Bendigo and Adelaide Bank Limited v Clout

33 Mr Clout convened a meeting of creditors on Monday, 26 November 2013 to consider the proposal. It is convenient to refer to the meeting as a single meeting, as the meetings in relation to each bankrupt estate were held consecutively. Those present at the meeting were Mr Clout, Mr Kennedy (a member of his staff), Mr and Mrs Mouglalis, two inspectors from the Australian Financial Services Authority and a representative from Supreme Shower Screens, a creditor in each of the three estates. Mr Clout held proxies from 15 creditors and Mr Kennedy a proxy from one other. 34 The meeting proceeded in a conventional way but was then adjourned to 3 December 2013. The minutes of the meeting record the reason for the adjournment as follows: The President advised that owing to the failure of numerous creditors claiming in the estate to provide sufficient supporting documents to evidence their claims, the meeting would be adjourned until at the same time and location 7 days from the date of the meeting, namely, 3 December 2013. 35 Mr Clout prepared for circulation to creditors a letter dated 26 November 2013 informing them of the adjournment of the meeting to Tuesday, 3 December 2013 at 10.00 am. 36 At the adjourned meeting on 3 December 2013, the only persons physically present were Mr Clout, Mr Kennedy, Mr and Mrs Mouglalis and a representative from Supreme Shower Screens. Mr Clout held proxies for 17 creditors and Mr Kennedy a proxy for one. Again, it is convenient to refer to the meeting as a single meeting. 37 The special resolution to accept the composition proposal in respect of the joint bankrupt estates was carried. Eighty three percent by number and 78% by value voted in favour whereas 17% by number and 22% by value voted against. 38 The special resolution in relation to the bankrupt estate of Mr Mouglalis was passed. Eighty percent by number and 97% by value voted in favour with 20% by number and 3% by value voting against. 39 In relation to the bankrupt estate of Mrs Mouglalis, the special resolution was carried. Seventy nine percent by number and 77% by value voted in favour and 21% by number and 23% by value voted against. 40 On 20 December 2013, Mr Clout prepared for circulation to creditors a letter informing them of the result of the meeting on 3 December 2013 and of his intention to declare a first and final dividend. He again requested completed proofs of debt. 41 On 13 March 2014, Mr Clout prepared for circulation to creditors a notice of declaration of dividends for each of the three estates in which they were entitled to a dividend and sent a dividend cheque. 42 Bendigo Bank's evidence was to the effect that it did not receive any of the communications from Mr Clout. In particular, it did not receive the correspondence from Mr Clout dated 22 May 2012, 22 November 2012, 15 November 2013, 26 November 2013 and 20 December 2013. For this reason, Bendigo Bank did not have the opportunity to lodge a proof of debt or to participate in the meetings on 26 November and 3 December 2013.

Was the composition proposal calculated to benefit creditors generally? 43 Bendigo Bank contended that the terms of the composition were not calculated to benefit creditors generally so that this threshold matter was established. I accept that submission. 44 Any benefit to the creditors generally was trifling, as the amount available for distribution in each of the bankrupt estates was approximately one-thousandth of the indebtedness in each case. There is no reasonable basis upon which it could be said that such trifling benefits to such a small number of creditors could be said to be for the benefit of creditors generally. 45 Many of the creditors voting in favour of the composition had indicated that they would not seek to participate in a distribution of the funds available. Plainly, they were not voting in their own interests or in the interests of creditors generally. They must have been exercising their votes in furtherance of the interests of Mr and Mrs Mouglalis: cf Loane v Gold Ribbon (Accountants) Pty Ltd [2004] FCA 537 at [3], [20]; New Age Constructions (NSW) Pty Ltd v Etlis [2013] FCA 884 at [65], [81]. 46 Several of the authorities concerning compositions for amounts which are grossly disproportionate to the bankrupt's indebtedness were reveiwed by Cowdroy J in Westpac Banking Corporation v Hingston (No 2) [2010] FCA 1116 at [69]-[82]. I respectfully adopt that review, without repeating it in these reasons. The authorities indicate that the gross inadequacy of the amount of the composition when a bankrupt has incurred substantial debts may often be sufficient by itself to warrant the setting aside of a composition or, at least, may provide good reason to conclude that the case is better dealt with by bankruptcy with the possibility for public examination of the bankrupt pursuant to s 81 of the Bankruptcy Act. That is especially so when the Court is satisfied of the existence of other factors also pointing in favour of the setting aside of the composition. 47 Mr Clout recognised that the composition would not benefit creditors generally as, in his report to creditors of 15 November 2013, he said: As a result of the quantum of the contribution proposed, were the Proposal accepted the majority number (as distinct from value) are not likely to receive any dividend. Furthermore, the return to those creditors who will receive a dividend is of such insignificance that I cannot suggest acceptance of the Proposal would benefit creditors generally. Continued investigation into the Bankrupts' affairs and income may offer a greater return to creditors. 48 Mr Clout maintained that view of the composition in both his evidence and submissions at trial. Counsel for Mr and Mrs Mouglalis did not contend that the composition should be regarded as calculated to benefit the creditors generally. 49 The finding that the terms of the agreements were not calculated to benefit creditors generally is sufficient by itself to enliven the discretion under s 222(1) to set them aside.

Were the terms of the composition proposal unreasonable? 50 In relation to this threshold requirement, Bendigo Bank relied upon the same matters as it did for the submission that the composition was not calculated to benefit creditors generally, namely, the miniscule amounts available for distribution to creditors. 51 Mr Clout's own recommendation against acceptance of the proposed composition is pertinent in this respect as well. 52 The focus of this ground in s 222(1)(d) is on the terms of the agreement itself and the circumstances existing at the time the agreement was made: Khera v National Australia Bank at 146, 148. A derisory amount for distribution may not necessarily make the terms of a composition unreasonable. That would be so if it is manifest that no further amounts can be obtained. That suggests that a consideration of matters bearing upon the reasonableness of the amount available for distribution is pertinent. This in turn raises consideration of the completeness of the trustee's investigation and of the information available at the time of the meeting as to the bankrupt's affairs. That is the matter to which I turn next.

Investigation-related factors 53 Bendigo Bank submitted that Mr Clout's investigation of the affairs of Mr and Mrs Mouglalis had, in a number of significant respects, been incomplete. Mr Clout acknowledged the incompleteness of his investigation. He attributed this to a lack of resources. Mr Clout had, in effect, made a similar acknowledgement in the s 73 report dated 15 November 2013. Mr Clout informed creditors: To date my investigations into the affairs of the Bankrupts have been constrained by the limited resources available to the Bankrupt Estates. As discussed in my previous Report to Creditors, a piece of real property which was not disclosed in Mr Mouglalis' Statement of Affairs was located through my investigations. I note that the Bankrupt has indicated that omission was accidental. Further investigations may be warranted into the collapse of the Golden Edges Homes corporate group and associated transactions with the Bankrupts' Superannuation Fund. Should the Proposal be allowed no creditor will be able to fund further investigations into the Bankrupts' affairs by my office. Later in the report, Mr Clout said that "continued investigations into the Bankrupts' affairs and income may offer a greater return to creditors". 54 In his first report to creditors dated 22 November 2012, Mr Clout had reported that "the Bankrupts' books and records have not been received in full". He went onto record that a number of the records of the personal affairs of Mr and Mrs Mouglalis had been stored on the computer of Golden Edge Homes which had been seized by its liquidator. In relation to the potential voidable transactions which may allow recovery by the Bankrupts' estates, Mr Clout reported that, while his investigations to that date were incomplete, his preliminary view was that any recoveries were unlikely. 55 Some of the submissions of Bendigo Bank were to the effect that Mr Clout's investigations had not only been incomplete, but had been deficient. While Mr Clout accepted the former, he disputed the latter. 56 In my opinion, it is not necessary in the context of the present application to express a view as to whether Mr Clout's discharge of his duties as trustee of the bankrupt estates fell short of the standard of care to be expected of the ordinarily careful and competent insolvency trustee. It is sufficient to record my satisfaction that Mr Clout's investigations were, as at 3 December 2013, incomplete in a number of respects. My reasons for that conclusion follow. 57 Normally, an assessment of the incompleteness of a trustee's investigation of a bankrupt's affairs would require consideration of the steps actually undertaken. Given Mr Clout's acknowledgement of the incompleteness of his investigation, I think it preferable to focus instead on those matters on which Bendigo Bank relied.

The companies in liquidation 58 In his first report to creditors on 22 November 2012, Mr Clout reported that not only Golden Edge Homes Pty Ltd, but other companies in the "Golden Edge Homes corporate group", had been placed into liquidation before his appointment as trustee. This was incorrect as only Golden Edge Homes Pty Ltd was being wound up. 59 Mr Clout said that he had proceeded in his trusteeship on the basis that all Golden Edge companies had been placed into liquidation. He also said that he had investigated each member of the group with a view to identifying any asset of the bankrupts' estates. It is reasonable to infer, and I so find, that Mr Clout's investigation of the other companies in the group had been coloured by his view that they too were in liquidation so that he made less inquiry about these companies than would otherwise have been the case.

Other companies 60 In her Statement of Affairs, Mrs Mouglalis disclosed that, in addition to Golden Edge Homes Pty Ltd, she had been involved in Golden Edge Properties Pty Ltd and Golden Edge Homes (NSW) Pty Ltd. Mr Clout acknowledged that he had not investigated either entity in any significant way. 61 In his Statement of Affairs, Mr Mouglalis disclosed his involvement with Oreol Pty Ltd. Mr Clout acknowledged that he had not received financial statements for that company.

Bankrupts' books and records 62 In his report of 22 May 2012, Mr Clout recorded that he had been told by Mr and Mrs Mouglalis that the books and records for their personal affairs were stored on the computer of Golden Edge Homes which had been seized by the liquidator. He acknowledged that his office file contained no record of any request to the liquidator for copies of the personal records of Mr and Mrs Mouglalis. However, Mr Clout said that a staff member "would have" contacted the liquidator (a member of Hall Chadwick) to obtain access to the server and had been told that there was "nothing personal" on the computer. There is no indication that Mr Clout made any further enquiry of the liquidator, or for that matter, of Mr and Mrs Mouglalis in the light of that information.

Interview of Mr and Mrs Mouglalis 63 Mr Clout interviewed Mr and Mrs Mouglalis on 31 May 2012 at their home (described as "rather opulent"). He made no note of the interview, nor any file note. As I understand it, this was Mr Clout's only interview of the bankrupts.

Partnership and family trust 64 Mr and Mrs Mouglalis disclosed in their respective Statements of Affairs that they had a "land ownership partnership" named "Golden Edge Homes (Special Projects)". Mr Clout acknowledged that his office had not investigated the partnership. I note however, that Mr Clout did have a partnership taxation return for the 2008 financial year for the partnership. This return indicated that, in the 2008 financial year, the partnership had a total business income of $4.28 million, total expenses of $4.28 million and a net income of $105,000. The apparent scale of the partnership business suggests by itself that it was a matter warranting investigation. Mr Clout also had financial statements for the partnership for the 2009 financial year. 65 Mr Clout also acknowledged that, as at 3 December 2013, no one in his office had obtained the financial statements relating to the Family Trust of Mr and Mrs Mouglalis. I note however, that he had taxation returns for the Family Trust for the 2008 and 2009 financial years, and that his file included financial statements for the Trust for the 2009 financial year.

Superannuation 66 Mr Clout agreed that the superannuation arrangements of Mr and Mrs Mouglalis were relevant. He did not, however, ascertain that until May 2011 (three months before its liquidation), Golden Edge Homes Pty Ltd had been the trustee of the superannuation fund, entitled "The Golden Edge Homes Superannuation Fund", in which Mr and Mrs Mouglalis had interests. A new company, Nejam Pty Ltd, had then commenced as trustee of the superannuation fund. 67 Mr Clout had financial statements and taxation returns for the Golden Edge Homes Superannuation Fund for the financial years ending on 30 June 2008, 2009 and 2010, but none thereafter. The accounts showed that, as at 30 June 2010, the balance of the account of Mrs Mouglalis was $867,000. However, in her Statement of Affairs initially dated 7 June 2012, Mrs Mouglalis said that the balance of her account was $48,000. Mrs Mouglalis' Statement of Affairs also indicated that she had withdrawn $200,000 from her superannuation account in 2010. Although Mr Clout acknowledged that the difference of $619,000 could be divisible property available to creditors, he did not (with one qualification) know what Mrs Mouglalis had done with that money. The qualification is that Mrs Mouglalis said that she had withdrawn the $200,000 so as to lend it to Golden Edge Homes. 68 I permitted counsel for Mr and Mrs Mouglalis to re-open their case at the end of the final submissions to tender a document which seemed to indicate that the balance of the superannuation account of Mrs Mouglalis had remained at approximately $800,000 at both 30 June 2011 and 30 June 2012. This may cast some doubt on the reliability of the statements of Mrs Mouglalis in her Statement of Affairs, but it does not undermine the submission of Bendigo Bank that the information then available to Mr Clout suggested a sensible line of investigation which he had not pursued.

Bank accounts 69 Although Mr and Mrs Mouglalis or NAB had disclosed the existence of three bank accounts, Mr Clout had obtained bank statements for only one (joint) account and that only for the period 17 March 2012 to 16 May 2013. He had not obtained bank statements for the other accounts or for the joint account in respect of the period prior to 17 March 2012 (the sequestration orders were made on 16 May 2012). It may be that the bank statements which Mr Clout did not have were recorded on the computer of Golden Edge Homes, but Mr Clout did not ask its liquidator to produce copies of the statements. Nor did he seek copies of the account statements from NAB, although NAB had informed him by email dated 22 May 2012 that copies of the statements were available on payment of their fee. 70 An examination of the bank accounts would, at the least, have been useful in identifying any potentially voidable transactions as well as potentially giving rise to other lines of enquiry. Mr Clout acknowledged that without the bank statements it had been difficult for him to make that assessment. He also acknowledged that he had been looking for voidable transactions in only the two year period before the bankruptcies when it had been open to him to consider a five year period (s 120(1)). 71 Mr Clout did not have bank statements for any of the accounts of the companies controlled by the Mouglalises, their partnership, their Family Trust nor their superannuation funds for any period at all.

Financial statements 72 Mr Clout did not have financial statements for any of the companies controlled by Mr and Mrs Mouglalis, nor their partnership, their Family Trust or their superannuation fund of any year after 30 June 2010.

Source of the monies for the composition 73 Mr Clout was informed that the $50,000 for the composition was contributed by Mr Conry. He learnt that Mr Conry was Mr Mouglalis' employer. Mr Conry's company had also lodged a proof of debt. Despite these matters, Mr Clout made no investigation of whether the $50,000 for the composition was being provided by Mr and Mrs Mouglalis but through Mr Conry.

Enquiries of others 74 Mr and Mrs Mouglalis had provided Mr Clout with only limited records relating to their personal affairs. Although Mr Clout knew that Mr and Mrs Mouglalis were indebted for substantial amounts to both Westpac and Bendigo Bank and, accordingly, that each was likely to have information about their financial affairs, he did not ask either to provide relevant financial records. This was so even though he had been retained by Westpac to assist in realising the real estate securing the debts of Mr and Mrs Mouglalis to it. His explanation was that he had expected the banks, voluntarily, to provide the information to him.

Investigations 75 Mr Clout acknowledged that his time costs records showed relatively few entries for the charge category "investigation" after May 2012. In particular, he acknowledged that the time costs entries for "investigation" did not include an entry relating to the consideration in his office of documents received from the bankrupts' accountant. He said however, that he had reviewed the material "in a superficial way" with Mr Kennedy because he had identified any issues requiring further investigation. 76 Counsel for Bendigo Bank attached considerable significance to this evidence. I take into account Mr Clout's explanation that work by way of investigation may have been incorrectly coded in the charge category "assets". Nevertheless, and even allowing for that explanation, Mr Clout's investigation does not appear to have been extensive. As an example, Mr Clout acknowledged that the work in process records indicate that he had spent only 18 minutes reviewing some 400 pages of material received from the accountant of Mr and Mrs Mouglalis. I have the firm impression that Mr Clout concluded relatively early in his trusteeship that there were unlikely to be recoveries for creditors and that this influenced his approach to investigations.

General 77 Counsel for Bendigo Bank was critical of other aspects of Mr Clout's investigation. Given the shortcomings referred to in the findings above, and my other findings, it is not necessary to make a detailed assessment of these other matters. 78 I note again that I have not considered it necessary to consider whether Mr Clout's investigation was an inadequate discharge of his function. Mr Clout had himself informed creditors that he regarded his investigations as being incomplete and had pointed out to them some shortcomings in the material provided to him. 79 It is sufficient for me to express my satisfaction that Bendigo Bank has established that Mr Clout's investigations were, in material respects, incomplete. 80 Counsel for Bendigo Bank submitted that in this circumstance, it is in the public interest, as well as the interests of creditors, for a more complete investigation to be undertaken. I accept that submission.

Process-related factors 81 The principal matter on which Bendigo Bank relied in this category was the lack of notice to it of the bankruptcies of Mr and Mrs Mouglalis and of the meetings at which the composition proposal was to be considered. This led to a good deal of examination in the evidence of the means by which Mr Clout sent the reports and notices in question, and of the systems within Bendigo Bank for the receipt and processing of reports and notification of that kind. In the view I take of the matter, it is not strictly speaking necessary to make findings about these matters. What is more significant is that Mr Clout's notices and reports, if sent to and received by Bendigo Bank, did not come to the attention of the responsible officers within the Bank. That is the explanation for Bendigo Bank not having responded to Mr Clout or having sought to be represented at the meetings held on 26 November and 3 December 2013. 82 I am satisfied that Bendigo Bank's failure to attend the meetings on 26 November and 3 December 2013 was not intentional nor the result of carelessness by its officers with the relevant responsibility. That seems to me to be the particularly pertinent circumstance, although the Bank's position would obviously be strengthened if it could show that the notices and reports had not been sent to it at all. I note that in Hingston (No 2), Cowdroy J at [98] regarded the inadvertence of Westpac's failure to attend a composition meeting of which it had admittedly had notice as being a consideration weighing in favour of the setting aside of the composition. 83 Nevertheless, given the energy which the parties gave at trial to the issue of whether the notices and reports had been sent or received, I will make findings of fact as to whether Mr Clout's office did give notice to Bendigo Bank so that Bendigo Bank's lack of awareness is attributable to failures within its own internal systems. 84 Each of Bendigo Bank and Mr Clout relied very much the systems in place in their respective offices for their contentions that Mr Clout's letters had not been received/had been posted, as the case may be. Before turning to the individual communications, it is appropriate to describe those systems.

Mr Clout's mailing systems 85 Mr Clout deposed to the means by which his office sent correspondence by post to creditors of a bankrupt estate in 2012. On occasion, this involved the use of a third party provider, Kwik Kopy, which was engaged to print and post materials to creditors. 86 Mr Clout described the usual practice by which his firm engaged Kwik Kopy to post materials to creditors of a bankrupt estate. A member of his office sent by email to Kwik Kopy the documents to be sent to creditors, a spreadsheet containing the names and addresses of each creditor and a request for a quotation for the cost of doing so. If that quotation was accepted, his staff member would instruct Kwik Kopy to print out and post the attached documents to each of the creditors listed. Kwik Kopy then confirmed to David Clout and Associates that it had completed the task and rendered its invoice. 87 In November 2013, David Clout and Associates engaged a different external provider, Faxmate, to send and receive facsimiles and emails. Mr Clout deposed to his firm's practice of sending to Faxmate an email containing the facsimile numbers or the email addresses of the recipients, together with the content of the communication and any enclosures to be sent with the facsimile or email. Faxmate would then send the communication to the named recipients. It was Faxmate's practice, if delivery of a facsimile or email to a recipient was unsuccessful, to send an email, automatically generated, to Mr Clout's firm informing it that the delivery had been unsuccessful.

Bendigo Bank's systems 88 Mr and Mrs Mouglalis were debtors of Bendigo Bank by reason of a loan made to them by ABL Nominees Pty Ltd in April 2009. This loan related to an investment by Mr and Mrs Mouglalis in Great Southern Limited. ABL Nominees made similar loans to many other investors. It referred to these collectively as the "Great Southern Loans". 89 On 1 December 2008, the business of Adelaide Bank Limited, including the Great Southern Loans, was transferred to Bendigo Bank. 90 Great Southern Limited failed. Bendigo Bank established a department with responsibility for recovering the outstanding Great Southern Loans from borrowers, namely, the Great Southern Department. It is based in the Adelaide premises of Bendigo Bank and not at the Bank's Head Office in Bendigo Victoria and is separate from the Collections Department, which deals with non-performing loans more generally. The Collections Department and the Great Southern Department are located next door to each other. The Great Southern Department handles all matters relating to Great Southern accounts, whether they are performing or otherwise. Some indication of the extent of the Great Southern Department's responsibility is indicated by the fact that, in September 2015, it was managing 2700-2800 debtors. 91 From at least 2010, the Great Southern Department had been responsible for the management of the account of Mr and Mrs Mouglalis and the pursuit of recovery from them. Bendigo Bank's "file" relating to Mr and Mrs Mouglalis is kept in the Great Southern Department and was so kept at material times in 2012, 2013 and 2014. 92 In order to facilitate the work of the Great Southern Department, Bendigo Bank established a data room known as the "e-room". This is not a physical space but an electronic "room". Any communications received by Bendigo Bank in relation to a Great Southern Loan borrower are scanned and saved into the borrower's file in the e-room for retention. This includes correspondence received by facsimile, email and post. 93 Mr Flamer-Smith was the Manager of the Legal and Resolution Section within the Great Southern Department. In that position he monitored, amongst other things, the insolvency appointments of Great Southern Loan borrowers. Mr Flamer-Smith gave evidence as to the systems established by Bendigo Bank in relation to the Great Southern Loans. His evidence on this topic was not seriously challenged and, in any event, I regarded his evidence as being honest and reliable. 94 Mr Flamer-Smith deposed, and I accept, that the e-room does not contain any record of correspondence from David Clout and Associates concerning the bankruptcies of Mr and Mrs Mouglalis before 25 September 2014. In particular, there is no record in the e-room of Mr Clout's correspondence of 22 May 2012, 22 November 2012, 15 November 2013, 26 November 2013 and 20 December 2013. The entries relating to correspondence from David Clout and Associates in the e-room on and after 25 September 2014 occurred because Mr Flamer-Smith became aware (on or shortly after 22 September 2014) that the Veda default listing for Mr and Mrs Mouglalis had been updated to "settled" and had then caused enquiries to be made. He first learnt of the bankruptcies of Mr and Mrs Mouglalis on or about 24 September 2014. 95 Mr Clout's evidence was to the effect that his correspondence in 2012 regarding Mr and Mrs Mouglalis had been sent to Bendigo Bank's postal address, namely, PO Box 480, Bendigo, Victoria 3552 by ordinary post, and his correspondence in 2013 to Bendigo Bank's facsimile number (08) 8300 6898 (the Facsimile Number). 96 Bendigo Bank led detailed evidence as to the manner of operation of its Adelaide mailroom and then evidence from Mr Flamer-Smith to the effect that he had been informed by Ms Pope, the Office Services Supervisor of the Bank in Bendigo, that the practices in the Adelaide mailroom were replicated in the Bendigo mailroom. 97 Mr Flowers, the Office Services Supervisor of the Adelaide mailroom, described the process by which ordinary mail is dealt with in the Adelaide office. Ordinary mail is delivered by Australia Post and sorted according to the addressee shown on the envelope by employees in the mailroom. If the mail is specifically addressed to an individual or a department within the Bank, the mailroom staff deliver it, unopened, to that addressee. If the mail does not have a specific addressee, mailroom staff open it in order to determine the appropriate department to which the mail is to be delivered. It is then delivered to that department. Mr Flowers said that any mail which relates to a bankruptcy is generally delivered to the Collections Department but any mail relating to Great Southern Limited borrowers or their insolvency to the Great Southern Department. The deliveries are effected by the physical transporting of the mail by trolley to the relevant department. 98 In relation to bankruptcies, Mr Flamer-Smith said that mail concerning a bankruptcy is as a matter of routine directed by the persons in the Bendigo mailroom to its Collections Department in Adelaide by means of a secure bag. When the Collections Department recognises that the bankruptcy relates to an outstanding Great Southern Loan, it sends the correspondence to the Great Southern Department. 99 Mr Flamer-Smith gave evidence of a hearsay nature as to the practices adopted in the Bendigo mailroom with respect to mail received there but which is properly directed to the Great Southern Department. That mail, once sorted, is placed in a separate secure bag and then sent to Adelaide. The same occurs with respect to mail properly directed to the Collections Department. 100 Mr Flamer-Smith deposed that the Facsimile Number was an operational facsimile number for Bendigo Bank in Adelaide in 2012 and 2013. He said the usual procedure was for facsimiles received at the Facsimile Number to be printed out and then, I infer, to be delivered to the relevant department within Bendigo Bank. 101 Mr Flamer-Smith deposed, and I accept, that he had made thorough searches of the records of Bendigo Bank, had made enquiries of the team members dealing with Great Southern Loan recoveries and had caused searches to be made of the e-room. He said that these had not revealed any record of Bendigo Bank receiving any of the documents in relation to the bankruptcies of Mr and Mrs Mouglalis said to have been sent by Mr Clout in 2012 and 2013. 102 Mr Flamer-Smith also caused a search to be made in the e-room of all correspondence and notices received by Bendigo Bank from David Clout and Associates generally. That search showed that, while in the period from 7 April 2011 until 4 July 2014, Bendigo Bank received correspondence and notices from Mr Clout on numerous occasions in relation to other debtors, it did not receive until 25 September 2014 any communication from him concerning Mr and Mrs Mouglalis. The correspondence commencing on that date had been in response to the Bank's own correspondence.

The 2012 correspondence 103 The first notification which Mr Clout said Bendigo Bank should have received was his letter of 22 May 2012. This was the letter pursuant to s 125 of the Bankruptcy Act. 104 Mr Clout said that the letter sent to financial institutions on 22 May 2012 was a standard form letter sent in all cases in which he was appointed as the trustee of a bankrupt estate. He said that, in accordance with the usual practice of his office, the letter was sent by various methods, including post, facsimile and email, to approximately 30 financial institutions included on an office master list. 105 Mr Clout deposed that the letter of 22 May 2012 was sent to Bendigo Bank's postal address, namely, PO Box 480, Bendigo, Victoria 3552, by ordinary post. His evidence did not make clear whether his office had sent the s 125 letters itself or whether it had used Kwik Kopy for the purpose. I had the impression that that there was an element of reconstruction in his evidence on this topic. Mr Clout did not produce the master list to verify that Bendigo Bank was included on it, nor the address shown for it on that list. 106 There is some support for Mr Clout's claim: the work in progress records of his office indicate that letters were sent to financial institutions on 22 May 2012 and one financial institution, NAB, did respond on the following day. On the other hand, Westpac, which should have received the same letter, did not produce, on subpoena requiring it to produce the communications it had received from Mr Clout's office relating to Mr and Mrs Mouglalis, the letter of 16 May 2012 or, for that matter, the report to creditors dated 22 November 2012. Westpac did produce copies of Mr Clout's later correspondence. Bendigo Bank submitted that this supported the inference that there were inadequacies in the posting systems adopted by Mr Clout's office. 107 There were some shortcomings in the evidence of Bendigo Bank as well. It did not establish that a search had been made of the mail room at Bendigo Bank, did not establish details of the means by which mail staff in either Bendigo or Adelaide should recognise that a s 125 letter should be directed to the Collections Department or the Great Southern Department, and did not establish generally how it deals with letters sent pursuant to s 125 of the Bankruptcy Act. In particular, Mr Flamer-Smith's evidence did not indicate that correspondence of this kind came as a matter of routine to the Great Southern Department if the bankruptcy concerned a Great Southern borrower. 108 Although there are competing inferences available, I think it likely (and so find) that on 22 May 2012 Mr Clout's firm did send to a number of financial institutions, including Bendigo Bank, notice in standard form of the bankruptcy of the Mouglalis estate and a request for information pursuant to s 125 of the Bankruptcy Act. Mr Clout's evidence as to the system, his firm's work in progress records and the circumstance that Mr Clout received a response from one financial institution, NAB, on 23 May 2012, tends to confirm that this was so. Any failure of system must have occurred within Bendigo Bank. 109 The conclusion that the first report to creditors dated 22 November 2012 was sent to Bendigo Bank by Mr Clout's office can be reached with greater confidence. Mr Clout adduced office records indicating that Mr Kennedy forwarded the report to Kwik Kopy on 22 November 2012 together with a list of addressees which included Bendigo Bank and its post office box address in Bendigo. Mr Clout also produced Kwik Kopy's invoice for the performance of its work of the same date. 110 Apart from the fact that Westpac does not appear to have received the report of 22 November 2012 either, there is no indication that the first creditors' report was not provided to Bendigo Bank by Kwik Copy. This suggests that the reason why the first creditors' report did not come to the attention the Great Southern Department must have been a failure by Australia Post or, more likely, some internal failure of Bendigo Bank's own systems. I make that finding. Again, however, I find that the first creditors' report did not come to the attention of the Great Southern Department which had the responsibility for managing the recovery from Mr and Mrs Mouglalis. 111 Mr Clout deposed that his letters of 15 November 2013, 26 November 2013 and 20 December 2013 had been sent to creditors using the services of Faxmate. In Bendigo Bank's case, the facsimile number (08) 8300 6898 had been used in relation to each communication. 112 Mr Clout adduced evidence from a member of his staff, Ms Lucas, and from Mr Halliday, the principal of Faxmate, as to the implementation of the system for the dispatch of the correspondence in November and December 2013. I considered that each of Ms Lucas and Mr Halliday gave reliable evidence and I accept it. The evidence of Ms Lucas and Mr Halliday indicates that the system was implemented appropriately. No shortcoming in the system was identified in the cross-examination. 113 It is a curious coincidence that three communications sent on different dates but to the same facsimile number should not have been received and dealt with in accordance with Bendigo Bank's systems. It is possible however, that there was some technical and unidentified glitch which accounts for Bendigo Bank's non-receipt of the three facsimiles. 114 Counsel for Mr Clout drew attention to a memorandum to mortgage brokers from Bendigo Bank dated 12 November 2013 informing them that its lending operations team would, with effect from 15 November 2013, cease using the facsimile number 08 8300 6898 and commence using a new number. Counsel for Mr Clout submitted that this may indicate that, in some way, the facsimile number used by Mr Clout had been discontinued and hence explain why the three facsimiles had not been received. I think that explanation is improbable and do not accept it. The memorandum indicates only that one department within Bendigo Bank would be using a new facsimile number. Mr Flamer-Smith said that the Facsimile Number continued to be used with respect to other departments and, in particular, for facsimiles coming to the Great Southern Department. 115 Given the evidence of Ms Lucas and Mr Halliday, I am not prepared to find that the three facsimiles in November and December 2013 were not sent by Faxmate to Bendigo Bank even though a reason for their non-receipt by Bendigo Bank has not been identified. I find that the non-receipt of these documents by Bendigo Bank was a not attributable to any shortcoming by Mr Clout's office.

The effect had Bendigo Bank participated in the 3 December 2013 meeting 116 Counsel for Mr and Mrs Mouglalis submitted, in effect, that even had Bendigo Bank participated in the meeting of 3 December 2013, it would have had no practical effect. That was so, he submitted, because it should be concluded that Mr Clout would have admitted Bendigo Bank's claimed debt for a nominal value of one dollar only, with the effect that its vote could not have affected the outcome of any of the resolutions. 117 Counsel reasoned as follows. In 2010, many investors affected by the collapse of Great Southern Limited had commenced proceedings in the Supreme Court of Victoria seeking orders which would have with the effect, amongst other things, that Bendigo Bank could not enforce recovery of the loans which ABL Nominees had made to investors in Great Southern Limited. It is not necessary for present purposes to be more particular than that. The proceedings were group proceedings and comprised a number of distinct groups. Mr and Mrs Mouglalis were members of one group. The trial in the action before Croft J occupied some 90 (non-consecutive) sitting days and concluded on 24 October 2013. As at the date of the adjourned meeting, 3 December 2013, judgment was still reserved. Ultimately, the various claims were compromised and the compromise approved by Croft J: Clarke (as trustee of the Clarke Family Trust) v Great Southern Finance Pty Ltd (Receivers and Managers Appointed) (in liq) [2014] VSC 516. 118 Counsel for Mr and Mrs Mouglalis submitted that in these circumstances it would not have been open to Bendigo Bank as at 3 December 2013 to take action to enforce its claim against Mr and Mrs Mouglalis. Mr Flamer-Smith accepted that any attempt by Bendigo Bank, as at 3 December 2013, to enforce its claim against Mr and Mrs Mouglalis while the proceedings in the Supreme Court of Victoria were current is likely to have been regarded as an abuse of process. That being so, the submission of Mr and Mrs Mouglalis was that Mr Clout could have admitted Bendigo Bank's claim in the vote for one dollar only and that that amount would have been insufficient to cause a different outcome for any of the resolutions. 119 Counsel for Mr and Mrs Mouglalis did not articulate the basis upon which, in the circumstances above described, Mr Clout could properly have admitted Bendigo Bank's claim for the nominal amount of one dollar only. 120 In one of his affidavits containing his evidence in chief, Mr Clout accepted that participation by Bendigo Bank in the meeting on 3 December 2013 would have led to the composition proposals being defeated. He deposed: If the Applicant had submitted a proof of debt in respect of the Bankrupt Estates which was adjudicated on by me and accepted, and assuming that neither the liquidators of Golden Edge Homes or Westpac did not submit a proof of debt and vote in favour of the Composition Proposal, the Composition Proposal voted on at the Adjourned Meeting of Creditors would have failed. Although, the majority requirement would have been met in respect of the number of creditors who voted for the Composition Proposal, the value of creditors voting in favour of the Composition Proposal would not have been sufficient for it to pass. 121 In cross-examination by counsel for Mr and Mrs Mouglalis, Mr Clout modified that position: Q: [I]f the applicant bank had advised you at the section 73 composition … and you were aware that there was a dispute that had not been concluded associated with the debt for Mouglalis what would you have done? A: I would have obviously requested further information in relation to the dispute. And had the issue been that the outcome of that was subject to a court case I would treat it as a contingent liability and admit it for a dollar for voting purposes on the basis that the decision for - as to whether that was [a proved] debt to rank is subject to some future outcome. 122 In cross-examination by counsel for Bendigo Bank, Mr Clout said, initially, that if he had been told of litigation concerning the Bank's claim against Mr and Mrs Mouglalis, he would have admitted the Bank as a creditor, but only for one dollar. Later he said that, before reducing the Bank's claim debt of $1.4 million to one dollar, he would have sought definite evidence that the Bank was not able at that time to pursue the debt and that its recovery depended upon a future contingency. However, when reminded of his treatment of the claim of Bendigo Bank in his trusteeship of other bankrupts in analogous circumstances, Mr Clout appeared to accept that he would not have reduced Bendigo Bank's claim to one dollar for voting purposes. Further, he accepted that a court's adjudication is not the kind of contingency on which he would have relied in order to admit a claimed debt for a nominal sum only. 123 In his final submissions, Mr Clout's counsel did not seek to maintain the claim that, had Bendigo Bank attended the meeting on 3 December 2013, its claim would have been admitted for a nominal amount only. Counsel submitted only that Mr Clout would have to consider Bendigo Bank's claim for a debt of $1.4 million on the material before him. He did not identify any rational basis upon which, on that consideration, Mr Clout could properly have admitted Bendigo Bank's claim for voting purposes for one dollar only. 124 I do not accept the submission made by counsel for Mr and Mrs Mouglalis as to the way in which Mr Clout would have admitted the claimed debt of Bendigo Bank. 125 I proceed on the basis that a creditor's entitlement to vote at the 3 December 2013 meeting was governed by s 64ZA of the Bankruptcy Act. Any question as to the entitlement of a creditor to vote was to be determined by Mr Clout as trustee: s 64ZA(8). See also Staples v Milner [1998] FCA 466; (1998) 83 FCR 203 at 205. Had Mr Clout been aware of the litigation in the Supreme Court of Victoria, he would have had to consider its significance for Bendigo Bank's entitlement to vote. Having regard to the circumstance that Croft J had reserved his decision on group actions after a trial extending over 90 days, it is difficult to discern any rational basis upon which Mr Clout could have determined that the Bank's claim was so uncertain that it should be admitted for the nominal amount of one dollar only. Counsel for Mr and Mrs Mouglalis did not identify such a basis. Mr Clout could, rationally, have considered that Bendigo Bank's ability to enforce the claim was subject to a contingency and he might, accordingly, have considered that its debt should be admitted for voting purposes for a reduced amount only. However, even if Mr Clout had admitted the debt for only a portion, say 50%, it is obvious that the vote by Bendigo Bank against the composition proposal would have prevented it succeeding.

Premier Timber and Trusses Pty Ltd 126 In their respective Statements of Affairs, each of Mr and Mrs Mouglalis disclosed an indebtedness to Premier Timber and Trusses Pty Ltd (Premier) in the sum of $102,084. Each of Mr and Mrs Mouglalis had provided personal guarantees to Premier in consideration of its supply of materials to Golden Edge Homes. 127 Premier provided a proxy to Mr Clout in respect of the composition proposals and directed him to vote against the composition. At the meeting of 26 November 2013, Mr Clout admitted Premier's claim but for one dollar only. His reasoning was that Premier had not provided a proof of debt nor any evidence of the bankrupts' indebtedness. 128 Ms Lucas from Mr Clout's office wrote to Premier on 26 November saying (relevantly): Please be advised that your claim was not sufficiently particularised in that you did not provide a proof of debt form to substantiate your claim against the Bankrupt Estates. Please complete and return the Proof of Debt form with supporting documentation to substantiate your claim prior to the adjourned meetings. 129 Premier posted a proof of debt to Mr Clout's office on 29 November 2013. It was received by David Clout and Associates on the morning of 3 December 2013. Counsel for Mr Clout accepted that Premier had thereby provided the particulars required by s 64D of the Bankruptcy Act. 130 The proof of debt was brought to Mr Clout's attention during the course of the s 73 meeting. He maintained the position that the claim should be admitted for one dollar only. This was because Premier had not provided supporting documentation and had not supplied a statutory declaration in support of their claim. 131 Had Mr Clout admitted the Premier claim for its full amount, its vote would have meant that the composition would not have been accepted. 132 Bendigo Bank was critical of Mr Clout's decision in respect of the Premier claimed debt. It pointed out that Premier's proof of debt was supported by a declaration from its managing director made after reference to the penalties for which s 263(1)(d) of the Bankruptcy Act provides for a false declaration. Counsel submitted that, in this circumstance, it was immaterial that Premier had not supplied a statutory declaration. 133 Bendigo Bank also submitted that Mr Clout could easily have had Mr and Mrs Mouglalis, who were present at the adjourned meeting, confirm their indebtedness to Premier for $102,084. Each had done so previously in their respective Statements of Affairs. Given that it was known that Premier had directed Mr Clout to vote against the composition proposals, an admission by Mr and Mrs Mouglalis of the debt would in the circumstances have been an admission against their interest. Mr Clout made no such enquiry of Mr and Mrs Mouglalis. 134 I accept Bendigo Bank's submissions about these matters. It indicates how easily a slightly different exercise of discretionary judgment by Mr Clout would have resulted in the composition proposals not being accepted. 135 In fairness to Mr Clout, I record that he did admit, for the nominal sum of one dollar only, the claim of another creditor, Doorland, whose circumstances were analogous to those of Premier. In contrast to Premier, Doorland (which claimed a debt of $19,244) had directed its proxy to vote in favour of the composition proposals.

Admission of the claims of other creditors 136 Bendigo Bank was also critical of Mr Clout admitting for voting purposes the claims of several persons who said that they had lent small amounts in cash to Mr and Mrs Mouglalis. There was little supporting documentation for their claims but several had provided statutory declarations. In the view of the matter which I take, it is not necessary to make separate findings in relation to these creditors. I note however, that these persons were amongst those creditors voting in favour of the composition who had indicated that they did not wish to share in the proceeds.

Discretionary matters 137 Although counsel for Bendigo Bank opened with a submission that Mr Clout had been motivated by an improper purpose in seeking to have the composition approved, he did not press that submission in closing, nor did he pursue a submission to the effect that Mr Clout had acted dishonestly. 138 Counsel for Mr and Mrs Mouglalis submitted initially that Bendigo Bank's claim was time-barred. He referred to s 178 of the Bankruptcy Act. However, counsel later conceded that the time-bar in s 178(2) was inapplicable to Bendigo Bank's claim pursuant to ss 76B and 222(1) of the Bankruptcy Act, and it is not necessary to address it further. 139 Counsel for Mr and Mrs Mouglalis also conceded that neither of the time-bars in subs (4) and (7) in s 222 of the Bankruptcy Act applied to applications brought pursuant to subs (1). 140 The circumstance that the composition has been implemented fully does not mean that it cannot, or should not, be set aside: Re Kukler; ex parte National Australia Bank Ltd v Kukler [1998] FCA 1165; (1998) 87 FCR 352 at 365. 141 Mr Flamer-Smith deposed that, in the event that the Court does set aside the composition, Bendigo Bank will fund a new trustee to conduct investigations into the affairs of Mr and Mrs Mouglalis. It proposes to have Mr Mansfield of Deloitte Touche Tohmatsu appointed as trustee and is willing to provide him with funds up to $25,000 in order to conduct his investigations. It will also consider providing further funding taking into account the outcome of the initial investigations and any requests made by the new trustee. 142 It is true that with the possible exception of monies withdrawn from the superannuation account of Mrs Mouglalis, Bendigo Bank has not established the existence of undisclosed assets. Nor has it established the existence of particular means of recoveries by the bankrupt estates. Further, Mr and Mrs Mouglalis have provided evidence that their respective incomes are now modest: Mr Mouglalis receives a Government pension and Mrs Mouglalis works as a shop assistant. Their counsel submitted that in these circumstances there was no point in the composition being set aside as no further monies are likely to be available to creditors. 143 In my opinion, this Court should be circumspect in acting on such a submission. The existence and availability of potential sources of recovery is the very matter which has not been the subject of a complete investigation. The Court should be slow to accept a submission that no assets will be available when it is the very existence of such assets which Bendigo Bank wishes to have investigated properly. The Court should not, in effect, put itself in the position of discharging the trustee's function. 144 I note that there was no suggestion by counsel for Mr and Mrs Mouglalis that Bendigo Bank was pursuing the present application for an improper purpose.

Conclusion 145 For the reasons given above, I consider that Bendigo Bank has shown that the compositions should be set aside and that a new trustee should be appointed to investigate the bankrupt estates of Mr and Mrs Mouglalis. Orders to that effect will be made. Bendigo Bank is directed to bring in minutes of the orders which will be appropriate, including any consequential orders. I will hear from the parties as to costs. I certify that the preceding one hundred and forty-five (145) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White.