Commissioner of Inland Revenue v Barron-Afeaki

[2019] NZHC 1857

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-002718

[2019] NZHC 1857

IN THE MATTER

of the Insolvency Act 2006 and

IN THE MATTER

of the Bankruptcy of KAHUNGUNU WILLIAM BARRON-AFEAKI

BETWEEN

THE COMMISSIONER OF INLAND REVENUE

Judgment Creditor

AND

KAHUNGUNU WILLIAM BARRON- AFEAKI

Judgment Debtor

Hearing:	31 July 2019
Appearances:	T Saunders for Judgment Creditor S J Tee for Judgment Debtor
Judgment:	2 August 2019

JUDGMENT OF ASSOCIATE JUDGE MATTHEWS

This judgment was delivered by me on 2 August 2019 at 12 noon pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

Solicitors:

Legal Services Hamilton (T Saunders), Inland Revenue, Hamilton Morton Tee Limited, Takapuna

The Commissioner of Inland Revenue v Barron-Afeaki [2019] NZHC 1857 [2 August 2019]

[1]    The Commissioner of Inland Revenue  applies  for  an  order  adjudicating  Mr Barron-Afeaki bankrupt. The application is based on a judgment entered in the District Court on 7 August 2018, in the sum of $88,264.49. With the addition of interest and penalties Mr Barron-Afeaki’s debt to the Commissioner stood at

$245,430.88 when an officer of the Inland Revenue Department swore an affidavit in support of this application.

[2]    Mr Barron-Afeaki opposes adjudication. He relies on s 37(b) and (c) of the Insolvency Act 2006, which provide that the Court may, at its discretion, refuse to adjudicate a debtor bankrupt if the debtor is able to pay his or her debts, or it is just and equitable that the Court does not make an order of adjudication. He accepts that he is currently unable to pay the debt.

[3]    Apart from indicating that he does not accept that the interest and penalties calculated by the Commissioner are correct, a point on which Mr Barron-Afeaki presented neither evidence nor argument, he asks the Court to exercise its discretion not to adjudicate him bankrupt because it would not serve any purpose, the making of an order would jeopardise his ability to earn, and he has a significant prospect of well- paid work which, should it come to fruition, would enable him to repay the debt in full.

[4]    The principles to be applied by the Court when considering a request by a debtor that it exercise its discretion not to adjudicate that debtor bankrupt are the subject of a number of cases. They were drawn together in a convenient summary by Associate Judge Bell in Re Commissioner of Inland Revenue, Ex Parte Brown.1 From the principles enunciated in that case I draw the following as being of specific present relevance:

(a)A creditor who establishes the jurisdictional facts set out in [s 37] is not automatically entitled to an order. On the other hand, it is for an opposing debtor to show why an order should not be made.

McHardy v Wilkins & Davies Marinas Ltd.2

1      Re Commissioner of Inland Revenue, Ex Parte Brown [2016] NZHC 1232 at [15], quoting Re Fontein, ex parte Bank of New Zealand HC Auckland CIV-2009-404-7769, 22 November 2010.

2      McHardy v Wilkins & Davies Marinas Ltd CA 54/93, 7 April 1993 at 3.

(b)… in the exercise of the discretion under [s 37] it is proper for the Court to consider not only the interests of those directly concerned – the petitioner, other creditors, the debtor – but also the wider public interest.

(c)In determining whether an order should be made the wider public interest must be taken into account to determine whether adjudication is “conducive or detrimental to commercial morality and the interests of the general public”.

Re Nesbit Ex Parte Vala.3

(d)… on a bankruptcy petition the Court must have regard to public interest in a way which transcends the interest of the immediate parties to the proceeding … The public interest in exposing and controlling an insolvent debtor is one which exists quite independently of the separate question of debt collection by his immediate creditors.

Re Fidow.4

[…]

(g) There is a need “… for the Court to balance the various considerations relevant to the case and to determine whether in the end the debtor has succeeded in showing that an order ought not to be made.

McHardy v Wilkinson Davies Marinas Ltd.5

Mr Barron-Afeaki’s personal circumstances

[5]    Mr Barron-Afeaki is a barrister of this Court and a Senior Counsel in the Kingdom of Tonga. He is a notary public in New Zealand. He practises in both jurisdictions.

[6]    He does not have assets of any significance in New Zealand: just two vehicles, and household furniture. He does not own any real estate.

[7]    Mr Barron-Afeaki does not disclose his present income. However, I note that the judgment debt is comprised of both income tax and GST. A summary of his account with the Commissioner shows unpaid sums for GST over an eight-month period from November 2016 to July 2017. The total was just under $15,000 suggesting an income after expenses, but before income tax, of approximately

3      Re Nesbit, Ex Parte Vala [1934] GLR 553 at 556.

4      Re Fidow [1989] 2 NZLR 431 at 444.

5      McHardy v Wilkins & Davies Marinas Ltd, above n 2.

$100,000 or some $12,000 per month. His income over later periods, or presently, is not known. Mr Barron-Afeaki has two children who rely on him for financial support.

[8]    Mr Barron-Afeaki maintains that he can, nonetheless, repay the judgment debt if given more time. He says that he has been waiting for some time to take up “an extremely lucrative position”. If this comes to fruition the debt can be cleared. I return to this issue below.

[9]    Mr Barron-Afeaki says that an order for adjudication would cause him acute embarrassment, and issues of stigma in the Kingdom of Tonga. He says his late father held the title Afeaki. He was a high chief and protocol advisor to the king. This title has now been bestowed on his elder brother who holds the family land and title. He was appointed senior counsel by the Supreme Court of Tonga and in that capacity has provided advice to the king, the government, Royal Commissions of Inquiry and to the Tongan people on significant legal issues which include pro bono work. Another of Mr Barron-Afeaki’s brothers has been appointed a Law Lord and sits on the Privy Council representing the Kingdom of Tonga. All of these persons share the Afeaki name and Mr Barron-Afeaki is concerned about the shame he would bring upon his family if an order were to be made. He would be embarrassed and have lesser standing within the culture and community of Tonga. As well, Mr Barron-Afeaki is a respected member of the Polynesian community in Auckland, and adjudication would cause him embarrassment in this community.

[10]   In support of his contention that he may in due course take up a lucrative employment position, Mr Barron-Afeaki  produced  to  the  Court  a  letter  from  JHT Management Services  Limited (JHT) dated 14 May 2019.  This is signed by  Mr John Hauraki and is addressed “To Whom It May Concern”. Mr Hauraki says he is the owner and director of this company which has been formed “to spearhead investment, management and consultation opportunities in New Zealand and the South Pacific region”. He says that funding for this initiative is primarily to come from Hong Kong and China. JHT has for the last four and a half years researched and developed a platform, and services and human resources so it is ready to move into the market with   its   business   once   agreed   seed   funding   becomes   available. Funding of

$25,000,000 was expected to come from Hong Kong in early to mid 2018. Mr Hauraki

says this investment was delayed by Chinese Government regulations and processes, but that these have now been satisfied. He says that JHT is now ready to commence its services, and that the seed funding has been increased to $100,000,000.

[11]   Mr Hauraki says that Mr Barron-Afeaki has been advising him for the last three and a half years on legal and strategic issues in preparation for JHT’s business getting underway. As a result JHT has offered Mr Barron-Afeaki a full-time executive role on its executive investment committee, which Mr Barron-Afeaki has accepted. When JHT receives its $100,000,000 of seed funding Mr Barron-Afeaki will be paid

$2,000,000 as a sign-on fee to cease all other legal or corporate client relationships, and after that he will receive a full-time annual salary of $450,000 together with travel and entertainment allowances of $150,000, a vehicle and comprehensive insurance.

[12]   Mr Hauraki says that in the last week of May 2019 he intended to travel to Hong Kong to establish the line of credit referred to, and remain in China for three to four weeks to ensure all final requirements and processes were completed. On that basis Mr Hauraki, whilst acknowledging knowledge of Mr Barron-Afeaki’s current IRD issues, supports a delay in the case to enable the above arrangements to be put in place.

[13]   Some  elaboration  on  this  information  is  contained  in  an  affidavit  of   Mr M L Herewini, the Chief Executive Officer and a director of JHT. Mr Herewini says that in May 2019 JHT was ready to commence its services in New Zealand and the South Pacific with the seed funding it expected. It remains ready to do so. Since May there have been ongoing discussions “with China”, and recent requirements of the Chinese Government are now “finally reaching a conclusion”. He affirms on oath that the offer made to Mr Barron-Afeaki is sound and genuine and JHT is committed to it. The project on which JHT intends to embark is not a short-term commitment and although frustrating delays have occurred, these do not preclude and should not overshadow JHT’s commitment, nor the viability of the project (on which no further details are given).

[14]Mr Herewini confirms Mr Barron-Afeaki’s intended remuneration package.

[15]   The proposed trip with Mr Hauraki to Hong Kong in May did not take place because of what Mr Herewini describes as “Chinese… red tape”. However, he had intended to remain in China for three to four weeks at that time to ensure that all final requirements and processes were put in place to enable the transfer of the agreed seed funding.

[16]   That trip to China is now expected to take place in late-August and will require at  least  four  weeks  to  ensure  that  all  formalities  are  finalised.  Accordingly,  Mr Herewini asks, as Mr Hauraki did in his letter, for a delay to the current proceeding.

[17]   When the Commissioner commenced proceedings against Mr Barron-Afeaki in the District Court, he initially filed a defence. In April 2018, during a period of case management of that proceeding, Mr Barron-Afeaki filed a memorandum to which was annexed a letter from JHT dated 11 June 2018, in very similar terms to the letter now before this Court, and parts of Mr Herewini’s affidavit. At that point Mr Hauraki said that he had been assured that the funding expected from Hong Kong would be transferred to JHT by 20 July 2018. He also intended to travel to Hong Kong at that point  to  meet  with  others  involved.  The  remuneration  package  intended  for  Mr Barron-Afeaki is described in the same terms as it is now. The seed funding, however, was limited to US$25,000,000 not $100,000,000 as now stated (without stipulation of currency).

[18]   Neither Mr Hauraki, in either of his letters, nor Mr Herewini in his affidavit, says or implies that Mr Barron-Afeaki’s employment with JHT would not, or even may not, take place in the event that he is adjudicated bankrupt.

[19]   In an affidavit in opposition, Ms Ambrose, an officer of the Inland Revenue Department, deposes to details of Mr Barron-Afeaki’s taxation liabilities, including payments he has made along the way. She also discloses that Mr Barron-Afeaki was adjudicated bankrupt by the Court on 3 November 2011 on the application of the Commissioner, in respect of unpaid tax amounting to $415,808.77. Mr Barron-Afeaki was discharged from bankruptcy in November 2014, but immediately began to accrue fresh income tax and GST debt. Although Mr Barron-Afeaki has made some

payments on account of his commitments to the Commissioner he has not at any point been up to date, nor is he paying GST collected on current income from his practice.

Discussion

[20]   Relying on the letters written by Mr Hauraki and the affidavit of Mr Herewini, Mr Tee for Mr Barron-Afeaki asks that the Court give more time to Mr Barron-Afeaki to clear his debt to the Commissioner. In a candid and helpful exchange with the Court Mr Tee indicated that any means by which this might be achieved would be acceptable. The period of delay which he sought was until the end of September 2019. He based this on Mr Herewini’s evidence that it was expected that JHT would be in a position to finally put together the formalities for its seed capital. This is likely to take at least four weeks starting in late-August 2019. Thus, Mr Tee pins his client’s opposition to the Commissioner’s bankruptcy application entirely on the prospect that given more time of this duration there is a real likelihood that the debt will be paid in full and bankruptcy can be avoided.

[21]   A number of factors favour delaying an adjudication in bankruptcy for the period sought. I will refer to these before reviewing the factors which point the other way.

[22]   First, Mr Barron-Afeaki does not have any other creditors. He is not engaged in any commercial venture which might be putting other members of the community at financial risk of dealing with him whilst he is insolvent, until the end of September.

[23]   Secondly, although Mr Saunders for the Commissioner argues a degree of prejudice to the Commissioner from any further delay in adjudication, the evidence establishes that there is no prospect of the Commissioner receiving any money at all towards the tax arrears if Mr Barron-Afeaki is adjudicated bankrupt now, and unless the JHT proposal is sheeted home, that will remain the position. The Commissioner’s prospect of recovering the tax which she has a statutory duty to collect is entirely dependent on this transaction. There is a relatively minor prejudice to the Commissioner in that Mr Barron-Afeaki continues to work as a barrister but is not presently accounting for GST he receives. In the bigger picture before the Court, however, delaying adjudication for another two months would be relatively

inconsequential in this respect. In short, without the JHT transaction there is nothing available to the Commissioner now, and will not be later.

[24]   Thirdly, I accept that in Mr Barron-Afeaki’s case there is a prospect of material prejudice to him by his being adjudicated bankrupt. I am satisfied he has some stature within the Polynesian community in Auckland and it is clear that he holds a position of some seniority as a legal practitioner in Tonga. I think it likely that adjudication in bankruptcy would carry with it a greater stigma for Mr Barron-Afeaki than for many other members of the community.

[25]   There are also factors which dictate that adjudication should take place now. First, the prospective arrangement with JHT has been in the wings for well over a year. Reference has been made on a number of occasions, and in the context of two cases, this and the proceeding in the District Court, to regulatory requirements which are said to be taking time to comply with, but have in each communication been said to have been either dealt  with,  or  to  be  close  to  being  finalised.  Even  now  it  seems  Mr Herewini has to go to China for up to four weeks to finalise matters. Given the history of putting this funding together it seems to me realistic to think that there may yet be obstacles in the way of it being finalised.

[26] Secondly, if adjudicated bankrupt Mr Barron-Afeaki can continue to work at his profession. A prohibition on that in earlier legislation is not in the Lawyers and Conveyancers Act 2006. In this way he can provide for himself and his dependent children.

[27]   Thirdly, Mr Barron-Afeaki has already been bankrupt and indeed his annulment was only around five years ago. The stigma of bankruptcy already surrounds him and to the extent that it has an effect within his community and in Tonga, he is already required to manage that situation. There is no evidence that it is impeding his professional life or personal life. I am prepared to accept that a second bankruptcy may make the stigma greater, but I do not consider that this will be so to a material degree.

[28]   Fourthly, if the JHT transaction is concluded and the substantial cash payment to Mr Barron-Afeaki is made, he could immediately clear all indebtedness, together with any costs incurred by the Official Assignee, and apply for annulment of his bankruptcy. There does not seem to be any reason why annulment would not follow. If the JHT transaction comes  to  fruition  within  the  time  period  hoped  for  by  Mr Herewini, there does not seem to be any reason why Mr Barron-Afeaki could not take up his intended role with that company as soon as it is in a position to commence business. Thus, if adjudication in bankruptcy occurs now but the funding expected by JHT arrives within the next few months, Mr Barron-Afeaki could be out of bankruptcy very early on in his new role. There is nothing in either of the letters to which I have referred, or the affidavit of Mr Herewini, which states or implies that Mr Barron- Afeaki will not be employed by JHT if he is bankrupt.

[29]   Weighing up all these factors I have formed the view that the Court cannot delay any further the adjudication sought by the Commissioner, for the following reasons. First, although Mr Barron-Afeaki does not have any other creditors and is not engaged in any commercial venture of risk to other parties, he is asking the Court to exercise a discretion in his favour when he is not even paying to the Commissioner current GST obligations. Rather, he has completely abdicated his responsibility to comply with the GST legislation and to account to the Commissioner for GST collected on business income which he has received. The reason for this is not clear but if it stems from needing to use this money for living expenses (which is not suggested in evidence, but may be one inference which can be drawn) he is in a relatively parlous financial state in terms of income and liabilities. This poses a degree of risk to the community as well, of course, as being a risk to the Commissioner.

[30]   Secondly, although I accept that there is a prospect of Mr Barron-Afeaki receiving a financial sum in cash, that is contingent on the JHT transaction finally taking place and on the evidence before me I find that there is a material element of uncertainty about that. This prospective source of funds to pay the Commissioner’s debts differs from an asset in New Zealand which will be received, even if at an unknown date, such as an interest under a trust or an estate, or the sale proceeds of an asset, or an advance from a known source. If the difficulties in finalising the seed capital are sufficient to have delayed matters for well over a year, no certainty

surrounds JHT’s ability to comply in the short term with those requirements, or even in the longer term. Even now, another four weeks are required on the part of the directors of JHT, in China, to “finalise formalities”. This leaves a shroud of uncertainty over whether the transaction will proceed, or if so when.

[31]   Thirdly, there is a clear avenue available to Mr Barron-Afeaki to seek to terminate his bankruptcy by annulment if and when the JHT transaction is finalised and his new job can go ahead on the terms before the Court.

[32]   Fourthly, to the extent that there may be stigma within the Polynesian community in Auckland or in Tonga from a second bankruptcy, it is fair to record that Mr Barron-Afeaki has entirely brought this upon himself by not meeting his commitments to the Commissioner for the last five years.

[33]   I discussed with Mr Tee how giving more time might actually be effected. There seemed on the face of it be only two ways this could occur, either by an adjournment or by making an adjudication order but directing that it lie in court until a date at say the end of September, as sought. For the reasons just given I have decided that it is appropriate that a bankruptcy order be made now, so I refer to these only to record this discussion, and my views on it. First, it would be highly prejudicial to the Commissioner to simply adjourn this case. I agree with Mr Saunders that given the uncertainty surrounding the JHT transaction, if that were not finalised by the end of September the Commissioner and the Court could be faced with another request to delay this case further, based (one predicts) on yet more delays occasioned by complying with the requirements JHT faces in order to obtain its seed funding. Given the history of Mr Barron-Afeaki’s compliance with his taxation obligations in respect of both GST and income tax, the interests of the Commissioner outweigh the interests of Mr Barron-Afeaki in relation to the prospect of a further adjournment of this case.

[34]   The second course discussed with counsel is not, on reflection, available as a matter of law. Section 55 of the Insolvency Act 2006 says that a bankruptcy commences on the date and at the time when the debtor is adjudicated bankrupt. Section 56 provides that the date of adjudication, on a creditor’s application, means the date and time when the Court makes the order of adjudication. Rule 11.4(2) of the

High Court Rules 2016 provides that a written judgment is given at the delivery time directed or nominated under r 11.5. Rule 11.5 provides that the delivery time of written judgment is the date and time directed by the Judge responsible for it or if no direction is given a date and time nominated by the Registrar.

[35]   The combined effect of these provisions, in my opinion, is that the delivery time of a decision on an application for adjudication is when the Judge so directs, which might differ slightly from the time when it is handed over to counsel, and that is the date and the time which comprise the date of adjudication in terms of s 56 of the Insolvency Act 2006. Accordingly, by s 55, the bankruptcy commences at that point. I do not see any scope within these provisions for the Court to make an order directing that an order of adjudication lie in court to a later date.

[36]   I am mindful of the decision of the Court of Appeal in Denize v Stockco Ltd that r 11.5 does not empower a Judge to direct that a judgment not be entered for several months in order to allow additional time for payment of the debt which was the subject of the proceeding.6 Whilst not directly applicable to an order for adjudication, the principle substantiates the interpretation I have placed on the rules and sections referred to.

Outcome

[37]   Mr Barron-Afeaki is adjudicated bankrupt. The order is timed at 12 noon on  2 August 2019.

[38]   Mr Barron-Afeaki will pay to the Commissioner costs on this application in the sum of $2,454.28 plus disbursements in the sum of $1,509.17.

J G Matthews Associate Judge

6      Denize v Stockco Ltd [2011] NZCA 192 at [25].