Re Bradley John Jacobs Ex Parte: Reginald William O'Connor [1984] FCA 31; 1 FCR 1 / 53 ALR 93 Bankcuptcy (29 February 1984)

FEDERAL COURT OF AUSTRALIA

Re: BRADLEY JOHN JACOBS
Ex Parte: REGINALD WILLIAM O'CONNOR
No. 21 of [1984] FCA 31; 1983
1 FCR 1 / 53 ALR 93
Bankcuptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA
Fisher J.(1)

CATCHWORDS

Bankruptcy - composition - Application to declare void whether s.109 priorities applicable to composition - whether creditors entitled to agree to priorities.

Bankruptcy Act 1966 ss.109, 187, 204, 213, 218, 222, 238, 239, 243.

Bankruptcy - Arrangements without sequestration - Composition - Provision for payment in full of debts with statutory priority - Whether void - Whether creditors entitled to agree to priorities - Bankruptcy Act, 1966 (Cth), ss 109, 187(1)(b), 243(1). Held: (1) The essence of a composition under the Bankruptcy Act 1966 (Cth) s. 187(1)(b), as between the debtor and the general body of creditors, is that all creditors be accorded equal treatment.

Re Boyley; Ex parte The Deputy Commissioner of Taxation (1954) 16 ABC 33 distinguished.

In re Milner; Ex parte Milner (1885) 15 QBD 605 applied.

(2) However there is no objection to creditors agreeing amongst themselves for payments to be made to one or more of their class in priority to others, so long as each is aware and nothing is done secretly or by way of private bargain.

HEARING

1983, September 12; November 9; 1984, February 29. 29:2:1984
APPLICATION.

Application pursuant to the Bankruptcy Act 1966 (Cth) s. 222 for an order declaring void a composition.

T. Owen, for the applicant.

W. H. Hall, for the respondent.

T. N. Cogan, for the trustee.
Cur. adv. vult.

Solicitors for the applicant: Ian Law & Co.

Solicitors for the respondent: W. H. Hau.

Solicitors for the trustee: Minicozzi Cogan & Co.
B. A. GRAY.

ORDER

1. The application be dismissed.
2. No order as to costs except that the trustee of the

Composition be entitled to his costs out of the
funds in his hands, the same to be taxed.

Application dismissed.

DECISION

The applicant in this matter is the Registrar in Bankruptcy for the Bankruptcy District of South Australia. He makes application pursuant to s.222 of the Bankruptcy Act 1966 ("the Act") for an order declaring void a composition of Bradley John Jacobs ("the debtor"). This composition was accepted by the creditors of the debtor under Part X of the Act on 1 June 1983. The debtor's proposal was in writing and was placed before a duly convened meeting of creditors on that date. The proposal was relatively short and is as follows:

" THE BANKRUPTCY ACT 1966

Proposal for Composition

WHEREAS I, BRADLEY JOHN JACOBS of 195 Seaview Road
Henley Beach in the State of South Australia,
Chef, have authorised KEVIN MICHAEL PIPKIN of 13B
Greenhill Road, Unley in the said State, Chartered
Accountant, to call a meeting pursuant to Section
188 of the Bankruptcy Act 1966 (as amended),

NOW I, the said BRADLEY JOHN JACOBS, DO HEREBY MAKE
the following proposal for a Composition in full
settlement and satisfaction of my debts.

1. The Trustee of this my Composition shall be a
person nominated by my creditors in pursuance
of Section 204(4) of the said Act, who
hereinafter shall be called "my Trustee".

2. I covenant to pay to my Trustee the sum of
SEVENTY DOLLARS ($70.00) per week, the first
of such payments to be made seven (7) days
after the date on which a special resolution
by my creditors for the acceptance of this my
Composition has been passed until such time as
all my priority debts have been paid in full
and the sum of seventy cents in the dollar has
been paid with respect to all my non-priority
debts.

3. The Trustee shall apply any moneys received by
him pursuant to this Composition in making
payments to my creditors in order prescribed
by Section l09 of the said Act in the same
manner as if I had been made Bankrupt on the
date of the acceptance of this proposal.

4. This Composition is made pursuant to Part X of
the said Act.

DEFINITIONS

1. The definitions contained in Sections 5 and
187 of the said Act apply to the terms used in
this Composition.

2. PRIORITY DEBTS; means provable debts of the
debtor which would have been paid in priority
pursuant to Section l09 of the said Act had
the debtor become bankrupt on the date on
which a special resolution is passed accepting
this Composition and including the
remuneration and disbursements of the Trustee
of this Composition and that of the
Controlling Trustee of the debtor, being the
debts referred to in sub-section l of that
section (insofar as it is applicable).

3. NON-PRIORITY DEBTS: means provable debts of
the debtor owing as at the date of the passing
of the resolution accepting this Composition
other than the priority debts.

DATED this 1 day of June 1983.

SIGNED by the said BRADLEY )
JOHN JACOBS in the presence )
of: ) Signed B. Jacobs

Signed W.H. Hall "

2. The applicant's concern is with clause 3 of the proposal, providing as it does for payment in full of debts which are entitled to priority under s.109. Stated in the terminology of s.222 of the Act pursuant to which section his application is made, he has a doubt whether a proposal for a composition containing such a provision is capable of acceptance by special resolution under sub-s.204(1) of the Act. The matter was fully argued by three counsel and as it is apparent that it raises questions concerning the essential nature of a statutory composition, it is necessary at the outset to set out the relevant provisions of the Act.

3. Part X of the Act prescribes the manner in which debtors may make binding arrangements with their creditors without sequestration. Section 187 defines, inter alia, a composition as follows:

"187(1). In this part, unless the contrary intention
appears - "composition" means an arrangement (not being
an arrangement entered into for the purposes of a
proclaimed law) by which the creditors of a debtor

(a) agree to payment of the debts due to them by
instalments; or

(b) agree to accept, in full satisfaction of the
debts due to them, less than the full amount of
those debts, whether in the form of money or
other property and whether by instalments or
otherwise;"

4. The essential difference between a composition on the one hand and a deed of arrangement or a deed of assignment, being the other forms of statutory arrangements outside bankruptcy, is made apparent by further definitions.

5. A deed of arrangement is appropriate if the affairs of the debtor are to be subject to some form of arrangement, and it is defined as follows:

"'deed of arrangement' means a deed (not being a deed of
assignment, a deed in respect of a composition or a deed
executed for the purposes of a proclaimed law) providing
for the arrangement of the affairs of a debtor with a
view to the payment, in whole or in part, of his debts."

6. A deed of assignment contemplates the assignment of all of the assets of the debtor for the benefit of his creditors and is defined in the following terms:

"'deed of assigment' means a deed by which a debtor
assigns all of his divisible property for the benefit of
his creditors."

7. Section 204 prescribes the manner in which a composition is accepted by the creditors and is, to the extent presently relevant, as follows:

"204(1). The creditors may, at a meeting called in
pursuance of an authority under section 188, by special
resolution -

(a) ...

(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 7 days from the day on which the
resolution is passed.

204(2) ...

204(3) A special resolution accepting a composition
shall specify the terms of the composition."

8. The Act provides that arrangements between debtors and creditors which do not comply with the provisions of Part X of the Act are void. In respect of compositions, s.213 specifically states -

"213(3). Subject to this Part, a composition made
by a debtor after the commencement of this Act, not
being a composition accepted by a special
resolution of a meeting of creditors under section
204, is void."

Section 218(2) provides -

"Where a special resolution accepting a composition
is passed under section 204, the trustee of the
composition shall -

(a) forthwith -

(i) give notice of that fact, in accordance with
the rules, to each creditor of the debtor; and

(ii) cause notice of that fact to be published in
the Gazette and in such other manner (if any)
as is prescribed; and

(b) within 21 days after the passing of the special
resolution - file a copy of the statement of the
debtor's affairs referred to in section 195 in the
office of the Registrar."

9. Section 222, pursuant to which section this application is made, is as far as relevant as follows:

"222(1). Where there is a doubt, on a specified ground,
whether a deed of assignment or a deed or 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
Registrar, the trustee, a creditor or the debtor may
apply to the Court for an order under sub-section (2).

(2). Upon the hearing of an application made under
sub-section (1), the Court may, subject to this
section, make an order -

(a) declaring that the deed or composition is void,
or that it is not void, on the ground specified
in the application; or

(b) declaring that a provision of the deed is void,
or is not void, on the ground specified in the
application.

222(3). The Court shall not make an order declaring a
deed to be void on the ground that it does not comply
with the requirements of this Part if the deed complies
substantially with those requirements.

222(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 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.

222(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 sub-
section (4) unless it is satisfied that it would be in
the interests of the creditors to do so."

10. It is apparent that the provisions of s.222 empower any one of a number of persons to apply to the Court on limited and essentially technical grounds for the purpose of having the deed or composition declared void because it had not been entered into in accordance with nor did it comply with he provisions of Part X. Section 239, on the other hand empowers a creditor to apply to the Court to set aside a composition if it feels it ought on any ground to be set aside. The relevant portions of this latter section are as follows:

"239(1). A creditor may, within 21 days from the date
on which the special resolution accepting a composition
under this Part was passed, apply to the Court for an
order setting aside the composition and may also apply
for the making of a sequestration order against the
estate of the debtor,

239(2). If the Court, on such an application,
considers that the terms of the composition are
unreasonable or are not calculated to benefit the
creditors generally or that for any other reason the
composition ought to be set aside, it may make an order
setting it aside and, if it thinks fit, may forthwith
make the sequestration order sought.

11. The statutory consequences to creditors of a special resolution under s.204 are set out in s.238 which relevantly provides

"238(1). A composition that has been accepted by a
special resolution of a meeting of creditors called in
pursuance of an authority under section 188 (in this
Division referred to as a composition under this Part)
is binding on all the creditors of the debtor.

238(2). Subject to sub-sections (3) and (4), it is
not competent for a creditor, so long as a composition
under this Part remains valid -

(a) to present a creditor's petition against the
debtor, or to proceed with such a petition
presented before the composition was accepted, in
respect of a provable debt;

(b) to enforce any remedy against the property or
person of the debtor in respect of a provable debt; or

(c) to commence any legal proceeding in respect of a
provable debt or take any fresh step in such a
proceeding."

12. As a special resolution is described as a resolution passed by a majority in number and at least three-fourths in value of the creditors present and voting at a meeting, it is clear that the majority of creditors may in this way impose its will on minority creditors. The latter's remedy is an application to Court under s.239 of the Act.

13. The present application is pursuant to s.222 of the Act. The applicant's doubt which is required to be raised on a specific ground is whether that which was accepted by the special resolution was a composition in accordance with the definition of that term. If it was, he is satisfied that it was "accepted by a special resolution of a meeting of creditors under section 204."

14. The proposal for a composition purports to give priority in payment to a particular class of creditors, namely those who would have been paid, under s.l09 of the Act, in priority if the debtor had become bankrupt on the date of the meeting. He has no concern with the proposal to give priority to payments of remuneration and disbursements to the Trustee and the Controlling Trustee who called the meeting.

15. Counsel for the applicant contended that the proposal for a composition could not be accepted as a composition by the meeting because it provided for payment in full to a particular class of creditors who had otherwise no right to such priority payment in the circumstances. The essence of a composition under s.187(1)(b), it was contended, was that all creditors would be accorded equal treatment and that no creditor or class of creditors could receive payment in full of his debt. Because certain creditors were entitled under the proposal to payment in full, albeit by instalments, of their debts rather than participating in a pro rata distribution, the proposal, it was said, could not be accepted by creditors as a composition and therefore must be declared void.

16. In two respects I find that I am in agreement with these submissions. In the first instance the proposal is drafted and put forward by the debtor to the creditors on the assumption or at least with the implied suggestion that provable debts which would have enjoyed priority under s.109 of the Act are entitled to be paid in full. The validity of this assumption is in my view unequivocably denied by the terms of s.243 of the Act dealing as it does with the application of the general provisions of the Act to compositions. This section, set out hereunder, clearly has the effect of excluding the application of s.l09 to compositions. It provides:

"243(1). Subject to this section, the provisions of
sections 82 to 107 (inclusive) and sections 140 to 148
(inclusive) apply, subject to such modifications and
adaptations (if any) as are prescribed by the rules, to
and in relation to a composition under this Part as if -

(a) a sequestration order had been made against the
debtor on the day on which the special resolution
accepting the composition was passed; and

(b) the trustee of the composition were the trustee in
his bankruptcy.

243(2). In the application of the provisions of this
Act specified in sub-section (1) to and in relation to a
composition, a reference to a provable debt shall be
read as a reference to a provable debt within the
meaning of this Part.

243(3). The provisions of sub-sections 157(6) and
(7), sections 162 to 169 (inclusive), sub-section
170(2), sections 171 to 174 (inclusive), section 175
(other than paragraph (1)(b) and sections 176 to 184
(inclusive) apply, subject to such modifications and
adaptations (if any) as are prescribed by the rules, to
and in relation to a trustee of a composition under this
Part as if the debtor by whom the composition was made
were a bankrupt and the trustee of the composition were
the trustee in his bankruptcy.

243(4). If, after taking into account the
modifications and adaptations made by the rules and the
provisions of sub-section (2), a provision specified in
sub-section (1) or (3) is incapable of application to or
in relation to a composition, or the trustee of a
composition, as the case requires, or is inconsistent
with this Part, that provision does not so have
application.

243(5). In this section, 'modification' includes the
addition or omission of a provision or the substitution
of a provision for another provision."

17. In my opinion the authors of McDonald Henry and Meek Australian Bankruptcy Law and Practice 5th edition identify the true position when at paragraph 502 they state that s.l09 "does not apply to compositions under Part X". This view is reiterated in paragraph l083 to the effect that "ss.l09 to ll4 (order of payment of debts) (do) not apply to compositions under this Part".

18. The argument to the contrary appears to be founded on the decision in Re Boyley (1954) 16 ABC 33. However this decision relied upon the statutory priority which s.221(b)(i) of the Income Tax Assessment Act 1936 gave to the Commissioner of Taxation. This particular provision was repealed by Act No. 50 of 1966 and thus the reasoning can have no direct application in the present circumstances.

19. Counsel for the applicant also contended that it is of the essence of a composition that all creditors are to be accorded equal treatment. In my opinion this is without doubt the position as between the debtor and the general body of creditors. It is quite wrong for the debtor, in making his proposal, to prefer, openly or sub silentio, any creditor or class of creditors. If priority to a class is denied by the Act, as I have found it is in this matter, then the debtor can not give and should not attempt to give priority to a creditor or particular class of creditors. This is, if at all, a matter for the creditors inter se. The essence of a composition between the debtor and his creditors is that the creditors be offered equality of treatment (Ex parte Milner (l885) l5 QBD 605. As the Master of the Rolls said on page 6l2

"In my opinion it is of the very essence of a
composition of this nature that all the creditors who
come in under it oblige themselves to each other, and
the debtor obliges himself to every one of them, that,
so far as he is concerned, all of them shall come in
upon a footing of equality. This equality is implied by
law from the very nature of the transaction..."
I have added the emphasis.

20. However neither in this case nor the earlier decision of Dauglish & Others v Tennent (l866-l867) L.R. 2 Q.B.49 where, as was said in Ex parte Milner, the grounds of the principle were fully set out, was it suggested that it would be improper for the creditors to agree between themselves for something other than equality of treatment. So long as the creditors act in good faith towards each other and make no secret bargains with any other creditor or the debtor, there can be no complaint about such an agreement. Secrecy and lack of good faith are of the essence of any objection. As Mellor J. said in Dauglish v Tennent supra at p.54

"To put the case on a broad ground, it is an agreement
between the debtor and each creditor that they are
contracting on terms of equality as to each and all, and
if by a secret bargain some creditors have an advantage
over other creditors, it is a fraud upon those who must
be presumed to have signed the deed upon the
understanding that all the creditors should be placed on
the same footing."

21. The Master of the Rolls, when approving this statement in Re Milner at page 6l3, added the following words in parenthesis after the words of Mellor J, "that they are contracting" set out above, namely "(I will go further and say they are contracting with each other)". Bowen L.J.endorsed this approach when he said in Re Milner at page 6l5:

"But in an ordinary case what does a simple composition
with creditors mean? It means that each of the
creditors agrees to forego a part of his debt, the
consent of each creditor who comes into the arrangement
being a consideration for the consent of the others. It
follows that it is of the very essence of such a
transaction that the creditors who take part in the
scheme act upon the faith and understanding that they
are all coming in upon terms of equality, and if a deed
is prepared to carry out this equal distribution, every
creditor who executes it does so on the faith that there
is no private bargain with any of the other creditors
which will destroy this equality. If there is any
private agreement that one of the creditors is not to be
dealt with upon this equal footing, but is to receive a
preference, that is a breach of faith, and, if the
debtor is aware of it, it strikes at the root of the
deed, and entitled any creditor who has been thus
deceived to treat it as void."

22. It is significant that each Judge specifically refers to the preferential treatment of a creditor as a private or secret bargain or agreement. This emphasis suggests that there is no objection to such a bargain or agreement being made so long as it is not private or secret but fully disclosed to and agreed by other creditors. This approach to equality of treatment is referred to by Lukin J. in Re Allan's Deed of Arrangement (1931-1932) 4 ABC 98 at page 1l1-1l1, particularly the latter page, when he adopts what Lord Shaw of Dunfermline said in Farmers Mart Ltd. v Milne (1915) A.C. 106 at 117 when speaking of the general principle of equality of treatment "Special preferences created under special contracts or by special circumstances there may be, but that is the general rule".

23. It was contended that it was of the essence of a composition, as defined, that in accepting less than the full amount of their debts, there should be no inequality between creditors. They must participate strictly pro rata, it was said, in the amount distributed among them by the trustee. However in my opinion the definition of composition merely specifies the general body of creditors and that body's arrangements with the debtor. It makes no reference to each creditor and any arrangement among the creditors inter se. There is no express embargo on the creditors openly agreeing amongst themselves, doubtless as a means of obtaining acceptance of the debtor's proposal, that one or more of them should receive priority in the time or amount of payment. Such an arrangement is not contrary to any express provision of the Act, and I see no justification for implying such an embargo.

24. It was also submitted that because the priorities of s.l09 had expressly been excluded from compositions, it was not permissible for creditors to agree to give priorities on the "expressio unius est exclusio alterius" maxim. I cannot accept this argument. A similar argument was convincingly rejected by Paine J. in Re Bellis (1957-1964) 20 ABC 80 at p 85 where His Honour said:

"The registrar, on this point, has called my attention
to s.l62(7). This provides that div. 6 of Pt. IV of the
Act, of which ss.74 and 75 are parts, shall apply to a
deed of assignment under Pt. XI. No similar provision is
contained in the Act with regard to a composition or
scheme of arrangement under s.l6l.

I do not think this is any reason for the application of
the maxim, 'Expressio unius est exclusio alterius'. On
the contrary I think this express provision with regard
to a deed of assignment rather emphasizes the degree of
freedom open to those who adopt a course under s.l6l.
The comparative absence of restrictions contained in the
last-mentioned section, when compared with those
prescribed for a deed of assignment, is undoubtedly
notable. Nevertheless, it rather implies a wider scope
of action. A deed of assignment obliges the assignor,
the debtor, to part with his property to the same extent
as he would if a sequestration order is made against
him. A composition or scheme of arrangement does not
necessarily lead to that result, but frequently, if not
generally, calls for no such degree of deprivation.

I think the answer to the registrar's first question is
that as a general rule, it is competent to include the
provisions similar to those of ss.74 and 75 in a scheme
of arrangement under s.l6l, either wholly or in part, so
long as this inclusion causes no conflict with the
general policy of the Act. I see no such conflict in
the scheme under consideration."

25. It is my opinion therefore that there is no objection to creditors agreeing amongst themselves for payments to be made to one or more of their class in priority to others, so long as each is aware and nothing is done secretly or by way of private bargain. It must frequently happen that it is of benefit to the general body of creditors that a particular creditor, who would be entitled to priority if a sequestration order is made, should have this potential priority recognised if the proposal is favourably viewed by the other creditors. There would be many like circumstances, such as an agreement by a creditor to continue to supply goods to a debtor, which could justify a priority. On the other side of the coin, the fact that a parent or relative was prepared to postpone his or her entitlement could well benefit other creditors. It is hard to see such an arrangement as denying the proposal the character of a receive this priority payment by instalments. As Paine J. said in Re Bellis, the comparative absence of restrictions in the Act when dealing with a composition implies a wider scope for action, and, so long as there is no conflict with the general policy of the Act, creditors are free to make such arrangements as they consider appropriate. The definition of deed of arrangement would also appear to recognise that a composition may contain an obligation on the debtor to execute a deed.

26. The Courts have not always required strict compliance with the literal terms of the definitions. In Re Stillman and Wilson (1949-1952) 15 ABC 68 the creditors in accepting by extraordinary resolution the debtors' composition provided that the trustee should treat as a priority creditor the Commissioner of Taxation who was in fact not a creditor of the debtors. Clyne J. held that the provision did not invalidate the composition because, as he said at page 73,

"The creditors have accepted this clause providing this
benefit and it seems fair and reasonable to assume that
the creditors considered it to be for their benefit to
approve the composition, despite the unusual provision
in favour of the Commissioner..."

While a composition by its provisions ordinarily regulates the mutual claims and obligations of a debtor and his creditors, I can see no valid reason for objecting to the composition because it contains some extraneous provisions which may afford a third party some benefit, where on the whole the composition is beneficial to the creditors. Bissell v Jones and Others (l868-69) LR 4 QB is a decision to like effect. Re K.R & SR Lane (1982-1983) 45 ALR 565 is an instance of an assignment being approved by the Court notwithstanding the fact that the debtors were not assigning all of their property as contemplated by the definition of "deed of assignment".

27. In the present case the debtor's proposal contained a provision granting priority to s.109 creditors. In my opinion this was not only as a matter of law unnecessary but also generally undesirable unless it was known that there were priority creditors who would not without the provision accept the proposal. Even then, it is essentially a matter for express agreement amongst the creditors inter se, rather than between them as a body and the debtor. Moreover if the debtor does put forward a proposal containing such a provision it would generally require that the other creditors understand that the priority creditors had no priority in law and that any priority they were to receive must be the consequence of a conscious decision by the other creditors. It is doubtless desirable to provide in the Minutes recognition of these matters, though the Registrar's primary task under s.222 is to ensure that the resolution is accepted by the prescribed majorities.

28. In the present matter much of what I have said may be of mere academic interest for I am told there are in fact no creditors who would be entitled to a s.l09 priority. There was however no record in the minutes of meeting that the creditors were alerted to the provision, to the need or justification for its insertion, or to the fact that there were no known priority creditors. The matter was primarily argued before me as a matter of principle and these practical considerations would be doubtless of greater relevance if I were to reach the stage of an exercise of discretion.

29. None of the above arguments have persuaded me that the debtor's proposal as accepted by the creditors was not a composition as defined by s.187(1) of the Act. Furthermore the argument was not put forward that it could not be a composition because it contemplated some creditors might receive payment in full of their debts by instalments whereas others received less then the full amount of their debts. A contention that the provisions of paras. 187(1)(a) and 187(1)(b) are mutually exclusive would doubtless be confronted by the reasoning of the former Chief Justice of the High Court in Gee v Schmutter [1971] HCA 6; (1970-1971) 123 CLR 503. The Court there held that the definitions of "deed of arrangement" and "deed of assignment" in s.187 were not mutually exclusive, and likewise that a deed of arrangement could embody some of the provisions of a composition.

30. This application, to the extent that it seeks an order that the composition be declared void, is dismissed. In all the circumstances I think it appropriate that each party bear his own costs, except that the trustee should receive his costs out of the funds in his hands, and I so order.