Bennett v Preston HC Palmerston North CIV 2007-454-856
[2008] NZHC 2650
•28 October 2008
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
CIV 2007-454-856
BETWEEN MICHAEL HEBDEN BENNETT Judgment Creditor
ANDHADDON WINSTON PRESTON First Judgment Debtor
ANDDEANE PRESTON Second Judgment Debtor
Hearing: 14 October 2008
Appearances: PF Dalkie for Judgment Creditor
PD McKenzie QC and CD Batt for Judgment Debtors
Judgment: 28 October 2008 at 3.00 pm
JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL
This judgment was delivered by the Registrar on 28 October 2008 at
3.00 p.m. pursuant to r 540(4) of the High Court Rules 1985.
Solicitors: MacDonald Pilcher Partnership, Barristers & Solicitors, PO Box 37851, Parnell, Auckland.
Tripe Matthews & Feist, Barristers & Solicitors, PO Box 5003, Wellington
MH BENNETT V HW PRESTON AND ANOR HC PMN CIV 2007-454-856 28 October 2008
Introduction
[1] The judgment debtors, Mr Haddon Preston and Mr Deane Preston (together, “the judgment debtors”), apply to set aside bankruptcy notices issued by the judgment creditor. These bankruptcy notices each sought to enforce costs orders of
$124,094.84 arising out of proceedings brought by the judgment debtors in the High
Court at Wellington.
[2] Mr Michael Hebden Bennett and Viking Kayak Limited (in liquidation) (“the judgment creditors”), oppose this application.
Background Facts
[3] Mr Bennett was and is the sole director and shareholder of Kayak Direct International Limited, which later changed its name to International Direct Limited (“IDL”). He is also the sole director and shareholder of Viking Kayak Limited (in liquidation) (“Viking”).
[4] In July 1990, Mr Deane Preston entered into a franchise agreement with IDL. This agreement gave Mr Deane Preston the right to manufacture kayaks within a designated manufacturing area and to sell the kayaks anywhere. The kayaks were produced from moulds designed by IDL and, in particular, by Mr Bennett.
[5] A number of issues arose between the parties to the franchise agreement. As a result, Mr Deane Preston did not make certain payments under the agreement. IDL also made allegations of breach of copyright against Mr Haddon Preston, Mr Deane Preston’s father. IDL purported to terminate the franchise agreement in early 2001.
[6] On 3 October 2001, IDL then issued proceedings against the judgment debtors. The judgment debtors filed statements of defence on 9 November 2001. They also issued a counterclaim against IDL, Mr Bennett and Viking, alleging inter alia, wrongful repudiation and breaches of the franchise agreement and liability under a purported assignment of IDL’s obligations under the franchise agreement to Viking. I will refer to these proceedings as “the 2001 proceedings”.
[7] On 17 January 2003, during the course of the 2001 proceedings, IDL was placed into voluntary liquidation by Mr Bennett. Two partners of Ferrier Hodgson, Chartered Accountants (“the Ferrier Hodgson partners”), were appointed as liquidators.
[8] The Ferrier Hodgson partners took no further step in the 2001 proceeding and so it continued by way of the judgment debtors’ counterclaim. On that claim, Ellen France J delivered the judgment of the High Court on 4 July 2005 (Preston & Anor v International Direct Limited (in liquidation) & Ors HC WN CIV 2001-404-1762 4
July 2005), ordering, inter alia:
(a) Judgment in favour of Mr Deane Preston against IDL in the sum of
$337,625.68 by way of damages and interest;
(b) Judgment in favour of the judgment debtors against IDL in the sum of
$2,525.00 by way of damages and interest;
(c) Judgment for costs in favour of the judgment creditor Mr Bennett against the judgment debtors, Mr Deane Preston and Mr Haddon Preston in the sum of $124,094.84; and
(d) Judgment for costs against IDL in favour of Mr Deane Preston and Mr
Haddon Preston in the sum of $149,735.64.
[9] The costs order against the judgment debtors was in relation to their unsuccessful claim against Mr Bennett based on a Trevor Ivory (Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517) form of action, seeking to hold him liable for the actions of the company.
[10] IDL is in liquidation. At this point, it is not in a position to honour any part of the judgment against it.
[11] On 13 November 2007, as I have noted, bankruptcy notices issued by Mr Bennett were served on the judgment debtors. These notices were initially filed in Palmerston North as against Mr Haddon Preston and in Timaru as against Mr Deane Preston.
[12] Previously, on 5 December 2005, the Ferrier Hodgson partners had been replaced by Mr Robert Walker (“Mr Walker”) as liquidators of IDL. Thereupon, Mr Walker commenced investigations into IDL’s transactions. The judgment debtors allege that these investigations showed reckless, fraudulent and bad faith dealings involving Mr Bennett, IDL and Viking.
[13] On 27 November 2007, as a result of these investigations, Mr Walker and Mr Deane Preston (as first and second plaintiff respectively) brought proceedings against Mr Bennett (“the 2007 proceedings”) alleging a number of breaches of provisions of the Companies Act 1993. In addition, Mr Deane Preston alleged an alienation of company property with intent to defeat creditors, under s 60 of the Property Law Act 1952 (“the PLA”).
[14] Also on this date, the judgment debtors filed the current applications to set aside the bankruptcy notices issued against them. Subsequently, in a minute dated 16
April 2008, Associate Judge Christiansen ordered that Mr Deane Preston’s application be transferred from the Timaru High Court to the Palmerston North High Court to be heard alongside Mr Haddon Preston’s application.
[15] Lastly, I note that on 13 October 2008, Mr Bennett filed an application to strike out the 2007 proceedings (“the strike out application”).
The Present Applications
[16] The judgment debtors apply to set aside the bankruptcy notices in question, first, under s 19(1)(d) of the Insolvency Act 1967 (“the 1967 Act”), this Act being the insolvency legislation in force at the relevant time, and secondly under the Court’s inherent jurisdiction to set aside a bankruptcy notice to control abuse of its processes. I will consider each of these arguments in turn.
The Insolvency Act 1967
[17] Section 19 Insolvency Act 1967 defined what would constitute an act of bankruptcy. Subsection 19(1)(d) provided that the debtor will commit an act of bankruptcy:
“(d) If a creditor has obtained a final judgment or final order against the debtor for any amount, and, execution thereon not having been stayed, the debtor has served on him in New Zealand … a bankruptcy
notice under this Act, and he does not, within 14 days after the service of the notice in a case where the service is effected in New Zealand … either comply with the requirements of the notice or satisfy the Court that he has a counterclaim, set-off, or cross demand which equals or exceeds the amount of the judgment debt or sum ordered to be paid, and which he could not set up in the action in which the judgment was obtained, or the proceedings in which the order was obtained:”
[18] Therefore, to set aside a bankruptcy notice under s 19(1)(d) an applicant must satisfy the Court that he/she:
(1) has a counterclaim, set-off or cross-demand; and
(2) this equals or exceeds the amount of the judgment debt; and
(3)he/she could not have set up this counter-claim, set-off or cross- demand in the action in which the order was obtained.
[19] “The onus is on the debtor to satisfy the Court that there is a proper basis under section 19 for setting aside the judgment”: Harts Contributory Mortgages Nominee Co Ltd v Krasniqi HC AK B462-IM02 2 October 2002 at [13], citing Clark v UDC Finance Limited [1985] 2 NZLR 636, 637.
[20] The counter-claim, set-off or cross-demand must be “genuine” and “triable”: Clark v UDC Finance Limited at 637; Sharma v ANZ Banking Group (New Zealand) Limited (1992) 6 PRNZ 386, 389. Thus, “[w]hat is required is an analysis of the material placed before the Court to see if there is a proper foundation for the allegations of cross-claim which are made”: Re Blackler; Saker v Blackler HC WN CIV 2008-485-124 26 May 2008 at [5].
[21] In addition, the counter-claim, set-off or cross-demand must be mutual and in the same right. However, in Re Elvin, ex parte Sandilands [1990] 3 NZLR 124
Gallen J appears to take a somewhat expansive approach to the mutuality requirement, commenting at 126-127:
“It seems to me that s 19 for its operation depends upon a degree of mutuality. There must be some coincidence, some nexus or correlation between the circumstances out of which the opposing claims arise, some relationship between the parties and this must to some extent be a pragmatic decision which needs to be considered in relation to each particular case. I do not think that the decisions as to the nature of counter-claims, set-offs or cross-claims in other contexts, necessarily assist. The purpose of the section is to deal with a lis which exists as between two comparable persons. Clearly it would be unjust if one having succeeded in obtaining a judgment against another, were able to enforce that without reference to other related claims which might substantially reduce the obligation to pay.”
[22] Gallen J’s approach has been followed in, for example, Krukziener v Hanover Finance Ltd HC AK CIV-2007-404-002896 12 August 2008 at [20] and Re Bruns; ex parte Wadsworth Norton HC AK B800-IM02 12 February 2003 at [45].
[23] The meaning of “cross-demand” is discussed in Re McKenzie, ex parte Leisure Ventures Christchurch Limited HC AK B215/90 7 June 1990. Tompkins J held that a counterclaim is a creature of statute and that the use of both “cross-demand” and “counterclaim” indicates that there must be some difference between the terms. His Honour adopted (at 8) the approach of Lord Hanworth MR in Re A Bankruptcy Notice [1934] Ch 431, 438 “that cross-demand is a word introduced in order to give a wider ambit to the meaning of these claims, something that would not be described as a set-off, something that could not have been brought in the action, something that still lies outside a counterclaim, but is of a nature which can be specified and which is of such a nature that it equals or exceeds the amount of the judgment debt”. Tompkins J also approved the similar statement in Re A Debtor No. 80 [1958] Ch 81,
90.
[24] In Potemkin v Protector Safety Ltd HC AK B1106/86 10 September 1986
Doogue J commented at 4:
“I do not think it is appropriate that a bankruptcy notice be issued in terms of this Section when it is apparent that the debtor sets up crossclaims in the action between the parties which exceed the amount of the costs ordered against him on the interlocutory proceedings. It was urged upon me … that the words ‘counter-claim, set-off and cross-demand’ were to be interpreted in the narrow fashion which they often are in procedural matters under the Rules of either the District Court or the High Court. In this particular context the words appear in statute and in my view they must be given a fair, large and liberal interpretation in accordance with the Acts Interpretation Act.”
[25] Lastly, the meaning to be given to the requirement that the judgment debtor “could not set up” the counterclaim, set-off or cross-demand in the earlier action is authoritatively stated in Hardie v Booth [1992] 1 NZLR 356 at 361-362. There, Tipping J cited Casey J’s judgment in Clark v UDC Finance Ltd [1985] 2 NZLR 636 as follows:
“His Honour referred to the following passage from the decision of Lockhart J in Re Brink, ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR at p 437:
“The words ‘that he could not have set up in the action or proceeding in which the judgment or order was obtained’ mean ‘which he could not by law set up in the action’: see Re Jocumsen [(1929) 1 ABC 82] at p 85; Re a Debtor [1914] 3 KB 726, per Avory J, at 730; Re Stokvis (1934) 7 ABC
53, especially per Lukin J at 57, where His Honour said: ‘I take a counter- claim, set-off, or cross demand which could not be set up as one which, from point of time or from its nature, or from absence of empowering provisions, or from positive inhibition so to do, could not be set up in the particular case in which judgment was obtained . . . Mere failure to take advantage of the opportunity can hardly be said to be inability.’”
The inability of which r 41(3) speaks is primarily a legal inability. Factual inability is also available but that requires some cogent circumstance. To take a looser view would be to frustrate the purpose of the rule which is obviously designed to ensure that all issues between the parties both ways be tried at
once and that a bankruptcy notice only be set aside if the debtor has a cross- claim which either legally or factually could not be set up in the same proceedings. As Casey J said in Clark's case the primary emphasis is on the legal nature of the impediment and therefore any factual grounds for the suggestion that the cross-claim could not be set up must be carefully scrutinised.”
See also Re Blackler at [5] and Re Rees; Holmes Construction Wellington
Limited v Rees HC AK CIV 2006-404-4219 9 February 2007.
Application to the present case
[26] Here, Mr Deane Preston alleges counterclaims or a cross-demand against the judgment creditors – namely, his claim before the High Court for an order under s 60 of the PLA relating to alienation of IDL’s property with an intent to defeat creditors. Mr Haddon Preston maintains first that as he is jointly and severally liable with Mr Deane Preston in relation to the costs award underlying the bankruptcy notices and secondly, that as Mr Deane Preston has a valid counterclaim, set-off or cross- demand, this is bound to indemnify Mr Haddon Preston for any liability arising from the 2001 proceedings.
[27] The judgment creditors allege, in relation to both judgment debtors, that first, an act of bankruptcy has occurred as the grounds for the bankruptcy notice were not complied with within 14 days of the date of service and secondly, that the judgment debtors do not have any counterclaim to set off against the costs demand that equals or exceeds the amount claimed by the judgment creditors and which could not be set up in the 2001 proceedings.
[28] On the first point put forward by the judgment creditors, in that the judgment debtors filed their application to set aside the bankruptcy notice within the 14 day time period, “[a]n act of bankruptcy is not committed by reason only of non- compliance with the notice until the application has been determined”: r 828(2) of the High Court Rules. I need say nothing more on this point.
Mr Deane Preston
[29] The judgment debtors allege that Mr Deane Preston’s cause of action under s
60 of the PLA in the 2007 proceedings constitutes a relevant cross-demand. Section
60 provides:
“60 Alienation with intent to defraud creditors
(1) Save as provided by this section, every alienation of property with intent to defraud creditors shall be voidable at the instance of the person thereby prejudiced.
(2) This section does not affect the law of bankruptcy for the time being in force.
(3) This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intention to defraud creditors.”
[30] Specifically, the judgment debtors allege a cross-demand under s 60 as set out in their amended statement of claim (dated 23 June 2008) for the 2007 proceedings, at paras 66 and 67, and referring to para 27. Essentially, the judgment debtors plead:
• That IDL transferred its franchise business to Viking by:
(a) recording transactions in the current account for IDL so that by July
2001 a debt of $189,143.28 was shown as owed by Viking to IDL;
(b)reducing this debt by recording journal entry transactions (including the transfer of net sales in the sum of $90,592) from IDL to Viking;
(c) offsetting the balance of the debt owed by Viking to IDL in the sum of $54,951.00 against a claimed liability to Mr Bennett, which claimed liability (of $80,000) was rejected by Mr Walker as liquidator by letter to Mr Bennett dated 19 February 2006;
(d)on or about 8 November 2001, assigning the rights and obligations pursuant to four franchise agreements, (not including the franchise
agreement with Mr Deane Preston), to Viking for no consideration;
and
(e) by deed of assignment purported to be dated 31 December 2002, assigning trademarks from IDL to Viking for the consideration of $1.
• That this transfer of property was an alienation of property made with the intent to defraud creditors of IDL, including Mr Deane Preston, in that:
(a) at the date of the resolution to transfer IDL’s assets to Viking (on 5
June 2001), Mr Bennett was aware of a significant complaint by Mr
Deane Preston relating to the conduct of the franchise business;
(b)at that date, Mr Bennett had illegally terminated the franchise agreement with Mr Deane Preston and had placed IDL at risk as a result of this unlawful action;
(c) Viking did not pay valuable consideration for the franchise businesses or for the trademarks and had knowledge of the undervalue (as its “operating mind” was that of Mr Bennett, who was simultaneously the “operating mind” of IDL);
(d)Mr Bennett knew of the value attributed to the franchise businesses and trademarks in IDL’s books and the value at which the franchise agreements were being entered into;
(e) the franchise agreements were IDL’s income-earning assets and without them IDL had no ability to make a profit. In addition, the trademarks supported and protected IDL’s income-earning capacity and without them IDL was unable to carry on its business; and
(f) by the transfer of IDL’s business to Viking, IDL’s assets were eroded such that IDL was unable to meet the claims of creditors, including contingent creditors such as Mr Deane Preston.
[31] In addition, the judgment debtors refer to para 38 of the amended statement of claim, at which it is pleaded that Mr Walker as liquidator of IDL has formed the
opinion that Mr Bennett fraudulently divested IDL of its assets for the purpose of defeating its creditors, including Mr Deane Preston and the judgment debtors in respect of the costs award.
[32] In the 2007 proceedings, orders are sought under s 60 directing that the transactions set out in para 27 of the amended statement of claim be set aside. The effect of this would be to revest the property in IDL, such that it might be traced.
[33] In response the judgment creditors contend that Mr Deane Preston does not have a claim under s 60 of the PLA that can be raised as a counterclaim, set-off or cross-demand against the judgment debt on two grounds – first, that Mr Deane Preston is not “the person thereby prejudiced” under s 60 and secondly, s 60 does not apply to contingent liabilities of the present kind.
[34] On the first ground, the judgment creditors emphasise the definite article in s
60 – that the alienation of property is only voidable at the instance of “the” person thereby prejudiced. They say that this has been overlooked in some of the cases on this section, which have effectively substituted the word “any”. The judgment creditors say that the alleged transactions in question emanated from a company now in liquidation and that if (which is denied) there is any cause of action prima facie available under s 60 then it is in the hands of the liquidator of the company.
[35] They submit that an individual creditor has no locus standi to bring such a proceeding, for two reasons. First, any such individual creditor is not “the person” affected by the alleged alienation. Secondly, if such an action was brought and was successful, it would then give the plaintiff creditor a preference over other creditors.
[36] In reply, counsel for the judgment debtors, Mr McKenzie QC, submitted that Mr Deane Preston is the person prejudiced here – that he is a “creditor” of IDL and is therefore the party prejudiced by the alienation of IDL’s assets.
[37] The judgment debtors also refer to a decision of the English Court of Appeal in Re Cyona Distributors Limited [1967] All ER 281. This case concerned proceedings brought under the fraudulent trading section of the Companies Act 1948 (UK) (largely equivalent to our former s 320 of the Companies Act 1955). Essentially, someone on behalf of the allegedly fraudulent director had paid money directly to
the creditors (the Commissioners of Customs and Excise), who had brought proceedings under the fraudulent trading section (which proceedings had been stood over pending criminal proceedings). The liquidators of the company sought to have the money returned to the company and for the creditors to prove in the liquidation. Lord Denning MR referred to the section and commented (at 284):
“If a man has carried on the business of a company fraudulently, the court can make an order against him for the payment of a fixed sum … An order can be made either at the suit of the liquidator, etc, or of a creditor. The sum may be compensatory; or it may be punitive. The court has full power to
direct its destination. The words are quite general … By virtue of these words the court can order the sum to go in discharge of the debt of any particular creditor: or that it shall go to a particular class of creditors: or to the liquidator so as to go into the general assets of the company: so long as it does not exceed the total of the debts or liabilities. … Certainly when an application is made by a creditor who has been defrauded, the court has power, I think, to order the sum to be paid to that creditor. In short, I think that the words of the section are to be given their full width. When a creditor applies, as the commissioners did here, he applies on his own account. He does not apply as being under a trust for the other creditors or for anyone else. He is the master of his own application. …”
[38] Tipping J referred to this case in Marshall Futures Limited v Marshall [1992]
1 NZLR 315 at 331-332. Although it was unnecessary to decide the issue, His
Honour observed:
“I must say, however, that at first blush before any of the authorities were mentioned I was of the preliminary view that the section should be construed in terms of the approach of Lord Denning MR … It seems to me more natural to take the view that the section is aimed at personal responsibility to the creditor rather than to the company. That may well be reinforced by the fact that the sections refer to all or any part of the debts of the company. However it is plain from what Lord Denning said that notice of the proceedings ought to be given to the liquidator of the company in any event.”
[39] In Sanders v Flay (2005) 9 NZCLC 263,906 at [19], a case under s 301 of the Companies Act 1993, Heath J was satisfied that “an approach along the lines suggested by the majority in Cyona” was appropriate in the circumstances.
[40] Here, the judgment debtors submit that, by analogy with in Re Cyona Distributors Limited, where the creditor is a party to an application brought in relation to a company in liquidation to recover property to which the company is entitled, the Court is entitled to direct that the sums or property recovered be held by the liquidator for the creditor concerned.
[41] I turn now to the second ground advanced by the judgment creditors. There, they question whether s 60 covers the situation where the liability owed to a creditor is contingent. The judgment creditors acknowledge that Re Hale [1974] 2 NZLR 1 is authority for the broad proposition that contingent liabilities are to be taken into account when considering the section. However, the judgment creditors submit that Re Hale was about a contingent liability under a guarantee, and that this is a special case for the reason given in the extract from Kerr on Fraud and Mistake (7ed 1952) at 315-316 quoted by Perry J (at 6-7):
“A guarantee given by a person who settles the bulk of his property, must be regarded as a contingent liability, against which available assets should be provided in order to support such settlement. For the guarantee must be viewed as if the event had already happened — the possibility of which the parties must have had in contemplation when the guarantee was given — of the debtor being unable to pay; and the fact that, when the settlement was made the principal debtor had assets sufficient for payment of the debt cannot be regarded. The state of the assets of the guarantor is the question
which the Court considers. The guarantee must not be regarded as a liability which might never become a debt.” (emphasis added)
[42] The judgment creditors submit that the present case is fundamentally different
– the contingent liability here is one which is subject to the outcome of litigation. They provide a chronology, which includes (inter alia) the following events:
9 November 2001 Mr Deane Preston files his counterclaim to the
2001 proceedings.
31 December 2002 Deed of assignment of trademarks
March 2005 Trial of 2001 proceedings before France J
4 July 2005 France J’s judgment delivered
[43] Therefore, the judgment creditors submit that it is plain that much of the alleged transfer of assets with intent to defraud creditors occurred before any of the relevant events and that, on 8 November 2001, when Mr Deane Preston filed his counterclaim, he was “at his height a contingent creditor” of IDL. The judgment creditors contend that this contingency was fundamentally different from the contingency under a guarantee described in Re Hale.
[44] Thus, the judgment creditors submit that it is simply not possible for Mr Deane Preston to succeed on this ground because he cannot prove that Mr Bennett could possibly have known the outcome of the 2001 proceedings (at which both quantum and liability were in issue) on the date Mr Deane Preston’s counterclaim was filed or when the trademarks were transferred. The judgment creditors say that this situation was therefore fundamentally different to the case of a guarantee where a prima facie liability arises at the time of the signing of the guarantee.
[45] Mr McKenzie QC in responding for the judgment debtors says that, although
Mr Deane Preston may have been a contingent creditor, importantly by letter dated
20 April 2001 he put Mr Bennett on notice that his claim was being formulated and that IDL’s purported cancellation of the franchise agreement was not accepted. This was well before the transfer of assets said to give rise to a breach of s 60. As such, the judgment debtors submit that the assets were transferred to defeat Mr Deane Preston’s signalled claim.
[46] The most recent and authoritative consideration of s 60 is in the Supreme Court’s decision in Regal Castings Limited v Lightbody & Ors [2008] NZSC 87. There, the Court unanimously found that there had been a breach of s 60 of the PLA, but differed as to whether there were any circumstances (namely, a voluntary alienation by an insolvent debtor) in which the law would deem an intent to defraud (per Freeman v Pope (1870) LR 5 Ch App 538 (CA)).
[47] In terms of what is required to establish an “intent to defraud”, Elias CJ stated at [5] and [6]:
“The question of intent to defraud is one of fact. It must be determined at the time of alienation, but the intended prejudice may be to future creditors rather than creditors existing at the date of the alienation. Absence of full value obtained for an asset transferred is evidence from which an inference of intent to defraud may be taken. But full value of itself may not be sufficient to displace an intent to defraud …
It is not determinative that a voluntary alienation may be in circumstances which contemplate what will happen on future bankruptcy. Nor does the section attach simply because a disposition proves in the end to have depleted the assets available to creditors, if it cannot be determined that it was made with that intent. Dixon CJ in Hardie v Hanson suggested that an “intent to defraud” is an intention to “cheat” the creditors of access to the assets alienated. Gaudron J in Cannane v J Cannane Pty Ltd (in liq) thought that “fraud” involved “the notion of detrimentally affecting or risking the property of others, their rights or interests in property, or an opportunity or advantage which the law accords them with respect to property”. Such intention may arise even though the transferor hopes and expects that there will be no eventual shortfall. It is necessary in each case to:
look at the whole of the circumstances surrounding the execution of the conveyance, and then ask yourself the question whether the conveyance was in fact executed with the intent to defeat and delay creditors…”.
(footnotes excluded)
[48] Blanchard and Wilson JJ said at [52] and [53]:
“The expression “intent to defraud” in s 60(1) of the Property Law Act was not happily chosen. But it has been regarded as shorthand for intent to hinder, delay or defeat a creditor in the exercise of any right of recourse of the creditor in respect of property of the debtor. That is how the concept is now expressed in s 345(1)(a) of the Property Law Act 2007. The existence of any
such dishonest intent on the part of the debtor is a question of fact and the onus of proving it is upon the party attacking the transaction.
That much is clear. But what constitutes such an intent? To answer that question it is essential to distinguish between the debtor’s purpose and his or her intention. … It is not necessary to show that the debtor wanted creditors to suffer a loss; that it was his purpose to cause loss. It is, however, necessary to show the existence of an intention to hinder, delay or defeat them and that the debtor has accordingly acted dishonestly.” (footnotes excluded)
[49] As to whether s 60 applies to contingent creditors, Elias CJ explicitly stated that “the intended prejudice may be to future creditors rather than creditors existing at the date of the alienation” (at [5]). Her Honour also referred to the approach of the Court in Re Hale to a contingent liability under a guarantee and the similar approach in Re Ridler (1883) 22 Ch D 74 (CA), and commented at [8]:
“In assessing the financial position and prospects of the transferor at the date of the alienation, the court is concerned with practical risk rather than with an exact balance sheet calculation. So, where the transferor is subject to a
liability under a guarantee, the obligation is not properly treated as though wholly contingent.”
[50] It seems, therefore, that the recognition of a contingent liability in Re Hale (and Re Ridler) should not be restricted to a contingent liability under a guarantee but will apply in any situation where there is a “practical risk” at the time of alienation that a liability will eventuate and the transferor nevertheless alienates the property with intent to defraud that contingent creditor.
[51] In light of these statements of principle and on the evidence before me, I am satisfied that, for present purposes, there is a triable case against Mr Bennett under s
60 of the PLA. At this point it appears in my view that there is a genuine and triable case that the primary income-earning assets of IDL may have been transferred by Mr Bennett to Viking at a known undervalue, that this was done at a time when Mr Bennett was aware of Mr Deane Preston’s allegations against the company, and that the effect of this was to erode IDL’s assets to an extent that it was unable to meet the contingent liability to Mr Deane Preston. It must also be noted that this transfer was
to another company wholly owned and solely directed by Mr Bennett. I am satisfied it is genuinely arguable that there was a practical risk at the time of this alienation that IDL might be found liable to Mr Deane Preston and that Mr Bennett nevertheless went ahead with the intent to defeat, hinder or delay Mr Deane Preston’s right of recourse.
[52] Moreover, I am satisfied here that Mr Deane Preston is the person affected. I do not accept that the company IDL is the only entity that is covered by s 60 of the PLA. The section is headed “Alienation with intent to defraud creditors” and, by analogy, I concur with Tipping J (in Marshall Futures Limited v Marshall) that it “seems to me more natural to take the view that the section is aimed at personal responsibility to the creditor rather than to the company”. Where a company’s assets have been alienated with intent to defraud creditors it is entirely illogical to say that the creditors are not persons affected. Nor am I at all persuaded by the argument that the section is only applicable to the single person affected. The section does not require such a restrictive interpretation. Following this logic would mean, for example, that where a debtor transferred his or her own personal assets to, say, a trust, with the intention to defeat more than one creditor, only one creditor could apply under s 60. This clearly cannot be the proper meaning of the section.
[53] Moreover, I am satisfied that a Re Cyona Distributors type approach is appropriate in the circumstances here. As such, I find that Mr Deane Preston has done enough at this point to satisfy the Court that he has a genuine, triable cross- demand against Mr Bennett for the purposes of s 19(1)(d) of the 1967 Act.
[54] The remaining issues relating to whether Mr Deane Preston’s pleaded s 60 claim can constitute a counterclaim, set-off or cross-demand against the judgment debt are first, whether the alleged s 60 claim equals or exceeds the judgment debt, secondly, whether the claim could have been set up in the 2001 proceedings and thirdly, whether there is the required degree of mutuality between the claims.
[55] On the first point, the judgment debtors allege that the value of the alleged alienated property, as particularised in the amended statement of claim, exceeds the sum of the judgment debt. Before me, the judgment creditors did not appear to challenge the judgment debtors’ application on this point. I am of the view that there
is sufficient evidence before the Court at this point to satisfy it that Mr Deane
Preston’s cross-demand does exceed the judgment sum.
[56] Secondly, the judgment debtors submit that the s 60 claim arises out of Mr Walker’s investigations into the transactions of IDL – which were completed after the 2001 proceedings. As such, they contend that the particular facts and evidence on which the claim is based were not available to Mr Deane Preston at the time of the
2001 proceedings. Moreover, the judgment debtors say that discovery is yet to take place in relation to the 2007 proceedings and that it is likely to be necessary to administer interrogatories and conduct further inquiries to ascertain the full nature of the transactions and the present whereabouts of the subject property.
[57] In noting that it was Mr Walker’s investigations that gave rise to the circumstances giving rise to Mr Deane Preston’s claim before me Mr McKenzie QC added that the Ferrier Hodgson report stated (at para 4) that the Ferrier Hodgson partners had obtained only “some” of the company’s books and records, and went on to say (at para 7.1) that “[w]e are unable to comment on the final 9 months of trading, as accounts have not been prepared for their period”. In addition the report confirmed that it based its findings in relation to Mr Bennett’s conduct “on the books and records we currently hold” (at para 7.2).
[58] Mr McKenzie QC noted also that the Ferrier Hodgson partners were appointed by Mr Bennett under a voluntary liquidation, as opposed to being court-appointed liquidators. He notes that Mr Walker was not appointed until after Ellen France J’s judgment.
[59] I am satisfied that the facts underlying Mr Deane Preston’s cross-demand only came to light as a result of Mr Walker’s investigations. Thus it is reasonable to conclude that they would not have been known to Mr Deane Preston at the time of the 2001 proceedings and so, in practical terms, could not have been set up in those proceedings. This is not a case like Stirling v Webb Ross and Co CA47/86 24 April
1986 where the subject matter of the claim was established in information that was in the possession of the debtor’s solicitors at the time of the earlier proceedings, or Harach v Dia HC WN CIV 2006-485-002245 19 February 2008 where there was evidence that the debtor was well aware of the alleged counterclaim but had elected
to follow advice from his solicitor not to pursue it. Nor is it akin to Hardie v Booth where the relevant events took place approximately six weeks before the trial of earlier proceedings, there was no legal impediment to his setting up the claims by amendment to his existing counterclaim and the Judge there did not accept that the judgment debtor was factually unable to set up the relevant cross-claims despite the time being “relatively short”.
[60] In the present case, I am satisfied that it was factually impossible for Mr Deane Preston to raise the alleged cross-demand in the 2001 proceedings. It is not a case of mere inconvenience or difficulty or that Mr Deane Preston simply failed to take advantage of an available opportunity. The facts underlying his cross-demand were not yet known at the time of the 2001 proceedings and Mr Deane Preston did not have access to the information from which those facts arose. In my view, this is not a case where Mr Deane Preston could have raised the cross-demand in the 2001 proceedings so that all of the issues between the parties could be dealt with together such that he ought now to be prevented from attempting to resist the bankruptcy notice on this ground.
[61] Lastly, in terms of mutuality, the judgment debtors submit that the cross- demand arises out of the same transaction and series of events as the matters which gave rise to the judgment debt. As such, relying on the broad statement of the principle in Re Elvin, the judgment debtors contend that the requirement for mutuality is satisfied. Again before me counsel for the judgment creditors did not appear to address this point.
[62] Here I am satisfied that that there is sufficient mutuality between the costs orders constituting the judgment debt and the alleged cross-demand. Both arise generally out of the breakdown of the relationship between the parties to the franchise agreement and Mr Deane Preston’s attempts to obtain compensation from IDL and/or Mr Bennett. In my view, there is clearly a sufficient “nexus or correlation between the circumstances out of which the opposing claims arise” such that it would be unjust to permit the judgment creditors to issue the bankruptcy notice against Mr Deane Preston without reference to Mr Deane Preston’s alleged cross-demand, which might substantially reduce – or completely off-set – his obligation to pay the judgment debt.
[63] For these reasons, I am satisfied that Mr Deane Preston’s application to set aside the bankruptcy notice under s 19(1)(d) should be granted.
Mr Haddon Preston
[64] The preceding analysis is also relevant to Mr Haddon Preston’s claim under s
19(1)(d). However, a further issue arises here – namely, whether Mr Haddon Preston can claim the benefit of the counterclaim, set-off or cross demand, as discussed, by reason of his joint and several liability for the judgment debt and Mr Deane Preston’s liability to indemnify Mr Haddon Preston in relation to that liability.
[65] Mr Haddon Preston submits that his case under s 19(1)(d) arises out of an obligation on Mr Deane Preston to indemnify him in relation to the judgment debt costs order and therefore, there is a direct nexus between him and the s 60 PLA claim.
[66] Conversely, the judgment creditors argue that it does not logically follow from the fact that Mr Deane Preston has an alleged cross-demand against the judgment creditors and that Mr Deane Preston and Mr Haddon Preston are jointly and severally liable, that the bankruptcy notice should therefore be set aside as against Mr Haddon Preston. Nor, it is submitted, does this follow from the assertion that Mr Deane Preston is bound to indemnify Mr Haddon Preston for any liability arising out of the 2001 proceedings.
[67] The judgment creditors contend that, to the extent that each judgment debtor is jointly and severally liable to indemnify the judgment creditors, it is a matter between the judgment debtors inter se – it is not something that can be visited upon the judgment creditors on the basis that, since one judgment debtor may or may not have a claim against the judgment creditor, then another judgment debtor can rely on that. The judgment creditors submit that the position can be analogised to that of co- guarantors under a judgment on a guarantee – that one co-guarantor cannot avoid execution of the judgment debt or bankruptcy simply because the other co-guarantor might have a claim. (On this, refer Bowyear v Pauson (1881) 6 QBD 540; Waltus Property Developments Ltd v Newmarket Carpark Ltd HC AK CP 641-IM-00 20
July 2001; O’Donovan and Phillips The Modern Contract of Guarantee (3ed 1996)
at 557-558.) Thus, the judgment creditors submit that Mr Haddon Preston should be
required to pay up under the bankruptcy notice and then, if he does have a claim against Mr Deane Preston, that is a matter between them.
[68] Mr McKenzie QC acknowledges that the circumstances here are unusual but says that this is a case of joint and several liability and that it is necessary to recognise Mr Haddon Preston as being covered by Mr Dean Preston’s cross-demand so as to prevent an injustice. Mr McKenzie submits that the interconnection between the claims and the father/son relationship between the judgment debtors are significant factors giving rise to a special situation here. The judgment creditors are seeking a costs judgment sum, for which the judgment debtors have a joint obligation.
[69] It is clear that the judgment debtors are jointly and severally liable to meet the costs orders constituting the judgment debt. Therefore, in my view there can be no question that the judgment creditors’ ability to pursue Mr Haddon Preston for this debt is not dependent on their position vis-à-vis Mr Deane Preston. I am of the view that the facts first that Mr Deane Preston has established a relevant cross-demand under s 19(1)(d) and secondly that he is liable to indemnify Mr Haddon Preston, do not give rise to Mr Haddon Preston having a relevant cross-demand against the judgment creditors. The ability of Mr Haddon Preston to seek contribution or indemnification from Mr Deane Preston is not something that affects the debt he owes to the judgment creditors. Nor is the father-son relationship between the judgment debtors something that affects this. As such, I am of the view that Mr Haddon Preston has failed to establish grounds under s 19(1)(d) to set aside the bankruptcy notice issued against him. This is not the end of the matter for the present application by Mr Haddon Preston, however.
Inherent Jurisdiction to Control Abuse of Court’s Processes
[70] The judgment debtors (and Mr Haddon Preston in particular) also rely on the inherent jurisdiction of the High Court, when considering an application to set aside a bankruptcy notice, to grant relief to debtors to control the abuse of the Court’s process. Conversely, the judgment creditors deny that the bankruptcy notices constitute an abuse of process.
[71] The recognition of the Court’s inherent jurisdiction here stems from Re Wise; Wise & Anor v Benecke HC AK B227-228/95 21 June 1995. In this case, relief was not available under s 19(1)(d) because the debtors had failed to establish a counterclaim, set-off or cross demand.
[72] Master Kennedy-Grant, however, held:
(a) I do have jurisdiction to grant relief to the debtors;
(b) The jurisdiction is the inherent jurisdiction of the Court to control the abuse of its process;
(c) The grounds on which the jurisdiction may be exercised are:
(i) procedural defect in the obtaining of the judgment on which the bankruptcy notice is based; and/or
(ii) the existence of arguable grounds of defence to the claim for which judgment was given;
(d) The grounds on which the jurisdiction may be exercised may extend beyond those stated in (d) [sic] to any ground on which the Court feels it necessary to intervene to prevent injustice but I make no finding on that point in this judgment;
[73] His Honour held that the existence of s 19(l)(d) is not a bar to the exercise of the Court's inherent jurisdiction to control the abuse of its process by setting aside a bankruptcy notice on grounds other than the existence of a counter claim, set-off or cross-demand.
[74] A number of subsequent judgments – namely, Re Stansfield, Stansfield v Gould HC AK B1378/01 3 December 2002, Re Holloway; Holloway v Darby HC HAM CIV 2005-419-1085 8 December 2005, Re Rees, Re Sadler and Re Blackler – shed further light on the use of this inherent jurisdiction.
[75] In Re Stansfield Master Faire (as he then was) followed Re Wise in finding that the Court’s inherent jurisdiction to prevent abuse of process could be exercised despite the specific grounds for setting aside a bankruptcy notice provided in s
19(1)(d). His Honour cited Re A Debtor (No 757 of 1954), ex parte The Debtor v FA
Dumont Ltd [1955] 2 All ER 65 (CA), in which the Court commented (at 78) that an attempt by a creditor to perpetrate a fraud on the other creditors is “an obvious example of abuse of the process of the courts”. Master Faire found that it was not a case in which the Court’s inherent jurisdiction ought to be exercised. The creditors had made an honest mistake in obtaining judgment in an amount exceeding the actual debt. They had not threatened to use the bankruptcy proceedings in an oppressive fashion, and His Honour was not satisfied that the actions of the creditors had produced a result adverse to the debtor (in that the mistake had no obvious effect on the outcome of a vote whether to accept a proposal by the debtor).
[76] In Re Holloway the debtor did not rely on s 19(1)(d) because the application to set aside the bankruptcy notice was made outside the 14 day time period. Associate Judge Faire referred to Re Wise and observed at [7] to [8]:
“In that case, the provisions of the Insolvency Act 1967 and the Insolvency Rules were not available to the debtors because they could not establish the existence of a counterclaim, set-off or cross-demand which could not be set up in the proceeding under which the judgment was given. Rather, their
approach was to apply to set aside the judgment. If they were successful then, obviously, the foundation for the bankruptcy notice would be removed.
Master Kennedy-Grant, after examining the facts, considered that the debtors had a reasonable prospect of applying successfully for an order setting aside the judgment obtained against them and, on that basis, determined that it was appropriate to exercise the Court’s inherent jurisdiction.
It must be emphasised, however, that what was involved in that case was a direct attack on the judgment which was the foundation for the request to issue the bankruptcy notice and the bankruptcy notice itself.”
[77] However, notwithstanding this arguably narrow reading of Re Wise, His Honour concluded (at para [16]) that “in the unusual circumstances of this case … the Court’s inherent jurisdiction should be exercised”. This was because:
(a) The Court has “an inherent jurisdiction to stay bankruptcy proceedings where there is an abuse of process”;
(b) The debtor had issued proceedings against the creditor “for an amount many times in excess” of the judgment sum;
(c) The Judge in the earlier proceedings had explicitly stated that the judgment did not affect the debtor’s right to pursue recovery of money alleged to be owed him by the creditor by alleging a different cause of action in subsequent proceedings;
(d) Prejudice to the creditor could be minimised by imposing conditions requiring the debtor to prosecute his proceedings diligently, ordering that the amount of the judgment sum be paid to the Registrar of the Court to be held pending the lifting of the stay, conclusion of the debtor’s proceedings or further order of the Court, and reserving leave for further directions if the proceedings were not prosecuted;
(e) The debtor had explained the factual circumstances pertaining to his claim and there had been no opposing evidence from the creditor;
(f) “The jurisdiction which I am exercising in this case pertains to circumstances which are not specifically covered by s19(1)(d) of the Insolvency Act 1967 because of the rather unusual circumstances that flow from the judgment entered on appeal”; and
(g) To allow the bankruptcy proceedings to continue in these circumstances would be to “countenance an abuse of the process of the Court”. A possible adjudication in bankruptcy would prevent the debtor pursuing his claim and “other adequate remedies” were available to the creditor which would not lead to this injustice.
[78] In contrast to the indication in Re Stansfield that fraud by a creditor constitutes an abuse of process that might form the basis for the Court exercising its inherent jurisdiction, Associate Judge Sargisson seems to take a more narrow approach in Re Sadler. There, the judgment debtor argued that the Court’s inherent jurisdiction to set aside the bankruptcy notice ought to be exercised on the grounds that he was solvent and had “more than demonstrated his willingness” to meet the judgment debt in the event that his action against the judgment creditor failed by paying the amount
of the judgment debt to a solicitor’s trust account. Her Honour rejected this argument (at [39]) on the grounds, inter alia:
“b)The debtor’s submissions in respect of this ground rely on the judgment of Master Kennedy-Grant in Re Wise, ex parte Benecke HC AK B277-95 and B228-95, 21 June 1995. In that case the Master noted that relief was not available to the debtors under s 19 (1)(d) because the debtors did not have a counterclaim, set-off or crossdemand. However after considering the authorities, he concluded that the Court has an inherent jurisdiction to stay the application to set aside, where the debtor’s case is based on an alleged defect in the process by which judgment was obtained or where there is an arguable defence to the claim for which judgment was given which the debtor had been unaware of. The debtor had filed an application to set aside judgment.
c) Mr Sadler has not pointed to any circumstances of the kind described by Master Kennedy-Grant as a foundation for the exercise of the Court’s inherent jurisdiction to stay the current application. There is no basis for concluding other than that the judgment in the District Court against Mr Sadler was properly obtained.”
[79] The Associate Judge did not refer to Master Kennedy-Grant’s indication that the grounds on which the Court’s inherent jurisdiction might be exercised might extend beyond those explicitly recognised “to any ground on which the Court feels it necessary to intervene to prevent injustice”. Moreover, it seems that Her Honour was not referred to Re Holloway, in which Associate Judge Faire arguably took a more expansive approach to the exercise of the inherent jurisdiction: see Her Honour’s judgment declining the debtor’s application for recall in HC AK CIV 2006-404-
004528 13 September 2007 at [13](c).
[80] Most recently, in Re Blackler Associate Judge Faire found that the judgment debtor did not have a prima facie triable case to a counterclaim, set-off or cross- demand under s 17 of the Insolvency Act 2006 (the equivalent to s 19(1)(d) under the 1967 Act). Counsel then submitted that the pleading could be amended and a
question arose as to whether the Court should exercise its inherent jurisdiction to provide an opportunity for this to be done. Associate Judge Faire stated (at [26]):
“I have reservations as to whether such a course is justified by way of an exercise of the Court’s inherent jurisdiction. That is because the purported exercise in this case would seem to run directly counter to the statutory basis for setting aside the bankruptcy notice. That is the need to find a prima facie case or a genuinely triable issue in relation to the cross-claim. That is a matter that was expressly left open when the examination of the Court’s inherent jurisdiction to prevent an abuse of process was undertaken by Master Kennedy-Grant in re Wise, ex parte Benecke HC AK B227-95 and B228-95 21 June 1995. Of course, if jurisdiction could be invoked an approach might be simply to adjourn the application to set aside the bankruptcy notice pending the determination of a strike out application or, if appropriate, trial of the District Court proceeding. In that way, the effect of r
830(2) of the High Court Rules is preserved and no act of bankruptcy will occur pending the determination of this application. However, as I have said, I have concerns as to whether the inherent jurisdiction is available when the matter is expressly covered by s 17 of the Insolvency Act 2006. In short, as
the Act provides the express ground for setting aside the bankruptcy notice, it is that ground which I must analyse in determining whether the bankruptcy notice should be set aside.”
[81] For the sake of completeness, I note that His Honour decided to adjourn the application to allow the judgment debtor the opportunity to amend the statement of claim, allowing sufficient time for any discovery and interrogatories in relation to his claim to be completed.
[82] Lastly, it is worth quoting Associate Judge Faire’s summary in Re Rees (at [34]) as to the correct approach to relief where the Court exercises its inherent jurisdiction:
“Mr Hucker invited me to set aside the bankruptcy notices on terms as to the prosecution of the appeals. That approach is not justified for the reasons given by the Court of Appeal in Sharma v ANZ Banking Group (NZ) Ltd at 5
to which I have already made reference. If the bankruptcy notices are to be set aside it can only be on the basis that no act of bankruptcy has occurred. In my view, the correct approach, if the inherent jurisdiction of the Court is to be invoked, is to do what Master Kennedy-Grant did in re Wise, ex parte Benecke and simply adjourn this application to check progress with the
hearing of the appeals and on the condition that the debtors take all practical steps to prosecute those appeals diligently. In that way the effect of r 830(2)
of the High Court Rules is preserved.”
Application to the present case
[83] Here, the judgment debtors submit that it is premature and an abuse of process to bankrupt either Mr Deane Preston or Mr Haddon Preston in relation to the costs order in circumstances where a substantially greater judgment against the company, in liquidation, owned and controlled by Mr Bennett, remains unsatisfied. They say that the outstanding 2007 proceedings raise serious issues as to irregularities in the conduct of the company IDL and they allege that steps were taken at the direction or under the control of Mr Bennett, to divest that company of assets that would otherwise have been available to satisfy the judgment against IDL in favour of the judgment debtors. It is submitted that it is premature to bankrupt either of the judgment debtors in relation to costs when the proceedings between the parties have not been fully resolved and that this is contrary to the philosophy and practice of the insolvency legislation.
[84] In addition, it is contended that Mr Haddon Preston is clearly solvent and can meet the joint liability in issue – and that his solvency has not been challenged. The judgment debtors submit that it is an abuse of the bankruptcy process to seek to execute that judgment against a solvent debtor.
[85] In response, the judgment creditors note that the solvency argument is presumably directed at s 26 of the 1967 Act, which provides as relevant:
“26 Court's power on creditor's petition
…
(2) If the Court is not satisfied that the allegations stated in the creditor's petition have been proved, or is satisfied that the debtor is able to pay his debts or that it is just and equitable not to make an order of adjudication or that for other sufficient cause no order ought to be made, the Court may dismiss the petition. …”.
[86] The judgment creditors submit that there is no evidence at all before the Court upon which it could possibly be satisfied that Mr Haddon Preston – or Mr Deane Preston – are solvent. They say that the only evidence is a “one liner” statement in the affidavit of Ms Batt (dated 27 November 2007), which, being hearsay, is not admissible on an application such as this. The judgment creditors contend that there must be actual verified evidence before the Court, as to the debtor’s solvency. They say that this is plain from Re Guest; ex parte BNZ Finance Limited [1991] 1 NZLR
250; Re Hall; ex parte City Construction Limited [1990] 1 NZLR 577 and Re Stirling; ex parte Webb Ross & Co [1990] 1 NZLR 569. It is also said that there has been an absolute void of any argument as to the judgment debtors’ solvency. As such, the judgment creditors submit that any application to set aside the bankruptcy notice on this ground must fail.
[87] In reply, Mr McKenzie argued that the judgment creditors’ notice of opposition did not put Mr Haddon Preston’s solvency in issue, which would have alerted Mr Haddon Preston to provide evidence as to his assets. Counsel submitted that it was too late at the hearing to endeavour then to put it in issue – that it would be unfair to allow this at the present point.
[88] I do not understand the judgment debtors here to rely on s 26. Instead, as I understand their position, they plead solvency as a basis on which the Court ought to exercise its inherent jurisdiction to set aside the bankruptcy notice. Moreover, as I see the position, it is reasonably arguable that the judgment creditors were put on notice that Mr Haddon Preston’s solvency was pleaded and that they failed to challenge this in their notice of opposition. Thus, I tend to the view that Mr Haddon Preston was not put on notice to file detailed affidavits establishing his solvency. For
present purposes, if it was necessary for me to do so, I would proceed on the basis that Mr Haddon Preston is solvent and able to pay the sum of the judgment debt.
[89] Following the Re Wise line of cases, the Court has an inherent jurisdiction to control abuse of its process where there is a procedural defect in the judgment underlying the judgment debt, arguable grounds of defence to that judgment exist or, possibly, on another ground where the Court feels it necessary to intervene to prevent injustice. I am persuaded, as the Court found in Re A Debtor (No 757 of
1954) (as cited in Re Stansfield), that a genuine and triable allegation of fraud on the part of the judgment creditor which, if proved, would have the likely effect of completely off-setting the judgment debt, is an “obvious example of abuse of the process of the courts” such that the Court should exercise its inherent jurisdiction.
[90] In my view this is supported by the submissions as to Mr Haddon Preston’s solvency and his last resort offer made before me, by Mr McKenzie QC, to pay the amount of the judgment sum into Court to be held pending further order of this Court, and possibly, resolution of the 2007 proceedings. Although mere solvency is not a ground to exercise the Court’s inherent jurisdiction (per Re Sadler), it is a relevant factor in all the circumstances (see Re Holloway). Moreover, as occurred in Re Holloway, I am satisfied here that there are proceedings extant against the judgment creditors “for an amount many times in excess” of the judgment sum, which proceedings are brought by a person who is liable to indemnify Mr Haddon Preston and any prejudice to the judgment creditors can be minimised by, for example, imposing conditions requiring those 2007 proceedings to be prosecuted diligently.
[91] As I understand their position, the judgment debtors ask that the Court, in its inherent jurisdiction, order that the bankruptcy notices be set aside. This is contrary to the approach of Associate Judge Faire in Re Rees. Instead, the approach advocated in Re Rees is to adjourn the application pending determination of the alleged claim or further order of the Court.
[92] Mr McKenzie QC made submissions before me in particular with regard to Mr Haddon Preston’s application supporting such a course of action (presumably in the alternative). Mr Bennett has applied to strike out the 2007 proceedings. Mr
McKenzie QC argued that there are issues that the Court will be required to deal with both in the strike out application and the substantive trial hearing which need to be disposed of before considering the present application to set aside the bankruptcy notices. Mr McKenzie QC noted that the strike out application has a fixture on 26
November 2008 and so depending on the outcome of that application initially there might well be no delay in adopting this course of action.
[93] And, in any event, in my view it is premature for this Court to effectively determine the allegations of fraud by refusing Mr Haddon Preston’s application to either set aside or stay the bankruptcy notice issued against him at this stage. Instead, the appropriate approach here is to adjourn Mr Haddon Preston’s application until after the final hearing of the 2007 proceedings. To allow bankruptcy proceedings to continue against Mr Haddon Preston at this point, having regard to the circumstances I have outlined, would be to countenance an abuse of process of this Court. It is also premature and an abuse of process to bankrupt Mr Haddon Preston in relation to a costs order in circumstances where larger judgments both for damages and interest and costs against the company IDL now in liquidation, a company owned and controlled by the judgment creditor, remain unsatisfied.
Result
[94] For the reasons I have outlined above, Mr Deane Preston succeeds in his application to set aside the bankruptcy notice under s 19(1)(d). An order is to follow setting aside the bankruptcy notice issued against him.
[95] But, in relation to Mr Haddon Preston, s 19(1)(d) does not assist. I am satisfied however that this Court should exercise its inherent jurisdiction to adjourn his application until after the hearing of the 2007 proceedings or pending further order of this Court.
Orders
[96] I now make the following orders:
(a) The bankruptcy notice served on Mr Deane Preston on 13 November 2007 is set aside.
(b) Further steps in bankruptcy taken in reliance on the bankruptcy notice served on Mr Haddon Preston on 13 November 2007 are stayed pending further order of this Court subject to the condition that Mr Haddon Preston will procure the prosecution with all diligence of the present High Court proceeding brought by Mr Deane Preston against Mr Bennett.
(c) Leave is reserved to the judgment creditors and Mr Haddon Preston to apply for further orders in the event that the present High Court proceeding against Mr Bennett is not prosecuted with diligence or on resolution or other disposition of that proceeding.
[97] As to costs, the judgment debtors Mr Deane Preston and Mr Haddon Preston have effectively succeeded in their present applications and I see no reason why costs should not follow the event in the usual way. Costs are therefore awarded to the judgment debtors against the judgment creditors on their present applications on a Category 2B basis together with disbursements (if any) as approved by the Registrar.
‘Associate Judge D.I. Gendall’
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