Re Keith George Morris Ex Parte: Halina Wendy Adams v Everett Thomson Bent, As Trustee of the Property of the Debtor v Keith George Morris [1980] FCA 149; (1980) 48 FLR; 341 (27 November 1980)

FEDERAL COURT OF AUSTRALIA

Re: KEITH GEORGE MORRIS
Ex parte: HALINA WENDY ADAMS
And: EVERETT THOMSON BENT, AS TRUSTEE OF THE PROPERTY OF THE DEBTOR
And: KEITH GEORGE MORRIS [1980] FCA 149; (1980) 48 FLR 341
No. 24 of 1980 X
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA
C.A. Sweeney, J.(1)

CATCHWORDS

Bankruptcy - The Court being satisfied that the debtor had omitted material particulars from his Statement of Affairs, made an order pursuant to s.222 of the Bankruptcy Act 1966 declaring a Part X Composition to be void, being satisfied that it would be in the interests of the creditors to do so; order of sequestration made against the estate of the debtor.

Bankruptcy - Composition - Statement of affairs - Omission of material particulars - Meaning of "material particular" - Oral correction of erroneous particulars - Interests of creditors to have composition declared void - Sequestration order - Principles to be applied when considering whether to make sequestration order - Bankruptcy Act 1966 (Cth), ss. 188, 195, 222. Morris, the debtor, signed an authority under s. 188 of the Bankruptcy Act 1966 (the Act). On 9th April, 1980, Morris' creditors accepted a special resolution in favour of a composition whereby the respondent Bent was appointed trustee of the composition. The composition provided that, after costs, expenses and priority debts had been met, Morris was to pay to each creditor the sum of fifteen cents in the dollar. On 30th April, 1980, the applicant, one of the creditors, sought to have the composition declared void on various grounds, and to have a sequestration order made against the debtor.

The debtor was obliged to provide a statement in writing of his affairs, verified by statutory declaration, for submission to creditors at the creditors' meeting pursuant to s. 195 of the Act. By s. 195 (2):

"The statement of the debtor's affairs shall specify his assets and liabilities and shall include -
(a) in respect of each asset - particulars of the asset, including its estimated value;
(b) in respect of each liability - particulars of the liability, including whether it is secured or not;
(c) in respect of any liability that is secured - particulars of the security."

The applicant based her application upon s. 222 of the Act (as amended by the Bankruptcy Amendment Act 1980, s. 117) which by sub-s. (4) provides that where the court is satisfied that the debtor:
"(a) has given false or misleading information in answer to a question put to him with respect to his conduct, trade dealings, property or affairs at the meeting of creditors at which the resolution requiring him to execute the deed or accepting the composition was passed; or
(b) has omitted a material particular from the statement of his affairs under section 195 of this Act 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."

By sub-s. (5) the court is to refrain from making an order declaring, inter alia, a composition void on a ground specified above, unless it is satisfied that it would be in the interests of creditors to do so.

In the course of the hearing it was established that the debtor had omitted from his statement of affairs: (a) reference to a debt due to his estate in respect of the sale of his accountancy practice; (b) reference to a debt due to his estate from a sale of shares in a company; (c) reference to a debt due from him to General Credits Ltd. in the sum of $100,000; (d) reference to a contingent liability to the Housing Builders' Association Ltd.

The respondents argued that the omitted particulars were not material, or if they were material originally they ceased to be so when the debtor made oral explanation of the particulars at the meeting of creditors. Finally it was submitted that if the composition were declared void, no sequestration order should be granted for the reason that the creditors would receive a lower dividend in any bankruptcy than they would under a composition.

Held: (1) A particular which is relevant to and might be likely to affect the making of a decision of the creditors under s. 204 (1) is a material particular within s. 222 (4).

Re Segal; Lensworth Finance Ltd. v. Segal (1975), 45 FLR 85, at p 88, cited with approval.
(2) A material particular omitted or wrongly included in a statement of affairs at the date of the verification thereof does not cease to be a material particular if the same is subsequently the subject of a statement by the debtor at the meeting of creditors.

Re Segal; Lensworth Finance Ltd. v. Segal (1975), 45 FLR 85, at pp 89-90, not followed.
(3) The purported correction of an erroneous material particular at the meeting of creditors is a matter relevant to the exercise of the discretion of the court in considering whether to declare the composition void.
(4) When a debtor signs an authority under s. 188 of the Act he commits an act of bankruptcy. If any composition is approved by the creditors, and subsequently declared void, the court will proceed to make a sequestration order unless some sufficient cause is shown to outweigh the public interest and that of individual creditors who are unable to have their debts paid to them.

Rozenbes v. Kronhill [1956] HCA 65; (1956), 95 CLR 407, referred to.
(5) In the circumstances the composition was declared void, and an order of sequestration made against the estate of the debtor.

HEARING

Melbourne, 1980, May 20; August 29; September 1, 16; November 27. 27:11:1980
APPLICATION.

The applicant creditor sought declarations and orders against the debtor and his trustee that the composition of the debtor dated 9th April, 1980, was void on various grounds. In particular she alleged that the debtor at meetings of creditors gave false or misleading information, that he omitted material particulars from his statement of affairs, and that he included an incorrect and material particular in his statement of affairs in that he understated the amount he owed to General Credits Ltd. The applicant also sought a sequestration order against the estate of the debtor.

G. T. Bigmore (solicitor), for the applicant.

H. R. Hallenstein, for the respondent.
Cur. adv. vult.

Solicitors for the applicant: Sewell King & Hedstrom.

Solicitors for the respondent: Harle & Associates.
D. LEVIN

ORDER

(1) declares the composition of the debtor of 9 April 1980 to be void;

(2) makes an order of sequestration against the estate of the debtor, the act of bankruptcy being that on 6 February 1980 he signed an authority under s.188 of the Bankruptcy Act 1966;

(3) orders that the respondents pay the costs of the applicant of and incidental to this application;

(4) reserves general liberty to any party to apply.

Declarations and orders accordingly.

DECISION

The applicant, Halina Wendy Adams, is a creditor of Keith George Morris, the debtor named in a composition dated 30 April, 1980, of which Everett Thomson Bent is the trustee.

The special resolution in favour of the composition was in the following terms:

"That the creditors accept a composition pursuant to the provisions of Part X of the Bankruptcy Act 1966 as amended in respect of the provable debts of the debtor in the following terms:-

1. That the trustee of the composition be Everett Thomson Bent of 144 Jolimont Road, East Melbourne.

2. That the debtor pay to the trustee of the composition a sum sufficient to provide for the following distribution:-

(a) Firstly in payment of the controlling trustee's remuneration, expenses and liabilities.

(b) Secondly, in payment of the costs of administering the composition including the remuneration of the trustee.

(c) Thirdly, in payment in full of the debts which have priority under Section 109 of the Bankruptcy Act.

(d) Fourthly, in payment of a dividend of fifteen (15) cents in the dollar to creditors proved in accordance with the provisions of Part VI of the Bankruptcy Act, such payment to be made not later than the 16th May, 1980."

The debtor and the trustee were both respondents to the application, dated 30 April 1980, in which the following orders were sought :-

"1. A Declaration that the composition of the debtor dated the 9th day of April, 1980 is void on the ground that:

(a) No Certificate has been filed as required by sub-section 204(7) of the Bankruptcy Act, 1966;

(b) The resolution passed on the 9th day of April, 1980 at a meeting of the creditors of the debtor called pursuant to the provisions of Part X of the Bankruptcy Act, 1966 by which (it is contended by and on behalf of the Debtor and the Respondent) a composition of the Debtor was accepted was not passed as a special resolution in that the chairman of the said meeting failed to determine the question as to the right of General Credits Limited to vote; or

(c) It does not appear that the meeting of the creditors of the debtor first held on the 29th day of February, 1980 was properly adjourned, nor that the adjourned meeting held on the 28th day of March, 1980 was properly adjourned by the passing of a resolution pursuant to Section 197 of the Bankruptcy Act, 1966 or in accordance with Section 201 of the said Act.

2. Alternatively, an order declaring the said composition to be void on the ground that:

(a) The debtor at the said meetings of his creditors on the 29th day of February, the 28th day of March and the 9th day of April, 1980 gave false or misleading information in answer to a question or questions put to him with respect to his conduct, trade dealings, property or affairs; or

(b) The debtor omitted a material particular from the statement of his affairs under Section 195 of the said Act, namely the nature and extent of his interest or interests in the companies, Howarth Pty. Ltd., Keith Leslie Pty. Ltd., Kenrich Homes Pty. Ltd., Kenrich Homes (Vic.) Pty. Ltd. and Valith Pty. Ltd.; or

(c) The debtor included an incorrect and material particular in the said Statement of Affairs, namely the debtor significantly under-stated the amount owed by him to General Credits Limited.

3. Alternatively, an order that the said composition be set aside.

4. Alternatively, an order that the said composition be terminated.

5. Further, a sequestration order against the estate of the debtor.

6. Such further or other orders directions or relief as to this Honourable Court may seem fit.

During the course of the hearing, Mr. Bigmore, who appeared for the applicant, abandoned paragraph 1(a) and (c) and paragraph 4 of the application.

It will be convenient to deal first with the applicant's claim in paragraph 2(b), which was amended to read that the debtor had omitted the following material particulars from the statement of his affairs under s.195 of the Bankruptcy Act 1966:-

"(i) A debt due to the estate being the $7,800.00 still due and payable for the sale of the debtor's Accountancy Practice under a contract between the debtor and one Stephen Robert Thom dated the 12th day of April, 1979;

(ii) A debt due to the estate being the $24,000.00 (or thereabouts) still due and payable for the sale of the debtor's shares in Debonaire Air Conditioning under a contract between the debtor and one Edward Albert Kendall dated the 21st day of February, 1978;

(iii) An unsecured liability of an additional amount of approximately $100,000 owed to General Credits Ltd. or alternatively an unsecured liability of approx. $120,000.00 owed to General Credits (Finance) Pty. Ltd; and

(iv) A claim by Housing Builders Association Ltd. in the sum of $15,833.62."

It became common ground that the debtor had omitted from his statement of affairs any reference to a debt due to his estate in respect of the sale of his accountancy practice under a contract dated 12 April, 1979. Mr. Hallenstein, of counsel, who appeared for the debtor and the trustee, contended that the amount outstanding was not $7,800 as alleged but rather $5,237. Nothing turns on the difference in amount and it is unnecessary to resolve it.

Mr. Hallenstein agreed that there was a debt due to the estate in respect of the sale of the debtor's shares in Debonaire Air Conditioning but it was his submission that it amounted only to $4,080 plus interest, which Mr. Bigmore conceded to be correct.

In his final address Mr. Hallenstein at first conceded that the debt of approximately $100,000 owed to General Credits Ltd., or alternatively an unsecured liability of approximately $120,000 owed to General Credits (Finance) Pty. Ltd., was omitted from the statement of affairs.

At a later stage of his address, he said that he agreed that there was an incorrect particular, under the heading of "Unsecured Creditors" in the statement of affairs which so far as is material, read as follows :-

"Name Amount Nature of Debt

General Credits Ltd. $19,894.15 Money owing under

a guarantee."

He agreed that the correct way to have expressed the position between the debtor and that company would have been to have said that it had a judgment against him in the sum of $19,894.15, and that it also had a claim against him for a further sum of $100,000, in respect of which he had obtained leave to defend, and setting out the circumstances in relation to that further claim. In the course of the hearing of the present application it had become clear that the debtor had conceded at the meeting of creditors that he in fact owed General Credits Ltd. the further sum of $100,000.

Since the date of the composition, Housing Builders' Association Ltd. has lodged a proof of debt with the trustee in the sum of $15,833.62. In his affidavit, sworn on 9 June 1980, the debtor said that he was "uncertain and making enquiries about that claim". In his oral evidence given on 29 August, 1980, he said the claim related to the completion of certain houses taken over by the liquidator of two companies with which he had been associated. In his final address Mr. Hallenstein at first conceded that this was an omitted particular but later submitted that there was no evidence that the liability existed or was contingent at the time of making the statement of affairs. It clearly related to building operations, in which the debtor had taken an active part as a director of the two companies, which predated the statement of affairs. In my opinion it was, at best from the debtor's point of view, a contingent liability at the time of the statement.

In the result, I am satisfied that the debtor omitted the particulars from his statement of affairs, which have been considered above. A question remains for decision whether those particulars, or any of them, were material, within the meaning of the Bankruptcy Act 1966.

The obligations of the debtor in relation to a statement of his affairs arise under s.195, sub-sections (1) and (2) of which provide as follows :-

"195. (1.) The debtor shall, unless prevented by illness or other sufficient cause, attend the meeting and shall submit to the creditors at the meeting a statement in writing, verified by statutory declaration, of his affairs.

(2.) The statement of the debtor's affairs shall specify his assets and liabilities and shall include -

(a) in respect of each asset - particulars of the asset, including its estimated value;

(b) in respect of each liability - particulars of the liability including whether it is secured or not; and

(c) in respect of any liability that is secured - particulars of the security."

This portion of the application is based upon s.222 of the Bankruptcy Act 1966, sub-sections (4) and (5) of which, as amended by s.117 of the Bankruptcy Amendment Act 1980, read as follows :-

"(4) Where the Court, on the application of 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 with respect to his conduct, trade dealings, property or affairs at the meeting of creditors at which the resolution requiring him to execute the deed or accepting the composition was passed; or

(b) has omitted a material particular from the statement of his affairs under section 195 of this Act 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 the last preceding sub-section unless it is satisfied that it would be in the interests of the creditors to do so."

Mr. Hallenstein submitted that the omitted particulars should not be held to be material because of explanations made by the debtor at the creditor's meeting. S.195 requires a debtor to verify his statement of affairs by statutory declaration. S.222(4) empowers the Court, if it is satisfied that he has omitted a material particular from the Statement, to make an order declaring the composition, or any provision of it to be void. By sub-section (5) it is provided that the Court shall not make such an order unless it is satisfied that it would be in the interests of the creditors to do so. Thus, the Court's jurisdiction to make such an order does not arise unless it is satisfied that a material particular has been omitted, and it is not to be exercised unless it is satisfied that it would be in the interests of the creditors to do so.

What is the proper construction to be given to the expression "a material particular" in s.222(4)? In re Segal : Lensworth Finance Ltd. v. Segal and Ward (1975) 9 ALR 154 at p. 157 Riley J. said :-

"Bearing in mind the purpose of the statement of affairs I am of opinion that a particular is material within the meaning of section 222(4)(b) if it is a particular which would be relevant to and might be likely to affect the making of the decision of the creditors under section 204(1)."

Under s.204(1), the creditors may, at a meeting called in pursuance of an authority under s.188 of the Act, by special resolution -

"(a) Where the debtor's property is subject to control under this Division, resolve that the debtor's property be no longer subject to control under this Division;

(b) require the debtor to execute a deed of assignment or a deed of arrangement under this Part;

(c) accept a composition; or

(d) require the debtor to present a debtor's petition within seven days from the day on which the resolution was passed."

I respectfully agree with Riley J. that a particular which would be relevant to, and might be likely to affect the making of a decision by the creditors under s.204(1), is a material particular within the meaning of s.222(4). The obligations of the debtor in respect of his statement of affairs are to be found in sub-sections (1) and (2) of s.195. That statement verified by statutory declaration, is the only sworn account the creditors receive of the debtor's affairs before they make a decision under s.204(1) and the debtor may not thereafter be examined on oath, as a bankrupt may be. The statutory requirement that the statement of affairs be verified on oath seems to me to emphasise the central importance of that statement and to represent an attempt to ensure that the creditors have a complete and accurate account of the debtor's affairs.

In addition to his obligations in respect of the statement of affairs the debtor "shall, at the meeting, answer to the best of his knowledge and ability, all questions put to him by the controlling trustee or by a creditor with respect to his conduct, trade dealings, property and affairs" (see s.195(3)). The way in which the debtor discharges this additional obligation, and any information he spontaneously presents to the meeting are amongst the circumstances which are to be considered before the Court decides whether, in the exercise of its discretion, it should make an order under s.222, but they do not, in my opinion, justify a conclusion that a particular which was material at the time of its omission from the statement of affairs loses its character of materiality. The question whether an omitted particular is material depends, in my view, on the construction of the statement of affairs as a whole, as at the time when it was verified by the debtor's statutory declaration. A particular which is then to be regarded as material does not, in my opinion, lose that quality by reason of subsequent events. If a contrary view can be spelled out of Riley J's observations in Re Segal (at pp. 158-9), as Mr. Hallenstein contended, I would respectfully disagree with it.

If one takes the lower amount of $5,237 which Mr. Hallenstein conceded to be a debt due to the estate in respect of the sale of the debtor's accountancy practice, and adds to it the agreed figure of $4,080 (omitting the interest which Mr. Hallenstein agrees to be due, but the amount of which was not calculated by the parties), there was a total sum of $9,317 omitted from his statement of affairs. The inclusion of these amounts would have increased the debtor's assets from $12,185.75 to $21,502.76. Each of these particulars was, in my opinion, material, especially when one bears in mind that the creditors were being asked to accept a composition of 15 cents in the dollar. I regard the claim by Housing Builders Association Ltd. as a material particular. If it were admitted in full, the debtor calculated that he would be required to pay a further sum of $2,375.04. Bearing in mind the precarious financial position of the debtor, of which more anon, a prudent creditor would have regarded such a possible additional liability as material. It may well have been considered to be the last straw, which would prevent the debtor from being able to meet his obligations under the composition.

In a case, such as the present, where a meeting of creditors is adjourned to a later day, a particular creditor may determine his attitude towards, say, a proposed composition on the faith of the statement of affairs alone, and give a proxy vote accordingly. If a particular, then properly to be regarded as material, were omitted from that statement, it is difficult to see how it could cease to be material by reason of some unsworn statement made on a day to which the meeting was adjourned. I reject Mr. Hallenstein's submission that an omitted particular, which, on a reading of the statement of affairs as a whole, would be regarded as material, may cease to be so by reason of some explanation given at the creditor's meeting. Any such explanation, as had been said, is properly to be considered when the Court is considering whether, in the exercise of its discretion, it should make an order, and in its determination of the test laid down by s.222(5), as amended by s.117 of the Bankruptcy Amendment Act 1980.

If, contrary to the opinion I have expressed, an omitted particular, properly to be regarded as material as at the date of the debtor's statement of affairs as verified by his statutory declaration, may lose that character because of events at the creditor's meeting, it is necessary to look at the evidence relating to the meeting, which is relevant, in any event, to the exercise of the Court's discretion and the question arising under s.222(5).

The meeting opened on 29 February 1980 and the minutes recorded the following :-

"The Statement of Affairs in the prescribed form supported by a Statutory Declaration signed by the debtor was tabled and the information contained therein made known to the creditors. Mr. Joughin pointed out that General Credits Limited was shown for an amount of $19,894.15 whereas his company would be claiming an amount in the vicinity of $120,000. He said that the matter was rather complicated, that in the last proceedings Judgment had been entered for the amount set out in the Statement of Affairs but leave had been granted for other matters to be defended particularly when all of the securities had been realised. He said that so far as General Credits Limited was concerned the debt had now been established at an amount of $120,000 and that unless the debtor agreed to the amount claimed by General Credits Limited it was proposed to have the matter taken back to Court.

Mr. Morris said that he was astounded at the claim made by General Credits and he suggested that their claim be set out in writing and addressed to his solicitors, Harle and Associates.

The Meeting was informed that it was the debtor's intention to submit a proposal in the way of a Composition but in the light of the claim made by General Credits Limited, it was fruitless to go any further until that creditor's position had been clarified and in all the circumstances it was agreed that the only sensible thing to do was to adjourn the meeting."

The following resolution was passed:-

"THAT this meeting be adjourned until Friday, 28th March, 1980 at 10.30 a.m."

The minutes of the adjourned meeting on 28 March read as follows :-

"Creditors were reminded that the main reason for the meeting being adjourned was to allow Mr. Morris to consider his position in the light that General Credits were claiming to be a creditor for an amount in the vicinity of $120.000 whereas he had believed the debt to be approximately $20,000. It had now been agreed that General Credits should be admitted as a creditor for $120,000.

Mr. Morris said that he could only see his way clear to submit a proposal to his creditors in the form of a Composition providing for a payment of 15 cents in the dollar in full settlement. This offer had already been conveyed to General Credits who had given the Chairman a Proxy for him to vote for the acceptance of a Composition for the payment of that amount.

Miss Adams questioned Morris at length as to his asset position and emphasised that his only asset was the money held by the Controlling Trustee which were (sic) his share of the proceeds of the property at 7 Karen Court, Doncaster.

Mr. Berryman said that he would have to report back to the Board before making a decision on the acceptance of the offer and Miss Adams said that she would like to discuss the matter with her solicitor with whom she had an appointment this afternoon.

The following resolution was passed:-

'THAT this meeting be adjourned until Wednesday, 9th April, 1980 at 4.30 p.m.' "

The minutes of 9 April record a matter raised on behalf of a creditor and the debtor's answer in the following terms :-

"Accountancy practice was sold for $16,000 in March 1979. Morris said that the value of the practice declined considerably when the three companies with which he was associated and in respect of which he is now liable for guarantees made up to 60% to 70% of his fees, the income was reduced to around $16,000 per year and was not a viable proposition. He said that the proceeds were used to pay a Bank of New South Wales overdraft $5,000, Bankcard $4,000, Pay out on leases of equipment $750, Commission on the sale $1,000 and the balance to other sundry creditors and/or guaranteed creditors."

It can fairly be said that the debtor altered his original account of his liability to General Credits Ltd., but nothing occurred which would, in my opinion, justify a conclusion that the debtor did anything to remedy the defects in the statement of his affairs arising from the omissions of items relating to the sale of his accountancy practice, the proceeds of the sale of the shares in Debonaire, and the claim by Housing Builders Association Ltd. The last named claim resulted from the activities of the companies, of which he was a director, and fees from which he described as making up to 60% to 70% of the receipts of his accountancy practice. In my opinion, he must have been aware that the guarantees which he had given in respect of the building activities of the companies were capable of giving rise to a liability, which should have been included in paragraph 4 of Part VII of his statement of affairs, which read as follows :-

"4. Particulars of my contingent liabilities and any other liabilities not specified in a previous Part of this Statement are:- Nil."

Thus, even on the construction of s.222(4) for which Mr. Hallenstein contended, nothing transpired after the making of the statement of affairs which would justify a conclusion that the particulars omitted in relation to the sale of the debtor's accountancy practice, the sale of the Debonaire shares, and the claim by Housing Builders Association Ltd. ceased to be material, as, in my opinion, they were at the date of the making of that statement.

I am satisfied that the omitted particular relating to General Credits Ltd. was explained to the creditors by the debtor and that the position was further clarified by the statements made on behalf of that company at the meeting. In respect of that particular, the discretion which, in my opinion, is conferred upon the Court by the use of the word "may" in s.222(4), in contrast to the word "shall" in sub-section (5), should not be exercised, and an order should not be made declaring the composition to be void upon the ground of the omission of that particular.

However, for the reasons I have earlier given, I consider that the effect of the omission of the material particulars relating to the other three subject matters was not in any way remedied by the course of events after the making of the statement of affairs and, in relation to them it is necessary to consider whether the Court is satisfied, in accordance with s.222(5), that it would be in the interests of the creditors to make an order declaring the composition to be void.

In his affidavit in support of his opposition to the application, the debtor swore that "as set out in my Statement of Affairs I have no assets", an assertion which is, by his counsel's justified concession, inaccurate.

In paragraphs 82-86 of that affidavit under the heading "The Composition" the debtor deposed as follows :-

"82. The debts owed to creditors who attended the said meetings are as follows -

$120,000.00 General Credits Ltd., being I believe

$112,046.30 plus interest.

$17,611,33 Managed Deposits Ltd., being I believe

$17,316.02 plus $295.31 interest.

$26,668.68 Halina Wendy Adams, being I believe

$21,000.00 plus $2,798.00 interest plus
$2,870.68 costs.

$164,280.01.

83. I was also aware of a claim by Boral Bricks (Vic.) Ltd. by reason of its Creditors' petition referred to herein. Since the composition, Boral Bricks (Vic.) Ltd. has lodged a Proof of Debt with my trustee in the sum of $3,808.36, comprising $3,458.36 plus $350.00 interest.

84. Accordingly, as at the time of the approval of Composition there were known debts totalling $164,280.01 plus $3,808.36 = $168,088.37. The Composition approved by creditors was a payment of 15 cents in the dollar which would total a payment of $25,213.26. Prior to these proceedings I anticipated that the costs for which I would be liable would be approximately $2,500.00. In these circumstances I anticipated that by reason of the said Composition I would have to find a maximum total sum of approximately $28,000.00.

85. I had intended and still intend to raise the sum of $28,000.00 forthwith as follows -

$12,185.75 held by my trustee, Mr. Bent, being

my share of net sale proceeds from 7
Karen Court, East Doncaster.

$3,000.00 recently received from sale of

accounting practice.

$4,000.00 to be borrowed from the bank.

$9,000.00 to be borrowed from my wife and

mother.

$28,185.75.

86. Since the Composition my trustee has received a Proof of Debt from the Housing Builders' Association Ltd. in the sum of $15,833.62. At the present time I am uncertain and making enquiries about that claim and I am informed by Mr. Bent, my trustee, and believe that the has not yet admitted the Proof of Debt. If the claim were admitted then under the Composition I would be liable to pay a further sum of $2,375.04. I would raise this amount forthwith by borrowing it and by using whatever sum in the vicinity of $1,800.00 may yet be paid from the sale of my accountancy practice. It is apparent that by reason of these proceedings my costs are increasing substantially."

In the course of his oral evidence, the debtor said that the original idea for the composition was that he should provide the sum of $25,000, but that it later changed to a proposal for the payment of 15 cents in the dollar, and that calculations showed that that would involve the provision of $28,000, on the assumption that the total required for costs would be $2,500. He stated that he understood that he would be able to obtain a personal loan of $4,000 from his bank. The sum of $12,185.75 was held by the trustee and an amount of $3,000 received from his accountancy practice was immediately available for the purposes of the composition. When asked how he would be able to meet the composition if he where asked to provide an additional sum of $2,500 for costs, above his original estimate of $2,500, he replied that the only way would be "to borrow the additional funds which, if it meant resolving the situation, I would endeavour to do, provided the amount is not unlimited - within reason." Asked by his counsel whether it was probable that he would be able in fact to borrow a sum sufficient to pay total costs of $5,000, he replied "Well, I would be hopeful of raising it." The debtor looked at the terms of the composition which provided for the distribution, firstly, in payment of the controlling trustee's remuneration, expenses and liabilities and secondly, in payment of the costs of administering the composition including the renumeration of the trustee and said that "prior to these proceedings I anticipated that the costs for which I would be liable would be approximately $2,500.00" related to both these headings, and was based upon what the trustee had told him.

The trustee gave evidence that his costs as controlling trustee by way of renumeration, expenses and liabilities were $1800. He had calculated his costs as trustee of the composition up to 31 August 1980 at $1846.80. He estimated that, if the composition were to proceed fairly quickly from the date on which he gave evidence, 1 September 1980, the additional costs would be approximately $1000 and the fees payable to the Registrar in Bankruptcy would be $950. His estimates of costs did not include any amount which might be involved if there were a rejection of the proof of debt of Housing Builders' Association Ltd. and an appeal which might involve the trial, in effect, of three building cases. In cross-examination the trustee agreed that he had included 17 hours work done before he became controlling trustee, but the costs charged in respect of this time were not stated in evidence.

The debtor was then recalled by Mr. Hallenstein and asked what his position would be if he were called upon to find a round figure of approximately $8000 in respect of costs. The transcript then read -

". . . It certainly is a lot higher than what I anticipated in previous considerations. As I previously intimated to your Honour, up until now I had been able to meet my commitments and I believe I will be able to raise the necessary money by borrowing either from my wife and my mother or the bank and if that is not sufficient, I still think I would have sufficient good name to be able to raise it from finance companies or whatever I may have to do but I certainly would like to do it to have the matter resolved.

MR. HALLENSTEIN: Are you prepared to meet an amount of costs even as high as some $8000 for the purposes of avoiding a sequestration order? --- I am.

And are you prepared to do that, realising that you may well not have to raise such a sum of money if in fact a sequestration order were made? --- That is correct.

I have no further questions.

HIS HONOUR: Yes, Mr. Bigmore?

MR. BIGMORE: These loans that you contemplate, Mr. Morris, do not involve the giving by you of any security? --- That is correct; I have no security to give.

Do you know whether Valith Pty. Ltd. would be willing to offer security for borrowings by you - a mortgage say - over the matrimonial home? --- I do not know; the subject has never been raised.

Under the trust deed you would agree that the trustees of that Morris Family Trust have very wide and extensive powers indeed for the giving of security and the raising of finance, is that so? --- That would be correct."

On 9 April, 1980, when the creditors accepted the debtor's proposal for a composition, it provided that the payment of 15 cents in the dollar should be made not later than 16 May 1980. It is clear that the trustee has at no time had funds in hand which would have enabled him to pay this amount to the creditors, after paying the amounts of costs which under the composition had priority over the payments to the creditors. A question may arise whether the creditors are now bound by the terms of the composition, as 16 May 1980 has passed without payment, or any further meeting or agreement to accept later payment, but as this aspect of the case has not been the subject of submission by any party, I put it to one side.

I take the view that the debtor has not shown, on the balance of probabilities, that he has the financial capacity, as distinct from the wish, to provide the trustee with the necessary funds to make the payments of 15 cents in the dollar. His ability to do so turns upon his obtaining loans from his wife and his mother and from his bank or finance companies. His position is such that it would not be in the interests of the creditors to leave their receipt of the promised 15 cents in the dollar dependent upon the outcome of his attempts to raise further funds. It is noteworthy that, although the hearing extended throughout 29 August and 1 September, and the debtor's financial ability to provide the necessary funds was obviously in issue, no attempt was made to lead any independent evidence of the availability of loans. I am satisfied that it would be in the interests of the creditors to make an order declaring the composition to be void. It is not necessary to consider the other grounds upon which the composition was attacked.

There remains for consideration the claim by the applicant that a sequestration order be made against the estate of the debtor, pursuant to the power conferred by s.222(7) which reads as follows:-

"(7.) The trustee or a creditor may include in an application under sub-section (1.) or (4.) of this section 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 sub-section (2.) or (4.) of this section declaring the deed or composition to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought."

In his affidavit, the debtor said -

"87. If my estate were sequestrated there would be available the following sums -

$12,185.75 proceeds from 7 Karen Court, East

Doncaster.

$3,000.00 received from sale of accountancy

practice.

$1,800.00 possible further payment from

accountancy practice.

$16,985.75.

88. If one allows some $4,000 costs and expenses there would then be available for distribution among creditors the amount of some $12,985.75. It would appear that the following payments in the dollar would then result -

Total Debts of $164,280.01 7.9[ in the dollar.
Total Debts of $168,088.37 7.7[ in the dollar.
Total Debts of $183,921.99 7[ in the dollar.

I am informed by Mr. Bent, my trustee, and believe that his calculations result in a payment in the dollar of some 5 cents if a sequestration order were made against my estate.

89. Further, if I were declared bankrupt my membership with the Australian Society of Accountants and the Chartered Institute of Secretaries would be forfeited. I would probably lose my present responsible job and I would lose any alternative of being able to work in any way as a self-employed accountant."

There was no independent evidence that his present job was in jeopardy.

In his oral evidence, the debtor said that he was a tax agent, a registered auditor and a commissioner for taking affidavits.

Section 222(9) provides that -

"(9.) 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 sub-section (1.) of section 43, sections 44 and 47, sub-sections (1.) and (2.) of section 52 and Part XIA. of this Act do not apply in relation to such an application."

The applicant is owed the sum of $23,798 by the debtor under a judgment entered on 17 August 1979 in respect of a building transaction which commenced in or about early 1974. A sustained attack was made upon the attitude which she adopted towards the debtor in the course of that transaction and the subsequent litigation. I am satisfied that she has a strong sense of grievance against the debtor, which appears to me to be justified, when one looks at the history of the matter. In my opinion, she was plainly entitled to claim that an order of sequestration should be made against the estate of the debtor.

The High Court considered the provisions of s.56(2) of the Bankruptcy Act 1924, the predecessor of s.52(2) of the 1966 Act, in Rozenbes v. Kronhill [1956] HCA 65; (1956) 95 C.L.R. 407 in which (at p.414) Dixon C.J. Webb and Fullaghar JJ. said:

"In Cain v Whyte (1), this Court expressed agreement with a judgment of the Supreme Court of Queensland (Henchman J.) in which his Honour said: '. . . prima facie, on proof of the matters mentioned in s.56(2), the Court will proceed to make an order for sequestration, and . . . it is for the debtor to show some cause overriding the interest of the public in the stopping of unremunerative trading, and the rights of individual creditors who are unable to get their debts paid to them as they become due. Something has to be put before the Court to outweigh those considerations before it can be said that sufficient cause is shown against the making of a sequestration order'.

(1) (1933) 48 C.L.R.639."

It is true that s.222(9) provides that the provisions of sub-sections (1) and (2) of s.52 do not apply in relation to an application made under sub-section (9). However, the debtor committed an act of bankruptcy when he signed the authority under s.188 and the applicant seeks an order of sequestration. It seems to me that, by parity of reasoning, it is appropriate that, prima facie, the Court should proceed to make an order of sequestration, unless some cause is shown to outweigh the considerations noted in the judgment of the High Court. In my opinion, no such cause exists in the present case.

The debtor's contention that his creditors would receive a lower dividend in a bankruptcy than they would under a composition has not been made out on the evidence. Such a conclusion would depend upon an acceptance of his evidence as to his assets and liabilities, which is a step I would not feel justified in taking in the light of the history of this case. I do not believe that he has given a frank account of his affairs and consider that it would be unsafe for the Court or his creditors to act upon the faith of his evidence. I believe that it would be in the interests of his creditors to have his estate administered in bankruptcy, despite the effects which such an order will have upon the debtor.

The Court -

(1) declares the composition of the debtor of 9 April 1980 to be void;

(2) makes an order of sequestration against the estate of the debtor, the act of bankruptcy being that on 6 February 1980 he signed an authority under s.188 of the Bankruptcy Act 1966;

(3) orders that the respondents pay the costs of the applicant of and incidental to this application;

(4) reserves general liberty to any party to apply.