Elder

[2012] NZHC 289

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV2011-404-002766 [2012] NZHC 289

UNDER  Part 5 of the Insolvency Act 2006

IN THE MATTER OF     a Proposal made by Collin James Elder

BETWEEN  COLLIN JAMES ELDER Insolvent

CIV 2011-404-002767

AND UNDER                 Part 5 of the Insolvency Act 2006

IN THE MATTER OF     a Proposal made by Adeline Wei Wei Elder

BETWEEN  ADELINE WEI WEI ELDER Insolvent

Hearing:         20 February 2012

Appearances: M J Whale for the Applicants

H Schoonraad for the Commissioner of Inland Revenue in Opposition

Judgment:      22 February 2012

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

This judgment was delivered by me on

22.02.12 at 4:30pm, pursuant to

Rule 11.5 of the High Court Rules.

Solicitors/Counsel:

Registrar/Deputy Registrar

Date……………

J Whale, Lowndes Associates, Auckland – [email protected]

COLLIN JAMES ELDER and ADELINE WEI WEI ELDER HC AK CIV 2011-404-002766 / 002767 [22

February 2012]

H Schoonraad, Inland Revenue, Auckland – [email protected]

The application

[1]      The  applicants  (Mr  and  Mrs  Elder)  have  applied  under  Part  5  of  the Insolvency Act 2006 (the Act) for approval of their Proposals for their combined payment of a total sum of $224,000 payable to their creditors over three years.  The Proposals offered creditors 12 cents in the dollar owed to them.

[2]      The Court has no ability to hear a joint Proposal application, hence the filing of separate Proposals.  Because Mr and Mrs Elder have a number of joint debts, their two applications were heard together before me.

The Proposals

[3]      On 18 May 2011 a creditors meeting was held in relation to the Proposals. Five creditors voted in favour of the proposals and three against.  The total amount of proven claims was $3,171,397.67 of which $2,509,346.98 was owed to creditors who voted for the Proposals, and $662,050.69 was owed to creditors who voted against the Proposals.

[4]      Those against were the Inland Revenue Department (the Commissioner) to whom  $79,100.00  was  owed,  Origin  Mortgage  Management  Services  (2008) Limited (Origin Mortgage) to whom $390,800.00 was owed, and Westpac.

[5]      Before Mr and Mrs Elders’ Proposals were filed, Origin Mortgage had filed and  served  applications  to  adjudicate  Mr  and  Mrs  Elder  bankrupt.     Those applications  have  been  held  over  pending the  Court’s  decision  on  Mr  and  Mrs Elders’ Proposal applications.

[6]      The Commissioner has filed an opposition to the Proposals.  That opposition is supported by Origin Mortgage.   It is not supported by Westpac even though Westpac voted against the Proposal at the creditors meeting.

[7]      The Proposal Trustees have applied for the Court’s order approving those Proposals, they being satisfied the voting outcome of the creditors meeting has provided them with authority to do so.

[8]      Section 333(3) of the Act provides:

...

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

(a)      the provisions of this sub part 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.

[9]      The Commissioner’s opposition focuses upon (b) and (c).  There is no claim under (a) of procedural error or default.

[10]   After hearing the submissions of Mr Whale for the applicants and Mr Schoonraad for the Commissioner, I informed the parties that the Proposals would be granted.  In brief my reasons follow.

Opposition to the Proposals

[11]     The  primary  concern  of  the  Commissioner  was  the  fact  that  the  major creditor of Mr and Mrs Elder was Anna Ng.  She was owed $1,372,409.00, being by far the largest debt owed.   Ms Ng is a cousin of Mrs Elder.   The Commissioner submits that she in particular but others as well were related parties who should not have been part of the general body of creditors and whose debts should not be considered in relation to the voting for the Proposals.

[12]     Other grounds for opposition include:

(a)      That the Proposals were speculative when viewed in the context of Mr and Mrs Elder’s current and prospective earnings which the Commissioner claims are uncertain, unreliable and difficult to assess.

(b)It  is  in  the public interest  that  Mr  and  Mrs  Elder  be  adjudicated bankrupt because they are a risk to the commercial community and to the integrity of New Zealand’s tax system.  Accordingly their affairs should be controlled and investigated by the Official Assignee.

Related parties

[13]     The Commissioner says that the debts owed to Ms A Ng, to Ms F van Rijn ($153,800), Hall & Parsons CA Limited ($210,450), and S Stodart ($139,000) should all be treated as the debts of related parties and accordingly their votes for the proposals should not be counted.

[14]     Ms Stodart is a lawyer who acted for Mr and Mrs Elder in their conduct of business affairs.   Likewise and for a similar purpose Hall & Parsons CA Limited were engaged as accountants.

[15]     Ms van Rijn was a personal friend who had lent money to Mr and Mrs Elder.

[16]     In   the   course   of   submissions   I   informed   Mr   Schoonraad   that   the Commissioner’s challenge to the creditor claims of the lawyer and the accountants must fail.  There is no authority nor in this case any evidence supporting claims that the services of a professional nature provided by the lawyer or accountant put those persons in default of a right to vote at a creditors meeting.

[17]     The position affecting the claims of Ms Ng and Ms van Rijn are different. One is related to Mrs Elder, the other is her close friend.

Ms van Rijn and Ms Ng

[18]     They are noted in the Creditors Proposal as being ‘Excluded Creditors’.  That is, they have elected to forego payment from funds available to creditors; that if the Proposals are granted Ms Ng and Ms van Rijn agree to forego their creditor claims. On the other hand, as the Proposals noted, approval of them does not affect the rights, remedies or claims which Ms Ng and Ms van Rijn may have against other parties or in relation to securities granted to them by others.

[19]     The Proposal trustee also advised all creditors that if Mr and/or Mrs Elder were bankrupted that Ms Ng and Ms van Rijn would lodge a claim in the bankruptcy estates.

[20]     Mr Schoonraad’s submission  for the Commissioner is that if a ‘friendly’ creditor  is  prepared  to  waive  his/her  claim  on  the  condition  that  a  proposal  is approved  by  the  High  Court  then  that  claim  should  be  discounted.     The Commissioner enquires why the creditors did not waive their debts before the Proposal was voted upon.

[21]     I do not accept the submission.  I do not agree that a person who may, post the creditors meeting, elect not to share in the Proposal outcome, should be disqualified from voting at all.  Indeed, as Mr Whale submits, it is not uncommon for some creditors to waive an entitlement to a Proposal share after the Proposal has been approved.  Nor at that same time is it uncommon for that same creditor to say that if the Proposal is not approved, that he/she will participate in the bankrupt estate in the way he/she is legally entitled to.

[22]     I accept the submission of Mr Whale that the agreement of Ms Ng and Ms van Rijn not to participate in distributions under the Proposals directly and significantly  benefits  all  other  creditors  and  that  the  value  of  creditors’ claims entitled  to  a  distribution  is  substantially  reduced  with  a  resulting  much  larger payment to those creditors.   Therefore, the terms of the Proposals (including the waivers of Ms Van Rijn and Ms Ng) are in fact calculated to benefit the general body of creditors.

[23]     In appropriate circumstances the Court can take into account the fact that a proposal is supported by an entity closely associated with the insolvent.   But it follows that a Court should be weary of doing so unless the insolvent is in a position to influence or control the way or manner in which a creditor exercises his/her vote at the creditors meeting.  This is not the case here.  There is no suggestion of control even though Ms Ng may have a close family association with Mr and Mrs Elder.  To the contrary, in the case of Ms Ng there are facts which indicate an attempt to

regularise the business relationship in a professional manner once it became clear the

Elders were in default of their repayment obligations to her.

[24]     By a written loan agreement Ms Ng lent $1,000,000.00 Singapore dollars to Mr  and  Mrs  Elder.    The  loan  was  guaranteed  by  Avocado  Orchards  Limited (Avocado Orchards).  The loan agreement provided that the loan and all interest and all other monies payable were to be secured by PPSR’s on Avocado Orchards and Kimberley Orchards Limited.  As well unregistered second mortgages were required over, the Court assumes, orchard growing properties.  The loan agreement was dated

4 July 2008.

[25]     Subsequently in view of repayment defaults Mr and Mrs Elder agreed to an interest increase to 14 per cent until the debt was paid.

[26]     Then, on 9 April 2009 an agreement was completed between Ms Ng and EP Trustees Limited (EP) the beneficial owner of the shares in Avocado Orchards.  By the agreement EP agreed to sell those shares to Ms Ng for $1.00.  The agreement recorded that Ms Ng agreed to purchase the shares to secure payment of her loan to Mr and Mrs Elder and that upon settlement of that loan ownership of the shares was to be transferred back to EP.

[27]     The Commissioner has concerns regarding these arrangements.  The business operations of Avocado Orchards were conducted through its subsidiary Perfect Fruit Company Limited.  It is the latter company that now employs Mr Elder as its general manager.  Yet it is Avocado Orchards which has agreed to pay Mr Elder a wage from which Mr Elder has promised to fund his contributions to the creditors’ pool.

[28]     The Commissioner notes that the loan allowed for PPSRs to be provided but in the following year the shares were effectively transferred.   The Commissioner suspects irregularity due to the fact that the shares were required to be returned to the beneficial owner when the debt was repaid.   Mr Schoonraad submitted that the whole arrangement lacked ‘commercial reality’.

[29]     With  respect,  I  disagree.    The  share  transfer  arrangement  was  meant  to provide security at a time when it was perceived sufficient security was unavailable. Ownership of the shares was not in the control of Mr and Mrs Elder but by a trust company  the  primary  beneficiaries  of  which  were  Mrs  Elder’s  mother  and  her brother.  Mrs Elder was a discretionary beneficiary of that trust.  Mr Elder was not a beneficiary at all.

[30]     Too much significance has been placed by the Commissioner upon the fact that the consideration for the sale of shares was noted as $1.00.  The clear purpose of the sale document, which document was not prepared by a lawyer, was that it was intended  to  provide  security for  the  debt.    Evidence  indicates  the  Perfect  Fruit Company Limited is trading and is able to provide Avocado Orchards with funds to enable payment of Mr Elder’s wages of $5,000 per month. As earlier noted although Ms Ng has waived any entitlement to the creditors’ pool she nonetheless has retained the rights, remedies or claims which she may of had against other parties or in relation to securities granted by other parties.

[31]     Commercial reality suggests these arrangements are not part of any design to manipulate the process embarked on more than two years later when the creditor Proposals were initiated.

[32]     In summary, I consider there is no basis for discounting creditor claims for the reasons identified on behalf of the Commissioner. There is no suggestion that the accountants or the solicitor voted for any reason other than that it was better to receive some payment by approving a Proposal than to receive nothing at all if the client was bankrupted.   Ms van Rijn has waived her entitlement to any Proposal payment while reserving her right to make a claim if Mr and Mrs Elder are bankrupted.   There is nothing unusual in this nor, is there any evidence at all to suggest it was a decision reached other than by Ms van Rijn alone.  Ms Ng’s advance of funds to assist the Elders was documented in an agreement prepared by a solicitor. A subsequent agreement for the sale and purchase of shares was intended to provide additional security for payment.   The Commissioner has suspicions about that arrangement but those are not supported by facts.  There is no evidence that Ms Ng has voted for the Proposals in any way other than that she had control of.

Certainty of payment

[33]     As earlier noted the two Proposals provide for a combined commitment to contribute $224,000.00 over three years.   This is to be done by six monthly instalments to which Mr Elder is committed to providing $24,889.00 and Mrs Elder

$9,445.00.

[34]     Initially  the  Commissioner’s  concerns  were  with  the  apparent  lack  of certainty about where those contributions were to be sourced from.   Avocado Orchards had no trading activity yet Mr Elder’s contributions to the creditor’s pool were to come from a salary provided by that company.   It appeared to the Commissioner that Avocado Orchards was not registered for payment of PAYE.  Mrs Elder worked as a real estate agent and was dependent upon commission earned from sales achieved.  The Commissioner was concerned there was no certainty of regularity of income from that source.

[35]     Largely these concerns have been satisfied by affidavits from each of Mr and Mrs Elder filed just last week.  Mr Elder’s employment position has been regularised to the satisfaction of the Commissioner.   Mrs Elder has provided evidence of significant earnings in the last 10 months.  There is no basis for the Commissioner to continue to be concerned about the availability of sufficient funds to meet the contributions required in combination to fund the creditors’ pool.

[36]     Concerning Mr Elder’s situation the Court comments that it is not unusual for an employee to be engaged by an entity to work in a particular capacity for a subsidiary of that entity.

[37]     The  Commissioner’s  remaining  concern  is  with  the  fact  that  whilst  Mrs Elder’s promised contribution to the creditors’ pool is significantly less than that of Mr Elder it is she who is earning far more than he.  The Proposals indicated that her contribution   to   the   pool   over   three   years   would   amount   to   approximately

$100,000.00 less than Mr Elders.  Yet, over the last 10 months her net income will

equate  to  approximately  $72,000.00  per  annum  whilst  Mr  Elder’s  salary  is

$60,000.00 gross per annum.

[38]     Mr Schoonraad submitted that because a Proposal cannot be filed jointly by two persons the separate Proposals of Mr and Mrs Elder ought to be considered separately and that perhaps in her case her Proposal is inadequate because she may be able to provide more than she has offered by way of contribution.  Conversely it appears Mr Elder would be unable to afford that contribution he has offered to provide.

[39]     I agree with Mr Whale’s submission that whilst there must be two separate Proposals they need not be considered on a standalone basis.  Whereas here there are joint liabilities there is a need in both Proposals to put together something that will address the joint nature of those liabilities.  Clearly, to make the Proposals work the Elders need to find a combined total of about $68,000.00 over 12 months (after deducting the initial payment required).   Further it is clear from the terms of the Proposals that it was always intended that Mrs Elder would be the major contributor to the creditors’ pool.   Also, the  Proposal of each notes that they will “pay or procure” payment of sufficient funds to meet their combined obligations.

[40]     Upon Proposal applications this Court is frequently confronted with issues regarding the reasonableness of the amount offered to creditors, and whether there is certainty that payment will be made.  Of assurance to the Court in this case is that both applicants have a history of significant employment.  Even now Mrs Elder is doing well in difficult market circumstances.  There is not in this case anywhere near the same uncertainty as in others where Proposals have been rejected.

[41]     In this case, the joint and separate creditors of each of the Elders (other than Ms Ng and Ms van Rijn) are scheduled to receive a total of 12 cents in the dollar in aggregate on their claims over three years.  The Court accepts there is substantial certainty that funds enabling those payments to be made will be forthcoming.

[42]     Courts have approved Proposals for much lesser returns to creditors.  In this case the dividend to participating creditors is substantially more than they would receive if Mr and Mrs Elder were bankrupted.

[43]     For reasons discussed the Court is satisfied there is a sufficient certainty of payment of the distribution to creditors.

Section 333(3)(c) – Expediency and public interest

[44]     In  this case the Commissioner has submitted there are two main  factors mitigating against approval of the Proposals, namely:

(a)      the continuing risk that Mr and Mrs Elder pose to the commercial community and to the integrity of the New Zealand tax system;

(b)the transparency that would be gained by having the Official Assignee conduct an investigation of their ‘opaque’ financial affairs, and the greater return to creditors if any voidable dispositions or previously unrealised assets are uncovered.

[45]     In this case the evidence suggests a pattern of successful trading in property development for a number of years.   Ultimately there was too much reliance on property development and there ensued a diversification of projects between 2004 and 2008, with reasonable debt to equity ratios.  Then, delays on one major project resulted in substantial unexpected additional costs.  The impact of finance company collapses and the property development market was a determinative factor in the position Mr and Mrs Elder now find themselves.  I accept Mr Whale’s submission that Mr and Mrs Elder had been involved with mainly successful property development operations which defaulted as a result of a dramatic downturn in the sector.

[46]     Mr and Mrs Elder set up separate entities for each of their ventures.  This was done on the advice of their accountant as a prudent way to manage their portfolio and risk.  Such a form of corporate structuring is common in commercial practice, as

the Court has recognised. [1]

[1] Re Cummins, High Court Wellington, CIV 2009-485-2192, 21 July 2010, and on appeal Magsons

Hardware Limited v Bogiatto.

[47]     It is a fact that when the sell down occurred in the outcome of the market collapse, mortgagees were unpaid as was GST on the sale.  Until then however this was not a characteristic of the Elder operations.

[48]     I accept the submission of Mr Whale that there is no evidence of misdealing but rather there were consequences that were beyond the ability of the Elders to control.

[49]     Mr Whale submits that changes to the economy have played a significant role in this case; that Mr and Mrs Elder have not acted recklessly or irresponsibly.   I agree.   In most cases even when some of those companies towards the end were unable to pay tax, returns were filed disclosing the liability.   The evidence demonstrates efforts having been made to pay tax shortfalls.

[50]     The Elders have expressed no intention of returning to property development in the medium term future.

[51]     In submissions the Commissioner referred to a number of factors indicating that Mr and Mrs Elder are an ongoing risk to the commercial community and to the tax system.   Those assertions are not, I consider, sufficiently established by the evidence.  The core debt owed by companies associated with Mr and Mrs Elder is but a small portion of the $1.2M that the Commissioner says is now owed by those companies.  Also there is no evidential basis for the assertion that Mr and Mrs Elder have abandoned previous failed business ventures in the past to embark on new business ventures.  A reasonable inference is that the funds borrowed from Ms Ng were on-lent to entities associated with Mr and Mrs Elder and were no doubt used in part to satisfy obligations they had to the Inland Revenue Department.

[52]     Mr Elder has provided a detailed account of issues emerging from the failure of some of the business entities.  There is nothing in those which indicates reckless trading.  Rather, Mr Elder worked to promote the sale in order to reduce the funding shortfall.  Usually it was for reasons beyond the control of Mr and Mrs Elder that their responsibilities to mortgagees and to the Inland Revenue Department were not met.

[53]     There is nothing in this view of things which suggests actions amounting to misconduct, much less of serious misconduct.  There is nothing that suggests a need in the public interest for the Official Assignee to conduct a further investigation of the Elders’ affairs or that there is anything likely to be unravelled if such a process was to occur.

[54]     Of the Elders’ current creditors only Origin Mortgage and the Commissioner oppose.  On the other hand there are sophisticated creditors/commercial entities who support it and do not want any further enquiry.

[55]     In my assessment there is no continuing threat or harm to the commercial community and bankruptcy is not required to protect the public from Mr and Mrs Elder.

Trustee of the Proposals

[56]     In  a  memorandum  filed  on  14  July  2011  the  Commissioner  expressed concern about the objectivity of the trustees of the Proposals and the appropriateness of the disclosures by them.

[57]     The matter was not pursued by the Commissioner in submissions before me.

[58]     Mr Whale informs me that the matter of the Commissioner’s concerns has now been addressed.   He advises that if the Court requires it, the trustees will withdraw, they having provided details of an experienced substitute.

[59]     I do not believe it is necessary for the Court to make any ruling at this time on the point.

Decision

[60]     The Court grants its approval of both Proposals in the form submitted for approval.

Associate Judge Christiansen