Gunns Finance Pty Ltd (Receivers and Managers Appointed) (in Liquidation) v Moss
[2017] FCCA 1773
•18 August 2017
FEDERAL CIRCUIT COURT OF AUSTRALIA
| GUNNS FINANCE PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) v MOSS & ANOR | [2017] FCCA 1773 |
| Catchwords: BANKRUPTCY – Personal Insolvency Agreement – reduction of the value of a creditors vote at a creditors meeting on the basis of a cross-claim – jurisdiction to review – discretionary factors – determination of cross-claim – review of Trustees’ decision in relation to the value of the debt. |
| Legislation: Bankruptcy Act 1966, ss.30, 104, 178, 188, 189A, 222, 222C Corporations Act 2001 (Cth), s.761A |
| Cases cited: Australia and New Zealand Banking Group Limited v Shilton [2015] FCCA 1783 Bendigo and Adelaide Bank Limited v Clout [2016] FCA 119 BHP Billiton Finance Ltd v Federal Commissioner of Taxation (2009) 72 ATR 746 |
| Applicant: | GUNNS FINANCE PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) ACN 091 861 700 |
| First Respondent: | STEPHEN JOHN MOSS |
| Second Respondent: | STEPHEN ROBERT DIXON AND NICK MELLOS IN THEIR CAPACITY AS TRUSTEES OF THE PERSONAL INSOLVENCY AGREEMENT OF STEPHEN JOHN MOSS |
| File Number: | MLG 2112 of 2016 |
| Judgment of: | Judge McNab |
| Hearing date: | 26-28 April 2017, 4 May 2017 |
| Date of Last Submission: | 6 June 2017 |
| Delivered at: | Melbourne |
| Delivered on: | 18 August 2017 |
REPRESENTATION
| Counsel for the Applicant: | Mr Möller |
| Solicitors for the Applicant: | K&L Gates |
| Counsel for the First Respondent: | Mr Di Pasquale |
| Solicitors for the First Respondent: | Watson Mangioni Lawyers |
| Counsel for the Second and Third Respondents: | Ms Umbers |
| Solicitors for the Second and Third Respondents: | CLH Lawyers |
ORDERS
The Personal Insolvency Agreement of the First Respondent, Stephen John Moss dated 9 September 2016 be set aside.
A sequestration order be made against the estate of Stephen John Moss pursuant to section 222(10) of the Bankruptcy Act, 1966.
The Applicant’s costs of the proceeding be paid out of the bankrupt estate of Stephen John Moss in accordance with the Act, in the same priority as if they were the costs of a petitioning creditor save that any costs claimed for the costs of Mr Lombe’s report be limited to $7,500.00
The funds currently held in the trust account of the Applicant’s solicitors on account of the Respondents’ costs be returned to the Applicant.
AND THE COURT NOTES THAT:
A.The date of the act of bankruptcy in respect of the First Respondent debtor is 4 July 2016 in accordance with sections 40(1)(i) and 115(1B) of the Act.
B.A consent to act as trustee signed by Daniel Peter Juratowitch has been filed under section 156A of the Act.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLG 2112 of 2016
| GUNNS FINANCE PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) ACN 091 861 700 |
Applicant
And
| STEPHEN JOHN MOSS |
First Respondent
| STEPHEN ROBERT DIXON AND NICK MELLOS IN THEIR CAPACITY AS TRUSTEES OF THE PERSONAL INSOLVENCY AGREEMENT OF STEPHEN JOHN MOSS |
Second Respondent
REASONS FOR JUDGMENT
Introduction
By an application filed 28 September 2016, the Applicant, Gunns Finance Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (‘Gunns Finance’) claims:
1. An order pursuant to s. 222(1), alternatively s. 222(2), further or alternatively s. 30 of the Bankruptcy Act 1966 (‘the Act’) that the personal insolvency agreement (‘PIA’) dated 9 September 2016 executed by the respondents be set aside.
2. In the alternative to 1, an order pursuant to s. 222C, further or alternatively s. 30 of the Act, that the PIA be terminated.
3. An order pursuant to s. 222(10), alternatively s. 222C(5) of the Act, that the estate of the First Respondent be sequestrated.
4. An order under s. 178 or alternatively, s. 104 of the Act that the decision of the second and third respondents to admit the Applicant’s statement of claim and proxy and proof of debt dated 16 August 2016 for only $1 in respect of the “Woodlot Loans” be set aside, and instead be admitted in full.
5. An order pursuant to ss 32 and 222(8) of the Act, the Applicant’s cost be paid by the second and third respondents.
6. In alternative to 5, an order that the Applicant’s costs of the application be taxed and paid out of the estate of Steven John Moss in accordance with the Act and as if they were the costs of a petitioning creditor.
7. Such further or other orders as the Court considers appropriate.
On 14 November 2016 the Court made interim orders restraining the Second and Third Respondents from taking further steps to implement the personal insolvency agreement and not to make an interim distribution to creditors under the personal insolvency agreement beyond the amount of $50,000 in respect of legal costs of the Trustees. Otherwise, the Court made trial directions and the matter was heard over three days from 26 April 2017. The decision was reserved on 7 June 2017, at which time the filing of written closing submissions closed.
Gunns Finance submits that the PIA entered between the First Respondent (Mr Moss) and the Second and Third Respondents should be set aside:
a)because its terms are unreasonable or not calculated to benefit creditors generally in that:
i)the proposed return to creditors is disproportionate to Mr Moss’ total indebtedness;
ii)the estimated return to creditors in a bankruptcy scenario would exceed the return under the PIA; and
iii)creditors who were related to or not-arm’s length from Mr Moss dominated the voting and ensured passage of the PIA. In particular it is said that two creditors, Mr Gregory Moss (admitted for $320,842.77) and Mr Carlo Brattoni (admitted for $319,741.00) constituted the bulk of creditors by value when the Gunn’s debt was admitted to the extent of $1 only.
b)it also contends that the PIA should be set aside on the basis that:
i)the Trustees did not admit Gunns Finance’s claim in full but instead admitted the significant portion of it for only $1 for voting purposes;
ii)Mr Dixon, one of the Trustees and a respondent as such, had a conflict of interest in adjudicating Gunns Finance’s claim;
iii)in any event, the vote resolving to accept the PIA proposal was very close;
iv)the Trustees’ investigations into Mr Moss’ affairs were incomplete; and
v)the Trustees made material revisions to, and errors in their estimates of a return to creditors in bankruptcy.
Gunns also appeals the Trustees’ decision to admit the significant portion of its claim (the Woodlot proceedings) for the notional amount of $1 for voting purposes
Affidavits relied on by the parties
The Applicant relies on the following affidavits:
a)Affidavit of Lewis Seelenmeyer filed 28 September 2016;
b)Affidavit of Bryan Webster filed 29 September 2016;
c)Affidavit of Lewis Seelenmeyer filed 30 January 2017;
d)Affidavit of David Lombe filed 16 February 2017;
e)Affidavit of Bryan Webster filed 24 February 2017;
f)Affidavit of Edward Ryman filed 8 March 2017;
g)Affidavit of Lewis Seelenmeyer filed 8 March 2017;
h)Affidavit of Gary Pertile filed 18 April 2017; and
i)Affidavit of David Sherwood filed 28 April 2017.
The First Respondent relies on an affidavit of Stephen Moss filed 21 April 2017.
The Second and Third Respondents rely on the following affidavits:
a)Affidavit of Nick Mellos filed 21 December 2016;
b)Affidavit of Stephen Dixon filed 21 December 2016;
c)Affidavit of Stephen Dixon filed 1 March 2017;
d)Affidavit of Stephen Dixon filed 26 April 2017; and
e)Affidavit of Nick Mellos filed 26 April 2017.
Summary of findings
In summary, I have concluded that an order should be made setting aside the PIA for the following reasons:
a)the Gunns Woodlot debt was wrongly admitted for only $1 and should have been admitted for its full claimed value;
b)the return to creditors under the PIA is negligible and there is little risk to creditors if it is set aside;
c)the Trustees ought to have been circumspect in relation to debts owed to friendly creditor who voted for the PIA but did not stand to benefit under it;
d)further investigation is required in relation to the affairs of the debtor in particular in relation to the property owned by his wife.
I have also concluded that a sequestration order should be made against the estate of the First Respondent.
Chronology of events
The chronology set out below recounts the relevant events in the proceeding in a summary way. I will return in detail to certain aspects of the chronology.
Between 2006 and 2009, Mr Moss invested in three Gunns forestry projects and one Gunns Walnut Project. He obtained six loans from Gunns Finance to finance the investments.[1] The loans comprised the following:
a)in 2006, he obtained two loans, each for $150,160 to finance two investments of 20 walnut lots each in the “Walnut Project No.1”;
b)in 2007, he obtained two loans to finance investments in the “2006 Woodlot Project”: the first for $204,600 to finance 30 woodlots, and the second for $68,200 to finance 10 woodlots;
c)in 2008, he obtained a loan for $136,400 to finance 20 woodlots in the “2008 Woodlot Project”;
d)in 2009, he obtained a loan for $134,640 to finance 20 woodlots in the “2009 Woodlot Project”.
[1] see affidavit of Bryan Webster dated 29 September 2016 [17], [42]-[54].
On 25 September 2012, Ian Carson, Daniel Bryant and Craig Crosbie of PPB Advisory were appointed as voluntary administrators of the companies in Gunns group and its subsidiaries, including Gunns Finance. Shortly after, Mark Korda and Bryan Webster of KordaMentha were appointed as receivers and managers of Gunns Finance.
On 5 March 2013 the creditors resolved to place the companies into liquidation. The voluntary administrators were appointed as liquidators of the companies.
In or around April 2013 Mr Moss accepted an offer by the receivers and managers of Gunns Finance to vary the repayment terms of the first and second Walnut loans.
In or around June 2013 Mr Moss defaulted under the Woodlot Loan Agreements.
On 2 April 2014 Gunns Finance commenced proceedings in the Supreme Court of Victoria to recover the loans in the woodlot projects, which proceeding was subsequently transferred to the Supreme Court of New South Wales and later to the District Court of New South Wales. Mr Moss cross-claimed, alleging that he was entitled to damages and/or that the loans were invalid. The proceeding has been adjourned to the Court’s “inactive” list (‘the first District Court proceeding’).
On about 31 October 2015 Mr Moss defaulted under the first and second Walnut Loan Agreements.
On 9 March 2016 Gunns Finance commenced additional proceedings in the NSW District Court to recover two loans regarding the Walnut Project (‘the second District Court proceeding’).
On 4 July 2016 Mr Moss executed an authority under s.188 of the Bankruptcy Act 1966 (Cth) (‘Bankruptcy Act’), appointing Mr Dixon and Mr Mellos of Grant Thornton as his controlling Trustees.
On 26 July 2016 the solicitors for the Applicant sent a letter to the Trustees, which set out: the history of the Woodlot and Walnut proceedings, including Mr Moss’ defence and cross-claim in the former proceeding; that under a restructure of the loans for the Walnut Project, Mr Moss had agreed that the loan agreements were valid, binding and enforceable; that Gunns Finance had applied for summary judgment in the Walnut proceeding; and that Mr Moss had no genuine defence to the Woodlot or Walnut proceeding and his cross-claim in the Woodlot proceeding lacked merit.
On 28 July 2016 Mr Moss proposed a personal insolvency agreement to creditors. The Trustees also sent a notice, convening a meeting of creditors for 8 August 2016 and enclosing a report to creditors as required by s.189A of the Bankruptcy Act dated 28 July 2016.[2]
[2] see affidavit of Bryan Webster dated 29 September 2016, 853.
On 4 August 2016 the Trustees were advised by their solicitor to admit Gunns Finance’s claim “for a nominal sum of $1.00”.[3]
[3] Exhibits to affidavit of Stephen Dixon dated 21 December 2016, 113-120.
On 5 August 2016 the Trustees were advised by their solicitor to admit Gunns Finance to vote “for a nominal sum of $1.00 in relation to the debt the subject of the Walnut proceeding”.[4]
[4] Ibid 121-124.
On 8 August 2016 Gunns Finance provided a statement of claim and proxy, by which it claimed that Mr Moss owed $654,466.03 ($483,360.95 in respect of outstanding loan obligations, plus $173,685.08 in indemnity legal costs for which Mr Moss was said to be liable under the terms of the loan agreements). In addition, the first meeting of creditors was held.[5] The meeting was adjourned to 18 August 2016.
[5] Exhibits to affidavit of Stephen Dixon dated 21 December 2016, “SRD-1” 75.
On 10 August 2016 the solicitor for the Applicant wrote to the Trustees in relation to a suggestion that the Trustees would reject the full value of Gunns Finance’s claim and admit it for $1 in respect of the Woodlot loans and $33,000 in respect of the Walnut loans. The letter explained why Mr Moss’ defence and cross-claim in the Woodlot proceeding would fail. It also addressed the sale of the Woollahra property where Mr Moss lived with his wife and family. The Trustees issued a supplementary report to creditors.[6]
[6] see affidavit of Bryan Webster dated 29 September 2016, 991.
On 11 August 2016 Mr Dixon, Trustee, wrote to the solicitor for the Applicant confirming that the Trustees had received Gunns Finance’s statement of claim and proxy for $654,466.03. The letter disclosed that Mr Dixon had “also urgently requested additional information from Mr Moss’ legal advisors regarding his defence and cross-claim.” The letter also discussed the potential voidable transaction concerning the transfer of the Woollahra property to Ms Goodyer, Mr Moss’ wife.[7]
[7] Ibid “BW8”.
On 12 August 2016 Gunns Finance obtained summary judgment in the second District Court (Walnut) proceeding for $34,108.55 plus interest of $575.41 and costs on an indemnity basis. In addition, the Trustees were advised by their solicitors that “it is incumbent on the Trustees to form an opinion on the prospects of success of litigation, irrespective of how difficult that task may be” and that the Trustees should “invite both parties to furnish them with information, legal argument and advice on the likely success of the litigation.[8]”
[8] Exhibits to affidavit of Stephen Dixon dated 21 December 2016, 125-127.
On 16 August 2016 Mr Moss’ counsel provided a memorandum at the request of Mr Moss advising that he considered that Mr Moss had good prospects of defending the Woodlot proceeding.[9]
[9] Ibid 129-132.
On 17 August 2016 the solicitors for the Applicant wrote to the Trustees, confirming that Gunns Finance had obtained summary judgment in the Walnut proceeding.
On 18 August 2016 the second meeting of creditors was held,[10] which was further adjourned to 8 September 2016.
[10] Ibid “SRD-1”.
On 30 August 2016 Mr Moss proposed a revised personal insolvency agreement to creditors.
On 1 September 2016 the Trustees issued a further supplementary report to creditors,[11] which set out a revised proposal for a PIA.
[11] see affidavit of Bryan Webster dated 29 September 2016, 1039.
On 8 September 2016 the third meeting of creditors was held.[12] A special resolution carried, requiring Mr Moss to execute the revised PIA. Gunns Finance was admitted to vote for $1 on the claim the subject of the Woodlot proceeding and for $61,320.45 (the amount of the summary judgment in its favour in the Walnut proceeding).
[12] see exhibits to affidavit of Stephen Dixon dated 21 December 2016 “SRD-1”.
On 9 September 2016 Mr Moss executed the revised PIA.
Background
The background in relation to the Gunns group and its businesses is set out in the affidavit of Bryan Webster sworn 29 September 2016 at [7]-[9]. That was not the subject of any challenge in the proceeding.
That evidence provided in substance that Gunns Finance was a member of the Gunns Group of companies (‘Gunns’). The Group conducted several businesses in the forestry sector. The parent company of the Group was Gunns Ltd, which was listed on the Australian Securities Exchange.
The Gunns Group comprised of three main divisions:
a)forestry products, which involve managing plantation forestry resources, and the processing and export of woodchips;
b)managed investment schemes; and
c)other businesses including sawmilling and timber processing, a pulp mill project and other non-core businesses.
The responsible entity of the managed investment schemes was Gunns Plantation Pty Ltd (‘Gunns Plantation’), it being established in 1999 and a wholly owned subsidiary of Gunns Ltd. Gunns operated a number of schemes including forestry projects and three Walnut schemes between 2000 and 2012.
Gunns Finance (a subsidiary of Gunns Ltd) loaned money to many of the investors in the Gunns managed investment schemes. The report to creditors prepared by the Trustees states in relation to Mr Moss:
(a) the debtor was born on 26 November 1961 and currently resides in Woollahra, New South Wales, with his partner and their two dependent children.
(b) He is currently employed as a solicitor on a full-time basis at Slater and Gordon situated in Sydney, New South Wales.
(c) Additionally the debtor works extensively as an adviser in the gaming and racehorse industries.
(d) In 1999, the debtor established the company Five Categories Pty Ltd to facilitate the ownership and training of racehorses.
(e) In about 2002, the debtor obtained investments in Australian agriculture through a managed investment scheme with Gunns Finance. The debtor further invested in other managed investment schemes including AGW and Gunns Plantation between the years 2002 to 2009.
(f) From the years 2008 to 2013, the debtor worked in a partnership with Chatswood Stud to facilitate the business racehorse pinhooking. Pinhooking is the process of buying yearling horses with the intention of training and then reselling same within a short time frame in order to generate a profit. The debtor has advised that he borrowed money from family members to facilitate this business and that this business was ultimately unprofitable. He ceased to trade this partnership in 2013.
(g) The debtor satisfied the high interest payments associated with these loans until approximately 2013.
(h) The debtor has disclosed that due to his failure to meet the required interest payments, Gunns Finance and Gunns Plantation commenced recovery action against him in the District Court of New South Wales. The debtor incurred significant legal costs to defend this action.[13]
[13] Report to creditors dated 28 July 2016.
The evidence tendered on behalf of Mr Moss at the hearing of the proceeding established that:
a)Mr Moss had claimed a tax deduction in respect of the interest liabilities arising from the loans that he had obtained from Gunns and had done so for a number of years; and
b)he was an experienced commercial lawyer familiar with the financial products offered by Gunns Finance and able to take advantage of the tax benefits offered by the entry into the Woodlot and Walnut schemes.
The evidence supports a finding that Mr Moss completed application forms to invest in each of the projects that he invested in. He completed finance applications which contained inter alia a loan schedule and loan terms by which Mr Moss agreed and acknowledged that he had read, understood and agreed to be bound by the relevant loan contract. It is not challenged that the monies which were the subject of loans were advanced by Gunns Finance to Gunns Plantation in order to fund Mr Moss’ investments in the projects.
Mr Moss made payments in accordance with the terms of the loan agreements and continued to do so after the collapse of the Gunns group until around June 2013 when he defaulted under each of the loans.[14]
[14] Affidavit of Bryan Webster dated 29 September 2016 [60]; default notices exhibit BW-1 of the first Webster affidavit.
Entry into the PIA
On 4 July 2016, Mr Moss executed an authority under s. 188 of the Bankruptcy Act 1966 (Cth), appointing Messrs Dixon and Mellos as his controlling Trustees. The first report to creditors indicates that Mr Moss was proposing that his affairs be dealt with by way of a PIA. Mr Moss proposed that he pay a total sum of $110,000 in full discharge of his debts, which totalled $2,722,490. The first report stated that in his statement of affairs, Mr Moss had disclosed unsecured creditors with an estimated value of $1,562,016 which included Gunns Finance’s Woodlot claims in the sum of $655,145. Gunns Finance was recorded as a contingent creditor and the report stated that the debtor may have a reduced or increased liability to those creditors depending on the outcome of legal action. The first report to creditors also indicated that Mr Moss was currently proceeding with a counterclaim against Gunns Finance, which he estimated to be in the value of $701,000 and that the Trustees were seeking legal advice with respect to the counterclaim.
Gunns Finance was the largest individual creditor of Mr Moss.
The PIA proposal was revised and provided that Mr Moss would pay $150,000 to creditors pursuant to the PIA.[15]
[15] Affidavit of Bryan Webster dated 29 September 2016 [23].
On 26 July 2016, K&L Gates, solicitors for Gunns, sent a letter to the Trustees setting out:
a)the histories of the Woodlot and Walnut proceedings;
b)a statement of reasons why it considered that Mr Moss had no defence or viable counterclaim in relation to either of those proceedings;
c)that unless Mr Moss acknowledged indebtedness of $655,144.68 in respect of both proceedings, Gunns would proceed to trial in the Woodlot proceeding and continue with summary judgment in the Walnut proceeding.
In setting out its reasons why it considered that the cross-claim would fail, the K&L Gates letter provided:
Mr Moss filed a defence and counterclaim to the Woodlot proceeding.
1.6 In his defence and cross-claim , Mr Moss:
a) does not admit the loans in their terms;
b) admits he sought funding but does not admit the advances;
c) denies that the loan agreements are enforceable;
d) alleges that he relied on the product disclosure statement (PDS) issued by GPL in relation to the Woodlot projects to enter into the loan agreements; and
e) alleges that Gunns Finance engaged in misleading and deceptive conduct through its alleged authorised representative.
…
1.8 Mr Moss’ defence and counterclaim are untenable for, inter alia, the following reasons:
a) in his affidavit dated 5 May 2015, Mr Moss states that he is a “legal practitioner of some five years with experience in all aspects of the conduct and commencement of commercial litigation”. Consequently it is difficult to accept that Mr Moss failed to understand the nature and effect of the loan agreements;
b) it is assumed by Gunns Finance and Mr Moss that the loan agreements were valid, binding and enforceable on the basis of Moss’ conduct, including:
i) signing the loan agreements which included terms by which Mr Moss acknowledged:
a) his decision to participate in the respective Woodlot projects, to apply for and borrow the loans and to enter into the project documents was not made in reliance of any statement, representational conduct by Gunns Finance or GPL including any statement, representational conduct concerning the performance of the Woodlot projects or the potential benefits, financial or otherwise, which may be available as a result of participation in the Woodlot projects; and
b) he had taken such independent legal and financial advice from the adviser of his choice in connection with the project documents as he thought fit;
ii) using the funds advanced by Gunns Finance to acquire the respective woodlots in the Woodlot projects; and
iii) making principal and interest payments in respect of the funds advanced by Gunns Finance from the time each loan was drawn down (the first loan was drawn on 17 May 2017 and the final loan was drawn down on 29 June 2009 until July 2013;
iv) receiving tax deductions with respect to his investments; and
v) remaining silent until his defence was filed on 21 May 2015 as to any alleged defects in the ability and binding effect of the loan agreements.
The letter then went on to set out Gunns’ view as to why claims in relation to Mr Moss’ reliance on the relevant Product Disclosure Statement (PDS) and his financial adviser would fail.
I set out the detail of the correspondence because in my view it is apparent that this correspondence was not in the nature of a pro forma letter from a creditor and engaged directly with claims made by Mr Moss that he had a defence and viable cross-claim in relation to the Woodlot and Walnut loans.
Accepting that the letter from K&L Gates was dated 26 July 2016, nonetheless, it is apparent that the report to creditors dated 28 July 2016 made no reference to the correspondence from the solicitors for Gunns. Further, the introductory paragraph of the letter found at page 855 of the court book states (erroneously):
To date I have not received any request from creditors on any specific matters that they wish for me to investigate.… Please advise me in writing if you believe there are any omissions from this report or if you have any information which may assist in our investigation.
Given the level of detail in the correspondence of 26 July 2016 from K&L Gates, I would have reasonably expected some reference to the correspondence and the detail of the matters contained in it in the advice provided to creditors.
As noted in the chronology, on 8 August 2016, there was a meeting of creditors which was adjourned. The Trustees stated that one of the reasons for the adjournment was so that they could seek advice about Mr Moss’ cross-claim in the Woodlot proceeding.
On 10 August 2016, K&L Gates wrote to the Trustees, principally for the purpose of explaining why it would be wrong for the Trustees to reject the full value of Gunns Finance’s claim and to admit it instead for $1 in respect of the Woodlot claim and $33,000 in respect of the Walnut loan. The letter of 10 August 2016 sets out in detail what are effectively submissions made on behalf Gunns as to why the defence and cross-claim in the Woodlot proceedings would fail. Specific reference was made to authority involving Gunns and similar transactions and submitting why the decisions in the cases referred to would apply to the benefit of Gunns in the proceeding involving Mr Moss. The correspondence also made the point (in my view, correctly) that the Woodlot loans were not contingent liabilities simply because they were the subject of current litigation. The correspondence also raised issues in relation to what the solicitors for Gunns regarded as a potential voidable transaction involving the Woollahra property. The letter provides:
The Trustee state in part 5.1.6 of their first report that Mr Moss’ spouse, Ms Goodyer purchased the Woollahra property in December 2012 from Amalfi Estates Pty Ltd (‘Amalfi Estates’). The Trustees appear to have accepted advice from the accountant for Ms Goodyer that Ms Goodyer paid “sufficient consideration” for the Woollahra property.
However, we note that Amalfi Estates purchased the Woollahra property in February 2011 for 5.85 million. At the time the Woollahra property was purchased, Mr Moss and Ms Goodyer were equal shareholders in Amalfi Estates, they remained as such until 29 December 2014, well after the Woollahra property was purchased by Ms Goodyer. Therefore Mr Moss had a 50% share in the Woollahra property at the time it was sold to his wife.
The Woollahra property was sold to Ms Goodyer in December 2012 for $4.8 million, which is $1.05 million less than the price paid for the property almost two years earlier. The receivers consider that further investigations are warranted into whether the sale of the Woollahra property is a voidable transaction given that it appears to have been sold for less than its market value.
The letter also put the Trustees on notice that it foreshadowed making an application to the Court seeking the relief currently sought in the event that the Woodlot claim was not admitted to its full value.
The Trustees’ supplementary report to creditors dated 10 August 2016 makes no reference to correspondence from K&L Gates although I accept that that correspondence may not have been considered by the Trustees when the report was formulated.
On 11 August 2016, Mr Dixon, one of the Trustees, wrote to K&L Gates advising that the Trustees were seeking further legal advice in respect of matters raised in K&L Gates’ letters of 26 July and 10 August 2016. It also stated that the Trustees had requested additional information from Mr Moss’ legal advisers regarding his defence and cross-claim.
In relation to the potential voidable transaction raised in the correspondence of 10 August 2016, the correspondence from the Trustee provides:
Amalfi Estates Pty Ltd (Amalfi Estates) transferred its interest in the property situated at Tara Street Woollahra New South Wales 2025 (“the property”) on 19 December 2012 and the debtor’s spouse, Pauline Goodyer became the sole registered proprietor of the same.
A historical company extract for Amalfi Estates has confirmed that the debtor has relinquished his shareholding in the company on around 29 December 2014 as detailed in our first report.
The letter then went on to state that if the current market value of $7.6 million is to be attributed to the value of the property, the debtor’s 0.002% interest in the Amalfi Estates on or around the time of the transfer of the property on 19 December 2012 would have been approximately $152. The Trustee went on to say that it did not consider there to be a voidable transaction which would be recoverable by a Trustee in bankruptcy.
The Trustees sought legal advice from their solicitors CLH Lawyers concerning Gunns Finance’s claims. The Trustees obtained four pieces of advice which may be summarised as follows:
a)by letter dated 4 August 2016 CLH Lawyers advised that its claim should be admitted “for a normal sum of $1.00”;[16]
b)by letter dated 5 August 2016 CLH Lawyers advised that the Trustees should admit Gunns Finance to vote “for a nominal sum of $1.00 in relation to the debt the subject of the Walnut proceeding”;[17]
c)by letter dated 12 August 2016, CLH Lawyers advised that “it is incumbent on the Trustees to form an opinion on the prospects of success of litigation, irrespective of how difficult that task may be” and that the Trustees should “invite both parties to furnish them with information, legal argument and advice on the likely success of the litigation;”[18]
d)The Trustees obtained a memorandum from Mr Weinberger of counsel who had been acting for Mr Moss and who was also a creditor of Mr Moss in relation to prospects of Mr Moss defending the Woodlot proceeding.
[16] Exhibits to affidavit of Stephen Dixon dated 21 December 2016, 113-120.
[17] Ibid 121-124.
[18] Ibid 125-127.
The memorandum from Mr Weinberger does not appear to have dealt with in any detailed way the matters raised by the solicitors for Gunns in the correspondence of 26 July and 10 August 2016. Mr Weinberger expressed the opinion that Mr Moss’ prospects of defending the plaintiff’s claim were good although he stated that there was little prospect of Mr Moss recovering damages from the plaintiff in excess of the amount required to reduce his liability to the plaintiff to nil because Gunns is in liquidation.
There was a further meeting of creditors on 18 August 2016 which was adjourned. Prior to that meeting, on 12 August 2016, Gunns Finance obtained summary judgment in the Walnut proceeding.
On 1 September 2016, the Trustees issued a supplementary report to creditors. The proposal contained in that report provided that:
a)an adjourned meeting of creditors was to be held on 8 September 2016;
b)Mr Moss proposed a payment of $150,000; and
c)related party creditors would not participate in the distribution of a dividend.
The Trustees revised the housing benefit. The new calculation of Mr Moss’ housing benefit was $110,500 for the first year of bankruptcy and $73,667 per annum for the second and third years. The Trustees provided a revised assessment of Mr Moss’ contribution liability to $162,390 (if he was required to seek alternative employment and earn only $150,000 per annum) and $237,540 if he kept working at Slater and Gordon on a salary of $240,000 per annum.
The estimated return to creditors changed from that expressed in the second report to $3.92 in a bankruptcy scenario and $2.49 under the proposed PIA.
The meeting of creditors was convened on 8 September 2016 and the minutes of the meeting were in evidence before the Court. I accept the summary of the effect of the minutes as set out in the submissions filed on behalf of the Respondent that it was common ground that:
a)Gunns Finance was admitted to vote for $61,320.45 (the amount of its summary judgment in the Walnut proceeding) and for $1 on the claim the subject of the Woodlot proceeding;
b)Australian Financial Security Authority (‘AFSA’) advised the Trustees that, in assessing the housing benefit, the Trustees had not divided the benefit of the rental correctly – that it should have been divided between two adults only. Mr Pertile of AFSA, who attended the meeting, asked questions of the Trustees about their approach;
c)Mr Mellos said that, based on his calculations, if the Trustees divided the housing benefit by two or for the three years of the bankruptcy, the income contribution would be increased by $68,000 or an extra 1.5 cents in the dollar;
d)Mr Seelenmeyer, a solicitor from K&L Gates, objected to the way in which Gunns Finance’s claim had been treated;
e)The Trustees said that they had sought specific legal advice in relation to Gunns Finance’s vote, and the advice was that Gunns Finance should be admitted to vote for $61,226.45, being the judgment debt of $61,320.45 and $1;
f)The Trustees were asked, including by Mr Pertile of AFSA, if the legal advice could be provided to creditors. The Trustees refused, saying that the advice was privileged;
g)Mr Mellos said the Trustees could not be expected to act as a judge in relation to the debt that was subject to dispute currently before the Courts, that they had sought legal advice, and that the legal advice was to admit the Woodlot debt for $1;
h)Mr Seelenmeyer said that the Trustee, Mr Dixon was an investor in Gunns projects, had a liability to Gunns Finance, and that Mr Dixon may be in a position of conflict of interest. He asked whether Mr Dixon had declared that conflict;
i)Mr Dixon said the matter was personal and he did not intend to make any comments on it at the meeting;
j)Mr Seelenmeyer also asked questions about the adequacy of the Trustees’ investigations concerning the transfer of the Woollahra property; and
k)There was discussion about whether Mr Moss would lose his job at Slater and Gordon if he was made bankrupt.
The minutes recorded that the majority of creditors voted in favour of the PIA. It was submitted by Gunns that, had Gunns Finance been allowed to vote for the full value of the Woodlot loans, the required majority would not have been achieved and the resolution would not have passed.[19] Based on the value of Gunns’ claims, this submission is correct.
[19] Applicant’s submissions [72].
Of the creditors who voted, the creditors Carlo Brattoni and Gregory Moss accounted for $640,583 of the admitted debts of $1,111,747.44.
The Applicant’s grounds of relief
Gunns seeks to set aside the PIA pursuant to s. 222(1)(d) and (e) of the Bankruptcy Act 1966 (‘the Act’).
Section 222(1) provides:
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.
In relation to the ground identified in s. 222(1)(d) that the terms of the agreement are unreasonable or not calculated to benefit the creditors generally, the Applicant points to the dividend under the PIA as opposed to the dividend payable in the event of bankruptcy. For this purpose, the Applicant points to the level of indebtedness of Mr Moss as estimated by the Trustees in their first report as being $2,722,492, comprising general unsecured creditors of $1,562,016 and related party creditors of $1,160,474. Then it is said that while the expected return to creditors under the PIA is a mere $2.49 in the dollar, the return to creditors set out in the high bankruptcy scenario in the third report from the Trustees is $3.92.
Further, it is said that the disparity becomes more marked when the “housing benefit in a banking scenario is calculated properly which would lead to an increase in the income contribution of $68,000 and provide an additional 1.5 cents dividend available to creditors.”
It is also submitted that the estimate provided by the Trustees in relation to the bankruptcy scenario which was presented to creditors did not take into account the additional recoveries that a bankruptcy trustee might make upon a more extensive investigation of the affairs of Mr Moss and having regard to recovery powers available under the Act.
Mr Moss emphasises in his evidence the effect that a sequestration order may have on him. He points to the magnitude of the consequences of bankruptcy on him as compared to what he sees as the small benefit provided to creditors if he was made bankrupt as against the benefits under the PIA. He submits that the amount of $150,000 for distribution under the PIA (which amount he says was obtained from friends and colleagues who were subsequently reimbursed by his wife) is a reasonably significant amount being about 10% of the value of the non-related party creditors.[20]
[20] Transcript, 244 [10] – [20].
Mr Moss accepted that the fact of signing the s.188 authority was a show cause event by virtue of his professional obligations as a lawyer practising in New South Wales. Further, the evidence established that he had informed Damian Hardwick, General Manager – General Law of Slater and Gordon that he had entered into a PIA on 9 September 2016 (exhibit A-1).
Mr Moss gave evidence that he had received correspondence from the Law Society in relation to him being a “bankrupt” solicitor and gave an undertaking not to deal with trust monies.[21]
[21] Transcript, 245.
The correspondence and emails from Mr Hardwick before the Court do appear to be supportive of Mr Moss. The email of 9 September 2016 states in relation to his entry into the PIA:
…[t]hat is not good mate. I am sorry to hear it. I don’t see any issues at present. I will run it by someone in risk in case they have a different view (which I’m sure they won’t).
In an email from Mr Hardwick of 22 December 2016 responding to advice from Mr Moss that the Applicant had commenced these proceedings, Mr Hardwick stated “sounds like very bad luck mate. Please sing out if there is anything we can do to assist.”
Some months later, the tone of communications from Mr Hardwick had changed. By letter dated 11 April 2017, Mr Hardwick advised Mr Moss that in the event that Mr Moss ceased to be entitled to practice as a legal practitioner or became the subject of a sequestration order, Slater and Gordon would exercise its right to terminate his employment contract immediately and without notice.
No direct challenge was made to the substance of that letter. Mr Moss gave evidence that Mr Hardwick had told him that if anyone wanted to challenge the letter, he would be pleased to come to Court and give evidence. No further challenge was made to the content of the letter in the course of evidence. Clearly there was a basis to question the reason that Mr Moss had asked for the letter to be written and why his employment would be terminated in the event of a sequestration order being made and not when he had entered in PIA (being a show cause event).
I will proceed on the basis that Mr Moss’ employment with Slater and Gordon will be terminated in the event of a sequestration order being made, notwithstanding the support given to him by that firm in earlier correspondence after becoming aware that he had entered into a PIA. I do not accept that Mr Moss’ income will be limited to $50,000 per annum or that the loss of his income of $240,000 as an employee solicitor with Slater and Gordon will mean that his creditors will be significantly worse off in the event of bankruptcy as opposed to under the terms of the PIA.
Mr Moss gave evidence that he may be able to obtain full-time employment with a company called Lucky Drink Pty Ltd as a China Liaison Officer on an annual salary of $50,000. He also gave evidence that he has a debt with the Australian Taxation Office of $59,000 being paid in instalments of $3,500 per month. Mr Moss submits that if his salary was only $50,000 per annum as a result of bankruptcy, the return to creditors would be less than that under the PIA. Given Mr Moss’ background in business as disclosed in his statement of affairs provided to the Trustees – he has been a director of more than 21 companies and has established and worked in businesses in the horseracing and brewing industries (Lucky Drink Pty Ltd). He has also been the director of companies involved in gaming machine manufacture (Aruze Gaming Australia Pty Ltd), property development (Dragon Developments Holdings Pty Ltd and GRE Property Management Pty Ltd), marketing (Ginger Marketing Pty Ltd), horse supplements (Ranvet P/L) and labour hire (Rosscarbery Holdings Pty Ltd). I am of the view that it is more than likely that Mr Moss will earn significantly more than $50,000 per annum. Mr Moss is more than an employee solicitor. He is an experienced solicitor and businessman. I assume that there will be a demand for his skills as a solicitor albeit not employed by Slater and Gordon or authorised to deal with trust monies.
There is a real prospect of a return to creditors if he is made bankrupt given his earning potential based on his experience both as a solicitor and a businessman.
Consideration of Claims
The Applicant claims that the vote on the PIA was disproportionately affected by creditors who would benefit under the PIA – namely Mr Gregory Moss and Mr Brattoni.
In Bendigo and Adelaide Bank Limited v Clout [2016] FCA 119, White J stated at [15] that the principles relating to the exercise of the power pursuant to s. 222(1) are well settled:
[15] The principles relating to the exercise of the power pursuant to s 222(1) in circumstances like the present are settled. The Court must be satisfied that at least one of the circumstances listed in subs (1)(d) and (e) are shown to exist and, if so, that the discretion then vested in the Court may be exercised in favour of the Applicant. Given the terms of subs (1)(e), there is an obvious overlap between the satisfaction of that threshold condition and the exercise of the discretion.
[16] In Re Mills; Ex parte Lloyd’s [1997] FCA 223; (1997) 73 FCR 551 at 55961, Merkel J identified a number of factors which may be relevant to the exercise of the power under s 222(1):
(a) whether, after considering all the circumstances of the case, a greater opportunity to inquire into the debtor’s affairs and a more comprehensive explanation by the debtor is called for. If so, the interests of unsecured creditors and the public interest may be served by the investigation being conducted by a Trustee in bankruptcy armed with the coercive powers for which the Act provides;
(b) whether circumstances exist which “give cause for a suspicion” or to “arguable” causes of action which may benefit creditors;
(c) whether the amount offered under the composition is little or trivial so that there may be no harm of any consequence to creditors if the composition is set aside if other factors warrant that course;
(d) whether payments have been made pursuant to the composition;
(e) whether the composition was passed, amongst other things, on the basis of a report to creditors as to the debtors’ financial affairs which was misleading.
[17] In Moran v Robertson [2012] FCA 371 at [17][18], Flick J added to these considerations the following:
(a) whether creditors who had voted in favour of a composition had indicated that they would not participate in any distribution of assets and, to the extent that it is known, the reasons for their nonparticipation;
(b) whether the Trustee had recommended the acceptance or rejection of the proposed insolvency agreement and the factual basis for that recommendation, including whether there was any reasonable basis for a conclusion that the controlling Trustee may not have acted with diligence or impartiality (see also Spicer v Wily [2000] FCA 1200 at [15];
(c) the relationship between the amount payable under the composition and the debts owing in the bankruptcy.
In Hingston v Westpac Banking Corporation (2012) 200 FCR 493, the full Federal Court (Greenwood, McKerracher and Nicholas JJ) said at [58], that in assessing whether the composition is unreasonable, or not calculated to benefit creditors generally, regard should be given to the following factors:
a)the relative size of the amount of the debts owing to the proposal made being a relevant but not determinative factor;
b)whether any payments have been made to the creditors or the Trustee; and
c)the nature of the relationship between the debtor and the creditors who voted in favour of the composition.
At [91] the Court held that a calculus of factors must be taken into account, which include:
…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 relatively between the positions under an administration in bankruptcy and a distribution under the composition proposal.[22]
[22] See also Australia and New Zealand Banking Group Limited v Shilton [2015] FCCA 1783.
Also of significance is a circumstance where a creditor of substantial value is voting on a proposal to which they will have no benefit from the outcome. As was stated by Yates J in New Age Constructions (NSW) Pty Limited v Etlis [2013] FCA 884 at [81] (‘New Age Constructions’):
First, the dividend is available to some, but not all, creditors. Those who had voted in favour of the First Respondent’s proposal, but who do not take under it – representing four out of seven creditors – can only be seen to have been actuated by interests that are extraneous to the desire to recover what they claim is owing to them.
In my view, a significant feature in the present case is the role of creditors who voted in favour of the proposal but who would not benefit from it. In the present case, Gregory Moss’ (the brother of the debtor) debt was admitted to the extent of $320,842.77 which in the scheme of the creditors of the debtor is a significant sum, being the third highest debt ranking behind Mr Brattoni and the sum of the debt claimed by Gunns but not admitted.
Real questions arise in relation to the reasonableness of the PIA when the evidence shows that each of Mr Moss, Mr Brattoni and Mr Gregory Moss were simultaneously directors of Five Categories Pty Ltd – the company Mr Moss used “for the purposes of breeding and training racehorses” – as follows:
a)Mr Brattoni: 24 June 2015 to 25 October 2016;
b)Gregory Moss: 13 February 2015 to 25 October 2016; and
c)Stephen Moss: 6 May 1999 to 8 September 2016.
I accept the submission made by the Applicant that Mr Brattoni and Gregory Moss have a personal and professional relationship with Mr Moss which means that they cannot be described as “arm’s length” creditors.
The level of the debts claimed by Mr Gregory Moss and Mr Brattoni and admitted for the purposes of the vote on the PIA were such as to dominate the vote.
The evidence disclosed that it is apparent that Mr Brattoni had a personal connection with Mr Moss as a result of being the Chief Executive Officer of the Travel Compensation Fund in New South Wales which was one of Mr Moss’ main clients at Slater and Gordon. He was also a director of a company with Mr Moss and if the evidence in relation to the debt is accepted, he owned racehorses with Mr Moss.
In his statement of affairs, Mr Moss described Mr Brattoni as a “fellow director”.[23] The Trustees described Mr Brattoni as an “associate” of Mr Moss in their report.
[23] Affidavit of Stephen Dixon dated 26 April 2017, 20.
Another aspect of Mr Brattoni’s debt is the circumstances in which Mr Brattoni obtained a “judgment by acknowledgment”. Judgment by acknowledgment is dealt with under rule 20.34 of the Uniform Civil Procedure Rules 2005 (NSW) and is, in effect, a consent to judgment by the defendant in that proceeding, Mr Moss. The judgment was entered on 16 June 2016, shortly prior to the First Respondent executing an authority under s.188 of the Act on 4 July 2016.[24] Mr Moss gave evidence that he was actively considering entering into a PIA in May 2016.[25]
[24] The judgment is exhibited as part of “GP-6” to Mr Pertile’s affidavit dated 18 April 2017, 359.
[25] Transcript p.239.35
In my view the consent to judgment with someone who was apparently a friendly creditor of Mr Moss is clearly something that calls into question the nature of the relationship between the debtor and the creditors who voted in favour of the composition. Given that Mr Moss has vigorously defended the claims made by Gunns and taken each course open to him in response to action taken by an unfriendly creditor, it does call into question the position taken by him in relation to the debt claimed by Mr Brattoni, particularly in circumstances where the judgment was entered in the course of the process of entering into the PIA. The Trustees must have been alive to the risk that friendly creditors may vote on a PIA and that a default judgment or judgment by consent or acknowledgment provided to a friendly creditor would require circumspection.[26]
[26] See Ilhan v Cvitanovic [2009] NSWSC 160.
I note Mr Dixon gave evidence that he had sighted the contract of sale of the horse “Donating” that is said to establish the underlying claim upon which Judgment was entered by consent. He also gave evidence that he had seen some email correspondence between Mr Moss and Mr Brattoni which said “you owe me this and I’m going to pursue you for it.” None of these documents were produced to the Court in this proceeding, notwithstanding that the question of the bona fides of the debt was directly in issue as a result of the Applicant’s outline of submissions filed on 3 April 2017.
Mr Moss was in a position to give evidence in relation to the transaction and produce the primary documents said to give rise to the debt. He produced an Inglis sales result page purporting to show the horse “Donating” was offered at public auction at the Great Southern Sale in June 2016 about 1 month after he claimed to have transferred it to a Trust of which he was a beneficiary for $25,000. The valuation supporting the valuation of the horse at $25,000 was provided by Chatswood Stud which the report to creditors referred to as a former business partner of the Mr Moss. The horse was passed in on a bid of $12,000 and had a reserve of $30,000. [27] I do not understand why Mr Moss did not give sworn evidence in relation to the transaction when he was in a position to do so in circumstances where the bona fides of the transaction were under challenge. The statement of claim and contract said to give rise to the debt was not produced to the Court.
[27] SJM-5 to affidavit of Stephen John Moss sworn 21 April 2017.
In the Trustees’ first report, the debts of each of Mr Brattoni and Mr Gregory Moss debts were characterised as loans. The Trustees’ first report noted those debts as being contingent on the basis that the relevant liability was the subject of legal proceedings.
By the time of the third meeting, Mr Brattoni had obtained a default judgment against Mr Moss. At the third meeting Mr Brattoni declined to answer questions about the nature of the debt and whether he received any payments from Mr Moss in respect of it. The exchange that occurred at the meeting as recorded by Mr Seelenmeyer is set out in his affidavit sworn 28 September 2016. Mr Seelenmeyer’s evidence was not challenged on this issue.
At paragraph [58] of the affidavit of Lewis Seelenmeyer, he gives evidence :
I recall that around at this time Mr Brattoni said words to the following effect:
I motion that we stop wasting time on academic issues which make no difference regarding what we are here to vote on and causing extra cost discussing matters of no relevance, and that we get to vote on the substantive issues!
It is apparent from the evidence of Mr Seelenmeyer at paragraphs [126] to [133] of his 28 September 2016 affidavit that Mr Brattoni refused to answer questions in relation to the debt said to have been owed by Mr Moss to him.
Mr Seelenmeyer gives evidence that:
[128] Mr Pertile said words to the following effect:
Have any payments been made by Mr Moss in respect of the debt?
[129] In response, Mr Brattoni said words to the following effect:
You cannot cross-examine me.
[130] Mr Pertile said words to the following effect:
I can ask you questions.
[131] In response, Mr Brattoni said words to the following effect:
I will not answer
[132] Mr Pertile said words to the following effect:
You can answer now or can answer when I formally write you.
[133] Mr Brattoni said words to the following effect:
You can write to me then. I am not answering.
The non-responsive stance adopted by Mr Brattoni is notable.
For the reasons set out above (in particular in relation to the low return available to creditors under the PIA and the real questions that arise in relation to the domination of the vote by creditors who were not at arm’s length), in my view there are grounds for setting aside the PIA pursuant to s. 222(1)(d) of the Act.
These matters give rise to a finding of satisfaction that the terms the agreement are not calculated to benefit the creditors generally. In making that find I have regard to what was said in New Age Constructions at [60] where His Honour stated:
Of course, when s. 222(1)(d) speaks of the benefit to creditors of a personal insolvency agreement, it is referring to the benefit to creditors in their capacity as such and not to interests such as those arising from family relationships, friendship or emotional attachment: see the observations of Lindgren J in Deputy Commissioner of Taxation v Alternative Business Solutions (Aust) Pty Ltd (Administrators Appointed) (2006) 24 ACLC 435 (at [9]) when considering the analogous position under s 440A of the Corporations Act 2001 (Cth).
Grounds for setting aside the PIA pursuant to s.222(1)(e) of the Act on the grounds that the Trustee should have admitted the Gunns Finance’s claim in full.
The legal advice received by the Trustees
The Trustees sought legal advice on various occasions in August 2016 in relation to Gunns’ claim.
4 August 2016 advice
Mr Dixon gave evidence that he sought legal advice from CLH Lawyers shortly prior to the first meeting of creditors on 8 August 2016 in relation to the Woodlot proceedings and Mr Moss’ cross-claim, which he received on 4 August 2016 and discussed with Mr Mellos.[28]
[28] Dixon affidavit [20].
The advice of 4 August 2016 recommended that the Trustees admit Gunns to vote at a meeting of creditors for a nominal sum of $1.00.[29] In relation to Mr Moss’ cross-claim in the Woodlot proceedings, the advice noted:
We suggest that the matters raised by the Debtor are matters that ought not to be determined by the Trustee. We consider that Re Gunns Finance Limited (in liq) (recs & mgrs. apptd); and Re Gunns Plantation Limited (in liq) (recs & mgrs. apptd) (No 2) [2013] VSC 365 neither lends support to nor detracts from the Debtor’s Defence or Cross-Claim. It is not possible for the Trustee to conclude that the Defence or Cross-Claim are unarguable, nor is it possible for the Trustee to conclude that the Defence or Cross-Claim are bound to fail. Whilst we cannot determine the likelihood of success of the Defence or Cross-Claim, they appear on the pleadings to be arguable, raise triable issues and do not appear unfounded. However, we have not had the benefit of viewing the Loan Agreements nor the product disclosure statements upon which the Proceedings were commenced.[30]
[29] Exhibits to affidavit of Stephen Dixon dated 21 December 2016, 113.
[30] Exhibits to affidavit of Stephen Dixon dated 21 December 2016, 116-117.
The letter went on to note that the Victorian Supreme Court and Court of Appeal have held that similar plantation schemes were not misleading and deceptive and adequately disclosed the investment risks, and that:
However it does not appear that the Gunns scheme has received the same attention by the Courts. We are cognisant that parallels might be drawn between the schemes but we have not seen the relevant product disclosure statements for each scheme...[31]
[31] Ibid 117.
In relation to the outcome of the Woodlot proceeding, the solicitor for the Trustees advised that it was not the role of the Trustees to determine the outcome of the Woodlot proceedings nor the nature of the Debtor’s claim, noting that:
[s]uch an exercise would involve ascribing a value to the Cross-Claim (nil or otherwise) in order to estimate the amount by which the Gunns debt should be set off, and ultimately presuming the outcome of the Proceedings. We suggest that it is not possible (nor is it appropriate) at this stage for the Trustee to presume such outcome…[32]
[32] Ibid 118.
8 August 2016 advice
Mr Dixon also gave evidence that he sought further legal advice in relation to the Walnut proceedings, which he received on 5 August 2016 and discussed with Mr Mellos.[33]
[33] Dixon affidavit [21].
The advice of 5 August 2016 notes that:
Gunns alleges that the Debtor owes the sum of $48,811.80 as at 25 July 2016 plus interest plus costs on a full indemnity basis pursuant to the Walnut Agreements.[34]
[34] Exhibits to affidavit of Stephen Dixon dated 21 December 2016, 122.
The letter goes on to recite Mr Moss’ Statement of Claim, and his Defence, noting that save for one ground “the Debtor raises substantially the same Defence raised in the Woodlot Proceedings.[35]”
[35] Ibid 123.
The letter concluded by recommending that the Trustees admit Gunns to vote at a meeting of creditors for a nominal sum of $1.00 in relation to the debt the subject of the Walnut proceedings.[36]
[36] Ibid 124.
For these reasons Mr Moss has not established that Gunns Finance was acting as an agent for Gunns Plantation or that Gunns Finance is fixed with a liability in respect of any alleged misrepresentation contained in the product disclosure statement. For these reasons the cross-claim fails. I note that extensive submissions were filed by the Applicant dealing with whether or not the product disclosure statements were defective. For the reasons that I have given it is unnecessary for me to consider those matters as I have come to the view that Gunns Finance does not have liability for any alleged defect in the product disclosure statement.
Proof of quantum of the Woodlot claims
The Mr Moss takes issue with the calculation of interest and indemnity costs which form a substantial part of the of the Applicant’s claim. The First Respondent did not claim that the part of the debt relating to the advance of loans in the sum of $351,441.40 was not made by Gunns Finance.
In relation to interest, the proof of debt submitted by Gunns Finance to the Trustees was statements relating to each loan setting out the amounts of interest and overdue interest that the Applicant was obliged to pay each month. No issue was taken with the calculation of interest when Mr Webster was cross-examined in relation to the proof of debts.
In relation to the Applicant’s claim for legal costs which form part of the debt, it was submitted that the Applicant had not substantiated any amount. The loan agreements contain a clause (clause 13.2) requiring Mr Moss as borrower to pay:
all costs and expenses of Gunns Finance, including legal and administrative costs and expenses on a full indemnity basis in relation to
…
(b) the enforcement, protection or waiver or attempted or contemplated enforcement or protection of any rights under any project document (with each loan agreement being a project document).
By clause 14 of each loan agreement, Mr Moss indemnified Gunns Finance:
against any claim, action, damage, loss, liability, costs, charge, expense, outgoing or payment which Gunns Finance pays, suffers, incurs or is liable for, in respect of
…
(b) the occurrence of any Event of Default or potential Event of default.”
An event of default included the failure of the borrower to pay any amount due and payable to Gunns Finance under any project document when due (clause 12).
The quantum of the costs claimed by Gunns Finance is referred to in an email from K&L Gates to the receivers’ staff (at page 535 of the exhibits to the affidavit of Mr Pertile). The First Respondent submitted that any costs payable to the Applicant had it been successful in the Woodlot proceeding would have been a matter of discretion for the judge in the proceeding and even if ordered on an indemnity basis would have been subject to taxation. The evidence of the amount charged by the solicitors in respect of the Woodlot proceeding constitutes sufficient evidence of the costs paid by the Applicant in respect of the proceedings and the entitlement to indemnity costs is established by the terms of the loan agreements.
A sequestration order should be made
I have concluded that orders should be made that the PIA of the First Respondent made on 9 September 2016 should be set aside pursuant to s.222(1) of the Act.
By its Application the Applicant sought an order pursuant to s.222(10) of the Act that a sequestration order be made against the estate of the First Respondent.
Section 222(10) relevantly authorises that where the Court, on an application made under s.222(1), does make an order setting aside a personal insolvency agreement, it may if it thinks fit, immediately make the sequestration order sought.
For, the reasons set out above, I conclude that a sequestration order should be made against the estate of the Mr Moss pursuant to s.222(10) of the Act as it is in the best interests of creditors to do so.
Conclusion
The Court is not persuaded on the balance of probabilities that Gunns Finance was acting as an agent for Gunns Plantation. In these circumstances the cross-claim must fail.
Further, I am satisfied that the Applicant is entitled to the sums claimed in its statement of claim which was filed in the Woodlot proceeding.
I am conscious of the effect of these orders and the effects of bankruptcy on a professional person in Mr Moss’ position weighs heavily. I bear in mind the very clear expression of the importance of the human consequences of bankruptcy articulated by Allsop CJ in Hutchings v Australian Securities and Investments Commission [2017] FCA 858. Bearing those matters in mind, I am satisfied that these orders are appropriate having regard to the matters set out above. I am not satisfied that the Applicant’s interests as a creditor were adequately considered by the Trustees when they admitted the Woodlot debt to the extent of $1.00 only.
In particular, I conclude that the terms of the PIA were unreasonable and that they were not calculated to benefit generally the creditors of Mr Moss. I also conclude that the PIA ought to be set aside for the further reason that the administration of Mr Moss’ estate by a trustee in bankruptcy (including an investigation of the sale of the Woollahra property and future contributions by Mr Moss), may well yield a better distribution for creditors than that proposed by the operative terms of this PIA.
In relation to the costs of Mr Lombe’s report, the Court was informed that the cost of that report was about $75,000. Given that much the report was excluded, I allow $7,500 for the costs of that report.
I certify that the preceding two hundred and two (202) paragraphs are a true copy of the reasons for judgment of Judge McNab
Date: 18 August 2017
[68] Found at pages 10-105 of exhibit BW-1 to the affidavit of Bryan Webster the firm 28 September 2016
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