CATCHWORDS
BANKRUPTCY - meeting of creditors - entitlement to vote - rule against double proof - whether guarantor who has made part payment under a guarantee is a creditor entitled to vote at meeting where principal creditor does not seek to prove for that part.
BANKRUPTCY - meeting of creditors - Deed of Assignment - special resolution - Chairman wrongly excluded a creditor from voting - creditor represented by receiver - receiver not validly appointed - whether special resolution validly passed.
Words and Phrases - "creditor".
Bankruptcy Act 1966 (Cth) - s 5, s 188, s 194, s 198, s 198A, s 198(1), s 198(4), s 200(1), s 200, s 200(3), s 201, s 222, s 222(1), s 240
Re Dingle; Westpac Banking Corporation v Worrell & Anor (1993) 47 FCR 478
Westpac Banking Corporation v Gollin & Co Limited (In liquidation) (1988) VR 397
Re Sass [1896] 2 QB 12
Re Fenton; Ex parte Fenton Textile Association Limited [1931] 1 Ch 85
Zantiotis v Andrew (No 2) (1988) 80 ALR 299
Re Tregonning; Ex parte Friends' Provident Life Office (1983) 74 FLR 327
Re McLean; Ex parte Friends' Provident Life Office (1992) 36 FCR 502
NEVILLE LOESKOW v AVOKAH IRRIGATION PTY LTD (RECEIVER AND MANAGER APPOINTED) ACN 009 739 655 and COMMONWEALTH BANK OF AUSTRALIA ACN 123 123 124
No. QG 145 of 1995
LOCKHART, RYAN & FOSTER JJ
24 APRIL 1996
BRISBANE
IN THE FEDERAL COURT OF AUSTRALIA)
)
QUEENSLAND DISTRICT REGISTRY ) No. QG 145 of 1995
)
GENERAL DIVISION )
On appeal from a Judge of the Federal Court of Australia
BETWEEN: NEVILLE LOESKOW
Appellant
AND: AVOKAH IRRIGATION PTY LTD (RECEIVER AND MANAGER APPOINTED) ACN 009 739 655
First Respondent
AND: COMMONWEALTH BANK OF AUSTRALIA ACN 123 123 124
Second Respondent
JUDGES MAKING ORDERS: LOCKHART, RYAN & FOSTER JJ
DATE: 24 APRIL 1996
PLACE: BRISBANE
MINUTE OF ORDERS
THE COURT ORDERS THAT:
1. The appeal be dismissed with costs.
2. The sequestration order made by the primary Judge be confirmed.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA)
)
QUEENSLAND DISTRICT REGISTRY ) No. QG 145 of 1995
)
GENERAL DIVISION )
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: NEVILLE LOESKOW
Appellant
AND: AVOKAH IRRIGATION PTY LTD (RECEIVER AND MANAGER APPOINTED)
First Respondent
COMMONWEALTH BANK OF AUSTRALIA
Second Respondent
COURT: LOCKHART, RYAN & FOSTER JJ.
DATE: 24 APRIL 1996
PLACE: BRISBANE
REASONS FOR JUDGMENT
LOCKHART J.
I agree with the reasons for judgment of Foster J. and the orders which he proposes.
I certify that this page is a true copy of the reasons for judgment herein of the Honourable Justice Lockhart.
Associate
Dated: 24 April 1996
IN THE FEDERAL COURT OF AUSTRALIA)
)
QUEENSLAND DISTRICT REGISTRY ) No QG 145 of 1995
)
GENERAL DIVISION )
On appeal from a decision of a single Judge of the Federal Court of Australia
BETWEEN:NEVILLE LOESKOW
(Appellant)
AND: AVOKAH IRRIGATION PTY LTD (RECEIVER AND MANAGER APPOINTED)
(First Respondent)
AND: COMMONWEALTH BANK OF AUSTRALIA
(Second Respondent)
CORAM: Lockhart, Ryan and Foster JJ
DATE: 24 April 1996
PLACE: Brisbane
REASONS FOR JUDGMENT
RYAN J
I agree with the reasons for judgment of Foster J and the orders which he proposes.
I certify that this page is a true copy of the reasons for judgment of his Honour Justice Ryan.
Associate:
Date:
IN THE FEDERAL COURT OF AUSTRALIA)
)
QUEENSLAND DISTRICT REGISTRY ) No. QG 145 of 1995
)
GENERAL DIVISION )
On appeal from a Judge of the Federal Court of Australia
BETWEEN: NEVILLE LOESKOW
Appellant
AND: AVOKAH IRRIGATION PTY LTD (RECEIVER AND MANAGER APPOINTED) ACN 009 739 655
First Respondent
AND: COMMONWEALTH BANK OF AUSTRALIA ACN 123 123 124
Second Respondent
CORAM: LOCKHART, RYAN & FOSTER JJ
DATE: 24 APRIL 1996
PLACE: BRISBANE
REASONS FOR JUDGMENT
FOSTER J: This is an appeal from the judgment of a single Judge of the Court. His Honour had before him two applications under s 222(1) of the Bankruptcy Act 1966 (Cth) ("the Act") brought by the first and second respondents respectively. Each application was in the following terms:-
"APPLICATION is made ... for the following orders:
1. A declaration that the
Deed of Arrangement between Peter Ivan Felix Geroff and Gregory Michael Moloney
(the Trustees) and Neville Loeskow (the Debtor) made on 24 August 1994 is
void upon the ground that the resolution that the Debtor execute a Deed of
Arrangement which was proposed at the meeting of creditors held on 18 August
1994 was not carried as a special resolution.
2. A sequestration order against the estate of the Debtor.
..."
His Honour made a sequestration order against the estate of the debtor (Loeskow) who brings these appeals seeking in substance, though not in form, a reversal of the sequestration order and the reinstatement of the Deed of Arrangement.
BACKGROUND
Loeskow, a businessman in the Bundaberg area, was, by 1994, in substantial financial difficulties and was clearly in a state of insolvency. He was heavily indebted to the second respondent ("the Bank"). The first respondent ("Avokah Irrigation"), a company with which he was associated, on 3 June 1988 had entered into a Deed of Guarantee with the Bank which guaranteed the repayment to the Bank of "all monies ... now or hereafter to become owing or payable to the Bank by the debtor ...". The guarantee was a whole moneys guarantee.
On 19 July 1994 Loeskow signed an authority pursuant to s 188 of the Act by which he authorised Peter Ivan Felix Geroff and Gregory Michael Moloney, registered trustees, to take control of his property and call a meeting of his creditors. The meeting was duly called on 18 August 1994. Twenty creditors attended with claimed debts amounting to $13,978,752.00. Loeskow's statement of affairs dated 18 July 1994 showed a deficiency of liabilities over assets of $12.274M. The Bank claimed a debt of $3,155,828.00. Avokah Irrigation claimed a debt of $403,310.95, this being the amount it had by that time paid to the Bank under the guarantee. The full amount of the Bank's debt was $3,559,138.00. However, it claimed only $3,155,828.00 on the basis that it had already received from Avokah Irrigation the sum of $403,310.95.
Mr Geroff was elected chairman of the meeting. He referred to the "proofs of debts" that he had received prior to the commencement of the meeting and proceeded to announce those debts which he accepted or rejected for the purpose of the meeting. He accepted the Bank's debt of $3,155,828.00 but rejected Avokah Irrigation's debt. In relation to the rejection of this debt he made the following statement to the meeting:-
"Dealing firstly with the proof of debt from Avokah Irrigation in the amount of $403,310.00, it relates to the sale of that company's assets to meet obligations under guarantee given by Avokah Irrigation Pty Ltd to the Commonwealth Bank of Australia for advances made to Neville Loeskow. The guarantee is for the entire amount of the debt and it is my advice that where there was only a partial payment of that debt the guarantor cannot prove in the debtor's bankruptcy in competition with the creditor. That is the advice I have been given. I also --- having perused the guarantee document under clause 13 signed by Avokah Irrigation, specifically precludes the guarantor from proving in competition with the bank whilst the bank's debt remains unpaid."
There was discussion at the meeting in relation to this ruling, in which were involved particularly the solicitor representing the Bank and the solicitor advising Mr Geroff. The Bank's solicitor inquired whether the Bank was allowed to prove for the rejected debt in place of Avokah Irrigation. An inconclusive discussion then took place as a result of which the Bank did not seek to increase the size of its claim to include the amount rejected. It may be noted that it was not contended in the proceedings before the primary Judge, nor in this appeal, that relevant error occurred in the conduct of the meeting through any refusal on the part of the chairman to allow the Bank to increase the size of its claimed debt. The only error relied upon, in this aspect of the case, is an alleged unlawful refusal on the part of the chairman to accept Avokah Irrigation's proof of debt.
In the result, the refusal to accept this debt was a critical factor at the meeting. The proposal put to the meeting was that Loeskow enter into a Deed of Arrangement, the effect of which was to provide for the payment of $50,000 to the trustee for the benefit of his creditors. It was indicated that these funds were to come from persons and entities related to Loeskow. The meeting was informed that after allowance for the costs of the administration, there would be a pro rata distribution to proving creditors of about one five hundredth of a cent in the dollar. The meeting passed a special resolution approving of the proposal. Had Avokah Irrigation's proof of debt been admitted and, had it voted against the proposal, the special resolution would have been defeated.
The Bank and Avokah Irrigation then made the applications which were heard and determined by the primary Judge. Before considering the case at first instance, I find it convenient to set out the statutory framework in which the questions for determination arose.
THE STATUTORY FRAMEWORK
Loeskow sought to utilise the provisions of Pt X, Div II of the Act. He sought that his affairs be dealt with under Pt X without his estate being sequestrated and accordingly, pursuant to s 188 he signed an authority authorising Messrs Geroff and Moloney, as registered trustees, to call a meeting of his creditors and to take over the control of his property. The meeting was duly called after the appropriate report (s 189A) and notices of the meeting were forwarded to the creditors (s 194).
Entitlement to vote at such a meeting is dealt with by s 198 of the Act. This section relevantly provides as follows:-
"198(1) Subject to this section, every creditor is entitled to vote at a meeting under this Division.
...
198(4) A creditor is not entitled to vote (otherwise than in respect of the election of a chairman of the meeting), unless he has made known
to the chairman particulars of his debt.
..."
Section 200 provides for manner of voting as follows:-
"200(1) A creditor may vote either in person or by his attorney or by a proxy appointed in writing by the creditor or his attorney.
...
200(3) A person claiming to be the proxy of a creditor is not entitled to vote as proxy (otherwise than in respect of the election of a chairman of the meeting) unless the instrument by which he is appointed has been lodged with the chairman."
Admission and rejection of claims to vote at the meeting are the subject of s 201 which provides as follows:-
"201 Any question as to the right of a person to vote at a meeting under this Division, or as to the amount of the debt in respect of which a person is entitled to vote at such a meeting, shall be determined by the chairman, who may, if he thinks it necessary to do so, adjourn the meeting for a period, not exceeding 14 days, to enable him to investigate the matter."
Section 240 provides that the creditors at the meeting may "by special resolution" require the debtor to execute the relevant Deed of Arrangement.
A "special resolution" is defined in s 5 of
the Act as meaning "a resolution passed by a majority in number and
at least three fourths in value of the creditors present
personally, by attorney or by proxy at a meeting of creditors and voting on the
resolution".
Section 222 of the Act empowers the Court to declare a Deed of Arrangement void. As indicated, the applications in this case were brought under this section. It relevantly provides as follows:-
"(1) Where there is a doubt, on a specific ground, whether 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, a person authorised in writing by the Inspector-General, the Registrar, 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 (1), 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
(b) declaring that a provision of the deed is void, or is not void, on the ground specified in the application.
...
(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 specified in subsection (4) unless it is satisfied that it would be in the interests of the creditors to do so.
...
(7) A trustee or a creditor may include in an application under subsection (1) ... 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) ... declaring the deed ... to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought."
THE CASE AT FIRST INSTANCE
The primary Judge, in determining the applications, was not limited to the material before the trustee at the meeting (Re Dingle; Westpac Banking Corporation v Worrell & Anor (1993) 47 FCR 478). A receiver had been appointed to Avokah Irrigation and was present at the meeting claiming to represent the company. No question arose at the meeting as to his ability so to represent Avokah Irrigation. However, it was ascertained after the meeting and before the hearing at first instance that there were defects in relation to the appointment which rendered it invalid. This fact led to certain submissions being made to his Honour which were dealt with in his decision.
His Honour had to determine two main questions which are also the questions for determination in this appeal. In the first place it was asserted by the present respondents that the trustee had erred in rejecting Avokah Irrigation's claim to vote through the erroneous application by him of the rule against "double proof". Secondly, it was submitted by the present appellant that the invalid appointment of the receiver meant that Avokah Irrigation was not, in fact, present and entitled to vote at the meeting within the meaning of the relevant sections.
In relation to the first question his Honour after
consideration of the judgment of Tadgell J in Westpac Banking
Corporation v Gollin & Co Limited (In liquidation) (1988) VR 397
and other relevant authorities said:-
"The thrust of the judgment in Gollin is that, if the principal creditor seeks to prove for the whole of the principal debt, any rights which the guarantor's part payment may confer on him is deferred or postponed to the right of the principal creditor.
...
The basis for the rule against double proof is that until paid in full, a creditor is entitled to prove for the whole debt even if part of it has been paid by the surety. That is established by Re Fenton and by In re Oriental Commercial Bank [1871] LR 7 Ch App 99 per Mellish LJ at 103-4. The rule, as the Oriental Commercial Bank case shows, is designed to prevent two dividends being paid for the same debt. As the passage to which reference has earlier been made indicates, the rule does not apply where the creditor has renounced his right to prove: see also in this regard Phillips & O'Donovan, The Modern Contract of Guarantee 2nd ed. p. 522.
In this particular case, Avokah Irrigation has paid $403,310.95 and as a consequence is an actual and not a contingent creditor for that amount. The bank did not seek to prove for the same $403,310.95 and there was therefore no infringement of the rule against double proof. The position legally was that the bank was entitled to prove for that part of the debt that remained unsatisfied from any source and the guarantor who had paid part of the debt was entitled to prove for the amount which it had paid."
His Honour accordingly held that "the rejection of the proof of Avokah Irrigation for the reasons given by the chairman was wrong". He went on to say that in his opinion:-
"the mere fact that the bank was entitled to prove for the whole amount of the debt, did not preclude an entitlement in Avokah Irrigation to prove in respect of that part of the debt which it in fact had paid, if the bank chose not to prove for the whole amount of the debt."
As to the second question, his Honour noted that the question whether the receiver (Mr Dennis) held a proper proxy for Avokah Irrigation had not been in issue at the meeting. However, he considered material bearing upon this matter. He concluded for reasons set out in his judgment that Mr Dennis had not been validly appointed as a receiver, a decision which has not been challenged in the appeal. However, his Honour was not prepared to hold that this fact had any bearing upon what the outcome should be. The simple fact of the chairman's erroneous ruling on the "double proof" question had deprived Avokah Irrigation of its entitlement to vote on the resolution in circumstances where the vote was critical to the outcome. In those circumstances the resolution was fundamentally flawed and the Deed of Arrangement could not stand.
THE CASE ON APPEAL
Both questions were reargued on the appeal. I shall deal in the first place with the matter of "double proof".
(a) Double Proof
The rule against double proof has been the subject of considerable discussion in the cases. A very comprehensive review of earlier authority was undertaken by Tadgell J in Gollin. His Honour pointed out that where both a principal creditor and a guarantor sought payment from the insolvent debtor, it was necessary to have regard to the terms of the guarantee given by the guarantor to the creditor. Different considerations would apply where the guarantee was in respect of part only of the debt as against the provision of a whole moneys guarantee. In the latter case a guarantor who had paid part of the creditor's debt was not entitled to receive any payment from the debtor in respect of the debtor's consequent indemnity to him until the principal creditor had been fully paid.
His Honour expressed the opinion that the relevant principle had been correctly stated by Vaughan Williams J in Re Sass [1896] 2 QB 12 in the following passage at 14:-
"I think that the common law right of the bank here was to sue the debtor for the whole amount that was due from him to them, irrespective of the sum which was paid by the surety, unless that sum amounted to 20s. in the pound. When bankruptcy supervened the right of the principal creditor - the bank - was to prove for that amount, unless there was a surety and that surety was a surety for part of the debt. In that case, if the surety is a surety for part of the debt, and the surety has paid that part, then by virtue of that payment the right of proof, which would have been the right of proof of the principal creditor, becomes pro tanto the right of proof by the surety. The surety has a right, having paid part of the debt in that way, to stand pro tanto in the shoes of the principal creditor; and even if the principal creditor has proved and has received the dividend, and the surety comes and repays the full amount, the principal creditor would then be trustee for the surety of the amount of the dividend which he had so received. In my judgment that right of the surety as against the principal creditor only arises in a case where the surety has paid the whole of the debt. It is quite true that where the surety is surety for a part of the debt as between the principal creditor and the debtor, the right of the surety arises merely by payment of the part because that part, as between him and the principal creditor, is the whole. Now for the purpose of this guarantie all I have to determine here is, whether, as between the bank and the surety, the surety became a surety for the whole of the debt or for a part".
I am satisfied that this statement of principle has not been departed from in subsequent cases. Indeed, it has been accepted in cases such as Re Fenton; Ex parte Fenton Textile Association Limited [1931] 1 Ch 85 where Lawrence LJ said at 115:-
"In the present case the surety has guaranteed the whole of the debts of the principal creditors, although he has limited his liability under each guarantee to a fixed amount. The effect of this is that the principal creditors have the right to prove against the estate of the principal debtor for the whole of their debts, and until they have received 20 shillings in the pound on those debts the surety cannot prove against the estate of the principal debtor, even although he may have paid the full amount for which he is liable under his guarantees: see Re Sass."
On the basis that the decision in Re Sass had, apparently, never been questioned (the contrary has not been suggested in argument in this appeal), Tadgell J provided the following statement of principle, with which I respectfully agree:-
"A payment made by the guarantor to the creditor before
the bankruptcy of the debtor of course entitles the guarantor to credit for it
as against the creditor. If the payment
is of less than the guarantor's full obligation the creditor remains entitled
to prove in the principal's bankruptcy for the whole of the guaranteed debt
simply because the guarantor has no equity as against
the creditor to resist it. A guarantor
who has paid on foot of his guarantee can, nowadays, always prove in the
bankruptcy of the debtor with a view to obtaining indemnity in respect of the
payment. The extent to which the
guarantor's proof will be admitted will depend upon the application of the rule
precluding double proof in respect of the same debt: Re Oriental Commercial Bank; Ex parte European Bank (1871) 7 Ch.
App. 99, at p. 102, per Mellish L.J.
If the guarantor has discharged the whole of his liability under the
guarantee he will be subrogated
to the creditor's right of proof.
The rule against double proof in that case works in favour of the
guarantor and against the creditor. The
right of subrogation, however, does not arise if the guarantor has not
discharged his obligation to the creditor.
The mere fact of payment by the guarantor on account of the guaranteed
debt, or the fact of his right to prove in respect of payment of part of it,
cannot prevent the guaranteed creditor also from proving for the debt
regardless of what he has been paid on account by the guarantor."
In this case the primary Judge, as shown by the passages cited from his judgment, was of the opinion that the rule against double proof was not infringed because the Bank had not sought to prove for the amount paid to it by Avokah Irrigation under the guarantee. I respectfully disagree with him in this view. This was not a case where Avokah Irrigation had guaranteed only a specific part of Loeskow's debt to the Bank. It had given, in fact, a whole moneys guarantee. It was not entitled to any payment in respect of Loeskow's debt to it arising from its payment until the Bank had been paid in full. Accordingly, at the very least, it was not entitled to receive any payment until the Bank had received full payment of the amount that it claimed, namely the reduced amount of $3,155,828.00. Accordingly, I differ, with respect, from the reasons advanced by the primary Judge for holding that Avokah Irrigation was wrongly excluded from voting at the meeting. Its partial discharge of its obligations under its guarantee of Loeskow's debt to the Bank did not prevent the application to it of the rule against double proof, if that rule were otherwise applicable.
I have, however, come to the conclusion that it was not appropriate to apply the rule in the circumstances of the case. Despite its reference to "proof", I am of the view that the rule really relates to entitlement to receive payment from a debtor or his insolvent estate. It does not operate to prevent the creation of a debtor/creditor relationship between a guarantor and a principal debtor. In the present case, of course, the payment by Avokah Irrigation to the Bank under the guarantee created a debt between Loeskow and Avokah Irrigation of the amount of the payment, namely $403,310.95. The rule against double proof operated only to prevent payment of that debt or any rateable dividend in respect of it until the Bank's debt was paid in full. It had no effect upon the existence of the debt or upon Avokah Irrigation's status as a creditor of Loeskow.
In my view, Avokah Irrigation was properly able to claim that at the time of the meeting it was a "creditor" within the meaning of s 198 of the Act even if it was not then entitled as against the Bank or other creditors to obtain any payment in respect of its debt and would obtain no such entitlement until the Bank's debt was fully discharged. The meaning of "creditor" in the context of Part X of the Act has been considered by Beaumont J in Zantiotis v Andrew (No 2) (1988) 80 ALR 299. His Honour (at 302) expressed these views as to the meaning of "creditor" in the relevant sections of the Part:-
"Entitlement to vote at the meeting is governed by s 198 of the Act. Subject to the section, `every creditor is entitled to vote at the meeting...': s 198(1). A creditor is not entitled to vote in respect of an unliquidated or contingent debt or a debt the value of which is not ascertained: s 198(2). For the purpose of enabling a creditor to vote, a debt that is certain but is payable in the future shall be deemed to be payable at the time of the meeting: s 198(3). A creditor is not entitled to vote unless he has made known to the chairman particulars of his debt: s 198(4).
On behalf of the applicant, it is submitted that, on its true construction, s 198(1) confers a right to vote upon only those creditors who are entitled to `prove' under the deed of assignment.
...
I cannot accept the applicant's ... contention.
It is true that it has been held that a reference in bankruptcy legislation to a `creditor' generally means a person entitled to prove in the bankruptcy: see Grave v Bishop (1855) 25 LJ Ex 58; Wood v De Mattos (1865) LR 1 Ex 91; Re Poland (1866) LR 1 Ch App 356 (but see Hoggarth v Taylor (1867) LR 2 Ex 105); Re Ward; Ex parte Hammond and Son v Official Receiver and the Debtor [1942] 1 CR 294. But the meaning of the term must depend upon its particular context.
In the present case, the context strongly suggests that, subject
to the specific exceptions mentioned in s 198 (eg 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'."
[See also Re Dingle at 486,7]
I respectfully agree with his Honour's construction. Accordingly, I am of the opinion that Avokah Irrigation was a "creditor" within the meaning of s 198. Although subject to the rule against double proof in respect of payment to it of any dividend it was, unless disentitled pursuant to the appellant's second submission, a creditor entitled to vote at the meeting.
INVALIDITY OF THE APPOINTMENT OF THE RECEIVER
The second submission depends upon the invalidity of the appointment of the receiver, Mr Dennis, to Avokah Irrigation. This invalidity was dealt with by his Honour in his reasons. It arose from a failure to comply with certain stipulated requirements of his appointment under the relevant deed. The reasons are unchallenged and there is no need to set them out afresh. It is clear that the invalidity was of a technical kind and was capable of being cured. It would seem to have been cured by the time of the hearing before his Honour insofar as the first respondent, in those proceedings as in this appeal, is described as "Avokah Irrigation Pty Limited (Receiver and Manager Appointed)". It is accepted, however, that at the time of the meeting Mr Dennis' appointment was invalid, although this fact was not then realised by him or anyone else. The meeting proceeded on the basis that he validly represented Avokah Irrigation and held a valid proxy from it to vote against the resolution.
Notwithstanding this, the appellant submitted that the invalidity of the appointment has the effect of destroying the respondents' claim that the resolution that Loeskow execute the Deed of Arrangement was not carried as a special resolution. It will be remembered that such a resolution must be passed by a majority in number and at least three fourths in value of the creditors present personally, by attorney or by proxy at a meeting of creditors and voting on the resolution. The appellant asserted that, because of the invalidity of the appointment, Avokah Irrigation was not "present personally, by attorney or by proxy" at the meeting.
The appellant referred, in the first place, to the nature of the hearing provided for by s 222(1) of the Act, asserting that it was a re-hearing by the Court rather than a mere review of the chairman's decision on the material before him at the meeting. This being so, it was incumbent upon the Court to have regard to material placed before it, even if such material was not before the chairman. In the present case, of course, the relevant material was the information relating to the then invalidity of Mr Dennis' appointment. It was also submitted, in this context, that the respondents, as applicants before his Honour, bore the onus of proof of establishing that the relevant resolution had not been carried as a special resolution. Reliance was placed upon a number of authorities to which I shall make brief reference.
In Re Tregonning; Ex parte Friends' Provident Life Office (1983) 74 FLR 327, Fitzgerald J dealt with an application under s 222 of the Act in which an order was sought declaring void a Deed of Assignment. The application was brought by Friends' Provident on the basis that it was relevantly a creditor whose right to vote at the meeting approving the Deed of Assignment had been wrongly excluded by a ruling of the chairman. The chairman had refused to allow Friends' Provident to vote on the basis of material placed before him by the debtor and his solicitor to the effect that the debtor had a defence to the claim which "was not `frivolous or trivial', and that if any amount was owing it was `certainly less than the amount claimed'". At the hearing before Fitzgerald J his Honour admitted evidence which had not been available to the chairman and which, in his view, clearly established the existence of the debt. He found that Friends' Provident "was at all material times a creditor of the debtor in the sum ... claimed in [its] proof of debt". His Honour held, on the basis of this finding, that Friends' Provident had locus standi to bring the application under s 222(1). He gave the following reasons (at p 331):-
"Although the power to determine the rights of persons
to vote at meetings of creditors under Pt X and the amounts of the debts in
respect of which they are entitled to vote is given by s. 201 of the Act
to the chairman of the meeting and s. 225 gives evidentiary effect to a
certificate in respect of the chairman's decision, the decision is not
entirely beyond question.
Notwithstanding that there may perhaps be room for argument based on the
definition of `special resolution' in the Act if it is applicable, it has been
accepted without question that a declaration such as is sought in this case is
appropriate if a creditor entitled to vote was improperly excluded from voting
when the vote, if cast against the resolution, would have resulted in its
defeat: see Re Segal; Lensworth Finance
Ltd v. Segal and Ward (1975) 45 F.L.R. 85 at 91, 93 per Riley J.; Re Levy; Ex parte Scholefield Goodman and
Sons Ltd (1980) 50 F.L.R. 99 at 115 per Bowen C.J.; Re Moloney; Ex parte Field (1981) 51
F.L.R. 31 per Lockhart J. It seems
that the exclusion of such a creditor from the vote means that there has been
no valid special resolution and, accordingly, that the deed was not `entered
into in accordance' with Pt X: see s. 222(1)."
A similar view was reached by Beaumont J in Zantiotis. A Full Court of this Court held to the same effect in Re Dingle at 484. The Court's jurisdiction to reconsider a chairman's ruling on a creditor's right to vote is, thus, fully established.
It is also clear that, on such a reconsideration, the Court may have regard to material not before the chairman. As already indicated, this was the view of Fitzgerald J in Re Tregonning. It was so held by Heerey J in Re McLean; Ex parte Friends' Provident Life Office (1992) 36 FCR 502 at 510. The matter is placed beyond doubt by the decision of the Full Court of this Court in Re Dingle where the Court said (at 486):-
"... when the Court is called upon to determine whether a person is entitled to vote as a creditor, it must act on the material before it; it is not limited to the material before the trustee or chairman: see Re Tregonning; Ex parte Friends' Provident Life Office (1983) 74 FLR 327 at 330 and Re McLean; Ex parte Friends' Provident Life Office (1992) 36 FCR 502 at 510. Moreover, it is not sufficient that the creditor merely demonstrate a prima facie or arguable case."
It is clear, also, that a person claiming to be a creditor wrongly excluded from voting bears the ordinary civil onus of establishing these matters before the Court. In Dingle, the Full Court said (at 488):-
"We think Drummond J was correct when he said that the issue that he had to determine, in order to grant the relief sought, was whether Westpac was in fact a creditor of the debtors in the amount claimed. The trustee's determination at the meeting gives rise to the case; but it is irrelevant to its resolution. The Court must decide, for itself, the question of Westpac's entitlement to vote; and it must do so on the material before it. Westpac must prove that the composition was void because the statutory requirements of the Bankruptcy Act have not been complied with; the necessary statutory majority having not been achieved because it was improperly denied a vote. In short, proof that Westpac was a creditor is an essential element to establish both its standing to bring the application and its entitlement to the relief sought."
I am of the opinion that, in view of these principles, the primary Judge was required to consider, in addition to the material before the chairman, the further material placed before him, namely that Mr Dennis had not been validly appointed as receiver of Avokah Irrigation. The uncontested effect of this invalidity was that Mr Dennis had no authority to represent Avokah Irrigation at the meeting, had no authority to vote on its behalf, had he been permitted to do so. Nor did he have any authority specifically conferred upon him to lodge with the chairman of the meeting, the "proof of debt" which was rejected on the ground that it infringed the principle against double proof.
It is clear that his Honour was seized of these considerations. However, he dealt with the question of the invalidity of Mr Dennis' appointment in the following way:-
"In the view I take of the matter, independently of the question of whether Mr Dennis was validly appointed as receiver, Avokah Irrigation was a creditor of Mr Loeskow and was entitled to vote at the meeting and its vote was crucial. Contrary to the Chairman's ruling, the entitlement of Avokah Irrigation to vote was not affected by any consequences of the rule against double proof."
It was the contention of the appellant that his Honour erred in the approach taken in this passage. It was submitted that he should have taken into account that the invalidity of Mr Dennis' appointment, irrespective of any error in the application of the rule against double proof, was sufficient to deprive Avokah Irrigation of any entitlement to vote at the meeting.
The appellant, in written submissions, developed the argument, with reference to the relevant statutory provisions, in the following terms:-
"The process of determining the entitlement of a person to vote at a meeting under Part X involves:
(a) firstly, determining that the person is a creditor within the meaning of s198;
(b) secondly, determining
that the creditor has exercised his right to vote by appointing a person in the
manner prescribed under Part X:
ss199, 200 and the Bankruptcy Rules,
or by attending personally.
If a person is not either a creditor or has not properly exercised the right to vote then a chairperson should reject the vote."
Having regard to these considerations, the argument proceeded, it devolved upon the present respondents to prove at the trial:-
"(a)that the First Respondent was a creditor in fact (s198); and
(b) that Mr Dennis (who attended the meeting) had a right to vote at the meeting for the First Respondent (s200); and
(c) that the vote would have affected the fate of the meeting."
Only if these matters were established would the Court's discretion be enlivened to overturn the decision of the chairman and make a sequestration order.
Specifically, it was submitted that his Honour erred in failing to accept the existence of an issue, namely; was Mr Dennis the attorney or proxy of the first respondent (s 200(1))? As this issue could only be decided in the negative then, it followed that the present respondents had failed to prove that the first respondent was entitled to vote at the meeting.
I should add that there was no dispute that if Mr Dennis had been permitted to vote at the meeting he would have voted against the resolution and that the vote would have defeated the resolution.
The respondents did not dispute that the invalidity of Mr Dennis' appointment prevented him acting as a duly appointed attorney or proxy of Avokah Irrigation within the meaning of s 200(1) of the Act. However, they argued that his Honour was correct in treating this matter as irrelevant. Because Avokah Irrigation had been wrongly rejected as a creditor entitled to vote through the erroneous application of the rule against double proof, the question of Mr Dennis' authority to vote on its behalf simply did not arise at the meeting and, perhaps, was not allowed to determine the result of the applications.
The respondents relied upon the wording of s 198(4) in contrast with the wording of s 200. It may be noted that s 198 has the heading "Entitlement to Vote at Meeting" whereas s 200 bears the heading "Manner of Voting". It was the respondents' contention that in determining "entitlement to vote" it was irrelevant to consider whether an entitlement established under s 198 might not, in fact, be capable of exercise through failure to comply with s 200.
I think there is considerable force in this argument. Indeed, I am persuaded by it. As already indicated, Avokah Irrigation was a "creditor" of Loeskow and was therefore entitled to vote at the meeting pursuant to s 198(1) unless disentitled by the provisions of any sub-sections of that section. It was submitted on behalf of the appellant that it was so disentitled by sub-s (4) in that it had not made known to the chairman particulars of its debt. This failure was said to have occurred by reason of the fact that the particulars had been supplied by Mr Dennis in the absence of authority to do so. I am of the opinion that the very general wording of s 198 when contrasted with the wording of s 200 precludes any necessity that, in the case of a company, the particulars of debt be supplied in any formal manner. In particular it is not a critical requirement that they be furnished by some person holding a relevant power of attorney or proxy. Here the information was given to the chairman in the presence of Loeskow and his son both of whom were directors of Avokah Irrigation. The information was not disputed and was accepted by the chairman. In my view, common sense requires that it be accepted that in those circumstances sufficient compliance with the sub-section had occurred. That being so, "entitlement to vote" was established.
The difficult question in the case, as I see it, is whether the acknowledged inability of Mr Dennis to vote on behalf of Avokah Irrigation at the meeting prevented the establishment of the ground of the application.
This is not a case such as Tregonning, Zantiotis, or Dingle where the Court entertained additional evidence bearing upon an issue raised at the creditor's meeting. Here, the question of Mr Dennis' right to represent the company and vote on its behalf against the resolution was simply not raised, nor was it intended to be raised, it being assumed on all sides that the right existed. Although the Court was required to re-hear and not merely review, it could not, in the nature of things, assume the role of chairman and engage in essentially hypothetical considerations as to what might or might not have occurred had the issue raised before it for the first time been presented to the chairman at the meeting. In my view, this provides a critical point of distinction between this case and the earlier cases.
In my opinion, the present case would be properly analogous to cases such as Tregonning and Dingle if objection had been taken at the creditor's meeting to Avokah Irrigation being represented by Mr Dennis, followed by a dismissal of the objection by the chairman made without the benefit of material demonstrating invalidity which was later placed before the primary Judge. The Judge would then have been in a position to consider the objection afresh with the benefit of the additional evidence which had been denied to the chairman. Undoubtedly, in such circumstances, he would have been entitled to reverse the chairman's earlier ruling.
However, this was not such a case. The point was never taken before the chairman and, consequently, was not ruled upon at the meeting; whereas, the "double proof" point was taken and resulted in the exclusion of Avokah Irrigation from any participation in the voting procedure. The correctness of this decision on the part of the chairman was properly the subject of application to and reconsideration by his Honour pursuant to s 222 of the Act. His Honour found that the rule had been wrongly applied. I have respectfully differed from his Honour in finding that, had it been appropriate to apply the rule, its application by the chairman would have been correct, but that, in the circumstances, it was inappropriate to apply the rule at all.
In my opinion, his Honour was correct in refusing to consider, in the absence of its having been an issue before the chairman, the question of the validity of Mr Dennis' appointment. It is quite clear that, had the chairman not fallen into error in relation to the double proof rule, Avokah Irrigation would have been accepted as entitled to vote within the meaning of s 198. No question as to its right to exercise that entitlement pursuant to the provisions of s 200 would have arisen as there was then no question of the validity of Mr Dennis' appointment or his proxy. Nor is there any question that his vote would have been against the resolution. In my view, the respondents were properly successful before his Honour in establishing that the chairman's error resulted in the resolution being carried in circumstances where it should have failed for want of the necessary majority in value. The respondents have similarly succeeded in establishing this before this Court.
In my view, to allow the invalidity of Mr Dennis' appointment to be raised as a further basis for the upholding of the chairman's decision would be to enter into an impermissible area of speculation. For example, if one were to assume that Avokah Irrigation had not in fact been excluded from voting entitlement but that it had been met with an objection that it could not participate in the vote because Mr Dennis could not represent it, then, obviously, a variety of events might have occurred, including an application to the chairman to adjourn the meeting so that the situation could be cured. The Bank might have made application to amend the amount of its debt to claim the whole of the debt. This application would not then have been made in the context of any discussion as to the application of the double proof rule, which discussion, as appears from the transcript, had the result of deterring the Bank from persisting in that very application. In the absence of any such deterrence, it is very likely that such an amendment would have taken place or, at least, an application made for the meeting to be adjourned so that the position could be considered. These and other possible speculative considerations are sufficient, in my view, to indicate that his Honour was amply justified in refusing to regard the invalidity of Mr Dennis' appointment as determinative of the question before him. He was correct in regarding them as irrelevant to that determination.
His Honour, having found that the resolution for the entering into of the Deed of Assignment was invalidly passed, then exercised his discretion under the section to make a sequestration order in respect of Loeskow's estate. His Honour indicated the grounds for the exercise of this discretion in his Honour's reasons for judgment. It has not been argued that, in the circumstances of the resolution having been found to be invalid, his Honour committed any reviewable error in the exercise of that discretion. Indeed, in my opinion, he was plainly correct.
Accordingly, I would dismiss this appeal with costs and confirm the sequestration order made by his Honour.
I certify that this and the preceding twenty seven (27) pages are a true copy of the reasons for judgment herein of the Honourable Justice M. L. Foster.
Associate:
Date:
A P P E A R A N C E S
COUNSEL FOR THE APPELLANT: J.C. BELL with P.P.M McQUADE
INSTRUCTED BY: CONOMOS LAWYERS
COUNSEL FOR THE RESPONDENT: P.R. DUTNEY QC with M. FARMER
INSTRUCTED BY: FREEHILL HOLLINGDALE & PAGE
DATE OF HEARING: 7 NOVEMBER 1995
DATE OF JUDGMENT: 24 APRIL 1996
