Published 22 August 2011
Auckland High Court associate judge Roger Bell has again attacked the case brought by the receivers of lender St Laurence Funding Ltd to wind up 3 companies associated with bankrupt property developer Stephen Kelly.
The applications to liquidate Great Western Land Ltd, Merchant Land Ltd & Progression Development Ltd – directors David McCall, Grafton (Great Western & Progression) & Rex Terrill, Ramarama (Merchant) – were called for the first time in June, then again in July, each time adjourned after Associate Judge Bell questioned the plaintiff’s documentation or follow-up.
After another session on Friday, Associate Judge Bell adjourned the applications to Friday 16 September, once more telling counsel for the receivers they should meet Mr Kelly and visit the property at 160 Grafton Rd, Grafton, which is being subdivided into apartments and from which Mr Kelly maintained St Laurence would get paid.
Mr Kelly was adjudicated bankrupt in November 2008 with personal debts to unsecured creditors totalling $3.17 million and contingent debts, including personal guarantees, exceeding $28 million.
Counsel for St Laurence, Scott Barker, said on Friday: “There’s an admission of insolvency and that’s the end of it.” But for the judge, that was far from the end. He’d told other counsel appearing for the receivers last month he expected them to try to meet Mr Kelly – supposedly employed on subdivision of the Grafton building but, according to Mr Barker, plainly running the companies.
Mr Barker said Mr Kelly was employed by Non Carburandum Ltd, whose director was Mr Terrill. But Mr Barker said that company’s shareholder, Moos Holdings Ltd, was struck off the register in 2009. Mr Kelly remained registered as its sole director.
“This is a situation where Mr Kelly, while he’s denying he’s managing the companies, is plainly doing so. He is a bankrupt who was criticised (in an often-cited judgment by Justice Raynor Asher) and lost money during property developments. He appears the person instructing Mr Nguy (defence counsel Jesse Nguy), in breach of the Insolvency Act.
But Associate Judge Bell responded: “I appreciate that Mr Kelly has an unsatisfactory history, is a bankrupt, says he can operate the way he is because he’s an employee of the company Non Carburandum providing project management services…. While creditors often claim that value can be extracted in liquidation, it’s an all-too-familiar case that an asset is sold, administration by liquidators… and nothing left.
“I still need to find out how realistic Mr Kelly is in holding out the prospect of payment. I want to give the receivers a fresh opportunity to go on site and meet Mr Kelly.”
The judge argued there was no explanation of why St Laurence valued the security at zero, but Mr Barker told him Christchurch consultant John Grant, who produced an affidavit for the receivers, knew the property and had done the assessment, “and if they considered there were any value in this they would have exercised the power of sale”.
Associate Judge Bell: “We have the affidavit of Mr Kelly holding out the prospect of money coming in about 4 months, attaching the current valuation, an as-is value and if the development is completed, and holding up the prospect there is a chance of creditors being paid, and what I have is a stonewall statement from the receivers saying the assessment of value is nothing and a refusal from the receivers to go on site.
“At the moment I’ve got generalised answers, ‘No we’re not going to talk to Mr Kelly’, ‘No we’re not going to go on site’. I have to evaluate the generalised statements from the receivers, ‘and we value the security at zero because we say so’.”
Mr Barker tried going on the offensive: “Allied Finance receivers have asked us (his law firm) to pursue liquidation of other companies because Mr Kelly is hiding a vehicle from them. There is no evidence of sale – this is a statement of optimism from a man who has lost vast amounts of other people’s money on property developments.
“Most importantly, Mr Kelly acknowledges not only that these loans from St Laurence have been in arrears for a long time but that the companies are insolvent. It’s cashflow insolvency.
“Overlaying this, in the absence of evidence of anyone except Mr Kelly, he is managing these companies in direct prohibition under the Insolvency Act.
“A staff member of the Official Assignee says ‘I understand you are employed by Non Carburandum’. It has a shareholder that has been removed from the register, Moos Ltd. Mr Kelly refers to an application for reinstatement being made. In the meantime, Non Carburandum should not be operating. There’s no evidence from the director of Non Carburandum. He’s an associate of Mr Kelly’s.
“ There is no evidence from the Official Assignee, all we have is Mr Kelly’s statement that he’s employed on some basis by Non Carburandum and he’s given evidence on behalf of 3 other companies, and the inference I’m asking you to draw is that he’s managing them, so he‘s doing post-bankruptcy what he did to become bankrupt.
“There is no evidence that there will be any sales, there is no evidence that anybody is willing to refinance any of this subject debt and, if there was, it would have happened a lot sooner than in response to a liquidation application.”
Associate Judge Bell: “He’s holding out the prospect of $330,000 in the next 4 months.” (Mr Barker said the single loan to the companies was for $300,000 with guarantees, and the sum owed now amounted to $322,000 plus interest & costs.)
Mr Barker: “There’s no evidential basis for the statement, there is a valuation but there is no offer to refinance, there are no agreement for sale & purchase, there is simply nothing but this statement from Mr Kelly that, if he’s given some extra time, he will achieve that.
“The public interest grounds in this case are of equal relevance & importance to the admission of insolvency. The statements Justice Asher made apply equal force here.
Associate Judge Bell: “On the one hand Mr Kelly is holding out the prospect of payment, and payment in full.”
Mr Barker: “Your Honour might rightly infer the receivers’ decision to proceed to liquidation implies no faith in what Mr Kelly has to say.”
Associate Judge Bell: “At the moment I simply have statements that Mr Kelly is a bad man, has gone bankrupt. He may be a rogue, but even rogues sometimes pay their debts.”
Mr Barker: “The fundamental point is, if there were any genuine prospect of repayment, we would have something more than optimism from Mr Kelly. They would demonstrate they have a marketing programme, they would have people queuing up. It doesn’t tell us there is any demand for what Mr Kelly is offering.”
Associate Judge Bell: “He points out it’s close to Auckland Hospital… it’s low-cost accommodation.”
Mr Barker: “There’s no concrete evidence to back up anything Mr Kelly has said, nothing from a director, a prospective financier, a purchaser – an admission of insolvency.”
Associate Judge Bell: “There’s an assertion of balance-sheet insolvency & inability to pay. I appreciate there’s cashflow insolvency, but … I have to evaluate those matters.”
Mr Barker: “Yes, but you have to do that on an evidential basis. There’s not a statement from an accountant saying he’s looked at the books.”
Associate Judge Bell: “And refusal from your clients to go on site and even meet or find out more.”
Mr Barker: “Mr Grant says why the receivers, in considering your Honour’s invitation, considered it would be a complete waste of time. It was not a decision they took lightly, but Mr Grant considers Mr Kelly to be unreliable. If there is value in this development, the liquidators can progress it. But the current administration of it is entirely unsatisfactory.”
During this interchange, defence counsel Mr Nguy was left on the sideline.
Mr Nguy: “It’s more of a personal attack on Mr Kelly and not concentrating on the real issue here. The affidavit of Mr Grant accepts there is security for the property. He says the first mortgagee is MTLT and this company has been struck off. Mr Grant has got it wrong, the first mortgagee is MTLFT, MTLT is a completely different company. [I couldn’t find MTLFT on the Companies Register.]
“He (Mr Grant) valued the security at zero but has nothing to justify that. He then said he met Mr Kelly on numerous occasions back in 2008-09 and on site. Mr Kelly would say he had met Mr Grant only twice, once in Christchurch, once on site. They can do a lot in 6 months, let alone 2 years.
“Saying there is nothing to prove sale – I have been emailed yesterday 2 contracts by the solicitor of the purchasers which is Richard Ellis Law, 2 agreements to purchase 2 units. In total 10 apartments have been completed & sold. The reason no settlements have taken place is body corporate litigation within the building and LINZ could not issue separate title for those units, hence the delay.”
Mr Nguy said the body corporate now had a manager and there was co-operation between the body corporate and his clients.
“Several of the current purchasers have settled 6 of the units on the old title. By 6 September, 6 of the units will be settled and $48,000 will be available to pay the plaintiff and a spreadsheet sets out how the rest of the debts can be paid. As of yesterday (last Thursday), my firm has been instructed to take over the settlement of the units and I expect settlement will take place as scheduled and payment will be made in 4 months.
“If the security is valued at zero, what is the point of placing the company into liquidation? Would it not be better for the defendants to be given time to pay the debts back?
“The shareholders are ordinary New Zealanders, better the debts get paid. The property has a first-ranking mortgagee; if the company is placed in liquidation they will sell the assets and nothing will be left over to the plaintiff. It’s best if the company be given the opportunity to settle the debts. What is another 4 months with the opportunity the debt will be fully paid?”
On Mr Barker’s submission that Mr Kelly was running the companies, “Mr Kelly says he has simply been authorised allowed by the Official Assignee to work as a project administrator for this development. The general manager of Non Carburandum is Mr Edmond, and he is the person who is running the company.
“Mr Kelly is not controlling the company, he is simply working for the company, the company needs a person to do the running around and he is the best person because he has knowledge of the building for a period of time. Yes, Mr Kelly is bankrupt, but even a bankrupt can work.
“There is a real prospect that the debt will be paid. It is a good building, it is in a very good location, close to the hospital & the medical school, the ground floor is converted into motel-type accommodation, it is a very attractive building. There is a very real prospect the debt will be paid….”
Mr Nguy said the top floor of the building had 47 parking spaces and, once purchase of the 6 apartment units settled, a second-tier finance company was waiting to refinance the St Laurence loan.
When Mr Barker said this was all evidence from the bar, Associate Judge Bell commented: “Thank you for your interruption. Will you let Mr Nguy finish his submission please?” After a few more words from Mr Nguy and a suggestion from Mr Barker that the judge “is inviting some sort of informal discussion between the parties”, Associate Judge Bell added: “In these kinds of cases I get a lot of submissions from people on proposals. This is done all the time in Auckland (Mr Barker is from Wellington) – even Inland Revenue discusses with debtors.”
Earlier stories, U: The names behind the action, the week to 31 July 2011, part 1: Great Western Land, Merchant Land & Progression Developments survive for another month
26 June 2011: U: The names behind the action, the week to 26 June 2011, part 1, Judge casts doubt on documentation for liquidating McCall & Terrill companies Great Western, Merchant & Progression
U: The names behind the action, the week to 15 May 2011, part 3, Kelly associate McCall bankrupted
24 November 2008: Judge rejects compromise, bankrupts Kelly
Want to comment? Go to the forum.
Attribution: Court hearing, story written by Bob Dey for the Bob Dey Property Report.