Gee v Schmutter [1971] HCA 6; (1971) 123 CLR 503 (12 March 1971)

HIGH COURT OF AUSTRALIA

GEE v. SCHMUTTER [1971] HCA 6; (1971) 123 CLR 503

Bankruptcy

High Court of Australia
Barwick C.J.(1), McTiernan(2) and Windeyer(3) JJ

CATCHWORDS

Bankruptcy - Deed of arrangement - Deed of assignment - Whether mutually exclusive - Whether deed containing assignment can be deed of arrangement - Composition - Bankruptcy Act 1966 (Cth), ss. 187 (1)*, 213 (1)**.

HEARING

Melbourne, 1970, October 13; 1971, March 12. 12:3:1971
APPEAL from the Federal Court of Bankruptcy.

DECISION

1971, March 12.
The following written judgments were delivered:-
BARWICK C.J. On 19th November 1969 Francis John Schmutter, the respondent, (Cth) (the Act) and styled a deed of arrangement to which Maxwell George Gee, the appellant, was the other party. The deed was executed pursuant to a special resolution passed at a meeting of the respondent's creditors in accordance with s. 194 of the Act. By the deed the appellant was appointed trustee to whom the respondent conveyed and assigned "all his divisible property within the meaning of Pt X of the Bankruptcy Act 1966 upon trust to deal with the same in accordance with this Deed of Arrangement". Certain of the respondent's assets were scheduled to the deed and the appellant was required to realize these assets as soon as possible. The deed contained no express provision as to the balance of the "divisible property". Its terms provided that the respondent should continue to operate his business of a haulage contractor under the control of the appellant and a committee of inspection. All sums of money received by the respondent from such business less all operating expenses, such personal expenses as the trustee might in his unfettered discretion allow to be paid by the respondent and less a weekly allowance which might be fixed by the trustee and varied by him from week to week, were to be paid to the appellant. (at p502)

2. The deed provided that the appellant should apply the moneys received by him:

(a) Firstly, in the payment of any moneys with respect to any
road tax then due and owing to the State of New South
Wales by the respondent and any fines owing with respect
to the non-payment of such road tax.
(b) Secondly, subject to the resolution of the committee of
inspection, in payment of any other road tax and of any
fines with respect to non-payment of road tax whether
incurred before or after the execution of the deed.
(c) Thirdly, in the payment of the costs and disbursements of
the deed and the administration thereof including the
remuneration of the appellant.
(d) Fourthly, in payment of any debts of the respondent which
are preferential under the Bankruptcy Act 1966.
(e) Fifthly, in the payment proportionately to unsecured
non-preferential
creditors of the amounts owing to them
respectively
on 30th October 1969.
(f) Lastly, in repaying any surplus to the respondent. (at p505)

3. Upon payment in full of the amount of the road tax and fines and of all the debts of the respondent the appellant was to re-transfer and assign to the respondent all his unrealized assets. (at p505)

4. Finally it was provided by the deed that no proceedings should be commenced or continued in any court against the respondent with respect to any debt which would have been provable in his bankruptcy had he been made bankrupt on 30th October 1969 until notice should be given to the respondent as provided in the deed. (at p505)

5. At the time the deed was executed the respondent had incurred a substantial liability to the State of New South Wales for road maintenance charges and fines, for non-payment of which he was liable to be imprisoned. This liability did not give rise to a debt provable in bankruptcy. Apparently the creditors were prepared to resolve upon the execution of the deed to enable the respondent to carry on his business and so that they might have access to the proceeds thereof as well as to his realizable assets. (at p505)

6. At a time when it appeared that the appellant was about to receive sufficient money to pay the creditors in full as well as the amount of the road traffic taxes and fines, doubts were raised as to the course which the appellant should pursue. The appellant thereupon applied to the Federal Court of Bankruptcy under s. 134 (4) of the Act for direction in respect of:

(1) whether he was empowered under the deed to continue to receive moneys from the respondent being the proceeds of

his business as a haulage contractor;
(2) whether he was empowered to pay out of the moneys in hand the road

traffic fines imposed on the respondent ; and
(3) such further or other directions as the Court may deem fit to give him. (at p505)

7. On this application coming before the Court of Bankruptcy it decided that the deed was not a deed of arrangement within the meaning of the relevant provisions of the Act but a deed of assignment and as such void on the ground that it was not substantially in accordance with the form provided in the Fourth Schedule of the Act for such a deed. Consequently the Court made no order on the appellant's application for directions. (at p506)

8. The appellant by leave of the Court of Bankruptcy has appealed to this Court to reverse the finding of that Court. Although duly served with the notice of appeal, the respondent did not appear on the hearing of the appeal. We were greatly assisted however by counsel for the appellant. (at p506)

9. Part X of the Act which commences with s. 187 provides for arrangements with creditors without sequestration. It is convenient at the outset to refer to some of the definitions contained in this Part :

"187. - (1) 'Composition' means an arrangement by which
the creditors of a debtor -
(a) agree to accept payment of the debts due to
them by instalments ; or
(b) agree to accept, in full satisfaction of the debts
due to them, less than the full amount of those
debts whether in the form of money or other
property and whether by instalments or otherwise;"
. . . . . .
"'deed of arrangement' means a deed (not being a
deed of assignment or a deed in respect of a composition)
providing for the arrangement of the affairs of
a debtor with a view to the payment, in whole or in
part, of his debts;
'deed of assignment' means a deed by which a
debtor assigns all his divisible property for the
benefit of his creditors;
'divisible property', in relation to a deed of assignment
executed by a debtor, means the property,
other than property acquired by the debtor after
the day on which he executed the deed, that would
be divisible amongst his creditors under Part VI.
if he had become a bankrupt on that day." (at p506)

10. Section 213 (1) provides that a deed of assignment or a deed of arrangement executed after the commencement of the Act is void unless entered into in accordance with Pt X of the Act and complies with the requirements of that Part. Section 214 (2) provides that a deed of assignment shall provide for the assignment of all divisible property of the debtor for the benefit of the creditors and be substantially in accordance with the form in the Fourth Schedule to the Act. That form provides for the conveyance and assignment to the trustee of all the debtor's divisible property upon trust to deal with the same in accordance with Pt X of the Act for the benefit of the creditors of the debtor and as to any surplus after paying in full the several debts and liabilities of the debtor together with costs and charges on trust for the debtor. So far as a deed of assignment is concerned the requirements of the Act are to be found in s. 214 (2). There are significant differences in the provisions of the Act with respect to deeds of assignment and those with respect to deeds of arrangement but I do not think it is necessary to refer to them having regard to the view I have formed as to the relevant character of the deed in this case. (at p507)

11. As I have said, the Court of Bankruptcy decided that the deed was a deed of assignment. The steps in reasoning taken by the Court of Bankruptcy can be seen in the following quotations from the reasons of the learned Judge in Bankruptcy for reaching the conclusion at which the Court arrived :

"By cl. 3 of the deed in the present case, the debtor assigns
all his divisible property ; the clause does not expressly say
that it is assigned for the benefit of the creditors but it is
assigned on trust to be dealt with in accordance with the deed
and, having regard to the terms of the deed as a whole, it
cannot be doubted that the assignment is for the benefit of
the creditors. Apparently, therefore, the deed is a deed of
assignment within the definition in s. 187 (1) and if this is so it
cannot be a deed of arrangement.
If the deed is a deed of assignment, however, it does not
comply with the requirements of Pt X. . . . A deed which
. . . provides for the debtor to carry on his business under
supervision and to make payments out of his income to the
trustee cannot be said to be substantially in accordance with
the form prescribed by the Fourth Schedule. If the present
deed is a deed of assignment it is therefore void." (at p507)

12. Having regard to the differences in the provisions of the Act with respect to deeds of assignment and deeds of arrangement his Honour said:

"It was not intended that the creditors might by combining
in a deed a provision for the assignment of all the divisible
property of the debtor with provisions for the control of his
affairs and for the making of contributions to his estate, have
the benefit of the assignment but avoid the consequences which
the Act attaches to the execution of a deed of assignment.
The intention of Pt X was that an assignment by a debtor of
all his divisible property for the benefit of his creditors must
be substantially in accordance with the prescribed form so
that, if valid, it amounts to a deed of assignment and has the
operation which Pt X gives to such a deed." (at p507)

13. In rejecting the appellant's application for directions the Court of Bankruptcy was in substance holding that because the deed was void (s. 213 (1)), the appellant was not relevantly a trustee entitled under the Act to make an application for directions. It did not exercise the power given by s. 222 to declare the deed to be void : indeed no application in that connexion was made. (at p508)

14. An important question thus arises affecting the ability of a debtor and his creditors to make effective arrangements of the debtor's affairs without sequestration. Basically the question is whether the definitions in the Act of a deed of assignment and of a deed of arrangement are so mutually exclusive that any deed, whatever the substantial purpose evidenced by its other provisions, which contains an assignment of the "divisible property" of the debtor as a means of providing or of securing the payment of the debtor's debts or of some part of them is necessarily a deed of assignment within the meaning of the Act. (at p508)

15. The appellant's first submission was that the definition of "deed of assignment" did not mean that any deed which contained a provision by which the divisible property was assigned to a trustee must be a deed of assignment. The appellant contested the view that a deed containing such an assignment under which the creditors were intended to benefit by payment of their debts in whole or in part, was necessarily a deed of assignment within the meaning of the Act. In this connexion it was pointed out that cl. 3 of the deed did not say expressly that the assignment to a trustee of divisible property was "for the benefit of his creditors". On the contrary, the assignment of the divisible property was upon trust to be dealt with in accordance with the terms of the deed which were clearly not the same as the provisions of Pt X. (at p508)

16. The appellant's second argument was that in any case the deed could not be a deed said to be solely for the benefit of the creditors because the Crown in right of the State of New South Wales had no right to prove in bankruptcy and was not relevantly a creditor. The deed did provide for the payment of money to the State of New South Wales. Further, it was submitted that, in any case, the assignment was not an assignment "for the benefit of creditors" within the meaning of the definition in the Act. (at p508)

17. It would appear that the deed was entered into in accordance with Pt X. See ss. 187, 188, 194 and 216. The question is whether it is a deed of arrangement and complies with the requirements of that Part. The deed clearly satisfies these provisions. But, nonetheless, is it a deed of arrangement as defined? Having regard to the definition of a deed of arrangement which I have set out, the first question to be resolved is whether the deed is a deed of assignment as defined. (at p508)

18. A deed of assignment to satisfy the terms of the Act must contain an assignment to a trustee of the debtor's divisible property to be held upon trust to be dealt with in accordance with Pt X of the Act. But though a deed of assignment must contain such a transfer of the divisible property, I find no provision in the Act which provides that a deed of arrangement may not be so regarded if it contains an assignment of the debtor's divisible property. Indeed a close examination of Pt X rather suggests that the Act contemplates that a deed of arrangement may deal with the divisible property and contain an assignment of it. Upon the signature of an authority in accordance with s. 188 and the consent of the trustee to exercise the powers that authority purports to give, the property of the debtor - which by definition is "the divisible property" of the debtor, see s. 190 (5) - becomes subject to control under Div. 2 of Pt X until one of a number of specified contingencies occurs : s. 189 (1). The trustee may take control of such property and deal with it by reason of and in accordance with s. 190 (2) and (3). The creditors at the meeting for which ss. 194-203 provide may resolve upon one of the courses described in s. 204 (1). The courses are, it seems to me, mutually exclusive. Thus the creditors may end the control under the division of the debtor's divisible property by simply so resolving : see ss. 189 (1) (a) and 204 (1) (a). But a resolution that either a deed of assignment, or a deed of arrangement be executed will bring the control under the division to an end : s. 189 (1). In the case of a deed of assignment the divisible property must be assigned to the trustee under the deed. The Act specifies the trusts on which the property will be held. The debtor's interest therein is at an end except as to a surplus. He is immediately released from his debts. (at p509)

19. On the other hand, the provisions to be included in the deed of arrangement are to be specified by the creditors : s. 204 (2). This section puts no express limitation on what may thus be specified. But as already indicated, the execution of the deed of arrangement terminates the control under the division of the divisible property of the debtor. It would seem to me to be strange that the deed of arrangement could contain no provision as to the title to or the use of the debtor's property pending the carrying out of the agreed arrangement of the debtor's affairs. Clearly some such provisions must be capable of being made. For example, a provision to regulate the use by the debtor of the whole or part of the debtor's property could surely be included in the deed of arrangement. Why should there not be an assignment of the whole or of part of the debtor's property to the trustee upon trust that it be used in a particular way? Why should such use not extend to sale or disposal? I am unable to see any fundamental reason, derived from the Act or any policy it expresses, why a deed of arrangement may not contain an assignment of the divisible property of the debtor. Certainly, it does not seem to have been thought under earlier legislation that there was an incompatability with, or opposition to, principle in the presence of such an assignment in a deed of arrangement : see, for example, Re Galvin (1). (at p510)

20. But it is said that such an assignment cannot be for the benefit of the creditors for in that event the deed must be a deed of assignment. With every respect to the Court of Bankruptcy, I do not think that it follows that the divisible property is assigned "for the benefit of the creditors" within the meaning of the definition of "deed of assignment" in s. 187 (1) because the creditors are to benefit if the provisions of the deed are fulfilled. In my opinion, the sense of the expression "for the benefit of his creditors" in the definition of a deed of assignment, is that the substantial if not indeed the only operation of the deed is that, of its own force it commits the divisible property to the creditors and for their benefit alone subject only to the attainment of a surplus. Hence the need for the deed of assignment to conform to the form in the schedule which carries out the provisions of s. 214 (2). (at p510)

21. It follows that I am unable to accept the view of the Court of Bankruptcy that "it was not intended that the creditors might by combining in a deed a provision for the assignment of all the divisible property of the debtor with provisions for the control of his affairs and for making contribution to his estate, have the benefit of the assignment but avoid the consequences which the Act attaches to the execution of a deed of assignment". A deed of arrangement is an alternative to a deed of assignment which itself operates as a release of the debtor's debts (s. 230 (1)). I cannot see that the Act, or any policy which it expresses, is offended by an arrangement such as that contained in the deed in this case, even though the creditors thereby obtain access both to the divisible property and to the continuing efforts of the debtor. It is of course a matter for the debtor and the creditors as to whether or not such an arrangement is acceptable. There is to my mind no reason, grounded on public considerations, to deny efficacy to a deed such as the present, representing, as it seems to me, a sensible arrangement of benefit both to the debtor and to his creditors. (at p510)

22. Therefore I am unable to accept the view that simply because the deed contained an assignment to the trustee of the respondent's divisible property it was a deed of assignment as defined nor can I accept the view that because the creditors will benefit by the execution of the deed it is necessarily a deed whereby the divisible property is assigned for the benefit of his creditors within the meaning of the Act. I would therefore conclude that the deed, which did not purport to be a deed of assignment, as defined, was not in truth a deed of assignment within the meaning of the Act. Had it been such a deed of assignment, it seems to me, it would not have complied with requirements of the Act and the Fourth Schedule and for that reason would not have been effective as a deed of assignment within Pt X of the Act. (at p511)

23. The next question, it seems to me, is whether the deed was a deed of composition. Such a deed is an arrangement by which there is an agreement to accept payment of the debts by instalments or payment of a lesser sum than the full amount of the debts due. Section 234 provides that "except in so far as the deed provides for the release of the debtor from his debts, the deed of arrangement does not operate to release the debtor from any of his debts". Section 187 (1) in defining "deed of arrangement" contemplates that such a deed may be made with a view to the payment in whole or in part of the debtor's debts. There is no doubt therefore that a deed of arrangement within Pt X of the Act may contain a provision for the release of the debtor from his debts. It seems to me that a deed of arrangement which either provides for the release of the debtor or for the payment of only part of the amount due by him to his creditors as part of the arrangement it embodies is not for that reason a composition within the meaning of the Act. In my opinion, a deed of composition must itself contain an agreement to accept part payment of the debts due in satisfaction. In any case the deed in this case contemplated the payment in full of the debts and contained neither an agreement by the creditors to accept part only of the debts due to them nor a release of the debtor in any circumstances short of payment in full of the amount due. I therefore conclude that this deed was not a deed of composition. (at p511)

24. The deed was in its nature apart from any particular statutory provisions, a deed of arrangement. It was arranging the affairs of the debtor so that on the one hand he could avoid imprisonment and bankruptcy, pay some amounts to the Crown which was not relevantly a creditor and carry on his business with a view to the payment in full of his creditors. I cannot find anything in the provisions of the deed which would deny it the character of a deed of arrangement. Nor can I find any provision of the Act which would preclude it being effective as such a deed. (at p512)

25. It may be that the provisions of the deed are in some respects in conflict with the provisions of the Act. In this connexion attention is called to the provisions of the deed which purport to regulate the circumstances in which an action or proceeding may be commenced or continued by a creditor for the recovery of his debt and also to the circumstance that it might possibly be contended that the provision for the payment of the road maintenance charges disturbs the statutory priority of the payment of debts. But, in my opinion, the deed is not necessarily void because of these provisions. It may be that any such provision being in conflict with the statute may be inoperative or it may be that because of provisions of that kind the Court of Bankruptcy in the particular circumstances of the case may be disposed in the exercise of a discretion to declare the deed void ; though I should think that unless the deed is an attempt as a whole to displace the terms of the Act as distinct from making a severable provision which is inconsistent with the provisions of the Act there should in general be no necessity to declare it void. It should be sufficient that particular provisions, being unable to overrule the Act, are inoperative. However, these matters do not presently fall for decision. (at p512)

26. In my opinion, the Court of Bankruptcy was in error in holding that this deed was a deed of assignment and that it could not be a deed of arrangement within the meaning of Pt X of the Act. Consequently, in my opinion, that Court was in error in refusing to make an order on the appellant's application for directions. The order of the Court of Bankruptcy ought to be set aside. The application could be remitted to that Court for appropriate directions to be given on the footing that the deed is a valid deed of arrangement and the appellant as its trustee a proper applicant for directions. But in the circumstances, this Court ought, in my opinion, to give the necessary directions. In my opinion, the appellant should be directed that:-

(i) The trustee is empowered under the deed of arrangement to
continue to receive moneys from the debtor being the
proceeds of the business carried on by the debtor as a haulage
contractor until such time as he has in hand sufficient to
pay the then remaining balance of the road taxes, road
traffic fines, provable debts of the respondent and the costs
ordered to be paid out of the moneys in hand.
(ii) The trustee is empowered to pay out of the moneys in hand
the road traffic fines imposed on the debtor. (at p513)

McTIERNAN J. I agree with the judgment and the reasons of the Chief Justice. (at p513)

WINDEYER J. I agree that, for the reasons given by the Chief Justice, this appeal should be allowed. I do not think that the deed embodied an invalid arrangement between the debtor and his creditors. The trustee is I consider empowered to receive moneys from the debtor in accordance with the deed until such time as the obligations therein referred to have been discharged. I have had some doubts as to the effect of the provision as to the amounts owing to unsecured creditors which are said "Fifthly" to be "paid proportionately". But the operation of that provision is not a question that affects the validity of the deed. (at p513)

ORDER

Appeal allowed. Order of the Federal Court of Bankruptcy set aside and in lieu thereof order that the following directions be given to the applicant

(i) The trustee is empowered under the deed of arrangement
to continue to receive moneys from the debtor
being the proceeds of the business carried on by the
debtor as a haulage contractor until such time as he
has in hand sufficient to pay the then remaining
balance of the road taxes, road traffic fines, provable
debts of the respondent and the costs ordered to be
paid out of the moneys in hand.
(ii) The trustee is empowered to pay out of the moneys in
hand the road traffic fines imposed on the debtor.

Order that the costs of the applicant as between solicitor and client of the application and hearing before the Court of Bankruptcy including reserved costs and costs of this appeal be paid out of the moneys the subject of the trust of the deed of arrangement.