Carter Holt Harvey Limited v Schlegel

[2015] NZHC 1414

IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY

CIV-2014-470-188 [2015] NZHC 1414

BETWEEN

CARTER HOLT HARVEY LIMITED

Judgment Creditor

AND

BRIAN SCHLEGEL Judgment Debtor

Hearing:	22 June 2015 at 2:15pm
Appearances:	M J F Wright for Judgment Creditor Judgment Debtor in person
Judgment:	22 June 2015

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

Cooney Lees Morgan (MJF Wright) Tauranga, for Judgment Creditor

Copy to:

Josh McBride, Barrister, Auckland, for Judgment Creditor

Brian Schlegel

CARTER HOLT HARVEY LIMITED v BRIAN SCHLEGEL [2015] NZHC 1414 [22 June 2015]

[1]      Carter  Holt  Harvey  Ltd  has  applied  for  an  order  adjudging  Mr Schlegel bankrupt.    Until  recently,  Mr  Schlegel  was  represented  by  a  Tauranga  firm  of lawyers.  They filed papers asking for leave to withdraw.  I gather that Mr Schlegel has been unable to fund his representation.  I have earlier today given leave to those lawyers to withdraw.  Mr Schlegel is now unrepresented.

[2]      On 25 May 2015 I gave directions for the hearing of this application.  That included a direction that Mr Schlegel was to file any further evidence and any amended opposition by 5 June 2015, and any evidence in reply by Carter Holt Harvey was to be filed by 12 June 2015.   Mr Schlegel did not file any further documents.  Carter Holt Harvey filed a memorandum raising this point.  I issued a minute  dated  16  June  2015  giving  Mr  Schlegel  an  opportunity  to  file  further evidence by 5:00pm on 18 June 2015.   Mr Schlegel said that he did not find out about that minute until earlier on 18 June 2015.  He had limited opportunity in which to file any further evidence.

[3]      Instead, today he has produced a written submission setting out matters he wishes me to take into account in deciding the application.  Mr Schlegel had already provided some evidence as to his personal circumstances in an affidavit he swore on

19 March 2015.  He has repeated some of those matters in his written statement.  He has also raised other matters in his written statement which are more evidence than submission.

[4]      Mr Wright has taken the point that I ought not to take those additional matters into  account  because  they are not  sworn  evidence.    I assume that,  if  given the opportunity, Mr Schlegel would swear an affidavit confirming matters set out in his written statement.  I will proceed on the basis that the matters Mr Schlegel has set out in his written statement are matters that he wants to be taken into account and that he would give evidence to that effect if given the opportunity.  In doing that, I am stretching the point somewhat.   But I take into account the disadvantage that Mr Schlegel is in, in not being represented and in having difficulties in funding legal representation.

[5]      Carter Holt Harvey’s case is that it is a creditor of Mr Schlegel in the sum of

$68,013.30 under a judgment of the Tauranga District Court of 4 August 2014.  A certificate of judgment under the District Court Rules has been filed.  A bankruptcy notice for the judgment sum was served on Mr Schlegel on 15 November 2014.  He had 10 working days in which to comply with the notice, but he did not.  On expiry of the 10  working days he committed an  act  of bankruptcy under s  17  of the Insolvency Act 2006.  Carter Holt Harvey Ltd filed its application in February this year.

[6]      Under  s  13  of  the  Insolvency  Act  2006,  a  creditor  must  satisfy  these requirements to apply for a bankruptcy adjudication:

(a)       It must show that the debtor owes the creditor $1,000 or more, in the case of a single creditor.

(b)It must show that the debtor has committed an act of bankruptcy in the three months before the application was filed.

(c)       The debt must be for a certain amount.

(d)The debt must be payable either immediately or at a date in the future that is served on him.

[7]      All those requirements have been satisfied in this case.  Carter Holt Harvey is a creditor under a judgment for some $68,000; the act of bankruptcy was committed on 29 November 2014; the application was filed within three months after that date; and the judgment debt was payable on judgment being given.

[8]      The application was first called on 23 March 2015.   On 19 March 2015 lawyers instructed by Mr Schlegel filed a notice of intention to oppose, together with an extensive affidavit in opposition.  The notice to oppose had a single ground which said:

I do not owe a debt to the creditor (section 43(1)(a) Insolvency Act 2006).

[9]      I adjourned the application to allow Mr Schlegel to apply to the District Court to set aside the judgment.  Judge Ingram heard that application in the District Court on 4 May 2015.  He gave a decision on 6 May 2015 dismissing the application.

[10]     In the hearing today, Mr Schlegel accepted that it is not now open to this court to look behind the judgment.  Mr Schlegel has taken the judgment hard.  He continues  to  maintain  that  the  indebtedness  alleged  against  him  by Carter  Holt Harvey has been over-stated and continues to contend that the amount of the debt should be smaller.  Notwithstanding that, he still accepts that a judgment has been given against him and he is obliged to pay it.  Carter Holt Harvey sued him under a guarantee  which  he  gave  for  the  obligations  of  Cambridge  Homes  BOP Ltd,  a franchisee of Cambridge Homes Holdings Ltd.   Carter Holt Harvey sued him for building materials supplied under a running account but not paid for.  Mr Schlegel contends that there had been some confusion between materials supplied to the franchisee and materials supplied by Carters to other parts of the Cambridge Homes group.  Judge Ingram decided that it was too late now for Mr Schlegel to take issue with the amount of the debt.  In coming to that decision he relied on the terms of trade of Carter Holt Harvey.

[11]     The creditor has made out the grounds required under s 13 of the Insolvency Act.   Even if those grounds are made out, the court has a discretion whether to adjudicate the debtor bankrupt.   That discretion is found in ss 36 and 37 of the Insolvency Act:

36       Court may adjudicate debtor bankrupt

The court may, at its discretion, adjudicate the debtor bankrupt if the creditor has established the requirements set out in section 13.

37       Court may refuse adjudication

The  court  may,  at  its  discretion,  refuse  to  adjudicate  the  debtor bankrupt if—

(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.

[12]     I take it that Mr Schlegel would base his argument on s 37(c) to say that it is just and equitable not to make him bankrupt.  When the court considers the exercise of the discretion, the burden is on the debtor to persuade the court not to make an order of adjudication.

[13]     In his affidavit of 19 March 2015, Mr Schlegel set out certain matters under

the heading “Personal situation”:

[50]      I do not want to be made bankrupt.  I was adjudicated bankrupt on

23 October 2008 in relation to a guarantee I signed for a company I worked for.  I was the general manager for a company and I got tricked.  My wife

and I lost everything out of that, including our house which was valued at

approximately $1 million dollars.   We have struggled to come back from that.

[51]      Since I was adjudicated bankrupt, I have largely lived on my wife’s income.  Since the termination of the franchise agreement, I have applied for more than 150 jobs.  However, three things have let me down – I have too much experience for the job I am applying for, I am too old (I am 52) or, when they do a medical search, they find I broke my back in 2003.

[52]     I have no assets and I do not believe it is worthwhile for Carters to make me bankrupt. They will not get anything and it is a worthless exercise.

[53]      Currently I am a business consultant for some companies that are in financial trouble.  These companies are looking to me to set up a business to assist them further.  However, to do so, I need finance certification.  I have recently applied to the Finance Service Providers register so that I can advise in relation to finance and insurance.  I used to be a regional bank manager and I want to continue in this line of work. Things are looking bright for me, however, if I am declared bankrupt, I believe my pending Finance Service Providers application will not be granted.   I am fighting this bankruptcy because I believe there has been a miscarriage of justice, but more importantly, I believe I can earn a living through finance.  I will be unable to continue in this field if I am adjudicated bankrupt, and I do not want the strain of bankruptcy on me for the next three years.

[14]     In his written statement for today, Mr Schlegel has raised additional matters. He says he is now 53 years of age and he has a life-long spinal injury which raises problems for him in obtaining employment.  He says that if he goes bankrupt he will have to register as unemployed.  That will have an adverse effect on his son, who has an  ambition  to  join  the  Air  Force.    Mr  Schlegel  believes  that  his  status  as unemployed will jeopardise his son’s chances of being accepted into the Air Force.

He also explained that he has undergone difficulties in being able to deal with the present proceeding recently because of his son’s ill health.  He contends that his wife has left home and says that she will not return if he is bankrupted.  He contends that no one would benefit if he is made bankrupt.  He says that he has made proposals to Carters to pay the debt but Carters have not accepted them.  He had offered a lump sum, admittedly much less than the judgment debt.  He also made an offer to pay a minimum of $1200 a month and, if need be, up to 30 per cent of his income until the debt was paid off in full.  He contended that given his prospective income, he should be able to clear the debt inside three years.   He also says that his work in the financial sector would entail acting on behalf of borrowers to find lenders, and he would earn commission income from the lenders.  He had worked in that field in the past but under recent legislation he is now required to be registered.  That work does not require him to handle funds on behalf of other people, and that minimises the risk to the public in his undertaking that work.

[15]     He explained, in answer to my questions, that he has no other creditors.  In particular, he does not owe any money to the Inland Revenue.  He says he has not had any income since 2012 and has been very much reliant on his wife’s earnings to support himself.   Overall, he says there would be nothing gained from him being adjudicated bankrupt whereas there would be something for Carters if he is allowed to pay off the debt over time.

[16]     He also explained some circumstances about his previous bankruptcy.   On that I feel some diffidence in accepting what he says.   The circumstances of his previous bankruptcy seem most unusual and would need to be supported by more evidence than his simple explanation today.

[17]     The exercise of the discretion requires taking into account the interests of the debtor, the interests of the creditor,  as well as  the public interest.    In  deciding whether a debtor should be adjudicated bankrupt, it is helpful to take into account the main purposes of bankruptcy law.   I consider that there are five.   Not all of them apply in every case:

(a)      To ensure that the assets of the bankrupt are administered under the control  of  an  independent  person,  the  Official  Assignee,  in  the interests of the creditors.

(b)      To ensure accountability for obligations incurred.

(c)      To protect the commercial community against the debtor incurring further credit.

(d)To punish the bankrupt (this one is rarely applied, only in exceptional cases).

(e)      To discharge the bankrupt from liabilities so that the bankrupt can resume normal life again.

[18]     In considering whether to adjudicate a debtor bankrupt, it is necessary to consider alternatives to bankruptcy.  Section 8 of the Insolvency Act indicates that an insolvent debtor may have alternatives to bankruptcy such as making a proposal to creditors under subpart 2 of Part 5 of the Insolvency Act; paying creditors under a summary instalment order under subpart 3 of Part 5, or entry to the no-asset procedure under subpart 4.

[19]     None of those options are viable in this case.  Mr Schlegel says that he has only one creditor – Carters.  If Mr Schlegel were to put a proposal under subpart 2 of Part 5 it would not get off the ground because Carters would veto it.   As for a summary instalment order, Mr Schlegel does not qualify because it is a requirement that his total debts do not exceed $40,000.  He would also not be eligible for the no- asset procedure, because his debts exceed $40,000 and also because he has been

previously adjudicated bankrupt.1

[20]     Given that those alternatives are not available and that Mr Schlegel has not been able to negotiate a satisfactory arrangement with Carters to pay the debt off

over time, the decision for the court is a stark one, either to adjudicate Mr Schlegel

1      Insolvency Act 2006, s 363(1)(c).

bankrupt or, leave him to try to pay off the debt over time as best he is able. Mr Schlegel maintains that he has no assets and that he is dependent on his wife for financial support.  He suggests that he has a way forward, by obtaining registration as a financial services provider, which would give him a better income.

[21]    I assess his position with regard to the five provisions that I identified previously.   In regard to the administration by the Official Assignee, Mr Schlegel says that he has no assets at present.  That may well be understandable since he came out of bankruptcy in 2011 and it is unlikely that he would have accumulated much in the way of assets since then.  It is common for debtors to maintain that they have no assets.   That submission by itself is normally not a conclusive matter.   It is well recognised that courts will nevertheless make orders for adjudication because it is generally considered that there is an advantage in having someone independent to take charge of the affairs of the debtor and investigate them to see whether any asset can be gathered in for the benefit of creditors.  In this case Mr Schlegel’s say-so is not enough to prevent the first basis for bankruptcy applying.

[22]     The next is accountability for obligations that have been incurred.   This provision operates so that debtors are held accountable for the liabilities that they have incurred.  The principle is that someone who has incurred liabilities without the means to meet them needs to understand that there will be consequences in the event of non-payment.  The courts have followed that in bankruptcy applications in cases where guarantees have been given.  An example is a decision of Master Kennedy- Grant in Re Coll, ex parte Consumer Finance Ltd.  That was a case where a financier had obtained a guarantee.  I regard the position of Carter Holt Harvey as comparable. It was not the supply of funds but the supply of building materials which was the

subject of the guarantee.  Master Kennedy-Grant said this:2

He has incurred those liabilities by giving guarantees.  He has not honoured his guarantees.   He is not in a position to honour his guarantees.   The guaranteeing of financial advances to companies by directors of those companies is standard practice in New Zealand.  It is an almost invariable requirement of lenders.   Without the additional security provided by such guarantees, lenders would very often not make advances.  The directors of companies  obtain  the  benefit  for  their  companies  of  advances  made  in reliance on their guarantees.   It would not, in my view, be conducive to

2      Re Coll ex parte Consumer Finance Ltd HC Rotorua, B 69/97, 18 September 1997 at 7.

commercial morality – the proper consideration by directors of whether they can give guarantees and the proper consideration by directors of whether, once  having  given  guarantees,  they  should  honour  them  –  if  I  were  to dismiss the petition.

[23]     Master Kennedy-Grant also made similar comments in Re D’Esposito, ex

parte Westpac Banking Corporation:3

I  have  had  occasion  to  comment  before  on  the  fact  that  the  giving  of personal guarantees is an integral part of the financing of business.  Failure to  honour  personal  guarantees  can  have  serious  consequences  for  the creditors to whom they have been given.  The general expectation among the business community and on the part of those who finance business must be that guarantees, if given, will be able to be honoured, that the guarantors have assets against which the person to whom the guarantees are given may proceed if the guarantees are not honoured.

[24]     I find that factor of accountability applies in this case.  Carter Holt Harvey supplied building materials on credit to Cambridge Homes (BOP) Ltd in reliance on Mr Schlegel’s guarantee.  It would not be an acceptable response for there not to be consequences when Mr Schlegel’s guarantee turns out to be worthless.

[25]     I make it clear that I do not regard this as a case where Mr Schlegel’s conduct

is of the sort requiring punishment.

[26]     There  is,  however,  the  question  of  risk  to  the  commercial  community. Mr Schlegel has already been bankrupt once.   Since his discharge, he has again incurred a liability which he cannot pay.   In my view becoming insolvent in a relatively brief period after discharge from bankruptcy does present a heightened risk to the commercial community.

[27]     There is also the question of Mr Schlegel’s wish to be registered under the financial services legislation.   He makes the points that if he were bankrupted he would not be eligible for registration and that he would not be handling monies on behalf of other people.  Notwithstanding that, a decision not to bankrupt him would in effect allow him to fly under false colours.   He is insolvent but would present himself as free from bankruptcy and would be free to incur further credit.   He

therefore presents more of a risk to people who may deal with him than others who

3      Re D’Esposito, ex parte Westpac Banking Corporation HC Napier B16/98, 30 June 1998 at [19].

would otherwise be eligible for registration.  In my judgment he should not have the opportunity to be registered under the financial services legislation when he is in fact insolvent.

[28]     Finally,  the  fifth  purpose  of  bankruptcy  also  counts  in  favour  of  an adjudication.  There is an immediate disability imposed on Mr Schlegel in that he is unable to work on a self-employed basis until his discharge.  Normally that discharge comes after three years.   The alternative for Mr Schlegel is that he will have a liability which, notwithstanding his best wishes, I consider he will struggle to discharge.  The advantage of bankruptcy is that the debt is taken off him. After three years he will be freed of that debt and have an opportunity to set himself up again.

[29]     I accept that Mr Schlegel has tried to obtain employment and that he has real problems, in part because of health issues.  Notwithstanding that, I am not satisfied that those personal factors should count against my making an order in favour of Carter Holt Harvey.  The interests of others, the community at large, and Carter Holt Harvey in this case must prevail at the expense of Mr Schlegel’s own personal interests.

[30]     Accordingly in the exercise of the discretion I am satisfied this is a proper case for Mr Schlegel to be adjudicated bankrupt.  I record the time of the order as

3:25pm.

[31]     Carters are entitled to costs on this application.  I make an order that Carter

Holt Harvey Ltd is to have costs on a 2B basis.

………………………………………..

Associate Judge R M Bell