Sheppard v Blanchett

[2012] NZHC 789

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-7505 [2012] NZHC 789

UNDER  Part 5 of the Insolvency Act 2006

IN THE MATTER OF     a Proposal made by David Andrew Tauber

BETWEEN  BRUCE SHEPPARD Applicant

ANDDAVID MURRAY BLANCHETT AND COLIN MCCLOY AS LIQUIDATORS OF A.P.G. HOLDINGS LIMITED (IN LIQUIDATION)

Respondents

Hearing:         23 April 2012

Appearances: M J Whale for Applicant

M D Branch and S J Rawcliffe for Respondents

Judgment:      23 April 2012

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

Lowndes Associates (M J Whale) P O Box 7311 Auckland 1141, for Applicant

Email:   [email protected]

Harkness Henry (M D Branch and S J Rawcliffe), Private Bag 3077 Hamilton 3240 for Respondents

Email:   [email protected] / [email protected]

SHEPPARD V BLANCHETT AND McCLOY AS LIQUIDATORS OF A.P.G. HOLDINGS LIMITED (IN LIQUIDATION) HC AK CIV-2011-404-7505 [23 April 2012]

[1]      This  is  an  application  under  s  333  of  the  Insolvency Act  2006  for  the approval by the court of a proposal that has been accepted by the required majorities of creditors under s 331 of the Act.   The insolvent is David Andrew Tauber.   The liquidators of A P G Holdings Ltd (In Liquidation) are the only creditors to oppose the application.

[2]      The grounds in the notice of opposition are that the proposal is not reasonable and is not calculated to benefit the general body of creditors, and that there has not been  compliance  with  subpart  2  of  Part  5  of  the  Insolvency  Act,  specifically s 327(2).    In  submissions,  the  liquidators  also  relied  on  the  third  ground  of opposition under s 333 that it is not expedient that the proposal be approved.

[3]      At  the  start  of  the  hearing,  there  was  also  an  appearance  by  Dominion Finance (In Receivership and In Liquidation).   Dominion Finance is a judgment creditor of Mr Tauber.   Dominion Finance had brought a bankruptcy application against Mr Tauber, relying on a judgment of this court.  The bankruptcy application was adjourned until today.   This morning Ms Mansell for Dominion Finance said that it wished to withdraw the application for adjudication in bankruptcy, whatever the outcome of the application for approval of the proposal.   That application has accordingly been withdrawn with leave.

Mr Tauber’s insolvency and his proposal

[4]      Mr Tauber’s statement of affairs shows assets worth $10,512 made up of

$3000 in a bank account, $7000 in a KiwiSaver account, and some sporting equipment which he values at $500.   In his statement of assets, he also lists shareholdings in a number of companies.  He says that the shares in the companies have no value.  Some of the companies are corporate trustees and in many cases he is a discretionary beneficiary of the trusts.  Some of the companies have assets – Score Trustees Ltd, Honk Marine Ltd, Honk Farms Ltd, TG Nominees Ltd, Education Holdings (2008) Ltd and Apartments Ltd.  The assets of those companies are subject to securities in favour of various secured creditors:   Westpac New Zealand, Hong

Kong and Shanghai Bank, ASB Bank, and Asia Syndicate Finance Ltd.  Mr Tauber does not believe that there will be any surplus after the securities have been realised. He does not propose that any surplus will be made available for creditors.  Strictly speaking, he cannot be compelled to make over any surplus because the assets of the companies are not within his ownership.

[5]      His statement of liabilities shows creditors amounting to $100,449,632.  He has included in the list of creditors the liquidators of A P G Holdings Ltd  as creditors for the sum of $13,033,067.  That is the amount that the liquidators are seeking in a proceeding they have taken against him.  However, he is defending that proceeding and he disputes his liability under the claim made by the liquidators.  He does not dispute his liability for the remaining amounts.  Using the figures in his statement of liabilities, the residual amount is $87,416,565.  But in the course of the hearing today counsel updated the figures.

[6]      The larger part of Mr Tauber’s debts are for guarantees he gave to support borrowings by companies in which trusts associated with him had an interest. Along with his statement of assets and statement of liabilities a schedule setting out the names and addresses of creditors and a schedule of securities.

[7]      Mr Tauber  has  also  given  a  personal  statement  which  elaborates  on  the information about his affairs.   He says that he currently lives in an apartment at

8/97 Herne Bay Road, Auckland, and he works from offices at the Westpark Marina. He also spends time in Gladstone, Queensland, Australia.  He says that his current earnings comprise $120,000 from Coastal Dredging and Construction Ltd for Auckland work, and nearly $60,000 per annum from Coastal Dredging and Construction Pty Ltd for work in Queensland.

[8]      As to his current business interests, he says that his most significant business is the marina and dredging enterprise which is ultimately owned by the Honk Marine Trust.    Marine Trustees  Ltd  is  a  trustee  of  that  trust  and  he  is  a  discretionary beneficiary of that trust.  He is a director of companies owned by the Honk Marine Trust.  He says that the business was founded on zero equity.  He says that it has grown into a significant business but has substantial liabilities.   He says that the

business has been unable to pay a dividend while pursing an aggressive growth strategy.  He draws a working salary from that business.

[9]      He also says that he works in a farm business owned by the Cows Trust. Cows Ltd is the trustee of that trust.  He says he is a discretionary beneficiary of that trust.  He does not draw a salary as the business is still developing.  He says it has incurred substantial losses and has significant liabilities.  He is not owed money by the business.

[10]     It  also  appears  that  he  was  involved  in  a  number  of  investments  of commercial property and similar kinds of investments which have failed.  It was a result of the failure of those companies and those investments that he has very substantial liabilities.  Mr Tauber had been a partner in Ernst and Young, chartered accountants, until 2003.  His entrepreneurial activities date from his departure from Ernest and Young in 2003.

[11]     In his first affidavit, he says that he had an interest in a variety of other business investments, including property, but that he did not generally own any property personally.  He held shares in his own name or through a nominee for tax reasons.    He says that standard professional advice from legal or accounting firms always recommended prudent ownership structures to protect individuals from liability.   He says that this strategy is not “cutting edge”.   He goes on to say that generally all investments were owned through trusts, in most of which he is one of a number of discretionary beneficiaries.  Different investments were made by different trusts.  This was so that failure of one investment would not mean failure of other investments.    He said again that this was a standard approach rather than “cutting edge”.

[12]     What he does not say is that when he gave guarantees he himself carried responsibility for the failures of those investments.

[13]     In his proposal, Mr Tauber has put his creditors into groups.  I am working from the schedule which Ms Rawcliffe has prepared.   The Group 1 creditors are

Dominion  Finance  Group   Ltd   ($5,979,659)  and  Heartland  Building  Society

($111,116), a total of $6,090,775.

[14]     There are six Group 2 creditors totalling $18,127.

[15]     The Group 3 creditors are Westpac New Zealand Ltd ($22,350,000),  Hong Kong & Shanghai Bank ($7,905,677),  Asia Syndicate Finance Ltd ($26,971,692), Elite  Corporation  ($13,404,483)  and  ASB  Bank  Ltd  ($2,317,343).    They  total

$72,949,195.

[16]     Group 4 creditors are TG Nominees Ltd ($4,820,756) and Remuera Ridge Trust ($3,427,634) totalling $8,248,390.  The liquidators in APG Holdings Ltd are not included in any group.

[17]     I asked counsel to calculate how much of these liabilities are unsecured.  It is accepted that that calculation does involve an element of estimation and guesswork. Mr Tauber provided figures in his proposal under the Schedule of Securities (Schedule D).  For current purposes the parties have adopted those.  The unsecured part of these creditors amounts to $45,233,494. The trustee valued the claim by APG Holdings Ltd liquidators at $8,631,746.  When that is added on, the total unsecured creditors come to $53,865,240 (estimated).

[18]     Mr Tauber’s original proposal was:

(a)      To make an immediate payment of $200,000 to the Group1  creditors, and then to pay a further $50,000 over the next four years to be distributed pro rata amongst the Group 1 creditors.

(b)He would pay the Group 2 creditors 10 per cent of their claims within two days of the proposal being approved.

(c)      The Group 3 creditors (secured creditors) would not participate in any distributions.   In particular secured creditors who were to incur a shortfall would not receive anything in respect of their shortfall.  His schedule identified the creditors who would suffer potential shortfalls

as  Hong  Kong  &  Shanghai  Banking  Corporation  in  the  sum  of

$500,000,  and  the  Asian  Syndicate  Finance  Ltd  in  the  sum  of

$15 million.

(d)      The Group 4 creditors are entities with which he is associated with.

They would be paid nothing.

(e)      He would also meet the costs of the trustee.   Mr Bruce Sheppard, chartered accountant, of Gilligan & Sheppard is to be trustee.

(f)      He  also  proposed  to  co-operate  with  the  secured  creditors  in  the realisation of their securities.  That would be up until 23 April 2016 or whenever all the securities are realised, whichever was sooner.

[19]     The proposal was to be in full and final settlement of all claims except for the claims made by the liquidators of APG Holdings Ltd.   Clause 25 of the proposal provided that if he did not perform an obligation he is required to perform under the proposal,   and that default was for more than 10 working days after the trustee notified him of it, the trustee would have to call a meeting of creditors.  He would be given no notice of the meeting or be entitled to speak. At that meeting creditors were entitled to decide whether or not to cancel the proposal and the proposal had to be approved by a majority number of 75 per cent in value in the same way as was required under s 331 of the Insolvency Act for the initial proposal.

[20]     There was a meeting of creditors on 2 December 2011.  Mr Tauber asked for an adjournment to enable him to continue negotiations with two of his creditors who did not find his proposal in its current form acceptable.  The matter was adjourned to

8  December  2011.    Mr  Tauber  amended  his  proposal.  The  meeting  was  then adjourned to 9 December.  An amended proposal was put which made it clear that there was to be no settlement of the claim by the liquidators of APG Holdings Ltd and they were to remain free to continue their proceedings against him.

[21]     Under the amended proposal the initial payment to the Group 1 creditors was increased from $200,000 to $250,000 and the further payments to those creditors

were increased to $83,334 per annum to be made over the next three years.   The effect  was  that  the  total  payments  to  the  Group  1  creditors  would  increase  to

$500,000.  A provision in the original proposal for Honk Marine Ltd to sign a deed in favour of those creditors and the trustee was deleted.  The source of the funds for the $250,000 would come from the proceeds of sale of a property at 715 Mt Albert Road, Mt Albert, Auckland owned by TG Nominees Ltd.  I was told that that would involve the support of Westpac New Zealand Ltd to allow that funding to be made available.

[22]     At the adjourned meeting on 9 December 2011, two creditors voted against amending the proposal but there was sufficient voting in terms of value and number to satisfy the requirements as to majorities under s 331.  Those voting against were the liquidators of APG Holdings Ltd and the Hong Kong & Shanghai Bank.

The liquidators’ claim

[23]     It is now necessary to deal with the claim made by the liquidators of APG Holdings Ltd.  The liquidators are suing Mr Tauber in this court.[1]   They allege that Mr Tauber was either a director of APG Holdings Ltd or he was a deemed director under s 126(1) of the Companies Act 1993.  The statement of claim alleges various breaches of duty owed by Mr Tauber to the company under a number of sections in the Companies Act.  There was also said to be a breach of the Financial Reporting Act and a breach of fiduciary duty.  Mr Tauber has filed a statement of defence.  He is actively defending the proceeding.

[1] CIV-2010-404-1288.

[24]     APG Holdings Ltd was originally known as Capital Events Ltd.   There was a holding company called Capital Events Holdings Limited. Mr Tauber’s investment was through another company, Basin Ridge Management Ltd, which held shares in Capital  Events  Holdings  Ltd,  which  in  turn  held  shares  in  Capital  Events  Ltd. Mr Tauber  was  a  director  of  Basin  Ridge  Management  Ltd  and  Capital  Events Holdings Ltd.  Basin Ridge Management Ltd has since gone into liquidation.  The records in the Companies Office do not show him as a director of Capital Events

Ltd/ APG Holdings Ltd.  Mr Tauber says that he was not involved in the day-to-day

management of Capital Events Ltd.   Capital Events Ltd was originally incorporated in November 1999 and was part of a number of companies operating under the umbrella of “Capital Events”.   There were associated companies in the group, including Capital Events Auckland Ltd, Capital Events Hire Ltd, Capital Events Holdings Ltd and Capital Events Rugby Ltd.  The two individuals who had invested in the Capital Events group of companies were Mr Tauber and a Mr Terry Wilson. My impression from reading the affidavits is that, whatever Mr Tauber’s role in the companies  was,  Mr  Terry  Wilson  played  a  more  active  and  dominant  part. Mr Wilson’s investments seem to have been through other companies, BFN Ltd, KAP Nominees Ltd and KAP Nominees (2) Ltd. Other companies in the Capital Events group were BFN Ltd, AIHP Ltd, Stadium Nominees Ltd, Corporate Host Event Management Ltd and Corporate Host Events Ltd.   BFN Ltd was known as “Jokers Wild Ltd” and AIHP Ltd was formerly known as “The Big Tent Company Ltd”.     Some of these companies provided hospitality services for sporting and cultural events, and had business dealings with the New Zealand Rugby Union, New Zealand International Sevens, the Auckland Rugby Union, the Wellington Rugby Union, the Waikato Rugby Union, the Canterbury Rugby Union, Counties Manukau Rugby Union, Air New Zealand Fashion Week, Christchurch New Zealand Trotting Cup, Vodafone Warriors, Ellerslie Racecourse, the Auckland Cup, the Melbourne Cup and Cirque du Soliel.  Jokers Wild Ltd made investments in pubs and bars in the Auckland area.

[25]     The liquidators say that Mr Tauber and Mr Wilson began their investments in Capital  Events  Ltd  in  March  2004.    They  say  that  at  the  time  of  that  initial investment, Capital Events Ltd had an equity of $454,453.  The liquidators say that after the shares had passed into the control of the Tauber and Wilson entities, some

$2 million was paid out to associates and related entities,  leaving the company insolvent.

[26]     The liquidators have put in evidence documents which they say Mr Tauber signed as director for Capital Events Ltd.   There is also some evidence from a company accountant and from Mr Keshvara, a former director and Mr Wilson’s father-in-law, which point to Mr Tauber’s involvement with the company.  There is evidence suggesting that a Mr Morgan, who was the director in the period leading up

to liquidation was no more than a “patsy” director.  On the other hand, there is also evidence  from  witnesses  for  Mr Tauber  showing that  his  involvement  with  the company was simply as a passive investor, and that he was not involved in the management of the company.  When the case goes to trial, Mr Tauber’s case will be along the lines that while he may have been a director of a holding company, that is not enough to make him a de facto director of a subsidiary company.

[27]     Mr Tauber says that he regards the chances of the liquidators’ succeeding against him as remote.  My view is that there is evidence going both ways.  It is not possible for this application to make a final determination as to the merits of the liquidators’ claim against Mr Tauber.  I record that the liquidators do have a properly arguable case against Mr Tauber.   But equally, I also record that Mr Tauber has a properly arguable defence to their claim.  I express some wariness about accepting Mr Tauber’s assurances that his liability is remote.   He is not a good judge of litigation risk.    He defended the claim against him by Dominion Finance unsuccessfully in a three day hearing.  He lodged an appeal, but Mr Whale tells me that that appeal has been abandoned.   He also took unsuccessful judicial review proceedings against Inland Revenue in connection with the Inland Revenue’s execution of a search warrant when they were investigating his tax affairs.

[28]     If  this  were  a  company  liquidation  I  would  classify  the  liquidators  as prospective  creditors  under  s  288(5)  of  the  Companies Act  –  they  have  a  real prospect of being creditors.[2]   A prospective creditor is different from a contingent creditor who is owed an existing obligation which may mature into a present liability on the happening of some future event or at some future date.  Many of Mr Tauber’s creditors were contingent creditors, claiming under guarantees, and it is still not clear whether some of those principal debtors are not good for their liabilities.

[2] McHugh v Austral Group Management Ltd (1993) 6 NZCLC 68,300, per Holland J.

[29]     As prospective creditors of Mr Tauber the liquidators have claims which would be provable in his bankruptcy under s 232 of the Insolvency Act 2006.  They also count as creditors under s 325 of the Insolvency Act: as the debt is provable in his bankruptcy, their claim is also a debt for the purpose of subpart 2 of Part 5 of the

Insolvency Act.

[30]     Because Mr Tauber’s liability to their claim has not been established it is not the case that the liquidators’ claim should be accepted at its face value.  The trustee discounted the amount of the debt apparently on account of the uncertainty of the claim. That is why he allowed the sum of $8,631,746 for voting purposes.  For this judgment it is not necessary for me to put a value on the amount of the liquidators’ claim.   It is simply sufficient, for this judgment, to note that the liquidators have made a claim against Mr Tauber, it is a bona fide claim and it is also bona fide disputed.  Regulation 32 of the Insolvency Regulations allows for the decision of a trustee fixing the value of a claim to be appealed to this court.  There has not been an appeal against the decision of the trustee fixing the value of the liquidators’ claim at the sum of $8,631,746  for voting purposes.

The place of proposals in bankruptcy law

[31]     Before I consider the merits of the proposal against s 333 of the Insolvency Act, it might be useful to say something about bankruptcy law in general and the place of proposals under subpart 2 of Part 5 of the Act.

[32]     Section 8 of the Insolvency Act makes it clear that a proposal under Part 5 is an alternative to bankruptcy.   Section 8 does not say anything that is not stated expressly and in more detail elsewhere in the Act.  It says:

Alternatives to bankruptcy

(1)      A debtor who is insolvent may have an alternative to bankruptcy, such as—

(a)      making a proposal to creditors (see subpart 2 of Part 5); or

(b)      paying creditors in instalments under a summary instalment order (see subpart 3 of Part 5); or

(c)      entry to the no asset procedure (see subpart 4 of Part 5).

(2)      This  section  is  intended  only  as  a  guide  to  the  alternatives  to bankruptcy.

[33]     While the section is simply a guide, it serves as a useful reminder that when bankruptcy is considered, alternatives may be considered, including proposals under

Part 5.   A proposal allows an insolvent person to negotiate with his creditors an arrangement which addresses his insolvency.  It follows these stages:

(a)       when  a  proposal  is  put  forward  there is  proper disclosure by the insolvent to his creditors as to his affairs;

(b)      a meeting is held where creditors are given an opportunity to vote.

There is only acceptance of the proposal when the requisite majority is achieved; and

(c)       the court must approve the proposal. The proposal is then put into effect.

[34]     Bankruptcy is also a response to insolvency.   In my view, there are five elements that may be found in bankruptcy.   These five elements are not found in every case but in the wide range of situations in which bankruptcy is required, these elements do recur.

[35]     The first element is that there is administration of the debtor’s estate in the interests of creditors.   That administration of the bankrupt’s estate takes place by vesting the assets of the bankrupt in the Official Assignee, who has powers which to realise the assets of the insolvent and distribute them to creditors, and associated powers to ensure that the bankrupt gives full co-operation and information available. The Official Assignee is also given the power to set aside insolvent transactions.

[36]     The second element is what I call ‘accountability’.   The purpose of this element is to ensure that when a person incurs liabilities, in particular when he obtains credit, he is required to answer for a failure to pay.  We can see this element of the law operating in a decision of Master Kennedy-Grant in Re Coll ex parte

Consumer Finance Ltd where he said: [3]

[3] Re Coll ex parte Consumer Finance Ltd HC Rotorua, B69/97, 18 September 1997 at 7.

He has incurred those liabilities by giving guarantees.  He has not honoured his guarantees.  He is not in a position to honour his guarantees.   The

guaranteeing of financial advances to companies by directors of those companies is standard practice in New Zealand.  It is an almost invariable requirement of lenders.   Without the additional security provided by such guarantees, lenders would very often not make advances.  The directors of companies  obtain  the  benefit  for  their  companies  of  advances  made  in reliance on their guarantees.   It would not, in my view, be conducive to commercial morality - the proper consideration by directors of whether they can give guarantees and the proper construction by directions of whether, once having given guarantees, they should honour them - if I were to dismiss the  petition.  I am satisfied  that  the  proper  order  in  this  case  is  one  of adjudication.

[37]     Master Kennedy-Grant also spoke to similar effect in re D’Esposito ex parte

Westpac Banking Corporation where he said: [4]

I  have  had  occasion  to  comment  before  on  the  fact  that  the  giving  of personal guarantees is an integral part of the financing of business.  Failure to  honour  personal  guarantees  can  have  serious  consequences  for  the creditors to whom they have been given.  The general expectation amongst the business community and on the part of those who finance business must be that guarantees, if given, will be able to be honoured, that the guarantors have assets against which the persons to whom the guarantees are given may proceed if the guarantees are not honoured.

[4] re D’Esposito ex parte Westpac Banking Corporation HC Napier, B16/98, 30 June 1998 at [19].

[38]   The point being made in these passages is that when debtors assume responsibilities   and   are   not   able   to   meet   those   liabilities,   then   there   are consequences.   These decisions show that adjudication in bankruptcy can be an appropriate response when there is a lack of sufficient accountability.

[39]     The third element is that bankruptcy can be a punishment for misconduct.  It is unfashionable to label bankruptcy as having a punitive element, and judges today tend  to  flinch  from  that  mainly  because  there  is  a  residual  memory  of  the Marshallsea Prison when the law provided for the detention of bankrupts who could not honour their creditors.   Nevertheless it is a fact of life that bankruptcy has a punitive element.  There is a stigma that attaches to bankruptcy.  A bankrupt who incurs disabilities is not able to incur credit except to a very limited extent.  He is not allowed to carry on business without the consent of the Official Assignee.   He is prohibited from holding office as a director.  He is prohibited from travelling out of New Zealand without the consent of the Official Assignee.   Bankruptcy can be appropriate in its punitive sense as a way of showing society’s condemnation of the

conduct of a debtor who has incurred liabilities.

[40]     The decision of Tompkins J in Re Trott and Joy,[5]  gives an indication of the circumstances in which bankruptcy can be allowed to act punitively. That was a case of  an  application  to  approve  a  proposal  under  the  Insolvency Act  1967  on  an application for adjudication.   What Tompkins J said there as grounds for refusing consent to approve a proposal, also goes to the punitive element of bankruptcy.  He said:[6]

[5] Re Trott and Joy  HC Auckland , B1471/88 and B1472/88, 14 April 1989.

[6] Ibid, at 28 and 29.

An  insolvent’s  misconduct  may  be  so  irresponsible  and  its  effects  on creditors or others so devastating that a court may conclude that it is in the public interest that the person responsible should not escape the stigma of bankruptcy.  Rather, it may be in the public interest that such a person should be marked as a bankrupt and further, that he should suffer the various disqualifications that go with bankruptcy.  Those disqualifications are after all designed to protect the unsuspecting community from the ravages of irresponsible financial conduct.   And the stigma of bankruptcy itself is a deterrent to others from behaving in a like manner.

...

But for misconduct to amount to a reason why it is not expedient that the proposal should be approved, it must be conduct so serious and irresponsible as to make it, for the reasons I have referred to, contrary to the public interest for the proposal to proceed.  It would include evidence of the deliberate and wilful squandering of assets, of excessively extravagant living, or what could fairly be described as conduct of a gross character.

[41]     That passage shows that there are times when an adjudication can be viewed as applying a deterrent policy to punish someone who has run up debts in circumstances amounting to misconduct.  The need to punish may be a reason not to allow alternatives to bankruptcy.

[42]     The fourth element also has a public interest aspect: to protect the community from a debtor who runs up credit without being able to honour it.

[43]     The fifth element in bankruptcy centres around the role of bankruptcy law in providing for the discharge of the bankrupt when he is released from the debts.  He is free to re-enter the commercial community and to make a fresh start in his life.

[44]     Those five elements come into consideration at various stages in bankruptcy law.  They are factors which the courts weigh up when considering whether to make

an order for adjudication in the discretion under ss 36 and 37 of the Insolvency Act. These matters also come into play on discharge applications, either when a bankrupt applies for an early discharge,[7]  or when the Official Assignee or a creditor opposes the discharge after the lapse of the normal three year period.[8]    These matters can come into consideration when a court considers whether to approve a proposal under

s 333 of the Insolvency Act, as the dictum from Tompkins J in Re Trott illustrates.

[7] Insolvency Act 2006, s 294.

[8] Ibid, s 292

[45]     When considering proposals against these five elements of bankruptcy, it can be seen that the proposals have certain advantages but also some disadvantages.  The advantages of a proposal are that it allows for consensual administration of the affairs of the bankrupt, and it allows the debtor to retain his autonomy.  Proposals invariably allow the debtor to remain in business.  Proposals usually involve more efficient administration of the affairs of the bankrupt and there is usually a provision of the proposal that the debtor will carry the costs of administering the proposal. That can result in more efficient arrangements than those that follow a formal adjudication in bankruptcy.   Under bankruptcy, release and re-integration into the

community is usually delayed unless there is a prompt annulment[9]  or the bankrupt

succeeds in an application for early discharge.  On the other hand, under a proposal the  bankrupt  remains  free  to  operate  in  the  community,  is  not  debarred  from incurring credit and is not subject to any of the other disabilities of bankruptcy.

[9] Ibid, s 309.

[46]     As to disadvantages, a proposal may not address some of the other elements of bankruptcy.  A proposal is not a useful mechanism for protecting the public from the insolvent recklessly incurring more credit.   A proposal does not involve any element of punishment of the insolvent.   It can be an open question whether a proposal does reflect due accountability on the part of the insolvent.

[47]     When a proposal comes before the court for approval, the court checks to see whether the procedures  have been followed.   It checks whether the proposal is reasonable as between creditors and the insolvent, but also amongst the creditors themselves.  And it also checks whether the public interest factors are triggered as

well.

This proposal - compliance

[48]     The liquidators first attack the proposal for inadequate disclosure under s

327.  It is necessary to set out the standards that are required for a proposal under that section.

[49]     Rule 24.42 of the High Court Rules provides that a proposal must be in form B9 and it must be accompanied by a statement of affairs and affidavit as in Form B10.  Form B10 sets out the matters that must be addressed in a statement of affairs and affidavit by an insolvent.   The form provides that an insolvent is required to show his assets, debts and liabilities.  It is quite clear that it is directed at assets in which an insolvent has a beneficial interest.  It requires an insolvent to disclose what might be made available for creditors if assets were realised.  However, it does not require a disclosure of assets, or a thorough disclosure of affairs, in the same way that  would  be required  if  the  insolvent  were adjudicated bankrupt  and  he were required to provide all the information which the Official Assignee would require on

an adjudication.[10]    The debts and liabilities to be disclosed for a proposal are those

which are existing and due, although it could be prudent also to provide for anticipated liabilities - which Mr Tauber has done in this case.

[10] Ibid, ss 139 and 142-146.

[50]     The liquidators have taken Mr Tauber to task for alleged inadequacies in his statement of affairs.  They have queried his liability to Asian Syndicate Finance Ltd, because the information about that creditor is sparse.  They have queried the Group 4 creditors, saying there is a lack of information about those creditors.   They are sceptical because these creditors will receive nothing yet have voted in favour of the proposal.  They have queried Mr Tauber’s disclosure that his salary will be $180,000 per annum, but he is only going to contribute $50,000 each year to his creditors. They query his estimate of the tax he would be required to pay.   They say that there is no information as to his directorships and shareholdings in various companies, and that there has been no disclosure of dividend payments from any of the entities involved  with  Mr  Tauber.    They  also  query  his  involvement  in  Yogi  Trustee Company Ltd and Eclipse Development Ltd.  Without going through these matters

and  various  other  queries,  my  view  is  that  Mr  Tauber  has  generally  met  the

requirements of r 24.42 and s 327.  There are areas where matters of detail have been omitted, but I do not regard those omissions as prejudicial to either the creditors’ consideration of the proposal or my consideration of his proposal.  I do not accept the complaint of non-compliance under s 327.  The liquidators do not complain of non-compliance in any other aspect.

Are the terms of the proposal not reasonable or not calculated to benefit the general body of creditors?

[51]     This requires a consideration of justice or reasonableness as between the debtor and creditors and also amongst the creditors themselves.  The aspect that I am concerned with here is the exclusion of the liquidators from the proposal.

[52]     Mr Tauber’s  proposal  is  that  the liquidators  are not  to  participate in  his proposal.  He says that he is under no liability to them.  He therefore does not see why he should provide for them in his proposal.  He says that this proposal favours them because their claim is not discharged under this proposal and they remain free to sue him and to enforce any judgment they might obtain against him.  In his words, they will have a “free run” at him.

[53]     The liquidators  are in  a minority position  here.   They voted  against  the proposal  and  they  were  out-voted  by  the  other  creditors.    Heath  and  Whale Insolvency  Law   in   New   Zealand   deals   with   this   claim   in   relation   to   the reasonableness ground as follows:[11]

[11] Heath and Whale Insolvency Law in New Zealand (looseleaf ed, LexisNexis) at 10.28(c).

It is suggested that the ground can be further broken down into two related issues.  The first issue looks at the issue of minority oppression; that is, are dissenting creditors suffering unfair prejudice as a result of the vote by the majority?   The second issue considers whether, in the view of the court, the compromise is one that the creditors should enter into.

Early  English  authority  provides  support  for  this  demarcation  of  issues. Thus in Re Reed and Bowen ex parte Reid and Bowen, Lord Esher MR stated:[12]

[12] Re Reed and Bowen (1886) LR 17 QBD 244 (Companies Act) at 251.

...this Act was passed... for the purpose of protecting the creditors  against  their  own  recklessness;  [and]  for  the purpose of preventing a majority of creditors from dealing

thus recklessly, not only with their own property but with that of the minority...

The first issue resembles the ‘unfair prejudice’ test found in most company régimes.   The usual process adopted by the courts is to apply a two-stage test.  The first stage is to ask whether a creditor is prejudiced by the terms of the proposal.  The second stage is to balance that creditor’s interest against those of the other creditors, and the debtor. The interests are weighed in accordance with the policy of the Insolvency Act 2006, in particular regard would be had to whether the creditor’s normal right to a pro-rata share of the debtor’s estate is taken away.

[54]     In this case, there is uncertainty what the outcome of the liquidators’ claim against Mr Tauber will be.  In my judgment, that uncertainty has to be considered and catered for.   It must surely be possible to set up some arrangement which recognises that the liability of Mr Tauber to the liquidators is not established, and which  would  allow  the  liquidators  to  share  in  the  distribution  if  liability  is established, but would allow funds to be made available to other creditors if the liquidators fail.

[55]     The proposal is, in my view, defective in saying that the liquidators ought to have nothing at this stage.  Mr Tauber’s claim is that the liquidators ultimately would have a “free run” at him later on.  I regard that as spurious.  It is quite clear that Mr Tauber arranges his affairs very carefully.  He has arranged his affairs so that he has minimal assets available for creditors.  He has conducted his affairs consistently in the past on that basis.  I see no reason not to attribute the same intention to him in the future.  It is clear that if the liquidators obtain judgment against Mr Tauber they will find the cupboard bare and there will not be anything available for them.   In effect, approval of the proposal now would allow Mr Tauber to arrange matters so that the liquidators will get nothing, even if they should succeed in their claim.  While there is uncertainty whether the liquidators’ claim is sound, there is no good reason why this court should peremptorily close the door on the liquidators now.

[56]     Accordingly, I find under s 333(3)(b) that this proposal is not reasonable. That may be enough by itself to dispose of the application altogether, but there are other elements to be considered as well.

Is it not expedient to approve the proposal?

[57]     Under s 333(3)(c) the question of expedience allows the court to consider whether a proposal is appropriate in the light of the public interest factors in insolvency.  That is, are there any public interest factors here that would require that the proposal not be accepted?

[58]     I have already referred to the judgment of Tompkins J in Re Trott, where he set out the standard for refusing approval where there has been misconduct on the part of an insolvent.  There is nothing in the evidence in this case to suggest that Mr Tauber  has  been  a  party  to  conduct  of  the  particular  nature  identified  by Tompkins J.  While Mr Tauber has been reticent to explain in full how he came to amass the huge liabilities that he has, the most that I can infer is that he has adopted a high risk policy and has incurred large liabilities as a result.   But to make that finding does not take matters as far as Tompkins J indicated in Re Trott.

[59]     There is, however, a concern which arises out of the way that Mr Tauber has structured his affairs.  The liquidators’ submission is pitched in terms of an insolvent dining at the rich man’s table but only giving crumbs to his creditors.   They cite Associate Judge Sargisson in Re Marsh v Commonwealth Bank of Australia and Re Perriam v Commonwealth Bank of Australia:[13]

Finally, approaching the public interest from the perspective of protecting the public may involve wider considerations extending to the integrity of the insolvency regime generally.   In particular, the integrity of the insolvency regime, and thus the public interest to which that regime is directed, is undermined where, in the recurring words of this Court, insolvents are seen to dine at the rich man’s table while their creditors receive only crumbs: Re Riddiford HC Wellington B91/89, 7 July 1989; Re Lowndes HC Auckland, B2161/90,  10  May  1991;  Re  Lal  HC  Auckland  CIV-2007-404-3456,

5 November 2007.  In such a case the Court may exercise its discretion to refuse approval under the expedience head notwithstanding that a proposal may be reasonable in the narrower sense contemplated by s 333(3)(b).  Even where a proposal places creditors in a better position than that on insolvency, where benefits under a proposal are distributed so inequitably as between the insolvents and their creditors as to give rise to the perception above, the Court will not hesitate to refuse the proposal on the ground of inexpedience.

[13] Re Marsh v  Commonwealth Bank of Australia and Re Perriam v  Commonwealth Bank of

Australia HC Auckland, CIV-2009-404-3336 and 3337, 16 March 2010 at [39].

[60]     Mr Tauber has arranged his affairs to ensure that if he has to carry any personal liability under the guarantees he signed, he has minimal personal exposure

because he has minimal assets.  He says that he did this under advice and that it is a prudent and standard approach to take.  However, it is a deliberate policy of reduced accountability.  He has arranged his affairs so that he will not have to answer to the full for the liabilities he has incurred.   His liabilities under the guarantees he has given are for more than $80 million.  To sign these guarantees and then to say to his creditors  that  he  has  $10,000  in  assets,  and  that  that  is  all  they would  get  on bankruptcy, is to go against the commercial morality which was addressed by Master Kennedy-Grant in re Coll.

[61]     Added to that, the liquidators have adduced evidence as to Mr Tauber’s accommodation arrangements.  He lives in an apartment at 8/97 Jervois Road. These are the Shangri La apartments - an upmarket apartment block.   The evidence the liquidators have obtained is that it is worth in the order of $2 million.  The apartment is owned by his wife and by a lawyer.  I infer that there is some kind of trust there, and it is a trusteeship in which apparently Mr Tauber has no personal interest, either as trustee or as discretionary beneficiary.  But he is able to live there without having to account to his creditors.

[62]     There is a general public concern that failed businessmen are still able to lead a life of comfortable circumstances while making minimal provision for their creditors.   There is a proper basis for the indignation in the community at such arrangements.     It is my judgment that when a man such as Mr Tauber adopts a conscious policy of reduced accountability, it is appropriate that the law require him to face the ordinary consequences of adopting that policy of reduced accountability, which  is  to  be  made  bankrupt.      That  is  the  consequence  of  adopting  such  a deliberate policy.  The law has to say to people who consciously arrange their affairs so that they will not have to answer to their creditors, that they ought to take the law’s normal consequence, which is bankruptcy.

[63]     Accordingly, in my view there are also good grounds why it is expedient that this proposal not be approved.  To approve the proposal would reward Mr Tauber for adopting his policy of reduced accountability.

[64]     It is not necessary for me to go on to consider whether it is necessary for the public to be protected against Mr Tauber.  If I were to have to consider that matter, my view is that people who have lent money to Mr Tauber have been, on the whole, financial institutions that were able to make assessments as to credit risks.  I have no doubt that by now Mr Tauber has got a poor credit rating in every credit agency and there is a relatively low risk of him now running up further credit which he is not able to honour. So that would not count in the exercise of my discretion.  It is the reduced accountability that makes it expedient not to approve the proposal.

Disposition

[65]     For these reasons, I refuse to approve the proposal.

[66]     Mr Branch does not seek costs against the trustee.  That follows the approach I took in the Simpkin case.[14]    In my assessment, in this case the trustee has acted quite properly in this proposal, and it is not proper for him to carry costs.  Mr Branch seeks costs against Mr Tauber personally.   He seeks costs for one counsel only. Mr Whale seeks time to respond to that.

[14] Re Simpkin HC Whangarei, CIV-2010-488-778 21 March 2011.

[67]     Mr Whale is to file submissions as to costs in a week’s time, and Mr Branch

can reply at the end of that week. I will deal with costs on the papers.

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

R M Bell

Associate Judge