Loane v Gold Ribbon (Accountants) Pty Ltd [2004] FCA 537

FEDERAL COURT OF AUSTRALIA

Loane v Gold Ribbon (Accountants) Pty Ltd [2004] FCA 537 BANKRUPTCY – appeal from decision of Federal Magistrate to annul composition – whether present respondent had standing to bring application to annul composition – effect of the appellant's bankruptcy and wife's subsequent guarantee on appellant's status as guarantor – whether delay constituted a miscarriage of justice Bankruptcy Act 1966 (Cth) ss 73, 74, 75, 82 R v Brian William Maxwell (unreported, Supreme Court of New South Wales Court of Criminal Appeal, Spigelman CJ, Sperling and Hidden JJ, 23 December 1998) - followed DARRYL JOHN LOANE v GOLD RIBBON (ACCOUNTANTS) PTY LTD (ACN 081 156 078) No Q 194 of 2003 SPENDER J BRISBANE 29 APRIL 2004

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY Q 194 OF 2003

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

BETWEEN: DARRYL JOHN LOANE

APPELLANT

AND: GOLD RIBBON (ACCOUNTANTS) PTY LTD

(ACN 081 156 078)

RESPONDENT

JUDGE: SPENDER J

DATE OF ORDER: 29 APRIL 2004

WHERE MADE: BRISBANE

THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The appellant pay the respondent's costs of and incidental to the appeal, to be taxed if not agreed. 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 Q 194 OF 2003

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

BETWEEN: DARRYL JOHN LOANE

APPELLANT

AND: GOLD RIBBON (ACCOUNTANTS) PTY LTD

(ACN 081 156 078)

RESPONDENT

JUDGE: SPENDER J

DATE: 29 APRIL 2004

PLACE: BRISBANE

REASONS FOR JUDGMENT 1 This is an appeal from orders made by a Federal Magistrate on 25 November 2003, annulling a composition entered into by the appellant, and making a sequestration order against him. 2 Darryl John Loane was made bankrupt on 20 February 2000 when his debtor's petition was accepted. On 9 August 2001 the appellant entered into a composition with his creditors, pursuant to s 73 of the Bankruptcy Act 1966 (Cth) ("the Act"). Section 74 provides: 'Upon the passing of a special resolution at a meeting of creditors of a bankrupt under subsection 73(4), the bankruptcy is annulled, by force of this subsection, on the date on which the special resolution was passed.' 3 The composition, which was accepted by the majority of the creditors, was derisory. The composition offered less than one ten thousandth of a cent in the dollar. It was voted against by all of the creditors who appear to be at arm's length from the appellant. It was voted for by creditors who in fact had no prospect of receiving even a cent in the dollar by way of a dividend, was against the Trustee's recommendations, and was made in the absence of investigations that the Trustee had recommended. The Trustee's report referred to the lack of co-operation by Mr Loane and by his accountant, one David Ryland. 4 The respondent to this appeal applied to annul the composition on 12 October 2001. That application was supported by an extensive affidavit of Mr Grant Dene Sparks who, along with Mr Ray Richards, are joint liquidators of the respondent company. The application by the respondent to have the composition annulled was made pursuant to subs 75(4)(b) of the Act. Sub-section 75(4) of the Act relevantly provides: 'If: … (b) it is made to appear to the Court that: (i) the composition or scheme of arrangement cannot be proceeded with without injustice or undue delay to the creditors or to the bankrupt; or (ii) the approval of the creditors was obtained by a misrepresentation by the former bankrupt; or (iii) it is desirable that the affairs of the former bankrupt be investigated and administered under the provisions of this Act relating to bankruptcy; or (iv) it is likely that the creditors will receive a greater dividend if the former bankrupt is again made a bankrupt; the Court may, if it thinks fit, on the application by the trustee or a creditor, annul the composition or scheme of arrangement.' Sub-section 75(6) of the Act provides: 'The trustee or a creditor may include in an application under subsection (4) an application for a sequestration order against the estate of the debtor and, if the Court makes an order on the first-mentioned application annulling the composition or scheme of arrangement, it may, if it thinks fit, forthwith make the sequestration order sought.' 5 The hearing before a Federal Magistrate was on 17 December 2002 and subsequent submissions in writing were placed before the Federal Magistrate's Court in January 2003. Judgment was delivered on 25 November 2003, where the Federal Magistrates Court ordered that: '(1) The composition entered into on 9 August 2001, be annulled pursuant to section 75(4)(b)(iii) of the Bankruptcy Act 1966; (2) A sequestration order be made against the estate of Darryl John Loane; (3) The applicant's costs of and incidental to this application, including reserved costs, if any, be taxed and paid from the estate of the Bankrupt in accordance with the Bankruptcy Act 1966.' 6 The trial proceedings were conducted on behalf of the present appellant by a litigation guardian, which had been appointed by the Federal Magistrates Court on 20 August 2002. That appointment was necessitated by the severe depressive disorder suffered by Mr Loane, resulting in a serious and near fatal suicide attempt on 24 December 2001. 7 There are really only two questions on the appeal. 8 The first, referred to in the Federal Magistrates Court as the "threshold point", is the contention that the present respondent did not have standing to bring its application to annul the composition, because at the time of the bringing of the application it was not a "creditor" of the respondent. The contention on behalf of the appellant is that while Mr Loane would have been a contingent creditor pursuant to a guarantee that he had executed in May 1999 had he not become bankrupt, the fact that he had become bankrupt and that subsequent to his bankruptcy his wife, Ms Caerdinael, had executed a guarantee in respect of a loan from Gold Ribbon (Accountants) Pty Ltd ("GRA") had the effect that GRA was not a creditor of the appellant. 9 Notwithstanding what are, at the least, imprecise legal descriptions of events that occurred, it seems to me plain that GRA was a contingent creditor within s 82(1) of the Act. It had that status at the date of Mr Loane's bankruptcy, during the course of it, at the date of the special resolution which accepted the composition, and at the date of the application to the Federal Court for annulling of the composition. Section 82(1) of the Act provides: 'Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.' 10 In my opinion, a contingent creditor who is able to prove in the bankruptcy of the bankrupt is a creditor who can apply, pursuant to s 75(4) of the Act, for the annulment of a composition. 11 It is necessary, in the resolution of what has been called the threshold point, to refer to the legal arrangements which were in fact entered into, and it is unhelpful to have the characterisation of those legal arrangements determined by person's opinions as to what they might have been. 12 A document called "Gold Ribbon (Accountants) Pty Ltd Accountants Funding Programme" is the document which constitutes the loan arrangements between GRA and Venola Pty Ltd, a company of which Mr Loane was director. The terms and conditions of that document provides in cl 1 of Section C of that document: 'The Applicant hereby applies to Gold Ribbon (Accountants) Pty. Ltd. ("GRA") as administrator of the Accountants' Funding Programme for registration in the programme.' Clause 5 of those terms and conditions provides as follows: 'As the Applicant or on behalf of the Applicant, I undertake that the Applicant will duly perform all the obligations imposed on it for participation in the programme including the obligation that advances to the applicant by GRA pursuant to the programme will be repaid to GRA on the due date for repayment. Where applicable provided herewith in the form required by GRA are guarantees of the Applicant's due performance of all its obligations under the programme. These guarantees are provided by: I. The Directors of the Applicant Company; …' Clause 13 of those terms and conditions provides as follows: 'The Applicant will give to GRA 90 days notice in writing if it intends to withdraw from the programme and acknowledges that unless the Applicant is in default, then GRA will give to the Applicant 90 days notice in writing if it intends to terminate the Applicant's participation in the programme.' 13 Notwithstanding statements concerning the effect of these arrangements by various witnesses in the Federal Magistrates Court, in my opinion this was an ongoing loan of indefinite duration, which could be terminated by 90 days notice in writing and could also be terminated for default. 14 Mr Loane signed a guarantee on the same day as the loan document. The guarantee relevantly provides: 'IN CONSIDERATION of advances under and or pursuant to the Accountants' Funding Programme ("the programme") conducted by GRA and administered by Gold Ribbon (Accountants) Pty. Ltd. or other financial accommodation granted or hereafter to be granted and continuing to the applicant Accountant as set out in Schedule 2 to this instrument ("the Applicant") at the request of the Guarantor (as testified to by the Guarantor's execution hereof). HEREBY: 1. UNCONDITIONALLY AND IRREVOCABLY GUARANTEES to GRA in accordance with the provisions set out in Schedule 1 to this instrument the due and punctual payment to GRA of all moneys which at any time or from time to time remain owing to GRA until the guarantor is released from the guarantor's liabilities under the Programme …' In schedule 1 to that guarantee the following appears: '… 2. The liability of the Guarantor under this instrument is not released by any act matter or thing that GRA may do or omit to do which but for these provisions would or might release the guarantor from that liability including but not limited to ... (d) Any other person giving a guarantee in respect of all or any of the moneys hereby guaranteed; ... 3. This guarantee:- (a) Is a continuing guarantee; (b) Shall not be considered as satisfied by any intermediate payment or satisfaction of all or any of the moneys hereby guaranteed; and (c) Remains in force until it has been released by an instrument in writing executed by GRA.' 15 It was conceded by Mr Collins, who appeared on behalf of the appellant, that if Mr Loane had not become a bankrupt his liability under the guarantee would continue. His contention, however, is that after he became a bankrupt, the fact that his wife executed a guarantee in respect of the sums advanced by GRA to Venola Pty Ltd had the effect of replacing him as a guarantor by his wife. 16 However, consistent with the clauses to which I have just referred, the appointment of Ms Caerdinael did not have the effect of "replacing", or "terminating", or "bringing to an end" the obligations of guarantor of Mr Loane. On 28 March 2000 an internal memorandum of Sherie Schweitzer refers to the execution of a new "guarantee" signed by "the new director/s of the company". That memorandum says: 'I refer to information received recently that Mr. Darryl Loane, the guarantor of Venola Pty Ltd. (Application No 61) has declared himself a bankrupt. I was further advised that there has been other director/s appointed to the Company. As I have handed the file over to you for your management, I would like to suggest that the Board of Directors be advised in writing of the situation and that the new director/s of the company be requested to sign a new Guarantee. …' What has been called the letter of offer dated 3 July 2000, is in the following terms: 'Dear Ms. Caerdinael, Thank you for your recently submitted current receivable figures (Form E). Your application for extension of your loan facility with Gold Ribbon (Accountants) Pty Ltd has been assessed and approved. To allow us to proceed with your rollover could you please sign this Letter of Offer confirming details of your existing advance.' The letter is addressed to Ms Caerdinael at Venola Pty Ltd at an address in Surfers Paradise. 17 The payment schedule referred to in that letter of offer is as follows: 'PAYMENT SCHEDULE Total Receivables $ 1,677,889.00 Amount Funded by way of Loan $ 800,000.00 Next Review date: 18th July, 2000 New Receivables Declaration required back no later than: 25th July, 2000 Date Repayable: Upon GRA giving the Applicant 90 days written notice' 18 In my opinion Ms Caerdinael became a further guarantor of the advance by GRA to Venola Pty Ltd and that that advance was a continuing loan. This much is supported by the reference to the date repayable as being '[u]pon GRA giving the Applicant 90 days written notice'. In my opinion there has never been a release or a discharge of Mr Loane as guarantor of the moneys loaned by GRA to Venola Pty Ltd. 19 On Mr Loane's bankruptcy, GRA became a contingent creditor in his estate, and in my opinion the Magistrate was correct to conclude that it had standing to bring the application for annulment of the composition. 20 It almost goes without saying, but the terms of the composition are so outrageous and the sums offered so trivial that under no view could it be thought that this composition was in the interests of creditors. It seems - and in fact, there were no submissions to the contrary - that the Magistrate was perfectly entitled to be satisfied of the consideration referred to in subs 75(4)(b)(iii) of the Act, namely, that it was desirable that the affairs of the former bankrupt be investigated and administered under the provisions of the Act relating to bankruptcy. 21 The second issue pressed on the appeal relates to the significance of delay. Notwithstanding delays between the filing of the application and the trial, for almost all of which the appellant himself was responsible, there were delays from the date of final submissions until the date of judgment. It was submitted by Mr Collins on behalf of Mr Loane that having regard to the length of the delay, the discretion by the Magistrate to annul the composition should have been exercised contrary to the way it was exercised. 22 The question of delay and its relevance as a ground of appeal was the subject of observations in R v Brian William Maxwell (unreported, Supreme Court of New South Wales Court of Criminal Appeal, Spigelman CJ, Sperling and Hidden JJ, 23 December 1998). Under the heading "Delay", their Honours said: 'The first ground of appeal asserts that the trial miscarried by reason of the delay between hearing and verdict. Delay is not, however, of itself, a ground of appeal. Nor does the delay in and of itself indicate that the trial miscarried or that the verdict is in any manner unsafe. Nevertheless, a comparison between the judgment and the issues in the trial may indicate that the effect of delay has been such as to constitute a miscarriage of justice.' 23 What that passage indicates is that it is necessary to establish that the delay has had the effect of constituting a miscarriage of justice. Their Honours continued, a little later: 'The effect of delay was considered by the English Court of Appeal in Goose v Wilson Sandford & Co, unreported Court of Appeal (Civil Division) 13 February 1998. That case involved a trial which ended on 13 July 1994, when Harman J reserved judgment. Correspondence ensued between the Plaintiff's solicitors and the Court during the course of which a number of assurances were given as to when judgment could be expected. Those expectations were not fulfilled. Eventually judgment was handed down on 1 April 1996, twenty months after the hearing. A short part of this delay was explicable by the judge's illness. The judgment of the Court of Appeal was a joint judgment of Peter Gibson, Brooke and Mummery LJJ. Their Lordships said, in words which this Court adopts and endorses: "A judge's tardiness in completing his judicial task after a trial is over denies justice to the winning party during the period of the delay. It also undermines the loser's confidence in the correctness of the decision when it is eventually delivered. Litigation causes quite enough stress, as it is, for people to have to endure while a trial is going on. Compelling them to await judgment for an indefinitely extended period after the trial is over will only serve to prolong their anxiety, and may well increase it. Conduct like this weakens public confidence in the whole judicial process. Left unchecked it would be ultimately subversive to the rule of law. Delays on this scale cannot and will not be tolerated. A situation like this must never occur again." Public confidence in the judicial process is of particular significance in the administration of the criminal law. Indeed one of the most important aspects of the welfare and stability of Australian society is the hard earned, but widespread, belief that judges administering the criminal law do so with competence, fairness and impartiality. The administration of criminal justice is of great significance in the preservation of the liberty of Australian citizens. This Court must be rigorous in ensuring that judicial conduct in the course of criminal trial does nothing to disappoint the high expectations which the community as a whole has of the judiciary in this regard. Although mere delay is not a ground of appeal, this Court must apply the strictest of scrutiny to a criminal judgment which may have been affected by the inevitably adverse consequences of delay. We adopt the analysis of the English Court of Appeal in Goose v Wilson Sandford, where their Lordships said, "Because of the delay in giving judgment, it has been incumbent on us to look with especial care at any finding of fact which is now challenged." 24 As those observations indicate, delay itself is not a ground of appeal, nor does delay of itself indicate that the trial miscarried. It is necessary to consider whether delay has had the effect of constituting a miscarriage of justice. One particular example of this might be a challenge to a finding of fact made some time after the hearing, the finding being based on the observation of witnesses. 25 There is no such consideration involved in the present case. There is no circumstance pointed to where delay may have affected the evaluation of any issue which fell for determination. At best, it can be said that during the period under which the judgment was reserved, the appellant was not subject to the consequences of bankruptcy. During that period there was always the possibility that the judgment would have the effect of annulling his composition and the possibility also of the making of a sequestration order, as in fact happened. 26 That consideration, it seems to me, is not a basis on which it can be said that the discretion to annul the composition miscarried, nor does it indicate that the delay has had the effect of constituting a miscarriage of justice. 27 For my own part, the terms and the circumstances of the composition are so outrageous that the only effect of the delay in giving judgment is that a composition, which ought to have been annulled sooner, was annulled later. 28 For these reasons the appeal is dismissed. I order that the appellant pay the respondent's costs of and incidental to the appeal, to be taxed if not agreed. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Spender