Patel v Debt Buyers Limited

[2018] NZHC 2015

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2016-404-3261

[2018] NZHC 2015

UNDER

The Insolvency Act 2006, Part 5(2)

IN THE MATTER OF

an application for approval of a proposal by PAUL GOOLD SPACKMAN

BETWEEN

KANU PATEL

Applicant

AND

DEBT BUYERS LIMITED

Respondent

Hearing:

8 August 2018

Appearances:

E J Werry for the Trustee R Palu for the Insolvent

J Wong for Debt Buyers Limited

Judgment:

8 August 2018

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

Mike Garnham, Wellington, for the Insolvent

Ong & Partners (Adeline Ong), Auckland, for the Trustee Debt Buyers (Joshua Wong), Albany, Auckland

Copy for:
E J Werry, Auckland, for the Trustee

PATEL (SPACKMAN) v DEBT BUYERS LIMITED [2018] NZHC 2015 [8 August 2018]

[1]    There is an application to approve a proposal by Mr Spackman under Part 5(2) of the Insolvency Act 2006. Mr Spackman first lodged his proposal in December 2016. The matter has taken a long time. There were delays during 2017; there were also meetings. A final meeting took place on 10 November 2017. The trustee, Mr Patel, relies on the voting at that meeting for his application to approve Mr Spackman's proposal. He filed his application on 30 April 2018.

[2]    Originally the application was to be heard on 23 July 2018 but the parties were not ready and the case was adjourned. The parties filed a joint memorandum yesterday asking for an adjournment on the ground that there were settlement discussions. I indicated that the application should proceed. I was concerned that this matter had gone on for much longer than is normal in cases under Part 5(2) of the Insolvency Act. It was important that there be a decision as to the proposal.

[3]    There is a curious feature about the proposal. Mr Spackman was accepted as a creditor on his proposal and as entitled to vote in support of it. His was the deciding vote on whether his proposal was accepted by creditors.

[4]    The proposed trustee, Mr Patel, made a report on 30 April 2018.   He lists   Mr Spackman's assets, which are very modest. He found that the creditors whom he had accepted and who had voted on the proposal came to $719,444.52, made up as follows:

Bluestone Mortgages Limited

$225,739.19

Midlands Mortgage Trust

$9,081.60

First      Mortgage      Trust/Paul Spackman

Debt Buyers Limited

$390,774.40

$93,849.33

Mr Patel's report also notes the Westpac Bank as a creditor. The bank has security for one debt and is also owed a credit card debt for a very small amount. Westpac did not claim as a creditor for Mr Spackman's proposal.

[5]    For a proposal to be accepted the voting requirements under s 331(3) of the Insolvency Act are:

The resolution accepting the proposal must be decided by a majority in number and three-quarters in value of the creditors who:

(a)Vote; and

(b)Are personally present or are represented at the meeting by a person specified in s 332 or have voted by postal vote.

[6]    Debt Buyers Limited opposed Mr Spackman's proposal. Bluestone Mortgages Limited, Midlands Mortgage Trust and Mr Spackman voted in favour of the proposal. Mr Patel held that those who voted in favour of the proposal were 86.9 percent of the value of the debts, and Debt Buyers Limited, the only creditor opposing, was 13.03 percent. If the debt to First Mortgage Trust/Paul Spackman is taken out, the voting results are different. In that case, Debt Buyers Limited's debt comes to some 28.5 percent of the total debts and the 75 percent requirement cannot be satisfied.

[7]    Mr Spackman's insolvency goes back many years. He carried out a development on the Kapiti coast. That failed with the global financial crisis and the drop in property values. He had carried out the development with funds provided by various financiers. Those financiers were not fully paid, as can be seen from the creditors claiming in his proposal. While finance was advanced to his company, Pier Developments Limited, he and his partner gave guarantees. She also made a proposal under Part 5(2) of the Insolvency Act. It was approved.

[8]    Mr Spackman sought to square matters with his creditors before making his formal proposal. In 2015, he made an arrangement with Bluestone Mortgages Limited under which he would make  monthly  payments  for  three  years,  beginning  August 2015. I was advised from the bar that he did not begin making payments until September 2015, but I am confident that he will make the last payment. He has kept all payments up. Those payments, which total about $10,000, will be accepted in full and final settlement of the debt to Bluestone Mortgages Limited. That debt has been kept alive to preserve voting rights for the full value of the debt, $225,739.19.

[9]    A  similar   arrangement   was   made   with   Midlands   Mortgage   Trust. Mr Spackman paid it $250.00 in full settlement, but the debt would be written off only if the court approved Mr Spackman's proposal.

[10]   Debt Buyers Limited is the assignee of a debt to another creditor. It bought up a book of debts which it is enforcing against various guarantors.

[11]   The arrangement that Mr Spackman made with First Mortgage Trust is important. First Mortgage Trust is also referred to as FM Custodians Limited. In October 2016, FM Custodians Limited and Mr Spackman made a deed. The recitals record that FM Custodians Limited had made a loan to Pier Developments Limited and that Mr Spackman and his former partner had guaranteed the loan. It also records that in September 2016 the amount outstanding under the loan was $390,774.40. Recital G says:

G.       In September 2016, the Assignor accepted a lump sum payment of

$10,000 (the purchase sum) in consideration of the assignment of the debt and in full and final settlement of the Guarantor's obligations to the Assignor.

The deed goes on to provide for the assignment of the debt to Mr Spackman in consideration of the purchase sum, the $10,000.

[12]   Before this deed was entered into, FM Custodians Limited was a creditor of Pier Developments Limited and of Mr Spackman. It was a creditor of Pier Developments Limited under the loan agreement but that debt is illusory because Pier Developments Limited has been removed from the Companies Register. There is no suggestion that there is any value in pursuing that debt.   It was also a creditor of    Mr Spackman because it could look to him for payment under his guarantee.

[13]   After the deed was entered into Mr Spackman no longer owed FM Custodians Limited any money because the payment of $10,000 was accepted in full and final settlement of his liability to that company. The debt was extinguished and there was no longer a  creditor/debtor  relationship  between  FM  Custodians  Limited  and  Mr Spackman. What was assigned to Mr Spackman was FM Custodians Limited's right to claim payment from Pier Developments Limited. As I say, that was an illusory

right because there was no value in the debt payable by Pier Developments Limited, given that the debtor no longer existed.

[14]   Mr Spackman contends that because of this deed he was entitled to claim as a creditor on his own proposal and that his right to claim also carried voting rights. Mr Werry accepted that there could be no voting rights unless the voter was a creditor of the insolvent. I am unable to accept that Mr Spackman became a creditor entitled to vote on his proposal by virtue of the deed between himself and FM Custodians Limited. Under the deed his indebtedness to FM Custodians Limited was extinguished. FM Custodians Limited could not transfer to Mr Spackman its right to be paid by Mr Spackman. While a debt is capable of transfer, you cannot transfer it to the debtor, because as soon as you transfer the debt to the debtor the indebtedness is extinguished. At least two people are required for a creditor/debtor relationship. When the debtor and the creditor are one person, the debt obligation disappears.

[15]   That happened here. It meant that First Mortgage Trust was no longer a creditor of Mr Spackman and had no voting rights. Mr Spackman had no voting rights for the debt to FM Custodians Limited which had been extinguished. Accordingly, in my judgment, the trustee erred in accepting the claim by Mr Spackman to be a creditor for his proposal. He should not have been allowed to vote. That means that the requisite majority was not reached under s 331(3) of the Insolvency Act. Because of that, the proposal did not meet the requirements for approval by the Court.

[16]Accordingly, I dismiss the application for approval of the proposal.

...............................................

Associate Judge R M Bell