Bendigo and Adelaide Bank Limited v Clout - [2016] FCA 119 - FCA 2016 case summary — Zoe

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Bendigo and Adelaide Bank Limited v Clout

[2016] FCA 119

Federal Court of Australia|2016-02-18|Before: Mr P, Mr CJ, White J

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At a glance

Source facts

Court

Federal Court of Australia

Decision date

2016-02-18

Before

Mr P, Mr CJ, White J

Source

Original judgment source is linked above.

Judgment (26 paragraphs)

[1]

Background 21 Until August 2011, Golden Edge Homes Pty Ltd, which was owned and controlled by Mr and Mrs Mouglalis, conducted business as a building and property developer on the Gold Coast in Queensland. An order for its winding up was made on 2 August 2011. A person other than Mr Clout was appointed as liquidator. 22 Mr and Mrs Mouglalis attributed their bankruptcy some nine months later to adverse economic conditions in the building industry and to legal action taken against them. 23 Following his appointment as their trustee in bankruptcy, Mr Clout, on 22 May 2012, sent to a number of financial institutions a notice pursuant to s 125 of the Bankruptcy Act informing them of his appointment and seeking details of accounts held by Mr and Mrs Mouglalis as well as other information. 24 In their respective statements of affairs, each of Mr and Mrs Mouglalis disclosed assets of $120,000, but this was the value of shares they owned jointly in Great Southern Limited, which Mr Clout determined were of no value. In addition, Mr and Mrs Mouglalis disclosed two pieces of real estate but both were mortgaged to Westpac Banking Corporation (Westpac) which appointed a receiver to achieve their realisation. 25 Mr Mouglalis disclosed creditors of approximately $3.7 million as well as an indebtedness to Westpac totalling $7.3 million and to Bendigo Bank of $987,500. Mrs Mouglalis also disclosed creditors totalling approximately $3.7 million and the indebtedness to Westpac. For reasons not explained in the evidence, Mrs Mouglalis did not include the indebtedness to Bendigo Bank. Subsequent realisations of properties securing Westpac's debt reduced its indebtedness to $4.8 million. 26 Although there was no formal admission by Mr and Mrs Mouglalis that they were indebted to Bendigo Bank in the sum of $1.4 million, they did not contest that amount. Mr Clout admitted that Mr and Mrs Mouglalis were indebted to Bendigo Bank for $1.4 million. 27 In his first report to creditors, which was not until 22 November 2012, Mr Clout stated that, with the exception of household items, he had not identified any other assets and that neither bankrupt had an income from which a contribution to their bankrupt estates could be expected. Mr Clout went on to express the opinion that, on the information then available to him, he did not expect that any of the unsecured creditors would receive a dividend. He said that his investigations into the bankrupt estates were continuing and requested creditors to provide complete proofs of debt. 28 On 17 May 2013, Mr Clout received a proposal by Mr and Mrs Mouglalis for a composition pursuant to s 73 of the Bankruptcy Act. It contemplated that $50,000 would be paid within seven days of acceptance, and identified five "associated creditors" and 17 creditors who would forego a dividend if the proposal was accepted. 29 Mr Clout provided, as required by s 73(1A) of the Bankruptcy Act, a copy of the proposal to the Official Receiver at the Insolvency and Trustee Service (ITSA), who then sought further information. Mr Clout's office also raised matters with Mr and Mrs Mouglalis. This led to Mr and Mrs Mouglalis submitting a revised proposal in August 2013. By this time Mr Clout had agreed to cap his costs of calling the creditors' meetings to consider the proposal at $6,000. The remaining amount of $44,000 would be reduced further by amounts due to Mr Clout for his fees and outlays and by the realisation fee. 30 The revised proposal was subject to still further revision. The proposal in its final form was provided to Mr Clout on 1 November 2013. This contemplated a payment "through benefactors" of $50,000, of which $6,000 was to cover Mr Clout's costs of calling and conducting the meetings of creditors to consider the proposal. The balance, after deduction of other proper costs and fees, was to be apportioned pro-rata between the three bankrupt estates. This proposal listed 16 creditors who had agreed not to participate in a dividend in the event that it was accepted. 31 Mr Clout prepared a report to creditors dated 15 November 2013 in which he reported generally on the proposal. In particular, Mr Clout included his own view of the proposal, as required by s 73(2A) of the Bankruptcy Act. He said: I do not recommend that creditors accept the proposal given acceptance would not benefit creditors generally. 32 The report showed that, after deduction of fees, the effect of acceptance of the composition proposal would be as follows: Joint Estate Estate of Mr Mouglalis Estate of Mrs Mouglalis Pro-rata apportionment of $50,000 after apportionment to each estate of $2,000 for meeting costs $23,692 $12,372 $14,681 Total of trustee's fees, outlays and the realisation fee $16,538 $3,566 $7,013 Balance of funds available for distribution $7,154 $8,806 $7,668 Estimated unsecured creditors $7,853,476 $8,055,875 $7,906,693 Estimated dividend (cents in the dollar) $0.001 $0.001 $0.001

[2]

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.

[3]

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.

[5]

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.

[18]

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.

[20]

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.

[21]

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.

[22]

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.

[23]

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.

[25]

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.

Parties

Applicant/Plaintiff:

Bendigo and Adelaide Bank Limited

Respondent/Defendant:

Clout

Legislation Cited (2)

Bankruptcy Act 1996(Cth)ss 5, 64D, 64ZA, 73, 74, 76B, 81, 120, 125, 178, 222, 263

Bankruptcy Act 1966(Cth)

Cases Cited (14)

Statutory provisions 7 Section 73 permits compositions of a bankrupt's debts. It provides (relevantly): (1) Where a bankrupt desires to make a proposal to his or her creditors for: (a) a composition in satisfaction of his or her debts; or (b) a scheme of arrangement of his or her affairs; he or she may lodge with the trustee a proposal in writing signed by him or her setting out the terms of the proposed composition or scheme of arrangement and particulars of any sureties or securities forming part of the proposal. ... (2) The trustee shall call a meeting of creditors and shall send to each creditor before the meeting a copy of the proposal accompanied by a report on it. (2A) The report must indicate whether the proposal would benefit the bankrupt's creditors generally. ... (4) The creditors may, by special resolution, accept the proposal. (5) A creditor who has proved his or her debt may assent to or dissent from the proposal by written notice to that effect delivered to the trustee before the meeting or sent by post to the trustee and received by him or her before the meeting, and in that case the creditor shall, for the purposes of this Division, be deemed to have been present at the meeting and to have voted according to his or her assent or dissent. 8 The term "special resolution" used in subs (4) is defined in s 5(1) of the Bankruptcy Act to mean a resolution passed by at least 50% of the creditors by number and by at least 75% of the creditors by value voting on the resolution. 9 Section 74, by which the bankruptcy is annulled upon the passing of a special resolution, provides (relevantly): (5) Upon the passing of a special resolution at a meeting of creditors of a bankrupt under subsection 73(4), the bankruptcy is annulled, by force of this subsection, on the date on which the special resolution was passed. ... (6) Where a bankruptcy is annulled under this section, all sales and dispositions of property and payments duly made, and all acts done, by the trustee or any person acting under the authority of the trustee or the Court before the annulment shall be deemed to have been validly made or done but, subject to subsection (7), the property of the bankrupt still vested in the trustee vests in such person as the Court appoints or, in default of such an appointment, reverts to the bankrupt for all his or her estate or interest in it, on such terms and subject to such conditions (if any) as the Court orders. ... 10 Bendigo Bank applies under ss 76B and 222(1) of the Bankruptcy Act for the setting aside of the composition. Section 222, which is concerned with the setting aside of personal insolvency agreements, provides (relevantly): Setting aside on grounds of unreasonableness etc. (1) If a personal insolvency agreement is in force, the Court may, on application by: ... (c) a creditor; make an order setting the agreement aside if the Court is satisfied that: (d) the terms of the agreement are unreasonable or are not calculated to benefit the creditors generally; or (e) for any other reason, the agreement ought to be set aside. ... Ancillary orders (8) If the Court makes an order under subsection (1), (2) or (5), the Court may make such other orders as the Court thinks fit. (9) An order under subsection (8) may be an order directing a person to pay another person compensation of such amount as is specified in the order. This subsection does not limit subsection (8). Application for sequestration order (10) The trustee or a creditor may include in an application under subsection (1), (2) or (5) an application for a sequestration order against the estate of the debtor. If the Court, on the first-mentioned application, makes an order under this section setting the personal insolvency agreement aside, it may, if it thinks fit, immediately make the sequestration order sought. (11) The making of an application by the trustee or a creditor for a sequestration order under this section is taken, for the purposes of this Act, to be equivalent to the presentation of a creditor's petition against the debtor, but the provisions of subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application. ... 11 Section 76B makes s 222 applicable in the case of compositions pursuant to s 73. It provides: Sections 222 to 222D, 224 and 224A apply, with such modifications (if any) as are prescribed by the regulations, in relation to a composition or scheme of arrangement under this Division as if: (a) the composition or scheme were a personal insolvency agreement executed by the debtor; and (b) the trustee of the composition or scheme were the trustee of the personal insolvency agreement. 12 The effect is that, when a s 73 composition is in force, the Court may, on the application of (amongst others) a creditor, make an order setting aside the composition if the Court is satisfied that: (a) the terms of the agreement are unreasonable or are not calculated to benefit the creditors generally; or (b) for any other reason, the agreement ought to be set aside. There is authority that ground (b), despite its apparent width, is confined to circumstances which relate to the terms of the composition itself or to the circumstances in which the composition came to be accepted by the special resolution of creditors: Khera v National Australia Bank Ltd [1996] FCA 1050; (1996) 71 FCR 133 at 146 (Lockhart and Hill JJ). 13 Bendigo Bank relies upon all of the grounds in s 73 as enlivening the Court's discretion to set aside the composition. It contends that the terms of the composition were unreasonable, as they resulted in only derisory payments to the creditors; that the composition was not calculated to benefit the creditors generally; that Mr Clout's investigations were incomplete; and that in a number of respects the process leading to the passing of the special resolutions was inadequate. 14 At the trial, Bendigo Bank did not pursue claims which it had made pursuant to ss 76B, 178 and 222C of the Bankruptcy Act.

Principles 15 The principles relating to the exercise of the power pursuant to s 222(1) in circumstances like the present are settled. The Court must be satisfied that at least one of the circumstances listed in subs (1)(d) and (e) are shown to exist and, if so, that the discretion then vested in the Court may be exercised in favour of the applicant. Given the terms of subs (1)(e), there is an obvious overlap between the satisfaction of that threshold condition and the exercise of the discretion. 16 In Re Mills; Ex parte Lloyd's [1997] FCA 223; (1997) 73 FCR 551 at 559-61, Merkel J identified a number of factors which may be relevant to the exercise of the power under s 222(1): (a) whether, after considering all the circumstances of the case, a greater opportunity to inquire into the debtor's affairs and a more comprehensive explanation by the debtor is called for. If so, the interests of unsecured creditors and the public interest may be served by the investigation being conducted by a trustee in bankruptcy armed with the coercive powers for which the Act provides; (b) whether circumstances exist which "give cause for a suspicion" or to "arguable" causes of action which may benefit creditors; (c) whether the amount offered under the composition is little or trivial so that there may be no harm of any consequence to creditors if the composition is set aside if other factors warrant that course; (d) whether payments have been made pursuant to the composition; (e) whether the composition was passed, amongst other things, on the basis of a report to creditors as to the debtors' financial affairs which was misleading. 17 In Moran v Robertson [2012] FCA 371 at [17]-[18], Flick J added to these considerations the following: (a) whether creditors who had voted in favour of a composition had indicated that they would not participate in any distribution of assets and, to the extent that it is known, the reasons for their non-participation; (b) whether the trustee had recommended the acceptance or rejection of the proposed insolvency agreement and the factual basis for that recommendation, including whether there was any reasonable basis for a conclusion that the controlling trustee may not have acted with diligence or impartiality (see also Spicer v Wily [2000] FCA 1200 at [15]; (c) the relationship between the amount payable under the composition and the debts owing in the bankruptcy. 18 Counsel for Bendigo Bank submitted that the factors bearing upon the exercise of the power in s 222 could be grouped into three categories. First, "composition-related factors" such as the amount of payment to the unsecured creditors under the composition; whether the trustee considered the composition contrary to the interests of creditors; and whether the obligations under the composition have been carried out fully. 19 The second category are "investigation-related factors", such as whether the trustee's investigation (and, in particular, of related party transactions) was full and complete; whether a greater opportunity to investigate by the trustee, employing the coercive powers for which the Bankruptcy Act provides, may be beneficial to the unsecured creditors and in the public interest; and whether or not there is a possibility of financial benefit to the creditors in setting aside the composition and the trustee undertaking further investigations. 20 The third are "process-related factors" such as the closeness of the vote approving the composition; whether one or more creditors had been denied the opportunity of voting on the composition and, if so, the effect that had on the voting outcome; whether in all the circumstances the will of the creditors should be respected or not; whether the approval of the composition was colourable for any reason; whether the trustee's report was deficient or incomplete in any way; whether there were any false or misleading statements by the bankrupt in the statement of affairs, creditors' meetings or otherwise; and whether or not all relevant information had been provided to the creditors.

[2014] VSC 516

(1996) 71 FCR 133

(1998) 87 FCR 352

(1997) 73 FCR 551

(1998) 83 FCR 203

Cited By (4)

Bendigo and Adelaide Bank Limited v Clout

Inspector-General in Bankruptcy v Hartnett

Moss v Gunns Finance Pty Ltd

Mouglalis v Bendigo and Adelaide Bank Ltd