Smith v Quintano

[1998] FCA 1801

JUDGMENT No. .d&2,l,.1

FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - Part X composition - setting aside, terminating and avoiding a composition - whether sections 222, 239 and 242 overlap - incorrect material particular in statements of affairs - onus of proof - how an applicant can prove that a debt does not exist

Bankruptcy Act 1966 (Cth) ss 222, 236, 239, 242

Khera v National Australia Bank Limited [I9961 71 FCR 133 followed

Zantiotis v Andrew & Anor [I9881 80 ALR 299 considered

Re McLean; Exparte Friends' Provident Lfe Ofjce [I9921 108 ALR 360 considered

Re Dingle; Westpuc Banking Corporation v Worrell & Anor (19931 I19 ALR 265 considered

BRIAN SMITH v DEBORAH QUINTANO & ANOR

NX 78 OF 1996

BRIAN SMITH v MARTIN QUINTANO & ANOR

NX 79 OF 1996

EINFELD J

2 APRIL 1998

SYDNEY

GENERAL DISTRIBUTION

IN THE FEDERAL COURT OF AUSTRALIA	)	NX 78 of 1996
NEW SOUTH WALES DISTRICT REGISTRY )	NX 79 of 1996

In NX 78/96: Between: B U N SMITH

Applicant

And:

DEBORAH OUINTANO

First Respondent

And:

VANDA GOULD

Second Respondent

In NX 79/96: Between: BRIAN SMITH

Applicant

And: MARTIN OUINTANO

First Respondent

And: VANDA GOULD

Second Respondent

ORDER

The Court orders that:

1. The applications be dismissed.

2. The applicant pay the respondents' costs.

Note:

Settlement of entry of orders are dealt with in accordance with Order 36 of the

Federal Court Rules.

EINFELD J

2 APRIL 1998

SYDNEY

GENERAL DISTRIBUTION

IN THE FEDERAL COURT OF AUSTRALIA	)	NX 78 of 1996
NEW SOUTH WALES DISTRICT REGISTRY )	NX 79 of 1996

In NX 78/96: Between: B U N SMITH

Applicant

And:

DEBORAH QUINTANO

First Respondent

And:

VANDA GOULD

Second Respondent

In NX 79/96: Between: BRIAN SMITH

Applicant

And: MARTIN OUINTANO

First Respondent

And: VANDA GOULD

Second Respondent

REASONS FOR JUDGMENT

EINFELD J	SYDNEY	2 APRIL 1998
INTRODUCTION

By applications dated 16 August 1996, the applicant, Brim Smith, attacks a composition of the creditors of Martin Quintano and his wife Deborah Quintano (the debtors), entered into on 15 July 1996 pursuant to Part X of the Bankruptcy Act I966 (Cth) (the Act). Mr Smith was the only creditor to vote against the composition and he now seeks to have it either set aside or terminated, on the basis that the debt of the largest creditor did not actually exist and should not have been admitted. Without that creditor voting in favour of the composition, the special resolution would not have passed.

BACKGROUND

In late 1988 and early 1989, Brian Smith carried out some building work on a property owned by the debtors. When payment was not made for this work, Mr Smith issued proceedings in the District Court of New South Wales. In the course of negotiations between Mr Smith and the debtors to settle these proceedings, the debtors both swore statutory declarations on 2 March 1995 as to their respective debts. The matter was not settled and on 13 April 1995 Mr Smith obtained judgment in the District Court of New South Wales against the debtors for $73,214.82. On 10 May 1995 Deborah Quintano filed an affidavit as to property and means in support of an application to pay the judgment debt by instalments. Presumably that application went nowhere in finalising the dispute because in May 1996 Mr Smith served bankruptcy notices on the debtors. On 14 June 1996 the debtors proposed a composition to their creditors and prepared statements of affairs. Mr Vanda Gould, a chartered accountant enlisted by the debtors to assist them in their affairs, arranged concurrent meetings of their creditors on 15 July 1996. The proposed composition involved the debtors providing $10,000 each in full and final satisfaction of all debts owed to unsecured creditors, which were about $400,000, the $20,000 to be provided by John Quintano, Martin Quintano's father, who was the largest single creditor.

The following extract from the minutes of the meeting records the voting of the creditors on the special resolution to adopt the proposed composition:

Creditors voting in favour of the special resolution totalled $313,759:

Nicolas Gadaleta

John Quintano

Kaufmann Peters

Yasmin Quintano

Remy Pribilovics

Christopher Quintano

Creditors voting against the special resolution totalled $83,842:

Brian Smith

The Chairman noted the resolution was passed as a majority in number and

75% in value supported the Composition.

Mr Gould was appointed trustee of the composition. It is the unsecured debt claimed by John Quintano which is at the centre of the current controversy. The crux of the applicant's case is that John Quintano was not entitled to vote on the special resolution to adopt the proposed composition because the debt he was allegedly owed by Martin and Deborah Quintano did not exist.

At the creditors' meeting Mr Smith was represented by counsel who spent a considerable period of time during the meeting asking questions about the debtors' various financial affairs and arrangements. The minutes of the meeting summarise this questioning and then state [sic]:

The Chairman noted that concerns relating to the John Quintano Debt matter were appropriate issues to raise and that the history of the debt, subject to Mrs Quintano 'S consent, to be sent by Mrs Quintano 'S accountant to the instructing solicitor of Brian Smith to clarzfy the concerns of his clients. If there was any substance to the concern that the debt had only been created for purposes of the Part X meeting then the Court could be approached to set aside any Part Xproposal that was passed on an improper basis.

The 'accountant' who was to send the details of the loan by John Quintano to the debtors was Nicolas Gadaleta. Mr Gadaleta appeared as a witness at the hearing of these matters and the report he forwarded to Mr Smith's solicitor, apparently in performance of the obligation noted in the minutes, became part of the evidence in these proceedings.

In the months following the meeting of creditors, the requisite notices, authorities and certificate of resolution were completed and the agreed amount of $20,000 was received by the trustee and placed into a bank account. Letters were sent to all creditors notifying them of a first and final dividend to be paid and requesting that they lodge proofs of debt. The applicant

participated in this process by lodging a proof of debt. On 9 July 1997 the trustee made calculations of dividend entitlements and forwarded cheques to all creditors in order to disburse the $20,000. The applicant received two cheques which, at the time of the hearing in this matter, remained unpresented. A bank reconciliation shows that all other cheques have been presented and that the trustee's costs have been paid. The Part X composition is therefore finalised.

THE APPLICATIONS

In application numbered NX 78/96 Deborah Quintano was originally the sole named respondent. In application numbered NX 79/96 Martin Quintano was originally the sole named respondent. Each application sought orders setting aside the composition, as it related to the particular respondent, under section 239 of the Act, or alternatively terminating the composition under section 242 of the Act, and a subsequent order that the estate of each of the debtors be sequestrated. As both applications were filed 11 days out of time, an order was also sought extending the time in which each might be filed.

On 5 June 1997 Justice Sackville gave leave to the applicant in NX 79/96 to file an amended application joining Vanda Gould, the trustee of the composition, as a respondent to the proceedings. On 13 June 1997 an amended application was filed in that matter but it named 'Martin Quintano' as first respondent, 'D Quintano (a female)' as second respondent and Mr Gould as third respondent. Leave was never given to the applicant to merge the matter numbered NX 78/96 into the matter numbered NX 79/96 and the unilateral and unauthorised attempt to do so in the amended application presented a procedural obstacle at the hearing, as orders binding Deborah Quintano could not be made in NX 79/96 where she was not a party. Despite having been alerted to the amended application's potential problems at the beginning of the hearing, and choosing to proceed regardless, the applicant was nevertheless granted leave at the end of the hearing to abandon the amended application, and proceed on the two original applications and to join Mr Gould as the second respondent to both. The applications in NX 78/96 and NX 79/96 were therefore heard concurrently by consent and the evidence adduced became by consent evidence in both matters. The application for an extension of time to file the applications was also heard concurrently with the substantive applications. Mr Gould appeared at the beginning of the hearing but &er stating that he submitted to any order

of the Court save as to costs, he was excused from any hrther participation.

THE LEGISLATION

Section 239 provides:

(I) A creditor may, within 21 days from the daie on which the special

resolution accepting a composition under this Part was passed, apply to the Court for an order setting aside the composition and may also apply for the making of a sequestration order against the estate of the debtor.

(2) I f the Court, on such an application, considers that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the composition ought to be set aside, it may make an order setting it aside and, if it thinhfit, may forthwith make the sequestration order sought.

(3) The Court may, if it thinks fit, diqense with service on the debtor of notice of an application under this section, either unconditionally or subject to conditions.

(4) The making of an application for a sequestration order against the estate of a debtor under this section shall, for the purposes of the Act, be deemed to be equivalent to the presentation of a creditor 'S petition against the debtor, but the provisions of subsection 43(I), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application.

Section 242 states:

(I) The Court may, upon application by the Trustee, a creditor or the debtor, or, if the debtor has died, the person administering the estate of the debtor, if it is satisfied:

(a)	that the debtor, or, if the debtor has died, the debtor or the person administering the estate of the debtor, has failed to cariy out or comply with a term of the composition;
(b)	that the composition cannot be proceeded with without injustice or undue delay to the creditors, the debtor or, i f the debtor has died, the estate of the debtor; or
(c)	that for any other reason the composition ought to be terminated, make an order terminating the composition.

(2) The Court shaN not make an order terminating a composition on the ground speciJied in paragraph (I)(a) or (c) unless it is satisfied that it would be in the interests of the creditors to do so.

(3) The trustee or a creditor may include in an application under subsection

(I) an application for a sequestration order against the estate of the debtor and if the Court makes an order on the first-mentioned application terminating the composition, it may, if it thinks fit, forthwith make the sequestration order sought.

(4) 171e Court may, if it thinhfit, dispense with the service on the debtor of notice of an application by the trustee or a creditor under this section, either unconditionally or subject to conditions.

(5) The making of an application by the trustee or a creditor for a

sequestration order under this section shall, for the purposes of the Act, be deemed to be equivalent to the presentation of a creditor 'S petition against the debtor, but the provisions of subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application.

It was submitted on the respondents' behalf that neither of these sections provides the appropriate avenue for the applicant to ventilate his concerns and that if any application is made on the basis that a creditor, who voted for a special resolution to adopt a composition, should not have been allowed to vote, it must be made under section 222 of the Act:

(I) Where there is a doubt, on a speciJic ground, whether a deed of assignment or a deed of arrangement was entered into in accordance with this Part or complies with the requirements of this Part, or whether a composition has been accepted by a special resolution of a meeting of creditors under section 204, the Inspector-General, the trustee, a creditor or the debtor may apply to the Court for an order under subsection (2).

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

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

(3) 7he Court shall not make an order declaring a deed to be void on the ground that it does not comply with the requirements of this Part i f the deed complies substantially with those requirements.

(4) Where the Court, on the application of the inspector-General, the trustee or a creditor, is satisfied that the debtor:

(a)	has given false or misleading information in answer to a question put to him or her with respect to any of his or her conduct or examinable afSrs at the meeting of creditors at which the resolution requiring him or her to execute the deed or accepting the composition was passed; or
(b)	has omitted a material particular from the statement of the debtor's affairs given under subsection 188(2) or included an incorrect and material particular in that statement;

the Court may make an order declaring the deed or composition to be void or

declaring any provision of the deed or composition to be void.

(5) The Court shall not make an order declaring a deed or composition, or a provision of a deed or composition, to be void on a ground specz3ed in subsection (4) unless it is satisfied that it would be in the interests of the creditors to do so.

(6) The Court shall not make an order under subsection (2) or (4) unless the

application for the order is made:

(a)	in relation to a deed of assignment - before the final dividend has been paid under the deed; or
(b)	in relation to a deed of arrangement - before the terms of the deed have been carried out; or
(c)	in relation to a composition - before the finalpayment has been made under the composition.

(7) The trustee or a creditor may include in an application under subsection

(I) or (4) an application for a sequestration order against the estate of the

debtor and if the Court, on the first-mentioned application, makes an order under subsection (2) or (4) declaring the deed or composition to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought.

(8) The Court may, if it thinks fit, dispense with service on the debtor of notice of an application by the trustee or a creditor under this section, either unconditionally or subject to conditions.

(9) The making of an application by the trustee or a creditor for a

sequestration order under this section shall, for the purposes of this Act, be deemed to be equivalent to the presentation of a creditor's petition against the debtor, but the provisions of subsection 43(1) section [sic] 44 and 47,

subsections 52(1) and (2) and Part XlA do not apply in relation to such an

application.

In Khera v National Australia Bank Limited [l9961 71 FCR 133, Justices Lockhart and Hill

stated at 144:

The first striking feature is that the Act &aws a distinction between the powers of the court to declare something void or set it aside or terminate it. Under s 222 the court may declare a deed of assignment, a deed of arrangement or a composition void; or it may declare that a provision of the relevant deed is void or not voidas the case may be. Under s 236 a court may also terminate a deed of arrangement. Pursuant to s 239 a court may set aside a composition; under s 242 a composition may be terminated.

This feature is of importance.

In respect of the grounds for declaring a composition void under section 222, their Honours stated at 145:

These are all matters which go to the validity of a deed of assignment or arrangement or of a composition, matters that relate to the setting up or establishment of the deed or composition. It is in the case of defects of this kind that the court is empowered to declare the deed or composition void. In each such case, all the relevant facts would have occurred at or before the passing of the requisite special resolution of creditors, though some of the relevant facts may not come to light until years later ....

Similar&, so far as s 222(4) is concerned, the fact of there being false or misleading information or omission of material particulars or the inclusion of incorrect and material particulars in the statement of affairs by the debtor may not come to light until later, notwithstanding that the facts which establish the false or misleading information or omission from or inclusion in the statement of affairs of material particulars were facts in existence at the time of the passing of the special resolution.

Relevantly, Justices Lockhart and Hill stated at 146, with regard to section 236(1):

Notwithstanding the generality of the language of para (c) of s 236(1), in our view ifthe facts lead to the application of s 222(4) (grounds for declaring the deed void under s 222(2)), s 236 cannot be relied on. In other words, matters which bear on the validity of the meeting of creditors and which would lead to the deed being avoided, are encompassed solely by s 222 and not by s 236. This view is supported by the final three paragraphs of the judgment of

Toohey Jin Doukidis, by Musolino at 246, and by Hill J in Re Gye & Perkes;

Ex parte McIntyre [l9891 ALR 460 at 475-7.

On the subject of sections 239 and 242, their Honours said at 146:

Turning to s 239 concerning compositions. Although at first sight the grounds on which the court may set aside a composition under s 239(2) are wide, upon closer examination they relate in our opinion to matters that concern the terms of the composition itselJS that is to say facts which were in existence (whether known or not) at the time of the passing of the special resolution of creditors to accept the composition under Pt X The court may set aside the composition if it considers "that the terms of the composition are unreasonable'', This plainly centres attention upon the terms of the composition itse& The Court may set aside a composition if the terms of the composition "are not calculated to benefit creditors generally". Again attention is centred upon the terms of the composition

Then follows the third ground "for any other reason the composition ought to be set aside". In our opinion this ground, despite the width of its language, is confined to circumstances which relate to the terms of the composition itself or the circumstances in which the composition came to be accepted by special resolution of the creditors. To an extent these grounds may overlap with the grounds on which the court may declare a composition void under s 222.

That does not militate against the construction of s 239(2) which appeals to

US.

Our view is reinforced by consideration of s 242 which empowers the court to terminate a composition if satisfied of the three matters set out (in the disjunctive) in subs (I). Those grounds mirror the grounds upon which the court may terminate a deed of arrangement under s 236. In our view the construction to be given to s 242(I) is substantial& the same as that to be given to s 236(1).

Justice Tamberlin, the third member of the bench, agreed generally with Justices Lockhart and Hill, but expressed the view that the application of section 236(1)(c) should not be restricted to matters concerning the terms of the composition. This distinction does not affect this case as section 236 was not relied on or even mentioned here

In light of this decision of a Full Court which is binding upon me, the applicant in these proceedings should have brought his applications under section 222. The entitlement of John Quintano to vote on the special resolution and the validity of his alleged debt, while at the very heart of the validity of the composition itself, are certainly not problems that arose after the composition had been entered into and do not relate to the actual terms of composition. They

therefore cannot fall under section 239(1)(c) and, as an allegation that an incorrect material particular was included in the statements of affairs, also cannot come under section 242. It is thus impossible for these applications to succeed as they are presently constituted.

Nevertheless, in view of the fact that the existence of John Quintano's debt has been fiilly litigated, I shall consider the substantive merit of the applications, as if they were brought under section 222. Three primary prerequisites are thrown up by that section:

1.   Was false or misleading information given at the creditors' meeting in answer to any question of the debtors?

2. Was a material particular omitted or an incorrect and material particular included in the debtors' statements of affairs?

3.    Were the present applications made before the final payment was made under the composition?

In this case, the first two questions may be dealt with together.

FALSE O R MISLEADING INFORMATION / INADEQUATE PARTICULARS

Procedural difficulties aside, the relevant dispute in this matter is whether the debt allegedly owed by Martin and Deborah Quintano to John Quintano did in fact exist. On this issue, the applicant relied on three affidavits by himself and one by his brother, Haile Bany Smith. The applicant's own affidavits proved that he was in fact owed the sum of $73,214.82 from a judgment obtained in the District Court which with accrued interest at the time of the creditors' meeting on 15 July 1996 had risen to $83,842. They also set out the relevant events surrounding the meeting. Annexed to the applicant's affidavit of 20 September 1996 are several documents regarding the financial affairs of the debtors:

(i) copies of the statutory declarations by the debtors dated 2 March 1995 setting out their assets and liabilities, but not recording any loan or monies owed to John Quintano

(ii) a copy of a mortgage document, executed on 9 May 1995, showing John Quintano as mortgagee and the debtors as mortgagors and acknowledging receipt by the debtors of

$173,976.56

(iii) an affidavit by Deborah Quintano of her property and means dated 10 May 1995 which sets out liabilities of $42,500 to the National Australia Bank (1st Mortgage), $86,500 to John Quintano (2nd mortgage), $70,000 for bank securities and $190 to Bankcard

(iv) a copy of a title search dated 24 July 1995 on the home of the debtors which shows two registered mortgages, the first to the National Australia Bank and the second to John Quintano

In addition the applicant presented in evidence a copy of the statement of affairs for each of the debtors which relevantly lists John Quintano as a secured creditor in the sum of $293,309.

The evidence of Nicolas Gadaleta, the 'accountant' for the debtors who prepared the report purporting to substantiate and explain the loan from John Quintano, revealed that Mr Gadaleta is not, contrary to his statement in the report, a 'qualified accountant'. His evidence was to the effect that the loan from John Quintano to the debtors was structured through a company called Fenquin Pty Ltd, of which Martin Quintano is a director and company manager and John Quintano is a major shareholder. According to Mr Gadaleta, John Quintano lent money to the debtors by allowing them to draw money from the company and then debiting his director's loan account. The report of Mr Gadaleta, which was allegedly compiled from an analysis of the books and records of the company, but which was quite unintelligible, showed a breakdown, for each year from 1989 to 1996, of the payments from the director's loan account of John Quintano to the debtors, contributions to the loan account by John Quintano, and a cumulative total for the amount said to have been paid to the debtors. The report stated that, as at April 1996, the debtors owed John Quintano $288,583.

Although fully aware, and reminded by me at the time he chose to call him as a witness, that Mr Gadaleta's evidence would, prima facie, be unfavourable to his client's case, the applicant's counsel nevertheless decided to do so, citing some need to introduce the evidence 'so that he

could strike it out'. He then attempted unsuccessfully to have the witness declared unfavourable pursuant to section 38 of the Evidence Act I995 (Cih). The effect of Mr Gadaleta's testimony was to place before the Court at least some evidence, however flimsy, that the debt of Martin and Deborah Quintano to John Quintano did exist.

Each of the debtors relied on the affidavit of Rodd Peters, their solicitor, who deposed to the events surrounding the creditors' meeting and to the delay on the part of the applicant in getting these matters on for hearing. They also relied on an affidavit of Brenda Cheng, an employee of the trustee, who deposed that on or by 9 July 1997 all necessary steps had been taken and completed in the administration of the composition.

Both Martin and Deborah Quintano swore affidavits and were cross-examined. Martin Quintano stated that the loan from his father was not set out in his statutory declaration of 2 March 1995 because he was not 'particularly carefbl' to disclose it. He said that the purpose of the statutory declaration was to evidence his hopeless financial situation, which could be and was accomplished without mentioning the liability to John Quintano. Martin Quintano also stated that, despite being advised at the creditors' meeting that his father was owed $293,000, he now accepts the advice of Mr Gadaleta that the debt is actually $288,583. Finally, Martin Quintano stated that in 1988 he came to a verbal agreement with his father to borrow money via his father's loan account with Fenquin Pty Ltd. Deborah Quintano was not present at this meeting. From time to time after this conversation he drew cheques from that company's accounts or directly debited the company's accounts in favour of various creditors of both himself and his wife, and the corresponding adjustments were then apparently made to his father's loan account.

The cross-examination of Martin Quintano revealed a number of anomalies in the financial affairs of the Quintano family and its company, Fenquin. Firstly, it was shown that although Martin Quintano was a director and company manager of a company with an annual turnover of approximately $2,800,000, he had an average income, according to his tax returns from

1989 to 1996, of $21,867. He could not explain why he was paid so little or how he supported

his family on that amount, or even what his family's expenses were, as his wife allegedly took care of such matters. Nor could he explain why he and his wife were paid the same amount when he managed 20 employees and she merely did some banking and mailing. His only

explanation was that 'the accountants do the books' and he knew nothing about the arrangements, despite being a director of this company with the significant statutory obligations that attach to that office. He also admitted that his income was actually about $50,000 per year but was not able to explain how this was made up or what tax was paid, or how his tax returns could be so wrong.

Martin Quintano was also asked to explain the difference between the balance of the debt said to be owed to his father in 1995 ($173,000) and the amount of the debt stated at the creditors' meeting in 1996 ($293,000). His only explanation for this large increase in the amount owed to John Quintano in one year was that it might have been interest accrued on the existing loan. This answer is highly unlikely to be true as Martin Quintano's &davit stated that his agreement with his father had set an interest rate of "only" 15% per annum.

Deborah Quintano concurred with her husband despite the fact that she was not present at all of the meetings and did not participate in all of the conversations to which he deposed. In cross-examination she did not manifest any knowledge of the financial arrangements of either the company or her husband, or even of herself She knew nothing of the so-called loan from John Quintano to her and her husband despite having sworn in 1995 that she received $150 per week from John Quintano. It seems that both Martin and Deborah Quintano leave all financial matters to each other and both of them leave it to the accountants. Who actually looks &er their finances is a complete mystery. In fact, all their evidence was singularly unsatisfactory. Indeed I found the evidence of all witnesses in this matter to be vague and obfuscatory. The manner in which it was presented certainly did not aid the Court's understanding of any of the matters involved. The only thing that did become clear during the hearing was that the financial operations of Fenquin Pty Ltd and the Quintano family may not bear close scrutiny from various authorities, including the Australian Taxation Office.

With regard to the central issue in this case, there was very little evidence at all. Martin Quintano claimed there was an oral agreement between himself and his father to create an on- going loan to himself and Deborah of which Deborah had no knowledge at all and to which she was not and could not have been a party. For some reason, which nobody could explain, this loan was to be structured through Fenquin and involved the debiting of John Quintano's director's loan account and payments from the company to Martin and Deborah Quintano or

directly to their third party creditors. The only "evidence" substantiating this arrangement was the distinctly inadequate report of Mr Gadaleta which, in an even more bizarre twist, was actually put into evidence in the case of the applicant. The dearth of evidence regarding this loan was not helped by the procedural difficulties of the case. Properly constituted, these matters would have named John Quintano as a party, and the Court would then have had the benefit of his testimony regarding the matter. As it was, he was neither a party nor a witness so the one person in the best position to shed light on this matter was not heard at all.

For these reasons, I have serious misgivings as to whether the alleged debt of Martin and Deborah Quintano to John Quintano is bona fide and should have been admitted at the creditors' meeting. Nevertheless, the applicant has brought this case and he must bear some onus of proving that the debt did not exist. As counsel for the respondent pointed out, even if all evidence of the respondents was disbelieved, which is an appealing conclusion, the fact remains that the applicant has not been able to prove that the debt does not exist. In fact, given the strange presentation of the applicant's case, his evidence actually goes some way to showing that there is a debt owed, rather than the contrary proposition.

I raised at the hearing my concern that any applicant could discharge an onus to prove that a debt does not exist. In K h the Full Court set out the same dilemma as faced by Justice Kiefel at first instance in that matter:

Her Honour expressed grave doubts about the existence and the nature of any transaction between the appellant and Mr Patel. But her Honour then said that, notwithstanding both the disquiet which she felt and the fact that she had formed the view that aspects of the story put forward by the appellant were improbable, it did not follow that the debt of the appellant to Mr Patel did not exist. She said that it was incumbent upon the respondent to establish that the transaction did not exist, since it asked the court to conclude that the appellant had given false and misleading information or had included an incorrect particular concerning an alleged credifor in his statement of affairs.

The Full Court did not comment on whether this approach was correct or not. The respondents submitted that this approach was correct, based on a single paragraph from a

judgment of Justice Heerey in Re McLean; Ex varte Friends ' Provident Life Office [l9921

108 ALR 360:

It was accepted, correctly in my view, that the onus lies on FPL to establish that it was a creditor of Mr McLean in the alleged amount. This is simply an application of the ordinary principle that he who alleges must prove. In the converse case, when the applicant under s221(1) contends that the chairman wrongly admitted a creditor to vote (as in Zantiotis) the onus would lie the other way.

The case referred to by Justice Heerey, Zantiotis v Andrew & Anor [l9881 80 ALR 299, is not relevant to the present case because, although the applicant was disputing the admission to vote of a certain creditor, it was not the actual existence of the debt which was at issue, but whether, pursuant to the Act, the debt was such as to give rise to a right to vote. Thus the difficulty in discharging any onus was not the same as in the present matter.

The respondents submitted that the interpretation of Justice Heerey was adopted by a Full Court of this Court (Justices Wilcox, Ryan and Cooper) in Re DingZe: WestDac Banking Corporation v WorreN & ~ n & [l9931 119 ALR 265. In that matter Westpac applied to the Court for a determination that it was in fact a creditor entitled to vote on a proposed composition at a creditors' meeting. The chairman of the meeting had determined that Westpac was not allowed to vote. The Court stated:

[the trial judge] had to ask himselfwhether he was satisfed, on the evidence the partiesplaced before him, that Westpac was a creditor of the debtors and, if so, in what amount. The problem he struck was that the parties - and, more especially, Wespac who bore the onus of proof - elected not to tender the necessary evidence.

That case is not directly applicable to the matter at hand. In D- the question of whether there was a debt entitling Westpac to vote on a composition involved calculating the value of the actual debt against the value of a potential cross-claim. It is true that Westpac, as the applicant, carried the onus of proving it was a creditor. However, it did not face the problem of the applicant in this matter, who is attempting to prove that a debt does not exist at all.

It will not be often that a person not a party to the alleged debt is seeking to prove its non- existence against parties claiming to owe it. Section 222(1) speaks of "a doubt ... whether a

composition has been acccepted by a special resolution of a meeting of creditors...". In the

facts of this case, it is not a simple matter to determine how much and what evidence is needed

to cast a sufficient doubt that the debt exists.

As it seems to me, a feeling of disquiet about the debt is not enough. The party challenging the debt will normally be required to establish by evidence a genuine doubt that it exists. However, even by such a test, it is clear enough that the applicant's evidence in this case has if anything tended to establish the existence of the debt, not its non-existence. In order to ground a successfbl application under section 222(4), the Court must be able to find that the statements of affairs available to creditors at the creditors' meeting contained as an incorrect material particular the debt owing to John Quintano. Most hesitantly I feel constrained to find that this would not be a finding based on the evidence.

COMPLETION OF COMPOSITION AND OTHER MATTERS

The applicant faces a number of other obstacles to success. Firstly, it is a requirement of section 222 that any application to avoid the composition be made before the composition is complete. Counsel for the respondents argued that the time of the application is the time of the hearing of the matter and the making of the order. I doubt this submission and tend to the view that the relevant date is when the application is filed -- in this case about 11 months before the finalisation of the composition. However, despite knowing from various sources that the administration of the composition was proceeding, the applicant made no request to the trustee and sought no order from the Court at any time to stay the administration of the composition pending the outcome of these applications.

Secondly, it is hndamental to all three sections in question, sections 222, 239 and 242, that any order of the Court be for the benefit of creditors. In this case, all dividends have been paid and there is no evidence to suggest that a greater benefit will accrue to creditors generally by avoiding the composition and sequestrating the estates of the debtors. There is no evidence that there are any substantially unencumbered assets which could be recovered and distributed. In fact the evidence presented to the creditors' meeting was to the contrary, which no doubt prompted a number of creditors to vote for the composition.

Third is the further discretionary factor raised by the significant delay on the part of the applicant in applying for a hearing date for this matter. Between the original filing of the applications and the hearing was a period of 2 years and 2 months for which no explanation has been given. During this time the administration of the composition proceeded and was finalised.

Finally, the applications were filed 1 1 days out of the time limit for challenges to compositions set by section 239 which specifies 21 days for the filing of an application to set aside the composition. As I have held that an application under this section could not succeed, the application for an extension of time must also fail. The late filing is merely a further factor to be considered as part of the overall circumstances.

CONCLUSION

The applicant's failure to constitute this matter under the correct section of the Act is indicative of the manner in which the entire proceedings were conducted. The normal course in matters such as these would have been to notify the trustee and request that the composition not be proceeded with pending an application for a declaration that John Quintano was not entitled to vote on the composition and a consequent order under section 222 declaring the composition void. That did not happen, it being apparently determined to let the whole operation proceed to a conclusion and then attempt to create havoc by having the whole process reversed.

Because they disregarded the Full Court's decision in K-these applications were improperly constituted under provisions of the Act which do not apply to the facts of the case. Even if it had been appropriate to rely on either section 239 or 242, the discretionary factors involved would mitigate heavily against their success.

Nevertheless, and despite the fact that it was not included in the application, I considered the substantive case as if it had been brought under section 222. Even on the merits, there was insufficient evidence to justify a finding that the alleged debt did not exist and thus that the statements of affairs were incorrect in a material particular. Moreover, putting evidentiary and procedural difficulties to one side, the lack of apparent benefit to the creditors generally, given

the finalisation of the composition, is the single largest factor weighing against the applicant. I cannot see why it should be disturbed, under section 222, at this late stage. Although it was patently obvious that there is a long history of ill feeling between the applicant and the debtors, the provisions of Part X are not punitive and it is not open to the Court to set aside a composition and bankrupt the debtors merely to vindicate the hostility of the applicant, however justified it may be. No benefit to creditors is readily apparent so that no order avoiding the composition can or ought to be made.

The applications are dismissed. The applicant is to pay the respondents' costs.

I certify that this and the S C ~ L ' ^ / ~ " " * /

preceding pages are a true copy of the

Reasons for Judgment herein of his i.ior,our

Justice Einfeld

-y -' Associate

l M/

For the applicant:

Mr G. Jones instructed by Cassidy Gibson

Howlin.

For the first respondent in each matter:

Mr M. Aldridge instructed by Kauhann

Peters.

Date of hearing:

14 and 15 October 1997

Date of judgment: 2 April 1998