Court orders personal insolvency agreement be set aside

03 July 2009

---

The recent decision of For the Good Times Pty Ltd v Boyle [2009] FMCA 512 considered whether the court should set aside a personal insolvency agreement made under Part X of the Bankruptcy Act 1966 (Cth) (Act).

The facts

Mr Boyle owed For The Good Times Pty Ltd (FTGT) more than $2 million. Mr Boyle subsequently conceded that he was insolvent and owed his creditors perhaps as much as $28 million. Mr Boyle proposed that his affairs be dealt with by way of a personal insolvency agreement pursuant to Part X of the Act. Despite Mr Boyle’s controlling trustee’s recommendation to the contrary, the requisite majority of creditors accepted the agreement pursuant to which Mr Boyle was to contribute $40,000. Creditors’ meetings subsequently approved payments to Mr Boyle’s controlling trustee leaving virtually nothing to be distributed to Mr Boyle’s creditors.

Setting aside a personal insolvency agreement

FTGT applied to the court to have the personal insolvency agreement set aside and for a sequestration order against Mr Boyle’s estate.

Section 222 of the Act sets out the circumstances in which a court may set aside a personal insolvency agreement.

In this case FTGT relied upon the following grounds:

• the terms of the agreement are unreasonable or are not calculated to benefit the creditors generally (section 222(1)(d));
• for any other reason the agreement ought to be set aside (section 222(1)(e));
• the debtor has omitted a material particular from the statement of the debtor’s affairs given under section 188(2C) or (2D) of the Act (section 222(5)(e)(i)); and
• the debtor has included an incorrect and material particular in the statement of affairs given under section 188(2C) or (2D) of the Act (section 222(5)(e)(ii)).

The Act provides that the court must not make an order under section 222(5) unless:

• it is satisfied that it would be in the interests of the creditors to do so (section 222(6)); and
• the application for the order is made before all the obligations that the personal insolvency agreement created have been discharged (section 222(7)).

The decision

Federal Magistrate Smith ordered the personal insolvency agreement be set aside, that a sequestration order be made against Mr Boyle’s estate and appointed a new trustee to administer Mr Boyle’s estate.

Federal Magistrate Smith found that the terms of the personal insolvency agreement were not calculated to benefit the creditors generally. Important to this conclusion was Mr Boyle’s trustee’s recommendation to creditors that they could expect no monetary benefit from the agreement and the fact that the trustee was the only person who would benefit from the agreement. Federal Magistrate Smith concluded that the creditors suffered a loss of benefits with no compensating advantage pursuant to the agreement by which Mr Boyle avoided bankruptcy.

Federal Magistrate Smith also found that a number of grounds for setting aside the agreement, on the basis that Mr Boyle had omitted material particulars from his statement of affairs, had been established. One such example was the omission of substantial creditors from the statement of affairs.

Given the above findings, it was not necessary for Federal Magistrate Smith to consider whether the agreement should be set aside for any other reason.

Significance

This case serves as a reminder of the court’s ability to set aside personal insolvency agreements in certain circumstances.

---

This article provides information about topical legal issues.
Information contained in this article is intended as an introduction only and should not be relied on in place of legal advice.