Commissioner of Inland Revenue v Fagan
[2017] NZHC 2214
•13 September 2017
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA
TE WHANGANUI-Ā-TARA ROHE
CIV-2016-485-693 [2017] NZHC 2214
BETWEEN THE COMMISSIONER OF INLAND
REVENUE Judgment Creditor
AND
JOHN GRANT FAGAN Judgment Debtor
Hearing: 13 September 2017 Appearances:
M De Villiers for the Judgment Creditor
No appearance by Mr FaganDate ofJudgment:
13 September 2017
ORAL JUDGMENT OF ASSOCIATE JUDGE SMITH
[1] The Commissioner applies for an order adjudicating Mr Fagan bankrupt.
[2] The Commissioner obtained a judgment against Mr Fagan in the District Court at Palmerston North on 24 February 2015, for $123,764.89. The debt related to unpaid income tax for the years 2008 to 2014, and a student loan (2007 and 2008).
[3] A bankruptcy notice was issued and Mr Fagan did not comply.
[4] Adjudication proceedings were commenced, but they were withdrawn on
3 March 2016 when an arrangement was entered into between Mr Fagan and the
Commissioner. At about that time the Commissioner wrote off $80,535 of the debt.
THE COMMISSIONER OF INLAND REVENUE v FAGAN [2017] NZHC 2214 [13 September 2017]
[5] Mr Fagan defaulted on the payment arrangements, and a further bankruptcy notice was issued on 31 August 2017. In this notice, the Commissioner claimed the sum of $40,249.23, being the balance owing on the judgment after the write-off just referred to.
[6] Mr Fagan did not challenge this bankruptcy notice.
[7] A second adjudication application was then filed, in which the Commissioner claimed the sum of $67,336. The adjudication application was called for the first time on 7 February 2017, and there were a number of adjournments after that first call. At the time, Mr Fagan was a prison inmate, but he instructed solicitors, Messrs Thomas, Dewar Sziranyi Letts, to act on his behalf, and that firm filed a notice of opposition on his behalf on 20 March 2017.
[8] The grounds set out in the notice of opposition were:
(a) I am owed the sum of $475,000 from a company called PLDL Limited related to the development of the Peninsular Golf Club at 34 Windmill Drive, Wainui north of Auckland;
(b)I expect to receive those funds within the 2017 calendar year and wish to settle the debt with IRD from those funds;
(c) Pursuant to section 37(b) of the Insolvency Act 2006 I am able to pay my debts in time; and
(d) It is otherwise just and equitable not to adjudicate me bankrupt.
[9] Mr Fagan has filed two affidavits in support of his opposition, respectively dated 19 April 2017 and 22 June 2017. An affidavit has also been provided by a former business associate of Mr Fagan’s, Mr Ian Hilford. For the Commissioner, Ms Madeleine Bowen, a collections officer employed by the Commissioner, has filed a detailed affidavit in reply.
[10] A fixture was allocated for a defended hearing of the adjudication application on 11 July 2017, but the hearing was adjourned when Mr Fagan’s solicitors sought and were granted leave to withdraw. Mr Fagan advised the Court that he intended to instruct a new solicitor, but it appears that that has not occurred.
[11] Mr Fagan advised the Registrar by telephone yesterday that he would not be appearing today.
[12] Mr Fagan’s opposition was essentially based on two grounds:
(a) that he would be able to pay the debt if given further time to do so;
and
(b) it would not be just and equitable to make an adjudication order.
[13] In support of the first of those two grounds, Mr Fagan asserted that there were three possible sources from which he could pay the debt. First, he said that he has an interest in a claim of $3,000,000 which Mr Hilford says he has, arising out of a golf club development venture in which Mr Fagan had some involvement, at Red Beach, Whangaparaoa Peninsula. Mr Hilford has confirmed in his affidavit that, if his company’s claim against certain third parties is successful, Mr Fagan will receive the sum of $425,000 (assuming the full $3,000,000 is recovered).
[14] In his affidavit sworn on 30 May 2017 Mr Hilford acknowledged his commitment to pay the $425,000 to Mr Fagan (subject to recovery on his claim as stated above), and said that he had instructed his solicitors to investigate how best to take the claim. He said that he would be taking action “shortly” to recover what is owed to [the relevant company with which Mr Hilford and Mr Fagan were associated].
[15] No further information has been put before the Court on this prospective claim since Mr Fagan’s second affidavit was sworn on 22 June 2017. The Court has nothing before it to adequately assess the merits of the proposed claim to which Mr Hilford and Mr Fagan refer, and it is not even clear whether the claim has yet
been filed. Nothing is before the Court which would indicate when any recovery might be made by Mr Fagan.
[16] The second possible source of funds referred to by Mr Fagan is a loan for
$30,000 he made to two individuals, to fund the deposit on a property purchase on the Kapiti Coast. It appears from Ms Bowen’s evidence of enquiries made by her of the real estate agent involved that the loan may have been for a term of five years (although it may be that Mr Fagan is entitled to make demand for repayment before the end of the five year term – that was not entirely clear on the evidence). In any event, there is nothing before the Court to say when the $30,000 is likely to be repaid. If Mr Fagan were entitled to that sum immediately, I think it reasonable to suppose that he would have taken some recovery steps by now. There is no evidence that he has done so.
[17] The third source of funds referred to by Mr Fagan was the modest income that he has been, or will be, earning on the prison’s “work to release” employment scheme. There is nothing in the evidence to suggest that any income he might earn from that scheme would make any significant inroad into the debt claimed by the Commissioner, which (according to a certificate produced by Ms De Villiers this morning) now stands at $69,377.95.
[18] The second substantial ground on which Mr Fagan opposed the adjudication application was that it would not be just and equitable to make an adjudication order. The essence of his argument was that (prior to his imprisonment) he had been involved from around 1999 in entrepreneurial activities and “deal making”. He submitted that any order for adjudication would effectively prevent him from earning an income from those activities on his release from prison. As I understand it, Mr Fagan currently remains an inmate at the prison, although he is now working on the work to release programme. His term of imprisonment still has some considerable time to run, but there is a possibility that parole could be granted to him before the expiry of the term, and possibly as early as late this year.
Principles applicable to bankruptcy adjudication applications
[19] Section 37 of the Insolvency Act 2006 (the Act) 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.
[20] It is clear that the Commissioner has established the elements of s 13 of the Act, namely that Mr Fagan owes a sum in excess of $1,000 and that he has committed an act of bankruptcy within the period of three months before the Commissioner filed the application for adjudication. It is equally clear that Mr Fagan is not presently able to pay the debt. The only issues are whether he should have further time to pay, and whether it would not be just and equitable to make an adjudication order (on the basis of the grounds advanced by Mr Fagan).
[21] Once the formal requirements for adjudication have been satisfied, the position is that an applicant creditor is prima facie entitled to an order of adjudication. The order is not to be refused on the grounds of expediency or convenience.1 Each case must be considered on its own terms.
[22] In the Re Epirosa case, Master Williams QC (as he then was), listed a number of factors commonly referred to by the Court in considering the exercise of its discretion under s 37 of the Act. The factors include:
(a) What are the wishes of all affected parties, including the applying creditor, other creditors and the debtors?
1 Re Epirosa, ex parte Diners Club (NZ) Limited HC Wellington B No 498/91, 6 March 1992.
(b)Does the debtor have the ability to meet his or her debts over time and, if so, does that meet the requirements of achieving finality within a reasonable period?
(c) What were the circumstances in which the debt was incurred, and do those circumstances suggest that the creditor is acting unreasonably in pursuing adjudication?
(d) Will adjudication be pointless?
(e) Will the debtor, if adjudicated, be rendered unable to support himself or herself?
(f) Does the debtor have such a standing in the community that significant issues of stigma or embarrassment will result?
Application of principles in this case
[23] The wishes of the affected parties is a neutral factor in this case. No creditor has filed notice in support or opposition, and the starting position is that the Commissioner’s prima facie right to an adjudication order should prevail.
[24] As for the ability of Mr Fagan to meet his debts over time, and the need to achieve finality within a reasonable period, I am satisfied that this factor strongly favours the Commissioner. There is no indication of when Mr Fagan might recover the funds he says he is entitled to, and it is quite clear that he is presently “cashflow insolvent”. There is no evidence to suggest that finality can be achieved within a reasonable period.
[25] The circumstances in which the debt was incurred, namely failure to pay income tax over a lengthy period and failure to comply with the student loan obligations, is another factor favouring a liquidation order. I consider also under this head Mr Fagan’s failure to comply with the arrangements with the Commissioner that resulted in the withdrawal of the first adjudication claim.
[26] There is nothing to suggest that Mr Fagan will be unable to support himself if an adjudication order has been made, and it is clear that there is no issue of standing in the community (the convictions which have resulted in his imprisonment apparently include convictions for the use of forged documents).
[27] Nor do I think there is any merit in Mr Fagan’s “just and equitable” argument. His track record of criminal offending, and his apparent inability to adhere to arrangements reached with the Commissioner in the past, do not suggest that the public interest would support the Court holding its hand on adjudication to allow Mr Fagan an earlier re-entry to the commercial community than might otherwise have been the case.
[28] After having considered the evidence, and weighing the various factors relevant to the exercise of my discretion, I am satisfied that it is appropriate to make the adjudication order sought.
[29] Accordingly, I make an order adjudicating Mr Fagan bankrupt, with costs on scale 2B to the Commissioner and disbursements as fixed by the Registrar. Those
orders are timed at 11.39 am.
Solicitors:
Thomas Dewar Sziranyi Letts, Wellington
Associate Judge Smith
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