DCT v Bauer & Ors [2003] FMCA 282 (9 July 2003)

[2003] FMCA 282

Bankruptcy - Application for orders declaring void a composition - sequestration not ordered at this time.

1. The Deputy Commissioner of Taxation ("the Applicant") seeks orders against DARYL JAY BAUER and LAIARNIE MICHELLE BAUER ("the Respondents") and GRAHAM BENDEICH ("the Trustee") for orders declaring void a composition entered into on 28 May 2001 (`the composition").

2. The Applicant seeks the composition to be declared void pursuant to s.222 of the Bankruptcy Act on the following grounds:-

(a) The Applicant or its Solicitors was not given notice of the Meeting of creditors pursuant to s.188(1) of the Bankruptcy Act 1966 ("The Act"); or

(b) The male respondent gave false or misleading information to a question put to him at the meeting of creditors with respect to his examinable affairs; or

(c) The Respondents did not, in their statement of Affairs, make a full and correct disclosure and/or gave false and misleading information or omitted material particulars.

3. In the alternative, it is asserted the composition should be declared void, as it is alleged that the terms of the composition were and are unreasonable and were not calculated to benefit creditors, and the amount offered is so trivial, pursuant to s.239(2) of the Act. As a final alternative the Applicants seek the composition to be terminated pursuant to s.242 of the Act.

4. The Respondents and the Trustee opposed the Application.

5. The respondents were facing some troubling financial challenges in late 2000 including Court proceedings against them and apparently received at that time, an unsolicited letter inviting them to obtain advice from Mr Will Hawney of Queensland Administration Services, about how to organise their financial affairs.

6. After an initial meeting with Mr Hawney or about 27 October 2000 it was agreed by the Respondents to retain Mr Hawney's firm to prepare documents with the prospect of securing a Part X composition with creditors. Because of delays in providing the necessary funds for the process, the authorities under s.188 were not signed until 111 May 2001. Mr Jeffrey Crowther, a Solicitor, was appointed controlling Trustee.

7. On 11 May 2001 the Respondents completed Statements of Affairs setting out details of their assets and liabilities. I shall deal with the representations in those statements later in these reasons.

8. Mr Crowther says on 16 May 2001 he forwarded to all the creditors (including the Applicant) a Notice of Meeting attaching, as required.

9. The original list of 15 creditors from the Statement of Affairs, did not include DENTROSE PTY LTD Trading as MOSS STREET POOL SUPPLIES, however after a telephone discussion between DENYS MCKELSON and the controlling Trustee on or about 15 May 2001, the Company was included and received a Notice of the Creditors Meeting.

10. The minutes of the Creditors Meeting on 28 May 2001 reveal that:-

(a) The only persons present (other than the controlling Trustee and the male Debtor) were Mr McKelson and Mr Hawney (who held a proxy on behalf of the debtor Absolute Business Solutions).

(c) Ford Credit, after consideration of s.90 of the Act, withdrew their proof of Debt and GE Finance had not provided a proxy.

(d) A quorum was present. The Controlling Trustee's Report was Tabled as was a Consent to Act as Trustee. The two present creditors voted in favour of the Debtors proposal and, the Resolution was passed accepting the composition.

11. The effect of the proposal was that the Respondent's were to pay $29,000 by monthly instalments over 48 months. The "very preliminary estimate" given by the Trustee in his report to creditors was that the total dividend payable to ordinary unsecured creditors could be in the vicinity of 5 cents in the dollar. This divended was to be paid in about June 2005 "when all the compromise sum is due to have been received".

12. This application was commenced on 4 September 2001. An urgent injunction was sought thereafter to control the proceeds of sale of the property at 18 Arbee Road, Jimboomba which the Respondents had sold. The Respondents had also contracted to purchase land at 327 Edelston Road Jimboomba. By orders made by McInnis FM on

7 September 2001 and 14 September 2001 the balance of sale proceeds, after allowance for the purchase of the Eldelston Road property were paid to the Trustee. The Respondents were restrained from thereafter selling, encumbering or otherwise dealing with the Edelston property.

13. By Affidavit filed on 19 November 2001, the Trustee confirmed that he holds approximately $36,337.88 from the proceeds of sale.

"(1) Where there is a doubt, on a specific ground, whether a deed of arrangement was entered into in accordance with this Part or complies with the requirements of this Part, or whether a composition has been accepted by a special resolution of a meeting of creditors under section 204, the Inspector-General, a person authorised in writing by the Inspector-General. The Registrar, the Trustee, a creditor or the debtor may apply to the Court for an order under subsection (2).

(2) Upon the hearing of an application made under subsection (1), the Court may, subject to this section, make an order:

(a) declaring that the deed or composition is void, or that it is not void, on the ground specified in the application; or

(b) declaring that a provision of the deed is void, or is not void, on the ground specified in the application.

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

(4) Where the Court on the application of the Inspector-General, the trustee or a creditor, is satisfied that the debtor:

(a) has given false or misleading information in answer to a question put to him or her with respect to any of his or her conduct or examinable affairs at the meeting of creditors at which the resolution requiring him or her to execute the deed or accepting the composition was passed; or

(b) has omitted a material particular from the statement of the debtor's affairs given under subsection 188(2) or included an incorrect and material particular in that statement;

The Court may make an order declaring the deed or composition to be void or declaring any provision of the deed or composition to be void.

(5) The Court shall not make an order declaring a deed or composition, or a provision of a deed or composition to be void on a ground specified in subsection (4) unless it is satisfied that it would be in the interest of the creditors to do so.

(6) The Court shall not make an order under subsection (2) or (4) unless Application for the order is made:-

(a) in relation to a deed assignment - before the final divided has been paid under the deed;

(b) in relation to a deed of arrangement - before the terms of the deed have been carried out; or in relation to a composition - before the final payment has been made under the composition.

(7) The trustee or a creditor may include in an application under subsection (2) or (4) an application for a sequestration order against the estate of the debtor and if the Court, on the first mentioned application, makes an order under subsection (2) or (4) declaring the deed or composition to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought.

(8) The Court may, if it thinks fit, dispense with service on the debtor of notice of an application by the trustee or a creditor under this section, either unconditionally or subject to conditions.

(9) The making of an application by the trustee or a creditor for a sequestration order under this section shall, for the purposes of this Act, be deemed 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."

15. In Re Cufari; Ex parte Commissioner of Taxation v Huppatz [1992] FCA 95; (1992) 110 ALR 497, Doussa J stated (at 503):

"A particular is `material' within the meaning of s 222 (4)(b) if it is a particular which would be relevant to and might be likely to affect the making of a decision by the creditors: See Re Segal; Ex parte Lensworth Finance Ltd v Segal (1975) 45 FLR 85; 9 ALR 154; Beard v Prestige Banking Industries Pty Ltd [1981] FCA 97; (1981) 36 ALR 307; 52 FLR 384, per Fox J (at 397 - 398), per Lockhart J (at 417 - 419) and per Sheppard J(at 424 - 425). The test is an objective one. The subsection does not required that a misstatement be made `knowingly'. In Re Segal; Lensworth Finance Ltd v Segal (supra) Riley J said (at 87 - 88) that it is essential that the information contained in the statement of affairs be `full and correct: the creditors are entitled to all available information about the debtors' conduct, trade dealings, property (and) affairs before they make their decision."

16. The Applicant alleges no notice was received by it as required by the Act. Furthermore, as the history above confirms although the authority under s.188 was not signed until May 2001 it was certainly contemplated by the Respondents as a strategy from October 2000.

17. The evidence of Liam Stewart confirms discussions as to when the meeting of creditors was to be held occurred between Mr Stewart and Mr Hawney in February, March and April 2001. In short, in his Affidavit, Mr Stewart says the Applicant did not:-

"Receive notice of the meeting notwithstanding the Applicant's effort to ascertain some for attendance purposes".

18. Under cross-examination Mr Stewart conceded that although there is no record of receiving a notice, he cannot say the Australian Taxation Office did not receive the notice. Mr Crowther gave evidence of sending the Notice and provided a copy of his firm's mail register.

19. On the balance of probabilities, I accept the evidence of Mr Crowther on this issue, and find that a notice was sent to the Australian Taxation Office at PO Box 9990, Brisbane and would have been received in the usual course of post.

20. There can be no doubt that the Applicant is a creditor - having the benefit of a judgement against the male Respondent entered in the District Court of Queensland on 13 June 2001 for $165,647.99 - and the benefit of a judgement against the female Respondent entered in the Magistrates Court of Queensland on 7 June 2001 for $27,454.62.

21. There is another alleged creditor, who was not referred to in the statement of Affairs and who, as a result did not receive Notice of the Meeting. Orbitbase Pty Ltd, previously trading as Moreton Pools and Tennis Courts claims to be a creditor of the Respondents as a result of a dishonoured cheque dated 5 March 1999. This debt is disputed by the Respondents, who say the pool was not completed and they engaged other contractors who "discovered that there were several significant defects in the pool". It is noted that Mr Henry (for the alleged creditor) says no notice of defective work has ever been given to his company, nor would it seem that any action for payment has been commenced by him, the cheque being dishonoured in 1999.

22. It is not the role of this Court, in this proceedings, to determine whether the Company is a creditor of the Respondents. I do not regard it, in the circumstances as misleading for this "creditor" not to have been included in the statement of Affairs. No notice to this creditor at the time of the composition was required.

Was the respondents' conduct false or misleading?

(a) gave a false or misleading answer in relation to his income for 1999; and

(b) included incorrect material particulars in their statements of Affairs including underestimates of the Equity in Arbee Road.

24. I had the benefit of seeing Mr Bauer under cross examination. He is not a sophisticated businessman. He knew he was in trouble financially when he received the unsolicited invitation from Mr Hawney's firm. He had failed to lodge income tax returns for the years ended 30 June 1999 & 30 June 2000 at the time of the meeting of creditors:-

"because on March 5, 1999 Police executing a search warrant raided our home and removed practically every piece of paper in our home".

25. Subsequently, and prior to the hearing on 6 November 2001, the male respondent did lodge on 10 October 2001 his returns. The returns (Exhibited to the respondent's Affidavit filed 16 October 2001) assert a taxable income to 30 June 1999 of $27711 and a taxable income to

26. The Australian Taxation Office treated the return, lodged on

10 October 2001, pursuant to s.170 (1) of the Income Tax Assessment Act 1936 as a request for an amendment - which was refused. As a result of this position, the assessment which issued on 9 February 2001 for the year ended 1999, (which founds the District Court judgement) stands according to the ATO.

27. Mr Bauer says that his main objective was not to go bankrupt. He relied totally on Mr Hawney, who understandably would do nothing until the required funds for preparing the arrangement had been paid.

28. Whilst I have come to the view that, although an inept businessman, Mr Bauer was essentially telling me the truth, there are aspects of the whole process which concern me. In some aspects this involves an assessment of evidence given by Mr Hawney and his demeanour under cross examination which follows in these Reasons.

29. The minutes of the meeting reveal the following entry:-

"Mr McKelson required information on the debtor's income and wanted to know how long had the debtors been in the situation they were in. Mr Bauer advised that their present situation went back to 1999 and that his income over the past 4 to 5 years was approximately $25,000 a year."

30. The applicants recently lodged Taxation returns seem to accord with what he told the meeting. It must be recalled that the assessment made for 1999 by the Applicant is a default assessment as a result of his failure to lodge a return. In view of the seizure of financial records from the Respondent I would not find that his representation to the meeting in answering Mr McKelsons question, as he did, was knowingly false.

31. Under Cross-examination Mr Bauer acknowledged he knew about the debt to Moss Street Pool Supplies at the time he completed his statement of Affairs. He did not provide a satisfactory explanation for failing to include that debt amongst the unsecured creditors.

32. The fact that, as a result of Mr McKelson's persistence, he not only received Notice of the meeting but also attended doe not mean an incorrect statement was not made. It clearly was.

33. The controlling trustees report to creditors is relevant in at least 2 major respects:-

34. Mr Crowther said he believes he saw Mr Bauer on 19 April 2001, who said he owed the Australian Taxation Office about $176,000. Exhibit 6, which is the draft Controlling Trustees report from Mr Crowthers file, makes the statement that after he had examined the statement of Affairs

"they disclosed fifteen unsecured creditors with a total combined amount owing of $107,855.05".

35. This was duplicated in the final report sent to creditors. It represents a serious understatement (by $165,000). After Mr Crowther was apparently told of the amount outstanding to the ATO, he expanded that section of the final report by including the following words:-

"The Australian Taxation Office is owed a significant sum".

36. Such a statement does not sufficiently cure the earlier misstatement of the level of unsecured creditors in my view.

37. The issue in respect of the equity in the real properties owned by the Respondent's was the subject of further evidence before me. Mr Crowther says in his interview with the male respondent that Mr Bauer was trying to save his house and he was told:-

a) Arbee was worth $175,000 with a debt of $161,000; and

b) the Stockleigh Road property was worth $135,000 with a debt of $132,000.

"I have received written market assessments from Taylor & Cook Real Estate at Jimboomba valuing Arbee Road at $160,000 and Stockleigh Rd at $125,000".

39. As a result the creditors who received the Report would have reasonably assessed the position of the secured creditors (Colonial state Bank and Ford Credit) as follows:-

40. At the meeting only 2 creditors were represented, Mr McKelson for Moss Street Pool Supplies and Mr Hawney as proxy for Absolute Business Solutions Pty Ltd.

41. Ms Lisa Brinckman of Absolute Business Solutions alleged that:

a) On 28 May 2001 she received a phone call from Mr Hawney enquiring about a proxy for the meeting that day.

b) Mr Hawney informed her that as only a small number of creditors had returned proofs of debt there would be more money to those (including her firm) who had done so.

c) As the former tax Agent of the respondents, she enquired about the outstanding tax debt and was informed by Mr Hawney that the ATO had not lodged a proof of debt; that he believed they would not enforce the debt; and that she could expect up to 50c in the dollar if she gave a proxy to him to vote in favour of the composition.

d) Had she been aware at or before the time of the creditors meeting that the equity in the Arbee property was in the order of $25,000 she would have voted for requestion.

42. Under cross-examination she maintained her position, alleging in effect, misrepresentations by Mr Hawney. Whilst Mr Hawney denies the conversation with Mr Brinckman I prefer the evidence of Ms Brinckman. Overall Mr Hawney's evidence was not impressive in my view.

43. Similarly Mr McKelson alleges he was misled by Mr Hawney, critically saying at paragraph 13 of his Affidavit that:-

"Prior to the meeting officially commencing, and prior to Mr Crowther's arriving Mr Hawney privately informed me and I believed that not all Mr and Mrs Bauer's creditors had lodged proofs of debts with the Controlling Trustee. He further informed and I believed that only those creditors which had lodged their proof of debt at the time of the Meeting would get paid".

44. The effect of Mr Hawney's advice was that the company Moss Street Pool Supplies could expect it would be paid it's total outstanding debt. As a result Mr McKelson voted in favour of the resolution.

45. Mr Hawney denied making the statements attributed to him. Again he was cross-examined on this issue and I found his denials unconvincing. I prefer the evidence of Mr McKelson on this issue.

46. In a subsequent Affidavit sworn 6 November 2001, Mr McKelson says that he would not have supported the composition if he had been aware that the equity in Arbee Road was in the order of $25,000.

47. The equity in Arbee Road was certainly more than the $1000 claimed in the Controlling Trustees report. The Controlling Trustee relied upon written market appraisals (being exhibit 2) under the hand of Barry Bunter, the Principal of Taylor & Cook Real Estate, Jimboomba. Mr Bunter no longer recalls giving the appraisals; can find no record of them in his "appraisal register", and says at the relevant time the property would not have been appraised "at less than $175,000 - $180,000."

48. Further evidence from Mr Bishop for the Respondents (retrospectively valuing the property at $180,000) and from Mr Bradford for the applicant (retrospectively valuing the property at not less than $190,000) was offered.

49. I also find it difficult on the evidence to explain the market appraisal of $160,000 on the letterhead of Taylor & Cook Real Estate. It is completely at odds with the evidence of Mr Bunter that:-

a) he was aware the Respondents had purchased the property for $186,000 in November 1998.

b) a partly completed pool was under construction on the property.

If proper investigations of the history of the property by the Controlling Trustee had been undertaken, he may have regarded the appraisal with some suspicion.

50. The totality of the evidence leads me to the conclusion that the two voting creditors at the meeting on 28 May 2001 were misled into supporting the composition by a combination of:-

(a) remarks made by Mr Hawney who was the agent of the Respondents; and

(b) defects and errors in the Controlling Trustees Report as identified above.

51. Furthermore it would be reasonable to infer that the other unsecured creditors were not properly informed.

52. Section 239 of the Bankruptcy Act 1966 provides that:-

"(1) A creditor may; within 21 days from the date on which the special resolution accepting a composition under this part was passed, apply to the Court for an order setting aside the composition and may also apply for the making of a sequestration order against the estate of the debtor.

(2) If the court on such an application, considers that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the composition ought to be set aside, it may take an order setting it aside and, if it thinks fit, may forthwith make the sequestration order sought.

(3) The court may, if it thinks fit, dispense with service on the debtor of notice of an application under this section, either unconditionally or subject to conditions.

(4) The making of an application for a sequestration order against the estate of a debtor under this section shall, for the purposes of this Act, be deemed to be equivalent to the presentation of a creditor's petition against a debtor, but the provisions of subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part X!A do not apply in relation to such an application."

53. While the application has not been brought within time, the Court may extend time pursuant to section 33(1)(c) which provides:

(c) extend before its expiration or, if this Act does not expressly provide to the contrary, after its expiration, any time limited by this act or any time fixed by the Court or the Register under this act (other than the time fixed for compliance with the requirements of a bankruptcy notice), for doing an act or thing or abridge any such time."

54. In Deputy Commissioner of Taxation v Wily (1999) FCA 307, O'Connor J (at paragraph 30) indentified a number of factors relevant to the exercise of the discretion under s.239 in the following terms:

"The discretion given to the Court under s239 to set aside a composition is wide. In Re Mills; ex parte Lloyd's 91997) 73FCR 551, Merkel J set out and applied, in deciding that case, a range of factors which are relevant to the exercise of the discretion. The discretion might be exercised:-

(1) to allow a greater opportunity to enquire into the debtor's affairs and have the debtor explain matters at greater length.

(2) Because of the existence of the circumstances which give "cause for suspicion "in relation to the debtor's financial affairs.

(3) Because the amount offered under the composition is little or trivial.

(4) Because no payments have been made under the composition.

(5) Because the report to creditors the foundation on which the composition was passed, was misleading".

55. I am satisfied that it is both appropriate to extend time for the application under s239 to be filed and further that the composition should be set aside. The report to Creditors was misleading as was the conduct of Mr Hawney.

56. The effect of the composition was to exclude the equity of the Arbee Road property from being available to creditors. The sale of that property for $235,000 means the equity of over $65,000 (some of which was used to purchase the Edelston Road property) would be available to creditors. It seems also likely that the level of debt to the Australian Taxation Office may also be clearer now and, perhaps, substantially reduced.

57. The Applicant seeks that a sequestration order be made against the estates of both Mr & Mrs Bauer. This discretion may be exercised under s.239(2).

58. The Court would normally proceed to make a sequestration order where a composition is declared void "unless some sufficient course is shown to outweigh the public interest and that of creditors" (see Re: Morris Ex parte Adams (1980) 48 FLR341).

59. In this case the respondents retained professional advisers; paid funds of over $3000 and merely signed to take advantage of a process available to avoid bankruptcy. At all times it seems that they did disclose the level of their debt to the Australian Tax Office to both the Controlling Trustee and Mr Hawney.

60. Considering that the largest unsecured debt is to the Applicant and that it primary arises from a default assessment and penalties imposed, I think it is reasonable to give the Respondents an opportunity to reach some arrangement with their creditors properly, including the Applicant.

61. The execution of an authority under s.188 constitutes an Act of Bankruptcy sufficient to found a creditors petition.

62. The respondent's have, I believe, been the recipients of a badly applied process. They may not be able to make an arrangement with creditors or successfully contest a creditors petition. I propose to give them an opportunity to do so. I will not order sequestration at this time.

63. In my view this is a matter where costs should follow the event. There will be an order that the First Respondents pay the Applicants costs of these proceedings as agreed, or taxed.

I certify that the preceding sixty-three (63) paragraphs are a true copy of the reasons for judgment of Baumann FM