Loane v Gold Ribbon

REASONS FOR JUDGMENT 1 This is an appeal from orders made by a Federal Magistrate on 25 November 2003, annulling a composition entered into by the appellant, and making a sequestration order against him. 2 Darryl John Loane was made bankrupt on 20 February 2000 when his debtor's petition was accepted. On 9 August 2001 the appellant entered into a composition with his creditors, pursuant to s 73 of the Bankruptcy Act 1966 (Cth) ("the Act"). Section 74 provides: '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.' 3 The composition, which was accepted by the majority of the creditors, was derisory. The composition offered less than one ten thousandth of a cent in the dollar. It was voted against by all of the creditors who appear to be at arm's length from the appellant. It was voted for by creditors who in fact had no prospect of receiving even a cent in the dollar by way of a dividend, was against the Trustee's recommendations, and was made in the absence of investigations that the Trustee had recommended. The Trustee's report referred to the lack of co-operation by Mr Loane and by his accountant, one David Ryland. 4 The respondent to this appeal applied to annul the composition on 12 October 2001. That application was supported by an extensive affidavit of Mr Grant Dene Sparks who, along with Mr Ray Richards, are joint liquidators of the respondent company. The application by the respondent to have the composition annulled was made pursuant to subs 75(4)(b) of the Act. Sub-section 75(4) of the Act relevantly provides: 'If: … (b) it is made to appear to the Court that: (i) the composition or scheme of arrangement cannot be proceeded with without injustice or undue delay to the creditors or to the bankrupt; or (ii) the approval of the creditors was obtained by a misrepresentation by the former bankrupt; or (iii) it is desirable that the affairs of the former bankrupt be investigated and administered under the provisions of this Act relating to bankruptcy; or (iv) it is likely that the creditors will receive a greater dividend if the former bankrupt is again made a bankrupt; the Court may, if it thinks fit, on the application by the trustee or a creditor, annul the composition or scheme of arrangement.' Sub-section 75(6) of the Act provides: 'The trustee or a creditor may include in an application under subsection (4) an application for a sequestration order against the estate of the debtor and, if the Court makes an order on the first-mentioned application annulling the composition or scheme of arrangement, it may, if it thinks fit, forthwith make the sequestration order sought.' 5 The hearing before a Federal Magistrate was on 17 December 2002 and subsequent submissions in writing were placed before the Federal Magistrate's Court in January 2003. Judgment was delivered on 25 November 2003, where the Federal Magistrates Court ordered that: '(1) The composition entered into on 9 August 2001, be annulled pursuant to section 75(4)(b)(iii) of the Bankruptcy Act 1966; (2) A sequestration order be made against the estate of Darryl John Loane; (3) The applicant's costs of and incidental to this application, including reserved costs, if any, be taxed and paid from the estate of the Bankrupt in accordance with the Bankruptcy Act 1966.' 6 The trial proceedings were conducted on behalf of the present appellant by a litigation guardian, which had been appointed by the Federal Magistrates Court on 20 August 2002. That appointment was necessitated by the severe depressive disorder suffered by Mr Loane, resulting in a serious and near fatal suicide attempt on 24 December 2001. 7 There are really only two questions on the appeal. 8 The first, referred to in the Federal Magistrates Court as the "threshold point", is the contention that the present respondent did not have standing to bring its application to annul the composition, because at the time of the bringing of the application it was not a "creditor" of the respondent. The contention on behalf of the appellant is that while Mr Loane would have been a contingent creditor pursuant to a guarantee that he had executed in May 1999 had he not become bankrupt, the fact that he had become bankrupt and that subsequent to his bankruptcy his wife, Ms Caerdinael, had executed a guarantee in respect of a loan from Gold Ribbon (Accountants) Pty Ltd ("GRA") had the effect that GRA was not a creditor of the appellant. 9 Notwithstanding what are, at the least, imprecise legal descriptions of events that occurred, it seems to me plain that GRA was a contingent creditor within s 82(1) of the Act. It had that status at the date of Mr Loane's bankruptcy, during the course of it, at the date of the special resolution which accepted the composition, and at the date of the application to the Federal Court for annulling of the composition. Section 82(1) of the Act provides: 'Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.' 10 In my opinion, a contingent creditor who is able to prove in the bankruptcy of the bankrupt is a creditor who can apply, pursuant to s 75(4) of the Act, for the annulment of a composition. 11 It is necessary, in the resolution of what has been called the threshold point, to refer to the legal arrangements which were in fact entered into, and it is unhelpful to have the characterisation of those legal arrangements determined by person's opinions as to what they might have been. 12 A document called "Gold Ribbon (Accountants) Pty Ltd Accountants Funding Programme" is the document which constitutes the loan arrangements between GRA and Venola Pty Ltd, a company of which Mr Loane was director. The terms and conditions of that document provides in cl 1 of Section C of that document: 'The Applicant hereby applies to Gold Ribbon (Accountants) Pty. Ltd. ("GRA") as administrator of the Accountants' Funding Programme for registration in the programme.' Clause 5 of those terms and conditions provides as follows: 'As the Applicant or on behalf of the Applicant, I undertake that the Applicant will duly perform all the obligations imposed on it for participation in the programme including the obligation that advances to the applicant by GRA pursuant to the programme will be repaid to GRA on the due date for repayment. Where applicable provided herewith in the form required by GRA are guarantees of the Applicant's due performance of all its obligations under the programme. These guarantees are provided by: I. The Directors of the Applicant Company; …' Clause 13 of those terms and conditions provides as follows: 'The Applicant will give to GRA 90 days notice in writing if it intends to withdraw from the programme and acknowledges that unless the Applicant is in default, then GRA will give to the Applicant 90 days notice in writing if it intends to terminate the Applicant's participation in the programme.' 13 Notwithstanding statements concerning the effect of these arrangements by various witnesses in the Federal Magistrates Court, in my opinion this was an ongoing loan of indefinite duration, which could be terminated by 90 days notice in writing and could also be terminated for default. 14 Mr Loane signed a guarantee on the same day as the loan document. The guarantee relevantly provides: 'IN CONSIDERATION of advances under and or pursuant to the Accountants' Funding Programme ("the programme") conducted by GRA and administered by Gold Ribbon (Accountants) Pty. Ltd. or other financial accommodation granted or hereafter to be granted and continuing to the applicant Accountant as set out in Schedule 2 to this instrument ("the Applicant") at the request of the Guarantor (as testified to by the Guarantor's execution hereof). HEREBY: