Fontein v Bank of New Zealand HC Auckland CIV 2009-404-7769

[2010] NZHC 2081

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2009-404-007769

IN THE MATTER OF     the Insolvency Act 2006

AND

IN THE MATTER OF     the bankruptcy of PM Fontein

BETWEEN  PATRICK MARINUS FONTEIN Judgment Debtor

AND  BANK OF NEW ZEALAND Judgment Creditor

Hearing:         8 and 10 November 2010

Counsel:         SA Barker and NK King for judgment creditor

DM Connor and RA Dellow for judgment debtor

Judgment:      22 November 2010 at 2:30pm

JUDGMENT OF ASSOCIATE JUDGE FAIRE [on application for adjudication order]

This judgment was delivered by me on 22 November 2010 at 2:30pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:           Buddle Findlay, PO Box 2694, Wellington

Lowndes Associates, PO Box 7311, Auckland

FONTEIN V BANK OF NEW ZEALAND HC AK CIV 2009-404-007769  22 November 2010

[1]      The  judgment  creditor  applies  for  an  order  adjudicating  Patrick  Marinus

Fontein a bankrupt.

[2]      The judgment creditor obtained judgment against Mr Fontein at the High Court  at  Auckland  on  10 November  2009  for  $27,807,689.51  plus  costs  and disbursements, plus interest, making a total of $28,359,045.07.

[3]      The  judgment  creditor  requested  a  bankruptcy  notice  be  issued.     A bankruptcy notice was issued and was served on Mr Fontein.   He did not comply with the bankruptcy notice.  That resulted in an act of bankruptcy occurring.

[4]      The judgment creditor filed this application for an adjudication order.

[5]     The jurisdictional requirements which must be met before an order of adjudication  is  made  are  contained  in  the  Insolvency  Act  2006,  ss 13  and  36. Section 13 provides:

13       When creditor may apply for debtor's adjudication

A creditor may apply for a debtor to be adjudicated bankrupt if—

(a)the debtor owes the creditor $1,000 or more or, if 2 or more creditors join in the application, the debtor owes a total of $1,000 or more to those creditors between them; and

(b)the debtor has committed an act of bankruptcy within the period of 3 months before the filing of the application; and

(c)       the debt is a certain amount; and

(d)       the debt is payable either immediately or at a date in the future that is certain.

Section 36 provides:

36.      Court may adjudicate debtor bankrupt

The  Court  may,  at  its  discretion,  adjudicate  the  debtor  bankrupt  if  the creditor has established the requirements set out in section 13.

[6]      The jurisdictional requirements are met in this case.  That was acknowledged by Mr Connor.   I must now consider the Insolvency Act 2006, s 37.   Section 37 provides:

37.      Court may refuse adjudication

The Court may, at its discretion, refuse to adjudicate the debtor bankrupt if—

(a)       the applicant creditor has not established the requirements set out in section 13; or

(b)      the debtor is able to pay his or her debts; or

(c)it is just and equitable that the Court does not make an order of adjudication; or

(d)      for any other reason an order of adjudication should not be made.

[7]      An  amended  notice  of  opposition  to  oppose  bankruptcy  was  filed  on

9 August 2010.  That document reveals that the matters raised in opposition all relate to an invitation to the court to refuse to adjudicate the judgment debtor a bankrupt based on the just and equitable grounds that are set out in the Insolvency Act 2006, s 37(c).

[8]      In Eide v Colonial Mutual Life Assurance Society Ltd[1] the general principles involved in the exercise of the discretion under the then Insolvency Act 1967, s 26 (now the Insolvency Act 2006, s 37) were analysed.  The important matters were the following:

[1] Eide v Colonial Mutual Life Assurance Society Ltd [1998] 3 NZLR 632 (HC) at 635.

1)“A creditor who establishes the jurisdictional facts set out in s 23 is not automatically entitled to an order. On the other hand, it is for an opposing  debtor  to  show  why  an  order  should  not  be  made.” McHardy v Wilkins & Davies Marinas Ltd (Court of Appeal, Wellington, CA 54/93, 7 April 1993) at p 3.

2)“. . . in the exercise of the discretion under s 26 it is proper for the Court to consider not only the interests of those directly concerned – the petitioner, other creditors, the debtor – but also the wider public interest.” McHardy v Wilkins & Davies Marinas Ltd (supra) at p 3.

3)In determining whether an order should be made, the wider public interest   must   be   taken   into   account   to   determine   whether adjudication is “conducive or detrimental to commercial morality and the interests of the general public.” Re Nisbett, ex parte Vala [1934] GLR 553 at p 556.

4)“. . . on a bankruptcy petition the Court must have regard to public interest in a way which transcends the interest of the immediate parties to the proceeding. . . . The public interest in exposing and controlling   an   insolvent   debtor   is   one   which   exists   quite

independently of  the  separate  question  of  debt  collection  by  his immediate creditors.” Re Fidow [1989] 2 NZLR 431 at p 444.

5)        Absence of assets is a factor but:

“.  .  .  even  the  undoubted  absence  of  assets  will  not necessarily preclude an order, for the circumstances may be such that the debtor ought in the public interest to be visited with   the   disqualifications   that   go   with   bankruptcy.” McHardy v Wilkins & Davies Marinas Ltd (supra) at p 3.

6)        Another matter:

“. . . is the potential for further investigation. A bankruptcy makes available to creditors an array of procedures for investigating  the  financial  circumstances  of  the  debtor. Those procedures are likely to prove more effective than an investigation conducted by other means.” Re Fidow (supra) at p 444.

7)        There is a need:

“. . . for the Court to balance the various considerations relevant to the case, and to determine whether in the end the debtor has succeeded in showing that an order ought not to be made”. McHardy v Wilkins & Davies Marinas Ltd (supra) at p 4.

[9]      To  the  above  summary  I add  that  the  oppressive  use  of  the  bankruptcy process may be a ground for refusing an order: Baker v Westpac Banking Corporation.[2]

[2] Baker v Westpac Banking Corporation CA212/92, 13 July 1993 at 4-5.

[10]     The judgment creditor’s application is supported by a number of creditors who have given notice of appearance in support.  They are:

a)        Allied   Workforce   Ltd,   which   claims   an   outstanding   debt   of

$112,050.97;

b)Carters,  a  division  of  Carter  Holt  Harvey  Ltd,  which  claims  an outstanding debt of $281,526.27;

c)        Fidelity Ltd, which claims an outstanding debt of $20,979,000, being a  debt  owing  by  the  judgment  debtor  in  respect  of  a  personal

guarantee  and  indemnity  of  the  indebtedness  of  Kensington  Park

Properties Ltd (in receivership);

d)       Fleet Partners NZ Trustees Ltd, which claims an outstanding debt of

$58,300.98, being a debt owing by the judgment debtor in respect of a personal guarantee and indemnity of the indebtedness of Kensington Park Properties Ltd (in receivership);

e)        Orix  New  Zealand  Ltd,  which  claims  an  outstanding  debt  of

$50,414.93, being a debt owing by the judgment debtor in respect of a personal guarantee and indemnity of the indebtedness of Kensington Park Properties Ltd (in receivership); and

f)        Southern Cross Building Society, which claims an outstanding debt of

$4,418,978, being a debt owing by the judgment debtor in respect of a personal guarantee and indemnity of the indebtedness of Kensington Park Properties Ltd (in receivership) and Huka Falls Resort Ltd.

Mr Fontein’s current indebtedness and current assets

[11]      In the third proposal which Mr Fontein made to his creditors, which contains an accompanying statement of affairs dated 12 July 2010, he lists the total amount owing to his creditors as $93,946,950.31.  That, he said, it was made up of either personal guarantees or personal obligations owed as follows:

a)        $13,110,285.62 in respect of Kensington Properties Ltd;

b)        $1,063,569.33 in respect of Kensington Park Properties Ltd;

c)        $914,116.36 in respect of Kensington Construction Ltd; and

d)$78,858,979  which  is  owed  to  various  financiers  and  funders, including the applicant creditor in this proceeding.

[12]     In the same statement of accompanying affairs he lists his assets as having a current value of $12,650 and made up of furniture, artwork, stereo equipment, televisions, clothing and computers.

Mr Fontein’s personal background

[13]     Mr Fontein is 45.   He lives with his wife.   They have been married for 21 years and have three boys, aged 15, 13 and 11.

[14]     Mr Fontein  has  a  Bachelor  of  Engineering  degree  from  the  Auckland University and a Master of Business Administration from London University.  He is a Fellow of the New Zealand Property Institute and belongs to a number of professional bodies.   He has been actively involved in a number of voluntary community and industrial work projects.   He has contributed to the educational institutions attended by his sons.  He has been a successful sportsman, playing both soccer and cricket.  He has received a number of professional awards.  He has had no convictions or professional disciplinary sanctions and, until the failure of Kensington Park Properties Ltd, he had been involved in no prior failed business activity.

[15]     He is the sole director and guarantor of Kensington Park Properties Ltd (in receivership), Kensington Construction Ltd (in receivership and liquidation), Kensington Properties Ltd and Kensington Remuera Ltd.  These companies together are known as the Kensington Group.   In addition, he was the sole director and a guarantor of Huka Falls Resort Ltd, which is also in receivership and in liquidation. I will explain shortly the relationship of the various companies in the Kensington Park Group.

[16]     Mr Fontein founded Kensington Properties Ltd, the manager of Kensington Park Properties Ltd, in 1995 following his return from London in late 1994.  His first five years on return was involved in property consulting work, which included work for Fletcher Challenge, Fletcher Building and Fletcher Construction.   The first development project undertaken by Kensington Properties Ltd was in 1996.  Up until

2008 Kensington Properties Ltd had completed approximately fifteen development projects in industrial offices and in residential developments.

[17]     The  judgment  creditor,  Bank  of  New  Zealand,  first  provided  finance  to interests associated with Mr Fontein in 2001.  The bank financed his family home in Shore Road, Remuera in 2001.   Those arrangements continued when his family shifted  to  Orakei  Road  in  2004.    The  bank’s  loan  was  repaid  in  2006  when Mr Fontein and his family moved to the Remuera house.   That was financed with assistance from Southern Cross.

[18]     Mr Fontein says that he carried out considerable research on international best practise in the property industry.   He went on approximately 30 international property development best practise study tours between 1998 and 2007.   The information gleaned, he said, he adapted to the New Zealand market.  That led him to, what is described in the papers as, master planned communities which provide for the creation of the right amenities from the beginning of a project.

[19]     He said he put these plans into the development which was planned for

Kensington Park at Orewa and at the Huka Falls Resort in Taupö.

[20]     From 2000 to 2006 Kensington Properties Ltd’s development finance had been with Westpac Banking Corporation and one project was with the ANZ National Bank.  The Bank of New Zealand in January 2006 made approaches to Kensington Park Properties Ltd.  As a result, the bank agreed to advance various project finance loans to the company.  The loans were provided to assist funding to the company to develop the project at Orewa.  They were split into land facilities and development facilities.  The loans were provided to assist with the purchase of land at Orewa.  The development facilities were provided to assist in funding each of the development stages on a cost-to-complete basis.  The functions and relationships of the companies in the Kensington Park Group in relation to the Orewa project are explained in the final report of the liquidator of Kensington Construction Ltd.   Kensington Construction Ltd contract directly with the supplies and contractors for the construction of the Kensington Park project at Orewa.  Those costs were charged to the project developer, Kensington Properties Ltd, which is also in liquidation. Kensington Properties Ltd then charged the property holding company, Kensington Park Properties Ltd.   That company, of course, is the company through which the

funding was obtained and funds flowed.  When Kensington Park Properties Ltd was unable to fund the project Mr Fontein’s personal exposure materialised.

[21]     The  Bank  of  New  Zealand  instructed  a  quantity  surveyor  who  provided monthly certificates to ensure that the draw downs under each of the facilities were used to pay for work undertaken on each of the development stages to which the facilities related.   In addition, a review was undertaken to see that the remaining facilities were sufficient to complete each of the developments.

[22]     By February 2008 Kensington Park Properties Ltd’s facilities with Bank of New Zealand were in excess of $73,000,000.  The bank requested that Kensington Park Properties Ltd repay some of the development facilities.   The company complied.  By July 2008 the Stage 1A development facility had been repaid in full and  the  Stage  1B  development  facility  had  been  reduced  to  approximately

$11,500,000.

[23]     In July 2008 the land bank facility expired.   The Bank of New Zealand offered  to  extend  the  facility  on  certain  terms  and  conditions.     Mr Fontein acknowledges that at no time did he obtain a single legal binding commitment from the bank to finance the entire project through all stages to completion.  He says the reason for that was that it was not usual practice to do so at the time.  He said he proceeded as had been the general practice over the last fifteen years on the basis that pre-sales of approximately 65 per cent of building completed would be expected as a condition precedent to further lending.  He said the problem that occurred was because he had no precise commitment the possibility that Bank of New Zealand would only grant finance on terms that his company could not meet arose.

[24]     At  a  meeting  on  8  August  2008  the  bank  was  advised  that  one  of Mr Fontein’s co-shareholders, Mr K Cummings, believed that creditors were owed approximately $3.5 million and that some of the drawn down funds had not reached contractors.   Members of the bank met with Mr Fontein and his legal advisers on

13 August  2008.     Mr  Fontein  said  that  he  advised  the  bank  that  unfunded infrastructure and unfunded stage costs had caused the $3.5 million funding gap.  He said that he advised that the work had been carried out in July and that it was

therefore  not  due  for  payment  until  the  end  of  August  2008.    The  revelation, however, by one of the co-shareholders of Mr Fontein of the position understandably would cause the bank concern, particularly as development facilities were provided on a cost-to-complete basis.   Mr Fontein maintains throughout that there was no diversion of funds to other projects.  He maintains that the problem was simply the carrying out of infrastructure and other staged costs where there had been no funding provision made but in respect only of the Orewa project.

[25]     In the lead up to this period Mr Fontein had recognised the difficulties which he and his passive investors faced.  As a result he mortgaged or sold any asset he had to provide further  capital to Kensington Park  Properties  Ltd.   He says that the combined steps taken resulted in an extra $18.541 million of capital being provided so that shareholder equity in the project totalled $32.64 million.  His own personal injection   of   finance   into   the   project   was   $5.5   million.      Mr Fontein   now acknowledges that the Kensington Park project was too big for him personally and that the project had too much under construction.

[26]     Matters  culminated  in  early  September  with  meetings  with  the  bank employees when a rescue package was put to the bank.  The bank, clearly, was not happy with that position and then made demand for $42 million.

[27]     On 12 September 2008 Mr Fontein requested that the bank place Kensington Park Properties Ltd into receivership.  That step, he said, was taken after receiving advice.  On 24 September 2008 the bank made demand on Kensington Park Ltd and Mr Fontein, as guarantor, for the amounts then owed.

[28]     Mr Fontein complains that there were three opportunities given to the bank or the receivers which might have improved the recovery which the bank could have made.  I do not intend to detail them specifically.  Ultimately the bank, in June 2009, received an unconditional offer of $20 million from a Mr John Sax and interests associated with him which the receivers accepted.  That was followed by the issue of proceedings against Mr Fontein by the bank.  The bank obtained judgment by default on 10 November 2009 in the sum of $27,807,689.51 plus interest.   That was the

figure that was then owing after recoveries from the receiver from Kensington Park

Properties Ltd.

[29]     The  receiver’s  sale  of  the  property  has  not  been  challenged  and  no counterclaim or claim, alleging a breach of the Receivership Act 1993, s 19 (the approximate  equivalent  of  the  Property  Law  Act  2007,  s 176)  alleging  sale  at undervalue has ever been launched.

[30]     Prior to the sale of the properties, Mr Fontein’s liabilities under the personal guarantees granted by him to the various creditors of the company totalled in excess of $120,000,000.   In addition, there were a number of unsecured creditors of the Kensington Group of companies and Huka Falls Resort Ltd who did not enjoy guarantees who had not been paid and who have therefore suffered losses as a result of the collapses of these companies.

[31]     Consistent with his desire to do  all he could  to lessen the losses to  his creditors, Mr Fontein has filed three proposals under the Insolvency Act 2006, Part

5, Subpart 2.

[32]     The proposals required the Bank of New Zealand’s support.   Without the bank’s support a proposal would not satisfy the requirements of the Insolvency Act

2006, s 331(3) because those in favour would not represent three-quarters in value of the creditors of Mr Fontein.

The proposals

[33]     The proposals all have a common theme, which is to provide a dividend to creditors arising from future earnings.   The first proposal was made on or about

10 November 2008.   It provided for a living allowance taken out of earnings of

$80,000 and a distribution of 50 per cent of the surplus with a minimum payment of

$300,000 to those creditors who were not the institutional lenders.

[34]     The second proposal, which was made on or about 29 January 2009, was similar in what was offered.

[35]     The third proposal is dated 12 July 2010 and shortly before a scheduled hearing of this proceeding.  The living allowance was reduced to $50,000 after tax. The maximum pay out was $500,000 with no limit on duration.   The institutional creditors were brought into the third proposal.   I am not surprised that that would have happened because by July 2010 any securities enjoyed by those creditors was spent as a result of the sale of security properties.

[36]     In the table which Mr Connor provided to me he disclosed that in respect of the third proposal, 43 per cent in value had voted in favour and 57 per cent in value had voted against.

[37]     There were two other matters that require brief comment although they were not strictly proposals in terms of the Insolvency Act 2006.  There is an allegation in the papers that there was an unconditional cash offer of $35 million from Paul Adams of the Carrus Corporation.  The bank’s deponent says that that proposal never reached the stage of a firm proposal that could be accepted.   Another matter concerned a proposal made by Mr Sax.  It is alleged that he proposed to the BNZ on

2 September 2009 that he pay $250,000 immediately and a further $125,000 over two years to purchase the bank’s debt.  That was on the basis that there would be no adjudication of Mr Fontein as a bankrupt.  The proposal was declined.  In my view, Mr Barker was right to submit that it was not a pari passu offer.   Had the bank accepted the offer it would have been on more favourable terms than would have been offered to other creditors.  That may well have led to that proposal being set aside if another creditor had sought adjudication of Mr Fontein and the Official Assignee determined to challenge the proposal under the irregular transaction provisions contained in the Insolvency Act 2006, Part 3 Subpart 7.

Mr Fontein’s current work position

[38]     Mr Fontein says that he started Windsor Consulting Ltd in March 2009 and has used that company as the vehicle by which he provides property consultancy services.  He says that since June 2009 he has had substantial regular work and that by  the  end  of  2009  he  was  providing  consultancy  services  for  ten  different companies.  He says that he has disclosed his current difficulties to those companies.

He says that his first twelve months trading have resulted in revenue in excess of

$300,000.  He now has more work than he can cope with but is not prepared to take on staff while the bankruptcy proceeding is extant.  He says that a substantial part of his property consultancy work in 2009 and 2010 is with Downer New Zealand Ltd. Mr NR Woolcock, who now enjoys a corporate role with the Downer Group and is responsible for managing all the property and quarrying activities of that company throughout  New  Zealand,  has  filed  an  affidavit  supporting  Mr Fontein.     He confirmed that Downers would want to continue to utilise Mr Fontein’s property consultancy services throughout 2010, 2011 and 2012.  He expresses the view that if Mr Fontein was adjudicated a bankrupt his company would not promise to continue engaging Mr Fontein’s services.

Mr Fontein’s current lifestyle

[39]     Mr Fontein and his family have had to move into rented accommodation.  I have already referred to the sale of the major family asset.  The children’s schooling has  been  supported  by  Mr  and  Mrs Fontein’s  parents.    I  have  no  doubt,  as Mr Fontein has said in affidavit, that the family have undergone a massive lifestyle transformation as a result of the financial difficulties he now faces.

The exercise of discretion pursuant to the Insolvency Act 2006, s 37

[40]     A substantial volume of affidavit evidence has been filed in this case.  There are some areas of conflict in the evidence.   Counsel agreed, however, that there would be no cross-examination.   Conclusions on the reason for the failure of the Kensington  Park  group  of  companies,  which  resulted  in  Mr Fontein  facing substantial liability under the guarantees which he had given can only be general or, perhaps, tentative at best because, despite the volume of material, a precise independent  analysis  of  the  cause  of  the  failure  has  not  been  undertaken  and presented to the court.  I do not make that observation necessarily as a criticism of the parties because it may simply be too early for that to occur.

[41]     Mr Fontein’s  actions  when  the  enormity  of  the  financial  problem  was recognised by himself cannot be criticised.  I accept that he has done all that he could by the introduction of all funds from his own resources in an effort to reduce the consequences of the losses which have occurred.  In this respect he is in a completely different position from many debtors who find themselves in the position in which Mr Fontein is and where reliance on trusts and other vehicles is maintained so that, despite financial disaster, the benefits previously enjoyed can be carried on.  This has not occurred with Mr Fontein.

[42]     It must also be recorded, as is accepted by Mr Fontein, that although he is highly critical of the bank’s approach to his request for financial assistance, he does not allege that the bank acted in any way in breach of contract.

[43]     From the bank’s perspective it is recognised that the Official Assignee’s investigation in this case, if an order of adjudication is made, will cover a limited area and is unlikely to be involved in any asset tracing.  That, again, is because of the full disclosure made by Mr Fontein, including the introduction of trust funds to help alleviate the shortfall.

[44]     This, however, is no ordinary bankruptcy.  The deficiency estimated at some

$93  million  is  very  substantial.    It  arises  as  a  result  of  property  development activities.  Mr Fontein was very much in the driving seat of the development.  He made the major decisions and was in control.  Property development is Mr Fontein’s preferred area of business activity and certainly an area of expertise for him.   A refusal to adjudicate him a bankrupt leaves him free to carry on in this area of business without restriction and without supervision of any kind.  Although there is considerable support in the affidavits that have been filed for Mr Fontein with a number of deponents questioning the value in his case of adjudication, there remains the problem that those involved in substantial undertakings which carry risks must bear and face the consequences when a failure occurs.  I invited counsel to provide any examples from the cases where an debtor had incurred major liability in his chosen field of operation and wished to carry on in that field where adjudication had not been ordered.   Counsel’s advice to me was that they had discovered no such examples.  I am not surprised by that.  Some response is clearly required.  Without it

the wrong message is given to the commercial community.  Those who are involved in undertakings which carry risk have a potential to cause untold grief to the many who contract with them and who do not get paid and suffer the consequence of the ultimate collapse when it occurs.

[45]     What is apparent from the evidence that was adduced before me is that the bank’s concern was triggered by an approach from one of Mr Fontein’s investor shareholders.   The immediate position was a revelation that infrastructure costs of approximately $3.5 million had been incurred without funding being put in place.  It is  understandable,  in  these  circumstances,  that  the  person  to  whom  Mr Fontein looked for further funding assistance was put on inquiry and was concerned as to its exposure to loss.  To downplay that position is simply unrealistic.

[46]     Mr Fontein is critical of the bank’s position.  I have already recorded, in this judgment, however, that no step was taken or, indeed, no evidential foundation has been provided to me to suggest that the final steps taken to realise the securities were taken in breach of the Receivership Act 1993.  An attempt was made in the course of submission to extract from the evidence some idea of the real value of the development and to draw some conclusions from how the ultimate purchase was proceeded with apparently with some success.  I do not, in this judgment, recount the examination that was attempted because what was plain was that it was incomplete and there was no specific valuation foundation that might support it.  That leaves me with the position previously recorded that there is no material before me which could be called in aid of Mr Fontein and which suggests the action taken with respect to the securities was improperly taken.  To suggest that the bank should have simply gone on lending and place yet further funds into it cannot, on the information that has been placed before me, be supported.

[47]     There are a number of other matters in the evidence which were the subject of submissions by counsel.  The fact that Mr Fontein entered into side agreements in relation to the purchase of two units by employees is but one.  Side agreements were prohibited by the loan agreements.  What the effect of the side agreements were in the long run cannot be determined in the material before me.  By itself and, having regard to the size of the development, I would not have considered this specific

action by Mr Fontein justifying a particular adverse comment.   Nevertheless, his actions were not authorised by the loan agreements.

[48]     Considerable time was taken in analysing whether the drawn down funds were actually misapplied in the sense that they were paid to entities unrelated to the Orewa project.   It is difficult on the material that was put to me to reach a final conclusion on this.   I have already referred to the fact that there was no cross- examination of deponents who might have been able to throw further light on the matter.

[49]     But, in any event, I am not sure that it overcomes the problem that led to the bank’s concern in the first place and that was that expenditure and a liability had been incurred of not less than $3.5 million, for which no funding arrangement had been put in place.

[50]     Mr Connor submitted that the bank must have been fully aware of the fact that  Mr Fontein,  from  his  own  personal  resources,  was  never  in  a  position  to underwrite the liabilities that were being incurred in respect of the development. That is so, but it does not reflect what the full picture reveals.  The bank saw a range of securities.  The personal guarantee was but one.  Control of the progress of the development and the expenditure incurred was clearly another and obvious important aspect.  That was in the hands of Mr Fontein.  He cannot escape responsibility for it.

[51]     Counsel also examined cases where particular failures were attributable to the collapse of the Orewa  project.    I do  not see  any real benefit in  analysing that evidence because the size of the shortfall simply speaks for itself.  The collapse of the Kensington Park group of companies would obviously have caused financial stress to a number of entities who contracted with the group.

[52]     Mr Connor drew attention to the effect an order for adjudication might have on Mr Fontein’s future employment.  There is no precise answer to its effect.  If a prospective client in the development property industry considers that value would be given by Mr Fontein’s advice, one would expect that they would determine in what area he could assist and so employ him.   In my view it is significant that

Mr NR Woolcock, when commenting on the Downer position, simply expressed it on the basis that he would not promise to continue Mr Fontein’s engagement.

[53]     Reference is contained in the papers to the Taupö development.   This was undertaken by Huka Falls Resort Ltd.  Mr Fontein and his wife hold all 300 shares in Huka  Falls  Resort  Ltd.    That  company  is  in  receivership  and  in  liquidation. Mr Fontein resigned his directorship of that company at the time Kensington Park Properties Ltd was placed into receivership.   I do not see the need to analyse that company any further.   It is simply another entity with which Mr Fontein had an important association with and which has failed.   Mr Barker, in his submissions, referred to the Companies’ Office records.  They disclose that Mr Fontein is, or was, the director of 34 companies all of which have been struck off or are in receivership and in liquidation.

[54]     Mr Connor  drew  my  attention  to  the  fact  the  liquidators  of  Kensington Construction Ltd and Kensington Properties Ltd have reported that there is no breach of the statutory provision.  That may be so, but as I have earlier referred to, the real problem occurs with Kensington Park Properties Ltd, the company which had ultimate responsibility for making payment for the costs incurred by the other companies in developing the Orewa project and which was also the principal entity which sought funding for the development.

[55]     Counsel also referred to the tightening financial conditions.   Undoubtedly that has had an effect on the outcome and the ultimate exposure of Mr Fontein to the losses which have occurred in the Orewa project.  The sale of the project to another developer at a price significantly below what had been spent on the project, and in circumstances where no evidence has been placed before me that anyone complained that that sale was not proper indicates that the tightening financial condition did have a significant bearing on the value of development projects.

[56]     The  other  aspect  that  was  not  the  subject  of  any  precise  evidence,  but obviously was a factor in the creditor bank’s consideration, was the ability of purchasers of units, that is, the finished products of the development, to complete settlements under contract.   Once again, one can understand why, in a tightening

financial environment, that concern would arise.   I am not able to analyse, in this judgment, the precise effect of that position because there was no detailed evidence presented to me, beyond the completion of some of the stages, of how quickly the units were being sold, and are currently being sold, and how close to budget projection the sales are in terms of what is realised for individual units.  Having said that, this analysis cannot downplay the bank’s concern which arose from the undertaking of development items for which funding was not in place, a matter that was of concern not only to the creditor bank, but also to Mr Cumming, one of Mr Fontein’s passive shareholder investors.

[57]     Mr Connor submitted that the bank’s actions in seeking support from other creditors for its opposition to Mr Fontein’s proposals and seeking support for his adjudication in bankruptcy evidenced an oppressive use of the bankruptcy process such that an order of adjudication on the bank’s application should not be made.

[58]     I have already recorded the names of creditors supporting the application.  No specific creditor has appeared in opposition to an order of adjudication.

[59]     The next issue raised is whether the steps and actions of the bank in some way disqualify it from pursuing an application to adjudicate Mr Fontein a bankrupt. The authorities, as I mentioned in [9] have looked at this from the point of view whether  the  creditors’  actions  amount  to  an  oppressive  use  of  the  bankruptcy process.   Two affidavits advancing different positions were filed.   In support of Mr Fontein,  Professor  DA  Webb  has  filed  an  affidavit.     Mr MRH  Webb,  a practitioner who has practised in areas of banking and finance and insolvency law over 30 years, has filed an affidavit in which he questions the propositions advanced by Professor Webb.

[60]     Some general propositions can be listed:

a)       It  is  recognised  by  both  deponents  and  is,  without  doubt,  that  a creditor such as the bank, in this case, has a prima facie right to apply to have Mr Fontein adjudicated a bankrupt;

b)        Such a creditor is entitled to refuse its consent to a proposal;

c)       No  prior  case  has  been  cited  for  the  proposition  that  a  party’s entitlement   to   seek   adjudication   is   dependent   on   the   party’s compliance with what has been described as reasonable commercial practice.  Rather the question is whether the debtor has established a case on a review of all the relevant facts that the court should exercise its discretion not to adjudicate;

d)The evidence before me is to the effect that none of the professional bodies such as Insol, the New Zealand Society of Chartered Accountants, the New Zealand Law Society or the Joint Insolvency Committee have issued any practice note or guidance on what practice should apply in relation to communications between creditors or to the conduct of one creditor towards another when seeking support or objection to an application for adjudication of bankruptcy.   Further, the New Zealand Bankers’ Association Code of Practice does not specifically address the situation; and

e)        In the case of a personal insolvency there is no obligation to advertise.

To suggest that a creditor cannot notify other creditors of the steps to be taken makes no sense.  That is particularly so when one considers there is an obligation on a debtor advancing a proposal to notify all creditors of the proposal that is being advanced.  When a proposal is advanced, one would expect creditors who are named in it to confer.

[61]     The specific conduct challenged in this case appears to be:

a)       Pursuing adjudication when the prospect of some recovery appears unlikely;

b)Conferring with creditors and seeking their support for continuation of the adjudication proceeding.

[62]     On the first matter, I have already dealt in this judgment with the need to look at all the facts in determining whether the debtor has made out a case for the exercise of the discretion not to adjudicate.   With respect to the second, the actions of the bank that are the subject of the complaint are its approach to two creditors, Franklin Plumbers & Builders Supplies Ltd and Mr Reesby on behalf of one of the financiers, Fidelity Finance.   In relation to the second, the evidence as to precisely what was said is disputed.   I have already referred to the fact that there was no cross- examination.   There was no opportunity to assess whether one particular position should be favoured against the other.  I am left therefore with the position where I can find no specific basis for complaint about the actions taken by the bank.  I have already earlier referred, in this judgment, to the fact that this is no ordinary or usual situation.  The size of the loss and its obvious consequences need to be recalled when this exercise is carried out.  I certainly cannot conclude that any act on the part of the bank was an oppressive use of bankruptcy procedure on its behalf.

[63]     The final matter that requires comment is whether the court might dispose of this matter in some other way.  A belated attempt to have the proceeding halted on an oral application was made following a discussion I had with counsel as to whether the appropriate course might be, at a future time, an order of discharge from bankruptcy pursuant to the Insolvency Act 2006, Part 4 subject to terms.  A stay or a halt, as it is now referred to is possible on terms pursuant to the Insolvency Act

2006, s 38.  That approach was taken in Re Taylor.[3]

[3] Re Taylor (1992) 4 NZBLC 102,875 (HC) per Thomas J.

[64]     There are problems with the approach.  First, it leaves open the possibility of adjudication occurring at a later time when the stay is lifted.   Adjudication has consequences when transactions are undertaken by the bankrupt at any time up to and including the order of adjudication.  The period of inquiry is set from the order of adjudication.   Halt orders are often appropriate where a founding judgment supporting the bankruptcy proceeding is under appeal or review or where some other special circumstances exist, such as the possibility of the judgment debtor’s estate being increased by some external factor at a future time.

[65]     The case before me is quite different from that which was before Thomas J. He there dealt with a person who was 56 years of age; whose only employment was the unemployment benefit and who was described by the judge as being, in the judgment debtor’s belief, too old to have much success in obtaining a full-time job. The court proceeded on the basis that the judgment debtor would not carry on any activity similar to that which led the judgment debtor into insolvency.  That is not the situation on which I am required to rule.

[66]     When I consider all the factors in this case, I reach the conclusion that the judgment debtor has not satisfied me that this is an appropriate case not to adjudicate him a bankrupt.  The Official Assignee’s inquiries into the judgment debtor’s estate and the judgment debtor’s future conduct may, at some time in the future, justify an application for early discharge on terms.

[67]     Accordingly I adjudicate Patrick Marinus Fontein a bankrupt. [68]     This order is made at 2:30pm on 22 November 2010.

Costs

[69]     There has been a substantial volume of material in this case.  My preliminary view is that the judgment creditor is entitled to costs based on Category 2 Band B. Because I did not give counsel the opportunity of addressing on costs at the conclusion of the hearing, if counsel cannot agree on the appropriate costs, memorandum in support, opposition and reply may be filed at seven-day intervals.

The file is then to be referred to me to fix costs on this application.

JA Faire

Associate Judge