Bankruptcy proposal of Wikeley

[2014] NZHC 3145

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-1164 [2014] NZHC 3145

IN THE MATTER

of the Insolvency Act 2006

AND

A Proposal under Part 5, Subpart 2 of the Act made by Kenneth David Wikeley an Insolvent

BETWEEN

The bankruptcy proposal of K D WIKELEY

Insolvent

AND

KENNETH DAVID WIKELEY

Hearing:	27 November 2014
Appearances:	Mr Taylor for provisional trustee Mr Foote for trustees for the Genset Trust
Judgment:	10 December 2014

JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE [Costs against Provisional Trustee]

This judgment was delivered by me on

10.12.14 at  3 pm, pursuant to

Rule 11.5  of the High Court Rules.

Registrar/Deputy Registrar

Date……………

The bankruptcy proposal of K D WIKELEY [2014] NZHC 3145 [10 December 2014]

This costs application arises out of a proposal which was made by Mr K D Wikeley (the debtor) for approval of a proposal to creditors under Part 5 Subpart 2 of the Insolvency Act 2006 (“the Act”).  The parties who are seeking costs are the trustees of the Genset Trust.  They seek costs against Mr J P Meltzer who, as the provisional trustee, filed an application for approval of the proposal under s 333(1)(a) of the Act in or about June 2014.

[1]      Mr  Meltzer,  as  the  provisional  trustee,  had  convened  a  meeting  of  the creditors.  The meeting of creditors was held on 4 June 2014.

[2]      The trustees of the Genset Trust voted against the proposal at the meeting. Nonetheless the proposal was accepted by a majority of creditors.   Subsequently, though, the trustees of the Genset Trust appealed against Mr Meltzer’s decision to admit three claims as part of the proposal process.  The trustees then withdrew their appeal in relation to one of the claims.  In  a  judgment dated 30 October 2014,

Associate Judge Osborne allowed the appeal.1

[3]      As a result of the appeal disallowing the votes of the two creditors, the required majority of creditors to support the proposal could not be achieved and Mr Meltzer gave notice that he intended to withdraw the application to the High Court for approval.  He has since made that application and the proceeding has been withdrawn.  Mr Wikeley has since been adjudicated bankrupt.

[4]      The trustees of the Genset Trust seek costs on the proceedings in the High Court against the provisional trustee.   Mr Meltzer by his counsel, Mr Taylor, has made submissions opposing the application.    Mr Taylor submits, in summary, that because of the special role that provisional trustees fulfil, they should not be visited with  costs  orders,  at  least  where  there  has  been  no  misconduct  on  their  part. Mr Foote  submitted that applications for costs against provisional trustees  should be treated no differently from any other cost application.   He submits that if the provisional trustee applies for confirmation of a proposal and is unsuccessful, he or

she should be liable for costs.   Persons who offer themselves for appointment as

1 Re Wikeley [2014] NZHC 2677.

provisional trustees may potentially find themselves in the same position as liquidators who are unsuccessful in litigation, in that they, too, may be exposed to applications for costs orders on the part of the successful party.

[5] The process in which the provisional trustee is involved falls into two parts.  The first is concerned with arranging a meeting of creditors and conducting a poll of the creditors to ascertain whether there is the required majority by value and numbers in support  of  the  proposal  which  the  debtor  wishes  to  put.    Assuming  that  the provisional trustee is satisfied on the last point, he or she will then make an application to the court for approval of the compromise.  If, as happened here, the provisional trustee has taken a mistaken view about the extent of the creditor support for the proposal when carrying out the responsibilities in the first phase, affected parties can apply to the High Court to review whether or not a particular creditor ought to have been accorded the right to vote.   But that does not excuse the provisional trustee from making a decision in the first place and, if the outcome is an affirmative, to apply to the Court for approval of the proposal.

[6]      Associate Judge Osborne who heard the appeal against the decision to admit the claims of the creditors concluded that inadequate detail had been provided by the creditors whose debts were under challenge and therefore the debts had not been substantially prove and the creditors in question ought not to have been accorded

voting rights.2

[7]      The Judge made orders for costs against the debtor and one of the creditors who actively opposed the appeal.   No costs were ordered against the provisional trustee.

[8]      In general, when the Court is considering making costs orders, a principle which is required to be taken into account is that the party who fails with respect to a proceeding or an interlocutory application should pay costs to the party who succeeds.3     The courts do not generally conduct a review of why the party was

unsuccessful: it is the fact of failure alone which is relevant.

2      At [44] and [60].

3      HCR r 14.2(a).

[9]      The conduct of the party in question and the reasonableness of their actions may be taken into account in a later rule, r 14.6, which is concerned with increased costs and indemnity costs.  Those matters are concerned with the quantum of costs rather than the incidence of costs.

[10]     Therefore the reasons why the provisional trustee in this case failed are not, in terms of r 14.2(a), of direct relevance.

[11]     While it is correct that in strict analysis this is a case where the provisional trustee commenced proceedings, the fact is that once a required majority votes to adopt a proposal, the provisional trustee is legally required to make an application. That is a factor which I view as having some weight when considering the present application.   Therefore categorising the provisional trustee as the initiator of the proceedings only tells part of the story.

[12]     In my view, the type of considerations that guide the court when considering applications for costs against liquidators, provide an analogy which ought to guide the court in considering costs orders against provisional trustees.  That is to say, I consider that just as the courts have in the case of liquidators identified policy reasons why liquidators should be immune from the making of costs orders, the same considerations apply here.   To transplant the words of Oliver J Re Wilson Lovatt &  Sons Ltd, a case involving a liquidation, to cases involving provisional

trustees: 4

I can quite see that there may be very powerful reasons of policy for a rule that a liquidator, when carrying out his functions and thus subjecting himself to the possibility of proceedings against him by parties who are discontented with the way in which he has carried out those functions, must be entitled to defend himself without being subjected to the risk of having costs awarded against him personally, because of course he cannot protect himself against claims being made. Unless there were some such rule it might be very difficult to get persons to take on the heavy responsibility of the liquidation of companies. It seems to me that it is quite a different matter where the liquidator himself takes it on himself to institute proceedings, whether they be proceedings in the winding-up or otherwise.

[13]     While the judgment referred to circumstances in which the liquidator him or herself  institutes  proceedings  as  presenting  different  considerations,  I  do  no

4      Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 (Ch) at 285 per Oliver J.

apprehend that the Judge was adverting to what are to be regarded as the exceptional circumstances which apply in cases where the relevant person is required by law to bring the proceedings.

[14]     As with liquidators, I consider that unless the discretion to order costs is restricted in circumstances of the kind under consideration in this case, the result will be that it might be difficult to get persons to take on the responsibility of provisional trustee.   I would accept that the grounds for exempting provisional trustees from costs orders would not reasonably apply to cases where there has been misconduct on the part of the provisional trustee.

[15]     Overall,  I  do  not  consider  that  it  would  be  a  salutary  development  if provisional trustees carried out their obligations against the background that if they made a mistake in the process of polling the creditors, they could face an application for costs on the proceedings which they subsequently filed in the court for confirmation of the proposal.  I am satisfied that there has been no misconduct on the part of Mr Meltzer in this case.

[16]     In Meltzer v Parker Street Holdings, Associate Judge Bell came to a similar decision. He stated:5

It may be useful if I state my general approach on costs applications in ordinary applications for approval of proposals.   In the ordinary course of events, a trustee  will  ensure  that  the  requirements  of  the  Insolvency Act  have  been complied with and will not present an application to the Court unless there has been compliance. But once the requirements of the Act have been met and the requisite majorities have been satisfied, then a trustee is duty bound to present an application to the Court for the Court's approval. In carrying out that duty, the trustee ought not to be exposed to the risk of the costs except in cases of misconduct. In the ordinary course of events a trustee should not be exposed to costs whatever the outcome of an approval application. In this case there is nothing to suggest that there has been any misconduct by trustees.

[17]     For all of these reasons I decline to order costs against the provisional trustee in this case and the application is therefore dismissed.

5      Meltzer v Parker Street Holdings HC Auckland CIV-2010-404-8293, 28 July 2011 at [8].

J P Doogue

Associate Judge