SANDFORD [2019] NZHC 456

SANDFORD [2019] NZHC 456 [15 March 2019]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2018-404-2751[2019] NZHC 456UNDER the Insolvency Act 2006IN THE MATTER of a Proposal by Insolvent to Creditors underSubpart 2 of Part 5 of the Insolvency Act2006BETWEEN JOHN DAVID SANDFORDInsolventHearing: 14 March 2019Counsel: Mr G Bogiatto for the TrusteeJudgment: 15 March 2019RESERVED JUDGMENT OF ASSOCIATE JUDGE SMITHThis judgment was delivered by me on 15 March 2019 at 10.00am,pursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors / Counsel:George Bogiatto, Auckland[1] On 14 December 2018 the Insolvent (Mr Sandford) filed a proposal to hiscreditors, together with the usual sworn statement of assets, debts and liabilities. Thestatement of assets and liabilities showed total assets of $3,000 (furniture and personalitems only), and unsecured liabilities totalling $566,820.25.[2] Mr Sandford proposed a payment at the rate of 10 cents in the dollar to hisunsecured creditors, with payment to be made within 30 days of an order of the Courtapproving the proposal.[3] The proposal stated that there were no debts to be paid in priority to theunsecured debts, and it made provision for the payment of the trustee's fees andexpenses.[4] The proposal contained the following cl 5:5. This proposal, if accepted by my creditors, shall include satisfactionof any moneys, liabilities, debts and obligations howsoever arisingowed by my wife to any of my creditors, if any.[5] Mr John Buchanan countersigned the proposal signifying his willingness to actas trustee.[6] A report subsequently filed by Mr Buchanan shows that a creditors' meetingwas convened on 16 January 2019. Mr Buchanan sent the appropriate notice to thecreditors advising them of the meeting details, and provided them with copies of theproposal, Mr Sandford's statement of assets, debts and liabilities, and proof of debtand voting letter forms. Mr Buchanan reported that the proposal was accepted by therequired majority of shareholders. Of the 11 creditors who were entitled to vote onthe proposal, Mr Buchanan reported that eight voted in support, two voted against, andone did not cast a vote or abstained. Of the creditors who attended the meeting orsubmitted voting letters and proofs of debt prior to the meeting, 94.96 per cent in valuesupported the proposal. Two creditors voted against the proposal, namely ANZ BankNZ Ltd and Diners Club (NZ) Ltd. The total amount of votes against the proposalrepresented 5.04 per cent in value of all creditors who attended the meeting and wereentitled to vote.[7] Mr Buchanan considered the proposal advantageous to the creditors, and herecommended accordingly in his report.[8] Mr Buchanan then filed an application for approval of the proposal pursuant tos 333 of the Insolvency Act 2006 (the Act). A supporting affidavit was filed showingthat the trustee's report and application to this Court for approval of the hearing wassent to the creditors, including notice that the application for approval would be calledon 14 February 2019.[9] When the matter was called before me on 14 February 2019 I raised withMr Bogiatto the question of whether a proposal can legitimately prevent an insolvent'screditors from pursuing other parties (in this case Mr Sandford's wife). I adjournedthe matter to 14 March 2019 to allow Mr Bogiatto time to consider the issue.[10] The trustee came to the view that the proposal containing cl 5 could not stand.On 7 March 2019 Mr Sandford presented an amended form of proposal, signed by himand countersigned by Mr Buchanan as trustee. The amended form of proposal was inthe same terms, but omitting the original cl 5.[11] Filed with the amended proposal was an affidavit by Ms Fleur Martin, a legalsecretary employed by Mr Bogiatto. Ms Martin attached consent forms from eight ofthe creditors who supported the proposal, each stating that they consented to anamendment being made to the proposal by deleting cl 5. Each said that they wouldsupport the proposal being approved by the High Court with that amendment.[12] Mr Bogiatto helpfully filed written submissions on the issue of the validity ofthe original proposal. He accepted that cl 5 was not properly included in the proposal,noting that s 326 of the Act refers to "A Proposal to creditors for payment orsatisfaction of the Insolvent's debts". He also referred to the judgment of Muir J inPublic Trust v Silverfern Vineyards Ltd, a case dealing with the validity of acompromise approved by creditors under Part 14 of the Companies Act 1993.1Mr Bogiatto noted that Muir J held that a company seeking a compromise with its1 Public Trust v Silverfern Vineyards Ltd [2015] NZHC 3078.creditors under Part 14 could not make the compromise subject to a condition that thecompany's guarantors would be protected from any future liability.[13] Mr Bogiatto submitted that the original form of proposal should be amendedunder s 333(6) of the Act. Section 333(6) provides:333 Court must approve proposal(6) When it approves the proposal, the court may correct any formal oraccidental error or omission, but must not alter the substance of theproposal.[14] Mr Bogiatto submitted that the inclusion of cl 5 in the original proposal wasalways a nullity in view of the scheme of proposals under the Act. Its inclusion wasof no legal effect, because it did not comply with s 327 as to the prescribed form of aproposal. In the words of s 333(6), the inclusion of the original cl 5 was a "formalerror". He asked the Court to approve the amended proposal, which has the supportof all of the creditors who voted in favour of the original proposal. He submitted thatapproval of the amended proposal would not alter the substance of what the insolventput to his creditors.Discussion and conclusions[15] Notwithstanding that the creditors who supported the original proposal supportthe proposed amendment, the law is clear that the Court is constrained by s 333 of theAct to allow only amendments that are formal or accidental errors or omissions. Itmust not alter the substance of the proposal.[16] A situation similar to the present arose in Re Evans, in which Blanchard J dealtwith a situation where the proposal to creditors required that they undertake not topursue their rights against the insolvent's wife in certain circumstances.2 Mrs Evans'debt to the bank involved the same money as was owed to the bank by the insolvent,Mr Evans, and she was jointly and severally liable for that debt. There was only oneproposal made, and it was in relation to Mr Evans. Blanchard J noted that, if the Court2 Re Evans HC Auckland, B2143/92, 26 November 1992.were to approve the proposal, the bank would have lost its rights against Mrs Evanspurely and simply because it lacked voting power in relation to the affairs of herhusband. The learned Judge concluded that, even if he had the necessary power ofapproval, he did not consider it proper to exercise the power. The Court's decisionwas that it would be necessary for Mr Evans to start again, if he saw fit, and make aproposal in relation to his affairs which did not have the effect of binding his creditorsin relation to the affairs of his wife. The proposal was dismissed.[17] That decision is not dissimilar to that reached by Muir J in the SilverfernVineyards Ltd case, although Muir J noted in that case the distinction withcompromises under Part 14 of the Companies Act 1993, where the procedure does notinvolve any requirement that Court approval be obtained before the creditors arebound by the compromise approved at the creditors' meeting.[18] In the end, the issue comes back to the application of r 333(6). Clearly it cannotbe said in this case that the inclusion of the original cl 5 was an accidental error oromission. Indeed, the clause was included deliberately, with a view to providing someprotection for Mr Sandford's elderly wife.[19] In Silverfern Vineyards Ltd Muir J concluded that the inclusion of the purportedrelease of the guarantors was sufficient to render the compromise void. Similarly, inRe Evans Blanchard J felt constrained to dismiss the application for approval of theproposal, notwithstanding the existence of a provision in Part 15 of the Insolvency Act1967 for the Court to amend proposals, which was in similar terms to s 333(6) of theAct.3[20] It is difficult in those circumstances to conclude that a defect in the originalproposal which would have been significant enough if the proposal had been acreditors' compromise under Part 14 of the Companies Act to render the proposal void,could be regarded as a "formal error". That is especially so where the inclusion of theoriginal cl 5 was deliberate, as it was here.3 Insolvency Act 1967, s 143(6).[21] I do not think that view is affected by the fact that the proposed amendment isclearly for the benefit of the creditors, and those of them who voted for the proposalhave all signalled their support for the amendment. The problem is one of jurisdiction,and in particular the limited power the Court has to amend under s 333(6) of the Act.The unfortunate fact is that the "substance" of the original proposal was that bothMr Sandford and his wife would be released from liability if the proposal wereapproved, and I do not think that "substance" would remain unaltered if theamendment were allowed.[22] For those reasons, I am not prepared to allow the amendment to the proposal.[23] Mr Bogiatto accepts that Mr Sandford's motivation to gain protection for hiselderly wife does not fit within the scheme of Sub-part 2 of Part 5 of the InsolvencyAct 2006, and in those circumstances I conclude that the provisions of the Sub-parthave not been complied with,4 and that it is not expedient to approve the proposal.5[24] If the proposal cannot be amended, as I have held is the case, there can be noquestion of my exercising my discretion to approve the proposal in its original form.As I have said, the defect was one of substance, and I do not consider the proposalprocedure could properly be used to deprive creditors (who may have voted againstthe proposal or not voted at all) of any rights they might have against Mrs Sandford.[25] The application for approval of the proposal is accordingly refused, but, as inRe Evans, without prejudice to Mr Sandford's ability to start again and present a freshproposal if he wishes to do so. The application was not opposed, so there will be noorder for costs.Associate Judge Smith4 Insolvency Act 2006, s 333(3)(a).5 Section 333(3)(c).