Unka
[2015] NZHC 1077
•20 May 2015
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2014-485-11314
CIV-2014-485-11317
CIV-2014-485-11318
CIV-2014-485-13319 [2015] NZHC 1077
IN THE MATTER OF The Insolvency Act 2006 IN THE MATTER OF
The proposal of Lesley Christine Unka
IN THE MATTER OF
The proposal of Korin Unka
IN THE MATTER OF
The proposal of Keran Kanu Unka
IN THE MATTER OF
The proposal of Suresh Unka
Hearing: 8 December 2014; further submissions 22 January 2015 Counsel:
Q Haines for the provisional trustee, Paul Surridge
S Barker for the objector, ANZ Bank New Zealand Limited
The Insolvents in PersonJudgment:
20 May 2015
JUDGMENT OF ASSOCIATE JUDGE SMITH
[1] Ms Lesley Unka, and her two sons Korin Unka and Suresh Unka, are insolvent. Each of them has put a proposal to their creditors, and they now apply to the Court for approval of those proposals.
Background
[2] Mr Keran Unka, the husband of Lesley Unka and father of Korin and Suresh, is also insolvent. The insolvencies all resulted from the failure of various business enterprises in which the Unka family were involved, the most recent of which was a
shopping centre development at Raumati.
IN RE UNKA [2015] NZHC 1077 [20 May 2015]
[3] ANZ Bank New Zealand Limited (the Bank) obtained judgment against the four members of the Unka family on 12 June 2014, in the total sum of $942,643. The Bank subsequently issued bankruptcy proceedings against each of them. All four members of the Unka family then made proposals to their creditors under the Insolvency Act 2006 (the Act), and those proposals were accepted at creditors’ meetings held on 21 October 2014.
[4] The provisional trustee named in each of the proposals, Mr Paul Surridge, now applies to the Court under s 333(1) of the Act for approval of the proposals.
Events subsequent to the hearing on 8 December 2014
[5] Following the hearing, Mr Keran Unka abandoned his application for approval of his proposal. He was made bankrupt, on his own application, on
18 December 2014. As part of an agreement made with Mr Keran Unka and his wife and two sons, the Bank then filed notices of discontinuance of its bankruptcy applications against each of Ms Lesley Unka, Mr Suresh Unka, and Mr Korin Unka. The Bank also advised in a memorandum dated 22 January 2015 that it withdraws its formal opposition to the remaining applications for approval. The Bank further advised that, in the event of the Court declining to approve the proposals made by Ms Lesley Unka, Mr Suresh Unka or Mr Korin Unka, and a further proposal being made by one or more of those parties, the Bank would not oppose any such proposal.
[6] I now give judgment on the applications to approve the proposals made by
Lesley, Suresh, and Korin Unka.
The proposals
[7] The three proposals are in almost identical terms. Each provides for the insolvent to make 36 monthly consecutive payments of $500 (total $18,000) in satisfaction of all unsecured creditors’ debts and obligations. The payments would be made to the trustee on the first business day of each month, with the first payment one month after the approval of the proposal. The proposal would be “binding on all named creditors”.
[8] Provision was made for payment of the trustee’s fees. There were no debts
owed to priority creditors by any of the three insolvents.
[9] Statements of affairs filed by Ms Unka and her two sons provided the following information:
Ms Lesley Unka
Total assets: $15,159.17
Total unsecured creditors: $5,288,699.40
[10] Ms Unka listed a total of 15 unsecured creditors, the largest debt being a debt of $1,948,923 owed to Mr Evan Bourke. The second largest debt shown in the statement of affairs was the debt of $942,643.05 owing to the Bank.
Mr Suresh Unka
Total assets: $7,150.55
Total liabilities: $5,270,699.40
[11] Mr Suresh Unka’s list of unsecured creditors was almost identical to Ms Lesley Unka’s list. The only differences are that Mr Suresh Unka’s list does not include a debt of $30,000 owing to Onny Gajadhar, which was included in his mother’s list, and Mr Suresh Unka also listed a $35,000 student loan.
Mr Korin Unka
Total assets: $2,341.86
Total liabilities: $5,241,299.40
[12] Again, Mr Korin Unka’s list of unsecured creditors was almost identical to his mother’s list, the only differences being the omission of the debt of $30,000 to
Onny Gajadhar included in Ms Lesley Unka’s list, and the inclusion of a $6,000
student loan in Mr Korin Unka’s list.
The creditors’ meetings
[13] The creditors’ meetings for each of the three proposals were held on Tuesday,
21 October 2014 at 10am.
[14] Notices of the creditors’ meeting were posted to creditors on Friday,
17 October 2014, with copies of each insolvent’s proposal, statement of affairs and affidavit, a creditor’s claim form and a postal vote form. Notice of the meetings was posted to the Bank that day, with the other documents just referred to, addressed to the Bank’s registered office in Auckland.
[15] The Bank did not receive the documents in time to vote at the meeting. Mr Cooper, a manager of lending services for the Bank, says that the first the Bank knew of the creditors’ meeting was when it received copies of the applications to the Court for approval of the three proposals after the creditors’ meetings had taken place. He says that the exact date of the arrival of the documents at the Bank is not known, but it is unlikely to have been before 21 October 2014 given that domestic post usually takes up to three days to arrive. And once the documents had been received at the Bank’s registered office, they would have to be processed and sent to the relevant people dealing with the Unkas’ files in the Bank’s Wellington office.
[16] The result was that the Bank did not lodge creditor’s claims for any of the meetings, did not attend any of the meetings, and did not vote on any of the proposals. Mr Cooper says that even if the documents had arrived at the Bank’s registered office on the Monday, 20 October 2014, the Bank would barely have had sufficient time to consider the proposals internally and seek legal advice on whether it should vote for or against.
What happened at the creditors’ meetings
[17] The proposals were all approved. In a report provided to the Court on
21 October 2014, Mr Surridge advised that, although no creditors attended any of the
three creditors’ meetings, nearly all creditors to whom notice of the meetings had been given submitted postal votes, all in favour of the proposals. In the case of Ms Lesley Unka, Mr Surridge received 14 correctly completed creditor claim forms, all of which he accepted. The total of these claims was $6,211,979.40. No creditor voted against the proposal.
[18] Three unsecured creditors listed by Ms Unka in her statement of affairs did not submit claims and did not vote: Johnston Lawrence Nominees (debt $50,000), Medical Assurance Society (debt $23,000), and the Bank (debt $942,643.05).
[19] A majority in number and three-quarters in value of creditors who voted by postal vote was therefore achieved, and a resolution to approve Ms Unka’s proposal was carried.
[20] One of the creditors who voted in favour of the proposal, Ms June Bourke (debt $1,948,923), had not been mentioned in Ms Unka’s statement of affairs. Ms Bourke nevertheless submitted a creditor’s claim form, in precisely the same amount as the amount claimed by her husband Evan Bourke. Both submitted votes in favour of the proposal, which were allowed by Mr Surridge.
[21] Mr Suresh Unka’s proposal was approved by his creditors in similar fashion. No creditors attended his creditors’ meeting, but Mr Surridge received 12 correctly completed creditor claim forms and accompanying postal votes, all of which he accepted. No creditor voted against the proposal, and the total of all creditors who voted by postal vote was $6,191,979.40. As in respect of Ms Lesley Unka’s proposal, claims (and votes in favour) were accepted from both Mr Evan Bourke and Ms June Bourke, each in the amount of $1,948,923. The requisite majority in number and three-quarters in value of creditors voting by post was accordingly achieved, and the proposal approved.
[22] The only creditors listed in Mr Suresh Unka’s statement of affairs who did not submit postal votes were Johnston Lawrence Nominees (debt $50,000), the Government (student loan debt $35,000), and the Bank (debt $942,643.05).
[23] There was a similar picture with Mr Korin Unka’s proposal. Mr Surridge received 12 correctly completed creditor claim forms at or before the meeting, and all of those creditors voted in favour of the proposal. No creditor attended the creditors’ meeting, and no creditor voted against the proposal. Again, the only creditors not to submit claims and vote on the proposal were Johnston Lawrence Nominees, the Government as holder of the $6,000 student loan, and the Bank.
Mr Surridge’s further report
[24] Mr Surridge submitted a further report to the Court on 28 November 2014. By then, he had received claims from some additional creditors of Ms Unka and her sons who had neither submitted claim forms for the creditors’ meetings nor voted at those meetings. They were the Southwold Family Trust (debt $6,521,601), Mr Larry Ogg and Ms Carol Ogg (debt $2,888,145), and a brother of Suresh Unka and Korin Unka, Mr Sharn Unka (debt $337,267).
[25] Mr Surridge was concerned at the level of this additional debt, which was substantially more than the debt levels on which the creditors voted when they approved the proposals. He decided to write to all creditors who had voted on the proposals asking if their voting position had changed as a result of the additional debts being recorded and the reduced dividend they would receive if the proposals were approved by the Court.
[26] At the hearing on 8 December 2014, Mr Haines produced letters from all of the creditors who had voted in favour of the three proposals. Without exception, the creditors indicated that they would not wish to change their votes on the proposal because of the disclosure of the additional debts owing to the Southwold Family Trust, Mr and Mrs Ogg, and Mr Sharn Unka. All of the letters were supportive of the proposals made by Ms Unka and her two sons, many containing complimentary references to their integrity and abilities, and expressing sympathy with the financial difficulties in which the insolvents found themselves.
[27] Mr Sharn Unka’s letter advised that he would forego any dividend under the
proposals if they were approved, but still wished his support for the proposals to be
taken into account by the Court. Similar sentiments were expressed in a letter written on behalf of Mr and Mrs Ogg.
Applications by insolvent individuals for approval of proposals made to their creditors – relevant legal principles
[28] Section 333 of the Act provides:
333 Court must approve proposal
(1) After the proposal has been accepted by the creditors, the trustee must, as soon as practicable,—
(a) apply to the court for approval of the proposal; and
(b) send notice of the hearing of the application in the prescribed form to the insolvent and to each known creditor.
(2) The court must, before approving a proposal, hear any objection that is made by or on behalf of a creditor.
(3) 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 are not calculated to benefit the general body of creditors; or
(c) for any reason it is not expedient that the proposal be approved.
(4) The court must not approve a proposal if it does not provide for the payment, before any other debts are paid, of—
(a) those debts that would have priority under this Act if the insolvent was adjudicated bankrupt; and
(b) the trustee's fees and expenses that are properly incurred by the trustee in respect of the proposal; and
(c) costs incurred by a person other than the insolvent in organising and conducting a meeting of creditors for the purpose of voting on a proposal.
(5) Subsection (4)(a) does not apply to the extent that a creditor waives the priority that the debt of that person would otherwise have had.
(6) When it approves the proposal, the court may correct any formal or accidental error or omission, but must not alter the substance of the proposal.
[29] A proposal that is approved by the Court under s 333 is binding on all creditors whose debts are provable. The Court’s approval is also conclusive as to the validity of the proposal.1 No creditor whose debt was provable in the proposal is permitted to take an enforcement step after the proposal has been approved by the Court (and while the proposal remains in force), except with the permission of the Court given on such terms as the Court thinks appropriate.2
[30] The section has been considered by the Court of Appeal on a number of occasions. In Magsons Hardware Ltd trading as Mitre 10 Mega v Bogiatto,3 the Court confirmed that a two-step process is to be followed when considering an application under s 333. The first, or threshold, enquiry is whether one or more of the s 333(3) tests have been met. If so, the second enquiry is whether the Court should exercise its residual discretion to refuse approval.4
[31] In delivering the judgment of the Court in Magsons Hardware, Harrison J referred to the Court’s earlier decision in Farmer v Rowley, in which Richardson J observed:5
The Court may refuse its approval if and only if it is of the opinion that one or more of the trigger paragraphs (a), (b) and (c) [under the predecessor section 143(3) of the Insolvency Act 1967] applies. It follows that the exercise of the discretion reposed in the court under this section must be related to the particular paragraph or paragraphs relied on.
[32] The Court in Magsons Hardware also referred with approval to the following passage from Hardie Boys J in Re Bennetts’ Proposal, which had been cited by McKay J in Farmer v Rowley:6
Therefore I think it proper to deal with an application under s 143 a little differently from one under s 122. Rather than it being for the proponents of a scheme to show that it ought to be approved, 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
1 Insolvency Act 2006, s 334.
2 Section 335.
3 Magsons Hardware Ltd trading as Mitre 10 Mega v Bogiatto [2011] NZCA 378.
4 At [22].
5 Farmer v Rowley [1992] 2 NZLR 195 (CA) at 199, cited in Magsons Hardware, above n 3, at
[22].
6 Re Bennetts’ Proposal HC Christchurch B/138/81; M306/81, 1 February 1982 at 9, cited in
Magsons Hardware, above n3, at [23].
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 upon 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.
[33] The passage quoted from Re Bennetts’ Proposal has also been approved by the Court of Appeal in Herbert v New Zealand Guardian Trust Co Ltd.7
[34] In considering whether a proposal is “reasonable” under s 333(3)(b) of the Act, the Court must make an objective assessment from the perspective of the commercially experienced prudent creditor.8 In Magsons Hardware, the Court of Appeal considered that, in addition to considering the Court’s independent judgment of the views of the creditors, the words “the general body of creditors” in s
333(3)(b) raises the fairness of the proposal as between classes of creditors, requiring a comparative analysis of the creditors’ relative positions under the proposal or bankruptcy respectively.9
[35] A proposal which provides a dividend to creditors which is so small as to provide them with no practical advantage over a bankruptcy has been held to be not reasonable. In Herbert, the Court of Appeal found that the proposal was not reasonable because it offered little material return in comparison with what creditors
could expect to recover if Mrs Herbert were bankrupted.10
[36] In considering whether, for any reason, it is not expedient that the proposal be approved,11 the expression “expedient” is to be given a broad meaning. It will include matters relevant to the public interest, although the subsection is not confined in its scope to public interest considerations. In Re Kelly, Asher J
considered that subsection (3)(c) requires an open-ended approach – any attempt to
7 Herbert v New Zealand Guardian Trust Co Ltd [2012] NZCA 442 at [27].
8 Re Kelly ex parte Structured Finance Ltd [2009] 2 NZLR 785 HC, at [45] per Asher J. The approach adopted by Asher J in Re Kelly was approved by the Court of Appeal in Magsons Hardware, above n 4, at [29].
9 At [29].
10 At [35].
11 Section 333(3)(c).
focus on a specific matter would be to impose a limitation that does not arise from the words of the subsection.12
[37] In Re Trott & Joy, Tompkins J accepted that misconduct may, in an appropriate case, be such that the insolvent should not be permitted to avoid the stigma of bankruptcy and its resultant disqualifications, or that the public interest may require a detailed inquiry and investigation that would be available in a bankruptcy, but not available following approval of a proposal.13 In Re Kelly, Asher J accepted the reasoning of Tompkins J in Re Trott & Joy as it applies to the relevance of the public interest, noting that the purpose of the Act is not to punish a debtor.14 Asher J considered that focussing on the word “misconduct” was unhelpful, and that the public interest was best approached from the perspective of protecting the public from the insolvent by avoiding the risk of further conduct to the detriment of the community.15
Discussion and conclusions
[38] It is quite clear that none of the insolvents set out the full extent of their debts in their statements of affairs, as required by s 327(2)(a) of the Act.16 In each case, the statement of affairs referred only to the debt of $1,948,923 owing to Mr Evan Bourke, and made no mention of the debt (of the same sum) which was also owed to Mrs June Bourke. Nor did the statements of affairs refer at all to the debts owing to the Southwold Family Trust ($6,521,601), Mr and Mrs Ogg ($2,888,145), or Mr Sharn Unka ($337,267). Total debts were therefore understated by a sum in excess of $10 million in the case of each proposal (assuming the debts to
be valid).
[39] In addition to those deficiencies, the Bank now says that the judgment debt of
$942,643.05 owed to it by each of the insolvents does not represent the full amount
of the insolvents’ liabilities to it. Mr Cooper says that each of the insolvents is liable
12 Re Kelly ex parte Structured Finance Ltd above n 9, at [53].
13 Re Trott & Joy HC Auckland B1471/88, 14 April 1989 at 28.
14 At [60]-[61].
15 At [62].
16 Section 327(2) states: The statement of affairs must set out the following information: (a) The insolvent’s assets, debts, and liabilities…
to the Bank under a cross-guarantee that the company Seed Group Ltd gave in respect of the liabilities to the Bank of two associated companies, Raumati Property Holdings Management Ltd (RPHML), and Property Holdings KC Ltd (PHKC). (The insolvents were each guarantors of Seed Group’s liability to the Bank). According to Mr Cooper, the insolvents’ additional liability under the cross- guarantee is $1,471,037.71 in respect of the lending to RPHML, and $952,043.23 in respect of the Bank’s lending to PHKC.
[40] On that basis, Mr Cooper says that the Bank’s total claim against each of the
insolvents (excluding Mr Keran Unka), is $3,374,621.77.
[41] The Bank has not pursued these additional claims arising out of the insolvents’ guarantees of the liability of Seed Growth Ltd to the Bank. That is said to have been for “commercial reasons”, although the bank has not stated what those commercial reasons are. There is no evidence, however, that the Bank has abandoned its claims arising out of the cross-guarantee given by Seed Group Ltd. Each of the insolvents had the opportunity to reply to Mr Cooper’s evidence about this additional debt, and none of them denied it.
[42] If the Bank’s additional claims were added, the undisclosed liabilities in each of the insolvents’ statements of affairs would have exceeded $13 million.
[43] On any view of it, that is a huge understatement of relevant liabilities, even allowing for the statements of Mr and Mrs Ogg and Mr Sharn Unka that they do not seek any dividend from the insolvents.
[44] The failure to comply with s 327(2)(a) of the Act was a failure by each of the insolvents to comply with part 5, subpart 2 of the Act. Jurisdiction therefore exists for the Court to refuse to approve the proposals under s 333(3)(a) of the Act.
[45] In my view, the deficiencies in this respect are sufficiently great that the proposals should be refused, notwithstanding that all creditors apart from the Bank and two smaller creditors have indicated that they still support the proposals. It would not be in the public interest for the Court to sanction proposals where the
voting proceeded on the basis of information which was as seriously inaccurate as the information provided by the insolvents in this case. The statutory requirement for an insolvent to submit a statement of affairs setting out the insolvent’s assets and liabilities, verified by affidavit,17 suggests that a solemn obligation was intended to be imposed on insolvents to put a full and complete picture of their affairs before their creditors. While there will clearly be situations where the Court will not regard
inaccuracies in an insolvent’s statement of affairs as serious enough to justify the Court exercising its discretion against approval of the proposal, the statutory obligations in s 327(1) and (2) could easily be undermined if the Court were to effectively condone inaccuracies on the scale which has occurred in this case. I accordingly exercise my discretion to decline to approve the proposals under s 333(3)(a) of the Act.
[46] I am also of the view that there were procedural deficiencies in the scheduling of the creditors’ meetings which render it inexpedient for me to approve the proposal, under s 333(3)(c) of the Act. Notices of the meetings scheduled for
10am on Tuesday, 21 October 2014, were only sent to the Bank (and the other creditors to whom they were sent) with proof of claim and postal voting forms on Friday, 17 October 2014. The forms were sent to the bank at its registered office in Auckland, notwithstanding that the Unkas must have been aware that their liabilities to the Bank were not being administered out of the Bank’s Auckland offices. At very best, the Bank would have received notice of the meetings, the claim forms and postal voting papers, on Monday 20 October 2014. If the Bank wished to exercise its right to submit a postal vote there was every chance that its postal vote might not arrive with the provisional trustee until after the meetings had been held. Furthermore, there would have been very little time for the Bank to consider its position and take any legal advice it may have wanted to take before the meetings.
[47] This is not one of those cases (like Magsons Hardware) where it is clear that the Bank’s vote would not have affected the results of the voting. If the provisional trustee had accepted the Bank’s total claim against each insolvent at $3,374,621.77, which given the apparently “pragmatic” approach the provisional trustee took to the
acceptance of other creditors’ claims he may well have been prepared to do, the
17 Insolvency Act, s 327(1)(b).
required three-quarters in value of the debts of creditors voting would not have been reached: all of the proposals would have failed at that point (Mr Cooper’s evidence is clear that the Bank would have voted against the proposals).
[48] The inadequate notice of the meetings also deprived the Bank of the opportunity to question the insolvents, and potentially secure amendments to the proposals which might have been to the benefit of all creditors.
[49] The period between the posting of notices of the creditors’ meetings and the meeting dates themselves was far too short, particularly when a weekend intervened. The whole process appears to have been unnecessarily rushed, with the predictable results that the statements of affairs were woefully inaccurate, and inadequate notice was given to the creditors for them (or at least those who were not already sympathetic to the insolvents) to formulate views on the proposals, and make such decisions as to whether they would attend the meetings and how they would vote.
[50] I do not believe those procedural deficiencies are sufficiently cured by the Bank’s later decision to withdraw its objection to the proposals. The outcome may have been different if the Bank had been given adequate notice of the meetings. In my view, it would be inappropriate for the Court to effectively condone the outcome of a process which appears to have afforded creditors who were either locally based or friends or family members of the insolvents a better opportunity to participate effectively in the process than was afforded to the Bank.
[51] For the foregoing reasons, I decline to approve the proposals. That decision is without prejudice to the insolvents’ rights to submit further proposals if they wish to do so. If they elect to submit further proposals, far greater care should be taken to ensure that their statements of affairs are accurate and complete, and that all creditors receive sufficient notice of the creditors’ meetings to properly consider the proposals and how to exercise their voting rights.
[52] For completeness, I add that I would not have found it inexpedient to approve the proposals on account of any perceived risk to the commercial community if the insolvents were permitted to avoid bankruptcy (i.e. in the event of a creditor other
than the Bank now wishing to file a bankruptcy application). Ms Unka is a respected physiotherapist in her community, and Korin and Suresh appear to be hard working and of good character. The situation in which they now find themselves appears to have arisen largely because of their willingness to provide guarantees in support of business ventures which have failed.
Orders
[53] I make the following orders:
(a) The applications by Ms Lesley Unka and Messrs Korin and Suresh Unka for approval of their proposals under p 5(2) of the Act are refused.
(b) There will be no order for costs on the applications for approval.
(c) The Bank’s applications (4in proceedings Nos. CIV-2014-485-10132, CIV-2014-485-10116, and CIV-2014-485-10119) to adjudicate Ms Lesley Unka, Mr Korin Unka, and Mr Suresh Unka bankrupt, are withdrawn by leave, with no issue as to costs.
Associate Judge Smith
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