Chicama Land Company Limited (in liquidation) v Baker
[2024] NZHC 493
•22 March 2024
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
I TE KŌTI MATUA O AOTEAROA WHANGĀREI-TERENGA-PARĀOA ROHE
CIV-2023-404-001742
[2024] NZHC 493
UNDER the Insolvency Act 2006 BETWEEN
CHICAMA LAND COMPANY LIMITED (IN LIQUIDATION)
Judgment Creditor
AND
THOMAS PETER BAKER
Judgment Debtor
AND
DIANE BAKER
Judgment Debtor
Hearing: 1 February 2024 Appearances:
N R Frith / R A H Laugesen for the Judgment Creditor Judgment Debtors in Person
Judgment:
22 March 2024
JUDGMENT OF ASSOCIATE JUDGE GARDINER
This judgment was delivered by me on 22 March 2024 at 3.30 p.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date.......................................
Solicitors:
Minter Ellison Rudd Watts, Auckland
CHICAMA LAND COMPANY LTD v BAKER [2024] NZHC 493 [22 March 2024]
Introduction
[1] The judgment debtors, Diane Baker and Thomas Peter Baker (the Bakers), owe the judgment creditor, Chicama Land Company Ltd (in liquidation) (Chicama),
$145,649.13 plus interest pursuant to a final judgment of the Whangārei District Court dated 30 September 2022.1 The judgment relates to Chicama’s overdrawn shareholder account.
[2] The Bakers have committed acts of bankruptcy because they have each failed to comply with bankruptcy notices served in respect of the judgment debt. It is common ground that the presumption of insolvency has arisen. Chicama therefore seeks orders adjudicating the Bakers bankrupt.
[3] Chicama has filed separate bankruptcy applications against the Bakers. This judgment deals with both applications given the identical factual and legal basis.
[4] The Bakers oppose the applications. They ask the Court to exercise its discretion under s 37 of the Insolvency Act 2006 (the Act) because their age and financial circumstances are such that:
(a)it is not just and equitable to make an order for adjudication; and
(b)adjudication would be pointless and unduly punitive.
[5] Initially, the Bakers also opposed the applications on the grounds that they intended to pursue claims against their former solicitors and/or the solicitors for Chicama. Those grounds have since been abandoned.
[6]The Bakers’ arguments primarily fall under three heads:
(a)They do not own any assets and, if they were adjudicated bankrupt, Chicama would likely be unable to recover anything.
1 Chicama Land Company Ltd (in liq) v Baker [2022] NZDC 18081.
(b)They are elderly and do not pose any ongoing commercial risk.
(c)Bankruptcy could harm Mr Baker’s future employment prospects.
[7] The issue to decide is whether the Bakers have established a proper basis for the Court to refuse to adjudicate them bankrupt because of these considerations.
Background
[8] Chicama owned and operated a farming property near Whangārei. The Bakers are equal shareholders in Chicama. Mr Baker is the sole director. On 31 July 2020, the Whangārei High Court placed Chicama into liquidation and appointed Steven Khov and Kieran Michael Jones as liquidators.
[9] In exercising their statutory obligations, the liquidators discovered that the Bakers had caused Chicama to fund their personal expenses, resulting in their shareholder current accounts being significantly overdrawn. On 30 September 2022, Chicama obtained judgment against the Bakers for the judgment debt. The judgment has not been appealed or stayed.
[10]The following relevant events then occurred:
(a)On 12 December 2022, Chicama demanded the judgment debt from the Bakers but they failed to pay or respond.
(b)On 5 July 2023, Chicama served the Bakers with bankruptcy notices dated 23 March 2023 in accordance with substituted service orders.
(c)On 20 July 2023, the bankruptcy notices expired unremedied.
(d)On 28 July 2023, Chicama filed the applications, and served endorsed copies on the Bakers on 21 August 2023. The applications were filed in the Auckland Registry because, at that date, Chicama could not ascertain the Bakers’ place of residence (hence requiring service via substituted service orders), and the Auckland High Court is nearest by
the most practicable route to where Chicama’s liquidators carry on business at 59 Apollo Drive, Albany, Auckland.
(e)On 27 September 2023, the Bakers filed notices of opposition, applications to transfer the proceedings from the Auckland High Court to the Whangārei High Court and a supporting affidavit of Diane Baker dated 27 September 2023.
(f)On 28 September 2023, Associate Judge Taylor timetabled the applications to a defended hearing and directed Chicama to file a notice of opposition to the transfer application, or otherwise provide its consent, by 3 November 2023.
(g)On 13 October 2023, the Bakers advised that they no longer opposed the bankruptcy applications on the grounds that they intended to pursue a claim against their former solicitors and/or the solicitors for Chicama.
(h)On 22 November 2023, the proceedings were transferred to the Whangārei High Court by consent.
(i)On 6 December 2023, Chicama filed and served reply evidence.
Legal principles
Insolvency Act 2006
[11] The criteria for when a creditor may apply for the debtors’ adjudication are set out in s 13 of the Act:
13 When creditor may apply for debtor’s adjudication
A creditor may apply for a debtor to be adjudicated bankrupt if—
(a)the debtor owes the creditor $1,000 or more or, if 2 or more creditors join in the application, the debtor owes a total of
$1,000 or more to those creditors between them; and
(b)the debtor has committed an act of bankruptcy within the period of 3 months before the filing of the application; and
(c)the debt is a certain amount; and
(d)the debt is payable either immediately or at a date in the future that is certain.
[12] Under s 17, a debtor commits an act of bankruptcy (as required under s 13(b)) if a creditor has obtained a final judgment or final order against the debtor for any amount, the execution of which has not been halted by a court, and the debtor, having been served with a bankruptcy notice, has not complied with the requirements of the notice or otherwise satisfied the Court that he or she has a cross-claim against the creditor within the required timeframe.
[13] Section 36 provides that the Court may, at its discretion, adjudicate the debtor bankrupt if the creditor has established the requirements set out in s 13. It has been said that once the formal requirements for adjudication (now set out in s 13) are made out, the judgment creditor is prima facie entitled to an adjudication order.2 This Court has said:3
Whilst the petitioning creditor does not have an automatic right to obtain an order of adjudication, nevertheless the onus in those circumstances is on the debtor to persuade the Court that an order should not be made.
[14] The Court may, in its discretion, refuse adjudication for the reasons set out in s 37 of the Act. Section 37 provides:
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.
2 See Baker v Westpac Banking Corp CA212/92, 13 July 1993 at 3, 4 and 5–6; and Re Epirosa HC Wellington B498/91, 6 March 1992 at 5 and 8.
3 Kiwibank Ltd v Hutchin [2015] NZHC 1518 at [26].
[15] The Court of Appeal has observed that s 37 confers a “wide discretion” informed by various factors.4
[16]Relevant factors include:5
(a)the interests of those directly concerned including the petitioner, other creditors and the debtor;
(b)the wider public interest, including the public interest in exposing and controlling the insolvent debtor;
(c)whether adjudication is conducive or detrimental to commercial morality;
(d)the potential for further investigation procedures to be made available to creditors by the bankruptcy.
[17] The oppressive use of the bankruptcy procedure may be a ground for refusing an order.6 The undoubted absence of assets may be another ground, although that will not necessarily preclude an order given the public interest in continuing oversight over the bankrupt’s affairs and the disqualifications that go with bankruptcy.7 The Court must balance the various considerations and determine whether in the end the debtor has succeeded in showing that an order ought not to be made.8
Should adjudication be refused because of the Bakers’ personal circumstances?
The Bakers’ opposition
4 Body Corporate 68792 v Memelink [2018] NZCA 509, [2019] NZAR 127 at [15].
5 Re Fontein, ex parte Bank of New Zealand HC Auckland CIV-2009-404-7769 at [8], citing Eide v Colonial Mutual Life Assurance Society Ltd [1998] 3 NZLR 632 at 4–5.
6 Re Fontein, ex parte Bank of New Zealand, above n 5, at [9], citing Baker v Westpac Banking Corp, above n 2, at 4–5.
7 Commissioner of Inland Revenue v Brown [2016] NZHC 1232 at [14], citing Baker v Westpac Banking Corp, above n 2, at 4.
8 Re Fontein, ex parte Bank of New Zealand, above n 5, at [8], citing Eide v Colonial Mutual Life Assurance Society Ltd, above n 5, and McHardy v Wilkins & Davies Marinas Ltd (in rec) (, CA54/93, 7 April 1993) at 4.
[18] The Bakers submit that the Court should refuse to adjudicate them bankrupt because of their age, ongoing health issues, already difficult financial position, lack of assets, and because they pose no future risk to the commercial community.
[19] In their written submissions in opposition to the bankruptcy applications and an affidavit sworn by Mrs Baker, the Bakers state that:
(a)Mrs Baker is 80 years old, and Mr Baker is 74 years old;
(b)Mrs Baker is retired and has no intention or ability to return to work;
(c)Mr Baker is a truck driver, earning approximately $1,000 a week after tax;
(d)Mr Baker has had health issues, specifically Leptospirosis, which are ongoing;
(e)they have no assets, and over the last few years have sold everything they owned to keep up with cost of living increases;
(f)they rent a small property where they are living for $560 per week;
(g)they receive superannuation payments of approximately $770 to $820 a fortnight;
(h)they do not own any vehicles, but have the costs of driving, maintaining and insuring vehicles which they have borrowed from a friend;
(i)their income is barely enough to cover day-to-day living expenses;
(j)they have sold nearly everything they owned to cover costs of historical legal fees;
(k)they have around $2,000 to $3,000 in the bank;
(l)they have no intention to become directors or run a company again.
[20] The Bakers’ evidence is that they incurred the judgment debt due to ignorance, namely that they should have paid themselves salaries from the company rather than using company funds to pay for their personal living expenses. They say that they did not appreciate the difference between company drawings and salary.
[21] The Bakers submit that they pose no future risk to the commercial community. Mrs Baker’s affidavit states that they do not intend to manage a business again.
[22] On this subject, Chicama raised that the Bakers appear to be involved in the management of a registered New Zealand limited company, Te Arai Ltd. The Companies Office records that Mr Baker is the sole director, and that Mr and Mrs Baker each have a 50 per cent shareholding in the company. Mr Baker filed an annual return for the company on 18 April 2023.
[23] The Bakers say that they incorporated this company when they lived and owned a farm in Te Arai because they thought the company name might one day be valuable given the rapid development of the area. They say that the company is inactive, and they have taken steps to disestablish it.
[24] The Bakers submit that as they have no assets, bankruptcy serves no purpose. They refute the suggestion that they own three vehicles which they bought from the liquidators of Chicama. They say that these vehicles were purchased by a friend (Penelope Kempton), who is the registered owner of the vehicles according to vehicle registration records.
[25] The Bakers are concerned about the impact the stigma of bankruptcy may have on Mr Baker’s employment prospects.
[26] As some, but not all these assertions were corroborated by evidence in Mrs Baker’s affidavit, before the hearing I issued a minute giving Mr and Mrs Baker the opportunity to file further evidence.9 Specifically, I invited them to file:
9 Chicama Land Company Ltd (in liq) v Baker HC Auckland CIV-2023-404-001741, 1 February 2024.
(a)any evidence to show that they have only around $2,000 to $3,000 in the bank (such as current bank statements for all individual and joint accounts);
(b)the statutory declaration they provided to the liquidators providing details of their assets;
(c)any evidence to corroborate the submissions concerning the three vehicles, including registration records;
(d)any evidence to support the submissions concerning Te Arai Ltd, including that steps have been taken to disestablish this company.
[27] I also noted that Mr Baker had not filed an affidavit and directed that at a minimum he swear an affidavit deposing to the contents of the affidavit of Mrs Baker said to be made on his behalf.
[28] Mr Baker did not swear an affidavit and the Bakers did not provide the evidence requested before the hearing.
[29] During the hearing, the Bakers handed up further material that they wished to rely on. I accepted this material into evidence and gave the liquidators the opportunity to respond. The further material consisted of:
(a)an ANZ account summary for Mrs Baker dated 1 February 2024;
(b)a Westpac transaction statement for Mr Baker dated 16 January 2024;
(c)a Westpac transaction statement for Chicama Land Company Limited dated 6 August 2020; and
(d)registration records for vehicles with plates JMN156 and DWZ198 dated 22 January 2024, and for one vehicle with plate HANG10 dated 2 February 2024.
[30] After the hearing the Bakers sought leave to file further evidence. As they are self-represented I allowed them to file this evidence, which constituted a further affidavit from Mrs Baker concerning Te Arai Ltd and an affidavit from Mrs Kempton concerning ownership of the vehicles. I gave the liquidators an opportunity to make written submissions on this further evidence.
Chicama’s submissions
[31] Chicama makes two main submissions. First, that there is insufficient evidence about the Bakers’ asset position and personal circumstances before the Court, which warrants the Official Assignee investigating. At the hearing, Mr Spring for Chicama said that there was no evidence before the Court proving the Bakers’ assets and liabilities, their income, and the amounts contained in their bank accounts. There were no employment records to corroborate the assertion of Mr Baker’s income as a truck driver. Furthermore, there were unanswered questions about the three vehicles.
[32] Second, Chicama submits that there is a wider public interest in favour of adjudication, despite the Bakers’ age and their evidence about not intending to pursue any further business interests. There is evidence that the Bakers are involved in managing a company (Te Arai Ltd), and in the absence of any evidence to the contrary, this is an example of how the Bakers could continue to participate in the business community.
[33] Chicama acknowledges that the Bakers are elderly but submits that is not fatal to their application. Chicama submits that the judgment debt has been incurred entirely because of the conduct of the Bakers, namely taking money from the company to use for personal expenditure. Thus, Chicama submits, this is not a situation where the judgment debtors are blameless.
Assessment
[34] As noted, the starting position is that the Bakers have committed an act of bankruptcy. The onus is on them to persuade the Court that an order for adjudication ought not to be made.
[35] The Bakers’ age is a factor weighing against an adjudication order. Having said that, this is not a case where they are extremely elderly and past participating in commercial activities. At the hearing, Mr Baker explained that they have been specialist farmers for many years, contract grazing heifers for export to China. Mr Baker is still working. I did not form the impression that the Bakers necessarily intend to stay out of business activities altogether, despite Mrs Baker saying this in her affidavit and written submissions.
[36] The fact that Mr Baker remains the director of a company is concerning, even a ‘shelf company’, as he described it. Despite saying in their written submissions that they had taken steps to disestablish the company, by the hearing they had not in fact taken any such steps. In the affidavit filed after the hearing Mrs Baker confirms that the company has been inactive since it was established nearly the years ago, and that she and Mr Baker have spoken with multiple people at the Companies Office to have the company removed from the register since it was brought to their attention by the liquidators. However, questions remain about the status of this company. No emails or correspondence between the Bakers and the Companies Office have been annexed to Mrs Baker’s affidavit evidencing the attempts to deregister the company. Nor have the Bakers provided any accounting evidence (such as tax returns) to support their claim that the company is not active.
[37] As noted earlier, a lack of assets may be a ground for exercising the discretion to refuse to make an order, but it is not decisive, particularly if it is in the public interest that the debtor is subject to the disqualifications of bankruptcy.10 Submissions that the debtor has no assets are closely scrutinised.11 The onus is on the debtor to establish they have no assets, and their evidence must be corroborated.12
10 Commissioner of Inland Revenue v Brown [2016] NZHC 1232 at [14], citing Baker v Westpac Banking Corp, above n 2, at 4; and Re Fontein, ex parte Bank of New Zealand, above n 5 at [8], citing Eide v Colonial Mutual Life Assurance Society Ltd, above n 5, and McHardy v Wilkins & Davies Marinas Ltd (in rec), above n 8, at 3.
11 Re Richards, ex parte Auckland Finance Ltd HC Auckland CIV-2008-404-2324, 9 July 2009 at [53], citing Re Rossall ex parte Auckland Finance Limited HC Auckland CIV-2002-404-580, 30 April 2004.
12 Re Burridge ex parte Alderton & Kingston Nominees Ltd HC Auckland B107/94, 10 April 1995 at 7.
[38] Even allowing for the fact that they are not represented by counsel, the Bakers have not provided the minimum evidence the Court would require to exercise its discretion to refuse to order bankruptcy.
[39] At the hearing the Bakers discussed a budget they had prepared, dealing with their income and expenditure. I accept that, based on that budget, they appear to have a modest surplus every week.
[40] However, they have provided very little evidence to corroborate their assertion that they have no assets. In her affidavit, Mrs Baker deposes that she and Mr Baker sold almost everything they owned to fund legal and consultant fees and that they are renting their current address. She said that their only assets are $2,000 to $3,000 in the bank. At the hearing, they added that the only assets they have besides this cash are the furniture items in their house.
[41] In my minute prior to the hearing, I invited the Bakers to file evidence to show that they have only around $2,000 to $3,000 in the bank, and their statutory declaration to the liquidators providing details of their assets.
[42] At the hearing, Mr Baker provided a transaction statement for a Westpac Everyday Account for the period 17 December 2023 to 16 January 2024, with a closing balance of $2,108.59. He has not sworn an affidavit to confirm that he does not have any other bank accounts, or indeed, any other assets. The only income into this account is his superannuation, suggesting that he may have another account.
[43] Mrs Baker has provided an ANZ account summary which shows balances on 1 February 2024 totalling around $5,900 and a $7,700 credit balance on a Visa account. Mrs Baker has not provided any bank statements for these accounts.
[44] It appears from Mrs Kempton’s affidavit that she paid the liquidators for the three former company vehicles, which are registered in her name. However, it also seems from comments made by the Bakers during the hearing and Mrs Kempton’s evidence that there is some form of arrangement between them about the vehicles. It
was apparent that the Bakers use the vehicles when they need to and contribute to their maintenance.
[45] Overall, it is not conclusive from the evidence the Bakers have presented that they have no assets, and that therefore there would be no purpose to the Official Assignee investigating. It is especially concerning that Mr Baker has not sworn and filed an affidavit at least deposing to the truth of the contents of Mrs Baker’s affidavit, even after I specifically directed that in my minute.
[46] If a debtor is facing bankruptcy through no fault of their own, this may be a factor weighing against an order. That is not the case here. It was clear from what the Bakers said during the hearing that they have owned several farms and that these have been (before now) successful commercial operations. The liquidator’s latest report refers to Chicama also being involved in property development. It defies belief that the Bakers did not appreciate the difference between a salary and company drawings or that they should not be using company funds to pay for their personal living expenses.
[47] Also troubling is the fact that the Bakers do not appear to accept that there was anything wrong in what they did. At the hearing they alternately blamed their accountant or said that although it is poor practice to use the company bank account for personal expenses, it is what many people in the farming community do.
[48] Overall, and weighing these considerations, the Bakers have not persuaded me that their personal circumstances are such that an order ought not to be made. Given the incomplete picture of their financial position, I consider that there is merit in the Official Assignee being appointed to investigate whether there is any potential for recovery of assets for Chicama’s creditors, which stand at $1,355,100.13 Further, it is in the public interest that the Bakers be disqualified from running a business.
Result
[49]I order that:
13 Liquidators’ Seventh Report to Creditors and Shareholders, 30 July 2023.
(a)Diane Baker is adjudicated bankrupt;
(b)Thomas Peter Baker is adjudicated bankrupt.
[50]The time of these orders is 3.30 pm.
[51] Chicama will be paid its costs on a scale 2B basis, and reasonable disbursements to be fixed by the Registrar.
Associate Judge Gardiner
0
3
1