Trustees Executors Limited v Cary HC Auckland CIV-2011-404-1461

[2011] NZHC 1504

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-1461

IN THE MATTER OF     the Insolvency Act 2006

AND IN THE MATTER OF the bankruptcy of T CARY

BETWEEN  TRUSTEES EXECUTORS LIMITED Judgment Creditor

ANDTRENT CARY Judgment Debtor

Counsel:         B Balderstone and J D Hughes for Judgment Creditor

B Connor and R Dellow for Judgment Debtor
J P Bowler for South Canterbury Finance

Judgment:      12 September 2011

RESERVED JUDGMENT OF ELLIS J

This judgment was delivered by me on 12 September 20115 at 12 noon, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors:      Buddle Findlay, PO Box 2694, Wellington

Callaghan and Co, PO Box 1434, Auckland 1140

Grove Darlow & Partners PO Box 2882, Auckland

Counsel:       D Connor, PO Box 3897, Auckland 1140

[1]      Trustees Executors Limited (“TEL”) has applied for an order adjudicating

Mr Cary bankrupt.  The application is founded on a judgment debt relating to a loan

TRUSTEES EXECUTORS LIMITED V CARY HC AK CIV-2011-404-1461 12 September 2011

of $2,520,000 advanced by TEL to the Puerto Villarta Family Trust (“the Trust”) in respect of which Mr Cary gave a personal guarantee. The loan was used by the Trust to purchase a house in Benson Road, Remuera in which Mr Cary lived with his wife and child.

[2]      The application for adjudication is supported by South Canterbury Finance Limited (“SCF”) on the basis of debts owed by Mr Cary to SCF arising from two further personal guarantees of loans made to companies that were owned and controlled by him.

Background

[3]      The loan was advanced by TEL to the Trust in 2006.  It was secured by way of first mortgage over the Benson Road property.   As I have said, Mr Cary also personally guaranteed the loan.

[4]      The  Trust   first   fell   into   default   in   early  2008   and   defaulted   again subsequently.  However it managed to remedy those defaults from time to time until early 2010.  No loan repayments have been made since 15 February of that year.

[5]      Property Law Act notices were served on the Trust requiring compliance by

7 May 2010, but still the defaults were not remedied.  At that point, TEL resolved to exercise its right as mortgagee to sell the Benson Road property.

[6]      It appears that TEL’s resolution was frustrated, however, by Mr Cary refusing TEL’s valuer access to the property.   This resulted in TEL commencing summary judgment proceedings, both for the outstanding debt and also for vacant possession of the property.

[7]      Just prior to the hearing of the summary judgment application, Mr Cary asserted the existence of a residential tenancy between him as trustee of the Trust and his wife as tenant.

[8]      The Court granted summary judgment in relation to the debt matter (the debt at that time being $2,895,944.99) on 18 February 2011.   On 15 March 2011, a bankruptcy notice was issued. No application was made to set it aside.

[9]      During this time, Mr Cary and his family remained living at Benson Road. Notice under the Residential Tenancies Act to vacate the property was served on him.  The tenancy issue went to the Tenancy Tribunal.  The Tribunal ruled in favour of TEL on 25 March 2011.

[10]     Mr Cary and  his  wife  were then  required  to  vacate by 31  March  2011. Mr Cary  did  not  do  so  and  appealed  to  the  District  Court.    The  appeal  was subsequently abandoned and the house was eventually vacated in the last week of April 2011.  It was only at that point that TEL was able to market it for sale.

[11]     On 20 April 2011, the application for adjudication was filed.  It was allocated a first call on 17 June.

[12]     In  late  May  and  early  June,  there  was  an  exchange  of  correspondence between the solicitors for TEL and those for Mr Cary in the course of which it was confirmed that  Mr Cary was  willing to  pay $450,000  to TEL in  respect  of the anticipated short-fall following the sale of the Benson Road property.

[13]     During this time, issues were also raised on behalf of Mr Cary about the adequacy of TEL’s approach to the marketing and sale of the property and whether the best price was likely to be achieved.  However, he has taken no formal steps in that respect.

[14]     In a letter dated 13 June 2011, TEL’s solicitor confirmed that a sale and purchase agreement in relation to the property had been signed and that a provisional estimate of the short-fall was in the region of $800,000 to $900,000.   The letter concluded by saying:

If, as you say, your client intends [on] making a proposal in respect of payment of the outstanding debt, then we would respectfully suggest the time is of the essence.

[15]     When the adjudication application was called on 16 June, it was allocated a hearing date of 31 August.

[16]     On 29 July 2011, the sale of Benson Road for $2.1 million settled.  Following settlement, there remained a debt owing by Mr Cary to TEL of $985,605.18 with interest continuing to accrue.  No repayment has been made by Mr Cary to TEL.

Mr Cary’s position on the adjudication application

[17]     Mr Cary has not at any time denied that this debt is owed, nor that he is insolvent.  His failure to comply with the bankruptcy notice is an act of bankruptcy.

[18]     Rather, Mr Cary’s opposition to the adjudication application was initially based on the grounds that:

(a)       he might be able to pay his debts over a reasonable period of time; (b)          it would not be just and equitable for an order to be made; and

(c)      there were other reasons why the order should not be made, namely that the sale of the property might result in the principal debt being reduced or extinguished.

[19]     Necessarily, the last of these grounds fell away once the sale of the property had been effected.

[20]     Mr Cary also filed an affidavit in support of this opposition.  As a result of the position later taken by him, it is unnecessary to record much of what he said in it here.  However, it remains relevant to note that in the affidavit, Mr Cary:

(a)      referred  to  recent  discussions  he  had  had  with  his  father  in  law, Murray Price, in which Mr Price:

Told me that he would be prepared to purchase any shortfall in the debt from TEL from tax loss funds which are due to him from the Inland Revenue Department, through the Price

Karaka Trust, although, like me, Murray is unable to put any specific proposal about that until Benson Road is sold, and any shortfall determined.

(b)detailed his current financial position, namely that he has very limited assets, “with the principal ones, including Benson Road, being owned by/through various trusts and companies.”  He then went on to say:

However,  by  my  calculations,  the  furniture  and  house chattels that ... I took ... from Benson Road have a value of approximately $20,000 with my half share being $10,000.  I am also a discretionary beneficiary in several trusts, but have no defined beneficial interest in any of the relevant trust assets.

As to my liabilities, I have a number of credit cards with debit balances for or totalling approximately $35,000, I also have a loan balance due to Marac Finance on vehicles that ... I used to own, totalling approximately $50,000.

There are also outstanding legal and consultancy fees owed by me totalling $7,800.

Finally there are also contingency guarantees that I have personally provided that have not been called on, with Westpac,  Basecorp,  SCF  and  MTF,  with  all  guarantees having a security attached as a first charge over specific assets owned by either a trust or a company in respect of each security.

To the best of my knowledge, none of the principal securities are in arrears, again consistent with no call on the guarantees having been made by any of the lenders concerned.

[21]     Shortly before the adjudication hearing on 22 August 2011, a further affidavit was filed on behalf of TEL which was primarily concerned with giving the Court updated figures in relation to the debt now owing by Mr Cary to TEL.   However TEL had annexed to the affidavit a letter from Rennie Cox, solicitors, to TEL dated

17 August 2011. The letter stated:

We have been instructed by Basecorp Finance Limited (“Basecorp”) in relation to Mr Cary, who we understand Trustees Executors Limited is pursuing by way of bankruptcy petition, as a result of a mortgagee sale short-fall.  ....

Basecorp has had a long history of working with Mr Cary, and he is continuing to do some property related work for Basecorp.  ...

Given Mr Cary’s historical relationship with Basecorp and the on-going work which he has been doing for Basecorp, Basecorp has a vested interest in Mr Cary not being bankrupted.  We understand that he has no personal assets, and that for the last two years he sank most of  his income into meeting Trustees Executors’ interest payments on the Benson Road property, which ultimately was sold at mortgagee sale.

We have been advised by Mr Cary that a third party family funder has offered to put forward some funds to enable a scheme of arrangement to be promoted in terms of Part 5 of the Insolvency Act 2006.  Given Mr Cary’s contingent liabilities, including in particular, his personal guarantee liability to Basecorp of over $5,000,000, it would appear that a settlement by Mr Cary with Trustees Executors, and South Canterbury Finance (who we understand have joined the creditors’ application), would see a far better return  for  those entities than  would  be  forthcoming from an  insolvency scheme.

[22]     The response from TEL’s solicitors (which was also annexed to the affidavit)

concluded by stating:

TEL, of course, welcomes any approach by Basecorp to buy the outstanding debt owed to it by Mr Cary.  However, in the absence of any such payment of the debt owed, TEL intends to proceed with the bankruptcy action.

[23]     On  30  August  2011,  (the  day  before  the  adjudication  hearing)  newly instructed  counsel  for  Mr Cary[1]  filed  a  memorandum  in  which  he  advised  that Mr Cary wished to pursue a proposal under Part 5, Subpart 2 of the Insolvency Act

[1] His instructing solicitors have been the same throughout.

2006.  He sought an adjournment of the hearing of the adjudication application to enable that proposal to proceed.

[24]     In general terms, the proposal was predicated upon Mr Cary receiving a loan from Mr Price of $350,000.  Mr Connor advised that the proposal would, if accepted by the requisite majority of Mr Cary’s creditors, enable him to make a payment to them of approximately five cents in the dollar.  Mr Whittfield had consented to being the trustee.   A timetable was proposed which would culminate in a meeting of creditors being convened and held no later than 5 October 2011 with any application by the trustee to be filed by 12 October 2011.

[25]     Both TEL and SCF immediately advised the Court that they opposed any adjournment of the application.  By way of minute, I indicated to counsel that I was

not prepared to deal with the matter on the papers and required them to appear as scheduled at 10 am on 31 August 2011.

[26]     On the morning of the hearing, the Court received a formal application for an adjournment from Mr Connor accompanied by affidavits from Mr Price (confirming his willingness to make the $350,000 loan) and from Mr Cary, attaching a draft proposal.  A statement of Mr Cary’s affairs was not annexed to the proposal but was, nonetheless, handed up by Mr Connor at the hearing before me.

[27]     The statement of affairs disclosed total assets of $10,995, comprising clothing valued at $2,200, a surf board valued at $200, a Freelander vehicle valued at $8,000, and sports gear valued at $595.  It disclosed liabilities of over $8 million including

the debts owed to TEL and SCF and also debts of:

$7,549 to Westpac;

$8,893 to the National Bank;

$10,383 to the Bank of New Zealand;   $5,129 to American Express;

$8,010 to GE Creditline;

$174,718 to TEA Custodians;

$250,000 to Marac Finance Limited;

$32,911 to Motor Trade Finance Limited (secured over the Freelander);   Legal debts of $35,000;

$45,310 to Cantab Management;   $70,290 to Price Karaka Trust;

$918,000 to Basecorp;

$175,000 to Mitchell Family Trust;

$903,293 to Westpac (guarantee); and

$4,440,000 to Basecorp Finance (guarantee).

[28]     Other than the amount owing to Motor Trade Finance Ltd, none of the debts listed are secured by property owned by Mr Cary.  It may be that some of them are secured by property owned by other entities but there was no evidence given of that.

[29]     It appeared from Mr Cary’s affidavit that he has discussed the proposal with a number of his other creditors.  But due (apparently) to some oversight, he did not say whether they were in favour of it.  While it is probably reasonable to infer from the letter  to  which  I  have  referred  above  that  his  principal  (contingent)  creditor, Basecorp, would be supportive of the proposal, I nonetheless record that there was no affidavit in that respect filed from Basecorp, nor indeed from any of Mr Cary’s other creditors.

[30]     At the hearing before me, Mr Connor very fairly accepted that the lateness of the proposal and of the application for adjournment caused considerable inconvenience to TEL, SCF and to the Court. That is undoubtedly so.

[31]     Mr Connor also advised, however, that in the event that the adjournment application was declined, Mr Cary wished to withdraw his former, formal, grounds of opposition to the adjudication application.  Rather, Mr Cary simply relied on his desire to pursue the proposal as a matter which went to the Court’s discretion under s 37 of the Insolvency Act 2006 and in particular whether it was just and equitable to adjudicate him bankrupt.

[32]     This helpful synchronicity of focus means that I am effectively able to deal with both the adjournment application and the application for adjudication together. In doing so I propose to consider whether Mr Cary’s desire to pursue the proposal means that it would not be just and equitable to adjudicate him bankrupt at this stage.[2]   If it does, then (plainly) an adjournment is both justified and required.  If it does not, then there is no other basis upon which adjudication should be refused and an order can be made accordingly.

[2] By which I mean pending completion of the steps I have set out in [24] above.

The creditors’ position

[33]     Because of the lateness of the adjournment application and the altered focus of Mr Cary’s opposition, there could be little doubt that TEL and SCF were placed on the back foot.  They were, however, united in their opposition to the application

for the adjournment.

[34]     The   principal   submissions   for   the   creditors   were   ably   made   by Ms Balderstone.  She made it clear that TEL’s opposition to the adjournment (and therefore in support of adjudication) was based on its contentions that:

(a)      the  application  and  the  proposal  were  merely  designed  to  delay matters;

(b)Mr Cary had failed fully or frankly to disclose his financial affairs and that there were therefore grounds for concluding that scrutiny of them by the Official Assignee was required; and

(c)       Mr Cary was continuing to engage in business in the “property space”

and to incur debt.

[35]     In support of the first contention, Ms Balderstone relied on:

(a)      the last minute nature of both the proposal and the application, in circumstances where Mr Cary had foreshadowed a proposal some two months earlier and having then been advised that “time was of the essence”; and

(b)      Mr  Cary’s  history  of  obstruction  and  delay  in  relation  to  the

mortgagee sale.

[36]     In support of the second contention, Ms Balderstone referred in particular to: (a)           discrepancies  between  the  disclosure  of  liabilities  in  Mr  Cary’s

affidavit and the liabilities in his statement of affairs.   By way of example only, she pointed out that:

(i)the debt to Marac was stated to be for $50,000 in his affidavit but was said to be for $250,000 in his statement of affairs;

(ii)as well as the $5 million personal guarantee he said in his affidavit that he had given to Basecorp it appeared from the

statement of affairs that he also owed Basecorp a primary debt of nearly $1 million;

(b)the fact that Mr Cary had not referred (either in his affidavit or his statement of affairs) to his shareholdings in various companies  or detailed his interests in the various trusts referred to in his affidavit; and

(c)       the  fact  that  a  recent  Baycorp  search  showed  that  Mr  Cary used

“aliases”.

[37]     The factual basis for the third contention was disputed and, in light of the conclusions I have reached I do not propose to consider it further.

[38]     Because of the prejudice to TEL caused by Mr Cary’s late change of position and the potential relevance of Mr Cary’s shareholdings and any use of aliases, I granted TEL leave to file a further affidavit in those respects.  The affidavit was duly filed annexing a Baycorp search which indicated that Mr Cary had previously been known by another name.   Electronic extracts from the Companies Office registers also showed both that shares in various companies had previously been held by someone of that name and that there were a number of companies in which Mr Cary (using his present name) was a shareholder.

[39]     With the benefit of hindsight, it is perhaps predictable that the matter did not end there.  Mr Cary then filed a further affidavit (without leave) explaining that he had, for apparently valid reasons, legally changed his name in 1999.   The word “alias” was thus inapt and unfairly prejudicial.  He also explained that the companies in which he was presently recorded as holding shares were shelf companies that had no shareholder value.

[40]     Equally predictably, TEL objected to my reading that affidavit (because it was filed without leave).  SCF then itself filed a further affidavit (also without leave) relating to a recent transfer of shares by Mr Cary.

[41]     The Court registry then received a further indication from Mr Connor that Mr Cary was about to file a further affidavit.   I issued a minute directing that that was  not  to  occur  and  that  I would  consider  what  account  I would  take of the evidence filed after the hearing without leave (if any) in the course of preparing this judgment.

[42]     The net result is that the Court is, largely as a result of Mr Cary’s last minute change of tack, in an unsatisfactory position.   However, I propose to proceed as follows.   In formal terms, I have “read” the affidavit which Ms Balderstone was granted leave to file.  In fairness to Mr Cary I have also read his reply.  I have, not, however, formally “read” the further evidence filed by SCF and I do not take it into account. The net result is that:

(a)       I accept that Mr Cary changed his name for legitimate reasons;

(b)I note that Mr Cary is the sole shareholder in a number of companies and  that  he  has  not  disclosed  this  to  the  Court.    I also  note  his evidence that these shareholdings have no value.

Discussion: should the application for adjudication be granted or adjourned?

[43]     Mr Connor advanced Mr Cary’s position very squarely on the basis of the submission  that  there  was  a  real  possibility that  Mr  Cary’s  Part  5  proposal,  if accepted, would yield a better result for his creditors than would his adjudication. He referred me to other cases in which an adjournment had been granted to enable creditors to consider a Part 5 proposal including, in particular, the adjournment of an adjudication application granted two days earlier by Associate Judge Gendall in

Re Serepisos, ex parte South Canterbury Finance Ltd (in Rec).[3]

[3] Re Serepisos, ex parte South Canterbury Finance Ltd (in Rec) HC Wellington CIV-2011-485-279,

29 August 2011.

[44]     Perhaps unhappily for Mr Connor, he had been unable to obtain a copy of the learned Associate Judge’s decision prior to the hearing.  My subsequent reading of it

revealed that there were two signal points of difference from the present case.

[45]     First, Mr Serepisos’ counsel  had  submitted that  the nature of the Part  5 proposal being put forward meant that there was the prospect that all creditors would be paid in full.  In that respect, Associate Judge Gendall noted at [5] that:

The affidavit evidence before the Court goes on to suggest that a sale on an orderly basis  of the judgment  debtor’s assets given  what are essentially recent valuation figures could result in a surplus of assets over liabilities being achieved of some $30,000,000.00.

[46]     Secondly (and equally importantly), Associate Judge Gendall noted (at [15])

that:

...The creditors before me today, South Canterbury Finance Limited (In Receivership) and Equitable Mortgage Limited support such an adjournment being granted.  ...

There was also further evidence from another creditor that it wished to have time to consider the proposal.

[47]     By contrast:

(a)      Mr Cary’s proposal would see his creditors obtain only four cents in the dollar; and

(b)Mr Cary’s application for adjournment is opposed by the two creditors who were before me.  No evidence has been filed by any of his other creditors.

[48]     Those  two  points  of  difference  are  not  merely  of  academic  interest.    I consider that they actively count against the grant of an adjournment (and in favour of adjudication) here.  The following matters (which are set out in no particular order of priority) also, in my view, point to the same conclusion.

[49]     First, although I do not regard the discrepancies between Mr Cary’s affidavit and his statement of affairs as warranting any inference that he has intentionally misled the Court, they do indicate a somewhat cavalier attitude to matters that are of central importance to the issue presently at hand.  I do not agree with Mr Connor’s submission that the opportunity afforded at a creditors meeting to question Mr Cary

is analogous to the “array of procedures” that is available to the Official Assignee.  I agree with Ms Balderstone that there is reason to consider that a more rigorous investigation of Mr Cary’s affairs would be beneficial.

[50]     I mention that I have not placed any particular store in Mr Cary’s failure to refer to  his  shareholdings  in  what  he has  now  advised  are shelf companies.    I nonetheless record my view that it seems to me to be prudent for a debtor who is asking the Court to give him the benefit of the doubt to disclose even shareholdings such as those.  It seems to me that a Court is more likely to make the leap of faith required if it can be confident that even those matters that the debtor might think are of marginal relevance only have nonetheless fully and frankly been disclosed.  It is surely better to anticipate, and answer at the outset, any matters that might later be raised by those seeking adjudication.

[51]     Secondly,  I  accept  that  there  appears  to  be  some  historical  basis  for concluding  that  Mr  Cary’s  proposal  is  motivated  as  much  by  a  desire  for prevarication and delay as it is by a desire to do the best by his creditors.   An inference of prevarication and delay can be drawn in particular from both the last- minute putting of the proposal (in circumstances where the possibility of it had been signalled considerably earlier) and the history of Mr Cary’s recent dealings with the Benson Road property.

[52]     Thirdly, there is the fact that the vast majority of Mr Cary’s debt arises as a result of personal guarantees that have been given by him.   In the present climate there is, I think, considerable force in those authorities in which it has been said that “commercial  morality”  requires  the  Courts  to  recognise  the  importance  of  such

guarantees being honoured by those who have given them.[4]

[4] See for example Re Coll, ex p Consumer Finance Ltd HC Rotorua B69/97, 18 September 1997; Re D’Esposito, ex p Westpac Banking Corporaton HC Napier B16/98, 30 June 1998; Re Lawrence; Lawrence v BNZ HC Auckland B1174-IM01, 4 October 2002.

[53]     I do not disregard the possibility that Mr Cary’s adjudication may be an

exercise in futility.  He has, as I have said, deposed that he has no assets.  There is, however, no corroboration of that.[5]    And for the reasons I have already given, it

[5] As to the relevance of which see Re Fidow [1989] 2 NZLR 431 (HC).

seems that the scrutiny of the Official Assignee as to that matter may be beneficial.  I do not therefore consider that the risk of pointlessness is sufficient to outweigh the other considerations to which I have referred above.

[54]     Mr  Cary’s  application  for  adjournment  is  therefore  declined.    It  is  not disputed that grounds for adjudication exist and I decline to exercise my discretion not to grant the application for the reasons I have given.

[55]     Accordingly, and in formal terms, Mr Cary is adjudicated bankrupt at the time this judgment is issued, namely at 12 noon on Monday 12 September 2011.

[56]     Mr Connor signalled that in the event of adjudication by me Mr Cary would seek a stay in order that Mr Cary could pursue an appeal.

[57]     I  am  prepared  to  grant  an  interim  stay  until  5  pm  on  Wednesday

14 September 2011.   The stay will lapse at that time unless Mr Cary has filed a formal application for stay in this Court.   If an application is filed any notice of opposition to it is to be filed by 5 pm on Friday 16 September.  Unless counsel notify the Court that I can determine the application on the papers, there will be a short (one hour) hearing at some point during the following week.  In light of my other

Court commitments a 9 am fixture is likely to be required.

Rebecca Ellis J