D.C.T. v TRIGO-CONTILLO - [2005] FMCA 1856

FEDERAL MAGISTRATES COURT OF AUSTRALIA

D.C.T. v TRIGO-CONTILLO

[2005] FMCA 1856

BANKRUPTCY – Debt agreements – whether void – substantial compliance – material particulars – understatement of debt – agreement declared void.

Bankruptcy Act 1966, ss.185C, 185T, 185U
Federal Magistrates Court Rules 2001, r.37.02

Applicant:

DEPUTY COMMISSIONER OF TAXATION

Respondent:

AUGUSTINE JESUS TRIGO-CONTILLO

File Number:

MLG1367 of 2005

Judgment of:

Riethmuller FM

Hearing date:

5 December 2005

Last Submission:

5 December 2005

Delivered at:

Melbourne

Delivered on:

16 December 2005

REPRESENTATION

Counsel for the Applicant:

Mr Fary

Solicitors for the Applicant:

ATO Legal

Counsel for the Respondent:

No appearance

DECLARATION

That pursuant to s.185T of the Bankruptcy Act 1966 (the Act), the Respondent's debt agreement under Part IX of the Act entered on the insolvency index on 29 July 2005 is void.

ORDERS

The estate of AUGUSTINE JESUS TRIGO-CONTILLO be sequestrated.
The Applicant's costs (including reserved costs, if any) of this application be paid from the respondent's bankrupt estate.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLG 1367 of 2005

DEPUTY COMMISSIONER OF TAXATION

Applicant

And

AUGUSTINE JESUS TRIGO CONTILLO

Respondent

REASONS FOR JUDGMENT

This is an application for a declaration that the respondent’s debt agreement under Part IX of the Bankruptcy Act 1966 is void and for a sequestration order.

Background

On 27 July 2005 the respondent submitted a Debt Agreement Proposal dated 21 July 2005 to the Insolvency Trustee of Australia. The Debt Agreement was accepted on 28 July 2005 and entered on the Insolvency Index on 29 July 2005. An administrator was also appointed.
In the Debt Agreement the respondent listed the Australian Tax Office (ATO) as an unsecured debtor in the sum of $55,564.00. Two further unsecured debts to the National Australia Bank were listed in the sum of $11,065.00 and $5,000.00 respectively.
The debtor’s statement of affairs in the proposal indicates that the respondent has no assets other than his earnings.
As at 22 July 2005, the unsecured debt owed to the applicant was in fact $174,551.96, comprising:
a)A judgment debt obtained on 15 October 2004 plus general interest charged in the amount of $60,589.12; and
b)Income tax debts for the income years ended on 30 June 2000, 30 June 2001, 30 June 2002 and 30 June 2003 in the amount of $121,410.30.
On 2 September 2005, the respondent’s creditors (other than the applicant) voted to accept the respondent’s Part IX proposal. No vote was cast by the applicant. Susan O’Neill, the case officer responsible for collecting the outstanding amounts owed by the respondent deposed that:
10.I am informed and verily believe that a copy of the respondent’s debt agreement proposal and statement of affairs were received on 11 August 2005 by the insolvency section in the ATO office at Moonee Ponds, Victoria. The ATO officer…did not vote on the respondent’s debt agreement proposal by replying to the voting letter as he believed that the proposal was for a higher return to the ATO than other creditors.
Ms O’Neill sets out that on 21 September 2005, she reviewed the respondent’s debt agreement and affairs and became aware of the discrepancy. She says that she contacted the administrator, DR Administration, but by this time the 2 September 2005 deadline for voting on the proposal had passed.
As at 5 December 2005, the respondent’s debt to the ATO stands at $184,913.13.

The Law

Part IX of the Bankruptcy Act 1966 was inserted to allow for a less formal and less expensive arrangement to be entered into with creditors so as to allow people with low levels of debt, few assets, and low incomes, to take advantage of arrangements similar to that available under Part X. In the second reading speech on 26 June 1996 the Attorney General said:
Alternatives to Bankruptcy Debt Agreements – A New Form of Insolvency Administration
Over a number of years, there have been calls for a form of insolvency administration outside bankruptcy and part X that can be used by people with low levels of debt, few assets and low incomes who are not able to afford to enter arrangements under part X of the act. With the recent rise in the number of bankruptcies, most of which are attributed by the bankrupt to either unemployment of excessive use of credit, the introduction of a new simple form of insolvency administration is timely.
People who find themselves unable to pay all their debts or who may be unable to meet repayments due to a temporary change in income will no longer have to go bankrupt. Instead, they may put a proposal to creditors for dealing with their debts. Proposals might contain a request such as the payment of less than the full amount of all or any of the debtor’s debts, a delay on payment, periodic payments out of income or agreement to seek financial advice. The essence of debt agreements is that they are made direct with creditors.
As a result, debt agreements can only be entered into when the total amount of the debts are less than the amount prescribed pursuant to

s.185C(4)(b) which is currently $74,292.40.
Section 185T sets out the process to be adopted on an application for a declaration that an accepted debt agreement is void:
S185T - Applying for an order declaring a debt agreement void
Persons who may apply for an order
(1)The debtor (or the debtor's personal representative if the debtor has died), a creditor or the Official Receiver may apply to the Court for an order declaring that all, or a specified part, of a debt agreement is void.
Grounds for applying for an order
(2)A person mentioned in subsection (1) may apply for an order only if:
(a)there is doubt on a specific ground that all or part of the debt agreement was not made in accordance with this Part or does not comply with this Part; or
(b)the statement of affairs lodged with the debt agreement was deficient because it omitted a material particular or because it was incorrect in a material particular.
Time limit on applying for an order
(3)A person cannot apply for an order declaring a debt agreement void after all the obligations created by the agreement have been discharged.
Simultaneous application for a sequestration order
(4) A creditor may include an application for a sequestration order in an application for an order declaring all or part of a debt agreement void.
Effect of applying for a sequestration order
(5)For the purposes of this Act, making an application for a sequestration order under subsection (4) is taken to be presenting a creditor's petition against the debtor, but subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to the application.
The court has power to declare that a debt agreement is void pursuant to s.185U.
S185U - Making an order declaring a debt agreement void
Power to make order
(1)On an application under section 185T, the Court may make an order declaring a debt agreement void.
Limit on declaring debt agreement void on grounds of non-compliance with this Part
(2)The Court must not declare all or part of a debt agreement void on the ground that it does not comply with this Part if the agreement or part of the agreement complies substantially with this Part.
Declaring a debt agreement void on grounds of deficient statement of affairs
(3)The Court must not declare all or part of a debt agreement void on the ground that the statement of affairs lodged with the debt agreement was deficient, unless the Court is satisfied that it is in the creditors' interests to declare the agreement or part of the agreement void.
Sequestration order
(4)If the Court makes an order declaring all of a debt agreement void, the Court may also make a sequestration order if a creditor applied for the sequestration order
Applications to set aside a debt agreement are provided for in the Federal Magistrates Court Rules 2001 rule 37.02 which provides as follows:
Rule 37.02 - Application for order declaring debt agreement void
(1)This rule applies to an application for an order declaring that all, or a specified part, of a debt agreement is void.
(2)The application must be in accordance with the form of application set out in Part 1 of Schedule 2.
(3)If the application is made by a creditor who also seeks a sequestration order under subsection 185T (4) of the Bankruptcy Act, that must be stated in the application.
(4)The application must be accompanied by:
(a)a copy of the debt agreement; and
(b)an affidavit stating the facts relied on to establish the relevant ground for applying for the order.
Note: The grounds for applying for the order are stated in subsection 185T (2) of the Bankruptcy Act.
(5)At least 5 days before the date fixed for the hearing of the application, the application and each supporting document must be served on:
(a)the debtor; and
(b)if the applicant is not the Official Trustee, the Official Receiver for the District in which the application is made.
The application has complied with the rule. There are two alternative basis for declaring the agreement void.
In this case, no party has argued that the conduct of the applicant was relied upon to their detriment, as such questions of any potential estoppel do not need to be considered.
On the evidence in this matter, the respondent’s total debts were far in excess of the prescribed amount. Therefore, it is not an agreement covered by Part IX of the Act. The difference in the amounts is so great that it could not be considered to substantially comply (if substantially comply with the monetary limit is possible). On this basis I find that the agreement is void.
I am also satisfied on the material before me, including the aforementioned affidavit of Susan O’Neill sworn 3 November 2005, and the submissions of counsel for the applicant Mr Fary, that the statement of affairs dated 22 July 2005 was incorrect in a material particular, namely the amount owing to the applicant.
The question of whether it is in the creditors’ interests to declare the agreement void is more difficult. I must be satisfied that a declaration voiding the debt agreement is in the interests of the creditors before any such order is made under s.185T(2)(b): see s.185U(3).
Both the National Australia Bank and DR Administrators (the “additional creditors”) were served with notice of this application and given ample time in order to oppose the orders sought. No submissions were received from the additional creditors as to whether an order rendering the debt agreement void would be in their interests. It is likely that any distribution by a trustee in bankruptcy would be less than the payout under the terms of the debt agreement, given the relative small amount owed to the additional creditors compared to the sum owed by the respondent to the ATO. However, the agreement substantially disadvantages the applicant which is owed more than ten times any other creditor.
I am therefore satisfied that it is in the interests of the respondent’s creditors (as a group) that the debt agreement be declared void under s.185T(2)(b).
The respondent is clearly insolvent. I consider it appropriate in the circumstances of the case to grant the further remedy of a sequestration order.

I certify that the preceding twenty-one (21) paragraphs are a true copy of the reasons for judgment of Riethmuller FM

Associate:

Date: