Walker v Forbes

[2013] NZHC 412

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV2012-409-002486 [2013] NZHC 412

BETWEEN  ROBERT BRUCE WALKER First Plaintiff

ANDPROPERTY VENTURES LIMITED (IN RECEIVERSHIP AND LIQUIDATION) Second Plaintiff

ANDFIVE MILE HOLDINGS LIMITED (IN RECEIVERSHIP)

Third Plaintiff

ANDAUSTIN JOHN FORBES First Defendant

ANDALISTER SPEDDING JOHNSTON Second Defendant

ANDGORDON LEWIS HANSEN Third Defendant

ANDDAVID IAN HENDERSON Fourth Defendant

ANDADOLF DE ROOS Fifth Defendant

ANDDANIEL JAMES GODDEN Sixth Defendant

ANDPWC (SUED AS A FIRM) Seventh Defendant

ANDFRIGHT AUBREY LIMITED Eighth Defendant

ANDRICHARD WILLIAMS GIBBONS Ninth Defendant

Hearing:         22 February 2013

Counsel:         TGH Smith and JBM Smith for Plaintiffs

D I Henderson (In Person) - Fourth Defendant

WALKER V FORBES & ORS HC CHCH CIV 2012-409-002486 [6 March 2013]

Judgment:      6 March 2013

JUDGMENT OF WHATA J

[1]      The   plaintiffs   seek   leave   to   proceed   against   the   fourth   defendant, Mr Henderson, a bankrupt.  He was a director of the now failed Property Ventures Limited companies.

[2]      The essential reasons specified to join Mr Henderson are as follows:

(a)       The plaintiffs want access to Mr Henderson’s Directors and Officers

Liability insurance;

(b)It is proper and necessary to join Mr Henderson for the purposes of establishing his liability for breach of director’s duties;

(c)       The Official Assignee has no objection to the proceedings; and

(d)Any judgment  would  be instructive if  the  Official Assignee were asked to admit a claim by other plaintiffs in Mr Henderson’s bankruptcy.

[3]          Mr Henderson opposes.  He contends:

3.1      The fourth defendant does not have the benefit of a Directors and

Officers insurance policy with Vero Insurance Limited;

3.2Alternatively, if the fourth defendant does have the benefit of such a policy  it  only  covers  the  actions  and  decisions  of  the  fourth defendant taken in conjunction with the other directors named as defendants and therefore no purpose would be served by proceeding against the fourth defendant;

3.3Section 76 of the Insolvency Act 2006 does not apply as it only gives the Court jurisdiction to allow a proceeding to continue against a bankrupt  if  the  proceeding was  commenced  prior  to  the  date  of adjudication.

3.4The fourth defendant would wish to defend this proceeding but has no capacity to meet the legal costs of doing so;

3.5      The plaintiffs are bringing this claim for improper purposes.

Background

[4]      The first plaintiff, Mr Walker, is the liquidator of Property Ventures Limited (PVL) and many of its subsidiaries.  These companies were placed into liquidation with estimated losses of at least $150 million.   Mr Henderson was a managing director of PVL, (though he says not  at all material times).   He was  adjudged bankrupt on 29 November 2010.  The claim against Mr Henderson was commenced on 12 November 2012 and comprises seven causes of action against the directors of PVL for allegedly serious breaches of their duties.

[5]      The relief sought by the plaintiffs includes the following:

(a)      Declarations that the PVL directors have breached their duties under ss 131, 135, 136, 137 of the Companies Act 1993;

(b)Orders pursuant to s 130(1) of the Companies Act 1993 that the PVL directors pay to the first plaintiffs the sum of $100 million by way of compensation or such other sum as the Court thinks fit;

(c)      An  order  banning  the  PVL directors  from  acting  as  directors  of companies under s 383 of the Companies Act.

[6]      There are also related claims, including against PricewaterhouseCoopers for breach of an alleged duty of care to PVL and to the PVL Group.  I am also advised that one of the directors will seek to join Vero Insurance Limited.

[7]      Mr  Walker  says  that  the  PVL  directors,  including  Mr  Henderson,  held liability insurance with Vero.  This is not accepted by Mr Henderson in his notice of opposition.  However, disclosure by Vero unveiled a document which purports on its face  to  be  a  “Directors  and  Officers  Liability  and  Company  Reimbursement Insurance Policy”.   There is also correspondence from the then chairman of PVL

putting their brokers on notice of potential claims in respect of the PVL companies. That  correspondence  and  related  correspondence  assumes  the  existence  of Vero liability insurance.

[8]      Mr Walker also avers that:

12.In  ...  order  to  obtain  access  to  the  proceeds  of  Mr  Henderson’s insurance cover it is necessary that these proceedings continue and that a judgment be obtained against him and on the plaintiffs’ behalf I ask that the Court allow this proceeding against him to continue in terms of section 76 of the Insolvency Act 2006.

[9]      Mr Walker also produces a letter from Grant Slevin, Senior Investigating Solicitor, Insolvency & Trustee Service, Ministry of Economic Development.  That letter records the acceptance of the Official Assignee that the companies for which Mr Walker  is  a  liquidator  are  secured  creditors  in  respect  of  any  liability Mr Henderson may have to them for breach of director’s duties to the extent they hold  a  statutory charge  over  the  proceeds  of  any  insurance  policies  that  might respond to such breaches. The letter states:

Accordingly  the  Official  Assignee  accepts  that  your  client’s  rights  of recovery, including his right to establish in court that Mr Henderson is liable to Property Ventures Limited and its subsidiaries for any breaches of duty, are not affected by Mr Henderson’s bankruptcy.   The Official Assignee’s consent to the issue of proceedings against him is accordingly not required.

The letter also records that a determination by the Court would be instructive in the event that the Official Assignee was required to either admit and quantify, or reject, any proof of debt Mr Walker might elect to lodge in Mr Henderson’s bankruptcy.

Preliminary matters

[10]     Mr Henderson objects to the reference to the document purporting to be an insurance policy and related documents because they are hearsay.  I am satisfied that there are proper grounds for their admissibility given:

(a)      The policy is a business document;

(b)      It is unreasonable to require the document to be produced formally by

a Vero representative;

(c)       Similarly, it is unreasonable, at this stage, to call the former PVL

chairperson to produce related correspondence;

(d)      I am satisfied as to the reliability of the documentation; and

(e)       When questioned about the insurance policy, Mr Henderson did not deny that he was insured, only that he might not be covered by it.

Issues

[11]     With the benefit of argument, the key issues for resolution are:

(a)       Whether s 76 of the Insolvency Act 2006 permits commencement of proceedings against an undischarged bankrupt after adjudication; and

(b)       If so, whether leave should be granted to commence proceedings.

Jurisdiction

[12]     Section 76 of the Insolvency Act 2006 states:

76       Effect of adjudication on Court proceedings

(1)       On adjudication, all proceedings to recover any debt provable in the bankruptcy are halted.

(2)       However,  on  the  application  by  any  creditor  or  other  person interested in the bankruptcy, the Court may allow proceedings that had already begun before the date of adjudication to continue on the terms and conditions that the Court thinks appropriate.

[13]     This section on its face confers a power of the Court to “allow proceedings that had already begun before the date of adjudication to continue”.   It does not expressly contemplate allowance for fresh proceedings after bankruptcy.  But there is

authority for the proposition that earlier enactments,1  of the same proviso, allowed for fresh proceedings.

[14]     Assuming  there  is  jurisdiction  to  enable  commencement  of  proceedings against Mr Henderson, the applicable principles were set out in Saimei v McKay & Ors2 (and adopted by various authorities since), including FE Investments Limited v Klisser as follows:3

(a)       The Court has a discretion to do what is right and fair according to the circumstances of the case;

(b)       When  a  person  is  adjudicated  bankrupt,  his  assets  are  to  be administered in an orderly fashion for the benefit of all his creditors and a particular creditor should not be able to obtain an advantage by bringing proceedings against him. There should thus be no prejudice to other creditors or to the ordinary administration of the bankruptcy if the action were to proceed;

(c)       The claim should not be clearly unsustainable but the Court will not investigate the merits of the claim;

(d)       The claim should normally be of a type which is more suitably determined by action rather than by lodging a proof of debt in the bankruptcy. If the claim could just as easily be dealt with in the bankruptcy, leave is not likely to be granted;

(e)       Leave  is  more  likely  to  be  granted  where  there  is  an  insurance company standing behind the defendant to pay any judgment debts the plaintiff might obtain, because if it is successful, such an action is unlikely to prejudice the creditors of the defendant;

(f)       It may be desirable to impose a condition that the plaintiff will not enforce any judgment against the defendant without the leave of the Court to ensure that the Official Assignee retains ultimate control;

(g)       Mere delay itself in applying for leave will not prevent leave being granted.  Leave  is  not  to  be  withheld  simply  and  solely  as punishment; and

(h)       Leave may be granted after the expiry of the relevant period of limitation to continue an action commenced within the limitation period without the leave of the Court.

[15]     Both parties accepted that these principles applied.

1      Refer Insolvency Act 1967, s 32; and see Gasior v Barton (2002) 7 NZBLC 103,746 (HC) at

[29]-[32]; Re B (A Prisoner) [1972] NZLR (SC) 897 at 899.

2      Saimei v McKay & Ors (1998) 6 NZBLC 102,611 [HC].

3      FE Investments Limited v Klisser [2010] 2 NZLR 217 (HC) at [17].

Scope of s 76

Argument

[16]     Mr Henderson placed great emphasis on the plain and ordinary meaning of the words used in s 76, together with the purpose of the Insolvency Act.  He quoted from the explanatory note to the Insolvency Law Reform Bill to contend that the purpose of the Act was to:

provide a predictable and simple regime for financial failure that can be   administered  quickly  and  efficiently,  imposes  the  minimum necessary compliance and regulatory costs on its users and does not stifle innovation, responsible risk taking, and entrepreneurialism by excessively penalising business failure; ...

[17]     Mr Henderson submits that the simple and clear procedure envisaged by the Insolvency Act involves a claim being lodged with the Official Assignee and in the event that the Official Assignee is unable or unwilling to recognise the claim, the Act sets out procedures for recourse to this Court for resolution.  He then says it does not make sense nor is it necessary to read into the plain words of s 76 the right or the power to commence proceedings after adjudication.

[18]     By contrast, Mr Smith submitted that there must be an implied premise4 that s 76  applies  to  all  proceedings  to  recover  provable  debts  so  as  to  insulate  a bankrupt’s estate from proceedings except with leave of the Court.  This construction is said to be consistent with the statutory purpose of the Insolvency Act and with how previous enactments were approached.5    Mr Smith then points to references in Parliamentary materials where it is said that the new provisions in large part do no more than restate, reorganise, reorder, simplify and modify those provisions without

any intention of altering the substantive law.6   He says that in order to give practical

4      Applying  the  interpretative  reasoning  employed     in  Commerce  Commission  v  Fonterra Co-operative Group Limited [2007] NZSC 36; See also Genesis Power Limited v Greenpeace New Zealand Inc [2009] 1 NZLR 730 (SC) at 749-750.

5      Gasior v Barton (2002) 7 NZBLC 103,746 (HC).

6      Refer Insolvency Law Reform Bill, Explanatory note at 6.

effect to the purpose and function of the Insolvency Act, an expanded discretion to grant leave to post adjudication proceedings must be implied.7

[19]     In terms of the substantive merits, Mr Smith contends that it is necessary to proceed against Mr Henderson to properly and fairly ventilate the claim to compensation against all directors.   He also says that the present proceedings are unsuitable for resolution via the Official Assignee processes and that recourse to this Court is needed to establish that the claimed debt against Mr Henderson is in fact

provable.8

Resolution

[20]     The purpose of s 76 is  to halt proceedings  against a person adjudicated bankrupt and to require provable debts to be admitted by the Assignee.  A discretion is conferred on the Court to “allow proceedings that had already begun before the date of adjudication” to continue.   A provable debt is a debt or liability that the bankrupt  owes  “at  the  time  of  adjudication”  or  “after  adjudication  but  before

discharge, by reason of an obligation incurred by the bankrupt before adjudication.”9

The proposed claim against Mr Henderson relates to compensation for his alleged breaches of duty as a director prior to his adjudication.  Prima facie this is a provable debt in bankruptcy.  While Mr Walker states that the Official Assignee would have some difficulty calculating a fair value for the claim, he does not deny that it is a provable debt.10

[21]     There are also strong reasons why there is no “implicit premise”11 that leave may be granted to commence proceedings after adjudication under the auspices of s 76. The immediate and general legislative context does not obviously demand such

a result.

7      Citing Glynbrook 2001 Ltd v Official Assignee [2012] NZCA 289.

8      cf Gasior v Barton (2002) 7 NZBLC 103,746 (HC) at [29].

9      s 232(1).

10     [15] of Mr Walker ’s affirmation, 14 November 2012.

11     This is the language used in Genesis Power Limited v Greenpeace New Zealand Inc [2009]

1 NZLR 730 (SC) at [52].

[22]     First, the language used at s 76(2) is clear.  The Court has expressly limited discretion to:

...  allow proceedings that had already begun before the date of adjudication to continue ... .

[23]      Second, this reflects the overt policy of the Act to channel claims against a bankrupt’s estate through the Official Assignee, also affirmed by s 77, dealing with execution processes. Section 77 states:

77       Execution   process  must  not  be   begun  or  continued  after adjudication advertised

(1)       A creditor must not begin or continue an execution, attachment, or other process in respect of the bankrupt's property or person, for the recovery of a debt provable in the bankruptcy, after-

(a)      the Assignee has advertised the bankrupt's adjudication; or

(b)      the Assignee  has  given  notice  of  the  adjudication  to  the creditor.

...

[24]     Third, both ss 76 and 77 fit within a scheme of insolvency designed to secure the pari passu or “equal steps” principle.  As stated in the explanatory note to the Insolvency Reform Bill:

In  essence,  insolvency  law  provides  for  equal  treatment  of  all  creditors within a particular class.   This avoids wasteful races to the court.   In the absence of such a principle, each creditor would have the incentive to act in their own self-interest, seeking to apply to the court first with a view to recovering everything owed to them regardless of the consequences for other creditors.

[25]     Parliament has sought to give effect to this principle by making proceedings to recover debt against a bankrupt subject to the discretion of the Court, and has expressly limited that discretion to proceedings that predate the adjudication.

[26]     Fourth, the wider scheme of the Act contemplates a clear procedure whereby

a  creditor’s  claims  may  be  submitted,12   admitted  or  rejected  by  the  Official

12     s 233.

Assignee,13  with a related power to examine a creditor,14  and to obtain evidence of debt.15    The Court may cancel or reduce an admitted creditor’s claim.16   A creditor may apply to the Court for an order reversing or modifying an Official Assignee’s decision to reject a claim.17    If the claim is over $200,000 the application may be made to the High Court, with a capacity to appeal to the Court of Appeal with leave.18    Notably, if after ten working days an assignee does not admit or reject a claim a creditor may apply to the High Court for an order to admit or reject the claim.19     All of this suggests that there is no obvious gap to be filled and that Parliament contemplated that all claims, large or small, complex or simple, would be assessed first by the Official Assignee.

[27]     Fifth, the various authorities cited to me compelling an expansive approach to interpretation do not appear to be apposite because in those cases judicial interpolation was necessary to make the Act work.20

[28]     Sixth,  to  the  extent  they  are  relevant,  authorities  dealing  with  earlier legislation  must  be  understood  in  light  of  the  statutory  language  then  used. Significant reliance was placed by Mr Smith on Gasior v Barton21 wherein Williams J observed:

[29]     Section 32 is part of that scheme. ... The requirement for leave is plainly to provide a safeguard for claimants to be able to demonstrate that debts which they assert should be provable in the bankruptcy are in fact provable. The claim for exemplary damages in Saimei is a good example. Other claims for general damages may be in a similar category since they may not come within the ambit of the phrase "debt provable in bankruptcy" as defined in s 2, as may claims for equitable relief. The Assignee's power to defend either applications for leave or the proceedings themselves appears in s 71(b).

[29]     But s 32 of the Insolvency Act 1967 stated:

13     s 234(2).

14     s 234(1).

15     s 236.

16     s 238.

17     s 239.

18     s 241.

19     s 237(2).

20     Refer Glynbrook 2001 Ltd v Official Assignee [2012] NZCA 289 at [45].

21     Gasior v Barton (2002) 7 NZBLC 103,746.

32       Effect of adjudication on Court proceedings

... upon an adjudication being advertised, all proceedings to recover any debt provable in the bankruptcy shall be stayed, but the Court may, on application by any creditor or person interested, allow any proceedings commenced to be continued on such terms and conditions as it thinks just.

(Emphasis added)

[30]     Unlike s 32, s 76(2) expressly states that the discretion to allow proceedings relates only to pre-adjudication proceedings.

[31]     Eighth, I do not accept that a narrow reading of s 76 will reverse the course of insolvency law.  I was not taken to a long unbroken line of authority on point.  It may be that the point is obvious to insolvency lawyers that authority is not needed.  But I would need more than this to overcome the clear words used at s 76(2) in light of the statutory purpose of the Insolvency Act 2006.

[32]     Balanced against all of this, however, I accept the basic proposition that Parliament  should  not  be  taken  to  prohibit  legitimate  claims  for  breaches  of director’s duties and relevant compensation where the insolvency scheme does not provide a practical remedy.  If, for example, a notice of claim cannot now be made to the Official Assignee or there are insurmountable difficulties with processing a claim in the ordinary way, it may be that the type of interpolation made in Glynbrook 2001

Ltd v Official Assignee22 could be required here.  I also accept that Mr Henderson’s

involvement in the proceedings would practically, and more fairly, assist the resolution of the underlying issues.  These are very complex proceedings and I know that the Official Assignee would prefer to have the underlying issues ventilated in this Court.  And there is some sense in construing s 76 to relate to debts that are “in fact provable”23 in the bankruptcy.

[33]     But I do not think that, on the information available to me, the route afforded by the Insolvency Act is so impracticable in this case that s 76(2) must be read to include the power to grant leave to commence or continue the present proceedings

against Mr Henderson.   A solution appears to lie in the scheme of the Act itself.

22     Glynbrook 2001 Ltd v Official Assignee [2012] NZCA 289.

23     Refer Gasior v Barton (2002) 7 NZBLC 103,746 (HC).

Section 237(1) states that a creditor may give the Assignee notice to admit or reject a claim.  Section 237(2) states that if the Official Assignee does not admit or reject a claim within ten working days, the Court may admit or reject the claim, or make any other order that it thinks appropriate.   At least in this way the Official Assignee remains the first port of call, as the statutory scheme contemplates.

[34]     It also seems to me that in this case Mr Henderson’s presence is not strictly necessary as the insurance claim could be ventilated directly against the insurer.24   It was not made clear to me why Mr Walker has not sued the insurer, Vero.  Notably, the Official Assignee would treat the plaintiffs as secured creditors to the extent that they hold a statutory charge created by s 9 of the Law Reform Act 1936 over the proceeds of the insurance policy referred to in the application.

[35]     Accordingly,  based  on  what  I  have  heard,  I  am  disinclined  to  allow proceedings   to   be   continued   against   Mr Henderson   insofar   as   they   seek compensation under the auspices of s 76(2).  I say nothing about other relief sought for breach of duty or for orders seeking to prevent Mr Henderson from taking up a directorship in the future.  No leave is required to commence such claims.

Result

[36]     Subject to what I say at [37], I am disinclined to grant leave to continue the proceedings  against  Mr Henderson  for  compensation.    Leave  is  not  required  to commence proceedings against Mr Henderson for declarations as to breaches of his statutory duties and/or for other relief, including prohibition against him acting as a director in the future.

[37]     I nevertheless want to afford an opportunity to the plaintiffs, Mr Henderson and the Official Assignee to file memoranda dealing with the availability of the process contemplated by s 237.  This was not addressed previously in submissions.

Accordingly, I grant leave to them to file submissions on the availability of s 237 to

24     Refer QBE Insurance (International) Ltd and Vero Liability Insurance Ltd v MTec Consultants

Ltd [2012] NZHC 3329.

the  plaintiffs  within  ten  working  days.  I  will  issue  a  final  decision  once  those submissions (if any) are received.

Solicitors:

Luke Cunningham & Clere, Wellington