Wenkart v Pantzer

REASONS FOR JUDGMENT (NO. 3) BEAUMONT J: 1 By his amended notice of intention to oppose the respondent's notice of motion, the applicant pleads, inter alia, the following in par 28(a): "28. ... [T]he respondent is not entitled to ... (a) remuneration, costs, charges and expenses incurred by the Respondent after the First Proposal on 9 March 2000 which the Respondent neglected and refused thereafter to put to creditors in accordance with section 73(2) of the Act which he was obliged so to do either by operation of the Act and/or because of his duty to act reasonably; ..." 2 For reasons previously given today, I am of the opinion that this plea raises a question of law to be determined in its proper factual context, about which, as will appear, there is no real dispute. I have therefore ordered that there be determined as a separate question the following question: Do the facts and matters pleaded in par 28(a) of the applicant's amended notice of intention to oppose, dated 28 April 2003, constitute an answer in whole or in part to the respondent's notice of motion, dated 31 October 2002, and if in part, to what extent? 3 The question of law that arises for decision has its statutory background in the provisions of s 73of the Bankruptcy Act 1966 (Cth) ("the Act"). Relevantly, under that provision, where a bankrupt is asked to make a proposal to creditors for a composition in satisfaction of his or her debts, he or she may lodge with the trustee a proposal in writing signed by him or her setting out the terms of the proposed composition (s 73(1)). 4 By s 73(2) of the Act, it is provided that the trustee shall call a meeting of creditors and shall send to each creditor before the meeting a copy of the proposal accompanied by their report on it. Section 73(2A) provides that the report must indicate whether the proposal would benefit the bankrupt's creditors generally and, by s 73(4), the creditors may by special resolution accept the proposal. Relevantly, for present purposes, the proposal, the subject of this separate question, is dated the 9 March 2000 and it is in the following terms: "Re: SECTION 73 PROPOSAL Herewith, as required - PROPOSAL FOR SECTION 73 COMPOSITION WITH CREDITORS 1. A lump sum amount of $1,180,000 will be paid to you for distribution among my creditors (with the exception of those noted in 2. below). Any such monies paid, will be expressly held on trust by you. Should the proposal be rejected, or challenged, these monies are to be returned to myself intact and without deduction therefrom, or should the proposal be accepted and the proposal is not challenged, until such time as the relevant distributions are paid to my creditors. These funds will be made available on the date of acceptance of the proposal by creditors as either bank cheque payable to your trust account or in the form of an irrevocable power of attorney to draw upon funds deposited for the purpose with conditions specified by you. 2. All cash currently held by the trustee is to form part of my proposal and be distributed among the creditors. These monies together with the amount payable in 1. above will form the fund from which creditors distributions will be paid. 3. The following creditors of my estate are being offered nil distribution from the fund - Non-Associated creditors Australian Taxation Office Richard Walter Pty Limited (In Liquidation) These parties retain their existing rights under their respective guarantees as provided by myself. Associated Creditors Hapday Holdings Pty Limited; Macquarie Health Corporation Limited; WWW McHealth [sic] Pty Ltd; Throvena Pty Limited; Mrs C. Wenkart; Mr D. Wenkart; Mr S. Wenkart; Bella Christina Pty Limited 4. All other creditors of the fund are to receive a pari passu distribution of the fund, as determined by the trustee, and after allowance for costs related to the trustee's administration of my affairs. 5. All present and future legal chose in action available to, or commenced by the trustee, against related parties to cease and all demands made by the trustee to be withdrawn. 6. In consideration of the above, all other property, assets and choses in action will revert to my ownership." 5 It will be necessary later to refer to some of the litigious history in this area generally, including some aspects of the history of the proceedings which I heard over a period commencing from the beginning of 2001 continuing for some considerable period thereafter involving, essentially, the rejection by Mr Pantzer of Mr Pitman's proof of debt. However, before mentioning that specifically, it will assist to provide the context, for present purposes, of the information supplied to creditors by the Trustee in four reports. 6 In his first report dated 2 December 1999, the Trustee referred to the statement of affairs completed by the bankrupt which were then set out in terms of assets and liabilities as Item 1 in the report. In essence the statement of affairs disclosed assets including real estate in the sum of $1,250,000; superannuation of $600,000; and book debts of approximately $55,000, totalling $1.9 million. 7 On the other side of the ledger, liabilities were disclosed as approximately $23 million owed to unsecured creditors, with secured creditors owed a little less than $1 million, disclosing a deficiency in excess of $22 million. 8 Also annexed to the first report was a list of creditors and according to that list, along with amounts owed to family companies and members of Dr Wenkart's family in the total amount of approximately $2.4 million, the main creditor was shown as Richard Walter Pty Limited (in liquidation) in the sum of $20 million. That company is, again, associated with Dr Wenkart's family interests. 9 In addition, unsecured creditors were shown so as to include Mr Gennaro Abignano in the sum of approximately $1.1 million, giving a total figure in the Trustee's list of unsecured creditors in the sum of approximately $23.6 million. The secured creditors were shown to include two companies associated with Dr Wenkart's family; that is to say, Hapday Holdings Pty Limited, in the sum of $550,000 and Bella Christina Pty Limited in the sum of $389,000. So far as external secured creditors are concerned, St George Bank Limited was shown as a creditor in the sum of approximately $53,000. 10 In the first report Dr Wenkart's affairs were described as follows: "3. Bankrupt's Affairs Dr Wenkart is 55 years old. He describes himself as a medical administrator of Macquarie Health Corporation Limited. However, he was also a director of numerous companies within Macquarie Health Group and known to be their controlling mind. I have not been able to determine at this early stage what interest Dr Wenkart has in the Macquarie Health Group and the Wenkart family group of companies and trusts. The corporate and trust structure is very complex extending to overseas entities. The transactions that require investigation span more than two decades. I am informed that the most significant of those transactions resulted in the payment of over $21,000,000 into the Federal Court by Richard Walter Pty Limited (In Liquidation). This followed on from a protracted court battle and settlement involving the Australian Taxation Office which issued a number of notices under Section 218 of the Income Tax Assessment Act on debtors of Richard Walter Pty Limited (In Liquidation). That fund I am informed is now worth as much as $24,000,000 with accumulated interest. Other claimants to the fund include Richard Walter Pty Limited (In Liquidation) itself and the beneficiaries of a number of Wenkart family trusts. Dr Wenkart guaranteed performance of the debtors of Richard Walter Pty Limited (In Liquidation) and as a consequence one or both of the Australian Taxation Office and Richard Walter Pty Limited (In Liquidation) may be contingent creditors of Dr Wenkart." 11 As it appears, and this seems to be common ground, Dr Wenkart guaranteed the performance of the debtors of Richard Walter Pty Limited (In Liquidation), it may be convenient to mention here the decision of the Full Court in Morlea Professional Services Pty Limited v Richard Walter Pty Limited (In Liquidation) (1999) 96 FCR 217 (an appeal from the first instance decision by Justice Emmett). The appeal was dismissed for reasons published on 23 December 1999. On the same date, the same Full Court Bench (Hill, Sackville and Finn JJ) delivered judgment in a matter between Macquarie Health Corporation Limited v Commissioner of Taxation (1999) 96 FCR 238 which, although involving a different substantive issue and certainly a different substantive party in the form of the Commissioner of Taxation, nonetheless involved competing claims to a large sum of money paid into Court on 4 August 1998 by a group of companies connected with Dr Wenkart. 12 In Macquarie Health Corporation Limited the Full Court dismissed the appeal and cross appeal from the orders made by the primary Judge subject to one qualification and that is the parties were given the opportunity to be heard on the question of interest. Ultimately the Full Court disposed of that matter in February 2000. 13 For its part, Richard Walter Pty Limited (In Liquidation) also instituted proceedings in this Court on 18 August 2000 after the Trustee had rejected its proof on 28 July 2000 and, looking ahead, it may be noted at this point that those proceedings were ultimately dismissed on 3 December 2001. 14 I should, however, now revert to the text of the first report to creditors which, as I have mentioned, was given on 2 December 1999. In that report, the Trustee referred to a possible composition stating as follows: "4. Possible Composition Dr Wenkart has suggested that he is able to obtain financial assistance to propose a composition under Section 73 of the Bankruptcy Act. If a written proposal is submitted by Dr Wenkart, it will be put to creditors with a more detailed report. However, to do that the investigation must advance to the stage where I can provide creditors with sufficient meaningful information to enable them to make an informed decision for or against the proposal." 15 The second report of the Trustee was given on 18 January 2000. For present purposes, it will suffice to refer to par 4 which again addressed the question of a proposal for a composition, at that stage in the form of drafts only. The Trustee reported as follows: "4. Composition At the time of writing, the bankrupt had submitted two draft proposals for a composition under Section 73 of the Bankruptcy Act. I do not propose to call a meeting of creditors to consider a proposal for a composition until the bankrupt submits a proposal in final form and my investigations have advanced to the stage where I can comply with my statutory duties under Section 73(2A). That Section requires me to report on whether I consider the proposal would benefit the bankrupt's creditors generally. To do that, for example, I have considered it necessary to call for formal proofs of debt from creditors. Once I receive a proposal in final form and have the information necessary to comply with my statutory reporting duties[,] I will issue a separate report to creditors and call a meeting to consider the proposal." 16 In his third report dated 21 March 2000 the Trustee again reported on the composition proposed to be brought forward by the bankrupt as follows: "3. Composition On 16 February 2000 the bankrupt submitted a document that appeared to be a proposal pursuant to Section 73 of the Bankruptcy Act. After some correspondence, it was resolved that the document constituted a formal proposal pursuant to Section 73. On taking legal advice, further correspondence was, and will be, required to clarify a number of issues under the formal proposal. Subject to those comments, I will be required to conduct certain investigations to enable me to report to creditors as to whether or not the proposal would benefit the bankrupt's creditors generally pursuant to Section 73(2A). I do not anticipate that the report will be issued before May or June at the earliest." 17 It may be convenient to note here that in par 6, proofs of debt, in particular the proofs submitted by Richard Walter Pty Ltd (in liquidation) and the Australian Taxation Office are mentioned as follows: "6. Proofs of Debt As creditors are aware, on 10 January 2000 I called for formal proofs of debt. My legal advice regarding the formal proofs of debt submitted by Richard Walter Pty Limited (In Liquidation) and the Australian Taxation Office was that they did not evidence debts provable in the bankruptcy of Dr Wenkart. Those parties are being given a final opportunity to submit evidence in support of their claims before I formally reject them. Adjudication of the other proofs of debt is continuing." 18 Finally, in his fourth report dated 31 July 2000, as previously foreshadowed in the third report, the Trustee reported on the question of a composition proposal as follows: "9. Composition Meeting I have received a proposal under section 73 of the Bankruptcy Act from the bankrupt which supersedes previous versions submitted to me. Clarification of a number of points in the proposal was required. In addition, the recent public examinations were necessary so that I could provide creditors with an informed opinion as to whether or not the proposal would benefit creditors generally as required by section 73(2A). While the affairs of the bankrupt require further investigation, including possible supplementary public examinations, I am nonetheless now in a position to state that in my opinion the proposal would not benefit the bankrupt's creditors generally. The bankrupt is offering a fund of $1,180,000 for distribution among creditors (albeit that associated creditors were excluded from the proposal). What is being offered is, at best, no more than the unencumbered value of the Paddington and Riverstone properties which is likely to be recovered by me as Trustee anyway. In addition, the proposal does not take into account the following: · the significant interest of the bankrupt in the estate of the late Alfred Kurt Wenkart, which has assets valued at some millions of dollars; · possible or likely recoveries against Hapday Holdings Pty Ltd and Solomon Garland totalling some hundreds of thousands of dollars; and · the amounts that would be collected from reviewing the bankrupt's compulsory income contribution assessment. The Bankruptcy Act provides that a recipient of a notice of Rejection of Debt has a twenty-one (21) day period in which to make an application to review such rejection by me. In view of this it would seem peremptory to call a section 73 meeting prior to the expiration of twenty-one (21) days from the rejection of all proofs of debt. In the event that a challenge against my decision to reject was successful by any of the entities the practical result might be that the decision made by those creditors admitted to vote at this point in time on a section 73 proposal could in fact be reversed in the future. Accordingly, I do no[t] propose to call a section 73 meeting until all matters relating to the rejection of proofs of debt have been finalised." 19 Earlier in the fourth report the Trustee had made the following comments on the adjudication of proofs of debt: "7. Adjudication of Proofs of Debt As indicated earlier, I have taken legal advice and adjudicated on proofs of debt. I have rejected in full the proofs of debt lodged by Richard Walter Pty Ltd (In Liquidation) ('Richard Walter'), the Australian Taxation Office ('ATO'), WWW MacHealth Pty Ltd and Nika Management Services Pty Ltd (In Liquidation) ('Nika'). Prior to rejecting the proofs of Richard Walter, ATO and Nika I requested further particulars from each of those entities regarding their respective proofs of debt and in the event that a response was received I considered that response prior to my formal rejection. The proofs of debt lodged by G Abignano & Genallco Pty Ltd (jointly) and A Pitman have been rejected in part and further particulars were requested for other parts. I have requested further particulars regarding the proof of debt lodged by Hapday Holdings Pty Ltd ('Hapday'). At this stage I intend to admit Hapday for voting purposes only without prejudice to my rights to finally determine the proof of debt. Once further particulars have been provided I will further consider the proof of debt. As previously indicated I have rejected in full the proof of debt lodged by Bella Christina Pty Ltd." 20 There are some other issues of litigious history that should be mentioned. The first is that Throvena Pty Ltd, which, as I mentioned, is one of Dr Wenkart's family companies, made application to this Court on the 28 July 2000 for an order for the convening of immediate creditors to consider the proposal. However, on the 23 February 2001 that application was dismissed without the need for hearing, Throvena Pty Limited's solicitors having informed the Court that, by reason of the grant of an interim injunction granted by myself at about that time in proceedings with relation to Mr Pitman's proof of debt, there was no point in proceeding with that application at that point of time. 21 One final piece of forensic history should perhaps be mentioned and that is in the proceedings brought in the Macquarie Health Corporation which, as I said, was finally dealt with by the Full Court in February 2001, an application was made to the High Court for special leave to appeal from that decision but it appears that application was refused later in the year, apparently in about October 2001. 22 On behalf of the applicant, reliance is placed upon, first of all, the language of s 73(2), which, it will be recalled, provides that the Trustee "shall call a meeting of creditors, and shall send" to each creditor a copy of the proposal. Reliance is also placed upon a decision of the Full Court in Adsett v Belouis (1992) 37 FCR 201 and on the reasons for judgment of hearing in Re Bendel (1997) 80 FCR 123. 23 In my opinion, neither of these cases is authority for the proposition that the trustee is under an obligation of an absolute kind to call a meeting of creditors upon the receipt of a document which the bankrupt may have described as a proposal for composition. There are a number of reasons why a such an absolute obligation should not be imported. The first is the fact that a bankrupt may ascribe to a document a character of a proposal for a composition cannot be a conclusive determination of that question. The second, which is perhaps another way of looking at the same issue, is that when s 73 is read as a whole, including in particular s 73(2A) and s 73(4), it appears that the matters upon which the trustee should act are governed by considerations of substance and not of form. 24 It will be recalled that s 73(2A) imposes upon the trustee an obligation to prepare a report which "must indicate whether the proposal would benefit the bankrupt's creditors generally". 25 Likewise, by s 73(4) the creditors may, by special resolution, accept the proposal. 26 Both these paragraphs indicate that the trustee is concerned here with matters of substance and not governed by any mechanical form in deciding how to respond. Thus, if the trustee does not have sufficient material upon which the trustee could indicate one way or the other whether a proposal would benefit the bankrupt's creditors generally, then, in my opinion, there is no absolute, and certainly no unconditional, obligation on the trustee to call a meeting of creditors. 27 Apart from these questions of the textual construction of s 73, there is nothing in either of the cases relied upon by the applicant to the contrary. 28 In Adsett v Berlouis, the central question for consideration was whether a primary Judge correctly ordered that a trustee bear the trustee's own costs of applications for removal. In the course of dealing with that issue the Full Court (Northrop, Wilcox and Cooper JJ) noted (at 202 - 203) the terms of s 73(2). Their Honours went on to say: "Mr Adsett did not immediately do so [i.e. call a meeting] because, apparently, he was not satisfied that the material in his possession revealed all the bankrupts' creditors." 29 Their Honours then went on to discuss the subsequent history of the matter. Later in their reasons, their Honours said (at 212): "Secondly, in relation to the submission of counsel for the appellant, the facts noted by them require consideration in their context. It is true that the trustee had reason to believe that there were omissions in the documentary material provided to him by the bankrupts. But he had no reason to believe that the bankrupts were being obstructive or defiant in relation to their documents. Whatever their previous defaults, on 6 June 1991 they delivered a large quantity of documents to the trustee. The suspected omissions were relatively minor and concerned documents whose existence was uncertain. In our opinion, a trustee acting reasonably and economically would have drawn the bankrupts' attention to the suspected omissions and asked whether those documents existed and, if so, their whereabouts. If the bankrupts' responses were unsatisfactory, it may have been reasonable to commence contempt proceedings. But, in the face of apparent co-operation by the bankrupts, it was unnecessary and unreasonable to initiate the contempt proceedings on 14 June. This is particularly the case when it is remembered that, by that date, the trustee had sufficient information to convene the creditors' meeting and to prepare his report." 30 In my opinion, these observations are consistent with the construction which I have endeavoured to put upon s 73. That is to say, that until the trustee has sufficient information it would be impossible for the trustee to express a view on the question posed by s 73(2A). That is, whether the proposal would benefit the bankrupt's creditors generally. 31 In Re Bendel, in the course of his reasons in dismissing an application for review of a trustee's decision concerning the holding of a meeting of creditors, Heerey J addressed the issue of "the ascertainment of creditors" as follows (at 131 - 132): "Ascertainment of Creditors I do not think that a desire by a trustee to ascertain the existence and amount of alleged debts owed to creditors who might vote at a meeting is in itself a reason for delaying the calling of a meeting. The appropriate mechanism for resolving doubts as to the entitlement of creditors to vote is provided by s 64ZA(8) an (9)." 32 His Honour then turned to question of the provision of a report by reference to the antecedent provisions of s 73(2A) as follows (at 132): "Provision of a Report If an order were made under s 178 for the holding of a creditors' meeting, the convening and conduct of that meeting would have to comply with the Act as it now stands, including the provision of a report which, as now required by s 73(2A), includes the trustee's view as to whether the proposal would benefit the bankrupt's creditors generally. In any case, subs (2A) probably only makes explicit what was contemplated by subs (2) prior to the amendment. A report by the trustee 'on' the proposal should or, at the very least could, include the trustee's views as to the merits of the proposal, including its benefits for creditors generally in comparison with a continuation of the bankruptcy administration. I think the trustee in the present case was justified in taking the view that he needed more investigation before he could adequately report on the affairs of the bankrupt and the merits (if any) of the proposed composition. The trustee as a matter of common sense could hardly ignore the fact that Merkel J had declined to adjourn the petition pending a Part X proposal (more favourable to creditors than the s 73 proposal) essentially because of suspicion of collusion between Mr Bendel and certain creditors. But in any case, all this has been rather overtaken by events. The evidence before me indicates clearly that there is a need for a very thorough investigation indeed of the affairs of Mr Bendel. To take but one instance, it is apparent that in truth he is conducting his accountancy practice in partnership with his son. His interest in the partnership was not disclosed in his statement of affairs but was in an application for registration as a tax agent. Mr Steven Bendel has a limited interest in the partnership but there is no one else who could be enjoying the benefits of the substantial income derived (a gross of some $283,908.95) other than Mr Bendel himself. Even more importantly, Mr Bendel has attempted to deceive this Court by the use of fraudulent documents in relation to the alleged debt of Sash Investments. I shall discuss that evidence when dealing with the appeal by that creditor. I conclude therefore that the application for the review of the trustee's decision concerning the holding of a meeting of creditors should be dismissed." 33 Again, his Honour's observations that the trustee was "justified in taking the view that he needed more investigation before he could adequately report on the affairs of the bankrupt and the merit (if any) of the proposed composition" are consistent with the construction that I have placed upon the operation of s 73. 34 It seems to me that there is a matter of a purposive interpretation of this provision. The trustee must be in a position where he or she can express an adequate view on the question posed by s 73(2A). This is not to say that a trustee may not be liable if the trustee fails to take steps that were reasonably open to him or her in obtaining that information and ultimately that becomes the question here. 35 It will be recalled that the offer proposed in the composition dated 9 March 2000 was in the lump sum amount of $1.18 million. It will further be recalled that under par 3, some non-associated creditors were to be excluded, namely the Australian Taxation Office and Richard Walter Pty Limited (In Liquidation), subject to the proviso, as there expressed, that these parties "retain their existing rights under their respective guarantees as provided" by Dr Wenkart. 36 It will be further recalled that the associated creditors there mentioned were also excluded from distribution from the fund. However, as has been seen, the issues raised in each of the four reports of the Trustee which I have cited, makes it clear that the Trustee took the view that it was not feasible for him to express a view on the question posed by s 73(2A); that is to say, whether the proposal "would benefit the bankrupt's creditors generally". 37 Even as late as 31 July 2000, although the Trustee had rejected, earlier in that month, the proofs of debt of Richard Walter Pty Limited (In Liquidation), the Australian Taxation Office and other creditors, time had not run for those parties claiming to be creditors to challenge that rejection. More important perhaps, is the fact that in the report dated 31 July 2000, the Trustee took the view that what was being offered under the proposal, as he stated in par 9, "is at best, no more than the unencumbered value of the Paddington and Riverstone properties which is likely to be recovered by me as Trustee anyway". 38 Moreover, as the Trustee went on to say, the proposal did not take into account the three items there mentioned, including the possible interest, said to be significant, in the estate of the late Alfred Kurt Wenkart and together recoveries against Hapday Holdings and Soloman Garling "totalling some hundreds of thousands of dollars". In those circumstances it seems to me that the Trustee was justified in holding his hand at that stage and not convening the meeting until he had information which was adequate for the purposes of providing the report mandated by section 73(2A). Accordingly, I am of the opinion that the separate question should be answered "no". I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beaumont.