Re Constance Vaccaro v John Howard Mann [1991] FCA 309; 403 Bankruptcy 30 FCR 214 (17 July 1991)

FEDERAL COURT OF AUSTRALIA

Re: CONSTANCE VACCARO
And: JOHN HOWARD MANN
No. G605 of 1990
FED No. 403
Bankruptcy
30 FCR 214

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Davies(1), Sheppard(1) and Gummow(1)JJ.

CATCHWORDS

Bankruptcy - deed of arrangement declared to be void for want of compliance with provisions of Part X of Bankruptcy Act 1966 - whether appointment of registered trustee as controlling trustee revived after deed declared void - order made by Court after deed declared void empowering trustee, as controlling trustee, to sell debtor's property - debtor party to proceedings in which that order obtained - whether debtor estopped from challenging authority of controlling trustee.

Bankruptcy Act 1966, ss.40(1)(i) to (n), 188, 189, 190, 194, 204, 213, 214, 216, 221, 222, 224.

HEARING

SYDNEY
17:7:1991

Counsel for the Appellant: Mr J.K. Chippindall

Instructed by: Brown and Partners

Counsel for the Respondent: Mr J.E. Thomson

Instructed by: Michell Sillar McPhee Meyer

ORDER

Leave to appeal be granted.

The appeal be allowed.

The order of this Court made on 4 October 1990 be set aside and in lieu thereof it be ordered that this matter be remitted to a judge of the Court for directions.

There be no order as to the costs of the appeal.

The costs of the hearing before the primary Judge be reserved to the judge finally dealing with the application of the appellant filed on 25 September 1989.
NOTE: Settlement and entry of Orders is dealt with by Order 36 of the Federal Court rules.

DECISION

This appeal from a decision of a judge of this Court was heard on 31 May last. At the conclusion of the hearing the Court expressed the view that leave to appeal was required. It granted leave. The appeal was allowed, the order appealed from set aside and the matter remitted to a judge of the Court for appropriate directions. We decided that there should be no order as to the costs of the appeal. The costs of the hearing before the primary Judge were reserved to the judge finally dealing with the application. We did not publish reasons for our decision on 31 May last but said that we would publish reasons in due course. What follows are our reasons for the conclusions at which we arrived.

2. The application before the learned primary Judge was an application by the respondent, John Howard Mann, a registered trustee, brought by the appellant, Constance Vaccaro, a debtor. The debtor's application sought a number of declarations and orders including orders that the Court inquire into the conduct of the respondent as controlling trustee of the property of the debtor, that the respondent be removed from office as controlling trustee of the property of the debtor and that the debtor's property be released from control under Division 2 of Part X of the Bankruptcy Act 1966 ("the Act"). The debtor also sought a declaration that the respondent had been guilty of a breach of duty in relation to his administration of the debtor's property and affairs. His Honour concluded that he could see no basis upon which the debtor's application could succeed. His Honour referred generally to certain authorities and said that there was a unanimity of view that a case really had to be virtually hopeless to be struck out before it was heard. His Honour thought that this was such a case.

3. The facts of the case are unusual. On 24 November 1986 the debtor signed an authority under subsec. 188(1) of the Act authorising the respondent (hereinafter referred to as "the trustee") to call a meeting of her creditors and take over the control of her property. On 29 December 1986 the debtor executed a deed of arrangement purportedly pursuant to ss.213 and 214 of the Act. Subsection 213(1) provides that, subject to Part X of the Act, a deed of assignment or a deed of arrangement executed by a debtor is void unless it is entered into in accordance with Part X and complies with the requirements of that Part. Section 216 provides that a deed of assignment or a deed of arrangement is to be executed by the debtor and the trustee within 21 days from the day upon which the special resolution requiring the debtor to execute the deed was passed. The execution of the deed by the debtor and by the trustee is to be attested by a witness.

4. There was a meeting of the debtor's creditors called by the trustee on 9 December 1986. The meeting unanimously resolved that the debtor enter into a deed of arrangement, that the trustee be the trustee thereof and that the main elements to be included in the deed were to be:-
(a) The debtor be permitted to continue to carry on the business

of a guest house at Bowral known as Annesley-Westwood for a
period of six months.
(b) Thereafter a further meeting of creditors be held to decide
on further action including the question whether the
business should be sold and whether an option to purchase
the freehold on which the business was carried on held by
the debtor should also be sold.
(c) Interest be paid to creditors on their debts to the extent
that a surplus of funds became available during the course
of the administration of the deed of arrangement and after
all creditors had been paid the principal amounts of their
debts in full.

5. As mentioned, the deed of arrangement was executed on 29 December 1986. The deed provided that the debtor conveyed and assigned to the trustee the property described in its schedule upon trust to deal with it in accordance with the deed. It is unnecessary to refer to the remainder of the terms of the deed except to say that it did contain, amongst others, provisions to give effect to the matters referred to in paragraphs (a), (b) and (c) above.

6. During the year 1987 there were a number of meetings of creditors and meetings of a committee of inspection which had been appointed. There were negotiations for the sale of the business and the option. Towards the end of the year the debtor made an unsuccessful attempt to obtain finance sufficient to enable her to pay out her creditors.

7. On 30 December 1987 and 22 January 1988 the learned primary Judge dealt with a number of matters. In an oral judgment delivered on 30 December 1987 he decided that the debtor's signature on the authority she had signed pursuant to s.188 of the Act had been attested by a witness as required by para. 188(2)(b) thereof. In the course of that judgment his Honour referred to the fact that it had emerged that the debtor's signature to the deed of arrangement, despite the presence on the face of the deed of the signature of a person purporting to sign as an attesting witness, had not in fact been attested as required by subsec. 216(2). On 22 January 1988 his Honour made a number of declarations and orders. One of these was a declaration to give effect to the terms of paragraph 2 of the orders sought in the trustee's further amended application filed on 18 December 1987. That paragraph sought a declaration that, pursuant to subsec. 222(2) of the Act, the document dated 29 December 1986 purporting to be a deed of arrangment made between the debtor and the trustee was void.

8. Also on 22 January 1988, his Honour granted leave to the trustee, pursuant to subsec. 190(3) of the Act, "as controlling trustee of the estate of the debtor" to sell the option contained in an agreement dated 30 April 1986 made between a Mr and Mrs Brown and the debtor. His Honour ordered that the proceeds of sale of the option be received by the trustee as controlling trustee and be invested by him in the manner set out in the order to the detail of which it is unnecessary to refer.

9. On 22 January 1988 his Honour noted a number of agreements made between the trustee, the debtor and a creditor. These were set out in paragraph 3 of the Short Minutes of Order which were before his Honour on 22 January 1988. Paragraph 3(a) commenced with the words, "The debtor irrevocably authorises" the trustee and there follow a number of subparagraphs. The authority conferred on the trustee authorised him to advertise and call for proofs of debts of creditors and thereafter to act upon such proofs in the manner provided for by ss.102 and 103 of the Act "as though" the trustee "were the trustee in bankruptcy of the debtor" as to how the proceeds of sale of the option were to be applied in the payment of the trustee's remuneration and of creditors.

10. Subparagraphs (b) and (c) of para. 3 of the Short Minutes were as follows:-

"(b) the debtor hereby appoints JOHN HOWARD MANN
the debtor's agent to do all things necessary
and incidental to the carrying out of the
terms of this agreement, and the said JOHN
HOWARD MANN hereby agrees to so act;
(c) the debtor agrees that the appointment of
JOHN HOWARD MANN as the debtor's agent and
the authorities hereby granted by the debtor
are irrevocable by the debtor without the
consent of a majority in value of the creditors
of the debtor, granted at a meeting of such
creditors duly called pursuant to the Bankruptcy
Act, 1966."

11. There were some further orders made on 22 January 1988 to which it is unnecessary to refer.

12. We pause here to say that it is difficult to discern what was intended by the various agreements provided for in para. 3 of the Short Minutes. The appointment of the trustee as the debtor's agent and some of the other matters to which we have referred suggest to us that the parties had in mind an informal administration of the debtor's estate outside the provisions of the Bankruptcy Act. Plainly enough the agreements did not provide for the entry by the debtor into a deed of assignment, a deed of arrangment or a composition; and there was to be no sequestration order. All this would suggest that there must have been an underlying doubt whether the trustee was any longer the controlling trustee of the debtor's property and affairs. Be that as it may, it would seem that since 22 January 1988 all parties have proceeded upon the assumption that the trustee remained the controlling trustee after the deed was declared to be void. That was common ground between them when the hearing of this appeal began.

13. Throughout 1988 and the years which have followed it the trustee has purported to continue to act as controlling trustee holding meetings of creditors and conducting negotiations in relation to the disposal of the debtor's property. Thus on 8 June 1988 the trustee entered into as conditional contract for the sale of the property the subject of the option. The contract was conditional upon this Court approving the contract.

14. On 1 July 1988 the learned primary Judge, purporting to act pursuant to subsec. 190(3) of the Act, gave the trustee, described in his Honour's order as controlling trustee, leave to sell the property pursuant to the terms and conditions of an agreement for sale dated 8 June 1988. The contract was made subject to a favourable determination by the Supreme Court of New South Wales of the question whether the trustee had validly exercised the option to purchase the property. The trustee had purported to exercise the option on 18 April 1988. The circumstances in which this came about are described in an affidavit of the trustee sworn on 21 November 1989. It is unnecessary to refer to the detail of this evidence.

15. The order of 1 July 1988 has been entered. An examination of the Court file would suggest that the orders made on 22 January 1988 have not.

16. Since 1 July 1988 a number of steps have been taken but the position of the debtor's estate and affairs remains unresolved. The trustee has sworn that he has continued to negotiate both with the owners of the property and with the debtor but these negotiations have not been successful. The trustee has sworn that he believes that he has done everything possible to administer the debtor's estate in such a way that a "fair and proper" dividend is paid to her creditors.

17. When the hearing of the appeal began, this Court, of its own motion, raised the question whether the trustee's appointment as controlling trustee came to an end when the deed of arrangement was entered into. We are clearly of opinion that the proper construction of the Act requires the conclusion that the trustee ceased to be a controlling trustee on the execution of the deed and that his appointment as controlling trustee did not revive after the deed was declared to be void. Part X of the Act is entitled, "Arrangements with Creditors without Sequestration". Its object is to enable debtors, with the approval of their creditors, to have or to agree to have, their estates administered privately and thus avoid the stigma and some of the other consequences (although not all) which sequestration brings with it.

18. Three types of private arrangements are contemplated - deeds of assignment, deeds of arrangement and compositions. The Act enables the interim appointment of a registered trustee as a controlling trustee and the immediate calling of a meeting of creditors so that their wishes can be ascertained. The scheme of the Act is such as to suggest that the legislature intended that the appropriate arrangement should be entered into reasonably soon after the calling of the meeting of creditors although s.197 provides for the adjournment of meetings. Nevertheless, the first meeting is to be called no later than 35 days after the signing of the authority (s.194); and para. 221(1)(c) of the Act provides that, where a meeting of creditors called in pursuance of an authority under s.188 has not, within four months from the date for which the meeting is called, passed one of the special resolutions referred to in subsec. 204(1), the Court may, if it thinks fit, on the application of one of a number of persons, including a creditor and the controlling trustee, forthwith make a sequestration order against the estate of the debtor. The resolutions provided for in subsec. 204(1) are to resolve that the debtor's property be no longer subject to control, to require the debtor to execute a deed of assignment or a deed of arrangement under Part X, to accept a composition or to require the debtor to present a debtor's petition within 7 days from the day on which the resolution is passed.

19. These provisions and a reading of Part X as a whole, disclose, in our opinion, an intention on the part of the legislature to bring certainty and finality to the administration of a debtor's affairs as expeditiously as possible. Either a debtor's property is to be released from control or there is to be entry into one of the three types of private arrangement for which Part X provides. If this does not occur, sequestration will usually follow either because the debtor presents his own petition or because he is made bankrupt on an application brought pursuant to para. 221(1)(c) of the Act. These provisions are reinforced by the acts of bankruptcy provided for in paras. (i) to (m) of subsec. 40(1). In particular para. 40(1)(m) provides, inter alia, that, if a deed of assignment or a deed of arrangement executed by a debtor under Part X is declared to be void by the Court, the debtor commits an act of bankruptcy. That provision is an indication of the finality which the legislature plainly intended should be the consequence of the invocation by the debtor or his creditors of the provisions of Part X.

20. It is, perhaps, unnecessary to say that on no basis could it be thought that the legislature intended a controlling trustee to continue to hold office as such after the execution of a deed of assignment or arrangement or the entry by the debtor into a composition. The manifest inconvenience of there being at the same time a trustee under such an arrangement and a controlling trustee is a sufficient reason for the conclusion that the office of controlling trustee ceases to exist once one of the private arrangements is entered into.

21. In fairness, that was not suggested by either counsel to be the position. What was suggested was that a controlling trustee's appointment would revive if, for any reason, a deed of arrangement were avoided. The argument in favour of the view that such a revivor does occur lies in the fact that the deed is declared to be void. It could be argued that the position should be looked at as if no deed had ever been executed because the deed that was executed was void ab initio so that, in reality, the appointment of the controlling trustee continued to have effect. We are of opinion that such a result was not intended by the legislature and that the provisions of the Act do not warrant the conclusion that the words which the legislature has used bring it about. It was plainly the intention of Parliament that the term of office of a controlling trustee should be no longer than was necessary to enable, either the debtor's property to be released from control, or some final form of statutory administration put in place whether by way of sequestration order or one of the recognised private arrangements. The totality of the provisions of Part X lead us to this conclusion and it is confirmed by reference to the act of bankruptcy provided for in para. 40(1)(m) referred to above.

22. Of course, we are not concerned with a case where the deed on its face failed to comply with the provisions which Part X requires of a valid deed. The deed was not patently a nullity. It carried with it the presumption of validity. See, e.g., Hoffmann - La Roche and Co. A.G. v Secretary of State for Trade and Industry (1975) AC 295 at 341, 352, 366; Craig on Administrative Law, 2nd ed., pp 323-341. On the execution of such a deed, though it be subject to being later declared void if challenge be made to it, it operates unless and until such a declaration be made. On execution, the authority of the controlling trustee ceases and control passes to the trustee under the deed. And s.224 specifically preserves the validity of payments made and acts and things done in good faith under a deed, though the deed be later declared void under s.222.

23. After the matter had been discussed with counsel for a period and there had been an adjournment to enable counsel to consider what the members of the Court had said, neither counsel submitted to us that we should adopt the view that there had been a revivor of the controlling trustee's office. In particular, counsel for the trustee expressly disclaimed reliance on any such argument. What he did was to rely upon an argument based upon issue estopel said to arise as a consequence of the making by his Honour of the order of 1 July 1988 granting leave to the trustee to sell the property in terms of the contract dated 8 June 1988. It will be recalled that that order has been entered. In counsel's submission, the order operates to determine conclusively, as between the trustee and the debtor, the trustee's authority and power to act as controlling trustee. Counsel referred to a number of authorities, principally to the well known authorities of Blair v Curran [1939] HCA 23; (1939) 62 CLR 464 and Jackson v Goldsmith [1950] HCA 22; (1950) 81 CLR 446. In considering these authorities care has to be taken to distinguish between issue estoppel and res judicata. Counsel did not go so far as to suggest that the issue estoppel upon which he relied and which was said to arise in a proceeding in bankruptcy operated in rem; cf. Spencer-Bower and Turner, The Doctrine of Res Judicata, 2nd ed., (1969), para. 255, p 217. It was enough for his purposes to show that the estoppel operated as between the trustee and the debtor, they being parties both to the application in question here and to the application for approval which was the subject of the order of 1 July 1988.

24. It is to be remembered that we deal with this matter on appeal from an order striking out a substantive application. The proceeding being in bankruptcy, the ordinary rules of this Court do not apply to it; see Order 1, rule 11. The provisions of Order 11, r.16 and Order 20, r.2 of the Court's general rules do not apply. Nevertheless, the principles which guide us and a judge dealing with an application to strike out a proceeding in bankruptcy are those established in cases such as Dey v Victorian Railways Commissioners [1949] HCA 1; (1949) 78 CLR 62 and General Steel Industries Inc. v Commissioner for Railways (N.S.W.)(1964) [1964] HCA 69; 112 CLR 125.

25. Although made in a judicial proceeding, the order of 1 July 1988 was of an administrative character authorising certain action by a person purporting to be a controlling trustee in the course of his administration of the property under his control. Furthermore, the order was of an interlocutory kind which, as appropriate, might be varied from time to time or rescinded. These considerations suggest to us that the better view is that the order determined no issue which would lead to there being an issue estoppel. However, the matter was not the subject of consideration by the primary Judge and we do not express a concluded opinion about it.

26. We have said enough about the facts of the case to show the need for there to be the regularisation of the administration of the debtor's affairs and of the claims and counter claims which the debtor and the trustee claim to have. The case requires comprehensive directions which will result in the clarification of the position. This needs to be done not only in the interests of the debtor and the trustee, but also in the interests of creditors generally and in the public interest.

27. It was for the above reasons that we made the orders referred to at the commencement of what we have said.