Bell Associates v Foley

[2018] NZHC 1282

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2017-404-2634

[2018] NZHC 1282

UNDER

the Insolvency Act 2006

IN THE MATTER OF

the bankruptcy of STEPHEN EUGENE FOLEY

BETWEEN

BELL ASSOCIATES

Judgment Creditor

AND

STEPHEN EUGENE FOLEY

Judgment Debtor

CIV-2017-404-2639

UNDER

the Insolvency Act 2006

IN THE MATTER OF

the bankruptcy of DIANE JEAN FOLEY

BETWEEN

BELL ASSOCIATES

Judgment Creditor

AND

DIANE JEAN FOLEY

Judgment Debtor

Hearing:

30 May 2018

Appearances:

C B Pearce for the Judgment Creditor, Bell Associates P J Morris for Carters (a creditor of Diane Foley)

M J Hartfield for the Commissioner of Inland Revenue (a creditor of Stephen Eugene Foley)

J M Skinner for the Judgment Debtors

Judgment:

30 May 2018

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

BELL ASSOCIATES v FOLEY and FOLEY [2018] NZHC 1282 [30 May 2018]

[1]    Bell Associates, a law firm, applies for orders adjudicating Mr and Mrs Foley bankrupt. It is a creditor of Mr and Mrs Foley under a judgment of the North Shore District Court of September 2017 for $39,673.83. The debt is for unpaid legal fees incurred between September and December 2016. Carter Holt Harvey Ltd, a judgment creditor of Mrs Foley under a judgment of June 2017 for $98,787.98, supports the application against her. Her liability is under a personal guarantee given for building materials supplied to Point to Point Holdings Limited, a building development company which went into liquidation in 2017. The Commissioner of Inland Revenue has entered an appearance for the proceeding against Mr Foley. The Commissioner's appearance relied on a debt, said to be for $27,895.15, under a judgment of the North Shore District Court in August 2016. The Commissioner supports the application against Mr Foley. While I have stated the amount of the debt the Commissioner claims in the appearance, the position of the Commissioner has added features, which I will need to address.

[2]    The act of bankruptcy Bell Associates relies on is non-compliance with bankruptcy notices served on Mr  and  Mrs  Foley  in  November 2017.  Mr  and  Mrs Foley acknowledge that they are indebted to Bell Associates; they do not challenge their liability; and they acknowledge that they have committed acts of bankruptcy within three months before the applications against them were filed. It is clear that Bell Associates has met the requirements of ss 11, 13 and 16 of the Insolvency Act 2006.

[3]    Mr and Mrs Foley resist adjudication. They ask the Court not to adjudicate them in its discretion under s 37 of the Insolvency Act 2006:

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.

Mr and Mrs Foley refer, in particular, to s 37(c) and say that it is just and equitable for them not to be adjudicated bankrupt. Their case is that the estate of Mrs Foley's late mother has a house at Gulf Harbour, which is being marketed for sale. Mrs Foley has an interest of a half share of the residue of the estate. After the costs of administering the estate and minor bequests are paid, Mrs Foley is likely to receive in the order of

$500,000, which can be applied to meet her own debts and the debts of Mr Foley.

[4]    There is a procedural matter: the affidavits of service show that only the summons to debtor for each proceeding was served on Mr and Mrs Foley. Mr Pearce advised that that defect had been noted earlier by and directions were given to address the fact that the applications had not been served. I was advised that they were later served by email. There has been no prejudice to the debtors because that deficiency in service has been addressed. The debtors have taken proper steps to resist the applications. They have had legal advice throughout.

[5]    There was a late flurry before the hearing. Mr Bell filed a further affidavit on 25 May 2018. There was no objection to my reading that affidavit. There was also communication between Mr Skinner and Mr Hartfield about Mr Foley's tax position. In an earlier affidavit, Mrs Foley had indicated that  she believed Mr Foley  owed  the Commissioner taxes of about $160,000. However, the Commissioner provided Mr Skinner with further information, including a summary of account for Mr Foley as at 25 May 2018. That shows that Mr Foley has considerable arrears in taxes. He is shown as owing goods and services tax for three periods in 2008, the balance of which is $5,900-odd. He is shown as owing income tax for the years ending March 2007 to March 2014, which with interest and penalties come to $221,000. He has arrears of child support. His non-payments of child support go back to August 2001, the most recent entry being April 2018. With interest and penalties, the child support comes to some $283,000. All up, the Commissioner says that Mr Foley owes her about

$500,000. Mr Hartfield did not have any instructions as to Mrs Foley. I will treat her as not having any proved liability to the Commissioner.

[6]    This  late  development  caused  Mr Skinner  to  ask  for  an  adjournment.     I indicated after hearing him that I would hear the matter on the merits. It seemed to me that it is still necessary to consider the application against Mrs Foley.  Even if  Mr Foley were taken by surprise, I would still consider the application against him, albeit the matters of which Mr Hartfield advised Mrs Skinner were to be challenged.

[7]    Mr and Mrs Foley live at 39 Regency Park Drive, Gulf Harbour, Whangaparaoa, Auckland. The property belongs to the estate of the late Mrs Gaudie. Under her last will she appointed her two daughters  as  executors  of  her  estate. Mrs Foley, however, renounced probate, given her difficult financial position. Probate was granted on 10 April 2018, quite some time after the death of the late Mrs Gaudie. Now that probate has been granted, the property has been listed for sale, and Mrs Foley is working actively with the land agent to try to sell the property.

[8]    Mr and Mrs Foley propose that out of Mrs Foley's half-share of the residue of the estate, they would pay not only Mrs Foley's creditors but also Mr Foley's. The apparent increase in liability on the part of Mr Foley to the Inland Revenue has cast a shadow on that prospect. Because of that, I consider the applications against Mr and Mrs Foley separately. I note that no distribution from the estate is likely to be possible until October 2018 because of the six-month waiting period required under ss 47 and 48 of the Administration Act 1969.

[9]    In Baker v Westpac Banking Corporation, the Court of Appeal gave guidance how the Court should exercise its discretion when a creditor has established the grounds for bankruptcy.1 Richardson J said:2

It is proper for the Court to consider not only the interests of those directly concerned – the petitioner, other creditors, the debtor – but also the wider public interest. A creditor who establishes the jurisdictional facts set out in s 23 is not automatically entitled to an order. On the other hand, it is for an opposing debtor to show why an order should not be made. 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

1      Baker v Westpac Banking Corporation CA2012/92, 13 July 1993.

2      At 4.

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.

[10]   I have found it useful on bankruptcy applications to consider them against certain features of bankruptcy:

(a)On adjudication, the assets of the debtor vest in the Official Assignee, who them assets and distributes the proceeds to creditors. There is a collective administration of the assets of the debtor in the interests of all creditors.

(b)Restrictions are imposed on the debtor against carrying on business on their own account, managing a business or becoming a director of a company; there are also restrictions against incurring credit and against travelling overseas without the consent of the Official Assignee. Those restrictions are directed at protecting the public from the debtor continuing to incur credit while insolvent.

(c)Bankruptcy goes to ensure accountability. Debtors who incur liabilities need to answer for them, and if unable to do so the law provides consequences. Bankruptcy is a consequence if a debtor is unable to meet liabilities as they have fallen due.

(d)On rare occasions, bankruptcy is also imposed punitively. Those are cases where there has been reprehensible conduct by a debtor in incurring liabilities. I emphasise, however, that that applies only in rare cases and usually requires strong proof of actual dishonesty by the bankrupt.   While there are matters here that do not reflect well on   Mr and Mrs Foley, I make it clear now that I am not considering imposing bankruptcy as a matter of punishment.

(e)Most debts are discharged when the bankrupt is discharged from bankruptcy. I say most debts because there is, of course, an exception for family support and some other debts.3

3      Insolvency Act 1967, s 114; Insolvency Act 2006, s 304.

[11]   While the law does not tolerate an unresolved insolvency, bankruptcy is only one response and others are available. Section 8 of the Insolvency Act recognises that, for example, there are formal alternatives such as summary instalment orders, the no asset procedure and proposals under Part 5 subpart 2 of the Insolvency Act. Less formal procedures are possible. There may be informal compromises between a debtor and their creditors. Sometimes a simple extension of time to allow debts to be cleared is adequate to address any concerns.

[12]   In this case the Foleys are clearly insolvent. Their indebtedness to Bell Associates goes back to 2016. I infer that Mrs Foley’s indebtedness to Carters goes back to a similar period. Mr Bell says that Mr Foley made a number of promises to pay but he did not carry out any of them. Their insolvency is confirmed by other creditors having appeared in the applications. The Foleys have been reticent to make full disclosure of their circumstances. Mrs Foley gives relatively brief evidence as to what their liabilities might be, but she couches it in terms that leave a suspicion that there may be other liabilities and creditors that have still to appear. The Foleys say nothing about their current business activities; they say nothing about their assets; they say nothing about their income; and they say nothing about how they came to be insolvent. Instead, they have left the creditors to do their own digging as best they can.

[13]   Mr Bell's updating affidavit of 25 May 2018 shows that their insolvency appears to have arisen out of the failure of a property development company initially called Point to Point Holdings Limited, but, in the way of unsuccessful property companies, the directors had the name of the company changed to HPTP 2014 Limited shortly before it  went  into  liquidation.  The  company  went  into  liquidation  on 23 January 2017.   From   reports   given   by   the   liquidators   it   appears   that   the Commissioner is a preferential creditor for $478,000 and that there are unsecured non-preferential creditors of about $1.1 million. According to the liquidator's most recent report, realisations appear to have come to only $78,000. Given that state of affairs, there is a question whether the Foleys have additional liabilities for guarantees they have given or for breaches of directors' duties, which can arise on the failure of a company.

[14]   Now for Mrs Foley. While she gave a guarantee to Carters, there is nothing to suggest that she is likely to incur much, if any, in the way of additional liabilities. The running of the company seems to have been very much Mr Foley's matter rather than hers. Her tax position is unknown. She has a stronger case than Mr Foley to resist bankruptcy. She can point to an interest in an asset. Her case is that, if only she were given time, her sister, as executor of her mother's estate, will realise it and there will be payment enough to clear all her creditors.

[15]   In resisting that argument, Mr Pearce indicated that his client wanted finality. There are additional matters which count in favour of not deferring matters to await payment.

[16]   Mr Foley's financial position is much worse than Mrs Foley's, but her association with him is a risk factor. I do intend to make an order for adjudication against Mr Foley. It is desirable that when his relatives are also insolvent, their affairs are also to be brought under the control of the Official Assignee to guard against any temptation of a bankrupt to try to carry on business in the name of the relative as a front for activities of the bankrupt. That, in my view, is a risk factor in the current situation. Moreover, the undoubted need to wait a further six months goes beyond giving time to overcome temporary cashflow difficulties. I am concerned to ensure that all Mrs Foley's affairs are independently investigated by someone independent, the Official Assignee. Six months is more than the usual adjournment period. The creditors have already been put off on earlier occasions by stalling tactics and promises that something will be done. In short, I do not regard the proposed wait until October this year to see if any proceeds of sale of the Gulf Harbour property has been an adequate response to Mrs Foley's undoubted bankruptcy. I will, therefore, make an order adjudicating Mrs Foley bankrupt.

[17]   Mr Foley's position is worse than Mrs Foley's. He has not disclosed any assets. His financial position seems to be significantly worse, given that the Commissioner has shown a very serious position: non-payment of tax going back many years. His is a clear case where an insolvent ought to be met with the consequences of having failed to pay liabilities as they have fallen due. I regard Mr Foley as a distinct risk factor because he has been adjudicated bankrupt once before, although that was many years

ago. But, more alarmingly, he was banned from holding a company directorship for two years; that was in 2006, after he had been discharged from his first bankruptcy.

[18]   Mr Foley's apparent non-payment of child support going back many years also gives serious cause for concern. There seems to have been a deliberate choice on his part not to meet his child support responsibilities. While a discharge in bankruptcy does not operate on those liabilities, Mr Foley needs to understand that a continued failure to meet those responsibilities does carry consequences.

[19]   Overall, then, I am not satisfied that it would be just and equitable under s 37 to decline the application for  adjudication.  I make  orders  adjudicating  Mr and  Mrs Foley bankrupt. The time of the orders is 11.17 am.

Costs

[20]   I award costs  to Bell Associates and to Carters under Category 2.  As for   the Commissioner, I do not presently make any order for costs but I reserve costs. There has been a recent decision of this Court holding that when the Commissioner is represented by in-house counsel, the Commissioner cannot claim costs under Part 14 of the High Court Rules.4 There may be another route for the Commissioner to claim costs in this case: that is to seek a determination as to the Commissioner's priority under s 274(1)(b) of the Insolvency Act 2006, which allows a creditor who procures an order for adjudication to include reasonable costs incurred. I reserve that for the Official Assignee and the Commissioner to come back to Court if they require. I do regard the Commissioner's appearance as steps reasonably taken by the Commissioner to obtain an order for adjudication.

……………………………….

Associate Judge R M Bell

Solicitors:

Bell Associates (David Bell), Auckland, for the Judgment Creditor

Skinners Law ( James M Skinner), Takapuna, Auckland, for Judgment Debtors

Inland Revenue Department (Mark J Hartfield) Takapuna, for Commissioner of Inland Revenue Stace Hammond (Philip J Morris), Hamilton, for Carter Holt Harvey Ltd, a creditor

Copy for:
Carter B Pearce, Bankside Chambers, Auckland, for Judgment Creditor

4      Commissioner of Inland Revenue v New Orleans Hotel (2001) Ltd [2018] NZHC 971.