Maharaj v Dysart Timbers Limited

[2019] NZHC 1914

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-001045

[2019] NZHC 1914

UNDER

the Insolvency Act 2006

IN THE MATTER OF

the bankruptcy of ASHOK MAHARAJ

BETWEEN

RAJVEEN PRASAD

Judgment Creditor

AND

ASHOK MAHARAJ

Judgment Debtor

CIV-2019-404-000489

UNDER

the Insolvency Act 2006

IN THE MATTER OF

the second proposal of ASHOK MAHARAJ

BETWEEN

ASHOK MAHARAJ

Insolvent

AND

DYSART TIMBERS LIMITED, FIELD MANUKAU HOLDINGS LIMITED

(trading as MITRE 10 MEGA MANUKAU), KENNARDS HIRE NEW ZEALAND LIMITED, NICK NAND KISHORE, RAJVEEN PRASAD, ROBERT JOHN WARBURTON,

RONALD RAVINDRA PRASAD, WASTE MANAGEMENT NZ LIMITED, WARBURTON LIMITED,

WESTMINSTER FINANCE LIMITED

Creditors

Hearing:	23 July 2019
Appearances:	B Cunningham for Applicant/Trustee and Insolvent B Pamatatau for Judgment Creditor (Mr Prasad)
Date:	7 August 2019

PRASAD v MAHARAJ [2019] NZHC 1914 [7 August 2019]

JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

Introduction

[1]Two proceedings are being heard together. They are:

(a)An application by the trustee of the insolvent, Mr Ashok Maharaj, for approval of a second proposal, pursuant to s 333 of the Insolvency Act 2006; and

(b)An application by the judgment creditor, Mr Rajveen Prasad, for an order adjudicating Mr Maharaj bankrupt pursuant to s 13 of the Insolvency Act 2006.

[2]                 In a judgment dated 12 February 2019, Associate Judge Smith declined an earlier application for approval of Mr Maharaj’s proposal under s 333 on the grounds that that earlier proposal was too vague (that is, not supported by critical evidence) and the public interest factor that Mr Maharaj had been trading for some years whilst insolvent.1

[3]                 In support of the current application  for  approval  of  a  second  proposal, Mr Maharaj proposes to borrow the sum of $40,000 from Keyline Homes & Projects Ltd (of which he is the sole shareholder) and for those funds to be distributed by the trustee to creditors. He also proposes to make periodic payments to the largest creditor, Westminster Finance Ltd, over a period of 12 months from his earnings as an employee of Keyline Homes & Projects Ltd. It is contended that this will result in the insolvent paying a dividend of 15 cents per $1 of debt to all unsecured creditors (except Westminster Finance Ltd) within 14 days of any order approving the proposal. The applicant and Mr Maharaj say that this proposal would be of much greater benefit to the general body of creditors than if Mr Maharaj were adjudicated bankrupt.

1      Broad v Kishore [2019] NZHC 108.

[4]                 No notice of opposition has been filed against the application for the approval of the second proposal. A creditor, Mr Nick Kishore, who successfully opposed the application for approval of the earlier proposal (and was awarded costs) voted against the second proposal at the creditors’ meeting but has chosen not to play a role in these proceedings. Likewise, the judgment creditor, Mr Prasad, has chosen to take no active role in relation to the second proposal. He attempted to vote at the creditors’ meeting, but that vote was disallowed. Mr Pamatatau appeared on behalf of Mr Prasad at the hearing, but his instructions were simply to observe the proceedings and to abide the Court’s decision.

Relevant legal principles

[5]                 Sections 327 to 332 of the Insolvency Act 2006 set out the requirements for a proposal that must be complied with before the court may approve the proposal under s 333. First, the proposal must satisfy the form prescribed in s 327 and be filed in the court (s 328). Secondly, a meeting of creditors must be held and the required creditors’ acceptance obtained (ss 330 and 331).2 Thirdly, the court’s task under s 333 is then a two-step process: it must first decide whether one of the grounds for refusing exists and, if so, it must then decide whether to exercise its discretion to refuse approval.3

[6]                 In Re Bennetts’ Proposal, Hardie Boys J set out the approach normally taken to proposals:4

The Court is clearly required to exercise its independent judgment, for considerations of wider public interest are relevant, and therefore even unanimity amongst the creditors will not be pre-determinative of approval. But unless it is clear that the creditors generally would fare better under a bankruptcy, approval ought normally to be given unless other special circumstances militate against it. Whilst a proposal ought not to be imposed upon dissentient creditors if that would be disadvantageous to them as members of the general body of creditors their dissent should not be upheld if to do so could be prejudicial to the general body of creditors.

2      Insolvency Law & Practice (online ed, Thompson Reuters) at [IN333.01].

3      Farmer v Rowley [1992] 2 NZLR 195 (CA). See also the earlier decision of Associate Judge Smith in Broad v Kishore, above n 1, where the authorities are examined in detail.

4      Re Bennett’s Proposal HC Christchurch B138/81, M306/81, 1 February 1982 at 9 as cited in Farmer v Rowley, above n 3; and Magsons Hardware Ltd t/a Mitre 10 Mega v Bogiatto [2011] NZCA 378 at [23].

Factual background

The earlier proposal

[7]                 The background to the earlier proposal is analysed by Associate Judge Smith in his decision of 12 February 2019. I summarise the main findings as follows.

[8]In his statement of affairs sworn on 5 September 2018, Mr Maharaj stated:

(a)He had been trading as a builder through Victory Builders & Developers Ltd (Victory) for the past few years. Initially, Victory was profitable, but later it suffered a downturn in fortunes and was eventually put into liquidation on 2 March 2018;

(b)Victory was the only source of Mr Maharaj’s income, and his personal cashflow and ability to meet his financial obligations dried up when Victory was liquidated;

(c)He had recently been suspended as a licenced building practitioner for a period of six months and that had affected his ability to obtain construction work or other employment; and

(d)His statement of assets and liabilities showed total assets of $450 consisting of cash on hand, and total liabilities of $576,662.17.

[9]                 In relation to the first proposal, Mr Broad, the provisional trustee, convened a meeting of creditors on 19 September 2018.

[10]              Mr Broad approved creditors’ claims totalling $630,465.56 for the purposes of voting at the creditors’ meeting. Westminster Finance Ltd and Dysart Timbers, with debts (as admitted by Mr Broad at the time) of $356,478.92 and $112,971.70 respectively, voted in favour of the proposal, as did four other creditors. There were three votes against the proposal, including Mr Kishore, whose proof of debt was accepted by Mr Broad in the claimed amount of $50,000.

[11]The value of the debts of the creditors voting in favour of the proposal was

$503,464.54 (representing 79.85 per cent of the total admitted debt). The required

majority in number and 75 per cent of value of the debt of creditors voting for approval of the proposal were accordingly met.5

[12]              The Westminster debt of $356,478.92 was substantially comprised of default interest. It made cash advances to Mr Maharaj in 2007 and 2008 totalling $90,000 but the rest of the Westminster claim is for interest. The evidence showed that Mr Maharaj made no payments to Westminster between 24 April 2008 and 24 August 2018.

The second proposal

[13]              Mr Maharaj says that he brought the current application (the second proposal) urgently, only five weeks after the earlier proposal was rejected by Associate Judge Smith, because of the adjudication application brought by Mr Prasad. If the second proposal application were not heard before the determination of the adjudication application, Mr Maharaj would have lost the opportunity to have that second proposal considered by the Court.

[14]              In support of the current application, Mr Maharaj proposes that his employer, Keyline Homes & Projects Ltd, would pay $40,000 to the trustee within 10 days of any court approval. This would be enough to cover 15 per cent of $163,665.57 ($24,549.84) being the total proven debts of the creditors, including Mr Kishore, plus the trustee’s costs and expenses but not the proven debts of Westminster Finance Ltd.

[15]              In accordance with the proposal, the trustee would then pay Westminster Finance Ltd over a 12-month period, 15 per cent of the $90,000 in principal owed ($13,500) and 5 per cent of the interest of $266,478.92 accrued ($13,323.95).

[16]              In his affidavit filed in support of the application, Mr Maharaj summarises his proposed payment regime in a table as set out below.

Amount owed to creditors (not Westminster)	15 cents per $1.00	Payment    to    be   made within
$161,865.57 (approved by trustee)	$24,279.84	14 days of approval of the proposal

5      Insolvency Act 2006, s 331(3).

Principal owed to Westminster Finance Ltd	15 cents per $1.00	Payment    to    be   made within
$90,000 (approved by trustee)	$13,500	12 months of approval of the proposal, at $1,125 average per month
Interest owed to Westminster Finance Ltd	5 cents per $1.00	Payment    to    be   made within
$281,352.73 (at 24 March 2019) (approved by trustee)	$14,067.64	12 months of approval of the proposal, at $1,172.30 average per month

[17]Mr Maharaj has further deposed that:

I have not been personally trading whilst insolvent for 10 years. I have been associated with various companies engaged in building work as an employee of Victory Builders Ltd (removed 17 November 2015), Victory Builders (2012) Ltd (removed 5 February 2019), and Victory Builders & Developers Ltd (in liquidation from 2 March 2018), and as the sole shareholder in Keyline Homes & Projects Ltd.

[18]              On 20 March 2019, Mr Maharaj lodged a proposal in this Court, and the new trustee, Ms Roshni Chauhan, gave notice to every known creditor affected by the proposal that a meeting of creditors would be held on 12 April 2019 to consider the proposal.

[19]              Ms Chauhan presided over the creditors’ meeting on that date, and the proposal was accepted by the required majority of creditors.

[20]              The names and addresses of every known creditor affected by the proposal was attached (as exhibit B) to the report of the trustee on the proposal dated 29 April 2019. This includes a list of contingent liabilities that relate to current and as yet undetermined proceedings in the District Court.

[21]              In the minutes of the creditors’ meeting (exhibit G to the report of the trustee on the proposal), it is noted that, for the purposes of voting in the creditors’ meeting, the trustee rejected the claim of Mr Prasad by reason of his not having sent a creditors’ claim form with  his  postal  vote.  Those  voting  against  the  resolution  included Mr Kishore, who had previously opposed the earlier application for approval of the first proposal.

[22]              The trustee, Ms Chauhan, contends that the second proposal is advantageous for the creditors for the following reasons:

(a)The adjudication of the insolvent would not result in any recovery by the creditors of the debts owed to them; and

(b)The proposal would result in a recovery by the creditors of 15 cents per

$1, and 5 cents per $1 in the case of interest owed to Westminster Finance Ltd, which is more than would otherwise occur.

Analysis and decision

[23]              I accept Mr Cunningham’s submission for Mr Maharaj that there is no statutory bar to the making of a second application for approval of a proposal, even where the second application is made within a relatively short period after the first application is declined.6

[24]              However, where a second application is made, the applicant must, in my view, discharge the burden of establishing a material change of circumstances (which might include a proposal with fundamentally different terms) or other substantial, fresh grounds that squarely address and confront the reasons for the rejection of the original proposal. It is essential that there be a sufficient evidential foundation so that the Court may legitimately exercise its discretion under s 333 in a different way.

[25]              The critical issue in this case is whether Mr Maharaj has discharged that burden. In determining that issue, it is necessary to begin with an analysis of the key reasons why Associate Judge Smith rejected the first proposal.

[26]              Associate Judge Smith held that the first proposal was framed in an imprecise way. The proposal raised questions as to whether Mr Maharaj made the proposal without having secured employment or the necessary financial support from family members in the hope that those would be secured at some time before the 12-month proposal period expired. The Judge held that that possibility, and the absence of any supporting affidavit from a family member who was willing to fund the proposal, did

6      See Re Diston [2016] NZHC 722; and Liguori v Gold Fund Ltd [2012] NZHC 2253.

not engender much confidence that Mr Maharaj would meet his obligations under the proposal if it were approved. Nor did the March 2018 liquidation of Victory.

[27]              In concluding that the proposal was too vague, Associate Judge Smith found that the creditors were entitled to greater clarity on the question of how Mr Maharaj would fund the proposal and that evidence had not been provided.

[28]              Associate Judge Smith further held that Westminster’s decision not to enforce its debt against Mr Maharaj for such a long period, with interest accruing at a rate that had increased the total debt roughly four-fold, was a factor to be weighed in determining whether to approve the proposal. Associate Judge Smith concluded that Mr Maharaj never had the ability to repay the Westminster debt and had clearly incurred new credit knowing that, if Westminster were ever to demand payment, his creditors could not all be paid. However, Mr Maharaj had continued to trade, subjecting himself to the risk of substantial claims (such as those successfully brought by Mr Prasad) that he could not meet.

[29]              Associate Judge Smith held that a public interest issue arose that justified an inquiry into Mr Maharaj’s insolvent past trading.

[30]At [101] and [102], Associate Judge Smith held:

[101]    In addition to those considerations [namely, trading while insolvent], I think the lack of any reliable evidence of how the proposal would be funded supports the concern I have over Mr Maharaj’s commercial reliability, and the need for protection for those who might otherwise have commercial dealings with him in the future. The fairly recent failure of Victory adds to the concern.

[102]    In all those circumstances, I am satisfied that the public interest would not be served by approving the proposal, and that it would be inexpedient to do so.

[31]              Finally, Associate Judge Smith noted that the Official Assignee might be well placed to look into the circumstances of Mr Maharaj’s bankruptcy (if the existing creditor’s application by Mr Prasad proceeds) and take any steps that might be considered appropriate.

[32]              Against that background, I turn to consider whether, in considering the terms of the second proposal and broad public interest factors, I should exercise my discretion to approve the second proposal.

[33]              I accept that I should have regard to the commercial judgment of the creditors, who in approving the second proposal have demonstrated their willingness and wish to receive a partial payment without recourse to bankruptcy. However, I find, essentially for the same reasons as Associate Judge Smith, that I should not approve the second proposal in the exercise of my discretion under s 333. There is again a lack of reliable evidence as to how Mr Maharaj would fund the proposal, and concerns remain over Mr Maharaj’s commercial reliability. There is no basis for me to conclude that the important public interest factor identified by Associate Judge Smith, namely the need for protection for those who might otherwise have commercial dealings with Mr Maharaj in the future has been addressed or ameliorated in any material way.

[34] In the context of Associate Judge Smith’s finding that the first proposal was too vague, it was, in my view, incumbent on Mr Maharaj to provide cogent and clear evidence as to how his proposal is to be funded and critically, to provide confidence to the Court and the parties that Mr Maharaj would meet his obligations under the proposal if it were approved. He has not done so; the evidential burden he carries, as I have described at [24] above, has not been met.

[35]              Mr Maharaj has provided very little information about the company Keyline Homes & Projects  Ltd.   I accept that he has attached a letter from the director,     Mr Malvin Chand, confirming that the company will advance to the trustees, within 10 days of approval, the sum of $40,000 in relation to Mr Maharaj’s proposal. However, there is no information as to the financial position of Keyline Homes & Projects Ltd (of which Mr Maharaj is the sole shareholder) and whether the sum of

$40,000 would be a loan to Mr Maharaj (and if so repayable on demand) or a gift. Mr Maharaj says he is an employee of that company but very little information has been provided as to the nature of the company’s business, what salary Mr Maharaj earns and further financial information (such as living expenses and the like) for the Court confidently to conclude that he could afford to pay, as proposed, the sum of

$1,125 per month over a period of 12 months.

[36]              I accept that Keyline Homes & Projects Ltd is involved in the construction industry and that Mr Maharaj is the licenced building practitioner. But, beyond that, there is a lack of evidence for the Court to properly evaluate the merits of the second proposal.

[37]              It would appear from Mr Maharaj’s evidence (but it is far from clear) that Keyline Homes & Projects Ltd is the latest company in a long line of companies with which he has been involved that have been unsuccessful.7 This includes Victory Builders & Developers Ltd which was placed into liquidation on 2 March 2018. The Company Office record that Keyline Homes & Projects Ltd was previously known as Victory Homes & Developers Ltd and incorporated on 2 March 2018, the same date as the liquidation of Victory Builders & Developers Ltd.

[38]              I do not accept Mr Maharaj’s assertion that he has not been personally trading whilst insolvent for 10 years. There may be some basis for questioning the length of time (10 years) but it seems clear, as far as the evidence goes, that Mr Maharaj has been associated with a number of insolvent companies (of which he and/or his family were shareholders and he was principal employee). Furthermore, the affidavits filed in relation to the second proposal do not address the issue identified by Associate Judge Smith that Mr Maharaj has never had the ability to repay the Westminster debt. On that issue, Associate Judge Smith held:8

It appears that Mr Maharaj has never had the ability to repay the Westminster debt, which is long overdue and has been incurring interest at a substantial rate every month. The situation appears to be one where Westminster has simply refrained from pursuing its rights against Mr Maharaj in the belief that it would be futile to do so. In the meantime, Mr Maharaj has clearly incurred new credit knowing that, if Westminster were ever to demand payment, his creditors could not all be paid. He has continued to trade, subjecting himself to the risk of substantial claims (such as those successfully brought by Mr Prasad) that he could not meet.

[39]              I note that, in the proceedings before Associate Judge Smith, Mr Kishore, an opposing creditor, contended that Westminster, Warburton Ltd and Mr Warburton (who together made up 60 per cent of total approved claims) should be treated as entities related to Mr Maharaj and the Court should place less weight on their vote. Associate Judge Smith concluded that, on the face of it, the relationship between   Mr Maharaj and Westminster, Warburton Ltd and Mr Warburton, appeared to have been primarily commercial in nature. I have some reservations about that finding and would need to know a great deal more about the background of the relationship before coming to any conclusion. I do not need to do so for the purposes of this application,

7 See Affidavit of Ashok Maharaj (sworn 29 April 2019) at [16]. This is referred to at 0 above.

8      Broad v Kishore, above n 1, at [98].

but I do emphasise that there are many gaps in the evidence and an overall lack of reliable evidence before the Court.

[40]              For all these reasons, I conclude that I should dismiss the application for approval pursuant to s 333 of the Insolvency Act 2006. I am, likewise, not prepared to grant a conditional approval on the terms proposed by Mr Cunningham. A conditional approval would not address the concerns that I have outlined above.

Result

[41]              The application for approval of the proposal (described in the application as the second proposal) is dismissed, pursuant to s 333 of the Insolvency Act 2006.

[42]In the absence of an opposing party there is no issue as to costs.

[43]              As requested by Mr Pamatatau, I adjourn the bankruptcy proceedings, namely Prasad v Maharaj, CIV-2018-404-001045 to the Bankruptcy List on 5 September 2019 at 10.00 am.

Associate Judge P J Andrew