Re Andrew George Stanley Gibbons and Susanne Patricia Gibbons Ex Parte: Bank of New Zealand [1991] FCA 39 (20 February 1991)

FEDERAL COURT OF AUSTRALIA

Re: ANDREW GEORGE STANLEY GIBBONS and SUSANNE PATRICIA GIBBONS
Ex parte: BANK OF NEW ZEALAND
No. NX94 of 1990
FED No. 37
Bankruptcy - Section 201 of Bankruptcy Act

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
GENERAL DIVISION
Gummow J.(1)

CATCHWORDS

Bankruptcy - composition under Part X - application by creditor to set aside composition under sub-ss. 222 (2), (4) of Bankruptcy Act 1966 - whether composition not accepted by special resolution - whether material particulars omitted - voting rights of debtors in compositions.

Section 201 of Bankruptcy Act - whether Chairman's decision was something Court had to accept - power of Chairman to decide issues of fact or law is subject to examination by Court - onus on applicant to show it was in interest of creditors to set aside composition under s. 222 (4).

Bankruptcy Act 1966

Re Levy and Others; Ex parte Sholefield Goodman and Sons Ltd and Others [1980] FCA 129; (1980) 50 FLR 99

Re Beames; Ex parte Beneficial Finance Corporation Ltd [1985] FCA 191; (1985) 7 FCR 216

HEARING

SYDNEY
20:2:1991

Counsel and solicitors for Mr B.A.J. Coles instructed the
applicant: by Messrs Kemp, Strang and Chippindall

Counsel and solicitors for Mr V.R.W. Gray instructed

the debtors: by Messrs Smits Naple Barwick

ORDER

Pursuant to sub-s. 222 (2) of the Bankruptcy Act 1966, declares void the composition accepted on 18 July 1990 at a concurrent meeting of creditors of the debtors, Andrew George Stanley Gibbons and Susanne Patricia Gibbons on the ground that the composition was not accepted by a special resolution as required by s. 204 of that Act.

Orders that the estates of Andrew George Stanley Gibbons and Susanne Patricia Gibbons be sequestrated but suspends the operation of this order until 4.15 pm on 20 February 1991 or earlier further order.

Otherwise dismisses the application filed 1 August 1990.

Orders that the applicant's costs of the application be paid out of the estates of the debtors.

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

DECISION

At an adjourned concurrent meeting of the creditors of both debtors held at Sydney on 18 July 1990, what purported to be a special resolution was passed in the following terms:

"That the Composition under Part X of the
Bankruptcy Act, 1966, proposed by the Debtor
(sic) be accepted in the terms and conditions as
outlined in the proposal forwarded to creditors."

Earlier, on 26 June 1990, each of the debtors had signed an authority as described in sub-s. 188 (1) of the Bankruptcy Act 1966 ("the Act") which authorised their solicitor, Mr John Landerer, to call a meeting of their creditors. In each case, the signing of the authority under s. 188 was the commission of an act of bankruptcy: sub-s. 40 (1) (i) of the Act. The debtors each furnished a statement pursuant to para. 188 (2) (c) (ii), indicating proposals for the conduct of their affairs, and swore an affidavit verifying a statement of affairs. Each proposal stated:

"That members of our family will provide
$250,000 within twelve (12) months . . . to the
Trustee of our estate for distribution . . ."

In the events that have happened, no such funds have been provided.

2. The meeting was first convened on 11 July 1990 but after discussion it was resolved that the meeting be adjourned to 18 July 1990. The debtors, Mr and Mrs Gibbons, were in attendance, both on 11 and 18 July 1990.

3. At the meeting on 18 July 1990, Mr K.R. Shirlaw was appointed Chairman. He ruled that the ballot was to be treated as conducted on the basis that two parties, Andrew Gibbons Real Estate Pty Limited ("the Company") and Bank of New Zealand ("the applicant"), were not entitled to vote. The gentlemen holding proxies for these creditors had indicated that they wished to vote against the motion accepting the composition under Part X Division 2 of the Act which was proposed by the debtors. The only other creditor voting against the proposal for composition was the Government Insurance Office of New South Wales, a creditor in the amount of $154,727.13. The Company was a creditor in the sum of $416,270, and the applicant was a creditor in the sum of $767,569. In the result, the Chairman treated 21 creditors as having voted, 20 being for the composition and only one against; he treated the total value of the debts of those voting for the composition as $1,616,213 which, when taken with the adverse vote of the Government Insurance Office of New South Wales in the sum of $154,727, gave an overall total of $1,770,940.

4. By ordinary resolution, Mr Shirlaw was appointed Trustee. Although he has not been joined as a party to the present application, the material before the Court shows that Mr Shirlaw had notice of the proceedings and of the hearing date. An affidavit sworn by Mr Shirlaw on 28 September 1990 and filed by the solicitors for the debtors was not read. Neither debtor gave evidence.

5. Section 198 provides for the entitlement of creditors to vote at, inter alia, meetings called in pursuance of an authority under s. 188. Section 204 of the Act provides that a composition of the nature presently in question might be accepted by the creditors by special resolution. That expression is defined in sub-s. 5 (1) of the Act as meaning a resolution passed by a majority in number and at least three-fourths in value of the creditors personally present by attorney or by proxy at a meeting of creditors and voting on the resolution. It is apparent that if the vote of the applicant had been allowed, (and a fortiori that of the Company also), the special resolution would not have been passed.

6. On 18 September 1989, Mr and Mrs Gibbons had entered into a guarantee whereby they guaranteed to the applicant the obligations of the Company; on 11 May 1990, the applicant made demand upon the debtors, pursuant to the guarantee, in the sum of $718,684.82, and by the time of the lodgment of the proof of debt for the meeting on 18 July 1990 the indebtedness claimed had risen to the sum earlier indicated, namely $767,569. On the same date as the debtors gave the guarantee to the applicant, the Company granted to the applicant a deed of equitable mortgage whereby it charged to the applicant all of its assets and undertaking in consideration of the advance of funds by the applicant to the Company. Upon the Company defaulting in its obligations to the applicant, on 30 April 1989 the applicant appointed Mr J.W. O'Brien (who gave evidence on the present application) its agent, pursuant to powers contained in the security. Mr O'Brien's investigations led him to the conclusion that the debtors were indebted to the Company in the sum of $416,270, and pursuant to powers in the security a proxy was appointed in respect of this debt. At the time the proof of debt was lodged, Mr O'Brien was not aware of further matters which would have increased the amount of the proof. On 4 February 1991, shortly before the hearing of the present application, the debt owed to the Company was $488,664.

7. At the meeting on 18 July 1990, the Chairman conducted the proceedings in such a way that the vote was taken before the exclusion of the votes in respect of the applicant and the Company. The Chairman, Mr Shirlaw, told the meeting that he would not allow the votes of either the applicant or the Company for reasons as expressed as follows in the minutes of the meeting:

"(1) Bank of New Zealand as the primary liability of Andrew
Gibbons Real Estate Pty Limited had not been crystalised
(sic) and the counter-claim by the debtors would render the
amount of the debt uncertain and yet to be ascertained.
(2) Andrew Gibbons Real Estate Pty Limited was not entitled to
vote as the proxy was in favour of Mr S.G. Campbell and he
was not present to vote and there was a dispute regarding
this debt which rendered it of unknown value."

8. In the present application, which was filed on 1 August 1990, the applicant seeks, inter alia, orders that the compositions entered into by the debtors are void and that the estates of each of the debtors be sequestrated. Reliance is placed upon two branches of s. 222 of the Act (those in sub-ss. (2) and (4)) and also upon s. 239 of the Act. First, the applicant contends that the compositions were not accepted by special resolutions, such that the Court should declare the compositions to be void pursuant to its powers under sub-s. 222 (2). Then it is said that in any event there were omissions of material particulars from the statements of the debtors' affairs given under sub-s. 188 (2), such that the Court should declare the compositions void under sub-s. 222 (4) and that the Court should be satisfied that it would be in the interests of creditors to do so, as required by sub-s. 222 (5). Pursuant to sub-s. 222 (7), applications for sequestration orders are included in each application under s. 222.

9. Further, and in the alternative, the applicant submits that the terms of the compositions are unreasonable within the sense of sub-s. 239 (2), and that the Court should set aside the compositions and make sequestration orders pursuant to the powers in sub-s. 239 (1).

10. Counsel for the debtors indicated that if, contrary to his submissions, the Court were to decide, on any of the grounds advanced by the applicant, that the compositions were to be declared void or set aside, then he would not put anything to the contrary of the applicant's further submission that the Court should proceed to make sequestration orders. Counsel for the debtors said that there was no suggestion his clients were able to meet claims which at the time of the hearing of this application were in the order of $3m.

11. I turn therefore to consider the submissions in support of the application.

12. Counsel for the debtors indicated in address that he did not seek to support the disallowance by Mr Shirlaw of the votes for the applicant and the Company. Rather, he submitted that the outcome of the meeting as certified by Mr Shirlaw as Chairman was something which the Court was required to accept by virtue of the operation of s. 201 of the Act.

13. Section 201 is in the following terms:

"201 Any question as to the right of a person to vote at a
meeting under this Division, or as to the amount of the debt
in respect of which a person is entitled to vote at such a
meeting, shall be determined by the chairman, who may, if he
thinks it necessary to do so, adjourn the meeting for a
period, not exceeding 14 days, to enable him to investigate
the matter."

I should observe at the outset that in the event the Chairman went ahead and ruled as he did on 18 July 1990 without adjourning the meeting, as contemplated by s. 201, to enable him to investigate any questions as to entitlement to vote. That, however, was not the main thrust of the opposing argument by counsel for the applicant.

14. He directed attention to the full power given to this Court by s. 30 of the Act to decide all questions, whether of law or fact, in any matter under Part X of the Act, and to the decision of Bowen C.J. in Re Levy and Others; Ex parte Sholefield Goodman and Sons Ltd and Others [1980] FCA 129; (1980) 50 FLR 99. As his Honour pointed out (supra at 112) s. 201 does not expressly make the decision of the chairman final and conclusive; the circumstance that the decision pursuant to s. 201 is not subject to appeal does not mean that the Court is barred from examining whether such decision was or was not properly made, where the Court is seized of jurisdiction under sub-s. 222 to determine whether a composition has been accepted by a special resolution under s. 204 of the Act at a meeting called in pursuance of an authority under s. 188. It should be added that sub-s. 225 (2) provides that a certificate by the chairman given under sub-s. 204 (7) that a special resolution has been passed is prima facie evidence only that the meeting was duly convened and held and that the special resolution was duly passed.

15. Accordingly, the Court should not accept the submission of counsel for the debtors that the effect of the legislation is to give a conclusive and binding effect to the determination of the Chairman as to the voting entitlement of the applicant and the Company, where the issue before the Court under sub-s. 222 (1) is whether the composition was accepted by a special resolution of a meeting of creditors under s. 204.

16. In any event, and even without the concession made by counsel for the debtors as to the method of conduct of the meeting on 18 July 1990, I would have been satisfied on the evidence that the applicant and the Company were wrongly denied their voting entitlement under s. 198. The voting entitlement given by that provision is plainly of the first importance in the operation of Part X Division 2 of the Act. This is not a case of substantial compliance, within the meaning of sub-s. 222 (3) of the Act. Accordingly, subject to any question of discretion that may arise, the Court should declare, pursuant to sub-s. 222 (2) that the composition is void because it was not accepted by special resolution of a meeting of creditors under s. 204 of the Act.

17. I would exercise any discretion that remained in the present case favourably to the applicant. The reasons for this will appear from the treatment of the second ground upon which the applicant seeks to impugn the composition.

18. Sub-section 222 (4) (b) provides that the Court may make an order declaring a composition void where it is satisfied that the debtor has omitted a material particular from the statement of the debtor's affairs given under sub-s. 188 (2), or has included an incorrect and material particular in that statement. The applicant complains that there is a misdescription of its claim as contingent, and an omission of the quantification of the applicant's claim, something which was known to the debtors after the issue of the demands upon the debtors pursuant to the guarantee, on 11 May 1990. In the Statements of Affairs dated 26 June 1990, the liabilities under the guarantee held by the applicant are dealt with under the heading of "Possible Claims" by stating:

"Bank of New Zealand for guarantees alleged
(sic) given to that bank to secure a facility
provided by Andrew Gibbons Real Estate Pty
Limited. Amount not known as assets of company
not yet realised. "

19. Further, there is an omission in these Statements of Affairs of any reference to the indebtedness to the Company of an amount in the order of $400,000; this is so notwithstanding that an earlier statement of assets and liabilities as at 8 December 1989, which had been submitted by the debtors to the applicant in December 1989, had disclosed such an indebtedness. The applicant makes other complaints of omissions of material particulars within the meaning of para. 222 (4) (b) but it is sufficient for present purposes to refer to the two I have mentioned, these being probably the most serious.

20. Counsel for the debtors said that on the authorities he did not seek to assert that there was no misleading information in the materials supplied to creditors. Rather, he relied upon sub-s. 222 (5) which he said gave the applicant the onus of showing that notwithstanding the misleading or inadequate information, it would be in the interests of creditors to set aside the composition under sub-s. 222 (4). Sub-section 222 (5) is in the following terms:

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

21. Counsel for the applicant cited Re Beames; Ex parte Beneficial Finance Corporation Ltd [1985] FCA 191; (1985) 7 FCR 216 at 230, for the proposition that it is sufficient for the Court to be satisfied that in some respects creditors may be better off by the making of an order declaring the composition void. In this regard, counsel referred to a number of what he called "potential benefits". Counsel referred to the relief from the operation of s. 240, dealing with the release of the debtors from all provable debts. He pointed also to the failure of any of the funds mentioned in the present composition to arrive from members of the family of the debtors, and to the practical utility of an order on the present application as making it unnecessary for there to be a special resolution pursuant to s. 241 terminating the composition.

22. I have already referred to the Statement of Assets and Liabilities which was submitted by the debtors to the applicant in December 1989. This disclosed a real estate investment known as "Rodeo Plaza", said to be valued at $6m, and in which the debtors had a one-third share in the net equity of $4m. Mr O'Brien has conducted further inquiries upon the subject, and was cross-examined on the topic by counsel for the debtors. It is sufficient for the purposes of this judgment to indicate that I accept the submission of counsel for the applicant that this is a topic which may well merit further examination as to the existence of an asset available to creditors.

23. Further, the evidence includes an ordinary bill of sale, under the applicable New South Wales legislation, dated 22 December 1989, between Mr and Mrs Gibbons as mortgagors, and the mother of Mrs Gibbons, Mrs E.G. Campbell, as mortgagee. The date, 22 December 1989, was a little over six months before the commission by the debtors of their acts of bankruptcy on 26 June 1990. In this instrument, the debtors are stated as residing at the premises 2D Tarrant Avenue, Bellevue Hill, a suburb of Sydney, and the subject of the security is set out in an inventory of the furniture and chattels at these premises. The security is stated as having been given in consideration of an advance by Mrs Campbell to the debtors of $190,000, with the principal to be repaid on 22 December 1994 and to bear interest in the meantime at the rate of 20% per annum. There is annexed to an affidavit by Mr O'Brien copies of instruments issued by Commercial Union Assurance Company of Australia Limited on 20 March 1989 and 21 June 1990, in favour of Mr and Mrs Gibbons indicating an insurance in the sum of $254,200 of the contents of the premises at 2D Tarrant Avenue, Bellevue Hill. On 20 April 1990, the policy was endorsed to delete a diamond ring previously insured for $63,860.

24. Mr O'Brien agreed in cross-examination that it was at present a difficult market to sell personal chattels which were, in effect, luxury items. Nevertheless, I accept the submission of counsel for the applicant that there may be an advantage to creditors in an opportunity to deal with questions arising from the bill of sale dated 22 December 1989, including the existence of consideration and the purposes of those involved in the transaction and the effect of the transaction.

25. It follows that had it been necessary to do so, I would have rested my decision upon sub-s. 222 (4) in addition to sub-s. 222 (2). The applicant, as I have indicated, also relied upon s. 239, but in the light of the conclusions I have reached, it is not necessary to deal with that ground of attack upon the composition.

26. Accordingly, pursuant to sub-s. 222 (2) of the Act, the Court will declare void the composition accepted on 18 July 1990 at a concurrent meeting of creditors of the debtors, on the ground that the composition was not accepted by a special resolution as required by s. 204 of the Act. Further, the Court will order that the estates of Andrew George Stanley Gibbons and Susanne Patricia Gibbons be sequestrated. I will hear the parties on the question of cost of the application filed 1 August 1990. Otherwise, the application will be dismissed.