FEDERAL COURT OF AUSTRALIA

Inspector-General in Bankruptcy v Hartnett [2025] FCA 111

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to section 222(1) of the Bankruptcy Act 1966 (Cth), the personal insolvency agreement of the First Respondent dated 23 April 2024 is set aside.

2.    Pursuant to section 222(10) of the Bankruptcy Act 1966 (Cth), the estate of Beau Timothy John Hartnett is sequestrated, with the effective date of bankruptcy being 19 December 2024.

3.    Mr Gavin King, registered trustee in bankruptcy, is appointed trustee over the estate of Beau Timothy John Hartnett.

4.    The Applicant pay the Second and Third Respondents’ costs after 16 January 2025 which were thrown away by the claim for costs made against the Second and Third Respondents as contained in the Application filed on 29 August 2024.

5.    The Applicant/First Cross-Respondent’s and Fourth Respondent/Cross-Claimant’s costs are to be paid from the estate of Beau Timothy John Hartnett in accordance with the Bankruptcy Act 1966 (Cth).

6.    This order is taken to be entered once it has been authenticated in accordance with rule 39.35 of the Federal Court Rules 2011 (Cth).

THE COURT NOTES THAT:

1.    A consent to act as trustee under section 156A of the Bankruptcy Act 1966 (Cth) has been signed by Mr Gavin King.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

DOWNES J:

Synopsis

1    Mr Beau Hartnett, who is the First Respondent, is a Gold Coast solicitor who ceased to practise late last year.

2    The Applicant (Inspector-General) seeks an order setting aside a personal insolvency agreement dated 23 April 2024 (PIA) entered by Mr Hartnett, and Ms Anne Meagher and Mr Adam Kersey, the Second and Third Respondents (the Controlling Trustees).

3    The same order is also sought by the Fourth Respondent/Cross-Claimant (Mr Bell), who is a creditor of Mr Hartnett.

4    As the PIA was entered nearly a year ago, there is some urgency associated with the resolution of this proceeding.

5    The power to set aside the PIA arises under s 222(1) of the Bankruptcy Act 1966 (Cth) if the Court concludes it is unreasonable or not calculated to benefit the creditors generally (s 222(1)(d)), or that there is any other reason to set it aside (s 222(1)(e)).

6    By his Cross-Claim, Mr Bell also seeks orders that Mr Hartnett’s estate be sequestrated, that Mr Hartnett’s effective date of bankruptcy be 12 January 2024 and that Mr Gavin King be appointed as trustee of Mr Hartnett’s estate. That application is brought pursuant to any or all of ss 222(8), 222(10) and 222(11) of the Bankruptcy Act.

7    For the following reasons, the orders sought by the Inspector-General and Mr Bell will be made, with some variations.

Rulings during the hearing

8    During the hearing, certain rulings were made, with reasons to be provided in this judgment. These are my reasons for those rulings.

Objections to evidence

Affidavit of Beau Timothy John Hartnett affirmed 2 December 2024

9    The Inspector-General raised objections to two paragraphs of the affidavit of Beau Timothy John Hartnett affirmed on 2 December 2024 (Hartnett affidavit).

10    The Inspector-General objected to [104] of the Harnett affidavit on the basis that it was a conclusory statement. That paragraph refers to an order made in the Supreme Court of Queensland conditioned on Mr Hartnett and a company of which he was a director paying the sum of $65,074.22 into a trust account. It states:

The total of $65,074.22 included $51,749.22 as partial costs of the Supreme Court trial.

11    The Inspector-General submitted that [104] asserts that the total amount of $65,074.22 included partial costs of $51,749.22 of the Supreme Court trial, but that the basis of that fact is not made apparent in the Hartnett affidavit. However, as submitted by Mr Hartnett, the facts stated in this paragraph are within Mr Hartnett’s personal knowledge. To the extent that it could be said that it was conclusory (that is, an opinion), it was admissible by reason of s 78 of the Evidence Act 1995 (Cth). For these reasons, I did not exclude this evidence.

12    An objection was also taken to [120] of the Hartnett affidavit. That paragraph states:

I believe that King Tide Company Pty Ltd and I do not have any liability to Arawak Holdings Pty Ltd (in liquidation), because of the application of the indemnity principle.

13    Mr Hartnett submitted that [120] is a summary of other paragraphs of his affidavit and that it should be allowed. However, as submitted by the Inspector-General, Mr Hartnett’s subjective belief as to his indebtedness is irrelevant to any issue in this proceeding. That had the consequence that it was not admissible: see s 56(2) of the Evidence Act. That paragraph was excluded for this reason.

Affidavit of Anthony Robert Bell affirmed 8 November 2024

14    Mr Hartnett objected to [19] of the affidavit of Mr Bell affirmed on 8 November 2024 (Bell affidavit) on the ground that it makes a positive assertion that Mr Hartnett had significant assets not held in his name which was legally and factually inaccurate. That paragraph stated:

The third reason was that Mr Hartnett had significant assets not held in his name that I thought might be used to pay the total debt.

15    Although I did not regard this as a proper objection, I made an order pursuant to s 136 of the Evidence Act limiting [19] of the Bell affidavit to being evidence of the reasons that Mr Bell voted the way that he did. In my view, this met the complaint raised by Mr Hartnett.

16    Mr Hartnett objected to [22] of the Bell affidavit on the same grounds as [19]. That paragraph stated:

The meeting was adjourned to 22 April 2024. My instructions were still to vote against the proposed personal insolvency agreement because I did not think I was getting enough money out of the proposed agreement, particularly when considered against what I saw to be considerable assets to which, and over which, Mr Hartnett had access or control.

17    For the same reason, I did not exclude the evidence but made an order pursuant to s 136 of the Evidence Act limiting [22] of the Bell affidavit from the words “particularly” onwards to being evidence of the reasons that Mr Bell voted the way that he did.

Amendment of Defence

18    Mr Hartnett sought leave at the hearing to file an Amended Defence. The proposed Amended Defence articulated further reasons in [197] as to why Mr Hartnett denies that the Inspector-General is entitled to the relief sought.

19    The proposed amendments are set out below in the underlined text:

197. Mr Harnett denies that the Applicant is entitled to the relief sought because:

(a)    The PIA is no longer ‘in force’ and the precondition for the exercise of the discretion conferred by s. 222(1) is not enlivened; and

(b)    In the alternative, if the discretion conferred by s. 222(1) is enlivened it ought not to be exercised in the circumstances of this case because:-

(i)    the application was made late and after the distribution of funds and the provision of a Certificate of Completion;

(ii)    the will of the creditors should be respected;

(iii)    Arawak Holdings Pty Ltd was not in fact a creditor of the First Respondent, or alternatively, was not a creditor in the amount admitted;

(iv)    the information presented to the creditors was sufficient for them to make an informed decision;

(v)    there is no suggestion that any information contained in the statement of affairs is inaccurate in any material way;

(vi)    the trustees recommended that the creditors accept the first respondent’s proposal under Part X of the Act;

(vii)    the transactions contemplated by the PIA have been completed;

(viii)    the size of the dividend is not determinative;

(ix)    the trustee’s reports/notices to creditors were not misleading;

(x)    the size of the dividend may take on greater significance where there are further matters to investigate;

(xi)    the related party transactions have already been investigated;

(xii)    neither the PIA proposal or process are obviously colourable;

(xiii)    there is no realistic prospect of any benefit to creditors (from any further investigation or otherwise)

(xiv)    there has been no offer of funding for the proposed trustee in bankruptcy;

(xv)    there has been no offer of funding for the second and third respondents’ renumeration for work performed as controlling trustees and Trustees of the first respondent’s PIA.

20    Of these proposed amendments, the Inspector-General objected to sub-paragraphs (i), (iii), (vii), (xi), (xiv) and (xv). Reliance was also placed on the absence of an affidavit or other evidence to explain why the pleadings were not amended sooner.

21    During the hearing, I granted leave to Mr Hartnett to include sub-paragraphs (iii), (vii), (xi) and (xiv) as part of the amendments to his pleading. The amendments proposed in (i) and (xv) were not allowed. These are my reasons for so ruling.

22    As to proposed sub-paragraph (i), Mr Hartnett submitted that it should be allowed as it is based on existing evidence that the certificate of completion has been issued and all the funds distributed. Mr Hartnett submitted that the effect of the amendments was thus merely to provide notice to all parties of his proposed legal arguments.

23    For the following reasons, this amendment was refused:

(1)    there was no explanation for the delay by Mr Hartnett in applying for the amendments;

(2)    there is a potential loss of public confidence in the legal system which can arise where a court is seen to accede to such applications made without adequate explanation or justification: see Alexiou v Australia and New Zealand Banking Group Limited (Application to Amend Pleading) [2025] FCA 7 at [50] (Perram J) citing Tamaya Resources Ltd (in liq) v Deloitte Touche Tohmatsu [2015] FCA 1098 at [127] (Gleeson J);

(3)    Mr Hartnett’s choices to date in the litigation and the consequences of those choices tell against allowing the amendment: Alexiou at [50], citing Tamaya at [127]. This is especially as Mr Hartnett is an experienced solicitor who has had separate legal representation throughout this proceeding;

(4)    affidavit evidence explaining the reasons for the delay in commencing this proceeding could have been adduced by the Inspector-General if the allegation had been made at an earlier time, and the Inspector-General was therefore prejudiced. In circumstances where no affidavit material was adduced by Mr Hartnett to explain the delay in seeking to amend his pleading and as the application was made at such a late stage in the proceeding, this makes it impossible to determine what the interests of justice require in terms of balancing the respective interests of the parties: see, generally, Alexiou at [88]–[91]; and

(5)    Mr Hartnett did not make clear (and it was not otherwise apparent) what it was that the proposed addition of subparagraph (i) added to the allegations in [197(a)] and [197(b)(vii)], which amendments were not opposed by the Inspector-General or were allowed. Thus, it was not shown that the proposed addition of (i) was important to Mr Hartnett’s case.

24    The reasons in (1), (2) and (3) above also explain why the application to include sub-paragraph (xv) was refused. In addition, the Inspector-General would have been able to investigate potential funding, and adduce evidence about this issue, had it been raised at an earlier time. The Inspector-General was therefore prejudiced. In circumstances where no affidavit material was adduced by Mr Hartnett to explain the delay in seeking to amend his pleading and as the application was made at such a late stage in the proceeding, it was not possible to determine what the interests of justice require in terms of balancing the respective interests of the parties: see, generally, Alexiou at [88]–[91].

25    The remainder of the contested amendments were allowed because:

(1)    they raised legal arguments based on existing evidence or (in the case of sub-paragraph (iii)) were based upon additional documentary evidence sought to be tendered by Mr Hartnett which the Inspector-General was able to address, through cross-examination and submissions, such that the prejudice to the Inspector-General (if any) was not significant. In this regard, no application for an adjournment was made by the Inspector-General and nor was any application made to adduce additional evidence at the hearing, whether by way of oral evidence or a further affidavit;

(2)    although the amendment in (xiv) made a new allegation of fact, any prejudice to the Inspector-General was overcome by leave being granted to Mr Bell to rely upon the affidavit of Mr Gavin King dated 24 January 2025, the proposed trustee in bankruptcy. Mr King was not required for cross-examination, and his affidavit addressed (and overcame) the issue raised by (xiv).

Amendment of Notice of Cross-Claim and Statement of Cross-Claim

26    Mr Harnett filed written submissions on 30 January 2025 alleging that the Cross-Claim brought by Mr Bell was incompetent, and that the Notice of Cross-Claim and Statement of Cross-Claim should be disposed of summarily or struck out.

27    The essence of Mr Harnett’s argument was that the power to make a sequestration order against Mr Hartnett’s estate pursuant to s 222(10) of the Bankruptcy Act was not enlivened as a matter of construction. This was on the basis that there was no extant application to set aside the PIA by Mr Bell, upon which Mr Bell could seek a sequestration order against Mr Harnett’s estate. Mr Harnett argued that the only application to set aside the PIA was that made by the Inspector-General.

28    In response, Mr Bell sought leave to file an Amended Cross-Claim that added a prayer for relief seeking the following:

Order pursuant to section 222(1) of the Bankruptcy Act setting aside the Personal Insolvency Agreement for Beau Timothy John Hartnett dated 23 April 2024.

29    That prayer for relief was in identical terms to that sought by the Inspector-General.

30    By Order dated 30 January 2025, leave was granted to Mr Bell to amend the Notice of Cross-Claim and Statement of Cross-Claim for the following reasons:

(1)    the attack by Mr Hartnett on the competency of the Cross-Claim should have occurred before the hearing, or at least been notified to Mr Bell. Had that occurred, the application by Mr Bell to seek the additional relief would have been made at an earlier time. Any complaint by Mr Hartnett about the lateness of the amendment application is rejected for this reason;

(2)    the relief sought by Mr Bell was duplicative, being the same relief as that sought by the Inspector-General and which relief Mr Hartnett had come to the hearing to resist in any event. The lack of prejudice to Mr Hartnett is made plain by the fact that no application for an adjournment was made by him and nor was any application made to adduce additional evidence at the hearing, whether by way of oral evidence or a further affidavit, for the purposes of meeting the additional relief sought by Mr Bell.

31    As a consequence of the amendment being permitted, the argument about the competency of the Cross-Claim must fail.

Chronology of events leading up to the PIA

32    Mr Hartnett was the former principal of the law firm Hartnett Lawyers.

33    Relevant background relating to the debt owed by Mr Hartnett to Mr Bell is contained in the headnote of the decision of Bell v Hartnett Lawyers (No 3) (2022) 112 NSWLR 463; [2022] NSWSC 1204 (Bell CJ, Adamson JA and Griffiths AJA) (emphasis omitted):

In late 2013, Mrs Mabel Deakin-Bell (Mabel or the mortgagor) died. Under her will, Mr Anthony Robert Bell (the Respondent), was left a property which was subject to a $30,000 mortgage to the late Ms Gwendoline Deakin-Bell (Gwendoline or the mortgagee).

From 2014, Mr Beau Timothy John Hartnett (the Appellant) acted for Gwendoline in seeking to enforce the mortgage. The only evidence of a costs agreement between the Appellant and Gwendoline was an unsigned copy of an agreement which gave a costs estimate of $3,900 to $6,400. That agreement, which purported to be issued “pursuant to the requirement of the Legal Profession Act 2007”, contained a clause allowing the charge of an “uplift fee” of 25%, said to be because the Appellant’s fees would only become payable upon sale of the property or his ceasing to act for Gwendoline.

On 2 December 2014, Gwendoline commenced proceedings against the Respondent in the Supreme Court of New South Wales seeking possession of the property and payment of the mortgage together with interest and costs, said to amount to $34,683.19 by 14 November 2014 (the Possession Proceedings). These proceedings were ultimately undefended and, on 29 April 2016, orders were made by Davies J for possession and sale of the property. By this time, a series of invoices amounting to approximately $77,200 had been prepared by the Appellant, although there was no evidence that they had been sent to Gwendoline.

On 5 September 2016, the Appellant wrote to the NSW Trustee and Guardian (as the Respondent had not yet obtained probate of Mabel’s will), giving an estimate of costs “in the range of $220,000.00-$240,000.00”, excluding the real estate agent’s commission for sale of the property. On 30 September 2016, the Appellant again wrote to the NSW Trustee and Guardian, advising that the previous estimate did not include the uplift fee nor GST, and that his revised estimate was “in the range of $302,500.00 - $330,000.00.” On 1 October 2016, the property was sold at auction for $376,000. The net proceeds of sale were $352,137.02.

On 17 November 2016, Gwendoline signed a document entitled “Specific Trust Account Authority”, which authorised payment to her of $39,089.57, payment to Hartnett Lawyers of $288,601.03, and payment of the balance ($33,834.45) to the Supreme Court of New South Wales, pursuant to the orders of 29 April 2016. The payment to the Supreme Court was not made.

The Respondent obtained probate of Mabel’s will on 29 November 2016. The Appellant and Respondent thereafter engaged in protracted correspondence in which the Respondent attempted to obtain copies of invoices and amounts charged by the Appellant. This correspondence also involved various complaints by the Respondent to the Legal Services Commissioner of Queensland. The Appellant never provided copies of invoices or amounts charged. Indeed, he took steps actively to dissuade the Respondent from inquiring further, including writing several letters to the Respondent’s lawyers in which the Appellant threatened (ostensibly on behalf of his client, Gwendoline) to seek the revocation of the Respondent’s grant of probate over Mabel’s estate.

Eventually, on 9 January 2018, the Respondent sought a costs assessment in the Possession Proceedings. The Appellant did not ultimately engage in the costs assessment process on behalf of Gwendoline, and it was finalised on 24 May 2018, with the assessor, Mr Christopher Wall, determining a total amount payable of $37,345.50 (the Wall Assessment). Gwendoline died on 31 May 2018.

After further protracted correspondence, on 1 September 2020, the Respondent filed a Summons in the Equity Division in which he sought a declaration that the Appellant held the amount of $287,551.30 as trustee for him, together with an order that the Appellant pay him the amount of $287,551.30 (the Equity Proceedings). Equitable compensation was also sought together with interest, costs and such “further other orders as are appropriate in the circumstances of the case.” Certain interlocutory relief was also sought.

On 26 April 2021, Slattery J re-opened the Possession Proceedings. In a further judgment delivered on 12 October 2021 (the second Slattery J judgment), his Honour declined to join the Appellant to the Possession Proceedings, holding that the Appellant “was still amenable to the Court’s supervision” pursuant to its inherent supervisory jurisdiction. On 11 November 2021, Slattery J made orders for the filing of a “points of claim” by the Respondent, and a reply and “points of defence” by the Appellant, identifying how this Court’s inherent jurisdiction was said to be engaged. These were duly filed, and the two documents identified case numbers for both the Possession Proceedings and the Equity Proceedings. On 16 December 2021, Slattery J ordered that these documents “shall be taken to be pleadings” in both the Possession and Equity Proceedings.

On 7 December 2021, the Appellant filed a Notice of Motion seeking to have both the Equity Proceedings and the Possession Proceedings removed to this Court, on the basis that the Court’s disciplinary jurisdiction had been engaged.

That Notice of Motion was dismissed.

On 8 September 2022, Peden J (the primary judge) delivered judgment. Her Honour relevantly ordered, in the Equity Proceedings, the payment by the Appellant of $251,255.53 to the Respondent, which was the difference between the amount the Appellant had been paid and the Wall Assessment.

34    By that decision, Mr Hartnett’s appeal from the decision of Peden J was dismissed with costs on 12 October 2023, with Bell CJ observing at [131] that, “[e]xorbitant charging debases the reputation of the legal profession as well as subjecting clients or others involved in litigation to unwarranted costs”.

35    Mr Hartnett had given an undertaking to the Court of Appeal on 9 November 2022 that he would not dispose, dissipate or otherwise deal with any assets for which he has an interest in, including company assets where he is a director and shareholder up to the unencumbered value of $311,356.47, on certain terms. In Beau Timothy John Hartnett trading as Hartnett Lawyers v Anthony Robert Bell as Executor of the Estate of the late Mabel Dawn Deakin-Bell (No 2) (2023) 113 NSWLR 381; [2023] NSWCA 311, Mr Hartnett was the appellant, and Mr Bell was the respondent. By that decision, Bell CJ and Adamson JA made the following orders:

(1)   Order the appellant to pay the respondent’s costs, as ordered on 12 October 2023, in the gross sum of $70,000.

(2)   Order the appellant to pay the respondent’s costs of the notice of motion filed on 2 November 2023 in the gross sum of $5,000.

(3) Order that the sum of $30,000 paid into court by the appellant and received by the Court on 8 December 2022 be released to the respondent forthwith to be applied in accordance with s 136 of the Civil Procedure Act 2005 (NSW).

(4)   Note that the appellant will not be in breach of the undertaking given to the court by his counsel on 9 November 2022 (the Undertaking) if he pays the following sums into the respondent’s solicitor’s trust account:

(a)   $311,356.47;

(b)   post-judgment interest of $28,858.29;

(c)   $70,000 (as ordered in order (1) above); and

(d)   $5,000 (as ordered in order (2) above).

(5)   If and when the appellant pays the amounts set out in order (4) above, he is discharged from the Undertaking.

36    Between 15 December 2023 and 23 January 2024, Mr Bell pursued Mr Hartnett for the amounts owing to him. Mr Bell received no payment from Mr Hartnett.

37    On 22 December 2023, Mr Bell served a bankruptcy notice on Mr Hartnett in relation to judgment debts for sums totalling $340,006.

38    On that same day, Mr Hartnett sought pre-insolvency advice from SV Partners about a possible appointment under Part X of the Bankruptcy Act.

39    On 24 January 2024, Mr Bell filed a creditor’s petition, which was listed for hearing on 5 March 2024.

40    On 1 March 2024, Mr Hartnett appointed the Controlling Trustees, themselves officers of SV Partners, under s 188 of the Bankruptcy Act, and provided a statement of his affairs and a draft proposal for dealing with his affairs under Part X of the Bankruptcy Act.

41    Mr Hartnett’s statement of affairs dated 1 March 2024 identified the following creditors:

(1)    Hartnett Legal Services Pty Ltd in the amount of $3,718,800;

(2)    Mr Bell in the amount of $584,589;

(3)    Walsh Accountants in the amount of $1,628;

(4)    MPB Investments Pty Ltd in the amount of $550; and

(5)    Henry House & Home in the amount of $1,500.

42    On 5 March 2024, the Controlling Trustees issued an initial notice to creditors. The following creditors subsequently lodged Statements of Claim in the period between 7 March 2024 and 15 April 2024:

43    The documentary evidence contained communications between Mr Hartnett and his accountants, Walsh Accountants, which showed that he had either drafted documents to be provided by the accountants to the Controlling Trustees (including letters) or had requested that the accountants speak to him before answering queries raised by the Controlling Trustees.

44    On 28 March 2024, the Controlling Trustees issued their Report to Creditors, which included:

(1)    at Annexure F, a proposed personal insolvency agreement that had been amended to now include a “contribution” of $80,000 from Mr Hartnett; and

(2)    at Annexure D, a comparison of estimates of distributions available to creditors under a personal insolvency agreement and under high, medium and low outcomes under a bankruptcy. The estimated distribution under a personal insolvency agreement was $15,850, which would result in a distribution rate of 2.694 cents in the dollar to all unsecured creditors except the Hartnett Service Trust which had agreed to forgo a distribution if the personal insolvency agreement was accepted.

45    On 16 April 2024, a meeting of Mr Hartnett’s creditors was chaired by Ms Meagher, which was adjourned at the instigation of Ms Meagher to allow further time to adjudicate and consider claims by creditors.

46    On 18 April 2024, a second creditors’ meeting was convened and then adjourned to allow further time for the Controlling Trustees to respond to questions raised by creditors.

47    On 19 April 2024, the Controlling Trustees issued a further notice to creditors in response to questions raised by creditors at the second creditors’ meeting. The estimated realisation for a high outcome for a bankruptcy and a medium outcome under a bankruptcy had increased from the previous estimates. Although the estimated distribution under a personal insolvency agreement had not changed at $15,850, the estimated rate had reduced to 2.165 cents in the dollar due to the admission of Arawak which was not included in Mr Hartnett’s statement of affairs.

48    On 22 April 2024, the meeting of the creditors was convened for a third time, at which the creditors resolved by majority to execute the amended Draft Proposal annexed to the Report to Creditors of 28 March 2024. The creditors who voted in favour of the PIA were:

(1)    Hartnett Service Trust ($3,688,067);

(2)    MPB Investments ($550);

(3)    McCallum-Henry ($1,500); and

(4)    Walsh Accountants ($1,628).

49    In order for the Part X proposal to be adopted, it was necessary that the proposal be accepted by a special resolution at a creditors’ meeting of (both) a majority of creditors and at least 75% in value of the creditors: s 204(1)(b) of the Bankruptcy Act; r 75-132(1) of the Insolvency Practice Rules (Bankruptcy) 2016 (Cth).

50    The following facts are common ground:

(1)    the PIA offered a negligible return to creditors of $15,850 (after expenses), as against total claimed debts of $4,450,980;

(2)    the PIA was carried in value because of the vote of a related-party creditor (Hartnett Service Trust), which claimed some 83% of the total debts and which voted in favour of the PIA despite not receiving a dividend under it;

(3)    the PIA was carried by number of votes because three minor creditors also voted for it, each with debts less than $2,000 in value (and therefore receiving estimated distributions under the PIA of between $11 and $38);

(4)    Mr Hartnett prepared Statements of Claim and Appointment of Proxy forms for these minor creditors;

(5)    the only two significant creditors who were arms-length from the debtor, being Mr Bell and Arawak, voted against the PIA.

51    Of the amount of $585,899.19 claimed by Mr Bell, Mr Bell received $12,686.59 from the PIA.

Relevant legal principles

52    Section 222(1) of the Bankruptcy Act relevantly provides that a personal insolvency agreement may be set aside by the Court on the Inspector-General’s application if the Court is satisfied that either:

(1)    the terms of the personal insolvency agreement are unreasonable or not calculated to benefit the creditors generally (s 222(1)(d)); or

(2)    for any other reason, the personal insolvency agreement ought to be set aside (s 222(1)(e)).

53    In Moss v Gunns Finance Pty Ltd (2018) 131 ACSR 462; [2018] FCAFC 185 (Gleeson, Lee and Banks-Smith JJ), the Full Court stated at [12]–[13]:

As to the state of satisfaction required by s 222(1)(d), in assessing whether a PIA is unreasonable or not calculated to benefit creditors, regard can be had to a variety of factors. Some of these factors which have present relevance include: first, the relative size of the debts owing and the proposal; secondly, the nature of the relationship between the debtor and the creditors who voted in favour of the PIA: Hingston v Westpac Banking Corporation (2012) 200 FCR 493; [2012] FCAFC 41 at [58] (Greenwood, McKerracher and Nicholas JJ); and thirdly, whether the circumstances call for a greater opportunity to inquire into the debtor’s affairs and the closeness of the creditors’ vote, particularly if influenced by creditors who were not at arm’s length from the debtor: Osborne v Gangemi (2011) 9 ABC (NS) 257; [2011] FCA 1252 at [47]. Fourthly, the inadequacy of a return may also constitute sufficient basis to set aside the PIA, especially so when other factors point in favour of setting it aside: Bendigo and Adelaide Bank Ltd v Clout (2016) 14 ABC (NS) 46; [2016] FCA 119 at [46].

As to s 222(1)(e), given the width of the notion that the Court has power to set aside the PIA if it reaches the state of being satisfied that it is appropriate to do so “for any other reason”, there are no particular limits circumscribing the discretion under this sub-section: see New Age Constructions (NSW) Pty Ltd v Etlis (aka Etlis) (2013) 11 ABC (NS) 542; [2013] FCA 884 at [61].

54    Section 222(1)(e) confers a broad discretion, which “plainly permits the Court to take into account a range of considerations, including those whose cumulative effect shows that the agreement should be set aside”, including ones which overlap with s 222(1)(d): New Age Constructions (NSW) Pty Ltd v Etlis (2013) 11 ABC (NS) 542; [2013] FCA 884 at [61] (Yates J). There is no bright line between s 222(1)(d) and (e) in this respect: Etlis at [55].

Whether discretion arises in this case

55    Mr Hartnett submits that the PIA is not “in force” within the meaning of s 222(1) of the Bankruptcy Act. Because of this, he contends that an application cannot be brought under s 222(1) in relation to the PIA and that, as a consequence, the discretion to set aside the PIA does not arise.

56    The words “in force” were inserted into s 222 on 30 November 2004 by s 142 of the Bankruptcy Legislation Amendment Act 2004 (Cth) and condition the discretion to set aside a personal insolvency agreement by reference to it being “in force”. The insertion of the words “in force” cannot be regarded as mere surplus wording and must be given work to do: Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at [71] (McHugh, Gummow, Kirby and Hayne JJ).

57    Importantly, the words “in force” in s 222(1) also appear in ss 222(2) and 222(5). The power in those subsections cannot be exercised unless the “application for the order is made before all of the obligations that the personal insolvency agreement created have been discharged”: see ss 222(4) and (7). It follows that the words “in force” are intended to mean something other than the discharge of all of the obligations created by the agreement. Further, s 222 contemplates that a personal insolvency agreement will be “in force” after all of the obligations it creates are discharged. That is because ss 222(4) and 222(7) allow for the possibility that an application for an order setting aside a personal insolvency agreement may be made before all of the obligations it creates are discharged, but the agreement will nonetheless be “in force” at the time the Court is called upon to exercise the power in ss 222(2) or 222(5).

58    Although Mr Hartnett accepts that different meanings are to be given to the words “in force” and the statutory phrase “before all of the obligations that the personal insolvency agreement created have been discharged”, he submits that in all but complex cases a personal insolvency agreement will cease to be “in force” once all of the obligations under the agreement have been discharged, unless a factor arises to extend the time that the agreement is “in force”. Such a factor, he submits, would include where a personal insolvency agreement “assigns the debtors’ right, title and interest in certain pending litigation being conducted by a liquidator to his creditors”, which creates an “uncrystallised right” pending the outcome of the litigation. By contrast, the case at hand is not complex, so Mr Hartnett submits: the PIA ceased to be “in force” on 4 June 2024 when the creditors were paid, and the Controlling Trustees issued their certificate pursuant to s 232. Mr Hartnett contends that the entire PIA has therefore been “spent”, and no factor arises to extend the time of its operation to the commencement of these proceedings on 30 August 2024.

59    However, as the Inspector-General submits, the words “in force” in s 222 mean that the personal insolvency agreement continues to have legal force or effect under the Bankruptcy Act: that is, it applies where the personal insolvency agreement has not been set aside or terminated as is provided for by various provisions of the legislation, including s 222 itself.

60    That is because s 222 engages statutory rights and duties and has important statute-based consequences. Notably, a personal insolvency agreement can only achieve its intended legal effect by the force of the legislation, because at general law it could not operate to release the debtor from the debts of creditors, noting they are not a party to it. Thus, the personal insolvency agreement only has such force and effect as the statute gives it, and it is that “force” to which s 222(1) is referring.

61    For example, s 229 provides to the effect that a personal insolvency agreement is binding on all creditors, and that, so long as the agreement remains valid, it is not competent for a creditor to, for example, enforce any remedy against the person in respect of a provable debt. Thus, s 229 continues to have work to do in relation to a personal insolvency agreement after all of the payments have been made under it, because the provision operates “so long as the agreement remains valid” to prevent a creditor from enforcing a debt that is released by the operation of the agreement. That is, a personal insolvency agreement continues to have legal force and effect under s 229 even after all payments are made.

62    Similarly, s 230 provides that a personal insolvency agreement operates to release the debtor from provable debts as provided in the agreement “unless the agreement is set aside or terminated under this Part”. The structure of s 230 is to provide for a release if and for so long as a personal insolvency agreement is not set aside or terminated.

63    Notably, that a personal insolvency agreement has been implemented was treated by Yates J as a relevant factor in the exercise of the discretion to set aside the agreement, rather than a matter which prevented the discretion from arising at all: see Etlis at [56].

64    As the PIA has not been set aside or terminated, the application under s 222(1) can be brought as the PIA is “in force” within the meaning of that provision. This has the consequence that the discretion under s 222 is enlivened.

Exercise of discretion

65    Given that I have determined that the Court’s discretion to set aside the PIA pursuant to s 222(1) of the Bankruptcy Act is enlivened, it must be considered whether that discretion should be exercised.

Dividend was trivial relative to the debts

66    The estimated return to creditors under the PIA was the sum of $15,850, as compared to the debts covered by the PIA in the amount of $4,450,980. That resulted in an estimated return to creditors (other than Hartnett Service Trust) of 2.165 cents in the dollar.

67    Mr Hartnett concedes that that the sum offered under the PIA was “not great”. However, he also argues that the return is “neither little or trivial”, and that his largest creditor effectively surrendered its right to receive a dividend under the PIA to the benefit of the other creditors. Further, Mr Hartnett argues that while the return to creditors relative to Mr Hartnett’s total indebtedness is a relevant factor in the exercise of the Court’s discretion to set aside the PIA, it is not determinative. He submits that the prospect of a bankruptcy providing a lesser, or no, return to creditors is also a relevant factor as to whether the PIA should be set aside. As to this last submission, Mr Hartnett relies on the uncontested expert evidence of Ms Meagher that the return under the PIA was higher than any potential return in a bankruptcy.

68    However, for the reasons explained below, I do not accept that there has been sufficient investigation into Mr Hartnett’s affairs to date and I also do not accept the opinion of Ms Meagher that the return under the PIA was higher than any potential return in a bankruptcy.

69    While I accept that it is not a determinative factor, the return of $15,850 as against total debts of $4,450,980 is properly characterised as “so trivial or so disproportionate” that it is “better dealt with by way of bankruptcy” with “the Trustee in bankruptcy exercising relevant powers”: see Hingston v Westpac Banking Corporation (2012) 200 FCR 493; [2012] FCAFC 41 (Greenwood, McKerracher and Nicholas JJ) at [58]. That is because, where such a trivial sum is offered to compromise significant debts and taking into account the other circumstances of this case, as addressed in further detail below, it is in both the creditors’ interests and the public interest that there be a proper investigation by a trustee in bankruptcy, exercising the suite of powers available in a period of a bankruptcy (including public examination powers).

70    For these reasons, the trivial amount of the dividend is a factor in favour of setting aside the PIA under either or both of ss 222(1)(d) and 222(1)(e) of the Bankruptcy Act.

Claim by Hartnett Service Trust which voted for PIA

71    The Hartnett Service Trust submitted a statement of claim for approximately $3.69 million, comprising some 83% of Mr Hartnett’s total debts under the PIA.

72    Mr Hartnett did not dispute that the Hartnett Service Trust was a related entity to him. Nor did Mr Hartnett dispute that the vote in favour of the PIA would not have succeeded in value were it not for the vote of the Hartnett Service Trust. However, Mr Hartnett denies that he was the controlling mind of the Hartnett Service Trust, or that the Hartnett Service Trust was actuated by interests extraneous to any desire to recover what it claims is owing to it.

73    The debt claimed by the Hartnett Service Trust must be considered in light of the following background facts.

74    Mr Hartnett traded as Hartnett Lawyers from 3 September 2001 until the incorporation of the firm in late 2021. He used a service trust (Hartnett No. 2 Trust) prior to 2012. The financial statements for his legal practice show an amount still owing of $3,044,911 in relation to these service fees.

75    On 14 October 2021, Hartnett Legal Services Pty Ltd commenced trading as Hartnett Lawyers.

76    Mr Hartnett was a director of Hartnett Legal Services Pty Ltd until 23 April 2024, and its sole shareholder until 29 February 2024.

77    Hartnett Legal Services Pty Ltd also acts as the trustee of the Hartnett Service Trust, which trust was formed on 23 May 2011. Mr Hartnett and Ms Suzanne Weel, who is married to Mr Hartnett and is also a solicitor, are named as the primary beneficiaries in the Trust Deed. Mr Hartnett was and remains the ‘Principal’ of the Trust, and he was and remains one of the three individuals who comprise the ‘Nominee’. In each of those roles, he has the power to make distributions of income and capital from the Trust.

78    The debt claimed to be owed by Mr Hartnett to the Hartnett Service Trust is said to have arisen pursuant to a Service Agreement dated 1 July 2012 which he signed in both: (i) his capacity as sole company director and sole company secretary of Hartnett Legal Services Pty Ltd and (ii) his personal capacity (Service Agreement). The services to be provided pursuant to that agreement were identified in Schedule 2 and relate to services typically provided to a law firm.

79    Under the Service Agreement, the Hartnett Service Trust was required to give Mr Hartnett a tax invoice for the previous month’s services (cl 12.2), which he was required to pay within seven days after receipt (cl 12.3). This did not occur.

80    Mr Hartnett gave evidence under cross-examination that the Service Agreement had been “orally varied or varied by conduct or otherwise”, and after initially maintaining that the agreement was in force for some time, he later said that it was “amended fairly shortly after it was signed”. He claimed that the written “agreement was varied” (but not in writing) by himself acting for both parties, potentially due to conduct, because the invoices were not raised and paid “precisely in accordance” with the clauses in the written agreement. When giving this evidence, Mr Hartnett did not appear to be confident in his answers, and at times, I received the impression that he was speculating, especially when he gave inconsistent answers.

81    He gave evidence in a similar hesitant way when he was asked about what he had told Ms Meagher about the recoverability of $369,763.19 of debts referred to in the statement of affairs. Mr Hartnett gave this evidence:

And what did you say? What was the substance of what you said to the controlling trustee? You don’t need to recall the precise words, but what was the substance of what you said?---Well, I – I – there were many, many meetings and many conversations with the – with one of the controlling trustees – the other I didn’t have any contact with – and there were discussions around the – the likely recovery or amount that – that might be recovered in the event enforcement action was taken to recover those sundry debtors by a trustee in bankruptcy, for example.

And the controlling trustee with whom you spoke was Anne Meagher?---That’s correct.

Okay. Now I will go back to my question. You’ve told me that you discussed it with the controlling trustee; what was the substance of what you said about recoverability?---Well, I – I – I recall that I said that if a third party was to come in and try to take steps to recover the – the debtors without the – the – the longstanding relationship with – with clients, the – the likely recovery amount was going to be greatly impacted – greatly – and – and the – the face value of those – of those summary debtors would be – would – would be discounted considerably. That’s – that’s the effect of what I said.

82    Because of the manner in which Mr Hartnett gave his evidence under cross-examination (which gave me no confidence that his answers were correct) and because I consider that the vote in favour of the PIA was a contrived one for which he was responsible, as I address below, I do not accept any evidence given by Mr Hartnett in this proceeding (whether oral or written). In short, Mr Hartnett is not a reliable witness.

83    At this juncture, I note that Mr Hartnett, a solicitor with litigation experience, was provided with a folder of documents in the witness box by senior counsel for the Inspector-General during the course of his cross-examination. At the end of the day’s hearing, he waited until the court room emptied of all lawyers and my associates and then removed the folder from the court room and took it home. When his cross-examination continued the next day, he admitted to this fact, but claimed that he had not looked at the documents in the folder. I do not accept this evidence as it is objectively unbelievable. Why else remove the folder if not to prepare for what was to come? Mr Hartnett’s conduct in the furtive removal of the folder from the court room while he is being cross-examined was unacceptable, and he knew it was, and that he behaved in this manner only serves to strengthen my view that I cannot accept any evidence given by Mr Hartnett.

84    In the course of their investigation, the Controlling Trustees obtained from Walsh Accountants certain general ledgers for the Hartnett Service Trust for the 2016 to 2023 financial years.

85    In the covering email from Walsh Accountants which attached these documents, it was stated that “[d]ue to software changes over the years some reports aren’t available, but this is everything we could put together promptly”. I infer from this that, given more time, further material could be obtained by a trustee in bankruptcy for the financial years prior to 2016.

86    As to the material which was provided:

(1)    The general ledgers are not complete, but rather show trial balances (that is, the profit and loss account and the balance sheet as they appear in the general ledger at year end).

(2)    The amounts for ‘debtors’ in the trial balance sheets for the 2016 to 2023 years do not correspond with the amounts for ‘trade debtors’ in the balance sheets that form part of the year-end financial statements. For example, the debtors (account number 951800) in the trial balance sheet for the 2019 year is $3,523,809.69 whereas the debtors in the 2019 financial statements is $3,929,234. No satisfactory explanation was provided for these differences, and Ms Meagher had not noticed them.

(3)    The trial balances showed other amounts owing by Mr Hartnett to the Hartnett Service Trust, apart from ‘debtors’ in account number 951800 – including account number 964030 which as at 30 June 2019 was shown in the trial balance as an amount of $485,090.02. Ms Meagher indicated that she had used these amounts to come up with the “overall sum” but had not asked “what that was about”. The detailed account 964030 appears to only have been provided for the 2016 income year, but the entries suggest that this account arises from private expenses of Mr Hartnett paid by the Hartnett Service Trust including ‘School fees’ of $9,090. Under cross-examination, Mr Hartnett denied that he had used money from the Hartnett Lawyers business for his own purposes, rather than paying what was supposedly owed to the Hartnett Service Trust but this evidence suggests that he did use the funds from the Hartnett Service Trust for his own private purposes.

(4)    The service fees were allowed to accrue with no evidence of any but occasional minimal payments.

87    These facts indicate that Mr Hartnett did not consider himself under any legal obligation to make payments to the Hartnett Service Trust notwithstanding the requirement under the Service Agreement to do so, and that the Hartnett Service Trust (which did not pursue him for these fees) was of the same view. These facts also indicate that at least some of the amounts said to be owed by Mr Hartnett to the Hartnett Service Trust could relate to amounts which were not associated with the Service Agreement, such as (for example) school fees (presumably fees associated with the children of Mr Hartnett and Ms Weel), and that further investigations by a trustee in bankruptcy could reveal additional information about the true position underlying the debt said to be owed.

88    Mr Hartnett submits that the claim made by the Hartnett Service Trust is valid and that the Inspector-General’s submission to the effect that there are “substantial questions about whether the “friendly” debt was ever intended to be paid or intended to create legal relations” is without basis. Mr Hartnett relies upon the following evidence of Ms Meagher to demonstrate the existence and validity of Mr Hartnett’s debt to the Hartnett Service Trust:

(1)    Ms Meagher deposed that she spent at least 15 hours examining the Hartnett Service Trust proof of debt;

(2)    Ms Meagher deposed to obtaining a range of relevant documents to examine the proof of debt, including financial statements, the general ledgers, sample payrolls and the lease agreement;

(3)    Ms Meagher deposed to speaking to Mr Tom Walsh of Walsh Accountants, who had been Mr Hartnett’s accountant for some time and who verified both the existence of the Service Agreement and that the money owed under the Service Agreement remained outstanding;

(4)    Ms Meagher gave detailed answers in cross-examination concerning the considerable steps that she took to verify the debt;

(5)    Ms Meagher deposes to having had “all the information that a controlling trustee reasonably required to adjudicate and there was no real prospect that any further investigations would have resulted in me adjudicating differently”; and

(6)    Ms Meagher sought legal advice which confirmed her view that the claim made by the Hartnett Service Trust could be admitted.

89    However, the thrust of Ms Meagher’s evidence was to defend the attack on whether she had investigated the claim by the Hartnett Service Trust as Controlling Trustee with sufficient rigour to admit it for voting purposes. That is a very different question to whether the claimed debt is a bona fide one as a matter of fact, especially as Ms Meagher did not have all of the relevant information and, of that information which she did have, it came through Walsh Accountants, likely provided under the watchful eye of Mr Hartnett.

90    For these reasons, I consider that there is a serious question as to whether the debt claimed to be owed to the Hartnett Service Trust is a bona fide one, either in the amount claimed or at all.

91    Such a conclusion is fortified by the fact that Ms Weel was a director of Hartnett Legal Services Pty Ltd at the date of entry into the PIA, she was the person who submitted the documents to the Controlling Trustees on behalf of the Hartnett Service Trust and she caused a purported creditor to cast a decisive vote which avoided the bankruptcy of her husband. All of this in circumstances where, under the proposal, the Hartnett Service Trust would not receive a dividend. While the evidence shows that it is common for a related party creditor to vote in favour of a personal insolvency agreement but not receive a dividend, the other circumstances of this case cause this case to stand apart.

92    In circumstances where the validity of the debt said to be owed to the Hartnett Service Trust was a matter which was raised by the Inspector-General at an early stage in this proceeding, it is noteworthy that Mr Hartnett did not call Ms Weel as a witness. I infer that her evidence would not have assisted Mr Hartnett’s case.

93    In addition to a serious question as to whether the debt claimed to be owed to the Hartnett Service Trust is a bona fide one, it is plain that the interest which motivated the Hartnett Service Trust to vote for the PIA was to avoid Mr Hartnett’s bankruptcy for personal reasons unconnected to the prospect of a financial return to the trust in its capacity as a creditor.

94    That has two important consequences.

95    First, when s 222(1)(d) speaks of “the benefit to creditors of a personal insolvency agreement, it is referring to the benefit to creditors in their capacity as such and not to interests such as those arising from family relationships, friendship or emotional attachment” (emphasis added): see Etlis at [60]. The fact that the Hartnett Service Trust cast a decisive vote in favour of the proposal, in the circumstances described above, demonstrates that the PIA was not calculated to benefit the creditors generally.

96    Secondly, the Hartnett Service Trust’s decisive vote in favour of the PIA significantly undermines the “great respect” that the Court would ordinarily give to “the views of practical people of business who have come together to make a decision on the composition proposal in a properly informed way”: Hingston at [92]. This is not a case in which practical people of business weighed the risks and benefits of competing alternatives and made a judgment to accept the PIA. Rather, it is one in which a family trust, through a wife, cast a decisive vote to avoid the bankruptcy of one of its beneficiaries, being her husband.

97    Such matters provide strong support for setting aside the PIA under either or both of ss 222(1)(d) or (e) of the Bankruptcy Act.

Claim by minor creditors who voted for PIA

Overview

98    Aside from the Hartnett Service Trust, only three other creditors, each with relatively insignificant debts, voted in favour of the PIA, being:

(1)    MPB Investments (claim of $550);

(2)    McCallum-Henry (claim of $1,500); and

(3)    Walsh Accountants (claim of $1,628).

99    Mr Hartnett admits that he prepared both the Statement of Claim and Appointment of Proxy forms (including the directions on how the votes should be cast) for all of the minor creditors. Mr Hartnett also provided the completed forms for MPB Investments and McCallum-Henry by email to Ms Meagher on 10 April 2024, advising that Walsh Accountants would provide its forms in due course.

100    On 10 April 2024, Mr Dan Ryan, the solicitor acting for the Controlling Trustees, sent an email to Ms Meagher referring to the claims by MPB Investments and McCallum-Henry, stating that they are “very suspicious and require scrutinizing as they will be received by others as being solely a ploy to get the >50% number majority”. The solicitor then identified a number of questions which should be asked and documents which should be obtained in relation to these claimed debts. However, all of the answers to those questions and the documents identified by Mr Ryan are not in evidence, and it is not apparent that this information and these documents were obtained (or able to be obtained) by the Controlling Trustees. Remarkably and notwithstanding the advice of Mr Ryan, the Controlling Trustees admitted the claims of MPB Investments and McCallum-Henry.

101    For the following reasons, I have very serious concerns about the validity of the debts claimed by the minor creditors and about Mr Hartnett’s conduct relating to them leading up to the PIA being entered.

McCallum-Henry

102    In his statement of affairs dated 1 March 2024, Mr Hartnett declared a debt to “Henry House and Home” of $1,500. Mr Hartnett then prepared and caused a Statement of Claim to be submitted by McCallum-Henry dated 10 April 2024 which claimed an amount of $1,500 for “house and home services (lawn/garden)”. However, the Statement of Claim attached a “tax invoice” dated 9 April 2024 which was for an amount of $2,227.50.

103    On 17 April 2024, Ms Petra Sinon of SV Partners spoke with Mr McCallum-Henry who confirmed that he provided services to Mr Hartnett prior to the appointment of the Controlling Trustees and that the invoice had been part paid such that $1,500 was still outstanding. Ms Sinon requested a statement of account and a copy of the email by which the invoice was originally provided to Mr Hartnett. Despite that request, Mr McCallum-Henry did not provide a statement of account or the email. He did however provide an “updated” tax invoice, dated 9 April 2024, showing an “amount paid” of $727.50, leaving an outstanding balance of $1,500.

104    Mr Hartnett’s evidence is to the following effect:

(1)    Mr Hartnett retained McCallum-Henry to supply and lay new turf at the Surfers Paradise Property in December 2023 and January 2024;

(2)    Mr Hartnett was dissatisfied with McCallum-Henry’s work. Mr Hartnett informed Mr McCallum-Henry that he would not pay his invoice in full, but would pay $727.20 for the cost of materials out of “goodwill”;

(3)    McCallum-Henry issued invoice INV-0561 dated 9 April 2024 in the amount of $2,227.50;

(4)    on 10 April 2024 (that is, the same day as Mr Hartnett procured the Statement of Claim from McCallum-Henry), Mr Hartnett made part-payment to McCallum-Henry of $727.50.

105    Under cross-examination, Mr Hartnett gave somewhat bizarre evidence that he included the amount of $1,500 in his statement of affairs because it was the amount he was not prepared to pay.

106    I do not accept Mr Hartnett’s evidence. That is because, in circumstances where his evidence was different to the version of events given by Mr McCallum-Henry and it is objectively unlikely that Mr Hartnett (a solicitor) would include an amount in his statement of affairs that he was not prepared to pay, it is more likely that Mr Hartnett paid the amount of $727.50 so that the balance of the amount owing on the invoice would match what was stated in his statement of affairs on 1 March 2024.

107    The better explanation is that Mr Hartnett obtained the invoice from McCallum-Henry for the purpose of gathering a friendly creditor who would count towards the majority vote requirement for the PIA. That this is what occurred is supported by the following facts:

(1)    despite request on behalf of the Controlling Trustees, no invoice issued by McCallum-Henry which predated the appointment of the Controlling Trustees was provided. This should have raised an immediate red flag to the Controlling Trustees and this claim should have been investigated further;

(2)    Mr McCallum-Henry’s statement to SV Partners about when the part payment of that invoice occurred (being prior to the appointment of the Controlling Trustees) conflicts with the evidence of Mr Hartnett that it was paid on 10 April 2024;

(3)    the invoice which was provided by McCallum-Henry was dated one day prior to his Statement of Claim, and was issued some three months after the work was purportedly performed;

(4)    Mr Hartnett discussed this proceeding with Mr McCallum-Henry on at least two occasions, and took a call from him about his relationship breakdown. Mr Hartnett continued to engage Mr McCallum-Henry for “the next stage of the work”;

(5)    although he has been in contact with him, Mr Hartnett did not call Mr McCallum-Henry as a witness at the hearing. I infer from this that Mr McCallum-Henry would not have given evidence which was favourable to Mr Hartnett;

(6)    in circumstances where he did not own the property, Mr Hartnett did not adduce any evidence to show that he had personally paid costs and expenses associated with the Surfers Paradise Property prior to this occasion, being evidence which could have been adduced by him if it was available. For this reason, Mr Hartnett did not provide a satisfactory explanation for why the invoice was issued to him personally. (I note as an aside that this is one of the matters which was raised by the solicitor acting for the Controlling Trustee).

108    Mr Hartnett submits that McCallum-Henry is evidently a creditor for some sum and that any change in quantum would not have affected the outcome of the creditors’ meeting. However, I disagree: in fact, there is a serious question as to whether McCallum-Henry is a creditor of Mr Hartnett at all. This claim has the hallmarks of a sham.

109    Mr Hartnett also submits that there is no evidence to indicate that McCallum-Henry would have voted against the PIA and his vote in favour of it is evidence to the contrary. I reject this submission for the same reasons.

Walsh Accountants

110    On 29 February 2024, Walsh Accountants sent an email to Mr Hartnett attaching an invoice addressed only to “Hartnett Legal Services Pty Ltd”. Later that day, Mr Hartnett sent an email to Walsh Accountants asking for the invoice to be addressed to “Beau Hartnett and Hartnett Legal Services Pty Ltd”, which invoice was provided on 1 March 2024, being the same date as the date of the appointment of the Controlling Trustees.

111    Ms Meagher deposes that she was not aware of the invoice being issued solely to Hartnett Legal Services Pty Ptd.

112    Mr Hartnett deposes that he obtained advice from Walsh Accountants in his personal capacity. However, according to Mr Hartnett’s oral evidence, the entries on the invoice which are dated 22 February 2024, 26 February 2024 and 27 February 2024 related to borrowings by Mr Hartnett’s superannuation fund. The basis upon which Walsh Accountants would charge either Mr Hartnett or Hartnett Legal Services Pty Ltd for such work was not satisfactorily explained by Mr Hartnett. Mr Hartnett also deposes to a conversation which he says that he had with Mr Walsh to the effect that the invoice was issued in error; however, I place no weight on this evidence as it is hearsay evidence and Mr Walsh was not called as a witness.

113    By reason of the following matters, I find that Mr Hartnett caused Walsh Accountants to reissue the invoice and to sign the Statement of Claim and Appointment of Proxy form which Mr Harnett had prepared, including directing the vote in favour of the PIA, for the purposes of assisting Mr Hartnett to achieve the required majority for voting purposes and thereby avoid bankruptcy:

(1)    when he requested that the invoice be reissued, Mr Hartnett was aware that he intended to appoint the Controlling Trustees the next day. It is likely in all of the circumstances that Walsh Accountants were aware of this also, as they had been advising Mr Hartnett about his financial situation;

(2)    Mr Hartnett had already utilised funds from Hartnett Legal Services Pty Ltd to pay for personal expenses (if one accepts that the invoice related to work performed for him in his personal capacity). Yet he decided that in this instance he would be personally liable for the payment of this invoice on the day before he appointed the Controlling Trustees, being an invoice which I infer that he and Walsh Accountants knew that he would not pay;

(3)    having regard to the course of correspondence between Mr Hartnett and Walsh Accountants which is in evidence, it is apparent that Mr Hartnett and his related entities are important clients to Walsh Accountants, and that Walsh Accountants had an expectation of future work and therefore income from these clients;

(4)    Mr Hartnett did not call Mr Walsh as a witness at the hearing. I infer from this that Mr Walsh would not have given evidence which was favourable to Mr Hartnett.

MPB Investments

114    MPB Investments claimed an amount of $550 for “valuation of property” and attached a tax invoice issued to Mr Hartnett dated 5 February 2024. The property which was the subject of the valuation (described as the Surfers Paradise Property) was owned by Shandon International Pty Ltd and was, according to Mr Hartnett’s evidence, on a “bare trust on behalf of Ms Weel as to 99 shares and [Mr Hartnett] as to 1 share”.

115    Mr Hartnett submits that the rational explanation for him incurring the “modest” cost of obtaining a valuation for a property that he did not own is that he resides there. His evidence was to the effect that he obtained the valuation to assist with a possible refinance of the Surfers Paradise Property with a view to making an offer to settle the litigation with Mr Bell.

116    Mr Hartnett’s affidavit refers to engaging “Mr Brett Gardiner of MPB Investments Pty Ltd to obtain a valuation report”.

117    However, the valuation report which is in evidence is a valuation conducted by Herron Todd White on the instructions of Macquarie Bank (and not MPB Investments Pty Ltd). Further, the purpose of the report is stated to be “Access the Market Value for internal reporting purposes”, and not for the purpose of any loan or refinance. On its face, the valuation report appears to have been obtained by the Macquarie Bank. If that is so, one would expect that it would be the Macquarie Bank which paid for the valuation report, being a charge which it might (or might not) pass on to its customer.

118    Further, although Mr Gardiner is listed on the valuation report as the “[c]ontact”, it is not apparent for which entity Mr Gardiner is a contact. This is particularly in circumstances where the name of the mortgage broker for which Mr Gardiner worked, and with whom Mr Hartnett was corresponding to obtain a loan for the superannuation fund, is a different entity to MPB Investments. No mention is made in the valuation report of MPB Investments.

119    According to a file note, Ms Sinon of SV Partners spoke with Mr Gardiner on 16 April 2024 and he confirmed that MPB Investments is a mortgage broker and not a valuation business, that MPB Investments paid the cost of obtaining the valuation report, and that Mr Hartnett was expected to refund it.

120    In circumstances where the valuation report raised so many questions, as identified above, further investigation was required before this debt was admitted for the purposes of voting in relation to the PIA. For example, there is no evidence that MPB Investments in fact paid for the valuation report (such as a tax invoice issued to MPB Investments). There is also no letter of engagement of MPB Investments, no contemporaneous file notes in relation to the alleged refinancing of the Surfers Paradise Property to pay the judgment debt owing to Mr Bell, or letters or emails between MPB Investments and Mr Hartnett referring to the valuation, or attaching it, or otherwise supporting Mr Hartnett’s version of events.

121    The lack of such evidence, either given to the Controlling Trustees or adduced by Mr Hartnett in this proceeding, and the inconsistencies and unanswered questions arising from the valuation report itself, leads to the conclusion (and I find) that Mr Hartnett caused Mr Gardiner to issue the invoice for the purpose of gathering friendly creditors who would count towards the majority vote requirement, and that there is a serious question concerning the validity of the invoice issued by MPB Investments. Such a conclusion is supported by the following additional matters:

(1)    Mr Hartnett was in an ongoing relationship with Mr Gardiner, including engaging him with respect to finance for superannuation transactions, such that (like Walsh Accountants) Mr Gardiner had an expectation of future work and therefore income from Mr Hartnett;

(2)    the valuation report is dated 15 December 2023 but the invoice was issued on 5 February 2024, after Mr Hartnett had obtained advice from SV Partners about a possible appointment under Part X in December 2023 and January 2024, and shortly before he lodged his statement of affairs on 1 March 2024;

(3)    Mr Hartnett prepared the Statement of Claim and Appointment of Proxy form that was submitted by MPB Investments;

(4)    Mr Gardiner was not called as a witness to give evidence in support of Mr Hartnett’s version of events. I infer from this that Mr Gardiner would not have given evidence which was favourable to Mr Hartnett.

Conclusion in relation to minor creditors

122    For these reasons, the invoices of the minor creditors issued to Mr Hartnett personally, and their respective votes in favour of the PIA, were each obtained by Mr Hartnett for the purpose of obtaining an outcome which would enable him to avoid bankruptcy but also avoid paying the debt owed by him to Mr Bell.

123    Such conduct constitutes an abuse of the processes contained in the Bankruptcy Act.

124    A finding that there has been such abuse constitutes a compelling reason to be satisfied that the PIA is unreasonable or not calculated to benefit the creditors generally within the meaning of s 222(1)(d) or, at the least, that there is another reason the agreement ought to be set aside (s 222(1)(e)).

125    That is so irrespective of whether the claim by Awarak was a genuine one, either in the amount admitted by the Controlling Trustees or at all. In other words, even if Awarak had not voted against the PIA, the conclusions which I have reached would remain unchanged.

Prospect of greater return through bankruptcy

126    As at 26 March 2024, there were:

(1)    16 private companies of which Mr Hartnett was a current or former director;

(2)    12 companies of which Mr Hartnett was a former shareholder (having disposed of his shareholding in ten of these in February or March 2024);

(3)    13 trusts of which Mr Hartnett was a beneficiary; and

(4)    one unit trust of which Mr Hartnett was a current director of the trustee company.

127    The evidence shows that the following properties are currently held by entities with which Mr Hartnett is associated:

128    Mr Hartnett submits that the Controlling Trustees undertook a thorough analysis of Mr Hartnett and his associated entities which did not disclose anything more than “idle wondering”, and that Ms Meagher knew that Mr Hartnett was a “supremely well-structured individual” when she undertook her investigations. Mr Hartnett relies on Ms Meagher’s evidence that she was:

not able to identify any further investigations which could have been reasonably undertaken during the time allowed which had any real potential to yield any further recoveries in a bankruptcy.

129    However, this statement must be read in context and by reference to the qualifying factor “during the time allowed”. That is a reference to the fact that the Controlling Trustees undertook their investigations, and formed their recommendations for a particular purpose, in a period of less than four weeks between their appointment on 1 March 2024 and the Creditors’ Report on 28 March 2024.

130    Mr Hartnett also relies on the fact that Ms Meagher was the only expert called in this case, and is a highly experienced accountant, insolvency practitioner and trustee. Mr Hartnett distinguishes Moss, where the applicant had an independent expert witness who gave evidence about steps that could have been taken to yield a greater return. He submits that Ms Meagher’s evidence that the PIA was a better outcome than a bankruptcy remained consistent throughout the proceeding, was not seriously challenged and should be accepted.

131    However, as is plain from her affidavit, Ms Meagher’s opinions were premised to a large extent on the information provided to her by Mr Hartnett and Ms Weel. As to this, Mr Hartnett failed to disclose all relevant information to the Controlling Trustees which necessarily affects the weight to be attached to the opinions expressed by Ms Meagher in this proceeding, and by the Controlling Trustees in the Creditors’ Report. For example, the Controlling Trustees were, at the time of publishing their Report, unaware of the purchase of 15/136 Old Burleigh Road Broadbeach. Mr Hartnett did not disclose that purchase to the Controlling Trustees.

132    Further, the Creditors’ Report stated that, in the last five years, Mr Hartnett had made payments to his superannuation fund of $58,353.85, but that no bank statements showing deposits of those amounts had been identified. That raises the prospect that in his statement of affairs, Mr Hartnett failed to disclose current or previous bank accounts from which those payments were made, and all of the assets of the superannuation fund. If those bank statements were located, they may reveal additional assets available in a bankruptcy.

133    Further and as already observed, the evidence shows that Mr Hartnett oversaw the provision of information by Walsh Accountants to the Controlling Trustees. For example, Mr Hartnett drafted information to be inserted into a table which was then provided to the Controlling Trustees. Ms Meagher admitted that she was not aware that he had done this. In addition to drafting documents to be provided by Walsh Accountants to the Controlling Trustees, Mr Hartnett repeatedly asked to speak to the person at Walsh Accountants before that person then spoke to the Controlling Trustees, as is shown by emails exchanged between Mr Hartnett and Walsh Accountants. Such conduct tends to indicate that Mr Hartnett was not being transparent with his financial affairs in his dealings with the Controlling Trustees; if he was, there would be no need to so closely control the interactions between his accountants and the Controlling Trustees.

134    In these circumstances, there is a compelling inference that other information was not disclosed by Mr Hartnett to the Controlling Trustees in addition to that identified above.

135    For these reasons, I place little weight on Ms Meagher’s opinions and those of the Controlling Trustees in the Creditors’ Report. In any event, for the reasons given above, I consider that four weeks was not sufficient time to investigate affairs as complex as those of Mr Hartnett and that the circumstances call for a greater opportunity to inquire into Mr Hartnett’s affairs.

136    Mr Hartnett submits that, even if Ms Meagher was wrong or overlooked something in her investigations, the Inspector-General has already enjoyed the “opportunity to inquire into the debtor’s affairs” by reason of its involvement in Mr Hartnett’s estate during the PIA process, and by its further extensive investigations in these proceedings by use of the coercive powers of the Court. I disagree. The conduct of the Inspector-General to date has been directed at obtaining the relief sought by it, and its application under s 222(1) was the subject of vigorous opposition by Mr Hartnett. The Inspector-General was not engaged in an overarching investigation of the entirety of Mr Hartnett’s affairs including the extent to which Mr Hartnett has assets beyond those identified by the Controlling Trustees.

137    Mr Hartnett also relies on the lack of expert evidence adduced by the Inspector-General which demonstrates that there will be a positive financial benefit to creditors if the PIA is set aside and a sequestration order made. However, it is not essential for expert evidence to be adduced by an applicant seeking relief under s 222(1) as it is sufficient if there is a “prospect or possibility of economic advantage to creditors”: Moss at [81].

138    A prospect or possibility of economic advantage to creditors exists in this case having regard to the assets owned by the entities and trusts associated with Mr Hartnett. The existence of such assets begs the obvious question: how is it that these entities and trusts have accumulated assets worth many millions of dollars while he apparently has no significant assets of his own? In circumstances where Mr Hartnett practised as a solicitor in his individual capacity (and so was earning fees in his own name) for about two decades from 2001, further investigation is needed as to whether Mr Hartnett has “parked” assets within, or transferred assets to, these trusts for the purposes of shielding himself from paying his creditors and, if so, whether there have been transfers of assets within the meaning of, for example, ss 121(1) and 128B of the Bankruptcy Act.

139    The Inspector-General also identified several specific transactions that it argues should have been further investigated by the Controlling Trustees and which require investigation by a trustee in bankruptcy. It is not necessary to address these transactions given the findings made above.

Prejudice to Mr Hartnett

140    Mr Hartnett submits that setting aside the PIA would be prejudicial in circumstances where payments have been made under the PIA, none of the creditors have offered to disgorge the benefits they have received, and the sum of $80,000 paid into the PIA by a separate entity will be unrecoverable. Mr Hartnett submits that it would be “manifestly unfair and unreasonable that Mr Hartnett, the related trust and the contributor of the funds will lose the entirety of anything under this personal services agreement” while bearing all the consequent costs. This, he submits, would allow creditors who proved to get “two bites at the cherry”.

141    Section 224 of the Bankruptcy Act provides that if a personal insolvency agreement is set aside by the Court or terminated, “[a]ll payments made, acts and things done and transactions entered into in good faith under, or for the purposes of, the agreement” before a person has notice of the order of the Court or of the termination of the agreement are “valid and effectual and are not liable to be set aside by the trustee of a later personal insolvency agreement or in a subsequent bankruptcy”.

142    However, if that outcome causes prejudice in a particular case, a debtor can cross-apply for an ancillary order under s 222(8) of the Bankruptcy Act, which enables the Court to make such other orders as it sees fit, such as any orders which are necessary to place the parties in the position in which they would have been had they not entered into the agreement. Mr Hartnett has not sought such an order in this case.

143    Mr Hartnett also submits that a sequestration order will cause very significant prejudice and unfairness to him in circumstances where he first handed over control of his affairs almost one year ago, but could have a bankruptcy operate for three more years from the date of any order. He submits that the estate would then have to be administered at very great cost, as against which this case and the previous many months of investigation and this trial have discovered not even the prospect of one other asset likely to produce one dollar for the costs of the administration, let alone for the creditors. He submits that, given the inclusion of the Hartnett Service Trust as the largest creditor, even if there were some asset or recoveries, after the trustee’s costs and the costs of this action, any distribution amongst the creditors would be nil.

144    However, having regard to Mr Hartnett’s abuse of the processes which resulted in the PIA, any prejudice to Mr Hartnett or any associated entity which contributed the $80,000 is of their own making and does not militate against setting aside the PIA or making a sequestration order.

145    Further, having regard to the fact that the Controlling Trustees did not have complete information to form the views which they formed in the Creditors’ Report (with the consequence that the creditors also did not have complete information on which to base their decision), the overall complexity of Mr Hartnett’s financial affairs generally, the serious doubts about the validity of the debts claimed to be owed to the Hartnett Service Trust and the minor creditors, and the fact that the proposed trustee, Mr Gavin King, has indicated that he is prepared to act as trustee of Mr Hartnett’s estate on a speculative basis, I do not accept that the distribution to creditors in a bankruptcy would be nil.

146    Finally, while I accept that the fact that the transactions contemplated by the PIA have been completed is a factor against setting it aside, this fact does not overcome the more compelling factors which are in favour of setting the PIA aside, as identified above.

Conclusion

147    For those reasons, the PIA will be set aside on the ground that it is unreasonable and not calculated to benefit creditors generally within the meaning of s 222(1)(d) and on the ground that, in all of the circumstances of this case, there is another reason that it should be set aside within the meaning of s 222(1)(e). A sequestration order will also be made along with the ancillary orders sought by Mr Bell, with minor variations.

148    As Mr Bell’s application is brought under s 222(10), ss 43(1), 44, 47, 52(1) and 52(2) and Part XIA do not apply: see s 222(11) of the Bankruptcy Act. In particular, although the making of the application for the sequestration order under s 222(10) is taken to be equivalent to the presentation of a creditor’s petition against Mr Hartnett, it is not necessary for the act of bankruptcy on which the petition is founded to have been committed within six months before the presentation of the petition (or, in this case, the application under s 222(10) is brought).

149    Mr Hartnett was served with a bankruptcy notice on 22 December 2023 and no payment was received. Accordingly, Mr Hartnett committed an act of bankruptcy on 12 January 2024: see s 40(1)(g) of the Bankruptcy Act. Mr Hartnett did not dispute this. Further acts of bankruptcy occurred on 1 March 2024 and 23 April 2024: see ss 40(1)(i) and 40(1)(j) of the Bankruptcy Act. A further act of bankruptcy will occur when an order is made in this proceeding setting aside the PIA: see s 40(1)(m) of the Bankruptcy Act.

150    Mr Bell seeks an order that the date of bankruptcy be the earliest of these dates, namely 12 January 2024. Mr Hartnett appeared to accept that this date could be nominated, but submits that the nomination of this date will result in prejudice to him, being a date “far earlier than would normally be the case under the Act”. This submission has some force. However, Mr Hartnett did not nominate an alternative date of bankruptcy.

151    None of the dates on which any of the acts of bankruptcy occurred in this case could be said to be within the period of six months immediately before the date on which the application for the sequestration order was made within s 115(1B) of the Bankruptcy Act. In this situation, it is appropriate to nominate 19 December 2024 as the date of bankruptcy, being the date on which the application for the sequestration order was filed by Mr Bell. Such an order was made by White J in a similar situation, which order was upheld in Mouglalis v Bendigo and Adelaide Bank Ltd (2017) 250 FCR 92; [2017] FCAFC 47 per Besanko J at [8], per Logan J at [44] and per Charlesworth J at [64]–[65].

Costs order and findings sought by Controlling Trustees

152    By the Statement of Claim, the Inspector-General made allegations concerning the sufficiency of the work performed by the Controlling Trustees, and included in the prayer for relief an order that (inter alia) the Controlling Trustees pay costs. While it was a necessary part of the Inspector-General’s case that the investigations by the Controlling Trustees were not sufficient (because if they were, this would tell against the relief being granted) and although I have made findings that aspects of the investigations by the Controlling Trustees were inadequate, it was not necessary to seek costs against the Controlling Trustees as part of the prayer for relief.

153    At the conclusion of the second last day of trial, the Inspector-General decided not to press its claim for costs and informed the Controlling Trustees. During the closing submissions, the claim for costs was abandoned formally and the Inspector-General also identified allegations in the Statement of Claim which were not pressed.

154    The Controlling Trustees seek an order that their costs from 16 January 2025 be paid by the Inspector-General, being the date on which certain correspondence was exchanged. Notably, the correspondence sent on behalf of the Inspector-General did not abandon the claim for costs; rather, at best for the Inspector-General, it appeared to suggest that it might not be pressed.

155    In my view and subject to one qualification, the order sought by the Controlling Trustees is an appropriate one in circumstances where the Inspector-General only abandoned the claim for costs on the second last day of trial. However, the costs to be paid from 16 January 2025 should be limited to those costs which were thrown away by the costs order being sought against the Controlling Trustees and then abandoned. Such a limitation on the costs order is an appropriate one as I consider that there is a real likelihood that the Controlling Trustees would have had legal representation in this proceeding in any event.

156    The Controlling Trustees also seek certain positive findings (contained in a nine page table) and complain that a number of matters were not put to Ms Meagher under cross-examination. However, some of the findings which are sought were not pleaded (and so are not facts in issue in this proceeding) and many of the findings either have no bearing on the relief sought by the Inspector-General and Mr Bell or are contrary to findings which have been made, as is apparent from these reasons. I therefore decline to make the findings sought or to delay delivery of this judgment to engage in the task of determining whether such findings should be made. Further, in circumstances where the case has proceeded on pleadings and affidavit evidence, it was not necessary for the case advanced by the Inspector-General to be put to Ms Meagher when she was under cross-examination.

Orders and disposition

157    The following orders will be made:

(1)    Pursuant to section 222(1) of the Bankruptcy Act 1966 (Cth), the personal insolvency agreement of the First Respondent dated 23 April 2024 is set aside.

(2)    Pursuant to section 222(10) of the Bankruptcy Act 1966 (Cth), the estate of Beau Timothy John Hartnett is sequestrated, with the effective date of bankruptcy being 19 December 2024.

(3)    Mr Gavin King, registered trustee in bankruptcy, is appointed trustee over the estate of Beau Timothy John Hartnett.

(4)    The Applicant pay the Second and Third Respondents’ costs after 16 January 2025 which were thrown away by the claim for costs made against the Second and Third Respondents as contained in the Application filed on 29 August 2024.

(5)    The Applicant/First Cross-Respondent’s and Fourth Respondent/Cross-Claimant’s costs are to be paid from the estate of Beau Timothy John Hartnett in accordance with the Bankruptcy Act 1966 (Cth).

(6)    This order is taken to be entered once it has been authenticated in accordance with rule 39.35 of the Federal Court Rules 2011 (Cth).

158    In anticipation of an application by Mr Hartnett to stay the sequestration order pending any appeal, I observe that the Federal Court does not have that power: see Ritson v Commissioner of Police (NSW) [2021] FCAFC 208 (Allsop CJ, Lee and Downes JJ) at [64]–[65].

Associate:

Dated:    24 February 2025

SCHEDULE OF PARTIES