Herbert v Allied Nationwide Finance HC Auckland CIV-2010-404-8294
[2011] NZHC 1225
•26 September 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-8294
UNDER the Insolvency Act 2006
BETWEEN RICHARD WALLACE HERBERT Judgment Debtor
ANDALLIED NATIONWIDE FINANCE First Creditor
ANDAUCKLAND MORTGAGE TRUST Second Creditor
ANDBANK OF NEW ZEALAND Third Creditor
Hearing: 1 August 2011
Appearances: Ms K Scott and Miss J Phillips for Allied Nationwide Finance (1st
Creditor)
Mr J Kleinbaum for Commissioner of Inland Revenue (11th Creditor) Mr G Holm-Hansen for Public Trust Limited (15th Creditor)
Ms L Gellert for Westpac New Zealand Limited (17th Creditor)
Mr K P McDonald for Cynotech Securities Limited (18th Creditor) Mr A Nicholls for trustees of applicants
Judgment: 26 September 2011 at 11:00 AM
JUDGMENT OF ASSOCIATE JUDGE DOOGUE
This judgment was delivered by me on
26.09.11 at 11 a.m., pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Counsel:
Date……………
Buddle Findlay, P O Box 1433, Auckland – [email protected]
Inland Revenue Department, P O Box 33150, Takapuna – [email protected] Simpson Grierson, Private Bag 92518, Auckland - [email protected] Simpson Grierson, Private Bag 92518, Auckland – [email protected]
HERBERT V ALLIED NATIONWIDE FINANCE & Ors HC AK CIV-2010-404-8294 26 September 2011
Mr Kevin McDonald, Barrister, Auckland - [email protected]
Edwards Clark Dickie, (Mr A Nicholls) – [email protected]
ANDDAVIES LAW NOMINEES Fourth Creditor
ANDEASY FACTORS INTERNATIONAL LIMITED Fifth Creditor
ANDFIRST MORTGAGE NOMINEES LIMITED Sixth Creditor
ANDC E INVESTMENT TRUST Seventh Creditor
ANDFAPP SECURITIES LIMITED Eighth Creditor
ANDF M CUSTODIANS LIMITED Ninth Creditor
ANDTHE NEW ZEALAND GUARDIAN TRUST COMPANY Tenth Creditor
ANDINLAND REVNUE DEPARTMENT Eleventh Creditor
ANDMARAC FINANCE LIMITED Twelfth Creditor
ANDMIDLANDS FINANCE LIMITED Thirteenth Creditor
ANDNZ MORTGAGE INCOME TRUST Fourteenth Creditor
ANDPUBLIC TRUST LIMITED Fifteenth Creditor
ANDSNEDDEN SOLICITORS NOMINEE COMPANY LIMITED
Sixteenth Creditor
ANDWESTPAC NEW ZEALAND LIMITED Seventeenth Creditor
ANDCYNOTECH SECURITIES LIMITED Eighteenth Creditor
AND ANZ NATIONAL BANK LIMITED Nineteenth Creditor AND
UDC FINANCE LIMITED Twentieth Creditor
AND SOUTH CANTERBURY FINANCE
LIMITED
(IN
RECEIVERSHIP)
Twenty-First Creditor
ANDSIMON BARNES Twenty-Second Creditor
ANDAMERICAN EXPRESS INTERNATION (NZ) INC Twenty-Third Creditor
Background
[1] On 1 August, I heard together two applications for approval of creditors’ proposals which were made by Mr and Mrs Herbert. The one brought by Mrs Herbert was unopposed. Three parties opposed the application that Mr Herbert had made. Two of the parties had filed notices of opposition. They were Allied Nationwide Finance (―Allied‖) and the Commissioner of Inland Revenue. A further creditor, Cynotech Securities Ltd, had not filed any notice of opposition or affidavit in support, but I granted leave for counsel for Cynotech to appear and address the Court, having regard to the fact that there was doubt whether Cynotech had been served with the application for approval.
[2] Mr Herbert was a chartered accountant who decided, in the early-2000s, that he would become involved in a property development at Pauanui. He had had no previous experience as a property developer. The Pauanui Lakes Development was ambitious. It involved the construction of a golf course to a high specification, and the subdivision of residential land with a sale of sections and villas which the developers apparently constructed. The project seems to have been undertaken by a number of companies which the promoters of the development incorporated. Mr Herbert had five partners who participated with him in the development.
[3] The development was a spectacular financial failure. The five other persons who joined Mr Herbert and the venture have been adjudicated bankrupt. Mr Herbert describes himself as the ―last man standing‖. He had already been adjudicated bankrupt sometime before 16 November 2010, but the order of the Court was later annulled due to procedural issues. There are now before the Court applications to adjudicate both Mr and Mrs Herbert bankrupt. I have deferred further consideration of those applications until the Court has given a decision in the applications which have been made under s 333 of the Insolvency Act. That section provides:
333 Court must approve proposal
(1) After the proposal has been accepted by the creditors, the trustee must, as soon as practicable—
(a) apply to the court for approval of the proposal; and
(b) send notice of the hearing of the application in the prescribed form to the insolvent and to each known creditor.
(2) The court must, before approving a proposal, hear any objection that is made by or on behalf of a creditor.
(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] Mr Herbert essentially blames the global credit crisis for the financial failure of the Pauanui venture. Ms Scott who appeared for Allied submitted that Mr Herbert is clearly insolvent, having debts in excess of $29,000,000 to his various creditors, against assets of $8,700. It is of concern to me that the second most valuable asset listed by Mr Herbert is his ―garden statues‖ of $1,500 (the most valuable being a cabinet allegedly worth $2,500). No matter how princely Mr Herbert’s garden gnomes may be, I consider that Ms Scott’s submission is correct.
[5] While Mr Herbert no longer retains a practising certificate as a chartered accountant, he expects to take up work as a business consultant and he expects that existing clients will continue to instruct him in that capacity.
[6] The proposal has a complicating feature in that it contemplates that Mr and
Mrs Herbert should settle upon their respective provisional trustees a total sum of
$10,000. It is proposed that that amount should be divided pro rata between the creditors of each of them. The proposal which Mr Herbert has made under s 333 would result in the creditors receiving very small amounts. Mr Ross Green who has given an affidavit for the Commissioner calculates that if the debts are in the order of
$29 million, then each creditor of Mr Herbert will receive 0.016 cents in the dollar of the debts owed. There are two further and notable aspects of the proposal which deserve mention. The first is that the $10,000 is to be provided by a person called Simon Barnes who is apparently a trustee of the trust which has a third mortgage over the Herbert’s family home to which I make further reference below. The second is that the funds of $10,000 are to be shared between two pools of creditors, the members of which are not identical in each case. To give an example, the Commissioner of Inland Revenue is a creditor of Mr Herbert but not of Mrs Herbert.
The exact mechanism by which the money would be shared has not been spelt out, but counsel for Mr Herbert, Mr Nicholls, agreed with me that there would have to be an agreement between the two trustees to apportion the funds in pursuance of the overall scheme, the outline of which I have set out in this paragraph.
[7] I mentioned that the funds for the proposed payment to the creditors were to come from a Mr Barnes. He is a trustee of the Tarad trust, which is the third mortgagee of the property at Coatesville. Mr and Mrs Herbert are beneficiaries of that trust. The first mortgagee, the Bank of New Zealand (BNZ), is owed $2 million. The second mortgagee is Real Estate Credit Ltd, which I was told is a subsidiary of Marac Finance.
[8] In his proposal, Mr Herbert says at paragraph 1:
That satisfaction of my debts to the secured creditors will be made in the following manner:-
(a) To the mortgagee of the property at 271 Glenmore Road Albany, the Insolvent will continue to make the payments required in relation to that security. All other secured creditors will be paid in accordance with clause
4.
[9] Mr Green in his affidavit said that it is unclear why Mr Herbert’s proposal should include ongoing mortgage payments for 271 Glenmore Road, Albany, when he does not own the property in his personal capacity but merely holds it on trust for the beneficiaries of the Richard Herbert Family Trust. I agree with that comment.
Submissions
[10] I shall now set out some of the submissions made by the parties who opposed approval by the Court of the creditors’ compromises. Understandably, there was an element of overlap between the various parties’ submissions and I will not therefore set out completely each party’s submissions but I shall note all the important grounds that were put forward.
Allied Nationwide Finance
[11] The first creditor, Allied, opposes the application on the grounds that:
a) the terms of the proposal are not reasonable or calculated to benefit the general body of creditors;[1] and
b) it is not expedient that the proposal be approved.[2]
[1] Insolvency Act 2006, s 333(3)(b).
[2] Ibid, at s 333(3)(c).
[12] Counsel for Allied submitted:
a) there was uncertainty and vagueness about the total debts. In a proposal to creditors, these were stated to be $41 million approximately, but this had reduced to $29 million by the time of the creditors’ meeting with no satisfactory explanation forthcoming as to the reasons for that reduction;
b)the terms of the proposal are not reasonable and not calculated to benefit the general body of creditors.
i)a very small dividend was being paid in relation to very large debts. In relation to Allied, this was $883 in respect of debts of over $2 million, representing a return of approximately
0.034 cents in the dollar;
ii)the applicant attempts to justify the very small payments being offered on the basis that he has worked in the interests of the creditors for an orderly disposal of the assets of the development. But that is the obligation of the debtor in any case. No particular weight ought to be attached to this feature of the case. In any case there is no evidence supporting this assertion;
iii)part of the payment to be made by the applicant would be directed towards the debts of his wife with whom many
creditors had no connection at all;
c) it was not appropriate to approve the proposal because the proposal was not expedient and/or in the public interest;
i)since June 2008 when the breaches occurred, the applicant as guarantor had not made any payment to the first creditor, Allied, despite making payments to the 11th creditor;
ii)the irresponsibility of the applicant and devastating effect on creditors or others may lead the Court to conclude that the applicant ought not to escape the stigma of bankruptcy but rather, it may be in the public interest that such a person should be marked as a bankrupt and that he should suffer the various disqualifications that go with bankruptcy. Those disqualifications are, after all, designed to protect the community from the effects of irresponsible financial conduct. The stigma of bankruptcy is itself a deterrent to others to stop
them from behaving in a like manner;[3]
[3] NOTE — Re Trott and Joy [2009] 2 NZLR 800 (HC) at 810.
iii)it is not an adequate explanation of the failure for the applicant to point to the global financial crisis. Property developers cannot do business on the basis that the market will always be buoyant. Mr Herbert must take responsibility for being (at
best) imprudent or (at worst) commercially irresponsible;[4]
[4] Bridgecorp v Nielsen [2010] 1 NZLR 820 per Heath J.
iv)the primary recipient of payments will be the mortgagee of the property in the Albany area, which was owned by an entity legally separate from the applicant. This property was apparently the residence of the applicant and it was situated in an affluent area. The applicant was attempting to “[dine] at
the rich man's table”[5] while insolvent;
[5] Marsh v Commonwealth Bank of Australia, New Zealand Branch HC Auckland CIV-2009-404-3336, 16 March 2010.
v)the applicant is intending to continue acting as a business consultant and that is not in the wider public interest. It would be in the public interest for him to be adjudicated bankrupt because that would help the public to identify the risks associated with receiving advice from him;
vi)given the scale of the losses in this case, there is a general public interest in protecting future creditors of the applicant by publicising the applicant’s wrongdoing and preventing him from being in a position to trade for at least the period of bankruptcy.
Cynotech Securities Ltd
[13] Mr Herbert’s future income stream was unknown and therefore it had not proved possible to give any undertaking that in the future he would pay part of his earnings towards his debts. Counsel for Cynotech, Mr McDonald, was critical of the position concerning Mr Herbert’s future earnings and indeed his personal financial circumstances as contemplated by the application. He pointed out that Mr Herbert and his wife were intending to live in a property near Albany which was owned by a trust. The exact details were not clear. It appeared that the property was worth $2 million, approximately. The applicants had given evidence that there were secured over the property debts of about that amount and that therefore there was no equity in the property. Mr Herbert was a beneficiary of the trust. The trust was going to continue to meet the mortgage obligations. Mr Herbert was going to make payments to the trustee as his income permitted, but the amounts were not known.
[14] Against that background, counsel submitted that the effect of the arrangement was that Mr Herbert and his wife would continue living in a high value property and that the creditors who had lent funds that were secured over that property would obtain a preference over other creditors. Mr McDonald submitted that even if interest only was paid on the mortgages and assuming a rate of interest of 6 per cent, the annual cost of the mortgage to retain ownership of the residence was in the order of $120,000 per year or $2500 per week, by his rough estimate.
Discussion
The size of the payment to the creditors
[15] Very substantial loss has been caused to creditors. The amount of indebtedness that resulted from the failure of the Pauanui Lakes Development is approximately $29 million. The applicant, Mr Herbert, owes that amount. He has proposed to the creditors that they should receive $10,000. I do not know exactly what dividend will be available to each creditor but the figure which Mr Green mentioned of 0.016 cents in the dollar would seem to be about right. This amount can accurately be described as de minimis. It is of no practical advantage to the creditors. In substance, Mr Herbert has not made a compromise with his creditors of the kind that the s 333 procedure was designed to facilitate. I do not criticise the creditors who voted in favour of the proposal. They may well be acting from the laudable motive of wanting to assist Mr Herbert to make a fresh start. Whatever the true position, it can be said with certainty that they cannot have approached the matter by making a calculation that $10,000 was going to be of any practical advantage to them. If the proposal cannot be of any practical benefit to the supporting creditors, the same has to be said about the opposing creditors. They should not be constrained to accept an amount of this kind. It is not conducive to the interests of the general body of creditors. It has no impact at all on their interests. The proposal does not provide any countervailing advantage for the foregoing of the rights that they would have as creditors in the normal run of cases to pursue their debts to the point of bankruptcy.
[16] Putting matters another way, the proposal is not reasonable within the meaning of the section, and where the reasonableness of the proposal is assessed as it must be from the perspective of the creditors: Kelly v Structured Finance Ltd.[6]
[6] Kelly v Structured Finance Ltd [2009] 2 NZLR 785 (HC) at [44].
[17] In Re Nathan,[7] Robertson J arrived at a similar conclusion although he expressed it in a different way:
The amount which the creditors are to receive under the proposal is infinitesimal and consequently the advantage of a pre-adjudication proposal in this case is very questionable. … The other side of the coin is that if the proposal does not go ahead the creditors may receive nothing at all. That is what Mr Nathan has said, but it may not necessarily be the case. If bankruptcy occurs the Official Asssignee will be required to assess independently all claims and the background of previous dealings which may be of relevance. This could disclose a different situation. Where there is no recovery of any substance in a proposal, the possible benefits from a full and independent scrutiny are of greater significance.
[7] Re Nathan HC Whangarei B53/89, 14 August 1989 at 19–20.
[18] I also agree with Ms Scott that the decision of Heath J in Bridgecorp v Nielsen[8] which I have cited above is relevant in the context of this case. If Mr Herbert made the assumption that the real estate market would remain buoyant indefinitely, as he must have, then he was imprudent, at best. The failure of the Pauanui development cannot just be put down to the unexpected onset of the global lending crisis.
[8] Bridgecorp v Nielsen, above n 4.
[19] Decisions made on other applications under s 333 have referred to the desirability in appropriate cases of the investigation into a bankrupt’s affairs which can be undertaken in appropriate insolvencies by the Official Assignee. I accept that there is no evidence in this case of financial misconduct such as entries into voidable transactions. However, the scale alone of the losses which have been suffered as a result of Mr Herbert’s insolvency, point to the desirability of a review being undertaken by the Official Assignee. I do not overlook that apparently that the Pauanui development was carried on by means of companies, many of which are already in liquidation, and that the liquidators of the relevant companies would have statutory obligations to enquire into whether the law had been complied with in the management of the affairs of those companies and businesses that they carried on. Nonetheless, it is likely that the true authors of the financial collapse are those who created the companies and directed them, as well as accepting personal liability in return for funding being provided to the companies. Mr Herbert is such a person and his personal conduct may well merit investigation. Because of the large scale of the losses in this case, there is a public interest that there be scrutiny by the Official Assignee.
Mr Herbert’s proposal to work as a business consultant
[20] It is correct that Mr Herbert has assured the Court that he will not take further part in property development. I have already mentioned that he has lost his practising certificate as a chartered accountant. These combined considerations were the foundation for Mr Nicholls submitting that the Court could be satisfied that Mr Herbert would not be a commercial hazard in the community.
[21] The contrary submission was made that Mr Herbert intended to continue providing business advice to existing clients, which was undesirable. I agree that Mr Herbert’s track record means that it is undesirable that he should be advising others who are involved in the sort of investment that he was engaged in and which led to his insolvency. But this factor does not have the same weight as in cases, for example, where a businessman who had failed in a property development venture was proposing to re-enter that field of endeavour and where the viability of the debt repayment program being advanced was predicated upon the latest development
being a successful one, unlike its predecessor.[9]
[9] See for example the decision of Abbott AJ in Re Henderson (2010) 24 NZTC 24,039 (HC)
[22] I appreciate that two other authorities have passed judgement on Mr Herbert before the matter reached this Court. Specifically, the Deputy Registrar of Companies has imposed a ban on Mr Herbert becoming a director of a company for five years. As I have already mentioned, the New Zealand Institute of Chartered Accountants (―NZICA‖) has suspended him from practice. The grounds upon which Mr Herbert was suspended from practice were that he was guilty of conduct unbecoming of an accountant and breaching the Code of Ethics, particularly the principle that members of the NZICA must behave in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession. The questions that the NZICA was therefore required to determine are rather different from the one before the Court at present. Further, while the determination of the Deputy Registrar of Companies that Mr Herbert should be banned from starting up further companies is understandable, that is not the kind of decision which has any precedent value for the Court when considering the present application. Both those matters are of marginal relevance.
[23] Having said that, and conceding that I do not have a clear understanding of quite what services Mr Herbert would expect to provide to his clients as a business adviser, the generic description of the occupation that he expects to follow from this point forward gives rise to some concern. This is an issue of some, but not decisive, weight.
Retention of property at Coatesville
[24] The next point I consider is the criticism that was made about the retention of the family property at Coatesville. It may be correct that there is no equity in the property, but it also seems to be the case that such income as Mr Herbert earns will be used to service the mortgages. There is no evidence given that Mrs Herbert has any substantial source of income and the inference must be drawn that the applicant Mr Herbert alone will be funding the servicing of the mortgages. There is no reason apparent on the face of the evidence before the Court why the trustee should agree to assume the obligation of funding the applicant’s housing requirements unless, of course, he expected to be reimbursed for the amounts outlaid. That is exactly the position that is going to result, I believe.
[25] While there can be no complaint about the secured creditors exercising their security over the property, it is difficult to see why Mr Herbert should be accepting responsibility for additional payments to the creditors who happen to have security over the family home in preference to the other unsecured creditors. That is an unsatisfactory feature of the proposal which Mr Herbert has put forward. Were Mr Herbert to be made bankrupt, such an outcome would be avoided. He would still be able to work and he could be directed to contribute to his debts.
Conclusion
[26] The principal reason, though, why I consider that the proposal ought not be approved is that I am unable to accept that the proposal is in the interests of the body of creditors as a whole and that it is reasonable. The palpable inadequacy of the amount that is offered to the creditors means that this is not a proposal that the Court ought to approve.
[27] I appreciate that in Re Bennett’s,[10] Hardie Boys J expressed the view that the Court should be slow to decline approval for a proposal which the creditors have accepted by the required majority at the creditors’ meeting:[11]
… I think the Court should accept the view of the creditors, or the majority of them, and grant approval unless it is apparent that one of the grounds for refusing approval exists. The Court is clearly required to exercise its independent judgment, for considerations of wider public interest are relevant, and therefore even unanimity amongst the creditors will not be predeterminative of approval. But unless it is clear that the creditors generally would fare better under a bankruptcy, approval ought normally to be given unless otehr special circumstances militate against it. Whilst a proposal ought not to be imposed under dissentient creditors if that would be disadvantageous to them as members of the general body of creditors their dissent should not be upheld if to do so could be prejudicial to the general body of creditors.
[10] Re Bennett’s HC Christchurch B138/81 and M306/81, 1 February 1982.
[11] Ibid, at 9.
[28] This passage was cited with approval by the Court of Appeal in Farmer v
Rowley.[12] The Court further added:[13]
In determining whether the proposal is reasonable the Courtis required to exercise an independent judgment. Nevertheless it must be influenced by the commercial judgment of creditors who in approving the proposal have demonstrated their willingness and wish to receive a partial payment without recourse to bankruptcy. It is important to emphasise, too, that it is the creditors who stand to lose the benefit if a proposal is rejected and bankruptcy ensues. Unless there are special public interest or other commercial considerations present the assessment of the substantial body of the creditors ought to be accepted.
[12] Farmer v Rowley [1992] 2 NZLR 195 (CA).
[13] Ibid, at 200–201.
[29] Bearing in mind these considerations, I consider that the ground for refusing approval of a proposal in s 333(3)(b) has been made out — that is, the terms of the proposal are not reasonable and are not calculated to benefit the general body of creditors.
Result
[30] The result will be that Mr Herbert’s application is declined.
[31] Turning to Mrs Herbert’s application, I observe that that application, because it is essentially a joint proposal, cannot be treated as an independent application which could be approved even if the application by Mr Herbert were not.
[32] But there are also the same problems of substance with that application as there are with Mr Herbert’s. Given that the $10,000 is to be shared pro rata with Mr Herbert’s creditors, the rate of repayment will necessarily be identical to that which Mr Herbert’s creditors receive. I conclude in Mrs Herbert’s case that the proposal is wholly inadequate and is not one that could be regarded as in the interests of the body of creditors as a whole nor is it reasonable. It too will be declined.
[33] Counsel should confer on the matter of costs and if they are unable to resolve that issue by agreement I shall give further directions.
[34] Creditors’ applications for adjudication orders have been filed against both
Mr and Mrs Herbert and they are to be called again in my bankruptcy list at 10:45 am on 6 October 2011.
J.P. Doogue
Associate Judge
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