Thomas v Trustees Executors Limited HC Auckland CIV 2010-404-1514

[2010] NZHC 2300

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-1514

IN THE MATTER OF     THE INSOLVENCY ACT 2006

AND IN THE MATTER OF THE BANKRUPTCY OF AO THOMAS

BETWEEN  ANDREW OWEN THOMAS Judgment Debtor

ANDTRUSTEES EXECUTORS LIMITED Judgment Creditor

CIV-2010-404-3326

AND IN THE MATTER OF THE Insolvency Act 2006
AND IN THE MATTER OF a proposal by Andrew Owen Thomas

Hearing:         10 December 2010

Counsel:         BR Balderstone for judgment creditor

JC LaHatte for judgment debtor

Judgment:      17 December 2010 14:00:00

JUDGMENT OF ASSOCIATE JUDGE FAIRE

[on applications for an adjudication order and approval of a proposal]

Solicitors:           Buddle Findlay, PO Box 2694, Wellington

Mike Garnham, PO Box 10 240, Wellington

The applications

[1]      Two applications are before the Court for determination.

THOMAS V TRUSTEES EXECUTORS LTD HC AK CIV-2010-404-1514 17 December 2010

[2]      The first in time of filing is the judgment creditor’s application for an order adjudicating Andrew  Owen Thomas  a  bankrupt.    That  application  was  filed  on

28 April 2010.  The second is the application by the trustee of a proposal filed by

Mr Thomas for approval of the proposal.  Mr Thomas filed his proposal on 3 June

2010.  The trustee’s application for approval of the proposal was filed on 19 August

2010.   Notification of the date of hearing of that proposal for 21 September 2010 was given on 1 September 2010.

[3]      Because the principal ground advanced by Mr Thomas to the opposition to the application for adjudication is the existence of his proposal, that application necessarily must be determined first.

[4]      The proposal is opposed by Trustee Executors Ltd.

The grounds advanced in opposition to the proposal

[5]      Trustees Executors Ltd rely on two of the three matters which the court is required to consider pursuant to the Insolvency Act 2006, s 333(3) when considering an application to approve a proposal. The two matters relied upon in opposition are:

(a)       That the terms of the proposal are not reasonable or are not calculated to benefit the general body of creditors; or

(b)      It is not expedient that the proposal be approved.

Background

[6]      Mr Thomas is 61 years of age.  He has practised as a lawyer for most of his working life.  He qualified in London.  He spent his first three years working there. In 1979 he moved to Australia.   He worked for five years in Darwin and later in Sydney.   His wife is a New Zealander.   In 1984 they came to live in Auckland. Mr Thomas worked in private practice.   In 1986 he started his own practice.   He describes his wife as a talented designer.  He said they carried out a development in Quay Street, Auckland where he had his office for many years.  In 1998 he bought a

property in Hamilton.  His wife became the project manager.  Mr Thomas describes her position as the driving force of the development of that property for its first five years.

[7]      The Hamilton property development is situated between Barton and Anglesea Streets in the centre of Hamilton city.  Casabella Lane, as the development is known, consists of boutique shops, cafes and apartments.

[8]      In 2003 Mr Thomas and his wife separated.   He describes what happened following that separation as follows:

I floundered on my own.  I was trying to run my practice and manage the offices  in  Auckland  and  complete  a  large  shopping  development  in Hamilton.   Somehow, by May 2006 the development in Hamilton was finished and all shops leased.  In hindsight I should have stopped then or at least sold off part of the development but instead I continued to extend the development and in the ensuing downturn have lost everything.

[9]      Mr Thomas describes that in 2007 he planned to extend the development on to an adjacent site.   He says at that time the total complex had a value of approximately $14,000,000.  He said there were significant borrowings which he had personally guaranteed.  By 2008 it was clear that the development had to come to an end and apartments had to be sold as quickly as possible to reduce debt.   He had difficulties with some of the unit titles.  Of 30 units, 25 have been sold.  Five are required to be sold. Action has been taken by the mortgagee in respect of four.

[10]     Mr Thomas  says  as  a  result  of  this  failure  he  has  no  other  assets  of significance.   He does not have a family trust.   The residential and commercial properties which he owned in Auckland have all been sold and the proceeds have been invested in the Hamilton project.   His only asset of any consequence is his existing law practice.  That is what he wishes to use to make a small contribution to his creditors over the next three years.

[11]     In 2006 Mr Thomas wished to refinance the first and second mortgages over four of the apartments in the complex.  He approached Trustees Executors Ltd for a mortgage facility.   A loan of $1,000,000 was drawn down on 16 January 2006. Defaults occurred in repayments almost straight away.  Payments for a period were

made late but in default.  No payments have been made since 4 March 2008.  The only moneys that Trustees Executors Ltd have received since March 2008 are from the appointment of a receiver of income.

[12]     Trustees Executors Ltd served a Property Law Act notice on the principal debtor, Casabella Residential Ltd and its guarantor, Mr Thomas, on 7 April 2008. The default remained unremedied.  Mr Thomas has made no payments in discharge of the liability incurred.

[13]   In March 2009 Trustees Executors Ltd commenced summary judgment proceedings  against  Mr Thomas.     Mr Thomas  took  no  steps  to  oppose  the application.   Judgment was entered against Mr Thomas on 11 August 2009 on an unopposed basis for $1,197,188.10.

[14]     Trustees Executors Ltd issued a bankruptcy notice on 10 March 2010.   No steps were taken to set it aside.  On 28 April 2010 Trustees Executors Ltd filed their application for an adjudication order.

[15]     Trustees Executors Ltd first marketed the security properties for sale in July

2008.   It had received a recommendation from real estate agents that the property should be sold by public auction.  The properties were advertised and an auction date set for 19 August.   The real estate agents had indicated that prices in excess of

$230,000 for each of the units could be achieved.  That, however, was based on the understanding that a code of compliance certificate had been issued for each of the units.  At the auction it became apparent that code of compliance certificates had not been issued. The auctions were withdrawn.

[16]     At the time of the auction there were issues involving the construction of the units which included water ingress and water damage as a result.  Trustees Executors Ltd say that they have engaged building consultants and builders with a view to remedying the issue but, to date, have not been able to effect sales of the units.

[17]     Trustees  Executors  Ltd  obtained  a  valuation  from  Curnow  Tizard  Ltd, registered  valuers  of  Hamilton.    The  report  has  been  produced.    It  provides

assessments in relation to the four units over which security is held by Trustees Executors Ltd.   The valuation is made on an as is basis and without a code of compliance certificate and expresses the opinion as at 23 June 2010.  In summary, the report provides the following opinion in respect of the four units over which

security is held.

Forced Sale	Current market value
Apartment 4	$206,000	$265,000
Apartment 5	$222,000	$285,000
Apartment 6	$226,000	$290,000
Apartment 7	$229,000	$295,000
Totals	$883,000	$1,135,000

Mr Thomas’ indebtedness as recorded in his statement of assets and liabilities attached to his proposal

[18]     In his statement of affairs, attached to his proposal, Mr Thomas lists debts owing to his unsecured creditors of $4,340,000.  He records the amount due to his secured creditor, Trustees Executors Ltd at $1,282,000 and a debt due to his second secured creditor, Asset Finance Ltd, of $380,000.  He values the security of Trustees Executors  Ltd  at  $982,000  and  the  value  of  Asset  Finance  Ltd’s  securities  at

$140,000.  Based on that he gave his total debts of $4,880,000.

[19]     In respect of Trustees Executors Ltd whether one takes Mr Thomas’ estimate of his indebtedness to Trustees Executors Ltd after the potential realisation of securities or, for that matter, the valuation material that I have referred to, there is still a substantial unsecured indebtedness owed to Trustees Executors Ltd alone.

[20]     The trustee, Mr RL Merlo, reports that proof of debts from creditors were received and none were disallowed.  He records the total proofs of debt received at

$8,108,170.83.    These include the full amount due to the secured creditors.  Votes were received on the basis of the full amounts claimed in line with Guest v Duffy.[1]

The proposal

[1]  Guest v Duffy [1991] 1 NZLR 183 (CA) at 187.

[21]     The proposal is that the creditors are paid from income Mr Thomas earns from his law practice over the three-year period.  The proposal provides for payment of a dividend to all creditors.   It is based on the preferential creditor, the Inland Revenue Department, being paid $360 per week and Mr Thomas paying not less than

$50,000 per annum by quarterly payments of $12,500 to his trustees, which would then be divided proportionately amongst his creditors. The proposal provides that:

provided all payments are made in accordance with the scheme then once the period  of  three  years  has  elapsed  from  the  commencement  date  of  the scheme  being 1 September  2010,  then  I will  be  released  from all  debts (including contingent debts) which were provable under the Insolvency Act

2006 on the date of filing this proposal in the court.

Preferential payments

[22]     The  Insolvency  Act  2006,  s 333(4)(a)  provides  that  the  court  must  not approve a proposal if it does not provide for payment before any other debts are paid of those debts that would have priority under the Insolvency Act if the insolvent was adjudicated bankrupt.  Evidence was adduced to me of emailed confirmation from the Inland Revenue Department confirming acceptance of the debtor’s proposal to pay $360 per week for the next three years and confirmation that the balance of the debt to the Commissioner will be written off in respect of the debtor and his associated companies.  On that basis, I have concluded that there is no jurisdictional bar by the operation of the Insolvency Act 2006, s 333(4)(a) to this proposal being approved.

[23]     Mr Merlo reports twelve creditors supported the proposal together with the Inland Revenue Department as a preferred creditor.   Two creditors opposed the proposal.  Of those who support the proposal their debts total $6,621,801.81.  Those who opposed had debts of $1,486,369.02.   No creditor appeared.  The voting was entirely by postal vote.

The statutory provisions

[24]     The Insolvency Act 2006, s 327 requires a proposal to satisfy an insolvent’s debt to be in a prescribed form and to be accompanied by a statement of affairs in the prescribed form and verified by affidavit.  Under s 328, the proposal must be filed in court.  Under s 330, the person appointed provisional trustee under the proposal is required to call a meeting of creditors as soon as practicable after the proposal is filed.  Section 331 sets out the procedure to be followed at a meeting of creditors.  A proposal will be accepted by a majority in number and three-quarters in value of the creditors who vote and who are personally present or are represented at the meeting by a person specified in the Insolvency Act 2006, s 332   or have voted by postal vote. After the proposal has been accepted by the creditors, the trustee must apply to the court for approval of the proposal.   Section 333 requires the court, before approving a proposal, to hear any objection that is made on behalf of a creditor and provides, in subs (3) that the court may refuse to approve the 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  not  calculated  to benefit the general body of creditors; or

(c)     for any reason it is not expedient that the proposal be approved.

[25]     In Farmer v Rowley[2]it was said of the predecessor to s 333, namely the

[2] Farmer v Rowley [1992] 2 NZLR 195 (CA) at 199-200.

Insolvency Act 1967, s 143(3) that:

The Court may refuse its approval if and only if it is of the opinion that one or more of the trigger paras (a), (b) and (c) applies. It follows that the exercise of the discretion reposed in the Court under the section must be related to the particular paragraph or paragraphs relied on.

[26]     The Court of Appeal also approved the approach to approving a proposal as set out in re Bennett’s Proposal[3] in relation to s 143 of Insolvency Act 1967 where it was said at 205:

… I think the Court should accept the view of the creditors, or the majority of them, and grant approval unless it is apparent that one of the grounds for refusing approval exists. The Court is clearly required to exercise its independent  judgment,  for  considerations  of  wider  public  interest  are relevant, and therefore even unanimity amongst the creditors will not be predeterminative  of  approval.  But  unless  it  is  clear  that  the  creditors generally would fare better under a bankruptcy, approval ought normally to be given unless other special circumstances militate against it. Whilst a proposal ought not to be imposed under dissentient creditors if that would be disadvantageous to them as members of the general body of creditors their dissent should not be upheld if to do so could be prejudicial to the general body of creditors.

[3] Re Bennett’s Proposal HC Christchurch B138/81 and M306/81, 1 February 1982 per Hardie Boys J, cited at 205 in Farmer v Rowley.

[27]     A number of decisions were reviewed in Kelly v Structured Finance Ltd[4] which suggested that there is an onus on creditors who oppose the proposal to show that the approval should be refused.  I adopt and agree with the assessment which concludes that the section calls for independent judgment and that what is required is that the Court exercises its discretion to refuse to approve if, after exercising its independent judgment, it considers that one or more of the various factors referred to in the subsection are made out.  That, then, requires a careful consideration of the three factors referred to in the Insolvency Act 2006, s 333(3).

Have the provisions of Part 5, Subpart 2 been complied with?

[4] Kelly v Structured Finance Ltd [2009] 2 NZLR 785 (HC) at 790.

[28]     Ms Balderstone criticised the information provided in Mr Thomas’ proposal. She drew attention to the fact that the names of creditors listed by him did not match those who voted.  Whilst, at first glance, this may appear to be the case I was assured that the entities were all the same although there has been a lack of synchronisation in their description.  The three creditors who voted and who were identified as not

being creditors on Mr Thomas’ list were Ascot Auckland Ltd, Public Nominees Ltd and All Purpose Finance Ltd.

[29]     However, Ascot Auckland Ltd is recorded in the list of creditors supplied by Mr Thomas as Beverley Monk, Public Nominees Ltd is recorded as the creditor Balmain  NZ  and All  Purpose  Finance  Ltd  is  recorded  as  the  creditor  St  Kilda Finance.   I am satisfied that the creditors did receive appropriate notification and lodged their votes and proof of debts accordingly.

[30]     The  next  matter  raised  by  Ms Balderstone  was  the  substantial  under- recording of the size of the creditors’ debts.  Certainly, the explanation given that this came   about   because   of   additional   interest   charges   cannot   be   the   case. Ms Balderstone correctly referred to the fact, for example, that AG Finance Ltd’s debt, which was said to be $600,000 but which was recorded by the trustee at

$1,716,281 illustrates the point.  Similarly, in the case of Francis Chan the debt said to be owed was $485,000 but in fact he proved for $837,530.  In the case of K Wong the debt was said to be $665,000 but he provided for $853,617.   In the case of Bridging Finance Ltd that company was said to be owed $110,000 but in fact proved for $214,029.  This might have been significant had it led to a situation which could have affected the outcome of the meeting itself.  I have checked the total and despite what the affidavit evidence provides, on the material placed before me, the requisite majority in number and the requisite three-quarters in value of the creditors were met in terms of the Insolvency Act 2006, s 331(3) and would have been met had the figures disclosed by Mr Thomas with his proposal been correct.

[31]     I endorse the comments of Associate Judge Lang in Ede v Carters.[5]    There his Honour had to deal with an affidavit of assets and liabilities that was filed with the proposal which understated the level of the debtor’s total indebtedness and overstated the value of his assets.  But for one exception, his Honour determined that the defects in the statement of affairs were not of such magnitude or materiality as to vitiate the entire proposal.  He did recognise, however, that there could be situations where the information which accompanies a proposal and which is now required to be  provided  by  the  Insolvency Act  2006,  s 327  is  so  demonstrably  materially

[5] Ede v Carters HC Auckland CIV-2003-404-5299, 9 June 2004.

incorrect that the proposal would not comply with what is now Part 5, Subpart 2.  I do not regard the deficiencies in the information given as falling into that category.  I reach that position because all of the creditors, although misnamed, who were identified by Mr Thomas in fact lodged their proofs of debt.  As I have recorded, even if one uses the figures provided by Mr Thomas, there is sufficient support for the proposal for a resolution to be passed in compliance with the Insolvency Act

2006, s 331(3).  Unlike the matter dealt with in Ede[6] this understatement does not

have, to use the Judge’s words, “a major impact on the manner in which the proposal will operate”.

[6] Ibid, at [20].

[32]     I conclude therefore that there is no foundation for the proposition that the provisions of the Insolvency Act 2006, Part 5, Subpart 2 have not been complied with in this case.   I also record that the notice of opposition did not rely on this matter as a ground of opposition.  I have discussed it because counsel’s submissions did.

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

[33]     The examination required under this part of the discretion is an objective assessment  as  to  whether  the  proposal  would  be  acceptable  to  a  commercially prudent creditor: Kelly v Structured Finance Ltd.[7]

[7] Kelly v Structured Finance Ltd, above n 4, at 794.

[34]     Ms Balderstone, quite properly acknowledged that Trustees Executors Ltd will not be worse off under the proposal than  if Mr Thomas was adjudicated a bankrupt.  Its case is rather built on the premise that there was first a lack of accurate disclosure as to the indebtedness and, second, a sparse amount of detail as to how Mr Thomas could meet his obligations under the proposal.

[35]     Under the proposal he is required to pay to the preferential creditor, the Inland Revenue Department, $18,720 per  annum and not less than $50,000 per annum to the trustee for his creditors.

[36]     In his affidavit of 23 November 2010 Mr Thomas expressed the view that he should be able to generate at least $150,000 in gross fees from his legal practice.  He then  lists  expenses,  both  in  running  the  practice  and  for  his  own  purposes,  of

$81,280.  No provision is contained in that estimate for the payment of tax.  Having said that, I bear in mind that he has negotiated his position with the Inland Revenue Department who, in fact, support his proposal.

[37]     The  accounting  material  which  Mr Thomas  has  produced  showing  his financial performance in his legal practice disclosed gross fees in:

2009 of $79,789,

2008 of $118,490,

2007 of $134,330,

2006 of $337,500, and

2005 of $354,748.

It is significant to note that he incurred significant wages, presumably to support his gross fees, for the 2005 and 2006 years.  The wage bill was less in 2007 and in the subsequent years.

[38]     Mr Thomas  claims  that  he  spent  considerable  time  trying  to  finalise  the Casabella project which had an impact on his legal practice.  He says now that he has received support from a number of creditors and clients and, based on that, believes that he can revive his practice and achieve the goals that will enable him to comply with his proposal.  I do have some concerns about his optimism, particularly in the area that he practises and having regard to the current economic climate.   Having said that, I do not overlook that the majority of his creditors, who are commercial operators, and the Inland Revenue Department, have demonstrated a willingness to receive returns based on the proposal without recourse to bankruptcy.  There is no doubt that, if one considers the proposal at face value, creditors will certainly fare better than would occur if Mr Thomas was adjudicated a bankrupt.   In addition, Mr Thomas says that he has sent a copy of his proposal to the Law Society prior to

his obtaining a practising certificate for the current year.  He says that no objections to his continuing with his trust account have been raised by the Law Society.

[39]     Although I do have some concerns about Mr Thomas’ ability to earn the income that is required to comply with the obligations he is undertaking under the proposal that concern does not persuade me that the terms of the proposal are not reasonable and not calculated to benefit the general body of creditors.

Are there reasons supporting the position that it is not expedient that the proposal be approved?

[40]     The extent of the inquiry under this subsection was reviewed in Kelly v

Structured Finance Ltd.[8]

[8] Kelly v Structured Finance Ltd, above n 4.

[41]     The following approach  and matters are relevant to the determination of whether it is expedient or not to approve the proposal, namely:

(a)       The inquiry involves an open-ended approach;

(b)There is no justification to impose limitation on the words used in the subsection;

(c)      Considerations of the public interest can be considered under this aspect of the subsection; and

(d)An examination of the insolvent’s misconduct may be appropriate.  It is only gross misconduct that will invoke the expediency ground.  If the conduct is so irresponsible and its effects on the creditors or others so devastating that the court concludes that it is in the public interest that   the   person   responsible   should   not   escape   the   stigma   of bankruptcy, the expediency ground will be made out. A person whose conduct  is  gross  misconduct  should  suffer  the  various disqualifications that go with bankruptcy because they are designed to

protect the unsuspecting community from the ravages of irresponsible financial  conduct.    The  stigma  of  bankruptcy  in  itself  can  be  a deterrent to others from behaving in like manner.

[42]     Against that background I now examine the matters which were advanced under this aspect of the section.  In summary, Ms Balderstone submitted:

(a)      The debtor breached the loan agreement in 2007 and has made no payments  since  March  2008  despite  receiving  income  over  that period;

(b)Since moving from his practice as a solicitor to that of a property developer he has suffered a surprising reversal of fortune which he now wishes to reverse yet again by his return to practise;

(c)      It would not be right to allow him to return to practise without repercussion while his creditors write of substantial debts; and

(d)      There is a substantial shortfall between his assets and liabilities.

[43]     The matters raised by Ms Balderstone are clearly important.  However, I do not consider they are decisive and justify the refusal to approve this proposal.  I take into account the following further matters:

(a)      There  is  substantial  support  for  the  proposal  from  the  debtor’s creditors and the Inland Revenue Department;

(b)There is no evidence of the debtor removing his assets into other entities so as to avoid the consequence of an impending bankruptcy. Quite the opposite has occurred in this case, and that is that he has literally used all his available assets in his attempt to try and keep the development going;

(c)      I accept the debtor’s statement that he wishes to return to practice and to perform in an occupation where he is qualified and has, in the past,

performed reasonably well.   His age and current motivation suggest that he would not return to the speculative field of property development which, clearly, has been his downfall; and

(d)Although  the  losses  are  substantial,  I  do  not  regard  Mr Thomas’ conduct as falling within the category of gross misconduct which, in this case, requires that the various disqualifications that go with bankruptcy must be imposed.

[44]     For the above reasons I conclude that the reasons advanced do not take this case into that category of case which is not expedient to approve the proposal.

The effect of the approval of a proposal

Conclusion

[45]     The analysis  which  I have carried out  in this  judgment leads me to the conclusion that I would be justified by none of the grounds set out in the Insolvency Act 2006, s 333(3) for refusing to approve the proposal.  That is the test prescribed by the Insolvency Act 2006, which I must apply.  Accordingly the proposal must be approved.

Order

[46]     The proposal of Andrew Owen Thomas filed on 3 June 2010 is approved.

The adjudication application

[47]     The effect of the order just made when the Insolvency Act 2006, s 335(2)(b) is considered leads, inevitably, to the dismissal of the creditors’ application. Accordingly, the creditors’ application for adjudication is dismissed.

Costs

[48]     Although the objectors’ opposition to this proposal has failed, there are a number of matters that impact on the question of costs, some of which are mentioned in the judgment relating to timeliness of the application and provision of material in the course of the hearing at the court’s request, which need to be taken into account. Accordingly, I reserve costs and encourage counsel to agree.  In the event the parties cannot agree on costs, memoranda in support, opposition and reply shall be filed and served at seven-day intervals.  On receipt of the reply memorandum, the Registrar shall refer the matter to me to conclude the question of costs.