Haghi v Commissioner of Inland Revenue

[2015] NZHC 796

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV2013-404-004973 [2015] NZHC 796

BETWEEN

MOHSEN HAGHI

Insolvent

AND

THE COMMISSIONER OF INLAND REVENUE

Judgment Creditor

Hearing:	13 March and 17 April 2015
Appearances:	W McCartney for the Applicant Insolvent K B Chin for the Commissioner
Judgment:	22 April 2015

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

This judgment was delivered by me on

22.04.15 at 4:00pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

M HAGHI v THE COMMISSIONER OF INLAND REVENUE [2015] NZHC 796 [22 April 2015]

[1]      This decision addresses issues with an insolvency application filed on 12

June 2013 for approval of a proposal to pay creditors.   If successful the insolvent

(Mr Haghi) will avoid bankruptcy provided he meets his proposal commitment.

[2]      The application is opposed by the Commissioner of Inland Revenue (the Commissioner).  Of particular concern to the Commissioner was the conduct of the creditors meetings by Mr Meltzer, insolvency practitioner, but there is issue also about the extent of disclosure provided in support of the proposal.

Issues

[3]      Section 333(3) of the Insolvency Act 2006 states:

(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 Commissioner’s opposition primarily focuses upon claims that there has been inadequate compliance with the procedural requirements for the conduct of insolvency meetings.

[5]      The Commissioner also claims that the proposal terms are not calculated to benefit the general body of the creditors but rather it appears Mr Haghi is attempting to keep his creditors at bay with a low return while retaining the family home and continuing to be involved in the business community.

[6]      Finally it is the Commissioner’s position that it is not expedient that the proposal be approved because Mr Haghi’s self employment is an ongoing risk to the revenue system and he has not kept current with his obligations to file returns and pay taxes on time.

[7]      Mr Haghi says his total assets are $2,100,000 and his total liabilities are

$5,767,526.   Of the total liabilities the Commissioner has filed a provable debt of

$325,863.67.

[8]      Mr Haghi proposes to pay $600,000 to all unsecured creditors.  That amount will  provide in  excess of a 15  per cent  return  to  those  creditors,  less  proposal expenses.

[9]      Mr Haghi has two secured creditors.  They are FM Custodians Limited (as trustee of First Mortgage Trust) and Waimauri  Limited  (as trustee of Rockfield Trust).   They are respectively the first and second registered mortgagees of Mr Haghi’s family home, the value of which comprises all but $50,000 of the value disclosed by Mr Haghi as comprising his assets.

[10]     The proposal notes:

(a)      that the secured creditors would remain outside the pool of creditors who would receive payments under the proposal;

(b)      that when Mr Haghi is able to he will pay $600,000 plus the trustee’s

fees and disbursements;

(c)      that Mr Haghi intends to source such payments from distributions to be received from the 136 Fanshawe Trust (on behalf of 136 Fanshawe Ltd) and that not less than $300,000 will be paid one year after that date which is two months after “the 136 Fanshawe Street litigation” (as described in Mr Haghi’s accompanying statement of affairs and affidavit)  is  determined  finally  (including  all  appeals,  and  time periods for appeal if any rights of appeal are not exercised by any party to that litigation), and says a further $300,000 would be paid two years after the proposal acceptance date.

[11]     The proposal  acknowledges  that  it  could  not  succeed  unless  Mr Haghi’s interests (controlled by his sister) were successful in their 136 Fanshawe Street litigation.

[12]     The 136 Fanshawe Street litigation involved claims by Mr Haghi’s interests for an order for specific performance to settle the purchase of that property.  Its claim was disputed by Wilson Parking New  Zealand  Limited (Wilson Parking) which claimed it had a first right of refusal for the purchase of that property.

[13]     Since  the  proposal  was  filed,  the  litigation  has  concluded.    Mr  Haghi’s interests were successful in the High Court at the end of 2013.  An appeal by Wilson Parking to the Court of Appeal was heard in June 2014.  In August 2014 the Court of Appeal dismissed Wilson Parking’s appeal.

[14]     In  September  2014  Wilson  Parking  applied  for  leave  to  appeal  to  the Supreme Court.  In December 2014 the Supreme Court dismissed the application for leave.

[15]     136 Fanshawe Limited then completed the purchase of the property.   Mr Haghi deposes that in that outcome the 136 Fanshawe Trust will be able to advance to him the funds required to complete the payments to creditors according to the proposal.   Indeed during the course of the Court hearing Mr McCartney indicated those two instalments would be paid within one and six months respectively if the proposal is approved.

The Commissioner’s opposition to the proposal – consideration and comment thereon

[16]     The initial proposal meeting was scheduled for 16 December 2013.

[17]     The Commissioner identifies procedural concerns regarding the manner in which that meeting was conducted.   Mr Chin counsel for the Commissioner challenges the adjournment of the 16 December 2013 meeting after, as he said it appeared the vote had already been taken.

[18]     Regarding the second proposal meeting scheduled for 31 January 2014 Mr Chin said notice of that meeting date was not advised to the Commissioner; and that although Mr Meltzer recorded the Commissioner’s position as voting against the proposal, no opportunity was provided to revise concerns with others in attendance.

[19]     Mr  Chin  also  challenges  the  validity  of  Mr  Edney’s  vote  on  behalf  of Waimauri Ltd because of the timing and method of Mr Edney’s communication of that vote.

The 16 December 2013 proposal meeting

[20]   At the initial creditors’ proposal meeting held on 16 December 2013, representatives of three creditors appeared.   Ms Law and Ms Gavin appeared on behalf of the Commissioner.  Mr Eeles represented another unsecured creditor, the Auckland  Masonic  Centre  Limited.    Mr  Edney  of Waimauri  Limited  a  secured creditor was also present as was Mr Haghi along with his solicitor Mr Brennan, Mr Haywood a chartered accountant, and Mr Meltzer.

[21]     In the course of the proposal meeting there were introductions, a discussion with a proposal outline, and questions were asked on behalf of the creditors represented.  When the creditors were asked to indicate whether they supported or opposed the proposal, Ms Law indicated the Commissioner’s opposition to it.  Mr Eeles indicated approval of it.  Mr Edney deposed he attended that meeting and of his being concerned about an article that had been published the previous weekend in which there was reference to the decision of the Court of Appeal in Waipareira

Investments Limited1  wherein the Court upheld a ruling that a secured creditor vote

was invalid in a liquidation proposal meeting.

[22]   Although no outcome was declared by Mr Meltzer at that time, the Commissioner’s representatives assumed there was insufficient support for the proposal because the Commissioner’s representatives were invited to an adjacent room and asked whether they would be prepared to change their vote.   The reply

given was that the Commissioner would not change her position.

1 Grant and Smith v Waipareira Investments Ltd [2014] NZCA 607.

[23]     A short time later and after Mr Meltzer had a word with the applicant’s solicitor Mr Brennan,  Mr Meltzer declared  that  the proposal  meeting  would  be adjourned.

The resumed proposal meeting

[24]     At the resumed proposal meeting on 31 January 2014 the Commissioner was not represented.  For the Commissioner it is asserted that no notice of the adjourned meeting had been provided.  Although the Commissioner was not represented it was noted the Commissioner opposed  the proposal.   The evidence is that  at the 31

January 2014 meeting Mr Edney who was, he deposes, in a remote South Island location had sent a text message that was received on Mr Haghi’s mobile phone in the course of the meeting then taking place.

[25]     The Commissioner says notice of the meeting on 31 January 2014 was not received.   Evidence on  behalf of the applicant is that notice was posted to the Commissioner.     In  the  circumstances  the  Court  accepts  on  the  balance  of probabilities that the notice was in fact posted.  Also s 330(1) of the Insolvency Act

2006 requires only that the notice be posted to the creditor’s last known address.

Proof of delivery is not required.

[26]     It is the applicant’s evidence that at the meeting on 31 January 2014, despite being  absent,  the  Commissioner’s  vote  against  the  proposal  was  recorded  and counted and despite that, the vote reached the requisite majorities for approval.  Mr Edney’s phone text vote in favour of the proposal provided sufficient support for the proposal to be approved, as was proclaimed by Mr Meltzer.

[27]     Mr Chin  submits  that  the Commissioner representatives  were  denied  the opportunity  to  seek  clarification  of  the  proposal  and  to  speak  to  the  meeting regarding any concerns there may be.

[28]     The Commissioner challenges the trustees’ acceptance of the late vote case by Mr Edney from Waimauri Limited by way of phone text.   Indeed Mr Edney confirms the phone text message was delivered to Mr Haghi’s phone.  He deposes he tried a number of times to contact Mr Meltzer but was unsuccessful.  He confirmed speaking to Mr Meltzer and advised he wished to vote in favour and then as Mr Meltzer suggested he confirmed this vote by way of a text message.

[29]     Mr McCartney notes that s 330(2) of the Insolvency Act 2006 provides that a creditor may vote by postal vote and that there is no definition of postal vote and therefore   there   is   no   prohibition   on   an   absent   creditor   exercising   a   vote electronically.   Mr McCartney submits that one would expect that an email vote would be acceptable and if so then in principle a text vote should also be acceptable, if the circumstances justify it.

[30]     In  his  evidence Mr Meltzer says  he  was  satisfied Mr Edney’s  vote was genuine; that there was no other way for Mr Edney to record his vote in written form; and that it was clear from the previous meeting that Mr Edney wished to vote in favour of the proposal and had since taken legal advice regarding his position as a secured creditor.

[31]     Mr McCartney’s submission is that even if the text vote could be said to be contrary to the Act at most it amounts to a minor procedural error and could not have unfairly prejudiced any other creditors.

[32]     In the Court’s view its primary purpose is to give effect to the wishes of the general body of creditors.  In the particular circumstances of the case it is arguable (at least by reference to the affidavit evidence and the oral evidence presented) that:

(a)      At the initial proposal meeting and although creditors were asked to indicate their vote, that no result was declared, and because Mr Edney wanted to obtain further advice regarding Waimauri’s secured creditor position proper reason was given for adjourning that meeting.

(b)      Notice of the resumed meeting had been given to the Commissioner;

(c)       There was proper reason for accepting a phone text vote.

Whether the terms of the proposal were calculated to benefit the general body of creditors

[33]     Mr Chin submitted that the Commissioner is in the position of an oppressed minority compared to other commercial creditors; that the Commissioner is tasked with the collection of revenue and with the protection of the integrity of the tax base and if compelled to accept the return offered by the proposal then the Commissioner would effectively be forced to treat Mr Haghi differently from other taxpayers in the same situation.

[34]     Waimauri Limited, as secured creditor, had voted in favour of the proposal but it was not proposed that as a secured creditor it would share the proposal fund. In the proposal Mr Haghi confirmed that there would be no defaults under the secured loans during the term of the proposal.   It appears therefore that secured creditor’s rights would not be affected by the proposal.

[35]     Mr Chin submits that Mr Haghi had undertaken that mortgagee payments would be met but he provided no information regarding the source of the funds to continue paying the mortgage.  Mr Chin queries whether separate funds which had not been disclosed may be involved.  He submitted unsecured creditors may not have been given Mr Haghi’s best offer under the proposal.

Considerations

[36]     Due  to  an  apparent  dispute  over  factual  detail  proved  in  relation  to  the conduct of the 16 December 2013 meeting the Court directed affidavit deponents be called for cross examination.  Hence the hearing of this application was part heard and adjourned until 17 April 2015.

[37]     It is the Court’s view that all witnesses heard provided truthful testimony, and that differences of account were honestly held and that any differences were largely inconsequential.

[38]     At the 16 December 2013 meeting Mr Meltzer asked the creditors to vote on the proposal by a show of hands and then Mr Eeles voted for the proposal and Ms Law on behalf of the Commissioner voted against it.  Then and after a discussion with Mr Meltzer in which it was intimated the Commissioner would not change its position Mr Meltzer announced the meeting would be adjourned.  He explained Mr Edney needed to get advice about whether Waimauri Ltd should vote.

[39]     Mr Chin questioned whether there could be an adjournment, a vote having been  taken.    Mr  Meltzer’s  response  was  that  it  was  within  his  authority  as chairperson to adjourn the meeting at any time.

[40]     In the Court’s view Mr Meltzer is correct.  A secured creditor had recently learned of a Court of Appeal decision that might have impacted on the security of its loan if it voted in favour of the proposal, but that the creditor wished to seek further advice on the matter.

[41]     The evidence is that it was for this reason Mr Edney indicated to Mr Meltzer at the 16 December 2013 meeting that Waimauri Ltd would not be voting on the proposal.

[42]     At  that  meeting  Mr  Meltzer  obtained  legal  advice  from  Mr  Brennan  a solicitor who has practiced in insolvency law for over 25 years.  A few days later it was Mr Brennan’s advice given by his report dated 19 December 2013 that secured creditors could vote on insolvency proposals without concern that they may thereby be considered to have waived or released their security.

[43]     With respect the Court concurs with that advice.  The Waipareira case was concerned with a meeting of creditors of a company in liquidation.  The meeting was carried out within the framework of the liquidation provisions of the Companies Act

1993.  As Mr Brennan noted this is a separate and self contained regime within the confines of which certain options are reserved to secured creditors.  In short those provide  options  whereby  a  secured  creditor  can  pursue  a  claim  relying  on  the security or otherwise as an unsecured creditor, but in essence cannot do both.

[44]     Some provisions within the Insolvency Act 2006 (the Act) suggest a similar regime may apply to bankruptcy.  As Mr Brennan’s report notes ss 95 and 243 – 250 of the Act permit a secured creditor to either realise the value of property, subject to its charge, or to pursue a claim as an unsecured creditor for an amount owed more than the security is worth, or to surrender a security interest and to prove in bankruptcy as an unsecured creditor for the whole debt.

[45]     Section 244 of the Act enables the Official Assignee by formal process to require a secured creditor to select one of those options.

[46]     Mr Haghi’s application is made in accordance with a procedure set out in Part

5, Sub-Part 2 of the Act and the associated Insolvency (Personal Insolvency) Regulations 2007.   Sections 95 and 245 – 250 of the Act are concerned with the position of a debtor who has been adjudicated bankrupt.  Part 5 of the Act and Part 4 of the Regulations  have  created a separate regime whereby  bankruptcy may be avoided.   It is clear that for present purposes a secured creditor is included in the same class as unsecured creditors for the purposes of voting at meetings of creditors called  to  consider  an  insolvency  payment  proposal.     Presently  there  is  no requirement for secured creditors on an insolvent’s proposal to elect to value their security and vote only in relation to any unsecured portion, or to waive their security in order to be able to vote to the full extent of their debt.

[47]     The Commissioner’s remaining concern with the meeting process is about the means by which Mr Edney voted at the resumed meeting on 31 January 2014 i.e. by text message to Mr Haghi’s mobile phone after the meeting began.

[48]     Mr Edney deposes that on 24 January 2014:

I was in a remote part of Central Otago.  My only means of communication was by mobile phone, and the network coverage was poor.  I had received further legal advice, and I was willing to vote in favour of the proposal.

I attempted to call Mr Meltzer several times on 31 January 2014, but could not make contact with him.   I did manage to call Mohsen Haghi who I understood was at the meeting when he received my call.  He gave his phone to Mr Meltzer.   I told Mr Meltzer that I wanted a vote in favour of the proposal, but was unable to attend the meeting, or provide a postal vote on

paper.  Mr Meltzer asked me to send a text confirming that I wished to vote in favour of the proposal on behalf of Waimauri Limited, which I did.

[49]     The Act provides requirements for the sending of postal and electronic votes to creditor meetings of a bankrupt.  Those meetings are arranged and presided over by an Assignee or his/her appointee.

[50]     Section 93 of the Act permits voting by postal vote or electronic vote but requires those votes to reach the Assignee at least two working days before the meeting begins if they are to be counted.

[51]     A  different  regime  occurs  at  creditor  meetings  called  to  consider  an insolvent’s proposal.  Section 330(2) provides that a creditor who has proved a claim in the prescribed manner may vote on the proposal by sending a postal vote that reaches the provisional trustee before or at the meeting.  Then such would be treated as a vote of that person who was present and voted at the meeting.

[52]     In this case there is no challenge to the claim of Waimauri Limited as a creditor, or that Mr Edney represented that company which held a mortgage security over Mr Haghi’s property.   Ms Law in her affidavit and evidence for the Commissioner  deposed  of  Mr  Edney’s  concerns  as  a  secured  creditor  being expressed at  the initial  meeting.    It  was  clear  Mr Edney was  prepared  to  give consideration to voting in favour of the proposal provided Waimauri Limited’s security was not affected.

[53]     There may well be no precedent for a vote by way of a text message being recorded or accepted in support of an insolvency proposal.   This Court considers there is no reason why this could not now occur in circumstances where the communication is received and accepted on behalf of a creditor whose claim of an interest is known and accepted.

Conclusions

[54]     The  evidence  about  Mr  Haghi  and  his  business  enterprises  discloses something of a mess of trust and corporate entities littered with debt.  To be fair most

of those trust entities have been in the control of corporate trustees and a few only were in Mr Haghi’s control.

[55]     Since he filed his proposal his family home property has been transferred to a trust in the control of his wife.  Therefore he no longer owns that property which provides mortgage security to the mortgagees one of which had already voted in favour of the creditor’s proposal.

[56]     Mr Haghi’s proposal proclaimed that the market value of the family home exceeded the total secured over it by the two secured creditors’ mortgages.   The proposal proclaimed Mr Haghi intended that the secured creditors would remain outside the pool of creditors who will receive payments under the proposal on the basis that there would not be any defaults under those secured loans during the term of the proposal but if that situation should change and if the security property was sold and a shortfall was to occur then those secured creditors would join the pool of creditors as unsecured creditors to the extent of any shortfall.

[57]     Mr Chin submits it may be implied that there is a pool of funds available to Mr Haghi from sources not disclosed.   However, and during submissions Mr McCartney advised that the family home had been transferred to a trust controlled by Mr Haghi’s wife and that since, mortgage interest had not been paid but has been capitalised and would be added to the mortgage debts already owed.

[58]     There does not appear to be any evidence suggesting the availability of funds from other sources to meet mortgage commitments.

[59]     Against this background of financial wreckage and commercial carnage there may nevertheless be cause for optimism.

[60]     In circumstances not entirely explained by the evidence provided for the insolvency proposal hearing, the Court has received an account of circumstances that may breathe some fresh air into claims of commercial rejuvenation.   Interests associated with Mr Haghi and controlled by his sister have recently concluded a

litigation dispute with Wilson Parking New Zealand Limited over the right to purchase a central city Fanshawe Street parking building.

[61]     Since Mr Haghi’s insolvency proposal has been filed that claim of a right to purchase has been tested in the High Court and Court of Appeal.   Those higher courts have endorsed the right of purchase claims of Mr Haghi’s interests and have rejected those of Wilson Parking. The Supreme Court has refused leave to appeal.

[62]     The evidence is that the right of purchase has now been exercised and that that a degree of optimism now supports Mr Haghi’s insolvency proposal promises of payment of $300,000 within one month and a further $300,000 within six months.

[63]     Mr Haghi’s track record is not a good one but on balance the Court accepts the assessment of Mr Smith a tax specialist that whilst Mr Haghi’s affairs were clearly in a mess he is not a “serial tax offender; that all of his financial problems arose as a result of one single disaster which was the impact the global financial crisis had on his property portfolio.

[64]     Except for the Fanshawe Street property purchase it is clear Mr Haghi’s creditors would receive nothing at all and Mr Haghi would probably be bankrupt. The Fanshawe Street property provides the promise of assistance from entities controlled by his sister.

Judgment

[65]     The insolvency proposal is approved but leave is reserved to apply for the proposal to be cancelled if there has not been delivered to the creditors that which by then has been promised.

[66]     Each party will bear their own costs.

Associate Judge Christiansen