Brooks v Clyne & Bennie (1988) Limited

[2013] NZHC 3501

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2013-409-001444 [2013] NZHC 3501

IN THE MATTER             of the Insolvency Act 2006

AND

IN THE MATTER             of the bankruptcy of JOSEPH BROOKS BETWEEN  JOSEPH BROOKS

Applicant

ANDCLYNE & BENNIE (1988) LIMITED Respondent

Hearing:                   2 December 2013

Appearances:           S R G Judd for Applicant

G E Slevin for Official Assignee
No appearance for Respondent

Judgment:                19 December 2013

JUDGMENT OF ASSOCIATE JUDGE MATTHEWS

[1]      The applicant, Mr Brooks, was adjudicated bankrupt on 28 June 2010.  On

17 December 2012 the bankruptcy was annulled under s 309(1)(b) of the Insolvency Act 2006.  Mr Brooks now applies to have his adjudication in bankruptcy annulled under s 309(1)(a).

[2]      The relevant parts of s 309 are these:

309    Court may annul adjudication

(1)     The Court may, on the application of the Assignee or any person interested, annul the adjudication if –

(a)     the  Court considers that the  bankrupt  should  not  have  been adjudicated bankrupt; or

BROOKS v CLYNE & BENNIE (1988) LIMITED [2013] NZHC 3501 [19 December 2013]

(b)     the Court is satisfied that the bankrupt’s debts have been fully paid or satisfied and that the Assignee’s fees and costs incurred in the bankruptcy have been paid; or

(c)     ... (d)          ...

(2)     ...

(3)     The adjudication is annulled –

(a)     from the date of adjudication, in the case of an application on the ground specified in subsection (1)(a):

(b)     from the date of the Court’s order of annulment, in the case of an application on one of the grounds specified in subsection (1)(b) to (d).

[3]      The adjudication was based on a bankruptcy notice served on Mr Brooks under s 17 of the Insolvency Act, with which he did not comply.  The notice required Mr Brooks to pay the sum owing under a judgment entered against him by default in the District Court, on 29 January 2010.  As a result of not complying with the notice Mr Brooks committed an act of bankruptcy entitling the respondent to apply for his adjudication, and the Court to adjudicate him bankrupt accordingly.

[4]      After the adjudication was annulled under s 309(1)(b) Mr Brooks applied to the District Court to set aside the judgment.  The judgment had been entered on the basis that Mr Brooks had given a personal guarantee to the respondent of the obligations of a company called B52 Limited.   However, he had not signed the guarantee, so did not have personal liability for the debt, and the judgment was set aside by consent three weeks after the application was filed in the District Court. This application was filed a few days later.

[5]      The issue in this case is whether the Court can annul a bankruptcy under s 309(1)(a)  when  it  has  already  annulled  the  bankruptcy  under  s  309(1)(b).    It appears that this issue has not previously been decided.

[6]      The significance to Mr Brooks of an order under s 309(1)(a) is apparent from s 309(3).  An order under s 309(1)(a) is effective from the date of adjudication, but the order made under s 309(1)(b) took effect when the order was made.   In Mr Brooks’ case, this means that he was bankrupt from June 2010 to December 2012,

and he says he should not have been; the adjudication process followed from a judgment which should not have been entered in the first place, and he says he is entitled to an order which annuls the adjudication from the time it was made.

[7]      The Official Assignee opposes this application.  His first submission is that there is no bankruptcy, now, which can be annulled, as the bankruptcy was annulled under s 309(1)(b) on 17 December 2012.  He says that in this application Mr Brooks asks the Court to interfere with a previous and properly made decision.   He refers to BNZ v Ngataki.1    In that case, the bank had obtained judgment against Mr Ngataki and in due course he was adjudicated bankrupt.   Sometime later he applied for annulment, and the bank supported this application because Mr Ngataki had entered

into an arrangement with the bank for payment.   Later Mr Ngataki defaulted in making agreed payments and the bank sought to set aside the annulment.  The Judge said:

[4]   There is no doubt there has been breach but I do not believe the Court has the power or the jurisdiction now to set aside the annulment made three years ago.  There must be finality and the order of adjudication is always regarded as a final order, an order of annulment is regarded as a final order, and there is not the jurisdiction to revisit these matters.

[5]    The plaintiff has quite properly obtained summary judgment for the sum, it is entitled to petition on the judgment for the defendant’s bankruptcy and the whole sequence leading to adjudication appears likely to be repeated.

[6]    It is quite alien to the principles of the Insolvency Act 1967 for the Court to interfere with the orders once made particularly in view of the time lapse and I indicated to counsel, and so hold, there is no jurisdiction to revisit the order made annulling the bankruptcy.

[8]      I do not find this case helpful.  There is no reference to, let alone analysis of, the issue arising in this case.  Here, there is no suggestion that the annulment granted by the Court should be revisited or set aside.  A new order for annulment is sought, to take effect from the date of adjudication.

[9]      Secondly, Mr Slevin says that the effect of adjudication is to change the legal status of a person, by divesting him of his property.  He says the effect of annulment

1      Bank of New Zealand v Ngataki HC Auckland CP394-IM99, 10 February 2000, per Master Gambrill.

is to restore that person’s legal status and revest in him his property.2    He says an annulment by the Court under s 309(1)(a) cannot have that effect as it has already occurred.  There is no bankruptcy to annul and nothing which may be the subject of an order under s 309(1)(a).

[10]     Mr Brooks asked the Official Assignee to apply to the District Court to set aside the judgment from which the bankruptcy ensued, but the Official Assignee declined to do so.  Mr Slevin says that Mr Brooks could have applied to this court for a review of that decision but did not do so.   Instead he applied to annul the bankruptcy under s 309(1)(b) thereby effectively accepting that the bankruptcy was valid in the first place, contrary to his position now that an order should be made under s 309(1)(a).

[11]     Mr Judd says that during the bankruptcy Mr Brooks could not apply to the District Court himself to set aside the judgment.  He says that faced with a refusal by the Official Assignee to apply to do so, Mr Brooks took the only other course available to him, namely to arrange to pay his creditors, apply for annulment under s 309(1)(b), apply to the District Court to set aside the judgment, and then apply for annulment dating back to the original adjudication, a course not open to him when he applied under s 309(1)(b) because he had no way of applying to the District Court to set aside the judgment, whilst bankrupt.  To now say that he cannot apply under s

309(1)(a) would be to deny him an annulment of a bankruptcy which was based on a judgment which was set aside, and should not have been entered in the first place. There was no act of bankruptcy, and therefore no basis upon which an adjudication order could properly have been made.

[12]     I agree with Mr Judd that the course adopted by Mr Brooks was appropriate given the Official Assignee’s refusal to apply to the District Court. There is evidence from the Official Assignee’s staff that they formed the view that an application to the court would be unsuccessful.  That may well be so, but it is no answer to Mr Brooks’ position to say that he could have appealed from the Official Assignee’s decision but

did not do so.

2      Section 311(1).

[13]     Equally, whilst this Court does not know why the respondent did not oppose the application to set aside the judgment, it is a matter of record that as a result of the payments made in order to establish jurisdiction for an order under s 309(1)(b), the respondent was in fact paid in full.  It is a reasonable inference that the process under s 309(1)(b) assisted in clearing the way for the judgment to be set aside, and thus for an application under s 309(1)(a) to be made.

[14]     It is necessary to establish, first, whether all else being equal, this is a case in which an order would be made under s 309(1)(a).   Mr Judd relies on Holdgate v Blocassa Ltd.3  The Court said:

In exercising its discretion under [s 119(1)(a)], a Court must approach the matter on the basis of the facts as they were at the time of adjudication. Those facts may not necessarily have been before the Court which made the adjudication, but they must be the true facts at that time.

[15]     Based on this principle, Mr Judd says that had the Court known that the judgment of the District Court was based on an allegation that Mr Brooks had given a personal guarantee, but that he did not sign it so had no personal liability for the debt, and that the judgment was therefore a miscarriage of justice, it would not have adjudicated Mr Brooks bankrupt.  Rather, it would have adjourned the application to allow a reasonable period for an application to be made to the District Court to set the judgment aside, and reconsider the application when the outcome of that application was known.

[16]     Mr Judd then refers to Sircombe v Auto Wholesalers Cars,4 in which Master

Lang, as he then was, said:

[18]   I also accept that in determining this proceeding the Court should not allow Mr Sircombe to be placed in a better position than he would have been in if he had raised his present argument at the time the petition was originally heard.   The Court routinely encounters bankruptcy petitions in which the debtor has applied, or wishes to apply, for an order that a judgment obtained in the District Court be set aside.  In those circumstances the Court usually adjourns the bankruptcy proceeding until such time as the application has been heard and determined in the District Court.  In my view that is what the Court is likely to have done in the present case had Mr Sircombe raised his concerns on [the date of adjudication].

3      Holdgate v Blocassa Ltd [2007] NZCA 132 at [21].

4      Sircombe v Auto Wholesalers Cars HC Whangarei CIV-2003-488-129, 2 December 2003.

[17]     The learned Master accurately described the approach this Court takes, and had the Court been informed at the time the application for adjudication was before it that an application had been made, or was to be made, to the District Court to set aside the judgment, I have little doubt that adjudication would not have taken place while such an application was extant.  Indeed, this Court does not routinely enquire into  the  strength  of  any  such  application,  particularly if  given  an  assurance  by counsel that such an application is soundly based.   This Court does not entertain argument as a matter of course that is properly within the domain of the court which entered judgment.

[18]     Accordingly, applying Holdgate v Blocassa Ltd, I approach this application on the basis that at the time of the adjudication there were sound reasons for the judgment  of  the  District  Court  to  be  set  aside,  and  thus  for  the  bankruptcy proceedings which followed to be flawed.

[19]     Were this the first application to annul Mr Brooks’ bankruptcy, I would have

little difficulty in finding that annulment under s 309(1)(a) was appropriate.

[20]     This confines the issue now before the Court to whether the annulment under s 309(1)(b) prevents an annulment under s 309(1)(a) now being granted.

[21]     Mr  Judd  says  that  there  is  no  power  to  recall,  set  aside  or  rescind  a bankruptcy adjudication,5 so the only remedy available to a person who wishes, as he put it, to correct the record is to apply for annulment under s 309(1)(a). An order for annulment can be made notwithstanding an earlier discharge from bankruptcy.6

[22]     In Chean v Official Assignee Associate Judge Bell came close to having to determine this issue.  In that case, the Judge was satisfied that an annulment order should be made under paragraph (b) of the equivalent section of the Insolvency Act

1967, under which he was considering the application.  He noted, however, that the

5      Re Byron (a debtor) ex parte Commissioner of Inland Revenue [1964] NZLR 508; Heath & Whale Insolvency Law in New Zealand (looseleaf ed, LexisNexis) at [9.24].

6      Cameron v Official Assignee HC Hamilton B81/80, 21 March 1989, per Doogue J; Chean v Official Assignee HC Auckland CIV-2007-404-2297, 21 February 2011, Associate Judge Bell and Heath & Whale at [9.23].

debtor wanted him to make an order under paragraph (a), so as to annul the bankruptcy entirely, as though it had never happened.

[23]   The Judge noted that Mr Chean was adjudicated bankrupt on his own application, and said that paragraph (a) is directed at cases where “something has gone badly wrong with the process by which a person was adjudicated bankrupt”. The Judge said that where a person has signed his or her own petition in bankruptcy, it will usually be hard for that person to complain of defects in procedure, abuse of process or similar.

[24]     Secondly, the Judge noted that the debtor had allowed his bankruptcy to continue, and entered into a deed of settlement with his creditors, and then been discharged from bankruptcy.   The actions he had taken might be considered as a form of acquiescing in his bankruptcy.  In addition, significant time had passed since the adjudication with the result that it may be difficult to hold that the bankruptcy should be annulled retrospectively, even if, as alleged by the debtor, poor advice was given in relation to applying for adjudication in the first place.

[25]     The Court noted that these views were provisional, and allowed the debtor “the  opportunity  to  come  back  to  the  Court  to  develop  further  any  case  for annulment (under (paragraph (a)) but in doing that I do not want to encourage him that he can be assured of success”. A formal order was made to that effect.

[26]     In taking that course the Judge clearly left open the prospect that an order could  still  be  made  under  paragraph  (a),  after  an  order  for  annulment  under paragraph (b).  The judgment does not record whether the Judge heard any argument on whether there may be jurisdiction to proceed in that way.

[27]     Mr Slevin says that once the order made under paragraph (b) was sealed, that would have been the end of that proceeding, and the reservation of leave given by the Judge would have expired at that point.

[28]     Procedurally, that may be correct, but with respect misses the substance of the point.  The correct procedure for an application for annulment is by originating

application,7 so even if the first proceeding came to an end, it would have been open to the debtor, had he been minded to pursue an application under paragraph (a), to proceed by way of a second application.  For present purposes all that can be taken from this case is that the Judge did not form a view that an order under paragraph (a) could not follow an order under paragraph (b).

[29]     Mr  Judd  says  that  the  approach  taken  by  the  Judge  must  be  correct. Parliament cannot have intended to deprive a person of a right to seek an annulment from the date of adjudication only because annulment has already been granted from a later date.  Complying with the requirements of an order under s 309(1)(b) does not change the facts that can be relied on in  an  application for annulment under s

309(1)(a), which are facts predating adjudication.  The grounds for annulment in (a)

and (b) are different.

[30]     Mr Judd says that s 309 must be interpreted in light of its purpose.  The two paragraphs of subs (1) are concerned with different scenarios and have different purposes.    He says  that  given  that  bankruptcy involves  a change of status  and inevitably a stigma, Parliament must have intended that a person who can satisfy the requirements of paragraph (a) can still apply under that paragraph, even if no longer bankrupt, whether by virtue of discharge or annulment.  Mr Judd points out that s

309  does  not  specifically  provide  that  an  application  cannot  be  made  under paragraph (a) once an order has been made under paragraph (b).   He says that paragraph (a) is intended to correct a miscarriage of justice.  It cannot, in the absence of express words, have been the intention of Parliament that a person would lose the ability to  correct  an  error of justice  just  because they have paid  back  all  their indebtedness.

Discussion

[31] The different times at which annulment takes place under subs (3), depending on the ground of the annulment, do not reflect statutory provisions in other jurisdictions. In Australia s 153B of the Bankruptcy Act 1966 provides for the Court

to make an order annulling the bankruptcy if it is satisfied that a sequestration order

7      Kipping v UDC Finance Ltd [2012] NZHC 1707.

ought not to have been made.  Although s 154 sets out the effect of annulment, the Act is silent on the date at which the order takes effect.  In Oates v Commissioner of Taxation,8  the Court held that the effect of annulment is generally (but not without exception) to treat the bankruptcy as if it had not occurred, that is that the person is treated as not having been bankrupt.  It is implicit that the annulment is treated as taking effect at the date of adjudication.

[32]     In England s 282 of the Insolvency Act 1986 provides that a Court may annul a bankruptcy order if it appears to the Court that on any grounds existing at the time the order was made, the order ought not to have been made, or that the debts and expenses of the bankruptcy have all either been paid or secured to the satisfaction of the Court since the making of the order, to the extent required by the bankruptcy rules.  Broadly, these reflect the terms of s 309(1)(a) and (b) of the Insolvency Act

2006.   Again, however, the English statute does not specify any date from which annulment speaks.

[33]     In this country the differing times at which annulment takes effect were first enacted in the Insolvency Act 1967.  As noted by the learned authors of Spratt and McKenzie’s Law of Insolvency,9 an order for annulment under the then equivalent of the current s 309(1)(a) has retrospective effect.  This has laid to rest the debate on this issue which dated back to at least 1872.10

[34]     In my view, the significance of this is recognition by Parliament that where an order of adjudication ought not to have been made in the first place, the effect of bankruptcy should be removed from the date when that occurred.   This in turn recognises the effect that adjudication has, namely to change the status of a person and significantly curtail that person’s rights, as provided for in the Insolvency Act. Put another way, the retrospective effect of annulment where adjudication should not have occurred recognises the justice in this change of status being reversed for the

period between the adjudication and the order of annulment.

8      Oates v Commissioner of Taxation (1990) 27 FCR 289, 99 ALR 167.

9      Frederick Spratt and Peter McKenzie Spratt and McKenzie’s Law of Insolvency

(2nd ed, Butterworths, Wellington 1972) at [119/12].

10     In Oates there is a comprehensive review of decisions of courts in the United Kingdom and Australia on the date from which annulment takes effect.

[35]     If the Court were to decide that once a bankruptcy has been annulled on the ground in paragraph (b), it could no longer be annulled under paragraph (a), it would defeat the intention of Parliament that when the grounds required for an order under paragraph (a) are made out the bankruptcy should be annulled from the outset.

[36]     Whilst I accept Mr Slevin’s submission that s 311(1) will not apply as there is no property now vested in the Official Assignee, this does not lead me to a different interpretation of s 309.  There is at least one other circumstance where it will not have any effect, namely where after payment of debts and expenses there is no property still vested in the Official Assignee.  In my view s 311(1) sets out an effect which will apply or not apply as the circumstances dictate.

[37]     For these reasons I find that the annulment under s 309(1)(b) does not prevent a further annulment under s 309(1)(a).

Outcome

[38]     The adjudication of Mr Brooks in bankruptcy on 28 June 2010 is annulled under s 309(1)(a) of the Insolvency Act 2006.

[39]     Mr Brooks is entitled to costs which will be on a 2B basis together with disbursements fixed by the Registrar.

J G Matthews

Associate Judge

Solicitors:

Ladbrook Law Limited, Auckland

Insolvency and Trustee Service, Christchurch.