Urquhart
[2021] NZHC 1326
•8 June 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-001457
[2021] NZHC 1326
UNDER Subpart 2 of Part 5 of the Insolvency Act 2006 IN THE MATTER OF
The proposal to creditors of CRAIG ALEXANDER URQUHART
Hearing: 23 March 2021
Further submissions received 23 and 26 April 2021
Appearances:
P R Cogswell for Provisional Trustee
B P Molloy and C P Tatley for Oxford Finance Ltd (a creditor in opposition)
Judgment:
8 June 2021
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
RE URQUHART [2021] NZHC 1326 [8 June 2021]
Introduction
[1] The provisional trustee of the insolvent, Mr Craig Urquhart, applies for approval of a proposal to creditors, pursuant to s 333 of the Insolvency Act 2006.
[2] The proposal provides for payment of $40,000 in one instalment to participating unsecured creditors. That sum is contributed from the proceeds of the sale of an asset (motorbike) owned by the Halstaff Trust, and the balance in a cash contribution by the Halstaff Trust.
[3] The proposal represents a recovery to creditors of 8.5 cents in the dollar. That is said by the trustee to be better than the anticipated nil recovery in any bankruptcy.
[4] It is not in dispute that the voting and procedural requirements of Part 5, sub- Part 2 have been complied with in accordance with s 333(3)(a).
[5] The largest of the unsecured creditors, Oxford Finance Ltd (Oxford) opposes the application on the grounds that:
(a)The terms of the proposal are not reasonable or are not calculated to benefit the general body of creditors (s 333(3)(b)); and/or
(b)It is not expedient that the proposal be approved (s 333(3)(c)).
Factual background
[6] This is a second application brought by Mr Urquhart for the approval of a proposal. In 2011, Mr Urquhart entered into a creditors proposal, which the Court approved pursuant to s 333 of the 2006 Act. Mr Urquhart says that that earlier proposal followed the demise of Finco Holdings Ltd, a finance company, with which he was associated.
[7] In his present statement of assets, debts and liabilities, Mr Urquhart states that as at 31 August 2020, he had unsecured debts and liabilities of $379,636.84 and secured creditors’ debts of $4,604,948.44 (i.e. total debts and liabilities of
$4,984,585.28).
[8] Most of the secured creditor debt consists of Mr Urquhart’s liability as a guarantor for various family trusts of which he is a trustee and discretionary beneficiary. That is apparent from the following table of “secured creditors” attached to Mr Urquhart’s statement of assets, debts and liabilities:
Creditor1 Liability/Shortfall NZ$ Liability As Asset Finance $359,912.82 Thelma Trustee / Guarantor BNZ $1,085,508.80 Claire Trust / Guarantor BNZ $327,388.82 Jewell Trust / Guarantor BNZ $478,580.34 Solutions Group Investments Ltd / Guarantor BNZ $17,957.66 Credit card Tablehill Farms Ltd $448,425.00 Solutions Group Investments Ltd / Guarantor J D Tuscan Downs Trustee Company Ltd $301,575.00 Solutions Group Investments Ltd / Guarantor Tablehill Farms Ltd $230,550.20 MBG (Securities) Ltd / Guarantor J D Tuscan Downs Trustee Company Ltd $155,049.80 MBG (Securities) Ltd / Guarantor Tablehill Farms $1,200,000.00 PBP Ltd / Guarantor Total Secured Creditors
$4,604,948.44
[9]The secured loans are not in default.
[10] Oxford, previously known as Dorchester Finance, is an unsecured creditor in the sum of $332,213.71. It obtained summary judgment against Mr Urquhart and his co-director, Mr McCollum, on 29 March 2019, in the sum of $274,864.67, together with interest at 10.45 per cent and solicitor client costs.
[11] Mr Urquhart and Mr McCollum were the directors and shareholders of Point Ormiston Estate Ltd, which carried on business as a property developer. Both directors provided guarantees for mortgages held over Point Ormiston Estate Ltd properties by Oxford. Oxford successfully sought by way of summary judgment to enforce the guarantees to recover a shortfall following a mortgagee sale.
[12] Mr Urquhart is 58 years of age, self-employed and says that he has declared earnings, averaged over the past five years, of $62,200, before taxation. He says that
1 Mr Urquhart is a trustee and discretionary beneficiary of the Thelma Trust, the Claire Trust, the Jewell Trust and the Solutions Trust. He is a director of Solutions Group Investments Ltd and MBG (Securities) Ltd. The Solutions Trust is a shareholder of Solutions Group Investments Ltd. Mr Urquhart is both a director and 100 per cent shareholder of PBP Ltd.
all of his personal financial resources were depleted in the last two years following the failure of Point Ormiston Estate Ltd.
[13]Mr Urquhart’s total net realisable assets are $4,102.
[14] At the creditors’ meeting on 2 October 2020, the value of accepted claims for Mr Urquhart totalled $3,166,317. Oxford attended the creditors’ meeting, with counsel.
[15] At the meeting the proposal was supported by six creditors comprising 85.71 per cent in number. It was supported by creditors holding 86.96 per cent in value with the total admitted claim.
[16] The sole creditor opposing the proposal, namely Oxford, represented 14.29 per cent in number and 13.04 per cent in value.
[17] The BNZ, a secured creditor in the total sum of $1,909,435.62 did not vote. It is apparently in accordance with the standard BNZ policy. The BNZ was the only creditor not to vote.
Procedural history
(a)Execution of Oxford’s summary judgment of 29 March 2019
[18] On 13 May 2019, I made an order, pursuant to r 17.29 of the High Court Rules, staying the enforcement of my judgment of 29 March 2019, pending determination of Mr Urquhart’s complaint to the Law Society about Oxford’s solicitor’s fees. In my minute, I noted that a substantial portion of Oxford’s judgment comprises legal costs.2 That issue remains unresolved pending the outcome of an appeal to the Legal Complaints Review Office.
(b)The history of these proceedings subsequent to the hearing
[19] In a minute issued subsequent to the hearing, dated 24 March 2021, I directed that the provisional trustee and/or Mr Urquhart provide further financial information
2 Under s 161 of the Lawyers and Conveyancers Act 2006, where a complaint has been made under s 132(2) about the amount of a bill of costs registered by a practitioner, no proceedings for the recovery of the amount of the bill may be commenced or proceeded with until after the complaint has been finally disposed of.
relevant to the application. As noted in my minute, Oxford contended that there was a paucity of relevant financial information before the Court, which meant that it could not fairly and reasonably assess whether the proposal is a reasonable one and one which the Court should approve. I noted that the financial affairs of Mr Urquhart, involving as they do a number of trusts and company, is somewhat complex – and that there was therefore some merit to Oxford’s position.
[20] I directed that the provisional trustee and/or Mr Urquhart were to provide by affidavit the following further information:
(a)The management accounts and year ended financial statements for all the entities identified as trading;3
(b)Any further valuations of the trust properties (but excluding 1 Siota Crescent and 1A Siota Crescent, which have now been sold) held by the provisional trustee and/or Mr Urquhart which have not to date been disclosed to Oxford.
[21] In response to the direction, the Court received the following further documents from the parties:
(a)Affidavit of the provisional trustee, Ms Finnigan, sworn 14 April 2021;
(b)Affidavit of Mr Urquhart, sworn 14 April 2021;
(c)Submissions in response from Oxford, dated 23 April 2021;
(d)Provisional trustee’s response to Oxford’s further submissions, dated 26 April 2021.
Relevant legal principles
[22]Section 333 of the Arbitration Act reads:
Court must approve proposal
3 Outlined at p 43 of the Common Bundle of Documents, namely, MBG Ltd, MBG (Securities) Ltd, Solutions Group Ltd, Solutions Group Investments Ltd and PBP Ltd, i.e. those companies referred to at paragraphs 1, 2, 4, 5 and 7 of “schedule C” (statement of shareholdings and directorships as at 31 August 2020).
(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.
[23] Section 333 provides the third stage of a three-stage process for putting a proposal into effect. The first stage, which must satisfy s 327, is that the proposal is to be filed in the court (s 328). Second, the meeting of creditors must be held in the required creditors’ acceptance obtained (ss 330 and 331). Third, the Court must, under s 333, consider and approve the proposal.
[24] Whether the proposal is not “reasonable” (s 333(3)(b)) is to be assessed objectively from the perspective of the “commercially experienced prudent creditor”.4
4 Kelly v Structured Finance [2009] 2 NZLR 785 (HC) at [45]; approved by the Court of Appeal in
Magsons Hardware Ltd t/a Mitre 10 Mega v Bogiatto [2011] NZCA 378.
In Herbert v New Zealand Guardian Trust Co Ltd & Ors,5 the Court of Appeal held that in determining whether a proposal is reasonable, the Court is required to exercise an independent judgment. Nevertheless, it must be influenced by the commercial judgment of creditors, and unless there are special public interest or other commercial considerations present, the assessment of the substantial body of creditors ought to be accepted.6
[25] In determining whether it is expedient to approve a proposal (s 333(3)(c)), the Court of Appeal in Farmer v Rowley,7 emphasised the wider public interest element inherent in s 333(3)(c). As Asher J explained in Kelly v Structured Finance:8
[53] It was presumably the predecessor to s 333(3)(c) that Hardy-Boys J had in mind in Re Bennett’s Proposal when he referred to the Court considering the wider public interest. The Court may refuse to approve the proposal if it considers that for any reason it is not expedient that the proposal be approved. The word “expedient” is capable of a broad meaning. It can mean ‘practicable’, but also has the wider meaning of ‘suitable’ or ‘appropriate’ … I consider that s 333(3)(c) requires an open-ended approach, and that any attempt to focus it on a specific matter would be to impose a limitation that does not arise from the words of the subsection.
[26] An insolvent’s misconduct may be a factor relevant to the assessment by the Court of the public interest on the basis that it suggests a possibility of a continuing threat of harm to the commercial community.9
Analysis and decision
[27] The critical issues to address are whether the terms of the proposal are reasonable and whether it is expedient that it be approved. In assessing these factors, I must exercise an independent judgment, albeit that the assessment of the substantial body of creditors is generally an important factor and to be given weight in the determination. In the circumstances of the case, where there is a significant overlap
5 Herbert v New Zealand Guardian Trust Co Ltd & Ors [2012] NZCA 442.
6 See also Farmer v Rowley [1992] 2 NZLR 195 (CA) at 201; and Re Bennetts HC Christchurch B138/81; M306/81, 1 February 1982, at 9.
7 Farmer v Rowley, above n 6, at 201 per Richardson J, 202 per Hardie Boys J, and 208 per McKay J.
8 Kelly v Structured Finance, above n 4.
9 Re Marsh ex parte v Commonwealth Bank of Australia, New Zealand Branch HC Auckland CIV- 2009-404-3336, 16 March 2010, at [52].
between the reasonableness and expediency factors, I consider it appropriate to consider s 333(3)(b) and (c) concurrently.
[28] Mr Cogswell, for the provisional trustee, contended that the proposal is reasonable, calculated to benefit the general body of creditors, and will provide to those creditors a better result than would be achieved were the insolvent to be made bankrupt. He further submitted that the provisional trustee has complied in all respects with my directions of 24 March 2021 and that she has deposed as to the insolvent’s position on three separate occasions. Mr Cogswell argued that she is in the best position to give evidence as to the insolvent’s position and there is no basis for challenging the veracity of the information provided. He also argued that the trading of the identified entities is only of relevance to the insolvent to the extent of his interests in those identified entities. With one exception, that interest is a five per cent shareholding at the most.
[29] I acknowledge that the proposal has been supported by the vast majority of creditors and that they are in the main all sophisticated and experienced commercial entities. However, where, as in this case, the views of Oxford, as the unsecured creditor, diverge from those of the secured creditors, it is appropriate that the views of the secured creditors be accorded less weight than might otherwise be the case. The Court of Appeal in Herbert v New Zealand Guardian Trust Co Ltd & Ors held:10
While the views of creditors will ordinarily carry substantial weight in deciding upon the reasonableness of an offer in commercial terms, the significance of this factor is undermined in this case for two reasons. First, the views of the creditors in the present case are not unanimous. Secondly, the views of the secured creditors ought to carry less weight to the extent they are secured.
(emphasis added)
[30] Oxford is an unsecured creditor for almost 90 per cent of the unsecured debt. The secured loans are not in default. It appears that the principal debtors of the secured loans are able to meet their obligations to the creditors. This is the very sort of case where the views of the secured creditors ought to carry less weight.
10 Herbert v New Zealand Guardian Trust Co Ltd & Ors, above n 5 at [34].
[31] The financial affairs of Mr Urquhart are complex. They provide important context for evaluating the proposal and addressing what Mr Molloy contended is a lack of transparency and unexplained discrepancies in the financial information provided.
[32] Mr Urquhart is the trustee and discretionary beneficiary of five trusts. This includes the Halstaff Trust, which would provide the proposal payment of $40,000. Some of those five trusts own properties. This includes the Claire Trust which owns a property of approximately $1.4 million value at Whangaparāoa. I accept that the two leasehold properties at Kohimarama (the Jewell Trust and the Thelma Trust) have recently been sold.
[33] Mr Urquhart is also a shareholder and director of some 11 companies, although four of those companies are said not to be trading and have no assets. The various trusts are also shareholders in some of those companies.
[34] Mr Urquhart is also a 100 per cent shareholder and director of PBP Ltd. As the above table notes, PBP is indebted to Tablehill Farms Ltd in the sum of $1.2 million. The provisional trustee and Mr Urquhart say that the $1.2 million has been on-lent to unidentified third parties.
[35] Mr Urquhart says that for the last five years he has earned the very modest income of $62,200 per annum (before taxation). By virtue of his personal guarantees he has total debts and liabilities of $4,984,585.28 and his total net realisable assets are only $4,102. As Mr Molloy submitted, he is insolvent by quite some margin and appears to have placed himself in a position where his personal guarantees are of no value.
[36] In his statement of affairs Mr Urquhart says that he is self-employed. In the schedule of shareholdings and directorships he says that he has received the average salary of $62,200 as “manager of MBG Ltd”. MBG Ltd is said to be a mortgage finance facilitator and a registered financial service provider (FSP). It facilitates the lending of finance and is registered with the FMA. Mr Urquhart says that he is not personally a FSP and he does not provide financial advice to clients.
[37] The fundamental problem with the proposal in this case is that the Court is ultimately left with a troubling sense that the insolvent, Mr Urquhart, may have other financial means available to him that have not yet been disclosed. It is far from clear on the evidence before the Court, whether, as contended, Oxford and the other creditors would be better off under the proposal as opposed to a bankruptcy.
[38] The Court of Appeal in Herbert v New Zealand Guardian Trust Co Ltd & Ors,11 held that where insolvents may have other financial means available to them not yet disclosed, that is a consideration that goes to the grounds for refusal under both s 333(3)(b) and (c) of the Insolvency Act (i.e. the reasonableness and expediency factors).
[39] I acknowledge that as directed, the provisional trustee and Mr Urquhart provided the further information the subject of my minute of 24 March 2021. However, there remain some fundamental unanswered questions about Mr Urquhart’s true financial position. I also accept that Ms Finnigan has done an independent examination of Mr Urquhart’s financial position (she has deposed to that position on three separate occasions), but it must be the case that to a large extent she is dependent on full disclosure from Mr Urquhart. Accordingly, her investigations to date, as the statutory scheme anticipates, do not equate with what would be a full and impartial review by the Official Assignee, were Mr Urquhart to be made bankrupt.
[40] Ms Finnigan contends in her affidavit of 21 December 2020, that the proposal provides certainty to secured creditors that Mr Urquhart will continue to support the repayment of debts by related interests. I accept that an act of bankruptcy might be a default under the terms of the secured loans, but it is not at all clear how and whether Mr Urquhart does support the repayment of debt in other ways. As I have noted above, Mr Urquhart’s significant personal liability under the guarantees contrasts with his income of $62,200 per annum and essentially no assets. This includes recent, further lending of $1.2 million, based apparently on Mr Urquhart’s personal guarantee and despite his apparently poor financial position recorded as at 31 March 2019 – and when, as at 31 March 2019, the assets of PBP Ltd were recorded as being ($696).
11 Herbert v New Zealand Guardian Trust Co Ltd & Ors, above n 5 at [37].
[41] As Mr Molloy submitted, the movement of funds between commercial entities and the various trusts is complex; there are significant intercompany loans and movements of funds between the respective trusts. No loan documents or financial statements for the trusts or movement of funds between the companies have been provided and the Court is left with considerable uncertainty as to the nature and reasons for the advances. Mr Urquhart appears to have made himself judgment-proof in circumstances where he continues to be a guarantor for substantial sums of money.
[42] In response to my minute, the financial statements and management accounts provided relate to the financial year ending 2019. However, my directions did not confine the financial information sought to a particular time period (i.e. the year ending March 2019) but rather expected Mr Urquhart and the trustee to provide the most up- to-date information available. Mr Cogswell submitted that the March 2020 financial statements (not provided) had not been prepared when this proposal was being documented. He indicated that should the Court require the March 2020 statements, they could be provided. However, in my view, they should have been provided in response to my minute (it seems they were available), but in any event, with no criticism intended of Mr Cogswell, I do not see the benefit of seeking further information at this stage.
[43] In their most recent submissions, the parties have raised and disputed a number of accounting and alleged material discrepancies between the various management accounts and financial accounts. It may be, as Mr Cogswell submitted, that there is a valid explanation for some of the discrepancies identified by Mr Molloy in opposition, but the Court is not well placed in applications of this kind, generally determined on the papers, to address those issues. Again, the issue arises as to whether all of these matters ought to be addressed by a full and impartial review by the Official Assignee.12
[44] I also accept that on the face of it, it might be erroneous to conflate the identified entities’ position with that of the insolvent, Mr Urquhart, when it comes to
12 That might conceivably include an investigation of the issues arising from MBG Ltd’s financial statements indicating that various payments were made to third parties during the financial year ending 2019, including salaries of $134,600, administration costs of $200,000 and brokers/introducers’ fees of $69,431. It is also noted at paragraph 6 of the notes to the financial statements of Solutions Group Ltd accounts that there had been advances to a beneficiary of the Halstaff Trust. However, this is not specifically recorded in the statement of financial position, nor has that beneficiary been identified.
considering his position. With the exception of PBP Ltd, Mr Urquhart is only a five per cent shareholder in the relevant companies. However, the various trusts appear to be substantial shareholders in at least some of the companies and there is a common shareholding to many of them.13 Again, all these matters may well benefit from a more thorough investigation by the Official Assignee.
[45] Transparency is an important factor in evaluating the statutory criteria in ss 333(3)(b) and (c). As Associate Judge Osborne stated in Re Blackmore:14
It behoves those involved with any proposal under Part 5 of the Act to demonstrate transparency and complete integrity in the approach taken to a proposal, from the provision of complete and reliable information to all creditors to the objective analysis of creditors’ claims. A lack of transparency is a matter which may justify the Court in its discretion refusing to approve a proposal.
(emphasis added)
[46] In Mr Urquhart’s case there has been a clear lack of transparency, which I find is the principal basis for rejecting the application. The independent role of the trustee is of course designed to ensure transparency and accountability. However, as noted above, there are limits as to how far a trustee can investigate matters. In circumstances where an insolvent has structured his affairs in a complex way with a view to minimising any exposure to creditors, the Court is entitled to look critically at the proposal and to insist on full disclosure. In the main, the statutory scheme is designed to deal with relatively straightforward applications without the need for lengthy and contested Court examination of the insolvent’s true financial position. In genuine insolvency situations there will of course be very limited funds available for litigation of that kind.
[47] I accept that the size of the proposal (a recovery to creditors of 8.5 cents in the dollar) is a relevant factor and that the courts have approved proposals for smaller distributions in other cases.15 However, that is no answer to the issue of a lack of transparency.
13 Mr David John Miller, who has in many cases the same address as Mr Urquhart, is a shareholder in Solutions Group Investments Ltd, Solutions Group Ltd, MBG (Securities) Ltd and MBG Ltd.
14 Re Blackmore HC Christchurch CIV-2010-409-001667, 5 December 2011 at [76].
15 Re Marsh ex parte, Commonwealth Bank of Australia, New Zealand Branch, above n 9, (less than 1 cent in the dollar); see also Re Gibson HC Auckland, CIV-2010-404-8054, 15 February 2011.
[48] In Re Diston ex parte Thompson,16 it was held that the basis for determining a proposal to be unreasonable may be (although it was not engaged in that case) because “it would not be fair or reasonable for [the unsecured creditor] to be constrained to accept that sum rather than taking its chances in a bankruptcy”. That principle also applies in this case.
[49] This case is also similar to Re Nathan,17 where it was held that if a bankruptcy occurs, the Official Assignee would be required to assess independently all claims and the background of previous dealings which may be of relevance. That could, it was held, disclose a different situation.
[50] The wording of s 333(3)(c) imparts, as noted in Kelly v Structured Finance,18 a very wide degree of discretion on the determining Judge. It is not in dispute that this can encompass public interest factors.
[51] I find that there is a public interest factor of relevance to this application which provides a further reason for refusing the proposal. Namely: it appears that Mr Urquhart continues to be involved in the finance industry. He may not personally be a registered financial service provider, but he is the manager of MBG Ltd, which is a registered FSP. Furthermore, this application is, as I have already noted, a second application for the approval of a proposal. That is not in itself a bar to the Court granting approval on a second occasion. However, in the circumstances of this case, it simply raises further unanswered questions about whether there is a need to protect the public from Mr Urquhart, an insolvent debtor.19
[52] I also agree with the observation of Associate Judge Sargisson in Marsh v Commonwealth Bank of Australia, New Zealand Branch,20 where she noted that a lack of any personal assets of substance with which to back up personal guarantees is suggestive of a somewhat cavalier attitude to those guarantees.
16 Re Diston ex parte Thompson [2015] NZHC 2050 at [51].
17 Re Nathan HC Whangārei B53/89, 14 August 1989 at 19–20; cited with approval in Herbert v New Zealand Guardian Trust Co Ltd & Ors, above n 5 at [36].
18 Kelly v Structured Finance, above n 4 at [53].
19 Kelly v Structured Finance, above n 4 at [63].
20 Re Marsh ex parte v Commonwealth Bank of Australia, New Zealand Branch, above n 9 at [51].
[53] Finally, I reject Mr Cogswell’s submission that the pending application filed by Mr Urquhart on 23 April 2021, with the Legal Complaints Review Office, is of any relevance. The application for approval of the proposal before me proceeds on the basis that Mr Urquhart is insolvent and is liable to make payment of the judgment debt.
[54] For all these reasons, I find that the application should be refused. The proposal is neither reasonable nor expedient.
Result
[55] The application by the provisional trustee for approval under s 333 of the Insolvency Act 2006 is dismissed. I decline to approve the proposal.
[56] As to costs, I am of the preliminary view that Oxford, in successfully opposing the application, is entitled to costs and on a 2B basis. This was a fully contested application and Oxford is the successful party. If costs cannot be agreed, then written submissions (of no more than three pages) are to be filed and served within 14 days.
Associate Judge P J Andrew
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