The Insolvency Act limited the court's discretion in refusing approval of the proposal
The High Court has decided to uphold a payment proposal approved by creditors, despite strong opposition made by one of the creditors.
In Calypso No.1 Limited and v Ian George Fistonich [2023] NZHC 78, Ian Fistonich was a property developer who owned several companies that operated under the brand, Accent on Construction. He has personally guaranteed debts that Accent owed to trade creditors. In 2018, Accent was placed into liquidation and receivership. The company's creditors tried to recover the guaranteed debts from Fistonich.
Two creditors commenced bankruptcy proceedings against Fistonich. In turn, Fistonich made a proposal to his creditors for the payment of his debts. The proposal was presented by Fistonich’s trustees at a meeting with the creditors.
During the meeting, the trustees rejected Premier LP's $1m claim. Consequently, Premier LP was not allowed to vote on the proposal. The court noted that if Premier LP were permitted to vote in opposition, the proposal would not have reached the majority threshold required by the Insolvency Act to approve the proposal.
Following the creditors' meeting, Fistonich's trustees filed the proposal in the high court for approval. Premier LP and its associated entity Foy & Halse opposed the trustee's approval application. Their opposition stemmed from a litigation that Fistonich had filed against them, alleging breach of fiduciary duty, knowing receipt, breach of contract, and negligence. In the proposal for creditors, Fistonich committed to pay $250 per week for five years as a dividend to creditors, and he promised to extend to his creditors any benefit he might gain from the Halse litigation.
Daniel Grove of Premier LP and Foy & Halse asserted that there could only be two outcomes of the proceedings—the court will approve the proposal or adjudicate Fistonich bankrupt. The High Court ultimately decided to approve the proposal.
Grove argued that the court should not approve the proposal because it was hopelessly vague and speculative, the dividend under the proposal was small, that there was a public interest involved in adjudicating Fistonich bankrupt, and that an amendment of the statement of claim was filed, resulting in an extremely prejudicial change in circumstances since the time the creditors voted to approve the proposal.
Fistonich's trustees claimed that Premier LP and Foy & Halse's opposition is "really rooted in their desire to avoid the Halse litigation proceeding to a hearing, rather than in any genuine concern for the general body of Mr Fistonich's creditors."
The court pointed out that the Insolvency Act limited the court's discretion in refusing to approve the proposal. The court must accept the view of the majority of creditors and approve the proposal unless it is apparent that a ground for refusing approval exists.
The High Court noted that even if an amended statement was filed, the substance of the claim against Halse was substantially the same. The court also found that the creditors did not approve the proposal based exclusively on the belief that there would be no amendment to the pleadings as required during the litigation.
"It is not for the Court to override the views of the creditors in respect to the risk of whether or not the Halse Litigation will be successful, and therefore, this is not a sufficient ground for the court to refuse approval of the proposal," the High Court said in its reasons for judgment.
The High Court rejected all other grounds of opposition raided by Premier LP and Foy & Halse. The court ultimately approved the proposal, subject to the condition that the proposal will only be deemed complete once Fistonich has extended any benefit from the Halse litigation to creditors.
