Persons must be just before they are generous and debts must be paid before gifts can be made; words spoken by an English judge 150 years ago, applied this century in a challenge to a $350,800 gift made by Auckland property developer Andrew Fonagy prior to his 2020 bankruptcy.
Whilst Fonagy is now discharged from bankruptcy, Insolvency Service is still at work sorting out claims from his earlier bankruptcy. In particular, it is hunting down recovery of a $350,800 loan owed Mr Fonagy which he gifted some four years prior to bankruptcy; a gift to a family trust he then controlled.
This loan arose from the 2016 purchase of a property in Auckland, at Papakura. The purchaser was a company then controlled by Fonagy. The purchase was funded in part by a $350,800 loan from Mr Fonagy, repayable on demand.
Insolvency Service claims the value of this gift should be clawed back to pay creditors in his bankruptcy.
Insolvency law has detailed rules regarding recovery of assets gifted prior to bankruptcy. There is a history of debtors getting rid of valuable assets before going into bankruptcy.
Any gift received two years prior to bankruptcy has to be returned, handed over to Insolvency Service. Gifts received further back in time, three years through to five years prior to bankruptcy, also have to be surrendered, unless the person receiving the gift can prove the bankrupted donor was solvent.
Mr Fonagy’s family trust asked the High Court to dismiss under its fast-track summary judgment procedure attempts by Insolvency Service to call back the $350,800 loan. It was an open and shut case, the Trust claimed. There was no dispute Mr Fonagy was solvent at the time, it said.
The High Court was told Mr Fonagy was heavily involved in Christchurch’s post-earthquake rebuild at time rights to repayment of the $350,800 loan were gifted to his family trust. His company, Colombo Projects Ltd, was building in Christchurch’s central business district.
For Insolvency Service, the central issue turned out to be the status of a personal guarantee Mr Fonagy had given for borrowings by Colombo Projects.
Insolvency Service said the full dollar value of Colombo’s guaranteed debt counted as a personal debt of Mr Fonagy. It was a contingent liability. No claim had been made on the guarantee at time of the gift, but it was a Fonagy debt nevertheless, it said. On this assessment, Mr Fonagy personally, was at best, over five hundred thousand dollars in the red after gifting the $350,800.
Mr Fonagy’s family trust said any valuation of liability on the guarantee should include an assessment of Colombo’s then solvency. Colombo could meet its debts when the gift was made, the Trust claimed.
Associate judge Sussock ruled the dollar amount of guaranteed Colombo debt counted as a personal debt of Mr Fonagy in assessing his solvency at time of the 2016 gift. It was as if the guaranteed debt were due and owing at that time. Solvency of Colombo itself was not relevant.
Colombo later proved to be insolvent. The High Court ruled in 2020 that a debt of $1.4 million was owed by Mr Fonagy’s bankrupt estate on his guarantee, being the shortfall on a mortgagee sale by a Colombo Projects’ secured creditor.
re Fonagy – High Court (20.12.23)
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