Sandford
[2019] NZHC 456
•15 March 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-2751
[2019] NZHC 456
UNDER the Insolvency Act 2006 IN THE MATTER
of a Proposal by Insolvent to Creditors under Subpart 2 of Part 5 of the Insolvency Act 2006
BETWEEN
JOHN DAVID SANDFORD
Insolvent
Hearing: 14 March 2019 Counsel:
Mr G Bogiatto for the Trustee
Judgment:
15 March 2019
RESERVED JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 15 March 2019 at 10.00am, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors / Counsel:
George Bogiatto, Auckland
SANDFORD [2019] NZHC 456 [15 March 2019]
[1] On 14 December 2018 the Insolvent (Mr Sandford) filed a proposal to his creditors, together with the usual sworn statement of assets, debts and liabilities. The statement of assets and liabilities showed total assets of $3,000 (furniture and personal items only), and unsecured liabilities totalling $566,820.25.
[2] Mr Sandford proposed a payment at the rate of 10 cents in the dollar to his unsecured creditors, with payment to be made within 30 days of an order of the Court approving the proposal.
[3] The proposal stated that there were no debts to be paid in priority to the unsecured debts, and it made provision for the payment of the trustee's fees and expenses.
[4]The proposal contained the following cl 5:
5.This proposal, if accepted by my creditors, shall include satisfaction of any moneys, liabilities, debts and obligations howsoever arising owed by my wife to any of my creditors, if any.
[5] Mr John Buchanan countersigned the proposal signifying his willingness to act as trustee.
[6] A report subsequently filed by Mr Buchanan shows that a creditors' meeting was convened on 16 January 2019. Mr Buchanan sent the appropriate notice to the creditors advising them of the meeting details, and provided them with copies of the proposal, Mr Sandford's statement of assets, debts and liabilities, and proof of debt and voting letter forms. Mr Buchanan reported that the proposal was accepted by the required majority of shareholders. Of the 11 creditors who were entitled to vote on the proposal, Mr Buchanan reported that eight voted in support, two voted against, and one did not cast a vote or abstained. Of the creditors who attended the meeting or submitted voting letters and proofs of debt prior to the meeting, 94.96 per cent in value supported the proposal. Two creditors voted against the proposal, namely ANZ Bank NZ Ltd and Diners Club (NZ) Ltd. The total amount of votes against the proposal represented 5.04 per cent in value of all creditors who attended the meeting and were entitled to vote.
[7] Mr Buchanan considered the proposal advantageous to the creditors, and he recommended accordingly in his report.
[8] Mr Buchanan then filed an application for approval of the proposal pursuant to s 333 of the Insolvency Act 2006 (the Act). A supporting affidavit was filed showing that the trustee's report and application to this Court for approval of the hearing was sent to the creditors, including notice that the application for approval would be called on 14 February 2019.
[9] When the matter was called before me on 14 February 2019 I raised with Mr Bogiatto the question of whether a proposal can legitimately prevent an insolvent's creditors from pursuing other parties (in this case Mr Sandford's wife). I adjourned the matter to 14 March 2019 to allow Mr Bogiatto time to consider the issue.
[10] The trustee came to the view that the proposal containing cl 5 could not stand. On 7 March 2019 Mr Sandford presented an amended form of proposal, signed by him and countersigned by Mr Buchanan as trustee. The amended form of proposal was in the same terms, but omitting the original cl 5.
[11] Filed with the amended proposal was an affidavit by Ms Fleur Martin, a legal secretary employed by Mr Bogiatto. Ms Martin attached consent forms from eight of the creditors who supported the proposal, each stating that they consented to an amendment being made to the proposal by deleting cl 5. Each said that they would support the proposal being approved by the High Court with that amendment.
[12] Mr Bogiatto helpfully filed written submissions on the issue of the validity of the original proposal. He accepted that cl 5 was not properly included in the proposal, noting that s 326 of the Act refers to "A Proposal to creditors for payment or satisfaction of the Insolvent's debts". He also referred to the judgment of Muir J in Public Trust v Silverfern Vineyards Ltd, a case dealing with the validity of a compromise approved by creditors under Part 14 of the Companies Act 1993.1 Mr Bogiatto noted that Muir J held that a company seeking a compromise with its
1 Public Trust v Silverfern Vineyards Ltd [2015] NZHC 3078.
creditors under Part 14 could not make the compromise subject to a condition that the company's guarantors would be protected from any future liability.
[13] Mr Bogiatto submitted that the original form of proposal should be amended under s 333(6) of the Act. Section 333(6) provides:
333 Court must approve proposal
…
(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.
[14] Mr Bogiatto submitted that the inclusion of cl 5 in the original proposal was always a nullity in view of the scheme of proposals under the Act. Its inclusion was of no legal effect, because it did not comply with s 327 as to the prescribed form of a proposal. In the words of s 333(6), the inclusion of the original cl 5 was a "formal error". He asked the Court to approve the amended proposal, which has the support of all of the creditors who voted in favour of the original proposal. He submitted that approval of the amended proposal would not alter the substance of what the insolvent put to his creditors.
Discussion and conclusions
[15] Notwithstanding that the creditors who supported the original proposal support the proposed amendment, the law is clear that the Court is constrained by s 333 of the Act to allow only amendments that are formal or accidental errors or omissions. It must not alter the substance of the proposal.
[16] A situation similar to the present arose in Re Evans, in which Blanchard J dealt with a situation where the proposal to creditors required that they undertake not to pursue their rights against the insolvent's wife in certain circumstances.2 Mrs Evans' debt to the bank involved the same money as was owed to the bank by the insolvent, Mr Evans, and she was jointly and severally liable for that debt. There was only one proposal made, and it was in relation to Mr Evans. Blanchard J noted that, if the Court
2 Re Evans HC Auckland, B2143/92, 26 November 1992.
were to approve the proposal, the bank would have lost its rights against Mrs Evans purely and simply because it lacked voting power in relation to the affairs of her husband. The learned Judge concluded that, even if he had the necessary power of approval, he did not consider it proper to exercise the power. The Court's decision was that it would be necessary for Mr Evans to start again, if he saw fit, and make a proposal in relation to his affairs which did not have the effect of binding his creditors in relation to the affairs of his wife. The proposal was dismissed.
[17] That decision is not dissimilar to that reached by Muir J in the Silverfern Vineyards Ltd case, although Muir J noted in that case the distinction with compromises under Part 14 of the Companies Act 1993, where the procedure does not involve any requirement that Court approval be obtained before the creditors are bound by the compromise approved at the creditors' meeting.
[18] In the end, the issue comes back to the application of r 333(6). Clearly it cannot be said in this case that the inclusion of the original cl 5 was an accidental error or omission. Indeed, the clause was included deliberately, with a view to providing some protection for Mr Sandford's elderly wife.
[19] In Silverfern Vineyards Ltd Muir J concluded that the inclusion of the purported release of the guarantors was sufficient to render the compromise void. Similarly, in Re Evans Blanchard J felt constrained to dismiss the application for approval of the proposal, notwithstanding the existence of a provision in Part 15 of the Insolvency Act 1967 for the Court to amend proposals, which was in similar terms to s 333(6) of the Act.3
[20] It is difficult in those circumstances to conclude that a defect in the original proposal which would have been significant enough if the proposal had been a creditors' compromise under Part 14 of the Companies Act to render the proposal void, could be regarded as a "formal error". That is especially so where the inclusion of the original cl 5 was deliberate, as it was here.
3 Insolvency Act 1967, s 143(6).
[21] I do not think that view is affected by the fact that the proposed amendment is clearly for the benefit of the creditors, and those of them who voted for the proposal have all signalled their support for the amendment. The problem is one of jurisdiction, and in particular the limited power the Court has to amend under s 333(6) of the Act. The unfortunate fact is that the "substance" of the original proposal was that both Mr Sandford and his wife would be released from liability if the proposal were approved, and I do not think that "substance" would remain unaltered if the amendment were allowed.
[22]For those reasons, I am not prepared to allow the amendment to the proposal.
[23] Mr Bogiatto accepts that Mr Sandford's motivation to gain protection for his elderly wife does not fit within the scheme of Sub-part 2 of Part 5 of the Insolvency Act 2006, and in those circumstances I conclude that the provisions of the Sub-part have not been complied with,4 and that it is not expedient to approve the proposal.5
[24] If the proposal cannot be amended, as I have held is the case, there can be no question of my exercising my discretion to approve the proposal in its original form. As I have said, the defect was one of substance, and I do not consider the proposal procedure could properly be used to deprive creditors (who may have voted against the proposal or not voted at all) of any rights they might have against Mrs Sandford.
[25] The application for approval of the proposal is accordingly refused, but, as in Re Evans, without prejudice to Mr Sandford's ability to start again and present a fresh proposal if he wishes to do so. The application was not opposed, so there will be no order for costs.
Associate Judge Smith
4 Insolvency Act 2006, s 333(3)(a).
5 Section 333(3)(c).
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