Apatu v Mauger

[2012] NZHC 3270

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV-2011-441-832 [2012] NZHC 3270

IN THE MATTER OF     the Insolvency Act 2006

AND

IN THE MATTER OF      the bankruptcy of WINIPERE EVA MAUGER

BETWEEN  KENNETH TAMA TE KAPUA APATU First Judgment Creditor

ANDNATHAN WIRIHANA APATU, RENATA ROBIN APATU AND KATHERINE LOUISE BATES AS EXECUTORS OF THE ESTATE OF WIRIHANA TERRENCE APATU

Second Judgment Creditors

Hearing:         15 November 2012 (Heard at Napier)

Counsel:         N. Gray - Counsel for Judgment Creditor

D. O'Connor - Counsel for Judgment Debtor

Judgment:      6 December 2012

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

Under r 11.5 of the High Court Rules I direct the Registrar to deliver this judgment at 3.30 pm on 6 December 2012.

Solicitors:           Sainsbury Logan & Williams, Solicitors, PO Box 41, Napier

Lunn & Associates, Solicitors, PO Box 846, Napier

KTTK APATU & ORS v WE MAUGER HC NAP CIV-2011-441-832 [6 December 2012]

Introduction

[1]      This is an application by various judgment creditors (who are her relatives) to adjudicate the judgment debtor Ms Winipere Mauger (the debtor) bankrupt. The bankruptcy application is based on a judgment debt of $85,000.00, which represents a costs award made in this Court on 3 November 2011 against the judgment debtor and her brother, Mr Ashley Apatu (Ashley).

[2]      The costs award was made following proceedings in which the debtor and Ashley were unsuccessful plaintiffs in a claim against four other family members: Mr Kenneth Apatu, a brother of the debtor, Mr Nathan Apatu and Mr Renata Apatu, the debtor’s nephews, and Ms Katherine Bates, the debtor’s niece. I will collectively refer to this group as “the creditors”.

[3]      Over the last year, the creditors have sought to enforce payment of the costs award, which has so far proven unsuccessful. They have successfully applied to bankrupt Ashley, and now bring the present application to bankrupt the debtor for the outstanding debt.  No part of the outstanding $85,000.00 debt has been paid.

Background

[4]      The debtor is now aged 80 and resides in a retirement village in Napier. On

26 September 2007, before she became involved in the legal action the subject of the costs award, the debtor was involved in a high-speed car accident, during which she sustained a severe head injury by hitting her head on the steering wheel of the car. That event has significance to this application which will later be explained.

[5]      The litigation which gave rise to the costs award involved Ashley and the debtor bringing proceedings against the creditors alleging breaches of trust in the performance of their duties as executors of a family estate.1 As a consequence of finding against Ashley and the debtor as plaintiffs on the substantive issues, Williams

J in this Court ordered them to pay the creditors costs of $85,000.00 (the judgment

1 The substantive issues of those proceedings are not relevant to the present application but were determined in Apatu v Apatu, HC Napier CIV-2009-441-515, 10 May 2011.

to two-thirds on a category 2B scale basis.3   The litigation had already proved very costly for  the  debtor.    She  had  paid  some  $200,000  in  legal  fees  to Auckland solicitors Holmden Horrocks who were acting on her and Ashley’s behalf on the claim, and a further $96,000.00 was still said to be owing by her in outstanding fees due to Holmden Horrocks. In respect of that debt, Holmden Horrocks obtained a mortgage over one of the debtor’s properties and have since registered a caveat on the title to that property.  As I understand the position, despite his joint and several liability, no part of the Holmden Horrocks legal fees has been met by Ashley.

[6]      There also does seem to be some possibly serious irregularities in the various payments made by the debtor to Holmden Horrocks over the period of the litigation. The many payments in question were always made at the request and direction of Ashley.  The usual course of action was for the debtor to obtain a bank cheque for the bald amounts requested by Ashley, trusting her brother totally.  These amounts however were often greater than the amounts invoiced for legal services. Holmden Horrocks as I understand it then purported to hold the excess amount on account for Ashley.  Over the period of time in question I understand they have paid to Ashley from  these  amounts  contributed  by  the  debtor  various  sums  which  total  about

$31,300.00.  It is suggested that these payments may have been in part for work Ashley said he undertook on this litigation or even on earlier unrelated litigation involving Holmden Horrocks. It certainly appears that, even though Ashley was the main instigator and driver of this litigation against the creditors, he made no contribution to its costs.  And, as I have noted above, he has since been adjudicated bankrupt.

[7]      The creditors now seek to bankrupt the debtor for this outstanding $85,000.00 costs award.  They served these bankruptcy proceedings on the debtor on 14 March

2012, having previously served a bankruptcy notice on 10 January 2012. Attempts were then made to negotiate a settlement of the matter, with the creditors rejecting an offer from the debtor to part-pay the outstanding debt.  Adjournments were granted

on 4 May 2012 and on 31 May 2012 in order to allow the debtor to file and serve a

2 Apatu v Apatu HC Napier, CIV-2007-441-823, 3 November 2011.

3 At [21].

defence to the adjudication application. A final adjournment was granted on 28 June

2012 for the same purpose. Therefore it is clear the debtor has had some months to get her affairs in order and to realise any assets that may be required to pay the judgment debt or to settle these bankruptcy proceedings.

[8]      There is no argument here that an act of bankruptcy was committed by the debtor around 27 January 2012 when she failed to comply with the creditors’ bankruptcy notice dated 21 December 2011. I accept that the requirements of s 13

Insolvency Act 2006 are satisfied here and the Court has jurisdiction to adjudicate the debtor bankrupt.  The only remaining issue is whether one of the grounds in s 37

Insolvency Act 2006 is made out, allowing the Court to exercise its discretion to refuse adjudication.

Grounds of opposition to bankruptcy

[9]      Section 37 of the Insolvency Act 2006 provides:

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.

Debtor’s submissions

[10]     The debtor relies primarily on s 37(c), Insolvency Act 2006 and contends that refusing adjudication would be the just and equitable result in this case. The debtor claims that bankruptcy would be oppressive for the following reasons:

a. She notes that the head injury she suffered in September 2007 referred to at [4] above impaired her cognitive function throughout

control and manipulation by Ashley,  the perpetrator of that litigation;

b.The  debtor  has  already  suffered  substantially  as  a  result  of  the substantive  litigation  in  that  she  has  paid  substantial  amounts  of money in legal fees for that litigation to Holmden Horrocks, some of which it is said was misappropriated by Ashley; and she still has a (secured) debt for fees owing to them of $96,000.00.

c.        The debtor generally did not understand and had no control over the proceedings, despite being named as a plaintiff in them. She did not receive independent advice and it is alleged broadly that she was “swindled” by Ashley.

[11]     The debtor’s submissions rely on the Court drawing an inference that she had very little role in or understanding of the substantive proceedings against the creditors, and was essentially misled by her brother Ashley into both commencing those proceedings and also expending considerable resources in continuing them. The debtor says in those circumstances it would be oppressive to adjudicate her bankrupt on the basis of a costs award that arose out of the proceedings, in addition to the substantial sums she has already paid (and owes) in legal fees to Holmden Horrocks.

[12]     Evidence before me in support of this submission includes a report from Dr

Anne Walsh, a specialist psychologist, who interviewed the debtor on 22 August

2012 in order to assess her cognitive functioning and any potential impairment. In her affidavit, Dr Walsh deposes that the debtor’s behaviour during the interview was consistent with Frontal Lobe Syndrome, as a result of the 2007 accident. This syndrome she notes is often difficult to detect as a patient often appears to function normally. However, Dr Walsh confirmed that with someone affected by this syndrome, complex cognitive functions such as planning and decision-making are compromised. Dr Walsh’s overall opinion here was that:

Mrs Mauger is highly unlikely to have been able to make rational decisions in regards to the civil litigation. There are substantive reasons to doubt that she had the

cognitive capacity to fully understand the basis of and implications of undertaking such a case. As such, the decision making and choices made were very unlikely to have been under her control and/or made freely by her.

[13]     This evidence suggests that throughout the litigation, the debtor may have been completely susceptible to control and influence by a third party, in this case Ashley. Her understanding of the proceedings and the adverse effect of a costs award against her in the event she was not successful was likely to be very limited.

[14]     Those conclusions it is said are substantiated by other evidence before the Court supporting the view that the debtor had very little understanding of the nature and consequences of the litigation.   It seems she tried to instruct her daughter Ms Cecile Mauger to represent her and determine what was going on between the parties but it is suggested she was obstructed from doing so. When Ms Mauger tried to attend settlement meetings between the parties on behalf of her mother, the debtor maintains she was turned away by Ashley and his solicitors. At no time was the debtor independently advised or represented (given it is said that Holmden Horrocks were effectively Ashley’s lawyers), and could have truly understood  the consequences of the proceedings in which she was named as a party.

Creditor’s submissions

[15]     The creditors dispute this evidence as they claim that there is nothing in the decision of Williams J, or the transcript of the debtor’s evidence at that hearing, which shows a manifestation of any condition from which the debtor may have been suffering.  They claim that these records show that for the entire time the debtor understood exactly what she was doing and she made calculated choices to continue with the proceeding, exposing her to the adverse costs award which did follow and the potential debt.  They maintain she attended a judicial settlement conference and a defended hearing, during which she gave evidence, without raising any concerns about her understanding or lack of independent advice. They claim that even if she was suffering a psychiatric condition, it did not manifest itself during the proceeding or affect her decision-making capabilities. As a result, she was aware throughout the proceeding of its consequences and the fact that she could be held liable for the debts she incurred in pursuing the creditors.

[16]     The creditors also dispute the relevance of any issues the debtor might have with the fees charged by Holmden Horrocks or moneys they held on account for her or Ashley. They contend that any disputes over these matters could be pursued in a separate claim against the solicitors, or taken up with the New Zealand Law Society.

My assessment

[17]     The touchstone of the Court’s discretion to refuse adjudication following an act  of  bankruptcy  is  to  achieve  a  result  which  is  just  and  equitable.  The circumstances in which a debt was incurred are relevant to the exercise of the Court’s discretion to refuse adjudication. 4   Part of the circumstance prevailing in the present case is the familial relationship between the debtor and the creditors, and the background to the litigation which gave rise to the judgment debt. The cognitive functioning of the debtor, which I accept may have been compromised to a certain extent throughout the litigation (given that Dr Walsh’s evidence noted above at [12]

is effectively uncontradicted), also forms part of the circumstances in which the debt was incurred. The pertinent question here is whether it would be unjust to enforce a costs award properly made against an unsuccessful party, simply because that party was misled into commencing the proceedings, or did not understand the significance of continuing them.

[18]     There  is  no  doubt  that  the  issues  now  raised  in  opposing  the  present application  could  have  been  properly  raised  and  dealt  with  in  submissions  to Williams J on the issue of costs, but it seems they were not. At that stage of the proceedings, it is said the debtor did not have independent representation.  Perhaps if the same arguments had been advanced at that stage by different counsel to those representing Ashley, a costs order may have been made only against him as the main instigator and driver of the litigation, but that is simply speculation at this point. This evidence it seems was not before Williams J when the costs order was made and it does not appear he considered the prospect of awarding costs against Ashley alone rather  than  making  the  two  plaintiffs  jointly  and  severally  liable.  For  present purposes I accept the debtor’s submission that the substantive proceedings were

essentially controlled by Ashley and in that sense it might be thought unfair to have

4 Re Fidow [1989] 2 NZLR 431 at 441; Re Guest, ex p BNZ Finance Ltd [1991] 1 NZLR 250 at 255.

the judgment bite entirely against her, when arguably in the main all she did was lend her name to the proceedings. However, those observations do not detract from the validity of the costs order as the judgment debt.

[19]   The prospect of an adverse costs award is one of the consequences of commencing and continuing litigation, which must be weighed in the balance by any potential litigant. A principal issue here is whether the debtor’s limited cognitive functioning meant that the usual process of weighing the adverse consequences of litigation with the prospects of success was significantly impaired. In my view on the evidence before me there is something in this argument advanced for the debtor. However, the position of the creditors who are clearly innocent parties in all of this must also be considered.  If adjudication is refused here, there will be no opportunity for the Official Assignee to examine the debtor’s financial position and clear the costs order if her assets permit.  That remedy of adjudication appears to be what the creditors seek, as they seem unwilling to embark on other enforcement action such as charging orders or the like.

[20]     Two additional matters are relevant to determining  an  equitable and just result here - the reasonableness of the creditors’ decision to seek a bankruptcy order and the need for investigation of the debtor’s affairs by the Official Assignee.

[21]     As  to  the  first  matter,  counsel  for  the  debtor  claims  that  attempting  to bankrupt  an  80  year  old  widow  who  is  closely  related  to  the  creditors  is unreasonable, given the circumstances of the litigation, the role of Ashley in “roping her in”, and the creditors’ knowledge that she may not have had full cognitive capabilities during the proceedings.

[22]     As to the second matter, the creditors claim that the Official Assignee needs to investigate the transfer of the debtor’s home to a family trust in 2009, in respect of which the trust owed $217,500 to the debtor. It seems this debt has been partially forgiven by two annual gifts each of $27,000 to the trust.   The debt however still seems to stand at the sum of $163,500.00.  The creditors claim that this debt should be investigated by the Official Assignee as an asset potentially available to creditors, and that bankruptcy is the only way to allow for that course of action.

[23]     In determining what is the most just and equitable result in this case, it might also be suggested in a general sense that the consequences of bankruptcy to the debtor may not be as grave as they would have been if the debtor was younger, carrying on business, or had other creditors that had a potential claim to her assets.

[24]     Although  I consider all  the matters which have been raised to be finely balanced, I have considerable sympathy for the debtor in the predicament in which she finds herself here, particularly bearing in mind her age and health condition, the fact that she is of little future risk to the commercial community, the background to her incurring the present debt, the part played by her brother Ashley in all of that, and the fact that this is in essence a family matter with the creditors all being her immediate relatives.  On the other hand I am mindful that the creditors are generally innocent parties here and simply want to be paid.  By a rather fine margin, I conclude that all the reasons advanced by the debtor alone may not be quite enough on their own to justify the Court here exercising its discretion under s 37(c) Insolvency Act

2006 on just and equitable grounds to refuse an order for adjudication.

[25]     That is not the end of the matter however.  In the alternative the debtor before me advanced a further argument relying on s 37(b) Insolvency Act 2006 to resist adjudication.  On this, she claims that she is “able to pay her debts” as she has sufficient assets to pay the outstanding debt to the creditors here. In support of this position an affidavit prepared by Mr Duncan Millar, a chartered accountant has been filed by the debtor, which outlines the debtor’s assets and liabilities. That affidavit shows  the  debtor’s  total  assets  to  be  $384,982.00  and  her  total  debts  to  be

$237,798.00.  Those debts comprise over $183,000.00 by way of the present costs debt to the creditors and the amount outstanding in costs on the litigation due to Holmden Horrocks.  The balance represents sundry creditors of about $5,600.00 and about $49,000.00 owing to a related family trust (which in turn owes the debtor some $163,500.00). It would seem that the debtor’s assets exceed her liabilities by approximately $147,000.00 and this alone it is said is evidence that the debtor could still pay the judgment debt.

[26]     It needs to be acknowledged here however that this claim must be considered in the context of the present adjudication application, where the debtor has in the

past asked for and been granted three adjournments, in part so she could file a defence but also to enable her to take steps to resist adjudication, such as realising assets to clear the debt. The creditors claim that the debtor has failed to realise any assets since adjudication proceedings were filed, despite asking the Court for more time. They claim that although Mr Millar’s evidence may show a positive balance of assets over liabilities, it is unrealistic to expect those assets to be realised in a reasonable period of time, and therefore the basis on which the Court can exercise its discretion in s 37(b) is not made out.

[27]     In the present case, other than the $163,500.00 loan outstanding to the debtor from the Family Trust to whom she sold her home, (which itself may be able to be assigned to the creditors) there are two rural properties in which the debtor has an interest which might ultimately be available to meet the debt to the creditors.  As I understand the position, at least one of these properties is maori land which may not be immediately realisable, but ultimately some arrangement by way of assignment, sale or security might be concluded for the overall benefit of the family members involved.

[28]     Taking all these matters into consideration, I am of the view that there is a possible argument open to the debtor here that given the nature of those debts and the parties to whom they are owed, the debtor is able to pay all her debts given a reasonable period to do so and thus in terms of s 37(b) an order for adjudication should be refused in the exercise of the Court’s discretion.

[29]     I add this conclusion to the comments I have noted at para [24] above.  In doing so I conclude here but only by a rather slim margin that this is an appropriate case for the Court in exercising its discretion to refuse the application to adjudicate the debtor bankrupt.  I reach this position in part on the basis that the debtor may be seen as being in a position where she is able to pay her debts but also in part on the basis that this is bolstered by the other matters referred to at para [24] above and earlier in this judgment.   For these reasons, I find that it is appropriate here that the Court refuses the order for adjudication sought.

Conclusion

[30]     The adjudication application before me therefore fails and is dismissed.

[31]     As to costs, however, in my view this is an appropriate case where costs should lie where they fall. There is to be no order made as to costs.

‘Associate Judge D.I. Gendall’