Scuderi v Morris

SUPREME COURT OF VICTORIA

COURT OF APPEAL

No. 5491 of 1999

JOSEPH SCUDERI
	Appellant
v.
JACK MORRIS
	Respondent

---

JUDGES:	ORMISTON, BUCHANAN and CHERNOV, JJ.A.
WHERE HELD:	MELBOURNE
DATES OF HEARING:	19 and 20 March 2001
DATE OF JUDGMENT:	29 October 2001
MEDIUM NEUTRAL CITATION:	[2001] VSCA 190

---

CONTRACT – Existence of a binding agreement – Illegality – Composition by creditors - Good faith between creditors in a composition - Equitable fraud – Whether agreement between creditor and third party for secret additional benefit illegal - Voluntary administration under Part 5.3A of Corporations Law – Whether Part 5.3A affects principle of good faith between creditors - Whether acting on behalf of a company to be formed.

---

APPEARANCES:	Counsel	Solicitors
For the Appellant	Mr A.G. Uren, Q.C. Mr A.R. McNab	Lewis & Weir
Respondent	In person

ORMISTON, J.A.:

This appeal has posed particular difficulties for the Court inasmuch as the respondent, buoyed perhaps by his success in the County Court, chose not to have legal representation on this appeal and sought to argue the difficult issues raised by this case relying on legal knowledge acquired over 60 years ago when, so it seems, he graduated in law, though he did not practise it thereafter. The difficulties raised by the claim, put forward by the appellant, that the transaction may be treated as void or otherwise set aside on the ground that it involves a fraud on creditors who have entered into a composition (or are party to some other scheme or arrangement in insolvency), may be gauged by the arguments and the variety of authorities relied on, a year or so after the respondent’s graduation, for the purpose of the only case in the High Court which to our knowledge has dealt with the issue, namely E. T. Fisher and Co Pty Ltd v. English Scottish and Australian Bank Limited.[1] In order to resolve this appeal and to determine the relevant principles, we have had to look at a considerable number of additional reported decisions as well as a variety of text books, many of which we have had to find for ourselves with the invaluable assistance of the researchers engaged by the Court. The facts and issues are set out with considerable care and detail in the judgment of Chernov, J.A.
[1](1940) 64 C.L.R. 84.

For reasons not entirely apparent, although the relevant principles were worked out in numerous decisions in the period from 1788[2] to 1915[3], thereafter there have been remarkably few decisions in which the issue has arisen save for Fisher and the other decisions referred to by Chernov, J.A. in his judgment. It may be that the principles were largely worked out in relation to compositions in the true sense and that the use and popularity of various statutory schemes, deeds and arrangements over the 20^th century has made it less necessary to invoke general principles and made it more common to rely on specific provisions to challenge fraud or other unfairness.
[2]See Cockshott v. Bennett (1788) 2 T.R. 763; 100 E.R. 411. But the equitable aspect of the rule goes back at least to 1721: see Middleton v. Lord Onslow (1721) 1 P. Wms 768; 24 E.R. 605; Spurret v. Spiller (1740) 1 Atk. 105; 26 E.R. 69; Constantein v. Blanche (1786) 1 Cox. 256; 29 E.R. 1169.
[3]See Farmers’ Mart v. Milne [1915] A.C. 106.

Having regard to the discussion by Chernov, J.A. of those principles in his judgment, I would consider the best statement of the basic principle to appear in the judgment of Williams, J. in Fisher[4], with whom Rich, A.C.J. concurred and with whom McTiernan, J. substantially agreed[5]:

“It is clear that the contract by which the creditors mutually agree to forbear to sue for the full amount of their debts and to accept a composition is a contract uberrimae fidei, and that, if any creditor makes a secret stipulation with the debtor for some additional benefit for himself as, for instance, the payment of the balance of his debt, contemporaneously with the contract for the composition, the law considers such a stipulation to be fraudulent and opposed to public policy and therefore void, and not only will not allow him to recover or retain any such secret benefit but also regards it as vitiating and destroying his rights to recover his share of the composition.”

[4]At 103.

[5]At 91 and at 96-98.

One might have thought the principle to be primarily founded in equity, that is, it might have been thought that behaviour so proscribed should be treated as a species of equitable fraud entitling those affected to have the transaction set aside. From the outset, however, it seems that the principle was more strongly condemned and more broadly based than that. In Mr Justice Story’s well-known Commentaries on Equity Jurisprudence[6] it is forcefully stated:

“The doctrine was familiar in courts of law, and was not peculiar to courts of equity, that such secret arrangements are utterly void, and ought not to be enforced, even against the assenting debtor, or his sureties, or his friends. There is great wisdom and deep policy in the doctrine, and it is founded in the best of all protective policy, that which acts by way of precaution rather than by mere remedial justice; for it has a strong tendency to suppress all frauds upon the general creditors by making the cunning contrivers the victims of their own illicit and clandestine agreement. The relief is granted not for the sake of the debtor, for no deceit or oppression may have been practised upon him, but for the sake of honest, and humane, and unsuspecting creditors. “

[6]Third English edition (1920) at p.153. On the other hand, in Pomeroy’s Equity Jurisprudence (5^th ed.) the principle is tucked away in a single paragraph in Vol. 3 under “Constructive fraud”: see para.967.

How then do the rules carefully described in the judgment of Chernov, J.A. apply to the circumstances here under consideration? For the present I shall assume that the duty of good faith, equitable in origin but enforced almost from the outset also in common law courts, applies not only to compositions but also to those mutually bound by or participating in other statutory schemes, deeds and arrangements relating to the affairs of insolvent individuals and corporations, including deeds of arrangement under part 5.3A of the Corporations Law and now of the Corporations Act 2001. It is sufficient to set out a passage from one of the earlier decisions where that assumption has been made. McKewan v. Sanderson[7] was a case where, pursuant to a resolution of creditors, a statutory composition was entered into by all of a debtor’s creditors other than the plaintiff bank, but that bank received a guarantee from the debtor’s brother for the full amount of its debt, after a petition for liquidation or composition had been filed against the debtor. Malins, V.C. said of that transaction in a passage which has been frequently cited:[8]

“Now I take it to be thoroughly settled, both in Courts of Law and Equity, that where there is a bankruptcy, or an arrangement with creditors by composition or insolvency, when insolvency exists as contradistinguished from bankruptcy, it is the duty of all creditors who have once taken part in the proceedings of bankruptcy or composition to stand to share and share alike. Equality is the only principle that can be applied, and if one creditor, unknown to the other creditors – not unknown to one or two, but to the general body – enters into an arrangement by which he gets for himself from the debtor, or from anyone on behalf of the debtor, any collateral advantage whatever, that is fraud upon the other creditors; and, although the money may have been paid, this Court will enforce its repayment.”

As I read the authorities little distinction was drawn either in the 19^th century or later between cases where compositions outside the statutory regimes were under consideration and those where the entry into a composition took place after bankruptcy (or liquidation) proceedings had been commenced, save that particular provisions might fairly alter the parties’ objectives and expectations.[9]

[7](1875) L.R. 20 Eq. 65.

[8]At 72. Most recently cited in Cadbury Schweppes plc v. Somji [2001] 1 W.L.R. 615 at 624 per Robert Walker, L.J.

[9]For an examination of the variety of, and frequent changes to, the bankruptcy laws and of schemes, arrangements and compositions under those laws, see Robson: Law of Bankruptcy (7t^hed. 1894) Chapters 1 and 35.

Nevertheless, one must take note of the doubts whether and how every element of a rule laid down for those affected by compositions could precisely apply to the individual voluntary arrangements pursuant to the Insolvency Act 1986 (U.K.) under consideration and explained by the Court of Appeal in Cadbury Schweppes. So far as this country is concerned, obviously the powers given under s.445D of the Law (and of the Act) might well be construed as providing a code in relation to the circumstances whereby creditors and other interested parties, as described in sub-section (2), may seek to terminate a deed of company arrangement. However, insofar as those deeds ordinarily provide for an equal distribution (subject to stated or agreed exceptions) of a corporation’s remaining funds amongst its creditors, there would seem no good reason why the principle earlier referred to should not apply, as giving context and meaning to the generalities expressed in s.445D, whenever it is claimed that there has been a want of good faith of the kind here alleged. In my opinion the principle, which is primarily directed to fair dealing in good faith among creditors, should continue to apply to statutory deeds of composition, arrangement and the like, as they have for over 150 years, although its application must vary according to the statutory regime being considered.

It would appear that the learned judge in the present case sought only to apply the tests in the section in their generality but to a case where no creditor was seeking to terminate the deed. In that I think he was clearly in error but the precise relationship between the section and the principle now being considered was not further discussed in argument. It is therefore necessary to apply the principle here invoked to a case where I would agree with Chernov, J.A. that neither grounds 1 nor 3 can succeed and the only other relevant defence of the appellant to the respondent’s claim was based on the illegality which flowed from the allegedly inequitable dealing between the respondent and the other creditors of the company.

Here the relevant debtor was the company under administration, Denyers Pty. Ltd. The creditors may have been those who came in and proved for the purpose of the various statutory meetings which led to the adoption of the deed of company arrangement or, possibly, they may have been only those creditors bound by the deed, as several statements of the equitable and common law rule tend to suggest.[10] To the latter question it will be necessary to turn later in this judgment.
[10]See e.g., Re Milner; Ex parte Milner (1885) 15 Q.B.D. 605 at 613, per Brett, M.R.

It may thus be seen that the debtor company, Denyers, did not directly offer to pay or transfer anything to the respondent or do any other act so as to prefer any of its creditors. The question must be whether a person associated with the debtor[11] made such an offer, as the benefit promised to the respondent of $550,000 was to come from the appellant, Scuderi, as bidder for the assets of the company or as representing an entity to be substituted for him, which was clearly contemplated and which took place eventually.
[11]In the case of an individual debtor this would include a relative, as has occurred in most cases in which this issue has arisen.

Clearly enough that new company, such as one knew of it, was an outsider; indeed it was not formed at the time, but its financiers included a group from Malaysia as well as the appellant himself. The “bid” at the meeting purported to come from the appellant, the respondent and the respondent’s son, Richard. However, the respondent was obviously only Scuderi’s spokesperson and his son was Denyers’ Managing Director who was expected on any basis to have a managerial role in what they salvaged from the enterprise. On the other hand neither the respondent nor his son (nor his wife) had any financial interest in the company to be formed, except to the extent that the son might expect to be remunerated in any new managerial role. At the relevant time the debtor company was under the control of the administrator, but in my opinion that consideration should be ignored for practical purposes, for reasons to which I shall turn.

Those formerly ordinarily in control of the debtor company, excluding[12] also the temporary control of creditors entitled to vote at the meetings, were members of the respondent’s family, his wife and his son Richard, who might expect to resume control only if its debts could be paid off. But they certainly made no additional or secret offer to any creditor and, in particular none to the respondent, the allegedly “preferred creditor”. It would only be if the appellant and the new company could be treated as so closely related to the insolvent company, Denyers, that his offer might be treated as capable of being avoided by the rule here under consideration. In the light of the fact that he was merely an offeror for the business, at arms length from the respondent and his family, it might be thought hard to conclude that the appellant’s agreement to pay $550,000 over 10 years could be treated as that of the insolvent debtor or of a person sufficiently closely connected to the debtor for it to be affected by the rule. Although some early statements of the rule would suggest that receipt of an additional benefit from any source would breach the implied duty of good faith between the compounding creditors, it will be seen that subsequent authority has required, at the least, that the benefit must be given “with the knowledge and on behalf of the debtor”.[13]
[12]For this purpose it is obvious that ordinarily the creditors’ de facto control should be ignored, as they could hardly be expected to provide a prohibited benefit to one or more of their own number, unless it were for a legitimate business purpose.
[13]See esp. In re E.A.B. [1902] 1 K.B. 457 at 464-465, per Vaughan Williams, L.J., with whom Romer and Cozens-Hardy, L.JJ. concurred. (Cf. also Milner at 614, 615, 616.) The passage from E.A.B. at 464-5 was applied at first instance in Cadbury Schweppes by Anthony Boswood, Q.C. (sitting as a Deputy Judge of the Chancery Division) (unreported, 19 July 2000) paras.[22]-[23].

One must here continue with the issue which any discussion of the control of the insolvent company, Denyers, would appear to raise, namely the applicability of the rule to a debtor corporation in circumstances such as these. The object of what one might call an “old-fashioned” composition was, in return for payment of an agreed and fixed sum to be shared equally by his creditors, to relieve a debtor of his obligations to pay out in full his debts, or at least those debts which were the subject of the composition, and in consequence to enable the debtor to become free to resume his ordinary business and other activities freed from his former financial obligations. Even when those rules were transposed to cases involving deeds and arrangements in bankruptcy or under the relevant bankruptcy legislation, the object was likewise to free debtors from their existing obligations. So far as corporations are concerned it is arguable that different considerations might sometimes apply, though I am doubtful that it has been the subject directly of any relevant authority. Clearly, as the decision in Fisher emphasises, the relevant rules can apply to an insolvent company or corporation. In many cases, certainly where schemes of arrangement were entered into, the object also was to free the company of its existing obligations and permit it to trade again, as was apparently the case in Fisher.

That may also be said of many deeds of company arrangement under the more recent part 5.3A, but there are other schemes and other arrangements where revival is not the object. All that is there intended is that the company or corporation should be buried as efficiently and economically as possible under some arrangement which enables the creditors to get more than if it were to go directly into liquidation. The terms of the deed and the surrounding facts in the present case would indicate that the latter was the object of the company’s then creditors, and also for that matter of its directors, for on either basis the company’s business was to be sold to an outsider, including the goodwill attached to its name, and the proceeds were to be used merely for distribution under the deed to the company’s creditors. There was no intention of reviving the company and, as is so common, no good reason for doing so, except possibly for use as a shelf company. In this case it might be said that the object of the debtor, then under the control of the administrator, was merely to give it a decent burial with as much advantage to be obtained for the creditors as was practicable in the circumstances. It seems a far cry from a true composition and the benefit debtors ordinarily obtained and still obtain from arrangements of that kind. In other words this was not a moratorium cum composition kind of arrangement and the object was never to get the company out of administration or otherwise to avoid liquidation or dissolution. There was never any agreed limit on the amount of the creditors’ dividend and their endeavours were directed to getting as much as possible to divide between them. Survival of the corpse was never an issue, but in the case of a true composition payments of the kind proscribed by the principle are almost invariably directed to enabling the debtor to resume a normal life, freed from existing debts.

That is clearly why it has been laid down that a collateral benefit, though coming from a relative or other person connected with the debtor, must be given “with the knowledge and on behalf of the debtor” if it is to be avoided: see Re E.A.B.[14]. That very qualification, however, shows how difficult it is to apply the principle in the present case, at least if it be based on mutuality. Obviously the agreed payments were not to be made with the concurrence or knowledge of the administrator, who in law, at least, represented the debtor company at the time.[15] The respondent was not one of that company’s directors, but his son was and his wife had a very large majority holding of shares in the company and they were both present at the meeting on 16 August 1996. The evidence was not clear as to their precise knowledge of the respondent’s dealings, but, whatever the practical difficulties, I shall assume that the agreement reached on that day between the parties was reached with the “knowledge” of the former and “residual” controllers[16] of the debtor company, but is that enough?
[14]Esp. at 464-465 per Vaughan Williams, L.J. and see also Milner at 614, 615, 616; McKewan at 74; Cadbury Schweppes (Ch.D.) paras.[22]-[23].
[15]In practical terms it might be said that the creditors then controlled the company, as most future acts depended on their approval. As noted above (fn.12), that would exclude the rule’s application in this case, so one should look further afield.
[16]See above para.[11].

Furthermore, the agreement or arrangement must be one to pay one or more creditors who, so it must be assumed for the purpose of the argument, will thereby receive a secret benefit over and above that received by the other creditors not party to that agreement or arrangement. In the present case there can be no doubt that the respondent had been a creditor of the debtor company; indeed it would seem that almost one third of its current debts were owed to him at the time the company went into administration. Thus, if that had remained the position, he clearly would have been a creditor for the purpose of the rule. Does that situation change because the respondent agreed to forego the whole of that debt if the appellant’s offer was accepted and, moreover, also agreed to forego his contingent rights based on his payment out of the bank mortgage? In fact in the latter case he agreed to pay out the bank but to seek no right against the company in return. These were generous offers, put into execution by reason of the company’s accepting the appellant’s offer, but, so it was contended, they were generous because in their place were substituted the appellant’s obligation to pay $550,000 over time. So it was said that, although ostensibly he was no longer a creditor, he was getting a secret benefit as a creditor in return for his generosity to the debtor company.

For this purpose I would concede that, whatever the theoretical difficulties, it has been held that the fact that a creditor, having received a secret benefit, decides not to vote and chooses to stand outside the composition altogether by not signing or by not proving for a seemingly abandoned debt, does not relieve such a creditor from the consequences of the principle. McKewan was an example of this very kind of manoeuvre. The plaintiff bank, according to the facts[17], having received the secret guarantee it was promised by the debtor, forbore to prove against his estate and nobody on the bank’s behalf attended the second meeting which approved the scheme by the statutory majority. As the Vice Chancellor observed[18], having sought an adjournment of the first meeting, “why did they not attend the second meeting?” It took no further proceedings in the composition because it had the secret guarantee to pay out its whole debt. That was clearly no answer to the claim, so that his Honour expressed the principle, as set out above[19], by describing the duty as that of “all creditors who have once taken part in the proceedings of bankruptcy or composition”. (Emphasis added.) Likewise, in E.A.B., Vaughan Williams, L.J. said, again of a composition in bankruptcy[20]:

“Now, I will at once say that if, upon the evidence, one had to come to the conclusion that the debtor, for the purpose of getting this scheme approved, had in secret offered two creditors, in consideration of their withdrawing their claims, terms which were or might be better than those submitted to the other creditors, then, if those two creditors accepted those terms and thereupon withdrew their claims, that would be a very good reason indeed why the Court should refuse to sanction this scheme.” (Emphasis added.)

[17]At 67.

[18]At 70-71.

[19]In para.[5].

[20]At 464. I do not understand that his Lordship, by referring only to the sanctioning of the scheme, intended to restrict otherwise the operation of the principle.

Nevertheless, accepting that the respondent should at all times be characterised as a creditor for the purpose of the rule, it was the nature of the return benefit which brings the appellant’s argument down. Of course on its face there was a vote in favour of entry into a deed of company arrangement[21], but the object was not to obtain a moratorium or composition in order to free the debtor company from its obligations. It was not a case where it was expected or contemplated that the company should spring back Phoenix-like into a viable trading concern. The company was dead; the dispute was only as to its entrails. The real issue between the parties at the meetings was how to put the biggest fund in the hands of the deed administrator so as to get the best return for the creditors. The creditors were all going to share equally, but for the fact that the respondent as a creditor specifically agreed to abandon his right to prove and to abandon any right to reimbursement of the bank’s loan which as guarantor he chose to pay out fully.[22]
[21]With the opposition of only a few creditors.
[22]The deed of company arrangement also expressly excluded his rights as a creditor.

Moreover the rule was originally concerned primarily with equality of treatment of creditors who “mutually agree to forbear to sue for the full amount of their debts”[23]. Here the arrangement agreed upon expressly involved the respondent no longer remaining a creditor; thus its object and that of its terms in this regard was not mutuality but exclusion of his rights. Of course he had been offered another right which might appear to be in substitution for his debt, but any creditors with a modicum of business sense must have realised that, in abandoning his rights to prove, he must have obtained some benefit in its stead. It was of no concern to them (and still appears so), for they were getting no less than they otherwise would have received for their debts and in fact considerably more, indeed more than could be obtained by accepting the competing bid. It is mere speculation to say that an extra $550,000 could have gone to swell the available fund. It was not then available or agreed to be then made available, for it was to be paid to the respondent over 10 years, a timetable unlikely to find favour with the creditors, and what the appellant and his colleagues needed and sought was a spokesperson at the meeting, for which they had to pay.
[23]Fisher at 103.

Is it, nevertheless, also relevant to assert that the respondent was to stand outside the composition and that he was not to be subject to the mutual obligations imposed on those who become party to compositions or arrangements of a like kind, thereby obliging themselves to act with the utmost good faith if they are to take any benefit thereunder? It is, of course, that mutual obligation which is reiterated time and time again in the authorities. As was said by Bowen, L.J. in Milner[24], “… it is of the very essence of such a transaction that the creditors who take part in the scheme act upon the faith and understanding that they are all coming in upon terms of equality, and if a deed is prepared to carry out this equal distribution, every creditor who executes it does so on the faith that there is no private bargain with any of the other creditors which will destroy this equality.” It is unnecessary to reiterate and repeat the manner in which the principle was stated and restated in relation to compositions during the nineteenth century. On their face they would imply that the duty of good faith arises among those creditors because they come in and are party to a composition agreement. Their mutual obligations must arise in that way. The logic for restricting those creditors to those who are party to the composition is obvious. Being voluntary a composition can bind and affect only those who willingly join in it. Those who stand aside are not affected and may sue for their debts without restriction. The only practical consequence is that, if there are sufficient outside creditors, the value and usefulness of a composition becomes less and less. Otherwise both in equity and in law the only parties benefiting and who are subject to its obligations are the parties to the composition contract.
[24]At 615-616. The passage is expressly quoted and adopted by Starke, J. in Fisher at 91.

These statements of principle, as earlier noted, are not so easily transposable to circumstances where a scheme or deed or other arrangement is entered into pursuant to some statutory provisions relating either to bankruptcy or insolvent corporations. For the most part (and there have been exceptions) the object of those schemes has ordinarily been to bind all creditors of the insolvent individual or company. In a composition everybody must agree but, in the case of statutory schemes and deeds of arrangement, more often than not a prescribed majority is all that is required to impose the obligations on all creditors, certainly where machinery is available to enable a court either to sanction a scheme or arrangement or to set it aside if it is unfair or otherwise undesirable. That brings with it other consequences. Almost invariably all creditors are bound whether or not they vote in favour or at all and whether or not they come in and prove. For present purposes a resolution by majority in number and value is sufficient in relation to deeds under Part 5.3A, but at various times in the past under provisions relating to insolvent individuals or companies majorities of three-quarters, three-fifths, six-sevenths or a simple majority were required.[25]
[25]See the relevant chapters of Robson, referred to in fn.9 above.

As I have said, there seems little doubt that in the broadest sense the principles I have been discussing in relation to compositions generally apply to compositions under statute or to schemes of arrangement or the like, although the precise consequences of fraud of this kind depends, at least in part, on the nature of the scheme and the machinery for its implementation. This was confirmed by Vaughan Williams, L.J.[26] in E.A.B. when, in describing the circumstances under which a composition by way of scheme of arrangement under the Bankruptcy Act 1890 (U.K.) might not be sanctioned, said[27]:

“If, in substance, an arrangement were made with a creditor with the knowledge and on behalf of the debtor, whereby that creditor would get an advantage over the other creditors, I should say that that would be quite a sufficient reason for not sanctioning the scheme.”

The critical question here, however, is whether the respondent’s “advantage” was given on behalf of the debtor company.

[26]With whom Romer, L.J. and Cozens-Hardy, L.JJ. concurred.

[27]At 464.

As the various passages of principle relating to compositions set out above and in the judgments of the other members of the Court show, the principle was in the first place largely placed on the basis of the obligation of good faith owed by each creditor to the others. In a composition that was logical, inasmuch as only those persons who signed the composition as creditors were bound as such but, as I have stated above, the problem took on an extra dimension and was not so easily resolved by that principle when statutory compositions and schemes of arrangement were allowed by a majority vote to impose obligations on dissenting creditors. Thus in relation to those kinds of scheme, they became effective not so much by reason of creditors signing but because a specified majority of creditors voted in favour. If a creditor obtaining a secret benefit votes in favour of a scheme, no difficulty arises and the principle should apply as before. But in my opinion there is no reason to believe that a version of the principle should not apply to those creditors obtaining such benefits, but standing outside statutory compositions or arrangements, even if they do not vote or otherwise participate in the discussions leading to the scheme. Insofar as the principle is based on mutual good faith, it obviously cannot apply, but in those circumstances the fraud must be essentially that of the debtor or somebody acting on the debtor’s behalf or with its knowledge and acquiescence. The vice remains an act which impeaches the assumed equality of burden of the participating creditors, but it must be the act of the debtor company or somebody on its behalf. The preferred creditor’s dealing in those circumstances, therefore, can only be impugned because of the behaviour, directly or indirectly, of the debtor.

For present purposes, however, was the respondent a creditor within the meaning of the rule? E.A.B. would point to the conclusion that a non-participating creditor, at least in a statutory composition or arrangement, could be so described. Moreover the respondent voted in favour of each of the relevant resolutions, but in my opinion his obligations as a voting creditor were somewhat different from those as a participating creditor. The right to vote has been said to permit a vote in pursuit of one’s own personal interests, subject only to an overriding obligation to exercise those rights bona fide for the benefit of the creditors as a whole: see Ex parte Cowen; In re Cowen[28] and Ex parte Cobb; In re Sedley[29]. It is hard to see, under a statutory arrangement, why a creditor who wholly stands out is under some mutual obligation to other creditors who in fact participate, whatever other obligations the creditor may be under and whatever means may be adopted to set aside a fraudulent advantage whereby a debtor or somebody on the debtor’s behalf seeks to advantage a particular creditor. Nevertheless I would conclude that, because the respondent chose to exercise his rights as creditor in order to vote in favour of each of the relevant resolutions, he was at that time under a duty to act in good faith towards each of the other creditors, despite his non-participation thereafter, and he would have been bound to disclose any additional benefit offered to him by or on behalf of the debtor. But was there any such benefit, in other words, was the agreement to pay $550,000, offered to the respondent by or on behalf of the debtor?
[28](1867) L.R. 2 Ch. App. 563.
[29](1873) L.R. 8 Ch. App. 727.

Here, whether or not my conclusion as to the position of the respondent as creditor is correct, no benefit was offered or agreed to be paid to him by or on behalf of the debtor, and the transaction which the appellant seeks to impeach is not one which comes within any statement of the rule. Subject to one exception, I am happy to adopt what has been said by each of the other members of the Court in this regard, but I would wish to express my conclusions in these terms. For the principle to apply in this case, the object of the impugned benefit must be the debtor’s giving some secret advantage to a creditor, inasmuch as it is inequitable to allow a debtor to obtain a discharge for its debts in a manner which would unfairly prejudice the creditors as a whole who are prepared to participate on terms of equality in the composition or statutory arrangement. Undoubtedly the respondent was here promised a benefit in the form of the payment of $550,000 over ten years but the question must be as to what the purpose of that payment was. As I have earlier endeavoured to explain, it was not to permit the debtor company to resume business in its own right. The business was to be sold to an outsider and the proceeds were to be added to what otherwise existed by way of assets which were in any event to be distributed to the creditors. It was not a question of entering into or agreeing to a composition or arrangement whereby the debtor was to be relieved further of its obligations upon payment of, say, ten or fifty cents in the dollar. Although the debtor was well and truly insolvent, there was to be no limit on its funds to be made available for the purpose of the deed of arrangement so that, in a sense, the distribution was to be largely the same as would occur on a liquidation, save for the fact that certain statutory powers would not inhere in the deed administrator (though it was not here suggested that there was any special significance in that). Moreover, the company’s funds and assets were to be the better administered by the sale of the business as a going concern to one or other of the bidders. All that the respondent did was to speak and vote for the sale to the appellant. That was what the appellant sought and obtained. The debtor, whatever identity should be given to it, was in fact indifferent to the outcome because, although there were a few votes cast against the deed of company arrangement, there was no doubt that either a deed would have to be signed or the company would go into liquidation. The offer was not being made by the debtor or by a person with the knowledge and acquiescence of the debtor, for the appellant’s offer to the respondent was directed solely to getting the latter’s support for the bid for the business of the company which was to be sold as a going concern. The consideration for the offer consequently had no real connection with the debtor and, inasmuch as the respondent’s family, as shareholder and managing director had any interest in the outcome, it was only an interest in managerial participation in the business under new control, not an interest in the fate of the debtor company.

There is one matter where I would, with respect, differ from Chernov, J.A. As stated above, I do not consider that the company was represented only by the administrator for the purpose of the application of the rule. Nor am I satisfied that the respondent’s son and wife, who had previously had effective control of the company, had no knowledge of the respondent’s arrangement. I would prefer to base my conclusion on the object and purpose to be served by the appellant’s arrangement with the respondent, namely to ensure his support for the first resolution, so as to obtain control of the business for the appellant’s own purposes.[30] But it is important to show how the rule may have applied in only slightly different circumstances. If the appellant had decided that it wished to buy the company’s shares, as opposed to its business, and to add a moratorium element to the proposal, both to enable the existing creditors to be paid out and to enable the debtor company to resume business, then there would have been a strong argument that such a proposal would have been, at least in part, one put forward on behalf of the company and the knowledge of the son and mother might have become critical. The principle might then have been applicable. Fortunately for the respondent, the appellant’s offer was entirely extraneous and for his own purposes.
[30]There was no suggestion that there had been a misrepresentation to the creditors by the appellant or the respondent, as to the offer to purchase.

The agreement was therefore neither inequitable nor void, for the reasons I have endeavoured to explain. I would add that I am glad to come to this conclusion, for the appellant’s position all along has been entirely unmeritorious and he would have been, if the principle had here applied, a fortuitous beneficiary of the rigour of the common law aspect of the rule.

For these reasons I consider that the appeal should be dismissed.

BUCHANAN, J.A.:

I have had the considerable advantage of reading the draft reasons prepared by Chernov, J.A. For the reasons he has stated I agree that the trial judge was correct

in finding that the parties entered into a binding contract whereby the appellant agreed to buy the respondent’s support for his bid for the debtor’s property and that the contract was one made by the respondent in his own right.

I also agree that the contract is not tainted by illegality nor is rendered unenforceable by reason of breach of any duty owed by the respondent to the other creditors of Denyers Pty Ltd.

The foundation of the principle that a secret bargain between the creditor and the debtor or another which gives the creditor an advantage not enjoyed by other creditors is illegal or a breach of duty which renders it unenforceable is the assumption that there is a tacit understanding or implied agreement between the creditors that they will share equally with each other in any composition with the debtor. The creditor who contracts for a secret additional benefit betrays that understanding or agreement. As Brett, M.R. said in Re Milner; ex parte Milner[31]:

“This seems to shew that one of the grounds upon which the principle rests is, that the other creditors would not enter into such an agreement if they were not to take it for granted that all the creditors who enter into it are to stand on a footing of absolute equality. If this is not so, they are deceived.”

[31](1885) 15 Q.B.D. 605 at 613. See also Dauglish v. Tennent (1866) L.R. 2 Q.B. 49 at 54 per Mellor, J.

In my opinion it is not possible to postulate an understanding or tacit agreement of the creditors to which the respondent was a party that they would all share equally in the proceeds of the appellant’s offer. The combination of a number of circumstances lead me to that conclusion. The context in which the issue arose was that the inducement held out to the respondent was not offered by the debtor, but by a prospective purchaser of the debtor’s property, who was competing with another would be purchaser: the debtor’s interests could not be affected by the outcome of the issue to be resolved by the creditors. The respondent was clearly in the camp of the appellant as potential purchaser of the debtor’s property. The respondent was named as an offeror with his son and the appellant in the administrator’s report to the creditors. It was known from the outset that the

respondent was not to share at all in the dividend which each of the other creditors was to receive[32] and the fact that the respondent was not to prove for his debt in the administration was a significant component of the offer. The respondent appeared to have the carriage of the appellant’s case at the creditors’ meeting. He addressed the creditors, urging them to vote to accept the Scuderi offer. It was the respondent who met Clements’ increased offer by informing the meeting that he would settle the debtor’s obligation to the National Bank of Australia and would not seek to recover any part of it in the administration. In my opinion none of the creditors would have voted in the belief that the respondent, having foregone any entitlement to prove in the administration, would not benefit at all from the success of the Scuderi offer. The creditors could not reasonably have assumed that the respondent was just another creditor who would share equally in any distribution resulting from the sale of the debtor’s property.

[32]The fact that, under the agreement between the appellant and the respondent, the latter was not to prove in the administration was not a circumstance which by itself would preclude the conclusion that the agreement was unenforceable. Cf. Re EAB [1901] 1 K.B. 457.

Accordingly, I do not consider that there was any basis upon which the agreement between the appellant and the respondent could be characterized as illegal or as a fraud upon the creditors or as a bribe or as a breach of any obligation owed by the respondent to the creditors.

CHERNOV, J.A.:

On 14 September 1997 the respondent (“Morris”) filed a proceeding in the County Court in which he claimed damages from the appellant (“Scuderi”) for breach of contract allegedly made between them on 16 August 1996. Scuderi delivered a counterclaim but it was not pressed and I say nothing more about it. In his action, Morris claimed that Scuderi agreed to pay him $55,000 per annum for ten years in consideration of Morris supporting his bid for the purchase of the assets of Denyers Pty. Ltd. (“Denyers” or “the company”) which was then in voluntary

administration pursuant to Part 5.3A of the Corporations Law. Further, Morris contended that it was also part of the agreement that he would not prove for his debt in the administration of the company. He claimed that, while he had performed his part of the bargain, Scuderi failed to pay all the moneys due under the agreement. Due to the relevant jurisdictional limit of the County Court, Morris limited the amount of his claim for damages to $200,000. The judge upheld the plaintiff’s claim and awarded damages in his favour in the sum of $200,000. It is from this decision that Scuderi now appeals on grounds to which I will refer later.
The facts

The circumstances which led to the alleged contract and its breach are as follows. Denyers was a family company which manufactured hospital operating tables, wheelchairs and other items for the health care industry; it also had an interest in an associated medical company. The enterprise was founded in 1889 by the Denyers brothers and was incorporated in 1915. Morris’s wife is a grand-daughter of one of the founders and in 1996 held 90 per cent of the issued shares in the company. Morris, however, has never been a shareholder in Denyers although he joined its staff in 1952 and later became one of its directors and a joint manager. He retired from the company in 1992. It seems that until approximately 1996, the company traded profitably, selling its products domestically and overseas. When it commenced experiencing financial difficulties in 1996, its then managing director Richard Morris (who is Morris’s son) sought financial assistance from a number of sources including the company’s Malaysian agent and a New South Wales company with which it had a business connection, Clements Medical Equipment Pty. Ltd. (“Clements”), whose managing director was Warren Kaye (“Kaye”). Efforts to obtain a financial rescue package, however, were unsuccessful and, on 17 July 1996, Denyers was placed in voluntary administration pursuant to a resolution of its directors on the ground that, in their opinion, the company was insolvent and was unable to pay its debts as and when they fell due.

When the company collapsed, its unsecured debts totalled approximately $1.9 million of which in excess of $600,000 was owed to Morris, who was its largest single creditor. Over the years, he had lent Denyers his own money as well as money which he had borrowed on the security of his assets, including his home, for the purpose of on-lending it to the company. At the time of its collapse, Morris’s liability for interest in respect of those borrowings was in the order of $55,000 per annum and failure to pay the interest would have put him at risk of losing his mortgaged home and security on which he relied for his income.

It seems that, not long after the appointment of the administrator of Denyers, a group comprising Scuderi and a number of persons who were associated with Denyers’ Malaysian agent put together a proposal to purchase the company’s assets, including its name, from the administrator. It was proposed that the group would operate the Denyers business under the name Denyers International, employing most of its then current staff. Under that scheme, Scuderi was to hold the controlling interest in the acquiring vehicle and his Malaysian associates were to hold the balance. He took the lead in making the relevant inquiries concerning Denyers and in putting together a purchase proposal for consideration by his joint venturers. To this end, he acquired financial and other relevant information about the company from its administrator, commissioned a valuation of the company assets and obtained two independent accounting appraisals of its business. On 2 August 1996 he met with Richard Morris to inspect the company’s operations and to discuss the potential of its business. As a result of these discussions, Scuderi formed the view that Denyers was a potential “gold mine”. He also learned from Richard Morris that Clements was a prospective purchaser of the company’s assets and that, through Kaye, it had spent some time carrying out a due diligence investigation into its affairs. It also became obvious to Scuderi from his research that Morris was the biggest single creditor of Denyers and that, for practical purposes, if he were to be successful in acquiring its assets, he would have to secure Morris’s support for that proposal. The documents tendered in evidence at the trial show that, by 12 August 1996, Scuderi’s group had decided to make an offer to purchase the company’s assets for $480,000 on terms which were in fact put to the administrator on 16 August 1996 in circumstances to which I will refer shortly.

On 16 August 1996, during the course of a lunch which he hosted at the Melbourne Cricket Club (“MCC”), Scuderi told Morris of his proposed bid for the Denyers assets and sought his support in relation to it. The others present at the lunch were Mrs. Morris, Richard Morris and Scuderi’s Malaysian joint venturers. Morris, as his Honour found, anticipated that Scuderi’s co-venturers might provide financial support for the acquisition, but the discussion concerning the bid and, in particular, Morris’s support for it, took place only between Scuderi and Morris and in that context, Scuderi spoke of the offer as one that would be coming from him. As will be seen later, his offer to the administrator was made in his name. One of the matters discussed between the parties was the level of the company’s indebtedness to Morris and the ongoing costs to him of maintaining interest payments on his various borrowings to which I have referred. The trial judge found that Scuderi made a rough calculation of the annual interest payments that were due by Morris and then offered to pay him $55,000 per annum by monthly instalments for 10 years providing Morris supported his bid. It is quite apparent that the proposed payment was to compensate Morris for the interest payments he was obliged to make in respect of his borrowings to which I have referred.

Shortly after the MCC lunch, Scuderi submitted a written offer to the administrator to purchase the assets of Denyers, including its name, for $480,000. As I have said, it had been finalised by his group prior to 12 August 1996 and it seems that he waited until he secured Morris’s promise of support before he submitted the offer to the administrator. So far as is relevant, it was made in the name of Scuderi “in my personal capacity and may be assigned to my nominees”. During the same period bids for the assets of Denyers were also submitted to the administrator by Clements; at one stage, it even offered to pay Morris $80,000 in consideration of his support for its bid.

It is common ground that, on 20 August 1996, a meeting took place at Scuderi’s home between Scuderi, Morris and Richard Morris. It was Scuderi’s case below, which was rejected by his Honour, that it was at that meeting and not at the MCC meeting that he offered to pay Morris for his support. Scuderi claimed that he offered to pay the respondent $5,000 per month for a period of four years but on the condition that the new Denyers venture, operated by the appellant, would be profitable. It was contended that Morris accepted that offer during that meeting. Morris, however, denied any such agreement and, as I have said, his Honour accepted his version of the events.

In apparent compliance with the alleged agreement of 16 August 1996, Scuderi caused six consecutive monthly payments, each of $2,500,[33] to be made to Morris as from 3 November 1996. No further payments, however, were made by Scuderi notwithstanding that Morris supported his bid for the assets of Denyers and withdrew his claim in the administration in the circumstances to which I now turn.
[33]For reasons which are not presently relevant, it was agreed not long after the MCC meeting that the monthly amount due under the agreement would be temporarily reduced to $2,500 per month. Hence, the six payments of $2,500 rather than what was anticipated by the MCC agreement, namely, approximately $4,500 per month

At their re-convened meeting held on 23 August 1996, the creditors of Denyers were, in effect, required to decide the company’s future.[34] There were three options - terminate the administration and return the company to the control of its directors, liquidate it, or cause the administrator to enter into a Deed of Company Arrangement. The minutes of the meeting, which were accepted by both parties as accurately reflecting what occurred at it, show, inter alia, that the administrator tabled his reports to creditors of 6, 20 and 23 August 1996 and explained the contents of each in detail. In his report of 23 August 1996 the administrator recommended against terminating the administration and against liquidating the company. His recommendation was that the creditors should enter into one of the two proposed “Bids of Arrangement” that he had received which involved the purchase of the Denyers assets. One such offer (“Offer 1”) was described as the offer of “Messrs. R. & J.M. Morris and Mr. Joe Scuderi”. It involved Morris not proving for his debt in the administration and effectively offering the unsecured creditors a return of 18.9 cents in the dollar. The second offer (“Offer 2”) was made by Clements. It was not conditional on Morris not proving in the administration and, according to the administrator, would produce a return of 18.7 cents in the dollar to the unsecured creditors. The administrator acknowledged to the meeting that he had difficulty in separating the two offers, but as he was required[35] to recommend one of them, he advised the creditors to accept Offer 1 because it “appeared to offer the highest return” and because the funds were likely to be received in a “shorter time frame”. Morris and Kaye then addressed the meeting in support of the respective offers. Kaye said, inter alia, that he would increase the Clements’ offer by 0.2 cents in the dollar to match that of Offer 1. By way of response, Morris told the meeting that he would pay out the company’s debt to the National Bank of Australia in the sum of $160,000 (which he had guaranteed) and would not seek repayment of it in the administration. This had the effect of increasing the amount that would be available to unsecured creditors under Offer 1 to 21.8 cents in the dollar. This compared with the Clements’ new offer of 18.9 cents in the dollar. The administrator then took a poll to determine the preferred deed. The numerical majority of creditors voted in favour of Clements’ deed but the majority in value, which included Morris, favoured the revised Offer 1. The impasse was resolved by the administrator exercising his casting vote[36] in favour of Offer 1 on the basis that it clearly offered the greater return to the creditors. The creditors then resolved that the company execute a Deed of Company Arrangement. On 12 September 1996 such a deed (between the administrator and the company) was executed. It provided for the sale of the Denyers assets to “Joseph Scuderi (and/or) nominees” and that, upon payment to the creditors of their full entitlements under the deed, all relevant debts due to them by the company would be extinguished. It was a term of the deed that its operation was conditional upon Morris not proving for a dividend in respect of the debt due to him by the company, including the National Australia Bank debt for which he had assumed liability.
[34]In accordance with s.439C of the Corporations Law.
[35]Section 439A(4)(b) of the Corporations Law.
[36]Pursuant to Regulation 5.6.21 of the Corporations Regulations.

There are two points to be noted about the creditors’ position at the time when they voted to accept the revised Offer 1. The first is that they did not have a realistic choice as to whether they should vote for a compromise of their debts. That they had to adopt that course was clear almost beyond argument, given the administrator’s reports and his recommendations to them. The only question which they had to resolve before voting on the compromise was which of the two offers should be accepted. Secondly, it must have seemed to them that Morris either had a vested interest in Offer 1 or that he had come to some commercial arrangement, probably with Scuderi, in relation to the bid whereby he would receive some form of compensation, directly or indirectly, for foregoing his right to prove for his debt in the administration and for supporting Scuderi’s bid. It is also likely that the creditors recognised that there was a commercial reason behind Morris not urging them to adopt Offer 2, which would have given him 18.9 cents in the dollar as opposed to the revised Offer 1, which was predicated on his not proving in the administration. That he probably had a vested interest in Scuderi’s bid succeeding was also apparent from his:

·    speaking in support of Offer 1 in the absence of Scuderi
·    increasing the offer by taking on personally the responsibility of paying out the debt to the National Australia Bank and thereby providing the other unsecured creditors a further three cents in the dollar
·    being named as one of the proponents of the bid.

On 13 September 1996, in accordance with the resolution of the creditors, the administrator entered into an agreement with Ancall Pty. Ltd. (“Ancall”), which was incorporated on 3 September 1996 at the behest of Scuderi and which he effectively controlled, to sell to it the assets of Denyers for the sum of $478,000 on terms which included the payment of 10% of the purchase price upon signing of the agreement, 50% upon taking possession of the business and 40% over the following six months. The performance of that agreement was guaranteed by Scuderi. Ancall, however, had no funds in its own right and, consequently, borrowed the $200,000 which it paid pursuant to the agreement. Because Scuderi did not want to be exposed financially in respect of the conduct of the new business, he caused Bandell Pty. Ltd. (“Bandell”) to be incorporated on 3 September 1996 for that purpose. That company then leased the assets in question from Ancall. As I have already mentioned, on 3 November 1996 Scuderi (through Bandell) commenced paying Morris $2,500 per month, seemingly in reduction of the moneys owing under the agreement in question, but after a further five such payments, no more was paid. As things turned out, the new venture was unsuccessful, with the result that the administrator was not paid the whole of the balance due to him under the agreement and Ancall and Bandell sold their respective assets to Medsell Pty. Ltd. (“Medsell”). Medsell continues to conduct part of the business formerly operated by Denyers and Scuderi’s wife owns, through a family trust, 51 per cent of its shares.

Principal grounds of appeal

Mr. Uren, who appeared with Mr. McNab for Scuderi, attacked his Honour’s decision on three principal bases:

(a)He contended that, on his Honour’s own findings, there was no binding agreement made between the parties on 16 August 1996 because it has not been established that Morris bound himself on that day to support Scuderi’s bid. Alternatively, he argued, it was not open for his Honour to find that, on the evidence, such an agreement was made.
(b)The agreement between Scuderi and Morris, whenever made, was void for illegality.
(c)Scuderi did not contract with Morris in his own right, but did so as agent for a company to be incorporated.

I turn to deal with each of these claims.

(a) No binding contract

Mr. Uren contended that there was no finding by his Honour that Morris bound himself on 16 August 1996 to adopt any particular course in relation to Scuderi’s then proposed bid. At most, said Mr. Uren, his Honour found that Scuderi offered to pay Morris $55,000 per annum for ten years in exchange for his goodwill, namely, to secure his beneficent attitude, but leaving him free to take up at the creditors’ meeting such course as he saw fit. Thus, said Mr. Uren, the arrangement reached at the MCC lacked content and, therefore, no binding agreement came into existence on that day. Counsel argued that this conclusion is supported by Morris’s conduct at the creditors’ meeting. He pointed to his Honour’s reference in his judgment to Morris’s evidence that the reason why he offered to pay out the company’s debt to the National Australia Bank of $160,000 and make no claim for that in the administration, was that it suited Richard Morris if the Scuderi bid was successful. The Clements’ offer was likely to result in Richard Morris having to work for the new venture in Sydney, whereas the Scuderi offer would have him placed in Melbourne where he wanted to be. Mr. Uren also relied on the answers Morris gave in cross-examination in the course of which he said that, up to the point when the new Clements offer was received by the administrator (which was on the evening before the creditors’ meeting of 23 August 1996), he had not made up his mind what he was going to do “when the new offer came through. I didn’t know anything about it”.

Two points should be made in respect of Morris’s conduct at the creditors’ meeting to which Mr. Uren referred. The first is that it is consistent with his stated motive that, from the outset, namely, from 16 August 1996, he favoured the Scuderi offer because he regarded that as more beneficial from the point of view of his family and his son in particular. That was the principal reason, he said, for his accepting Scuderi’s offer in the first place on 16 August 1996. The second point is that he did not know of the terms of the Clements’ new offer until the meeting commenced on 23 August 1996 or shortly before it and he obviously had to consider its contents before deciding how to deal with the two offers. It was possible, as he said, that the new Clements offer was so favourable to the creditors that the Scuderi offer was bound to fail. In my view, Morris’s conduct does not demonstrate that he did not make a binding commitment on 16 August 1996 to support Scuderi’s bid at the forthcoming creditors’ meeting.

As to his Honour’s failure to state in terms in his judgment that Morris had bound himself to support the Scuderi bid, in my view that is understandable given that this question was not really in issue at the trial. It seems that it was not disputed that Morris had promised to support Scuderi’s bid (and not prove in the administration). It was never put to Morris in cross-examination, nor was it claimed by Scuderi in his evidence, that Morris did not bind himself to support the bid. What was vigorously contested at the trial was when the agreement was reached and whether Scuderi’s promise to pay was conditional. I have already mentioned that it was Scuderi’s case below that the agreement was reached at his home on 20 August 1996 – he claimed that the MCC meeting was only a preliminary meeting – and that the terms of the agreement were that, in exchange for Morris’s support for his bid, Scuderi would pay him $60,000 per annum over four years, that offer being conditional upon the new Denyers business being profitable. Morris denied any such agreement; his case was that the parties reached the relevant agreement on 16 August 1996 and his Honour so found. It is therefore understandable that his Honour did not spell out in terms particulars of the consideration that moved from Morris.

In my view, looking at his Honour’s judgment as a whole, it is implicit that his Honour accepted that, on 16 August 1996, Morris bound himself to support the Scuderi bid and such a finding was, in my view, clearly open to him. The learned judge found that, after Morris accepted Scuderi’s offer, the parties shook hands “on the agreement” and that a verbal agreement was reached between them on 16 August 1996. Such findings necessarily involve acceptance of Morris’s case that consideration (in the form of support for the bid) moved from him to Scuderi. Moreover, given his Honour’s favourable finding as to Morris’s credibility, he must have accepted his evidence that, in return for Scuderi’s promise to pay the money in question, he promised to support the Scuderi bid and not seek to prove in the administration .

The surrounding circumstances established by the evidence, which support such an implicit finding, include the following. As Mr. Uren accepted and as his Honour found, Scuderi and his Malaysian associates had decided on 12 August 1996 to proceed with the bid for the assets of Denyers on the terms which were put to the administrator on 16 August 1996. It was also accepted that Scuderi realised that the support of Morris was crucial to the success of the proposed offer. Further, Scuderi knew that Clements had made an offer to purchase Denyers’ assets and that it had offered $80,000 to Morris to secure his support. It was, therefore, obvious that the reason why the parties met on 16 August 1996 was to give Scuderi the opportunity to secure Morris’s support for his then proposed bid. It would be odd indeed if, in those circumstances, Scuderi would have committed himself to paying Morris without extracting a promise from him that he would support his bid. Moreover, as I have said, it was only hours after the MCC meeting that Scuderi, in his personal capacity, put his offer to the administrator, which is consistent with his being satisfied that he had the support of Morris. I have also mentioned that the terms of the Scuderi offer were finalised on 12 August 1996 but he must have held back submitting it to the administrator until he was satisfied that he had Morris’s support. There is no other apparent reason why he did not submit his offer to the administrator until after the MCC lunch. That the offer was put very shortly after the meeting indicates that he obtained Morris’s support at the MCC meeting. Similarly, Morris’s support of the bid at the creditors’ meeting is consistent with his acting pursuant to his promise of 16 August 1996.

In any event, even if Mr. Uren is correct, and his Honour did not find, or it was not open to his Honour to find, that Morris made a binding commitment on 16 August 1996 to support Scuderi’s then proposed bid, Morris clearly accepted Scuderi’s “offer” made at the MCC lunch[37] at some stage thereafter because he actively supported the bid on 23 August 1996 and did not prove for his debt in the administration. Thus, on either basis, a binding agreement was made between the parties in August 1996. Morris had carried out his part of the bargain but Scuderi failed to keep his promise. Therefore, Scuderi can only avoid liability if he can establish that his Honour erred on the issue of illegality or that of agency.
[37]It will be recalled that his Honour rejected Scuderi’s claim that the parties agreed on 20 August 1996, inter alia, that his obligation to pay Morris would depend on the new Denyers operating profitably.

At one stage, Mr. Uren sought to argue that, if the binding agreement between the parties came into existence on 23 August 1996, it was a different agreement from the one pleaded by Morris and that, therefore, Morris must fail in his claim. In the end, however, counsel agreed that the point was not taken below and that, had it been taken, in light of the evidence it is most likely that an amendment to the statement of claim would have been allowed so as to allege such an agreement. In the circumstances, Mr. Uren did not persist with that submission.

Consequently, in my view, Scuderi’s first ground of attack on his Honour’s decision must fail.

(b) Illegality

Mr. Uren put his case on illegality in a number of ways but ultimately, his primary submission on this issue was that the agreement was void for illegality because it provided, unbeknown to the other unsecured creditors, for a “bribe” or a financial inducement to Morris to vote in a particular way at the then forthcoming creditors’ meeting. It was said for Scuderi that this gave Morris a secret advantage or a preference over the other creditors and thus breached the underlying basis of a composition which is equality amongst the creditors as to the rate of return on their respective debts. By entering into the agreement, it was said, Morris breached his duty of good faith to his fellow creditors in relation to the composition. Consequently, Mr. Uren submitted, the agreement was bad per se and since the creditors did not give informed consent to it, it remained unlawful. More particularly, Mr. Uren argued that here:

-the creditors were not told that Morris was promised a considerable amount of money (which, in total, was greater than what he would have received in the administration) in return for his support
-they were misled by Morris when he told them, in the context of supporting the appellant’s bid, that he would lose more from the administration than they would
-there was inequality between Morris and his co-creditors as to the rate of return on their respective debts due to them by Denyers.

Hence, said Mr. Uren, the relevant conduct of Morris amounted to a fraud on his fellow creditors. The law proscribes such conduct, he said, and, therefore, he was not entitled to its assistance in recovering the money from Scuderi.

Mr. Uren submitted in the alternative that such an agreement was void if it required its terms to be kept secret from the creditors. Counsel put that it was implicit in the agreement contended for by Morris that its terms would be kept secret from the creditors. In my view, however, there is no factual basis from which such an inference could be reasonably drawn and I therefore put this contention to one side.

Before analysing Mr. Uren’s principal submission on illegality, it is convenient to dispose of his further complaint that his Honour failed to consider a number of factors which were said to be relevant to the question of illegality of the agreement, namely:

(a)that the inducement promised to Morris could have been promised to the administrator, thereby increasing the amount available for distribution to creditors
(b)that the relevant comparison was between Scuderi’s bid and the Clements offer
(c)that the payment by Morris of the National Australia Bank debt and his waiving his own claim in relation to it were not significant benefits for creditors.

As to the first factor, it is not at all apparent that his Honour did not consider it, but in any event, it is pure speculation whether it was contemplated that Scuderi would make an offer to the administrator. It was not suggested in his evidence that this was an option that he had considered. Morris was seen by him as a key to the success of the bid and, therefore, Scuderi’s efforts were directed at securing that support. If he had made the offer to the administrator instead of to Morris he clearly would not have received his support for the bid. Hence, as a matter of commercial reality, it is most unlikely that such an offer was contemplated by Scuderi. The voting at the creditors’ meeting confirmed this; but for the support of Morris, Scuderi’s bid would not have gained the vote of the majority in value. As to the above factor (b), which counsel said was not considered by the judge, it is obvious from his Honour’s reasons that in dealing with the benefit of Scuderi’s bid to the creditors, he compared it with that made by Clements. Finally, given that the administrator quantified the net benefit of the revised Offer 1 at almost three cents in the dollar, it is difficult to say that Morris’s offer to pay out the bank debt and not prove in the administration in relation to it were not significant benefits to the creditors.

I now turn to examine Mr. Uren’s primary submission that the agreement is void for illegality. As I have said, his case was that, by entering into the agreement in question, Morris breached his duty to act in good faith towards his fellow creditors and thereby perpetrated a fraud on them. Consequently, it was said, the agreement was illegal.

The principle

The authorities on which Mr. Uren principally relied for his primary contention and which are summarised below, recognise that at general law creditors in a composition contract not only with the debtor but also with each other. The understanding between them is that each will forego the same proportion of the debt due by the debtor. As between themselves and as between each of them and the debtor they enter into the arrangement on the basis of equality in the sense that there is a tacit understanding between them that they will all share in the shortfall and in the distribution of the payment in the same proportions. In such circumstances, there is an obligation on the creditors to act in good faith towards one another in respect of the composition and not make a secret bargain with the debtor or with another acting on his behalf or with his acquiescence, which gives them a greater return in respect of their debt than is to be obtained by the remaining creditors in a distribution. Such a bargain is fraudulent in equity and illegal and thus, unenforceable by the creditor who made it.

These authorities fall into a number of broad categories and it is convenient to analyse them in the context of their various groupings.

Debtor – creditor agreement as to benefit

One of the earliest cases that dealt with such agreements is Cockshott v. Bennett,[38] which was concerned with a composition of creditors’ rights. In order to induce the plaintiffs to execute the then proposed deed of composition under which creditors were to receive eleven shillings in the pound, the debtor met the plaintiffs’ demand that they be given a promissory note for the balance of the debt. The other creditors, who were not prepared to sign the deed unless the plaintiffs executed it, did not know of the plaintiffs’ arrangement with the debtor. It was held that the agreement to give the promissory note was void (at law and in equity) since the plaintiffs had perpetrated a fraud on the creditors. Lord Kenyon, C.J. said[39]:

“The foundation of my opinion is, that the temptation to give this note was a fraud on the creditors who were parties to the contract, on which their debts were to be cancelled in consideration of receiving a composition. The note preceded the execution of the deed; all the creditors being assembled for the purpose of arranging the defendant’s affairs, they all undertook and mutually contracted with each other that the defendants should be discharged from their debts after the execution of the deed. Then these plaintiffs, in fraud of that engagement, entered into a contract with the defendants, which prevented their being put in that situation which was the inducement to the other creditors to sign the deed, and to relinquish a part of their demands ... But this transaction is bottomed in fraud, which is a species of immorality; and, not being available as such, cannot be revived by a subsequent promise.”

[38](1788) 2 Durn & E 763; 100 E.R. 411.

[39]At 765; E.R. at 412-413

Another early case where the relationship between the debtor and the creditors in a composition was examined is Dauglish v. Tennent.[40] In that case, preferences beyond the amount due in the composition were offered by the debtor to some creditors to induce them to execute the deed of composition. The deed was held to be void as against the plaintiff who executed it without knowledge of the inducement. Mellor, J. explained[41]:

“To put the case on a broad ground, it is an agreement between the debtor and each creditor that they are contracting on terms of equality as to each and all, and if by a secret bargain some creditors have an advantage over other creditors, it is a fraud upon those who must be presumed to have signed the deed upon the understanding that all the creditors should be placed on the same footing.”

[40](1866) L.R. 2 QB 49.

[41]At 54.

Lush, J. was of the same opinion, saying[42] that:

“It must be taken that every creditor who signed the deed stipulated for good faith between the debtor and the whole of the creditors, and that the release was only to take effect if and when the requisite majority of the creditors should have bonâ fide executed the deed; and if the execution of some was obtained by bribery, then it is not such an execution of the deed as was contemplated.”
[42]At 54.

Creditor – third party agreements involving the debtor

A similar position occurs where the relevant inducement comes from one who acts in this respect on behalf of or with the acquiescence of the debtor. For example, in Knight v. Hunt[43] the plaintiff/creditor was induced to sign the deed of composition which was to give creditors ten shillings in the pound by reason of a promise by the debtor’s brother to supply him at his own cost with coal to the value of 150l. The other creditors knew nothing of this arrangement. The plaintiff received the coal and a promissory note in respect of the amount due to him in the composition but it was held that he was not entitled to enforce the credit note. Best, C.J. said[44]:

“These agreements for composition with creditors require the strictest good faith. If I see a man, acquainted with the circumstances of the debtor, agreeing to sign a paper, under which he is to be satisfied with 10s. in the pound, I conclude he has exercised a judgment on the subject. Am I not cheated if he procures another to give him 10s. more?”

[43](1829) 5 Bing 430; 130 E.R. 1127.

[44]At 433-434. E.R. at 1128.

His Lordship concluded that “(h)ere the Plaintiff has had his 10s. in the pound in coal, and he cannot have it again in money” (by way of the promissory note given in respect of the amount promised in the composition).

In this context, see also Cadbury Schweppes plc v. Somji[45] which is discussed in para.[72] below.
[45]2001 1 W.L.R. 615

In Re ex parte Milner[46] the debtor’s brother agreed to make additional payments to some of the creditors on account of their debts and thereby induced them to sign the deed of composition which the plaintiff creditor had earlier signed. Brett, M.R. had no doubt that the deed could be avoided if the additional payments had been made by the debtor himself. His Lordship said[47]:

“In my opinion it is of the very essence of a composition of this nature that all the creditors who come in under it oblige themselves to each other, and the debtor obliges himself to every one of them, that, so far as he is concerned, all of them shall come in upon a footing of equality. This equality is implied by law from the very nature of the transaction, and, if it is carried out by means of a deed, then, unless there is something in the deed which is plainly to the contrary, equality between the creditors becomes an implied condition of the deed, and if any breach of this condition is committed by the debtor the deed becomes voidable by every creditor who has executed it.” (Emphasis added).

[46](1885) 15 Q.B.D. 605.

[47]At 612.

His Lordship then referred to Dauglish and Knight and concluded that, where the inducement is made with the knowledge of the debtor (and is not disclosed to the creditors before they execute the deed), the principle he had formulated operated to make the deed voidable. The Master of the Rolls expressed doubt,[48] however, as to whether that would have been the position had the preference payment been made without the knowledge of the debtor. Baggallay and Bowen, L.JJ. also rested their respective conclusions[49] on the basis that the payment in question was made with the knowledge of the debtor.
[48]At 614.
[49]At 615 and 616.

Creditor – third party agreements not involving the debtor

That an agreement of the kind discussed between a creditor and a third party might not be struck down if the debtor had no relevant association with the transaction was, as I have said, recognised in Knight v. Hunt. The point was also highlighted in In re EAB[50] which was concerned with a scheme of arrangement, albeit one under the English Bankruptcy Act 1890. The debtor’s brother, without the knowledge of the debtor, provided additional benefits to two creditors on the basis that they would withdraw their claims under the scheme. The court held that because the added benefit was not provided with the knowledge or on behalf of the debtor, the court should not refuse to approve the scheme. Vaughan-Williams, L.J. said[51]:

“If, in substance, an arrangement were made with a creditor with the knowledge and on behalf of the debtor, whereby that creditor would get an advantage over the other creditors, I should say that would be quite a sufficient reason for not sanctioning the scheme. But in the present case I am not satisfied that this arrangement which was made through the debtor’s brother was one which he, the debtor, had knowledge of at all. ... If one accepts that conclusion, the result is this: that, so far from this being a bargain made by the debtor, or a bargain made on his behalf with his knowledge, it was a bargain made by a third person without any knowledge whatever on the part of the debtor. Under those circumstances, [the court should not refuse to approve the scheme].”
[50][1901] 1 K.B. 457.
[51]At 464-5.

Where agreement not secret or is outside composition

The authorities recognise that a creditor in a composition may, in certain circumstances, properly make an arrangement with another creditor, or the debtor or a third party to be paid a greater amount than other creditors in the composition. For example, Fisher, J. in Re Jacobs; ex parte O’Connor[52] pointed out that the authorities to which I have referred do not suggest that it would be improper for creditors to agree between themselves to a distribution which was not based on equality of treatment. But a secret bargain to that effect was a different matter. His Honour said that[53]:

“So long as the creditors act in good faith towards each other and make no secret bargains with any other creditor or debtor, there can be no complaint about such agreement. Secrecy and lack of good faith are of the essence of any objection.”

[52](1984) 1 F.C.R. 1.

[53]At 7.

In Paton v. Campbell Capital Ltd.[54], a deed of arrangement was executed by the creditors. They included Goodacre Developments Pty. Ltd. (“Goodacre”) and Permanent Custodians Pty. Ltd. (“Permanent”) which voted in favour of the deed because they had been given an extraneous benefit pursuant to a side arrangement made between each of them and the debtor. In the case of Goodacre the debtor had agreed to join in procuring a transfer to Goodacre of certain shares in the company which the debtor did not own but which he and another person controlled. Thus, it was found that they were induced to vote for the deed of arrangement by the benefits they gained from the debtor pursuant to the extraneous agreement. The judge below set aside the deed because, inter alia, the resolution in favour of the deed did not reflect “an agreement between the creditors fairly arrived at”. His Honour made a sequestration order and the debtor appealed. After analysing the earlier authorities to which I have referred, the Full Court[55], concluded that an arrangement by the debtor to give a creditor an inducement outside the proposed scheme in order to secure his or her vote would not create relevant “difficulty” if the inducement was “openly” disclosed and all creditors agreed to enter into the deed notwithstanding the inducement. Their Honours went on to say[56]:

“But where there is no such unanimity, the giving of an inducement to a creditor, or in the more colourful language of Lush, J. in Dauglish ‘a bribe’ operates to render void a deed entered into on that basis. In such a case the necessary good faith between the debtor and the whole of the creditors would be missing.”[57]

Their Honours concluded that the Goodacre arrangement, which apparently had not been disclosed to the creditors, operated to preclude the deed of arrangement from having been fairly reached and from being in the interests of creditors generally.[58]

[54](1993) 46 F.C.R. 30.

[55]Olney, Hill and Cooper, JJ.

[56]At 37.

[57]It is not clear whether, when speaking of “all” creditors and of the requirement for “unanimity”, their Honours were referring to those voting creditors who constitute the requisite majority for the purpose of s.204 of the Bankruptcy Act 1996 (Cth). or to a requirement of unanimity of all of the creditors as seems to be the case at general law. If their Honours were considering only the situation in the context of the Act, it would probably be sufficient for that purpose if those who constituted the requisite majority were aware of the inducement.

[58]It should be noted that the conclusion that the arrangement was not in the interests of creditors generally was reached in the context where, under the deed, the creditors were to receive only one cent in the dollar.

In E.T. Fisher & Co. Pty. Ltd. v. English, Scottish and Australian Bank Ltd.[59] (a case to which Ormiston J.A. drew attention during the hearing of the appeal) the High Court did not set aside an agreement between the creditor/bank and the debtor that was made during the currency of the composition and pursuant to which the creditor/bank was paid its debt in full. In that case, the creditors agreed that, subject to certain conditions, they would accept a compromise of their debts which included payment of the agreed amount by instalments. Subsequently, but during the course of the composition, the debtor obtained an advance from the bank which was also a creditor in the composition, in order to pay the balance due in the composition. The further funds were obtained on the condition that the debtor would pay the bank in full the new advance and the balance of its original debt. This arrangement was not known to any of the creditors except one. The High Court found that the subsequent agreement was not a fraud on the other creditors because it was not contemporaneous with the earlier composition and there was no misrepresentation by the bank of its position to the other creditors when the composition was effected. Starke, J. held that this transaction was beneficial to the debtor, the bank and the creditors and it enabled the debtor to pay its composition and was not inconsistent with good faith between the bank and the other creditors.
[59](1940) 64 C.L.R. 84.

Effect of Part 5.3A of the Corporations Law

Since the composition in the present case was made in the context of Part 5.3A of the Corporations Law, it is necessary to consider briefly whether the principles discussed earlier have been relevantly affected by the operation of that Part. In that context, it is necessary to look to the recent decision of the English Court of Appeal in Cadbury Schweppes plc v. Somji, to which we were referred by counsel for Scuderi in their memorandum of 19 April 2001 which was forwarded to us after conclusion of the argument in the appeal. The case was concerned with an Individual Voluntary Arrangement (“IVA”) proposed by the respondent debtor under Part VIII of the English Insolvency Act 1986 which, so far as is relevant, is broadly similar to Part 5.3A of the Corporations Law. The three major creditors, two banks and Cadbury Schweppes plc (“Cadbury”), persistently remained opposed to the proposed IVA. The vote of either Cadbury alone or the two banks together was necessary for the IVA to be approved. Before the final meeting of creditors, an associate of the respondent/debtor caused a company that he controlled, Leaf Holdings Ltd. (“Leaf”), to enter into an agreement with the two banks under which they sold to Leaf their interests in the debts for amounts significantly greater than the debts themselves. They also agreed to vote in favour of the IVA and keep the agreement secret. This arrangement was not communicated to Cadbury or to the chairman of the final meeting of creditors who held proxy votes. At that meeting the IVA was approved, the two banks voting in favour of the arrangement against the objection of Cadbury which then applied under s.262(1)(a)[60] of the Insolvency Act 1986 for the approval of the IVA to be revoked on the ground that it unfairly prejudiced its interests. It also sought a bankruptcy order on the basis that the arrangement was void, or alternatively, under s.276(1)(b)[61] of the Act on the ground that there was a material omission in the terms of the proposal. The judge at first instance found that even under the new legislative provisions there was, in addition to the need for equality amongst creditors, a requirement for complete good faith between a debtor and his creditors and between the creditors themselves, as established in cases from Cockshott v. Bennett to In re EAB. The trial judge concluded that the principles enunciated by the authorities continued to apply under the new provisions of the Act and on that basis, while dismissing Cadbury’s application under s.262(1)(a), he concluded that the approval of the IVA was void. The judge also found that he had jurisdiction under s.276(1)(b) of the Act to make a bankruptcy order on the ground that there was a material omission from the debtor’s proposal because had the truth been told, it would be likely to have made a material difference to the way in which the creditors would have considered and assessed the terms of the IVA.
[60]This section provides: “Subject to this section, an application to the court may be made by any of the persons specified below, on one or both of the following grounds, namely – (a) that a voluntary arrangement approved by a creditors’ meeting summoned under section 257 unfairly prejudices the interests of a creditor of the debtor;”.
[61]This section provides that the court may make a bankruptcy order if it is satisfied that “information which was false or misleading in any material particular or which contained material omissions – (i) was contained in any statement of affairs or other documents supplied by the debtor under Part VIII to any person, or (ii) was otherwise made available by the debtor to his creditors at or in connection with a meeting summoned under that Part..”.

Although the Court of Appeal agreed with the judge below that there was a material omission from the debtor’s proposal which justified the making of a bankruptcy order, it did not agree that the IVA was void. Their Lordships were of the view[62] that the judge below erred by “over-reliance on the old law” and that he had insufficient regard to the terms of the policy of Part VIII of the Act. In saying this, Robert Walker, L.J. (with whom Sir Christopher Staughton and Judge L.J. agreed) was referring, as I understand it, to the limitations that the legislation has placed on the procedure by which an approved IVA may be challenged on the ground of irregularity, namely, only by “... a direct challenge under section 262(1) or an indirect challenge by means of a bankruptcy petition ...”. Having said that, however, his Lordship referred[63], with apparent approval, to what Hoffmann, J. said in In re A Debtor[64], namely:
[62]At 626.
[63]At 625-626.
[64][1992] 2 Ch. 554 at 558-559.

“Those [earlier] authorities show that, in approaching the language of the 1986 Act, one must pay particular attention to the purposes and policies of its own provisions and be wary of simply carrying over uncritically meanings which had been given to similar words in the earlier Act. It does not, however, mean that the language of the new Act comes to one entirely free of any of the intellectual freight which was carried by words and phrases in earlier bankruptcy or other legislation.”

Robert Walker, L.J. went on to observe[65]:
“The intellectual freight least likely to be jettisoned includes the basic doctrines (such as proportionate treatment of unsecured creditors, and the principle of set-off) which have been features of the English bankruptcy laws since its earliest days [and that, although there was no strong presumption that similar principles must be found in the new statutory regime] it would be no great surprise to find it there in one form or another.”

Judge, L.J. put it more firmly, albeit focusing on s.276 of the Act, when he said[66]:
“The principles laid down in the cases in the 18th and 19th centuries, accurately summarised by the judge below, have not, as he rightly put it, ‘become outmoded or unnecessary in modern times’”.

Thus, it seems that it was accepted in Cadbury that the basic historical principles of equality and good faith between creditors in a composition have not been abandoned by the new insolvency regime of the English 1986 Act, although it is relatively clear that challenges to the validity of the composition or arrangement can only be made in accordance with the new legislation and only to the extent permitted by it.

[65]At 626.

[66]At 630.

The same position seems to apply in respect of Part 5.3A which was introduced into the Law by The Corporations Law Reform Act 1992 apparently to replace the former sections which were concerned with Official Management[67]. The Explanatory Memorandum in relation to the then proposed new legislation makes it apparent that the new legislation was to implement recommendations made by the Australian Law Reform Commission in its report on its “General Insolvency Inquiry” (“the Harmer Report”). So far as is relevant, the Harmer Report explains that its recommended provisions relating to the termination of a deed of arrangement by a court include as grounds for termination “factors which reflect public policy criteria developed by the courts for invalidation of schemes of arrangements”[68]. In particular, the Harmer Report notes that the general provision, now s.445D(1)(g), which allows the court to terminate a deed “for some other reason”, would “enable the court to draw on the case law which has been developed in respect of schemes of arrangement”[69]. It seems, therefore, that Part 5.3A does not intend to discard the fundamental aspects of the “intellectual freight” developed by the courts in the cases which have been discussed earlier. More specifically, the principles developed by the early cases which impose on creditors in a composition an obligation to act in good faith towards each other continue to apply in the context of the operation of Part 5.3A of the Law. The legislation does, however, place a limitation on the ability of a discontented creditor or other interested person to challenge a composition governed by the statute and it prescribes the grounds on which it may be sought to be set aside.[70] But such restrictions are not relevant for present purposes because no attempt has been made here by any creditor or any other interested party to challenge the validity of the composition of the Denyers unsecured debts.
[67]McVeigh v. Linen House Pty. Ltd. (No.2) [2000] 1 V.R. 31 at 46 per Phillips, J.A.
[68]Australia Law Reform Commission, General Insolvency Inquiry, Report No.45 Vol.1 (1988) [123].
[69]At [123].
[70]Section 445D of the Corporations Law.

Relevance of the principle to this case

It will be recalled that it was Mr Uren’s principal case that the agreement was illegal because it was entered into by Morris in breach of his obligation to act in good faith towards his fellow creditors. It was pointed out by counsel that, since in this case, the creditors including Morris were voting in the context of the composition, they owed a duty of good faith towards each other. Mr. Uren said that, by reason of the MCC agreement, Morris obtained a secret benefit outside the composition and hence his entry into it amounted to a breach of that duty and thus, a fraud on the creditors thereby making the agreement illegal and unenforceable.

In my view, however, even if Morris owed his fellow creditors a duty of good faith as was contended for by Mr. Uren, he did not breach that duty by entering into the agreement in question. In the cases to which I have referred involving a third party giving a creditor an additional benefit, the third party acted on behalf of the debtor or with his acquiescence or for his benefit except in In Re. EAB. In Cadbury, for example, the arrangement with Leaf was made with the knowledge and acquiescence of Somji and was for his benefit. A similar situation was present in the other cases such as Knight v. Hunt and Re ex parte Milner. In those cases, the relevant agreement was held to be unlawful. In this case, however, Scuderi, the third party offering to pay money to Morris, did not act on behalf of the debtor or with its acquiescence. Nor was the agreement made to benefit the debtor. The debtor, Denyers, as represented by the administrator at the relevant time, had no knowledge of this agreement between Scuderi and Morris and obviously could not have acquiesced in it. This fact distinguishes this case from the authorities to which I have just referred. On the other hand, as I have said, in In Re. EAB, the third party did not act on behalf of or with the acquiescence of the debtor and the relevant agreement was held to be not objectionable. In my view, that is also the case here.

There are also other reasons why I consider the agreement between Scuderi and Morris was not illegal and unenforceable. First, the terms of the agreement did not require Morris to keep it secret from the creditors, in contrast to the obligation of the two banks in Cadbury. It was not suggested by the evidence that this might have been the case. The fact that the particulars of the agreement were not disclosed does not lead to the conclusion that it was a term of the agreement that that would be the case. Next, it seems to me that this agreement was made outside the composition in the relevant sense, unlike the agreements which were considered in the earlier cases[71]. Those agreements were entered into primarily to secure a benefit to the debtor and offer to provide additional benefits to the creditors concerned in order to induce them to enter into the composition. This was not the purpose of the agreement in this case. Its purpose was to secure to Scuderi the assistance of Morris in purchasing the Denyers assets. Moreover, it was part of the agreement that Morris would stand out of the composition. Thus, the agreement here was relevantly outside the composition and, as was held in Fisher, it could not be said to amount to a fraud on the creditors.
[71]Cockshott v. Bennett, Dauglish v. Tennent, Knight v. Hunt, Re ex parte Milner, Cadbury.

For these reasons, it is my view that, by entering into the agreement, Morris did not breach his relevant duty to creditors, so that his Honour was correct in his finding that the agreement was not unlawful, as was contended for by Mr Uren, and that Morris was entitled to sue on it.

Given this conclusion, it is unnecessary to examine Mr. Uren’s argument that his Honour erred in finding that, because the Deed of Arrangement was fair to the creditors, it meant that the transaction was not tainted with illegality.

For these reasons, Scuderi’s claim that the agreement in question is illegal, must fail.

(c) Scuderi contracted as agent

I now turn to consider the argument put on Scuderi’s behalf that, when he entered into the Scuderi/Morris agreement, he did so as agent for a company to be incorporated. At the outset of the argument on this issue, Mr. Uren indicated that he would contend that, in the alternative, Scuderi acted as agent for an undisclosed principal, but he acknowledged that, if he failed to establish his case under s.131 of the Law (then s.183 of the Corporations Act 1989) he would necessarily fail in making good the alternative claim. Hence, the only question for present purposes is whether his Honour erred in finding that Morris contracted with Scuderi in his own right and not on behalf of a company to be formed.

His Honour accepted the evidence of Morris that, at all times, he dealt with Scuderi on a personal basis. Such a finding was clearly open to his Honour. It was made in the context of the evidence as to what transpired at the MCC luncheon meeting and shortly thereafter. Critically, issues such as the amount Morris had to pay by way of interest in relation to his loans, the question whether he would support the proposed bid and other associated matters were discussed by him only with Scuderi. At the conclusion of their discussions, as I have said, they shook hands “on the deal”. Moreover, as has also been mentioned, the offer made by Scuderi to the administrator very shortly after the MCC meeting was made in his personal capacity. There was no evidence that Morris was told by Scuderi that he was making the promise to pay the $55,000 each year on behalf of a company to be formed or on behalf of any other party. It may be fair to assume that had such a suggestion been made to Morris, he would have raised questions about the identity and capacity of the proposed payee to meet the relevant obligation. It was not suggested by Mr Uren that these matters are raised between the parties. Moreover, as at 16 August 1996 the companies which became involved in the acquisition of the assets in question, namely Ancall and Bandell, had not been incorporated, so that Scuderi would have had difficulty in explaining to Morris the particulars of the corporate vehicle and how it would pay the money in question. There was, therefore, no evidence that Scuderi was seeking to contract on behalf of a company to be formed.

It was said for Scuderi that the agreement was ratified for the purposes of s.131 of the Corporations Law by Bandell making the six payments to which I have referred earlier to Morris, all of which were accepted by him. It was also suggested that ratification could be inferred from Ancall entering into the purchase agreement. Further, it was contended for the appellant that at the creditors’ meeting it was clear that the acquisition would be made by Scuderi through a corporate vehicle. In my view, however, it is clear enough that the mere making of the six payments by Bandell on behalf of Scuderi, and Morris’s acceptance of those cheques, did not constitute ratification by the company for the purposes of s.131 even if it is to be assumed that, at the MCC lunch, Scuderi had told Morris that he intended to acquire the assets in question through a company yet to be formed and that payments to him would be made by such a company. Similarly, the mere fact that Ancall entered into the purchase agreement with the administrator does not mean that there was relevant ratification. Furthermore, even if it was clear at the creditors’ meeting that Scuderi would make the acquisition through a corporate vehicle, it does not follow that a week or so prior to that meeting, at the MCC lunch, he and Morris formed their contract on the basis that the relevant promise was being made on behalf of a company to be formed.

Thus, in my view, it was well open to his Honour to find on the evidence that the contract was made by Scuderi in his own rights. Hence, Scuderi’s third and last ground of attack on his Honour’s decision must fail.

In the circumstances, I would dismiss the appeal.

- - -

[2001] VSCA 190

29 October 2001