In New Age Constructions (NSW) Pty Ltd v Etlis, in the matter of Etlis [2013] FCA 884, an unsecured creditor applied to set aside a Personal Insolvency Agreement (PIA) and also sought a sequestration order against the debtor’s estate.  The Federal Court considered whether the terms of the PIA were unreasonable or not calculated to benefit creditors generally.

BACKGROUND

The applicant, New Age Constructions (NSW) Pty Ltd, obtained a judgment debt against the respondent, Mrs Etlis.

On 27 September 2012, New Age Constructions filed a creditor’s petition in the Federal Magistrates Court of Australia (now the Federal Circuit Court of Australia) seeking a sequestration order against Mrs Etlis’ estate.

On 13 November 2012, Mrs Etlis appointed a controlling trustee of her property under s 188(1) of the Bankruptcy Act 1966 (Cth). Mrs Etlis lodged a proposal for dealing with her affairs together with a statement of affairs.  The statement of affairs outlined Mrs Etlis position as at 12 November 2012 including details of her bank accounts, superannuation and property.

Mrs Etlis’ proposal was to procure $100,000 to be paid to the trustee of the PIA and distribute it in accordance with its terms, which included:

  • On completion of the PIA, Mrs Etlis would be released from all provable debts.
  • Under the PIA, Mrs Etlis’ income and property would not be made available to pay her debts.
  • The PIA also excluded ss 120, 121 and 122 of the Bankruptcy Act dealing with the avoidance of undervalued transactions, transfers to defeat creditors and preferences respectively.

On the basis of her statement of affairs, the Trustee recommended the proposal to creditors.  The Trustee estimated that administration of Mrs Etlis’ estate in bankruptcy would give creditors 1.77 cents for every dollar owed, whereas the proposal would give creditors 2.92 cents.

On 17 December 2012, at a meeting of creditors, the majority resolved that Mrs Etlis execute a PIA giving effect to the proposal.

New Age Constructions submitted:

  • that the proposal’s estimated return of 2.92 cents was unreasonable and delivered no practical benefit to creditors considering that the total value of claims exceeded $1.8 million and that Mrs Etlis’ properties and income had not been offered to satisfy her liabilities;
  • that there was reason to doubt whether certain creditors could genuinely be characterised as creditors, pointing to five creditors who were relatives, or associated with Mrs Etlis’ relatives; and
  • that further investigation was warranted in relation to Mrs Etlis’ true state of affairs.

In the course of the proceedings, omissions and inconsistencies were revealed in Mrs Etlis’ true financial affairs.

THE DECISION

The Court ordered that the PIA be set aside and made a sequestration order against Mrs Etlis’ estate. The Court’s reasoning was based on:

  • the PIA offering creditors a suspiciously small dividend;
  • the PIA not offering Mrs Etlis’ own assets or income in satisfaction of her liabilities;
  • the terms of the PIA being unreasonable;
  • the inconsistencies in Mrs Etlis’ true financial position; and
  • the need for further investigation.

COMMENTARY

It is imperative that debtors fully disclose their true financial position, to place creditors in the best position to determine whether a PIA serves their best interests.  Courts are also becoming increasingly wary of very small dividends in proposals for Personal Insolvency Agreements and Deeds of Company Arrangements.