Foster

[2023] NZHC 334

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2014-409-000405

[2023] NZHC 334

UNDER

the Insolvency Act 2006

IN THE MATTER

of an application to be employed by a family business

BY

BARRY HENRY GRANT FOSTER

Applicant

Conferences:	14 December 2022 and 15 February 2023
Counsel:	D M Jackson for Applicant
Judgment:	28 February 2023

JUDGMENT OF ASSOCIATE JUDGE PAULSEN

This judgment was delivered by me on 28 February 2023 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

RE FOSTER [2023] NZHC 334 [28 February 2023]

[1]    This is an application under 299(2)(b) of the Insolvency Act 2006 to vary a prohibition imposed upon Barry Foster that for five years from his discharge from bankruptcy he was not to be employed by any business owned, governed, controlled or managed by any relative of his.

[2]    The prohibition was imposed by Associate Judge Johnston in a judgment of 12 July 2019 following the hearing of the Official Assignee’s objection to Mr Foster’s discharge from bankruptcy.1

[3]    Mr Foster now applies to take up employment with a company, Selwyn Earthworks JV Ltd (SEJV), which he describes as a “family company”. The shares in the company are owned by a trust of which his mother is a trustee. Family members have been and are employed by the company.

[4]    The Official Assignee has not opposed the application and abides the decision of the Court.

Background

[5]    Mr Foster was declared bankrupt on 27 November 2014 by an order of the High Court on the application of the Commissioner of Inland Revenue. He was due to be automatically discharged from his bankruptcy on 13 January 2018. However, the Official Assignee filed an objection to the automatic discharge of his bankruptcy on 10 January 2018.

[6]    On 21 November 2018, the Official Assignee summoned Mr Foster to be examined under s 295 of the Insolvency Act. The hearing occurred on 2 and 3 July 2019. Prior to this hearing, the Official Assignee filed a report under s 296 of the Insolvency Act. The report stated that Mr Foster had provided a list of creditors owed

$8,225,284. Subsequently, the creditors who made claims in his bankruptcy were owed more than $9,000,000.

1      Commissioner of Inland Revenue v Foster [2019] NZHC 1639.

[7]    In his judgment dated 12 July 2019, Associate  Judge Johnston discharged  Mr Foster from his bankruptcy with prohibitions that were to apply for a five-year period.2 As noted above, one of those was that Mr Foster “will not … be employed by any business owned, governed, controlled, or managed by any relative of his”.3

[8]    Associate Judge Johnston found the Official Assignee had made out a number of the allegations that led the Assignee to object to Mr Foster’s discharge from bankruptcy. In relation to those matters (which formed the basis for the imposition of prohibitions) the Associate Judge said:

[19]   I am satisfied that the Official Assignee has made out a number of the allegations in the summons to which I have referred. By way of example I mention the following:

(a)      Between the mid-2000s and his bankruptcy, when Mr Foster’s various business operations were spiralling out of control, he and the businesses with which he was associated appear routinely to have ignored their obligations to the Commissioner of Inland Revenue, failing to account to the Commissioner in respect of GST, PAYE and KiwiSaver. The Commissioner was of course the party who ultimately obtained judgment against him and applied for his bankruptcy. By that stage, his personal obligations in respect of tax totalled more than $600,000.

(b)      The various businesses in which Mr Foster became involved failed to keep proper records of their affairs, and these businesses appear — to a degree at least — to have been run as one large operation. During the course of his evidence Mr Foster admitted that when one business had exhausted the limits of its overdraft arrangements with its bankers, work carried out by that business would be invoiced by another business and any payment would be receipted to the wrong entity. Practices such as this were so rife within Mr Foster’s businesses that the liquidator appointed to one of the companies in question described the group’s affairs as resembling differently coloured items being put in a washing machine together so as to make it impossible to separate the different dyes at the end of the cycle. That strikes me as an unusual but apt way of describing things.

(c)      Mr Foster ultimately admitted in the course of his examination that he, and businesses with which he was involved, traded recklessly. I took that admission to relate not so much to the technical meaning of reckless trading under the Companies Act 1993 but as a more generic acceptance of the shambolic and devil-may-care attitude that he ultimately adopted in trying to

2      Commissioner of Inland Revenue v Foster, above n 1.

3      At [25](f).

save his empire. That said, I am in no doubt that reckless trading in the Companies Act sense was involved.

(d)      During the entire period of the bankruptcy, Mr Foster has been employed by Selwyn Earthworks JV Ltd, a company owned or controlled by family members.   This  of  course is contrary to   s 149(1)(c) of the Act unless the bankrupt has the Official Assignee’s permission. The evidence demonstrated that on a number of occasions the Official Assignee made this clear to Mr Foster and invited him to apply for an exemption. There is no evidence of him having done so, although I record that his evidence was that he believed he had explained the position to the officer at the Official Assignee’s office with whom he was dealing and that he was allowed to continue.

(e)      There is also evidence that during the course of the bankruptcy (presumably using Selwyn Earthworks JV’s plant and on its time) Mr Foster carried out significant contracting work gratis for selected creditors apparently in an attempt to recompense them, thus subverting the Insolvency Act regime by effectively preferring those creditors.

[20]During the course of his examination, Mr Foster’s repeated explanation for his actions was that he had not understood that they were wrong or inconsistent with his obligations either prior to or during his bankruptcy. I do not accept that. In my judgment, Mr Foster knew that his actions were at best questionable and consistently demonstrated a preparedness to ignore his responsibilities. However,  whilst  I  am  satisfied  that Mr Foster’s actions reflect incompetence at a high level and a reprehensible disregard for his obligations, I do not think there is any conclusive evidence of conscious dishonesty on his part.

[9]    As noted above, one of the matters raised by the Official Assignee was that Mr Foster was employed by SEJV during the entire period of his bankruptcy without permission from the Official Assignee.4 This was obviously a matter of concern to the Associate Judge who, when referring to the possibility that Mr Foster might subsequently apply to vary or rescind the prohibitions, said:

[26]  It is open of course to Mr Foster to apply to the Court to vary or  rescind those orders, particularly the [prohibition on working for a family business], at any time during the five-year period during which they are to apply. Whilst it is not for me to pre-empt the outcome of any such application, I expect that, if Mr Foster is to be employed by a business in which a relative of his is involved, the Court will need to be persuaded that the business is so structured as to ensure that he does not have any governance or management role.

4      At [19](d).

[10]   On 17 November 2022, Mr Foster filed his application to be employed by SEJV as a foreman or supervisor on earthworks projects including subdivisions, civil works and mining projects between Christchurch and the West Coast of the South Island. He advised the Court that he will not be involved in any financial or management parts of the business. Subsequently there has been a change in that it is now said Mr Foster will be engaged by SEJV to work on the West Coast in alluvial mining projects.

Test for varying conditions under s 299

[11]   Under s 299(2), the Court may vary or cancel prohibitions the Court has put on a  person  after  their  bankruptcy  is  discharged.   Associate  Judge   Osborne  in   Re Henderson considered the relevant considerations and requirements for a Court to grant permission under s 299.5 The Court will not lightly remove a prohibition6 and an applicant has the onus to prove the public and community interest which informed the imposition of the prohibition will continue to be adequately protected.7

[12]His Honour stated:8

… the s 299 prohibition is not to be relaxed unless the risks associated with the bankrupt’s conduct are avoided in the structuring of the intended role. To that extent, the pursuit of an applicant’s entrepreneurial skills may have to take second place to the right of the public and the community to protection. It is also the case that the deterrent purpose of prohibition … may require that the applicant be restrained from engaging in entrepreneurial activity of the breadth and/or unrestricted nature to which he or she may aspire.

[13]   Associate Judge Osborne summarised the considerations which may arise upon an application under s 299 as follows:

[97] I adopt from the authorities which I have reviewed the following as considerations which arise when permission is sought under s 299 Insolvency Act:

(A)Over-arching considerations

(a)The starting point is that the prohibition was imposed not as punishment but for the purposes of:

5      Re Henderson [2017] NZHC 474, [2017] NZCCLR 20.

6 At [44].

7      At [20] and [46].

8 At [28].

(i)protection (particularly of the public);

(ii)deterrence; and

(iii)maintenance of appropriate business standards;

(b)The applicant bears the onus of showing that the restrictions should not apply to the particular work; and

(c)To gain permission, which by its nature may cut across such protection and undermine such deterrence, the applicant must demonstrate that the interests intended to be protected will not be significantly less protected if permission is granted.

(B)Relevant considerations

(a)Deficiencies leading to prohibition – applicant’s unfitness;

(b)Consequences of deficiencies;

(c)Applicant’s comprehension of deficiencies and acceptance of the need for the prohibition;

(d)Applicant’s subsequent conduct (for better or worse);

(e)Structure of the identified entity;

(f)Business and financial performance of the entity;

(g)Definition of applicant’s intended role in the entity;

(h)Risks associated with applicant’s intended role;

(i)Applicant’s needs;

(j)Third parties’ needs;

(k)View of relevant authorities; and

(l)Identification of safeguards/conditions.

(C)Procedural and evidential requirements

(a)The application should clearly identify the company or other subject entity, its structure and business, the role the applicant seeks to take, and any measures proposed to be implemented to eliminate risks for other interests; and

(b)The applicant should also adduce evidence capable of satisfying the Court that an exception should be made to the policy considerations underlying the prohibition.

What purpose does the prohibition serve?

[14]   Section 149 of the Insolvency Act prohibits an undischarged bankrupt from entering into, carrying on or taking part in the management or control of a business. It also prohibits a bankrupt from being employed by a relative or a company, trust, trustee or incorporated society that is owned, managed or controlled by a relative of the bankrupt.9 The Associate Judge effectively continued these prohibitions  upon  Mr Foster for five years following his discharge.

[15]   The purpose of the prohibitions is to protect the public from loss resulting from the imprudent management of businesses. The prohibition on the employment of bankrupts by relatives or entities managed or controlled by them prevents “window dressing” where the bankrupt in fact controls the business, and to ensure that the bankrupt is unable to influence the relative in managing a business.10

Relevant considerations

Deficiencies that led to the prohibition

[16]   The more serious the conduct that led to the prohibition, the risk to the public is greater.11 Mr Foster was bankrupted after several businesses he controlled spiralled out of control. In the examination before Associate Judge Johnston, Mr Foster admitted that he traded recklessly. The result was company and personal insolvency and substantial losses to creditors.

[17]   Further, Mr Foster repeatedly breached the terms of his bankruptcy. Relevantly, he worked for SEJV without obtaining permission from the Official Assignee to do so. Associate Judge Johnston rejected Mr Foster’s evidence that he did not understand that this was not allowed.

9      The term “relative” is defined in s 3 of the Insolvency Act.

10 Lindsay Hampton and others Brookers Insolvency Law & Practice  (looseleaf  ed, Thomson Reuters) at [IN149.05] citing Official  Assignee  v  Carroll  HC Auckland  CRI-2005-404-261, 16 December 2005.

11 Re Henderson, above n 5, at [49] citing Re Morija plc, Kluk v Secretary of State for Business, Enterprise and Regulatory Reform [2007] EWHC 3055 (Ch) at [35].

[18]   There was clearly much evidence before the Court that Mr Foster was not only employed by SEJV but was involved in its management. By way of example only, the Official Assignee’s report stated:

Personal Property Security Registrations by SEJV creditors Monument Finance Limited and Secured Finance Limited record the bankrupt as the person acting on behalf of SEJV. Other persons who dealt with SEJV in relation to a partnership agreement (the Woodstock Partnership, described below) have stated they dealt exclusively with the bankrupt. The Assignee considers it more likely than not that the bankrupt has in fact controlled SEJV and its business activities throughout his bankruptcy and continues to do so.

Applicant’s subsequent conduct

[19]   Mr Foster stated that he has observed all of the conditions imposed upon him by the Court and has no interest in returning to business.

Structure of SEJV

[20]   The evidence concerning the current structure and manner of operations of the company is incomplete. Mr Foster says the shareholder of the company is the RCGF Trust, a family trust with Mr Foster’s mother and a solicitor as the trustees. Mr Foster advises he is not a beneficiary of the trust after disclaiming his beneficiary status.

[21]   The company’s sole director is Murray Mowat. He is an accountant and as noted in the Official Assignee’s report, when interviewed Mr Mowat said he had little involvement in the day-to-day affairs of the company. It is not clear what, if any, oversight Mr Mowat could or would exercise over Mr Foster’s employment and duties.

[22]   The operations manager of the company is David Thorn, Mr Foster’s son-in- law. There is no other information about him or his specific duties, experience and qualifications.

[23]   The company’s financial administrator is said to be Michelle van der Linden. She is based in Christchurch but there is no other information about her, particularly her relationship to Mr Foster.

[24]   Mr Foster says that the company’s financial controller is Ross Clarke, based in Rolleston, although Mr Clarke has provided a letter to the Court signing it as the company’s General Manager. No other information is provided about him. I note that it appears Mr Clarke was involved in some of Mr Foster’s previous business ventures.

SEJV and Mr Foster’s role

[25]   There is no evidence concerning the past or present financial circumstances of SEJV or to any particular structures or systems that have or will be put in place to ensure Mr Foster does not undertake any governance or management role in the company.

[26]   In support of the application a letter has been supplied by Mr Clarke, who says that Mr Foster is not presently an employee or contractor of SEJV. He also says, incorrectly, that Mr Foster has not been on the payroll of SEJV. Mr Clarke says that SEJV performs alluvial mining on the Department of Conservation Estate and the requirements of such work exceed what the company’s current operators can deliver, whereas Mr Foster has the expertise and knowledge to perform such work and an unparalleled reputation in this field.

[27]   The Court has been provided with an employment agreement that has been presented to Mr Foster which defines his role widely as “site supervisor” with a job description:

Site Foreman responsible for the day-to-day coordination and oversight including staff labour, contractors, subcontractors and suppliers. The Foreman is responsible for running the site, meeting deadlines and quality assurance measures.

[28]   This role is the essentially the same role Mr Foster performed for SEJV whilst bankrupt. In an affidavit sworn prior to the hearing before Associate Judge Johnston, Mr Foster said:

I do not run the business as alleged. Rather, my son-in-law David Thorn runs the business. My family benefit from the business including my mother. Basically, my role is like that of a site foreman in that I organise the earthworks on what is an open cast mining site. I have nothing to do with the gold or its sale. I simply work out where to dig the test holes, organise the diggers and dump-trucks. I do coordinate and liaise with the staff but I am not the boss. It

is a family business. People do come to site and ask for me but you need to remember, this is the West Coast. These people have been dealing with me for decades and it is hard to get them to approach David in the first instance.

Applicant’s needs

[29]   Mr Foster’s needs are relevant to the assessment of whether a variation should be made under s 299, but the Court is unlikely to be swayed by these considerations if there is a clear risk to the public.12

[30]   In his affidavit in support of this application, Mr Foster said that he wishes to return to work after years of “limbo”. An affidavit by Donna-Marie Patterson indicated that Mr Foster lives in a makeshift container home on a farm owned by   Mr Foster’s friend. Mr Foster sustains himself by hunting and fishing, and living off friends and family. Mr Foster said he wishes to support himself after getting support from friends and family. He does not consider himself a beneficiary and has not applied for a benefit.

Third parties’ needs

[31]   The need of SEJV to have Mr Foster’s services may be a relevant consideration but has to be clearly established on the evidence.13 A letter from Mr Clarke on behalf of SEJV indicates that Mr Foster’s skills as an earthworks contractor are necessary for the business. SEJV wishes to employ Mr Foster instead of him going to work for a competitor. Mr Clarke also acknowledged that as the family trust is the owner of the company, there is an interest from Mr Foster’s mother (the trustee) that the company hires Mr Foster.   Mr Clarke said there is nonetheless a business reason to hire      Mr Foster.

12     Re Weston (2006) 3 NZCCLR 925 (HC) at [9].

13     Re Henderson, above n 5, at [83].

My assessment

[32]   Mr Foster’s application falls well short of satisfying me that this is an appropriate case to rescind the prohibition. The application does not provide sufficient evidence of the ownership and management structure of SEJV, the role that Mr Foster will undertake or any specific measures that are proposed to eliminate any risk that he may be involved in the governance or management of the business.

[33]   The role that it is said Mr Foster will have with SEJV appears to be a very similar role to the one that he was undertaking during the period of his bankruptcy. Fundamentally, there has been no change of circumstances that would justify me rescinding the prohibition.

[34]   Presently the only director of the company is Mr Mowat who acknowledged that he was not involved in the day-to-day management of the company. Other persons involved in the management of the company have close personal ties with or are relatives of Mr Foster, over whom he is likely to have considerable influence.

[35]   I do not accept that Mr Foster’s personal circumstances justify making the order sought. While Mr Foster gives evidence that he is surviving through the support of friends and family and needs to earn “my own salary and stop bludging off others”, the evidence is that he is a very skilled contractor with unparalleled skills and that there is a shortage of contractors on the West Coast. I cannot see why Mr Foster cannot obtain gainful employment with other contracting companies in those circumstances.

[36]   As far as the need of SEJV is concerned, I am not prepared to accept the bald assertions that Mr Foster’s skills are “unique” and “crucial” to the business of the company with no other evidence to corroborate that. Furthermore, given the unsatisfactory nature of the evidence before me, I am of the firm view that the interests of the company to secure Mr Foster’s services are outweighed by the risks that he poses should he be involved in the management of the business which the prohibition was put in place to prevent.

Conclusion

[37]    Mr Foster has failed to satisfy me that the public interest that required the imposition of the prohibition will be adequately protected if rescinded. I am also satisfied that there are no other circumstances that would justify such a course. The application is dismissed.

O G Paulsen Associate Judge

Solicitors:
Chris Morrall, Barrister & Solicitor, Christchurch