Westpac New Zealand Limited v Armitage

[2015] NZHC 337

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-004027
CIV-2014-404-004030
CIV-2014-404-000441

CIV-2014-404-000442 [2015] NZHC 337

BETWEEN

WESTPAC NEW ZEALAND LIMITED

Creditor

AND

HERBERT BRUCE ARMITAGE Insolvent

AND

DUNCAN BRUCE ARMITAGE Insolvent

Hearing:	15 July 2014
Appearances:	E Fox for the Creditor G Bogiatto for the Debtors’ Provisional Trustee  (Mr Peterson) on both applications
Judgment:	3 March 2015

JUDGMENT OF ASSOCIATE JUDGE SARGISSON

This judgment was delivered by me on 3 March 2015 at 4.30 p.m. pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date.......................................

Solicitors:

Minter Ellison, Auckland

G Bogiatto, Auckland

WESTPAC NEW ZEALAND LIMITED v HERBERT BRUCE ARMITAGE [2015] NZHC 337 [3 March 2015]

Introduction

[1]      These proceedings relate to applications by two insolvents, Herbert Armitage and his son Duncan Armitage, for approval of their respective proposals to creditors for  the  satisfaction  of  their  joint  and  separate  debts  under  Part  5  of  the Insolvency Act 2006.

[2]      According to their statements of affairs, the insolvents’ joint debts are some

$1,270,480.00  owed  to  four  joint  creditors.  Duncan  Armitage  owes  a  further

$52,982.34, to three separate creditors.   His total debts amount to $1,323,462.34. Herbert Armitage owes a further $366,769.75 to nine further separate creditors.  His total debts amount to $1,637,249.75.

[3]      Later documents indicate that some smaller debts are also owed.  These debts were omitted from the statements of affairs.

[4]      The proposals are to all intents and purposes identical save that the dividend issued by Herbert will be larger than that issued by Duncan. Both proposals were passed at quorate meetings of creditors, with majorities of over 75% of creditors both  in  number  and  in  value.  The  trustee  for  the  insolvents  has  endorsed  the proposals and confirms that he is willing to act as trustee for the creditors.

[5]      The respondent, Westpac, is a substantial creditor of both the insolvents. It assesses the sum owed to it as $242,178.25. The debt arose pursuant to a judgment obtained against the Armitages at the High Court on 16 July 2013. It related to a property development project in Mairangi Bay on the North Shore.  The project was unsuccessful and a mortgagee sale ensued. The debt represents the shortfall between the funds raised in the mortgagee sale and the amount actually owed, plus interest.

[6]      Westpac voted against the proposals and opposes the applications.

[7]      There is no dispute that the proposals, linked as they are, must either stand or fall together.

[8]      The proposals are for dividends amounting to 6.11c per dollar of debt for Herbert, representing a total contribution of $100,000, and 5.67c per dollar of debt for Duncan, representing a total contribution of $75,000. If both applications are approved, the return to Westpac will be 11.78c on the dollar.

[9]      Given that the debt to Westpac is over $240,000, and the insolvents together had assets of $11,300 at the time proceedings were filed, on the face of it Westpac would be better off under the proposals than it would if it were to claim the entirety of the insolvents’ assets.

[10]     Westpac is not persuaded that the proposals should be taken on their face.  It argues that approval should be refused under s 333 of the Act:

(a)       the  provisions  of  Subpart  2  of  Part  5  of  the Act  have  not  been complied with; and

(b)the terms of the proposals are not reasonable or are not calculated to benefit the general body of creditors; and

(c)       it is not expedient that the proposals be approved.

[11]     Westpac advances multiple arguments in support of each ground. Its primary objection under all three headings, however, amounts to an argument that there are reasons to suspect that some of the debts claimed by the creditors are not genuine.

Genuineness of debts

[12]     Westpac submits that many of the debts have not been adequately proved and are  claimed  by entities  and  people  closely  associated  with  the  insolvents,  most importantly James, Ernest and Charles Armitage. These individuals are the brothers of Herbert Armitage. They claim debts owed to them totalling over $1 million, being over 75% of the overall debt claimed in the proposals.

[13]     Westpac considers the debts to family members suspicious because: (a)        The debts are of a substantial size:

(i)       James  Armitage,  Herbert  Armitage’s  brother,  claims  that

Duncan and Herbert Armitage jointly owe him $275,480.

(ii)Ernest Armitage, Herbert Armitage’s brother, claims that the insolvents jointly owe him $548,000.

(iii)Charles Armitage, Herbert Armitage’s brother, claims that the insolvents jointly owe him $207,000.

(b)There is no documentary evidence to support any of these debts.  Each debt is supported only by the affidavit evidence of the debtors, the creditor, and the insolvents’ accountant, Clive Johnson. This lack of documentation is unusual for debts of this magnitude, even in a family context.

(c)      A large portion of the debt to James Armitage appears to relate to clothing stock and racking provided to Herbert Armitage for use by companies   now   in   liquidation.   This   property   was   apparently transferred to, and used and on-sold by, those companies. Westpac questions why the insolvents, rather than those companies, should be liable for that portion of the debt.

(d)Westpac suspects the debt to Charles Armitage concerned funds that the insolvents borrowed to pass on to Alan Armitage; if so, it could be clawed back.

[14]     Westpac  also  disputes  the  genuineness  of  various  smaller  debts  to  other creditors who voted in favour of the proposals.  These debts have a smaller effect on the overall claim, due to their size.  Although some are supported by evidence such as  dated  invoices  and  printouts  of  transactions, Westpac  contends  that  they  are suspicious for several reasons:

(a)      Debts    owed    by    Herbert   Armitage    to    Clive    Johnson    and Langley Factors ($33,403.75 and $82,799 respectively): though invoices are provided as evidence of these debts, there is no explanation for why the debt to Clive Johnson, which related to attendances dating back to 2007, was only claimed once the proposals were made, or for why the invoice for the debt to Langley Factors relates to debts as far back as 2007. Nor is there an explanation for why the debts invoiced to Langley Factors needed to be factored.

(b)      Debt owed by Herbert Armitage to John Bourke ($102,600):

(i)This  debt  allegedly arises  from  funds  advanced  by cheque payable to Herbert Armitage, but the only evidence in support of the debt is the unsupported assertions in the affidavits of Mr Bourke and Mr Armitage.

(ii)Additionally, these funds were purportedly advanced for the potential purchase of a Rotorua site, but the site was not for sale at the time the funds were advanced.

(iii)There  is  evidence suggesting that  Herbert Armitage  loaned John Bourke this sum, not the other way around: an email from  Bourke  to Armitage  states  that  he  undertakes  to  pay

$3,500 per month, and the statement of position provided by Herbert Armitage in support of his application for facilities lists the same amount from “John Bourke” under the heading “Other Income (commission, bonus, interest, dividends etc).”

(c)       Debt to ESNZ Trustee Limited ($84,666):

(i)       This debt is supported only by assertions in the affidavit of

Herbert Armitage.

(ii)Herbert Armitage is the sole shareholder and director of the company. Westpac argues he has displayed a remarkable lack of knowledge of the workings of the company, being unaware of why the company was set up or what it did. The claim that he holds ESNZ as a bare trustee for other persons explains neither his lack of involvement in the company as its director, nor his lack of knowledge as to why the company was set up.

(d)Debts    owed    by    Herbert    Armitage    to    Gary    Ashley    of Outlook Publishing, Michael Cournane and Warren Phillips: no evidence of these debts was provided apart from the creditors’ claim forms and assertions in their affidavits.

(e)      Debts  owed  by Duncan Armitage  to  David  Goulding,  Maia  Kihi, Tracey Jamieson and Gary Kihi, each for less than $1,500:

(i)       These   debts   were   not   disclosed   in   Duncan  Armitage’s

statement of affairs.

(ii)No  evidence  of  these  debts  was  provided  other  than  the creditors’ claim forms and affidavits. Duncan Armitage’s affidavit states that these debts were “overlooked” when preparing the statement of affairs.

[15]     Additionally, Westpac submits that there has been inadequate explanation of why the debts were not enforced, which is a further reason for suspicion, warranting investigation.

[16]     Even if, on investigation, the debts are found to be genuine, a suspicion calling for investigation is a factor bearing on the assessment of the proposals under s 333.

[17]     Westpac submits that, taking all of these factors into account, the proposal should not be accepted by the Court.  The Armitages should be adjudicated bankrupt in order to give the Official Assignee the opportunity to fully scrutinise all claims.

[18]     I agree that there is much that is unexplained about a significant number of these claimed debts.  There is none of the contemporaneous loan documentation that one would expect to see for such large advances, even in intra-family transactions. No formal loan documents have been produced. Nor is there even so much as a single contemporaneous handwritten note made by borrower or lender.  There are no bank records showing withdrawals and/or corresponding deposits.   In the normal course of things, debtors and creditors would be able to produce some documentary record in the face of criticism like that which Westpac has expressed. Without any such basic level of documentary support, to my mind, the disputed creditors’ claims inevitably raise suspicion that calls for a proper response from the provisional trustee and the insolvent.   Without such a response, the claims ring false and suggest a strong case for further investigation.

[19]     I turn then to consider whether, in view of this finding, Westpac is right that the Court should refuse to approve the proposals under s 333.

Discussion

[20]     Section 333 relevantly provides:

333  Court must approve proposal

[...]

(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.

[21]     These provisions afford the Court discretion to refuse to approve a proposal if, and only if, it considers that one or more of the statutory barriers to approval applies.

[22]     The effect of the section is to strictly constrain the Court's discretion. The Court must approve a proposal that has the requisite approval of creditors unless satisfied refusal is proper or required on one of the bases in s 333(3). The required creditors’ acceptance necessitates that the proposal must be passed at a creditors’ meeting by a simple majority in number and a 75% majority in value of creditors present and voting, or who voted by post.

[23]     In Kelly v Structured Finance Ltd the Court explained the position in the following way:1

[13]  Putting a proposal into effect is therefore a three-stage process. First, a proposal must be filed and a meeting of creditors called. Second, the meeting of creditors must be held and the required creditors' acceptance secured. Third, the Court must consider and approve the accepted proposal.

[14] Section 333(3) requires the Court to consider the compliance, reasonableness and expediency of the proposal. While the Court appears to have a general discretion to refuse approval as indicated by the word ‘may’, the Court may only refuse approval if one or more of the trigger paragraphs in s 333(3)(a), (b) and (c) applies: Farmer v Rowley [1992] 2 NZLR 195 at

199.

[15]  The approach to approving a proposal is that set out by Hardie Boys J in Re Bennett's Proposal HC CHCH B138/81 and M306/81 1 February 1982 in relation to the predecessor s 143 of the Insolvency Act 1967, quoted with approval in Farmer v Rowley at 205:

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

[24]     This statement indicates that there is no onus on the insolvent to show that the proposal should be approved. Indeed, this is indicated by the heading to s 333, which is ‘Court must approve proposal’.

[25]     A number of decisions suggest that there is an onus on creditors who oppose the proposal to show that approval should be refused.2   However, it is the obligation of the Court under s 333(3) to approve the proposal ‘if it considers’ that any of the various factors referred to are made out. The phrase ‘if it considers’ indicates the application of independent judgment. I respectfully agree with the conclusion of Robertson J in Re Nathan that an onus on an opposing creditor would ignore the public interest factor. Rather, the Court must follow the specific words of s 333(3). It has a discretion to refuse to approve if after exercising its independent judgment it

considers that one or more of the various factors referred to in that subsection are made out.3

[26]     I turn then to consider whether one or more of the “trigger  grounds” in

s 333(3) applies.

[27]     I put aside momentarily the triggers in s 333(3)(a) and (b) and begin with the expediency ground in s 333(3)(c).

Are there reasons of expediency for not giving approval?

[28]     The Court may refuse to approve a proposal where for any reason it is not expedient  that  the  proposal  be  approved.  In  exercising  its  discretion  to  refuse approval  under  s  333(3)(c)  the  Court  is  required  to  exercise  an  independent judgment. Considerations of the public interest are relevant as noted by Tompkins J, who considered the expediency ground in Re Trott and Joy. He said:4

But para (c) of subs (3) provides as a ground for refusing approval that for any reason it is not expedient that the proposal should be approved. As Hardie Boys J observed in Duncan Holding5 the Court is required to exercise

2      Re Trott and Joy HC Auckland B1471/88, 14 April 1989; Re Hart [1991] 2 NZLR 219 at 225.

3      Re Nathan HC Whangarei B53/89, 14 August 1989.

4      Re Trott and Joy¸ above n 2, at 810.

5      Re Duncan Holdings Ltd HC Christchurch M306/81, 1 February 1982.

its independent judgment and that considerations of the wider public interest are relevant.

[29]     Counsel for Westpac submits that the proposals are not in the public interest because of the suspicious debts to related parties discussed above. It contends that if the debts are not genuine, then the effect of approving the proposals would be to allow the insolvents to avoid the majority of their real debts, and retain much of their income. That would amount to rewarding dishonesty, and would not deter them from continuing with potentially reckless business practices in the future. It would not give future creditors the protections afforded by bankruptcy.

[30]     There  have  been  various  additional  arguments  raised  concerning  other reasons  why the  proposals  might  not  be  expedient,  and  why the  creditors’ and debtors’ conduct is commercially irresponsible enough that the Official Assignee should be involved even if the debts are genuine.

[31]     I take those arguments into account, but it is sufficient that, as matters stand, there is real suspicion as to the genuineness of the debts. It is difficult to know whether this is a case of two debtors who have put up proposals that are really shams designed to defeat genuine creditors; whether it is a case of individuals supported by an extraordinarily generous family; or something in between. That uncertainty alone justifies my being satisfied that good reason exists not to approve the Armitages’ proposals.

[32]     Without wishing to make a finding that is determinative of dishonesty, there is an overriding public interest here in investigation. If the disputed debts are not genuine,   then   it   is   appropriate   that   the   insolvents   bear   the   stigma   and disqualifications of bankruptcy, which are “designed to protect the unsuspecting community from the ravages of irresponsible financial conduct”, and act as “a deterrent to others from behaving in a like manner.”6  If the Official Assignee finds that the debts are, in fact, genuine, the insolvents will have the benefit of being cleared of suspicion.

[33]     There is a public interest in requiring creditors to provide sufficient evidence that their loans to insolvents were genuine, so that the Court may be satisfied that a proposal is not merely a method of helping insolvents to avoid the consequences of their actions, to the disadvantage of genuine creditors. Approving a proposal without such evidence may amount to an effective endorsement of irresponsible business practices on the part of both the undocumented creditors and the debtors, to the disadvantage of legitimate creditors.  I consider that where the evidence gives rise to genuine uncertainty over the legitimacy of significant debt, as here, that will be a good reason why approval of a proposal should be considered inexpedient.  There is such uncertainty here.   I am satisfied that it is not expedient that the proposals be approved.

Are there grounds under s 333(3)(a) and (b) for refusal?

[34]     There is some weight in the submission that commercially prudent creditors would want an investigation, and that the proposals are therefore not reasonable in the sense of being “acceptable to a commercially experienced prudent creditor”, as required by section 333(3)(b).7     However, because of the finding I have already made, it is unnecessary to discuss that argument further.

[35]     Likewise, if some of the votes were not genuine, the requisite majorities may not have been attained, and the procedural requirements of s 333(3)(a) therefore not complied with; but the state of the evidence is such that I cannot be satisfied that these debts are false, and given that I have found the proposal is not expedient, it is not necessary for me to be so satisfied.

Result

[36]     I have found, according to s 333(3)(c), that it is not expedient to approve the insolvents’ proposals. I see no reason why I should exercise my discretion under s 333(3) in order to approve them despite that finding.  I consider that it is proper and appropriate that the Official Assignee be able to investigate fully their financial affairs.

[37]     The applications to approve the proposals of Herbert Armitage and his son, Duncan Armitage, are refused.

[38]     The creditor, Westpac New Zealand Limited, has adjudication applications before  the  Court. They  have  been  adjourned  and  have  now  been  relisted  for

10.00 am on 13 March 2015.  Costs on the proposal applications are reserved until

that date.  If necessary I will hear further submissions from counsel at that time.

Associate Judge Sargisson