Consideration
44 In Hingston v Westpac Banking Corporation (2012) 200 FCR 493 at 510-511 [90]-[93] Greenwood, McKerracher and Nicholas JJ approved of the principles applicable to s 222(1)(d) identified by the primary judge that they had earlier summarised at 505 [58], namely (omitting citations):
"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; 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" with an investigation by the Trustee in bankruptcy exercising relevant powers; the relativity of the amount of the debts owing, to the proposal made, is relevant but not determinative; whether any payments have been made to creditors or to the Trustee of the bankrupt estate is also relevant; and, the nature of the relationship between the debtor and those creditors who voted in favour of the composition is relevant."
45 Their Honours said that a calculus of factors must be taken into account when considering the exercise of the power to set aside a personal insolvency agreement under s 222(1)(d) including (at 511 [91]-[92]):
"whether, from the perspective of all creditors substantial further investigation was required of a particular transaction or the affairs of the debtor more generally; whether some particular creditors may have dominated the vote in circumstances where there may be questions about the relationship between the debtor and those creditors; whether the composition proposal is properly regarded as trivial resulting in a negligible distribution to unsecured creditors; the relativity between the positions under an administration in bankruptcy and a distribution under the composition proposal; and the other matters already mentioned and taken into account by the primary judge.
Thus, the vote of the creditors is not paramount in an absolute sense. Great respect will be given to the views of practical people of business who have come together to make a decision on the composition proposal in a properly informed way. However, a discretion is conferred on the Court to set aside the composition (and the annulment of the bankruptcy) in the circumstances, relevantly, for present purposes, of s 222(1)(d)." (italic emphasis in original, bold emphasis added)
46 In my opinion, the trustee erred in failing properly to address the evaluation of the Bank's debt. In Re Dingle; Westpac Bank Corporation v Worrell (1993) 47 FCR 478 and 489G-490B Wilcox, Ryan and Cooper JJ found that the trustee, Mr Worrell, had a duty to make a judgment about the prospects of success of a creditor, in a complex proceeding, in the face of conflicting legal opinions, when adjudicating on a creditor's proof of debt. They said:
"Mr Worrell was placed in a most difficult position, being required to assess the prospects of success of a complex proceeding in the face of conflicting legal opinions. Nonetheless, we have to agree with Drummond J that it was his duty to make a judgment about those prospects. It should have been obvious to him that Westpac would seek to vote in opposition to the composition and that its vote (if allowed) would probably be critical to the result. In that situation, we think that, before coming to the meeting, Mr Worrell should have obtained a considered opinion from a suitably qualified lawyer briefed with all available information about the case, including the foreshadowed defences."
47 In this matter, there is no evidence here that the trustee did any such thing. I am of opinion that his valuation at $1, for voting purposes, of the Bank's debt claimed in the proceedings that were already substantively part heard before Sackar J demonstrated that the trustee gave no, or no real, consideration to the valuation of the debt in accordance his duty. The trustee made his valuation of a claim that was based on guarantees given by the debtor, as director, of his two companies to support their financing by the Bank to a sum of over $8.5 million. There is no evidence that the trustee sought legal advice, and if he did, there is no evidence as to how he could have come to the view that the Bank's claimed debt was effectively worthless for voting purposes. Nothing in the evidence before me suggested, and the debtor did not identify any justification, for such a value. His Honour's subsequent decision to give judgment in favour of the Bank in the full amount it claimed supports the inference that there was no reasonable basis for a valuation at $1.
48 For those reasons, I am of opinion that the Bank's claim to appeal against the trustee's decision under s 178 of the Act should be allowed and that the trustee should have admitted the debt, having regard to the evidence now before me, at full value. Had he done so, that would have affected the result of voting on the resolution. Certainly, at the time of the meeting, the trustee must have been able to form a view that the debt was worth, for voting purposes, substantively more than the nominal sum of $1. Were it to be admitted now on the basis of Sackar J's findings, as I find it should be, the resolution to approve the agreement would not have been passed as a special resolution.
49 The Bank also complained that the trustee should not have admitted for full value the two judgment debts of the debtor's father and DWS that he had expressed concern about in his report to creditors. A trustee in bankruptcy, and, likewise, a trustee for the purposes of a personal insolvency agreement, is not necessarily bound by Court judgments and, and in appropriate circumstances, can go behind them: see Wren v Mahony (1972) 126 CLR 212. Nonetheless, at the time of the creditors meeting the trustee's acceptance of those two judgment debts at face value is understandable. The Bank did not appeal against the trustee's admission of those debts at full value.
50 However, the debts claimed by the debtor's father and DWS amounted to just over $21.8 million, being half of the total debts submitted to proof. Those debts were also in the order of 80% of the about $28.1 million of debts admitted to proof, and of the about $26.7 million of the debts voting in favour of the agreement. That raised a real question as to whether the agreement should stand in light of the Bank's evidence of how those debts came to be claimed.
51 Moreover, the draft agreement, as put to the creditors, had been executed by the debtor as a deed on 21 May 2013. It provided that the debtor was to contribute only $200,000 to payment of all his debts. At the meeting, only because of Mr Bates' questioning, the debtor revealed that a third party, which he did not identify to the meeting (although he had earlier identified it to the trustee) would provide that money. The trustee made no inquiries and received no information from the third party as to whether that assertion by the debtor was true, notwithstanding his duty to make appropriate inquiries and investigations in connection with the debtor's property and examinable affairs and to exercise his powers and perform his functions in a commercially sound way (s 190A(1)(f) and (h)).
52 There is no intelligible reason in the evidence why a complete stranger would pay $200,000 to support anyone's personal insolvency agreement, let alone a debtor who had managed to run up alleged debts of about $46 million. The circumstances that the debtor asserted that the Far North Queensland Company would provide that money, required the trustee, at least, to make some attempt to find out whether that company was actually intending, or committed, to paying the $200,000 and what the circumstances were as to why it was doing so. There was no evidence about those matters.
53 Another matter of very great concern is the massive discrepancy between the sworn statement of affairs which the debtor made in the Federal Magistrates Court on 5 February 2013 and his statement of affairs on 21 May 2013. The debtor has given no explanation for that massive discrepancy between the two or the huge variation in the amount said to be owed as inter family-debts that rose from something like $3.4 million to over $22 million in the space of three and a half months, all of that happening at a time when Judge Driver's decision on the creditors petition was reserved and Sackar J's decision on the substantive proceedings before him were imminent.
54 Moreover, the addition to cl 3(f) of the debtor's sister and the final sentence of the personal insolvency agreement after the creditors meeting was a substantive change that had not been specified by the resolution under s 204(2). It added a conditional element to the agreement so that it was able to be frustrated by a lack of consent from the debtor's family members. That was a material matter that was not before the creditors or upon which they were able to make an informed vote. Rather, the impression conveyed to the meeting by the draft form of the agreement circulated to the creditors and executed by the debtor suggested that his parents (and DWS, as their company, although it was not named) were happy to waive their rights to prove, thereby increasing the dividend that would be available to the creditors.
55 The terms of the agreement in all the circumstances could not be seen to be reasonable. I am of opinion that the massive discrepancy between a payment of $200,000 to discharge debts of about $20 million dollars, leaving aside the inter-family debts, if they were waived, is not in the interests of creditors in all the circumstances. Moreover, the fact that the debtor failed to disclose in his statement of affairs dated 21 May 2013 assets of significant value that he had disposed of in the previous five years is also a further matter for concern. The sale of the debtor's and his wife's house at Tuncurry in 2009 could have been disclosed, but he gave no explanation as to why he did not do so despite having revealed, in his statement of affairs, another house sale by him and his wife in January 2009 for $2,000,000. His lack of explanation for the omissions of that sale, or transfer, of his shares in Unhappy Customers Litigation Pty Ltd to his daughter is also a matter of some concern. The debtor did explain to the trustee, as recorded in the report to the creditors, that the company had not traded and the shares had no value. But that hardly explained why the transfer occurred. Next, the debtor's transfer of the cause of action to Mr McClelland for $1.5 million was also omitted from his statement of affairs. The relationship of that to Mr McClelland's claim to be a creditor for nearly $2 million was also not explained, nor was whether the debtor had received the $1.5 million, and, if so, there was no explanation as to what happened to it.
56 The debtor has had a very large history in engaging in many transactions over many years with many persons. He has incurred very substantial debts. In my opinion, it is manifestly in the public interest that a trustee in bankruptcy be able to exercise the full powers of a trustee to examine the affairs of this debtor to ensure that all his assets and his liabilities have been properly and fully disclosed. While there will be some injustice done to the creditors, the almost derisory amount of money payable in this proposed composition if, and the question is very much conditional, all of the debtor's father, his sister and DWS choose to waive their rights, supports the conclusion that this agreement is unreasonable.
57 The trustee did not choose to disclose promptly or frankly to the creditors that the new conditions had been inserted into cl 3(f) after they had voted. The effective right of veto of the agreement at a later time and when they choose that each of the debtor's father, sister and DWS obtained is unreasonable. The right of veto was not created at the meeting in respect of the debtor's sister and is not supported by s 204(2). While the creditors are likely to have understood that the reference to Mr and Mrs D & W Shannon in the draft agreement included DWS, the debtor's sister was not referred to at all in this context. The veto's existence leaves completely uncertain whether the creditors will receive any return. The trustee made no investigations at all as to whether the promised funding would be forthcoming. That had effectively left the debtor and his family in control of vetoing the performance of the agreement in circumstances where, in a very short period of time, he had given radically different explanations of his supposed financial position. These are matters that are not calculated to benefit the creditors generally or at all. There is no assurance of any return to creditors under the 5 July 2013 agreement.
58 The nature of the relationship between the debtor and those creditors who voted in favour of the agreement is also relevant. Here, the trustee has been paid the $50,000 promised to him under the agreement. However, no payment has been made for the benefit of the creditors. The majority in value of the creditors who voted on the proposal are related parties to the debtor controlling about 80% of the vote. There are circumstances suggesting that those debts are not ones that arose in the ordinary course or would necessarily be found by a trustee to be real or capable of being admitted to proof: Hingston 200 FCR at 511 [91]-[92].