Simpkin HC Whangarei CIV-2010-488-000778

[2011] NZHC 232

IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY

CIV-2010-488-000778

UNDER  the Insolvency Act 2006

IN THE MATTER OF     a proposal by ANTHONY VAUGHAN SIMPKIN

Hearing:         21 March 2011

Appearances: M C Brugeyroux for Insolvent

J A Collins for La Grouw Investments Ltd

Judgment:      21 March 2011

ORAL JUDGMENT OF ASSOCIATE JUDGE BELL

Solicitors:

Morgan-Coakle, PO Box 114, Shortland Street, Auckland, for Trustee

Davys Burton PO Box 248, Rotorua, for La Grouw Investments Ltd

Webb Ross, Private Bag 9012, Whangarei

A V SIMPKIN HC WHA CIV-2010-488-000778 21 March 2011

[1]      Peri Micaela Finnigan  as proposed trustee has  applied for approval of a proposal made by Anthony Vaughan Simpkin to his creditors.   Ms Finnigan is a chartered   accountant   and   insolvency   practitioner   with   McDonald   Vague   in Auckland.   She was appointed trustee for the creditors at a meeting held on 20

December 2010.  The proposal was accepted at that meeting by the required majority of creditors.     The application is supported by her report which was filed in this Court on 5 January 2011.

[2]      I record these matters as matters of record.  The proposal was filed in this Court on 7 December 2110.  Notice of the proposal and of the creditors meeting to consider it, supported by the required documents, was sent on 10 December 2010 to every known creditor affected by it.   La Grouw Investments Ltd challenges the adequacy of the notice given.  The meeting was held on 20 December 2010.  For that meeting, six creditors sent proxies.  One of them abstained from voting.  The other five gave proxies voting for the proposal.  One of those creditors who gave a proxy also attended the meeting by telephone.   The voting was 100% for in terms of number and in value of creditors.  Notice of the outcome of the meeting was then sent to all creditors.

[3]      La Grouw Investments Ltd is a creditor of Mr Simpkin for $15,611.59.

[4]      Mr Simpkin puts his total liabilities at 10 December 2010 at $1,035,071.52. Of those total creditors, the Bank of New Zealand is a creditor for $858,000.  The Bank  of  New Zealand  has  security  over  two  properties  in  Whangarei,  one  at

4 Paranui Crescent, Tikipunga and the other at 29 Riverside Drive.  Those properties have been given an indicative valuation of $669,000.  Those values are derived from appraisals given by a land agent.   There appears to be a shortfall for the Bank of New Zealand of $189,000.   When the shortfall to the Bank of New Zealand of

$189,000   is   added   to   Mr   Simpkin’s   other   unsecured   liabilities,   they  total

approximately $366,000.

[5]      Mr Simpkin’s proposal is that he will take out a loan given by a friend for

$29,000.  He will apply $10,000 of that sum towards upgrade of the two properties to put them into a saleable condition, and will apply the remaining $19,000 towards his creditors generally. He calculates that the dividend to his creditors will be approximately six cents in the dollar.  He says that payment will be made promptly after the Court approves the proposal.  He says he is currently unemployed and he is looking for employment but he is hopeful that at best he could achieve employment

giving a return of about $45,000 a year.  From that $45,000 a year, he would repay that loan, possibly up to five years, and apply the rest of the funds towards living expenses.

[6]      For his assets, he has clothing and household effects of a purely nominal value.  He has disposed of a motor vehicle and is holding the proceeds of sale.  He has been advanced funds of $3,500 which is being held in a solicitor’s trust account to be applied towards getting approval of the proposal.   Effectively, if he were adjudicated  bankrupt  now  there  would  be  little,  if  anything,  available  for  his creditors.  I also accept that, at this stage, the chance of there being any surplus from the sales of Paranui Crescent and 29 Riverside Drive, after the Bank of New Zealand has been paid, is quite remote.

[7]      La Grouw Investments Ltd raises objections under three main heads.  Those are the three triggers upon which the Court can refuse approval of a proposal under s

333(3) of the Insolvency Act.  They are:

[a]       That the provisions of Part 5, sub-part 2 have not been complied with; [b]     The terms of the proposal are not reasonable or are not calculated to

benefit the general body of creditors;

[c]       It is in any event not expedient that the proposal be approved.

Compliance with provisions of sub-part 2 of Part 5

[8]      La Grouw Investments Ltd raises an issue with the adequacy of the notice given to creditors of the meeting.  Ms Finnigan’s office prepared the documents that had to be sent out under s 330(1) of the Insolvency Act.  That included a notice of proposal to creditors.  That showed the date of the proposed meeting as 2:00 pm on Monday, 20 December 2010;  a voting letter;  a form for a proxy; a proof of debt form;  a statement of affairs of the insolvent;  and a copy of the proposal.  In addition to those documents, there was also a covering letter sent to the creditors.   That covering letter said that the time and date of the meeting was 2:00 pm on Monday,

20  November  2010.    That  letter  itself  was  dated  10  December  2010.    Other documents also sent out had December dates on them.  That would have indicated to anyone receiving the documents that the documents had been sent out in the month of December and not any earlier month.

[9]      La Grouw Investments Ltd takes the point that the date in the covering letter of Monday, 20 November 2010, was inaccurate because that was a date earlier than the date on which the notice was sent out.  The question is whether due notice of the meeting was given to creditors when the covering letter contains this error.   Put simply,  it  is  plain  that  any  ordinary  creditor  reading  these  notices  would  soon identify the fact that the words “Monday, 20 November 2010” must be an error.  20

November 2010 was not on a Monday.  20 December 2010 was on a Monday.  A person reading the documents would see that the documents had been issued during December and they would assume that the notice would refer to a meeting to be held after the letter was sent out, not a time before.   They would also see that on the notice of proposal, the time and date of the meeting was given as Monday, 20

December 2010 and they would also see on the proxy form that the date of the meeting was given as Monday, 20 December 2010.

[10]     A creditor reading this would see Monday, 20 December 2010 used twice and Monday, 20 November 2010 used once.   Any reasonable creditor would understand  that  the  meeting  was  to  take  place  on  Monday,  20  December,  not Monday, 20 November.  While there was an unfortunate slip, I do not regard it as misleading or deceptive.   I think that any reasonable creditor would clearly have understood when the meeting was to take place.

[11]     Mr La Grouw, the director of La Grouw Investments Ltd, says that the notice sent to his company was received on 16 December 2010 and that he himself did not actually get to read the notice until 20 December 2010.   The delay in the mail is unusual because McDonald Vague have their offices in Auckland and the registered office  of  La  Grouw  Investments  Ltd  is  in  Auckland.    However,  I  accept  that Ms Finnigan gave prompt notice and adequate notice of the meeting by sending the documents out on 10 December 2010.  That was adequate notice for a meeting to be held on 20 December 2010.  Had the people in the registered office of La Grouw Investments Ltd acted promptly, there would still have been time for Mr La Grouw to have taken steps.  Further, Ms Finnigan has undertaken checks to see whether any of the creditors who did not give notice and did not attend the meeting, were prejudiced and would have wished to attend.  La Grouw Investments Ltd’s lawyers also wrote to creditors to check whether any of them had been prejudiced.  The result from inquiries on both sides is a deafening silence.

[12]     The inference I draw from that is that these creditors were not minded to take any active steps to deal with the proposal and they were simply happy to leave other

creditors to make the decision whether the proposal should be accepted or not.  I am influenced by that in part also by the evidence of Ms Finnigan who has analysed the behaviour of some of these classes of creditors in relation to previous proposals.  Her evidence does give some reason to believe that some of the creditors are minded not to take an active part in proposals under Part 5, sub-part 2 of the Insolvency Act.

[13]     If Mr La Grouw had received notice on 16 December instead of 20 December when he read the letter, and had he attended the meeting on 20 December, I do not accept that his vote would have influenced the outcome.   His company was very much in the minority. Five creditors who voted for had given proxies.  One of them, Ms Preen, attended by telephone but she has sworn an affidavit saying that even if Mr La Grouw had attended, she would not have been influenced by what he had to say. I regard it as speculative to suggest that other creditors who did not take part in the  process  would  have  taken  part  if  the  covering  letter  had  used  the  words “20 December 2010” instead of “20 November 2010”.

[14]     Overall, I am satisfied that there has not been any prejudice to creditors through this slip in the wording.   I am reinforced in that by the approach which Asher J took in the case Kelly v Structured Finance Ltd [2009] 2 NZLR 785 at [42] where he said, “It is relevant to consider the seriousness of these failures. A court will not place weight on minor procedural errors”. In this case, I regard this as a very minor procedural error, not something that jeopardises the entire process. I also feel some support in taking this approach in having regard to s 418(1) of the Insolvency Act, which says:

A proceeding under this Act must not be invalidated or set aside for a defect (which includes misdescription, misnomer or omission) in a step that must be taken as part of or in connection with the proceeding unless a person is prejudiced by the defect.

[15]     In this case, I do not consider that anyone has been prejudiced by this minor procedural slip.  I do not consider that the giving of notice is in any way invalid such that the notice should be regarded as a nullity.   In that, I also draw some support from the decision of Court of Appeal in Best v Watson [1979] 2 NZLR 492. That case was a decision under s 11 of the Insolvency Act 1967 which was the predecessor provision to s 418 of the Insolvency Act 2006. After discussing the difference between nullity and irregularity, the Court said this at line 30:

We think that the same considerations apply under s 11.   That provision may be invoked in any case where the proceedings are defective and however the defect may be characterised.   There will always be a question of degree whether or not it can be said that

notwithstanding failure to comply with an apparently mandatory requirement of the Act or the rules there is before the Court what can fairly be described as proceedings under the Act and that question should not be approached in a mechanical or technical way.

[16]     Applying that approach, this defect is, at worst, a mere irregularity.  I do not regard this as a matter that goes to non-compliance that would require the Court to refuse its approval under s 333(3)(a).

Whether the terms of the proposal or are not reasonable or are not calculated to benefit the general body of creditors

[17]     There is useful guidance in the decision of the Court of Appeal in Farmer v

Rowley [1992] 2 NZLR 195. Richardson J said at 200-201:

In  determining  whether  the  proposal  is  reasonable  the  Court  is required to exercise an independent judgment.  Nevertheless it must be  influenced   by  the   commercial   judgment   of  creditors   who, approving the proposal, have demonstrated their willingness and wish to receive a partial payment without recourse to bankruptcy.   It is important to emphasise too that it is the creditors who stand to lose the benefit if a proposal is rejected and bankruptcy ensues.   Unless there are special public interest or other commercial considerations present, the assessment of the substantial body of the creditors ought to be accepted.

[18]     In  this  case,  the  appropriate  numbers  have  given  their  approval  under s 331(3) of the Insolvency Act.  That is, there has been a majority in number of those who voted and who were present and also three-quarters in value.  In both cases, the figures are 100%.

[19]     Mr La Grouw protests that the proposal is not a reasonable one.   Mr La Grouw’s position seems to be that he regards six cents in the dollar as an inadequate proposal and he would wish Mr Simpkin to try harder to put forward something that would be more realistic.  That is an aspirational objection.  He would wish that Mr Simpkin had not fallen on hard times and, having fallen on hard times, he would wish that Mr Simpkin could try and put a more substantial proposal to his creditors. However, in this case, it is not the job of the Court to second guess the commercial judgment of the creditors, as Richardson J pointed out in Farmer v Rowley.

[20]     The  choice  facing  the  creditors  was  whether  to  have  Mr  Simpkin  go bankrupt, which would seem to have offered them next to nothing, or to accept a dividend  of  around  six  cents  in  the  dollar,  with  payment  being  forthcoming

reasonably quickly.  I can accept that creditors faced with that choice would accept the proposal made by Mr Simpkin, which gives them a measure of certainty, as against the uncertainty of any outcome under bankruptcy that could not achieve anything more than what was being offered by the proposal.  In this regard, I repeat the point I made before that any suggestion that there might be a surplus from the sale of Paranui Crescent and Riverside Drive is speculative, although I will deal with a modification to the proposal that does address that point.   I see no reason for overriding the commercial judgment of creditors in this case.

[21]     Accordingly, I do not see any ground for refusing approval under s 333(3)(b)

of the Insolvency Act.

Is there any reason why it is not expedient that the proposal be approved?

[22]     This ground requires the Court to consider wider public interest concerns. Bankruptcy can fulfil a useful public function in respect of people who have become insolvent  and  have  made  themselves  a  menace  to  the  commercial  community because they have borrowed and they have incurred credit recklesslessly and have been unworthy of the trust that people have placed in them.   But that is only one consideration.  One has to have regard to the fact that in a downturn, people may be hit with insolvency, perhaps as a result of bad business decisions they have made, but also because of changes in the economy.

[23]     Mr Simpkin has given an account of how he fell into insolvency.   He was entrepreneurial.   He embarked on property investment and property development. With the change in the economy, he was unable to clear all his liabilities from the properties which he had invested in or through the companies in which he had invested.  He was also handicapped because people who were co-venturers with him, Valentine Reid and Kelly McDonald, have not assisted him with meeting the liabilities where they share joint and several liability.  I accept that Mr Simpkin is trying responsibly to deal with his liabilities. He appears to be going about a rational process of selling properties to reduce his debts to the bank.   I accept in these circumstances, his case does not call for him to be marked out with the stigma of bankruptcy.

[24]     I also take this into account.   His liabilities have mostly been incurred in Whangarei.  His debt to La Grouw Investments Ltd was incurred in the Far North. These are small communities where a person’s commercial reputation is valuable to

them.  Whether or not Mr Simpkin is adjudicated bankrupt will not make too much difference to his ability to embark on any commercial ventures in Northland.  The community will already be aware that he has fallen on hard times and that he has been unable to meet his liabilities.  He does not need the stigma of bankruptcy to add to that.

[25]     Overall then, having considered the trigger points under s 333(3) of the Insolvency Act, there are no grounds on which I consider that the proposal must not be approved.

[26]     There is one additional matter.  In his initial documents, Mr Simpkin said that if there were any surplus from the sale of Paranui Crescent and Riverside Drive, that could go to his creditors as well.  That has not been formally carried through into the actual proposal put to creditors.  I consider there would be no prejudice to creditors if, by some fluke, there were a surplus.  It would be an assurance to creditors that if that fluke were to happen, it is not Mr Simpkin who would take the windfall, but they.   Accordingly, I record that Ms Brugeyroux is happy to have the proposal amended to incorporate provision for any surplus from those proceeds, if they should arise, should go to the creditors and not to Mr Simpkin personally.  If there is any difficulty over how that proposal should be amended to incorporate that wording, I will receive memoranda, but I hope that would not be necessary. In doing this, I simply indicate that I am correcting what seems to be simply an accidental omission. It does not alter the substance of the proposal.

[27]     Ms Brugeyroux has asked for costs.   She has referred me to the decision of Associate Judge Faire in  Re St Laurence Lending Ltd, 18 December 2009, HC Auckland CIV-2009-404-579.    That  was  a  case of  a proposal  where  a  creditor unsuccessfully  opposed  and  was  ordered  to  pay  costs,  admittedly  with  some discount, because of a procedural error in the process.

[28]     So far, the courts have not developed a fully principled approach to the fixing of costs in applications for approval of proposals under Part 5, sub-part 2 of the Insolvency Act  2006.    It  is  important  to  consider how  costs  can  affect  litigant behavior. Ordinarily, the principle is that costs follow the event.  However, to award costs against an unsuccessful creditor can lead to an asymmetrical result.   What I mean is this.  If a creditor successfully opposes a proposal, any order for costs in his favour is likely to be a pyrrhic victory only.  The creditor will not normally obtain an order for costs against the trustee because in most cases trustees will not apply for

orders approving the proposal unless they have satisfied themselves that the procedural requirements under sub-part 2 have been carried out and, in particular, that a meeting has been held and the required majority has been met.  Once that has been done, the trustee is under a duty to put the proposal before the Court for consideration.    It  cannot be right in those  circumstances to penalise the trustee simply because the proposal then does not meet the Court’s approval.   So to that extent the trustee has a certain amount of immunity from costs.   To award costs against the insolvent himself is a pyrrhic victory for the creditor because any award for costs is likely to be illusory.   The normal result is that the insolvent is made bankrupt and the creditor will receive little, if anything, in return for his successful opposition to the proposal.

[29]     If then a creditor unsuccessfully opposes, he can be hit with a double effect. If  he  opposes  successfully,  he  gets  nothing  by  way of  costs  for  his  successful opposition.   But if he opposes unsuccessfully, then he gets ordered to pay costs. That regime creates a disincentive for creditors to oppose proposals.   It is my judgment that it would be unfortunate if the law were not to be even-handed in terms of costs results.  That is, that if they are to be punished for costs then, on the other hand, if they are successful, they should get something back for costs.   The even- handedness, in my view, can be achieved by taking the other approach, which is not to award costs against a creditor who opposes unsuccessfully.

[30]     La Grouw Investments Ltd has been unsuccessful in its opposition. I have held that its grounds for doing so were not sound, but I do not find that its opposition has been so misconceived that it ought not to have opposed at all.   There was an error in procedure, in my judgment not a serious one, but it gave some grounds for raising a concern.  It has not been frivolous or vexatious in its opposition.  It was entitled to have the matter considered by the Court.  In that case it is entitled to have the even-handed approach applied on costs so that it is not left in the position of having a pyrrhic victory if costs were ordered in its favour.  The corollary is that it ought not to have costs ordered against it for being unsuccessful in its opposition.

So I order that costs lie where they fall.

R M Bell

Associate Judge