Section 222
9 Section 222 is found within Part X of the Bankruptcy Act. Within that Part, Division 2 deals with the meeting of creditors and control of a debtor's property. Section 188 is one of the provisions within Division 2. Division 3 within Part X is headed "General Provisions" and s 222 is found within that Division.
10 Section 222 relevantly provides as follows:
Setting aside on grounds of unreasonableness etc.
(1) If a personal insolvency agreement is in force, the Court may, on application by:
(a) the Inspector-General; or
(b) the trustee; or
(c) a creditor;
make an order setting the agreement aside if the Court is satisfied that:
(d) the terms of the agreement are unreasonable or are not calculated to benefit the creditors generally; or
(e) for any other reason, the agreement ought to be set aside.
…
Ancillary orders
(8) If the Court makes an order under subsection (1), (2) or (5), the Court may make such other orders as the Court thinks fit.
(9) An order under subsection (8) may be an order directing a person to pay another person compensation of such amount as is specified in the order. This subsection does not limit subsection (8).
Application for sequestration order
(10) The trustee or a creditor may include in an application under subsection (1), (2) or (5) an application for a sequestration order against the estate of the debtor. If the Court, on the first-mentioned application, makes an order under this section setting the personal insolvency agreement aside, it may, if it thinks fit, immediately make the sequestration order sought.
(11) The making of an application by the trustee or a creditor for a sequestration order under this section is taken, for the purposes of this Act, to be equivalent to the presentation of a creditor's petition against the debtor, but the provisions of subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application.
11 For the purposes of s 222(1)(c), it was common ground that it was for the Court to determine whether a person is in fact "a creditor": Beard v Prestige Baking Industries Pty Ltd (1981) 52 FLR 384. Fox J there observed that:
It is undoubtedly competent for the court to examine in close detail, definitively if necessary, whether a person claiming to be a creditor for the purposes of the section is one … : (1981) 52 FLR at 405.
Lockhart J found it unnecessary "to determine the standard which must be satisfied by the respondent under s. 222 to establish that he has the necessary locus standi as a creditor": (1981) 52 FLR at 411.
12 It was also common ground that the Court, when resolving the question as to whether a person is "a creditor", must act on the materials before it and is not confined (for example) to that which was before the trustee: Re Dingle; Westpac Banking Corporation v Worrell (1993) 47 FCR 478. Wilcox, Ryan and Cooper JJ there observed:
What must be proved on an application for review
We also agree with Drummond J that, when the Court is called upon to determine whether a person is entitled to vote as a creditor, it must act on the material before it; it is not limited to the material before the trustee or chairman … Moreover, it is not sufficient that the creditor merely demonstrate a prima facie or arguable case: (1993) 47 FCR at 486.
A little later their Honours concluded:
… We think Drummond J was correct when he said that the issue that he had to determine, in order to grant the relief sought, was whether Westpac was in fact a creditor of the debtors in the amount claimed. The trustee's determination at the meeting gives rise to the case; but it is irrelevant to its resolution. The Court must decide, for itself, the question of Westpac's entitlement to vote; and it must do so on the material before it. Westpac must prove that the composition was void because the statutory requirements of the Bankruptcy Act have not been complied with; the necessary statutory majority having not been achieved because it was improperly denied a vote. In short, proof that Westpac was a creditor is an essential element to establish both its standing to bring the application and its entitlement to the relief sought: (1993) 47 FCR at 488.
13 Section 222 in its present form, it may further be noted, was introduced by way of amendment in 2004 by the Bankruptcy Legislation Amendment Act 2004 (Cth). The section is an amalgamation of the powers of the Court previously conferred by the former ss 222 and 239. Prior to its amendment, the former s 222 provided as follows:
(1) Where there is a doubt, on a specific ground, whether a deed of assignment or a deed of arrangement was entered into in accordance with this Part or complies with the requirements of this Part, or whether a composition has been accepted by a special resolution of a meeting of creditors under section 204, the Inspector-General, the trustee, a creditor or the debtor may apply to the Court for an order under subsection (2).
(2) Upon the hearing of an application made under subsection (1), the Court may, subject to this section, make an order:
(a) declaring that the deed or composition is void, or that it is not void, on the ground specified in the application; or
(b) declaring that a provision of the deed is void, or is not void, on the ground specified in the application.
(3) The Court shall not make an order declaring a deed to be void on the ground that it does not comply with the requirements of this Part if the deed complies substantially with those requirements.
(4) Where the Court, on the application of the Inspector-General, the trustee or a creditor, is satisfied that the debtor:
(a) has given false or misleading information in answer to a question put to him or her with respect to any of his or her conduct or examinable affairs at the meeting of creditors at which the resolution requiring him or her to execute the deed or accepting the composition was passed; or
(b) has omitted a material particular from the statement of the debtor's affairs given under subsection 188A or included an incorrect and material particular in that statement;
the Court may make an order declaring the deed or composition to be void or declaring any provision of the deed or composition to be void.
(5) The Court shall not make an order declaring a deed or composition, or a provision of a deed or composition, to be void on a ground specified in subsection (4) unless it is satisfied that it would be in the interests of the creditors to do so.
(6) The Court shall not make an order under subsection (2) or (4) unless the application for the order is made:
(a) in relation to a deed of assignment - before the final dividend has been paid under the deed;
(b) in relation to a deed of arrangement - before the terms of the deed have been carried out; or
(c) in relation to a composition - before the final payment has been made under the composition.
(7) The trustee of a creditor may include in an application under subsection (1) or (4) an application for a sequestration order against the estate of the debtor and if the Court, on the first-mentioned application, makes an order under subsection (2) or (4) declaring the deed or composition to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought.
(8) The Court may, if it thinks fit, dispense with service on the debtor of notice of an application by the trustee or a creditor under this section, either unconditionally or subject to conditions.
(9) The making of an application by the trustee or a creditor for a sequestration order under this section shall, for the purposes of this Act, be deemed to be equivalent to the presentation of a creditor's petition against the debtor, but the provisions of subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application.
And the former s 239(2) provided as follows:
If the Court, on such an application, considers that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the composition ought to be set aside, it may make an order setting it aside and, if it thinks fit, may forthwith make the sequestration order sought.
14 Both the former s 239(2) and the current s 222(1)(d) direct attention to "the terms of" either "the composition" or "the agreement".
15 When addressing the terms of the former s 239 and the importance of consideration being given to "the terms of the composition", Lockhart and Hill JJ in Khera v National Australia Bank Limited (1996) 71 FCR 133 at 146 observed:
Turning to s 239 concerning compositions. Although at first sight the grounds on which the Court may set aside a composition under s 239(2) are wide, upon closer examination they relate in my opinion to matters that concern the terms of the composition itself, that is to say facts which were in existence (whether known or not) at the time of the passing of the special resolution of creditors to accept the composition under Pt X. The Court may set aside the composition if it considers "that the terms of the composition are unreasonable". This plainly centres attention upon the terms of the composition itself. The Court may set aside a composition if the terms of the composition "are not calculated to benefit creditors generally". Again attention is centred upon the terms of the composition.
Then follows the third ground "for any other reason the composition ought to be set aside". In our opinion this ground, despite the width of its language, is confined to circumstances which relate to the terms of the composition itself or the circumstances in which the composition came to be accepted by special resolution of the creditors. To an extent these grounds may overlap with the grounds on which the Court may declare a composition void under s 222. That does not militate against the construction of s 239(2) which appeals to us.
Tamberlin J agreed: (1996) 71 FCR at 147.
16 After referring to the "overlap" between those matters previously set forth in s 239(2) and s 222, Merkel J in Re Mills; Ex parte Lloyd's (1997) 73 FCR 551 at 559 to 561 helpfully summarised as follows the factors that may inform the exercise of the discretionary power:
In that regard a number of factors are relevant to the exercise of the power to declare a composition void under s 222 or to set it aside under s 239. The factors are:
(a) Whether, after considering all the circumstances of the case, a greater opportunity to inquire into the debtor's affairs and a more comprehensive explanation by the debtor were called for …
(b) If circumstances arise which "give cause for a suspicion" or to "arguable" causes of action which may benefit creditors then that can suffice to set aside the composition: see Mendelson at p 33. It is not necessary to establish that the creditors will be, or even are more likely to be, advantaged by bankruptcy rather than the composition. It is sufficient if bankruptcy will afford:
"a prospect or possibility of economic advantage to creditors sufficient to justify the conclusion that it is in their interests to make the declaration." per Jenkinson J in Augustyn v Putnin (1988) 83 ALR 514 at 515.
…
(c) If the amount offered under the composition is little or trivial there may be no harm of any consequence to creditors for the composition to be set aside if other factors warrant that course …
(d) A Court may be more disposed to set aside a composition if no payments to creditors have been made pursuant to the composition …
(e) A composition passed, inter alia, on the basis of a report to creditors as to the debtor's financial affairs which is misleading will also be a relevant factor …
These factors remain equally apposite to the exercise of the discretionary power now conferred by s 222 in its present form.
17 It is not understood that Merkel J in Re Mills was attempting to exhaustively set forth the factors to be taken into account or to indicate that any one or other of the factors mentioned would be conclusive as to the manner in which the power was to be exercised. To the list of factors summarised by His Honour may be added the following (to the extent that they are not already included within His Honour's summary), namely:
whether creditors who have voted in favour of a proposed insolvency agreement have indicated that they would not participate in any distribution of assets and, to the extent that it is known, the reasons for their non-participation; and
whether the controlling trustee recommends the acceptance or rejection of the proposed insolvency agreement and the factual basis for that recommendation.
18 Although it may thus be accepted that:
consideration can be given to the amount payable pursuant to a personalised insolvency agreement as compared to the debt;
it is equally well accepted, albeit less frequently mentioned, that:
• such a consideration is but one of the factors to be taken into account.
19 When considering the terms of the former s 222(5) and the phrase "in the interests of the creditors", in Re Tripodi; Ex parte Col Johnson Pty Limited (unreported, 22 January 1987) Burchett J observed:
… I think a broad view should be taken, and in a proper case it may be held that it is in the interests of creditors that there should be the full opportunity for inquiry which bankruptcy may entail, even though there is no assurance that inquiry will in fact uncover any further assets. But, as has been said, a mere speculative possibility is not in itself enough - the circumstances must raise an inference entitling the Court to conclude that the order would be in the interests of the creditors.
20 Courts have long had regard to the amount proposed by the composition compared to the amount of the debts owing: Westpac Banking Corporation v Hingston (No 2) [2010] FCA 1116 at [68] to [80], 117 ALD 552 at 563 to 565. Cowdroy J there referred with approval to previous decisions concerning s 239(2) as it existed prior to the 2004 amendments.
21 The first of those decisions considered by Cowdroy J was Re Richards; Ex parte Beneficial Finance Corporation Limited (unreported, 17 March 1986). Jackson J had there set aside a composition accepted by creditors. Part of His Honour's reasons was stated as follows:
The amount offered pursuant to the composition in settlement of the debts is so trivial when compared to the total of the debts that in the circumstances of the particular case I would regard that fact alone as a sufficient "other reason" in terms of s.239(2) for setting the composition aside. I take that view because it seems to me that in a case where a debtor having gross assets amounting to only $2500.00 has been prepared to incur debts amounting to a hundred times that amount, the case is better dealt with by way of bankruptcy (thereby giving rise to such matters as public examination of the bankrupt and other persons under s.81) than pursuant to the rather more bland provisions of Part X dealing with compositions.
The same comparison was likewise referred to by Morling J in Re Brennan; Ex parte Stokes (Australasia) Ltd (unreported, 31 May 1988) as follows:
In a case where a debtor has incurred debts of such huge proportions relative to his assets there is much to be said for the proposition that it is in the public interest that there be a public examination of the bankrupt (and possibly other persons) under s.81 of the Bankruptcy Act.
As noted by Cowdroy J, these observations by Morling J were subsequently adopted by Burchett J in Re Codrington; Ex parte Don McKay Tourist & Charter Pty Ltd (unreported, 1 September 1989) and by Neaves J in Palazzolo v Ex parte Discusso (unreported, 19 July 1991). In Re Codrington Burchett J observed:
In Re Brennan Morling J. also drew attention to the circumstance that although the court should be cautious in overturning a decision reached by creditors approving a composition, the fact that the creditors who voted in favour of the resolution had some connection with the debtor "is not without significance". In the present case, it could not be said that all creditors who voted in favour of the resolution were connected with the debtor. However the overwhelming preponderance of debts represented at the meeting involved the debtor's mother and brother. Only one independent creditor had a representative present, and that creditor was owed a relatively small amount.
Morling J., in summary of the factors which led him to set aside the composition there in question, referred to the small sum of money offered to creditors compared with the amount of the debts, the fact that the composition had not been implemented (in the present case only one payment has been made to the trustee), the relationship between the debtor and the creditors who voted in favour of the composition, the possibility that the creditors might do as well in bankruptcy as under the deed, and the prima facie right of the applicant to a sequestration order.
Cowdroy J also referred with approval to the following observations of French J (as His Honour then was) in Re Lockett; Ex parte Northern Equity Ltd (unreported, 6 April 1992), namely:
There is no doubt, however, that the fact that the composition yields a very small return to creditors is relevant in deciding whether it should be set aside under s.239.
22 The decision of Cowdroy J in the Westpac Banking Corporation case has more recently been applied by Bromberg J in Osborne v Gangemi [2011] FCA 1252 at [45]. Bromberg J there observed that a "… large number of decisions of this Court have come to the view that a composition ought to be set aside as unreasonable, where creditors are getting almost nothing from the composition in circumstances where investigative procedures available upon a bankruptcy to properly examine the debtors affairs, give some hope of a superior result". His Honour then set forth the terms of s 222 and continued as follows:
[43] This very wide discretion ought to be exercised cautiously and always with the objectives of Pt X and the Bankruptcy Act as a whole in mind. Personal Insolvency Agreements provide a useful means of dealing with the personal insolvency of an individual where a genuine accommodation can be made with that individual's creditors. The will of creditors, when exercised reasonably and in the interests of all creditors generally, will usually provide a sure and safe path to achieving the best result out of a bad situation. The qualifications upon the Court's discretion found in s 222(1)(d) both reveal and reflect the Bankruptcy Act's intent that creditors generally, rather than some but not others, benefit from an agreed composition dealing with a debtor's insolvency. A practical, common sense approach should be adopted to the exercise of the discretion bearing in mind that what s 222(1) calls for is a global assessment of the kind that creditors are called upon to make when they themselves are considering the utility of a PIA.
[44] In making their own considerations, reasonably minded creditors will assess the potential benefit of a proposed PIA against the alternative of the debtor's bankruptcy. A fundamental question will be whether and to what extent the composition on offer will likely be improved upon should the alternative of bankruptcy be insisted upon by the creditors. That assessment will be influenced by many factors but principal amongst them is likely to be the extent to which creditors may properly be satisfied that the proposal on offer reflects a fair and honest attempt by the debtor to address his or her debts. The extent to which creditors are able to know the true financial position of the debtor will be an important consideration, particularly if bankruptcy offers the potential for creditors to be put in a better position to know. The amount available for distribution under the proposed PIA is likely to be a very significant factor in the making of any reasonable assessment.
The personal insolvency agreement entered into by Mr Gangemi was there set aside.
23 The comparatively modest - or derisory - amount that may be recovered pursuant to a personal insolvency agreement is thus a consideration which the Court has repeatedly relied on. Nevertheless, it is but one consideration to be taken into account. There may well, however, be circumstances in which informed creditors may consider it in their best interests to approve a personal insolvency agreement and accept comparatively little in return.
24 In respect to this latter proposition, it should be noted that the earlier decisions referred to by Cowdroy J in Westpac Banking Corporation were also reviewed by O'Loughlin J in Re Andrew Nicholas Emmett; Ex parte Beneficial Finance Corporation Ltd (unreported, 16 December 1991). After reviewing the authorities, His Honour there relevantly concluded:
It seems to me that in each of these six cases there were factors, over and above the smallness of the dividend and the size of the debts, that caused the court to intervene. Even though there are examples of strong dicta to the effect that the smallness of the amount offered coupled with the amount of the debts might be sufficient, without more, to set aside the composition, it is significant that no case has been found where that has happened. I allow for the possibility that it could occur but I do not believe that this is the appropriate case …
Although regard may be had to the amount proposed by the composition compared to the amount of the debts owing, it is thus but one of the considerations to be taken into account: Re Agushi; Ex parte Farrow Mortgage Services Pty Ltd (1992) 8 ACSR 549. Olney J there said:
The case put by the applicants in support of these grounds is that the amount of the dividend likely to be returned to the creditors after payment of the costs of the trustee will be of the order of 0.019 of a cent in the dollar which is said to be so small as to be "derisory", which cannot be gainsaid. And it is cold comfort to the applicants that they may receive a dividend of this amount from the estate of each debtor. The alternative advocated on behalf of the applicants is that the debtors' estates should be administered in bankruptcy. The advantages of bankruptcy are said to lie in the capacity of a trustee in bankruptcy to investigate the affairs of a bankrupt and to obtain contributions from the debtor out of his income.
Just what is unreasonable or unjust in any particular case will depend upon the factual context in which such a judgment comes to be made. Previous cases may help to provide some sort of guide but can never be decisive of the outcome in a case in which the facts and overall circumstances are not the same. For this reason I do not propose to canvass the various decisions to which reference was made in argument. The fact that a negligible dividend will result from the deeds of arrangement is a circumstance which may in some cases weigh heavily in favour of a claim that the terms of a deed are unreasonable and unjust. But unreasonableness, like justice, must be measured against available alternatives. They are not matters which can be judged in a vacuum: (1992) 8 ACSR at 560 to 561.
His Honour went on to conclude as follows:
The alternatives here are that if the debtors are made bankrupt, although the two contributions of $5000 would not be made, investigation by the trustee may reveal information that could result ultimately in a larger return to the creditors and further that the debtors could in appropriate circumstances be required to contribute out of their future earnings. The evidence does not suggest that either alternative is likely to be fruitful. In the case of Agushi, nothing has been shown to suggest that he has any particular earning capacity and no effort was made to cross-examine him on this or any other question. In the case of Calabro, although it is known that he is a qualified legal practitioner presently holding a certificate to practise as an employee solicitor and that he is employed as such, he was not cross-examined on his earning capacity nor upon his assertion that there is some uncertainty as to whether or not he would be able to continue to be so employed as a bankrupt. This is not something upon which any judgment can be made on the material before the court. And there is no material before the court from which it could be concluded that further investigation of the affairs of the debtors is either called for or may disclose information which could lead ultimately to a more substantial dividend to the creditors. The amount of the debtors' liabilities is very large by any measure, but the size of the debt does not necessarily point to dishonesty or improper conduct on their part nor to the need for administration of their estates in bankruptcy. At a time when major public and private institutions have suffered staggering unrecoverable losses, the debtors have been caught up in the general economic climate of the times. There is no reason to believe that a fuller investigation of their affairs would prove fruitful. Apart from the applicants, all other creditors are prepared to accept the result represented by the deeds of arrangement. This is not a case where a large creditor has used its voting power to oppress small creditors. And it is not without significance that one of the debtors supporting the debtors' proposals was a building society owed $4m. Once it is concluded that the proceedings at the meeting of creditors were valid, I do not think that the final outcome can be said to be either unreasonable or unjust. In any event, nothing has been put before the court that would justify a conclusion that it would be in the interests of the creditors generally to terminate the deeds. What the applicants are in effect saying is that it is unreasonable, unjust and not in the interests of the creditors generally to insist that they (the applicants) should be required to get their proxies right. This proposition only has to be stated to demonstrate that it is unsustainable.