Re Honny Watkinson Ex Parte: the Registrar In Bankruptcy; Honny Watkinson; Ian Kenneth Mackinnon and the Mayor Councillors and Citizens of the City of Geelong [1986] FCA 43 (3 March 1986)

FEDERAL COURT OF AUSTRALIA

Re: HONNY WATKINSON
Ex Parte: THE REGISTRAR IN BANKRUPTCY; HONNY WATKINSON; IAN KENNETH MacKINNON
and THE MAYOR COUNCILLORS AND CITIZENS OF THE CITY OF GEELONG
No. 187 of 1984X
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA
Gray J.

CATCHWORDS

Bankruptcy - application to have composition declared void - whether application made within time.

Bankruptcy Act 1966, ss. 187(1), 194, 222(6)(a)(c), 242, 243A

Re Doukidis (Unreported) (26th June 1985)

Re Kleiss (1968) 15 F.L.R. 281

HEARING

CANBERRA
3:3:1986

DECISION

This is the hearing of a preliminary objection, based on a point of law, under the Bankruptcy Act 1966. The facts are not in dispute. On 2nd November 1984, a meeting of creditors resolved to accept a composition, involving payment on behalf of the debtor of $20,000.00 by installments. The full amount has now been paid by the debtor's father. The last date on which an installment reached the trustee of the composition was 23rd April 1985. The trustee has not distributed any of the funds to the creditors.

2. On 6th November 1985, the Registrar in Bankruptcy applied pursuant to s. 222 of the Act to have the composition declared void, on grounds which are not presently material. On 11th November 1985, the City of Geelong, a creditor, made an application, which refers to ss. 194 and 242, as well as to s. 222. The grounds of that application concern the alleged omission of a material particular from the statement of affairs of the debtor, insufficient information to creditors as to her assets, the alleged failure to give notice to all creditors of the meeting which accepted the composition, and an allegation that the composition is unreasonable.

3. The major issue argued has been whether the time within which an application under s. 222 can be made has run. Sub-section (6) of s. 222 provides as follows:

"(6) The Court shall not make an order under sub-section

(2) or (4) unless the application for the order is made-

(a) in relation to a deed of assignment - before
the final dividend has been paid under the
deed;

(b) in relation to a deed of arrangement - before
the terms of the deed have been carried out;
or

(c) in relation to a composition - before the
final payment has been made under the
composition."

4. It is para. (c) of that provision which applies to the present case. Mr. Irlicht, on behalf of the debtor, argued that the final payment had been made under the composition when the last amount to be paid by or on behalf of the debtor had been paid to the trustee of the composition. Mr. Boaden, on behalf of the Registrar in Bankruptcy and the City of Geelong, argued that the final payment was the last payment by the trustee of the composition to a creditor or creditors.

5. At first sight, the reader of s. 222(6) would expect the final payment to be the last transfer of money in connection with a composition, i.e. in this case, the last of the payments out to creditors. Mr. Irlicht's argument rested on three points.

6. In the first place, he compared the words of s. 222(6)(c) with other provisions of the Act, especially s. 222(6)(a). His argument was that the parliament had deliberately chosen words apt to make the time limit for setting aside a composition depend on the last action by the debtor concerned, rather than the trustee, whereas the limit for an application relating to a deed of assignment is governed by words which refer clearly to the last action by the trustee. Reference was also made to s. 243A, which relates to the giving by a trustee of a certificate that the terms of a composition have been carried out, and to the divergence between the words of that section and s. 222(6)(c).

7. Mr. Boaden countered this argument by reference to the definition of "composition" in s. 187(1), which is in the following terms:

"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 accept payments 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;"

Mr. Boaden stressed the reference to "payment" in para. (a) of this definition, as contemplating a payment to creditors.

8. Neither of these arguments is free from problems. Paragraph (b) of the definition of "composition" does not contain any reference to payment at all, and it is possible to envisage a composition in which property is passed to creditors, through a trustee, without money being paid. Section 243A was a provision of later origin in the Act than s. 222(6), so that differences in the wording between the two sections are not as reliable a guide as they may otherwise be.

9. The crucial question is whether differences within s. 222(6) have the significance for which Mr. Irlicht contends. In my view it is reading too much into those words to hold that they do. The use of the word "final" in both para. (a) and para. (c) is significant as indicating an end of a transaction. The change from "dividend" in para. (a) to "payment" in para. (c) does not appear to have any significance deriving from any differences in the mechanics of a deed of assignment and a composition. This does not mean that it should be given the significance of requiring the court to ignore all payments made by a trustee of a composition to creditors, which in ordinary parlance are made "under the composition", in determining whether a time limit applies. No clear reason was advanced why the parliament should have made a creditor's lot harder in the case of a composition than in the case of a deed of assignment, by making the time limit depend on the action of the debtor, or those acting on his or her behalf. This seems to me to be a case where the first impression of the meaning of words appears to be correct.

10. Mr. Irlicht's second argument was that injustice might flow to debtors from the construction contended for by Mr. Boaden. Mr. Irlicht postulated two compositions, with each debtor paying moneys to the trustee at the same time, but with the rights of creditors being dependent on the dilatoriness of the trustee in paying out. Such injustice is unlikely to be perceived in reality. The likelihood of two such parallel compositions is very small. Whenever a time limit is fixed by reference to the occurrence of some event, the possibility of the event occurring sooner in one case than in another is real. Parliament was not deterred from fixing the time limit by reference to the actions of the trustee in relation to deeds of assignment.

11. Finally, Mr. Irlicht relied on the judgment of Toohey J. in Re Doukidis (26th June 1985, unreported). In that case, at pp 10 and 11, his Honour said in relation to s. 222(6)(c):

"Counsel for Consolidated Constructions
submitted that the "final payment" must be a payment to
creditors. Counsel argued that the purpose of the
provision was to prevent creditors receiving benefits
they had agreed to accept under a composition and then
seeking to undo the composition itself. He referred to
the definition of "composition" in sub-s. 187(1) which
reads:"

His Honour there set out the definition, and continued:

"He further argued that the provision is
directed to the termination of a composition, suggesting
that such an event occurred on the furnishing of a
certificate by the trustee in accordance with s. 243A of
the Act.

The submissions made on behalf of Consolidated
Constructions have a certain attraction. But it seems
to me that they ignore the plain meaning of the words in
para. 222(6)(c). In the ordinary course it is hard to
imagine a situation in which creditors accept a
composition by virtue of which they receive nothing.
But this is such a case and, in terms of the
composition, the final payment, albeit the only payment
and one made to the trustee, has been made. In those
circumstances I am precluded from making an order under
s. 222."

12. His Honour was there dealing with the most unusual, and perhaps technically impossible, case of a composition which did not involve any payment to creditors. The creditors in that case had resolved to accept payment to the trustee of $1,500.00 in satisfaction of the debts and had resolved to allow the trustee to claim fees of $1,500.00. In the circumstances there was no payment to which the words "final payment" could attach, other than the payment of the $1,500.00 to the trustee. The unusual nature of the case is revealed in the passage quoted. The argument rejected by Toohey J. really sought to make the words "final payment" apply to something that was not a payment at all. In my view, Re Doukidis does not stand in the way of the view that I have expressed earlier.

13. Each of the applications by the Registrar in Bankruptcy and the City of Geelong has therefore been brought within the time limited by s. 222. It is strictly unnecessary for me to consider the arguments relating to s. 194 and s. 242.

14. I should say, however, that in the light of what Gibbs J., as he then was, said in Re Kleiss (1968) 15 FLR 281, at p 283, I am inclined to the view that s. 194(4) does not provide a separate procedure for setting aside a composition, but only provides some limit on what would otherwise have been an unrestricted ground for use in an application under s. 222.

15. If I had held the s. 222 applications to be out of time, I should not have dismissed the City of Geelong's application so far as it depends on s. 242. On the grounds set forth in the application and the supporting affidavits it is, in my view, arguable that the composition could not be proceeded with without injustice to the creditors.

16. The preliminary point must be determined in favour of the Registrar in Bankruptcy and the City of Geelong, and against the debtor.