Equus Financial Services Ltd v Sabri, J.L
[1994] FCA 660
•15 SEPTEMBER 1994
EQUUS FINANCIAL SERVICES LIMITED v JAMES LYFTI SABRI AND TIM ARTHUR JONAS
No. VG534 of 1993
FED No. 660/94
Number of pages - 18
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
SWEENEY(1), JENKINSON(2) AND RYAN(1) JJ
CATCHWORDS
Bankruptcy - whether creditor should have been permitted to vote on a resolution for a Deed of Arrangement - whether trustee's report to creditors omitted information available to him which was necessary to give a true and fair view of debtor's affairs - whether debtor omitted a material particular from his Statement of Affairs - whether Deed of Arrangement void.
Bankruptcy Act 1966: ss188, 189A(3), 222.
Re Tregonning; Ex parte Friends' Provident Life (1983) 74 FCR 327
Re McLean; Ex parte Friends' Provident Life (1992) 36 FCR 502
Brick and Pipe Industries v Occidental Life (1992) 2 VR 272
Dobbs v National Park (1935) 53 CLR 643
Cufari; Ex parte Commissioner of Taxation (1992) 34 FCR 544
Augustyn v Putmin (1988) 83 ALR 514
Re Burlock (Unreported Vic VG 409 of 93, 10 May 1994)
HEARING
MELBOURNE,8-9 June 1994
#DATE 15:9:1994
Counsel for the applicant: Mr Houghton
Solicitors for the applicant: Gadens Ridgeway
Counsel for the first respondent: Miss Davies
Solicitors for the first respondent: D E Phillips
Counsel for the second respondent: Mr Gardiner
Solicitors for the second respondnet: Cornwall Stodart
ORDER
THE COURT ORDERS THAT:
1. The appeal be allowed.
2. The order made on 30 November 1993 in the proceeding numbered VX497 of 1993 be set aside.
THE COURT DECLARES THAT:
1. On the ground stated in paragraphs 1 and 2 of the grounds specified in the Further Amended Application dated 28 September 1993 in the proceeding numbered VX497 of 1993 and on the ground specified in paragraph 4A of the said grounds the deed dated 20 April 1993 between the firstnamed respondent and the secondnamed respondent is void; and
2. Pursuant to paragraph 222(4)(b) of the Bankruptcy Act 1966 the said deed is void.
THE COURT FURTHER ORDERS THAT:
The respondents pay the appellant's costs (including reserved costs) of the appeal and of the proceeding numbered VX497 of 1993.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
SWEENEY AND RYAN JJ This is an appeal from orders of a single judge of the Court dismissing an application by the appellant, Equus Financial Services Ltd ("Equus") to set aside a Deed of Arrangement entered into by the respondent James Lyfti Sabri ("the debtor") on 20 April 1993. The second respondent to the appeal, Tim Arthur Jonas ("the trustee") is the trustee under the Deed.
On 8 November 1992 the debtor signed an authority pursuant to s.188 of the Bankruptcy Act authorizing Mr Jonas to call a meeting of his creditors and furnish the requisite statement of affairs. The proposal made by the debtor, as contemplated by s188(2)(c)(ii) was in these terms:
"1. The payment of the sum of $60,000 within seven days from the execution of the deed by the debtor and the trustee.
2. At the date of the execution of the Deed the assignment of all of my divisible property within the meaning of Section 116 of the Bankruptcy Act 1966.
3. Upon the completion of the terms of the Deed I am to be released from all provable debts.
4. I will procure the agreement of the following creditors not to submit claims in the event that a Deed of Arrangement be executed by me. - Bitona Pty Ltd
- Haki Sabri
- Hysen Sali
- Sami and Mary Karafili."
These four debtors were shown in the debtor's Statement of Affairs as unsecured creditors in respect of a total sum of $1,576,170. The Statement of Affairs disclosed a total of $4,338,490.00 owing to 25 unsecured creditors together with the sum of $10,963.00 being the excess of amounts due under hire purchase agreements over the value of the goods hired. The only assets disclosed in the statement were $150.00 in cash and a half share of the furniture in the matrimonial home said to be worth $5,000.00.
The net deficiency of assets against current liabilities was $4,344,303.00. In addition, the Statement of Affairs disclosed contingent liabilities of $8,942,612.00 to 18 different creditors including Equus which was said to be contingently entitled to $1m.
At the conclusion of the argument of the appeal we were told that counsel for Equus, the debtor and the trustee agreed that if there had been a distribution to creditors as soon as the meeting had been held and after the first deduction of the trustee's costs, "on the worst case scenario and taking into account all the contingent creditors making out a claim, in the end creditors would have got .002 cents in the dollar and on the best case, taking only half the contingent creditors as actually being accepted in their proofs, the creditors would have got .0038 cents in the dollar". The highest possible result for which the creditors could have hoped was stated to be between .007 and .008 cents in the dollar. In the events which have happened, the creditors stand to receive nothing under the deed.
In his report to the creditors the trustee said:
" The debtor has disclosed shareholdings in various companies, many of which are under some form of insolvency administration. I am informed by the debtor that with all companies with which he is associated, there is a substantial deficiency of assets over liabilities arising in a value of Nil attributable to the shareholdings. My enquiries in this regard however are not yet complete, but on evidence to hand to date it would appear unlikely that any asset may be available for realisation to creditors in the event of a bankruptcy."
Jarrah Holdings Pty Ltd was one of those companies, the debtor and his wife being directors.
The report concluded with the following paragraph:
" OPINION OF TRUSTEE
In my opinion, on the basis of the information currently at my disposal, it would appear to be in the best interests of creditors to deal with the debtor's affairs under Part X of the Bankruptcy Act in the manner proposed. My reason for this opinion is that based on the information available to me, the proposal will, in all probability, lead to a greater return than a bankruptcy. I have also taken into account the certainty of this proposal as against the uncertainty of the debtor's ability to generate income in the event of bankruptcy. Furthermore, the Trustee's costs of administering such a proposal would be significantly less than those associated with a bankruptcy and the time value of money over a three year period would also reflect favourably upon the said proposal.
In forming this opinion, I have relied upon the information provided by the debtor and the Statement of Affairs. Where necessary, I have also attempted to obtain independent verification of this information through discussion with creditors, property title searches, searches at the Australian Securities Commission, searches with the Transport Regulations Board, enquiries with credit reference associations and by review of documentation in my possession."
A meeting of creditors was held on 11 December 1992. At that meeting, the trustee gave a provisional indication that he was minded not to allow the holder of the proxy from Equus to vote in respect of the amount of $809,992.00 for which it claimed to be a creditor on a motion to accept the debtor's proposal. However, he said that Equus would have an opportunity further to substantiate its claim after the adjournment to 28 January 1993.
At the adjourned meeting, on 28 January 1993, the trustee declined to admit Equus to vote as a creditor citing a letter of advice from a partner in a firm of solicitors to the effect that, with some diffidence, the writer had concluded that Equus should not be allowed to vote. The writer of that letter orally amplified his advice at the meeting of 28 January 1993 after which the trustee ruled against Equus' entitlement to vote. However, the meeting was again adjourned, this time to 23 March 1993, without a vote being taken on the debtor's proposals. At that further adjourned meeting, the trustee referred to the fact that proceedings in the Supreme Court of Victoria between Equus and the debtor and his wife which had been fixed for hearing on 16 February 1993 had been adjourned to 21 April 1993. He also advised the meeting that he had received counsel's advice that Equus should be afforded an opportunity to produce further evidence in support of its claim. Accordingly, the meeting was further adjourned to 6 April 1993.
At the resumed meeting on 6 April 1993 the trustee referred to a second memorandum of advice from the same counsel to the effect that, after perusing the material submitted by the solicitors for Equus, Counsel saw no reason to alter the opinion expressed in his first memorandum that Equus should be permitted to vote only in respect of an amount of approximately $48,000.00 which was admitted by the debtor. This was in respect of a matter separate from the claim to vote in the amount of $809,992.00. The trustee, as chairman, acted on that opinion and ruled that Equus was entitled to vote only in respect of the sum of $48,914.35. The meeting then resolved to require the debtor to execute a deed of arrangement embodying his proposals. As the learned primary Judge found, 80.61% in value of creditors of Mr Sabri voted for the motion, and, had Equus been admitted to vote in a sum of or exceeding $730,393.07 (assuming all other creditors voted in an unchanged way) the motion would not have achieved the required 75% majority in value in favour.
Pursuant to the resolution to which we have just referred, the debtor and the trustee on 20 April 1993, executed a deed of arrangement. Equus subsequently applied on 22 July 1993 for an order to set aside the decision of the trustee to refuse it a right to vote at the meeting of 6 April 1993 for an amount of more than $48,914.35 and for a declaration that the deed of arrangement was void. Equus also sought that a sequestration order be made against the estate of Mr Sabri. The application for that order was not pressed before the learned trial Judge or on appeal.
The grounds relied on by Equus, as set out in its amended application were:
"1. The applicant is and was at all material times a creditor of the first respondent;
2. The second respondent at a meeting of the creditors of the first respondent held 6 April 1993 refused to allow the applicant to vote in respect of the special resolution when its vote would have influenced the outcome;
(These grounds related to the claim by Equus to be admitted to vote in respect of the amount of $809,992.00.)
3. The first respondent omitted a material particular from his Statement of Affairs, namely, that the applicant was an unsecured creditor;
4. The first respondent included an incorrect and material particular in his Statement of Affairs, namely, that the applicant was a contingent creditor;
4A. The second respondent did not disclose in his Report pursuant to section 189A or at all:
(a) the full facts and circumstances of a loan from Provident Finance Corporation Ltd or its assignment to Louis Mazloum;
(b) the existence of a creditor's petition against the debtor;
(c) the fact that it was likely that a costs order would be made affecting the amount available for distribution to the creditors.
5. The Deed of Arrangement is not in the interest of creditors generally in that it will produce a dividend which will be either non-existent or of insignificant value by reason of the fact that the amount proposed to be distributed to creditors will be extinguished in whole or substantial part by the costs of the second respondent."
Ground 4A(b) was related to the issue, on 13 April 1992, of a creditor's petition against each of the debtors at the instance of Provident Finance Corporation Pty Ltd ("Provident"). The findings of fact relevant to ground 4A(b) as made by the learned primary Judge were:
"First there is the matter of a bankruptcy petition issued against the debtor. The relevant court file shows that on 21 January 1992 Provident Finance Corporation Pty Ltd
(Provident) obtained judgment against the debtor for $137,976 and that on 11 February 1992 Provident caused a bankruptcy notice to be issued in which the sum of $140,562 was claimed. The bankruptcy notice was served on 21 February 1992 and a creditor's petition presented on 13 April 1992, and served on 11 May 1992. Upon the return of the petition on 23 June 1992 ANZ Banking Group and Countrywide Building Society appeared as supporting creditors. The petitioning creditor sought to withdraw the petition but the matter was adjourned to 14 July 1992 to enable ANZ Banking Group to make application to be substituted as petitioning creditor. Such an application was filed on 7 July 1992 and an order for substitution made on 14 July 1992 on which occasion the hearing of the petition was adjourned by consent to 9 November 1992.
The debtor having signed an authority pursuant to s.188 on 8 November 1992, the hearing of the petition was adjourned first to 15 December 1992 and subsequently from time to time to 16 February 1993, 29 March 1993 and 8 April 1993. On the latter date (being two days after the creditors had voted in favour of the Part X proposal) the petition was dismissed by consent and the following order for costs was made: The petitioning creditor's costs and the supporting creditor's costs including reserved costs of and incidental to the petition to be taxed and paid out of the debtor's deed of arrangement in proceedings number VX 487/93 with the same priority as if a sequestration order had been made.
The costs of the substituted petitioning creditor have since been taxed and allowed in the sum of $2,587.85. The supporting creditor's costs have been taxed and allowed in the sum of $2,936.50."
After the meeting of creditors on 6 April 1993, the adjourned trial of the Supreme Court proceedings commenced on 21 April 1993. The learned primary Judge made the following findings in respect of those proceedings:
".... there was some debate as to whether the proceedings should continue against the debtor and after hearing argument the judge gave the plaintiff (Equus) leave pursuant to s.233 to proceed against the debtor to judgment but no further. The trial continued for five hearing days. On the evening of the fifth day, the parties agreed to compromise and on 28 April 1993 judgment was entered by consent against six of the eight defendants (including the debtor) in the sum of $800,000 inclusive of both interest and costs."
It is clear that when an application is made challenging a decision of the chairman of a meeting convened pursuant to s.188, the question of entitlement to vote and the amount of the debt in respect of which that entitlement (if any) exists, are matters to be resolved by the judge hearing the application on the evidence before that judge. In that sense what was before the chairman of the meeting and the chairman's conclusion in the light of that evidence are not to the point. As the learned primary judge observed:
"It is however now accepted that notwithstanding the absence of any specific provision in s.201 for an appeal against a chairman's determination, the Court has jurisdiction to determine the right of a creditor to vote at a meeting under Part X (Forshaw v Thompson (1992) 35 FCR 329). Upon an application for avoidance of a deed of arrangement pursuant to s.222 on the ground that a creditor was wrongly admitted to vote or excluded from voting on the special resolution for the deed, the Court will have regard to the evidence presented at the time of the application and is not confined to the material presented to the chairman pursuant to ss198 and 201 Re Tregonning (1983) 74 FLR 327; Zantiotis v Andres (No 2) (1988) 80 ALR 299). The Court is not bound by the decision of the chairman (Re Levy; Ex parte Scholefield Goodman and Sons Ltd (1980) 50 FLR 99; Zantiotis v Andrew
(1987) 80 ALR 23)."
At first instance, Equus pointed to the judgment by consent in the Supreme Court on 28 April 1993 in the sum of $800,000.00 and invited his Honour to draw the inference that as at 6 April 1993 Equus was a creditor in respect of at least that amount. The learned primary Judge declined that invitation, saying at p.27 of his reasons:
"The transcript of the proceedings in the Supreme Court on 28 April 1993 shows that the judgment was for $800,000 inclusive of costs and interest. In an affidavit sworn by Russo on 2 September 1993 a statement to the same effect is made. In the same affidavit Russo refers to discussions held on the evening of 27 April 1993 at which he, his solicitor, the debtor, the debtor's solicitor and others were present which preceded the parties reaching the agreed compromise. The debtor says in an affidavit of 27 August 1993 (to which Russo's affidavit of 2 September 1993 is a reply) that when he agreed to settle the Supreme Court action he allowed something in excess of $200,000 for costs. Russo has not made any specific response to that assertion, and no inference can be drawn from the absence of such a response. It is fair however to conclude that the fact that the costs of a proceeding which had been on foot for over two years and in respect of which a trial had run for five hearing days in the Supreme Court would be quite substantial and that (even disregarding the interest component) Equus accepted somewhat less than $800,000 in satisfaction of its claim. Be that as it may, it is simply not possible to quantify the amounts which represented the various components of the settlement. In these circumstances it is not open to Equus to claim that the judgment for $800,000 obtained on 28 April 1993 establishes that at 6 April 1993 the debtor was liable to it for that sum nor indeed for any other ascertainable sum."
The case for the appellant in relation to the extent and the nature of the debt owed to it was put as follows:
"1. Equus was a creditor who should have been allowed to vote
1.1 The trial judge was correct in finding that the court is not confined to evidence presented to the Chairman of the creditor's meeting but can have regard to evidence presented to the court at the time of the application to set aside the Deed (judgment of Olney J at Appeal Book 338; re Tregonning; Ex Parte Friends' Provident Life
(1983) 74 FLR 327 at 330; re McLean; Ex Parte Friends' Provident Life (1992) 36 FCR 502 at 510-11.
1.2 The evidence relied upon by Equus as to the fact that it was an actual creditor of the debtors was a certificate dated 11 December 1992 pursuant to a conclusive evidence clause under the Finance Provision Agreement and a prima facie evidence clause under the Working Capital Loan Agreement which stated that the debtors were indebted to Equus in the sum of $809,992.11 (Appeal Book 260). Whilst the Finance Provision Agreement and Working Capital Loan Agreement related to the liability of Jarrah Holdings Pty Ltd to Equus, it was common ground that the debtors had guaranteed the obligations of Jarrah by a Deed of Guarantee and Indemnity dated 4 April 1989 which was put into evidence at the trial (ex. NR2 to the affidavit of Russo sworn 14 September 1993).
1.3 At the trial, Equus tendered a further certificate pursuant to Clause 4 of the Guarantee and Indemnity (prima facie clause) stating that the debtors were, as at 6 April 1993 being the date of the adjourned creditor's meeting, indebted to Equus in the sum of $893,544.91 (Appeal Book 274). Further, there was evidence that on 28 April 1993, Equus obtained a judgment of $800,000 against the debtors in the Supreme Court of Victoria after the trial had been proceeding for some days (Appeal Book 36-7).
1.4 The learned trial judge was wrong in holding that the court was not able to reach a conclusion as to the effect of the certificate of 11 December 1992 (Appeal Book 342). There was no material at all led at the trial that might displace either the conclusive or prima facie effect of the certificate as to the indebtedness of Jarrah. It is not to the point that the certificate was in respect of the obligations of Jarrah. The execution of the guarantee was not in dispute (see Heerey J in re McLean op. cit. at 513).
1.5 The second certificate of 10 September 1993 (Appeal Book 275) established that the debtors were as at the date of the adjourned creditor's meeting prima facie indebted to Equus in the sum of $893,544.91. It is submitted that, absent any evidence to the contrary or any positive defence, the certificate is sufficient to establish on the balance of probabilities that Equus was owed that sum at the date of the adjourned creditor's meeting (see Heerey J in re McLean op. cit. at 513).
1.6 The only evidence led at the trial that might call into question either of the certificates was the affidavit of James Sabri sworn 27 August 1993 (Appeal Book 217-23). Sabri does point to evidence in the Supreme Court proceeding in which Equus conceded that there had been an arithmetical mistake in the calculation of the amount owing. That does not destroy the efficacy of a certificate (see Brick and Pipe Industries v Occidental Life (1992) 2 VR 272 at 371). Further, Sabri does not assert (nor could he assert) that neither he nor his wife were indebted to Equus as at 6 April 1993 either in the sum of $809,992.11 or $893,554.91. In any event, Equus did not rely upon or produce that certificate in this proceeding.
1.7 Whatever might have been the situation that confronted the Chairman of the creditor's meeting, it was open to the court to accept the new certificate of 10 September 1993 and the court should have acted upon it in making a finding that Equus was an actual creditor of the debtors at the relevant time in the amount stated. The court ought to have been fortified in that conclusion by the judgment entered against the debtors on 28 April 1993 in the sum of $800,000.
1.8 The learned trial judge was wrong in holding that the certificate of 10 September 1993 could not advance the case of Equus because no particulars had been provided or any attempt made to reconcile it with the earlier certificate (Appeal Book 343). Where parties contractually bind themselves to a provision or provisions entitling the creditor to rely upon a certificate of indebtedness, the parties thereby agree to accept that certificate even in the absence of particulars. Such a clause enables a financier to dispense with proof of indebtedness (see Dobbs v National Park (1935) 53 CLR 643 at 651) save in the case of manifest error, fraud or evidence from the debtors that the prima facie presumption of indebtedness has somehow been displaced.
1.9 There was no evidence or material to suggest that either of the certificates suffered from the vice that they contained an element which represented a contingent liability (Appeal Book 343). The only possibility that the certificates may contain some element of a contingent nature is that the certificates contained arguably some component of costs incurred by Equus in enforcing its securities. However, that was not contingent because it did not become payable upon the order of any court. The costs became payable upon the incurring of the costs by the secured creditor."
In our opinion, these submissions are well founded. Having regard to the evidence as it stood at the trial and bearing in mind the fact that, through the long course of the adjourned meetings, the debtor showed no cause to lead to a denial of the effect of the certificates, in our respectful opinion, the correct conclusion at first instance would have been that Equus should have been admitted to vote as a creditor in the sum of $893,544.91 as stated in the certificate of 10 September 1992. In his own Statement of Affairs the debtor described Equus as a contingent creditor in respect of an estimated deficit of $1M.
The second submission on behalf of Equus was based upon the provisions of ss189A(2) which read:
"189A(2) The report shall:
(a) summarise and comment of the debtor's affairs as disclosed in the statement given under subparagraph 188(2)(c)(i); and
(b) set out such other information relevant to those affairs as is available to the trustee and is necessary to give a true and fair view of those affairs."
and upon those of paragraph 222(4)(b) which provides as follows:
"222(4)
Where the Court, on the application of the Inspector-General, a person authorised in writing by the Inspector-General, the trustee or creditor, is satisfied that the debtor: ...
(b) has omitted a material particular from the statement of the debtor's affairs given under subsection 188(2) or included an incorrect and material particular in that statement;
the Court may make an order declaring the deed or composition to be void or declaring any provision of the deed or composition to be void."
Equus submitted that the trustee's report failed to set out other information available to him which was necessary to give a true and fair picture of those affairs and that the debtor omitted a material particular from his Statement of Affairs, namely the presentation of the creditor's petition and its history. Bearing in mind the command of sub-sec(5) that the Court shall not make an order declaring a deed to be void on a ground specified in ss4 unless it would be in the interests of the creditors to do so, Equus submitted that it would be in their interests so to order.
Counsel for Equus submitted that the presentation of the creditor's petition against the debtor and the history of the proceedings in the Court upon it fell within the phrase "such other information relevant to those affairs as is available to the trustee and is necessary to give a true and fair picture of those affairs" and that the deed of arrangement entered into without the inclusion of that information in the trustee's reports was not entered into in accordance with Part X, so that the Court may declare his deed of arrangement to be void.
His outline of submissions read as follows:
" 2.1 The trustee in his report pursuant to Section 189A (Appeal Book 158-67) made no mention of the bankruptcy petition outstanding against the debtor by Provident Finance then ANZ Banking Group nor of any potential liability for costs occasioned by reason of the dismissal of the petition on 8 April 1993. The trustee or his staff had known of the existence of the petition as early as 14 July 1992 and swore an affidavit on 26 March 1993 in support of a further adjournment (affidavit of Rambaldi) (Appeal Book 286-80). The debtor did not disclose the existence of the petition in his statement of affairs (Appeal Book 44-53). The existence of the petition, the circumstances of how the original petitioner had been satisfied, the circumstances of why another creditor was substituted and the likelihood of whether the estate of Sabri would be ordered to pay the costs of the petition (which Sabri said was the usual order (Appeal Book 312) were:
(a) relevant to the affairs of the debtor and which should have been disclosed in the trustee's report (Section 189A (2) (b)); and
(b) were material particular which were omitted from the debtor's statement of affairs (Section 222(4) (b)).
2.2 The learned trial judge was wrong in concluding that these matters were not material (Appeal Book 336). Further, the learned trial judge was wrong in relying upon the fact that there was no evidence to suggest that the trustee was aware that it was likely that such a costs order would be made at the time he prepared his report (Appeal Book 336). The debtor was aware of these matters and, even if the trustee could be excused from omitting the question of the costs order from his report, it ought to have been included in the debtor's statement of affairs. Further, it is irrelevant that two of the creditors (ANZ Bank and Countrywide) knew of the existence of the petition because there is no evidence that they informed any of the other creditors of that fact."
(These two creditors had appeared on the hearing of the petition).
2.3 The matters were material because:
(a) it revealed a course of dealings between the debtor and certain of his creditors that had the effect of at least one of those creditors obtaining a preference (affidavit of Rambaldi Appeal Book 279);
(b) the costs orders to be paid out of the estate of Sabri were, in relation to the very limited pool of funds available for distribution to creditors, proportionately large;
(c) may have caused the creditors to reconsider their votes.
2.4 A particular is "material" within the meaning of Section 222(4)(b) if it is a particular which would be relevant to and might be likely to affect the making of a decision by the creditors (see re Cufari; Ex Parte Commissioner of Taxation (1992) 34 FCR 544 at 549 per von Doussa J). The test is objective. It is essential that the information contained in the statement of affairs be full and correct because the creditors are entitled to all available information about the debtor's conduct, trade dealings, property and affairs prior to making their decision.
3. The deeds of arrangement ought to be set aside 3.1 The court ought to be satisfied under Section 222(5) in respect of the omission of the material particular that it is in the interests of the creditors to set aside both Deeds. Bankruptcy will enable the trustee to properly investigate any void dispositions of property and to obtain contributions from the debtor for distribution to the creditors. That is in the interests of creditors because it involves an economic advantage or the prospect of such an advantage (see Augustyn v Putmin (1988) 83 ALR 514 at 515 per Jenkinson J and 521-2 per French J)."
It will be remembered that by 23 November 1992 when the trustee made his report Provident had obtained its judgment against the debtor and its petition against him had been listed on 14 July 1992 when ANZ Banking Group was substituted as petitioning creditor, claiming a debt of $56,621.33 and the petition was adjourned to 9 November 1992. On 8 November the debtor executed the authority under s188. On 9 November the petition was adjourned to 15 December. After the first creditors' meeting on 11 December, which was adjourned to 28 January 1993, the petition was on 15 December adjourned to 16 February 1993, when it was further adjourned to 16 February 1993 and then to 29 March and finally to 8 April, when it was dismissed by consent with costs of the petitioning creditor and a supporting creditor be taxed and paid out of the proceeds of the debtor's deed of arrangement, with the same priority as if a sequestration order had been made. On 20 April, the deeds of arrangement were executed.
In an affidavit sworn on 28 September 1993 the debtor deposed that in respect of the judgment debt of Provident, Mr Louis Mazloum was a joint debtor with him and entered into arrangements with Provident to pay the judgment debt, as a result of which he said that he became indebted to Mr Mazloum who appears in his Statement of Affairs as a creditor. In his report the trustee said:
" Louis Mazloun was a guarantor of a debt incurred by the debtor with Provident. Arrangements have since been entered into whereby Mr Mazloun has taken over the liability for this debt."
The trustee did not disclose in his Report that these arrangements were entered into by the debtor to stave off the petition of Provident and that they were made between 23 June and 14 July 1992, at a time when it was clear to the trustee that the debtor was hopelessly insolvent. The arrangements produced the result that the claim of one creditor was satisfied and liability to another creditor arose. Mr Mazloum was admitted to vote in the amount of $368,400.00. He voted in favour of the debtor's proposal. In the debtor's Statement of Affairs dated 8 November 1992 Mazloum was listed as an unsecured creditor in the amount of $165,000, the particulars given being "1992 loan refinance". As noted above, the judgment against the debtor which Mazloum satisfied was for $137,976.00.
In support of the debtors' application for the adjournment of the creditors' petition the trustee on 26 March 1993 swore an affidavit, in which he deposed:
" I remain of the view that the proposals by Sabri and Mrs Sabri would be in the best interests of creditors. Specifically, in my opinion, the proposal would yield a greater return to creditors than they would receive in a bankruptcy."
The minutes of the meeting of creditors of 6 April 1993 at which motions to accept each of the proposals of the debtor and his wife were passed include the following passage, the Chairman being the trustee:
" FURTHER QUESTIONS:
Mrs Susan Fiedler asked the Chairman what his firm's likely fees were in each of these administrations. The Chairman explained that he did not have these figures at his disposal at present, although he did indicate that they would be substantial.
Mrs Fiedler asked the Chairman to provide a dollar estimate as to the fees.
The Chairman explained that he had not had an opportunity to verify the amounts, although he estimated that his fees to date would be in the region of $20,000 to $25,000. The Chairman further noted that independent parties had previously contributed $6,500 on behalf of Mr Sabri. The Chairman replied in the negative. Mrs Fiedler asked the Chairman to provide an estimate of Counsel's fees.
The Chairman explained that he was unaware as to the amount of Counsel's costs.
Mrs Susan Fiedler asked whether the remuneration would be drawn out of one estate or whether they would be shared between the two.
The Chairman explained that each estate had its own separate code and that time was being charged against each estate. Mrs Susan Fiedler asked the Chairman if it was possible that the accumulated costs of Mrs Sabri's estate may exceed the amount that is to be contributed. The Chairman stated that he could not say whether this was the case or not.
Mrs Susan Fiedler stated that she "would question the interest of creditors in voting in favour of Rhonda Sabri's proposal if there is to be no distribution under her estate".
The Chairman explained that Mrs. Fiedler's comments would be reported in the minutes. The Chairman further noted for the record that "the majority of costs incurred in these administrations, were brought about by the actions of creditors."
Mrs. Susan Fiedler stated that she appreciated this point but that it was her understanding that the proposal to creditors could only be recommended by the Controlling Trustee if it was in the best interests of creditors. Mrs Fiedler asked the Chairman how he could recommend the proposal given that it may not result in a distribution to creditors.
The Chairman explained that his recommendation was done at the time of the preparation of his Controlling Trustee's report, and was based on the information available to him at that time. The Chairman further explained that at the time of writing the report he could not possibly have been aware that four meetings of creditors would be required. The Chairman further elaborated that he did not consider it the duty of the Controlling Trustee to "revisit" his original recommendation at this subsequent point in time. Mrs Susan Fiedler asked the Chairman whether he would be standing by his original recommendation. The Chairman explained that he made his original recommendation pursuant to provisions of the Act, and it was not a reasonable request to later review this decision in the light of subsequent adjournments."
The Act (by s189A(3)) imposes a duty on a controlling trustee to include in his report to the creditors a statement of his opinion as to whether it would be in the best interests of the creditors to deal with the debtor's affairs under Part X in the manner indicated in his proposal. Such a trustee, as the name suggests, continues to have a fiduciary duty to act equitably in his dealing with the creditors. It is difficult to understand why the trustee was not prepared to give the creditors of both debtors present at the meeting on 6 April 1993 the benefit of his opinion in the light of events which had taken place by the time they were asked to vote. It is all the more difficult to understand bearing in mind that he had deposed in his affidavit of 26 March 1993 that he remained of the opinion that the proposals would be in the best interests of the creditors.
By 26 March 1993 when the trustee swore his affidavit in support of the debtor's application for an adjournment of the hearing of the creditor's petition, it must have been clear to him that there was a strong division of opinion amongst the creditors. It may be doubted whether in these circumstances Mr Jonas as the controlling trustee under Part X should have offered evidence to be used on behalf of the debtor in a contest between him and some of his creditors, especially bearing in mind that the existence of the petition was not disclosed to the general body of the creditors, either by the debtor in his Statement of Affairs or by the trustee in his Report or at any of the meetings of creditors. Had all creditors been made aware of the presentation of the petition and of its history, some of them might have chosen to ask the Court when the petition was before it to deal with the petition in accordance with the principles laid down in Field v Commercial Banking Company of Sydney Ltd (1978 37 FLR 341 at 348-350). Some of them might have voted differently on the resolution to require the debtor to execute the deed.
We are satisfied that Equus was at all material times a creditor of the debtor and entitled to vote at the meeting of creditors held on 6 April 1993 in respect of a debt in an amount which would have led to the failure of the special resolution, and that the deed was not entered into in conformity with Part X. It should be declared to be void.
We are satisfied that the failure of the trustee to disclose in his Report to Creditors the existence of the creditor's petition against the debtor and the steps taken in it, including the arrangement between the debtor and Mazloum which led to the satisfaction of his debt to Provident and the creation of a debt owed by him to Mazloum amounted to a failure by the trustee to satisfy the requirements of ss189A(2). That failure would itself justify an order declaring the deed to be void.
We are satisfied that the debtor omitted a material particular, the existence and history to that date of the creditor's petition against him, from his Statement of Affairs and that it is in the interests of the creditors to make an order declaring his deed of arrangement to be void. By the time of the hearing at first instance, the return, if any, to be gained by the creditors under the deed was, at best from the point of view of the respondents, trifling (see Re Burlock, VG 409 1993, 10 May 1994, an unreported judgment of the Full Court of this Court at p13). At the present time the creditors will lose nothing and may make some gain by an order declaring the deed to be void. The debtor is an accountant.
The Court declares the deed to be void and orders that the respondents pay the appellant's costs of and incidental to the application and appeal, including reserved costs.
JUDGE2
JENKINSON J I have had the advantage of reading the reasons for judgment of Sweeney and Ryan JJ.
The outline of submissions by counsel for the appellant concerning the claims that the appellant was entitled to vote as a creditor for a debt of, or exceeding, $800,000, which have been set out in those reasons, make reference in paragraph 1.2 thereof to certificates, as to the amount owing to the appellant by Jarrah Holdings Pty. Ltd., purporting to have been made, and to have been given evidentiary effect, under provisions of contracts to which the guarantors, Mr. and Mrs. Sabri, were not parties.
Upon enquiry during the hearing of the appeal counsel for the appellant justified the attribution of evidentiary effect to those certificates by reference to a decision of Heerey J: Re McLean; Ex parte Friends' Provident Life Office 1992) 36 FCR 502. But an examination of the report of that case shows that each of the two certificates to which in a proceeding between creditor and guarantor Heerey J allowed evidentiary effect was made and tendered in evidence in pursuance of a term of a contract of guarantee between those two parties. Such a term is of course enforceable and suffices to give the certificate the evidentiary effect stipulated by the term : Dobbs v. The National Bank of Australasia Ltd. 1935) 53 CLR 643. But, since the evidentiary effect of such a certificate derives from the contract, that effect exists only as between the parties to that contract. One of the certificates tendered in the proceeding to which this appeal relates was made and tendered in pursuance of a term of a contract between the appellant and the respondent Mr. Sabri. Reference to that certificate is made in paragraph 1.3 of the outline of submissions. The evidentiary effect of that certificate in that proceeding between those parties is not questioned. But the other certificates, each of which was expressed to be made in pursuance of a term of a contract to which Mr. Sabri was not a party, had in my opinion no evidentiary effect in the proceeding to which Mr. Sabri was a party and in which Jarrah Holdings Pty. Ltd. was not, unless those certificates had been given evidentiary effect by some other agreement between Mr. Sabri and the appellant, of which this court has not been made aware, or perhaps given that effect by conduct on the part of Mr. Sabri's legal representative when the certificates were tendered. (See Cross on Evidence (4th Aust. ed.) paras (1645)-(1670), (1680).)
The term of the contract of guarantee and indemnity between the appellant and Mr. and Mrs. Sabri in pursuance of which a certificate was tendered and received in evidence provides:
"5. A Certificate signed by you any attorney director or manager of
(Equus) or any officer of (Equus) authorised by you for such purpose or (Equus') secretary for the time being or by any person purporting to be an attorney director manager secretary or authorised officer of (Equus) as to any sum payable to you or any of you pursuant to this guarantee as at the date set out in such Certificate shall in all courts and at all times be prima facie evidence of the facts therein stated."
The liability undertaken by Mr. and Mrs. Sabri was joint and several. The certificate was dated 10 September 1993 and was in these terms:
"Equus Financial Services Limited (006 912 344) being the First Company under the Guarantee and Indemnity (as defined therein) dated 4 April 1989 between Equus Financial Services Limited and the Guarantors, certifies pursuant to the Guarantee and Indemnity as set out in Clause 5 of that Agreement that as at 6 April 1993, the amount of indebtedness of the Guarantors to the Plaintiff was $893,544.91."
The creditors' resolution requiring Mr. Sabri to execute the deed was passed on 6 April 1993. Of the certificate the learned trial judge said:
"In my opinion this certificate cannot advance Equus' case. Equus says that it is prima facie evidence that at 6 April 1993 the debtor was indebted to Equus in the sum of $893,544.91, but no particulars have been provided and no attempt has been made to reconcile it with the certificate of 11 December 1992. Assuming for present purposes that the two certificates relate to the same basic liability, the second would suffer from the same vice as the first insofar as it presumably contains an element which on one view represents contingent liability. In any event, it would seem that at the time the certificate was issued the relevant liability as between Equus and the debtor has been compromised and accordingly the contractual basis for issuing the certificate had ceased to exist. For these reasons the certificate of 10 September 1993 cannot now be treated as prima facie, or any other, evidence of a liability existing between Equus and the debtor as at 6 april 1993.
The reference to "the same vice" is a reference to the opinion his Honour had expressed concerning one of the certificates made in pursuance of a term of the contract between the appellant and Jarrah Holdings Pty. Ltd. The learned trial judge had said that a component of the amount certified which was described in the certificate as "costs associated with collection" of the debts owed to the appellant by Jarrah Holdings Pty. Ltd., payment of which Mr. Sabri had guaranteed, "represented a contingent liability at the best". The contracts under which the debts were incurred by Jarrah Holdings Pty. Ltd. were not in evidence, but it would be surprising if in a commercial contract of the class to which those contracts belonged there were not express terms reinforcing what Mason J in Inglis v. Commonwealth Trading Bank of Australia 1973) 47 ALJR 234 at 235 called "(t)he general rule .... that the mortgagee is entitled to add to the mortgage debt all costs, charges and expenses reasonably and properly incurred for the purpose of protecting the estate or himself as mortgagee. As Lord Selborne LC said in Cotterell v. Stratton (1872), 8 Ch App 295, at p 302: 'The contract between mortgagor and mortgagee, as it is understood in this Court, makes the mortgage a security, not only for principal and interest, and such ordinary charges and expenses as are usually provided for by the instrument creating the security, but also for the costs properly incident to a suit for foreclosure or redemption'". These contracts between Jarrah Holdings Pty. Ltd. and the appellant included charges as security for payment. The contract of guarantee between the appellant and Mr. and Mrs. Sabri, which was in evidence, included a provision that Mr. and Mrs. Sabri should indemnify the appellant against all the appellant's "legal costs of and incidental to the .... enforcement of this instrument". In all those circumstances a finding that amounts, described as "costs associated with collection" and forming part of a claimed indebtedness of Jarrah Holdings Pty. Ltd., constituted contingent liabilities until a curial order had been made in respect of them was not justified by the evidence, in my opinion.
The learned trial judge's reference to compromise comprehends the judgment entered by consent on 23 April 1993 in the Supreme Court of Victoria and the agreement for that consent judgment between the appellant and Mr. Sabri which immediately preceded the judgment. Of other terms of that agreement there was no evidence before the learned trial judge. That being so, a conclusion that "the contractual basis for issuing the certificate had ceased to exist" cannot in my opinion be reached. The agreement expressed in clause 5 of the contract of guarantee and indemnity is to give evidentiary effect to a certificate as to indebtedness "as at the date set out" in the certificate "in all courts and at all times". I can see no reason to consider such an agreement spent upon judgment for a debt due under the contract. The cause of action merges in the judgment. But the contract stands. It is unnecessary in this case to consider whether a certificate as to that indebtedness "as at the date" of judgment or as at a date after judgment in respect of the judgment debt would have evidentiary effect. The certificate tendered was as to the indebtedness as at a date before judgment.
There being no persuasive evidence in contradiction of the evidence which the certificate afforded of Mr. Sabri's indebtedness to the appellant on the day the resolution was passed, a finding as to that indebtedness in accordance with the certificate was in my opinion required. Upon that finding the conclusion follows that, the appellant's claim to vote having been rejected by the second-named respondent, the deed was not entered into in accordance with Part X of the Bankruptcy Act 1966 and a declaration should be made that on the ground stated in paragraphs 1 and 2 of the grounds specified in the Further Amended Application dated 28 September 1993 in the proceeding numbered VX497 of 1993 the deed is void.
I agree, for the reasons Sweeney and Ryan JJ give, that the omission from the trustee's report to creditors of reference to the pending creditor's petition constituted a failure to comply with the requirements of s.189A(2)(b) of the Bankruptcy Act 1966. I prefer not to express an opinion whether the fact that the failure occurred of itself requires a conclusion that the deed was not "entered into in accordance with this Part" or a conclusion that the deed did not comply with the requirements of the Part, so as to enliven the discretionary power conferred by s.222(2)(a) of the Act. The fact that the failure occurred is in my opinion relevant to the exercise of the discretionary power conferred by s.224(4). My reasons for concluding that the latter power should be exercised are those given by Sweeney and Ryan JJ for their conclusion upon that part of the case.
A further declaration should be made that pursuant to s.222(4)(b) of the Act the deed is void. I agree that the respondents should be ordered to pay the appellant's costs (including costs reserved) of the appeal and of the proceeding numbered VX497 of 1993.
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