Re John Codrington; Ex Parte: Don Mckay Tourist & Charter Pty Limited v John Codrington [1989] FCA 349 (1 September 1989)

FEDERAL COURT OF AUSTRALIA

Re: JOHN CODRINGTON; Ex Parte: DON McKAY TOURIST & CHARTER
PTY LIMITED
And: JOHN CODRINGTON
No. W89 of 1989/X
FED No. 514
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION BANKRUPTCY DISTRICT OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Burchett J.(1)

CATCHWORDS

Bankruptcy - composition - setting aside under s.239 - extension of time - meaning of "creditor" in s.239 - guarantee and indemnity, construction of - whether debt only payable after the making of a demand.

Bankruptcy Act 1966, s.222, 2.239

HEARING

SYDNEY
1:9:1989

Counsel for the Applicant: J.K. Chippindall

Solicitors for the Applicant: M.D. Nikolaidis & Co.

Counsel for the Respondent: D.L. Williams

Solicitors for the Respondent: J.M. Caruana, Kay & Barry

ORDER

The composition be set aside.

The estate of the debtor be sequestrated.

The court notes that Mr M.C. Donnelly a registered trustee has consented to act as the trustee of the estate of the debtor.

The applicant's costs be taxed and paid according to the Act.

NOTE: Settlement and entry of orders is dealt with in rule 124 of the Bankruptcy Rules.

DECISION

This is an application, initially brought under s.222 of the Bankrupty Act 1966, for a declaration that a composition is void and for other relief. At the hearing, the applicant sought also (pursuant to leave I granted to amend the application) an extension of the period of twenty-one days referred to in s.239(1) and, subject to the court extending the time, an order setting aside the composition under s.239. The case was argued by both parties on the footing that both questions arising under s.239 were open to be decided by the court. In the event of success under s.222 or s.239, the applicant asked additionally for the making forthwith of a sequestration order - under s.222(7) or s.239(2) as the case might be. So far as the application relies on sub-ss. 1 and 2 of s.222, I granted the applicant leave to amend to state the ground that the special resolution accepting the composition did not specify the terms of the composition.

2. On 11 May 1989, there was held a meeting of the creditors of the respondent, which had been called pursuant to an authority under s.188. It was chaired by Mr Kettlestring, a registered trustee. Present, in addition to Mr Kettlestring, were the respondent debtor, Mr Codrington, the debtor's brother who was also a creditor, Mr Peter Codrington, a representative of another creditor, ANZ Bank (Visa Card Department), and legal advisers of the debtor. Mr Peter Codrington held proxies in favour of Mrs F Codrington, the mother of the debtor and Peter Codrington, and of a firm of solicitors Messrs Hunt Musgrave & Peach. Mr Kettlestring held a proxy in favour of Mr Cirillo, a creditor (by virtue of a right of contribution in respect of a payment made under a joint guarantee) who was a former business associate of the debtor as co-director of a company through which they had carried on business together, Kempal Pty Limited.

3. The minutes of the meeting show that the debtor's statement of affairs was tabled, and that Mr Kettlestring, as controlling trustee and chairman, "outlined the terms of a proposed composition under Part X of the Bankruptcy Act, in which Mr Codrington offered to contribute the sum of $10,000.00 payable in 10 monthly instalments of $1,000.00 each." The minutes also show that a resolution was carried unanimously in the following terms: "That the Composition be accepted as proposed by the Debtor." There then followed further resolutions appointing Mr Kettlestring as "Trustee of the Composition", and fixing his remuneration in accordance with the rates prescribed by the Insolvency Practitioners' Association of Australia "up to a maximum in this Administration of $5,000.00."

4. The debtor's statement of affairs revealed an amount of $574,500.00 owing to unsecured creditors, no secured creditors, and no assets. The amount of $574,500.00 was made up of nine sums varying between $2,000.00 and $95,000.00. It included $180,000.00 owing to the debtor's mother and brother, but did not include the debt of about $280,000.00 claimed by the applicant. The latter debt was shown as "possible claim under Guarantee from: Don McKay Cruises Pty Ltd (ref. Kempal P/L) ... (Estimate of Contingent claim is $200,000.00)". This was to understate the amount of the debt, to mis-state the name of the creditor, and arguably to misdescribe the debt.

5. The statement of affairs included the following paragraph:

"I have not previously compunded with my creditors
or made any assignment or arrangement for the
benefit of my creditors (except on the first day
of August 1985) - Previous Part X Arrangement."

In fact, the debtor had twice previosly entered into arrangements with his creditors under part X, once in 1980 and once in 1985. The debtor could not recall what dividend creditors received in 1980, but in 1985 his statement of affairs showed debts totalling $125,418.00, together with further (contingent) liabilities totalling $74,462.00, while his total assets were shown at the sum of $938.00. Under that composition, the debtor agreed to pay to his trustee the amount of $15,000.00 by monthly instalments over a period of two years.

6. The minutes do not explain how it was to be achieved that the debtor would make payments of $1,000.00 per month, and no explanation was proffered in evidence. His disclosed net income is only $250.00 per week, although he works for a company controlled by his brother, and receives substantial additional benefits - the provision of a motor vehicle with payment of its running expenses, and the payment of the rent ($235.00 per week) of his residence.

7. The applicant had no notice of the meeting of 11 May 1989. As I have said, it was not shown as a creditor in the statement of affairs, but a name resembling its name appeared as that of a "possible" or "contingent" creditor in an amount which substantially understated its claim. However, notice was sent addressed to the applicant care of Messrs Ebsworth & Ebsworth, solicitors, who had formerly acted for the applicant. A notice of the result of the meeting was also sent care of the same solicitors, although it mis-stated the applicant's name in the manner already indicated. Possibly as a result of the latter notice, the applicant did, on 19 June 1989, learn about the composition. It thereupon commenced these proceedings, which were filed on 10 July 1989.

8. The obligation of the debtor to the applicant which has led to the present proceedings stems from the sale of a motor vessel (the "Katika") by the applicant for $400,000.00 to the company Kempal Pty Limited on 21 May 1987. On completion of the purchase Kempal Pty Limited entered into a deed to secure a loan of $200,000.00 by the applicant to it for a period of one year at an interest rate of 17.5% per annum. The debtor, who was then a director of Kempal Pty Limited, together with another director a Mr R Colman, entered into an agreement of guarantee and indemnity dated 29 July 1987 in respect of:

"all monies now or hereafter to become owing
or payable to (the applicant) by (Kempal Pty
Limited) pursuant to or relating to the
Agreement (ie the agreement of loan) to the
intent that should (Kempal Pty Limited)
default in the due and punctual payment of
such moneys, or any part thereof, the
Guarantor (ie the debtor and Mr R Colman)
shall pay such moneys immediately on demand,
and to the person or persons to whom such
moneys ought to be paid".

By clause 3.1 it was provided (inter alia):

"the guarantor's guarantee ... shall be
principal obligations and (the applicant)
shall not be required to proceed against
(Kempal Pty Limited) or exhaust any remedies
it may have against (Kempal Pty Limited) but
shall be entitled to demand and receive
payment from the Guarantor when any payment
is due under this Guarantee."

9. From 29 July 1987 Kempal Pty Limited failed to pay any part of the instalments due. On 8 September, 10 September, and 7 October 1987 the applicant's then solicitors wrote letters demanding that Kempal Pty Limited rectify this situation. On 17 and 18 December 1987 letters were written to Kempal Pty Limited at the top of which appeared the words "Attention: Mr J Codrington". Each of these letters referred to a proposed realization of securities by Westpac Banking Corporation for default by Kempal Pty Limited and added:

"To avoid our client (ie the applicant)
proceeding to assist the Westpac Banking
Corporation on the realization of the
securities in Queensland and to avoid our
client taking action against the Guarantors,
namely Messrs Codrington and Colman, the loan
facility you have with our client must be
placed in a non default position immediately
... . ... We hereby put you on notice that if
you allow the subject loan facility to
continue in default and there are not
sufficient monies realised from the proposed
sale of the Queensland properties by the
Westpac Banking Corporation we will be
proceeding against the Guarantors, namely
Messrs Codrington and Coleman."

The letter of 18 December 1987 continued:

"We await your reply. Failure to comply with
the above demand on or before 29 December
1987 will result in our client being at
liberty to exercise its total rights set out
in the loan facility documentation."

10. Following this correspondence, there was a meeting between Mr Donald McKay, the director controlling the affairs of the applicant, and the debtor, in late February 1988 in the foyer of the Manly Pacific Hotel. The debtor informed Mr McKay that the sale of the land in Queensland which had been referred to in the correspondence had realized insufficient to pay out Westpac Banking Corporation and there would be nothing for the applicant. Mr McKay's version of this conversation does not suggest that he or his then solicitor, who was present, said in so many words to the debtor: "Demand is made upon you pursuant to your guarantee." But in the context of the previous correspondence I have no doubt that the debtor was given to understand that the applicant required payment. That requirement was directed to him as guarantor, just as it was directed to Kempal Pty Limited. The debtor said no money was available. I think he made it plain that he had no money available, as well as that Kempal Pty Limited had no money. He proffered the solution of a redevelopment of certain land, if the applicant would contribute the cost, on the basis that repayment might be able to be effected out of any profits earned. This suggestion was unacceptable to the applicant. I interpolate that Mr McKay's demeanour and the substance of his evidence have led me to accept his version of the events without hesitation. I do not accept the debtor's less than definite assertion that he did not tell Mr McKay in the conversation at the hotel that he would get nothing. On 16 August 1989 the debtor sent a letter to Mr McKay in which he wrote: "You will recall, the meeting I had with you and Tony Latimer (the applicant's then solicitor) at the 'Manly Pacific Hotel', when I laid all my cards on the table ... .". If he laid all his cards on the table, he must have made it plain he could not pay under the guarantee. In the letter, there is no suggestion of any technical or other defect in the applicant's claim upon the guarantee.

11. On 20 February 1989, Kempal Pty Limited was wound up by order of the Supreme Court of New South Wales pursuant to a summons which the applicant had taken out on 24 November 1988.

12. It is convenient to turn first to the issues arising under s.239. This section provides as follows:

"(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.
(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.
. . . "

13. The first question arising under s.239, in this case, is whether the applicant is "a creditor" within the meaning of that section. For the debtor, it was contended that the applicant was merely a contingent creditor because the debtor would only be liable to pay the applicant if the principal debtor Kempal Pty Limited and the other guarantor both failed to do so. I reject this contention. The fact that a debt may be discharged by someone else in no way detracts from the existence of the debt until it is so discharged. But it was then contended that no debt had arisen in favour of the applicant because, on the true construction of the agreement of guarantee and indemnity, demand had to be made by the applicant upon the debtor, whereas it was claimed no such demand had been made. For this proposition to succeed, it is necessary (1) that I should refuse to find a sufficient demand upon the evidence; (2) that the true construction of the agreement should indeed require the making of such a demand; and (3) that upon the true construction of s.239, the applicant's agreement, in the events which have happened, should not without such a demand be sufficient to constitute the applicant a "creditor". I shall deal with each of these matters in turn.

14. Upon the view that I have taken of the evidence, I think a sufficient demand was made, if the agreement required the making of a demand. It was not made in so many words, but there is no foothold in the agreement for any contention that an express demand is required. This is in itself sufficient to dispose of the point in favour of the applicant.

15. The question of construction of the agreement may be conceded to involve some textual ambiguity. But the clause I have quoted makes it plain that the obligation of the "guarantor" is not merely a liability to answer for the obligation of Kempal Pty Limited, as it would be in the case of a strict guarantee, but also involves a "principal" obligation. The structure of the clause, as it has been drafted, is to declare this quite fundamental aspect of the agreement being undertaken by the so called guarantors, whose principal obligations the clause asserts, and then to draw out the consequences by the added words stating (in effect) that the applicant is not required to proceed first against Kempal Pty Limited, "but shall be entitled to demand and receive payment from the Guarantor when any payment is due under this Guarantee." I think the words "under this Guarantee" refer to the entitlement to demand and receive payment from the guarantor, and not to the words "when any payment is due". More importantly, the words "shall be entitled to demand and receive payment", particularly following the fundamental assertion that the rights in question are "principal obligations" owed by the "guarantor", cannot be regarded as a clear statement that the entitlement to payment only arises on demand. They are susceptible of the meaning that there is an entitlement to payment by the "guarantor" when any payment is due, and that therefore the applicant may demand and receive payment. When the question is whether the words are used in the one sense or the other, I think assistance is to be gained from the general rule which has been held to apply in respect of the obligations of sureties. The draftsman of a clause plainly intended to impose an additional obligation, a principal obligation, upon the guarantor is hardly likely to have intended, by his use of somewhat ambiguous phraseology, to reduce, not only the principal obligation, but also the obligation of suretyship itself below that which would otherwise apply. In Rowlatt on Principal and Surety 4th edition, 108-109, the learned author states:

"It is the surety's duty to see that the
principal pays or performs his duty, as the
case may be. This was the reason given in
the previous edition of this work for the
rule that as soon as 'the default of the
principal is complete ... every surety is,
apart from special stipulation, immediately
liable to the full extent of his obligation,
without being entitled to require either
notice of the default, or previous recourse
against the principal, or simultaneous
recourse against co-sureties.'"

This passage, as it had appeared in the previous edition, was referred to by Lord Simon of Glaisdale in Moschi v. Lep Air Services Ltd (1973) AC 331 at 356-357 as representing the law. In the same case, Lord Diplock, at 348, said:

"It is because the obligation of the guarantor
is to see to it that the debtor performed his
own obligations to the creditor that the
guarantor is not entitled to notice from the
creditor of the debtor's failure to perform
an obligation which is the subject of the
guarantee, and that the creditor's cause of
action against the guarantor arises at the
moment of the debtor's default and the
limitation period then starts to run."

See also Sunbird Plaza Pty Ltd v. Maloney (1988) 77 ALR 205 at 209, per Mason C.J..

16. In my opinion, on the true construction of clause 3 of the agreement in the present case, the cause of action of the applicant against the debtor was complete without more upon default under the loan agreement.

17. The third of the questions listed above is the question of construction of s.239. The word "creditor" has been described as somewhat protean. There is authority justifying a construction of it, when it is used in a section conferring rights upon creditors to seek relief, in a wide sense so as to embrace contingent creditors: In Re Harvest Lane Motor Bodies Ltd (1969) 1 Ch 457, especially at 461; and see Re J.F. Aylmer (Manildra) Pty Ltd; Burgess v. Spooner (1968) 12 FLR 337 at 342, 351. Whether, in a particular section, the word "creditors" should be given such a wide meaning, of course, depends upon the context and subject matter. In my opinion, in s.239 the word is wide enough to include a person entitled to receive payment from the debtor on demand, though no demand may have been made.

18. Having answered each of the three questions unfavourably to the debtor, I must now turn the question whether I should extend the time to enable the applicant to rely on s.239. A formal submission was made on behalf of the debtor that the court lacks power in this respect, but no arguments were advanced, it being conceded that I would follow a number of decisions in which it has been held there is power to grant such an extension of time. It is sufficient to refer to Raschilla v. Gulluni [1987] FCA 67; (1987) 14 FCR 57 at 68, where French J. cited an earlier decision of Toohey J. for the proposition that s.33(1)(c) is applicable, and that what is required for the exercise of the power is that "an applicant ... satisfy the court that in all the circumstances of the case an extension of time is just". At 69, French J. made it clear that the court is entitled to have regard to the circumstances surrounding the composition sought to be set aside, and is not limited to questions of prejudice and the adequacy of an explanation for delay.

19. In the present case, there must almost necessarily have been some loss of time while the applicant assessed the situation that had arisen from a meeting of which it had had no notice. The applicant did take proceedings quite promptly under s.222, and the addition of a claim for relief under s.239 does not seem to me to involve a significant prejudice. If I were to consider the circumstances without regard to the merits of the matters relevant to an application under s.239, isolating the issues related to the question of extension of time, I would think it appropriate to extend the time. Upon a fuller examination of the whole of the relevant circumstances, as will appear, I take the same view. Accordingly, I will extend the time to permit the application to be made under s.239.

20. Section 239 confers a wide discretion on the court, exercisable where the terms of a composition are unreasonable, or not calculated to benefit the creditors generally, or where for any other reason the composition ought to be set aside. Considerations which will normally arise are referred to in Raschilla v. Gulluni (supra) and in Re Brennan Ex parte Stokes (Australasia) Limited v. Brennan (unreported Morling J. 31 May 1988). I do not think any narrow view should be taken of what is meant by the expression "not calculated to benefit the creditors generally". In the context of s.222(5), the phrase "in the interests of the creditors" has proved restrictive. But even in that context, in Augustyn v. Putnin (1988) 83 ALR 514 at 515 Jenkinson J. suggested the interests of creditors should not necessarily be limited to economic advantage, and that they could at any rate be satisfied by "a prospect or possibility of economic advantage to creditors sufficient to justify the conclusion that it is in their interests to make the declaration." In the same case, at 522 French J. said: "It is sufficient that there be a real possibility of a financial benefit." In Re Tripodi; Ex parte Col Johnson Pty Limited (unreported Burchett J. 22 January 1987), I said:

"I think a broad view should be taken, and in
a proper case it may be held that it is in
the interests of creditors that there should
be the full opportunity for inquiry which
bankruptcy may entail, even though there is
no assurance that inquiry will in fact
uncover any further assets."

21. In Re Brennan Morling J. considered the amount of the dividend which the composition was likely to yield. He said:

"It seems to me that for a composition to be
reasonable or to be calculated to benefit the
creditors generally, the terms must be such
as to offer the creditors some real advantage
above that which they might obtain if the
debtor's estate is administered in
bankruptcy. In the present case, the amount
which will be available for distribution
between the creditors is quite insubstantial
when compared with the total amount owing to
the creditors. It was correctly described
... as being 'more or less a token'."

He also referred to the possibility that if the debtor were made bankrupt he might be required to make contributions to his estate. He added:

"Moreover, while there is no reason to suppose
that the debtor has not disclosed all his
assets in his Statement of Affairs, the
creditors would be justified in thinking that
it was to their advantage that the extent of
the debtor's assets should be more fully
investigated. In a case where a debtor has
incurred debts of such huge proportions
relative to his assets, there is much to be
said for the proposition that it is in the
public interest that there be a public
examination of the bankrupt (and possibly
other persons) under s.81 of the Bankruptcy
Act."

Each of these considerations seems to me relevant in the present case. The amount of any possible dividend would be quite derisory, there being perhaps $5,000.00 available under the composition to meet about $750,000.00 of debts. Whilst the debtor's cash income is small, he is receiving other benefits from a company controlled by his brother, and his capacity to make some contribution cannot simply be disregarded. The debts are not as great as those involved in Re Brennan, but the statement of affairs discloses no assets at all to set against them and the debtor has twice before in the past nine years entered into compositions with his creditors, on the second of those occasions in terms which bear some comparison with those now under consideration. In the circumstances, what Morling J. said about the public interest might well be applied to the present case.

22. In Re Brennan Morling J. also drew attention to the circumstance that although the court should be cautious in overturning a decision reached by creditors approving a composition, the fact that the creditors who voted in favour of the resolution had some connection with the debtor "is not without significance". In the present case, it could not be said that all creditors who voted in favour of the resolution were connected with the debtor. However the overwhelming preponderance of debts represented at the meeting involved the debtor's mother and brother. Only one independent creditor had a representative present, and that creditor was owed a relatively small amount.

23. Morling J., in summary of the factors which led him to set aside the composition there in question, referred to the small sum of money offered to creditors compared with the amount of the debts, the fact that the composition had not been implemented (in the present case only one payment has been made to the trustee), the relationship between the debtor and the creditors who voted in favour of the composition, the possibility that the creditors might do as well in bankruptcy as under the deed, and the prima facie right of the applicant to a sequestration order. Only the last of these factors is not in substance involved in the present case, no bankruptcy notice having been served or petition presented.

24. I have concluded that I should exercise my discretion under s.239 in favour of the applicant. This makes it unnecessary to consider whether the claims under s.222 have also been made out.

25. The final question is whether I should also exercise the power contained in s.239(2) to make forthwith the sequestration order sought. For the debtor, I was urged to refrain from taking this step, but in my opinion, all the circumstances point to the desirability of making an order forthwith. Accordingly I set aside the composition and make a sequestration order.