particularly reliable. Mr Bax also confirmed that he did not have a good recollection of all aspects of it. Although Mr Dwyer was told that Mrs Andresen had an interest in a business, he did not record any aspect of it in the statement of affairs. 10 The understanding of both Mr Dwyer and Mr Bax was that Mrs Andresen's liability for group tax came about as a result of her position as a director of a company which conducted the business. In her most recent affidavit Mrs Andresen says that the business was conducted by herself and Mr Matejovic as partners, but that she held that interest as trustee for Intercoiffure Pty Ltd, of which she was a director. The shares appear to have been owned by another company Andresen Nominees Pty Ltd. Whilst it is possible that such information might have a connection with issues such as credit-worthiness or reliability of memory, the state of the evidence was not such that any conclusion based on this information could be made. 11 Mrs Andresen says that she was advised that if she paid the sum of $3000 they would convene a creditors' meeting and at that meeting the creditors would be advised that she would be able to pay the Australian Taxation Office debt if her husband agreed to transfer a boat which he owned. A discussion between Mrs Andresen and the advisers about this asset and the prospect that its owner would permit a sale obviously preceded this discussion. It was said to be valued at about $150,000. Mrs Andresen says that she told Mr Bax that she disputed the debt but she also conceded that she was then interested in removing the stress of the claim, if possible. 12 At the meeting Mrs Andresen signed an authority to Mr Bax, as her controlling trustee, to call a meeting of creditors. She says that she signed it so that a meeting of her creditors could be called to discuss an arrangement that could be made for payment, but that she did not appreciate she was effectively losing control of her property. Mr Bax however says that he did explain the effect of her authorising him as controlling trustee. 13 Mrs Andresen's signature was witnessed by Mr Dwyer. Although this was done on 27 November 1997 the date "1/12/97" was inserted in that part of the form. Mr Bax did not however sign the consent to exercise the powers of a controlling trustee on that date. He recalled that Mrs Andresen wished to talk to her husband. This would seem to me somewhat inconsistent with Mrs Andresen's evidence about her husband's ability to make decisions at that time, but nothing turns upon it. Mrs Andresen did not return to Brisbane again until the meeting of the creditors was held in the offices of Baker Johnson on 6 January 1998. 14 In the meantime, Mr Bax signed the trustee's section of the form and ascribed the date "10.12.97" to both his signature and the part where provision was made for a witness. The person who signed in that capacity was his secretary. Controversy surrounds when that signature was appended and whether Mr Bax's signature was in fact witnessed by the secretary. A copy of the original form containing the solicitor's signature with the two dates of 10/12/97 entered was lodged with Insolvency Trustee Services Australia (ITSA), but that copy did not contain the witness' signature. The secretary in question gave evidence. She was adamant that her practice was always to observe the signature being applied and then sign as a witness immediately thereafter. Whilst I have no reason to doubt the witness, so far as she was able to recall events so long ago, it would not be the first time that a practice for one reason or another has been departed from. 15 On 15 December 1997, Mr Bax called the meeting of creditors. On the same day he wrote to Mrs Andresen about the meeting. It included the following advice: "The writer by reason of the execution of the authority to call this meeting is now your Controlling Trustee. This means that all divisible property owned by you or to which you have an entitlement as at the date the writer signed the authority to convene the meeting pursuant to Section 188 vests in the writer pending the outcome of the meeting." 16 With respect to the report to creditors that he was to prepare, Mr Bax advised that it would contain a statement as to whether it was in the creditor's interest to accept the proposal or to proceed to bankruptcy. The notice to creditors, which was enclosed, also contained such a statement. Mrs Andresen says she was concerned about these letters, but did not seek to explain, in any detail, her lack of response. 17 At the meeting on 6 January 1998, the only persons present were Mr Bax, Mr Dwyer, Mrs Andresen, a representative from the Australian Taxation Office and a person from an accountancy firm, probably the present trustees. Mr Dwyer nominated himself as a creditor for the purposes of the meeting. This came about, according to Mrs Andresen, by her providing him with a post-dated cheque for his services, at his request, so that at the time of the meeting he would be a creditor. She was advised to do this by Mr Dwyer. This strategy is irrelevant to the issues in these proceedings and does not assist in resolving any factual issue. She said that at the meeting she advised that her husband might agree to sell the boat. She signed documents at the meeting but did not know what she agreed to. In response to an enquiry as to why a creditors' meeting was thought necessary at all, and why the Australian Taxation Office was not approached with respect to some suitable arrangement, Mr Bax said that he understood that the motor vessel had been for sale for some time and the entry into the Deed of Arrangement was by way of obtaining further time for Mrs Andresen to meet the Australian Taxation Office's demands. The report prepared by Mr Bax for the creditors' meeting had summarised Mrs Andresen's interests in real estate, which amounted to some $97,500. Both properties were owned jointly with her husband. 18 Mrs Andresen says that she is liable to be indemnified from the assets of Intercoiffure Pty Ltd with respect to the liability for Group tax. It had, as previously mentioned a net operating profit of $95,831 for the 1997 year, prior to taking account of accumulated losses which might be set off against it. In the 1998 year, a profit of some $59,000 is recorded, after payment, in that year, of substantial directors' fees. The only evidence that an indemnity would be forthcoming was that of Mrs Andresen. Mr Andresen owns the shares in Intercoiffure Pty Ltd with another company, of which he and Mrs Andresen are equal shareholders. Mr Andresen did not give evidence in the proceedings. Section 188 Requirements 19 Section 188 of the Act provides: "188 (1) A debtor who desires that his or her affairs be dealt with under this Part without his or her estate being sequestrated and: (a) is personally present or ordinarily resident in Australia; (b) has a dwelling-house or place of business in Australia; (c) is carrying on business in Australia, either personally or by means of an agent or manager; or (d) is a member of a firm or partnership carrying on business in Australia by means of a partner or partners or of an agent or manager; may sign an authority in accordance with the approved form naming and authorising a registered trustee, a solicitor or the Official Trustee to call a meeting of the debtor's creditors and to take control of the debtor's property. (2) An authority signed by a debtor under this section is not effective for the purposes of this Part unless: (a) if the person authorised is a registered trustee or solicitor - the person has consented in writing to exercise the powers given by the authority; and (aa) if the person authorised is the Official Trustee - an Official Receiver has given the debtor written approval to name the Official Trustee in the authority; and (b) the signature of the debtor to the authority and the signature of the trustee or solicitor to the consent are each attested by a witness. (c) * * * * (3) An authority under this section that is effective for the purposes of this Part is not revocable by the debtor. (4) Subject to subsection 192(1), a debtor cannot give an authority within 6 months of giving another authority, unless the Court grants leave to do so. (5) A registered trustee or solicitor who consents to exercise the powers given by an authority must, within 14 days of consenting, give a copy of the authority to the Official Receiver for the District in which the debtor resides. (6) When an authority becomes effective, the person authorised by it becomes the controlling trustee." (Emphasis is added). 20 Section 40(1)(i) provides that an act of bankruptcy is committed if a debtor "signs an authority under s 188". Other provisions which follow in that subsection make the calling of a meeting in pursuance of the authority; a failure to attend it or to comply with the requirement of the special resolution of the meeting, acts of bankruptcy: (pars (j) (k) (l)). Para (m) of the subsection also provides for an act of bankruptcy where a Deed of Assignment or Arrangement executed by the debtor, or where a Composition accepted by the meeting of creditors is subsequently declared void, is terminated or set aside. 21 Section 188(2)(b) requires that the signature of each of the debtor and the trustee or solicitor be witnessed. There is no issue about Mrs Andresen's signature having been witnessed. It was submitted for the trustee in the application that it could not be inferred that the secretary failed to observe Mr Bax signing simply because her signature was not appended on one copy. What the evidence shows, however, is that there was some gap between Mr Bax signing and the witness signing. This would not ordinarily occur in a circumstance where a signature was being witnessed, as the secretary's own evidence suggests. I am unable to conclude, in the face of an unexplained sequence of events, that the secretary's usual and proper practice of observing signatures prior to signing herself as a witness was followed. In so saying, I do not intend to imply lack of creditworthiness on the part of either witnesses to these events. Rather, I consider that the process undertaken has been shown to be unreliable. The likelihood is that the requirements of s 188(2) were not met. Whether termination of deed and sequestration 22 Section 236 provides, in relevant parts: "(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 the provision of the deed of arrangement; (b) that the deed of arrangement 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 deed of arrangement ought to be terminated; make an order terminating the deed. (2) The Court shall not make an order terminating a deed on the ground specified in paragraph (1)(a) or (c) unless it is satisfied that it would be in the interests of the creditors to do so. (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 deed of arrangement, it may, if it thinks fit, forthwith make the sequestration order sought. (4) . . . (5) The 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 subsection 43(1), sections 44 and 47, sub-sections 52(1) and (2) and Part XIA do not apply in relation to such an application." 23 The order sought by the trustee, terminating the Deed, is said to be based upon par (c) ("any other reason"). A further order, for sequestration of Mrs Andresen's estate, is also sought under s 236(3) and (5). Such an order, however, depends upon the Court first terminating the Deed. Given my finding, that the requirements of s 188(2) were not met, what followed after the signing of the authority was not effective to bring about the consequences which Part X provides for and the parties to the Deed are not bound to it. Orders under s 236 terminating a deed, require that there be an effective deed. An order under subsection (1) cannot be made in this case. It follows also that the sequestration order sought cannot be made, since subsection (3) provides that the Court may do so only if a Deed is brought to an end by an order made under the subsection. The Deed here was simply ineffective. 24 The Trustee, in later written submissions, also submitted that the Court might declare the Deed void under s 222(2) and proceed to make an order for sequestration, given the provisions of s 222(7). 25 Section 222(1) provides: "(1) 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 this Part or complies with the requirements of this Part, or whether a composition has been accepted by a special resolution of a meeting of creditors under section 204, the Inspector-General, the trustee, a creditor or the debtor may apply to the Court for an order under subsection (2)." Reliance was sought to be placed upon it in the event that the Court was not prepared to make a finding as to compliance with s 188(2). 26 The section cannot, in my view, have any application in this case. In the first place the section proceeds on the same basis as is required for s 236, namely that there be an otherwise effective Deed to which the orders are addressed. Although it is unnecessary to add, the grounds for the making of an order under the section are not present here. In general terms subsection (4), which sets out the grounds for declaring a deed void, allows the Court to declare a deed void where the debtor has acted in such a way as might misled creditors, and there is no suggestion of such conduct in this case. Whether Act of Bankruptcy: s 40(1)(i) 27 The Trustee also submitted, in argument, that Mrs Andresen committed an act of bankruptcy under s 40(1)(i) when she signed the authority to call a meeting of her creditors. 28 In Re Donovan; Ex parte ANZ Banking Group Ltd (1972) 20 FLR 50, 65-66, Sweeney J held that an act of bankruptcy was committed when the authority was signed and s 40 did not require that the authority also be one effective for the purposes of the Part X. I respectfully agree. In Re Curry; Ex Parte Goldsea Pty Ltd (1992) 40 FCR 32, 35 the act of bankruptcy there relied upon was that referred to in s 40(1)(l), that constituted by a failure, on the part of the debtor, to file a petition within the time specified in the resolution of the creditors at the meeting. In the view of Spender J, that required that there be a Deed binding upon the parties. His Honour had found that the requirements of s 188(2), with respect to the authority, had not been met, with the consequence that the authority was not effective for the purposes of Part X and for the meeting in question. It is not necessary here to consider the issue before his Honour, since here it is the signing of the authority itself and not anything undertaken in consequence of it which is relied upon. Further, his Honour cast no doubt upon the decision in Re Donovan. 29 It is necessary then to consider whether the authority itself may be considered as ineffective, for the reason that Mrs Andresen did not understand what she was undertaking. If that conclusion is reached, there would be no basis for the act of bankruptcy. 30 The lack of understanding on the part of Mrs Andresen was said to be one as to the effect of the transaction, namely as to the transfer of control over her property to her trustee. It is possible that Mrs Andresen did not: whether because she failed to comprehend what the solicitor had told her or because she did not turn her mind to what it meant. It would not appear to have been a matter of real concern to her, given her lack of reaction to the letter of 15 December 1997. Otherwise, it seems to me, Mrs Andresen understood that arrangements were to be made with creditors and the authority was to enable a meeting to be called to that end. The evidence is a long way from establishing that, through no fault of her own, Mrs Andresen signed the authority in the belief that it was radically different from what it was in fact: Petelin v Cullen (1975) 132 CLR 355; Saunders v Anglia Building Society [1971] AC 1004. 31 An act of bankruptcy was therefore committed by Mrs Andresen on 27 November 1997 when she signed the authority. Consequence of act of bankruptcy 32 The only order which might be made in the proceedings is one declaring the act of bankruptcy to have been committed, but there seems little point in doing so. It cannot presently found a petition, given the requirements of s 44(1)(c) of the Act, that there be no petition against the debtor unless "the act of bankruptcy on which the petition is founded was committed within 6 months before the presentation of the petition", and it is doubtful whether the Court has power to extend time: Re Moss; ex parte Tyaraf Pty Ltd [1985] FCA 403. 33 There will be an order dismissing the trustee's application; and a declaration only that the s.188 authority was not effective for the purposes of Part X of the Bankruptcy Act 1966 (Cth). I will hear the parties as to costs. I certify that the preceding thirty-three (33) paragraphs are a true copy of the Reasons for Judgment of herein of the Honourable Justice Kiefel. Associate: Dated: 7 February 2000 Counsel for the Applicant: Mr M Martin Solicitor for the Applicant: Baker Johnson Lawyers Counsel for the Respondent: Mr P McQuade Solicitor for the Respondent: McDonald, Balanda & Associates Date of Hearing: 9 December 1999 Date of Judgment: 7 February 2000