Beard, Kim Howard v Prestige Baking Industries Pty Ltd

[1981] FCA 110

Re: KIM HOWARD BEARD
And: PRESTIGE BAKING INDUSTRIES PTY. LTD. and MAXWELL GEORGE GEE (1981) 52 FLR
384
No. 137 of 1980
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Fox J.(1), Lockhart(2) and Sheppard(3) JJ.

CATCHWORDS

Bankruptcy - Deed of Arrangement Declared Void - Appeal - Meaning and Application of s.222(1) and (4) - Conclusiveness of Certificate Under s.201 - Position When State of Account Between Applicant Creditor and Debtor in Dispute and Undetermined - Interests of Creditors Generally.

Bankruptcy Act 1966 as amended ss.30, 31, 82, 86, 188, 201, Part X Division 2, 222, 224, 225, 233, 234, 236, 237, 257, 258.

Bankruptcy - Part X - Statement of affairs - Incorrect and material particulars - Entitlement of creditor to vote - Extent of entitlement to vote - Determination by chairman - Conclusiveness of certificate of chairman under s. 201 - Avoidance of deed of arrangement - Account between creditor and debtor in dispute - Interests of creditors generally - Bankruptcy Act 1966 (Cth), ss. 86, 188, 201, 222, 224, 225, 236.

HEADNOTE

In May 1979 the appellant debtor (Beard) entered into an agreement with Prestige Baking Industries Pty. Ltd. (Prestige) whereby, for a fee of $16,068 and royalty payments at a specified rate, Beard was granted a non-exclusive licence to operate certain hot bread shops for ten years with an option for renewal. Beard was also required to provide a security deposit of $3,790 on or before 30th May, 1979, and a contribution of one per cent gross turnover to be used for advertising purposes. Inter alia, the agreement provided that Prestige had to replace major items of equipment which became unserviceable or uneconomical to operate. Beard went into possession of the premises at the end of May 1979 and by 4th June, 1979, had paid the sum of $16,684.04 to Prestige. The business produced much less than the estimated income; Beard fell behind with his payments and on 5th November, 1979, Prestige served a notice terminating the agreement. On 14th November, 1979, Prestige demanded payment of $8,520.13 as the balance owing by Beard. On 7th January, 1980, in a letter headed "without prejudice", solicitors for Prestige claimed certain items of property and the sum of $1,500 in respect of Beard's indebtedness to Prestige.

In January 1980 Beard executed a s. 188 authority. In his statement of affairs Prestige was shown as a creditor in the sum of $1,500 next to the notation "disputed claim". Prestige was also shown as a debtor to the estate in the sum of $480 with the notation "likely to be received" and the further entry in the sum of $16,000 "plus damages" also noted with the words "disputed claim".

On 4th February, 1980, at the meeting of creditors called by the trustee, Prestige put forward a proof of debt in the sum of $8,520.13, being a debt of $12,310.13 and a credit of $3,790, the security deposit. The debt claimed by Prestige was the largest claim of the seven creditors present. In the proposed deed of arrangement Beard proposed to pay fifty dollars per week to his trustees until all creditors received the sum of fifty cents in the dollar. He also undertook to pursue his action against Prestige at his own cost and pay the net proceeds of such action or settlement of the trustee. Certain other property was also proposed to be assigned directly to the trustee for the benefit of the creditors.

Discussion took place as to the accuracy of the proof of debt put forward by Prestige. The meeting resolved to put a motion that Prestige's proof of debt be accepted for the purpose of voting in the sum of $1,500 only. On this motion being carried the chairman ruled accordingly. Subsequently the creditors voted to require Beard to enter into the amended deed of arrangement.

On an application by Prestige pursuant to ss. 236 and 222 of the Bankruptcy Act 1966 (the Act) the judge held that, though the chairman had determined the indebtedness of Prestige in the sum of $1,500 for the purposes of voting at the meeting, and that his certificate was conclusive by reason of s. 225(2) of the Act (prior to amendment), Beard had included an incorrect and material particular in that the entry of the sum of $1,500 as the sum in respect of which Prestige was a creditor was incorrect, and it was in the interest of the creditors to declare the deed of arrangement void.

On appeal by Beard against the decision of the judge and upon the cross appeal of Prestige against the refusal of the judge to make an order declaring void the deed of arrangement under s. 222(2) of the Act,

Held: (1) Prestige was a creditor within s. 222 of the Act and so had the requisite locus standi to make its application.

(2) The chairman of the meeting called pursuant to the s. 188 authority had determined the amount of the indebtedness in respect of which Prestige was entitled to vote.

(3) Per Fox and Sheppard JJ., Lockhart J. dissenting. On the facts of the present case no incorrect particulars had been included in Beard's statement of affairs. The inclusion of the figure of $1,500 as a disputed debt claimed as owing by Prestige was in the circumstances not shown to be incorrect.

(4) Per Fox J. In any event the figure of $1,500, even if incorrect, was not "material" within the meaning of s. 222(4)(b) of the Act.

(5) Per Fox and Sheppard JJ., Lockhart J. dissenting. The discretion of the trial judge was exercised incorrectly in favour of avoiding the deed of arrangement.

Per Fox J., obiter. In a situation where a decision within s. 222(4) or (5) will depend upon a determination of conflicting claims, it may well be that such claims will have to be determined definitively by the court sitting in bankruptcy.

HEARING

Melbourne, 1981, March 24-26; July 16. #DATE 16:7:1981

APPEAL.

Appeal from a decision of a single judge (C.A. Sweeney J.) declaring void pursuant to s. 222(4) of the Act a deed of arrangement executed by the appellant, Beard.

G. Nash, for the appellant Beard.

A.C. Chernov Q.C. and P. Hayes, for the first respondent.

No appearance for the second respondent.

Cur. adv. vult.

Solicitor for the appellant Beard: T. Irlicht.

Solicitors for the first respondent: Moule Hamilton & Derham.

D. LEVIN

ORDER

1. The appeal should be allowed, with costs.

2. The order of Sweeney J be set aside, and in lieu thereof it be ordered that the application be dismissed with costs, including reserved costs.

JUDGE1

This is an appeal from a judgment of a single judge of this court (C.A. Sweeney J) wherein he made an order under s.222(4) of the Bankruptcy Act, 1966 declaring void a deed of arrangement executed by the appellant, as debtor. The learned judge refused to make an order to the same effect under s.222(2) of the Act at the instance of the first named respondent, and it has filed a notice of contention in relation to that matter.

By an Agreement dated 30th May 1979, Prestige Baking Industries Pty. Limited (the first named respondent, which I shall call Prestige) granted to the appellant Kim Howard Beard a licence in the following terms:

"In consideration of the payment by the Licensee of any sums agreed to be paid hereunder by the Licensee and of the performance and observance of the conditions and obligations hereinafter contained on the part of the Licensee by the Licensee Prestige hereby grants to the Licensee a non-exclusive licence for the term specified in Item 4 of the Schedule hereto to operate a licensed hot bread baking store at the location specified in Item 5(a) of the Schedule hereto together with additional sales outlets as specified in Item 5(b) of the Schedule hereto or as subsequently approved in writing by Prestige and within the territory specified in Item 5(c) of the Schedule hereto."

The period specified was ten years commencing on 31st May 1979 with an option for renewal. The bakery specified in item 5(a) of the schedule was a bakery at Town Hall Shopping Centre, Ringwood and the additional outlets were at Maroondah Highway, Ringwood and at the Shopping Square, North Blackburn. Clauses 2(a) and 2(b) of the agreement were as follows:

"The Licensee hereby covenants and agrees with Prestige to:

(a) pay to Prestige independently of all other obligations hereunder the licence fee specified in Item 6 of the Schedule hereto in the manner therein provided as and by way of a licence fee;

(b) pay to Prestige for the continuing right to conduct the licensed business as defined in Item 7 of the Schedule hereto and for Prestige's continuing assistance and support as hereinafter provided the royalty at the rate as specified and payable as provided in Item 8(a) of the Schedule hereto."

Item 6 of the schedule, under the heading "The Licence Fee", simply stated:

"The sum of $16,068 payable on or before the Thirtieth day of May, 1979."

The Royalty required was $350 per week on a gross turnover of up to $5,800 per week and thereafter at the rate of 10% of gross turnover calculated on prescribed bases. The licensor was a lessee of the licensed premises and under the agreement the licensee was to pay the rent reserved and other amounts payable under the lease or leases. A security deposit of $3,790, payable on or before 30th May 1979, was refundable on the termination of the agreement subject to deductions for any amounts payable by Mr. Beard for breaches of the agreement. He was also required to contribute 1% of gross turnover to advertising and to insure against a comprehensive list of risks. The licence was a very long document and could be said to be very protective of the lessor. There were however, a number of licensor's covenants, one of which required the replacement of items of equipment which the licensee was entitled to use under the agreement which had a replacement value of more than $1,000 as each became in the opinion of Prestige unserviceable or uneconomic. The licensor was also to provide the licensee with technical assistance from time to time.

A supplementary deed, also of 30th May 1979, was entered into under which on payment to him of an amount of $6,246.29 the licensee assumed responsibility for certain statutory payments to which transferring employees would be entitled in respect of their period of service with the licensor. Apparently there was a guarantor of this obligation.

Mr. Beard paid an amount of $16,684.04 in two instalments, one on 30th May and one on 4th June, but it is claimed that this did not amount to a payment in full of the licence fee ($16,068), because it is said that Prestige rightly set off the sum of $6,246.29 just referred to. On 31st May 1979, Mr. Beard took possession of the premises and started to carry on the business in question.

Mr. Beard's interest in the enterprise arose from a tempting advertisement inserted by Prestige in the "Age" newspaper. He made inquiries and met a Mr. Walker who was acting for Prestige, and Mr. Griffiths, that company's Managing Director. Mr. Walker handed him a document bearing the title "Licensee Trading and Profitability Forecast". Thereunder, in two separate boxes, figures were set out against various descriptive items. The first box had as a general heading the words "At Existing Performance Levels". The second box had a corresponding heading "New Outlets Developments". Mr. Beard says that he understood the document to contain implied representations as to the nature and extent of activities being carried on by Prestige at the three addresses and the approximate returns therefrom. The fact was that Prestige had been carrying on a business of baking bread at the Ringwood bakery, but had not been carrying on some of the supplementary activities mentioned in the forecast. These included, for example, the sale of sandwiches of "own manufacture". Moreover, the activities of Prestige at the premises in question had been part of larger and more widespread operations, and it did not have adequate separate figures in relation to the three outlets. The reference to "existing performance levels" was then, in general, a reference to the wider operations from which the estimates were made. So far as particular operations were concerned, such as the sale of sandwiches, and the provision of bread of "own manufacture" from the baking store, Prestige intended, so Mr. Griffiths says, to refer to what could be done by an incoming licensee. He says, in any event, that he explained the whole situation to Mr. Beard before the agreement was signed. Mr. Beard says he was misled, and he has alleged fraud against Prestige. One point upon which there is little dispute is that a substantial part of the machinery at the Ringwood bakery was in a poor state of repair and barely operable at the time that Mr. Beard took over. This he says resulted in a loss in production, a drop in the quality of production, and the unwanted attention of the health authorities.

The business produced much less than the estimated income, Mr. Beard fell behind in his payments, and on 5th November 1979 Prestige served a Notice upon him terminating the licence. The Notice says that the Licence Agreement "has terminated" in accordance with two paragraphs of the Licence Agreement; 10(vii) and 10(x). Whether these were apt to the circumstances is not clear, but many provisions of the licence were particularised as having been breached. Non-payment of the licence fee was not complained of. The licensee was required to vacate immediately, and to pay all outstanding moneys. Other requirements included the return of documents, papers and stationery.

There was a subsequent letter of demand dated 14th November 1979 to which was attached an account showing $8,520.13 as the balance owing by Mr. Beard. Payment of this amount was required in 14 days, but no payment was made. A further letter, dated 7th January 1980 and headed "Without Prejudice", was sent by Prestige's solicitors to Mr. Beard. As it is of importance in the case, I set it out:

"As you know, we act for Prestige Baking Industries Pty. Ltd. in the matter of the now terminated Licence Agreement between Prestige and yourself, dated the 30th day of May 1979.

We have been informed by our client that in breach of the terms of the said Licence Agreement you have failed to return to Prestige the Procedures Manual, Sale, Production and other records consequent to the termination of the said Licence Agreement. We have been further informed that you are indebted to our client in respect of various allied matters, including the sale by yourself of a Ford Escort Panel Van, registration number ILB 782 which was transferred to you on condition that it was to be used only in connection with the business the subject of the Licence Agreement.

Accordingly our client has instructed us to demand that you return to us, as their solicitors and agents in this matter, the said Procedures Manual, the Sale, Production and other records relating to the business the subject of the said Licence Agreement, and to pay to us the sum of $1,500.00 in respect of your indebtedness to Prestige within fourteen (14) days from the date hereof, failing which legal proceedings for recovery will be instituted against you without further notice."

So far as appears, Mr. Beard did not reply to the letter; he certainly did not comply with its demand for payment. His solicitors wrote on his behalf on 10th January, apparently in reply to the notice of termination of November 1979, disputing the right to terminate, accepting the purported termination as a repudiation, and claiming a return of moneys paid.

Acting under s.188 of the Bankruptcy Act 1966, Mr. Beard obtained the consent of Mr. Gee, a registered trustee, to act as trustee and to call a meeting of creditors to approve a deed of arrangement. Notices were sent to the creditors who were named by Mr. Beard in a statement of affairs verified by him on 21st January 1980, and the meeting was held on 4th February 1980. The statement of affairs was prepared on Form 11 in accordance with Bankruptcy rule 78 (see also r.85(3)). This is the form used in bankruptcy. In Part II of the statement, dealing with unsecured creditors, Prestige was shown as being a creditor in the sum of $1,500 and in the column under the heading "Nature of Debt" there appeared opposite this sum the comment "disputed claim". In Part VII of Form 11, dealing with debts due to the estate, Prestige was named as a debtor in two separate sums, one for $480 shown as likely to be received and one for $16,000 "plus damages" and this was shown in the final column as "disputed claim".

The statement of affairs was presented to the meeting. Prestige gave to the trustee at or before the meeting a proof of debt in the sum of $8,520.13. This was made up largely of arrears of licence fee and royalties, but included a number of smaller items such as an estimated amount for an advertising levy and cost of fuel, gas and water rates. The total arising in this way was $12,310.13 and credit was then given for the whole of the security deposit, namely $3,790.

At the meeting Mr. Armstrong, a solicitor who held a proxy from Prestige, was appointed Chairman, it appearing that on the basis of its proof Prestige's debt was by far the largest. Mr. Beard and Mr. Gee, and 7 creditors are recorded as being present and Mr. S. Stern, a solicitor, was also present as an observer for Prestige. The minutes record that Mr. Gee introduced those present and explained the reasons for the meeting and the operation of s.188 of the Act. The statement of affairs was read out and distributed to the creditors. Mr. Gee is recorded as having explained to the meeting the alternatives available and the terms of the proposed deed. An important part of the deed was that the debtor was to pay $50 per week to the trustee until all listed creditors received 50c in the dollar of the debts due to them. The deed was also to provide that the debtor would "pursue any action he may have against Prestige Baking Industries Pty. Limited dilligently (sic) and will not compromise same without consent of the trustee to the compromise and shall pay the net proceeds of the action or the settlement thereof to the trustee for the purposes of this deed". The only property assigned by the deed was the debtor's interest in household furniture and a Mercury outboard motor, valued at $400 and $1,925 respectively. Under the deed as presented the sale of these items was to be postponed until default and the trustee decided to sell. This was amended at the meeting to provide for immediate sale. The other provisions I have mentioned remained, unaltered. In consideration of the debtor's obligations, the creditors released their debts (cf. s.234 of the Act).

The accuracy of the proof of debt tabled by Prestige was discussed at the meeting at length. Mr. Armstrong, appreciating his conflict of interest, vacated the chair and a Mr. Ryan was appointed in his stead. The fact that the demand for $1,500 was in a "without prejudice" letter, which demanded payment within 14 days was made clear to the meeting. The soundness of the set-off or cross-demand for $16,000, and more, was also questioned. According to Mr. Armstrong, three creditors present "forcibly" expressed the view, apparently from their own knowledge or experience, that an action against Prestige in relation to one of its licence agreements was unlikely to succeed. In the course of the debate Mr. Gee said that Mr. Beard's solicitor had expressed the view that he had about a 90% chance of success in an action against Prestige.

It was resolved by the meeting that the motion be put that the Chairman rule that the proof of debt tabled by Prestige be accepted, for the purpose of voting only, in the sum of $1,500, as shown in the statement of affairs of the debtor. Mr. Armstrong, representing Prestige, voted against the motion. The Chairman then ruled that the proof of debt tabled by Prestige "be accepted for the purpose of voting only for the sum of $1,500". The exact order of events and the exact language used is the subject of some disagreement which may be largely verbal. I have based the above account on the minutes signed by Mr. Ryan on 8th February 1980, which are in evidence and are evidence of what went on at the meeting (see secns. 225(4), 257 of the Act), and I have added some detail which does not appear to be in dispute. Mr. Beard was present throughout the meeting, and he has deposed to the effect that the minutes are substantially correct. Mr. Stern said in evidence, in effect, that they were not entirely accurate or complete. In declaring his decision that Prestige was a creditor, and a creditor in the sum of $1,500 the Chairman was acting under s.201, which is as follows:

"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 fourteen days, to enable him to investigate the matter."

The meeting, by special resolution, resolved that the debtor be required to execute a deed of arrangement in accordance with the draft. Mr. Armstrong voted against this resolution, and the representative of the Taxation Department abstained. Mr. Gee was appointed trustee and other consequential matters were attended to by the meeting. There seems to be no question that other sections of the Act, concerning, for example, execution (s.216), and notice and filing (s.218) were complied with. The deed as executed bears date 4th February 1980.

On 7th February 1980 there was filed on behalf of Prestige in this court an application that the deed be terminated pursuant to s.236 of the Bankruptcy Act. Subsequently, on 27th February 1980, the application was amended to seek a declaration that the deed be declared void pursuant to s.222 of the Act (sub-secns. (1) and (4)) or alternatively terminated under s.236 of the Act. The application was further amended on 21st May 1980 to set out grounds of the application and particulars of the affidavits to be relied upon.

The grounds as set out were:

1. The Chairman of the Meeting of Creditors of Kim Howard Beard (hereinafter called "the Debtor") held on the 4th day of February, 1980 wrongly determined the amount of the debt in respect of which the Applicant was entitled to vote at the said Meeting and the said Chairman should have determined the amount of the debt in respect of which the Applicant was entitled to vote at $8,520.13 and not at the amount in fact determined by the said Chairman of $1,500.00.

2. Alternatively to Paragraph 1 above, the said Chairman failed to determine the question of the right of the Applicant to vote as required by Section 201 of the Bankruptcy Act 1966, such determination being made by the Creditors present at the said Meeting.

3. The Special Resolution passed at the said Meeting of Creditors was irregular as the determination of the Applicant's right to vote was made by the said Creditors and resulted in an abuse of Special Resolution and a false majority.

4. A group of Creditors, namely, those Creditors other than the Applicant, present at the said Meeting of Creditors on 4th day of February, 1980 conducted themselves unfairly towards the Applicant Creditor at the said Meeting.

5. The debtor included two incorrect and material particulars in his Statement of Affairs, namely, the Applicant's debt at $1,500.00 and a debt owed by the Applicant to the Debtor at $16,480.00 and has thereby misled Creditors.

The amended notice of opposition, also dated 21st May 1980, was an extensive document, setting out a number of matters intermingled with particulars. It alleged fraud, based on representations made by Mr. Walker and on the document he handed to the debtor. It was alleged that on this ground, and because of wrongful repudiation by the applicant, the licence agreement had been rescinded, and damages were claimed. Alternatively, the debtor was entitled to amounts to set off against the applicant's alleged debt, and further or alternatively that the debtor was entitled to damages, or repayment of the sum of $16,068 (the licence fee). It alleged that clause 11 of the agreement, which involved payment of the licence fee, was void as a penalty. It alleged a breach of the requirement of the agreement that the licensor replace unserviceable or uneconomic equipment which had a replacement value of more than $1,000. It alleged breaches of implied terms concerning the licensed equipment. In all, this was an untidy series of claims, obviously in need of legal pruning. The debtor denied the grounds alleged by the applicant in relation to the meeting and expressed reliance upon the conclusiveness under s.225(2) of the chairman's certificate.

The evidence before the learned trial judge comprised affidavits, and the exhibits thereto, and cross-examination. The notice of appeal and notice of contention take us to the issues which were before the judge and are before us. The debtor has indicated to us something which was apparently not raised below, namely that in an action by him against Prestige reliance may be placed on secns. 52 and 53A of the Trade Practices Act, 1974, as amended.

His Honour held that the grounds concerning the meeting (1-4 above), which it was sought to bring under s.222(1), were not established. This sub-secn. is (and was at the material time) as follows:

"Where there is a doubt, on a specific ground, whether a deed of assignment or a deed of arrangement was entered into in accordance with this Part or complies with the requirements of this Part, or whether a composition has been accepted by a special resolution of a meeting of creditors under section 204 of this Act, the trustee, a creditor or the debtor may apply to the Court for an order under the next succeeding sub-section."

The learned judge found that the chairman of the meeting determined the applicant's debt at $1,500. I respectfully agree that the chairman did so. He did not leave the matter to the creditors. The judge held, applying s.225(2) in its form at the relevant time (before the 1980 amendments to the Act), that the certificate of the chairman was conclusive evidence that the meeting was duly convened and held and that the special resolution specified in the certificate was duly passed. He referred to Re Blake; ex parte Kebroc Home Developments Pty. Ltd. (in liquidation) and Citicorp Australia Limited a decision of C.A. Sweeney J delivered on 22nd May 1980. The sub-secn. was then as follows:

"A certificate of the passing of a special resolution under section 204 of this Act signed in accordance with that section is, in the absence of fraud, conclusive evidence that the meeting was duly convened and held and that the special resolution specified in the certificate was duly passed at the meeting."

It was not suggested before us that the certificate was in any way defective or inadequate, but only that it did not have the conclusive effect which the debtor relied upon. In my view the learned judge was right. The sub-section is in very wide terms and his view of it is supported by a number of authorities, to some of which he referred. With s.225(2) there can be contrasted s.258, which applies over a wider field.

Since the time of the relevant events, s.225(2) has been amended, so that the chairman's certificate is only prima facie evidence of the matters set out. This has led the courts to a closer examination of s.201 and its place in the (new) general scheme of things, and to the giving of relief under s.224 on a basis contrary to the chairman's rulings (see Re Tollitt; ex parte Scholefield Goodman and Sons Limited, a decision of Bowen C.J. delivered on 22nd October 1980, and Re Maloney; ex parte Field a decision of Lockhart J delivered on 20th March 1981). Before the amendment I think it was well established that an attack on the meeting, and what went on at it, was precluded by the certificate. This is not to say that relief under s.222(1) was rendered unavailable. Doubtless, if there were a proper certificate, the scope of the matters which could be relied upon under s.222(1) was less, but this sub-section still had much to do. It is interesting to observe, in any event, that s.222(1) is predicated on "a doubt" and sub-secn. (2) provides for a declaration either way, to remove the doubt. As I shall indicate, an inquiry under s.222(4) is not impeded or governed by the certificate.

Lest it be thought in the present case that the operation of s.225(2) has an unduly repressive effect, I should make some comments on the grounds relied upon by the applicant (respondent). Ground (1), which says that the chairman wrongly determined the amount of the applicant's debt (at $1,500 instead of $8,520.13) cannot be taken as more than an allegation that he erred. There was ample scope for him to form a bona fide view that the applicant's debt was in fact $1,500. This depends, at least in part, upon the construction of the letter of 7th January, marked "without prejudice", which has been set out earlier. The fact that it was so marked is not conclusive as to it being an offer of compromise. In fact, associated parts of it, such as those demanding the return of a manual and records, were plainly not; they were what, on the applicant's view, the agreement required. When it came to mention of a money sum, payment was demanded, and failure to pay within 14 days was to lead to "proceedings for recovery" without further notice. There are features, both of the letter, and of surrounding circumstances, that tend both ways. We know from the evidence of Mr. Griffiths that the $1,500 was not sought on account of the indebtedness, and that Prestige was prepared to accept payment of that amount as being, from its point of view, in final and full discharge of Mr. Beard's indebtedness to it. The letter did not mention the existence or possibility of claims by the latter against Prestige, or what, under a compromise or otherwise was to happen to any such claims. Prima facie, they could still be maintained, subject to any evidentiary or legal effect the making of the payment demanded would have.

There is a further aspect. Attention is naturally focussed on the amount of the demand and the amount of the proof, but a chairman is not bound to accept either, especially when the existence of any balance in favour of the creditor is disputed, and the debtor has a cross-claim for a large amount. In this case the chairman could well accept the amount of the demand, having in mind the large cross claim, however the "Without Prejudice" letter be regarded.

As for the remainder of the grounds relied upon to invalidate the meeting, namely (2), (3) and (4) set out above, I am of the view that the factual basis for them is not made out. I have already expressed agreement with the finding of the trial judge that it was the chairman who determined the amount of the debt, and no case of unfair conduct is established.

Ground (5) goes to the application of s.222(4) and involves a number of considerations. This sub-section was (and is) as follows:

"Where the Court, on the application of the trustee or a creditor, is satisfied that the debtor -

(a) has given false or misleading information in answer to a question put to him with respect to his conduct, trade dealings, property or affairs at the meeting of creditors at which the resolution requiring him to execute the deed or accepting the composition was passed; or

(b) has omitted a material particular from the statement of his affairs under section 195 of this Act or included an incorrect and material particular in that statement,
the Court may make an order declaring the deed or composition to be void."

A number of questions arise. It may be helpful if I indicate what in my understanding was the approach of the learned judge, and what his reasons and conclusions were, and if I make observations and state conclusions of my own in the course of doing so. For convenience, I do this in numbered paragraphs:

1. It was contended on behalf of the debtor that Prestige was not a creditor within the meaning of the opening words of the sub-section. This was an attack on its standing to bring the application, and was based on legal grounds, already mentioned, as to the state of the account between them. The judge reached a result on this aspect by asking himself whether there was a balance in favour of Prestige. He did not do this by definitively determining the rights of the parties. He accepted that $8,520.13 was due to Prestige, not by making a finding on the facts, but by proceeding on a concession by the solicitor for the debtor that the figure was correct "as a matter of arithmetic", - "if it were well founded". His Honour seems to have taken the view that if the debtor's grounds of opposition could be shown not to produce setoffs, cross-claims or cross-demands which individually or collectively amounted to $8,520.13, Prestige would have a balance in its favour, and be a "creditor". With respect, the concession did not go far enough to enable this result to be reached.

2. In considering Mr. Beard's claims, his Honour took them as set out in the earlier and unamended notice of opposition. In the amended document they were, as already mentioned, set out much more fully and were particularised in much greater detail. This mistake, as it appears to me to have been, had serious consequences, because it led to his Honour not considering at all some of the matters relied upon, and to the expression of conclusions which did not take them into account.

3. The earlier notice of opposition, although itself in fairly wide terms, contained four particulars, and his Honour considered each of these in turn. The first two relied on fraud, and his Honour found that the debtor had failed to establish a basis for the allegations made. He gave no reasons, beyond saying that he accepted Mr. Griffiths, the general manager of Prestige, as a witness of truth, and that, whenever his evidence conflicted with that of Mr. Beard, he had no hesitation in preferring the account of the facts given by the former. Before us, and notwithstanding the finding of credibility, counsel for Mr. Beard strongly pressed the case of fraud. It is not necessary for me to reach a conclusion on this aspect, and I do not do so.

4. The next particular claimed that the debtor was entitled to repayment of the sum of $16,068, or some part thereof. This was regarded by his Honour as based on a total failure of consideration. He disposed of it by saying that Mr. Beard's solicitor, in his final written submissions had abandoned it. This abandonment is referred to by his Honour again later, where he relies upon it as a factor to suggest that any amount the debtor could recover (pursuant to the obligation in the deed of arrangement) was not likely to be of much value to the creditors. In fact, a claim in substantial accordance with the particular was not abandoned in the final written submissions; far from it. What did happen was that the solicitor in the course of argument said that he did not press a claim based on total failure of consideration, both because there had been part performance and because it had not been raised in the notice of objection. I believe, with respect, that his Honour was mistaken in equating the particular with one way of expressing a case under it. The result was to exacerbate the difficulty flowing from reliance on the superseded notice of objection.

5. The last particular related to a sum of $500 claimed to be the value of goods of the debtor converted to its own use by Prestige. His Honour expressly left this matter undecided.

6. His Honour also considered, apparently under the heading of "set-offs", whether the debtor had any substantial claim in respect, as he said, of "the serious defects in the plant and machinery provided by the applicant for the use of the debtor under the licence agreement". He said, in an unelaborated conclusion "on the view of the facts most favourable to the applicant it could not be held that any claim which the debtor could conceivably establish for damages in respect of those defects could have been sufficient to extinguish the debt clearly owed by the debtor to the applicant, even if one gave the debtor an additional credit for the full amount of $500 claimed in respect of the stock left on the premises". I have already said that his Honour did not make any findings about the debt of $8,520.13, unless the above quoted passage is to be regarded as containing one. It would seem likely that his Honour proceeded from the limited concession, and did not find a cross-claim to exceed the amount of Prestige's claim. It is evident that his Honour did not attempt to reach a decision concerning claims which could arise out of the fact, as he found, that the plant and machinery were seriously defective.

7. On the basis of the abovementioned conclusions his Honour found that Prestige had established its standing to bring the application. For my part, for reasons I will give, I would either have considered the rights of the parties definitively, and seen then whether there was a balance in favour of Prestige, or, following the course his Honour did, I would have found the applicant to be a "creditor" for the purposes of s.222(4) if it established a prima facie case, or a reasonably arguable case, that it was owed a debt by the debtor. In either event, in my view, the debt would have to be one capable of proof in bankruptcy. I discuss the underlying legal considerations later in these reasons.

8. The next matter considered was whether the debtor included an incorrect and material particular in the statement of his affairs. Before his Honour it was contended that there were two such particulars, - those relating to the amount of $1,500 and to the amounts totalling $16,480. His Honour concluded that the first entry was "plainly incorrect", it being "quite clear" that the applicant's claim against the debtor was for the sum of $8,520.13. His Honour said that the "without prejudice" letter of 7th January gave no reason for using the lower figure. I have the misfortune of not finding the matter as clear as did the learned judge. I have already discussed the purport of the letter when considering the application under s.222(1). His Honour referred to the "offer" to accept the sum of $1,500, but, in terms at least, what the letter does is make a demand, and in the same sentence as other demands made in the terms of the contract. The significance one might otherwise give to the phrase "in respect of" can hardly be maintained in the light of the known fact that the sum of $1,500 was not sought on account. There are several possible explanations of the drop from $8,520.13, and it is speculation to choose between them. What was sought, doubtless, was prompt payment, but even then, the letter, on an ordinary reading, seems to be referring to the default proceedings as intended to recover the amount stated. The period of 14 days was a fairly conventional one, not usually regarded as critical by the law or by laymen. The same period was in the demand of the previous November. There remains a question of what the heading "Without Prejudice" can be related to. To many it would probably be regarded as attributable to a lawyer's excess of caution. In strictness it is a form of protection against the communication being used in evidence as an admission. In my view, it should be the text of the letter which governs in a case such as the present, and if the heading leads to uncertainty or ambiguity, the matter should be resolved against the person or company on whose behalf it is written. I have therefore come to a different conclusion from his Honour as to the meaning and effect to be given to the letter.

9. His Honour applied a test on this aspect of the case which was related to what the debtor should have known, or understood, was the claim made by Prestige, - apart from its actual correctness. This reliance upon what is asserted is even more apparent when the judge finds against the applicant in relation to the sum totalling $16,480. He said:

"The statement that the debtor had a claim against the applicant for "$16,000 plus damages" was accurate in the sense that the debtor asserted such a claim and as it was referred to as a disputed claim, I am not satisfied that it amounted to an incorrect particular."

It was not argued before us that this conclusion was wrong. I will discuss later what I believe to be the appropriate tests under s.222(4) but it is my view that whether his Honour's approach was correct, or my slightly different view is to be preferred, there was not any incorrect particular.

10. The judge did not consider separately the question whether if a particular was incorrect it was material. This question of materiality is of importance in the present case, because of the debate at the meeting. I shall consider it on the assumption, contrary to my own view, that there was an incorrect particular. Presumably "material" means something which did or might have affected the outcome (see Re Segal; Lensworth Finance Ltd. v Segal and Ward (1975) 9 ALR 154) and in this case one looks to the chairman's ruling and the passage of the resolution as the matters which might have been affected. Creditors not at the meeting would not receive the statement of affairs (s.195(1)). Plainly an inaccuracy would cease to be material if it were unambiguously corrected at the meeting. The most striking aspect is that if the debt to Prestige had been accepted by the chairman at the higher figure, a special resolution could not have been passed against its opposition. If the figure of $1,500 had been accepted when there had been no counterclaim or cross demand, and no discussion about these matters at the meeting, the argument that the incorrect particular was material would have been strong. As it is, there was the dispute between the parties, and there was a lengthy discussion about the claim by Prestige and the claim against it at the meeting. We do not have precise details as to what was said but it must at least have been sufficient to show others that one or both claims could prove to be erroneous, and seriously so. It was made apparent by solicitors for Prestige that the demand for $1,500 was in a letter marked "without prejudice", that the period mentioned therein had then expired, and that the claim then being pressed was for $8,520.13. It was also pointed out that Mr. Beard had a substantial claim which might exceed this sum and it was said that his solicitor had expressed the view that he had a high chance of success.

There is an incidental matter of fact. Mr. Stern, in an affidavit of 7th February 1980, seems to be saying that Mr. Gee suggested that it would be in the best interests of creditors to accept the lower figure of $1,500 so as to prevent Prestige from defeating the motion. I do not accept that Mr. Gee put the matter in that way. He pointed out the obvious fact, but it is not consistent with other evidence including that of Mr. Stern in cross-examination, and with the minutes, (which Mr. Stern properly pointed out was not "a transcript") that Mr. Gee was urging action to defeat a proper claim by, or right of, Prestige. Mr. Armstrong (proxy for Prestige) puts the observation in different language in his affidavit, without the inference that can be taken from what Mr. Stern said. Mr. Gee was a registered trustee and I would not readily impute any improper conduct to him, or for that matter to the representatives of the creditors. In this appeal counsel for Prestige has expressly disclaimed any attack on Mr. Gee. As a general observation I might say that quite a bit of the evidence suffers from the argumentative and colourful forms of expression, and the indirect language, so easy to present in affidavit form. My mind on this matter has fluctuated, but on the whole, I am not satisfied that if there was an incorrect particular, it was material.

11. The judge then considered the requirement of s.222(5) that the deed not be declared void unless the court is satisfied that it would be in the best interests of the creditors to do so. He said that he was satisfied in this regard. He based his conclusion on two matters (a) the advice reported to the meeting that the debtor's action against Prestige had a ninety per cent chance of success, which he said was greatly exaggerated and (b) a broad view which was expressed as follows:

"The course which the case has taken before me, including the final abandonment by Mr. Irlicht of at least one of the grounds of the debtor's claim against the applicant as unarguable, although it had been long persisted in, lead me to think that the pursuit by the debtor of his action against the applicant is unlikely to benefit his creditors to any substantial extent."

12. His Honour did not allude to his discretion under s.222(4). Section 222(5), provides wide scope for judgment, but is not co-extensive with the discretion under s.222(4). Considerations concerning the discretion overlap with the considerations which arise under sub-section (5), but I will deal with the whole matter in the present paragraph. The discretion is an unqualified one flowing simply from the use of the permissive "may". It has been held to include consideration of all relevant matters including the interests of creditors, of the debtor, and of the public (Re Dolman; ex parte Elder Smith Goldsbrough Mort Ltd. (1967) 10 FLR 384; Re Williamson; ex parte Wearne (1980) 31 ALR 598).

The position was that the unsecured creditors shown in the statement of affairs numbered 30 and totalled $24,742 in value (Prestige being shown at $1,500). Proofs of debt from 12 creditors (Prestige at $8,520.13) were tabled at the meeting, the total amount of their proofs being $18,870.29. There was present a Mr. J. Morris, who seems not to have been shown in the statement of affairs or the debtor's list but who lodged a proof of debt at the meeting for $550. There were 7 creditors who were present in person or by proxy. One, representing the Commissioner of Taxation (a priority creditor) abstained, Mr. Armstrong voted against, and the remaining five all voted for, the resolution. These included a creditor for $2,674.41 and the City of Ringwood, a creditor for $760. It can only be assumed that the 5 creditors who proved but were not represented at the meeting were prepared for it to take its own course, and were content that there be a deed of arrangement. The deed gave one positive advantage to creditors, which the debtor proffered, and that was the payment of $50 per week, which they could not obtain on a sequestration (see s.131). The possibility of his being able to provide this sum was explored at the meeting; he said he was then unemployed but was pursuing applications for a number of positions. I think we should accept his own assessment of his ability to pay this amount, and not attempt, at this stage at least, to protect him from his own offer.

Another advantage to creditors, beyond that which they might otherwise get, was the debtor's undertaking to pursue at his own cost any action he may have against Prestige. Counsel for Prestige submits that this undertaking is a main reason why the deed should be set aside; his instructions are that his client does not oppose a deed being entered into, but is opposed to the particular deed, and especially the clause mentioned. He acknowledges that his client can hardly object to the pursuit of a legitimate claim against itself, but says that there is in this case no basis for any such claim, and that to prosecute one will only involve it in costs and an order or orders for costs in its favour and against the debtor. In this regard, Prestige would appear to have only limited support from the judge's findings, in the sense that his Honour seemed to accept that an action by the debtor could well succeed to some extent. The costs of the proceedings (it is argued) will be payable by an insolvent, who will also incur costs (which it is conceded may be payable by legal aid), and his ability to meet his commitment under the deed will be diminished. There has so far been no determination of the relevant issues. I believe, on the basis of present materials, that the debtor has a reasonable chance of success in obtaining a substantial award against Prestige. I do not want to be put in the position of advising Mr. Beard, or of embarrassing future court proceedings, but his counsel has in this appeal pointed out several possible causes of action, at least one of which could well succeed in bringing in a substantial amount for creditors. The very poor condition of the machinery and equipment which the debtor took over is not the subject of any substantial dispute and this situation alone may form the basis of a successful action. I think the learned judge was also inclined to this view, although he did not think it would bring in a large sum.

The respondent has certainly not satisfied me that because of the particular clause the deed should be set aside. On the contrary I believe that it provides a firm ground for supporting the deed. The fact that Prestige, if its debt for voting purposes was accepted at $8,520.13, could have blocked the resolution, and would have voted to block it while the offending clause was there, does not seem to me to constitute a critical factor. If it had thus used its voting power (based on an alleged debt to it of $8,520.13) it would have stopped a scheme thought by the other creditors to be worthwhile, and all on the basis of a disputed debt, which could in reality and not speculatively, have proved to be counter-balanced by an amount owing to the debtor of a substantial amount, if not a larger amount.

Some guidance on the way cross-claims should be dealt with when exercising a discretion under s.222(4) can be obtained from the procedure prescribed by the Act for obtaining an ordinary sequestration order. If non-compliance with a bankruptcy notice is relied on, the notice must be based on a final judgment or order (s.40(1) (g)). Even so, the debtor has a chance of satisfying the court that he has a counter-claim set-off or cross-demand he could not have set up in the creditor's action. What is expected of him at this stage is that he show a prima facie case bona fide put forward that he has the cross-demand (Re Jocumsen (1929) 1 ABC 82; Ebert v The Union Trustee Co. of Australia Ltd. (1960) 104 CLR 346; Re a debtor; ex parte Commissioner of Taxation (1963) 19 ABC 296). If a petition is based on another act of bankruptcy, the fact that the debtor has a bona fide cross-demand against the petitioning creditor which will if successful exceed the petitioning creditor's debt or bring it below the prescribed amount is a discretionary basis for dismissing the petition (Re a debtor; ex parte The Peak Hill Goldfield Limited (1909) 1 KB 430, 438 and see Re a debtor; ex parte the Petitioning Creditor (1917) 2 KB 60, 64-5).

In my view, the court should in the circumstances such as exist in the present case, be slow in setting aside a deed. One should rather proceed on the basis that the creditors, and the debtor, know their own interests best. There are well known advantages in having a deed of arrangement. An important matter is that the situation between applicant and debtor is for the time being, because of the course followed at the hearing, in such an inconclusive state. The fact that the objecting creditor asserts a relatively large liquidated claim is an important factor, but this is diminished in importance when a substantial cross-demand, which may exceed the creditor's claim, is also asserted bona fide and the contest has not been resolved. The trial judge and this court have not heard any argument presented on behalf of the creditors. Mr. Gee was briefly represented before the court below and then submitted. We were told by counsel on the hearing of this appeal that Mr. Gee had been served with the necessary papers but had said that he did not wish to participate. I expect that this was related to the question of costs, but it has probably led to the proceeding appearing more as a contest between Prestige and Mr. Beard than it really is.

Assuming, contrary to my opinion, that the question of exercise of discretion were reached, I am of the view that it should not be exercised in favour of avoiding the deed. It also follows from what I have said that I would not be satisfied that it would be in the interests of the creditors to make the order sought (s.222(5)). Counsel for Prestige did not separately argue a case based on s.236, on the view that if he did not succeed under s.222, he would not be likely to succeed under the former section. I agree.

I should return to deal with aspects of the operation of the relevant parts of the Act, consideration of which I have foreshadowed. Perhaps the central question is how amounts in dispute, and cross-claims and demands should be dealt with in applying s.222(4). Should a court dealing with that sub-section determine the position conclusively (for the purposes of the Act), or is it permissible to adopt some less final approach? Other questions relate to the meaning of "creditor" in s.222, and the standard by which one judges whether the debtor included an incorrect particular in his statement of affairs.

It is necessary to examine the scheme of the Act, so far as relevant. Some recapitulation is unavoidable.

Section 188 enables the debtor to set in motion proceedings outside bankruptcy. Immediately the authority he signs becomes effective under that section, his "property", as defined, comes under the control specified in s.189 and s.190. Notice of the meeting provided for in the authority is sent to the persons stated by the debtor to be creditors (s.194(2)), although it is also to be advertised (s.194(3)). Failure to comply with these sub-sections is not fatal, unless the court, on application to it, so decides. Unless prevented by illness or other sufficient cause, the debtor is to attend the meeting (s.195(1)); his absence does not affect the validity of any resolution passed (s.195(4)). He is to submit a statement of affairs, which has to satisfy the requirements of s.195(2), to be in accordance with Form 11, and to be verified by a statutory declaration (r.78). He has to swear that the statement of affairs is true ("to the best of his knowledge and belief"). At the meeting the debtor is required to answer questions to the best of his knowledge and ability (s.195(3)). The majority in number of the creditors present are to elect a chairman (s.196 (1)). Meetings may be adjourned (s.196(2); s.197). Every creditor is entitled to vote except those with unliquidated contingent or unascertained debts (s.198). The creditor must first make known to the chairman particulars of his debt (s.198(4)). Section 201, which has been set out, gives the chairman power to decide who is entitled to vote, and in respect of how much (cf. s.68). Section 204 gives the meeting a number of options two of which are that it can require the debtor to execute a deed of arrangement and that it can require the debtor to present a debtor's petition. If the former, a trustee is to be appointed (s.204(4)). He must be a registered trustee (s.204(4); s.215). Action under the section must be by special resolution (s.204(1)), a term defined by s.5(1) to mean a resolution passed by a majority in number and at least three-fourths in value of the creditors present and voting. Restraints on execution by the sheriff (s.205) and on continuation of proceedings on a creditor's petition (s.206) flow from action taken under s.188 or consequent upon it. Section 214 deals with the form of the deed of arrangement. It must be executed by the debtor and the trustee within 21 days from the passing of the special resolution (cf. s.217). Under s.218 notice of the execution of the deed is to be given by the trustee to each creditor, and is to be published in the Gazette.

There then come the provisions of s.222, enabling a court to declare a deed void, and to make a sequestration order (s.222(7)). The power to declare a deed void is expressed in permissive language by the use of "may" and is discretionary. No order avoiding a deed can be made under s.222(4) unless the court "is satisfied that it would be in the interests of the creditors to do so" (s.222(5)).

Further meetings of creditors can be called (s.223). Section 224 protects dealings effected before a deed is declared void or terminated. Under s.233(1) a deed which complies with the requirements of Part X is upon execution binding on all the creditors, and under s.233(2) action by creditors against the debtor is restrained. Except in so far as the deed provides for the release of debts, it does not release them (s.234(1)). Under s.236(1) the court may make an order terminating the deed, for the debtor's failure to comply with a provision of it, or if it "cannot be proceeded with without injustice or undue delay to the creditors or to the debtor" or "for any other reason". But it is not to be terminated unless the court is satisfied that it would be in the interests of the creditors to do so (s.236 (2); cf. s.225(2), cited above). By s.237 (and see rules 84 and 85) many other provisions of the Act are made applicable mutatis mutandis; these include, in particular, the sections concerning proof of debts (including s.86, dealing with mutual credits and set off) and order of payment of debts.

The scheme outlined allows for a special resolution to be passed under s.204, and a deed executed, without any final or definitive determination of who are the creditors, or the amount or nature of their debts (see Re Spanney; ex parte Holtzmann (1936) 38 WALR 13, decided in relation to an earlier equivalent of s.201). Some creditors who would be entitled to prove are debarred from voting. This leads to an expectation that there will in later sections be some mechanism for the protection of creditors (in a wide sense) who claim to be disadvantaged by the procedure. Section 222 is such a section.

I conclude that where reference is made in s.222 to a "creditor", the term is used in a wide sense, probably to include any creditor who could prove in bankruptcy. It is certainly not confined to those whom the debtor named. For similar reasons, the reference in para (b) or sub-secn. (4), to the omission or inclusion of a material particular in a statement of affairs is not confined to a wilful or negligent omission or inclusion. A debtor may in good faith and without negligence omit a debt, overstate or understate it or misdescribe its nature. He may also incorrectly include a creditor or overstate his debt.

The fact that it is the statement of affairs itself which is referred to in para (b) of s.222(4), without regard to what the debtor may say at the meeting, or any material the chairman or any creditor present or the trustee might put before the meeting, is interesting. The way in which the paragraphs are drafted probably owes something to the fact that the debtor may lawfully be absent from the meeting (s.195(1)), in which case the statement of affairs is likely to play a greater part. The Clyne Committee, which reported in December 1962 and whose recommendations and draft Bill were closely followed in the Act of 1966, recommended that the relevant power to declare a deed void should be related to "false" or "misleading" information in the statement of affairs (para 318) although this is not the language used in its draft bill, or in s.222(4), which reproduces it. It would seem that under s.222(4) a causal relation between what it contains, and the way creditors vote at the meeting is to be found in the requirement that the particular omitted or included be "material". I have already examined this matter of materiality.

The appellant claims that he has a set-off, at least in equity, against the debt allegedly due to Prestige, and he claims that it exceeds the latter's claim. In any event, he says that he has a claim for unliquidated damages arising ex contractu (see s.82(1)(2), under which such a claim is provable in bankruptcy), and that it should be taken into account at this stage. In reliance mainly upon the arrangement of the parts of Form 11 (the statement of affairs), he contends that s.86, dealing with mutual credits and set-off, is intended to be applied before s.222(4) is considered.

The legislation is doubtless lacking in desirable detail and precision, but it seems to me that s.222 can operate before or after other steps provided by the Act have been taken, depending on how far proceedings consequent upon the meeting and the execution of the deed have progressed at the time the section is invoked. There is a time limitation in s.222(6)(b), which provides that an order declaring a deed void is only to be made "before the terms of the deed have been carried out".

It is undoubtedly competent for the court to examine in close detail, definitively if necessary, whether a person claiming to be a creditor for the purposes of the section is one (secns. 30, 31(1)(i)). In Re Tollitt; ex parte Scholefield Goodman and Sons Limited (supra) Bowen C.J. determined whether, for the purposes of s.222 proceedings, certain companies were creditors, and for what amounts. The court can at the same time determine the validity and extent of a cross-demand. This must, I believe, be the usual course when there is a dispute, the resolution of which will affect a decision on sub-sections (4) and (5).

What has to be decided for the purposes of sub-sections (4) and (5) will depend upon the circumstances of the case. There may be no significant contest about whether a person is a creditor, or for how much, or as to any set-off or cross-claim by the debtor, and in that event, if the deed is not set aside, the prescribed procedures can take care of their final determination. There are many possible situations. In general, a court deciding a case under s.222(4) will prefer to leave as much as possible for final decision in accordance with ordinary procedure and practice, and this is what was done in the present case. With great respect for a judge particularly experienced in bankruptcy matters, it seems to me that the approach he adopted was not correct in this case. He could not, in the circumstances of the case, come to a satisfactory conclusion either about the application of s.222(4) or the exercise of discretion thereunder or about the application of s.222(5) without knowing what, if anything, was owed, on a final balance, by the debtor to Prestige or vice versa. If this was not immediately to be resolved by action in other courts it had to be resolved by the court sitting in bankruptcy, so far as its jurisdiction extends, - and this seems to be wide (see s.30(1) (a)). What was not permissible in my view was to make an order setting aside the deed of arrangement without further investigation, or more final determinations, than were made.

I am therefore of the opinion that the appeal should be allowed, with costs, the order of his Honour set aside, and in lieu thereof it be ordered that the application be dismissed with costs, including reserved costs.

JUDGE2

This is an appeal from a judgment of a single judge of this Court. Application was made to his Honour under s.222 of the Bankruptcy Act 1966 ("the Act") by Prestige Baking Industries Pty. Limited, the respondent to this appeal, ("the respondent"), seeking an order declaring a deed of arrangement to be void. The debtor, Kim Howard Beard, was a respondent to the application and is the appellant in this appeal, ("the appellant"). The respondent Maxwell George Gee was the controlling trustee of the property of the debtor and he, in essence, submits to whatever orders may be made.

His Honour held that the respondent was a creditor of the appellant; that the appellant had included an incorrect and material particular in the statement of his affairs presented to his creditors at a meeting held on 4 February 1980 and, being satisfied that it would be in the interests of the creditors so to order, he made an order declaring the deed of arrangement entered into on 4 February 1980 to be void. He ordered that the appellant pay the costs of the respondent of and incidental to the application.

The appellant contends that the learned primary Judge erred in making each of these findings and orders.

I turn first to the question whether the respondent is a creditor of the appellant for the purposes of s.222.

Section 222 of the Act (in its form before the Bankruptcy Amendment Act 1980 came into operation, which is its relevant form) provided as follows: -

"222. - (1) Where there is a doubt, on a specific ground, whether a deed of assignment or a deed of arrangement was entered into in accordance with this Part or complies with the requirements of this Part, or whether a composition has been accepted by a special resolution of a meeting of creditors under section 204 of this Act, the trustee, a creditor or the debtor may apply to the Court for an order under the next succeeding sub-section. (2) Upon the hearing of such an application, the Court may, subject to this section, make an order declaring that the deed or composition is void or that it is not void on the ground specified in the application. (3) The Court shall not make an order declaring a deed to be void on the ground that it does not comply with the requirements of this Part if the deed complies substantially with those requirements.
(4) Where the Court, on the application of the trustee or a creditor, is satisfied that the debtor -

(a) has given false or misleading information in answer to a question put to him with respect to his conduct, trade dealings, property or affairs at the meeting of creditors at which the resolution requiring him to execute the deed or accepting the composition was passed; or
(b) has omitted a material particular from the statement of his affairs under section 195 of this Act or included an incorrect and material particular in that statement,
the Court may make an order declaring the deed or composition to be void.
(5) The Court shall not make an order declaring a deed or composition to be void on a ground specified in the last preceding sub-section unless it is satisfied that it would be in the interests of the creditors to do so."

Section 222 appears in Division 3, headed "General Provisions", of Part X of the Act, itself headed "Arrangements with Creditors without Sequestration". For a proper understanding of s. 222 it is necessary to examine the part it plays under Part X.

Under Part X a debtor, who desires that his affairs be dealt with under that Part without his estate being sequestrated, may sign an authority authorising a registered trustee to call a meeting of his creditors and to take over the control of his property or authorising a solicitor to call a meeting of his creditors (s. 188).

A consenting trustee or solicitor is required to call a meeting of creditors (s. 190). He is obliged to give notice of the meeting to each person who is stated by the debtor to be a creditor, and to advertise the meeting in a newspaper circulating in the locality in which the meeting is to be held (s. 194). The debtor is obliged, unless prevented by illness or other sufficient cause, to attend the meeting and to submit to the creditors at the meeting a statement of his affairs verified by statutory declaration (s. 195(1)). The statement of affairs must specify the debtor's assets and liabilities and must include particulars of each asset including its estimated value, particulars of each liability, whether secured or not, and if secured, particulars of the security (s. 195(2)). There is a prescribed form of statement of affairs: see r. 78 of the Bankruptcy Rules and forms 11 and 35.

The debtor is required at the meeting to answer, to the best of his knowledge and ability, all questions put to him by the registered trustee (called the controlling trustee) or by a creditor with respect to his conduct, trade dealings, property and affairs (s. 195(3)). The majority in number of creditors present at the meeting elect a chairman (s. 196(1)). Every creditor is entitled to vote unless his debt is unliquidated, contingent or unascertained (s. 198(1) and (2)).

Section 201 deals with admission and rejection of claims to vote. It provides: -

"201. 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 fourteen days, to enable him to investigate the matter."

"Section 201 is designed to empower the chairman not to make a final ruling on a debt - that is for the trustee who will decide whether it is provable - but to rule for the purposes of the meeting in a summary way avoiding technicalities and delays (Re Spanney; ex parte Holtzmann (1935) 38 W.A.L.R. 13). His decision is not made appealable by the Act (Re Amadio (1978) 24 A.L.R. 455). This position may be construed with the position under the Bankruptcy Act 1924 as amended (see para. 160 (f) and s. 169 of that Act)"

per Bowen C. J. in Re Levy; ex parte Scholefield Goodman & Sons Limited at p. 24, judgment delivered 22 October 1980, as yet unreported.

The creditors may, at the meeting, by special resolution: -

(a) where the debtor's property is subject to control under Division 2 of Part X, resolve that his property be no longer subject to control under that Division;

(b) require the debtor to execute a deed of assignment or a deed of arrangement under Part X;

(c) accept a composition; or

(d) require the debtor to present a debtor's petition within seven days from the day on which the resolution was passed (s. 204(1)).

Where the creditors pass a special resolution the chairman must forthwith sign a certificate to that effect in accordance with the prescribed form (s. 204(7)(a)).

Section 225(2) provided at the relevant time (which is February 1980 in the present case):

"a certificate of the passing of a special resolution under s. 204 of this Act signed in accordance with that section is, in the absence of fraud, conclusive evidence that the meeting was duly convened and held and that the special resolution specified in the certificate was duly passed at the meeting".

The certificate of the chairman was signed on 8 February 1980, before the amendment made by s. 122 of the Bankruptcy Amendment Act 1980 which provided that such certificates are now only prima facie evidence.

The debtor and the trustee must execute a deed of assignment or arrangement within twenty-one days from the passing of the special resolution (s. 216).

The Court may, if it thinks fit, on the application of a creditor or the controlling trustee, forthwith make a sequestration order against the estate of the debtor in certain circumstances including the case where a debtor has failed without sufficient cause to attend the meeting under s. 188, or to submit to the creditors at the meeting the statement of affairs referred to in s. 195, or where, having been required by a special resolution of the meeting of creditors to execute a deed of assignment or arrangement to present a debtor's petition, has failed without sufficient cause to execute the deed within the prescribed time or to present the debtor's petition within the time required by the special resolution (s. 221(1)).

Then comes s. 222, the material provisions of which I have set out.

A deed of assignment or arrangement that is entered into in accordance with Part X and complies with the requirements of that Part is, upon being duly executed by the debtor and the trustee, binding on all creditors of the debtor (s. 228(1) and s. 233(1)). A composition that has been accepted by a special resolution of the meeting under s. 188 is binding on all the creditors of the debtor (s. 238(1)).

The Court may terminate a deed of arrangement under s. 236.

The Court is empowered in certain circumstances to set aside a composition upon application by a creditor (s. 239); or to make an order terminating the composition upon application by the trustee, a creditor or the debtor (s. 242).

Certain provisions of the Act apply in relation to a debtor who has executed a deed of assignment or arrangement or where a composition has been accepted by the creditors, as if he were a bankrupt, including s.82 (as modified by Bankruptcy Rules 82, 83 and 84) dealing with debts provable in the bankruptcy and s. 86 relating to mutual credits, mutual debts and other mutual dealings between a bankrupt and a person claiming to prove a debt in the bankruptcy (ss. 231, 237 and 243).

The policy revealed by such of these provisions as relate to meetings under Part X appears to be to place in the hands of the chairman the power of determining the rights of persons to vote at meetings of creditors under Part X and the amounts of the debts in respect of which they are entitled to vote. His decision is not made appealable by the Act, doubtless for the reason that the efficient conduct of meetings of creditors under Part X and the desirability of certainty of decision requires that the requisite powers rest with the chairman. The provisions of the Act relating to meetings under Part X are rather crude. The principal source of information available to the registered trustee or solicitor who convenes the meeting under s. 188 is the information given to him by the debtor (s. 194(2)). This may be imperfect. Doubtless the requirement that notice of the meeting be published in a local newspaper (s. 194(3)) is designed to ensure that deficiencies in the information provided by the debtor are remedied. Creditors may, of course, attend the meeting and vote notwithstanding that they were not formally notified of the meeting under s. 194(2).

Although the chairman is empowered to determine questions relating to the rights of creditors to vote at meetings under Part X, his decisions have nothing to say as to their rights to prove under an administration under Part X. Nor do the chairman's rulings have any bearing on a person's locus standi as a creditor for the purposes of applying to the Court under ss. 222, 236, 239 or 242; but the certificate of the chairman has relevance for other purposes in connection with applications under those sections. Creditors may never have attended the meeting under s. 188; yet their right to apply to the Court thereunder is plain.

Real difficulties arise in determining whether an applicant under any of the sections has locus standi as a creditor. The debtor, the trustee or, perhaps, any creditor may appear and dispute that the applicant is a creditor. Definitive rules cannot be laid down as to how the Court determines these questions as the possibilities that may arise are so variable. I am not satisfied that the Court must approach this question as it would if hearing a disputed claim between parties on a final basis, although in some circumstances this may be the appropriate course to take: Re Levy; ex parte Scholefield Goodman & Sons Ltd. (supra). The Court is exercising its administrative jurisdiction under Part X to determine whether deeds of assignment or arrangement or compositions should be declared void or deeds of arrangement or compositions terminated. The primary relevance of the question, whether a person who claims to be creditor is in fact a creditor, is to determine his locus standi for the purposes of the application.

It may be sufficient for the applicant to show that he has a prima facie case to be a creditor of the debtor, analogous to the position of an applicant for interlocutory injunctive relief or of a debtor seeking to establish, under s. 41(7) of the Act, that he has a counter-claim, set-off or cross demand of the kind referred to in s. 40(1)(g): Ebert v. The Union Trustee Company of Australia Limited (1960) 104 C.L.R. 346 per Dixon C.J., McTiernan and Windeyer JJ. at p. 350; Re Brink; ex parte The Commercial Banking Co. of Sydney Limited (1980) 30 A.L.R. 433.

It may be sufficient if he shows a "genuine claim" to be a creditor: In Re a debtor 1963 1 W.L.R. 51 per Lord Denning M.R. at p. 55 and Upjohn L.J. at p. 56; or a claim which it is "proper and reasonable to litigate" Vogwell v. Vogwell (1939) 11 A.B.C. 83.

The respondent contended that it is sufficient for the applicant merely to assert that he is a creditor of the debtor. No authority was cited directly in support of this proposition and I do not accept it.

I do not find it necessary to determine the standard which must be satisfied by the respondent under s. 222 to establish that he has the necessary locus standi as a creditor. The learned primary Judge appears to have approached this case on the basis that the respondent established a prima facie case as to its claim of $8,520.13; and to have taken the same approach to the appellant's assertions by way of defence or cross claim, except as to its defence or cross claim based on fraud where he seems to have approached the matter as if it were a final hearing. No challenge was made to this approach before his Honour or this Court.

It may become relevant for the Court to determine whether the applicant, or any other person claiming to be a creditor, is a creditor of the debtor for other purposes under the three sections; for example, in an application under s. 222 to determine if the debtor has omitted a material particular from his statement of affairs or included an incorrect and immaterial particular therein (s. 222(4)(b)); or in exercising its discretion under sub-ss. (2) (4) or (5) of the section. Again, it is impossible to lay down definitive criteria to determine this question as the circumstances that may arise are multifarious.

I turn now to the appellant's assertion that the respondent failed to establish that it is a creditor of the appellant.

On 30 May 1979 the appellant and the respondent entered into an agreement under seal whereby, amongst other things, the respondent licensed the appellant to operate and manage as a licensee of the respondent "three special stores known as Hades Hot Bread Kitchen Stores". The licence agreement required the appellant to pay -

. royalties - $350.00 per week on gross turnover of up to $5800.00 (clause 2 (a) and item 8 (a) in the Schedule);

. advertising - 1% of gross turnover on local advertising (clause 2 (i));

. rent - (clause 2 (cc));

. charges

The amount claimed by the respondent to be owing to it by the appellant is $8,520.13 for royalties, advertising, rent and charges pursuant to the licence agreement.

The appellant concedes the "numerical accuracy" of the sum of $8,520.13 and that it is unpaid. The case was conducted before the learned primary Judge and this Court on the basis that the sum of $8,520.13 is due to the respondent except to the extent that the appellant establishes defences to the respondent's claim. It is to these defences of the appellant that I now turn.

(1) The appellant charges that he was induced by the fraudulent mispresentations of the respondent or its agent (a Mr. Walker of International Franchising) to enter into the licence agreement and that he (the appellant) lawfully rescinded it. Alternatively to his claim based on rescision of the licence agreement, the appellant claims damages against the respondent based on the alleged fraudulent misrepresentations. The alleged fraudulent misrepresentations are: -

(i) That the respondent by its agent, International Franchising fraudulently represented that the takings, profits and outgoings of the business of the respondent were as set out in a document headed "Licensee Trading & Profitability Forecast at Existing Performance Levels" (to which I shall refer as "the document");

(ii) That the respondent faudulently represented the document as a genuine forecast;

(iii) That the respondent fraudulently represented that it believed that the forecast correctly set out the figures which a licensee was likely to achieve;

(iv) That the respondent fraudulently represented that a licensee need not have had previous baking experience; and

(v) That the respondent fraudulently represented that the document was based on existing performance levels.

A large body of evidence was called by both parties on these issues. The learned primary Judge regarded the allegations of fraud as depending essentially on the credit of the appellant. The principal witness called by the respondent was a Mr. Griffiths, the managing director of the respondent and the author of the document. Mr. Griffiths gave evidence that the document was discussed in detail by the appellant with him; that he explained to the appellant that the figures appearing on the document were not takings, profits or outgoings obtained by the respondent, but a forecast only, based on known sales levels, in particular over the immediately preceding period of three months and on established "sales movements".

The appellant gave contradictory evidence to support his allegations of fraud. His Honour had the benefit of hearing all the evidence and seeing the witnesses in the witness box, including in particular the appellant and Mr. Griffiths. His Honour preferred the evidence of Mr. Griffiths to the evidence of the appellant wherever the two conflicted concerning the allegations of fraud.

In view of this finding, it seems that his Honour did not regard it as necessary to deal with other submissions of the respondent namely, that even if there was fraud by the respondent, the appellant did not rescind the licence agreement. It was asserted on behalf of the respondent that the purported rescission by the appellant in writing on 10 January 1980, which does not itself mention fraud, was well after the licence agreement had been terminated by the respondent (5 November 1979). It was also submitted on behalf of the respondent to his Honour that the appellant was precluded from rescinding the licence agreement because:

(a) he affirmed the agreement by being in possession from 1 June 1979 to 5 November 1979 paying some rent and royalties from June to September 1979; and

(b) restitutio in integrum is impossible; the appellant could not return the business which was very run down to the respondent in the condition in which he acquired it.

The appellant has not established that his Honour's findings as to the credit of the appellant and Mr. Griffiths were in error. There was ample evidence to support his Honour's finding that the appellant failed to establish any basis for his allegations of fraud.

2. The second matter relied on by the appellant is that clause 11 of the licence agreement is void as a penalty and therefore entitles the appellant to recover $16,068.00 from the respondent.

It is not clear to me whether the appellant's claim is for damages or is said to be recoverable on some other basis. The difficulty arises initially from the applicant's "Amended Notice of Opposition" dated 21 May 1980. It is a confusing document which intertwines statements of fact and of law, assertions, and claims for relief, many expressed as being in the alternative. Its lack of precision and clarity in formulating the true basis of the appellant's case was the source of some confusion before both the learned primary Judge and this Court.

His Honour did not deal with this question of penalty, perhaps because he thought that the appellant had abandoned the point. The appellant abandoned his claim to recover $16,068.00 in so far as it was based on alleged total failure of consideration. His Honour said that the abandonment was made in the final written submissions of the appellant. In fact it was abandoned during the oral submissions on behalf of the appellant; but nothing turns on this. Also, counsel for the appellant did not rely on total failure of consideration as a defence or cross claim before this Court. However, I am content to deal with the case on the footing that the appellant presses his claim to recover the sum of $16,068.00 as a penalty.

Clause 11 of the licence agreement provides:

"11. In the event of termination or determination of this Agreement for any reason all rights of the Licensee hereby granted shall terminate and the Licensee will not be entitled to receive any rebate or refund of the whole or any part of the sums paid by him pursuant to this Agreement . . ."

The payment said to be a penalty was a payment made under Clause 2 (a) of the licence agreement which is in these terms: -

"2. The Licensee hereby covenants and agrees with Prestige to:

(a) pay to Prestige independently of all other obligations hereunder the licence fee specified in Item 6 of the Schedule hereto in the manner therein provided as and by way of a licence fee;"

Item 6 specifies the sum as $16,068.00 payable on or before 30 May 1979.

We were referred to various cases dealing with penalties including Steedman v. Drinkle 1916 1 A.C. 275; Real Estate Securities Limited v. Kew Golf Links Estate Pty. Limited 1935 V.R. 114. In these cases the relevant contracts were executory, the purchasers had paid instalments on account of the purchase price of the property being purchased and had defaulted in making subsequent payments. In the present case the franchise agreement is not an instalment contract, and it is not executory. The payment of $16,068.00 was a payment in gross as the consideration for the grant of the licence.

There is no substance in this aspect of the appellant's claim and, even if there were, it is uncertain whether the appellant relies on this branch of its case as a defence to the respondents' claim or by way of some counter-claim, cross demand or set-off.

3. The appellant claims damages from the respondent for the alleged breach of a term of the licence agreement that the respondent would replace such items of equipment as have a replacement value of more than $1,000.00 such as, in the opinion of the respondent, became unserviceable or uneconomic. Alternatively, it was put that the respondent had breached an implied term that the respondent should take reasonable steps to form an opinion whether any items of equipment leased were unserviceable or uneconomic or alternatively, that it was an implied term that no item of equipment having a replacement value of $1,000.00 was either unserviceable or uneconomic to use.

The appellant also claimed a set-off in the sum of $500.00 with respect to stock left on the premises of the business by him which were said to have been wrongfully converted by the respondent.

The learned primary Judge said: -

"It is clear that there were serious defects in the plant and machinery provided by the applicant" (i.e. the respondent) "for the use of the debtor" (i.e. the appellant) "under the licence agreement, but on the view of the facts most favourable to the applicant, it could not be held that any claim which the debtor could conceivably establish for damages in respect of those defects could have been sufficient to extinguish the debt clearly owed by the debtor to the applicant, even if one gave the debtor an additional credit for the full amount of $500.00 claimed in respect of the stocks left on the premises. In my opinion the applicant clearly has established its standing as a creditor of the debtor to bring this application."

I am not satisfied that his Honour erred in making these findings.

4. The appellant claimed that the respondent had breached a term of the licence agreement that it would provide the appellant with technical assistance from time to time, and that, in the result, damage was sustained by the appellant. The learned primary Judge did not deal with this claim; but it is plain from the evidence that although there was some degree of conflict in the evidence, the respondent did provide technical assistance from time to time. The evidence as to damage sustained by the appellant by reason of this alleged breach was, to say the least, imprecise.

The appellant's claim for damages for fraud and under the items numbered 3 and 4 above, even if established, are not relevant to the question whether the respondent has locus standi as a creditor of the appellant for the purposes of bringing an application under s. 222. Counter-claims, cross demands or set-offs become relevant when a debtor becomes bankrupt or a party to an insolvent administration under Part X. It is then that questions arise as to rights of proof (s. 82) and entitlement to set off under s. 86 where there have been mutual credits, mutual debts or other mutual dealings between the debtor and a person claiming to prove a debt in the bankruptcy or insolvent administration; but they have nothing to say for the purposes of the question under consideration: see In re a debtor; ex parte The Peak Hill Goldfield Limited 1909 1 K.B. 430 especially per Farwell L. J. at p.438.

These may be relevant matters for the Court to take into account when exercising its discretion to avoid the deed of arrangement or deed of assignment or compensation under s. 222. For example, in some cases the Court may decide to adjourn the hearing of an application under s. 222 whilst the parties litigate the debtor's cross claim in a Court of competent jurisdiction where it is pending or is about to commence. The Court may then decide to resume the hearing of the application upon the determination of that litigation.

In the result, I am satisfied that the respondent is a creditor of the appellant in the sum of $8,520.13 for royalties, rents, advertising and charges unpaid pursuant to the licence agreement and is entitled to bring the application under s. 222.

The next question is whether the learned primary Judge was correct in finding that the debtor included an incorrect and material particular in his statement of affairs namely, the reference to the debt owed to the respondent as being a disputed claim in the amount of $1,500.00.

His Honour said: -

"In my opinion, the reference to the debt owed to the applicant as being a disputed claim in the amount of $1,500 was plainly incorrect. It was quite clear that the applicant's claim against the debtor was for the sum of $8,520.13, as set out in detail in the applicant's 'Final Notice' to the debtor dated 14 November, 1979. The justification pleaded for the use of the figure of $1,500 was that by a 'without prejudice' letter dated 7 January 1980 to the debtor the applicant demanded payment of $1,500 and the return of certain books and records 'in respect of your indebtedness to Prestige within 14 days from the date hereof, failing which legal proceedings for recovery will be instituted against you without further notice.' The item in the Statement of Affairs relating to the applicant's claim was, in my opinion, an incorrect and material particular within the meaning of 222 (4) (b) of the Act. It was quite wrong to treat the without prejudice offer to accept a lower amount, which was not acted upon by the debtor, as if that lower amount represented the whole of the claim of the applicant."

Some criticism was made before us of his Honour's treatment of the letter of 7 January 1980 as being "without prejudice". It was said that, although so described on its face, it was in law an open letter. The point is open to some debate; but in my opinion, nothing turns on it.

The fact is that it was an offer made by the respondent's solicitors to settle its claim for $8,520.13 upon payment of the substantially lesser sum of $1,500.00 and the return of certain books and records. It is clear from the evidence of Mr. Griffiths that it was intended by the respondent to be an offer in full and final settlement of the respondent's claim for $8,520.13. It is a matter of conjecture why the respondent was prepared to accept the sum of $1,500.00 and the return of the books and records in full discharge of the larger claim. Some attempt was made in argument to suggest that it indicated that the respondent had serious doubt about the strength of its claim and feared that a counter claim might be successfully established by the debtor. This is a matter of conjecture; but if one were to enter that field it might be at least equally correct to say that the respondent was prepared to take $1,500.00 and the return of the books and records because some money in hand was better than none as the debtor's financial position was so poor. However, I do not propose to speculate about the matter. The fact is that the offer was not accepted by the debtor; nor did he intend to accept it; nor could he have accepted it.

The letter of 7 January 1980 required the payment of $1,500.00 and the return of the books and records within fourteen days from the date thereof. The statutory declaration verifying the statement of affairs was made on 21 January 1980. It may be open to argument whether the offer had lapsed on the expiration of 20 January 1980 or was still open the following day. What matters is that the debtor could not then have paid $1,500.00 from any readily realisable assets. There is no evidence that the money could have been obtained by him from any other source. Not only could the money not be raised by him; but he had no intention of accepting the offer. Yet, instead of including the respondent's claim in the statement of affairs for the figure which he knew it claimed namely, $8,520.13, he put it in at $1,500.00 and, furthermore, as a "disputed claim" - i.e. a claim disputed by him.

He must have known that by doing this he was presenting a misleading picture to the creditors as to the amount claimed by the respondent. In fact, of course, he set in motion a chain of events which ultimately neutralised the respondent's power to block the proposed deed of arrangement because the respondent was allowed, by the chairman of the meeting of creditors, to vote for $1,500.00 only. His conduct also enabled the deed of arrangement to be put before his creditors containing a critical provision (clause 8) in circumstances where, by the statement of affairs, he represented to creditors that he had a claim against the respondent for $16,000.00, which the respondent disputed, and all he has to meet was a claim by the respondent for $1,500.00 which he disputed. Finally, by showing the respondent's claim as $1,500.00 and not $8,520.13 he must have realised that, if the respondent was admitted to prove as an unsecured creditor in the lower figure, it would receive only a dividend on a claim of $1,500.00, when the very nub of the offer was to accept the full amount of $1,500.00 in full satisfaction of the larger claim.

The learned primary judge said: -

"It was quite wrong to treat the without prejudice offer to accept a lower amount, which was not acted upon by the debtor, as if that lower amount represented the whole of the claim of the applicant."

I am not sure whether his Honour used the expression "without prejudice" as indicative of a view which he may have formed that the letter was "without prejudice" in the technical sense or as merely descriptive of the letter itself which bore those words. I am inclined to think that the words "without prejudice" were an incorrect label. Nor is it clear whether the offer was to accept $1,500.00 in full settlement of the claim for $8,520.13 only or any additional claim which the respondent may have. But the real point of his Honour's finding is that, in all the circumstances, the offer, not having been accepted by the appellant (and, I would add, he had no intention of accepting it or ability to do so), he should not have included the respondent's claim in the smaller amount. It was not a final assertion by the respondent that all the appellant owed it was $1,500.00. It was an offer of compromise, whether without prejudice or not. I agree with his Honour's finding as to the appellant's conduct being wrong. Indeed, it smacks to me of smart practice. However, the important point is that the inclusion of the respondent's claim at the lower figure as a disputed claim, when viewed objectively, was incorrect in fact.

In my opinion, the reference in the statement of affairs to the debt owed to the respondent as being limited to a disputed claim in the sum of $1,500 was incorrect.

As to its materiality, I respectfully agree with Riley J. in Re Segal; ex parte Lensworth Finance Limited (1975) 9 A.L.R. 154 at pp. 157 and 158: -

"The statement of affairs required by s. 195 and the answers which the debtor is required by that section to give to questions put to him at the meeting provide the basic information on which the creditors decide which of the courses available to them under s. 204(1) they should adopt. It is essential that that information should be full and correct: the creditors are entitled to all available information about the debtor's "conduct, trade dealings, property (and) affairs" before they make their decision: compare s. 222 (4) (a). Bearing in mind the purpose of the statement of affairs I am of opinion that a particular is material within the meaning of s. 222 (4) (b) if it is a particular which would be relevant to and might be likely to affect the making of the decision of the creditors under s. 204 (1)."

In some cases materiality may perhaps be determined by reference to the statement of affairs itself without considering the evidence as to what occurred at the meeting of creditors. In cases such as the present, where there was a considerable amount of discussion at the meeting on the respective claims of the appellant and the respondent against each other, it is necessary to examine the events of the meeting to determine materiality.

In the statement of affairs presented to the meeting the appellant showed his total indebtedness to unsecured creditors as $24,742.00 which included the disputed claim of $1,500.00 owing to the respondent. If the correct figure of $8,520.13 had been shown, the total amount owing to unsecured creditors would have been shown as $31,762. (I omit the cents). There was an understatement of the appellant's debt by $7,020.00; that is an understatement by some 21% of the total amount owing to unsecured creditors. Also the deficiency would have increased from $5,607.00 to $12,627.00. This deficiency assumes that the appellant correctly showed, as a disputed claim, the amount said to be owing to him by the respondent of some $16,000.00. If this was incorrect then plainly the deficiency was substantially greater.

The creditors at the meeting knew that the respondent claimed to be owed $8,520.13, and that, as the respondent's claim was the largest claim and accounted for more than 25% of the total claims, the acceptance or rejection of the proposed deed of arrangement would depend on the respondent's attitude. A Mr. Armstrong, a solicitor who held the proxy for the respondent at the meeting, was elected chairman of the meeting. However, he stepped down from the chair after the controlling trustee who was present at the meeting stated that the approval or otherwise of the deed would depend on whether the respondent's proof of debt in the sum of $8,520.13 was accepted by the meeting. Mr. Armstrong said: -

"At this point of time I stated that I did not consider that it would proper for me to make a ruling on my client's proof of debt. Accordingly, I stepped down from the chair and, after a short discussion, the meeting elected the said Ryan to be the chairman of the meeting."

Mr. Ryan represented another creditor at the meeting. The chair was then taken by Mr. Ryan.

A deal of discussion then took place as to the true amount owing to the respondent, and a vote was taken from the creditors present at the meeting as to whether the respondent's proof of debt should be accepted in the sum of $8,520.13 or $1,500.00. The vote was in favour of accepting the respondent's debt in the smaller sum and the chairman, Mr. Ryan, then ruled that the proof of debt of the respondent be accepted for the purpose of voting for the sum of $1,500.00.

Mr. Armstrong had with him at the meeting, documents outlining the appellant's indebtedness to the respondent; and without any consideration being given by the meeting to these documents, the vote to which I have just referred was taken.

Thus, the very presence of the incorrect reference in the statement of affairs to the respondent's debt as being a disputed claim of $1,500.00 sparked off the question at the meeting as to the amount of the true indebtedness of the appellant to the respondent. It led to the chairman (Mr. Armstrong) stepping down and the representative of another creditor taking his place. It also led to the vote being taken to accept the respondent's debt for voting purposes as being $1,500.00 only whereas, if it had been shown correctly, it would have led to the motion requiring the appellant to execute a deed of arrangement under Part X being defeated. In my opinion, the reference to the debt as being a disputed claim of $1,500.00 was not only incorrect, it was also material.

The next question is whether it has been established that the learned primary Judge erred in holding that he was satisfied that it would be in the interests of the creditors to make an order declaring the deed of arrangement to be void (s. 222(5)).

The appeal on this question relates to the exercise by the learned primary Judge of judicial discretion. In Warren v. Coombs (1979) 23 A.L.R. 405 the High Court considered the correct approach to be adopted by an appellate court in exercising its appellate functions. I see nothing in that case which warrants departure from the previously established principles which apply to an appellate court hearing an appeal against the exercise of a judicial discretion. It is sufficient to refer to House v. R. (1936) 55 C.L.R. 499 per Dixon, Evatt and McTiernan JJ. at pp. 504-5: -

"The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred."

See also Gronow v. Gronow (1979) 29 A.L.R. 129.

The question for us is whether his Honour's finding that he was satisfied that it would be in the interests of the creditors to make an order declaring the deed of arrangement to be void is erroneous, either because of identifiable error or because the result is so manifestly unjust or unreasonable that we should infer that his Honour failed to properly exercise his discretion.

His Honour said: -

"The question whether the Court is satisfied that it would be in the interests of the creditors to declare the deed to be void should be considered in the light of all the circumstances surrounding the composition. The trustee informed the creditors at the meeting, at which the special resolution for the composition was passed, that Mr. Irlicht" (the solicitor representing the appellant) "had advised the debtor that he had a ninety per cent chance of succeeding in his proposed action against the applicant. It is clear that this claim and its chances of success bulked large in the deliberations of the creditors other than the applicant. The deed itself provided in Clause 8 as follows: -

'8. the debtor will pursue any action he may have against Prestige Baking Industries Pty. Ltd. diligently and will not compromise same without consent of the trustee to the compromise and shall pay the net proceeds of the action or the settlement thereof to the trustee for the purposes of this deed.'

The total of the debts claimed by the other creditors of the debtor was $9,402 as against the $8,520.13 claimed by the applicant to be owed to it. The trustee pointed out to the meeting that the outcome of the vote would depend on the attitude of the applicant, whose debt in the sum of $8,520.13 was a disputed amount, and said that it would be in the best interests of the creditors if the applicant's debt were accepted in the sum of $1,500.00 so as to prevent the applicant from defeating the motion to require the debtor to execute the Deed of Arrangement. The applicant's representative at the meeting then pointed out that the sum of $1,500 was contained in a without prejudice letter and was therefore not an open offer. Before determining the question of the amount in respect of which the applicant should be admitted to vote, the chairman took a vote of the creditors on the question, which was in favour of accepting the applicant's debt in the sum of $1,500, and then determined to accept it in that amount.

I am satisfied that it would be in the interests of the creditors to make an order declaring the deed to be void. The advice that was reported to the meeting that the debtor's action had a ninety per cent chance of success greatly exaggerated any prospect of success which that action could reasonably have been considered to have had. It was plainly not in the interests of the applicant to have the deed approved. Under its terms the debtor covenanted to pay to the trustee the sum of $50 per week during the currency of the deed, which was to be terminated on the payment by the debtor of fifty per cent of all his provable non-priority debts and the payment in full of all his priority debts including the costs of administration of the deed. The debtor conveyed to the trustee his interests in household furniture valued at $400 and in a Mercury outboard motor valued at $1,925. The course which the case has taken before me, including the final abandonment by Mr. Irlicht of at least one of the grounds of the debtor's claim against the applicant as unarguable, although it had been long persisted in, lead me to think that the pursuit by the debtor of his action against the applicant is unlikely to benefit his creditors to any substantial extent."

I would make a few observations of my own. The deed of arrangement requires the appellant to pay to the trustee $50.00 per week during the currency of the deed. The evidence suggests that probably this money would not be available to creditors if the appellant were bankrupt, assuming its source is the bankrupt's income, if any. Although the Court has a wide discretion under s.131 of the Act, it is well established that orders should not be made by Courts thereunder requiring the bankrupt to make payments out of his income if this would leave him destitute or unable to support those dependant upon him.

The essence of the proposed deed of arrangement is clause 8 which requires the appellant to pursue his claim against the respondent. In deciding whether it would be in the best interests of creditors to avoid the deed, it is necessary in the present case to try and form some idea of the appellant's prospects of success. A large body of evidence comprising affidavits, exhibits and cross examination of witnesses was before the learned primary Judge; the appellant's case was formulated in writing and there were oral and written submissions. The appellant had another opportunity to formulate his case before this Court, although subject to the limitations necessarily inherent in an appeal stricto sensu.

His Honour approached the question this way and reached the conclusion that "the pursuit by the debtor of his action against the applicant is unlikely to benefit his creditors to any substantial extent".

I am not satisfied that his Honour has been shown to have erred in reaching that conclusion. Indeed, the evidence establishes to my satisfaction that the prospects of success of the appellant's claim are rather limited, with the possible exception of the claim of damages for poor equipment. Whether that claim is for a lesser or larger sum than the claim of the respondent against the appellant is a matter of conjecture.

Nor must it be forgotten that, in addition to its claim for $8,520.13 as a liquidated demand, the respondent asserts a claim for damages against the appellant in the sum of at least $18,048.00 (for rents, royalties and other matters). There is little evidence about this claim, so I say nothing as to its prospects of success. But the fact is that the respondent asserts it, and doubtless will pursue it if the appellant pursues his claim against the respondent. I have the firm impression that, at the end of the day, the creditors will receive little, if any, benefit from the litigation. The one certainty is that the costs will be substantial and, if the appellant is obliged to pay the respondent's costs or, only meet his own costs, the extent of his present insolvency will increase.

I am satisfied that it would be in the interests of creditors for the deed to be declared void. Also, any claim which the appellant may have against the respondent may be litigated if he is made bankrupt in due course. The trustee of his estate would have control of the litigation and use his own judgment as to its prospects of success.

It was contended by counsel for the appellant that the certificate of the chairman of the meeting of creditors, being conclusive evidence that the meeting was duly convened and held and that the special resolution specified in the certificate was duly passed at the meeting (s. 225 (2)), prevented the application of s. 222 (1) and (2) in the circumstances of this case; but he conceded, and rightly so, that it could not prevent the application of s. 222 (4) and (5). In view of my findings, it is unnecessary to consider the effect of this certificate. Nor is it necessary to consider the respondent's claim that the deed should be terminated under s. 236 of the Act.

I would dismiss the appeal with costs, including reserved costs. During the course of argument the appellant sought and was granted leave to amend ground 10. in his notice of appeal by adding the words "and material" after the word "incorrect" so that it now reads: -

"10. That His Honour was wrong in holding that the appellant included any incorrect and material particular in his Statement of Affairs."

We reserved the costs of the amendment. The order for costs should include those reserved costs.

JUDGE3

In this matter I have had the advantage of reading the judgments to be delivered by Fox and Lockhart JJ. I am saved the necessity of referring to the detail of the evidence and the legislation which is in question. I agree that the respondent is a creditor for the purposes of s.222 of the Act and thus had standing to bring the application. For the reasons given by Fox J. I am of opinion that the evidence reveals that the chairman of the meeting did, within the meaning of s.201 of the Act, determine the amount of the debt in respect of which the respondent was entitled to vote. It is true that the chairman took a vote on the matter, but the preponderance of evidence indicates that he eventually determined the question for himself. The chairman's certificate and the effect of s.225(2) in the form in which it was at the times of the meeting and the signing of the certificate preclude the respondent from making a successful application under s.222(1).

In reaching my conclusion I have taken into account a submission made by counsel for the respondent that the chairman's determination was so unreasonable as to be no determination at all, in other words, that it was perverse. For reasons which have been given by Fox J. and also for the reasons which I shall give when dealing with the application made under s.222(4), I am satisfied that this submission should be rejected. I leave open the question of the effect which s.225(2) (in its original form) would have had if, contrary to my view, the chairman's determination had been perverse.

It follows that the point raised by the notice of contention should be decided adversely to the respondent.

I agree in the conclusion of Fox J. that the respondent's case based on s.222(4) of the Act should also fail. In my opinion the statement of affairs did not contain any particular which was incorrect within the meaning of s.222(4)(b). The statement of affairs was signed by the appellant on 21 January, 1980. It is the position as it was on that day which must be considered. No proof of debt by the respondent was then in existence. It was not signed until 4 February, 1980 - see paragraph 9 of Mr. Griffiths' affidavit of 2 May, 1980. As at 21 January, 1980, the appellant had his own knowledge of the relevant transactions and dealings with the respondent. He also had two claims from the respondent, one comprised in the document described as "Final Notice" dated 14 November, 1979, and the other in the respondent's letter of 7 January, 1980. That letter is fully set out in the judgment of Fox J. It was marked "Without Prejudice".

Particularly by reason of that endorsement on the letter, the respondent seeks to have it read as if it offered (without prejudice) to accept the return of the records mentioned in the notice and the payment of $1,500 in settlement of its claim. Once the period of 14 days limited in the letter had elapsed the offer, not having been accepted, was at an end with the result that the letter was no longer of any significance. Notwithstanding the presence of the words "Without Prejudice", I do not so read the letter. The relevant paragraph of it uses the language of demand not of compromise. It is language similar to that used in the respondent's final notice of 14 November, 1979, which said: -

"We demand the outstanding balance of $8,520.13 be paid within 14 days herefrom failing which the matter will be placed in the hands of our solicitors for legal action".

Similarly the letter of 7 January, 1980, says, "failing which legal proceedings for recovery will be instituted . . . . . . . .". It does not say, "for recovery of $8,520.13 mentioned in the Final Notice", or use some other such words indicating a willingness to accept less than the full amount of its earlier claim as a compromise of the dispute which plainly existed. To a reasonable reader the effect of the letter, notwithstanding the earlier notice and the presence of the words "without prejudice", was that the respondent's demand was then $1,500 - not $8,520.13 - plus the return of the records.

It ought not to be overlooked that the parties were then in dispute. At about the same time the appellant had instructed his solicitor to write the letter of 10 January, 1980, which was written without apparent knowledge by the solicitor of the letter of 7 January, 1980. It is true that Mr. Griffiths gave evidence to the effect that he was at that time unaware of any claims to be made by the appellant. But there had been the unsatisfactory relationship between the parties which is referred to in the evidence, the need, in the respondent's view, to give a final notice, and the lack of response thereto by the appellant. It was thus clear to both parties at the time that the letter of 7 January, 1980, was written that there was a situation in which they were in dispute. This could well account for the apparent decision of the respondent to reduce its money claim to $1,500.

What I have said so far, however, does not establish more than that the appellant did not knowingly make an incorrect statement in the statement of affairs. The word "knowingly" does not appear in the sub-section, nor, in my opinion, should it be supplied. The test of whether there has been an incorrect statement is an objective rather than a subjective one. The question is whether the statement or rather particular was in fact incorrect. I take that to be the meaning of the legislation not only because of the terms of the language which is used but also because: -

(1) of the use of the words "false or misleading" in paragraph (4)(a) of s.222 in contrast to the word "incorrect" in paragraph 4(b) thereof; and

(2) there is no offence provided for if a statement of affairs contains an incorrect and material particular; cf. s.268(2).

But, notwithstanding that the test is an objective one, one must bring to bear practical considerations when determining whether there is or is not an incorrect particular. In countless situations the exact amount of a particular indebtedness will not be known until there has been a prolonged investigation of dealings and transactions between the debtor and a creditor. The purpose and object of the provision which requires a debtor to provide a statement of affairs is so that his financial position may be disclosed to his trustee and his creditors. Here, by reason of the construction which I consider should be put upon the letter of 7 January, 1980, the debtor did no more than include in his statement of affairs a statement or particular to the effect that he owed $1,500, the amount claimed by the respondent, to it. He also said, which was the truth so far as he was concerned, that that claim was disputed. His basis for stating the indebtedness as being $1,500 was thus a statement made by or on behalf of the respondent. The appellant used the respondent's own demand as the basis for saying what he did; he did not endeavour to work out for himself what, if anything, was owing. It would seem to me that it would be a rare case where any particular included in a statement of affairs which specified the amount of an indebtedness to be that which a creditor claimed, could be said to be incorrect within the meaning of the sub-section, objective though the test may be.

For the reasons I have given I am of opinion that the statement of affairs did not include an incorrect particular. It follows that it is my opinion that the appeal should be allowed.

My conclusion makes it unnecessary for me to consider the further question of whether the particular, if incorrect, was material, and whether, if it were, the learned trial judge should have exercised his discretion differently. I have not formed a view on the question of whether the particular, if incorrect, was material. But I would say that if it were I would agree with Fox J. that his Honour ought to have exercised his discretion by deciding against the grant of the application. I do not want to give additional reasons to those given by Fox J. for this conclusion.

I am also of the opinion that the evidence did not establish that the Court should have been satisfied, as required by s.222(5), that it would be in the interests of creditors to make an order declaring the deed void. I think that the benefits which have been demonstrated by Fox J. to have been conferred upon creditors by the deed, particularly the obligation imposed upon the appellant to bring an action against the respondent, establish positively that the deed was in fact for the benefit of creditors.

In reaching my conclusions I have taken into account the principles laid down in House v. R. (1936) 55 C.L.R. 499 and in Gronow v. Gronow (1979) 29 A.L.R. 129, but those principles have little or no place in relation to the question which arises under s.222(5) of whether the Court is satisfied that it would be in the interests of creditors to declare a deed or composition void. For reasons given by Fox J., it would not appear that the learned trial judge directed his mind, at least sufficiently, to the questions which arise for consideration when the Court comes to exercise the discretion it has under s.222(4).

For the reasons I have given I agree in the orders proposed by Fox J.