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:
Failure to receive notice of the meeting of creditors; and
Unreasonable terms of the Composition.
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  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
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
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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A recent NSW decision has implications for liquidators of trustee companies dealing with trust funds and priority debts.
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