COBBS HILL (TASMANIA) MEAT SUPPLIES PTY LTD (in liquidation) (ACN 071 384 686) and roberts limited (acn 009 475 647) and The inspector general of Bankruptcy v MOUSTAFA EL MOUSTAFA and DAVID HENRY SCOTT

REASONS FOR JUDGMENT On 14 May 1998 the Court made the following orders on an unopposed basis at the conclusion of submissions on that day. The orders were as follows: 1. It is declared that the composition of Moustafa El Moustafa ("the Debtor") accepted at a meeting of creditors on 4 August 1997 be declared void pursuant to s 222(2) of the Bankruptcy Act 1966 (Cth). 2. The estate of the debtor be sequestrated. 3. The debtor pay the costs of and incidental to the application and such costs be taxed and paid out of the debtor's estate. 4. The question of costs payable, if any, by the controlling trustee, be reserved and the following timetable apply in relation to that issue: (a) Any affidavit in opposition to an order for costs against the controlling trustee and any further submission in opposition to such an order be filed and served on or before 4.00 pm on Tuesday 19 May 1998. (b) Any affidavit or further submission in support of an order for costs against the controlling trustee be filed and served on or before 4.00 pm Friday 22 May 1998. (c) The application in so far as it deals with the question of costs if any to be paid by the controlling trustee be adjourned to 2.15 pm Friday 29 May 1998. 5. The application other than dealt with too finality by the foregoing orders be adjourned to 2.15 pm Friday 29 May 1998. The matter before the Court was an application pursuant to s 222 of the Bankruptcy Act 1966 (Cth) ("the Act") to declare void a composition. In the alternative the application relied upon ss 239 and 242 of the Act. The first applicant, Cobbs Hill (Tasmania) Meat Supplies Pty Ltd (in liquidation) ("Cobbs Hill") and the second applicant, Roberts Limited made application to the Court on 22 August 1997 for orders setting aside the composition and for sequestration of the estate of the first respondent, Moustafa El Moustafa ("the debtor"). On 2 February 1998 the Court ordered that the controlling trustee of the composition, Mr P Finkelstein, ("the controlling trustee") be joined as a respondent and that the Inspector-General in Bankruptcy ("the Inspector-General") be joined as an applicant in the proceeding. The trial commenced on 8 May 1998 and resumed on 12, 13 and 14 May 1998. Mr G Bigmore QC with Mr P Fary appeared for Cobbs Hill and Roberts Limited. Mr D Hyde of counsel appeared for the Inspector-General. Mr P Finkelstein, solicitor, appeared for the debtor and the controlling trustee (himself). There was no appearance on behalf of Mr Scott, the second respondent. Mr Bigmore advised the Court that Mr Scott had taken the position that he would abide by any order of the Court. In his submission in reply on 14 May 1998, Mr Finkelstein conceded that the circumstances surrounding the debtor's composition which was accepted at a meeting of creditors on 4 August 1997, were such that, in the words of Merkel J in Re Mills; Ex parte Lloyd's (1997) 73 FCR 551, 557, "serious issues and suspicions (had) been raised" concerning several issues relevant to the acceptance of the composition and that "[t]hese matters are clearly appropriate for further investigation which will not occur under the composition". Given the concession made by Mr Finkelstein in his reply it is unnecessary for the Court to traverse every complaint made by the applicants concerning the circumstances of the acceptance of the composition. However, having regard to the obvious public interest in ensuring that the provisions of the Act are rigorously and scrupulously applied, it is important to traverse in at least summary form, the problems raised by the circumstances in which the debtor's composition was accepted. It is to these matters which I now turn. BACKGROUND FACTS On 15 July 1997 the debtor executed an authority pursuant to s 188 of the Act in which he proposed that his affairs be dealt with under Part X of the Act. The authority authorised Mr Finkelstein to call a meeting of creditors and to take control of the debtor's property. A meeting of creditors was called for 4 August 1997. At that meeting a special resolution was passed which endorsed a proposal for the composition. Prior to the meeting solicitors acting for Cobbs Hill had advised Mr Finkelstein of a claim which Cobbs Hill had against the debtor pursuant to s 588M of the Corporations Law for $625,424.00. Section 588M of the Corporations Law entitles a liquidator to recover from a director of a company any loss or damage suffered by a creditor arising from insolvent trading of the company. Mr Finkelstein replied to that correspondence and informed Cobbs Hill's solicitors that no such valid claim existed because the debtor had resigned as a director of Cobbs Hill when the company was solvent. Mr Palmer, a solicitor representing Cobbs Hill, was denied the right to vote on behalf of Cobbs Hill at the creditors meeting after a ruling made by the "chairman" of the meeting a Mr Kerridge that Cobbs Hill was not entitled to a vote. Mr Kerridge permitted voting rights to be given to Vasel and Marisa Ivanopoulos ("the Ivanopoulos'") in respect of an alleged sum of $1.2m owing to them by the debtor relating to a third party guarantee. Prior to the creditors meeting it was incumbent upon the controlling trustee to prepare a report "summarising and commenting on the information about the debtor's affairs that is available to the controlling trustee". See s 189A(1)(a) of the Act. The debtor's statement of affairs referred to trust income received by him. The report made no mention of the amount of that income. It also failed to make any mention of what appeared to be at the very least curious circumstances concerning an encumbrance upon real property held by the debtor at Greenvale. That is a topic to which I shall later return. The report also failed to give any estimation of the likely dividend available to creditors upon the acceptance of the composition for a sum of a mere $8,000.00. The creditor's meeting was improperly conducted. It was the role of the controlling trustee to determine who should vote at the meeting. The "chairman", more properly described as "president" had no such role. See s 64ZA(8) and (9) of the Act. Apart from problems associated with the lack of compliance with ss 189A(1)(a) and 64ZA(8) of the Act there were in my view three issues of serious concern in the process that led to the acceptance of the composition. They were: · the failure to allow Cobbs Hill to vote when there was no evidence before the controlling trustee to justify a conclusion that the debtor had resigned as a director · the admission of the Ivanopoulos' to vote in circumstances where there was insufficient evidence to support a conclusion that the debtor in fact owed any money to the Ivanopoulos' · the failure to properly investigate the shady circumstances concerning the mortgage over the Greenvale property. It is to these issues that I now turn. THE COBBS HILL CLAIM The debtor had no role in the active management of Cobbs Hill from 15 May 1996. At that time there was no conclusive evidence that Cobbs Hill was insolvent. The debtor intended to resign his directorship in the company. Appropriate documentation was prepared by his solicitor to give effect to that intention. Those documents were never executed by the debtor. Failing to take a role in the management of the company is not tantamount to resigning as a director. A formal written notice of resignation was required by the company's articles and memorandum of association. No such resignation was given. I conclude that the Cobbs Hill claim was not properly or adequately investigated by the controlling trustee and that there was sufficient information before the creditors meeting for him to form the view that, at the very least, this matter required further investigation. At the conclusion of the evidence in the trial, it was clear to the Court that the Cobbs Hill ought to have been admitted to vote at the creditors meeting. However, with a more open mind on the issue, the controlling trustee would have had sufficient information about the matter at the time of the meeting to seriously challenge the contrary view which he had adopted in correspondence to Mr Palmer. THE IVANOPOULOS' DEBT The circumstances surrounding this issue defy belief. Given that a sequestration order has been made and that the trustee in bankruptcy will doubtless investigate this matter thoroughly it is sufficient for me to summarise my concerns. The first concern I have is in regard to the written guarantee produced to the Court as evidence of the Ivanopoulos claim. The written guarantee was purported to have been executed in July 1989. Curiously, the body of the guarantee refers to a "Deed of Company Arrangement" under the Corporations Law, references which were not introduced until June 1993. Mr Kerridge, who gave evidence on behalf of the debtor, claimed that he had prepared and witnessed the guarantee in 1989. He said that he had not retained a copy of the guarantee. Mr Kerridge claimed that in March 1997 and in connection with the debtor's purported debt to the Ivanopoulos', he sought to obtain a copy of the written guarantee from Mr Ivanopoulos. He claimed that Mr Ivanopoulos had only forwarded the execution pages containing the signatures and the schedule page. Mr Kerridge claimed that, as he had prepared the guarantee in 1989 from a standard form deed of guarantee, upon receipt of the execution and schedule pages from Mr Ivanopoulos in 1997, he (Mr Kerridge) simply added to the execution and schedule pages the missing pages from his standard form guarantee. Mr Kerridge deposed that the only difference between the written guarantee as produced in 1989 and the version he compiled in 1997 was the omission of the words "Scheme of Arrangement" to read instead "Deed of Arrangement". I do not find Mr Kerridge's account of the Ivanopoulos guarantee convincing. Mr Kerridge did not impress me as a witness of truth. At the end of his evidence I was left with the impression that he had manufactured the claim on the debtor by the Ivanopoulos', in order to ensure that the proposal for the composition put and favoured by the controlling trustee was accepted. His role may require further investigation by appropriate authorities. My impression that the Ivanopoulos guarantee was manufactured is substantiated by two further concerns: · is highly improbable that any rational person would seek to commit themselves to the guarantee, the terms of the guarantee being the debtor committing himself to a $1.2m debt on the basis of 10% of the profits to be earned by a company (Shepparton Wall Street Pty Ltd ) which was then in substantial debt · Stamp duty was not paid on guarantee in 1989, a matter which Mr Kerridge rather unconvincingly attributed to "oversight at the time". THE AWAD MORTGAGE The circumstances surrounding this issue also defy belief. In his report the controlling trustee said under the heading "Home Ownership" as follows: "The home in which the debtor resides at 1 Airdrie Mews, Greenvale (as contained in Certificate of Title Volume 9427 Folio 639) is owned in his name as sole proprietor, but is heavily mortgaged.. Against a current market value of $340,000.00 still the amount owed to Mr. and Mrs. Awad is currently $353,000.00, thereby leaving a shortfall by way of deficiency in the sum of $13,000.00. On that basis, the property at Greenvale will be insufficient in value to meet the debt owned (sic) to Mr. and Mrs. Awad as secured Creditors, to the extent that they would be entitled to prove for the amount of such deficiency as if unsecured Creditors." Given that the trustee in bankruptcy may need to further investigate this matter it is appropriate that I express in short form only my concerns about it. I am concerned about the timing of the transaction. The mortgage was not registered until 5 June 1997. The relevant authority was given to Mr Finkelstein on 15 July 1997 but an earlier authority was attempted to be given on 9 June 1997. The very timing of the mortgage is a matter which should have been reflected in the controlling trustee's report, the mortgage having been given after the collapse of Cobbs Hill and after the debtor was put on notice of his potential liability for insolvent trading. I am also concerned about the circumstances in which the mortgage was effected and as to whether the dealing between the trustee and the debtor was truly at arm's length. The controlling trustee, having been in a position to enquire of these significant matters, should have made some comment on them in his report. THE ROLE OF A SOLICITOR AS CONTROLLING TRUSTEE Section 188 of the Act entitles solicitors to act as a controlling trustee for the purposes of Part X bankruptcy. The inclusion of solicitors as a class of persons entitled to act as controlling trustee is a recent addition, one of the many amendments to the Act introduced in 1996. Prior to the amendment, only a registered trustee or the Official Trustee, could be a controlling trustee. It is important that solicitors who act as controlling trustee are cognisant of the role conferred upon them by the Act. Part X of the Act confers upon the controlling trustee a number of powers and responsibilities in respect of a debtor and his or her property. I will not comment on all these powers save those whose exercise in the present matter have been impugned. The controlling trustee is required to prepare a report for creditors commenting both on the debtor's affairs and on any proposal by the debtor for dealing with his or her affairs (see s 189A(1). This report must state whether a debtor's proposal is in the interests of the creditors (see s 189A(1)(b) ). In aid of this function, the controlling trustee is empowered to ascertain all that is material to the debtor's affairs (see s 190(2)(b)). The purpose of the report is to fully appraise the creditors as to the debtor's affairs so that creditors can make an informed decision on whether their interests would be best served by accepting the debtor's proposal or by the bankruptcy of the debtor. Consequently, it is essential for the controlling trustee to ensure that all facts material to the debtor's affairs are brought to the attention of creditors in the report and that the statement of belief of the controlling trustee is properly based. The controlling trustee is charged with the function of ruling on any entitlement of any person to vote at a meeting of creditors (see s 196 and s 64 ZA(8)). A controlling trustee must discharge this function with proprietary having regard to the merits of a creditor's claim and without regard to extraneous considerations. Both these roles point to a fundamental duty of a controlling trustee, a duty to act in an impartial and independent manner. Anything else would undermine public confidence in the administration of Part X of the Act. A solicitor who acts as a controlling trustee should be aware that this role is very different to the role which arises from the solicitor/client relationship - a relationship whereby a solicitor acting inaccordance with ethical and professional obligations, adopts a partisan role and on the instructions of the client, endeavours, frequently in an adversarial context, to secure the best outcome for the client. The partisan characteristics of a solicitor/client relationship must not inform the conduct of a solicitor acting as controlling trustee in that person's dealings or relationship with the debtor. If a controlling trustee is to properly perform his/her role or functions, he or she must be impartial to the wishes of the debtor. In this respect the role or function of a controlling trustee is the same regardless of whether the controlling trustee is a solicitor or registered trustee. COSTS The Court appreciated Mr Finkelstein's frankness in effectively conceding that the application before it must succeed, albeit in his reply. Having regard to Mr Finkelstein's changed view of the nature of the case especially after Mr Kerridge's evidence, the Court viewed it to be appropriate to permit Mr Finkelstein to place further material before it on the question of costs. The Court will now hear submissions on that issue. Prior to so doing, I should indicate that on 14 May 1998 I ruled that Mr Finkelstein's submission that he was immune from having to pay costs in this matter should be rejected. His alleged immunity arose from s 306B of the Act. That section provides that: "An action, suit or proceeding does not lie against the Inspector-General, an Official Receiver, the trustee of the estate of a bankrupt or any other person in respect of a statement made in good faith in a report prepared or given to a person under subsection 12 (1A) or (1B), 155A(6), 155F(2), 155I(4) or section 189A." Mr Finkelstein submitted that he was immune from a costs order against him because he made a statement in good faith in his report under s 189A of the Act. I assume, for the purposes of the argument, that the report under s 189A was made in good faith. However s 306B, in my view, only operates to provide a "qualified privilege" to persons under its umbrella in respect of claims against them for defamation. The relevant predecessor provision was inserted into the Act in 1981. The explanatory memorandum accompanying the relevant Bill provided as follows: "Clause 146 and 147 - Protection in respect of reports Official Receivers have been given qualified privilege in any report filed with the Registrar under s 19 to ensure that in the performance of his duties he is not inhibited by concern about civil liability for defamation. The same measure of qualified privilege is given to registered trustees who are required to report on the conduct and affairs of bankrupts. This clause gives the trustee the same protection that was previously given to the Official Receiver in relation to any reports prepared under s 19. It is made clear that the protection extends to supplementary reports (clause 146). The special protection for a report by a registered trustee is repealed (clause 147). Transitional provisions are included." The above quotation from the explanatory memorandum confirms my view of the effect of s 306B of the Act. However, if I am in error on this point, s 306B cannot assist Mr Finkelstein in respect of any omissions he has made in his report on issues such as: · lack of thorough summary of and comment on the status of the debtor as a continuing director of Cobbs Hill · lack of thorough summary of and comment on the Ivanopoulos and Awad issues.