New Age Constructions (NSW) Pty Ltd v Etlis, in the matter of Etlis

Solicitor for Nitzachon Pty Ltd: Barry B Moshel

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2221 of 2012

BETWEEN: NEW AGE CONSTRUCTIONS (NSW) PTY LTD ACN 058 622 950

AND: LANA ETLIS (AKA SVETLANA ETLIS), A DEBTOR

JOSEPH LOEBENSTEIN (AS TRUSTEE OF THE PERSONAL INSOLVENCY AGREEMENT OF LANA ETLIS, A DEBTOR)

JUDGE: YATES J DATE OF ORDER: 2 SEPTEMBER 2013 WHERE MADE: SYDNEY

1. Within seven days, the applicant provide a draft of the orders and the undertaking referred to in [89] of the reasons for judgment published today.
2. The second respondent give to Rambleford Pty Ltd (Rambleford) notice of the order he seeks as to the payment of his fees and disbursements from funds provided by Rambleford in relation to the personal insolvency agreement executed by the first respondent.
3. The notice referred to in order 2 be given in writing to Rambleford served at its registered office, principal place of business, and at any other address that Rambleford may have provided to the second respondent for the receipt of communications, within seven days.
4. The notice referred to in order 3 be accompanied by a copy of these orders.
5. The proceeding, insofar as it concerns the determination of the second respondent's application for the order referred to in order 2, stand over for hearing at 9.30 am on 18 September 2013.
6. Liberty to apply be granted on two days' prior notice. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2221 of 2012

BETWEEN: NEW AGE CONSTRUCTIONS (NSW) PTY LTD ACN 058 622 950

AND: LANA ETLIS (AKA SVETLANA ETLIS), A DEBTOR

JOSEPH LOEBENSTEIN (AS TRUSTEE OF THE PERSONAL INSOLVENCY AGREEMENT OF LANA ETLIS, A DEBTOR)

JUDGE: YATES J DATE: 2 september 2013 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 This is an application for an order under s 222(1) of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) that a personal insolvency agreement executed by the first respondent, Lana Etlis (also called Svetlana Etlis), be set aside and that a sequestration order be made against her estate. 2 The applicant, New Age Constructions (NSW) Pty Ltd, is an unsecured creditor of the first respondent. The second respondent is the trustee of the personal insolvency agreement. 3 At the commencement of the hearing, applications were made by Nitzachon Pty Ltd, formerly known as Bekorov Mamosh Pty Ltd (Nitzachon), and Ruven Morrison and Leah Morrison, to be heard in the proceeding: see r 2.04(1) of the Federal Court (Bankruptcy) Rules 2005 (Cth). I granted leave to Nitzachon, who claims to be an unsecured creditor of the first respondent. I refused leave to Mr and Mrs Morrison, even though Mr Morrison is also a director of Nitzachon. Nitzachon was represented at the meeting of creditors that resolved that the first respondent execute a personal insolvency agreement. It is a creditor who would take under that agreement. Mr and Mrs Morrison are secured creditors of the first respondent and did not participate in the meeting of creditors. There is no suggestion that they propose to surrender their security or that the security would be insufficient to discharge the debt they claim: see s 230(4) of the Bankruptcy Act. The fact that Mr Morrison is also a director of Nitzachon is not a reason to grant leave to him or Mrs Morrison to be heard in their own right.

Introduction 4 The first respondent is indebted to the applicant for the sum of $224,014.31. It appears to be uncontroversial that, on 30 July 2012, the applicant obtained a judgment against the first respondent and her husband, Robert Etlis. The first respondent and Mr Etlis have been separated for eight years. Nevertheless, according to the first respondent, they meet on a regular basis. 5 On 27 September 2012, the applicant filed a creditor's petition in the Federal Magistrates Court of Australia (now the Federal Circuit Court of Australia) seeking a sequestration order against the first respondent's estate. Recently, that proceeding was transferred to this Court: NSD 1628 of 2013. 6 On 13 November 2012, the first respondent signed an authority under s 188(1) of the Bankruptcy Act authorising the second respondent, Joseph Loebenstein, to be the controlling trustee of her property. She lodged a proposal for dealing with her affairs (the first respondent's proposal), together with a statement of affairs dated 12 November 2012 (the statement of affairs). A meeting of creditors was duly convened. 7 On 17 December 2012, the creditors present at that meeting resolved, by the required majorities, that the first respondent execute a personal insolvency agreement on certain terms (the personal insolvency agreement). The personal insolvency agreement gives effect to the first respondent's proposal. The second respondent was appointed as trustee of that agreement.

The statement of affairs 8 The statement of affairs was completed with Mr Etlis' assistance. The first respondent's evidence was that it was prepared by them together, although the circumstances in which that was done and the extent to which the first respondent contributed to that task are unclear. The first respondent's evidence was vague. Mr Etlis did not give evidence. According to the first respondent, the statement of affairs was completed on a computer by Mr Etlis entering the required information. Apparently, the first respondent was not present when this was done, although she said that she had discussed the statement of affairs with Mr Etlis. At some stage, the statement of affairs was completed and provided to her for signing. 9 The statement of affairs recorded, amongst other things, the following information concerning the first respondent as at 12 November 2012: The first respondent had two bank accounts with deposits totalling $5,270.65. The first respondent had a balance of $109,000 in a superannuation fund. The first respondent did not own shares. The first respondent had not sold, transferred or given away any assets worth more than $1,000 in the last five years. The first respondent had paid $100,000 to Mr and Mrs Morrison by bank cheque on 27 September 2012. The first respondent owned residential properties at 1/440 Hawthorn Road, Caulfield South (the Hawthorn Road property) and 14 Nathan Grove, Caulfield South (the Nathan Grove property). Each property was subject to a first mortgage to the ANZ Bank (securing a total debt of $1,297,000) and a second mortgage to Mr and Mrs Morrison (securing a total debt of $426,681). 10 The statement of affairs also disclosed the existence of a number of unsecured creditors. The largest unsecured creditor was Nitzachon, with a claimed debt, as at 1 October 2012, of $1,602,575.12.

The second respondent's report to creditors 11 The second respondent's report (the report) noted that the first respondent's liability to unsecured creditors was $1,991,409, with only $221,160 in assets available.

The first respondent's real property 12 The report set out the circumstances of the first respondent's acquisition and financing of the Hawthorn Road property and the Nathan Grove property, as then known by the second respondent. 13 According to the report, the Hawthorn Road property was purchased in 2005 for $640,000. The purchase was financed through Macquarie Bank, which lent approximately $355,000 on the security of a first registered mortgage over the Hawthorn Road property. Mr and Mrs Morrison lent $285,000. Initially, this loan was not secured. Subsequently, the first respondent granted a mortgage to Mr and Mrs Morrison that was registered as a second mortgage over the Hawthorn Road property. Interest under this loan was to be paid annually, but no interest appears to have been paid until September 2012, when the first respondent paid $100,000 to Mr and Mrs Morrison. 14 In May 2012, the first respondent purchased the Nathan Grove property for $1,065,000. The purchase was financed through the ANZ Bank (ANZ), which also refinanced the Macquarie Bank loan on the Hawthorn Road property. ANZ agreed to lend $1,300,000 with mortgages to be granted by the first respondent that were to be registered on the title to each property. ANZ appears to have apportioned the loan as to $448,000 in respect of the Hawthorn Road property and as to $852,000 in respect of the Nathan Grove property. Mr and Mrs Morrison agreed to "lift" their second mortgage on the Hawthorn Road property to enable ANZ's mortgage over that property to be registered. This arrangement was implemented through a Variation of Loan & Security Agreement, which was executed by the first respondent and Mr and Mrs Morrison. This agreement provided as follows: The first respondent would pay Mr and Mrs Morrison $100,000 in respect of their existing loan. After ANZ's mortgage on the Hawthorn Road property was registered, Mr and Mrs Morrison's second mortgage on that property would be "re-registered". The first respondent would grant a second mortgage to Mr and Mrs Morrison over the Nathan Grove property. 15 In the report, the second respondent recorded that he had received legal advice that: The second mortgage over the Hawthorn Road property appeared to be valid. The second mortgage over the Nathan Grove property may be an undervalued transaction for the purposes of s 120 of the Bankruptcy Act, which would be void against a trustee in bankruptcy of the first respondent's estate. If so, this would increase the assets available to unsecured creditors should a sequestration order be made against the first respondent's estate.

The first respondent's proposal 16 In essence, the first respondent's proposal was that she would procure the sum of $100,000 to be paid to the second respondent as trustee of the personal insolvency agreement and distributed in accordance with its provisions. Rambleford Pty Ltd (Rambleford), a company associated with the first respondent's mother-in-law (also called Svetlana Etlis), would provide these funds. Certain creditors associated with the first respondent, through Mr Etlis, would not take under the agreement. Upon completion of her obligations under the agreement, the first respondent would be released from all provable debts. Significantly, no property or income of the first respondent would be made available to pay her debts. Moreover, the provisions of ss 120, 121, and 122 of the Bankruptcy Act in relation to the avoidance of undervalued transactions, transfers to defeat creditors, and preferences would not apply.

The second respondent's recommendation 17 From the information then available to him, the second respondent estimated that, if the first respondent's estate were to be administered in bankruptcy, the best that creditors would receive would be approximately 1.77 cents in the dollar whereas, under the first respondent's proposal, creditors would receive approximately 2.92 cents in the dollar within a reasonably short period of time, with certainty, and without the necessity of providing funding. This calculation was based on the second respondent's estimate that, as at the date of the report, there would be approximately $53,000 available to creditors under the first respondent's proposal after the payment of trustee's fees and other fees, charges, and disbursements. 18 The second respondent's calculation of the best return to unsecured creditors in a bankruptcy was based on a trustee in bankruptcy successfully challenging Mr and Mrs Morrison's second mortgage over the Nathan Grove property. The second respondent considered, however, that such a challenge would involve risk and expense. The second respondent's calculation also assumed that ANZ would only seek to recover $448,000 under the mortgage of the Hawthorn Road property, and not the amount of the first respondent's full indebtedness to it. 19 On the information then available to him, the second respondent expressed the belief that the creditors' interests would be better served by accepting the first respondent's proposal than by seeking to have her estate administered in bankruptcy.

The meeting of creditors 20 The meeting of creditors was held on 17 December 2012. Seven creditors were present and voted. Six creditors voted in favour of the first respondent's proposal. The applicant was the only creditor who voted against it. It should be noted, however, that four of the creditors voting in favour of the proposal had an association with the first respondent, through Mr Etlis. These were creditors who would not take under the personal insolvency agreement. Of these creditors, two were admitted only for $1.00 for voting purposes. The other creditors' claims were admitted for full value. However, the votes of all four were counted equally with the votes of other creditors for the purpose of determining whether a majority in number of creditors had voted in favour of acceptance of the first respondent's proposal.

The second respondent's changed position 21 The second respondent made two affidavits that were read at the hearing. The first affidavit, made on 8 February 2013, gave, amongst other things, an account of the circumstances leading to his appointment as trustee of the personal insolvency agreement and of his assessment of the claims made by the unsecured creditors voting at the meeting. He also provided information concerning Mr and Mrs Morrison's claim as a secured creditor. In that affidavit, the second respondent adhered to the matters stated in his report and, in particular, his recommendation that the creditors' interests would be better served by accepting the first respondent's proposal than by seeking to have her estate administered in bankruptcy. 22 However, as a result of the present application, further information has come to light. This information has caused the second respondent to reconsider the recommendation he made in the report. In an affidavit made on 12 July 2013, the second respondent raised a number of matters that have persuaded him that further investigation of the first respondent's affairs is warranted and that this investigation should be carried out by a trustee in bankruptcy. The second respondent, therefore, supports the application to set aside the personal insolvency agreement. The second respondent does not seek to be the first respondent's trustee in bankruptcy.

Nitzachon's debt 23 Nitzachon's claimed debt of $1,602,575 represents over 80% of the value of unsecured creditors who voted in respect of the first respondent's proposal. Plainly, Nitzachon's vote carried the day insofar as acceptance of the first respondent's proposal required a resolution supported by three-fourths in value of the creditors present and voting at the meeting. 24 In response to a subpoena addressed to Nitzachon, Mr Morrison, in his capacity as director, sent a letter to the Registrar of the Court stating that: Nitzachon "did not generate any tax returns over the period" referred to in the subpoena. Nitzachon "acted as an intermediary between lender and borrower and did not generate any taxable income for the period". 25 These statements suggest that, in fact, Nitzachon did not make a loan to the first respondent and Mr Etlis. In his second affidavit, the second respondent said that, until receipt of this information, he was not aware that Nitzachon was not the actual lender in respect of the debt it claimed, or that it had acted only as an intermediary. 26 The second respondent noted that the letter did not disclose the identity of "the lender". He said that he had placed significant weight on a Deed of Loan and Guarantee dated 1 June 2003 (purportedly creating the first respondent's and Mr Etlis' liability to Nitzachon for a loan of $740,000) when admitting Nitzachon's claim at full value for the purpose of voting at the creditors' meeting. The second respondent said that the statement that Nitzachon was only an intermediary seemingly contradicted the terms of the document on which he had relied. He also said that, had the statements in the letter been known to him at the time of preparing the report, he would have referred to them and stated that, in the absence of a satisfactory explanation, Nitzachon's claim required further investigation.

The secured debt to Mr and Mrs Morrison 27 The Hawthorn Road property and the Nathan Grove property would have vested in a trustee in bankruptcy had the first respondent's proposal been rejected and a sequestration order made against her estate. The second mortgages held by Mr and Mrs Morrison over each property significantly reduced the assets available to unsecured creditors. Although, in the report, the second respondent had informed creditors that Mr and Mrs Morrison's second mortgage over the Nathan Grove property might be void against a trustee in bankruptcy, the risk and costs associated with such a challenge led him to conclude that the first respondent's proposal would provide a better outcome for unsecured creditors. 28 In the course of this proceeding, documents produced under subpoena by ANZ have provided additional information. 29 One of these documents is an email from the first respondent's mortgage broker, Laurent Poirier, to ANZ. It is dated 1 June 2012 and was apparently provided in connection with the refinancing of the Hawthorn Road property. It states: Dear Sir, Following up on our phone call of yesterday night relating to the caveat on the current home of the above file. I spoke to the client later last night and she explained to me the matter. The caveat was put on her property around 6 years ago when the client was going through divorce for asset protection matter. Mr Ruven and Mrs Leah Morrison are very close family friend and the client contacted them yesterday to ask them to remove the caveat. The divorce has settle many years ago and the caveat has no more purpose. The client confirmed me later last night that the Morrison will remove the caveat immediately and it will be remove before the settlement of the refinance. I thank you in advance for your full assessment of this file. Kind Regards, Laurent Laurent H Poirier SENIOR MORTGAGE BROKER 30 On one reading of it, Mr Poirier's email contradicts the claim that the first respondent had given security to Mr and Mrs Morrison in respect of a loan made by them. It suggests that they had lodged a caveat on the title to the Hawthorn Road property for "asset protection" reasons connected, in some way, to the first respondent's matrimonial affairs. 31 A Priority Agreement between ANZ and Mr and Mrs Morrison, made on 17 October 2012, nevertheless refers to a mortgage given by the first respondent to Mr and Mrs Morrison and seeks to adjust priorities between ANZ's mortgage and the mortgage said to have been given by the first respondent to Mr and Mrs Morrison. However, this agreement refers to a "maximum principal sum" of $285,000 secured in respect of Mr and Mrs Morrison's loan, even though the Variation of Loan & Security Agreement, which was apparently made months before the Priority Agreement, records that the principal sum under the loan was to be $513,394.93 by capitalising unpaid interest. 32 Documents produced under subpoena by Macquarie Bank have also provided additional information. A loan application form addressed to Macquarie Mortgages in respect of the purchase of the Hawthorn Road property was apparently completed by Mr Etlis, on the first respondent's behalf, on 5 July 2005. It records the sum of $285,000 as one of the first respondent's assets, which Mr Etlis described as proceeds from the sale of property. The sum is identical in value to the sum said to have been lent subsequently by Mr and Mrs Morrison to the first respondent at about this time. 33 In his second affidavit, the second respondent said that, had he known of Mr Poirier's email, the Priority Agreement, and the information contained in the application form provided to Macquarie Mortgages, he would have required further information from the first respondent and Mr and Mrs Morrison, and would have been likely to have sought further time to investigate the debt said to be owed by the first respondent and the security that had been given for that debt. The second respondent said that he would have recorded his concerns in the report. He said that, in the absence of a satisfactory explanation, he would also have stated that these matters required further investigation.

The second respondent's further communications with the first respondent 34 On 28 June 2013, the second respondent's solicitors wrote to the first respondent's solicitors to bring to the first respondent's attention the additional information the second respondent had received concerning Nitzachon's and Mr and Mrs Morrison's respective claimed debts. In his second affidavit, the second respondent said that his purpose in doing so was to give the first respondent an opportunity to address these matters. Correspondence passed between the solicitors. At the time that the second respondent made his second affidavit, the only additional information that had been provided to him was an unsworn affidavit from the first respondent. 35 In his second affidavit, the second respondent expressed the following views: He had insufficient information and evidence to determine the validity and admissibility of the debt claimed by Nitzachon. The second respondent expressed the belief that this debt required further investigation to determine whether it is a valid debt owed by the first respondent. He had insufficient information and evidence to determine whether the debt claimed by Mr and Mrs Morrison is a valid debt which remains an unpaid liability of the first respondent. The second respondent said that the debt and mortgage claimed by Mr and Mrs Morrison formed the cornerstone of his belief that the first respondent's proposal provided a better outcome for creditors than the first respondent's bankruptcy. He was no longer of the opinion that the first respondent's proposal provided a better outcome for creditors than the first respondent's bankruptcy. At the same time, he was not of the opinion that bankruptcy would provide creditors with a better outcome than that provided under the personal insolvency agreement. He said that there was simply insufficient evidence to enable him to form an opinion either way, and that he was unable to form a final opinion on whether the terms of the personal insolvency agreement are unreasonable or are not calculated to benefit the first respondent's creditors generally.

Further information 36 The documents provided by ANZ under subpoena included an application form signed by the first respondent on 23 October 2012 containing a statement of her then financial position. The application appears to relate to the first respondent's desire to modify the arrangements under which she was to pay interest to ANZ. The statement of her then financial position shows that the first respondent had total funds of $31,000 deposited with financial institutions other than ANZ and that she had a balance of $250,000 in a superannuation account. The only liability recorded by the first respondent was an investment loan with ANZ for $448,000. No other liabilities were recorded. The statement records that, at that time, the first respondent had total assets of $1,298,000, total liabilities of $448,000, and net assets of $848,000. 37 This information stands in stark contrast to the information recorded in the statement of affairs prepared for the first respondent by Mr Etlis approximately three weeks later on 12 November 2012. 38 So far as the first respondent's assets are concerned, there is a discrepancy between her funds in bank accounts ($31,000 v $5,270.65) and the balance of her superannuation account ($250,000 v $109,000). It is possible that the $31,000 or some part of it was used to prepay interest to ANZ. If so, it is difficult to understand why the first respondent would prefer to use funds in that way if she was liable to Nitzachon for a debt accruing interest at the rate of 20% per annum on a principal sum of $740,000. The first respondent suggested in cross-examination that the funds shown as being available in her bank accounts as at 23 October 2012 were used to pay bills. However, she did not identify, other than speculatively, the bills amounting to approximately $26,000 that would have been paid over this three week period. Perhaps more significantly, none of the liabilities shown in the statement of affairs - and, in particular, her alleged debts to Nitzachon and Mr and Mrs Morrison - are shown in the application form. 39 Further, at the hearing, evidence was adduced that, on about 3 October 2012, the first respondent sold shares using an e-trade account in her own name. The proceeds of $17,606.89 were deposited in one of her bank accounts. This sale was not shown in the statement of affairs, even though the first respondent was required to disclose all assets worth more than $1,000 sold, transferred or given away in the last five years. This transaction calls into question whether the first respondent has or had other assets which should have been recorded in the statement of affairs.

The first respondent's evidence 40 The first respondent made an affidavit on 18 July 2013, which was read in the proceeding. It appears to be an affirmed version, with minor amendments, of the unsworn draft provided to the second respondent: see [34] above. 41 The first respondent said that Nitzachon had in fact made a loan to her and Mr Etlis and that Mr Etlis used these funds to invest in a company in Latvia. She said that this investment failed and they were unable to recover the funds. She said that some amounts were repaid to Nitzachon when she and Mr Etlis sold some property in Sydney that they had owned. She said, however, that they were unable to pay off the full amount of the loan and interest. 42 In cross-examination, the first respondent was shown a bank statement for the period 9 August to 8 September 2003 in respect of an account jointly held by her and Mr Etlis. It shows the deposit of $740,000 on 29 August 2003. The source of the funds was shown as "Sanford Securities". This indicates that Nitzachon did not provide that sum and, by itself, casts doubt on its present claim to have made a loan to the first respondent and Mr Etlis for that amount. This evidence must also be seen in light of Mr Morrison's statement that Nitzachon only acted as an intermediary. Curiously, Nitzachon does not appear to have taken any steps to recover the significant liability that it now claims. 43 The first respondent said that she was not involved in negotiating the loan. She also said that, although she had heard of the name "Sanford Securities", she had not dealt with that entity. The first respondent's evidence in cross-examination suggests that her knowledge of a loan from Nitzachon is based solely on what Mr Etlis has told her. 44 In her affidavit, the first respondent said that Mr and Mrs Morrison lent her $285,000 in about July 2005 to purchase the Hawthorn Road property. She said that the application for the loan addressed to Macquarie Mortgages in 2005 was completed by Mr Etlis, who had knowledge of her financial position. She said that she trusted him to complete the application correctly and that she signed it without reviewing it. She said that the description in the application of the sum of $285,000 as the proceeds from sale of property is incorrect. She confirmed that she had borrowed this sum from Mr and Mrs Morrison, and said that she was not certain why Mr Etlis described the sum as the proceeds of sale. 45 The difficulty with this evidence is that, on present indications, the loan application addressed to Macquarie Mortgages appears to have been completed before any advance was made by Mr and Mrs Morrison. Another matter emerging from the evidence is that, according to a record produced by Nitzachon, payments totalling $247,409 were made to it on 15 and 19 July 2005, allegedly by the first respondent and Mr Etlis in reduction of the alleged loan. At the time, Mr Morrison was a director of Nitzachon. Other evidence (such as the second mortgage originally registered on the title to the Hawthorn Road property) records that Mr and Mrs Morrison made the advance of $285,000 to the first respondent on 21 July 2005. The coincidence in timing and approximate amount of these payments to Nitzachon in relation to the making of the loan of $285,000 casts doubt on the genuineness of that loan. As I have noted above, the first respondent's evidence was that she and Mr Etlis repaid some amounts to Nitzachon when they sold property in Sydney that they had owned. 46 In the absence of further explanation, one possible view on the evidence is that, at the time Mr Etlis prepared the loan application addressed to Macquarie Mortgages, the sum of $285,000 was accurately described by him as the proceeds from sale of property, and that this sum was paid to Nitzachon and then provided to the first respondent ostensibly as a loan from Mr and Mrs Morrison, in circumstances where no true liabilities between those parties were intended to be created. 47 With respect to Mr Poirier's email to ANZ, the first respondent confirmed that she spoke to Mr Poirier at around the time his email was sent. However, she denied telling him a number of things that Mr Poirier had recorded. She gave this evidence in her affidavit: The email refers to a telephone discussion between Mr Porier [sic] and me. To the best of my recollection, I did speak with Mr Porier [sic] at around this time but I did not say the words that are attributed to me in the e-mail. We did not discuss a divorce or divorce settlement. I am still legally married to Robert although we have been separated, and we have never had any Court proceedings or "settlement" in relation to our separation. Mr Poirer [sic] refers to a caveat in the email which was the second mortgage in place because the Morrisons had a second mortgage over the [Hawthorn Road property]. Also the Morrisons were former neighbours and I did not and would not describe them as "very close family friend[s]". 48 In cross-examination, the first respondent accepted that, on 31 May 2012, she told Mr Poirier that she had contacted Mr and Mrs Morrison and had asked them to remove the caveat they had lodged on the title to the Hawthorn Road property. She also accepted that she had not sought to correct what she regarded to be misstatements in the email. It also appears that no attempt has been made by the first respondent to have Mr Poirier correct these misstatements. 49 The first respondent was also cross-examined about Rambleford's provision of funds to pay creditors under the personal insolvency agreement. It seems that these funds were procured by Mr Etlis. The first respondent also accepted that Rambleford was paying her costs of this proceeding. The first respondent's evidence in cross-examination makes clear that she has no real knowledge of the arrangements by which these funds were procured or how, if at all, they are to be repaid.

legal principles 50 Section 222(1) of the Bankruptcy Act relevantly provides that a creditor may apply to the Court for an order that a personal insolvency agreement be set aside and that the Court may make such an order if satisfied that the terms of the agreement are unreasonable or are not calculated to benefit the creditors generally (s 222(1)(d)) or "for any other reason, the agreement ought to be set aside" (s 222(1)(e)). 51 If the Court makes an order under s 222(1), it may make such other orders as it thinks fit: s 222(8). If, as is the case here, the application under s 222(1) includes an application for a sequestration order, the making of the application is to be taken as the equivalent of presenting a creditor's petition against the debtor. In that case, it is not necessary for the applicant to establish an act of bankruptcy on the part of the debtor or to satisfy the conditions in s 44 on which a petition can be presented. Similarly, it is not necessary for the applicant to satisfy the requirements of s 47 and s 52(1) of the Bankruptcy Act pertaining to verification and proof with respect to a creditor's petition: s 222(11). If, on such an application, the personal insolvency agreement is set aside, the Court may immediately make a sequestration order against the estate of the debtor: s 222(10). 52 Part X of the Bankruptcy Act provides, by means of the implementation of personal insolvency agreements, a facility for debtors to discharge their liabilities to creditors and thus avoid the imposition of a sequestration order and the consequences of bankruptcy. The scheme of Pt X of the Bankruptcy Act recognises that a personal insolvency agreement may provide a true and better alternative for creditors than the debtor's bankruptcy. In the first instance, the desirability of proceeding in that manner in relation to a particular debtor is left to the wisdom of a collective decision of the debtor's creditors, informed by the debtor's disclosure of his or her financial affairs, and by a controlling trustee's summary and comments on that disclosure, accompanied by a recommendation as to whether the creditors' interests would be better served by accepting the debtor's proposal for dealing with his or her affairs or by the debtor's bankruptcy: see s 188(2C) and s 189A(1) of the Bankruptcy Act. 53 The need for the debtor's proposal to satisfactorily address the interests of his or her creditors generally is reflected in the requirement that the will of creditors be expressed through a special resolution passed by a majority in number and at least three-fourths in value of the creditors present and voting on the debtor's proposal: s 204(1) and s 5(1) of the Bankruptcy Act. 54 There is authority to the effect that the Court will not lightly interfere with the decision of creditors whose will has been expressed in this fashion: Re Segal, Lensworth Finance Ltd v Segal and Ward (1975) 9 ALR 154 at 163; Re Van Twest and Another, Ex parte Tubemakers Australia Ltd (1986) 69 ALR 573 at 575. Even so, s 222(1)(d) recognises that the passing of such a resolution will not guarantee that, objectively considered, the terms of a personal insolvency agreement are reasonable or calculated to benefit the debtor's creditors generally. Where the Court is satisfied that the terms of a personal insolvency agreement are unreasonable or are not calculated to benefit the creditors generally then, in the normal course, the agreement should and will be set aside. Nevertheless, a residuary discretion exists not to set aside the agreement: Re Williamson and Another, Ex parte Wearne and Others (1980) 31 ALR 598 at 604-606; NZI Capital Corporation Limited v Lancaster (1991) 30 FCR 441 at 451. 55 The cases do not draw a bright line between the respective requirements of s 222(1)(d) or between either of those requirements and the requirement of s 222(1)(e). This may be the legacy of the form in which the predecessor provision dealing with the setting aside of compositions was drafted: see s 239(2) appearing in Division 6 of Part X of the Bankruptcy Act, which was repealed by Act No 80 of 2004. The form of the present s 222(1) suggests, but does not necessarily impose, a more discrete categorisation of jurisdictional requirements. 56 Generally speaking, the amount available for distribution under a personal insolvency agreement is seen as an important consideration going to the question of reasonableness. In Westpac Banking Corporation v Hingston and Another (No 2) (2010) 117 ALD 552, Cowdroy J surveyed the relevant authorities. His Honour observed (at [97]) that sufficient cause to set aside a personal insolvency agreement might exist where the benefit provided to creditors is negligible and the discrepancy between that benefit and the total indebtedness of the debtor is substantial, although that consideration is not necessarily determinative; an applicant seeking to set aside a personal insolvency agreement may be required to point to other factors apart from a mere discrepancy between the dividend offered and the actual debt: see, for example, Re: Andrew Nicholas Emmett; Ex Parte: Beneficial Finance Corporation Ltd, Kabani Pty Ltd and Pegasus Leasing Limited [1991] FCA 838 at 22; Re: Alan Kevin Lockett Ex parte: Northern Equity Limited (ACN 009 153 468) (Receivers and Managers Appointed) and Alan Kevin Lockett [1992] FCA 184 at 14-15. Other factors considered relevant to whether the discretion should be exercised in such a case include the nature of the relationship between the debtor and creditors who voted in favour of the debtor's proposal; the possibility that creditors might do as well in bankruptcy as they would under the personal insolvency agreement; whether the personal insolvency agreement has been implemented; and the prima facie right of an applicant to a sequestration order, especially having regard to the size of the bankruptcy: Re: John Barrymore Brennan; ex parte: Stokes (Australasia) Limited and John Barrymore Brennan and Maxwell William Prentice [1988] FCA 833 at 8-9. 57 A more recent example of this approach to the question of reasonableness is seen in Osborne v Gangemi (2011) 9 ABC(NS) 257 in which Bromberg J said (at [47]): The authorities … demonstrate that a composition is likely to be set aside where the amount available for distribution is trivial or negligible when compared to the debtor's total debts. That will be particularly so where the debtor's affairs call for further investigation and insufficient information was available to creditors for them to have made an informed decision that a more advantageous outcome may not be achieved through the bankruptcy of the debtor. The closeness of the vote of creditors will be relevant and particularly so where the result may have been influenced by creditors who were not at arm's length from the debtor or whose interests coincide with the debtor's interest in avoiding bankruptcy, rather than the interests of creditors generally. The extent to which a composition has already been implemented, is a countervailing factor. 58 In contrast, in Re: Peter Leigh Richards Ex parte: Beneficial Finance Corporation Limited [1986] FCA 79 at 3, Jackson J thought that the smallness of the dividend compared to the total debt, coupled with other circumstances, including the public interest and the availability of a public examination in bankruptcy, may constitute, in a given case, sufficient "other reason" to set aside such an agreement. 59 In Re: John Codrington; Ex parte: Don McKay Tourist & Charter Pty Limited v. John Codrington [1989] FCA 514 at 13, Burchett J said, in relation to the now-repealed s 239(2), that a narrow view should not be taken of the expression "not calculated to benefit the creditors generally". His Honour said that the expression comprehends that it may well be in the interests of creditors that there should be a full opportunity for inquiry which bankruptcy may entail, with a prospect or possibility of economic advantage to creditors sufficient to justify the conclusion that it is in their interests that the agreement should be set aside: see, for example, Re Tripodi; Ex parte Col Johnson Pty. Limited [1987] FCA 7 at 31; Augustyn v Putnin (1988) 83 ALR 514 at 515 and 522. These observations show that there may be considerable overlap between factors that enliven the alternative requirements of s 222(1)(d). 60 Of course, when s 222(1)(d) speaks of the benefit to creditors of a personal insolvency agreement, it is referring to the benefit to creditors in their capacity as such and not to interests such as those arising from family relationships, friendship or emotional attachment: see the observations of Lindgren J in Deputy Commissioner of Taxation v Alternative Business Solutions (Aust) Pty Ltd (Administrators Appointed) (2006) 24 ACLC 435 (at [9]) when considering the analogous position under s 440A of the Corporations Act 2001 (Cth). 61 Perhaps the true breadth of the discretion conferred on the Court by s 222(1) to superintend personal insolvency agreements is signified by paragraph (e) which permits the Court to set aside the agreement if satisfied that, for any other reason, it ought to be set aside. In my view, this plainly permits the Court to take into account a range of considerations, including those whose cumulative effect shows that the agreement should be set aside. Those considerations may well include factors that cast real doubt on whether the terms of a personal insolvency agreement are reasonable or are calculated to benefit the creditors generally to support a separate finding that one or other of the requirements of s 222(1)(d) has been met.

The applicant's submissions and the second respondent's submissions 62 The applicant submits that the estimated return to creditors under the personal insolvency agreement (approximately 2.9 cents in the dollar) is paltry. Indeed, the applicant submits that, as matters presently stand, any return to creditors is likely to be significantly less than that estimated dividend. This is because, when estimating the return to creditors of 2.9 cents in the dollar, the second respondent proceeded on the assumption that, of the $100,000 provided by Rambleford, $53,771 would be available for creditors after the payment of fees, charges, and disbursements. This sum was based on, amongst other things, the second respondent's fees under the personal insolvency agreement being capped at $5,072. However, substantially as a result of this proceeding, the second respondent's fees and disbursements have significantly exceeded that cap. The position appears to be that the second respondent can - and, I infer, will - approach the first respondent's creditors to vary the cap, should the personal insolvency agreement not be set aside. If, in those circumstances, they are unwilling to vary the remuneration, the second respondent can apply to the Inspector-General to determine his remuneration: s 162(4) of the Bankruptcy Act; reg 8.09 of the Bankruptcy Regulations 1996 (Cth). 63 Leaving aside the possibility that the funds that may now be available to creditors under the personal insolvency agreement may be significantly reduced, the applicant submits that even a dividend of 2.9 cents in the dollar shows that the agreement is unreasonable, especially when considered against the total value of claims covered by the agreement, which exceeds $1.8 million. The applicant submits that such a dividend is negligible and delivers no practical benefit to creditors at all. The applicant also points to the fact that neither the first respondent's own assets, including her possible equity in the Hawthorn Road property and the Nathan Grove property (see further below), nor her income, have been offered to satisfy her liabilities. 64 The applicant submits that these considerations are alone sufficient to engage the discretion to set aside the personal insolvency agreement as unreasonable within the meaning of s 222(1)(d) of the Bankruptcy Act. It points, however, to additional factors that support that result. 65 First, the applicant submits that there is reason to doubt whether certain creditors who voted in favour of the first respondent's proposal can be genuinely characterised as such. The applicant points to the votes of Svetlana Etlis, Boris and Elena Etlis, Rambleford, and Lenbor Pty Ltd, all of whom are or are associated with Mr Etlis' relatives. The votes of these creditors contributed to obtaining the required majority in number of creditors attending the meeting and voting in favour of the first respondent's proposal. Significantly, however, these creditors have no entitlements under the personal insolvency agreement. Although the applicant does not challenge the legal entitlement of these creditors to vote at the meeting, it submits that these creditors cannot be disadvantaged by the imposition of bankruptcy on the first respondent. It submits that their interests are not truly those of creditors seeking to recover what is owed to them, but of persons promoting familial or other considerations unrelated to the recovery of debts. 66 Secondly, the applicant submits that there are matters relating to the first respondent's affairs that warrant further investigation. I have touched on these matters in my summary of, and comments on, the evidence. These matters are the subject of extensive written submissions by the second respondent, on which the applicant also relies. It is not necessary to set out the details of the second respondent's submissions. In the main, they are directed to discrepancies in the claims made by Nitzachon and Mr and Mrs Morrison, based on material currently before the Court in the form of affidavit evidence prepared by the second respondent that includes extensive reference to documents produced under subpoena. These discrepancies call into question the genuineness of the debt claimed by Nitzachon, and the genuineness of the debt claimed, and validity of the two mortgages held, by Mr and Mrs Morrison. 67 Thirdly, the applicant submits that there is at least a prospect that a greater return may be available to creditors should the first respondent's estate be administered in bankruptcy, than the second respondent considered to be the case when making his recommendation to creditors. The applicant points to the fact that, when estimating the likely payment to creditors in a bankruptcy, the second respondent proceeded on the basis that ANZ would only seek to recover $448,000 from a sale of the Hawthorn Road property, and not the full amount of the first respondent's indebtedness to it. The applicant submits that this assumption may not be valid. The terms of ANZ's Memorandum of Common Provisions, which has been incorporated in its mortgages with the first respondent, show that, if the arrangements between ANZ and the first respondent are "Unregulated Arrangements", ANZ can proceed against the Hawthorn Road property for "all money" owing to it. It is not presently known if the arrangements between ANZ and the first respondent are "Unregulated Arrangements". But should ANZ proceed to recover against the Hawthorn Road property for the full amount of the first respondent's indebtedness to it, and should the second mortgage granted by the first respondent to Mr and Mrs Morrison over the Nathan Grove property be void as against a trustee in bankruptcy (because, for example, it is an undervalued transaction), there is some prospect that funds available from the realisation of the Nathan Grove property may be available to creditors and provide a greater dividend in bankruptcy than that originally estimated by the second respondent. In this connection, it is relevant that, under the Priority Agreement to which ANZ and Mr and Mrs Morrison are parties, Mr and Mrs Morrison contracted away any right to require ANZ to marshal its securities. 68 Fourthly, the applicant submits that the second respondent's changed position, especially his opinion that the personal insolvency agreement should be set aside to enable investigation of the first respondent's affairs by a trustee in bankruptcy, should be given weight by the Court. 69 The applicant has proffered an undertaking to the Court that it would provide funding of $30,000 to any appointed trustee in bankruptcy to conduct any further investigation into the first respondent's affairs, as that trustee thinks necessary.

The first respondent's submissions 70 The first respondent submits that the personal insolvency agreement should not be set aside. She submits that the second respondent recommended the acceptance of her proposal after a "detailed and exacting review" and that the proposal was approved by her creditors and provides a meaningful return to them. Moreover, the first respondent submits that further information provided to the second respondent as a result of documents produced under subpoena in this proceeding, together with the answers she has provided in response to the second respondent's queries, demonstrate that there has been an "exhaustive investigation of [her] historical financial affairs" which has disclosed nothing that would provide a basis to set aside the personal insolvency agreement. 71 The first respondent points to the second respondent's estimate in the report that, under the personal insolvency agreement, creditors would receive 2.92 cents in the dollar within a reasonably short period of time, with certainty, and without the necessity of providing funding, whereas, in bankruptcy, the return would be either zero or, on a best case scenario, approximately 1.77 cents in the dollar. 72 The first respondent submits that the fact that some of her creditors are connected in some way with her is a matter that was disclosed to creditors prior to them voting on her proposal and does not, of itself, stand as a reason to render the personal insolvency agreement either unreasonable or not calculated to benefit the creditors generally. This is particularly so in circumstances where the personal insolvency agreement excludes these related creditors from receiving a dividend under it. 73 The first respondent submits that the applicant has not identified any investigative steps that would be available to a trustee in bankruptcy in connection with the mortgage granted to Mr and Mrs Morrison that would yield additional information to that obtained in this proceeding. She submits that to the extent that further investigation into this loan is warranted - which she does not accept - then the production of documents under subpoena in this proceeding, along with her affidavit, have served that purpose. 74 The first respondent submits that she has been "co-operative and responsive throughout" and there is no cause or need for investigation into her affairs by a trustee in bankruptcy. 75 Further, the first respondent submits that the evidence given in this proceeding should dispel any concern that the second respondent or, indeed, the Court might have regarding the status of Mr and Mrs Morrison, and Nitzachon, as creditors. She submits that, while the Court has a discretion under s 222(1) to set aside a personal insolvency agreement, that discretion should be exercised cautiously. She submits that there is no basis for such an exercise in the present case.

Nitzachon's submissions 76 Nitzachon adopts the first respondent's submissions. In addition, it says that the Deed of Loan and Guarantee to which I have referred (see [26]) establishes that it did in fact provide a loan to the first respondent and Mr Etlis. 77 Finally, Nitzachon submits that an independent trustee should be appointed in the event that the Court decides that the personal insolvency agreement should be set aside and a sequestration order made against the first respondent's estate.

consideration 78 The evidence presents a disturbing and contradictory picture of the first respondent's financial affairs, and challenges, amongst other things, the genuineness of the debt claimed by Nitzachon, and the genuineness of the secured debt claimed by Mr and Mrs Morrison. The validity of these claims has a significant bearing on the assets that might be available to creditors and, consequently, the extent to which creditors will be able to recover against the first respondent. It is not for the Court to determine on the present application the validity of these, or indeed other, claims against the first respondent. Nevertheless, the demonstration of a serious question as to whether significant claims against a debtor are valid, particularly where payment of those claims would materially affect the extent of recovery of other creditors taking under a personal insolvency agreement, is a relevant factor to be taken into account in determining not only whether the terms of the agreement are reasonable or are calculated to benefit the creditors generally, but whether there is "other reason" why the agreement should be set aside. 79 I do not accept the first respondent's submissions that there has been a "detailed and exacting review of [her] affairs" or that, with the aid of documents and other evidence obtained in this proceeding, there has been an "exhaustive investigation of [her] historical financial affairs". These submissions do not engage the second respondent's own evidence, which disavows any such review or investigation by him and which points persuasively to a need for investigation. The evidence before me plainly raises more questions about the first respondent's financial affairs than it answers. It makes clear that the first respondent has, to say the least, an incomplete understanding of significant aspects of those affairs. Contrary to her submission, the first respondent's own evidence provides no assurance at all that the terms of the personal insolvency agreement are reasonable or are calculated to benefit the creditors generally. 80 On any view, the dividend offered to creditors under the personal insolvency agreement is very small. Indeed, it is suspiciously small, when viewed against the background of all the evidence adduced on this application and the terms of the agreement itself. 81 First, the dividend is available to some, but not all, creditors. Those who had voted in favour of the first respondent's proposal, but who do not take under it - representing four out of seven creditors - can only be seen to have been actuated by interests that are extraneous to the desire to recover what they claim is owing to them. The remaining creditors voting in favour of the first respondent's proposal were Nitzachon (the genuineness of whose claim has been directly challenged) and another creditor whose claim ($14,500) is modest compared with the applicant's undisputed claim of $224,014.31. 82 Secondly, the first respondent's own assets and income are insulated from the claims of creditors. Creditors are only paid out of a fund procured by Mr Etlis from a company associated with his mother. The lack of transparency attending the procurement of these funds is a matter of disquiet. As I have noted, the cross-examination of the first respondent showed that she had no real understanding of the arrangements by which these funds came to be provided or how, if at all, they were to be repaid. 83 Thirdly, creditors taking under the personal insolvency agreement are denied the benefit of ss 120, 121, and 122 of the Bankruptcy Act in relation to antecedent transactions involving the first respondent. Thus, although the second respondent had obtained advice that Mr and Mrs Morrison's second mortgage over the Nathan Grove property might be void as against a trustee in bankruptcy, that transaction would effectively be immune to challenge by reason of the implementation of the agreement. Furthermore, the evidence adduced on this application indicates at least the possibility that, by reason of the terms of the agreement, an even greater challenge to this claimed debt may have been forgone. 84 It can be seen that the only benefit available to creditors under the personal insolvency agreement is a very small dividend which comes at a significant price. Any benefit to creditors is limited to what the first respondent, through Mr Etlis' intervention, has chosen to give them. The benefit to the first respondent is great. Her assets and income are immune from creditors' claims and, following the implementation of the agreement, all presently provable debts against her will be discharged. 85 Another disturbing matter emerging from the evidence is the demonstrated inaccuracy of the statement of affairs. I refer in this regard to the first respondent's failure to record her relatively recent share-trading activities. This is a matter of some significance. I do not think that the failure to mention this in the statement of affairs can be brushed aside as a mere oversight, as the first respondent appeared to do in cross-examination. As I have noted, it indicates the possibility that other assets or transactions exist which were not, and should have been, recorded in the statement of affairs. At the very least, creditors voting at the meeting in respect of the first respondent's proposal were not provided with complete information as to her affairs. Moreover, creditors did not have the benefit of the second respondent's presently-informed view, based on the information now available, that further inquiries into the first respondent's affairs are warranted. 86 A feature of the present application has been the absence of evidence from a number of persons who could have given evidence about, and been cross-examined on, important aspects of the first respondent's affairs. Mr Etlis is a notable example. He appears to have been a constant presence in the first respondent's financial dealings. Indeed, he appears to be the architect of the first respondent's financial planning including her proposal to creditors. Another example is Mr Morrison. Even though Mr Morrison made affidavits that were intended to be used in this proceeding, a decision not to read them was taken at the hearing, when it was apparent that he would be cross-examined. I can only conclude that that decision was taken advisedly to foreclose that possibility. 87 In light of the evidence adduced on this application, I am satisfied that the terms of the personal insolvency agreement are unreasonable. I am also satisfied that they are not calculated to benefit the creditors generally. It is not necessary for the Court to have recourse to s 222(1)(e), although I am satisfied that, cumulatively, the evidence demonstrates that the agreement ought to be set aside. I am firmly of the view that the better course is for the first respondent's estate to be administered in bankruptcy where a trustee in bankruptcy will be able to investigate her affairs with the benefit of the powers and procedures available under the Bankruptcy Act. I am persuaded that there is a real possibility that the return to creditors might well be greater in an administration of the first respondent's estate in bankruptcy, than the return that would presently appear to be available under the personal insolvency agreement. 88 Although Nitzachon has objected to the trustee proposed by the applicant, no material has been placed before me that would indicate that the applicant's nominee would not be an appropriate appointment or that he would not act independently in discharging the duties of a trustee in bankruptcy.

disposition 89 An order should be made setting aside the personal insolvency agreement. A sequestration order should be made against the first respondent's estate with the applicant's nominee appointed as trustee in bankruptcy. I note that an appropriate consent has been filed. The applicant's undertaking to provide funding to the trustee in bankruptcy in the amount of $30,000 should be accepted. The applicant seeks an order as to costs. I can see no reason why costs should not follow the event. The first respondent should pay those costs. 90 The applicant is to provide draft orders, including its undertaking, to my Associate within seven days. If I am satisfied with the form of the draft, I will then make the orders. 91 Subsections 222(8) and (9) permit the Court to make ancillary orders, including an order directing a person to pay compensation to another person. The second respondent seeks to invoke these provisions to recover his fees and disbursements, which now greatly exceed the cap of $5,072 provided for in the personal insolvency agreement. The second respondent currently holds on trust a portion of the funds provided by Rambleford, namely, $61,500. These funds were to be applied in accordance with the terms of the personal insolvency agreement. The second respondent seeks an order that his necessary and proper costs and disbursements incurred as trustee of the personal insolvency agreement, including those incurred in this proceeding, be paid from these trust funds, with the surplus refunded to Rambleford or applied as the Court might otherwise direct. 92 This application was signalled in the second respondent's second affidavit. The applicant, first respondent, and Nitzachon did not address the second respondent's application, even though they can be taken to have had clear notice of it. I intend to proceed on the basis that none of them object to such an order being made. 93 I am concerned, however, that the person most affected by the making of such an order, Rambleford, has not been heard on that particular application. I propose to defer determining the second respondent's application until satisfied that Rambleford has had notice of it and has been given an opportunity to be heard. I will make directions to enable this question to be determined separately. 94 At the hearing, the second respondent reserved his position on the question of the costs of the application. Given that the applicant has succeeded on its application to set aside the personal insolvency agreement and there is no reason for it to pay the second respondent's costs, it seems to me that the question of the second respondent's costs of the application is now tied to the fate of his application for compensation. 95 There remains the question of the disposition of the transferred proceeding from the Federal Circuit Court of Australia. The fate of that proceeding has not been addressed by the parties. In light of the fact that a sequestration order will be made in the present proceeding, it does not seem to me that that proceeding has any remaining utility. For abundant caution, I will make an order in that proceeding standing it over for directions at 9.30 am on 18 September 2013. I anticipate that, at that time, the proceeding will be dismissed. Nevertheless, I will hear the parties on whether any other order should be made. I certify that the preceding ninety-five (95) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.