Liguori v Golden Fund Limited

[2012] NZHC 2253

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2011-404-004878 [2012] NZHC 2253

UNDER  the Insolvency Act 2006

IN THE MATTER OF     the proposal of Alfonso Liguori

BETWEEN  A LIGUORI Insolvent

ANDGOLDEN FUND LIMITED, KNIGHT COLDICUTT LIMITED, K J KNIGHT, K F GOULD, R J WARBURTON T/A WARBURTON, NATIONAL DEBT MANAGEMENT (R J WARBURTON) LIMITED,

WESTMINSTER FINANCE LIMITED, M J MCCARTNEY, P A LIGUORI, D P LIGUORI, S I SAMSA, BROADLANDS FINANCE LIMITED, F BARTOLI,

TSB BANK LIMITED, ASB BANK LIMITED, RICHELIEU INVESTMENTS LIMITED, MALL SUPPLIES & SERVICES LIMITED, F J HAWKE & CO LIMITED

Creditors

Hearing:         29 February 2012, with further evidence and submission on 8 March

2012, 12 March 2012 and 21 March 2012

Counsel:         B M Cunningham for applicant trustee and for the insolvent

G Bogiatto for creditor in opposition

Judgment:      3 September 2012   

JUDGMENT OF ASSOCIATE JUDGE ABBOTT

This judgment was delivered by me on 3 September 2012 at 3.30pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:

B Coburn, Hesketh Henry, Private Bag 92093, Victoria Street West 1142

G Bogiatto, PO Box 106-120, Auckland

Counsel:

B Cunningham, PO Box 3599, Shortland Street, Auckland 1140

A LIGUORI V GOLDEN FUND LIMITED& ORS, HC AK CIV 2011-404-004878 [3 September 2012]

[1]      This is an application for approval of a proposal made by Alfonso Liguori to his creditors.

[2]      It has an unusual feature in that it is a variant of an earlier proposal that was not approved.1   The proposal is for Mr Liguori to make payments to creditors from the earnings of a hairdressing business that he has recently established.   The first proposal was also for payments to be made out of earnings from a hairdressing business.  The Court declined that proposal, notwithstanding that it was supported by the  requisite  number  of  his  creditors  because  it  considered  that  there  was  a

significant risk that the business could fail causing yet further loss to creditors.  Mr Liguori has changed his proposal to address the risks identified in the previous proposal.

[3]      The new proposal has been approved by all but one of the creditors.  The one creditor still opposing, Mr Francesco Bartoli, contends that the proposal is not achievable, it still represents a risk to future creditors, and it is not in the public interest for Mr Liguori (who is clearly and substantially insolvent) to be allowed to pursue further business activities rather than be put into bankruptcy.  Mr Bartoli also opposes the application on the ground that the matter has been determined by the earlier judgment.

The proposal

[4]      Mr   Liguori   has   eighteen   unsecured   creditors   who   are   owed   nearly

$3,205,000.    He has  declared  assets  of only $1,640.    He has  proposed  that  he contribute $144,000 over three years to a fund for distribution to his creditors.  He says that it is important to him to try to make some restitution to his creditors (even though it will be well short of what he owes).

[5]      The terms of the proposal are:

(a)       Mr Liguori will pay to the trustee $4,000 per month over a period of three years.

1 Liguori v Bartoli HC Auckland CIV 2010-404-002-668, 6 September 2010.

(b)The payments are to start four months from the date of approval of the proposal (this period was set to give Mr Liguori time to build up the returns from the business).

(c)      The fund will be distributed in proportion to each creditor’s debt, with the first distribution to be made six months after date of approval and subsequent distributions to be made quarterly.

(d)The trustee’s fees and expenses will be paid out of the fund in a sum calculated in accordance with the statutory formula being $9,000 plus GST.

(e)       Any windfall amount received by Mr Liguori during the term of the proposal will also be paid to the trustee and paid out as an additional distribution.

[6]      The differences between this and the previous proposal are:

(a)      Mr Liguori has started a new business, whereas he was previously proposing to purchase an existing business.  He has not had to borrow to set up the business.  He has negotiated a new lease for the premises, and the landlord has not charged him for fixtures such as plumbing that were left in the premises by the previous tenant.   Mr Liguori’s sons have assisted him to purchase chattels and an initial stock of consumables.  A builder friend has provided assistance in remodelling the premises on the basis that he will defer any recovery for his work (estimated to be in the order of $2,000 - $3,000) until the proposal has run its course.  In contrast, under the first proposal he was having to borrow to pay the purchase price of the business ($125,000), and had to fund that borrowing.

(b)The director of one of the creditors has undertaken to underwrite liabilities that the business may incur to trade creditors whilst the business  is  operating.   This  covers rent,  supplies  of consumables, electricity and telephone services required for the operation of the business. This support was not available under the first proposal.

The application

[7]      The  application  is  brought  by  the  trustee  of  the  proposal,  Mr  Noyce,  a chartered accountant.  He has provided a report confirming the terms of the proposal and its approval by the requisite majorities of creditors.  He has expressed the view that the proposal is advantageous for creditors as it will provide a modest recovery (four cents in the dollar) as against nil recovery in the event of bankruptcy.   The likelihood of a nil recovery in bankruptcy is evidenced by a statement of affairs sworn by Mr Liguori.   In a letter sent to creditors with the proposal, the trustee informed them that Mr Liguori had agreed to appoint an accountant to oversee the financial management of the business, and the accountant would be a co-signatory on the bank account.

[8]      Mr Liguori has sworn several affidavits in support of the application.  He has described the proposed hairdressing business which has been set up through a company  Dovan  Properties  Limited  in  leased  premises  in  Hurstmere  Road, Takapuna.  The business has been started in premises formerly occupied by another hairdressing business.  Mr Liguori has not had to borrow money to start it.  He has done much of the fit out himself.  He refers to the financial assistance he has had in that respect from his family.  Mr Liguori intends, so far as is possible, to operate the business on a cash basis.

[9]      Mr Bartoli has filed an affidavit in support of his opposition.  He contends that the proposal is still unworkable. He says that Mr Liguori is too old (he was 68 at the time of making his application) and too long out of the hairdressing business (it is 25 years since he worked as a hairdresser) to generate the profits required to fund the proposal from a “start up” business.   He also filed an affidavit from an experienced hairdresser, Mr Peter Emery, who has worked as an independent contractor for many years. Mr Emery supports Mr Bartoli’s contentions and says that, even if Mr Liguori can establish a viable business, it will take up to 2 years to build it up to the point where it can generate the income needed to fund the proposal.

[10]     Shortly before the hearing Mr Liguori filed an affidavit in which he gave evidence of the performance of his business over the three months since it started.

He was cross-examined by Mr Bogiatto, counsel for Mr Bartoli, about the funding of the business and its prospects, particularly in light of its operation up to that date.

[11]     Counsel for the trustee and Mr Liguori (Mr B Cunningham) was given leave at the hearing to call evidence from Mr Carl Wackrow, the director of Mr Liguori’s largest creditor (Mall Supplies and Services Limited).  Mr Wackrow stated that he was  prepared  to  underwrite  Mr  Liguori’s  trading  debts  for  the  period  that  the business was operating.

[12]     At the conclusion of the hearing I gave Mr Liguori leave to file an affidavit producing documents supporting the income and outgoings of the business up to the date of the hearing (Mr Liguori had commenced operating the business in December

2011 but did not have all the documents with him in Court).  I also set a timetable for counsel to file further submissions in relation to that further evidence.  They have done so.

Procedural issues

[13]     In his written submissions and at the hearing Mr Bogiatto took issue with the hearsay content of two exhibits to Mr Liguori’s affidavit evidence: a medical certificate by Mr Liguori’s doctor and a letter written by a hairdresser, Mr Whincop. The objection was on the basis that these documents comprised hearsay evidence, and Mr Liguori had been given leave prior to the hearing to produce this evidence in affidavits but had elected not to do so.  At the hearing Mr Cunningham argued that there had been no direction that the evidence could not be considered if it was not produced in affidavit form, and relied on s 18 of the Evidence Act 2006.

[14]     I accept that there was no explicit direction that the evidence could not be considered if it was not produced by affidavit.   As there appears to be a misunderstanding on the point, I will take the exhibits into account (in terms of s 18 of the Evidence Act 2006) but will attribute less weight to them than I would had they been produced in proper form.

[15]     The trustee/Mr Liguori have filed two further affidavits since the hearing, both producing further documents under the leave reserved, as well as commenting further  on  matters  addressed  in  the  hearing.    Mr  Bogiatto  has  objected  to  the

additional evidence set out in paragraphs 3 – 15 of the first of these affidavits, sworn on 8 March 2012.  In the event that the Court was to allow the additional evidence, he sought opportunity to cross-examine Mr Liguori on it.

[16]     The trustee/Mr Liguori did not have leave to file the additional evidence.  It is not to be read or taken into account.  I will accept the documents produced in the affidavit sworn on 8 March 2012 and the bank statements produced in the affidavit sworn by Mr Liguori on 21 March 2012, but not the evidence referred to in paragraphs 3 – 15 of the former affidavit.

[17]     The trustee/Mr  Liguori  have also  filed an  affidavit by Mr Wackrow, the creditor who gave evidence at the hearing.  I grant leave to file that affidavit as it confirms the oral evidence given by Mr Wackrow at the hearing.

The test for approval

[18]     The Court’s approval of a proposal is required under s 333 of the Insolvency Act 2006.  The Court has a general discretion to refuse approval in circumstances set out in s 333(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.

[19]     The  approach  that  the  Court  takes  to  an  application  for  approval  was reviewed, comparatively recently, in Kelly v Structured Finance Ltd.2    In that case, the Court noted that it could only refuse approval if one of the three considerations in s 333(3) applies.  The Court commented that it was not a case of one party or the other having an onus, but rather that the Court had a discretion not to approve if, after exercising its independent judgment it considers that any of the three matters in

the section are made out.3

2 Kelly v Structured Finance Ltd [2009] 2 NZLR 785 (HC).

3 At [17].

[20]     Whether the terms of a proposal are not reasonable or are not calculated to benefit the general body of creditors is to be assessed from the perspective of the creditors,4   and  requires  consideration  of two  questions:  first,  whether dissenting creditors are suffering unfair prejudice as a result of the vote of the majority; and, secondly, whether the compromise is one that creditors should enter into.5     The second of these questions requires the Court to make an objective assessment as to whether the proposal would be acceptable to a commercially experienced prudent creditor.6  This test has also been expressed as whether creditors generally would fare better under bankruptcy.7

[21]     The  expediency  of  the  proposal  requires  an  open-ended  approach  going beyond the matters of compliance (in s 333(3)(a)) or unreasonableness (s 333(3)(b)), and  can  include  anything  which  reflects  on  the  suitability of  the  proposal.8      It

includes  considerations  of  the  public  interest.9      In  the  latter  respect,  although

authorities refer to the stigma of bankruptcy being applied to sanction an insolvent’s misconduct, the public interest factor is best approached from the perspective of protecting the public from the insolvent by avoiding the risk of further conduct causing detriment to the community.10

Matters for consideration in this case

[22]     It is common ground that the formal requirements for approval (s 333(3)(a)) have been met.   Mr Bartoli contends, however, that approval should not be given because the terms are unreasonable (there is no realistic prospect that he will be able to meet them) and inexpedient (there is a real risk to the commercial community). He also contends that there is no significant distinction between the two proposals,

and Mr Liguori should not be given the opportunity to revisit the matter.

4 Kelly, above n 2, at [44].

5 Heath & Whale on Insolvency (looseleaf ed, Lexus Nexis) at [10.28], cited with approval in Marsh

& Perrium v Commonwealth Bank of Australia HC Auckland, CIV 2009-404-3336 at [16].

6 Kelly, above n 2, at [45]; Marsh & Perrium, above n 5, at [14]–[15].

7 Re Duncan Holdings Ltd (in liq) HC Christchurch M306/81, 1 February 1982; Farmer v Rowley

[1992] 2 NZLR 195 (CA); Marsh & Perrium, above n 5, at [18].

8 Kelly, above n 2, at [53]–[54].

9 Re Duncan Holdings Ltd (in liq), above n 7; NOTE Re Trott [2009] 2 NZLR 800 (HC).

10 Re Trott, above n 9, at 810; Kelly, above n 2, at [63].

Is the application barred by issue estoppel?

[23]     I will deal first with Mr Bartoli’s argument that an issue estoppel arises from the judgment on the first proposal, as it will dispose of the application if the principle applies.

[24]     Generally speaking, under the principle of res judicata a party is estopped from re-litigating a question or issue that has already been decided by a judicial tribunal. The reasoning underlying the rule was stated by Lord Blackburn in Lockyer v Ferryman:11

The object of the rule of res judicata is always put upon two grounds – the one public policy, that it is the interest of the state that there should be an end of litigation, and the other, the hardship on the individual, that he should be vexed twice for the same cause.

[25]     The principle has been confirmed in New Zealand by the Court of Appeal in

Shiels v Blakely:12

This is a plea of estoppel per rem judicatam. The rule is, so far as material to the present case, that where a final judicial decision has been pronounced by a New Zealand judicial tribunal of competent jurisdiction over the parties to, and the subject-matter of, the litigation, any party or privy to such litigation, as against any other party or privy thereto, is estopped in any subsequent litigation from disputing or questioning the decision on the merits.

[26]     From this general statement of principle the following constituent elements are said to arise:13

i.         The decision relied on was a judicial decision;

ii.        The decision was made and pronounced by a judicial tribunal; iii.       The judicial tribunal had competent jurisdiction in that behalf; iv.        The decision was final;

v.         The decision was a determination of the same question as sought to be raised in the litigation in which the estoppels is raised; and

vi.       The parties to the decision were the same persons as the parties to the proceedings where the estoppel is raised, or the decision was conclusive in rem.

11 Lockyer v Ferryman (1877) 2 App Cas 519 at 530.

12 Shiels v Blakely [1986] 2 NZLR 262 (CA) at 266.

13 Laws of New Zealand Estoppel at [3].

[27]    The majority of these elements are present in this case.   The point for determination is whether element five is present.   In other words, is the question which the Court has to determine the same as was determined on the first proposal?

[28]     In McLean v Bank of New Zealand,14 the Court held that the question in issue must be precisely the same as the question at issue in the later proceedings, citing the following passage from Craddock’s Transport v Stuart:15

If the question now being litigated is not necessarily precisely the same question as the one previously decided, it cannot be enough.  It is not enough that the questions are similar or very similar or almost the same; or that they may be the same. They must necessarily be precisely the same.

[29]     Accordingly, the party raising estoppel issue needs to eliminate any prospect of material difference.

[30]     Mr Bogiatto relied not only on the similarity between the two proposals, but specifically on the finding against the proposal on public interest considerations, and on the basis that it was “excessively optimistic” and was unlikely to achieve the results that Mr Liguori hoped.

[31]     I am not persuaded that this is a case for application of the principle. There is a clear difference between the proposals in the manner in which the business is to be established and the extent of the other risks associated with it.  In the first proposal Mr Liguori was to borrow the purchase price of the business.  This had two risks associated with it.  First, if the business failed it was highly likely that the value of the assets of the business would be diminished (Mr Liguori would be unable to repay the loan in full).  Secondly, the cost of the loan added another significant burden to the economic viability of the business.   In terms of other business risks, Mr Wackrow’s underwriting the proposal largely eliminates the risk to trade creditors.

[32]     Whilst  the  removal  of  financing  does  not  remove  the  need  to  examine whether the proposal is reasonable, it certainly enhances the prospect of the business succeeding.  Mr Wackrow’s underwriting similarly is not a complete answer to the need for the Court to satisfy itself on the expediency of the proposal, but it does go a

long way towards satisfying the concerns over public interest.

14 McLean v Bank of New Zealand (1996) 9 PRNZ 473 (CA).

15 Craddock’s Transport v Stuart [1970] NZLR 499 (CA) at 520.

[33]     Accordingly, although the two proposals are very similar (the constituents of the proposal are essentially the same) these changes to the underlying financial arrangements are sufficient to warrant a reconsideration of the factors of reasonableness and expediency on the basis that they potentially change the viability of the business (the source of the payments under the proposal) and remove at least some of the risk to the commercial public.  Further, although it is close to the point that “it is...in the interest of all parties and of the community that there should be an

end to litigation”,16 at this point it is not overwhelmingly so.  I find that the present

application is not estopped by the judgment on the first proposal.

Are the terms of the proposal “not reasonable”?

[34]     The   argument   advanced   for   Mr   Bartoli   was   that   the   proposal   was unworkable.  Mr Bogiatto referred to the Court’s comments on the earlier proposal that it was supported by the creditors on the ground that it offered a vague prospect of recovery as against none in bankruptcy (it was the lesser of two evils) rather than because creditors had come to a considered view on the prospects of the proposal succeeding.   Mr Bogiatto examined Mr Liguori at some length as to the level of revenue required to meet the rent and likely operating expenses of the business, to which had to be added the $4,000 per month for creditors.   He submitted that the income over the first three months of operation was not covering the outgoings let alone generating the surplus needed to fund the proposal, and Mr Liguori had not demonstrated that he would be successful in bringing in the additional hairdressers needed to generate the extra revenue needed.  He argued that the Court’s description of the first proposal as “overly optimistic” applied equally well to the present one. He said that on an objective assessment the proposal would still not be acceptable to a commercially experienced prudent investor.

[35]     I accept that the success of the proposal depends on Mr Liguori’s projections of income and expenditure being borne out over the period of the proposal.   Mr Emery, an experienced hairdresser who works as an independent contractor, has estimated the costs that the business would incur in these premises at approximately

$15,000 per month.  He based his view on several assumptions, including that any

other hairdressers were engaged on a contract basis, rent was payable at the rate set

16 New Zealand Social Credit Political League Inc v O’Brien [1984] 1 NZLR 84 at 99.

out in the lease ($3,354 per month), and that more than $7,000 per month would be needed for a modest salary for Mr Liguori ($52,000 per annum) and employment of a junior.  He also questioned whether Mr Liguori will be able to attract experienced hairdressers, capable of bringing clientele with them so as to generate the revenue needed,  given  the  start  up  nature  of  the  business  and  the  competition  from established and well-known businesses in the area.

[36]     Mr  Liguori  acknowledges  that  there  will  necessarily be  an  initial  period where revenue will be lower than regular outgoings for the business, but points to a strong upward trend in revenue over the first three months.   He says that the experience of that initial trading supports his belief that the business is capable of building its revenue and controlling its outgoings so as to generate enough to meet the proposal within a three to six month period.   He says that the landlord has recognised the reality of this build up period by agreeing to accept a reduced rental up to the end of April 2012, and possibly to extend it beyond that.  He also says that he has reduced his proposed remuneration from $20,000 per annum to $10,000 per annum, and has been able to eliminate the need for a junior (having regard to the terms on which he has engaged his contract hairdresser).   He also challenges Mr Emery’s projections for outgoings and consumables, contending that actual figures are substantially lower.

[37]     Just as the Court did on the first proposal, I have had the benefit of hearing Mr Liguori give evidence.   I gained the impression that Mr Liguori may still be “overly optimistic” about the speed of start up.  However, this time there are some specific figures to work from.  As at the date of the application the business was not generating sufficient revenue to allow it to fund the proposal, but in the most recent month the turnover had reached $7,200 and there was a strong upward trend.  There can be little doubt that the upward trend reflects the fact that part way through that initial  period,  Mr  Liguori  engaged  an  independent  contractor,  and  the  revenue reflects the business’ share of her billings.

[38]     I have a concern as to whether the business will generate the gross profit needed to fund the $4,000 per month payment to the trustee.   This concern arises from the following:

(a)      I consider Mr Liguori’s estimate of $8,000 as turnover needed to meet the expenses of the business (including rent as provided under the lease) to be light even using Mr Liguori’s figures (rather than those estimated by Mr Emery).  In his oral evidence Mr Liguori estimated monthly outgoings on utilities and consumables at just under $1,000 (I have taken the higher end of any figures where Mr Liguori gave a range).  In addition, the independent contractor’s entitlement has to be deducted from the revenue figures.   The business’ bank account for February shows payments to her in that month of $3,223 (indicating total billings by the contractor of $6,446 – although there is no detail provided so I cannot discount the possibility of some of these billings relating  back  to  January).    The  payment  to  the  contractor  would clearly increase if  she was  responsible for  any of the increase in turnover to achieve the break-even target (the total turnover for February, as shown on the GST return, was $7,202).  Based on these figures (which represent recurring liabilities only and do not cover any one-off payments that may arise) I consider that the business would need a turnover of at least $9,000 per month to meet outgoings and allow for the very modest drawings that Mr Liguori intends ($835 per month), after allowing for full rental to be paid.  For the proposal to succeed, it therefore seems likely that the business will need to generate further revenue of between $6,000 and $8,000 per month (depending on how much of it is attributable to Mr Liguori and how much to the independent contractors).

(b)The only scope for improvement in the returns of the business is by increasing its revenue.   At the time of the hearing, Mr Liguori anticipated the additional revenue coming from engagement of a further independent contractor, and hiring out of a chair in the salon (the market rate for that appears to be $500 per week).  I also take into account (based on the present independent contractor’s share of revenue for February compared to total revenue for that month declared in the GST return) that there appears to be considerable scope  for  increase  in  Mr  Liguori’s  own  billing.    If  all  of  these

possibilities eventuate,  I can accept the prospect that the business could generate the gross revenue needed to fund the proposal.

(c)      There was no documentary or other evidence before the Court to confirm Mr Liguori’s evidence that he (Dovan Properties Ltd) was granted a rent holiday under the lease until the beginning of December

2011.  Nor was there any evidence that the landlord agreed to reduce rent payable until the beginning of May 2012 to allow the business to get started.  My concern, given that the lease signed on 4 November

2011 states that full rental is payable from 1 September 2011, is that the landlord may not have waived, but merely deferred, some of this rent.  I add, however, that this concern derives from a view that Mr Liguori tends to take an optimistic view of matters, rather than from any evidence: the evidence supports Mr Liguori’s contentions.

(d)The GST returns for January and February 2012 state a gross income for the business which equates with bankings as disclosed by the bank statements.  This indicates that the income being reported includes the billings of the independent contractor.  However, the GST returns, as expanded by the working papers, do not show the independent contractor’s payments as an outgoing.   Whether or not that is the correct GST treatment, it has tended to mask the performance of the business in that early period, and possibly Mr Liguori’s perceptions of its potential to generate funds for the proposal within six months of start up.

(e)      Mr Liguori contends that the business will not need to pay income tax on its earnings for a significant period (presumably at least over the term of the proposal) because Dovan Properties Ltd is entitled to use tax losses that have accumulated in a related company.  I assume that Mr Liguori has received accounting advice on this, and that the tax losses are available and can be used by Dovan in this way, but there is no  evidence  to  confirm  this.    If  the  losses  are  not  available,  the business will need to generate even more income.

(f)      Lastly, although this is largely a matter for Mr Liguori and his family, I  note  that  the  very  modest  drawings  that  he  proposes  from  the business make him and his wife reliant on family support until such time as the business may become established and permit more substantial drawings.

[39]     I turn now to consider whether, in light of the above concerns and comments on them, the terms of the proposal are not reasonable or are not calculated to benefit the general body of creditors.

[40]     I start by dismissing any suggestion that Mr Bartoli suffers unfair prejudice as a result of the approval of the proposal by the remainder of the creditors.17    I note that this point was not advanced for Mr Bartoli, appropriately given there is no suggestion of unequal treatment between creditors.

[41]     The real issue is whether on an objective assessment the proposal would be acceptable to a commercially experienced and prudent creditor.  It will be apparent from the above that there are real questions as to whether the proposal is commercially viable.  However, that does not necessarily mean that it could not be acceptable to an experienced and prudent creditor.   Mr Liguori has put forward a business plan, and identified a revenue target and his proposed means of getting to it. He has also identified how he intends to control his expenditure.  In this respect the proposal is far more detailed now than it was when it came before the Court previously.   The creditors have all had an opportunity to challenge it, and it is significant that all bar Mr Bartoli have supported it.   Mr Bartoli’s opposition is based, in part, on Mr Emery’s predictions for the business.  Those predictions are necessarily general (Mr Emery did not have any information as to actual performance) and are not entirely accurate: for example, he does not allow for Mr Liguori’s willingness to work for little reclaim and he was not aware of the family support and assistance from the landlord.

[42]     In my view an experienced and prudent creditor could accept the proposal

based on Mr Liguori’s plan.  The evidence of the start up period indicates that Mr

Liguori’s age and lack of recent experience do not present insuperable barriers.

17 The point identified in Heath & Whale on Insolvency, above n 5, at [10.28]), and mentioned in

Marsh & Perrium, above n 5, at [16].

[43]     Mr Bogiatto argued that the proposal adds nothing to what would be achieved under bankruptcy (relying on Mr Liguori’s evidence that he would keep the hairdressing business  running  even  if the  proposal  is  not  approved  and  that  he expects to continue to receive support from his family).  There are two answers to that point.  The first is that the test as expressed in Re Duncan Holdings Ltd18  and

Farmer v Rowley19  and referred to in Marsh & Perrium v Commonwealth Bank of

Australia20 is that the Courts will approve a proposal unless, in the Court’s objective assessment, it is clear that the creditors generally would fare better under bankruptcy. It is clear in this case that they will not fare better.  Also, it seems likely that if the proposal is not approved, Mr Liguori may well lose the incentive to develop the business so as to generate the revenue needed (particularly when one takes into account that, at least through the early stages, Mr Liguori is prepared to limit his drawings to a very modest $10,000 per annum for his living expenses).

[44]     It is also significant, in my view, that Mr Wackrow, as the director of one of the major creditors, is prepared to underwrite trading losses.  He has said in evidence that he has assessed the business, and his potential exposure under this underwrite, and considers that it is an acceptable risk.   This does not suggest recklessness in dealing not only with his own interest, but also the interest of Mr Bartoli as an

opposing creditor.21

[45]     In light of the above, and subject to certain further information that I will require, I have come to the view that there is no reason not to approve the proposal on the basis that it is not reasonable.

Is there any reason that it is not expedient to approve the proposal?

[46]     I  turn  now  to  consider  whether  there  is  any  reason  not  to  approve  the proposal on the ground that it is not expedient.   The essential question here is whether there is any public interest consideration which persuades the Court, on its

independent assessment, that the proposal should not be approved.

18 Re Duncan Holdings Ltd, above n 7.

19 Farmer v Rowley, above n 7.

20 Marsh & Perrium, above n 5,  at [18].

21 A factor that was noted in Kelly, above n 2, at [45].citing Lord Esher in Re Reed and Bowen, Ex parte Reed and Bowen (1886) LR 17 QBD (CA) 244 at 251.

[47]     As already mentioned, public interest was a significant consideration in the decision not to approve the first proposal.   Mr Bogiatto submitted that the factors which led to that view still applied, and that there was no reason to come to a different view.  He referred in particular to the fact that this was a second insolvency, suggesting that Mr Liguori had learned little from the past, and that there were very real risks of further failure and a potential further pool of creditors to be harmed.  He also submitted that there are reasons to question Mr Liguori’s good faith and completeness of disclosure, which should count against him as indicating a lack of respect for his creditors.

[48]     When deciding not to approve the first proposal, the Court took into account that this was Mr Liguori’s second insolvency, putting him into the category of a high risk profile individual.   Although it noted Mr Liguori’s evidence that the present debts were a consequence of failed property transactions in difficult financial times, the Court took the view that this suggested that Mr Liguori had put in place high risk business structures.  It expressed the concern that the hairdressing business on which Mr Liguori was embarking could be another such venture.  The Court noted the large

losses from previous ventures, and commented:22

The  concern  is  that  he  will  repeat  that  process  unless  there  was  some assurance to the contrary.

[49]     The Court noted that the business carried with it inherent risk in that it was

100% financed.  It also recorded the point that it was intended to be run as a cash business (so recovery of sums was not going to be an issue) but said that if cash did not eventuate there could be risk to people such as employees and the lessor.  The Court also noted that although Mr Liguori had the support of an experienced businessman in the form of Mr Wackrow, ultimately the decisions would be made by Mr Liguori and it had real concerns about Mr Liguori’s ability to take advice that was offered.

[50]     Mr Liguori has attempted to address the Court’s concerns on the previous proposal.   I accept his evidence that he has been able to establish the business without need for external financing.  His family has contributed the cash needed to

refurbish the premises, and the landlord has allowed him to use fixtures installed by

22 Liguori, above n 1, at [17].

the previous tenant.   Although the evidence about this is vague, Mr Liguori acknowledges the assistance of a builder friend with the fit out, and a debt to him in the order $2,000 - $3,000, but says that there is an arrangement that that sum will not be payable until the proposal has been completed.

[51]     The Court’s previous concerns about employees are met in two ways.  First, Mr  Liguori  intends  engaging  independent  contractors  only or  hiring  out  chairs. Secondly, Mr Wackrow has undertaken to underwrite payments due to contractors for the period  whilst  the business  is  operating.   There will  be a need  to  incur liabilities in respect of services (electricity and telephone – water is included in the rent for the first couple of years of the lease), but again any risk in respect of them is covered by Mr Wackrow’s underwriting.

[52]     Although the undertaking does not fully underpin all of the costs of the business (it does not extend the tax or to salary obligations to any employees), Mr Liguori says that there will be no income tax for the period of the proposal (because of the availability of tax losses), and under his revised business plan he will not be engaging any employees.

[53]     Mr Bogiatto raised a number of matters which he contended should count against Mr Liguori on the grounds of lack of good faith or misconduct which warranted the sanction of bankruptcy:

(a)      Mr Liguori appealed the decision on the first proposal, but dropped that appeal rather than pay security for costs.  I do not accept that that should count against Mr Liguori.  He had made it clear that he could not meet the sum required for security for costs on the appeal.   I appreciate that Mr Liguori was able to make a second proposal only because he obtained the support of his family to do so, following withdrawal of the appeal.  Mr Bartoli may have incurred some costs in relation to opposing the appeal, but they were not costs that he was obliged to incur.

(b)Mr Bogiatto submitted that Mr Liguori did not disclose to creditors that the business would be operated through a company of which he was sole director and shareholder, and that he had guaranteed the

lease (albeit as trustee of a family trust).  He also said that Mr Liguori had not disclosed to the creditors his income from superannuation.  I accept that these are matters that could have been included in the proposal, but not that they make a difference in terms of calling for the sanction of bankruptcy.  I accept the evidence of Mr Liguori that Dovan Properties Ltd was a shelf company that had no liabilities and was being used simply to obtain the benefit of tax losses in related companies.  That can only be for the benefit of creditors generally: the tax losses have no value on their own.  I also accept the evidence of Mr Liguori that the family trust of which he is trustee, and in which capacity he signed the guarantee of the lease, has no assets.  I note Mr Liguori’s evidence that the landlord has been made aware of this fact. However,  Mr Wackrow’s  underwrite  covers  any  concern  over  the guarantee of the lease whilst the business continues to operate.  I also note  Mr  Wackrow’s  oral  evidence  that  if  the  business  does  not continue to operate for the three years of the proposal (which will now be one year after the lease first comes up for renewal), he will take over the lease and run whatever business is needed to cover the rent, or negotiate some terms to ensure that the landlord does not lose money.  Lastly, there is no dispute that Mr Liguori is over 65 years of age and creditors would have been aware of his entitlement to superannuation.

[54]     Mr Bartoli is clearly aggrieved that he is unlikely to recover more than a small percentage of the sum he advanced to Mr Liguori. That feeling is understandable, but I consider I can take into account that Mr Bartoli had a part to play in that: the money was used to pay legal fees for litigation brought by Mr Bartoli’s ex-wife following a marital breakup, and a wish to obtain a share in assets in a joint venture between Mr Bartoli and Mr Liguori.  These facts do not suggest any basis for an allegation of misconduct in relation to that debt at least.

[55]     A further matter affecting the issue of risk and public interest is the trustee’s advice that Mr Liguori has agreed to engage an accountant to oversee the financial management of the business and co-sign cheques. As there was nothing to this effect

in the proposal and it was not referred to in Mr Liguori’s evidence, I intend to make

it a condition of approval.

[56]     If it were not for Mr Wackrow’s underwrite, I consider that the public interest considerations would be relatively evenly balanced.   Although some of the risks identified on the first proposal remain, they have been substantially reduced. As it is of such significance, I set out the undertaking as given by Mr Wackrow in his affidavit:

I personally undertake that I will underwrite the trade debts of Dovan Properties  Limited  trading  as  Alta  Moda  Hair  (“the  company”)  from premises at 30 Hurstmere Road, Takapuna, for the duration, if any, of the proposal of Alfonso Liguori now before the court for approval, subject to the company’s [sic] continuing to trade.   I am confident that the company’s business will succeed but I state that I would not be liable for any trade debts incurred after the company had ceased to trade during the course of the proposal for any reason such as business failure.

I  define  the  trade  debts  as  those  arising  from  the  normal  expenditure inclusive  of  GST  required  to  operate  the  hairdressing  business,  which includes payment for rent, purchase of stock and consumables, electricity use, and telephone services but excludes the monthly payments due to the trustee under the proposal, repairs and maintenance, legal fees, and company tax.

[57]     As I have mentioned above, in his oral evidence Mr Wackrow said that he would also step in if the business stopped operating to ensure that the lessor did not suffer loss.  He expressed it in that way (rather than extending his underwrite to the term of the lease) to allow for the prospect of re-letting of the premises.

[58]     In light of the above, and subject to being satisfied on some further matters, I consider  that  Mr  Wackrow’s  undertaking  to  underwrite  trade  creditors  tilts  the balance in favour of the proposal. I see no reason to decline to approve the proposal on the grounds of expediency.

Decision

[59]     For the reasons I have given I make an order approving the proposal, subject to the following conditions:

(a)      The trustee is to investigate and file a report within 20 working days as to whether the business is now (more than six months after the start date) generating sufficient revenue to fund the proposal; and

(b)Mr Liguori is to file and serve an affidavit, also within 20 working days:

(i)Confirming that all GST tax returns have been filed up to that date, and that any GST payable has been paid (copies of the GST returns are to be exhibited); and

(ii)Proving the engagement of a chartered accountant to supervise the financial management of the business over the term of the proposal, and to be co-signatory of all cheques.

[60]     The approval of the proposal will lapse if the business is not now generating sufficient revenue to fund the proposal or if these conditions are not met in any other respect.   If the conditions are met, the proposal is to take effect according to its terms.  In other words, the first payment will be due four months from the date of this judgment.

[61]     Taking into account all the circumstances, there will be no order as to costs. The proposal put to the creditors was silent as to whether the costs of seeking approval would be paid out of the fund and so Mr Liguori must be personally

responsible for those costs.

Associate Judge Abbott