RE URQUHART [2021] NZHC 1326

RE URQUHART [2021] NZHC 1326 [8 June 2021]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2020-404-001457[2021] NZHC 1326UNDER Subpart 2 of Part 5 of the Insolvency Act2006IN THE MATTER OF The proposal to creditors of CRAIGALEXANDER URQUHARTHearing: 23 March 2021Further submissions received 23 and 26 April 2021Appearances: P R Cogswell for Provisional TrusteeB P Molloy and C P Tatley for Oxford Finance Ltd (a creditor inopposition)Judgment: 8 June 2021JUDGMENT OF ASSOCIATE JUDGE P J ANDREWIntroduction[1] The provisional trustee of the insolvent, Mr Craig Urquhart, applies forapproval 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 toparticipating unsecured creditors. That sum is contributed from the proceeds of thesale of an asset (motorbike) owned by the Halstaff Trust, and the balance in a cashcontribution by the Halstaff Trust.[3] The proposal represents a recovery to creditors of 8.5 cents in the dollar. Thatis 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) opposesthe application on the grounds that:(a) The terms of the proposal are not reasonable or are not calculated tobenefit 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 aproposal. In 2011, Mr Urquhart entered into a creditors proposal, which the Courtapproved pursuant to s 333 of the 2006 Act. Mr Urquhart says that that earlier proposalfollowed the demise of Finco Holdings Ltd, a finance company, with which he wasassociated.[7] In his present statement of assets, debts and liabilities, Mr Urquhart states thatas at 31 August 2020, he had unsecured debts and liabilities of $379,636.84 andsecured creditors' debts of $4,604,948.44 (i.e. total debts and liabilities of$4,984,585.28).[8] Most of the secured creditor debt consists of Mr Urquhart's liability as aguarantor for various family trusts of which he is a trustee and discretionarybeneficiary. That is apparent from the following table of "secured creditors" attachedto Mr Urquhart's statement of assets, debts and liabilities:Creditor1 Liability/ShortfallNZ$Liability AsAsset Finance $359,912.82 Thelma Trustee / GuarantorBNZ $1,085,508.80 Claire Trust / GuarantorBNZ $327,388.82 Jewell Trust / GuarantorBNZ $478,580.34 Solutions Group Investments Ltd /GuarantorBNZ $17,957.66 Credit cardTablehill Farms Ltd $448,425.00 Solutions Group Investments Ltd /GuarantorJ D Tuscan Downs TrusteeCompany Ltd$301,575.00 Solutions Group Investments Ltd /GuarantorTablehill Farms Ltd $230,550.20 MBG (Securities) Ltd / GuarantorJ D Tuscan Downs TrusteeCompany Ltd$155,049.80 MBG (Securities) Ltd / GuarantorTablehill Farms $1,200,000.00 PBP Ltd / GuarantorTotal 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 inthe sum of $332,213.71. It obtained summary judgment against Mr Urquhart and hisco-director, Mr McCollum, on 29 March 2019, in the sum of $274,864.67, togetherwith interest at 10.45 per cent and solicitor client costs.[11] Mr Urquhart and Mr McCollum were the directors and shareholders of PointOrmiston Estate Ltd, which carried on business as a property developer. Both directorsprovided guarantees for mortgages held over Point Ormiston Estate Ltd properties byOxford. Oxford successfully sought by way of summary judgment to enforce theguarantees to recover a shortfall following a mortgagee sale.[12] Mr Urquhart is 58 years of age, self-employed and says that he has declaredearnings, averaged over the past five years, of $62,200, before taxation. He says that1 Mr Urquhart is a trustee and discretionary beneficiary of the Thelma Trust, the Claire Trust, theJewell Trust and the Solutions Trust. He is a director of Solutions Group Investments Ltd andMBG (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 thefailure 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 forMr Urquhart totalled $3,166,317. Oxford attended the creditors' meeting, withcounsel.[15] At the meeting the proposal was supported by six creditors comprising 85.71per cent in number. It was supported by creditors holding 86.96 per cent in value withthe total admitted claim.[16] The sole creditor opposing the proposal, namely Oxford, represented 14.29 percent 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. Itis apparently in accordance with the standard BNZ policy. The BNZ was the onlycreditor 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 ofMr Urquhart's complaint to the Law Society about Oxford's solicitor's fees. In myminute, I noted that a substantial portion of Oxford's judgment comprises legal costs.2That issue remains unresolved pending the outcome of an appeal to the LegalComplaints 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 directedthat the provisional trustee and/or Mr Urquhart provide further financial information2 Under s 161 of the Lawyers and Conveyancers Act 2006, where a complaint has been made unders 132(2) about the amount of a bill of costs registered by a practitioner, no proceedings for therecovery of the amount of the bill may be commenced or proceeded with until after the complainthas been finally disposed of.relevant to the application. As noted in my minute, Oxford contended that there wasa paucity of relevant financial information before the Court, which meant that it couldnot fairly and reasonably assess whether the proposal is a reasonable one and onewhich 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 thatthere was therefore some merit to Oxford's position.[20] I directed that the provisional trustee and/or Mr Urquhart were to provide byaffidavit the following further information:(a) The management accounts and year ended financial statements for allthe entities identified as trading;3(b) Any further valuations of the trust properties (but excluding 1 SiotaCrescent and 1A Siota Crescent, which have now been sold) held bythe provisional trustee and/or Mr Urquhart which have not to date beendisclosed to Oxford.[21] In response to the direction, the Court received the following furtherdocuments 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, dated26 April 2021.Relevant legal principles[22] Section 333 of the Arbitration Act reads:Court must approve proposal3 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 referredto at paragraphs 1, 2, 4, 5 and 7 of "schedule C" (statement of shareholdings and directorships asat 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 tothe insolvent and to each known creditor.(2) The court must, before approving a proposal, hear any objection thatis 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 tobenefit 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 thepayment, before any other debts are paid, of –(a) those debts that would have priority under this Act if the insolvent wasadjudicated bankrupt; and(b) the trustee's fees and expenses that are properly incurred by the trusteein respect of the proposal; and(c) costs incurred by a person other than the insolvent in organising andconducting a meeting of creditors for the purpose of voting on aproposal.(5) Subsection (4)(a) does not apply to the extent that a creditor waivesthe priority that the debt of that person would otherwise have had.(6) When it approves the proposal, the court may correct any formal oraccidental 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 aproposal into effect. The first stage, which must satisfy s 327, is that the proposal isto be filed in the court (s 328). Second, the meeting of creditors must be held in therequired creditors' acceptance obtained (ss 330 and 331). Third, the Court must, unders 333, consider and approve the proposal.[24] Whether the proposal is not "reasonable" (s 333(3)(b)) is to be assessedobjectively from the perspective of the "commercially experienced prudent creditor".44 Kelly v Structured Finance [2009] 2 NZLR 785 (HC) at [45]; approved by the Court of Appeal inMagsons 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 heldthat in determining whether a proposal is reasonable, the Court is required to exercisean independent judgment. Nevertheless, it must be influenced by the commercialjudgment of creditors, and unless there are special public interest or other commercialconsiderations present, the assessment of the substantial body of creditors ought to beaccepted.6[25] In determining whether it is expedient to approve a proposal (s 333(3)(c)), theCourt of Appeal in Farmer v Rowley,7 emphasised the wider public interest elementinherent 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 Jhad in mind in Re Bennett's Proposal when he referred to the Courtconsidering the wider public interest. The Court may refuse to approve theproposal if it considers that for any reason it is not expedient that the proposalbe approved. The word "expedient" is capable of a broad meaning. It canmean '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 alimitation that does not arise from the words of the subsection.[26] An insolvent's misconduct may be a factor relevant to the assessment by theCourt of the public interest on the basis that it suggests a possibility of a continuingthreat of harm to the commercial community.9Analysis and decision[27] The critical issues to address are whether the terms of the proposal arereasonable 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 substantialbody of creditors is generally an important factor and to be given weight in thedetermination. In the circumstances of the case, where there is a significant overlap5 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 ChristchurchB138/81; 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 perMcKay 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 toconsider s 333(3)(b) and (c) concurrently.[28] Mr Cogswell, for the provisional trustee, contended that the proposal isreasonable, calculated to benefit the general body of creditors, and will provide tothose creditors a better result than would be achieved were the insolvent to be madebankrupt. He further submitted that the provisional trustee has complied in all respectswith my directions of 24 March 2021 and that she has deposed as to the insolvent'sposition on three separate occasions. Mr Cogswell argued that she is in the bestposition to give evidence as to the insolvent's position and there is no basis forchallenging the veracity of the information provided. He also argued that the tradingof the identified entities is only of relevance to the insolvent to the extent of hisinterests in those identified entities. With one exception, that interest is a five per centshareholding at the most.[29] I acknowledge that the proposal has been supported by the vast majority ofcreditors and that they are in the main all sophisticated and experienced commercialentities. However, where, as in this case, the views of Oxford, as the unsecuredcreditor, diverge from those of the secured creditors, it is appropriate that the views ofthe secured creditors be accorded less weight than might otherwise be the case. TheCourt of Appeal in Herbert v New Zealand Guardian Trust Co Ltd & Ors held:10While the views of creditors will ordinarily carry substantial weight indeciding upon the reasonableness of an offer in commercial terms, thesignificance 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 extentthey 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 securedloans are able to meet their obligations to the creditors. This is the very sort of casewhere 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 importantcontext for evaluating the proposal and addressing what Mr Molloy contended is alack of transparency and unexplained discrepancies in the financial informationprovided.[32] Mr Urquhart is the trustee and discretionary beneficiary of five trusts. Thisincludes 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 ownsa property of approximately $1.4 million value at Whangaparāoa. I accept that thetwo leasehold properties at Kohimarama (the Jewell Trust and the Thelma Trust) haverecently been sold.[33] Mr Urquhart is also a shareholder and director of some 11 companies, althoughfour of those companies are said not to be trading and have no assets. The varioustrusts are also shareholders in some of those companies.[34] Mr Urquhart is also a 100 per cent shareholder and director of PBP Ltd. As theabove 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 tounidentified third parties.[35] Mr Urquhart says that for the last five years he has earned the very modestincome of $62,200 per annum (before taxation). By virtue of his personal guaranteeshe has total debts and liabilities of $4,984,585.28 and his total net realisable assets areonly $4,102. As Mr Molloy submitted, he is insolvent by quite some margin andappears to have placed himself in a position where his personal guarantees are of novalue.[36] In his statement of affairs Mr Urquhart says that he is self-employed. In theschedule of shareholdings and directorships he says that he has received the averagesalary of $62,200 as "manager of MBG Ltd". MBG Ltd is said to be a mortgagefinance facilitator and a registered financial service provider (FSP). It facilitates thelending of finance and is registered with the FMA. Mr Urquhart says that he is notpersonally 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 isultimately left with a troubling sense that the insolvent, Mr Urquhart, may have otherfinancial means available to him that have not yet been disclosed. It is far from clearon the evidence before the Court, whether, as contended, Oxford and the othercreditors 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,11held that where insolvents may have other financial means available to them not yetdisclosed, that is a consideration that goes to the grounds for refusal under boths 333(3)(b) and (c) of the Insolvency Act (i.e. the reasonableness and expediencyfactors).[39] I acknowledge that as directed, the provisional trustee and Mr Urquhartprovided the further information the subject of my minute of 24 March 2021.However, there remain some fundamental unanswered questions about Mr Urquhart'strue financial position. I also accept that Ms Finnigan has done an independentexamination of Mr Urquhart's financial position (she has deposed to that position onthree separate occasions), but it must be the case that to a large extent she is dependenton full disclosure from Mr Urquhart. Accordingly, her investigations to date, as thestatutory scheme anticipates, do not equate with what would be a full and impartialreview by the Official Assignee, were Mr Urquhart to be made bankrupt.[40] Ms Finnigan contends in her affidavit of 21 December 2020, that the proposalprovides certainty to secured creditors that Mr Urquhart will continue to support therepayment of debts by related interests. I accept that an act of bankruptcy might be adefault under the terms of the secured loans, but it is not at all clear how and whetherMr 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 hisincome of $62,200 per annum and essentially no assets. This includes recent, furtherlending of $1.2 million, based apparently on Mr Urquhart's personal guarantee anddespite his apparently poor financial position recorded as at 31 March 2019 – andwhen, 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 entitiesand the various trusts is complex; there are significant intercompany loans andmovements of funds between the respective trusts. No loan documents or financialstatements for the trusts or movement of funds between the companies have beenprovided and the Court is left with considerable uncertainty as to the nature andreasons for the advances. Mr Urquhart appears to have made himself judgment-proofin circumstances where he continues to be a guarantor for substantial sums of money.[42] In response to my minute, the financial statements and management accountsprovided relate to the financial year ending 2019. However, my directions did notconfine the financial information sought to a particular time period (i.e. the year endingMarch 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 financialstatements (not provided) had not been prepared when this proposal was beingdocumented. He indicated that should the Court require the March 2020 statements,they could be provided. However, in my view, they should have been provided inresponse to my minute (it seems they were available), but in any event, with nocriticism intended of Mr Cogswell, I do not see the benefit of seeking furtherinformation at this stage.[43] In their most recent submissions, the parties have raised and disputed a numberof accounting and alleged material discrepancies between the various managementaccounts and financial accounts. It may be, as Mr Cogswell submitted, that there is avalid 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 onthe papers, to address those issues. Again, the issue arises as to whether all of thesematters 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 theidentified entities' position with that of the insolvent, Mr Urquhart, when it comes to12 That might conceivably include an investigation of the issues arising from MBG Ltd's financialstatements indicating that various payments were made to third parties during the financial yearending 2019, including salaries of $134,600, administration costs of $200,000 andbrokers/introducers' fees of $69,431. It is also noted at paragraph 6 of the notes to the financialstatements of Solutions Group Ltd accounts that there had been advances to a beneficiary of theHalstaff 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 fiveper cent shareholder in the relevant companies. However, the various trusts appear tobe substantial shareholders in at least some of the companies and there is a commonshareholding to many of them.13 Again, all these matters may well benefit from amore thorough investigation by the Official Assignee.[45] Transparency is an important factor in evaluating the statutory criteria inss 333(3)(b) and (c). As Associate Judge Osborne stated in Re Blackmore:14It behoves those involved with any proposal under Part 5 of the Act todemonstrate transparency and complete integrity in the approach taken to aproposal, from the provision of complete and reliable information to allcreditors to the objective analysis of creditors' claims. A lack oftransparency is a matter which may justify the Court in its discretionrefusing to approve a proposal.(emphasis added)[46] In Mr Urquhart's case there has been a clear lack of transparency, which I findis the principal basis for rejecting the application. The independent role of the trusteeis of course designed to ensure transparency and accountability. However, as notedabove, there are limits as to how far a trustee can investigate matters. In circumstanceswhere an insolvent has structured his affairs in a complex way with a view tominimising any exposure to creditors, the Court is entitled to look critically at theproposal and to insist on full disclosure. In the main, the statutory scheme is designedto deal with relatively straightforward applications without the need for lengthy andcontested Court examination of the insolvent's true financial position. In genuineinsolvency situations there will of course be very limited funds available for litigationof that kind.[47] I accept that the size of the proposal (a recovery to creditors of 8.5 cents in thedollar) is a relevant factor and that the courts have approved proposals for smallerdistributions in other cases.15 However, that is no answer to the issue of a lack oftransparency.13 Mr David John Miller, who has in many cases the same address as Mr Urquhart, is a shareholderin 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 than1 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 aproposal 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 toaccept that sum rather than taking its chances in a bankruptcy". That principle alsoapplies in this case.[49] This case is also similar to Re Nathan,17 where it was held that if a bankruptcyoccurs, the Official Assignee would be required to assess independently all claims andthe background of previous dealings which may be of relevance. That could, it washeld, disclose a different situation.[50] The wording of s 333(3)(c) imparts, as noted in Kelly v Structured Finance,18a very wide degree of discretion on the determining Judge. It is not in dispute that thiscan encompass public interest factors.[51] I find that there is a public interest factor of relevance to this application whichprovides a further reason for refusing the proposal. Namely: it appears thatMr Urquhart continues to be involved in the finance industry. He may not personallybe a registered financial service provider, but he is the manager of MBG Ltd, which isa registered FSP. Furthermore, this application is, as I have already noted, a secondapplication for the approval of a proposal. That is not in itself a bar to the Courtgranting 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 protectthe public from Mr Urquhart, an insolvent debtor.19[52] I also agree with the observation of Associate Judge Sargisson in Marsh vCommonwealth Bank of Australia, New Zealand Branch,20 where she noted that a lackof any personal assets of substance with which to back up personal guarantees issuggestive 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 vNew 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 filedby Mr Urquhart on 23 April 2021, with the Legal Complaints Review Office, is of anyrelevance. The application for approval of the proposal before me proceeds on thebasis that Mr Urquhart is insolvent and is liable to make payment of the judgmentdebt.[54] For all these reasons, I find that the application should be refused. Theproposal is neither reasonable nor expedient.Result[55] The application by the provisional trustee for approval under s 333 of theInsolvency Act 2006 is dismissed. I decline to approve the proposal.[56] As to costs, I am of the preliminary view that Oxford, in successfully opposingthe application, is entitled to costs and on a 2B basis. This was a fully contestedapplication and Oxford is the successful party. If costs cannot be agreed, then writtensubmissions (of no more than three pages) are to be filed and served within 14 days.__________________________Associate Judge P J Andrew