Re Lees, Edwin David Ex Parte Young, Grant Charles [1984] FCA 261

2. A sequestration order is made against the estate of the debtor.

) ) ) ) BANKRUPTCY DISTRICT OF THE STATE ) No. NSW 352X of 1984 ) ) ) )

Re: EDWIN DAVID LEES A debtor Ex parte: GRANT CHARLES YOUNG

This 1s an application by Grant Charles Young ("the applicant") that a deed of arrangement executed by Edwin David Lees ("the debtor") on 6 April 1984 pursuant

to Part X of the Bankruptcy Act 1966 ("the Act") be

declared void under sub-section 222(4) of the Act or be terminated under sub-section 236(1) thereof. The applicant also seeks a summary sequestration order against the estate of the debtor pursuant to sub-section 222(7) or 236(3) as

The grounds upon which the application is based are that the debtor gave false or misleading information in answer to questions put to him with respect to his conduct, trade dealings, property or affairs at the meeting of creditors at which the resolu- tion requiring him to execute the deed of arrangement was passed (para. 222(4)(a) of the Act) and that he omitted a material particular from the statement of his affairs

On 14 December 1983 the debtor, pursuant to section 188 of the Act, signed an authority authorising Mr. Brian Henry Kahlefeldt, a registered trustee, to call a meeting of his creditors for the purposes of Part X of the Act and to take over control of his property. Mr. Kahlefeldt consented, in writing, to exercise the powers conferred by the authority and called a meeting of the debtor's creditors in accordance with Division 2 of Part X

On the same day, 14 December 1983, the debtor also made a statutory declaration in accordance with Form 35 in Schedule 1 to the Bankruptcy Rules verifying an annexed statement of affairs in accordance with Form 11. The debtor declared that the annexed statement of affairs contained, to the best of his knowledge and belief, a true

and complete statement of his affairs as at 14 December 1983.

The summary disclosed an amount of $81,971.72 owing to

19 unsecured creditors (including the applicant), assets

of $7,400 and a deficiency of $74,571.72. The assets disclosed consisted of cash in hand ($400) and a half

share in household furniture and effects situated at

Unit 33, "Seven Oaks South'"', 29 Campbell Street, Sorrento, Queensland ($7,000). The statement of affairs also disclosed that the debtor had during the preceding five years carried on business on his own account as a solicitor. The statement of affairs was, in accordance with section 195 of the Act,

submitted to the meeting of creditors called by Mr. Kahlefeldt.

That meeting took place on 12 and 26 January 1984 and 21 March 1984. On the last mentioned date a special resolution was passed in the following terms -

"That the debtor be required to execute a deed of arrangement under which the debtor agrees to:

(a) Convey and assign to the Trustee all his interest in the Estate of Charles Benn Lees deceased.

(b) Pay to the trustee the following monthly instalments: -

(i) April, 1984 to July, 1984 $250 per month (ii) August, 1984 to July, 1985 $300 per month (iii) August, 1985 to July, 1986 $400 per month (iv) August, 1986 to March, 1987 $500 per month Instalments are to be paid by the end of each month.

The debtor shall have the right to accelerate the rate of such instalments."

The deed of arrangement as executed complies with those

It will be necessary to refer in some detail to what took place at the meeting of creditors but before

On 6 April 1977 a motor vehicle accident occurred on the Federal Highway near Sutton, New South Wales involving a motor vehicle owned by the applicant and a motor vehicle owned and driven by the debtor. The accident caused personal injuries to the debtor and resulted in substantial damage to both vehicles and to goods and equipment being transported in the applicant's vehicle. The debtor carried no insurance indemnifying him against liability for damage to the appli- cant's vehicle, goods and equipment and the circumstances of the accident were such that the debtor must have realized that a claim against him in negligence would have good prospects of success. The debtor was, at that time, a solicitor employed by a firm of solicitors practising in

At the time of the accident the debtor and his then wife, Elizabeth Anne Lees, were the registered proprietors for an estate in fee simple as joint tenants of certain land situate at R.M.B. 251, Wyoming Road, Gundaroo Road, Bungendore, New South Wales, being lot 23 an Deposited Plan 239020 ("the Bungendore property"). The land comprised 40 acres 3 roods 4 perches on which was erected

a timber residence of 150.86 square metres approximately with

a metal clad roof. There is evidence before me, which I accept, that at the present time a reasonable selling

price of the property would be between $120,000 and $125,000. In April 1977 the property was subject to a mortgage dated

3 September 1976 1n favour of Solex Nominees Pty. Limited

On 8 August 1977 a company known as Manettia Pty. Limited ("the company") was incorporated in the Australian Capital Territory with a nominal capital of $10,000 divided into 10,000 shares of $1 each. The subscribers to the memorandum of association were Mr. N.M. Macphillamy, Solicitor, and Mr. B.J. Doyle, Solicitor who were also the only directors.

Only two shares were issued, one being held by each of the

On 28 September 1977 Mr. Macphillamy and Mr. Doyle transferred their shares to the debtor and his then wife respectively. The debtor and his wife also became directors of the company on that date in place of Mr. Macphillamy and

The minutes of a meeting of the directors of the company held on 29 September 1977 record that the debtor informed the meeting that one Michael Christopher Green wished to establish a trust for the benefit of the debtor

and his wife and family. A deed of settlement to establish

a trust to be known as ''The Lees Family Settlement" was tabled and it was resolved that the company accept office as such trustee and that the deed of settlement be executed by the company. The minutes also record the acceptance of offers by the debtor and his wife that each would lend to the company as trustee of the settlement the sum of $22,500 repayable on demand free of interest. It was also resolved that the company as such trustee purchase the Bungendore

The reference to Mr. Green's wish to establish a trust for the benefit of the debtor and his family relates to a letter dated 9 September 1977 addressed by Mr. Green, a solicitor practising in Melbourne, to Messrs. Macphillamy, Cummins and Gibson, Solicitors, Canberra enclosing a cheque for $25 payable to Manettia Pty. Limited "by way of settle- ment upon that Company, so that it may act as trustee of the Lees Family Trust."" It appears from the affidavit of John Hilton Fielden sworn 7 May 1984 and filed herein on behalf of the applicant that the cheque was not presented

for payment and was in due course replaced by another cheque.

No further step was taken by the company to purchase the Bungendore property until 2 January 1978 when, at a meeting of directors of the company held on that date, it was resolved that the company execute a contract for the purchase of the

property and the relevant memorandum of transfer. A copy of

the contract for the sale of the property is in evidence before me but it bears neither evidence of execution nor

a date. The memorandum of transfer as executed by the debtor and his wife as transferors and the company as transferee bears date 2 January 1978 but it was not lodged for registration at the office of the Registrar-General in

Sydney until 23 June 1978. It was registered on 28 July 1978.

A further meeting of the directors of the company was held on 3 January 1978. The minutes of that meeting record the following under the heading "Purchase of property" -

"E.D. Lees tabled the contract for the purchase of the property referred to in the minutes of 28th September, 1977 and 2nd January, 1978, to- gether with the memorandum of transfer.

It was noted that this purchase was financed by the borrowings from E.D. & E.A Lees referred to in the minutes of 28th September, 1977 and by the following:

i) $20,000 loan on first mortgage by Solex Nominees Pty. Limited originally advanced to E.D. & E.A. Lees with interest payable at 14% p.a. of $2,800 p.a. and principal repayable at conclusion of term.

ii) $10,000 unsecured loan by the estate of the late C.B. Lees at no interest, repay-

It was noted that Solex Nominees Pty. Limited had consented to the transfer of the property to the company and that both Solex Nominees Pty. Limited and the estate of the late C.B. Lees had agreed to the above liabilities of E.D. & E.A. Lees to those lenders being taken over by the company on the same terms and conditions as previously existed.

It was resolved that the company as trustee for The Lees Family Settlement should take over the

liabilities to Solex Nominees Pty. Limited and estate late C.B. Lees referred to above on the same terms and conditions as previously

On 13 April 1978 Mr. M.H. McMichael, Solicitor, received instructions to act on behalf of the applicant's insurer in respect of the motor vehicle accident to which reference has already been made. A letter dated 9 May 1978 was addressed by Mr. McMichael to Messrs. Snedden, Hall and Gallop, Solicitors, who were then acting for the debtor. After referring to the motor vehicle accident and the amount of the loss suffered as a result thereof, the letter went on -

was not comprehensively insured but our instruc- tions are to proceed for the recovery of the above amount and unless we receive appropriate communi- cation from you within twenty-one (21) days of the

date of this letter our client will institute such proceedings as it may be advised for this purpose."

Proceedings to recover damages in respect of the loss suffered by reason of the collision were not commenced until 15 August 1979 when a statement of claim was filed in the Supreme Court of New South Wales. The proceedings were commenced in the name of G.C. Young Transport Pty. Limited but the applicant was subsequently substituted as plaintiff by order of the Supreme Court. The action was heard on 6

and 7 September 1983 when judgment was given for the applicant

in the sum of $21,106.54 plus costs. The judgment debt remains unpaid and there can be no doubt that the applicant is a creditor of the debtor and, as such, entitled to bring

Two events which took place between the date of the notice of intended action and the date of commencement

29 May 1984 has deposed that in or about February 1979 she was having lunch with the debtor at a restaurant in Canberra. The road accident to which reference has been made became a topic of conversation and it became apparent to Mrs. Hawkins that the accident of which the debtor was speaking was an accident that involved her brother, the present applicant. Mrs. Hawkins so informed the debtor who then said words to the following effect -

for him but he is not going to get anything out of me."

Mrs. Hawkins also gave evidence in the Supreme Court pro-

ceedings and a transcript of her evidence is before me.

sworn on 7 May 1984 has deposed that on 7 March 1979 he

received instructions from the debtor to provide account- ing services and to arrange for the filing of company documents in relation to Manettia Pty. Limited which the debtor informed him "had been set up pursuant to the constitution of a family trust for the debtor". He further deposed that on 9 May 1979 he attended on the debtor per- sonally when the following conversation took place -

Mr. Lees: "My wife and I have formed Manettia Pty Limited to act as Trustee for a family Trust".

Mr. Fielden: "Why has the Trust been set up? I know you have no children to distrib- ute income to?"

Mr. Lees: Certain assets of myself and my wife have been transferred to Manettia Pty Limited as Trustee. I was involved

in a motor vehicle accident and I be- lieve I might be sued for a substantial

sum. I was uninsured at the time". Mr. Fielden: "What assets were transferred?" Mr. Lees: "The main asset was a block of land

Mr. Fielden: "How were the funds acquired for the company to purchase that land?"

Mr. Lees: "The funds for the purchase of the land were lent by myself and my wife".

gendore property in favour of Solex Nominees Pty. Limited was discharged and on the same day a mortgage in favour of Citicorp Australia Limited was executed to secure the sum of

$40,000. Both transactions were registered on 6 November 1979.

agreement under section 86 of the Family Law Act 1975

transferred to Mr. T.R. Thompson, Accountant, the one share that he held in the company. Mr. Thompson had on 23 June 1982 executed a deed declaring that he would hold the share when transferred to him in trust for the benefit of the children of the debtor and Elizabeth Anne Lees, namely Benn

On the same date, 12 October 1982, the debtor resigned as a director of the company. On that day an amended defence was filed on behalf of the debtor in the Supreme Court

proceedings arising out of the motor vehicle accident on 6

At a meeting of directors of the company on 14 March 1983 the transfer of the debtor's share to Mr. Thompson was approved and the debtor's resignation as a

On 21 March 1984 the applicant presented a creditor's petition against the debtor based upon the act of bankruptcy committed by the debtor in signing on 14 December 1983 the authority under section 188 of the Act. The petition was duly served and came before this Court on 27 April 1984.

The hearing was adjourned until 25 May 1984. On 2 May 1984

the debtor filed a notice of intention to oppose the petition

on the ground that the deed of arrangement pursuant to

Part X of the Act had been executed on 6 April 1984 and

that the creditor's debt was a provable debt in the insolvency administration of the debtor. The petition at present stands adjourned pending the outcome of the application now before

I return to what took place at the meeting of the creditors of the debtor held on 12 and 26 January 1984 and 21 March 1984. The minutes of what took place on 12 January 1984 show that the debtor was questioned at length by creditors and that he provided the information recorded in the minutes. In relation to the property at Bungendore the minutes record as follows -

"Comprises 40 acres plus 17 square timber home. Property owned by Manettia Pty. Limited and is currently rented. The property was transferred/sold to the company by the debtor and his ex-wife on 28th July, 1978. The consideration was $75,000.

Payment was effected by book entry in the company's records. No actual cash transaction occurred.

he was in a sound financial position at that time. Subsequently the debtor's shares in the company were transferred to a trustee for the children by the Marriage. Upon divorce a property settlement was entered in December 1981 which provided for main- tenance and the aforementioned transfer of shares."

Under the heading "Yarrawonga Property/Florida Gardens Property" the minutes record -

"The debtor, his mother and one (1) brother are executors of his father's estate. The beneficiaries are the debtor and his two (2) brothers. The prop- erty has an estimated value of $110,000 and is the subject of a mortgage to Citicorp in the sum of $80,000. The mortgage was raised to pay $80,000

The debtor applied the funds in reduction of his creditors and $23,000 to purchase property at Florida Gardens. The unit was purchased

in the name of his present wife for $80,000. The property was ultimately sold by the mort- gagee in possession and as the debtor had given a guarantee and a shortfall eventuated on the sale of $56,000 the debtor is now liable.

With regard to the debtor as a beneficiary of his father's estate the debtor maintains he 1s not entitled to anything by virtue of the $80,000 already received by him." A motion that the debtor execute a deed under Part X of the

Act was lost and the meeting was adjourned until 26 January

Further details of the questions addressed to the debtor and the answers he gave are deposed to in the affidavit of Keith Arthur Bradley sworn 22 May 1984. In relation to the

Bungendore property the following exchange took place -

Mr. Bradley: "What were the circumstances of the transfer of that Bungendore property

Mr. Lees: "It was part of an estate planning exercise which I had been advised to make."

Mr. Bradley: "As at July, 1978 was your marriage still sound?"

Mr. Lees: "The marriage was still quite sound and it was not contemplated at that stage that the transfer was part of any matrimonial property settlement pursuant to a break-down in my re- lationship with my wife".

Mr. Bradley: "Was the consideration of the transfer of the property to Manettia Pty Lamited of $75,000 1n fact received by you and your wife?"

Mr. Lees: "It was merely a book entry. I was divorced from my then wife in 1981 and a property settlement was reached by filing a Section 86 Agreement in the Family Court. That Agreement provided that I forgave the Company, Manettia Pty Limited the debt which the Company owed me pursuant to the transfer of my interest in the Bungendore property and that I transferred my share in Man- ettia Pty Limited to an Accountant who would hold it on trust for my children of my first marriage."

Mr. Bradley: "What 1s the position with the Bungen- dore property now?"

Mr. Lees. "The block being 40 acres with a 17 sq timber house on it, 1S now rented by the Company, Manettia Pty Limited and my former wife does not live in uit. The firm of Macphillamy Cummins & Gibson had handled the transfer of the Bungen- dore property."

In relation to the estate of his late father the debtor said -

"Under the Will of my late father, my mother has a life estate in that property and the property is then to be divided equally between myself and my

two brothers 1n equal shares as tenants in common, My mother 1s aged 72 years. I think the property

1s worth about $110,000.00. In approximately 1981 or 1982 the property was mortgaged for $80,000.00

to Citicorp and those funds were then lent to me to pay my creditors and to assist in my purchase of a Unit on the Gold Coast. The raising of the loan of $80,000.00 on that property and the lending of that sum to me extinguishes my entitlement under the Will of my late father. I have reached agreement with my two brothers that my interest in that Will has been extinguished by the loan raising on that property

"Mr. Bradley, on behalf of Grant Young and his insurer, Stronghold Insurance, continued his ques- tioning as to details of the transfer of the land at Bungendore and the debtor's interest in his late father's estate.

Mr. Lees explained, so far as the land at Bungendore

was concerned, that he had discussed with his former employers, Macphillamy Cummins & Gibson, for some time

the advisability of establishing a Family Trust for

tax minimization purposes. Mr. Lees told the meeting

that the fact of the motor vehicle accident in 1977,

had no relevance to his decision to establish a Trust, although the happening of the accident did actually

delay the formation of the Trust and the subsequent trans- fer of the property at Bungendore.

Mr. Lees repeated that he had no interest in his father's Estate, as it had been agreed between him and the other beneficiaries under the Will (his brothers), that 1n view of a large debt to Citicorp Finance secured by mortgage over the only asset of the Estate, a property at Yarrawonga, that he would not receive any moneys from the Estate at the time of the realisation of that asset.

The meeting was adjourned for 15 minutes to enable Mr. Bradley to obtain further instructions from Sydney. When the meeting was re-convened, Mr. Bradley and

Miss Reid indicated that their instructions were to put a motion to the meeting that Mr. Lees file his own Petition in Bankruptcy. However, Mr. Bradley agreed to a further adjournment of the meeting to enable

the debtor to provide full partaculars of the transfer at Bungendore and his interest in the Yarrawonga property to the Controlling Trustee."

"That the debtor provide to the Controlling Trustee on or before the 29th February, 1984, all relevant details concerning the transactions whereby his interest in the Bungendore and Yarrawonga properties were transferred out of his Estate;

That the Controlling Trustee circulate a summary of these details to all creditors a reasonable time be- fore the 21st March, 1984;

That the meeting of creditors be adjourned to the 21st

March, 1984 at 11.00 a.m. at the Canberra Club, West Row, Canberra. City, A.C.T."

1974 he said to the debtor words to the following effect -

"Was there any connection between you being apprised of your liability following the motor vehicle accident in 1977 and the arrange- ments you made in relation to the Bungen- dore property?"

and the debtor replied - "Some time prior to the accident in 1977 when I was working at Macphillamy Cummins & Gibson, Solicitors, I had spoken to one of the partners there, Mr Stephen Walmsley I think it was, and a Barrister, John Hamilton, in relation to estate planning arrangements. The accident

did not influence my decision to undertake those estate planning arrangements at all."

The controlling trustee, Mr. Kahlefeldt, sub- sequently informed the creditors, including the applicant, that a letter had been received from Messrs. Macphillamy, Cummins and Gibson, Solicitors, to which were attached the letter dated 9 September 1977 from Mr. M.C. Green to Messrs. Macphillamy, Cummins and Gibson and the unsigned and undated contract of sale in respect of the Bungendore property to both of which reference has already been made. Also attached to the letter was a memorandum of transfer in respect of the property bearing date 28 July 1978. The significance, if

At the adjourned meeting on 21 March 1984 the resolution requiring the debtor to execute a deed of

arrangement was passed. The text of that resolution has

The debtor did not place any evidence before the Court although affidavits had been sworn by him and filed in the proceedings in support of a notice of intention to oppose the making of the orders sought by the applicant. He was represented at the hearing by counsel who, no doubt on instructions, did not challenge any of the factual material put before the Court on behalf of the applicant. Counsel for the debtor informed the Court that the debtor withdrew his opposition to the application though he did not consent

The applicant has established to my satisfaction that, at the meeting of creditors called by Mr. Kahlefeldt in accordance with Division 2 of Part X of the Act, the debtor gave misleading information in answer to questions put to him with respect to the Bungendore property and I so find. In the light of the circumstances surrounding the transfer of that property to Manettia Pty. Limited and the conversations with the debtor to which Mrs. Hawkins and Mr. Fielden deposed - the evidence as to which, as I have said, was not challenged in any way - the answers which the debtor gave to the questions put to him were not only less than frank but were

To say, as he did, that in July 1978, when the transfer of the property to Manettia Pty. Limited was registered, he was in a sound financial position was

misleading as at that time he was well aware that a claim for

damages arising out of the motor vehicle accident on

6 April 1977 had been made against him by letter dated

9 May 1978 and he must have known that the claim was likely to be successful and to result in his being liable for a substantial sum. At the time he had no other assets sufficient to meet any such claim. Yet no information concerning any of these matters was disclosed

It was also, in my view, misleading to inform the creditors that the Bungendore property had been transferred to Manettia Pty. Limited as "part of an estate planning exercise" (as he said on 12 and 26 January 1984) or as "a Family Trust for tax minimization purposes"

It is, I think, of great significance that no evidence was placed before the Court by or on behalf of the debtor directed to establishing the existence, or the carrying out, of any such purpose. The only inference from the evidence is that the property was not transferred for any such purpose as that referred to by the debtor

There can be no doubt that the whole of the circumstances surrounding the transfer of the Bungendore

property to Manettia Pty. Limited would have been very

material to the consideration by the creditors of the course which they should require the debtor to take. The property has a market value, according to the undisputed evidence before the Court, of between $120,000 and $125,000. It is subject to a mortgage to Citicorp Australia Limited but there is no evidence as to the amount outstanding thereunder. But even if the whole,

or substantially the whole, of the principal sum of $40,000 is outstanding, the creditors would be likely to benefit to a substantial extent if the debtor's share in

that property is to be available to meet their debts.

I am also satisfied that the debtor omitted from the statement of his affairs under section 195 of the Act particulars concerning his interest in the estate of his late father although his omission was corrected before the creditors voted upon the resolution that the debtor execute a deed of arrangement under Part X of the Act. I incline to the view, however, that this omission was not material in the relevant sense as the estate of the debtor's late father is clearly a creditor of the debtor in a substantial sum. In the view I have taken in relation to the Bungendore property it is unnecessary to pursue

that it would be in the interests of the creditors of the

debtor to declare the deed of arrangement executed by the debtor on 6 April 1977 to be void (paragraph 222(4) (a)

In those circumstances the question arises whether a summary sequestration order should be made against the estate of the debtor pursuant to sub-section 222(7) of the Act. There is ample material before the Court to justify the making of such an order. It is clear that the debtor is insolvent and that it is in the interests of the creditors that a sequestration order be made. No reasons have been advanced by the debtor against the making of such an order. I, therefore, make

a sequestration order against the estate of the debtor.

Reference should be made, in passing, to sub-section 222(9) of the Act which provides - "(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 provisionsof sub-section 43(1), sections 44 and 47, sub-sections 52(1) and (2) and Part XIA do not apply in relation to such an application." That sub-section does not expressly provide that the provisions of sub-section 52(1A) do not apply to an application for a sequestration order under section 222. However, as sub-section 52(1A) is expressed to limit the

Court's power to make a sequestration order under sub-

section 52(1) and the provisions of that sub-section

order under section 222, the better view would seem

to be that sub-section 52(1A) is equally inapplicable.

In any event in the present case a registered trustee,

Mr. Robert Yeomans, has, by instrument dated 20 March 1984 signed by him and filed with the Registrar pursuant to sub-section 156A(1), consented to act as the trustee

of the estate of the debtor in the event that he becomes

a bankrupt. That consent has not been revoked. It is true that the consent was filed not in the present proceedings but in the proceedings instituted by the creditor's petition which was presented against the debtor by the applicant on 21 March 1984, the hearing of which stands adjourned pending the determination of the present proceedings. That circumstance, however, seems to me to

The question was raised by counsel for the debtor whether, in the event of a sequestration order being made, the Court should appoint Mr. Kahlefeldt, the trustee under the deed of arrangement now declared void, to be the trustee under the bankruptcy administration

Paragraph 156A(3)(a) provides that, where at the time when a debtor becomes a bankrupt, a registered

trustee has, under sub-section 156A(1), consented to act

consent has not been revoked, the registered trustee becomes, at that time, by force of the sub-section, the trustee of the estate of the bankrupt. Paragraph 156A(3)(a) is not excluded from application by sub-section 222(9) and, in my opinion, it operates according to

its tenor to make Mr Yeomans the trustee of the bankrupt

I certify that this and the preceding twenty-one (21) pages are a true copy of the Reasons for Judgment herein of the Honourable Mr. Justice Neaves