Deputy Commissioner of Taxation v King
[2016] FCA 1281
•8 July 2016
FEDERAL COURT OF AUSTRALIA
Deputy Commissioner of Taxation v King
[2016] FCA 1281
File number: NSD 408 of 2016 Judge: RARES J Date of judgment: 8 July 2016 Catchwords: BANKRUPTCY – application to set aside debtor’s personal insolvency agreement pursuant to s 222(1)(d) or (e) Bankruptcy Act 1966 (Cth) – where agreement was approved by bare majority of creditors that included liquidators of insolvent companies formerly controlled by debtor and debtor’s related entities with substantial insolvent trading claims against debtor – where material items of expenditure and interests of debtor falsely omitted from or incorrectly disclosed in statement of affairs – where unexplained credits to debtor’s bank account greatly exceeded debtor’s declared income – where debtor’s spending extravagant – where applicant creditor offered indemnity for trustee in bankruptcy to investigate debtor’s affairs – where trustee of agreement had already conducted limited investigations – where return of between 1 to 4 cents in dollar to creditors under the agreement – where sequestration order against estate of debtor might reduce return to creditors to nil – whether full investigation of the debtor’s affairs would be in the interests of creditors and the public Legislation: Bankruptcy Act 1966 (Cth) ss 81, 188, 190, 222, 231, 267
Corporations Act 2001 (Cth)
Evidence Act 1995 (Cth) s 128
Cases cited: Augustyn v Putnin (1988) 83 ALR 514
Hingston v Westpac Banking Corporation (2012) 200 FCR 493
Owners of “Shin Kobe Maru” v Empire Shipping Co Inc (1994) 181 CLR 404
Re Emanuel George Doukidis: Ex Parte Consolidated Construction Pty Ltd [1985] FCA 289
Re Mills; Ex Parte Lloyd’s (1997) 73 FCR 551
Re Moulton; Ex Parte [The Law Society of New South Wales] Beneficial Finance Corporation Limited [1984] FCA 451
Re Williamson; Ex parte Wearne (1980) 31 ALR 598
Date of hearing: 22 June 2016, 8 July 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: General and Personal Insolvency Category: Catchwords Number of paragraphs: 82 Counsel for the Applicant: Mr CJ Peadon Solicitor for the Applicant: Hunt & Hunt Counsel for the First Respondent: Mr AW Smith Solicitor for the First Respondent: Moisson Lawyers Counsel for the Second Respondent: The second respondent filed a submitting notice ORDERS
NSD 408 of 2016 BETWEEN: DEPUTY COMMISSIONER OF TAXATION
Applicant
AND: MAXIMILLIAN HUGO PAUL KING
First Respondent
BRADLEY TONKS IN HIS CAPACITY AS TRUSTEE OF THE PERSONAL INSOLVENCY AGREEMENT EXECUTED BY MAXIMILLIAN HUGO PAUL KING
Second Respondent
JUDGE:
RARES J
DATE OF ORDER:
8 JULY 2016
THE COURT ORDERS THAT:
1.The personal insolvency agreement dated 24 September 2015 between the respondents be set aside.
2.A sequestration order be made against the estate of Maximillian Hugo Paul King.
3.The applicant creditor’s costs be taxed and paid from the estate of the first respondent debtor in accordance with the Bankruptcy Act 1966 (Cth).
4.Unless the Court otherwise orders, the second respondent retain the balance of the funds previously held by him in his capacity as trustee of the said personal insolvency agreement up to and including 15 July 2016.
5.Up to and including 15 July 2016, the first respondent have liberty to apply to the duty judge on such notice as to the judge seems fit for a stay of orders 1 and 2 or for an extension of order 4.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
(REVISED FROM THE TRANSCRIPT)RARES J:
The Deputy Commissioner of Taxation has applied for an order pursuant to s 222(1) of the Bankruptcy Act 1966 (Cth) setting aside the personal insolvency agreement executed by the first respondent, Maximillian Hugo Paul King, the debtor, and his trustee, Bradley Tonks, the second respondent on 24 September 2015. The Commissioner contends that the terms of the agreement are unreasonable or not calculated to benefit the creditors generally (s 222(1)(d)) or that the agreement should be set aside by the exercise of the power to do so under s 222(1)(e) “for any other reason”.
On 5 December 2014, the Commissioner obtained a judgment debt for $627,851.92 in the District Court of New South Wales. He presented a creditor’s petition on 5 June 2015 that was returnable on 9 July 2015. On that day, the Court adjourned the petition to 6 August 2015.
In the meantime, on 3 August 2015, the debtor, first, executed a proposal to enter into a personal insolvency agreement under which the trustee would receive a total of $60,000 and secondly, made a statement of affairs that he presented to the trustee. On that day, the trustee received a payment of $15,000 in respect of his right to indemnity for his fees and expenses of conducting any administration under s 188 of the Act. The proposal envisaged that the balance of the $60,000 would be paid by nine monthly instalments of $5,000, being the sum that would become available for distribution to the debtor’s creditors.
The grounds of opposition
The debtor’s grounds of opposition substantively raised the following contentions. First, at the meeting of creditors held on 24 September 2015, the majority (eight) of the creditors in number and in value, 75.48%, or $2,440,745.90 voted in favour of the agreement, while the other four, in value 24.52%, or $793,031.65, voted against. Liquidators of three companies with which the debtor was associated (Curlewis Recruitment Pty Ltd (In Liq), CPP Personnel Pty Ltd (In Liq) and Solutions Recruitment Management Pty Ltd (In Liq) as trustee for The Solutions Recruitment Unit Trust) comprising 72% of all creditors admitted to vote had lodged proofs of debt admitted for the amounts of $1,048,807, $762,346.63 and $523,737 respectively (totalling $2,334,890.63) to vote based on insolvent trading claims under the Corporations Act 2001 (Cth). The 3% balance of the creditors, with debts with a value of about $106,000, who voted in favour of entry into the personal insolvency agreement were, in the main, related to the debtor.
Secondly, the Commissioner had been admitted to proof for his judgment debt and interest in full, but this had included about $510,000 in respect of director penalty notices concerning withheld PAYG or group tax obligations due to the Commissioner by Curlewis Recruitment, of which the debtor was the director and shareholder. It owed those debts in respect of tax deducted, but unremitted, from employees’ wages and that this was the same liability as had been included in that company’s liquidator’s proof of debt that the trustee had accepted.
Thirdly, the return to creditors would be better under the agreement than in a bankruptcy. Among other matters, the third ground suggested that the debtor had been unsuccessful in his conduct of entrepreneurial business ventures, but that the “substantial majority, if not all of the Total Claims, were not the product of an excessive or lavish lifestyle maintained by [the debtor]”. This argument does not appear to have been pressed in the final submissions, when the debtor’s counsel made submissions concerning his client’s conduct in the three weeks before the debtor approached the trustee with a proposal for his agreement, to which I shall come in due course. Counsel said that the expenditure of the debtor “in the periods leading up to his bankruptcy [sic: scil: proposing his personal insolvency agreement] is materially something that one might well describe as something that would cause a Kardashian to blush”. I understood that to be a reference to a television or media personality known for her lavish lifestyle.
Fourthly, the then current (updated) proposal was that the debtor would arrange for contributions totalling $90,000 to be applied to the payment of his debts, so that creditors would receive a return of between 1.6 to 1.7 cents in the dollar. As I will explain, that prospective return has been increased by subsequent amendments to the agreement which the debtor has procured. Fifthly, there were no circumstances to require any substantial or specific investigation into the debtor’s affairs so as to warrant a sequestration order.
The trustee filed a submitting appearance except as to costs, and has undertaken not to make any distributions under the agreement until the resolution of these proceedings.
Immediate background leading to the entry into the agreement
On 27 August 2015, the trustee’s first report to creditors examined the debtor’s then proposal that $60,000 would be made available to his creditors for the purpose of satisfying his debts. That would have resulted in a return between 1.05 to 1.72 cents in the dollar. The trustee recommended to the creditors that they vote against that proposal.
On 4 September 2015, the debtor proposed to contribute an additional $30,000 and informed the trustee that five of the related parties entitled to prove in his agreement would not do so. In that circumstance, the trustee recommended that the creditors approve the agreement, noting that the return would be between 1.5 and 4.84 cents in the dollar. He stated that that return would be based on proofs, totalling $2.6 million, admissible on the known material in the agreement that would be pursued, leaving aside the five parties related to the debtor who were not to prove, whereas if a bankruptcy occurred, creditors entitled to prove would be able to make claims totalling $5.175 million, and that in a bankruptcy there would be the likelihood of a nil return to creditors.
The first meeting of creditors occurred on 7 September 2015. The liquidators of Curlewis Recruitment, CPP and Solutions Recruitment filed proofs of debt with the trustee very late, claiming, as I have noted, that the debtor had liabilities totalling over $2.33 million to those companies in respect of insolvent trading while he was a director of each. The trustee adjourned the meeting to 24 September 2015.
On 11 September 2015, the trustee wrote to the creditors advising them that, in light of the new information from the three liquidators, the likely return to creditors would now be between 1.39 to 2.43 cents in the dollar. He recommended that they vote against the proposal.
On 24 September 2015, the meeting occurred and the creditors voted by a bare margin in favour of the entry into the agreement, which then occurred.
The trustee’s reports concerning the debtor’s financial conduct
The trustee’s reports disclosed that the debtor was a director, or former director, of 11 companies, including Curlewis Recruitment, CPP and Solutions Recruitment, the liquidators of which had filed proofs of debt with the trustee. The reports also disclosed that, in a vague and unspecified way, the debtor had an association with Bridge Street Consulting Pty Limited that had been paying his rent of $1,700 per week at the time that he entered into the personal insolvency agreement. I shall return to that later. Bridge Street Consulting lodged a proof of debt for $129,740. The trustee admitted that proof to vote at the 24 September 2015 meeting for $91,000. Bridge Street Consulting was one of the three related parties whose votes carried the resolution.
The debtor was a director of Curlewis Recruitment from 1 July 2013. As I have noted, its liquidator filed a proof of debt with the trustee for $1,048,807 in respect of alleged insolvent trading activities by the debtor. The Commissioner imposed on the debtor director penalties in respect of Curlewis Recruitment’s unfulfilled taxation obligations for the seven-month period 1 August 2013 to 28 February 2014. As at May 2016, the debtor owned all of the shares in that company.
The debtor was also a director, but not a shareholder of Solutions Recruitment from 1 July 2009. Its liquidator filed a proof of debt for alleged insolvent trading liabilities of the debtor in the sum of $1,536,528 and a further claim for $15,000 on a personal guarantee. The liquidator of CPP filed a proof of debt for alleged insolvent trading liabilities of the debtor for $332,044. The debtor was a director of CPP from 15 April 2014.
It is safe to infer that as one company failed, the debtor incorporated or traded through another. On the material before me, each of Curlewis Recruitment, CPP and Solutions Recruitment appears to have a claim against the debtor in respect of his failure to ensure that each company met its taxation obligations, when it was not in a position to do so, but nonetheless continued trading. That conduct is consistent, on the evidence before me, with his behaviour in relation to his own personal regard for meeting his financial obligations and acting responsibly.
Mediablo Pty Limited was another company of which the debtor was a director from 26 June 2006, and in which he held a 100% shareholding at the time of the trustee’s first report. In his first report, the trustee noted that the debtor did not answer the question in his statement of affairs regarding involvement in any trusts and the trustee stated that: “… he has since confirmed that he is not aware of being involved in any trusts.” That picture changed when the trustee made his report of 11 September 2015. By then he had discovered that the debtor was associated with Solutions Recruitment that was the trustee for the Solutions Recruitment Unit Trust and a creditor of his estate and that the debtor may also have been involved in three other trusts in the previous 15 years namely, Mediablo which was a trustee of a trust and two other trusts, one known as the King Family Trust and the King Family Trust No 2. The debtor advised the trustee that each of those three trusts was dormant and, to the best of his knowledge, never used.
The trustee also had written to the debtor’s previous accountants to seek particulars of any trusts previously formed. They had responded that they had no documents relating to the affairs of the debtor, including the trusts to which the trustee’s report referred.
Before the first creditor’s meeting the trustee had been able to make some investigations and, by the time of the vote on 24 September 2015, he had made further investigations, and the debtor had provided further information to him that corrected some of the matters to which I have referred.
The events after 24 September 2015
The Commissioner took some time, that was not explained, before he filed his application to set aside the agreement on 22 March 2016.
On 2 June 2016, about three weeks before the hearing fixed for 22 June 2016, the debtor proposed to increase his contribution to the agreement by a further $100,000, $40,000 of which was to be payable within 28 days of creditors accepting the variation and the balance by instalments of $5,000 per month for 12 months thereafter. The trustee reported that the return to creditors would be increased to 3.3 cents instead of a return, on information then available, of about 1.56 cents in the dollar. The debtor also proposed to amend the agreement so as to enable the trustee to examine, under s 81 of the Act, transactions antecedent to the execution of the proposal for the personal insolvency agreement, as would have been the case were the debtor to be made bankrupt. Up to that time, the agreement had excluded the trustee from being able to conduct examinations. None of the creditors objected to these amendments and they took effect on 17 June 2016.
At the beginning of the first day of the hearing on 22 June 2016, counsel for the debtor announced that the debtor undertook that if the agreement were not set aside, he would seek promptly to have the agreement amended to include, as a further contribution, the income he earned from 5 August 2015 during the period of the agreement remaining in force.
The debtor applied today (8 July 2016) to re-open his case to lead evidence that he, in fact, had acted on that undertaking and that, on 29 June 2016, the trustee had written to creditors informing them of this, following the debtor having made the offer to the trustee to include his income on 24 June 2016. I permitted the re-opening as I considered it to be in the interests of justice to do so. The trustee then reported that the estimated return to creditors, in light of the new information, was 3.12 cents. The trustee noted that the value of the contributions that the debtor had volunteered to make in respect of his income was unknown. In his first report to creditors of 27 August 2015, the trustee, on the information known to him then, estimated that the debtor’s obligation to make contributions, from his income, were he to become a bankrupt, would have been in the order of $21,000 per annum. The trustee made that estimate after taking into account that the debtor was then living in a house, the weekly rental of which was $1,700 and the rent for which, the trustee noted, was provided by family assistance. The trustee also advised the creditors, in his report of 29 June 2016, that he estimated that his remuneration and expenses would increase by a further $5,500 and that the estimated return to creditors would reduce from 3.3 cents to 3.12 cents if the new variation were accepted.
The debtor’s statement of affairs
The debtor gave evidence that he completed his statement of affairs himself and without assistance. The statement of affairs had numerous inaccuracies that raise serious concerns as to, among other matters to which I will come, the reliability of the document as a whole.
First, the debtor answered “no” to the question whether he had a spouse or partner, when the truth was, that he did have a partner. Secondly, as I have noted, he answered “no” to the question as to whether he had had ever been a unit holder or beneficiary of any trust in the last five years, an answer that was, again, inaccurate. Thirdly, he said that his gross wages and salary before tax from his current employer, Curlewis Recruitment Holdings Pty Limited, totalled $70,000 per annum and that he was currently employed, as was the case, with a net income after tax of $51,800 (although because of the poor quality of the copy of the statement of affairs in evidence it may be that he wrote $57,800, but nothing turns on whichever after tax figure that he in fact included).
In another answer in cross-examination to a question requiring an estimate of his income before tax for the past 12 months from his employer, he said that had been $100,000 but that he expected in the next 12 months to receive $70,000. Each of those statements was false, as he admitted in evidence after I granted a certificate under s 128 of the Evidence Act 1995 (Cth). The debtor’s salary until two weeks before completing his statement of affairs was about $72,000 per annum, but that had been increased from 23 July 2015, as his bank statement showed, to about $100,000 per annum. In his evidence before me he sought to explain that discrepancy as follows:
Is there any good reason why you would agree to take a $30,000 salary cut?---As I recall, I – I – I thought that that was the maximum allowed under insolvency.
HIS HONOUR: Well, sorry, what do you mean you thought it was the maximum amount under insolvency, when the question is what is your estimate of your gross salary that you will earn over the next 12 months, or your gross income?---Sorry, could you repeat the question?
Sorry. The – you said that you thought that was the maximum you could earn in insolvency?---Mm.
But the question in the form is your gross – what do you estimate your gross wages and salary before tax will be over the next 12 months from your employer?---And I estimated that it would have been 70,000.
Well, how did you come to that estimate?---I believe, as I said, there was – I read somewhere that there was – the maximum allowable.
Allowable for what?---For bankruptcy or insolvency. (emphasis added)
Thus, he gave an estimate of his income for the next 12 months of $70,000, even though he knew that he was earning $100,000 at the time he made that false statement of his estimate.
Fourthly, the debtor answered “no” to question 16 in the statement of affairs which was:
Do you or any member of your family receive or expect to receive any benefit from any other person or entity? (include rent, low interest loans, payment of your expenses or children’s education).
In fact, he knew that the whole of his subsided rent of $1,700 per week (being the weekly equivalent of about $88,400 per annum) exceeded his estimates of his yearly salary before tax, until two weeks before he signed the agreement and statement of affairs. It is unclear whether the source of the rental payments was from Bridge Street Consulting or some arrangement that he was unable to identify. He did not clarify on what basis or by whom his rent was paid by someone else other than him, as the following evidence showed:
Were you paying any proportion of your rent?---No, the – no, I don’t – I – I don’t believe I was.
….
Mr King, who held the lease for the premises? The lease is in my name.
And your evidence is that [Bridge Street Consulting] contributed to the payment of the rent?---That’s correct.
And the rent was $1700 per week?---That’s correct.
And who else was contributing to the payment of the rent, Mr King?---At that time, I’m – to be honest with you, I cannot – I can’t remember exactly who was contributing to the rent. (emphasis added)
I do not believe that evidence.
Fifthly, in answer to question 18A, as to what he believed the main cause of his insolvency to be, he ticked the “adverse legal action” answer, rather than the possible answers “gambling, speculation and extravagance in living” or, “excessive use of credit facilities, including losses on repossessions, high interest payments and pressure selling”. He did not answer question 18B concerning business-related causes of his insolvency that stated it “only applies if you previously operated a business”, despite his having operated at least three companies then in liquidation that were, or were likely to be, making insolvent trading allegations against him, and what he knew to be the basis of the Commissioner’s judgment debt against him that comprised some of those liabilities in respect of his conduct of Curlewis Recruitment.
In answer to question 18C, “When did you first have difficulty paying your debts?” he identified June 2015. Given that the Commissioner’s judgment debt had been entered on 5 December 2014 and that there was no possibility, on the material he provided in his statement of affairs, of his ever being in a position to pay that, I am again satisfied that that answer was false to his knowledge. Moreover, the judgment debt comprised about $140,000 in respect of his unpaid taxation liabilities for the four years of income ended 30 June 2007, 2008, 2009 and 2010. That sum partly comprised general interest charges for unpaid tax and partly comprised unpaid tax, although some of his taxation liabilities had been paid.
Sixthly, the debtor also falsely answered “no” to each of questions 21, 33 and 37, in the statement of affairs, which read:
21.In the past 5 years, have you operated a business as a sole trader, via a partnership, via a company, or a trust?
33.Have you sold, transferred, or given away any assets worth more than $1000 in the last 5 years?
37.Other than your general household furniture, do you own any other assets or items of value? (eg jewellery, camera, artworks, antiques, copyrights).
The debtor’s negative answer to question 21 was false to his knowledge because he had operated at least three businesses through companies, namely Curlewis Recruitment, CPP and Solutions Recruitment.
The negative answers to questions 33 and 37 were also false to the debtor’s knowledge for the following reasons. The debtor was cross-examined about charges he incurred on his American Express credit card account for the period 14 July 2015 to 13 August 2015. It appeared that in the seven days up to 20 July 2015, (the account included items for 13 July 2015) when his use of the card ceased, he had spent $25,183.69. Bearing in mind that the return date for the Commissioner’s creditor’s petition was 6 August 2015, this level of expenditure in itself is remarkable. However, his purchases were, as his counsel conceded in argument, extravagant. For example, on 14 July 2015 the debtor purchased, from mrporter.com London, luggage worth $4,263.43. When asked what that luggage was, he said that there were three suitcases, two of which he gave to his partner.
On 15 July 2015, he purchased, from the Apple store, a MacBook, or MacBook computer for $906. Accordingly, he answered falsely one or both of questions 33 and 37, concerning whether he had transferred or given away any asset worth more than $1,000 or owned any assets of value. On 16 July 2015, he purchased, from Williams-Sonoma, cookware worth $2,420. On 17 July 2015, he purchased a laptop computer from the Apple store for $2,329. He gave some evidence to suggest that one of the computers may now be in the possession of a business. That again was an asset worth more than $1,000 that he knew that he owned or had transferred, which he did not disclose.
On 16 and 17 July 2015, he paid the Group Darlo a total of $2,800 which he said was for staff drinks and a dinner. On 17 July 2015, he went to Catalina Restaurant in Rose Bay and spent $1,263.50. Also, on 16 July 2015, he purchased his yearly family health insurance cover at a cost of over $6,700, that provided healthcare cover for himself, his partner and his infant son.
By the end of his mid-July 2015 spending spree, the debtor owed American Express $83,305.72, being the total of his new purchases together with what had been the opening debit balance of $56,351.49 recorded in the statement of account. It is plain, on the evidence, that the debtor had no possibility of meeting the debts for the purchases that he made between 13 and 20 July 2015, as and when they fell due, when he incurred them.
Moreover, the debtor disclosed in his affidavit evidence some of his bank statements. These included statements for an account that he operated with Commonwealth Bank of Australia that disclosed the information set out in the table below.
Quarterly period
Total Debits
Total Credits
1 November 2014 to 31 January 2015
$ 53,668.50
$ 55,298.99
1 February 2015 to 30 April 2015
$ 44,483.84
$ 41,284.13
1 May 2015 to 31 July 2015
$ 58,894.53
$ 67,915.90
Total
$ 157,046.90
$ 164,499.02
The statement for the period between 1 August 2014 and 31 October 2014 lacked the last page, on which the quarterly totals appeared, but if the subsequent credit entries for the next three quarters are annualised, they would be about $220,000. However, for the whole of that period apart from the last two weeks, the debtor was earning a weekly salary, net of tax, of $1,401.08 that was deposited into his bank account, which equated to about $72,000 per annum. There is no explanation before me or the trustee as to the source of the balance of the credit entries in this one bank account. That is in addition to the fact that, as I have said, someone else was paying the rent for his home totalling over $88,000 per annum for the whole of that period.
From what appears from his bank accounts in evidence, the debtor’s receipts seem to have exceeded his salary by about three times what he was earning, excluding the benefit he had from the payment of his rent.
Moreover, on 14 July 2014, the debtor received a transfer of $10,000 from another Commonwealth Bank account entitled “A Ruwald Bali Shop”. In affidavit evidence the debtor said that he had some investment in a shop in Bali but that this was worthless. He also said, when cross-examined, that he thought the two suitcases that he had given to his partner were in Bali and that the remaining one was in his possession.
Next, on 3 August 2015, the very day that he went to see the trustee to sign his personal insolvency agreement, his bank statement disclosed that he transferred $9,000 out of it to another Commonwealth Bank account. When asked about what that transfer was for, he said he was not sure who the recipient was. The effect of that transaction had been to leave a credit balance of only $500 in his bank account, which is the paltry sum that he disclosed in his statement of affairs.
Seventhly, the debtor said that, before he signed and dated the declaration at the end of the statement of affairs, he read that s 267(2) of the Bankruptcy Act provided that a person must not make a declaration that the person knows to be false and he then declared that its contents were correct.
The statutory scheme
Relevantly, Pt X of the Bankruptcy Act provided that a debtor who desired that his or her affairs be dealt with under that Part, without his or her estate being sequestrated, could sign an authority in accordance with the approved form authorising a registered trustee, relevantly, to call a meeting of his or her creditors and to take control of his or her property (s 188(1)). Importantly, s 188(2C) provided that if the person authorised were, relevantly, a registered trustee, the authority signed by the debtor under s 188 was not effective for the purposes of Pt X unless, before the person authorised consented to exercise the powers given by the authority, the debtor gave to him or her a statement of the debtor’s affairs and a proposal for dealing with them under Pt X. Hence, the significance of the statement of affairs made on 3 August 2015 which the debtor declared to be true.
The controlling trustee had duties specified in s 190 that included the power in s 190(2)(d):
… to deal with the debtor’s property in any way that will, in the opinion of the trustee, be in the interests of the creditors.
By dint of s 190(5) the debtor’s property in relation to an authority given under s 188, meant all the property that would be divisible amongst his creditors under Pt VI of the Act, other than a presently irrelevant subdivision, as if a sequestration order had been made against him on the day of the signing of the authority. This included property that had been acquired or devolved on the debtor after that day, but, if a personal insolvency agreement were executed by him or her in accordance with a special resolution of a meeting of creditors, called in accordance with the authority, would not include the property that was acquired by or devolved on him or her on or after the day on which he or she executed the agreement.
Relevantly, s 231 applied the provisions of s 81, with any prescribed modifications in relation to a debtor who had executed a personal insolvency agreement, as if the debtor were a bankrupt. Thus, a trustee appointed under a personal insolvency agreement had the power under s 81 of the Act to summon the debtor and others for public examinations in relation to the debtor’s affairs. However, the terms of a personal insolvency agreement, such as that originally signed on 24 September 2015, could exclude the use of s 81 to conduct examinations.
Importantly, s 222(1) provides:
222 Court may set aside personal insolvency agreement
Setting aside on grounds of unreasonableness etc.
(1)If a personal insolvency agreement is in force, the Court may, on application by:
(a) the Inspector General; or
(b) the trustee; or
(c) a creditor;
make an order setting the agreement aside if the Court is satisfied that:
(d)the terms of the agreement are unreasonable or are not calculated to benefit the creditors generally; or
(e) for any other reason, the agreement ought to be set aside.
(emphasis added)
In addition, the Court has a further power, on which the Commissioner did not rely, under s 222(5) where on application by, among others, a creditor, to make an order setting a personal insolvency agreement in force aside if the Court is satisfied that the debtor had relevantly omitted a material particular from his statement of affairs or included an incorrect and material particular in that statement (s 222(5)(e)). The Court can only make an order under s 222(5) if it is satisfied that it would be in the interests of creditors to do so (s 222(6)).
A trustee or creditor may include in an application for an order under s 222(1), a further application, as the Commissioner has done in this case, for a sequestration order to be made against the estate of the debtor and the Court has power to make that order immediately if it sets the agreement aside (s 222(10). The Commissioner filed a consent to act by the current trustee in the event that that outcome occurs.
The debtor’s submissions
The debtor argued that the agreement, with the amendments he had caused to be made to it, offered creditors a real and substantive return, in comparison to the likelihood of the debtor’s creditors receiving nothing were he made bankrupt. That was because, first, a number of potential creditors, who were related to the debtor, would not seek to participate in distributions by the trustee under the agreement and, secondly, the debtor’s father, who has supported his lifestyle to some degree, would be making or procuring the financial contributions to discharge the promise to pay creditors the $190,000 now offered under the agreement, together with the debtor’s offer of whatever income contributions he may be liable for from 3 August 2015.
The debtor also submitted that, while he may not have been a good historian as to his dealings in recollecting what he had done in his spending or the circumstances in which he or his companies had operated in the past, he had cooperated with his creditors and the trustee in seeking to make money available to satisfy, in part, the debts that he had previously incurred.
He argued that it would be entirely speculative to think that there were any undisclosed assets of value that a trustee in bankruptcy might be able to discover that would in any way enhance the, or provide a possible greater, return to creditors than was offered under the agreement. He contended that the trustee’s current ability to have him examined, which the latest amendments to the agreement will allow, if given effect, would allay any concern that he was seeking to conceal or hide anything that might be available to his creditors. He argued that with all the resources available to him, the Commissioner had not been able to point to or discover any basis for thinking that there were undisclosed assets that may be available to creditors, including in respect of any undisclosed or unknown trusts. He relied on what Lockhart J had said in Re Williamson; Ex parte Wearne (1980) 31 ALR 598 at 606, in a passage that French J, with whom Jenkinson and Spender JJ agreed, cited with approval in Augustyn v Putnin (1988) 83 ALR 514 at 520, namely:
I must take a practical view and not indulge in speculation as to theoretical possibilities of other assets emerging or other creditors possibly coming to light if the debtors are made bankrupt. There is nothing to suggest that either possibility would become a reality.
The debtor submitted that, on the material in evidence, this was the position here. Moreover, the debtor argued that he had made attempts to put before the Court details of his financial records that were available so as to allay any concerns that might apply as to whether he had now made a full disclosure. He contended that it was not possible to assume that he had any assets that were hidden or would come to light as a result of any investigation that might be undertaken by a trustee in bankruptcy, that would be any different to those which the trustee might undertake in accordance with the authority now given by the debtor to examine him and others under s 81 of the Act.
In particular the debtor relied on what the Full Court had said in Hingston v Westpac Banking Corporation (2012) 200 FCR 493 at 511 [91]-[92] in relation to the votes of 72% of the creditors representing the three liquidators. He argued that the liquidators had voted as practical people of business who, having regard to their experience and knowledge about the possibilities of investigating and pursuing assets not disclosed by debtors, had taken the view that the earlier and much less valuable 24 September 2015 version of the personal insolvency agreement was one which was commercially acceptable to them.
Consideration
Relevantly, Greenwood, McKerracher and Nicholas JJ explained the principles apposite to the exercise of the power to set aside a personal insolvency agreement under s 222(1)(d) of the Act in Hingston at 200 FCR at 510-511 [90]-[93]. They approved of the primary judge’s summary of those principles in that case (at 505 [58]), namely:
… in assessing whether the composition is unreasonable, or not calculated to benefit creditors generally, the Court has regard to the amount of the composition as compared with the debts owing by the debtor; in making that comparison the relativity between the amount of the debts incurred and the proposed composition might suggest that the proposal is so trivial or so disproportionate (as, for all practical purposes, the creditors are receiving nothing or a negligible amount) that the administration of the estate is “better dealt with by way of bankruptcy” with an investigation by the Trustee in bankruptcy exercising relevant powers; the relativity of the amount of the debts owing, to the proposal made, is relevant but not determinative; whether any payments have been made to creditors or to the Trustee of the bankrupt estate is also relevant; and, the nature of the relationship between the debtor and those creditors who voted in favour of the composition is relevant. (references omitted)
Their Honours said that a calculus of factors must be taken into account when considering the exercise of the powers to set aside a personal insolvency agreement under s 222(1)(d) including (200 FCR at 511 [91]-[92]):
… whether, from the perspective of all creditors substantial further investigation was required of a particular transaction or the affairs of the debtor more generally; whether some particular creditors may have dominated the vote in circumstances where there may be questions about the relationship between the debtor and those creditors; whether the composition proposal is properly regarded as trivial resulting in a negligible distribution to unsecured creditors; the relativity between the positions under an administration in bankruptcy and a distribution under the composition proposal; and the other matters already mentioned and taken into account by the primary judge.
Thus, the vote of the creditors is not paramount in an absolute sense. Great respect will be given to the views of practical people of business who have come together to make a decision on the composition proposal in a properly informed way. However, a discretion is conferred on the Court to set aside the composition (and the annulment of the bankruptcy) in the circumstances, relevantly, for present purposes, of s 222(1)(d). (italic emphasis in original, bold emphasis added)
The Court also has a further discretion to set aside an agreement under s 222(1)(e) “for any other reason”. The nature of that discretion is not circumscribed directly in the Act. In Owners of “Shin Kobe Maru” v Empire Shipping Co Inc (1994) 181 CLR 404 at 421, Mason CJ and Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ explained that:
It is quite inappropriate to read provisions conferring jurisdiction or granting powers to a court by making implications or imposing limitations which are not found in the express words.
French J said, in Augustyn 83 ALR at 521, in relation to the power to set aside a personal insolvency agreement based on a ground in s 222(5), that it was not necessary to demonstrate a positive financial benefit to creditors in order to engage the Court’s power to set aside an agreement. He approved what Toohey J had said in Re Emanuel George Doukidis: Ex Parte Consolidated Construction Pty Ltd [1985] FCA 289 at 7-8. Toohey J had held that it was enough if the evidence justified an inference that there were likely to have been undisclosed assets and that the creditors may be better off if the composition were set aside. He held that it was not necessary that the Court be satisfied that there would be a financial benefit to creditors from an order avoiding or setting aside the deed. Toohey J cautioned that the Court must have regard to all relevant matters, including the interests of the creditors and the public.
French J referred to the breadth of interests that were to be considered under s 222(5) approving what Neaves J had said in Re Moulton; Ex Parte [The Law Society of New South Wales] Beneficial Finance Corporation Limited [1984] FCA 451 at 25, namely:
Although it cannot, on the material before the Court, be postulated that the creditors will necessarily be financially better off if the debtor’s affairs are administered in bankruptcy, the material before the court as to the debtor’s property, trade dealings and affairs makes plain that it would be in the interests of the creditors that there be a full investigation of the debtor's affairs which the making of a sequestration order will facilitate. (emphasis added)
And in Re Mills; Ex Parte Lloyd’s (1997) 73 FCR 551 at 559G-561A, Merkel J discussed a number of other principles that can be relevant in deciding whether to set aside an agreement. I agree with what Yates J said in New Age Constructions (NSW) Pty Limited v Etlis (2013) 11 ABC (NS) 542 at 554 [61], namely:
… the true breadth of the discretion conferred on the Court by s 222(1) to superintend personal insolvency agreements is signified by paragraph (e) which permits the Court to set aside the agreement if satisfied that, for any other reason, it ought to be set aside. In my view, this plainly permits the Court to take into account a range of considerations, including those whose cumulative effect shows that the agreement should be set aside. Those considerations may well include factors that cast real doubt on whether the terms of a personal insolvency agreement are reasonable or are calculated to benefit the creditors generally to support a separate finding that one or other of the requirements of s 222(1)(d) has been met. (emphasis added)
The fact is that s 222(1)(e) confers, as the High Court identified in Shin Kobe Maru 181 CLR at 421, a discretion that is, relevantly, unconfined. No doubt, one of the factors that might be taken into account is that there are other grounds in s 222, including ss 222(1)(d) and 222(5), that give the Court specific bases on which to set aside agreements. But that does not mean that the Court’s discretion under s 222(1)(e) is to be confined by words that are not express in that provision of the Act.
The debtor is nearly 43 years old. He is a recruitment consultant. He obviously has some business abilities and has been able to manage corporations that have turnovers that were capable of generating the very substantial alleged insolvent trading liabilities for which he is claimed to be responsible.
In the present case, the evidence demonstrates that the debtor has been able to sustain a very comfortable, indeed lavish, lifestyle with significant spending well beyond his disclosed means. In the nine months immediately preceding his executing the agreement, he became liable under the judgment debt and had deposits into his bank account of three times what he earned. His rental of very expensive accommodation was subsidised entirely. He gave no explanation of why his rent was being paid or who was paying it, but I do not believe that he did not know these matters. No one gets their rent for expensive accommodation paid entirely without knowing how or on what basis that rental is paid.
I am satisfied the debtor was not being frank or candid in his disclosure in his statement of affairs, or in his evidence, even with the benefit of a certificate under s 128 of the Evidence Act. My concern is reinforced by the debtor’s other failures to complete his statement of affairs honestly, his unexplained resources and spending, his earlier failures to pay the tax debts that he had directly owed to the Commissioner under the personal assessments included in his judgment debt, and his administration of the three companies, the liquidators of which have made significant insolvent trading claims against him.
I am of opinion that these are serious matters that require examination in a public and open way to determine exactly what the debtor’s assets and liabilities are. It is also troubling when the trustee enquired of the debtor’s former accountants they responded that they had no documents at all, despite the fact that the debtor had caused to be incorporated, presided over, or been involved in, 12 companies, all of which appear to have carried on businesses for various ventures in which he was involved. In addition, the debtor established three or four trusts, yet he asserted that those trusts have done nothing and, apparently, have no assets. If that be correct, it begs the question of why the debtor found it was necessary to establish a second or subsequent trust after the first one, although it may possibly be answered by the fact that the debtor may have a very bad memory about how many dormant trusts he had.
Whatever be the position, the debtor’s involvement in his companies and trusts requires investigation, as does his involvement with the Bali enterprise. That business venture resulted in the payment to his Commonwealth Bank account of $10,000 in July 2014. It may or may not be coincidental that the expensive luggage, that he purchased for his partner in July 2015 immediately before he saw the trustee to propose executing his agreement, is also in Bali. The debtor did not give any substantive explanation about the Bali enterprise or why the luggage was out of Australia in Bali nor did he disclose anything in his statement of affairs about the Bali business or the luggage.
Moreover, he made a payment of $9,000 that effectively cleared his bank account immediately before completing his statement of affairs and seeing the trustee on 3 August 2015 to propose the agreement. He gave no explanation about what that payment was or to whom it was made.
None of his bank statements after the page dealing with the transactions on 3 August 2015 were in evidence at the hearing on 22 June 2016. However, those at least became relevant in relation to his most recent suggestion that he would make income contributions from 3 August 2015, for which he might be assessed, available under his latest proposal.
The profligacy of the debtor’s spending over $25,000 in a week in mid July 2015 occurred in circumstances where he knew that the creditor’s petition was to be heard three weeks later, and in which he spent significant sums acquiring assets and transferring some worth, to his knowledge, more than $1,000 to others as well as spending other sums on entertainment of an extravagant amount. These matters demonstrate that, first, that the debtor did have assets that he recently acquired but did not disclose and, secondly, the debtor was maintaining a lifestyle for some time that was beyond his apparent means or what he was prepared to disclose about those means, both in his statement of affairs and evidence. No doubt there may be some revelation at some point of the assistance that the debtor received from his father, but at the moment these matters are substantially unexplained.
The debtor made numerous, significant false statements in his statement of affairs, including his denials that he had a partner, had transferred or given away assets in the previous five years, let alone in the previous three weeks, worth more than $1,000, such as his laptop computer worth $2,329 and the luggage and that he owned items of value, such as his own new suitcase worth more than $1,000, his other $906 Apple computer, and the cookware. In addition, he did not disclose his involvement in whatever the business is in Bali.
I am of opinion that the debtor has not been transparent in revealing his true financial position, particularly in his evidence before me. As I have said, to suggest that he did not know what the arrangements were about the payment of his rent defied credulity. He has very significant obligations alleged against him by three liquidators for insolvent trading. There is no evidence that those liquidators have funds with which to pursue any of those claims. If the companies are insolvent to the degree of the claims for which the three liquidators were admitted to proof at the meeting of 24 September 2015, in the absence of other evidence, I infer that they had no such funds. Accordingly, I infer that each liquidator exercised his commercial judgment to obtain a return in the way he did because he did not see a prospect of getting one unless, which did not appear likely, a creditor were prepared to fund his conducting examinations of the debtor and others in the liquidation to investigate whether or not to undertake recovery actions.
The debtor also argued that there was not certainty that the Commissioner would fund the trustee to conduct public examinations were he made his trustee in bankruptcy. I reject that argument. It is safe to infer that the Commissioner’s purpose in bringing the proceedings is to achieve just that, as Mr Pownall, an officer of the Commissioner, suggested.
I am satisfied that the public interest requires that, in the circumstances of this case, a proper investigation of the property, affairs and trade dealings of the debtor should be undertaken through the medium of a bankruptcy. The material before me suggests that the debtor’s affairs have not been fully or transparently disclosed to the trustee, his creditors or to the Court.
The very large unexplained surplus of the debtor’s receipts over his income, his non‑disclosure of assets, the existence of trusts for which he and his accountants have produced no documents, and the Bali business suggests that there are matters that require investigation and one or more of those may offer some benefit to creditors through a bankruptcy investigation. Moreover, the lack of evidence as to how the debtor proposes to fund his obligation, that he recently proffered, of making income contributions for the period from 3 August 2015 to the end of the period of operation of his agreement, leaves more questions about what, if any, utility that proposal would have for creditors.
I am satisfied, having regard to the complexity of the debtor’s affairs and the lack of accurate information that he has provided, that any investigation of those matters will be lengthy and complex. The Commissioner is in a position to ensure that such an investigation is able to take place, fully funded.
In contrast, if the agreement remains in place, the trustee would only be obliged to ensure that any assets that he collected or discovered, if there are any, would be sufficient to satisfy the debtor’s limited obligations under the agreement. In the statement of affairs, the debtor was not prepared to identify that he had, or previously had, any assets other than shares in insolvent companies or an interest in allegedly dormant trusts. He disposed of a $9,000 cash asset that was in his bank account on the day of making the statement of affairs that he did not explain in evidence.
All of the matters to which I have referred above demonstrate that there is a real possibility that the debtor has assets that he is not prepared, or may have forgotten, to disclose.
In addition, moneys to perform the debtor’s obligations under agreement appear to have been sourced from the debtor’s family or related interests. Had those related interests not voted, the agreement would not have been passed and the creditor’s petition would have proceeded, as I consider it should have. This is a further reason why the agreement should be set aside.
Conclusion
In all of the circumstances, I am satisfied that, for the purposes of s 222(1)(e), the agreement must be set aside. This is a case in which a bankruptcy administration of the debtor’s affairs for the benefit of his creditors generally and the public should be undertaken in the public interest.
I certify that the preceding eighty-two (82) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares. Associate:
Dated: 7 November 2016
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