Diston

[2016] NZHC 722

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2016-485-69 [2016] NZHC 722

UNDER	the Insolvency Act 2006
IN THE MATTER OF	the proposal of Guy Marshall Diston

Hearing:	18 April 2016
Counsel:	Q S Haines for the Trustee, John Marshall Scutter
Judgment:	18 April 2016

ORAL JUDGMENT OF ASSOCIATE JUDGE SMITH

[1]      This   is   the   second   application   for   an   order   under   s 333   of   the Insolvency Act 2006  (the  Act)  approving  a  proposal  made  to  his  creditors  by Mr Guy Diston.   An earlier proposal was accepted by Mr Diston’s creditors at a meeting held on 8 May 2015, but in a reserved judgment given on 28 August 2015 I

declined to approve that proposal.1

Mr Diston’s first proposal

[2]      At the time of his first proposal, Mr Diston’s statement of affairs disclosed total debts of $2,258,188, which included a debt of $311,989 to ANZ Bank secured over the family home owned by Mr and Mrs Diston in Elizabeth Street, Waikanae. Mr Diston estimated the value of the home at $370,000.  The only other assets listed were furniture and personal property with an estimated value of $28,000.

[3]      Mr Diston’s proposal would have required him to pay the sum of $20,000, which would be distributed pro-rata among his creditors.  The $20,000 would have

been funded by Mrs Diston from her personal bank account, and would have been

1      Re a proposal by G Diston [2015] NZHC 2050.

Re Diston [2016] NZHC 722 [18 April 2016]

paid to the proposed trustee for distribution to the creditors.  The fees and expenses of the proposal would be met by family members.

[4]      At the creditors’ meeting held on 8 May 2015 the proposal was accepted by the required majority of creditors.  Fourteen creditors voted at the meeting, eleven in favour of the proposal and three against.  The debts held by those voting in favour represented approximately 89 per cent of the total debts held by the creditors who voted.  The required majority figures of 50 per cent in number of creditors voting and 75 per cent in value of total debts held by creditors voting, were accordingly

met.2

[5]      A number of the proofs of debt filed for the 8 May 2015 creditors’ meeting were for figures lower than those stated by Mr Diston in the statement of affairs submitted with his proposal.  In my judgment of 28 August 2015 I estimated that the total unsecured debt figure was probably a little less than $1.5 million, rather than the $1.946 million Mr Diston had put in his statement of affairs.

[6]      The  application  for  approval  of  the  first  proposal  was  opposed  by  one creditor, Mr Tompson.   Mr Tompson filed an affidavit in which he contended that aspects of Mr Diston’s conduct should be investigated by the Official Assignee, and that would not occur unless Mr Diston was bankrupted.  Mr Tompson also contended that the equity in the Distons’ Elizabeth Street property was such that Mr Diston’s creditors would fare better in a bankruptcy than they would if the proposal were approved.

[7]      In my decision on the trustees’ application for approval of the proposal, I concluded that the creditors would probably be slightly better off (in terms of the amount immediately available to them) under the proposal than they would be in a bankruptcy, but it would be marginal.3

[8]      I  noted  that  if  Mr Diston’s  proposal  were  approved,  the  dividend  for

unsecured creditors might be a only a little more than 1 cent in the dollar.  I referred

2      Section 331(3), Insolvency Act 2006.

3      Re a proposal by G Diston, above n 1 at [35].

to the Court of Appeal in Herbert v New Zealand Guardian Trust Ltd & Ors, where the Court had declined to approve a proposal where the dividend for unsecured creditors would be so small that it could be categorised as “derisory”.4

[9]      I noted  also  that  Mr Diston  had  obtained  appraisals  on  the  value  of the Elizabeth Street property from three separate local real estate firms.  Two of those appraisals suggested that unsecured creditors might fare slightly better in a bankruptcy,  and  one  suggested  that  the  unsecured  creditors  would  fare  slightly worse.   The real estate agents’ appraisals were not provided to the creditors, even though the appraisals had been obtained before the creditors’ meeting.

[10]     I noted in my August 2015 judgment that the creditors presumably voted on the basis of the rateable value of the Elizabeth Street property, namely $370,000, which had been provided to them.  They were not aware that all of the appraisals provided by the real estate agents were for figures in excess of $370,000, and that one was as high as $400,000.

[11]     Based on the real estate agents’ appraisals, Mr Diston’s counsel estimated that a sale of the Elizbeth Street property would produce a net amount for Mr Diston’s creditors  ranging  between  a  “worst  case”  figure  of  $7,055  (based  on  sale  at

$360,000), and a “best case” figure of $26,255 (based on sale at $400,000).

[12]     I concluded that when the creditors voted on the proposal at the 8 May 2015 meeting they did not have before them all of the information which would have enabled  them  to  value  the  chance  that  they  would  fare  better  commercially  if Mr Diston were adjudicated bankrupt.   I also concluded that the offer of $20,000 would not provide any tangible benefit to unsecured creditors, at least at the lowest end.  I noted, for example, that the Bank of New Zealand (which had voted against the proposal) would receive only $51 on its debt of $5,102.

[13]     Taking into account all of the factors, I concluded that the proposal was not reasonable,  and  was  not  calculated  to  benefit  the  general  body  of  creditors.    I

declined to approve the proposal under s 333(3)(b) of the Act.

4      Herbert v New Zealand Guardian Trust Ltd & Ors [2012] NZCA 442.

[14]     While it was not strictly necessary to deal with the question of whether it would be inexpedient to approve the first proposal (s 333(3)(c) of the Act), I noted in my August 2015 judgment that I would not have found it inexpedient to approve the proposal.  I found that Mr and Mrs Diston had sufficiently answered Mr Tompson’s allegations that Mr Diston had been conducting a business which was not disclosed to  creditors,  and   I  found  nothing  to  suggest  that  an  investigation  by  the Official Assignee might yield additional assets.   I found no evidence of dishonest trading or commercial recklessness on the part of Mr Diston, which might have been sufficient to raise an issue as to whether the commercial community needed to be protected  from  business  dealings  with  him  in  the  future.     I  noted  that  his indebtedness had arisen as a result of him giving personal guarantees of a company which had failed, which was not a remarkable situation on its own.  The liquidators of the company with which Mr Diston had been associated, Waikanae Plastics Ltd, had  not  issued  any  proceedings  against  Mr Diston  as  a  former  director  and shareholder.

The second proposal

[15]     Mr Diston made a second proposal to his creditors on 11 January 2016.  The terms of the proposal were:

(a)       the mortgage to the ANZ Bank would continue to be paid according to its terms;

(b)      Mr Diston  would  make six  consecutive six-monthly payments  of

$350 (total $2,100) in satisfaction of all priority creditors.  The first such payment  to be made within six  months of approval of the proposal;

(c)       payment  of  the  trustees’ costs  and  expenses  arising  out  of  the proposal would be made in the following manner:

(a) Twenty per cent of the first $3,000 or part of it, with a minimum of $200;

(b) Ten per cent of the next $7,000 or part of it; and

(c) Five per cent of any amount in excess of $10,000.

(d)	Mr Diston proposed to pay $20,000 to the trustee on approval of the proposal, and six consecutive six-monthly payments of $3,500 each
(total $21,000).  The first of those payments to be made six months after the approval of the proposal;
(e)	all unsecured creditors would receive a dividend of 20 per cent on the first $5,000 of proven debt (or part thereof) and then a pro-rata
payment on all debts over $5,000 as satisfaction of all unsecured creditors’ debts and obligations.  All payments would be made from
the insolvent to the trustee on the first business day of each six months;
(f)	the fees and expenses associated with organising and holding the creditors’ meeting would be met by Mr Diston’s family;
(g)	Mr Scutter was to be appointed trustee.
[16]	In  his	statement  of  affairs  and  affidavit  accompanying  the  proposal,

Mr Diston described himself as unemployed.  He disclosed total assets of $392,850, including furniture and other personal property valued at $12,500, together with cash in the bank of $350. The Elizabeth Street property was included within the $392,852 at its August 2014 government valuation of $380,000.  Total unsecured debts were shown at $1,676,726.06, and the mortgage debt to the ANZ Bank at $308,000.

[17]     Mr Scutter has filed a report on the creditors’ meeting, which was held on

3 February 2016.  Nine creditors, with debts totalling $822,264.71, voted in favour of the proposal by submitting claim forms and postal votes.  Six creditors or their proxies  attended  the  creditors’ meeting,  and  of  those  who  attended  there  were another four creditors (with debts totalling $542,794) who voted in favour of the

proposal.  Accordingly, thirteen creditors, with debts totalling $1,365,058.71, voted in favour of the proposal.

[18]     Two creditors voted against, Mr Tompson (debt $52,863.50) and Mr Hair

(debt $50,000).

[19]     The proposal was accordingly approved, with over 50 per cent of creditors voting in favour (thirteen creditors out of fifteen), and the creditors voting in favour holding more than 75 per cent of the total of the debts of all creditors who voted (92.99 per cent by value).

[20]     At  the  creditors’  meeting  it  was  resolved  that  Mr Diston’s  proposal  be

accepted, and that Mr Scutter be confirmed as trustee.

[21]     Mr Scutter then applied to the Court for approval of the proposal.

[22]    Mr Tompson has again opposed the proposal.   He filed an affidavit in opposition, but, as with the first proposal, has elected not to appear at the hearing.

[23]     Mr Tompson sets out a number of grounds of opposition in his affidavit.  First he complains that Mr Diston has already made a proposal which has been rejected by the Court: he should not be permitted to make a second proposal, particularly as Mr Tompson has incurred further costs since the last proposal was declined by the Court (issuing a second bankruptcy notice).

[24]     Mr Tompson has not referred me to any provision in the Act, or in the Insolvency Regulations, which prevents a debtor from filing a second, improved, proposal  after  the  Court  has  refused  to  approve  an  earlier  proposal.    Nor  was Mr Haines able to refer me to any provision or authority which does, or might, have that effect.

[25]     In those circumstances I do not think any abuse of process, or res judicata argument is available to Mr Tompson.  This is quite a different proposal from the one which was previously declined by the Court, and it has the approval of a significant majority of the creditors who voted on it.  Mr Tompson submits that the fact of the

rejection of the previous proposal (coupled with the further expense he has since incurred in issuing a second bankruptcy notice) makes it inexpedient to approve the proposal, within the meaning of s 333(3)(c) of the Act and/or under r 1.2 of the High Court Rules.  (Rule 1.2 states that one of the objectives of the rules is to secure the just, speedy and inexpensive determination of any proceeding or interlocutory application.)

[26]     I do not consider that r 1.2 has any application in this case.

[27]     Section 333(3)(c)  of  the  Act  provides  that  the  Court  may  decline  an application for approval of a proposal if, for any reason, it is not expedient that the proposal be approved.  While the term “expedient” is to be given a broad meaning,5 I do  not  think  it  can  be  called  in  aid  by  Mr Tompson  in  this  situation.    It  will frequently be the case that a debtor’s proposal is “triggered” by enforcement steps taken by one of a number of creditors, and in each such case that creditor is likely to

be able to say that if it were not for the pressure he or she applied (and the expense he or she may have incurred in initiating enforcement steps), the creditors would not have had the benefit of receiving the proposal at all.  Mr Tompson makes that very point in his affidavit.

[28]     But I think the question of expediency under s 333(3)(c) must be considered having regard to all factors, including the interests of the general body of creditors and the public interest. Any expense incurred by an individual creditor following the Court’s rejection of an earlier proposal may be a factor to be considered under the broad “expediency” heading, but it will not be the only factor.  In this case, I am not satisfied that the matters raised by Mr Tompson are enough, on their own, to justify a finding that it would not be expedient to approve the proposal.

[29]     Mr Tompson raises a number of matters about the second proposal itself. One relates to Mr Diston’s employment status.   In Mr Diston’s first affidavit he described himself as unemployed, whereas previously he had said he was a company director.   Mr Tompson also refers to Mr Diston presenting a business card to local

businesses, and offering services assisting those businesses to make savings on their

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

electricity costs.  Mr Diston has answered those matters in a second affidavit.  He says that he was a director of Waikanae Plastics Ltd (in liquidation) when the first proposal  was  submitted,  and  properly  described  himself  as  such  at  that  time. However Waikanae Plastics Ltd has since been removed from the register of companies, and Mr Diston’s status as a director then came to an end.   When the second proposal was submitted, he correctly described himself as unemployed.

[30]     Mr Diston says that in early 2016 he took employment (on a sub-contracting basis) with a company owned by his wife.  That company has a contract with another company to offer retail electricity services for it, and Mr Diston acts as a sales person.  His wife’s company earns commissions on sales Mr Diston makes, and the commission income so earned flows through as income to Mr Diston.  It is from this income that Mr Diston proposes to pay the instalments he proposes to pay under the proposal presently under consideration.

[31]     Mr Tompson points out that Mr Diston gave a figure of $25,000 for chattels and personal effects in the statement of affairs produced with his first proposal, but now gives a figure of $12,500 for those items.  Mr Diston again has a ready answer: he says that the chattels valued at $25,000 in the first proposal are owned jointly with his wife, and that his own interest should have been stated at one half of that figure, namely $12,500.

[32]     Mr Tompson also criticises the fact that Mr Diston did not itemise the chattels said to be valued at $12,500 in the statement of affairs which accompanied the second proposal.

[33]     Mr Tompson  then  challenges  the  estimated  value  of  $380,000  which Mr Diston has put on the Elizabeth Street property.  With the completion of the new expressway through to Waikanae, Mr Tompson says that the value will be higher: properties in the region are currently fetching at least $40,000 above government valuation.  Mr Tompson produced with his affidavit a copy of a Harcourts’ appraisal for the Elizabeth Street property recommending a listing price of $435,000 and a selling range between $380,000 and $425,000.  It appears from the appraisal that the agent provided the appraisal without viewing the property.

[34]     A further matter raised by Mr Tompson relates to Mr Scutter’s counsel’s fees associated with the first proposal.  The first proposal provided that the trustees’ fees and expenses would be met by family members, but the name of counsel who appeared for the trustees on the application for approval of the first proposal appears in the list of unsecured creditors which was provided with the second proposal.  The amount  involved  ($5,750)  is  relatively  modest,  and  Mr Diston  explains  in  his affidavit that there was a costs overrun; the fees now claimed by counsel represent the excess over and above what the family members agreed to fund.

Discussion and conclusions

[35]     Under s 333(3) of the Act, I may refuse to approve the proposal if I consider that:

…

(a)      the provisions of [subpart 2 of Part 5 of the Act] 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.

[36]     Looking first at subpara (a), dealing with the question of whether there has been compliance with subpart (2) of part (5), I note first that s 333(4) of the Act provides:

…

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.

[37]     There is provision made in the proposal for the priority payment of debts that would have priority if Mr Diston were adjudicated bankrupt, although it is not clear that any such debts exist.  Mr Haines advises that the provision made for payment of

$2,100 by instalments (para 2(a) of the proposal) was included in case Mr Tompson’s costs associated with the issue of two bankruptcy notices qualify as priority debts. Mr Haines advised that the trustee will give further consideration to that issue if the proposal is approved.   If the trustee considers that Mr Tompson’s costs associated with the issue of the bankruptcy notices are not priority debts, the $2,100 must still be paid by Mr Diston, but it will fall into the fund from which the trustees’ fees are to be paid and distributions made under para (4) of the proposal.  It is not necessary for me to resolve the point about whether Mr Tompson’s costs associated with the issue of the bankruptcy notices do or do not qualify as priority debts now: if and to the extent there is a priority creditor, I am satisfied that appropriate provision has been made in the proposal to pay that creditor.

[38]     I think proper provision has also been made in the proposal for the payment of trustees’ fees and expenses.  Paragraph (2) of the proposal sets out the details by reference to particular percentages of “the first $3,000 or part of it”, “the next $7,000 or part of it”, and “any amount in excess of $10,000”.   I think the wording could only be understood as creating a first charge, to the extent stated, on monies paid to the trustee by Mr Diston.  In my view s 333(4)(b) of the Act has been satisfied.

[39]     Section  333(4)(c)  is  also  satisfied:  the  proposal  provides  at  para  (6)  for payment of costs associated with organising and conducting the creditors’ meeting. Those costs are to be borne by Mr Diston’s family.

[40]     A  further   matter   which   might   be   considered   relevant   to   s 333(3)(a) compliance, is Mr Tompson’s concern that Mr Diston has not itemised the furniture and chattels valued by him at $25,000 (his share, $12,500) in the second proposal.  I do not think that omission is significant.  Mr Diston was obliged under s 327(2)(a) to state his assets in his statement of affairs, and I think with an item like furniture it would be unreasonable to require him to list every item separately, especially when the total figure is only $25,000.  If a creditor had any questions about the furniture and personal effects, those questions could have been asked at the creditors’ meeting.

There is no evidence that Mr Diston failed to adequately answer any questions put to

him at the creditors’ meeting.

[41]     It appears that the formal requirements of ss 327 and 328 have been met. The proposal appears to be in the form prescribed by s 327(1)(a), and was accompanied by the statement of affairs required by s 327(1)(b).  The statement of affairs included the particulars required by s 327(2), and the proposal was signed by Mr Diston.  It included a statement signed by Mr Scutter advising that he was willing to act as trustee if the proposal was approved.

[42]     The proposal was filed in Court as required by s 328(1), and it has not been withdrawn.  Mr Scutter has filed a report on the proposal setting out details of the voting of the creditors at the meeting held on 3 February 2016, and the resolution accepting the proposal.   An affidavit has also been provided by Ms East, a legal secretary, deposing that on 12 January 2016 she sent to all of the creditors named in the proposal a notice of the creditors’ meeting, a copy of the proposal and statement of affairs and affidavit, and creditors’ claim and postal voting forms.  Ms East also deposes that on 4 February 2016 she sent to all creditors named in the proposal a copy of the trustee’s application for approval of the proposal, trustee’s report, and notice of the date of hearing of the application for approval.

[43]     I am satisfied that there is no basis for refusing to approve the proposal under s 333(3)(a) of the Act.

[44]     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).

[45]     As noted in my judgment given on the application for approval of the first proposal, the starting point in considering this part of s 333 must be that the proposal should be approved unless it is clear that creditors generally would fare better under a bankruptcy, or there are other reasons for the Court to exercise its judgment against

approval.6

6      Re a proposal by G Diston, above n 1 at [30] citing Re Bennetts Proposal HC Christchurch, B138/81; M 306/81, 1 February 1982 at 9.

[46]     A significant reason for the failure of the first proposal was that the real estate agents’ appraisals of the Elizabeth Street property were not sent to creditors before the creditors’ meeting, and it appeared that in two out of five possible sales scenarios the creditors might be marginally better off if Mr Diston were bankrupted (in one of those  two  scenarios,  creditors  would  have  been  better  off  in  a  bankruptcy  by

$1,455.50, and in the other by $6,255.50).   In the second proposal, Mr Diston has increased his proposed contributions significantly.  Over three years he will pay an additional $23,100, taking the total contributions made by Mr and Mrs Diston to

$43,100.

[47]     Even if the ultimate sale price of the Elizabeth Street property were slightly over $400,000, as the appraisal recently obtained by Mr Tompson suggests it might be,  I  think  commercial  parties  considering  Mr Diston’s  second  proposal  would consider it preferable to take “the bird in the hand” offered by the proposal, rather than take their  chances  with  a forced  sale,  whether by the  Official Assignee  in Mr Diston’s bankruptcy, or possibly by the mortgagee.  Also, I do not think it can be safely assumed that the agents’ appraisals obtained by Mr Diston before the meeting on the first proposal took no account of the forthcoming completion of the expressway: the expressway had been a matter of public knowledge for quite some time before the first creditors’ meeting.

[48]     I am mindful too of the statement of Hardie Boys J in Re Bennetts’ Proposal, that the Court should accept the views of majority creditors, and grant approval, unless it is apparent that a ground for refusing approval exists.  Unless it is clear that the creditors will fare better under a bankruptcy, the proposal normally ought to be approved.   In this case, the thirteen creditors who voted in favour of the proposal included two large banks and a finance company, none of them with any apparent personal connection with Mr Diston or his family.   The judgment of commercial parties such as those is entitled to some respect on the approval issue.

[49]     A further consideration is that Mr Scutter advised me in the course of today’s hearing that the creditors were all advised in early September 2015 of the Court’s refusal to approve the first proposal.  The creditors would all have then had access to

my judgment delivered on 28 August 2015, and had the opportunity to read the detailed discussion in the judgment about the value of the Elizabeth Street property.

[50]     Given the factors discussed above, and the increased amounts Mr Diston now proposes to make available to his creditors, I do not think the concerns expressed in my August 2015 judgment about the value of the Elizabeth Street property, and Mr Diston’s failure to disclose to the creditors all of the information he had about its value, have any continuing force.

[51]     The question of a preference to the ANZ Bank (in respect of its receipt of ongoing interest payments) remains, but it must have been obvious to the creditors, and in my view there is no reason to depart from my findings in the August 2015 judgment on the first proposal that this factor, on its own, is insufficient to result in

refusal of the proposal on s 333(3)(b) grounds.7

[52]     The   other   substantial   ground   on   which   I   found   the   first   proposal unreasonable, or not calculated to benefit the general body of creditors, was that the proposed payment of $20,000 in satisfaction of all claims would have resulted in a tiny dividend for many creditors, which would have come within the “derisory” category discussed  by the  Court of Appeal  in  Herbert.    The  second  proposal  is substantially  better  for  the  creditors.    Total  contributions  from  Mr Diston  have doubled  (albeit  with  slightly  over  half  payable  over  a  three  year  period),  and provision has now been made for smaller creditors to get an increased proportion of their debts up to the first $5,000.  While the likely dividend remains very low, I am satisfied (by a narrow margin) that it is sufficient to avoid the “derisory” categorisation which would have been sufficient to see the application for approval refused.

[53]     I accordingly find that the proposal should not be refused on the basis that its terms  are  not  reasonable,  or  are  not  calculated  to  benefit  the  general  body  of

creditors.

7      Re a proposal by G Diston, above n 1 at [38].

[54]     The remaining matter to consider is whether for any reason it is not expedient to approve the proposal.  In my August 2015 judgment I found no reason to refuse approval under this head, and no new or additional grounds have been advanced by Mr Tompson on the application for approval of the second proposal.   The matters discussed at paras [54] and [55] of the August 2015 judgment continue to apply.

[55]     Having regard to all of the foregoing considerations, I am satisfied that the proposal should be approved.  I make an order accordingly.

Associate Judge Smith