Official Assignee v Dransfield

[2015] NZHC 391

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-1113

CIV-2014-404-1115 [2015] NZHC 391

UNDER

the Insolvency Act 2006

IN THE MATTER OF

applications for discharge from bankruptcy by PETAH JACQUELINE DRANSFIELD and BENJAMIN JOHN EVERETT

BETWEEN

OFFICIAL ASSIGNEE Plaintiff

AND

PETAH JACQUELINE DRANSFIELD
and

BENJAMIN JOHN EVERETT Judgment Debtors

CIV-2014-404-2853

UNDER  the Insolvency Act 2006

IN THE MATTER OF       an application under Part 5 subpart 2 by

JACQUELINE FRANCES EVERETT

Hearing:	4 March 2015 at 2:15pm
Appearances:	C T Jones for Official Assignee N A Farrands for P J Dransfield, B J Everett and J F Everett
Judgment:	4 March 2015

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

Insolvency and Trustee Service (C T Jones) Auckland, for Official Assignee

Morrison Kent (N A Farrands) Auckland, for J F Everett

OFFICIAL ASSIGNEE v DRANSFIELD EVERETT and EVERETT [2015] NZHC 391 [4 March 2015]

[1]      This hearing involves three insolvencies.  Benjamin John Everett and Petah Jacqueline Dransfield have both been adjudicated bankrupt.  They have applied for early discharge.   They are brother and sister.   Their mother, Jacqueline Frances Everett,  is  insolvent  but  she  is  not  bankrupt.    There  is  another  brother,  Simon Everett.    He  has  also  been  adjudicated  bankrupt  but  I am  not  considering  any application concerning him.

[2]      The family had a road construction and maintenance business.  They had a company called Blacktop Construction Ltd and there were associated companies: Delta Corporation Ltd and Asphalt Products Ltd.  These companies failed in 2014 and went into receivership and liquidation.  As I understand the evidence, the failure of the companies can be put down to adverse trading conditions.  There was nothing in the evidence to suggest that there was any reckless trading on behalf of the insolvents I am dealing with today.   The Official Assignee has not suggested any misconduct by the insolvents requiring censure.  There is the evidence that family, collectively, left money in by way of shareholders’ advances to the companies, substantial figures going into the millions of dollars.

[3]      The members of the Everett family gave guarantees to creditors to support company debts, and with the failure of the companies they faced personal liabilities. The debts under the guarantees are large, and they have no prospect of being able to meet them.  They have little in the way of assets.

[4]      The mother, Jacqueline Everett, is 71 years of age.  She does not enjoy the best of health.   Part of the family’s motivation to make arrangements with the creditors is to shield her from bankruptcy.

[5]      Benjamin Everett and Petah Dransfield were both adjudicated on applications by CBL Insurance Ltd.  It had made a payment under a contractor’s bond, and then made calls on Benjamin Everett and Petah Dransfield under guarantees they gave. It obtained summary judgment against them for approximately $1,200,000 in early

2014.   The summary judgment applications were not opposed.   It then served bankruptcy notices and followed with bankruptcy applications.  Petah Dransfield and Benjamin Everett were adjudicated bankrupt on 4 September 2014.   Both of them

filed statements of affairs promptly after adjudication.   Petah Dransfield explains that she had been trying to negotiate some compromise with CBL Insurance, but had not actively opposed the applications.  She hoped to negotiate an arrangement but the bankruptcy adjudications were made before any arrangement had been reached.

[6]      Other creditors had made a call on Jacqueline Everett under guarantees she gave, although I have not been advised of any proceedings taken against her.

[7]      As to the debts, there are a number of creditors who are owed a single debt by more than one member of the family.  That becomes important when dealing with matters further on.

[8]      The family has a plan for dealing with their creditors as an alternative to continuing in bankruptcy and to avoid Jacqueline going into bankruptcy.  This plan has come from the family as a whole.  Petah’s husband, Kyle, has stepped in to help out. Petah’s father-in-law, David, has taken an assignment of CBL Insurance’s debt. Kyle  has  arranged  with  his  mortgagee  to  increase  his  borrowings  by  a  further

$100,000 and in addition to pay the costs of the Official Assignee1, the costs of the

trustee of the proposal, and a preferential creditor.   Kyle has an arrangement with

Benjamin that Benjamin will help with the payment of those additional borrowings.

[9]      The proposal is, in broad terms, that the Official Assignee’s costs will be paid,  the  trustee  under  the  proposal  (Mr  Horton)  will  be  paid,  the  preferential creditors will be paid in full, and then the $100,000 will be paid out pro rata amongst the identified creditors.  Each creditor will have only one claim - that is, a creditor will not be able to claim twice because a debt is owed by more than one member of the family.

[10]     I am advised that Kyle Dransfield has arranged the borrowing but that the funds have not yet been drawn down.  From discussion today, it is expected that the funds will be drawn down and distributions to creditors will be made inside four

weeks.

1      The Official Assignee’s costs have been agreed at $6,808 for Petah Dransfield and $7,226 for

Benjamin Everett.

[11]     I go back.  The family hit upon this plan last year.  At the outset, all three of them started on proposals under Part 5 subpart 2 of the Insolvency Act.  Later, it was realised that proposals under that part of the Insolvency Act are not available after a debtor has been adjudicated bankrupt.  As an alternative to that, Benjamin Everett and Petah Dransfield have applied for early discharge from their bankruptcies under s 294 of the Insolvency Act.   The Official Assignee has provided reports on the discharge applications.   The Official Assignee does not show anything adverse in respect of either Petah Dransfield or Benjamin Everett, and does not put forward any reasons why early discharge should not be granted.

[12]     The Official Assignee has noted certain technical matters that will need to be addressed.  In particular, this is a three-way arrangement and there are questions of overlap.

Benjamin Everett

[13]     Mr Everett currently works for wages as a heavy truck driver and general contractor.  He works both in New Zealand and in Papua New Guinea.  He says that the Official Assignee has approved his employment with these companies and his work overseas.  In his application under Part 5 subpart 2 he put his assets at $4,000. His  liabilities  go  into  the  millions.    Initially  it  was  more  than  $6,000,000  but I understand that may be reduced by reasons of recoveries by receivers.  The largest creditor is Westpac New Zealand.  Most of his creditors are financiers.  He has few trade creditors.   His  liabilities to his creditors  arise primarily under guarantees. Under his proposal under Part 5 of the Insolvency Act, there was a meeting of creditors where the required majorities were met.   No creditor voted against his proposal.

[14]     On an application for early discharge a bankrupt may be required to  be formally examined.  I have not required that but I did ask for further information and that  was  volunteered  by  his  counsel.    From  the  back  of  the  court  Mr  Everett indicated to me, without giving evidence, that he concurred with what his counsel (Mr Farrands) had said.   In these circumstances I did not require Mr Everett to be

formally sworn.  The information I have been given is consistent with the evidence already given in the applications.

Petah Jacqueline Dransfield

[15]     Petah Dransfield is also working for wages.  She has modest assets and has

liabilities comparable to her brother’s.

Jacqueline Frances Everett

[16]     Mrs  Jacqueline  Everett  has  assets  said  to  be  worth  about  $76,000  and liabilities comparable to those of her children.  Mr Horton notes that while her assets might be $76,000 worth, if steps were taken to realise them they may realise significantly less.

Applications for early discharge

[17]     Under s 294 of the Insolvency Act, a bankrupt may apply for discharge before the normal three years are up under s 290.   On an application for early discharge, the bankrupt has to satisfy the court of the grounds.   In contrast, if the bankrupt has served out the three years and there is an objection to an automatic discharge, the objector has to satisfy the court that the bankruptcy should be continued.

[18]     It is agreed that the leading authority on applications for early discharge is the decision of the Court of Appeal in ASB Bank v Hogg cited by Mr Farrands. 2    The following passage is recorded in Mr Farrands’ submissions.  Although that decision was made under the Insolvency Act 1967, what is stated there is equally applicable under the Insolvency Act 2006:

In conferring a discretion expressed in the broadest terms, the legislation recognises that each case will be different, that the relevant factors may vary from case to case and that the exercise of the discretion must be governed by the circumstances of the particular case having regard to the guidance provided by a consideration of the scheme and purpose of the legislation. In providing for automatic discharge after three years, the legislation recognises

2      ASB Bank v Hogg [1993] 3 NZLR 156 (CA) at 157-158.

that it is not in the public interest that the bankruptcy should endure indefinitely. In providing for earlier discharge, s 108 recognises that continuing the bankruptcy to the end of the three years may not be in the public interest. Whether or not it is will be a matter for decision on the particular facts. In that regard, guidance is provided by s 109(2) which lists matters on which the assignee is to report to the High Court in such a case. The  Court  is  to  consider  the  assignee's  report  as  to  the  affairs  of  the bankrupt, the causes of the bankruptcy, the manner in which the bankrupt has performed the duties imposed on him or her under the Act and his or her conduct both before and after the bankruptcy, and also as to any other fact, matter or circumstance that would assist the Court in making its decision. Clearly the Court apprised of the matter will consider the legitimate interests of the bankrupt, the creditors and wider public concerns, but it is neither required nor entitled to impose threshold requirements in the exercise of the discretion so as to derogate from the breadth of the powers conferred under s

110. The applicant has the onus, in the sense of adducing evidence, to show good cause for ordering an early discharge, but his obligation goes no further

than that.

[19]     These applications for early discharge have been brought as a substitute for a proposal under Part 5 subpart 2 of the Insolvency Act.   In essence, the bankrupts want to make a part-payment to the creditors and, in exchange, to be released from bankruptcy.  The majority of creditors have accepted their proposal.  In the case of Petah Dransfield, one creditor has advised of an objection – that is Brake & Transmission  NZ  Ltd  which  is  owed  approximately  $1,100.00  but  it  has  not appeared today to oppose the application.

[20]     An alternative course Mr Everett and Mrs Dransfield might have taken would be by way of a composition under Part 5 subpart 1 of the Insolvency Act.  They were advised not to take that course because that is an uncommon procedure.  To a certain extent they may have been breaking new ground in taking it.   It would have been more costly and would have required extra work on the part of the Official Assignee. I accept that as a reasonable explanation for them not taking the composition route but instead applying for early discharge.

[21]     Because the creditors generally do not oppose early discharge, the court’s enquiry is into matters outside the interests of those creditors which might bear on the application.   It is helpful to bear in mind that there are five main features of bankruptcy   which   bear   on   decisions   under   proposals,   on   applications   for adjudication and also on applications for discharge.  These five matters are:

[a]       The administration of the estates of the bankrupts in the interests of creditors.

[b]       The need for accountability to creditors on the part of debtors. [c]     Whether there is any need to punish the bankrupts.

[d]      Whether there is a need to protect the public against the bankrupts going back into business again and incurring fresh credit.

[e]       The benefits of discharge to bankrupts in allowing them to re-enter normal commercial life.

The administration of the estate of the bankrupts in the interests of creditors

[22]     As I have already stated, both Mr Everett and Mrs Dransfield have provided statements  of  affairs  to  the  Official  Assignee.    The  Official  Assignee  has  not indicated  that  he  requires  further  information  from  the  bankrupts,  or  that  the discharge from bankruptcy will frustrate or delay the ordinary administration of the bankruptcies.   In fact, Mr Jones made it clear that if the court makes the orders sought then that will effectively bring the administration of the bankruptcies to an end.   The Official Assignee sees no further benefit in continuing with the administration of the bankruptcies.

[23]     There is a technical point that assets which vested in the Official Assignee will remain vested in the Official Assignee even after discharge.  That is in contrast with annulment, under which assets are re-vested in the bankrupt.  Mr Jones makes the suggestion in his memorandum that the bankrupts might consider an application for annulment based on change of circumstances so as to bring about a revesting.

[24]     In short, what has happened so far allows for proper administration of the estate of the bankrupts in the interests of creditors - the proposal addresses the interests of creditors perhaps more efficiently than would be the case if the bankruptcies were to continue.

The need for accountability to creditors

[25]     Accountability is requiring recognition on the part of a debtor that he has incurred liabilities and he must be answerable for them.   Mr Everett and Mrs Dransfield have already spent time in bankruptcy.  A discharge will not annul their bankruptcies.  They will still be recorded as bankrupt.  That will serve as adequate accountability.  An early discharge will not operate against that factor.

Punishment

[26]     There  is  nothing  in  the  circumstances  here  which  calls  for  a  punitive approach.  I regard the bankruptcies as having arisen from commercial misfortune on the part of Mr Everett or Mrs Dransfield.

Protection of the public

[27]     Whenever a bankrupt is discharged from bankruptcy, they are free to go back into business again subject to any restrictions imposed by the court.  They are free to incur fresh credit.  Sometimes there is a risk when the debtor wishes to go back into the very business in which they have failed.  In particular, property developers who have failed seem to think they can go back into property development again and run a business successfully without failure.   Those concerns do not apply here.   Both Mrs Dransfield and Mr Everett are working for wages and they intend to continue working for wages.  They do not have any capital to get back into business again.

[28]     I am satisfied that there is not any real risk to the public if they are discharged from bankruptcy now.

The benefit of discharge

[29]     The  benefit  of  discharge  is  that  the  bankrupts  are  released  from  the restrictions of bankruptcy.  In Mr Everett’s case that is important, because it means that he will not require the permission of the Official Assignee to leave the country.

But it also means that they can be treated on a normal basis again.  They are free to incur fresh credit again if they so wish.  I regard the benefits of discharge to them as being greater than any risk to the commercial community.

[30]     I regard the proposal as generally beneficial in the sense that the family have acted together to try and address the insolvency and to deal with the creditors in a more constructive way than if they had remained bankrupt.  That, I regard, as very much in the spirit of what s 8 is directed at – promoting alternatives to bankruptcy.

[31]     I note that the bankruptcies were advertised.  I am satisfied that the creditors have been adequately identified.  Overall, I view the applications for early discharge favourably.  I will need to consider the technical aspects of it later on.

Mrs Jacqueline Everett’s proposal under Part 5 subpart 2

[32]     Her liabilities are under the guarantees she gave.   She has put forward a proposal ahead of any creditor’s application under the Insolvency Act.  Her proposed trustee is Mr Horton, a recognised insolvency practitioner.  His evidence satisfies me that the provisions of Part 5 subpart 2 of the Insolvency Act have been followed, and that at the creditors’ meeting the required majorities were obtained.  Section 333(3) of the Insolvency Act says that the court may refuse to approve a 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. [33]   I am satisfied as to (a).

[34]     As to (b), the terms of the proposal  are likely to provide Mrs  Everett’s creditors with more than they are likely to obtain if she were adjudicated bankrupt. I note  that  while  she  puts  the  nominal  value  of  her  assets  at  about  $76,000,

Mr Horton, perhaps reflecting his experience in insolvencies, recognises that they may realise less given the costs of realisation.

[35]     Finally, I have to consider (c), whether it is not expedient to approve the proposal.   That requires me to address the five features of bankruptcy that I have already recorded in respect of the discharge applications.  The present circumstances are that Mrs Everett is an elderly lady with health difficulties and with insurmountable liabilities which she has no hope of paying.  Little would be served by making her bankrupt as opposed to approving her proposal.  She has, in terms of s

8,  presented  a  viable  alternative  to  bankruptcy.    The  public  interest  factors  in avoiding bankruptcy lie in her favour.

[36]     Taking matters as a whole, I view both the applications for early discharge and Mrs Everett’s proposal favourably.

Technical matters

[37]     I have already noted that Mr Jones has raised the issue that assets vested in the Official Assignee will not re-vest on an order for early discharge.   Mr Everett and Mrs Dransfield may care to note the ability to apply for an annulment.  Mr Jones has referred to my decision in Chean Fook Seong v Official Assignee where there

was an application for annulment after discharge.3

[38]     Mr Jones has also noted that if the distribution to creditors were to be handled by the Official Assignee, the Official Assignee would be duty bound to carry out a distribution strictly in accordance with the provisions of the Insolvency Act.  That would require the Official Assignee to obtain formal claims from each creditor, to examine them, and either admit or reject them.   A complicating factor is that a creditor owed the same debt by more than one member of the family would be able to make a claim in respect of each bankruptcy and would be entitled to a double dividend.  Under the family’s proposal, there will not be this double-up.  While a creditor may hold guarantees from both Mr Everett and Mrs Dransfield, it will be

treated as a single debt for the purposes of distribution.  The Official Assignee sees

3      Chean Fook Seong v Official Assignee HC Auckland CIV-2007-404-2297, 21 February 2011.

Mr Horton, the trustee, as an appropriate person to handle the distribution of funds to creditors not only in respect of Mrs Everett, but also in respect of Mr Everett and Mrs Dransfield.  That also, of course, has the advantage of convenience and common sense.

[39]     The only matter that I believe I have to address in respect of these technical aspects is the fact that creditors who may have claims against the estates of two bankrupts will receive a distribution on the basis that they will only have one claim in the distribution.   None of the creditors with two claims have objected to the proposal, or to the early discharge from bankruptcy.   The only person who has voiced any opposition is Brakes & Transmission NZ Ltd.  But that is a creditor of Mrs  Dransfield  and  not  of  Mr Everett.    In  fact  under  this  proposal,  Brakes  & Transmission NZ Ltd will do better than if it were to take under a bankruptcy where its claim would be diminished on account of other creditors having double claims.

[40]     In these circumstances, I accept the good sense of the proposal and I do not see any reason for rejecting the proposal because all creditors will have only a single claim under the distribution.

[41]     As to the mechanics, a loan will have to be drawn down and paid over to Mr Horton.  He will then make the distributions.  Mr Farrands has helpfully prepared a  schedule  listing  all  the  creditors.    I am  satisfied  that  all  creditors  have  been identified.    Mr Farrands  has  identified  proved  claims  and  claims  not  proved. Mr Horton will need to satisfy himself as to both proved claims and claims not yet proved, and make a distribution.  The figures Mr Farrands has drawn up I accept are indicative  only  but  they  have  been  helpful  in  terms  of  showing  the  likely distributions.

[42]     From the funds drawn down, Mr Horton is to pay the Official Assignee’s costs and the preferential creditors as well as his own costs, leaving $100,000 to make distributions to other creditors pro rata.  Once that is done, I would require him to file a report with the court, confirming that those distributions have been made.  I would  then  make  orders  discharging  Mr  Everett  and  Mrs  Dransfield  from bankruptcy, and I would also make an order approving Mrs Everett’s proposal.  By

proceeding in this manner, the court will satisfy itself that the family’s arrangement with the creditors has been carried out.   That will be more efficient than setting conditions for steps to be taken out and the associated difficulties of monitoring compliance with those conditions.

[43]     Once I am satisfied that distributions have been carried out, the orders for discharge from bankruptcy will be unconditional.

[44]     The case is to be called on 1 April 2015 at 10:00am.    It is anticipated that the distributions will have been completed by then and Mr Horton will have been able to report that the proposals have been carried out.  If, for any reason, those have not been completed then, Mr Farrands should ask for an adjournment to a later

insolvency date when I shall be sitting.

Associate Judge R M Bell