BACKGROUND

A bank loaned over $8,000,000 to Areaworks Pty Ltd for a property development in Victoria. Adrian Liddell (Liddell) provided a guarantee of the debt. Subsequent to default under the facility, the bank sold the secured property and commenced debt recovery proceedings against Liddell for the shortfall of over $700,000 owing to it.

A sequestration order was subsequently made against Liddell upon the presentation by Liddell of a debtor’s petition, with admitted debts in his bankruptcy totalling $3,303,078.

On 14 August 2014 a meeting of creditors was convened to consider a composition proposed by Liddell whereby $50,000 would be paid to creditors by his family, delivering an expected return to creditors of about 1 cent in the dollar (Composition). The seven creditors in attendance voted unanimously to accept the Composition.

The bank did not attend the meeting of creditors, as it was not provided with notice of the meeting. Liddell’s bankruptcy trustee forwarded notice of the meeting to an old registered office of the bank, and it was not received.

The bank submitted that if it had received notice of the meeting, it would have voted against the Composition, and given the size of the debt owing to it, the Composition would not have been passed. The bank made application for the Composition to be set aside under sections 222 and 76B of the Bankruptcy Act 1966 (Act) on two grounds:

  1. Failure to receive notice of the meeting of creditors; and
  2. Unreasonable terms of the Composition.

DECISION

The Federal Circuit Court found that the bank, as a creditor of Liddell, should have received notice of the meeting of creditors pursuant to section 64A of the Act, and that the trustee in bankruptcy did not make a proper attempt to ascertain the address of the bank’s current registered office.

The bank contended that the failure to provide it with notice was the key issue. Hartnett J agreed and held that regardless of whether the bank would have held sufficient voting rights at the meeting to prevent the passing of the Composition, the lack of notice was fatal, and the Composition must be set aside. In any event, the court also found that the bank would have had the necessary votes at the meeting to outvote the other creditors, and prevent the Composition from being passed.

Hartnett J also considered the reasonableness of the terms of the Composition. In New Age Constructions (NSW) Pty Ltd v Etlis [2013] FCA 884 Yates J quoted Bromberg J in Osborne v Gangemi (2011) 9 ABC (NS) 257, stating that a composition is likely to be set aside where the amount available for distribution is trivial, and this will be particularly so where the debtor’s affairs call for further investigation and insufficient information was available to creditors to enable them to make an informed decision.

The court found that the offering of 1 cent in the dollar under the Composition was trivial, and there was insufficient information available to creditors to make a decision as to what was in their best interests, in the context that the bank was absent from the meeting.

COMMENT

This case confirms the decision of the Full Court of the Federal Court in Hingston v Westpac Banking Corporation (2012) 200 FCR 493, which sets out the guiding principles (such as reasonableness of the composition’s terms, notification to creditors and consideration of the relevant procedures from the perspective of all creditors) for the exercise of the court’s discretion in an application to set aside a composition passed at a meeting of creditors. The Applicant will bear the onus of proof in establishing that, on the balance of probabilities, the court is to exercise the discretion pursuant to section 222 of the Act.