Horton v McKillen

[2015] NZHC 3134

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-1212 [2015] NZHC 3134

UNDER

Part 5, Subpart 2 of the Insolvency Act

2006

IN THE MATTER

of a proposal by Shane Fulton McKillen to Creditors under Part 5 Subpart 2 of the Insolvency Act 2006

BETWEEN

CHRISTOPHER ROBERT ROSS HORTON

Applicant

AND

SHANE FULTON MCKILLEN Insolvent

MCKILLEN FAMILY TRUST NO. 1
Creditor

MCKILLEN FAMILY TRUST NO. 2
Creditor

MCKILLEN FAMILY TRUST NO. 3
Creditor

MICHAEL MORTON Creditor

MICHAEL MORTON NO. 2 TRUST Creditor

AUDREY INVESTMENTS LIMITED Creditor

BANK OF NEW ZEALAND Creditor

COLLINSVILLE SECURITIES LIMITED

Creditor

UDC FINANCE LIMITED Creditor

HORTON  v MCKILLEN & ORS [2015] NZHC 3134 [11 December 2015]

FLEXIGROUP NZ LIMITED Creditor

AND

CIV-2015-404-1215

UNDER  Regulation 32(1) Insolvency (Personal

Insolvency) Regulations 2007

IN THE MATTER             of an appeal by Audrey Investments Limited of the decision of CHRISTOPHER ROBERT ROSS HORTON as provisional trustee of the creditors' Proposal of SHANE FULTON MCKILLEN

BETWEEN  AUDREY INVESTMENTS LIMITED Apellant

ANDCHRISTOPHER ROBERT ROSS HORTON

Respondent

AND CIV-2015-404-235

IN THE MATTER             a Proposal made by SHANE FULTON MCKILLEN to Creditors

BETWEEN  CHRISTOPHER ROBERT ROSS HORTON

Applicant

ANDSHANE FULTON MCKILLEN Insolvent

MCKILLEN FAMILY TRUST NO. 1

Creditor

MCKILLEN FAMILY TRUST NO. 2

Creditor

MCKILLEN FAMILY TRUST NO. 3

Creditor

MICHAEL MORTON Creditor

MICHAEL MORTON NO.2 TRUST Creditor

AUDREY INVESTMENTS LIMITED Creditor

BANK OF NEW ZEALAND LIMITED Creditor

COLLINSVILLE SECURITIES LIMITED

Creditor

UDC FINANCE LIMITED Creditor

FLEXIGROUP NZ LIMITED Creditor

Hearing:	22 June and 21 September 2015
Appearances:	B Gustafson for the Insolvent G Blanchard for the Trustee M Robinson and L Gellert for Audrey Investments Ltd L O'Gorman and A Harlowe for Bank of New Zealand
Judgment:	11 December 2015

JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE

This judgment was delivered by me on

11.12.15 at 4.00 pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Background

[1]      Mr  McKillen,  the  insolvent,  has  made  a  proposal  to  his  creditors  (“the Proposal”) which was considered at a creditors’ meeting on 19 February 2015.  The applicant, Mr Horton, who is the provisional trustee (“PT”), in the usual way at the conclusion of the meeting, determined which creditors were eligible to vote on the Proposal and determined the value that ought to be attributed to all of those claims so admitted in order that he carry out a calculation to determine whether the requisite majority required under s 331 of the Insolvency Act 2006 (“the Act”) supported the Proposal.

[2]       One of the creditors who attended the meeting was Audrey Investments Ltd (“Audrey”).  Audrey, by its counsel, Mr Robinson, submitted that certain creditors, who the PT considered ought to be entitled to vote, should not in fact have their claims recognised for the purposes of voting. Those contentions were rejected by the PT who concluded that the Proposal was supported by the majorities exceeding the statutory requirements that the Proposal be supported by the majority in number and

three quarters in value of the creditors who vote and are present at the meeting.1

[3]      Audrey, as it was entitled to do, has filed an appeal against the determination of the PT to admit the claims of some of the creditors who supported the Proposal. That appeal is one of the matters that this judgment is concerned with.

[4]       If the appeal which Audrey has brought is successful, the result will be that the Proposal ought not to have been approved for want of the required majority.

[5]      Audrey opposes the Proposal on additional alternative grounds, including that the Court ought not to exercise its discretion to approve the Proposal.   The grounds upon which it puts forward its opposition will be considered in more detail below.

[6]      Another creditor who opposed the motion for approving the Proposal at the creditors’ meeting was the Bank of New Zealand (“the BNZ”).   The BNZ also

1      Insolvency Act 2006, s 331.

opposes the application for approval of the Proposal which is now before the Court and I will make reference to the submissions which counsel, Mr Harlowe, made on behalf of the BNZ further on in this judgment.

The Proposal

[7]      In the attachments to the PT’s report, Mr McKillen asserted that he has debts

and liabilities of $33,803,509 and assets of $107,500.

[8]       Of the liabilities, $23.6 million represents a liability to the trustees of the McKillen family trust described as “MFT1”.  Mr McKillen says that $23.1 million of his liability to MFT1 arose in respect of his guarantee of unsecured, on-demand advances that MFT1 made, at his request, to various companies associated with him.

[9]      The  sum  of  $320,300  relates  to  an  advance  that  the  trustees  of  another McKillen family trust,“MFT2”, (including Mr McKillen) made to Mr McKillen in the past two years to enable him to repay another one of his creditors.

[10]     A further $250,000 is said to be a liability owed by Mr McKillen to the trustees of a third McKillen family trust, “MFT3”, in respect of a purchase of shares in April 2009.

[11]     A further debt of $721,965 is said to represent Mr McKillen’s liability to Collinsville Securities Ltd (“CSL”) (the directors of which are Mr McKillen and Mr Fine, and the shareholders of which are Mr McKillen and Mrs McKillen). Again, Mr McKillen says he is liable to CSL pursuant to a guarantee he has provided in respect of advances made by CSL at his request.

[12]     Mr McKillen proposes to pay $300,000 in three equal, annual instalments with the first three instalments to be paid (or procured to be paid) within 10 days of the Proposal being approved.  As counsel for Audrey and BNZ noted, this amounts to less than one cent for every dollar owed.

[13]     It is a further aspect of the Proposal that the four “Related Parties” (MFT1,

MFT2, MFT3 and CSL) will not participate in this $300,000 payment.   With that

deduction, the payment to the remaining creditors becomes approximately 3.3 cents in the dollar.

The applicant’s contentions in overview

[14]     Mr Gustafson, for the insolvent, summarised the position that the insolvent takes.   He said  that the Court ought to approve the Proposal for the following reasons:

(a)       the Proposal has the support of the majorities of the creditors  required by s 331 of the Act;

(b)      none of the grounds exist upon which the Court must not approve the

Proposal, set out at s 333(4) of the Act; and

(c)       none of the grounds exist upon which the Court may decide not to approve the Proposal, set out at s 333(3) of the Act.

[15]     Mr Gustafson also  submitted that  the Court  ought  to  dismiss  the appeal against the PT’s decision admitting the debt of MFT1 because there was no evidence that the PT did not fulfil the requirements of regs 12 and 35 of the Insolvency (Personal Insolvency) Regulations 2007 (“the Regulations”) and, in actual fact, the evidence is to the contrary as there was more than sufficient information to fulfill those requirements.

The dispute in outline

[16]     Audrey, which is a creditor of Mr McKillen, opposes the PT’s application for approval of the Proposal and also appeals against the PT’s decision to count the votes  of  certain  creditors  in  support  of  the  Proposal  pursuant  to  reg 32  of  the Regulations.

[17]     Mr Robinson, for Audrey, submitted that the Court should not approve the Proposal because Mr McKillen has been able to control and determine his own Proposal.  In particular:

(a)      The necessary majorities at the creditors’ meeting were only achieved with the supporting vote of the trustees of MFT1, MFT2, MFT3 (together, the MF Trusts) and CSL.

(b)Mr McKillen is a trustee (and beneficiary) of the MF Trusts and a director and shareholder of CSL.

(c)      The trustee took the claims of the MF Trusts and CSL at face value which gave them control of 73 per cent of the vote at the creditors’ meeting.  Of the remaining 27 per cent of the votes, 18 per cent voted against the Proposal.

(d)      The trustees of MFT1, alone, controlled 69.46 per cent of the vote.

The   trustees   of   MFT1   are   Mr   McKillen,   Mrs   McKillen   and Mr McKillen’s financial advisor, Mr Fine.  If their vote is put to one side, (or even discounted to 60 per cent of the total votes) then the Proposal would fail.

(e)      Further,  the  terms  of  the  proposal  are  neither  reasonable  nor calculated to benefit the general body of creditors.

[18]     The fact that the trustees of the MF Trusts and CSL would vote in favour of the Proposal on the basis that they get nothing in respect of the $24.9 million they claim to be owed, Mr Robinson submitted, only exacerbates the unreasonableness and inexpedience of the Proposal.

[19]     Mr Robinson  submitted that,  in  any event,  the  claim  forms  filed by the trustees of the MF Trusts and CSL do not comply with reg 12 of the Regulations and, for that reason alone, the trustees should not have counted their votes.

[20]     Further, he said, the claims filed by Mr Michael Morton and the Michael Morton   Family   Trust   No   2   (MMFT2)   have   not   been   adequately   proven. Mr McKillen’s attempts to explain the nature of his liability to Mr Morton have been unclear, ambiguous and inconsistent.  Mr Morton is a close friend of Mr McKillen.

[21]     The  BNZ  takes  a  similar  stance  on  opposing  approval  of  the  Proposal. Additional aspects of the submissions for the BNZ will be referred to in due course.

The appeal

[22]     The admission or rejection of creditor claims under Subpart 2 of Part 5 of the

Act is dealt with under reg 32 of the Regulations which provides:

32       Admission or rejection of claims for purposes of voting

(1)       The provisional trustee has the power to admit or reject a claim for the purposes of voting at a creditors' meeting, but his or her decision is subject to appeal to the Court.

(2)       If  the  provisional  trustee  is  uncertain  whether  a  claim  may  be admitted or rejected, he or she must allow the creditor to vote subject to that vote being declared invalid in the event of the claim being rejected for purposes of voting.

[23]     Under reg 35(1):

a creditor’s claim form for a claim under a proposal must comply with regulation 12.

[24]     Regulation 12 provides:

12       Creditor’s claim form

(1)       A creditor’s claim form under section 233 or 247 must— (a)       be signed by the person completing the form; and (b)       be dated; and

(c)       have  attached  to  it  evidence  of  the  debt  and  any    other evidence supporting the claim.

(2)       A  creditor’s  claim  form  under  s  233  or  247  must  contain  the following information:

(a)      the creditor’s full name:

(b)       the creditor’s current address, telephone number, and any other contact detail (such as a mobile telephone number or an email address):

(c)      the  creditor’s  goods  and services  tax  registration  number

(GST number), if any:

(d)      if the form is completed on behalf of the creditor, the full name of the person completing the form:

(e)      the full name of the bankrupt or debtor: (f) the amount of the debt claimed:

(g)      a description of how and when the debt was incurred: (h)   whether the debt is secured:

(i)       if the debt is secured, a description of the security and the estimated value of the security.

[25]     Counsel  submitted  that  of  importance  to  this  case  is  reg 12(1)(c)  and reg 12(2)(g).

[26]     Mr Harlowe referred to the decision of Re Wikeley where the Court set out a number  of  principles  that  apply  to  an  appeal  based  on  non-compliance  with reg 12(1)(c) and reg 12(2)(g).  Below is a summary:2

(a)       a claim unaccompanied by the material information prescribed in the

Regulations cannot support a vote;

(b)a claimant’s right to vote is lost through submitting a non-complaint claim form, but such claimant can still prove their claim for the purposes of distributions;

(c)       non-compliant claims are unable to be remedied following a vote; and

(d)if the court rejects a claim, the count taken at the creditors’ meeting is subsequently corrected  as  a  consequence  flowing  from  the  court's decision.

[27]     In Re Wikeley, the appellants asserted that three submitted claims were non- compliant with reg 12 because they did not:3

(a)       have attached to them evidence of the claimed debts; and

(b)      provide any other evidence supporting the claim; and

(c)       provide a description of how and when the debt was incurred.

[28]     The only information provided was the amount of the respective claims.4

The Court held:5

There was nothing before the trustee which could be accepted as proving the claims.

[29]     Accordingly,  the  Court  rejected  such  claims  and  set  aside  the  trustee’s

decision to admit the same.

[30]     The PT determined  that  a number of debts  which related  entities  to  the insolvent had claimed for were, in fact, claims which ought to be admitted under reg

12.  The question which is raised by the appeal is whether the requirements of reg 12 have, in fact, been met.

[31]     In support of the claim by MFT1, the applicant provided a form of guarantee executed by the trustees of MFT1 and the insolvent dated 18 May 2005.   This document recorded, amongst other things, that the debts which were set out in the “schedule” to the guarantee had been advanced to the entities set out therein.  In fact, eight schedules of advances in the period between 31 March 2006 to 31 March 2012 were annexed to the guarantee form which was supplied in support of the claim which MFT1 made.  Quite obviously, only the schedule dated 31 March 2006 had come into existence by the date of the guarantee which was 18 May 2006.  No detail of the source of the other schedules of advances is given.   It is implicit in the position which MFT1 takes that the amounts advanced have changed from time to time such that the schedules post-31 March 2006 were created as a record showing the changes that occurred to the individual advances that were then made.

[32]     Having regard to the purpose for which supporting documentation is required to be provided, it would be wrong, in my view, to insist on excessive formality concerning documents that are put forward as “evidence” of the debt upon which an individual creditors’ claim is based.  It would not be to the point to enquire whether

the totality of the evidence would be sufficient to justify the entry of judgment by a court applying the balance of probabilities test.  It should, instead, be sufficient if the document which appeared to be valid, and which people engaged in business, would reasonably regard as establishing the liability in question. A greater level of detail or precision in the supporting material is not called for, in my view.  The conclusions that I have come to in this regard are supported, I respectfully consider, by the comments of Whata J made in a different but related context of the level of particularisation and documentation which is necessary for the Official Assignee to have before recognising a particular claim against the estate of the bankrupt.  That procedure, too, involves compliance with reg 12.  In his decision of Walker v Official Assignee, the Judge stated his opinion that the reference to “evidence”:6

… simply contemplates that the creditor will provide cogent information, or proof, to enable the Official Assignee to examine the claim for the purpose of commencing the claims process. Any higher threshold would in my view, create an unnecessary administrative burden, both on the creditor and the Official Assignee, in circumstances where costs must be kept to a minimum. Indeed, an unduly complex administrative process involving rejections of claims for lodgement purposes until sufficient “evidence” is provided is discordant with the underlying premise of the Insolvency Act

2006 and Subpart 9 scheme to achieve efficient assessment of claims within defined timeframes.

[33]     In every case, it will be a matter of judging what is reasonable and sufficient to the circumstances of the case under consideration.  However there must be some “evidence” that is “attached” to the claim form.7   This suggests that there is required to be some confirmation or corroboration in writing of the claim.

[34]     The next question is whether the PT was correct to regard the claims of MFT1 as fulfilling the requirements of reg 12 for the provision of evidence of the debt.    As  well  as  imposing  that  requirement,  the  regulation  also  calls  for  a description of “how and when the debt was incurred”.8

[35]     On  the  face  of  it,  the  material  which  was  provided  establishes  that  the insolvent provided a guarantee for certain contingent debts.   But his obligations

under the guarantee did not take effect at the point where advances were made by

6      Walker v Official Assignee [2014] NZHC 975 at [37].

7      Insolvency (Personal Invoslvency) Regulations 2007, reg 12(1)(c).

MFT1 at his request.   That was a necessary but not sufficient element which the applicant had to demonstrate.   The guarantee provided that the liability of the guarantor actually came into existence in the following circumstances:

5.    All advances by the lender are made on demand and wherever default has been made in payment of all or any of the money so advanced the guarantor shall upon demand pay such money to the lender or perform such obligations imposed by the lender.   Such payment obligation will exist notwithstanding that at the time of such demand the lender may not make demand upon or commence proceedings against or realised any securities or otherwise taken any steps to recover the advances so made.

[36]     That provision makes it clear that the liability of the guarantor can be invoked without the necessity of the creditor first taking steps to recover the debt from the borrower.  However, before liability arises under the guarantee, there must first have been a demand made on the guarantor.  That a demand had been made would have to

be included in the description of how and when the debt was incurred.9   Evidence of

the making of the demand, being a necessary preliminary to liability under the guarantee, would need to at least be claimed and verified by documentation, had the demand been in writing.  Even if it had not, reference to the fact that a demand had been made ought to have been included in the claim form by virtue of the wording of reg 12(2)(g).

[37]     Mr Gustafson submitted reg 32(2) is the starting point.   He referred to a heavy reliance which counsel for the BNZ placed upon the decision of Re Wikeley. He said that the essence of the decision is to be found in the comments by the Judge that the consequences of non-compliance with the regime for approving debts as part of a Part  Five proposal  depended  upon  the degree and  seriousness  of  the non- compliance.  In that case, the insolvent provided neither detail of how and when the debts were incurred, nor evidence of the debts, nor any other evidence supporting the claims.  The Judge concluded that there was nothing before the trustee which could

be accepted as proving the claims.10

[38]     I do not consider that the process by which the PT is able to provisionally admit a debt assists the case for the appellant.  The Court, on hearing the appeal, is

9      Insolvency (Personal Invoslvency) Regulations 2007, reg 12(2)(g).

10 Above n 2, at [42].

not entitled to disregard the mandatory requirements of regulation which bind the

PT.

[39]     It is fair to recognise that whether or not the requirements of the regulations have been complied with will always be a matter of judgement and degree.  But in this case, absence of the elements that I have made reference to, in my view, meant that the claim form did not comply with the mandatory requirements of reg 12 and the claim against the insolvent, as guarantor of the MFT1 advances, ought not to have been admitted.   A PT taking a rational approach to the claim would only recognise that there were missing elements in the description of the basis for the claimed debt.

[40]     The reason why the requirements which stem from reg 12 are mandatory is explained in  Wikeley.11     In a summarised form,  the importance of providing an explanation of how the particular debt arose has to do with the consequences of a particular debt being admitted or “proved” at the creditors’ meeting.   The creditor who has negotiated this step may vote.  That, in turn, will potentially affect whether the proposal is adopted at the creditors’ meeting.   Whether or not the proposal is

adopted will, subject to court approval, mean that any creditor who has a provable claim will be bound by the proposal (whether or not they voted at the creditors’ meeting at the time of the proposal).   The right to enforce valuable claims can therefore be lost to creditors if a proposal passes.   In light of this context, it is understandable why there should be mandatory requirements for individual creditors to put forward an intelligible explanation as to how their debt arose in the first place. The presence or absence of such an explanation may make the difference between the claim being admitted for voting purposes, with the resulting consequences that I have referred to earlier in this paragraph.   It is therefore not simply a matter of insisting upon compliance with the technical requirements of the regulations for its own sake.

[41]     It follows that the appeal against the determination of the PT to admit that claim ought to be allowed and I rule accordingly.

11     At [22]-[27].

Section 333 of the Act

[42]     In the previous section of this judgment, I set out my view that the claim brought  in  regard to  the debt  allegedly owing  to  MFT1  had  not  been  properly established at the meeting of the creditors.  Because of the size of that debt, if it is to be removed from consideration, $23.6 million of debts would be excluded from consideration.  That would have meant that the Proposal would have been inevitably defeated.

[43]     As Mr Robinson for Audrey pointed out:

six votes with claims of $4,304,265 (41.4%) would have voted in favour of the Proposal; and

three votes with claims of $6,073,630 (ie 58.6%) would have voted against the Proposal.

[44]     The alternative ground upon which Audrey and the BNZ sought to exclude the claim of MFT1 is on the ground that it was essentially a claim by a related party and no, or reduced, weight ought to be given to the vote of MFT1 on that account.  I consider this ground next.

[45]     Section 333 of the Act relevantly provides as follows:

333     Court must approve proposal

…

(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.

[46]     I accept the submission of Mr Harlowe which was made in the following terms:

The approach to be adopted when assessing s 333(3) of the Act is in two steps, the first is a threshold enquiry as to whether either of the test set out in s 333(3)(b) or (c) of the Act have been met and then the second is whether the court exercises its residual discretion to refuse approval:   Magsons Hardware Ltd t/a Mitre 10 Mega v Bogiatto [2011] NZCA 378 at [22] …

The court has discretion to approve or refuse a proposal based on its own independent judgement without regard for whether there is an onus of proof on the creditor:  Kelly v Structured Finance Limited [2009] 2 NZLR 785 at [17].

What is determined reasonable or not for the purposes of s 333(3) of the Act, was summarised by the court in Magsons … when referring to Kelly and the Court of Appeal in Farmer v Rowley [1992] 2 NZLR 195 (CA) at 119-200:

[28]   When exercising its independent judgment to determine whether a proposal is reasonable, the Court [Farmer p201]:

...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 interests or other commercial considerations present the assessment of the substantial body of the creditors ought to be accepted.

[29]  We endorse Asher Js observation in Kelly v Structured Finance [at

45] that reasonableness under s 333(3)(b) is best assessed objectively from   the   perspective   of   the   “commercially   experienced   prudent creditor” rather than the public, whose interests are protected under s

333(3)(c). Additionally, while the reasonableness element imports into the  Court's  independent  judgment  the  views  of  the  creditors,  the

alternative touchstone of benefit to the general body of creditors under s

333(3)(b)  raises  the  fairness  of  the  proposal  between  classes  of creditors,  requiring  a  comparative  analysis  of  the  creditors'  relative

positions under the proposal or bankruptcy respectively.

[47]     Audrey’s position on the question of approval under s 333 is stated in the submissions of Mr Robinson to which I have referred at paragraph [17] above.

[48]     I accept that the factual basis for the submissions and, in particular, that the relationship between the insolvent and the trusts and CSL is correctly stated in the above submissions.

Discussion

[49]     The scheme of the legislation is such that even though a majority of creditors may support a proposal, the court has the final say as to whether or not the proposal will be approved.   In making that decision, the court must take into account the provisions of s 333, and it is subsection 3(b) of that section which is of particular applicability in the circumstances of this part of the case.

[50]     The  decided  authorities  make  it  clear  that  the  issue  of  any  connection between the insolvent and the creditors is a factor which ought to be scrutinised by the court.   This is implicit, for example, in the following passage taken from the Court of Appeal decision in Farmer v Rowley, where there is passing reference to the

relevance of such a feature to the case:12

First there is in my view no basis in the evidence for concluding that the terms of the proposal are not calculated to benefit the general body of creditors.  It is not as if the majority benefiting creditors are the alter egos of the Farmers or creditors who have other remedies, or that one or more creditors are in a position of dominance because of the size of the indebtedness.

[51]     Conversely, it would appear, where circumstances of the kind enumerated are present, there is not the same basis to draw an inference from the fact that a majority of creditors approved the proposal, that the terms of the proposal are reasonable and calculated to benefit the general body of creditors.

[52]     The process of approval by the court and the relationship with the voting of the majority was further commented on in the following passage from the same decision:13

There will  be  circumstances  in  which it is appropriate for  the  Court to consider the voting: for example to ascertain whether it reflects the views of genuine creditors truly interested in the outcome.

[53]     This aspect of the approval process was also more recently referred to in Re

Kelly ex parte Structured Finance Ltd, where Asher J, having noted the comments in

Farmer, stated:14

12     Farmer v Rowley [1992] 2 NZLR 195 (CA) at 208.

13     At 200.

14     Re Kelly ex parte Structured Finance Ltd [2009] 2 NZLR 785 (HC).

[56]  In Farmer v Rowley the Court of Appeal accepted that a creditor which was a family trust associated with the insolvent was entitled to put forward a proof of debt and vote at a creditors’ meeting.   However, the fact that a proposal is supported by an entity closely connected with the insolvent can be taken into consideration in the Court’s discretion…

[57]   I have not found it possible to establish with any certainty whether there would have been a difference to the ultimate result if the associated creditors had not voted in favour of the proposal.   I am not prepared to conclude that even if their value were deducted, those present would not have voted in favour of the proposal to the requisite 75 per cent threshold.  It is possible that they might have still done so.  I do, however, consider that it is relevant in the exercise of the discretion to take into account that Mr Kelly did rely on family entities of a considerable value which he controlled to vote in favour of the proposal.  Those entities presumably had a role at the meeting. Their contribution may have affected the outcome.

[54]     Based on this reference to authority, I consider the following approach is the correct one in the circumstances of this case.   Plainly, the court will only give its imprimatur to creditors’ arrangements which represent a genuine alternative to the process of bankrupting the insolvent.  The court will assess the advantages of one course of action against the other.   If the proposal appears to be supportable on genuine commercial grounds, then the court may approve it.  Where the proposal is supported by family-controlled entities, such as trusts, it does not necessarily follow that the court should disapprove it on the grounds that the proposal is not reasonable or not calculated to benefit the general body of creditors.

[55]     But  where  circumstances  such  as  these  exist,  there  is  an  alternative explanation available as to why the majority of creditors have opted for the proposal rather than for bankruptcy.  Family or other ties may mean that the family trust is actuated to withhold enforcement of its debt by considerations of family loyalty. The related  party  may  be  motivated  to  maximise  the  amount  of  property  that  the insolvent is left with, even if at the expense of the financial interests of the trust (along with  that  of other creditors).    In  such cases,  there will  have  been  other considerations other than the benefit of the general body of creditors  that have weighed with the majority.

[56]     In  the  present  case,  the  insolvent  put  forward  as  the  advantages  of  his Proposal, first, that the creditors will receive more under the Proposal than if he was bankrupted.  He also stated:

If I was bankrupted, I will have a significantly more limited ability to secure earnings from the establishment of a new business or from employment to contribute towards reduction of my debts.

[57]     The fact that any future income would be received either by Mr McKillen or his family trusts does not of course represent an advantage to the creditors who voted at the creditors’ meeting.

[58]     It is also apparent that one of the creditors who filed a proof of debt, MFT2, is to be the source of the funds that would be distributed to the creditors under the Proposal, if accepted.

[59]     It is a key feature of the facts in this case that the related parties are not to participate at all in the amount of funds to be placed in the pool for the creditors under the Proposal.   That element of the Proposal provides additional reasons for believing that, whatever the motivation of the trust might have been to support the Proposal, it was not to secure the best commercial outcome available.

[60]     The objectors in this case, Audrey and BNZ, are also critical of the size of the distribution that is proposed under the Proposal.  As Mr Harlowe noted in his submissions:

As the Proposal stands, three tranches of $300,000 paid to creditors representing a value of $9,085,630 amounts to a distribution of 3.3 cents in the dollar.

[61]     It is difficult for the Court to assess in absolute terms whether the Proposal is reasonable because that  involves an analysis of the alternatives available to the creditors.   The fact is, though, that the two experienced commercial creditors are opposed to the Proposal.  There is no question that their opposition is founded upon objections as to the commercial reasonableness of the Proposal.   There is no suggestion that the position they have taken is because of other extraneous reasons. This factor carries weight when the Court comes to assessing the reasonableness of the Proposal and whether it is calculated to benefit the general body of creditors.

[62]     A further factor is the impression one is left with about the insolvent’s recent

business  dealings.    In  overview,  vast  amounts  of  money  have  allegedly  been

advanced by the family trusts which the insolvent has directed towards various investment vehicles under his control.   By far, the greatest amount is the amount claimed by MFT1 which is $23,601,934.   The total claimed by related parties is

$24,894,199.

[63]     It appears that the insolvent directed the bulk of this money, $15.5 million, to Collinsville Limited and Collinsville Trust for the purposes of investing in VnC Cocktails Limited (“VnC”).   In his letter to his creditors, Mr McKillen stated “I invested in excess of $15.5 million to VnC by way of advances to Collinsville Limited”

[64]     I understand that the enterprise involved is a drinks business.   It went into receivership on 1 July 2014.  Audrey was an investor in this business.  There have been recriminations between the two parties that Audrey backed out of an agreement whereby it would extend the redemption period for redeemable preference shares which it held in the company and that this caused a liquidity crisis which led to the receivership.  Audrey has attempted to recover its investment by court proceedings and it has been faced with a counterclaim, alleging breach of the extension of the redemption period and a resulting claim for damages.

[65]     It may be that the large-scale loss of funds which passed through the hands of the insolvent would ultimately be viewed as a typical casualty of investment in high risk businesses.   The little that has been placed before the Court about VnC, disclosing as  it does  that the company was  apparently attempting to  market its products in the United States of America, is certainly consistent with such a view. On the other hand, the evaporation of wealth that has occurred was on a large scale. It has caused substantial losses to the two opposing creditors, with the BNZ claiming

$3,612,671 and Audrey $2,440,942.   As I have already noted, Audrey’s claim is

subject to a counterclaim.

[66]     There   is   also   evidence   which   suggests,   as   the   BNZ   contends,   that

Mr McKillen, not less than five years ago, has had access to gross assets of circa

$50,000,000, primarily through a family trust.  Currently, as Mr Gustafson noted in his submissions, the insolvent has assets of $107,500.

[67]     It is not at all clear that, in these circumstances, the Proposal is reasonable or calculated to benefit the general body of creditors.  There is reason to suppose, in my view, that the insolvent and the related parties have used their voting power to attempt to foist on the minority creditors an arrangement which is contrary to the interests of the latter.

[68]     The opposing creditors not only consider that the offer that has been put forward is paltry but that they would be better off having the affairs of the insolvent investigated by the Official Assignee.

[69]     As is not uncommon in applications of the kind now before the Court, the opposing creditors put forward the submission that it would be salutary for there to be an examination of the affairs of the bankrupt consequent upon an adjudication on bankruptcy.   The not unexpected response has been that there are no grounds to suppose  that  there  has  been  any occurrence  which  would  suggest  that  such  an investigation is needed and, therefore, counsel for the applicant has rejected such a submission.

[70]     Some brief attempt must be made to weigh these competing contentions.

[71]     Any advantages that could stem from an adjudication on bankruptcy, such as scrutiny of the financial affairs of the insolvent by a disinterested third party, the Official Assignee, has to be balanced against the disadvantages to the insolvent.  The stigma of bankruptcy would make it difficult for him, and enterprises associated with him, to obtain funding for further business activity.

[72]     At  the  same  time,  it  cannot  be  overlooked  that  the  insolvent’s  business activities have, in the past, been at a considerable cost to his creditors.   Three creditors have, with proven claims of approximately $6 million, voted against the Proposal at the creditors’ meeting.   The losses caused to these creditors are very substantial.   The extent of those losses provides a weighty justification for an examination of the affairs of the insolvent.

[73]     A rational comparison of the case for and against making an insolvency order requires brief consideration of the objectives of the Insolvency Act 1996.   Those objectives include making those who have not observed appropriate standards of commercial dealing accountable for their conduct.15    They also include recovering from insolvent persons and third parties financial resources which should be made available to creditors.

[74]     A further matter which, in my view, points to the necessity for scrutiny by the Official Assignee is as follows.  The impression conveyed by the evidence in this case is that while the insolvent has been engaged in entrepreneurial activity, he and his advisors have has taken steps to ensure that he and his family are insulated from losses that might result from his business undertakings.   It is in no doubt, for that reason, that a reasonably complex structure of family trusts has been created. However, those trusts have not placed financial resources beyond the recall of the insolvent because, as already noted, he is a discretionary beneficiary.  There has been limited disclosure of just what financial resources are vested in those trusts and where they originated from.   It is in no doubt the insolvent would say that such matters are not the proper concern of creditors, such as Audrey and the BNZ.

[75]     In my view, creditors would rightly be aggrieved by the insolvent imposing upon them a scheme which provides to them a minimal return in circumstances where there is no clarity as to what he and his family would retain through the indirect ownership of his family trusts if the scheme were to be approved.  Such an outcome would not seem to me to be one that is expedient within the terms of s 333 of the Act.

[76]     Further, assuming that the insolvent continues in the type of business that he has engaged in and in the past, further ventures which have major elements of risk associated with them are likely to follow.  While it is accepted that most businesses involve some element of risk, it is not to say that insolvency laws should be applied in a way which is tolerant of repetitive risks being taken by the same individual.   It

is  at  least  implicit  in  the submissions  which  Mr Gustafson made that  an  order

15     Re Kelly ex parte Structured Finance Ltd, above n 14.

confirming the Proposal is justified so as to permit the insolvent to continue his business activities.  I do not consider that such an outcome is necessarily desirable.

[77]     In all the circumstances, I find myself in agreement with the contentions of the opposing parties that approval of the Proposal is not expedient.

Result

[78]     The result is that the determination of the PT that the claim by the trustees of

MFT1 ought to be admitted is set aside.

[79]     The application for approval of the Proposal is declined.

[80]     The parties are to confer on the question of costs with a view to come to agreement.   If they are not able to resolve the question of costs, they are to file memoranda on  that  issue not  later than 20  working days  after the date of this

judgement.  Memoranda are not to exceed six pages in length.

J.P. Doogue

Associate Judge