Westpac Banking Corporation v Hingston

Westpac Banking Corporation v Hingston - [2010] FCA 1116 - FCA 2010 case summary — Zoe

[4]

The issues 4 On 4 August 2009 the Official Receiver accepted a Debtor's Petition presented by Dr Hingston under s 55 of the Bankruptcy Act dated 27 July 2009 ('the petition'). By virtue of s 55(4A)(b) Dr Hingston became a bankrupt on that day. On the same day the Trustee was appointed Trustee in Bankruptcy of Dr Hingston's estate. 5 In his petition Dr Hingston disclosed that he had negligible assets but debts of $7,505,583.53. Included was a debt to Westpac in the amount of $2,366,849.11 representing the balance outstanding under a guarantee and indemnity dated 5 January 2007 provided by Dr Hingston for a company with which he was associated, namely Fly Air Diamond Pty Limited (ACN 121 084 599) (in liquidation). 6 On 30 August 2009 the Trustee circulated his report which commented upon the likelihood of creditors receiving a dividend before the end of the bankruptcy. Such report was prepared pursuant s 19(1) of the Bankruptcy Act and in accordance with Reg 4.14(1) of the Bankruptcy Regulations 1996 (Cth) ('the Bankruptcy Regulations'). 7 The Summary of Statement of Affairs disclosed the claims of unsecured creditors amounting to $10,751,406.03 of Dr Hingston's estate, and no divisible assets of any substantial value. 8 The report also disclosed that Dr Hingston was employed as a surgeon and a medical lecturer and earned an income of $158,579.98 per annum; that he had five dependents; that immediately before being made bankrupt he had been a director and secretary of seven companies from which he had recently retired as a director and secretary. 9 The Trustee reported that the actual income threshold amount for five dependants, as at 22 July 2009, was $56,880.10, and that Dr Hingston's assessable income was $108,490.89 per annum. The Trustee calculated that accordingly Dr Hingston was obliged to make income contributions in the amount of $25,805.40 per annum to his bankrupt estate. The Trustee stated that he did not propose to convene a meeting of creditors and further stated that he did not recognise any significant matters requiring further consideration.

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Disclosure by Dr Hingston 25 In the petition Dr Hingston disclosed his total assets as being superannuation in the value of $75,388.28 and indicated that he owned no real estate, no motor vehicles, no shares, no investments, no interests in deceased estates, no sale, gifts or transfer of assets in the preceding five years, no items of any value, and a bank account having a debit balance of $57.02. 26 Dr Hingston revealed the following interest in companies: Company Date resigned as Amounts paid to the company in past 5 years Amount owed in wages Director Coastjet Pty Limited 15 January 2009 $500,000 $3,500 Coastjet Aircraft Maintenance Pty Limited 15 January 2009 $100,000 $3,500 Arena Coastjet International Aviation College Pty Limited 15 January 2009 $2,000 Nil Lund International School at Aviation Pty Ltd 15 January 2009 Nil Nil Johnston Aviation Pty Limited 15 January 2009 $2,000 Nil Fly Air Diamond Pty Ltd 15 January 2009 Nil Nil Fly Air Coastal Pty Ltd 15 January 2009 Nil Nil Hingston Holdings Pty Limited [trading as Hingston Holdings as Trustee for the Hingston Family Trust] 30 June 2009 Nil Nil North Coast Breast Centre Pty Limited 30 June 2009 Nil Nil Coastjet Aircraft Pty Ltd 15 January 2009 Nil Nil

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Transfer of real estate 46 Westpac submits that a transfer to Helen Hingston of a Port Macquarie property was made for undervalue or alternatively to defeat the creditors of Dr Hingston. In the petition Dr Hingston placed a tick in the box marked 'No' to the question 'Have you sold, transferred or given away any assets worth more than $1,000 in the last 5 years?'. 47 On 24 March 2009 Dr Hingston transferred the property known as 67 Jonas Absalom Drive, Port Macquarie, ('the property') to Helen Hingston. 48 The property had been acquired by Dr Hingston by transfer dated 1 December 2003 for a consideration of $535,750. A mortgage No. AA274683H dated 27 November 2003 in favour of the National Australia Bank Limited ('the NAB') was given by Dr Hingston, the amount secured being $485,000. 49 On 30 August 2005 Dr Hingston approached the NAB for further financial accommodation. The Customer Particulars Report contains details of Dr Hingston's assets. According to the particulars contained in such report Dr Hingston assessed the value of the property at $595,000. 50 On 13 March 2009 Helen Hingston applied to the Commonwealth Bank of Australia ('the CBA') for finance to enable her to purchase the property. In such application the purchase price of the property was stated at $600,000. The CBA commissioned its own valuation by a Certified Practicing Valuer. Such valuer compiled his Residential Property Evaluation and also assessed the value of the property at $600,000. 51 The property was transferred by Dr Hingston to Helen Hingston on 24 March 2009 for a consideration of $507,338.96. The transfer was registered under the provisions of the Real Property Act 1900 (NSW) and was issued registration No. AE601239K. By mortgage dated 1 April 2009 registered number AE601240B, the property was mortgaged to the CBA. 52 Westpac contend that if the composition were set aside the transfer of the property to Helen Hingston would be void against the Trustee in Bankruptcy on two grounds. Firstly, since the transfer took place within five years of the commencement of the bankruptcy and was for consideration less than market value, the property would become part of Dr Hingston's estate pursuant to s 120 of the Bankruptcy Act. Alternatively, pursuant to s 121 of the Bankruptcy Act the property would probably have become part of Dr Hingston's estate and the main purpose of the transfer was to prevent the property from becoming divisible amongst Dr Hingston's creditors.

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Inadequate amount payable to creditors under the composition 60 The second ground under which Westpac seeks to set aside the composition is on the basis that the amount payable to creditors under its terms is inadequate. At the date of Dr Hingston's bankruptcy, he was indebted to his creditors in the amount of $10,751,406.03. At the date of composition proposal Dr Hingston's annual income was $158,579.98 per annum which produced an assessable income for the purposes of the Bankruptcy Act of $108,490.89 per annum. Accordingly, the Trustee assessed that Dr Hingston was required to make an income contribution in the amount of $25,805.40 to his creditors in the first 12 months of his bankruptcy. 61 The composition provided for a total payment of $45,000 or $50,000 in full and final satisfaction of all outstanding debts of his estate. The composition indicated a repayment to creditors of approximately $0.004 in the dollar, an amount that Westpac submits is demonstrably inadequate. 62 Westpac submits that if the bankruptcy took its usual course of three years, the amount payable to creditors would be in the amount of at least $25,805.40 per annum thereby rendering a total repayment from Dr Hingston's income alone of over $75,000. Accordingly Westpac submits that the amount proposed to be paid under the composition is significantly less than if a bankruptcy order was made and therefore inadequate. 63 Dr Hingston submits that the four creditors who voted in favour of the scheme provided PoDs of $4,270,986 and that by virtue of the composition, they agreed not to prove such PoDs. Accordingly, Dr Hingston submits that by virtue of the composition, there is a greater sum available to the remaining creditors. 64 Secondly Dr Hingston submits that the Trustee's fees under the bankruptcy amounted to $25,000 as opposed to a fee of $10,000 under the composition, thereby representing a saving for his creditors. 65 Thirdly, Dr Hingston submits that the creditors to whose advantage the composition was offered would receive their payments at an earlier stage and that the monies received would be able to earn interest over what would otherwise be the duration of his bankruptcy. Accordingly, it is submitted that such early payments were to the creditors' distinct advantage. For these reasons Dr Hingston submits that the composition is reasonable. 66 Dr Hingston also submitted that the public interest would be best served under the composition as implemented. He directed the Court's attention to his work as a specialist cancer surgeon in the community and to the work performed by his breast cancer clinic which he has established in the Port Macquarie area for the benefit of the increasing and ageing population. He submits that if he were made bankrupt, the community would be deprived of such services. Dr Hingston also referred to his service overseas as a surgeon seconded to the Australian Defence Force which he submitted would be denied to him if he were to become a bankrupt. Dr Hingston referred to an air ambulance service which he established at Port Macquarie and a flight training school, both of which had apparently failed due to the effects of the global financial crisis.

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Consideration 67 The Court accepts that Dr Hingston genuinely considers that the interests of all parties are better served if the validity of the composition is upheld. No doubt the dismissal of Westpac's application would alleviate the severe strain under which Dr Hingston has evidently laboured and ensure the continuation of a stable environment for his family. Dr Hingston's submissions were put to the Court plainly and succinctly and the Court has clearly understood each submission Dr Hingston has made. Nevertheless, the Court must consider wider interests, as provided by the provisions of the Bankruptcy Act. 68 Section 222(1)(a) enables the Court to set aside a composition if a court is satisfied that the terms of the agreement are unreasonable or are not calculated to benefit the creditors generally. In assessing such requirement, the Court has had regard to the amount proposed by the composition compared to the amount of the debts owing by Dr Hingston. 69 In the matter of Re Richards: Ex parte Beneficial Finance Corporation Ltd [1986] FCA 74 Jackson J considered the equivalent provision of the Bankruptcy Act (then s 239(2)) prior to its 2004 amendment. That section authorised the Court to determine whether a composition was unreasonable. His Honour found that a provision for the payment of $4,000 by way of composition in respect of a total deficiency of $275,071.73 was inadequate. His Honour said: The amount offered pursuant to the composition in settlement of the debts is so trivial when compared to the total of the debts that in the circumstances of the particular case I would regard that fact alone as a sufficient "other reason" in terms of s 239(2) for setting the composition aside. I take that view because it seems to me that in a case where a debtor having gross assets amounting to only $2500.00 has been prepared to incur debts amounting to a hundred times that amount, the case is better dealt with by way of bankruptcy (thereby giving rise to such matters as public examination of the bankrupt and other persons under s 81) than pursuant to the rather more bland provisions of Part X dealing with compositions.

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86 In such letter Mr Leigh assessed the companies' debts to be in the vicinity of 12 to 15 million dollars. Mr Leigh stated that such debts could, in his opinion, be attributable to Dr Hingston's actions. 87 On 21 September 2009 the Trustee was provided with a s 439A Report to Creditors prepared by Mr Leigh in respect of the companies within the Coastjet Group, each of which was described as being under administration. The report states that Mr Leigh was appointed administrator of the Coastjet Group on 15 January 2009 by the directors of such companies pursuant to s 436A of the Corporations Act 2001 (Cth) as the directors were of the view that the companies 'were, or were about to become, insolvent'. 88 Such report referred to Dr Hingston's relocation from New Zealand to Australia in 2004 and of his passion for aviation in New Zealand. The report also referred to the fact that Dr Hingston had started a small commuter airline in New Zealand which had ultimately failed. 89 The report disclosed total liabilities of Fly Air Diamond of $3,392,719. The report, under the heading of insolvent trading, referred to the fact that it was likely that the Coastjet Group had engaged in insolvent trading for some time and in fact in some cases may have been insolvent since inception. The report referred to inadequate records, uncommercial transactions, unfair loans and unreasonable payments to directors. 90 The Court observes the history of the administration of the Coastjet Group is questionable. Dr Hingston testified that Mr Leigh, as administrator, had transferred an aircraft, the property of one of the companies in the group, to Helen Hingston for no consideration. Such evidence, if correct, is to say the least puzzling, and is prima facie highly irregular. However, the Court does not have any further evidence on this matter, nor is it necessary to further consider it in this application. 91 It should also be observed that Dr Hingston relied upon a letter written by David Leigh as the Administrator of the Coastjet Group dated 3 September 2010 stating: I refer to your recent enquiry in relation to my administration of the above companies (as they were formerly known) [the Coastjet Group].

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(i) omitted a material particular from the statement of the debtor's affairs given under subsection 188(2C) or (2D); or (ii) included an incorrect and material particular in that statement; 101 Westpac submits that Dr Hingston omitted a material particular from the statement of his affairs and accordingly s 222(5)(e)(i) of the Bankruptcy Act has application. Westpac submits that no reference was made in the debtor's petition to the fact that Dr Hingston had been a director of companies registered in New Zealand within five years preceding 27 July 2009 (that being the date of his declaration on the petition). Those companies were HDL Limited, HDL Publishing Limited and CoastJet (NZ) Limited (these companies will hereafter be referred to collectively as 'the New Zealand Companies'). Dr Hingston had also been a director of another New Zealand company named Hingston Surgical Limited. 102 Further, Westpac alleges that Dr Hingston did not disclose the existence of the Hingston Family Trust based in New Zealand ('the NZ trust'), the trustee of which is a New Zealand solicitor, Graeme Keith Marshall. The records of the NZ trust show that its beneficiaries are Dr Hingston, Helen Hingston and their children. The statement for the financial year ended 31 March 2009 records current assets of NZ $385,385. Significantly, the NZ trust owns all the shares in the New Zealand companies. 103 The financial report for the financial year ended 31 March 2009 for HDL Limited records rental from properties of NZ $158,057, and current assets having a value of NZ $1,677,320. Non current liabilities are recorded as NZ $1,609,556. There are 17 properties in New Zealand recorded as being assets of HDL Limited. No financial reports are in evidence relating to HDL Publishing Limited and CoastJet (NZ) Limited. 104 The financial report for Hingston Surgical Ltd for the year ended 31 March 2009 lists Dr Hingston as its sole director and records no current assets being owned by that company. The company recorded a net loss of NZ $963 for that year. The financial report shows that a Porsche motor car was sold on 1 September 2008. The cost price is shown as NZ $284,641. Other evidence establishes that this vehicle was sold to Helen Hingston for approximately AUD $45,000. 105 Westpac submits that Dr Hingston's Trustee should conduct a proper investigation to determine whether Dr Hingston earns income from his role as a director of the New Zealand companies; whether the New Zealand properties or income produced by the New Zealand properties form part of Dr Hingston's estate; whether the proceeds of the sale of a Porsche motor car claimed by Dr Hingston to be the former property of the NZ trust forms part of the estate of Dr Hingston; and whether any assets of the NZ trust form part of Dr Hingston's estate. Accordingly Westpac submits that it is in the interest of creditors that the composition be set aside pursuant to s 222(5) of the Bankruptcy Act. 106 Dr Hingston acknowledges that he did not disclose the existence of his directorships in the New Zealand companies, nor of the properties owned by the New Zealand companies, nor of the NZ trust. Dr Hingston maintains that he was of the belief that the debtor's petition only required disclosure of his assets in Australia. 107 Dr Hingston states that he had resigned as a director of the New Zealand companies and that a solicitor, Mr Marshall, is the sole trustee of the NZ trust. Dr Hingston states that he has no control over the discretionary powers of the Trustee and no vested interest in any of the assets of the NZ trust. Dr Hingston further claims that he had received no income from the New Zealand Companies.

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