REASONS FOR JUDGMENT

1                     This is an application by the Westpac Banking Corporation (‘Westpac’) under ss 222(1) and 222(5) of the Bankruptcy Act 1966 (Cth) (‘the Bankruptcy Act’) seeking orders setting aside a composition agreement (‘the composition’) entered into by the first respondent (‘Dr Hingston’) pursuant to s 73 of the Bankruptcy Act. An order is also sought under s 222(10) of the Bankruptcy Act that a sequestration order be made against the Dr Hingston. Two additional claims, namely that the composition be terminated pursuant to s 222(C) of the Bankruptcy Act and that the composition be set aside pursuant to s 222(2) of the Bankruptcy Act, had been made in the original application but were withdrawn prior to the hearing.

2                     Dr Hingston opposes the application. Although Dr Hingston had been legally represented, he has appeared unrepresented at the two most recent directions hearings and at the hearing of this application.

3                     The second respondent (‘the Trustee’) appeared and submitted to any orders except costs orders.

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.

Subsequent developments

10                  On 21 September 2009 the Trustee issued a Notice to Creditors informing them of a meeting to be held on 2 October 2009 to consider a proposal by Dr Hingston for a composition of his debts and subsequent annulment of his bankruptcy. Attached to the Notice to Creditors was a report by the Trustee pursuant to s 73(2) of the Bankruptcy Act (‘the second report’). The second report set out the list of creditors and Dr Hingston’s total debts in the amount of $11,244,501.91. The report foreshadowed further claims arising out of the liquidation of the seven companies in which Dr Hingston had been a director and secretary (‘the Coastjet Group’) as referred to in the Trustee’s initial report.

11                  The companies in the Coastjet Group were described as being in liquidation. Such companies were identified as follows.

Arena Coastjet International Aviation College Pty Ltd (In Liquidation) ACN: 129 780 418

Coastjet Aircraft Pty Ltd (In Liquidation) ACN: 118 585 783

Fly Airgold Pty Limited (In Liquidation) ACN: 117 506 144

Fly Air Diamond Pty Ltd (In Liquidation) ACN: 121 084 599

Hingston Holdings Pty ltd (In Liquidation) ACN: 124 110 434

Johnston Aviation Pty Ltd (In Liquidation) ACN: 124 829 376

North Coast Breast Centre Pty Ltd (In Liquidation) ACN: 106 047 205

12                  Certain creditors reserved their right to vote and agreed to forgo their claims as creditors and not to participate in any distribution. Those unsecured creditors included Dr Hingston’s wife Helen Margaret Hingston (‘Helen Hingston’) and their claims were listed as follows:

13                  The Trustee’s report contained the following proposal by Dr Hingston:

That upon acceptance of this proposal by a special resolution of a meeting of the creditors of my bankrupt estate I propose to pay an amount of $50,000 in full and final satisfaction of all outstanding debts of my estate payable as follows:

•  $25,000 payable immediately on acceptance by creditors;

•  $20,000 payable by 1 December 2009.

°   The funds are being provided by Helen Hingston.

°   If the proposal is not accepted by creditors the proposed amount will be withdrawn.

°   The following creditors reserve their right to vote and agree to forgo their claims as creditors of the bankruptcy and agree not to participate in any distribution:

– Dr Helen Hingston, Lydia Pursell,

– Bryan Singh, Bruno Lopreato

The composition fund shall be applied by the composition trustee in payment of the costs, remuneration, expenses, provable debts and other amounts payable in the administration of my bankruptcy in the manner prescribed by sections 108-114, but excluding subsection 109(1), of the Act as if the composition trustee were the trustee of my bankrupt estate and those provisions shall be applied to the administration of the composition mutatis mutandis, save that the unpaid remuneration and expenses (if any) of the trustee of my bankrupt estate shall also be paid out of the composition fund and shall rank pari passu with the remuneration of the composition trustee.

In the event that a creditor’s claim has not been admitted to proof in bankruptcy, then that creditor shall lodge a proof of debt with the composition trustee who shall deal with the proof of debt in the manner prescribed by sections 82-107 of the Act inclusive and any relevant bankruptcy regulations which provisions shall apply to the administration of the composition mutatis mutandis.

Subject to the provisions of subsection 75(2) of the Act, the composition herein proposed shall be binding upon all creditors in respect of the debts provable in my bankruptcy and shall operate as a release by my said creditors of such debts.

14                  In his second report the Trustee recommended that creditors should not accept the s 73 composition proposed. The Trustee stated as the reason for his recommendation:

I am of the view that substantial further investigation is still required to be undertaken in respect to the transfer of the Bankrupt’s property and into the Bankrupt’s affairs, accordingly, it is my opinion that creditors should not accept the Section 73 Composition as proposed.

Accordingly, as the Bankrupt is obliged to make income contributions I am of the opinion that the return to creditors could be greater in a bankruptcy scenario, should the Bankrupt remain bankrupt for the full three year period of bankruptcy.

15                  The Court notes that in the above proposal, the total payment by Dr Hingston is stated as $50,000 but the instalments said to constitute that payment only amount to $45,000. The evidence did not disclose any explanation for such discrepancy.

16                  By the date of the Trustee's second report (21 September 2009) the estimated participating creditors’ claims had increased to $26,244,501. The estimated return to unsecured creditors was stated by the second report to be 0.002c in the dollar under the bankruptcy. Under the proposed composition the return was estimated to be 0.001c in the dollar.

Creditors’ meeting

17                  The creditors’ meeting to consider the composition was held on 2 October 2009 at 4.00 pm at the offices of the Trustee. The following creditors attended, including those by proxy, and a Proof of Debt (‘PoD’) for each creditor is recorded as follows:

18                  Following the appointment of a minutes secretary and other formalities, a resolution was put as follows:

That the Bankrupt’s proposal for a Composition under Section 73(1) of the Bankruptcy dated 17 September 2009 for payment of an amount of $50,000 in full and final satisfaction of all debts due and payable, be accepted.

19                  The recommendation of the Trustee that the composition should not be accepted was referred to but the record of the meeting does not disclose whether questions were raised concerning such recommendation.

20                  The proposed composition was then submitted for voting. The following creditors voted in favour:

21                  The following creditors voted against:

22                  Thereafter the Trustee’s representative, Ms Fleur Evans, who acted as President of the meeting stated that, exercising the proxies which she held, the motion was carried and accordingly the bankruptcy of Dr Hingston was annulled.

23                  A further resolution was put before the meeting by the President, namely:

That Andrew Wily be appointed as Trustee of the Bankrupt’s composition under s 73 of the Bankruptcy Act 1966.

24                  The motion was carried and thereafter the meeting closed.

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:

27                  Dr Hingston stated that he had been a unit holder or beneficiary in the Hingston Family Trust (‘the Australian trust’), which he recorded as having no assets. Dr Hingston provided the address of the Australian trust as 28-32 William St, Port Macquarie, New South Wales. It should be observed that no reference was made to another trust of the same name, based in New Zealand.

Basis of Westpac’s application

28                  On 24 September 2009 Westpac received the Notice to Creditors dated 21 September 2009 (‘the Notice’) by mail at Westpac’s Service Centre at Concord, New South Wales. It was then forwarded to its Business Recoveries Team located in Adelaide on 29 September 2009, from which the Notice was forwarded to a bank officer in Sydney on 7 October 2009, namely five days after the meeting had been held. Westpac states that it would have attended the meeting of creditors and voted against the composition but for its administrative error in failing to appreciate the proximity of the meeting date.

29                  The evidence also establishes that Anne Johnston (‘Mrs Johnston’), a putative creditor, objected to the composition and has raised various issues concerning the creditors meeting of 2 October 2009. Such matters were considered by a Delegate-General of the Inspector General in Bankruptcy, and are not relevant for this application.

Operation of s 232 of the Bankruptcy Act

30                  As a threshold question, Dr Hingston submits that the Court has no power to determine this application in respect of the s 222(5) claim in view of the provisions of s 232 of the Bankruptcy Act. Section 232 provides:

Certificate relating to discharge of obligations

(1)     If the Trustee of a personal insolvency agreement is satisfied that all the obligations that the agreement created have been discharged, the Trustee must, on written request by the debtor, give the debtor a certificate signed by the Trustee to that effect.

(2)     A certificate signed by a trustee under this section is prima facie evidence of the facts stated in it.

31                  Dr Hingston relies upon the fact that the two payments required by the composition have been made to the Trustee. Further, Dr Hingston provided to the Court a letter dated 24 August 2010 which is addressed to him from the Trustee and stated to be issued under ss 232(1) and (2) of the Bankruptcy Act which provides:

I, Andrew Hugh Jenner Wily of Armstrong Wily, Trustee of Composition accepted on 2 October 2009 by the creditors of Guy Richard Hingston hereby certify that I am satisfied that all the obligations that the agreement created have been discharged on 30 November 2009.

32                  Dr Hingston then relies upon s 222(7) of the Bankruptcy Act which provides:

(7) the Court must not make an order under subsection (5) unless the application for the order is made before all the obligations that the personal insolvency agreement created have been discharged.

Westpac’s submissions

33                  Westpac submits (as conceded by Dr Hingston) that the prohibition in s 222(7) has application only with regard to the ground raised by Westpac under s 222(5) and does not extend to applications made under s 222(1). It submits that s 222(7) applies where ‘all the obligations that the personal insolvency agreement created have been discharged’. Westpac states (and this fact is not challenged) that whilst payments had been made pursuant to the composition to the Trustee, the Trustee has not made any payments to the creditors. Accordingly Westpac submits that the obligations remain unfulfilled under the composition.

Finding

34                  Guidance is provided by decisions of the Court made under the equivalent provisions of the Bankruptcy Act which prevailed prior to amendments which were introduced by the Bankruptcy Legislation Amendment Act 2004 (‘the amending Act’) and which came into effect on 1 December 2004.

35                  In Re Watkinson: Ex parte Registrar in Bankruptcy (unreported, Gray J, FCA, 3 March 1986) the Court considered the provisions of s 222(6) of the unamended Bankruptcy Act which relevantly provided:

The court shall not make an order under subsection (2) or (4) unless the application for the order is made…

(c) in relation to a composition – before the final payment has been made under the composition.

36                  Gray J said:

At first sight, the reader of s 222(6) would expect the final payment to be the last transfer of money in connection with a composition, ie in this case, the last of the payments out to creditors.

37                  His Honour considered the submission that the final payment had been made under a composition when the last amount to be paid by the debtor had been paid to the Trustee. His Honour rejected such contention, stating as follows:

In my view it is reading too much into those words to hold that they do. The use of the word “final” in both para (a) and para (c) is significant as indicating an end of a transaction… This seems to me to be a case where the first impression of the meaning of the words appears to be correct.

38                  His Honour’s observations were referred to by Hill J in Re Williams and Another; Ex parte Official Trustee in Bankruptcy (1990) 26 FCR 191 at 196 where Hill J adopted the conclusion of Gray J in Re Watkinson.

39                  The Court notes that the equivalent section in the current Act, s 222(7) (reproduced above at [32]), is not in identical terms to the pre-existing s 222(6)(c). The current s 222(7) prohibits the Court from setting aside a composition in circumstances where ‘all the obligations that the personal insolvency agreement created have been discharged’.

40                  The current s 222 was introduced by the amending Act. The Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 2004 refers at [11] to the decision of Parliament to conduct a review following concerns:

… related to potential conflicts arising from the relationship between the debtor and the controlling trustee as well as the impact on the outcome of the meeting where the debtor has so-called ‘friendly’ creditors who are associated entities or family members.

41                  The Explanatory Memorandum refers to the need to simplify the existing process for judicial review of deeds or compositions and states at [19]:

In particular, to recognise that the parties’ agreement is paramount, the current requirement that the avoidance of an agreement must to be ‘in the interests of creditors’ will be removed when the basis for seeking the order is that the requirements of Part X were not met.

42                  Significantly the Explanatory Memorandum does not suggest that any change was to be made to the interpretation of the manner in which the pre-existing s 222(6)(c) was to be applied, and does not suggest any legislative amendment to alter the interpretation placed upon that section by judicial decisions such as Re Williams and Re Watkinson. In these circumstances, the Court considers that it is appropriate to treat the pre-existing s 222(6)(c) and the extant s 222(7) as equivalent and to apply the same test as applied by Gray J in Re Watkinson.

43                  It follows from the above that ‘all the obligations that the personal insolvency agreement created’ as provided in s 222(7) have not been discharged and that there is accordingly no bar to the Court making an order under s 222(5) if the Court deems such an order to be appropriate.

Westpac’s application to set aside the composition

44                  Westpac relies on two grounds in its Application to set aside the composition.

Ground 1: Unreasonableness of the composition

45                  Westpac claims that pursuant to s 222(1) the terms of the composition are unreasonable or are not calculated to benefit Dr Hingston’s creditors generally. Three bases are relied upon by Westpac in support of this ground.

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.

Dr Hingston’s reply

53                  Dr Hingston challenges the allegation that the property was sold at undervalue and further challenges the assertion that the main purpose of the transfer was to prevent the property from becoming divisible amongst his creditors.

54                  Dr Hingston relied upon evidence of other sales of real estate located in the same street as the property in the period from 20 September 2007 to 7 September 2010. This data was obtained from a website which recorded sales data obtained from the Registrar General. The data records that the highest price received for any such properties was $470,000 and the average for such properties (one of which includes a vacant parcel of land) was $391,631.40. Dr Hingston maintained that the value of his property had been depressed because of the global financial crisis with the result that it had not achieved any capital gain since its acquisition by him in 2003. Accordingly Dr Hingston vehemently denied that the property was transferred to his wife at undervalue.

55                  Dr Hingston denied that he had any motive to defeat the interest of his creditors. Rather, he frankly acknowledged that his sole purpose in arranging the sale was to ensure that his wife and five children would continue to reside in the property without interruption in the event that he became a bankrupt.

Findings

56                  The only evidence before the Court from a qualified valuer concerning the valuation of the property is that contained within the records of the CBA. Despite sales evidence of properties in the same street, the Court accepts that the best evidence is that of the qualified valuer for the CBA, namely that in March 2009 the property had a value of $600,000.

57                  The CBA advanced $539,510 to Helen Hingston. Dr Hingston acknowledged that the difference between the amount advanced to Helen Hingston from the CBA and the amount paid for the property by Helen Hingston was applied to stamp duty in respect of the transfer. The correspondence records a letter dated 31 March 2009 forwarded to Dr Hingston from Steve Wilkinson, Partner of Port Macquarie Business Banking Centre which relevantly states:

I’m writing to confirm that we’ve received the settlement amount for the sale of your property at 67 Jonas Absalom Dr, Port Macquarie NSW and have disbursed the funds according to your settlement instructions.

NAB received $507,388.95 from the purchaser in exchange for the relevant documents of title and we’ve disbursed the funds as listed below:

        $506,988.95          GR Hingston – Payout Home loan No. 59 090 7189

$       400.00          Settlement & Discharge Mortgage Fees

     $ 507,388.95          Amount received

58                  Based upon the evidence of the value of that property at $600,000 and the consideration paid, the Court concludes that the transfer was effected at undervalue. The Court does not accept the submission of Dr Hingston that it was pure coincidence that the purchase price of the property was identical to the amount of the indebtedness then owing to the NAB together with associated settlement and discharge mortgage fees and stamp duty for the purchase by Helen Hingston.

59                  The Court finds that the transfer of the property occurred within five years of Dr Hingston’s bankruptcy and was for a value less than market value. Accordingly, such transfer is void against the Trustee. Further, given Dr Hingston’s own evidence that the transfer was effected so as to provide stability for his family in the event of his bankruptcy, the Court is satisfied that the transfer was made to prevent the property becoming divisible among the creditors within the meaning of s 121(1)(b) of the Bankruptcy Act. Accordingly Westpac has established its claim with regard to the property.

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.

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.

70                  A similar approach was taken by Morling J in Re Brennan; Ex parte Stokes (Australasia) Ltd (unreported FCA 31 May 1988) in which his Honour said:

In a case where a debtor has incurred debts of such huge proportions relative to his assets there is much to be said for the proposition that it is in the public interest that there be a public examination of the bankrupt (and possibly other persons) under s 81 of the Bankruptcy Act.

71                  The observations of Morling J were adopted by Burchett J in Re Codrington: Ex parte Don McKay Tourist and Charter Pty Ltd [1989] FCA 349 and by Neaves J in Palazzolo v Ex parte Discusso [1991] FCA 317.

72                  In NZI Capital Corporation Limited v Lancaster (1991) 30 FCR 441 Foster J, having noted that the unsecured creditors would receive between a return of less than one fiftieth of a cent in the dollar if the composition continued and having considered both Re Richards and Re Brennan, said at 445:

There can be no doubt that a strong case is made in the present proceedings for the setting aside of the composition on the simple basis that unsecured creditors are, for practical purposes, getting nothing and would be better off if the debtor were made bankrupt so they could take advantage of the investigatory procedures then available to them.

73                  At 451 his Honour continued:

In my view, the terms of the composition are demonstrably unreasonable having regard to the negligible amount available for distribution amongst the unsecured creditors.

74                  On appeal to the Full Court (Lancaster v NZI Capital Corporation Limited [1991] FCA 471) Lockhart, Beaumont and Gummow JJ considered whether the setting aside of the composition by Foster J and the subsequent making of a sequestration order in the debtor’s estate by Sheppard J without an adjournment were decisions made in error. The Full Court quoted the observations of Sheppard J at first instance when his Honour refused the adjournment:

In his reasons, Sheppard J said:

One of the problems which confronts the debtor is the position revealed by the statement of affairs which was filed in Court this morning in relation to the new proposed composition and his application for an adjournment. It shows a total indebtedness of 5.496 million dollars, that amount including 1.496 million dollars said to be owing to secured (sc. unsecured) creditors. No assets are brought to account so that not even the secured creditors, on the face of the statement of affairs would receive 1 cent. In other words the deficiency is the total amount of indebtedness, namely, 5.496 million dollars (Emphasis added)

Sheppard J went on to say:

… in the absence of complete agreement by creditors, and the petitioning creditor which is owed a substantial sum does not agree, there is something which, if not shocking, is at least something which takes one aback about a suggestion that somebody who owes almost 5.5 million dollars can offer $15,000 and walk away without there being any appropriate investigation of his affairs. An examination of the relevant provisions of Part X shows that if a deed of composition is entered into neither the provisions of s 69 of the Act which provides for the public examination of bankrupts, nor the provisions of s 81 thereof, which gives trustees in bankruptcy wide powers to examine other persons and to compel the production of documents, will apply.

The Full Court did not suggest that Sheppard J’s observations were erroneous.

75                  Caution must be exercised however when considering whether a mere discrepancy between the amount of the indebtedness and the amount payable to creditors under the composition is necessarily a sufficient reason for setting aside a composition.

76                  In Re Lockett: Ex parte Northern Equity Ltd and Others [1992] FCA 142 French J (as he then was) referred to the various authorities above in considering whether the mere discrepancy between the amount of indebtedness and the amount to be paid under the composition would constitute a sufficient reason for setting it aside. French J stated that while each of the above authorities turned on their own circumstances:

There is no doubt, however, that the fact that the composition yields a very small return to creditors is relevant in deciding whether it should be set aside under s 239.

77                  French J referred to the observations of Morling J in Re Brennan but noted that relevant to Morling J’s decision were certain circumstances, namely the fact that the composition had not been implemented; no payments had been made to creditors; the nature of the relationship between the debtor and the creditors who voted in favour of the composition; the possibility that the creditors might do as well in bankruptcy as they would under the deed; and the prima facie right of the applicant to a sequestration order.

78                  French J also observed that Burchett J in Re Codrington hadconcluded that (under the previous legislation) the interest of creditors is not necessarily expressed in terms of economic advantage. French J also considered the observations of Jackson J in Re Richards and observed that Jackson J had concluded that where a debtor had incurred liabilities one hundred times greater than his gross assets, proceedings were better dealt with by way of bankruptcy where public examination could occur.

79                  The circumstances before French J involved a level of indebtedness one thousand times greater that the total assets of the bankrupt. In such circumstances his honour found that the deficiency between the assets and the amount of the debts warranted the setting aside of the composition.

80                  In Re Emmett Ex parte: Beneficial Finance Corporation Ltd v Emmett [1991] FCA 632 O’Loughlin J considered the authorities referred to by French J and having done so said at [36]:

It seems to me that in each of these six cases there were factors, over and above the smallness of the dividend and the size of the debts, that caused the Court to intervene. Even though there are examples of strong dicta to the effect that the smallness of the amount offered coupled with the amount of the debts might be sufficient, without more, to set aside the composition, it is significant that no case has been found where that has happened.

81                  O’Loughlin J then referred to the broad power of the Court, observing at [37]:

The power of the Court to interfere and set the composition aside will arise where the terms of the composition are unreasonable, or are not calculated to benefit the creditors generally, or where for any other reason the composition ought to be set aside.

82                  O’Loughlin J found that the application before him should be dismissed. In summarising the circumstances before the Court, his Honour stated at [36]:

… the debtor was between two opposing groups of creditors all of whom were highly skilled business people well versed in the types of matters that had led to the debtor's financial downfall. He was fortunate that the larger group sided with him; they, coupled with some smaller creditors carried the day numerically and with the use of the voting power of his family trust, they were able to carry the day in terms of value. This is a very good example of an issue that was properly resolved where the Act intended that it should be resolved - before the creditor's in a special meeting. It would be inappropriate for a Court to interfere in such circumstances.

Findings

83                  Although Dr Hingston submitted that the above authorities have no application in view of the 2004 amendments, the substance of the repealed s 239(2) is relevantly the same as the extant ss 222(1)(d) and 222(1)(e). There is no reason to depart from the principles so established. The Court states its reasons hereunder for concluding that Westpac is entitled to relief under s 222(1) of the Bankruptcy Act.

(a) Trustee’s recommendation

84                  The Trustee’s recommendation to the creditors advised against the acceptance of the composition, stating that substantial further investigation was required to be undertaken in respect of Dr Hingston’s property and that in the Trustee’s opinion the creditors return could be greater under a bankruptcy scenario.

(b) Report of company administrators

85                  On 3 September 2009 the Trustee was advised by David Leigh, a partner of PPB Australia and liquidator of those of those companies referred to above at [11]. Mr Leigh stated:

With respect to the seven companies in liquidation, my investigations to date lead me to believe the bankrupt has committed multiple breaches of the Corporations Act including:

Section 588G – Trading whilst Insolvent; and

Sections 180, 181, 182 and 183 – Breaches of Director duties

There are also likely to be breaches of s 588FDA – Unreasonable Director Related Transactions, which I have not, at this stage, had the opportunity to consider or quantify.

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].

I confirm that the deeds of Company Arrangement were all wholly effectuated, and there is no claim against you personally arising therefrom.

92                  The Court does not consider that the above letters provide any assistance in respect of the application now before it. Prima facie however there are issues revealed by the second report of David Leigh which could be relevant to a bankruptcy examination of Dr Hingston, but no opportunity has been available for this to occur since the Notice convening the meeting of creditors of Dr Hingston’s bankrupt estate and proposing the composition was forwarded on the same day as Mr Leigh’s second report. The consequence of the liquidation of the Coastjet Group may have had an impact upon Dr Hingston’s financial affairs. The Trustee did not have sufficient chance to investigate, nor to report to the creditors.

(c) The proposed composition

93                  Westpac received the Notice on 24 September 2009. The Notice was forwarded pursuant to s 73(2) of the Bankruptcy Act. Regulation 4.18 of the Bankruptcy Regulations provides:

Proposal and report for a composition or arrangement

Where a trustee is required, under subsection 73 (2) of the Act, to send a copy of a proposal and a report to creditors before a meeting, the Trustee must send those documents to each creditor so that they arrive, or should in due course of post arrive, at least 7 days before the meeting.

94                  The Notice complies with the requirements of Reg 4.18 but provides a minimum period notice of the meeting fixed for 2 October 2009. The haste to hold the meeting, particularly bearing in mind the recent report of the liquidator of the companies associated with Dr Hingston, is unexplained.

95                  It is apparent that each of the persons who voted in favour of the composition (‘the favourable creditors’) had some personal or business relationship with Dr Hingston. Apart from the debts claimed to be owing to Helen Hingston, the debts of the remaining favourable creditors are said to arise out of guarantees and indemnities provided through business transactions involving Dr Hingston. Each PoD was dated 1 October 2009.

96                   Mrs Johnston and AMEX each voted against the composition. Westpac, a substantial creditor, was not present for the reasons provided previously. Had Westpac been present and voted, the 75% majority required to approve a composition would not have been achieved.

97                   Further, the benefit provided under the composition to the unsecured creditors is negligible. The composition provides for a payment to creditors of $45,000 or $50,000. Dr Hingston’s actual indebtedness to his creditors is over $11 million. That discrepancy in itself is cause for the Court to seriously consider setting the composition aside. As found by O’Loughlin in Re Emmett, the authorities indicate that such a discrepancy per se is not necessarily determinative. An applicant seeking to set aside a composition may be required to point to other compelling factors apart from a mere discrepancy between the dividend offered by the composition and the actual debt.

Finding: Unreasonableness of the composition

98                  Given the lack of time to investigate, Westpac’s inadvertent absence from the creditor’s meeting, the recommendation of the Trustee against acceptance of the composition, the contents of the Coastjet Administrator’s report, the fact that prima facie the creditors stood to receive $25,000 more under a Bankruptcy arrangement and finally the circumstances surrounding the favourable creditors, the Court is satisfied that compelling additional factors exist sufficient to set aside the composition.

Ground 2: Section 222(5)(e)(i) of the Bankruptcy Act

99                  In the alternative, Westpac’s application seeks to set aside the composition pursuant to s 222(5) of the Bankruptcy Act.

100               Section 222(5) relevantly provides:

(5)     If a personal insolvency agreement is in force, the Court may, on application by:

         (a)     the Inspector General; or

         (b)     the trustee; or

         (c)     a creditor;

         make an order setting the agreement aside if the Court is satisfied that:

            …

         (e)     the debtor has:

                   (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.

Findings

108               Although Dr Hingston was reluctant to acknowledge that he could instruct Mr Marshall in relation to the activities of the NZ trust, there is clear evidence before the Court that Dr Hingston makes decisions on behalf of the NZ trust. A decision of the Administrative Appeals Tribunal confirms such fact. In proceedings Hingston Surgical Limited and Another v Minster for Infrastructure, Transport, Regional Development and Local Government [2008] AATA 455 concerning an issue arising from the importation of the Porsche motor car into Australia, the Tribunal made the following finding at [22] in relation to Dr Hingston’s relationship with the trust:

He is the sole director of the family company and is in charge of the direction of the family trust, making all decisions for it.

109               The evidence before the Court has established that from at least 2005 Dr Hingston has described the assets of the Hingston family trusts as being assets which belong to him. Dr Hingston has included the trust assets including New Zealand properties, a Porsche motor car and an aircraft as assets of his own in support of his application for finance to the NAB on 30 August 2005. The NAB provided finance on this basis. The Court is satisfied that he has treated the assets of the trusts as his own, and retains control over these assets albeit through the trusts themselves.

110               Dr Hingston gave evidence of his relationship with Mr Marshall in respect of the administration of the NZ trust. The Court is satisfied that Mr Marshall takes instructions from Dr Hingston in relation to the NZ trust and that Dr Hingston retains ultimate control of the assets of the NZ trust through Mr Marshall.

111               Westpac does not submit that the omission of Dr Hingston’s interests in New Zealand was deliberate. However, it submits, correctly, that intention is irrelevant in the application of s 222(5)(e). That section merely requires that a debtor has omitted a material particular from his statement of affairs: see Beard v Prestige Baking Industries Pty Ltd and Another (1981) 52 FLR 385.

112               Dr Hingston acknowledged that he was not advised by Mr Marshall, nor by his accountant, that the New Zealand assets need not be disclosed in his bankruptcy petition. The form for a debtor’s petition prescribed by s 55(2) of the Bankruptcy Act required Dr Hingston to state his assets. There is no geographical limit to the question asked of Dr Hingston concerning his assets.

113               The Court is satisfied that Dr Hingston, in failing to disclose his interest in entities located in New Zealand, omitted a material particular in his Statement of Affairs. Accordingly, pursuant to s 222(5)(e) the composition should be set aside.

Should a sequestration order be made?

114               After the presentation of the petition and upon acceptance of the petition by the Official Receiver on 4 August 2009 Dr Hingston became a bankrupt in consequence of the operation of s 55(4A) of the Bankruptcy Act.

115               Dr Hingston’s bankruptcy was annulled in consequence of the operation of s 74(5) of the Bankruptcy Act by virtue of the passing of the special resolution to accept the composition at the creditors’ meeting held on 2 October 2009. The effect of the annulment of the bankruptcy was considered by the New South Wales Court of Appeal in Union Club v Lord Battenberg (2006) 66 NSWLR 1. The Court held that the annulment had retrospective operation which included the fact of the debtor becoming a bankrupt (see Giles JA at [81]; Santow JA at [128]).

116               Based upon the reasoning of their Honours in Lord Battenberg, Westpac submits that the Court, upon the setting aside of the composition, should make an order of sequestration pursuant to s 222(10) of the Bankruptcy Act.

117               The Court finds that as the composition is to be set aside, it is necessary to make any order for bankruptcy retrospective to the date of the acceptance of the debtor’s petition. By virtue of s 222(11) the requirements for the presentation of a creditors petition against a debtor are dispensed with regard to ss 43(1), 44, 47, 52(1), 52(2) and Part XIA of the Bankruptcy Act. The effect of s 222(11) is to render it unnecessary to require the presentation of a creditors petition; to comply with the requirements of proving an act of bankruptcy within six months before the presentation of such a petition; or to provide affidavits of debt. Further, pursuant to s 222(11) the Court is not required to consider whether the debtor is able to pay his or her debts.

118               Given the Court’s finding that the composition is to be set aside, it follows that Westpac is entitled to an order of sequestration in respect of the estate of Dr Hingston.

Associate:

Dated:         15 October 2010