For the Good Times Pty Ltd v Boyle & Anor

[2009] FMCA 512

FEDERAL MAGISTRATES COURT OF AUSTRALIA

FOR THE GOOD TIMES PTY LTD v BOYLE & ANOR [2009] FMCA 512

BANKRUPTCY – Personal insolvency agreement under Part X – debtor’s contribution wholly applied to remuneration and expenses of controlling trustee – not calculated to benefit the creditors generally – application to set aside – discretionary considerations – agreement set aside and sequestration order made.

Bankruptcy Act 1966 (Cth), ss.5, 6A, 40(1)(i), 40(1)(m)(i), 120, 121, 121A, 122, 123, 124, 125, 188(1), 188(2C), 188A(4), 189(1A)(d), 189AAA, 189A, 190A(1)(A), 194A(2), 204(1), 222, 222(1), 222(1)(d), 222(1)(e), 222(5), 222(5)(e), 222(7), 222(10), 222(11), 222(12), 222C, 229, 230, 232, Pt.X
Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth), rr.4.06, 10.02, 10.04

For the Good Times Pty Ltd v Coltern Pty Ltd [2007] NSWSC 807
Metropolitan Demolitions Pty Ltd v Jim Gialouris & Ors [1998] FCA 936
Paton v Campbell Capital Ltd (1993) 46 FCR 30
Re NZI Capital Corporation Limited v Lancaster [1991] FCA 334, (1991) 30 FCR 441

Applicant: FOR THE GOOD TIMES PTY LTD
ACN 096 931 341

First Respondent: NORMAN BOYLE

Second Respondent: FRANK LO PILATO

File Number: SYG 1286 of 2008

Judgment of: Smith FM

Hearing date: 25 May 2009

Delivered at: Sydney

Delivered on: 10 June 2009

REPRESENTATION

Counsel for the Applicant: Mr M Hodges

Solicitors for the Applicant: Mark Hodges Solicitor

Counsel for the First Respondent: First Respondent in person

Counsel for the Second Respondent: No appearance by or on behalf of the Second Respondent

Counsel for the Supporting Creditor: No appearance by or on behalf of the Supporting Creditor

ORDERS

1. The personal insolvency agreement executed by the first respondent on 5 May 2008 pursuant to Part X of the Bankruptcy Act 1966 (Cth) is set aside under s.222(1).

2. A sequestration order is made under s.222(10) against the estate of NORMAN CLIFFORD BOYLE.

3. The applicant’s costs, including all reserved costs, be taxed and paid from the estate of the first respondent in accordance with the Bankruptcy Act 1966 (Cth).

4. The Court notes that acts of bankruptcy occurred on 11 December 2007 under s.40(1)(i) and upon the making of this order under s.40(1)(m)(i).

5. Note that a consent to act as trustee has been signed by Maxwell William Prentice and will be lodged with the Official Receiver in Sydney.

6. The applicant must within 2 days give a copy of this order to the Official Receiver in Sydney. 

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 1286 of 2008

FOR THE GOOD TIMES PTY LTD
ACN 096 931 341

Applicant

And

NORMAN BOYLE

First Respondent

FRANK LO PILATO

Second Respondent

REASONS FOR JUDGMENT

1. For The Good Times Pty Ltd (“FTGT”) is the family company of Mr Junker and Ms Bondarew. It invested in a number of companies promoted by Mr Boyle, who was a professional property developer. He now owes FTGT more than $2m under a judgment of the Supreme Court of NSW which was ordered on 25 July 2007. He subsequently conceded that he was insolvent, and he owes all his creditors perhaps $28m. Assisted by Mr Lo Pilato, a trustee registered under the Bankruptcy Act, he proposed on 11 December 2007 that his affairs should be dealt with under Pt.X of the Bankruptcy Act 1966 (Cth), in a personal insolvency agreement by which he would contribute $40,000 towards payment of Mr Lo Pilato’s remuneration and costs, with the balance for distribution to his creditors. Three meetings of creditors were held before a requisite majority of creditors accepted the agreement on 16 April 2008, and it was signed on 5 May 2008. The creditors’ meetings also approved payments to Mr Lo Pilato which left nothing for distribution to Mr Boyle’s creditors. FTGT now asks the Court to set aside the Pt.X agreement, and to make a sequestration order against Mr Boyle.

2. The Court has power to set aside a Pt.X agreement on several grounds under s.222 or to terminate it under s.222C. In the present case, FTGT relies upon the grounds for setting aside under s.222(1)(d) or (e):

   (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. 

3. It also relies upon the ground under s.222(5)(e):

   (e)the debtor has: 

   (i)omitted a material particular from the statement of the debtor’s affairs given under subsection 188(2C) or (2D);

   or

   (ii)included an incorrect and material particular in that statement;

4. This ground is subject to s.222(7), which precludes the making of an order under s.222(5) “unless the application for the order is made before all the obligations that the personal insolvency agreement created have been discharged”.  In the present case, Mr Lo Pilato certified that “the terms of the personal insolvency agreement have been carried out and that the debtor has discharged all obligations created by the personal insolvency agreement” on 13 November 2008.  However, the present application was filed before that date, on 19 May 2008. 

5. Mr Lo Pilato must have been aware of the application to the Court soon after it was made, since he filed an appearance on 17 June 2008.  I was told at a directions hearing on 10 March 2009 that he wished to take part in the hearing.  However, on 30 April 2009 he filed a submitting appearance, and he has not participated in the proceeding, including by providing an affidavit or report to the Court. 

6. In circumstances which are obscure on the evidence before me, the application was repeatedly adjourned in the Registrars’ list before being referred to me on 10 March 2009. No application to dispense with service on Mr Boyle under s.222(12) had been made, and the application was served on Mr Boyle in January 2009. He has filed an affidavit which appears to show some professional assistance, but he represented himself at the hearing before me.

7. Notice to creditors under the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth) r.10.04 was given on 26 February 2009.  Although Mr Landrey, a significant creditor who claims to be owed more than $18m by Mr Boyle, filed an appearance on 6 March 2009 and attended the listing before me on 10 March 2009, neither he nor any creditor other than FTGT has applied to take part in the proceeding. 

8. Under s.222(10) a trustee or creditor who applies for the setting aside of an agreement may “include in the application” an application for a sequestration order, and “if the Court, on the first‑mentioned application, makes an order under this section setting the personal insolvency agreement aside, it may, if it thinks fit, immediately make the sequestration order sought”.  Under s.222(11), the making of such an application is “equivalent to the presentation of a creditor’s petition against the debtor, but the provisions of subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application”.

9. Although the original application did not seek a sequestration order, this was sought in an amended application filed on 25 March 2009.  The intention to include such a prayer had been foreshadowed to Mr Boyle, Mr Landrey, and the trustee at the listing before me on 10 March 2009, when I gave leave for the filing of the amended application.  I doubt that r.10.02 could now be found to have not been complied with, but, if so, I would dispense with compliance with that rule in relation to the original application.  I also do not consider that it is necessary to require further notice to be given to the other identified creditors, since they have had ample opportunity to keep informed as to developments in the proceeding after being served with Form 13 notices in February. 

The making of the personal insolvency agreement 

1. Mr Boyle’s indebtedness to FTGT arose out of events during 2001, when FTGT invested or lent $1.1m to Mr Boyle and his associated companies for investment in various subdivision projects in the Riverina area of NSW.  The circumstances were litigated before Young CJ in Eq, in proceedings where FTGT sued Mr Boyle, his companies, an accountant, Mr Hanley, and a real estate agent, Mr Woods, who were associated with him in some of his activities.  Mr Boyle did not participate in the three day hearing.  In For the Good Times Pty Ltd v Coltern Pty Ltd [2007] NSWSC 807, Young CJ found that his breach of shareholder agreements was “plainly established”, and said: “the document seems to have been considered by Mr Boyle merely as something that ‘the girls’ would type up when an investor needed assurance … he seems to have treated them as mere bits of paper to be churned out when needed to assist his fund raising” (see [92] and [95]).  He found that a series of false representations had induced FTGT to invest in Mr Boyle’s projects.  These included representations that joint venture opportunities were ready to commence, that they provided exceptional returns, that investors would be provided with security by second registered mortgage, that the companies owned or had equity in the relevant land, and that investors would receive high interest (see [230]‑[231]).  In the course of his judgment, he found at [176]: 

   Mr Boyle actually made most of the representations either by the advertisement he published, or in conversations with Ms Bondarew and Mr Junker.  He was clearly a person knowingly concerned with the making of the representations and I cannot see any material which would tend against making an order under s 82 of the Trade Practices Act against him. 

2. Elsewhere in his judgment, Young CJ made other findings against Mr Boyle which reflect seriously upon his business ethics.  For example, at [188]‑[189] he found: “The only inference that I can draw from the evidence is that Messrs Boyle, Woods and Hanley were promoters.  They all knew the way in which it was intended to raise funds and the form of the shareholders’ agreements.  …  I must infer that the various companies and Mr Boyle never intended to effect the represented mortgages or would only effect them if they saw fit to do so …”. 

3. Judgment against Mr Boyle in favour of FTGT was entered on 25 July 2007 in the sum of $2,178,008.  A bankruptcy notice was issued, but was unable to be served by hand on Mr Boyle.  Mr Boyle says that he was referred by a solicitor to Mr Lo Pilato in “early December 2007”.  Mr Lo Pilato then gave him advice about a Pt.X agreement. 

4. On 11 December 2007 Mr Boyle signed a proposal under s.188(1) of the Bankruptcy Act proposing that his affairs be dealt with under Pt.X by the execution of “a Personal Insolvency Agreement whereby I pay to the Trustee the sum of $40,000.00 which is to be paid within 14 days after the proposal being executed”. He also authorised Mr Lo Pilato to call a meeting of his creditors to consider his proposal. These actions constitute an act of bankruptcy under s.40(1)(i) of the Act. A later act of bankruptcy also occurs under s.40(1)(m)(i), upon the Court setting aside the Pt.X agreement.

5. Section 188(2C) provides that the authorising of a trustee is not effective unless the debtor has earlier given the trustee a statement of affairs, as defined by s.6A. A statement of affairs is then required by s.194A(2) to be tabled at the creditor’s meeting, with a “written statement identifying” any differences with the original statement.  In the present case, Mr Boyle gave Mr Lo Pilato a statement of affairs with his proposal, but there is no evidence that he ever tabled an amended statement of affairs with written statements identifying the substantially different information about his creditors which emerged prior to the meeting at which the proposed agreement was accepted. 

6. Mr Boyle’s statement of affairs claimed that his home, vehicle and other property was owned by a family trust and his wife.  He had no assets nor current income, but projected future income of $20,000 from self employment and an unknown employer.  He had previously entered a Pt.X agreement in 1992 [in fact, it was later discovered that he had been made bankrupt in 1993].  He had four unsecured creditors: the National Australia Bank for $326, Mr Landrey for ‘aprox $7m’, FTGT for approx $2.1m, and his current solicitor for ‘aprox $5,000’.  His statement of affairs referred to his having operated “many companies – all stopped trading.  Several deregistered – several in liquidation.  None of the companies have any realisable assets”.It said that no financial statement and tax returns had been prepared for the last 3 years. 

7. The personal insolvency agreement which was proposed in December 2007, was eventually approved and executed in the same terms on 5 May 2008.  It provided that “none of the debtor’s property will be available for the benefit of creditors with the exception of any property recovered by the Trustee under the antecedent transactions provisions”.  The “antecedent transactions provisions” are explained in s.188A(4), which applies the provisions of s.120 to 125 in relation to voidable earlier undervalued, etc, transfers of property. They do not encompass currently owned property of the debtor. The agreement provided that “the debtor’s income that is to be available to pay Creditor’s claims is $40,000.00”, to be paid within 14 days of the proposal being executed.  No conditions were attached to the operation of the agreement. 

8. Clause 8 provided that the money paid by Mr Boyle under the agreement was to be applied: first in payment of Mr Lo Pilato’s remuneration and expenses prior to his appointment as controlling trustee; secondly, in payment of his remuneration and expenses as controlling trustee; thirdly, in payment of incidental expenses, including legal fees payable in relation to the agreement; and fourthly, to creditors proportionately to their provable debts. 

9. Clause 5 provided: 

   In the event that the Debtor makes all payments in accordance with this Agreement and fulfils all obligations under this Agreement, the Debtor is released absolutely from all Provable Debts owed to Creditors. 

   This reflected the provisions of s.230. Moreover, s.229 has the effect that an agreement binds all creditors and bars them from taking any proceeding to recover a provable debt or proceeding with a creditor’s petition, whether they were aware of the insolvency agreement proposal or not.

10. Mr Lo Pilato signed his consent to his appointment as controlling trustee on 17 December 2007, thereby bringing the authorisation ‘into effect’ (see s.188(2C)). On 18 December 2007 he gave notice to the creditors identified by Mr Boyle in his statement of affairs pursuant to s.190A(1)(A). On 18 January 2008 he gave them notice of a meeting on 1 February 2008, and required the creditors to provide a proof of debt for their claims.

11. He enclosed a report under s.189A. This summarised Mr Boyle’s statement of affairs, including the four creditors. It offered no suggestion that Mr Boyle might own any additional property available to creditors. It suggested that no funds would be available to unsecured creditors “in a bankruptcy scenario”, but that if $40,000 were distributed under the Pt.X agreement they would receive a dividend rate of $0.13 based on total claims of $9,230,952.  This was explained: 

    The Trustee’s estimated remuneration under a bankruptcy scenario is higher than that to be approved under a Part X scenario on the basis that a bankruptcy administration requires the completion of further detailed investigations, a further report to creditors and additional compliance requirements under the Act, such as the completion of income contribution assessments for the three year period of the administration. 

12. The report recommended against acceptance of the agreement at the creditor’s meeting, but said that “further investigations should be conducted to allow me to recommend the best possible alternative for creditors”.  It invited creditors to advise “my office of any matters which warrant investigation”. 

13. This invitation was taken up by Mr Junker, who drew attention to nine possible creditors who had not been mentioned in the statement of affairs, to property which might have been undisclosed, and to several past transactions of Mr Boyle which might warrant investigation. 

14. Mr Junker also spoke with Mr Landrey, who told him on 2 January 2008 that Mr Boyle owed him “around $7 million”, but that “I’ll take any amount of money he puts on the table”.  On 30 January 2008 he told Mr Junker: “I think I told you that I’ve taken over one of the Boyle projects in Cairns.  …  Sure, I’ll take a hit of a few million but I’ll get some good money back from it.  …  I might ring Boyle to see what he’s prepared to offer for my vote.  And then I can ring you back to see if you’d increase your offer.  I could end up getting $50,000 or more from this”.  In a phone call which Ms Bondarew answered on 1 February 2008 while driving to the creditor’s meeting, he disputed his previous statements to Mr Junker, and threatened: “if you go saying that, I’ll ramp up this claim to a whole lot more than $7 million.  I’ll sort you out.  I’ll make sure of it”. 

15. Mr Landrey’s proof of debt was dated 30 January 2008, and claimed amounts of $610,360 and $7,585,424 under “personal guarantee pursuant to registered mortgage”, but it is unclear to me whether the attached documentation established these debts.  The extent and nature of Mr Landrey’s past and current business relationships with Mr Boyle was not clarified by any evidence to the Court from Mr Landrey.  According to a letter from Mr Boyle to Mr Lo Pilato dated 13 January 2008, Mr Boyle had been involved during 2005 in “other projects which had come on board in Queensland” which were “equity funded by Geoff Landrey.  …  Two of the three projects in Queensland were funded and construction commenced, however for a variety of reasons all projects are now sold or are mortgagee in possession.  …  Geoff Landrey as second mortgagee took over several of the QLD projects and suffered losses of over $7,000,000 the subject of my debt with him.  Geoff Landrey offered to pay For the Good Times aprox. 18 months ago $960,000 of the approx $1,100,000 capital they had invested and he would complete the subdivisions that RMBL were completing and For The Good Times refused to accept the offer”.Subsequent events confirm that Mr Landrey became concerned to save Mr Boyle from bankruptcy, for reasons which the evidence before me does not explain to my satisfaction. 

16. At the meeting of creditors on 1 February 2008, Mr Lo Pilato made the recommendation foreshadowed in his report, and the proposal to adjourn the meeting was carried on the motion of Mr Landrey.  The minutes record Mr Lo Pilato telling the meeting: 

    The President further advised that an adjournment would provide the opportunity to obtain further information from the debtor, complete investigations and allow greater opportunity for additional creditors to prove in the administration, noting that additional creditors had become known to the President as recently as the morning of the meeting. 

17. The meeting also carried a motion that “the remuneration of the Controlling Trustee, his partners and staff in the amount of $10,000.00 plus GST be approved for the period 17 December 2007 to 1 February 2008”.  The meeting was told that the future costs “would essentially be paid for from the pool of funds which might ultimately be available under the proposed PIA”. 

18. After the first meeting, spurred on by Mr Junker, Mr Lo Pilato made some further inquiries of Mr Boyle in relation to his debts and assets, and re‑advertised the proposal.  FTGT’s accountant sought access to the proofs of debt lodged by creditors and other documents, but sufficient access was not given by Mr Lo Pilato until after the agreement was executed, if then.  During February 2008, it must have become clear to everyone that Mr Junker was strongly dissatisfied with the proposed agreement, and with the disclosures made by Mr Boyle, and that he was canvassing creditors to refuse the proposal, and offering to purchase some of their debts. 

1. For his part, Mr Boyle sought to examine the claims made by some newly discovered creditors. It is clear that he, like Mr Junker, was keenly aware of the legislative requirement of s.204(1) that a creditor’s vote to require execution of the personal insolvency agreement was required to be passed “by special resolution”. As defined by s.5, this means “a resolution passed by a majority in number and at least three‑fourths in value of the creditors present personally, by telephone, by attorney or by proxy at a meeting of creditors and voting on the resolution”.  Some of the amendments to the growing list of creditors can only be accounted for by Mr Boyle’s desire to arrange a requisite majority.  For example, the substitution of his wife for the National Australia Bank’s debt of $344.  Some of his former business associates or their companies also came forward as creditors. 

2. Mr Boyle also wrote to some creditors offering them payments outside of any dividend which they might receive under the proposed agreement.  One such letter dated 14 April 2008 was sent to the solicitor for Albany Creek Pty Ltd, a new creditor whose claim was recognised by Mr Lo Pilato in the sum of $451,225.19 under a District Court judgment.  The letter offered: 

   That upon successful vote for my part x proposal I will pay to Albany Creek $5,000.00 within 6 months of the proposal.  I understand that the part x proposal is not finalised until payment is completed. 

3. In cross‑examination, he admitted writing four such letters to creditors “to secure their vote”.  He claimed that his intention was “in essence to purchase their debt”, and he showed no appreciation that offering such preferences was inconsistent with the candour, good faith, and equal treatment of all creditors, which is expected from a debtor proposing a Pt.X proposal (see Re NZI Capital Corporation Limited v Lancaster [1991] FCA 334 at [25]–[29], (1991) 30 FCR 441 at 449‑451, and Paton v Campbell Capital Ltd (1993) 46 FCR 30 at 37). However, there was no direct evidence that any creditor was, in fact, induced to vote in favour of the insolvency agreement by promises of financial benefits from Mr Boyle outside the terms of the insolvency agreement. Circumstantial and hearsay evidence presented by Mr Junker certainly raises suspicions of such inducement in relation to the votes of some creditors, including Mr Landrey. However, the basis for these suspicions was insufficiently explored in evidence and submissions before me, and I would not confidently draw a conclusion that this occurred. For reasons which will appear, I do not consider it necessary to be able to do so, before setting aside the agreement.

4. At the resumed creditor’s meeting on 29 February 2008, Mr Lo Pilato recognised the voting rights of six additional creditors: Mrs Boyle for $344, substituted for NAB; Albany Creek Pty Ltd for $451,225; Bentley’s MRI (accountancy services) for $262,971; Griffith 83 Lot Trust for $2,679,272; Mr Hanley for $1,939,633; the Australian Taxation Office for $8,927; and John F Morrissey & Co (legal services) for $40,282. 

5. According to the minutes, Mrs Boyle moved for an adjournment, and this was supported by Mr Lo Pilato on the basis that this had been requested “by numerous creditors to allow the meeting to be re‑convened in Sydney”.  It was “carried on the voices”.  Mr Junker alleges that the adjournment was only proposed when it became apparent that the requisite majority would not be forthcoming.  This is not denied by Mr Boyle nor any other witness.  The minutes refer to Mr Boyle saying that “he would have to consider his ability to provide a further offer with regard to the funds which are being made available to him by a third party.  Mr Boyle advised however that the adjournment would allow him to explore this possibility as well as provide him with the opportunity to speak with various parties”.  Mr Boyle’s letters attempting to induce four of the new creditors to change the voting intentions foreshadowed on their proofs of debt forms, were sent subsequent to this meeting. 

6. Mr Lo Pilato circulated a third report dated 2 April 2008.  This identified further significant creditors whose claims were subject to acceptance of proofs of debt.  They included Mr and Mrs Starosielcew for $400,000, and Ms Pulkownik for $900,000, who all claimed that they had “put up our property as security for Boyle and Woods to borrow against”.  However, these creditors were not accepted by Mr Lo Pilato as having voting rights, and they have complained about this.  Mr Hanley’s claim also was not accepted in an amount exceeding $1, on the ground of inadequate documentation.  There is evidence that other creditors who voted against the proposed insolvency agreement later complained that Mr Lo Pilato had not accepted substantial amounts of their claims. 

7. According to the list of creditors attached to Mr Lo Pilato’s report, total creditors’ claims at that time exceeded $15m, compared with the total recognised in Mr Boyle’s statement of affairs of about $9m.  Mr Boyle’s insolvency agreement proposal remained the same. 

8. The report gave Mr Lo Pilato’s opinion: 

   Based on the information presently available, I must prudently recommend that the proposal be rejected, on the basis that I do not have sufficient information at hand to determine whether the proposed Part X arrangement would result in a better outcome for creditors and with regard to my costs, the dividend payable to unsecured creditors will be less than 1 cent in the dollar. 

9. The adjourned creditor’s meeting was appointed for 16 April 2008. It was essential that the proposed agreement should be voted upon on that day, since s.189(1A)(d) terminates a trustee’s control of the debtor’s property arising from the giving of an authority if “4 months pass since the authority under section 188 became effective”, and the various consequences under s.189AAA and following sections only apply over that period. The period of control was due to expire on 17 April 2008.

10. On the morning of 16 April 2008, Mr Landrey presented Mr Lo Pilato with a second proof of debt claiming additional debts of about $10m which, essentially, relied only upon an undetailed assertion in a statutory declaration with some additional documents.  Clearly, Mr Lo Pilato was not given a reasonable time properly to reflect upon this material.  

11. Mr Junker gives the following account of the start of the meeting, which is not challenged, and I accept: 

    55On 16 April 2008, the third creditors’ meeting was held, commencing at 11.25 am.  Lo Pilato made an announcement in words to the following effect: 

    Lo Pilato:  “I may have to adjourn the meeting to another day because I’ve just received more proofs of debt that I have to consider.  Mr Landrey has increased his claim to around $18 million and I have a claim this morning from Toni Landrey for around $3.6 million.  I’ve also received a proof of debt from Crown & Gleeson and one from Richard Woods for $220.  I also advise that since the last meeting, Mr Boyle has been talking to a number of creditors, who have agreed to accept an offer from Mr Boyle.  They are Bentley’s and John Morrisey.” 

    Myself:  (Addressing Boyle) “How much did you offer Morrisey?” 

    Boyle:  “$3,000.” 

    Myself:  “And is that money for him to vote for the Part X?” 

    Boyle:  “Yes.” 

    Bondarew:  “And how much did you bribe Bentley’s with to vote for your Part X?” 

    Boyle:  “I offered them $5,000 to be paid off over a number of months.” 

    Mrs Ohnmar Khin (representing the ATO):  “We were offered, $1,500, but we rejected it.” 

    Anna (representing Bentley’s MRI):  “Why does this meeting have to be adjourned?  Can’t we finish this today?  Otherwise, we’ll have to come back again.” 

    Lo Pilato:  “I’m waiting on legal advice regarding these claims and I’m not sure how long it will take.  I’ll adjourn the meeting for an hour and then we’ll see where things are at that time.  Let’s say we meet back here at 12.30 pm”.  

    Bondarew and I, and Mr and Mrs Dover left the room.  Lo Pilato, Colbran, Landrey and Boyle remained in the room. 

    Bondarew and I, and Mr and Mrs Dover returned to the waiting area, outside the meeting room, at 12.30 pm.  We waited for 10 to 15 minutes before we realized that Lo Pilato, Colbran, Boyle and Landrey were still in the room together.  At that point, we decided to re‑enter the room.  The meeting re‑commenced at approximately 12.45 pm (not at 12.30 pm as indicated in the Minutes).  A copy of the Minutes appears in MJ1 at pages 203 to 217.

12. According to the minutes Mr Lo Pilato gave the meeting explanations for his decisions about voting rights, including his decision to recognise the new claims of Mr and Mrs Landrey.  It is unnecessary for me to examine these decisions, and I make no findings as to their correctness. 

13. The Minutes record, in part: 

    CONDUCT OF THE DEBTOR: 

    The President advised the meeting that he was extremely critical of Mr Boyle’s failure to disclose correctly in his SOA the true extent of his creditors.  The President confirmed that he had already written to Mr Boyle regarding these deficiencies and sought detailed explanations of same. 

    At this time the President tabled said correspondence for the consideration of creditors. 

    The President advised the meeting that he intended to refer this matter to the ITSA, together with the fact that the debtor’s failure to provide all books and records had resulted in the Controlling Trustee not being able to properly complete his investigations. 

    MOVED:Mrs Ohnmar Khin representing the ATO 

    RESOLVED:“That the Controlling Trustee be required to refer the debtor’s apparent misconduct to the ITSA.” 

    Carried on the voices. 

    PURPOSE OF MEETING AND DEBTOR PROPOSAL: 

    The President explained the purpose of the meeting and the options available to creditors. 

    The President tabled the Debtor’s Statement of Affairs, the Debtor’s proposal and the Controlling Trustee’s reports to creditors dated 18 January 2008, 15 February 2008 and 2 April 2008 respectively and discussed their contents. 

    The President advised that under the proposed Personal Insolvency Agreement (“PIA”), the debtor will contribute the sum of $40,000.00 as follows: 

$10,000 prior to the meeting	$10,000.00
$30,000.00 lump sum payment within 14 days of proposal being executed	$30,000.00
$40,000.00

The President advised that after allowing for the costs of the administration it is estimated that creditors will receive a dividend of less than 1 cent in the dollar on their provable debts. 

Ms Bondarew sought confirmation that the return to unsecured creditors from the proposed PIA would in fact be nil. 

The President confirmed that realistically creditors could expect to receive basically nothing from the proposed PIA. 

Under a bankruptcy scenario after allowing for the Controlling Trustee’s and Trustee’s remuneration and the 3.5% Commonwealth realisations charge it is estimated that creditors would not receive any dividend on their provable debts. 

The President advised that based on information presently available to him and the reality that creditors would receive a dividend of less than 1 cent in the dollar, he must recommend against the proposal. 

The creditors discussed amongst themselves the proposal and various other matters. 

The President opened the meeting to further comments and questions. 

There were no further comments or questions. 

1. Mr Junker’s affidavit provides the following analysis of the voting rights accepted by Mr Lo Pilato, and the outcome of the resolution to accept Mr Boyle’s Pt.X proposal.  This accords with the minutes and other evidence before me: 

   57At the meeting on 16 April 2008, Lo Pilato and Colbran from Bird Cameron announced that the following POD’s had been accepted for voting purposes: 

(a)  Vicki Boyle	Overdrawn NAB cheque account	$344
(b)  Geoffrey Landrey	Personal Guarantee	18,345,301
(c)  Richard Busuttil	Fees for legal services	9,353
(d)  FTGT	Judgment	2,262,144
(e)  Albany Creek	Judgment	451,225
(f)  Bentley’s MRI	Fees for accounting services	262,971
(g)  Griffith 83 Lot Trust	Personal Guarantee	2,679,272
(h)  Larry Hanley	Personal Guarantee	1
(i)  ATO	Unpaid Tax	8,927
(j)  John F Morrissey & Co.	Fees for legal fees	40,282
(k)  Toni Landrey	Personal Guarantee	3,652,684
(l)  Richard Woods	???	220
(m)  Crown & Gleeson	Judgment	840,000

The voting situation was: 

Creditors (a), (b), (c), (f), (j), (k) and (l) [seven votes] at 78% value, voted “for” the Part X. 

Creditors (d), (e), (g), (h), (i) and (m) [six votes] at 22% value, voted “against” the Part X. 

ie. Boyle’s Part X got up. 

1. The meeting then appointed Mr Lo Pilato as the trustee of the agreement, and addressed his past and future remuneration and expenses.  The minutes record past remuneration and expenses being approved at $16,972.20, additional to the $10,000 previously approved, together with future remuneration of $5,000, all these amounts not including any GST.  The agreement itself also gave him the right to recoup his costs and expenses, beyond his remuneration, from the $40,000 paid by Mr Boyle.  In the event, on the evidence before me, no dividend was ever paid to creditors.  I note that Mr Lo Pilato’s full accounts for his administration are not shown by any evidence presented to the Court.  

2. As I have noted above, Mr Boyle executed the agreement on 5 May 2008, and appears to have made his payments under its terms before the end of August 2008. Meanwhile, the present application had been filed on 19 May 2008 and was served, at least, on Mr Lo Pilato. In accordance with the resolution passed at the meeting on 16 April 2008, Mr Lo Pilato on 1 September 2008 referred to ITSA details of his correspondence with Mr Boyle which might reveal offences by Mr Boyle under the Bankruptcy Act in relation to his failure to give information about his conduct and affairs, and the manifest omissions from his statement of affairs. This included information relating to prior transactions.

3. On 29 October 2008, Mr Lo Pilato sent a circular to creditors informing them of his referral of possible breaches, and that “ITSA have advised that investigations with respect to these matters are on hold until such time as members of their staff can attend my offices and review my files with a view to determining whether sufficient evidence exists to warrant further investigations”.  Mr Lo Pilato said that he had completed his own investigations “to the extent possible, with regard to the records provided to me by the debtor, his comments regarding same and the resources available to me”.  He said that these had been “largely on an unfunded basis”, and: 

   Based on my investigations to date, I can not conclusively determine whether or not there exists transactions or assets which would likely be recoverable for creditors and which would most importantly provide the creditors with a commercial return.  However, further investigations, which I would envisage would include public examinations and the issuing of Official Receiver Notices to obtain further information, may well shed more light on this matter and hence warrant funding by creditors. 

4. His letter invited requests and funding from creditors to allow him to conduct further investigations, and said that if no adequate response was received within 14 days he would finalise his administration and issue a s.232 certificate to Mr Boyle. Such a certificate was issued on 13 November 2008, giving his opinion that “the terms of the personal insolvency agreement have been carried out and that the debtor has discharged all obligation created by the personal insolvency agreement”.  

Consideration 

1. The Court’s discretion to set aside a personal insolvency agreement was restructured in the 2004 amendments to the Act. The power under s.222(1) is not conditioned upon the establishment of a formal defect in the processes by which it came into effect, nor upon defects in the debtor’s statement of affairs or other conduct. These matters can provide alternative grounds under other subsections, but are not essential. Section 222(1) now has the effect that the consideration of the reasonableness and benefits to creditors of the terms of an agreement provides independent grounds for setting aside an agreement and making a sequestration order, and these considerations are no longer only qualifications after satisfaction of formal grounds, as under the old s.222(5).

2. In the present case, I consider that the evidence points very clearly to a conclusion that the terms of the agreement made on 5 May 2008 were, at the times that it was adopted by a majority of creditors and executed by Mr Boyle “not calculated to benefit the creditors generally”, taking into account the circumstances at that time.  At the forefront of this conclusion is the fact, reflected in Mr Lo Pilato’s recommendation to the creditors, that they could expect no monetary benefit from the terms of the agreement.  At a material level, the only benefits which flowed from the terms of the agreement were enjoyed by the trustee himself, and this consequence was apparent at the time that it was made. 

3. Under the terms of the agreement, Mr Boyle acquired the great benefit both of shedding himself of his enormous liabilities to his creditors, and of escaping from his liability to share with his creditors any of his current or future acquired property and income, beyond the relatively insignificant sum of $40,000.  The creditors who received nothing under the agreement obviously suffered, rather than benefited, from these consequences.  The benefits to Mr Boyle and detriments to his creditors may well have been real, and not imagined.  The trustee who had temporary control of his property for the 4 months between December 2007 and April 2008 was not satisfied that Mr Boyle did not own property which would otherwise have been available to creditors in an insolvency.  He also was not satisfied that there were no voidable earlier transactions, evidence of which might be discovered in a lengthier and more thorough administration in bankruptcy.  Moreover, it is not apparent why Mr Boyle would not have been able to contribute to the payment of his debts by using his income‑earning capacities during the period of a bankruptcy.  The evidence points strongly to the possibility that he had something of value to offer Mr Landrey.  In these circumstances, I conclude that the creditors suffered a very real loss of benefits, with no compensating advantage, under the terms of the agreement by which Mr Boyle escaped from bankruptcy. 

4. Mr Boyle submitted that the creditors acquired benefits from the activities of Mr Lo Pilato which were funded by the $40,000, and which they would not otherwise have enjoyed.  However, particularly in the absence of Mr Lo Pilato’s accounts for his activities and of his evidence to the Court as to his activities as trustee, I would not draw an inference that the creditors acquired any substantial benefits from his activities.  They were, essentially, directed at assisting and supervising the procedures to be followed under Pt.X before a personal insolvency agreement could come into effect.  In circumstances where the agreement which resulted was of no benefit to creditors generally, then all these activities leading to the agreement were also of no benefit to them, except to delay a more thorough bankruptcy administration by a trustee in bankruptcy whose impartiality might appear less suspect to some important creditors.  Unaided by any submissions from Mr Boyle, the trustee, or any creditor, I could not detect in the evidence any piece of information uncovered by Mr Lo Pilato, or other action taken by him in the course of his investigations, which I would categorise as providing a substantial benefit to Mr Boyle’s creditors generally.  This is in a context where many aspects of the evidence before me, some of which I have touched upon in my narrative of events, point to the necessity that a new and independent trustee should be appointed to administer Mr Boyle’s estate in bankruptcy.  

1. I am therefore satisfied as to the existence of a ground for setting aside the agreement under s.222(1)(d). This means that I do not need to consider whether there were ‘other reasons’ for doing this, arising from the circumstances in which the majority vote in favour of the agreement was taken. This would have taken me deeper into evidence about the receipt and acceptance of proofs of debt by Mr Lo Pilato, into the collateral arrangements of Mr Boyle with some of his creditors, and into the general fairness to all creditors of the procedures which were followed. Although there was a mass of evidence touching upon these matters before me, and this evidence raises real concerns, it was very poorly presented in submissions, and I would have had difficulty making firm adverse conclusions on any of these matters.

2. I am also spared from the need to itemise all of the material particulars which were omitted from Mr Boyle’s statement of affairs which was originally presented to Mr Lo Pilato and was subsequently tabled at the creditors’ meeting, so as to explain why numerous grounds for setting aside the agreement under s.222(5)(e) are also established. Its omission of very substantial creditors provides only one area of concern, illustrated by the escalation over the four month period of his total admitted liabilities from $9,230,952.96 to $28,552,727.34. It is well established that a particular is ‘material’ if it is relevant to and might be likely to affect the making of a decision by creditors, including creditors who did not attend the meeting, and that there is no requirement that a misstatement be made knowingly (see authorities cited by Sackville J in Metropolitan Demolitions Pty Ltd v Jim Gialouris & Ors [1998] FCA 936]).

3. I accept that, once a ground for setting aside the insolvency agreement is established, the Court has a discretion both whether to set it aside, and also whether to make a consequential sequestration order.  However, in my opinion, the ground which I have found above, in the context of the events which I have narrated above, provides overwhelming reasons why I should exercise both discretions.  Mr Boyle is admittedly insolvent as a result of business activities resulting in very substantial liabilities.  Some substantial creditors are strongly aggrieved by the insolvency agreement and the procedures in which it was made.  The circumstances of some of Mr Boyle’s liabilities reflect poorly upon his business ethics and competence, and support the public interest that his past and current affairs should be fully subject to a bankruptcy administration, including any consequential disqualification on corporate and other business involvement.  The identified concerns about his disclosures to his controlling trustee are properly matters deserving of investigation by a trustee in bankruptcy, if the funds to do so can be found. 

4. I have carefully considered the countervailing hardships pointed to by Mr Boyle in his submissions to me.  In particular, his claims that he genuinely attempted to be co‑operative with Mr Lo Pilato, that any defects in his statement of affairs were unknowing, that he believed that he was entitled to make preferential deals with creditors to secure their votes, that he believes that his creditors have no prospect of achieving a better outcome from his insolvency, and that he desires to avoid the stigma of bankruptcy.  However, giving him the benefit of doubts about many of these claims, I am not persuaded that they outweigh the reasons for setting aside the Pt.X agreement, and for making a sequestration order.  

5. I have considered whether FTGT has become disentitled to relief by reason of the delays in pursuing its application after its commencement in this Court.  The delays between May 2008 and January 2009 are not explained in the evidence before me, although it might be surmised that FTGT might have been waiting to see the outcome of Mr Lo Pilato’s complaint to ITSA.  However, neither Mr Boyle, the trustee, ITSA, another creditor, nor any other interested person, has pointed to any particular prejudice arising from the delays while the matter lingered in the Registrars’ lists.  In all the circumstances, I do not consider that FTGT’s delays in prosecuting the present application should cause me to decline to make these orders. 

6. I shall therefore make the orders sought, but shall require FTGT first to file satisfactory affidavits of debt and search under r.4.06, since I consider this would be appropriate in the circumstances. 

I certify that the preceding fifty-five (55) paragraphs are a true copy of the reasons for judgment of Smith FM

Associate:  Lilian Khaw

Date:  10 June 2009