Cairns v Gilliam

[2012] NZHC 1414

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-1243 [2012] NZHC 1414

IN THE MATTER OF     the Insolvency Act 2006

AND

IN THE MATTER OF the bankruptcy of SL Gilliam

BETWEEN  NIALL CHARLES EDGAR CAIRNS Judgment Creditor

ANDSANDRA LORRAINE GILLIAM Judgment Debtor

Hearing:         19 June 2012

Counsel:         SL Robertson for judgment creditor

G Bogiatto for judgment debtor

Judgment:      20 June 2012

JUDGMENT OF ASSOCIATE JUDGE FAIRE [on application to set aside a bankruptcy notice]

Solicitors:           Garth O’Brien & Associates, PO Box 79, Te Awamutu

G Bogiatto, PO Box 106 120, Auckland 1143

CAIRNS V GILLIAM HC AK CIV-2012-404-1243 [20 June 2012]

[1]      The judgment debtor applies to set aside a bankruptcy notice served on her on

19 March 2012.

[2]      The principal grounds relied upon are pleaded as follows:

(a)      The applicant has a genuine triable counterclaim, set-off or cross- demand that she was unable to use as a defence in the action in which the relevant judgment was given; and

(b)The applicant relies on the inherent jurisdiction of the Court to control abuse of process where there is an arguable defence to a claim for which judgment was given.

[3]      The judgment creditor opposes the application and relies on three principle grounds, namely:

(a)      The judgment debtor has failed to pay the sum of $50,076.30 plus interest at the rate of 7.5 per cent from 7 April 2011 to the date of payment, being due on a final judgment of the Family Court dated

9 March 2011, less one payment of $5,000 made by the judgment debtor  on  17 August  2011  and  one  payment  of  $1,500  made  on

15 September 2011;

(b)The  judgment  debtor  does  not  have  any  genuine  counterclaim  or cross-demand against the judgment creditor; and

(c)      The judgment debtor’s claims against the judgment creditor do not have   the   required   degree   of   mutuality  in   order   to   meet   the requirements of s 17(1) and (7) of the Insolvency Act 2006.

Statutory grounds for the application

[4]      The application is made in reliance on s 17 of the Insolvency Act 2006. Section 17 requires that the judgment debtor satisfies the Court that she has a cross claim against the creditor. The relevant parts of s 17 provide:

17       Failure to comply with bankruptcy notice

(1)      A debtor commits an act of bankruptcy if—

(a)      a creditor has obtained a final judgment or a final order against the debtor for any amount; and

(b)      execution of the judgment or order has not been halted by a court; and

(c)      the debtor has been served with a bankruptcy notice; and

(d)      the  debtor  has  not,  within  the  time  limit  specified  in subsection (4),—

(i)       complied with the requirements of the notice; or

(ii)      satisfied the Court that he or she has a cross claim against the creditor.

…

(7)      In subsection (1)(d)(ii), cross claim means a counterclaim, set-off, or cross demand that—

(a)       is equal to, or greater than, the judgment debt or the amount that the debtor has been ordered to pay; and

(b)      the debtor could not use as a defence in the action or proceedings in which the judgment or the order, as the case may be, was obtained.

[5]      In Clark v UDC Finance Ltd Casey J held that the judgment debtor must show:[1]

[1] Clark v UDC Finance Ltd [1985] 2 NZLR 636 (HC) at 637.

a)        That he has a genuine triable counterclaim, set-off or cross-demand;

and

b)That it is such that he could not have set it up in the action in which the relevant judgment was obtained.

[6]      That formulation was approved by the Court of Appeal in Sharma v ANZ Banking Group (New Zealand) Ltd.[2]   The inability referred to here is primarily a legal inability: Hardie v Booth.[3]

[2] Sharma v ANZ Banking Group (New Zealand) Ltd (1992) 6 PRNZ 386 (CA) at 389.

[3] Hardie v Booth [1992] 1 NZLR 356 (HC) at 362.

[7]      What 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. The type of inquiry called for was referred to by Casey J in Clark v UDC Finance Ltd and was expressed in the following ways:[4]

[4] Above n1, at 637.

The debtor must show a prima facie case.

The debtor should have a fair chance of success. There must be a genuine triable demand.

Background

[8]      The judgment creditor and judgment debtor began living together in a de facto relationship which commenced either towards the end of 2000 or beginning of

2001.  The separated in 2004.  There was one child of their relationship, who was born on 21 June 2004 in New Zealand.  She now lives with the judgment debtor.

[9]      An asset of some significant value was acquired by the judgment creditor at

216 Garnet Road, Westmere, Auckland (the “Westmere property”).   The purchase

price was $1.9 million.  The parties signed a termination agreement on 12 September

2005.   It makes reference to a child support agreement which was executed contemporaneously  with  the  termination  agreement.     Of  significance  to  this particular dispute is the fact that the judgment creditor granted the judgment debtor an exclusive right to occupy the Westmere property for her life time.  The grant was subject to certain terms and conditions, which are set out in clause 7 of the termination agreement.   Of importance for this application are the following conditions:

7.3Sandra will maintain the property in a reasonable and tenantable condition, fair wear and tear excepted.

7.4(a)       Sandra will pay the costs of all repairs and maintenance to the property.   However, subject to sub-clause (b) below, in the event the costs of  particular repairs and  maintenance exceed the sum of $10,000 all costs of the particular repairs or  maintenance  not  covered  by  insurance  shall  be  paid equally by Niall and Sandra.

(b)      In  the  event  Sandra  rents  out  the  property  and  lives elsewhere:

(i)        if she is in rental accommodation and the rent she receives from the property exceeds the rent she pays by $500 per week or more; or

(ii)      if she is living in a property owned by her or by an entity in which she has an interest and the rent from the  Westmere  property  exceeds  the  interest  costs paid by her or the entity for the property in which she is living by $500 per week or more;

in either of those circumstances in the event the costs of the particular  repairs  and  maintenance  exceed  the  sum  of

$20,000 all costs of the particular repairs or maintenance are

to be paid equally by Niall and Sandra.

7.6In the event that Sandra effects any improvements or extensions to the property neither she nor her estate shall be entitled to any compensation for such improvements.   Sandra shall not carry out any substantial alterations or renovations or changes to the substance of  the  improvement  on  the Westmere  property without  the  prior written consent of Niall or his legal personal representatives, consent not to be unreasonably withheld.   In the event that the parties are unable to agree as to substantial alterations or renovations to the Westmere property, they will participate in an Arbitration conducted in New Zealand by an Arbitrator agreed upon in writing by the parties and in default of agreement, by an Arbitrator appointed by the President of the New Zealand Institute of Arbitrators or its then nearest (or their equivalent under the new High Court Rules), and will accept the decision of the Arbitrator in respect of the alterations or renovations to the Westmere property that are being proposed by either party.

[10]     The judgment which is the basis for the bankruptcy notice is a judgment of the Family Court given on 1 July 2011.  The judgment in the Family Court related to a reimbursement of spousal maintenance paid by the judgment creditor pursuant to orders made in the High Court on appeal from the Family Court and in favour of the judgment debtor.  The judgment creditor appealed to the Court of Appeal.  The result was that the judgment in the High Court was set aside and the original Family Court orders were reinstated.   That had a consequence that there was a need for reinstatement of the overpaid spousal maintenance by the judgment debtor.   The

Family Court hearing, which led to the judgment which is the foundation of the bankruptcy notice, took place in 2011 and resulted in orders being made requiring the judgment debtor pay to the judgment creditor $56,576.30, together with interest. The bankruptcy notice earlier referred to in this judgment records a subsequent payment made in respect of the judgment debt by the judgment debtor.

[11]     This matter was first called before me on 26 April 2012.  At that time I gave directions for the fixture for disposal of this application.   I commented to counsel that the judgment debtor would be well-advised, if she was intent on pursuing her cross-claim, to commence a proceeding.  Her counsel acknowledged this and advised that any proposed proceeding would be annexed to her reply affidavit.  That has not occurred.  There was a debate between counsel for the judgment debtor and me as to what potential cause of action might exist in respect of some of the cross claims which she now seeks to advance.  I simply record the history of it in this part of the judgment.

The cross claims analysed

[12]     Bearing in mind that payments are being made by the judgment creditor for child support under a formula assessment under the Child Support Act 1991, the position between the parties is changing from month to month.   I am grateful to counsel for the constructive way they approached the various items that are involved, either by way of the giving of credit for payments made, or by recognising the possibility of valid cross claims.

[13]     The starting point is the judgment debt net sum recorded in the bankruptcy notice of $50,076.30.

[14]     On 15 June 2012 the judgment debtor made a payment of $6,500 to the judgment creditor.   Without taking account of the question of interest, that left a principal sum owing under the judgment of $43,576.30.

[15]     I next consider the various items of cross-claim that have been raised on the

judgment debtor’s behalf.

[16]     The  first  cross-claim  alleges  a  claim  of  $33,855.68.    It  relates  to  the

“Westmere property”.

[17]     The first component of this claim is a claim for the cost of carpet paid for by the judgment debtor in the sum of $14,590.  It is debatable as to whether this is a maintenance item in respect of which the judgment debtor is entitled to seek reimbursement of half of the cost of the carpet pursuant to clause 7.4 of the termination agreement.

[18]     Mr Bogiatto, however, advanced the submission that the judgment debtor was entitled to full reimbursement of the cost of the carpet.  Clearly, that submission has no support in clauses 7.3, 7.4 or 7.6 of the termination agreement.   Mr Bogiatto acknowledged that position.  When I asked precisely what the cause of action was that would justify such a claim, he was unable to provide me with clear authority to support it.   I therefore reject the submission that there is a foundation outside the termination agreement that would justify a cross-claim for the full value of the carpet.

[19]     I mention that it is debatable as to whether the replacement of the carpet itself falls within the obligations imposed by clause 7.3 and 7.4 of the termination agreement.  That is not something that can be resolved on this application.  For the purposes of this application I have concluded that there may be a cross claim for half of the cost of the carpet in the sum of $7,295 on an application of clause 7.4 of the termination agreement.   In reaching that position I do not overlook the fact that Ms Robertson questioned whether there was the required mutuality to support the cross-claim.  I am satisfied in this case that there is and that it is at least arguable because of the recitals contained in the termination agreement and that these matters all arise from the termination of the relationship of the judgment creditor and the judgment debtor.  Accordingly, I am satisfied that there is a sound foundation for the cross-claim that satisfies the test which I have set out in [5], [6] and [7].

[20]     The next part of the “Westmere property” repair claim relates to repair of decayed floor and framing in the sum of $12,090, and possibly linked to this is the claim  for  the  cost  of  replacement  of  faulty  flashing  in  the  sum  of  $901.43.

Mr Bogiatto  again  raised  the  submission  that  this  was  outside  the  termination agreement.  I reject that submission for the same reason that I have set out dealing with the carpet.  I am prepared to accept, however, that it might be arguable that the judgment debtor has a cross claim for half of these costs in reliance on clause 7.4.  If the two accounts are amalgamated an allowance for a cross claim of $6,495.72 should be made.

[21]     The next two claims that are made relate to the spa pool.  One is for a spa pool leak in the sum of $3,318.75 and the second is for the repair to a spa pool jet in the sum of $2,955.50.   Mr Bogiatto repeated his submission that these items were outside the termination agreement.   I reject that argument for the same reasons as already recorded.   He accepted that these items could not be a potential claim in reliance on clause 7.4 because they were below the $10,000 threshold referred to in that clause.  Accordingly, no allowance for these items as justifying a potential cross claim should be made.

[22]     The next item which is said to support a cross claim is a claim for child support arrears of $9,613.50.  Mr Bogiatto accepted that the judgment creditor has in fact paid $9,933.80 and accordingly there is no support for this aspect of the cross- claim.

[23]     The next item of cross claim relates to extra-curricular activity in the sum of

$1,239.  There is a short answer to this claim.  The claim can only be justified as being a term of an agreement entered into by the judgment creditor and judgment debtor prior to the judgment creditor being made liable for child support pursuant to a formula assessment.  Section 20 of the Child Support Act 1991 provides:

20       Suspension of voluntary agreements

Where—

(a)       A custodian  of  a child and  a liable  parent  have  entered into  an agreement providing for the payment of money towards the support of the child; and

(b)       The  liable  parent  becomes  liable  to  pay  child  support  under  a formula assessment to the custodian in respect of the child,—

the liability of the liable parent to pay money towards the support of the child under the agreement shall be suspended for such time as child support is payable under the formula assessment.

Accordingly, I find that there is no prima facie case supporting this claim as a cross- claim.

[24]     The next item of cross claim alleges that there was child support arrears owing prior to 2 November 2011 and in terms of the child support agreement in the sum of $3,566.69.

[25]     There is some foundation for this claim.   The full extent will have to be determined in a proceeding.   However, for the purposes of this judgment, I am satisfied that the judgment debtor has satisfied the test set out [5], [6] and [7] for a cross claim in the sum of $3,566.69 in respect of this issue.

[26]     The  next  item  concerns  an  invoice  in  connection  with  the  “Westmere property” in the sum of $731.   Mr Bogiatto repeated his submission that it was outside  the  termination  agreement.     For  reasons  already  given  I  reject  that submission.   The claim is under $10,000 and therefore could not be advanced in reliance on clause 7.4 of the termination agreement.

[27]     A final matter is mentioned in counsel’s submissions.   It relates to alleged additional child support due for April, May and June 2012.  I need not analyse that matter because counsel accepted that as at the hearing of this application, there was no actual sum due. The position will change, however, on 20 June 2012.

[28]     Two further matters require consideration.  The first relates to how I should approach a position where there is a foundation for a counterclaim for a sum less than the judgment sum due and owing and as pleaded in the bankruptcy notice.  The Insolvency Act 2006 makes provision for the position that arises where the sum is overstated in the bankruptcy notice.

[29]     The Insolvency Act 2006, s 30 provides that:

30       Effect of overstatement of amount owing

(1)      Overstatement in a bankruptcy notice of the amount owing by the debtor does not invalidate the notice, unless—

(a)       the debtor notifies the creditor that the debtor disputes the validity  of  the  notice  because  it  overstates  the  amount owing; and

(b)       the debtor makes that notification within the time specified in the notice for the debtor to comply with the notice.

(2)      A debtor complies with a notice that overstates the amount owing by—

(a)       taking  steps  that  would  have  been  compliance  with  the notice had it stated the correct amount owing (for example, by paying the creditor the correct amount owing plus costs); and

(b)       taking those steps within the time specified in the notice for the debtor to comply.

[30]     The judgment debtor has not established a basis for the notice being declared invalid.

[31]     I  am  therefore  faced  with  the  situation  where  the  debt  recorded  in  the bankruptcy notice is technically overstated if credit is given for payments made and an allowance is made for the cross claim..  The question then arises is whether the bankruptcy notice should be amended.  In Re Ebbett, ex parte Fletcher Merchants

Ltd the court amended a bankruptcy notice but refused to set the notice aside.[5]    I

consider that approach should be applied in this case.

[5] Ebbett, ex parte Fletcher Merchants Ltd HC Tauranga B109/92 9 October 1992, per Fisher J.

[32]     The second matter that arises is whether I can impose a condition on the orders that I make.  That is because I have in mind making the orders conditional upon  the filing of proceedings  within  a defined  time in relation  to cross  claim matters.   In my view, such a course is justified by the application of s 418 of the Insolvency Act 2006, which provides:

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.

[33]     An appropriate time within which a cross claim could be filed and served is

10 working days from the date of this judgment.  Counsel for the judgment creditor advises she has instructions to accept service of such proceeding.

[34]     The matters  that  I have  concluded might  justify a  counterclaim  totalling

$17,357.41.  There is, however, yet a further consideration.  That arises from the fact that a cost order was made in the High Court at Auckland on 28 May 2012 in favour of the judgment creditor against the judgment debtor in the sum of $3,760.   That clearly must operate as a set-off in respect of any of the cross claims that I have referred to.  The result is to reduce the cross claims to a figure of $13,597.41.  When that figure is deducted from the adjusted bankruptcy notice claim of $43,576.30 there is an undisputed figure in the bankruptcy notice due under the judgment and before interest is calculated of $29,978.89.  This analysis leads me to the position where I conclude that the bankruptcy notice should be amended to provide for the payment of $29,978.89 and that if the payment of that sum is not made, that an act of bankruptcy will accordingly occur.

[35]     Mr Bogiatto invited me to nevertheless extend the time for compliance so that the judgment debtor could consider payment and thereby avoid committing an act of bankruptcy, should I conclude that the bankruptcy notice should not be set aside.  The time for compliance is currently suspended in terms of this bankruptcy notice pursuant to r 24.10 of the High Court Rules.  I am satisfied that a period of

10 working days should  be fixed as the time for compliance with the amended bankruptcy notice from the date of issue of this judgment, either by virtue of the power vested in me pursuant to s 418 of the Insolvency Act 2006, or pursuant to r 1.19 of the High Court Rules.

Orders

[36]     I order that on condition that the judgment debtor file and serves a claim in respect of the matters identified in this judgment within 10 working days of this judgment, paragraph 1(a) of the bankruptcy notice, dated 13 March 2012, shall be amended to read:

You must pay to the judgment creditor, NIALL CHARLES EDGAR CAIRNS of

23  Wallaroy  Road,  Woollahra  Sydney,  New  South  Wales,  Australia,

$29,978.89, plus interest on the sum of $29,978.89 at the rate of 7.5% from

7 April 2011 to the date of payment, either in person or at the address for service of the judgment creditor (or the solicitor for the judgment creditor).

This amount is the amount the judgment creditor claims is due (or remains

unpaid) on a final judgment or final order for $56,576.30 plus interest, on which execution has not been stayed, that the judgment creditor obtained

against you in the District Court at Auckland on 1 July 2011 after giving

credit for payments by you of $13,000 and giving due allowance for a cross claim which you are to bring in the sum of $13,597.41. Time is extended for you to make such payment to 10 working days from the date of issue of the judgment on your application to set aside the bankruptcy notice.

[37]     The  judgment  debtor’s  application  to  set  aside  the  bankruptcy  notice  is refused in respect of the balance of the orders sought by her.

Costs

[38]     I fix quantum of costs in this proceeding based on Category 2 Band B for a half-day fixture.  I reserve the question of liability for costs pending determination of any cross claim filed by the judgment debtor or, if no cross claim is filed and served within 10 working days of the date of this judgment, costs shall be ordered based on Category 2 Band B in favour of the judgment creditor together with disbursements as

fixed by the Registrar.

JA Faire

Associate Judge