[1993] FCA 619; (1993) 119 ALR 265

[1993] FCA 619; (1993) 47 FCR 478

Bankruptcy - Application for orders annulling compositions accepted at meeting of creditors - Whether Court empowered to review trustee's determination that a person was not entitled to vote at the meeting - Circumstances under which the Court will intervene - Whether review should be based on the evidence before the Court or be limited to the material before the trustee - Whether applicant for review must demonstrate that the person is a creditor or merely that the person has a prima facie or arguable case - In the case of claimed set-off, necessity for trustee (and the Court on review) to evaluate the value of the set-off - Effect of lack of evidence concerning the value of the person's claim, and especially the prospects of success of the claimed set-off.

Bankruptcy Act 1966, ss.27, 30, 64ZA and 178.

Counsel for the Appellant: R Chesterman QC and P Wolfe

Solicitors for the First Respondent: Whitman and Co

Solicitors for the Second Respondent: Baker Johnson and Co

2. The appellant pay the costs of the respondents, these costs being taxed on the basis that matters QG 147 of 1993, QG148 of 1993 and QG 149 of 1993 constitute a single matter.

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

WILCOX, RYAN AND COOPER JJ Three appeals against a decision of a single Judge (Drummond J) have been heard together by consent. They concern compositions with their creditors made by three bankrupts, Arthur David Thomas Dingle, Valerie Jean Dingle and Graham Douglas Cockerill. As the effect of the compositions was to annul the bankruptcies, we will refer to the former bankrupts as "the debtors".

2. Each of the debtors became bankrupt on 26 October 1990 pursuant to a debtor's petition. Robert Burns, a registered trustee, was appointed trustee of each estate. Apparently, the debtors had been partners in businesses conducted in the Bundaberg district. None of them had significant unencumbered assets. In connection with their businesses, the debtors borrowed moneys from Westpac Banking Corporation ("Westpac"), the present appellant. The details are not material to these appeals; but it appears that, at some stage, Westpac lent the debtors a substantial sum expressed in Swiss francs. Because of a deterioration in the rate of exchange of the Australian dollar as against the Swiss franc, the Australian dollar cost of repaying this loan greatly exceeded the sum received. According to the debtors, the loss that each of them sustained on this transaction was a major cause of his or her bankruptcy. Each debtor formed the view, rightly or wrongly, that he or she was entitled to relief against Westpac in relation to the loan transaction.

3. On 25 January 1991, shortly after they were made bankrupt and with the consent of Mr Burns, the debtors commenced a proceeding against Westpac in this Court. They claimed declarations in connection with the transaction, an order under s.87 of the Trade Practices Act 1974 and damages. Westpac questioned whether the action was properly commenced and applied for summary dismissal. The application was heard by Pincus J who ordered, on 19 August 1991, that the action stand dismissed unless, within two months, a trustee or trustees of the bankrupts was joined as an applicant. Mr Burns was unwilling to be joined as an applicant, without a suitable indemnity for costs; and none was available. But some of the creditors were prepared to support the litigation financially if Ivor Worrell, another registered trustee who is the first respondent to these appeals, was appointed as trustee in place of Mr Burns. With the leave of the Court, Mr Burns resigned as trustee. On 8 October 1991, Mr Worrell was appointed in his stead. On 18 October 1991, Pincus J allowed an application for the joinder of Mr Worrell as an applicant in the pending proceeding.

4. In July and August 1992, the debtors submitted a composition proposal to Mr Worrell: see Div. 6 of Part IV of the Bankruptcy Act 1966. In substance, each proposal was identical. To illustrate the nature of the proposals, we set out that received from Mrs Dingle:

"(a) That Ivor Worrell, (hereinafter referred to as

'The Trustee'), or some other person appointed

by the creditors be appointed Trustee of the

Composition.

(b) That upon acceptance of this proposal I shall,

together with Arthur David Thomas Dingle and

Graham Cockerill, seek forthwith to be joined

as an applicant in the Federal Court

Proceedings No. NG29 of 1991 (hereinafter

referred to as 'the litigation'), in

substitution for the Trustee, the present

applicant, and thereafter that I shall,

together with Arthur David Thomas Dingle and

Graham Douglas Cockerill diligently prosecute

the litigation, but always subject to the

approval of the Trustee.

(c) That no settlement of the litigation may be

effected except upon the written approval of

the Trustee, and that any settlement of the

litigation shall be upon such conditions as the

Trustee may specify and that in so doing, the

Trustee shall have regard to the interests of

the creditors.

(d) That 30% of the proceeds due to me shall be

paid directly to the Trustee, who shall

distribute them in accordance with Section 109

of the Bankruptcy Act and the Income Tax

Assessment Act. The proceeds that are referred

to above are constituted by the benefits

recovered in the litigation less payment of

Solicitor and client costs. Where the benefits

are other than cash, they are to be valued by a

member of the Australian Institute of Valuers

and Land Economists appointed by the Trustee.

In the event that there are insufficient cash

benefits to make the contribution upon

settlement, I shall pay the Trustee the amount

of the deficiency in return for the release by

the Trustee of his interest in the benefit.

(e) This composition is to be conditional upon

acceptance by the creditors of the compositions

of Arthur David Thomas Dingle and Graham

Douglas Cockerill.

(f) This Composition shall be binding upon all

creditors so far as relates to provable debts

due to them from the bankrupts and shall

operate as a release by our said creditors of

such debts."

5. As required by s.73 of the Bankruptcy Act, Mr Worrell issued notices calling a meeting of creditors to consider the proposals. He enclosed reports in which he referred to the action against Westpac and stated that the amount claimed was $2,862,695 plus costs. Mr Worrell said that the solicitors acting in the matter "have indicated that the bankrupt's case is very strong and good prospects of success exist"; though he added that they also said there could be "no absolute certainty of success" and, if the action is successful at first instance, Westpac might appeal. Mr Worrell explained that the action against Westpac had hitherto been substantially funded by relatives of the debtors, but the relatives were unwilling to continue funding unless favourable consideration was given to the proposed compositions. Mr Worrell continued:

"It is clear that the bankrupt estate cannot continue with

the action and unless the Composition is accepted or the

creditors provide funds to the estate the action will not

continue and any chance of recovery of damages for the

benefit of creditors will be lost." (Original emphasis)

After summarising the main points of the composition proposals, Mr Worrell concluded:

"I am unable to accurately assess the dividend which will

be paid to ordinary creditors under the proposal assuming

that the action against Westpac is successful, as the total

amount of funds becoming available is dependent upon the

Courts finding as to the level of damages and the costs

involved which are not recovered from Westpac.

It is likely that if the action against Westpac is totally

successful, that is the damages mentioned above are

recovered in full and if costs not recovered are kept to a

minimum, a very substantial dividend will be paid. I am

able to state to creditors that unless the Composition is

accepted there appears to be no possibility whatsoever of

any dividend being paid to creditors other than perhaps a

very minor amount which might be paid to the Australian

Taxation Office.

The acceptance of the Proposal provides an opportunity for

creditors to recover some of any damages eventually

recovered and potentially to obtain a substantial dividend.

I recommend that the creditors accept the Composition."

(Original emphasis)

6. The creditors' meeting was held on 7 October 1992. Two days before the meeting, Feez Ruthning, the solicitors acting for Westpac, wrote to Mr Worrell contesting the correctness of the statement he had attributed to the solicitors. They said:

"It is our client's view that it is entirely inaccurate to

state that the case against it is strong and that good

prospects of success exist. In fact, the case has

negligible prospects of success. There are a number of

reasons for that, but we need state only two, firstly that

the action is time-barred pursuant to both the Trade

Practices Act and the Statute of Limitations, and secondly,

that this claim was settled previously and cannot now be

reopened.

It is our client's view that it is inappropriate that you,

as trustee for the estate, should recommend the composition

based on advice given by the bankrupts' solicitors. You

should at the least take independent advice in relation to

the matter and update your report."

7. Two Feez Ruthning personnel, Alexander "Sandy" Wilson and Alfio Pappalardo, attended the creditors' meeting. Mr Wilson held Westpac proxies in relation to each debtor and had been instructed to vote against the proposed compositions. Mr Pappalardo examined the records of the statements of debt lodged by creditors and concluded that, if Westpac's debt was accepted for voting purposes, it was sufficient in size to defeat the composition proposals even if all other creditors voted in favour.

8. It is apparent from Mr Pappalardo's affidavit that there was discussion at the meeting concerning the prospects of the claim against Westpac, Mr Wilson repeating the substance of the letter of 5 October. Mr Worrell, who had been elected President of the meeting, stated that he believed that Westpac's claim to vote was contentious, given the claim by the debtors against Westpac. He said that he needed to decide whether this counter-claim could be set-off against the claim made by Westpac in each estate. He tabled an opinion on the point provided by Mr P R Dutney QC. In that opinion Mr Dutney referred to s.86 of the Bankruptcy Act 1966, which permits the setting off of mutual debits and credits. Mr Dutney said:

"In determining whether or not to accept or reject the

bank's proof of debt and for how much, the trustee in

relation to a formal proof or the Chairman of a creditor's

meeting is obliged to consider the bankrupts claim against

the bank.

If the Chairman or trustee is satisfied as to the

correctness of the cross-claim he is entitled to set it off

notwithstanding that it may be a claim for unliquidated

damages for misleading and deceptive conduct. Although

there is authority that only provable debts may be set off

and by ss.82(2) of the Act unliquidated claims for damages

other than by reason of contract may not be proved, claims

for misrepresentation arising out of contract have been

held to be capable of set off: Jack v. Kipping (1882) 9

QBD 113 at 116-7; Re Mid-Kent Fruit Factory (1896) 1 Ch

567 at 572.

Although a claim for damages for misleading and deceptive

conduct is not as such a claim for misrepresentation it

would seem to be analogous insofar as s.86 of the

Bankruptcy Act is concerned."

9. There was debate about aspects of Mr Dutney's opinion, Mr Wilson arguing that s.86 did not apply. There was also discussion about the action's prospects of success. Mr Wilson claimed that Westpac had been "ambushed" by Mr Worrell, as he had not given Westpac any notice of his intention to disallow its claim to vote. (There was perhaps some substance in that complaint; but Mr Wilson did not seek any adjournment of the meeting to allow Westpac to put additional information before the trustee. No point was taken about the matter before the trial judge; and no such point is put to us.) When the proposals were put to the vote, Mr Worrell stated that he was not satisfied that Westpac was a creditor of any of the debtors and ruled that Westpac was not entitled to vote. The creditors resolved to accept each composition proposal. The result was that the terms of each composition became binding on all the creditors, to the extent of their provable debts (Bankruptcy Act s.75), and the bankruptcies themselves were annulled (s.74). The parties obviously assume that, provided those assisting the debtors supply the necessary funds, the action against Westpac will continue.

10. On 12 November 1992, Westpac filed an Application in relation to each debtor seeking, amongst other things, an order that "the composition accepted at the meeting of creditors of the former bankrupt on 7 October 1992 be declared void and be annulled". The three matters were heard together by Drummond J. He ordered that each Application be dismissed.

11. Division 5 of Part IV of the Bankruptcy Act deals with meetings of creditors. For present purposes the only material section is s.64ZA which provides:

"64ZA.(1) This section applies to voting:

(a) at an election under section 64P of a person to preside at a

meeting; and

(b) on any motion proposed at a meeting or an amendment proposed

to such a motion.

(2) In this section:

'creditor' means a creditor who, or whose proxy or attorney,

participates in the meeting in person or by telephone.

(3) A person other than a creditor is not entitled to vote.

(4) Subject to subsections (5) and (6), each creditor is entitled to

vote and has one vote.

(5) If a creditor holds a security in respect of a debt, the

creditor is not entitled to vote unless the debt, or the total amount

of the debts, owed to the creditor exceeds the amount estimated by

the creditor in the statement given to the trustee under section

64D to be the value of the security.

(6) A creditor who has failed to give to the trustee a statement in

accordance with section 64D is not entitled to vote.

(7) A creditor is not disqualified from voting merely because the

creditor is the President or the minutes secretary.

(8) The trustee may determine any question that arises as to the

entitlement of a person to vote.

(9) If the trustee needs a period in which to determine a question

referred to in subsection (8), the meeting is to be adjourned to

such time, date and place as the meeting resolves, being a date

not later than 14 days after the date of the original meeting, for

the purpose of enabling the trustee to determine the question."

12. Three points should be noted. First, subs.(4) confers on each "creditor" a right to vote, subject to subss. (5) and (6). The term "creditor" is defined in subs. (2) but only by way of restriction. The person must be a person who, or whose proxy or attorney, participates in the meeting; but the person must also be a "creditor" in the ordinary meaning of that word. Contrary to a submission put to us by counsel for the appellant, mere participation in the meeting does not make a person entitled to vote.

13. Secondly, where there is a question whether a particular person is entitled to vote, that is a matter for the trustee: see subs. (8). If the trustee needs time to determine the question, the meeting must be adjourned for a period not exceeding 14 days: see subs. (9). The trustee's decision, of course, determines only the person's right to vote at that meeting. As Bowen CJ said in Re Levy; ex parte Scholefield Goodman and Sons Ltd [1980] FCA 129; (1980) 50 FLR 99 at 112, in relation to s.201 of the Act (which confers a similar power on the chairman of a meeting called to consider a Part X proposal), the power is not "to make a final ruling on a debt ... but to rule for the purposes of the meeting in a summary way avoiding technicalities and delays".

14. Finally, s.64ZA provides no mechanism for reviewing a trustee's determination about a person's entitlement to vote.

The Court's jurisdiction to review the trustee's ruling

15. Notwithstanding the lack of an explicit provision to that effect, Drummond J held that the Court had jurisdiction to review Mr Worrell's determination. He based this holding on ss.27 and 30 of the Act. Section 27 confers "jurisdiction in bankruptcy" on this Court. Section 30(1) gives the Court certain powers. The sub-section provides:

"(1) The Court -

(a) has full power to decide all questions, whether

of law or of fact, in any case of bankruptcy or

any matter under Part X or Part XI coming

within the cognizance of the Court; and

(b) may make such orders (including declaratory

orders and orders granting injunctions or other

equitable remedies) as the Court considers

necessary for the purposes of carrying out or

giving effect to this Act in any such case or

matter."

Drummond J cited two cases in which it was held that the Court had power, in the exercise of its bankruptcy jurisdiction, to review a voting entitlement determination made under s.198 of the Act by a chairman of a meeting of creditors called to consider a Part X proposal: Zantiotis v Andrew (No.2)(1988) 80 ALR 299 and Forshaw v Thompson [1992] FCA 182; (1992) 35 FCR 329. (And see now Farrow Mortgage Services Pty Ltd v Abeyratne (Northrop, Sheppard and Wilcox JJ, 6 December 1993, not yet reported.) Drummond J thought that Forshaw v Thompson (a Full Court decision) provided particular support for the proposition that, notwithstanding s.64ZA(8) and the absence of an explicit power in the Court to determine the right of a person to vote at a creditor's meeting called under s.73,

"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."

"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.

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)."

Drummond J suggested that, in an appropriate case, the Court might deal with the matter by making a declaration under s.30. Consistently with his emphasis upon the discretionary nature of the Court's jurisdiction to interfere with a trustee's determination, or likely determination, about voting entitlement, Drummond J thought that the power 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".

He held that the Court should determine that question by reference to the evidence before it; the Court was not limited to the material before the trustee at the time of the determination.

16. We respectfully agree with the reasoning of Drummond J summarised above. At one time, it was thought that the absence of an explicit power of review prevented the Court reviewing a determination about voting entitlement made under s.198 of the Act, at least in cases where the chairman had fairly investigated the claim to vote and in the absence of what was called in Re Amadio (1978) 46 FLR 147 at 163 "a positive action under Part X affecting the legal rights of the parties". This decision was cited without disapproval by Bowen CJ in Levy. However, in Forshaw v Thompson the Full Court held that Amadio was unduly restrictive and that, in all cases, the Court had jurisdiction under s.27 to review the chairman's ruling: see per Lockhart J at 339, noting that Black CJ and Sweeney J both agreed with Lockhart J. It seems to us that the same view ought to be taken about a trustee's rulings under s.64ZA. Section 178 provides:

"If the bankrupt, a creditor or any other person is

affected by an act, omission or decision of the trustee, he

may apply to the Court, and the Court may make such order

in the matter as it thinks just and equitable."

17. In Re Tyndall [1977] FCA 15; (1977) 30 FLR 6 at 9-10, Deane J described this provision as one conferring "the widest possible discretion as to the appropriate order which should be made in the particular case". He said that, once the matter is properly before the Court, the Court is empowered and obliged "to make such order in the matter as it thinks just and equitable".

18. We emphasise, however, that the powers conferred by s.30(1) and s.178 are discretionary. It should not be thought that the Court will always intervene. We adopt, and apply to s.64ZA, what Lockhart J said in Forshaw v Thompson at 342 about a Part X meeting:

"I respectfully agree with his Honour that it is generally

undesirable that there be undue delay in the convening and

holding of meetings of creditors under Pt X; and that, if

there is to be a composition or arrangement or assignment

of the debtor's property under Pt X, the necessary steps

must be taken to bring that result about as quickly as

possible. Hence it is a fairly rare case, in my opinion,

in which the court would exercise the power which it has

under s.30 and intervene to determine whether a creditor is

in truth a creditor or whether his debt is contingent or

otherwise with respect to his entitlement to vote at

meetings under Pt X."

19. We think that the Court should be equally reluctant to intervene in cases where the vote has already been taken. Section 64ZA(8) commits to the trustee the question whether a person is entitled to vote. Finality is important. Where the complaint is that a person has been erroneously excluded from voting, we agree with Drummond J that the Court should at least insist upon proof that the excluded person is in fact a creditor and that his or her vote would have affected the fate of the proposal.

20. We also agree with Drummond J that, 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 [1983] FCA 261; (1983) 74 FLR 327 at 330 and Re McLean; Ex parte Friends' Provident Life Office [1992] FCA 324; (1992) 108 ALR 360 at 368. Moreover, it is not sufficient that the creditor merely demonstrate a prima facie or arguable case. The cases relating to a counter-claim, set-off or cross demand of the kind referred to in s.40(1)(g) of the Bankruptcy Act are not relevant. Why these decisions are distinguishable was explained by Heerey J in McLean at 369 as follows:

"The 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 (Ebert v Union

Trustee Co of Australia Ltd [1960] HCA 50; (1960) 104 CLR 346)

and Re Brink (Re Brink; Ex parte Commercial

Banking Co of Sydney Ltd [1980] FCA 78; (1980) 30 ALR 433) 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.

The contrary view would create an anomalous

position. If all a creditor had to show under

s.222(1) was an arguable case that the alleged

debt was owing, it would logically follow that a

debtor complaining of the inclusion of a

disputed debt by the chairman would only have to

show an arguable defence to make out a claim

under the same provision. Since there might be

an arguable claim and an arguable defence in

respect of the same debt, the court would face a

dilemma if arguability is the test. The

creditor would say, 'I should have been allowed

to vote because I have an arguable claim', and

the debtor would say, 'the creditor should have

been excluded because I have an arguable

defence'.

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

s.221(1) contends that the chairman wrongly

admitted a creditor to vote ... the onus would

lie the other way". (Original emphasis)

21. Counsel for Westpac submitted that the approach of Heerey J in McLean conflicted with that earlier taken by Beaumont J in Zantiotis and that Zantiotis is to be preferred. We see no conflict. The issue in Zantiotis was the value of the debt in relation to which the second respondent (the debtor's former wife) was entitled to vote. Moneys were payable under a maintenance agreement. Some instalments had fallen due for payment, others had not. The debtor contended that the second respondent should have been allowed to vote only in respect of the debt for which she could "prove" under the deed of assignment; that is, for the instalments that had fallen due by the date of the meeting. Beaumont J rejected this argument. He accepted that a reference in bankruptcy legislation to a "creditor" generally refers to a person entitled to prove in the bankruptcy. But he thought that s.198 evidenced a different intention. He said at 302-303:

"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'."

As we read this passage, Beaumont J determined only that a creditor may be admitted to vote notwithstanding that the debt may not then be provable in the assignment. He gave no support for the suggestion that the claimant to vote need not establish that he or she was a "creditor", within the ordinary meaning of that term. On the contrary, Beaumont J went to some trouble to ascertain from the evidence how much was, or would be, due to the second respondent from the debtor.

22. Another case mentioned by counsel for Westpac was Musolino v Sidiropolous (1991) 101 ALR 235. Counsel said that in this case the Full Court did not determine whether the claimant must establish his or her status as a creditor or merely prove an arguable or prima facie case. That is not how we read the decision. At 244 the Full Court said:

"In our opinion, the court, in an application under

s.222(1), may in its discretion decide, as a preliminary

and separate question, whether the applicant for relief has

the requisite standing as a 'creditor' for the purposes of

s.222(1): ... Where the issue appears to be suitable for

summary disposition ..., or suitable to be dealt with as a

preliminary point ..., the court may think it appropriate

to hear evidence and submissions on the issue of standing

before going to the substantive merits of the application.

But if the existence of the applicant's claim is disputed

and that issue appears to be complex, it will ordinarily

not be appropriate to resolve that doubt as a preliminary

point. It will usually be preferable for the court to hear

the whole proceeding and, if appropriate, to decide the

question of standing when dealing with the entire matter."

23. It is interesting to note, in the context of counsel's reliance on Zantiotis, that Beaumont J participated in this decision.

24. Finally, counsel referred to the Full Court decision in Beard v Prestige Banking Industries Pty Ltd [1981] FCA 97; (1981) 36 ALR 307, a case where the debtors claimed a set-off exceeding any sum that might be due by them by the creditor. At 325-306 Fox J said:

"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)). ... 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. There may be no

significant contest about whether a person is a

creditor, or for how much, or as to any set-off

or cross-claim by the debtor, and in that event,

if the deed is not set aside, the prescribed

procedures can take care of their final

determination. There are many possible

situations. 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".

25. We respectfully adopt these observations. 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.

26. After he analysed the task he had to undertake, Drummond J turned to the material available to him for that purpose. He said that the critical decision was governed by two questions:

"whether the (debtors) 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 (Westpac) after realisation by (Westpac) of the

(debtors') securities) and whether, in that event, the

(debtors) are entitled to bring the amount of their claim

in the action into account, either by way of set-off or

cross-demand against (Westpac's) claim, in order to decide

whether (Westpac) is a creditor."

27. Drummond J dealt with the second question first. Contrary to a submission put to him by counsel for Westpac, he held that s.86 of the Bankruptcy Act applies to a trustee's determination under s.64ZA, requiring the trustee to set off against the person's claim any moneys that may be due by that person to the debtor. Before us, counsel for Westpac conceded that this view is correct.

28. When he turned to the question whether the debtors are likely to succeed in their action against Westpac, Drummond J noted that Mr Worrell had made no real attempt to determine that matter. His Honour said that it was the trustee's duty to form an opinion about the prospects of success but he had not had the necessary information to enable him to do so. He had details of the claim and an opinion from the debtors' solicitor that the action had good prospects of success. He had a contrary opinion from Westpac's solicitor. Drummond J commented:

"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 debtors (who were being backed in

running the action by their relatives) or from Westpac.

Mr. Worrell expressed the opinion, both at the meeting and

in evidence, that he regarded both his own solicitor and

Westpac's solicitor as experienced and reputable

practitioners. He solved the dilemma he was in simply by

preferring his own adviser over Westpac'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 Westpac 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. Westpac, of course, went on to submit

that in that situation he should not have ignored what was

said to be Westpac's prima facie standing as a creditor and

exclude it from voting."

29. Mr Worrell was placed in a most difficult position, being required to assess the prospects of success of a complex proceeding in the face of conflicting legal opinions. Nonetheless, we have to agree with Drummond J that it was his duty to make a judgment about those prospects. It should have been obvious to him that Westpac would seek to vote in opposition to the composition and that its vote (if allowed) would probably be critical to the result. In that situation, we think that, before coming to the meeting, Mr Worrell should have obtained a considered opinion from a suitably qualified lawyer briefed with all available information about the case, including the foreshadowed defences. The advice from Mr Dutney went only part of the way. Mr Dutney was not asked to consider the issues raised in the pending proceeding or the evidence that bore upon them.

30. However, as we have said, once the matter came to court the course taken by the trustee became irrelevant. Drummond J had to ask himself whether he was satisfied, on the evidence the parties placed 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, Westpac who bore the onus of proof - elected not to tender the necessary evidence. In his reasons for judgment, Drummond J said that he "was not asked" to decide whether Westpac was a creditor. Counsel for Westpac claim that this comment misstates their client's position; that Westpac had submitted to Drummond J "that it was a creditor and would lose that status only if the bankrupts showed a cross demand". Counsel for the respondents support his Honour's description of the course taken by Westpac at first instance. It seems to us that the difference is only semantic. It is apparent that the position taken by Westpac was that it had placed material before Mr Worrell which satisfied him - or, at least, should have satisfied him - that Westpac was a creditor of each of the debtors in respect of a sum calculated by taking the accrued debt at the date of the sequestration orders and deducting the total assessed value of its securities; and that his Honour should have regarded this as entitling Westpac to a declaration that it was entitled to vote in respect of that sum unless and until the debtors established (the onus being on them) that they had a good counter-claim against Westpac. His Honour did not accept this approach, taking the view that the onus was on Westpac to satisfy him that it would have a final balance in its favour. His comment means no more than that Westpac made no attempt to do this. That it did not is conceded; counsel argued that:

(a) Westpac had a prima facie right to vote to the extent of its

claimed excess of debt over securities;

(b) The debtors' claim was not sufficiently strong, on the

material before the trustee, to satisfy him that there was a

likelihood of success, particularly because of Westpac's

pleaded defences of statute of limitations and compromise;

(c) Because of the weakness of the debtors' claim, it was

improper of the trustee to deny Westpac the right to vote to

the extent of the claimed excess; and

(d) Because of this impropriety on the part of the trustee, the

compromise ought to be declared void.

31. For Drummond J to determine that Westpac was a creditor in fact, he would have had to determine the following matters:

(a) The extent of excess of debt over security value;

(b) Whether the debtors in fact had an enforceable claim against

Westpac and, if so, its worth; and

(c) If the debtors had an enforceable claim, whether, after

set-off, any debt would remain due to the bank. If any debt

would remain due to Westpac, it was entitled to be confirmed

as a creditor in that amount.

32. As we have said, counsel for Westpac resisted the judge determining these matters. The reason, presumably, was that, in a practical sense, this course would require the trial of the action that Westpac seeks to avoid. We note that, consistently with their general position, counsel did not even put before Drummond J proper evidence of the excess of debt over the security value. They contented themselves with a statement in a solicitor's affidavit that Westpac's estimate of the value of its securities "is based upon valuation of the various properties carried out by Herron Todd White Valuers in 1991, the values of which were confirmed by them just prior to the meeting of creditors on 7 October 1992". Contrary to the submission of counsel for Westpac, Drummond J did not find that Westpac was a creditor to the extent of the excess. He merely noted the facts that Westpac is a secured creditor of each debtor and that -

"at the meetings, statements were produced on its behalf

showing the amount by which the debt claimed as owing to it

exceeded Westpac's estimate of the value of its

securities".

This does not involve a finding that the appellant was a creditor to the extent of the excess claimed.

33. Westpac failed at first instance because the legal contentions it put forward to justify the claimed relief were erroneous and the trial judge so held. Drummond J correctly held that, for Westpac to succeed, it was essential for him to determine as a fact that Westpac was a creditor in the amount claimed. This necessarily involved a trial of all of the issues, including the cross-claim. This did not occur because the necessary material was not placed before the Court. In consequence, Westpac failed to make out its entitlement to the declarations it sought. Each application was rightly dismissed.

34. If the necessary material was before us, it might be our duty to consider for ourselves whether Westpac was, on balance, a creditor of each of the debtors and, if so, in what amount. But we are in no better position to do this than the trial judge. Because of the course taken by Westpac at the trial, the requisite material is not available to the Court. Each of the appeals should be dismissed with costs.