Bridgecorp Ltd (in rec and in liq) v Nielsen HC Auckland Civ-2009-404-1060

[2009] NZHC 1318

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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2009-404-1060

IN THE MATTER OF     the Insolvency Act 2006

BETWEEN  BRIDGECORP LIMITED (IN RECEIVERSHIP) AND (IN LIQUIDATION)

Judgment Creditor

ANDRODERICK WILLIAM GUTHRIE NIELSEN

Judgment Debtor

Hearing:         16 September 2009

Counsel:         R J W Swan for Judgment Creditor

A M Swan for Judgment Debtor

E Grove for G C O Nielsen (in support) Judgment:     23 September 2009

JUDGMENT OF HEATH J

This judgment was delivered by me on 23 September 2009 at 10.00am pursuant to Rule 11.5 of the

High Court Rules

Registrar/Deputy Registrar

Solicitors:
McVeagh Fleming, Auckland
Ross & Whitney, Auckland
Farry & Co, PO Box 91212, Auckland
Counsel:

E Grove, PO Box 2886, Auckland

BRIDGECORP LIMITED (IN RECEIVERSHIP) AND (IN LIQUIDATION) V NIELSEN HC AK CIV 2009-

404-1060  23 September 2009

Introduction

[1]      Bridgecorp  Ltd  (in  receivership)  and  (in  liquidation)  seeks  an  order adjudicating Mr Nielsen bankrupt.   Bridgecorp’s application is supported by the debtor’s brother, who has a judgment debt in excess of $1,800,000 in his favour: Nielsen v Nielsen (High Court, Auckland,  CIV  2007-404-5496,  7  August  2008, Associate Judge Robinson).

[2]      Mr Nielsen opposes the application, on both jurisdictional and discretionary grounds.

Background

[3]      On 16 December 2005, Bridgecorp made a loan offer to Mondrian Property Holdings Ltd.   The money was advanced to enable a development of land in Queenstown to be completed.  The total amount of the loan, shown in the offer, was

$7,541,412.  That sum was borrowed for a period of six months from 30 November

2005, at a standard interest rate of 13% per annum and a default rate of 30% per annum.

[4]      As part of the financial arrangements, Mr Nielsen, Mr Burton and another company, Queenstown Villas NZ Ltd, provided guarantees.   The covenant of Queenstown Villas was supported by a registered second mortgage over a property at

58-76 Lake Esplanade, in Queenstown.  The second mortgage was subject to a prior charge in favour of Strategic Nominees Ltd.  The Strategic Nominees’ mortgage had a maximum priority of $12,000,000, plus 24 months interest and costs.

[5]      Clause  4.7  of  the  loan  offer  disclosed  mortgage  insurance  to  protect

Bridgecorp, in the event that the principal sum was not repaid:

Lenders Mortgage Insurance

Lender  Mortgage  Insurance  protects  Bridgecorp  Finance  Limited  if  the principal loan amount is not repaid in the ordinary course of business or not

repaid  from  the  sale  of  the  assets  securing  this  advance.    It  enables Bridgecorp Finance Limited to make available to the Borrower lending facilities at competitive interest rates.  This insurance does not [indemnify] the Borrower against its obligations under this facility.

The  premium  for  the  Lenders  Mortgage  Insurance  is  payable  by  the Borrower.  The premium rate of 1.56% per annum is payable at the date of drawdown, for the term of the loan and is deducted from the loan proceeds at drawdown.  The premium to cover the term of the loan is $52,062.00 and this amount will be deducted at drawdown. (my emphasis)

[6]      Almost a year later, on 6 November 2006, the residual land value for the

Lake Esplanade property was assessed by a registered valuer at $17,000,000.  If the

45 apartments making up Stage 2 of the development were completed, the assessed valuation was $68,170,000.  Both figures are exclusive of GST.

[7]      Originally, Mr Nielsen had intended to refinance to allow the development to proceed and to repay Bridgecorp’s loan.  That did not happen.

[8]      On 16 October 2007, Mr Nielsen, through his solicitor and duly authorised Attorney, signed an admission of claim, acknowledging that he owed Bridgecorp the sum of $11,482,605.31, as at that date.  The admission of claim also recorded that interest continued to accrue, on that sum, at the rate of 30% per annum to the date of judgment.  Including accrued interest, the amount for which judgment was sealed, on

27 May 2008, was $13,691,041.15.  Mr Nielsen has made no real efforts to settle the judgment debt.

[9]      Bridgecorp initiated bankruptcy proceedings to recover its debt.  By the time the bankruptcy notice was issued, Mr Nielsen was living in Las Vegas.  Substituted service of the bankruptcy proceeding was ordered.  Ultimately, the proceeding was brought to Mr Nielsen’s attention.

[10]     No application was made to set aside the bankruptcy notice.  Following non- compliance with the bankruptcy notice within the prescribed time, Bridgecorp filed an application to have Mr Nielsen adjudicated bankrupt.  The amount claimed was

$14,492,811.02, together with additional interest on the judgment debt.   Although the application specifically pleaded that Mr Nielsen had been residing in Nevada for the greater part of the previous six months, no point has been taken as to domicile.

[11]     Bridgecorp’s  application stated expressly that it  had  “no  security for  the debt”.  A statement indicating whether or not security for the debt exists is required by Form B3 of Schedule 1 of the High Court Rules, the prescribed form for such an application.  A verifying affidavit was sworn and filed confirming that assertion, in terms of r 24.11(3) of the High Court Rules.   On the filing of the application and verifying affidavit, the Registrar issued a Summons to Debtor on 5 May 2009.  The first call of the bankruptcy application was 18 June 2009.

[12]     On 15 June 2009, Mr Nielsen filed and served a notice of intention to oppose the application and an affidavit in opposition.  He indicated that he needed more time to  investigate  his  position,  to  respond  comprehensively  to  the  application.    Mr Nielsen also contended that it was just and equitable that the Court not make an order of adjudication.

[13]     The application for an adjudication order was adjourned for hearing on 16

September 2009.   Following timetabling directions made by an Associate Judge, additional  affidavits  have  been  filed  in  support  of  and  in  opposition  to  the application.  No deponent was called for cross-examination.

[14]     Initially, in his substantive affidavit, Mr Nielsen:

a)        disputed the amount claimed by Bridgecorp, on the basis that it may be subject to a possible insurance claim,

b)        contended that the interest rate charged might be deemed oppressive, c)       said that the debt claimed was not quantified correctly,

d)       suggested that Bridgecorp may hold security for the debt and

e)        asserted that an order for adjudication would serve no purpose and be punitive.

[15]     At the hearing, Mr Andrew Swan, for Mr Nielsen, raised three grounds of opposition, abandoning others to which I have referred.  They were:

a)       Contrary  to  s 14  of  the  Insolvency  Act  2006  (the  2006  Act), Bridgecorp had failed to disclose the existence of a security in its application to have Mr Nielsen adjudicated bankrupt.

b)Because there was no valuation of the security over the Queenstown property, as at the date of hearing, Bridgecorp had failed to establish that an amount of $1000 or more was owing to it.

c)       The Court ought to exercise its discretion not to adjudge Mr Nielsen bankrupt under s 37(d) of the 2006 Act.

The law

[16]     An application to adjudicate a person bankrupt is made under s 36 of the Act. The criteria that must be satisfied are set out in s 13:

13   When creditor may apply for debtor's adjudication

A creditor may apply for a debtor to be adjudicated bankrupt if—

(a)  the debtor owes the creditor $1,000 or more or, if 2 or more creditors join in the application, the debtor owes a total of $1,000 or more to those creditors between them; and

(b)  the debtor has committed an act of bankruptcy within the period of 3 months before the filing of the application; and

(c) the debt is a certain amount; and

(d)  the debt is payable either immediately or at a date in the future that is certain.

[17]     The  Court  may  exercise  a  discretion  to  refuse  to  make  an  order  of adjudication, under s 37.   There are four bases on which that discretion might be exercised:

a)       The prerequisites set out in s 13 have not been proved; or

b)       The debtor is able to pay his or her debts as they fall due; or

c)        It  is  just  and  equitable  that  the  Court  not  make  an  order  of adjudication; or

d)       For any other reason an order of adjudication should not be made. The first and last of those grounds are those on which Mr Nielsen relies.

[18]     The principles on which the Court will act in deciding whether or not to make an order of adjudication were discussed in Baker v Westpac Banking Corporation (CA212/92, 13 July 1993).   At 4-5 Richardson J, delivering the judgment of the Court of Appeal said:

The principles governing the exercise of the discretion under s26 to grant or refuse an order of adjudication in bankruptcy are well settled and have been discussed by this court in recent years in Ellis v NZI Finance Limited (CA253/89 judgment 24 July 1989) and McHardy v Wilkins & Davies Marinas Limited (in receivership) (CA54/93 judgment 7 April 1993).  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 s23 [now s 13] 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 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. …

[19]     The 2006 Act establishes a collective insolvency regime, designed to put the financial affairs of an insolvent debtor into the hands of an independent statutory officer (the Official Assignee) to realise his or her assets for distribution to all of the debtor’s creditors, in accordance with statutory priorities.

[20]     The Act is designed to deal only with insolvent debtors.   A person who is able to pay a debt, but is unwilling to do so, would not ordinarily be subjected to the bankruptcy regime.  For that reason s 37(b) permits the Court to refuse an order of adjudication if the debtor is able to pay his or her debts: see also Stirling v Webb Ross & Co [1990] 1 NZLR 569 (HC) at 575.

[21]     It is that scheme and the various private and public interests identified by the

Court of Appeal, in Baker, that inform the exercise of the s 37 discretion.

Is there jurisdiction to make an order of adjudication?

(a)   Should Bridgecorp have disclosed the security?

[22]     Mr Andrew Swan submits that there is no jurisdiction to make an order because the bankruptcy proceeding was flawed from the time Bridgecorp denied the existence of any security, in its application.   In response, Mr Richard Swan, for Bridgecorp, submits that there was  no  obligation  on  Bridgecorp  to  disclose the security over a different entity’s land or, alternatively, that any defect is cured by s 418 of the 2006 Act.

[23]     In support of his argument, Mr Andrew Swan relies on Master Gambrill’s judgment in Re Schwebel, ex parte Awon Holdings Ltd (1993) 7 PRNZ 305 (HC) and Re Keiha, ex parte Williams & Kettle Ltd (High Court, Gisborne, B10/88, 15 March

1989, Robertson J).

[24]     In Schwebel, Master Gambrill held that a failure to disclose the existence of security rendered the bankruptcy proceeding a nullity because there was no jurisdiction for the Registrar to issue a summons to the debtor, in terms of (what is now) r 24.1(1) of the High Court Rules.   Other  authorities  have  supported  that approach; for example, in a different context, Master Kennedy-Grant’s judgment in Re Moss (A Bankrupt) [1994] 3 NZLR 98 (HC).

[25]     The starting point is s 14 of the Insolvency Act 2006:

14  Application by secured creditor

The Court must not make an order of adjudication on the application of a secured creditor unless the creditor has established that the amount of the debt exceeds the value of the charge by at least $1,000.

Section 14 is in the same terms as s 25 of the Insolvency Act 1967, to which Master

Gambrill referred in Schwebel.

[26]     Mr Richard Swan’s first point arises from the definition of the term “secured creditor” in s 3 of the 2006 Act:

3  Interpretation

In this Part and Parts 2 to 7, unless the context otherwise requires,—

secured creditor means a person entitled to a charge on or over property owned by a debtor

He submitted that the focus was on a charge over property owned by the debtor, not property owned by a co-covenantor.

[27]     In contrast, the term “secured creditor” was defined more extensively in its predecessor, the Insolvency Act 1967.  Section 2 of that Act defined the term:

2  Interpretation

In this Act, unless the context otherwise requires,—

Secured  creditor  means  a  person  holding  a  mortgage,  charge,  lien,  or security on the property of the debtor, or any part thereof, as a security for the debt due to him from the debtor, whether given directly or indirectly through another person as security for a debt due to the creditor:   (my emphasis)

[28]     The s 3 definition of the term “secured creditor” refers to a person entitled “to a charge” over the debtor’s property.  The term “charge” is, itself, defined in s 3 of the 2006 Act as:

3  Interpretation

In this Part and Parts 2 to 7, unless the context otherwise requires,—

charge includes a right or interest in relation to property owned by a debtor, by virtue of which a creditor of the debtor is entitled to claim payment in priority to other creditors; but does not include a charge under a charging order issued by a court in favour of a judgment creditor.

[29]     The definition of “charge” is new and seems to have been inserted into the

2006 Act in order to synthesise definitions for the purposes of the Insolvency Act, the Companies Act 1993 and the Personal Property Securities Act 1999.  The term, like the definition of “secured creditor” is restricted to an interest in respect of property “owned by a debtor”.

[30]     It is clear that the land over which Bridgecorp took a mortgage was owned by

Queenstown Villas.  Mr Nielsen had no proprietary interest in that property.

[31]     There do not appear to be any cases decided under the 1967 Act on the circumstances  in  which  a  security  might  be  given  “indirectly”  through  another person as security for a debt due to the creditor.   But, when used in contrast to a security on or over property owned by a debtor, the words appear clear.  A deliberate decision  appears  to  have  been  made  to  exclude  securities  granted  by  principal debtors, co-covenantors or guarantors, in respect of property that the debtor does not own.   While the term “debtor” is not defined in the Act,  in  the context  of  an application for an order of adjudication, it plainly means the person against whom the application is brought: see, for example, ss 10, 11, 13, 16, 36 and 37 of the 2006

Act.

[32]     In those circumstances, I agree with Mr Richard Swan that there was no need for Bridgecorp to disclose the existence of a security that was not on or over Mr Nielsen’s own property.

(b)   Is the proceeding a nullity?

[33]     In case I am wrong on that point, I consider whether Mr Andrew Swan’s submission that the bankruptcy proceeding is a nullity through want of disclosure stands scrutiny.

[34]     Master  Gambrill’s  judgment  in  Re  Schwebel  was  based  on  authorities beginning with Williams J’s judgment in Re Nicol (1902) 22 NZLR 129 (SC), in which the Judge said that “defects of substance” could not be cured. The absence of an allegation and verification of absence of security was held to be such a defect of substance.

[35]     Despite Williams J’s finding that the equivalent of s 11 of the Insolvency Act

1967 (s 166 of the Bankruptcy Act 1892) only permitted “formal” defects to be remedied, in contrast with “defects of substance” (at 131), Master Gambrill declined to cure the defect on the basis of s 11 of the Insolvency Act 1967.   That section

created a much wider power to remedy defects than existed at the time Nicol was decided.

[36]     Section 11 of the 1967 Act and its comparator provision in the 2006 Act, s 418, are set out below:

11  Proceedings not annulled by defects

Proceedings under this Act shall not be annulled or set aside by reason of any defect, misnomer, or inaccurate description, or of the omission, of anything required to be done in or concerning any such proceedings in any case where no person is injuriously affected thereby; and any Court having jurisdiction may, in any case where any such error or omission is made, direct  the  same  to  be  rectified,  and  may  order  the  proceedings  to  be continued upon such terms as it thinks best in the interests of all concerned.

418  Defects in proceedings

(1)  A proceeding under this Act must not be invalidated or set aside for a defect (which includes misdescription, misnomer, or omission) in a step that must be taken as part of, or in connection with, the proceeding, unless a person is prejudiced by the defect.

(2)   The Court may order the defect to be corrected, and may order the proceeding to continue, on the conditions that the Court thinks appropriate in the interests of everyone who has an interest in the proceeding.

[37]     The Court of Appeal considered the breadth of s 11 of the 1967 Act in Best v Watson [1979] 2 NZLR 492 (CA). Richardson J, delivering the judgment of the Court, said, at 494:

In our view the section has to be given its full meaning and is not to be read subject to any limitations not required by the statutory language. There must, of  course,  be  proceedings  before  the  Court  before  rectification  may  be directed under s 11. So if the document is so defective that it is a nullity there is nothing before the Court capable of rectification. The distinction between nullity and irregularity is well recognised in other areas of the law (see, for instance, New Zealand Institute of Agricultural Science Inc v Ellesmere County [1976] 1 NZLR 630, particularly at p 636; and Police v Thomas [1977] 1 NZLR 109). In that latter case Cooke J, referring to s 204 of the Summary Proceedings Act 1957 which is in essentially the same terms as s 11 of the Insolvency Act, said at p 121: “No doubt s 204 is unavailable if a defect is so serious as to result in what should be stigmatised as a nullity.” He went on to observe that “nullity or otherwise is apt to be a question of degree”.

We think that the same considerations apply under s 11. That provision may be invoked in any case where the proceedings are defective and however the defect may be characterised. It will always be a question of degree whether or  not  it  can  be  said  that,  notwithstanding  failure  to  comply  with  an

apparently mandatory requirement of the Act or of the Rules, there is before the Court what can fairly be described as proceedings under the Act; and that question should not be approached in a mechanical or technical way. (my emphasis)

[38]     Nicol was considered by Ellis J, in Re Randhawa (High Court, Hamilton, M295/85, 18 June 1986).   In that case, no affidavit verifying a petition had been filed.  Nevertheless, the debtor had been adjudged bankrupt.  The Official Assignee and the petitioning creditor sought confirmation that the order of adjudication was valid.   Ellis J was asked not to follow Nicol and to hold that the bankruptcy proceeding was not a nullity.

[39]     Ellis J acceded to that submission.   After citing the passage from Best v

Watson to which I have referred, he continued, at 7:

In my opinion, the failure to file a verifying affidavit does not render the proceedings thereafter a nullity.  In my view such a failure could well be a sufficient ground to refuse to make an order of adjudication at the hearing and similarly it could be the basis of an application for an annulment of the adjudication under s 119 of the Insolvency Act.  In my view the debtor is adequately protected by his ability to oppose the making of an order of adjudication  or  in  a  case  such  as  this,  by  his  ability  to  seek  an  order annulling the adjudication.  In my opinion if the failure to file the verifying affidavit was raised against the petitioner, the Court would then be obliged to consider the matter under s 11 and approach the matter in accordance with the judgment of the Court of Appeal in Best v Watson ….  Since there has plainly  been  an  omission  of  something  required  to  be  done  in  the proceedings, the Court would then have to consider whether anyone was injuriously affected by the omission, and then decide what action to take and proceed “as it thinks best in the interests of all concerned”.   If, as in the present case, the debtors did not raise any objection, it may well be appropriate for the Court not to require the filing of the affidavit as the debtors themselves confirmed the truth of the allegations in the petition.

[40]     Randhawa was not drawn to the attention of Master Gambrill when she decided Schwebel.   In those circumstances, the Master’s judgment was given per incuriam.

[41]     In Re Moss, Master Kennedy-Grant expressly declined to follow Randhawa. The Master took the view that the “question of whether or not something is a nullity cannot be decided in reliance on the fact that it can be remedied if it is not a nullity”: at 104.

[42]     With  respect,  I  do  not  agree  with  the  analysis  undertaken  by  Master Kennedy-Grant in Moss.  I prefer the approach adopted in Randhawa.  There are two substantive reasons that lead me to that view:

a)      The nature and function of the bankruptcy process has changed considerably in emphasis since Nicol was decided in 1902.   At that time, bankruptcy was regarded as quasi-penal in nature.  In Heath & Whale on Insolvency, at para 2.2, the author (Mr J C D Guest) points out that the older statutes concentrated on a strict administration of the bankrupt’s affairs in a somewhat punitive manner, in the expectation that such treatment might deter potential insolvents from irresponsible behaviour.   The process is now more rehabilitative in nature.   It is designed to ensure creditors receive as much as possible out of the bankrupt’s property.   The rehabilitative nature of the process is exemplified by the ability to put forward a proposal to creditors (Part

5, Subpart 2 of the 2006 Act) and the no asset procedure (Part 5

Subpart  4  of  the  2006  Act).    After  discharge  from  bankruptcy,  a debtor is able to continue his or her life, free of debt.   Such considerations  tell  against  the type  of  strict  approach  to  technical requirements adopted in Nicol, Schwebel and Moss.

b)From a policy point of view, there is little to be gained from regarding a defect in the statement of security as sufficient to make a proceeding a nullity.  No prejudice has been caused to the debtor.  The proceeding has worked its way through the system to the point at which a judicial discretion on adjudication is to be made.   I agree with Ellis J, in Randhawa, that remedies are available to a debtor at that stage of the process; for example, if a creditor deliberately misled the Court to obtain an order of adjudication.  But, in the case of genuine mistake (as here) there is no warrant to characterise the whole proceeding as a nullity, particularly given the breadth of s 11 of the 1967 Act and s 418 of the 2006 Act.

[43]     Approaching this particular case by reference to s 418 of the 2006 Act, the omission of the existence of a security occurred “in a step” that was required to be taken as part of the bankruptcy proceeding.  Section 418(1) makes it clear that such a defect is not invalidated.  There is no prejudice to the debtor.  Best v Watson applies. Section 418(1) applies to cure any defect that might have existed, if it had been necessary to disclose the security over the Queenstown property.

Valuation of the security

[44]     In Keiha, Robertson J held that the absence of evidence about the value of a security held by a petitioning creditor, as at the date of hearing, was fatal to the claim.   He reached that view on the basis that, without such evidence, the Court could not be satisfied that the creditor had established that it had an unsecured debt exceeding the value of the charge by the prescribed amount, $200.00 in the 1967

Act.

[45]     This point is evidential in nature, not jurisdictional.   Assuming that I am wrong in my definition of the term “secured creditor” and Bridgecorp was obliged to disclose the security, the question is whether, on the evidence before the Court, I can be satisfied that an amount in excess of $1000 (s 14 of the 2006 Act) will be owing to Bridgecorp if the security were realised.

[46]     In its current state, the Queenstown property over which security is held was valued at $7,000,000 (6 November 2006) or $11,000,000 (16 September 2008).  The September 2008 valuation suggests that a first mortgagee could advance money on the basis of a value of $5,500,000, 50% of the asset’s market value.

[47]     Bridgecorp is a second mortgagee, standing behind Strategic Nominees Ltd’s first mortgage debt of  about $12,000,000.   The combined total of the Strategic Nominees’ debt and the amount admitted by Mr Nielsen, on the Bridgecorp claim, means that the property would need to sell for well in excess of $24,000,000 for Bridgecorp to be satisfied in full.  A safe inference can be drawn that Bridgecorp will be owed a debt in excess of $1000 after the mortgage is enforced and the property sold.

[48]     The second limb of this argument involves the existence of the mortgage repayment insurance.  Mr Neilsen complains that details of the policy and the claims have not been disclosed by Bridgecorp.   He submits that that is relevant to the amount which might be owing as, even if the principal “loan” to which cl 4.7 of the loan offer refers is repaid out of insurance moneys, I could not be confident that Bridgecorp would retain a qualifying unsecured debt for the purpose of the present application.

[49]     The evidence from Bridgecorp as to the status of the insurance policy and any claim is unsatisfactory.   It has elected to give sparse information about both the terms of the policy and the processes undertaken to obtain payment from that source. Rather,  it  has  relied  on  evidence  that  the  insurer  would  be  subrogated  to Bridgecorp’s rights, meaning that there could be no advantage to Mr Nielsen, even if money was paid from that source.

[50]     Evidence on this topic  has  been  given  by Ms  Gear,  the  Head  of  Credit

Recoveries for Bridgecorp.  She deposes:

44.Details of the lenders mortgage insurance are given in Bridgecorp’s standard letter of offer and I note in particular Clause 4.7:

Lenders’ mortgage insurance protects  Bridgecorp  Finance Limited if the principal loan is not repaid in the ordinary course  of  business  or  not  repaid  from the  sale  of  assets securing  the  advance.     It  enables  Bridgecorp  Finance Limited to make available to the borrower lending facilities at competitive interest rates.   This insurance does not indemnify the borrower against  its  obligations  under  this facility.

45.Bridgecorp has lodged a claim with the insurer and this claim is still being worked through by the parties.   In the event that a claim is paid out by the insurer, the insurer is able to enforce Bridgecorp’s rights against any borrowers, guarantors and security.  Accordingly any pay out by the insurer would not advantage Mr Nielsen.

46.Notwithstanding the insurance policy is for the benefit of Bridgecorp and not the borrower, the policy contains a limit of $3,500,000.00 as the maximum amount of any claim.  Under the circumstances even a successful claim/insurance pay out will not result in the loan being anywhere near repaid nor will it extinguish Mr Nielsen’s liability under the loan.

[51]     A creditor, at a disputed bankruptcy hearing, ought to adduce evidence of other means by which payment could be obtained.  For example, if it were clear that a creditor could be paid in full by demanding money from Debtor A, but chose not to do so and, out of spite, pursued Debtor B, whom it knew had no money, a basis might exist for the Court to exercise its discretion not to adjudge Debtor B bankrupt, on the “just and equitable” ground: for example, see Baker v Westpac Banking Corporation, at 4-5; set out at para [18] above.  By failing to make full disclosure a creditor puts itself at risk of an adverse inference of fact which might prejudice its claim.

[52]     In this case, notwithstanding the unsatisfactory nature of the evidence on this topic, I am prepared to infer that a debt in excess of $1000 will still remain even if the policy with Lloyds of London were engaged.   It is implausible to suggest that rights of subrogation would not exist.  Indeed, such a right can readily be inferred from the highlighted portion of cl 4.7 of the loan offer, set out at para [5] above.  If that were so the insurer would be able to use Bridgecorp’s name to sue Mr Nielsen in any event.  Mr Nielsen’s final position would not be improved.

[53]     Further, I am satisfied, from the valuation evidence to which I have referred, that the interest component of the Bridgecorp debt is, in any event, unlikely to be paid in full out of the sale of the property.

Discretionary grounds

[54]     Mr Andrew Swan relies on the existence of the insurance policy and the failure of  Bridgecorp  to  mitigate its  losses  through  dealing with  the  mortgaged property.

[55]     There is nothing of substance in those discretionary considerations.  I am not prepared to exercise a discretion to refuse an order of adjudication.

[56]     In his first affidavit, Mr Nielsen complained that his admitted insolvency was caused by events beyond his control.   In effect, he said that he ought not to be penalised, by way of bankruptcy, for his indebtedness to Bridgecorp.

[57]     Mr Nielsen was a property developer.  His indebtedness to Bridgecorp arose out of a guarantee of the obligations of a company of which he was a shareholder and director.   Under his direction, that company borrowed significant sums from Bridgecorp to undertake a property development in Queenstown.

[58]     I have no evidence about the purchase price of the land at Lake Esplanade. Nor  do  I  have  any  evidence  about  any  cash-flow  forecasts  which  might  have provided some basis for directors of Mondrian to believe that principal and interest payable to mortgagees could be paid, as they fell due.

[59]     Bridgecorp first demanded its money in early 2007.   A notice under the Property  Law  Act  was  issued  in  April  that  year.    The  debt  was  not  repaid. Refinancing could not be arranged.  The property was not sold by its owner; I infer because it was unable to do so.

[60]     Bridgecorp has suffered losses because neither the principal debtor nor the guarantors have been able to pay the debt.  Mr Nielsen was a director of Mondrial and a guarantor.  He ought to have taken steps to ensure that the company did not over commit itself financially.  Plainly it did.

[61]     Mr Nielsen operated a speculative business in good financial times and, I infer, did not make adequate provision to deal with any adverse financial conditions that might arise.  Property developers cannot do business on the basis that the market will always be buoyant.   Mr Nielsen must take responsibility for being (at best) imprudent or (at worst) commercially irresponsible.

[62]     There  is  adequate  evidence  of  steps  taken  by  Bridgecorp  to  realise  the security.   It is entirely understandable that it would not want to undertake a “fire sale”.  It is biding its time to see whether better recovery might be made.  It is for the creditor to choose the course of action which suits it best.   Mr Nielsen’s earlier obligation, as a debtor, was to seek out his creditor and pay.  He cannot complain if, having not done that, Bridgecorp has made commercial decisions which he regards as contrary to his own interests.

[63]     The way in which Mr Nielsen conducted his business interests suggests that there is good reason, on grounds of commercial morality, for the Official Assignee to inquire into his behaviour.   Restrictions on his business activities, triggered by bankruptcy, are desirable.  The amount of debt incurred by Mr Nielsen means that there is a public interest in investigating his financial affairs to determine whether post-bankruptcy restrictions are appropriate.

[64]     Bridgecorp is not Mr Nielsen’s only creditor.  His brother has a judgment for in excess of $1,800,000 and has his own application to have Mr Nielsen adjudged bankrupt  pending,  for  hearing  in  October  2009.     The  nature  of  a  collective insolvency regime is such that the existence of other creditors is something that militates against refusal of an order of adjudication.

Result

[65]     For the reasons given, I hold that there is jurisdiction to make an order of adjudication and that there are no discretionary considerations which tell against such an order being made.

[66]     I make an order adjudicating Mr Neilsen bankrupt.   The order is timed at

10am today, 23 September 2009.

[67]     Bridgecorp is entitled to costs on the present application.  Costs are awarded on a 2B basis, together with reasonable disbursements.  Costs are also awarded to the supporting creditor on a 2B basis, together with reasonable disbursements.  All costs and disbursements shall be fixed by the Registrar.

[68]     I  direct  that  the  Registrar  send  a  copy  of  this  judgment  to  the  Official

Assignee at Auckland at the same time as it is delivered to the parties.

P R Heath J

Delivered at 10.00am on 23 September 2009