FEDERAL COURT OF AUSTRALIA Deputy Commissioner of Taxation v McKean [2001] FCA 429 BANKRUPTCY - Part X arrangement - whether omitted a "material particular" from statement of affairs - reasonableness - whether terminating the composition would be in the interests of creditors Statutes Bankruptcy Act 1966 (Cth) Part X, ss 222(4)(b), 222(5), 239, 241, 242 Cases Augustyn v Putnin (1988) 83 ALR 514 Cited Beard v Prestige Baking Industries Pty Ltd (1981) 36 ALR 307 Appl Calegeros v Attorney-General (Cth) (1953) 88 CLR 41 Cited Khera v National Australian Bank Ltd (1996) 71 FCR 133 Appl Lasovase Pty Ltd v Byrne [1999] FCA 223 Cited Lensworth Finance Ltd v Segal and Ward (1975) 9 ALR 154 Appl DEPUTY COMMISSIONER OF TAXATION v GLENN R McKEAN Q 7264 OF 1999 KIEFEL J 17 APRIL 2001 BRISBANE IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q7264 OF 1999 IN THE MATTER OF GLENN R MCKEAN BETWEEN: DEPUTY COMMISSIONER OF TAXATION APPLICANT AND: GLENN R MCKEAN RESPONDENT JUDGE: KIEFEL J DATE OF ORDER: 17 APRIL 2001 WHERE MADE: BRISBANE THE COURT DECLARES THAT: 1. The deed of composition of 23 August 1999 is void. THE COURT ORDERS THAT: 2. The estate of Glenn R McKean be sequestrated. 3. The applicant's costs of the application be taxed and paid out of the said estate. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q7264 OF 1999 IN THE MATTER OF GLENN R MCKEAN BETWEEN: DEPUTY COMMISSIONER OF TAXATION APPLICANT AND: GLENN R MCKEAN RESPONDENT JUDGE: KIEFEL J DATE: 17 APRIL 2001 PLACE: BRISBANE REASONS FOR JUDGMENT 1 On 16 June 1999 the Deputy Commissioner of Taxation ('the applicant') filed a petition seeking the sequestration of Mr McKean's estate. It was adjourned to permit a proposal to be put under Part X Bankruptcy Act 1966 (Cth). On 23 August 1999 a composition was accepted by a meeting of creditors pursuant to which Mr McKean was to pay $20,000 in two instalments. The second instalment has not yet been paid. It was due six months after acceptance of the proposal. Mr McKean believes he is now in a position to make the payment from borrowed funds. 2 The applicant was not present at the meeting. This is not however relied upon as a ground. It is said to be owed some $122,580.75 by way of unpaid tax. The amounts then owing by Mr McKean to secured creditors totalled $318,879.00 and to unsecured creditors $144,680.00, which sum included the amount then due to the applicant. 3 The applicant applies to have the composition declared void, set aside or terminated on three grounds: (1) That Mr McKean omitted relevant information in relation to his financial affairs (s 222(4)(b)); (2) That he has failed to make a payment under the composition (s 241); (3) That the amount offered to creditors was unreasonable (s 239); and seeks a sequestration order. The third of the grounds requires an order extending time, since it was brought later than twenty-one days from the date of the special resolution accepting the composition. BACKGROUND FACTS 4 The Statement of Affairs was signed on the same day that a meeting is said to have taken place between Mr McKean and his wife, when he resigned as the trustee of the McKean Family Trust No. 2 and the property in question was transferred to his wife as the new trustee. That resolution, said to be in accordance with a Trust Deed dated 20 March 1991, also contains an indemnity, on the part of the new trustee, for any debts Mr McKean incurred as trustee. Documents produced and obtained after the creditors meeting disclose that at 20 September 1999 Mr McKean remained registered as the proprietor of eight lots of land at Tallebudgera, although the transfers to Mrs McKean had been lodged. On 21 December 1999 the transfers were effected. Mr McKean's status as a trustee or former trustee of the property was not disclosed to the creditors. 5 Other evidence shows that on some occasions what are said to be trust assets were treated as Mr McKean's and on others the trust is identified in connection with them. The picture is confusing. For example, a loan application for the construction of a house shows the land, the subdivisional lots referred to above, as his own. They were valued at some $1.72M. He appears on the title as proprietor, but the mortgage granted shows the McKean Family Trust No. 2 as providing a guarantee and indemnity. 6 The Trust is said to have conducted the business of jeweller and land developer. Mr McKean says it was also the owner of the business name "Telemedia Marketing", but that he was unable to register the Trust's interest in the business name. Bank records however show Mr McKean as the proprietor of the business. The account was opened in August 1998 and about $18,000.00 per month was paid through the account. It was closed in December 1999. There does not appear to be any evidence linking the business to the Trust. Mr McKean says that the application form for the opening of the account was signed in error. This does not support his contention that it was a business owned and conducted by the Trust. It may tend to show that Mr McKean's affairs were treated as those of the trust and vice versa. Various statements of assets and liabilities in evidence deal with property and debts in this fashion. For example a heading suggest joint ownership ("McKean Family Trust No. 2 and Glenn McKean"). The property is not further identified as belonging to either Mr McKean or the Trust, although no doubt the reference to him is simply as trustee. A difficulty with the statement for 30 June 1997 is that it bears the footnote "This is a true statement of my assets and liabilities" and is signed by Mr McKean. The statement for 1 December 1998, listing net assets of $678,800, shows the house and land owned by Mr and Mrs McKean together with the Tallebudgera lots. The joint heading is again used. 7 One Balance Sheet produced, for 30 June 1996 refers only to the McKean Family Trust ("trading as Black Opal Centre"). It refers to land held for resale and this may be to the Tallebudgera lots. Of interest, with respect to the question of any entitlement Mr McKean may have from the Trust, is the Trusts' liability shown as "beneficiary loans and McKean Family", at some $169,628.25. 8 In a loan application document dated 23 September 1997, Mr McKean described his occupation as retailer of "land and jewellery", which is of course the same description as the business of the Trust. He listed his assets as including the lots and business assets at $240,000 with average monthly sales from the business at $79,375.00. No reference was made to a Trust. 9 In September 1997 the subdivisional lots were also re-financed. Mr McKean was then shown as registered proprietor and mortgagor; but both the application for finance and the Schedule to the mortgage identify him as trustee. 10 Mr McKean says, in support of his contention that the land has always been held for and on behalf of the Trust, that the original block of land, from which the lots were subdivided, was purchased in 1986 by a company in which his wife held shares. The Trust, which was established in 1991 and conducted the opal business, purchased the land for $650,000 in about July 1993 with a loan from another company. The Trust was established with a loan from himself and his wife. A Loan and Profit-Sharing Agreement was entered into with that company. The land was only transferred into his name following the purchase because of his solicitor's error. 11 The state of the evidence is such that no firm conclusion can be drawn about the ownership of the land. There are certainly indications of the Trust's interest, but without recourse to the historical documents and financial dealings of the Trust and Mr McKean, an interest on Mr McKean's part could not be discounted. There are indications that Mr McKean is owed money by the Trust. It might be that he is entitled to further monies pursuant to his trustee's indemnity. The evidence discloses that Mr McKean was the proprietor of the Telemedia Marketing business and name. It remains to add, for the purpose of the questions arising, that Mr McKean's taxable income in the years to 1996 was in the order of $35,000. MATERIAL OMISSIONS 12 Section 222(4)(b) provides: "(4) Where the Court, on the application of the Inspector-General, the trustee or a creditor, is satisfied that the debtor: … (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". 13 Section 222(5) provides that such an order shall not be made unless the Court is satisfied that it would be in the interests of creditors. 14 The section refers to the information provided in the statement of affairs. A question here arises as to whether a debtor is obliged to ensure that further information, in addition to direct answers to questions, is provided, so that creditors are fully informed. The Deputy Commissioner of Taxation alleges a number of omissions, but many of them fall into this latter category. 15 So far as concerns the statement itself, question 1 asked the debtor to list "all accounts conducted at banks or other financial organisations in the last two years". Mr McKean did not list the accounts conducted in Telemedia Marketing's name by him. 16 It was also submitted that Mr McKean failed to list the money owed to him by the Trust (Qn 5) by way of the loan he had made to it and any indemnity due to him. The strongest evidence of this is his evidence that the Trust was commenced with a loan. This may be what is referred to in the Trust's accounts as monies due to family members, but it is not clear. At present it could only be said that there is a prospect that monies may be due to Mr McKean. 17 In relation to this ground much is said to turn upon the answer to question 7, which asked him to list details of all assets not covered by the preceding questions. Question 8 then required him to list any mortgage or other secured creditor. It is contended that he ought to have listed the subdivisional lots, since he appears as registered proprietor of them and that he ought also to have disclosed his interest in Telemedia Marketing. Mr McKean's answer is that they are not his assets, but those of the Trust. 18 In the answer to question 30 Mr McKean said he received $15,000 from the McKean Family Trust (not giving its full name) in the past 12 months and estimated that he would receive $20,000 in the next 12 months. An inference might be drawn that it is from the same source. Little can be inferred about his level of income, in connection with preceding years. The capacity in which he receives income is not stated. He is not disclosed as a trustee. 19 In his answer to question 38, Mr McKean clearly conveyed that he had not been in business himself in the last 5 years. This may be consistent with his contention that all business activities he was connected with were Trust businesses. The Deputy Commissioner of Taxation however points to the many indications that it was his business - or might equally be viewed as his businesses. 20 Question 40 related to Trusts. The question commenced: "Have you, your spouse or any member of your family had any interest in a trust in the last 5 years or have you transferred any assets to a trust in the last 5 years?" Mr McKean answered in the affirmative and then proceeded to further answer by simply identifying his wife as the trustee. Immediately below the reference to the trustee, Mr McKean was asked to identify the "Name and address of the appointer". He listed the original appointer in 1991. He and other members of the family were shown as beneficiaries. The assets listed as those of the Trust included the Tallebudgera land at $670,000; jewellery and stock fittings. No reference was made to another business owned by the Trust, which is to say it did not include a mention of Telemedia Marketing. 21 It is essential that the information in the statement of affairs be "full and correct". The purpose of a statement of affairs is to inform creditors before they make their decision: Re Segal; Lensworth Finance Ltd v Segal and Ward (1975) 9 ALR 154, 157. It seems to me however that what is alleged to be omitted can only be assessed in the context of the questions asked. Many of the allegations here confuse the obligation arising under s 222(4) with the duties of full disclosure referred to in s 268 and which may give rise to offences (as to which see generally Calegeros v Attorney-General (Cth) (1953) 88 CLR 41, 53). 22 There are however three notable omissions: the reference to Mr McKean's interest in Telemedia Marketing and the bank account conducted by him in that connexion; the appointment by him of his wife as trustee; and the transfer by him of the subdivisional lots to the Trust. In each case the questions required disclosure, even if Mr McKean was to add some explanation. An omission is "material" within the meaning of s 222(4)(b) if it was relevant to, and may have affected, the creditors' decision: Re Segal, 157; Beard v Prestige Baking Industries Pty Ltd (1981) 36 ALR 307, 319, 336-7. Each of the omissions but in particular those with respect to the transfer of assets to the new trustee appointed by Mr McKean would fall within this category. FAILURE TO MAKE A PAYMENT 23 Section 242(1) provides: (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 state 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." It is not in dispute that Mr McKean failed to make the second payment. Depending on the outcome of this application, he says that he is now in a position to do so. 24 Mr McKean submits that the matter should go back to his creditors. Section 241 certainly provides that the creditors may by special resolution at a meeting called for the purpose, terminate the composition where a debtor has failed to carry out a term of a composition. No other creditor however appears to have shown any interest in the matter and no one has suggested the calling of a meeting for this purpose. the interests of the creditors 25 Each of s 222(5) and s 242(2) condition the making of an order setting aside or terminating a composition, on the grounds referred to above, to the Court being satisfied that it is in the interest of creditors to do so. Whilst s 222 and s 242 deal with different situations - the former being concerned with matters of validity of the meeting which would lead to the deed being avoided and s 242 concerning facts and circumstances arising after the execution of the deed: Khera v National Australian Bank Ltd (1996) 71 FCR 133, 146, the question concerning the creditors' interests is the same. In this regard it is not necessary that a positive financial benefit to creditors be shown. It is sufficient that there exists a real possibility of benefit: Lasovase Pty Ltd v Byrne [1999] FCA 223; Augustyn v Putnin (1988) 83 ALR 514. 26 The return which would be achieved by creditors is very small. There are real questions as to the ownership of the assets and dealings in the Trust which it would be in the interests of creditors to have investigated. This requirement is satisfied. conclusion 27 It is not necessary to consider the remaining ground under s 239(2). The grounds in s 222(4)(b) and s 242(1)(a) have not been made out. In the circumstances I will make an order declaring the deed void and sequestrating Mr McKean's estate. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kiefel. Associate: Dated: 17 April 2001 Counsel for the Applicant: Mr C D Coulsen Solicitor for the Applicant: Australian Government Solicitor For the Respondent: In Person Date of Hearing: 28 March 2001 Date of Judgment: 17 April 2001