Re Malcolm Thomas Wardle Ex Parte: Malcolm Thomas Wardle [1987] FCA 479 (22 December 1987)

FEDERAL COURT OF AUSTRALIA

Re: MALCOLM THOMAS WARDLE
Ex parte: MALCOLM THOMAS WARDLE
No. 113 of 1986
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
GENERAL DIVISION
French J.(1)

CATCHWORDS

Bankruptcy - composition - application for approval and for annulment of bankruptcy - composition conditional on non-existence of undisclosed assets - contrary to general purposes of Act - composition not approved.

Bankruptcy Act 1966 s.73, s.74, s.150

Re: Peter Leopold Clyne (1978) 44 ABB 3902

HEARING

PERTH
22:12:1987

Mr M.T. Wardle appeared on his own behalf.

Mr F. D. O'Driscoll appeared on behalf of the Official Receiver.

ORDER

The application will be dismissed.

Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

DECISION

This is an application to approve a composition pursuant to s.74 of the Bankruptcy Act. The applicant, Malcolm Thomas Wardle, became bankrupt on his own petition on 28 February 1986. He was then aged 39 years, with a wife and one child of 12 months dependent upon him for support. He was also required to maintain two children aged 17 and 15 years respectively from a previous marriage.

2. Since 1981, under the terms of a maintenance agreement, he has been committed to paying $180.00 a month. He was, at the date of bankruptcy and still is, employed by Lombardo Marine Pty Ltd, as a fitter on a gross weekly wage of $310.00.

3. Wardle was previously a director and shareholder of Chelam Pty Ltd which participated in a joint venture with another company, Avoca Holdings Pty Ltd, in the operation of the Freemasons Hotel, Fremantle. Although not involved in the daily management of the hotel he invested $27,000 in that venture. The hotel was initially successful but began to decline financially when the co-owner's representative became interested in another business. Ultimately it ceased operations. Wardle was employed out of the country between 1982 and 1984 but during that time became aware that the hotel had closed up.

4. The principal debts disclosed in his statement of affairs relate to his personal guarantees on behalf of Chelam Pty Ltd. He was unable to meet these and filed his debtor's petition on 28 February 1986.

5. His statement of affairs showed assets of $955 and liabilities of $140,219. The principal creditors were the National Westminster Finance Australia Limited for $130,765 and the Swan Brewery Company Limited for $9,000. Those debts both arose out of guarantees. They have been admitted to rank for dividend in those amounts. There is also one other creditor for $454.

6. Realisations in the estate have totalled $1,136.12. There have been no unrealised assets found and disbursements made by Mr T.J. Collinson, initially appointed as trustee, totalled $3,113.02.

7. On 12 June 1987, Mr Wardle lodged with Collinson, a composition proposal which involved a payment of $6,000 to his creditors. With the proposal was a cheque for $5,500. A further $500 was tendered on 28 August 1987.

8. After payment of fees, funds available from the composition would yield a dividend of approximately 2.81 cents in the dollar. A meeting of the creditors was held on 14 July to consider the proposal. At that meeting the following special resolution was passed:-

"That a Composition be and is hereby accepted from
Malcolm Thomas Wardle (Fitter) based on the following:-

1. Proceeds from the realisation of the Estate to the
date of this meeting.

2. The sum of $5,500 being held by T.J. Collinson &
Co.

3.The additional sum of $500 to be contributed by Mr.
Malcolm Thomas Wardle.

4.Acceptance of costs and expenses in the
Administration to the date of this meeting together
with the settlement of Trustee's fees and expenses
as approved but yet unpaid.

5.Subject however, to the assets of the Estate as
described and referred to in the Trustee's report
dated the 6th July, 1987."

9. As Collinson reported to the meeting, the proposal offered the sum of $6,000 against possible known liabilities of $140,000. The composition was subject to costs but in order to assist the estate he agreed, at the meeting of creditors, to accept the sum of $1,500, representing approximately half of the fees incurred. That would have left an amount available for creditors of $4,500, subject to the cost of the composition itself.

10. Collinson recommended in his report to creditors that, having regard to the size of the composition, the Official Trustee should administer the estate from then on. The Official Trustee in his report to the Court observes that all formalities provided under ss. 73 and 74 of the Bankruptcy Act have been complied with and that he is not aware of any conduct by Wardle prior to or since the date of bankruptcy that has been other than satisfactory. He accepts that the causes of bankruptcy were the failure of the Freemasons Hotel venture and the reduction in Wardle's assets brought about by the failure of his first marriage. He also attributes the bankruptcy, in part, to lack of business ability and acumen, and the failure to exercise some control of the business venture. There is no suggestion that any offences have been committed by Wardle and there are no matters of the kind specified under sub-s. 150(6) which would provide sufficient reason for the refusal or suspension of an order for discharge. All non-assenting creditors were advised of the application to approve the composition and none have appeared to oppose it.

11. The report made by the previous trustee to creditors indicated that he had conducted intensive investigations into Wardle's affairs in respect of the period during which he was working in Indonesia and also in relation to Mrs Wardle's acquisition of a family home. He was able to trace the transfer of some funds in the name of Wardle from a Singapore bank to Australia, but was unable to identify those funds as having been specifically used for the acquisition of the property. Wardle however, confirmed that those funds, totalling about $5,000, were utilized in the maintenance of his family.

12. It was evident from the form of the composition proposal, as accepted by the creditors, and in particular para. 5 thereof, that there remained some doubt as to whether all available assets had been disclosed. Para. 5 in its terms, simply says:-

"Subject however, to the assets of the Estate as
described and referred to in the Trustee's report dated
the 6th July, 1987."

13. By itself this provision is meaningless. Some attempt is made to explain it in a letter to the Official Receiver from the previous trustee dated 21 December 1987, a copy of which has been placed on the file. In that letter it is said:-

"Creditors accepted the Composition on the basis of the
Assets of the estate as disclosed by Mr. Wardle. They
were aware however of suggestions that Mr. Wardle may
have invested some funds in a property registered in the
name of his wife and as such, it could later be found
that he may have an equity. The resolution therefore
included a reservation that if the assets as disclosed
by Mr Wardle were found to be wrong then the composition
was restricted to the previously disclosed assets and
not inclusive of any additional assets."

14. This, in my opinion, discloses a somewhat unsatisfactory position. When a court approves a composition it should be reasonably satisfied that the composition is so far as possible intended to achieve finality in the disposition of the affairs of the bankrupt in relation to his existing creditors, and that it can provide a proper ground for the application for annulment which almost inevitably accompanies it.

15. The exercise of the discretion to approve a composition is guided by principles which were set out by Deane J. in Re: Peter Leopold Clyne (1978) 44 ABB 3902, where His Honour said:-

"Generally speaking, this court should be slow to refuse
to approve a proposed composition or scheme of
arrangement which has been duly approved by special
resolution (i.e. by a majority in number and at least
three quarters in value of those present, either
personally or by attorney or proxy) at a properly
convened meeting of creditors, in the absence of
considerations which indicate the presence of one or
more of the following factors:

(i) That material was concealed from some or all of the
creditors.

(ii) That some or all of the creditors were unaware of
material considerations which could conceivably
have lead them to take a different view to the view
expressed in their voting on the proposed scheme.

(iii) That some or all of the creditors were not given a
proper opportunity of considering or voting upon
the proposed composition or scheme.

(iv) That the provisions of the proposed composition or
scheme are unreasonable or clearly not in the
interests of the creditors.

(v) That the provisions of the proposed composition or
scheme unfairly favour some class or classes of
creditors over another class or classes or some
creditor or creditors over another creditor or
other creditors.

(vi) That some or all of the creditors voted in support
of the proposed composition or scheme of
arrangement by reason of dishonest or collateral
purposes or objects.

(vii) That the bankrupt has been guilty of such
misconduct either leading to or in relation to the
bankruptcy that, in all the circumstances including
the period since the making of the sequestration
order, it is necessary in the public interest to
refuse to lend the sanction of the Court to the
arrangement which he has reached with the
creditors, or that the circumstances of the matter
are such as to make it necessary for the court to
refuse its approval to the scheme for the reason
that to give such approval would not be consistent
with the general purposes of the Bankruptcy Act."

16. I am conscious of the general principle that the court should be slow to refuse to approve a proposed composition which has been duly approved. I have very much in mind that the two major creditors of the bankrupt support the proposed composition. There is no suggestion, or at least no proper evidence beyond doubts expressed by the previous trustee, of undisclosed assets. There is no suggestion of any class of creditors being favoured over another or of any failure to give creditors a proper opportunity of considering or voting upon the proposal. Nor is there any basis for saying that the votes in support of the proposed composition were made for dishonest or collateral purposes or objects. There is no suggestion that Wardle has been guilty of misconduct of any kind, and certainly not of such a kind as would of itself render the approval he seeks, contrary to the public interest.

17. However, it seems to me that the form of the composition as it presently stands, with the qualification in para. 5, whether taken by itself or in the light of Collinson's letter, is inconsistent with the general purposes of the Bankruptcy Act with respect to compositions. In my opinion, a composition which is approved on the basis that it applies only to disclosed assets and purports to reserve the position of the creditors with respect to undisclosed assets is not consistent with those general purposes.

18. In the circumstances, I am unable to give approval to the terms of the composition as presently proposed. I take that step with some regret because as Mr Wardle has pointed out, his continuing bankruptcy is blocking the opportunity that he might otherwise have to take up a management position with his present employer. It is a term of that employer's standard employment contract that at that level the position is not available to an undischarged bankrupt.

19. It will be open to Mr Wardle should he wish to do so, to either reframe the terms of the composition in a way that is acceptable to the court, or alternatively, if that is thought to be impracticable, to consider making an application for discharge under the provisions of s. 150 of the Bankruptcy Act. The application will be dismissed.