Meltzer v Commissioner of Inland Revenue HC Auckland Civ-2010-404-3177
[2010] NZHC 2423
•6 December 2010
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-3177
UNDER the Insolvency Act 2006
IN THE MATTER OF the proposal of
BETWEEN MAY YAN WANG Insolvent
ANDJEFFREY PHILIP MELTZER Applicant
ANDCOMMISSIONER OF INLAND REVENUE
LATITUDE ASIA LIMITED Creditors
Hearing: 3-4 November 2010
8-9 November 2010
Appearances: P Sills for Ms Wang in both proceedings
R Brennan for the Applicant in the proposal proceeding
N Malarao and K Wendt for the Commissioner in both proceedings R Hucker for Latitude Asia Limited for part of the proposal proceeding
P Shackleton for the Judgment Creditor for part of the bankruptcy proceeding
Judgment: 6 December 2010 at 4.30 pm
Reasons: 30 December 1899
RESERVED JUDGMENT OF ASSOCIATE JUDGE SARGISSON (Application to approve creditors proposal)
This judgment was delivered by me on 6 December 2010 at 4.30 pm pursuant to
Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date ..........................
MAY YAN WANG AND ANOR V COMMISSIONER OF INLAND REVENUE AND ANOR HC AK CIV-
2010-404-3177 6 December 2010
CIV-2009-404-7750
AND UNDER the Insolvency Act 2006
IN THE MATTER OF the bankruptcy of
BETWEEN MAY YAN WANG Judgment Debtor
AND WESTPAC NEW ZEALAND LIMITED (1763882)
Judgment Creditor
Solicitors:
Blackwells, PO Box 9325, Newmarket, Auckland
Meredith Connell, PO Box 2213, Auckland Hucker & Associates, PO Box 3843, Auckland Sargent Law, PO Box 1482, Auckland
Introduction
[1] The applicant, Mr Jeffrey Meltzer of Meltzer Mason Heath, applies to the Court for the approval of the proposal of the insolvent, Ms May Yan Wang, for the satisfaction of her debts under subpart 2 of Part 5 of the Insolvency Act 2006. Mr Meltzer is the trustee named in Ms Wang’s proposal.
[2] The application is opposed. The only substantive opposition is that of the
Commissioner of Inland Revenue.
[3] Counsel for the applicant made only limited submissions, essentially supporting those of counsel for Ms Wang. Substantive submissions were therefore confined to those of counsel for Ms Wang and counsel for the Commissioner.
Background
[4] In 2005 Ms Wang and her then business partner, Mr Robert Reece, established, commencing with Dynasty Group Limited, a group of companies known as the Dynasty Group. The group’s principal activity was property development, at which it was initially successful. It had also earlier engaged, unsuccessfully, in the distribution of films to the Chinese market, and related activities.
[5] By August 2007 the property and financial markets had entered into a sharp decline. This had a significant impact on property developers, and the finance companies on which they were reliant for funding. The Dynasty Group was among those affected. It had, Ms Wang acknowledges, grown quickly. It became increasingly apparent it would be unable to meet its by then various and substantial commitments. In late 2007 and early 2008 Dominion Finance Limited, which Ms Wang describes as the key lender to the group, refused to extend financing of its developments. Counsel for Ms Wang acknowledges this refusal followed some form of default on the part of the group. The group was unable to secure finance from alternative sources. Ms Wang was not in a position to recapitalise it. Mr Reece, Ms Wang reports, was in a such position, but as the recession deepened became increasingly reluctant and in the event failed to do so.
[6] On 18 April 2008 Dominion Finance issued notices under s 119 of the Property Law Act 2007 requiring that the defaults be remedied. They were not. This prompted the decline and eventual dissolution of the Dynasty Group. Most of its constituent companies are now in liquidation. Ms Wang deposes that there is no value in the group and that any relevant securities have been realised.
[7] With the financial collapse of the Dynasty Group came that of Ms Wang. She lost her equity and, by virtue of personal guarantees of the liabilities of the group and some $1.3 million in tax, penalties and interest owed the Commissioner, is now substantially indebted herself, and unable to pay her debts.
[8] On 20 October 2009 the judgment creditor, Westpac New Zealand Limited, obtained judgment against Ms Wang in the sum of $620,342.66. The debt related, Ms Wang said in evidence, to shortfalls remaining after mortgagee sales of properties in Ponsonby and Kohimarama. It is unclear whether the money was lent to one of her companies and guaranteed by her, or lent to her personally.
[9] On 9 November 2009 Westpac requested a bankruptcy notice be issued. A
notice was issued on 26 November 2009 and served on Ms Wang on 30 November
2009.
[10] Ms Wang failed to comply with the terms of the bankruptcy notice, and thereby committed an act of bankruptcy. On 16 March 2010 Westpac applied for an order adjudicating her bankrupt. Those bankruptcy proceedings are adjourned pending the outcome of the present application. Counsel for Westpac was excused.
[11] Ms Wang filed a proposal in this Court on 12 May 2010 accompanied by a statement of affairs verified by affidavit. The trustee named in the proposal notified Ms Wang’s creditors of a meeting of creditors to be held and provided them with the requisite documents, including a copy of the proposal.
[12] The proposal provided for a minimum payment to creditors of $500,000 (to be paid into the account of the provisional trustee by 15 May 2010) which was to be distributed between creditors on a pro rata basis in full and final settlement of their
claims. The proposal was accompanied by a statement of affairs dated 11 May 2010. Ms Wang reported assets of $5,000 (comprising clothing) and liabilities of
$22,263,380.56. She anticipated income of $200,000 per annum over the following three years in consultancy fees, $500,000 of which she had secured as an advance for the purposes of the proposal. She anticipated nil expenses, stating that she would continue to live supported by the generosity of her friends and business associates.
[13] Ms Wang deferred the date of the meeting of creditors to respond to questions creditors raised. At the request of one she provided a supplementary statement of affairs on 9 June 2010. She confirmed that her financial position was as set out in her earlier statement, disclosed that she had borrowed in excess of
$200,000 to meet legal and other costs, and confirmed those who had advanced her funds would not prove their debts under the proposal. Other questions the creditors raised related to her involvement in the high profile purchase by overseas interests of a number of farms formerly owned by interests associated with the Crafar family, now in receivership. That purchase is a matter to which I will turn shortly. It is sufficient to note that in Ms Wang’s supplementary statement of affairs she states, in essence, that she has no personal interest in the purchase beyond her consultancy fees.
[14] On 28 June 2010, at the meeting of creditors, Ms Wang tabled an amended proposal. The essential terms of the amended proposal provide for:
a) Commencement on the approval of this Court and termination on payment of the “minimum payout” to creditors;
b) The minimum payout to be 6.5 cents in the dollar (expected to be
$1,352,000) to be distributed between creditors on a pro rata basis in full and final settlement of their claims; and
c) The minimum payout to be net of the fees and expenses of the trustee, with separate provision for such fees to be made by way of borrowed funds held in her solicitors’ trust account.
[15] Those terms also state that the provisional trustee is holding $500,000 of the minimum payout (as per the initial proposal comprising an advance of three years’ consultancy fees); the balance of $852,000, comprising borrowed funds, to be paid to him by 5pm on 2 July 2010, as indeed occurred.
[16] Ms Wang states in the amended proposal that the only money she is able to secure is the advance and the loan, that all of the money is being put into the proposal and that there will be nothing left over for her.
[17] The creditors passed a resolution accepting the amended proposal. Thirteen creditors voted. Ten voted to accept the proposal, comprising 81.66 per cent in value. The Commissioner, Latitude Asia Limited and another voted against the proposal.
[18] On 1 July 2010 Mr Meltzer, in his capacity as the provisional trustee, filed the present application. The application was accompanied by his report on the proposal. He expressed the opinion that Ms Wang’s proposal was an advantageous one for her creditors. The report was accompanied by a copy of the amended proposal, marked up to indicate the changes from the first. A final version has been provided to the Court. Somewhat irregularly, neither is signed, nor is the Court in receipt of a statement by the provisional trustee that he is willing to act on the basis set out in the amended proposal. There is also no express confirmation in the amended proposal, as there was in the supplementary statement of affairs, that those advancing Ms Wang the funds for the purposes of the proposal (and specifically those advancing the additional $852,000) would not prove their debts under the proposal. Counsel for Ms Wang sought to clarify that position in submissions. These procedural irregularities, given the result I will come to, are of no moment.
[19] On 23 July 2010 the Commissioner filed a notice of opposition to the application. At the hearing, counsel for Latitude Asia advised that his client wished to join the Commissioner in opposition but did not wish to be heard further.
[20] Ms Wang gave evidence at the hearing. There is also substantial affidavit evidence to which it will be necessary to refer.
[21] I turn presently to the legal principles on an application for approval of a proposal and the various substantive grounds on which it is opposed by the Commissioner. It is helpful, first, to refer, as a preliminary matter, to Ms Wang’s involvement in the purchase of the Crafar farms. The purchase, made by an overseas company called Natural Dairy (NZ) Holdings Limited, was effected by Ms Wang through an intermediary group of entities that she established and continues to operate. The group, known as the UBNZ Group, comprises several companies and a trust called the UBNZ Trust. Ms Wang refers in her evidence to the broader transaction as the Natural Dairy transaction.
[22] My broad purpose in this preliminary part is twofold:
a) To determine the benefit accruing from the Natural Dairy transaction to the UBNZ Group, and in particular to the UBNZ Trust; and
b)To determine the extent to which any such benefit, and the benefit of any other property held by the trust, might accrue to Ms Wang personally, and the extent to which Ms Wang might exercise control over the same.
[23] I turn first to the Natural Dairy transaction.
The Natural Dairy transaction
[24] The Natural Dairy transaction comprises two limbs:
a) The purchase of the Crafar farms by the UBNZ Group. The group comprises:
i)UBNZ Trustee Limited. Ms Wang is the sole director and shareholder of UBNZ Trustee. UBNZ Trustee is the sole trustee of the UBNZ Trust.
ii)UBNZ Funds Management Limited. Ms Wang is the sole director, and UBNZ Trustee the sole shareholder, of UBNZ Funds Management. UBNZ Funds Management purchases the farms and on sells them, at the same price, to UBNZ Assets Holdings Limited, to which I turn next. It has purchased and on sold four farms, and has agreed to purchase a further 16 from the receivers conditional on approval by the Overseas Investment Office, which it will on sell. UBNZ Trustee has paid a deposit on the 16 farms. The purchase price was not disclosed in the evidence but counsel for Ms Wang indicated at the hearing that it was in the region of $200 million. This is broadly consistent with the $24,429,747.90 GST refund claimed by UBNZ Assets Holdings in connection with the purchase.
iii)UBNZ Assets Holdings Limited. Ms Wang is the sole director, and UBNZ Trustee was formerly the sole shareholder, of UBNZ Assets Holdings (I address the present situation below). UBNZ Assets Holdings holds four farms and if the above agreement settles will hold the further 16.
b)The purchase of the shares in UBNZ Assets Holdings by Natural Dairy (NZ) Holdings Limited. Natural Dairy is registered in the Cayman Islands and listed on the Hong Kong Stock Exchange. Natural Dairy is paying total consideration of NZD$500 million (subject to some possible adjustment) for the shareholding. This was determined by what is described as an independent valuation on the basis that it has purchased the Crafar farms and is supplying milk to enable the manufacture of milk products. The purchase is proceeding in two tranches:
i)Purchase of 20 per cent of the shareholding for NZD$100 million. This has already taken place. The NZD$100 million was credited as paid on issue of HKD$552,155,999 of zero-
coupon convertible notes with a 10 year maturity. UBNZ Trustee is the registered holder of these notes. For convenience I refer to the then equivalent value of the notes in New Zealand dollars.
ii)Purchase of the remaining 80 per cent of the shareholding for NZD$400 million. An NZD$50 million deposit has been credited as paid on issue of HKD$276,078,000 of zero-coupon convertible notes with a seven year maturity. UBNZ Trustee is the registered holder of these notes. For convenience I refer to the then equivalent value of the notes in New Zealand dollars.
[25] The Natural Dairy transaction thus comprises two analytically distinct limbs: the purchase of the Crafar farms by the UBNZ Group and their vesting in UBNZ Assets Holdings, and the purchase of the shares in UBNZ Assets Holdings by Natural Dairy. Relevant to the present inquiry is what will be “left over” in the UBNZ Group (specifically UBNZ Trustee) if the Natural Dairy transaction proceeds.
A blurred distinction
[26] I pause to note that the distinction between the two limbs of the transaction becomes blurred when one considers the funding arrangements for each. Counsel for Ms Wang sought to explain these at the hearing by way of a written summary. This states that Natural Dairy advanced UBNZ Trustee the funds to purchase the first four dairy farms and the funds for the deposit on the remaining 16 (held in escrow). The cash for the UBNZ Group’s purchase of the farms, then, is sourced largely from Natural Dairy (the balance of the purchase price, the summary states, is to be financed initially by the receivers and later by an equity raising or otherwise by Natural Dairy). The distinction between the two limbs cannot help but look somewhat notional as a result.
[27] Further, the terms on which this cash is advanced are unclear. In a supplementary statement of 14 July 2010 Ms Wang states that “[a]ll advances from
Natural Dairy to either Funds Management, Assets Holdings or UBNZ Trustee are on commercial terms.” That supplementary statement, however, makes clear that at least the cash for the first four farms actually comprised a cash component of the consideration for the purchase of the 20 per cent shareholding:
10.Payment to UBNZ Trustee for the share purchase was to be by either a share placement to raise the necessary funds or Natural Dairy borrowing money, with any shortfall to be made up by issuing convertible notes. …
…
13.Natural Dairy has not yet raised sufficient cash for the entire 20% share purchase and so has elected to issue some convertible notes. The cash amount raised by Natural Dairy has been used to fund the purchase of the 4 dairy farms purchased by Assets Holdings. The balance of the consideration for the purchase of Assets Holdings’ shares will be a combination of convertibles notes A and B.
14.In relation to the first tranche of shares purchased by Natural Dairy, UBNZ Trustee was only entitled to receive NZ$100 million of cash and/or convertible notes (A and B combined).
…
20.All cash received by UBNZ Trustee in part payment of the first tranche of the share purchase has been used in relation to the acquisition of the first 4 farms.
21.Funds for the 4 farms purchased to date by Assets Holdings are from the cash component of the 20% tranche. …
[28] A cash component of the consideration for the 20 per cent shareholding is admitted of in the circular, a letter to Natural Dairy’s shareholders that sets out the details of the transaction. But a cash component is entirely at odds with the summary of the transaction provided to the Court by counsel for Ms Wang. It is also at odds with UBNZ Trustee being the registered holder of a full $100 million in convertible notes (according to a register that is in the evidence).
[29] It is sufficient at this stage to note these anomalous features of the transaction. I turn to consider, on the basis that these may for present purposes be put to one side, what will be left over in the UBNZ Group if the transaction proceeds in the manner represented to the Court.
[30] It is at least clear that the larger part of the consideration UBNZ Trustee receives is in the form of convertible notes.
[31] A convertible note is a hybrid security. It combines a note (a debt security, differing from a bond only in the term of the obligation) and a share option (an option to convert the note into equity). If the holder of the convertible note exercises the option it converts its note into equity (that is, shares) at a predetermined conversion price. If the holder of the convertible note does not exercise the option the note is redeemed for cash at its face value on maturity, as if it were an ordinary note.
[32] The terms and conditions of any particular security are, of course, a matter of contract and not of definition. The terms and conditions of these particular convertible notes are set out most comprehensively in the circular, which Ms Wang annexes to her affidavit of 11 October 2010. The circular takes the form of a letter from the board of China Jin Hui Mining Corporation Limited (now Natural Dairy (NZ) Holdings Limited) to its shareholders. Its express purpose is to give shareholders further details of the acquisition of UBNZ Assets Holdings (a “very substantial acquisition” under its listing rules) and the convertible notes to be issued to satisfy all or part of the consideration for the same.
[33] The convertible notes comprise convertible notes A and B. Both are zero- coupon convertible notes. The holders of the convertible notes have the right, on any business day during the period from their issue to their maturity, to convert the whole or part of their principal amount into shares at predetermined conversion prices. There has been some suggestion that they cannot be converted until maturity, but this is contrary to the clear effect of the circular. The conversion prices are subject to adjustment provisions described as customary, for example adjustments in the event of a stock split. The convertible notes are assignable or transferable. The relevant terms attaching to each note are these:
a) Convertible note A: the principal amount is not to exceed the HKD$ equivalent of NZD$215 million (credited as fully paid as part of the consideration for the purchase of UBNZ Trustee’s remaining 80 per cent shareholding in UBNZ Assets Holdings). Note A matures seven years from issue. The initial conversion price is HKD$2.50 per share.
b)Convertible note B: the principal amount is not to exceed the HKD$ equivalent of NZD$285 million (credited as fully paid as part of the consideration for the purchase of the initial 20 per cent and the remaining 80 per cent of UBNZ Trustee’s shareholding in UBNZ Assets Holdings). Note B matures 10 years from issue. The initial conversion price is HKD$2 per share.
[34] It is therefore envisaged that Natural Dairy may issue convertible notes to satisfy the entire consideration – NZD$500 million – for the purchase of UBNZ Trustee’s shareholding in UBNZ Assets Holdings. This amount is, in any event, I am invited to accept, the consideration, albeit subject to possible adjustment, for the purchase.
[35] It is apparent that this reflects a significant premium on the market value of the relevant properties. The circular states that the aggregate market value of the properties had dropped from approximately $320 million on 22 May 2009 (the date on which Natural Dairy agreed to purchase UBNZ Assets Holdings) to $206 million as at 19 June 2009. I note the consideration is subject to adjustment should the aggregate market value of the properties remain below $300 million. But in any event, if the Natural Dairy transaction proceeds UBNZ Trustee is left with securities of a very considerable value, a value, as counsel for Ms Wang conceded, many times that of Ms Wang’s present liabilities.
[36] I turn next to the UBNZ Trust.
[37] UBNZ Trustee is the registered holder of the notes issued to date, and will become the registered holder of any further notes issued in satisfaction of the consideration for the purchase of UBNZ Assets Holdings, or otherwise the holder of such consideration however comprised. It holds this property for the UBNZ Trust.
[38] A document entitled “Deed of Trust establishing the UBNZ Trust” was put in evidence by Ms Lara Camage for the Commissioner. Ms Wang accepted on cross- examination that this is the relevant trust deed.
[39] Under the trust deed the settlor is Ms Wang, the settled sum is $10, the trustee is UBNZ Trustee and the appointor is Ms Wu Yun. According to the evidence of Ms Wang, Ms Yun is a friend of hers but not beholden to her under any arrangement, or otherwise.
[40] The trust deed provides that the discretionary beneficiaries are:
a) The trustees;
b) The Fo Guang Shan International Buddhist Trust;
c) The final beneficiaries; and
d) Such other beneficiaries as may be appointed by the appointor.
These, it appears, are limited to trusts including among their beneficiaries one of the initial discretionary beneficiaries, or persons related by blood or marriage to one of the initial discretionary beneficiaries.
[41] The final beneficiaries are, by definition, “the trustee [sic] of the UBNZ Trust as to a sole beneficiary”.
[42] Other material terms of the trust deed provide that:
a) The trustee may distribute income to the discretionary beneficiaries including appropriating income not yet received;
b) The trustee may distribute capital to the discretionary beneficiaries;
c) The appointor has the power to appoint and remove discretionary beneficiaries;
d)The trustee has unfettered discretion as to the exercise of the powers and discretions conferred upon it by the deed;
e) No trustee who is also a beneficiary shall exercise any power or discretion vested in the trustee in his, her or its favour, but this restriction does not apply to the directors of a corporate trustee;
f) The appointor has the power to appoint and remove trustees;
g) A trustee may act and exercise its powers and discretions notwithstanding any conflict of interest; and
h)A corporate trustee may exercise all its powers and discretions notwithstanding that such exercise may in any way directly or indirectly benefit any beneficiary who has an interest (contingent or otherwise) in the trustee whether as a director, officer, shareholder or otherwise.
[43] Two final clauses, on their face, reserve in the trustee almost limitless additional powers. They provide:
25. AMENDMENT OF TRUST DEED
The Trustee may at any time or times during the Trust Period, and without infringing the rule against perpetuities, vary, revoke or enlarge all or any of the provisions of this deed concerning the management or administration of the Trust.
…
27. ACTION BY CONSENT
In addition to and not by way of limitation of the powers specified under clause 27 [sic], the Trustee may, notwithstanding any rule of law equity [sic] to the contrary and without prejudice to any of the powers or directions, in any case where the Trustee has the previous written consent of the Final Beneficiaries, make any decision or take any action in connection with the Trust Fund which is authorized by that consent, notwithstanding that it would or might not otherwise be a suitable action authorized by this deed or by the law relating to trustees.
[44] No close analysis of the trust deed was undertaken by counsel. I do not attempt it here. In particular I do not explore the suggestion of counsel for the Commissioner that the trust fails for lack of object (the basis for which will become clear). What is immediately apparent, however, is that:
a) UBNZ Trustee is the sole trustee, and a discretionary and the final beneficiary; and
b)As the sole trustee (and as a corporate trustee), UBNZ Trustee may distribute any or all of the income or capital of the trust to itself as a discretionary beneficiary, any conflict of interest notwithstanding.
[45] UBNZ Trustee is, of course, owned and controlled by Ms Wang. To the extent that there is a distribution of any, or indeed all, of the income or capital to UBNZ Trustee as a discretionary beneficiary, Ms Wang stands to personally benefit, an outcome that counsel for Ms Wang properly conceded. The only contingency to which such an outcome is subject is, it appears, removal of UBNZ Trustee as a trustee or discretionary beneficiary by the appointor pursuant to her powers of removal. This would appear trumped, however, by the powers reserved the trustee by clauses 25 and 27. In any event, I cannot but take these provisions, and indeed the entire structure of the arrangements, as telling signs that it is highly unlikely Ms Wang would have appointed Ms Yun were there any chance of her proving such an obstacle to the operation of the trust.
[46] I return, then, to the question I earlier posed. What is the extent to which trust property might accrue to Ms Wang personally and the extent to which Ms Wang might exercise control over the same? The position appears to be this. Ms
Wang, as the sole director of UBNZ Trustee, may, at the stroke of a pen, distribute the entirety of the trust property to UBNZ Trustee as a discretionary beneficiary. As the sole shareholder and director of UBNZ Trustee the benefit of any such distribution will accrue in its entirety to Ms Wang personally. Counsel for Ms Wang accepted the beneficial interest could “trickle down” in this manner. This accords with common sense. Ms Wang established the UBNZ Group. She introduced Natural Dairy to the benefits of the transaction. This appears to be the mechanism by which she is rewarded. There is certainly nothing to suggest anything to the contrary, save extraordinary generosity to the Buddhist Trust.
Other property of the UBNZ Trust
[47] The trust property, it seems, is not limited to the contingent interest in the
Natural Dairy transaction.
[48] Ms Wang, through the UBNZ Group, has established a dairy processing plant in Tauranga. It has secured a substantial contract for the export of UHT milk. Indeed, Ms Wang deposes it is contracted to export approximately NZD$100 million of UHT milk in the 2010/2011 year to China. It was Ms Wang’s evidence, in response to questions put to her at the hearing, that the dairy processing plant is owned by New Zealand Dairy Processing Limited. Ms Wang is the sole director and UBNZ Funds Management the sole shareholder of New Zealand Dairy Processing.
[49] As it is UBNZ Funds Management and not UBNZ Assets Holdings which owns New Zealand Dairy Processing, I can only assume its shares do not comprise part of the portfolio being sold to Natural Dairy but rather will continue to be held by UBNZ Trustee (the sole shareholder of UBNZ Funds Management) for the UBNZ Trust. There is no suggestion otherwise in the evidence.
[50] It also emerged at the hearing that Ms Wang is the sole director and shareholder of Super Worth International Limited, a company registered in the British Virgin Islands, and that Super Worth is a shareholder in publicly listed Natural Dairy. Ms Wang was clear in her evidence that the beneficial interest in the Natural Dairy shares does not reside in her personally. Rather, it resides in the
UBNZ Trust. Super Worth, she says, holds the shares on behalf of UBNZ Trustee. I am therefore invited to proceed on the basis that Super Worth’s Natural Dairy shareholding comprises trust property.
[51] The property of the UBNZ Trust extends, it therefore appears, to a dairy processing business and the beneficial interest in shares in Natural Dairy.
Summary
[52] The result is that it is tolerably clear that:
a) The Natural Dairy transaction, as it has been presented to the Court, leaves UBNZ Trustee with securities of very considerable value, likely to be comprised in large part of convertible notes. This is trust property. It is held by UBNZ Trustee in its capacity as trustee for the UBNZ Trust.
b)The trust property also includes a dairy processing business and the beneficial interest in shares in Natural Dairy.
c) The trust property is able to be distributed to UBNZ Trustee as a discretionary beneficiary. Distribution may occur at the behest of UBNZ Trustee as trustee. Ms Wang, as the director of UBNZ Trustee, has the control over this. Ms Wang, as the sole shareholder of UBNZ Trustee, benefits personally from the same.
The significance of this application
[53] Ms Wang deposes that the Natural Dairy transaction and New Zealand Dairy Processing’s UHT milk export contract are largely, if not entirely, contingent on the success of this application. She deposes, and her evidence in this respect is uncontroverted, that both have the potential to bring significant benefits to the national economy. She also deposes that if she is adjudicated bankrupt the UBNZ group of companies (including New Zealand Dairy Processing) will not have a
director. It is unlikely, she deposes, that she could be replaced. The transaction is too large and complex. No one else has the detailed knowledge necessary to steer the companies. No one likely has the inclination to proceed under such intense media scrutiny. Further, the confidence Natural Dairy has in the transaction stems from its confidence in her personally. This, she contends, would be undermined were she to be adjudicated bankrupt.
[54] Adjudication would also, Ms Wang deposes, bring severe and permanent consequences to her personally. An “overwhelming stigma” would attach to her in the eyes of Asian investors. She would be unable to continue to do business in New Zealand if adjudicated bankrupt, as her doing so depends on her ability to attract investment from Asia, and in particular China.
[55] I accept that bankruptcy and its incidents would be of significant consequence to Ms Wang and, as a corollary, could impact significantly on the Natural Dairy transaction. I consider it unlikely, however, that the situation is quite as stark as Ms Wang suggests. If she is adjudicated bankrupt:
a) The Official Assignee will no doubt determine quickly and carefully the questions of what should happen to Ms Wang’s interest in the UBNZ Group, the management of the group if it is to continue, and the utility of any ongoing involvement by her – if indeed necessary or desirable – as well as any conditions that ought to attach.
b)It is implausible that Natural Dairy would let the Natural Dairy transaction collapse, involving as it does an already major investment, either for want of a suitably qualified replacement, or because Ms Wang had attached to her the stigma of bankruptcy. It must be borne in mind that Ms Wang has had attached to her already a stigma surely akin to bankruptcy as a result of the intense media scrutiny to which her affairs have been subject. That latter stigma has not, to date, resulted in either the overseas investors’ withdrawal or the collapse of the transaction.
[56] I turn now to the relevant legal principles.
Legal principles
[57] A proposal to creditors under subpart 2 of Part 5 of the Insolvency Act must be in the prescribed form and accompanied by a statement of affairs in the prescribed form and verified by affidavit. Putting it into effect is a three-stage process. First, it must be filed in Court and the person appointed provisional trustee must, as soon as practicable after the proposal is filed, call a meeting of creditors. Secondly, the meeting of creditors must be held. A resolution accepting the proposal, with or without amendments or modifications, must be decided by a majority in number and three-quarters in value of the creditors. Thirdly, if the proposal has been accepted by the creditors, the provisional trustee must, as soon as practicable, apply to the Court for approval of the proposal.
[58] Section 333 of the Insolvency Act provides:
333 Court must approve proposal
(1) After the proposal has been accepted by the creditors, the trustee must, as soon as practicable,—
(a) apply to the Court for approval of the proposal; and
(b) send notice of the hearing of the application in the prescribed form to the insolvent and to each known creditor.
(2) The Court must, before approving a proposal, hear any objection that is made by or on behalf of a creditor.
(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. (4) The Court must not approve a proposal if it does not provide for the
payment, before any other debts are paid, of—
(a) those debts that would have priority under this Act if the insolvent was adjudicated bankrupt; and
(b) the trustee's fees and expenses that are properly incurred by the trustee in respect of the proposal; and
(c) costs incurred by a person other than the insolvent in organising and conducting a meeting of creditors for the purpose of voting on a proposal.
(5) Subsection (4)(a) does not apply to the extent that a creditor waives the priority that the debt of that person would otherwise have had.
(6) When it approves the proposal, the Court may correct any formal or accidental error or omission, but must not alter the substance of the proposal.
[59] Subsection (4) requires that the Court refuse approval if the proposal does not provide for the preferential payment of certain sums. The Court does not have a discretion to approve a proposal notwithstanding an omission to so provide. It may, however, under subsection (6), correct any formal or accidental error or omission provided it does not alter the substance of a proposal.
[60] Subsection (3) requires that the Court consider the compliance, the reasonableness and the expediency of the proposal. The Court is to exercise its independent judgment. It has a discretion to refuse approval if after exercising its independent judgment it considers that one or more of the various factors referred to in that subsection are made out: Kelly v Structured Finance Ltd [2009] 2 NZLR 785 (HC) at [17].
[61] The effect of subsection (3) is, however, to strictly constrain the Court’s discretion. It must approve a proposal that has the requisite approval of creditors unless refusal is precluded by one of the bases in subsection (4) or proper or required on one of the bases in subsection (3).
[62] In the present case, each of the bases in s 333(3)(a), (b) and (c) and s
333(4)(a) and (b) are in issue.
Issues for determination
[63] The issues raised for determination are as follows:
a) Whether the Court must not approve the proposal as it does not provide for the payment, before any other debts are paid, of those debts that would have priority under the Act if the insolvent was adjudicated bankrupt, namely tax payable by the bankrupt in the manner required by Part 3 of the Goods and Services Tax Act 1985;
b)Whether the Court must not approve the proposal as it does not provide for the payment, before any other debts are paid, of the trustee’s fees and expenses that are properly incurred by the trustee in respect of the proposal;
c) Whether the Court should refuse to approve the proposal on the ground that the provisions of subpart 2 of Part 5 of the Act have not been complied with;
d)Whether the Court should refuse to approve the proposal on the ground that the terms of the proposal are not reasonable or are not calculated to benefit the general body of creditors; and
e) Whether the Court should refuse to approve the proposal on the ground that it is not expedient that the proposal be approved.
[64] I refer to each in turn. For reasons I will come to it will not be necessary to discuss each in the same depth.
Whether the Court must not approve the proposal as it does not provide for the payment, before any other debts are paid, of those debts that would have priority under the Act if the insolvent was adjudicated bankrupt, namely tax payable by the bankrupt in the manner required by Part 3 of the Goods and Services Tax Act 1985
[65] Section 333(4)(a) provides that the Court must not approve a proposal if it does not provide for the payment, before any other debts are paid, of those debts that would have priority under the Act if the insolvent was adjudicated bankrupt.
[66] Counsel for the Commissioner raised at the hearing the issue of GST payable on Ms Wang’s consultancy fee advance. Section 274(5)(a) of the Insolvency Act provides that “tax payable by the bankrupt in the manner required by Part 3 of the Goods and Services Tax Act 1985” would have priority if Ms Wang was adjudicated bankrupt. It was accepted that GST was payable in this manner in an amount of between $21,505.38 (returns in that amount having been filed but not paid) and
$62,500 (the then prevailing rate of 12.5 per cent on the entire $500,000 advance). It was further accepted that Ms Wang’s amended proposal did not make provision for payment before any other debts were paid.
[67] This issue was resolved at the hearing. Counsel for Ms Wang advised, and counsel for the Commissioner confirmed, that UBNZ Assets Holdings direct credited the sum of $62,500 on the morning of 9 November 2010 (the point having been raised the prior afternoon). There is now no debt that would have priority under the Act if Ms Wang was adjudicated bankrupt. Counsel for Ms Wang submits, and I accept, that s 333(4)(a) has no continued application.
Whether the Court must not approve the proposal as it does not provide for the payment, before any other debts are paid, of the trustee’s fees and expenses that are properly incurred by the trustee in respect of the proposal
[68] Section 333(4)(b) provides that the Court must not approve a proposal if it does not provide for the payment, before any other debts are paid, of the trustee’s fees and expenses that are properly incurred by the trustee in respect of the proposal.
[69] The original proposal of 11 May 2010 is in careful compliance with s
333(4)(b). It provides that the proper fees and expenses of the trustee are to be “paid as a prior claim out of the Minimum Payout”. The amended proposal is not. It provides that the proper fees and expenses of the trustee are to be “paid by me from borrowed funds held in trust by my solicitor”. It does not provide, in other words, for their payment before any other debts are paid.
[70] The omission was raised by counsel for the Commissioner at a regrettably late stage in the proceeding. Counsel for Ms Wang acknowledged that the omission
was an oversight. He was granted leave to admit further evidence as to the context and import of the omission. The further evidence is to the essential effect that the creditors desired a certain minimum payout and that it was to this end that the trustee’s fees were no longer to be paid out as a prior claim. Instead, on 25 June
2010 $30,000 was deposited in Ms Wang’s solicitors’ trust account to cover the same (corroborated by her solicitors by letter). The provisional trustee was and remains content to proceed on that basis. He estimates further fees and expenses of up to $17,250.
[71] While it is clear more than adequate provision has been made, the proposal does not literally comply with s 333(4)(b). The Court has no discretion to approve the approval notwithstanding non-compliance with the paragraphs of subsection (4). This is well illustrated by Re Spencer (1994) 16 NZTC 11,140 (HC). If, however, non-compliance is formal rather than substantive I think it at least arguable the Court would not allow it to vitiate the entire proposal. In addition, of course, the Court may correct any formal or accidental error or omission, though it must not alter the substance of the proposal. One difficulty in the latter regard is that the creditors evidently thought the omission of sufficient substance to prompt it in the first place.
[72] It is, in the event, unnecessary that I reach a conclusion on the above point. It arose at a late stage in the proceeding and I have not had the benefit of submissions on it. In such circumstances I do not think it proper that I determine the point and I decline to do so accordingly.
Whether the Court should refuse to approve the proposal on the ground that the provisions of subpart 2 of Part 5 of the Act have not been complied with
[73] Section 333(3)(a) provides that the Court may refuse to approve the proposal if it considers that the provisions of subpart 2 of Part 5 of the Act have not been complied with. Counsel for the Commissioner submits that the proposal fails to so comply.
[74] The relevant provisions require the following. A proposal must be accompanied by a statement of affairs that is in the prescribed form and verified by
affidavit: s 327(1)(b). The statement of affairs must set out the insolvent’s assets, debts, and liabilities: s 327(2)(a). After the proposal is filed the provisional trustee must post to every known creditor (together with a copy of the proposal) a summary of the insolvent’s assets and liabilities: s 330(1)(b). I focus for present purposes on the requirement imposed by s 327(1)(b).
[75] In Ede v Carters HC Auckland CIV-2003-404-5299 CIV-2003-404-5926
CIV-2003-404-7255, 25 June 2004, Associate Judge Lang considered the analogous submission that the proposal in that case failed to comply with the relevant provisions in that the affidavit of assets and liabilities that was filed with the proposal understated the level of the insolvent’s indebtedness and overstated the level of his assets. In considering the submission, Associate Judge Lang bore in mind the fact that a proposal will always be based on an insolvent’s own appreciation of his or her financial situation. He acknowledged that this requires the insolvent to estimate the value of his or her own assets and liabilities and that this may obviously lead to situations in which an insolvent’s assets or liabilities will be overstated. For example, he noted, an insolvent may not realise that a contingent liability under a guarantee needs to be listed as a liability, or fail, quite innocently, to list an asset in which he or she holds an interest.
[76] Associate Judge Lang then stated:
[15] For present purposes I am prepared to accept, however, that there may be cases in which the information provided by the insolvent is so demonstrably and materially incorrect that the proposal does not comply with the requirement of s 140(4) of the Act. That section requires the verified statement of affairs to show particulars of the insolvent's assets, debts and liabilities.
[16] In considering this issue I bear in mind also, however, that the Act is more concerned with substance than form, and that technical defects in the statement of affairs are generally unlikely to vitiate the entire proposal: see Re Trott and Joy (Unreported, High Court Auckland, B1471/88 and B1472/88, 14 April 1989, Tompkins J); Re Williams (Unreported, High Court Invercargill, B24/92, 25 August 1992, Williamson J).
[77] I respectfully adopt Associate Judge Lang’s approach in the present case.
[78] In issue is the adequacy of disclosure of Ms Wang’s assets, debts, and liabilities in two respects:
a) That of her interests in four companies registered in the British Virgin
Islands (the BVI companies); and
b) That of her interest in the UBNZ Trust (and therefore the Natural
Dairy transaction).
[79] I refer first to the information provided by Ms Wang.
The information provided by the insolvent
[80] Ms Wang’s proposal was accompanied by a statement of affairs in the prescribed form and verified by affidavit. It sets out her assets as follows:
“A”
Assets Owned by Insolvent
Description
No. of Items
Estimated Value
Real Estate – Unit 701, 47
Wakefield Street, Auckland
1
Nil equity*
Furniture
Nil
Artwork
Nil
Stereo equipment
Nil
Televisions
Nil
Clothing
100
$5,000.00
Total
$5,000.00
* I own this property as trustee for the Manchurian Trust. The other trustee and registered proprietor is MAG Trustees Limited. Wine Country Credit Union has a registered first mortgage over the property. The mortgage is in default. There will be a shortfall on the sale of the property.
[81] Ms Wang’s supplementary statement of affairs of 9 June 2010, also verified by affidavit, relevantly provides:
Assets
10. My assets (both in New Zealand and elsewhere) are as follows:
…
Government stock, shares, debentures or bonds
24. I do not hold any of these assets.
…
Any other property or assets not specified above, including contingent or vested interest in any Estate or Trust
Again, I set out in a later section my Trust interests both as a beneficiary and as a trustee. For the reasons set out below, I do not consider any of my Trusts interests to have any value.
… Trusts Trustee
40.The following are details of all Trusts in respect of which I am a trustee:
…
(c) I am a trustee for the UBNZ Trust. I discuss this Trust and its relationship to the various UBNZ companies in a separate section below.
Beneficiary
41.The following are details of all Trusts in respect of which I am a beneficiary, either vested, contingent or discretionary:
…
(d) I am not a beneficiary of the UBNZ Trust.
…
Company Interest
43. The following are details of any company still registered in which:
(a)I own shares, or have owned shares at any time over the last five years (private companies only);
(b)I hold office as a director or held office as a director during the last five years.
44.There are other companies I have been a shareholder in or director of but they have all been struck off from the Companies Office Register.
45.I also comment on the status of each company and whether it has any realisable assets.
…
(h) ADB Funds Management Limited
I am the sole director and shareholder of this company. The company has not yet commenced trading and has no assets.
…
(o) UBNZ Group of Companies
…
(ii) UBNZ Trustee Limited
This is a simple trustee vehicle and is the corporate trustee for the UBNZ Trust (refer above). I am a bare trustee of the UBNZ Trust and have no beneficial interest in the Trust.
…
(s) As the balance of the shares in UBNZ Assets Holdings Limited are sold to Natural Diary then any profit on the sale of those shares has to be reinvested with the purchaser in convertible notes in two tranches: one at HK$2.50 per unit and one at HK$2.00 per unit. Those convertible notes cannot be redeemed for eight years. Those convertible notes will only be of value if the dairy business returns a profit and the share value on the Hong Kong Stock Exchange increases from its current level to a minimum of HK$2.00 and HK$2.50 per share. The shares are currently trading at HK$1.62 per share before trading was suspended.
(t) The above is academic as any value will be for the beneficiaries of the UBNZ Trust. I am not a beneficiary. I am a bare trustee only.
[82] The creditors, it seems, continued to question the extent to which Ms Wang stood to benefit from the Natural Dairy transaction. She affirmed in the conclusion of a supplementary statement of 14 July 2010 that:
The success of the Natural Dairy transaction returns no personal benefit to
May Wang as:
(a) May Wang is not Natural Dairy;
(b)In her personal capacity, May Wang is not a shareholder of any of the relevant companies;
(c) May Wang is not a beneficiary of the UBNZ Trust.
[83] The supplementary statement of affairs and supplementary statement canvassed above purport to be comprehensive. They are clearly directed at allaying creditors’ concerns as to Ms Wang’s interests in companies both in New Zealand and overseas, her interest in the Natural Dairy transaction, and her interest (be it vested, contingent, or beneficial) in the UBNZ Trust. They had the purpose – and, evidently, the effect – of reassuring creditors that the compromise was one they should enter into.
[84] That brings me to whether the information Ms Wang provided is so demonstrably and materially incorrect that the proposal does not comply with the requirement of s 327(2)(a) of the Act.
The BVI companies
[85] The position as it emerged from Ms Wang’s oral evidence at the hearing in respect of the BVI companies is as follows:
a) Ms Wang is the sole director and shareholder of four companies registered in the British Virgin Islands:
i) Super Worth International Limited;
ii) Quality Index Limited;
iii) Wonder Effort Limited; and iv) Progress Great Limited.
b)Quality Index, Wonder Effort and Progress Great do not trade, nor do they have any assets. They were registered for the purpose of investment in UBNZ Trustee (of which each is a former shareholder) but are of no continuing significance.
c) Super Worth does not trade. It does have assets – shares in Natural
Dairy – but these are held on trust for the UBNZ Trust. Super Worth
has a bank account, into which the borrowed $852,000 was transferred and from which it was transferred into the trust account of the provisional trustee.
[86] Plainly Ms Wang’s interests in the BVI companies were not disclosed. Counsel for Ms Wang acknowledges this. He submits, however, that disclosure was not required. Her interests, he submits, did not comprise “assets” as that word is properly understood within the context of the insolvency regime. Though the word is not defined in the Act, counsel for Ms Wang referred me to Bryan Garner Black’s Law Dictionary (9th ed, Thomson Reuters, St Paul, MN, 2009) at 134:
asset. (16c) 1. An item that is owned and has value. 2. (pl.) The entries on a balance sheet showing the items of property owned, including cash, inventory, equipment, real estate, accounts receivable, and goodwill. 3. (pl.) All the property of a person (esp. a bankrupt or deceased person) available for paying debts or for distribution.
(Emphasis added.)
[87] In the present context, counsel’s submission rings with a certain hollowness. It is not, however, necessary to determine, on this application, whether an insolvent is required, for the purposes of s 327(2)(a) of the Act, to set out property unavailable for paying debts or for distribution, either because the insolvent has the legal but not the beneficial interest in that property, or because that property is worthless. This is because, with the known exception of only the BVI companies, Ms Wang does set out such property. She purports to set out details of “any companies still registered in which [she owns] shares, or [has] owned shares at any time over the last five years” in a statement the purview of which is expressed to extend to overseas.
[88] For example, in Ms Wang’s statement of affairs she discloses her interest in Unit 701, 47 Wakefield Street, Auckland, though this is a legal but not beneficial interest, and though its value is estimated as nil. In her supplementary statement of affairs she discloses her interest in ADB Funds Management Limited, though the company is described as not trading and having no assets. She discloses numerous interests that do not meet the test her counsel now proposes. She cannot have it both ways.
[89] I am satisfied the information provided was incorrect in that it failed to disclose her interests in the BVI companies. The issue that remains is whether it is so demonstrably and materially incorrect that the proposal does not comply with the requirement of s 327(2)(a) of the Act. Counsel for the Commissioner submitted that the Court is entitled to take notice of the fact that the British Virgin Islands is a “well known tax haven”. He submitted creditors were entitled to disclosure of her interests registered there, and that “alarm bells” would justifiably had rung had they benefited from the same, particularly given their initial scepticism as to the adequacy of disclosure.
[90] I accept that the failure to disclose the interests in the BVI companies is a material omission. Ms Wang acknowledged, on cross-examination by counsel for the Commissioner, the need to have been “completely open and honest” in her supplementary statements. Had she been in respect of the BVI companies her creditors could have, for example, sought substantiation of her claims that the companies were non-trading and held no assets, or that while Super Worth did hold shares they were held on trust, or that while Super Worth did operate a bank account it was non-trading. Her creditors were denied this opportunity.
Ms Wang’s interest in the UBNZ Trust
[91] I turn to the second respect in which Ms Wang is said to have made inadequate disclosure – that of her interest in the UBNZ Trust.
[92] In my preliminary discussion I examined the nature of this interest in some depth. I observed that UBNZ Trustee may, in its discretion, distribute the entirety of the trust property to itself as a discretionary beneficiary. Ms Wang may effect such a distribution by virtue of her being the sole director of UBNZ Trustee. Ms Wang benefits personally from such a distribution by virtue of her being the sole shareholder of UBNZ Trustee. The trust property is, and may become much more, significant.
[93] In her supplementary statement of affairs Ms Wang refers to herself as “a trustee”, “a bare trustee” and “a bare trustee only”. She repeatedly asserts she is “not
a beneficiary” and has “no beneficial interest”. This is echoed in her supplementary statement. She states she is “not a beneficiary”. She states that “[i]n her personal capacity, May Wang is not a shareholder of any of the relevant companies” and, again, “not a beneficiary”.
[94] That Ms Wang is not, in her personal capacity, a shareholder of any of the relevant companies is plainly false. She is in her personal capacity a shareholder of UBNZ Trustee. UBNZ Trustee is not a “simple trustee vehicle”. It is a discretionary beneficiary of the UBNZ Trust. It is possessed of almost limitless powers under the trust deed.
[95] That Ms Wang is not a beneficiary – either vested, contingent, or discretionary – of the UBNZ Trust is a half truth. Without the other half, that she is the sole shareholder of a beneficiary, it is false. She is, as her counsel accepted, at least an indirect contingent beneficiary.
[96] The information provided is not simply incorrect. It is so demonstrably and materially incorrect that the proposal does not comply with the requirement of s
327(2)(a) of the Act. The disclosure in respect of Ms Wang’s interest in the UBNZ Trust is hopelessly inadequate, and gives every impression of being deliberately so. Her supplementary statement is in direct response to questions raised as to the value of the Natural Dairy transaction to her personally. She begins with the assertion that “May Wang is not benefitting personally from the transaction” and concludes that “[t]he success of the Natural Dairy transaction returns no personal benefit to May Wang”. Both are, when considered against the trust deed, flagrant distortions of the truth.
[97] The proposal does not comply with the provisions of subpart 2 of Part 5 of the Insolvency Act. The Court may therefore refuse to approve the proposal on this basis.
Conclusion
[98] I am satisfied that the inadequacy of disclosure I have considered above is so serious that on this ground alone the Court should refuse to approve the proposal. The integrity and efficacy of the insolvency regime generally, and of the proposal regime in particular, is wholly undermined when an insolvent approaches his or her creditors and the Court in an evasive or otherwise disingenuous manner. I consider this to be the case in respect of Ms Wang’s disclosure of her interest in the UBNZ Trust. She has shown a singular lack of candour that I have found it impossible to overlook.
[99] On the analysis so far, the remaining issues raised for determination do not strictly speaking require examination, but for completeness I make brief mention of each. They serve to reinforce my above decision. The first of these is s 333(3)(b).
Whether the Court should refuse to approve the proposal on the ground that the terms of the proposal are not reasonable or are not calculated to benefit the general body of creditors
[100] Section 333(3)(b) provides that the Court may refuse to approve the proposal if it considers that the terms of the proposal are not reasonable or are not calculated to benefit the general body of creditors. The test is to be approached from the perspective of the creditors.
[101] The most relevant limb of this inquiry is into whether in the Court’s view the compromise is one that the creditors should enter into. The Court is required to exercise an independent judgment. Nevertheless, it must be influenced by the commercial judgment of the creditors who in approving the proposal have demonstrated their willingness and wish to receive a partial payment without recourse to bankruptcy: Farmer v Rowley [1992] 2 NZLR 195 (CA) at 200-201.
[102] The creditors exercised their commercial judgment cautiously. They are sophisticated commercial parties. They sought and obtained further disclosure and secured greatly improved terms. The return to the creditors under the proposal is not
insubstantial. It is neither vague nor speculative. It is deposited in trust, intended for immediate distribution on the approval of the proposal by the Court.
[103] The fact remains, however, that the creditors exercised their commercial judgment on the basis of disclosure that has proved quite inadequate. The creditors were not apprised of Ms Wang’s interests in the BVI companies or, more significantly, the UBNZ Trust. I accord that judgment less influence as a result.
[104] In my view the compromise is not one the creditors should enter into. It is not commercially reasonable. The property of the UBNZ Trust, particularly if the Natural Dairy transaction proceeds, is substantial. It is unreasonable that the creditors be denied a share in the same. Indeed, were the creditors apprised of Ms Wang’s true position in relation to the UBNZ Trust I doubt very much, especially given their initial scepticism, they would have voted to accept her amended proposal.
[105] I do not consider, therefore, that the terms of the proposal are reasonable or calculated to benefit the general body of creditors in terms of s 333(3)(b). This serves to reinforce my earlier conclusion that it is appropriate the Court refuse to approve the proposal.
Whether the Court should refuse to approve the proposal on the ground that it is not expedient that the proposal be approved
[106] Section 333(3)(c) provides that the Court may refuse to approve the proposal if it considers that for any reason it is not expedient that the proposal be approved.
[107] Section 333(3)(c) requires an open-ended approach. Any attempt to focus it on a specific matter would be to impose a limitation that does not arise from the words of the paragraph. See Kelly v Structured Finance Ltd at [53]. The inquiry includes, but is not limited to, relevant considerations of the public interest, foremost among which is the public interest in the protection of the public from the insolvent debtor.
[108] Counsel for the Commissioner raises three principal grounds on which he submits it is not expedient that the proposal be approved:
a) That the votes of secured and related party creditors ought to be afforded less weight;
b)That Ms Wang poses a risk to the commercial community, and that it is in the public interest that this be met by her being adjudicated bankrupt and there being an investigation by the Official Assignee into her financial affairs; and
c) That Ms Wang poses a risk to the integrity of the tax system, and that it is in the public interest that this be met by her being adjudicated bankrupt.
[109] I address each of these grounds briefly.
The votes of secured and related party creditors
[110] Counsel for the Commissioner refers, first, to creditors that appear to have “other remedies” (citing Re Curson HC Dunedin B200/97, 9 June 1998 at 8) in the form of primary securities granted them by entities associated with Ms Wang. There is insufficient evidence, counsel submits, for the Court to be certain these primary securities might not avail those creditors in addition to their recovery under the proposal. Counsel submits that the Court should, accordingly, afford less weight than would ordinarily be the case to the votes of creditors who hold or held such securities.
[111] Ms Wang, for her part, was emphatic that any relevant securities had been realised. Her counsel described her creditors as being, in effect, at the end of the line. I accept, however, that there is no independent or documentary evidence of this. This is notwithstanding the point having been raised earlier by Mr Robert Smith for the Commissioner in his affidavit of 24 August 2010 (to which Ms Wang might otherwise have replied in her affidavit of 11 October 2010).
[112] Counsel for the Commissioner refers, secondly, to three creditors he terms related parties. Two are Dynasty Group companies – Dynasty Group Limited and Dynasty Properties Limited – of which Ms Wang is a shareholder. Both, however, entered into liquidation prior to the meeting of creditors. It was the liquidators who voted to accept the proposals. Counsel accepted that the votes cannot therefore be regarded as those of related parties. The other creditor is Golden Fund Limited, of which Mr Kerry Knight, whom Mr Smith for the Commissioner deposes is one of Ms Wang’s representatives in relation to the Crafar farms purchase, is a director. This point was not, however, explored in cross-examination, nor is it elaborated on in counsel’s submissions. It need not detain me further.
[113] I acknowledge counsel for the Commissioner’s submissions in respect of creditors said to have “other remedies”, and that Ms Wang’s evidence in respect of the same is lacking given that the point was earlier raised by the Commissioner. I do not consider them to greatly advance his broader argument but accept they might have otherwise weighed in the exercise of the Court’s discretion. In the event it is unnecessary that I consider them further.
A public interest in Ms Wang being adjudicated bankrupt.
[114] Considerations of the public interest are relevant to the exercise of the Court’s discretion under s 333(3)(c): Re Trott [2009] 2 NZLR 800 (HC) at 810. 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. See Kelly v Structured Finance Ltd at [61] and [63]. The conduct of an insolvent is relevant in so far as it evinces or points to the possibility of a continuing threat of harm to the commercial community: Marsh v Commonwealth Bank of Australia HC Auckland CIV-2009-404-3336 CIV-2009-404-3337, 16 March 2010 at [37].
[115] Counsel for the Commissioner submits it is in the public interest that Ms Wang be adjudicated bankrupt. She poses, counsel submits, a serious risk to the commercial community. Counsel refers to the magnitude of Ms Wang’s liabilities, the significant disparity between her assets and liabilities, her attempts to minimise her role in and failure to acknowledge her responsibility for her losses, and the ease
with which she has abandoned failed business ventures in the past to embark on new ventures, most of which have also failed. These, counsel submits, point to an ongoing risk such that the community is entitled to the protection that would be afforded it by Ms Wang suffering bankruptcy and its attendant disqualifications.
[116] Counsel for Ms Wang submits the commercial community does not need such protection. Ms Wang’s financial collapse was attributable to market conditions not seen since the Great Depression. She has not engaged in misconduct. She did not mislead her creditors, nor was she reckless. Her creditors were sophisticated commercial parties well able to appraise the risks. More recently, Ms Wang has successfully worked over the past two years on the Natural Dairy transaction. Counsel emphasises the private interests of the creditors in recovery under the proposal and submits considerations of the public interest would need to satisfy a high threshold were they to defeat these and require that approval be refused.
[117] Ms Wang reports assets of $5,000 against liabilities in the order of $22 million. I have addressed the basis on which she explains her commercial failures. She has referred variously to the recession, to the withdrawal of funding from Dominion Finance and to the refusal of Mr Reece to recapitalise the Dynasty Group. Somewhat troubling were her repeated attempts to diminish any element of personal responsibility. She claimed surprise at Dominion Finance’s lack of continued support, but glossed over the defaults that preceded it. In a similar vein, while taking notional responsibility for her acknowledged failures to comply with her personal income tax and more recently her personal GST obligations, to which I will return, she sought to shift the blame to her accountants, or to profess inexperience or inadvertence. She can have been in no doubt that she had failed, on an ongoing basis, to meet her tax obligations, being the experienced businesswoman that she is. These factors serve to reinforce the conclusion that Ms Wang’s attitude to her creditors is one suggestive of an ongoing risk.
[118] It is the recession on which Ms Wang places the greatest emphasis. The recession has had, of course, a significant impact on the property development market. Heath J had recent occasion to address that impact in Bridgecorp Ltd (in rec and in liq) v Nielsen [2010] 1 NZLR 820 (HC). Mr Nielsen opposed an application
for an order adjudicating him bankrupt on grounds that included that the Court ought to exercise its discretion not to adjudge him bankrupt. Heath J declined to exercise the discretion. He stated at [61]:
Mr Nielsen operated a speculative business in good financial times and, I infer, did not make adequate provision to deal with any adverse financial conditions that might arise. Property developers cannot do business on the basis that the market will always be buoyant. Mr Nielsen must take responsibility for being (at best) imprudent or (at worst) commercially irresponsible.
[119] The above self-evidently applies to Ms Wang. Equally clearly her imprudence or commercial irresponsibility evinces or points to the possibility of a continuing threat of harm to the commercial community. The question is as to the weight properly afforded it in the exercise of the Court’s discretion under s
333(3)(c). In the context of a proposal to creditors the Court must also consider the private interests of creditors, the legislative recognition of these interests in subpart 2 of Part 5 of the Act and also the public interest in persons who become insolvent being encouraged to make at least some payments in reduction of their debts. Considerable weight has been afforded these latter interests. This is most clearly illustrated in Re Trott. In the present case it is unnecessary to conduct this balancing exercise. The scales have already tipped firmly against Ms Wang.
[120] I turn to the worth of an investigation by the Official Assignee into Ms Wang’s financial affairs. Plainly there is considerable worth in such an investigation. I have considered, for example:
a) The hopeless inadequacy of disclosure that has proved an ongoing feature of this case. It can only be a matter of conjecture as to whether the last probing question, a candid answer to which might again recast the light in which Ms Wang’s proposal is to be assessed, remains unasked.
b)The apparent ease with which Ms Wang has repeatedly proved herself able to secure considerable sums of money: the $500,000 consultancy fee advance, the $852,000 borrowed for the purposes of the proposal, the in excess of $200,000 borrowed to meet legal and other costs and
the $62,500 in GST advanced by UBNZ Assets Holdings, the last materialising the morning after it was put in issue. Income tax, should it be payable, is again to be borrowed. This inevitably raises questions both as to the true source of the monies (albeit in some instances allayed, for example in respect of the $852,000 by the Court having received copies of the loan contracts) and to the wisdom of allowing further borrowing to continue in light of Ms Wang’s rather chequered financial history.
c) Questions attaching to the Natural Dairy transaction. On what basis has Natural Dairy advanced cash to UBNZ Trustee? If the cash was advanced on commercial terms as a loan, how is UBNZ Trustee – one of a group of companies established by an insolvent and receiving consideration in convertible notes – going to repay it? If the cash comprised a component of the consideration for the purchase of the first 20 per cent of UBNZ Assets Holdings, why is UBNZ Trustee the registered holder of the entire consideration for that tranche in convertible notes? Why, in any case, is Natural Dairy paying $500 million for shares in a company holding properties its own circular discloses were worth on their latest valuation only $206 million?
d)Questions attaching to the dairy processing plant. How was it financed? Ms Wang says first in her evidence that it was financed in part from overseas – from whom? She says later in her evidence that it was financed in part by the BNZ – why the discrepancy? In both instances she relies also on the export contract, but this, clearly, is a circular response.
e) Questions attaching to the BVI companies, and in particular Super Worth. What is the value of Super Worth’s shareholding in Natural Dairy? Why does Super Worth have a bank account if it does not trade? What other monies are available to her in that account?
[121] These factors point to the worth of an investigation into Ms Wang’s financial affairs by the Official Assignee. Ms Wang’s financial affairs are, it is readily appreciated, complex. They involve companies registered in New Zealand and overseas, property-owning trusts and a web of transactions between the various entities. An investigation by the Official Assignee, with his extensive investigatory powers, is desirable not only to determine whether Ms Wang has property she has not disclosed but also to determine whether post-bankruptcy restrictions might be appropriate.
A risk to the integrity of the New Zealand tax system
[122] Counsel for the Commissioner submits Ms Wang’s history of non- compliance with her tax obligations is another factor to be taken into account in the exercise of the Court’s discretion under s 333(3)(c). He refers in this respect to her non-compliance with personal tax obligations (the failure to file personal income tax returns over some five or six years) and with the tax obligations of associated entities (the failure to file over 300 GST returns). He also refers to possible irregular or fraudulent GST returns on property acquisitions and to her more recent initial failure to register for and pay GST on her consultancy fees. It suffices to note that, while with limited exceptions Ms Wang vigorously contested all, there is a plainly arguable case in respect of each that would have otherwise required serious consideration under this head.
[123] It is axiomatic that there is a public interest in the integrity of the tax system. Voluntary compliance is the cornerstone of that system. In Re Marra (2004) 21
NZTC 18,494 (HC), Master Lang stated at [17]:
Taxpayers comply with their obligations voluntarily and in the expectation that others will do likewise. If that expectation is allowed to erode, the very foundation of our present tax regime is at risk.
[124] The extent to which the public interest in the integrity of the tax system is a relevant factor in the exercise of the Court’s discretion under s 333(3)(c), and if so whether it would prove determinative in the present case, are not, however, issues which it is necessary to resolve on this application. They are matters best left for another day.
Conclusion
[125] It is my conclusion that approval of the proposal should be refused. Ms Wang has not been forthright to either her creditors or the Court. The disclosure of her interest in the UBNZ Trust has been entirely inadequate. That inadequacy has the result that the proposal does not comply with the relevant provisions of the Act and I have determined that approval is properly refused on that basis. This determination is reinforced by the considerations in s 333(3)(b) and (c), to which I have made brief reference. Ms Wang’s true position in relation to the UBNZ Trust is such that the compromise is not one the creditors should have entered into. There is considerable worth in the investigation into and the ongoing scrutiny of Ms Wang’s financial affairs that will attend on bankruptcy.
Result
[126] The application to approve the proposal is refused.
[127] The bankruptcy proceeding stands adjourned to tomorrow’s list. [128] Any issue of costs on this application may be raised at that time.
Associate Judge Sargisson
0
0
1