Marsh v Commonwealth Bank of Australia, New Zealand Branch (ABN 123 123 124) HC Auckland CIV 2009-404-3336
[2010] NZHC 378
•16 March 2010
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV2009-404-3336
IN THE MATTER OF Part 5 of the Insolvency Act 2006
AND IN THE MATTER OF of a Proposal made by
BETWEEN CAMERON JOHN MCLAREN MARSH Insolvent
ANDCOMMONWEALTH BANK OF AUSTRALIA, NEW ZEALAND BRANCH (ABN 123 123 124) Creditor
CIV2009-404-3337
AND IN THE MATTER OF Part 5 of the Insolvency Act 2006
AND IN THE MATTER OF of a Proposal made by
BETWEEN MARK FRANCIS PERRIAM Insolvent
ANDCOMMONWEALTH BANK OF AUSTRALIA
Creditor
Hearing: 30 September 2009
6 November 2009
20 November 2009
Counsel: M J Whale for Trustee and the Insolvent in both cases
R J Hollyman and K T Glover for Commonwealth Bank of Australia
in both cases
Judgment: 16 March 2010 at 5 pm
RESERVED JUDGEMENT OF ASSOCIATE JUDGE H SARGISSON
(Applications for Approval of Proposals)
This judgment was delivered by me on 16 March 2010 at 5 pm pursuant to
Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Lowndes Associates, Auckland
Mayne Wetherell, Auckland
Date ..........................
MARSH V COMMONWEALTH BANK OF AUSTRALIA, NEW ZEALAND BRANCH (ABN 123 123 124)
HC AK CIV2009-404-3336 16 March 2010
[1] These proceedings relate to applications by two insolvents, Mark Francis Perriam and Cameron John McLaren Marsh, for approval of their respective proposals to creditors for the satisfaction of their joint and separate debts under Part 5 of the Insolvency Act 2006.
[2] The insolvents are directors of the Perron Group and share liability for that group’s debts. In the case of each, their joint and separate debts as at the date the proposals were filed exceeded some $146 million to secured and unsecured creditors. These are owed, in the case of each, to 15 joint creditors, and in Mr Marsh’s and Mr Perriam’s cases respectively, to three and five further separate creditors. The proposal each has made to creditors is to all intents and purposes identical to the other’s proposal save that Mr Perriam is to contribute a larger sum towards the proposed payment to creditors. The proposals were approved by the requisite majority at a meeting of creditors held on 16 June 2009. The common trustees (for each insolvent) have endorsed the proposals and confirm that they are willing to act as trustees for the creditors.
[3] The respondent, Commonwealth Bank of Australia, is a substantial creditor
of both the insolvents. It voted against the proposals and opposes the applications.
[4] There is no dispute that the proposals, linked as they are, must either stand or fall together.
Background
[5] The relevant circumstances are not greatly in dispute. Briefly stated, the facts are as follows:
a) The insolvents are property developers. Their financial affairs include
a large number of related trusts and corporate entities, including Perron Rural Finance Limited and Hurstmere on Strand Limited (both now in receivership). More than 35 such entities are referred to in the insolvents’ statements of affairs accompanying their proposals.
b)In March 2007, Commonwealth Bank of Australia entered into a Committed Cash Advance Facility Agreement with Perron Rural Finance, under which it agreed to make available a loan facility in the amount of NZ$40 million. The loan was to be repaid by 29 August 2008 (later extended to 13 October 2008). Perron Rural Finance’s obligations were guaranteed by each of the insolvents personally and by Hurstmere. The loan was secured by, inter alia, a property at 57- 77A Hurstmere Road, Takapuna, North Shore City, owned by Hurstmere. The insolvents also provided their personal guarantees.
c) The loan was not repaid, and Commonwealth Bank of Australia served notices of demand on each of the insolvents as guarantors on 20 October 2008. Receivers were appointed over both Perron Rural Finance and Hurstmere on 21 October 2008. The receivers sold the secured property for just over $23 million in May 2009, but there remained a substantial shortfall (in excess of $18 million) between the amount realised and the amount owed under the loan. The insolvents themselves lacked any resources to bail Perron Rural Finance or Hurstmere out of their parlous financial situations.
d)In mid-August 2008, the insolvents were instrumental in arranging a six-year lease of space in the secured property from Hurstmere to related company Perron No17 Limited at a nominal rental. In their capacity as directors of both, they claimed Perron No17 was in rightful occupation and refused to comply with the receiver’s initial requests to vacate or pay market rent, though they eventually capitulated and agreed to vacate some six months later.
e) In March 2009, default judgment was entered for Commonwealth Bank of Australia in debt proceedings against the insolvents and, in April 2009, it brought proceedings in bankruptcy. Those bankruptcy proceedings have been adjourned pending the determination of the present applications.
f) The insolvents made proposals to creditors on 4 June 2009, considered at a meeting of creditors held shortly thereafter on 16 June
2009. The creditors voted to accept the proposals: in Mr Marsh’s case by a majority of 85.7% by number and 80% by value, and in Mr Perriam’s by a majority of 87.5% by number and 80.2% by value. Commonwealth Bank of Australia voted against both proposals.
g) At the time that the insolvents’ proposals were made, their joint indebtedness exceeded $143 million, arising largely under guarantees given to secure the group’s business activities.
h)As at the date of hearing, a number of securities had been realised reducing the joint and separate debts of each of the insolvents to approximately $130 million. It is further apparent that some securities remain, most notably a property in central Auckland, of an estimated value of $40 million (though expressed as highly variable between $25 and $50 million) over which Westpac holds a first mortgage.
[6] The thrust of the proposals is that the common trustees, Mr Harry and Mr
Bertelsen, chartered accountants of the firm Bertelsen Harry Waters Ltd, will:
a) Settle the claims of each insolvent’s creditors, including their joint creditors in accordance with the operative provisions of the proposals, to which I refer presently;
b)Receive the amounts payable to the insolvents under the proposal and distribute those amounts to participating creditors in accordance with the provisions of the proposals; and
c) Obtain and review financial information referred to in the proposals and advise creditors of any defaults under or in terms of the proposal with a view to providing each insolvent’s creditors “with a better result than would be achieved” if that insolvent became bankrupt.
[7] The rights of secured creditors remain unaffected by the proposals save to the extent that any realised security leaves them as unsecured creditors for any remaining debt. Commonwealth Bank of Australia is such a creditor.
[8] Commonwealth Bank of Australia accepts that the proposals have met the statutory voting threshold imposed under Part 5 of the Act but seeks that approval be withheld on grounds going to the Court’s discretion.
[9] Relevantly, s 333(3) of the Act provides that:
(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.
[10] Commonwealth Bank of Australia submits that the proposals are not reasonable and are not calculated to benefit the general body of creditors, and, further, that it is not expedient or in the public interest that the proposals be approved.
Legal Principles
[11] A proposal to creditors under Part 5 Subpart 2 of the Act must be in a prescribed form and lodged in Court. It is then voted upon at a creditors’ meeting. The proposal must be passed by a simple majority in number and a 75% majority in value of creditors present and voting, or who voted by post. Provided a proposal passes the procedural requirements of the meeting, s 333(1) requires that the trustee must apply to the Court for approval of the proposal as soon as practicable.
[12] Section 333(3) affords the Court discretion to refuse to approval the proposal
if, and only if, it considers that one or more of the statutory barriers to approval applies. The effect of the section is to strictly constrain the Court’s discretion with
the result that the Court must approve a proposal that has the requisite approval of creditors unless satisfied refusal is proper or required on one of the bases in s 333(3).
[13] In Kelly v Structured Finance Ltd [2009] 2 NZLR 785 the Court explained the position in the following way:
[13] Putting a proposal into effect is therefore a three-stage process.
First, a proposal must be filed and a meeting of creditors called. Second, the meeting of creditors must be held and the required creditors’ acceptance secured. Third, the Court must consider and approve the accepted proposal.
[14]Section 333(3) requires the Court to consider the compliance, reasonableness and expediency of the proposal. While the Court appears to have a general discretion to refuse approval as indicated by the word “may”, the Court may only refuse approval if one or more of the trigger paragraphs in s 333(3)(a), (b) and (c) applies: Farmer v Rowley [1992] 2 NZLR 195 at 199.
[15]The approach to approving a proposal is that set out by Hardie Boys J in Re Bennett’s Proposal HC CHCH B138/81 and M306/81 1 February 1982 in relation to the predecessor s 143 of the Insolvency Act 1967, quoted with approval in Farmer v Rowley at 205:
I think the Court should accept the view of the creditors, or the majority of them, and grant approval unless it is apparent that one of the grounds for refusing approval exists. The Court is clearly required to exercise its independent judgment, for considerations of wider public interest are relevant, and therefore even unanimity amongst the creditors will not be predeterminative of approval. But unless it is clear that the creditors generally would fare better under a bankruptcy, approval ought normally to be given unless other special circumstances militate against it. Whilst a proposal ought not to be imposed under dissentient creditors if that would be disadvantageous to them as members of the general body of creditors their dissent should not be upheld if to do so could be prejudicial to the general body of creditors.
[16]As this statement indicates, there is no onus on the insolvent to show that the proposal should be approved. Indeed, this is indicated by the heading to s 333, which is “Court must approve proposal”.
[17]A number of decisions suggest that there is an onus on creditors who oppose the proposal to show that approval should be refused: Re Trott AK HC B1471/88 14 April 1989, Tompkins J; Re Hart [1991] 2 NZLR 219 at 225. However, it is the obligation of the Court under s 333(3) to approve the proposal “if it considers” that any of the various factors referred to are made out. The phrase “if it considers” indicates the application of independent judgment. I respectfully
agree with the conclusion of Robertson J in Re Nathan HC Whangarei B53/89 14 August 1989 that an onus on an opposing creditor would ignore the public interest factor. Rather, the Court must follow the specific words of s 333(3). It has a discretion to refuse to approve if after exercising its independent judgment it considers that one or more of the various factors referred to in that subsection are made out.
Discussion
Are the terms of the insolvents’ proposals not reasonable in terms of s 333(3)(b?)
[14] The Court may refuse to approve a proposal if the terms of the proposal are not reasonable or are not calculated to benefit the general body of creditors. This test
is to be assessed from the perspective of the creditors. Wider public interest considerations are not relevant to the Court’s inquiry under s 333(3)(b), falling properly for consideration under the expediency head in s 333(3)(c).
[15] In Kelly v Structured Finance, at [45], this Court encapsulated the test thus:
In considering reasonableness a Court may objectively assess whether the proposal would be acceptable to a commercially experienced prudent creditor. As was stated by Lord Esher in Re Reed and Bowen ex p Reed and Bowen (1886) LR 17 QBD 244 (CA) at 251 in relation to the Bankruptcy Act 1883 (UK), which was the basis for much of our present legislation:
… this Act was passed … for the purpose of protecting the creditors against their own recklessness; [and] for the purpose of preventing a majority of creditors from dealing thus recklessly, not only with their own property, but with that of the minority …
[16] The learned authors of Heath and Whale on Insolvency (looseleaf ed, LexisNexis) suggest at 10.28, and I agree, that this ground may be broken down into two related issues. The first addresses minority oppression and asks whether dissenting creditors are suffering unfair prejudice as a result of the vote by the majority. The second issue considers whether, in the Court’s view, the compromise is one that the creditors should enter into.
[17] I dispense with minority oppression at the outset. Unequal treatment of creditors is said by Commonwealth Bank of Australia to go to the reasonableness of
the proposals, but it does not contend minority oppression. On the face of the proposals, no group of creditors will be worse off under the proposals than if the insolvents were to be placed into bankruptcy.
[18] I turn then to the second issue, whether the compromise is one that the creditors should enter into, or whether on an objective assessment the proposal would be acceptable to a commercially experienced prudent investor. Re-expressed, generally 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: Re Duncan Holdings Ltd HC Christchurch M306/81, 1 February 1982; Farmer v Rowley [1992] 2 NZLR 195. In this assessment the Court will be influenced by the views of the creditors, as expressed by Richardson J in Farmer v Rowley at 200 to 201:
In determining whether the proposal is reasonable the Court is required to exercise an independent judgment. Nevertheless it must be influenced by the commercial judgment of creditors who in approving the proposal have demonstrated their willingness and wish to receive a partial payment without recourse to bankruptcy. It
is important to emphasise, too, that it is the creditors who stand to lose the benefit if a proposal is rejected and bankruptcy ensues. Unless there are special public interest or other commercial considerations present the assessment of the substantial body of creditors ought to be accepted.
[19] Hardie Boys J’s comments at 202 of that case are also instructive:
Further, the judgment about these matters must essentially be one for the creditor to make. … The creditors were in the best situation to weigh up the alternatives and they chose to take the money. … I do not think it is part of the Court’s duty to refuse approval in the mere hope that something better will be offered. The statute does not contemplate a procedure akin to an auction.
[20] This echoes the earlier point, made by that Court in Guest v Duffy [1991] 1
NZLR 183, that the statutory procedure is “not intended as an opportunity for reactivating the acceptance process” (at 186, per Richardson J). I assess the insolvents’ proposals on this basis.
[21] The insolvents’ proposals are essentially identical. The substance of the operative provisions of the proposals is, in summary, as follows:
a) They govern the period to 31 March 2012.
b)The insolvents each make an initial payment to joint creditors of 3.5 cents in the dollar, and to separate creditors of seven cents in the dollar, on the first $100,000 of each creditor’s aggregate claim. Thus creditors receive a maximum initial payment, in the cases of joint creditors, of $3,500 from each insolvent, and, in the cases of separate creditors, of $7,000. This initial payment totals $125,961.
c) Each insolvent is entitled to earn and retain $80,000 of tax paid assessable income ($112,250 before tax) without any obligation to repay creditors.
d)Thereafter, 50% of each insolvent’s after tax personal earnings, as defined, are distributed to creditors with the remainder retained by the insolvents. Personal earnings are defined so as to exclude income arising from any payments made by secured creditors of the Perron Group in connection with dealings for the benefit of those secured creditors with secured assets. Accordingly, such income is not subject to or available for distribution to creditors.
e) Finally, each insolvent is to pay creditors 50% of any funds available
to shareholders within the Perron Group resulting from the realisation
of assets held within that group, less reasonable remuneration to the insolvents. Thus 100% of such funds, less reasonable remuneration to the insolvents, accrues to creditors.
[22] The proposals are so structured, according to the insolvents’ supporting affidavits, to provide an incentive for the insolvents to work hard and create new income streams to the benefit of both the insolvents and their creditors. The benefit to creditors thus comprises both the initial dividend of $125,961 and, contingently, the creditors’ share of whatever personal earnings, as defined, might eventuate during the currency of the proposals, and funds available to shareholders resulting
from the realisation of Perron Group assets, less the insolvents’ reasonable remuneration in respect of the same.
[23] Commonwealth Bank of Australia contends that the terms of the proposals are not reasonable and are not calculated to benefit the general body of creditors on four grounds:
a) That the proposals will yield no greater recovery for creditors than bankruptcy;
b)That the nominal and insignificant nature of the proposed dividends in satisfaction of the creditors’ claims against the insolvents are unreasonable;
c) That the proposals prefer the interests of separate creditors to joint creditors; and
d)That the proposals do not adequately identify and quantify the benefits afforded to secured creditors (and, consequently, the disparity in compensation existing between secured and unsecured creditors) given the benefits accruing to those creditors from the insolvents assisting in the disposal of secured assets.
[24] I address these in turn. First, whether the proposals yield a better return for the creditors than in bankruptcy. This question is really determinative of reasonableness under s 333(3)(b), absent minority oppression and subject to a qualification I will return to shortly. It is apparent on their face that the proposals do yield a better return for the creditors than on bankruptcy. Messrs Marsh and Perriam are hopelessly insolvent. Each claims to have no assets to speak of. On this basis, the initial payment contemplated by the proposals, totalling $125,961 and derived, apparently, from an entity called the Colorado Property Trust, of itself places creditors in a better position than would the insolvents’ bankruptcy. I proceed on this basis.
[25] Secondly, the creditors contend that the proposed dividend is so nominal and insignificant as to be unreasonable. This argument is not without some force. The proportion of the total indebtedness discharged by the initial payments is approximately 0.08 cents in the dollar. Further, I accept, though it was not argued in precisely these terms, that insofar as the proposals provide for any return additional
to that initial dividend, they do so in such acutely vague terms as to be all but discounted in my assessment of the proposals’ reasonableness.
[26] I focus, accordingly, on the initial dividend. The 1989 case of Re Trott and Joy [2009] 2 NZLR 800 was similarly concerned with a “very small” dividend as a proportion of total indebtedness. That case involved two insolvents, indebted in the amounts of approximately $17 and $22 million and proposing dividends of $337,000 and $122,000, representing six and 3.6 cents in the dollar respectively. Tompkins J noted that as a proportion of total indebtedness the amounts offered were very small. Against this, he considered the sheer magnitude of the debts, and noted that an offer
of payment amounting to a substantial number of cents in the dollar would involve in money terms a very large amount. In money terms the proposed dividends were substantial. But Tompkins J accepted that the Court in exercising its discretion should properly have regard not only to the total amounts offered, but also the relationship of the amounts to the total indebtedness. I accept that here, while noting that this factor did not prove determinative in Re Trott and Joy.
[27] Similarly, cases canvassed by Master Lang in Re Williams HC Auckland B695-IM01, 16 October 2002 demonstrate authority for the approval of proposals providing for payments of less than one cent in the dollar to creditors. Master Lang held that relatively small payments do not, on their own, justify the Court exercising its discretion against a proposal that the requisite majority of creditors have determined to accept.
[28] Finally in respect of this point, and more appositely insofar as it advances Commonwealth Bank of Australia’s position, I have had regard to the decision of this Court in Re Nathan HC Whangarei B53/89, 14 August 1989. That case involved an initial payment of $5,000, with a further $10,000 to be paid over two years, against total indebtedness of $863,000. The opposing creditor was to receive
$578.71 of $33,452.00, or 1.72 cents in the dollar. Robertson J declined to approve the proposal on the basis that the amount which the creditors were to receive was infinitesimal and as such the advantage of a pre-adjudication proposal very questionable. There was no substantial or tangible advantage to creditors in the proposal. Where there was no recovery of substance, the possible benefits from a full and independent scrutiny were said to be of greater significance.
[29] Here, with some hesitance, I consider that the proposed dividend is not so small as to be unreasonable. As a proportion of total indebtedness, I accept that the proposed divided of $125,961 is small to the point of infinitesimal. Having regard to the sum both as a proportion of total indebtedness and as a dollar amount, I think it open to me, following Nathan, to find it insubstantial and infinitesimal. However, the weight of authority, as evident above, sets a rather lower threshold for substance and tangibility than that in Nathan. On that authority I do not think that the proposed dividend can be properly said to be insubstantial or intangible. It comprises a benefit to creditors that they have here chosen to accept, and which they stand to lose if the proposal is rejected and bankruptcy ensues.
[30] Thirdly, Commonwealth Bank of Australia contends the proposals prefer the interests of separate creditors to joint creditors. It expands on this in its submissions, and argues, variously, that the proposals prefer payments to the insolvents to payments to their creditors, payments to those with smaller debts to those with larger debts (more than $100,000), separate creditors over joint creditors (in that the latter do not receive any benefit from their having obtained guarantees from both parties), and Mr Marsh’s family trust to all other creditors. None of these groups, however, would appear worse off under bankruptcy. Again, bearing in mind the nature of the reasonableness assessment, I am unable to here substitute my judgment for that of the creditors to the effect that on an objective assessment commercially experienced prudent creditors would not accept the proposals.
[31] Finally, the benefits afforded to secured creditors are said to be inadequately identified and quantified in the proposals, and as a consequence the disparity in compensation between secured and unsecured creditors is inadequately identified and quantified. I agree with Commonwealth Bank of Australia that in these respects
vagueness is a notable feature of the proposal. However, for reasons elucidated above, where no creditors are denied tangible or substantial benefits the absence of which would render any benefit of a proposal questionable, and where there is no clear indication that creditors will be better off under bankruptcy there is no place for the Court to determine that a proposal is unreasonable in the required sense. That is not to say that vagueness is entirely without significance and I will come back to it in my consideration of the proposals under the expedience head.
[32] The net result is that although Commonwealth Bank of Australia raises valid concerns, these concerns do not provide sufficient reasons for me to find the proposals unreasonable in the required sense. When considering whether or not the proposals fail the test of reasonableness I must not overlook that the insolvents’ majority creditors, most of whom are sophisticated commercial players, have demonstrated their willingness and wish to receive the returns envisaged by the proposals without recourse to bankruptcy. And as it stands, I am satisfied on the face of the proposals that the creditors will fare better under the proposals than on the bankruptcy of the insolvents, and to a not insubstantial or intangible degree. It is no answer that they might have done better. The statute does not contemplate a procedure akin to an auction.
[33] For the above reasons, I do not consider that the terms of the proposal are unreasonable in the required sense or that they are not calculated to benefit the general body of creditors.
Are there reasons why it is not expedient to approve the proposals under s
333(3)(c)?
[34] The Court may refuse to approve a proposal where for any reason it is not expedient that the proposal be approved. In exercising its discretion to refuse approval under s 333(3)(c) the Court is required to exercise an independent judgment. Considerations of the public interest are relevant as noted by Tompkins J, who considered the expediency ground in Re Trott and Joy at 810. He said:
But para (c) of subs (3) provides as a ground for refusing approval that for any reason it is not expedient that the proposal should be approved. As Hardie Boys J observed in Duncan Holding the Court is required to exercise
its independent judgment and that considerations of the wider public interest are relevant.
[35] I respectfully agree with Asher J in Kelly v Structured Finance in that the public interest is best approached from the perspective of protecting the public from the insolvent debtor. The scheme of the Act is protective rather than punitive.
[36] Misconduct is not a ground for refusing to approve an insolvent’s proposal under s 333(3), as it is, for example, for refusing to approve a bankrupt’s composition under s 315(3)(c). Nonetheless, an insolvent’s misconduct may factor into the Court’s consideration of the public interest. To this, Wylie J in Re Lowndes HC Auckland B1879/90, 17 December 1990 said (at 12 to 13), and I concur, that:
The Court must, I think, take notice of that difference, not to the absolute exclusion of misconduct as a factor, but rather as to the degree of misconduct which may impinge upon the public interest.
[37] The public interest being best approached from the perspective of protecting the public from the insolvent debtor, I think it correct to state that misconduct is relevant to the Court’s consideration of the public interest insofar as it evinces or points to the possibility of a continuing threat of harm to the commercial community.
To that extent, the statement of Tompkins J in Trott and Joy remains apposite:
An insolvent’s misconduct may be so irresponsible and its effects on creditors or others so devastating that a Court may conclude that it is in the public interest that the person responsible should not escape the stigma of bankruptcy. Rather, it may be in the public interest that such a person should be marked as a bankrupt and further, that he should suffer the various disqualifications that go with bankruptcy. Those disqualifications are after all designed to protect the unsuspecting community from the ravages of irresponsible financial conduct. And the stigma of bankruptcy is itself a deterrent to others from behaving in a like manner. (Emphasis added.)
[38] Other irresponsible financial conduct is similarly relevant where it is suggestive of such a continuing threat of harm. Thus in Re Curson HC Dunedin B200/97, 27 May 1998 the Court, in refusing to approve the insolvent’s proposal, considered the insolvent’s “startling reversal of fortune” and the number of his creditors as telling or suggestive of commercial irresponsibility going to inexpedience. Master Venning rejected the insolvent’s contention that his parlous financial situation arose not from commercial irresponsibility but from the loss of a
major tenant, the destruction of one of his properties by arson, and the inability to complete a development when a contractor went into liquidation.
[39] Finally, approaching the public interest from the perspective of protecting the public may involve wider considerations extending to the integrity of the insolvency regime generally. In particular, the integrity of the insolvency regime, and thus the public interest to which that regime is directed, is undermined where, in the recurring words of this Court, insolvents are seen to dine at the rich man’s table while their creditors receive only crumbs: Re Riddiford HC Wellington B91/89, 7 July 1989; Re Lowndes HC Auckland, B2161/90, 10 May 1991; Re Lal HC Auckland CIV-2007- 404-3456, 5 November 2007. In such a case the Court may exercise its discretion to refuse approval under the expedience head notwithstanding that a proposal may be reasonable in the narrower sense contemplated by s 333(3)(b). Even where a proposal places creditors in a better position than that on insolvency, where benefits under a proposal are distributed so inequitably as between the insolvents and their creditors as to give rise to the perception above, the Court will not hesitate to refuse the proposal on the ground of inexpedience.
[40] Here, Commonwealth Bank of Australia submits that it is in the public interest that the insolvents do not escape the effects of bankruptcy and expedient that the proposals not be approved. It relies on:
a) The conduct of the insolvents in frustrating Commonwealth Bank of Australia’s realisation of its security and exercise of its legal rights; and
b)The risk to the public and the business community of the continued unfettered operation of the insolvents’ business activities.
[41] A number of factors are said to point to this ongoing risk in addition to the insolvents’ conduct in relation to Commonwealth Bank of Australia’s realisation of
its security. They include the magnitude of the business failure, the absence of any attempt to adequately explain this failure and the concomitant loss of borrowed funds, as well as the huge shortfall between the insolvents’ assets and liabilities.
[42] Commonwealth Bank of Australia also argues, more broadly, that the Court ought to consider the proposals in the context of the insolvency regime generally. It contends it is a matter of concern going to the public interest that the insolvents may be seen to have avoided the usual consequences of serious commercial failure (bankruptcy), with creditors receiving next to nothing while the insolvents continue in their chosen work and retain a substantial income from the same.
[43] I discuss, first, the insolvents’ conduct in relation to Commonwealth Bank of
Australia’s realisation of its security. Hurstmere was to repay its loan, initially, on
29 August 2008. Two weeks prior to that initial repayment date, on 15 August 2008, the insolvents, as directors of Hurstmere, entered into a six-year lease with a related entity, Perron No17, at a nominal rental. One month after the initial repayment date, on 29 September 2008, the date for repayment was extended to 13 October 2008. Notices of demand were served on the insolvents and Hurstmere, as guarantors, on 20 October 2008, with receivers appointed over Perron Rural Finance and Hurstmere on the following day. Hurstmere’s receivers requested on 21 November 2008 that Perron No17 commence paying market rental or vacate the premises. It was not until late March that the insolvents undertook that Perron No17 would vacate.
[44] There is between the various parties and their representatives a stream of correspondence in which each adopts various positions in respect of the lease. It is not necessary for me to refer to this in any great depth. Commonwealth Bank of Australia’s essential position was that the lease was invalid as no formal consent had been obtained from the mortgagor as required by the facility agreement, or, if valid, that the lease represented a breach of the insolvents’ duties as directors. The insolvents’ essential position was that the lease was valid, Commonwealth Bank of Australia having known of its existence if not its terms, and that the lease was for value and did not represent a breach of directors’ duties for various reasons. These reasons went, broadly, to timing (where Perron No17 occupied a newly vacated tenancy with no reduction in the premises’ real return) and the existence of collateral arrangements (where Perron No17’s rent was offset against Hurstmere’s management fees).
[45] At the hearing it became clear that Commonwealth Bank of Australia now concedes that it knew of the existence of the lease, and that the insolvents for their part now accept such knowledge did not extend to the nominal terms. As counsel for the former also pointed out, there was no formal consent given to the lease by the bank in its capacity as mortgagor and such consent cannot be inferred where the essential terms were not disclosed. Therefore, even if the bank knew that there was some kind of collateral arrangement, as it had not given formal approval it was always open to it to cease its indulgence. It is plain from the correspondence that that is exactly what the bank did, via the receivers. It is also plain that the insolvents persisted in resisting the receiver’s instructions over a period of some months. In these circumstances, I accept that the bank’s contention that the insolvents acted to frustrate its realisation of its security is warranted.
[46] Conversely, I reject the insolvents’ characterisation of their conduct by their account:
The facts are that, notwithstanding some posturing by the lawyers on both sides, [we] were trying to find a way of assisting [Commonwealth Bank of Australia] to best maximise its position, even after the appointment of the receivers.
[47] It is difficult to treat this as other than disingenuous. The insolvents could have been in no doubt that the receiver had determined how they could best assist the Bank’s position. It was not for them to insist on some other strategy. Their various exhortations represent, at best, a misguided attempt to rationalise their own behaviour and, and at worst, a deliberate attempt at obfuscation. Either way, their conduct calls into question their commercial morality and does little to reassure me that they pose no continuing threat to the commercial community, the interests of whom are foremost in considering the expediency or otherwise of the proposals.
[48] I turn now to the insolvents’ lack of explanation for the failure of their businesses. The insolvents have provided no explanation for the failure of their businesses, other than general references to the recession, and the collapse of finance companies and the “property market”.
[49] Asher J afforded the absence of explanation some significance in Kelly v
Structured Finance at [66]:
It is also significant that Mr Kelly has made no effort to explain to the Court the financial disaster that appears to have befallen his group of companies. The Court can have little confidence in Mr Kelly’s ability to secure money in the future when he has failed so singularly to do so in the past. While there is no onus of proof on Mr Kelly in this proceeding, his failure to provide obviously relevant information can be taken into account by a court in exercising its independent judgment.
[50] Against this, I have considered this Court’s acceptance in the past of explanations given in terms of analogous generality, such as share market and property market collapses. I note that I have not been referred to any involving the quantum of loss contemplated here. I consider, ultimately, that the approach in Kelly v Structured Finance is apposite. The enormous losses in this case, coupled with the significant number of creditors, call for more than a cursory or glib explanation of the causes of failure. I am satisfied that the paucity of the insolvents’ explanation as to the failure of their businesses is a factor that should weigh in the exercise of my discretion, in which I am required to consider the public interest and in particular the threat posed to the commercial community should these insolvents escape bankruptcy and its attendant disqualifications. By any measure, theirs was a spectacular failure involving debts that approached $150 million, and even after realisation of all securities is expected to involve huge losses. I find the absence of explanation telling of the insolvents’ failure to manage their business affairs in an acceptable way, and suggestive of an inability to so manage their affairs in the future.
[51] I consider that the above comments apply equally to the concerns raised by Commonwealth Bank of Australia with respect to the disparity between the insolvents’ assets and liabilities. Their statements of assets disclose minimal assets of $8,750 (Marsh) and $42,305 (Perriam). I find the extent of the disparity extraordinary and, while there is no onus on the insolvents to explain it, the failure to do so does little to allay my discomfort about the way in which the insolvents have conducted their financial affairs. The lack of any personal assets of substance with which to back up their personal guarantees is suggestive of a somewhat cavalier
attitude to those guarantees. Their claim that Perron has successfully completed over
$400 million of developments makes the disparity all the more startling and, indeed, suggests there may be some value in further inquiry. It stretches the very bounds of credibility that individuals claiming such business success would deprive themselves so entirely of the trappings of a comfortable lifestyle as to be virtually devoid of personal assets. As in Curson, I am unable to rule out the possibility that further inquiry by the Official Assignee might disclose further assets.
[52] In this case, I consider that the public interest, approached from the perspective of protecting the public from the insolvents, demands the measure of protection afforded the commercial community by bankruptcy and its attendant disqualifications. In reaching this view I do not overlook that the recent economic climate has had a serious and in some instances devastating impact on the property development market, and that most of the money involved was advanced by sophisticated financial institutions well capable of independently appraising risk. I have also considered the glowing testimonials from some of the creditors as to the insolvents’ integrity in commercial dealings. However, the protective purpose of the insolvency regime requires that I remain cognisant of factors such as the insolvents’ conduct in relation to the realisation of Commonwealth Bank of Australia’s security, the paucity of their explanations in relation to their business failure and the disparity between their assets and liabilities. These factors together suggest an ongoing risk to the commercial community in allowing the insolvents to continue their business activities unhindered and a public interest in the investigation of their financial affairs and business conduct by the Official Assignee.
Generosity of income and intention to undertake further development to generate income
[53] Commonwealth Bank of Australia’s contention is that far from benefiting the unsecured or indeed the creditors generally, key elements of the proposals relating to the distribution of the insolvents’ income are structured with the objective of rewarding the insolvents to the virtual exclusion of the unsecured creditors.
[54] Relevantly, each insolvent is entitled to retain the first $80,000 after-tax of
his assessable income. Subject to this entitlement, the proposals provide that a category of the insolvents’ income defined as personal earnings be split 50/50 between themselves and their creditors. However, that split does not extend to any income that the insolvents may receive arising from payments the secured creditors make for or in connection with any dealings undertaken in relation to their securities. By definition such income is excluded from distributable personal earnings. If, therefore, the insolvents assist a secured creditor to realise a security, any part of any fee the creditor pays for the assistance that finds its way into the insolvents’ hands as income is not subject to the obligation as to sharing. Even if this fee was paid to the Perron Group and comprised, prima facie, funds available to shareholders, it would likely accrue to the insolvents in its entirety under the provision for reasonable remuneration as it is reasonable to assume that secured creditors would not be remunerating the insolvents at above a reasonable level. Reasonable remuneration as contemplated by the proposals would be excluded from distributable personal earnings in the same manner envisaged above. This is due to the breadth of the exclusion in the definition of personal earnings: “all my assessable income except income arising from any payments which may be made from secured creditors …”, capturing within its terms both payments made to the insolvents directly and those made indirectly by way of the Perron Group, finding their way to the creditors as reasonable remuneration.
[55] These are complex formulae that need to be viewed in the context of the insolvents’ projected future earnings capacity. The insolvents depose that their skills are in property development where they claim to have enjoyed outstanding success. They say they will actively assist secured creditors with the disposal of assets held by the Perron Group, and implicit in the terms of their proposals is that this is an activity for which they expect to be paid. They also say they are investigating a number of opportunities to develop new income streams and that the proposals are structured to incentivise them to work hard in doing so, to their benefit and to that of the creditors generally. They express confidence in their each earning more than $80,000 after tax annually during the currency of the proposals.
[56] On their face, the operative provisions of the proposals do appear to encourage the insolvents to work hard, but not necessarily for the general body of creditors. There is every incentive for them to each earn $80,000 of after-tax income annually from new income streams. Thereafter, however, the strongest incentive afforded by the proposals is for the insolvents to concentrate their remaining efforts on generating income arising from payments made by secured creditors in connection with dealings for their benefit with secured assets, whether directly or through the Perron Group and by way of reasonable remuneration. If they so direct their efforts, the benefits will accrue to the insolvents and specific secured creditors to the exclusion of the creditors generally. That the proposals are so structured belies the insolvents’ claims that the proposals are directed to the benefit of the creditors generally, itself demonstrating a lack of candour to which I will return.
[57] Whether or not the insolvents’ confidence in their early earning capacity is well placed is entirely a matter of conjecture. It is impossible to know, on the evidence, whether their expectations of substantial income are hopelessly optimistic or readily achievable. There is for instance no evidence as to where they might derive the necessary funding to generate new business. But even lending such claims credence, I cannot dismiss the possibility raised by Commercial Bank of Australia that the proposals are directed principally at securing personal benefits from secured creditors to the exclusion of creditors generally.
[58] Mr Hollyman has invited me to consider, for the sake of argument, that Messrs Marsh and Perriam might receive 3% of the price realised for their creditors’ securities by way of a personal return. In the case of the central city property over which Westpac has security, said to be worth some $40 million or more, this personal return would be upwards of $1.2 million. Creditors only conceivably benefit to the extent that up to $80,000 (after tax) of such income might be allocated to the insolvents’ entitlements, thus allowing income from new ventures, if indeed any such income eventuates, to be distributed between the insolvents and their creditors. It is unclear how the process of allocation will in fact take place, but under the formulae of the proposals there is every incentive for the insolvents to allocate any income from new ventures towards this entitlement to maximise non- distributable earnings, and more than a hint of inevitability as to precisely that
outcome. Irrespective of how this point is resolved, I agree with Mr Hollyman’s submission that the insolvents’ capture of the entirety or thereabouts of such benefits would be justifiably perceived as Messrs Marsh and Perriam dining at the rich man’s table while their creditors receive only crumbs. I have been provided with no evidential basis upon which to dismiss such concerns. Indeed, given the structuring of the proposal such concerns appear well founded. There is certainly inadequate disclosure to dispel these concerns.
[59] While I have found that these factors are insufficient to categorise the proposals as unreasonable in the strict sense of that term as properly understood under s 333(3)(b), they remain to be considered under the expedience head in s 333(3)(c). This Court has in the past talked of the unreasonableness (in a broad, public interest sense) of insolvents being seen to “dine at the rich man’s table whilst [their] creditors receive only crumbs” and such a situation would be patently unacceptable and affords proper grounds for refusing to approve the proposal under the expediency head.
[60] I am satisfied, then, that the public interest demands that I refuse to approve the insolvents’ proposals in this case. The insolvents have displayed, throughout, a lack of candour which belies their claims of integrity in commercial dealing. This lack of candour is evident in their conduct in relation to Commonwealth Bank of Australia’s realisation of its security. It is evident in their inability to explain the staggering losses they incurred and why despite 15 years of, on their account, successful property development, their assets were so woefully small and insufficient in even beginning to meet the liabilities arising under their personal guarantees. It is evident in the terms of the proposals as they relate to income arising from payments from secured creditors, and the inexplicable, or at the very least unexplained, exclusion of such income from that distributable to creditors. This lack of candour coupled with the financial irresponsibility that is manifest, at least in the absence of adequate explanation, in losses of this magnitude, convinces me that the insolvents pose a sufficient threat to the commercial community that it is inexpedient their proposals be approved and they be permitted to escape bankruptcy and its attendant disqualifications. Additionally, I am unable to overlook that the proposals as structured might quite conceivably result in the insolvents escaping the normal
consequences of their spectacular business failure and deriving substantial benefits from secured creditors, such benefits not being distributable to creditors generally. Such a potentiality would, in my view, be patently unacceptable in terms of the public interest in the integrity of the insolvency regime. Without evidence on which to dismiss this concern I must regard it as inexpedient that the proposals be approved on this basis also.
Result
[61] The applications to approve the proposals are refused.
[62] The creditor, Commonwealth Bank of Australia, has adjudication applications before the Court. They have been adjourned for call at 10am on 20
April 2010. Costs on the proposal applications are reserved until that date. If
necessary I will hear further submissions from counsel at that hearing.
Associate Judge Sargisson
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