Osborne v Gangemi

Counsel for the First Respondent: Mr S Minahan

Solicitor for the First Respondent: Abrahams Meese Lawyers

Counsel for the Second and Third Respondent: Mr P Agardy

Solicitor for the Second and Third Respondent: Lewis Holdway Lawyers

VID 790 of 2009 Counsel for the Applicant: Mr M Gronow

Solicitor for the Applicant: Christopher Bunnett Solicitor

Counsel for the Respondent: Mr S Minahan

Solicitor for the Respondent: Abrahams Meese Lawyers

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 742 of 2009

STEPHEN ROBERT DIXON (AS TRUSTEE OF THE PROPERTY OF ANTONIO GANGEMI, THE DEBTOR)

JOHN ADAMS (AS TRUSTEE OF THE PROPERTY OF ANTONIO GANGEMI, THE DEBTOR)

JUDGE: BROMBERG J DATE OF ORDER: 4 november 2011 WHERE MADE: MELBOURNE

1. The title of the proceeding be amended to reflect the withdrawal of Pasquale Lanciana as the first applicant.
2. The Personal Insolvency Agreement made by Antonio Gangemi under Part X of the Bankruptcy Act 1966 (Cth) and dated 7 September 2009, is set aside.
3. The estate of the first respondent Antonio Gangemi is sequestrated.
4. The costs of the second and third applicants be taxed and paid out of the estate of Antonio Gangemi in accordance with the Bankruptcy Act 1966 (Cth) as if they were the costs of a petitioning creditor.
5. The costs of the second respondent be reserved. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 790 of 2009

JUDGE: BROMBERG J DATE OF ORDER: 4 november 2011 WHERE MADE: MELBOURNE

1. The creditor's petition be dismissed.
2. The applicant's costs of the petition be taxed and paid in accordance with the Bankruptcy Act 1966 (Cth). Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 742 of 2009

STEPHEN ROBERT DIXON (AS TRUSTEE OF THE PROPERTY OF ANTONIO GANGEMI, THE DEBTOR)

JOHN ADAMS (AS TRUSTEE OF THE PROPERTY OF ANTONIO GANGEMI, THE DEBTOR)

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 790 of 2009

JUDGE: BROMBERG J DATE OF ORDER: 4 november 2011 WHERE MADE: MELBOURNE

REASONS FOR JUDGMENT 1 There are two applications before the Court which these reasons for judgment deal with. The first application was made by Pasquale Lanciana on 14 October 2009. Pursuant to s 222 of the Bankruptcy Act 1966 (Cth) ("the Bankruptcy Act"), that application seeks to set aside the Personal Insolvency Agreement ("PIA") entered into under Part X of the Bankruptcy Act by the First Respondent to that application, Antonio Gangemi. By orders made on 19 April 2010, Richard Osborne and Kourosh Jafari were added as applicants to this application. By an order made on 4 February 2011, I granted Lanciana leave to withdraw as an applicant in that proceeding. A notice of withdrawal was filed with the Court on 14 February 2011. An order needs to be made for the title of the proceeding to reflect the withdrawal of Lanciana as an applicant and I will make that order. Despite his withdrawal, Lanciana participated in the proceeding as a witness called by Osborne. 2 Each of the following creditors appeared and all opposed the application to have the PIA set aside: Alderuccio Solicitors; Stephen Palmer; Richard Kendall QC; Daniel Isakow; Bloomingdale Holdings Pty Ltd; Anthony Gangemi (Director Bloomingdale Holdings Pty Ltd ); Tamvakis Group Pty Ltd; JMT Developments Pty Ltd (Mario Costanzo); and Cathy Ekonomou. All of those creditors other than Alderuccio Solicitors, Palmer and Kendall were represented by Isakow. 3 For the reasons which follow, I have determined to set aside the PIA made by Gangemi on the basis that the terms of the PIA are not calculated to benefit Gangemi's creditors generally. I have also acceded to the application of Osborne and Jafari that a sequestration order be made against the estate of Gangemi. 4 The second application before the Court is a creditor's petition issued by Osborne. It was originally filed in the Federal Magistrates Court and was transferred to this Court on 19 October 2009. That application was heard together with the application to which I have already referred. Given that the Court will make a sequestration order against the estate of Gangemi in the first application, it is unnecessary for the relief sought by the creditor's petition to be further dealt with other than for the question of costs. For those reasons, I will deal with costs and otherwise dismiss the creditor's petition.

BACKGROUND FACTS 5 In 1997, Lanciana and Gangemi began to jointly develop various properties utilising a number of corporate entities which one or the other of them controlled. One of the corporations involved was Bloomingdale Holdings Pty Ltd ("Bloomingdale"). Gangemi was the director of Bloomingdale and at all relevant times was in control of that company and until 30 June 2011 its sole shareholder. 6 A number of properties were purchased in which Gangemi and Lanciana had an involvement. Gangemi's evidence was that eight properties were purchased in inner Melbourne suburbs. According to Gangemi, Bloomingdale and not Gangemi had a beneficial interest in each of these properties which was shared equally with Lanciana in relation to six of the properties and with additional interests in relation to the remainder. 7 One of those properties was purchased in 2002 and was located in Buckley Street, Footscray ("Buckley Street"). Buckley Street was registered in the name of 63 Buckley Street Pty Ltd. In the first half of 2002, Osborne advanced $200,000 to Gangemi. Jafari advanced $350,000 to Gangemi and Lanciana with a view to acquiring an interest in Buckley Street. It was intended that Buckley Street be a joint development involving Gangemi, Osborne, Jafari, Lanciana and others. Gangemi claimed in his evidence before me, that he held no beneficial interest in this property but that through a constructive trust, Bloomingdale held about a third of the beneficial interest in that property. 8 Another property that was purchased by Lanciana and Gangemi and which is of particular interest, was located at 87 Stevedore Street, Williamstown ("Stevedore Street"). Its registered owner was 87 Stevedore St Pty Ltd. Gangemi claims that through a trust, Bloomingdale and Lanciana each held half of the beneficial interest in that property. 9 Since about 1996, Bloomingdale has also owned a property at Rae Street, North Fitzroy. According to Gangemi this property, in which he resided, was held on trust for his son Anthony. In 1996, when the property was purchased, Anthony was aged one and made no contribution to the purchase of this property. From 2003, Bloomingdale also owned a property in Little Collins Street, Melbourne. 10 Before the Buckley Street properties could be developed, and by May 2003, the relationship between Gangemi and Lanciana broke down. They executed a document titled "Heads of Agreement" which dealt with the Buckley Street property. That and other circumstances led to proceedings being issued in the Supreme Court of Victoria which were heard by Hargrave J in January and February of 2008. Reasons for judgment in that matter are reported as [2008] VSC 168 and were delivered on 22 May 2008. 11 Hargrave J dealt with two proceedings. The first was brought by Gangemi and Bloomingdale against 63 Buckley Street Pty Ltd, Jafari, Lanciana and Osborne. The central dispute in that proceeding was who owned the shares and controlled 63 Buckley Street Pty Ltd. Hargrave J observed that Gangemi utilised Bloomingdale "as the vehicle for his relevant investments and ventures" (at [2]). Hargrave J declared that the ownership and control of 63 Buckley Street Pty Ltd had been transferred from Gangemi to Lanciana and then from Lanciana to Jafari. Other orders were made including for damages payable by Gangemi to 63 Buckley Street Pty Ltd and orders for costs. 12 The second proceeding that Hargrave J dealt with was brought by Osborne against Gangemi. In that proceeding, Osborne claimed the $200,000 advanced by him to Gangemi together with interest. Osborne obtained judgment against Gangemi for $250,000 together with damages in the nature of interest in the sum of $137,405.51. Gangemi was also ordered to pay costs. 13 Hargrave J made adverse findings as to Gangemi's credit including that Gangemi gave false evidence on a number of important issues. 14 Gangemi and Bloomingdale appealed the judgment in each of those proceedings. On 15 December 2009, the Victorian Court of Appeal dismissed those appeals: Gangemi v Osborne & Anor; Bloomingdale Holdings Pty Ltd & Anor v 63 Buckley Street Pty Ltd & Ors [2009] VSCA 297 (Nettle, Mandie and Harper JJA). 15 As a result of the breakdown of the relationship between Gangemi and Lanciana, a number of other proceedings, beyond those which I have already referred, were instituted in which Bloomingdale and or Gangemi were involved. A total of 14 proceedings appear to have been issued, as a Deed dated 5 March 2010 to which I will later refer reveals. One of those proceedings was a proceeding in the Supreme Court of Victoria where Bloomingdale brought a proceeding against Lanciana and the registered proprietor of Stevedore Street, 87 Stevedore Street Pty Ltd. 16 In the various proceedings in which Gangemi and or Bloomingdale were involved, they were represented by lawyers. It appears that initially Alderuccio Solicitors was involved but Isakow Lawyers appears to have become more substantially involved as the solicitors for Gangemi and or Bloomingdale. Kendall and Palmer appeared as Counsel for Gangemi and or Bloomingdale in many of those proceedings. Each of those lawyers were paid very substantial sums of money by Gangemi for legal fees incurred in the pursuance of the litigation to which I have referred. Each is a creditor of Mr Gangemi and I will further refer to their involvement, including by the making of submissions in this proceeding. 17 Gangemi had owned a property at 3 Otto Place, Richmond. In March 2008, the ownership of that property was transferred to Rover Corporation Pty Ltd for $425,000. None of those proceeds were received by Gangemi. Gangemi claims that all the proceeds of sale were applied to discharge a mortgage over the property held by an unrelated third party. The sole director and shareholder of Rover Corporation Pty Ltd is Mario Costanzo, a friend of Gangemi. 18 On 11 July 2008, Osborne served a bankruptcy notice on Gangemi. In early May of 2009, Osborne issued a creditor's petition which was served on Gangemi. This is the creditor's petition to which I earlier referred. The debt upon which Osborne relies is the judgment debt arising out of the orders made by Hargrave J. 19 In early 2009, a further 48 shares were created in Bloomingdale beyond the 12 shares held by Gangemi that were then in existence. Those 48 shares were registered in the name of Gangemi's son, Anthony. The issuing of those further shares very substantially diluted Gangemi's shareholding in Bloomingdale. Gangemi's son paid no consideration for those shares. Gangemi claims that the shares were given to his son as compensation for Gangemi's use of the Rae Street property to fund his legal expenses. On 30 June 2010, Gangemi transferred his remaining 12 shares for no consideration to a company controlled by his friend Mario Costanzo. 20 It would appear that the filing by Osborne of his creditor's petition led Gangemi to sign an authority pursuant to s 188 of the Bankruptcy Act on 30 June 2009. That commenced the process which ultimately led to the making of the PIA which is sought to be set aside in this proceeding. In pursuance of the authority given under s 188 by Gangemi, Mr Adams and Mr Dixon were appointed as the trustees of his estate ("the trustees"). 21 Gangemi had provided the trustees a statement of affairs dated 30 June 2009. The statement of affairs stated that Gangemi had $550 in liquid assets but $31,000 owing on credit cards. It disclosed the ownership of no real estate and no other assets beyond 12 Bloomingdale shares, the market value of which was said to be "in dispute". In relation to moneys owed, the statement of affairs identified $70,000 in GST reimbursement said to be owed by the Australian Taxation Office. Additionally, Gangemi claimed that he was owed $935,000 by Lanciana and $283,000 by the "Mitchell Street Unit Trust". The statement of affairs listed Daniel Isakow (Isakow Lawyers) as the only secured creditor in relation to $700,000 said to be owed to him. The security identified was listed as a "charge of shares" given in December 2008. Twelve unsecured creditors were named and various amounts owing were stated, the detail of which is not necessary for me to set out now. Gangemi identified Bloomingdale as a company operated by him, as well as 87 Stevedore Street Pty Ltd and a company called Rala Nominees Pty Ltd. 22 On 21 July 2009, the trustees notified Gangemi's creditors of a meeting of creditors convened for 5 August 2009. The notice to creditors was accompanied by the Trustee's Report ("the Report") prepared pursuant to s 89A of the Bankruptcy Act. The Report stated that Gangemi proposed that his affairs be dealt with by way of a PIA. The Report noted that Gangemi's initial proposal was revised on 20 July 2009 and that the revised proposal stated that a related creditor, Bloomingdale, will not prove for a dividend should Gangemi's proposed PIA be accepted. The Report summarised Gangemi's assets and liabilities. It noted Gangemi's shareholding in Bloomingdale and valued it as "unknown" because the trustees had been advised that Bloomingdale was currently involved in a number of legal proceedings. The Report stated that the trustees had obtained a copy of the management accounts from Bloomingdale and that a review of those accounts had confirmed that there was little or no equity available with respect to Gangemi's shares in Bloomingdale. No further or other investigations in relation to Bloomingdale were noted. 23 The Report listed "contingent assets" of $1,288,000. The notes in relation to that item stated that the contingent assets related to three matters. The first concerned GST in the amount of $70,000 claimable from the Australian Taxation Office. Creditors were advised that in his proposal for a PIA, Gangemi has offered creditors an amount of not less than $60,000 from this claim. The Report stated that Gangemi's family was prepared to advance an amount of up to $60,000 for the benefit of creditors in the event that Gangemi's claim was rejected by the Australian Taxation Office. 24 The notes as to "contingent assets" identified the other two contingent assets as concerning claims made by Gangemi in two court proceedings. Although the names of the third parties from whom damages are claimed were not identified, I apprehend that what was here being referred to were the claims made by Gangemi in his statement of affairs that he was owed monies by Lanciana and the Mitchell Street Unit Trust which were the subject of legal proceedings. Creditors were advised that the trustees were unable to provide details in respect of these claims and that a trustee in bankruptcy would not be likely to pursue these claims. The Report noted, however, that Gangemi had offered creditors 20% of any judgment awarded to him in relation to these two claims less any legal costs and disbursements payable. That was to be part of Gangemi's proposed contribution for a PIA. 25 The Report listed secured creditors of $700,000 (Isakow) and unsecured creditors of $2,312,212. It identified a deficiency (taking into account the contingent assets) of $1,723,662. 26 The Report noted that Isakow was a secured creditor and asserted that he had a security against Gangemi's 12 shares in Bloomingdale (a fact denied by Isakow in the proceeding before me). The debt involved was said to arise from unpaid legal fees. The unsecured creditors disclosed in the statement of affairs were listed. The debts to Kendall, Palmer, Alderuccio Solicitors and Davis Zucco solicitor ($8,000) were described as debts owed by Gangemi for legal services arising from a number of legal proceedings. The quantum of the legal debts in total was identified as $748,000. 27 The Report noted that there were debts of $1,153,000 which were described as arising mainly from credit facilities and personal loans from friends which were advanced to Gangemi and utilised by him to fund his day-to-day living expenses and his legal expenses. Although the Report does not make it clear, it appears that this amount includes about $1,000,000 claimed by Bloomingdale. The Report also noted that Gangemi had informed the trustees that Bloomingdale would not seek to prove for a dividend in the proposed PIA in the event it was accepted by creditors. The creditors were advised that Bloomingdale would nevertheless be entitled to vote at the meeting of creditors and that in the event of the bankruptcy of Gangemi, the debt owed to Bloomingdale would be provable in the bankruptcy. 28 The Report referred to contingent creditors that might also be entitled to have a claim on Gangemi's estate. It identified nine proceedings in progress which were said to be taken by and/or against Gangemi. No detail about those proceedings, including any benefit that may accrue to Gangemi (or Bloomingdale) was discussed. 29 The Report noted that Gangemi advised that he had first experienced difficulties in meeting his obligations in or about May 2008. It said that Gangemi had advised that his insolvency had arisen predominantly as a result of adverse legal actions. The Report noted that Gangemi had been involved in a number of property development projects in partnership with a business partner during the period 2002-2008. Other than a reference to advances made by Osborne as an investor in one of the property development projects, no details were given as to the nature of those projects and Gangemi's interest, if any, in them. 30 The Report described Gangemi's current circumstances as being unemployed due to the legal actions taken by and against him. It was said that Gangemi had advised that he did not expect to derive an income over the following 12 months. The Report noted that Gangemi resided in a property owned by Bloomingdale situated in Fitzroy. 31 A summary of what is said to be the investigations carried out by the trustees is given in an annexure to the Report. Little detail is provided. There is nothing in the annexure or elsewhere in the Report to suggest that any extensive investigations were conducted and in particular into the affairs of Bloomingdale including the extent to which assets held by Bloomingdale may in fact be held for Gangemi. 32 The Report summarised Gangemi's proposed PIA, the terms of which I will refer to later. The Report stated the expectation that Gangemi would not make any income contributions to the benefit of creditors in the event of bankruptcy. Further the Report stated, that in the event of bankruptcy, the trustee did not anticipate any divisible property of Gangemi would be made available to creditors. That view was said to be "subject to the determination of the value of the shares held by the debtor in the before mentioned private companies". No such determination was given in the Report or given at a later time to creditors. The Report noted that a trustee in bankruptcy may recover undervalued transactions or transfers to defeat creditors but stated that from the trustees' investigations to date, the trustee has not identified any payments or transfers which may be recovered by a trustee in bankruptcy. One exception was listed and it related to an allegation by Gangemi of a preference payment of $30,000 made to Osborne, which the trustees noted they would look into further and report. 33 The Report included an estimated comparison of returns which made a comparison between the bankruptcy of Gangemi and the Part X scenario proposed. After deducting fees and expenses involved with the administration of the estate, the estimated total funds available to creditors were listed as nil in relation to bankruptcy and $40,400 in relation to the Part X scenario proposed. That was then identified as providing an estimated dividend to unsecured creditors of nil in relation to bankruptcy and 3.08 cents in the dollar in relation to the Part X scenario proposed. The trustees expressed their belief that creditors' interests would be better served by accepting Gangemi's proposal for a PIA. 34 A meeting of creditors was held on 3 August 2009. The meeting was attended by Dixon as trustee together with Isakow as a creditor and also as proxy for all other creditors other than Osborne, Jafari and Lanciana, each of whom attended personally. The meeting ultimately resolved to adjourn to a further meeting to be held on 17 August 2009. However, a number of matters were raised in the meeting which are of some relevance to the issues that I need to deal with. There was discussion about the alleged preference payment made by Osborne of $30,000. Dixon confirmed that this was not a preference payment. Accordingly it was not available for distribution. As a result, Gangemi's proposed contribution was now an amount of no less than $80,000. Dixon provided an oral summary in similar terms to that contained in the Report. 35 The meeting was opened for questions from creditors. Amongst a range of queries raised, Lanciana queried whether the tax returns for Bloomingdale had been obtained by the trustee. Dixon advised that such documents were private and as such were not available to Gangemi's estate. Dixon reminded Lanciana that Bloomingdale and Gangemi were two separate entities. Lanciana referred Dixon to statements made by Hargrave J in the judgment to which I earlier referred. He asserted that the judge had treated Gangemi and Bloomingdale as the one entity. Lanciana was reminded by Dixon that the meeting of creditors had been called for Gangemi's estate and not for that of Bloomingdale. Lanciana also referred Dixon to Hargrave J's adverse findings made with respect to Gangemi's credibility and alleged that Gangemi was capable of providing false and misleading information to the trustees. Dixon responded that he wished to remain unbiased by not commenting on Gangemi's credibility. 36 The reconvened meeting of the creditors was held on 17 August 2009. Dixon advised that final decisions had been made in respect to the creditors' voting entitlements and that he would admit creditors, for voting purposes, in the following amounts which now totalled $4,151,306: Creditor Amount ($) ANZ 21,360 Alderuccio Solicitor 310,000 Bloomingdale Holdings Pty Ltd 1,075,030 Bruce Richard Stalban Kendall 65,745 Collins Plumbing Services Pty Ltd 9,020 Davis Zucco Lawyers 5,200 JMT Developments Pty Ltd 13,437 Mazza Engineering Pty Ltd 36,651 Mr Antony Domenic Gangemi 23,220 Mr Daniel Isakow 1,255,719 Mr Kourosh Jafari and 238,004 63 Buckley Street Pty Ltd Mr Pasquale Lanciana 195,183 Mr Richard Osborne 550,739 Mr Stephen Palmer 242,044 Ms Cathy Ekonomou 94,709 Yamambra Pty Ltd 9,085 Tamvakis Group Pty Ltd 6,160 ___________ Total 4,151,306 ___________ 37 Also in attendance at the meeting were Jafari, Osborne, Lanciana and Isakow. Dixon dealt with various issues concerning creditors voting rights. The proposal of Gangemi was put forward and described as the payment of a sum of not less than $80,000 within six months to be comprised of: GST in the amount of not less than $60,000 claimable from the Australian Taxation Office, such amount guaranteed by Gangemi's family members; An amount of $20,000 advanced by Gangemi's family; and 20% of any judgment awarded to Gangemi in the two Supreme Court proceedings (against Lanciana and the Mitchell Street Unit Trust), less legal costs and disbursements. (The description here given was not consistent with the terms of the PIA made, which limited the contribution to any damages awarded between the date of the PIA and 6 March 2010 in relation to any court proceedings). 38 Questions were taken. Lanciana queried whether Bloomingdale's tax returns had been obtained. Dixon again stated that those documents were private and not available and again reminded Lanciana that Bloomingdale and Gangemi were two separate entities. Lanciana queried the trustees' investigation with respect to the sale of two properties by Gangemi in the prior five years being a property in Prahran and a further property at Richmond. Dixon advised that preliminary investigations were conducted with respect to the sale of the Prahran property and it appeared to be an undervalued transaction. However, the trustees were unable to quantify the amount likely to be recovered by a trustee in bankruptcy in the event that the creditors resolved to put Gangemi into bankruptcy. In relation to the Richmond property, Dixon advised that it was a contaminated property and was sold to a friend (Costanzo) for what appeared to be a reasonable amount. Dixon was of the opinion that the sale of the Richmond property was not an undervalued transaction. 39 Lanciana proposed that the meeting be adjourned for a period of 14 days, however, the resolution failed. A number of other issues were dealt with prior to a special resolution being put to the creditors that Gangemi be required to execute a PIA in accordance with Gangemi's proposal. The minutes of the meeting record the vote as follows: The Proposal was voted for by the following creditors: Creditor Proxy Amount ($) ANZ Mr Dixon 21,360 Alderuccio Solicitor Mr Isakow 310,000 Bloomingdale Holdings Pty Ltd Mr Isakow 1,075,030 Bruce Richard Stalban Kendall Mr Isakow 65,745 Collins Plumbing Services Pty Ltd Mr Isakow 9,020 Davis Zucco Lawyers Mr Isakow 5,200 JMT Developments Pty Ltd Mr Isakow 13,437 Mr Antony Domenic Gangemi Mr Isakow 23,220 Mr Daniel Isakow - 1,255,719 Mr Stephen Palmer Mr Isakow 242,044 Ms Cathy Ekonomou Mr Isakow 94,709 Tamvakis Group Pty Ltd Mr Isakow 6,160 Yamaba Pty Ltd Mr Dixon 9,085 ______________________ Total 3,130,729 and 75.41% The Proposal was voted against by the following creditors: Voting Creditor Proxy Entitlement ($) Mazza Engineering Pty Ltd Mr Lanciana 36,651 Mr Kurosh Jafari and Mr Jafari 238,004 63 Buckley Street Pty Ltd Mr Pasquale Lanciana - 195,183 Mr Richard Osborne - 550,739 ______________________ Total 1,020,577 and 24.59% 40 The special resolution, which required a majority in number and at least three-fourths in value of the creditors present (s 5 of the Bankruptcy Act), was carried. In terms of value, the resolution was carried by a bare margin of 0.41%. 41 Resolutions were then passed appointing the trustees as joint and several trustees of the PIA of the estate of Gangemi. Other resolutions were passed in relation to the remuneration of the trustees.

LEGAL PRINCIPLES - SETTING ASIDE A PIA 42 Section 222(1) of the Bankruptcy Act empowers the Court to set aside a PIA 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). 43 This very wide discretion ought to be exercised cautiously and always with the objectives of Part 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. 45 It is not surprising then 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. The relevant decisions are summarised and applied by Cowdroy J in Westpac Banking Corporation v Hingston (No 2) [2010] FCA 1116 at [68]-[82] and [97]. The decisions referred to by Cowdroy J are Re Richards: Ex parte Beneficial Finance Corporation Limited [1986] FCA 74 (Jackson J); Re Brennan: Ex parte Stokes (Australasia) Limited (unreported FCA 31 May 1988) (Morling J); Re Codrington: Ex parte Don McKay Tourist and Charter Pty Ltd [1989] FCA 349 (Burchett J); Palazzolo v Ex Parte Discusso [1991] FCA 317 (Neaves J); NZI Capital Corporation Limited v Lancaster (1991) 30 FCR 441 (Foster J); Lancaster v NZI Capital Corporation Limited [1991] FCA 471 (Lockhart, Beaumont and Gummow JJ); Re Lockett: Ex parte Northern Equity Limited and Others [1992] FCA 142 (French J) and Re Emmett Ex parte: Beneficial Finance Corporation Limited v Emmett [1991] FCA 632 (O'Loughlin J). 46 Where the benefit provided under the composition to unsecured creditors is negligible and the discrepancy between that benefit and the amount of the total indebtedness of the debtor is substantial, that in itself may be cause for the Court to set aside the composition although the authorities indicate that such a discrepancy per se is not necessarily determinative: Westpac Banking Corporation at [97] (Cowdroy J). 47 The authorities to which I have referred 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 arms 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.

APPLICATION OF PRINCIPLES TO THE FACTS 48 The facts of this case are that a distribution of $80,000 was proposed in relation to total debts of over $4 million. Assuming the trustees admitted the same debt amounts for dividend purposes as they did for voting purposes at the meeting of 17 August 2009, the dividend payable to creditors would have been less than two cents in the dollar and about one cent in the dollar after deduction of the trustees' likely costs. The amount available for distribution was trivial or negligible when compared to Gangemi's total debts. Gangemi's affairs called for further investigation. This was not a situation where, as a result of the information put before them, creditors could have reasonably concluded that the interests of creditors generally would not be advanced by further investigations of Gangemi's affairs. 49 The information before the creditors was that Gangemi had been an active property developer who had amassed very substantial debts, yet claimed that he had no assets and no beneficial interest in any of the properties with which he was involved. He claimed he had largely become insolvent due to funding the legal expenses of litigation in relation to various of the property developments in which he was involved, whilst at the same time claiming that he had no beneficial interest in any of the properties concerned. All of that and his control of Bloomingdale squarely raised serious questions about the extent to which any assets held by Bloomingdale (including contingent assets related to the litigation in which Bloomingdale was involved) were in truth held for Gangemi and/or the extent to which legal expenses paid for by Gangemi and debts claimed to be owed by Gangemi were in truth the expenses and debts of Bloomingdale. 50 Those matters plainly required further investigation. As did other matters including property claimed to be beneficially held by Gangemi's son and whether or not payments made by Gangemi or other transactions undertaken by him were potentially within the reach of ss 120-122 of the Bankruptcy Act. Further investigation in the way of independent verification of information provided by Gangemi was also called for in circumstances where very serious adverse findings as to Gangemi's credit had recently been made by a judge of the Supreme Court. 51 Evidence given at the trial of this proceeding strongly reinforces the conclusion that further investigation of Gangemi's affairs were warranted. By a Deed of Settlement of 5 March 2010, Gangemi, Lanciana and his son Daniel, Bloomingdale (and a number of other companies associated with the property developments of Gangemi and Lanciana) agreed to settle some 14 legal proceedings in which Lanciana, Gangemi and one or more of the other parties to the Deed were involved. The contents of the Deed evidence that the mortgagee of the Stevedore St property took possession of it and that it was sold at public auction on 22 October 2009 for $3,600,000. 52 It can be inferred from the terms of the settlement arrived at that there is about $1.5 million of equity in the property available for distribution to its beneficial owners. Two alternative modes of settlement are agreed under the Deed. The first appears to involve the transfer of the beneficial ownership of the property to Bloomingdale on the basis that within 14 days of the making of the Deed "Gangemi and Bloomingdale will pay to Lanciana the sum of $725,000". In the alternative and in default of the first mode of settlement, 50% of the net proceeds of the sale are to be applied to Lanciana and 50% (less $50,000) "to Gangemi and Bloomingdale payable to Isakow Lawyers". The parties agreed to keep the terms of the Deed confidential. 53 The terms of the Deed suggest that Gangemi has a beneficial interest in Stevedore Street which he failed to disclose to his creditors. It at least suggests that the shares held by Gangemi in Bloomingdale were of significant value. The terms of the Deed also suggest that Gangemi and Bloomingdale have funds or access to funds in the order of $725,000. Thirdly, the terms of the Deed together with evidence given by Gangemi that the proceeds of the settlement are to be paid to Isakow Lawyers in satisfaction of legal fees incurred jointly by Bloomingdale and Gangemi, also suggests the possibility of an intended preference payment to some creditors to the detriment of others. 54 In that last respect, Gangemi's evidence was that by 2004, he was incurring debts that he could not pay. That evidence is in contrast with the information provided to creditors through the Trustees' Report, that Gangemi first experienced difficulties in meeting his obligations in or about May 2008. From 2004 Gangemi incurred and paid very substantial amounts by way of legal fees to his lawyers including very substantial sums paid in September 2009, shortly after the PIA was executed. Gangemi's evidence as to the amounts involved is confused, although clearly many hundreds of thousands of dollars were involved. His evidence as to whether the payments by him of legal fees related to fees owed by him, owed by Bloomingdale or owed by them jointly is also confused. In the context of the other evidence given by Gangemi as to his relationship with Bloomingdale, Gangemi's confusion serves to support the probability that any distinction between the assets and liabilities of Gangemi and Bloomingdale was likely to have been artificial and contrived. 55 The submissions of Osborne and Jafari point to the extensive investigative powers given by the Bankruptcy Act to a trustee in bankruptcy. Those submissions understate, as the submissions of Gangemi, Kendall and Palmer point out, the investigative powers which the Bankruptcy Act makes available to a trustee of a PIA by reason of s 231. However, that response misses the central point. The terms of the PIA made by Gangemi effectively foreclosed the use of the investigative powers conferred on the trustee by s 231 to so much of Gangemi's property made available under the PIA to meet the claims of the creditors. The PIA acknowledges that the trustees have agreed with Gangemi to deal with his affairs in accordance with the provisions of the PIA and the Bankruptcy Act. The PIA limits the property of Gangemi available to pay the claims of creditors to the $60,000 owed as GST refunds and 20% of any damages awarded to Gangemi from any court proceedings by 6 March 2010, after deduction of legal costs. Upon Gangemi meeting all of the obligations imposed by the PIA, the PIA provides for his complete release and discharge from those debts owed to his creditors provable under the PIA. 56 The alternative to the PIA which was open to creditors was the capacity to take advantage of the use of the investigative powers available in a bankruptcy across the entirety of Gangemi's affairs. Unlike the position arrived at under the PIA, those investigative powers can be utilised to investigate the extent to which Gangemi has assets beyond the assets acknowledged by the PIA. In addition, bankruptcy will make available the antecedent transactions provisions of ss 120-122 of the Bankruptcy Act. Furthermore, bankruptcy will make available to the creditors any property which devolved to Gangemi after the commencement of the bankruptcy and before its discharge (s 116(1)(a) of the Bankruptcy Act). In contrast, the PIA provides that the antecedent transactions provisions do not apply and any property acquired after the implementation of the PIA is not made available to meet the creditors' claims. 57 The likely utility to creditors of further investigations, together with the existence of active creditors resolved to pursue their interests (as demonstrated by Osborne and Jafari's pursuance of this application), suggest that there are practical and not merely hypothetical advantages to the creditors should the PIA be set aside. 58 This is also a case where the vote of creditors was close, in fact extremely close, and where the vote in favour of a PIA was very significantly influenced by creditors who were not at arms length from the debtor. Bloomingdale's vote in terms of value accounted for over a third of the vote in favour of a PIA. Not only is Bloomingdale a related party to Gangemi but, given that its dealings with Gangemi were potentially the target of further investigations, its interests in avoiding those investigations coincided with that of Gangemi. Given Gangemi's evidence, that most of his asserted indebtedness to Bloomingdale related to the payment by him of legal fees and his evidence that much of the fees in question were owed by him jointly with Bloomingdale, there are also serious questions raised as to whether Bloomingdale should have been permitted to vote in the amount allowed by the trustees. 59 It is not necessary to travel beyond the fact that Bloomingdale was a related party given the significance of its vote. However, other related parties who voted in favour were Gangemi's son Anthony (to the value of $23,220) and Gangemi's friend Cathy Ekonomou (to the value of $94,709). The vast bulk of the remainder of the creditors who voted in favour were Gangemi's lawyers. Isakow was admitted for voting purposes at $1,255,719. The debt owed to him was secured by a debenture charge over Bloomingdale. Bloomingdale had also granted security to Kendall and Palmer in respect of which caveats were lodged over the Rae Street property. The value in the vote in favour of these two creditors was $307,789. Each of these creditors had an interest in protecting the assets held by Bloomingdale from any claim that those assets were in fact the assets of Gangemi. Given the evidence that payments of legal expenses were being made as late as September of 2009, there is a further possibility that preference, priority or advantage was provided to these creditors over the interests of other creditors (s 122(1) of the Bankruptcy Act). It is likely that when voting in favour of the PIA, the interests of these creditors did not coincide with the interests of creditors generally. 60 I have taken into account the fact that the composition has already been implemented to the extent that Antonio Gangemi has made the $20,000 contribution from Gangemi's family as required by the PIA. Additionally a further sum of $60,000 has been received by the trustees from Anthony Gangemi which, I would infer, relates to the GST refund. These monies may no longer be available to creditors should the PIA be set aside. They are however trivial or negligible amounts compared to Gangemi's total debts. 61 I have also taken into account that the PIA provides for Gangemi to procure from Bloomingdale an undertaking not to prove for a dividend under the PIA, and that if the PIA is set aside Bloomingdale may prove for a dividend in the bankruptcy. I do not regard that factor as a countervailing factor of sufficient weight to tip the balance in favour of not interfering with the PIA. Firstly, the extent to which Bloomingdale could prove for a dividend is seriously in question. Secondly, if there is value in the concession made, no explanation has been given as to why it is in Bloomingdale's interests to have made the concession. In those circumstances, whether the concession is genuinely in the interests of creditors or serves an ulterior purpose is not clear. 62 For all of those reasons I am satisfied that the PIA made by Mr Gangemi is not calculated to benefit the interests of creditors generally and should be set aside. 63 It is unnecessary that I determine whether the Deed of 5 March 2010 constitutes a "secret arrangement" and provides an independent basis upon which the PIA should be set aside. Nor is it necessary that I consider whether there are non-disclosures arising from the Deed which lead to an additional basis for setting aside the PIA. To the extent the contents of the Deed are relevant, they have already been taken into account in my conclusion that the PIA should be set aside pursuant to s 222(1)(d). 64 Osborne and Jafari have also contended that the PIA should be set aside because meeting procedures required by ss 64D and 64ZA of the Bankruptcy Act were not complied with. The submissions made challenge the entitlement of various creditors to vote at the creditors' meeting but fail to establish any non-compliance with the provisions relied upon. Section 64D deals only with the requirements of a notice to creditors and relevantly, s 64ZA confers upon the trustee the power to determine any question that arises as to the entitlement of a person to vote at a creditors' meeting. The fact that a trustee may have wrongly determined any such question does not constitute a failure to comply with the provision, nor a breach of s 196 of the Bankruptcy Act.

DISPOSITION 65 I will make an order setting aside the PIA made by Gangemi. 66 A sequestration order against Gangemi's estate has also been sought by Osborne and Jafari and I have power to make such an order by reason of s 222(10) of the Bankruptcy Act. In my view, all of the circumstances point to the desirability of making such an order and I will make it. Mr Paul Anthony Pattison is a registered trustee who, by a Consent to Act Declaration filed with the Court on 7 May 2010 in Osborne's creditor's petition, has consented to be Gangemi's trustee in bankruptcy. By force of s 156A(3) of the Bankruptcy Act, Mr Pattison will become the trustee of the estate of Gangemi upon the Court making the sequestration order that I will make. 67 Gangemi, Osborne or Jafari have not contended that costs ought not follow the event. I will further order that the costs of Osborne and Jafari in their application for the PIA to be set aside, be taxed and paid out of the estate of Gangemi in accordance with the Bankruptcy Act and as if they were the costs of a petitioning creditor. I will make a further order that Osborne's costs of the creditors petition be taxed and paid in accordance with the Bankruptcy Act. I have not considered the question of the costs of the trustees and will hear from the trustees. I certify that the preceding sixty-seven (67) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Bromberg.