Clayton v Clayton
[2014] NZHC 2275
•18 September 2014
IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY
CIV-2014-463-000068 [2014] NZHC 2275
IN THE MATTER of the Insolvency Act 2006 AND
IN THE MATTER
of the bankruptcy of MARK ARNOLD CLAYTON
BETWEEN
MELANIE ANN CLAYTON Judgment Creditor
AND
MARK ARNOLD CLAYTON Judgment Debtor
Hearing: 12 September 2014 Appearances:
J R Hosking for Judgment Creditor
S R G Judd for Judgment DebtorJudgment:
18 September 2014
INTERIM JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
This interim judgment was delivered by me at 4.30 pm on 18 September 2014
Pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
CLAYTON v CLAYTON [2014] NZHC 2275 [18 September 2014]
[1] The judgment creditor and the judgment debtor were formerly husband and wife. Resolution of issues relating to their relationship property, property held in a number of trusts, and whether some of the latter is properly classified as the former were considered by the Family Court and a judgment was issued on 2 December
2011. After an appeal to the High Court, the Family Court Judge fixed and ordered the payment of costs by Mr Clayton to Mrs Clayton in the sum of $212,471. An application for a stay of this order has been declined.
[2] Mrs Clayton says that no part of this sum has been paid to her. On 6 May
2014 she issued a bankruptcy notice against Mr Clayton and served it. He has not complied with the notice. Mrs Clayton says he has committed an act of bankruptcy, and now applies to have him adjudicated bankrupt.
[3] On 19 May 2014 Mr Clayton filed a document titled “Application to Set Aside Bankruptcy Notice”. It set out five grounds on which it sought an order setting the notice aside. A sixth ground was referenced to an “affidavit to be sworn in support”.
[4] It is common ground that this document was filed within a period of
10 working days of service of the bankruptcy notice. However, no affidavit was filed in support of it until 12 June 2014, outside that period. Neither the application nor, later, the affidavit were served on the firm of solicitors who acted for Mrs Clayton on matters other than relationship property and who are named as the solicitors who issued the notice. They were, however, served on a different firm of solicitors in which Ms Hosking, who acts for Mrs Clayton on her relationship property dispute, is a partner.
[5] It seems the firm of solicitors which issued the bankruptcy notice was unaware of service of the documents to which I have referred. There not having been any response to the bankruptcy notice, it filed a creditor’s application for an adjudication order on 26 May 2014, and served it. This case was called before an Associate Judge in the High Court at Rotorua on 7 July 2014. The Minute issued by the Judge refers to “the defended adjudication application”, and “this adjudication
application” but makes no reference to the document upon which Mr Clayton relies
as an application to set aside the bankruptcy notice.
[6] The Judge allocated a fixture on 12 September 2014.
[7] The next day the Judge issued a further Minute, seemingly following an approach by memorandum from Ms Hosking in relation to the fixture date. The Judge confirmed the fixture date of 12 September 2014 and in his Minute referred again to “the adjudication application” but made no reference to any other application before the Court.
[8] Mr Clayton maintains that he filed and served a valid application to set aside the bankruptcy notice, which has not been decided. Mrs Clayton says that is not so; the document filed was not an application to set aside the bankruptcy notice, despite its title, it was not accompanied by an affidavit as required, and it was not served on the solicitors who issued the notice.
[9] It is necessary to determine, first, whether there is before the Court a valid application to set aside the bankruptcy notice, because r 24.10 of the High Court Rules provides:
(1) If an application to set aside a bankruptcy notice cannot be heard until after the expiration of the time specified in the notice as the day on which the act of bankruptcy will be complete, the time is treated as extended until the application has been determined.
(2) An act of bankruptcy is not committed by reason only of non- compliance with the notice until the application has been determined.
Is there an application before the Court to set aside the bankruptcy notice?
[10] Before an application can be made by a creditor to adjudicate a debtor bankrupt four criteria must be satisfied.1 Three are satisfied and need no discussion; the fourth is that:
the debtor has committed an act of bankruptcy within the period of three months before the filing of the application.
1 Insolvency Act 2006, s 13.
[11] Section 17 of the Insolvency Act 2006 provides (to the extent relevant):
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.
(2) The form that the bankruptcy notice must take is set out in section 29. (3) …
(4) The time limit referred to in subsection (1)(d) is, –
(a) if the debtor is served with the bankruptcy notice in New
Zealand, 10 working days after service; or
(b) if the debtor is served outside New Zealand, the time specified in the order of the Court permitting service outside New Zealand.
(5) …
(6) …
(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.
[12] It will be noted that s 17(2) is a mandatory direction on the form of a bankruptcy notice. It refers to s 29. Among other requirements for a notice, s 29 provides that a bankruptcy notice must be in the prescribed form.
[13] The prescribed form is form B2 in Schedule 1 of the High Court Rules. The bankruptcy notice issued by Mrs Clayton to Mr Clayton was in this form. After the address of the debtor, clause 1 provides that within 10 working days after service of the notice the debtor must take one of three steps. The first two are payment or giving of security for the sum claimed. The third alternative required step is to satisfy the High Court that the debtor has a counterclaim set-off or cross demand against the judgment creditor that equals or exceeds the amount claimed by the judgment creditor, and that the judgment debtor could not put forward in the action or proceeding in which the judgment or order was obtained.
[14] This mirrors s 17(1) and 17(7) of the Insolvency Act.
[15] It has become common terminology to describe the means of following the procedure in s 17(1)(d)(ii), satisfying the Court that a debtor has a cross claim against a creditor, as an application to set aside a bankruptcy notice. In fact, this is a misnomer, despite the phrase having made its way into r 24.10 of the High Court Rules. If the position described in s 17(1)(d)(ii) is established, an act of bankruptcy is not committed. From a debtor’s perspective, the crucial point is to establish the factual position provided for.
[16] The learned authors of Heath & Whale on Insolvency discuss the options facing a debtor.2 They note that a debtor may oppose a bankruptcy notice by affidavit, alleging a cross claim equalling or exceeding the amount of the judgment debt on which the bankruptcy notice is founded and which otherwise meets the terms of s 17(7). This is the entire ambit of challenge. If this is not established a bankruptcy notice properly issued will have the effect set out in s 17 – the debtor will have committed an act of bankruptcy.
[17] Although the accepted course for placing evidence on this point before the Court is by way of an application to set aside a bankruptcy notice, the factual position described in s 17(1)(d)(ii) will be derived from the evidence. Provision of
that evidence within the time provided (10 working days after service – s 17(4)) is
2 Paul Heath and Mike Whale Heath & Whale on Insolvency (2nd ed, LexisNexis, Wellington,
2013) at [3.8].
crucial to the successful establishment of the position a judgment debtor seeks to expound.
[18] Form B2 frames the notice to a debtor in compulsory terms. The notice in this case read, to the extent presently relevant:
To MARK ARNOLD CLAYTON of Rotorua, Company Director.
1. Within 10 working days after you are served with this notice (excluding the day of service) –
(a) you must pay to the judgment creditor, MELANIE ANN CLAYTON, $212,471.00 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, on which execution has not been stayed, that the judgment creditor obtained against you in the Rotorua High Court on 1
May 2014; or
(b) you must secure or enter into a new formal agreement with the judgment creditor or, alternatively, obtain the High Court’s approval of terms of payment; or
(c) you must satisfy the High Court that you have a counterclaim, set-off, or cross-demand against the judgment creditor –
(i) that equals or exceeds the amount claimed by the judgment creditor; and
(ii) that you could not put forward in the action or proceeding in which the judgment or order was obtained.
[19] Under the heading “Notes”, the notice further informed Mr Clayton:
Please carefully read the following information.
Consequences of not complying with notice
If you do not comply with paragraph 1, you will have committed an act of bankruptcy on which bankruptcy proceedings may be taken against you.
Procedure for counterclaiming etc
If you consider you have a counterclaim, set-off, or cross-demand against the judgment creditor that comes within paragraph 1(c), or you wish to seek the court’s approval of terms of payment, you must, within 10 working days from the date of receiving this notice, apply to the High Court. Your application must be supported by affidavit.
You must, within the same time, also serve a copy of the application and supporting affidavit on the judgment creditor.
[20] The notice finishes with the name, address and contact details of the solicitor who issued the notice.
[21] Mr Clayton failed to comply with these directions. The document he filed and upon which he relies, which is described on its face as “Application to Set Aside Bankruptcy Notice”, contains the following passage:
This document notifies you that:
1. The applicant Mark Arnold Clayton will on the day of 2013 apply to the Court for orders:
A setting aside the bankruptcy notice; B for increased costs.
2. The grounds on which each order is sought are as follows:
(a) the applicant has appealed from the judgment of Judge JF Munro delivered on 1 May 2014. The first judicial conference is set down for 10 June 2914 (sic);
(b) the applicant has applied for a partial stay of enforcement in relation to the decision appealed against. That application is set down for hearing on 16 June 2014;
(c) the applicant is solvent;
(d) bankruptcy proceedings should not be used simply as a form of debt collection;
(e) the respondent claims she cannot meet her reasonable needs; (f) appearing in the affidavit to be sworn in support.
[22] It will be noted that none of these grounds is directed at the sole basis upon which a bankruptcy notice may be set aside, namely that set out in s 17(1)(d)(ii).
[23] On 12 June 2014 an affidavit was filed by the solicitors then representing Mr Clayton. It is brief. Mr Clayton deposes to being the judgment debtor, to having appealed the decision of Judge Munro which awarded costs to Mrs Clayton, and to having applied for a partial stay of enforcement.
[24] Mr Clayton annexed to his affidavit a copy of Judge Munro’s decision on costs, a copy of an application for a partial stay of enforcement of that judgment, Mrs Clayton’s opposition to that, and her affidavit in support of it, notes of evidence taken before Judge Munro, exhibits referred to in it, and submissions made for Mr Clayton to Judge Munro on costs. There is no evidence even suggesting that Mr Clayton has the foundations of a cross claim in terms of s 17.
[25] It is well-established law that an application to set aside a bankruptcy notice must be brought in time. The form of a bankruptcy notice is mandatory and the form sets out not only the steps that a debtor must take, and the times within which they must be taken, but also the consequences of not doing so. Section 17 provides that an act of bankruptcy is committed unless the relevant steps are taken within 10 days of service of the bankruptcy notice. There is no basis for an extension of time to be given for compliance with the notice. In short, the establishment of an act of bankruptcy by a bankruptcy notice is governed by requirements which bind both creditor and debtor and are inflexible.
[26] Cases decided on issues arising in the application of s 17 and the rules relating to bankruptcy notices support this position, leaving aside s 418 of the Insolvency Act to which I will refer shortly. In Re Memelink ex parte SANCO (NZ) Ltd,3 an application to set aside a bankruptcy notice was filed in time but not served within the statutory period, and a supporting affidavit was not filed until over a month later. The affidavit was not served on the creditor. The learned Judge referred to authorities, and continued:4
[O]nce the tenth working day after service of a bankruptcy notice, not counting the day of service has passed, an act of bankruptcy occurs. Accordingly, provisions be they in the Insolvency Act 2006 or elsewhere which provide for some extension of time for bringing and serving applications will not assist. Blankly put, they cannot undo an event which has occurred, namely the act of bankruptcy.
It follows from these and other authorities that where an application (with the required supporting material) from a judgment debtor to set-aside a bankruptcy notice is filed after the tenth working day after service there is no jurisdiction for the Court to deal with that application.
3 Re Memelink ex parte SANCO (NZ) Ltd HC Wellington CIV-2008-485-2691, 10 March 2009.
4 At [11]-[15].
In my view, from the wording of the Insolvency Act 2006 and the provisions in the required Form B2 for bankruptcy notices, it is clear that a judgment debtor has only 10 working days from the date of service upon him of the bankruptcy notice to apply to this Court to set it aside and this application must be supported by affidavit. In addition, within this same 10 day working period the judgment debtor is required also to serve “a copy of the application and supporting affidavit on the judgment creditor”.
This has not happened in the present case. Even if the bare application itself was filed within the ten working day period after service of the bankruptcy notice it was not until one month later that the judgment debtor’s supporting affidavit was filed. Further, neither the application itself nor the affidavit in support were served upon the judgment creditor within that 10 working day period.
That said, there is no basis in law for me to deal with the judgment debtor’s application to set-aside the bankruptcy notice. The application must be dismissed. An order to this effect is to follow. (my emphasis)
[27] This decision is precisely on point, and I agree with the learned Judge’s
analysis.
[28] In Re Commissioner of Inland Revenue ex parte Bruce,5 Mr Bruce applied to set aside a bankruptcy notice served on him, within time, but did not file a supporting affidavit. The learned Judge applied Re Memelink and found the application to be a nullity. The debtor had committed an act of bankruptcy by failing to take one of the steps required by s 17 of the Insolvency Act.
[29] In ANZ Bank New Zealand Ltd v Edwards,6 an application to set aside a bankruptcy notice was filed within time but not served until outside time. The learned Judge found that an act of bankruptcy had been committed, the opportunity to seek to have the bankruptcy notice set aside having passed. She applied Re Memelink. She struck out the application.
[30] In Re Westpac New Zealand Ltd (1763882), ex parte Fung, Associate Judge
Faire applied Re Memelink and said:7
Where the time limit is not complied with an act of bankruptcy occurs and cannot later be undone by way of extending time. That is because an act of
5 Re Commissioner of Inland Revenue ex parte Bruce Auckland [2012] NZHC 1913.
6 ANZ Bank New Zealand Ltd v Edwards [2013] NZHC 2756.
7 Re Westpac New Zealand Ltd (1763882), ex parte Fung [2012] NZHC 2367 at [5]-[7] (footnotes omitted).
bankruptcy occurs at the moment there has been non-compliance: Re Scott ex parte ANZ Banking Group Ltd, Gillon v Blueprint Developments Ltd, Alexander v S H Locke (NZ) Ltd.
The result is that the application to set aside the bankruptcy notice in this case was flawed and accordingly I have no jurisdiction to consider the making of an order setting aside the bankruptcy notice.
The application is accordingly struck out.
[31] In Re Reynolds, ex parte Bartlett,8 Associate Judge Bell analysed this issue once more, and after noting one decision to the opposite effect, expressed the view that a valid application to set aside a bankruptcy notice must be both filed and served within the time for compliance with the notice. His Honour then observed:9
The basis for requiring service on the creditor within the time for compliance is to allow the creditor to establish at the end of the time for complying with the bankruptcy notice whether an act of bankruptcy has occurred or not. The creditor then knows when time will start running under s 13 of the Insolvency Act to bring a bankruptcy application. If an application is filed and served within time, the creditor will know that the time for complying with the notice has been extended until the setting aside application has been determined. Given that the purpose of the requirement for timely service is to bring the matter to the attention of the creditor there may be some room for leeway in other respects. While timely service is required it is necessary to bear in mind that frequently lawyers have to make setting aside applications within a limited time and often on very late instructions. The work often has to be carried out in something of a scramble. Under these circumstances, although an application must be served within the time for complying with the bankruptcy notice, the Court may have some flexibility by applying s 418 of the Insolvency Act, and following the approach taken by the Court of Appeal in Best v Watson. Where a setting aside application is filed in court in time but there may be difficulties with service the debtor’s lawyers can make sure that they advise the creditors promptly before the expiry of time that the application has been made even if there is some irregularity in service. They might email or fax a setting aside application to the creditor’s lawyers. It may be that at the time of service they do not know the first call date for the application and cannot inform the creditor’s lawyers. Those are mere irregularities. The key thing is that they do bring the matter to the knowledge of the creditor within time. Arguments from creditors that there were irregularities in the way they were informed of the matter are not likely to be received sympathetically.
I find that the present applications are not valid because they were not served within time. In the absence of any valid setting aside application, the time for compliance with the notice has not been extended under r 24.10. The debtors have already committed acts of bankruptcy.
8 Re Reynolds, ex parte Bartlett [2014] NZHC 447.
9 At [19]-[20] (footnotes omitted).
[32] Applying these principles I find that no valid application to set aside the bankruptcy notice was made. First, no affidavit setting out factual material from which the Court might be asked to find that Mr Clayton had a cross claim against Mrs Clayton in terms of s 17 was filed within the statutory 10 day period. Secondly, the application was not served on the solicitors who issued the notice. Nor was the fact of the application made known to those solicitors, before the expiry of time, a step which, applying the approach of Associate Judge Bell in Reynolds, may have laid a foundation for application of s 418 of the Insolvency Act.
[33] The application was served on another firm of solicitors which represented Mrs Clayton on relationship property matters. Mr Judd argues that this should be sufficient notice of the application for the Court to apply s 418, if indeed it is not sufficient service in itself. I do not accept that argument. I agree with the observations of Associate Judge Bell that the basis for requiring service on the creditor within time is to allow the creditor to establish whether an act of bankruptcy has occurred or not, at the end of the time period, and then to know when time starts to run under s 13 of the Insolvency Act to bring a bankruptcy application. The creditor will also find out whether r 24.10 applies. Serving another firm of solicitors which acts on different aspects of a person’s affairs is not sufficient. The Insolvency Act requires service on the creditor. Generally, service on that creditor’s nominated solicitors is sufficient to satisfy this requirement but it would be inconsistent with the importance of compliance with the mandatory statutory requirements to find that a creditor is served with a document of fundamental importance to the insolvency process when it is sent to a firm of solicitors which does not act for the creditor on these matters.
[34] Even if that conclusion is wrong, and application of s 418 should result in a finding that the application was sufficiently served, the absence of an affidavit in support nonetheless renders the application a nullity.
[35] It follows therefore that at no time has there been a valid application to set aside the bankruptcy notice before the Court. Therefore, r 24.10 does not apply, and an act of bankruptcy has been committed by Mr Clayton.
[36] It will be noted that I have refrained from referring to the content of the application and the content of the affidavit as a ground for finding that the application was a nullity. Mr Judd strongly argues that once an application is filed in the court it must be dealt with in accordance with the High Court Rules no matter how flawed it may be for any number of procedural or substantive reasons. He notes that some flaws may be capable of remedy under r 1.5 (non-compliance with rules) or r 1.9 (amendment of defects or errors) or under s 418. He says any flaws must be raised by the respondent to an application in a notice of opposition and then determined by the Court. The Court cannot leave it to a respondent to decide whether an application is fatally flawed, and then ignore it if that view is reached.
[37] Mr Judd is plainly right in that submission. As well, he is correct in his observation that in each of the cases to which I have referred, the Court considered an application to set aside the bankruptcy notice, and then made the findings to which I have referred. However, the cases have found not that each application should be dismissed on its merits, but that each application was a nullity. That is a different position. A creditor is entitled to strict compliance with the Act, just as a debtor is. The Act makes it very clear that if that compliance does not occur an act of bankruptcy is committed. I agree with Associate Judge Bell that r 24.10 only applies where a valid application to set aside a bankruptcy notice has been made.
Should Mr Clayton be adjudicated bankrupt?
[38] Mrs Clayton says that Mr Clayton should be adjudicated bankrupt. Mr Judd argues otherwise. His arguments can be conveniently grouped into five principal contentions. First, he says that Mrs Clayton has restraining orders preventing disposition of properties, and has registered notices under the Property (Relationships) Act 1976 against 23 properties. The restraining orders have been varied from time to time, the last change having been made on 1 September at which point Mrs Clayton received $150,000, on account of her entitlement to relationship property. Mr Judd says that the restraining orders prevent Mr Clayton accessing funds to pay, and Mrs Clayton is, in effect, secured.
[39] Whilst the restraining orders may prevent Mr Clayton accessing funds, there can be no doubt that Mrs Clayton would immediately sign a consent memorandum to vary the orders to release funds to pay to her. Mr Judd’s argument is, with respect, circular. The only reason Mrs Clayton has restraining orders and notices under s 42 of the Property (Relationships) Act is that Mr Clayton is not honouring either Family Court or High Court judgments in relation to division of property, or Family Court orders in relation to costs and maintenance. He had an opportunity to deal with the problem of which he now complains as recently as 1 September when the orders were last varied, but did not do so.
[40] Secondly, Mr Judd says that Mrs Clayton has received some payments and property on account of overall division of relationship property, even though the entitlement she may ultimately have remains before the Court of Appeal. I accept that may be so, but I do not see how it is relevant to this application. Mr Clayton has failed to comply with orders of this Court and the Family Court, none of which are stayed, or with a bankruptcy notice.
[41] Thirdly, Mr Judd says that if the appeal to the High Court against the costs judgment of the Family Court fails, Mr Clayton will be able to pay the debt. Again, that submission does not assist Mr Clayton. If the appeal fails, the Family Court judgment on costs will stand, but it stands now. It is not stayed. It was not explained to me how Mr Clayton’s ability to pay will be altered by the decision of the High Court on the appeal. His willingness to do so may alter and the amount he has to pay may alter, but that appears to be the extent of the effect of the judgment which will in due course be handed down. I return to the effect of the appeal against the Family Court costs judgment when considering the fifth argument presented by Mr Judd.
[42] Fourthly, Mr Judd says that Mr Clayton is solvent. He notes that s 37(b) provides that the Court may, at its discretion, refuse to adjudicate a debtor bankrupt if the debtor is able to pay his or her debts. In support of this proposition Mr Judd points to evidence which he says establishes that Mr Clayton’s assets exceed his liabilities, and that he has an income of some $280,000 per annum, from the companies which he or associated entities own. He notes that as recently as
1 September 2014, when Mr Judd completed what he described as the Southern
Cross transaction, the Bank of New Zealand relied on Mr Clayton’s personal
guarantee to the tune of $6 million.
[43] Ms Hosking says, however, that the assets upon which Mr Clayton relies in this assessment are the very assets which he says are owned by trusts and other entities in his case in the Court of Appeal, his argument being that these assets are not his and therefore are not relationship property. In essence Ms Hosking says that Mr Clayton is trying to have it both ways.
[44] Ms Hosking also refers to a statement of assets produced by Mr Clayton’s
accountant, Mr W L Giesbers. Mr Giesbers refers to an affidavit he swore on 7 July
2014, and then says:10
My confirmation as to Mr Clayton’s solvency was based on the schedule of the equity held directly and beneficially as recorded in the financial statements of the various entities as at 31 March 2013, annexed and marked “A”.
He refers to this annexure as a consolidated position statement based on the financial statements for all the entities referred to.
[45] Exhibit A sets out a total of $29,276,518 which Mr Giesbers describes as “total assets and entitlements of Mark Clayton at 31 March 2013”. This total is derived from two lists. Assets of $15,758,773 are described as “total assets owned directly by Mark Clayton”. Assets of a further $13,519,745 are described as “total assets Mark Clayton is beneficially entitled to”.
[46] Of the former, just over $19 million is described as Clayton Holdings Limited equity. Ms Hosking says that this is not a personal asset, rather it is the property of Clayton Holdings Limited, and Mr Clayton’s personal asset is the shares in that company which are in fact valueless. For this proposition she relies on evidence from a Mr Dent who gave evidence for Mr Clayton in the Family Court, from Mr Lyne who gave evidence for Mrs Clayton in the Family Court, and Mr Hagen who gave evidence in all courts on behalf of Mr Clayton. Ms Hosking says that
three said that the shares in Clayton Holdings Limited are worthless.
10 Affidavit of W L Giesbers, 8 September 2014, at [11].
[47] If this contention is correct, the assets owned directly by Mr Clayton in the list produced by Mr Giesbers reduces from $15,756,773 to a negative position of over $3 million.
[48] Whilst the equity owned by the company is not Mr Clayton’s, the value of his shares in this company is not established. The evidence of two of these three people was not before this Court on this application and I do not have direct access to it. I do have an affidavit from Mr Lyne, and refer to it below.
[49] Secondly, there are issues before the Court of Appeal in relation to the relationship property orders made by the Family Court, as the judgment of the High Court is under appeal. It is that Court which will ultimately decide which assets are susceptible to orders in favour of Mrs Clayton under the Property (Relationships) Act, and the value of those assets. Suffice it to say, for present purposes, that reference to the equity in the company in an asset list from Mr Clayton should be deleted, but I am not told what sum, if any, should be substituted for the value of the shares. This casts doubt on the net asset position.
[50] There are two affidavits before the Court from Mr Giesbers. He has been Mr Clayton’s financial advisor since 2008 and his accountant since 2013. He is chairman of the Claymark group of companies, a position he has held since 2008. He says he has oversight of the Claymark group’s finances. He also says he is responsible for administering the Clayton trusts and related entities in preparing their financial statements. He says that on the basis of all the information known to him in his professional roles Mr Clayton is solvent.
[51] Although Mr Giesbers devotes attention to accrediting himself as an expert, he is plainly not independent from Mr Clayton. I admit his opinion into evidence with that rider.
[52] Mr Giesbers’ second affidavit is dated 8 September 2014. Again, he devotes part of his evidence to accreditation as an expert, and repeats his evidence in relation to his role with Mr Clayton’s affairs. Mr Giesbers then refers to the restraining orders held by Mrs Clayton the effect of which, he says, is to freeze BNZ accounts of
the Vaughan Road Property Trust and to impose a restriction on other entities referred to in the list of assets to which he says Mr Clayton is beneficially entitled, to prevent any transactions that result in a reduction of their net equity. Mr Giesbers then refers to Mrs Clayton’s notices of claim under s 42 of the Property (Relationships) Act and says the effect of those notices “is to prevent these entities
from raising any additional funding against their assets”.11 He concludes by saying
that the result of the order and the notices is to severely restrict Mr Clayton’s access
to the equity shown in the asset list he produces (discussed above).
[53] Mr Giesbers concludes by referring to the solvency test in s 4 of the Companies Act, and confirms that Mr Clayton is solvent and able to meet that test, subject to his being able to access the equity to which he has direct or beneficial entitlement, by which I take it he means the assets in the list he produces.
[54] No information was provided by or on behalf of Mr Clayton on how it might be said that he can access equity in the assets described as those to which he is beneficially entitled. For example, I have not been told whether he now has a vested or contingent interest under any of the trusts, which are 15 in number. Nor do I know whether he can access an asset said to be worth $1 million and described as an advance to the Medford Trust from Mr Clayton, for example by showing whether that trust has any net or liquid assets from which it could make payment. The same applies to advances he is said to have made to other trusts. These factors, coupled with the element of doubt about the value of Mr Clayton’s shares in Clayton Holdings Limited, as distinct from that company’s own stated equity which is not, of course, his, provide a basis for the Court to treat Mr Giesbers’ assertion of solvency with a level of circumspection. That circumspection is heightened when a chartered accountant produces an asset list showing the equity in a company as an asset of a shareholder, particularly when this issue is, to his client’s knowledge, before the courts. However, he was not cross-examined.
[55] As well, there is evidence to weigh against Mr Giesbers’ view. Mrs Clayton swore an affidavit on 3 September 2014. I refer to relevant parts of her evidence.
First, she produces an affidavit from Mr Clayton dated June 2008. In that affidavit
11 Affidavit of W L Giesbers, 8 September 2014 at 15.
he claimed as separate property his shares in Clayton Holdings Limited, Kaimai Developments Limited and his interest in the Claymark Trust, the Stacey Clayton Education Trust, the Anna Clayton Education Trust, the Denarau Resort Trust and Vaughan Road Properties Limited. As well, he describes his interests in four of the trusts listed by Mr Giesbers as assets in which he has a beneficial entitlement as
“discretionary beneficiary”,12 a term he also applies to two other trusts referred to in
his affidavit but not in Mr Giesbers’ list. If this is still the case, it reduces the value of this portion of his asset list from around $13.5 million to around $1.5 million. Although the affidavit was sworn six years ago there does not seem any likelihood that an interest which was then discretionary is now vested.
[56] Secondly, Mrs Clayton produces a table, supported by a number of annexures, setting out what she believes to be Mr Clayton’s assets and liabilities. It discloses total assets of some $564,000, and total liabilities of some $4,802,000. The latter includes a current account said to be owed to the Vaughan Road Property Trust. The debt is $4,543,456, and that also appears in Mr Giesbers’ list of assets and liabilities of Mr Clayton, as a liability, so is beyond dispute.
[57] The other liabilities shown by Mrs Clayton are the costs award on which this application is based, and three unpaid instalments of maintenance ordered by the Family Court, due on 24 June, July and August 2014 respectively. These are also established. The net position is that Mr Clayton is insolvent to the tune of over $4.2 million, on the basis of this information.
[58] In this list Mrs Clayton does not give any credit for value of shares in Clayton Holdings Limited. To support this contention she produces an affidavit from Mr A J Dent, to whom I have referred earlier. He is a chartered accountant of Wellington requested by Mr Clayton’s counsel in the relationship property proceedings to provide an independent opinion on the value of that company. His affidavit contains a detailed analysis, and he concludes that in his view the value of the equity in this
company would be “negative at this time”. The affidavit was sworn in May 2011.
12 Affidavit of M A Clayton, 18 June 2008 at 3.
[59] The final information on Mr Clayton’s financial position to which I will refer is a transaction undertaken within the last few weeks involving the purchase of a sawmill by a company called Profiles Wood Products Limited. This is evidently a company owned by Mr Giesbers. However, this purchase of a sawmill involved Mr Clayton giving a guarantee of $6 million to the Bank of New Zealand. It is this transaction which led to Mrs Clayton applying for a restraining order, and thus to the orders made in September to which I have already referred. Mr Clayton has not explained to the Court why he has given a guarantee to the Bank of New Zealand in respect of a company, the shares in which are not disclosed anywhere in the evidence before me as an asset in which Mr Clayton has any ownership interest. Even putting aside the inherent likelihood of Mr Clayton assuming liability as a guarantor to the tune of $6 million in respect of advances to a company in which he has no interest, this contingent liability is not shown on the statement of assets and liabilities produced by Mr Giesbers in his affidavit of 8 September 2014, and it has the potential to impact negatively on the net asset position.
[60] There may be other guarantors of the advance, but ordinary commercial practice strongly suggests that if that is so, the guarantees would be joint and several. It was not suggested, and there is no reason to suppose, that Mr Clayton’s exposure is below $6 million.
[61] It is not possible, on the evidence produced to me, to make a firm finding on whether Mr Clayton is or is not insolvent. There is sufficient evidence to give me a significant element of doubt, on this application, that I should accept Mr Giesbers’ assertion, or his list of assets, at face value. There are contrary indications in relation to the value of Mr Clayton’s shares in Clayton Holdings Limited, no evidence on whether the trusts to which he is said to have made advances are able to repay those advances on demand, evidence that his interest in most of the trusts listed by Mr Giesbers is contingent, and evidence of a contingent liability which is not disclosed by Mr Giesbers.
[62] Whilst it might be inferred that in accepting a guarantee from Mr Clayton the Bank of New Zealand has satisfied itself that the guarantee is adequately backed, the information provided to the bank is unknown. If, for example, the bank has received
and acted on the list produced by Mr Giesbers without scrutinising it in the way it is challenged before me, drawing this inference would take the matter no further ahead. Similarly, it is not known whether the bank has been informed that Mr Clayton has judgments against him approaching $250,000, which are not stayed, and which he has not paid.13 The fact that these orders have not been complied with is evidence which supports the contention that Mr Clayton is insolvent.
[63] The costs judgment of the Family Court is under appeal, due to be heard by the High Court in November. The fifth element of Mr Judd’s argument is that this application should be adjourned until the result of the appeal is known. The Court may do so under s 42(2)(a). It is not appropriate to assess the strength of the appeal, save to note that it is against the exercise of a discretion. But I take into account on this point the refusal of the Court to grant a stay of the judgment, and that if Mr Clayton is solvent as he claims, he is able to abide by the order of the Family Court, even if that means he must arrange for release of restrained funds to do so.
[64] An application for adjudication in bankruptcy is not a process for the collection of inter partes debt, though it arises in the context of unpaid debts. It is necessary to also take into account the public interest. It is clear that Mr Clayton is actively engaged in business. I need refer to no more than his ownership and managing directorship of Clayton Holdings Limited and its associated companies, and his recent acceptance by the BNZ as a guarantor of a $6 million loan. If Mr Clayton is in fact insolvent, those who deal with him on business affairs are entitled to be aware that any credit they may grant to him, or other exposure to his activities which they may assume, has an element of risk. Here, Mr Clayton continues to operate in business with substantial unpaid judgments and no identified source for paying them. Indeed, it was an element of his case as presented by Mr Judd that he could not pay them because of restraining orders and notices in favour of Mrs Clayton, even though the restraining orders were reviewed as recently as the beginning of this month without any apparent action on the part of Mr Clayton to release sufficient monies to meet them. The same inability to pay must apply to
other credit he incurs.
13 This figure is drawn from the costs judgment of the Family Court and the unpaid instalments of maintenance.
[65] If these judgments were met, Mr Clayton’s net position would not necessarily alter; if he has the assets he claims to have, they would be diminished by the amount required to make payment, but on the other side of the equation his liabilities would reduce by the same amount. However, payment would remove from his overall financial position the immediate effect on his solvency of unmet Court judgments. As well, given the extent to which he appears to conduct his overall financial affairs through trusts, it may be that payments could be arranged in such a way that his personal asset and liability equation is not affected. I know insufficient of the affairs of the trusts to find that to be the position, and have not overlooked that if monies were advanced to Mr Clayton from a trust to meet these obligations, he would merely be swapping one liability for another with no net effect on his solvency. The difference, however, would be that one is an immediate liability, whereas an advance from a trust may not necessarily be made on those terms. And it is possible that he could receive funds from a trust by way of distribution which would increase assets without incurring a liability.
[66] I have therefore concluded that the appropriate course is to adjourn this application for a brief period to enable Mr Clayton to satisfy the outstanding judgments of this Court ($212,471) and the Family Court ($45,000) in full. If he is unable to do so, or does not do so even if able, the correct course appears to be to adjudicate him bankrupt.
[67] The application is adjourned to 9.00 am Thursday, 25 September 2014.
J G Matthews
Associate Judge
Solicitors:
Lance Lawson, Rotorua.
Tompkins Wake, Hamilton.
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