DENTAL COUNCIL V GIBSON HC AK CIV-2010-404-6412

DENTAL COUNCIL V GIBSON HC AK CIV-2010-404-6412 24 November 2010IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2010-404-6412IN THE MATTER OF the Insolvency Act 2006 AND IN THE MATTER OF a proposal by insolvent to creditors under Part 5 of the Insolvency Act 2006 AND IN THE MATTER OF NEVILLE JAMES GIBSONCIV-2010-404-230BETWEEN DENTAL COUNCIL Judgment Creditor AND NEVILLE JAMES GIBSON Judgment Debtor Hearing: 24 November 2010 Appearances: Mr M L Broad and Ms A M Pope for judgment creditor and objecting creditors Mr A Woodhouse for trustee in CIV-2010-404-6412 No appearance for judgment debtor Judgment: 24 November 2010(ORAL) JUDGMENT OF LANG J [on application for order seeking approval of a proposal under Part 5 Insolvency Act 2006 and application for order of adjudication]Solicitors: Kensington Swan, Auckland Copy to: Mr N J Gibson, Auckland Carter & Partners, Auckland[1] There are two applications before the Court today. The first is an application on behalf of Dr Gibson for approval to a proposal filed under Part 5 of the Insolvency Act 2006. The second is an application seeking an order that Mr Gibson be adjudicated bankrupt. [2] It is obviously necessary to deal with the application for approval of the proposal first. If approval is granted, the bankruptcy proceedings will be dismissed. If the application for approval is not granted, I will need to consider whether to make an order of adjudication.The application for approval of the proposal[3] Mr Gibson currently has debts outstanding in the sum of approximately $5,731.939. He has virtually no assets other than business debts that are said to be owing to him in the sum of approximately $98,000. He has put a proposal to his creditors that involves two essential components: a) The continuation of civil litigation that he has commenced in the High Court at Wellington against a range of defendants. He anticipates that this litigation will realise approximately $6.6 million for the benefit of his creditors. b) The recovery of approximately $98,000 in outstanding business debts, together with annual contributions of $33,000 for a period of three years. Those contributions are to come from earnings that Mr Gibson anticipates he will achieve through his business in the field of debt recovery. [4] The proposal was put to a meeting of Mr Gibson's creditors in the required manner. Eighteen creditors voted in favour of the proposal. The value of the debts owed to those creditors is $3,471,816.23. Two creditors, the Dental Council and the law firm, Minter Ellison Rudd Watts, voted against the proposal. They are owed a total sum of $575,193.23.[5] As required by the Act, the provisional trustee has now applied to the Court for approval of the proposal. The creditors who voted against the proposal at the creditor's meeting have objected to the proposal, and have appeared today in support of their objections. [6] In order to understand the issues that the application raises, it is necessary to have regard to some of the background events that led to the acceptance of the proposal by Mr Gibson's creditors.Background[7] Mr Gibson has been involved in litigation of one sort or another for several years. The litigation appears to have followed two paths, and has led in large part to the state of indebtedness in which he finds himself. [8] The first stream of litigation arises out of charges that Mr Gibson faced as a result of investigations into his practice as a dentist by the dental disciplinary authorities. Ultimately, the Dentists Disciplinary Tribunal found some of these charges proved and imposed financial penalties and orders for costs on Mr Gibson. Mr Gibson appealed against the Tribunal's findings and against the penalties that it imposed upon him. His appeal to this Court was dismissed in a judgment delivered by Wylie J on 14 November 2008: Gibson v Complaints Assessment Committee HC Auckland CIV 2008-404-7353 and CIV-2005-404-7355, Mr Gibson sought leave of this Court to appeal against the Judge's decision but the Judge declined leave:Gibson v Complaints Assessment Committee HC Auckland CIV 2008-404-7353 and CIV-2005-404-7355, 22 July 2009. He then applied to the Court of Appeal for special leave to appeal to that Court. Special leave was granted, but the appeal was ultimately dismissed: Gibson v Complaints Assessment Committee [2009] NZCA 601. An application by Mr Gibson seeking an order that the Court of Appeal recall its judgment was also dismissed: Gibson v Complaints Assessment Committee[2010] NZCA 161. [9] Mr Gibson faces significant debts as a result of these proceedings. These take the form of fees that he has incurred in instructing barristers to act on his behalfin relation to the various proceedings. They also include awards of costs that this Court and the Court of Appeal have made against Mr Gibson when his appeals and applications for leave to appeal have failed. [10] The second stream of litigation follows as a result of a successful claim that Mr Gibson made against the accounting firm Arthur Anderson. After obtaining judgment against Arthur Anderson, he issued proceedings against the law firm Minter Ellison Rudd Watts who had acted on his behalf in relation to the proceedings against Arthur Anderson. He contended that Minter Ellison Rudd Watts had a conflict of interest, and that they had failed to act in his best interests in relation to that litigation. [11] Mr Gibson failed in that claim and the trial Judge made a large award of costs against him. The award of costs amounted to approximately $486,000. [12] Earlier this year, Mr Gibson filed a proceeding in the High Court at Wellington seeking damages against the Dental Council and other persons in relation to actions that they had taken in relation to Mr Gibson over the last five or six years. This proceeding forms the basis of the first part of the proposal to which I have referred. It is a matter to which I shall return shortly.Relevant principles[13] The principles to be applied when a Court considers an application for the approval of the proposal under Part 5 are now well understood. A proposal must be in a prescribed form and it must be filed in the Court. It is then the subject of a vote at a creditor's meeting. It must be passed by a simple majority in number and a 75 per cent majority in value of creditors present or who vote by post. If a proposal passes the procedural requirements of the meeting, s 333(1) of the Act requires the provisional trustee to apply to the Court as soon as practicable for approval of the proposal.[14] Section 333(3) governs the circumstances in which the Court may refuse to approve a proposal after it has been accepted by the required majority of creditors. It provides:(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.[15] Under s 333(3), the Court has a discretion to refuse to approve the proposal. It may only do so, however, if it considers that one of the statutory barriers to approval prescribed in the section applies. As a result, the section strictly constrains the Court's discretion, with the result that the Court is required to approve a proposal that has the requisite approval of creditors, unless it is satisfied that refusal is proper or required on one of the grounds prescribed by s 333(3). [16] In Kelly v Structured Finance Ltd [2009] 2 NZLR 785 Asher J said at 786:[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 (CA) at p 199). [15] The approach to approving a proposal is that set out by Hardie Boys J in Re Bennett's Proposal (High Court, Christchurch, M 306/81, B 138/81, 1 February 1982) in relation to the predecessor, s 143 of the Insolvency Act 1967, quoted with approval in Farmer v Rowley at p 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."[16] As this statement indicates, 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".(a) Should the Court refuse to approve the proposal under s 333(3)?[17] The first ground for refusal is that the provisions of Sub-Part 5 have not been complied with. The objecting creditors contend that the proposal does not comply with Sub-Part 5 in two ways. First, the statement of assets and liabilities that the trustee sent to creditors listed the debt owing to the Dental Council as a contingent debt. As counsel for the trustee now accepts, that was an incorrect categorisation of the Dental Council's debt. That debt arises as a result of orders for costs made by this Court and the Court of Appeal. It is not a contingent debt in any way at all. [18] The second complaint is that the trustee proposes to charge remuneration in the sum of $275 per hour, together with expenses. The objectors point out that Regulation 40 of the Insolvency (Personal Insolvency) Regulations 2006 prescribes a formula for the trustee's remuneration. This is based on a set percentage of the value of assets that the trustee recovers for creditors as a result of the proposal. The objectors say that the proposal is deficient in the present case, because it prescribes a formula for the remuneration of the trustee that differs from the mandatory formula that the regulations prescribe. [19] I have not heard detailed argument on this point, so I am not prepared to say definitely whether or not this aspect of the proposal conforms with Sub-Part 5 of the Act. Even if it does not, however, I do not consider that it takes the objector's case very much further, because a majority of the creditors has voted in favour of the proposal knowing the basis upon which the trustee will be remunerated. For that reason I find that the Court has no power to refuse to approve the proposal under s 333(a).(b) Are the terms of the proposal reasonable, and are they calculated to benefit the general body of creditors?[20] Section 333(b) permits the Court to refuse the proposal if it considers that the terms of the proposal are not reasonable, or that they are not calculated to benefit thegeneral body of creditors. In considering this issue, the Court must approach its task from the perspective of the creditors. Wider public interest considerations are not relevant to the Court's enquiry under this head. If they are relevant at all, they fall for consideration under the expediency head in s 333(3)(c). [21] In Marsh v Commonwealth Bank of Australia HC Auckland CIV 2009-303- 3336, 16 March 2010 Associate Judge Sargisson approved the view of the learned authors of Heath and Whale on Insolvency at 10.28 that s 333(3)(b) may be broken down into two related issues. The first addresses minority oppression, and asks whether dissenting creditors will suffer undue prejudice as a result of the vote by the minority. The second issue is whether, in the view of the Court, the compromise is one that the creditor should enter into. [22] I do not consider that there is any evidence to support the first ground. I do not consider that the objecting creditors will suffer minority oppression in the event that the approval is proposed. [23] The second issue, in my view, is determinative of the present application. The issue to be decided under this head is whether, on an objective assessment, the proposal would be acceptable to a commercially experienced and prudent investor. Another way of putting the matter is whether, in the Court's objective assessment, it is clear that the creditors generally would fare better if an order of adjudication would be made. [24] Although the assessment is one for the Court, it must bear in mind and be influenced by the views of the creditors. In Farmer v Rowley [1992] 2 NZLR 195 Richardson J said at 200:In determining whether the proposal is reasonable the Court is required to exercise an independent judgment. Nevertheless it must be influenced by the commercial judgment of creditors who in approving the proposal have demonstrated their willingness and wish to receive a partial payment without recourse to bankruptcy. It is imp to emphasise, too, that it is the creditors who stand to lose the benefit if a proposal is rejected and bankruptcy ensues. Unless there are special public it or other commercial considerations present the assessment of the substantial body of creditors ought to be accepted.[25] In the same case Hardie-Boys J said at 202:Further, the judgment about these matters must essentially be one for the creditor to make. The creditors were in the best situation to weigh up the alternatives and they chose to take the money. I do not think it is part of the Court's duty to refuse approval in the mere hope that something better will be offered. The statute does not contemplate a procedure akin to an auction.[26] As Associate Judge Sargisson observed in Marsh at [20], these comments echo the point made by the Court of Appeal in Guest v Duffy [1991] 1 NZLR 183 that the statutory procedure is not intended as an opportunity for reactivating the acceptance process. I propose to analyse whether or not the proposal is reasonable having regard to the principles to which I have just referred. [27] I deal first with the recovery of funds through the Wellington litigation.Recovery of funds through the Wellington litigation[28] This was clearly an important part of the proposal from the perspective of both Mr Gibson and, no doubt, the creditors. In the proposal Mr Gibson said:That the satisfaction of my debts will be made in the following manner: (a) I will assist and co-operate with realisation of any contingent asset with the proceeds being paid into the pool of funds available to unsecured creditors including windfalls in the three year period set out in 5 below. 5. Subject to a successful outcome, there will be a sum estimated to be $6.6 million from litigation. Any funds that are obtained from this litigation will be made available to unsecured creditors. 8. The total sum available as a dividend to unsecured creditors subject to a successful outcome of litigation as set out in paragraph 5 will therefore be approximately $6,733,000 to be distributed pro rata to all unsecured creditors.[29] Given the importance of this aspect of Mr Gibson's proposal, it is necessary to say something about the proceeding that he has commenced in the High Court at Wellington. That proceeding in its current form names as defendants the Attorney- General, the Dental Council, D'Ath Law, North Harbour Law, David Marshall andBrent Stanley (both dentists) and the New Zealand Dental Association. The statement of claim runs to 52 pages and contains several causes of action. [30] It is neither possible, nor appropriate, in the context of the present application for me to comment on the likely prospects of success of this litigation. It is appropriate, however, that I should examine the practical considerations that need to be taken into account when considering whether the proposal is reasonable. [31] First, the proceeding is the last in a long line of proceedings in which Mr Gibson has been involved. Secondly, as matters currently stand, he is acting on his own behalf and without legal assistance. This has already led to difficulties within the litigation that have been the subject of comment by two Judges of this Court. [32] In an application that Mr Gibson filed to set aside the bankruptcy notice in the bankruptcy proceeding, Associate Judge Bell considered Mr Gibson's submission that the Wellington proceeding provided him with an arguable set-off or counterclaim against the Dental Council that he could not have raised in the proceedings that led to the debt owed to the Dental Council. That debt, of course, comprises awards of costs made by in favour of the Dental Council and against Mr Gibson in the appeals that he lodged to this Court and the Court of Appeal. [33] The Associate Judge held that the claims in the Wellington proceeding could not have been raised by him in the context of the appeals involving the Dental Council: Re Gibson, ex parte Dental Council of New Zealand HC Auckland CIV 2010-404-230, 3 June 2010. He considered, however, that the claims that Mr Gibson made in the Wellington proceeding did not raise an arguable counterclaim or set-off against the Dental Council. For that reason he refused to set the bankruptcy notice aside. [34] By coincidence, the Wellington proceeding came before Associate Judge Bell a short time later whilst he was sitting in Wellington. On that occasion he directed that the defendants were not required to take any further steps to defend the proceeding until an amended statement of claim had been filed, accompanied by acertificate from a barrister confirming that the pleading contained tenable causes of action. [35] Mr Gibson filed a further amended statement of claim, and it was the subject of a strike-out application by at least some of the defendants. Mallon J heard that application and in a judgment delivered on 23 November 2010 she struck out the entire proceeding other than the claim against North Law: Gibson v Attorney- General and Others HC Wellington CIV 2010-4485-479. As a result, the litigation that formed such a large part of Mr Gibson's proposal is no longer in existence, subject only to Mr Gibson's right to appeal to the Court of Appeal against Mallon J's decision. In the absence of a successful appeal, the litigation will obviously be severely reduced in scope. [36] The events that I have just described lead me to observe that any litigation is subject to inevitable cost, risk and delay. It is not a reliable source of income or capital. That general proposition is made the more acute in the present case by the fact that, as has already been demonstrated, it is inevitable that the claim will need to overcome significant hurdles if it is to proceed to a final hearing. [37] First, Mr Gibson will need to persuade the Court of Appeal that his claim should be reinstated. That is likely to take at least another six to nine months. Secondly, if the claim is reinstated he will inevitably face an application by the defendants for an order requiring him to provide security for their costs. Such an application was before Mallon J, but she did not need to determine it given her conclusion regarding the fate of the bulk of Mr Gibson's claim. She said, however, that, if she had been required to determine the application, she would have required Mr Gibson to provide significant security for the defendants' costs. [38] Given Mr Gibson's present financial situation, I am unsure where he could find the resources to enable him to comply with an order requiring him to provide substantial security. The claim would be stayed, however, until such time as security was provided. If it was not provided within a reasonable time, the claim would be struck out.[39] Even if Mr Gibson was able to provide security, his troubles would not be over. I have no doubt that the plaintiffs will seek greater particularisation of his claim, and this is likely to lead to further Court hearings. That much is evident from the judgment of Mallon J, who indicated that, in its present form, the amended statement of claim remains deficient in many respects. There will then be a lengthy period involving the discovery and inspection of documents. I anticipate that this process alone would probably occupy six to nine months. [40] Thereafter, the matter will need to be set down for trial. Even without knowing the number of witnesses who would need to give evidence, I anticipate that the trial would take six to eight weeks. At present trials of that length are being set down for hearing in Auckland in mid-2012. Those are proceedings that are ready to be set down now, and not proceedings that have yet to have their interlocutory processes completed. All of this suggests to me that it is wildly optimistic to suggest that, even if the litigation is reinstated by the Court of Appeal, it can be brought to a successful conclusion within the three year period anticipated by the proposal. [41] The creditors who voted on the proposal were not to know of the practicalities of the situation. They could not know what Associate Judge Bell or what Mallon J would say. They could not know about the likely hurdles that will be placed in the path of that litigation. Viewed objectively, however, I do not consider that any prudent commercial investor would entertain relying for a moment upon litigation of this type as a means of acquiring funds. That aspect of the proposal, in my view, is manifestly unreasonable.The other contributions[42] The second aspect of the proposal relates to the recovery of debts relating to past earnings by Mr Gibson, together with his ability to generate income and make further contributions over the next three years. The proposal does not make it clear what type of business Mr Gibson is engaged in. From the bar today, counsel for the trustee confirmed that Mr Gibson provides advice to clients regarding complicated debt recovery issues. Although it is not evident from the proposal, clients enter a contract with Mr Gibson's family trust for the provision of those services. Thefamily trust then enters into a contract with Mr Gibson. When the work has been completed, the family trust renders an invoice to the client. When payment is received from the client, the family trust reimburses Mr Gibson. [43] The material that Mr Gibson provided in support of his proposal reveals that, during the year ended 31 March 2009, he accumulated and was paid a single fee of $38,099.79. That was recorded in his tax return as his only income during the 2009 tax year. Mr Gibson filed his income tax return on 25 August 2010, and the tax assessment that was subsequently produced in respect of the 2009 year records that he has tax to pay on his income in the sum of $7,126.73. It is not known whether or not that debt has been paid. [44] During the year ended 31 March 2010, Mr Gibson rendered eight other invoices. Of these, five related to work carried out on a single project. The sum of $38,400 remains outstanding in respect of an invoice that Mr Gibson rendered on 1 April 2009. That invoice was for the total sum of $50,720,16 when disbursements are added. Then, on 1 October 2010, Mr Gibson rendered a further invoice in the sum of $53,000. That invoice related to attendances for the period from 1 April 2009 to 31 March 2010. That invoice has not been paid either. [45] I was advised from the bar today that these invoices relate to work carried out on behalf of a client called Mr McIntosh. He is evidently engaged in recovering a large sum of money from a Mr McCormick. Mr McCormick has been bankrupted in both New Zealand and Australia. [46] Mr Gibson's trustee explained to me that payment of the invoices is contingent on recovery of the debt owing by Mr McCormick. Obviously the chances of recovery from Mr McCormick personally are likely to be slim, because of the fact that he is bankrupt. The trustee advised me that Mr Gibson hopes to be able to assist Mr McIntosh to recover the amount outstanding because Mr McIntosh holds a second mortgage over a number of properties located in Australia. Westpac is apparently the first mortgagee of those properties. It would appear, however, that there is little or no prospect of the outstanding debts owing to Mr Gibson being paid unless and until equity is extracted from Mr McCormick's properties.[47] There is some evidence to the effect that Mr Gibson has other work to carry on with in the future. There is no indication, however, as to how much he is likely to receive for that work or whether it is likely to provide him with any form of regular income. [48] I am conscious of the fact that, if Mr Gibson is unable to meet the first annual instalment of approximately $33,000, the creditors will be able to apply to the Court for an order that the proposal be rescinded. In that event he could be adjudicated bankrupt. I take the view, however, that the manner in which Mr Gibson proposes to earn his income is sufficiently uncertain that it does not amount to a reasonable means of meeting his obligations to his creditors under the proposal. The fact that he has not been paid in respect of his work for Mr McIntosh since 1 April 2009 is not an encouraging indicator for the future. I do not consider that any reasonably prudent commercial investor would be prepared to go along with a proposal that involves this degree of uncertainty and vagueness. [49] For that reason I have concluded that the second aspect of Mr Gibson's proposal is not reasonable either. [50] This conclusion means that it is not strictly necessary for me to go on to consider whether the proposal is calculated to benefit the general body of creditors or whether, for any other reason, it is not expedient to approve the proposal. I have no doubt that Mr Gibson intends the proposal to be for the benefit of the general body of his creditors. The problem, however, is that it is simply not realistic for the reasons that I have already outlined.(c) Is it not expedient to approve the proposal?[51] Section 333(3)(c) permits the Court to refuse its approval to a proposal if for any reason it is not expedient that the proposal be approved. It is within this context that aspects of the public interest may be taken into account. The creditors say that this is an important aspect of the current application. They point to the fact that Mr Gibson has failed to pay large awards of costs that the Court has made. He hascontinued to instigate litigation that causes those in the business community further expense, and he shows no sign of stopping in the near future. [52] This aspect of the application is one that is not as important, in my view, as it might be in many cases. I do not see Mr Gibson as a menace to the commercial community generally. He has not been involved in raising large sums of money from commercial lenders for speculative ventures. Rather, he has been the recipient of large adverse awards of costs by the Court. He has also incurred debts to a wide variety of creditors to fund unsuccessful litigation. [53] I accept that there is an element of public interest in the fact that Mr Gibson has failed to meet his obligation to pay awards of costs by the Court. On its own, however, I would not have been prepared to refuse consent to the proposal on the ground that it was inexpedient that the proposal be approved. [54] I record also that I regard as a neutral factor the fact that some of the creditors are persons who clearly have a close personal or family connection with Mr Gibson. Even if that is the case, they are still owed money and they are entitled to vote as they see fit. Likewise, I regard as largely neutral the possibility that the Dental Council may favour adjudication because it is likely to conclude litigation in which it would otherwise be involved in the future. That may be the case, but the Dental Council is owed a large sum of money, as is Minter Ellison Rudd Watts. They, too, are entitled to express their views regarding the proposal.Result[55] It follows, as a result of my conclusion in relation to s 333(3)(b), that I do not consider that the Court should approve the proposal. The application for approval of the proposal is accordingly dismissed.The application for an order of adjudication[56] I now turn to the application by the Dental Council for an order that Mr Gibson be adjudicated bankrupt.[57] All of the jurisdictional requirements required by the Insolvency Act 2006 have been satisfied. Mr Gibson has failed to pay the amount claimed in a bankruptcy notice within the time permitted by the Act. His application for an order that the bankruptcy notice be set aside was dismissed by Associate Judge Bell in his judgment dated 3 June 2010. As a result, Mr Gibson has committed an act of bankruptcy that enables an order of adjudication to be made. [58] Counsel for the trustee, in the event that I conclude that the proposal should not be approved in its present form, nevertheless I should defer making an order of adjudication to enable Mr Gibson to canvass the views of his creditors in the light of the information that is now to hand. I do not consider that would be appropriate in the circumstances of the present case. Mr Gibson has advanced the proposal on a best case scenario. He has had every opportunity to place before the Court the material that he wishes it to consider in deciding whether to approve it. For that reason I do not consider that any further opportunity should be given. [59] The Court retains a residual discretion not to make an order of adjudication. That discretion is not regularly exercised in favour of a debtor, particularly when debts have been incurred in a commercial context. I acknowledge that the debts in the present case can be viewed as having arisen in a context that is not strictly commercial. Nevertheless, there is a public interest factor inherent in enforcing awards of costs made by the courts. It is also clear that Mr Gibson has some assets that the Official Assignee may be able to gather in for his creditors. For that reason an order of adjudication will not be futile. [60] Taking those matters into account, I have reached the clear view that it is appropriate to make an order of adjudication. I make an order accordingly. The order is timed at 3.30 pm.Costs[61] The objectors are entitled to an award of cost on a Category 2B basis together with disbursements as fixed by the Registrar in relation to the approval proceedings. The Dental Council is entitled to an award of costs on a Category 2B basis togetherwith disbursements as fixed by the Registrar in respect of the bankruptcy proceedings. [62] I reserve leave to the trustee to seek an order that his fees and expenses (up to the date of my judgment) should be entitled to priority in the bankruptcy. If agreement cannot be reached with the Official Assignee counsel should file a memorandum dealing with this issue. Lang J