Commissioner of Inland Revenue v Hanning

[2013] NZHC 3344

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2012-483-000116 [2013] NZHC 3344

BETWEEN  THE COMMISSIONER OF INLAND REVENUE

Judgment Creditor

ANDJOHN LINDSAY HANNING Judgment Debtor

Hearing:                   12 December 2013

Appearances:           M Matthew for applicant

M Hartfield for Inland Revenue (respondent) R Thompson for Official Assignee

Judgment:                12 December 2013

(ORAL) JUDGMENT OF ASSOCIATE JUDGE ABBOTT

Solicitors:

Rennie Cox, Auckland

Inland Revenue Department, Auckland

Meredith Connell, Auckland

THE COMMISSIONER OF INLAND REVENUE v HANNING [2013] NZHC 3344 [12 December 2013]

[1]      The applicant, Mr Hanning, was adjudicated bankrupt in the High Court at Whanganui on 4 September 2013.   He has applied for an order annulling that adjudication, on the grounds that the order was made on the basis of an improperly obtained  order  for  substituted  service.    He  says  that  he  did  not  learn  of  the application until after the order was made, and if the order for substituted service had been sought properly, he would have learnt of the application and been able to take steps to oppose it.

Procedural matters

[2]      The  application  has  been  made  as  an  interlocutory  application  in  the liquidation.   The proper procedure would be to apply by way of originating application.  All parties are agreed that the Court can proceed today by treating the present application as an originating application.

[3]      I record that the matter is now proceeding in this Court after an order was made transferring the proceeding from the Court in Whanganui, on the basis that the debtor resides in Auckland and it is convenient for the parties to have the matter determined here.

The application for adjudication

[4]      The  Commissioner  applied  for  Mr  Hanning’s  adjudication  because  Mr Hanning failed to comply with a bankruptcy notice served on him on 3 July 2012, at Mr Hanning’s place of business in Ohakune.  The bankruptcy notice sought payment of a judgment obtained by the Commissioner against Mr Hanning in the Taupo District Court on 18 July 2011.  It is not in dispute that Mr Hanning did not apply to set aside the bankruptcy notice, although he does say in his affidavit in support of the application that he attempted to contact the Commissioner by telephone following receipt of the notice, but did not get a response to messages left.

Service of the application for adjudication

[5]      The Commissioner filed the application for adjudication on 16 October 2012. The Commissioner instructed a process server in Whanganui to serve it.  The process

server was given Mr Hanning’s Ohakune business address as the place for service. He gave evidence of travelling to Ohakune, but finding the premises closed up (Mr Hanning conducted a seasonal ski hire business, and this was towards the end of the ski season).  The agent says that he called Mr Hanning on a cell phone number that had been given to him, and spoke to Mr Hanning.  He says that arrangements were made to make contact the following week, but that Mr Hanning did not keep to the arrangement, and did not respond to further telephone messages left for him.  The agent refers to Mr Hanning telling him that he had returned to Auckland.  The agent added that he believed that Mr Hanning was living somewhere in Auckland, but was evading service.

[6]      The Commissioner applied for an order for substituted service on the basis of the agent’s evidence.  For reasons that have not been explained in the material before the Court, that application was not made for some seven months.   There  is no evidence as to what had occurred in the meantime (if anything).  In the application for  substituted  service  the  Commissioner  requested  that  personal  service  be dispensed with and that in place of personal service the proceedings be advertised in the public notice section of the Whanganui Chronicle and the New Zealand Herald.

[7]      An order for substituted service was made on that application, and on those terms, on 25 June 2013. The Commissioner effected service in terms of that order by advertising in both newspapers on 3 July 2013.

Disposal of the application for adjudication

[8]      The  application  for  adjudication  was  given  a  first  hearing  date  in  the Whanganui Court of 9 July 2013.   As the advertising had taken place too late to allow the Commissioner to proceed that day, the application was adjourned to 4

September 2013.   Mr Hanning did not appear at the hearing on 9 July 2013, nor when the matter came back before the Court on 4 September 2013.

[9]      The Court made an order adjudicating Mr Hanning bankrupt on 4 September

2013,  there being no  opposition  to  that  application,  nor any appearance by Mr

Hanning.

The application for annulment

[10]     The  Official  Assignee  (as  assignee  of  Mr  Hanning’s  bankrupt  estate) contacted Mr Hanning a few days after the order for adjudication.  Mr Hanning has given evidence that this was the first that he knew of the application (and apparently the first contact that he had had about the debt since his efforts to speak to the Commissioner following service of the bankruptcy notice).  He filed his application for annulment on 16 September 2013.  At the same time he applied for a stay of advertising pending hearing of the application for annulment.  That application was not pursued because the Official Assignee agreed to defer any specific steps in the administration of the estate until the application for annulment was determined.

[11]     The proceedings were transferred to this Court by order made on 8 November

2013, on joint request of the parties.   Following transfer, the application for annulment was allocated a hearing date today.  Although the Commissioner clearly has had notice of today’s hearing, she has not filed notice of opposition, or any evidence in response to the affidavit filed by Mr Hanning in support of his application.

[12]    The Official Assignee filed a report, in response to the application for annulment, on 14 October 2013, and on 5 December 2013 filed a second report.

The grounds for annulment

[13]     Mr Hanning seeks an order for annulment under s 309(1)(a) of the Insolvency

Act 2006:

The Court may, on the application of the Assignee or any person interested, annul the adjudication if

(a)       the  Court  considers  that  the  bankrupt  should  not  have  been adjudicated bankrupt....

[14]     He says that the order for adjudication should not have been made because he was not properly served with the application, and was denied opportunity to oppose it.  In essence he says that he is not insolvent, and had he been served he would have been able to make arrangements to pay the debt.

[15]     The Commissioner takes the position that the application for adjudication was properly served, because it was served pursuant to an order for substituted service (that fact is not disputed), and that the order for substituted service was properly obtained. That is the core issue in this application.

[16]     The  Official  Assignee  also  takes  the  position  that  the  application  was properly served, but that is based solely on compliance with the order for substituted service.  Counsel for the Assignee acknowledged that the Assignee was not able to comment on or make submissions in relation to, how the order was obtained.  In the event that the Court was to exercise its discretion to make an order for annulment, counsel for the Assignee invites the Court to make any order dependent on various conditions, including payment of the Assignee’s costs to date.

Was the order for substituted service properly obtained?

[17]     The real argument in this case revolves around whether the Commissioner took reasonable steps to effect personal service on Mr Hanning, and, in relation to the evidence produced in support of the application for substituted service, whether the   Commissioner   disclosed   all   material   information   as   to   Mr   Hanning’s whereabouts so as to allow an effective order for substituted service to be made.

[18]     As I have already mentioned, the evidence put before the Court in support of the application for substituted service related only to attempts to serve Mr Hanning in Ohakune.   The issue over service arises because the Commissioner apparently knew that Mr Hanning owned a residential property in Auckland, and had previously written to him both at that address and at a postal address (a Post Office Box) in Ohakune.   Further, Mr Hanning maintains that the Commissioner also knew of a telephone  number  at  the  Auckland  address,  or  alternatively  could  have  easily obtained that number from the White Pages telephone directory.  The Commissioner did not provide any evidence to counter this information, nor suggest that either of these addresses, or the further telephone number, could be used as a  means of bringing documents to Mr Hanning’s attention.   Instead, the Commissioner simply sought an order for an advertisement of the application in the public notices columns

of the Whanganui Chronicle and the New Zealand Herald.   Those advertisements appeared on one occasion only.

[19]     The lack of evidence in response from the Commissioner is curious.   Mr Hanning’s affidavit in support was filed on 16 September 2013.  As I have already mentioned,  there  is  no  opposition  filed,  nor  any  affidavit  in  response  to  Mr Hanning’s evidence.  On that basis, I think it can be said, without any hesitation, that the Commissioner did not put all material information before the Court to allow the Court to assess what orders would best bring the proceeding to the attention of Mr Hanning.   It could also be argued, on the basis of the same facts, that the Commissioner did not take all reasonable steps to effect personal service, although that has to be balanced against Mr Hanning’s clear avoidance of contact with the process server in October 2012.

[20]     When  one  factors  in  the  seven  month  gap  between  the  process  servers attempts to serve Mr Hanning in Ohakune, the failure to follow up on a apparently known residential address in Auckland, and no apparent steps to contact Mr Hanning between October 2012 and filing of the application for substituted service in early June 2013, I find that there is justification for Mr Hanning’s complaint that the order for substituted service was obtained improperly.   The evidence before the Court omitted material information known to the Commissioner, and led the Court to the mistaken view that the best (and perhaps the only) means of alerting Mr Hanning to the application for adjudication was the advertisement in the two newspapers.

[21]     The  time  gap  between  the  first  attempt  to  serve  Mr  Hanning,  and  the application for substituted service is also significant in that Mr Hanning contends that he was back in Ohakune for the next ski season, and could have been contacted again at that point.   Additionally, there is no evidence of any further attempt to contact Mr Hanning by the cell phone on which the agent contacted him in October

2012.  I see no reason to question Mr Hanning’s evidence that he did not see either of the advertisements, and learnt of the application, and the order for adjudication, only after he was contacted by the Official Assignee.

[22]     I accept that the Commissioner had reasonable grounds for considering that Mr Hanning was evading service of the application for adjudication.  However, that fact alone does not excuse non-compliance with the obligation of a party seeking an order on a without notice application to disclose all information material to the order sought.

[23]     I am satisfied that if the Commissioner had disclosed her knowledge of the debtor’s ownership of a property in Auckland, it is likely that the Court would either not have made an order until it was satisfied that steps had been taken to serve the debtor at that address, or at least would have included as a term of any order that the documents be left at that address, or and perhaps be sent to the Ohakune Post Office Box address.  This is particularly so given that the Commissioner was clearly aware that the debtor had returned to Auckland.

[24]     I find  that  there  was  a  distinct  possibility that  if  the Commissioner had disclosed  knowledge  of  the Auckland  property,  an  order  for  substituted  service would either not have been made at that time, or a different order for substituted service would have been made, and that one way or the other the application for adjudication would have come to Mr Hanning’s attention before the hearing of the application.  The failure to do so, even though I accept it was unwitting, is a breach of obligation to put all material information before the Court on a without notice application.  This resulted in the order for substituted service being made improperly, so that the order for adjudication should not have been made.

Exercise of discretion

[25]     The Court has a discretion whether or not to make an order annulling the bankruptcy, even if it is satisfied that one of the grounds under s 309 exists.

[26]     The Commissioner contends that the Court should not exercise its discretion in this case, having regard to Mr Hanning’s clear unwillingness to cooperate, and the longstanding nature of the debt (obviously known to Mr Hanning).

[27]     I have to weigh that against Mr Hanning’s contention that he was entitled to be served with the application, and had that been done properly, he was in a position to raise the funds and clear the debt to the Commissioner.  Mr Hanning has given evidence in which he has acknowledged frankly that he did “put his head in the sands”  over  this  matter  for  a  considerable  period.     He  refers  to  personal circumstances which led to this.   However, he says that he still should have been given the opportunity to respond to the application, and that had he had that opportunity, the order for adjudication would not have been made.

[28]     The most significant point made on behalf of Mr Hanning in relation to the exercise of the discretion is that once the order for adjudication was made, it became impossible for him to obtain finance.  Although I think there is reason to be critical of Mr Hanning for his failure to address this debt ahead of the application for adjudication, I cannot discount the possibility that if the application had either been served on him personally or brought to his attention, he would have acted on it (he certainly acted promptly in terms of obtaining legal advice once he learned of the order for adjudication) and that he would then have been in a completely different position in terms of meeting the debt.

[29]     It is difficult to say on the evidence before the Court whether Mr Hanning will be in a position to raise finance (most likely against the equity in his Auckland property) to meet the debt, or whether he would have to realise assets to do so.  The Commissioner takes the view that the Official Assignee is the appropriate party to realise assets.   However, the question that I must decide on in the exercise of my discretion is whether Mr Hanning should be denied the opportunity to settle the debt, due to his inactivity over a lengthy period, or whether he should be given one last opportunity to demonstrate an ability to pay the debt and to proceed to do so.

[30]     I regard it  as  significant  that  he has  now obtained  legal  and  accounting advice, and apparently is acting in reliance upon that.  I am told he has brought tax returns up to date, and it certainly appears that he is endeavouring now to take his responsibilities for this debt seriously.  The Commissioner sought to rely on a recent proposal to settle the debt at a reduced level as a basis for saying that Mr Hanning

would not be able to clear the whole debt.  I am not sure that I can take that from the fact of that proposal.   Counsel for Mr Hanning informs me that the proposal was based on an assessment of the core debt.  That is not an unusual position for a debtor to take in trying to seek relief from the Commissioner under the Tax Administration Act.   I don’t think that that factor can be taken into account  as evidencing an inability to raise the money needed to settle the debt.

[31]     Weighing all of these factors I have decided that this is an appropriate case in which to exercise my discretion and to annul the order for adjudication.  One further factor that has influenced me in this regard is that Mr Hanning accepts that he should meet the costs incurred by the Official Assignee.  His counsel has accepted that the order for annulment can lie in Court, and not be sealed, until such time as those costs are met.

[32]     Counsel for Mr Hanning informs me that he expects to be able to meet those costs within three working days (he is taking steps to cash in an insurance policy).

Decision

[33]     I make an order annulling the order for adjudication made on 4 September

2013, under s 309(1)(a) of the Insolvency Act 2006.

[34]     The order just made is on the condition that Mr Hanning pay the Official Assignee’s costs of $10,208.69 within five working days. The order for annulment is not to be sealed until proof of payment is provided to the Court.

[35]     The application for adjudication dated 12 October 2012 is reinstated, and adjourned to the bankruptcy list at 10.45am on 4 February 2014.  Mr Hanning is to file and serve any notice of opposition by 25 January 2014.

[36]     Mr Hanning has succeeded on his application for annulment.  He is entitled to costs on a scale 2B basis, together with disbursements as fixed by the Registrar.

[37]     The   Official  Assignee   agreed   not   to   take   any   further   steps   in   the administration of the bankrupt estate as soon as the application for annulment was brought to her attention.   On that basis, I do not see that there is any need for an order for costs in respect of the application for stay of advertising of the order for

adjudication.

Associate Judge Abbott