Aluminium Plus Wellington Ltd (in liq) v Shaw
[2017] NZHC 2607
•25 October 2017
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA
TE WHANGANUI-Ā-TARA ROHE
CIV-2016-485-546
CIV-2016-485-547 [2017] NZHC 2607
BETWEEN ALUMINIUM PLUS WELLINGTON
LIMITED (IN LIQUIDATION) Judgment creditor
AND
ANGELA CLAIRE SHAW IAN ALEXANDER SHAW Judgment debtors
Hearing: 12 October 2017 Appearances:
J G Cole for the Judgment creditor
Angela Shaw and Ian Shaw in personJudgment:
25 October 2017
RESERVED JUDGMENT OF ASSOCIATE JUDGE SMITH
[1] Mr and Mrs Shaw apply for orders setting aside bankruptcy notices served on them on 28 August 2017.
Background
[2] Mr and Mrs Shaw were directors of the judgment creditor (Aluminium Plus), which was put into liquidation on 14 October 2014. Colin David Owens and David Stuart Vance were appointed liquidators.
[3] The order for liquidation was made on the application of a creditor, Viridian Glass Limited Partnership (Viridian). Viridian had obtained a judgment against Aluminium Plus on 14 July 2014 in the District Court at Levin for $87,468.82, being
unpaid invoices of $61,043.05 for glass supplies invoiced between 7 October 2013
ALUMINIUM PLUS WELLINGTON LIMITED (IN LIQUIDATION) v SHAW [2017] NZHC 2607 [25 October
2017]
and 20 December 2013, interest, collection and credit consultants’ fees, costs, and disbursements.
[4] Aluminium Plus initially took steps to defend Viridian’s claim. It filed a
notice of counterclaim, in which it said:
Over a period of time the plaintiff owes the defendant sums of money due to incorrect invoicing, supplying of faulty products, delays in supply, rework on job sites caused by plaintiff but done by defendant. Whilst the relationship was going these credits were noted but never quantified. Since the relationship is over then they need to be quantified and offset from plaintiff’s claim. Court to confirm final credit which could be as high as the $61,000 claimed. Hence no loss to the plaintiff.
An invoice for $13,240 has been sent through as the first credit due to the plaintiff which was not disputed or owing. More credits are being worked on presently so can be presented at Court.
[5] Aluminium Plus did not pursue its defence and counterclaim, however. It failed to file and serve its “information capsule” under the relevant District Court Rules which were then in force. Judgment was then entered against it by default.
[6] Aluminium Plus did not appeal the default judgment, or apply to have it set aside. A statutory demand was subsequently served on Aluminium Plus by Viridian, and Aluminium Plus neither complied with it nor applied to this Court for an order setting it aside. The liquidation proceeding subsequently commenced by Viridian was not defended by Aluminium Plus.
[7] Notwithstanding their failure to take steps to oppose Viridian’s claim, and to oppose the liquidation proceeding against Aluminium Plus, Mr and Mrs Shaw maintained the belief that Aluminium Plus did have a valid claim against Viridian for late supplies and/or defects in the product supplied. Their solicitors advised the liquidators of their views in that respect, by letter dated 27 January 2015.
[8] The liquidators elected not to pursue the claims against Viridian which Mr and Mrs Shaw thought were available to Aluminium Plus, and they elected not to take any steps to have Viridian’s judgment set aside. Instead, they commenced a proceeding in this Court against Mr and Mrs Shaw, first in their capacities as trustees of a family trust known as the I & A Shaw Family Trust (the Trust), and secondly in
their capacities as directors of Aluminium Plus.1 The claim against the Trust was based on alleged breach by the Trust of contractual obligations owed by the Trust to Aluminium Plus to fund purchases of glass made by Aluminium Plus on the Trust’s behalf. The claims against Mr and Mrs Shaw in their personal capacities pleaded breaches by them of their duties as directors of Aluminium Plus, under ss 135, 136 and 137 of the Companies Act 1993 (the Companies Act).
[9] The claims in contract and under s 136 of the Companies Act were dismissed in a judgment given by Brown J on 24 June 2016. However, the claims under ss 135 and 137 of the Companies Act were upheld, and judgment was entered against Mr and Mrs Shaw on those claims in the total sum of $125,884.59 (which sum included an amount of $26,879.56 for the costs and disbursements of the liquidation to that time).
[10] The Judge explained the background of the arrangements between the Trust and Aluminium Plus as follows. From 2007 the Trust had traded as a glazier and manufacturer of aluminium joinery, using the trade name “Aluminium Plus”. The Trust obtained the glass, aluminium and other products it required from a number of suppliers who were content to contract directly with the Trust. However, one supplier, CSR Viridian (New Zealand) Ltd (CSR), was not prepared to contract with a trust; it wanted to trade with a corporate entity.
[11] Aluminium Plus was incorporated in May 2007, with Mr and Mrs Shaw as its directors. Their intention was that Aluminium Plus would enter into contracts for the supply of goods by CSR and any other supplier who preferred to contract with Aluminium Plus rather than the Trust. However, the Trust would still be the entity that entered into contracts with customers for the installation of glass and aluminium joinery in buildings. Goods purchased by Aluminium Plus would be passed on to the Trust for use in the installation business.
[12] Aluminium Plus did not have a bank account. When CSR supplied product it would issue an invoice to Aluminium Plus, and payment would be made to CSR by
cheque from an account operated by the Trust.
1 Owens v Shaw [2016] NZHC 1400.
[13] In their breach of contract claim, the liquidators contended that the Trust breached a purchase and supply agreement between it and Aluminium Plus, under which, in circumstances where the Trust had arranged for Aluminium Plus to purchase goods or services from suppliers for the benefit of the Trust, the Trust would make payment direct to the suppliers. In their defence, Mr and Mrs Shaw pleaded an agreement entered into between the Trust and Aluminium Plus in December 2013, under which Aluminium Plus agreed to release the Trust from any obligation it may have to pay for goods supplied to it by Aluminium Plus. The consideration for this release was the Trust’s agreement to release Aluminium Plus from any liability it might have had to the Trust arising from the supply of faulty goods. Based on this agreement, Mr and Mrs Shaw contended that the Trust had no contractual obligation to pay the debt which became the subject of the District Court judgment.
[14] Brown J accepted the evidence of Mr Shaw relating to the agreement entered into between the Trust and Aluminium Plus in December 2013. His Honour considered that the agreement was effective to discharge the Trust immediately, with the consequence that the Trust no longer had an obligation to pay the extant invoices for which judgment was later entered for Viridian. For that reason, the liquidators’ breach of contract claim against Mr and Mrs Shaw as trustees of the Trust failed.
[15] Brown J upheld the liquidators’ claim of breach of ss 135 and 137 of the Companies Act, which are respectively concerned with reckless trading and breach of the director’s duty to exercise care, diligence and skill. His Honour considered that when Mr and Mrs Shaw, as directors of Aluminium Plus, elected to release the Trust from the obligation to make payment for the supplies of glass to Aluminium Plus, the supplier became exposed to the risk of loss – Aluminium Plus had no income or assets from which it could pay.
[16] The liquidators’ claim under s 136 of the Companies Act2 failed, essentially on the basis that, when Aluminium Plus incurred the relevant liability to Viridian for
2 Section 136 provides that a director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.
the supplies, the purchase and supply agreement between it and the Trust was still in force and the directors knew that they could look to the Trust to pay.
[17] Brown J did refer in his judgment to the Shaws’ contention that Aluminium Plus had a good counterclaim against Viridian which had never been resolved. His Honour referred specifically to the notice of counterclaim which Aluminium Plus had filed in the District Court,3 noting the reference in the notice of counterclaim to an invoice for $13,340 was a reference to an invoice from “Aluminium Plus” to Viridian dated 13 February 2014, for labour costs and an additional discount given to
the client in respect of a Trust installation in Churton Park (that work having apparently been undertaken at a point prior to the supplies which were the subject of Viridian’s claim in the District Court).
[18] Brown J accepted that there had been some history of supply of defective glass from time to time, but noted CSR’s position that any defective products supplied of which it had notice, had been identified and replaced.
[19] Bankruptcy notices were issued against Mr and Mrs Shaw on 21 July 2016, but Mr and Mrs Shaw had filed an appeal against the judgment of Brown J. They applied to set aside the bankruptcy notices, solely on the basis of the appeal.
[20] By consent, an order was made on 14 December 2016 staying enforcement proceedings on an interim basis, pending resolution of the Shaws’ appeal against the judgment of Brown J.
[21] The Court of Appeal gave judgment on 25 July 2017, partially allowing the appeal.4 The judgment for $125,884.59 was quashed, and judgment substituted in the amount of $106,505.03. (The Court of Appeal considered that Mr and Mrs Shaw were not liable for the liquidation cost of $26,879.56.) In all other respects the High
Court judgment was to remain in force.
3 Extracts from which are quoted in paragraph [4] of this judgment.
[22] The Court of Appeal recorded that the Shaws’ original ground of appeal against the liability finding was that Brown J erred by failing to take into account Aluminium Plus’ counterclaim against Viridian. The Court stated:5
However, [counsel for the Shaws in the Court of Appeal], who did not appear in the High Court, accepted that the counterclaim defence was not raised or pleaded by the Shaws, and that we would not grant leave to raise a new ground on appeal.
[23] The Court of Appeal upheld Brown J’s finding that the decision by the Shaws (as directors of Aluminium Plus) to release the Trust from its obligations to fund purchases, including the purchases from Viridian, was negligent, because there was no other source of funding. The decision was not saved simply because Aluminium Plus had a prospective or contingent right of counterclaim against Viridian. The Court noted that the solvency of Aluminium Plus was entirely dependent upon the Trust’s continuing financial support. It considered that the release from its contingent liability to the Trust which was given to Aluminium Plus by the Trust in the December 2013 agreement, was of no tangible benefit to Aluminium Plus unless
the directors:6
(a) formed an opinion independently of the Trust that Aluminium Plus was liable to the Trust;
(b) resolved affirmatively to contest Viridian’s claim; and
(c) secured an unconditional right to indemnity from the Trust if its defence and counterclaim failed.
[24] The Court of Appeal also noted that there was no certainty that the counterclaim would equal the claim made against Aluminium Plus in the District Court.
[25] Following the Court of Appeal judgment, Aluminium Plus had sought to enforce the judgment of Brown J, as amended by the Court of Appeal, by the issue of
amended bankruptcy notices. Mr and Mrs Shaw did not accept the Court of Appeal
5 At [10].
judgment, however. Assisted by a senior barrister, they filed an application in the
Supreme Court for leave to appeal the Court of Appeal judgment.
[26] Aluminium Plus applied for an order lifting the interim stay of enforcement proceedings. That application was not opposed by Mr and Mrs Shaw, and on 16
August 2017 I made an order lifting the interim stay of enforcement proceedings and granting leave to Aluminium Plus to amend the bankruptcy notices to show the amount claimed as $106,505.04 plus costs and disbursements in the High Court of
$45,649.17. I extended the time for Mr and Mrs Shaw to comply with the amended bankruptcy notices to 10 working days after service of the amended bankruptcy notices on Mr and Mrs Shaw, and I dismissed the applications which Mr and Mrs Shaw had filed in 2016 to set aside the earlier bankruptcy notices.
[27] Aluminium Plus issued fresh bankruptcy notices against Mr and Mrs Shaw on 17 August 2017, claiming the total sum of $152,154.20.
[28] Mr and Mrs Shaw then filed new setting aside applications, stating the following grounds:
That [the judgment of Brown J given on 24 June 2016] regarding said matter has been appealed at the Supreme Court SC 90/2017 as per attached. This Judgment will either be dismissed by the Supreme Court or otherwise a counter claim will be filed at this time by the Defendant for said amount on the basis that this Judgment was received on the basis of false & misleading information being provided to the Courts. It has also been noted that said proceedings have also not been correctly served on the Defendant as required by the Courts …
The application is made in reliance on Supreme Court Rules 2004, High
Court Rules 2016 and other relevant legislation.
[29] The Shaws’ applications to set aside the amended bankruptcy notices were called before me on 12 September 2017. After hearing from Mr and Mrs Shaw and counsel I dealt with the issue of service of the bankruptcy notices which Mr and Mrs Shaw had raised, directing that service of the amended bankruptcy notices was effected on Mr and Mrs Shaw on 28 August 2017. I gave further directions for the filing of notices of opposition, reply affidavits and written submissions, and for the hearing of the setting aside applications.
[30] Notices of opposition have been filed by Aluminium Plus, and an affidavit supporting the notices of opposition has been filed by Ms Louise Craig, a manager employed by Deloitte in its recovery team, who has assisted the liquidators in the matter. An affidavit has also been provided by Mr Shaw.
The arguments for Mr and Mrs Shaw
[31] Mr and Mrs Shaw relied on Mr Shaw’s affidavit, sworn on 2 October 2017, in which he addressed the question of why Aluminium Plus had not pursued its counterclaim in the District Court proceeding.
[32] Mr Shaw referred to Viridian’s information capsule filed in the District Court in May 2014. He noted that although the plaintiff in the District Court proceeding was Viridian, earlier supplies to Aluminium Plus had been made by CSR, which appeared to be a separate legal entity.
[33] Viridian’s information capsule had referred to certain terms and conditions of trade, which were said to form part of its agreement with Aluminium Plus. The terms and conditions, which were said to have been included in a Credit Application form sent to Aluminium Plus on or about 15 December 2009, and subsequently accepted by Aluminium Plus, were said to have included the following clause:
No claim relating to products and services will be considered unless made within seven (7) days of delivery, notwithstanding the obligations imposed upon [Viridian] by the Consumer Guarantees Act 1993 and the Fair Trading Act 1986, which shall apply to the minimum extent required (clause 12.1 and clause 13.1).
[34] Mr Shaw stated that he and Mrs Shaw did not receive a copy of Viridian’s Terms and Conditions until four or five days before the trial commenced in the High Court before Brown J in 2016, when further documents were provided to their solicitor. The solicitor then received a copy of a “Viridian Glass Limited Partnership application for credit account” dated 7 November 2013, signed by Mr Shaw on behalf of the Trust. These were not the terms and conditions on which Viridian had relied when it obtained its judgment in the District Court. The Terms and Conditions, referred to in Viridian’s District Court information capsule, were apparently those of CSR.
[35] Mr Shaw drew attention to the fact that the November 2013 credit application form was not signed on behalf of Viridian, who he said was then taking the view that it would only deal with Aluminium Plus, and would not deal with the Trust. Mr Shaw inferred that, because he had not been invited to sign a credit application form for Viridian until November 2013, no prior credit application form (with Viridian’s terms and conditions of trade incorporated in it) had ever been signed by either the Trust or Aluminium Plus.
[36] Mr Shaw’s principal claim, then, is that Viridian’s information capsule filed in the District Court, sworn by its solicitor on its behalf, misled Aluminium Plus into believing that terms and conditions were in place between Viridian and Aluminium Plus, including a provision requiring that any claims be notified within seven days of delivery, which would likely have precluded any counterclaim. In fact, no such terms and conditions had been agreed between Aluminium Plus and Viridian.
[37] Mr Shaw stated that this misapprehension led directly to the decision by Aluminium Plus not to pursue its counterclaim in the District Court. He produced a copy of an email dated 16 June 2014 from a solicitor who was then advising him, in which the solicitor noted that the principal reason for the dispute was the supply by Viridian of allegedly faulty product. The solicitor then referred to Viridian’s information capsule, which included reference to the 2009 credit application form, and the terms and conditions of trade in it which were said to be part of each supply contract between Viridian and Aluminium Plus.
[38] The solicitor advising Mr Shaw went on to say:
Your counter claim only has validity if the product supplied by [Viridian] was faulty and brought to the attention of [Viridian] within 7 days of delivery. [Viridian’s] case asserts there were 68 invoices rendered between
30 August 2013 and 17 December 2013. In effect [Aluminium Plus] will have to furnish correspondence from third parties that the product supplied
by [Viridian] was faulty.
The 68 invoices rendered by [Viridian] are in effect 68 agreements between the parties and your riposte to non-payment of these invoices has to come within either the provisions of the Consumer Guarantees Act or the Contractual Remedies Act.
[39] As noted above, Mr Shaw said that the credit application form was not supplied until a few days before the High Court trial in May 2016. He said in his affidavit that the credit application form was referred to Brown J, but his belief was that the Judge ruled at the time that, if argument relating to the credit application form were heard, there would not be enough time for the trial to be completed within the time allocated. His recollection was that the Judge ruled that the trial would proceed, with issues over the credit application forms to be argued separately at another time if required.
[40] The Shaws contend that the liquidators have been pursuing the claims against them on a contingent fee basis, as a test case for future liquidations. They infer that the liquidators were unwilling to attempt to reopen the District Court judgment against Aluminium Plus because they would have had to fund any such proceedings themselves (and if successful, would have opened up the question of the validity of their own appointment as liquidators and created the potential for claims against them by Mr and Mrs Shaw).
[41] At the hearing on 12 October 2017, Mr and Mrs Shaw asked me to adjourn their applications to set aside the bankruptcy notices, pending delivery of the Supreme Court’s decision on the application for leave to appeal to that Court. If I was not willing to adjourn the setting aside applications on that basis, they submitted that the notices should be set aside now, and a rehearing ordered in the District Court, to ensure that justice can be done in the case.
[42] I advised counsel and Mr and Mrs Shaw that I would hear the argument on the setting aside applications before deciding whether a decision on those applications should be deferred pending the decision of the Supreme Court on the Shaw’s leave application. I advised that if I came to the view that the decision on the setting aside application should be deferred I would issue a minute advising the parties of that decision.
[43] Since the hearing, the Supreme Court has refused Mr and Mrs Shaw’s application for leave to appeal.7 In those circumstances there is no need to consider further the application for adjournment.
The arguments for Aluminium Plus
[44] Aluminium Plus contended that it was entitled to rely on the final judgment of the Court of Appeal. No stay of execution of that judgment had been ordered, whether in the Court of Appeal or in the Supreme Court, and the application for leave to appeal to the Supreme Court did not act as a stay of proceedings or a stay of
execution.8
[45] Mr and Mrs Shaw have failed to show that they have a cross claim, as defined in s 17(7) of the Act. They must show that they have a genuine and triable cross claim against Aluminium Plus, as to both liability and quantum. That means that they must demonstrate they have a claim of true substance that they genuinely propose to pursue.
[46] Mr Cole submitted that an appeal does not qualify as a cross claim for the purposes of s 17(7).9
[47] Mr Cole next submitted that any “counterclaim” the Shaws may consider they have, is not in fact a claim against Aluminium Plus. It is an alleged counterclaim by Aluminium Plus against Viridian, and Viridian is not a party to the bankruptcy proceeding (nor was it a party to the proceedings in the High Court or Court of Appeal). Mr Cole further submitted that the liquidators were not a party to Viridian’s District Court proceeding; they were appointed by the High Court well after the District Court proceeding had been concluded.
[48] Mr Cole then submitted that Brown J did consider the Shaws’ “counterclaim”
argument, but came to the view that Aluminium Plus did not have a good counterclaim against Viridian. His Honour referred to the allegations about faulty
7 Shaw v Owens [2017] NZSC 160: judgment 20 October 2017.
8 Supreme Court Rules 2004, r 30.
9 Citing Mead v Memelink [2016] NZHC 143.
products raised by the Shaws, but noted that the counterclaim filed by Aluminium Plus was dismissed (as part of the default judgment), with costs of $1,068.50 on the counterclaim. A default judgment, even one irregularly obtained, must stand until it is set aside.10
[49] Even if the Court accepts that the Shaws have some cross claim against Aluminium Plus, Mr Cole submitted that there is no evidence that it would equal or exceed $152,154.20, being the amount now owing under the judgment debt (including costs). The amount of the unpaid invoices on which Viridian obtained judgment was only $61,043.05, and the Court of Appeal endorsed the observation of Brown J that there was no certainty that Aluminium Plus’ alleged counterclaim would equal or exceed Viridian’s claim.
[50] Finally, Mr Cole submitted that the Shaws are wrongly attempting to mount a collateral challenge to the prior judgments in the District Court, High Court, and Court of Appeal. In their capacities as directors of Aluminium Plus, they could have ensured that Aluminium Plus’ alleged counterclaim against Viridian was addressed by the District Court, but they did not. It is simply too late now for the Shaws to raise issues relating to the relationship between Aluminium Plus and Viridian, and Viridian’s default judgment.
Discussion and conclusions
Principles applicable to applications to set aside a bankruptcy notice
[51] Section 17 of the Act materially provides:
17 Failure to comply with bankruptcy notice
(1) A debtor commits an act of bankruptcy if—
(a) a creditor has obtained a final judgment or a final order against the debtor for any amount; and
(b) execution of the judgment or order has not been halted by a court; and
(c) the debtor has been served with a bankruptcy notice; and
10 Referring to Tira Arika v Sideaway [1923] NZLR 158 (SC).
(d) the debtor has not, within the time limit specified in subsection (4),—
(i) complied with the requirements of the notice; or
(ii) satisfied the court that he or she has a cross claim against the creditor.
…
(7) In subsection (1)(d)(ii), cross claim means a counterclaim, set-off, or cross demand that—
(a) is equal to, or greater than, the judgment debt or the amount that the debtor has been ordered to pay; and
(b) the debtor could not use as a defence in the action or proceedings in which the judgment or the order, as the case may be, was obtained.
[52] In order to satisfy s 17(1)(d)(ii) of the Act, the debtor must show that he or she has a genuine, triable claim against the creditor.11
[53] The primary emphasis of s 17(7)(b) is on the legal inability of the debtor to establish the cross claim as a defence in the proceeding in which the judgment was obtained. There must be cogent circumstances for the judgment debtor to be able to establish a factual inability to set up the cross claim as a defence.12
[54] In addition to the “cross claim” ground of opposition, there may be a limited number of circumstances in which a court may set aside a bankruptcy notice on the basis of an abuse of process on the part of the creditor. Re Wise was a case where a creditor had obtained a judgment by default.13 The debtors sought orders setting aside the bankruptcy notice subsequently served by the creditor, on the basis that they had a valid defence to the creditor’s claim which they were unable to put
forward because they were not aware of the court hearing which resulted in the judgment against them. Master Kennedy-Grant considered that the court had
jurisdiction to grant relief to the debtors despite the limitation in s 17(7) (then s
11 Thomasen v Nigro CA124/76, 19 July 1978; Clark v UDC Finance Ltd [1985] 2 NZLR 636 (HC).
12 Hardie v Booth [1992] 1 NZLR 356 (HC) at 362.
13 Re Wise, ex parte Benecke B227/95, 21 June 1995.
19(1)(d) of the Insolvency Act 1967), where there was an arguable ground of defence to the claim for which judgment was given.14
[55] In Re Saker, however, Associate Judge Faire expressed reservations as to whether the inherent jurisdiction invoked by Master Kennedy-Grant in Re Wise is available when the matter is expressly covered by s 17 of the Insolvency Act 2006.15
Associate Judge Faire said:
[26] I have reservations as to whether such a course is justified by way of an exercise of the Court's inherent jurisdiction. That is because the purported exercise in this case would seem to run directly counter to the statutory basis for setting aside the bankruptcy notice. That is the need to find a prima facie case or a genuinely triable issue in relation to the cross-claim. That is a matter that was expressly left open when the examination of the Court's inherent jurisdiction to prevent an abuse of process was undertaken by Master Kennedy-Grant in re Wise, ex parte Benecke HC AK B227-95 and B228-95 21 June 1995. Of course, if jurisdiction could be invoked an approach might be simply to adjourn the application to set aside the bankruptcy notice pending the determination of a strike out application or, if appropriate, trial of the District Court proceeding. In that way, the effect of r
830(2) of the High Court Rules is preserved and no act of bankruptcy will occur pending the determination of this application. However, as I have said, I have concerns as to whether the inherent jurisdiction is available when the matter is expressly covered by s 17 of the Insolvency Act 2006. In short, as the Act provides the express ground for setting aside the bankruptcy notice, it is that ground which I must analyse in determining whether the bankruptcy notice should be set aside.
[56] In Re Minter Ellison Rudd Watts, Associate Judge Osborne adopted the reasoning of Associate Judge Faire as set out in the passage from Re Saker quoted above, stating that “as the Act provides the express ground for setting aside a bankruptcy notice, the concept of resorting to the inherent jurisdiction is contradicted.”16
Application of the principles in this case
[57] On their own case, Mr and Mrs Shaw have no counterclaim or set-off against Aluminium Plus. They do not suggest that Aluminium Plus owes them any money; rather, their argument is that they had a good defence to the claims made against
them in the High Court, namely a defence that at least a substantial part of the
14 At 6.
15 Re Saker, ex parte Blackler HC Wellington CIV-2008-485-124, 26 May 2008 at [26].
16 Re Minter Ellison Rudd Watts, ex parte Hampton [2012] NZHC 1715 at [60].
liabilities of Aluminium Plus on which the liquidators’ claim was based were not liabilities at all (because Aluminium Plus had a good set-off against Viridian which had never been heard). Alternatively, their argument would have to be that Brown J failed to have sufficient regard to a contingent asset held by Aluminium Plus, in the form of a counterclaim against Viridian. Of course, both arguments would have faced the formidable obstacle that Viridian had obtained a judgment upholding its own claim and dismissing Aluminium Plus’ counterclaim.
[58] In the ordinary course, a judgment debtor whose defence has been rejected by the court, or who has failed to raise a defence which might have been available to him or her, cannot deploy the failure of that defence as a cross claim, in opposition to a bankruptcy notice later issued by the judgment creditor. The right place for the debtor to raise the defence is by way of appeal against the judgment (or possibly, depending on the circumstances, by application for a rehearing).
[59] I accept Mr Cole’s submission that an appeal against the judgment which provides the foundation for a bankruptcy notice does not constitute a cross claim for the purposes of s 17(7) of the Act, at least in circumstances where the matters raised on appeal were matters raised before the Court which gave the judgment on which
the bankruptcy notice was based.17 In this case, it seems to me that the matters now
raised were either raised at the trial in the High Court or could have been raised either at that time, or in the Court of Appeal.
[60] As Ms Craig pointed out in her affidavit in the present proceedings, the issue of the entity with which Aluminium Plus was trading was the subject of evidence at the High Court trial,18 and of course the Shaws’ solicitor then had the relevant credit application forms and terms and conditions between Aluminium Plus and Viridian (provided to him some four or five days before the High Court hearing).
[61] Mr Grace, who represented Mr and Mrs Shaw at the trial before Brown J, cross-examined Ms Craig on the differences between the terms and conditions of
17 In any event, the Supreme Court has now refused leave to appeal to that Court, and it appears there are no further appeal rights available to Mr and Mrs Shaw.
18 For example, Mr Shaw acknowledged in cross-examination that the same bank account was used by both CSR and Viridian, but went on to refer to the apparently different ownership structures of CSR and Viridian.
trade for CSR and Viridian. For example, at pages 13 to 14 of the notes of evidence the following exchange occurred:
Q. Now you’ve referred to terms of trade and you’ve provided an exhibit [A] which is on page 22 of the first bundle. It’s a copy of those terms and trade which you say apply. So where did you get this from?
A. My understanding is that this was part of the winding-up application for [Aluminium Plus].
Q. If you look at the top right-hand side it says “refers to page 2 of 2”.
Where’s page 1?
A. Again, I am unaware of that. It was part of the winding-up application records.
Q. Okay. Now if you look at the bottom at the signature, D S Stewart, it refers to [CSR].
A. Mhm.
Q. Is that the same company as the Viridian company that made the claim in liquidation?
A. I am unable to answer that possibly except to say that I have read somewhere that Viridian did go through a change in the structure, so I will make an assumption that that was the structure, that was the company prior to the restructuring, but I don’t know that for sure.
Q. You don’t know that, well, what I’ll put to you is that it is a
completely different company?
A. I can’t answer that.
[62] The issue of whether the relevant product supplies had been made to
Aluminium Plus before Mr Shaw signed Viridian’s credit application form on 7
November 2013 was expressly raised in cross-examination of Ms Craig, and the issue of whether Viridian ever accepted the November 2013 credit application form submitted by Mr Shaw on behalf of the Trust was also put to Ms Craig in cross- examination.
[63] Mr Shaw said that he thought it was around 2011, possibly 2012, when Viridian took over from CSR as the supplier, but when he was asked whether there were any differences between Viridian and CSR, he replied: “No. We still processed our orders the same, still dealt with Dwayne, who we always dealt with, yeah. It was just business as usual.”
[64] On the question of why the counterclaim was not pursued in the District Court, the following exchange occurred in Mr Shaw’s cross-examination by counsel for the liquidators:
Q. … The reason the judgment was obtained is because you disengaged from the District Court process, didn’t you?
A. Basically, as you can see from the paperwork filed, I was representing the company at the time and as you’ll see per the emails to Emma, let me find an example, so for example 245, bottom paragraph, “Hi Emma. Just to note I will provide an additional brief of our evidence,” which is what I presumed would have covered the capsule, “but as a qualified lawyer you’ll certainly know that there is a discovery phase during civil election for which all information will be provided by both parties as at present no evidence in detail has been presented by your client, which is Viridian. I will also be requesting all said internal correspondence on said matters, but as you know this will be done later on. Also can you copy the copy of the Court order requesting that I supply you with additional information by the 27th as this would be appreciated so I can read my file.” So what I was asking there was during discovery I would get access to their emails, Duane’s notes and everything, work papers, so I would then have the evidence of these credits that were due, and that’s why I was pushing for this discovery phase, or why I was relying on the discovery phase. And the same thing – no. Same as this judgment which I brought up with the costs and disbursements and the interest like there’s a statement from you to the District Court that you’ve signed saying that an account application had been signed allowing them to do this, and that was done by yourself, which is not the case and incorrect evidence.
Q. I want to just refer you to, I’m just trying to find the right page, page
303 of the bundle. Just part way down that page, this is the file note from Ms Craig to Ms Coppins in relation to the dispute with
Viridian, “Why wasn’t this dispute in the Court if it was disputed
and you have a chance to defend it. The company had no funds to defend it. It is easier for the trust to defend it. Sorry, what do you
mean? A lawyer advised that it would be easier to defend the debt
with the liquidators when the liquidators enforce the debt against the trust.” That’s a file note of 24 October 2014. Do you recall saying that?
A. I remember the lawyer saying at the time which it was not John that it would be easier for the trust to defend it. The thing is, it was disputed in the Court as you can see in terms of the counterclaim and all that. Then judgment was done because the capsule wasn’t served.
Q. So judgment was obtained? A. By default, though.
Q. And the counterclaim was discontinued and in the last two years –
A. Was it discontinued, though? Well, no, you did that by default because the capsule hadn’t been provided then you basically got all that struck out, is that correct?
Q. It’s in the information capsule. The judgment was obtained, as it says, because you didn't take any steps. What I’m putting to you is you made a deliberate decision to take no steps because you knew it would be more difficult for the liquidators to enforce against the trust on the advice that you’ve received.
A. Don’t believe the lawyer said it. He just said the defence of the trust
because of the credits had a stronger case.
[65] Brown J later took up the issue of why Mr and Mrs Shaw did not cause Aluminium Plus to apply to set aside the default judgment after it had been entered. The following exchange occurred between the Judge and Mr Shaw:
Q. Now, when the default judgment was obtained against the company under these rules about information capsules and things, why didn’t the company apply to set it aside if it had been, you know, felt that it hadn’t been heard, as it hadn’t?
A. It’s just – I don’t know the technical grounds or reasoning why he said that. I was just putting the trust in the lawyer at the time is that he said to use the funds in the trust to fight it on the trust side.
Q. So you were confronted with the default judgment? A. Yeah.
Q. And are you saying that, I don’t want to know what the lawyer said to you, because that would be privileged, but would you then consult a lawyer about the fact that the default judgment had been entered?
A. Yeah, that would have been, yeah, I can’t remember rightly if it was in regards to the defaulted judgment or before it. I can’t remember it, honestly.
[66] It is clear from those extracts from the notes of evidence at the High Court trial that the change in supplier from CSR to Viridian, the allegations of faulty products supplied by Viridian to Aluminium Plus, and Aluminium Plus’ reasons for discontinuing the counterclaim were all traversed at the trial before Brown J. It appears that Mr Shaw did not then raise the email obtained from his solicitor on 16
June 2014, in which the solicitor raised the CSR terms and conditions as an apparent obstacle to pursuing the counterclaim against Viridian. But Mr Shaw clearly was alert to the argument he and Mrs Shaw are now running, that the statement made in Viridian’s information capsule filed in the District Court was incorrect on the issue
of which terms and conditions of trade were applicable to Viridian’s supplies (Viridian’s, CSR’s, or neither company’s). Mr Shaw said in cross-examination at the trial in the High Court:
… Same as this judgment which I brought up with the costs and disbursements and the interest like there’s a statement from you to the District Court that you’ve signed [counsel cross-examining Mr Shaw had also represented Viridian in the District Court, and had signed Viridian’s information capsule] saying that an account application had been signed allowing them to do this, and that was done by yourself, which is not the case and incorrect evidence.
[67] Why Mr Shaw apparently did not raise the 16 June 2014 advice from his solicitor at the trial in the High Court is not clear, although it is possible that he and Mrs Shaw may not have then fully appreciated the arguments they are now making. But any late knowledge of the “terms and conditions argument” could presumably have been corrected by the Court of Appeal – if it was considered to have been sufficiently raised and if the argument had any merit. The “cross claim” which Mr and Mrs Shaw are now running (if, contrary to my view, it is a cross claim) was clearly there for them to run, at least in the Court of Appeal if not in the High Court itself.
[68] I think the place for correcting any injustice which may have occurred in the entry of the judgments against Mr and Mrs Shaw was the Court of Appeal, and not at this late stage (after the Court of Appeal has substantially upheld the judgment of Brown J). And if, as Mr and Mrs Shaw submit, there was further injustice in the Court of Appeal’s alleged misapprehension that the “counterclaim defence” had been withdrawn when it had not, the place for redress would presumably have been in the Court of Appeal or in the Supreme Court – it would not be in this Court.
[69] I do not consider it the task of this Court to re-open the issues of (i) whether judgment should have been entered in the District Court against Aluminium Plus and Aluminium Plus’ counterclaim dismissed; or (ii) whether Brown J should have inquired into those issues as part of a broader inquiry into whether Aluminium Plus’ liabilities were in fact as high as the liquidators said they were. Still less is it the task of this Court to purport to decide whether the Court of Appeal misconceived what appeared to be a concession made by counsel appearing there for the Shaws, namely
that the “counterclaim argument” was not being run on appeal. This is especially so given the Supreme Court’s finding that nothing raised by the Shaws suggested a miscarriage of justice: in dismissing the Shaws’ application for leave to appeal, the Supreme Court said:19
The matters Mr and Mrs Shaw seek to raise are largely factual and related to the particular circumstances of this case. It is therefore not of general public or commercial importance. Further, nothing raised by Mr and Mrs Shaw suggests that the Court of Appeal’s decision was wrong or that it has resulted in the risk of a miscarriage of justice.
[70] For the foregoing reasons, Mr and Mrs Shaw have not persuaded me that they have a genuine, triable cross claim within the meaning of s 17(7) of the Act. Nor do I see anything in the circumstances of this case which might suggest any abuse of process in the issue and service of the amended bankruptcy notices. Aluminium Plus properly consented to the stay of enforcement proceedings in December 2016, for the purpose of allowing Mr and Mrs Shaw to ask the Court of Appeal to correct any errors in the judgment which had been entered against them, and Mr and Mrs Shaw did not oppose the application made by Aluminium Plus in August of this year to lift the stay order.
Result
[71] The applications by Mr and Mrs Shaw for orders setting aside the amended bankruptcy notices served on them on 28 August 2017 are dismissed.
[72] On the Shaws’ present applications, Aluminium Plus is entitled to one set of costs, which are fixed on a 2B basis, with disbursements to be fixed by the Registrar. As between themselves, Mr and Mrs Shaw are jointly and severally liable for those costs.
[73] I invited the parties to submit memoranda on the issue of costs on the first setting aside applications filed by Mr and Mrs Shaw in 2016 (the 2016 applications). Those memoranda have now been filed. Counsel for Aluminium Plus submitted that costs should be awarded on the 2016 applications on a ‘2B’ basis, for filing a notice
of opposition and one memorandum of counsel, and for one appearance at a
19 Shaw v Owens, above n 7, at [16].
mentions hearing. In accordance with schedules 2 and 3 to the High Court Rules, costs of $2,532 are sought on the 2016 applications.
[74] Counsel acknowledged that both parties had some measure of success in the Court of Appeal, but the Shaws’ success related only to the quantum of the judgment against them – the decision of Brown J in the High Court was upheld in all substantive respects. Further, the 2016 applications were dismissed (without opposition) in August 2017, after the Court of Appeal had given its judgment.
[75] Mr and Mrs Shaw submitted that there were reasonable grounds for contesting the bankruptcy notices issued in 2016, and that the reason they could not establish a cross claim arose from the circumstances of the entry of the default judgment. Aluminium Plus’ counterclaim has never been determined by a Court. They also referred to the fact that no costs were awarded in the Court of Appeal (although they acknowledged that they had legal aid for the appeal20).
[76] I accept Aluminium Plus’ submissions on this issue. The decisions in the High Court and the Court of Appeal make it clear that Mr and Mrs Shaw never had a cross claim as defined in s 17(7) of the Act, and of course the 2016 applications were eventually dismissed.
[77] I accept that the costs of $2,532 claimed by Aluminium Plus on the 2016 applications are appropriate under schedules 1 and 2 to the High Court Rules. There will be judgment for Aluminium Plus in that sum accordingly, in addition to the costs awarded at paragraph [72] of this judgment. Again, Mr and Mrs Shaw are jointly and severally liable for the $2,532.
Associate Judge Smith
Solicitors:
Ford Sumner, Wellington for the judgment creditor
20 Absent exceptional circumstances, costs are not awarded against a legally aided person. (Legal
Services Act 2011, s 45(2).
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