Grounds 5 6 and 7
73 By ground 5, the appellant contends that the primary judge failed to give "adequate reasons for the making of orders founded upon … s 222(1)(d) … as [applied] by [s 76B]".
74 By ground 6, the appellant contends that the primary judge erred in determining that the transfer of the Port Macquarie property was at an undervalue within s 120 or was undertaken for one of the main purposes within s 121(1)(b), as the issue was not in controversy before him; no proper regard was given to s 120(4) or s 121(5); and in making the transfer findings, the primary judge failed to address the real question in issue, namely the application of the two limbs of s 222(1)(d) (by reason of s 76B) to the facts in issue.
75 By ground 7, the appellant contends that the primary judge erred in concluding that the terms of the composition were unreasonable or not calculated to benefit the creditors generally, because, no proper regard was given to the paramountcy of the vote of creditors attending the meeting on 2 October 2009 (and voting in person or by proxy) in support of the acceptance resolution; Westpac failed to attend the meeting or submit a proof or proxy; the return to creditors was likely to be greater under the composition once costs savings, as compared with an administration in bankruptcy, were taken into account; and, the primary judge misdirected himself as to the quantum of the benefits to creditors in the administration.
76 As to the quantum of the benefits under either path, the Trustee had assessed the estimated return to unsecured creditors in a bankruptcy administration, assuming estate revenue of $77,415.00 (being the contributed income by Dr Hingston), of $0.002 cents in each dollar and an estimated return under the composition of $0.001 cents in each dollar. If an assumption is made that only those creditors accepted as creditors at the date of the meeting, participate in a distribution in bankruptcy, an amount of $49,295.02 would be available for distribution over a three year period to participating creditors to the value of $11,244,501.91 resulting in an estimated return of $0.00438 ($0.004 cents in the dollar). In a composition in which non-participating creditors of $4,270,986.00 are excluded and the composition fund is $50,000.00 (with a net fund of $30,840.54 after administration costs and expenses (see AB, Part B, Vol 1, p 158)), the net fund would be distributed to a creditor pool of $6,973,515.00 resulting in a dividend of $0.00442 ($0.004 cents in the dollar).
77 The appellant contends that the Trustee in bankruptcy would incur further costs over three years; the creditors under the composition would receive the distribution immediately; further investigation of Dr Hingston's affairs and any recovery of property would require one of the creditors to fund the investigation or give an indemnity to the Trustee; and, there was no evidence before the primary judge of any "tangible benefit" available to the estate should the bankruptcy continue, and no evidence of detriment to the creditors should the composition proceed.
78 Although the appellant concedes that the "benefit under the composition was negligible (in a monetary sense)" (see para 33 of the appellant's submissions) so too, it is said, was the prospective distribution to participating unsecured creditors over the life of the bankruptcy.
79 Additionally, the appellant emphasises these two considerations which caused the primary judge, it is said, to fall into error. First, in applying s 222(1)(d), the primary judge became distracted by the transfer question as the issue was not the subject of relief sought; Mrs Hingston was not a party; no finding was made of the "true market value" of the property; and, no consideration was given to questions relevant to ss 120(3) and (6) and s 121(4) and (8). Second, the primary judge failed to give proper weight to the wish of the meeting of creditors reflected in the 96.41% (in value) voting either in person or by proxy in favour of accepting the composition proposal, and a majority in number so voting.
80 As to the transfer question (ground 6), the primary judge examined the transaction, as put in issue by Westpac by Point 7 of the Points of Claim, arising out of the non-disclosure of the transfer in the debtor's statement of affairs and the recommendation of the Trustee on 21 September 2009 that "substantial further investigation" was "required to be undertaken in respect of the transfer", so as to determine whether the evidence suggested a basis for concern that a transfer to a related party at an undervalue had occurred for a relevant statutory purpose. Properly understood, that question was examined to determine whether the composition ought to be set aside on the footing that the extinguishment terms were unreasonable, or not calculated to benefit the creditors generally, when substantial further investigations into a matter of substance had not occurred. The primary judge was satisfied that a transfer at an undervalue for the relevant statutory purpose had occurred, for the purpose of determining whether the transfer, as suggested by the Trustee's recommendation, required substantial examination. The question was examined in the context of the relief sought based on the s 222(1)(d) integers, not as a remedial determination of rights and obligations arising under ss 120 or 121.
81 Moreover, inferences might also arise relevant to questions of the unreasonableness of the extinguishment terms or whether those terms were not calculated to benefit creditors, arising out of Dr Hingston's conduct. Although Dr Hingston told the Trustee's staff that he was "not sure how [he] omitted to mention [the transfer] in [his] declaration" (see [7] of these reasons), one reason might be that he transferred the property four months before the commencement of the bankruptcy to his wife at an undervalue to remove the differential market based increment (beyond the mortgage discharge amount) from the unsecured creditors, and the compromise with its extinguishment terms, had the effect of preventing any further examination or investigation, substantial or otherwise, of the transfer circumstances.
82 It is inconceivable that Dr Hingston simply forgot about the transfer transaction when completing his declaration in support of the statement of affairs. The failure to disclose the transfer suggests a proper concern that the transfer value was not determined at arm's length. If the transfer value had been effected at an arm's length market value, presumably Dr Hingston would have had no difficulty in disclosing the transaction in the statement of affairs and the basis for it. Dr Hingston's election to conceal the disclosure of the transfer and thus obfuscate the facts, suggests, as the Trustee thought, that the transfer required substantial further investigation.
83 All of these matters are relevant to the questions arising under s 222(1)(d), that is, whether a composition that discharges finally all due debts in payment of the projected dividend and releases the debtor is unreasonable or not calculated to benefit the creditors generally, when a transfer of property has occurred to a related party in circumstances that warrant substantial further investigation of apparent undervalue and the particular purpose in question.
84 The primary judge did not fall into error in considering the transfer matters nor in the method of treatment of those matters.
85 As to grounds 5 and 7, the primary judge provided exposed reasons for the findings reliant on s 222(1)(d). The primary judge did not fall into error in isolating the principles described at [54] to [57] (of these reasons). The primary judge correctly identified, as the appellant concedes, that the monetary benefit of the composition to unsecured creditors is negligible. In the context of $11.2m of debts, the composition proposal is, in any practical sense, so trivial as to amount to nothing with the result that the administration of the estate would be better dealt with by way of bankruptcy. The primary judge correctly took into account the chronology of the making of the composition proposal, the notice to creditors of 21 September 2009 and the meeting of 2 October 2009, with the limited time thus available to the Trustee to properly examine aspects of the transfer transaction and, more broadly, the affairs of Dr Hingston.
86 The primary judge properly took into account the Trustee's recommendation.
87 The primary judge also properly took into account the circumstance that the debt to Westpac is a significant amount and that Westpac failed to attend the meeting out of inadvertence. That factor is, of course, not determinative of either matter arising under s 222(1)(d). However, the debt due to Westpac and an explanation on the facts as to the failure to attend the meeting is, at least, a relevant matter properly taken into account by the primary judge.
88 In addition, the primary judge properly took into account the circumstance that the four creditors (in number and by value) put forward as non-participating creditors, should the composition proposal be accepted, determined the outcome of the special resolution to accept the composition proposal. Although the primary judge identified some features of an apparent relationship between those creditors and Dr Hingston, the circumstance that the non-participating creditors determined the acceptance of the composition proposal was a relevant matter to be taken into account.
89 The primary judge did not err in weighing all of these factors in the balance in exercising the discretion to set aside the composition on the footing that the terms of the composition were unreasonable or not calculated to benefit the creditors generally.
90 It is true that by reason of the amendments to the Bankruptcy Act in 1992 reflected in s 74(5) which effects an annulment of the bankruptcy upon the passing of a special resolution of a meeting of creditors convened under s 73(4), particular emphasis is given to the determination of the creditors reached in a properly convened meeting. Creditors are not required to act judicially or quasi-judicially in exercising a vote at the meeting. The Trustee is required to adopt a "businesslike approach" by informing the creditors of relevant information leaving the decision, as far as possible, to be made by creditors, as practical people of business. As Allsop J observed in Labocus Precious Metals Pty Ltd v Thomas [2007] FCA 1154 at [54], the Court should not take any narrow or pedantic view of the structure of the Bankruptcy Act concerning compliance with processes which enable creditors convened under s 73(4) to vote on a composition proposal. The procedure is to be followed against the background of the need to inform creditors of relevant matters and then allow the creditors to make up their own minds as to what they wish to do.
91 However, equally clearly, a composition might be set aside by the Court in circumstances where the terms of the composition are unreasonable or not calculated to benefit the creditors generally. As Allsop J also observed in Labocus at [55], it goes without saying that the Court should view the relevant procedures from the perspective of the interests of all creditors. Thus, a calculus of factors must be taken into account including such matters as those taken into account by the primary judge, namely, whether, from the perspective of all creditors substantial further investigation was required of a particular transaction or the affairs of the debtor more generally; whether some particular creditors may have dominated the vote in circumstances where there may be questions about the relationship between the debtor and those creditors; whether the composition proposal is properly regarded as trivial resulting in a negligible distribution to unsecured creditors; the relativity between the positions under an administration in bankruptcy and a distribution under the composition proposal; and the other matters already mentioned and taken into account by the primary judge.
92 Thus, the vote of the creditors is not paramount in an absolute sense. Great respect will be given to the views of practical people of business who have come together to make a decision on the composition proposal in a properly informed way. However, a discretion is conferred on the Court to set aside the composition (and the annulment of the bankruptcy) in the circumstances, relevantly, for present purposes, of s 222(1)(d).
93 The primary judge had proper regard to the principles governing the exercise of the discretion and properly applied those principles to the evidence before him.