Spratt, Re T.J. Wilde, Ex Parte W.J. & Ors [1986] FCA 33

IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) QLD E207 of 1983

BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND }

EX PARTE: WILSON JOSEPH WILDE and ERNEST GEORGE HARRIS & ORS

First Respondent AND: P. & S. DECO QUARRIES PTY. LTD.

JUDGE MAKING ORDER: PINCUS J. DATE OF ORDER: 19 February, 1986 WHERE MADE: BRISBANE

1. It be declared that on or about 28 February, 1985 the fourth respondent made a compromise within the meaning of s.135(1)(f) of the Bankruptcy Act and made a compromise within the meaning of $.135(1)(g)

of the Bankruptcy Act in respect of action no. 2508 of 1981 pending in the Supreme Court of Queensland.

2. The costs of and incidental to the application to date be reserved.

3. The matter be adjourned for further hearing toa date to be fixed by the Registrar.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) QLD E207 of 1983

BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND )

EX PARTE: WILSON JOSEPH WILDE and ERNEST GEORGE HARRIS & ORS

Trustees/Applicants AND: JANELLE KAYE SPRATT First Respondent

The trustees of the estate of Timothy John Spratt, a bankrupt, apply for declarations whose object is to prevent the

third respondent, Mr. Peach, from continuing a certain action in the Supreme Court of Queensland. The purpose of that action is

to obtain a decree of specific performance in respect of an

agreement to transfer to Mr. Peach certain shares in the second

respondent, which I shall simply call "the company".

The fourth respondent, Mr. Rees, was, until 27 June, 1985, the trustee of the estate and while holding that office, Mr. Rees agreed to sell the shares in question to the first respondent, Mrs. Janelle Spratt, or her nominee, for $15,000. Mr. Peach is the nominee. The applicants say that by reason of

provisions of the Bankruptcy Act that agreement cannot he

Before Mr. Spratt became bankrupt (on 16 May, 1983), there was a number of actions on foot in the Supreme Court of Queensland concerning disputes with Mr. Peach. Although there is evidence before me concerning three Supreme Court cases, it seems necessary to refer only to one, namely no. 2508 of 1981, because it was as part of, or un connection with, a compromise of that action that the impugned agreement was made. The applicants apply on the assumption that it is necessary to come to this court for the relief to which they claim to be entitled. It isa digression to say so, but the litagation in question, which was already rampant enough before the applicants came here, seems to be a very expensive fight about property of modest value. No

doubt the expense incurred has been increased by the applicants

having to raise aspects of the matter in another forum.

The applicants' factual case, on the affidavits, involves an examination principally of the question whether "good

faith" attended the impugned transaction and contains a history

of dealings between the parties over a period of years relating to the capital and property of the company. The question of good faith is said to arise under s.135(4) of the Bankruptcy Act, which provides a means of escape from the prima facie invalidity of trustees' entering into certain transactions without permission of the creditors or of the committee of inspection and

Very sensibly, at an interlocutory stage, the parties agreed to have the dispute before me tried in two phases, the former being confined to questions arising under s.58(3) of the Bankruptcy Act, which is set out below, and the question whether

the permission of creditors or of a committee of inspection or

the leave of the court was necessary under s.135(1) which is also, so far as relevant, set out below. The purpose of this arrangement was to leave the question of ""good faith" undes s.135(4) to be considered, if necessary, after the first phase of the litigation, because it was thought that determination of that

issue would substantially lengthen the hearing and because it

Action 2508 of 1981 in the Supreme Court of Queensland was a claim by the company against Mr. and Mrs. Spratt for rent due under the lease, with a counter claim for damages for breach of terms of the lease. After Mr. Spratt became bankrupt, the

action was continued and the applicants contended that the Plaintiff in the suit (the company) has thereby breached s.58(3) of the Bankruptcy Act. The relevance of that contention was said

to be that the breach of the Bankruptcy Act vitiated the

agreement for sale of the shares, said to have arisen out of the

wrongful act of the company in continuing the suit.

"Except as provided by this Act, after a debtor has become a bankrupt, it is mot competent for a creditor -

(a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or

terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt

The company's claim for rent in action 2508 of 1981 was "in respect of a provable debt". It was said, however, that in setting the matter down for hearing, s.58(3) was not breached because the case was set down only against Mrs. Spratt. There is nothing in the evidence to support that. The case was simply set down and under the practice of the Supreme Court, as it seems to me, a special order would have been necessary to achieve the

result that it was set down against one defendant only. No such

The question remains whether the breach of s.58(3) vitiated the agreement. Discussion of that 1s deferred until

after treatment of the questions arising under s.135.

creditors granted by resolution passed at a general meeting or of the committee of inspection or with the leave of the Court, doall or any of the following things:

(f) make a compromise in respect of any debt exceeding $20,000 or such greater amount as is prescribed for the purposes of section 134 claimed to be due to the bankrupt, or any claim exceeding $20,000 or such greater amount

as is prescribed for the purposes of section 134 by the bankrupt;

(g) make a compromise with a creditor or a person claiming to be a creditor in respect of a debt provable, or claimed to be provable, in the bankruptcy and claimed to exceed $20,000 or

such greater amount as is prescribed for the purposes of section 134;".

A number of answers were made to the applicant's contention that the agreement for sale of shares which is attacked was part of a compromise caught by one or both of these provisions. It was said that the share sale was no part of any compromise, that Mr. Rees (the former trustee) was not involved in any compromise, that there was no debt or claim exceeding $20,000 and that Mr. Rees abandoned his counterclaim. To consider these matters, it 1s necessary to set out the facts in some detail. On any view, the transactions attacked were effected by the parties ina rather loose way. The question, which I have found rather difficult, is what legal effect should

When the agreement for sale in question was made, Mr.

Peach and his family had all but 33,333 of the 160,000 shares in the company. It is plain that they were anxious to acquire the rest. On 23 June, 1983, Messrs J. T. Taylor & Co., solicitors for the company, wrote to Mrs. Spratt a letter referring to Mr.

Spratt''s bankruptcy which noted that "as you are a joint

defendant we are entitled to pursue you personally, in our client's action against you and your husband, as joint

defendant". On 16 November, 1983 (some previous discussions having taken place on the same subject) Messrs James

Byrne and Co., solicitors, wrote to their client Mr. Rees about the action 2508 of 1981, informing him that the solicitors for the company "would be prepared to settle the matter along the

following lines... The proposal set out in the letter was that shares formerly belonging to Mr. Spratt, numbering 26,667, would be transferred to Mr. Peach for $5,240, that Mrs. Spratt would transfer her 6,667 shares to Mr. Peach for nothing, and would pay $2,300 to the company to cover some legal expenses. The company was to discontinue its action. The solicitors recommended the settlement proposed. There followed some communications between

the two sets of solicitors concerning the balance sheet of the

company, constituting an attempt to satisfy Mr. Rees as to the

value of its assets. On 30 May, 1984 the solicitors for the company wrote to Messrs James Byrne and Co. to say that the company had been attempting to provide "all relevant information as to allow your clients to be able to ascertain the market value of the shares in the company". They said that if satisfactory terms were not reached by 4 June, 1984 "then we are instructed to set this matter down for trial". That occurred. The case was listed for 28 February, 1985 but was not then heard. It was mentioned before Master Lee Q.C. on 1 March, 1985, so presumably it must have been adjourned to that date. However, on 28 February, 1985, two documents were signed; one was an agreement by Mr. Rees to sell to Mrs. Spratt the 26,667 shares in the

company registered in the name of Mr. Spratt for $15,000. The

other was headed "Terms of Settlement". It was signed by, inter alia, counsel for the defendants (Mr. and Mrs. Spratt). By clause 1 of the terms of settlement, Mrs. Spratt promised to transfer to Mr. Peach or his nominee her 6,677 shares "at a price to be determined by auditors of P. & S. Deco Quarries Pty. Ltd." By clause 2 it was provided:

"That John Robert Rees as trustee in the bankruptcy

Ltd. as such trustee to Janelle Kaye Spratt or her nominee for a consideration of $15,000".

It is important to note that this clause is expressed as a promise by Mr. Rees. By clause 3, Mrs. Spratt nominated Mr. Peach or his nominee as the party to whom the shares were to be transferred. By clause 6, Mrs. Spratt undertook to pay the

company's costs of the three actions referred to above, including

It 15 an oddity of the terms of settlement that they say nothing about either the claim or the counterclaim in the action to which they principally relate, namely no. 2508 of 1981. The question 1s whether either claim or counterclaim survived the execution of the terms of settlement. It was contended, on behalf of the company, that (in effect) the settlement was only a

partial compromise and left the parties free to pursue their

The matter is complicated by the fact that Mr. Rees, the

trustee, was not on the record. As mentioned above, proceedings should not have continued against Mr. Spratt because he was a

bankrupt and the leave of the court had not been obtained.

Both the claim and counterclaim related to matters which had eccurred before bankruptcy. No doubt the parties appreciated that Mr. Spratt, as the bankrupt, was no longer concerned with the suit and it was for that reason that, firstly, the solicitors for the company negotiated with Messrs James Byrne and Co. as solicitors for the trustee, Mr. Rees and, secondly, the terms

contained a promise by Mr. Rees but none by Mr. Spratt.

It was suggested that, in executing the terms of settlement as counsel for the defendants, counsel must have been in error, and that he was acting only for Mrs. Spratt. Mr. Rees has made an affidavit saying that while he was trustee there were no funds in the estate and for that reason he decided not to take any part in the trial set down for hearing on 28 February, 1985. He said:

"IT was not a party to the compromise of the action. I merely sold the shares held by the bankrupt to Mrs. Spratt and so enabled her to compromise the claim against her."

When Mr. Rees applied to the court on 27 June, 1985 for acceptance of his resignation, there was read an affidavit by him veferring to the same action, no. 2508 of 1981, containing the following:

"As a result of settlement negotiations entered into between the parties, I agreed to transfer the aforesaid shares in the company held by me as trustee for the estate of the bankrupt to Janelle Kaye Spratt and in turn her nominee Robert William Peach for a cash consideration of $15,000... In all the circumstances, [I consider the sale price offered for the shares to be fair and reasonable as far as the creditors are concerned. In addition, at the time of signing the aforesaid agreement, I believed that the bankrupt, the said Timothy John Spratt concurred in the terms of settlement and the sale of the said shares."

It will be noted that the passage quoted does not make quite the same point as the more recent affidavit, and in particular does not say that the settlement was only between Mrs. Spratt and the company. The same affidavit exhibited a letter from Messrs James Byrne and Company to the solicitors for the present applicants dated 11 June, 1985 which referred to the fact that Messrs James

Byrne and Co. received instructions to act on behalf of Mr. Rees

"In relation to the Court action we wish to advise that considerable discussions took place between

Mr. and Mrs. Spratt, John Rees and our counsel. We understood that Mr. and Mrs. Spratt were satisfied

with the settlement on the basis of the advice they received from counsel.

We understood that in relation to the Court proceedings, the Plaintiff was proceeding only against Mrs. Spratt and not Mr. Spratt. The Trustee had no funds in the Estate to prosecute what appeared to be at the very best a dubious defence and counterclain. He was therefore facing

possible judgment 1f necessary leave was granted - no leave was necessary to compromise the action.

The agreement that John Rees as Trustee sell Mr. Spratt's shares in the company to the Plaintiff was an important part of the settlement to avoid a

well in excess of any value the shares may have had. "

The proceedings relating to Mr. Rees' resignation as trustee were referred to in the course of these proceedings, and I have looked at and taken into account the earlier affidavit of Mr. Rees, relying on Wood v. Rowe (1820) 11 Bligh 595, 4 E.R. 459. That appears to be authority for the view that the court may take judicial notice, in a final hearing, of admissible material read in interlocutory proceedings in the same matter. This is not quite the same situation but, in my view, I am not obliged to

ignore the content of the previous affidavit of Mr. Rees,

although it was not formally read on the hearing of this

Although I accept that Mr. Rees, having no funds to do so, did not instruct his solicitors to defend the action, I find that counsel nevertheless appeared for both defendants when the matter was called on. It is true that the order of 1 March, 1985 records counsel as having appeared for "the defendant" without specifying which, but it seems likely that that is merely a typing slip. A more reliable guide to counsel's role is the fact

that he executed the terms of settlement as counsel for both

defendants. I also take into account that Mr. Peach swore, without objection, that his solicitor told him that at all

relevant times until May 1985, Messrs James Byrne and Co. were

Both the claim and the counterclaim were, in my view, implicitly abandoned by the terms of settlement to which I have referred. In a practical sense, no one séems to have had much interest aun the counterclaim, but to apply the ""officious bystander" test, it would have been absurd to suppose that it was thought the counterclaim was still on foot after the execution of the terms of settlement. The company no doubt assumed that it was not to be pursued. That is even more clear with respect to the claim, which was a matter of practical concern. The point of the settlement, so far as Mrs. Spratt was concerned, was that the claim was not to be pursued. The action was adjourned by Master

Lee 9.C. to the settlement list, an appropriate course only if a

party to the compromise. Although not on the record in the action, he was advised and, in my view, represented by counsel and as his solicitors said, the document he signed (the agreement for sale of the shares) was an important part of the settlement. If Mr. Rees had the impression that the action was not set down against Mr. Spratt and therefore had nothing to do with the

estate, his misapprehension in that respect does not produce the

result that the authority of counsel who signed the terms of settlement was limited to merely advising him. As Mr. Spratt was bankrupt, Mr. Rees stood in his shoes in respect of all the matters dealt with by the compromise. In my view, there was in substance an agreement to which there were three parties: the company, Mr. Rees as trustee of the bankrupt estate, and Mrs. Spratt. The terms of the agreement consisted of the contract for sale of the shares, the terms of settlement and the implications

mentioned above, that is, that both claim and counterclaim were

The next question is whether the abandonment (by agreement) of the claim and counterclaim, or of either of then, constituted such a compromise as is spoken of in the two Paragraphs of s.135(1) quoted above. Each of the claim and counterclaim exceeded $20,000. The difference between them was less than $20,000 and it was argued on behalf of the company that it is that difference to which I must have regard in applying pars.(f) and (g). Generalising counsel's proposition, it would,

if correct, permit the making of a compromise (without permission

or leave) in respect of any claim by or against the estate, however large, as long as there is a claim of similar size the other way. The natural reading of the paragraphs in question does not support that. In my view, there was a claim exceeding $20,000 within the meaning of par.(f) in respect of monies

claimed to be due to the bankrupt. The fact that there was also, within the meaning of par.(g), a claim exceeding $20,000 bya person claiming to be a creditor (the company) did not cancel it. I am of opinion, further, that there was a compromise "in respect of" each of those claims. The compromise was that referred to above, the essence of which was that each claim was to be abandoned and as an important part of the compromise, the trustee agreed to sell the shares. The whole settlement was caught because it was a compromise "in respect of" each of the claim and counterclain. I note that in Re N.F.U. Develonment Trust Ltd. (1973) 1 All E.R. 135, it was said that a total surrender of rights is not a compromise. Here, however, the whole case was settled by all those interested making concessions and that is a compromise: W.F. Marshall Ltd. v. Barnes (1953) 1 All E.R. 970

It 1s therefore my view that what the trustee purported

I would mention there was no suggestion that I could or

The conclusion I have reached makes it unnecessary to

deal also with the question arising under s.58(3), mentioned

above. However, I think I should set out my views. It was argued that in proceeding with the Supreme Court action against

Mr. and Mrs. Spratt, the company committed an illegality which vitiated the subsequent compromise of the action. It is true that, as the correspondence demonstrates, the setting down of the action led directly to the compromise. Mr. Rees, having no cash in the estate, did not want to incur liability in defending the suit and Mrs. Spratt, although desirous of defending, was told by her solicitor that to do so would cost much more than she had paid. I infer 'that the company, by Mr. Peach, sensed that there were difficulties of that kind. It was the step of setting the action down which brought matters toa head and produced the

Section 58(3) does not merely prohibit the taking of such a step as mentioned in it. The expression used is that "it is not competent for a creditor" to do so. The question is whether the voildness of the step taken in the Supreme Court action affects the validity of the settlement, on the ground that there was a causal connection between the settlement and the

steps taken 1n pursuit of the action which were designed to force

In some circumstances, apart from statute, the illegality of one transaction of course affects another; for example, 1t was held in Spector v. Aqeda (1973) Ch. 30 that in some circumstances a loan made to discharge an earlier illegal

loan is itself illegal. However, the question whether the

compromise 1s affected by the fact that the action was pursued

without the necessary leave should not be determined on the principles of the law of contract; it is a pure question of statutory construction. As a matter of policy, there may be much to be said for the view that the company should not keep the fruits of its having unlawfully purported to pursue the Supreme Court action. The relevant provision does not, however, directly affect the compromise, nor is it necessary, in order to

make the section work, to hold that the compromise is avoided.

In short, I hold in favour of the company with respect

I propose also to decide a question raised under s.60 of

the Bankruptcy Act, on which was based the contention that Mr. Rees abandoned his counterclaim. The relevant provisions are subs.(2) and (3) of s.60:

"(2) An action commenced by a person who subsequently becomes a bankrupt 1S, upon his

becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action.

within 28 days after notice of the action is served

action." It was argued that the counterclaim brought in the Supreme Court was an "action" within the meaning of subs.(5), which defines it to mean "any civil proceeding, whether at law or in equity". It was contended that correspondence in evidence constituted a notice of the action within the meaning of subs.(3); on that assumption, it is my view that there was no obligation to make an

Langley Constructions (Brixham) Ltd. v. Wells (1969) 1 W.L.R. 503 is authority for the view that under the English

provision corresponding to our s.58(3) of the Bankruptcy Act,

quoted above, "a cross~demand can be used as a set-off, namely as a shield to reduce or exclude the plaintiff's claim". I think that principle, if correctly stated, should be applicable to s.60(2), which has a similar purpose. Here, the claim by the defendants in the Supreme Court for damages for breach of the lease was pleaded asa set-off against the rent and as a counterclaim as well. On the rule just set out, the pleading was good, at least in so far as it took effect as a set-off. Under the practice of the Queensland Supreme Court, the distinction does not make much sense, because 0.25 r.18 says the court may give judgment under a plea of set-off for the amount by which the set-off proved overtops the plaintiff's claim. However that may be, 1t is my view that, at best for the company, the failure to elect (if there was one) prevented the pursuit of the counterclaim only to the extent that it exceeded so much of the

plaintiff's claim as was proved. That conclusion cannot assist

I come now to a different topic, namely the contention of the applicants that there was a breach of par.(a) of s.135(1), which makes it necessary for the trustee to obtain permission from the creditors or the committee of inspection, or the leave of the court, to:

greater amount as is prescribed for the purposes of section 134".

In case I am held to be wrong with respect to pars.(f) and (g) of

s.135(1), it is desirable to express, at least in summary, my conclusions on par.(a). The only question is whether the shares in question had a value exceeding $20,000 and much evidence was directed to that point, principally with respect to the value of what might be called the underlying assets of the company. It is very difficult, and somewhat artificial, to fix a precise value of the total assets of the company, as there is a great deal of guesswork in such matters as estimates of rock quantities. According to the applicant's case, the value of the shares was $34,667. According to the case for the company, however, their value was only 40% of that. The discrepancy is surprisingly large. I thought the evidence of Mr. Slater, the company's valuer, was more accurate, but nonetheless am of the view that the net tangible assets of the company exceed $120,000 in value but are less than $150,000 in value, with the result that the proportion of them represented by the shares in question exceeds

In my view, the word "value" in par.(a) of subs.135(1)

has the meaning set out in authorities such as Spencer v. The

"In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e., whether there was in fact on that day a willing buyer, but by inquiring 'What would a man desiring to buy the land have had to have paid for it on that day to a vendor willing to sell it for afairr price but not desirous to sell?'." (Per Griffith C.J., p.432)

Here, there was an actual sale on the relevant day, but it does

not seem to me that the price then obtained was necessarily an

indication of true value since, on any view of the matter, the vendor trustee had little information as to the value of the underlying assets. Nevertheless, the willingness of the then trustee to sell for what seems a rather low price illustrates the dominant position of the purchaser, Mr. Peach. He and his family held all but 33,333 of the 160,000 shares in the company. The articles contain provisions of a familiar kind inhibiting free transfer; that is, they give the board an unfettered discretion to refuse registration of transfers and contain pre-emptive provisions requiring any shareholder desiring to sell to place the parcel for sale in the hands of the directors, who are then entitled to sell (in the absence of agreement) at a price fixed by the auditors. When one adds to these disabilities the fact that an outside buyer might reasonably have expected to be excluded from any say in the running of the company, a substantial discount must be allowed to represent the difference between the commercial value of the shares and the value which they would have, considered as a proportion of the net assets of the company. The Court of Appeal In re Bird Precision Bellows Ltd. (1986) 2 W.L.R. 158, in what might be called for simplicity an oppression petition, affirmed a compulsory purchase order fixing the price at a proportionate part of the total value of the company's assets. A similar course seems to have been upheld by the Queensland Full Court In re Golden Bread Pty. Ltd. (1977) Qd.R. 44. I do not regard these cases, however, as governing the matter under consideration. Here, the commercial value of the

shares had to be much less than the appropriate proportion of the

evidence showed that the Peach interests were extremely anxious to obtain full ownership of the shares. That does not appear to affect their true value, although no doubt the fact that existing shareholders are potential buyers may be taken into account. The circumstance that a particular vendor or purchaser may be over-anxious to sell or buy does not affect the true value of property, although it may produce the result that a sale by or to such a person will be at a price rather different from the

It is because of my view of the proper discount to be allowed that I have found it unnecessary precisely to fix the value of the company's property. Taking the top of the range mentioned above, namely $25,000, as one-sixth of the value of the

company's assets, I am not prepared to hold that the value of the

shares, 1n accordance with the interpretation here placed on the

word "value", can have exceeded $20,000; that is so because the circumstances were such that a discount of more than 20% was

(i) The sale was of a minority interest and not such an

interest as to give control; (ii) The articles contain the provisions summarised above;

(iii) The company was, at least on the face of it, not