Re Szeitz, M. and anor

[1992] FCA 551

Re: MICHAEL SZEITZ and DONNA SZEITZ
Ex parte: COUNTRYWIDE BUILDING SOCIETY (IN LIQUIDATION)
And: DEAN ROYSTON McVEIGH
No. X 582 of 1991
FED No. 551
Bankruptcy - Equity

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA
GENERAL DIVISION
Hill J.(1)

CATCHWORDS

Bankruptcy - composition - substantial creditor denied vote at meeting of creditors - whether court could go behind judgment debt to determine standing of judgment creditor to vote - whether composition to be declared void - whether guarantee executed by debtor in favour of applicant

Equity - whether party guilty of unconscionable conduct in obtaining guarantee

Bankruptcy Act 1966 (Cth) s222

Re Tregonning; Ex parte Friends' Provident Life Office (1983) 74 FLR 327 at 331, applied

Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 462, 474, applied

Re Williams; Ex parte the Official Trustee in Bankruptcy (Hill J, 21 August 1990, unreported), applied

HEARING

MELBOURNE

#DATE 2:7:1992

Counsel for the Applicant: P.G. Cawthorn

Instructed by: Molomby and Molomby

Solicitors for the Respondent: J.M. Smith and Emmerton

ORDER

THE COURT DECLARES THAT:

1. The composition entered into by Michael Szeitz on 29 January 1992 is void.

THE COURT FURTHER ORDERS THAT:

2. The matter be stood over until 3 August 1992 at 9.30am before Mr Justice Hill.

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

JUDGE1

The Applicant, Countrywide Building Society (in liquidation) applies to the Court for an order declaring that a composition entered into by Mr Szeitz, under Part X of the Bankruptcy Act 1966 ("the Act") on 29 January 1992 is void. That composition was entered into by Mr Szeitz and his wife, who is also a party to the present proceedings. Alternatively, the applicant seeks an order setting aside the composition under s239 of the Act or an order under s242 of the Act terminating the composition. In respect of the order sought under s239 of the Act, the applicant seeks an extension of time for making the application.

1. By an amendment to the application made with leave at the commencement of the hearing, the applicant also challenges a decision of Mr McVeigh, the Controlling Trustee of the composition ("the Trustee") to exclude the applicant from voting at the meeting at which the resolution accepting the composition was purported to be passed.

2. Mr and Mrs Szeitz executed an authority pursuant to s188 of the Act on 10 December for the calling of a meeting of creditors to propose a composition under Part X. The Trustee having consented to act as trustee of the composition, a circular was forwarded to creditors bearing the date 2 January 1992 and calling a meeting for 15 January 1992. The proposed composition provided for Mr and Mrs Szeitz to pay to the Trustee $26,400 over a three year period by monthly installments. After subtracting the Trustee's fees and commission, the composition was estimated to give a return to unsecured creditors of approximately 1.3c in the dollar, on the basis that there would be payment to creditors of both the joint and separate estates equally.

3. Enclosed with the notice was a copy of a statement of affairs of Mr and Mrs Szeitz as at 4 December 1991. Their joint unsecured creditors totalled $35,600, the debts of secured creditors were estimated to exceed the value of securities by $33,600. The joint creditors were ANZ Bank Visa, Barclays Visa and Chase AMP Visa; the secured creditors were ANZ Bank and Metro Co-operative. The only joint assets disclosed were household furniture and effects estimated to be worth $25,000.

4. In a separate statement of affairs forwarded with the notice Mr Szeitz disclosed unsecured liabilities of $1,560,415, made up of a debt to the applicant of $1,530,000 and $30,000 to Manchester Unity and $415 to a firm of solicitors. After taking into account a secured creditor to the extent that the debt exceeded the value of the security for that debt and a timeshare unit estimated to be worth $3,000, the statement of affairs disclosed a deficiency of $1,567,415. Mrs Szeitz did not disclose any separate assets or liabilities.

5. Under the heading "Comment on the Statement of Affairs" the circular stated:
   

"A review of the Statement of Affairs discloses one major creditor resulting from a personal guarantee given by Michael Szeitz. This personal guarantee was given on the basis of a verbal agreement between Mr Szeitz and others involved in a property redevelopment project. The verbal agreement led Mr Szeitz to believe that he would have 50% equity in the project. Mr Szeitz was interested in the project because of his previous real estate experience. Mr Szeitz was not issued with any equity despite repeated requests for a share certificate. Advice from the property development company's lawyers stated that the company's directors did not require any change to the equity structure of the company but that Mr Szeitz's personal guarantee was to remain in place. Mr Szeitz had no involvment in the development from the time he signed the guarantee.

Mr Szeitz then contacted the Countrywide Building Society and informed them of the circumstances in place surrounding his personal guarantee and requested that the guarantee be annulled. The Countrywide Building Society replied through its solicitors that they would continue to exercise their rights pursuant to the guarantee.

In January 1991 a notice of demand was issued to Mr Szeitz calling in the guarantee. The demand was for $2,300,000. The property concerned has since been sold for $775,000 leaving a balance of $1,525,000.

Mr Szeitz has received informal legal advice from a number of sources and all have advised him that he has a very good chance of having the guarantee quashed. However the funds required for such legal proceedings are not available and hence Mr Szeitz's wish to enter into this composition."

1. The Trustee expressed the opinion that it would be in the best interests of creditors to accept the composition, as it would lead to a greater return to creditors that a bankruptcy.

2. On 15 January 1992 the meeting so convened was held. Present at it, in addition to the Trustee, were representatives of Barclays Bank Aust Ltd, ANZ Banking Group Ltd and the Applicant. Some proxies were also tabled.

3. Mr Szeitz was given the opportunity to expand on the statement of affairs. He read what the minutes refer to as a "prepared statement", but which was in fact a letter written by Mr Szeitz on behalf of himself and his wife on 20 November 1991 to Mr Healy of KPMG Peat Marwick, the firm of which the Trustee is a partner. It details Mr Szeitz's version of the commercial transaction involving the proposed development in Bridge Road, Richmond, which was financed by the applicant. The details of that development are not of significance in the present case. What is important is the following comment:
   

"On the above basis, I agreed to give a personal guarantee for the loan.

From the time I signed the guarantee, I had no involvement in the development... The guarantees are joint and several..."

1. Mr Szeitz says that he elaborated upon the matters discussed in the letter. According to the minutes of the meeting he stressed that it was his firm belief that if the personal guarantee did not exist he would have been able to pay all of his debts in full. He outlined his current employment situation, but although the minute refers to his being employed by Bongiorno Insurance, he referred, according to his evidence before me, to that company in the context that he was attending a training course at its premises.

2. The meeting discussed the question of the personal guarantee and the possibility of challenging it. The question of ANZ Banking Group and Barclays Bank Ltd funding a legal opinion in respect of the validity of the guarantee was canvassed. The applicant made its position clear that it opposed the composition, unless it was "redrafted". The meeting was adjourned until 27 January.

3. Prior to the adjourned meeting arrangements were made for an opinion to be given by a firm of solicitors. It suffices to say that the opinion is qualified by the self evident proposition that each case must depend upon its own facts. The conclusion was that:
   

"the propositions in favour of the Guarantee being set aside by reason of the unconscionable conduct of Countrywide are 'arguable'".

1. The final paragraph of the opinion, in addressing the position of the Trustee, adopts a rather more aggressive note. The writer states that:
   

"Although I have expressed the opinion the Guarantee would be set aside by the Court, that is, of course, my opinion only."

1. The opinion was tabled at the adjourned meeting. The same persons were present. After it was tabled, Mr McVeigh announced that it led him to believe that the applicant should not be admitted to vote. There was discussion on this question. The minutes record that the representatives of both Barclays Bank and the ANZ Banking Group announced that they would vote for the composition if the applicant was not admitted to vote. Mr Szeitz agreed that these representatives conveyed the idea that they would reject the composition if the applicant were admitted to vote. Ultimately, Mr McVeigh ruled that he would not, on the basis of the opinion, admit the applicant to vote. The composition was then accepted by a special resolution of creditors, excluding the applicant. Thereafter the representative of the applicant announced the applicant's intention to challenge the matter in court.

2. The trustee, in appearing, took the view that it should submit to any order the court should make in the application, other than as to costs. The real contest was between the applicant and Mr Szeitz, as to the validity of the guarantee. Mr Szeitz submitted that the guarantee was void, either because the signature upon it was a forgery or because the applicant breached its fiduciary duty to him at the time it was entered into. It is accordingly necessary to go back earlier in time, to detail the events surrounding the finance arrangements between Hewson Pty Limited and the applicant which included the necessity of a guarantee being given by Mr Szeitz.

3. Mr Szeitz was a licensed real estate agent and a registered tax agent. He was a director of Byvan Management Pty Ltd, a substantial company having, so Mr Szeitz said over a hundred million dollars worth of property under management. Mr Szeitz says that he was a director of the company only because he was a licensed real estate agent, it being necessary that a director of that company hold a real estate license, having regard to its business activities. He said that despite his directorship he was not involved in the management of the company. That was left to a Mr Shannon, who was not a director of the company, but was its real controller.

4. Mr Szeitz had been involved in two joint ventures involving property through companies called Czar Pty Limited and Ackto Pty Limited. In both at some time Mr Shannon had also been involved. Both had involved Mr Szeitz signing joint and several guarantees to financiers. Mr Shannon and Mr Szeitz decided to go into another joint venture involving land at Richmond. Together they attended at the premises of the applicant to discuss an application for finance for the proposed joint venture. They spoke to a Mr Watt and discussed with him the commercial details of the development. Thereafter Mr Szeitz wrote to Mr Watts on 30 November 1989 to supply certain "evidence" in support of the feasibility study which had been provided to the applicant in support of the application.

5. Apart from these contacts, there was no further direct communication between Mr Szeitz and the applicant. Such further meetings as may have taken place were between Mr Shannon and representatives of the applicant, or through the intervention of solicitors.

6. On 18 December 1989 it would seem that the Applicant made a formal offer of finance. This document, if it existed was not in evidence. However a letter of acceptance accepting an offer of 18 December 1990 was signed "for and on behalf of Hewson Pty Ltd" by Mr Shannon and Mr Szeitz. Their respective signatures on the letter of acceptance bear the date 9 January 1990. There was a letter of offer for finance from the applicant addressed to the Secretary, Hewson Pty Ltd c/- of Byvan Management Pty Ltd which bears the date 8 January 1990 tendered in evidence. That letter offered to Hewson Pty Limited, as borrower a facility of $1,718,762, plus capitalised interest of $140,000. An establishment fee of $141,900 was payable to the applicant. The letter provided that the advance was to be jointly and severally guaranteed by Mr Shannon, Mr Szeitz and a Mr Davidson.

7. At some stage, Mr Davidson had come into the picture. According to Mr Szeitz, Mr Shannon took the view that the participation of a third investor was necessary to fund the deposit to purchase the property. Mr Szeitz agreed to this course with some reluctance, but on the basis that Mr Davidson would have a fifty per cent equity in the project and Mr Shannon and Mr Szeitz would share the remaining 50% equally between them. This change of plans may well have prompted the need for a second letter of offer and a second acceptance. Thereafter Mr Szeitz pursued with Mr Shannon the question of obtaining a share certificate in respect of the shares in Hewson Pty Limited which Mr Shannon had agreed were to be issued to Mr Szeitz. Hewson Pty Limited was the company chosen as the joint venture company, but it appears that Mr Szeitz never became a director or shareholder in that company.

8. Tendered in evidence by the Applicant was the duplicate of a letter, prepared probably by the applicant's solicitor and which bore the typewritten date 23 January 1990. It was addressed to Mr Szeitz and contained a recommendation on behalf of the solicitor's client that Mr Szeitz take independent legal advice as to the obligations that he would incur under the guarantee. The letter requested that acknowledgment of receipt of it be made by signing and returning the duplicate. A signature appearing to be that of Mr Szeitz appears on the bottom of the letter by way of acknowledgment. Mr Szeitz deposed that he could not remember signing that letter. Similar documents were tendered signed by Mr Shannon and Mr Davidson.

9. Also tendered in evidence was a document headed "Acknowledgment and Authority" bearing date 25 January 1990, apparently signed by each of Mr Shannon, Mr Szeitz and Mr and Mrs Davidson in which they acknowledged receiving the "Memorandum of Common Provisions" incorporated into mortgages over properties which were to be provided as security for the financial accommodation which the applicant was to provide. Mr Szeitz deposed that he could not remember either receiving or signing that acknowledgment either.

10. On 2 February 1990 there was a further letter from the applicant to the Secretary, Hewson Pty Limited, addressed in care of Byvan Management Pty Limited confirming that the application for finance had been approved in principle. That letter also provided as a condition of the advance that it be jointly and severally guaranteed by Messrs Shannon, Szeitz and Davidson. The document contained a further letter of acceptance form to be completed by Hewson Pty Limited. The letter of acceptance form was not apparently completed or if it were, the completed form was not tendered in evidence.

11. Finally, there was tendered in evidence the loan agreement and guarantee bearing date 16 February 1990. That document was signed under the common seal of Hewson Pty Limited by Mr Davidson as a director and Mr Shannon as secretary of that company, and by each of Mr Shannon and Mr Davidson as guarantors. Additionally there was on that document a signature appearing to be that of Mr Szeitz as a joint and several guarantor with Mr Shannon and Mr Davidson. Mr Szeitz had no recollection of signing this document either. His signature appeared to have been witnessed by Ms Vanderveen, who was a secretary employed by Byvan Management Pty Limited to perform secretarial services for Mr Shannon and Mr Szeitz. Mr Szeitz denied the signature was his and suggested that it had been forged. This document was forwarded to the Building Society by the solicitor who purported to act for Hewson Pty Limited with a letter of 14 February 1990 enclosing, inter alia, security documents.

12. Also forwarded to the Building Society at some time was a statement by Mr Szeitz of his assets and liabilities as at 1 February 1990. This was not disputed by Mr Szeitz who agreed with the material contained in it. His assets as at that date totalled, according to the document, $1,246,000, and his liabilities $788,000, leaving a surplus of $458,000.

13. The financial accommodation sought was in due course provided by the applicant to Hewson Pty Limited on 16 February 1990. By, at the latest, 2 August 1990 Mr Szeitz's attempts to obtain evidence, by way of a share certificate, of his promised equity in Hewson Pty Limited had brought him into conflict with Mr Shannon. On that date, he wrote to the Administrator of the Applicant a letter in the following terms:
    

"I refer to the above loan which relates to a property in Bridge Road, Richmond. At the time of the application, I was to be a Shareholder of Hewson Pty Ltd and therefore have a vested interest. A guarantee was signed by myself and the loan was cross collaterised with loans 1236628 and 1180673.

The shares were never issued, nor I believe ever intended to be issued, in my name and therefore I have no interest, financial or otherwise, in the property.

I therefore demand the release of my guarantee which is non-enforceable and any reference to my other loans is to be deleted."

1. On 13 December 1990 a liquidator was appointed to the applicant by the Registrar of Building Societies. Thereafter Hewson Pty Limited, as alleged by the applicant, defaulted on 11 October 1991 in its obligation to the applicant. Demand of the guarantors, which was alleged to have been made on 11 October 1991 was unsatisfied. The amount sought to be recovered was $2,3522,225.17, being the amount said to be owing as at 28 October 1991. On 28 October 1991, the applicant commenced proceedings against Hewson Pty Limited and each of the apparent guarantors by way of statement of claim to recover the amount said to be owing.

2. A notice of appearance was entered on behalf of Mr Szeitz on 15 November 1991, but no further steps were taken by him. According to Mr Szeitz this was the result of a lack of money to instruct lawyers. On 6 January 1992 a default judgment was obtained by the applicant against Hewson Pty Limited and the guarantors in the sum of $2,352,225.17 together with interest of $99,064.12 and costs. Subsequently the property the subject of the applicant's security was sold and the amount due reduced, so that the amount owing by Hewson Pty Limited, and the subject of any guarantee of Mr Szeitz stood at $1,819,972.69 including accrued interest as at the date of the present hearing.

3. It is in these circumstances that the applicant says that it was a creditor of Mr Szeitz and complains that it was denied the opportunity to vote on the composition. This denial, so it is alleged by the applicant, entitled it to an order of the Court under s222 of the Act declaring that the composition was void. Although the amended application relied upon other sections, in argument only s222 was ultimately pressed as the apposite section in the present circumstances. It is therefore unnecessary to consider whether the other sections referred to in the application could have been invoked by the applicant.

1. Section 222 is in the present terms, so far as is presently relevant:
   

"(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... 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 ... composition is void ... on the ground specified in the application ..."

1. In my view if the applicant was a creditor of Mr Szeitz and was improperly excluded from voting by the Trustee, then s222 empowers the Court to make a declaration that the composition was void: Re Tregonning; Ex parte Friends' Provident Life Office (1983) 74 FLR 327. In that case the creditor did not have, as here, the advantage of a judgment debt. Having found that a debtor-creditor relationship existed, Fitzgerald J said at 331:
   

"Although the power to determine the rights of persons to vote at meetings of creditors under Pt X and the amounts of the debts in respect of which they are entitled to vote is given by s201 of the Act to the chairman of the meeting and s225 gives evidentiary effect to a certificate in respect of the chairman's decision, the decision is not entirely beyond question. Notwithstanding that there may perhaps be room for argument based on the definition of 'special resolution' in the Act if it is applicable, it has been accepted without question that a declaration such as is sought in this case is appropriate if a creditor entitled to vote was improperly excluded from votinig when the vote, if cast against the resolution, would have resulted in its defeat: see Re Segal; Lensworth Finance Ltd v Segal and Ward (1975) 45 FLR 85 at 91, 93 per Riley J; Re Levy (1980) 50 FLR 99 at 115; Re Moloney; Ex parte Field (1981) 51 FLR 31 per Lockhart J. It seems that the exclusion of such a creditor from the vote means that there has been no valid special resolution and, accordingly, that the deed was not 'entered into in accordance' with Pt X: see s222(1).

1. In the present case, as I have already observed, the applicant had a judgment in its favour against Mr Szeitz. Although that judgment was obtained by default, it was nevertheless a judgment and it would be, if indeed it were ever appropriate, a rare case where a trustee would seek to go behind a judgment and reject the judgment creditor as being a "creditor" for the purposes of determining who was entitled to vote at the meeting. I do not need to decide whether it would ever be appropriate for a trustee to reject a judgment creditor as a creditor or indeed if the evidence before the trustee in the present case and the opinion of the solicitor warranted that course being adopted here.

2. On the other hand, despite submissions to the contrary by the applicant, it is clearly open to the court in its bankruptcy jurisdiction to look behind a judgment debt in an appropriate case to see whether there was behind it in truth a real debt. This is particularly the case where the debt was obtained by default: Wren v Mahoney (1972) 126 CLR 212, Boral Johns Perry Industries Pty Limited v Piccardi (23 June 1989, Full Court of the Federal Court, unreported); Wolff v Donovan (1991) 29 FCR 480 at 485-6. The occasions where this would be appropriate are not limited to the hearing of bankruptcy petitions, but extend in my opinion to cases where an application is made to the court to set aside a composition or scheme of arrangement under s222.

3. However, in the present case I am of the view that when the circumstances of the relationship between the applicant and Mr Szeitz are examined, it is clear that behind the judgment debt obtained by the applicant there was a real debt.

4. The substantial submission of Mr Szeitz concerned the execution of the guarantee. It may be observed that both in correspondence to the applicant and the Trustee Mr Szeitz had referred to the guarantee as having been executed by him. Nowhere was there any suggestion that the guarantee was not his deed and that the purported execution by him was a forgery. The signature on the guarantee was, as it was put in evidence, not signed by Mr Szeitz with his "customary flourish" but a glance at a number of documents admittedly signed by him, showed considerable variation in his signature. However, the matter was not left in doubt after Ms Vanderveen gave evidence of witnessing his signature in his office on an occasion when both Mr Shannon and he were present.

5. Ms Vanderveen was not a party to the present litigation. There was no reason for her to prevaricate. She said, and I accept her evidence, that she would never have signed her name in advance of any signature by Mr Szeitz and given the document to Mr Shannon, and had never done so. Her evidence was not challenged to any extent. It was put to her that she had told Mr Szeitz some time ago that she had no recollection of having witnessed the document. She denied having said so, although she recalled a conversation with Mr Szeitz about her witnessing the document. I find that Mr Szeitz did in fact execute the guarantee in the presence of both Mr Shannon and Ms Vanderveen. In so finding I do not find that Mr Szeitz failed to tell the truth in the witness box. I think that he has throughout the case and as far as I can judge in his dealings both with the applicant and the Trustee conducted himself honestly and openly. It seems likely that the predicament in which he now finds himself has come about by his failure to obtain independent legal advice in respect of the joint venture transaction, a failure which I am sure he now regrets.

6. The subsidiary argument was that the applicant owed Mr Szeitz a duty to inform him that he neither was a director or shareholder in Hewson Pty Limited, when the applicant became aware of that fact and before Mr Szeitz executed the guarantee. The first difficulty with this submission is that it was never proved in evidence either that the applicant knew that it was intended that Mr Szeitz become a director and shareholder of Hewson Pty Limited, or that if it knew, it became aware before the execution of the guarantee that Mr Szeitz had not become a director and shareholder. Mr Szeitz submitted that I should infer that the applicant would have conducted a company search and would have thereby been apprised that Mr Szeitz had not become a director and shareholder. The applicant's file was made available to Mr Szeitz for inspection, but if such a search was available, it was not tendered.

7. The leading authority on the circumstances where a court may, on the application of a guarantor, set aside the guarantee as against a lender to a third party is the decision of the High Court in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447. In that case a guarantee given by an elderly Italian couple with security over their home in favour of a bank to secure an overdraft to their son's company was set aside. The bank was aware that the company was in financial difficulties and the guarantee was to secure existing as well as future indebtedness. The leading judgment was that of Deane J, with which Mason and Wilson JJ. agreed, although each of Mason and Wilson JJ., also delivered separate judgments. The foundation of the decision was the jurisdiction of equity to relieve against unconscionable dealing. That jurisdiction depended upon the existence of circumstances in which (per Deane J at 474):
   

"(i) a party to a transaction was under a special disability in dealing with the other party with the consequence that there was an absence of any reasonable degree of equality between them and (ii) that disability was sufficiently evident to the stronger party to make it prima facie unfair or 'unconscientious' that he procure, or accept, the weaker party's assent to the impugned transaction in the circumnstances in which he procured or accepted it."

1. In such a case the onus is imposed upon the stronger party (in Amadio, the bank) to show that the transaction was fair, just and reasonable. The jurisdiction is related, albeit distinct, from the relief which may be granted where undue influence is proved. The cases where unconscionable conduct may be found can not be exhaustively catalogued. They include circumstances such as poverty, need, sickness, infirmity, age, illiteracy or lack of education or special circumstances where assisitance or explanation will be necessary. However, as Mason J observed in Amadio at 462, mere difference in bargaining power of the parties will not suffice to make out a case of special disadvantage:
   

"(T)he disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party."

1. The present is not a case where undue influence could be made out. Nor could it be said that the applicant was in breach of the limited obligations of a financier to disclose to the intending surety anything which had taken place between it and the principal debtor which "was not naturally to be expected: see Amadio at 463 per Mason J.

2. The present case stands in considerable contrast to the facts in Amadio. The borrower seeking the funds did so for the purpose of a new project; it had no existing indebtedness and the guarantee was only in respect of a future indebtedness. Mr Szeitz was neither elderly or illiterate. It may well be the case that he had little experience in his business affairs with guarantees, although in his personal dealings he had twice committed himself to joint and several guarantees for joint venture projects. Be that as it may, he approached the applicant with Mr Shannon for finance for a joint venture through a company. He was aware (this was not denied) that the giving of a guarantee was a precondition of the advance being made. The applicant, through its solicitors, warned him of the need for separate legal advice on the matter of the guarantees. I find that it is more probable than not that Mr Szeitz signed the acknowledgement of receipt of that warning. He chose to ignore it. Not only that, but he signed the guarantee document, without ensuring that he had become a shareholder and director of Hewson Pty Limited. He now seeks to have the guarantee ignored by a court in bankruptcy on the grounds that the financier had an obligation to advise him that he was not a shareholder of the borrower, when he took no steps himself to ensure that he was, before he became liable on the guarantee. In my view Mr Szeitz has not made out a case that he was placed in such a position of disadvantage vis-a-vis the applicant such that the applicant was guilty of "unconscionable conduct" of a kind as would justify a court of equity setting aside the guarantee which he gave.

3. It follows that the applicant was a creditor of Mr Szeitz and was improperly excluded from voting by the Trustee. Hence, subject to any discretionary matters, the applicant is entitled to a declaration that the composition is void.

4. The jurisdiction of the Court under s222 to declare a composition or arrangement to be void is discretionary: Musolino v Sidiropolous (1991) 101 ALR 235 at 245. It was submitted that in exercising that discretion I should take into account the fact that no suggestion has been made that Mr Szeitz acted in any way dishonestly or such that the public scrutiny of his affairs in bankruptcy was warranted. Further, it was submitted, the reality of the situation was that if the estate of Mr Szeitz were to be administered in bankruptcy, it could be expected that the creditors would receive no dividend at all, whereas, under the composition a small dividend would be available for creditors.

5. I have taken into account these matters. However, against them must be balanced the fact that the applicant was the largest creditor by far. It did not approve of the composition and at least two other creditors only approved of the composition on the basis that the applicant would not participate in it, thereby releasing a large dividend for distribution to them. While the Court will often not interfere with a composition or scheme which has been approved by creditors on the basis that the commercial decisions of the creditors will generally be respected, the present application is to set aside a composition which has been approved by creditors holding only a very small percentage of the debts owing. Further, the amount available to creditors under the composition once the applicant participates in it is quite small, so that there is little harm to those creditors who otherwise resolved to approve it by the making of a declaration that the composition was void.

6. There is another matter to which reference should be made and which I raised with counsel during the course of the argument. The composition concerned both Mr and Mrs Szeitz. Yet, so far as the minutes of the meetings of creditors disclosed, only one meeting was held of all creditors joint or several and only one resolution was passed approving the compromise. A consequence is that the composition should be declared void for this reason as well.

7. The problems which arise when an arrangement or compromise are proposed in a circumstance where there are joint creditors as well as several creditors have been explored in a number of cases including Re Brown; Ex parte Humes Ltd (1987) 16 FCR 378 (Pincus J), Re Cullen; Ex parte the Official Trustee in Bankruptcy, (3 December 1985, Sheppard J, unreported),Re Edwards (1987) 14 FCR 113 (French J) and Re Williams; Ex parte the Official Trustee in Bankruptcy (Hill J, 21 August 1990, unreported). The message in these cases does not appear to have reached those who act as chairpersons of meetings of creditors. I repeat what I said in Re Williams:
   

"In my view, the proper interpretation of the Act is that where a composition is proposed to be made between two or more debtors (having joint and several debts) and their creditors joint and several, there is a requirement, subject to r100C, that there be held separate meetings of the several creditors of each debtor as well as a separate meeting of the joint creditors of each.

These separate meetings could, of course, be held consecutively. They may also, and this is reinforced by r100C, be held concurrently. Where they are held concurrently in circumstances where it can be said there is in truth but one meeting as contemplated by r100C, it is nevertheless important that the distinction be retained between the composition that is offered between a debtor and his or her several creditors and the composition that is being offered between the debtors and their joint creditors.

Accordingly, there must be proposed to the separate creditors of each debtor the respective resolutions to be passed with respect to the separate liabilities, and to the joint creditors the resolution proposed with respect to the joint liabilities. Voting in respect of each resolution should be open only to the appropriate class of creditor."

1. The applicant included in its application in addition an application for a sequestration order against the estate of Mr Szeitz. I note an agreement reached between the parties that if I were to declare that the composition was void, the question of whether a sequestration order should be made should be adjourned until 3 August 1992, on which date if the parties have been unable to come to an agreement in the meantime Mr Szeitz would not oppose the making of such an order.

2. Accordingly I propose to declare that the composition entered into by Mr Szeitz on 29 January 1992 is void. I will hear argument on the question of costs.