Re McLean; Ex parte Friends' Provident Life Office

[1992] FCA 479

Re: WILLIAM MALCOLM MCLEAN and DARIANE LEE MCLEAN
Ex Parte: FRIENDS' PROVIDENT LIFE OFFICE
No. V X265 of 1991
FED No. 479
Bankruptcy
(1992) 108 ALR 360
(1992) 36 FCR 502

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Heerey J.(1)

CATCHWORDS

Bankruptcy - Part X Bankruptcy Act 1966 - meeting of creditors - applicant excluded from voting at meeting by chairman - Court's jurisdiction to determine right to vote at meeting - whether review of chairman's decision or rehearing - whether sufficient for creditor to show arguable claim - contingent debt - S.198(2) Bankruptcy Act 1966 - whether litigation makes debt contingent - exercise of discretion - personal and family factors - commercial judgment of creditors.

Words and Phrases - "contingent debt".

Bankruptcy Act 1966 (Cth): Ss.30(1)(a), 198(2), 201, 222(1) and (2)(a) and 233(2)(b)(ii).

Beard v Prestige Baking Industries Pty Ltd (1981) 36 ALR 307

Re Brink (1980) 44 FLR 135

Ebert v Union Trustee Co of Australia Ltd (1960) 104 CLR 346

Forshaw v Thompson, unreported, Federal Court, Full Court, 1 May 1992

Re Levy (1980) 50 FLR 99

Ex Parte Ruffle; Re Dummelow (1873) 8 Ch App 997

Re Tregonning (1983) 74 FLR 327

Zantiotis v Andrew (No.2) (1988) 80 ALR 299

HEARING

MELBOURNE

#DATE 7:7:1992

Counsel for the applicant: Mr R.J. McInnes

Solicitors for the applicant: Coltmans

Counsel for the respondents: Mr R.S. Randall

Solicitors for the respondents: Cornwall Stodart

ORDER

IT IS DECLARED THAT:

1. The deed of arrangement made on 24 July 1991 between William Malcolm McLean and Dariane Lee McLean as debtors and Barry Keith Taylor as trustee was not entered into in accordance with Part X Bankruptcy Act 1966 (as amended) in that

(a) The applicant, being a creditor of William Malcolm McLean, was wrongfully excluded from voting at the meeting of creditors held under Part X of the Act on 24 July 1991;

(b) In all the circumstances, had the applicant been allowed to vote against the resolution as was its intention, the special resolution would not have been passed.

2. Upon the above grounds the said deed of arrangement is void as between the applicant and William Malcolm McLean.

IT IS ORDERED THAT:

3. The estate of William Malcolm McLean be sequestrated.

4. The application be otherwise dismissed.

5. Costs be reserved.

6. Liberty to apply be reserved.

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

JUDGE1

On 24 July 1991 a meeting of the creditors of the respondents William Malcolm McLean and Dariane Lee McLean (Mr and Mrs McLean) held under Part X of the Bankruptcy Act 1966 (the Act) approved a special resolution that Mr and Mrs McLean be required to execute a deed of arrangement. Mr and Mrs McLean duly executed the deed that day. The Chairman of the meeting, Barry Keith Taylor (Mr Taylor), who is also a respondent to this application, excluded the applicant Friends' Provident Life Office (FPL) from voting at the meeting. FPL brings this application under s.222(1) of the Act seeking a declaration under s.222(2)(a) that the deed is void. Those provisions relevantly state:

"(1) Where there is a doubt, on a specific ground, whether ... a deed of arrangement was entered into in accordance with this Part ... a creditor ... may apply to the Court for an order under subsection (2).

(2) Upon the hearing of an application made under subsection (1), the Court may, subject to this section, make an order -

(a) declaring that the deed ... is void, or that it is not void, on the ground specified in the application; ...

(b) ..."

1. In addition to its claim that it was wrongfully excluded from voting at the meeting FPL relies on a second ground of alleged invalidity, namely that Mr Taylor allowed a secured creditor Forty-eighth High Seas Pty Ltd to vote in respect of the whole amount of its debt when the statement of affairs sworn by the debtors disclosed that the debt did not exceed the estimated value of the creditor's security: cf s.198(5) and (6). I need say no more about this second ground because, although the facts alleged by FPL appear to be correct, the arithmetic is such that if FPL's first ground fails the rejection of the Forty-eighth High Seas Pty Ltd's vote would not have affected the outcome and it would not be appropriate to exercise the discretionary power conferred by s.222(2)(a).
   FPL's Claim against Mr McLean

2. FPL carries on the business of life and disability insurance. Mr McLean was an insurance salesman. Companies with which Mr McLean was associated were appointed by FPL as agents and he guaranteed their obligations to FPL. The obligations of those companies which FPL claims attract the liability of Mr McLean under the guarantees are first, advances totalling $150,000 which were made to assist in the establishment of the agency business of two of those companies and, secondly, the refund of commissions paid to a company for policies which subsequently lapsed.

3. In the middle of 1988 FPL established agency arrangements with a group of companies in Melbourne known as the Carlton Ross group. The evidence does not disclose the relationship of the companies in the group as between themselves. Those relevant for the purposes of FPL's claim against Mr McLean are Carlton Ross and Associates Pty Limited (CRA) and Carlton Ross and Associates (South Melbourne) Pty Limited (CRA (South Melbourne)).

4. On 24 June 1988 FPL sent to the directors of CRA and other companies in the group a "letter of intent." The purpose of this letter was expressed to be to "formalise the major considerations in the establishment of your proposed managing agency with Friends'."

5. Clause 19 of the letter stated:
   

"19. Branch establishment funds. Friends' will advance $50,000 assistance for the establishment of each Sales Centre. This will be in the form of a loan which will be written off over three financial years commencing 1 July 1989. This extraordinary grant applies provided the agency agreement is in force, and new business production objectives and lapse objectives are being met."

1. The letter was followed by agency agreements and guarantees. Those relevant to FPL's claim against Mr McLean are:
   

- agency agreement between FPL and CRA (South Melbourne) (then called Excell Strategic Marketing Pty Ltd) dated 11 July 1988 - guarantee dated 11 July 1988 by Mr McLean and another of the CRA (South Melbourne) agency agreement

- agency agreement between FPL and CRA (then called Wyford Pty Ltd) dated 15 July 1988

- guarantee dated 15 July 1988 by Mr McLean and others of the CRA agency agreement

1. The agency agreements (described as "first option agency agreements") and guarantees are on printed forms and relevantly contain identical terms.

2. The agency agreements provide:
   3. REMUNERATION
   

3.1 Commissions

During the term of the Agency, the Agent shall be entitled to commissions or other remuneration in respect of contracts of insurance arranged by the Agent pursuant to this Agreement on the following conditions:

(a) commissions or other remuneration shall only fall due upon;

(i) acceptance by the Office of an application endorsed with the Agent's name and delivered to the office,

(ii) receipt by the Office of the correct first premium, and

(iii) compliance by the Agent with the provisions herein;

(b) ...

(c) ...

(d) ...

(e) commissions or other remuneration shall otherwise be calculated and payable in accordance with the provisions set out in a looseleaf booklet entitled "Agency Commission and Bonus Schedules" which has been signed by the Office for the purpose of identification. 3.2 Advances and Over-Payments.

Any advances or over payments made to the Agent by the Office shall constitute a debt owing by the Agent to the Office and shall be repayable to the Office upon demand or deducted in whole or in part from the Agent's commission entitlement.

11. VARIATION

This Agreement (including the booklet referred to in Clause 3.1(e)) may only be modified, varied or amended by notice in writing executed by the Office and served upon the Agent.

13. TERMINATION OF AGENCY

(a) The Agency may be terminated by the Agent or by the Office at any time by notice in writing without assigning any cause.

1. Under the guarantees Mr McLean covenanted:
   

1. To be answerable and responsible for the due payment by the Agent of all monies at any time payable by the Agent to the office.

4. That my/our liability hereunder shall not be impaired or discharged by the Office giving time or any other indulgence to the Agent.

5. That the office may at any time in its absolute discretion and without giving any notice to me/us terminate the said Agency and such termination shall not impair or discharge my/our liability hereunder.

6. That a certificate signed by the Manager for the time being of the Office shall be prima facie evidence that the amount stated therein is owing by the Agent to the Office and/or that the amount stated therein has been paid by the Office to such other person or corporation and that the debt in satisfaction of which that amount was paid by the Office was a debt due and owing by the Agent to such other person or corporation.

7. That I/we will pay any moneys becoming due forthwith upon written demand therefor by the Office.

9. That in order to give effect hereto I/we declare that the Office shall be at liberty to act as though I/we were the principal debtor and that I/we hereby waive all and any of my/our rights as surety which may at any time be inconsistent with the provisions hereof.

1. A factor which might lead to liability on the part of the agent to refund commission advanced to FPL was the subsequent lapse of policies.

2. On 1 November 1989 FPL by its solicitors wrote to CRA advising that they acted on behalf of FPL and stating:
   

"In accordance with Clause 13(a) of your First Option Agency Agreement with the Office ("the Agreement"), we hereby give you notice of termination of the Agency and the Agreement effective at 4.00 p.m. 21 November 1989.

Our client hereby reserves its rights under the Agreement and at law generally."

1. On 6 December 1989 FPL's solicitors wrote to CRA demanding repayment of an advance of $50,000. Also on 6 December 1989 FPL's solicitors wrote to CRA (South Melbourne) advising that FPL had calculated the "company's performance bonus entitlement consequent upon the termination of the agency" which were said to disclose that FPL had overpaid the sum of $952,115.59. Demand was made for repayment of this amount and a further amount of $100,000 being for two loans of $50,000 each.

2. On 7 December 1989 FPL's solicitors wrote to Mr McLean making demand under the guarantees as follows:
   

CRA

Loan $50,000.00 CRA (South Melbourne)

Overpayment 952,115.59 Loans 100,000.00 $1,102,115.59

1. On 1 August 1990 FPL commenced proceedings in the Commercial List of the Supreme Court of Victoria against a number of the Carlton Ross companies, including CRA and CRA (South Melbourne) and against Mr McLean and a number of other guarantors. Mr McLean and all but one of the other defendants retained Messrs Sly and Weigall to act on their behalf. On 16 August 1990 a defence was delivered. In relation to the amounts claimed for overpayments of performance bonus the defence pleaded that it was an implied term of the agency agreements that FPL would act with reasonable diligence in relation to the renewal of policies procured by the agents and would not take any unreasonable step likely to cause the non-renewal of a policy. It was also pleaded in par.15(f) of the defence:
   

"So far as the Defendants are able to understand the basis upon which the Plaintiff has calculated the amounts particularised in paragraph 12 (of the statement of claim) the Defendants say that if (which the Defendants do not admit) the lapse rates were as alleged by the Plaintiff, the Plaintiff in breach of the term of the agreements pleaded in sub-paragraph (e) hereof caused a substantial proportion of the lapses of the policies."

1. As to the claims for repayment of the loans, the defendants in substance pleaded that FPL was not entitled to call up the loans because there was an agreement constituted by the June letter and that (as at the date of purported termination on 21 November 1989) in terms of the June letter "the new business productions objectives and lapse objectives had been met."
   The Part X Meeting

2. On 20 June 1991 Mr and Mrs McLean signed an authority under Part X of the Act authorising Mr Taylor to call a meeting of their creditors. On the same day they signed joint and separate statements of affairs. The statement of affairs of Mr McLean included amongst his contingent liabilities an amount of $952,162 as a debt claimed by FPL. It was said to involve "lapses in dispute." The meeting was to be held on 24 July. On 22 July Mr McLean sent a letter to Mr Taylor in the following terms:
   

"Dear Barry,

Re: MALCOLM and DARIANE MCLEAN - Part X

To clarify our recent conversation I would like to point out the main reasons for Friends Provident's alleged debt being placed as a contingent liability for my Part 10 meeting to be held on July 24, 1991.

I believe we were wrongly terminated as a master Agency by Friends Provident Life Office and because of this we currently have a counter claim before the Supreme Court for damages. Friends Provident have made allegations of overpaid commissions. This they maintain was due to overly high levels of lapses. We deny this and point to the following.

1. They have recalculated the lapse ratio at a rate higher than it was in reality in an effort to obtain extra monies.

2. Any lapses that were a result of our very sudden and wrongful termination is hardly our responsibility.

3. Friends Provident made countless blunders in servicing clients, i.e. Sending Commission Statements to new clients and loosing documents etc.

4. After only six months of establishing a very important relationship with us Friends Provident's senior management left their employ. This created a great deal of uncertainty for us and caused severe communications problems which did not resolve themselves for four months. We were very disappointed as Friends Provident had been courting us with all sorts of promises related to developing a sound financial future for Carlton Ross and Assoc., our staff and families.

5. By identifying an actuarial error in our product and then informing us eight months later of this serious oversight, obviously created some very costly problems (a loss of commission for ourselves and our sales people) and caused a large number of our Sales people to leave.

This case is ongoing having been in the Courts for over a year. Our solicitors Sly and Weigall state we have an excellent opportunity to succeed in our claim for damages against Friends Provident.

I believe that as a direct result of Friends Provident's action in this matter my families financial security and well being has been devastated.

Currently we are seeking Legal Aid to continue with the Damages Claim.

For these reasons and many others, I believe that Friends Provident should not be allowed to vote as a unsecured creditor at the meeting of 24 July, 1991.

Yours sincerely,

Malcolm McLean Dariane McLean"

1. The letter appears to have been signed by Mr McLean only.

2. By the time of the meeting Mr Taylor also had in his possession a letter from Sly and Weigall dated 9 July 1991 addressed to Mr N Hanna, one of the other defendants in the Supreme Court proceedings. That letter reported on procedural directions which had been given by a Master on 1 July and included the following:
   

"No order was made requiring you to provide amended further and better particulars of defence and counterclaim. However, Counsel for FPL indicated the Plaintiff's solicitors would issue a summons if deficiencies alleged in your further and better particulars were not rectified. We expect to receive such summons shortly. We confirm our advice of 21 June 1991 that unless we receive our outstanding costs of $5000.00 we shall, upon service of any summons, notify the Court we have ceased to act. We understand there may be a possibility that you are eligible for Legal Aid and enclose Legal Aid application forms (in duplicate) so that you may apply. We point out that financial assistance is not extended to an applicant's retrospective legal costs."

1. At the meeting FPL was represented by its solicitor Mr Charles Leonidas. The minutes of the meeting record that Mr Taylor said that he would not accept the vote for FPL as the debt was in dispute. Mr Leonidas asked the basis for that rejection and the minutes record:
   

"Mr Taylor stated that he had read the opinion of Sly and Weigall and also had discussions with Mr Pat Montgomery of that office. Mr Leonidas asked what figure is being claimed. Mr Taylor stated that a specific figure is not being claimed as it is a damages action under a compensation claim....

Mr Leonidas asked that the documents be tabled at the meeting from which Mr Taylor obtained his reasoning. Mr Taylor stated that he was unable to."

1. After considerable debate the meeting approved a special resolution that Mr and Mrs McLean be required to execute a deed of arrangement in amended terms which provided for the debtors to pay $400 per month for 36 months and to assign to the trustee their "share of the proceeds (if any) from Court action against Friends Provident." Twelve creditors whose debts totalled $705,623.02 (85.4%) voted for the resolution and one creditor with a debt of $110,958.98 (14.6%) voted against. Had FPL been admitted to vote, the special resolution would not have been passed.

2. Subsequent to the meeting FPL's solicitors wrote to Mr Taylor requesting, amongst other things, his reasons for rejecting the FPL vote. On 16 August 1991 Mr Taylor replied stating:
   

"The following are my reasons as Chairman of the Meeting to not permit (FPL) to vote. I obtained that reasoning from information brought to my attention by the debtors and also discussions held with other directors of Carlton Ross Pty Ltd together with the strongly held opinion of Sly and Weigall, Mr Pat Montgomery, that there is an adequate case against (FPL) to fight in the Courts. I enclose a copy of the material that I relied upon in reaching my decision to refuse (FPL) the right to vote and they are as follows:

(a) Letter from Sly and Weigall to Mr N Hanna dated 9 July 1991

(b) Letter from Mr and Mrs McLean to myself dated 22 July 1991."

1. On its face that letter might seem to indicate that the Sly and Weigall letter of 9 July contained the "strongly held opinion" as to the case against FPL. It is plain that the Sly and Weigall letter contains nothing of the sort.
   Default Judgment

2. Subsequently Sly and Weigall ceased to act for the defendants in the Supreme Court action. An application for legal aid in July 1991 was unsuccessful. Although Mr McLean paid his share of the costs, other defendants did not pay and the solicitors took the view that all were jointly and severally liable for the costs. On 10 October 1991 FPL obtained judgment in default of defence to an amended statement of claim. The obtaining of the default judgment by FPL after the deed of arrangement appears to be a breach of s.233(2)(b)(ii) of the Act which relevantly provides that so long as a deed of arrangement entered into in accordance with Part X remains in force it is not competent for a creditor:
   

"(b) except with the leave of the Court and on such terms as the Court imposes -

(i) ...

(ii) to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding."

1. However counsel for FPL did not argue that the default judgment created for present purposes an estoppel as between FPL and Mr McLean. At most, counsel suggested that it might be relevant to the issue whether Mr McLean had a strong defence because, having put forward to the meeting that he had strong prospects of success, he then abandoned the defence. In my opinion, Mr McLean's abandonment of the defence is explicable by lack of funds and not by any lack of confidence in the merits of his case. But for the reasons I shall mention in a moment, the relevant issue is not whether Mr McLean has or believes he has an arguable defence but whether in truth the debt claimed by FPL is owing.
   The Court's function under s.222(1)

2. Section 201 of the Act provides:
   

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

1. It has recently been held by the Full Court that s.201 does not exclude the court's jurisdiction to determine questions concerning the rights of persons to vote at meetings of creditors under Part X: Forshaw v Thompson (unreported) 1 May 1992, at 21 per Lockhart J (with whom Black C.J. and Sweeney J agreed).

2. But some aspects of the exercise of that undoubted jurisdiction need to be considered. Is the court's function confined to a review of the correctness of the chairman's decision, or does the court reconsider the issue afresh? Does the court have to make a final determination as to the validity of a debt in respect of which a creditor claims an entitlement to vote or is it sufficient if an arguable case is raised? Conversely, can a creditor be excluded if the debtor shows an arguable defence to the alleged debt? And does the fact that the debt is disputed make it a "contingent debt" and thus excluded by s.198(2) from debts which confer a right to vote?
   Review or rehearing?

3. In Re Levy (1980) 50 FLR 99 at 113 Bowen C.J. left open the question whether the court is to determine whether the chairman's decision was correct having regard to (a) the material before him or (b) the facts in evidence before the court.

4. In support of (a), it might be said that s.222(1) directs attention to whether the deed "was entered into in accordance with" Part X. Therefore it might be said that the court is reviewing the process by which the deed was entered into and whether the chairman exercised his statutory functions according to law. Moreover, the determination of the right to vote is a function conferred by s.201 of the Act upon the chairman, albeit non conclusively. In aid of this function there is an obligation on creditors to provide particulars of their debts to the chairman (s.198(4)) and the chairman is empowered by s.201 to adjourn the meeting for up to 14 days to investigate the matter, amongst other things no doubt for the purpose of verifying assertions made by the creditor and obtaining legal advice.

5. However I think that the weight of authority is now in favour of the view that the court looks at the evidence presented to it at the time of the application under s.222(1). This was the approach of Fitzgerald J in Re Tregonning (1983) 74 FLR 327 and Beaumont J in Zantiotis v Andrew (No.2) (1988) 80 ALR 299.

6. Practical considerations support this view. For example, a chairman in excluding a creditor from voting might make an error of the kind that would invalidate the exercise of a discretion, as occurred for example in the present case where the chairman mistook the effect of the Sly and Weigall letter. It would seem unjust if a debtor was to be prevented from putting before the court other evidence, perhaps of a very persuasive kind, which showed that the debt was not in truth owing. The limited period allowed by s.201 may be quite insufficient for obtaining witnesses or documents which a creditor may need to prove, or a debtor disprove, an alleged debt.

7. In terms of s.30(1)(a) of the Act, the question in the matter under Part X which the court has power to decide is therefore whether the creditor was entitled under s.198 to vote at the meeting in respect of the debt claimed, or some other amount: cf Zantiotis v Andrew (No.1) (1987) 80 ALR 23 at 26.
   Is an arguable case sufficient?

8. In Beard v Prestige Baking Industries Pty Ltd (1981) 36 ALR 307 which concerned an application under s.222(4) Fox J said (at 325):
   

"It is undoubtedly competent for the court to examine in close detail, definitively if necessary, whether a person claiming to be a creditor for the purposes of the section is one..."

1. Sheppard J, the other member of the majority, appears to have adopted implicitly this approach; see 36 ALR at 341-3. Lockhart J, who dissented in the result, said (at 329):
   

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

It may be sufficient for the applicant to show that he has a prima facie case to be a creditor of the debtor, analogous to the position of an applicant for interlocutory injunctive relief or of a debtor seeking to establish under s41(7) of the Act, that he has a counter-claim, set-off or cross-demand of the kind referred to in s.40(1)(g): Ebert v Union Trustee Co of Australia Ltd (1960) 104 CLR 346, per Dixon C.J., McTiernan and Windeyer JJ. at 350; Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433.

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

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

1. In the event Lockhart J did not find it necessary to determine the standard which must be satisfied by the creditor.

2. In my respectful opinion, it will usually be appropriate for a court to make a finding as to the existence and extent of the alleged debt and not merely whether there is an arguable case. Thus in Re Tregonning (1983) 74 FLR 327 at 330 Fitzgerald J said:
   

"Notwithstanding the existence of the District Court proceedings, I consider that I may appropriately make a finding as to whether Friends' Provident (coincidentally the alleged creditor in that case also) is a creditor of the debtor and, if so, the amount of the debt."

1. His Honour cited Re Levy and Beard. Likewise in Zantiotis v Andrew (No.2) (at 300) Beaumont J defined the substantive issue before him as "whether the debts claimed by the second respondent on 9 September (the date of the meeting) were admissible for the purposes of voting at the Part X meeting." His Honour then proceeded to deal with the various issues as on a final hearing and not in terms of whether a triable issue was raised.

2. I would respectfully suggest this approach is correct in principle. The issue of entitlement to vote at the meeting has to be decided once and for all. There is no later occasion on which the issue may fall to be decided. So the situation is not truly analogous to that which arises on a summons for final judgment or application for interlocutory injunction where the possibility of a subsequent full hearing on the merits is in contemplation. Likewise the alleged "counter-claim, set-off or cross demand" considered in Ebert and Re Brink was one which, according to the claim of the debtor in the bankruptcy court, could be raised at a future date in another court. The Act confers a right to vote on creditors, not persons who have an arguable case that they are creditors. It may be that complex issues of fact and law are raised, but that is a matter to be dealt with by appropriate procedural directions and cannot be determinative of the nature of the jurisdiction conferred on the court.

3. The contrary view would create an anomalous position. If all a creditor had to show under s.222(1) was an arguable case that the alleged debt was owing, it would logically follow that a debtor complaining of the inclusion of a disputed debt by the chairman would only have to show an arguable defence to make out a claim under the same provision. Since there might be an arguable claim and an arguable defence in respect of the same debt, the court would face a dilemma if arguability is the test. The creditor would say "I should have been allowed to vote because I have an arguable claim" and the debtor would say "the creditor should have been excluded because I have an arguable defence."

4. It was accepted, correctly in my view, that the onus lies on FPL to establish that it was a creditor of Mr McLean in the alleged amount. This is simply an application of the ordinary principle that he who alleges must prove. In the converse case, when the applicant under s.221(1) contends that the chairman wrongly admitted a creditor to vote (as in Zantiotis) the onus would lie the other way.
   Contingent Debts

5. For the purposes of s.198(2) a debt is not contingent merely because, at the time of the meeting, it is the subject of uncompleted litigation. In Re Levy 50 FLR at 111 Bowen C.J. said:
   

"Some suggestion was made that because the claims were the subject of proceedings in the Supreme Court, which had not been finalized, they were both contingent and unascertained. This seems to me to misconceive the position. On the view I take of the facts the debts were due before the commencement of the proceedings in the Supreme Court. The proceedings in that court were only a method provided by law for the enforcement of the debts. To bring those proceedings did not change the debts into contingent debts. It is true that if a substantial defence on the merits had been disclosed, this might have led to a different conclusion. However, this would be because a substantial defence was disclosed. It has been said that a debt is "contingent" where there is doubt if there will be any debt at all (Ex parte Ruffle; Re Dummelow (1873) 8 Ch App 997 at 1001.) However, I can discern no defence on the merits in those proceedings or in the material before me."

1. In Forshaw v Thompson (at 24) Lockhart J expressed the same view as that of Bowen C.J. in the first part of the passage just cited. His Honour said:
   

"A contingent debt for purposes of bankruptcy law has a well settled meaning and it certainly does not mean merely any debt which is in dispute."

1. However, I would respectfully disagree with Bowen CJ's qualification that a "substantial defence on the merits" might make a debt contingent. The passage cited from Ex parte Ruffle does not, on examination, support that view.

2. In Ruffle the creditor had been allowed to vote in respect of a judgment debt of pounds 357, which was not disputed, and also for pounds 200 which the creditor estimated as the amount of costs which would be payable. The terms of the statute conferring the right to vote were indistinguishable from s.198(2). The Court of Appeal held that the pounds 200 was an unliquidated debt, and that the creditor should have sworn that at least some certain sum was due. Sir George Mellish L.J. said, at 1001:
   

"The question really is, what is meant by an 'unliquidated debt' in the 3rd sub-section. The fair construction of the clause seems to me this: 'a contingent debt' refers to a case where there is a doubt if there will be any debt at all; 'a debt, the value of which is not ascertained,' means a debt the amount of which cannot be estimated until the happening of some future event; and 'an unliquidated debt' includes not only all cases of damages to be ascertained by a jury, but beyond that, extends to any debt where the creditor fairly admits that he cannot state the amount. In that case there must be some further inquiry before he can vote."

1. Thus Ruffle was not directly concerned with the question of contingent debts. In any case, the reference by Sir George Mellish to "a case where there is doubt if there will be any debt at all" is quite consistent with the usual understanding of the concept of a contingent debt, that is to say a debt which will only become payable upon the occurrence of some future event which may never happen, for example a guarantee where liability is contingent upon a default by the principal debtor. In such a case, there may never be any debt at all.

2. Accordingly I conclude that the fact that FPL's claim against Mr McLean was in dispute in the Supreme Court proceedings does not make FPL's debt a contingent debt for the purposes of s.198(2), whether or not Mr McLean's defence might be said to be substantial.
   Certificates of Liability

3. In the hearing before me FPL tendered a certificate dated 15 May 1992 under cl.6 of the guarantee of 11 July 1988 to the effect that the amount owing by CRA (South Melbourne) to FPL as at the date of the certificate was $1,052,115.59. There was also tendered a similar certificate of the same date under cl.6 of the guarantee of 15 July 1988 to the effect that the amount owing by CRA to FPL as at the date of the certificate was $50,000. In terms of cl.6 of the guarantees those certificates are prima facie evidence of the matters stated. Absent any evidence to the contrary or any positive defence, the certificates are sufficient to establish on the balance of probabilities that the relevant amounts are owing by the respective companies to FPL. The execution of the guarantees not being in dispute, it would also follow that Mr McLean is prima facie liable for these amounts.
   Defences to FPL's Claim

4. It was argued that the agency agreements had not been validly terminated because they included an implied term that they could only be terminated on or after 1 July 1992, and then only on reasonable notice. The argument is founded on cl.19 of the letter of intent of 24 June 1988.

5. I do not accept this argument. I think the suggested implied term is inconsistent with the express terms of the agency agreement and in particular cl.13 (a).

6. As to the calculation of lapse rates, Mr McLean's case puts in issue whether FPL have made the correct calculation. It is pointed out that the calculation given for CRA (South Melbourne) for the year ended 30 June 1989 was 17.52% whereas the figure up to and including May 1989 was 8.2%.

7. However I think that such criticism is not sufficient to displace the prima facie effect given to the certificates of liability by cl. 6 of the guarantees.

8. It was also argued that the notices given by FPL in January and May 1989 which varied its performance bonus scheme (see statement of claim par.9) were a variation of the agency agreements which discharged Mr McLean's liability under the guarantees. This point had not been raised prior to the hearing before me.

9. The answer however is that cl.9 of the guarantee is a principal debtor clause which operates to prevent the guarantee being discharged by variation of the principal contract: see O'Donovan and Phillips, The Modern Contract of Guarantee, p 266. In any case, the principal contract provides in terms for such variation: see cl.3 (1)(3) and O'Donovan and Phillips, op cit, p 263.
   Counterclaim by Mr McLean

10. The counterclaim in the Supreme Court proceedings pleads in par.59 a repudiation of the agency agreements by wrongful termination, by refusal to pay commission and by "publicly asserting that the agreement had been or was to be terminated." Damages are alleged to be lost commission and it is said full and further particulars were to be supplied prior to trial. No particulars were in fact supplied, either in the Supreme Court proceedings or the application before me.

11. Here the onus lies on Mr McLean. For the reasons already mentioned, I do not think the agency agreements were wrongfully terminated. The only evidence as to entitlement to commission are the certificates of entitlement. The alleged public assertion as to termination does not add anything to the allegation of wrongful termination itself. There is no claim for defamation.

12. Mr McLean's letter to Mr Taylor of 22 July 1991 made a number of complaints about alleged "blunders" of FPL such as losing documents and also referred to the early departure of some of its senior management. The defence in the Supreme Court proceedings pleads in par.15(e) an implied term that FPL would act with reasonable diligence in relation to the renewal of policies procured by the agents and would not take any unreasonable steps likely to cause the non renewal of a policy. It is alleged in par.15(f) that FPL, in breach of that term, "caused a substantial proportion of the lapses of the policies." No further particulars are given and the alleged term does not appear in the counterclaim.

13. Mr McLean's affidavit filed in the present application refers to "considerable problems" working as agent for FPL. There is reference to the departure of senior staff and an occasion in early 1989 when FPL lost 120 policy documents sent to it by agents for processing. Commission statements were sent by mistake to 180 clients and reminder notices were sent three months late.

1. Such material as there is on this issue makes no attempt to quantify the loss said to have been suffered by the agents. And moreover a counterclaim by the agent sounding in damages does not avail Mr McLean as guarantor.

2. I conclude therefore that FPL was a creditor of Mr McLean in the amount claimed and was wrongly excluded from voting at the meeting.
   Mrs McLean

3. It is not suggested FPL was a creditor of Mrs McLean. It was not entitled to vote on any special resolution requiring her to execute a deed of arrangement under s.204(1)(b). I do not see any basis on which the deed can or should be declared void as against her.
   Discretion

4. Mr McLean raised a number of discretionary matters against the making of the declaration sought by FPL.

5. He lives with his wife and six children aged 14 to two in a house at Yarrambat. He and his wife are joint proprietors. The property is said to be worth $275,000 and is encumbered by four mortgages totalling $280,000. He is presently able to earn income as an insurance agent. Most of his work is placed with Zurich Life. That company has a policy not to engage or continue to engage undischarged bankrupts. According to a letter from Zurich Life which was in evidence, Mr McLean's agency "would be under review" were he to become bankrupt.

6. Mr McLean's present income is not disclosed, but he deposes that he is "able to continue to service mortgage payments on the property." Even assuming an average interest rate of 15 per cent and no capital repayment, that would require more than $40,000 per year out of after tax income. He says that if he were prevented from making mortgage payments "the equity in the property would decline."

7. One of his children has a condition which requires special care.

8. He said that if the deed of arrangement were declared void, the creditors would be worse off to the extent of $14,400.

9. I am not persuaded that these factors should weigh against the exercise of the discretion to declare the deed void. Whether acceptance of a debtor's capacity to earn income under a Part X arrangement is preferable to sequestration is essentially a matter for the commercial judgment of creditors and is I think much better left to a meeting of creditors than to the court.

10. I do not think personal and family factors are relevant to the exercise of the discretion. In any case, insofar as there is an equity in the property, which seems unlikely even on Mr McLean's figures, it is not apparent why he should be entitled to that to the exclusion of his creditors.

11. I should add that the letter from Zurich Life is something less than an unequivocal intimation that bankruptcy will inevitably lead to the termination of his services. I was not referred to any statutory provision or commercial consideration which would necessarily prevent an undischarged bankrupt from working as an insurance salesman.
    Orders

12. I will therefore make the orders sought as against Mr McLean. Since the application fails as against Mrs McLean, I will adjourn the question of costs for further argument. There will be orders as follows:
    1. Declare that the deed of arrangement made on 24 July 1991 between
    

William Malcolm McLean and Dariane Lee McLean as debtors and Barry Keith Taylor as trustee was not entered into in accordance with Part X Bankruptcy Act 1966 (as amended) in that

(a) The applicant, being a creditor of William Malcolm McLean, was wrongfully excluded from voting at the meeting of creditors held under Part X of the Act on 24 July 1991;

(b) In all the circumstances, had the applicant been allowed to vote against the resolution as was its intention, the special resolution would not have been passed.

2. Declare that upon the above grounds the said deed of arrangement

is void as between the applicant and William Malcolm McLean.

3. Order that the estate of William Malcolm McLean be sequestrated.

4. Application otherwise dismissed.

5. Costs reserved.

6. Liberty to apply.