Callaghan Innovation v Johnson
[2021] NZHC 694
•31 March 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-001828
[2021] NZHC 694
UNDER The Insolvency Act 2006 IN THE MATTER OF
The bankruptcy of DAVID ALAN JOHNSON
BETWEEN
CALLAGHAN INNOVATION
Judgment Creditor
AND
DAVID ALAN JOHNSON
Judgment Debtor
CIV-2020-404-001928 BETWEEN
THECIRCLE.CO.NZ LIMITED
ApplicantAND
CALLAGHAN INNOVATION
Respondent
Hearing: 18 March 2021 Appearances:
R B Hucker and R F Selby for Judgment Debtor/Applicant D H McLellan QC and C D Boswell for Judgment Creditor/Respondent
Judgment:
31 March 2021
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
CALLAGHAN INNOVATION v JOHNSON [2021] NZHC 694 [31 March 2021]
Introduction
[1] There are two applications before the Court: an application to set aside a bankruptcy notice and an application to set aside a statutory demand.
[2] The applications arise out of a judgment against the judgment debtor, Mr David Johnson, and the company, Thecircle.co.nz Ltd (Circle), in respect of a non-party costs order in the sum of $1,274,268.00 That order was made by Powell J in Trends Publishing International Ltd (in rec and liq) v Callaghan Innovation.1
[3] Both Mr Johnson and Circle have appealed the costs order of Powell J to the Court of Appeal. The appeal was heard on 15 March 2021 and judgment is reserved.
[4] No stay of the costs judgment of Powell J has been applied for and no order made under r 12 of the Court of Appeal (Civil) Rules 2005 (stay of proceedings and execution).
[5] In both cases (i.e. the Bankruptcy Notice and the statutory demand) the judgment on which the debt is based is under challenge through the appeal process. Mr Johnson and Circle contend that this is recognised as a primary ground for the exercise of the Court’s inherent jurisdiction to set aside a bankruptcy notice or statutory demand (s 290(4)(c) of the Companies Act 1993). They place significant weight on the timing “proximity” of the appeal, namely that it has been heard and judgment of the Court of Appeal is imminent.
Background facts
[6] In his substantive judgment of 30 April 2019, Powell J dismissed in its entirety an action brought by way of counterclaim by Trends Publishing International Ltd (Trends) against the judgment creditor, Callaghan Innovation (Callaghan).2
[7] The counterclaim was filed following Callaghan, and other creditors, issuing proceedings to liquidate the company. Callaghan’s debt arose from a funding
1 Trends Publishing International Ltd (in rec and liq) v Callaghan Innovation [2020] NZHC 1626.
2 Trends Publishing International Ltd v Callaghan Innovation [2019] NZHC 907.
agreement with Trends under which it had agreed to provide funding for Trends’ research and development.
[8] Callaghan suspended and later terminated the agreement after it became aware of evidence that Trends was wrongly claiming expenses as research and development. Callaghan sued for the reimbursement of the wrongly claimed grant money. Trends counterclaimed seeking millions of dollars in damages, alleging that Callaghan’s suspension and termination of the funding agreement caused Trends’ business to fail.
[9] Powell J rejected all of Trends’ allegations. His substantive judgment was not appealed; it is only the costs order that is under challenge in the Court of Appeal.
[10] Trends was placed into receivership on 7 October 2019 and put into liquidation on 1 November 2019.
[11] Callaghan sought costs on an indemnity basis from Trends and also from its managing director, Mr Johnson (i.e. the judgment debtor) and his company, Circle, as maintainers of the litigation. Circle owned the building from which Trends operated and provided financial support to Trends, including for the litigation. Mr Johnson deposed that the litigation was funded by Circle, Trends itself being insolvent.3
[12] In his costs judgment of 10 July 2020,4 Powell J ordered Mr Johnson and Circle jointly to pay Callaghan its costs and disbursements in the sum of $1,274,268.68. That amount is said to have increased to $1,311,978.08 with interest.
[13] Callaghan then made demand for the judgment debt on 23 July 2020. Neither Mr Johnson nor Circle have responded.
[14] On 1 October 2020, Callaghan served Circle with a statutory demand in relation to Powell J’s costs order judgment.
3 Trends Publishing International Ltd (in rec and liq) v Callaghan Innovation, above n 1, at [82](e).
4 Trends Publishing International Ltd (in rec and liq) v Callaghan Innovation, above n 1.
[15] On 12 October 2020, Circle filed and served an application to set aside the statutory demand.
[16] On 16 October 2020, Callaghan served Mr Johnson with a Bankruptcy Notice based on the costs order judgment of Powell J.
[17] On 23 October 2020, Mr Johnson filed and served an application to set aside the Bankruptcy Notice.
Relevant legal principles
(a)Setting aside a bankruptcy notice
[18] In seeking to invoke the Court’s inherent jurisdiction to control the abuse of its process (as a ground for setting aside the Bankruptcy Notice) Mr Johnson relies upon the following passage of Master Kennedy-Grant in Re Wise,5
Having considered the matter further, I have come to the following conclusions:
(a)I do have jurisdiction to grant relief to the debtors;
(b)The jurisdiction is the inherent jurisdiction of the Court to control the abuse of its process;
(c)The grounds on which the jurisdiction may be exercised are:
(i)procedural defect in the obtaining of the judgment on which the bankruptcy notice is based; and/or
(ii)the existence of arguable grounds of defence to the claim for which judgment was given;
(d)The grounds on which the jurisdiction may be exercised may extend beyond those stated in (d) to any ground on which the Court feels it necessary to intervene to prevent injustice but I make no finding on that point in this judgment;
(e)The correct procedure for invoking the inherent jurisdiction of the Court is not the filing of an affidavit under r 41 but the filing of an interlocutory application to set aside the bankruptcy notice on one of the grounds stated in (c) above or, possibly, the broader ground stated in (d) above.
5 Re Wise, ex parte Benecke HC Auckland B227-228/95, 21 June 1995 at 6.
[19] Mr Johnson also relies upon the following passage of Abbott AJ in Krukziener v Hanover Finance Ltd:6
[29] The first two circumstances identified by Master Kennedy-Grant in Re Wise call into the question the judgment itself. A procedural defect suggests an element of unfairness in letting the judgment stand. The “arguable grounds of defence” suggests a substantive reason for questioning the soundness of the judgment (hence the case law built up around stay pending an appeal but perhaps also a defence that had not been identified at the time of the underlying judgment or which has emerged since). In all of these cases there is an issue as to the safety of the underlying judgment. The Court will intervene in those cases on the grounds that it would be an abuse to allow a bankruptcy proceeding to be pursued if there is good reason to doubt the judgment on which it is based. There is no suggestion in the present case of a procedural defect, a legitimate defence being overlooked, or (now that the appeal has been determined) that there was any error in the judgment.
(emphasis added)
(b)Setting aside a statutory demand
[20]Section 290 of the Companies Act reads:
Court may set aside statutory demand
(1) The Court may, on the application of the company, set aside a statutory demand.
(2)The application must be –
(a)made within 10 working days of the date of service of the demand; and
(b)served on the creditor within 10 working days of the date of service of the demand.
(3) No extension of time may be given for making or serving an application to have a statutory demand set aside, but, at the hearing of the application, the Court may extend the time for compliance with the statutory demand.
(4) The court may grant an application to set aside a statutory demand if it is satisfied that –
(a)there is a substantial dispute whether or not the debt is owing or is due; or
6 Krukziener v Hanover Finance Ltd HC Auckland CIV-2007-404-002896, 12 August 2008, at [29].
(b)the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or
(c)the demand ought to be set aside on other grounds.
(5) A demand must not be set aside by reason only of a defect or irregularity unless the Court considers that substantial injustice would be caused if it were not set aside.
(6) In subsection (5), defect includes a material misstatement of the amount due to the creditor and a material misdescription of the debt referred to in the demand.
(7)An order under this section may be made subject to conditions.
Analysis and decision
Application to set aside the Bankruptcy Notice
[21] The critical issue to address is whether the appeal of the underlying judgment (ie the costs order) gives rise to an issue as to the safety of the underlying judgment, such that the Court should exercise its inherent jurisdiction.
[22] At the outset, it is important to note the nature and scope of the Court’s inherent jurisdiction. As Osborne AJ held in Izard Weston v Ayers,7 the basis of the Court’s inherent jurisdiction is to control abuse of process. The Court intervenes to avoid a miscarriage of justice. In each case, it is for the debtor to demonstrate that there is good reason to doubt the judgment on which the bankruptcy notice is based.8
[23] The scope of the Court’s jurisdiction to set aside a bankruptcy notice should be also be considered in light of the purpose of a bankruptcy notice.9 The purpose of a bankruptcy notice is to test the solvency of a debtor by seeing whether the debtor can comply with a formal demand based on an indisputable liability, a final court judgment or order.10
7 Izard Weston v Ayers [2017] NZHC 3000, at [10].
8 Izard Weston v Ayers, above n 7, at [12].
9 Mainzeal Property & Construction Ltd (in liq) v Yan [2019] NZHC 3145, at [11].
10 Mainzeal Property & Construction Ltd (in liq) v Yan, above n 9, at [11].
[24] It is well settled that an appeal does not operate as a stay of execution of the underlying judgment and that absent a stay, the judgment is to be regarded as final and capable of being enforced.11
[25] In the statutory demand context (discussed below) the law is “crystal clear” that a company cannot establish a genuine dispute about the existence of the amount of a debt to which the demand relates where there is a judgment debt which, while it may be the subject of an appeal to a higher court, has not been stayed so far as the operation of that judgment is concerned.12 I accept that the jurisdiction to set aside a statutory demand, a solely statutory based jurisdiction, is not exactly the same as the inherent jurisdiction to set aside a bankruptcy notice. However, that legal principle is a useful starting point for addressing the question of whether an appeal against the underlying judgment debt could, in any way, give reason to doubt the safety of the underlying judgment debt.
[26] I reject Mr Hucker’s principal submission that the judgment debt being challenged through the appeal process is recognised as a primary ground for the exercise of the Court’s inherent jurisdiction to set aside a bankruptcy notice. In substance, Mr Hucker contended for a relaxation of the authorities which in my view do not support that principal submission. In my view, the essence of the inherent jurisdiction is to avoid a miscarriage of justice arising from an abuse of process. That will likely be a special case, although I accept that each case will need to be considered on its merits and the categories of cases to which it applies are not closed. I also agree with the findings of Osborne AJ in Izard Weston,13 that the observation in Re Wise should be seen in its context, namely a case in which the judgment against the defendant was obtained by default.14
11 Court of Appeal (Civil) Rules 2005, r 12; Duncan v Osborne Buildings Ltd (1992) 6 PRNZ 85 (CA) at [87]; Re Hair ex parte Schmidt [2014] NZHC 2476; Re Sigglekow, ex parte Turner [2012] NZHC 3334.
12 Cullen Group Ltd v Commissioner of Inland Revenue [2019] NZHC 3110, at [22]; and Remote Camps Australia Pty Ltd v Hazeldine Pty Ltd [2012] FCA 130, at [25].
13 Izard Weston v Ayers, above n 7, at [10].
14 The judgment debtor in Re Wise claimed to have no notice of the hearing date (at which judgment was entered by default). Master Kennedy-Grant also held that the judgment debtors had a reasonable prospect of applying successfully for an order setting aside the underlying District Court default judgment.
[27] In this case, the appeal is not against a default judgment but, rather, a fully reasoned determination of Powell J after the parties had been given and exercised their right to be heard (and even though Mr Johnson and Circle were originally non-parties to the litigation). In the absence of any additional factor, beyond the mere fact and the hearing of an appeal, and in particular the absence of any factor suggesting an arguable miscarriage of justice, there is in my view no basis for invoking the inherent jurisdiction.
[28] The Court’s role in determining whether to exercise the jurisdiction to set aside is not, as Mr Hucker contended, a general filtering exercise dependent on arbitrary factors such as whether the Court of Appeal called upon the counsel for the respondents to address the Court (I understand that Mr McLellan did so before the Court of Appeal on 15 March 2021). The jurisdiction is confined to s 17 of the Insolvency Act 2006 and/or the inherent jurisdiction, with the latter being exercised to avoid a miscarriage of justice.
[29] I find that the circumstances of this case fall well short of the necessary miscarriage of justice threshold such that I could properly exercise my inherent jurisdiction to either set aside the Bankruptcy Notice or adjourn the proceedings. I acknowledge, on a practical level, that the Court of Appeal judgment, which could be decisive one way or the other, is likely to be issued shortly. However, and in the circumstances where no stay has been sought or obtained, the timing in my view provides no principled basis for exercising a jurisdiction that ought to be exercised with circumspection and care.
[30] It is important to note that this is not an adjudication application. As Mr McLellan QC submitted, any issues of discretion can be addressed at the adjudication stage under ss 36 and 42 of the Insolvency Act. Section 42 expressly allows the Court to halt an adjudication proceeding pending the determination of an appeal against the underlying judgment debt.15 However, those are arguments for a future hearing and the high hurdle set by the jurisprudence to intervene to prevent an abuse of process is not met on these facts.
15 See my judgment in Mainzeal Property & Construction Ltd (in liq) v Yan [2020] NZHC 1659.
[31] Mr Johnson’s reliance upon the Supreme Court decision Almond v Read,16 whilst giving rise to an important principle, does not assist his position. A right to a first appeal is not an absolute or unfettered right that allows a judgment debtor to avoid payment of the underlying judgment debt. The appropriate course, not adopted here, if there is a risk of appeal rights being rendered nugatory, is to apply for a stay of execution pending an appeal and usually, to give security. There is clear long- established authority which makes that clear. In McLeod v NZ Pineco Ltd,17 Williams J held:18
[T]he ordinary course here has been that where an unsuccessful litigant in this Court asks for a stay of execution pending appeal, an order has been made staying execution on his giving security.
…
The right of the plaintiff in the present case is an absolute right to have his money at once. The right of defendants is the right of appeal, and the right in some way or other to have it made certain by this Court that the appeal should not be fruitless. The duty of this Court is, I think, to reconcile as far as possible the conflicting rights of the plaintiff and a defendant. The way to do that is to follow the English cases, and to say that an order staying proceedings shall be made on payment by the defendants to the plaintiff of the money in question, the plaintiff giving security for the repayment.
[32] No evidence has been presented to me as to why Mr Johnson has not applied for a stay of execution (or whether he is in a position to provide any security). An application to set aside a bankruptcy notice cannot be used as a vehicle to circumvent the need to obtain a stay of execution and/or pay security associated with such a stay.
[33] For all these reasons, I find that the application to set aside the Bankruptcy Notice should be dismissed. There is no basis for my exercising my inherent jurisdiction.
Application to set aside the statutory demand
[34] I have already referred above to the “crystal clear” principle that Circle’s appeal to the Court of Appeal does not create a substantial dispute as to whether the
16 Almond v Read [2017] NZSC 80, [2017] 1 NZLR 801.
17 McLeod v NZ Pineco Ltd (1892) 11 NZLR 493 (SC); see also Mainzeal Property & Construction Ltd (in liq) v Yan, above n 9, at [19]–[20].
18 McLeod v NZ Pineco Ltd, above n 17, at 494–495.
judgment debt is owing. The costs judgment has not, as I have emphasised, been stayed.
[35] While the Court clearly has a discretion to set aside a statutory demand on “other grounds” (s 290(4)(c) of the Companies Act), the discretion is only to be used in circumstances which are “sufficiently compelling” to “clearly justify” departure from the policy of the 1993 Act that insolvent companies should be put into liquidation.19
[36] For reasons similar to those giving rise to my decision to dismiss the application to set aside the bankruptcy notice, I also find that there are no sufficiently compelling reasons here that might justify the setting aside of the statutory demand. Circle cannot point to anything beyond the mere filing and hearing of the appeal that might provide a good reason to doubt the judgment on which the statutory demand is based – and again, the practical issue of timing, namely the potentially imminent delivery of the Court of Appeal judgment, provides no principled basis for the exercise of the discretion under s 290(4)(c). The costs order judgment of Powell J was a regularly obtained judgment, not a default judgment, and once again, if there are relevant issues associated with the appeal at the time of any substantive liquidation application, the Court has the power to adjourn the proceedings. Timing might be relevant at that stage. In any event, a default judgment is not of itself a basis for either setting aside a bankruptcy notice or a statutory demand.20 The threshold in either case is a high one.
[37] I also agree with the submission of Mr McLellan that it is not necessary for Callaghan, as the respondent, to establish some countervailing prejudice. There is clearly a public interest in preventing insolvents, whether individuals or companies, from trading. The other factors that Mr Hucker referred to, namely that there is no risk of any dissipation of assets by Circle (or indeed, Mr Johnson) have no real relevance to these particular applications albeit that they might (if appropriate) be relevant at the later stage of liquidation (and/or adjudication in the case of Mr Johnson).
19 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA), at 398.
20 Izard Weston v Ayers, above n 7, at [12].
[38] In its written submissions, Callaghan had sought an immediate order under s 291 of the Companies Act putting Circle into liquidation. However, I note that at the hearing that application was not pursued with any real vigour or determination. The appropriate course, in my view, is to dismiss the application to set aside the statutory demand and for the plaintiff, Callaghan, to then decide how to proceed on the basis of a presumption of insolvency under s 287 of the 1993 Act.
Result
[39]The application to set aside the Bankruptcy Notice is dismissed.
[40]The application to set aside the statutory demand is dismissed.
[41] As to costs, I find that the judgment debtor and the respondent (i.e. Mr Johnson and Thecircle.co.nz Ltd) should be required to pay costs on a joint and several basis (2B) to Callaghan Innovation (as both the judgment creditor and the respondent).
Associate Judge P J Andrew
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