Brown v Bridgecorp Limited (in rec and liq) HC CHCH CIV 2009-409-000927
[2009] NZHC 2348
•9 November 2009
234
IN THE HIGH COURT OF NEW ZEALAND
CHRISTCHURCH REGISTRY
CIV 2009-409-000927
BETWEEN ROBERT DOUGLAS BROWN
Judgment Debtor
ANDBRIDGECORP LIMITED (IN RECEIVERSHIP AND LIQUIDATION) Judgment Creditor
Hearing: 20 October and 6 November 2009
Counsel: G M Brodie for Judgment Debtor
M Fogarty for Judgment Creditor
Judgment: 9 November 2009
JUDGMENT OF FOGARTY J
REASONS FOR ADJUDICATION ON 6 NOVEMBER 2009
Introduction
[1] Bridgecorp Limited (in Receivership in Liquidation) applies to this Court to make an order adjudicating Mr Robert Brown bankrupt. Bridgecorp obtained a judgment debt on 15 December 2008 for $919,823.01 together with interest payable from that judgment date. The interest payable under the provisions of the loan documents is at a rate of 30% per annum.
[2] Mr Brown asked this Court to refuse to adjudicate him bankrupt. He relies
on the power contained in s 37 of the Insolvency Act 2006 which provides:
37 Court may refuse adjudication
The Court may, at its discretion, refuse to adjudicate the debtor bankrupt if—
BROWN V BRIDGECORP LIMITED (IN RECEIVERSHIP AND LIQUIDATION) HC CHCH CIV 2009-409-
000927 9 November 2009
(a) the applicant creditor has not established the requirements set out in section 13; or
(b) the debtor is able to pay his or her debts; or
(c)it is just and equitable that the Court does not make an order of adjudication; or
(d) for any other reason an order of adjudication should not be made.
[3] In particular he relies on paragraphs (c) and (d). He has filed an affidavit which in summary makes these points:
1.Bridgecorp had advanced $3.5 million on second mortgage secured against a property in Napier which Mr Brown was developing as a 114 bed hotel. The scheme was that the completed hotel would be leased to Scenic Circle Hotels Limited, which would have management rights. Individual rooms in the hotel would be sold off on unit titles to individual investors. Construction cost of the project was estimated at around $12 million. It was totally financed from a first mortgage from Hanover Finance of $10 million and a second of $3.5 million from Bridgecorp.
2.This petition for bankruptcy is after he endeavoured to meet his obligations to Bridgecorp. Bridgecorp has received about $4,010,000 from the commercial properties which were mortgaged by Mr Brown
to provide additional security in support of his guarantee.
3.Mr and Mrs Brown live at a property in Glandovey Road called Greystones. This is mortgaged to Equitable Life Limited and Marac Finance. The title to the property is in the name of a company, Antrim and Wiltshire Investments Limited. The shares in this company are held by True Trust, the Wiltshire Trust and the Antrim Trust, the first being settled for the benefit of his wife, the second for himself. Neither of these family trusts hold any assets other than a 50% shareholding in Antrim and Wiltshire Investments Limited.
4.He has no assets left. Mr Brown had assets in a development company called Aurum Apartments in Queenstown but those apartments had been sold and the proceeds applied to mortgagees, particularly the Southland Building Society and the Canterbury Mortgage Trust. His other liabilities are a residual debt to American Express on his credit card and to VISA on a second credit card and for damages in relation to a property purchase he entered into in 2007. He defaulted on the purchase and the property was sold at a loss.
[4] Mr Brown has also proposed to Bridgecorp that he supply a declaration as to
his means and offer to pay 25% of his net earnings for a period of three years. This was not accepted. If he is adjudicated bankrupt he will not be able to earn his living
as a real estate agent. He has worked as a real estate agent for all his life obtaining a registered salesperson’s licence in 1965 and a real estate agent’s licence in 1979. He
is 69 years of age and if he cannot work as a real estate agent he and his wife will have to try to live on national superannuation.
Issues
[5] The discretion to refuse adjudication has been part of statute law for some time. The principles upon which the Court approaches the exercise of its discretion have been summarised succinctly by the Court of Appeal in Baker v Westpac Corporation (CA212/92, 13 July 1993) as applied in Richards v Auckland Finance Limited HC AK CIV 2008-404-002324, 9 July 2009, Associate Judge Abbott:
[19] The principles on which the Court approaches the exercise of its discretion on an application for adjudication are settled. They have been summarised succinctly in the following passage from the decision of the Court of Appeal in Baker v Westpac Banking Corporation (CA 212/92, 13 July 1993):
… 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 established the jurisdictional facts set out in s23 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 succeed in showing that an order ought not to be made. …
[6] The exercise of discretion is usefully discussed by Fisher J in Re Fidow
[1989] 2 NZLR 431 at 443-445. In particular I note this passage:
The next matter to be borne in mind here is that on a bankruptcy petition the Court must have regard to public interest in a way which transcends the interest of the immediate parties to the proceedings. … The public interest in exposing and controlling an insolvent debtor is one which exists quite independently of the separate question of debt collection by his immediate creditors.
[7] The issues arising from the arguments of counsel are:
1. Whether the adjudication can be justified by the need for there to be
an enquiry into the debtor’s assets by the Official Assignee.
2.Whether there is a public interest to adjudicate bankrupt guarantors in order to reinforce the importance of persons assuming responsibility for debt.
3.Whether it is in the public interest for Mr Brown being allowed to practise as a real estate agent while insolvent, when the Real Estate Agents Act 2008 s 37(2) provides:
37 Persons prohibited from being licensed
…
(2) A person is not eligible to hold an agent's licence if he or she
is an undischarged bankrupt or is subject to subpart 4 of Part 5 of the
Insolvency Act 2006.
Analysis
[8] Mr Fogarty’s argument for adjudication relied principally on matters relating
to issues 1 and 2. I raised issue 3 and adjourned argument part heard to 6 November, for submissions on this point.
The need for enquiry into the possibility of any other assets
[9] As Mr Brodie pointed out, many of the cases where this Court has considered and refused to exercise its residual discretion are set in a factual context where there
is either some doubt as to whether all assets have been disclosed or a question as to whether assets have been removed into trust relationships in order to defeat creditors.
[10] So, for example, in the case of Richards a finance company was seeking an order adjudicating a guarantor bankrupt. The genesis of the debt is very similar to here. The financer had provided second tier funding for a property development being promoted by Mr Richards. He sought to avoid adjudication of bankruptcy on the grounds that he had contributed more than his share to the joint debts of the co- guarantors; that he was not personally responsible for the failure of the building project; and thirdly, that he had exhausted all his available assets to clear his debt so that the hardship to him and his family was therefore unnecessary. When analysing the facts Associate Judge Abbott found reasons for enquiry before one could be sure that there were no other potential sources of recovery of money to reduce the debts. There is some doubt on what Mr Richards had been living on in the two years prior
to filing the application for adjudication. There was a question over the value of some shares, and there was a question as to whether or not Mr Richards had beneficial interest in any property held in his wife’s name.
[11] In the case of Liu v Dinh HC WN, CIV 2008-485-002190, 29 January 2009, Associate Judge Gendall, there was evidence that the debtor had either transferred the home in which she resided in Auckland to a trust or alternatively made funds available for its acquisition. Associate Judge Gendall, following Lang J in the case
of Re Pulman HC AK CIV 2006-404-004697, 20 April 2007, took the view that the
creditors were entitled to have the Official Assignee investigate the manner in which the family trust had acquired the home.
[12] In his submissions Mr Fogarty submitted that in this case there was a lack of detail and substance in the description of Mr Brown’s financial situation and that a thorough investigation of his assets would serve a useful purpose.
[13] Mr Brodie responded by saying that all questions that the receivers have chosen to ask have been answered. For example, the receivers enquired as to the basis upon which Mr and Mrs Brown lived in the Glandovey Road property. The receiver of Bridgecorp has not been able to offer any possible asset such as may be held by trustees or by the wife or by other persons. By contrast, Mr Brown has disclosed the liquidation of all the properties offered in support of the guarantee in the first place, the disposal of some Queenstown properties, and the indebtedness over his home.
[14] In the hearing which resumed on 6 November Mr Fogarty relied additionally
on a search of the Company Registry Office showing Mr Brown’s participation as shareholder and/or director in a number of other companies. Mr Brown has filed, however, an affidavit explaining the nature of those companies which either have no assets or are in liquidation.
[15] It seems to me inherently improbable, on the above facts, that Mr Brown has
a cunning plan to avoid bankruptcy by appealing to the exercise of this discretion and having tucked away some significant assets.
The importance of adjudicating guarantors bankrupt
[16] This was the principal argument against exercise of the discretion advanced
by Mr Fogarty.
[17] In the most recent judgment, of the large number cited before me, Associate Judge Abbott in Richards cited from Master Lang (as he then was) in Re Rossall ex parte Auckland Finance Limited HC AK CIV 2002-404-000580, 30 April 2004:
[17] Finally, issues of public interest, and in particular the promotion of commercial reality, will always be relevant. In many cases consideration of the factors referred to above will determine whether an order of adjudication ought to be made. However, one of the hallmarks of commercial morality is the expectation that a person who assumes an obligation will have the willingness and ability to meet it. A debtor who fails to do so is always at risk of being adjudicated bankrupt. An order of adjudication serves the immediate practical purpose of removing the debtor from the commercial community for three years. It also serves the wider public interest of ensuring that all persons who assume obligations do so in the knowledge that they may be declared bankrupt if they fail to repay the debt.
[18] That is a rather powerful statement. I note that it goes further than Fisher J
did in Re Fidow where he said at page 445:
However I accept that in the light of the foregoing authorities it is in the public interest that an individual who has spectacularly failed in financial matters should be marked out in a way which will warn others who then contemplate dealings with him that there is that history of failure. There are also other disqualifications which attend a bankruptcy designed to protect the financial community at least for a period so far as that failed individual is concerned. Tompkins J has referred also to the stigma of bankruptcy as a deterrent to others. In this day and age I would not like to think that the punitive element of bankruptcy is still a significant matter but it does seem that on the authorities I am not to entirely disregard it.
[19] The present recession has rendered insolvent many finance companies and developers, many of which have, nonetheless, avoided liquidation or bankruptcy. These insolvencies can be seen to be of a different character from those which occur while the economy is buoyant. Therefore, in this case, I favour Fisher J’s summary.
I think it is reinforced by Part 5 of the Insolvency Act 2006 whereby Parliament enables debtors to reach accommodation with their creditors. Thereby Parliament enables persons staying in business who would be insolvent and adjudicated bankrupt but for their creditors accepting pennies on the dollar.
[20] I take into account that at the time the project was financed Bridgecorp took, along with the guarantee of Mr Brown, a package of securities backing the guarantee
to the extent of about $4 million. They have realised upon those securities. They have, in a substantial sense, achieved the level of recovery that they expected to receive on acceptance of the guarantee. One presumes that they did some diligence and realised that the other assets were already so encumbered that further securitisation of those was not practicable. So this is not a case where a guarantee has proved empty. On the contrary, a substantial sum has been recovered.
[21] Mr Brodie properly conceded that he should not make too much of the fact that the indebtedness to Bridgecorp has grown rapidly because of the 30% interest rate. That is a savage rate of interest. I do not know whether the judgment debt in
2008 of nearly $1 million included accrued interest at that rate.
[22] Taking all these factors into account I do not think that this case by any measure can be presented as one where a finance company has lent money in reliance upon a guarantee which has proved empty. There is no suggestion on these facts that the guarantee was irresponsibly given. I see no hallmark of commercial immorality in either the giving of the guarantee or in its substantial discharge on the facts. I do not see this as a case where the adjudication of Mr Brown should be marked out in order to warn others against entering into guarantees lightly.
Is the public interest served in allowing Mr Brown to practise as a real estate agent?
[23] Mr Brodie’s principal argument as to why the Court should refuse to adjudicate Mr Brown bankrupt is that he would no longer have the ability to practise
as a real estate agent. In submissions filed for this later hearing Mr Fogarty takes issue with this proposition. He submits that the Real Estate Agents Act 2008 distinguishes between an individual licensed as an agent or branch manager and an individual licensed as a salesperson. An individual cannot be licensed as an agent or branch manger if he or she is an undischarged bankrupt or is subject to sub-part 4 of Part 5 of the Insolvency Act 2006 (is insolvent in the sum of less than $40,000): see
s 37(2) set out above.
[24] However, Mr Fogarty argues that that provision does not apply to an individual who may be licensed as a salesperson. He relies on two provisions:
s 36(2), and s 37(1).
[25] To appreciate the argument it is appropriate to set out the whole of ss 36 and
37 of the Real Estate Agents Act 2008:
36 Entitlement to licence
(1) An individual may be licensed as an agent or branch manager if the individual satisfies the Registrar that he or she—
(a) has attained the age of 18 years; and
(b) is not prohibited from holding a licence under section 37;
and
(c) is a fit and proper person to hold a licence; and
(d) has the prescribed qualifications; and
(e)has obtained 3 years' experience in real estate agency work within the 10 years preceding the application to be licensed as an agent or branch manager under this Act.
(2) An individual may be licensed as a salesperson if the individual satisfies the Registrar that he or she—
(a) has attained the age of 18 years; and
(b) is not prohibited from holding a licence under section 37;
and
(c) is a fit and proper person to hold a licence; and
(d) has the prescribed qualifications.
(3) A company may be licensed as an agent if at least 1 officer of the company satisfies the Registrar of the matters set out in subsection (1).
37 Persons prohibited from being licensed
(1) The following persons are not eligible to hold a licence:
(a)a person who has been convicted, whether in New Zealand or another country, of a crime involving dishonesty (or of a crime that, if committed in New Zealand, would be a crime involving dishonesty) within the 10 years preceding the application for a licence:
(b)a person who has been convicted of an offence under sections 14, 17 to 22, or 24 of the Fair Trading Act 1986, within the 5 years preceding the application for a licence:
(c)a person whose licence or certificate of approval has been cancelled within the preceding 5 years or whose licence is suspended at the time of application under the Real Estate Agents Act 1976:
(d)a person whose licence has been cancelled within the preceding 5 years or whose licence is suspended at the time of application under this Act:
(e)a person subject to an order made, or a notice given, under the law of a country, State, or territory outside New Zealand,
within the preceding 5 years who is prohibited from acting as an agent, branch manager, or salesperson (or equivalent)
in that country, State, or territory, unless the person satisfies the Authority that he or she is a fit and proper person to hold
a licence:
(f)a person who is an officer of a licensee company, a chief executive officer of a licensee company, or a branch manager and who has been disqualified from holding a licence or whose licence has been suspended under the Real Estate Agents Act 1976:
(g) a person who is prohibited from being a director or promoter of, or being concerned or taking part in the management of, an incorporated body under the Companies Act 1993, the Securities Markets Act 1988, or the Takeovers Act 1993:
(h)a company, or other corporate entity or partnership, where a person concerned in its management is disqualified from being licensed in his or her own right under paragraph (a):
(i)a person described in section 7(1) (which relates to the exemption of lawyers and conveyancers from this Act) who
is subject to the provisions of the Lawyers and
Conveyancers Act 2006.
(2) A person is not eligible to hold an agent’s licence if he or she is an undischarged bankrupt or is subject to subpart 4 of Part 5 of the Insolvency Act 2006.
[26] Mr Fogarty also relies on the definitions in s 4 of the Act:
agent means a real estate agent who holds, or is deemed to hold, a current licence as an agent under this Act
branch manager means a person who holds, or is deemed to hold, a current licence as a branch manager under this Act
licence means a licence granted under this Act to act as an agent, branch manager, or salesperson
salesperson means a person who holds, or is deemed to hold, a current licence as a salesperson under this Act
[27] Mr Brodie argued that s 36(2)(b) where it refers to holding “a licence”
effectively applies s 37(2).
[28] The effect of Mr Brodie’s argument is to read the phrase “a licence” as any
licence. The alternative construction is to read the phrase “a licence” as meaning a licence to act as a salesperson by reason of the context of subs (2).
Analysis
[29] While there is a potential for some ambiguity in the phrase “a licence”, to read it as meaning any licence would render unnecessary the separation of s 36 into two subsections and likewise the separation of s 37 into two subsections.
[30] If it was intended by Parliament that a person be not eligible to hold a licence
as an agent, or a branch manager, or a salesperson if she or he were an undischarged bankrupt or subject to sub-part 4 of Part 5 of the Insolvency Act that could have been easily set out in one paragraph. The consequence of that is that much of the duplication in ss 36(1) and ss 36(2), see sub-paragraphs (a), (b), (c) and (d), would
be unnecessary. The only differentiation as to entitlement would be in the case of an agent or branch manager having obtained three years’ experience in real estate agency working within the ten years preceding the application. There will also be different prescribed qualifications.
[31] I am quite satisfied that Parliament intended to enable persons who are undischarged bankrupts, or are subject to sub-part 4 of Part 5 of the Insolvency Act,
to be licensed as a salesperson. Parliament, however, has maintained a policy present under the preceding Act that such a person cannot be an agent or branch manager. The reason for the policy is obvious. The licensed agents or branch managers operate trust accounts. They handle money belonging to others. This is a precautionary policy.
[32] It could not be that Parliament was assuming that all such persons are by definition untrustworthy. People can become bankrupt without there being any question as to their moral integrity especially in a serious recession. No question as
to Mr Brown’s moral integrity has been raised in these proceedings. He has been caught by the widespread collapse of commercial property developments by reason
of the recession.
[33] On the assumption that I would construe the statute in this way Mr Brodie went on to argue two propositions:
1. That the Court should not presume that Mr Brown would obtain employment as a salesperson; and
2. That Mr Brown’s personal integrity and interest should be balanced
by this Court against the public interest discernable in the statute against undischarged bankrupts being licensed agents or branch managers.
[34] In that regard Mr Brodie pursued a distinction between insolvency and bankruptcy. He pointed out that Parliament has left with the Court the ability to exercise a discretion to decline to adjudicate on this petition thus leaving Mr Brown in possession of his Real Estate Agent’s licence. That is true. Though it is equally true that the jurisprudence is well established in the two authorities that I have cited above, Baker and Fidow, that the Court when considering the discretion must have regard to the public interest in a way which transcends the interests of the immediate parties, in this case, the creditor and the debtor. Licensed agents operate trust accounts whereby they handle other people’s money. Public confidence in the administration of trust accounts would be undermined were this Court to allow persons they know to be insolvent to operate that trust account. This is a policy proposition. Essentially Mr Brodie is asking this Court to form a judgment in respect of Mr Brown that he is of no risk. But this does not answer the question. For the policy is, as I have explained, precautionary, and a related incidence of that precautionary policy is one of maintaining public confidence in the operation of trust accounts.
[35] Mr Brodie has emphasised that under the new statute the new regulatory body, the Real Estate Agents Authority, has more powers to supervise and detect any
problems. I agree. However, in my judgment that is not sufficient to exercise the discretion in his favour.
[36] I put it to Mr Brodie that he has not been able to find a case where a Court had refused to adjudicate a debtor bankrupt where the debtor was a practising solicitor or accountant, both of whom operate trust accounts. I would be surprised to find there was such a case. Both counsel have assiduously collected authorities in the course of arguing this case.
[37] I was left at the end of the argument with the conclusion that the public interest required the adjudication of Mr Brown as a bankrupt. Accordingly, at the end of the oral hearing I did adjudicate him bankrupt. I have now set out my reasons.
Solicitors:
Saunders Robinson Brown, Christchurch, for Judgment Debtor (Counsel: G M Brodie)
Chapman Tripp, Christchurch, for Judgment Creditor (Counsel: M Fogarty)
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