Cardno (NZ) Limited v Stokes
[2023] NZHC 1204
•23 May 2023
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2021-409-134
[2023] NZHC 1204
UNDER the Insolvency Act 2006 IN THE MATTER
of an application pursuant to s 17 of the Act
BETWEEN
CARDNO (NZ) LIMITED
Judgment Creditor
AND
COLIN PETER STOKES
Judgment Debtor
Hearing: 17 April 2023 Appearances:
M R C Wolff for Judgment Creditor Judgment Debtor in person
Judgment:
23 May 2023
JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
[1] On its face, this is an application by the judgment debtor, Mr Colin Stokes, pursuant to s 17 of the Insolvency Act 2006 for an order setting aside a bankruptcy notice dated 15 April 2021 served on him by the judgment creditor, Cardno (NZ) Ltd, on or about that date.
[2] In his notice of application, Mr Stokes says that he has a “counterclaim, set-off, or cross-demand against the judgment creditor Cardno — that equals or exceeds the amount claimed by the judgment creditor Cardno”. He also says that “new evidence has been obtained that could not be put forward in the action or proceeding in which the judgment or order was obtained”.
CARDNO (NZ) LIMITED v STOKES [2023] NZHC 1204 [23 May 2023]
[3] Mr Stokes did not argue the case on either of those bases. Rather, he contended that the Court should set aside Cardno’s bankruptcy notice because the judgment on which it was based was tainted by fraud.
[4] The judgment debt upon which the bankruptcy notice is based arises from litigation commenced by Mr Stokes and others as long ago as August 2014. It is a costs award. Whilst it is unnecessary to go into the details of the litigation, it may be helpful to describe some aspects.
[5] In 2002 Messrs Stokes and others purchased land in a yet to be completed subdivision from Noble Investments Ltd (NIL). NIL had engaged Apple Fields Ltd (AFL) to provide project management services and Cardno to provide planning, surveying and engineering services. The individuals at AFL and Cardno who appear primarily to have been involved in the project were Mr Justin Prain (AFL) and Mr Richard Graham (Cardno).
[6] The development got underway after NIL secured the rezoning of the property in August 2006. The venture failed and in August 2014 Mr Stokes and one of his colleagues, Mr Gregory Smith, commenced a proceeding in which they claimed that NIL had breached contractual obligations to them and that AFL, Mr Prain and Cardno were also liable in respect of resulting losses. The defendants all entered defences and NIL and AFL counterclaimed.
[7] In mid-2018, NIL and AFL were wound up and struck from the register, resulting in the proceedings against those companies being stayed. The case against Mr Prain and Cardno remained on foot. The claims against Mr Prain and Cardno included allegations that both had acted fraudulently.
[8] In December 2019 Mr Prain and Cardno filed and served applications pursuant to r 15.1 of the High Court Rules 2016 for orders striking out the claims against them. They both contended that there was no reasonably arguable case against them.
[9] Those applications came on for hearing before Associate Judge Lester on 19 May 2020.
[10]In a judgment dated 5 June 2020 the Judge concluded that:1
[57] I find the proposed sixth amended statement of claim does not plead a reasonably arguable cause of action against Mr Prain and the statement of claim against him is struck out under r 15.1(a). For reasons I have given, I do not consider the cause of action against Mr Prain capable of being saved by amendment. That was the function of the proposed sixth amended statement of claim. No further proposed pleading was put up after the plaintiffs received the defendants’ submissions. Mr Stringer was not able to point to any material or otherwise explain how the pleading gaps could be rectified in an amended pleading. At the risk of labouring the point, the plaintiffs have had a number of indulgences from the Court to get their pleading in order. If that could not be done at the outset of these proceedings when the plaintiffs had experienced counsel, as they do now, I see no prospect of the situation changing.
[58] In respect of the deceit claim against Cardno, the same position applies and accordingly, the deceit claim against Cardno is struck out.
[11] In a further judgment dated 22 July 2020, the Judge dealt with costs.2 For reasons fully set out in the judgment, the Judge made costs awards against the plaintiffs. They — the plaintiffs — were jointly and severally liable for these costs awards, and it is the costs award in its favour that Cardno now seeks to enforce against Mr Stokes.
[12] I pause at this point to mention a discrete contention advanced by Mr Stokes in the course of his argument. The point he raised related to Associate Judge Lester’s judgment of 5 June 2020 striking out the claims against Mr Prain and Cardno. As Mr Stokes correctly says, at that point there was a stay of the proceeding in force that had been made some considerable time earlier by Associate Judge Matthews. At the time the temporary stay was ordered the plaintiffs’ extant pleading was their fifth amended statement of claim. Prior to the hearing before Associate Judge Lester on 19 May 2020, the plaintiff’s (then recently appointed) counsel had proffered a draft sixth amended statement of claim. Because of the stay, that document did not have the status of a formal pleading. Associate Judge Lester recognised this, but nevertheless proceeded to consider the application by Mr Prain and Cardno — in part, at least, — having regard to this document.
[13]Here is what the Judge said in his judgment:3
1 Smith & Stokes v Prain [2020] NZHC 1236 at [57]-[58].
2 Smith v Prain [2020] NZHC 1766.
3 Smith & Stokes v Prain, above n 1, at [14].
[14] The defendants’ applications were brought in December 2019. As I have said, the plaintiffs engaged counsel in February 2020. On 24 April 2020, the Court received a proposed sixth amended statement of claim prepared by Mr Stringer, counsel for the plaintiffs. Because the plaintiffs’ claim was stayed, the sixth amended statement of claim was not formally accepted for filing but treated as indicating the pleading the plaintiffs’ intended to file if the stay was lifted. Accordingly, the defendants focussed their challenge on the proposed sixth amended statement of claim, which I will refer to simply as the sixth amended statement of claim.
[14] Mr Stokes complains that Associate Judge Lester struck out their claim on the basis of an analysis of a pleading which by definition was not before the Court, at least formally.
[15] The difficulty with this contention is that it is clear from the judgment that the Judge struck out the plaintiffs’ proceeding against Mr Prain and Cardno, not on the basis of the inadequacy of the pleading in the draft sixth amended statement of claim, but on the basis of their consistent failure over a prolonged period of time adequately to plead their claim.
[16] The core criticism that the Court made of the plaintiffs’ pleadings — which runs right through the various iterations of their claim — was that it did not comply with pleading obligations requiring the plaintiffs to identify with clarity the damage suffered.
[17] It is clear from the closing passages of Associate Judge Lester’s judgment that his emphasis on the proposed sixth amended statement of claim reflected his conclusion that the inadequacies in the plaintiffs’ claim could not be rectified by further repleading.
[18] In any event, the plaintiffs did not appeal from Associate Judge Lester’s judgment of 5 June 2020.
[19] I turn then to what appears to be the essential basis for this application, which is that, since the Associate Judge Lester’s substantive and costs judgments were delivered, new evidence has emerged which undermines the foundation for the former and, therefore, by definition, the latter.
[20] While s 17 of the Insolvency Act provides for a judgment debtor to apply for an order setting aside a bankruptcy notice, this may only be done on the limited grounds set out in the section. As already said, notwithstanding the terms of his application, Mr Stokes does not claim to have a cross-claim or that there is new evidence of the sort envisaged in s 17. He attacks the underlying substantive judgment, that is to say Associate Judge Lester’s judgment striking out the claims against Mr Prain and Cardno, as being tainted by fraud.
[21] In the overwhelming majority of cases the Court will not reconsider the merits of the judgment giving rise to the judgment debt when considering an application such as this for an order setting aside a bankruptcy notice.
[22] In short, the entitlement of a party served with a bankruptcy notice to apply to set it aside is not a mechanism which is intended to operate as an alternative to appeal.
[23] However, in genuinely extraordinary circumstances, when the Court can be satisfied that there is some factor which vitiates the original determination, so that allowing parties to proceed on the basis of a bankruptcy notice founded on that judgment would facilitate an injustice, the Court will exercise its inherent jurisdiction to set the bankruptcy notice aside.
[24] In other words, the Court will not allow itself or its processes to become vehicles for injustice.
[25] There is no doubt that if a party can demonstrate that a judgment was obtained by means of fraud the Court will intervene — no authority need be cited for this.
[26]In the end, that is the argument Mr Stokes advances here.
[27] Mr Stokes says that that Cardno’s Mr Graham perjured himself in affidavit evidence that was before Associate Judge Lester, and that his evidence led to the striking out of the claim.
[28]The basis of this submission requires some explanation.
[29]The application is specifically directed at an affidavit sworn by Mr Graham.
[30] A point that should be noted is that Mr Graham’s affidavit which is the subject of this criticism was not filed in the substantive proceeding itself. It was filed in earlier caveat proceedings in which Mr Stokes and others unsuccessfully sought to sustain caveats that had been lodged over land within the subdivision. It will be necessary to return to this point.
[31] The component of the affidavit about which Mr Stokes complains is essentially para 21 where he says that “… the land across the development slopes from the highest point in the northwest to lowest point in the southeast meaning that it is not physically possible for stormwater from Lot 9 to drain to Lots 12–15 because of the upward slope from south to north”.
[32]This is then reinforced in para 27:
27. As I mentioned in my earlier affidavit [it] is not possible for the stormwater from Lot 9 to drain to Lots 12–15 because the distance would be too great, and the pipe outfall too deep (likely at least 4 metres below ground level) at the discharge point.
[33] The essence of what Mr Graham was saying in these paragraphs is that it was not feasible to drain stormwater from Lot 9 to Lots 12–15 because of the typography of the site and the distance between the two areas under consideration.
[34] Mr Stokes’ key contention is that in offering this evidence Mr Graham was telling a conscious lie.
[35] Essentially, the argument is that NIL had Mr Graham “in their pocket” and that Mr Graham offered this evidence because it would be financially beneficial for NIL to be able to avoid installing stormwater drainage between these points, against the background of a situation where he was motivated to assist NIL as the company owed Cardno a substantial amount of money in outstanding fees.
[36]Here is how Mr Stokes put the position in his submission:
Cardno knew their manager Richard Graham started up a new company “Richard Graham Surveying Ltd” on the back of taking over Cardno’s work and abetting NIL and others to defraud Stokes and others of their known interests.
[37] As Mr Wolff submits on behalf of Cardno, there are several reasons why this application for an order setting aside the bankruptcy notice cannot succeed, the most important of which are as follows:
(a)First, there is the point that Mr Graham’s affidavit evidence which is the subject of attack by Mr Stokes was not given in the substantive proceeding struck out by Associate Judge Lester in his judgment dated 5 June 2020, or the subsequent costs application which was dealt with by the Judge in his costs judgment dated 22 July 2020. They were affidavits sworn by Mr Graham in the earlier caveat proceeding and before the Court in the substantive proceeding only as exhibits to the Mr Graham’s affidavit evidence as a shorthand means of setting out the background. Thus, the affidavit evidence under attack was given by Mr Graham in different proceedings in which Cardno was not even a party. Whilst this is not a good starting point for Mr Stokes’ application, I do not regard that this is a dispositive consideration, viewed in isolation. If the relevant material was influential or might have been influential in the determination of the strike out application, then it would nevertheless be a matter to which the Court would be required to have regard in determining whether to exercise its discretion to set aside the bankruptcy notice.
(b)More importantly, Associate Judge Lester’s judgment was based primarily on procedural failings rather than any assessment of the cause of action, and it is by no means obvious to me that the evidence contained in Mr Graham’s affidavit was influential at all. It is noteworthy that Associate Judge Lester did not refer to this evidence in his judgments.
(c)Finally, I am unpersuaded, despite Mr Stokes’ vehement assertions to this effect, that the evidence he now puts before the Court establishes
that Mr Graham perjured himself. Mr Stokes played an audio recording of a conversation with Mr Graham during which he says Mr Graham admitted his perjury. There was also a transcript in evidence, which seemed to me to be accurate. It is not at all clear to me that Mr Graham concedes at any point in the discussion, despite Mr Stokes’ apparent bullying approach, that his affidavit evidence was inaccurate, let alone that it was knowingly false. In this regard, I note that in the context of his appeal against Associate Judge Lester’s costs judgment, Mr Stokes invited the Court of Appeal to allow in the further evidence on which he relies in this application. The Court of Appeal, in dismissing his appeal, refused to permit him to call this evidence. The Court referred to the evidence as “neither cogent nor credible”.4 Having now assessed that evidence myself, I respectfully agree.
[38] I am not satisfied that Mr Stokes has a credible argument that Associate Judge Lester’s judgments striking out the claim and awarding costs are vitiated by any fraud or perjury.
[39] Mr Stokes’ application for an order striking out Cardno’s bankruptcy notice is dismissed.
[40] I extend the time within which Cardno is entitled to commence a bankruptcy proceeding to 2 June 2023.
[41] I reserve costs as I have not heard from either party in relation to the same. My preliminary view is that Cardno is entitled to a costs order on a 2B basis. If the parties are unable to resolve costs then they may file memoranda in the usual way.
Associate Judge Johnston
Solicitors:
Morrison Kent, Wellington for Judgment Creditor
4 Stokes v Prain [2021] NZCA 683 at [45].
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