RDN Developments Pty Ltd v Shtrambrandt and; RDN Developments Pty Ltd v Shtrambrandt

[2012] FMCA 437

FEDERAL MAGISTRATES COURT OF AUSTRALIA

RDN DEVELOPMENTS PTY LTD v SHTRAMBRANDT and
RDN DEVELOPMENTS PTY LTD v SHTRAMBRANDT & ANOR [2012] FMCA 437

BANKRUPTCY – Application to set aside a personal insolvency agreement entered into by the First Respondent – agreement set aside and sequestration order made – freezing orders previously made by the Court continue – trustee in bankruptcy be appointed.

Bankruptcy Act 1966 (Cth) ss.222(1), 222(2), 222(5), 222(6), 222(10)
Transfer of Land Act 1958 (Vic)

For the Good Times Pty Ltd v Boyle and Anor [2009] FMCA 512.
Re Andrew Nicholas Emmett Ex Parte: Beneficial Finance Corporation and Others [1991] FCA 632.
Re Brennan; Ex Parte Stokes Australasia Pty Ltd (Morling J, unreported, 31 May 1988).
Re Codrington; Ex parte Don MacKay Tourist and Chartered Pty Ltd [1989] FCA 349.
Re Doukidis; Ex parte Consolidated Constructions Pty Ltd, [1985] FCA 224.
Re Khera Ex parte: National Australia Bank Ltd [1996] FCA 470.
Re Richards; Ex parte Beneficial Finance Corporation Finance Ltd (Jackson J, unreported 17 March 1986).
Stedman v Deputy Commissioner of Taxation [2000] FCA 336.
Talacko & Talacko (No. 3) [2011] FCA 1343.

Applicant: RDN DEVELOPMENTS PTY LTD

First Respondent: ARKADY SHTRAMBRANDT

File Number: MLG 1324 of 2011

Applicant: RDN DEVELOPMENTS PTY LTD

First Respondent: ARKADY SHTRAMBRANDT

Second Respondents: TIMOTHY MARK SHUTTLEWORTH HOLDEN
AND
MATTHEW TERRENCE GOLLANT

File Number: MLG 1830 of 2011

Judgment of: Whelan FM

Hearing date: 19 April 2012

Date of Last Submission: 19 April 2012

Delivered at: Melbourne

Delivered on: 25 May 2012

REPRESENTATION

Counsel for the Applicant: Mr Fary

Solicitors for the Applicant: De Wet Partnership Solicitors

First Respondent: First Respondent appeared in person

Counsel for the Second Respondent: Mr Lhuede

Solicitors for the Second Respondent: Piper Alderman

ORDERS

1. Pursuant to s.222(1) of the Bankruptcy Act 1966 (Cth) (“the Act”) the Personal Insolvency Agreement entered into by the First Respondent on 29 December 2011 be set aside.

2. A sequestration order issue against the estate of ARKADY SHTRAMBRANDT under s.222(10) of the Act.

3. Mr Paul Burness be appointed as the trustee of the bankrupt estate.

4. The creditors petition filed in proceedings MLG 1324/2011 is dismissed.

5. The Applicant’s costs of the application and the creditors petition (MLG 1324/2011), including reserved costs, be taxed and paid out of the bankrupt estate of the Debtor with the same propriety as the costs of a petitioning creditor.

6. The freezing order made on 10 February 2012 against Fenedisto Pty Ltd ACN 080 844 677 and Fenedisto (Vic) Pty Ltd ACN 155 495 266 be extended until 24 August 2012.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT MELBOURNE

MLG 1324 of 2011

RDN DEVELOPMENTS PTY LTD

Applicant

And

ARKADY SHTRAMBRANDT

Respondent

MLG 1830 of 2011

RDN DEVELOPMENTS PTY LTD

Applicant

And

ARKADY SHTRAMBRANDT

First Respondent

And

TIMOTHY MARK SHUTTLEWORTH HOLDEN AND MATTHEW TERRENCE GOLLANT

Second Respondents

REASONS FOR JUDGMENT

1. This is an application made under s.222 of the Bankruptcy Act 1966 (Cth) (“the Act”) to set aside a personal insolvency agreement (“PIA”) entered into by the First Respondent.

2. The Second Respondents are the controlling trustees in relation to that insolvency agreement.

Background

1. On 5 August 2011, the Applicant in these proceedings issued a bankruptcy notice and served it on the First Respondent on 11 August 2011. The Applicant subsequently issued a creditor’s petition on 13 September 2011, which was served on 19 October 2011.

2. Procedural orders in that matter, MLG 1324 of 2011, were issued by Registrar Pringle on 15 November 2011 and on 25 November 2011 authority was given to the controlling trustees by the First Respondent, effectively staying those proceedings.

3. On 29 December 2011 the application in this matter was lodged.

4. The Applicant in these proceedings seeks orders, pursuant to s.222(1), s.222(2) and s.222(5) of the Act, that the personal insolvency agreement entered into by the First Respondent be set aside. The Applicant also seeks that a sequestration order be made against the estate of the First Respondent and provision be made as to costs.

5. Section 222 of the Act sets out the basis upon which the Court may set aside a personal insolvency agreement. Sub-section 222(1) provides that a personal insolvency agreement may be set aside on the application of, as in this case, a creditor if the Court is satisfied that the terms of the agreement are unreasonable, or are not calculated to benefit the creditors generally or for any other reason the agreement should be set aside.

6. In this case the Applicant relies on both the terms of the agreement being unreasonable and there being other reasons whereby the agreement ought to be set aside.

7. Sub-section (2) deals with setting aside a personal insolvency agreement for non-compliance with the relevant part of the Act and it provides that the Court may make an order setting aside a personal insolvency agreement if it is satisfied that the agreement was not entered into in accordance with the Part or does not comply with the requirements of the Part.

8. Sub-section (5) provides that an order may be made setting aside a personal insolvency agreement if the Court is satisfied that the debtor has omitted a material particular from the statement of the debtor’s affairs given under s.188(2)(c) or s.188(2)(d) or included any incorrect and material particular in that statement.

9. Sub-section (6) provides that the Court must not make an order under sub-s.(5) unless it is satisfied that it would be in the interests of the creditors to do so and sub-s.10 specifically provides that the trustee or a creditor may include in an application under sub-s.1, sub-s.2 or sub-s.5, an application for a sequestration order against the estate of the debtor. If the Court on the first mention 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.

The Applicant’s Evidence

1. The Applicant in this matter relies on three Affidavits sworn by Mr May, a Director of RDN Developments Pty Ltd. In support of the application, the Applicant took the Court to the main documents which gave rise to the insolvency agreement, the authority to the controlling trustees, the statement of affairs, the report by the controlling trustees, the personal insolvency agreement and the resolution of the creditors.

2. The Applicant took the Court to the following particular aspects of the statement of affairs which was lodged by the First Respondent. Starting at question 22 of the statement, the Court’s attention was drawn to the fact that the First Respondent indicated that his total cash assets amounted to $205.30.[1] He also claimed to have a superannuation fund, called the Arkady Super Fund, which had a balance of some $800,000.00 and which was said to be a regulated superannuation fund.[2] In relation to the question, “Have you made a lump sum payment to any super fund in the last five years?”, he disclosed one payment of $1,000.00.[3]

   [1] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-8 at page numbered 10.

   [2] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-8 at page numbered 10.

   [3] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-8 at page numbered 10.

3. The First Respondent claimed in his statement of affairs not to have a vehicle or any real estate or shares, to have no other investment and that his only substantial asset was an amount of $800,000.00 owed to him by an E Semenova, who the Applicant understands to have been the First Respondent’s former wife.

4. In relation to the question, “Have you sold, transferred or given away any assets worth more than $1,000.00 in the last 5 years?” the First Respondent answered “No”.[4] And, in answer to the question, “Have you contributed or otherwise assisted in the purchase or improvement of any asset valued over $1000 which is held by someone else?”, he answered “No”.[5]

   [4] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-8 at page numbered 12.

   [5] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-8 at page numbered 13.

5. At page 14 of the statement of affairs the First Respondent lists his liabilities. Under question 40, “Unsecured Creditors”, he indicates that there is a total of something in excess of $5 million owed to unsecured creditors. These include an amount of $700,000.00 owed to the Applicant, although the Applicant suggests that the debt is greater than that, and a loan of $215,000.00 from a Ms Mayorova who the Applicant understands to be the First Respondent’s step-daughter. Further amongst the list of creditors is the company Fenedisto which is said to be owed $2.575 million for rent and a Mr Alan Gregory Walker who is said to be owed $1.398 million for a loan.

6. In answer to the question, “Have you been a director or had a management role in a company at any time over the past 5 years?”, the First Respondent answered, “Yes, Fenedisto Pty Ltd”[6] and in relation to the nature of the company activity indicated that it was a trustee of a self-managed superannuation fund. In answer to the question, “Have you been a unit holder, or beneficiary in a trust in the last 5 years?”, the First Respondent answered, “No”.[7] Although the form required that a copy of the last available financial statement be provided and annexed to the statement, no financial statements were annexed with respect to Fenedisto.

   [6] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-8 at page numbered 18.

   [7] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-8 at page numbered 19.

7. The Applicant also took the Court to the report to Creditors produced by the controlling trustees.[8] The Applicant referred to that report indicating that the First Respondent had realisable assets valued at $205.00 and noting the superannuation amount of $800,000.00, which the controlling trustee found to be in a superannuation fund regulated under the Act, being generally not realisable in a bankruptcy.

   [8] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-11.

8. There is a reference in the report to some evidence of the fund holding properties in Brighton at Cole Street and then there is a note that money owed to the Debtor, with reference to the $800,000.00 owed by Ms Semenova, was said by the Debtor to be unrealisable.[9] The report also noted that the controlling trustee had been advised of additional creditors that had not been included in the statement of affairs, being Best Hooper and A & A May.[10]

   [9] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-11 at page 2 of the Report.

   [10] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-11 at page 3 of the Report.

9. Under the heading of “Investigations conducted by the controlling trustee”, the controlling trustees indicated that the Debtor’s current residence was owned by Fenedisto and that the controlling trustee had been informed by the Debtor that he may have an interest in a property located in the Ukraine.[11]

   [11] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-11 at page 3 of the Report.

10. In relation to the property Unit 3, 66 Westbury Street (“the Westbury Street property”) the Debtor claimed that this property was held by him as a trustee for his step-daughter, Anna Mayorova, and that the proprietorship of the property was transferred to her in April 2008. Further investigations were to be undertaken into the transfer of that property. There is also reference to a property at 6 Curraweena Road, a property acquired by the Debtor as sole proprietor in October 2006 and sold by him in May 2010. The Debtor advised that the property was sold for $875,000.00, that of the sale proceeds, $500,000.00 was paid to the mortgage, $150,000.00 paid to reduce the Debtor’s debts to Fenedisto and the balance used for personal expenses.

11. The Debtor indicated that he currently drives a motor vehicle under an arrangement with a Ms Levtchouk and that any jewellery or artwork at his residence are the property of his former partner who he claimed had paid cash for that collection.

12. Under 5.4 “Legal Action”, the controlling trustee indicates that there were legal proceedings against the former lawyers of the Debtor and that he had assigned those proceedings for the sum of $40,000.00 and that this was the money that was being used to fund the personal insolvency agreement.[12] The Applicant noted that those proceedings have actually now been heard and Judgment delivered and that the First Respondent was unsuccessful in those proceedings.

    [12] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-11 at page 4 of the Report.

13. The controlling trustee notes that he had been informed that Fenedisto was trustee of the Fenedisto Unit Trust and that all units were owned by the Arkady Super Fund. The Applicant understands that the members of that fund are the First Respondent and his family, and so therefore the First Respondent and his family would be the trustees of the fund of which one of the assets is units in the Fenedisto Unit Trust. The controlling trustee concludes that there would be no value in the Debtor shareholding in Fenedisto on the assumption that they are a trustee and also on the assumption that none of the provisions of the Act would operate in relation to that fund.

14. As to antecedent transactions, the controlling trustee was unaware of any, but his investigations were continuing.

15. The report then contains a summary of the Debtor’s proposal which was a payment of $40,000.00 on account of the $5 million or so owed to unsecured creditors. This would provide, what is described as, a “minimal return to creditors”.[13] Precisely how minimal is calculated further on in the report.

    [13] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-11 at page 5 of the Report.

16. On page 6 of the report, under the heading “Return to Creditor’s in the event of Bankruptcy”, the controlling trustee estimates that no funds would be available to unsecured creditors on the analysis set out there. There is a high position and a low position. On the high position the assets are thought to be $5,205.00, which is largely comprised of income contributions, and on the low position, nil. The Applicant noted that there was no provision in the report for the possibility that any amounts might be recovered under the avoidance provisions of the Act. Once you take out the costs of administration, which on both scenarios was going to exceed the assets, you would come out with a nil return.

17. On page 7 of the report is the heading “Return to Creditors under the proposed personal insolvency agreement”, and again there is a high figure and a low figure. The low figure is $28,241.00 and the high figure $38,141.00. There is an estimated return of between $0.0023 cents in the dollar or $0.0004 cents in the dollar. The Applicant says on the basis of that, with his claim exceeding $700,000.00 the return would roughly be $280.00. It is important to note on the basis of the information before the controlling trustee, the opinion of the controlling trustee was that the creditor’s should reject the Debtor’s proposal for the personal insolvency agreement for the following reasons:

    a)The contribution to the PIA is from the proceeds from the assignment of rights to a legal action that the Debtor is currently involved in, which was a matter that was extremely difficult to value, although the Court should note that that legal action has subsequently resolved;

    b)The likely return to creditor’s from the proposed personal insolvency agreement is very small and is estimated to be less than one cent in the dollar which represents a commercially insignificant return to creditors; and

    c)There have been significant investigations undertaken but due to the statutory time frames there are still a number of questions relating to the affairs of the Debtor that have not been answered and documents not provided.[14]

    [14] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-11 at pages 7-8 of the Report.

18. In the event, what occurred at the creditors’ meeting was that the creditors whom the Applicant characterised as predominantly the related party and his accountant, decided that the proposal should be accepted. The Applicant took the Court to the record of the meeting of the Creditors and indicated there that Anna Mayorova was admitted to vote for the principal debt of $273,220.00, Anna Mayorova being the First Respondent’s step-daughter.[15]

    [15] Affidavit of Timothy Mark Shuttleworth Holden, sworn 4 April 2012, Annexure TMSH-2 at page 3 of the Report.

19. The minutes also noted that Fenedisto’s claim of a debt of $2.6 million and subsequent financial statements and a letter provided on the day of the creditor’s meeting, caused some concern over the quantum of the claim lodged against the debtor. Discussion ensued on treatment of loan accounts and there were further questions and responses which covered the structure of Fenedisto, which Mr Holden detailed to the meeting. Mr Holden noted that not all of the information had been provided including the trust deeds.[16]

    [16] Affidavit of Timothy Mark Shuttleworth Holden, sworn 4 April 2012, Annexure TMSH-2 at page 3 of the Report.

20. Later in the minutes, Mr Holden noted the claim of Alan Walker (“Mr Walker”), the First Respondent’s accountant, and that it related to monies initially loaned in 2002 of some $400,000.00. A mortgage was given over the assets of Fenedisto to secure that amount and further deeds of assignment to support the claim in subsequent years, however no bank statements to show the original advancements of the funds had been provided.[17]

    [17] Affidavit of Timothy Mark Shuttleworth Holden, sworn 4 April 2012, Annexure TMSH-2 at page 3 of the Report.

21. The minutes note that Fenedisto was admitted for $1.353 million relying principally upon bank statements said to show funds advanced by Fenedisto on behalf of the Debtor and Mr Walker was admitted in full for voting purposes on the basis of the documentation supplied, despite the objection of some of the creditors present.[18]

    [18] Affidavit of Timothy Mark Shuttleworth Holden, sworn 4 April 2012, Annexure TMSH-2 at page 4 of the Report..

22. The minutes note that there were 13 creditors voting in favour for an amount of $3.12 million making 80.56% of the creditors and 5 creditors voted against for an amount of $753,000.00, being 19.44%. What was required was a majority in number and an absolute majority in value. On that basis the special resolution was passed.[19]

    [19] Affidavit of Timothy Mark Shuttleworth Holden, sworn 4 April 2012, Annexure TMSH-2 at page 6 of the Report.

23. The Applicant also took the Court to the personal insolvency agreement itself, which was entered into by the First Respondent in accordance with the resolution. The parties are named as Mr. Shtrambrandt, the First Respondent, Mr Holden and Mr Gollant, the Second Respondents. The recital indicates that the agreement is entered into in accordance with the provisions of Part X of the Act.[20] At page 3, clause 4 it is indicated that the property of the Debtor which is indicated at item 1 of the schedule, if any, is to be available to pay the creditor’s claims. If you go to the schedule, you will note that the property recorded there is recorded as being none.[21] This in itself is noteworthy given that in other circumstances all divisible property of the Debtor might be made available to settle the creditor’s claims.

    [20] Affidavit of Timothy Mark Shuttleworth Holden, sworn 4 April 2012, Annexure TMSH-3 at page 2.

    [21] Affidavit of Timothy Mark Shuttleworth Holden, sworn 4 April 2012, Annexure TMSH-3 at page 10.

24. Clause 5 of the personal insolvency agreement refers to income available to pay the creditors claims and again in the schedule this is recorded as being none.[22]

    [22] Affidavit of Timothy Mark Shuttleworth Holden, sworn 4 April 2012, Annexure TMSH-3 at page 10.

1. Clause 6 refers to contributions and again contributions from the Debtor are effectively recorded as none. There is no contributor that was party to the deed and none is specified. The contributions are set out in item 4 of the schedule,[23] which essentially amounts to the sum of $40,000.00 funded by the assignment of the rights in the legal action.

   [23] Affidavit of Timothy Mark Shuttleworth Holden, sworn 4 April 2012, Annexure TMSH-3 at page 10.

2. Clause 14 notably indicates that the antecedent transaction provision of the Act will not apply to the Debtor under the terms of the deed and clause 15 indicates that creditors are not entitled to receive a dividend. Clause 15 read in conjunction with Item 6 of the Schedule indicates that there will be no creditors that will not be covered by the personal insolvency agreement.

Grounds of the Application

1. The bankruptcy proceedings in this matter have their origins in an application made by the Applicant in this matter against the First Respondent and Others in the Supreme Court of Victoria seeking compensation under s.118 of the Transfer of Land Act 1958 (Vic).

2. On 24 June 2010 Croft J gave judgment in that matter that amongst other things, the Debtor pay to the Applicant compensation of $453,925.79 and interest of $100,519.07.[24] The Applicant took the Court to excerpts from the transcript of the hearing coming before Croft J which is contained as an annexure to one of the affidavits in the proceedings. In particular the Court was taken to page 227 of the transcript where Mr Shtrambrandt was being cross-examined and he said:

   I explained it to Mr May that if he doesn’t want to be sued in the future he shouldn’t have any assets in his name. That’s when people don’t take risks and don’t waste money on suing a person. He asked me how my situation is structured and I explained to him that all the assets that he believes I have are owned by Fenedisto and the super fund and in reality there are no assets in my name and that’s what gives me a relatively easy field and that’s what Mr May thought would be a good idea for him to structure his dealings with Anna May . . .[25]

   [24] Affidavit of Andrew May sworn 29 December 2011, Annexure AM-1.

   [25] Affidavit of Andrew May sworn 29 December 2011, Annexure AM-2 at pages numbered 227-228.

3. The Court was taken further to page 314 of the transcript and to this statement of Mr Shtrambrandt:

   My situation is I am not that concerned about the outcome of this case because the plaintiff is aware I don’t have any assets in my name.[26]

   And the further statement:

   It’s just a matter of principle for me, for my family, to get it right that’s what I am fighting for. I walked away twice from confronting the plaintiff. Twice I removed the caveats and walked away. This time I am being attacked and I want to get the story right for the sake of my family. As I said, this is not financial burden for me because I represent myself. It’s not going to be a financial burden for me because I can tell in Court I would rather plead Part 10 than give the applicant one cent if he wins.[27]

   [26] Affidavit of Andrew May sworn 29 December 2011, Annexure AM-2 at page numbered 314.

   [27] Affidavit of Andrew May sworn 29 December 2011, Annexure AM-2 at pages marked 314-315.

4. The Applicant submits that that is exactly what the First Respondent did and that this supports his submission that the Part X processes were being misused or were intended to be misused and the First Respondent attempted to set up his affairs so as to avoid any creditor’s claims. The Applicant says that the evidence is significant in terms of the bankruptcy because if the First Respondent had that intention at any time when he disposed of an asset, that transaction could be challenged by a trustee in bankruptcy.

5. On the first return of the creditors petition, the First Respondent sought a two-week extension on the basis that first, he had claims against his former solicitors in excess of $1 million. Ultimately that was the claim that was assigned to Fenedisto and was unsuccessful.

6. Second, he had established that there was an asset in Europe that he might be able to sell, namely interest in a property in the Ukraine. He later said that his parents had an interest in that property and were willing to assign their interest to him and his sister.

7. Third, he indicated that he had separated from his wife and was in the process of negotiating a financial agreement; that he had substantial holdings in a superannuation fund in which his current wife and step-daughter were beneficiaries and that he had authority to draw down on the super fund in the initial sum of $100,000.00 towards a settlement. He indicated that the equity in the superannuation fund was $3 million and 70% of that was his. An overdraft could be established within two weeks from which the debt owing to the Applicant could be paid, so he had the ability to raise a very large amount of money at the drop of a hat.

8. He indicated that he had one large creditor, Fenedisto, who he owed approximately $200,000.00 which the Applicant submitted the Court should compare with the figure given in the statement of affairs; that he had no income and survived on loans from Fenedisto; and that he had no other major creditors.

9. Once the adjournment was granted the First Respondent then entered into the Part X personal insolvency agreement effectively staying any further proceedings in relation to the creditors petition.

10. The first ground upon which the Applicant relies relates to s.222(1)(d) that is that the terms of the personal insolvency agreement are unreasonable or not calculated to benefit creditors generally. The Applicant submits that there are numerous cases in which a derisory dividend has been a significant factor in setting aside compositions or deeds under Part X under the former provisions of the legislation and also under the current provisions. In this case it should be noted that the anticipated dividend was $0.0004 cents in the dollar.

11. It should further be noted that the personal insolvency agreement does not include the antecedent transaction provisions nor does it include an assignment of a debtor’s divisible property for the benefit of creditors, nor does it include the Debtor’s income.

12. The Applicant took the Court to a number of decisions in support of the submission that a derisory dividend was a significant factor in setting aside a composition or deed under the Act. The first of these was Stedman v Deputy Commissioner of Taxation [2000] FCA 336 (“Stedman”) where the Full Court of the Federal Court in coming to its decision stated at paragraph 11, “offering to pay 3 cents in the dollar was manifestly unreasonable and derisory”.

13. The Applicant also took the Court to the case of Re Andrew Nicholas Emmett Ex Parte: Beneficial Finance Corporation and Others [1991] FCA 632, (“Emmett”) a decision of O’Loughlin J, where his Honour referred to a number of decisions dealing with the issue of when a derisory dividend might be a factor in setting aside a personal insolvency agreement. He noted at paragraph 36 of that judgment:

    It seems to me that in each of these six cases there were factors, over and above the smallness of the dividend and the size of the debt, that caused the Court to intervene. Even though there are examples of strong dicta to the effect that the smallness of the amount offered coupled with the amount of the debts, might be sufficient, without more, to set aside the composition, it is significant that no case has been found where that has happened.

14. O’Loughlin J nevertheless allowed for the possibility that this might occur.

15. The Applicant then took the Court to a more recent decision of Federal Magistrate Smith in For the Good Times Pty Ltd v Boyle & Anor [2009] FMCA 512 (“For the Good Times Pty Ltd”). In that decision his Honour referred to the new provisions of s.222(1) and says:

    Section 222(1) now has the effect that the consideration of the reasonableness and benefits to creditors of the terms of an agreement provides independent grounds for setting aside an agreement and making a sequestration order, and these considerations are no longer only qualifications after satisfaction of formal grounds, as under the old s.222(5).

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

    Under the terms of the agreement, Mr Boyle acquired the great benefit both of shedding himself of his enormous liabilities to his creditors, and of escaping from his liability to share with his creditors any of his current or future acquired property and income, beyond the relatively insignificant sum of $40,000.[28]

    [28] For the Good Times Pty Ltd v Boyle & Anor [2009] FMCA 512 at paragraphs 46-48.

16. His Honour goes on to therefore say that he is satisfied as to the existence of a ground for setting aside the agreement under s.222(1)(d).

17. The Applicant points to the fact that in that case the size of the dividend alone was sufficient and also notes that as with this case there was a recommendation by the controlling trustee that the personal insolvency agreement should not be accepted

18. The second ground relied upon by the Applicant is that there was a material misstatement and omission of material particulars from the statement of affairs as set out in s.222(5)(e).

19. The Applicant referred to a letter dated 6 December addressed to the controlling trustees.[29]. That letter indicates that the solicitors for the Applicant were instructed to provide the controlling trustee with information in relation to the incomplete statement of the debtor’s affairs provided and then goes on to enumerate a number of matters, which in the view of the Applicant required investigation. The Applicant referred in particular to the concern of Mr May that if Mr Walker lodged a proof of debt it would be in direct contradiction to sworn evidence that he gave in the Supreme Court earlier in the year to the effect that he and the Debtor had not lent or borrowed any money to or from each other.

    [29] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-8.

20. In the event Mr Walker was accepted as an unsecured creditor. He is referred to in the statement of affairs and was also allowed to vote at the Part X meeting. Exhibit ‘AM-9’ contains transcript of proceedings in the Supreme Court of Victoria. On page 419, the transcript deals with cross-examination by the Applicant’s Counsel of Mr Walker and it goes as follows: “How much money did you lend to clients?” He says, “It was probably between 20 to $100,000 because I could”. He is then asked, “You are confident of that range of $20,000 to $100,000?”. He says, “Generally speaking that’s the term – sorry, that’s the amount of loans I would normally deal with”. He is then asked, “So you haven’t lent a client $1 million for example?” He says, “I think I would remember that, sir”. It is then put to him, “What about a couple of hundred thousand, would you remember that?” He says,

    I hate to say yes or no. Yes and no. I currently have a business that banks over $150,000.00 a week. I’m semi-retired, so while those amounts may be considered large to some people they are probably not as large or as significant to myself, and I used to be a merchant banker as well, so the amounts you talk about aren’t large”.

    He is then asked, “But you did lend the money, is that your evidence?” He says, “I gave the money to Arkady, it didn’t go ahead and Arkady actually returned the funds to me.” [30]

    [30] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-9, at pages numbered 419-420.

21. Then at page 420, the cross-examination continues and Mr Walker is asked:

    Could you please turn to paragraph 22 of the document in front of you, which is Exhibit L. That says in relation to a property at Cole Street: “Further, Mr Walker who has been funding the ongoing mortgage payments became concerned as to the very substantial delay and to his position generally in the proposed development. He insisted that the matter be regularised at the earliest possible opportunity to record the proposed joint venture.” Do you remember insisting on that Mr Walker?

    He responds,

    Once again, (a) I can’t remember the loan and, I can’t remember the regularising of it. It may have been one of those things where Arkady was in a tight spot, I don’t know. I’m sorry, I can’t remember. I apologise.[31]

    [31] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-9 at page numbered 421.

22. He is then asked, “Did you execute an agreement with a company called Fenedisto?” He says, “I can’t recall. I may have. I’m sorry. Generally if I lent money I would have lent it to Arkady. It may have been backed up by an agreement. I normally lend the money to people, not to businesses.”[32]

    [32] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-9 at page numbered 421.

23. And then at page 422, “Do you remember agreeing, as recital E records, to “Contribute to all the construction funds for a property at Cole Street, Brighton, estimated at $1.8 million?” He says, “I don’t recall at all. I really don’t”.

24. The Applicant says it seems that between this cross-examination and the meeting of creditors, Mr Walker’s memory was revived and that this is a matter that required investigation. It was a circumstance that falls under the criteria of ‘some other reason’ where transactions are shadowy and require further investigation.

25. The Applicant also raised questions as to whether Fenedisto was a complying superannuation fund and the lack of evidence in relation to that. The Applicant also refers to a supplementary report provided to the creditors by the controlling trustees, just seven days before the meeting of creditors, in relation to the financial statements of Fenedisto. That report says:

    I refer to previous circular to creditors . . I advise that on 21 December I received the financial accounts for the Fenedisto Unit Trust for the years ending 30 June 2009 and 30 June 2010. Fenedisto has previously claimed to be a creditor in the administration to the amount of $2.600,000 however, the accounts, as at 30 June 2010, reveal that Mr Shtrambrandt is owed $3,061,225 by Fenedisto.

    Therefore even if there is an offset of the two amounts, Mr Shtrambrandt, on the information currently available to me is owed at least $461,255.00 by Fenedisto.

    In the case of bankruptcy the trustee of a bankrupt estate would be able to pursue Fenedisto for the repayment of the loan amount which could be between $461,225 and $3,061,225.[33]

    [33] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-12 at page 1.

26. The controlling trustee goes on to talk about the possibility of a significant recovery in the case of bankruptcy and reiterates his recommendation to reject the personal insolvency agreement.

27. The Applicant further referred to the accounts of the Fenedisto Unit Trust. The balance sheet as at the 30 June 2010 shows under ‘Current Liabilities’, the amount owed by the trust to other persons, loans from directors of $3,061,255 up almost a million from the year before ($2,066.652.00), which suggests that money has flowed from Mr Shtrambrandt to the Unit Trust of about $1 million a year. Under “Assets”, the only assets disclosed there are financial assets of $1 million or $1.1 million and property, plant and equipment of $6,183,693.00. There is no reference to $2.6 million owed by Mr Shtrambrandt in the assets of the Unit Trust. Mr Shtrambrandt says and Fenedisto says that he owes the Trust $2.6 million, but it is not there in the financial statement. The Director of the trustee company declares that the financial statements present fairly the Trust’s financial position as at 30 June 2010 and that is signed by Mr Shtrambrandt himself on 7 July 2010.[34]

    [34] Affidavit of Andrew May, sworn 29 December 2011, Annexure AM-12 at page 6.

28. The Applicant also referred to the request that was made at the meeting of creditors to look at bank statements for the National Australia Bank (“NAB”) mortgage account of Fenedisto as trustee of the Unit Trust. The solicitors for the Applicant were allowed to look at the statements, but not permitted to take copies. There was a credit of some $484,000.00 with a reference to Foodline Investments and it was suggested that this might or must be a personal asset of the Debtor because he is a shareholder in Foodline Investments and owns shares beneficially. Mr Shtrambrandt said that he had the shares as a trustee and also that Foodline owned a property at 154 Browns Road, Noble Park. Mr Walker said that it was his recollection that the shares were held in trust for the Fenedisto Unit Trust.

29. The Applicant also refers to the Westbury Street property which the Debtor transferred to Anna Mayorova, his step-daughter, the consideration for which was expressed to be pursuant to an agreement between Mr Shtrambrandt and Ms Mayorova dated 10 February 2004. A transfer pursuant to an agreement is different from a transfer to a beneficiary who is entitled under a trust which was referred to in the report.

30. The Applicant also notes the sums of money that were paid into the NAB account of Fenedisto by Anna Mayorova. Again, Mr May does not know what all those payments might relate to, but submits that it is certainly a matter for investigation. It may be that Mr Shtrambrandt sold a property that he owned beneficially to his step-daughter and the money went to Fenedisto and therefore was not available as an asset of the First Respondent.

31. Further, there is the question of the sale of 6 Curraweena Road. This property was put up for sale a short time after the Supreme Court proceedings commenced. The Debtor, Mr Shtrambrandt, was the former owner. Again, an amount of $283,000.00 was deposited to the NAB account of Fenedisto by the First Respondent. Mr May says he believes that represents part of the proceeds of sale of that property.

32. A further issue raised by the Applicant is the question of funds from Foodline Investments. The Debtor is the sole beneficial owner of two shares in Foodline. He was an officer of that company, but ceased to be so on 30 July 2011. The Fenedisto Unit Trust NAB accounts show an amount of $484,000.00 coming in labelled Foodline Investments. Again, it is speculated this may be a transfer of funds directly or indirectly to Mr Shtrambrandt, but paid to Fenedisto. These are all matters for investigation. In terms of timing, it is noted, that Mr Shtrambrandt’s resignation of his directorship occurred within a month of the bankruptcy notice being served. Mr Shtrambrandt beneficially owned all the shares in Fenedisto and then transferred those to Ms Levtchouk the same day he resigned as a director of Fenedisto.

33. Fenedisto is the registered proprietor of the property at 6A and 6B Cole Street, Brighton, with 6A being Mr Shtrambrandt’s residential address. Mr May, who is a property developer himself, gives evidence that he thinks that those properties are worth between $4 and $5 million.

34. The Applicant submits that all of these are matters which should be subject to investigation and would be subject to investigation by a trustee in bankruptcy. In summary, the Applicant says the Debtor made the following omissions or misstatements in his Statement of Affairs:

    a)The Debtor failed to disclose the following creditors:

    i)Best Hooper Solicitors for $5,009.00; and

    ii)A & A May for $4,260.00.

    b)The Debtor failed to disclose as an asset an amount owed by Fenedisto to him of between $461,225.00 and $3,961,225.00.

    c)The Debtor failed to attach the last available financial statement of Fenedisto which is particularly significant in view of (b) above.

    d)The Debtor failed to disclose the following transfers of property within the last five years:

    i)The sale of the property at 6 Curraweena Road;

    ii)Payment of $150,000.00 from the sale of the Debtor’s property at 6 Curraweena Road to Fenedisto in 2010;

    iii)The disposition of the rest of the net proceeds of sale of the Curraweena Road property;

    iv)Assignment of claims in the Supreme Court to Letore Pty Ltd which in turn assigned them to Fenedisto

    v)The transfer by the Debtor to Ms Mayorova of the Westbury Street property in 2008; and

    e)The properties at 6A and 6B Cole Street, Brighton as assets of the Arkady Superannuation Fund.

1. The Applicant contends that each of those matters taken alone or in combination would be sufficient to set aside the personal insolvency agreement.

2. In any event the Applicant says that under s.221(1)(e) of the Act ‘for any other reason’ the composition should be set aside or terminated. In that respect the Applicant takes the Court to the decision of Keifel J in Re Khera; Ex parte: National Australia Bank [1996] FCA 470 (“Re Khera”). Her Honour stated in relation to that expression “for any other reason” the following (at page 8):

   Other decisions of the Full Court of this Court have assumed the existence of a wide power to terminate: see Chiragakis v Deputy Commissioner of Taxation (1986) 68 ALR 527 and Paton v Campbell Capital Ltd (990) 46 FCR 30. In the former case the factor which influenced both the primary Judge and the Full Court and led to an order being made to terminate the arrangement was the feeling of “disquiet” about disclosures, in the background of a substantial alteration in the debtors’ fortunes. In Paton’s case there were three factors which led to a similar conclusion: a return to the creditors which could scarcely be of interest to them; some matters which called out for inquiry; and special arrangements that had been made with some creditors. In the present case there are, I consider, serious concerns about stated liabilities and assets, and with respect to the latter, a substantial asset is said to be effectively beyond the reach of the creditors. To this may by added as relevant in my view the fact that the resolution was carried by creditors not formerly disclosed and who either appear to have some connection with Mr Khera or are the creditor whose transaction is sought on serious grounds to be impugned. All these matters highlight the need for proper inquiry. Whilst it is no doubt correct to say that the failure of a creditor to establish grounds under s.222 does not provide a reason for the grant of an order under s.236 and that more is needed here I consider sufficient is shown to provide good reasons for ending the arrangement and ordering sequestration.

3. Her Honour rejected the contention that a prohibition was implied in s.236(1) of the Act, the precursor to s.223(C)(1)(g), which prevented the Court from setting aside a deed in circumstances of the case before her when:

   circumstances surrounding those matters (grave doubts about the existence of and nature of any transactions between the debtor and one of his creditors) combined with those which brought about the special resolution are, at the least, shadowy and there is a real need shown for proper enquiry and, of course, that it is in the interests of creditors to do so.[35]

   [35] Re Khera; Ex parte: National Australia Bank [1996] FCA 470 at page 9.

4. The Applicant submits that the circumstances here are also shadowy. The First Respondent has had the opportunity in view of the three affidavits sworn by Mr May to dispel any concerns that the Court might have or to further explain the transactions which have been identified and he has not done so.

5. The Applicant submits that he has shown the significance of the three disputed creditors and the impact that the challenge would have had to their participation in voting for the personal insolvency agreement. The Applicant submits that the following claims to vote are questionable:

   ·The claim from Fenedisto Pty Ltd for the amount of $1.35 million;

   ·The claim of Mr Walker, the director’s accountant for the amount of $1,398,381.00; and

   ·The claim of Anna Mayarova, the debtor’s step-daughter, for the amount $273,220.00.

6. The Applicant lists a large number of matters which ought to be investigated in the interests of creditors. These include:

   ·The Debtor’s apparent intention to use the provisions of Part X for an improper purpose;

   ·His stated intention to structure his affairs to put assets beyond the reach of creditors;

   ·The whereabouts of the amounts advanced by the Debtor to Fenedisto;

   ·The whereabouts of the vehicles or assets financed by Toyota Finance in the name of the Debtor in the amount of $275,654.00;

   ·Whether the $600,000.00 alleged to be owed to Fenedisto Pty Ltd is genuine and whether it represents a fair market rental;

   ·The Debtor’s submission to the Court that his total debts were approximately $200,000.00;

   ·Whether the disputed creditors are creditors in the amounts claimed by them; and

   ·Whether there are transactions which could be set aside in a bankruptcy including transfers of property from the Bankrupt to Fenedisto Pty Ltd and of the Debtor’s former interest in the Westbury Street property to Anna Mayarova in 2008.

7. The Applicant also suggests that the affairs of Fenedisto should be also be investigated. The Debtor was the sole beneficial shareholder prior to transferring his shares to Irinya Levtchouk. He claims to survive on loans from Fenedisto yet has little or no income. He claims that Fenedisto acts as trustee for the Fenedisto Unit Trust and that the units in Fenedisto are owned by the Arkady Superannuation Fund. There are amounts that were paid to Fenedisto from the sale of property at 6 Curraweena Road and there is a real issue as to whether Fenedisto is a debtor or creditor of the Bankrupt.

8. Further, the genuineness of the alleged loans by Mr Walker to Fenedisto and reasons for the assignment of that loan to the Debtor should be investigated and the extent of the Debtor’s actual control over Fenedisto Pty Ltd notwithstanding his apparent status as non-director and non shareholder.

9. There is also an issue as to whether the Debtor’s shares in Foodline Investment Pty Ltd are an investment that might be recovered for the benefit of creditors. The Debtor is a sole beneficial shareholder in Foodline of two shares. Foodline previously owned property at 154 Browns Road, Noble Park and appears to have paid some $484,000.00 to Fenedisto. There is a suggestion that those shares were held in trust for the Fenedisto Unit Trust. There are further issues as to whether the assets in the Arkady Superannuation Fund might be capable of being covered by a trustee in bankruptcy and whether the Debtor has interests in property in Odessa, Ukraine. The Debtor claims that he has outstanding liabilities in excess of $5 million in circumstances where he has negligible assets and income.

10. The Applicant submits that the Court has a discretion to set aside or terminate the personal insolvency agreement and to make a sequestration order against the Debtor and should proceed to make those orders.

The Submissions of the Respondents

1. The First Respondent provided two affidavits in this matter the contents of which were extensively challenged by the Applicant either for relevancy or for their content. The First Respondent agreed that his affairs were set up in such a way that he could not be sued but says that this was nothing to do with trying to avoid creditors. It was to protect his family and his family’s assets. Mr Shtrambrandt referred extensively to previous proceedings involving himself and Mr May and his former wife.

2. In relation to the property at Westbury Street, the Respondent says that the flat was bought for an amount of $320,000.00 and the deposit of $32,000.00 was paid by his step-daughter. The property was bought in her name but as she had just recently arrived in Australia there was no chance to guarantee the loan and that was why he became involved; that when she was 18 the flat was duly transferred to her and she is the one which continues to receive the rent from that flat.

3. The First Respondent said in reference to the debt owed to the Applicant that he did not agree with the decision made by Justice Croft in those proceedings and made it clear that he did not intend to pay what his Honour had ordered.

4. In reference to the moneys owed to Mr Walker, the First Respondent produced copies of the cheques that Mr Walker had provided to various people from whom he had borrowed money at different times to keep him afloat while he was in Court and involved in proceedings with his former wife. All of those are small amounts but totalled to a significant amount. The First Respondent says that all documentation in relation to Fenedisto Pty Ltd and the superannuation trust were provided to the trustee and the Applicant was welcome to find where the money came from because it just was not there.

5. The First Respondent admitted that he was living beyond his means and that was his problem but that Mr May’s assertions were wistful thinking and not facts. He indicated that he was quite happy for someone impartial to go through all the books and do it once again and have the matter finished with.

6. Mr Lhuede, who appeared for the Second Respondents, indicated that the formal position of the trustees was that they neither consented or opposed the application. That being said, the trustees’ position still remained the case that the proposal was in the opinion of the trustees, derisory; that there were a large number of matters which did require proper investigation and which were not able to be investigated within the parameters of the Part X provisions.

7. Mr Lhuede submitted that while the derisory amount being returned to the creditors might not be sufficient in itself to set aside the personal insolvency agreement, there were in this case many matters requiring investigation and that it certainly continued to be the case of the trustees that it was not in the interest of creditors for the personal insolvency agreement to have been entered into.

Conclusions

1. In this matter the Applicant applies for orders setting aside a personal insolvency agreement; for a sequestration order against the estate of the Debtor under s.222(10) of the Act; for orders appointing Mr Paul Burness as trustee of the bankruptcy estate; for orders that the creditors petition filed in proceedings MLG 1324/2011 be dismissed if the sequestration order is made pursuant to s.222(10) of the Act; and for orders that the Applicant’s costs of the application and the creditor’s petition, including reserved costs, be taxed and paid out of the bankrupt estate of the Debtor with the same priority as the costs of the petitioning creditor.

2. The Applicant also seeks orders to continue the freezing order previously made by the Court for a period of three months to allow the Trustee in Bankruptcy time to consider the position of Fenedisto. The Applicant has also indicated that if Mr Paul Burness is appointed as the Trustee in Bankruptcy – something to which he has already given his consent – the Applicant in this matter is prepared to fund the examination of the Debtor’s financial affairs at least to an amount of $25,000.00 and possibly more if required.

3. The provisions of the Act relevant to these proceedings are essentially set out in s.222, in particularly s.222(1)(d) and (e); s.222(2); s.222(5) and (6) and s.222(10).

4. The first ground relied upon by the Applicant is that the terms of the personal insolvency agreement are unreasonable or not calculated to benefit creditors generally. It is difficult to dispute that in the context of the amount owed to unsecured creditors, as admitted to vote at the creditors’ meeting, that the dividend to creditors could only be described as derisory.

5. The reality is, of course, that much of the $40,000.00 which may be available under the terms of personal insolvency agreement would be eaten up by the administration of the estate and it is unlikely that the creditors in this case would obtain anything. It is indeed hard to see where the creditors could benefit at all in terms of this personal insolvency agreement. The personal insolvency agreement does not include the antecedent transaction provisions; it does not include any assignment of the Debtor’s divisible property for the benefit of the creditors; nor does it include the Debtor’s income.

6. Similar to the position of the debtor in For the Good Times Pty Ltd (at paragraph 48 of that Judgment):

   Under the terms of the agreement, Mr Boyle (in this case Mr Shtrambrandt) acquired the great benefit both of shedding himself of his enormous liabilities to his creditors and of escaping from his liability to share with his creditors any of his current or future acquired property and income beyond the relatively insignificant sum of $40,000.00. The creditors who receive nothing under the agreement obviously suffered rather than benefitted from these consequences.[36]

   [36] [2009] FMCA 512.

7. In Emmett, his Honour O’Loughlin J referred to a number of cases where derisory amounts had been found to be a basis, or in part a basis, for the setting aside of personal insolvency agreements. His Honour referred at paragraph 26 to the decision of Toohey J in ReDoukidis; Ex parte Consolidated Constructions Pty Ltd (“Re Doukidis”).[37]

   [37] Re Doukidis; Ex parte Consolidated Constructions Pty Ltd, [1985] FCA 224

8. In that case the debtor offered his creditors a composition whereby he would pay the sum of $1,500.00. In fact, this amounted to an offer of nothing because elsewhere the trustee’s fees were fixed at $1,500.00. In that case there was a finding that the debtor had omitted from his statement of affairs certain assets and other information. These omissions were regarded as material and his Honour made a finding that certain ‘questions’ asked at the meeting of creditors suggested that enquiries into his affairs may have provided fruitful. In those circumstance, Toohey J concluded that it was appropriate to make an order setting aside the composition.

9. I note that in this case also it is suggested that there were material omissions in the Debtor’s statement of affairs and there were certain questions raised which would suggest that enquiries into his affairs may provide fruitful; inquiries which were also supported by the controlling trustee.

10. Justice O’Loughlin also referred to the decision of Jackson J in Re Richards; Ex parte Beneficial Finance Corporation Finance Ltd (Jackson J, unreported 17 March 1986). In that case his Honour found:

    The amount offered pursuant to the composition in settlement of the debts is so trivial when compared to the total of the debts that in the circumstances of the particular case I would regard that fact alone as sufficient “other reason” in terms of s.239(2) for setting the composition aside.[38]

    [38] Re Richards; Ex parte Beneficial Finance Corporation Finance Ltd (Jackson J, unreported 17 March 1986) at page 2.

11. Nevertheless, as O’Loughlin J notes, the judgment of his Honour discloses further events which presumably weighed heavily in the balance. In particular the fact that about two years prior to the meeting at which the compromise was accepted the debtor had compiled a statement of assets and liabilities showing a surplus of assets of some $467,000.00. On that subject his Honour said

    It appears to me that the debtor’s answers at the meeting were unsatisfactory and that the apparent decline in the debtor’s assets was something that should have been further investigated before a resolution accepting a compromise of the nature in question was passed.[39]

    [39] Re Richards; Ex parte Beneficial Finance Corporation Finance Ltd (Jackson J, unreported 17 March 1986) at page 2.

12. Justice O’Loughlin also referred at paragraph 29 to Re Brennan; Ex parte Stokes Australasia Pty Ltd, (Morling J, unreported, 31 May 1988) (“Re Brennan”). In that case, the debtor’s father-in-law was prepared to advance him $20,000.00 for the benefit of his creditors whose debts totalled in excess of $2 million. Morling J said:

    In a case where a debtor has incurred debts of such huge proportion relative to his assets there is much to be said for the proposition that it is in the public interest that there be a public examination of the bankrupt (and possibly other persons) under s.81 of the Bankruptcy Act.

13. Those remarks as noted by O’Loughlin J were quoted and approved in other matters referred to in his decision. Nevertheless Morling J did not rely solely on the derisory nature of the amount offered but also referred to the fact that there was a proven personal relationship between the debtor and each of creditors who voted in favour of the composition; the possibility that creditors might do as well in bankruptcy as they would under the deed and finally that the applicant had presented a creditor’s petition and his Honour was of the view that the applicant had a prima facie right to his sequestration order. It might well be argued that each of those matters is also present in this case.

14. O’Loughlin J also referred at paragraph 32 to Re Codrington; Ex parte Don MacKay Tourist and Chartered Pty [1989] FCA 349 (“Re Codrington”). In that case the debtor’s composition was the payment of 10 monthly instalments of $1,000.00 each for the benefit of creditors whose debts were in excess of $5.5 million. The paucity of that contribution was exacerbated by the need for $5,000.00 to be set aside for the trustee’s remuneration. The affairs of the debtor were complicated by him having falsely stated that he had not previously compounded with his creditors where in fact in 1980 and 1985 he had entered into an arrangement with his creditors under the provisions of Part X of the Act. In Re Codrington, Justice Burchett referred to the decision of Morling J in Re Brennan and drew attention in that case to the fact that the creditors who voted in favour of the resolution had some connection with the debtor. He went on to say:

    In the present case, it could not be said that all creditors who voted in favour of the resolution were connected with the debtor. However the overwhelming preponderance of debts represented at the meeting involved the debtor’s mother and brother. Only one independent creditor had a representative present, and that creditor was owed a relatively small amount. [40]

    [40] Re Codrington; Ex parte Don MacKay Tourist and Chartered Pty Ltd [1989] FCA 349 at paragraph 22.

15. Again, it is significant in this case that substantially the large creditors admitted were the Applicant’s accountant; Fenedisto, a company of which he had previously been a director; and his step-daughter.

16. I would be inclined to agree with Federal Magistrate Smith that changes in the legislative regime would now allow for the setting aside of the agreement under s.222(1)(d) simply on the basis that the derisory nature of the amount being provided to the creditors. The exclusion from the personal insolvency agreement of capacity to consider antecedent transactions and any current or future acquired property or income would also support the making of the order.

17. I am further satisfied however that there are additional factors in this case. I do not consider it necessary to go to all of the transactions that have been questioned by the Applicant in this matter. It is sufficient, in my view, that the Applicant has raised serious questions in relation to transfers of property within the previous five years; the relationship between the First Respondent and Fenedisto Pty Ltd; the question of monies owed or loaned between Fenedisto Pty Ltd and the First Respondent; and issues concerning the transfer of the Westbury Street property to Ms Mayarova.

18. I also note that the view of the controlling trustee was that were matters that should be investigated and the view of the controlling trustee that the personal insolvency agreement should not be accepted. I concur with the view of the controlling trustee that there are a number of questions relating to the affairs of the Debtor that have not been answered and that ought to be the subject of proper investigation. I am therefore also satisfied that there are grounds under 2.222(1)(e) of the Act for the setting aside of the personal insolvency agreement. I am further satisfied that it would be in the interests of creditors for the personal insolvency agreement to be set aside.

19. Having formed that view I need now consider whether the Court should proceed to make a sequestration order in these proceedings. Section 40(1)(m) of the Act provides that it is an act of bankruptcy if a personal insolvency agreement executed by a debtor under Part X is set aside by the Court or terminated. Section 222(10) further provides that a creditor may include in an application under sub-ss.(1), (2) or (5) an application for a sequestration order against the estate of the debtor.

1. In this case, not only has the Applicant done so but the Applicant was previously the petitioning creditor in proceedings stayed by the Court as a result of the First Respondent entering into the personal insolvency agreement. I am satisfied that under those circumstances, the Applicant has a prima facie right to have a sequestration order made.

2. Under all the circumstances of this case it appears to me that the only way that a proper investigation into the affairs of the First Respondent can be conducted for the benefit of the creditors is if a sequestration order is made and a trustee in bankruptcy is able to undertake those investigations.

3. I am therefore satisfied that a sequestration order against the estate of the Debtor under s.222(10) should be made.

4. Further I am satisfied that there should be an order for the appointment of a trustee in bankruptcy of the estate and Mr Paul Burness should be appointed to that role. While the appointment of Mr Burness was opposed by the First Respondent, it was not opposed by either of the controlling trustees.

5. Having made the sequestration order under s.222(10) it is appropriate that the creditor’s petition filed in the proceedings MLG 1324/2011 should be dismissed.

6. I am also satisfied that under the circumstances the Applicant’s costs of the application in this matter and also in the matter MLG1324 of 2011, including costs reserved by the Registrar in that matter, should be taxed and paid out of the Bankrupt’s estate with the same priority as the costs of the petitioning creditor.

7. Previously in these proceedings the Court has made freezing orders in relation to the Fenedisto companies. The Applicant seeks that those freezing orders be continued for a period of three months to allow the trustee in bankruptcy time to investigate and consider his position.

8. The Applicant referred the Court to the matter of Talacko & Talacko (No. 3) [2011] FCA 1343 where his Honour Justice North made ongoing freezing orders. In that case, a freezing order had been made as part of a set of orders which vested the respondent’s property in the official trustee in bankruptcy on an interim basis pending the hearing and determination of an appeal against a judgment upon which the applicants had issued the bankruptcy notice. The estate of the respondent had then been vested in a registered trustee in bankruptcy as a result of a sequestration order made against his estate and the question arose as to whether the injunction should be continued. North J noted that the injunction had originally been granted against the background of actions and conduct by the respondent which had demonstrated the likelihood that he would seek to deal with the property to the detriment of the applicants. Given the nature of the proceedings and the complicated nature of the estate, which consisted largely of properties in the Czech Republic which were subject to complex laws of that country, his Honour was of the view that the trustee should be given sufficient time to come to terms with the nature of the estate before determining whether to seek any particular orders against the respondent and in those circumstance continue the injunction for a period of six months.

9. In this case, the relationship between the Debtor and Fenedisto is a significant issue in determining what assets the debtor actually has available to him. There are for example considerable questions about amounts of money transferred to Fenedisto on behalf the Debtor. The First Respondent made no submissions in relation to the question of whether the freezing orders should be continued.

10. I am satisfied that the trustee in bankruptcy should be given sufficient time to determine as to whether there should be additional or further orders made affecting the assets of Fenedisto and on that basis I am prepared to continue the freezing order for a period of three months.

I certify that the preceding one hundred and seventeen (117) paragraphs are a true copy of the reasons for judgment of Whelan FM

Date:  25 May 2012