Deputy Commissioner of Taxation v Johns

Background 8 Mr Johns has practised as a solicitor in New South Wales since 18 March 1963. Since 9 March 1979 he has practised as a sole practitioner. Some time ago the applicant sued Mr Johns and obtained a judgment in relation to tax liabilities he owed to the applicant. The judgment was obtained in the District Court of New South Wales on 11 June 1999 and amounted to $243,434.64.

2002: The First Creditor's Petition 9 On 8 April 2002 a bankruptcy notice was served on Mr Johns and he did not comply with it. The applicant then presented a creditor's petition in this Court on 3 July 2002. Mr Johns opposed the petition but he and the applicant were able to agree upon a payment arrangement whereby Mr Johns would pay the Australian Taxation Office ('ATO') in instalments. The creditor's petition was dismissed by consent on 13 October 2003. Mr Johns paid the first instalment in September 2003, but did not make the second payment due under the instalment agreement.

2004: The second Creditor's petition 10 The applicant sued Mr Johns again, this time in the Supreme Court of New South Wales, and obtained a judgment amounting to $1,213,578.04 on 31 March 2004. Mr Johns was served with a second bankruptcy notice on 31 May 2004 and on 6 July 2004 a second creditor's petition was presented to this Court. The matter was listed before a Registrar of the Court for first directions on 9 August 2004. 11 It was not in dispute between the parties that between 9 August and 9 October 2004 the creditor's petition was adjourned by consent so that the Mr Johns could re-finance and pay the debt due to the applicant, in part or in full. 12 On 6 August 2004 a Mr Frank Shead wrote to Mr Johns' solicitors, Kemp Strang. The letter is on the letterhead of an organisation called 'Ym2t' and in it Mr Shead writes: 'We have been consulted by and are acting on behalf of Mr Malcolm Nelson Johns and entities associated with him.' Mr Shead said he was arranging finance from two sources which would yield a total of approximately $1.5 million to Mr Johns. He was arranging the facilities to have available to Mr Johns 'the necessary surplus to meet a liability to the Australian Taxation Office which [Mr Shead understood] to be in excess of $1,000,000.00.' 13 At the first directions hearing before the Registrar on 9 August 2004 the creditor's petition was adjourned by consent to 30 August 2004. 14 On 24 August 2004 the applicant's solicitors wrote to Mr Johns' solicitors. The letter recites that in a telephone conversation the previous day Mr Johns' solicitors had advised the applicant that Mr Johns had struck problems in finalising the finance facilities outlined in Frank Shead's letter of 6 August 2004. The applicant's response was to insist that any proposal from Mr Johns should be forwarded in writing to the AGS no later than 4 pm the next day, 25 August 2004. Mr Johns took advantage of this opportunity and on 25 August 2004 his solicitors wrote to the AGS submitting a proposal for the applicant's consideration.

25 August 2004: A Proposal 15 The first part of the proposal set out Mr Johns assets: a property at Glebe Point, his legal practice and personalty. The Glebe Point property was estimated to be worth 'approximately $4.5 million' and was encumbered to the extent of $3.3 million. The legal practice had a total of $1.2 million in assets comprising debtors and unbilled work in progress. The personalty, which included cars, artworks and antiques had an estimated value of 'in excess of $1 million upon an orderly realisation'. 16 Particular reference was made to a debt owed to the legal practice by Rural and General Insurance Ltd, which was in liquidation. The debt amounted to $125,000 and it was expected that the liquidator would soon make a dividend payment to creditors. It was possible that creditors would receive 100 cents in the dollar and the proposal went on to indicate that 'The dividend cheque, anticipated to be in excess of $100,000 will be made available to ATO as soon as received.' 17 The next part of the proposal states: 'The problem adverted to in our telephone conversation of 23 August 2004 and referred to in your fax was that our client's second mortgagee over his property, Westlawn Finance, was unwilling to release its collateral security over the legal practice even though fully secured over our client's residence. This has necessitated a restructuring of the refinance proposals previously notified to you.' 18 Westlawn Finance held a second mortgage over the Glebe Point property in the amount of $700,000. In addition, this loan was secured by a charge over the assets of the legal practice. 19 Attached to the proposal was another letter from Mr Shead, dated 25 August 2004. In this letter Mr Shead indicated that the National Australia Bank had agreed to permit Mr Johns to take out a 2nd mortgage over his home. This second mortgage was expected to yield approximately $700,000 to Mr Johns. One possible course would have been to use this $700,000 to pay back the Westlawn loan. In this way the charge over the legal practice would be removed, leaving it unencumbered. Then Mr Johns might seek a loan secured over the assets of the legal practice and use the proceeds of that loan to pay the ATO. This is what the proposal and Mr Shead seemed to have in mind but it is not clear because of some of the statements made in the proposal and in Mr Shead's letter of 25 August 2004. 20 In his letter Mr Shead says 'Upon drawdown [on the National Australia Bank loan] the legal practice will become unencumbered and therefore enable us to arrange the necessary additional funding.' On the other hand, the next paragraph states: 'Further, we have this afternoon been able to draw down $100,000.00 from [the National Australia Bank] facility which sum will be available by a cheque in favour of the ATO on Monday.' 21 Moreover, point 1 of the proposal reads: '1. From the refinance of the second mortgage over Mr Johns' property 244 Glebe Point Road [sic], an initial amount of $100,000.00 will be available to ATO [sic] on 30 August 2004 and the balance (anticipated to be approximately $600,000.00 subject to valuation), will be available on settlement in approximately three weeks.' 22 In contrast, point 3 of the proposal reads: 'With the discharge of the encumbrance to Westlawn Finance, the legal practice will be able to be separately financed for an amount of approximately $400,000.00 to $500,000.00. Preliminary discussions with a lender have already been commenced in this regard, and it is anticipated that this facility could be available shortly after discharge of Westlawn Finance.' 23 The difficulty which arises is that the proceeds of the second mortgage of the Glebe Point property in favour of the National Australia Bank seem to be destined for the ATO, rather than for Westlawn Finance. It is unclear how the Westlawn loan was to be paid back and therefore how the charge over the assets of the legal practice would be removed. 24 The proposal then deals with Mr Johns' personalty and it was emphasised that the realisation of these assets should be 'controlled' and that a 'fire sale' would not produce the best results. Mr Johns would grant a power of attorney to certain accountants who would in turn undertake the sale of the personalty. It was estimated that the realisation would take place over 3 to 4 months. 25 Importantly, the proposal goes on to state: 'We submit that the above proposal, although different somewhat from our client's original instructions, nevertheless represents a sensible proposal to enable the debt due to your client to be repaid in full within a reasonable period. The only alternatives that we can see to this proposal are bankruptcy, or a formal appointment under Part X of the Bankruptcy Act. The disadvantages of the former course are obvious, in that it impacts negatively upon Mr John's ability to maintain his legal practice, prevents any refinance arrangements and leads to a fire sale of assets. As regards the second alternative, we submit that the above proposal has much the same effect, as we are instructed that the ATO is effectively Mr Johns' sole creditor of any substance.' [Emphasis] 26 Thus, at the time of the proposal it appears that Mr Johns and his advisors believed that Mr Johns had the ability to re-organise his affairs in order to meet his obligation to the applicant. They had also turned their mind to the alternatives, which they saw as bankruptcy or a Part X appointment. It is clear that Mr Johns was concerned about the effect of bankruptcy on his ability to continue to practice as a solicitor. At this stage, however, he and his advisers were of the view that the Part X appointment would have much the same effect as the proposal. In those circumstances, their preference was the proposal put to the applicant. 27 On 27 August 2004 the applicant's solicitors wrote to Mr Johns' solicitors. The applicant's response to the 25 August proposal was simply that the applicant intended to proceed with the hearing of the creditor's petition on 30 August and to oppose any application for an adjournment. 28 On 30 August 2004 the matter came before a Registrar and was adjourned on the application of Mr Johns to 21 September 2004. Despite the parties' agreement that the adjournments during this period were by consent [see [11] above], the Court's record of the orders made on 30 August shows that this adjournment was granted on Mr Johns' application and, if necessary, I take judicial notice of that fact pursuant to Order 35 rule 9. On the same day Mr Johns had sworn an affidavit, which is annexed to Mr Melrose's own affidavit. In his affidavit Mr Johns states that: '4. I submit that, given reasonable time to realise and borrow against my assets, I will be able to pay the debt due to the [DCT] in full and, that I am able to pay my debts. 5. I practice as a solicitor of the Supreme Court of New South Wales. The making of a sequestration order against my estate is likely to detrimentally affect my right to practice.' 29 In court that day Mr Johns' representatives filed a Notice of Intention to Oppose Petition. The two grounds set out in the notice were that Mr Johns was able to pay his debts and that "There for [sic] other sufficient cause a sequestration order ought not be made." The Notice refers to the affidavit, which was also filed in court. The matter was adjourned to 21 September 2004 and the Registrar made directions about the filing of affidavits.

30 August 2004: A Statement of Affairs 30 Exhibited to Mr Melrose's affidavit is a statement of affairs dated 30 August 2004. On page 6 of the statement there is a heading, 'About your Insolvency' and next to it is written 'INSOLVENCY IS NOT ADMITTED'. On the same page Mr Johns indicates that his taxable income in the preceding 12 months was derived wholly from the legal practice and amounted to some '(E) $201,755+'. I take it that the 'E' indicates that the figure is an estimate. In the next section Mr Johns was asked about taxable income that he expected to receive in the following 12 months. Mr Johns states that he expected the only taxable income to come from the legal practice and as to the amount makes the comment that 'If Estate sequestered, probably nil, if not, as in prior recent years.' 31 On page 12 of the statement of affairs there is a section which calls for information about 'Vehicles'. Mr Johns listed 5 vehicles: 3 Rolls Royces, a Bentley and a Citroen. The total 'Estimated Resale Value' for the motorcars was $1.355 million. The total 'Amount Owed' was $840,000. On page 13 under the heading 'Other items of value' Mr Johns listed the 'Artworks & Antiques' at home as having an Estimated Resale Value of $750,000 and the artworks at his office at $180,000. Section 45 on page 22 deals with real estate and Mr Johns stated that he owned a house at Glebe Point Road. The 'estimated resale value of the property' was $4.25 million and the amount owed 'to creditors who hold security over [the] property' was $3.275 million. 32 Section 46 on page 23 deals with 'Shares' and Mr Johns indicated that he held shares in 5 private companies. Against 3 of them he stated that he owned 'All issued shares'. Those companies were: Le Canadel Pty Ltd; Le Canadel Properties Pty Ltd and Stony Holdings Pty Ltd. The remaining 2 companies in which Mr Johns owned shares were Loadent Pty Ltd and Hitego Pty Ltd. 33 The hearing of the petition was adjourned twice by consent before coming before the Court again on 26 October 2004. On that date, the applicant indicated to the Registrar that the applicant would oppose any further adjournment of the hearing. The Registrar made directions designed to prepare the matter for a contested hearing. On 9 November 2004 the Registrar made further directions and on 23 November 2004 the matter came before Allsop J for the first time.

1 November 2004: Valuation of the Glebe Point Property 34 One of the exhibits to Mr Melrose's affidavit is a valuation report by Colliers International dated 1 November 2004 The valuation relates to the Glebe Point property and is described to be 'under instruction from Malcolm Johns on behalf of Commonwealth Bank of Australia. Colliers valued the property at $4.3 million. Appendix B to the report is a title search dated 24 September 2004, which records Loadent Pty Ltd ('Loadent') as the owner of the property. According to a document entitled "Land and Property Information New South Wales - Title Search", which was annexed to Mr Melrose's affidavit, Loadent was the registered owner of the Glebe Point property as at 3 June 2005, the date of that search. According to page 5 of Loadent's "Financial Report for the Year Ended 30th June 2003, which was exhibited to the affidavit, at that time, Loadent held the Glebe Point property on trust. 35 Another document annexed to Mr Melrose's affidavit is an ASIC Historical Company Extract in respect of Loadent. The extract is dated 3 June 2005 and records that Loadent had issued capital of 1 share and that that share was held by a Mr Daniel McGregor Downie. The extract indicates that this share was not beneficially held. Mr Downie had been a director from 15 October 1998 to 15 June 2004. On 15 June 2004 Mr Johns was appointed and he is listed as the 'Current Director' and the 'Current Secretary'. In his affidavit Mr Melrose recounts that on 4 March 2005 junior counsel for Mr Johns provided him with a copy of a stamped, unregistered transfer in respect of the Glebe Point property. That transfer is annexed to Mr Melrose's affidavit. It is a transfer from Loadent to Mr Johns and is dated 10 March 1999. The transfer is expressed to be "pursuant to a Deed of Trust bearing date 4 December 1998" and is executed and stamped. Mr Weston's report also provides some guidance, at page 8 Mr Weston reports: 'Based on information provided by the debtor, it would appear that the debtor may have an interest in [the Glebe Point Property] for the following reasons: · The purchase of the property was settled in March 1999 and for land tax purposes, a shelf company was created, of which the debtor was the bare trustee. The property was purchased in the company's name. · In or around 2002, the legislation regarding land tax changed and it was assessed that an amount of approximately $800,000 was due by the debtor to the Australian Tax Office.' 36 The terms of this extract are, in at least two respects, clearly wrong. If the Glebe Point property was purchased in Loadent's name, it would be the bare trustee. Moreover, the reference to the 'Australian Tax Office' should be a reference to the 'NSW Office of State Revenue'. 37 From the foregoing it would seem that the Glebe Point property was registered in the name of Loadent as bare trustee for Mr Johns, at least from 10 March 1999 and perhaps from an earlier date.

Land Tax 38 Returning to appendix B to the Colliers valuation - the title search of 24 September 2004 - there are 5 entries in the Second Schedule. They are: '1. Reservations and Conditions in the Crown Grant(s) 2. 8555892 Mortgage to Westlawn Finance Limited 3. 9930308 Mortgage to National Australia Bank Limited 4. 9930309 Postponement of Mortgage. Priority now 9930308, 8555892 5. AA585203 Caveat by Her Majesty Queen Elizabeth II affecting Lots 40-42 in DP975580' 39 In appendix C to the Colliers valuation there is a copy of the caveat referred to in entry number 5. The interest claim is 'As first charge pursuant to Section 47 of the Land Tax Management Act 1956'. The statutory declaration accompanying that caveat was made on 19 July 2002. Mr Johns did not mention any debt to the NSW Office of State Revenue on account of land tax in his August 2004 statement of affairs. Nor did he list that office as a secured creditor. While he was not the registered proprietor of the Glebe Point property, it seems he was the beneficial owner. It seems clear that the encumbrances on the property totalling some $3.3million in the August 2004 proposal did not include anything on account of land tax.

MID November 2004: Disputed Communications 40 During November 2004 communications took place between Mr Johns personally, an officer of the applicant, whose name is Ms Jennifer Game, and a Mr Mathew Barrett, an officer of the Commonwealth Bank of Australia. 41 Both Mr Johns and Ms Game made affidavits in the proceedings before Allsop J and both their affidavits were tendered as exhibits to Mr Melrose's affidavit in these proceedings. Mr Johns affidavit was sworn on 13 December 2004 and Ms Game's affidavit was affirmed on 14 February 2005. 42 In his affidavit Mr Johns deposes to having a number of discussions with Mr Barrett between 8 November and 23 November 2004. Mr Johns was trying to obtain a loan from the Commonwealth Bank and Mr Barrett was his contact there. On 12 November 2004 Mr Johns and Mr Barrett had a conversation in which Mr Barrett indicated that one of the conditions the bank would require was that the ATO change its position in relation to quarterly repayments. Mr Barrett suggested that Mr Johns obtain a letter from the ATO setting out the new arrangements. Mr Johns replied that he would try to get a letter like that. 43 According to Mr Johns he then had a meeting with Ms Game at the ATO offices in Centrepoint on 15 November 2004. Mr Johns expected to receive at least $500,000 from the Commonwealth Bank loan. He indicated to Ms Game that he would pay that amount to the ATO. He also expected to sell his 1911 Rolls Royce motorcar to a friend and receive a net amount of $400,000 in May 2005. This amount would also be made available to the ATO. Mr Johns told Ms Game that the bank wanted the ATO to reduce the quarterly repayments and that the bank would like confirmation. Ms Game agreed to Mr Johns' proposal and said that once the $500,000 had been received the petition would be withdrawn. Mr Johns would pay the $400,000 to the ATO in mid-June 2005. Mr Johns and Ms Game agreed that Mr Johns would arrange for Mr Barrett to telephone her. Mr Johns did so and after some initial difficulties in contacting Ms Game, Mr Barrett reported to Mr Johns on 18 November 2004 that he had spoken to Ms Game and confirmed the agreement which had been struck with Mr Johns at the 15 November meeting. That was Mr Johns' version of events. 44 Ms Game gave a markedly different account in her affidavit of 14 February 2005. At the 15 November meeting Mr Johns put his proposal to her but she indicated that as far as the ATO was concerned Mr Johns was insolvent. The ATO could not proceed with the arrangement which Mr Johns proposed unless he could satisfy the Court that he was solvent and the Court granted him more time. The ATO's position was that it had given Mr Johns several extensions of time and would not give him any more. Ms Game goes on to include reference to a number of prior consistent statements. Included in these was that Ms Game had said to Mr Barrett: 'I think that [Mr Johns] is insolvent'. There was also the following statement: '9. I was firmly of the view, having regard to the breached arrangement arising from the 2002 ATO petition, the lack of any immediate payment, inaction by Mr Johns on realising his assets and his apparent, to me, insolvency, that I was not prepared to grant any arrangement of the kind he proposed and would not have said anything to indicate that I would agree.'

23 November 2004: Proceedings before justice allsop 45 As I have already indicated, the matter came before Allsop J for the first time on 23 November 2004. At that stage his Honour had before him the creditor's petition and the notice of intention to oppose it. The grounds of opposition were not particularised but were, in effect, that Mr Johns was solvent and that a sequestration order ought not be made because of its likely effect on his ability to practice as a solicitor. Despite the directions made by the Registrar in October and November 2004 the matter was not yet ready for a hearing and on 23 November 2004 Allsop J made the following directions:

'1. That on or before 10 December 2004, the respondent [Mr Johns] file and serve any further evidence upon which it [sic] seeks to rely, other than valuation evidence, and any amended notice of opposition.

2. That counsel confer in relation to valuation evidence prior to 14 December 2004.

3. That the matter be stood over for further directions at 9:30 am on 14 December 2004.'

46 On 14 December 2004 Mr Johns filed in court the affidavit he swore on 13 December 2004 and an amended notice of intention to oppose the petition. The amended notice provided particulars of the second ground of opposition, that the making of a sequestration order would have an undesirable effect on Mr Johns' ability to practise as a solicitor and, in turn, a detrimental effect on his creditors. Although expressed to be part of the second ground, details of the alleged agreement struck between Mr Johns and Ms Game in November were included and it was said that it would now be unconscionable for the applicant to proceed to seek or obtain a sequestration order against Mr Johns. 47 On 14 December Allsop J made the following directions, and I take this from the Court's records rather than [16] of Mr Melrose's affidavit:

'1. Grant leave to file in court the affidavit of Malcolm Nelson Johns sworn 13 February [sic: December] 2004.

2. The respondent [Mr Johns] file and serve all expert evidence on which he will seek to rely on or before 21 January 2005.

3. The respondent file and serve all remaining lay evidence on which he will seek to rely on or before 31 January 2005.

4. The applicant [DCT] file and serve any affidavit of expert or lay witnesses on or before 14 February 2005.

5. The matter be set down for hearing at 10:15 am on 10 March 2005 for 2 days.

7. Grant leave to file in Court Amended Notice of Intention to Oppose Petition.'

48 On 2 March 2005 Mr Johns filed affidavits of Mr A Davies sworn 16 February 2005 and Mr P Clark sworn 2 March 2005. Both gentlemen describe themselves as valuers. The same day the applicant filed an affidavit of a Mr David Bird sworn 2 March 2005, who is also a valuer. The next day, 3 March 2005, Mr Johns filed in court a notice of motion supported by two affidavits. These two affidavits were sworn by Mr Johns, the first on 2 March 2005 and the second the following day. On the motion Mr Johns sought an order vacating the hearing dates of 10 and 11 March 2005.

2 March 2005: The affidavit in support of the motion to vacate hearing dates

The outcome of the re-financing plan 49 In his affidavit of 2 March 2005 Mr Johns set outs what occurred in relation to his plan to reorganise some of his loans. The plan involved the Glebe Point property and the legal practice. Mr Johns says that on 3 February the mortgages in favour of the National Australia Bank ($2,651,858.14) and Westlawn Finance Limited ($725,000) were discharged and a surplus of $500,000 was paid over to the ATO. The money, totalling $3,876,858.14, came from the Commonwealth Bank. As a result of the repayment of the Westlawn loan, its security over the legal practice was removed. 50 The $500,000 which was sent to the ATO was not entirely directed to reducing Mr Johns' indebtedness to the ATO. A letter is annexed to the affidavit which provides more detailed information about the distribution of the money. That letter was written by a Ms Gabrielle R Dwyer, on the letterhead of 'Malcolm Johns & Company, Lawyers' and dated 3 February 2005. It was sent to Ms Mene Scoufis at the ATO. In his affidavit Mr Johns describes it as 'Letter from me to ATO…'. 51 According to Mr Johns' instructions the payment served to reduce Mr Johns' own debt by $203,050.82. In addition, some $214,478.57 was applied in reduction of the debts owed by 4 companies controlled by Mr Johns: 'Hitego', 'Le Canadel', 'Le Canadel Properties' and 'Stony Holdings'. The debts owed by those companies and by Mr Johns himself were set out in a table. The remaining $82,470.61 was directed as follows:

'1. To pay any such interest amounts incurred since the above table was compiled for the accounts contained in said table.

2. To pay any costs incurred in the filing of the Statement of Liquidated Claim against Stony Holdings Pty Ltd.

3. To be distributed against the latest entries in Malcolm Nelson Johns' Legal and Income Tax Accounts.'

52 In relation to these arrangements Ms Dwyer wrote: 'As discussed, the aim of these payments is to completely clear all Tax Office Accounts for Hitego Unit Trust, Le Canadel Pty Ltd, Le Canadel Properties Pty Ltd, Stony Holdings Pty Ltd and the Malcolm Johns & Co Running Balance Account, and to make a start on paying the amounts contained in Malcolm Nelson Johns' Legal and Income Tax Accounts.'

The Rolls Royce Motorcars 53 Mr Johns says that since the date of his last affidavit (13 December 2004) he had sold two of his Rolls Royce Silver Ghost motor vehicles (the 1911 and the 1923) to a Mr Jorge Aquilino Fernandez. Annexed to the affidavit was the text of an email sent on 3 February 2005 from Mr Johns to a Mr Grahame Young who was acting on Mr Fernandez's behalf. According to the email, Mr Fernandez had agreed to buy both motorcars for the sum of $830,000. After discharging the encumbrances on the vehicles, the residue of the purchase price was calculated to be $300,000. This sum was to be paid directly to the ATO. The encumbrances were in favour of Esanda and Westpac. Mr Johns goes on to say that the payment to Esanda in relation to the 1923 motorcar had fallen due on 16 January 2005 and that the payment to Westpac was due on by 22 February 2005. The payment to the ATO was to be made by 30 June 2005.

The Sale Of The Glebe Point Property And The Personalty 54 The next part of the affidavit sets out Mr Johns' proposal to sell the Glebe Point property and his personalty 'in order to pay [his] debt to the DCT the subject of the Creditor's Petition…'. Mr Johns had obtained advice in relation to selling the Glebe Point property and annexed to the affidavit is a letter from Cassim Real Estate dated 28 February 2005. In the letter Cassim provided details of a marketing campaign which they would undertake in relation to the property commencing on 30 March 2005. In order to obtain the highest possible price they recommended that the property be sold by private treaty. Cassim thought that a 'reasonable current market selling price' for the property would have been between 4 and 4.5 million dollars. 55 Mr Johns sought advice in relation to selling his personalty from Glenleigh Antiques Pty Ltd. A letter is annexed to the affidavit and is 1 page in length. Unfortunately this page has been omitted from the documents exhibited to Mr Melrose's affidavit, however I have the advantage of having the full affidavit since it is in the court file relating to the creditor's petition which was before Allsop J. The letter is headed "Marketing Proposal Antiques, Fine Arts & Rare Toys Collection" and in it Mr Leigh Pritchard of Glenleigh says that he and Mr Paul Sumner would be entering into discussions with the major auction houses to negotiate the sale of the collection on Mr Johns' behalf. Mr Pritchard strongly suggested that the collection be sold at an auction held at Mr Johns' residence, which he referred to as "Hartford House". Mr Leigh referred to a valuation of Mr Paul Clark and says that he was "confident that the prices detailed in [Mr Clark's] valuation were achievable with our proposed marketing plan". Mr Clark had valued the collection at $1,937,223. 56 In his affidavit Mr Johns expressed concern that unless the marketing and sale of the Glebe Point property and the collection were undertaken in an orderly fashion the proceeds would be considerably reduced.

The Effects Of A Sequestration Order 57 The final part of the affidavit related to the effects a sequestration order would have on Mr Johns and it is useful to set these paragraphs out in full:

'10. I am presently 64 years old and have practised as a solicitor in New South Wales for over 41 years. I was admitted as a solicitor on 18 March 1963, having previously undergone 5 years of article clerkship. I became a partner in the firm Kearney Boyd & Johns on 1 August 1965, then on 1 May 1978 I became a partner in Johns Brand & Co. Since 9 March 1979 I have practised as a sole practitioner under the name "Malcolm Johns & Co".

11. I am extremely concerned that should a Sequestration Order be made against my estate, my entitlement to hold a Practising Certificate as a solicitor will be in jeopardy having regard to Section 38FB(3) of the Legal Profession Act, 1987 (and after 1 July 2005, Section 42(2) of the Legal Profession Act, 2004). I have disclosed the presentation of the Creditor's Petition herein to the Law Society of New South Wales, which has determined that, pending the determination of these proceedings and upon certain conditions, I am a fit and proper person to hold a practising certificate. Should however my right to hold a practising certificate be withdrawn from me by reason of the making of a Sequestration Order against my estate (and with it the right to maintain a trust estate), then the value of my legal practice will largely be destroyed. I have estimated this practice to be worth, on a going concern basis, in excess of $1.3 million as recorded in my aforesaid Statement of Affairs. As is shown in annexure "A" of my aforesaid affidavit, CBA was prepared in November 2004 to lend me $700,000.00 as a business loan in respect of this practice. My ability to continue to practice as a solicitor is of course essential to my ability to engender income at my age.

12 The sale of my legal practice is not in my opinion a viable option in the present market, at least not in the short term. Further, for the reasons given above it is not necessary that the practice be sold in order to realise sufficient moneys to pay my indebtedness to the DCT in full. The prospective loss of this asset, and of my future income, in the event of a Sequestration Order being made against me and my losing my right to practice as a sole practitioner, I submit is a hardship in all the circumstances which is both unnecessary and unreasonable. I have at all times recognised my taxation responsibilities and liabilities to the DCT, have never sought to avoid or conceal them and have always attempted to negotiate with the DCT to pay the liabilities which were caused by the contraction of my legal practice as a result of the recent downturn in personal injury work. The DCT is my only creditor of substance, apart from related party creditors and ordinary trading creditors of the legal practice which are within normal terms (as disclosed in Part C of my aforesaid Statement of Affairs).

13 I accordingly humbly request that this Honourable Court grant my request to vacate the hearing dates in these proceedings fixed for 10 and 11 March 2005 and adjourn the hearing of the Creditor's Petition to a date to be fixed having regard to the impending sales of the Property and the Personalty.'

3 & 4 March 2004: Hearing OF the Motion TO vacate Before Allsop J 58 Allsop J began to hear Mr Johns' motion on 3 March 2005 but ultimately stood the matter over to the following day. On 4 March 2005 Allsop J made the following orders, which I take from the Short Minutes of Order handed up that day: 'By consent and subject to the conditions agreed between the parties set out below, the court orders that:

The hearing date fixed for these proceedings on 10 March 2005 be vacated.

The Respondent [Mr Johns] pay the costs of the Applicant of the motion to vacate and counsel's fees thrown away by the adjournment on an indemnity basis.

The Applicant have leave to proceed to taxation of the costs referred to in Order 2 above forthwith.

The Creditor's petition be adjourned to 9:30am on 3 May 2005 for directions before Allsop J.

Either party have liberty to apply on 3 days' notice.

The Court notes the following agreement between the parties:

The Respondent hereby withdraws the Notice of Grounds of Opposition filed on his behalf in the proceedings.

The Respondent shall notify the Applicant, at the office of the solicitors for the Applicant, in writing of each disposal of property other than in the ordinary course of the conduct of the legal practice under the name of Malcolm Johns & Co within 2 business days of any such disposal.'

59 In paragraphs 11 and 12 of the Points of Claim in relation to the applicant's third claim [that the authority signed by Mr Johns on 7 June 2005 naming and authorising Mr Weston to call a meeting of creditors of Mr Johns and to take control of the property of Mr Johns, be set aside as an abuse of process], the following allegations are pleaded:

'11. On 3 March 2005, on a motion by the First Respondent [Mr Johns], the hearing date was vacated, the First Respondent withdrew the Amended Notice to Oppose Petition and the petition was adjourned.

12 The purpose of the orders in paragraph 11 was to permit the First Respondent to dispose of his assets in an orderly way to pay the Applicant's debt.'

60 In his Points of Defence Mr Johns admitted paragraph 11 but did not admit paragraph 12. At [19] of Mr Melrose's affidavit he says that: '19. The DCT consented to the order vacating the hearing date of 10 March 2005. On 3-4 March 2005 the legal representatives for Mr Johns advised AGS that Mr Johns intended to take prompt steps to dispose of assets in order to raise funds with which to meet his debt to the DCT.' 61 The second sentence of [19] is not in evidence, however, it is clear from Mr Johns' affidavit of 2 March 2005 what his stated intentions were. He intended to sell the Glebe Point property and his collection of personalty and described those sales as 'impending'. The proceeds of those sales were to pay his indebtedness to the applicant and he had already taken the step of obtaining advice in respect of both sales. At [29] of his affidavit, which is in evidence, Mr Melrose says: '29. As stated above (at paragraphs 18 and 19) the Creditor's Petition in 2004 proceedings was the subject of a Motion to vacate the hearing date on 3 March 2005. Mr Johns advised the Court (through senior counsel) that an adjournment of the Creditor's Petition was sought for a period of several weeks in order to allow time for marketing, sale and disposal of assets…' 62 On 3 March 2005 Mr Johns' solicitors had written to Mr Melrose by email enclosing a document entitled "Asset Realisation Program". One way to summarise the document is as follows: No. Asset Surplus 1 Property 244 Glebe Point Road, Glebe Point $500,000 2 Personalty - artworks, antiques and rare toys $1.93M 3 1911 and 1923 Rolls Royce motorcars $300,000 4 Legal practice $700,000 TOTAL $3.43M

63 Marketing in relation to the Glebe Point property was to commence on 30 March 2005 and marketing for the personalty had already started. The sale of the motorcars was to complete on 30 June 2005. The legal practice was a little more complex. It was said to be valued at between $700,000 and $1.3M and carried a liability to the Commonwealth Bank in the amount of $700,000. In relation to this it was said 'Bill of sale for $700,000 to CBA - to be discharged and practice becomes unencumbered upon property being sold. Ordinary trade creditors approx $30-40,000.' 64 Despite Ms Game's insistence that Mr Johns was insolvent in November 2004, the applicant was clearly of the view in early March 2005 that it was in the applicant's interest to allow the sale of the personalty and the Glebe Point property to go ahead rather than to press for a hearing of the creditor's petition and the making of a sequestration order.

29 March 2005: Bill of sale to Tony Faure 65 The following information about the bill of sale executed in late March 2005 is taken from Mr Weston's report. 'On 29 March 2003 [sic: 2005] Tony Faure and Malcolm Nelson Johns executed a Loan Contract. The terms of that Loan Contract provide, inter alia, as follows: · The amount of the loan is $600,000; · The interest rate is 10% fixed for the term of the Loan Contract; · The repayment [sic: payment] of the sum of $15,000 interest is payable on the date of the advance; · Mr Johns is required to provide to Mr Faure a Bill of Sale over certain artwork at Level 12, Skygarden Building, 77 Castlereagh Street, Sydney set out in Annexure "A" and certain collectibles, artwork and other personalty at 244 Glebe Point Road, Glebe set out in Annexure "B" · Mr Johns pay an additional amount of consideration for the advance of not less than $45,000 "for the forbearance of the credit provider under the terms of the commercial hire purchase agreement…' 66 The 'Loan Contract' is not in evidence. Neither are the 'Bill of Sale' or the 'commercial hire purchase agreement'. Mr Weston goes on to report that on the same day, 29 March 2005, Mr Johns executed a 'Bill of Sale' in favour of Tony Faure. The bill of sale was in relation to certain personal property located at Mr Johns' offices and certain 'collectibles, art and furnishings' located at 244 Glebe Point Road. 67 On or about 31 March 2005, Loadent granted a mortgage to Mr Faure over the Glebe Point property. The mortgage document appeared to Mr Weston to have been executed by Mr Johns as sole director of Loadent. The mortgage in favour of Mr Faure secured two sets of obligations. The first were those under 'the Agreement', details of which are not given but one could infer that this is a reference to the 'Loan Contract'. The second set were those under a 'Commercial Hire Purchase Agreement dated 11 July 2002'. Mr Weston writes: 'The debtor has informed us that he entered into that Commercial Hire Agreement with Tony Faure pursuant to which Tony Faure advanced to the debtor [Mr Johns] $130,000 and that the amount remaining to be repaid as per the terms of that agreement at the time of [sic] the Bill of Sale was signed was $89,000.'

What became of the $600,000 advanced by Mr Faure? 68 The answer is not entirely clear. Mr Weston concludes by saying 'Further investigations will be necessary in relation to where the $600,000 loan monies went and why.' However, Mr Weston was able to provide some information, which was as follows: 'On 31 March 2005, Mr Johns paid the sums of $45,000 and $89,526.85 to Robinson Beale Horton McMinn, the solicitors acting on behalf of Tony Faure, which were held by that firm in controlled monies accounts described to be "Robinson Beale Horton McMinn in trust for Faure/Johns". The debtor has informed us that he instructed Robinson Beale Horton McMinn to release those monies to Tony Faure on 6 June 2005 and that those monies were released to Tony Faure on that day. The $89,526.55 [sic] payment related to the amount outstanding to Tony Faure under the Commercial Hire Agreement dated 11 July 2002. The $45,000 payment relates to the payment of the additional consideration payable under the loan contract. On 31 March 2005, $282,445.63 was paid to the Malcolm Johns & Co business account with NAB [Account number …]. Those monies have since been disbursed from that account in a number of different payments to different organisations including an $88,000 payment to Hitego, $28,000 on account of PAYG and $31,000 to the CBA. The details of the payments made are recorded in the bank statements which are in my possession. Further analysis is required of those bank statements. $55,000 was paid to Stuart Murray as a consulting fee; $10,600 was paid in Land Tax; $85,000 was paid to Arthur Forrest an accountant. $12,000 was paid to Robinson Beale Horton McMinn, the lawyers acting for Tony Faure on the transaction, as legal fees arising from the transaction.' 69 Mr A Forrest is listed as Mr Johns' accountant in his August 2004 Statement of Affairs. 70 It is clear from Mr Melrose's affidavit that the applicant knew nothing about Mr Johns' transactions with Tony Faure. Indeed, Mr Melrose suggests that the first and only information which was received was found in a statement of affairs dated 7 June 2005. While this was not admitted by Mr Johns [see [16] of the Points of Claim and Points of Defence], it seems fairly clear that the applicant only became aware of this transaction on receipt of the statement of affairs of 7 June 2005.

28 April 2005: Expressions of Interest Close 71 On 5 April 2005 Mr Melrose downloaded an extract "from the website of Cassim" which relates to the Glebe Point property. He printed the extract and annexed it to his affidavit. The extract seems to be sourced from the website www.domain.com.au and bears Cassim's logo. It contains details relating to the Glebe Point property and a number of photographs. On the second page of the printout is the statement 'Expressions of Interest Closing 4.00pm, 28 April, 2005 (unless sold prior)'. Shortly after 28 April 2005, on 2 May 2005, Mr Melrose telephoned Mr Baird, the solicitor acting for Mr Johns. 72 Later that morning Mr Baird forwarded an email to Mr Melrose. The email had been sent from Mr Johns to Mr Baird. The subject line of the email read "Update of Orders made by Allsop J on 4 March 2005 for the purpose of Directions Hearing on 3 May 2005" and in the body of the message Mr Johns described it as a "report on progress made since the proceeding was last before the Court". In that email Mr Johns said: ' …The [Glebe Point property] was open for inspection by appointment during April 2005 on Saturday and Wednesday evenings and the number of inspections were [sic] gratifying. Three contracts have been issued and my agents are dealing with these 3 potential purchasers and I am told that offers around my expectation can be expected in the next days or so…' 73 On pages 16-17 of his report Mr Weston stated: '· The debtor appointed Cassim Real Estate in conjunction with Alison Coope to market the [Glebe Point property], pursuant to an agency agreement dated 17 March 2005. · I was informed by the agent that a marketing schedule was submitted and approved by the debtor. The property was submitted for sale by expressions of interest closing on 28 April 2005. No expressions of interest were received by the closing date.'

3 May 2005: Directions hearing Before Allsop J 74 Pursuant to the orders made on 4 March 2005, on 3 May 2005 the creditor's petition came before Allsop J for directions. By consent the matter was stood over to 7 June 2005.

14-15 May 2005: The Auction of personalty Takes Place 75 On 10 May 2005 the Sydney Morning Herald reported on the auction of personalty which was to take place at the Glebe Point property. The auction took place on 14 and 15 May 2005. Bonhams & Goodman were the auctioneers and a catalogue of the items up for sale was an exhibit to Mr Melrose's affidavit. 76 On 16 May 2005, the day after the auction took place, Mr Melrose wrote to Mr Johns' solicitors reminding them of the agreement between the applicant and Mr Johns noted in Allsop J's orders of 4 March 2005. Mr Melrose wrote "Pursuant to the agreement…we await notification in writing from you of any disposal of property consequent upon the auction conducted on 14-15 May 2005." After 16 May 2005 letters passed between the AGS and Mr Johns' solicitors until 1 June 2005, when Mr Johns' solicitors emailed Mr Melrose a document setting out the results of the auction. The document is entitled 'Vendor After-Sale Advice' and comprises 169 pages. On the last page the gross proceeds are stated as $829,194.00 and it appears that costs and commission had not been taken into account.

1 June 2005: Interest in glebe point property 77 In an email from Mr Johns to Mr Baird of 1 June 2005 Mr Johns said that 'Billy Bridges told [him] on Monday [30 May 2005] that he has "a live one" on the house and he is working on them as to price.

1 - 6 June 2005: Results of auction conveyed to the applicant 78 On 1 June 2005 Mr Melrose received a 'Vendor After-Sale Advice' document from Mr Johns' solicitors. It was unclear from that document exactly how much of the $829,194 Mr Johns would ultimately receive. This difficulty was compounded by the fact that Mr Johns had allowed Mr Pritchard to introduce some items into the auction. It was therefore necessary to identify Mr Pritchard's lots and subtract the amounts received in relation to those lots from the total. Mr Johns also encountered some difficulty in obtaining a final account from the auctioneers taking into account commissions and other charges. On 6 June Mr Johns wrote to his solicitors and the email was forwarded to Mr Melrose: '…The B&G auction figures I have manually calculated are as follows- Gross sales $829,194 Less Glenleigh Antiques introduced lots $101,980 Balance $727,214 Less B&G commission $43,632 balance $683,581 Less extra charges by B&G $29,711 balance $653,870 The auction was a disaster from my standpoint and the forced sale resulted in things being given away. The proceeds were less than half what I would have received normally. Paul Sumner told me this afternoon that B&G today informed him that they anticipated paying him tomorrow …'

7 June 2005 79 The hearing of the creditor's petition was due to resume before Allsop J at 9:30 am on 7 June 2005. Shortly prior to that day the applicant had notified Mr Johns that on 7 June 2005 she would seek a sequestration order against his estate. 80 On 7 June 2005 Mr Weston sent a letter to the applicant which stated: 'I confirm that at approximately 8:45am today I executed the relevant authority under Part X of the Bankruptcy Act accepting appointment as Controlling Trustee of the Estate of Malcolm Nelson Johns of 244 Glebe Point Road, Glebe Point. I enclose herewith the following documents: · Authority appointing me as Controlling Trustee and my consent to act; · Personal Insolvency Agreement; and · Statement of Affairs Date this 7th day of June 2005' 81 As at 7 June 2005 Mr Johns admits that he was insolvent and he knew he was insolvent before signing the authority.

the application 82 The applicant did not seek to eschew the obvious, that the urgency of her application, if not its driving force, was the operation of s 189AAA of the Act which is in the following terms: '(1) If: (a) an authority signed by a debtor under section 188 has become effective; and (b) either: (i) a creditor's petition was presented against the debtor before the authority became effective; or (ii) a creditor's petition is presented against the debtor after the authority became effective but before the first or only meeting of the debtor's creditors called under the authority; proceedings relating to that petition are, by force of this subsection, stayed until: (c) the conclusion of the meeting; or (d) the adjournment of the meeting; whichever is the earlier. (2) This section does not limit subsection 206(1)' 83 The applicant's second creditor's petition was presented to the Court on 6 July 2004 and will lapse at midnight on 5 July 2005: Subsection 52(4)(a) of the Act. All proceedings relating to the petition are, by force of subs 189AAA(1), stayed until the earlier of the dates mentioned in the subsection, including an application to extend the life of the petition under subs 52(5) of the Act. 84 It follows that unless the applicant secures relief in one of the forms claimed in the application and, on a subsequent hearing of the applicant's second creditor's petition, the Court makes a sequestration order against Mr Johns' estate prior to 6 July 2005, the petition will lapse.

THE APPLICANT'S CLAIMS FOR RELIEF 85 I propose to deal with each of the applicant's claims for relief in the same order that they were addressed by the parties on the hearing before me rather than in the order in which they appear in the application.

1. Declaration that authority is not effective for the purposes of Part X of the Act 86 Section 188 of the Act contemplates that a debtor who desires that his affairs be dealt with under Part X without his estate being sequestrated sign an authority in accordance with the approved form naming and authorising a registered trustee to call a meeting of the debtor's creditors and to take control of the debtor's property: Subsection 188(1). The signing of the authority constitutes an act of bankruptcy: Paragraph 40(1)(i). 87 However, the signed authority does not become effective for the purposes of Part X unless and until the requirements of the section have been met. Relevantly, these are:
   1. The person authorised has consented in writing to exercise the powers given by the authority: Paragraph 188(2)(a).
   2. The signature of the debtor to the authority and the signature of the trustee to the consent are each attested by a witness: Paragraph 188(2)(b).
   3. Before the person authorised consents to exercise the powers given by the authority, the debtor gives to the person authorised: (a) a statement of the debtor's affairs; and (b) a proposal for dealing with them under Part X: Subsection 188(2)(C). It is only once these requirements have been met that the person who has been authorised under the authority to convene the meeting and take control becomes the controlling trustee: Subsection 187(1) definition of 'controlling trustee' and subs 188(6) and subs 189(1). 88 Under subs 188(2E), a proposal for dealing with the debtor's affairs under Part X must include a 'draft personal insolvency agreement'. 89 Subsections 188A(1), (2) and (3) set out the requirements for a personal insolvency agreement. They provide: ' (1) A personal insolvency agreement is a deed that: (a) is expressed to be entered into under this Part; and (b) complies with subsection (2). (2) A personal insolvency agreement must: (a) identify the debtor's property (whether or not already owned by the debtor when he or she executes the agreement) that is to be available to pay creditors' claims; and (b) specify how the property is to be dealt with; and (c) identify the debtor's income (whether or not already derived by the debtor when he or she executes the agreement) that is to be available to pay creditors' claims; and (d) specify how the income is to be dealt with; and (e) specify the extent (if any) to which the debtor is to be released from his or her provabledebts; and (f) specify the conditions (if any) for the agreement to come into operation; and (g) specify the circumstances in which, or the events on which, the agreement terminates; and (h) specify the order in which proceeds of realising the property referred to in paragraph (a) are to be distributed among creditors; and (i) specify the order in which income referred to in paragraph (c) is to be distributed among creditors; and (j) specify whether or not the antecedent transactions provisions of this Act apply to the debtor; and (k) make provision for a person or persons to be trustee or trustees of the agreement; and (l) provide that the debtor will execute such instruments and generally do all such acts and things in relation to his or her property and income as is required by the agreement. (3) Subsection (2) does not limit the provisions that may be included in a personal insolvency agreement.' 90 Finally, for present purposes, subs 204(1) and (2) provide: '(1) The creditors may, at a meeting called in pursuance of an authority under section 188, by special resolution: (a) where the debtor's property is subject to control under this Division, resolve that the debtor's property be no longer subject to control under this Division; (b) require the debtor to execute a personal insolvency agreement; or (d) require the debtor to present a debtor's petition within 7 days from the day on which the resolution was passed. (2) A special resolution requiring a debtor to execute a personal insolvency agreement must specify the provisions to be included in the agreement.' 91 It is not in dispute that the authority signed by Mr Johns on 7 June 2005, which is in evidence as an exhibit to Mr Melrose's affidavit, complied with the requirements of paras 188(2)(a) and (b). Mr Weston consented in writing to exercise the powers given by the authority and both his signature to the consent and Mr Johns' signature to the authority are each attested by a witness. Moreover, it is not disputed that Mr Johns gave to Mr Weston, on a timely basis, a statement of his affairs in an approved form: See s 6A of the Act. What is put in issue is that Mr Johns did not give Mr Weston a proposal for dealing with his affairs under Part X, specifically because it did not include a 'draft personal insolvency agreement' as required by subs 188(2E). 92 What Mr Johns gave Mr Weston was an instrument in the following form: 'MALCOLM NELSON JOHNS ("DEBTOR") PART X BANKRUPTCY ACT 1966 TERMS OF PROPOSED PERSONAL INSOLVENCY AGREEMENT I, MALCOLM NELSON JOHNS of 244 Glebe Point Road, Glebe Point in the State of New South Wales, Solicitor, hereby propose that my affairs be dealt with as follows:
      1. The Debtor shall convey to the Trustee all his divisible property as defined in Section 116 of the Bankruptcy Act excluding after‑acquired property to be dealt with in accordance with this Personal Insolvency Agreement ("PIA").
      2. The Trustee shall apply the funds received by him pursuant to this PIA in payment of: (a) The relevant Commonwealth Charges; (b) The remuneration of the Controlling Trustee and of the Trustee of this PIA; (c) The admitted claims of the participating creditors under this PIA in accordance with the provisions of the Bankruptcy Act.
      3. The Debtor shall retain any income to meet normal living expenses, but will be required to make contributions from his income available to the Trustee under this PIA to the extent that such income is represented by nett collections of debtors (being outstanding rendered costs less practice expenses, out-of-pocket expenses, Counsel's fees and other disbursements) and billable work in progress of the legal practice "Malcolm Johns & Company" as at the date of this PIA.
      4. This PIA shall bind all creditors of the Debtor, provided that nothing contained in this PIA shall affect the rights of secured creditors to realise or otherwise deal with property under their securities.
      5. Creditors shall receive their entitlements under this PIA in full and final satisfaction of their debts as provided under the Bankruptcy Act.
      6. Provided that the Debtor has in all respects complied with his obligations under this PIA and the Bankruptcy Act, he will be released and discharged from all provable debts owed by him to each of his creditors respectively and from all claims, actions, suits, demands and other proceedings by each of his creditors in respect of or on account of those debts.
      7. This PIA will commence on the date of it being duly executed by the Debtor and the Trustee in accordance with Section 216 of the Bankruptcy Act.
      8. This PIA will terminate if: (a) An Order is made by the Court under Section 222 of the Bankruptcy Act to set aside the PIA; or (b) The Trustee issues a Notice Terminating the PIA in accordance with Section 222A of the Bankruptcy Act; or (c) Creditors resolve by Special Resolution pursuant to Section 222B of the Bankruptcy Act to terminate the PIA; or (d) The Trustee is satisfied that the Debtor has complied with all of the obligations contained in the PIA and the Trustee has applied all of the available funds in payment of the claims of participating creditors, in which event the Trustee will issue a Certificate in accordance with Section 232 of the Bankruptcy Act.
      9. The provisions of the Bankruptcy Act relating to antecedent transactions shall not apply to this PIA.
      10. The Trustee of this PIA is Paul Gerard Weston of Horwath, 1 Market Street, Sydney NSW 2000.
      11. The remuneration of the Controlling Trustee and of the Trustee of this PIA shall be approved by creditors and paid out of the funds received by the Trustee pursuant to this PIA.
      12. The Debtor shall cooperate fully with the Trustee and shall execute all such instruments and do all such acts as are necessary or desirable further to give effect to the terms of this PIA. Dated 7 June 2005 (Sgd) Malcolm Nelson Johns' 93 The applicant contended that this document is not a 'draft personal insolvency agreement' because:
2. It is not in the form of a deed; alternatively
3. it is not expressed to be entered into under Part X. 94 The heading to the instrument set out in [92], in particular the words: 'PART X BANKRUPTCY ACT 1966 TERMS OF PROPOSED PERSONAL INSOLVENCY AGREEMENT' is, in my view, a complete answer to the second of the applicant's contentions. 95 It is clear that an instrument executed by the debtor and the trustee will only qualify as a 'personal insolvency agreement' under Part X if the instrument is a deed: Subsection 188A(1). 96 The instrument will be a deed if it is expressed to be a deed and execution of the instrument by the debtor and the trustee is attested by a witness who is not a party to the deed: Subsections 38(1) and (3) of the Conveyancing Act 1919 (NSW) and s 216 of the Act. However, no particular form of words is necessary. 97 If an instrument can operate as a deed, irrespective of its form, provided it is expressed to be a deed and its execution is compliant with the requirements for execution of deeds, it is difficult to see why an instrument does not qualify as a 'draft personal insolvency agreement' solely because it is not in the form of a deed; the form of the instrument is irrelevant to its qualification as a deed. 98 The instrument which Mr Johns gave Mr Weston is not a deed but that is only because it is not expressed to be a deed and Mr Johns execution of the instrument was not attested by a witness. If those matters were complied with, such as by the insertion of an appropriate attestation clause: 'Executed as a deed by the Debtor in the presence of" and Mr Johns' execution of the instrument was attested by a witness, it would operate as a deed by Mr Johns although, because of the requirements of s 216 of the Act, it would not be a personal insolvency agreement. 99 As if he saw the difficulty with his argument, Senior Counsel for the applicant trespassed outside his written submissions when he said: 'It is more than just the fact that it is not headed deed, if one actually looks at the substance of that document it is not set out in the form of the operative agreement that contains all of the terms. I think that is a better way of describing it. It does not set out with the particularity required the terms that go into the final document that comply with the requirements of s 188A(2). So it is just not the fact that it is not expressed to be as a deed, it doesn't contain the terms of the agreement. It is not capable of being executed as a document that has any binding effect. If one looks at it it contains terms that if put into a document would be capable of giving legal effect to, but it obviously doesn't contain all of the terms of the deed in their final form in the form that the debtor is putting up as the form on which creditors can vote. So it is not just the fact that it is not in form of the deed, it is not in the final form of the deed. It is an incomplete document.' [Emphasis] 100 However, when asked whether there were any matters in subs 188A(2) which are not covered by the instrument in question, Senior Counsel responded: 'They seem to have gone through the check list … your Honour' There was no further submission that the terms of subs 188A(2) were not covered by the instrument which Mr Johns gave Mr Weston on 7 June 2005. 101 For the foregoing reasons, I am of the view that the instrument which Mr Johns gave Mr Weston on 7 June 2005 does not fail to qualify as a 'draft personal insolvency agreement' within subs 188(2E) because it is not in the form of a deed. 102 One is impelled to the same conclusion by approaching the requirements of the term 'draft personal insolvency agreement' by reference to the purpose underlying subs 188(2E) namely, to enable creditors to know precisely what it is that the debtor is proposing so that they can accept, reject or amend it: Section 204 of the Act. Under this approach, the word 'draft' has its ordinary meaning - '… a first or preliminary form of writing, subject to revision': Macquarie English Dictionary - and the term 'personal insolvency agreement' takes its meaning from the requirements of s 188A but, in context, only those requirements which enable creditors to know exactly what the debtor is proposing. In this context, requirements going to form are irrelevant. Consequently the fact that the 'draft personal insolvency agreement' is not in the form of a deed is irrelevant: See St Leonards Property Pty Ltd v Stanley [2005] FMCA 497. 103 If I am wrong in this regard, then I am of the view that the defect or irregularity is formal rather than substantive and that it has not occasioned substantial and irremediable injustice: See Kleinwort Benson Australia Ltd v Crowl (1998) 165 CLR 71 in the joint judgment at 77; see also at 81 and subs 306(1) of the Act. 104 In the context of whether the defect or irregularity is substantial or formal, one is reminded of the principles stated by McHugh, Gummow, Kirby and Hayne JJ in Project Blue Sky v Australian Broadcasting Authority (1998) 194 CLR 355 at 390-391: 'The classification of a statutory provision as mandatory or directory records a result which has been reached on other grounds. The classification is the end of the inquiry, not the beginning. That being so, a court determining the validity of an act done in breach of a statutory provision, may easily focus on the wrong factors if it asks itself if compliance with the provision is mandatory or directory, and if directory, if there has been substantial compliance with the provision. A better test for determining the issue of validity is to ask whether it was a purpose of the legislation that an act done in breach of the provision should be invalid. This has been the preferred approach of courts in this country in recent years, particularly in NSW. In determining the questions of purpose, regard must be had to the "language of the relevant provision and the scope and object of the whole statute"'. [Emphasis] 105 The purpose of subs 188(2E) of the Act seems clear: To allow creditors to know precisely what it is that the debtor is proposing so that they can accept, reject or amend it, if they wish. If that is the purpose of the section then the instrument in question satisfies that purpose. It is not a complex task to make the minor amendments to the instrument so that it complies with the provisions of s 38 of the Conveyancing Act. No one has suffered any substantial or irremediable injustice. 106 In conclusion on this issue, I am of the view that the authority given by Mr Johns to Mr Weston on 7 June 2005 is effective for the purposes of Part X of the Act.

2. Order Pursuant to S 208 of the Act releasing the property of Mr Johns from the control of Mr Weston 107 Section 208 of the Act provides: 'The Court may make an order releasing the debtor's property from control under this Division if: an interested person applies to the Court for such an order; and the Court is satisfied that special circumstances justify it making the order.' 108 The applicant submitted that there were abundant special circumstances justifying the Court making an order under s 208. These were put in the following terms: (i) Mr Johns has been unable to pay his debt to the applicant since at least 8 April 2002. He defended the petition that was subsequently presented until it was dismissed on 13 October 2003 consequent upon him entering into an agreement to pay the debt by instalments. That agreement was not kept and a further bankruptcy notice and petition followed. Again this petition was the subject of a defence. (ii) Notwithstanding the Notice of Intention to Oppose Petition, the petition was adjourned by consent on a number of occasions to enable Mr Johns to borrow sufficient funds to pay out the applicant's debt in whole or in part. That seemed not to occur and the matter was fixed for a contested hearing. On the eve of the hearing Mr Johns applied to vacate the hearing date on the basis that he wished to engage in an orderly realization of his assets. Ultimately this was not opposed and granted on the basis that the Notice of Intention to Oppose Petition was withdrawn. (iii) Two key steps in the asset realization programme were the sale of personalty by auction estimated to realize $1.9 million and that sale of 244 Glebe Point Road, Glebe estimated to sell for $4.3 million. The auction of personalty proceeded on 14 and 15 May 2005. The gross proceeds were $829,000.00 although this included some items from another vendor. A number of items were withdrawn from the sale and others passed-in. For example a Norman Lindsay painting was not sold. It is impossible to reconcile completely the two lists of personalty provided to the applicant in late 2004 with the list of items actually sold. (iv) Nevertheless Mr Johns' solicitor no doubt on instructions continued to assert as late as 3 June 2005:- 'My instructions of course remain the same, namely that the entire net proceeds from the sale of the personalty will be paid directly to your client.' (v) Of course, that statement could not be true to Mr Johns' knowledge because, as appears from Statement of Affairs given to Mr Weston those proceeds of sale were the subject of a Bill of Sale given to Tony Faure on 29 March 2005. That is to say that after the petition had been adjourned by Justice Allsop but before the sale of the personalty took place Mr Johns disposed of the proceeds of sale of the auction to someone other than the applicant, and to someone not apparently a significant creditor. The circumstances surrounding the Bill of Sale had not been disclosed. It is not known whether the security represented a security for money then advanced or for an existing indebtedness. (vi) It was also apparent from the Statement of Affairs that the only personalty currently in the possession of Mr Johns is a piano valued at $28,000.00. There has been no explanation as to what has happened to the lots withdrawn from or passed-in at the auction, including the Norman Lindsay painting, or the items that were listed in the list of assets provided to the applicant in 2004 but not sold in the auction. Apparently these are no longer owned by Mr Johns. (vii) There are at least two antecedent transactions that require investigation and may give rise to possible causes of action in a bankruptcy. First is the Bill of Sale over the proceeds of the auction and secondly there appears to be disposition of a significant number of personal assets not sold at the auction. (viii) In addition to this there are the many discrepancies between the lists of assets given by Mr Johns to the applicant in this matter since its commencement. Suffice to say that the difference between what was said to be Mr Johns' net assets and liabilities in March of this year for the purposes of the asset realization programme as can be seen there is now a marked shortfall of assets over liabilities as demonstrated by the Statement of Affairs. In fact it must have been obvious to Mr Johns' at the time of giving the charge to Mr Faure that the giving of that charge meant that the purpose of the asset realization programme, namely to pay out the applicant's debt, could not and would not be met. Mr Johns of course did not tell anyone about this. (ix) When it became apparent to the applicant that the asset realization from the auction was well below the estimate (less than half) and that the house was not going to sell it became clear that the applicant's debt was not going to be paid. The applicant gave notice that on 7 June 2005 or as soon thereafter as the Court could deal with the application the applicant would seek a sequestration order based upon its petition which was listed before Justice Allsop on that day. There can be no doubt that such a sequestration would have been made on 7 June or shortly thereafter. Mr Johns had withdrawn his Notice of Intention to Oppose Petition. There was no basis for a further adjournment to sell assets (the personalty had been sold, or otherwise seemingly disposed of, and the house at Glebe was now valued at $3.8 million, the value of its encumbrances). (x) Faced with an inevitable sequestration order being made Mr Johns' response was, on the morning of 7 June 2005, to sign an authority under section 188 of the Act. The signing of that authority brought into play section 189AAA of the Act. (xi) In the circumstances of this case that section defeats the present creditors' petition utterly. The petition will expire on 5 July 2005 prior to any creditors' meeting. The terms of the section prevent the life of the petition being extended. The petition will thus expire and with it the benefit of a significant relation back period. Given the transactions which are now known (referred to above) it is obvious that any trustee would engage in a close and careful scrutiny of Mr Johns' actions during that relation back period - that benefit would be lost. (xii) The petitioning creditor would not even be in a position to seek a costs order on the present petition. (xiii) Whether it be deliberate or not, the execution of the authority has, at the death knell, brought to an effective end a properly presented and pursued creditors' petition, in circumstances where the Court and the petitioning creditor extended every indulgence to Mr Johns and enabled him to avoid an otherwise inevitable bankruptcy. The Part X authority cannot be seen as a genuine response to a recently realised insolvency. (xiv) A close perusal of the Debtor's Proposal indicates it is not likely to be as beneficial to creditors as a bankruptcy. (xv) In bankruptcy creditors would receive income contributions based upon the whole of Mr Johns' income, the possibility of recovering antecedent transactions, an extended relation back period and the recovery of after-acquired property. It is submitted that Part X of the Act was never intended to operate in such a manner. 109 As was said by Burchett J in Minister for Community Services & Health v Chee Keong Thoo (1988) 78 ALR 307 at 324, albeit in a different statutory context: ' … the core of the idea of "special circumstances" is that there is something unusual or different to take the matter out of the ordinary course …' 110 The phrase 'special circumstances' is obviously designed to accommodate a great variety of circumstances which are 'out of the ordinary course' in the sense used by his Honour, however, they must be circumstances which justify an order releasing the debtor's property from control of the controlling trustee. Contrary to the applicant's submission, the circumstances described in (i) - (ix) of [2] seem to me to provide strong grounds for ensuring that control of Mr Johns' property stays with Mr Weston. The circumstance that is (xii) is irrelevant and those in (xiv) and (xv) are not specified with any degree of particularity to warrant serious consideration. As Senior Counsel for the applicant conceded, he could say no more than that they refer to possibilities. 111 That leaves the circumstances referred to in (x), (xi) and (xiii) of [2], and they are the circumstances upon which the applicant principally relies as being the 'special circumstances' justifying the making of an order under s 208. So much is to be gleaned from what the applicant's Senior Counsel submitted in address: 'So what we have in summary, your Honour, we would say, you have a position where, by means of half truths and mistruths and promises, Mr Johns has strung out a creditors petition as long as he could. That's what all the facts point to. Of itself that's what debtors tend to do, but that is a relevant special circumstance in the present case. When one combines that with the next two facts, one clearly gets circumstances with in [sic] s 208. Those two are that on 7 June, we had, as had been foreshadowed to Mr Johns, my client was intending to seek the sequestration order from Allsop J as soon as Allsop J could hear that application. On that very morning the authority was signed. That's the first of the special facts. But the one that makes this case exceptional and clearly falls within the s 208, in my submission, is the fact that the signing of that authority brought s 189AAA into play. That section stays all proceedings relating to a creditors' petition, an application to extend the life of a creditors' petition as a proceeding relating to a creditors' petition. A petition can't be extended. The inevitable consequence of the signing of the authority meant that the petition would lapse and couldn't be extended.' [Emphasis] 112 Even if one could infer, and for the reasons which I refer to later, I am not prepared to draw the inference, that Mr Johns signed the authority when he did for the purpose of bringing s 189AAA of the Act into play, that would not, in my view, provide a 'special circumstance' to justify the making of an order releasing Mr Johns property from the control of Mr Weston. Subsection 189AAA(1) in its very terms, contemplates the timing of the authority becoming effective vis-ŕ-vis the timing of the presentation of the creditor's petition as being totally irrelevant to its operation and effect in staying proceedings relating to the petition. The fact that a debtor, such as Mr Johns, signs an authority which becomes effective shortly before a creditor's petition is about to lapse through effluxion of time cannot, in my view, by reason of the operation and effect of subs 189AAA(1), provide a 'special circumstance' to justify an order releasing Mr Johns' property from the control of Mr Weston pursuant to s 208 of the Act. 113 Senior Counsel for the applicant referred me to two reported cases - Re Alty; Exparte Muir (1985) 9 FCR 190 and Laurence v Mulroney (1987) 15 FCR 268 - where the earlier version of s 208 had been considered but submitted that they did not seem to assist in any particular way other than as examples of the wide range of special circumstances that a court is entitled to take into account. I am not convinced that this is right. In both cases, the circumstances considered 'special' were extraneous to the operation of the Act. In the first, the special circumstance went to the issue of the validity of the trustee's appointment - whether the debtors knew what they were doing in making the appointment; in the second, it went to the issue of whether the effect of the authority (failing the making of an order under s 208) could be, and admittedly was designed to be, to stultify contempt proceedings in the Supreme Court of New South Wales. In other words, they were circumstances which had not arisen by the reason of the operation of the provisions of the Act; rather they were extraneous circumstances which, in each case, could be properly described as 'out of the ordinary course'. While it may be accepted that the terms of s 208 were intended to provide the Court with a discretion to take into account a wide variety of circumstances which qualify as being 'out of the ordinary course', the operation and effect of s 189AAA does not, in my view, so qualify. 114 For the foregoing reasons I do not think the applicant has made out any special circumstances justifying the making of an order releasing Mr Johns' property from the control of Mr Weston.

3. An order that the authority be set aside as an abuse of process 115 The applicant's claim for relief on this ground was, by order of the Court, pleaded by way of points of claim; and the first respondent's response was by way of points of defence. 116 The essence of the applicant's case [paras 23-26 inclusive of the points of claim] was that as at 7 June 2005 the first respondent was insolvent and had not been able to pay his debts as they fell due from at least 31 January 2004; it was an overwhelming probability that on 7 June 2005, or shortly thereafter, a sequestration order would be made against the estate of the Mr Johns; and that on 7 June 2005 Mr Johns, being aware of these matters, appointed the Mr Weston as controlling trustee of his affairs pursuant to Part X of the Act. The applicant's points of claim went on [paras 28 through 51 inclusive] to refer to the imminent expiration of the petition and the operation of s 189AAA of the Act. The argument has a remarkable similarity to the case put for an order pursuant to s 208 of the Act. 117 Mr Johns denied that he had not been able to pay his debts from 31 January 2004. Indeed, the evidence is quite clear that as recently as February 2005 Mr Johns had been able to refinance with the Commonwealth Bank and make a payment of some $500,000 to the applicant, although only a little over $200,000 went in reduction of his own indebtedness; the balance went in reduction of debts owed by associated companies to the applicant: See [51], [52], supra. 118 Overall the evidence indicates, and I find, that Mr Johns did not make a full and true disclosure to the applicant of all his assets and liabilities. This is particularly evident in relation to the bill of sale transaction with Tony Faure on 29 March 2005 and the application of the proceeds of the bill to discharge various liabilities; no part went to reduce his liability to the applicant. I infer that this transaction, either prospectively, at the time of its implementation or at the next mention was not the subject of any disclosure to the applicant because of Mr Johns' apprehension that it would precipitate or accelerate action by the applicant to immediately move on the creditor's petition rather than allow it to be stood over by consent on 3 May 2005 to 7 June 2005. Non disclosure of the transaction, either prospectively, contemporaneously, or at the next mention was perceived, rightly or wrongly, as a way of buying time; postponing the inevitable. As the applicant's Senior Counsel conceded in the extract from the transcript at [111]: '… that's what debtors tend to do.' 119 But it was the timing of Mr Johns' signing of the authority, on the very morning the creditor's petition was to come back before the Court and shortly after Mr Johns had been notified that, on 7 June 2005, the applicant would seek a sequestration order against his estate, and less than a month before the expiry of the petition, coupled with the operation of s 189AAA, which lies at the foundation of the applicant's claim for relief that the authority should be set aside as an abuse of process. 120 From an early date, certainly from the time of the August 2004 proposal, it is clear that Mr Johns' first priority in his dealings with the applicant was to avoid the applicant moving on the creditor's petition and persuading the Court to make a sequestration order against his estate. So much is evident from the August 2004 proposal extracted at [25] where the negative impact that would have on Mr Johns' ability to maintain his legal practice was given as the principal reason why that course should not be pursued. Many, if not all, of Mr Johns' actions in the intervening period up until 7 June 2005 are explicable by reference to this priority. 121 In these early days, it also seems to be clear that a priority of Mr Johns, if not his first priority, was to avoid authorising a trustee to take control of his property pursuant to Part X of the Act; his clear preference was to reach an agreement with the applicant, his principal if not only creditor, which would enable him to pay off his liability to the applicant within a reasonable time: See the extract at [25]. In these early days, this may be perceived as a realistic possibility and, in consequence, a reasonable expectation on Mr Johns' part, although following the failure to sell the Glebe Point property and the failure to realise the values put on the personalty, that possibility had become unrealistic; and I am prepared to infer that Mr Johns had come to this realisation. Indeed, I would infer that he had come to this realisation at the time he entered into the bill of sale transaction with Tony Faure on 29 March 2005 and thus his entry into that transaction and the application of the proceeds of the bill in the manner that took place, were a manifestation of that realisation. 122 By the end of March 2005 Mr Johns realised that it was only a matter of time before the applicant moved on the creditor's petition and pressed the Court to make a sequestration order against his estate. Moreover, I would also infer that, by this time, Mr Johns' realised that the likelihood of the Court making such an order was increasing with the passing of time and that the only way he was going to maintain his first priority of avoiding that consequence was to sacrifice his other priority and authorise a trustee to take control of his property pursuant to Part X of the Act. That he did not do so straight away is explicable by reference to the fact that the matter was not before the Court again until 5 May 2005 and, when it did come back, it was stood over by consent until 7 June 2005. 123 There is no evidence to support any finding or inference that Mr Johns had at all relevant times intended, and gave effect to that intention in his dealings with the applicant, to refrain from authorising a trustee to take control of his property pursuant to Part X of the Act until late in the life of the creditor's petition. The decision to authorise a trustee to take control of the property pursuant to Part X of the Act was, I find, solely a function of his realisation that if he did not do so when he did, there was a strong likelihood, indeed almost a certainty, that the Court would made a sequestration order against the estate, contrary to what had always been his first priority. Prior to the end of March 2005, that prospect did not loom so large as to cause him to do what he did on the morning of 7 June 2005. But there is nothing in that which constitutes an abuse of process warranting the setting aside of the authority. Indeed, it is something which the Act contemplates in express terms: See subs 188(1) - in particular the introductory words. Nothing in the terms or operation of S 189AAA alters that result. 124 The application should be dismissed. The applicant should pay the respondents' costs. I certify that the preceding one hundred and twenty-four (124) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.

Counsel for the Applicant: Mr M Aldridge SC

Solicitor for the Applicant: Australian Government Solicitor

Counsel for the First Respondent: Mr J T Johnson

Solicitor for the Second Respondent: Watson Mangioni