The Federal Court decided in favour of the Deputy Commissioner of Taxation, who sought orders that the taxpayer’s ‘personal insolvency agreement’ be set aside an order for sequestration be made (that is, that the taxpayer be bankrupted).
The Commissioner obtained a judgment debt for $627,851.92 in the District Court of New South Wales on 5 Dec 2014 and he presented a creditor’s petition on 5 June 2015.
Before that petition could be heard, the taxpayer entered into a ‘personal insolvency agreement’ under Part X of the Bankruptcy Act 1966. The arrangement was that the taxpayer make a payment of $60,000 to his trustee, $15,000 to cover the trustees fees (under s188 of the Act) and the balance, to go to his creditors be paid in 9 monthly instalments of $5,000.
The Commissioner applied to have the personal insolvency agreement set aside, under s222(1)(d)&(e) of the Act, on the grounds appearing below (in paras (d) & (e)).
222 Court may set aside personal insolvency agreement
Setting aside on grounds of unreasonableness etc.
(1) If a personal insolvency agreement is in force, the Court may, on application by:
(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.
There were real questions about:
- The creditors voting in favour of the insolvency agreement.
- The accuracy and completeness of the taxpayer’s statement of affairs.
- A lifestyle that appeared lavish and unexplained by the resources disclosed in his statement of affairs.
After reviewing the matter and the evidence before it, the Court considered there was a “real possibility that the debtor has assets that he is not prepared, or may have forgotten, to disclose”.
The Court said the evidence demonstrated that the debtor “has been able to sustain a very comfortable, indeed lavish, lifestyle with significant spending well beyond his disclosed means”.
In addition, the Court said it was satisfied “the debtor was not being frank or candid in his disclosure in his statement of affairs, or in his evidence”.
The Court said this was a case in which a bankruptcy administration of the debtor’s affairs for the benefit of his creditors generally and the public should be undertaken in the public interest. It was satisfied that the public interest required that, in the circumstances of the case, “a proper investigation of the property, affairs and trade dealings of the debtor should be undertaken through the medium of a bankruptcy”.
The Court was of this view, even if the result turned out to yield less for creditors.
(DCT v King [2016] FCA 1281, Federal Court, Rares J, 8 July 2016 (but only just released by the Court).)
[LTN 207, 26/10/16] [FJM]
Catcwhords from Austlii report of the Federal Court decision
BANKRUPTCY – application to set aside debtor’s personal insolvency agreement pursuant to s 222(1)(d) or (e) Bankruptcy Act 1966 (Cth) – where agreement was approved by bare majority of creditors that included liquidators of insolvent companies formerly controlled by debtor and debtor’s related entities with substantial insolvent trading claims against debtor – where material items of expenditure and interests of debtor falsely omitted from or incorrectly disclosed in statement of affairs – where unexplained credits to debtor’s bank account greatly exceeded debtor’s declared income – where debtor’s spending extravagant – where applicant creditor offered indemnity for trustee in bankruptcy to investigate debtor’s affairs – where trustee of agreement had already conducted limited investigations – where return of between 1 to 4 cents in dollar to creditors under the agreement – where sequestration order against estate of debtor might reduce return to creditors to nil – whether full investigation of the debtor’s affairs would be in the interests of creditors and the public