Bank of New Zealand v Davey
[2023] NZHC 1362
•31 May 2023
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2021-409-409
[2023] NZHC 1362
UNDER the Insolvency Act 2006 AND
IN THE MATTER
of the bankruptcy of MATTHEW ROBERT DAVEY
BETWEEN
BANK OF NEW ZEALAND
Judgment Creditor
AND
MATTHEW ROBERT DAVEY
Judgment Debtor
Hearing: 22 May 2023 Counsel:
K M Paterson and C F Olds for Judgment Creditor N R Williams for Judgment Debtor
Judgment:
31 May 2023
JUDGMENT OF ASSOCIATE JUDGE LESTER
BANK OF NEW ZEALAND v DAVEY [2023] NZHC 1362 [31 May 2023]
[1] Mr Davey is the sole director and majority shareholder of Fortress Information Systems Limited (in rec and liq) (Fortress). Fortress, incorporated in 1999 by Mr Davey, was a ticketing company.
[2] Mr Davey’s counsel, Mr Williams, submitted Fortress grew to rival Ticketek and Ticketmaster. Mr Williams submitted that from nothing, Fortress grew into a $10 million per annum company using cutting edge technology. Mr Williams submitted Fortress not only survived, but flourished during the Global Financial Crisis and was a successful thriving business prior to the pandemic of 2020.
[3] Mr Williams submitted that the COVID pandemic lockdowns of 2020 were a force majeure event for Fortress which went to the very nature of its business. The shutting off of Fortress’ cashflow led to Bank of New Zealand (BNZ) calling upon Mr Davey’s guarantee and ultimately obtaining summary judgment against Mr Davey on 21 July 2021 for $3,851,640.00 in respect of his liability under his guarantee of Fortress obligations to the BNZ.
[4] BNZ served Mr Davey with a bankruptcy notice in September 2021 and an application for adjudication in December 2021. Mr Davey opposes adjudication.
[5] BNZ’s application for adjudication was heard on 22 May 2023. The delay in the application being heard, in part, arising from Mr Davey on 30 August 2022 seeking leave to appeal the July 2021 summary judgment. Mr Davey’s leave application was declined on 30 March 2023. The time for Mr Davey to seek leave to appeal that decision to the Supreme Court expired on 2 May 2023. Mr Davey, acting for himself, filed an application for leave to appeal with the Supreme Court on 8 May 2023. That was the same day that Mr Williams filed his submissions in support of Mr Davey’s application for the adjudication application.
[6] On 19 May 2023, Mr Davey filed a claim in the High Court at Auckland against the BNZ and the receivers of Fortress arising from how the receivership of Fortress was conducted.
[7] As at the date of hearing of the opposed adjudication application, Mr Davey owes the BNZ nearly $4.7 million.
Nature of Mr Davey’s claim against BNZ and the Receivers
[8] The following summary comes from Mr Davey’s unsuccessful application for leave to appeal the summary judgment out of time.1 Broadly, Mr Davey’s position is that the BNZ acted unreasonably in pursuing him and that he had cross-claims and equitable defences which his previous lawyers failed to advance. The Court of Appeal summarised Mr Davey’s position by reference to Mr Davey’s affidavit as follows:
One of the main grounds of my appeal is that there was a material mistake and/or an error in fact and/or in law, which is that it was in fact the BNZ Bank who appointed receivers BDO and not me or Fortress. I believe that this means that the BNZ is vicariously liable for the acts and/or omissions and/or breach of the receiver’s duties and I had a legal defence in the law of agency against the BNZ. I also believe that I had numerous cross-claims and/or offsets (different to a set-off) on the basis that there were numerous contracts with event venues which were owed money or damages following COVID[-]19 which threw a spanner in the works causing significant funding and financial difficulties.
…
My main issue is that BDO as receivers and effectively the bank’s agents were negligent and/or contributed to any losses and that the BNZ and/or BDO’s conduct was injurious or adverse to the company and then to me. There were numerous opportunities to recoup or recover losses and also the sell off asset and/or intellectual property to realise the value, minimising any losses to the companies, the BNZ and/or me as the Guarantor. In my view, the[y] failed and/or neglected in exercising their duty of care and/or are contributory[il]y liable.
[9] The Court of Appeal considered Mr Davey’s proposed appeal lacked merit. All of the matters that Mr Davey wished to raise in the Court of Appeal were considered by Associate Judge Paulsen and rejected.2 The Court of Appeal said:3
In any event Mr Davey’s proposed counter-claim is predicated on BNZ being the agent of the receiver, which is not a tenable position at law.
1 Davey v Bank of New Zealand [2023] NZCA 86.
2 Bank of New Zealand v Davey [2021] NZHC 1854 at [27]-[38].
3 Davey v Bank of New Zealand, above n 1, at [16].
The Court of Appeal concluded its judgment by saying that with Mr Davey’s delay in seeking to appeal not being adequately explained:4
… the merits of the proposed appeal become more relevant and we are satisfied that the proposed appeal does not have merit.
[10] Mr Williams explained at the hearing that the proceeding issued by Mr Davey on 19 May 2023 relies on the principle in Standard Chartered Bank Ltd v Walker,5 recognised by Associate Judge Bell in F M Custodians Ltd v Lawrie Wooding Properties Ltd that:6
The debenture holder, the bank, is not responsible for what the receiver does except in so far as it gives him directions or interferes with his conduct of the realisation. If it does so, then it too is under a duty to use reasonable care towards the company and the guarantor.
[11] Given Mr Davey has been in dispute with the BNZ since the summary judgment proceeding was issued in February 2021 and given Mr Davey was represented by counsel at various times since then (albeit Mr Davey was self-represented in the Court of Appeal), it is noteworthy that the reframing of the claim against BNZ has only happened now.7
Threshold for the making of an adjudication order
[12] Mr Williams accepts that the requirements for an order for adjudication under ss 36 and 13 of the Insolvency Act 2006 (the Act) are made out and that the onus is on Mr Davey to show why an order should not be made.
[13] Mr Davey submits the Court should exercise its discretion not to adjudicate him bankrupt primarily on the basis that:
4 Davey v Bank of New Zealand, above n 1 at [17].
5 Standard Chartered Bank Ltd v Walter [1982] 3 All ER 983 (CA), followed in Edmonds v Westland Bank Ltd [1991] 2 NZLR 655 (CA) at 12.
6 F M Custodians Ltd v Lawrie Wooding Properties Ltd [2013] NZHC 295 at [65].
7 A review of Mr Davey’s statement of claim does not disclose detail of how the BNZ is said to have involved itself in the receivership save for one paragraph [56] which begins; “BNZ may have specifically instructed BDO to not allow Mr Davey to provide guidance on the business operations of the company…”. (emphasis added).
(i)the collapse of Fortress was due solely to the effect of the completely unanticipated COVID-19 pandemic;
(ii)Mr Davey was not guilty of any culpable conduct that contributed to the failure of Fortress and he was co-operative with the BNZ and the receivers;
(iii)Mr Davey will suffer significant hardship if he is bankrupted;
(iv)Mr Davey has no significant assets and there are no grounds to believe that an Official Assignee investigation will find any undisclosed assets. Mr Davey’s claim against BDO and the BNZ will not be available to him if he is bankrupted.
[14] Mr Davey relies primarily on ss 37(c) and 37(d) of the Act namely, that it is just and equitable that the Court not make an order for adjudication or there are other reasons why an order should not be made.
[15] Ms Paterson, counsel for the BNZ, submitted that two broad issues arose – the first being whether the Court should exercise its s 37 jurisdiction not to bankrupt Mr Davey. The second issue arose if the Court declined to exercise its discretion in Mr Davey’s favour and was whether the Court should halt the adjudication process pursuant to s 38 given Mr Davey’s application for leave to appeal to the Supreme Court and his proceeding just filed against the Receivers and BNZ. I will deal with the issues in that order.
Factors relied on in favour of the discretion being exercised in Mr Davey’s favour
The impact of COVID-19
[16] The submission that the failure of Fortress was a result of the COVID pandemic is connected to the submission that Mr Davey had not been guilty of culpable conduct contributing to the failure of Fortress. The impact of COVID on Fortress was the central theme of Mr Williams’ submissions.
[17] Mr Williams submits Fortress, and the events industry, were affected by the largest set of event cancellations in history, with Fortress losing all revenue practically overnight. Cancellations are hugely resource intensive. A single event cancellation can take four weeks to perform. Fortress was hit with close to 500 event cancellations when New Zealand went into Level 4 COVID lockdown on 19 March 2020 at a time when Fortress was already swamped with Australian cancellations the week before. Mr Williams submitted that Fortress only had enough funds to pay a skeleton staff who were working from home with a hugely increased workload.
[18] Ms Paterson did not attempt to explain away the impact of COVID on Fortress, but in my view, there are aspects of Fortress’ business model which I note below, that contributed to the position it found itself in.
[19] The evidence is that on 23 April 2020, Fortress provided to the BNZ an information presentation called “BNZ Support – COVID Response and Business Overview”. The document was essentially a summary of Fortress’ business model along with describing the ticketing industry. It explained the challenges of constrained revenue for the short to mid-term and that Fortress had immediately undertaken aggressive cost cutting measures and sought cashflow support from the BNZ to ensure Fortress’ future. It did not paint the lock clause in the same way Mr Williams described it in this application.
[20] I do not need to go into the detail of Fortress’ request for further financial support because on 22 May 2020, Fortress without prior notice to the BNZ, overdrew its account by nearly $1.7 million. Ms Paterson described this as the beginning of the end of Fortress’ relationship with the BNZ.
[21] Mr Williams submitted this unauthorised overdraft allowed Fortress to refund consumers which, from the ticket holders’ point of view, would not have been seen as reckless or commercially unacceptable. This submission represented Mr Davey making the best of a bad situation. The reality is, through this unauthorised use of BNZ funds, Mr Davey elected to shift the risk of loss onto the BNZ when it is quite clear he knew there was no prospect of that amount being repaid by Fortress.
[22] From the fact that the $1.7 million was used to refund ticketholders, it seems Fortress did not hold money from ticketholders on trust until the completion of events.
[23] All of this is in the context, as I will develop below, that Mr Davey asserts he has no assets. Notwithstanding that, he knew he was guarantor of the BNZ debt, that he and Fortress had no way of repaying the unathorised $1.7 million overdraft, let alone any other debt he or Fortress were already liable for and again, without notice to BNZ, Mr Davey had his company make the unauthorised withdrawal. This commercially unacceptable behaviour cannot be justified on the basis that consumers received refunds that they may otherwise not have received. As I said to Mr Williams, that was something of a “Robin Hood” defence represented by Mr Davey electing to take money from the BNZ to repay consumers when, at a risk of repetition, Mr Davey knew neither he nor Fortress could repay it.
[24] Mr Davey’s conduct on this point is inconsistent with Mr Williams’ submission that Mr Davey did all he could to prevent the present situation arising.
[25] One of Mr Davey’s complaints against the receivers is that there was a $700,000 fund held at the ANZ which he asserts was not got in by the receivers. The evidence strongly suggests there is nothing in this point. The evidence is that the BNZ became aware there was approximately $700,000 in a Fortress bank account with ANZ. These funds represented the proceeds of the sale of Fortress’ assets to Ticketek. The funds were supposed to have been paid by Fortress to the BNZ in repayment of a temporary overdraft facility with the invoice recording that the account for payment was a NAB account in Australia. Instead, it appears that Fortress redirected the proceeds to an ANZ account. In any event, the receivers’ reports make it clear this fund was recovered by them.
[26] It can be readily accepted that COVID had a drastic impact on Fortress and that Mr Davey had every incentive to keep Fortress going. Nonetheless, the two events I have described above mean Mr Williams’ submission that Mr Davey did not engage in conduct that requires a sanction to uphold commercial morality, cannot be maintained. The same factors undermine Mr Williams’ submission that Mr Davey did not undertake poor business practices or excessive risk taking. In my view, those
descriptions are directly applicable to Mr Davey’s involvement in the unauthorised overdraft and redirection of funds to the ANZ.
[27] The point of guarantees is to protect the creditor from adverse events which impact on the principal debtor’s business, whether those events are foreseen or not. COVID was unexpected and had a serious affect on Fortress. However, Mr Davey’s conduct stands against his opposition to adjudication.
Significance of Mr Davey’s debt being based on a guarantee
[28] Ms Paterson referred to a line of authority where the Courts have placed weight on the need for personal guarantees to be honoured. Ms Paterson submits that adjudication is necessary to protect commercial morality in relation to guarantees. The tenor of the authorities is that the Court has endorsed the commercial importance of holding guarantors to the consequences of their promises.8
[29] I have already commented that the purpose of guarantees is to reallocate commercial risk. Mr Davey’s conduct in relation to the unauthorised overdraft emphasises that he should be held to the consequences of his guarantee.
Absence of assets
[30] Mr Davey submits he ought not to be made bankrupt as he has no assets of significance. While absence of assets can be a factor in determining whether adjudication would be pointless, it is not a determining factor.
[31] Mr Davey has not filed a statement of assets and liabilities. His claims that he has no assets are made in very general terms. The Courts have held that a submission by a debtor that they have no assets requires close scrutiny to confirm that assets were not transferred to a family trust or exist in the name of another person for the debtor’s benefit.9 That principle is longstanding. Where the only evidence for the want of
8 Re Aitcheson ex parte Bank of New Zealand, HC Auckland B1235/98, 9 July 1999; Re Coll ex parte Consumer Finance Ltd B69/97, 18 September 1999; Re D’Esposito ex parte Westpac Banking Corporation HC Napier B16/98, 30 June 1998; Brambles New Zealand Ltd v Braid [2018] NZHC 1187 at [12], [19] and [20].
9 Rossall v Auckland Finance Ltd HC Auckland CIV-2002-404-580, B1370/02 30 April 2004 at [13]; Re Richards ex parte Auckland Finance Ltd HC Auckland CIV-2008-404-2324, 9 July 2009.
assets is the uncorroborated evidence of the debtor, the Court will make an order for adjudication.10
[32] There is also something of a disjuncture between Mr Davey’s claim that Fortress was a thriving business with a significant turnover of which he was a 90 per cent shareholder, yet he has no assets. The two cannot be easily reconciled and the absence of detailed financial evidence from Mr Davey supports there being an order for adjudication.
Is adjudication punitive?
[33] Mr Davey submits that making him bankrupt would be purely punitive and serve no practical or useful purpose.
[34] The BNZ submits that it is in the wider public interest to hold Mr Davey to the consequences of promises he made to the BNZ in guaranteeing his company’s obligation. The submission that adjudication would serve no practical purpose also assumes Mr Davey’s claim of having no assets is correct.
Stigma and embarrassment
[35] Mr Davey argues bankruptcy will cause him embarrassment and stigma and that the stigma would be greater for him than for others. This is a factor that can be taken into account by the Court in exercising its discretion.11
[36] Mr Davey’s evidence, however, is that the failure of Fortress has already had an adverse impact on his ability to obtain consulting work in the IT field. The industry in which Mr Davey operates is well aware of the history of Fortress. While it must be accepted that bankruptcy will involve some stigma, it will not significantly alter the public knowledge of the failure of Fortress of which Mr Davey was sole director.
10 Re Bakarat [1920] NZLR 134 (SC); Ex Parte Leonard [1896] 1 QB 473 (CA) and Re Otway
[1895] 1 QB 812 (CA).
11 Re Epirosa ex parte Diners Club (NZ) Limited & American Express International Inc
HC Wellington B498/91, 6 March 1992 at 8.
Personal hardship
[37] Mr Williams submits that the failure of Fortress had taken a huge emotional toll over the last two years on Mr Davey affecting his mental health and wellbeing. Mr Davey has faced negative news media. Mr Davey holds a Canadian passport and so is not eligible for Government assistance in Australia. Mr Davey’s day-to-day living is a struggle. He has not been able to obtain credit cards and is currently renting in Australia. Bankruptcy may well impact on his ability to maintain or find a new tenancy. The bankruptcy may also cause issues for his visa in Australia. Mr Davey’s daughter lives in Canada and bankruptcy will affect his ability to travel to see her as he will need permission to travel overseas.
[38]There is limited evidence in respect of these claims.
[39] Mr Davey’s desire to get on with his life and seek new consultancy work is readily understandable. But if Mr Davey is not bankrupted, the debt he owes the BNZ will not go away. In Evia Rural Financing Ltd v Cribb, Associate Judge Bell, referring to the judgment debtor said:12
It will be advantageous if the slate is wiped clean by having Mr Cribb adjudicated bankrupt now rather than leave him with these debts which will plague him forever, and which I realistically regard him as having no hope of ever satisfying.
[40] This is not a case where Mr Davey finds himself in the position he is in through entirely no fault of his own.
[41] Mr Williams submitted that Mr Davey is intent on paying back what he owes, or at least a large part of it once his proceeding against the BNZ and BDO is determined. The eleventh hour issue of proceedings by Mr Davey against the BNZ and the Receivers is too little too late.
12 Evia Rural Financing Ltd v Cribb HC Hamilton CIV-2011-419-631, 6 March 2012 at [54]; upheld on appeal Cribb v Evia Rural Finance Ltd [2014] NZCA 543 (leave to appeal to the Supreme Court dismissed); Cribb v Evia Rural Financing Ltd [2015] NZSC 5.
Mr Davey’s newly issued proceedings – do they justify a stay or support the prospect of repayment?
[42] Section 38 of the Act provides that the Court may at any time halt the creditor’s application for adjudication on such terms and conditions, if any, that the Court thinks fit. This ground relies on the proceeding issued by Mr Davey against the BNZ and the Receivers and Mr Davey’s application for leave to appeal to the Supreme Court.
[43] Mr Davey first said he would file a claim against the BNZ in his affidavit in opposition to the summary judgment application dated 23 April 2021. Mr Davey has repeatedly stated that proceedings against the Receivers were imminent. In his notice of opposition to the adjudication application dated 23 February 2022, Mr Davey stated that he would file proceedings against the Receivers within 15 working days and in his amended notice of opposition to this application filed in August 2022, said that he would file the proceedings against the Receivers by 25 August 2022.
[44] As to Mr Davey’s proceedings against the Receivers, it has been said that rarely will a judgment debtor’s claim against a third party sway the Court from ordering bankruptcy.13
[45] Where a claim against a third party is straightforward and where the result will be known in the near term and has a reasonable chance of success, then such may lead the Court to halt the bankruptcy process to await the outcome of those proceedings.14
[46] However, here the proceeding has only just been filed, will take years to resolve, and involves complex issues. Given Mr Davey is based in Australia and claims to have no assets, one suspects he is likely to face an application for security for costs.
[47] The statement of claim does not properly differentiate between the causes of action against the BNZ and the Receivers. It does not particularise the claim described by Mr Williams in submissions that the BNZ’s liability rests on it, so involving itself
13 Body Corporate 207650 v Singh [2019] NZHC 1547 at [32].
14 Re Kroon ex parte Westpac Banking Corporation HC Auckland, CIV-2006-404-4720, 24 April 2007; Zhang v Westpac New Zealand Ltd [2019] NZHC 2422.
in the receivership process that it will be held liable alongside the receivers save for the limited pleading referred to at footnote 7 above.
[48] Mr Williams submitted that given the complexity of the proceeding, even if it had been issued say one year ago, it would still be some way from a hearing. That is correct but if it had been issued when first foreshadowed then it should have been well advanced by this time. In in any event, its merits would be much clearer.
[49] As I have said, the newly issued proceeding is too little too late and does not, in my view, justify halting the adjudication process essentially for years while Mr Davey continues in the business world as an insolvent.
Leave to appeal to the Supreme Court
[50] Section 42 of the Act which applies when the judgment founding the bankruptcy proceeding is under appeal cannot be relied on by Mr Davey.
[51] There is no appeal against the entry of summary judgment. Mr Davey’s application for leave to appeal out of time was declined. It is that decision which is subject to the leave application in the Supreme Court.
[52] Mr Williams submits that bankruptcy will affect both Mr Davey’s existing proceeding and his appeal.
[53] Bankruptcy will not prevent the Official Assignee pursuing Mr Davey’s appeal on his behalf. It is true that control of the appeal passes from the bankrupt to the Official Assignee:15
It remains open for the appeal to be conducted – not by the bankrupt but under the control of the Official Assignee. In many cases that can be useful. It allows for an independent review of the merits of the case. Often the benefit of that review is that finality is brought to litigation when the pursuit of the litigation seems to be fruitless.
[54] Mr Williams noted another passage from Re Koroniadis ex parte Bank of New Zealand that bankrupts often feel a sense of grievance because they have not had
15 Re Koroniadis ex parte Bank of New Zealand [2013] NZHC 2865 at [12].
an opportunity to pursue an appeal against the judgment which they consider was wrongly given against them.
[55] The impact of this submission falls away given Mr Davey’s unexplained delay in pursuing the appeal against the original summary judgment decision which, it will be recalled, was given 21 July 2021 but the application for extension of time to appeal was not filed until 30 August 2022. As already noted, the Court of Appeal considered the significant delay was not adequately explained by Mr Davey.
Conclusion
[56] Mr Davey owes the BNZ a significant amount on which interest continues to accrue. On Mr Davey’s case, he has no prospect of meeting that obligation save for the proceedings he delayed in issuing.
[57] Mr Davey, who is hopelessly insolvent, asks to be left free to operate in the commercial world while he pursues proceedings which, even optimistically, will take at least two years to get to trial and more likely more given Mr Davey is representing himself. Save for the impact of COVID coming out of “left field” to undermine the business model of Fortress, there is in reality no other factor in favour of the Court exercising its discretion not to adjudicate Mr Davey bankrupt.
[58] I decline to exercise the s 37 discretion in Mr Davey’s favour. Nor do I see this as a situation for halting bankruptcy. Bankruptcy does not of itself mark an end to Mr Davey’s proceeding. I decline to halt the bankruptcy proceeding.
[59] Accordingly, there is an order adjudicating Matthew Robert Davey bankrupt. The bankruptcy order is timed as at the date and time of release of this decision.
Costs
[60] BNZ is entitled to costs. If it considers its agreement with Mr Davey entitles it to indemnity costs, it should file a memorandum explaining why that is the case and file the usual supporting material. If no such memorandum is filed within 15 working
days then the BNZ is entitled to costs on a 2B basis plus disbursements as fixed by the Registrar and that shall be the costs order.
Associate Judge Lester
Solicitors:
Buddle Findlay, Christchurch
Copy to:
M R Davey (self-represented)
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