IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-1922
CIV-2010-404-1923
CIV-2010-404-1925
CIV-2010-404-1927
CIV-2010-404-1928

IN THE MATTER OF	the Insolvency Act 2006

IN THE MATTER OF	the bankruptcy of ROBERT IAN BRUCE, STEPHEN JOHN ARMSTRONG MASON, JOHN ROBERT ARMSTRONG MASON, WAYNE RAMON ALLEN and MARK NEWALL MASON
Judgment Debtors

AND	CROWN MONEY CORPORATION Judgment Debtor

Hearing:	18 August 2010

Appearances: Mr A Gilchrist for judgment debtors
Mr I Denton for judgment creditor

Judgment:	18 August 2010

(ORAL) INTERIM JUDGMENT OF LANG J [on application for orders of adjudication]

Solicitors:
Chris Walker, Howick, Manukau
Mr A Gilchrist, Auckland
Wilson Harle, Auckland

CROWN MONEY CORPORATION V BRUCE 7 ORS HC AK CIV-2010-404-1922  18 August 2010

[1]       In these five bankruptcy proceedings, Crown Money Corporation Limited (“Crown”)  seeks  an  order  adjudicating the  debtors  bankrupt.    The  debtors  owe Crown approximately $2.9 million as a result of guarantees that they gave to Crown in respect of monies that it advanced to various companies with which they have an association or in which they hold an interest.

[2]       The  debtors  contend  that  the  Court  should  exercise  its  discretion  not  to bankrupt them at this stage.  They accept that all the requirements for an order of adjudication have been fulfilled, but they say that there is a very realistic prospect that the debt will be able to be repaid in full over the next five or six months. Whether or not that can be done depends upon whether or not two subdivision projects in which their companies are involved can be brought to a state of completion.

[3]       Originally the debtors contended that no order of adjudication should be made.   Alternatively, they argued that the proceedings should be adjourned until April 2011, by which stage it is likely that the debt would have been repaid in full.

[4]       By the end of the hearing today, they had modified their position.  They now ask the Court to adjourn the proceeding on a part-heard basis for a period of two months.  This will enable them to continue with their efforts to refinance the projects in order to enable the debt owing to Crown to be repaid or, alternatively, to advance the subdivision to a stage significantly closer to completion.

[5]     Crown opposes the proceedings being adjourned.   It seeks an order of adjudication in respect of all five debtors now.

Factual background

[6]       In order to understand the background against which these submissions are made, it is necessary to say something further about the subdivision projects with which the debtors have been involved.

[7]       Their  companies  have  undertaken,  or  are  undertaking,  three  subdivision projects in the rural Whitford area.   The first of these was apparently completed without incident using funds advanced by another financier.   Those funds were repaid and all matters in respect of that subdivision are at an end.

[8]       The second subdivision is known as Regis Park Stage 2, and involves the subdivision and sale of a significant number of sections in the Whitford area.  Crown has not advanced any monies in relation to this particular project, but it nevertheless remains relevant for present purposes.

[9]       The subdivision involves 50 hectares that the debtors’ company acquired in

2005.   The subdivision of part of the land within this project is well advanced. Twelve contracts have been entered into for the sale of sections in the subdivision. The debtors anticipate that titles to these properties will issue in early to mid November 2010.   Eight of the contracts provide for settlement to occur five days after titles are available.   The remaining four contracts provide for settlement to occur three months after title is available.   This means that all twelve contracts should be completed by early 2011.

[10]     At that point the debtors estimate that the Bank of New Zealand, which holds a first mortgage over the property, will be owed approximately $800,000.   Two freehold titles, together having a value in excess of $1 million, will be available for sale at that stage to repay the balance of the debt owing to the Bank.  The debtors’ company will then be left with another freehold parcel of land that is of sufficient size to produce 22 further sections.  They estimate that the value of this parcel of land is approximately $4.5 million.   They will need to obtain further funding to develop this parcel of land, but they are confident that this will be forthcoming in the near future from the Bank of New Zealand.

[11]     There is also the possibility of a significant part of the remaining parcel of the land being sold to Transpower.  Transpower has an interest in erecting a facility on part of the land, and it is likely that this could produce a sale   formore than $4 million.  If this was to proceed, the development costs for the balance of the land would be very significantly reduced.

[12]     Negotiations with Transpower have proceeded very slowly, but the debtors are now confident that, as a result of recent meetings with Transpower, the process will speed up so that they will know within the next six or seven weeks whether or not Transpower is serious about acquiring the land.

[13]     Once there is sufficient equity in the land as a result of the sales to which I have referred, the debtors anticipate that one of two situations will arise.  First, the remaining freehold land will be available as security for Crown should Crown wish to take security over it.  Secondly, the land will be available for further refinancing so that Crown can be paid out in full.

[14]     The third subdivision is known as Regis Farm.   This comprises a block of land that the debtors’ company acquired in May 2007.  It was valued at that time at
$7.909 million.   It currently carries a first mortgage to the Bank of New Zealand securing advances currently totalling approximately $3.8 million.  There is a second mortgage registered against this block of land in favour of Crown to secure the debt that is the subject of these proceedings.

[15]     Recently, in fact this morning, the debtors received a letter of offer from the Bank of New Zealand confirming that it was prepared to make sufficient funds available to their company to enable them to undertake the physical development of this project.  Roading has now begun, and it is anticipated that physical works will be completed by 30 September 2010.  Titles should be available in relation to the sections within this subdivision in early 2011.

[16]     The subdivision has a total of ten sections.   Of these, six are subject to existing contracts, having a total value of approximately $6 million.   GST will, however, need to be deducted from the sale proceeds.  The debtors anticipate that the four remaining sections should be able to be sold for approximately $700,000 each. This means that the sections should bring in total revenue of approximately $8.8 million.   Of this sum, they anticipate that they will need to repay the Bank approximately $4.5 million, because they do not consider that they will need all of the funding that the Bank has made available.  This will leave a significant surplus

that can be applied in repayment of the Crown debt, if that has not already occurred by other means.

[17]     There is one further aspect of the factual background that needs to be taken into  account.    This  relates  to  a  loan  offer  that  Regis  Farm  has  received  from Spinnaker Capital Limited.  That loan offer is designed to completely refinance the loan that Crown has made in respect of that project.  To some extent the loan offer is in its early stages, because it contains a number of pre-conditions that have yet to be satisfied.  In particular, there will need to be detailed discussions between the Bank of New Zealand and Spinnaker if the loan offer is to come to fruition.  Nevertheless, I accept that there is a realistic prospect at this stage that the debtors will be able to refinance the Crown loan through the Spinnaker loan offer, and that confirmation of that fact should be known within the next six to seven weeks.

The principles to be applied

[18]     Before considering the principal issue that I need to determine, it is necessary to briefly refer to the principles that the Court needs to apply.

[19]     Section 13 of the Insolvency Act 2006 provides as follows:

Court adjudication on creditor's application

13	When creditor may apply for debtor's adjudication

A creditor may apply for a debtor to be adjudicated bankrupt if—

(a)	the debtor owes the creditor $1,000 or more or, if 2 or more creditors  join  in  the  application,  the  debtor  owes  a  total  of
$1,000 or more to those creditors between them; and

(b)	the debtor has committed an act of bankruptcy within the period of 3 months before the filing of the application; and

(c)	the debt is a certain amount; and

(d)	the debt is payable either immediately or at a date in the future that is certain.

In the present case there is no dispute that all of the conditions necessary for an order of adjudication have been satisfied.

[20]     Once these provisions have been satisfied, the Court has powers under ss 36 and  37  to  adjudicate  the  debtor  bankrupt  or  to  refuse  to  make  an  order  of adjudication.  Those sections provide:

Court's options when hearing creditor's application

36	Court may adjudicate debtor bankrupt

The  Court  may,  at  its  discretion,  adjudicate  the  debtor  bankrupt  if  the creditor has established the requirements set out in section 13.

37   Court may refuse adjudication

The Court may, at its discretion, refuse to adjudicate the debtor bankrupt if—

(a)	the applicant creditor has not established the requirements set out in section 13; or

(b)	the debtor is able to pay his or her debts; or

(c)	it is just and equitable that the Court does not make an order of adjudication; or

(d)	for any other reason an order of adjudication should not be made.

[21]     In the present case, as I have said, the debtors rely on the discretion of the Court to refuse to adjudicate a debtor bankrupt.  They say that the Court should not make an order at this stage.

[22]     There are a number of well-established principles that need to be taken into account  when  a  Court  is  considering  whether  or  not  to  make  an  order  of adjudication.   The circumstances in which the debt was incurred will always be relevant, as will be the size of the debt.  In this case the debt is very large, and it was incurred in the circumstances of commercial dealings for commercial gain.

[23]     Secondly, the Court needs to take into account the promotion of commercial morality.  This is a particularly important issue in a case such as the present, where the creditor is relying upon indebtedness that has arisen as a result of each of the debtors giving a guarantee.   The commercial community expects guarantees to be honoured.   When they are not, the commercial community expects that the courts will be vigorous in enforcing them.  There is a very real public interest in ensuring

that persons who give guarantees in any situation, and particularly in a commercial situation such as that in this case, honour the guarantees.

[24]     Another issue that is always relevant is whether or not there are aspects of the debtor’s affairs that should be the subject of investigation by appropriate officials such as the Official Assignee.   Such an investigation can reveal assets that might only be able to be gathered in for the benefit of creditors by a person having the powers of the Official Assignee.  That is a relevant factor to be borne in mind in the present case.

[25]     The debtors submit that their current predicament has largely been produced by two matters that were completely outside their control.  The first of these arose in relation to the Regis Park Stage 2 development, when Transpower issued a designation in respect of the land upon which the subdivision was to be undertaken. Transpower did this as part of its future planning for the electricity needs of Auckland.   It designated part of the subdivision as land through which an underground power line was to run.  This affected ten of the sections that were to be the subject of the Regis Park Stage 2 development.

[26]   This caused a very significant problem for the project, because it took approximately three and a half years for issues in relation to the designation to be resolved.  They were not resolved until November 2009, when the debtors reached an accommodation with Transpower that included a significant payment by way of compensation.

[27]     The second event that has had a significant impact upon them relates to the Regis Farm development.   Originally the zoning for this development permitted a specified number of sections to be developed in the area surrounding the development.  The local authority realised, however, that there was a miscalculation in the zoning that it had promulgated.  For that reason it lodged an objection to its own proposed zoning and this took a significant amount of effort to resolve.  It has not yet been finally resolved, although a consent order is currently with the Environment Court for its consideration.

[28]     The debtors contend that both of these factors led to the two developments being stalled for a considerable period.  It has also meant that the subdivision will now be completed in a depressed market, meaning that the ability to sell sections at a premium has been reduced.

[29]     I accept that to some extent these factors were beyond the control of the debtors.  Having said that, any rural subdivision development of this type is always going to be fraught with risk.  Developers can never be sure that the project will run smoothly.  They have to proceed on the basis that unforeseen difficulties can arise. Should that occur, they need to be in a position to meet their obligations to persons such as their financier.

[30]     Viewing matters overall, I take the view that there are grounds here for orders of adjudication to be made.  Of particular importance is the fact that these debtors have given guarantees in a commercial context, and Crown is entitled to rely upon them.  Most of the debtors have other existing and ongoing business interests and it has to be said that there are matters that could well be worthy of investigation by the Official Assignee.   The only real issue is whether I should make orders of adjudication at this stage, or whether the debtors should be given further time within which to advance the subdivisions to the point where Crown can be repaid.

Decision

[31]     With that background in mind, it is necessary to determine whether it is appropriate to adjourn the proceedings for a short period as the debtors now seek. Several factors are relevant, in my view, to determination of this issue.

[32]     First, I need to take into account the interests of all parties when making the decision.   It needs to be remembered that, when a creditor applies for an order of adjudication, it acts not only on its own behalf but also on behalf of the community as a whole, and the commercial community in particular.  The interests that need to be taken into account go well beyond those that affect the creditor alone.

[33]     From Crown’s perspective, it is difficult to see how it would be prejudiced by the  debtors’  proposal.    Its  debt  will  remain  intact,  and  will  continue  to  accrue interest.  Crown will retain the ability to seek an order of adjudication if it appears unlikely that matter will be resolved quickly.

[34]     There is, in fact, likely to be a significant downside for Crown if orders of adjudication are made at this point.  If that occurs, I have no doubt that the Bank of New Zealand will withdraw its support for funding the development of the two subdivisions.  It is also virtually certain that Spinnaker will withdraw its loan offer. The ability of the debtors to continue with the subdivision will therefore be stymied. It means that in all probability the sections will be sold at fire sale value, thereby releasing no equity at all for Crown.  If orders of adjudication are made at this point, Crown is therefore likely to be in a position of having to write the debt off.

[35]     I do  not  accept  Crown’s  submission  that the  subdivisions  could  proceed unhindered in the event that the debtors are adjudicated bankrupt.  Whilst I accept that the companies could proceed by appointing substituted directors, the reality is that the banks and finance companies have been dealing with these debtors.  They could not be sure that the debtors will retain their interest and enthusiasm for the projects if they were adjudicated bankrupt.   I therefore consider that the practical reality is that the projects will be at an end if orders of adjudication are made today.

[36]     It is also necessary to take into account the interests of other creditors.  These include the Bank of New Zealand.   It has advanced large sums of money to the debtors’ companies.   It, too, is at risk in the event that the subdivision does not proceed and the sections are sold in an “as is where is” state.  Whether or not it will be able to recoup its principal and interest will depend on the value that it receives for the land.

[37]     There are also likely to be other creditors who may be affected if orders of adjudication are made at this point so that the developments stop.   These include contractors and other persons who have carried work out on the projects to date.

[38]     Then there are the shareholders of the companies through which the debtors have carried out the two projects.   Although they are associated with the debtors, they are also separate legal entities.  They will undoubtedly suffer a total loss of their investment in the event that the subdivisions are not permitted to proceed further.

[39]     Taking those factors into account, I have reached the conclusion that it would not be just and equitable at this stage to make orders of adjudication.   I accept, however, that the position is likely to change in the event that the projects stall, or if other factors mean that they cannot be completed.   I consider that the next two months will be critical.   They will enable the Court to ascertain the extent of the Bank of New Zealand’s commitment to the project, and they will enable the debtors to investigate further the possibility that an advance from Spinnaker could be used to repay Crown’s debt.   The next eight weeks will also be important in terms of the ongoing process of obtaining titles for the Regis Park Stage 2 subdivision.

[40]     For these reasons I have decided that I will not make orders of adjudication at this stage.  Instead, I direct that the matter is to be the subject of a further hearing before me on Friday 15 October 2010 at 9 am.  The purpose of that hearing will be to review the progress that has been made in completing the subdivisions, and to ensure that the debtors remain committed and on track.  If I am not satisfied regarding either of those factors, then it is highly likely that orders of adjudication will be made at that time.

[41]     I  direct  that  the  debtors  are  to  file  an  updating  affidavit  no  later  than

8 October 2010 to advise the Court of progress that has been made between today’s date and 8 October.  I will then hear counsel on 15 October regarding the orders that should be made at that point.

Costs

[42]	Given that the matter has not yet reached a conclusion, I reserve costs at this stage.

Lang J