FM Custodians Limited v Henderson HC Christchurch CIV 2010-409-559

[2010] NZHC 1962

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2010-409-000559

IN THE MATTER OF     the Insolvency Act 2006

AND

IN THE MATTER OF     the bankruptcy of DAVID IAN HENDERSON

BETWEEN  FM CUSTODIANS LIMITED HAVENLEIGH GLOBAL SERVICES Judgment Creditors (substituted)s

ANDDAVID IAN HENDERSON Judgment Debtor

CIV-2010-409-001672

IN THE MATTER OF     DAVID IAN HENDERSON BETWEEN ALLIED FARMERS INVESTMENTS

LIMITED Creditor

Hearing:         10 November 2010

Appearances: A J Forbes QC for Debtor

J V Ormsby for FM Custodians, Havenleigh Global Services and
Strategic Finance (559)

C R Vinnell for South Canterbury Finance (Creditor in Support) in both proceedings

J P Forsey for Allied Farmers Investments (1672)
K Patterson for BNZ (Creditor in Support) in both proceedings

Judgment:      10 November 2010 at 5pm

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

as to Hearing Date

FM CUSTODIANS LIMITED AND ANOR V HENDERSON HC CHCH CIV-2010-409-000559  10 November

2010

[1]      These proceedings,  which are both adjudication applications, were  called together for convenience.

[2]      The proceedings had on 1 November 2010 been adjourned to 29 November

2010 upon the application of the debtor.  The proceedings came before me today as a result of a request by FM Custodians that the Court allocate an earlier hearing date.

The 1 November 2010 hearing

[3]      Mr Henderson, in the 559 proceeding, had filed a notice of intention  to oppose his adjudication on 29 October 2010.

The submissions today

[4]      At the hearing on 1 November 2010, however, Mr Forbes on behalf of Mr Henderson informed the Court that Mr Henderson had reached the point of having to accept that he was insolvent.  Mr Henderson requested an adjournment of four weeks to enable him to put the detail of an insolvency proposal to his creditors.   All creditors represented in Court opposed the adjournment.  I nevertheless granted an adjournment to 29 November 2010 upon the basis that Mr Henderson put the outline of his proposal to all creditors within ten working days.  There would thereby be the opportunity for those creditors (as with others) to consider whether any outlined proposal had any support.

[5]      The hearing on 1 November 2010 took place in two parts, commencing in the morning, and finalised with directions in the afternoon.

[6]      Later the same week, following the adjournment, Mr Graeme Reid, who is associated with FM Custodians, came to learn that there had been registered at the Companies Office a number of share transfers from Mr Henderson to one John Edward Butler.   Mr Reid has deposed that Mr Butler has been involved with Mr Henderson for a number of years.  Mr Reid deposed that FM Custodians was very concerned at Mr Henderson’s disposal of assets, taking the view that he appeared to

be  disposing  of  assets  with  an  intention  to  defeat  the  creditors.    He  expressed concern that if the two bankruptcy applications before the Court were left until 29

November 2010 there was a significant risk that further assets might be disposed of.

[7]      Mr Ormsby, for FM Custodians, requested that the Court allocate an earlier hearing date.

[8]      By minute dated 9 November 2010 I notified counsel that the timing of the share transfers, when the outline of an insolvency proposal was pending, was a matter of legitimate and immediate concern.   I allocated the hearing today for the purposes of counsel addressing the Court on the appropriateness of an earlier hearing date than that to which the proceeding had previously been adjourned.  I directed that if Mr Henderson wished to provide any further information upon which the Court was to rely he should do so in the form of an affidavit.

Mr Henderson’s evidence

[9]      Mr Henderson’s solicitors filed two affidavits on 9 November 2010.

[10]     In his own affidavit, Mr Henderson deposed that he had had no intention of defeating creditors.  He deposed that none of the shares involved has any value.  He further deposed that one of the companies involved (FTG Trustee Services Limited) is a trustee company only, acting as trustee in relation to a discretionary trust of which Mr Henderson is a discretionary beneficiary.   Mr Henderson deposed that shares in all other companies (apart from ILR Holdings Limited) were held by him as trustee for the same trust as referred to above.  He explained that for the purposes of  speed  and  efficiency  it  was  his  practice  to  incorporate  new  companies  with himself as director and shareholder but with the intention to transfer those shares to the trust.

[11]     Mr Henderson went on to explain that the transfer of the shares was at the instigation  and  on  the  advice  of  his  solicitor,  Mr  Grant  Smith  of  Cousins  & Associates (who is also the solicitor for Mr Henderson in this proceeding).   Mr Henderson summarised Mr Smith’s advice in this way:

5.… He said that he had had experience with other clients who have been adjudicated bankrupt in relation to the particular difficulty that arises when a bankrupt is a shareholder and sole director of a company.  One of the first things that happens is that the Companies Office advises the shareholder that the director must be replaced, as that director is now bankrupt.  If that does not happen the company will be struck off the Companies register.   However, as the shareholder is also a bankrupt the shareholder has no capacity to appoint a new director.  Mr Smith said that his experience is that the Official Assignee will not sign a shareholder’s resolution appointing a new director, even if that director is willing to act.  Accordingly, the bankrupt is left in the position where, if he nevertheless wishes to avoid the company being struck off, he must satisfy the Official Assignee  that  the  shares  have  no  value,  nominate  a  purchaser (usually a family member or business associate) to purchase the shares  for  a  nominal  value  and  then  have  the  new  shareholder appoint a director, all before the company is struck off.

[12]     Mr Henderson went on to note the protective provisions of s 211 and 212

Insolvency Act 2006, dealing with transactions at an undervalue.

[13]     He  asserted  that  he  did  not  consider  there  was  any risk  of  prejudice  to creditors in the period to 29 November 2010.  He rejected any suggestion that it was not in the public interest to allow him to continue to manage his own affairs in the meantime.  He rejected any suggestion that there was no chance that any proposal by him would be accepted by his creditors.  He deposed that any statement of assets and liabilities he provided would be true and correct.  He offered to give an undertaking to the Court that he would not transfer or otherwise dispose of any further shares or other assets in which he had a legal or beneficial interest before 29 November 2010.

[14]     That offer was taken further by Mr Forbes today.  Mr Forbes provided a draft form of undertaking which he indicated Mr Henderson was prepared to sign, which reads:

(i)        I will not transfer or otherwise dispose of any further shares or assets in which I have a legal or beneficial interest until the bankruptcy proceedings come before the court again on 29 November 2010;

(ii)       If I am adjudicated and the Official Assignee requires any shares transferred by me, as referred to in the memorandum of counsel for the judgment creditor and affidavit of G D Reid dated 5 November

2010, then I will do so; or

(iii)     If the court, the judgment creditor (and the other creditors) agree, I

will arrange for another director of the relevant companies to be

appointed now and for the shares to then be re-transferred to me. (this is because the purpose of the transfer of the shares was to overcome the administrative difficulty, as referred to in my affidavit dated 9 November 2010 para 5).

[15]     There  was  also  a  brief  affidavit  from  Mr  Smith,  who  referred  to  Mr Henderson’s affidavit and confirmed the content in relation to the advice he had given Mr Henderson.  He added that he experienced in relation to other bankrupts the difficulties which he had outlined to Mr Henderson.

[16]     At the hearing today Mr Forbes provided to the Court a draft form of a further affidavit by Mr Smith, indicating that in the time available there had been no opportunity to have Mr Smith swear it.  Mr Forbes confirmed that Mr Smith was in a position to swear the affidavit.  In the document Mr Smith recorded that he had not told Mr Forbes of the share transfers as it had not occurred to him that they were relevant to the request for adjournment.   He had, following discussion with Mr Henderson, issued the instructions to his staff to effect the share transfers prior to these proceedings being first called on 1 November 2010.  He saw a need to address the “administrative difficulty” caused by adjudication by having the share transfers completed in case Mr Henderson was adjudicated that morning.  He says that he was satisfied the shares in the company in question were either not of any value or, in the case of FTG Trustee Services Limited, involved a trusteeship only.  In response to a request from the Court, Mr Smith’s document stated that he had no letter or memorandum in relation to the advice he gave Mr Henderson.  It was not his usual practice to record such advice to Mr Henderson in written form.

Today’s hearing

[17]     Mr Ormsby, supported by Messrs Forsey and Vinnell and Mrs Patterson, emphasised that on 1  November 2010 there had been no  prior notice from Mr Henderson of any request for an adjournment.  In the circumstances of a debtor who was acknowledging his insolvency, the adjournment was very much a discretionary adjournment.  Mr Ormsby emphasised that the creditors have no confidence or trust in Mr Henderson as a result of the steps taken by Mr Henderson on 1 November

2010.

[18]     Mr Ormsby illustrated the refusal of Mr Henderson’s creditors to accept his explanation by reference to a number of aspects of the share transfers.  He referred by way of example to Tomanovich Holdings Limited which owns property in Gibbston Valley.   Mr Henderson had deposed that the shares in that company, as well as others, were held by him as trustee for a trust, and that it had been his practice to incorporate companies with himself as director and shareholder, but with the intention to transfer those to the trust.  But FTG Trustee Services Limited had not been incorporated until August 2003, with Tomanovich Holdings Limited having been incorporated earlier.

[19]     It is unnecessary that I analyse further this area of concern or other examples given by Mr Ormsby.  Such an example is sufficient to satisfy me that the concerns expressed by the creditor are real and are based on a degree of analysis of such factual information as is at present available to the creditors.  The issues involved are of the kind that could lead to argument, if not litigation.

[20]     Mr Ormsby submitted that there were two main reasons requiring the hearing to be brought forward, and one subsidiary reason.   First, he submitted that the creditors were entitled to have a real concern as to what might happen in relation to assets.    He submitted  that  the creditors  were  entitled  to  have no  confidence in undertakings offered by Mr Henderson given his unilateral action on the day the adjournment was sought.   Secondly, Mr Ormsby noted that the adjournment had been very much an exercise of the Court’s discretion against a background where the Court, on 1 November 2010, could have had no confidence that any proposal put forward would obtain support.  Thirdly, Mr Ormsby referred to other litigation (of which the Court is aware) in which Mr Henderson is giving instructions on litigation in the exercise of purported powers by reason of his directorship when the relevant company is under the control of others (through receivership).

[21]     For Mr Henderson, Mr Forbes submitted that Mr Ormsby’s concerns as to whether particular shares were held in trust or not could not take matters further – the pre-existing structure was whatever it was.  The Court should not consider that the matters raised by Mr Ormsby give rise to further concerns.

[22]     Mr Forbes submitted that this was not a case of blatant disregard of creditors’ interests.  He rejected any suggestion by Mr Ormsby that Mr Henderson’s conduct had amounted to “unacceptable conduct”.   He submitted that if assets had been inappropriately transferred, they will have to be re-transferred.   Mr Forbes asked rhetorically “Where is the prejudice?”.   He submitted that this is not a case of prejudice.   If anything has been done which is to be criticised, it was through a mistaken approach.  Mr Forbes emphasised that Mr Henderson sincerely wishes to explore settlement with his creditors, and that he should be entitled to do so.  The undertakings and commitments offered would preserve the position for creditors.

[23]     In conclusion, Mr Forbes submitted that the Court should focus on the quality of Mr Henderson’s actions.   He had real grounds for the decision he took on Mr Smith’s advice.  If anything has gone awry, the position can be restored.

[24]     Mr  Forbes  informed  me  that  while  the  creditors  represented  in  Court indicated that they would oppose any proposal, his instructions were that Mr Henderson had been speaking to at least some creditors who might be prepared to support a proposal.   When I asked Mr Forbes to obtain instructions from Mr Henderson and Mr Smith as to the two creditors whom Mr Henderson considers most likely to support, Mr Forbes (after taking instructions) indicated that the two Mr Henderson considered fell into that category were Equitable Finance (for approximately $30 million dollars) and SCF.  Mr Forbes accepted that the reference to  SCF  might  appear  odd  in  that  Mr  Vinnell  was  appearing  recording  SCF’s intention to reject any proposal, but Mr Forbes advised the Court that Mr Henderson did indeed consider there was a prospect of progress with SCF.

Discussion

[25]     The Court’s initial decision to grant a four-week adjournment was a finely balanced exercise of the discretion.  Given the unanimous opposition on the day to any adjournment, Mr Henderson should have realised the extent of the indulgence granted.  I considered there was just sufficient in Mr Henderson’s frank (albeit late) acknowledgement of his insolvency combined with his determination to bring a

proposal together to justify one a period of adjournment to ascertain any measure of support.

[26]     Regardless of Mr Henderson’s subsequent assurances as to the integrity of what he did on 1 November 2010, his creditors having regard to their own interests are entitled to take an even firmer view than that previously held.  Unilateral action of the kind taken in the circumstances invites suspicion.   It is no answer for Mr Henderson to suggest, as has been suggested, that all the relevant information was entering a public register and would become known – the creditors were left to find out the information at an uncertain time.  They are now entitled to look to the Court to review the date of hearing in the light of their even more strongly-held views.

[27]     The fact that Mr Henderson happens to have had nine days to begin exploring proposal options and support is also to be taken into account.  He is not able at this point to point to any firm support even in principle.  Of the two creditors most likely to support him, he identifies one who is represented today and indicates through counsel that it is adamantly opposed to further adjournment.

[28]     There is also a broader public interest which it is the responsibility of the Court to regard.   When, at this point, there is no solid indication of support for a creditors’ proposal but the debtor is insolvent on a grand scale, the point at which adjudication is ruled upon so that the assignee can enter upon his statutory task if necessary, should be early.

[29]     Finally,  I am unable to  accept that the debtor should receive what is in essence a four-week indulgence when the debtor did not frankly volunteer to the Court or his creditors the plans he had or the steps he was taking to deal with shareholdings  in  his  name.     The  Court  expects  frankness  in  that  situation. Regardless of the fact that legal advice from his solicitor was apparently involved, Mr Henderson did not meet the reasonable expectation of the Court and of his creditors that he frankly disclose all relevant information when requesting the adjournment.

Order

[30]     I vacate the hearing date on 29 November 2010.   Instead, I adjourn each proceeding to the bankruptcy list at 10 a.m., 15 November 2010.

[31]     I reserve the costs of attendances leading up to and including the hearing today and this order.  It appears to me that the need for these attendances has been brought about by the unilateral actions of Mr Henderson.  The creditors have been successful in having the hearing brought forward.  Costs should follow the event and should be awarded to be paid in any event.  If the parties are unable to agree costs, counsel for the creditors are to file submissions first (limited to three pages) and counsel for the debtor is to file his submissions within five working days thereafter

(limited to three pages).

ASSOCIATE JUDGE OSBORNE

NOTICE REQUIREMENT

The solicitors on the record for the parties are promptly to provide a copy of this

Minute to their clients (r 5.43).