Bank of New Zealand v Blum
[2015] NZHC 1116
•22 May 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-002143 [2015] NZHC 1116
BETWEEN BANK OF NEW ZEALAND Judgment Creditor AND
MARKUS LEOPOLD BLUM Judgment Debtor
Hearing: 15 May 2015 Appearances:
Ms M Green for Judgment Creditor
Mr M Blum in personJudgment:
22 May 2015
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE [REDACTED VERSION]
This judgment was delivered by me on
22.05.15 at 4 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
BANK OF NEW ZEALAND v BLUM [2015] NZHC 1116 [22 May 2015]
Background
[1] The judgment creditor, BNZ, seeks an order to adjudicate the debtor, Mr Markus Blum, bankrupt. Mr Blum opposes adjudication.
[2] Mr Blum owes BNZ the sum of $30,635.10. This is the amount unpaid on a judgment obtained in the District Court at Auckland on 13 November 2013.
[3] On 25 November 2014, the debtor was served with a bankruptcy notice. Mr Blum did not comply with the notice nor did he satisfy the Court that he has a cross claim against BNZ.
[4] Mr Blum is involved in unrelated proceedings with a trading bank (not the BNZ). He was a former director and shareholder of Global Prestige Brands Limited (“GPB”). That company is a customer of the bank and was indebted to it in the sum of approximately $566,000. In April 2012 the bank alleged sent an email to Mr Blum and GPB providing information about GPB’s financial position. Mr Blum alleges that inadvertently the email contained confidential information [Redacted].
[5] On 17 June 2013, the bank obtained interim orders prohibiting use of the confidential information and requiring Mr Blum and GPB to return the information and delete the information in their control.
[6] The bank brought proceedings seeking permanent orders. On 15 May 2014, Thomas J released her decision.1 The Judge entered judgment in favour of the bank and held that:
(a) Mr Blum is not entitled to make use of the confidential information.
He is not entitled to disclose anything which would reveal the contents of the report or which is based on his knowledge of the report which he acquired by opening and reading the report in circumstances
where the report was clearly confidential.
1 ANZ Bank New Zealand Ltd v Blum [2014] NZHC 640.
(b) Disclosure of the confidential information is not in the public interest.
(c) The orders made are a justified restriction on the defendants’ freedom
of expression.
[7] Mr Blum and GPB have appealed against this decision to the Court of Appeal. A fixture for the appeal has been set for 10 am on Wednesday 17 June 2015. Mr Blum told me that the security for costs on the appeal of $5,000 has been paid. He further advises that senior counsel, Mr B Stewart QC, has agreed to take the appeal on a pro bono basis.
The debtor’s case
[8] Mr Blum has filed a notice of opposition. He opposes adjudication on the following grounds:
(a) A bankruptcy order will or may prevent him from continuing as a party to the Court of Appeal proceeding; and
(b)A bankruptcy order may or will prevent him from taking legal action against the bank on the grounds that the bank misrepresented its services/facilities to him and his company and subsequently placed his company into receivership.
[9] In effect the case for Mr Blum is that he ought to be entitled to a dismissal, a halt or an adjournment of proceedings in order to enable him to prosecute his appeal and also to enable him to obtain a legal opinion on a claim against the bank which, if favourable, would allow him to repay BNZ.
[10] In relation to the first ground of opposition, it was implicit in Mr Blum’s submissions that he considered that there was a risk that if he were to be bankrupted, the Official Assignee would decline to proceed with the appeal. He considered that the Official Assignee was not the correct person who should make a decision about whether or not the appeal ought to be allowed to proceed. Because of the volume of confidential information and the nature of the breach of confidentiality, Mr Blum
told me, on the part of the bank which he alleges took place, it is very important for the appeal to go ahead on 17 June 2015.
[11] In relation to the second ground which concerns an adjournment for the purposes of taking steps to instruct counsel to bring a case against the bank, Mr Blum seeks a six-week adjournment in order to find a lawyer who will act for him on legal aid in his case against the bank. He says that a barrister is presently looking at the proceeding with a view to taking that proceeding, too, on a pro bono basis. I will deal with each of the two main points that Mr Blum made in the next part of this judgment.
The discretion to adjudicate
[12] The Court has discretion to adjudicate a debtor bankrupt if the creditor has
established the requirements set out in s 13 of the Insolvency Act 2006 (“the Act”).2
[13] Section 13 provides:
13 When creditor may apply for debtor's adjudication
A creditor may apply for a debtor to be adjudicated bankrupt if—
(a) the debtor owes the creditor $1,000 or more or, if 2 or more creditors join in the application, the debtor owes a total of
$1,000 or more to those creditors between them; and
(b) the debtor has committed an act of bankruptcy within the period of 3 months before the filing of the application; and
(c) the debt is a certain amount; and
(d) the debt is payable either immediately or at a date in the future that is certain.
[14] There is no dispute that all four requirements are satisfied. However, the Court may refuse adjudication at its discretion. It is for an opposing debtor to show the Court why an order should not be made.3 Section 37 provides:
37 Court may refuse adjudication
2 Insolvency Act 2006, s 36.
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.
[15] In this case, the only grounds available to refuse adjudication are s 37(c) and
(d).
[16] In considering whether to exercise the discretion not to adjudicate the debtor, the Court must consider not only the interest of those directly concerned – the petitioner, other creditors, the debtor — but also the wider public interest. Richardson J in Baker v Westpac Banking Corp said:4
The court will give proper weight to the commercial judgment of the petitioner but the oppressive use of the bankruptcy process may be a ground for refusing an order. Another ground may be the undoubted absence of assets but that will not necessarily preclude an order given the range of interests involved including the public interest in the continuing oversight of a bankrupt's affairs and the disqualifications that go with bankruptcy. In the end the court must balance the various considerations relevant to the case and determine whether the debtor has succeeded in showing that an order ought not to be made.
[17] Further light is cast upon the approach that the Court ought to take to the exercise of the discretion by Fisher J in Re Fidow:5
Notwithstanding those prima facie grounds, it is clear that a bankruptcy adjudication does not follow automatically. Discretions arise at several points. One is that pursuant to s 26(1) itself, the Court has from the outset a discretion whether or not to adjudge the debtor bankrupt even when the prima facie grounds are established. In addition, Mr Winger for the debtor has raised a number of matters in support of an application to stay the proceedings for a period of six months pursuant to s 26(7).
It is clear that under s 26(7) the Court is given a very wide discretion. In that regard Eichelbaum J said in Re Sturdee (a debtor) [1985] 2 NZLR 627 at p
635:
4 At 4.
In considering a bankruptcy petition the Court does not have exclusive regard to the wishes of the petitioner, the creditors, or the debtor. It has also to consider whether the course proposed is conducive or detrimental to commercial morality and the interests of the general public: Re Nisbett, ex parte Vala [1934] GLR 553, 556 per Fair J. Similar considerations, in my opinion, apply to an application for stay. Re Katavich, ex parte Boglich (1911) 30 NZLR 449 was concerned with a composition supported by all the creditors save one who petitioned for bankruptcy. Under the terms of s 37 of the Bankruptcy Act 1908 (see now s 26(3) of the Insolvency Act 1967) the Court had to consider whether it would be to the advantage of creditors that the estate should be administered under the proposed deed of composition. Edwards J thought it helpful to refer to the provisions of what is now s 122 relating to the approval by the Court of a composition with creditors which empowered the Court to refuse approval if the terms of the composition were unreasonable or not calculated to benefit the general body of creditors, or if the bankrupt had been guilty of misconduct or for any reason it was not expedient that the composition should be approved.
Relevance of the appeal to application for adjudication
[18] The key to determining this point is to consider what are the “relevant” factors which the Court of Appeal in Baker had in mind in the passage cited above from that judgment.
[19] At a high level, it can be said that the objective of bankruptcy is to make provision for the equitable distribution of a bankrupt’s assets amongst his or her creditors.6 However, the court does not have regard entirely to the interests of the creditor who brings the application for adjudication but must also have regard to the interests of the debtor. The policy that the court’s processes should not be used in an oppressive way must be considered along with the interests of the wider community. Reference in cases such as Re Sturdee to the maintenance of commercial morality indicate that it is a legitimate function of the insolvency laws to ensure that conduct
in the commercial arena which falls below generally accepted standards should not go unremarked. In the process of balancing the various considerations which inform the decision as to whether the discretion to adjudicate is exercised or not, the court should view as a factor in favour of adjudication that there has been unethical or
dishonest conduct on the part of the debtor.
6 Paul Heath and Mike Whale (eds) Heath and Whale Insolvency Law in New Zealand (2nd ed, LexisNexis, Wellington, 2014) at [1.2].
[20] There are other miscellaneous grounds upon which the discretion has been exercised in favour of the judgement debtor but the above is a sufficient summary for present purposes.
[21] The proposition which Mr Blum puts forward is essentially that even though BNZ may prima facie be entitled to an order of adjudication, there is public interest in permitting him to pursue the litigation against an unrelated party, the justification for which is apparently the need to expose [Redacted].
[22] I do not accept that this is a function which can properly be allocated to bankruptcy law and it is not a matter that bankruptcy law has historically been concerned with. It falls outside the area mapped out by cases such as Baker. The subject matter of the appeal essentially raises questions about [Redacted]. The debtor was only involved in his capacity as the unintended recipient of [Redacted].
[23] Further, assuming that the bank did accidentally release [Redacted], it is likely that in doing so that the bank would have been in breach of [Redacted]. As well, the court in its equitable jurisdiction has powers to restrain violations of confidential information and to grant remedies where it has occurred. Indeed, that jurisdiction is at the heart of the injunction proceedings with which the appeal that Mr Blum has brought to the Court of Appeal is concerned with.
[24] It is not a matter of trivialising [Redacted]. Rather, [Redacted] is not a matter which the court should properly be concerned with when exercising its discretion under ss 36 and 37 of the Insolvency Act 2006.
Control of the appeal
[25] The next issue is concerned with what would happen to the appeal in the event that Mr Blum were to be adjudicated bankrupt. Mr Blum’s submission was that the prospects of the appeal proceedings would be minimal if an adjudication order were to be made.
[26] On adjudication, all property belonging to the bankrupt vests in the Official Assignee. The powers that the bankrupt could have exercised in, over, or in respect of any property for the bankrupt’s own benefit vests in the Assignee.7
[27] “Property” is defined as:8
property means property of every kind, whether tangible or intangible, real or personal, corporeal or incorporeal, and includes rights, interests, and claims of every kind in relation to property however they arise.
[28] A right of appeal has been held to come within the definition of “property”
for the purposes of the Act.9
[29] Under s 117, the Assignee may disclaim onerous property which is defined, inter alia, as:10
A litigation right that, in the opinion of the Assignee, has no reasonable prospect of success or cannot reasonably be funded from the assets of the bankrupt's estate
[30] The effect of a disclaimer brings to an end the litigation right of the Assignee and the bankrupt but it does not affect the right of any other person, except in so far as is necessary to release the Assignee or the bankrupt from a liability.11 The bankrupt may also apply to the Court for an order that the disclaimed property is vested in the bankrupt.12 The Court may make the order if it is satisfied that it is fair
that the property should be vested in the bankrupt.13
[31] The Assignee has discretion in administrating the bankrupt’s property. However, he or she must have regard to the resolutions of the creditors at creditors’ meetings.14 If the Assignee believes that a resolution of the creditors conflicts with
the Act or is unjust or unfair, the Assignee may apply to the Court for directions.15
7 Insolvency Act, s 101.
8 Section 3.
9 Re Collier HC Christchurch B28/91, 20 August 1993 per Tipping J.
10 Insolvency Act, s 117(4)(a)(iii).
11 Section 118.
12 Section 119(2).
13 Section 119(3).
14 Section 224(1).
[32] It follows that the Assignee has a significant role to play in determining if Mr Blum can be a party to the appeal. He or she could disclaim the right to appeal if he or she considers that the litigation has no reasonable prospect of success or if it cannot reasonably be funded from the assets of the bankrupt's estate. Whilst Mr Stewart is working pro bono, “funding from the assets of the bankrupt’s estate” could arguably also extend to costs that may be awarded against Mr Blum if the appeal is unsuccessful. The point about the costs is considered below.
[33] However, if the right to appeal is disclaimed, Mr Blum may apply to the Court for an order that the disclaimed property is vested in him.16 This way, he can still be a party to the appeal.
[34] Therefore, even if there were a public interest in Mr Blum’s appeal going ahead, there is no reason why that cannot happen even in the circumstances where he has been adjudicated bankrupt.
[35] However it is not correct to say that all the arguments are one way that the appeal ought to go ahead. There may well be the potential for the pool of creditors to be further enlarged by the addition of a costs order in the Court of Appeal in the event that Mr Blum is unsuccessful on his appeal.
[36] The costs position if Mr Blum is unsuccessful is not clear. Mr Blum told me, and I accept, that he has made payment of the security for costs required under the Court of Appeal rules in the amount of $5,000. I am not clear, though, whether there may be any additional exposure to an adverse costs order representing an amount that is not satisfied by the security for costs. Given that Mr Blum is admittedly unable to meet his debts, it would not be acceptable for him to expose his creditors to additional risk. It is also relevant to note that it has not been explained what the source was of the $5000 security for costs. This is not a trivial matter having regard to the fact that Mr Blum is admittedly unable to pay his debts.
[37] All of this suggests to the court that the question of Mr Blum’s involvement
in the appeal is exactly the type of matter that ought to be considered by the Official
Assignee. Not only can the Official Assignee carry out a balancing of the positive and negative aspects of the appeal from the point of view of the creditors, but he or she is also the appropriate person to negotiate terms such as any indemnity that might be required.17
The proposed claim against the bank for misrepresentation
[38] The existence of possible litigation that could be brought against third parties to pay off the debt owed to the creditor has been considered when the Court has been asked to exercise its discretion in refusing adjudication.
[39] In Re Kroon ex parte Westpac Banking Corporation, the Court took the view that “it will rarely be the case that the Court will be deflected from adjudicating a debtor on the basis that the debtor has a claim against a third party. Further, it will be for the debtor to show that there is some proper ground to suppose that the claim
is a viable one and that the result of the litigation will not long be delayed”.18
[40] In Re Lee, the existence of two potential undetermined claims was raised. The Judge noted that the claims appeared speculative and no proceedings have been initiated. Further:19
There is no realistic possibility of these undetermined claims being heard within the foreseeable future, or, indeed, if at all. In those circumstances, the existence of alleged claims against third parties is not a good ground for depriving a creditor of its normal rights.
[41] The Judge was not persuaded that adjudication should be refused.
[42] Re Lee was cited in Laws of New Zealand under the first situation that has
“repeatedly failed to win debtors a reprieve from the Court making the adjudication order”:20
17 See Miah v Official Assignee [2013] NZHC 2726.
18 Re Kroon ex parte Westpac Banking Corporation HC Auckland CIV-2006-404-4720, 24 April
2007 at [84].
19 Re Lee HC Christchurch B331/02, 27 March 2003 at [20] per Master Christiansen. Similar sentiments were expressed in Ellis v NZI Finance Ltd CA253/89, 24 July 1990.
20 Laws of New Zealand Personal Bankruptcy and Insolvency (online ed) at [117].
·claims against third parties yet to be litigated that the debtor asserts will produce a money judgment which when paid to the debtor can be distributed to his or her creditors
[43] In addition to adjudicating or refusing to adjudicate the debtor bankrupt, the court has the power to halt the creditor’s application on the terms and conditions (if any), and for the period, that the court thinks appropriate.21
[44] In relation to whether the existence of potential claims against third parties is sufficient to justify a halt, Laws of New Zealand provides:22
Debtors often seek the Court’s indulgence to have the use of this general power to halt (stay) proceedings where the debtor claims an action against a third party which could get in enough money to meet the debt of the applicant creditor and possibly other creditors. The Court will consider whether the debtor should be given time to prosecute that action in determining whether to grant an order halting (staying) proceedings on the creditor's application for bankruptcy. Such requests usually fail, as the existence of a claim against a third party is not a basis for refusing the creditor’s application, once he or she has established the statutory criteria for seeking the adjudication order.
(Emphasis added)
[45] This position is supported by Re Smith ex parte Diners Club New Zealand
Ltd where Master Kennedy-Grant said:23
I do not consider it is a sufficient reason for further adjourning this petition. I am of this view because, quite clearly, the debtor's ability to pay his creditors, the present petitioners included, is dependent upon his succeeding in his claim against Sun Alliance. He is presently unable to proceed with that claim because of the absence of legal aid. His ability to proceed with it is dependent upon his getting legal aid and then, of course, there is the question of whether or not he will succeed. That is clearly going to take at least another six months, I would suspect more likely another year. The matter first came before the Court in August of this year. The bankruptcy notice was served on the debtor in June of this year. In all the circumstances I am satisfied that the proper order to make is one refusing a further adjournment.
[46] The quoted passage in Kroon was cited by Courtney J in Re Gwyer, ex parte
Westpac New Zealand Ltd. However, she decided to order a halt pending the
21 Insolvency Act, s 38.
22 Laws of New Zealand at [123].
23 Re Smith ex parte Diners Club New Zealand Ltd HC Tauranga B48/ 97, 17 November 1997.
outcome of a Family Court conference, which was said to canvass the matter of the third party claim.24
[47] Kroon was also cited in Re Falls Road Properties Ltd, ex parte Fletcher where Peters J ordered a halt. In that case, the Judge noted that the claim against third parties was to commence in four weeks’ time and there did not appear to be any pressing need to have an order for adjudication.25
[48] These cases show that when there is a foreseeable date in the future that may resolve the issue of the third party claim, the Court is more inclined to halt the adjudication proceeding.
[49] The case which Mr Blum would advance against the bank is vague in its outlines. As far as I can gather, it is a claim against the bank for misrepresenting to Mr Blum the basis upon which it would issue trade financing credit to his company in order for it to pay its suppliers. Mr Blum told me that the company had previously obtained a facility from another financier, Lock Finance which provided a longer period of credit from the point where goods were obtained until his company had to pay for them. I assume that it is part of the case for the company that Mr Blum, while attempting to procure better financial arrangements for his company, mistakenly entered into arrangements with the bank which were materially less favourable in that they resulted in a shorter, not longer, period of credit becoming available.
[50] Ms Green, for BNZ, was also critical of the fact that the receivership of the company which was said to result from the involvement with the bank dated back to April 2012 when the bank terminated the credit lines because of an alleged breach of the company’s covenants. It has taken until now, she pointed out, some three years later, for the allegations of misrepresentation to surface for the first time. While she did not say so, I understand the point to be that the delays are not consistent with a
bona fide claim.
24 Re Gwyer, ex parte Westpac New Zealand Ltd [2013] NZHC 257.
25 Re Falls Road Properties Ltd, ex parte Fletcher [2012] NZHC 698.
[51] I should record that Mr Blum said that he only learnt of the possibility of assistance being provided free of charge by the Auckland Community Law Centre relatively recently and after he had approached them they referred him to the commercial barrister who has agreed to provide an opinion on a pro bono basis. Whether this explanation would go some of the way to offsetting the criticisms that Ms Green makes is not something that a firm conclusion can be reached at this stage.
[52] The overall impression I have is that there may be significant difficulties in the path of the debtor in bringing the type of claim which he now proposes should be brought against the bank. He was a businessman operating on a reasonably large scale. There may be difficulties in persuading the court that, in the course of seeking more favourable credit terms, he mistakenly entered into an arrangement which had quite the opposite effect. Regardless of what representations he says were made on the part of the bank, at some point, the terms upon which the bank was prepared to engage with the company would have been placed in writing for execution by the company, and presumably Mr Blum. The criticism could well be made that at that point it should have been obvious to him on what basis the bank was prepared to finance the business.
[53] Further, this claim, if it ever sees light of day, will not come before the court at least this year and probably well into the next. There will be very significant delays if a halt to the proceeding is granted or if the court agrees to adjourn the bankruptcy proceeding to give a chance for Mr Blum to progress the intended litigation.
[54] For all of these reasons, I do not consider that it would be appropriate to make an order of the kind just mentioned.
[55] That being so, the creditor is free to proceed.
The proposal to pay half of the debt
[56] Mr Blum filed an affidavit which was sworn on the day of the hearing of this fixture. In it he deposed that in or about August 2012 he offered to pay 50 per cent of the balance owing on the credit cards, this being the debt upon which the
bankruptcy is based. The sum offered was $17,000 and the person he spoke to at BNZ, he deposed, said that he would need to obtain approval from his superior and would get back to Mr Blum. Mr Blum said that the BNZ never came back to him. He said that he had no further communication with the bank until he was served with the bankruptcy notice on 25 November 2014.
[57] An affidavit has been filed on behalf of the creditor in which an employee says that someone from the bank spoke to the debtor on or about 8 August 2012 during the course of which conversation Mr Blum offered to pay one half of the amount outstanding in full and final settlement of his liability to the bank. No payment was received, although the bank does not assert that it responded accepting the proposal. However the bank employees says that after a block was put on Mr Blum’s accounts, he phoned to enquire why this had occurred and was told that that had been done because he had not made the payment which he said he would. The affidavit continues that Mr Blum advised that he would make payment the following day and was told that litigation would be commenced if no payment was received and that if there were to be any changes made to the payments, he was to call the creditor back. He did not do so.
[58] The bank was not obliged to accept any proposal which Mr Blum might make to pay off the debt. It was not in breach of any obligation in failing to accept his offer. Mr Blum would have known that he did not make any payment. He is not contending that he had in fact made the payment. In summary there was no accord and satisfaction which could be put forward as an arguable defence and nor is the failure to enter into the agreement a matter which would disentitle the bank to an order in the discretion of the Court.
Summary
[59] The following is a summary of the effect of this judgment.
a) The involvement of Mr Blum in the appeal proceeding which relates to [Recacted] is not a relevant factor to take into account when the court is considering exercising its discretion whether or not to
bankrupt Mr Blum.
b)A further reason why the appeal is not a relevant factor that should deter the court from adjudicating Mr Blum bankrupt is that the appeal proceedings will not benefit Mr Blum’s creditors.
c) While Mr Blum has the advantage of an offer of representation pro bono by senior counsel, which will mean that no legal costs are payable for his representation, it is not clear whether there may be adverse costs consequences to the bankrupt so that his existing debts are added to. I accept that the security for costs on appeal has been paid but that does not necessarily dispel these concerns.
d)The Official Assignee is the correct person to make a decision whether the appeal ought to proceed or not. If the debtor is aggrieved by that decision he is not without rights in the matter.
e) The proposed claim against the bank is unclear and there are circumstances which will make it difficult for the debtor to succeed. In these circumstances, an order for adjournment or halt to the proceedings would not be justified on that ground.
f) The offer that the debtor says he made to settle the proceedings is not a reason why the Court should decline to make an adjudication order.
Order
[60] There will be an order adjudicating the debtor bankrupt. The judgment creditor will have costs on a 2B basis together with disbursements to be fixed by the Registrar. The time of the making of these orders will be the date and time on which
this judgment is released by the Registrar of the Auckland High Court.
J.P. Doogue
Associate Judge
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