Brown

[2020] NZHC 1131

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2020-404-470

[2020] NZHC 1131

IN THE MATTER

AND

of the Insolvency Act 2006

IN THE MATTER

of a proposal under Part 5 subpart 2 of the Insolvency Act 2006 by KEPPEL JOHN BROWN

Applicant

Hearing:	21 May 2020
Appearances:	RB Hucker and M Swan for the Insolvent O Ward for the Trustee
Judgment:	26 May 2020

JUDGMENT OF ASSOCIATE JUDGE SMITH

Solicitors:

Hucker & Associates, Auckland Stace Hammond, Auckland

Re Brown [2020] NZHC 1131

[1]                The insolvent, Mr Brown, filed a proposal to his creditors under subpart 2 of Part 5 of the Insolvency Act 2006 (the Act) on 16 March 2020. The proposal named Brenton John Joseph Hunt as the proposed trustee, and it was accompanied by the required affidavit setting out Mr Brown’s assets and liabilities.

[2]                The proposal was approved by the required majority in number and value of Mr Brown’s creditors, at a creditors’ meeting held on 16 April 2020.1

[3]                Mr Hunt filed a report on the proposal dated 24 April 2020, and he subsequently made application to this Court under s 333(1) of the Act for approval of the proposal. No creditor objected to the proposal.

[4]                I heard brief argument from Mr Hucker for the insolvent and Mr Ward for the trustee at a list hearing on 21 May 2020. Counsel subsequently submitted a memorandum addressing one aspect of the voting at the creditors’ meeting that I had raised in a Minute dated 22 May 2020.

Mr Brown’s assets and liabilities

[5]                Mr Brown disclosed total assets of $24,019.22, which included $15,000 as the estimated value of furniture and personal property. The only other assets comprised cash held in two bank accounts, of approximately $9,000.

[6]                Mr Brown’s affidavit listed unsecured creditors totalling $1,263,120.28. There were no secured creditors.

[7]                There were a total of 13 unsecured creditors. The six largest (in the amounts proved at the subsequent creditors’ meeting) were the following:

1      Under s 331(3) of the Act, the resolution accepting the proposal had to be decided by a majority in number and three-quarters in value of the creditors who voted and were either personally present or represented at the meeting by a person specified in s 332 of the Act, or voted by postal vote.

Peter John Reardon	$335,000.00
Lion NZ Ltd	$298,385.90
The Laura Hopwood Trust	$175,000.00
Paul Lomax of Chester Hospitality Ltd	$150,000.00
Flexigroup (New Zealand) Ltd	$144,895.43
Alison Hopwood	$100,000.00

[8]                Of the unsecured creditors, Mr Reardon and Ms Alison Hopwood are close family members of Mr Brown, and the Laura Hopwood Trust is associated with Mr Brown’s partner, Laura Hopwood.

[9]                Mr Brown’s affidavit provided some background to his insolvency. Briefly, he was involved in a number of restaurant businesses that were not financially successful. Two of them were effectively controlled by Lion Breweries, and that company owned the fixed assets. Mr Brown received a fixed monthly fee managing the restaurants, with any profit going to Lion Breweries.

[10]            The businesses were operated through four separate companies, one of which is now in liquidation. The shares in the companies are owned by the Keppel Brown Trust. That Trust has no other assets.

[11]            Mr Brown became insolvent, largely on account of a number of personal guarantees he had given, when the various business ventures failed.

[12]            The Laura Hopwood Trust is one of Mr Brown’s substantial creditors. He was a trustee of this Trust, but he retired from that position in January 2019. He is not a named beneficiary of the Laura Hopwood Trust. The Laura Hopwood Trust owns a property estimated to be worth $1.15 million. However, debts totalling approximately

$1,036,000 are secured over this property.

[13]            Mr Brown is now employed as a manager for a commercial cleaning business. He earns a salary of $140,000 gross per annum. He has two school-aged children and one pre-schooler, and his partner has recently taken on a part-time job to assist with the household income. Mr Brown says that he has completed a budget in the form that

would be required by the Official Assignee, and the budget shows a small deficit each week. He considers that it is unlikely that there would be any contributions assessed for payment if he were bankrupt.

The proposal

[14]            Mr Brown proposes to pay a single lump sum of $40,000 to his creditors in full satisfaction of his debts. That payment would be made within 10 working days of the Court approving the proposal, and, subject to one provision relating to the family creditors, it would be distributed to the creditors as if Mr Brown had been adjudicated bankrupt. Mr Hunt’s fees as trustee are provided for, as is the cost of conducting the meeting of creditors (these costs are to be paid by Mr Brown (or on his behalf) in addition to the $40,000 made available for creditors).

[15]            The three creditors who are either family members of Mr Brown or (in the case of the Laura Hopwood Trust) operated by one or more of Mr Brown’s family members, would not participate at all in the distribution of the $40,000 to the creditors. The proposal described these creditors as having agreed to forgo receiving any distribution under the terms of the proposal.

[16]            The proposal contained a provision that, if it was accepted by the requisite majorities of creditors and approved by the Court, it would be binding on all of Mr Brown’s creditors, and he would be released and discharged from any further liability to creditors.

The creditors’ meeting

[17]            Mr Hunt gave notice of the meeting to every known creditor on 17 March 2020. The notice was accompanied by copies of the proposal and Mr Brown’s statement of affairs, together with forms or proof of debt, voting letter, and proxy form. There was also a background statement provided by Mr Brown.

[18]            Mr Hunt presided at the meeting, which was conducted by audio-visual link using the Zoom platform.

[19]            A total of eight creditors, with debts totalling $1,111,367.62, voted in favour of the proposal (80% by value). Two creditors, with debts totalling $159,153.58 (20% by value), voted against.

[20]            The Laura Hopwood Trust, Mr Reardon and Ms Alison Hopwood all voted in favour of the proposal. The two votes against were Mr Lomax ($150,000), and Turner Hopkins Limited ($9,153.58).

Relevant provisions of the Act

[21]Section 333 of the Act 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

(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.

[22]              Section 333 requires the Court to follow a two-step process when considering an application for approval of a proposal under the Act:2

(1)To refuse to approve the proposal, the Court must first be satisfied that one of the three grounds in ss 3(a)-(c) or ss 4 of s 333 of the Act has been established. The Court cannot consider the cumulative effect of the grounds; it must be satisfied that one particular ground has been made out.

(2)If one of the grounds in ss 3(a)-(c) of s 333 is made out, the Court still has a discretion to approve the proposal. If the ground in s 333(4) is made out, the Court has no discretion; it must not approve the proposal.

[23]            The following statement from Re Bennetts has been cited with approval in subsequent Court of Appeal cases:3

… 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 would be prejudicial to the general body of creditors.

Discussion and conclusions

[24]            I am satisfied that the provisions of subpart 2 of Part 5 of the Act have been complied with. The one matter that gave me some cause for pause in that respect was that the votes of the two family members and the Laura Hopwood Trust together accounted for approximately 48% of those voting in favour of the proposal.

2      Magsons Hardware Ltd t/a Mitre 10 Mega v Bogiatto [2011] NZCA 378, and Farmer v Rowley

[1992] 2 NZLR 195 (CA).

3      Re Bennetts HC Christchurch M306/81, 1 February 1982, approved in Farmer v Rowley and Magsons Hardware Ltd (above note 21), and in Herbert v New Zealand Guardian Trust Co Ltd [2012] NZCA 442 at [27].

[25]            Those three creditors would not stand to receive any distribution if the proposal were accepted by a majority of creditors and approved by the Court. But I think they did remain creditors of Mr Brown for voting purposes (and were accepted as such by the trustee). They only agreed to abandon their claims against Mr Brown on condition that the proposal would be accepted by the creditors and approved by the Court, and that had not occurred when they filed their proof of debt with Mr Hunt and voted at the creditors’ meeting. I note also that in Re Kelly Asher J considered that the voting of the various entities associated with the insolvent in that case was a matter not concerned with a procedural step, or the reasonableness of the terms of the proposal, but something the Court was entitled to consider under s 333(3)(c).4

[26]I conclude that there is no basis to refuse the proposal under s 333(3)(a).

[27]            The next question is whether the terms of the proposal are unreasonable, or not calculated to benefit the general body of creditors (s 333(3)(b) of the Act).

[28]              First, it is not at all clear that the creditors would fare better if Mr Brown were bankrupted. He has total assets of only approximately $24,000, and the bulk of that is made up of furniture and personal effects, at least some of which he might be expected to retain in a bankruptcy. Certainly there is a family trust that owns a substantial property, but there is nothing to suggest that Mr Brown’s creditors might be able to access the assets of this Trust if he were bankrupted.

[29]            It is true that Mr Brown is now earning a fairly substantial income as a manager, and there is a possibility that the Official Assignee might require him to make some contributions to creditors if he were bankrupted. However with three young children, including a pre-schooler, I do not think it is at all clear that any contributions the Official Assignee might require Mr Brown to make would exceed the $40,000 now offered by Mr Brown to his creditors.

4      Re Kelly, ex parte Structured Finance Ltd [2009] 2 NZLR 785 HC.

[30]            The $40,000 proposed to be paid in satisfaction of Mr Brown’s debts might be said to be a small proportion of the total debts accepted by Mr Hunt at the creditors’ meeting ($1,270,521.20) – the percentage is only approximately 3.15%. But when the excluded family-associated creditors are taken into account, that percentage rises to approximately 6%. There have been some cases where proposals have been refused because the amount offered by the insolvent to creditors is so small as to be derisory,5 but although the dividend in this case is small I do not think it can be put into the “derisory” category.

[31]            The wishes of the creditors favour the approval of the proposal. While two creditors with debts totalling approximately $159,000 did vote against the proposal, several substantial commercial creditors voted in favour – Lion NZ Ltd ($298,385), Bidfood Ltd ($19,079.73), and Flexigroup (New Zealand) Ltd ($144,895.43). And even if the three creditors with family connections were taken out of the voting pool, the required majorities in number and value of those creditors voting would still have been achieved.6

[32]            I do not think that the two dissenting creditors have suffered unfair prejudice as a result of the majority vote in this case, and neither has seen fit to object. In the end, I think the decisive factors are that a commercially experienced prudent investor would be likely to look at the $40,000 on offer and compare it favourably with what that investor might receive if Mr Brown were bankrupted7, and the views of the creditors as a group would have supported the proposal regardless of whether the votes of the family creditors were counted.

[33]            Dealing with the latter part of s 333(3)(b), I do not think it can be said that the proposal is not calculated to benefit the general body of creditors. All of the creditors are unsecured, and the fact that three of them will not benefit at all from the proposal

5      For example, Herbert v New Zealand Guardian Trust Co Ltd, above n 3, where the dividend offered to creditors was approximately 0.016 cents in the dollar.

6      With the family-related creditors excluded, there would still have been five creditors voting for the proposal and only two against. The 50 per cent in number of creditors voting requirement would thus have been met. And the total of the debts of the five creditors voting for the proposal would have represented 75.88 per cent of the total value of the debts of all creditors who voted.

7      See Re Marsh ex parte Commonwealth Bank of Australia HC Auckland, CIV-2009-404-3336, 16 March 2010, referring to Re Kelly ex parte Structured Finance Ltd, above n 4.

(because they are, or are associated with, family members) does not in my view mean that the proposal is not calculated to benefit the general body of creditors. The three creditors in question have taken their own decisions not to pursue Mr Brown further if the proposal is approved, and there are no doubt benefits for them in their close family member avoiding bankruptcy.

[34]I conclude that the proposal should not be refused under s 333(3)(b) of the Act.

[35]            The last of the s 333 considerations relates to the expediency of the proposal. The Court here is concerned with any matters relevant to the public interest, although that need not be the only focus of the subsection.

[36]            In this case, Mr Brown has provided detailed background of the matters leading to his insolvency, and no creditor has raised any issue of misconduct on his part, or pointed to any matter that might require investigation by the Official Assignee.

[37]            In Re Kelly, three of the eight creditors that voted in favour of the proposal appeared to have a family association with the insolvent, and, in Asher J’s view, those entities may well have been controlled by the insolvent. It was not clear to the Court whether the entities actually existed legally as companies or trusts, or whether the debts were genuine. On the facts of the case, the Judge considered that the fact that the insolvent relied on family entities which he controlled to vote in favour of the proposal weighed against the exercise of the Court’s discretion to approve the proposal.

[38]            None of those factors exist in this case. There is nothing to suggest that the three family creditors are controlled by Mr Brown, or that the debts owed to them are not genuine debts. Nor is there any evidence to suggest that the exercise of their votes by the family members, or by the trustees of the family trust, were anything other than genuine exercises of their respective rights as creditors. Certainly these creditors’ reasons for supporting the proposal were not commercial reasons, but they are no less creditors on that account, and I do not consider that their votes, considered with all the other factors I have referred to, constitute a circumstance that would justify refusing approval on the grounds that it would be inexpedient to do so. The resolution to approve the proposal would have passed with or without their votes, and I do not

consider there is anything to suggest that the family members had any role in the meeting (according to the minutes it only lasted six minutes) that might have affected the outcome.

[39]I find that there is no basis for refusing the proposal under s 333(3)(c).

[40]            Finally, the various matters referred to in s 333(4) of the Act have been satisfied. There is no basis for refusing the proposal under that subsection.

Result

[41]For the foregoing reasons, the proposal is approved.

Associate Judge Smith