Liguori v Bartoli HC Auckland CIV 2010-404-2668

[2010] NZHC 1653

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-002668

AND UNDER                 the Insolvency Act 2006

IN THE MATTER OF     of a proposal of A Liguori

BETWEEN  ALFONSO LIGUORI Insolvent

ANDFRANCESCO BARTOLI Creditor

Hearing:         30 August 2010

Appearances: Mr Richard Gay for the insolvent

Mr George Bogiatto for F Bartoli (a creditor opposing) Judgment:     6 September 2010 at 10.30 a.m.

JUDGMENT OF ASSOCIATE JUDGE DOOGUE

This judgment was delivered by me on

06.09.10 at 10.30 a.m., pursuant to

Rule 11.5  of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:

D R Gay, Auckland – [email protected]
G Bogiatto, Auckland – [email protected]

Copy:  Mr Digby Noyce (the Provisional Trustee) - [email protected]

LIGUORI V BARTOLI HC AK CIV-2010-404-002668  6 September 2010

Background

[1]      Mr Liguori seeks the Court’s approval of a compromise that he has entered into with his debtors under s 333 of the Insolvency Act 2006.   The application is made upon the grounds that at a meeting of the creditors held on 19 May 2010 at the provisional trustee’s office, the required majority accepted the proposal which was made.  It is further based on the ground that the proposal is said to be advantageous for the general body of creditors as it will result in more funds being paid to the creditors than if the insolvent were adjudicated bankrupt.

[2]      It is proposed that the insolvent will generate funds which will pay the proper fees and expenses of the trustee and that as well the sum of $4,000 will be paid to the trustee every month for distribution to the creditors.   All the above payments will come from the operation of a hairdressing business which Mr Liguori proposes to acquire if the proposal is approved.  The first distribution is to be made within six months from the date of approval and thereafter distributions will be made to the creditors quarterly.  The creditors include four legal practitioners or firms,  as well as Natwest Finance Limited, TSB Bank and ASB Bank amongst others.   One of the creditors was Mall Supplies and Services Limited of which one of the directors is a Mr C Wackrow.  The total debts which Mr Liguori owes are $3,072,975.35.  The objecting creditor is owed $64,760.   Mall Supplies and Services Limited is owed

$800,000.

[3]      There were two striking features of the application.  The first was that if the proposal was to succeed finance would be required and Mr Wackrow said that his firm would do whatever was necessary to arrange finance for the acquisition of the business.    I will  describe  the  business  in  more  detail  shortly.    Essentially,  Mr Wackrow and his firm would stand behind any arrangement that would be necessary to raise the money.  At least one of the creditors is, notwithstanding the fact that it is going suffer a major loss, prepared to advance the money necessary for the purchase of the business.  The second striking aspect of the proposal is that the payments will not be made out of a fund which is to be provided by some third person.  Rather, the proposal is that:

a)        A business should be acquired; and

b)The funds that are required to be paid to creditors under the proposal will be earned from the profits of that business.

[4]      Another  significant  matter  of  background  is  that  Mr  Liguori  has  been bankrupted before – around about 1987.   His present insolvency is therefore the second one that he has undergone.

[5]      It would appear that some of the liabilities which Mr Liguori owes go back some years – for example in the case of Mall Supplies and Services Limited some 14 years or so.

[6]      The proposal is founded on the acquisition of a hairdressing business situated north of Auckland.   An agreement for sale and purchase has been entered into to acquire that business for a sum of $125,000.  The agreement is subject to finance. The agreement contains a turnover warranty.  The turnover warranted for the year ended 31 March 2010 is $412,185.

[7]      There was produced in evidence the profit and loss account which the vendor compiled for the year ended 31 March 2010.  It is a fair inference that the figure of

$412,185 excludes GST because the warranty agreement contained in the agreement for sale and purchase treats the turnover in that way.  The purchaser is described as “Dovan Properties Limited and/or Nominee”.  Mr Liguori said in his evidence that this is a company which he owns but which has been inactive for some years.  When questioned about why the term “or nominee” was mentioned, Mr Liguori said that he had other companies which had accumulated substantial taxation losses and it might be that, dependent upon professional advice, if the business was acquired it would be acquired by one of those companies so that advantage of the tax losses would be available.  The tax losses amount to hundreds of thousands of dollars, Mr Liguori told me.  It was put to Mr Liguori that while he had once been a hairdresser he had not been in that industry for quite a number of years and that given his age it would be difficult for him to start back.  It was further suggested to him that there had been significant changes in that industry and his knowledge was out of date.  Mr Liguori

expressed his confidence (as he did about the project generally) that he would have no difficulty getting the business up and running.

[8]      The profit and loss account for the year ended 31 March 2010 showed a surplus of $71,000 approximately.  Mr Liguori also produced a budget cashflow for the  year  ended  March  2011.    That  cashflow  shows  an  increase  in  turnover  of

$30,000.  That increase appears to be based upon Mr Liguori’s general optimism that the business will be a success.  Mr Bogiatto pointed out that if at best all that was achieved was the turnover for the year ended 31 March 2010, the figures given in the cashflow forecast did not “work”.  That is because from the $71,000 surplus there had  to  be  found  $26,000  for  Mr  Liguori’s  personal  living  expenses  which  left

$45,000,  compared  with  a  requirement  that  $49,000  be  made  available  to  the creditors in that year.   Mr Bogiatto also drew attention to the fact that the overall expenses and costs must have been reduced substantially because the next budgeted surplus  from  the  business  before  taxation  had  risen  from  the  $71,000  that  I mentioned previously to $127,000 – a $56,000 increase.  Mr Liguori said that partly this would be achieved by opening a beauty business as an adjunct to the hair salon and he pointed out that the sum of $80,000 had been allowed for getting that side of the business started.

[9]      Mr Wackrow gave evidence in support of the application.  He confirmed his support for Mr Liguori.  He further expressed his confidence that the business could be made to work and that the figures set out were achievable.

Discussion

[10]     Both counsel referred me to Kelly v Structured Finance Ltd[1] as well as other authorities.  I do not intend to make any extensive reference to the authorities other than Kelly.

[1] Kelly v Structured Finance Ltd [2009] 2 NZLR 785.

[11]     In the light of Asher J’s decision in Kelly the following points seem to me to be relevant to this application.  Section 333(3) of the Insolvency Act 2006 provides as follows:

(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.

[12]     Mr  Gay  placed  emphasis  on  the  fact  that  the  commercial  creditors  all supported the proposal and that they were very unlikely to do that unless they expected that it would succeed.  Further, Mr Wackrow who is obviously a successful businessman was going to stand behind the borrowing arrangements to ensure that finance was available for the acquisition of the business.  These people would not have approved the proposal and taken tangible steps to support it if they did not have confidence in it, he said.  He referred me to paragraph [67] of Kelly where it was said:

[67]Ultimately the Court does not decide to refuse or approve a proposal simply because  one  or  some  of  the  matters  referred  to  in  that  subsection  are satisfied. A court must place great weight on the views of creditors who support a proposal, particularly where, as here, some are significant commercial entities. They are in the best commercial position to evaluate a proposal. Risk is generally inherent whenever an insolvent person seeks a compromise with creditors, and a court cannot expect perfect certainty of payment from any proposal.

[13]     In order to assess whether the section ought to be approved in conformity with s 333(3)(b) it is necessary to say a little more about the background.

[14]     Mr Liguori has accumulated debts of $3,000,000.   He has been bankrupt previously.  He is proposing to acquire a business which he has not been previously engaged in and to increase significantly the earnings from the business in the first year of operation.   He does not seem to be deterred by the current financial environment.   By contrast, he has blamed his previous involvency and the current one on general market conditions.

[15]     In Kelly Asher J observed, in relation to the proposal he was considering:

[46]The terms of the proposal in its original form can give no comfort to a commercially experienced prudent creditor.

[16]     It may be that the creditors in this case feel that by backing the proposal they are choosing the lesser of two evils.  It does not necessarily follow that they have a great conviction that the acquisition of the hair salon business has a reasonably good prospect of succeeding.   It seems likely that their decision is based upon a choice between what, being sanguine, they hope will be achieved by the proposal when compared with what in effect would be a nil return if Mr Liguori was adjudicated bankrupt.  That follows from the fact that he claims to have total assets of $1,500 against liabilities of over $3,000,000.

[17]     Both  sides  assumed  that  in  deciding  whether  or  not  to  approve  the compromise I was entitled to look at wider aspects of the underlying arrangements which would make the implementation of the compromise possible.  I believe that assumption is correct.  One of the key matters that concerns me is what, if any, risks would arise if the applicant were to proceed with the proposal.  The applicant could be viewed as a high risk profile individual because of his two insolvencies; the second of which has resulted in large losses to creditors.  The concern is that he will repeat that process unless there is some assurance to the contrary.  To the extent that the hearing before me enquired into this matter, it revealed that the applicant’s explanation for both of his insolvencies were circumstances beyond his control in the form of market downturns or related phenomena – in the latest case the global financial crisis.   I would accept that there have been insolvencies caused in other cases by the 2008/2009 global financial crisis.   However, the applicant’s failure measured as the extent of his losses coupled with the fact that this is the second insolvency is indicative of high risk business structures and operations.  The fact that nothing has changed means that if there occurred a further sharp financial downturn, events could repeat themselves in the applicant’s case.

[18]     As  well,  the  characteristics  of  the  business  that  the  applicant  intends  to acquire possesses inherent risk, in that it is 100% financed.

[19]     My concern is that there could be a business failure which would result in the applicant having still further debts and financial harm being suffered by additional creditors.  Mr Gay emphasises that the business is a cash business and that is a fair point. There would not be the difficulty of having to collect debts owed to the

business.   But if the cash is not there, there could well be risks to people such as employees (of whom there will be four) and the lessor of the premises.

[20]     I mentioned earlier the debtor’s high risk profile.  It is fair to record that the debtor accumulated the very large current debts which are the subject of the compromise, as a result of activities as a property developer.   That is a high risk business.   The existing proposal envisages investment in a less hazardous activity and that is the point which to some extent mitigates concerns about risk.  However, there are two other matters that must be mentioned.  First, the fact that the debtor has now been insolvent on two occasions raises concerns that those insolvencies were at least contributed to by poor judgement and unreliability.  The second is that I had the opportunity to hear Mr Liquori give evidence.  I formed the impression that he was not concerned to give a considered and balanced answer to the questions put to him. Rather, he gave the impression of being overly confident and dismissive of any doubts.

[21]     One final factor that I mention is that Mr Liguori does have the support of a substantial and experienced businessman, Mr Wackrow.   Mr Wackrow has shown commendable loyalty to Mr Liquori.  I have no doubt that he would be able to give sound advice if Mr Liquori was disposed to take it.  But in the end, if this venture were to proceed, the decisions about the business would be made by Mr Liquori alone.

[22]      Then there is the question of whether, in the overall circumstances, it might be preferable for the applicant to be adjudicated bankrupt. Approval of the compromise would avert bankruptcy.  While the creditors may view the compromise proposal as being the less unpalatable, wider considerations of public interest tend to point in a different direction.   The matters that I refer to are those which were

described by Fisher J in Re Fidow (a debtor)[2] at 443–445, which can be summarised

[2] Re Fidow (a debtor) [1989] 2 NZLR 431 (HC).

in the following terms:

My concern in the present case is that on the face of it there are unlikely to be significant assets here for any creditor other than RSL. … A bankruptcy makes available  to  creditors  an  array  of  procedures  for  investigating  the  financial

circumstances of the debtor. Those procedures are likely to prove more effective than an investigation conducted by other means. … The next matter to be borne in mind here is that on a bankruptcy petition the Court must have regard to public interest in a way which transcends the interest of the immediate parties to the proceedings. … [I]t is in the public interest that an individual who has spectacularly failed in financial matters should be marked out in a way which will warn others who then contemplate dealings with him that there is that history of failure. … For those  reasons  I conclude that  the  likelihood  of  little  or  no  available  assets  for unsecured creditors in this matter is not of itself a reason for declining an adjudication. It is simply a matter to be taken into account in the exercise of my overall discretion.

[23]     In my view, there are real public interest considerations against approving the compromise in this case.

[24]     I am conscious that to decline the compromise will have the consequence of sealing off the last hope that the creditors have for obtaining any significant repayment from the applicant.   But  I have real fears that the proposal that the applicant has put forward will in due course, if approved, further swell the ranks of Mr Liquori’s unpaid creditors.   The proposal is excessively optimistic and, if approved, in my judgement would be unlikely to achieve the results that Mr Liquori

hopes for. For these reasons I decline to approve the compromise.

J.P. Doogue

Associate Judge