Broad v Kishore
[2019] NZHC 108
•12 February 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-1904
[2019] NZHC 108
UNDER the Insolvency Act 2006 IN THE MATTER
of the proposal of ASHOK MAHARAJ under sub-Part 2 of Part 5 of the Act
BETWEEN
PETER JAMES BROAD as trustee named in the proposal
Applicant
AND
NICK NAND KISHORE as an unsecured creditor named in the proposal
Respondent
Hearing: 5 February 2019 Appearances:
P Broad the Provisional Trustee, in person B Cunningham for the Insolvent
R V Sami for Mr Kishore, an opposing creditor
Judgment:
12 February 2019
JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 12 February 2019 at 3.30pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors / Counsel:
Skeates Law, Auckland
B Cunningham, Auckland Murdoch Price Auckland P Broad, Auckland
MAHARAJ v KISHORE [2019] NZHC 108 [12 February 2019]
[1] Mr Peter Broad, the provisional trustee in respect of a proposal to creditors made by Mr Ashok Maharaj under Part 5, subpart 2, of the Insolvency Act 2006 (the Act), applies for approval of Mr Maharaj's proposal to his creditors.
[2] A meeting of creditors was duly convened in accordance with the Act. Some of the creditors opposed Mr Maharaj's proposal, but Mr Broad's report of the meeting shows that the required majority of creditors (both in number and in value) supported the proposal. However, one of the opposing creditors, Mr Nick Kishore, has filed a notice of opposition to Mr Broad's application for approval of the proposal.
[3] Mr Kishore's principal ground of opposition is that the trustee ought not to have accepted the claim of one creditor, Westminster Finance Limited (Westminster). Westminster was by far the largest claimant, with a claim of $356,478.92, and Mr Kishore says that if the trustee had not accepted Westminster's sum at that figure the required majority of creditors voting1 would not have been met. The trustee should have rejected the proof of debt submitted by Westminster, or capped it at a reasonable sum. In either event, the requisite three-quarters in value of the debts of all creditors present and voting would not have been achieved.
Mr Maharaj's statement of affairs and proposal
Statement of affairs
[4] In his statement of affairs sworn on 5 September 2018, Mr Maharaj said that he had been trading as a builder through Victory Builders & Developers Ltd (Victory) for the past few years. Initially Victory was profitable, but later it suffered a downturn in fortunes and it was eventually put into liquidation on 2 March 2018. Mr Maharaj said that Victory was his only source of income, and his personal cashflow and ability to meet his financial obligations dried up when Victory was liquidated. Also, he said that he had recently been suspended as a licensed building practitioner for a period of six months, and that has affected his ability to obtain construction work or other employment. Mr Maharaj deposed that he could not meet his commitments or the
1 The resolution accepting an insolvent's proposal must be decided by a majority in number and three-quarters in value of the creditors who vote and are personally present at the creditors meeting (or who are represented at the meeting in accordance with the requirements of the Act, or have voted by postal vote) — Insolvency Act 2006, s 331(3).
guarantees he had given to creditors of Victory, but with the assistance of loans from family and friends could provide a dividend of 15 cents in the dollar which he hoped would be acceptable to his creditors.
[5] Mr Maharaj's statement of assets and liabilities showed total assets of $450.00, consisting of cash on hand, and total liabilities of $576,622.17.
[6] Mr Maharaj listed "secured creditors" as nil. Of the seven listed unsecured creditors, Westminster was by far the largest with a claimed debt of $357,000. The next largest debts were debts to Dysart Timbers (Glen Innes) Ltd ($105,569.20), Mitre 10 Manukau ($45,761.64), and Rajveen Prasad ($31,239.38).
The proposal
[7]Mr Maharaj's proposal is dated 5 September 2018.
[8] The proposal notes that there are no priority debts (a debt owed to the Commissioner of Inland Revenue is for unpaid income tax, and as such is not entitled to priority under the Act).
[9] The proposal sets out the proposed dividend of 15 cents per $1.00 on all unsecured debts. Payments would be made to the trustee on a monthly basis in amounts not less than $1,000, but in any event full payment of an amount sufficient to satisfy the 15 cents in the dollar on all creditors' claims would be made within 12 months of the approval of the proposal by the Court. The funds necessary to do that would be obtained from family members and paid to the trustee. Distributions of dividends would be made to each creditor proportionately to the total debt, as crystallised at the time of filing the proposal.
[10] The proposal states that payment of the trustees' costs and disbursements would be made independently of the payments for creditors.
[11] Mr Broad has countersigned the proposal, indicating his willingness to act as interim trustee in terms of the proposal.
The meeting of creditors and the interim trustee's report
[12] Mr Broad convened a meeting of creditors on 19 September 2018. He filed a report on the meeting, on 9 October 2018.
[13] Mr Broad reported that on 5 September 2018 Mr Maharaj gave notice to every known creditor affected by the proposal that a meeting of creditors would be held on 19 September 2018 to consider the proposal. He gave a further notice of the meeting to every known creditor himself, on 12 September 2018. Mr Broad's notice was accompanied by a statement of Mr Maharaj's assets, debts and liabilities, a list of his creditors affected by the proposal (showing the amounts of their claims), a copy of Mr Maharaj's proposal, a proof of debt form, and a voting letter.
[14] Mr Broad reported that the proposal was accepted by the required majority of creditors. He produced a copy of the resolution approving the proposal.
[15] Mr Broad reported that three additional creditors, not referred to by Mr Maharaj in his statement of affairs, submitted proofs of debt that were accepted by Mr Broad. Those additional creditors were Richard Warburton ($1,700), Nick Kishore ($50,000), and Warburton Ltd ($16,197.75).
[16] Mr Broad submitted in his report that the proposal was an advantageous one. Adjudicating Mr Maharaj bankrupt would not result in any recovery by the creditors, while the proposal would provide them with 15 cents in the dollar on their debts.
[17] Mr Broad approved creditors' claims totalling $630,465.56 for the purposes of voting at the creditors' meeting. Westminster Finance and Dysart Timber, with debts (as admitted by Mr Broad) of $356,478.92 and $112,971.70 respectively, voted in favour of the proposal, as did four other creditors. There were three votes against the proposal, including Mr Kishore, whose proof of debt was accepted by Mr Broad in the claimed amount of $50,000.
[18]The value of the debts of the creditors voting in favour of the proposal was
$503,464.54, representing 79.85 per cent of the total admitted debts. The required
majority in number and 75 per cent in value of the debts of creditors voting for approval of the proposal were accordingly met.
[19] Mr Broad's minutes of the creditors' meeting record that Mr Broad reported to the meeting on approved claims and the result of the postal vote. Creditors' claims and voting forms were laid out at the meeting so that any creditors or their representatives could inspect them.
[20] The meeting proceeded with an examination of Mr Maharaj, including questioning by Mr Kishore on various topics. Mr Kishore was accompanied at the meeting by his solicitor, Mr Sami, and Mr Sami also questioned Mr Maharaj on various matters (including how Mr Maharaj intended to get income to meet his obligations under the proposal, given that he had been suspended as a licensed building practitioner). Mr Maharaj advised the meeting that the suspension was only for six months, and that he would be receiving financial assistance from his family in the interim period.
[21]The minutes recorded that no creditor wished to amend the proposal.
Mr Broad's application for approval of the proposal
[22] Mr Broad applied to the Court for approval of the proposal under s 333 of the Act, in reliance on his trustee's report and on Mr Maharaj's affidavit filed with the proposal. No further affidavit in support was filed at that stage.
Mr Kishore's notice of opposition and affidavit in opposition
[23] Mr Kishore first contends that the proposal should be refused because it is not reasonable, or not calculated to benefit the general body of creditors.2 He notes that Westminster's debt of $356,478.92 is substantially comprised of default interest — it made a cash advance of $55,000 to Mr Maharaj on 24 April 2008, and two further cash advances on 13 October 2007 ($20,000) and 2 June 2008 ($15,000), but the rest of the claim is for interest.
2 Insolvency Act 2006, s 333(3)(b).
[24] The evidence shows that Mr Maharaj made no payments to Westminster between 24 April 2008 and 24 August 2018. In those circumstances, Mr Kishore pleads that Westminster's claim is statute-barred. Alternatively, the total amount of interest claimed by Westminster is excessive, and Westminster has acted oppressively in seeking to recover that interest (by lodging a claim with the provisional trustee) so long after the debt became due for payment. Mr Kishore says that if either of those challenges to the Westminster claim were upheld, the required three quarters in value of creditors voting in favour threshold would not have been achieved, and Mr Maharaj's proposal would have gone no further. He says that the effect of accepting Westminster's claim would be that the opposing creditors will suffer an unfair prejudice as a result of the vote by the majority (Westminster in particular).
[25] Mr Kishore's second contention is that it would not be expedient for the proposal to be approved.3 In support, Mr Kishore refers to instances of alleged defective and inferior building work performed or supervised by Mr Maharaj. He refers to a claim he has pending in the Manukau District Court against Mr Maharaj, in which he alleges defective and inferior workmanship. He also says that Mr Prasad, one of the creditors who voted against the proposal, has obtained judgment against Mr Maharaj in the Manukau District Court for a claim based on defective and inferior workmanship.
[26] Mr Kishore then refers to the suspension of Mr Maharaj's licence as a building practitioner, and to a liquidator's report recently issued by the liquidator in the liquidation of Victory. That report says that Mr Maharaj's shareholder's account was overdrawn at the time of liquidation, and that the liquidator has issued a claim against him.
[27] Mr Kishore contends that the proposal should be declined to avoid further risk to the commercial community. Also, bankruptcy will afford greater opportunity for investigation of Mr Maharaj's financial affairs, and adjudication would be for the overall benefit of all creditors and the general public.
3 Insolvency Act 2006, s 333(3)(c).
[28] With his supporting affidavit, Mr Kishore produced a copy of a Prendos report on his own claim against Mr Maharaj. The report concluded that the building work did not comply with the Building Code and/or with applicable Standards, in various stated respects. The workmanship was said to be not what a competent tradesman would produce. Mr Kishore produced a copy of a quotation for $42,000 plus GST for remedial work on his own property, and said that he has so far paid $22,000 in legal fees as a result of Mr Maharaj's actions.
[29] Mr Kishore then produced a copy of a report of the Licensed Building Practitioners Board (the Board) given on 30 April 2018, in which the Board found that Mr Maharaj had committed disciplinary offences under ss 317(1)(b) and 317(1)(d) of the Building Act 2004.4 Mr Maharaj's licence was suspended for six months, and he was ordered to pay $3,000 towards the costs of the Board's enquiry. The Board's report included the following:
[39] There was clear evidence before the Board that building work had been carried out in a negligent manner and in a manner that was not in accordance with the consent documentation.
…
[41] The respondent should have also identified that the remediation undertaken was not appropriate. The Board did not accept [Mr Maharaj's] evidence that he did not know who had installed packers. It found [Mr Maharaj] to be evasive in his answers and that his evidence was inconsistent with documentation and other testimony before it.
…
[49] The Board also notes that [Mr Maharaj] has made changes to the consented design without using any form of process.
…
[68] The matters before the Board were very serious in the nature. A commensurate penalty is warranted and as such the Board considers that a suspension of [Mr Maharaj's] licence is warranted to not only punish [Mr Maharaj] but also to deter others from such conduct.
4 Section 317(1)(b) applies where a licensed building practitioner has carried out or supervised building work or building inspection work in a negligent or incompetent manner. Section 317(1)(d) applies where the practitioner has carried out or supervised building work or building inspection work that does not comply with a building consent.
[30] Mr Kishore noted that the 6 month suspension would have ended on 30 October 2018, and that Mr Maharaj may now already be engaging in further building works, posing further risk to the public.
[31] With reference to Westminster, Mr Kishore expressed concern that the debts of Westminster, Mr Warburton, and his company Warburton Ltd, were accepted by Mr Broad. He noted that Mr Warburton has been supporting or assisting Mr Maharaj in the District Court proceeding Mr Kishore has brought against Mr Maharaj, and Mr Warburton also supported Mr Maharaj in the Board complaint process. Mr Kishore expressed concern at what he saw as a lack of independence of these three debts.
Affidavits in support of the proposal
Mr Maharaj
[32] Mr Maharaj provided a second affidavit in support of the proposal, on 3 December 2018.
[33] He said that he originally became involved in property investment around 2000, and he was involved in a building company at that time. He would purchase suitable properties, selling off the original house, subdividing, and constructing a new property on the balance of the land. That business model worked well for him until the global financial crisis in 2008, when finance became difficult to obtain. During the global financial crisis he could not sell the properties he had, and his debts were incurring interest payments that he could not meet. Banks were proceeding to mortgagee sales.
[34] Mr Maharaj had known Mr Robert Warburton for some years. Mr Warburton operates Westminster, which Mr Maharaj described as a small finance company. He obtained the loans from Westminster which are now the subject of Westminster's claims.
[35] Mr Maharaj described the loans as "risky lending" for Westminster. Mr Maharaj had been unable to obtain funding through a bank or other financial
institution, and there were no funds otherwise available for his kind of "speculative borrowing". He said that he told Mr Warburton that he was under severe financial pressure, but if he could get some advances he would be able to finish property renovations, sell a property or properties, and repay the loans. The interest rates were relatively high, but Mr Maharaj said that it was he who offered the particular rates shown in the various loans. The interest rates were not proposed by Westminster.
[36] Mr Maharaj said that he was an experienced property developer, and knew what he was doing. He needed the funding, and he had to make an attractive proposal to Westminster to obtain it.
[37] Mr Maharaj said that he promised Westminster that he would repay the funds with interest, and he repeated that promise over the years. However, he was never in a financial position to repay any of the loans. In March 2018, Victory was placed in liquidation.
[38] Mr Maharaj acknowledged that Mr Warburton has assisted him with various problems from time to time, including in the claim brought against him by Mr Kishore.
[39] Mr Maharaj included the debt to Westminster in his proposal because he acknowledges that he owes the money, including the interest. As he put it, "there was never any question in my mind that I would not repay the loan." Mr Maharaj also acknowledged the debts owed to Mr Warburton and Warburton Ltd, in the respective sums shown in their proof of debt forms.
Mr Robert Warburton
[40] In an affidavit sworn on 3 December 2018, Mr Warburton confirmed that he prepared the claim forms for Westminster, Warburton Ltd, and himself.
[41] Mr Warburton said that he has known Mr Maharaj for approximately 20 years. The last 10-15 years have been difficult, but he has done his best to assist Mr Maharaj. From time to time that has included providing unpaid support in relation to litigation matters, occasionally acting as Mr Maharaj's McKenzie friend in Court hearings.
However, he has mostly encouraged Mr Maharaj to obtain legal counsel where Mr Maharaj's financial resources have enabled that.
[42] When Westminster made the advances to Mr Maharaj, he was already under considerable financial pressure, and he did not have the financial resources to weather the effects of the global financial crisis. Mr Warburton confirmed that it was Mr Maharaj who proposed the interest rates and main terms for the lending. Westminster found those terms acceptable, and made the advances.
[43] Mr Warburton said that, notwithstanding his inability to repay, Mr Maharaj has consistently advised him (verbally) that he would repay "when he came right". When that had not happened and the proposal was made, Mr Warburton saw the offer of 15 cents in the dollar as a welcome conclusion to what had been a very bad investment decision that had perpetuated over the years, with further assistance provided for no return.
[44] Mr Warburton produced with his affidavit copies of the material provided to Mr Broad in support of Westminster's claim for the $356,478.92 debt which was accepted for voting purposes by Mr Broad. Mr Warburton also provided a copy of the registered Memorandum referred to in the mortgage and loan agreements, setting out the general terms of the advances made by Westminster to Mr Maharaj. Among the documents was a spreadsheet showing the advance of $55,000 made on 24 April 2008, and interest accruing on it between then and the date Mr Maharaj filed his proposal.
[45] The April 2008 loan was due for repayment within three months. The interest rate was 36.36 per cent and the penalty rate was 46.36 per cent. Monthly penalty interest (not compounding) was charged by Westminster at the penalty rate, being
$2,124.83 per month. As at 24 May 2014, the balance was $210,112.59. At the date Mr Maharaj filed his proposal, the balance due on the April 2008 loan was
$318,478.92.
[46] The October 2007 loan was evidenced by an email dated 28 September 2007 from Mr Maharaj, requesting a loan of $20,000, with repayment of $21,500 in two weeks' time.
[47] The 2 June 2008 advance of $16,500 was supported by a written agreement, which referred to a new advance of $15,000 and an "urgent finance facility fee" of
$1,500. The term of the loan was two weeks, and the total interest payable was nil.
[48] A second mortgage securing the advances over a property then owned by Mr Maharaj in Motatau Road was registered on 28 April 2008. A memorandum of general terms and conditions relating to the mortgage shows that the October 2007 advance was secured.5
Applications for approval of insolvents' proposals — legal principles
[49]Section 333 of the Act materially 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)The court must not approve a proposal if it does not provide for the payment, before any other debts are paid, of—
(a)those debts that would have priority under this Act if the insolvent was adjudicated bankrupt; and
(b)the trustee’s fees and expenses that are properly incurred by the trustee in respect of the proposal; and
5 In the memorandum of general terms and conditions, the expression "the secured moneys" was defined to include all moneys due at the date of the document, or which might before owing to Westminster at any time in the future.
(c)costs incurred by a person other than the insolvent in organising and conducting a meeting of creditors for the purpose of voting on a proposal.
(5)Subsection (4)(a) does not apply to the extent that a creditor waives the priority that the debt of that person would otherwise have had.
(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.
[50] The Court's task is a two-step process: it must first decide whether one of the grounds for refusing exists and, if so, it must then decide whether to exercise its discretion to refuse approval.6
[51] In Re Bennetts' Proposal, Hardie Boys J set out the general approach the Court should take, in the following terms:7
…Rather than it being for the proponents of a scheme to show that it ought to be approved, I think the Court should accept the view of the creditors, or the majority of them, and grant approval unless it is apparent that one of the grounds for refusing approval exists. The Court is clearly required to exercise its independent judgment, for considerations of wider public interest are relevant, and therefore even unanimity amongst the creditors will not be predeterminative of approval. But unless it is clear that the creditors generally would fare better under a bankruptcy, approval ought normally to be given unless other special circumstances militate against it. Whilst a proposal ought not to be imposed upon dissentient creditors if that would be disadvantageous to them as members of the general body of creditors their dissent should not be upheld if to do so could be prejudicial to the general body of creditors.
[52] That passage has been approved by the Court of Appeal on a number of occasions, including in Magsons Hardware Ltd v Bogiatto,8 Farmer v Rowley,9 and Herbert v New Zealand Guardian Trust Co Ltd & Ors.10
[53] In Farmer v Rowley, the Court of Appeal made it clear that the Court may refuse its approval if and only if it is of the opinion that one or more of the trigger paras (a), (b) and (c) of s 333(3) applies. It follows that the exercise of the discretion
6 Farmer v Rowley [1992] 2 NZLR 195 (CA).
7 Re Bennetts' Proposal HC Christchurch B138/81; M306/81, 1 February 1982 at 9.
8 Magsons Hardware Ltd v Bogiatto [2011] NZCA 378.
9 Farmer v Rowley, above n 6.
10 Herbert v New Zealand Guardian Trust Co Ltd & Ors [2012] NZCA 442.
reposed in the Court under the section must be related to the particular paragraph or paragraphs relied on.11
[54] In determining whether a proposal is reasonable, the Court is required to exercise an independent judgment. Nevertheless, it must be influenced by the commercial judgment of creditors who in approving the proposal have demonstrated their willingness and wish to receive a partial payment without recourse to bankruptcy. Unless there are special public interest or other commercial considerations present, the assessment of the substantial body of the creditors ought to be accepted.12
[55] The reasonableness of a proposal is to be assessed from the perspective of a "commercially experienced prudent investor". It does not import consideration of the public interest, which can best be considered under s 333(3)(c).13
[56] The alternative test in s 333(3)(b), whether the terms of the proposal may not be calculated to benefit the general body of creditors, requires consideration of the fairness of the proposal between classes of creditors by reference to their relative positions under the proposal or bankruptcy.14
[57] Applying the expression "not expedient" in s 333(3)(c) may require consideration of public interest factors. However, in Re Kelly Asher J considered that the subsection requires an open-ended approach — it is not appropriate to focus on any specific matter where to do so would impose a limitation that does not arise from the words of the subsection.15
[58] An insolvent's conduct may be a factor relevant to the Court's assessment of the public interest, to the extent that it may suggest a possibility of a continuing threat of harm to the commercial community. However, the Court's power under s 333(3)(c)
11 Farmer v Rowley, above n 6, at 199-200.
12 Farmer v Rowley, above n 6, at 200-201, per Richardson J.
13 Re Kelly ex parte Structured Finance Ltd [2009] 2 NZLR 785 at [45], approved in Magsons Hardware Ltd v Bogiatto, above n 8.
14 Magsons Hardware Ltd v Bogiatto, above n 8
15 Re Kelly ex parte Structured Finance Ltd, above n 13, at [53].
is not to be used for the purpose of punishing a debtor; the power is to avoid the risk of further harm to the public.16
[59] In Re Trott & Joy, Tompkins J accepted that an insolvent's misconduct might provide a ground for the Court to find it not expedient to approve a proposal under s 333(3)(c), but the "misconduct must be so irresponsible and its effects on creditors or others so devastating that a Court may conclude that it is in the public interest that the person responsible should not escape the stigma of bankruptcy". The disqualifications that go with bankruptcy may be required to "protect the unsuspecting community from the ravages of irresponsible conduct".17
Issues
[60]The following issues fall to be determined:
(1)Has there been non-compliance with the provisions of subpart 2 of Part 5 of the Act?
(2)Should the Court decline to approve the proposal on the basis that it is not reasonable?
(3)Should the Court decline to approve the proposal on the basis that it is not expedient to do so?
(4)Should the Court exercise its discretion in favour of approving the proposal?
[61]I will deal with each of those issues in turn.
16 Magsons Hardware Ltd v Bogiatto, above n 8, at [56].
17 Re Trott & Joy HC Auckland B1471/88, 14 April 1989, at 28.
Issue (1) – Has there been non-compliance with the provisions of subpart 2 of Part 5 of the Act?
Mr Sami's submissions
[62] Mr Sami challenged the amount for which Westminster's debt was admitted, contending that if the debt had been disallowed, or capped at a substantially lower figure, the proposal would not have received the required majority of 75 per cent in value of the debts held by all creditors who voted.
[63] Mr Sami first submitted that Westminster has acted oppressively in delaying making any claim for a period of over 10 years, allowing penalty interest to accrue (at an exorbitant rate) to an extent that became unduly burdensome on Mr Maharaj. He submitted the Court would have power to reopen the contract on an appropriate application being made in the District Court or in this Court under s 120(b) of the Credit Contracts & Consumer Finance Act 2003 (the CCCFA) (even if Mr Maharaj acknowledged the debt or failed to take any steps). He submitted that Westminster's claim for interest ought to have been crystallised at the date 12 months after the April 2008 loan fell due, giving a claim figure of $80,497.96 ($55,000 plus interest on that sum at the penalty rate for 12 months). In the alternative, he relied on s 20 of the Limitation Act 1950, contending that Westminster could only be entitled to recover interest up to 24 May 2014 (being the date six years after the first interest instalment on the April 2008 loan fell due).
[64]Section 20 of the Limitation Act 1950 materially provided:
20 Limitation of actions to recover money secured by a mortgage or charge or to recover proceeds of the sale of land
(1)No action shall be brought to recover any principal sum of money secured by a mortgage or other charge on property, whether real or personal, or to recover proceeds of the sale of land (not being the proceeds of the sale of land held upon trust for sale), after the expiration of 12 years from the date when the right to receive the money accrued.
(2)Repealed.
…
(4)No action to recover arrears of interest payable in respect of any sum of money secured by a mortgage or other charge or payable in respect
of proceeds of the sale of land, or to recover damages in respect of such arrears, shall be brought after the expiration of 6 years from the date on which the interest became due:
Provided that—
(a)Where a prior mortgagee or other encumbrancer has been in possession of the property charged, and an action is brought within one year of the discontinuance of that possession by the subsequent encumbrancer, he may recover by that action all the arrears of interest which fell due during the period of possession by the prior encumbrancer or damages in respect thereof, notwithstanding that the period exceeded 6 years:
…
[65] Mr Sami accepted at the hearing that Westminster's loan was secured by a registered mortgage, and thus covered by s 20.
[66] On his limitation argument, Mr Sami calculated that Westminster's debt should not have included any interest after 24 May 2014, and the amount due at that date was
$210,112.59. If the total creditor's claims, and the claims of creditors voting in favour of the proposal were both reduced to reflect acceptance of Westminster's debt in the sum of $210,112.59, the percentage of creditors voting in favour of the proposal (according to the values of their accepted claims) would have been 73.7655 per cent, and thus fallen short of the threshold for approval prescribed by s 331(3) of the Act.
Submissions by Mr Cunningham and Mr Broad
[67] Mr Cunningham appeared to accept that any claim for interest in respect of the period after 24 May 2014 would be statute-barred, but he contended that the limitation defence has never been raised by Mr Maharaj, who has on a number of occasions advised Mr Warburton of his wish to repay the debt and interest in full. In those circumstances it was not for the provisional trustee to unilaterally apply the Limitation Act to cap Westminster's claims.
[68] Mr Cunningham submitted that Westminster was well aware of Mr Maharaj's financial circumstances when the loan was made, and that no question of oppression could arise in circumstances where Westminster has not sought to recover the debt
owed to it (Mr Cunningham submitted that it would have been an exercise in futility for Westminster to have issued proceedings to recover the debt18).
[69] Mr Broad drew to my attention regulation 32 of the Insolvency (Personal Insolvency) Regulations 2007. That regulation provides:
32 Admission or rejection of claims for purposes of voting
(1)The provisional trustee has the power to admit or reject a claim for the purposes of voting at a creditors’ meeting, but his or her decision is subject to appeal to the court.
(2)If the provisional trustee is uncertain whether a claim may be admitted or rejected, he or she must allow the creditor to vote subject to that vote being declared invalid in the event of the claim being rejected for purposes of voting.
[70] Mr Broad also drew my attention to the judgment of Associate Judge Osborne in Re Wikeley, in which the Associate Judge dealt with an appeal under regulation 32(1) by a creditor who had opposed Mr Wikeley's proposal, on the basis that the provisional trustee wrongly admitted three other claims for voting purposes.19 Mr Broad submitted that regulation 32(1) prescribes a "track" for a creditor who wishes to challenge a trustee's decision to accept or reject a creditor's claim for voting purposes, and in the absence of any appeal it is too late now for Mr Kishore to challenge the provisional trustee's decision to accept the Westminster claim.
Discussion and conclusions on Issue (1)
[71] In the view that I have come to on Issues (2) to (4) it is not strictly necessary for me to decide this issue. However, I will make some observations on counsel's submissions.
[72] I note first that Mr Sami's limitation argument appears to be based on a misapprehension, in that the figure of $210,112.59 he adopted for the Westminster debt as at 24 May 2014 appears to omit the $38,000 claimed in respect of the two advances made by Westminster on 13 October 2007 and 2 June 2008. On the face of
18 Westminster lost its security for the debt in 2010, when another mortgagee sold the property in the exercise of its power of sale.
19 Re Wikeley [2014] NZHC 2677.
it, those two advances, on which no interest has been claimed, would have been protected at the time Westminster's debt was to be assessed.20
[73] If it were the case that Westminster was entitled to claim for the principal sum plus interest accrued to 24 May 2014 on the April 2008 loan, there seems to be no reason why it would not also have been able to claim at least an additional $35,000 for the October 2007 and June 2008 advances.21 Adding $35,000 to Mr Sami's Westminster claim figure of $210,112,59 would produce an adjusted claim figure for Westminster of $245,112.59, and an adjusted total of $392,098.21 for the value of the claims of creditors voting in favour of the proposal. The total figure for the claims of all creditors voting would have been $519,099.21.22
[74] If the total value of the claims of all creditors voting was $519,099.21, and creditors voting in favour of the proposal held debts totalling $392,098.21, the proportion of creditors voting in favour of the proposal would, by my calculation, have been 75.534 per cent. The threshold would have been met.
[75] By my reckoning, a similar result would follow if Westminster's claim were computed by adding to the capital of the three loans interest going back six years from 5 September 2018, being the date at which Westminster's claim fell to be assessed.
[76] I think there may be more merit in Mr Sami's submission based on the CCCFA. In the District Court decision of Real Finance Ltd v Setefano, Judge Tuohy adopted a period of 12 months after it had become clear to a creditor that the debtor could not or would not repay a loan with very high default interest provisions, within which the creditor ought to commence a recovery action. Delay beyond that period could make the claim (with ongoing interest at very high rates) unduly burdensome and unconscionable, and amount to oppressive conduct that would justify re-opening the
20 Under s 328(3) of the Act, the time for determination of creditors' claims is the time when the proposal is filed in Court. In this case, that was 5 September 2018, and the 12 year period prescribed under s 20 of the Limitation Act 1950 would not expire until various dates in 2019 and 2020.
21 Assuming, for present purposes, that the fee of $1,500 charged on each of these advances was the equivalent of interest.
22 Not the $484,099.23 figure calculated by Mr Sami.
contract under the CCCFA.23 However, I do not need to make any formal finding on the CCCFA submission, and I refrain from doing so.
[77] Mr Broad submitted that regulation 32(1) provides a single (and compulsory) "track" for a creditor who wishes to challenge a provisional trustee's decision to accept or reject the claim of it or another creditor, for the purposes of voting at a creditors' meeting. It is not open to a (creditor who has not filed an appeal) to challenge a provisional trustee's decision to admit another creditor's claim on an application to the Court for approval of the proposal.
[78] Again, I do not need to decide the point, but there does seem to me to be a potential conflict between the obligation on the Court to consider whether the provisions of subpart 2 of Part 5 of the Act have been complied with24 (which would include the provisions of the subpart which prescribe the voting majorities), and any interpretation under which the Court would not be entitled to have regard at all to the issue of whether a creditor's claim was correctly accepted by the provisional trustee.
[79] I note that in Re Tames Associate Judge Abbott took the view that the existence of the regulation 32 right of appeal does not preclude the Court from enquiring into whether there has been compliance with the voting requirements of the Act, particularly where non-compliance would affect the outcome of the vote.25 His Honour did not feel constrained by the Court of Appeal cases of Guest v Duffy26 or Whiteman v UDC Finance Limited27 to hold to the contrary. The Associate Judge said:28
[27] I find that the Court can review compliance with the voting requirements, particularly where non-compliance affects the outcome of the vote. I do not consider such enquiry cuts across the general objective of the legislation that the degree of support for a proposal be determined before it
23 Real Finance Ltd v Setefano [2017] NZDC 27629 at [33], referring to Crawford v Heaven [2000] 14 PRNZ 255 (HC). In the latter case, Laurenson J dealt with a case in which the plaintiff's claim for interest was made 10 years after the load was made. His Honour considered that the rapid decline in interest rates over the period made it oppressive in terms of s 10(1)(b) of the Credit Contracts Act 1981 to enforce the contract rates over the whole period. The contract was re-opened under s 14 of that Act.
24 Section 333(3)(a).
25 Re Tames [2013] NZHC 1089.
26 Guest v Duffy [1991] 1 NZLR 183 (CA).
27 Whiteman v UDC Finance Limited [1992] 3 NZLR 684 (CA).
28 Re Tames, above n 25, at [27].
comes before this Court for approval. The Act expressly provides that the Court can take into account whether the procedural requirements have been met. Those requirements include the need to obtain acceptance by certain majorities of the insolvent's creditors. If a challenge to the quantum of a claim that affects the outcome to the proposal could only be considered by way of appeal under regulation 32, the appeal would need to be determined before the Court determined any application for approval. I do not accept that that is the intention of the Act (it would have been a relatively simple matter to have provided for it). In my view the two avenues for challenge co-exist.
[80] There are some attractions in that analysis, especially as His Honour's "two avenues for challenge" approach would not render the appeal right in regulation 32(1) redundant — that appeal right would still be necessary to deal with the situation where a proposal had been defeated by the provisional trustee's decision to reject a creditor's claim. In such circumstances there would be no application by the provisional trustee for approval of the proposal, and the insolvent or any creditor wishing to challenge the provisional trustee's decision would have to invoke the appeal right in regulation 32(1). But those are arguments for another day. I record simply that I would not necessarily have accepted Mr Broad's proposition that the Regulation 32(1) appeal right provides the only means by which a creditor may challenge the provisional trustee's decision.
[81] In the end, I am content to resolve the application under Issues (2)-(4), on the basis that the proposal is not reasonable, and it is not expedient to approve it.
Issue (2) – Should the Court decline to approve the proposal on the basis that it is not reasonable?
Mr Sami's submission
[82] Mr Sami submitted that no explanation has been offered on the financial arrangements Mr Maharaj proposes, namely as to the identities and means of the family members who are said to have offered financial support. None of those family members have filed affidavits in support. Nor is there any comprehensible plan put forward for Mr Maharaj's future business prospects and income. The offer is vague, and nothing is said as to what will happen if the family members withdraw their support.
[83] Mr Sami also submitted that three of the creditors voting in favour of the proposal (Westminster, Mr Warburton, and Warburton Ltd, who together made up 60 per cent of total approved claims) should be treated as entities related to Mr Maharaj, and the Court should place less weight on their votes.29
Mr Cunningham's submissions
[84] Mr Cunningham submitted that the proposal would benefit the general body of creditors, who would receive 15 cents in the dollar on their debts. They will get nothing if the proposal is not approved and Mr Maharaj is adjudicated bankrupt. He referred to the passage from Re Bennetts Proposal quoted at paragraph [51] above, and in particular the statement that unless it is clear that creditors generally would fare better in a bankruptcy, approval ought normally to be given unless other special circumstances militate against it. Mr Cunningham submitted that no ground has been established which would justify the Court finding that the terms of the proposal are not reasonable.
Discussion and conclusions on Issue (2)
[85] If the proposal is approved, and the creditors do receive 15 per cent of their debts over the next year, I think it is fair to say on the evidence now before the Court that they would probably be better off under the proposal than they would be under a bankruptcy. In those circumstances approval would normally be given. The question is whether the proposal is sufficiently clear (including as to the proposed funding source or sources) that it is likely that the creditors will receive their 15 per cent dividend.
[86] Mr Sami argues that there is insufficient evidence of Mr Maharaj's ability to make the payments that will be required to be paid within the year if the proposal is approved. He emphasises the absence of any evidence supporting Mr Maharaj's ability to meet his obligations under the proposal.
29 Referring to Re Kelly ex parte Structured Finance Ltd, above n 13, at [54]-[57].
[87] The minutes of the creditors' meeting show that Mr Sami attended the meeting and put certain questions to Mr Maharaj, including how Mr Maharaj intended to meet his payment obligations under the proposal (given that he had been suspended as a licensed building practitioner). The minutes record Mr Maharaj's response that the suspension was only for six months, after which time he could continue. Mr Maharaj told the meeting that he would be receiving assistance from family in the meantime to meet his obligations under the proposal, but he appears not to have provided any further information.
[88] Given that there will be total creditors' claims in excess of $515,000, the proposal envisages that Mr Maharaj will find somewhere in the range of between
$75,000 and $95,000 to pay his creditors within 12 months. The proposal says that payments would be made to the trustee at the rate of not less than $1,000 per month, but if payments continued at that rate Mr Maharaj would only have paid $12,000 by the end of the 12 month term of the proposal, and he would have to complete his obligations by paying the balance on the last day. The imprecise way the proposal has been framed raises a question as to whether Mr Maharaj may have made the proposal without having secured employment or the necessary financial support from family members, in the hope that those would be secured at some time before the 12 month proposal period expired. That possibility, and the absence of any supporting affidavit from a family member who is willing to fund the proposal, does not engender much confidence that Mr Maharaj would meet his obligations under the proposal if it were approved. Nor does the March 2018 liquidation of Victory.
[89] In my view the creditors were entitled to greater clarity on the question of how Mr Maharaj would fund the proposal, and that evidence has not been provided. I accept Mr Sami's submission that the terms of the proposal are too vague, particularly as the proposal leaves it unclear as to what instalments creditors will receive, when they will receive those instalments, and whether the proposed source or sources of the family funding will be able and willing to provide the funds.
[90] In my view, the vagueness of the proposal as discussed above makes it unreasonable, notwithstanding the views of Mr Warburton and the other creditors who
voted to support it. Subject to the exercise of my discretion, I would say that grounds exist to refuse the proposal under s 333(3)(b) of the Act.
[91] Mr Sami's second argument under this head was that less weight should be given to the votes of Westminster, Warburton Ltd and Mr Warburton because of their apparently close relationship with Mr Maharaj. I do not accept that submission. This is not a situation where the pivotal votes resulting in the approval of a proposal have come from a family trust or family member who is either controlled or likely to be heavily influenced by the insolvent. Certainly Mr Warburton appears to have assisted Mr Maharaj both personally and on a commercial level, but in the claim lodged by Warburton Ltd for $16,197.75 the company appears to have kept careful records of the time spent assisting Mr Maharaj, and on 11 April 2018 it billed him a total of
$16,197.75 for its services. I accept that it might be questioned why Warburton Ltd's services were apparently not billed earlier (the time records produced cover attendances going back to 12 April 2014), but that might be explained simply on the basis that Mr Warburton appreciated that rendering an invoice to Mr Maharaj would probably be futile. On the face of it, the relationship appears to have been primarily commercial in nature. For those reasons I would not have been prepared to discount Mr Warburton's views for the reasons Mr Sami suggested.
[92] That is not to say, however, that the decision of Westminster not to enforce its debt for such a long period, with interest accruing at a rate that has increased the total debt roughly fourfold should not weigh against the approval of the proposal. It does, and I address that matter under Issue (3) below.
Issue (3) – Should the Court decline to approve the proposal on the basis that it is not expedient to do so?
Mr Sami's submissions
[93] Mr Sami says that the public interest is triggered in this case by Mr Maharaj's incompetence as a businessman and builder, who has persistently set up businesses which fail, causing large losses to his creditors, including unsuspecting members of the public who have engaged his building services. Mr Sami referred to one District Court judgment obtained by the creditor Rajveen Prasad, in a case arising out of
alleged defective and inferior workmanship by Mr Maharaj, and to the decision of the Board suspending Mr Maharaj's licence as a building practitioner. He also referred to the second report of the liquidators of Victory, which referred to a claim against Mr Maharaj on an overdrawn shareholder's account.30
[94] Mr Sami submitted that bankruptcy is appropriate in this case, to protect the public.
Mr Cunningham's submissions
[95] Mr Cunningham submitted that Mr Maharaj's borrowing from Westminster did not amount to irresponsible conduct. Westminster was fully aware of his financial circumstances, before making advances to allow Mr Maharaj to complete various projects and sell the properties before the banks that had provided mainstream finance conducted mortgagee sales. He submitted that Mr Maharaj's conduct had not been so irresponsible, and its effects on creditors or others so devastating, that the Court should conclude that it is in the public interest that he not escape the stigma of bankruptcy. On the public interest generally, Mr Cunningham noted that the question is whether there is a need to protect the public from the insolvent. The issue is not one of punishment of the insolvent, but avoiding the risk of further conduct to the detriment of the commercial community.
Discussion and conclusions on Issue (3)
[96] I doubt that it is for this Court to attempt to pass judgment on Mr Maharaj's qualities as a builder, and I doubt that any negligence that might have been or might be established against Mr Maharaj as a result of building work carried out by him could, on its own, provide a basis for the Court to make a "not expedient" finding on the basis that bankruptcy is necessary to protect those who might otherwise engage Mr Maharaj to carry out building work. However, I think those matters, considered with the matters referred to below, do support Mr Sami's broad proposition that this is a case where there is a need to protect the public from the risk of loss caused by Mr Maharaj's commercial behaviour. I note in that regard that the Board did not
30 At the creditors' meeting Mr Maharaj denied liability for this claim.
merely express concern at the standard of the building work performed by Mr Maharaj
— it found that he had been evasive in his answers, and that his evidence was inconsistent with documentation and other evidence before it.
[97] Those, then, are matters that contribute to a need for protection of the public from Mr Maharaj's commercial activities. But of greater concern is that Mr Maharaj appears to have been trading while insolvent for perhaps 10 years or more.
[98] It appears that Mr Maharaj has never had the ability to repay the Westminster debt, which is long overdue and has been incurring interest at a substantial rate every month. The situation appears to be one where Westminster has simply refrained from pursuing its rights against Mr Maharaj in the belief that it would be futile to do so. In the meantime, Mr Maharaj has clearly incurred new credit knowing that, if Westminster were ever to demand payment, his creditors could not all be paid. He has continued to trade, subjecting himself to the risk of substantial claims (such as those successfully brought by Mr Prasad) that he could not meet.
[99] In any situation where it appears that an insolvent has been trading for some years while insolvent, I think a public interest issue must arise as to whether some enquiry into the insolvent's past trading is warranted. That would be particularly so if any assets have been disposed of, or credit may have been obtained on the basis of any incomplete disclosure of liabilities.
[100] There may be other considerations which Mr Maharaj could put forward, but the bottom line must be that either the money was owing to Westminster or it was not. If it was not, Mr Maharaj should have made that plain to the creditors and omitted Westminster's claim from his statement of affairs. If Westminster's claim is good, there does not appear to be any escape from the conclusion that Mr Maharaj has been trading while insolvent for somewhere up to 10 years.
[101] In addition to those considerations, I think the lack of any reliable evidence of how the proposal would be funded supports the concern I have over Mr Maharaj's commercial reliability, and the need for protection for those who might otherwise have
commercial dealings with him in the future. The fairly recent failure of Victory adds to the concern.
[102] In all those circumstances, I am satisfied that the public interest would not be served by approving the proposal, and that it would be inexpedient to do so.
[103] I do not think that view can be affected by the views of the larger creditors who voted in favour of the proposal. Certainly Westminster's and Mr Warburton's views should not render approval of the proposal expedient in circumstances where Westminster's election not to pursue its debts over a very long period (while maintaining a right to do so if ever it suited it) appears to have provided the opportunity for Mr Maharaj to incur further liabilities that he cannot meet. The other major creditor who voted in favour of the proposal was Dysart Timber. But it appears from the minutes that Dysart Timber was not represented at the creditors' meeting, and it may not have had full knowledge of the details of Westminster's claim (including the facts that Westminster had chosen to do nothing to enforce its claim for 10 years, and that roughly three quarters of its claim represented interest charged at over 46 per cent per annum).
[104] Apart from Westminster and Dysart, there were four creditors who voted for the proposal, with debts totalling approximately $34,000. Creditors voting against the proposal held admitted debts with a total value of $127,001.02. So this is far from a case where the views of the creditors on the proposal were unanimous, and if the unusual circumstances of Westminster's claim had been fully appreciated it may be that some of the creditors who voted for the proposal would have voted against it. If two had done so, the proposal would not have been approved.
[105] If the existing creditor's application for an adjudication order filed by Mr Prasad proceeds, the Official Assignee will be well placed to look into the circumstances of Mr Maharaj's bankruptcy and take any steps that might be considered appropriate. In my view the supervision of the Official Assignee is appropriate in this case, and it would not be expedient to approve the proposal.
Issue (4) – Should the Court exercise its discretion in favour of approving the proposal?
[106] Having found that there exist reasons under s 333(3)(b) and (c) to refuse to approve the proposal, I see no reason to exercise my discretion in a contrary way. The application to approve the proposal will be refused accordingly.
Result
[107] The application for an order approving the proposal is refused. In the ordinary way, Mr Kishore should be entitled to costs. My preliminary view is that those costs should be assessed on a 2B basis, but I did not hear submissions from counsel on costs, and I will leave them to confer on the issue. If counsel cannot agree, any memorandum by Mr Kishore seeking an award of costs should be filed and served within 10 working days. Any memorandum for Mr Maharaj should be filed and served within 5 working days after receipt of Mr Kishore's memorandum. I do not consider that the case is one where costs should be awarded for or against Mr Broad.
Associate Judge Smith
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