FM Custodians Ltd v McNally

[2013] NZHC 34

IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY

CIV-2012-488-813 [2013] NZHC 34

UNDER  the Insolvency Act 2006

IN THE MATTER OF     the bankruptcy of STEVEN RAE McNALLY

BETWEEN  FM CUSTODIANS LIMITED Judgment Creditor

ANDSTEVEN RAE MCNALLY Judgment Debtor

Hearing:         29 January 2013

Appearances: Steven Rae McNally in person

L Hawes-Gandar for Judgment Creditor

Judgment:      29 January 2013

ORL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

Grove Darlow (T J G Allan/L Hawes-Gandar) P O Box 2882 Auckland, for Judgment Creditor

Email:    [email protected]

Copy for:

S R McNally, Kaikohe

Email:    [email protected]

FM CUSTODIANS LIMITED V MCNALLY HC WHA CIV-2012-488-813 [29 January 2013]

[1]      FM Custodians Ltd obtained judgment against Mr McNally for $856,353.37 on 14 June 2012.  FM Custodians Ltd had sued Mr McNally, a property valuer, for alleged negligence in a property valuation.

[2]      After it obtained judgment, FM Custodians Ltd served a bankruptcy notice on Mr McNally.    The  bankruptcy  notice  is  in  the  form  required  by  s  29  of  the Insolvency Act 2006.  The notice, properly, requires compliance within 10 working days of service of the notice.  The matters which Mr McNally must do to comply with the notice are the standard requirements.   In particular paragraph 1(b) of the notice says  that  he  may secure or enter into  a new formal  agreement  with  the judgment creditor or alternatively obtain the High Court’s approval of terms of payment.    The  statutory  basis  for  that  provision  of  the  bankruptcy  notice  is  s

29(1)(b)(iii) of the Insolvency Act 2006.

[3]      Mr McNally has clearly read the bankruptcy notice because he has applied to the court for an order approving the terms of payment.  He proposes to pay the sum of $50,000 to FM Custodians Ltd over a period of five years.  He asks the court to approve those proposed terms of payment.

[4]      FM Custodians Ltd opposes.   It initially opposed as if Mr McNally had applied to set aside the bankruptcy notice, and submissions were prepared for this hearing on that basis.  That opposition is misdirected, because Mr McNally has not applied to set aside the bankruptcy notice.  Instead, he has applied to the Court to approve the terms of payment and which, if approved, would then mean that the bankruptcy notice has been complied with, so that no act of bankruptcy would arise. Accordingly I do not have to consider questions such as whether Mr McNally had a cross-claim in which he could not have set up in the original proceedings.  I also do not have to consider whether the case comes within the decision of Master Kennedy-

Grant in Re Wise.[1]

[1] Re Wise ex parte Benecke HC Auckland, B227-228/95, 21 June 1995.

[5]      There is a technical matter to be considered.   The bankruptcy notice was served on Mr McNally on 27 November 2012.  Mr McNally filed his application on

11 December 2012.   That was the 10th  working day after he was served with the

bankruptcy notice.  He accordingly took steps within the 10 working days of service. The legislation  and  the  High  Court  Rules  are  silent  as  to  what  happens  to  the bankruptcy notice while this application remains pending before the court.  This is the first date on which the court could have heard Mr McNally’s application after he was served.  It seems to me that it is a necessary implication of the legislation that if there is a delay between filing of the application and the hearing, the bankruptcy notice remains in suspension in the meantime.  Accordingly it is still open to the court to consider Mr McNally’s application on its merits.

[6]      Mr McNally has attached a handwritten document to his notice of application for approval of terms of payment, and he has also sworn an affidavit.  His affidavit sets  out  his  means.    In  addition  to  FM  Custodians  Ltd,  he has  listed  creditors amounting to some $72,000.  He has also listed assets which he says have a net value of about $21,000.    Even if his liability to FM Custodians Ltd was excluded, he is already insolvent.   The debt to FM Custodians Ltd swamps the other creditors. Mr Hawes-Gandar makes the point that if Mr McNally were to apply for a proposal under sub-part 2 of Part 5 of the Insolvency Act 2006, FM Custodians Ltd would be owed more than 75 per cent of his total debts and therefore FM Custodians Ltd would be able, by its own vote, to abort any proposal that Mr McNally might put forward.

[7]      It is important, when considering these applications under s 29(1)(b)(iii) of the Insolvency Act to note the purpose.   The court is not necessarily exercising a discretion in the same way as it does under Part 5 sub-part 2 of the Insolvency Act when the court is considering a proposal which has already been approved by the requisite majority of creditors.  The court is exercising an independent power.  The purpose of the power is to consider whether the bankruptcy notice will be deemed to have been complied with by the court approving the terms of payment.

[8]      In  effect,  if  the  court  approves  the  terms  of  payment  or,  in  terms  of  s

29(1)(b)(iii) the debtor has compromised on terms that satisfy the court, then the

debtor is treated as having complied and no act of bankruptcy will arise.   If the debtor has made a payment which satisfies the creditor, even though it may not be a payment in full, that will be enough to stop an act of bankruptcy arising.

[9]      The position that confronts the court is that the creditor does not approve. The court is being asked to approve and, in effect, to override the decision of the creditor.  It needs to be said at the outset that the court does not necessarily exercise a commercial judgment in these matters.  Usually the court applies insolvency law, while leaving the parties themselves to make commercial judgments as to whether they should accept part-payment in satisfaction of debts. A starting point is an initial reluctance of the court to question the commercial judgment of a creditor or to override it.  It may be that if the creditor were seen to be acting unconscionably or unreasonably  or  in  a  way  that  would  not  be  consistent  with  any  commercial judgment, that the court might step in to override the wishes of the creditor.

[10]     I go further.   Mr McNally has proposed a payment of $50,000 which he calculates as representing a dividend to FM Custodians Ltd of approximately 6 cents in the dollar.  It is hard to see how the court could accept that as being tantamount to payment in the same way as the other requirements which have to be met to show that no act of bankruptcy will arise for the purpose of a bankruptcy notice.  The offer falls so far short of even amounting to satisfaction of the debt that it would be difficult for the court itself to give approval to it.

[11]     The court’s function is simply to approve terms of payment.  That does not mean that the court itself fixes terms of payment or imposes those terms of payment on the debtor.  It is for the debtor to offer terms of payment, to see whether they meet the court’s approval.  In this case, the terms are fairly loose – a general proposal to pay over five years without any programme of payment being provided or with any provisions as to what should happen if there is non-compliance.

[12]     I will assume, for argument’s sake, that Mr McNally’s proposal could be tightened up so that there were more ‘teeth’ in it.   If that were done, the offer of

6 cents in the dollar, spread over five years, is not something that would come close to amounting to satisfying the debt in a substantive sense.

[13]     For these reasons I do not grant approval of the terms of payment proposed by Mr McNally.   I am not satisfied that there is any reason why this court should override the decision of the creditor not to approve the terms of payment.

[14]     I want to make it clear that the effect of this decision is limited.   It is a decision only on the s 29(1)(b)(iii) of the Insolvency Act.   It means, now, that

10 working days have expired following service of the bankruptcy notice.   It now remains open to FM Custodians Ltd to apply to the court for an order adjudicating Mr McNally bankrupt.

[15]     The court has a wider discretion when it hears an application for adjudication, although Mr McNally has sat in court today and heard my comments when other applications come before me.  Nevertheless, I do emphasise that for present purposes I have only decided that his proposal is not acceptable as amounting to compliance with a bankruptcy notice.  My decision does not extend beyond that.  I have heard Mr McNally’s application in court, not in chambers.

[16]     I dismiss Mr McNally’s application.

...........................................

R M Bell

Associate Judge