Re Nolan, J.W.M. v Ex parte Seargeant D.L. [1995] FCA 120

CATCHWORDS BANKRUPTCY - application to set aside composition - whether creditors entitled to vote and in what amount - composition not approved by three-quarters in value of creditors - whether discretion should be exercised - composition declared void and sequestration order made. Bankruptcy Act 1966 (Cth) s 222(2), s 222(4), s 222(7) Musolino v Sidiropoulos (1991) 101 ALR 235 (FCA/FCt) Re Dingle; Westpac Banking Corporation v Worrell (1993) 47 FCR 478 (FCA/FCt) Augustyn v Putnin (1988) 83 ALR 514 (FCA/FCt) RE JEREMY WILLIAM MARDEN NOLAN; EX PARTE DAVID LLEWELLYN SEARGEANT NX 191 of 1993 Sackville J. 14 March, 1995 Sydney.

FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NX 191 of 1993 GENERAL DIVISION ) RE: JEREMY WILLIAM MARDEN NOLAN Debtor BETWEEN: DAVID LLEWELLYN SEARGEANT Applicant AND: JEREMY WILLIAM MARDEN NOLAN Respondent CORAM: SACKVILLE J. PLACE: SYDNEY DATE: 14 MARCH 1995 MINUTES OF ORDER THE COURT: 1. Declares, pursuant to s.222(2) of the Bankruptcy Act 1966 ("the Act") that the composition purportedly approved at the creditors' meeting of 7 December 1993 is void, on the ground that the proposed composition was not accepted by a special resolution of creditors as required by s.204 of the Act. 2. Orders, pursuant to s.222(7) of the Act, that a sequestration order be made against the estate of the respondent. 3. Declares that the act of bankruptcy occurred on 9 November 1993. 4. Orders that costs of this application be taxed and paid out of the estate of the debtor in accordance with the provisions of the Act. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NX 191 of 1993 GENERAL DIVISION ) RE: JEREMY WILLIAM MARDEN NOLAN Debtor BETWEEN: DAVID LLEWELLYN SEARGEANT Applicant AND: JEREMY WILLIAM MARDEN NOLAN Respondent CORAM: SACKVILLE J. PLACE: SYDNEY DATE: 14 MARCH 1995 REASONS FOR JUDGMENT The Proceedings The applicant, David Llewellyn Seargeant ("the applicant"), is one of a number of unsecured creditors of Jeremy William Nolan ("the respondent"). On 7 December 1993, at an adjourned meeting of creditors of the respondent, a special resolution was passed in the following terms: "That the creditors of Jeremy William Nolan accept a composition of $30,000 under Part X of the Bankruptcy Act, 1966 to be paid by him in full satisfaction of all debts owed by Mr Nolan. The full amount to be paid immediately following the meeting. That the order of the distribution of the sum of $30,000 be in accordance with the provisions of Section 108 and 109 of the Bankruptcy Act, 1966." The applicant (who voted against the resolution) applies, under s.222(2) and s.222(4) of the Bankruptcy Act 1966 ("the Act"),for an order declaring the composition void. In the alternative, the applicant seeks an order under s.239(2) of the Act setting aside

the composition or an order terminating it under s.242(1) of the Act. The applicant also applies for a sequestration order against the estate of the respondent. I shall refer to the grounds relied upon by the applicant after referring to the relevant provisions of the legislation. I should note that the trustee, Mr Wily, submitted to any order of the Court, save as to costs. The Bankruptcy Act Part X of the Act provides for arrangements between a debtor and creditors, without a sequestration order being made. Section 188(1) permits a debtor, who desires that his or her affairs be dealt with under Part X and who meets specified criteria, to sign an authority in accordance with the prescribed form authorising a solicitor or a registered trustee to call a meeting of his creditors. An authority to a solicitor is not effective, unless inter alia, within 10 days before signing it, the debtor has given to the solicitor a statement of the debtor's affairs and a statement indicating how the debtor proposes that his or her affairs be dealt with under Part X: s.188(2)(c). An authority that is effective for the purposes of Part X is not revocable: s.188(3). A solicitor who has consented to call a meeting of creditors under an authority must prepare a written statement containing prescribed information about the matters that may reasonably be expected to be dealt with in a creditors' resolution at the meeting: s.189B. The solicitor is also obliged to call the creditors' meeting: s.190(1). In general the meeting is to be held not later than 35 days after the authority is signed by the debtor and not earlier than 14 days after a notice in the prescribed form and other specified documents are sent by the solicitor to each person stated by the debtor to be a creditor: s.194(1). Subject to certain exceptions, every creditor is entitled to vote at the meeting, but only if he or she has made known to the chairman particulars of the debt: s.198(1), 198(4). One exception is that a creditor is not entitled to vote in respect of a contingent debt: s.198(2). Another is that the spouse of the debtor is not entitled to vote at a creditors' meeting: s.198(7). A creditor is entitled to vote either in person or by a proxy: s.200(1). The determination of a claim to vote at a creditors' meeting is dealt with by s.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 204(1) provides that the creditors, by special resolution passed at a meeting convened pursuant to s.188(1), may (inter alia), "accept a composition". A "composition" is defined by s.187(1) of the Act to mean "an arrangement...by which the creditors of a debtor: (a) ...; or (b) agree to accept, in full satisfaction of the debts due to them, less than the full amount of those debts, whether in the form of money or other property and whether by instalments or otherwise." A "special resolution" is defined by s.5(1) to mean one "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". Subject to Part X, a composition made by a debtor, not being a composition accepted by a special resolution of a meeting of creditors under s.204, is void: s&213(3). A certificate of the passing of a special resolution under s.204 signed in accordance with that section is prima facie evidence that the meeting was duly convened and held and that the special resolution was duly passed at the meeting: s.225(2). The duly signed minutes of a meeting are prima facie evidence of the proceedings at the meeting: s.225(4). Section 222 provides as follows: "222(1) Where there is a doubt, on a specific ground, whether a...composition has been accepted by a special resolution of a meeting of creditors under section 204,...a creditor...may apply to the Court for an order under subsection (2). 222(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...composition is void, or is not void, on the ground specified in the application; ... 222(3) The 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 if the deed complies substantially with those requirements. 222(6) The Court shall not make an order under subsection (2) or (4) unless the application for the order is made: ... (c) in relation to a composition - before the final payment has been made under the composition. 222(7) The...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 ...composition to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought." Section 239 empowers the Court to set aside a composition: "239(1) A creditor may, within 21 days from the date 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. 239(2) If 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 thinks fit, may forthwith make the sequestration order sought." Section 242 deals with the power of the Court to terminate a composition: "242(1) The Court may, upon application by...a creditor...if it is satisfied: ...

(b) that the composition cannot be proceeded with without injustice or undue delay to the creditors..., or (c) that for any other reason the composition ought to be terminated; make an order terminating the composition. 242(2) The Court shall not make an order terminating a composition on the ground specified in paragraph (1)...(c) unless it is satisfied that it would be in the interests of the creditors to do so. 242(3) The 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 makes an order on the first-mentioned application terminating the composition, it may, if it thinks fit, forthwith make the sequestration order sought." Outline of Applicant's Case The principal ground on which the applicant relies is that the composition was not accepted by a special resolution of creditors under s.204. The applicant contends that the special resolution achieved the statutory majority (which includes a requirement that three-fourths in value of the creditors voting support the resolution) only because Mr Gowrie-Smith, said to be a creditor of the respondent in the sum of $160,424, voted in favour of the resolution. The applicant argues that Mr Gowrie-Smith was not a creditor of the respondent or, if he was, the debt due to him was significantly less than that claimed and recognised by the chairman of the creditor's meeting at which the voting took place. This contention requires an examination of two transactions involving the respondent and Mr Gowrie-Smith occurring, respectively, in April 1987 and December 1987. In short the applicant says that, although moneys were lent, the borrower was not the respondent but J.W. Nolan Pty Ltd; further, the lender was not Mr Gowrie-Smith but a company associated with him, Damnosa Investments Pty Ltd. The applicant also claims that, even if Mr Gowrie-Smith is a creditor of the respondent, interest has been calculated incorrectly and should not have included any capitalised interest. The applicant contends that the effect of these matters is that the court should declare the composition void. Secondly, the applicant relies on s.222(4)(a), arguing that the respondent gave false or misleading information in answer to questions put to him with respect to any of his conduct or examinable affairs at the meeting of creditors. Among other things it is said that the respondent falsely stated that the sum of $30,000 was to be paid by relatives, with stringent conditions attached, and that he did not know who was paying the instalments of interest on the Mill Hill Road property. The applicant also relies on s.222(4)(b), contending that material particulars were omitted from the debtor's statement of affairs. The applicant argues, among other things, that if the respondent was indebted to Mr Gowrie-Smith on a guarantee (as, on one view of the facts, he was), the respondent had a right of contribution against the principal debtor, J.W. Nolan Pty Ltd. That right of contribution should have been (but was not) disclosed as an asset in the statement of affairs. Thirdly, the applicant relies in s.239(2) of the Act insofar as it allows the Court to set aside the composition "for any other reason". In essence, the applicant argues that the respondent, with the assistance of his wife (Ms Ashman), has used his indebtedness to companies controlled by him to outvote the applicant and thereby secure a favourable outcome. The applicant says that the public interest calls out for the full opportunity for inquiry which the respondent's bankruptcy entails. The Nolan Companies Before proceeding to the circumstances of the composition, it is convenient to describe briefly the activities of the major companies associated with the respondent over the period from 1987 onwards. In this respect the evidence was by no means complete and the account given by the respondent of the companies' activities was not always clear. Furthermore, the position was complicated by the fact that the companies in which the respondent and Ms Ashman were the sole shareholders appear to have changed their roles from time to time. Nonetheless, a brief outline can be given. J.W. Nolan Pty Ltd was incorporated in April 1985. At all relevant times the respondent and Ms Ashman have each held one share in the company and have been the only directors. The company's principal activity has been the manufacture and assembly of furniture. In more recent times furniture has mostly been leather lounges, assembled in a converted shed at the home of the respondent and Ms Ashman at Mill Hill Road, Bondi Junction. That property was jointly owned by the respondent and Ms Ashman until August 1991, when the respondent transferred his interest in the property to Ms Ashman, in circumstances to be described later. The company has engaged outworkers and contractors to manufacture components of the lounges. At an earlier stage the company dealt in leather hides, although it is not clear when the company ceased that activity. The accounts of the company for the year ended 30 June 1988 showed operating revenue of $547,739 (including sales revenue of $504,410). Sales in the 1992 financial year had been reduced to $36,997; the equivalent figure was $49,997 in the 1993 financial year. Warminster Pty Ltd ("Warminster") was incorporated in 1983. The sole shareholders and directors have always been the respondent and his wife. In August 1983 Warminster became the trustee of a trust known as the Ashman Trust. At all material times, the beneficiaries under that Trust have included the respondent and members of his family. At some time not precisely specified in the evidence, but probably about late 1992, Warminster ceased to be the trustee of the Ashman Trust, being replaced (although apparently not immediately) by Seats Pty Ltd. At some stage following its replacement as trustee, Warminster ceased to trade, although its financial statements for the 1991-1992 financial year reveal a trading income of $594,042, which fell to $233,280 the following year. Warminster's principal trading activity is recorded in its more recent financial statements as a leather wholesaler. At one stage Warminster held a 50 per cent shareholding in a company known as Dovedala Pty Ltd, which traded under the name of "Co-existence". Dovedala's major activity was to import pull- on leather covers obtained from Thailand. Dovedala conducted these activities from about 1986 to 1992. From about late 1987 Warminster held a 50 per cent shareholding in a company identified by the respondent as National Leather Pty Ltd. A one-third shareholding was held by a company controlled by Mr Seargeant, the applicant in these proceedings, and a one-sixth shareholding was held by a company controlled by a Mr Gourlay. National Leather's activities included buying and selling leather. The company encountered financial difficulties in about 1990 or 1991 and ceased to trade at some stage not made clear in the evidence. One consequence of National Leather's financial difficulties was that Westpac Banking Corporation took proceedings in 1991 against the applicant and his wife, Mr and Mrs Gourlay and the respondent on guarantees amounting to over $600,000. In December 1991 Westpac obtained judgment against the respondent in the sum of $619,049.26 plus costs, such judgment to take effect on 19 December 1992. It appears that the applicant (whether with or without a contribution from the Gourlays is not clear) paid out the Westpac debt and sought contribution from the respondent as co-guarantor. In September 1993 the applicant obtained judgment against the respondent in proceedings in the Commercial Division of the Supreme Court of New South Wales for $128,116.43. This judgment provided the foundation for the applicant's claim to be entitled to vote at the creditors' meeting. The respondent said that not all of Warminster's activities were in its capacity as trustee of the Ashman Trust. In particular the respondent gave evidence that from 1989 onwards it traded both in its own right and in its capacity as trustee, although the evidence did not make clear how the two categories of activities were kept separate. The respondent did explain that Warminster was the company that had a sales tax number, so that activities within the Nolan companies attracting sales tax were channelled through that company. Seats Pty Ltd ("Seats") was incorporated in 1993 and is another company of which the sole shareholders and directors have been the respondent and Ms Ashman. It was originally established by the respondent to provide consultancy services, but apparently did not do so. However, at some time in 1993 Seats became the trustee of the Ashman Trust, replacing Ms Ashman who had apparently acted in that capacity for a short period. The respondent described Seats' more recent business activities as the buying and selling of leather and fabric for onselling to J.W. Nolan Pty Ltd. Transactions between the Nolan companies and between the companies and their directors were not carried out at arm's length. This is important for an appreciation of the events which were the subject of the application. The respondent was the moving force behind the companies and he made the decisions relating to their day to day operations and financial dealings. The respondent gave instructions to Mr McKeon, a partner in a firm of chartered accountants. Mr McKeon, from about 1987, prepared all accounts for the companies and the Ashman Trust, as well as taxation returns for the respondent and Ms Ashman. Ms Ashman played more of a part in the business after about early 1991, when she and her husband experienced both marital and financial difficulties, but I find that even after that time the respondent was clearly the principal decision-maker for the companies. Ms Ashman described herself in evidence as "working for" her husband. She performed some tasks for the various companies, such as answering telephones and preparing invoices. However, having seen and heard her in the witness box, I think it clear that she did not play a significant part in decisions affecting the businesses or financial transactions conducted by the companies. The respondent, so far as appears from the documentary evidence, did not receive a salary from the various companies whose operations he directed. Rather, moneys were paid at his direction from time to time, to meet his expenses, and amounts were debited to his loan accounts. The company records were frequently completed and decisions recorded after the close of the financial year in which the relevant events or transactions were said to have occurred. Three examples may be given. Not all tax returns of the respondent were in evidence. However, the returns for the years ended 30 June 1990 and 1992 showed rent received by him in respect of Mill Hill Road, amounting to $15,000 and $20,500, respectively. The rental was paid by Warminster, as trustee of the Ashman Trust for use of a converted shed as a warehouse and depot at Mill Hill Road. These amounts were offset by nearly equal amounts of interest paid by him. Mr McKeon acknowledged that there was no written lease and the amounts of rental charged in a particular year "reflected the most tax effective means of organising the entirety of the affairs of the Nolan interests". (Mr McKeon also acknowledged that the 1992 return was incorrect, since the respondent had transferred his half interest in the property at Mill Hill Road to his wife in August 1991.) A similar tax planning approach was taken in relation to so-called "management fees" paid by Warminster to other companies in the group. There were no management agreements and the fees were determined by the respondent and Mr McKeon on the basis of "tax planning motives". A more recent example is that the invoices for goods supplied by Seats to J.W. Nolan Pty Ltd have been prepared after the close of the financial year. The House Transaction Considerable time was spent in evidence exploring the circumstances in which the respondent transferred a half interest in 11 Mill Hill Road, Bondi Junction, to Ms Ashman. Itis convenient briefly to recount the background to the transaction. In May 1989 the respondent and Ms Ashman completed the purchase of the Mill Hill property for the price of $505,000 and became registered as proprietors subject to a mortgage to Newcastle Permanent Building Society. The deposit of $50,500 was paid from the Ashman Trust account and apparently debited to the respondent's loan account with the trust. Newcastle Permanent advanced $458,994 to Warminster as trustee for the Ashman Trust. The loan account of the respondent (and presumably that of Ms Ashman) was debited with approximately half this sum. The mortgage executed by the respondent and Ms Ashman described the principal sum as $505,000, receipt whereof was acknowledged by the mortgagors. However, the transaction was treated in the records of Warminster and the Ashman Trust, and in the records of Newcastle Permanent, as a loan to the company supported by the security of a third party mortgage. Both the respondent and Mr McKeon said they understood the transaction this way. Interest payments were made by Warminster Pty Ltd and a variable proportion of those payments was debited to the loan accounts of the respondent and Ms Ashman. In February and March 1991 solicitors for the respondent wrote to the applicant's solicitors expressing concern about the debt due to Westpac Banking Corporation in respect of National Leather and referring to correspondence received by the respondent from Westpac advising that the indebtedness had not been reduced. On 7 May 1991 a different firm of solicitors wrote to Newcastle Permanent advising that the respondent wished to transfer his half interest in Mill Hill Road to Ms Ashman, but would "continue to guarantee the terms of the loan". On 17 May 1991 the Valuer-General inspected the property and on 9 July 1991 prepared a valuation of a half interest at $220,000. On 21 May 1991 Newcastle Permanent agreed to the transfer. On 8 August 1991 Westpac made a written demand on the respondent (among others) for the amounts due to the Bank under the guarantee, then amounting to $606,203. On 23 August 1991 the respondent executed a transfer of his half share in the Mill Hill Road property in favour of Ms Ashman for an expressed consideration of $220,000. No moneys were paid by Ms Ashman for the transfer and it is clear that the respondent did not expect to receive any payment for his share. On the same day, 23 August 1991, Ms Ashman executed a fresh mortgage of the Mill Hill Road property, expressed to be in consideration of Newcastle Permanent advancing to Warminster Pty Ltd the sum of $505,000. Both the transfer and mortgage were subsequently registered. On 4 December 1991 the respondent executed a guarantee in favour of Newcastle Permanent guaranteeing what was described as a loan agreement in the form of the mortgage dated 23 August 1991. In an examination before the Prothonotary of the Supreme Court of New South Wales, conducted in August 1991, the respondent explained the transfer by reference to a trauma that had occurred in 1982 or 1983, when the then matrimonial home had been sold to pay off debts incurred in a business venture. He stated that in 1991 "we had been going through a similar trauma" because of money lost in National Leather. He said that Ms Ashman was very agitated at that time and the marriage was in difficulties. She insisted on the transfer of the half share to bring some stability into her life. In oral evidence before me, the respondent acknowledged that in March 1991 he was concerned that the indebtedness to Westpac was not being reduced and that he may have expressed the view to his wife that the house at Mill Hill Road might have to be sold. He also accepted that, although at the time the value of the house may not have exceeded the debt due to Newcastle Permanent, whether the mortgage would be called upon would depend on whether Warminster could pay the debt from its resources. Elsewhere in his evidence the respondent asserted that the critical reasons for the transfer of his half share of the Mill Hill Road property was that his marriage was in difficulties and that Ms Ashman insisted on having the house in her name for the marriage to continue. He had not wanted to incur the expense of stamp duty, but did so to preserve his marriage. In re-examination he said that he was paying his debts as and when they fell due throughout 1991, although it is not easy to reconcile that answer with his failure to comply with Westpac's demand in August 1991. Ms Ashman gave evidence that she considered the transfer of the half share of the house to her an emotional issue and that she had been concerned about it for a considerable time. She had refused to sign a guarantee in favour of Westpac because she had already lost one house. However, she acknowledged that she was aware of difficulties in National Leather and did not want her home to be considered for business purposes. With the exception of perhaps six instalments of interest, each of approximately $2,000, which were paid by Ms Ashman, all interest payments due to Newcastle Permanent have been paid through the Ashman Trust. In 1994 the interest payments totalled approximately $40,000. Ms Ashman said in evidence that, subject to the exception to which I have referred, she left the payment of interest to her husband. The Composition On 8 November 1993 the respondent made an offer in writing, pursuant to Part X of the Act, to pay $30,000 to his creditors in full and final settlement of all his debts. The next day, 9 November 1993, the respondent signed an authority under s.188(1) of the Act authorising a solicitor, Mr D. Landers, to call a meeting of the respondent's creditors for the purposes of Part X of the Act. Mr Landers had not previously acted for the respondent, but was suggested as an independent solicitor by Mr D. Maher of Armstrong Wily & Co, Chartered Accountants. Armstrong Wiley & Co had been consulted by the respondent's solicitors, Garland Hawthorne & Brahe, about the possibility of a Part X arrangement. The solicitor, Mr Landers, called a meeting of creditors, which took place on 26 November 1993. The respondent's statement of affairs, dated 9 November 1993 and presented to the meeting of 26 November 1993, revealed amounts due to unsecured creditors of $529,981.48 compared with assets of approximately $15,000. The assets were said to be household effects situated at 11 Mill Hill Road, Bondi Junction, and shares in the three companies referred to earlier, together with 10 preference shares in another company, Nolan Investments Pty Ltd. The unsecured creditors were shown as follows: Creditors Amount Year Nature of Contracted Debt Ashman Trust 155,610.09 1988-1994 Loans Warminster Pty Ltd 81,248.17 1991-1994 Loans Garland Hawthorne Professional Brahe 4,582.79 1992-1994 Fees David Llewellyn Seargeant 128,116.43 Creditor Ian Gowrie-Smith 160,424.00 1987-1994 Loans plus interest Under the heading "Particulars of any contingent assets not included in a previous Part of this Statement", the respondent included "1/2 share in equity in property at 11 Mill Hill Road, Bondi Junction 2022". At the meeting of 26 November 1993, Mr Landers was appointed to act as "President" (presumably intended to be a reference to chairman) of the meeting. The applicant was present at the meeting, but was also represented by Mr Boardman, a chartered accountant. Mr Landers stated that he had received proxies from Garland Hawthorn Brahe and Mr Gowrie Smith, but that these contained insufficient documentation to substantiate the alleged debts and, accordingly, they could not be admitted for voting purposes. Over Mr Boardman's objections, Mr Landers adjourned the meeting, pursuant to s.201 of the Act, until 7 December 1993 "to more fully investigate the claims of these two creditors". During the course of the meeting Mr Seargeant expressed doubts as to the validity of the proofs of debt lodged on behalf of Warminster Pty Ltd and the Ashman Trust. At the adjourned meeting, Mr Landers expressed the view that the documentation for the proofs of debt for Warminster, the Ashman Trust and Garland Hawthorn Brahe were in order. The proof of debt (which is extracted later in this judgment) was dated 29 November 1993 and stated that the respondent was indebted to a company known as Damnosa Investments Pty Ltd in the sum of $160,424, the same sum that had been recorded in the respondent's statement of affairs as due to Mr Gowrie-Smith. A letter of 19 November 1993, from Mr Gowrie-Smith addressed to the respondent was apparently also before the meeting. That letter does not clearly identify the debtor, but provides details of the debt said to be due. The letter reads as follows: "Unfortunately it has now become necessary for me to request repayment of the loan funds advanced by me through Damnosa at your direction and under your guarantee of repayment. On my calculations the amount outstanding is as follows:- $ 50,000.00 advanced on 16 April 1978 $ 51,174.00 advanced on 23rd December 1987 $ 5,000.00 capitalized interest for 6 months $ 54,250.00 outstanding interest to 31st October 1992 $160,424.00 Total I realise that it may place you in a difficult position regarding repayment, however I do require these funds in Australia. Would you please contact my Sydney office to make arrangements for repayment." Mr Boardman, on behalf of the applicant, contended at the meeting that the proof of debt submitted by Mr Gowrie-Smith was not accompanied by sufficient documentation to allow it to be admitted for voting purposes. In particular, Mr Boardman complained that the documentation did not include a loan agreement specifying details sufficient to enable an interest calculation to be made. Mr Boardman requested another adjournment to enable the documentation to be considered further. Mr Landers declined the request, on the ground that in his opinion all proofs of debt were in order. The chairman of the meeting then moved that a resolution in the terms quoted earlier be passed as a special resolution. The minutes record the details of the following creditors, present or represented by proxy, voting in favour of the proposal as follows: Ian Gowrie-Smith 160,424.00 Garland Hawthorn Brahe 4,602.79 Seats Pty Ltd As trustee for the Ashman Trust 155,610.09 Warminster Pty Ltd 81,248.17 $401,885.05 (75.48%) The chairman noted that the only creditor voting against the proposal was the applicant, who was a creditor in an amount of $130,511.43 (including interest) (24.52%). Since the resolution was supported by a majority of creditors voting and by more than three-quarters in value of the creditors voting, the motion was recorded as having passed on a special resolution. The meeting also voted to appoint Mr Wily as trustee for the purpose of Part X of the Act (although the applicant abstained from voting on this resolution). A cheque was received from the respondent for $30,000 at the creditors' meeting. The trustee signed a notice of acceptance of composition on 9 December 1993. There was no evidence that any of that sum had been distributed to creditors prior to the institution of the present proceedings on 24 December 1993. The Loan Transactions - Principles It is convenient to consider first the applicant's contention that the composition was not approved by a special resolution of creditors, as required by s.204 of the Act. Before considering the evidence the relevant general principles should be noted. Jurisdiction is conferred on the Court by s.222(1) to hear or entertain an application for relief pursuant to s.222(2), where there is a doubt, on a specific ground, whether a composition has been accepted by a special resolution of a meeting of creditors and an application is made by a creditor for an order under s.222(2). Section 222(2) gives the Court the authority to adjudicate on the matter; that is, to resolve the doubt. Thus there are two stages in the jurisdiction conferred: Musolino v Sidiropoulos (1991) 101 ALR 235 (FCA/FCt), at 243; Farrow Mortgage Services Pty Ltd (In liquidation) v Abeyratne (1993) 47 FCR 208 (FCA/FCt), at 215. There was no dispute in the present case that the requirements of s.222(1) were satisfied. The respondent did not challenge the standing of the applicant as a creditor. The Court has power, in the exercise of its bankruptcy jurisdiction, to review a voting entitlement determination made by the chairman of a creditors' meeting at which a composition proposed is to be considered. Section 201 does not exclude the jurisdiction of the Court to determine questions concerning the right of persons to vote at a creditors' meeting, including whether they are creditors at all: Forshaw v Thompson (1992) 35 FCR 329 (FCA/FCt), at 339; Re Dingle; Westpac Banking Corporation v Worrell (1993) 47 FCR 478 (FCA/FCt), at 484-486. The Court determines the issue presented under s.222(1) on the evidence before it and not merely by way of review of the chairman's decision: Re McLean; Ex parte Friends' Provident Life Office (1992) 36 FCR 502 (FCA/Heerey J.), at 510. In particular, where the issue is whether a person is entitled to vote as a creditor or a composition proposal the Court must act on the material before it and is not limited to the material before the chairman: Re Dingle, at 486. The Court has a discretion under s.222(2) in deciding whether or not to make a declaration that a composition is void, if the ground is established. An important factor is whether the vote of the person wrongly excluded from voting, or wrongly permitted to vote, would have affected the fate of the proposal: Re Dingle, at 485-486. On an application raising the issue of whether a person claiming to be a creditor was entitled to vote on a composition proposal, the onus lies on the applicant making an allegation to prove it: Re McLean, at 512; Re Dingle, at 486-487. Where the applicant claims to have been wrongfully excluded as a creditor from voting on the proposal, that party bears the onus of establishing that he or she was a creditor in the amount alleged. It is not enough merely to make out a prima facie or arguable case. Conversely, where the applicant claims that the chairman wrongly permitted a person to vote as a creditor, the onus is on the applicant to establish that the person was not a creditor, or was not a creditor in the amount alleged: Re Dingle at 486. Thus in the present case, as Mr Harper submitted on behalf of the respondent, the applicant bears the onus of establishing that Mr Gowrie-Smith was not a creditor of the respondent when the vote took place or, alternatively, of establishing that Mr Gowrie-Smith was not a creditor in the amount recognised by the chairman. Section 222(5) provides that the Court is not to make an order declaring a composition void on a ground specified in s.222(4) unless it would be in the interests of creditors to do so. Section 222(3) does not apply to an order made under s.222(2). However, the use of the word "may" in s.222(2) is facultative, not mandatory. Accordingly, the Court has a judicial discretion under s.222(2) to make, or not make, a declaration. Thus it can take into account the interests of creditors as a whole and the public interest: Musolino v Sidiropoulos, at 245. The Loans - Background to Evidence The respondent gave evidence as to his dealings with Mr Gowrie-Smith, and was cross-examined by Mr Skinner. Mr McKeon also gave evidence and was cross-examined. An affidavit sworn by Mr Gowrie-Smith was read in the respondent's case. The respondent's solicitors advised the applicant's solicitors on 21 October 1994 that Mr Gowrie-Smith, a resident of the United Kingdom, would not be available to attend the hearing on 3 or 4 November 1994, but that they still intended to rely on his affidavit: cf Bankruptcy Rules r.135(2). The letter foreshadowed an application to vacate the hearing date unless the applicant agreed. The applicant's solicitors did not object to the proposed course, although ultimately much of Mr Gowrie-Smith's affidavit was rejected on evidentiary grounds. Mr Skinner submitted that Mr Gowrie-Smith's non-appearance was at the choice of the respondent and that the applicant had no real option but to permit his affidavit to be read. Thus little weight should attached to Mr Gowrie-Smith's untested evidence. Mr Harper contended that the applicant could have objected to the use of the affidavit (albeit at the risk of an adjournment) and thus the lack of opportunity to test Mr Gowrie-Smith's evidence lay at the applicant's door. It seems to me that I should take those portions of Mr Gowrie-Smith's affidavit admitted into evidence into account in making findings. However, where there is other evidence in the matters covered - such as the respondent's oral evidence or documentary evidence - I should treat Mr Gowrie-Smith's contested evidence with caution. I do not think that this is a case for the application of any principle analogous to Jones v Dunkel (1959) 101 CLR 298, against the respondent. On the other hand, in the circumstances, I do not consider that the applicant is to be taken as accepting the accuracy of Mr Gowrie-Smith's evidence because of the absence of any cross-examination. As it happens, Mr Gowrie-Smith's evidence added little to that given by the respondent. The respondent struck me as an intelligent witness. On many issues I thought that he was genuinely attempting to recall events, some of which occurred some years earlier. However, the respondent perceived that it was in his interests that certain transactions should be characterised in a particular manner or that one motive rather than another should be ascribed to a dealing in which he was involved. For example, he clearly appreciated that it was in his interests that the loans obtained through Mr Gowrie-Smith should be regarded as loans from Mr Gowrie-Smith personally (not from one of his companies) to him personally (not to one of the Nolan companies). These perceptions, in my view, coloured the respondent's recollection and presentation of certain events. On those issues I think it is appropriate to treat the respondent's evidence with considerable caution.

A further factor to take into account is that, as the respondent acknowledged, the relevant conversations between himself and Mr Gowrie-Smith occurred in 1987 and it was difficult for him to recall the detail. Moreover, the transactions were informal. The respondent described them as arrangements between friends. This informality was compounded (when it comes to classifying the transactions in legal terms) by the marked tendency of the respondent not to differentiate between himself and his companies. In evidence he frequently referred to his companies' activities or transactions as if they were his own. For example, late in his evidence, after this very point had been made when he was present in the witness box, he stated that certain moneys had been paid into "my bank account". The fact was (as he knew) that the account was that of J.W. Nolan Pty Ltd. In these circumstances, the documentation recording the actions or communications of the parties to the conversations requires particularly careful consideration in determining the course of events where the evidence is disputed or unclear. In other words, the contemporary documentation, or that recording the subsequent conduct of the parties, may shed light on what was said and what the parties intended at the time. Furthermore, such documentation, may be significant in determining whether an agreement was entered into and, if so, between which parties. The authorities recognise, for example, that subsequent communications between the parties to an alleged contract may be used as an admission by conduct as to the existence or non-existence of a subsisting contract: Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 (NSW S Ct/McLelland J.), at 9255-9256. Subsequent communications between those parties may also shed light on the question of whether the conversations had given rise to a binding contract (and, I think, on the question of the parties to any such contract), although the probative value of the communications depends upon the circumstances: Film Bars at 9255; B. Seppelt and Sons Ltd v Commission for Main Roads (1975) 1 BPR 9147 (NSW CA), at 9149, 9154-9155. (Generally speaking, an agreement cannot be construed in the light of the subsequent conduct of the parties:L. Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 (HL).) The First Loan - April 1987 The respondent gave evidence that in about 1982 he had lent Mr Gowrie-Smith, an old friend, $42,000 at an interest rate of 15 per cent per annum. The arrangement was a "handshake deal" and was not documented. Some five years later, in April 1987, Mr Gowrie-Smith and the respondent had a conversation at the Tattersall's Club in Sydney, where Mr Gowrie-Smith was a committee member. In the intervening period, the relationship between the respondent and Mr Gowrie-Smith had been somewhat strained, because of certain business dealings. According to the respondent, the conversation went as follows: "JWN: I need to pay a German supplier of leather goods and I haven't got the cash to do so at the moment. Could you lend me $50,000.00 for about 18 months? And if you do, I will pay you interest at 15% per annum on the same terms and conditions as my loan to you. I will telephone you with the details of the supplier to whom the payment is to be made. IG-S: That should not be a problem. Ring me with the details when you have them. JWN: You know that you have my guarantee that the money will be repaid." That account makes no reference to the terms of the loan, but the respondent in oral evidence agreed with the suggestion in Mr Gowrie-Smith's affidavit that the term of the loan was 18 months. In cross-examination, the respondent acknowledged that he may have used the personal pronoun in the conversation in a colloquial fashion, to refer to the company J.W. Nolan Pty Ltd, which was then purchasing leather goods. I find that he did so. At the time J.W. Nolan Pty Ltd had 180 day credit terms with a German tannery known as Schweizer Leather. It was that tannery to which moneys were paid by Mr Gowrie-Smith or by a company associated with him. (There was evidence that a company called Southern Sea Electronics Ltd had directed the transfer of DM 64,863 from a Hong Kong bank account to a German company, Leder Fabrik Louif Schweizer Gmbh & Co. There was no evidence as to the relationship between Southern Sea Electronics Ltd and Mr Gowrie-Smith, except that the direction was enclosed in a letter from Mr Gowrie-Smith to Mr Wily, on 26 January 1994. That letter attached "correspondence by way of evidence of funds advanced to Mr Nolan".) The respondent also acknowledged that there was no discussion at the Tattersall's Club of how Mr Gowrie-Smith would pay the money to the German supplier and that, as far as the respondent was concerned, Mr Gowrie-Smith might well have decided to use the funds of a company controlled by him for this purpose. Interest The respondent accepted that there was no specific reference to the capitalisation of interest in the conversation at Tattersalls. He claimed in evidence that capitalisation of interest was part of the arrangement because of the reference to "the same terms and conditions" as the earlier loan. I have serious reservations about whether those words were used. They are not mentioned by Mr Gowrie-Smith in his affidavit and it seems to me unlikely that such formal language was employed. However, the respondent was not directly challenged on this aspect of the April 1987 conversation and I do not think I should reject his evidence on the point, particularly having regard to the burden of proof on the applicant. But, as the respondent later acknowledged in his evidence, the original loan arrangement in 1982 did not include a provision that overdue interest should be capitalised or that Mr Gowrie-Smith should pay interest on such sums. Rather, there had been a conversation when Mr Gowrie-Smith had failed to repay the loan after twelve months and at that time it was agreed that the loan should be extended for a further two months and that Mr Gowrie-Smith should pay interest on the outstanding interest for that period. In these circumstances, I do not think that it was contemplated by the general language used in the April 1987 conversation that overdue interest should be capitalised and interest paid on that amount by the borrower. This view is reinforced by the information conveyed by the respondent to Mr McKeon and by Mr McKeon's actions in accordance with instructions given by the respondent. Mr McKeon was unaware of the loan until November 1988, when he was preparing the financial statements of J.W. Nolan Pty Ltd for the year ended 30 June 1988. At that time he formed the view that the company's profit for the year was too high, in the sense that the gross profit margin was above the industry average. He discussed this difficulty with the respondent, who then informed him of the payment made in April 1987 to the German supplier, which had not been recorded in the company's books. The respondent told Mr McKeon that the debt was the company's and showed Mr McKeon an invoice from the German supplier. Mr McKeon saw no documentation to indicate which person or entity had paid the German supplier, but was told by the respondent that the loan was for a sum of $50,000 and was from Mr Gowrie-Smith. As from June 1988, the loan was "transferred" by Mr McKeon to the Ashman Trust, on the instructions of the respondent (although the entries were not made until November 1988). The reasons for the "transfer" were not made clear in the evidence.In any event, the loan was amalgamated in the records of theTrust with a second loan made in December 1987 (to which I shall refer later). The two loans were recorded in the records of the Trust as a single sum due to Damnosa Investments Ltd ("Damnosa"), a company apparently controlled by Mr Gowrie-Smith. Interest payments were made in respect of both loans late in 1988, 1989 and 1990. The payments were made by cheques drawn on J.W. Nolan Pty Ltd or Warminster (the evidence was not entirely clear, although, as Mr McKeon testified, at least some payments were made by J.W. Nolan Pty Ltd). The first payment was made in November 1988, 18 months after the advance. The interest paid at that time was calculated simply by reference to an interest rate of 15 percent per annum on a loan of $50,000 for 18 months ($11,250). No explanation was given as to why there was no capitalisation of interest after a period of 12 months. The fact that the term of the loan was 18 months would not indicate that interest was payable otherwise than annually; subsequent interest payments were made on an annual basis and calculated by reference to the principal sum of $50,000 and an interest rate of 15 per cent, without any indication that overdue interest had been capitalised. Nor do working papers prepared by Mr McKeon from time to time for the Ashman Trust show any provision for capitalisation interest. There was no evidence of any demand made by Mr Gowrie-Smith reflecting the capitalisation of interest, until the letter of 19 November 1993. However, the demand was sent after the circular to creditors was prepared and dispatched, and it is not a document upon which I would place significant weight in ascertaining the intention of the parties six and a half years earlier. The Nature of the Arrangement It is not easy to fit an informal transaction of the kind I have described within a precise legal framework. However, in my view the Tattersall's conversation constituted an agreement by Mr Gowrie-Smith to advance to J.W. Nolan Pty Ltd the sum of $50,000. The advance was to be made by Mr Gowrie-Smith discharging J.W. Nolan Pty Ltd's liability to its German supplier. The advance was at an interest rate of 15 percent per annum and was for a term of 18 months. No provision was made for the capitalisation of overdue interest. I have considerable doubts as to whether the creditor in relation to the loan of $50,000 should be regarded as Mr Gowrie-Smith or Damnosa (or some other company within Mr Gowrie-Smith's group). Damnosa was recorded in the Ashman Trust as the creditor. Mr Gowrie-Smith's letter of demand to the respondent, of 19 November 1993, referred ambiguously to the repayment of "the loan funds advanced by me through Damnosa at your direction and under guarantee of repayment". The proof of debt lodged by Mr Gowrie-Smith on 29 November 1993 is even more confusing: "1. I advanced funds by way of loan to Jeremy Nolan. 2. These funds were advanced at my direction for convenience through Damnosa Investments Limited. 3. Jeremy Nolan was at the date on which the debtor signed a s.188 Authority, namely 9th November 1993 and still is, justly and truly indebted to Damnosa Investments Limited in the sum of $160,424.00, in accordance with the particulars specified in the statement of account annexed hereto.

4. Security is not held by myself or by Damnosa Investments Limited or by any person on its behalf for the payment of the whole or any part of the sum specified in paragraph 1." However, I have concluded, not without hesitation, that I cannot be satisfied that the creditor in respect of the loan of $50,000 was not Mr Gowrie-Smith personally. There is no contemporary documentary evidence that Damnosa made the payment to the German supplier and, indeed, there is material suggesting that the payment was made by a company known as South Sea Electronics Ltd, the controllers of which are not identified. Mr McKeon, whose evidence I generally accept, was told by the respondent in November 1988 that the creditor was Mr Gowrie-Smith, although the advance ultimately was consolidated in the Ashman Trust accounts with other moneys provided by Damnosa. Some payments of interest appear to have been made by cheques drawn in favour of Mr Gowrie-Smith personally; other cheques were recorded as having been drawn to enable bank drafts to be obtained for Mr Gowrie-Smith. There was also correspondence directed to the respondent in 1992, from Mr Gowrie-Smith or persons writing on his behalf, seeking payment of moneys due. I do not think that this correspondence, which is on the letterheads of companies apparently associated with Mr Gowrie-Smith, is very helpful on this issue. But the correspondence is at least consistent with the April 1987 debt being due to Mr Gowrie-Smith. By contrast, I think it clear on the evidence that the moneys were advanced and intended to be advanced to J.W. Nolan Pty Ltd, and not to the respondent personally. The respondent used the personal pronoun as a colloquial means of referring to J.W. Nolan Pty Ltd. I have little doubt that Mr Gowrie-Smith, who was a friend of the respondent and had some knowledge of his business affairs (and, I would infer, his habits of speech) would have understood the conservation this way. It was clear from the conversation that the money was required to pay a business creditor and the overwhelming likelihood is that Mr Gowrie-Smith knew that the supplier provided goods for a business conducted by the respondent's company. It was agreed in the conversation that the respondent would provide details of the supplier, to enable a direct payment to be made or arranged by Mr Gowrie-Smith to the German company. That information was duly supplied and Mr Gowrie-Smith acted upon it. When interest payments were ultimately made some at least were made by J.W. Nolan Pty Ltd (and none by the respondent personally). Furthermore, the transaction was recorded in the books of J.W. Nolan Pty Ltd as a loan to the company, in accordance with the respondent's instructions to Mr McKeon. Despite the respondent's protestations in evidence, I do not think the parties to the April 1987 conversation intended that the loan constituted by the payment to the German supplier should be regarded as one to the respondent personally. The insistence by the respondent that the advance was to him personally sits somewhat oddly with his equally fervent insistence that he had given a "guarantee" to Mr Gowrie-Smith that the advance would be repaid. Again, I have serious reservations about whether anything was said concerning a guarantee or, if it was, whether it was anything more than the words of comfort or reassurance often given by those seeking financial accommodation. While no special words are required to constitute a contract of guarantee, such a contract requires a promissory statement, showing an intention to be bound, and an acceptance to the offer: J. Phillips and J. O'Donovan, The Modern Contract of Guarantee (2nd ed 1992), 35-36; cf Sorby v Gordon (1874) 30 LT 528 (Ct Exch). However, the respondent was not pressed on this topic in cross-examination, at least so far as the April 1987 conversation is concerned. While I have misgivings, I am not able to conclude that the words to which the respondent deposes were not used. Subject to the same misgivings, I am not able to conclude that those words were not intended to constitute a guarantee in favour of Mr Gowrie-Jones that the advance to J.W. Nolan Pty Ltd would be repaid by the respondent in the event of the company's default. The Second Loan - December 1987 In December 1987 a further conversation took place between the respondent and Mr Gowrie-Smith, on this occasion in London. For the reasons already given, it is extremely difficult to state with any precision the details of the conversation which took place. The difficulty is compounded by the fact that the only portion of the respondent's affidavit concerning the conversation that was admitted into evidence simply said: "I again borrowed Ł20,000 from him." Mr Gowrie-Smith's affidavit was no more helpful on the terms of the conversation between himself and the respondent. Having regard to the difficulties to which I have referred, I find that the conversation between Mr Gowrie-Smith and the respondent was to the following effect: l After some discussion about the respondent's business interests, the respondent said words to this effect: "Well, I need some money for the business which I'm currently embroiled in, and its a growing business and would you be able to loan me some more money." l Mr Gowrie-Smith stated that he was prepared to make available Ł20,000 by way of loan for the business, at an interest rate of 15%, repayable after six months. l The respondent said he would provide details of the account to which the money should be advanced. l Apart from the above, there was no discussion about the identity of the borrower. l There was no discussion as to the person or entity who was to advance the money. The respondent was aware that it was likely that the money would be advanced by one of Mr Gowrie-Smith's companies and not by Mr Gowrie-Smith personally. l There was no discussion as to whether the respondent would provide a guarantee. l There was no discussion as to the capitalisation of interest. On 14 December 1987 Mr Gowrie-Smith signed a memorandum to a Ms Watkins of Minster Management Plc (a company associated with Mr Gowrie-Smith), as follows: "REMARKS: Please request Joyce to forward the sum of Ł20,000 equivalent in Australian dollars to J W Nolan Pty Limited, Westpac Banking Corporation, Redfern Branch, A/c No. 530124, by way of advance repayable 6 months from payment at 15% per annum." The memorandum was on the letterhead of Medirace Plc, another company presumably associated with Mr Gowrie-Smith. On 23 December 1987 Damnosa deposited, by telegraphic transfer, the sum of $51,174 into the account of J.W. Nolan Pty Ltd with Westpac. At this point, if not earlier, the respondent became aware of the identity of the company depositing the funds. In November 1988 -some eleven months after the deposit - Mr McKeon, in the course of preparing the accounts in the Nolan companies for the year ended 30 June 1988, recorded in the general ledger of J W Nolan Pty Ltd the following transaction: "1/12/87 ST'MENT 35 LOAN Ł20000 DAMNOSA INVESTMENTS 51174" UK Mr McKeon made this entry after a conversation with the respondent, in which the latter informed Mr McKeon that the second loan had been made by Damnosa. Components of the Second Loan It is necessary to elaborate on these findings. First, although the respondent was very anxious in his evidence to create the impression that the moneys were loaned to him personally, I do not accept that this was the effect of the conversation or of the subsequent payment to the German supplier. I have already found that the first loan was to J.W. Nolan Pty Ltd. With some doubt, I am prepared to accept that the respondent, in the December 1987 conversation, used words to the effect of those I have quoted. They accord with part of the account given by the respondent in evidence in chief. Nonetheless, this language, like the language used in the first conversation, was intended to refer to the company borrowing money, rather than to the respondent personally borrowing. In context, the respondent was referring to a loan to be made to the business which, as he knew, and, as I infer Mr Gowrie-Smith knew, was conducted by a company. As I have previously noted, the respondent had a practice of using "I" and "my" to refer to activities or transactions carried out by his companies, rather than by him personally. Mr Gowrie-Smith, who had dealt previously with the respondent, would have been familiar with that use of language. (I think that the reference by the respondent, in correspondence in 1992 to Mr Gowrie-Smith, to "my current indebtedness" is to be understood in the same way.) The respondent accepted in his evidence that he had told Mr Gowrie-Smith where the money should be sent. Whether or not Mr Gowrie-Smith was aware of the precise name and account number of the recipient at the time of the conversation, the respondent told Mr Gowrie-Smith during the conversation that this information would be provided shortly (as indeed it was). I think, therefore, that Mr Gowrie-Smith was aware during this conversation (as he was in the April 1987 conversation) that the borrower of the money would be a company. In fact, Mr Gowrie-Smith became aware of the identity of the company, at the latest, on 14 December 1987, when he gave instructions to forward Ł20,000 to J.W. Nolan Pty Ltd. The respondent's later conduct supports the view that the conversation was understood by him at the time to involve the provision of a loan to J.W. Nolan Pty Ltd. The recording in the general ledger of the company, made by Mr McKeon in November 1988 after discussion with the respondent, records the debt as one owed by J.W. Nolan Pty Ltd to Damnosa. No documentation was produced to suggest that the transaction was recorded as a loan made to the respondent and then on-lent by him to J.W. Nolan Pty Ltd. No payments of interest were made by the respondent personally. As I have previously said, payments were made by cheques drawn on either J.W. Nolan Pty Ltd or Warminster Pty Ltd. There is also material to indicate that Mr Gowrie-Smith understood at the time of the conversation that the borrower was to be a company controlled by the respondent and that, at least as from 14 December 1987, he understood that company to be J.W. Nolan Pty Ltd. Not only was the money transferred to J.W. Nolan Pty Ltd, in accordance with Mr Gowrie-Smith's instructions, but an internal memorandum of a company associated with Mr Gowrie-Smith was in evidence which indicated that the accounts of Damnosa for the year ended 31 March 1988, showed an amount of Ł20,000 due from J.W. Nolan Pty Ltd, together with interest accrued at 15 per cent per annum. Secondly, although the evidence on this question is more equivocal, I do not accept the respondent's evidence that it was the intention of both parties to the conversation that the loan was to be made by Mr Gowrie-Smith personally. I think that in this respect the second loan stands in a different position to the April 1987 loan, for three reasons. l There is clear evidence that Damnosa paid the Australian dollar equivalent of Ł20,000 to J.W. Nolan Pty Ltd in December 1987. l Mr McKeon was told by the respondent, after the event, that the lender was Damnosa, whereas the respondent told him that the lender under the April 1987 arrangement was Mr Gowrie-Smith. l There is evidence from which I draw the inference that the accounts of Damnosa for the year ended 31 March 1988 recorded the sum of Ł20,000 as due to it by J.W. Nolan Pty Ltd. There are other factors supporting the conclusion that the parties intended the loan to be made by Damnosa. The general ledger of J.W. Nolan Pty Ltd recorded the lender as Damnosa. That recording was carried through to the books of the Ashman Trust following the "transfer" of the debt on the instructions of the respondent. The 1993 financial statements of the Ashman Trust, extracts from which were in evidence, showed that in 1992 and 1993 current liabilities of the Trust included unsecured loans of $106,174 to "Damnosa Pty Ltd". That figure clearly included the funds advanced in December 1987. The respondent, as the moving force behind the Nolan companies and the Ashman Trust, must have been aware of the contents of these financial statements. The proof of debt lodged by Mr Gowrie-Smith, although a confused document containing inconsistent statements, asserts that the respondent is "justly and truly indebted" to Damnosa. There is some evidence which points to a contrary conclusion. The interest cheques sent by J.W. Nolan Pty Ltd or Warminster Pty Ltd were apparently either made payable to Mr Gowrie-Smith, or were made payable to Westpac to allow drafts to be drawn in favour of Mr Gowrie-Smith. However, almost at the same time as the respondent prepared the first cheque, on 1 November 1988, he told Mr Gowrie-Smith that the lender of the sum of Ł20,000 was Damnosa. A possible explanation for the cheque drawn in November 1988 being made payable to Mr Gowrie-Smith was that it combined interest due in respect of the April 1987 loan (which I have found was payable to Mr Gowrie-Smith personally) and interest due on the second loan (which was due to Damnosa). Later cheques were drawn separately in respect of each loan and all appear to have been payable to (or to contemplate bank drafts payable to) Mr Gowrie-Smith. However, I do not think that this evidence can outweigh the other facts, including contemporaneous material, pointing to Damnosa being the lender to J.W. Nolan Pty Ltd. I should add that I have not overlooked correspondence with the respondent in which references are made by persons associated with Mr Gowrie-Smith's companies and, in one case, by Mr Gowrie-Smith himself, to debts due or outstanding to Mr Gowrie-Smith. I do not consider that this correspondence, some years after the transactions and in equivocal terms, sheds significant light on the intentions of the parties at the time or on the legal character of those transactions. Thirdly, unlike the April 1987 conversation, there was no specific mention of a guarantee in the December 1987 conversation. In his account of this conversation the respondent gave this evidence in chief: "And I said obviously the terms and conditions would be the same as all our loans in the past, which were that the terms and conditions would be that the loan would be repayable, guaranteed by me - it was a loan from Ian to me personally - and that the rate of interest would be 15 per cent, as was our original loan back in about 1982, and that obviously any interest or anything like that would be capitalised if it was due to be unpaid. But because he's a good friend of mine, it was stated, and it was also unstated, that the loan was direct from him to me and that I was the guarantor, and whatever happened I would repay him the moneys." In his account in cross-examination he claimed that "he would have said" that the loan was on the same terms and conditions as was discussed in the earlier loans. He then acknowledged the difficulty of recalling what was said in the conversation, which he said was between friends. The following question and answer occurred: "According to my note of what you recall as best you could now of the conversation that took place in December with Mr Gowrie-Smith, there was no reference to any personal guarantee by you of whatever the entity was that was going to receive the money from whatever entity it was that Mr Gowrie-Smith would use to provide the funds. Are you aware of that?---Essentially the loan - I approached Ian for a loan, I told him where I wanted to send the funds." In my view, there was a good deal of reconstruction in the respondent's evidence and much of that reconstruction was coloured by his perception of how the transaction could best be characterised from his point of view. The respondent became increasingly hesitant in recounting the substance of the conversation in December 1987. I do not accept that he had an independent recollection of that conversation, other than that he recalled making a request for funds for the business in which he was involved through J.W. Nolan Pty Ltd. Thus, although I have found (with some misgivings) that the respondent referred to the terms and conditions of the 1982 transaction in the course of the April 1987 conversation, I am satisfied that no equivalent reference was made in the December 1987 meeting to the arrangements made eight months earlier. I do not rule out the possibility that a general reference was made to the earlier dealings and I have taken into account, as Mr Harper submitted that I should, the fact that there was a series of dealings between the parties, albeit at substantial intervals. Even so, I am satisfied that nothing was said that demonstrated an intention to incorporate any guarantee (or the equivalent) given in relation to the first loan in April 1987. The essence of the arrangement made in December 1987 could be stated simply and, indeed, was incorporated in Mr Gowrie-Smith's note of 14 December 1987 (except for the identity of the lender). There was no mention in that note of a guarantee given by the respondent. While the respondent may have considered himself under a moral obligation as a friend to ensure payment was made, I do not think anything was said in the conversation that could fairly be construed as constituting a guarantee by the respondent to repay moneys borrowed by J.W. Nolan Pty Ltd, should the latter default. I should add that in reaching this conclusion I have not overlooked the letter of 19 November 1993 from Mr Gowrie-Smith to the respondent. As I have mentioned, this letter was written after the notice to creditors and does little to shed light on the dealings that took place in December 1987. The proof of debt lodged by Mr Gowrie-Smith, to which I have also referred, makes no reference to any guarantee. Fourthly, the respondent acknowledged that the question of capitalisation of interest was not discussed specifically at the December 1987 meeting. "Yes. There was no reference in that conversation, was there, to capitalising interest?---No, only as before in the previous one that it would be on the same terms and conditions as the original loan. I mean this is all done between friends. I mean, you know, you don't always spell out every single detail and say - look, the 15 per cent was generally always mentioned. Yes?---Well, it was just generally always mentioned, the 15 per cent. I think, because at some stages 15 per cent was quite a high interest rate relative to what the regular interest rates were but that was a condition of the original loan and because I didn't want it to change from the original loan that was the figure that we'd agreed upon. I don't know what the regular interest rate was in December 1987, I can't tell you." I have already concluded that the agreement of April 1987 did not require the capitalisation of overdue interest. For similar reasons, even if (contrary to my finding) the terms and conditions of the April 1987 agreement were expressly incorporated in the December 1987 conversation, that would not have the effect of requiring the capitalisation of overdue interest. The conclusion that such a term was not incorporated in the agreement is reinforced by the fact that Mr Gowrie-Smith's note of 14 December 1987 made no reference to capitalisation of interest. Fifthly, although it is not a matter of great importance, I think that the parties intended the loan to be made in sterling and that interest should be calculated by reference to the principal of Ł20,000. The sum transferred to J.W. Nolan Pty Ltd was the Australian dollar equivalent of Ł20,000. The loan was recorded in the books of J.W. Nolan Pty Ltd as Ł20,000 (although the Australian dollar equivalent was also given). Working papers and cheque butts show that annual interest payments were calculated by reference to the Australian dollar equivalent of Ł3,000 (that is 15 percent of Ł20,000). Indeed, the respondent's own affidavit said the loan was for Ł20,000. Finally, I should note that at the time the respondent swore his affidavit, his recollection (although not expressly included in the affidavit) was that the loan was for a period of eighteen months. In the light of Mr Gowrie-Smith's note of 14 December 1987, the respondent accepted that the term of the loan was six months. Conclusions on Second Loan It follows that in my view the parties to the conversation of December 1987 intended that a loan of Ł20,000 should be made to J.W. Nolan Pty Ltd (although Mr Gowrie-Smith may not have been aware of the precise name of the company until details were subsequently provided by the respondent). They also intended that the loan should be made by Mr Gowrie-Smith or one of his companies, as he decided. The loan was to be for a term of six months, at an interest rate of 15 per cent per annum. There was no discussion of a guarantee or capitalisation of interest. I do not think it is necessary to classify the agreement more precisely than this, or to determine whether it would have been enforceable had Mr Gowrie not arranged for Damnosa to lend the sum of Ł20,000. Once the moneys were paid by Damnosa to J.W. Nolan Pty Ltd, the latter became indebted to the former on the terms agreed during the conversation between Mr Gowrie-Smith and the respondent. Conclusions as to Indebtedness Two principal conclusions flow from the findings I have made. l First, at the time of the creditors' meeting, the respondent was not indebted to Mr Gowrie-Smith except (arguably) pursuant to the guarantee given by the respondent, in April 1987, to answer for the default of J.W. Nolan Pty Ltd in repaying the first loan of $50,000, plus interest calculated at the rate of 15 percent per annum. l Secondly, neither the April 1987 nor December 1987 agreements provided for capitalisation of interest in the event of default. Thus even if (contrary to my findings) the respondent was indebted to Mr Gowrie-Jones in respect of both loans, the interest was limited to the agreed rate of 15 percent per annum on the principal sum outstanding. Effect on the Composition It is necessary to consider whether these conclusions, if accepted by the chairman of the creditors' meeting, would have produced a different outcome in the voting in the composition resolution. The short answer is that the proposal would not have been approved by a special resolution, since it would not have secured a three-fourths majority in value of the creditors voting on the proposal. l On the conclusions I have reached, Mr Gowrie-Smith was entitled, at best, to vote in respect of the debt of $50,000 plus unpaid interest due in December 1993, calculated at 15 per cent per annum. The parties agreed that the total due at the date of the creditors' meeting, on this analysis, was $72,500. If Mr Gowrie-Smith was a creditor of the respondent for this amount, the vote in favour of the proposed composition would have been $313,961.05 (70.6%) and the vote against would have been $130,511.43 (29.4%). Thus the proposed composition would not have been approved by a special resolution as defined in the Act. l If, contrary to my findings, the respondent was indebted to Mr Gowrie-Smith in respect of both loans, his total indebtedness (on the assumption, as I have held, that there was to be no capitalisation of unpaid interest) would not have exceeded $136,959. (This figure is made up of the sum of $72,500 already referred to and an amount of $64,459 in respect of the second loan. The latter sum represents the amount of Ł20,000 advanced in December 1987, plus three instalments of Ł3,000 interest, due as at December 1993. At the exchange rate prevailing in December 1993 (AUD1 = ŁST 0.4499) the equivalent of Ł29,000 was $64,459. This assumes, in favour of the respondent's contentions, that the last interest instalment of Ł3,000 was due by the date of the creditors' meeting, even though the anniversary of the payment of the Ł20,000 had not arrived by that date.) If Mr Gowrie-Smith were a creditor for $136,959 at the date of the creditors' meeting, the vote in favour of the proposed composition would have been $378,420 in value (74.35%) and $130,511 against (25.65%). The proposed composition again would not have been approved by a special resolution as defined in the Act. Discretion In these circumstances, the necessary conditions for the exercise of the power to declare the composition void have been established. The question is whether I should exercise the discretion conferred by s.222(2) of the Act in favour of declaring the composition void and whether I should make a sequestration order pursuant to s.222(7) against the estate of the respondent. In my opinion, a number of factors should be taken into account in exercising my discretion. First, on the findings I have made, the composition was not approved at the creditors' meeting by a special resolution passed in accordance with the requirements of the Act. As Musolino v Sidiropolous shows, this factor is not conclusive. However, it is nonetheless a significant consideration, particularly having regard to the fact that the only substantial creditors of the respondent, outside the Nolan companies, were Mr Gowrie-Smith and the applicant. On the findings I have made each was owed a similar amount. While Mr Gowrie-Smith was apparently content to accept a return of less than six cents in the dollar, the applicant was not; he voted against the composition. Had the voting been recorded in accordance with the true indebtedness of the respondent to the various creditors, the applicant's vote would have ensured that the proposed composition was rejected. The applicant would then have been free to proceed with a creditor's petition for a sequestration order against the respondent's estate in the usual way. Secondly, to adapt the language of Neaves J. in Re Moulton; Ex parte Beneficial Finance Corporation Ltd, FCA, 20 December 1984, unreported, cited in Augustyn v Putnin (1988) 83 ALR 514 (FCA/FC), at 521-522, while it cannot be postulated that creditors will necessarily be better off if the respondent's affairs are administered in bankruptcy, the material before me suggests that it would be in the interests of creditors, qua creditors, that there be a full investigation of the respondent's affairs in bankruptcy. Re Moulton and Augustyn v Putnin were cases under s.222(5) of the Act, but similar considerations, in my opinion, are relevant to the discretion I am required to exercise. A trustee in bankruptcy is likely to wish to investigate the transfer of the respondent's half share in the Mill Hill property in 1991, to determine whether it is a settlement caught by s.120(2)(a) of the Act. That sub-section provides as follows: "A settlement of property...is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 5 years before, the commencement of the bankruptcy, void as against the trustee in bankruptcy, unless the parties claiming under the settlement prove: (a) that the settlor was, at the time of making the settlement, able to pay all his debts without the aid of the property comprised in the settlement." A settlement includes any "disposition of property": s.120(8). In determining the solvency of the settlor, the court is not restricted to a consideration of debts presently payable, but can have regard to a contingent liability under a guarantee: Re Hyams; Official Receiver v Hyams (1970) 19 FLR 232 (FC Bkpcy/Gibbs J.), at 257-258. The question is whether there is a reasonable possibility that the settlor would have to meet any contingent liabilities: Re Hyams, at 258. If so, those liabilities should be taken into account. The onus of establishing the matters referred to in s.120(2)(a) of course lies on the party claiming under the settlement, in this case Ms Ashman. It is necessary for the party claiming under the settlement to show that the settlor was able, at the time of the settlement, to pay all debts out of his or her own assets. It is not necessary for me to express a concluded view on the question of whether Ms Ashman could prove the matters in s.120(2)(a) of the Act, should a sequestration order be made against the respondent. It is enough to say that, despite the respondent's assertion in re-examination that he could pay all his debts, as and when they fell due in 1991, there is a substantial body of evidence to suggest to the contrary. Some 15 days before executing the transfer on 23 August 1991, the respondent had received a demand for $606,203 from Westpac. In December 1991 judgment for a slightly larger amount was entered against him, to take effect one year later. It is not clear on the evidence what assets the respondent had at the time other than his half share of the Mill Hill property and his shares in the various Nolan companies. There is no evidence that would enable me to make an accurate assessment of the value of those shareholdings at the relevant time. It is, however, doubtful whether they could have realised sufficient to pay all the debts of the respondent, including liabilities due under the guarantee to Westpac. This is so even if account is taken of the liability of the remaining co-guarantors to contribute to payment of a Westpac debt. Mr Harper drew attention to the fact that the amount due to Newcastle Permanent in 1991 (about $460,000) exceeded the value of the property, as assessed by the Valuer-General in July 1991 (about $440,000). Furthermore, there was no evidence of the value of the property at the time of the current proceedings. But the best part of four years has elapsed since the Valuer-General's valuation. There is no reason to assume that the value of the Mill Hill property has not changed in the intervening period. There is at least a realistic possibility that the property has increased significantly in value. If it has, its value will exceed the amount due to Newcastle Permanent, which has remained constant at about $460,000, all interest payments to date having been met. Moreover, the borrower from Newcastle Permanent was Warminster, as trustee for the Ashman Trust. Neither the respondent nor Ms Ashman was a borrower, although each guaranteed the debt. As the respondent acknowledged in evidence, whether Newcastle Permanent takes action under the mortgage depends upon whether the Ashman Trust (or Seats as the current trustee of the Trust) continues to meet interest payments due under the loan agreement. The evidence establishes that the Trust in fact has met interest payments due to Newcastle Permanent (subject to Ms Ashman making some payments herself at an earlier stage). As I have previously noted, the interest paid by the Trust amounted to about $40,000 in 1994. The balance sheet of the Trust at 30 June 1993 shows net assets of $33,367. It is true that the current assets include loans to the respondent, recorded at that date as $123,625. However, there is at least a realistic possibility, having regard to the manner in which the affairs of the Nolan companies, including the Trust, were conducted over a number of years, that the financial statements do not accurately record the Trust's capacity to repay all or some of the loan to Newcastle Permanent. It emerged from the respondent's evidence, for example, that $18,000 of the $30,000 paid by him in respect of the composition came from redeemable preference shares held by the Trust in Nolan Investments Pty Ltd. These shares had been recorded in the balance sheet (along with other shares in unlisted companies) at the cost price of $2. It also emerged that the Trust retained a 6.5 per cent shareholding in Nolan Investments Pty Ltd. The respondent said that he had valued the total shareholding in Nolan Investments Pty Ltd at $25,000 in 1991, but there was no evidence as to the current value of the remaining shares. Nor was there clear evidence of the financial position of the Trust in the period since the close of the 1992/1993 financial year. It may turn out that the Trust has little or no capacity to contribute to repayment of any interest or principal due to Newcastle Permanent. On the other hand, further investigations may demonstrate that the Trust's assets are sufficient to enable a significant contribution to be made. Mr Harper pointed to the evidence that the transfer of the half share of the Mill Hill property was undertaken for family reasons and, specifically, to ensure the continuation of the considerations played some part in the transfer of the respondent's half-share. However, that fact would not be sufficient to prevent s.120(2) of the Act applying to render the settlement void as against the trustee in bankruptcy. The critical question would be whether Ms Ashman could establish that the respondent was able to pay all his debts at the time of the transfer without calling on the half share in Mill Hill Road. Moreover, if it were relevant, I would find that, on the evidence before me, both the respondent and Ms Ashman were aware and intended that the transfer, if effective, made it less likely that the respondent's share in the Mill Hill Road property would be taken in satisfaction of debts due to creditors to whom moneys were owed by the respondent following the failure of the National Leather venture. Thirdly, a trustee in bankruptcy is likely to explore the possibility that the respondent would be liable to make a contribution to the trustee of his estate, in accordance with Part VI, Division 4B of the Act. The respondent admitted that J.W. Nolan Pty Ltd was selling about seven leather lounges per week, at a base price of $1,532, exclusive of sales tax. He accepted that each lounge produced a gross profit of $200 to $300 per unit, or a total of about $70,000 to $105,000 per annum. Ms Ashman has drawn a salary of $2,000 per month from the business since June 1993, while the respondent has paid his personal bills by means of cheques drawn on the company's account. As previously noted, interest payments to the Newcastle Permanent, amounting to $40,000 in 1994, have been paid regularly through the Ashman Trust. It is clear that the income generated by J.W. Nolan Pty Ltd and other Nolan companies is almost entirely attributable to the efforts of the respondent. Accounts of the various Nolan companies and of the Trust had not been prepared for the period after 30 June 1993. It must be recognised that there is a substantial risk that the trading activities of the Nolan companies will cease if the respondent is made bankrupt. It is also true, as Mr Harper pointed out, that the level of contributions from the respondent's income as a bankrupt must take account of certain family obligations: see s.139T of the Act. Nonetheless the respondent clearly has a capacity to generate income, as defined in s.139L of the Act, at a level beyond that at which contributions may be assessed under Division VI, Part 4B. There can be no certainty that, as a bankrupt, the respondent will generate sufficient income to make contributions in accordance with Part 4B. However, he clearly has the potential to do so. The possibility of such contributions is a factor to be taken into account in the exercise of my discretion. Fourthly, in my opinion, in the circumstances of this case the public interest supports the making of both an order under s.222(2) of the Act and a sequestration order against the respondent's estate under s.222(7) of the Act. On the evidence, there is no basis for doubting that the respondent was indebted to the Ashman Trust and Warminster in the amounts referred to in the respondent's statement of affairs. At all relevant times, the affairs of the Trust and of Warminster were effectively controlled and managed by the respondent, with Ms Ashman playing a minor role. The respondent's indebtedness to the Nolan companies arose in part because he used the companies as the means of paying his personal bills. That indebtedness was the linchpin of the proposed composition, in that the debts due to the companies constituted roughly 45 per cent of the respondent's total indebtedness at the date of the composition. A vote by the Nolan companies at the creditors' meeting in favour of the proposed composition was crucial to its success. Ms Ashman claimed that she obtained the idea of an arrangement under Part X of the Act as a solution to her husband's problems, after watching a television program. Be that as it may, Ms Ashman acted on the advice, if not the direction of her husband, when executing proxies on behalf of Warminster and Seats to support the proposed composition at the creditors' meeting. In executing these documents, Ms Ashman did not direct attention to whether the composition would maximise the financial return to the companies as creditors of the respondent, although she no doubt held the view that it would be of assistance to the financial position of the family that her husband should avoid bankruptcy. It is clear that Ms Ashman saw that a principal advantage of the proposed composition was that it would allow her husband to obtain relief from the debt owed to the applicant, whom (rightly or wrongly) she regarded as having acted unfairly towards her husband in the past. The Act does not specifically forbid a person directing or procuring the vote of a creditor to support a proposed composition by the spouse of that person, although of course the spouse of a debtor is not entitled to vote at a creditors' meeting: s.198(7). But, in my view, it will often not be in the public interest that a debtor and his or her spouse should use the voting entitlement attributable to debts owed to companies controlled by them as the means of thwarting creditors seeking to obtain a sequestration order against the debtor's estate. I do not suggest that this is a universal principle. A great deal must depend on the circumstances of the case, including the nature and quantum of the debts due to the family companies, whether the debtor actively participates in procuring the vote, whether the vote is aimed against the interests of other creditors, and the extent of payments to be made by the debtor under any proposed composition. In my view, the circumstances of the present case strongly suggest that the public interest would be served by orders being made under s.222(2) and s.222(7) of the Act. Mr Harper, in addition to matters to which I have referred already, raised other considerations that he contended should lead to a sequestration order not being made. He argued that a sequestration order would cause hardship to the respondent, by prejudicing his marriage and by leading to the loss of the family home, which was "essentially serviced from the business activities" of the respondent. He also pointed out that this was not a case where the debtor was proposing to make a derisory payment in respect of vast debts. The payment amounted to just under 6 per cent of the respondent's total indebtedness. I am not in a position to make a finding as to the effect a sequestration order (as distinct from the effect of the financial difficulties the respondent has encountered in any event) upon the respondent's marriage. That issue was not specifically addressed in the evidence. The loss of the family home is a distinct possibility should a sequestration order be made, but is not certain. Assuming, however, that the marriage would be prejudiced and the family home lost, I do not think these considerations outweigh the factors to which I have already referred. If the family home is to be lost, it is largely as a consequence of the respondent being unable to pay his debts. That inability, in turn, has come about, at least in part, because the respondent has directed resources under his control to the acquisition and servicing of the Mill Hill property. Any prejudice to the marriage that can be attributed to a sequestration order is unfortunate. Regrettably, severe financial pressures - whether or not resulting in bankruptcy - often produce intolerable strains on a marriage. The Bankruptcy Act, among other objectives, seeks to balance the financial interests of creditors against the protection accorded to a debtor from recovery action in respect of past debts: see s.58(3). While the impact of a sequestration order upon a marriage may be a factor to consider in a particular case, it would rarely be a basis for denying a creditor the remedies for which the Act otherwise provides. The circumstances of the present case do not provide such a basis. Other Contentions In view of the conclusions I have reached, it is not necessary to deal with the other arguments put forward on behalf of the applicant. However, I should briefly mention one matter. I have found, having regard to the burden of proof, that the respondent guaranteed the repayment of the first loan of $50,000, plus interest, by J.W. Nolan Pty Ltd to Mr Gowrie-Smith. I have also found that the respondent did not give an enforceable guarantee in respect of the second loan. To the extent that the respondent did guarantee the indebtedness of J.W. Nolan Pty Ltd to Mr Gowrie-Smith, he had a right of indemnity or reimbursement from the company as principal debtor: J. Phillips and J. O'Donovan, at 500 ff. The debtor's statement of affairs made no mention of any right of indemnity from J.W. Nolan Pty Ltd. A particular is "material" for the purposes of s.222(4)(b) of the Act if it is a relevant matter and might be likely to affect the making of a decision by creditors: see Chirigakis v Deputy Commissioner of Taxation (1986) 68 ALR 527 (FCA/FC), at 533; Re Cufari; Ex parte Commissioner of Taxation v Huppatz (1992) 34 FCR 544 (FCA/von Doussa J.), at 549. The test is objective: creditors are entitled to full and correct information about the debtor's affairs before they make their decision: Re Segal; Lensworth Finance Ltd v Segal (1975) 45 FLR 85 (F Ct Bktcy/Riley J.), at 87-88. In my opinion the existence of an asset, in the form of a right of indemnity or reimbursement from J.W. Nolan Pty Ltd, was a matter highly relevant to creditors and likely to affect the making of a decision by them. No doubt inquiries would have been necessary to ascertain the capacity of J.W. Nolan Pty Ltd to reimburse the respondent (his share in J.W. Nolan Pty Ltd being recorded in the statement of affairs as of nominal value only). Nonetheless, the respondent's entitlement was a matter that might well have influenced creditors, particularly having regard to the fact that the respondent had conducted his affairs in a manner calculated to minimise his own assets. Thus in my view, had s.222(2) of the Act not been available to the applicant, s.222(4)(b) would have been satisfied. For reasons I have already given, had it been necessary to do so, I would have decided that an order under s.222(4)(b) declaring the composition void, would have been in the interests of the creditors within s.222(5) of the Act. Conclusion It follows from what I have said that an order should be made declaring that the composition purportedly approved at the creditors' meeting of 7 December 1993 is void, on the ground that the proposed composition was not accepted by a special resolution of creditors as required by s.204 of the Act. A sequestration order should be made against the estate of the respondent. The act of bankruptcy was the signing by the respondent of the authority under s.188 of the Act on 9 November 1993: s.40(1)(i). I certify that this and the preceding 60 pages are a true copy of the Reasons for Judgment of the Honourable Justice Sackville. Associate: Dated: 14 March, 1995 Heard: 3-4 November, 1994; 13-14 February, 1995; 2 March 1995 Place: Sydney Decision: 14 March, 1995 Appearances: Mr M. Skinner, instructed by Holmes & Bevan, Solicitors, appeared for the applicant. Mr R. Harper, instructed by Garland Hawthorn Brahe, Solicitors, appeared for the respondent.