Blackmore HC Christchurch CIV-2010-409-001667

[2011] NZHC 1771

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2010-409-001667

UNDER  the Insolvency Act 2006

IN THE MATTER OF     of a proposal by an insolvent GRANT MARSLAND BLACKMORE

CIV-2010-409-001668

AND UNDER                 the Insolvency Act 2006

IN THE MATTER OF     of a proposal by an insolvent JAMES ARTHUR FRY

Hearing:         11 October 2011

(Heard at Christchurch)

Appearances: M J Wallace for Applicants

D M Salmon for Carter Holt Harvey Limited, a creditor

Judgment:      5 December 2011

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

as to  applications for approval of Insolvency Proposals

Introduction

[1]      Grant Marsland Blackmore and James Arthur Fry are insolvent and seek approval of proposals under Part 5 Insolvency Act 2006.   The insolvents say that they gave proper notice of meetings to consider their proposals; that their proposals were accepted by the required majorities of creditors at duly convened meetings; and

that the proposals are advantageous to their creditors.

BLACKMORE & FRY HC CHCH CIV-2010-409-001667 & CIV-2010-409-001668 5 December 2011

[2]      The  insolvents  have  adduced  evidence  in  support  of  their  applications including from creditors who continue to support the insolvency proposals as being for the benefit of creditors generally.

[3]      A single creditor, Carters, opposes the applications.  A number of grounds of opposition were advanced.

[4]      I have come to the conclusion that the applications must be declined on one particular ground at least.  As that ground is determinative it becomes unnecessary that I examine in detail some of the evidence which might have informed other grounds of opposition.  The critical ground of opposition is that the applicants failed to comply with the provisions of s 330 of the Act in that creditors were given inadequate or insufficient notice of reconvened creditors’ meetings.  I will deal with that ground of opposition first before dealing briefly with the remaining grounds.

Requirement of notice under s 330 Insolvency Act 2006

[5]      The context of the discussion which follows is the requirement of notice to creditors under s 330(1) of the Act. The subsection provides –

330  Provisional trustee must call meeting of creditors

(1) The provisional trustee must, as soon as practicable after the proposal is filed, call a meeting of creditors by posting to every known creditor at the creditor's last known address—

(a) a notice of the date, time, and place of the meeting: (b) a summary of the insolvent's assets and liabilities:

(c)   a  copy  of  the  proposal  and  particulars  of  any  charge  or guarantee:

(d) a creditor's claim form:

(e) a postal vote in the prescribed form.

The factual background

[6]      The  Court  was  informed  that  the  insolvents  were  the  directors  of  a

Christchurch construction company, CBD Construction Limited, which was placed

in liquidation in March 2010.   It had been involved in construction work at the Kawarau Falls site at Queenstown.   The liquidator’s initial assessment was that unsecured creditors of CBD would receive approximately 20 cents in the dollar.  The insolvents had guaranteed CBD’s obligations to 12 suppliers.   Additionally, they were debtors of CBD through overdrawn current accounts.

[7]      Carters  obtained  judgment  (pursuant  to  guarantees)  against  each  of  the insolvents for $237,131.43 on 28 June 2010.   Each insolvent was served with a bankruptcy notice on 20 August 2010 and bankruptcy proceedings were commenced against  each  on  18  November  2010.     Those  proceedings  were  subsequently adjourned pending the outcome of the proposals which are now before the Court.

[8]      By his sworn statement of affairs, Mr Blackmore deposed to having personal chattels of $8,700 and debts owed to him estimated to produce $29,622, as compared with $825,000 debt to unsecured creditors.   Mr Fry, by his  sworn statement of affairs, deposed to having $7,700 of personal assets as contrasted with the same

$825,000 debt to unsecured creditors.  The date of deposition in each case was 23

July 2010.  The calculation of the $825,000 debt was set out in a schedule to each statement of affairs in the form attached as Schedule 1 to this judgment.

[9]      It is significant in relation to subsequent developments that the (unidentified)

person who drafted the schedule of creditors expressly added against the total of

$825,000 the notation –

... need $903,000.00 for Carters to be less than 25%.

With subsequent additions to creditors and their totals, the Carters debt came to be tallied as less than 25 per cent of the total unsecured debt.

[10]     The insolvents’ proposals were filed in Court on 29 July 2010.  They were filed with an indication that it was intended they be considered together.   Each insolvent offered a dividend of $0.15 on all unsecured debts so that the unsecured creditors would receive a total dividend of $0.30.  There was no detailed evidence adduced as to correspondence or discussions which had occurred between the insolvents and their creditors before 29 July 2010 but it is clear (for instance from

the schedule of creditors) that some correspondence had taken place with at least an outline of the proposal previously sent.  Carters had refused to accept the proposals, instead electing to issue bankruptcy proceedings.  Another creditor, L & M Victoria Limited (a lessor of property to CBD), had also at that stage indicated its opposition to the proposals.

[11]     The  proposed  trustee,  Cyril  Warren  McKenzie,  convened  a  meeting  of creditors on 28 September 2010.  Mr McKenzie did not give any evidence (whether in relation to the calling of a meeting “as soon as practicable after the proposal is filed” under s 330 of the Act or otherwise) but there was an explanation in a letter from the insolvents’ solicitors dated 17 September 2010 that Mr McKenzie had then called the meeting of creditors having “recently returned from overseas”.

[12]     For the purposes of the meeting on 28 September 2010 Carters filed a claim for $229,558.30 and provided postal votes against the proposals.  Another creditor for a modest sum also had provided a postal vote rejecting the proposals.

[13]     A  Carters’  representative  attended  the  joint  creditors’  meeting  on  28

September 2010 and voted against the proposals.  As the proposals did not have a sufficient majority by value, Mr McKenzie as chairman adjourned the creditors’ meeting for two weeks to allow time to persuade Carters to accept the proposals.

[14]     Mr McKenzie subsequently further adjourned the meeting on two occasions. The additional notices identified neither a place nor a specific time for the adjourned meetings.

[15]     In the meantime, correspondence was occurring between Carters’ solicitors and the insolvents’ solicitors, with Carters indicating that it did not accept that a total of $0.30 cents in the dollar was the very best which the insolvents could do for the creditors.

[16]     On 1 November 2010, by faxed letter, Mr McKenzie informed Carters –

Further  to  my  letter  dated  20  October  2010,  advising  of  a  meeting  of creditors to be held on 2 November 2010, I wish to advise that a further

creditor has joined and this has effected (sic) the overall position of the proposal.

I am considering the effect of this and still in negotiations with Carters, so advise that I am further adjourning the meeting until 16 November 2010.

[17]     On  the  same  day,  1  November  2010,  the  insolvents’ solicitors,  notified Carters’ solicitors of a “change  in circumstances”,  which was explained in these terms –

The  landlord  of  rental  premises  in  Cromwell  has  filed  a  claim  for

$316,095.01.  That amount includes contingent losses.  The authority for this is In re Guest Ex parte BNZ Finance Limited [1990] 3 NZLR 700 at page

711.  It follows that Carters debt will no longer be greater than 25%.  The

remaining creditors have the ability to approve the proposal without Carters support.

In light of the above Carters/QBE may wish to reconsider its position and support the proposals at fifteen cents in the dollar.  May we hear from you by return?

[18]     By faxed letter on 5 November 2010 Carters’ solicitors requested an updated creditors’ schedule together with the contact details of the landlord and details of the rental premises in Cromwell.

[19]     On 10 November 2010, Carters’ solicitors referred to Mr McKenzie’s earlier correspondence and requested that he advise the time and venue of the creditors meeting which was to take place on 16 November 2010.

[20]     By letter faxed on 15 November 2010 Mr McKenzie notified Carters that he wished to advise –

...that  another  creditor  has joined  and  this  has  effected (sic) the  overall position of the proposal.

Mr  McKenzie  advised  that  he  was  therefore  adjourning  the  meeting  until  30

November 2010.

[21]     On 29 November 2010 at 1.30pm, Mr McKenzie by faxed letter advised

Carters that the further meeting of creditors had been set down for 2.30 pm on 30

November 2010 at Mr McKenzie’s offices in Christchurch.   An updated list of

creditors was attached in the form attached to this judgment as Schedule 2.   The significant changes were:

a)       James Grant Developments Limited was identified for the first time as a creditor in the sum of $450,000.

b)        L & M Victoria Limited had increased its claim from $175,000 to

$236,668.

c)        Whiting Partnership had increased its claim from $6,000 to $31,886. [22]     The overall effect was to increase the list of creditors to a value of $1,410,855 with Carters’ debt ($229,558) representing 16.3 per cent (down from 27.8 per cent in the original schedule of creditors).

[23]     Carters’ national manager of credit operations, Damien Martin, gave evidence in support of Carters’ objection to approval of the proposals.  He deposed in relation to the notice given on 29 November 2010 –

a)       Carters were concerned at the addition of James Grant Developments Limited as a new creditor and at the increase in the debts claimed by the Whiting Partnership and L & M Victoria Limited.

b)The  late  notice  precluded  Carters  from  being  able  to  attend  the meeting, with Carters’ regional and branch managers being engaged in other meetings and there being insufficient time to send a representative from Auckland.

c)       Because Carters understood that L & M Victoria Limited would be voting against the proposals, Carters felt reassured that the proposals could not be approved anyway and that the meeting was therefore likely to be adjourned again with later opportunities to question the insolvents and Mr McKenzie and to explore and question creditors’ claims.

d)Carters therefore, late on 29 November 2010, advised Mr McKenzie that  the  late  notice  meant  that  Carters  was  unable  to  attend  the meeting in person. Carters instead attached an updated postal vote against the proposals.

[24]     At 2.09 pm on 30 November 2010  (21 minutes before the meeting) the solicitors for L & M Victoria Limited advised Carters’ solicitors that L & M Victoria Limited had decided to vote in favour of the proposals and had filed a postal vote accordingly.

[25]     The meeting of creditors was reconvened at 2.30pm on 30 November 2010. Carters was  not  represented.    Mr McKenzie has  provided the required  form  of statement of the resolution of the creditors at the meeting which accepted the proposal.

[26]     The creditors who voted in favour (as recorded by Mr McKenzie) were –

Allied Workforce  184,798.00

Cardlink  3,148.00

Crane Distributors  898.00

Hillside Building Supplies  52,884.00

Hush Interiors  34,498.00

ITM Southern Lakes  4,528.00

Placemakers Riccarton  30,032.00

Placemakers Queenstown  10,185.00

CBD Construction (In Liquidation)      131,135.00

Whiting Partnership  31,886.00

James Grant Developments Ltd           450,000.00

L & M Victoria Limited  236,668.00

Total  $1,170,660.00

[27]     Mr McKenzie entered the figure of $131,135 for CBD in relation to both Mr Blackmore and Mr Fry.  The proofs of debt filed indicate that that figure is correct only as a total for both Mr Blackmore and Mr Fry.  The claim against Mr Blackmore was $71,339.97 whereas the claim against Mr Fry was $59,794.57, being separate debts.  It does not appear that Mr McKenzie, as chairman, noted the distinction as his record refers only to the total for the two insolvents.

[28]     Carters (in relation to a claim of $229,558) was the only creditor who voted against the proposals.

[29]     Mr McKenzie recorded resolutions accepting the proposals upon the basis that they had been approved by a majority in number (12 for and one against) and by three quarters in value of the creditors who had voted ($1,170,600 out of a total of

$1,410,855 representing 83 per cent).  If the CBD debts of the insolvents had been treated separately and not totalled the value calculation for Mr Blackmore would have been $1,110,864.97 out of 1,410,855 producing 78 per cent, and for Mr Fry it would have been $1,099,319.57 out of $1,410,855 producing 78 per cent.

[30]     Against   this   background   Mr   McKenzie   promptly   applied   for   orders approving the proposals.

[31]     Before turning to a discussion of the legal requirements, two further aspects of the background can be dealt with.

Intervening negotiations

[32]     Evidence was given of two sets of negotiations which occurred in relation to the proposals.

[33]     The  solicitors  for  the  insolvents  had  negotiations  with  Carters’ solicitors

before and during the course of the proposals.  Carters disclosed that it has insurance

in relation to its losses and that the insurer was involved in the negotiation.  Carters and its insurer took the view that the insolvents could offer more than a total of 30 cents  in  the  dollar.    They  were  seeking  60  cents  in  the  dollar.    Against  the background where the trustees of the family trusts of the insolvents were making available by way of loans to the insolvents the funds for the proposals, Carters was looking to the insolvents to procure more funds from their family trusts.   These negotiations appeared to come to an end on 1 November 2010 when the insolvents’ solicitors indicated that the insolvents would not move beyond their 30 cents offer.

[34]     Around the same time, either Mr McKenzie or the insolvents’ solicitors were also having discussions with the solicitors for L & M Victoria Limited.   L & M Victoria Limited had initially, in July 2010, submitted a claim for $175,000 for guaranteed  lease  payments,  and  intended  to  vote  against  the  proposal.    On  15

October 2010 it submitted an amended claim for $316,095.01, the increase to the original claim comprising $79,857.93 of interest together with monthly rental to the end of the lease in June 2015.  When Mr McKenzie, on 29 November 2010, gave his notice of the details of the 30 November 2010 meeting, the updated list of creditors which he attached included L & M Victoria Limited at $236,668 (that is at the level of its increased claim, including its future rental stream to 2015, but excluding its interest claim).   On the following day, just before the meeting, L & M Victoria Limited’s solicitors notified Carters’ solicitors that L & M Victoria Limited would now be voting in favour of the proposals.

The requirements of notification

[35]     Section 330(1) of the Act provides –

330  Provisional trustee must call meeting of creditors

(1) The provisional trustee must, as soon as practicable after the proposal is filed, call a meeting of creditors by posting to every known creditor at the creditor's last known address—

(a) a notice of the date, time, and place of the meeting: (b) a summary of the insolvent's assets and liabilities:

(c)   a  copy  of  the  proposal  and  particulars  of  any  charge  or guarantee:

(d) a creditor's claim form:

(e) a postal vote in the prescribed form.

[36]     It is in s 327 of the Act that the requirements as to the form of the proposal are specified, in these terms –

327  Form of proposal

(1) The proposal must be—

(a)      in the prescribed form; and

(b)      accompanied  by  a  statement  of  affairs  that  is  in  the prescribed form and verified by affidavit.

(2) The statement of affairs must set out the following information: (a)      the insolvent's assets, debts, and liabilities:

(b)      the name, address, and occupation of each of the insolvent's creditors:

(c)      the securities (if any) held by each creditor. (3) The proposal must—

(a)      be signed by the insolvent; and

(b)      have endorsed on it the name of a person (A) who is willing to act as a trustee for the creditors; and

(c)      include a statement by A that A is willing to act.

Although s 327(1) refers to “the prescribed form”,  a form has not been prescribed. The  Insolvency  (Personal  Insolvency)  Regulations  2007  prescribe  three  forms relating to proposals but do not prescribe the form of proposal itself.

[37]     Carters’ first ground of objection to the applications for approval is that the provisions  of  s  330  of  the Act  were  not  complied  with.  Carters  says  that  Mr McKenzie gave inadequate notice of the time and place at which the reconvened creditors’ meeting on 30 November 2010 was to be held.

[38]     Carters’ objection  brings  into  play  the  provisions  of  s  333  of  the  Act.

Relevantly, s 333 provides –

333   Court must approve proposal

(1) After the proposal has been accepted by the creditors, the trustee must, as soon as practicable,—

(a)      apply to the Court for approval of the proposal; and

(b)      send  notice  of  the  hearing  of  the  application  in  the prescribed form to the insolvent and to each known creditor.

(2) The Court must, before approving a proposal, hear any objection that is made by or on behalf of a creditor.

(3) The Court may refuse to approve the proposal if it considers that—

(a)      the provisions of this subpart have not been complied with or

(b)      the  terms  of  the  proposal  are  not  reasonable  or  are  not calculated to benefit the general body of creditors; or

(c)      for  any  reason  it  is  not  expedient  that  the  proposal  be approved.

(4) ... (5) ...

(6) When it approves the proposal, the Court may correct any formal or accidental error or omission, but must not alter the substance of the proposal.

[39]     Counsel did not address me in detail as to the burden of proof in relation to the Court’s powers and duties under s 333 of the Act.  There are differing judicial views  as  to  the  burden  of  proof:  see  for  instance  the  discussion  in  Brookers Insolvency Law & Practice (online edition) at IN 333.05.   I find this to be one of those cases – as observed by Hillyer J in Re Farmer[1]  – in which questions of onus are not significant.  The important requirements of notice of Subpart 2 of Part 5 of the Act  has  not  been  complied  with  and,  in  my judgment,  the  exercise  of  the discretion under s 333(3) to refuse to approve a proposal is clearly called for.

[1] Re Farmer HC Auckland B812/90 1 October 1991.

[40]     I return then to the content of a proposal as required by s 327 of the Act. Section 327(2) required the insolvents to set out in their statements of affairs the insolvent’s assets, debts and liabilities and the name, address and occupation of each

of the insolvent’s creditors (as well as securities held by creditors).

[41]     Section 330(1)(c) of the Act requires that the provisional trustee include in the documents provided to every known creditor a copy of the proposal (that is including the statement of affairs).

[42]     Thus,  when  each  creditor  receives  the  trustee’s  notice  of  a  meeting  the creditor is intended to immediately have the ability to form a comprehensive understanding of the insolvent’s assets and liabilities, to have the means to make its own enquiries into assets and liabilities, and to be able to contact the creditors and debtors at their addresses. A creditor will also be able to determine where it is likely to  sit  in  relation  to  voting  power.    A creditor  may  decide  in  the  light  of  all information that it does not need or desire to attend the meeting of creditors, either to examine the insolvent or for any other purpose under s 331(2), and may therefore elect to proceed by way of a postal vote rather than to incur the time and cost of attendance at a meeting which may be outside the creditor’s home base.

[43]     The Insolvency Act does not prescribe a period of notice to be given in relation to a creditors’ meeting.   Section 330(1) of the Act provides that the provisional trustee’s notice must be given as soon as practicable after the proposal is filed.  It does not go on to specify a period before a meeting.

Discussion

[44]     Mr Salmon, for Carters, submitted that the notice given must be:

a)       Sufficient to accommodate the time taken for postage and return of postal votes;

b)Sufficient to enable arrangements to be made for a party to attend if it wishes;

c)       Sufficient to allow for consideration of the mandatory information regarding assets and liabilities and for parties to decide whether they wish to examine meaningfully at the meeting;

d)       Such that normal obligations of reasonableness and fairness are met.

[45]     Mr Salmon submitted that the notice given in relation to these proposals did not constitute “notice” under s 330(1) of the Act because it did not achieve the requirements of sufficiency and reasonableness which he had identified.   The insufficiency arose for two reasons.

[46]     First, he noted that the time and place of the meeting to be held on 30

November 2010 were not notified until 1.30 pm the day before (29 November 2010). He acknowledged that notice of the date itself had been given some two weeks earlier.  He submitted however that when the precise time and place were provided only the day before the meeting in conjunction with the very significant changes to the make up of creditors, the notice given was insufficient.

[47]     Secondly, Mr Salmon submitted that the additional information provided on

29 November 2010 in relation to the alleged debt to a related party of itself made the notice insufficient.  Mr Salmon characterised the new information as to creditors and their debts as “crucial  and significant”  and a development which warranted more than one day in which to consider and scrutinise that debt.

[48]     The evidence on these issues from Carters’ relevant manager, Mr Martin (above [23])  emphasised the inability of  a relevant  Carters’ representative from Auckland to attend the meeting.  His evidence also recorded an expectation that both Carters and L & M Victoria Limited would be voting against the proposals on 30

November 2010 which would lead to a further adjournment of the meetings and a later opportunity for Carters to question the insolvents and Mr McKenzie on the debts in the presence of other creditors at a reconvened meeting.

[49]     In his submissions Mr Wallace dealt first with the time and place of the meeting as notified on 29 November 2010.  He observed that the hour of day and the place were the same as the meeting held on 27 September 2010.   There was an implicit suggestion that this in some way made the specific time and specific place predictable.  I disagree that any such implication existed.  The time and place of the meeting (as well as the date of the meeting) are required to be included in a notice

under s 330(1)(a) of the Act.   Except in the case of the clearest and  the most unavoidable implication (which this is not), there is no place for implied notice.  The debt entitlements of creditors are at stake.

[50]     Whether the failure to give a notice with complete particulars is a vitiating event in relation to a particular proposal will turn on the particular circumstances of the case. A creditor may learn of the details of the meeting from another creditor and be able to attend and vote.  This case does not fall into such a clear category.  Mr Martin’s evidence is that, with only one day’s notice of the time and place of the meeting, Carters was not able to have its local managers attend the meeting and had insufficient time to send an Auckland representative.  On the other hand, Mr Martin also referred to another difficulty in this way –

Nonetheless,  because  Carters’  understanding  was  that  L  &  M  Victoria Limited would vote against the creditors’ proposals, Carters felt reassured that the creditors’ proposals could not be approved.  Carters’ (sic) anticipated that the meeting would be adjourned again ...

[51]     There may be force in Mr Wallace’s proposition that Carters apparently chose to rely on two things in not attending the meeting, namely, its assumption that L & M Victoria Limited would vote against the proposals and the fact that Carters itself was putting a postal vote in opposition.  One might have expected that an organisation such as Carters would have the ability, even with such late notice, to have someone appropriate  attend  the  meeting.     Mr  Martin’s  frank  reference  to  a  sense  of reassurance because of the assumed position of L & M Victoria Limited was clearly a matter relevant to Carters’ attitude on receiving the notice of time and place on 29

November 2010.   But it is not a fair characterisation of Mr Martin’s evidence to suggest that Carters chose not to attend because of the L & M Victoria Limited position and Carters’ ability to send a postal vote.  Carters (through Mr Martin) has clearly indicated that it considered itself precluded from being able to attend the meeting on 30 November 2010.  A fundamental purpose of requiring the time and place of a meeting to be notified is to enable the creditor to attend at that time and place.  It will not usually be a valid criticism of any creditor (be it “small” or “big”) that it does not manage to reorganise its resources when given notice of the relevant details at the eleventh hour.   This is particularly so when a trustee has previously adjourned  the  meeting  more  than  once  to  enable  the  insolvent  to  procure  his

preferred outcome.   It is incumbent on the trustee to ensure that proper notice is given of the details of any adjourned meeting.

[52]     I recognise that where notice of the date of the meeting has been given the late giving of the detail of the time and place might generally fall at the less serious end of inadequate notice.  There is however in this case a further and in my view serious inadequacy in the notice given.

[53]     The express basis upon which the first meeting of creditors was adjourned was –

To allow time to persuade Carters to accept the proposals.

If that had been all that took place, and adjustments had not been made to the make- up or value of creditors, then all that might reasonably have been required is further (and possibly brief) notice of the date, time and place of the resumed meeting.

[54]     It happened in relation to these proposals that neither the debtors nor Mr McKenzie were able to persuade Carters to accept the proposals. As it happened that failure to persuade Carters either coincided with or led to discussions with other listed  creditors  and  with  a  new  creditor.    Mr  Mckenzie  accepted  the  new  and amended proofs of claim (subject to some amendment) for the purposes of the resumed meeting on 30 November 2010.

[55]     When the adjournment of a meeting of creditors leads to material changes in the insolvent’s assets and liabilities position, it is incumbent on the trustee to give proper notice of the updated summary of the insolvent’s assets and liabilities and any of the other details required to be disclosed under s 330(1) of the Act.   That will include in the case of a creditor proving its debt for the first time the details of the creditor’s name, address and occupation as required to be included in a proposal under s 327(2)(b) of the Act.  The time between receiving all such information and the time at which the meeting of creditors subsequently occurs is the period during which a creditor is intended by the regime of the Act to be able to make its enquiries, determine how it intends to proceed, and otherwise ready itself for the creditor’s meeting.

[56]     Counsel did not refer me to any authorities on the concept of “notice” under

s 333(1)(b) of the Act.

[57]     In R Pitchforth Meetings, Practice and Procedure in New Zealand, (4th  ed. CCH 2010) at #2-055 it is said in relation to the requirements for adequate notice -

The  notice  must  be  adequate,  indicating  time  and  place  as  well  as  the business which will be transacted (Wishart v Foster (1961) 4 FLR 72 (IRC)).

The author goes on to refer to situations where allegations of poor notice have been made in these terms –

The test is: is the notice written so that ordinary minds can fairly understand its meaning?  In Henderson v Bank of Australasia (1891) 45 ChD 330 at 337

Chitty J said:

In cases of this kind it is settled that the notice which specifies the business to be done, or the objects of the meeting, is to be a fair notice, intelligible to the minds of ordinary men, the class of men who are shareholders in the company, and to whom it is addressed.

In R v Hill (1825) 4 Barn & Cress 426; 107 ER 1118 it was held that the ringing of a bell is inadequate notice of meeting.

The author then proceeds to examine other aspects required for adequacy of notice, such as the notice should be reasonable and that the notice should disclose the business of the meeting.

[58]     At #2-065, in relation to the issuing of notices, the author says –

Notices should be sent out so that they are received in time for the members to have proper notice (a time stipulated in the rules) of the meeting, or if there  is  not time  for  that,  a  reasonable  time  before  the  meeting.    Lord Herschell LC in Hick v Raymond & Reid [1893] AC 22 at 29; [1891-4] All ER Rep 491 at 493 (HL), described “reasonable time” as follows;

I would observe, in the first place, that there is of course no such thing as a reasonable  time   in   the   abstract.      It   must   always  depend   on   the circumstances ... the only sound principle is that the “reasonable time” should depend on the circumstances which actually exist...

[59]     The initial reference to Wishart v Foster (above [57]) is to a decision of the Commonwealth Industrial Court (of Australia).   While ultimately determining the case on other grounds, the Court observed that it thought the notice calling a meeting of members of a labourers’ federation was defective because of a failure to indicate

the time at which a meeting was to be held.   The notice of a special meeting indicated it would be held at a particular place on a particular date but did not specify any time for the meeting.  The respondent had sought to justify the absence of any reference to a particular time by contending that meetings of the branch were normally held at 8.00 pm.  The rule in question had required notice of the time and place of special meetings.

[60]     While I was not referred to cases which had examined in the context of creditors proposals what might be considered the legal ingredients of the legal requirements of notice, it is not difficult to locate cases in which requirements of adequacy or reasonableness have been recognised.

[61]     Thus, in Re Westpac New Zealand Ltd[2], Associate Judge Abbott at [22] said this in declining an application for approval of a proposal:

A proposal for a compromise with creditors is a serious matter. It has the potential to have a substantial effect on a creditor’s rights. It is incumbent on the insolvent initially, and on the trustee of the proposal subsequently, to prove that the statutory pre-requisites to court approval have been met. It is fundamental that creditors be given proper notice of the proposal, and of the application for approval.  It is implicit in the statutory requirements that first the creditors and secondly the court are left in no doubt as to the detail of the proposal, and that creditors must have a reasonable opportunity to examine and challenge it. Regrettably, I am not satisfied that this is the case with this application.

[2] Re Westpac New Zealand Ltd, ex parte Jacob HC Auckland CIV-2010-404-005069, 6 December 2010.

[62]     For a case in which the Court found the notice to have been adequate, see Re Simpkin[3].   In that case a notice of the creditors meeting was sent by the proposed trustee on 10 December 2010 and apparently received at the creditor’s address on 16

[3] Re Simpkin HC Whangarei CIV-2010-488-00778, 21 March 2011

December 2010.   The meeting was to be held on 20 December 2010.   Associate Judge Bell found on the facts of this case that there was “adequate notice of the meeting”.  In the Simpkin case, the proposed trustee undertook checks to see whether any of the creditors who did not give notice of a claim and did not attend the meeting were prejudiced and would have wished to attend. Associate Judge Bell inferred that the creditors were not minded to take any steps to deal with the proposal and that

they were simply to leave other creditors to make the decision on whether to accept

.

the proposal or not.   His Honour went on to conclude that had a director of the objecting creditor attended the meeting, his vote would not have influenced the outcome.

[63]     The applicant trustee and debtors in this case have adduced evidence from some creditors that attendance by Carters would not have changed the vote of that particular creditor or that (in the case of a creditor who did not vote at the meeting) the creditor supports the proposal.

[64]     I find in the present case that when Mr McKenzie eventually (the day before the  meeting)  gave  notice  of  its  time  and  place  the  notice  was  inadequate  both through a lack of adequate forewarning as to the time and place and the detail of creditors’ names and claims.

[65]     Section 418 of the Act exists to save defects and irregularities.  Section 418 provides:

(1)       A proceeding under this Act must not be invalidated or set aside for a defect (which includes misdescription, misnomer, or omission) in a step that must be taken as part of, or in connection with, the proceeding, unless a person is prejudiced by the defect.

(2)       The Court may order the defect to be corrected, and may order the proceeding to continue, on the conditions that the Court thinks appropriate in the interests of everyone who has an interest in the proceeding.

[66]     The Courts have recognised the distinction between a nullity and a mere irregularity.  The Court of Appeal in Best v Watson[4]   (a case decided in relation to the predecessor provision, s 11 Insolvency Act 1967) said at 494:

We think that the same considerations apply under s 11. That provision may be invoked in any case where the proceedings are defective and however the defect may be characterised. It will always be a question of degree whether or  not  it  can  be  said  that,  notwithstanding  failure  to  comply  with  an apparently mandatory requirement of the Act or of the Rules, there is before the Court what can fairly be described as proceedings under the Act; and that question should not be approached in a mechanical or technical way.

[4] Best v Watson [1979] 2 NZLR 492.

[67]     More recently, in considering the significance of non-compliance with the provisions of sub-part 2 of Part 5 of the Act, Asher J in Kelly v Structured Finance Ltd[5] at [42] said:

It is relevant to consider the seriousness of these failures. A court will not place weight on minor procedural errors. For the reasons given I do not consider that the errors in relation to this proposal were serious and meant that significant creditors did not get a fair opportunity to influence the creditors’ approval process.

[5] Kelly v Structured Finance Ltd [2009] 2 NZLR 785 at 793.

[68]     I have found the breach of the requirement of (adequate) notice in this case serious.  At least one significant creditor – the creditor who had been opposing a creditors’ proposal from the outset – did not get a reasonable opportunity to examine the amended proposal and to challenge it.

[69]     This is not a case where the Court should seek to carry out a sophisticated analysis of actual harm to a party.  The Court, on occasion, carries out an analysis of whether a proposal would still have been accepted but for the defect or irregularity. That is particularly appropriate where the Court is dealing with what is sometimes referred to as a “mere irregularity” but may also be appropriate in some cases for serious defects.  The prejudice in this case runs deeper.  The provisional trustee and the insolvents chose to establish the time and place of the final meeting only 25 hours before that time arrived. There was an immediate prejudice to Carters in that it was given a time for the meeting without details of the amended list of creditors (both as to identity and amount) and therefore no opportunity to properly analyse the credentials of the new creditor and the increased creditors’ claims.   A prejudice arises, for a  creditor such  as  Carters,  not  only where it  is  demonstrated on  an application such as this that the creditor would have changed its vote (to “against”) or the creditor’s claim was invalid or overstated for any reason.  A prejudice also arises where it is clear in relation to the last-minute addition of a creditor or a last- minute increase in value that the provisional trustee, the insolvents or the claiming creditor itself might have been influenced on discussion or negotiation to amend its claim in some way or indeed to vote differently.  The loss of that possibility is in itself a prejudice to the objecting creditor.  Where the defect – in this case extremely

late notice – is serious indeed, the Court should be slow in the exercise of its saving

discretion to effectively ignore the prejudice which was visited on Carters through the late notice.

Carters’ other grounds of objection

[70]     As I have found that Carters was prejudiced by the inadequate notice of the resumed creditors’ meeting, it is strictly unnecessary that I reach a conclusion in relation to Mr Salmon’s other grounds of objection.  I will therefore only briefly deal with them.

Evolution of proposals to bring Carters’ debt below 25 per cent

[71]     Among the insolvents, or those representing them, someone recorded on the original originally drafted Schedule of Debts the notation –

... need $903,000 for Carters to be less than 25%

(above [9])

[72]     At that point the total value of creditors had been recorded as $825,000.  It is a strong if not irresistible inference that someone among the insolvents or their advisors had an eye to establishing the existence of total debt over $903,000 so that any continuing objection by Carters would be in relation to less than the 25 per cent statutory block to approval.

[73]     I will return briefly to some of the “debt” which was subsequently added for the purposes of the resumed meeting.   The total value of debt for the resumed meeting was assessed by Mr McKenzie to be $1,410,885 (incorrectly including the CBD debt for each creditor as $131,135 – see above at [27]).  But assuming for the moment that Mr McKenzie’s $1,410,885 had been correctly calculated, the analysis of Mr Salmon would indicate that with three additional components taken out, Carter’s percentage would have remained at 28.5 per cent (in other words over the

25 per cent bar to approval). The calculation is this:

Total resumed meeting  $1,410,885

Less Whiting partnership future component        $21,275

Less L & M Victoria future component             $133,223

Less James Grant Developments Limited total  $450,000

New Total  $806,387

Carters percentage  28.5%

[74]     I will return shortly to why these three elements of additional claim might be seen to have been a manipulation of the total debt owed by the insolvents.

[75]     Against the background of the early comment as to the need to get debt above

$903,000, the treatment and willing acceptance of these three additional debts or increases in debt invites at least suspicion.  Mr Martin, in his affidavit in support of Carters’ objection,  expressly referred  to  the  “need  $903,000” notation.    No-one sought  to  give  reply  evidence  on  behalf  of  the  insolvents  as  to  an  innocent explanation of that notation or as to the integrity with which those involved in subsequently considering debts acted against the background of the calculations and consideration which went into the notation.

[76]     It  behoves  those involved with any proposal under Part 5 of the Act to demonstrate transparency and complete integrity in the approach taken to a proposal, from the provision of complete and reliable information to all creditors to the objective analysis of creditors’ claims. A lack of transparency is a matter which may justify the Court in its discretion refusing to approve a proposal.  In the absence of any explanation from the insolvents or the original trustee as to the “need $903,000” notation, I would have been strongly inclined on this ground alone to refuse to approve these proposals.

[77]     James Grant Developments Limited claims to be a creditor for $450,000. The insolvents did not in evidence offer any clear explanation of the relationship between themselves (James Fry and Grant Blackmore) and the eponymously titled company.  In his submissions in support of the proposals, Mr Wallace referred to the company as being “a creditor alleged to be associated with the insolvents”.   On the

evidence adduced, and in the absence of any explanation from the insolvents themselves,  I have no  hesitation in concluding that there was a very close and probably controlling relationship between the insolvents and the company.   James Grant Developments Limited submitted claims in relation to Mr Fry’s proposal, signed by Mr Blackmore and in relation to Mr Blackmore’s proposal, signed by Mr Fry.  The claim (specifically $450,705) related to a deed of lease dated 25 February

2010 between James Grant Developments Limited as landlord, CBD as tenant and Messrs Blackmore and Fry as guarantors.   Messrs Blackmore and Fry signed as directors on behalf of James Grant Developments Limited, as directors on behalf of CBD, and as guarantors personally.  The lease, which was for a term of six years, commenced on 1 March 2010 for an annual rental of $75,119.  The sum claimed by James  Grant  Developments  Limited  ($450,705)  is  almost  exactly  six  times  the annual rental, suggesting either that no part of the rental was paid by the tenant from the time the lease was entered into or that the James Grant Developments Limited claim was overstated.

[78]     CBD  (the  tenant  under  the  lease)  was  placed  in  liquidation  the  month following the date of the lease and in the very same month (March) as the term of the lease commenced.  Given the involvement of Messrs Blackmore and Fry on all sides of the transaction, in relation to each hat they wore they would have known the perilous financial situation of CBD and of themselves as guarantors of many of CBD’s debts.

[79]     James Grant Developments Limited saw fit not to include itself as a creditor in the proposals filed in Court by the insolvents on 29 July 2010.  But on the eve of the resumed meeting (29 November 2010) Messrs Blackmore and Fry and the provisional trustee saw fit to include the sum of “$450,000” in the updated list of creditors  posted  out  that  day.     The  creditor ’s  claim  forms  for  James  Grant Developments Limited for $450,705 were not in fact signed until 30 November 2010 (the day of the final meeting).   The postal votes provided for James Grant Developments Limited were also signed on 30 November 2010.

[80]     The lease was of a unit in Cumnor Terrace, Christchurch.   No information was apparently provided to the provisional trustee and certainly none was provided

to the Court as to any steps taken by James Grant Developments Limited to re-let the unit and to obtain replacement income.

[81]     To the extent that creditors’ claims may include contingent debts, it is settled law that such may be included within creditors’ claims and voted upon: see Re Guest ex parte BNZ Finance Ltd[6] at 711.  In the same passage his Honour recognised also that the chairman of the meeting cannot exclude or discount the rights of friendly creditors.   However, his Honour also made clear that such contingencies and relationships can be dealt with by the Court under the provisions of what was then s

[6] Re Guest ex parte BNZ Finance Ltd [1990] 3 NZLR 700 per Holland J.

143(3)(c) of the 1967 Act, now s 333(3)(c) of the 2006 Act.

[82]     In Kelly v Structured Finance Ltd (above [67]), Asher J considered under the heading “Expediency of the proposal”, the voting by three entities associated with the insolvent. At [56], his Honour referred to authorities establishing that where a proposal is supported by an entity closely associated with the insolvent, that can be taken in to account in the exercise of the Court’s discretion. His Honour concluded, at [57], notwithstanding the possibility that the exclusion of associated creditors might still have achieved the 75 per cent threshold, it remained relevant in the exercise of the discretion to take into account the fact that the insolvent did rely on family entities with a considerable value, which presumably had a role at the meeting, and their contribution may have affected the outcome.

[83]     In the present case, while the related entity cast a postal vote, I conclude that its last-minute addition of a $450,000 claim may well have affected the thinking of one or more creditors such as L & M Victoria Limited.  The late introduction of the James Grant Developments Limited debt, some uncertainties surrounding the correct extent of the debt, and the apparent control of Messrs Blackmore and Fry of the company, all lead me to a position where I would if necessary have been strongly inclined to find it inexpedient to approve the proposals, having regard only to the

existence of the James Grant Developments Limited claim.

Increase in debts owed to Whiting Partnership and L & M Victoria Limited

[84]     The  debts  claimed  by  the  Whiting  Partnership  and  by  L  &  M  Victoria Limited, as accepted by the trustee, increased between July 2010 (when they were respectively put at $6,000 and $175,000) and the final meeting in late November

2010 (when they were respectively put at $31,886 and $236,668).  Mr Salmon, from the evidence provided, identified $21,275 of the Whiting debt and $133,223 of the Victoria debt as a future component, meaning such were referable to losses of future rental stream.   Victoria’s claim form expressly refers to (amongst other things) a

“contingent liability”, having regard to a lease term expiring on 1 June 2015.

[85]     No evidence was provided by the insolvents or the trustee as to any re-letting carried out by either of these two creditors.   The contingent aspect of the claims, when combined with the James Grant claim, amounts to $504,498 of the total of

$1,410,885, or a little over 35 per cent.  As Asher J indicated in Kelly v Structured Finance the Court is not required to approve a proposal simply because closely related or contingent creditors produce the required voting majorities.  In the Court’s assessment of expediency, the nature of such debts comes into the reckoning.   In relation to contingent debt, the reality is that a significant portion of the contingent allowances may never become actual debt.  That is to be contrasted with the debt owed to Carters, all of which relates to goods already supplied.

[86]     The contingent nature of significant portions of the Whiting and Victoria debts, when combined with similar issues as well as the closely related nature of the James Grant debt, and the very late notice to other creditors of these increases, is further reason to conclude that it would not be expedient to approve these proposals. As Asher J found in relation to the proposal in Kelly v Structured Finance, the existence of these contingent claims and their acceptance by the trustee may well have had a role in the voting.  It is conceivable that they affected the outcome.

Disclaimer of onerous property

[87]     The CBD lease on its face was entered into approximately one month before

CBD was placed in liquidation.  In addition to his primary submissions, Mr Salmon

developed an alternative submission based on the liquidators’ power to disclaim onerous property under s 269 Companies Act 1993.   Having regard to my other findings, it is unnecessary that I examine this submission in detail.  In relation to the guarantee liabilities of Messrs Blackmore and Fry the submission may have run into the difficulty that, by s 269(3)(b) of the Act a disclaimer under s 269 does not affect the rights or liabilities of persons other than the company.   I take the matter no further.

Conclusion

[88]     I find that it is inexpedient that the proposals of the debtors be approved.  For this reason I refuse to approve the proposals.

The position of the insolvents

[89]     There is evidence before the Court to indicate that the insolvents had over a lengthy period successfully been involved in the construction industry and that the liquidation of CBD flowed from financial difficulties associated with the Kawarau Falls project alone.  It is also clear that the liquidators of CBD have recognised the cooperation they have received from Messrs Blackmore and Fry, to the extent also that they had CBD vote in favour of the proposals.  I have not had such detail of evidence as would enable the Court to reach any definitive view about such matters but for the avoidance of doubt nothing in this judgment, and in particular nothing in the refusal of the Court to grant approval, is in any way a reflection on the manner in which Messrs Blackmore and Fry conducted themselves in the business.  There is no suggestion in this case that there is a public interest factor arising from commercially inappropriate conduct of the insolvents.

Costs

[90]     Costs need not necessarily follow the event in relation to the approval or refused approval of insolvency proposals.

[91]     In this case, however, the issue of inadequate notice was immediately taken by Carters and thereafter pursued.   It is the issue on which the Court has decided against the proposals.  There are sufficient other concerns with the proposals that the insolvents and their trustee should reasonably have anticipated that a further adjournment of the proposal process was required to allow further consideration of the proposals were to be ultimately approved by this Court.

[92]     In the circumstances it is my tentative view that costs should follow the event in this case.   It is the trustee who was ultimately responsible for determining the timing of the meeting at which the voting took place and it was the trustee who brought this application to Court. An award of costs against the insolvents would on the available evidence not be fully meaningful.  Tentatively, the appropriate course would appear to be that costs should follow against the applicant.

[93]     I leave it to the parties to reach agreement on the costs issue, if possible. Failing agreement, Carters is to first file a memorandum as to costs (maximum four pages) to be followed within five working days by a memorandum for the trustee and/or the insolvents, depending upon whom is effected by Carters’ application for

costs (also maximum four pages).

Associate Judge Osborne

Solicitors

Edmund Lawler & Associates Ltd - [email protected] Counsel –  Lee Salmon Long – [email protected] Dallison Stone, PO Box 13166, Armagh, Christchurch 8141

Counsel – M J Wallace – [email protected]

SCHEDULE 1

SCHEDULE 2