Secretary, Department of Social Security v SRA

[1993] FCA 573

ARTHUR DAVID THOMAS DINGLE; VALERIE JEAN DINGLE; and GRAHAM DOUGLAS COCKERILL
EX PARTE: WESTPAC BANKING CORPORATION and IVOR WORRELL
Nos. QB1464 - QB1466 of 1990
FED No. 573
Number of pages - 15
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
GENERAL DIVISION
Drummond J(1)

CATCHWORDS

Bankruptcy - Bankrupts had a claim for unliquidated damages arising from a loan transaction against a creditor - trustee in bankruptcy had advice on prospects of success of claim - proposal for composition under Bankruptcy Act Pt IV - trustee refused to allow the creditor to vote on the composition - composition approved - if the creditor had been allowed to vote the composition would have been rejected - only persons who are in fact creditors and have provable debts are entitled to vote on a composition - the trustee has an obligation to decide whether a person is in fact a creditor in order to determine that person's entitlement to vote - trustee must consider the effect of Bankruptcy Act s. 86 in order to determine a person's entitlement to vote on a composition - Court has a discretionary power to review the trustee's decision not to allow a person to vote on composition - power to review the trustee's decision generally exercised only if the person claiming to be entitled to vote satisfies the Court that he is in fact a creditor and that his vote would have produced a different result with respect to the proposed composition - creditor did not seek to prove that the bankrupt did not have a set-off of an amount in excess of the amount of the bankrupt's debt - trustee failed to appreciate the nature of his obligations - notwithstanding the trustee's failure the application to set aside compositions dismissed.

Bankruptcy Act 1966 (Cth) - Pt IV

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

Re Driller (1971) 21 FLR 159

Forshaw v Thompson (1992) 35 FCR 329

Gye v McIntyre (1991) 171 CLR 609

Re McLean; Ex parte Friends' Provident Life Office (1992) 108 ALR 360

Musolino v Sidiropolous (1991) 101 ALR 235

Zantiotis v Andrew (No. 2) (1988) 80 ALR 284

HEARING

BRISBANE, 18-19 February, 1993

#DATE 16:8:1993

Counsel for the applicant: R.N. Chesterman QC and P.M. Wolfe

Solicitors for the applicant: Feez Ruthning

Counsel for the respondents: P.R. Dutney QC

Solicitors for the respondents: Baker Johnson and Partners

Counsel for Mr Cockerill and F.W. Redmond
Mr and Mrs Dingle:

Solicitors for Mr Cockerill and
Mr and Mrs Dingle: Whitman and Co

ORDER

THE COURT ORDERS THAT:

1. The application is dismissed.

2. The applicant pay the costs of each of the respondents, Mr Worrell, Mr Cockerill, Mr Dingle and Mrs Dingle, of and incidental to the application including reserved costs to be taxed.
Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

JUDGE1

DRUMMOND J I have before me three applications by Westpac Banking Corporation ("WBC") for orders declaring void the compositions accepted at meetings of the creditors of each of Mr. Cockerill and Mr. and Mrs. Dingle, who became bankrupt on their own petitions in October 1990. I will refer to them as "the bankrupts" although their bankruptcies were annulled upon acceptance of the compositions. The meetings were called by Mr. Worrell, who was the trustee of each bankrupt's estate, under s. 73(2) the Bankruptcy Act 1966; they were all held on 7 October last.

1. WBC is a secured creditor of each bankrupt. However, at the meetings, statements were produced on its behalf showing the amount by which the debt claimed as owing to it exceeded WBC's estimate of the value of its securities: see s. 64ZA(5) the Bankruptcy Act. It is common ground that, if Mr. Worrell had decided that WBC was entitled to vote in respect of that amount on each of the proposals for the compositions, each would have been defeated. Mr. Worrell, however, refused to allow WBC to vote and it is that which has led to these applications.

2. WBC is being sued by the bankrupts for damages and other relief arising out of a foreign currency loan agreement into which they entered in 1984. This action was commenced in January 1991, i.e., after the commencement of the bankruptcies. The applications are the latest battle in a war waged by WBC, with considerable success to date, to put an end to the bankrupts' action against it. Many of the bankrupts' difficulties are due to their having commenced an action after they had become bankrupt, which their trustees in bankruptcy alone had the right to maintain. The history of the interlocutory litigation is summarised in the affidavit of Ms. Fortescue filed on behalf of WBC.

3. If the compositions can be overturned, that will very likely put an end to the bankrupts' action against WBC. In his report to creditors furnished pursuant to s. 73(2) the Bankruptcy Act, Mr. Worrell stated:
   

"It is clear that the bankrupt estate cannot continue with the action and unless the Composition is accepted or the creditors provide further funds to the estate the action will not continue and any chance for recovery of damages for the benefit of creditors will be lost." (emphasis is Mr. Worrell's)

1. Mr. Worrell is not prepared to pursue the action further unless he is protected in respect of the costs of the action; the relatives of the bankrupts, who appear to have funded the action to date, are not prepared to give Mr. Worrell an indemnity in respect of his liability to WBC for its costs, should it be successful in its defence. No creditor is prepared to indemnify Mr. Worrell.

2. If the compositions stand, however, the bankrupts will be able to pursue the action with assistance from their relatives; but if WBC succeeds in its defence, it would appear that, because of the bankrupts' lack of assets, WBC will not be able to obtain satisfaction of the substantial order for costs that it would be likely to obtain in that event. If the action is successful, the composition provides for 30% of the fruits of the action, together with "the value of any release of security (held by WBC) over property owned by the bankrupts" to be made available to the unsecured creditors, in the order of priority set out in s. 109 the Bankruptcy Act 1966. The only prospect the unsecured creditors have of recovering anything from the bankrupts is if they obtain judgment in the action against WBC.

3. The case was argued for WBC on the basis that the crucial question for the Court in deciding the validity of the compositions was whether the trustee had acted properly in excluding WBC from voting. A number of complaints were made against Mr. Worrell: it was submitted that he failed to give WBC natural justice, the requirements of which he was bound to observe in making the decision not to allow WBC to vote, that he misused the power conferred on him by s. 64ZA(8) the Bankruptcy Act in determining that question and that, in ruling against WBC he proceeded on an erroneous view of the law as to the availability of s. 86 the Bankruptcy Act. Senior counsel for WBC made his position clear in argument when he submitted that I should not decide whether WBC was in fact a creditor, that only the trial judge who hears the bankrupts' quite complicated action against WBC could determine that, but that WBC's position was that there was no basis for the trustee depriving WBC of "its prima facie right as a creditor". It is understandable that WBC should adopt this approach: it seeks to avoid the trial by bringing these applications, which, if successful, will result in relieving it of the burden of having to litigate the issues raised in the bankrupts' action.

4. The main questions for my decision therefore are:
   

(1) What did the trustee have to decide in order to determine the question of WBC's entitlement to vote?

(2) Can the Court review the trustee's decision to exclude WBC from voting?

(3) If it can, and assuming WBC can show that the trustee wrongly and/or improperly excluded it from voting, should the compositions be declared void?

(1) THE ISSUE FOR THE TRUSTEE

1. I think Mr. Worrell as trustee was required by s. 64ZA(8) to determine whether WBC was in fact a creditor of each bankrupt when the question arose as to WBC's entitlement to vote.

2. Section 73 the Bankruptcy Act permits a bankrupt to make a proposal to his creditors for a composition in satisfaction of his debts. Upon receipt of such a proposal, the trustee is required to call a meeting of creditors and to send to each creditor beforehand, a copy of the proposal, accompanied by his report on it. A proposal for a composition can only be accepted by the creditors by special resolution, i.e., by a majority in number and at least three-fourths in value of the creditors who participate in the meeting in person, by telephone or by proxy: s. 73(4), s. 5(1), s. 64ZB and s. 64H. Section 74(5) provides that, in the event that the creditors accept the bankrupt's proposal, the bankruptcy is annulled by force of that sub-section on the date on which the special resolution was passed. Section 75(1) makes a composition accepted in accordance with Division 6 of Part IV binding on all the creditors of the bankrupt so far as it relates to provable debts due to them from the bankrupt. Section 75(4) empowers the Court, in its discretion, on application by the trustee or a creditor to annul such a composition in any one of the circumstances provided for by that sub-section. (In the course of the hearing, WBC developed an argument based on this sub-section.) Section 76A applies Division 5 of Part IV to meetings held under s. 73. Under s. 64ZA(8) and (9) of Division 5, the trustee is empowered to determine any question that arises as to the entitlement of a person to vote at such a meeting and to adjourn the meeting for up to 14 days for the purpose of enabling him to determine that question.

3. Section 73(4) requires that a person be a creditor before he has any right to vote: it is not enough that the person seeking to vote has a bona fide claim to be a creditor or a prima facie entitlement to be regarded as a creditor. Acceptance by the creditors of a proposal by a bankrupt pursuant to Division 6 of Part IV results in the automatic annulment of the bankruptcy: s. 74(5). It is unlikely that it was the legislative intent that such a change of status could be brought about by the vote of persons who are not in fact creditors of the bankrupt.

4. In Zantiotis v Andrew (No. 2) (1988) 80 ALR 299, Beaumont J, who had earlier held that the Court had jurisdiction to decide whether a creditor adverse to a Part X scheme had been wrongly allowed to vote by the chairman of a meeting considering the scheme, in the course of determining that issue, said at pp 302-3:
   

"In the present case, the context strongly suggests that, subject to the specific exceptions mentioned in s. 198 (e.g. s. 198(2)), a creditor is entitled to vote notwithstanding that, on technical grounds, the "proof" of his or her debt may be rejected in whole or in part. The evident object of s. 198 is to establish a simple, practical procedure to enable the chairman to determine who can vote and, if so, for what amount. Because of time constraints, it was no doubt thought undesirable that the chairman should have to enter upon an investigation into the technical questions which could well surround such an inquiry into whether a debt should be admitted to "proof". By s. 198(4), a creditor is not entitled to vote unless he or she has made known to the chairman particulars of his or her debt. This is a practical safeguard designed to ensure that, for instance, frivolous claims cannot give any right to vote. Moreover, by virtue of s. 198(2), no vote is available in respect of unliquidated or contingent debts or in respect of debts the value of which is not ascertained. On the other hand, future debts, if certain, qualify under s. 198(3). Thus s. 198 reveals on its face a legislative intention to establish a code that, with certain defined exceptions, gives a creditor a right to vote notwithstanding that further investigation may reveal that his claim should not be admitted to "proof".

1. WBC relies on this passage in support of its argument that in a case such as this the trustee should not attempt to finally determine whether a person who has claimed the right to vote at a meeting held under s. 73 is a "creditor" within that section and so entitled to vote. WBC went on to submit that whether WBC was a creditor of the bankrupts was a complicated question, the answer to which depended on whether their action against WBC was well-founded, and that the trustee could only come to an informed opinion after something approaching a trial; s. 64ZA(8), so it was said, did not require the trustee to reach "an informed opinion" and, in any event, he did not have sufficient material to decide whether WBC was a creditor. Accordingly the trustee was not justified in depriving WBC of its prima facie right to vote.

2. While I do not doubt the correctness of what Beaumont J said of s. 198, I do not think his remarks are applicable to s. 73. There is no restriction of the range of "creditors" who are entitled to vote at meetings held under s. 73(2). Anyone who falls within that class and who, being a member of that class, has not lost the right to vote by failing to give the notices required by s. 64ZA(5) and s. 64ZA(6), is entitled to vote. The provisions that govern the entitlement to vote on proposals by the debtor under Part X are materially different from the corresponding provisions of Division 6 of Part IV. Section 198 governs who can vote for or against a Part X proposal. But the creditors permitted to vote for or against a Part X scheme comprise a narrower class than persons owed debts that would be provable under s. 82. Section 198 denies that status to persons who will have debts that are provable: while there is no restriction on a spouse proving in the debtor's bankruptcy, a spouse is not entitled to vote on a proposal for a Part X scheme. See s. 198(7). And it is important to compare s. 198(2) with s. 82(1) and (4) with regard to contingent debts (which are provable) and with s. 82(2) with regard to certain claims for unliquidated damages (that are also provable). The task of the chairman of a meeting called under Part X to determine if a person is entitled to vote is simpler than that of the trustee at a s. 73 meeting: only creditors with debts the value of which is ascertained can vote at Part X meetings while at s. 73 meetings, the trustee has to evaluate whether a person is a creditor in respect of contingent claims and certain unliquidated claims and what the value of those claims should be assessed at, for voting purposes. It is understandable that s. 198 should be seen as an indication that the meeting provided for by Part X is to be conducted expeditiously, and without the need for a detailed investigation of the entitlement of persons claiming the right to vote. Cf. Forshaw v Thompson (1992) 35 FCR 329 at 342.

3. For the reasons given, only a person who is in fact a creditor is entitled to vote at a meeting called pursuant to s. 73(2) and, in my view, a person is a creditor within s. 73 only if he has a debt provable under s. 82. There are a number of reasons why this is so. Firstly, while the context must always control the meaning of an expression, a reference in bankruptcy legislation to a "creditor" generally means a person entitled to prove in the bankruptcy: Zantiotis v Andrew (No. 2), supra, at 302. Secondly, the only creditors who are bound by an accepted compromise are those with provable debts: s. 75(1). It is they who are interested in whether a proposed compromise should be accepted or rejected. Thirdly, in contrast to s. 198, s. 73 and s. 64ZA do not contain any provisions that exclude from voting any class of creditor with a provable debt. Fourthly, a creditor who has in fact proved his debt is given the right to vote in a special way by s. 73(5): the inference is that it is creditors with provable debts who are entitled to vote in the ordinary way.

4. If a trustee is confronted with a difficult task, as Mr. Worrell was here, when he has to decide at a s. 73 meeting whether a person is in fact a creditor in order to determine that person's entitlement to vote, he cannot wash his hands of it. The making of such a decision is one of the duties imposed on him as trustee by s. 64ZA. While he can expect the Court's assistance on particular legal questions, I do not think he can assume that it will be enough for him to bundle up all the information relevant to the question whether a person is a creditor and ask the Court to do his job for him on an application for directions. Cf. Re Driller (1972) 21 FLR 159 at 172-173. If he needs more than the 14 days allowed by s. 64ZA(9), he can seek more time from the Court: see s. 33(1)(c). But he himself must reach a decision on the matter as best he can. There is nothing novel in the notion that the trustee may have to decide for himself complex questions in determining whether a person is a creditor: the trustee may have to perform just such a difficult task in deciding whether to admit or reject proofs of debt under s. 102, an exercise said to be "solely in the discretion of the trustee ... which he should exercise without applying to the Court for directions even though a rejection may lead to litigation". See McDonald, Henry and Meek's Australian Bankruptcy Law and Practice, 5th Ed., para. 480.

(2) REVIEWABILITY OF THE TRUSTEE'S DECISION
17. In my opinion, the trustee's determination of any question of entitlement to vote that arises at a meeting called pursuant to s. 73(2) is not final: it can be reviewed by the Court. This is so even though WBC relied only on s. 30 the Bankruptcy Act as the source of the Court's power and did not rely on s. 178.

1. In Forshaw v Thompson (1992) 35 FCR 329, the chairman of a meeting of creditors convened under Part X indicated that, at the resumed meeting, he would admit to vote a person claiming to be a creditor, which vote would ensure rejection of the debtor's proposal. The Full Court held that s. 201 did not make such a decision by the chairman final and that the Court could intervene to determine the person's entitlement to vote both before the chairman made his own determination and afterwards. Whether it will be appropriate for the Court to exercise that jurisdiction in a particular case is, as the report at 342 shows, a separate question. Lockhart J (Black CJ and Sweeney J agreeing) said, at pp 335-6:
   

"Sections 221(1) and 222(1) and (2) are examples of provisions of the Act which specifically empower the court, in exercising its jurisdiction in bankruptcy conferred by s. 27, to make a summary sequestration order against the estate of the debtor (s. 221(1)) or to declare a deed or composition or provision of a deed of assignment or arrangement void (s. 222).

It is clear that the court may, on hearing applications pursuant to either of those two provisions, determine whether a creditor was entitled to vote at the meeting convened pursuant to s. 190. But the absence of an express provision empowering the court to determine at an earlier stage in the Pt X process whether a creditor is entitled to vote, does not lead to the conclusion that the court is without jurisdiction to determine that issue."

1. At p 339, Lockhart J said of s. 201:
   

"In my opinion s. 201 does not evince an intention by the legislature to exclude the court's jurisdiction to determine questions concerning the right of persons to vote at meetings of creditors under Div 2 of Pt X. The section entrusts to the chairman the power to determine the right of a person to vote at a meeting of creditors under Div 2 of Pt X and the amount of his debt to be taken into account for voting purposes. Although no right of appeal is granted against the chairman's decision, the section does not make his decision final and conclusive. The determination of the right of a creditor to vote may involve the consideration of a variety of circumstances including, as here, the question whether the creditor is a contingent creditor and therefore disqualified from voting by s. 198(2) or whether he is a creditor at all (also this case). The determination of these questions is certainly open to the chairman for the purposes of determining entitlement to vote at meetings, but his examination must necessarily be limited and not binding upon anybody otherwise than with respect to the entitlement to vote at the relevant meeting; he cannot determine substantive rights and liabilities involving the relationship of debtor and creditor."

1. He concluded at pp 341-2:
   

"In my opinion the question whether First National has any right to vote at a meeting of creditors under Div 2 of Pt X is not only within the court's jurisdiction, but is plainly a "question ... in any matter under Part X ... coming within the cognizance of the Court", and therefore empowers the court under s. 30(1)(b) to grant the relief considered to be necessary in the particular case.

The court's jurisdiction is conferred by s. 27(1) with respect to matters under the Act. A matter may arise under Pt X concerning the rights of creditors to vote at meetings under Pt X. To search for a section in Pt X which in terms empowers the court to consider the entitlement of creditors to vote at meetings misconceives the question of jurisdiction and confuses it with the question of power. Jurisdiction arises under s. 27(1) for the reasons mentioned earlier; the powers of the court are to be found in s. 30, in addition, of course, to the court's powers conferred upon it by the Federal Court of Australia Act 1976 (Cth)."

1. As is apparent from these passages, the case concerned only the Court's jurisdiction and power to determine for itself the entitlement of a person to vote at a meeting held under Part X. It was not concerned with the question whether the Court could review the manner in which the chairman might come to his own decision on a person's entitlement to vote. But Forshaw v Thompson I think supports the proposition that, notwithstanding s. 64ZA(8) and notwithstanding the absence of any express power in the Court to determine the right of a person to vote at a creditors' meeting called under s. 73(2), the Court can declare void a composition as not having been accepted in accordance with Division 6 of Part IV on the ground that a person who was in fact a creditor of the bankrupt within s. 73(2) was denied a vote by the trustee at the meeting called under that provision. There is no more reason to treat s. 64ZA(8) as excluding the jurisdiction of the Court to determine that matter than there is to so regard s. 201. Whether a composition has not been accepted in accordance with Division 6 of Part IV, as is required by s. 75(1) if the composition is to be effective, because a creditor has been wrongly denied a vote at the creditor's meeting is a question that arises in the bankruptcy of the bankrupt who proposed the composition: ss. 27(1) and 30(1) therefore give the Court the necessary jurisdiction and power to determine that question. For similar reasons, I think the Court would be able to decide the question of a person's entitlement to vote if its intervention was sought before the vote on the bankrupt's proposal was taken in circumstances in which it was apparent that the trustee intended to exclude a person from voting.

2. The Court's power to intervene when a question arises as to a person's entitlement to vote at a meeting called under s. 73(2), being conferred by s. 30(1), is discretionary. It would I think be rare for that power to be exercised, either before or after the vote is taken, unless the vote of the person said to be wrongly excluded would be likely to result or would have resulted in rejection of the proposal for the composition: otherwise, the trustee's error in denying that person the right to vote would very likely be a non-prejudicial irregularity within s. 306(1).

3. Forshaw v Thompson is also authority, in my view, that the Court has jurisdiction under s. 27(1) in the exercise of which it could make a declaration under s. 30 that the trustee had acted improperly at a meeting held under Division 6 of Part IV. Whether the trustee had performed the duties cast on him at a meeting of creditors under s. 73 in accordance with Division 5 of Part IV would also be a question that arises in the bankruptcy of the particular bankrupt over which the Court has jurisdiction pursuant to s. 27 and it is a question which the Court has full power to decide pursuant to s. 30(1). The existence of s. 178 as another means of reviewing the trustee's conduct does not I think require s. 30(1) to be read down so as not to apply to such a matter. Section 64ZF would be relevant to the making of such a determination as would s. 306. It was not disputed before me that the trustee is required, when exercising his statutory power of determination under s. 64ZA(8), to accord natural justice to anyone against whom he rules, although it was contended on behalf of Mr. Worrell that he had met those requirements when he made the decision against WBC. I therefore leave open this question. But assuming the trustee is bound to observe relevant rules of natural justice, a complaint that there was a denial of natural justice in such circumstances would similarly be a matter within the Court's jurisdiction.

(3) DOES ERROR OR IMPROPRIETY BY THE TRUSTEE INVALIDATE THE COMPOSITION?
24. I have held that the Court has jurisdiction and power under ss. 27 and 30(1) to make a declaration whether a trustee has acted erroneously or improperly in excluding a person from voting on a bankrupt's proposal under s. 73. But in my opinion (and subject to the necessary reservation that exceptional circumstances might otherwise require) the discretion to do that should not be exercised unless that person is able to satisfy the Court that he is in fact a creditor owed a provable debt and that his vote would have produced a different result with respect to the bankrupt's proposal. This is so for the following reasons:

(a) it is inconsistent with the intent of Division 6 of Part IV the Bankruptcy Act that a composition or scheme that has the support of the majority required by s. 73(4) of persons whose status as creditors is not in dispute should be overturned merely because the trustee made errors or was guilty of improprieties that cannot have any decisive effect on the fact of majority support for the composition or scheme;

(b) while the trustee must determine voting entitlement himself, that he erroneously or even improperly excludes a creditor from voting does not have irreversible consequences: in such circumstances, the Court has ample power to overturn the outcome of the meeting and set aside the composition under ss. 27 and 30(1), s. 75(4) and s. 178;

(c) if the trustee has been guilty of impropriety in connection with the meeting but it is not such as to have affected the decision there taken with respect to the bankrupt's proposal, the Court still has ample power under s. 179 to deal with the trustee.

1. That the question for the Court when complaint is made about the consequences of a creditor's meeting because the trustee or chairman wrongly excluded a person from voting at the meeting will ordinarily be: "was that person in fact qualified to vote?" is supported by Re McLean; Ex parte Friends' Provident Life Office (1992) 108 ALR 360. That case involved an application under s. 222 brought by a person excluded from voting at a Part X meeting to declare void the deed of arrangement into which the debtors were required to enter, by resolution of their creditors at that meeting. If the applicant had voted, the debtors' proposal for the arrangement would have been defeated and sequestration would have followed. The chairman of the meeting excluded the applicant from voting on the ground that its claims against the debtors were in dispute in Supreme Court litigation between them. Applying Forshaw v Thompson, Heerey J held at 367 that the Court had jurisdiction to determine questions concerning the rights of persons to vote at such a meeting. He said at 368 that, in deciding this sort of question, the Court "looks at the evidence presented to it at the time of the application under s. 222(1)". However, his Honour also held that the question for the Court was not whether the claimant to vote had an arguable case that a debt was owing, but whether the claimant was in fact a creditor. At p 368, he said:
   

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

1. He referred to both the majority and the minority view in Beard v Prestige Baking Industries Pty. Ltd. (1981) 36 ALR 307 and, in particular, to what the minority judge, Lockhart J, had to say to the effect that it might be sufficient for an applicant under s. 222 to show that he has a prima facie case to be a creditor of the debtor, analogous to the position of an applicant for interlocutory injunctive relief or of a debtor seeking to establish under s. 41(7) of the Act that he has a counter-claim, set-off or cross-demand of the kind referred to in s. 41(g). Consistently with the majority view in Beard, his Honour rejected this approach and said, at p 369:
   

"In my respectful opinion, it will usually be appropriate for a court to make a finding as to the existence and extent of the alleged debt and not merely whether there is an arguable case.

...

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

1. Beard involved an appeal against an order under s. 222(4) declaring void a deed of arrangement in which the debtor argued that the trial judge erred in holding that the applicant was a creditor within s. 222(4) because he had failed to make any finding on a cross-demand which the debtor raised against the applicant. Of this argument, Fox J said at pp 325-6:
   

"It is undoubtedly competent for the court to examine in close detail, definitively if necessary, whether a person claiming to be a creditor for the purposes of the section is one (ss. 30, 31(1)(i)). In Re Tollitt; Ex parte Scholefield Goodman and Sons Ltd., supra (unreported), Bowen CJ determined whether, for the purposes of s. 222 proceedings, certain companies were creditors, and for what amounts. The court can at the same time determine the validity and extent of a cross-demand. This must, I believe, be the usual course when there is a dispute, the resolution of which will affect a decision on sub-ss. (4) and (5). What has to be decided for the purposes of sub-ss. (4) and

(5) will depend upon the circumstances of the case. ... In general, a court deciding a case under s. 222(4) will prefer to leave as much as possible for final decision in accordance with ordinary procedure and practice, and this is what was done in the present case. With great respect for a judge particularly experienced in bankruptcy matters, it seems to me that the approach he adopted was not correct in this case. He could not, in the circumstances of the case, come to a satisfactory conclusion either about the application of s. 222(4) or the exercise of discretion thereunder or about the application of s. 222(5) without knowing what, if anything, was owed, on a final balance, by the debtor to Prestige or vice versa. If this was not immediately to be resolved by action in other courts it had to be resolved by the court sitting in bankruptcy, so far as its jurisdiction extends - and this seems to be wide (see s. 30(1)(a)). What was not permissible, in my view, was to make an order setting aside the deed of arrangement without further investigation, or more final determinations, than were made."

1. In Musolino v Sidiropolous (1991) 101 ALR 235 at 244, the Full Court accepted that if there is a question whether a person has standing as a creditor to bring the application under s. 222, the Court must make a final determination on that matter, if it is essential to the resolution of the case.

2. In my opinion Heerey J's comments in Re McLean at pp 369-370, supported by those of Fox J in Beard and by this Court in Musolino, are equally applicable to the exercise the Court has to perform when a complaint is made that a person has been wrongly excluded from (or included in) voting at a meeting held under s. 73.

(4) WAS THE TRUSTEE IN ERROR WITH RESPECT TO S. 86?
30. I have explained why I think Mr. Worrell's task was to determine whether WBC was, in fact, a creditor of the bankrupts, and why error or impropriety on his part in denying WBC its vote does not invalidate the composition unless WBC can satisfy the Court that it is in fact a creditor. This decision is governed by the question whether the bankrupts will succeed in their action against the bank (if they succeed fully it appears they will recover damages that will exceed the amount owing by them to WBC after realisation by WBC of the bankrupts' securities) and whether, in that event, the bankrupts are entitled to bring the amount of their claim in the action into account, either by way of set-off or cross-demand against WBC's claim, in order to decide whether WBC is a creditor.

1. The second question turns in part upon whether regard can be had to s. 86 in determining whether WBC is a creditor. WBC submitted that the trustee proceeded on an erroneous view of the law in that he wrongly assumed that s. 86 applied to compositions that come into existence pursuant to s. 73 and s. 74 and that the true question for the trustee in deciding whether or not WBC was entitled to vote as a creditor was whether under the general law the bankrupts' claims against WBC would amount to a set-off. I have held that the entitlement which a person has to vote on a proposal put up under s. 73 by a person who is bankrupt depends upon that person being a creditor in the sense of a person who has a provable debt. Section 86 is a provision to which regard must necessarily be had in deciding whether a claimant in fact has a provable debt, whether that question arises before or after acceptance of such a proposal. Pursuant to s. 240, a composition under Part X operates, unless set aside, to release the debtor from all provable debts and it is true that, unlike the position under Division 6 of Part IV, s. 243 expressly applies s. 86 to such a composition for the purpose of determining what are those provable debts. Pursuant to s. 75(2), acceptance of a composition under s. 73, of its own force and independently of any consent by the creditor, releases the bankrupt from exactly the same range of provable debts from which a composition under Part X releases the debtor. Even though there is no provision applicable to compositions under s. 73 that is equivalent to s. 243, I do not think provable debts released upon acceptance of a composition under s. 73 can be identified without recourse to the provisions of Division 1 of Part VI, which includes s. 86. It was rightly recognised, in view of Gye v McIntyre (1991) 171 CLR 609, that set-off under s. 86 is available in respect of a very wide range of dealings between the bankrupt and the creditor claiming a provable debt. It seems to me that on any view of the bankrupts' action, connected as it is with the dealings between the bankrupts and WBC that gave rise to the bankrupts' indebtedness to the bank, the claims made in the action can be set-off against WBC's claims pursuant to s. 86. Mr. Worrell was therefore right in regarding s. 86 as permitting him to take into account against WBC's claim the amounts claimed by the bankrupts in the action. See p 7 of the minutes of the meetings.

(5) THE TRUSTEE'S CONDUCT AT THE MEETINGS
32. Mr. Worrell made no real attempt to determine whether WBC was in fact a creditor of the bankrupts. It was his duty to reach a decision on that, a decision that required him to form an opinion on the merits of the bankrupts' action. He did not have the material before him to enable him to perform that task. Mr. Worrell relied on oral advice from his solicitor, who was also acting for the bankrupts in the action against WBC, that the action had good prospects of success (although prior to the meetings he did take written advice from counsel on one of the points raised on behalf of WBC, viz., that the action was time-barred). He was confronted with representations by the solicitor for WBC who attended the meeting that the bankrupts' action had no real prospect of success; that solicitor gave some substantial reasons for that view, particularly with respect to the proposition that the action was time-barred and that it was also barred by a settlement agreement. Mr. Worrell did not invite the parties to consider furnishing him with information and any advices they might wish to put before him on the matter. He did not consider adjourning the meeting for a time to seek further information from the bankrupts (who were being backed in running the action by their relatives) or from WBC. Mr. Worrell expressed the opinion, both at the meeting and in evidence, that he regarded both his own solicitor and WBC's solicitor as experienced and reputable practitioners. He solved the dilemma he was in simply by preferring his own adviser over WBC's adviser, even though there was nothing before him which could, in my view, sensibly allow him to make that choice. I think he probably adopted this approach because of the view he expressed both at the meeting and in oral evidence that it would only be the judge who heard the trial who would really be able to express a useful view on the merits of the action. I note that far from WBC criticising Mr. Worrell for taking this approach, it submitted that that was a proper opinion for Mr. Worrell to have held on the material before him. WBC, of course, went on to submit that in that situation he should not have ignored what was said to be WBC's prima facie standing as a creditor and exclude it from voting.

1. There are other aspects of Mr. Worrell's conduct of the meeting that expose him to legitimate criticism. It seems clear that prior to the meetings on 7 October, he received the letter dated 5 October, 1992 from WBC's solicitors which put to him the proposition that the bankrupts' claim had been "settled previously and cannot now be re-opened". Yet his evidence was that he was unaware of this proposition until the solicitor for WBC mentioned it at the meetings. In any event, whenever it was that he first learned of this suggestion, he appears to have ignored the matter when it really called for investigation on his part: the solicitor for WBC produced documentary evidence in the form of a letter containing a WBC offer of an AUD loan at concessional interest rates that was subject to an express condition that the bankrupts release WBC from all claims in respect of the foreign currency transaction that gave rise to the litigation. This letter also contained an unqualified acceptance signed by the bankrupts after they had signed an acceptance on an earlier WBC letter of offer which they had however endorsed with a note that it was signed "under duress". He appears unjustifiably to have brushed this information aside, even though he had earlier taken the trouble to seek advice from counsel on the point that the action was time-barred. More importantly, while he said in oral evidence that he only decided to exclude WBC from voting at the meetings immediately before he notified WBC of that decision, he had long before given careful thought to that very question: as far back as May he had taken advice from senior counsel with respect to certain matters relevant to the question of WBC's entitlement to vote. He did not, however, give any warning to WBC that he had this matter under consideration until he made the decision. His explanation was that it never crossed his mind that it was incumbent on him to alert WBC to the proposition that they might not be allowed to vote, notwithstanding the fact that the only factor he identified as the one which led him to make that decision was senior counsel's opinion, which he had had since May. I should say I do not think that Mr. Worrell was actuated by any improper motive to prevent WBC from voting. Rather do I think he acted as he did because, while he accepted that he had to make a decision on the matter, he wrongly thought it was not for him to attempt the difficult task of assessing the validity of the bankrupts' claims in the action as part of the necessary job of deciding WBC's entitlement to vote.

(6) THE FATE OF WBC'S APPLICATIONS
34. I have given my reasons for holding that the Court will not as a general rule interfere at the behest of a person excluded from voting, even where deficiencies in the way the trustee arrived at that decision are shown, unless that person can satisfy the Court that it is in fact a creditor. Although WBC submitted, correctly in my view, that it is for the Court to reach its own view on the materials before it when a trustee's decision excluding someone from voting is challenged, WBC deliberately did not seek to put into evidence all the material that it would be necessary for the Court to have to enable it to form a view for itself on whether WBC was, in truth, a creditor.

1. The evidence before me on this issue is limited to the question whether the action was time-barred and barred by compromise. On the second of these matters the evidence was confined to the two letters of offer I have referred to, to a third letter which may have been prepared by WBC but signed by the bankrupts and which contains an express withdrawal of the "duress" allegation and evidence that the bankrupts took up the AUD loan at concessional rates with the result that "the bankrupts were indebted (to WBC) in the amount of $881,905.00 less than would otherwise have been the case had the concessional interest rates not been applied, as at the date of their bankruptcies on 25 October, 1990". I was not asked by WBC to find that the bankrupts' action was in fact barred by what was said to be a compromise agreement. WBC relied on the evidence relating to this issue to demonstrate the extent of the impropriety that it was submitted Mr. Worrell engaged in when he decided to exclude WBC from voting and to support a submission that it showed that there was an insufficient likelihood of success of the bankrupts' action to justify Mr. Worrell depriving WBC of its claim as a creditor to vote.

2. It was also submitted, in reliance on the bankrupts' pleading, that the possibility that the action was time-barred was also so strong as to disentitle Mr. Worrell rejecting WBC's claim to vote. The action was commenced in January 1991. The statement of claim is by no means as clear a statement of the bankrupts' claims against WBC as it could be. However, in addition to a complaint to the effect that negligent advice by WBC led the bankrupts' to enter into the foreign currency loan agreement, the pleading appears to contain, albeit in a confused way, allegations that that advice was also fraudulent and there also seem to be allegations that WBC's negligence and perhaps fraud subsequent to entry into the agreement, but touching on the management of the loan, also caused them loss. It is not plain that the bankrupts cannot assert, within the confines of their case as pleaded, that loss only accrued when the off-shore loan was finally brought on-shore in February 1988. Cf. Magman International Pty. Ltd. v Westpac Banking Corporation (1991) 32 FCR 1. The inappropriateness of reaching a conclusion that the action is time-barred on the limited material before me is underlined by the comments of Mason CJ, Dawson, Gaudron and McHugh JJ in Wardley Australia Ltd. v State of Western Australia (1992) 175 CLR 514 at 533-4. I would not be prepared to conclude from an examination that is limited to the bankrupts' pleading that the action is time-barred in whole or in sufficient part to show that WBC is, in fact, a creditor.

3. The applications can only succeed if I am satisfied WBC was in fact a creditor of the bankrupts. Yet I was not asked to decide that question. The material before me does not in any event allow me to reach a conclusion on it.

4. WBC also submitted, in reliance on s. 75(4)(b)(i) the Bankruptcy Act, that if the composition stands that will inflict injustice on WBC. It is said this will arise from the fact that the composition will allow the bankrupts to prosecute their action against WBC, who will be unable to recover its own costs if its defence is successful and that possible benefit to the creditors generally, if the composition stands, will thus be at the expense of injustice to one of the creditors, WBC. I reject these submissions. Assuming that s. 75(4)(b)(i) empowers the Court to annul a composition if it appears that the composition cannot be proceeded with without injustice to one, as opposed to all of the bankrupts' creditors, WBC will not, in its capacity as a creditor of the bankrupts, suffer any injustice if the composition proceeds here. It will be entitled to share equally with all the other creditors in the fruits of the action, provided the bankrupts' success is not sufficient to overtop WBC's own claim on the bankrupts, so that it remains one of their creditors. WBC may well suffer an injustice of the kind it has referred to if the composition stands, but that will not be suffered in its capacity as a creditor of the bankrupts, only in its capacity as a person sued by them.

5. The applications are dismissed.