Re Beard, Kim Howard Ex parte Prestige Baking Industries Pty Ltd v Gee, Maxwell George

[1980] FCA 166

Re: KIM HOWARD BEARD
Ex parte: PRESTIGE BAKING INDUSTRIES PTY. LIMITED
And: MAXWELL GEORGE GEE & KIM HOWARD BEARD
No. 3 of 1980 Part X
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA
C.A. Sweeney, J.

CATCHWORDS

Bankruptcy -Meeting under Part X - Incorrect and material particular included in debtor's statement of affairs - The Court, being satisfied that it would be in the interests of creditors to do so, makes an order declaring Deed of Arrangement to be void.

HEARING

MELBOURNE

#DATE 30:10:1980

ORDER

1. The Court, being satisfied that the debtor has included an incorrect and material particular in the statement of his affairs, and being satisfied that it would be in the interests of the creditors so to order, makes an order declaring the Deed of Arrangement of the debtor, made on 4 February 1980, to be void.

2. It further orders that the debtor pay the costs of the applicant of and incidental to the application, such costs to be taxed, if not agreed.

3. Liberty to apply is reserved to all parties.

JUDGE1

In this application Prestige Baking Industries Pty. Ltd. (the applicant) contends that there is a doubt on specific grounds whether a Deed of Arrangement entered into between Kim Howard Beard (the debtor) and Maxwell George Gee (the trustee) on 4 February 1980 was entered into in accordance with Part X of the Bankruptcy Act 1966 (the Act). The specific grounds upon which the applicant relies are : -

(a) the creditors determined the amount of the applicant's debt and not the chairman of the meeting as required by s.201 of the Act;

(b) if the chairman determined the amount of the applicant's debt, he wrongly determined it at $1,500 instead of the correct figure of $8,520.13;

(c) the chairman "failed to act in a summary manner on the best information he could gather at the meeting."

The applicant seeks an order under s.222(1) of the Act declaring that the deed is void on those grounds. He also seeks to attack the resolution that the debtor enter into the Deed of Arrangement on the ground that the creditors at the meeting, other than the applicant, conducted themselves unfairly towards the applicant at the meeting.

In answer to this portion of the applicant's claim the debtor relies on the Chairman's Certificate dated 8 February 1980 as conclusive evidence that a special resolution was duly passed at the meeting of creditors in the following terms :

"That the debtor execute a Deed of Arrangement which shall contain the provisions contained in the draft Deed produced to the Meeting."

I am satisfied that the chairman of the meeting determined the amount of the applicant's debt at $1,500. In my opinion, having regard to the reasons given and the authorities cited in Re Blake ex parte Kebroc Home Developments Pty. Ltd. (in liquidation) and Citicorp Australia Limited (22 May 1980), the certificate of the chairman, is, by reason of s.225 of the Act, conclusive evidence that the resolution specified in the certificate was duly passed at the meeting and affords a complete answer to that portion of the application based on s.221(1) of the Act. That certificate was signed on 8 February 1980 and was thus not affected by the amendment made by s.122 of the Bankruptcy Amendment Act 1980, in relation to certificates signed after 8 April 1980, which are now only prima facie evidence.

The applicant further contends that the Court should be satisfied that the debtor has included two incorrect and material particulars in his Statement of Affairs, namely, the applicant's debt at $1,500, and a debt said to be owed by the applicant to the debtor at $16,480. Accordingly he seeks an order, pursuant to s.222(4) of the Act, declaring the Deed of Arrangement to be void.

The debtor puts his answer to this portion of the application in three ways :-

(i) the applicant is not a creditor of the debtor and so has no standing to bring the application;

(ii) the debtor has not included any incorrect and material particular in his Statement of Affairs;

(iii) in any event, the Court should not make an order declaring the deed to be void on this ground, as it should not be satisfied that it would be in the interests of the creditors to do so.

It was common ground between the parties that on 30 May 1979 the applicant and debtor entered into an agreement under seal (the licence agreement), whereby, amongst other things, the applicant licensed the debtor to operate and manage as a licensee of the applicant "three special stores known as Hades Hot Bread Kitchen Stores". It was claimed by the applicant that "due to repeated breaches" by the debtor of his obligations under the license agreement, the applicant terminated it by written notice on 5 November 1979.

On 10 January 1980, Mr. Irlicht, who appeared for the debtor on the hearing of this application, wrote a letter on behalf of the debtor to the solicitor for the applicant, which, omitting formal parts, read as follows :-

"I refer to the Notice issued by you on behalf of your client Messrs. Prestige Baking Industries Pty. Ltd. to Mr. Kim Howard Beard for whom I act.

On my instructions it appears that my client entered into the agreement in question as a result of a number of misrepresentations made by your clients. The misrepresentations concern the figures of the business and the state of the repair of the machinery and consequently my client rescinds the agreement.

Alternatively, it is contended that no circumstances have arisen whereby your client was entitled to terminate the licence agreement and consequently my client accepts your client's purported rescission of the licence agreement as repudiation of the contract between the parties. It is contended that in any event your client is not entitled to forfeit monies paid with respect to the licence agreement.

In any event it transpires that at lease (sic) with respect to one of the premises which (sic) respect to which a licence agreement was granted, evidently there was no right by your client to grant a licence of the terms of the lease under which it was holding.

In addition to the above claims, my client claims security deposit which has been paid to your client as well as value of the stock which has been left in the premises by my client.

In view of the above facts, unless within 14 days from this date, I receive repayment of the monies paid by my client to your client, together with an indication of your client's willingness to compensate my client for the damages he has suffered, my instructions are to institute legal proceedings against your client without any further notice.

Could you please advise me, whether you have instructions to accept service of proceedings."

Apart from an appearance by Mr. Irlicht for him at a preliminary stage of the case, the trustee took no further part in the proceedings and Mr. Irlicht stated that he submitted to any order made by the Court.

On the hearing of this application, Mr. Irlicht conceded that, as a matter of arithmetic, the applicant's claim under the licence agreement, if it were well founded, amounted to $8,500, but, in his client's notice of opposition, stated the following grounds : -

"1. The debtor denies that the applicant Prestige Baking Industries Pty. Ltd. is his creditor and consequently denies its right to bring this application. Any liability which may have otherwise been incurred by the said debtor to the applicant was incurred pursuant to a contract which was induced by the applicant's fraud or alternatively that of its agent and which contract the debtor being entitled to do so has rescinded, or alternatively the debtor is entitled to amounts of set-offs which extinguish the amount which otherwise may be owing to the applicant.

PARTICULARS

(a) One John Walker of International Franchising, as agent for the applicant falsely and fraudulently or alternatively recklessly represented to the debtor that the takings profits and outgoings of a business consisting of hot bread kitchens in Ringwood, Eastland and Old Orchard were as set out in a piece of paper which he gave to the debtor. The debtor refers to his Affidavit sworn on 14th March, 1980.

(b) Further or alternatively, the debtor is entitled to damages against the applicant for fraud which is (sic) not less than the amount which would otherwise be owing to the applicant.

(c) Further or alternatively to sub-paragraphs (a) and (b) hereof, the debtor is entitled to receive from the applicant repayment of the sum of $16,068.00 (being the sum which the debtor has paid to the applicant), or part thereof.

(d) The debtor is entitled to a set-off in the sum of $500.00 with respect to goods belonging to him, which have been wrongfully converted by the applicant."

In the course of his written final submissions, Mr. Irlicht abandoned the claim based on an alleged total failure of consideration and particularised in paragraph 1(c), that the debtor was entitled to recover the price paid by him to the applicant in respect of the licence agreement.

The debtor, in his affidavit in support of his notice of opposition, stated that the agent of the applicant informed him that the takings and the profits and outgoings of the business, the subject of the proposed licence agreement, were as set out on a piece of paper which he then gave to the debtor, telling him that these were the figures obtained by the applicant, which was itself carrying on the business. The document so referred to was in fact headed "Licensee Trading and Profitability Forecast."

The allegations of fraud were denied by the general manager of the applicant, whom I accept as a witness of truth. Wherever his evidence conflicts with that of the applicant I have no hesitation in preferring his account of the facts. The debtor has failed to establish any basis for these allegations.

The debtor also sought to base his submission that the applicant had no standing as a creditor to bring this application upon a claim that the debtor was "entitled to amounts as set-offs which extinguish the amount which otherwise may be owing to the applicant." In addition, he alleged that he was entitled to a set-off in the sum of $500 with respect to stocks left on the premises of the business by him, which were said to have been wrongfully converted by the applicant.

It is clear that there were serious defects in the plant and machinery provided by the applicant for the use of the debtor 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 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.

The applicant claimed that the debtor included two incorrect and material particulars in his Statement of Affairs, namely, the applicant's debt at $1,500, instead of $8,520.13, and a debt owed by the applicant to the debtor at $16,480. The debtor denied these claims and contended that, in any event, the Court should not be satisfied that it would be in the interests of the creditors to make an order declaring the deed to be void on this ground (see s.222(4)(a) and (5) of the Act.)

In his list of unsecured creditors, the debtor included the item "Prestige Baking Industries Pty. Ltd., $1,500, contracted in 1979" and under the heading "Nature of Debt" he stated "Disputed Claim". Under the heading "Debts Due to the Estate" there appeared two items showing the name of the applicant as the debtor, one for $480, in respect of which it was stated that $480 was the amount likely to be received and the other for "$16,000 plus damages", and under the heading of the amount likely to be received there appeared the words "disputed claim".

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.

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.

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 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, 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.

Once the deed is declared to be void, the parties will be free to take such steps as they may be advised. If a meeting of creditors is held under Part X, one would hope that it would be conducted in a more satisfactory manner than the meeting which resulted in the deed. If one of the creditors chooses to issue a creditor's petition, that creditor and the debtor will be free to put their cases in relation to it as they choose. Any other creditor who wishes to intervene may seek leave to do so.

It is not necessary to consider the applicant's claim that the deed should be terminated under s.236 of the

The Court, being satisfied that the debtor has included an incorrect and material particular in the statement of his affairs, and being satisfied that it would be in the interests of the creditors so to order, makes an order declaring the deed of arrangement, made on 4 February 1980, to be void. It further orders that the debtor pay the costs of the applicant of and incidental to the application, such costs to be taxed, if not agreed. Liberty to apply is reserved to all parties.