LEO JOHN MOLLOY HC AK CIV-2003-404-6274

LEO JOHN MOLLOY HC AK CIV-2003-404-6274 17 February 2006IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2003-404-6274IN THE MATTER OF the Insolvency Act 1967 AND IN THE MATTER OF LEO JOHN MOLLOY (A Bankrupt) LEO JOHN MOLLOY Applicant Hearing: 13 February 2006 Appearances: Mr P J Dale for applicant Mr J Ridling for Inland Revenue Department Mr N Malaroa for Official Assignee Mr D N Tuck for Westpac Banking Corporation (given leave to withdraw) Judgment: 17 February 2006 at 10.37 amJUDGMENT OF ASSOCIATE JUDGE DOOGUESolicitors: Grove Darlow & Partners, P O Box 2882, Auckland Kevin McDonald, 62A Kurahaupo Street, Orakei, Auckland Mr N Malarao, Meredith Connell, P O Box 2213, Auckland for Official Assignee Mr J Ridling, Inland Revenue Department, P O Box 1462, Wellington Simpson Grierson, Private Bag 92518, AucklandBackground[1] Mr Molloy ("the applicant") was adjudicated bankrupt on 7 November 2003. Total debts that were subsequently proved in the bankruptcy were $1.1 million. Of this amount, the Inland Revenue Department proved for unpaid taxation including penalties of $485,000. [2] The applicant, I was told, had been a "high profile" restauranter who was one of the founders of Euro Restaurant in Auckland and also a large eating and drinking establishment called "Danny Doolans". These businesses were very successful. They followed earlier successes that the applicant had had in founding a franchise tavern business which traded under the name of "The Fat Lady's Arms". [3] The applicant got into difficulties for two reasons. First of all, he decided to open a new establishment in Auckland known as "Cardiac" which was a bar/nightclub business operated by a company which he was proprietor of, Sugar Bar Limited. He says the budget to establish Cardiac was $1.5 million but it ended up costing closer to $2.3 million. When the business could not sustain the additional debt receivers were appointed and the applicant's house was sold at a substantial discount to its market value and the applicant, bowing to the inevitable, applied for his own bankruptcy on the debtor's petition which resulted in his adjudication on 7 November 2003. [4] The second problem that the applicant had was that he entered into a tax avoidance arrangement commonly referred to as the "Actonz" Investment Scheme. He "invested" $156,584.38. He says that he did so on the basis of professional advice that this would be an acceptable way of reducing his tax. It was not. I will comment on the fact that the applicant acted on advice below. Presumably the $156,584.38 was not recovered. Still worse though, he was assessed as owing taxation of $482,230.70. Part of this included a shortfall penalty for "abusive tax". In his decision striking down the Actonz scheme Young J in Erris Promotions Ltd & Ors v Commissioner of Inland Revenue (2003) 21 NZTC 18,330 considered the statutory criteria for an abusive tax position. He concluded that it required anunacceptable tax interpretation and as a consequence the entry into of an arrangement which has a dominant purpose of tax avoidance.Authorities[5] Counsel for the CIR, Mr Ridling, and Mr Dale for the applicant both referred to ASB Bank v Hogg [1993] 3 NZLR 156,157. The Court of Appeal in that judgment held that there is no presumption against granting applications for discharge. Richardson J in delivering the judgment of the Court of Appeal said this of s 110 of the Insolvency Act:"In conferring a discretion expressed in the broadest terms, the legislation recognises that each case will be different, that the relevant factors may vary from case to case and that the exercise of the discretion must be governed by the circumstances of the particular case having regard to the guidance provided by a consideration of the scheme and purpose of the legislation. In providing for automatic discharge after three years, the legislation recognises that it is not in the public interest that the bankruptcy should endure indefinitely. In providing for earlier discharge, s 108 recognises that continuing the bankruptcy to the end of the three years may not be in the public interest. Whether or not it is will be a matter for decision on the particular facts. In that regard, guidance is provided by 109(2) which lists matters on which the assignee is to report to the High Court in such a case. The Court is to consider the assignee's report as to the affairs of the bankrupt, the causes of the bankruptcy, the manner in which the bankrupt has performed the duties imposed on him or her under the Act and his or her conduct both before and after the bankruptcy, and also as to any other fact, matter or circumstance that would assist the Court in making its decision. Clearly the Court apprised of the matter will consider the legitimate interests of the bankrupt, the creditors and wider public concerns, but it is neither required nor entitled to impose threshold requirements in the exercise of the discretion so as to derogate from the breadth of the powers conferred under s 110. The applicant has the onus, in the sense of adducing evidence, to show good cause for ordering an early discharge, but his obligation goes no further than that."[6] Both counsel made reference to the decision of Re Anderson (HC Hamilton, B213/89, 14 April 1992, Penlington J). I accept that that decision is a useful guide to how the discretion under s 110 of the Act is to be applied. Penlington J in that case (at p 20) held that the following matters were generally relevant to the exercise of the Court's discretion:(a) The interests of the bankrupt; (b) The interests of the creditors;(c) The public interest; (d) Commercial morality; and (e) The conduct of the bankrupt.[7] As well, he went on to list other matters of relevance at pp 22 and 23 of the decision some of which I will make reference to hereafter. [8] There are proper grounds for submitting, as Mr Dale did, that the interests of the bankrupt justify making the orders sought. There is no doubt that the applicant has suffered considerably from the stigma of bankruptcy. He has given undisputed evidence that he has suffered from depression and other health effects as a result of bankruptcy. No doubt some of these effects were due to his failure in business and not just to his being labelled a bankrupt but I accept that that would be a weighty burden for him. The many positive references that have been produced in his favour confirm that bankruptcy has been very hard for him. [9] In general, at the earlier stage of his bankruptcy when he was on an unemployment benefit, the case for discharging from bankruptcy was even stronger than it is now. Now at least he has been able to obtain some employment and he is not required to try and support his family on a very reduced income. Nor is he left in the dispiriting position of being for the first time in his life dependent upon a state handout for support. [10] Beyond that it is a little unclear as to how the interests of the bankrupt justify a discharge. I record that he has stated in an affidavit that he is "not suited to normal hourly rate work". He speaks of the need for him to be given an outlet for his entrepreneurial and creative talents. I accept that those are legitimate objectives on his part, however, I do not accept that it has been established that there is no opportunity for him to exercise such talents as an employee of the pizza business. I have no doubt that he is the driving force behind that business. It also seems very likely that he will have input into the development and direction of the business even although he is not a proprietor of it.[11] I accept that discharge would have a positive effect on his self-regard and represent a step along the way towards rehabilitation in the business community. [12] So far as the interests of creditors are concerned, I do not see the discharge of bankruptcy as having any appreciable advantage from their point of view. The hard facts are that they are not going to get anything back from the applicant. Even if the applicant is discharged for bankruptcy, that position is not going to change. He may be able to unleash his business talents if he is discharged but that is not going to redound to the advantage of the creditors. [13] The next issue to be considered is that of the public interest. In Re Ord (HC Auckland, CIV 1999-404-364, 14 May 2003) Master Lang, as he then was said:The Court needs to balance Mr Ord's right to resume a normal life as against the need to protect the commercial community from future harm at the hands of Mr Ord.[14] And further:The Court will generally look at the bankrupt's business history in order to objectively assess whether or not the event which have occurred in the past give rise to a genuine need to protect the business community. (para [31]).[15] A bankrupt's business history has to be seen in its context. It is correct that harmful failures in the past accompanied by irresponsible conduct must give the Court very real cause for concern. On the other hand the Court needs to take into account any reliable evidence that the bankrupt has mended his ways and that he is unlikely to succumb to the invidious business practices which resulted in earlier business failings. [16] My assessment of this aspect of matters is that Mr Molloy's business history does give cause for concern. Mr Dale preferred to analyse matters along the lines that the applicant had been involved quite a number of business ventures with only one failure. I would suggest that tells only part of the story. It may well be that the applicant's success in business was produced by not only his drive and entrepreneurial instincts but also his appetite for risk. He may have had major successes but he has also had a major defeat – or more accurately his creditors havewhich has involved very substantial loss. The fact that, by his telling, the "build budget" for Cardiac was $1.5 million but ended up costing closer to $2.3 million gives food for thought. To be fair Mr Molloy accepts that and that he got carried away "with his own ego", as he put it. The fact that he is now able to honestly acknowledge his failings in such a candid way is to his credit. [17] I need to say something further about the taxation scheme, that is the Actronz tax reduction venture, that the defendant got involved in. Mr Dale was at pains to assert that Mr Molloy had acted on professional advice in entering into this scheme and that in taking part in such a venture he was doing no more than any other "high profile" business and professional people had done. [18] I have difficulty in attaching importance to the fact that applicant apparently acted on professional advice in entering into the tax avoidance arrangement. Professional advice can be wrong. It not uncommonly proves to be so in the area of tax avoidance schemes. More significantly, the obtaining of advice does not eliminate risk. As an intelligent and able businessman, Mr Molloy would have known that. [19] The actions of the applicant in committing approximately $150,000 to such proposal in addition to all his other exposures to debt were inherently risky. Even more so was that apparently he had not covered himself against the possibility that the scheme would be struck down and that he would have to repay tax and be visited with penalties. In the result the sum of approximately $450,000 had to be paid. I have no doubt that the fact that the applicant entered into such a speculative proposal having regard to the scale of his other responsibilities was reckless. [20] In summary, the way that the applicant approached the setting up of the Cardiac bar and his actions in entering into the taxation avoidance scheme are very disquieting features of his business track-record. The applicant was reckless in the way he conducted his business. [21] Next is the matter of commercial morality. Mr Dale was critical of the stance taken by the Commissioner. He said that the Commissioner's submissionshad a punitive bias about them. He again referred to the decision of Master Lang inRe Ord where his Honour said:There is no suggestion, however, of any misconduct or disgraceful conduct of the type as was referred by the Court in the decision of Re Kaye (HC Auckland, B2182/93, 9 May 1997).[22] Mr Dale said that this was not a case like Re Kaye where the bankrupt had acted in a devious and misleading way towards his creditors. [23] In my view, standards of commercial morality can be breached even in the absence of deliberate fraud or deception. I would have little doubt that there would be a consensus in the business community that taking major risks which can result in the loss of hundreds of thousands of dollars to creditors and the Inland Revenue, can be viewed as a contravention of commercial morality. That does not mean that in every case where there has been a loss to creditors, it will be established that there has also been a breach of commercial morality. It depends upon the degree of risk involved and the potential loss to creditors that may result if the risk does not pay off. [24] The next matter to be considered is the conduct of the bankrupt. Counsel for the Commissioner was critical of the fact that Mr Molloy had not made any contribution to his debts. He was also critical of the fact that Mr Molloy did not propose to make any contribution in the remaining period of his bankruptcy. I agree, though, with Mr Dale when he said that Mr Molloy simply has not had the ability to make any contribution in the past. He could not get work. As well, Mr Dale said that Mr Molloy is being paid wages of $12 an hour. He has to support his family. I suppose there is always the possibility that Mr Molloy is going to benefit from any increase in the value of the business because he is a discretionary beneficiary of the trust that owns it. But given the lack of information that has been provided to me about the exact nature of the trust arrangement, I would not be prepared to conclude that there is any source of funds available to Mr Molloy which would enable him to make a meaningful contribution to his debts during the remaining period of his bankruptcy.Conclusion[25] Mr Molloy is seeking the exercise for discretion in his favour. He has to point to some cogent grounds for the exercise of the Court's discretion: Re Anderson. It seems to me that Mr Molloy at this stage of his life has been given an opportunity to re-engage in business. The venture that he is involved in may be a modest one by his erstwhile standards. But it does represent a meaningful way for him to provide for the support of his family. [26] I accept that Mr Molloy has said that he has had a change of heart. He seeks to assure the Court that he would not carry on his business in the imprudent way that he ran his business operations in the past. Those assurances of course are entitled to some weight. I also need to take into account the fact that the way the new business has been structured, it seems very unlikely that the applicant is in any position to run-up large scale debts that could again cause financial loss to his creditors during the period that remains of his bankruptcy. [27] But while I understand his impatience to again exercise his talent for entrepreneurialship, I do not understand what compelling need there is for that to occur at this time. If anything, I would have thought that a gradual re-introduction into business would be advantageous. I am not convinced that given the harm that he has caused to his business creditors and to the revenue in the past that any other approach is justified. He has a further period of approximately nine months to run before his bankruptcy terminates. I am not convinced, despite Mr Dale's persuasive submissions on Mr Molloy's behalf, that this is a case in which an early discharge from bankruptcy is justified.Costs[28] The parties should let me have any memorandum that they wish to file on the matter of costs within 14 days. J P Doogue Associate Judge