Re Alan Bernard Coates and Lynette Carol Coates Ex Parte: J and L Fransen Builders Pty Ltd [1993] FCA 14 (3 February 1993)

FEDERAL COURT OF AUSTRALIA

Re: ALAN BERNARD COATES and LYNETTE CAROL COATES
Ex Parte: J and L FRANSEN BUILDERS PTY LTD
Nos. NX54 and NX53 of 1992
FED No. 34
Number of pages - 14
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
BANKRUPTCY DIVISION
Wilcox J.(1)

CATCHWORDS

Bankruptcy - Schemes of arrangement - Application by creditor for orders declaring deeds of arrangement void on grounds of omission of material particulars and inclusion of incorrect material particulars - Further applications for orders terminating deeds - Omission of material particulars and inclusion of incorrect material particulars established - Substantiality of these defects - Public interest - Unsatisfactoriness of situation where trustee is not aware of causes of debtor's apparent loss of $20 million - Failure of trustee to discover existence of parcel of land held in names of debtors - Ignorance of trustee regarding affairs of three companies owned by debtors - Failure of trustee to address possibility of contribution to estate from after-acquired income - Public interest in the accountability of debtors and their trustees.

Bankruptcy Act 1966, ss.222, 236.

HEARING

SYDNEY, 3 February 1993
3:2:1993

Counsel for the Applicant: J K Chippindall

Solicitors for the Applicant: Collin Biggers and Paisley

Counsel for the Respondent: A C Hogg

Solicitors for the Respondent: Simon Beverly and Associates Matter No. N X54

ORDER

The Court orders that:
1. It be declared that the deed of arrangement agreed to be entered

into between Alan Bernard Coates and Max Christopher Donelly is
void.
2. The deed of arrangement be terminated.
3. The estate of Alan Bernard Coates be sequestrated.
4. The debtor pay the applicant's costs of this proceeding.

Matter No. N X53
The Court orders that:

1. It be declared that the deed of arrangement agreed to be entered
into between Lynette Carol Coates and Max Christopher Donelly is
void.
2. The deed of arrangement be terminated.
3. The estate of Lynette Carol Coates be sequestrated.
4. The debtor pay the applicant's costs of this proceeding.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

WILCOX J: Before the Court are applications made in respect of the estates of two debtors: Alan Bernard Coates and Lynette Carol Coates. The debtors are husband and wife and the two matters have been heard together. Each application seeks an order under s.222 of the Bankruptcy Act 1966 declaring void a deed of arrangement entered into by each of the relevant debtors with his or her creditors pursuant to a resolution passed at a meeting of creditors held on 1 April 1992; and also an order under s.236 of the Act terminating the deed. The particular provision upon which the applicant relies is s.236(1)(c).

2. I do not think it is necessary for me to rehearse in detail the facts of the cases; they are within a relatively small compass. Nor is it necessary to go to all of the matters raised by counsel, many of which were discussed between counsel and myself during the course of their submissions. In my view the application in respect of each section should succeed.

3. In relation to s.222 Mr Chippindall, on behalf of the applicant, relies on both subs.(1) and subs.(4). Subsection (1) provides relevantly:

"Where there is a doubt, on a specific ground, whether a deed of
arrangement was entered into in accordance with this Part, or complies
with the requirements of this Part ... a creditor may apply to the court
for an order under subsection (2)."

4. Subsection (2) authorises the Court subject to the section to make an order declaring the deed void on the grounds specified in the application.

5. Subsection (3) provides that "... The Court shall not make an order declaring a deed to be void on the ground that it does not comply with the requirements of this part if the deed complies substantially with those requirements."

6. Accordingly, two matters are relevant in determining whether to exercise the power under s.222(1). The first question is whether there is a doubt whether the deed was entered into in accordance with the Part of the Act (i.e. Part X) or complies with its requirements. Secondly, the Court must be satisfied that the non-compliance is substantial.

7. In the present case two matters have been addressed in reliance upon s.222(1). The first matter is that the meeting was called for a date earlier than the requisite period of fourteen days. The notice of the meeting is dated 18 March, so it seems to me that the earliest date upon which the meeting could have been held consistently with the requirement of a fourteen day notice would be 3 April. In fact, as I have said, the meeting was held on 1 April.

8. Secondly, the applicants contend that the two major creditors, the Commonwealth Trading Bank and the Advance Bank, did not comply prior to the meeting with the requirements of the Act in relation to valuation of their securities. I think that this contention is correct, even though, ultimately, they were not allowed to prove for the whole of their debts but only for amounts said to represent the unsecured portion of them. Accordingly, it seems to me that there has been a failure to comply with the requirements of Part X in respect of the calling and the conduct of the meeting.

9. It is another question whether the degree of non-compliance was substantial. So far as time is concerned, in some cases a difference of two days may be important. However, in the present case it appears that there was a good attendance of creditors. There is no reason to believe the short notice made any difference to the attendance at the meeting or the events which ensued at it. The present applicant knew of the meeting. It was represented at the meeting by a director, Mr J. Fransen. He opposed the proposed deed. It has not been suggested that there was any actual prejudice because of the short notice.

10. In relation to the two secured creditors, this might have been a matter of importance had the margin been small; but the resolution to approve the deed was passed overwhelmingly. It is important that there be strict compliance with the requirements of the Act in regard to proof of debts. The accountant who convened and chaired the meeting, the now trustee Mr Donnelly, should have insisted upon proofs of debt complying with the Act. But there is no reason to believe that his omission affected the result. Accordingly, if the case rested only on subs.(1), it would not in my view succeed.

11. However, subs.(4) is also relied upon. That subsection provides that, where the Court on the application inter alia of a creditor is satisfied that the debtor has given false or misleading information in answer to a question put to him with respect to any of his conduct or examinal affairs at the meeting of creditors at which the resolution was passed, or has omitted a material particular from the statement of his affairs, it may make an order declaring the deed of composition to be void. There is no basis for suggesting that either of the debtors gave false or misleading information in response to a question at the meeting. But it is established that there was an omission in a material particular from the statement of each debtor's affairs, and also the inclusion of an incorrect and material particular in each statement.

12. The matter of omission is the omission of a parcel of real estate, identified in the evidence as lot 8, deposited plan 256516. It appears that this land is held unencumbered by the two debtors. It is a comparatively small parcel, apparently abutting a larger parcel disclosed in the statement of affairs and subject to a mortgage to the Commonwealth Bank. It is impossible to say how much the small parcel is worth. It may have only a nominal value. On the other hand, particularly having regard to its strategic position relative to the larger parcel, it may be possible for the trustee to realise a substantial sum in respect of lot 8. The parcel of land was not only not disclosed by the debtors. Worryingly, its existence was not known to the trustee until today. Mr Donnelly gave evidence that, in these cases, he followed his usual practice and obtained a search of the purchasers' index at the Land Titles Office. But he was not able to point to any search. If there was such a search, it was remarkably deficient in failing to pick up the reference to the small parcel of land, despite the fact that it is registered in the correctly stated names of both debtors.

13. The second matter arising under subs.(4) is the inclusion in the statement of affairs of a number of debts which, at least prima facie, appear not to be owing by the debtors. I refer to two claims by barristers, who apparently appeared in litigation on behalf of the debtors, or perhaps one of their companies. I do not understand how these claims could be provable in bankruptcy. There is also a claim made by a firm of quantity surveyors. The supporting invoice shows the creditor as being Baese Pty Limited, a company controlled by Mr and Mrs Coates. The amount of these claims is small. Their exclusion would have made no difference to the fate of the resolution to approve the Part X deed. Nonetheless, it seems impossible to categorise them as immaterial.

14. It follows from the above that subs.(4) is satisfied. However, subs.(5) says that the Court shall not make an order declaring a deed to be void on a ground specified in subs.(4) unless it is satisfied that it would be in the interest of the creditors to do so. The wording of that subsection is very close to the requirement contained in s. 236(2) of the Act in relation to terminating a deed. By that subsection, the Court is instructed not to make an order terminating a deed on the ground specified in para.(a) or (c) of subs.(1) unless it is satisfied that it would be in the interest of the creditors to do so.

15. As I have mentioned, Mr Chippindall relies on para (c), requiring the Court to be satisfied that, for any other reason, the deed of arrangement ought to be terminated. It seems to me that the fate of these applications has to be determined by reference to the general situation; having regard to the interest of the creditors, but considering that matter in the context of principles laid down in this Court in relation to the need for accountability in the administration of the bankruptcy law and the desirability of trustees obtaining information upon relevant matters.

16. I have in mind decisions such as that of Morling J. in Re John Barrymore Brennan; Ex parte Stokes (Australasia) Ltd (unreported 31 May 1988). In that case his Honour was pressed by a submission that the amount that would be available to creditors under a sequestration order would be quite insubstantial, when compared with the total amount owing to the creditors, and was more or less a token. This is the present case. The debts of the two debtors come to some $11.853 million. The moneys presently available to the trustee seem to come to a total of about $26,000; most of this coming being a contribution by the father of the female debtor. In Brennan Morling J. rejected the submission that there would be no dividend beyond a token. He referred to the possibility that the debtor might be required to make contributions to his estate. That is a relevant matter in the present case. He also referred to the justification of creditors for thinking:

"... that it was to their advantage that the extent of the debtors
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 section 81 of the Bankruptcy Act."

17. Similar views were expressed by Burchett J. in Re John Codrington; ex parte Don McKay Tourist and Charter Pty Limited (1 September 1989 not reported). During the course of that judgment his Honour referred to what he had said in an earlier case about it being in the interest of creditors for there to be a full opportunity for inquiry, even though there was no assurance that inquiry will uncover further assets. In that case, like the present, the amount available to creditors' under a composition was very small relative to the total debts.

18. It seems to me that there are four reasons which, at least cumulatively, justify the conclusion that it would be in the interests of the creditors - and I add of the community generally - for sequestration orders to be made in the present cases.

19. In the first place, it was claimed by Mr Coates at the meeting of creditors that "a few years ago" his net worth was about $8 million. As I have mentioned, the deficiency claimed by him at the present time is some $11.853 million. On these figures he has suffered a reduction in net worth of nearly $20 million. Apparently Mrs Coates has suffered similarly. The only explanation Mr Coates gave of this change of fortune is "the slump in the property market". During the course of his evidence I asked Mr Donnelly if he could indicate the nature of the slump and the type of property involved and indicate how it was that $20 million came to be lost. The only information he was able to give me in response to this inquiry was to refer to a particular property at Watsons Bay; apparently the property out of which arose the claim of the present applicant, a building contractor. The loss in respect of that property seems to be in the order of $2 million - $2.5 million. Mr Donnelly was unable to explain the balance of the loss. It is a most unsatisfactory situation when not even the trustee, under two deeds of arrangement of estates, is able to explain, in even general terms, the cause of the debtors' loss of some $20 million.

20. Secondly, it appears that there are three family companies in which the shares are held wholly by the two debtors. The proposal put to the creditors referred to only two of these companies. It provided that the shares in those companies be retained by the debtors. Counsel said that each of the companies is insolvent, but there is no evidence as to the position. There is evidence that one of the companies, Baese Pty Limited, holds title to two parcels of land at Kungalla in the Shire of Ulmarra, but each property is mortgaged to the Australia and New Zealand Banking Group Limited. The bank has indicated that the value of its security is less than its debt; so there may be no residual value in these properties. But the important point is that Mr Donnelly does not know the position. Nor do the creditors, at least insofar as there was an opportunity of learning about the matter at the meeting of creditors.

21. In relation to the other company, Coates Signs Pty Limited, there is no information as to what assets it might have.

22. I do not entertain great optimism that either of these companies will be found to have a surplus of assets over liabilities; but I simply do not know. I think it is unsatisfactory that the only two shareholders in the companies should have their estates administered by a trustee who has no idea whatever about the companies' position.

23. The third company, Silkyard Pty Limited, is completely unknown to Mr Donnelly. There is no information before me with regard to it.

24. The third matter refers back to a point made by Morling J. in Brennan; namely the possibility of a contribution from future income. Neither Mr nor Mrs Coates gave evidence before me. I have not had the opportunity of seeing them. Mr Donnelly told me, in response to a question, that he judged Mr Coates to be in his mid 40s. He is apparently in good health. Mr Donnelly understands that he is employed at a salary of about $1,000 per week. None of this information has been checked; but prima facie it indicates that Mr Coates has some ability to make a contribution towards his estate. The deed of arrangement contained no offer of a contribution out of future income. The matter of contribution has not been investigated by the trustee. I appreciate that a contribution would make little difference to a deficiency of $11.853 million; but it is important that insolvents be encouraged to make contributions where they can, even if the outcome in dividend terms is small.

25. Finally, and I regret having to say this, I am less than impressed by the way in which the estates have been administered by Mr Donnelly. Again and again, during the course of his evidence, Mr Donnelly was unable to provide information about matters which he should have had readily available. On a number of occasions he said that he would have to resort to his file. This response was reasonable enough. But, even after he was handed his file and went through it, he frequently could not provide the requested information. In each case the inquiry related to a topic about which the trustee ought to have been informed. I was unable to resist the feeling that these estates have been dealt with by Mr Donnelly on the basis that their position is quite hopeless; that there is a huge deficiency; that the major creditors, the banks, have written off their debts and are not interested in pursuing them further; and that, so far as Mr Donnelly is concerned, the object of the exercise is simply to comply with the necessary statutory requirements and complete the matter as quickly as possible.

26. I do not wish to be misunderstood. I am not for one moment suggesting that a trustee should undertake unnecessary work or incur unnecessary costs; indeed, quite the contrary. Great care must be taken to ensure that costs are kept under control, particularly in a case like this where money is tight. But, whatever the attitude of the major creditors, a trustee has an obligation to the totality of the creditors, to the community as a whole and to his own self-respect to get properly on top of the administration of any estate committed to his care. It seems to me elementary that Mr Donnelly should have ascertained why it was that there was such a spectacular deficiency and how these two people came to lose $20 million in a few years. This would not necessarily have required litigation or, perhaps, even a formal examination under s.81 of the Act. It might have been enough for Mr Donnelly to have access to the insolvents' records of property dealings, supplemented with information readily procurable from the various mortgagees. It is extremely likely that, within a relatively short period and without incurring great cost, Mr Donnelly could have been in a position to satisfy an inquirer such as Mr Fransen where the money had gone.

27. I should say that, according to his evidence, Mr Fransen asked this question at the creditors' meeting but could not get an answer. Apparently no other creditors supported his inquiry. The matter was allowed to drop. Mr Fransen's inquiry is not recorded in the minutes of the meeting, but the evidence was given this morning before Mr Donnelly was called and he did not contradict it. There is no reason to doubt its accuracy.

28. Secondly, I find it unsatisfactory, as I have already hinted, that a parcel of land, however small and unimportant, has come to light only as a result of these applications. I have serious reservations as to whether a purchaser's index search was carried out. I would have thought that, if so, the search would have been produced when the matter was raised with Mr Donnelly by Mr Chippindall. If the search was carried out, it may not have been properly examined. Mr Donnelly had very little idea about the properties involved. He seems to have taken the view that they would all be gobbled up by the mortgages and, accordingly, he need not concern himself with them.

29. Other aspects of the administration have already been referred to: the admission, at least for voting purposes, of proofs of debt which seem clearly misconceived and the sloppiness in regard to arrangements for the meeting.

30. I think it would be in the interests of creditors for there to be a fresh look at these estates. That consideration supports the view that sequestration orders ought to be made and the Official Receiver take over the estates' administration.

31. In relation to the exercise of the Court's discretionary powers, it is worth repeating what was said by Lockhart J., speaking for a Full Court, in Chiragakis v Deputy Commissioner of Taxation (1986) 68 ALR 527 at 535.

"Proceedings in bankruptcy or under Part X involve the public interest
as well as the direct financial interests of creditors. The events of
1980 and the affairs of the appellant do call for inquiry, especially as
the appellant's own statement of affairs reveals very few assets of his
own notwithstanding his large liabilities and considerable
income-earning capacity."

32. Those words can be applied directly to the present case. It may be that, at the end of any investigation, no new assets will have been unearthed and it will have been found that there have been no settlements, preferences or offences against the Bankruptcy Act. But, even if that is the result of investigations by the Official Receiver, the public interest will have been served by bringing the facts out into the open. Although Mr Fransen's company may not be any wealthier, he will, at least, be better informed as to the reason for the financial collapse of these two people which has cost the company over $1/2 million.

33. I think the appropriate course is for me to make orders under each of the provisions referred to. I propose to make a declaration pursuant to s.222 of the Bankruptcy Act in each matter that the deed of arrangement agreed to be entered into between - and I will insert the name of the relevant debtor - and Max Christopher Donnelly is void on the ground that the debts disclosed in his or her statement of affairs omitted material particulars and that the statement of affairs included incorrect material particulars. In each case I will further order that the deed of arrangement be terminated. In each case I make a sequestration order against the estate of the debtor, and I order that the debtor pay the costs of the proceedings.