Re Andries Johannesen Ex Parte: Farrow Mortgage Services PtyLtd (In Liquidation) [1993] FCA 8 (29 January 1993)

FEDERAL COURT OF AUSTRALIA

Re: ANDRIES JOHANNESEN
Ex Parte: FARROW MORTGAGE SERVICES PTY.LTD. (IN LIQUIDATION)
No. SX55 of 1992
FED No. 16
Number of pages - 14
Bankruptcy - Guarantee

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA
GENERAL DIVISION
O'Loughlin J.(1)

CATCHWORDS

Bankruptcy - Part X - Composition - application for order declaring composition void - question of the amount for which a creditor should be admitted to proof for voting purposes - whether chairman's decision is examinable by the Court.

Guarantee - whether a creditor's claim in the estate of a guarantor should be reduced by the existence and value of securities given to the creditor by the primary debtor.

HEARING

ADELAIDE
29:1:1993

Counsel for the Applicant : Mr T.A. Trim

Solicitors for the Applicant : Kelly and Co

Counsel for the Respondent : Mr J. Oks

Solicitors for the Respondent: Hume Taylor and Co

ORDER

THE COURT DECLARES THAT:
The composition proposed by the debtor, Andries Johannesen, to his creditors and purportedly accepted by those creditors at a meeting held on 8 May 1992 is void.

THE COURT ORDERS THAT:
The debtor pay the applicant's costs.
Note: Settlement and entry of order is dealt with in Bankruptcy Rule 124.

DECISION

O'LOUGHLIN J. Application for an order that a Composition be declared void or, alternatively, be set aside.

2. At a meeting of his creditors that was duly convened and held on 8 May 1992, Andries Johannesen ("the debtor") made a proposal for a Composition in full settlement and satisfaction of his debts. He covenanted to pay his trustee $84,000 by escalating quarterly payments over a period of four years. The Chairman of the meeting has filed a certificate in Court certifying that the creditors present and voting at the meeting passed a special resolution accepting the debtor's proposal for the Composition. The efficacy of that resolution is now challenged by Farrow Mortgage Services Pty. Ltd. (in liquidation) ("the creditor").

3. The creditor, who was represented by its proxy at the meeting and voted against acceptance of the debtor's proposal, had filed a proof of debt for the sum of $987,783.20. The chairman of the meeting, however, had only admitted for voting purposes the creditor in the sum of $241,948.00. It is common ground that if the chairman was correct, then the special resolution was passed by the requisite majorities in number and value. It is also common ground that if the chairman was wrong viz, if the creditor had been entitled to vote in the larger sum, then its opposition to the Composition would have meant that the motion would have failed to attract the necessary 75% in value of those creditors voting and the debtor's proposal would have failed.

4. On 22 November 1989 the debtor, together with two other men, had executed, in favour of the creditor, a deed of guarantee ("the guarantee") guaranteeing the due repayment of (inter alia) all sums of money that may thereafter fall due and become payable by Listall Pty. Ltd. ("Listall") to the creditor. As security for the moneys advanced to it by the creditor, Listall had executed a Memorandum of Mortgage ("the Morgage") over the whole of the land in three Certificates of Title ("the land") and had also granted the creditor a lien over an amount of $100,000 which Listall had placed on deposit with another company in the Farrow Group, Farrow Finance Company Ltd. ("Farrow Finance"). The guarantee, however, was not supported by any form of security from the debtor or from either of his co-guarantors other than their joint and several personal covenants.

5. On 7 May 1991 the creditor commenced proceedings against Listall, the debtor, and the co-guarantors in the Supreme Court of South Australia. In its Statement of Claim the creditor pleaded that Listall had defaulted under the mortgage and that, as a consequence, the moneys advanced to Listall under the security of the mortgage together with accrued interest had fallen due and become payable. The creditor's claim was quantified at $812,955.47 together with interest thereon accruing at the rate of $425.62 per day calculated from 24 April 1991.

6. Listall and the debtor filed a defence in the Supreme Court proceedings wherein they respectively denied liability for the amount claimed against them under the mortgage and the guarantee. They alleged that, in breach of a duty to maintain the security of the deposit of $100,000, the creditor had permitted it to be "rolled over"; Farrow Finance shortly thereafter went into liquidation and the deposit has been lost. As to the land, it was pleaded that the creditor, as a mortgagee, unreasonably prevented a sale for the sum of $550,000 being made by Listall under a contract of sale executed on 22 April 1991.

7. Various breaches by the creditor of other duties were alleged in the defence which concluded with the claim that the guarantee was unenforceable against the debtor. Appropriate declaratory relief was sought by way of counter-claim. Despite the nature of the defence raised in his pleadings, the debtor nevertheless listed the creditor in his Statement of Affairs as an unsecured creditor in the sum of $230,000. This figure was arrived at by nominating the maximum amount of the creditor's claim as $880,000 and by deducting therefrom $100,000 being the value of the deposit and $550,000 being the claimed value of the land. The figures of $230,000 and $880,000 are to be compared with the figures of $241,948 (the amount for which the creditor was admitted to prove for voting) and $987,783.20 (the amount claimed by the creditor in its proof of debt). No attempt was made to reconcile these sets of figures but, in the final analysis, nothing will turn on the discrepancies.

8. Section 204 of the Bankruptcy Act 1966 (Cth) ("the Act") empowers creditors, by special resolution, to accept a composition that has been proposed by a debtor. Section 5 of the Act defines "special resolution" as meaning:

"... a resolution passed by a majority in number and at
least three-fourths in value of the creditors present
personally, by attorney or by proxy at a meeting of
creditors and voting on the resolution."

9. Six other creditors, with debts admitted for voting in sums totalling $1,184,511, voted for the composition: the creditor and two others voted against. As admitted for voting purposes, the three opposing parties' debts amounted to only $301,804 and thus the requirements of the definition of a special resolution were met. If, on the other hand, the creditor's proof of debt had been admitted for voting purposes, either in the sum of $880,000 or $987,783.20 (instead of $241,948) the vote would not have commanded the necessary three- fourths in value and the debtor's proposal for a composition would have failed.

10. In its application to the Court, the creditor has sought the following orders:

"(i) An application that the composition herein be declared
void under Section 222(2) of the Bankruptcy Act 1966
(as amended) on the ground that the composition has
not been accepted by a special resolution of a meeting
of creditors.
(ii) In the alternative, that the within composition be
declared void under Section 222(4) of the Bankruptcy
Act 1966 (as amended) on the ground that the debtor
has included an incorrect and material particular in
his Statement of Affairs.
(iii) In the further alternative, that the composition be set
aside pursuant to Section 239 of the Bankruptcy Act 1966 (as
amended)."

11. Sub-section 222(1) of the Act provides, inter alia, that where there is a doubt, on a specific ground, whether a composition has been accepted by a special resolution, various parties, one of whom can be a creditor, may apply to the Court for an order under subs(2). Under that sub-section the Court may make an order declaring that the composition is void. Sub-section 222(4) contains further grounds that could lead to a declaration that a composition is void. If for example, the Court is satisfied that the debtor has given false or misleading information or has omitted a material particular from his statement of affairs or (as was alleged in the present application) has "included an incorrect and material particular in that statement", the Court may make the necessary declaration if it is satisfied that it would be in the interests of the creditors to do so (subs5). This last mentioned requirement is not a condition attaching to an order that is made under subs222(2). Finally, s239 of the Act gives a creditor the right, generally, to apply to the Court for an order setting aside a composition; the section provides that if the Court:

"... considers that the terms of the composition are
unreasonable or are not calculated to benefit the creditors
generally or that for any other reason the composition ought
to be set aside, it may make an order setting it aside and,
if it thinks fit, may forthwith make the sequestration order
sought."

12. As the creditor did not seek a sequestration order I do not consider that it should obtain relief under s239 of the Act. The only argument that was advanced on behalf of the creditor was to the effect that the true amount of the creditor's debt was such that if it was properly taken into account the dividend available to creditors would be so trivial that it would constitute sufficient reason to set aside the composition. In Re Emmett; Ex parte Beneficial Finance Corporation Ltd (unreported: judgment delivered 16 December 1991) I had cause to review the application of s239 to compositions where the anticipated dividend was likely to be small. I reviewed the facts and the decisions of six unreported decisions of this Court on the section: Re Doukidis; Ex parte Consolidated Constructions Pty. Ltd. (Toohey J: 26 June 1985); Re Richards; Ex parte Beneficial Finance Corporation Ltd. (J. Ackson J. 17 March 1986); Re Brennan; Ex parte Stokes (Australasia) Ltd. (Morling J: 31 May 1988); Re Codrington; Ex parte Don McKay Tourist and Charter Pty. Ltd. (Burchett J: 1 September 1989); Re Pallazzolo; Ex parte Discusso and Ors (Neaves J: 19 July 1991) and N.Z.I. Capital Corporation Ltd. v Lancaster (Foster J: 26 July 1991). I concluded with these remarks:

"It seems to me that in each of these six cases there were
factors, over and above the smallness of the dividend and
the size of the debts, that caused the Court to intervene.
Even though there are examples of strong dicta to the effect
that the smallness of the amount offered coupled with the
amount of the debts might be sufficient, without more, to
set aside the composition, it is significant that no case
has been found where that has happened. I allow for the
possibility that it could occur but I do not believe that
this is the appropriate case: (c.f. Re Van Twest: Ex parte
Tubemakers Australia Ltd. [1986] FCA 449; (1986) 69 ALR 573 at 576 per
Pincus J.)."

13. In the present case, the creditor made no attempt to place before the Court any material (other than that to which reference has already been made) to support a claim that the composition would be unreasonable, that it would not benefit creditors or that for some other reason it ought to be set aside. The material before the Court is not, in my opinion, sufficient to set aside the composition. In particular, there is no suggestion of impropriety on the part of the debtor in his business transactions; he was one only of three guarantors and nothing is known of the financial circumstances of his co-guarantors or of the primary debtor. If a Court is asked to interfere and to set aside a composition that has been accepted by the statutory majorities, it is incumbent on the applicant/creditor to place before the Court all relevant information so that the Court may be fully apprised of the personal and financial circumstances of the debtor.

14. The creditor's claim for an order under subs222(4) can be put to one side. It was argued that the "incorrect and material particular" in the statement of affairs was the claim by the debtor that he was entitled to insert a net amount after valuing the land and the deposit. I reject that proposition. The provisions of subs(4) are directed towards issues that mislead or might have misled creditors. The reference to the inclusion of "an incorrect and material particular" is to be read and understood in conjunction with earlier references to omissions and the giving of false or misleading information. In the present case the debtor set out the amount that he thought was the gross claim - $880,000 (no point was taken on the difference between this figure and the amount of $987,783.20, the amount in the creditor's proof of debt). He then stated that the creditor's claim was being defended and thereafter proceeded to subtract his estimates of the values of the relevant securities. This information, or some of it, may have been incorrect but it could not have misled a creditor; on the contrary, it gave to the creditor that information which the debtor thought to be relevant. For these reasons I would not be prepared to make an order under subs222(4).

15. That then leaves for consideration the creditor's primary claim: that there is a doubt, on a specific ground, whether the composition was accepted by a special resolution of a meeting of creditors. The specific ground was the action of the chairman in admitting the creditor's proof of debt, for voting purposes, in the lesser sum.

16. The primary argument advanced on behalf of the debtor was that the chairman of the meeting of creditors, to the exclusion of the Court, determines all questions relating to the admission and rejection of claims to vote. Section 201 of the Act provides:

"Any question as to the right of a person to vote at a
meeting under this Division, or as to the amount of the debt
in respect of which a person is entitled to vote at such a
meeting, shall be determined by the chairman, who may, if he
thinks it necessary to do so, adjourn the meeting for a
period, not exceeding 14 days, to enable him to investigate
the matter."

17. Thus it was argued that this statutory power, coupled with the provisions of subs225(2), withheld from the Court the power to interfere with any decision of the chairman of a meeting on a subject that was covered by s201. Sub-section 225(2) states that:

"A certificate of the passing of a special resolution under
s204 signed in accordance with that section is prima facie
evidence that the meeting was duly convened and held and
that the special resolution specified in the certificate was
duly passed at the meeting."

18. Such a certificate has been duly filed in these proceedings.

19. It was conceded on behalf of the debtor in these proceedings that in Re Levy; Ex parte Scholefield Goodman and Sons Ltd. [1980] FCA 129; (1980) 50 FLR 99 and in Zantiotis v Andrew (1987) 80 ALR 23, the Court had interfered with a decision of a chairman - first on a right to vote and second on the amount in relation to which the creditor might vote. It was claimed, however, that such an interference was incidental to an issue already before the Court and that the proper resolution of the issue made it necessary to determine whether a creditor had a right to vote at a particular meeting. I do not think that either of these authorities are susceptible to such a constrained interpretation. In any event, the matter has recently been put beyond doubt by the decision of the Full Court in Forshaw v Thompson (1992) 35 FCR 329. In that case the chairman of a meeting of creditors of two debtors called under Pt.X of the Act decided to admit for voting purposes the claims of a creditor against the debtors. The claims arose under guarantees given by the debtors. The debtors contended that the guarantees were void, or, alternatively, that the creditor was estopped from enforcing the guarantees and that there was no debt due. The debtors, having unsuccessfully applied for orders that the chairman be restrained from permitting the creditor to vote at the meeting, appealed to the Full Court. It was held, inter alia, that s201 entrusts to the chairman of a meeting the power, and requires him, to determine the right of a person to vote at a meeting of creditors under Div.2 of Pt.X and the amount of his debt to be taken into account. The provisions of the section, however, neither make his decision final or conclusive nor exclude the Court's jurisdiction to determine questions concerning the right of a person to vote at meetings of creditors under Div.2 of Pt.X.

20. In the present case, the creditor claims that the chairman of the meeting erred when he allowed the size of the creditor's claim to be diminished by the claimed value of the land and the value of the deposit of $100,000. As was pointed out in argument, these were securities that had been given by the primary debtor, Listall - not by the debtor and his co-guarantors in support of the guarantee. There were provisions in the guarantee that supported the creditor's argument that the debtor (and hence the chairman) was not entitled to invoke any form of set-off when making a quantification of the amount due and payable under the guarantee. Foremost of those provisions was that contained in clause 3(b)(ii)(B) which, so far as material, provided:

"3. The following provisions shall apply to the Guarantee
and Indemnity contained in Clause 1 above:-
(a) ...
(b) (i) ...
(ii) Each of the Guarantors shall be liable to
pay to the Creditor the whole of the
guaranteed moneys... and no Guarantor
shall be entitled to have the Creditor
apply against that part of the Guaranteed
moneys for which that Guarantor is liable,
(A) ...
(B) any moneys which are or might
be recoverable by the Creditor
pursuant to the realisation of
any security (including the
guarantee of any other
Guarantor) now or at any
future time held by the
Creditor."

21. In each case, the extent of a guarantor's obligation will depend upon the exact terms of the relevant document but unless expressly negatived there is authority to support the proposition that a guarantor is not entitled to the benefit of any set-off or cross claim which was or might have been available to the primary debtor against the creditor: See Covino v Bandag Manufacturing Pty. Ltd (1983) 1 NSWLR 237; see also Ulbach v Walker Brothers (Australia) Pty. Ltd, an unreported decision of the High Court: judgment delivered 4 May 1965. In the latter case, Taylor J, in delivering the judgment of the Court said:

"There is, we think, the clearest evidence that the amount
of the respondent's debt was 15,089 and that a debt to this
extent was acknowledged by both of the appellants. But
because it was in respect of a liability contracted under a
contract of guarantee the appellants, or perhaps the
trustee, thinking that the respondent might recover some
part of its outstanding moneys from the principal debtor,
inserted a net amount in the deed after taking this factor
into account.
The court thought there was no justification for the writing
down of the respondent's debt in this manner and we agree."

22. In my opinion the chairman of the meeting of creditors erred when he admitted the creditor's proof of debt in the lesser sum: the express terms of the guarantee prevented him from giving any credit for or making any allowance for the existence and values of the securities that the creditor had received from the primary debtor. The creditor should therefore have been admitted to vote in the full amount of its claim. On the authority of Forshaw v Thompson (supra), and notwithstanding the language of s.201 of the Act, this Court is entitled, in appropriate circumstances, to determine questions concerning the right of a person to vote at a Pt.X meeting of creditors, and it is appropriate in the circumstances of this case that the Court should interfere. It is clear that the proposal for the composition would have been rejected if the creditor had been allowed to vote for the full amount of its claim.

23. There will be an order declaring that the composition is void on the ground that the chairman of the meeting of creditors of the debtor (which meeting was held on 8 May 1992) erroneously admitted the creditor to vote in the sum of $241,948.00. There will be a further order that the debtor pay the creditor's costs.