+ Sequestration Order and Section 221

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In Holbrook v Muntz [2010] FMCA 105, heard 19 February 2010, the Court considered the operation of section 221(1) of the Bankruptcy Act ("the Act") in the context of section 204(1) of the Act.

Under section 221(1), the Court may, on the application of a Controlling Trustee, make a sequestration order against the estate of a debtor if the creditors have not within four months from the date of the Controlling Trustee's appointment, passed one of the special resolutions referred to in subsection 204(1).

Section 204(1) states that the creditors may (i) resolve that the debtor's property be no longer subject to control under "this Division" or (ii) require the debtor to execute a personal insolvency agreement or (iii) require the debtor to present a debtor's petition within 7 days from the date on which the resolution was passed.

At the last of the creditors' meetings falling within the four month period, the ATO as sole creditor, failed to pass any of the resolutions contemplated by section 204(1).

The trustee then applied to the Court under section 221(1) for an order sequestrating the estate of Mr Muntz. He also sought an order appointing himself as trustee of Mr Muntz's bankrupt estate.

The evidence indicated that in June 2007 Mr Muntz had borrowed $500,000 by mortgaging his interest in his family home in Perth and then from that sum, contributed $490,000 into a superannuation fund by a lump sum contribution on 28 June 2007. The Court noted that the superannuation payment of $490,000 might be voidable under section 128B of the Act as a superannuation contribution made to defeat creditors.

The Court also noted that when the mortgage was taken out and the superannuation contribution made, Mr Muntz was aware of the ATO claim against him and that the claim was the subject of an AAT test case which had already been listed for hearing. The hearing took place some months after June 2007.

The Court concluded that by making the superannuation contribution when he did, Mr Muntz put himself in the position where he no longer had the means to settle with the ATO for the amount owing. In the exercise of the discretion as to whether to issue a sequestration order, Mr Muntz's conduct, in so far as it diminished his ability to pay the amount owing to the ATO by reason of the payment made for his own benefit, was taken by the Court to be conduct which weighed heavily against him and in favour of the issuance of the sequestration order. That was particularly so, concluded the Court, where the issuance of the sequestration order might result in the recovery of some of those monies for the benefit of the creditor.

Despite the above evidence, Mr Muntz argued in opposing the application that there was no public morality issue as there was only one creditor. However, the Court noted that the creditor was charged with the collection of taxation revenue for the Commonwealth and given that the processes under section 204 of the Act had not yielded an outcome, the filing of an application for a sequestration order was one possible outcome.

Another possible outcome was the signing of a further authority under section 188 and a further round of creditors meeting with the ATO. The Court noted that there was nothing to indicate that such a process would result in a resolution of the matter different to that which had occurred as a result of the creditors meetings already held.

Mr Muntz then asserted that he would lose his registration as a tax agent and his public practising certificate as an accountant if he was made bankrupt, with consequential loss of income. The Court had little sympathy for this argument and noted that there was no evidence that the loss of income would ipso facto occur, and even assuming it did occur, the Court characterised it as a normal consequence of such a person being made a bankrupt.

Mr Muntz finally argued that the Controlling Trustee had made the application for no other reason than to secure the payment of his fees as a preferred creditor and therefore would have a conflict of interest if he became trustee of the bankrupt estate.

In the Court's view, there was no conflict because a) the application for a sequestration order was made by the applicant in his capacity as Controlling Trustee not as creditor; b) the Controlling Trustee's fees had been fixed at creditors meetings and were not susceptible to further increase because the Controlling Trustee's authority ended 4 months after it was signed (section 189(1A)(d) of the Act) and there would be no further creditors meetings; c) the Controlling Trustee's fees would be afforded the priority dictated by section 109(1)(b) of the Act and are not susceptible to amendment by the trustee in bankruptcy; d) the sole creditor, the ATO, did not object to the appointment of the Controlling Trustee as trustee in bankruptcy; and e) no further payment of the Controlling Trustee's fees was required personally from Mr Muntz.

The Court held that even if there were a conflict, the advantages of appointing the same person as Controlling Trustee outweighed any detriment caused by any possible conflict, because there would be a general saving to creditors by appointing a person who has already spent hours investigating the affairs of Mr Muntz.

In the circumstances, there was no impediment to the appointment of the Controlling Trustee as the trustee in bankruptcy. Indeed, the appointment was, in the Court's view, an entirely sensible one from both:

• a practical viewpoint, given the Controlling Trustee's knowledge of Mr Muntzss affairs; and

• a costs viewpoint, given that there will inevitably be costs savings by reason of the Controlling Trusteess appointment as trustee in bankruptcy because of his knowledge of the affairs of Mr Muntz and the reports already having been prepared in his capacity as Controlling Trustee in relation to Mr Muntzss affairs. The Court averred to part of the purpose or intent of Part X of the Act as being to reduce costs and fees.

There was therefore an order that the Controlling Trustee be appointed the trustee in bankruptcy of Mr Muntz's estate.

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