Federal Court of Australia

Marketlend Pty Ltd v Govindasamy, in the matter of Govindasamy [2024] FCA 704

ORDERS

THE COURT ORDERS THAT:

1.    The respondent’s interim application dated 6 May 2024 for the review of the Registrar’s orders dated 16 April 2024 be dismissed.

2.    The applicant’s costs of the application as agreed between the applicant and the trustee in bankruptcy, or as assessed, be paid from the respondent’s bankrupt estate 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.

REASONS FOR JUDGMENT

(Delivered ex tempore, revised from the transcript)

STEWART J:

Introduction

1    A creditor’s petition for the sequestration of the respondent’s estate came before a Registrar of the Court on 16 April 2024. The respondent applied for the adjournment of the petition in reliance on s 206(1) of the Bankruptcy Act 1966 (Cth). That section provides as follows:

Where:

(a)     a meeting of creditors has, in accordance with this Part, passed a special resolution requiring a debtor to execute a personal insolvency agreement; and

(b)     a creditor’s petition was presented against the debtor before the passing of the resolution or is presented against him or her after the passing of the resolution but before the agreement has been duly executed;

the Court may, upon application by the debtor, a creditor or a person nominated as trustee of the proposed agreement, if it appears to the Court that it would be for the advantage of the creditors that the debtor’s affairs be administered under the agreement, adjourn the hearing of the petition for such period as it considers necessary to allow the agreement to be executed and, if the agreement is duly executed within that period, shall dismiss the petition.

2    The Registrar dismissed the adjournment application and made orders sequestrating the respondent’s estate.

3    The respondent applied for the review of the Registrar’s decision under s 35A(5) of the Federal Court of Australia Act 1976 (Cth). This is that review. The review is conducted in accordance with the principles outlined in Bechara v Bates [2021] FCAFC 34; 286 FCR 166. In short, the order made by the Registrar operates as an order of the judges of the Court on the proviso that a judge of the Court may be asked to make an order in its place. The hearing is de novo. The Court is not required to find any error in the decision of the Registrar. Instead, it must consider the matter for itself on the evidence led before the Court on that occasion.

4    On the matter being called before me, the petitioning creditor, the applicant, whose debt is not in dispute, moved on the creditor’s petition for the sequestration of the respondent’s estate. In response to that, the respondent sought the adjournment under s 206(1). There is no dispute that but for the question of the adjournment, the requirements for the making of a sequestration order are met. That is to say, other than in respect of the adjournment which, if successful, would require the setting aside of the Registrar’s orders, the respondent does not challenge the orders of the Registrar.

5    Also, the applicant does not dispute that the jurisdictional requirements for the exercise of the power of adjournment under s 206(1) as reflected in paragraphs (a) and (b) of that subsection are satisfied. The result is that I am required to inquire into whether it would be for the advantage of the creditors that the debtor’s affairs be administered under the proposed personal insolvency agreement (PIA) and, if satisfied as to that, to decide whether the hearing of the petition should be adjourned to allow the PIA to be executed.

Background

6    On 26 October 2023, the applicant issued its creditor’s petition against the respondent. The petition relies on a bankruptcy notice dated 7 December 2022 issued in respect of a judgment debt for $185,701.95.

7    On 12 February 2024, the respondent signed a Controlling Trustee Authority pursuant to s 188 of the Act, appointing Mr Otway and Mr Scott as Controlling Trustees. An automatic stay of the creditor’s petition pursuant to s 189AAA of the Act arose pending the conclusion of creditors’ meeting in relation to a PIA to be proposed by the respondent.

8    The Controlling Trustees provided a first report to creditors dated 8 March 2024, in advance of a meeting convened for 26 March 2024. The meeting on 26 March 2024 was adjourned.

9    A second report from the Controlling Trustees was issued on 3 April 2024 and the creditors’ meeting was resumed on 11 April 2024. At the resumed meeting, the respondent submitted an oral amendment to his proposed PIA, to increase the proposed contribution from $60,000 to $225,000 to be paid by an initial (already paid) sum of $15,000 plus six monthly contributions of $35,000.

10    A resolution was put to the meeting that the proposed PIA be accepted, which resolution was overwhelmingly approved by creditors: 28 of 31 creditors with provable debts of $6,950,810 (or 89.1% of debts) voted in favour, and three of 31 creditors with provable debts of $854,558 (or 10.9% of debts) voted against. The Controlling Trustees inadvertently failed to put to the creditors a resolution pursuant to s 204(3) of the Act that trustees of the amended PIA be appointed.

11    The conclusion of the meeting of creditors meant that the statutory stay of proceedings on the creditor’s petition pursuant to s 189AAA came to an end.

12    Subsequent to the meeting, the respondent signed an amended PIA in the form that had been approved by the creditors.

13    On 15 April 2024, the Controlling Trustees made an application that they be appointed trustees of the PIA, which application was returnable the next day on the hearing of the creditor’s petition.

14    The respondent and one of his creditors (Pana Legal) applied that the hearing of the creditor’s petition be adjourned to permit the execution of the amended PIA. As mentioned, at the hearing on 16 April 2024, the Registrar declined to further adjourn the creditor’s petition and made a sequestration order.

For the advantage of creditors?

15    The respondent is a 48-year-old medical practitioner who provides medical services to state health authorities, mainly in remote regional areas in South Australia and New South Wales, by way of an independent contracting arrangement through Divya Agalya Pty Ltd (DAPL). The shares in DAPL have since March 2022 all been held by the respondent’s daughter, Agalya Senthil Kumar. Ms Kumar is also the sole director of DAPL. Prior to March 2022, the respondent was also a director and shareholder of the company.

16    DAPL is the trustee of the Divya Agalya Family Trust (DAFT) and the Divya Agalya Unit Trust (DAUT). The beneficiaries of DAUT are Ms Kumar and DAFT, and the beneficiaries of DAFT are Ms Kumar and the respondent.

17    Until recently, DAFT was the registered proprietor of three residential properties in Coober Pedy, SA with an estimated value of only about $95,000. The properties were recently transferred to a company of which Ms Kumar is the sole shareholder and director, Property Assam Pty Ltd. Nil consideration was paid.

18    DAUT generates substantial revenue from the professional medical services work undertaken by the respondent. In the financial year ending June 2023 that amounted to $535,335 (excl. GST), and in the following seven and a half months to 12 February 2024 it amounted to $400,962 (excl. GST).

19    Those figures illustrate that the respondent has a substantial earning capacity. However, he has managed to accumulate debts on his own reckoning, of some $12 million and, on the estimation of the Controlling Trustees, as much as $20 million.

20    In their first report to creditors, the Controlling Trustees reported the respondent’s total assets as amounting to $76,295 on the respondent’s figures, and $97,607 on their estimation. That is to say, those amounts make no impression on the accumulated debts. There is an apparently secured creditor in relation to present and after-acquired property, D&J Jackson Superannuation Fund (DJJS) with a claim of $1,303,197.

21    In addition to DALP, DAUT and DAFT, there are a significant number of entities related to the respondent.

22    The cause of his insolvency is said by the respondent to be “economic conditions affecting industry, including competition, credit restrictions, fall in prices or increase in costs”. In that regard, the Controlling Trustees noted in their first report that the respondent’s affairs are extensive and encompass a large number of associated entities over many years. The respondent’s current financial difficulties appear to relate to the failure of Lyndoch Medical Centre Pty Ltd, a company of which the respondent was a director and shareholder.

23    In both their first and second reports to creditors, the Controlling Trustees recommended that the interests of creditors would be better served by bankruptcy than by the PIAs that were then proposed.

24    Subsequent to the amended PIA being accepted at the resumed creditors’ meeting, the Controlling Trustees prepared a further assessment of the comparable positions for creditors under the PIA and in bankruptcy. In both scenarios, the position is bleak.

25    Under the PIA, the respondent’s contribution of $225,000 results in an estimated return to unsecured creditors of 0.92 cents in the dollar. Under the “high” estimated scenario in bankruptcy, the estimated return to unsecured creditors is 1.23 cents in the dollar. The “low” scenario results in nil return.

26    Mr Berriman, who appears for the applicant, submits that there is a further real risk in relation to the PIA which is that the monthly instalments of $35,000 may at some point not be paid. Although that would likely then result in bankruptcy, further time would have been lost in the interim.

27    Mr Kentish, who appears for the respondent, submits that the scenario in bankruptcy is significantly overstated because of the evidence that in that scenario the respondent would not continue earning at the levels that he has been earning and on which the “high” scenario depends. The respondent’s evidence is that he is prepared to work hard and earn significantly in order to avoid the stigma of bankruptcy. That means that in the PIA scenario, he would be earning sufficiently to make the promised instalments in order to make his contributions. However, he says that in the event of sequestration he will have no motivation to work so hard in difficult circumstances merely for those earnings to accrue to creditors. Rather, he says that he will pursue further studies so that when he emerges from bankruptcy he will be in a better professional position.

28    I do not find it particularly helpful to compare the PIA and bankruptcy scenarios because both produce such paltry outcomes; there are uncertainties and risks on both scenarios on both sides of the ledger.

29    Rather, the focus for me is on the submissions made on behalf of the applicant that there may be some advantage to creditors in the respondent’s affairs being investigated by a trustee in bankruptcy. In that regard, the following observations are pertinent.

30    The Controlling Trustees identify that there may be transactions which are voidable preferences under the Act, in particular in relation to transfers to family members or trusts which should be investigated.

31    There are further investigations to be undertaken as to the distributions made by DAUT to the respondent, his daughter and DAFT which may produce some value to creditors.

32    The Controlling Trustees identify that dividends paid by DAUT appear to be at odds with the unit holdings and could be further investigated by a trustee in bankruptcy, particularly as to the entire structure of DAPL, DAUT and DAFT and the legal effect of the trusts.

33    The winding up of Caritas Pty Ltd, a company in which the respondent is a shareholder and was a director, may produce some benefit to creditors. The company was the trustee of another trust, the Mercy Unit Trust. The company is the registered proprietor of a property in Elizabeth Park, SA, which may have significant value. The respondent is a substantial ($629,141) creditor of the Trust.

34    The respondent has an undisclosed financial involvement with Accumulus Pty Ltd that is, in the words of the Controlling Trustees, “not otherwise reported”. That company owns a property in South Australia. Despite the controlling Trustees having made further inquiries as to the respondent’s relationship with the company, they had not received any answers. I accept, as pointed out by Mr Kentish, that the respondent’s relationship with that company appears to have ended as long ago as 2016 which would cast some doubt on whether there is still anything useful to learn about it. Nevertheless, those are matters that a trustee in bankruptcy might find worth investigating.

35    The recent transfers of the Coober Pedy properties for nil consideration to a company controlled by Ms Kumar also calls for investigation, notwithstanding the apparently low value of the properties.

36    I have taken into account that the creditors, by substantial majority in number and value, voted to accept the PIA. However, that was in circumstances where the amendments to the PIA were proposed orally at the resumed creditors’ meeting when the Controlling Trustees were not in a position to report on the comparable positions. It is not in dispute that the views of the majority of the creditors are not decisive on the question of advantage: Smits v Lillas & Loel Lawyers Pty Ltd [2016] FCAFC 143 at [35].

37    Consideration of the Controlling Trustees’ analysis produced after the meeting makes it clear, as already traversed, that there is very little benefit in the PIA to unsecured creditors. It may be that there is more in bankruptcy, or it may turn out that there is less. But, the fact remains, that there is barely anything to offer creditors under the PIA.

38    As against that, albeit in the slightly different context of the setting aside of a composition under s 222 on the basis that it is unreasonable or not calculated to benefit the creditors generally, it has been recognised that the following factors, if present, are relevant:

(1)    a greater opportunity to inquire into the debtor’s affairs and a more comprehensive explanation by the debtor are called for;

(2)    there are circumstances which “give cause for a suspicion” or to “arguable” causes of action which may benefit creditors;

(3)    it is sufficient if bankruptcy will afford a “prospect or possibility of economic advantage to creditors sufficient to justify the conclusion that it is in their interests to make the declaration; and

(4)    the amount offered under the composition is little or trivial with the result that there may be no harm of any consequence to creditors for the composition to be set aside.

(See DCT v Zappia [2019] FCA 2152 at [6].)

39    Those considerations are equally relevant in the present statutory context and they are all present in the present factual context.

40    Taking all matters into consideration, I am simply not satisfied that it is for the advantage of the respondent’s creditors that his affairs be administered under the PIA rather than in bankruptcy.

41    In the result, there is no basis to exercise the power under s 206(1) to adjourn the creditor’s petition. The respondent’s application to review the Registrar’s orders should be dismissed.

42    There is no dispute that the costs of the review application should be paid from the bankrupt estate.

Associate:

Dated:    28 June 2024