Jorgensen and Ex Parte: Madgwicks v Jorgensen

[1998] FCA 492

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	QX 154  of   1996

RE:	ALAN BRADLEY JORGENSEN
EX PARTE:	MADGWICKS   Applicant
ALAN BRADLEY JORGENSEN   Respondent
JUDGE:		SPENDER J
DATE OF ORDER:		29 APRIL 1998
WHERE MADE:		BRISBANE

THE COURT ORDERS THAT:

The application be dismissed.

THE COURT DIRECTS THAT:

The parties make written submissions concerning costs within fourteen days of today.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	QX 154 of 1996

RE:	ALAN BRADLEY JORGENSEN
EX PARTE:	MADGWICKS   Applicant
ALAN BRADLEY JORGENSEN   Respondent

JUDGE:	SPENDER J
DATE:	29 APRIL 1998
PLACE:	BRISBANE

REASONS FOR JUDGMENT

This is an application filed on 19 September 1996 seeking:

“1.  That the Composition accepted by a special resolution of a meeting of the Debtor Alan Bradley Jorgensen’s creditors, on the 30th August 1996, called in pursuance of an authority signed by the Debtor under Section 188 of the Bankruptcy Act 1966, as amended, be set aside and/or declared void.

2.  A Sequestration Order against the estate of the Debtor Alan Bradley Jorgensen.”

On 1 August 1996 Mr Jorgensen executed an authority under section 188 of the Act.  In August there was a circulation of documents to creditors concerning the meeting and the related affairs of Mr Jorgensen.  By letter of 29 August 1996 the applicant, Madgwicks, sent a letter to the chairman of the meeting of creditors, and that letter referred to a number of matters or a number of questions which Madgwicks wished the chairman to put to Mr Jorgensen at that meeting.  The meeting was held on 30 August 1996 and this application was filed on 19 September 1996.

Section 222 of the Bankruptcy Act 1966 relevantly provided:

(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, the Inspector-General, a person authorised in writing by the Inspector-General, the Registrar, the trustee, a creditor or the debtor may apply to the Court for an order under subsection (2).

...

(4)     Where the Court, on the application of the Inspector-General, a person authorised in writing by the Inspector-General, 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 any of his conduct or examinable 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 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.

(5)     The Court shall not make an order declaring a deed or composition, or a provision of a deed or composition, to be void on a ground specified in subsection (4) unless it is satisfied that it would be in the interests of the creditors to do so.
...

(7)     The trustee or a creditor may include in an application under subsection (1) or (4) an application for a sequestration order against the estate of the debtor and if the Court, on the first-mentioned application, makes an order under subsection (2) or (4) declaring the deed or composition to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought.
...

(9)     The making of an application by the trustee or a creditor for a sequestration order under this section shall, for the purposes of this Act, be deemed to be equivalent to the presentation of a creditor’s petition against the debtor, but the provisions of subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application.
...”

Section 239 of the Act provides:

“(1)     A creditor may, within 21 days from the date on which the special resolution accepting a composition under this Part was passed, apply to the Court for an order setting aside the composition and may also apply for the making of a sequestration order against the estate of the debtor.

(2)     If the Court, on such an application, considers that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the composition ought to be set aside, it may make an order setting it aside and, if it thinks fit, may forthwith make the sequestration order sought.”

The hearing of Madgwicks' application occurred on 9 April 1997 and was then adjourned until 18 August 1997. As s 222(9) of the Act indicates, the making of an application by a creditor for a sequestration order under s 222 is deemed to be equivalent to the presentation of a creditor’s petition. Section 52(4) would then apply in respect of the application for a sequestration order but, in the conclusions to which I come, it is unnecessary to consider the complications caused by that fact.

A real difficulty apparent in the plethora of evidence that has been led is that the applicant has not specifically set out the areas of complaint in respect of the material non-disclosure alleged. It will be noted that s 222(1) commences:

“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 whether a composition has been accepted by a special resolution...”

[emphasis added]

The absence of particularisation of the area of complaint does cause real difficulty.  It appears, however, that the applicant seeks to have the composition declared void on the basis either that Mr Jorgensen gave false or misleading information in answer to questions put to him, or that Mr Jorgensen has omitted a material particular from the statement of affairs.  It is also, it seems, sought to be set aside under s 239 on the basis that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally.

The issues therefore seem to be first, the locus standi of Madgwicks as a creditor of Mr Jorgensen; secondly, whether Mr Jorgensen has given misleading information or omitted a material particular; and thirdly, a consideration of the nature of the composition and its terms.

Mr Jorgensen was previously involved in property development and the diecasting industry in Melbourne.  The companies in the group of companies were known as the Consolidated Die-casting Group.  It appears that the borrowings of the group were cross-collateralised and entirely secured in the lender's favour upon personal and corporate assets.  The predominant lender was the Australia & New Zealand Bank (‘the ANZ Bank’).  On the recession of the property market in the late 1980s and early 1990s, the ANZ Bank exercised its rights under the securities in 1992.  Thereafter the companies in the group had receivers appointed over them by the ANZ Bank.  The total advances by the bank to the group was of the order of $13 million.  That indebtedness was significantly reduced later after realisation of assets the subject of securities.

On the question of locus standi, Madgwicks claimed to be the creditor of Mr Jorgensen in the sum of $26,325.15 for services provided and expenses incurred at the direction of Mr Jorgensen.  The indebtedness to Madgwicks arose as a result of that firm of solicitors acting for a company, Lotusdale Pty Ltd, in proceedings in the Supreme Court of Victoria.  Mr Jorgensen was at the relevant times a director and secretary of that company.  The contention on behalf of Mr Jorgensen is that he instructed the applicant to act on behalf of Lotusdale Pty Ltd and that he provided instructions at all times to Madgwicks as an officer of Lotusdale.

It is contended that Mr Jorgensen did not say that he would be personally liable for the applicant’s fees.  He disputes that he is personally liable for those fees and expenses incurred by Lotusdale in respect of Madgwicks acting for Lotusdale.  Madgwicks instituted proceedings in Victoria against Mr Jorgensen in respect of those fees but the issue has never been resolved at trial.  However, the statement of affairs signed by Mr Jorgensen disclosed an amount owing to Madgwicks and there is other evidence upon which I conclude that Madgwicks is a creditor of Mr Jorgensen and is entitled to bring this application.

Whether a debt is in fact a debt of a corporation or the personal debt of the person who directs the corporation is a question that frequently arises, usually because the parties at the time of the dealings in question have given scant attention to that aspect of the matter, and this case is no exception.  However, the evidence indicates that the bills on which the applicant relies were personally addressed to Mr Jorgensen, although it appears that they were paid by cheques drawn on the account of Lotusdale.

In a contemporaneous letter, which is Exhibit 2 before me, Mr Jorgensen wrote to Madgwicks saying:

“Whilst it is not in any way my intention to ‘weasel’ out of paying my legals...”

In evidence Mr Jorgensen said that this expression was “figuratively speaking”.  In a further letter concerning a dispute concerning the quantum of the amount Mr Jorgensen wrote in a letter which is now Exhibit 3, saying:

“...combine with this the fact that I was asked to pay as I went along, which I did & use your imagination as to what a fair figure is that I owe you.”

That letter was written on the letterhead of Townsend and Parker Pty Ltd, which was a company in the group but which was not involved in the relevant litigation.  Those two letters express a recognition that the obligation in respect of the payment of the fees for legal services was Mr Jorgensen's.

There is further evidence of acknowledgment of the personal nature of the debt.  I have referred to the fact that the signed statement of affairs admits the debt, but there is a document which appears as Exhibit ABJ10 to one of the affidavits of Mr Jorgensen which is a hand-written list by Mr Jorgensen of his unsecured creditors.  The third item on that list refers to “Madgwicks Solicitors 535 Bourke St Melb”.  The original writing contained a sum of $12,500.  That has been crossed out and in the same hand (Mr Jorgensen's) a figure of $25,000 appears.  The year is said to be 1996.  The nature of the debt is said to be “Legal Fees Disputed”, and in the “Comment/Proof” column the words appear:

“Madgwicks issued summons for $25,000.  I concede ½.”

Mr Jorgensen in his evidence says that the statement "I concede ½" was directed at the quantum of the bill and did not constitute an acknowledgment that the debt was owed by him personally.  That explanation fails to convince me.  The item appears in a list of unsecured creditors and, in my opinion, the reference to "I concede ½" is a reference both to the amount of the bill and the person owing the debt.  That seems to be consistent with the change in the figure from $12,500 to $25,000 and to the description of the nature of the debt, “Legal Fees Disputed”. That observation was not meant, in my opinion, to put in question the identity of the debtor but to indicate that the quantum of the debt is not accepted by Mr Jorgensen.

Further, Mr Jorgensen took no objection at the creditors meeting on 30 August 1996 to voting by Madgwicks, who had given a proxy to the chairman of the meeting.  Mr Jorgensen was then legally represented.  I am satisfied that Madgwicks is a creditor of Mr Jorgensen, particularly having regard to the circumstance that the bills were personally addressed to him, the acknowledgment that appears in Exhibit ABJ10 to one of his affidavits, and the acknowledgment that appears in the signed statement of affairs.

It was submitted on behalf of Madgwicks that the debtor was estopped by his conduct or, alternatively, had waived his rights or elected not to object at a time when he is taken in law to a full knowledge of the consequences of his conduct.  It was then submitted that in all the circumstances the debtor is estopped by his conduct or has waived or elected not to contest the existence of a debtor/creditor relationship with Madgwicks.

I do not accept that the doctrine of estoppel can aid Madgwicks in this case.  First of all, in Re Dingle; Westpac v Worrell (1993) 47 FCR 478, it was emphasised that it was necessary that the applicant be a creditor. That case was concerned with the entitlement to vote at a meeting, and the Full Court (Wilcox, Ryan and Cooper JJ) held that to be entitled to vote at a creditors’ meeting a person must be a person who, or whose proxy or attorney, participates in the meeting and must also be a "creditor" in the ordinary meaning of that word.  The Court, in concluding the need for a person to be a “creditor” in the ordinary meaning of the word, referred, amongst others, to the case of Re McLean; Ex parte Friends’ Provident Life Office (1992) 36 FCR 502, where Heerey J said at 511:

“The Act confers a right to vote on creditors, not persons who have an arguable case that they are creditors.”

In Musolino v Sidiropolous (1991) 101 ALR 235, the Full Court said at 244:

“In our opinion, the court, in an application under s222(1), may in its discretion decide, as a preliminary and separate question, whether the applicant for relief has the requisite standing as a ‘creditor’ for the purposes of s 222(1):...”

The Full Court concluded in Dingle's case at 488:

“We think Drummond J was correct when he said that the issue that he had to determine, in order to grant the relief sought, was whether Westpac was in fact a creditor of the debtors in the amount claimed.”

As those authorities show, what has to be proved is that Madgwicks is a creditor of Jorgensen and, if it be that in some way Mr Jorgensen is estopped for denying that Madgwicks is a creditor, that does not establish that Madgwicks is a creditor.  Further, Madgwicks has the onus of proving that it is a creditor.  Estoppel or waiver or election is not relevant to the question of locus standi in this case.

As to s 222, the relevant questions are:

·whether the respondent gave false or misleading information in answer to a question put to him in respect of any of his conduct or examinable affairs at the meeting of creditors;

·whether the respondent omitted a material particular from the statement of his affairs; and

·where there are grounds for declaring the composition void, is it in the interests of creditors that the court do so, and, where there are grounds to declare the composition void under s 222(4), whether the court should exercise its general discretion whether or not to declare the composition void.

Whether there is a material omission is an objective test. If the information which is omitted might affect the dividend or affects the decision of the creditors under s 204(1), then it is an omission which is material. It is frequently a question of degree. The onus is on Madgwicks to establish by evidence the question of materiality: Re Segal; Lensworth Finance Ltd v Segal (1975) 9 ALR 154 at 157/8; Burns; Ex parte National Mutual Life Association of Australia Ltd v Burns (1992) 39 FCR 477 at 481.

Further, in Re Cufari; Ex parte Commissioner of Taxation v Huppatz (1992) 34 FCR 544, Von Doussa J said at 549:

“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 a decision by the creditors: see Re Segal; Lensworth Finance Ltd v Segal (1975) 45 FLR 85; Beard v Prestige Baking Industries Pty Ltd (1981) 52 FLR 384, per Fox J (at 397-398), per Lockhart J (at 417-419) and per Sheppard J (at 424-425). The test is an objective one. The subsection does not require that a misstatement be made ‘knowingly’.  In Re Segal; Lensworth Finance Ltd v Segal (supra) Riley J said (at 87-88) that it is essential that the information contained in the statement of affairs be ‘full and correct: the creditors are entitled to all available information about the debtors’ conduct, trade dealings, property [and] affairs before they make their decision’.”

There are a large number of matters on which Madgwicks relies in this area.  I want to make particular reference to only some of those; in particular, the position of the ANZ Bank and its voting at the meeting; the non-disclosure of interests said by Madgwicks to be held by Mr Jorgensen in a number of companies and, in particular, two companies, Pinoak Pty Ltd and Freeway Management Pty Ltd; the significance of the betting by Mr Jorgensen in June and August of 1996 and, more particularly, in the context of s 239, the paucity or derisory nature of the dividend offered by the composition.

There is one matter I can immediately deal with.  There is a complaint by Madgwicks that the creditors meeting was held in Cairns when most of the major creditors were situated in Victoria.  It was submitted that the location of the meeting created difficulties for any concerned creditors to either personally attend the meeting or properly question the debtor.  In my opinion, there is no basis of valid complaint in relation to this aspect of the matter.

The minutes of the meeting of creditors held on 30 August 1996 is Exhibit ABJ14 to an affidavit of Mr Jorgensen sworn on 7 April 1997.  At page 5 of those minutes, a resolution is recorded as follows:

“that in accordance with Section 196(2) of the Bankruptcy Act 1966, the time and place for the meeting is convenient to the majority in number of creditors present.”

The minutes record that that was moved by the Chairman as proxy for Madgwicks, and the minutes further record that that resolution was carried unanimously.

Further, the minutes record that there were questions that Madgwicks wished to put to Mr Jorgensen and which were, in fact, put to him during the course of that meeting.  There is annexed to the minutes a letter from Mr Kennedy of Madgwicks concerning those questions.   There is no basis then in respect of this area of complaint.

So far as the questions of material non-disclosure are concerned, particularly in relation to the non-disclosure of corporate interests by Mr Jorgensen, there was extensive questioning of him at that meeting concerning those matters.  The letter of 29 August addressed to the chairman of the meeting was tabled and the questions in it were put to Mr Jorgensen.  The creditors present at the meeting did not request an adjournment to enable further investigations to be conducted into the affairs of Mr Jorgensen.

Further, Madgwicks have forwarded a copy of this application, together with the orders of Kiefel J, to all of the creditors.  The creditors who have shown an interest have stated their position.  The effect of this evidence is that it has not been established that the creditors would have changed their vote, or the creditors who did not attend and vote would have attended in person or by proxy to vote against the resolution had they known of the allegations of the applicants.  Specifically, 8 creditors, totalling some $880,000, have said they would not have changed their decision.

Concerning the alleged non-disclosure of corporate interests, Madgwicks has acted for some of those companies in significant litigation and it is a little bit precious to suggest that they, in particular, were somehow misled by the absence of any reference to the corporate interests of Mr Jorgensen.

The meeting of creditors resolved:

“the creditors accept the composition as proposed by the debtor, the terms being that creditors agree to accept an amount of $15,000.00 in full and final satisfaction of all outstanding debts.  Such amount to be paid to the Trustee on acceptance of the proposal.”

The statement of affairs of Mr Jorgensen indicated that the ANZ Bank was owed $13,000,000 pursuant to a guarantee.  The amount claimed at the meeting in respect of the ANZ debt was $4,197,505, the reduction taking account of the realisation of assets.  The Commonwealth Development Bank was a creditor for $160,000.  Of the $14,561,444 expressed to be creditors in the statement of affairs, $13,304,944 or 91 per cent related to guarantees, and $480,000 (some 3 per cent) related to property settlement.  The claim of Madgwicks of $26,325 represented .18 per cent of the creditors in the statement of affairs.

At the meeting of creditors on 30 August 1996, seven creditors totalling $5,162,435, or 96 per cent in value of the creditors, voted in favour of the proposal, and three creditors totalling $190,344, or 4 per cent, voted against the proposal.  Those three creditors were Madgwicks, $26,325; Sky Channel, $4019; and the Commonwealth Development Bank, $160,000.  The ANZ Bank, whose debt was $4,197,505, voted in favour of the proposal.

In respect of the ANZ’s significant vote, it was submitted by Mr Gynther of counsel on behalf of Madgwicks that, having regard to the circumstances leading to the vote by ANZ, "there is a strong prospect that ANZ has trafficked in 4.1 million of voting rights."

By proxy in Form 44 dated 26 August 1996, an attorney for the bank appointed Mr Peter Plevritis the ANZ Bank proxy for the purpose of attending the meeting of creditors and voting in respect of the resolution under s 204 of the Bankruptcy Act. As is required, the proxy specifically nominated the manner in which Mr Plevritis was to vote in respect of the proposal under s 204. The proxy form required him to vote for a resolution accepting a composition. He was not left with any discretion as to how to exercise his vote. That decision was made by the bank.

There are two deeds of settlement which are relevant to this question of trafficking.  The first was entered into in October 1992 in respect of the principal borrowers and guarantors and is Exhibit 5 before me, and the second is a deed of settlement of 27 September 1994, essentially arising by reason of default in payment of the sums under the deed of settlement of October 1992.  The first deed was prepared by the ANZ Bank's solicitors, Freehill Hollingdale and Page.  It shows an amount owing of $10,287,448.00, and interest in the sum of $431,013.98.

At that time, the ANZ Bank had commenced enforcement proceedings against the guarantors and the guarantors had denied liability.  Proceedings had been commenced against the bank challenging the appointments of receivers and managers.  By reason of the deed of settlement, the parties wished to settle a number of proceedings that had been instituted.  There was an acknowledgment of joint and several liability by the guarantors in the sum $11,530,285.26 and the amount that was required to be paid to the ANZ Bank over time of $350,000.

The essential terms of the second deed (which arose by reason of default in payment under the first deed) was the payment by Riton Proprietary Limited (‘Riton’) to the ANZ Bank in the sum of $180,000; the ANZ Bank waived its rights under the earlier terms of settlement to the extent that it would cease to take further steps to commence bankruptcy proceedings against any of the Jorgensen family, refrain from enforcing the judgment against the indemnifiers, observe the terms of settlement if a breach of those terms by the indemnifiers had not occurred, and not enforce its entitlement to any further payments from the indemnifiers.

In that deed, the bank reserved its right to participate in a dividend in any administration or bankruptcy of the Jorgensens and attribute such amount as it may, in its absolute discretion, determine in respect of the value of any relevant security held by the bank.  It also agreed to appoint Mr Plevritis as the bank's proxy for the purpose of considering and, if thought fit, for approving an arrangement or composition pursuant to Part X of the Bankruptcy Act.  That second deed was also prepared by the ANZ Bank’s solicitors, Freehill, Hollingdale and Page.

Under that second deed, the ANZ Bank retained the right as to how it would vote at any meeting under Part X of the Bankruptcy Act.  Although the payment of $180,000 by Riton, of which Mr Plevritis was director, was a payment which clearly was of benefit to the bank, it does not appear that there was an arrangement or agreement that the bank would vote in favour of any arrangement or composition however derisory the amount might be, as part of a deal.  The deed of settlement with the ANZ Bank, the amount paid to the bank, pursuant to that settlement was specifically disclosed by Mr Jorgensen to the meeting.

Notwithstanding that one might legitimately entertain a degree of cynicism as to what commercial reason would prompt the ANZ Bank to vote in favour of a composition of $15,000 in respect of debts in excess of $4 million, the position is that, even if one puts to one side the $4,197,505 of debt owed to the bank, there would still be six creditors whose debt is of the order of $1 million in favour of the proposal against three creditors whose debt is $190,344 against the proposal.  That is to say, the other creditors whose interest was substantially more than the dissentient creditors were in favour of that proposal.

Concerning the non-disclosure of corporate interests, it has to be recognised that there were quite extensive questions asked by Mr Jorgensen concerning some of the companies, at the instigation of Madgwicks, at the meeting of 30 August.  It is unnecessary to set out in full that questioning as recorded in the minutes, but it is useful to set out the passage that deals with the question concerning Freeway Management Proprietary Limited.  At page 8, the minutes record:

“Mr Morris asked the debtor what his interest in Freeway Management Pty Ltd was.  Mr Jorgensen advised that Freeway Management Pty Ltd was Trustee for the P&L Family Trust, which was a Discretionary Trust with no set beneficiaries and that he was a director of Freeway Management Pty Ltd.  Mr Morris asked where the Trust and Freeway Management Pty Ltd derived their respective incomes from, to which Mr Jorgensen responded that income was derived previously from the aforementioned diecasting entities, which were now subject to external administration and that presently neither the trust nor the company derived income from any source.

The Chairman asked what assets the company or the Trust owned, to which Mr Jorgensen responded neither owned assets, given that the previous interest was in the aforementioned diecasting companies.  Mr Morris asked the debtor whether he drew any remuneration or other monies from Freeway Management Pty Ltd, to which the debtor responded that he did not.  The Chairman further asked whether he had drawn funds from a company or trust over the last twelve months, to which Mr Jorgensen responded, approximately $20,000.00.”

The evidence before me shows that there were a large number of companies of which Mr Jorgensen was either a shareholder/director, or secretary.  An Australian Securities Commission search appears as Exhibit A to the affidavit of Mr Jorgensen filed 16 December 1996.  In respect of the companies which there appear, a number of those companies were de-registered; the ANZ Bank appointed receivers and managers to seven of those companies; the National Australia Bank appointed receivers and managers in 1996 to three of those companies; and, of the remaining seven companies, it appears that Townsend Parker Gravity Diecasting Proprietary Limited was placed in liquidation and Mackland Proprietary Limited, formerly Townsend and Parker (Vic) Pty Ltd, is now in liquidation.

It is said that Mantinella Proprietary Limited is a shelf company and has never traded and holds no assets; however, there is a suggestion in Exhibit 7 that it holds 200 shares in Townsend and Parker Proprietary Limited.

The three other companies have a greater significance. Freeway Management Proprietary Limited is a company of which Mr Jorgensen was once a director. Its major assets are shares in non-current or other defunct companies. It was also a guarantor of the Commonwealth Development Bank loan. In respect of Townsend and Parker Proprietary Limited, Mr Jorgensen ceased to be a director and secretary of the company in 1996. He has no shareholding in it, but the shareholding, it seems on the material, is held by, amongst other people, his de facto wife. The final company, Pinoak Proprietary Limited, was formerly Consolidated Diecaster Sales Proprietary Limited. This was under voluntary administration until the 28 March 1996 when it ceased to trade. Mr Jorgensen has no shareholding in that company. It was submitted that misleading information was given to the meeting by Mr Jorgensen in respect of Pinoak in that the statement which appears at page 7 of the minutes, that the company went into administration twelve months ago, was intended by Mr Jorgensen to indicate that Pinoak was a company of no value. It was said that, since there was no commercial basis for placing the company in an administration under s 436A of the Corporations Law if the company had no significant assets or capacity to trade, the proper inference on Pinoak coming out of administration is that it had assets or continues to trade.  There is, however, evidence that it ceased to trade when it came out of administration on 28 May 1996.

I have referred expressly to the questioning of Mr Jorgensen concerning Freeway Management Proprietary Limited.  It is submitted for Madgwicks in respect of this matter, that the reference by Mr Jorgensen to funds of $20,000 drawn from a company or trust failed to disclose the source of those funds and a likely inference was that the $20,000 has been drawn or paid by a trust or company other than Freeway Management or the P & L Family Trust.

It was submitted:

“The creditors are entitled to be informed of the exact source of the $20,000, the reason for the payment and the likelihood of other sums being received from the same or related or associated entities.

I have considered the criticisms that were made concerning this aspect of the matter in the evidence, and having regard to the quite extensive questioning of Mr Jorgensen at the meeting of creditors at the instigation of Madgwicks, I am not satisfied that there has been any material non-disclosure concerning the company interests held by Mr Jorgensen.  Nor has it been established there is a possibility of some funds for the benefit of creditors arising from the matters said not to have been disclosed, were a sequestration order to be made.

The next matter to which I want specifically to refer concerns the evidence of betting by Mr Jorgensen, particularly in June and August 1996.  Neither income from successful bets nor debts from unsuccessful bets was disclosed in his statement of affairs nor to the meeting.  It is said that either one or other should have happened and that there has been a material omission in this respect.  It is said a Mr Mann, a bookmaker in Victoria, was a further creditor not disclosed in the statement of affairs in respect of unsuccessful bets Mr Jorgensen had with him; and that if Mr Jorgensen was a successful punter, the winnings should have been available and disclosed to creditors and the trustee.

It is said that if, as Mr Jorgensen claims, he was acting as a commission agent, the name of any syndicate on whose behalf he was betting could have been stated and the amounts of commission should have been disclosed in his statement of affairs or to his trustee. It was submitted that there are prospects that an offence has been committed under s 271 of the Bankruptcy Act.

I do not think that Mr Jorgensen has been totally frank concerning either the extent of his bets or the capacity in which those bets were placed.  I think on the balance of probabilities that he was in his own right a very extensive bettor.  Whether in fact he was successful is a matter about which a firm conclusion cannot be made but, notwithstanding the grave reservations I have about the honesty of this aspect of his evidence, I do not see that this aspect of the matter provides a basis on which the composition should be set aside.

The final matter to which direct reference should be made concerns s 239 and, in particular, the paucity of the dividend accepted by the majority of his creditors.

Without taking into account the costs of the trustee, the $15,000 paid represents, at the very highest, about .28 cents in a dollar.  It was submitted that this was really a token or derisory dividend such as to call for the intervention of the Court.  Lockhart and Hill JJ said of s 239 in Khera v National Australia Bank Ltd (1996) 141 ALR 416 at 429:

“Although at first sight the grounds on which the court may set aside a composition under s 239(2) are wide, upon closer examination they relate in our opinion to matters that concern the terms of the composition itself, that is to say facts which were in existence (whether known or not) at the time of the passing of the special resolution of creditors to accept the composition under Pt X.  The court may set aside the composition if it considers ‘that the terms of the composition are unreasonable’.  This plainly centres attention upon the terms of the composition itself.  The court may set aside a composition if the terms of the composition ‘are not calculated to benefit creditors generally’.  Again attention is centred upon the terms of the composition.

Then follows the third ground ‘for any other reason the composition ought to be set aside’. In our opinion this ground, despite the width of its language, is confined to circumstances which relate to the terms of the composition itself or the circumstances in which the composition came to be accepted by special resolution of the creditors. To an extent these grounds may overlap with the grounds on which the court may declare a composition void under s 222.”

Accordingly, under s 239 the Court is required to consider whether the composition ought to be set aside on the ground that its terms are unreasonable or are not calculated to benefit creditors generally, or by reason of other circumstance which relates to the terms of the composition itself or the circumstances in which the composition came to be accepted by special resolution.

The factors relevant to that consideration have been recently considered by Merkel J in Re Mills; Ex parte Lloyd’s (1997) 73 FCR 551, particularly the factors which his Honour refers to at pp 559-561:

The major consideration in relation to the matters under s 239 concerns the paucity of the dividend.  If creditors have not been misled or deceived concerning relevant matters, the fact that they choose to accept a very small amount by way of dividend does not mean that the offered amount is such as to require the court to substitute its view for that of the creditors.

The nature of the proper approach the court should adopt in circumstances such as this was considered by O'Loughlin J in Re Emmett; Ex parte Beneficial Finance Corp Ltd v Emmett (16 December 1991, unreported).  In that particular case at page 7, his Honour said:

“Dr Baxter marshalled a formidable array of cases in support of his argument that the composition should be set aside.  Many of them, like the present case, related to a debtor who had acted as a guarantor and all of them incorporated a proposed dividend which was variously described as a ‘token’ or as ‘derisory’.”

His Honour specifically referred to six of those cases where small dividends were the subject of consideration: Re Doukidis; Ex parte Consolidated Constructions Pty Ltd (Toohey J, 26 June 1985, unreported ); Re Richards; Ex parte Beneficial Finance Corporation Limited (Jackson J, 17 March 1986, unreported ); Re Brennan; Ex parte Stokes (Australasia) Limited (Morling J, 31 May 1988, unreported ); Re Palazzolo; Ex parte Discusso (Neaves J, 19 July 1991, unreported ); and NZI Capital Corporation Limited v Lancaster (1991) 30 FCR 441.  In that particular case Foster J said there was a “strong case” for setting aside the composition "on the simple basis that unsecured creditors are, for practical purposes, getting nothing and would be better off if the debtor were made bankrupt so they could take advantage of the investigatory procedures then available to them."

In Emmet's case (supra), O'Loughlin J said:

“It seems to me that in each of these six cases there were factors, over and above the smallness of the dividend and the size of the debts, that caused the Court to intervene.  Even though there are examples of strong dicta to the effect that the smallness of the amount offered coupled with the amount of the debts might be sufficient, without more, to set aside the composition, it is significant that no case has been found where that has happened.  I allow for the possibility that it could occur but I do not believe that this is the appropriate case: (cf Re Van Twest; Ex parte Tubemakers Australia Ltd (1986) 69 ALR 573 at 576 per Pincus J). I repeat what I have earlier said: the debtor was between two opposing groups of creditors all of whom were highly skilled business people well versed in the types of matters that had led to the debtor’s financial downfall. He was fortunate that the larger group sided with him; they, coupled with some smaller creditors carried the day numerically and with the use of the voting power of his family trust, they were able to carry the day in terms of value. This is a very good example of an issue that was properly resolved where the Act intended it should be resolved - before the creditor’s [sic] in a special meeting. It would be inappropriate for a Court to interfere in such circumstances.”

Those considerations have been revisited by O'Loughlin J more recently in Re Abouav; Ex parte Wilboarne (29 May 1996, unreported).  In that case he said at page 9:

“ In Re Emmett [16 December 1991, unreported] I expressed the view that an applicant who seeks to set aside a Part X proceeding has to satisfy the Court that he or she is entitled to obtain orders that countermand the wishes of the majority of the creditors whose debts equal or exceed 75% in value of all debts; the applicant must put before the Court sufficient material to establish that grounds exist for granting the relief sought.  Absent such material, the Court would be entitled to proceed upon the premise that the compromise was prima facie reasonable and was prima facie for the benefit of the creditors generally.  I adhere to those views.  See also Re Segal; Ex parte Lensworth Finance Ltd v Segal and Ward (1975) 45 FLR 85 at 89 and Re Beames; Ex parte Beneficial Finance Corporation Ltd (1985) 7 FCR 216 at 229.”

His Honour at p10 said:

“Despite the paucity of the dividend, I can see no cause for the Court to intervene.  The applicant has not advanced any information that would justify interference with the wishes of the overwhelming majority of creditors.”

The application he then dismissed.  Similarly, in this case, notwithstanding the paucity of the dividend, I can see no reason why the Court should intervene to circumvent the decision of the majority of the creditors.  There is a deal of animosity and vindictiveness shown in the relationship between Mr Jorgensen and Madgwicks, notwithstanding in comparative terms, the smallness of the debt.

No doubt matters can be pointed to about which further information might have been useful. 
But I am not satisfied that there was any material non-disclosure.  In my opinion, there is no basis for thinking that the creditors would not have concluded, as they did in fact conclude, if they had been informed of the various matters to which reference has been made on behalf of Madgwicks.  As I indicated, I have been troubled by the evidence of the scale of the betting activities of Mr Jorgensen, not only the frequency but the quantum of the bets.  Notwithstanding that concern if the creditors had been informed of the full details of Mr Jorgensen’s betting activities, I do not think that the decision to accept the composition would be any different.

For these reasons I dismiss the application.

My present intention as to costs is to order the applicant to pay one half of the respondent's costs, to be taxed if not agreed.  One of the reasons for the reduction is that on a significant aspect of the proceedings, that of the locus standi of Madgwicks to bring the application, Mr Jorgensen failed, and I think it fair in all the circumstances that he does not recover the costs that ordinarily would be ordered in favour of a person who successfully defended an application under s 222.

With that intimation, I invite the parties to make submissions concerning costs in writing, those submissions to be filed and served within 14 days.

I certify that this and the preceding seventeen (17) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Spender.

Associate:

Dated:            29 April 1998

Counsel for the Applicant:	Mr M Gynther
Solicitor for the Applicant:	Madgwicks
Counsel for the Respondent	Mr P McQuade
Solicitor for the Respondent	McHenry & Company
Date of Hearing:	9 April 1997 and 14 August 1997
Date of Judgment:	29 April 1998