Kenny v Carkeek - [2007] FMCA 510

FEDERAL MAGISTRATES COURT OF AUSTRALIA

KENNY v CARKEEK

[2007] FMCA 510

BANKRUPTCY – Application to declare Debt Agreement void.

Bankruptcy Act 1966, ss.82, 185I, 185J, 185L, 185T, 185U

BMW Australia Finance Ltd v Geraerts [2004] FMCA 1028
Deputy Commissioner of Taxation v Trigo-Contillo [2005] FMCA 1856

Applicant:

CHRISTOPHER PAUL KENNY

Respondent:

NICHOLAS JAMES CARKEEK

File number:

MLG 873 of 2006

Judgment of:

McInnis FM

Hearing date:

21 November 2006

Delivered at:

Melbourne

Delivered on:

12 April 2007

REPRESENTATION

Counsel for the Applicant:

Ms F. Forsyth

Solicitors for the Applicant:

Hume Lawyers

Counsel for the Respondent:

Mr A. Sandbach

Solicitors for the Respondent:

Goldsmiths

ORDERS

The Application be dismissed.
The Applicant shall pay the Respondent’s costs to be taxed in default of agreement pursuant to the Federal Court Rules.
Liberty to apply within seven days of the date of these orders is granted to the parties in relation to costs.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLG 873 of 2006

CHRISTOPHER PAUL KENNY

Applicant

And

NICHOLAS JAMES CARKEEK

Respondent

REASONS FOR JUDGMENT

In an application filed 11 July 2006 Christopher Paul Kenny (the Applicant) makes application pursuant to s.185T(2)(b) of the Bankruptcy Act 1966 (the Bankruptcy Act) for declarations pursuant to ss.185U and/or 185J(1) of the Bankruptcy Act to declare Debt Agreement void.
To understand the nature of the application it is noted by way of background that Nicholas J Carkeek (the Respondent) entered into a Part IX Debt Agreement number Qld2066/4/4(DS) effective 14 July 2004 (the Debt Agreement).
By letter dated 15 June 2004 the Insolvency and Trustee Service Australia (ITSA) Queensland branch referred to the Debt Agreement proposal lodged with the Official Receiver by the Respondent and noted it had been accepted for processing on "8/06/2004".
The Applicant is also the plaintiff in the Victorian Magistrates Court proceeding number U00247128 (the Magistrates Court proceeding) and the Respondent is the defendant in those proceedings. A hearing in those proceedings has been delayed pending the outcome of the court's decision in this matter.
The Magistrates Court proceedings were issued in 1 February 2006 claiming an amount of $19,436.00 damages together with costs and interest, allegedly for moneys owing arising out of a claimed breach of contract asserted to have occurred in July/August 2001. A statement of claim which accompanies the complaint refers to an agreement between the parties apparently entered into "in or around July 2001" which was "for the purposes of contributing to the purchase of an option contract in the Euro". It is not necessary in this judgment to recite in further detail the pleadings in the Magistrates Court proceeding.
The Respondent filed a defence in the Magistrates Court proceedings on 13 March 2006. In the defence no reference is made to the Debt Agreement. However, by letter dated 20 June 2006, the Respondent's solicitors advised the Applicant's solicitors as follows:
“TAKE NOTICE that our client entered into a debt agreement on 8 June 2004, as such our client is released from your client pursuant to s185J(1) of the Bankruptcy Act. As such your proceeding is unable to proceed by virtue of the provision of that Act and we give you 7 days to discontinue your proceedings.
If you fail to discontinue your proceedings, then at any further hearing of this matter, we will make application to amend our defence and provide this letter in support of an application that your client pay our costs on a solicitor-client basis from the date of this fax.”
In his affidavit sworn 11 July 2006 in support of the application the Applicant sets out the chronology of events and attaches relevant documents. He refers to the Debt Agreement and in particular s.5 of that agreement which provides for a repayment of debts to various unsecured creditors over a period of time. He notes that agreement was reached to pay off 7 out of 10 unsecured creditors over time periods from 2007 to 2009.
Reference is then made to a further document attached namely an extract from ITSA's National Personal Insolvency Index database as at 14 June 2006 which refers to the Respondent and the Debt Agreement. In that document next to the heading, “Overall Summary” the following appears,
“The debtor put forward a proposal to creditors for consideration under Part IX of the Bankruptcy Act and creditors have accepted the proposal.”
The Applicant claims that the document appears to reveal that the obligations created by the Debt Agreement "do not appear to have been discharged."
The Applicant then deposed in his affidavit the following:
“11.Prior to 20 June 2006, I have no knowledge of the existence Debt Agreement. I am not a party to the Debt Agreement and I am not listed as a creditor on the Debt Agreement. I received no notification that the Debt Agreement was being entered into.”
In the same affidavit the Applicant then refers to a copy of the Statement of Affairs which was lodged with the Debt Agreement proposal by the Respondent in 2004 (the Statement of Affairs). He then refers to the Statement of Affairs and deposes as follows:-
“13.I have looked at the Statement of Affairs and can state that:
a. The debt alleged in the Magistrates Court proceeding is not listed as a debt in the Statement of Affairs;
b. I am not listed as a creditor anywhere in the Statement of Affairs.”
In his affidavit the Applicant then deposes that because neither the debt he has claimed nor his name as a creditor listed in the Statement of Affairs, then that document is deficient as it omits a material particular. He then states that it is on that basis that he makes his application pursuant to s.185T(2)(b) of the Bankruptcy Act.
The Applicant further notes in his affidavit that the debt he is claiming in the Magistrates Court proceedings appears to be larger than any debt agreed to be repaid pursuant to the Debt Agreement. He asserts that he is at a significant disadvantage compared to other creditors in not having been provided for in the Debt Agreement. He notes other creditors pursuant to the Debt Agreement have received payment of a portion of their debts and deposes that "a further debt agreement could be entered into to continue that process". He relevantly states
"However provision, also needs to be made for the moneys that may be found to be owing to me."
Relevantly he notes that the Magistrates Court proceedings are still to be heard and determined and then states,
“19.… On that basis, no moneys have yet been ordered to be paid to me. However, provision should have been made for this potential debt in dealing with the Respondent's creditors.”
The Applicant then relevantly deposes,
“20.It would be unfair to permit the Respondent to rely on the existence of the Debt Agreement to discharge any obligations to pay me pursuant to the Magistrates Court Proceeding on the basis that the debt was a ‘provable debt’ pursuant to section 185J (1) of the Bankruptcy Act but not to require him to identify me or the debt owed to me in his Statement of Affairs when it was lodged in 2004 and therefore to account for the debt owed to me in the Debt Agreement.”
In his application the Applicant specifically seeks orders as follows:-
“1.A declaration pursuant to section 185U of the Bankruptcy Act 1966 that the Part IX Debt Agreement No.Qld 2066/4/4(DS) of Nicholas James Carkeek dated 14 July 2004, or part of that agreement, is void.
2. In the alternative, a declaration that the debt alleged in Magistrates’ Court proceeding number V00247128 is not a debt from which the Respondent is released pursuant to section 185J(1) of the Bankruptcy Act.”

Relevant legislation

The relevant legislation arising out of this application includes the following:-
“185J Time and effect of release
(1) When details of a debt agreement are entered in the National Personal Insolvency Index, the debtor is released from provable debts from which the debtor would have been released if he or she had been discharged from bankruptcy immediately after the details were entered in the Index.
185T Persons who may apply for an order
(1) The debtor (or the debtor's personal representative if the debtor has died), a creditor or the Official Receiver may apply to the Court for an order declaring that all, or a specified part, of a debt agreement is void.
Grounds for applying for an order
(2) A person mentioned in subsection (1) may apply for an order only if:
(a) there is doubt on a specific ground that all or part of the debt agreement was not made in accordance with this Part or does not comply with this Part; or
(b) the statement of affairs lodged with the debt agreement was deficient because it omitted a material particular or because it was incorrect in a material particular.
185U Power to make order
(1) On an application under section 185T, the Court may make an order declaring a debt agreement void.
Limit on declaring debt agreement void on grounds of non‑compliance with this Part
(2) The Court must not declare all or part of a debt agreement void on the ground that it does not comply with this Part if the agreement or part of the agreement complies substantially with this Part.
Declaring a debt agreement void on grounds of deficient statement of affairs
(3) The Court must not declare all or part of a debt agreement void on the ground that the statement of affairs lodged with the debt agreement was deficient, unless the Court is satisfied that it is in the creditors' interests to declare the agreement or part of the agreement void.”
An affidavit sworn by Eamon Thomas Patrick Nolan on 18 August 2006, the solicitor for the Applicant, deposes amongst other things to what are described as "reasonable and adequate inquiries to try and obtain the details of the Respondent's creditors" and claims that those attempts have "so far proven unsuccessful". The affidavit supports an application for an adjournment to notify relevant creditors.
Mr Bronius Zumeris the solicitor for the Respondent, in an affidavit sworn 29 September 2006 refers to the background of the dispute and what appears to be common ground concerning notification given by the Respondent’s solicitors to the Applicant’s solicitor of the existence of the Debt Agreement. He then relevantly deposes as follows:
“12.On 18 July 2006 I spoke to Ms Deborah Southam of Fox Symes & Associates (‘debt administrator’) confirming that the Debt Agreement remains on foot and that all creditors have agreed to have the Debt Agreement remain in place.”
He then referred to a concern conveyed to the solicitors for the Applicant that these proceedings should continue. In his affidavit Mr Zumeris deposed that on 16 August 2006 he forwarded a letter (incorrectly dated 17 July 2006) by facsimile to the debt administrator requesting a detailed statement including a detailed history, a list of all creditors and their addresses, and an amount of their debt, the current status of the Debt Agreement and how the proceedings in this court "will prejudice other debtors if not set aside" and "the extent to which the position of the debtors has been changed and how this has taken place." It is not readily apparent why the letter referred to "other debtors" or the position of "the debtors".
In any event on 17 August 2006 Mr Zumeris claims to have received from the debt administrator an emailed response. That email states in part,
“As discussed today, Mr Carkeek has today submitted a proposal to the Insolvency and Trustee Service Australia to terminate his debt agreement. The Official Trustee has processed the proposal and the deadline date is 21 September 2006.
The deadline date is the date by which creditors affected by the debt agreement are to vote to either accept or reject the termination proposal.”
It should be noted that the Respondent purportedly revoked instructions to the debt administrator to terminate the Debt Agreement and did so by email dated 24 August 2006.
During this time it would appear that a hearing was listed before this Court on 21 August 2006 and according to Mr Zumeris in his affidavit, he received instructions on 18 August 2006 to seek an adjournment, “as the Respondent was advised by the Debt Administrator that the Debt Agreement was put to a Creditors vote and that the Respondent should file for bankruptcy.”
Mr Zumeris deposes that by letter dated 5 September 2006 he consented to an adjournment of the court proceedings “for a period of 4-6 weeks” where it appears the proceedings had been adjourned to

7 September 2006.
Mr Zumeris then deposes as follows:-
“18.On 6 September 2006 I wrote to the Respondent confirming instructions that the debt agreement will not be terminated and payment will be made towards our costs. Now produced and shown to me and marked “BZ-10” is a copy of that email.
19.On 18 September 2006 I was notified by e-mail that the Respondent revoked his instructions to the debt administrator to terminate the Deed Agreement on 24 August 2006. Now produced and shown to me and marked “BZ-11’ is a copy of that e-mail.
20.On 29 September 2006 the Respondent advised me that there was an overwhelming vote by creditor’s in favour of retaining the debt agreement. On even date, I wrote to the Applicants’ solicitors seeking to adjourn the matter for 8 weeks in order to allow our client to raise the funds required to brief Counsel and the matter be listed for a trial of at least 1 day in duration. Now produced and shown to me and marked “BZ-12” is a copy of that letter.
21.As at the date of this Affidavit I have still not received the materials requested from the debt administrator and the client, despite attempts to raise funds, has had difficulty raising the funds with which to defend this matter and requests an adjournment of 90 days in order to do so.”
In dealing with the “Creditors Interests” Mr Zumeris claimed that it is “yet to be determined whether there is any provable debt owed to the Applicant”. He otherwise claims that “any debt incurred prior to the date creditors accepted the Debt Agreement is captured by the Debt Agreement whether the “debt was disclosed or not”. Accordingly he argues “if it is determined that there is a debt owed to the Applicant it would be included in the Debt Agreement”. Specifically it was claimed that, “In the event that it is determined that a debt is owing to the Applicant, the quantum of that debt is to be included in the Debt Agreement as at the deadline date of the Debt Agreement being 14 July 2004 and the Debt Agreement varied accordingly.”
Mr Zumeris’s affidavit otherwise deals with issues concerning discovery which are not now relevant.

Submissions

Applicant’s submissions

Reference was made to the Magistrates Court proceedings and in particular the pleadings to establish the framework for the dispute.
The essential issue relied upon was that the Applicant had no knowledge of the existence of any Debt Agreement.
It was argued that the Respondent by relying upon the letter dated

20 June to support the proposition that it is released pursuant to s.185J(1) of the Bankruptcy Act must be claiming, according to the Applicant’s submissions, that the claim by the Applicant in the Magistrates Court proceedings is a provable debt pursuant to the Bankruptcy Act.
It was submitted that s.185J(1) of the Bankruptcy Act only releases someone from a provable debt.
It was argued that if the claim of the Applicant in the Magistrates Court proceedings is a provable debt then it should have been included in the Statement of Affairs. It is common ground that it was not included in that statement.
Reference was made to s.82 of the Bankruptcy Act which relevantly provides as follows:-
“(1)Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.” (Emphasis added)
…
(8) In this section, liability includes:
(a) compensation for work or labour done;
(b) an obligation or possible obligation to pay money or money's worth on the breach of an express or implied covenant, contract, agreement or undertaking, whether or not the breach occurs, is likely to occur or is capable of occurring, before the discharge of the bankrupt; and
(c)an express or implied engagement, agreement or undertaking, to pay, or capable of resulting in the payment of, money or money's worth, whether the payment is:
(i)     in respect of amount--fixed or unliquidated;
(ii)     in respect of time--present or future, or certain or dependent on a contingency; or
(iii)   in respect of the manner of valuation--capable of being ascertained by fixed rules or only as matter of opinion.”
In essence it was submitted that either the Debt Agreement does not provide a defence to the Respondent because the claim is not a provable debt or if it is a provable debt it is a debt which should have been disclosed in the Statement of Affairs.
Accordingly it is argued that the Applicant is entitled to have the Statement of Affairs set aside pursuant to s.185T(2)(b) of the Bankruptcy Act set out earlier in this judgment. It was submitted that s.185U of the Bankruptcy Act gives the Court power to set the agreement aside.
Reference was made to an ex tempore decision of this Court namely BMW Australia Finance Ltd v Geraerts [2004] FMCA 1028 as authority for the proposition that a failure to include a debt on a Statement of Affairs is an omission of a material particular.
It was submitted in the present case that if the amount claimed in the Magistrates Court proceedings could properly be regarded as a provable debt then it is a debt which should have been included in the Statement of Affairs. Accordingly that provides grounds for the Applicant to set aside the Debt Agreement and to have that agreement declared void. It was noted that although the defence of the Respondent in the Magistrates Court proceedings does not raise the Debt Agreement, the parties understood that an amendment to the defence would be sought at an appropriate time.
It was argued that there would be anomaly in the law if someone could simply not disclose a debt or a claim against them in a Statement of Affairs, enter into a Debt Agreement and then use that agreement as a complete defence in the Magistrates Court proceedings.
This Court, it was argued, should not have to wait for the Debt Agreement to be raised by way of amendment in the defence in the Magistrates Court proceedings. It was argued that is not really a matter of whether the defence can apply but rather interpreting the Bankruptcy Act which is within the power of this Court to determine whether or not the claim falls under the provisions referred to in earlier submissions. If the claim it was argued in the Magistrates Court proceedings is not released and is something the Applicant can simply pursue or is entitled to pursue or if the Respondent seeks to rely on the Debt Agreement then he cannot do so unless the claim was part of the Debt Agreement. Where a Statement of Affairs does not refer to the claim and where the Applicant had no notice of the Debt Agreement, it was submitted the Respondent is therefore not entitled to rely upon it on the ground that the Statement of Affairs omits a material particular.
During the course of submissions the Court raised with Counsel for the Applicant a concern that perhaps the matter should be left to the State Magistrates Court in the pending proceeding. It was argued that the State Magistrates Court does not have any power to make any declarations in relation to whether or not the Debt Agreement is void and that if power exclusively within the jurisdiction of a Federal Court exercising powers pursuant to the Bankruptcy Act. It was submitted if the Court were to make a declaration that the Debt Agreement was void then that issue would not be raised in the pending Magistrates Court proceedings. It was further argued that if this Court fails to make the declaration and the Debt Agreement is raised by way of defence in the Magistrates Court proceedings it may provide a complete answer in those proceedings leaving the Applicant with no claim and no remedy. Conversely, it was acknowledged that if the Applicant succeeds in the Magistrates Court proceedings then the attack on the Statement of Affairs would cease. It was argued that it is appropriate therefore to bring the matters before this Court. It was noted in any event that if the Applicant succeeds before this Court the Respondent by the defence currently filed in the Magistrates Court proceedings has other matters that can be raised in defence of the claim. Those matters fall properly within the domain of the State Magistrates Court.

It was further submitted that it would be unfair for the law to operate in such a way as to permit the Respondent to escape a claim relying on the Debt Agreement though not with any participation in the Debt Agreement of the Applicant who then may lose the claim in the pending Magistrates Court proceedings on the basis of the Debt Agreement of which the Applicant was not aware and not a party. The risk to the Applicant of continuing with the Magistrates Court proceeding was the possibility that that Court may find the Debt Agreement precluded the claim and it does not have the power to set aside the Debt Agreement on the basis that the Statement of Affairs is deficient.

Respondent’s submissions

It was submitted on behalf of the Respondent that the application in this Court is brought as what was described as “an adjunct to the Magistrates Court proceedings”. It was noted those proceedings were commenced many years after the debt which it is claimed is pursued came into existence. The Court notes in passing that the claim does arise from a contract allegedly entered into between the parties in July/August 2001. It was submitted that the present proceedings are a tactic in the context of the Magistrates Court proceedings and that what is in truth an application to deal with the entirety of the administration of the estate of the Respondent has been brought.
Counsel drew the Court’s attention to the proposal raised in 2004 by the Debtor to ITSA. On the affidavit evidence of the Respondent’s solicitors it was submitted that recently the Creditors have unanimously voted to keep the Part IX Deed on foot underpinning the application by the Applicant. It was submitted it is a proposition that there was some material non-disclosure because this claim was not set out in the Statement of Affairs. This begs the question as to whether or not there is in fact a debt. It was submitted that the Respondent’s position is that there is not and never was a debt. Accordingly there is no material non-disclosure.
As I understood the submissions for the Respondent, whilst it is argued that the view of the Respondent was that there was never a debt, it does not necessarily mean that there is currently not a provable debt pursuant to the relevant provisions of the Bankruptcy Act. Whether it is a provable debt however it was submitted depends on whether it is a debt at all according to the Respondent’s submissions. It was acknowledged that it will only become a debt if a decision is made in favour of the Applicant in the Magistrates Court proceedings and that Court has not yet determined whether there is any debt at all.
It was further submitted that in considering an application of this type the Court must take into account the interests of the Creditors pursuant to s.185U(3) set out earlier in this judgment. It was submitted there is nothing adduced by the Applicant to satisfy the Court that it is in the Creditors interests to declare this agreement which has been on foot for over two years and satisfied by regular part payments that it would be in any way in the interests of Creditors for that to be set aside. It was argued the effect of any finding that there is a debt would be simply that the Applicant would be entitled to have the fruits of the Debt Agreement.
It was further submitted that regardless of the outcome of the Magistrates Court proceedings the Applicant could lead with the Deed Administrator a claim to be a Creditor and the administrator would be required to consider that on its merits. The Applicant would then be entitled to participate pari passu with all other creditors in the benefit of the Debt Agreement.
During the course of submissions it was put to Counsel that if the Debt Agreement is raised though not including the Applicant’s claim but raises a complete defence to the Applicant’s attempts to convert what may be regarded as a provable debt into a debt, the Respondent could successfully use the Debt Agreement to extinguish rather than support the debt. In those circumstances it was suggested there would be nothing for the Applicant to then obtain by way of benefit in the Debt Agreement. Counsel agreed with that proposition and also agreed that in those circumstances rather than the benefit of the Debt Agreement it could be used to defeat the Applicant’s claim of a debt.
Counsel for the Respondent submitted that if the Applicant had undertaken appropriate searches then it would have been realised at the appropriate time that there was a registered insolvency agreement in place and that it was wrong for the Applicant to pursue proceedings in the State Magistrates Court. Rather an approach should have been made to the Deed Administrator and as a matter of law if the Applicant is indeed a Creditor then he will automatically receive a benefit under the Debt Agreement provided the proof is accepted by the Deed Administrator. No legal proceedings are then required. It was argued that the purpose of the Debt Agreement is to bring an end to multiple legal proceedings and provide for payment of creditors generally which are to the best advantage of the creditors as a group.
It was argued that this particular Part IX agreement appeared to be directed to small debts and the capacity of an estate to pay those debts should not be diminished by wasted legal costs. This is more significant in the context of a Part IX Agreement than it may be in the context of a Part X Agreement. It was submitted that is why the Applicant should not have commenced proceedings in the Magistrates Court but should instead have approached the Deed Administrator.
It was further argued that the reason the Applicant is not a party to the Debt Agreement is that he has chosen not to be a party. That has arisen due to the failure of the Applicant to lodge a Proof of Debt which would be dealt with on its merits by the Deed Administrator.
It was submitted that whilst the Debt Agreement may be used as a complete defence, it would not necessarily be a complete answer to any claimed Proof of Debt with the Deed Administrator in circumstances where it was submitted evidence already exists that the Applicant has been advised that the Applicant may participate in the Debt Agreement upon the Proof of Debt being accepted.
During the course of submissions discussion arose concerning whether the Applicant had a right to submit a Proof of Debt to the Deed Administrator. Reference was made to s.185I of the Bankruptcy Act which relevantly provides:-
“The parties to a debt agreement are:
(a) the debtor; and
(b) the creditors to whom the debtor owed debts immediately before the debt agreement was made.”
It was submitted by Counsel for the Applicant that that provision clearly relates to the Applicant to the extent that a claim is made by the Applicant that the Debtor owed debts to the Applicant immediately before the Debt Agreement was made. In the present case the debt alleged relates to claimed breach of agreement entered into in 2001 and the Debt Agreement was approved in 2004. It was further submitted that s.185L entitles the Applicant to a proportionate share of the proceeds of the Debt Agreement. That section provides:-
“If:
(a) the property subject to a debt agreement is not sufficient to pay in full, or to the extent provided by the agreement, all the debtor's provable debts; and
(b) the debt agreement does not specify how the property is to be distributed among the creditors;
the property must be distributed among the creditors in proportion to the provable debts.”
It was argued therefore that applying that provision, if the Applicant has a debt then the Applicant also has a legal right to a proportionate share of the proceeds of the Debt Agreement.
The issue remaining for the Court to consider however is whether or not there is evidence to satisfy the Court under s.185U of the Bankruptcy Act that it is appropriate in the exercise of the Court’s discretion to declare the Debt Agreement void. Reliance was placed upon s.185U(2) set out earlier in this judgment and in particular it was noted that the Court must not declare all or part of the Debt Agreement void on the ground that it has not complied with this part if “the agreement or part of the agreement complies substantially with this part”.
It was argued the only matter put forward by the Applicant is that the Applicant had a debt not included in the Statement of Affairs. To make good that claim it was submitted the Court would need to be satisfied that there was a material omission in the Statement of Affairs and it is not sufficient to simply contend that the Applicant had a claim. Rather, it is necessary for the Applicant to satisfy the Court that there was a debt in 2004 and the affidavit material does not provide support for that conclusion, according to the Respondent’s submissions. Accordingly it cannot be demonstrated that there was any deficiency in the Statement of Affairs by reason of an omission of a material particular.
It was also submitted for the Respondent that the Applicant must show that it is in the creditors’ interests to declare the agreement or part of the agreement void. As noted earlier in this judgment, reference was made to s.185U(3) which requires the Court to be satisfied that it is “in the creditors interests to declare the agreement or part of the agreement void”. This, it was submitted, is a mandatory requirement and that there is no evidence adduced by the Applicants to satisfy the Court that it is in the creditors interests to declare the agreement void. Reliance was placed upon the affidavit of Mr Zumeris and in particular paragraph 20 where he deposes,
“On 29 September 2006 the Respondent advised me that there was an overwhelming vote by creditor’s in favour of retaining the debt agreement. On even date, I wrote to the Applicants’ solicitors seeking to adjourn the matter for 8 weeks in order to allow our client to raise the funds required to brief Counsel and the matter to be listed for a trial of at least 1 day in duration. Now produced and shown to me and marked “BZ-12” is a copy of that letter.”
At the time the vote of creditors had made on 29 September 2006 it appears that the Respondent did not have assets which would be available for distribution to creditors on bankruptcy and the income was sufficiently modest that no income contribution would be required if the Respondent was to be bankrupted. Accordingly, it was submitted that it would not be in the interests of creditors if the Debt Agreement was set aside because there would be nothing available to creditors generally over time.
The Application it was submitted is misconceived and should be dismissed. It completely fails to consider according to the Respondent’s submissions what it is that the Court must look to under the relevant provisions of the Bankruptcy Act. The Creditors having considered the position after the commencement of this Application it was argued made their views clear and there was nothing before the Court produced by the Applicant to suggest the Creditors perception of their own interests is wrong. The Court should conclude the Application is misconceived and there is no material to show any basis for the Court setting aside or declaring the Debt Agreement to be void.

Applicant’s submissions in reply

Reference was made to the Creditors interests and it was noted the Creditors have all been served with the Application. If the Creditors have any interest in the matter then submissions should have been put forward to the Court.
It was noted that paragraph 20 of the affidavit of Mr Zumeris referred to earlier appears to be what could be described as “double hearsay”. It is an instructing solicitor stating that the Respondent advised him that there was an overwhelming vote in favour of retaining the Debt Agreement. The exhibit namely “BZ12” is simply a letter requesting an adjournment and does not refer to any vote by Creditors in favour of continuing the current agreement. Accordingly it was submitted that to the extent that any consideration is made of what the Creditors may or may not think of the proceedings there is nothing before the Court as to what the Creditors do in fact think.
It was submitted that there is no material before the Court to suggest that Creditors oppose in any way the current application. Reference was made to the decision of the Federal Magistrates Court in Deputy Commissioner of Taxation v Trigo-Contillo [2005] FMCA 1856 and in particular the following paragraph where the Court relevantly states,
“19. Both the National Australia Bank and DR Administrators (the “additional creditors”) were served with notice of this application and given ample time in order to oppose the orders sought. No submissions were received from the additional creditors as to whether an order rendering the debt agreement void would be in their interests. It is likely that any distribution by a trustee in bankruptcy would be less than the payout under the terms of the debt agreement, given the relative small amount owed to the additional creditors compared to the sum owed by the respondent to the ATO. However, the agreement substantially disadvantages the applicant which is owed more than ten times any other creditor.”
It was submitted in the present case there is a debt of almost $20,000 and despite it being in dispute it would appear to be larger than any other debt that has been claimed by any other Creditor. To that extent therefore the Creditors interests need to be considered. It is submitted the Applicant’s interests must be considered to be paramount given that the claim is of larger value than any other Creditors and approximately just less than half of the total amount.
It was not conceded that the Applicant would necessarily be accepted as part of the Debt Agreement should a Proof of Debt be lodged with the administrator of the deed. If included in the Statement of Affairs then the Applicant would have been a Creditor and part of the Debt Agreement from the beginning and the Applicant could then have voted at the commencement to determine how the matter was to proceed and on the material would have had a substantial vote. In the circumstances the Applicant it was submitted was subjected to a process over which the Applicant made no contribution nor had any control.
It was submitted the Court should determine the question of whether the Applicant has a provable debt or not and any argument about whether there is a debt and that it is a debt which is not yet been proven is a circular argument. If it is not a provable debt it was submitted the Court has an option of simply providing a declaration which would avoid all issues in relation to the Debt Agreement that the debt is simply not covered by s.185J(1) so therefore the Debt Agreement does not apply to it and the Applicant can proceed with the Magistrates Court proceeding. If, on the other hand, the Respondent wishes to assert that the Debt Agreement does apply then it must be accepted that it is a provable debt. That then leads to the position where the Respondent whilst conceding the Applicant was not part of the Statement of Affairs and had no control over the approval of the Debt Agreement then the interests of the Applicant can still be considered but the Applicant has to take the agreement as it stands.
It was submitted that without evidence from the Creditors in relation to disturbing the Debt Agreement, despite the fact that the agreement has been in place for some time the Court still has power under the relevant provisions to set it aside, either terminate it or satisfy it.
It was also noted that it is not sufficient to simply rely upon the length of time over which the Debt Agreement has been in place. The Court may also consider another Debt Agreement may be entered into but can be entered into on this occasion where the Applicant at the outset has the same power as all other Creditors in relation to the term of the agreement and how the matter is to proceed. It was submitted the Applicant’s debt should have been included in the Statement of Affairs and the failure to do so gives rise to a deficiency of a kind which entitles the Applicant to the relief sought particularly in the absence of evidence as to disadvantage to the other Creditors.

Reasoning

I am satisfied that pursuant to s.82 of the Bankruptcy Act the claim by the Applicant in the Magistrates Court proceedings could properly be regarded as a provable debt prior to the date of the Debt Agreement. The debt is claimed to have come into existence arising from a contract entered into between the parties in July/August 2001. In my view it is properly to be regarded as a debt or liability, present or future, certain or contingent. I am further satisfied that applying s.82(8)(b) that the claim by the Applicant could properly be regarded as a liability defined in that sub-section being an obligation or possible obligation to pay money on the breach of an express or implied covenant, contract, agreement or undertaking. Hence, I find that the pending claim in the Magistrates Court could properly be regarded as a provable debt.
I am further satisfied that applying s.185T the Court has a discretion in considering this application to declare that all or a specified part of the Debt Agreement is void. I accept that pursuant to s.185T(2)(b) that one of the alternate grounds upon which an application may be made for an order under that section is that the “Statement of Affairs lodged with the Debt Agreement was deficient because it omitted a particular material or because it was incorrect in a material particular”.
The omission relied upon in this case which was the subject of submissions by the parties is clearly the failure of the Respondent to refer in the Statement of Affairs to the Applicant’s claim. The question for the Court to consider is whether that failure could properly be regarded as omitting “a material particular”. It does not seem to me that it could properly be characterised as “incorrect in a material particular”. It is clear in the present case that the Statement of Affairs simply does not refer at all to the Applicant’s claim.
The Applicant’s affidavit in support correctly notes that the Part IX Debt Agreement was effective on 14 July 2004. The Applicant otherwise deposes that the Magistrates Court proceedings were issued on 1 February 2006. There is no evidence before the Court to suggest that prior to the commencement of proceedings in the State Magistrates Court that the claim now pending in that Court was the subject of any letter of demand. Indeed the Statement of Claim itself now relied upon in the pending Magistrates Court proceeding makes vague reference to demands being made “from August 2001 to November 2005”. The particulars of those demands are claimed to be “oral and in writing”. The oral demands are claimed to have occurred “on various occasions since the return was received”. The date the return was received is pleaded to be 24 August 2001. Significantly however the first demand in writing appears to be on 23 November 2005 by letter from the Applicant’s solicitors to the Respondent. That clearly post dates the date of the Debt Agreement. It is not clear however from the evidence that the oral demands if made predated the date of the Debt Agreement or that the amount claimed had then crystallised. In the absence of that evidence I am not satisfied that the Statement of Affairs therefore could be found to be deficient by omitting a material particular namely an outstanding unspecified claim of the Applicant which prior to the date of the Debt Agreement had only been the subject of oral demands without particulars and referred to only in pleadings before the pending Magistrates Court proceedings.
Whilst the claim may be a provable debt and ultimately depending on the outcome of the pending Magistrates Court proceedings or indeed in the absence of a final judgment may be the subject of a proof of debt lodged with the administrator of the deed, I am not prepared to accept that it should have been disclosed in the Statement of Affairs. Accordingly, I do not accept that it is appropriate in the exercise of the Court’s discretion for the reasons given that the Statement of Affairs should be set aside or that the Court pursuant to s.185U should made an order declaring the Debt Agreement void.

In the event that I am incorrect in my conclusion that it is inappropriate to make an order declaring the Debt Agreement void I am otherwise satisfied that pursuant to s.185U(3) the Court should not in any event declare all or part of the Debt Agreement void on the grounds that the Statement of Affairs lodged with the Debt Agreement was deficient because I am not satisfied that it is in the Creditors interests to declare the agreement or part of the agreement void.
In my view the pending Magistrates Court proceeding issued on 1 February 2006 based in part upon a letter of demand pleaded to have been dated 23 November 2005 should not now be relied upon in a manner which would interfere with a Debt Agreement reached by Creditors and which at least appears to have been part performed.
I am not satisfied on the evidence for the reasons submitted for and on behalf of the Applicant however that there is sufficient evidence to enable the Court to conclude that a vote took place of Creditors in favour of retaining the Debt Agreement on 29 September 2006. I accept the criticism of that evidence and in my view it is not sufficient for a deponent to simply assert that that event occurred based on what the deponent was told by the Respondent. It is clear to me that if a meeting occurred as claimed then there is no reason why clear evidence could not be provided to the Court in relation to that meeting. The exhibit relied upon and referred to in paragraph 20 of the affidavit of Mr Zumeris does not assist. Nevertheless I am further satisfied that the Debt Agreement having been entered into approximately two years prior to the commencement of the State Magistrates Court proceedings and in part executed appears to be in the interests of Creditors and I am further satisfied the Applicant in these proceedings may well have rights to lodge a Proof of Debt with the administrator and obtain some benefit of the Debt Agreement albeit not having the opportunity to participate at an earlier stage in the decision making process which led to the Debt Agreement being finalised.
I accept as submitted by the Respondent that in the circumstances the proper approach of the Applicant was to lodge a Proof of Debt with the administrator after having made all due and proper searches which would have revealed the existence of the Debt Agreement. I further accept that as a matter of principle where a Debt Agreement has been entered into and properly accepted that it is not in the interests of Creditors generally for other proceedings to be pursued by other Creditors not party to the Debt Agreement as that would unnecessarily draw valuable resources away from the resource pool available to Creditors.
I accept further that on the material before me it would appear that the Applicant has as submitted by the Respondent failed to undertake the appropriate searches. Had appropriate searches been undertaken then it would have been realised that there was a registered insolvency agreement in place and that the State Magistrates Court proceedings were inappropriate. The option still available to the Applicant is to at least seek to prove the debt to the satisfaction of the Deed Administrator and not incur further legal expenses for what is a relatively modest claim.
Whilst I note that the amount now claimed by the Applicant in the pending Magistrates Court proceedings may be significantly higher than most other Creditors, that fact of itself does not persuade me that the Court should exercise its discretion in favour of the Applicant in this application.
It is my conclusion therefore that it would be inappropriate for the Court to exercise its discretion to declare the Debt Agreement void. To that extent the Debt Agreement stands. Whether that finding results in a complete defence to the pending Magistrates Court proceedings will be determined when and if it is raised in any proposed Amended Defence and no doubt will be a matter considered by the State Magistrates Court in due course. In the alternative the Applicant may seek to pursue the rights which appear to be remaining to lodge a Proof of Debt with the administrator rather than pursue the State of Magistrates Court proceedings.
For the reasons given it follows the Application should be dismissed with costs.

I certify that the preceding eighty (80) paragraphs are a true copy of the reasons for judgment of McInnis FM

Associate:

Date: 12 April 2007