Fenning v Lexus Trustees Limited
[2019] NZHC 3009
•19 November 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-001960
[2019] NZHC 3009
BETWEEN WARREN FENNING
Insolvent
AND
LEXUS TRUSTEES LIMITED and SALLY
ANNE JUDITH RIDGE as trustees of the 24 TRUST
First CreditorHEARTLAND BANK LIMITED
Second CreditorWESTPAC BANKING CORPORATION
Third Creditor
CIV-2019-404-001015 BETWEEN
LEXUS TRUSTEES LIMITED and
SALLY ANNE JUDITH RIDGE as trustees of the 24 TRUST
Judgment Creditors
AND
WARREN IAN FENNING
Judgment Debtor
Hearing: 14 November 2019 Appearances:
A Nicholls for Trustee
J D McBride for Judgment Creditors, Lexus Trustees Ltd and Ms S Ridge
Judgment:
19 November 2019
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
FENNING v LEXUS TRUSTEES LTD & OR [2019] NZHC 3009 [19 November 2019]
Introduction
[1] The trustee of the creditors for the insolvent (also the judgment debtor), Warren Fenning, seeks court approval of a proposal pursuant to s 333 of the Insolvency Act 2006.
[2] The judgment creditors in the bankruptcy proceedings, Lexus Trustees Ltd and Sally Ridge, oppose the approval on the grounds that Mr Fenning is “hopelessly insolvent”, cannot afford his proposed repayments and poses an ongoing risk to the community. It is contended that it would be neither reasonable nor expedient to approve the proposal.
Procedural background
[3] The judgment creditors filed a memorandum dated 9 October 2019 outlining their objections to the approval sought.
[4] In my minute of 10 October 2019, I directed that Mr Fenning was to file and serve an affidavit addressing concerns raised in the memorandum. Since then, the Court has received an affidavit from Mr Fenning sworn 31 October 2019, a memorandum of counsel for the trustees dated 12 November 2019 and a further memorandum from the judgment creditors dated 13 November 2019.
Relevant legal principles
[5]Section 333 of the Insolvency Act provides, in relevant part:
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.
[6] The approach normally taken by the court to s 333 proposals is set out by Hardie Boys J in Re Duncan Holdings Ltd (in liq):1
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.
[7] In Re Stevenson, Associate Judge Osborne, with reference to the heading in s 333, held that the words “Court must approve proposal” emphasised the limited nature of the discretion.2
1 Re Duncan Holdings Ltd (in liq) (Re Bennett’s) HC Christchurch M306/81, 1 February 1982 at 9 as cited in Herbert v New Zealand Guardian Trust Co Ltd [2012] NZCA 442 at [27], Magsons v Hardware Ltd t/a Mitre 10 Mega v Bogiatto [2011] NZCA 378 at [23], and Farmer v Rowley [1992] 2 NZLR 195 (CA).
2 Re Stevenson [2015] NZHC 2528 at [8].
The issue
[8] I accept that the procedural requirements for the notice of the meeting and the calling of the meeting pursuant to s 333 have been complied with. I also accept that the majority of proven creditors by number (seven out of nine) and by dollar value (94 per cent) support the proposal.
[9] The critical issue for me to determine is whether, as a matter of independent judgement and having regard to considerations of wider public interest, I should decline to approve the proposal.
Analysis and decision
[10] The judgment creditors contend that the proposal is not reasonable because Mr Fenning’s budgeted future expenses and income are far too optimistic and give no assurance of repayment. It is submitted that no commercially prudent creditor would accept a proposal that assumes a jump in gross income of 300 per cent (Mr Fenning is a real estate agent with Bayleys Real Estate in Auckland with limited experience in the industry) against a background of earnings that are substantially less than that. It is further said that the budget for living expenses is unrealistic.
[11] The judgment creditors also contend that there is an established pattern of Mr Fenning assuming debts and repayment plans that he cannot afford and borrowing money to support his lifestyle choices and level of indebtedness. This includes his unexplained credit card debt, the unaffordable motor vehicle purchase from UDC Finance in 2016 (borrowing $81,765), the purchase of building materials on account and the unaffordable repayment plan with Heartland Bank. It is said that there will be a real risk that Mr Fenning will have to borrow more money from friends and family to meet his obligations under his proposal with the attendant risk (if not inevitability) that he cannot service those debts either. The prospect of further, reckless borrowings is thus claimed to be a real one.
[12] I accept that there is some merit in the opposition of the judgment creditors (public interest grounds) and that the objections raised must be taken seriously. There is an apparent pattern of Mr Fenning living well beyond his means and defaulting on
his financial obligations, including defaulting on the Heartland Bank repayment scheme. Furthermore, his projected income as a relatively new entrant to the real estate industry (and necessary to meet payment of the proposals) is, in the circumstances, optimistic.
[13] However, on balance, I find that I should approve the proposal for the reasons that follow.
[14] It is clear that the creditors generally will be better off under the proposal than under a bankruptcy. The return from the proposal is at the rate of 10 cents in the dollar, and I accept the submission of Mr Nicholls, for Mr Fenning, that, under the proposal, the creditors will evidently receive more than they would under a bankruptcy. To uphold the dissent of the judgment creditors in this case could be prejudicial to the general body of creditors. The dollar value of the dissenting creditor is $35,023, and the percentage value of the dissenting creditors to the value of the proven debt is
1.96 per cent.
[15] The question of whether the proposal is reasonable is to be assessed objectively from the perspective of the “commercially experienced prudent creditor”. In Farmer v Rowley, the Court of Appeal held:3
In determining whether the 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. It is important to emphasise, too, that it is the creditors who stand to lose the benefit if a proposal is rejected and bankruptcy ensues. Unless there are special public interest or other commercial considerations present the assessment of the substantial body of the creditors ought to be accepted.
[16] As Mr Nicholls submitted, if the dissenting creditors’ opposition is now upheld, it would likely be prejudicial to the general body of creditors in the following ways:
(a)No creditor would receive the dividend from the $50,000 lump sum. The lump sum funds are advanced from a family trust; they are not the
3 Farmer v Rowley, above n 1, at 200–201.
funds of Mr Fenning and would not be available to the creditors on his bankruptcy.
(b)No creditor would have an opportunity to benefit from a dividend from the instalment payments.
[17] This is also a case where, in my view, the Court should give some particular weight to the decision of the creditors, here, sophisticated institutional creditors who can be relied upon to make a commercially prudent decision. I accept the submission of Mr McBride, for the judgment creditors, that the relatively modest amounts of money to be repaid as part of the proposal are “small beer” for the creditor banks involved, but I do not see any basis for concluding that the institutional creditors have not agreed with the proposal without making an informed assessment of whether Mr Fenning can realistically meet his obligations under the proposal. I note that the initial creditors’ meeting was adjourned because, prior to the meeting, the largest creditor, Heartland Bank Ltd, indicated that it wanted to consider a modified proposal. The modified proposal was then circulated to creditors for their consideration and voting.
[18] Mr Fenning is no longer working in the print industry and is now a self- employed real estate agent earning commission. He is no longer responsible for a large business with many employees. His debts (which I accept are substantial) relate largely to personal guarantees being enforced after the liquidation of the printing business. The allegation that Mr Fenning may be a “commercial hazard” is not without foundation, but in my view the risk should not be overstated. Mr Fenning, in his new position, and where his reputation will be all important, will have every incentive to avoid any further default on his obligations. Furthermore, on the basis of the evidence of commissions earned and payable by the end of March 2020 (documentation supplied by Bayleys Real Estate), there is some reason to have confidence that Mr Fenning will be in a financial position to meet the obligations under the proposal. He is working for a reputable real estate company dealing with large property transactions at the high end of the Auckland market. It is not simply a case of “bare assertions”.
[19] To the extent that there are issues with the proposed living expenses set out in Mr Fenning’s affidavit, it may be that he needs to reappraise these and will need to ensure that his expenses are managed in such a way that he is in a position to meet his obligations under the proposal. However, despite legitimate concerns raised on that issue by the judgment creditors, I do not see that as a basis for refusing to approve the proposal.
[20] The proposal is also expressed in clear and concrete terms and the payments are to be made over the next three years, with the first payment, due in October 2020, being a relatively modest amount. The payments have obviously been staggered in the expectation that over time Mr Fenning’s income will increase. Should Mr Fenning default, it will be immediately apparent and in that event it is, of course, unlikely that Mr Fenning would avoid bankruptcy.
Result
[21] I make an order pursuant to s 333 of the Insolvency Act 2006 approving the trustee’s proposal but subject to the condition that Mr Fenning, the insolvent, make a payment, within 7 days, to the judgment creditors in the sum of $5,756. I note that Mr Fenning and the trustee are agreed that I could make that order subject to that condition.
Associate Judge P J Andrew
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