Ward v Zozi
[2012] FMCA 898
•28 September 2012
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| WARD v ZOZI & ANOR | [2012] FMCA 898 |
| BANKRUPTCY – Application to set aside personal insolvency agreement and to make a sequestration order – whether petitioning creditor is a creditor under s.222(1) of the Bankruptcy Act 1966 (Cth) – whether debtor omitted material particular or included incorrect and material particular in his statement of affairs – whether terms of personal insolvency agreement to set be aside as unreasonable or not calculated to benefit creditors generally or for other reason – whether to make a sequestration order on the basis of a creditor’s petition. |
| Bankruptcy Act 1966 (Cth), ss.52, 120, 121, 122, 188, 189A, 189AAA, 190, 222 Family Law Act 1975 (Cth), s.90C |
| Augustyn v Putnin (1988) 83 ALR 514; [1988] FCA 372 Westpac Banking Corporation v Hingston and Another (No. 2) (2010) 117 ALD 552; [2010] FCA 1116 Zozi v Ward [2011] FMCA 168 |
| Applicant: | WARWICK ROBERT WARD |
| First Respondent: | MIOMIR ZOZI |
| Second Respondent: | PAUL ANDREW LEROY |
| File Number: | SYG 2391 of 2011 |
| Applicant: | WARWICK ROBERT WARD |
| First Respondent: | MIOMIR ZOZI |
| Second Respondent: | PAUL ANDREW LEROY |
| File Number: | SYG 645 of 2011 |
| Judgment of: | Barnes FM |
| Hearing dates: | 21 and 26 March 2012 |
| Last date of submissions: | 19 April 2012 |
| Delivered at: | Sydney |
| Delivered on: | 28 September 2012 |
REPRESENTATION
| Counsel for the Applicant: | Mr J Johnson |
| Solicitors for the Applicant: | Sally Nash & Co |
| Counsel for the First Respondent: | Mr S Benson |
| Solicitors for the First Respondent: | Gillis Delaney Lawyers |
| Solicitors for the Second Respondent: | Yates Beaggi Lawyers |
ORDERS
IN MATTER SYG 2391 OF 2011:
The Personal Insolvency Agreement executed by the first respondent on 12 August 2011 be set aside.
IN MATTER SYG 645 OF 2011:
Leave be granted to amend the creditor’s petition by altering the date of the act of bankruptcy in paragraph 4 to 11 March 2011.
The requirement to serve the amended petition be dispensed with.
A sequestration order be made against the estate of Miomir Zozi.
A copy of these orders be given to the Official Receiver in Sydney by the applicant within 2 working days.
IT IS FURTHER ORDERED IN BOTH MATTERS THAT:
The applicant creditor’s costs (including any reserved costs) be taxed in accordance with the Federal Court Rules and paid from the estate of the first respondent in accordance with the Bankruptcy Act 1966 (Cth).
THE COURT NOTES THAT:
The date of the act of bankruptcy is 11 March 2011.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 2391 of 2011
| WARWICK ROBERT WARD |
Applicant
And
| MIOMIR ZOZI |
First Respondent
| PAUL ANDREW LEROY |
Second Respondent
SYG 645 of 2011
| WARWICK ROBERT WARD |
Applicant
And
| MIOMIR ZOZI |
First Respondent
| PAUL ANDREW LEROY |
Second Respondent
REASONS FOR JUDGMENT
These proceedings
The applicant, Mr Ward, seeks to set aside a personal insolvency agreement (PIA) signed by Mr Zozi, the first respondent. The second respondent is Mr Leroy, the trustee of Mr Zozi’s PIA. In addition Mr Ward seeks that a sequestration order be made against the estate of Mr Zozi on the basis of a creditor’s petition presented on 6 April 2011 (or in the alternative under s.222(10) of the Bankruptcy Act 1966 (Cth)).
On 16 September 2009 Mr Ward obtained judgment against Mr Zozi in the Local Court of New South Wales in the sum of $31,072.50. On 17 September 2010 a bankruptcy notice was issued based on this judgment and interest. Mr Zozi applied to set aside the bankruptcy notice on the basis that he had a cause of action in negligence against Mr Ward that would exceed the amount of the judgment. On 11 March 2011 Smith FM dismissed the application to set aside the bankruptcy notice (see Zozi v Ward [2011] FMCA 168).
On 6 April 2011 Mr Ward filed and presented a creditor’s petition in which it was claimed that Mr Zozi owed him a total of $33,895.83, consisting of the amount of $31,072.50 for legal professional fees which had been assessed and registered as a judgment/order in the Local Court in Sydney together with interest up to 7 September 2010 in the sum of $2,823.33. The creditor’s petition and accompanying documents were served personally on Mr Zozi. I note that the period for expiration of the creditor’s petition was extended under s.52(5) of the Bankruptcy Act 1966 (Cth) to be a period of 24 months from the date of presentation.
On 20 June 2011 Mr Zozi executed an authority under s.188 of the Bankruptcy Act appointing Mr Leroy as controlling trustee of his property. A certificate of appointment confirms that Mr Leroy was appointed controlling trustee on 20 June 2011. A stay of proceedings relating to the creditor’s petition came into effect under s.189AAA of the Bankruptcy Act. Mr Leroy was provided with a statement of affairs (SOA) sworn by Mr Zozi on 20 June 2011 and a draft PIA signed by him on the same date. Following a resolution at a creditor’s meeting that Mr Zozi be required to execute a PIA, on 12 August 2011 Mr Zozi signed a PIA which was signed by Mr Leroy as trustee on 16 August 2011.
Under the PIA a total of $35,000 was payable to the trustee by way of a lump sum of $10,000 to be paid within seven days of execution and the balance of $25,000 to be paid by 36 equal monthly instalments of $694.45 commencing one month after execution.
On 19 September 2011 Mr Ward filed an interim application seeking that the PIA be set aside. When the matter first came before me it was foreshadowed that the issues raised in the interim application would be raised in a separate application. On 20 October 2011 the applicant commenced separate proceedings in which he sought orders to set aside the PIA under s.222 of the Act. It was agreed that the application to set aside the PIA and the creditor’s petition would be heard together.
On 29 November 2011 these matters were listed for hearing on 20 February 2012. Mr Zozi did not file any affidavit evidence as provided for in directions.
In the meantime, on 23 January 2012 Mr Ward filed an interim application seeking that Mr Zozi be restrained until further order from transferring his interest in a property at 261 Dora Street, Hurstville. Smith FM made such orders on 24 January 2012 at a hearing at which Mr Zozi did not appear. The matter was adjourned until 30 January 2012. Mr Zozi again did not appear and the orders were confirmed by Smith FM.
On 20 February 2012, on the application of a solicitor who indicated that he had recently been approached to act for Mr Zozi, the hearing was adjourned until 21 March 2012. Further directions were made for Mr Zozi to file affidavits by 5 March 2012. He did not comply with those orders in relation to the filing of affidavits. The solicitor who had appeared on 20 February 2012 did not thereafter file any notice of appearance.
Shortly before the adjourned hearing date, Mr Zozi retained Gillis Delaney Lawyers. A further adjournment was sought. That application was refused on 19 March 2012. Mr Zozi was, however, given leave to file and rely on two affidavits sworn on 21 March 2012.
The personal insolvency agreement
The application to set aside the PIA is brought under s.222 of the Bankruptcy Act which relevantly provides as follows:
Setting aside on grounds of unreasonableness etc.
(1) If a personal insolvency agreement is in force, the Court may, on application by:
(a) the Inspector-General; or
(b) the trustee; or
(c) a creditor;
make an order setting the agreement aside if the Court is satisfied that:
(d) the terms of the agreement are unreasonable or are not calculated to benefit the creditors generally; or
(e) for any other reason, the agreement ought to be set aside.
…
Setting aside on grounds of 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.
Ancillary orders
(8) If the Court makes an order under subsection (1), (2) or (5), the Court may make such other orders as the Court thinks fit.
…
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.
The applicant claimed to be a creditor within s.222(1)(c) of the Bankruptcy Act and sought that the PIA be set aside under s.222(1) on the basis that its terms were unreasonable or not calculated to benefit the creditors generally (s.222(1)(d)) or there was other reason why it ought to be set aside (s.222(1)(e)). It was submitted that the PIA was not properly entered into in accordance with issues of public policy. Reliance was also placed on s.222(5) of the Act. It was contended that Mr Zozi had omitted a material particular from his SOA within s.222(5)(e)(i) and/or that he had included an incorrect and material particular in that statement (s.222(5)(e)(ii)).
Mr Ward relied on affidavits sworn by him on 19 October 2011 and 23 January 2012; an affidavit of Melanie Cavanough sworn on 21 December 2011; an affidavit of Mark Slater sworn on 30 January 2012; an affidavit of Daniela Fazio sworn on 23 January 2012 and two affidavits sworn on 24 January 2012; and an affidavit of Christie Boyd sworn on 23 January 2012.
Mr Leroy, as the trustee of the PIA, filed a submitting appearance, but was represented at the hearing. He filed an affidavit sworn on 16 February 2012 which was in evidence before the court.
Mr Zozi relied on his affidavit of 21 March 2012 and the affidavit of Daniel Touma of the same date. Mr Zozi and Mr Touma were both cross-examined.
After the hearing, and with the approval of counsel and solicitors for the other parties to the proceedings, counsel for the applicant drew the attention of the court to the decision of Flick J in Moran v Robertson [2012] FCA 371.
Mr Ward’s standing as a “creditor”
An application to set aside a personal insolvency agreement under s.222 of the Bankruptcy Act may be made by the Inspector-General, the Trustee or a creditor. Mr Ward made the application on the basis that he was a creditor of Mr Zozi.
On the last day of the hearing counsel for Mr Zozi raised, for the first time, an issue as to whether Mr Ward was a creditor, or a creditor for the amount he claimed, and whether he had locus standi for the purpose of these proceedings.
Mr Ward is a barrister. By letters of 13 and 17 July 2011 and 17 August 2011 he provided Mr Leroy (as Mr Zozi’s controlling trustee) with details of his claim to be a creditor of Mr Zozi. He explained that the claim included legal fees that had been assessed and were the subject of a Local Court judgment (the judgment that formed the basis for the bankruptcy notice) and interest and also a costs order of this court in his favour made in the proceedings to set aside the bankruptcy notice. He also provided details of a debt due to a defunct firm of solicitors (for which he acted) under a Local Court judgment. Mr Zozi did not take issue with whether he owed a debt to Mr Ward in his unsuccessful application to set aside the bankruptcy notice. This issue was not raised until towards the end of the hearing. Mr Zozi now submits that Mr Ward has not established that he is a creditor for the purpose of standing to bring proceedings under s.222 of the Bankruptcy Act. It was submitted that the court could not be satisfied that Mr Ward was a creditor in the absence of evidence of any costs disclosure letter or fee agreement. Mr Ward did not produce any such material in response to a notice to produce served on Friday 23 March 2012 (after the first day of the hearing) requiring production on 26 March 2012.
Counsel for Mr Zozi “queried” Mr Ward’s standing as a creditor by reason of the possible effect of provisions of the Legal Profession Act 2004 (NSW), apparently on the basis that there was no evidence before the court that the requirements of that legislation had been complied with in circumstances where the claimed liability of Mr Zozi to Mr Ward arose where Mr Ward had acted for Mr Zozi in legal proceedings and had obtained an assessment of barrister’s fees.
Mr Zozi relied on the fact that the Legal Profession Act provides for the disclosure of costs to clients and to other law practices and that there are consequences if disclosure does not occur. It was submitted that the court could not be satisfied that the judgment that formed the basis for the bankruptcy notice issued on the application of Mr Ward was regularly obtained. Mr Zozi submitted that Mr Ward had to put before the court evidence of his disclosure in accordance with the Legal Profession Act or of whatever it was he said triggered his right to payment in order for the court or the Trustee to be satisfied that he was a creditor. Mr Zozi submitted that it “may have been” that the costs assessment had proceeded on an erroneous footing, although it was conceded that it could not be said that this was necessarily the case. There is no evidence before the court to support such a contention.
It is for the court to determine whether Mr Ward is a creditor for the purposes of s.222 of the Act (see Moran v Robertson [2012] FCA 371 at [11]-[12] and cases cited therein). The court “must act on the material before it” (Moran v Robertson at [12]).
Mr Ward obtained a certificate of determination issued by a costs assessor. The certificate was filed in the registry of the Local Court. This had the effect that it was taken to be a judgment of the court. There is no evidence of any action taken by Mr Zozi to set aside that judgment. Mr Zozi disclosed that Mr Ward was an unsecured creditor in the SOA he signed on 20 June 2011.
The issue of whether there was in truth and reality a debt owed to Mr Ward was not raised in opposition to the bankruptcy notice (see Zozi v Ward). Nor has Mr Zozi raised any such issue in opposition to the creditor’s petition. No authority was cited in support of the proposition that a creditor relying on a judgment debt must also provide evidence of the basis for the underlying debt to establish standing under s.222(1) of the Bankruptcy Act.
Mr Ward was not required for cross-examination in these proceedings. He gave unchallenged affidavit evidence that he was a creditor of Mr Zozi for the amount of the judgment debt and interest thereon. The speculation on the part of counsel for Mr Zozi about whether or not provisions in the Legal Profession Act were complied with by Mr Ward in his dealings with Mr Zozi is no more than that. I am satisfied on the material before court that Mr Ward is a creditor for the purpose of making an application under s.222 of the Act.
The applicant sought to rely on both s.222(1) and s.222(5) of the Bankruptcy Act. Before considering the application of s.222 of the Act it is relevant to refer to the background to the proceedings and the relevant evidence before the court.
Mr Zozi’s Statement of Affairs of 20 June 2011
As indicated, Mr Zozi signed a SOA on 20 June 2011. A copy of part of the SOA is annexed to the affidavit of Mr Ward sworn on 19 October 2011. In addition, p.4 of the SOA, which contains personal details and asks questions about family law, financial proceedings and legal actions, is an exhibit to the affidavit of Mr Leroy.
In the SOA Mr Zozi disclosed details in relation to his spouse with whom he lived and indicated that he had not been, was not and was not likely to become involved in any family law property or spousal maintenance proceedings.
By way of assets, Mr Zozi disclosed that he had $500 to $1,000 in cash, $900 in a St George Bank account in the name of Z & M Floors Pty Ltd (Z & M), $20,000 in superannuation, two vehicles (a Toyota Kluger and a Volkswagen Transporter) and tools of trade. He disclosed joint ownership with his wife of a family home in Hurstville, stated that the estimated resale value of the property was $610,000 and claimed that he owed $582,000 to a creditor who held security over the property. He did not disclose any sales, transfers or gifts of assets in the last five years.
In one part of the SOA Mr Zozi stated that he did now own any shares. In another part he disclosed that he was a director of Z & M. In response to the question “Do you own, or have you at any time during the last 5 years owned any shares in this company?” he responded “Yes”, and “TBC” in response to the question “No. of shares”. He stated that the company did not owe him any wages, loans or other money and that a dividend or distribution was not expected. He did not disclose any past or present shareholding in any other companies.
Mr Zozi stated in the SOA that he had two secured creditors, the mortgagee of the Hurstville property and a lender with security for a loan (variously described as in the amount of $10,000-$11,000 or $16,000) over one of the vehicles (the Toyota Kluger) in the form of a lease. He claimed his repayments under these loans were up to date.
According to the Controlling Trustee’s Report Mr Zozi declared in the SOA that his gross income for the past 12 months was between $25,000 and $35,000 approximately.
In the part of the SOA relating to unsecured creditors Mr Zozi disclosed total debts of an estimated value of $281,000 consisting of a debt of $95,000 owed to Mr Touma said to have been incurred in 2010; a debt of $22,000 described under the heading “Mth/Yr Incurred” as “2007” owed to Leinad Developments Pty Ltd (Leinad Developments); another debt of $35,000 owed to Leinad Developments said to have been incurred in 2009; a debt of $55,000 owed to Touma Construction Pty Ltd (Touma Construction) said to have been incurred in 2009; a debt of $59,000 owed to Mr Ward said to have been incurred in 2011 (described as “Bar. Costs”); and a debt of $15,000 said to have been incurred in 2011 owed to another named creditor, George Nik and Associates.
The Trustee’s report of 13 July 2011
On 13 July 2011 Mr Leroy issued a report to all known creditors of Mr Zozi in accordance with s.189A of the Bankruptcy Act. Included in that report was a copy of the proposed PIA in the form in which it was ultimately executed, providing for a total payment of $35,000 to the Trustee by way of a lump sum of $10,000 within seven days of execution and the balance of $25,000 by way of 36 equal monthly instalments of $695.45 each month.
In his report Mr Leroy did not recommend that the creditors vote in favour of the PIA. Insofar as the report expressed the opinion that “creditors’ interests will be better served by accepting the proposal rather than the bankruptcy of the debtor (sic)”, Mr Leroy clarified in his affidavit that this was a typographical error and that this paragraph should have read “[i]t is my opinion that creditors’ interest will not be better served by accepting the proposal rather than the bankruptcy of the Debtor”. This clarification is consistent with the conclusion in the Trustee’s report.
Mr Leroy explained why he did not recommend that creditors vote in favour of the PIA as follows:
It is required under the Act, for a Controlling Trustee, to conduct such enquiries as are necessary to satisfy creditors, the Court and myself that the Personal Insolvency Agreement proposal being made by the Debtor is in the best interests of the creditors.
The main alternative available to creditors at the creditors meeting is that creditors pass a resolution to require the Debtor to file a Debtor’s Petition within 7 days from the day on which the resolution was passed.
The powers of the Trustee are greater in bankruptcy, however the relevance of such enquiries need to be examined briefly, as any serious anomaly in the personal insolvency agreement would be reported to creditors and, if necessary, to the Court and may provide the basis to terminate the personal insolvency agreement and cause the Debtor to be declared Bankrupt.
Bankruptcy provides for the realisation of after acquired property and income contributions during the minimum three year period of a normal bankruptcy. As previously advised, the Debtor is currently earning a gross income of $35,000.00 annually. And, whilst these provisions are available under bankruptcy, there is a strong possibility that as a bankrupt, the Debtor may not earn sufficient income to be liable for income contributions.
Based on the information disclosed by the Debtor in his Statement of Affairs, during interviews with either myself and my staff, and as a result of the inquiries and investigations, I believe that it is not in the creditor’s best interest to deal with the Debtor’s affairs under Part X of the Bankruptcy Act 1966 by way of a personal insolvency agreement. As previously advised:-
I do not recommend that creditors vote in favour of the Personal Insolvency Agreement. (Emphasis in original.)
This conclusion is reached not because I believe further enquiries/investigations would lead to recoveries which would ultimately benefit creditors (often the cost of such investigations and recoveries outweigh any net benefit to creditors) rather that the commercial outcome for participating creditors of the proposed agreement in the amount of 7.60 cents is minimal. The proposal may have merits to the major creditors who will naturally receive the largest dividend given the size of certain alleged claims.
In his report Mr Leroy referred to the fact that in his SOA Mr Zozi had declared his gross income over the 12 months prior to his appointment (in June 2011) to be between approximately $25,000 and $35,000 derived from self-employment as a carpenter with Z & M and had estimated that his gross income over the next 12 months would be between approximately $25,000 and $30,000. Mr Zozi’s 2009 and 2010 tax returns were said to show income of $34,134 and $41,320 for the 2009 and 2010 financial years respectively.
The Trustee’s report summarised the assets and liabilities disclosed in the SOA. However it also recorded that investigations had revealed that Z & M was registered on 17 June 2010 and that at the time of the report Mr Zozi held 10 of 30 shares (a matter not disclosed in the SOA). No value had been attributed to the shares in the SOA. Based on the Z & M balance sheet as at 30 June 2010 (less than 2 weeks after it was registered) Mr Leroy expressed the view that Mr Zozi’s one third interest in the proprietary funds as at that date had an approximate value of $2,921.67. Mr Leroy also referred to the evidence that Mr Zozi had previously been a director of Raptor Motors Investment Group Pty Ltd (a matter not disclosed in the SOA).
The Trustee’s report also stated that while in his SOA of 20 June 2011 Mr Zozi had disclosed a bank account with St George Bank which was said to contain $900, his bank account statement indicated that there had been a balance of $5,441.28 in that account as at 28 May 2011. Mr Zozi also subsequently disclosed a joint bank account with Commonwealth Bank of Australia with a negative balance.
Mr Leroy’s report referred to the fact that Mr Zozi’s Hurstville home (which Mr Zozi had valued at $610,000 in his SOA) was at the time of his report being marketed for sale by private negotiation in the amount of $845,000. The estate agent had indicated that on 10 June 2011 (shortly before the completion of the SOA on 20 June 2011) a potential purchaser had made an offer in the amount of $845,000. The sale did not proceed as the potential purchaser was unable to obtain finance. Mr Leroy obtained three market appraisals indicating an “average” resale value for the property of $728,333.33.
Further details were provided by the Trustee in relation to other assets and liabilities, including superannuation and vehicles. Relevantly, the amount outstanding in relation to the Toyota Kluger was said to be $9,818 (not approximately $16,000 as disclosed in the SOA). The Trustee recorded that his understanding was that the Volkswagen Transporter was not secured by a finance facility.
In relation to the unsecured creditors disclosed in the SOA, Mr Leroy referred to the fact that Mr Zozi had disclosed Mr Touma as an unsecured creditor for an amount of $95,000 in relation to what was said by Mr Zozi to be a personal loan applied to purchasing supplies for Z & M; two loans from Leinad Developments in the amounts of $22,000 and $35,000; and a $55,000 loan from Touma Constructions which Mr Zozi had advised were also applied towards purchasing supplies for his company. Mr Zozi also disclosed the debt to Mr Ward. The indebtedness to George Nik and Associates was said to be in relation to professional accounting fees and disbursements.
Mr Leroy indicated that at the time of the report there had not been sufficient time to examine whether there had been any substantial payments via Mr Zozi’s bank accounts or to investigate any undervalued transactions, transfers to defeat creditors or payments of preferences involving Mr Zozi. Mr Leroy was not aware of and had not been advised of any such payments.
Mr Leroy advised that he was in receipt of a voluntary third party contribution in the amount of $10,000. He indicated that on Mr Zozi’s current gross income of $35,000 there was a strong possibility that as a bankrupt he may not earn sufficient income to be liable for income contributions.
Nonetheless, as set out above, Mr Leroy concluded that it was not in the creditors’ best interests to deal with the debtor’s affairs under Part X of the Bankruptcy Act by way of a PIA.
Other information about Mr Zozi’s assets and liabilities
After the issue of the s.189A report, proofs of debt and proxy forms were received by Mr Leroy, including proofs of debt from Touma Constructions, Mr Touma and Leinad Developments and also a proof of debt from the Deputy Commissioner of Taxation in the sum of $1,916.37 dated 26 July 2011. The debt owed to the Australian Taxation Office (ATO) had not been included in the SOA. A proxy and statement of claim was also received from Mr Ward for the sum of $57,000.
A meeting of creditors was convened and adjourned to allow the controlling trustee to determine issues about the entitlement of certain creditors to vote. In particular, Mr Ward had raised with Mr Leroy concern about Mr Zozi’s claimed indebtedness of $95,000 to Mr Touma and the other debts to his associated companies, Touma Construction and Leinad Developments, having regard to a statutory declaration declared by Mr Zozi on 18 May 2009.
A copy of this statutory declaration is in evidence before the court. It contains a table described as “a true statement of my personal financial position” in which Mr Zozi had included the Hurstville property at the value of $650,000 (less a loan of $600,000) and a motor vehicle of $26,000 (less a car loan of $30,000). The only other loan he disclosed was a personal loan of $22,000. This was said to leave net assets of $24,000. Mr Zozi declared that he was “not aware of any other personal assets” in his name.
After the creditors’ meeting Mr Leroy requested further particulars of the claims of Mr Touma, Leinad Developments and Touma Constructions. Mr Touma provided statutory declarations dated 5 August 2011, both personally and in his capacity as director of Leinad Developments and Touma Construction, in support of the proofs of debt. He claimed that he had loaned Mr Zozi $95,000 “by way of paying bills for him and giving him cash amounts listed on [a] letter [to Mr Zozi] dated 22 July 2009” by way of some seven loans “over almost 2 years from September 2007”. A copy of a letter dated 22 July 2009 from Mr Touma to Mr Zozi which referred to cash amounts loaned to Mr Zozi between September 2007 and November 2008 was provided. It was accompanied by statements of what are said to be amounts loaned on specified dates. Mr Touma claimed in that letter that he had withdrawn the money from Leinad Developments company funds because Mr Zozi had told him that he would be able to repay him “very promptly”, but that he had not received any repayment. The letter asked Mr Zozi to make “some attempt” to repay the specified amounts that Mr Touma stated he needed to pay back into his business and letter stated that Mr Touma “would like to receive some sort of interest payment” on the amount. There is no other documentary evidence of such loans. Mr Touma declared that “no further information [could] be provided because all our books & records were held by [a named accounting firm] & cannot be obtained because that business is being prosecuted by the ATO”.
Mr Touma also provided Mr Leroy with a statutory declaration about what were said to be two personal loans made by Leinad Developments to Mr Zozi (not to his company) totalling $57,000 by way of providing material and tradesmen in 2009 and another declaration about a personal loan of $55,000 by Touma Construction to Mr Zozi personally in September 2010 by way of providing building material.
Mr Touma provided copies of invoices and purchasing order dockets said to be in relation to the loans from Leinad Developments and Touma Construction. In his statutory declarations Mr Touma stated that these were the only records he could provide. The documents provided to Mr Leroy are in evidence before the court. They include copies of Purchasing Order No.187552 addressed to Leinad Developments from Mr Zozi dated 2 February 2009 referring to “350 m2 Blue gum Floor boards” and Order No.187558 dated 6 March 2009 stating “Could you supply tradesmen to do flooring and polishing at Kangaroo Point for me” and Order 187582 dated 3 September 2010 addressed to Touma Construction for specified quantities of Black Butt Flooring, Tasmanian Oak parquetry, Plywood underlay and Battens. Also in evidence are copies of Tax Invoices issued by Leinad Developments to Mr Zozi for $22,000 and $35,000 and from Touma Construction for $55,000.
At the reconvened creditors’ meeting on 9 August 2011, Mr Leroy admitted the proofs of debt lodged on behalf of Touma Construction, Leinad Developments and Mr Touma for voting purposes only. While the ATO had provided a proof of debt, it did not exercise the right to vote. Pursuant to a special resolution carried by 78.41 per cent of the creditors present and participating at the adjourned meeting of creditors it was resolved that Mr Zozi be required to execute the proposed PIA. Those voting for this proposal were Mr Touma, Leinad Developments and Touma Construction. Mr Ward voted against the proposal.
The PIA and subsequent developments
On 12 August 2011 Mr Zozi executed the PIA. It was executed by Mr Leroy on 16 August 2011. On 18 August 2011 Insolvency and Trustee Services Australia (ITSA) issued a certificate of appointment acknowledging Mr Leroy’s appointment as trustee of Mr Zozi’s PIA as at 16 August 2011.
In his affidavit of 19 October 2011 Mr Ward appeared to take issue with the conduct of Mr Leroy as trustee of the PIA. However it was clarified by counsel for Mr Ward in submissions that he was not instructed to invite the court to make any adverse finding against Mr Leroy or to seek any costs order against Mr Leroy. In any event, as pointed out by Goldberg J in Re Stuart Stanley McDougall; Ex Parte Policy Nominees Pty Ltd & Martin Alan Thomas [1997] FCA 197 in relation to a trustee’s report, while a trustee has power to make such enquiries and investigations in respect of a debtor’s affairs as the trustee considers necessary (see s.190(2)(b)), a s.189A report must be prepared within a limited time. Goldberg J pointed out in relation to an earlier version of s.189A that the section only required the report to set out such information as was available to the trustee (see s.189A(1)). His Honour suggested that even if there was other information necessary to give a true and fair view of the debtor’s affairs, if that information was not available to the trustee the report would not fail to comply with the predecessor to s.189A simply because it did not refer to it. The same may be said in relation to the requirements of s.189A in its present form.
Further, as Mr Leroy pointed out in his affidavit, while he did not seek or receive further documents or particulars from Mr Zozi in relation to the debts claimed by Mr Touma, Touma Construction or Leinad Developments, he has not yet adjudicated on any proofs of debt for the purposes of declaring a dividend to unsecured creditors.
A number of matters of relevance in the present proceedings have come to the attention of Mr Leroy since the execution of the PIA. Mr Leroy attested to the fact that he now has information from an estate agent indicating that (apart from the offer of 10 June 2011 which was not proceeded with) some time between 1 February 2011 and 31 April 2011 an estate agent acting for Mr and Mrs Zozi had received an offer to purchase the Hurstville property in the sum of $800,000. This offer was rejected by Mr and Mrs Zozi.
Further, notwithstanding Mr Zozi’s declaration in his SOA that he had not been a party to any family law property or spousal maintenance agreement and that he was not presently involved in any family law property or spousal maintenance proceedings, on 29 November 2011 Mr Leroy received correspondence from solicitors said to be acting for Mrs Zozi requesting that he provide a withdrawal of caveat to allow refinancing of the Hurstville matrimonial home, in accordance with a Family Law Financial Agreement. A copy of a document described as a draft Family Law Financial Agreement (the Financial Agreement) was provided to Mr Leroy and is in evidence. It provided for insertion of a date in 2011. Mr Leroy unsuccessfully attempted to obtain further information from these solicitors.
In cross-examination Mr Zozi confirmed that he had signed an agreement in the form of the draft Financial Agreement under s.90C of the Family Law 1975 (Cth) sometime after entering the PIA.
The Financial Agreement recited that Mr Zozi was sole director and shareholder of Z & M (although I note that he had a one-third holding as at the time of the Trustee’s report). He was said to be the registered proprietor of three (sic) motor vehicles and the sole owner of a David Jones credit card (which, it emerged, was issued after the SOA was signed). It was also disclosed that Mr and Mrs Zozi had a joint Commonwealth Bank account and jointly owned the Hurstville property. No reference was made to any other bank account. In a Schedule of Property attached to the Financial Agreement, the Hurstville property was said to have an estimated value of $850,000. A mortgage in the amount of $600,000 was disclosed. The three vehicles were said to have a total estimated value of $43,000. Mr Zozi’s shares in Z & M were said to have an estimated value of $200,000 while his superannuation was estimated at $15,000. Mr Zozi was said to have a car loan of $5,000 and a David Jones American Express card liability of $3,000.
These assets and their estimated net values do not accord with those disclosed in the SOA.
Mr Leroy also gave evidence that Mr Zozi had defaulted under the terms of the PIA. Letters were sent to him dated 1 September 2011, 23 September 2011 and 28 October 2012 in relation to the first default which was remedied upon the payment of the sum of $11,618.22 on 1 November 2011. A letter in relation to the second default was sent on 19 January 2012. Payment in the sum of $1,157.80 was made on 30 January 2012.
Mr Zozi’s evidence
Mr Zozi swore an affidavit in these proceedings on 21 March 2012 in which he responded to the applicant’s written submissions. He was also cross-examined. Mr Zozi accepted that some of his payments under the PIA had been late but attested that at the time of his affidavit the payments were “current and up to date”.
He gave evidence that, at the suggestion of Mr Touma, he “was taken to” a lawyer to prepare a Family Law Financial Agreement with his wife, from whom he was separated, and that he signed such an agreement. He undertook not to commence family law proceedings in relation to the agreement or to enforce it.
His evidence was that Z & M, which he described as “[m]y company”, was still trading and that he earned between $80,000 and $120,000 per annum from Z & M.
According to Mr Zozi the only two transactions he had engaged in during the last 12 months whereby ownership had changed were a transfer of his Toyota Kluger vehicle to his wife five or six months previously and transfer of registration of the work vehicle (listed in the SOA) from his previous company (Z & M Parquetry Flooring Pty Ltd which was not referred to in the SOA) to Z & M in November 2011. He stated that he had never owned the work vehicle personally and that it was not registered in his name at the time he completed the SOA. He disclosed an order for possession in favour of the mortgagee over the Hurstville property and a writ of possession requiring him and his wife to vacate the property.
In cross examination Mr Zozi confirmed that all his earnings were from Z & M Floors, that he earned from $80,000 to $120,000 gross per annum and that his earnings had improved since July 2011. He told the court that he was no longer a shareholder in Z & M and that after he entered the PIA his sons had become the sole owners of Z & M.
Mr Zozi explained that he had seen a lawyer about a Family Law Financial Agreement with his wife some five to six months before March 2012 (that is, after he executed the PIA). As indicated above, he acknowledged that he had signed an agreement in the form of the draft Financial Agreement in evidence before the court. He confirmed that the estimated values for assets were correct in that agreement and that he had not changed any matters in the Schedule of Assets and Liabilities before signing the Financial Agreement.
Mr Zozi was unable to explain why he had estimated his superannuation at $20,000 in his June 2011 SOA and $15,000 in the later Financial Agreement, except to indicate that his accountant told him about his superannuation and that he had cancelled life insurance and changed a few things.
Mr Zozi agreed that in February 2011 (when he wanted $890,000 for the Hurstville property) the estate agent with whom he had signed a sales agreement told him the estimated selling price should be $800,000. He also explained that the estimate of $610,000 in the SOA was based on a bid that had been received at an auction that was held some two years earlier.
In relation to the debt said to be owed to Mr Touma, Mr Zozi claimed that he kept a record on a piece of paper, but that he did not know the whereabouts of that record. He claimed that all the payments he received from Mr Touma were in cash and that he had not banked the money, but had used it at a time he was having “difficulties” to pay bills and a judgment debt. He agreed there was no date to repay Mr Touma. He said he was supposed to pay interest on the loan. He did not know the amount and was going to ask Mr Touma when he had the money. Mr Zozi confirmed that there was no repayment date for the loans from Touma Construction and Leinad Developments.
Mr Zozi explained that he did not include the loans from Mr Touma and Leinad Developments in his statutory declaration about his financial circumstances of 18 May 2009 because he was going to pay Mr Touma and did not think he had to put those things in. In re-examination he said he had not included anything from a business.
Mr Zozi also admitted in cross-examination that he had omitted debts owed to Telstra and to some trade suppliers from his SOA. He explained this on the basis that it was not a big amount of money and he thought he could pay these creditors, which he said he had done.
Mr Touma’s evidence
Mr Touma also swore an affidavit on 21 March 2012 on his behalf and on behalf of Touma Construction and Leinad Developments, which he said he controlled. He attested that he did not regard it as in his interests personally nor in the interests of the companies he controlled for the PIA to be terminated and a sequestration order made against Mr Zozi. He was “content” for Mr Zozi to continue to make payments pursuant to the PIA.
Mr Touma gave oral evidence that some of the funds advanced to Mr Zozi were given direct to him and some used to pay bills on behalf of Mr Zozi. Contrary to Mr Zozi’s evidence, Mr Touma said that payments to Mr Zozi were made both by cheque and cash. Mr Touma gave evidence that all his personal files and the files of his companies had been in the possession of the accountant. However he then said that he had retained the invoices and letters in relation to Mr Zozi’s debts because he had all the bills for which they were chasing people. The only action he had taken in relation to chasing Mr Zozi was phone calls and talking to him.
Mr Touma gave evidence that the police were also investigating the affairs of Touma Constructions and Leinad Developments, that the companies had been “frozen” until the investigation was finished, that they were not presently trading and that he was semi-retired.
Contrary to Mr Zozi’s evidence, Mr Touma said that no interest was payable on the personal loans (totalling $95,000) to Mr Zozi. Mr Zozi was supposed to repay “some amount” every month. The company loans were to be paid “as soon as he had funds available”. Mr Zozi was a client of Mr Touma and Leinad Developments and had also provided services to Leinad Developments in the past.
Section 222(5)
The applicant submitted that Mr Zozi had omitted a material particular from his statement of affairs and/or had included an incorrect and material particular in that statement within s.222(5)(e) of the Bankruptcy Act. The applicant bears the burden of establishing on the balance of probabilities that there was an omission of a material particular or an inclusion of an incorrect and material particular in the statement of affairs within s.222(5)(e) (see Re Mcdougall; Ex parte Policy Nominees Pty Ltd v Thomas [1997] FCA 197).
In determining whether a particular has been omitted from the SOA, it is necessary to have regard to the context of the questions asked in the SOA. The materiality of the contents of the SOA and whether there is an omission is to be determined at the time the SOA was received by the creditors (Re McDougall). As von Doussa J stated in Re Cufari and Another; Ex Parte Commissioner of Taxation v Huppatz (1992) 34 FCR 544; [1992] FCA 95 at [19]:
A particular is "material" within the meaning of para.222(4)(b) if it is a particular which would be relevant to and might be likely to affect the making of a decision by the creditors: Re Segal; Lensworth Finance Ltd v. Segal and Ward (1975) 9 ALR 154; Beard v. Prestige Baking Industries Pty Ltd and Anor [1981] FCA 97; (1981) 36 ALR 307 at 319 per Fox J., 336-7 per Lockhart J. and 342 per Sheppard J. The test is an objective one. The sub-section does not require that a mis-statement be made "knowingly". In Re Segal; Lensworth Finance Ltd v. Segal and Ward, Riley J. said at 157 that it is essential that the information contained in the statement of affairs be "full and correct: the creditors are entitled to all available information about the debtors' conduct, trade dealings, property (and) affairs before they make their decision".
In Re Cufari von Doussa J held in relation to the predecessor to s.222(5) that a failure to make a proper estimate of income tax due constituted a material omission (at [21]) and also that the inclusion of an inadequate estimate was an inclusion of an incorrect and material particular in a statement of affairs (at [23]).
It was contended that s.222(5) of the Act applied in several respects. First, it was asserted that Mr Zozi included an incorrect and material particular in the SOA in relation to the estimated value of the Hurstville property, having regard to marketing of the property at $845,000 and the rejection of an offer of $800,000 shortly before the date Mr Zozi completed his SOA.
The value of Mr Zozi’s interest in his home, his most significant asset, is clearly material in the Re Segal sense. It cannot be said that there was no basis for the estimated value of $610,000 in the SOA insofar as it was based on the amount of the last bid received at an earlier unsuccessful auction of the property. However even in his 2009 Statutory Declaration Mr Zozi estimated the value of the property at $650,000. A purchaser willing to pay $800,000 for the property was found in early 2011. Mr and Mrs Zozi rejected the offer. The property was subsequently listed for sale in 2011 at $845,000. In the 2011 Financial Agreement it was said to have a value of $850,000.
What is in issue under s.222(5) is whether the estimated value was “incorrect”. The test is objective. The appraisals obtained by Mr Leroy indicate an estimated “average” resale value for the Hurstville property in the order of $728,333. However there is no valuation of the property in evidence before the court. The evidence before the court is sufficient to raise considerable concern about whether the estimated value of $610,000 for the Hurstville property in the SOA was an adequate estimate (see Re Cufari). However in Re Cufari there was evidence of later income tax assessments against which the adequacy of an estimate by the debtor of income tax liability could be assessed objectively. In this case I am not satisfied on the evidence before the court that it has not been established that the figure provided by Mr Zozi was, strictly speaking, “incorrect” within s.222(5) of the Act. Nonetheless, the evidence in relation to the listing, sale offer and value of the Hurstville property is of particular relevance under s.222(1) as discussed below.
It was also submitted that there was an incorrect particular within s.222(5) in the SOA in relation to Mr Zozi’s income. The part of the SOA containing the applicant’s statement about his income for the previous financial year is not before the court, but it is not in dispute that, as stated in the Trustee’s report, in his SOA Mr Zozi declared that his gross income over the 12 months immediately preceding the appointment of the controlling trustee was between approximately $25,000 and $35,000, derived from self-employment as a carpenter with Z & M. He also estimated that his gross income over the next 12 months would be between approximately $25,000 and $30,000. Issue was taken by the applicant with this estimate of future income on the basis that in his affidavit sworn on 21 March 2012 Mr Zozi claimed that he earned between $80,000 and $120,000 per annum from Z & M. On this basis it was contended that there was an incorrect material and particular in the SOA.
There is no evidence before the court (such as an income tax return or other financial records) in relation to Mr Zozi’s actual earnings for the financial year 2010-2011. However, Mr Zozi’s income tax returns for the financial years ending 30 June 2009 and 30 June 2010 were referred to by the Trustee in his report as indicating that Mr Zozi’s income was in the order of $34,000 and $41,000 for the 2009 and 2010 financial years respectively. Mr Zozi’s earnings are “material”, particularly having regard to the possibility of a contribution from income in the event of bankruptcy. However Mr Zozi’s disclosure as at March 2012 that his current earnings were in the order of $80,000 to $120,000 per annum is not such as to establish that he included an “incorrect” particular in the SOA signed on 20 June 2011 and provided to creditors shortly thereafter in relation to the amount of his income for 2010-2011 or his estimate of future income. The discrepancy between the estimate in the SOA and Mr Zozi’s admitted income is relevant in relation to the exercise of the discretion under s.222(1) of the Act. Mr Zozi’s present earnings are such that, contrary to the position on the evidence available at the time of the Trustee’s report to creditors, he would be in a position to make a contribution from his income if he were to be bankrupt. This factor is considered further below in relation to s.222(1) of the Act.
Issue was also taken with Mr Zozi’s disclosure of the value of his shares in Z & M Floors Pty Ltd. In the SOA Mr Zozi indicated in response to Q.29 that he did not own any shares. However in response to Q.43 he disclosed that he was a director of Z & M and that he owned or had owned shares in the company (the number of which was described as “TBC”). He did not otherwise disclose to the Trustee the number of shares owned or provide any estimate of the value of those shares or disclose any sale of the shares.
It was submitted first that Mr Zozi had omitted a material particular from the SOA because he did not disclose that, as the Trustee later discovered and as Mr Zozi confirmed, at the date Mr Zozi signed the SOA the shares in Z & M were owned a third by himself and one third by each of his two children. Of itself, the failure by Mr Zozi to disclose that he held only one third of the shares does not necessarily amount to an omission of a “material particular” that would be relevant to and might be likely to affect the making of a decision by the creditors. Obviously the relevance of the number of shares held would be affected by the value of the shares.
In that context, counsel for the applicant referred to the fact that there was a difference between the value attributed to such shares in the Trustee’s report and in the later Financial Agreement. After the Trustee had, by search of the Australian Business Register, identified that there were 30 ordinary shares in the company valued at $1 each and that Mr Zozi held 10 ordinary shares, on the basis of Z & M’s financial and income tax returns for the period ending 30 June 2010 (shortly after it was registered) the Trustee reached the view that it appeared that Mr Zozi’s one third interest in Z & M as at 30 June 2010 was approximately $2921.67. However in the Financial Agreement signed in 2011 Mr Zozi estimated the value of his shares in Z & M at $200,000. He also described himself as the sole shareholder in Z & M, which raises an issue about whether there was a subsequent transfer of assets. Somewhat confusingly, in cross-examination he told the court he was no longer a shareholder in Z & M and that his sons were now the owners of the company.
The Trustee’s estimate of value was determined on the basis of the information obtained by him. It was not based on information provided in the SOA. It is the case that Mr Zozi did not attribute any value to his shareholding in Z & M Floors in the SOA. However it cannot be said that Mr Zozi included an incorrect particular in this respect. In one sense there could be said to be an omission of a particular. However Mr Zozi included in the SOA “TBC” (which I take to be an abbreviation for ‘to be confirmed’) in relation to his shareholding in Z & M. In circumstances where, on the Trustee’s view of the then available financial records for Z & M for the year ending 30 June 2011, the value of Mr Zozi’s proprietary interest in such shares was in the order of only $2,921.67, it has not been established that Mr Zozi omitted a material particular from the SOA (see Re McDougall). Despite Mr Zozi’s estimate of the value of his shareholding at $200,000 in the subsequent Financial Agreement, this estimate is not proper evidence of the actual value of the shares such as to warrant a conclusion that there was an omission of a material particular. Nor am I satisfied that the response “TBC” was an inclusion of an incorrect particular.
The discrepancy as to value and ownership of the Z & M shares does, however, suggest that further inquiries in relation to this asset may potentially be of benefit to creditors. Such circumstances are relevant in relation to whether an order should be made under s.222(1) of the Bankruptcy Act, but I am not satisfied that it has been established that the debtor omitted a material particular from the SOA or included an incorrect and material particular in that statement. Insofar as it appeared to be asserted that Mr Zozi had given misleading information to the Trustee I note that what is in issue under s.222(5)(e) is the content of the SOA, not other information provided to the Trustee.
As indicated, the Deputy Commissioner of Taxation lodged a proof of debt in the sum of $1,916.37. It is not in dispute that Mr Zozi omitted the debt he owed to the ATO from his SOA. While this was undoubtedly an omission of a particular from the SOA, I am not satisfied that it was a material particular in the sense considered in Re McDougall when regard is had to the relatively insignificant amount of this debt compared to the overall indebtedness of $281,000 disclosed by Mr Zozi.
It is of more concern that in addition, other debts to Telstra and trade creditors which Mr Zozi said he had subsequently paid were omitted from the SOA. There is no evidence before the court as to the number of such creditors or the total indebtedness not included in the SOA. In such circumstances I cannot be satisfied that each of these omissions was “material” in the requisite sense. Nonetheless such omissions and inconsistencies are, as discussed further below, relevant in relation to whether the PIA should be set aside under s.222(1) of the Act.
Finally, the applicant submitted that there was a material omission from the SOA of the amount in a bank account operated by Mr Zozi. In his SOA of 20 June 2011 Mr Zozi disclosed a bank account with St George Bank said to have a current balance of $900. However the Trustee’s investigations revealed that as at the earlier date of 28 May 2011 that account had a balance of $5,441.28. There is, however, no evidence before the court as to whether there were transactions on the St George bank account between the end of May and 20 June 2011 such as to establish that as at the relevant date (20 June 2011) there was an incorrect particular in relation to the amount in that bank account.
Notwithstanding that there was not full and complete disclosure in the SOA, it has not been established that the debtor omitted “a material particular” from the SOA or included an incorrect and material particular in that statement. There is no suggestion that s.222(5) permits aggregation of omissions in order to assess materiality. Hence it is not necessary to consider whether I am satisfied that it would be in the interests of the creditors to make an order under s 222(5) of the Bankruptcy Act as required by s.222(6).
Section 222(1) of the Bankruptcy Act
That leaves the issue of whether the PIA should be set aside under s.222(1) of the Bankruptcy Act on the basis that the court is satisfied that the terms of the agreement are unreasonable or not calculated to benefit the creditors generally or that for any other reason the agreement ought to be set aside.
In Westpac Banking Corporation v Hingston and Another (No. 2) (2010) 117 ALD 552; [2010] FCA 1116, Cowdroy J considered a number of authorities in relation to s.222(1)(d). The approach taken by his Honour was upheld on appeal (see Hingston v Westpac Banking Corporation (2012) 200 FCR 493; [2012] FCAFC 41). The Full Court found at [93] that Cowdroy J had “proper regard to the principles governing the exercise of the discretion [under s.222(1)] and properly applied those principles to the evidence before him”. The approach taken by Cowdroy J has also been referred to with approval in other decisions (see in particular Osborne v Gangemi [2011] FCA 1252 and Moran v Robertson [2012] FCA 371).
In Hingston v Westpac (at [58]) the Full Court of the Federal Court summarised the principles correctly outlined by Cowdroy J at first instance as follows:
As to those principles, the primary judge considered that in assessing whether the composition is unreasonable, or not calculated to benefit creditors generally, the Court has regard to the amount of the composition as compared with the debts owing by the debtor (at [68]); in making that comparison the relativity between the amount of the debts incurred and the proposed composition might suggest that the proposal is so trivial or so disproportionate (as, for all practical purposes, the creditors are receiving nothing or a negligible amount) that the administration of the estate is “better dealt with by way of bankruptcy” (Re Richards) with an investigation by the Trustee in bankruptcy exercising relevant powers: Re Richards: Ex parte Beneficial Finance Corporation Ltd [1986] FCA 74; Re Brennan: Ex parte Stokes (Australasia) Ltd (unreported FCA 31 May 1988, per Morling J); Re Codrington: Ex parte Don McKay Tourist and Charter Pty Ltd [1989] FCA 349; Palazzolo v Ex parte Discusso [1991] FCA 317; NZI Capital Corporation Limited v Lancaster [1991] FCA 334; (1991) 30 FCR 441 (see [69] to [74] of the principal judgment); the relativity of the amount of the debts owing, to the proposal made, is relevant but not determinative: Re Lockett: Ex parte Northern Equity Ltd and Others [1992] FCA 142; whether any payments have been made to creditors or to the Trustee of the bankrupt estate is also relevant (at [77]); and, the nature of the relationship between the debtor and those creditors who voted in favour of the composition is relevant (at [77]).
Before turning to the facts of this case, it is also relevant to note that, as Bromberg J pointed out in Osborne v Gangemi, the very wide discretion under s.222(1) (whether reliance is placed on subs.1(d) or 1(e)) “…ought to be exercised cautiously and always with the objectives of Part X of the Bankruptcy Act as a whole in mind” (at [43]). His Honour pointed out that a personal insolvency agreement was a useful means of dealing with personal insolvency where “a genuine accommodation can be made with that individual’s creditors”. However, as his Honour stated at [43]–[46]:
The will of creditors, when exercised reasonably and in the interest of all creditors generally, will usually provide a sure and safe path to achieving the best result out of a bad situation. The qualifications upon the court’s discretion found in s 222(1)(d) both reveal and reflect the Bankruptcy Act’s intent that creditors generally, rather than some but not others, benefit from an agreed composition dealing with the debtor’s insolvency. A practical, common sense approach should be adopted to the exercise of the discretion, bearing in mind that what s 222(1) calls for is a global assessment of the kind that creditors are called upon to make when they themselves are considering the utility of a PIA.
In making their own considerations, reasonably minded creditors will assess the potential benefit of a proposed PIA against the alternative of the debtor’s bankruptcy. The fundamental question will be whether and to what extent the composition will likely be improved upon so that the alternative of bankruptcy be insisted upon by the creditors. That assessment will be influenced by many factors. The principal amongst them is likely to be the extent to which creditors may properly be satisfied that the proposal on offer reflects a fair and honest attempt by the debtor to address his or her debts. The extent to which creditors are able to know the true financial position of the debtor will be an important consideration, particularly if bankruptcy offers the potential for creditors to be put in a better position to know. The amount available for distribution under the proposed PIA is likely to be a very significant factor in the making of any reasonable assessment.
It is not surprising, then, the large number of decisions of [the Federal] Court have come to the view that a composition ought to be set aside as unreasonable, where creditors are getting almost nothing from the composition in the circumstances where investigative procedures available upon a bankruptcy to properly examine the debtor’s affairs, gives some hope of a superior result …
Where the benefit provided under the composition to unsecured creditors is negligible and the discrepancy between that benefit and the amount of the total indebtedness of the debtor is substantial, that in itself may be cause for the court to set aside the composition, although the authorities indicate that such a discrepancy per se is not necessarily determinative: Westpac Banking Corporation at [97] (Cowdroy J).
In Moran v Robertson (at [15]) Flick J stressed the importance under s.222(1)(d) of consideration being given to matters that concern the terms of the PIA, that is to say facts which were in existence (whether known or not) at the time of the passing of the special resolution of the creditors and whether in that context the terms were unreasonable or not calculated to benefit creditors generally (and see Khera v National Australia Bank Ltd (1996) 71 FCR 133 at 146; [1996] FCA 1050 per Lockhart and Hill JJ). Insofar as it is contended that the terms of the PIA are unreasonable, I have borne in mind that what is unreasonable in a particular case will depend upon the factual context. Previous cases may provide a guide, but cannot be decisive of the outcome (see Re Agushi; Farrow Mortgage Services Pty Ltd (In Liq) v Cole (1992) 8 ACSR 549; [1992] FCA 440).
However Flick J also considered and summarised in some detail some of the factors generally relevant to the exercise of the power to set aside a personal insolvency agreement under s.222(1) that had been considered in earlier cases or under predecessors to s.222(1). His Honour pointed out that the judicial consideration of such factors to which he referred did not purport to be exhaustive or to suggest that any of the factors in question would be conclusive (at [17]). However, his Honour was of the view that factors considered in Re Mills; Ex Parte Lloyd’s (1997) 73 FCR 551 at 559 – 561, were “apposite” to the exercise of the discretionary power in the present s.222(1) of the Bankruptcy Act.
In Re Mills Merkel J referred to the following factors in relation to setting aside a composition (at 559-560):
(a) Whether, after considering all the circumstances of the case, a greater opportunity to inquire into the debtor's affairs and a more comprehensive explanation by the debtor were called for: see Re Doukidis; Ex parte Consolidated Constructions Pty Ltd (unreported, Toohey J, 26 June 1985) at p 15. In Mendelson v Lelleton (unreported, Federal Court, Lindgren J, 6 November 1996), Lindgren J observed at p 38 that where there is cause for investigation of the debtor's dealings the interests of unsecured creditors and the public interest would be served by the investigation being conducted by a trustee in bankruptcy armed with the coercive power provided by the Act.
Further, in Re Bendel; Ex parte Lowe Lippman (A Firm) (unreported, Federal Court, Merkel J, 19 April 1996) I concluded that where serious issues are raised about preferences to some creditors, dissipation of assets, the validity or enforceability of "loans" from associated parties and, in particular, whether any "friendly" debts were intended to create legal relations, a sequestration order rather than a composition is the more appropriate vehicle for resolving such issues.
(b) If circumstances arise which "give cause for a suspicion" or to "arguable" causes of action which may benefit creditors then that can suffice to set aside the composition: see Mendelson at p 33. It is not necessary to establish that the creditors will be, or even are more likely to be, advantaged by bankruptcy rather than the composition. It is sufficient if bankruptcy will afford:
“a prospect or possibility of economic advantage to creditors sufficient to justify the conclusion that it is in their interests to make the declaration.” per Jenkinson J in Augustyn v. Putnin (1988) 83 ALR 514 at 515.
In Augustyn, French J (with whom Spender J agreed), in explaining why "a real possibility of a financial benefit" to creditors was sufficient, said (at 521-522):
“And although in Re Doukidis; Ex parte Consolidated Constructions (unreported, Federal Court, Toohey J, 26 June 1985), Toohey J said that ‘it is enough if the evidence justifies an inference that there are likely to have been assets and that the creditors may be better off if the composition is set aside’ (a dictum repeated in Re Brown; Ex parte Humes Ltd (1987) 16 FCR 378 at 384 per Pincus J), it does not follow that the court must be satisfied on the balance of probabilities that there will be a financial benefit to creditors from an order avoiding or setting aside a deed.
…
In my opinion, his Honour the trial judge in the present case was entitled to form the view that the orders sought would provide the creditors with an opportunity to further investigate the appellant's position and that it was in their interests to do so.”
See also Re Cufari at 551-552.
(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: see Re Richards; Ex parte Beneficial Finance Corporation Limited (unreported, Jackson J, 17 March 1986) at pp 3 and 6 and Mendelson at p 32.
(d) A Court may be more disposed to set aside a composition if no payments to creditors have been made pursuant to the composition: see Raschilla v Gulluni (1987) 14 FCR 57 at 70.
(e) A composition passed, inter alia, on the basis of a report to creditors as to the debtor's financial affairs which is misleading will also be a relevant factor: see Re Cufari at 549.
In Moran v Robertson Flick J recognised that this was not an exhaustive list and that it had not been suggested that any one factor would be conclusive. His Honour added (at [17]) as further relevant factors:
· whether creditors who have voted in favour of a proposed insolvency agreement have indicated that they would not participate in any distribution of assets and, to the extent that it is known, the reasons for their non-participation; and
· whether the controlling trustee recommends the acceptance or rejection of the proposed insolvency agreement and the factual basis for that recommendation.
Flick J accepted that consideration could be given to the amount payable pursuant to a personal insolvency agreement compared to the debt and discussed cases in which this had been of significance (see in particular in Westpac Banking Corporation v Hingston and in Osborne v Gangemi). However his Honour pointed out (at [18]) that such a consideration was only one of the factors to be taken into account.
It is notable that circumstances that are raised under s.222(5) may also give rise to issues under s.222(1) of the Act. One significant difference is that the express limitation in s.222(6) that the court must not make an order under s.222(5) unless satisfied it would be in the interests of the creditors to do so does not apply to the discretion to set aside a PIA under s.222(1) of the Act.
In support of the proposition that the terms of the PIA were not reasonable or were not calculated to benefit the creditors generally or that for any other reason the PIA ought to be set aside the applicant placed reliance on a number of factors. In particular, it was submitted that any distribution likely to result from the PIA was so trivial that it was preferable that Mr Zozi be made bankrupt so that access could be gained to the relevant investigatory procedures open to a trustee in bankruptcy (see NZI Capital Corporation Limited v Lancaster (1991) 30 FCR 441 at 445; [1991] FCA 334 and Re Roger Lonsdale Lancaster v Nzi Capital Corporation Limited and the Official Trustee In Bankruptcy [1991] FCA 471).
It was also submitted that it was in the public interest that there be a proper examination of the affairs of Mr Zozi in bankruptcy (see s.222(1) of the Bankruptcy Act and Re Brennan; Ex parte Stokes (Australasia) Ltd [1977] FCA 833; Re John Codrington; Ex Parte: Don Mckay Tourist & Charter Pty Limited v John Codrington [1989] FCA 349; Re Palazzolo Ex Parte: Discusso; Chalk; Chalk; Vaaca; Vaaca; Saggin and Saggin Trading As Southern Cross Produce and Newstart 259 Pty Limited Trading As Global Fruit Supply v Palazzolo and Sistrom [1991] FCA 317; and Re Alan Kevin Lockett Ex Parte: Northern Equity Limited and R and I Bank of Western Australia Limited [1992] FCA 142).
The applicant referred to the fact that under the terms of the PIA there is no procedure for an examination to be conducted of the debtor or of any other party to determine issues associated with the “examinable affairs” of Mr Zozi. This was said to be of importance in circumstances where (as set out above) there had not been full and complete disclosure in the SOA. It was also pointed out that under the PIA the only property available to creditors would be the limited contribution in monetary terms paid over an extended period of time by Mr Zozi in return for relief of substantial claims against his estate in circumstances where it was said to be apparent that Mr Zozi’s income was more substantial than he had disclosed in his SOA and where he had not accurately disclosed his assets and liabilities.
Particular issue was taken by the applicant with the extent of disclosure by Mr Zozi in his SOA having regard to each of the matters discussed above in relation to s.222(5) of the Bankruptcy Act as well as the other apparent discrepancies that emerged in relation to the extent and value of Mr Zozi’s assets and liabilities. Counsel for the applicant suggested there was a need for investigation of the affairs of Mr Zozi in light of the limited information he had provided and the inconsistencies in the evidence about his financial situation in the material before the court. He pointed to the difference between Mr Zozi’s disclosure of his personal situation in his statutory declaration of 18 May 2009 as including a personal debt of only $22,000 and the disclosure in the SOA of relatively substantial personal debts of $95,000 to Mr Touma, $57,000 to Leinad Developments and $55,000 to Touma Construction.
Reference was also made to the evidence of delayed compliance with the terms of the PIA by Mr Zozi at an early stage and the fact that there was a Financial Agreement under the Family Law Act that had been signed by Mr Zozi which had not been disclosed to the trustee and which raised issues about the value and extent of Mr Zozi’s assets. It was suggested that substantial liabilities may have been incurred without any proper regard to underlying assets. It was also said to be relevant that Mr Leroy, the controlling trustee, had recommended against the PIA.
Counsel for Mr Zozi contended that Mr Ward must impugn the veracity of the claimed debts owned to Mr Touma, Leinad Developments and Touma Construction in order to succeed on this application, as if he did not he would not be able to demonstrate that Mr Zozi’s creditors generally (of which the Touma interests accounted for the majority) would be “better off” with the PIA set aside than if it was not. However that is not the test under s.222(1) of the Act.
Insofar as counsel for Mr Zozi relied on the authority of Re Williamson and Another; Ex parte Wearne and Others (1980) 43 FLR 305; [1980] FCA 90, it was in the context of the predecessors to ss.222(5) and 222(6) of the Bankruptcy Act that Lockhart J accepted that an order could not be made under the equivalent of s.222(5) unless the court was satisfied that it was in the interests of the creditors to do so. As indicated, this limitation does not apply to s.222(1) of the Act, albeit the interests of creditors are relevant to the exercise of the discretionary power in s.222(1) (see Re Mills at 559 and Moran v Robertson at [17]). Moreover it is not necessary to establish that the creditors “will be, or even are more likely to be, advantaged by bankruptcy” rather than under the PIA (Re Mills at 560). I have, however, borne in mind the need for caution in exercising the discretion under s.222(1), consistent with the objectives of Part X of the Bankruptcy Act and the Act as a whole and the remarks of Bromberg J in Osborne v Gangemi (at [43]–[44]) and Flick J in Moran v Robertson (at [23]).
Counsel for Mr Ward did not rely on the proposition that the Trustee should not have admitted the proofs of debt from Mr Touma, Touma Constructions and Leinad Developments for the purposes of voting or suggest that the court could be satisfied that Mr Zozi was not indebted to Mr Touma and his companies as claimed. Rather, what was suggested was that in all the circumstances further inquiry was warranted for various reasons, including the concerns raised by inconsistencies in the disclosure in this respect and the limited information about those debts.
In his SOA Mr Zozi disclosed a loan of $95,000 in 2010 from Mr Touma. Mr Touma’s evidence (with which Mr Zozi now agrees) is that there were a number of loans made to him by Mr Touma between September 2007 and November 2008. However Mr Zozi did not disclose personal loans of $95,000 in his 18 May 2009 Statutory Declaration. Mr Zozi’s evidence is that the loans from Mr Touma were cash payments that were used to pay bills, a judgment debt and to spend, in contrast to his advice to the Trustee that this loan was applied to purchasing supplies for Z & M. Mr Touma’s claim to the Trustee was that the $95,000 loan was by way of paying bills for Mr Zozi and giving him cash amounts. However in cross-examination Mr Touma said that some of the payments were by cheque. Mr Zozi’s evidence was that he was supposed to pay some interest on these loans. Mr Touma said in cross examination that there was no interest payable.
Furthermore, while Mr Touma provided some supporting documentation about those loans to the Trustee, in cross-examination he initially stated that “all” his personal files and those of his companies had been with his accountant who was being prosecuted by the ATO and had been with him since before 22 July 2011 (the date he provided letters and invoices to the trustee). However he subsequently claimed he retained all the bills they were “chasing people with” and that he was chasing Mr Zozi (by phoning and talking to him, but not by legal action). Mr Touma’s claim that some payments were in cash and some by cheque could not be substantiated as he did not have the cheque books used to make such advances to Mr Zozi. These were also said to be with the police.
Mr Ward also raised an issue as to whether the incorporation of Touma Construction post-dated the asserted indebtedness to that entity on the basis that in his SOA Mr Zozi disclosed that a debt to Touma Construction was incurred in 2009. Touma Construction was not incorporated until 14 July 2010. Mr Touma claims that the liability to Touma Construction did not arise until September 2010. This reveals an error in the 2009 date provided by Mr Zozi in the SOA.
The evidence about these transactions is such as to suggest that there is a need for further investigation of these claimed debts. The conflicting evidence raises serious issues about the validity and enforceability of such “loans” and about whether such “friendly” debts were intended to create legal relations (Re Mills at 559). As Merkel J stated in Re Mills (at 560), a sequestration order rather than a PIA is the more appropriate vehicle for resolving such issues.
It is also relevant to have regard to other variations in and conflicting evidence about the extent and value of Mr Zozi’s assets and liabilities. For example, in cross-examination Mr Zozi gave evidence that he had transferred his one-third holding in Z & M to his two sons on undisclosed terms, notwithstanding that his interest in that entity was included as one of his assets in the SOA. He did not disclose the extent of his shareholding in the SOA or its value. While that asset was valued at approximate $2,921.67 by the Trustee on the basis that it was a one third interest and on the limited financial information then available, in the Financial Agreement under s.90C of the Family Law Act that Mr Zozi admitted he had signed later in 2011 (although no family law proceedings had been commenced), Mr Zozi’s interest in Z & M was valued at an estimate of $200,000 and he claimed to be the sole shareholder. The discrepancy between the suggested value made known prior to the creditors’ decision to require the debtor to execute a PIA and the value Mr Zozi attributed to his shareholding in the family law context is of some significance. If the shareholding was of a greater value that may well have been material to the creditors’ decision to vote for the PIA. The significant difference in the estimated value attributed to Mr Zozi’s shares in Z & M and Mr Zozi’s evidence about his shareholding in Z & M are matters which go to suggest that for other reason the PIA should be set aside in the interests of creditors and the public interest. These matters are also relevant in relation to whether it is appropriate to exercise the discretion under s.222(1) of the Bankruptcy Act (notwithstanding that the share transfer appears to have post-dated the PIA and thus may not be within s.222(1)(d) (see Moran v Robertson at [14])).
The disclosure in his SOA was not complete. If Mr Zozi were made bankrupt, access could be gained to investigative procedures open to a trustee in bankruptcy and ss.120–122 of the Bankruptcy Act could apply. That is of particular relevance having regard to the issues about the extent of Mr Zozi’s assets and liabilities.
As indicated, in his SOA Mr Zozi declared that he had not been a party to a family law property or spousal maintenance order or agreement. Mr Leroy’s evidence is that on 29 November 2011 he received correspondence from solicitors who he understood to be acting for Mrs Zozi requesting that he provide a withdrawal of a caveat he had registered on the Hurstville property so as to allow a refinancing of the property in accordance with a Family Law Financial Agreement. They anticipated settlement of the refinancing to take place on or before 5 December 2011. Mr Leroy understood the reference to a Family Law Financial Agreement to be a reference to a binding financial agreement entered into in accordance with s.90C of the Family Law Act. Mr Leroy’s evidence is that prior to receipt of this correspondence he was not aware that Mr Zozi had purported to enter into such a binding financial agreement. Mr Zozi’s evidence in these proceedings as to when he signed the Financial Agreement suggests that Mr Zozi correctly stated that there was no such agreement at the time of the PIA.
However it remains of concern that there was a differences in the value attributed to Mr Zozi’s superannuation in his SOA ($20,000) and in the Financial Agreement ($15,000). In addition, while Mr Zozi now claims he never owned the work vehicle he disclosed in the SOA, he claimed ownership of another vehicle in the Financial Agreement (a 1992 Toyota Soarer) not included in his SOA. His evidence is that since entering the PIA he transferred the Toyota Kluger (the most valuable of the vehicles) to his wife. The value of the loan in relation to this car was said to be $16,000 in the SOA, but only $5,000 in the Financial Agreement.
These factors, taken together, suggest that the creditors did not have full information about Mr Zozi’s financial position when the majority voted in favour of the PIA and support the contention that the PIA should be set aside under s.222(1)(e).
It is also relevant that Mr Zozi admitted in cross-examination that he had not disclosed all of his unsecured creditors in the SOA. He claimed that he had not disclosed such creditors because he intended to pay and had paid them. This would suggest that some creditors have received full payment, whereas others would receive a minimal payment under the PIA. Mr Zozi’s failure to disclose all of his unsecured creditors in the SOA (including the ATO) is a matter of significance in relation to s.222(1)(d) and (e) and the exercise of the discretion under s.222(1) of the Bankruptcy Act.
Insofar as Mr Ward took issue with the value attributed by Mr Zozi to the Hurstville property in the SOA ($610,000), as indicated the Trustee did not accept this as the value of the property. Mr Leroy carried out his own investigations as detailed above, including obtaining estimates from three different estate agents. He provided this information to creditors. However in the context of considering whether there is a real possibility that creditors may be disadvantaged by bankruptcy rather than the PIA and whether the court should exercise its discretion under s.222(1) it is relevant that Mr Zozi valued the property at $610,000 in circumstances where in 2009 he had valued it at $650,000 and, according to Mr Leroy’s report to creditors, the property was at the time of the SOA being marketed for sale via private negotiation in the amount of $845,000. Further, an offer of $800,000 had been rejected by Mr and Mrs Zozi in early 2011 and on 10 June 2011, before Mr Zozi completed his SOA, a purchaser had made an offer in the amount of $845,000, albeit the sale did not proceed as the potential purchaser was unable to raise finance.
In cross-examination Mr Zozi stated that his estimate of the resale value of the property had been the highest bid received at an unsuccessful auction of the property some two years earlier. Nonetheless, even if it cannot be said that he included an “incorrect” material particular in the statement in the absence of valuation evidence, Mr Zozi’s estimate was misleading, having regard to the other evidence of value of which he was aware.
These factors, taken together, establish that there is a need for a greater opportunity to inquire into Mr Zozi’s affairs and, in some respects, a need for more comprehensive explanation by him than would be available under the PIA. The “interests of unsecured creditors and the public interest” would be served (as Merkel J put in it Re Mills at 560) by the investigation being conducted by a trustee in bankruptcy.
Moreover, having regard to Mr Zozi’s evidence about his assets and liabilities, in particular his income, the ownership and value of shares in Z & M and the debts to the Touma interests, there is “cause for a suspicion” or a “prospect or possibility of economic advantage to creditors” in bankruptcy (see Re Mills at 560). The inconsistencies and the conflicting nature of the information available to Mr Leroy give rise to reservations about the reliability of the information which was passed on to creditors. The possibility that further inquiries may expose further assets available to creditors cannot be discounted (Moran v Robertson at [73]). In circumstances where the amount offered under the PIA is trivial there would be no harm of any consequence to the creditors if the PIA is set aside.
Mr Touma (whose company activities are frozen, who is semi-retired and who clearly has a relationship with Mr Zozi that is closer than a pure business relationship) expresses contentment with the PIA. I have taken into account the attitude of Mr Touma and his companies and the contrasting attitude of Mr Ward. The vote in favour of the PIA was based on the vote of the Touma interests. Such creditors cannot be seen as at arms length from Mr Zozi. In any event, the PIA was proposed in circumstances where the creditors did not have complete and accurate information about Mr Zozi’s financial affairs.
Section 222(1)(d) focuses on the terms of the PIA. Under the PIA Mr Zozi was to pay a total of $35,000 by way of a lump sum of $10,000 within seven days of execution of the agreement and the balance of $25,000 by way of 36 equal monthly instalments of $694.45, commencing one month after execution of the PIA. The $10,000 was provided by a third party. Some payments have been made to the Trustee although there is no evidence of any payments to creditors.
Mr Zozi has defaulted under the terms of the PIA. Written notice of default was sent to him by letters of 1 September 2011, 23 September 2011 and 28 October 2011 in relation to the first default and 19 January 2012 in relation to the second default. The first default was not remedied until 1 November 2011. Mr Zozi made a payment on 30 January 2012 in respect of the second default. As at 19 October 2011, Mr Zozi was in default under the terms of the PIA. Interest was charged on the overdue monies. According to Mr Leroy, as at 16 February 2012 Mr Zozi was in arrears in the sum of $7.54 in respect of interest charged in respect of the second default. According to Mr Zozi, by 21 March 2012 his payments were up to date. This is relevant to the exercise of the power under s.222(1). On the other hand, a factor which militates against the exercise of the power is the fact that the PIA has been put into effect to some extent in that payments have been made to the Trustee (although no distributions to creditors have been made). Further Mr Zozi no doubt has a personal interest in maintaining the PIA which provides him with some certainty (Moran v Robertson at [96]).
However it is of significance in this case as part of all the circumstances that, as the trustee pointed out in his report to creditors, any distribution likely to emanate from the personal insolvency agreement is “minimal” having regard to Mr Zozi’s disclosed debts and assets. In that report, prepared on the basis of his estimate of Mr Zozi’s financial position as disclosed in his SOA and following investigations, the Trustee included a comparative table of the dividend estimated to accrue to creditors under the proposed PIA and under any bankruptcy. As Mr Leroy pointed out, the period of bankruptcy administration is generally three years. The PIA is to operate for a longer period. Mr Leroy estimated that the ultimate dividend rate for the creditors under the PIA would be 7.60 cents per dollar and in bankruptcy would be in the order of 4.60 cents per dollar (having regard to the estimate of higher bankruptcy administration costs). However this estimate was made on the basis of information then available about Mr Zozi’s income, assets and liabilities. It is now apparent that in bankruptcy Mr Zozi would be likely to be required to make a contribution from his income.
It is also notable that in comparing the estimated dividend to creditors from the proposed PIA and on bankruptcy, Mr Leroy proceeded on the basis that, in essence, he accepted the figures provided in the SOA except for the estimate of Mr Zozi’s equity in the property at Hurstville. His calculation could not take into account the information now available or the possibility that investigations by a trustee in bankruptcy may reveal further assets or different values for assets which would increase the likely distribution in bankruptcy. It now appears that the PIA was approved in circumstances where the report to creditors was (through no fault of Mr Leroy) misleading as to the debtor’s financial affairs. The prospect of an income contribution by Mr Zozi in bankruptcy as well as the possibility of investigation by a trustee in bankruptcy is also relevant to s.222(1)(e) and to the exercise of the discretion under s.222(1).
Further, and in contrast to the position in Re Williamson where the trustee played a neutral role and brought nothing to the attention of the court supportive of the case for the applicant, in this case Mr Leroy had and maintains the opinion that the PIA is not in the interests of creditors. It is relevant to have regard to the views of the controlling trustee in relation to whether creditors’ interests will be better served by accepting a PIA proposal rather than bankruptcy of the debtor. Mr Leroy was of the view that the creditors’ interests would not be better served by accepting the PIA proposal rather than bankruptcy. He did not recommend that creditors vote in favour of the PIA. The reason given was that “the commercial outcome for participating creditors” of the PIA in the amount of 7.60 cents was “minimal”, although it was acknowledged that it may have merit to the major creditors who would receive the largest dividend given the size of certain “alleged claims”.
As Mr Leroy pointed out, the investigative powers of the Trustee are greater in bankruptcy although, as he observed, any serious anomaly in the PIA would be reported to creditors and, if necessary, the court, and may provide the basis to terminate the PIA.
Bankruptcy also provides for the realisation of after-acquired property and income contributions during the minimum three year period of a normal bankruptcy. On the evidence before the Trustee at the time of preparation of his report, his understanding was that the debtor was earning a gross income of $35,000 annually. In that context Mr Leroy suggested that there was a strong possibility that Mr Zozi may not earn sufficient income to be liable for income contributions as a bankrupt. On the basis of Mr Zozi’s recent evidence about his current earnings, he would in fact be in a position to make an income contribution. There is insufficient evidence before the court to conclude that this was the case at the time of the PIA but this factor is relevant to the exercise of the court’s discretion. More generally, given the inadequacy of Mr Zozi’s financial disclosure, the PIA cannot be said to be a “fair and honest attempt” to address his debts (Moran v Robertson at [22]).
As indicated, insofar as it was contended that the applicant had to demonstrate that creditors would be better off if the PIA was set aside, that is not the test. What is in issue under s.222(1)(d) of the Bankruptcy Act is whether the terms of the agreement are unreasonable or not calculated to benefit creditors generally. Section 222(1)(e) is more broadly expressed. There is no additional requirement that the court must not make an order unless it is satisfied that it would be in the interests of the creditors to do so. The court has a discretion which must be exercised in light of all the circumstances (see Moran v Robertson and Westpac v Hingston).
Conclusion
The amount available for distribution under the PIA is negligible when compared to the total debts presently known. Mr Zozi’s affairs call for further investigation. While it has not been established that the various deficiencies in his statement of affairs were individually within s.222(5) of the Bankruptcy Act it is clear that there was insufficient information available to creditors for them to have, as Bromberg J put it in Osborne v Gangemi (at [47]) “made an informed decision that a more advantageous outcome may not be achieved through the bankruptcy” of Mr Zozi. Mr Zozi and Mr Touma have an ongoing personal relationship. It is not clear that Mr Touma’s interests coincide with the interest of creditors generally. Distribution has not commenced under the PIA, although some contributions have been made.
As the distribution under the PIA would be minimal, there would seem to be little harm of consequence to creditors to set aside the PIA in circumstances where no payments to creditors have been made. Further, while no issue is taken about the conduct of the Trustee, it is now apparent that his report was prepared on the basis of incomplete information from the debtor about his assets and liabilities. He was not in favour of the PIA. In his affidavit of 16February 2012 he maintained his view that the likely dividend to unsecured creditors under the PIA would be minimal on the assumption that all creditors admitted for voting purposes were admitted for the purpose of a distribution.
This is a case in which a greater opportunity to inquire into the debtor’s affairs is called for. I have borne in mind that it is not necessary to establish that creditors “will be, or even are more likely to be, advantaged by bankruptcy” rather than the PIA (Re Mills at 560). On the evidence now before the court, bankruptcy will afford a prospect of economic advantage to creditors such as to warrant a conclusion that in all the circumstances the terms of the agreement are not calculated to benefit creditors generally or that for any other reason the PIA should be set aside.
The circumstances are within s.222(1)(d) and s.222(1)(e) and for the reasons given the court should exercise the discretion under s.222(1) to set aside the PIA.
The Creditor’s Petition
The applicant asks the court to make a sequestration order on the basis of the creditor’s petition presented on 6 April 2011 on which he sought to proceed if the PIA was set aside. The date of the commission of the act of bankruptcy relied on is 11 March 2011. This was the date on which Mr Zozi’s application to set aside the bankruptcy notice was dismissed (see Zozi v Ward). Mr Ward sought leave to amend the creditor’s petition to refer to the correct date of the act of bankruptcy.
Mr Zozi did not file any notice of opposition to the creditor’s petition. He did not oppose a sequestration order being made on the basis of the creditor’s petition, rather than under s.222(10) of the Bankruptcy Act, if the PIA was set aside. In particular, he did not suggest that the court could not or should not proceed in the manner sought by the applicant. No authority was cited to suggest that the court could only make a sequestration order under s.222(10) if the PIA was set aside. The creditor’s petition was presented before the s.188 authority became effective (see s.189AAA). This is not a case in which s.206 of the Bankruptcy Act operates to require dismissal of the petition. There was no application to the court to adjourn the hearing of the petition on the basis that it was to the advantage of creditors that Mr Zozi’s affairs be administered under the PIA (see Paradise Enterprises Limited v Kakavas [2011] FMCA 370 at [11]–[23]). The earlier relation back date available in respect of the creditor’s petition may become significant.
The applicant filed the usual affidavits in support of the creditor’s petition. I am satisfied with proof of the matters in s.52(1) of the Act. Mr Zozi did not raise any issues under s.52(2). I am not satisfied on the evidence before the court that he is able to pay his debts within s.52(2)(a) or that for any other reason a sequestration order ought not to be made. Leave should be given to amend the creditor’s petition to refer to 11 March 2011 as the date of the act of bankruptcy. As this issue was canvassed at the hearing service of the amended petition should be dispensed with. A sequestration order should be made against the estate of Miomir Zozi.
I certify that the preceding one-hundred and forty-one (141) paragraphs are a true copy of the reasons for judgment of Barnes FM
Date: 28 September 2012
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