FEDERAL COURT OF AUSTRALIA
Official Trustee in Bankruptcy, in the matter of Sam Pos Pty Ltd (in liq) [2024] FCA 1350
ORDERS
DATE OF ORDER: |
THE COURT NOTES THAT:
The applicant (the Official Trustee) has become the replacement administrator of debt agreements (the debt agreements) made under Part IX of the Bankruptcy Act 1966 (Cth) (the Act) that were formerly administered by Sam Pos Pty Ltd (in liquidation) (Sam Pos).
THE COURT ORDERS THAT:
1. In respect of the debt agreements, the Official Trustee would be justified in:
(a) determining whether, for the purposes of ss 185LC(1) and (3) of the Bankruptcy Act 1966 (Cth) (the Act), a 6-month arrears default occurs at a particular time (the test time) by having regard only to the obligations of the debtor created by the debt agreement, and not to obligations of Sam Pos created by the debt agreement, including Sam Pos’ obligation to pay dividends to creditors;
(b) only giving the Official Receiver the notification required under s 185LC(1) of the Act when, at the test time, the obligations of the debtor created by the debt agreement have not been discharged and the last of such obligations should have been discharged by the debtor at a time six months before the test time;
(c) treating a debt agreement as not having ended for the purposes of ss 185N(1) and (5) of the Act in circumstances where a debtor has discharged their obligations created by a debt agreement but where Sam Pos failed to discharge its obligations created by the debt agreement for the payment of dividends to creditors;
(d) only giving the Official Receiver the notification required under s 185N(5) of the Act that a debt agreement has ended under s 185N(1) upon the discharge of not only the debtor’s obligations created by the debt agreement, but also other obligations created by the debt agreement, including the payment of dividends to creditors.
2. Pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth), on the ground that it is necessary to prevent prejudice to the proper administration of justice, the annexures to the affidavit of Joel Michael Shaw dated 8 March 2024 are not to be disclosed or made available for inspection by any person other than the personal staff of judges of the Court, any officer of the Court or the applicant, its delegates, staff and legal representatives, for a period of 30 years.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
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RANGIAH J:
1 The applicant (the Official Trustee) has become the replacement administrator of debt agreements formerly administered by Sam Pos Pty Ltd (in liquidation) (Sam Pos) pursuant to s 185ZB(3) of the Bankruptcy Act 1966 (Cth) (the Act).
2 The Official Trustee took over the administration of the debt agreements in circumstances where much of the money paid by debtors for distribution to creditors was misappropriated by a director of Sam Pos. One of the problems facing the Official Trustee as the replacement debt agreement administrator is that its obligations under the debt agreements to pay dividends to creditors cannot be fully discharged because there is a shortfall in the amounts available for distribution to creditors.
3 The Official Trustee seeks a series of directions under s 30 of the Act. The proposed directions concern the proper construction of ss 185LC and 185N of the Act.
4 The affected debtors were notified of the Official Trustee’s application pursuant to an order of the Court made on 14 March 2024. Initially, no debtor elected to make submissions in respect of the application. However, on 14 October 2024, a debtor (the Interested Party) belatedly applied for leave to make submissions opposing the Official Trustee’s submissions regarding the proper construction of s 185N of the Act. By order made on 31 October 2024, the Interested Party was permitted to make written submissions, which were filed on 5 November 2024 and responded to by the Official Trustee on 14 November 2024.
5 It is necessary to explain the factual background and the relevant statutory provisions before considering the parties’ submissions.
6 Sam Pos was a registered debt agreement administrator pursuant to Part IX of the Act. Simone Hildebrand was a director and described herself as the CEO of Sam Pos (trading as Debt Cutter) at the relevant times.
7 In its capacity as a debt agreement administrator, Sam Pos’ obligation was to receive funds from debtors into its trust account and pay that money out in accordance with the terms of various debt agreements: ss 185LD and 185Y of the Act. There was also an obligation on Sam Pos to pay a realisation charge: s 6(1)(ab) of the Bankruptcy (Estate Charges) Act 1997 (Cth). This charge is recognised under the debt agreements.
8 In February 2023, the Inspector-General in Bankruptcy conducted an investigation into the trust account records of Sam Pos and became aware of substantial payments out of Sam Pos’ trust account for purposes unrelated to the administration of the debt agreements.
9 On 8 March 2023, the Inspector-General cancelled Sam Pos’ registration as a debt agreement administrator, and the Official Trustee became the replacement administrator of the debt agreements previously administered by Sam Pos pursuant to s 185ZB(3) of the Act. There were 234 such debt agreements.
10 In June 2023, the Inspector-General and the Official Trustee commenced a proceeding against Sam Pos, Ms Hildebrand, and Geekseat Australia Pty Ltd (Geekseat) alleging that between 1 July 2021 and 31 January 2023, $1,159,127.63 which was either held in the trust account or which ought to have been held in the trust account, was paid by Sam Pos to Geekseat for purposes which were not permitted by s 185LD(2A) and that $1,130,877.63 had not been repaid.
11 On 6 December 2023, the Court gave judgment for the sum of $1,130,877.63 against Sam Pos and Ms Hildebrand: Inspector-General in Bankruptcy v Sam Pos Pty Ltd [2023] FCA 1621. However, nothing has been recovered from either of those parties.
12 When the Official Trustee became the debt agreement administrator, it received the cash at bank that was still held by Sam Pos on trust in the sum of $222,463.29. As a consequence of the misappropriation of funds, there will be a shortfall in the vicinity of $1 million available for distribution to creditors. Potentially, the payment of the asset realisation charge to be paid to the Commonwealth will also be affected.
13 The debt agreements imposed an obligation to pay lawfully due administration fees to Sam Pos (which accrued while it was the debt agreement administrator). The liquidator for Sam Pos has now confirmed that it will not claim as a creditor in respect of those fees.
14 As at the time the present application was made, the debt agreements taken over by the Official Trustee were at different stages. Those stages may be summarised as follows:
(a) There were 26 debt agreements which were abandoned by the debtors because no payments were made for a period of six months (group (a)). These have subsequently been terminated.
(b) There were 10 debt agreements in respect of which payments had not been made by debtors and there has been a delay of more than six months since the agreement was due to be completed (group (b)).
(c) There were 86 agreements in respect of which debtors had paid all the amounts due under them, and creditors had not been paid because of the misappropriation of funds, but fewer than six months has passed since the end date of each agreement (group (c)).
(d) There were 14 agreements in respect of which debtors had paid all the amounts due under the agreement, and creditors had not been paid because of the misappropriation of funds, and more than six months have passed since the end date of the agreement (group (d)).
(e) There were 98 debt agreements that were ongoing with debtors continuing to make payments, and in respect of which, creditors will not be able to be paid in full unless the misappropriated money is recovered (group (e)).
15 The issues raised in this proceeding affect the debt agreements in groups (c) and (d) immediately. They also have the potential to affect the debt agreements in group (e), because as time passes, they may become agreements in groups (c) and (d). Groups (a) and (b) are unaffected.
16 The Official Trustee is uncertain as to whether:
(1) on the proper construction of s 185N of the Act, it is correct to proceed upon the basis that:
(a) a debt agreement does not end for the purposes of ss 185N(1) and (5) of the Act upon a debtor having discharged their obligations created by a debt agreement where other obligations created by the debt agreement, including the payment of dividends in respect of the provable debts, have not been discharged (including by abandonment or waiver); and
(b) the Official Trustee does not have an obligation to notify the Official Receiver under s 185N(5) of the Act that a debt agreement has ended under s 185N(1) upon a debtor having discharged their obligations created by the debt agreement where other obligations created by agreement, including the payment of dividends in respect of the provable debts have not been discharged (including by abandonment or waiver);
(2) on the proper construction of s 185LC, it is correct to proceed upon the basis that:
(a) whether a 6-month arrears default occurs at a particular time under s 185LC(3)(b) is to be determined by having regard only to the obligations of the debtor created by the debt agreement and not to other obligations created by the debt agreement, including payment of dividends with respect to the provable debts; and
(b) the Official Trustee has an obligation to notify the Official Receiver, pursuant to s 185LC(1) of the Act that a designated 6-month arrears default of a debtor has occurred under s 185LC(3)(b) at a particular time (test time) in relation to a debt agreement, only when at the test time, the obligations of the debtor created by the debt agreement have not been discharged and that the last of such obligations should have been discharged at a time six months before the test time.
17 Accordingly, the Official Trustee’s Originating Application seeks directions that:
1. Pursuant to s 30 of the Bankruptcy Act 1966 (Cth) (the Act) that the Official Trustee would be justified in:
(a) Determining, for the purposes of s 185LC(1) of the Act, whether a 6-months arrears default occurs at particular time under s 185LC(3)(b), by having regard only to the obligations of the debtor created by the debt agreement and not to other obligations created by the debt agreement, including payment of dividends with respect to the provable debts.
(b) Notifying the Official Receiver, pursuant to s 185LC(1) of the Act that a designated 6-month arrears default of debtor has occurred under s 185LC(3)(b) at a particular time (test time) in relation to a debt agreement, only when at the test time the obligations of the debtor created by the debt agreement have not been discharged and that the last of such obligations should have been discharged at a time 6 months before the test time.
(c) Treating a debt agreement as not having ended for the purposes of s 185N(1) and (5) of the Act only upon a debtor having discharged his or her obligations created by a debt agreement where other obligations created by the debt agreement, including the payment of dividends in respect of the provable debts but excluding the payment of any fees to Sam Pos, have not been discharged.
(d) Not notifying the Official Receiver under s 185N(5) of the Act that a debt agreement has ended under s 185(N)(1) only upon a debtor having discharged his or her obligations created by the debt agreement where other obligations created by the debt agreement, including the payment of dividends in respect of the provable debts but excluding the payment of any fees to Sam Pos, have not been discharged.
Overview of Part IX of the Bankruptcy Act
18 Pt IX was introduced in 1996 as a relatively low cost, informal and flexible alternative to bankruptcy for debtors with low levels of income and debt. The Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 1996 (Cth) states at para 135.16:
The purpose of debt agreements is to provide a viable, low cost alternative to bankruptcy for low income debtors with little or no property, with few creditors and with low levels of liability, for whom entry into a Part X administration is not possible because of inability to meet set up costs. It is intended to channel debtors who would otherwise become bankrupt out of bankruptcy, where creditors may not get any return by way of dividends.
19 Section 185C(4)(b)–(e) imposes various monetary thresholds for a debtor to providing a proposal.
20 Part IX contains the following divisions:
(a) Div 1 – Preliminary;
(b) Div 2 – Debt agreement proposals;
(c) Div 3 – Making a debt agreement;
(d) Div 3A – Duties of administrators;
(e) Div 4 – Varying a debt agreement;
(f) Div 5 – Ending a debt agreement;
(g) Div 6 – Voiding a debt agreement;
(h) Div 7 – General provisions relating to debt agreements; and
(i) Div 8 – Registration of debt agreement administrators etc.
Debt agreement proposal and debt agreement
21 Divisions 2 and 3 provide for the requirements and procedure for a debtor to make an agreement proposal and enter into an agreement with the debtor’s creditors.
22 Section 185C(2) sets out requirements for the proposal, including identification of the property that is to be dealt with under the agreement and how the property is to be dealt with.
23 A proposal is not necessarily confined to payment of money, but may provide for property of the debtor to be sold and the net sale proceeds to be contributed as part of the proposal. That is, there may be an obligation on the debtor to realise certain property by a certain date.
24 Section 185C(2A) provides that an agreement must not provide for the transfer of property (other than money) to a creditor. Also, s 185C(2AA) imposes a time limit for payments by a debtor in respect of provable debts.
25 A person, such as a debt agreement administrator, is to be authorised to deal with the identified property in the way specified. That is, it is the administrator who will have the obligation to deal with property.
26 The proposal must specify that provable debts in relation to the agreement are to rank equally and that the amount of the provable debt is to be ascertained at the time when the acceptance of the proposal for processing is recorded on the National Personal Insolvency Index (NPII): s 185C(2)(d) and (f).
27 A proposal may provide for remuneration of an administrator (ss 185C(3), 185C(3A) 185Z(1)) and reimbursement to the administrator of expenses of the kind specified in the agreement that are incurred by the administrator: s 185C(3B).
28 Once a debt agreement is made (see ss 185E–185ED), the parties to the agreement are the debtor and the creditors of the debtor to whom the debtor owes provable debts: s 185I. The debt agreement administrator is not a party to the agreement.
29 Upon an agreement being in force and entered into the NPII, a creditor cannot present a creditor’s petition against the debtor, proceed further with a creditor’s petition, enforce any remedy against the debtor’s person or property, or start or take a fresh step in legal proceedings in respect of a provable debt except as specified: s 185K.
30 The duties of an administrator are provided for in Div 3A.
31 Section 185LA sets out the general duties of an administrator, which include dealing with the debtor’s property in the manner specified in an agreement.
32 In addition, s 185Y provides that money received by an administrator from a debtor is taken to have been received on trust to be dealt with in the way specified in the agreement.
33 Section 185LD(1) provides that a debt agreement administrator must pay all money received by the person from debtors under those debt agreements to the credit of a single interest-bearing bank account that bears the words “–Debt Agreement Administration Trust Account”. Section 185LD(2) provides that only money received from debtors under debt agreements can be paid into the account. Under s 185LD(2A), a debt agreement administrator must not pay any money out of the account otherwise than for purposes related to the administration of debt agreements, or in accordance with the Act, or in accordance with a direction of the Court.
34 It may be seen that the administrator is responsible for making payments to creditors from funds received from a debtor.
35 One of the administrator’s duties provided for in Div 3A is the notification to the Official Receiver under s 185LC of a “6-month arrears default by a debtor”. The consequence of that notification is that the Official Receiver, upon being satisfied of the existence of the default, declares that the agreement is terminated: s 185QA.
Bringing a debt agreement to an end
36 Pursuant to Div 5 an agreement may be brought to an end by one of the following means:
(a) by discharge of the obligations created by an agreement, a consequence of which is that the debtor is provided with a certificate to that effect and obtains a release from their provable debts: ss 185N(1), (3), 185NA(2);
(b) termination upon acceptance of a proposal to terminate: ss 185P–185PD;
(c) termination by the Court, one of the grounds for which is failure of the debtor to carry out a term of the agreement and that it being in the creditors’ interest to terminate the agreement: s 185Q;
(d) upon the occurrence of a designated 6-month arrears default: s 185QA (and s 185LC) as referred to above; and
(e) termination upon the bankruptcy of a debtor: s 185R.
37 Also, pursuant to s 185T (Div 6), the Court may declare all, or a specified part, of an agreement to be void. The grounds for making such a declaration include non-compliance with the provision for entering into such agreement (s 185T(2)(a)–(b)) and a breach of duty by an administrator in relation to the agreement (s 185T(2)(c) – and see s 185LA). Section 185T(3) imposes a time limit on applying for such declaration: it cannot be made “after all the obligations created by the agreement have been discharged”. A release under s 185NA(1) ceases to have effect if the agreement is declared void by the Court: s 185NA(2).
38 A debt agreement may be brought to an end where a designated 6-month arrears default by a debtor occurs at a particular time in relation to a debt agreement. Section 185LC(1) of the Act relevantly provides that if a designated 6-month arrears default by a debtor occurs at a particular time in relation to a debt agreement, the administrator of the debt agreement must notify, in writing, the Official Receiver of that occurrence within 10 business days of that occurrence.
39 Pursuant to s 185QA, if a notification is made under s 185LC and the Official Receiver is satisfied that such a default has occurred, the Official Receiver must make a declaration in writing, which brings the debt agreement to an end.
40 A debt agreement may also end when all the obligations that it created have been discharged. Section 185N relevantly provides that:
185N End of debt agreement on discharge of obligations under agreement
Time of end of debt agreement
(1) A debt agreement ends when all the obligations that it created have been discharged, unless the agreement has been terminated earlier under section 185P, 185Q, 185QA or 185R.
…
Notification of end of debt agreement
(5) If a debt agreement ends under subsection (1), the person who was the administrator of the agreement immediately before it ended must, within 5 business days after the end of the agreement, notify the Official Receiver, in writing, of the end of the agreement.
…
41 The scheme of Pt IX is such that a debt agreement only operates to release a debtor from provable debts if it ends under s 185N. Section 185NA relevantly provides that:
185NA Release of debtor from debts
Time and effect of release
(1) When a debt agreement ends under subsection 185N(1), the debtor is released from provable debts from which the debtor would have been released if the debtor had been discharged from bankruptcy immediately after the acceptance of the relevant debt agreement proposal for processing was recorded on the National Personal Insolvency Index.
42 If a debt agreement “ends earlier” under one of the sections referred to in s 185N(1), the debtor does not obtain the benefit of the release of their debts, and remains liable to their creditors for the full amounts of the debts that remain due.
43 Section 30(1)(a) of the Act provides that the Court, “has full power to decide all questions, whether of law or of fact, in any case of bankruptcy or any matter under Part IX, X or XI coming within the cognizance of the Court”. Under s 30(1)(b), the Court may make such orders as the Court considers necessary for the purposes of carrying out or giving effect to the Act.
44 In Talacko v Talacko (2010) 183 FCR 311, the Full Court held at [18] that, “[t]he breadth of the language appearing in s 30(1) supports a conclusion that it should not be construed narrowly or in a confined or limited way”. The Full Court quoted the following passage from the judgment of Neaves J in Re Bilen; Ex parte Sistrom (unreported, Neaves J, 11 April 1985):
In my opinion s 30(1) of the Bankruptcy Act 1966 is not a provision limiting the Court’s jurisdiction. It is a facultative provision giving the Court full power, within the limits of its jurisdiction to be found elsewhere, to make such orders as it considers should be made in order to carry out and give effect to the Act. The words used are not words of limitation but of extension.
45 In Vale v Sutherland (2009) 237 CLR 638, the High Court confirmed at [19] that s 30(1) of the Act, “is to be generously construed”, subject to the limitation that, “it does not authorise the making of an order which would bring about a result which differs from that prescribed elsewhere in the Act”. There is suggestion of such a limitation applying in the present case.
46 In Unal v Cetinkaya [2015] FCA 270 at [61]–[68], Beach J elucidated a number of principles applying to an application for directions by a trustee in bankruptcy. Those principles can be adapted to an application by a debt agreement administrator in the position of the Official Trustee. Relevantly, a proper subject matter for directions is the manner in which an administrator should act in carrying out their statutory functions and exercising or not exercising their powers under the Act. The Court will generally not give an advisory opinion divorced from a concrete issue between the administrator and creditors, the debtor, or third parties, or otherwise decontextualised from an actual transaction or course of conduct. The discretion to refuse to give directions may be exercised where there is an insufficient factual or legal foundation for the advice to be given, or expert opinion has not been sought, or there is a more suitable forum for resolving the issue, or advice is being sought on a commercial decision.
47 In the present case, I am satisfied that the Court has the jurisdiction and power to give directions of the kind sought by the Official Trustee and that it is appropriate to do so.
Construction of s 185N of the Bankruptcy Act
48 The issue raised by paragraphs 1(c) and 1(d) of the Originating Application concerns s 185N(1) of the Act, which provides one of the means by which a debt agreement may come to an end.
49 Section 185N provides, relevantly:
185N End of debt agreement on discharge of obligations under agreement
Time of end of debt agreement
(1) A debt agreement ends when all the obligations that it created have been discharged, unless the agreement has been terminated earlier under section 185P, 185Q, 185QA or 185R.
…
(3) If a debt agreement ends under subsection (1), the Official Receiver must give the debtor a certificate to that effect.
…
50 The Official Trustee submits that the phrase, “all the obligations that it created”, in s 186N(1) of the Act is not restricted to the obligations of a debtor, and extends to the obligations of a debt agreement administrator. If that construction is correct, the Official Trustee has no obligation to give a debtor a certificate under s 185N(3) in respect of a debt agreement where Sam Pos failed to pay creditors the dividends payable under the debt agreement. The further consequence is that the debtor will not be entitled to release from their debts under s 185NA(1). As the Official Trustee accepts, the outcome for a debtor who has complied with all their obligations under a debt agreement will be unfair and harsh.
51 Construction of the phrase, “when all the obligations that it created have been discharged”, in s 185N(1) must begin with an understanding of what obligations are created under a debt agreement.
52 Under s 185C(2) of the Act, a debt agreement proposal must identify the debtor’s property that is to be dealt with under the agreement and specify how the property is to be dealt with. The proposal must authorise, relevantly, a debt agreement administrator to deal with the identified property in the way specified. It must provide that, if the total amount paid by the debtor under the agreement is insufficient to meet the provable debts in full, those provable debts are to be paid proportionately.
53 Section 185H provides that a debt agreement is made if a debt agreement proposal is accepted and, relevantly, the details of the debt agreement are entered on the NPII. Under s 185I, the parties to a debt agreement are the debtor and the creditors to whom the debt is owed.
54 Section 185LA(1) provides that the duties of an administrator of a debt agreement include dealing with the debtor’s property in the manner specified in the debt agreement. Section 185LD(1) provides that a debt agreement administrator must pay all money received from debtors to the credit of a bank account described as a “Debt Agreement Administration Trust Account”, which, under s 185Y, is held on trust to be dealt with in the way specified in the debt agreement. Section 185LD(2A) requires that the debt agreement administrator must not pay any money out of the account otherwise than, relevantly, for purposes related to the administration of debt agreements or in accordance with the Act. The Act does not provide for debtors to make payments due under a debt agreement directly to creditors.
55 The word “create” is relevantly defined in the Macquarie Dictionary Online as, “to bring into being; cause to exist; produce”. The “obligations…created under” a debt agreement within s 185N are not confined to obligations specified in a debt agreement but extend to obligations brought into existence or enlivened under the Act upon the making of a debt agreement.
56 A debt agreement will create an obligation for a debtor to make a payment or payments to a debt agreement administrator, and may create an obligation for the debtor to deal with their property, in accordance with the terms of the debt agreement. A debt agreement will also create an obligation for the debt agreement administrator to pay the amounts received from a debtor (less remuneration and charges) to creditors in accordance with the debt agreement.
57 Section 185N(1) provides that a debt agreement ends, “when all the obligations that it created have been discharged”. The plain meaning of the words “all the obligations” is to refer to the obligations upon a debtor and a debt agreement administrator created by the debt agreement. The obligations of a debt agreement administrator include payment of dividends in respect of provable debts in the way specified in the debt agreement.
58 The Official Trustee submits that such a construction is consistent with the broader operation of the scheme for the release of the debtor from debts under Part IX of the Act. The effect of s 185N(1) is that the debt agreement ends when there are no obligations created by the debt agreement left to be discharged. When the debt agreement ends as provided for by s 185N(1), s 185NA(1) operates to release the debtor from relevant provable debts. That is, the debtor is released from the creditors’ provable debts when the creditors have been paid the dividend provided for by an agreement. On the other hand, if a debt agreement “has been terminated earlier” under one of the sections referred to in s 185N(1) (ss 185P, 185Q, 185QA or 185R), at least some obligations under the agreement will not have been discharged. In such a case, the debtor does not obtain the benefit of a release under s 185N(1). This scheme is consistent with s 185N(1) only applying where, as the provision states, “all the obligations” created under the debt agreement have been discharged.
59 A construction of s 185N(1) as encompassing obligations on a debt agreement administrator is also consistent with the Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 1996 (Cth), which provides at paragraph 135.34:
Proposed section 185N provides that a debt agreement ends when all the obligations that are created by it have been discharged. Proposed sections 185P, 185Q and 185R provide for earlier termination of debt agreements. When a debt agreement ends because all the obligations created by it have been fulfilled, the debtor is able to retain any property that was the subject of the agreement but which was not required to be distributed to creditors. An example of the operation of the provision is given. A debt agreement entered into by Rhea required her to sell her boat and her car and to pay $15,000 from the proceeds to her creditors. Rhea sells the boat and the car and realises $16,000, and pays $15,000 to the creditors as required, thus bringing the agreement to an end. Rhea is entitled to keep the $1,000 left over after paying the creditors.
(Emphasis added.)
60 The third sentence describes a consequence under s 185N(2) that arises when a debt agreement ends under s 185N(1) once all the obligations created by the debt agreement, including distributions to creditors, have been fulfilled. The example that is given also refers to the agreement being brought to an end upon the payment of creditors. The example is repeated as a note to s 185N(2).
61 The Official Trustee submits that a construction of s 185N(1) as extending to the obligations of a debt agreement administrator is consistent with the reasoning in Hingston v Westpac Banking Corporation (2012) 200 FCR 493 (Hingston) with respect to s 222(7) of Pt X of the Act. Section 222(7) provides that the Court must not make an order setting aside a personal insolvency agreement under s 222(5) unless the application for the order, “is made before all the obligations that the personal insolvency agreement created have been discharged”. Section 222 applied to a composition under s 73. The debtor had made all payments required under the composition, but the trustee had not distributed any dividends to the creditors by the time the application to set aside the composition was made.
62 At first instance, in Westpac Banking Corporation v Hingston (No 2) [2010] FCA 1116, Cowdroy J held at [43] that not all the obligations that the composition created had been discharged and there was no bar to the Court making an order under s 222(5). On appeal, a ground concerning this issue was pleaded but not pressed, so the Full Court’s observations upon the issue are obiter dicta. Nevertheless, those observations are relevant and instructive.
63 The Full Court observed at [20] that in respect of s 227(7), while payment of the composition fund to the trustee by the debtor was one obligation, others included implementation and completion of the proof of debt procedure, determination of the dividends to be paid having regard to the claims admitted to proof, and payment of the dividends. As none of these obligations, apart from the payment of the composition fund, had been discharged before the application was made, the Full Court considered that s 222(7) was not engaged. The Full Court construed the phrase, “all the obligations created by the composition”, as encompassing not only the debtor’s obligations, but also the trustee’s obligations.
64 The Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 1996 provides in respect of what is now s 185T (dealing with applications for a debt agreement to be declared void):
135.44 …It should be noted that this terminology is identical with that used, for example, in section 222 of the Act, dealing with the termination of deeds and compositions under Part X. The case law principles that have been developed in relation to that section and other similar provisions in Part X should provide a guide to the interpretation of the corresponding provisions relating to debt agreements.
135.45 An application for an order voiding a debt agreement cannot be made after all the obligations created by the agreement have been discharged.
65 Even apart from paragraph 135.44 of the Explanatory Memorandum, there is a principle that where Parliament repeats without alteration words which have been judicially construed, it is presumed to have intended the words to bear the meaning already judicially attributed to them: WorkPac Pty Ltd v Skene (2018) 264 FCR 536 at [107]; Baini v R (2012) 246 CLR 469 at [43] (Gaegeler J). In addition, it is ordinarily considered a sound rule of construction that the same word appearing in different parts of a statute should be given the same meaning: Minister v Moorcroft (2021) 273 CLR 21 at [25]. These factors support a construction of s 185T(3) and, correspondingly, s 185N(1) in a manner consistent with the construction of s 222(7) given by Cowdroy J at first instance in Westpac Banking Corporation v Hingston (No 2) and by the Full Court in Hingston.
66 The Interested Party submits that the obligations referred to under s 185N(1) do not include any obligations of a debt agreement administrator, and that Hingston is distinguishable because the legislative provisions governing a personal insolvency agreement are different. The Interested Party submits that the administrator is not a party to a debt agreement pursuant to s 185I of the Act and that the only obligations that can arise under a debt agreement are those that must be performed by one of the parties, being the debtor or the creditors. He submits that a debt agreement contains no positive obligations that must be performed by the creditors and any act or omission of the administrator was not an obligation for the purposes of a debt agreement. The Interested Party also submits that there is no duty or obligation upon a debtor to ensure that the administrator was performing its statutory duties under the Act. The Interested Party argues that the Act in fact requires that payments made by a debtor must be made to the administrator and not directly to creditors. He submits that, accordingly, an obligation cannot arise under an agreement to which the administrator is not a party.
67 The Interested Party submits that the interpretation of the term “obligations” he contends for best assist in achieving the purpose or object of the Act.
68 The Interested Party relies on Deronjic v Debt Fix Pty Ltd [2022] FedCFamC2G 845 at [33]–[34] which, he submits, makes it clear that the only obligations that were required to be discharged under the debt agreement were obligations to be borne by the debtor alone. However, the passages relied on do not support the Interested Party’s construction of them.
69 The Interested Party’s submissions pay insufficient attention to the clear language of s 185N(1) which provides that a debt agreement ends when all the obligations that it created have been discharged. The provision does not in its terms apply only to the obligations of the parties to a debt agreement. Further, his submissions fail to acknowledge that the scheme of Pt IX contemplates that a debt agreement will invariably create obligations upon a debt agreement administrator that they are bound to discharge. The Interested Party’s submissions do not supply any adequate reasons to construe s 185N(1) otherwise than according to its terms.
70 Section 185N(1) of the Act must be construed such that the phrase “all the obligations” extends to the obligations upon a debt agreement administrator created by the debt agreement. Consequently, s 185N(1) cannot operate until creditors with provable debts have been paid their dividend entitlements provided for by a debt agreement.
71 It may be observed, however, that an agreement may be varied under ss 185M–185MC to provide that creditors are to receive a smaller dividend, which would provide a mechanism enabling an agreement to be brought to an end under s 185N(1).
Construction of s 185LC of the Act
72 The issue raised by paragraphs 1(a) and 1(b) of the Originating Application concerns the proper construction of ss 185LC and 185QA of the Act. If those provisions apply, the Official Trustee is obliged to give notification to the Official Receiver of the default of Sam Pos which would result in termination of relevant debt agreements.
73 Section 185LC provides, relevantly:
185LC Administrator to notify Official Receiver of a designated 6-month arrears default by a debtor
(1) If a designated 6-month arrears default by a debtor occurs at particular time in relation to a debt agreement, the administrator of the debt agreement must notify, in writing, the Official Receiver of that occurrence within 10 business days of that occurrence.
…
(3) For the purposes of this Part, a designated 6-month arrears default by a debtor occurs at a particular time (the test time) in relation to a debt agreement if:
(a) both of the following apply:
(i) before the test time, one or more payments in respect of provable debts became due and payable by the debtor under the debt agreement;
(ii) at no time during the 6 month period ending immediately before the test time were any obligations in respect of those payments discharged; or
(b) both of the following apply:
(i) at the test time, the obligations created by the debt agreement have not been discharged;
(ii) the last of those obligations should have been discharged at a time 6 months before the test time.
74 Section 185QA provides:
185QA Terminating a debt agreement—designated 6-month arrears default
(1) If:
(a) the administrator of a debt agreement notifies the Official Receiver that a designated 6-month arrears default by the debtor has occurred; and
(b) the Official Receiver is satisfied that the designated 6-month arrears default has occurred;
the Official Receiver must:
(c) declare in writing that the agreement is terminated; and
(d) record the declaration on the National Personal Insolvency Index.
(2) The debt agreement is terminated when the declaration is recorded on the National Personal Insolvency Index.
75 The Official Trustee submits that the phrase, “the obligations created by the debt agreement have been discharged”, in s 185LC(3)(b)(i) refers only to obligations of a debtor, and does not extend to obligations of a debt agreement administrator. If that construction is correct, the Official Trustee is not required to notify the Official Receiver of the default of Sam Pos. However, the Official Trustee acknowledges that the contrary construction may also be open.
76 Section 185LC(1) imposes an obligation on an administrator of a debt agreement to notify the Official Receiver of, “a designated 6-month arrears default by a debtor”, in relation to a debt agreement.
77 It is not entirely clear whether the phrase being defined in s 185LC(3) is:
“a designated 6-month arrears default”; or
“a designated 6-month arrears default by a debtor”.
Precisely what term is being defined in s 185LC(3) has significance for the issue of statutory construction under consideration. I shall return to that question.
78 The phrase defined in s 185LC(3) is defined in the form of alternative factual scenarios. The second limb of each alternative is similar, but the first limb of each is different.
79 The first of the alternatives (under s 185LC(3)(a)(i)) applies where, “one or more payments in respect of provable debts became due and payable by the debtor under the debt agreement”. This plainly applies only to default by a debtor, not a debt agreement administrator.
80 The second of the alternatives (under s 185LC(3)(b)(i)) is where, “the obligations created by the debt agreement have not been discharged”. The use of the term “obligations” demonstrates a legislative intention to expand the scope of the default beyond a debtor’s failure to make payments. There may be such an obligation and default by a debtor where, for example, the debtor has agreed to sell property to enable dividends to be paid to creditors but has failed to do so.
81 I interpolate to note that paragraphs (a)(ii) and (b)(ii) of s 185LC(3) apply where payments should have been made or obligations should have been discharged at a time six months before the “test time”. The “test time” is the “particular time” of the default. The “particular time” is not defined. The “test time” is ascertained by application of s 185LC(3)(a) and (b). For example, if a payment that was due to be made by a debtor under an agreement on 1 January 2024 has not been made, there is a designated 6-month arrears default by the debtor at the “test time” of 1 July 2024: see also s 2G(2) of the Acts Interpretation Act 1901 (Cth).
82 Section 185LC(3)(b)(i) does not expressly limit, “the obligations created by the debt agreement”, to the obligations of the debtor. This raises the question posed by the Official Trustee of whether such obligations extend to obligations of a debt agreement administrator that have not been discharged, including an obligation to pay dividends to creditors in accordance with the debt agreement. The Official Trustee has received opinions from different counsel expressing opposing views, which is one of the factors that has led the Official Trustee to make the application for directions.
83 There are two factors against construing the phrase, “the obligations created by the debt agreement”, in s 185LC(3)(b)(i) as being confined to the obligations of the debtor.
84 First, the language of s 185LC(3)(b)(i) does not distinguish between the obligations of the debtor and the obligations of the debt agreement administrator created by the debt agreement. The language, on its face, encompasses both.
85 Secondly, s 185LC(3)(a) is expressly limited to an obligation of a debtor, whereas s 185LC(3)(b) is not. That is consistent with the obligations under s 185LC(3)(b) applying beyond the obligations of a debtor.
86 There are two factors submitted by the Official Trustee to affect the construction of s 185LC(3)(b) which, in the end, I consider to be of no assistance. The first is paragraph [191] of the Explanatory Memorandum to the Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007 (Cth), which provides:
The new section 185LC will provide that an administrator must notify the Official Receiver within 10 working days of a designated 6-month arrears default by the debtor. Such a default will occur if a debtor has made no payments for a period of 6 months or has failed to complete the agreement within 6 months of the time specified in the agreement for its completion. This new section should be read in conjunction with the new section 185QA that is inserted by item 56....These new provisions will provide a mechanism to automatically terminate an agreement when the agreement has been effectively abandoned by the debtor, without requiring the delay and costs of processing a termination proposal. The purpose of this new section is to ensure that abandoned but unterminated debt agreements do not remain in limbo indefinitely.
87 Paragraph [191] states that the purpose of s 185LC(3)(b), “is to ensure that abandoned but unterminated debt agreements do not remain in limbo indefinitely”, which may support a construction that the section extends to default of any obligations that result in the agreement not being completed. However, the previous sentence refers to automatic termination of an agreement, “when the agreement has been effectively abandoned by the debtor”, suggesting that the provision is only concerned with the default of the debtor. The sentence stating that, “[s]uch a default will occur if a debtor…has failed to complete the agreement within 6 months”, is ambiguous as to whether a default by a debt agreement administrator amounts to a failure by the debtor to complete the agreement. The paragraph is too ambiguous and uncertain to be of assistance.
88 The Official Trustee submits that a construction of 185LC(3)(b) as extending to the obligations of a debt agreement administrator may have unfair, and accordingly unintended, consequences for a debtor when the administrator is at fault. In some circumstances, the consequences of competing constructions may be considered when interpreting a statutory provision. In Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (1981) 147 CLR 297, Mason and Wilson JJ observed at 321:
If the choice is between two strongly competing interpretations, as we have said, the advantage may lie with that which produces the fairer and more convenient operation so long as it conforms to the legislative intention. If, however, one interpretation has a powerful advantage in ordinary meaning and grammatical sense, it will only be displaced if its operation is perceived to be unintended.
89 In this case, there is no clear “fairer and more convenient operation” based on either interpretation. It can be accepted that where the default is by the debt agreement administrator, a construction of s 185LC such that the agreement will be terminated under s 185QA can produce unfairness for the debtor. On the other hand, the continuation of the agreement where there is default by the debt agreement administrator may be unfair to creditors who have not received what they agreed to and the agreement would otherwise “remain in limbo indefinitely”. Accordingly, the potential consequences of the competing constructions do not assist.
90 The Official Trustee submits that contextual factors support a construction of the phrase, “the obligations created by the debt agreement”, in s 185LC(3)(b)(i) as only referring to obligations that the agreement imposes upon a debtor, and not obligations imposed upon a debt agreement administrator.
91 The Official Trustee’s argument in this respect commences by noting that s 185LC(1) refers to the designated default as being “by a debtor”, and when s 185LC(3) defines the, “designated 6-month arrears default”, it also refers to the default as being “by a debtor”.
92 The Official Trustee submits that s 185LC(3)(a)(i) (“one or more payments in respect of provable debts having become due and payable by the debtor”) refers to payments that are to be made by the debtor to be available for the payment of dividends to creditors. Payments due and payable by a debtor are paid to the debt agreement administrator on trust to be dealt with in the way specified in an agreement: s 185Y. It is the administrator, and not the debtor, who pays the dividends to creditors: see ss 185C(2)(c), 185LA.
93 Section 185LB(1) imposes a duty on the debt agreement administrator to notify creditors if there is a “3-month arrears default” of the debtor. That is, both ss 185LB and 185LC refer to the default of the debtor.
94 The Official Trustee submits that when s 185LC(3)(b) is read in the context of s 185LC as a whole, and in the context of s 185LB, the provision applies to obligations that extend beyond making payments created under an agreement that are imposed on the debtor and can be discharged by the debtor. The Official Trustee submits that it would be inconsistent with that statutory purpose for agreements to be terminated where the debtor has discharged their obligations but there has been a failure outside the debtor’s control by the administrator to comply with its obligations.
95 The Official Trustee also submits that it would be incongruous for s 185LC to impose upon an administrator a duty to notify the Official Receiver of its own non-compliance, such as a failure to pay dividends to creditors that have provable debts, which has nothing to do with the debtor and which will bring about the termination of the debt agreement.
96 The Official Trustee’s submission that the contextual factors support a construction of s 185LC(3)(b)(i) such that the phrase, “the obligations created by the debt agreement”, only refers to obligations the agreement imposes upon a debtor, and does not encompass obligations imposed on a debt agreement administrator, is persuasive.
97 Division 3A of the Act deals with, “Duties of administrators”. Section 185LB(1) imposes a duty upon a debt agreement administrator to notify the creditors of a, “3-month arrears default by a debtor”. That provision only applies where there is a failure by a debtor to make one or more payments.
98 Section 185LC has the heading, “Administrator to notify Official Receiver of a designated 6-month arrears default by a debtor”. That heading suggests that the provision only applies to default by a debtor (the heading being part of the Act: see s 13(2)(d) of the Acts Interpretation Act 1901). So too does the text of 185LC(1), which provides that, “[i]f a designated 6-month arrears default by a debtor occurs…the administrator of the debt agreement must notify, in writing, the Official Receiver of that occurrence” (emphasis added).
99 However, a complexity arises through the definition provided in s 185LC(3). That provision commences, “For the purposes of this Part, a designated 6-month arrears default by a debtor occurs at a particular time (the test time) in relation to a debt agreement…”.
100 What is unclear is whether the expression being defined is, “designated 6-month arrears default by a debtor”, or “designated 6-month arrears default”.
101 If it is the latter, then the words “by a debtor” are not part of the definition. Then s 185LC(1) would only be concerned in a circumstance where a debtor has committed a designated 6-month arrears default in a way described in paragraphs (a)(i) or (b)(i) of s 185LC(3). Section 185LC(1) would not apply to any failure by a debt agreement administrator to discharge an obligation.
102 On the other hand, if the phrase being defined is the former, that would be consistent with a failure to discharge an obligation by a debt agreement administrator being designated as a failure by the debtor, and be consistent with the obligations referred to in s 185LC(3)(b) encompassing a failure of a debt agreement administrator to discharge their obligations.
103 However, in s 185LC, only the words “designated 6-month arrears default” are emphasised. They are emphasised both by their italicising and bolding. The words “by a debtor” are not emphasised. The emphasis seems to indicate the phrase being defined does not include the words “by a debtor”.
104 That construction is confirmed by s 185 which provides, relevantly, “[i]n this Part, unless the contrary intention appears…designated 6-month arrears default has the meaning given by subsection 185LC(3)”. That provision indicates that the phrase being defined in s 185LC(3) does not include the words “by a debtor”. The words “by a debtor” seem to have been included in 185LC(3) to reinforce that s 185LC(1) will only be engaged where there is a “designated 6-month arrears default” committed by a debtor.
105 In my opinion, the phrase, “the obligations created by the debt agreement have been discharged” in s 185LC(3)(b)(i), refers only to obligations upon a debtor, and does not encompass obligations of a debt agreement administrator. The Official Trustee is not required under s 185LC(1) to notify the Official Receiver of the defaults of the former debt agreement administrator, Sam Pos.
106 I will give directions substantially in the form sought by the Official Trustee.
107 The final matter to deal with is the Official Trustee’s application for a suppression order in respect of the annexures to the affidavit of Joel Michael Shaw dated 8 March 2024. Those annexures set out personal information of various debtors affected by Sam Pos’ misappropriation. I consider that it is in the interests of justice to make a suppression order under s 37AF of the Federal Court of Australia Act 1976 (Cth).
108 I have already made a suppression order in respect of the affidavit of the Interested Party for similar reasons.
I certify that the preceding one hundred and eight (108) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Rangiah. |
Associate:
