Ifx Markets Limited v Rappaport
[2009] FMCA 893
•29 October 2009
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| IFX MARKETS LIMITED v RAPPAPORT & ANOR | [2009] FMCA 893 |
| BANKRUPTCY – Application to set aside a Personal Insolvency Agreement (PIA) – whether the PIA fails to comply with Part X of the Bankruptcy Act 1966 (Cth) and is unreasonable considered. |
| Bankruptcy Act 1966 (Cth), ss.64ZA, 77, 196, 222, 231 Bankruptcy Regulations 1996 Corporations Act 2001 (Cth), s.206 |
| For the Good Times Pty Ltd v Boyle & Anor [2009] FMCA 512 Re Andrew Nicholas Emmett; ex parte Financial Finance Corporation Ltd [1991] FCA 632 |
| Applicant: | IFX MARKETS LIMITED |
| First Respondent: | MICHAEL DANIEL RAPPAPORT |
| Second Respondent: | MICHAEL GREGORY JONES |
| File Number: | SYG 1049 of 2009 |
| Judgment of: | Driver FM |
| Hearing date: | 10 September 2009 |
| Delivered at: | Sydney |
| Delivered on: | 29 October 2009 |
REPRESENTATION
| Counsel for the Applicant: | Mr L Byrne |
| Solicitors for the Applicant: | Heidtman & Co Lawyers |
| Counsel for the first Respondent: | Mr P Dunn, QC |
| Solicitors for the first Respondent: | Lander & Rogers |
| Counsel for the second Respondent: | Mr E Finnane |
| Solicitors for the second Respondent: | Uther, Webster & Evans |
ORDERS
The application is dismissed.
The Court notes that in the light of the dismissal of the application, the first respondent seeks costs on an indemnity basis and the second respondent seeks costs on a party and party basis.
The applicant is to file and serve on the respondents any affidavit evidence it wishes to rely upon in relation to costs no later than
12 November 2009.
The respondents are to file and serve on the applicant any affidavit evidence in reply in relation to costs no later than 19 November 2009.
The respondents are to file and serve on the applicant submissions in relation to costs not less than 14 days before the hearing date.
The applicant is to file and serve on the respondent submissions in relation to costs not less than 7 days before the hearing date.
The matter be listed in relation to the outstanding costs applications at 10.15am on 8 December 2009.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 1049 of 2009
| IFX MARKETS LIMITED |
Applicant
And
| MICHAEL DANIEL RAPPAPORT |
First Respondent
| MICHAEL GREGORY JONES |
Second Respondent
REASONS FOR JUDGMENT
Introduction and background
The applicant, IFX Markets Limited (“IFX”) seeks in these proceedings orders pursuant to s.222 of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”) setting aside a Personal Insolvency Agreement (“PIA”) in respect of Michael Daniel Rappaport, the first respondent. The second respondent is the administering trustee under the PIA. IFX also seeks costs. The applicant contends that the PIA is not in the best interests of the creditor because:
a)payment of only 1.3 cents in the dollar;
b)it has incurred legal costs; and
c)bankruptcy is a better option for creditors.
The following statement of background facts is derived from written submissions filed on behalf of the parties.
The first respondent (Mr Rappaport) was born on 8 October 1979.
Mr Rappaport (with a different name) entered into a PIA on 9 July 2007 that was completed on 20 February 2008. Pursuant to the PIA a contribution of $50,000 was made to the realisation fund and provable debts in the amount of $6,960,616 were discharged.
The controlling trustee’s report in relation to the 2007 PIA indicates:
a)debts claimed by related parties amounted to $5,877,821 (see pages 5-6); and
b)debts claimed by unrelated parties amounted to $1,081,800. These mainly related to share trading activities and, as to $250,000 gambling (see pages 4-5).
At the creditor’s meeting at which the 2007 PIA was approved, related party debtors the admitted value of whose claims exceeded three quarters of the value of aggregate claims of debtors were present.
The dividend produced by the agreement was in the order of 0.5 cents per dollar.
Mr Jones acted as controlling trustee in respect of the 2007 agreement.
Mr Rappaport engaged in trading shares/derivatives in 2008.
On 13 June 2008 Mr Rappaport entered an agreement with IFX Markets trading as City Index to use City Index as a live trading platform for the purpose derivative trading.
Between 13 June and 18 June 2008 Mr Rappaport traded in derivatives using City Index.
Between 17 and 18 June 2008 Stop Loss Orders were placed on Mr Rappaport’s account, which resulted in a loss.
On 31 July 2008, City Index filed a Statement of Claim in the District Court of New South Wales seeking $171,932.89 and interest. The solicitor acting for IFX/City Index was Heidtman & Co.
A directions hearing was listed for 10 October 2008 for the claim. Mr Rappaport filed a cross claim for $680,000 in damages.
In 2009 Mr Rappaport was unemployed.
Mr Michael Jones was appointed controlling trustee of the debtor (Mr Rappaport) on 17 March 2009.
In his statement of affairs dated 17 March 2009 Mr Rappaport listed debts totaling $3,410,809.95, resulting from related party loans and amounts owing to a stockbroking firm. City Index was listed in:
a)paragraph 4 as monies owed to debtor ($680,000); and
b)paragraph 5 as an unsecured creditor ($166,000).
On 20 March 2009 Jones Partners sent a circular to creditors, which was received by IFX. Mr Jones sent this circular to IFX’s solicitor, Heidtman & Co. This letter advised that a meeting would take place on 23 April 2009 at Mr Jones’ office.
All creditors were notified by Mr Jones of the meeting pursuant to s.188 of the Bankruptcy Act.
On 2 April 2009 IFX’s solicitors, Heidtman & Co sent a proof of debt to the second respondent (Mr Jones) in respect of the debt. Heidtman & Co advised that they were acting for IFX.
On about 8 April 2009 Heidtman & Co were advised in writing as to the creditors’ meeting at the office of Jones & Co. The solicitors were advised of the time, place and date of the meeting and were provided a copy of the proposal given by the debtor, a copy of the controlling trustee’s report, a copy of controlling trustee’s statement, an advice setting out the total remuneration claim, a notice informing the debtor and each creditor of their right, within 28 days of notice of a controlling trustee’s claim for remuneration to request that the claim be taxed, and a report detailing the debtor’s proposal and financial affairs.
Mr Jones prepared a controlling trustee’s report in relation to the (2009) PIA (set out at in Exhibit MJ-1 to the affidavit of Michael Jones of 29 July 2009). That report indicates:
a)Mr Rappaport’s related party debtors; and
b)unrelated party debtors. Again, these appear largely to have related to trading losses (page 4);
c)no significant divisible assets had been identified (page 10); and
d)the dividend available for creditors was expected to be 1.3 cents per dollar (page 10).
On 23 April 2009 a creditors’ meeting was held at the office of Jones & Co in accordance with earlier communications.
At the creditor’s meeting at which the PIA was approved:
a)related parties with debts admitted to vote in the amount of $2,132,399.70 were present through their proxy Mr Thomas Rappaport (as set out in annexure A to the minutes of meeting) (representing more than 75% of the value of claims of those present); and
b)one other debtor with claims of $71,500.00 was present through its proxy Mr Robert Francis.
At the meeting, those creditors present who had debts totaling $2,204,299.81 (admitted for voting purposes) voted unanimously in favour of a resolution that Mr Rappaport be required to execute a PIA.
IFX did not attend the meeting. If the applicant had attended the meeting and voted against the resolution, the resolution still would have been passed by a special majority in number and at least 75 per cent value.
The PIA (set out in Exhibit MJ-1), executed by Mr Rappaport and Mr Jones, provides, among other things, that:
a)the creditors of Mr Rappaport include the applicant (Recital C, section 1.1);
b)$10,000 and any divisible property of Mr Rappaport will be contributed to the realisation fund (section 5);
c)upon performance by Mr Rappaport of his obligations under the PIA, provable debts of the creditors are discharged (section 9);
d)pursuant to section 12.2, the realisation fund is to be applied (in the following order of priority) to pay:
i)the second defendant’s costs:
·as controlling trustee;
·as trustee of the PIA;
ii)in a similar fashion to that provided for in sections 108-113 of the Bankruptcy Act (which includes meeting the creditors’ claims).
On 27 August 2009 a contribution under of the PIA totaling $10,000 was banked in Mr Jones’ trust account.
On 28 April 2009 the first and second respondents executed the PIA.
On 28 April 2009 Mr Martin Vu of Jones Partners advised Ms Karen Nathan of Heidtman & Co lawyers of the outcome of the meeting of creditors and the PIA.
On 1 May 2009 Heidtman & Co filed this application to set aside the PIA.
On 16 June 2009 I made orders for filing of evidence relating to the application. Those orders were not complied with in a timely fashion.
The evidence
The application is supported by affidavits by Malcolm Nixon made on 30 April 2009, Alan McMurran made on 18 May 2009 and Robert Whitton made on 18 August 2009. Only Mr Whitton was cross-examined on his affidavit. I received the evidence of Mr Whitton, who was presented as an expert, with some hesitation because his evidence was opinion evidence relating to the benefit accruing to creditors and others from the PIA. I informed the parties’ representatives that I would give little weight to Mr Whitton’s opinion because the matters he expressed views upon where matters upon which the Court is required to form its own judgement.
I also received as evidence the following documents tendered during the course of the hearing on behalf of IFX:
· A1 Minutes of creditors’ meeting, 23 April 2009
· A2 Proof of Debt, 2009
· A3 Personal Insolvency Agreement
· A4 Circular to creditors, 24 May 2007
· A5 Minutes of creditors’ meeting, 27 June 2007
· A6 Proof of Debt, 2007
Mr Rappaport relies upon the affidavit of Michael Jones made on 29 July 2009, to which was exhibited a bundle of documents. Mr Jones was cross-examined on his affidavit.
Submissions
IFX contends that the terms of the PIA are unreasonable because:
a)in assessing the reasonableness of the terms of a personal insolvency agreement, it is insufficient to have sole regard as to whether the distribution made to creditors under the agreement is greater (by however small an amount) than the initial distribution that would have been made available upon sequestration;
b)other factors should be taken into account, including:
i)the opportunity lost to the creditors to have:
·further investigations (e.g., those made pursuant to ss.77(c) or 81 of the Bankruptcy Act). As Mr Jones admitted, a further $26,000 in divisible assets has been found since the PIA was executed. This shows the potential benefit to creditors of continued investigations ;
·further contributions from income of the debtor during the period of bankruptcy;
ii)the value to the debtor of avoiding those effects of bankruptcy and other effects, including:
·restrictions on the debtor’s ability to travel (s.77(a)(ii) of the Bankruptcy Act); and
·restrictions on the debtor’s ability to manage corporations (s.206B(3) of the Corporations Act 2001).
iii)the loss of vindication that a sequestration order might bring about particularly in circumstances, such as the present, where the same debtor entered into a personal insolvency agreement less than two years before the agreement under consideration; and
c)in the circumstances, the small distribution made available does not provide reasonable consideration for the rights foregone by IFX or the detriments avoided by Mr Rappaport.
IFX relies upon the decision of this Court in For the Good Times Pty Ltd v Boyle & Anor [2009] FMCA 512, in particular at [48].
Secondly, IFX contends that the PIA does not comply with Part X of the Bankruptcy Act because the documents required by regulation 10.04 of the Bankruptcy Regulations (“the Regulations”) were not provided to IFX before the meeting of creditors to consider the proposed PIA at the stated address of IFX.
That assertion is made notwithstanding that on 21 March 2009, IFX received a letter from Mr Jones advising it of a creditor’s meeting to be held on 23 April 2009, along with a form of proof of debt, information sheet on remuneration and declaration of independence.
IFX sent the completed proof of debt to Mr Jones, noting its address as Level 38, Australia Square. IFX denies receiving other information or correspondence from the trustee until the date of the meeting. Mr Jones does not claim to have sent any further information to IFX at its business address during that time.
Mr Rappaport contends that regulation 10.04 was complied with on
8 April 2009 when a complete set of documents required by the Regulations were sent to the solicitors for IFX. Secondly,
Mr Rappaport contends that the application should be dismissed on discretionary grounds because:
a)a majority in number of creditors support the PIA;
b)the Trustee gave an opinion that “having considered the available information the interest of creditors would be better served by accepting the debtor’s proposal rather than the bankruptcy of the debtor”[1] and IFX has not demonstrated to the contrary;
[1] Exhibit "SLH-3".
c)IFX has been dilatory;
d)Mr Rappaport has complied with his obligations under the PIA;
e)the PIA provides that:
i)the provisions of the Bankruptcy Act relating to antecedent transactions will apply and therefore the PIA gives the same rights in respect of those transactions as would a bankruptcy; and
ii)all of Mr Rappaport’s divisible property will be made available for the benefit of creditors;
f)the full range of investigatory powers under the Bankruptcy Act are available to the trustee of the PIA, including the ability to examine the debtor and other persons in relation to the debtor’s examinable affairs[2];
g)IFX has not demonstrated any practical benefit in setting aside the PIA or that it would be better off with a bankruptcy;
h)the moneys offered under the PIA are not insubstantial and would not otherwise be available in a bankruptcy;
i)the Court will only make an order under s.222(5), if it is satisfied that it would be in the interest of creditors to do so, (s.222(6)) and will have regard to all relevant circumstances including the public interest. The Court will not lightly substitute its own view for the wishes of the majority of the creditors: Re: Dolman; ex parte Elder Smith Goldsborough Mort Ltd (1969) 10 FLR 384; Re: Williamson; ex parte Wearne (1980) 31 ALR 598, 43 FLR 305;
j)IFX was not present at the creditors meeting.
[2] See s.231 of the Act, which imports, amongst other things, ss.77 and 81 of the Act.
Mr Rappaport also challenges the standing of IFX on the basis that the debt asserted by IFX is disputed by him and there are contested proceedings in the District Court of New South Wales over that debt.
Reasoning
I accept on the basis of the affidavit of Mr Nixon and the documents exhibited to Mr Jones’ affidavit that IFX has standing to bring the present proceedings. IFX lodged a Proof of Debt which was accepted by Mr Jones for the purposes of the PIA. While IFX does not have the benefit of a judgment debt and is pursuing a judgment in the District Court, those proceedings (which include a cross-claim against IFX by Mr Rappaport) have been stayed, apparently pending the outcome of these proceedings. In my view, even if the Proof of Debt lodged by IFX had not been accepted by Mr Jones, IFX would have had standing in the present proceedings as a purported creditor to challenge the PIA. Indeed, the rejection of a proof of debt by an administering trustee under a PIA might be a basis for such a challenge.
There is no substance to the asserted breach of Part X on the basis of non compliance with bankruptcy regulation 10.04 which provides as follows:
At least 10 days before the first meeting of creditors called under an authority under section 188 of the Act is held, the controlling trustee must give the Official Receiver for the District in which the debtor resides, the debtor and each creditor:
(a) notice in writing of the date, time and place of the meeting; and
(aa)a copy of the proposal, given by the debtor under subsection 188 (2C) of the Act, for dealing with the debtor's affairs under Part X of the Act; and
(b) a copy of the controlling trustee's report, prepared in accordance with subsection 189A (1) of the Act, in relation to the debtor's affairs; and
(c) a copy of the controlling trustee's statement, prepared in accordance with subsection 189B (1) of the Act, in relation to special resolutions expected to be passed at the meeting; and
(d) a notice that includes the basis and the method on which the controlling trustee seeks to be remunerated, and, if appropriate, an estimate of the expected level of the controlling trustee's remuneration; and
(e) if the controlling trustee claims remuneration calculated by reference to an hourly rate -- a notice stating:
(i) the type of work undertaken by the trustee and the trustee's staff; and
(ii) the number of hours charged by each person; and
(iii) the hourly rate charged for each person; and
(iv) the total remuneration claimed; and
(f) a notice informing the debtor and each creditor of their right, within 28 days of receiving notice of a controlling trustee's claim for remuneration, to request that the claim be taxed.
Note Section 194 of the Act sets out the time for when a meeting that is to be called under an authority under section 188 of the Act must be held.
IFX chose to communicate with Mr Jones through solicitors. The solicitors stated that they acted for IFX. Mr Jones properly corresponded with the solicitors, rather than with IFX directly. It would have been wrong of Mr Jones to have done otherwise.
The real issue in this case is whether the Court should exercise its discretion to set aside the PIA or dismiss the present application. Section 222 of the Bankruptcy Act provides:
(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.
Setting aside on grounds of non‑compliance with this Part etc.
(2) 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; or
(d) the debtor;
make an order setting the agreement aside if the Court is satisfied that:
(e) the agreement was not entered into in accordance with this Part; or
(f) the agreement does not comply with the requirements of this Part.
(3) The Court must not make an order setting aside a personal insolvency agreement on the ground that it does not comply with the requirements of this Part if the agreement complies substantially with those requirements.
(4) The Court must not make an order under subsection (2) unless the application for the order is made before all the obligations that the personal insolvency agreement created have been discharged.
Setting aside on grounds of false or misleading information etc.
(5) 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 debtor has given false or misleading information in answer to a question put to the debtor with respect to any of the debtor's conduct or examinable affairs at the meeting of creditors at which the resolution requiring the debtor to execute the agreement was passed; or
(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; or
(f) the debtor was subject to a requirement under subsection 194A(3) to table a statement, and the debtor has:
(i) omitted a material particular from that statement; or
(ii) included an incorrect and material particular in that statement; or
(g) the controlling trustee has:
(i) omitted a material particular from the declaration given by the controlling trustee under subsection 189A(3); or
(ii) included an incorrect and material particular in that declaration; or
(h) the controlling trustee was subject to a requirement under subsection 194A(5) to table a statement, and the controlling trustee has:
(i) omitted a material particular from that statement; or
(ii) included an incorrect and material particular in that statement; or
(i) a person who became the trustee of the agreement has:
(i) omitted a material particular from the declaration given by the person under subsection 215A(3) or (4); or
(ii) included an incorrect and material particular in that declaration.
(6) The Court must not make an order under subsection (5) unless it is satisfied that it would be in the interests of the creditors to do so.
(7) The Court must not make an order under subsection (5) unless the application for the order is made before all the obligations that the personal insolvency agreement created have been discharged.
Ancillary orders
(8) If the Court makes an order under subsection (1), (2) or (5), the Court may make such other orders as the Court thinks fit.
(9) An order under subsection (8) may be an order directing a person to pay another person compensation of such amount as is specified in the order. This subsection does not limit subsection (8).
Application for sequestration order
(10) The trustee or a creditor may include in an application under subsection (1), (2) or (5) an application for a sequestration order against the estate of the debtor. 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.
(11) The making of an application by the trustee or a creditor for a sequestration order under this section is taken, for the purposes of this Act, to be 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.
Court may dispense with service on debtor of notice of application
(12) The Court may, if it thinks fit, dispense with service on the debtor of notice of an application by the Inspector‑General, the trustee or a creditor under this section, either unconditionally or subject to conditions.
IFX feels aggrieved because this is the second occasion in two years that Mr Rappaport has entered into a PIA in order to deal with very substantial debts. On both occasions, related creditors used their voting power to ensure that the PIA was adopted. On both occasions the anticipated distribution to creditors was minimal and in fact no benefit is likely to flow to creditors from the present PIA. Although a contribution of $10,000 was obtained from a related creditor and a further $26,000 has since been recovered by the trustee, those funds will all go in meeting the costs of the administration of the PIA by
Mr Jones. IFX considers that the PIA does not benefit it and that it might secure a better outcome in a bankruptcy. IFX draws an analogy between this case and the PIA in For the Good Times Pty Ltd.
In my view, this case can be distinguished from For the Good Times Pty Ltd. First, the debts in issue in that case were very substantially more than in the present case (although the debts in issue in this case are significant). Secondly, and more importantly, the PIA in For the Good Times Pty Ltd was obviously colourable and the trustee was not supportive of it. In the present case, there is no evidence that ss.196 and 64ZA of the Bankruptcy Act were not complied with and there is no suggestion that Mr Jones has not performed his functions diligently and in good faith. Although about 75 per cent of the debts admitted for voting purposes at the meeting of creditors called by Mr Jones were related creditors, there is no evidence that those debts were not genuine. Neither is there any evidence that an investigation of
Mr Rappaport’s affairs pursuant to a bankruptcy would reveal additional assets that could be recovered for the benefit of creditors or that it would produce an income contribution. Mr Jones is still pursuing enquiries pursuant to the PIA and his efforts to date have recovered $26,000, in addition to the $10,000 initially advanced by a related creditor. While it is unlikely that creditors will derive any benefit from the PIA, there is no reason to believe that creditors would be better off under a bankruptcy.
In addition, there is no certainty that, if the PIA is set aside, a bankruptcy would result. IFX is not in a position to seek a sequestration order. It is still pursuing a judgment debt. There is no evidence of an act of bankruptcy having been committed by Mr Rappaport upon which IFX could petition.
A further concern is that the setting aside of the PIA would leave Mr Jones unremunerated in respect of his administration. There is no proposal by IFX to compensate Mr Jones for his work. The present proceedings have been on foot since 1 May 2009 and, while the blame cannot necessarily be directed at IFX for the time taken in the proceedings, there has been non compliance with procedural directions of the Court. In my view, it would undermine the policy underlying Part X of the Bankruptcy Act if PIAs were to be set aside without any demonstrable benefit to creditors flowing, after significant delay and expenditure of time and effort in the administration by the trustee[3].
[3] The trustee submitted to the orders of the Court and was represented to assist the Court.
I am supported in these conclusions by the decision of the Federal Court in Re Andrew Nicholas Emmett; ex parte Financial Finance Corporation Ltd [1991] FCA 632. Although that case deals with Part X in an earlier form, the principle arising from the case is relevant: namely that a huge deficiency in assets over liabilities and minimal or no dividend to creditors are not in themselves sufficient grounds to set aside an arrangement under Part X. In my view, in circumstances, as here, where there is no clear benefit to creditors flowing from the setting aside of a PIA, where the PIA process or content is not colourable and where the administering trustee acting in good faith over a significant period of time would be left unremunerated, the Court should not intervene to set aside the PIA. That is the conclusion I reach in this case.
I will order that the application be dismissed with costs.
I certify that the preceding fifty-two (52) paragraphs are a true copy of the reasons for judgment of Driver FM
Associate:
Date: 29 October 2009
0
2
3