Wang v Galloway Properties Limited [2018] NZHC 284 (2 March 2018)

Last Updated: 19 December 2018

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2017-404-2088 [2018] NZHC 284

UNDER	Part 5 of the Insolvency Act 2006
IN THE MATTER	of the proposal by Xueliang Wang for her creditors
BETWEEN	XUELIANG WANG Applicant
AND	GALLOWAY PROPERTIES LIMITED Respondent

Hearing:	27 February 2018
Appearances:	D B Hickson and J Wong for the applicant N Woods for the respondent
Judgment:	2 March 2018

JUDGMENT OF ASSOCIATE JUDGE JOHNSTON

Introduction

[1] This is an application pursuant to pt 5, sub-pt 2 of the Insolvency Act 2006 for approval of a proposal presented on behalf of Xueliang Wang (debtor).

[2] It is opposed by Galloway Properties Ltd (Galloway), one of her creditors.

Background

[3] It is common ground that by about mid 2017 the debtor had amassed debts of over $350,000 and had very limited assets available with which to meet her obligations. As I understand the evidence, this situation arose as a result of a failed

WANG v GALLOWAY PROPERTIES LIMITED [2018] NZHC 284 [2 March 2018]

property development business. However, the details of that are not otherwise relevant to the disposal of the application.

[4] On 12 September 2017, the debtor filed and served a proposal in the manner provided for in the Act. This was supported by a statement of her affairs in affidavit form which purported to set out her assets and liabilities and list her creditors.

[5] The list of creditors did not include Galloway, to which company she was indebted in the sum of $15,117.06 plus interest and costs. The debtor’s evidence, which I accept, is that this omission was accidental. She says that as her indebtedness to Galloway arose from a guarantee she had provided of the obligations of the development company pursuant to a lease, this contingent obligation was not at the top of her mind when she turned her attention to identifying her creditors.

[6] However, accidental or not, the omission of course meant that Galloway did not receive the proposal, and did not have the opportunity to participate in the process provided for in the Act.

[7] The debtor’s proposal was — and indeed is — that she raise $60,000 from family sources in China, and make this available to be distributed pro-rata amongst her creditors. That would involve a payment of approximately 17% of her total debt.

[8] The creditors’ meeting was scheduled to be held in Auckland on 22 September 2017. With one exception, all of the creditors who had been notified of the proposal apparently wrote to the proposed trustee prior to that date indicating that they supported the proposal and would not be attending. The exception was Best Doors Ltd. That company did attend the creditors’ meeting through one of its directors, and voted against the proposal. The upshot was that 90% (by number) and 99% (by value) of the creditors who received the proposal voted to approve it.

[9] Subsequent to the creditors’ meeting, the proposed trustee became aware of the debt owed to Galloway. He communicated with Galloway’s solicitors indicating a willingness to facilitate that company’s retrospective involvement in the proposal which would enable it to have its vote counted, and indicated also that in applying for
the court’s approval it would seek an amendment to the proposal by which Galloway would be treated as a creditor. Galloway rejected those invitations and on 30 October 2017 filed its notice of opposition to this application.

Evidence

[10] Aside from the pleadings and other formal documentation, a total of three affidavits are before the court. The substantive affidavit in opposition was sworn by Sandra Hayes on 30 October 2017. Ms Hayes is a director of Galloway. There is an affidavit in reply sworn by the debtor on 27 November 2017. Finally, there is an affidavit sworn by Kieran Jones on 21 February 2018, that is to say, three working days prior the hearing. Mr Jones is an accountant engaged by the proposed trustee. His affidavit responds to certain issues raised in the submissions filed in advance on Galloway’s behalf.

[11] At the commencement of the hearing, Mr Woods objected to Mr Jones’ affidavit being read. For his part, Mr Hickson for the debtor accepted that the affidavit had been filed and served out of time, but submitted that the court should read it because it addressed important factual matters which the proposed trustee did not understand were in issue before submissions were filed on Galloway’s behalf. Having heard from counsel, and having expressed the court’s dissatisfaction with additional evidence coming in at such a late stage, I concluded that Mr Jones’ affidavit should be read. I am satisfied that Mr Woods was in no way prejudiced in advancing Galloway’s position by this evidence being allowed in.

Legal Framework

[12] The provision within pt 5, sub-pt 2 of the Act which is most particularly engaged by this application is s 333. It is headed “Court must approve proposal”. Despite that heading, it is for the applicant to establish that the proposal should be approved, though, as both Mr Hickson and Mr Woods submitted, the cases suggest that applications such as this rarely turn on questions of whether one party or the other has discharged any particular onus.

[13] Subsections (1) and (2) of s 333 relate primarily to process.
[14] Subsections (3) and (4) are critical. They provide:

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.

(4) The court must not approve a proposal if it does not provide for the payment, before any other debts are paid, of—

(a) those debts that would have priority under this Act if the insolvent was adjudicated bankrupt; and

(b) the trustee’s fees and expenses that are properly incurred by the trustee in respect of the proposal; and

(c) costs incurred by a person other than the insolvent in organising and conducting a meeting of creditors for the purpose of voting on a proposal.

...

[15] In summary then, the court may refuse to approve a proposal if one or more of subs (3)(a)–(c) apply, the obvious inference from the use of the word may being that, even in the event of one or more of those sub-paragraphs applying, the court may nevertheless approve the proposal in the exercise of its discretion. In contrast, subs 4 prohibits the court from approving a proposal that does not provide for the matters set out in subs (4)(a)–(c).

[16] Subsection (5) addresses priorities and is not relevant here.

[17] Subsection (6) confers upon the court the power to correct aspects of the proposal, and I will return to this.

[18] In this case, Mr Hickson accepts that the formal requirements of the Act have not been met with the result that s 333(3)(a) is triggered, meaning that I may refuse the application.

Narrowing the Issues

[19] As I understood Mr Woods’ argument, Galloway’s opposition to the proposal falls under three heads:

(a) first, it is contended — and quite correctly — that the proposal in the form filed and served did not comply with the provisions of the Act because it did not correctly identify all the creditors;

(b) second, it is said that there are other inadequacies in the documentation, in particular that it did not provide sufficient information about the source of the $60,000 being offered, that it included no information concerning the debtor’s overseas assets and that it did not state clearly whether the $60,000 must also cover the trustee’s costs;

(c) finally, in terms of s 333(4)(a), because the original proposal provided only for distributions to the named creditors, which do not include Galloway, it is said that the court must not approve the proposal.

[20] The second and third submissions can be disposed of briefly.

[21] It is by no means obvious to me that the Act requires that a proposal provide detailed information about the source of funds for distribution. It is true that the debtor in this case has done nothing more than say that the $60,000 she proposes be available for distribution is to come from family sources offshore, but it does not appear to me to be vital that creditors are advised of the details of the sources of such funds. They are adequately protected in the sense that if the proposal is approved but the funds do not materialise, they have the usual remedies available to them. In any event, the evidence in this case is that the $60,000 is already held by the proposed trustee in his trust account and earmarked for distribution if the court approves the proposal.

[22] The proposition that the documentation is defective because it does not deal with the debtor’s overseas assets is a little surprising. There is no particular reason to suppose that she has any such assets. In my view, this point does not take matters very far.
[23] It is true that the original proposal was not clear as to whether the $60,000 was all for distribution to creditors or whether it also had to cover the trustee’s costs. But that has since been clarified by the proposed trustee who has confirmed that $60,000 will be available for distribution to creditors.

[24] I accept that the original proposal as filed and served expressly provided that the $60,000 was to be distributed amongst — and only amongst — the named creditors, which would exclude Galloway. But s 333(6) enables the Court, upon approving a proposal, to correct “any formal or accidental error or omission” in that proposal. And as I said to counsel during the course of the hearing, I would only approve the proposal in an amended form whereby Galloway participates on the same basis as the other creditors. To the extent, therefore, that this can be regarded as a defect in the proposal, it is easily rectified.

[25] That leaves the first, and what I regard as the primary, basis for Galloway’s opposition.

[26] Essentially, Galloway says that, because it was not included amongst the creditors notified of the proposal, it missed the opportunity to participate in the process, and has been prejudiced by this.

[27] For the debtor, Mr Hickson described this as a technical defect in the course of argument. It is more than that. As Mr Woods contended, correctly identifying the creditors to who or which the proposal must be presented is elementary.

[28] But, the authorities are clear that a failure of this nature is not necessarily fatal to a proposal if, on balance, all relevant factors favour it. Re Lowndes is one example of a case in which a proposal was approved notwithstanding a failure to give proper notice to all creditors.¹ In Farmer v Rowley, the Court of Appeal overturned the High Court’s refusal to approve a proposal in circumstances similar to the present case.

[29] The Court is required to undertake an assessment of how the outcome of the process might have been affected had the proposal included Galloway. And as

¹ Re Lowndes HC Auckland B1879/90, 17 December 1990 per Wylie J.

Richardson J said in Farmer, in making the assessment under s 333(3), the court must have proper regard to the apparent commercial judgment of the creditors involved.

[30] Mr Hickson sought to demonstrate arithmetically that even if Galloway had been identified as a creditor and fully involved in the process, this would have made no difference to the outcome. Here is how he put it in his written submissions:

2.2 Ms Wang accidentally overlooked the debt owed to Galloway when preparing her Proposal. Consequently Galloway did not receive notice of or vote at the creditor’s meeting which overwhelmingly approved the Proposal both by number (90%) and by value (99%).

2.3 The Galloway debt, however, only amounts to $15,171.06 or just 4.24% of the total indebtedness of $357,851.34. Accordingly, even if Galloway had been at the meeting and had voted against the Proposal, there would still have been a clear majority by number (82%) and an overwhelming majority by value (95%) in support of the Proposal. So Galloway’s presence at the creditors’ meeting would have made no difference to the outcome of the vote which was resoundingly in favour of the Proposal.

[31] Superficially, that response has some appeal.

[32] However, as Mr Woods submitted, it is not simply a matter of counting the number of creditors and the value of their debts. The issue is more nuanced than merely determining whether Galloway voting against the proposal (together with the other creditor who did so, Best Doors) would have threatened the majority support in number and value which the proposal attracted.

[33] As Richardson J said in the leading judgment in Farmer v Rowley:²

First, I am satisfied that the failure to give notice of the third meeting to the Rawkins should not in itself be held to warrant refusing approval. Certainly as Mr Ivory submitted, it is not simply a matter of determining whether their vote would or might have made a difference on the day. It is also appropriate to consider whether if present they might have influenced the voting of others so that the requisite majority support for the proposal might not have been obtained. It is clear that, had they attended the third meeting and voted against the proposals, the requisite majority would have been obtained, calculating the votes in that regard in accordance with the ruling of Tomkins J.

2. Farmer v Rowley [1992] 2 NZLR 195 at 200, and see also the Court of Appeal’s more recent judgment in Magsons Hardware v Bogiatto [2011] NZCA 378.

[34] Mr Wood submitted that had Galloway been included in the list of creditors and served with the proposal, the company may have become sufficiently exercised to lobby other creditors to participate in the process, examined the debtor at the creditors’ meeting, and sought to persuade the other creditors that they ought not to approve this proposal. Had they not approved it, Mr Woods contended, this would have led inevitably to the debtor’s bankruptcy and an opportunity publicly to examine her affairs.

[35] As an example of the issues which Mr Woods suggested might have been examined at the creditors’ meeting and in any formal bankruptcy process, he referred me to the evidence that during 2015 the debtor’s husband purchased a residential property which, later that year, was transferred to the trustees of a family trust, and in which the family still lives.

[36] Mr Woods developed this contention by reference to the judgment of Robertson J in Re Nathan,³ where the importance of the integrity of the law’s response to insolvency was emphasised.

[37] This argument is not without force.

[38] In response, Mr Hickson reminded me that of the 14 creditors who were included in the proposal, only Best Doors was sufficiently interested to attend the creditors’ meeting. All the other creditors simply responded to the proposal in writing saying that they were prepared to accept it. He was also able to refer me to correspondence indicating that since Galloway had been identified, all other creditors had been notified of this and told that Galloway’s inclusion in the proposal would result in a modest reduction in the amount to be paid to them. Nonetheless, all had continued to support the proposal.

[39] In relation to this, I would add that Galloway has had the opportunity, since it became aware of the proposal, to garner support amongst the other creditors for a challenge to it, and yet it stands alone in opposing the proposal today.

³ Re Nathan HC Whangarei 53/89, 14 August 1989 per Robertson J.

[40] The vast majority of the creditors in this case — both in terms of number and value — are sophisticated commercial entities: they do business in an environment in which they understand that the only sure way of protecting themselves against bad debts is not to give credit. Nevertheless, they make the business judgment to give credit without security recognising that on occasions the sort of situation which has arisen in this case will occur. When they do, experience suggests such commercial entities are generally inclined to make a robust judgment as to whether they are prepared to expend their resources — internal and external — in pursuing speculative claims, or recover what they can, write the balance of their debt off and focus their attention on their businesses. That, I am satisfied, is the kind of thinking which informed the majority of the creditors in this case.

[41] I am reinforced in my conclusion by the fact that the other creditors, including Best Doors, though now aware of Galloway’s position, are, as I have said, taking no part in this proceeding.

Conclusion

[42] In the end, approaching the matter in the way described in the authorities to which I have referred, and in particular in the manner described by Richardson J in Farmer, I have reached the conclusion that the proper course is to approve this proposal.

[43] I am quite satisfied that the terms of the proposal in this case (as I intend to amend them) are reasonable, and calculated to benefit the general body of creditors. In my judgment it is expedient that the proposal be approved.

[44] Pursuant to s 333 of the Insolvency Act 2006, the court approves the proposal with the following amendments:

(a) first, that the entire $60,000 is to be available for distribution to the creditors;

(b) second, that Galloway Properties Ltd is to be included amongst the creditors who are to receive a distribution under the proposal.
[45] Costs must also be addressed. My preliminary view is that the applicant as the successful party is entitled to its costs on a 2B basis. I expect counsel will confer and resolve costs issues. However, if that proves impossible, then they can revert to me by memorandum and I will deal with costs.




Associate Judge Johnston

Solicitors:

D B Hickson, Auckland for the applicant Rice Craig, Auckland for the respondent