Robertson v Moran
[2011] FMCA 496
•20 July 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| ROBERTSON & ANOR v MORAN & ORS | [2011] FMCA 496 |
| BANKRUPTCY – Personal insolvency agreement – application to set aside – agreement not calculated to benefit creditors generally – large unsecured indebtedness – token contribution under agreement – dominant related creditors benefiting from continuing business activities of debtor – controlling trustee recommended against acceptance of agreement – further investigation of debtor’s business affairs warranted – application set aside – sequestration order made. |
| Bankruptcy Act 1966 (Cth), ss.40(1)(i), 81, 109(1)(a), 115(1), 115(1B), 188, 188(2C), 222, 222(1), 222(1)(c), 222(1)(d), 222(5), 222(5)(e), 222(6), 222(10), 222(12) Bankruptcy Legislation Amendment Act 2004 (Cth) Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth), r.4.06 |
| Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 Augustyn v Putnin (1988) 83 ALR 514 Re Agushi; Ex parte Farrow Mortgage Services Pty Ltd v Cole (1992) 8 ACSR 549 Re Beames; Ex parte Beneficial Finance Corporation Ltd (1985) 7 FCR 216 |
| First Applicant: | ALEXANDER ROBERTSON AS TRUSTEE FOR THE ALEX ROBERTSON SUPERANNUATION FUND |
| Second Applicant: | SPINITU PTY LIMITED (ACN 003 361 573) ON ITS OWN ACCOUNT AND AS TRUSTEE FOR THE ROBERTSON RETIREMENT FUND |
| First Respondent: | RUSTY JOHN MORAN |
| Second Respondent: | MATTHEW HOWARD PAUL DANIEL |
| Third Respondent: | ADAM SHEPARD (TRUSTEE) |
| File Number: | SYG 830 of 2010 |
| Judgment of: | Smith FM |
| Hearing dates: | 4, 5 and 6 May 2011 |
| Delivered at: | Sydney |
| Delivered on: | 20 July 2011 |
REPRESENTATION
| Counsel for the Applicants: | Ms A Stenmark SC and Mr D Eardley |
| Solicitors for the Applicants: | Watkins Tapsell |
| Counsel for the First and Second Respondents: | Mr J Lockhart SC and Mr C Colquhoun |
| Solicitors for the First and Second Respondents: | David Begg and Associates |
| Solicitors for the Third Respondent: | Somerset Ryckmans |
ORDERS
The matter is adjourned for the making of final orders.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 830 of 2010
| ALEXANDER ROBERTSON AS TRUSTEE FOR THE ALEX ROBERTSON SUPERANNUATION FUND |
First Applicant
| SPINITU PTY LIMITED (ACN 003 361 573) ON ITS OWN ACCOUNT AND AS TRUSTEE FOR THE ROBERTSON RETIREMENT FUND |
Second Applicant
And
| RUSTY JOHN MORAN |
First Respondent
| MATTHEW HOWARD PAUL DANIEL |
Second Respondent
| ADAM SHEPARD (TRUSTEE) |
Third Respondent
REASONS FOR JUDGMENT
Mr Rusty Moran and Mr Matthew Daniel are close business associates, who have promoted and managed several property development projects on behalf of other investors as well as for the benefit of their own family trusts and companies. Their projects have included a hotel and apartment complex known as ‘Kiama Blue’, a 600 lot residential subdivision and industrial park at Marulan, and, currently, a residential and retail development at Hurstville. They raised some of the funds for their projects through an investment company, Tailored Property Capital Pty Ltd. In 2007, Mr Robertson loaned them $500,000 in two transactions, at a time when the Kiama project was in difficulties which it subsequently did not survive. Messrs Moran and Daniel guaranteed repayment of the loans, but faced further financial difficulties and complex litigation in relation to the Marulan project. In 2010, on the eve of a hearing in District Court proceedings brought by Mr Robertson to recover his investment from the guarantors, Messrs Moran and Daniel each executed authorities under s.188 of the Bankruptcy Act 1966 (Cth) appointing Mr Adam Shepard as controlling trustee of their respective estates.
Mr Shepard’s appointment took effect on 20 January 2010, resulting in a stay on the claims of Mr Robertson and other personal creditors of Messrs Moran and Daniel, pending the presentation to creditors of proposed personal insolvency agreements (‘PIAs’). In the relatively short time available to him, Mr Shepard conducted some investigations of their complex business and financial affairs, and recommended to their creditors that the PIAs should not be accepted. However, the PIAs were approved by a sufficient majority of creditors, most of whom were related to Messrs Moran and Daniel or had other special reasons for supporting their efforts to avoid bankruptcy. The PIAs were executed on 15 April 2010, and Mr Shepard became the trustee responsible for administering the PIAs. He has not yet discharged that office nor made a distribution to creditors, and is awaiting the outcome of the present matter before doing so.
Mr Robertson filed his present application on 16 April 2010. It seeks orders under s.222 of the Bankruptcy Act, setting aside each of the PIAs on the ground that “the terms of the agreement are unreasonable or are not calculated to benefit the creditors generally” under s.222(1)(d). Alternatively, Mr Robertson relies on the ground under s.222(5)(e), that each debtor “omitted a material particular from the statement of the debtor’s affairs” given to Mr Shepard under s.188(2C) and that the Court should be “satisfied that it would be in the interests of the creditors to do so” as required by s.222(6). Mr Robertson also seeks consequential sequestration orders in relation to each of Messrs Moran and Daniel’s insolvent estates under s.222(10).
The proceedings in this Court have become complex and protracted. Mr Robertson’s representatives attempted by use of subpoenas, perhaps to an unnecessary extent, to explore the business and financial affairs of Messrs Moran and Daniel. Their efforts were repeatedly frustrated, and hearings were adjourned due to defaults on both sides. Volumes of documents were tendered before me, showing the intricacies of Messrs Moran and Daniel’s business affairs. Some of the matters which were of concern were explored in cross‑examination of Mr Moran, but Mr Daniel did not present himself as a witness.
However, the present proceedings are not a general and roving inquiry into Messrs Moran and Daniel’s affairs, nor was the hearing a substitute for the public examinations which might be held if their insolvency is administered in bankruptcy. It is enough for me to explain how the additional investigations presented to me have confirmed in my mind the continuing relevance of Mr Shepard’s original opinions, that the PIAs did not have benefit for creditors generally, and how they have also raised some additional concerns warranting further investigation by a trustee in bankruptcy.
As I shall explain, I have been sufficiently persuaded that the ground under s.222(1)(d) has been made out, and that discretionary considerations point to the setting aside of both PIAs and to the making of sequestration orders which will require Messrs Moran and Daniel’s insolvencies to be administered under the Bankruptcy Act.
Although some omissions from Messrs Moran and Daniel’s statement of affairs were established in cross‑examination of Mr Moran, and although I was left concerned at a lack of candour to creditors about their on‑going business interests in relation to the Hurstville project and their private and business use of the funds of JEG Constructions No. 2 Pty Ltd, I have not found it necessary to arrive at findings specifically directed at the ground under s.222(5)(e).
Messrs Moran and Daniel raised a common defence, which challenges Mr Robertson’s standing as a ‘creditor’ able to seek relief under s.222(1)(c). They argue that the guarantee he relies upon is unenforceable by him, by reason of the uncertain description of the lender in the relevant two documents executed on 29 August 2007. I reject these defences, for reasons which I shall explain at the start of this judgment.
My conclusion as to the legal effectiveness of the second deed of loan and guarantee executed by Messrs Moran and Daniel, means that the standing of the second applicant, Spinitu Pty Ltd, the trustee of Mr Robertson’s retirement fund, is irrelevant.
I shall separately examine the PIAs of each of Messrs Moran and Daniel, and consider Mr Shepard’s separate recommendations to creditors. I shall explain why I agree with his recommendations and why I consider that they have continuing relevance. I shall arrive at the same conclusions in relation to each debtor’s PIA.
Mr Robertson’s standing as a ‘creditor’ of both debtors
Both counsel took me to Re Beard v Prestige Baking Industries Pty Ltd & Anor (1981) 52 FLR 384, concerning whether the standing of a ‘creditor’ to apply under s.222 of the Bankruptcy Act requires proof of a claimed indebtedness, or only proof that the applicant lodged a proof of debt with the controlling trustee and was admitted to vote. In Beard at 404‑405, Fox J suggested in relation to s.222 in its then terms, that ‘creditor’ “is used in a wide sense, probably to include any creditor who could prove in bankruptcy … It is undoubtedly competent for the court to examine in close detail, definitively if necessary, whether a person claiming to be a creditor for the purposes of the section is one … What has to be decided … will depend upon the circumstances of the case”. At 410‑411, Lockhart J explained why “definitive rules cannot be laid down as to how the court determines these questions, as the possibilities that may arise are so variable”.
In the present case, as in my recent judgment in National Australia Bank Ltd v Cranney & Anor [2011] FMCA 169 at [32]‑[35], I have concluded that I should adopt a more demanding test of standing than may be necessary. I note that Mr Robertson and the trustee of his retirement fund, Spinitu Pty Ltd, submitted claims to Mr Shepard of indebtedness by Messrs Moran and Daniel under their guarantees in the amount of $834,139.68, and were admitted to vote at the creditors’ meeting on Mr Shepard’s valuation of their claims, in effect, at $514,300. These facts might be enough in themselves to establish the standing of either or both of these applicants for the purposes of s.222, especially since their admission to vote has not been challenged, and since the difference between their claims and Mr Shepard’s valuation would not have materially affected my assessment of the relevant substantive issues under s.222.
However, the issue as to the legal effectiveness of the second deed of loan and guarantee has been squarely raised, and it is convenient to address it in the present matter on a definitive basis. My finding as to the existence of Mr Robertson’s debt under the second guarantee, then assists my consideration of the discretions under s.222(1) and (10).
Essentially, the issue concerns the significance of the description of the lender in the second deed of loan and guarantee. The debate can be solved shortly on established principles of contract law. Once I find that Mr Robertson acquired enforceable rights in his own name to sue to recover the loans identified in the second deed, plus interest calculated under that deed, no further issues arise as to Mr Robertson’s standing as a creditor in the present proceedings. Messrs Moran and Daniel have not presented any substantive case to disprove evidence led before me, which shows that the principal and interest remain outstanding, both by the principal borrower, and by the guarantors.
Mr Robertson’s business background was not explored before me, but I was left with an impression that he had some experience as an investor and businessman. Some of his assets appeared in the accounts of an unincorporated “Robertson Retirement Fund”, which was established under a trust deed dated 20 August 1997, and was managed in the name of a company under his control, “Spinitu Pty Ltd”.
Mr Robertson became acquainted with the activities of Messrs Moran and Daniel, and in 2007 he regarded them as personal friends. In February 2007, Mr Robertson arranged for Spinitu Pty Ltd to make a short term loan of $250,000 to their company Tailored Property Capital Pty Ltd, which was engaged in raising money for use in the Kiama Blue project.
The terms of this loan were specified in a “Deed of Loan Agreement” dated 28 February 2007, executed by Mr and Mrs Robertson, and by Mr Moran and Mr Daniel, in their respective capacities as officers of Spinitu Pty Ltd and Tailored Property Capital Pty Ltd, and – in the case of Messrs Moran and Daniel – as personal guarantors under the deed. Under the deed, the principal was due for repayment after three months, or six months if the loan was extended. Interest ‘on a simple interest basis’ accrued at 30% per annum.
The terms of the deed followed a form adopted by Tailored Property Capital Pty Ltd which their lawyer described as the ‘TPC Kiama loan deed’. Its terms considerably obscured the enforceability of a clause purporting to give personal ‘unconditional’ guarantees from Messrs Moran and Daniel in relation to repayment of the sum advanced. This was because cll.19.1 and 20.1 provided:
19GUARANTEE
19.1Notwithstanding anything to the contrary contained in this Deed, the obligations of the Guarantor under this clause 18 (sic) shall only commence upon breach of clause 4.1.1 or breach of the warranties contained in sub‑clauses 6.1.6 and 6.1.7 of this Deed by the Borrower and shall only apply and be enforceable and recoverable after the Borrower or any liquidator, receiver, controller or administrator of the Borrower has first exhausted recourse against the borrowers and guarantors for which loans have been advanced by the Borrower for the purposes of the Kiama Project (including the Kiama Project Securities) or upon Project Completion of the Kiama Project.
…
20.RECOURSE
20.1Notwithstanding anything to the contrary contained in this Deed the Lender agrees that their recourse against the Borrower shall be limited to the monies applied and recovered from the Kiama Project after deduction of legal, recovery, enforcement and expenses associated with enforcing securities for the Kiama Project (“Kiama Project Securities”) together with property of the Borrower should such form of monies become mixed with other property of the Borrower to the extent such monies for which the Lender has recourse to has been mixed with the property of the Borrower.
…
The funds under the first loan deed were duly transferred, and Tailored Property Capital Pty Ltd presented Spinitu Pty Ltd with monthly ‘investment summaries’ showing the accrual of interest, together with news bulletins claiming that “completion of the project is drawing near”.
However, Messrs Moran and Daniel’s need for an extension of the first loan and for a further advance of $250,000 from Mr Robertson became pressing. No sales had been achieved by August 2007, and Mr Robertson could insist on better terms. He gave evidence to the Court:
I wouldn’t lend a second lot of money till I got a personal guarantee from Rusty and Matt, and then they rushed around like anything you can’t believe to get it, because they wanted the money urgently, and they were going to give personal guarantees – get rid of the first one, and get onto personal guarantees.
Mr Robertson also insisted upon part of the new loan being applied to repay the accrued interest on the first loan. He agreed that the new interest rate would be 25% per annum, reducible to 20%.
The subsequent documentation was prepared in exchanges between the legal representatives of the parties. The terms were eventually recorded in a second “Deed of Loan Agreement” dated 29 August 2007, executed by Messrs Robertson, Moran and Daniel. It followed the Kiama Loan Deed form used for Tailored Property Capital investors, but shows that Mr Robertson was able to insist upon the deletion of clauses 19.1 and 20.1, and to obtain a truly unconditional guarantee from Messrs Moran and Daniel in relation to “all monies payable to the Lender by the Borrower under or in accordance with or in consequence of this Deed” (note the handwritten amendments to cl.19.3).
The present debate about the enforceability of this guarantee, arises not from the terms of the borrower’s obligations, nor from the terms of the guarantee, but from the description of ‘the Lender’ in the Schedule to the second deed.
The first deed had recorded the Lender as “Spinitu Pty Ltd”, without reference to any trustee capacity. The second deed named the Lender as “Alex Robertson as Trustee for the Alex Robertson Superannuation Fund”. Messrs Moran and Daniel now argue that the extended description of Mr Robertson gives rise to such uncertainty as to prevent the deed being enforced against the guarantors.
It is now common ground that at no time has a trust fund with the name “Alex Robertson Superannuation Fund” been established, designated, or otherwise recognised by Mr Robertson, Spinitu Pty Ltd, another company under his control, or any other person. It is also common ground that the full amount of the money due under the second loan agreement was advanced to Tailored Property Capital Pty Ltd, in purported execution of the Lender’s obligations, two days after it was signed and exchanged, on 31 August 2007. The agreed balance was ‘electronically transferred’ into the borrower’s bank account on that day from the bank account of Spinitu Pty Ltd, having been raised after Mr Robertson realised an investment which appears to have been held in the name of Spinitu Pty Ltd.
The same extended description of Mr Robertson also appeared in a “Deed of Termination” made on the same day as the second deed of loan, 29 August 2007. Its purpose was to regulate the effects of the second deed of loan on the outstanding liabilities of Tailored Property Capital Pty Ltd and of the guarantors under the first deed of loan. Its parties are shown as the parties to the first deed of loan, i.e. Spinitu Pty Ltd, Tailored Property Capital Pty Ltd and Messrs Moran and Daniel, and also “Alex Robertson as Trustee for the Alex Robertson Superannuation Fund of ____________ (Robertson)”. Mr Robertson’s signature at the end appears above the words “Alex Robertson”, but he is given the fuller description in the adjacent identifier. The body of the deed of termination states:
WHEREAS
ASpinitu Pty Ltd at the request of and on behalf of Robertson advanced loan funds to TPC pursuant to a Deed of Loan Agreement with TPC dated 28 February 2007 relating to loan advance funds on terms and conditions stated in the Loan Agreement of 28 February 2007.
BThe parties have agreed to the termination of the Deed of Loan Agreement dated 28 February 2007 on the condition that a New Loan Execution Deed, is entered into between Robertson, TPC and the Guarantors which includes new terms and conditions relating to the loan advance of 28 February 2007 simultaneous with this Deed of Termination.
CThe New Loan Execution Deed to be entered into between Robertson, TPC and the Guarantors is to include new terms relating to the initial loan advance made by Spinitu on behalf of Alex Robertson under the Loan Execution Deed of 28 February 2007.
DThe parties seek to record the termination of the Loan Agreement on 28 February 2007 and that a New Loan Execution Deed is to be entered into simultaneously with this Deed between the same parties (excluding Spinitu) with amended terms and conditions relating to the 2 loan advances made to date by Robertson to TPC. The Guarantors are to guarantee the performance of TPC under the New Loan Execution Deed.
OPERATIVE PROVISIONS
1.Definitions and Interpretations
1.1In this Deed the context states otherwise:
“Deed of Loan Agreement 28 February 2007” refers to the Deed of Loan Agreement entered into between Spinitu, TPC and the Guarantors dated 28 February 2007, which was originally incorrectly dated 28 March 2007.
“Deed of Termination” means and refers to this Deed of Termination.
“New Deed of Loan Agreement” means the “Deed of Loan Agreement between Robertson, TPC and Guarantors” dated 29 August 2007.
“New Loan Execution Deed” means the New Deed of Loan Agreement.
2.Termination of Loan Agreement 28 February 2007
2.1The Deed of Loan Agreement dated 28 February 2007 is agreed to be terminated from the date of this Deed on the following Terms and Conditions:
a)that TPC, the Guarantors and Alex Robertson enter into a New Loan Execution Deed simultaneously as the date of this Deed of Termination to record the initial loan advance of $250,000 under the Deed of Loan Agreement 28 February 2007 and a further advance of $250,000 by Robertson on 29 August 2007;
b)the Parties acknowledge that the initial loan advance of 28 February 2007 was made for and on behalf of Alex Robertson and that this loan advance amount and the terms of this loan advance are now included in the New Loan Execution Deed of 29 [handwritten] August 2007 between those respective parties; and
c)that neither party shall make any claims or rely on any term of the Deed of Loan Agreement 28 February 2007.
3.No claim under Deed of Loan Agreement 28 February 2007
The Parties acknowledge that by entering into this Deed of Termination that no party can make a claim whatsoever against any other party to this Deed relating to the terms of the Deed of Loan Agreement of 28 February 2007 other than to acknowledge reliance upon the terms of the New Loan Execution Deed which now records the Loan terms for the 1st and 2nd loan advances of $250,000 on 28 February 2007 and 29 August 2007 respectively.
4.Costs
Each party shall bear their own costs associated with this Deed of Termination.
There is no reliable extrinsic evidence to explain why Mr Robertson was described in the two deeds dated 29 August 2007 by reference to a trust fund which did not exist and was never brought into existence. The lawyers who negotiated the drafting of the deeds have not given evidence, and neither their records of the drafting nor all of their written correspondence is in evidence. Mr Robertson is now an elderly person, and frankly conceded in his evidence that he has poor memories of the events in 2007 in relation to his instructions to his solicitor and execution of the documents. He said, and I accept, that he has no recollections of noticing or adverting to how precisely he was described as the Lender in the documents which he executed in August 2007.
The cross‑examination of Mr Robertson opened up possibilities that the references to “as Trustee for the Alex Robertson Superannuation Fund” were a mistake on the part of everyone, and that the words were intended to refer to the existing trust fund known as the “Robertson Retirement Fund”. However, I consider that this explanation is unlikely and do not accept it, in view of the accurate description of that fund and its trustee in the first deed of loan, and the accurate recitation and inclusion of Spinitu Pty Ltd as a party in the termination deed, by reason of its designation as the Lender under the first loan.
In my opinion, the probable explanation for Mr Robertson’s extended description in the August 2007 documents is that, at the time that he agreed to make the second loan to assist Messrs Moran and Daniel’s Kiama project, the authors of the documents were informed that Mr Robertson was contemplating the possibility of a restructure of his retirement fund arrangements, perhaps as a result of accounting advice or other reasons. There is no direct evidence of this, but in cross‑examination Mr Robertson accepted that he might have been discussing with his accountant at that time the establishment of a new superannuation fund.
That such a fund was known to be inchoate when the August 2007 deeds were made and completed in relation to the Lender’s obligations, might appear to be pointed to in the mysterious “of ______” in the description of Mr Robertson in the list of parties to the deed of termination.
More importantly, in my opinion the recitals to the contemporaneous deed of termination expressly explain Mr Robertson’s description and inclusion as a party to the documents, by showing that the parties intended Mr Robertson in his personal legal capacity to be recognised as both the principal lender under the first deed of loan, and also the principal lender under the second deed of loan, at least unless or until some other entity came into existence as the trustee for a trust fund which might be established in the future with the name “Alex Robertson Superannuation Fund”.
On this interpretation of the parties’ intention, the current and future existence of that fund was not a matter upon which the signatories to the deed intended to condition any of their obligations. The deed of loan agreement and guarantee was clearly intended to take effect immediately, by placing a personal obligation on Mr Robertson to effect the promised loan, and by giving him the immediate benefit of the borrower’s covenant for repayment and of the guarantors’ covenants to indemnify him personally in relation to default by the borrower. So construed, the reference to a possible future trustee capacity attaching to Mr Robertson’s rights under the deeds presents no present impediment to the enforcement of those rights by Mr Robertson in his personal capacity.
Such a construction is, in my opinion, entirely consistent with a recognised approach to the construction of commercial documents containing references to the possible future substitution of contracting parties or possible future changes to their capacities (cf Vickery v Woods (1952) 85 CLR 336 at 343, 348). On that construction of the parties’ intentions, I do not accept that there is any ‘uncertainty’ under principles of contract law affecting the second deed of loan, which prevents its enforcement by Mr Robertson. I do not accept that the Court should not now recognise him in law as ‘the Lender’ under its terms, and as a ‘creditor’ in relation to the unrequited obligations of the guarantors. This is not a transaction where a “narrow or pedantic approach is warranted”, and the Court can, and should, discern the parties’ intention in relation to Mr Robertson’s rights and obligations on a construction of these commercial documents which prevents them being void for uncertainty of meaning (cf. Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429 at 437).
The above construction is, in my opinion, confirmed by a consideration of the nature of the transaction and the surrounding ‘matrix of facts’. These include the undoubted contemporaneous facts: that such a trust fund had not been established; that the second loan agreement was intended by Messrs Robertson, Moran and Daniel to take immediate effect according to its terms; that it was of no concern to Messrs Moran and Daniel as to how Mr Robertson procured the promised funds; and that the loan was intended to be, and was, executed immediately by the promised funds being urgently transferred to the borrower upon execution of the documents.
I have above noted the absence of other contemporaneous evidence bearing on the construction of the description of Mr Robertson in the two deeds. Mr Robertson’s memories are now unreliable. Mr Moran gave no evidence directed at this issue, Mr Daniel gave no evidence whatsoever. Neither party called the lawyers involved in negotiating the terms of the documents.
The correspondence between the lawyers which is in evidence tends to confirm that Mr Robertson was regarded as the current principal in relation to the proposed loan obligations, but is not conclusive. The lawyers adopted headings to their correspondence “loan agreement with Alex Robertson” and “advance from Alex Robertson”, and on at least one occasion the lawyer for Tailored Property Capital Pty Ltd referred to “The Lender, Alex Robertson”. There is no evidence that the current existence of a fund called “Alex Robertson Superannuation Fund” was ever a matter of concern to either party.
The subsequent dealings of the parties, at least until a demand was made on the guarantors, tends to confirm that Mr Robertson continued to be regarded by both parties as the principal lender in a personal capacity – for example in the change of style to the Tailored Property monthly ‘investment summaries’ after August 2007, whereby the name of the lender was changed from Spinitu Pty Ltd to “Alex Robertson” without qualification, in relation to both loans of $250,000. However, this later evidence can be given little weight in relation to the construction of the earlier documents. As Allsop P recently explained in Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at [6], with an exhaustive examination of the authorities:
… the construction of a written contract is to be determined by what a reasonable person in the parties’ position would have understood it to mean in the circumstances and context in question. How parties later acted, probative of what they themselves thought their obligations were, is difficult to reconcile with the objective paradigm.
Having found a clear construction of the parties’ intentions concerning the description of Mr Robertson in the two deeds made on 29 August 2007, I do not consider that presumptions about the effect of ambiguities of language in contracts have any relevance to the present issue. Moreover, in the present case those presumptions are not easily given effect, since the deed of loan agreement seems to have been drafted by the guarantors’ solicitor based upon a precedent commonly used by Tailored Property Capital Pty Ltd in relation to its investors, and since the guarantee was an inextricable part of a commercial dealing in which the guarantors sought, and gained the immediate and full benefit of, the assistance of Mr Robertson. In that context, it appears to me that the ‘traditional view’ of protectiveness in relation to sureties cited by counsel for Messrs Moran and Daniel is not sufficient, unaided by any other consideration, to require a construction of the deeds which would render them unenforceable by Mr Robertson (their counsel cited Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 561, and Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 at [17]).
I also am unpersuaded by their counsel’s submissions that giving effect to the deeds under the above construction would result in uncertainty as to the giving of a receipt or discharge by or on behalf of the Lender. He argued that the borrower and its guarantors are unable to identify a person with a capacity to give them a receipt which would discharge their obligations to the described Lender. However, in my opinion, the deed of loan agreement clearly contemplated that Mr Robertson would be able to give such a receipt in his personal capacity, at least until and unless he established a designated trust fund which would become the repository of the Lender’s rights as against the borrower and guarantors. On the evidence before me, that has not occurred, and the parties were and are unconcerned that it should occur.
I am satisfied that Mr Robertson has established that he is a creditor of both Mr Moran and Mr Daniel for the purposes of s.222(1), by reason of his rights as ‘the Lender’ under the Deed of Loan agreement dated 29 August 2007 and their obligations as personal guarantors under that Deed. He has established a present entitlement to a liquidated sum, which would indemnify him for the default of the borrower in relation to repayment of the two advances totalling $500,000 plus interest subsequently accruing on those advances calculated in accordance with that deed.
My findings as to the effectiveness of the two deeds dated 29 August 2007 on the above construction of Mr Robertson as the Lender in his personal capacity, means that the previous rights of Spinitu Pty Ltd under the first deed were effectively terminated by the deed of termination. It therefore is not a ‘creditor’ as against Messrs Moran and Daniel in relation to their guarantees given in either of the deeds. I find that it has no standing to obtain the relief sought in the present application.
It is irrelevant to the present matter, and unnecessary for me to consider, whether Mr Robertson would be under obligations to account to Spinitu Pty Ltd as a result of the funds which were advanced in discharge of Mr Robertson’s obligations under the second loan agreement being derived from funds appearing in the accounts of Spinitu Pty Ltd. That is a matter of accounting purely concerning Mr Robertson and his company and his existing retirement fund.
Mr Moran’s Personal Insolvency Agreement
Mr Shepard’s first report to creditors, dated 12 February 2010, contained a fair and accurate summary of Mr Moran’s statement of affairs and proposed personal insolvency agreement. It is enough for me to summarise the pertinent parts of his report:
a)Mr Moran had disclosed no assets except a boat worth $4,000 and unrecoverable book debts from two related companies of $4,822. Mr Shepard had not seen evidence of any other assets.
b)Mr Moran had disclosed income from two related companies of $52,500, and the use of a 2002 Mazda Tribute. Mr Shepard had not been able to verify his past income, and had no information on the business activities of a related company from which Mr Moran projected a future income of $50,000 p.a. On Mr Moran’s statement of affairs, he would not be liable to income contributions if he were made bankrupt.
c)Mr Moran had disclosed unsecured creditors totalling $5,705,826. Mr Shepard noted that this did not include any amount in relation to the guarantees to Mr Robertson, and that there might be doubts about some of the related party guarantee claims, due to obscuring conditions in the TPC Kiama Loans agreements such as I have quoted above.
d)The proposed PIA offered to answer Mr Moran’s insolvency by an advance of $30,000 within one month of execution, which would cover the estimated costs of the administration and leave an estimated $8,450 for distribution to unsecured creditors.
e)Mr Shepard noted that related creditors totalling $1,192,961 would participate in the distribution, and that no income contributions were proposed. Mr Moran would be absolutely released from all provable debts. None of his current and future property would be available to creditors, and the “antecedent transactions provisions of the Act” would not apply to Mr Moran, so as to allow the setting aside of past transactions.
f)Mr Shepard had conducted some investigations into companies in which Mr Moran was involved, including Looknear Pty Ltd, Tailored Property Pty Ltd, Tailored Property Capital Pty Ltd, R & V Moran Pty Ltd, Earljest Pty Ltd, Cope Street Pty Ltd, Moran Corporation Pty Ltd, Moran Underwriting (Kiama) Pty Ltd, Novara Crescent Pty Ltd, Tailored Equity Pty Ltd, JEG Constructions No. 2 Pty Ltd, and Coset Pty Ltd. Mr Shepard noted that the information given by Mr Moran indicated that it was unlikely that any recoveries would be made from these companies if Mr Moran were made bankrupt, and that he had not discovered any transactions which would be voidable for the benefit of creditors in bankruptcy.
Mr Shepard reported no information to Mr Moran’s creditors explaining Mr Moran’s then current business activities and expectations. On the evidence now before me, by early 2010 these had become focused upon the Hurstville project. The Part X procedures which Mr Moran had initiated on the advice of an expert insolvency accountant, Mr Ron Dean‑Willcocks, were aimed at insulating that project from Mr Moran’s creditors arising from the failure of his previous business ventures. The Hurstville project was being managed in the name of Earljest Pty Ltd as trustee for the ‘Hurstville Unit Trust’, and thence for the benefit of a complex structure of related companies and family trusts and third party investors. As the evidence before me showed, the funds to support the Hurstville project and aspects of Messrs Moran and Daniel’s personal and other business affairs, had been channelled to JEG Constructions No. 2 Pty Ltd from the settlement in July 2009 of litigation arising from the failure of the Marulan project.
Mr Shepard’s report to creditors gave little information about this source of funds, and said nothing about Mr Moran’s involvement and expectations in relation to the Hurstville project. Mr Shepard was able to report in relation to the two key corporations under Mr Moran’s directorship, only:
12Summary of the Debtors Statement of Affairs and Controlling Trustee’s Investigations
…
Company and Trust Involvement
…
·Earljest Pty Limited
ACN 097 280 129
The Debtor is a director of the company. The debtor advised in his Statement of Affairs that the company does not have any significant assets. I am requesting a Statutory Declaration of assets and liabilities from the Debtor as director of the company and I will table same at the meeting of creditors.
The Debtor advised it is unlikely a recovery would be made from this company.
…
·J.E.G. Constructions No. 2 Pty Limited
ACN 084 850 644 [sic: ACN 106 435 572]
The Debtor is a director of the company. The company was subject to a Deed of Company Arrangement and Mark Fraser Cooper of Frasers Insolvency Advisory was appointed Deed Administrator. The administration ceased on 15 September 2005. The Debtor advised that financial statements have not been prepared since 30 June 2005. According to a balance sheet as at 30 June 2005, the company had assets of $3,562 to meet liabilities of $1,659,409. I will be seeking a Statutory Declaration of current assets and liabilities from the Debtor as a director of the company and I will table same at the meeting of creditors.
The Debtor advised it is unlikely a recovery would be made from this company. However, due to the age of the financial statements I require further information to verify same.
…
Mr Shepard’s comparison of anticipated outcomes between bankruptcy and the proposed PIA suggested that unsecured creditors would receive no dividend in bankruptcy, and a dividend of $0.15 in the dollar under the PIA. He recommended to creditors:
15Statement by Controlling Trustee as to whether the interests of creditors would be better served by Bankruptcy or acceptance of the debtor’s proposal
…
Due to the time constraints imposed under the Part X regime, certain information has not been made available to me to form a conclusive view on matters relevant to this administration:
·I have not received details of the Debtor’s income for the past 12 months and supporting evidence of same.
·I have not received information on the position of the company, Tailored Property Pty Limited, from the Official Liquidator.
·I have not been able to independently verify the accuracy of the balance sheet provided for the Debtor’s companies.
·I have not received financial statements for Earljest Pty Limited.
·I have not verified creditors claims.
·I have not received results of a motor vehicle search with the Roads & Traffic Authority.
Should the Debtor be bankrupted, I estimate that a dividend would not be paid to unsecured creditors. Should the proposed Personal Insolvency Agreement complete as contemplated, unsecured creditors would receive a dividend 0.15 cents in the dollar, subject to the claims of Bond Lawyers, Merxe Revert Girones, Alexander Robertson as Trustee for the Alex Robertson Superannuation Fund and Tailored Property Pty Limited.
At the meeting of creditors to be held on Thursday, 25 February 2010, creditors will be asked to make a decision by passing a resolution with respect to the Debtor’s future. Creditors may also wish to adjourn the meeting to allow the Controlling Trustee further time to conduct investigations and report to creditors on the potential recoveries available on bankruptcy.
I consider that it would be in the creditors’ interests for the creditors to reject the proposal for Personal Insolvency Agreement as I have not received sufficient information to determine the likely recoveries should the Debtor be made bankrupt. However, as stated above, creditors may adjourn the meeting to allow the Controlling Trustee to conduct further investigations and I highly recommend this course of action.
(emphasis in original)
The minutes of the creditors’ meeting held on 25 February 2010 record:
The Controlling Trustee suggested that due to unresolved matters in the Controlling Trustee’s investigations as outlined in his report to creditors dated 12 February 2010, creditors may wish to adjourn the meeting to allow the Controlling Trustee further time to make investigations. …
A resolution to this effect was then “carried on the voices”, and a second meeting was later appointed for 25 March 2010.
Shortly prior to the second meeting of creditors, Mr Shepard forwarded a supplementary report to creditors, dated 16 March 2010. It reported:
a)Mr Moran had now advised “that he will be employed at Moran Corporation as a business consultant”. Mr Moran was a director of this company, but no details of his anticipated work nor how it would be funded, were provided to creditors. Mr Moran had declared that the company had cash assets of $50,000 to meet liabilities of the same amount for unpaid wages, not including Mr Moran.
b)No further personal assets had been discovered by Mr Shepard, except a jet ski and trailer worth $6,000 on auction. Property searches revealed no interests, although a possibly voidable transaction had occurred when proceeds of a property at Cronulla had been paid to Mr Moran’s wife, but Mr Shepard said: “the costs associated with taking action would outweigh any benefits to creditors”.
c)Mr Shepard’s updated list of unsecured creditors totalled $3,884,957. He said that only “a nominal amount” would be admitted in relation to the claims of Mr Robertson and Spinitu Pty Ltd, because the outcome of the District Court proceedings (which was stayed) was unknown.
d)An improved dividend rate of $0.33 in the dollar was estimated due to the anticipated disallowance of some claims and to three changes to the proposed PIA: an increase in the advanced funds to $45,000; the capping of the controlling trustee’s remuneration at $17,500 plus GST, and the non‑participation of 5 related creditors.
The significant reason for Mr Shepard continuing to make an adverse recommendation to creditors was explained by reference to his attempts to investigate Mr Moran’s business affairs. Mr Shepard explained his general concern:
2Summary of the Controlling Trustee’s Investigations
…
Company Involvement
I have received Statutory Declarations and balance sheets produced from MYOB from the Debtor. I have noted inconsistencies between intercompany loan accounts presented in each companies balance sheet and negative total asset values which suggest the accounts are not current and/or have not been prepared correctly. Furthermore, as discussed later in this report I have received two Statutory Declarations for JEG Constructions No 2 Pty Limited which contain information that conflict with each other. The Debtor purports (sic) however that the other entries in the accounts are correct.
Should the Debtor be made bankrupt, a Trustee would need to engage Liquidators in order to further investigate the companies’ affairs and to potentially recover assets from the company. I note that the recovery costs associated with this course of action would be significant. I further note that recovery action and creditor funding is discussed further in section 3 of this report.
…
He reported in relation to Earljest Pty Ltd, and JEG Constructions No. 2 Pty Ltd:
·Earljest Pty Limited
ACN 097 280 129
The Debtor has signed a Statutory Declaration as a director of the company declaring that the company has a net asset position of negative $546.34. The major asset is cash at bank valued at $45,029. I note the Statutory Declaration and MYOB accounts show an incorrect negative total asset figure due to intercompany loan accounts which should appear as liabilities instead of appearing in the accounts as negative assets. After taking into consideration the costs of liquidation, it is unlikely there would be a dividend to unsecured creditors on winding up.
The company is Trustee of the Hurstville Unit Trust. Based on my investigations the Debtor is not a beneficiary of the trust.
Based on the information above it is unlikely a recovery would be made from this company.
…
·J.E.G. Constructions No. 2 Pty Limited
ACN 084 850 644 [sic: ACN 106 435 572]
The Debtor signed a Statutory Declaration on 23 February 2010 as a director of the company declaring that the company has assets of $880,439 to meet liabilities of $1,059,161. The major assets are cash on hand of $687,631 and various intercompany and director loans of $183,807. Based on this information, I have estimated that after costs of liquidation approximately $600,000 would be available to unsecured creditors which would pay a dividend rate of approximately 57 cents in the dollar. I note the accounts show that the Debtor is owed an amount of $6,005 from the company; however this would be offset by a staff loan for the amount of $32,221.
However, I have received a Statutory Declaration from the director at 3.38pm on 16 March 2010. The Statutory Declaration contains information conflicting with the previous Statutory Declaration. It states the accounts were incorrectly prepared and that expenses paid by the Debtor and Matthew Daniel that were incurred on behalf of Tailored Property Capital Pty Limited and Tailored Property Pty Limited were incorrectly entered into the accounts of J.E.G. Constructions No. 2 Pty Limited. Due to the late receipt of this information, I am unable to comment on the accuracy of either of the Statutory Declarations or the accounts of the company and any potential recovery actions against the company.
…
Mr Shepard gave creditors a glimpse of the convoluted business and family structures which were being conducted by Mr Moran, when referring to his review of the Deed of Trust of the Moran Family Trust. He said:
·Moran Family Trust
… it appears to be a discretionary trust. The Debtor is a beneficiary of the trust and a director of the Trustee of the trust, R & V Moran Pty Limited.
The trust holds beneficially shares in the following companies:
-JEG Constructions No 2 Pty Limited;
-Cope Street Pty Limited;
-Tailored Property Capital Pty Limited;
-Tailored Property PL;
-Novara Crescent PL.
I note the asset positions of the above companies are discussed above.
Should the Debtor be bankrupted, any entitlement to distributions of income and capital of the trust would vest in the bankrupt estate. Due to minimal assets of the trust as well as the discretionary nature of the trust it appears unlikely a distribution will be made to beneficiaries.
Mr Shepard warned creditors about the expense of investigating Mr Moran’s affairs:
3Likelihood of Recoveries / Commercial Considerations / Funding
Should the debtor be made bankrupt and recovery action was to be considered against the Debtor’s companies and potential antecedent transactions, in the first instance I would recommend the examination of directors and all relevant parties pursuant to Section 81 of the Act. I estimate the cost of same would approximate not less than $20,000 - $50,000. In the event that a decision was subsequently taken to pursue recoveries, legal fees (assuming matters would be defended) might approximate $20,000 - $100,000, the funding of which may be required from unsecured creditors depending on recoveries in the administration. Litigation funding may be available to a Trustee depending on establishing the commercial merits of any action to the satisfaction of a litigation funder.
Creditors and any potential litigation funders would also need to consider the capacity of any party, against which proceedings may be contemplated, to pay in the event of a successful outcome.
Any creditor who would consider funding should in connection with any possible recovery action should advise us of same in writing prior to the meeting of creditors.
(emphasis in original)
Mr Shepard’s concluding recommendation to Mr Moran’s creditors was:
5Statement by Controlling Trustee as to whether the interests of creditors would be better served by Bankruptcy or acceptance of the debtor’s proposal
At the meeting of creditors to be held on Thursday 25 March 2010, creditors will be asked to make a decision by passing a resolution with respect to the Debtor’s future.
I note should the Debtor be bankrupted, I estimate that a dividend would not be anticipated for unsecured creditors, subject to any recoveries from the Trustee’s investigation. Should the proposed Personal Insolvency Agreement complete as proposed by the Debtor, unsecured creditors should receive a dividend of approximately 0.47 cents in the dollar dependent upon the extent of creditor claims. However, I note that the dividend rate is reduced to 0.33 cents in the dollar when taking into account my actual disbursements. I am not prepared to forgo my actual disbursements incurred in the administration.
I consider that it would be in the creditors’ interests for the creditors to reject the proposal for Personal Insolvency Agreement in that I have not received sufficient information and had time to satisfy my inquiries regarding the affairs of the Debtor.
(emphasis in original)
The minutes of the reconvened creditors’ meeting on 25 March 2010 do not record Mr Shepard as qualifying or supplementing his written reports, except to present a calculation estimating a dividend under the PIA of $0.42 in the dollar. All the creditors who voted not to accept Mr Shepard’s recommendation, but to approve the PIA, were represented by Mr Dean‑Willcocks. For reasons which are unclear, Mr Shepard admitted a representative of Mr Robertson and Spinitu Pty Ltd to vote against the PIA, but in amounts which largely discounted their claims to interest. Kingsway Group Pty Ltd, a creditor for $404,622, was also separately represented, and voted against the PIA. The other three, smaller creditors, who voted against the PIA had given proxies to Mr Shepard to that effect.
The minutes record the only discussion:
Statements and Questions:
…
An observer asked for clarification on the position of JEG Constructions No. 2 Pty Limited. The President reiterated the matters outlined in the Trustee’s report to creditors dated 16 March 2010.
Peter Hatheier of Kingsway Group Pty Limited asked a question of the debtor regarding the DA approval and rezoning of the property at 121‑123 Novara Crescent, Jannali NSW. The debtor advised the matter was outlined in the Trustee’s reports, however he advised that the approvals had not been obtained.
Mark Findlay of the Insolvency and Trustee Service Australia asked the debtor how Vanessa Moran was obtaining the balance of funds for the proposed PIA, as Mrs Moran is currently unemployed. The debtor advised that he has separate financial affairs to his wife and does not know how she is getting the funds.
The President asked creditors if there were any further questions. None were forthcoming.
The voting in favour of acceptance of the PIA is recorded (with added emphases):
Special Resolution:
“That the Debtor execute the Personal Insolvency Agreement”
Moved by Ron Dean‑Willcocks on behalf of proxies held
$
%
For
Leslie & Jonathan Patterson
80,000
Mark Whiteley
880,641
Vanessa Moran
880,880
B & E Archer
50,000
B & E Archer Superannuation
427,090
J & C Daniel
253,744
Treazure Pty Limited
398,231
Patterson Superannuation
200,000
Jill Moran
81,683
Tony & Janet Moran
144,504
Julie Fairclough
90,663
Moran MG Superannuation
70,631
David & Elissa Stonestreet
178,000
Total
3,736,067
79.52%
Against
Alex Robertson as trustee for the Alex Robertson Superannuation Trust
257,150
Spinitu Pty Limited as trustee for the Alex Robertson Superannuation Trust
257,105
Kingsway Group Limited
404,622
National Australia Bank
24,338
HSBC
5,007
Royal Tiles Pty Limited
13.969
Total
962,236
20.48%
The President declared the special resolution carried.
I have marked in bold, the names of the voters who had agreed not to participate in any dividend because they were ‘related parties’, and in italic the other voters who, in my opinion, should be regarded as having likely personal motives – not shared with creditors generally – for keeping both Mr Moran and Mr Daniel out of bankruptcy.
I have included Mr Whiteley in the group of creditors with a likely special interest in supporting the PIA, since there is abundant evidence – not least in Mr Moran’s evidence under cross‑examination – that Mr Whiteley probably had personal and financial motives for supporting Mr Moran and Mr Daniel’s current business activities and keeping them out of bankruptcy. A substantial part of the documentary and oral evidence before me explored the origins and nature of Mr Whiteley’s involvement in the Hurstville project and in the earlier Kiama and Marulan projects. Mr Moran would have me accept that Mr Whiteley is the true owner or, at least, a preferred creditor in relation to funds exceeding $1m which during 2009 and 2010 were being disbursed by Messrs Moran and Daniel from the bank account of JEG Constructions No. 2 Pty Ltd. Mr Moran claimed: “JEG was a company account with funds that did not belong to me, but belonged to Mark Whiteley, and were available to use at his discretion. … he gave me, as a director of JEG, the ability to determine what expenses needed to be paid in order to keep JEG afloat. … in order to keep the Hurstville Unit Trust afloat”. Other evidence shows conclusively that these funds derived from the July 2009 Marulan settlement, were freely disbursed during 2009 and 2010 by the directors of JEG for the benefit of Messrs Moran and Daniel personally, and for the benefit of a variety of entities which were the vehicles for their business and personal affairs. If I accept that Mr Whiteley has a priority interest in the JEG funds, and that the dispersal of the funds for the benefit of the debtors and their family and business interests has been occurring with Mr Whiteley’s knowledge and permission, then he was probably a close associate of the debtors at the time of their PIAs, with personal motives for assisting them to avoid bankruptcy and an investigation of these arrangements, which were not shared with their creditors generally.
I do not consider that I should make other findings in relation to the details of the evidence concerning Mr Whiteley’s involvement in Messrs Moran and Daniel’s financial and business affairs. Mr Whiteley was not a witness before me, and I consider that it would be more appropriate for the relevant evidence tendered and elicited before me concerning Mr Whiteley to be considered by the trustee who will be appointed under the sequestration orders I propose to make in these proceedings. It will then be a matter for the trustee to decide whether further investigations, including by examination of Mr Whiteley, should be pursued.
Mr Daniel’s Personal Insolvency Agreement
Mr Shepard’s first report to Mr Daniel’s creditors is also dated 12 February 2010. It reported:
a)Mr Daniel had disclosed assets totalling $127,375, of which $35,000 was ‘superannuation’ and $71,442 was ‘income contributions’. Mr Shepard’s researches had discovered no other asset other than a very small parcel of shares. He had confirmed that Mr Daniel had no equity in a property at Sylvania co‑owned with his wife. Mr Shepard was unable to advise whether previous property dealings might involve voidable transactions.
b)Mr Daniel had disclosed his income from on‑going employment as a major projects assessment officer in the NSW Department of Planning, and that he had access to a 2003 Mazda Tribute motor vehicle. Based on the income disclosed, he would be liable to make a contribution from his income of $23,814 per annum if he was made bankrupt.
c)Mr Daniel had disclosed creditors totalling $5,905,597, including secured creditors totalling $1,230,000, but not including Mr Robertson. Mr Shepard noted a concern about the claims of related creditors under TPC Kiama Loan guarantees containing the obscuring condition quoted above.
d)The PIA proposed that Mr Daniel’s wife would advance $35,000 within one month, and that 10 creditors related to him and Mr Moran would not participate in a dividend. Mr Shepard estimated that this would result in a dividend to the other unsecured creditors of $0.40 in the dollar, from an amount of $13,275 available for distribution after the deduction of his costs and remuneration.
e)Mr Shepard noted Mr Daniel was not proposing any income contributions, and that he would be absolutely released from all provable debts. None of his current and future property would be available to creditors, and the “antecedent transaction provisions of the Act” would not apply to Mr Daniel, so as to allow the setting aside of past transactions.
f)Mr Shepard had conducted some investigations into companies in which Mr Daniel was involved, including Looknear Pty Ltd, Tailored Property Pty Ltd, Tailored Property Capital Pty Ltd, Earljest Pty Ltd, Cope Street Pty Ltd, Novara Crescent Pty Ltd, JEG Constructions No. 2 Pty Ltd, and Matt Daniel Pty Ltd. He noted that the information before him indicated that it was unlikely that any recoveries would be made from these companies if Mr Daniel was made bankrupt.
In relation to Mr Daniel’s involvement in Earljest Pty Ltd and JEG Constructions No. 2 Pty Ltd, Mr Shepard reported:
12Summary of the Debtors Statement of Affairs and Controlling Trustee’s Investigations
…
Company and Trust Involvement
…
·Earljest Pty Limited
ACN 097 280 129
Trustee for the Hurstville Unit Trust
The Debtor was previously a director of the company, resigning from the position on 29 June 2009. The debtor advised in his Statement of Affairs that the company does not have any significant assets. I am requesting a Statutory Declaration of assets and liabilities from the current director of the company and I will table same at the meeting of creditors.
The Debtor also disclosed in his Statement of Affairs that the company is the trustee for the Hurstville Unit Trust. The Debtor advised in his Statement of Affairs that the trust does not have any assets. The Debtor has not provided sufficient documentation for the company to allow me to determine whether a recovery would be made from the trust should the Debtor be made bankrupt.
…
·J.E.G. Constructions No. 2 Pty Limited
ACN 084 850 644 [sic: ACN 106 435 572]
The Debtor was previously a director of the company, resigning from the position on 28 May 2005. The company was subject to a Deed of Company Arrangement and Mark Fraser Cooper of Frasers Insolvency Advisory was appointed Deed Administrator. The administration ceased on 15 September 2005. The Debtor advised that financial statements have not been prepared since 30 June 2005. According to a balance sheet as at 30 June 2005, the company had assets of $3,562 to meet liabilities of $1,659,409. I will be seeking a Statutory Declaration of current assets and liabilities from the current director of the company and I will table same at the meeting of creditors.
The Debtor advised it is unlikely a recovery would be made from this company. However, due to the age of the financial statements I require further information to verify same.
…
Mr Shepard made the same recommendation to Mr Daniel’s creditors which he had made to Mr Moran’s creditors:
15Statement by Controlling Trustee as to whether the interests of creditors would be better served by Bankruptcy or acceptance of the debtor’s proposal
…
Due to the time constraints imposed under the Part X regime, certain information has not been made available to me to form a conclusive view on matters relevant to this administration:
·I have not been able to independently verify the equity details of the property at 10 Edward Street, Sylvania NSW.
·I have not received information on the position of the company, Tailored Property Pty Limited, from the Official Liquidator.
·I have not been able to independently verify the accuracy of the balance sheet provided for the Debtor’s companies.
·I have not received financial statements for Earljest Pty Limited and Matt Daniel Pty Limited.
·I have not received any documentation for the formation of the Hurstville Unit Trust or any financial statements for same.
·I have not received any documentation in relation to the sale of the properties in 2007 and 2008 and made investigations into whether there were antecedent transactions.
·I have not verified creditors claims.
·I have not received results of a motor vehicle search with the Roads & Traffic Authority.
Should the Debtor be bankrupted, I estimate that a dividend would be between 0.3 - 0.4 cents in the dollar subject to disputed creditors. Should the proposed Personal Insolvency Agreement complete as contemplated, unsecured creditors would receive a dividend 0.4 cents in the dollar subject to disputed creditors.
At the meeting of creditors to be held on Thursday, 25 February 2010, creditors will be asked to make a decision by passing a resolution with respect to the Debtor’s future. Creditors may also wish to adjourn the meeting to allow the Controlling Trustee further time to conduct investigations and report to creditors on the potential recoveries available on bankruptcy.
I consider that it would be in the creditors’ interests for the creditors to reject the proposal for Personal Insolvency Agreement as I have not received sufficient information to determine the likely recoveries should the Debtor be made bankrupt. However, as stated above, creditors may adjourn the meeting to allow the Controlling Trustee to conduct further investigations and I highly recommend this course of action.
(emphasis in original)
Mr Daniel’s first meeting of creditors was held on 25 February 2010, following that of Mr Moran’s creditors. As with Mr Moran’s meeting, it was adjourned until 25 March 2010.
Mr Shepard circulated a supplementary report to Mr Daniel’s creditors dated 16 March 2010. It reported:
a)The advance under the PIA would be increased to $50,000, and Mr Shepard would cap his remuneration at $17,500 plus GST. However, the list of non‑participating creditors was reduced, so as to be confined to those related to Mr Daniel and to allow creditors related to Mr Moran to participate.
b)On the basis that Mr Shepard would admit the claims of participating unsecured creditors in the total amount of $2,684,027, a dividend of $0.57 in the dollar was now predicted under the PIA. This calculation treated Mr Robertson’s debt as “a nominal amount” due to the uncompleted District Court proceedings. Under bankruptcy, Mr Shepard estimated a dividend of between $1.03 and $0.56 in the dollar.
c)Mr Shepard’s further investigations of Mr Daniel’s assets and company involvements had not located any additional prospects of recovery.
Mr Shepard’s discussion in relation to JEG Constructions No. 2 Pty Ltd and Earljest Pty Ltd was:
2Summary of the Controlling Trustee’s Investigations
…
Company Involvement
I have received Statutory Declarations and balance sheets produced from MYOB from the director of the company, Rusty Moran. I have noted inconsistencies between intercompany loan accounts presented in each companies balance sheet and negative total asset values which suggest the accounts are not current and/or have not been prepared correctly. Furthermore, as discussed later in this report I have received two Statutory Declarations for JEG Constructions No. 2 Pty Limited which contain information that conflict with each other. Mr Moran purports however that the other entries in the accounts are correct.
Should the Debtor be made bankrupt, a Trustee would need to engage Liquidators in order to further investigate the companies’ affairs and to potentially recover assets from the company. I note that the recovery costs associated with this course of action would be significant. I further note that recovery action and creditor funding is discussed further in section 3 of this report.
I provide further information regarding the entities as follows:
…
·Earljest Pty Limited
ACN 097 280 129
The director of the company, Rusty Moran, has signed a Statutory Declaration as a director of the company declaring that the company has a net asset position of negative $546.34. The major asset is cash at bank valued at $45,029. I note the Statutory Declaration and MYOB accounts show an incorrect negative total asset figure due to intercompany loan accounts which should appear as liabilities instead of appearing in the accounts as negative assets. After taking into consideration the costs of liquidation, it is unlikely there would be a dividend to unsecured creditors on winding up.
The company is Trustee of the Hurstville Unit Trust. I discuss the Hurstville Unit Trust later in this report.
Based on the information above it is unlikely a recovery would be made from this company.
…
·J.E.G. Constructions No. 2 Pty Limited
ACN 084 850 644 [sic: ACN 106 435 572]
The director of the company, Rusty Moran, has signed a Statutory Declaration on 23 February 2010 as a director of the company declaring that the company has assets of $880,439 to meet liabilities of $1,059,161. The major assets are cash on hand of $687,631 and various intercompany and director loans of $183,807. I have estimated that after costs of liquidation approximately $600,000 would be available to unsecured creditors, which would pay a dividend rate of approximately 57 cents in the dollar.
I note the accounts show that the Debtor is owed an amount of $126,172 from the company which is partially offset by a staff loan for the amount of $29,121. Based on the above information, should the Debtor be made bankrupt there would be a potential recovery of $60,643.
However, I have received a Statutory Declaration from the director at 3.38pm on 16 March 2010. The Statutory Declaration contains information conflicting with the previous Statutory Declaration. It states the accounts were incorrectly prepared and that expenses paid by the Debtor and Matthew Daniel that were incurred on behalf of Tailored Property Capital Pty Limited and Tailored Property Pty Limited were incorrectly entered into the accounts of J.E.G. Constructions No. 2 Pty Limited. Due to the late receipt of this information, I am unable to comment on the accuracy of either of the Statutory Declarations and the accounts of the company. As such, I am unable to provide an accurate estimate on the estimated realisable value of the Debtor’s claim against the company. I note that should the debtor be made bankrupt, the Trustee’s costs and remuneration would increase substantially trying to recover the debt.
…
·Hurstville Unit Trust & Earljest No. 1 Trust
I have reviewed the Deed of Trust for the Hurstville Unit trust and it appears to be a unit trust. The assets of the trust include a loan to Earljest Pty Limited for $66,681 and an option in property option with unknown value. The Debtor is not a beneficiary, however Earljest Pty Limited holds 10 units as Trustee of the Earljest No. 1 Trust.
I have reviewed the Deed of Trust for the Earljest No. 1 Trust and it appears to be a discretionary trust. The Debtor was previously a beneficiary of the trust, however he disclaimed his interest in the trust on 29 June 2009. I have reviewed the variation of the deed. The Debtor advised he did this due to a conflict of interest in the property option and his current employer. It is possible that the disclaimer of the benefit in the Earljest No. 1 Trust could be voidable pursuant to section 120 and 121 of the Act. However, I note that due to the discretionary nature of the trust it is uncertain whether there would be a distribution from the trust. As such, the costs of litigation could outweigh the return to creditors should a Trustee in bankruptcy pursue same.
Mr Shepard included the same warning as he gave to Mr Moran’s creditors, as to the cost of s.81 examinations if further investigations occurred under a bankruptcy. He then made the same recommendation as he had made to Mr Moran’s creditors, adding a further reason for recommending the rejection of the PIA, concerning Mr Daniel’s income:
5Statement by Controlling Trustee as to whether the interests of creditors would be better served by Bankruptcy or acceptance of the debtor’s proposal
At the meeting of creditors to be held on Thursday 25 March 2010, creditors will be asked to make a decision by passing a resolution with respect to the Debtor’s future.
I reiterate should the Debtor be bankrupted, I estimate that a dividend of between 0.56 and 1.03 cents in the dollar would be anticipated for unsecured creditors, subject to any recoveries from the Trustee’s investigation. Should the proposed Personal Insolvency Agreement complete as contemplated without taking into account my actual disbursements, unsecured creditors should receive a dividend of approximately 0.75 cents in the dollar dependent upon the extent of creditor claims. However, I note that the dividend rate is reduced to 0.57 cents in the dollar when taking into account my actual disbursements. I am not prepared to forgo being reimbursed my actual costs of the administration.
I consider that it would be in the creditors’ interests for the creditors to reject the proposal for Personal Insolvency Agreement in that I have not received sufficient information and time to satisfy my inquiries regarding the affairs of the Debtor. Furthermore, the actual dividend rate after taking into account the disbursements is approximately the same under bankruptcy.
(emphasis in original)
Mr Daniel’s adjourned creditors’ meeting was held on 25 March 2010, following that of Mr Moran. Mr Dean‑Willocks again exercised proxies on behalf of most of the creditors who supported the PIA. Mr Shepard gave a revised estimate of a dividend under the PIA of $0.68 in the dollar. The minutes then record the following discussion:
Statements and Questions:
…
The President reiterated the position on JEG Constructions No. 2 Pty Limited as outlined in the Trustee’s report to creditors dated 16 March 2010. The President noted the difference between optimist and pessimistic realisations should the debtor be made bankrupt were dependent on the recovery from JEG Constructions No. 2 Pty Limited.
Mark Findlay of the Insolvency and Trustee Service Australia asked the debtor the source of the balance of funds for the proposed PIA. The debtor advised that his wife, Brooke Daniels, had the funds.
Ron Dean‑Willcocks advised that to the extent the amount claimed by the creditors which he holds proxies for exceeds the amount admitted by the President, he objects to the President’s decision to reject these amounts for voting purposes.
Tiana Daly as proxy for Alex Robertson and Spinitu Pty Limited as trustee for the Alex Robertson Superannuation Fund objected to the President’s decision to only partially admit their claims for voting purposes.
The President asked creditors if there were any further questions. None were forthcoming.
…
The vote in favour of the PIA was carried as follows, again adding emphasis to show the related and other creditors who, in my opinion, were probably special supporters of Mr Daniel for motives not shared with those of creditors generally:
Special Resolution:
“That the Debtor execute the Personal Insolvency Agreement”
Moved by Ron Dean‑Willcocks on behalf of proxies held
$
%
For
Leslie & Jonathan Patterson
80,000
Mark Whiteley
880,641
Vanessa Moran
880,880
B & E Archer
50,000
B & E Archer Superannuation
427,090
J & C Daniel
253,744
Treazure Pty Limited
398,231
Patterson Superannuation
200,000
Moran MG Superannuation
70,631
David & Elissa Stonestreet
178,000
ANZ
28,252
Citigroup
41,174
Total
3,488,643
77.74%
Against
Alex Robertson as trustee for the Alex Robertson Superannuation Trust
257,150
Spinitu Pty Limited as trustee for the Alex Robertson Superannuation Trust
257,105
Kingsway Group Limited
404,622
Westpac
80,279
Total
999,201
22.26%
The evidence now before the Court
As I have foreshadowed, I have concluded that the two PIAs should be set aside largely because I agree with the assessments of Mr Shepard as to the interests of creditors, for the reasons given by him. I consider that his assessments of the benefits to creditors at the time of the creditors’ voting on the PIAs was correct, and that it remains valid on the evidence now before me. In short, the PIAs appear to me not to be calculated to benefit the creditors generally, and to be unreasonable, because at the time they were voted upon the business affairs of Messrs Moran and Daniel had obscurities which the expertise of Mr Shepard was not able to be satisfied about, to such an extent as to conclude that it was not in the interests of creditors to take the very small dividends under offer and to forego the real, but unquantifiable, advantages which might be available under a bankruptcy administration, including investigation of antecedent transactions, current and future acquired assets, and income contributions. I would draw the same conclusion, in my assessment of the PIAs on all the evidence now before me. There are also other supporting considerations, which I shall examine below.
I therefore have not found it necessary to closely examine the deficiencies in Messrs Moran and Daniel’s statement of affairs, as presented to creditors and Mr Shepard, although a great deal of effort was given by Mr Robertson in the present proceedings to discovering defects. It is not necessary for me to do this, because essentially, Mr Shepard’s adverse assessment of benefit to creditors, and my own adverse assessment, broadly accepts the debtors’ statements of affairs and supporting information given to Mr Shepard, but finds this information deficient to justify creditors foregoing their rights under a bankruptcy administration of the admitted insolvencies.
However, some significant, if not ‘material’, omissions from the debtors’ statements of affairs were pointed to in the course of Mr Moran’s cross‑examination, and these should not go unremarked. The cross‑examination revealed a casualness and degree of disregard for obligations of candour, which give me some concerns, and have influenced my conclusions in a minor way.
Thus, it emerged that, in fact, Messrs Moran and Daniel have the use of, and commonly drive, respectively a Lexus and a BMW, whose lease and running expenses are paid by JEG Constructions No. 2 Pty Ltd. The elderly Mazdas referred to in their statements of affairs were normally used by their wives. It also emerged in cross‑examination that a variety of other personal benefits for Messrs Moran and Daniel and their family members were being paid from the JEG Constructions No. 2 Pty Ltd bank account, which were not recognised in their statements of affairs. It is now apparent that the accounts of that company concerning the use of its funds were being constructed in retrospect, upon possibly dubious accounting evidence. This was illustrated even at the time of Mr Shepard’s investigations, when he was given inconsistent statutory declarations and accounts in relation to the payment of personal credit card debts from the JEG funds.
The JEG funds
More importantly, Mr Shepard confirmed that he had not been shown JEG accounts which would have allowed him to identify and examine the receipt of funds exceeding $1m from the 2009 settlement of the Marulan litigation, and their dispersal under instructions from Mr Moran. Mr Shepard agreed that he had never been told by Mr Moran nor Mr Daniel that in July 2009 JEG had received over a million dollars by way of a court settlement, although he was aware of an amount of cash in the company’s bank account.
I was invited to arrive at my own findings as to the sufficiency of Mr Moran’s evidence explaining this cash and its use, but I was not able to reach any confident findings – and would not have been able to do so without further investigation and report by an expert and independent accountant of the evidence not seen by Mr Shepard. It is clear, at least, that Messrs Moran and Daniel were less than candid with Mr Shepard, and through him with their creditors generally, as to the derivation, accessibility, and intended use of the funds which had been channelled to JEG in 2009.
It is now clear that these funds were, in fact, used to make all of the advances required under both PIAs, and that their wives did not provide these funds. In my opinion, Messrs Moran and Daniel probably intended to use those funds for that purpose at the time of entry into their PIAs, and were less than candid about this intention. I do not accept that they genuinely believed that their wives had, or would use, their own financial resources to provide the advances. Neither of the wives was called as witnesses in relation to this.
My concerns also extend to Mr Moran’s evidence about Mr Whiteley’s involvement in the use of the JEG funds, which I have pointed to above. I consider it strongly possible, if not likely, that Mr Whiteley’s support for the PIA was built upon promises of preferred payments from those funds and of benefits from the Hurstville project which were not being offered to creditors generally.
For these, and other reasons, I am not satisfied that the evidence relating to the JEG banking records, including the involvement of Mr Whiteley in its affairs, does not deserve further investigation by a trustee in bankruptcy, nor that any such investigation might not be productive of benefits to creditors. In short, the fresh evidence about Mr Moran’s management of the finances of JEG Constructions No. 2 Pty Ltd for the benefit of himself, Mr Daniel, their families, and their continuing business interests and associates, does not cause me to reach a better or more confident finding in favour of the PIAs, than was able to be reached by Mr Shepard when reporting to creditors.
The Hurstville project
Another significant area where the evidence now before the Court is more extensive than was available to Mr Shepard, concerns Messrs Moran and Daniel’s continuing involvement in the Hurstville project, through their management of key entities involved in the Hurstville Unit Trust.
I accept that I am unable to arrive at any better conclusion than was reached by Mr Shepard from the documents shown to him: that both debtors were and probably remain removed by discretionary trusts from the tracing of any past or present benefit in the current or projected assets and profits from the Hurstville project. However, the new evidence gives a picture of their continuing commitment and expectations in relation to that project which, in my opinion, was deliberately withheld from Mr Shepard and, through him, the creditors generally. It is now clear that both debtors expect to derive substantial indirect benefits from this project, perhaps including potential management and consultancy fees or other income, and probably including expectations of benefits to their related entities and business associates who supported the PIA.
Evidence of this is found in the brief of instructions given to Mr Dean‑Willcocks, when his services were engaged in August 2009. The covering letter to him dated 19 August 2009 from a solicitor, KB Legals explained:
Further to the conference with you recently with Mr Rusty Moran and Mr Matt Daniel on Friday evening of August 7, 2009 we attach hereto a structure summary. We confirm that at this initial stage we act for Earljest Pty Ltd as trustee for the Hurstville Unit Trust, Mr Matt Daniel, Mr Gary Punch and Mr Rusty Moran.
As discussed at the meeting our clients have concerns about possible litigation proceedings being instituted which could impact upon our clients. Of major concern is the protection of the Hurstville Unit Trust from any actions relating to the unit holders or the principals behind the unit holders which may directly or indirectly impact upon the trust. In particular our clients have concerns concerning the impacts in the case of the liquidation of Tailored Property Pty Ltd or the appointment of the Trustee in Bankruptcy in respect to Mr Rusty Moran or Mr Matt Daniel.
We understand that you are insolvency specialists and accordingly as part of enabling our office to provide a detailed legal advice to our clients, we request your specialist advice on certain structuring aspects and exposures of our clients. For this reason the attached documents and your instructions together with any communication for this matter should be regarded as confidential and privileged.
Please advise on the suitability of the KB suggestions and other action points contained in the brief.
…
The attached brief contains short histories of the complex business arrangements of most of the business entities in which Messrs Moran and Daniel were involved, and suggestions for restructuring their involvement. It is not necessary for me to attempt to recount nor analyse the accuracy of these histories, nor the extent to which the proposals for restructuring were or were not subsequently implemented. I doubt whether I could do this unaided by much more protracted examination of the relevant evidence and without independent accountancy investigation and report. The brief does, however, commence with a useful summary of the then position of the Hurstville Unit Trust, and explains its perceived importance to Messrs Moran and Daniel:
1.Hurstville Unit Trust
Hurstville Unit Trust – Deed of Option over land at 23 ‑ 29 Treacy Street, Hurstville
·On 24 Dec 2008 a Deed of Option was entered into between Earljest Pty Limited as Trustee for the Hurstville Unit Trust (“Earljest”) and FCS Holdings Pty Limited in relation to the purchase of land at 23 – 29 Treacy Street Hurstville, whereby Earljest will eventually either:
oacquire the land at Hurstville or
osell the option to a third part purchaser for a profit
·Term of option = 30 months
·Option Strike Price = $6.25m
·Possible DA approved sell price = $11M.
·Costs spent to date = $200k.
·Costs to get DA approval = $300k.
·Option Deed contains a Nomination provision – Clause 4
·Option Deed contains an Assignment Provision – 13.2
Hurstville Unit Trust
·Name of Trust = The Hurstville Unit Trust – Refer to annexure A
·Current Trustee = Earljest Pty Limited ACN 097 280 129:
oSole Director was Matthew Daniel until 29 June 2009
oSole Director as of 29 June 2009 = Rusty Moran
oSole shareholder = Matthew Daniel 100 of 100. [Note #1.1]
oCo Charges = Nil.
·Current Unit Holders:
o10 units – Earljest Pty Limited ACN 097 280 129 ATF Earljest No 1 Trust – Refer to annexure B
§ Trustee = Earljest Pty Limited ACN 097 280 129
·Director = Rusty Moran
·Shareholder = Matthew Daniel: 100 of 100
·Co Charges = Nil
§ Trust Deed Date = 14 December 2005
§ Settlor = Robert Duncan Hugh
§ Primary Beneficiaries = Matthew Daniel [Note #1.2]
§ Appointor = Robert Duncan Hugh
o10 units – Australian Sports Merchandise Pty Limited ACN 074 164 202 ATF The Punch Family Trust – refer to annexure C
§ Trustee = Australian Sports Merchandise Pty Limited ACN 074 164 202
·Directors = Gary Punch, Sylvia Lestavel
·Co Charge = CBA dated 29 May 1998 – all monies. [Note #1.3]. TBA.
·Co Charge = CBA dated 2 Feb 2000 – all assets in Punch Family Trust dated 7 June 1996 being released currently.
·Co Charge = NAB dated 13 Feb 2008 = $73,560 and VW car.
·Shareholders = Gary Francis Punch: 2 of 4, Sylvia Lestavel: 2 of 4.
§ Trust Deed Date = 7 June 1996
§ Settlor = Joseph Grech
§ Primary Beneficiary = Gary Francis Punch, Amanda Kay Punch
§ Nominator = Gary Francis Punch
o10 units – Moran Underwriting (Kiama) Pty Limited ACN 107 182 990 ATF Kiama Underwriting Discretionary Trust – Refer to annexure D
§ Trustee = Moran Underwriting (Kiama) Pty Limited
·Director = Rusty Moran
·Shareholders = Vanessa Moran 100 of 100.
·Liabilities = $1,010,000 unsecured loan from Tailored Equity Pty Limited. [Note #1.4]
§ Trust Deed Date = 26 November 2003
§ Settlor = Karl Burnett
§ Primary Beneficiaries = Vanessa Moran and Calvin Moran
§ Guardian = Rusty Moran and Vanessa Moran
§ Appointor = Rusty Moran and Vanessa Moran [Note #1.5]
·Proposed to introduce three new Unit holders – Note #1.6:
oRodney Freeman ATF TMC Discretionary Trust – Note #1.7
oMark Whiteley
oKB Legals Pty Limited
·Proposed to terminate current Joint Venture – Note #1.8
This summary appears to be consistent with other evidence before me, although it was submitted that Mr Daniel had transferred his shareholding in Earljest Pty Ltd and ceased to be a primary beneficiary of the Earljest No. 1 Trust in June 2009, as well as resigning as director at that time. I was therefore left uncertain who are the current likely beneficiaries of his former interests in the Hurstville project.
It is notable from the above that in August 2009, the Hurstville project was being managed on an assumption that it had a “possible DA approved sell price” of $11m. Mr Shepard was not told of this potential value of the project. That there was probably substance to the 2009 estimate was confirmed by evidence tendered to the Court that Mr Moran in July 2010 authorised a further payment of $200,000 from the JEG funds to extend the option, and that on 9 December 2010 he was able to submit a “major project application” with the Department of Planning. The development application gave an “estimated capital investment value” of $134,000,000, and attached the necessary certificate signed by the Minister for Planning on 6 September 2010.
It is most difficult now to predict how Mr Shepard would have further investigated and assessed the implications of Messrs Moran and Daniel’s involvement in the Hurstville project, if he had been better informed about it when writing his reports to their creditors. It remains difficult for me to assess the implications of the fresh evidence, in relation to possible benefits to their creditors if their insolvencies were administered in bankruptcy. I accept that Mr Robertson has not established to my satisfaction that there currently exists an asset of either of them, or a clear prospect of a future asset, arising from the Hurstville project, which would become available to their creditors in a bankruptcy. However, there appears, at least, to be prospects of Mr Moran being able to claim substantially greater remuneration or other benefits from his management and consultancy efforts, than he foreshadowed to his creditors.
I accept that a jaundiced view of Messrs Moran and Daniel’s business histories would not predict a willingness by them to structure their current business affairs to provide a greater return to their creditors than was promised in the PIA. However, it is not unknown for businessmen in their position, aided by their insolvency advisors either before or after the making of a sequestration order, to discover sources of financial contribution to offer to creditors, which would be greater than were suggested in the present PIAs. It seems to me quite possible that greater contributions for the payment of their creditors might have been forthcoming in February 2010 from entities related to Messrs Moran and Daniel, if Mr Shepard had been able to better inform their creditors of their intentions and expectations in relation to the Hurstville project. It seems to me not impossible that, if the PIAs are set aside, those entities might in the future wish to assist them to emerge swiftly from bankruptcy, by making greater contributions than were offered in February 2010.
In short, the evidence discovered and presented to the Court by Mr Robertson concerning Messrs Moran and Daniel’s past and continuing involvement in the Hurstville project does not satisfy me that it holds no prospect of potential benefits to creditors generally if they were made bankrupt, whether by investigation of the transactions involved or by inducement of better offers to creditors.
Nothing in the new evidence concerning the JEG funds and the Hurstville project causes me not to accept the strength and continuing relevance of Mr Shepard’s adverse recommendations to their creditors at the time of acceptance of the present PIAs.
The PIAs should be set aside and a sequestration order made
It is necessary for me separately to consider: (i) why I am satisfied that the ground under s.222(1)(d) exists in relation to both PIAs; (ii) why I am satisfied that I should exercise discretion under s.222(1) to set them aside; and (iii) why I am satisfied that I should also exercise the discretion under s.222(10) to make sequestration orders in relation to Messrs Moran and Daniel. As will appear, the central reasons for my exercise of the two discretions are also the reasons for my being satisfied as to the ground, but there are additional and broader considerations which are also relevant to those discretions.
The ground of “the terms of the agreement are unreasonable or are not calculated to benefit the creditors generally” was inserted in the Bankruptcy Act by the Bankruptcy Legislation Amendment Act 2004 (Cth) in a general re‑writing of the Court’s powers to set aside a personal insolvency agreement. I accept that its language has similarities with previously considered grounds requiring an assessment of whether a PIA is ‘unreasonable’ and whether, notwithstanding an imperfection in procedure or in a debtor’s disclosures to creditors, the setting aside would be ‘in the interests of the creditors’. I accept therefore, as both counsel submitted, that guidance as to the intended meaning of the words of s.222(1)(d) may be sought in the previous jurisprudence (and c.f. Cowdroy J in Westpac Banking Corporation v Hingston (No.2) [2010] FCA 1116, (2010) 117 ALD 55 at [39]‑[43], and [68]‑[82]).
It is appropriate to note that, for the first time, the situation of ‘the creditors’ under a PIA has been expressly qualified by the word ‘generally’. No doubt the previously unqualified reference to “interests of the creditors”, which is still found in s.222(6) in relation to the s.222(5) ground, will often be given the same connotations. However, in the context of the broader s.222(1)(d) ground, the word ‘generally’ is a reminder that a PIA is intended to benefit all creditors, in the sense of the body of creditors generally, and not just benefit a particular body of creditors – even a dominant body of creditors.
As the Explanatory Memorandum to the 2004 amendments noted, the amendments were intended to do more than consolidate the previous powers of terminating a PIA, and sought to address what was seen as a significant concern. It said:
11The Government decided to conduct the review following concerns related to potential conflicts arising from the relationship between the debtor and the controlling trustee as well as the impact on the outcome of the meeting where the debtor has so‑called ‘friendly’ creditors who are associated entities or family members. However, the review was not limited to dealing with these issues and also considered whether arrangements between debtors and their creditors without sequestration are still a useful feature of the personal insolvency system.
12The Issues Paper which was released at the start of the review identified a number of potential problems for discussion:
1.‘Friendly’ creditors—concerns that a debtor may be able to manipulate the outcome of the vote.
…
In the context of that concern, the Court needs to consider carefully how a PIA is ‘calculated to benefit’ ‘creditors generally’. Particularly where, as with the present two PIAs, they were adopted by a special majority of creditors consisting overwhelmingly of ‘friendly creditors’, and were opposed by substantial creditors with no special reasons for discounting their financial interests as creditors as a result of personal or family reasons for preserving the debtors from bankruptcy, or for expecting special benefits from this outcome arising otherwise than under the PIAs. In my opinion, the Court may have a doubt in such a case that a PIA is ‘calculated to benefit creditors generally’, where the debtor gains releases from very large debts, and escapes from all the impediments of bankruptcy which are designed to ensure thorough investigation of the debtor’s affairs, and the discovery and application for the benefit of creditors generally, of the debtor’s past, present, and future property interests, including by way of income contributions during a period of bankruptcy. The doubt may be reinforced, where the benefits of the debtor’s releases are gained by him or her, and by his or her friends, by the payment of an amount for distribution to creditors which is so disproportionate to the debtor’s debts as to appear token, derisory or contemptible – at least when viewed from the perspective of ‘creditors generally’.
In the present case, it is appropriate, in my opinion, to apply previous authority which has recognised that there are real benefits to creditors who are not obtaining special advantages from a PIA, in their rights to subject the debtor to a full bankruptcy administration, even if the prospects of significant financial improvement of the offered dividend cannot be predicted in advance. These authorities do not require the Court to be able to reach an assurance, or finding of confidence, that creditors would achieve a better dividend if the debtor was subjected to bankruptcy administration, before it can conclude that a PIA offering a derisory dividend, imposed by a special group of creditors on the debtor’s creditors generally, is not in the interests of creditors generally.
I therefore accept the relevance to the present case of previous authority which supports the above propositions, which I cited and applied in National Australia Bank Ltd v Cranney & Anor [2011] FMCA 169 at [70] (i.e. Re John Codrington; Ex parte: Don McKay Tourist & Charter Pty Limited v Codrington [1989] FCA 349 at [20]‑[23]; Re Lockett; Ex parte Northern Equity Ltd (French J, 6 April 1992, BC9203445); NZI Capital Corporation Limited v Lancaster (1991) 30 FCR 441 at 451, upheld by the Full Court on 11 October 1991 (see BC9103440); and Palazzolo v Palazzolo (Neaves J, 19 July 1991, BC9103274)).
I have considered other authorities which were cited to me by counsel for Messrs Moran and Daniel (Augustyn v Putnin (1988) 83 ALR 514 at 522, Re Beames; Ex parte Beneficial Finance Corporation Ltd (1985) 7 FCR 216 at 230, and Re Agushi; Ex parte Farrow Mortgage Services Pty Ltd v Cole (1992) 8 ACSR 549 at 561). As with all judgments concerning the setting aside of PIAs, the language of the judge needs to be understood in the particular statutory and factual context of the case. In particular, it is important to note that the old provision which is now found in s.222(6), in its terms, requires the Court to be positively satisfied that setting aside a PIA is in the interests of creditors. New s.222(1)(d) does not impose a test in those terms, but focuses upon the terms of the PIA to see if it is “calculated to benefit the creditors generally”. There are different nuances of meaning in the new language, and it may be easier to be satisfied in terms of s.222(1)(d) than s.222(6).
However, I accept that a balancing of the outcomes for ‘creditors generally’ to their being bound by the terms of the PIA is a relevant consideration under s.222(1)(d), and is certainly a relevant consideration to exercising the discretion under s.222(1). I therefore accept the continuing guidance given by previous authorities, as did Cowdroy J in Westpac v Hingston (supra). I accept that the Court should consider whether there is an appreciable possibility that a bankruptcy administration might be productive of benefits to creditors, and that it should not exercise the power under s.222(1) if it is “fairly confident that the creditors would gain nothing” from exercising the power (cf. Pincus J in Re Beames (supra)).
I have certainly not arrived at that confidence in the present case, since I am not persuaded that the complicated financial affairs of Messrs Moran and Daniel have been sufficiently investigated and presented to creditors or the Court in a way which allows satisfaction that bankruptcy administration would be a waste of everyone’s time and money and would bring no benefit to creditors generally.
As did Cowdroy J in Westpac v Hingston (supra) at [98], I have also found in the circumstances of the present case reasons additional to the trivial dividends offered to creditors under the present PIAs, for being satisfied that the terms of the PIAs were not ‘reasonable’ nor ‘calculated to benefit the creditors generally’, and that the appropriate response to that finding is to set aside the PIAs and make sequestration orders.
Summarising my reasons:
i)Creditors of both debtors would receive only a token dividend under the PIA, in relation to very substantial total indebtedness, and in return for releasing all possibilities of future recovery in the course of a bankruptcy administration. This is shown in Mr Shepard’s estimates of dividends, even where they were inflated because they did not take into account the debtors’ substantial indebtedness to Mr Robertson.
ii)The debtors contributed nothing for payment of their debts from their current or future assets and income or discretionary resources, nor from their past and future business enterprises conducted for the benefit of third persons.
iii)There is a real possibility that a better financial return to creditors could accrue through a bankruptcy administration, if only by reason of Mr Daniel’s obligations to contribute from his income at the Department of Planning, and by reason of Mr Moran’s continuing management of the promising Hurstville venture. In relation to Mr Moran, I do not accept that his projection of income which was held out to creditors reflected his true earning capacities and expectations, nor his actual remuneration by way of various benefits and financial advantages which his on‑going management of that venture has given him and will allow him to receive in the future, including by way of access to the funds held by JEG Constructions No. 2 Pty Ltd.
iv)The debtors received full and immediate releases from all indebtedness, and a complete immunity from investigation of antecedent transactions and their current and future financial affairs over the period of an insolvency administration. In my opinion, these releases had real value to the debtors, and creditors generally suffered real losses by giving them.
v)I am not at all satisfied that the evidence before me shows that there is no prospect that the investigations of a trustee in bankruptcy into the debtors’ past and current business affairs will not produce additional benefits to creditors. As Mr Shepard reported to creditors, and the evidence before me confirms, there are several areas of their business activities which invite further inquiry. I do not accept that, if necessary, the trustee would not receive assistance for future investigations, including s.81 examinations – if only from Mr Robertson making accessible the material discovered in the course of the present proceedings.
vi)The controlling trustee was unable to perform inquiries which satisfied him as to the benefit of the PIAs for creditors generally, and recommended against their acceptance. In my opinion, his opinions were soundly based, and have continuing relevance.
vii)The vote in favour of the PIAs was dominated by ‘related’ creditors and creditors with a special interest in assisting the debtors to achieve a release from insolvency and an avoidance of a bankruptcy administration.
viii)In short, the terms of the PIAs were calculated to give real benefits only to the debtors and to their friendly creditors, and the terms were not calculated to benefit the creditors generally.
Considering the general discretion to set aside the PIAs upon satisfaction of a ground for doing so, I am unable to identify any consideration which would outweigh the force of the above reasons for finding the ground in s.222(1)(d) to have been satisfied.
Considering the consequential discretion under s.222(10) to make sequestration orders, in my opinion it is an appropriate exercise of power to accede to Mr Robertson’s application for sequestration orders against each debtor. He has established that he is a creditor in relation to each debtor for a debt exceeding $500,000, which accrued several years ago. The debtors committed voluntary acts of bankruptcy under s.40(1)(i) on 20 January 2010, when they signed authorities under s.188. Their statements of affairs revealed that they were both very substantially insolvent at that time, and there is no evidence suggesting that this situation has changed.
When exercising both of these discretions, I have taken into account possible hardships which each debtor might face as a result of a sequestration order and in the course of a bankruptcy administration, but I consider it just and appropriate, and consistent with the policies of the Bankruptcy Act, to make sequestration orders which will have relation back to that date (see s.222(12) and s.115(1) and (1B)).
I therefore contemplate making orders in the following terms:
i)The personal insolvency agreement of Rusty John Moran dated 15 April 2010 is set aside under s.222(1) of the Bankruptcy Act 1966 (Cth).
ii)A sequestration order be made against the estate of Rusty John Moran under s.222(10) of the Bankruptcy Act 1966 (Cth).
iii)The personal insolvency agreement of Matthew Howard Paul Daniel dated 15 April 2010 is set aside under s.222(1) of the Bankruptcy Act 1966 (Cth).
iv)A sequestration order be made against the estate of Matthew Howard Paul Daniel under s.222(10) of the Bankruptcy Act 1966 (Cth).
v)The applicants’ costs, including all reserved costs, be taxed and paid from the estates of the bankrupts in the priority fixed by s.109(1)(a) of the Bankruptcy Act 1966 (Cth).
vi)Note that the date of a relevant act of bankruptcy in relation to each bankrupt is 20 January 2010.
vii)The applicants must enter and give a copy of this order to the Official Receiver within 2 working days.
I shall appoint a listing in the near future for the purpose of making final orders, after receiving any further submissions of the parties in relation to the form of the orders, their date of effect, and any outstanding disputed questions of costs. The applicants should have available on that date affidavits satisfying r.4.06 of the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth), and notify the Court if any consent of trustee has been signed.
I certify that the preceding one hundred and one (101) paragraphs are a true copy of the reasons for judgment of Smith FM
Date: 20 July 2011
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