Voukidis v Anastasopoulos
[2019] FCCA 3397
•25 November 2019
FEDERAL CIRCUIT COURT OF AUSTRALIA
| VOUKIDIS v ANASTASOPOULOS & ANOR | [2019] FCCA 3397 |
| Catchwords: BANKRUPTCY – Composition with creditors (“Composition”) – when a Composition is “in force” – when a Composition is discharged. WORDS & PHRASES – “creditor” – “false” – “in force”. |
| Legislation: Bankruptcy Act 1966, ss.73, 74, 76B, 109, 115, 222, 224, 230, 232, 254 |
| Cases cited: Ambridge Investments Pty Ltd (in liq) (recvr app’td) v Baker & Ors [2010] VSC 59 Khera v National Australia Bank Limited (1996) 71 FCR 133 Moss v Gunns Finance Pty Ltd (Receivers & Managers Appointed) (In liquidation) (2018) 16 ABC(NS) 325 |
| Applicant: | OLGA VOUKIDIS |
| First Respondent: | GEORGINA ANASTASOPOULOS |
| Second Respondent: | LOUISE THOMSON IN HER CAPACITY AS THE TRUSTEE FOR THE BANKRUPT ESTATE OF GEORGINA ANASTASOPOULOS |
| File Number: | SYG 2634 of 2017 |
| Judgment of: | Judge Cameron |
| Hearing dates: | 2-6, 9 September 2019 |
| Date of Last Submission: | 27 September 2019 |
| Delivered at: | Sydney |
| Delivered on: | 25 November 2019 |
REPRESENTATION
| Counsel for the Applicant: | Mr A. Hopkins |
| Solicitors for the Applicant: | Spinks Eagle |
| Counsel for the Respondents: | Mr J. Rose |
| Solicitors for the Respondents: | Diamond Conway |
ORDERS
The application be dismissed.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 2634 of 2017
| OLGA VOUKIDIS |
Applicant
And
| GEORGINA ANASTASOPOULOS |
First Respondent
| LOUISE THOMSON IN HER CAPACITY AS THE TRUSTEE FOR THE BANKRUPT ESTATE OF GEORGINA ANASTASOPOULOS |
Second Respondent
REASONS FOR JUDGMENT
INTRODUCTION
The applicant (“Olga”) has applied under s.222 of the Bankruptcy Act 1966 (“Act”) to set aside a composition (“Composition”) with creditors which the first respondent (“Georgina”) entered into pursuant to s.73 of the Act on 6 April 2017. She also seeks an order that Georgina’s creditors be restored to the positions they were in before the composition was proposed on 2 March 2017.
The second respondent, Ms Thomson, was the trustee of the Composition. At the time of the Composition Georgina was a registered proprietor with her husband Nicholas Anastasopoulos (“Nicholas”) of two properties, although both were mortgaged. The dividend paid pursuant to the Composition was approximately one eighth of a cent in the dollar.
THE ALLEGATIONS IN BRIEF
The parties’ cases are set out in detail later in these reasons. For present it is sufficient to note that:
a)Olga alleged that the Composition should be set aside under s.222(1)(d) of the Act as unreasonable and not calculated to benefit the creditors generally and under s.222(1)(e) of the Act for other reasons related principally to the genuineness of a large loan which was admitted as a debt and the lack of investigations into it; and
b)Georgina opposed those contentions and said that in any event:
i)it was too late to undo the Composition; and
ii)Olga lacked standing to make the application.
RELEVANT LEGISLATION
As at 6 April 2017, s.73 of the Act relevantly provided:
73 Composition or arrangement
(1)Where a bankrupt desires to make a proposal to his or her creditors for:
(a) a composition in satisfaction of his or her debts; or
(b) a scheme of arrangement of his or her affairs;
he or she may lodge with the trustee a proposal in writing signed by him or her setting out the terms of the proposed composition or scheme of arrangement and particulars of any sureties or securities forming part of the proposal.
(1A)The trustee must, within 2 business days after receiving the proposal, give a copy of the proposal to the Official Receiver.
…
(2)The trustee shall call a meeting of creditors and shall send to each creditor before the meeting a copy of the proposal accompanied by a report on it.
(2A)The report must indicate whether the proposal would benefit the bankrupt’s creditors generally.
(2AA)The report must name each creditor who was identified as a related entity of the bankrupt in the bankrupt’s statement of affairs.
…
(4)The creditors may, by special resolution, accept the proposal.
(5)A creditor who has proved his or her debt may assent to or dissent from the proposal by written notice to that effect delivered to the trustee before the meeting or sent by post to the trustee and received by him or her before the meeting, and in that case the creditor shall, for the purposes of this Division, be deemed to have been present at the meeting and to have voted according to his or her assent or dissent.
At all material times s.76B of the Act has relevantly provided:
76B Setting aside and termination of a composition or scheme of arrangement
Sections 222 to 222D, 224 and 224A apply, with such modifications (if any) as are prescribed by the regulations, in relation to a composition or scheme of arrangement under this Division as if:
(a)the composition or scheme were a personal insolvency agreement executed by the debtor; and
(b)the trustee of the composition or scheme were the trustee of the personal insolvency agreement.
At all material times s.222 of the Act has relevantly provided:
222 Court may set aside personal insolvency agreement
Setting aside on grounds of unreasonableness etc.
(1)If a personal insolvency agreement is in force, the Court may, on application by:
…
(c) a creditor;
make an order setting the agreement aside if the Court is satisfied that:
(d)the terms of the agreement are unreasonable or are not calculated to benefit the creditors generally; or
(e)for any other reason, the agreement ought to be set aside.
Setting aside on grounds of non-compliance with this Part etc.
(2)If a personal insolvency agreement is in force, the Court may, on application by:
(a) the Inspector-General; or
(b) the trustee; or
(c) a creditor; or
…
make an order setting the agreement aside …
…
(4)The Court must not make an order under subsection (2) unless the application for the order is made before all the obligations that the personal insolvency agreement created have been discharged.
Setting aside on grounds of false or misleading information etc.
(5)If a personal insolvency agreement is in force, the Court may, on application by:
(a) the Inspector-General; or
(b) the trustee; or
(c) a creditor;
make an order setting the agreement aside if the Court is satisfied that:
…
(e) the debtor has:
(i) omitted a material particular from the statement of the debtor’s affairs given under subsection 188(2C) or (2D); or
(ii) included an incorrect and material particular in that statement; or
…
(6)The Court must not make an order under subsection (5) unless it is satisfied that it would be in the interests of the creditors to do so.
(7)The Court must not make an order under subsection (5) unless the application for the order is made before all the obligations that the personal insolvency agreement created have been discharged.
Application for sequestration order
(10)The trustee or a creditor may include in an application under subsection (1), (2) or (5) an application for a sequestration order against the estate of the debtor. If the Court, on the first-mentioned application, makes an order under this section setting the personal insolvency agreement aside, it may, if it thinks fit, immediately make the sequestration order sought.
(11)The making of an application by the trustee or a creditor for a sequestration order under this section is taken, for the purposes of this Act, to be equivalent to the presentation of a creditor’s petition against the debtor, but the provisions of subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application.
…
At all material times s.232 of the Act has relevantly provided:
232Certificate relating to discharge of obligations
(1)If the trustee of a personal insolvency agreement is satisfied that all the obligations that the agreement created have been discharged, the trustee must, on written request by the debtor, give the debtor a certificate signed by the trustee to that effect.
(2)A certificate signed by a trustee under this section is prima facie evidence of the facts stated in it.
BACKGROUND FACTS
Generally
Between 2000 and 2008 Olga’s former husband Christos Voukidis (“Christos”) and Georgina’s husband Nicholas were in business together renovating office buildings. Also involved in their business ventures was one Theo Baker (“Theo”). Christos and Nicholas’s interests in the joint ventures were held by Koombari Pty Limited. Theo’s interest was held by CareerPath Pty Ltd.[1] There were other companies in the group, including Jedda Projects Pty Limited, which was a wholly owned subsidiary of Koombari, and OnetoFour Holdings Pty Limited which was an investment vehicle for Christos, Theo and Nicholas.[2] Theo also operated a finance company, Freestyle Lending Pty Limited, latterly known as FSL Services Pty Ltd (“FSL”).[3]
[1] Affidavit of Nicholas Anastasopoulos 10 May 2019 (“NA1”) [4]-[5], [7]
[2] NA1 [10]
[3] NA1 [7]
Nicholas’s evidence was that in around 2005 Koombari needed funds for working capital and in June 2005 he applied to FSL to borrow $300,000 (“FSL Loan”). Georgina was also a party to the loan. The extent to which that loan had been repaid was a major point of contention in this case.[4]
[4] NA1 [16]-[18]
The building enterprise failed and Christos’s business relationship with Nicholas and Theo ceased in about 2009-2010.[5]
Relevant bankruptcies
[5] NA1 [50]-[58]
Nicholas’s bankruptcy
On 6 May 2014 Nicholas was bankrupted and Ms Thomson made trustee of his estate at the suggestion of the applicant creditor.[6] FSL’s (first) proof of debt dated 8 July 2014[7] alleged a debt of $33,691,386 less $300,000 security. In his statement of affairs, Nicholas said the debt was $44 million.[8]
[6] NA1 [87]
[7] NA1 [88]; CB 1006, 1008
[8] CB 984
Christos deposed that he made numerous attempts to contact Ms Thomson and to arrange a meeting to inform her of what he knew about the FSL Loan. On 9 February 2016 he was able to provide his information to the principal of Veritas Advisory.[9] For his part, Nicholas deposed that he told Ms Thomson that “Chris’s claim that the FSL loan was repaid, are false” and that Ms Thomson obtained legal advice about the FSL loan in late 2015.[10]
[9] Affidavit of Christos Voukidis 20 July 2018 (“CV1”) [47]-[48]; T d.4 p.29-30
[10] NA1 [91]-[93]
In a subsequent proof of debt dated 30 May 2016,[11] FSL moderated its claim to $16,484,782. Nicholas entered into a composition with his creditors on 8 June 2016.[12]
[11] NA1 [96]; CB 1218
[12] NA1 [95]-[98]
Georgina’s bankruptcy
Olga had guaranteed certain National Australia Bank (“NAB”) loans to Jedda Projects and Koombari as a result of which in 2012 she was joined in New South Wales Supreme Court proceedings brought by NAB (“Supreme Court Proceedings”).[13] Georgina and Nicholas were also parties to those proceedings and Olga cross-claimed against them as co-guarantors.[14] The Supreme Court Proceedings were resolved and, relevantly, judgment on Olga’s cross claim was entered for her against Georgina and, ostensibly, Nicholas in the sum of $1,185,750.54 (“Judgment Debt”) on 8 May 2015.[15] Nicholas was already bankrupt at that point.
[13] Affidavit of Olga Voukidis 21 August 2017 [3]-[4]
[14] CB 919
[15] CB 1117
Georgina did not pay the Judgment Debt and, after serving a bankruptcy notice on her, Olga filed a creditor’s petition on 9 September 2016. However, on 10 October 2016 Georgina filed a debtor’s petition,[16] which was accepted by the Official Receiver, and so the creditors petition was dismissed on 18 October 2016 with an order that Georgina pay Olga’s costs. Ms Thomson was appointed trustee of Georgina’s bankrupt estate.[17]
[16] CB 1232
[17] Affidavit of Georgina Anastasopoulos 10 May 2019 (“GA”) [57]
Georgina’s statement of affairs, filed on 10 October 2016,[18] stated that her debt to Olga was $433,333[19] and that she owed $7.5 million to Freestyle Lending.[20] Other, lesser, creditors were also disclosed. I accept Georgina’s oral evidence that the $433,333 figure was based on her assessment that she only owed Olga a one third share of the Judgment Debt.[21] Her statement of affairs also estimated that in the next twelve months her income would be $60,000.[22]
[18] CB 1269
[19] CB 1256
[20] CB 1256
[21] T d.5 p.89
[22] CB 1240
FSL’s statement of claim and proxy dated 30 May 2016 claimed $16,636,282 was outstanding under the FSL Loan.[23]
[23] Affidavit of Christos Voukidis 30 July 2019 (“CV2”) [32]; NA1 [96]; CB1218-1223
Georgina told Ms Thomson, as recorded in the latter’s first report to creditors dated 8 November 2016, that she first had difficulties paying her debts in 2015.[24]
[24] T d.6 p.57; CB 1389
The statement of affairs gave Olga’s address as “175 Castlereagh Street Sydney 2000”.
On 20 October 2016, Olga’s solicitor, Ms O’Donohoe, wrote to Ms Thomson advising her of the orders made on 18 October 2016 but Ms O’Donohoe heard nothing from Ms Thomson or her firm, Veritas Advisory, until 21 April 2017.[25] The cause of that apparent silence seems to arise out of the relocation of Ms O’Donohoe’s firm, Spinks Eagle, from Suite 9.02, 175 Castlereagh Street, Sydney to Level 3, 183 Macquarie Street, Sydney on 15 November 2016. In that regard, the evidence of Ms Panos, the Administration Manager at Veritas Advisory, satisfies me that in accordance with a standard practice at that firm, on 8 November 2016 the firm’s receptionist posted Ms Thomson’s (first) report to creditors to 175 Castlereagh Street, Sydney and, on 17 November 2016, to an address in Drummoyne. The letter addressed to “Olga Voukidis, 175 Castlereagh Street, Sydney” was returned. Olga deposed that she had lived at an address in Drummoyne between 2010 and May 2014 and although she had had a mail redirection in place after she moved away, she had received no Veritas Advisory mail redirected from that address.
[25] Affidavit of Aoife O’Donohoe 21 August 2017 (“AOD”) [13]; CB 1355
After having been requested by Veritas Advisory for Olga’s contact details, on 16 November 2016 Georgina advised an address in Drummoyne and a further address of “C/ Spinks Eagle Lawyers Pty Ltd, Suite 9.02, 175 Castlereagh Street, Sydney”.[26]
[26] GA [58] CB 1433, 1434
Between October 2017 and April 2018 Georgina had had at least four meetings with Ms Thomson, each of 1 to 2 hours’ duration, at which Ms Thomson posed various questions regarding Georgina’s debts and at which requests for documents were made. Documents were supplied in response to those requests.[27]
[27] GA [71]-[72]
Second report to creditors and notice of creditors’ meeting
Ms Thomson’s second report to creditors was dated 30 March 2017 and was posted that day.[28] It annexed a notice of a creditors’ meeting to be held on 6 April 2017 and referred to Georgina’s proposal that she enter into a composition with her creditors.[29] Ms Panos’s search of Veritas Advisory’s records turned up no record to the effect that any creditors’ report regarding Georgina that might have been sent by the firm to Olga care of Spinks Eagle at Suite 9.02, 175 Castlereagh Street, Sydney in March 2017 had been returned.[30]
[28] Affidavit of Niki Panos 13 June 2019 (“NP”) [18], [19]
[29] CB 1521
[30] NP [20]
In her report Ms Thomson recorded the results of her investigations into Georgina’s assets and liabilities. In the context of a comparison of the merits of a composition with those of bankruptcy she said:
Creditors will note that the Section 73 Composition provides for a return of 0.00105 [sic] cents in the dollar to participating unsecured creditors.
I note that a return for Bankruptcy is estimated to be nil to unsecured creditors due to minimal divisible assets and uncommercial recoveries available … [31]
[31] CB 1463
Georgina deposed that on 21 March 2017 her sons paid $6000 to Veritas Advisory to cover Ms Thomson’s fees for the meeting of creditors and that on 29 March 2017, pending the outcome of the creditors’ meeting, they paid a further $30,000 into her solicitors’ trust account. This became the Composition fund.[32]
[32] GA [80]-[81]
The creditors’ meeting was held on 6 April 2017 and the Composition agreed to by special resolution, the motion being carried unanimously.[33] However, the consequence of the failures in communication was that Olga did not attend the creditors’ meeting which I accept she would have done had she been aware of it.
[33] CB 1542
Ms O’Donohoe deposed that around 21 April 2017 she received a letter from Ms Thomson dated 12 April 2017 inviting the submission of proofs of debt by 5 May 2017.[34] Around the same time she noticed a copy of the (second) report to creditors dated 30 March 2017[35] “apparently addressed” to Spinks Eagle’s former address. Ms O’Donohoe believed that she had received this document on 21 April 2017 because she scanned it that day and it is her usual practice to scan documents the day they are received.[36] I am prepared to accept that Ms O’Donohoe received those documents at that time and to infer that their late arrival was caused by them having been addressed C/- Spinks Eagle Lawyers Pty Ltd Suite 9.02, 175 Castlereagh Street, Sydney, as the mailing records referred to by Ms Panos said. That redirection caused their late arrival.
[34] AOD [16]
[35] CB 1453
[36] AOD [17]
FSL’s “Statement of Claim and Proxy” form for the meeting on 6 April 2017 stated that Georgina owed it $9,867,311.[37] Its claim was admitted for that amount.[38] Excluding Olga, the other six creditors were admitted for a total amount of $216,120.[39] Olga lodged her proof of debt on 4 May 2017 claiming $1,333,349.28 and was admitted for $1,333,349.[40]
[37] GA [83]
[38] CB 1773
[39] CB 1773
[40] CB1579, CB 1755; AOD [19]
On 16 May 2017, following correspondence with Ms Thomson’s office querying the steps taken to notify Olga of the creditors’ meeting,[41] Ms O’Donohoe wrote to Ms Thomson[42] advising that Olga had not received prior notice of the creditors’ meeting and saying amongst other things:
Our client foreshadows an application being made to the Court under sections 76B and/or 178, Bankruptcy Act 1966, to challenge the validity of the section 73 composition. [43]
[41] CB1731-1738
[42] CB 1739
[43] CB 1740
Ms Thomson replied on 19 May 2017[44] addressing issues raised by Ms O’Donohoe regarding notification of the creditors’ meeting and acknowledging that proceedings had been foreshadowed and threatening a claim for indemnity costs if they were instituted. She also argued that Olga’s presence at the creditors’ meeting would not have affected the passage of the special resolution given the support it otherwise enjoyed with creditors. Ms Thomson also advised that she proposed to pay dividends the following week.
[44] CB 1747
Dividends from the Composition were paid to creditors between 24 and 30 May 2017.[45] Ms O’Donohoe deposed that the dividend from the estate was 0.12 cents in the dollar.[46]
[45] GA [98]
[46] AOD [23]
Olga did not deposit the cheques drawn in her favour for the costs of the creditor’s petition or as her dividend arising from the Composition.[47] On 23 November 2017 Ms Thomson wrote to Olga, care of Ms O’Donohoe, stating that if the cheques remained unpresented after 30 November 2017 she would cancel them and forward the funds to the Commonwealth in accordance with s.254 of the Act.[48] On about 14 December 2017, Ms Thomson sent a cheque for $3,726.76 to the Australian Financial Security Authority (“AFSA”) in stated compliance with s.254 of the Act.[49]
[47] Affidavit of Olga Voukidis (latterly Olga Sclavenitis) 12 July 2019 (“OV3”) [4], [13]
[48] CB 1852
[49] CB 1856
I also note Georgina’s oral evidence that in the last two to three years she had been on two low-cost international holidays and that one of her sons had married and that she, and presumably Nicholas, paid more than $20,000 towards the wedding celebration.[50]
[50] T d.6 pp.61, 90
FSL Loan
At the time they entered into the FSL Loan, Nicholas and Georgina owned a house at Maroubra which was mortgaged to NAB and a unit or townhouse property at Hillsdale.[51] The FSL Loan was secured at that time by an unregistered second mortgage over the Hillsdale property[52] which was in its turn protected by a caveat. That caveat was lifted and replaced by FSL Services earlier this year when the then-registered mortgagee was replaced with a different lender. The new caveat dated 30 August 2019 recorded the caveatable interest as “Equitable Mortgage between the Registered Proprietors and the Caveator”.[53] At the time of the trial Nicholas and Georgina still owned those properties.
[51] GA [6], [15]-[16]
[52] GA [16]-[18]
[53] Affidavit of Nicholas Anastasopoulos 30 August 2019 (“NA2”) [4], [7]-[8], Annexure E
Interest on the FSL Loan was calculated on a per mensem rather than on a per annum basis. If loan payments were in order the rate was 2% pm but, if not, the rate jumped to 5% pm.[54] According to the terms of the Facility Agreement which documented the terms of the FSL Loan, Nicholas and Georgina were to be charged simple interest, a matter Nicholas acknowledged at para.77 of his affidavit sworn 10 May 2019.
[54] CB 210
Nicholas stopped paying interest on the loan in around August 2006 although Christos arranged for monthly payments of $2,000 to be made from November 2006 to July 2007[55] at which point all interest payments ceased.[56]
[55] T d.5 pp.41-42; CB785; NA1 [29]
[56] CB785
In October 2006 a payment of $100,000 was made in reduction of the FSL Loan principal.[57]
[57] CB783
In October 2007 Nicholas and Theo exchanged emails discussing how a final payment of $200,000 towards the FSL Loan might be made to one of the joint enterprise’s companies and credited to Theo as a loan by him to that company. On 11 October 2007 Nicholas wrote to Theo referring to “… our meeting with regard to the repayment of $200,000 previously advanced …” and asking him to confirm “… whether you would like me to deposit on your behalf the above funds plus interest into St Leonards Property Pty Ltd or Onetofour Holdings Pty Ltd”, to which Theo responded on 15 October saying:
The funds should be deposited into the Freestyle Lending account … in order for your obligation to be fulfilled.
…
For the avoidance of doubt, no agreement has been reached between us for repayment of the debt, owed by you to Freestyle Lending, by way of transferring funds to any other entity other than to Freestyle Lending.
Christos replied to Theo later that day asking:
Will you be depositing $200k into St Leonards on receipt of these funds?
and Theo responded on 16 October 2007 saying:
I’d like to finish our discussion – when can we meet?[58]
[58] CB 813-814
In about 2009 when Nicholas’s sister died and her two daughters began living with them, Nicholas had been able to borrow more money from Theo to pay for related house renovations.[59] That was a $50,000 “advance” on 12 August 2010[60] to Kleoni Management[61] which, Nicholas said, was subsequently discharged by being traded off against work he did for Theo in 2010 correcting the group’s accounts, referred to below.[62]
[59] GA [22]; NA1 [61]-[62]
[60] T d.5 p.84
[61] T d.6 pp.30-31
[62] T d.6 pp.13-14
As to subsequent events, I accept Nicholas’s evidence that:
For the majority of 2010 … I [was] pre-occupied with the task of reprocessing, reconciling and checking the authenticity of documents to accurately reflect the financial company accounts, following the revelations of hearing during October and November 2009, which are referred to in Vickery J [sic] judgement handed down in Ambridge Investments Pty Ltd (in liq) (recvr app’td) v Baker & Ors [2010] VSC 59 (12 March 2010).[63]
He submitted that in Ambridge v Baker Vickery J had found, amongst other things that documents and bank statements had been altered and used to process company financial accounts.[64]
[63] NA1 [63]
[64] NA1 [63]
Christos admitted in that case to having falsified records which were discovered in the proceeding in respect of which Vickery J relevantly said:
133Voukidis, on behalf of the sixth Defendant Break Fast, discovered bank statements of the company in respect of accounts maintained by it at the National Australia Bank (“NAB”). Prior to discovery of these bank statements, Voukidis altered a number of entries in the bank statements relating to two of the accounts. This process commenced in December 2005 or late 2006 and continued until at least 31 October 2008. The present proceeding commenced in 2005. The alterations were undertaken systematically, deliberately and skilfully. To all but perhaps a highly trained expert eye, supported by sophisticated technical apparatus, the alterations were contrived with the appearance of complete authenticity. The false bank statements, which had been fabricated by Voukidis, were discovered by him in the course of the proceeding progressively in affidavits of documents which he swore in the proceeding. They were presented to the Plaintiff and to the Court as if they were genuine.
…
136.Voukidis did not formally admit to making his alterations until his conduct had been undeniably laid bare. Even then he delayed. He subsequently swore an affidavit in the proceeding dated 24 August 2009 in which he said, inter alia:
Some of the statements which have been discovered are incorrect or incomplete. I have altered some of these statements prior to them being discovered in this proceeding.
The affidavit proceeded to explain in detail the alterations to the bank statements which he had carried out and proffered an apology to the Court, saying that:
I now realise that my actions were not appropriate. The extreme seriousness of the conduct I have engaged in has been thoroughly explained to me by my lawyers. I am deeply regretful of my actions and sincerely wish to apologise to this Honourable Court.
137.As detailed in a schedule to his affidavit, the alterations to the Break Fast NAB bank statements undertaken by Voukidis were extensive in the two accounts which he described. The alterations included changes to the description of transactions recorded in the bank statements, in four instances adding additional information as to the source of the funds recorded, and others adding numbers of references to payment of directors fees. There were also cases of large transactions being deleted entirely from the original record, and other cases in which the figures involved in the transactions recorded were altered substantially.
(Ambridge Investments Pty Ltd (in liq) (recvr app’td) v Baker & Ors [2010] VSC 59)
(References omitted)
It was presumably to these findings and to such conduct as might have supported them that Nicholas was referring in the passage quoted above at [40].
In late October or early November 2010 Theo gave him a statement of account[65] which showed the accrued debt under the FSL Loan would be $663,080.55 on 30 November 2010. In that statement unpaid interest had been capitalised and a monthly fee of $30, for which no provision had been made in the Facility Agreement, included.
[65] NA1 [69]; CB 840
Because, it is said, Theo required further security for the FSL Loan, Nicholas and Georgina signed a Deed of Acknowledgment with FSL dated 30 November 2010 which, relevantly, amended the principal sum in the Facility Agreement to $663,080.55 and included the Maroubra property as additional security.[66] Nicholas and Georgina also gave FSL a mortgage dated 30 November 2010 over their home in Maroubra.[67] By a “Deed of Rectification of Deed of Acknowledgement and Variation to Loan Agreement” dated 30 November 2010 Nicholas and Georgina agreed to a further amendment to the Facility Agreement which provided for the capitalisation of unpaid interest.[68] Each mortgage was an “all moneys” mortgage in that it secured the payment of all amounts owed by Nicholas and Georgina to FSL from time to time.[69]
[66] CB 843-844
[67] NA1 [73]-[74]
[68] CB 879
[69] CB 212 – Hillsdale; CB 851, 854 – Maroubra
Nicholas’s evidence did not explain why he (I accept Georgina played no role in these discussions) was willing to accept the capitalisation of interest in the Deed of Acknowledgment, which had not been provided for in the Facility Agreement, or why he consented to the formalisation of such an arrangement in the Deed of Rectification. The consequence of having done so has been the accrual of huge sums of unpaid, capitalised interest which dwarf the original borrowing.
FSL has never sought to exercise its power of sale over either of the properties[70] or to bring proceedings to recover the money lent.[71] Further, earlier this year it lifted and replaced its caveat over the Hillsdale property so that Mr and Mrs Anastopoulos could substitute the existing first mortgage with a larger mortgage,[72] the extra funds partly being used to fund their defence of this proceeding,[73] even though that move reduced the value of FSL’s second mortgage as a security.[74]
[70] T d.5 p.50
[71] T d.5 p.82
[72] T d.5 p.50-51
[73] T d.5 pp.50-52; T d.6 pp.78-9
[74] T d.5 p.51
CONTESTED ACCOUNTS OF THE FSL LOAN
Christos and Nicholas gave conflicting evidence on certain matters relating to the FSL Loan which were relevant to whether FSL’s claim was properly admitted as a debt owing by Georgina.
Christos’s version of relevant events associated with the FSL Loan was that:
a)Theo had started to press for repayment of the loan by no later than October 2006. Nicholas did not have the means to make interest payments or to reduce the loan principal so they had discussions and around that time they agreed to pay $100,000 as a lump sum and a further $6,000 in interest with the payment being made by Jedda Projects.[75]
b)the payments were made that month[76] and Nicholas made the relevant ledger entries.[77] Nicholas drafted the OnetoFour Holdings management accounts for the 2007 financial year[78] recording the $106,000 payment.[79]
c)at around this time Nicholas was responsible for the finances and the running of the development side of business and prepared the companies’ accounts.[80] The only venture for which he did not have the day-to-day conduct of the accounts was Break Fast Investments in Melbourne;[81]
d)although Nicholas had stopped making payments out of his personal account in August 2006, payments continued to be paid out of the OnetoFour Holdings account.[82] Nicholas started to make interest payments from the OnetoFour Holdings bank account around that time and processed journal entries in the various company general ledgers to reflect the FSL loan as debt in OnetoFour Holdings’ accounts.[83]
e)an FSL loan statement dated 2 October 2007, which showed a balance of $203,726.68,[84] was evidence of the $100,000 having been paid. That statement also recorded that the “lower rate” of interest had been reduced to 1% and Christos submitted that the monthly interest had reduced from $6,000 pm to $2,000 pm;[85]
f)around August 2007 he overheard Theo asking Nicholas to repay the loan. About then he was also party to conversations involving Nicholas and Theo in which Theo asked when the loan would be finalised and in which he did not adopt a suggestion that instead of Nicholas paying FSL $200,000, the amount could be treated as a capital contribution of some unidentified sort from Theo to one of the group’s joint ventures;[86]
g)in August 2007 Koombari received payments of about $600,000 and around the same time $200,000 was distributed from Koombari to Nicholas.[87] On 9 October 2007 $200,000 was received into FSL’s account with St George Bank[88] and on 11 October 2007 Nicholas told him that he had paid off the balance of the FSL loan;[89]
h)after Nicholas went bankrupt, FSL claimed he owed it $44 million. An FSL loan statement dated 31 May 2014[90] recorded an outstanding balance of $33,691.386.07 a “lower rate” of 2% and an absence of any payments after 31 December 2006 whereupon the monthly interest charge rose steadily from $22,299.80 on 31 January 2007 to $1,633,628.21 on 31 May 2014. It also recorded that interest was being charged at 5% pm starting in January 2006 at which point the loan balance was approximately $312,056.64. It is not apparent from the statement why the interest charge rose at that point to the higher rate. Christos’s position was that this document was a fabrication.[91]
[75] T d.4 pp.14,16
[76] CB 670ff
[77] CV2 [17]
[78] CV2 [16]
[79] CB 739
[80] T d.4 p.27
[81] T d.4 p.26
[82] T d.4. pp.48, 50
[83] CV2 [8]
[84] CV1 [19]-[20]
[85] CV1 [16]
[86] CV1 [20]
[87] CV1 [21]-[22]
[88] CB 812; CV1 [25]
[89] CV1 [23]-[26]
[90] CB 954
[91] T d.5 p.14
Nicholas’s version of relevant events associated with the FSL Loan was that:
a)between August 2005 and July 2006, he and Georgina made interest payments to FSL of $6,000 per month from “our NAB flexi account” and that in August 2006 they stopped paying the interest out of “our NAB account”. Theo would occasionally ask about the debt;[92]
b)he did not pay out the principal FSL Loan in two instalments.[93] First, the $106,000 was not paid in reduction of his debt under the FSL Loan. Jedda Projects’ bank records showed a cheque for $106,000 being presented and paid on 26 October 2007 and FSL’s bank records showed a “Customer Deposit” of the same amount on 27 October 2006. He deposed that these transactions were not a payment towards his FSL loan but a payment from Jedda Projects on behalf of OnetoFour Holdings.[94] Secondly, as his bank statements[95] revealed, he did not apply the $200,000 he received from Koombari in August 2007 to the FSL Loan. He also relied on a November 2007 FSL statement of loan account in the name of an apparently unrelated company which recorded a payment of $200,000 to FSL on 9 October 2007;[96]
c)initially he and Christos worked together to run the group day-to-day but as the finances became more complex their roles became more specific and he took charge of property related issues while Christos did the accounts for the entire group of companies;[97]
d)from 7 November 2006 to 7 June 2007 Christos made monthly payments of $2,000 to FSL which he, Christos, posted in OnetoFour Holding’s books as reductions of a loan owed by OnetoFour Holdings to Theo’s company CareerPath;[98]
e)in about October 2007 Christos showed him the FSL statement for September 2007 dated 2 October 2007 which reported an outstanding balance of $203,726.68. He said it was Christos’s suggestion to invite Theo to convert that amount into a capital contribution if Nicholas paid that sum into one of the group’s companies;[99]
f)on 9 October 2007 $200,000 was paid into FSL’s bank account[100] but not by him. FSL records point to it being related to another, identified borrower.[101] He had used the $200,000 that Koombari paid him in August 2007 to reduce his overdraft and for purposes other than payment of the FSL loan.[102]
g)he did not say to Christos that he had paid off the FSL Loan;[103]
h)originally Theo had constantly asked about the money owed but the two put everything aside once confronted with “the trouble with Chris”.[104] He could not recall receiving any correspondence about the loan from Theo from 2008 to 2017[105] or loan account statements bringing the default to his attention.[106] Nor did he check the balance.[107]
i)the $100,000 had been paid against the FSL Loan in “devious circumstances” but was returned by FSL[108] in June 2010.[109] Nicholas said that Christos had used funds Theo had lent OnetoFour Holdings to part-pay the FSL Loan with Theo’s loan to OnetoFour Holdings being reduced accordingly by that amount.[110] The reversing transaction occurred when CL Asset Holdings Pty Ltd paid $100,000 to St Leonards Centre Unit Trust.[111]
[92] NA1 [26]-[27], [29]
[93] NA1 [30]
[94] NA1 [33]
[95] CB 778ff
[96] CB 819
[97] NA1 [15]
[98] NA1 [36]-[38]
[99] NA1 [39]; see also CV1 [19]
[100] CB 812
[101] NA1 [46] CB 819
[102] NA1 [42]-[49]
[103] NA1 [49]
[104] T d.5 p. 84
[105] T d.5 p.85
[106] T d.5 p.95
[107] T d.5 p.103
[108] Td.5 p.93
[109] NA1 [66]-[67]
[110] T d.6 p.34-36; NA1 [65]-[67]
[111] T d.6 p.34-37; Exhibits 10, 11
FSL LOAN STATEMENTS AND BALANCE SHEETS
The documents recording the FSL Loan were inconsistent. They were all entitled “Statement of Loan Account” but the first three were more in the nature of invoices, the latter ones were more like statements of account whereas the fourth one was a combination of both. In date order they were:
Date
Account number
Balance
Concessional interest rate
Min
payment24/07/06[112]
ANA-050705
300,000
2%
6,000.00
20/08/06[113]
ANA-050705
300,000
2%
6,000.00
20/09/06[114]
ANA-050705
300,000
2%
6,000.00
02/10/07[115]
ANA-050705
203,726.68
1.00%
(none given)
c.31/10/10[116]
ANA-050705
663,080.55 (incl $30/mth account fee)
2.00%
31/05/14[117]
ANA-050705
33,691,386.07
2.00%
31/05/16[118]
ANA-050706
16,636,282.75
2.00%
30/09/16[119]
ANA-050706
10,606,523.35
(after Nicholas’s share removed on 31 May 2014)
2.00%
[112] CB 653
[113] CB 654
[114] CB 655
[115] CB 784, 817
[116] CB 840
[117] CB 954
[118] CB 1222
[119] CB 1230
An undated statement which records transactions from 4 August 2007 to 30 November 2010, although it purports to end on 31 October 2010,[120] includes the following details, amongst others:
31 December 2007: $330,691.19
31 December 2008: $420,077.06
31 December 2009: $533,168.94
30 November 2010: $663,080.55
[120] CB 840
However, a later statement dated 31 May 2014[121] showed, amongst other balances which are not presently relevant, the following balances in respect of the following dates:
[121] CB 954
31 December 2007: $785,864.68
31 December 2008: $1,413,502.46
31 December 2009: $2,538,419.55
30 November 2010: $4,337,550.12
31 December 2010: $4,558,586.92
31 December 2011: $8,186,477.56
31 December 2012: $14,724,680.19
31 December 2013: $26,443,120.68
30 April 2014: $32,057,757.86
A further statement, dated 31 May 2016,[122] includes the following balances:
[122] CB 1222-1223
30 November 2010: $663,080.55
31 December 2010: $696,870.41
31 December 2011: $1,251,465.43
31 December 2012: $2,250,959.36
31 December 2013: $4,042,355.37
30 April 2014: $4,900,664.00
31 December 2014: $7,259,410.02
31 December 2015: $13,036,714.73
31 May 2016: $16,636,282.75
It will be observed that the 2014 document contradicts or is contradicted by the other two.
FSL profit and loss statements and balance sheets for the years 2010/2011 to 2016/2017 inclusive[123] were introduced into evidence and the balance sheet for 2010/2011 records a loan of $50,000 to “Kleoni Management” which is a company associated with Nicholas[124] and Georgina.[125] A loan to Kleoni Management continued to be recorded in those balance sheets, (with the exception of 2013/2014 which seems incomplete) until it appears for the last time in the balance sheet for 2014/2015. However, while referring to the smaller accommodation given to Nicholas, FSL’s balance sheets made no reference to the FSL Loan or anything similar.
THE PARTIES’ ARGUMENTS
[123] CB 1811-1,1811-2, 1811-19, 1811-20, 1811-30, 1811-31, 1811-42, 1811-43, 1811-55, 1811-56, 1811-62, 1811-63, 1811, 1112, 1812, 1113
[124] T d.6 p.30
[125] CB 1239
Applicant’s case
Olga’s case was that the Composition should be set aside:
a)under s.222(1)(d) of the Act as unreasonable and not calculated to benefit the creditors generally because:
i)the return was trivial; and
ii)Georgina owned or part–owned two properties which suggested the existence of assets and income available for realisation and distribution to creditors;
b)under s.222(1)(e) of the Act for other reasons, namely:
i)she, Olga, had been unable to attend the creditors’ meeting at which the Composition had been approved and so had been unable to obtain advice about it and to argue against it, which “was not in the interests of creditors generally”.
ii)given Georgina’s real estate interests Ms Thomson ought to have made more inquiries than she did into:
1. the genuineness of the FSL Loan;
2. the accuracy of Georgina’s estimate of income; and
c)under s.222(5)(d) of the Act because Georgina’s statement of affairs misstated her income, and the size of the debt she owed Olga, with the consequence that false and misleading information had been relied on by creditors when voting on the Composition proposal.
Olga also alleged that the Composition was unreasonable because certain creditors were not at arm’s length and at the meeting all the creditors were represented by the same proxy, who was Georgina’s solicitor.
Olga also alleged that the Composition should be set aside pursuant to s.222(1)(d) and/or (e) of the Act because:
a)Ms Thomson had acted improperly and/or in conflict with her duties as trustee by:
i)failing to disclose that she had also been the trustee of the bankrupt estate of Georgina’s husband, Nicholas Anastasopoulos (“Nicholas”);
ii)failing to notify her of the meeting appropriately, or to take reasonable steps to ensure she was aware of it, or to make appropriate inquiries about her address for service;
iii)incorrectly stating the amount owed to her;
iv)“declining” or “refusing” her, Olga’s, creditor information and other such documentation;
v)providing premature advice and insufficient information about whether the Composition was in the best interests of creditors when further investigation should have been conducted and additional information provided to creditors to ensure that they could make an informed decision.
Respondents’ case
Georgina contended that:
a)the Court had no jurisdiction under s.222(1) of the Act because:
i)the Composition was no longer “in force”;
ii)Olga was no longer a creditor; and
b)it had not been shown that the s.222(1) tests had been satisfied; and
c)setting the Composition aside would not be in the creditors’ interests.
Georgina also alleged that:
a)there had been an unreasonable or unnecessary delay in bringing this proceeding; and
b)as a result of relying on acts done in performance of the Composition, Georgina and the other creditors’ positions had altered in that after the Composition had been accepted:
i)her sons had paid the whole of the Composition fund ($36,000) to Ms Thomson (in April 2017);
ii)dividends from this fund had been distributed to all of her creditors, including Olga, on or about 24 May 2017; and
iii)with the exception of Olga, all creditors had accepted those payments.
Georgina alleged that it would be “impossible, inconvenient or impractical” to set aside the Composition and to do so would not be in the best interests of creditors.
ISSUES
The questions for decision concern s.222 of the Act and are principally whether the Composition should be set aside because:
a)its terms are unreasonable (s.222(1)(d));
b)its terms are not calculated to benefit the creditors generally (s.222(1)(d)); or
c)another reason justifies it (s.222(1)(e)).
A composition may also be set aside if the debtor’s statement of affairs includes an incorrect and material particular. (s.222(5)(e)(ii))
AUTHORITIES
In Khera v National Australia Bank Limited (1996) 71 FCR 133 at 146, when considering a predecessor of s.222(1)(d) and the circumstances in which a composition might be avoided or alternatively terminated, Lockhart and Hill JJ said:
Although at first sight the grounds on which the Court may set aside a composition under s 239(2) are wide, upon closer examination they relate in my [sic] opinion to matters that concern the terms of the composition itself, that is to say facts which were in existence (whether known or not) at the time of the passing of the special resolution of creditors to accept the composition under Pt X. The Court may set aside the composition if it considers “that the terms of the composition are unreasonable”. This plainly centres attention upon the terms of the composition itself. The Court may set aside a composition if the terms of the composition “are not calculated to benefit creditors generally”. Again attention is centred upon the terms of the composition.
The process which the Court is to apply in considering the application for relief under s.222(1) was described, in the context of a personal insolvency agreement (“PIA”), by the Full Court of the Federal Court in Moss v Gunns Finance Pty Ltd (Receivers & Managers Appointed) (In liquidation) (2018) 16 ABC(NS) 325 at 329 as follows:
10.Section 222 of the Act relevantly provides that a PIA may be set aside by a creditor if the Court is satisfied that either:
(1)the terms of the PIA are unreasonable or not calculated to benefit the creditors generally (s 221(1)(d)); or
(2)for any other reason, the PIA ought to be set aside (s 221(1)(e)).
11If the court reaches a level of satisfaction in relation to either of these matters (thus allowing it to exercise the discretion to set aside the PIA), then the Court is to consider whether it ought to make any ancillary orders (s 222(8)) and also, if a sequestration order is sought …, whether such an order should be made (s 222(10)).
12As to the state of satisfaction required by s 222(1)(d), in assessing whether a PIA is unreasonable or not calculated to benefit creditors, regard can be had to a variety of factors. Some of these factors which have present relevance include: first, the relative size of the debts owing and the proposal; secondly, the nature of the relationship between the debtor and the creditors who voted in favour of the PIA: Hingston v Westpac Banking Corporation (2012) 200 FCR 493; 9 ABC(NS) 678 at [58] (Greenwood, McKerracher and Nicholas JJ); and thirdly, whether the circumstances call for a greater opportunity to inquire into the debtor’s affairs and the closeness of the creditors’ vote, particularly if influenced by creditors who were not at arm’s length from the debtor: Osborne v Gangemi (2011) 9 ABC(NS) 257 at 268 [47]. Fourthly, the inadequacy of a return may also constitute sufficient basis to set aside the PIA, especially so when other factors point in favour of setting it aside: Bendigo and Adelaide Bank Ltd v Clout (2016) 14 ABC(NS) 46 at 54 [46].
13As to s 222(1)(e), given the width of the notion that the Court has power to set aside the PIA if it reaches the state of being satisfied that it is appropriate to do so “for any other reason”, there are no particular limits circumscribing the discretion under this sub-section: see New Age Constructions (NSW) Pty Ltd v Etlis (2013) 11 ABC (NS) 542 at 554 [61].
Their Honours went on to say at 343:
81It was not necessary to establish on the balance of probabilities that the creditors will achieve a better dividend in a bankruptcy: Augustyn v Putnin (1988) 83 ALR 514 at 521 per French J. The relevant inquiry was the one to which the primary judge appropriately had regard, that is, whether there was “a prospect or possibility of economic advantage to creditors”: Augustyn at 515 per Jenkinson J.
Section 222(6) provides that a composition cannot be set aside under s.222(5) unless the Court is satisfied that it would be in the interests of creditors to do so. In relation to a predecessor of s.222(5), in Augustyn v Putnin (1988) 83 ALR 514 at 521 French J quoted what Pincus J had said in Re Beames; Ex parte Beneficial Finance Corp Ltd (1985) 7 FCR 216 at 232:
So far from attaining any degree of satisfaction that [setting deeds of assignment aside] would be ‘in the interests of the creditors to do so’ I am fairly confident that the creditors would gain nothing by my following that course. … the mere holding of another meeting, to discuss the matters disclosed in these proceedings, would not be in itself of advantage to the creditors; the interests spoken of in s.222(5) must be, directly or otherwise, the obtaining of money.
The discretion to set aside a composition is one that must be exercised cautiously: Osborne v Gangemi (2011) 9 ABC(NS) 257 at 267 [43].
DOES THE COURT HAVE POWER TO MAKE THE ORDERS SOUGHT?
Is the Composition “in force”?
Section 222 provides that a composition may be set aside for unreasonableness or for not being calculated to benefit the creditors generally if it is “in force”. A preliminary question is therefore whether Georgina’s Composition is “in force”.
A composition is an agreement between a bankrupt debtor and his or her creditors that the latter will accept the proceeds available from the composition in place of those that would be available if the debtor’s estate were administered in bankruptcy. Implicitly, the proceeds available to each creditor are less than the full amount owed to that creditor: cf Whitton v Perovich (2016) 14 ABC(NS) 85 at 92-93 [35]-[36]. One of the consequences of the parties agreeing to and entering into a composition is that the debtor’s bankruptcy is annulled: s.74(5) of the Act. One consequence of the setting aside of a composition is, or at least can be, that the debtor becomes a bankrupt again: Hingston v Westpac Banking Corporation (2012) 200 FCR 493 at 519 [129], s.222(10).
Georgina’s written submissions cited a number of cases which relevantly held that once the obligations under a court order are discharged, the order is no longer “in force”. I respectfully agree with that reasoning, as far as it goes, however, a composition is not an order. It is a sui generis statute-based agreement: Whitton v Perovich at 102 [97]; which engages statutory rights and duties and has important statute-based consequences. Importantly, the Court was not taken to any authority for the proposition that a composition ceases to be “in force” when its terms have been fully executed or that a composition should be treated like a contract which comes to an end through performance. In this regard it might be noted that s.222 provides in sub-sections (2) and (5) that a composition may be “in force” and the Court empowered to set it aside even though since the commencement of the proceeding seeking that order all the obligations under the composition have been discharged: see sub-sections (4) and (7) respectively. I conclude from this that the Act contemplates that a composition may be in force notwithstanding that it is no longer executory and, if a contract, would have terminated.
I conclude that unless at the time of decision under s.222 the composition in question has already been set aside or terminated under the Act, which is not this case, the composition in question continues in force subject to other factors which might cause it to no longer be in force. No such factors were identified in argument. For instance, the terms of the Deed of Composition were not referred to in this context but provides:
2. Rights, Obligations & Powers
…
2.3The S.73 may be varied, terminated or set-aside as allowed by … Item 7 of the Schedule …[126]
[126] CB 1551
Item 7 of the schedule to the Deed of Composition relevantly provides:
…
(c)Other than Clause 2.3 and 9, the S.73 shall terminate, at the discretion of the Trustee, following the lapse of 10 months from the commencement.[127]
[127] CB 1556
It was not suggested that Ms Thomson exercised that discretion. Consequently, there is no basis to find that the Composition has terminated according to its own terms.
In the circumstances it is apparent that the Composition remains in force.
Were all the duties under the Composition discharged before this proceeding was commenced?
Even if a composition is in force, it cannot be set aside under s.222(5) unless the proceeding seeking that relief is commenced before all obligations created by the composition have been discharged: s.222(7). Because the possible availability of relief under s.222(5) had not been raised in the points of claim and was not mentioned until opening submissions, Georgina did not concede that Olga had sought relief under s.222(5). Nonetheless, she contended that all duties under the Composition had been discharged before Olga commenced this proceeding.
That argument was advanced in support of the submission that the Composition was no longer in force, a contention which I have already rejected. However, the argument that the Composition was no longer in force because all its terms had been carried out has relevance to the present question.
The material factual matter underlying this question was Olga’s failure to present the dividend cheques which Ms Thomson posted to her.[128] This, it was accepted, meant that the corresponding sums remained in Ms Thomson’s account until she paid them to the Commonwealth pursuant to s.254 of the Act more than six months later on or about 14 December 2017. Olga submitted that when she commenced this proceeding on 21 August 2017 those funds were still held on trust for her by Ms Thomson and so the Composition had not been completed.
[128] OV3 [4],[13]
Georgina’s Composition provided in the following terms for its completion:
7.The Completion and consequent discharge of the Debtor’s obligations to this S.73 will occur when all the realised and received amounts have been fully distributed to participating unsecured creditors in accordance with this S.73.[129]
[129] CB 1552
It appears that Ms Thomson considered, following Georgina’s entry into the Composition, that the payment by Georgina’s sons of the sum which was used to fund the Composition was sufficient for her to certify under s.232, as she purported to do on 12 April 2017, that the Composition “was completed and all obligations of the debtor under the agreement have been discharged”.[130] However, I consider Ms Thomson to have been mistaken in that belief at least as far as the completion of the Composition was concerned. A trustee’s certification under s.232 is no more than prima facie evidence of the facts stated in it and cannot be determinative of whether all the obligations created by the Composition have been discharged. That question is to be determined as a matter of construction of the terms of the Composition: Hingston v Westpac at 499 [20].
[130] CB 1559
As already noted, Georgina’s Deed of Composition refers to the distribution of amounts but as there is no evidence that Olga agreed to accept payment by cheque it is possible that the tender of a cheque did not amount to payment, let alone distribution. But, in any event, the Composition’s proceeds could not be said to have been fully distributed if funds remained in the trustee’s account because a dividend cheque or dividend cheques had not been presented. Put another way, while there were still obligations to perform under cl.7 of Georgina’s Deed of Composition, whether by Georgina or by Ms Thomson, there was no completion in accordance with the Composition’s terms: cf Hingston v Westpac at 499 [20]. It is therefore unsurprising that Ms Thomson, as trustee, did not in fact conclude her administration with the posting of the dividend cheques to creditors but waited the six month period prescribed by s.254 of the Act and then fully distributed the remaining funds in the manner required by that section, namely by paying them to the Commonwealth.
I conclude that it was that payment which finally discharged Ms Thomson’s obligation to distribute the funds which she held for that purpose. Until s.254 was engaged she was obliged by the Deed of Composition to make distributions to the participating creditors in accordance with s.109 of the Act and, until she did, the Composition remained executory. However, when the six month unclaimed funds waiting period under s.254 expired, she was obliged by the Act to pay those funds to the Commonwealth. Once Ms Thomson discharged that statutory obligation she had no further funds to distribute and no duties under the Deed of Composition in that connection.
The consequence of this finding is that the obligations under the Deed of Composition were not all discharged until the payment to the Commonwealth in December 2017 which was months after the commencement of this proceeding. As a consequence, s.222(7) does not prevent Olga from seeking an order that the Composition be set aside under s.222(5).
Does Olga remain “a creditor” entitled to bring this proceeding?
Section 230 of the Act relevantly provides:
230Release of provable debts
(1)If a personal insolvency agreement provides for a debtor to be released from a provable debt, the agreement operates to release the debtor from that provable debt unless the agreement is set aside or terminated under this Part.
…
Georgina argued that Olga’s claim had been extinguished with the completion of the Composition and thus she was no longer a creditor with the consequence she had no standing to bring this proceeding.
Section 222 gives a “creditor” standing to bring a proceeding to set aside a composition and relevantly imposes no restrictions apart from the ones which have already been mentioned. “Creditor” is not defined for the purposes of s.222 but in context, must include a person who before the composition had been a creditor of the then-bankrupt. Section 222(1)(d) points to that conclusion when it says that the Court may set aside the agreement if it is satisfied that its terms are unreasonable
… or are not calculated to benefit the creditors generally … .
The creditors referred to there are those who had a claim on the-then bankrupt. Olga was such a person vis à vis Georgina and so had standing to bring this proceeding.
SECTION 222(1)(d): WERE THE TERMS OF THE COMPOSITION UNREASONABLE OR NOT CALCULATED TO BENEFIT THE CREDITORS GENERALLY?
Return trivial absolutely and relatively
In Re Mills; Ex parte Lloyd’s (1997) 73 FCR 551 Merkel J said that:
(c)If the amount offered under the composition is little or trivial there may be no harm of any consequence to creditors for the composition to be set aside if other factors warrant that course … (at 560)
According to Ms Thomson’s letter to Olga dated 24 May 2017[131] enclosing cheques paying her dividend from the Composition and her costs as petitioning creditor, “a dividend at the rate of 0.12 [cents in the dollar] was declared for the Estate”. A dividend of slightly more than one tenth of a cent in the dollar, namely a return of 0.0012%, is indeed so small that it is properly characterised as trivial.
[131] CB 1778-1779
The negligible value of the Composition to creditors was recognised by Ms Thomson who advised in her report to creditors of 30 March 2017 that she did not see “how this offer will benefit creditors generally”.[132] However, importantly she went on to advise that it was better than the then-existing position, in that the Composition provided for “a return of 0.00105 [sic] cents in the dollar” whereas “a return for Bankruptcy is estimated to be nil to unsecured creditors” because of “minimal divisible assets and uncommercial recoveries”.[133]
[132] CB 1463
[133] CB 1463
Not only was the dividend a very small return in the dollar but the fund available for distribution amongst the creditors, $30,000, was similarly tiny when compared to the debts owing to unsecured creditors which, in the context of the Composition were estimated to total $10,822.242. However, on the assumption that the FSL Loan is properly admitted, the disparity does not invite concern or suspicion.
Georgina’s assets and income
Olga compared the dividend against Georgina’s circumstances and submitted that the latter supported an inference that Georgina had access to assets and sources of income that were not brought to account and a further inference that it had not been in the interests of creditors to accept the Composition. In that regard Olga observed that Georgina was the registered proprietor of the Maroubra property and owned the Hillsdale property as joint tenant with Nicholas and had conceded in cross-examination that she earned more each year than the $60,000 she had estimated in her statement of affairs.[134] Olga further pointed to Georgina’s evidence that following the annulment of her bankruptcy she had been able to:
a)service the loans on the properties and had reduced the principal on the (first) mortgages;[135]
b)contribute $20,000 to the wedding of one of her sons in January 2018; and[136]
c)afford two overseas holidays, albeit they involved visits to Greece where Georgina and Nicholas have relatives.[137]
[134] T d.6 pp.66-67
[135] T d.6 pp.66, 86
[136] Td.6 pp.88-89
[137] Td.6 pp.66-67, 90, 92
As far as the realisable value of the properties is concerned, were it not for the FSL Loan, which dwarfs everything else, Olga’s arguments might be persuasive. However, assuming that that loan was properly claimable for the full amount particularised in FSL’s proof of debt, funds received from the sale of the Maroubra and Hillsdale properties would be entirely allocated to the first mortgagees and then to FSL as the second mortgagee. There would be no surplus available for distribution to unsecured creditors.
As to Georgina’s earnings, the evidence did not go so far as to reveal how much more than $60,000 p.a. she earned at the time of the Composition. Absent such information, and given Georgina’s uncontroverted evidence that she worked casually as a pharmacist, there is no sound basis to conclude that there is a prospect that creditors would have gained a material economic advantage from setting the Composition aside so that such income as she earned above the appropriate income threshold amount, less deductions under div.4B of pt.VI of the Act, could be distributed amongst them. In reaching this conclusion I have had regard to Georgina’s stated gross earnings in the year before her statement of affairs of $85,000[138] but I have also had regard to the fact that in order to calculate the applicable “base income threshold amount” for the purposes of div.4B of pt.VI of the Act, income tax and the Medicare levy must be deducted. It is likely that any net surplus above the applicable base income threshold amount, if there was one, would be negligible and not material to the Composition in any meaningful way.
[138] T d.6 p.67
In relation to the lifestyle which Georgina is able to enjoy, I note her evidence that the Maroubra property had been rented out for about eighteen months before the hearing of this application because she and Nicholas lived in his late mother’s home and that their nieces lived in the Hillsdale property paying outgoings such as rates.[139] Georgina also implied that Nicholas contributed to the loan servicing costs.[140] I infer from Georgina’s evidence that Nicholas shares the couple’s expenses and do not conclude that the expenditures to which reference has been made were funded solely by her. The evidence in question also gave little insight into Georgina’s financial situation at the time of the Composition, which is the relevant issue.
[139] T d.6 pp.87, 89
[140] T d.6 p.67
Significance of assets, income and trivial return
Assuming for present purposes that the FSL Loan was properly admitted, the small amount available for distribution is understandable and unexceptionable.
Olga submitted that the creditors’ interests would have been better served by Ms Thomson making more enquiries than she did. However, to the extent that this argument relates to the sum available for distribution, rather than the enforceability of the FSL loan and what additional investigations might have uncovered in that regard, it is no more than speculative.
Creditors not at arm’s length and represented by the same proxy
The allegation that the Composition was unreasonable because certain creditors were not at arm’s length and all the creditors attending the meeting were represented by the same proxy was not addressed in Olga’s written submissions. Nor was any attention paid to it in the evidence.
According to an AFSA document dated 14 October 2016,[141] Georgina’s statement of affairs disclosed twelve sole creditors and two joint creditors. According to the minutes of the creditors’ meeting of 6 April 2017 at which the Composition was approved, the two joint creditors and six of the sole creditors attended by proxy.[142] Their proxies were held by Georgina’s solicitor and, in the case of FSL, the proxy was directed how to vote on the approval of the Composition and on the appointment of Ms Thomson as trustee of the Composition.[143]
[141] CB 1354
[142] CB 1539
[143] CB 1530
The fact that only one person, who was Georgina’s solicitor, was the proxy has not been shown to be important in itself although the fact that all the attending creditors chose to appoint him may say something. According to Georgina’s statement of affairs[144] the creditors who were represented at the 6 April 2017 meeting were her solicitors, her accountants, one of her sons, two related creditors[145] and FSL. It was not demonstrated that Georgina directed those creditors’ decisions or that they did not make up their own minds regarding how to approach the proposed Composition. Whether they would have been disposed to assisting Georgina is speculative and, as already noted, no arguments were addressed to that possibility or to its significance.
[144] CB 1256
[145] CB 1254
Of greater importance is the fact that the vote was unanimous. The fact that some creditors were not at arm’s length is of little significance in light of the unanimity of view expressed by the resolution to accept the composition proposal. That unanimity points to the Composition being a suitable, businesslike resolution of the situation.
SECTION 222(1)(e): IS THERE ANOTHER REASON TO SET THE COMPOSITION ASIDE?
Olga’s absence from the creditors’ meeting
Ms Thomson’s second report to creditors, enclosing notice of the 6 April 2017 meeting of creditors, was posted by her office seven days before that date, on 30 March 2017. The then-s.73(2) (since repealed) and the then-reg.4.18 (also since repealed) provided that Ms Thomson should have sent those documents so that they arrived, or in the ordinary course of post ought to have arrived, at least seven days before the meeting. Plainly that duty was not discharged in this case but Olga has not suggested that this failure had any particular significance in circumstances where the correspondence did not come to Ms O’Donohoe’s attention until 21 April 2017.[146]
[146] AOD [17]
Nonetheless, Olga did not attend the meeting because she did not receive notice of it. She submitted that the lack of notice denied her the opportunity to discuss with and lobby other creditors as, she submitted, Georgina had. However, she did not identify what the subject of her lobbying would have been or why it would might have been persuasive.
One might presume that the FSL Loan would have been the subject of any such discussions, noting that Olga submitted that what she described as the “premature acceptance of the composition” without notice to her meant that her efforts to obtain advice on challenging the FSL Loan were stymied. However, the basis on which she has contended in this proceeding that the FSL Loan should not have been taken into account, namely that it had been discharged, has not been made out for reasons which are set out later. That being so, even if Olga had been able to attend and argue that the FSL Loan had been paid out, the proper decision would have been to reject that contention. Consequently, the fact that Olga was unable to attend and mount that argument does not support a finding that the Composition should be set aside for that reason.
Need for further inquiries
Olga submitted that rather than accepting Georgina’s allegations at face value for want of resources to undertake inquiries, it would have been in the best interests of creditors for Ms Thomson to have conducted further investigation into several matters, namely the status of the FSL debt, any equity in the relevant properties and the disclosures made by Georgina.
Olga argued that there was a real possibility that the FSL Loan had been paid in full by 2007, observing that although Theo had been chasing the loan in 2006, by 2008 he was no longer doing so. Olga referred in that connection to emails between Theo and Nicholas in October 2007 which she argued indicated payment in full had been made around that time.[147] She also observed that:
a)the loan did not appear in the FSL accounts as an asset, bad debt or otherwise;
b)the FSL Loan statements manifested inconsistent details, such as different amounts, different loan account numbers and the inclusion of account fees in one statement but not others;
c)FSL subordinated its security interest, to its detriment, by allowing new lenders to obtain higher priority;
d)FSL had permitted multiple dealings to be registered since 2011 despite being in a position to register mortgages over each property;
e)the separate $50,000 loan was never paid off but was instead written off against services Nicholas rendered to Theo. Georgina speculated that the same might have happened to the FSL Loan; and
f)Georgina had told Ms Thomson that she only began experiencing difficulty paying her debts in 2015[148] and Olga argued that if the FSL debt had truly been owing, Georgina would have had trouble paying her debts far earlier than that.[149]
[147] CB 813 ff
[148] CB 1389; T d.6 p.57
[149] T d.6 pp.57-60
Olga also submitted that FSL’s conduct demonstrated that it “has never been at arms-length and is willing to sacrifice its purported debt for the interests of” Nicholas and Georgina.
Merits of making further inquiries into the FSL Loan
Whether Georgina has any equity in the two properties depends on whether the debt under the FSL Loan is as large as the sum admitted in Ms Thomson’s administration of the Composition.
A conclusion that in October 2006 $100,000 was indeed paid towards the FSL Loan debt is supported by Nicholas’s qualified acceptance that it had been,[150] and the FSL Loan statement of 2 October 2007 which recorded a loan balance of $203,726.68.[151] However, Nicholas also deposed that those funds had been repaid.
[150] T d.5 p.93
[151] CB 784
A number of FSL Loan statements subsequent to the one of 2 October 2007 were introduced into evidence. They all post-dated June 2010, when Nicholas said that the $100,000 had been returned, and none suggested that the principal owing under the loan had ever been reduced, even erroneously. Those statements ostensibly provide some support for Nicholas’s evidence that that payment had been returned but the inconsistencies in the various FSL Loan statements cause me to have little confidence that they can be relied on to give a true and accurate picture of the loan account over time or at any particular point.
Moreover, Nicholas’s affidavit evidence to the effect that the $100,000 payment was not in fact a payment towards his FSL loan but a payment from Jedda Projects on behalf of OnetoFour Holdings[152] sits oddly with his correspondence with Theo in October 2007 and his apparent adoption of that payment. Nicholas also said in cross-examination that that payment had not reduced his loan with FSL and yet the fact that it had achieved exactly that was plainly the factual basis of the email correspondence in October 2007, in which a $200,000 payment of principal was canvassed and Theo spoke of how such a payment should be made in order that Nicholas’s obligation be “fulfilled” and “repayment of the debt” achieved.[153]
[152] NA1 [33]
[153] CB 813-814
If $100,000 had been paid in October 2006 then the amount said to be owing by Georgina under the FSL Loan would be significantly less than the debt which was admitted.
As to the alleged payment of $200,000, Nicholas’s bank statements bear out his oral evidence that he did not apply the $200,000 he received from Koombari in August 2007 to the FSL Loan. It appears that Olga and Christos’s contention that he had, which relied significantly on FSL’s bank records, was little more than supposition in that:
a)the FSL bank statement relied on by Olga[154] recorded that on 9 October 2007 there had been a receipt of $200,000, that entry being described as “Customer deposit”. There was no other, similar receipt recorded in the period 4 October 2007 to 19 October 2007. The FSL statement of account relating to the other FSL borrower who was referred to in the evidence recorded that that borrower paid FSL $200,000 on 9 October 2007. The evidence indicates that the $200,000 received by FSL on 9 October 2017 was not paid by Nicholas but by the other FSL borrower;[155]
b)although Olga submitted that the emails exchanged by Nicholas and Theo in October 2007[156] indicated “payment in full around that time”, the correspondence did not say so much. Rather than bearing out that contention, the correspondence in question, set out above at [38], records an attempt to re-route the $200,000, if paid, from FSL to one of the companies in the group and that Theo did not agree with the idea. Importantly, the correspondence speaks of payment being a future event but the emails in question were exchanged between 11 and 16 October 2007 and the $200,000 deposit into FSL’s account had already occurred on 9 October 2007; and
c)Olga’s speculation that the FSL Loan may have been paid off in the same manner as the $50,000 loan had been “traded off … for services rendered”[157] was not supported by evidence which suggested that that may have happened.
[154] CB 812
[155] CB 819
[156] CB 813-814
[157] T d.6 p.14
The conclusion which the evidence compels is that Nicholas did not pay $200,000 to FSL on 9 October 2007. There is no evidence suggesting that he did so at any other time.
I can appreciate that Olga is suspicious of the genuineness of the FSL Loan. It appears that nothing has been paid towards it for over a decade, with the result that Georgina’s indebtedness has only grown. Further, in that time Theo has taken no steps to seek repayment of the principal lent or, since 2007 any of the interest accrued, and has in fact subordinated his loan to other, registered mortgages. It also appears that the FSL Loan has not been treated as an asset in FSL’s balance sheets since at least 30 June 2011,[158] if it ever has been, and the inconsistencies and errors in the loan statements which were issued after 2010 raise questions regarding the reliability of those documents.
[158] CB 1811-1 ff
However, whether or not $100,000 was paid and repaid, the fact is that Nicholas and Georgina executed the Deed of Acknowledgment by which they agreed that they owed FSL $663,080.55 under the FSL Loan and there is no evidence that anything was paid subsequently. Nicholas and Georgina also agreed in the Deed of Rectification of Deed of Acknowledgement and Variation to Loan Agreement to replace simple interest with compound interest (by agreeing to the capitalisation of unpaid interest payments).[159] In the absence of an attempt to show that the loan agreement, as amended, was not enforceable according to its terms, Olga’s complaints do not take matters very far.
[159] CB 878-879
Merits of inquiries into Georgina’s earnings
The only other matter potentially relevant for inquiry concerned Georgina’s earnings but, as recorded earlier, I am not persuaded that any misstatement of those earnings was likely to have been material to the decision made by the creditors on 6 April 2017 or to the dividends available to them. In any event, Olga did not make detailed submissions on this issue.
Ms Thomson’s conduct of Georgina’s bankruptcy
The allegation against Ms Thomson in the points of claim did not allege that she had breached s.222(5)(g)-(i) which at the relevant time permitted a composition to be set aside if:
…
(g)the controlling trustee has:
(i)omitted a material particular from the declaration given by the controlling trustee under subsection 189A(3); or
(ii)included an incorrect and material particular in that declaration; or
(h)the controlling trustee was subject to a requirement under subsection 194A(5) to table a statement, and the controlling trustee has:
(i)omitted a material particular from that statement; or
(ii)included an incorrect and material particular in that statement; or
(i)a person who became the trustee of the agreement has:
(i)omitted a material particular from the declaration given by the person under subsection 215A(3) or (4); or
(ii)included an incorrect and material particular in that declaration.
…
Instead what Olga asserted was that Ms Thomson had acted improperly and had “acted in conflict with her duties as trustee” by:
a)acting as the trustee in bankruptcy for both Nicholas and Georgina;
b)not disclosing, as the trustee in bankruptcy for Georgina, her involvement as trustee for Nicholas.
c)failing to take reasonable steps to give Olga proper notification of the creditors’ meeting on 6 April 2017;
d)failing to make reasonable inquiries as to Olga’s address for service;
e)failing to make reasonable enquiries as to whether Olga had received notice of the meeting on 6 April 2017;
f)failing to obtain instructions that Spinks Eagle was acting for Olga and that Spinks Eagle had authority to accept service on Olga's behalf;
g)incorrectly stating the amount owing to Olga as $433,333 (rather than at least $1,185,750.54);
h)declining and/or refusing to accept certain documentation about creditor information on behalf of Olga;
i)failing to take reasonable steps to discharge her responsibility as trustee to investigate matters properly, including the underlying veracity of certain creditor claims;
j)providing an advice on the Composition which was at a premature stage and in circumstances where sufficient steps to investigate Georgina’s bankrupt estate had not been taken;
k)providing insufficient information as to what was in the best interests of the creditors; and
l)failing to provide creditors with information sufficient to enable them to make an informed decision about Georgina’s affairs in circumstances where those affairs called for further investigation.
Appointment of an unfunded or underfunded trustee.
Georgina noted that Ms Thomson’s enquiries had been truncated for want of funds sufficient to enable her do more and submitted that Ms Thomson would not be in any better position were the Composition set aside and she appointed once again to be the trustee of the bankrupt estate. Georgina argued that there was little utility in reopening a matter to appoint an unfunded trustee in bankruptcy. Georgina acknowledged Olga’s undertaking to the Court on the last day of the trial to fund the reasonable costs of any trustee other than Ms Thomson up to the amount of $30,000,[167] but submitted:
The effect of the undertaking is to hold the court in terrorem that Thomson will not be indemnified if she is reappointed as trustee of Georgina’s estate. Secondly, it does not address the costs which a trustee incurs beyond the initial $30,000 now proposed by Olga. Once that amount is spent the trustee returns to the position where he or she is unfunded for any further work.
[167] T d.6 p.28
Georgina submitted that there would be no utility in appointing an unfunded trustee.
In Re Zamora Homes Pty Ltd (in liq), unreported Supreme Court of New South Wales, 18 January 2019 (no media-neutral citation), Black J considered an application to appoint a special purpose liquidator to a company, Jainti Pty Limited (in liq). The appointment of such an office-holder was deferred until the question of funding was determined on the basis that:
… there would be little utility in appointing a special purpose liquidator, who is unfunded, where the liquidator who is presently in place has not taken steps to pursue claims which may be available to Jainti, at least partly because he is unfunded. (at [2])
However, a special purpose liquidator is not truly analogous to a trustee in bankruptcy or the trustee of a composition, not least because the role is additional to that of the liquidator who has already been appointed to administer the company in question. In those circumstances, it is unsurprising that in Deputy Commissioner of Taxation, in the matter of Italian Prestige Jewellery Pty Ltd v Italian Prestige Jewellery Pty Ltd [2018] FCA 983 at [34] Markovic J observed that the authorities establish that it is appropriate to appoint a special purpose liquidator if, relevantly, a creditor is prepared to fund investigations and recovery claims but on condition that another liquidator be appointed.
In the present context, it is hardly surprising that an estate which is likely to produce trivial dividends to creditors will have insufficient funds from its own resources to support investigations of any depth. However, if investigations are considered appropriate, the importance of a dearth of funds in the estate should not be exaggerated. For instance, in Hingston v Westpac, the appellant submitted (at 508 [77]) that further investigation of his affairs and any recovery of property would require one of the creditors to fund the investigation or give an indemnity to the trustee. However the court stated:
In the context of $11.2 million of debts, the composition proposal is, in any practical sense, so trivial as to amount to nothing with the result that the administration of the estate would be better dealt with by way of bankruptcy. (at 510 [85])
and set the composition aside nonetheless.
APPLICATION TO AMEND TO SEEK SEQUESTRATION ORDER
Submissions
Olga submitted that were her application successful a sequestration order was the better of the two possible types of order available to her. She acknowledged in her written submissions, albeit not very clearly, that her initiating application had sought a Hingston order and that she had not pressed for a sequestration order before the last day of the hearing. However, she argued that this change of direction as to relief did not alter her pleaded case and caused no prejudice to Georgina.
A Hingston order has the effect of returning the debtor to bankruptcy, implicitly on and from the date when they were originally made bankrupt: Hingston v Westpac at 519 [129]. A person is automatically discharged from bankruptcy on the third anniversary of the filing of his or her statement of affairs: s.149(4) of the Act and, as noted earlier, Georgina filed her statement of affairs on 10 October 2016. Olga submitted that in this case a sequestration order was preferable to a Hingston order because:
a)at the time that written submissions were filed the automatic s.149(4) discharge date was approaching and it was unknown whether a trustee in bankruptcy would apply for an extension of the bankruptcy period were judgment to be pronounced before that date;
b)there needed to be a proper investigation of Georgina’s affairs and there needed to be enough time in which to do it; and
c)it was in creditors’ interests to see more than a short period of bankruptcy and a hamstrung trustee.
The automatic discharge date passed during the period judgment was reserved.
For her part, Georgina, correctly in my view, characterised Olga’s submissions as an application to amend her initiating application to include a prayer that a sequestration order be made under s.222(10). She argued that such leave should not be granted because:
(a)the pleadings insofar as they concerned Olga and Georgina were closed in mid-December 2017, when Georgina filed her Defence;
(b)in the intervening (nearly 2) years Olga has never sought to telegraph to Georgina any indication that she would seek at the trial any order other than a Hingston-style order if the composition was set aside;
(c)Olga’s delays in the conduct of the proceedings disentitle her to judicial relief of the type sought here;
(d)the application was made orally on the last day of the trial and on the run, without any formal application in a case or supporting evidence to demonstrate justice in making the amendment;
(e)Olga has provided no draft of the proposed order to Georgina or to the court, either before making the application or since;
(f)it was made at the heel of the trial, after most (all bar one) of the witnesses had been cross-examined;
(g)by that time, forensic decisions had been made about how Georgina’s evidence in the case was adduced, and how Olga and her witnesses were cross-examined, and those witnesses had all been cross-examined;
(h)additionally, evidence that would be relevant to determining a relevant fact if an order was made under s 222(1) and (11) – the date of commission of the earliest act of bankruptcy within a 6 month period – was not led, because it was not necessary to be led under a case that relied on a Hingston-style order;
(i)in the circumstances, allowing the amendment contravenes the principles of just, quick and cheap resolution of the real issues in dispute in the proceedings, with the emphasis being on the word “just” in this case: Aon Risk Services Australia Limited v Australian National University [2009] HCA 27. 239 CLR 175; and
(j)allowing the amendment so late in the proceedings, also flies in the face of just case management: Queensland v J L Holdings Pty Ltd [1997] HCA 1.
Consideration
A situation similar to the present was considered in Bendigo and Adelaide Bank Ltd v Clout (No.2) (2016) 14 ABC(NS) 69 where an application for a sequestration order was not foreshadowed until the parties were called upon to submit a form of order following the delivery of reasons for judgment which held that a composition should be set aside. The principal difference between that case and this is that here the application for alternative relief was made before the hearing had concluded. In both matters the applicants had closed their case before the particular relief was mentioned.
I have concluded that Olga should have leave to amend her application to seek a sequestration order and should be treated as having done so. I have reached that conclusion because:
a)the date for the automatic discharge of Georgina’s bankruptcy has passed and no extension of it is possible. It does not appear to me that Olga is disproportionately responsible for the matter not being ready for hearing earlier than it was;
b)although Georgina submitted that because forensic decisions had been made it would be unfair to permit the amendment, the argument was not supported with any detail and is not otherwise compelling. If the particular relief which might be ordered following an avoidance of the Composition was likely to have affected Georgina’s approach to the evidence, then some indication of how that was so should have been proffered. In the absence of such indication, I am not persuaded that the issue of relief cannot be addressed by submissions alone; and
c)in those circumstances, no delay, inconvenience or additional costs will be caused by the amendment.
In concluding that Olga should be permitted to amend I have not overlooked the absence of a proper explanation of the lateness of the application. However, the clear impression which Olga’s counsel conveyed when he first raised the issue on the last day of the trial was that he had only just become aware of Bendigo and Adelaide Bank Ltd v Clout (No.2) and its relevance to the present case.[168]
[168] T d.6 p.2
This Court does not have a rule similar to r.16.54 of the Federal Court Rules 2011 which provides that an amendment to a pleading takes effect from the date the amendment is made. At common law an amendment to pleadings takes effect not from the date when it is made but from the date of the original document which it amends: Wigan v Edwards (1973) 1 ALR 497 at 515; Sneade v Wotherton Barytes & Lead Mining Co Ltd [1904] 1 KB 295 at 297; Baldry v Jackson [1976] 2 NSWLR 415 at 419; Proctor v Jetway Aviation Pty Ltd [1984] 1 NSWLR 166 at 174-175, 180 and 183; and Harris v Western Australian Exim Corporation (1994) 56 FCR 1 at 9-10. This fact has the consequence that the amendment to seek relief in the form of a sequestration order is taken to have been included in the initiating application, which would be a relevant matter if the Court were to make a sequestration order in this matter.
IF THE COMPOSITION IS SET ASIDE WHAT CONSEQUENTIAL ORDER SHOULD BE MADE?
Submissions
Georgina argued that if the Composition were to be set aside the only just order would be a Hingston order for what she said were the reasons given in the appeal decision in that case, namely that such an approach reflected the intention of the Act more closely than a sequestration order would. However, what was relevantly found in Hingston v Westpac was that the order made in that case under s.222(8) of the Act protected the interests of the creditors in question, not that it was invariably the way, or the only way, to achieve that outcome. The facts of Hingston v Westpac were different from the present case, most relevantly because they included the transfer of a substantial asset from the debtor to his wife five months before his debtor’s petition was filed. As White J said at first instance in Bendigo and Adelaide Bank Ltd v Clout (No.2):
It is understandable that in those circumstances the Full Court was concerned that the order of the court should not diminish the rights of the creditors arising from that transfer. Such a diminution may have occurred if the bankruptcy commenced on a later date [which a sequestration order would have involved].
…
It is appropriate to keep in mind that an order pursuant to s 222(8) is not the only means by which the parties may be returned to their pre-composition positions. A sequestration order pursuant to s 222(10) may also serve to achieve, in substance, the same effect. (at 80 [47], [51])
In Bendigo and Adelaide Bank Ltd v Clout (No.2) White J noted that, as in this case but unlike Hingston v Westpac, the nominal discharge date had passed. His Honour noted that in Hingston v Westpac the trustee still had the ability to object to Dr Hingston’s discharge from bankruptcy, which is not the case once the nominal discharge date has passed. His Honour observed:
An awareness by a bankrupt that a trustee may object to the automatic discharge from bankruptcy operates as an incentive to the bankrupt to cooperate in the discharge of the trustee’s duties with respect to the bankrupt estate. On my assessment, it is desirable that the new trustee in the present case have the advantage of [the debtors] having that awareness. (at 80 [49])
The power to object to the automatic discharge from bankruptcy would be available if a sequestration order rather than a Hingston order were made.
Georgina cited Whitton v Perovich in which Rangiah J made a Hingston order upon the termination of two related compositions even though the nominal bankruptcy discharge dates had passed. However, in that case the trustee had objected to automatic discharges before the composition was entered into and so the debtors’ bankruptcies had already been extended by five years. The compositions in question were terminated because the debtors failed to comply with terms which required them to pay agreed sums to the trustee within a week of the creditors’ meeting at which the compositions were agreed. Rangiah J said:
There is no evidence of change in the positions of the debtors or any creditors making it unjust to make orders which have that effect. The property should again vest in their trustee in bankruptcy and be available to be realised for the benefit of the creditors. (at 107 [125])
Georgina argued that were a sequestration order made, the evidence did not identify the date of bankruptcy and so this might have the unfair consequence of the date of bankruptcy being set as the date this proceeding was commenced. However, that contention was based on the misapprehension that the date of bankruptcy would be of any particular significance. In Bendigo and Adelaide Bank Ltd v Clout (No.2) White J appears to have believed that it affected the date of automatic discharge from bankruptcy but Besanko J observed on appeal in Mouglalis v Bendigo and Adelaide Bank Ltd (2017) 250 FCR 92 at 95 [9] that such a view would be erroneous because the three year period specified in s.149(4) does not commence until after a statement of affairs is filed following a sequestration order, and the Court cannot alter that period or its commencement date: Mouglalis v Bendigo and Adelaide Bank per Logan J at 106 [56] and Charlesworth J at 107 [60]-[61].
Consideration
Section 222 does not mandate what order the Court should make consequent upon the avoidance of a composition. It is a matter of discretion based on the facts of the matter and the nature of the relief sought. The cases which were cited in argument are illustrative of orders which might be made in particular circumstances but do not dictate what orders might be made on this occasion.
In this case, given that the date for Georgina’s automatic discharge from bankruptcy, were a Hingston order to be made, has passed and the Court cannot alter it, there seems no merit in making such an order. First, Georgina would become a discharged bankrupt and her estate would not be controlled by a trustee, which would defeat the purpose of the present application. Secondly, the Composition fund has, in any event, been fully distributed. In Hingston v Westpac, no distributions to creditors had been made before the trial: Westpac Banking Corporation v Hingston (No.2) (2010) 8 ABC(NS) 439 at 446 [33]; or, it would seem, before the appeal: Hingston v Westpac at 508 [77]; and it appears that this fact was not unimportant to the Full Court: Hingston v Westpac at 516 [118]. The difficulty and impracticality of ordering the return of paid dividends points to why that might have been so. Thirdly, even ignoring the difficulties in having paid dividends returned, it is not clear to whom they would be returned.
Under s.224 of the Act, referred to earlier at [143] those difficulties would not arise in the case of a sequestration order consequent upon a setting aside of the Composition.
Section 115 of the Act relevantly provides:
115 Commencement of bankruptcy
…
(1B)If a person becomes a bankrupt because of a sequestration order made under Division 6 of Part IV or under Part X, then the bankruptcy is taken to have relation back to, and to have commenced at, the time of the commission of the earliest act of bankruptcy committed by the person within the period of 6 months immediately before the date on which the application for the sequestration order was made.
…
If it made a sequestration order under s.222(10) and no act of bankruptcy occurred within the period of 6 months immediately before the date on which the application for the sequestration order was made as contemplated by s.115(1B) of the Act, the Court would have a discretion in the setting of a date as the date of bankruptcy: Mouglalis v Bendigo and Adelaide Bank Ltd at 95 [8] per Besanko J, at 104 [44] per Logan J and at 108 [65] per Charlesworth J. In that case, in the absence of a relevant act of bankruptcy, the date the proceeding was commenced was set as the date of bankruptcy.
In this case it is not apparent that an act of bankruptcy occurred in the six months before the commencement of the proceeding. Were a sequestration order to be made, no injustice would arise if a date at or after the commencement of this proceeding were set as the date of bankruptcy as Georgina can be taken, from the commencement of the proceeding, to have been on notice of the possibility that the Composition might be set aside and to have been aware of the possible consequences of that were it to occur. In relation to the recent borrowing secured by a mortgage over the Hillsdale property, as it was to fund this proceeding I assume that the lender was aware of that purpose and the loan’s associated risks, if any.
Olga’s sons have contributed $36,000 for the Composition and they would not get that money back; Olga’s evidence was that she would not indemnify them for their contribution.[169] However, they were volunteers and their contribution was, in effect, a gift. Having made the gift they have no right to be repaid or to expect that they might be.
[169] T d.2 pp.55-57
Given these matters, if the Composition were set aside, the appropriate consequential relief would be the making of a sequestration order with the commencement of this proceeding being the date of bankruptcy.
SHOULD THE COMPOSITION BE SET ASIDE?
As observed earlier, the Composition’s dividend was so small as to be trivial and its inadequacy weighs heavily in favour of avoidance of the Composition. However, there would be no point in setting the Composition aside if there were no prospect or possibility of economic advantage to creditors as there was, for instance, in Hingston v Westpac. In this case, whether there is such a prospect or possibility turns on whether the FSL Loan debt truly consumes all of the value of the Maroubra and Hillsdale properties not committed to securing the mortgages registered on title. Olga’s implicit contention that it does not has something to be said for it in that it appears that the loan’s principal was reduced by $100,000 in October 2007. However, the Deed of Acknowledgement dated 30 November 2010 and the Deed of Rectification of Deed of Acknowledgement and Variation to Loan Agreement, also dated 30 November 2010, must be shown to not be enforceable according to their terms before the $100,000 payment can cast any material doubt on the final total of the FSL Loan. However, no challenge was made to the enforceability of those deeds according to their terms. Accepting on that basis that they are enforceable and in circumstances where I accept that the postulated $200,000 payment was not made, the conclusion must be that no result for creditors better than that provided by the Composition would be available if Georgina were to be made bankrupt.
In such circumstances, I do not find that the terms of the Composition were unreasonable or not calculated to benefit the creditors generally. Further, the inquiries into the validity of the FSL Loan debt which Olga argued ought to be pursued, while potentially casting doubt on Theo’s historical willingness to pursue the debt or even to treat it as enforceable, would not tend to show that the deeds of November 2010 were, in fact, not enforceable. It should be noted that the contention that they were enforceable, and were relied on accordingly, was the implicit basis of FSL’s statement of claim and proxy submitted to Ms Thomson.
Finally, although Georgina’s statement of affairs contained information which was not correct, the incorrect information was not such that would, given all the other circumstances, justify an order setting the Composition aside. All things considered, it would not be in the interests of the creditors to make that order.
I therefore conclude that the Composition should not be set aside.
CONCLUSION
The application will be dismissed.
I certify that the preceding one hundred and seventy-five (175) paragraphs are a true copy of the reasons for judgment of Judge Cameron
Associate:
Date: 25 November 2019
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