FEDERAL COURT OF AUSTRALIA Lillas & Loel Lawyers Pty Ltd v Smits [2016] FCA 11 File number: QUD 962 of 2015 Judge: LOGAN J Date of judgment: 20 January 2016 Catchwords: BANKRUPTCY AND INSOLVENCY – creditor's petition – act of bankruptcy constituted by failure to comply with bankruptcy notice based on order for costs against respondent debtor made in Supreme Court of Queensland – where controlling trustee appointed – where resolution passed at meeting of creditors in favour of debtor executing personal insolvency agreement (PIA) – where applicant creditor and Deputy Commissioner of Taxation as supporting creditor opposed to PIA – whether PIA would be for the advantage of creditors – where debtor sought adjournment of petition Held: PIA provided for miniscule return to creditors – adjournment of petition would only visit further costs on applicant and supporting creditor – sequestration order made Legislation: Bankruptcy Act 1966 (Cth) Taxation Administration Act 1953 (Cth) Cases cited: Smits v Lillas & Loel Lawyers Pty Ltd [2015] FCCA 1092 cited Date of hearing: 20 January 2016 Registry: Queensland Division General Division National Practice Area: Commercial and Corporations Sub-area: General and Personal Insolvency Category: Catchwords Number of paragraphs: 32 Solicitor for the Applicant: Lillas & Loel Lawyers Pty Ltd Counsel for the Respondent: Mr D Edwards (directly instructed) Supporting Creditor: Ms K Cameron (appearing pursuant to statutory right of audience under the Taxation Administration Act 1953 (Cth)) ORDERS QUD 962 of 2015 BETWEEN: LILLAS & LOEL LAWYERS PTY LTD Applicant AND: LEONARDUS GERARDUS SMITS Respondent JUDGE: LOGAN J DATE OF ORDER: 20 january 2016 THE COURT ORDERS THAT: 1. A sequestration order be made against the estate of LEONARDUS GERARDUS SMITS. 2. The Official Trustee is the trustee in bankruptcy. 3. The applicant creditor's costs be taxed and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966. The Court notes that the date of the act of bankruptcy is 25 SEPTEMBER 2015. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT (REVISED FROM TRANSCRIPT) LOGAN J: 1 By a creditor's petition filed on 14 October 2015, Lillas & Loel Lawyers Pty Ltd (Lillas & Loel Lawyers) have sought the making of a sequestration order against Mr Leonardus Gerardus Smits (Mr Leonardus Smits). The first return date of that petition was 25 November 2015. On that date, a Registrar made an order adjourning to today the hearing of the petition. 2 On 20 November 2015 (inferentially, from the controlling trustee's initial report) Mr Leonardus Smits executed an authority under s 188 of the Bankruptcy Act 1966 (Cth) (the Act) appointing Mr Geoffrey McDonald, chartered accountant and registered trustee, as a controlling trustee. As appears from his first report, on 25 November 2015 Mr McDonald notified creditors by email of his appointment, and sought the provision of information to assist in his investigations, together with details of their claims as creditors. Inferentially, it was the appointment of Mr McDonald as controlling trustee and his subsequent notification of that appointment that prompted the application for the adjournment of the hearing of the creditor's petition. 3 A meeting of creditors was initially appointed to be held in Sydney on 23 December 2015. In the result, that meeting was adjourned until 19 January 2016. At that meeting, which was chaired by Mr McDonald in his capacity as controlling trustee, a resolution was passed by special majority in favour of Mr Leonardus Smits executing a personal insolvency agreement. The creditors who attended that meeting, together with the amounts of their respective debts admitted to proof, the percentage of total debts, and those who voted for or against the resolution, are set out in a table in para 11 of an affidavit of Mr Tim Orlizki, filed in Court today by leave. That table is as follows: Creditor Voted in Favour Voted Against Amount % of Total Amount % of Total Marina Bruns-Smits $232,103.00 14.37% Australian Taxation Office $305,473.00 18.92% Morgan Conley Solicitors $667,722.00 41.35% David Edwards, Barrister $91,120.00 5.64% Licardy & Co $13,728.00 0.85% James Loel $69,404.00 4.30% Lillas & Loel Lawyers Pty Ltd Ronald Taylor $200,000.00 12.38% Vestcorp Financial Services $9,091.50 0.56% Peter Mohammed $2,000.00 0.12% Loire Consultants Pty Ltd $1,500.00 0.09% Tiggergroup $4,730.00 0.29% Ray Walker $11,506.55 0.71% Jeff Dawson $4,500.00 0.28% Michael Unicomb $2,000.00 0.12% $1,233,501.05 76.38% $381,377.00 23.62% Total Claims: $1,614,878.05 4 Lillas & Loel Lawyers is a corporation, the sole director of which is Mr James Loel. As is apparent from the table, Lillas & Loel Lawyers voted against the resolution. So, too, did the Deputy Commissioner of Taxation (Commissioner). Their combined vote, according to the proofs admitted, was insufficient to prevent the passage of a special resolution. 5 It is common ground that Mr McDonald chose not to be the trustee in respect of the personal insolvency agreement. There is no evidence that the personal insolvency agreement has yet been executed. Nor, as yet, has the time within which such an agreement must be executed expired. The present position is just that, though there has been a resolution in favour of the execution by Mr Leonardus Smits of a personal insolvency agreement, it has not yet been executed. Inferentially, this is because he has yet to find a trustee willing to act in respect of the personal insolvency agreement. 6 Upon the calling on of the petition today before a Registrar, it was signified, on behalf of Lillas & Loel Lawyers, that the case was one which ought to be heard by a judge. It was then referred to me, as duty judge. Before me, Mr Edwards of counsel, who is directly briefed by Mr Leonardus Smits, made application on his behalf for an adjournment of the hearing of the petition. That was opposed by the petitioning creditor, Lillas & Loel Lawyers. 7 The Commissioner, who had given a prior notice of appearance, appeared also to resist the granting of an adjournment. The Commissioner's position was to support the application made by Lillas & Loel that Mr Leonardus Smits be made bankrupt on the petition today. 8 Mr Leonardus Smits did not file affidavit evidence in support of his application for an adjournment. He did, though, with commendable candour, tender, by his counsel, a copy of a deed of settlement made on 18 January 2016, as between Mr Joel Pitman, (who owns and operates the solicitor's practice, "Morgan Conley", himself), Mr McDonald, as controlling trustee, and Mr Jacobus Johannes Smits (Mr Jacobus Smits). Mr Jacobus Smits is Mr Leonardus Smits' brother. It is desirable to set out both the introduction, as well as cll 1.1 to 1.3 inclusive of that deed: INTRODUCTION A. The Smits and Pitman were involved in certain dealings with each other wherein Morgan Conley Solicitors, the business owned and operated by Pitman, provided Smiths with legal services. B. As a result of those legal services Smits accrued a total debt with Pitman in the amount of $1,435,935 (including GST). C. Smits now acknowledges those debts are properly payable. D. On 23 November 2015 Smits executed a section 188 Authority appointing McDonald as his controlling trustee to conduct a Part X under the Bankruptcy Act 1966 (Cth). E. Each party claims to have rights as against the others. F. To date, Pitman has sought that his debt be admitted for the full amount and has voted to reject the proposal of Smits. G. Smits and Jac have requested that in exchange for payment by Jac, Pitman vote in favour of his Part X proposal. H. All of the parties wish to resolve any rights or claims that may exist between them as at this date on the basis of the terms set out in this Deed. IT IS AGREED 1. The Settlement 1.1 By this Deed and in consideration of the mutual promises contained herein: 1.2 Smits undertakes that any Claims or Demands which he allegedly holds against Pitman have not been heretofore assigned, transferred, conveyed or sold whatsoever to any third party and otherwise shall indemnify Pitman from any claims or Demands form [sic] any such third parties. 1.3 McDonald (as trustee of the estate of Smits) does not object to Smits entering into his Deed. 9 As can be seen, the amount of the debt asserted in the deed as owed to Morgan Conley is much greater than that admitted to proof (in the deed $1,435,935; as admitted to proof, $667,722). On its face (see cll 1.4 and 1.5), the deed provides for, in return for a payment by Mr Jacobus Smits of $70,000 by close of business on 18 January 2016, and a promise by Mr Leonardus Smits to pay $10,000 to Mr Pitman by close of business on 30 June 2016, that Mr Pitman will vote in favour of the proposal for a personal insolvency agreement (on 19 January 2016 (see cl 1.9)). 10 Mr Leonardus Smits has not put before me sworn evidence of his current financial circumstances. It was said that the proximity of the adjourned return date of the petition to the date of the adjourned meeting of creditors worked against this. This was put on his behalf as one reason why an adjournment ought to be granted. I do not accept this as a reason. There has been, since 25 November 2015, a contingency that the petitioning creditor, and perhaps another creditor, might choose either to continue, or, as the case may be, to seek substitution for the prosecution of the creditor's petition. Viewed against that much longer timeframe, there has been ample opportunity to prepare in draft an affidavit which might support an adjournment. 11 It is true that the two reports of the controlling trustee make reference to Mr Leonardus Smits' financial position, based on a statement of affairs sworn on 18 November 2015. In that sense, though there is not sworn evidence of that position by an affidavit filed in Court, there is, albeit with the controlling trustee, recent sworn evidence of the position. That position, as disclosed in para 3 of the initial report to creditors, together with the trustee's opinion in that regard, is as follows: SOA SOA AMOUNT Trustee's opinion $ $ Assets Cash At Bank/On Hand 1,126 Nil Vehicles: 6,000 nil Tools of Trade Nil Nil Superannuation 21,206 Nil Real Estate Nil Nil Shares Nil Nil Debtors Nil Nil Other Assets: Nil Nil None Total Assets 28,332 Nil Less: Liabilities Secured Creditors Nil Nil Unsecured Creditors -8,035,132 -8,035,132 Total Creditors -8,035,132 -8,035,132 Net Deficiency (7,978,468) (8,035,132) 12 As is apparent from the trustee's initial report, and confirmed by the supplementary report, Mr Leonardus Smits is hopelessly insolvent. He did not, by his counsel, endeavour to submit otherwise in support of the application for an adjournment. He is presently 63 years of age, living in New South Wales. His usual occupation is that of property developer and company director, but he is presently unemployed. To Mr McDonald, as set out in para 1 of his initial report, Mr Leonardus Smits attributed his financial woes to relationship difficulties, which in turn were a reflection of unsuccessful developments and perhaps also a sequel to the global financial crisis of 2008. 13 Mr McDonald's initial disposition was to recommend to creditors that it was in their interests to accept the personal insolvency agreement being promoted by Mr Leonardus Smits. That agreement would have seen the sum of $55,000 paid by a third party to the controlling trustee for distribution, after deduction of controlling trustee's expenses, to creditors. That sum, and that proposal, did not change as at the adjourned meeting on 19 January 2016. What did change was the amount of the trustee's costs. These proved to be much greater than those originally estimated. The funds available by contribution remained at $55,000. The controlling trustee's remuneration, which was approved at that meeting, proved to be $40,000. 14 Further details in respect of the funds available for unsecured creditors are as set out in annexure A to the supplementary report. I incorporate that below: LEONARDUS G. SMITS ESTIMATED DIVIDENED TO CREDITORS FROM PROPOSED PERSONAL INSOLVENCY AGREEMENT Funds available by contribution $55,000 Funds from assets $Nil Total Funds Available $55,000 Less: Estimated Costs of Administration of The Estate Controlling Trustee's Remuneration $40,000 Trustees Costs Advertising & PIA $500 Estimated Trustee's Remuneration $5,000 Realisation Charge (7% of $55,000) $3,850 Total Cost of Administration $49,350 Estimated Funds Available to Unsecured $5,650 Petitioning Creditors costs $5,000 Funds for Unsecured Creditors $650 ESTIMATED DIVIDEND TO CREDITORS IS $0.00008 CENTS IN THE DOLLAR (based on the estimated unsecured creditors disclosed in the SOA) COMPARED TO: ESTIMATED DIVIDEND TO CREDITORS FROM BANKRUPTCY Funds Expected from: Realisation of Assets $0 $Nil Income Contributions (estimate 3 years at current estimated income p.a) Less: Estimated Costs of Administration of the Estate Estimated Controlling Trustee's Remuneration $40,000 Estimated Trustee's Remuneration (3 year period, no litigation costs) $40,000 Trustees costs and GST $3,000 Realisation Charge (7%) $0 Total Cost of Administration $83,000 Surplus Funds Available for Creditors $0 Unsecured Creditors $8,035,132 (return of $0.00) ESTIMATED DIVIDEND TO CREDITORS IS $0.0000 CENTS IN THE DOLLAR (based on the estimated unsecured creditors disclosed in the SOA) 15 As can be seen, the funds for unsecured creditors' net of expenses and administration costs amount to $650. This would yield, on Mr McDonald's estimation, the sum of 0.00008 cents in the dollar to creditors. Mr McDonald also prepared a comparative estimation (set out above) of a return to creditors in the event of the making of a sequestration order. His estimate, as reflected in his supplementary report, is that the dividend to creditors on insolvency would be nil cents in the dollar. 16 The occasion for the increase in trustee's costs over that estimated is set out in Mr McDonald's supplementary report. It is pertinent to set out those reasons: In this case I have had extensive communications with many creditors about what information is typically required to prove their claims. In some cases additional information has been supplied in others it has not. I have been faced with the unusual situation of the debtor vigorously rejecting the claims of creditors who are voting against the proposed PIA and spending considerable time attempting to substantiate the claims of creditors who are supporting the PIA proposal. In some cases, I have effectively had no communication from the actual creditors, yet receiving dozens of emails from the debtor (on their behalf). The debtor admitted that, in some instances, the information supplied to me was misleading and incorrect. As an example of the amount of time I have expended on attempting to determine the merits of creditor's claims, I can confirm that I have alone sent and received about 750 emails. The amount of time which I have been forced to expend on determining the merits of creditor's claims, including the holding of an adjourned meeting of creditors, has caused the level of my remuneration to increase significantly. In his supplementary report, Mr McDonald made the following recommendation to creditors: 3. PIA Proposal and Assets Since my previous Report, advising that the Debtor was not offering creditors the benefit of making available all of his assets under the terms of the PIA, I have had numerous discussions with the Debtor and strongly suggest that he should change that position. The Debtor is not willing to make any divisible property available to the creditors. This is the most significant factor which has influenced my decision to recommend that the creditor's interests are not served by accepting the PIA proposal. Whilst the Debtor may yet decide to amend his proposal, the fact that any amendment is offered after I had set a deadline would cause me some concern about the bona fides and degree of co-operation that would be forthcoming to the Trustee of any PIA under Part X of the Act. The terms of the PIA continue to be that the debtor, through his own or third party contributions, must pay funds to a trustee in the total amount of $55,000. These funds would not be an asset of the bankrupt estate. These funds represent the pool of funds that are being made available to the creditors ONLY if they accept the PIA. 17 Under the terms of the personal insolvency agreement, which has been approved at yesterday's meeting, only the contributed sum of $55,000 is available for the meeting of expenses, administration costs and the payment of a dividend to creditors. That is in contrast to the position which would prevail in the event of insolvency in the sense that all of the provisions of the Act governing what amounts to property divisible, as well as the provisions in respect of preferences and the like, would be available to a trustee. So, too, in theory, would be an income contribution. Given Mr Leonardus Smits' present unemployment and also an unfortunate health position, detailed in the controlling trustee's reports, there is no present reason to expect any particular benefit from an income contribution. 18 There is then a considered value judgment by a registered trustee, whose integrity is not in question. That is that it is in the interests of creditors that Mr Leonardus Smits be made bankrupt. Mr McDonald's opinion is one which is the result of a change in position following such investigations and dealings with Mr Leonardus Smits as he has been able to conduct during the period of his appointment. 19 In my view, the Court should always, in respect of an adjournment application such as the present, give weight to a considered value judgment of the controlling trustee. That is not to say at all that such a value judgment is decisive. The statutory test is set out in s 206(1) of the Act: (1) Where: (a) a meeting of creditors has, in accordance with this Part, passed a special resolution requiring a debtor to execute a personal insolvency agreement; and (b) a creditor's petition was presented against the debtor before the passing of the resolution or is presented against him or her after the passing of the resolution but before the agreement has been duly executed; the Court may, upon application by the debtor, a creditor or a person nominated as trustee of the proposed agreement, if it appears to the Court that it would be for the advantage of the creditors that the debtor's affairs be administered under the agreement, adjourn the hearing of the petition for such period as it considers necessary to allow the agreement to be executed and, if the agreement is duly executed within that period, shall dismiss the petition. It was correctly accepted on Mr Leonardus Smits' behalf that he carried an onus of making it appear to the Court that it would be for the advantage of the creditors for his affairs to be administered under the agreement. 20 Given the miniscule return for which the agreement provides, there is little to be said in favour of that agreement's return, as opposed to that which may flow on insolvency. There is, of course, as was highlighted on Mr Leonardus Smits' behalf, a value judgment made by creditors that the agreement, nonetheless, be accepted. That also is relevant, but the statutory test does not make the views of the majority decisive, but rather whether it appears that it would be for the advantage of the creditors generally. 21 At the time when Mr McDonald authored his supplementary report, 11 January 2016, the deed of settlement had not been executed. There is no evidence one way or the other that the deed was before the meeting of creditors. On an application such as the present where the applicant for adjournment carries an onus, it might be expected that, if it were before a creditors' meeting, that this would have been evidenced. The deed is certainly a document which one might expect would have been of interest to creditors generally. It provides for one particular voting creditor to have an advantage which others do not. 22 Given the terms of the deed, it is, to say the least, a moot point as to whether Morgan Conley, via Mr Pitman, remained entitled to vote in the amount originally allowed as a proof. In any event, given that there was separate provision for Morgan Conley to receive payment, the worth of the commercial value judgment exercised by Morgan Conley in favour of the approval of the personal insolvency agreement proposal is diminished. Without that particular creditor's vote, the resolution would not have been carried. 23 The creditor's petition is based on an act of bankruptcy constituted by failure to comply with a bankruptcy notice. That bankruptcy notice is based on an assigned order for costs made in favour of Pioneer Investments (Aust) Pty Ltd in the Supreme Court of Queensland by Margaret Wilson J. That order provided for costs to be assessed. In turn, those costs, as assessed, became the order of a Queensland Supreme Court Registrar. 24 Mr Leonardus Smits applied in the Federal Circuit Court for that bankruptcy notice to be set aside. On 25 September 2015, for reasons then published, that court (Jarrett FCJ) dismissed the application (see Smits v Lillas & Loel Lawyers Pty Ltd [2015] FCCA 1092). Until then, time for compliance with the bankruptcy notice, which had been served as long ago as 2013, ran (see s 41(7) of the Act). I am satisfied that Mr Leonardus Smits has not complied with the bankruptcy notice within the time allowed. 25 I am also satisfied for present purposes that the debt remains owing to the petitioning creditor. In that regard, it should be noted that there is an appeal to this Court against the judgment dismissing the application for the setting aside of the bankruptcy notice. That appeal is to be heard on 4 March 2016. The existence of that appeal does not prevent the making of a sequestration order, though it is relevant. There was no submission made, though, on behalf of Mr Leonardus Smits as to the strength or otherwise of the particular grounds of appeal in support of the adjournment application. 26 For completeness, I should also note that Lillas & Loel Lawyers have made application for security for costs in respect of that appeal. That application is to be heard on 3 February 2016. I make nothing more of the existence of that application than to note it as part of the overall litigation which is presently extant as between Lillas & Loel Lawyers and Mr Leonardus Smits. 27 I have already mentioned that I do not consider the proximity of the return date of the creditors' petition to the date of the meeting, given the background circumstances, as providing the basis for an adjournment so as to allow time for the preparation of particular material by Mr Leonardus Smits. There was reference in that regard to the debt relied upon by the Commissioner. That particular debt, though, as is apparent from the affidavit of Thilga Prabhakharan, has been extant for some time. If, for example, there were an objection or proceedings under Pt IVA of the Taxation Administration Act 1953 (Cth) extant in respect of any assessment part of that debt, it was well within Mr Leonardus Smits' power to have placed such evidence before me. Any such challenge is unlikely to have occurred in the interval between yesterday and today. 28 Another point put on Mr Leonardus Smits' behalf was that a majority were in favour of the personal insolvency agreement. That is true but the statutory test is otherwise and, as I have already mentioned, the worth of that majority is, to say the least, moot, having regard to the deed. 29 It was also put that there is no "smoking gun" evident from the controlling trustee's reports. It is true that there are no obvious sources of preferential payments or voidable dispositions. But having considered the position, the controlling trustee nonetheless has voiced his revised view that insolvency with attendant investigatory provisions and wider availability of divisible property is preferable to the net amount available under the personal insolvency agreement. 30 The case is different to those where an application for adjournment is made after the execution of a s 188 authority and prior to the holding of a creditor's meeting and the taking of a vote. That difference is reflected in the particular test posited in s 206(1) of the Act, as opposed to a more general discretion. 31 It only comes to this. Having regard to the miniscule return to creditors, the interrogative note at least, which attends the majority in favour of the personal insolvency agreement, the opposition voiced by the petitioning creditor and the only creditor who has chosen to appear today, the Commissioner, I am not persuaded that it would be for the advantage of creditors that the debtor's affairs be administered under the agreement. 32 To adjourn the petition would visit further costs on Lillas & Loel Lawyers in respect of a debt which, as proved, is relatively modest and in respect of which that company has already incurred the costs of contesting an application to set aside the bankruptcy notice. It would also visit further costs on the Commissioner. It appears unlikely that either would recover anything in respect of costs although, of course, that might change after investigations by a trustee in bankruptcy. These considerations in themselves, in my view, are sufficient to refuse the adjournment application. Being satisfied that the act of bankruptcy has been committed, that the debt remains owing and in respect of the other matters which a creditor must prove on the hearing of a petition, I make a sequestration order against the estate of the debtor. I note that the Official Trustee will be the trustee. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan. Associate: Dated: 20 January 2016