Crawford v Odin Enterprises Pty Limited, Roberts, Jenden and Richardson
[2010] NZHC 767
•27 May 2010
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
IN THE MATTER OF the Insolvency Act 2006
AND
CIV 2008-404-007860
IN THE MATTER OF the bankruptcy of C S Crawford
BETWEEN CRAIG STIRLING CRAWFORD Judgment Debtor
ANDODIN ENTERPRISES PTY LIMITED, SARAH MARY ROBERTS, RODERICK CHARLES JENDEN AND MARTIN VICTOR RICHARDSON AS TRUSTEES OF THE JENDEN BUSINESS TRUST
Judgment Creditors
AND
CIV 2008-488-000833
IN THE MATTER OF the Insolvency Act 2006
AND
IN THE MATTER OF the bankruptcy of L J Yelcich
BETWEEN LOIS JEAN YELCICH Judgment Debtor
ANDODIN ENTERPRISES PTY LIMITED, SARAH MARY ROBERTS, RODERICK CHARLES JENDEN AND MARTIN VICTOR RICHARDSON AS TRUSTEES OF THE JENDEN BUSINESS TRUST
Judgment Creditors
Hearing: 12 November 2009
Counsel: B N White for judgment creditors
P T Finnigan for judgment debtors
Judgment: 27 May 2010
at 4:00pm
JUDGMENT OF ASSOCIATE JUDGE ABBOTT
This judgment was delivered by me on 27 May 2010 at 4:00pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Buddle Findlay, PO Box 2694, Wellington 6140for judgment creditorsCoast to Coast Law, PO Box 181, Wellsford 0940 for judgment debtors
CRAWFORD V ODIN ENTERPRISES PTY LIMITED& ORS HC AK CIV 2008-404-007860 27 May 2010
[1] These applications for orders adjudicating the judgment debtors bankrupt have been heard together as they are based on the same judgment debt, and raise the same issues.
[2] There is no question that the debtors are insolvent, and that the creditors (trustees of a trust engaged in lending, to whom I will refer collectively as Odin) have established the formal prerequisites for an order for adjudication, namely an unmet judgment debt and an act of bankruptcy by both debtors. Odin accepts that it is unlikely that adjudication will result in any financial benefit to creditors, but says that an adjudication order should be made in the wider public interest.
[3] Mr Crawford and Mrs Yelcich acknowledged that they have no ability to meet the judgment debt, and say that an order would be futile. They say that the debt has arisen by reason of the recent economic downturn rather than any culpability on their part, and therefore there is no need for an order in the public interest.
Background
[4] The applications have their genesis in land development projects commenced by the debtors ahead of the recent global financial crisis and downturn in property values.
[5] Mr Crawford and Mrs Yelcich are brother and sister. Between late 2004 and early 2006 they acquired two blocks of bare rural land at Matakohe and Mangawhai, in Northland, for development. The land was purchased by companies in which they were the sole directors and equal shareholders: Church Road Corporation Limited (Church Road) and Sandhills Development Limited (Sandhills). Both properties were found by Mr Yelcich’s husband Boris Yelcich. He was unable to invest in them as he had been made bankrupt in September 2002. Nevertheless, he was actively involved in the purchases and the plans for development.
[6] Church Road borrowed the whole of the purchase price for the Matakohe property (approximately $2 million) from Davies & Co Solicitors Nominee Company Limited (Davies). The loan was for twelve months, and included a sum for capitalised interest for that period. The loan was guaranteed by the debtors. In addition, security was given over a farm property at Ruawai. The farm was owned by Ruawai Properties Limited (Ruawai). Mr Crawford and Mrs Yelcich are also the directors and shareholders of this company. The land was held in two titles, referred to as the “home block” (on which the Yelcichs lived) and the “farm block”.
[7] Sandhills purchased the Mangawhai property in December 2005 for $3.75 million by refinancing and increasing the borrowing from Davies. The restructured loan was again for a twelve month period, but with interest capitalised for six months only. Mr Crawford borrowed $450,000 against the security of his home, which he applied towards the purchase and refinancing. The debtors again guaranteed the loan.
[8] Further funding was required to develop the properties. This funding had not been obtained by mid-2006, by which point the debtors also had to find interest on the monies borrowed from Davies. Davies’ solicitors introduced the debtors to Odin. In mid 2006 Odin advanced Church Road, Sandhills and Ruawai approximately $770,075 for a six month term, also with interest on the loan being capitalised. The loan was secured by a second mortgage over the Matakohe land, the Mangawhai land and Ruawai’s two blocks. The Davies mortgage fell due in December 2006, and was extended for a further three months after the three companies borrowed a further $380,000 from Odin to pay interest on both the Davies loan and the initial loan from Odin. This loan was secured by a third mortgage over the properties. Mr Crawford and Mrs Yelcich guarantee the companies’ obligations under both Odin loans.
[9] At this point, the end of 2006 and beginning of 2007, the companies had borrowed in the order of $6.6 million from Davies and approximately $1,150,000 from Odin. Interest was accruing on these loans at a substantial monthly rate (the default rates under the mortgages ranged from 19.5% p.a. to 29.5% p.a.), the annual cost of penalty interest at that point. In addition, development finance had still to be found. As against that, the Mangawhai land was valued in February 2007 at
$9,067,000 and the Matakohe land in June 2007 at $4,575,000. It is unclear from the evidence whether these were bare land values, or post-subdivision values, but I assume the former. At about the same time, the Ruawai farm block was valued at
$760,000, and the home block at $770,000.
[10] The companies were unable to obtain any further funding. They defaulted on their obligations both to Davies and to Odin. Property Law Act notices were issued, leading to a downward spiral in fortunes for the debtors:
a) Odin sold the Ruawai home and farm blocks by mortgagee sale in
November 2007, and subsequently obtained summary judgment on
17 October 2008 against the debtors under their guarantees for the sum of $1,351,074.41, being the outstanding amount due after crediting the proceeds of the sales. The debtors defended the summary judgment application, claiming that Odin had sold at under value. Judgment was stayed in respect of $629,500, being the court’s assessment of the potential value of that claim, so as to allow the debtors to pursue the claim.
b)Davies obtained judgment on 23 January 2009 against the debtors (pursuant to their guarantees) for the sum of $6,626,812.50 in respect of its loans. Davies has not, as yet, taken any steps to enforce its judgment, but still holds first mortgages over the Matakohe and Mangawhai blocks. It is common ground that the current value of those blocks is now substantially less than the amount owing under the first mortgage.
Principles
[11] The debtors accept that Odin has established the formal prerequisites for an order for adjudication: s 13 Insolvency Act 2006 (the Act). This leaves it to the court’s discretion whether or not to make the order: s 36 of the Act.
[12] The debtors rely on the further discretion given to the court under s 37 of the
Act to refuse adjudication, particularly under subsections (c) and (d):
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.
[13] The principles which the court applies when exercising its discretion are well established by authority in this court and the Court of Appeal.[1]
[1] See, for example, Re Fidow [1989] 2 NZLR 431 (HC); McHardy v Wilkins & Davies Marinas Ltd (in receivership) CA54/93, 7 April 1993; Baker v Westpac Banking Corporation CA212/92, 13 July 1993; helpfully summarised in Eide v Colonial Mutual Life Assurance Society [1998] 3 NZLR 632(HC).
[14] Counsel were agreed on the following principles, essentially as set out in
Eide:
a) A creditor who establishes the jurisdictional facts set out in the Act 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.
b)In the exercise of its discretion 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) 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.
d)The public interest in exposing and controlling an insolvent debtor exists independently of the separate question of debt collection by immediate creditors.
e) Absence of assets is a factor, but even undoubted absence of assets will not necessarily preclude an order, as the circumstances may be such that the debtor ought in the public interest to be visited with the disqualifications that go with bankruptcy.
f) The potential for further investigation is a factor for exercising the discretion to adjudicate, having regard to the procedures available to creditors for investigating the financial circumstances of the debtor in the course of a bankruptcy (which are likely to be more effective than an investigation by other means).
g) The court must balance the various considerations relevant to the case to determine whether or not the debtor has succeeded in showing that an order ought not to be made.
[15] An order for adjudication will still be appropriate, even if the debtor is insolvent “through no fault or foible of [his or her] own” where there is a public interest factor, or the bankruptcy will serve a practical or useful purpose.[2]
The debtors’ arguments
[2] Re Taylor (1992) 4 NZBLC 102,875 (HC); Re Wong, ex parte Turners & Growers HC Auckland
B1104/93, 1 October 1993.
[16] Mr Finnigan for the debtors advanced a thorough and well-reasoned argument that the debtors’ present positions were a consequence of an unforeseen economic slump, and that there were no wider public interest factors to deflect the court from finding that there was no purpose to making the orders. He submitted:
a) These were relatively unsophisticated people (in commercial terms).
Mr Crawford had limited business experience and Mrs Yelcich was a homemaker from a farming background;
b)The debtors understood the terms of the lending, but believed that their position was protected by the values of the underlying land. What they did not appreciate at the time they undertook the obligations was that there were risks associated with buying of bare land for development without arrangements in place to finance the development, which left them vulnerable to a drop in property values or unavailability of finance (given that any assets available to them had been fully utilised in purchasing the land);
c) The lenders were far more experienced commercial parties than either Mr Crawford or Mrs Yelcich, but they could be taken to be satisfied that there were appropriate margins for the lending at the time that the land was purchased, and for some time afterwards (the solicitor acting for Davies, who introduced the debtors to Odin, clearly had also underestimated these risks);
d)The debtors had committed between $1.5 and $2 million of assets to support the venture (the Ruawai land and the money borrowed by Mr Crawford against his home);
e) There was nothing needing investigation: the circumstances leading to the judgment debt were known, and the debtors had made full disclosure of their assets and liabilities;
f) The debtors’ misfortunes had been compounded by Odin’s improper exercise of its power of sale in respect of the Ruawai blocks, and by the purchaser having misused confidential information to acquire that land: the combined effect was to lose a substantial part, if not all, of the value of that land, which would otherwise have been available to meet their debts;
g) When assessing matters of public interest, the court should also take into account Odin’s conduct in the mortgagee sales: an order for adjudication would have the effect of precluding Ruawai from pursuing a claim for the undervalue (a minimum of $629,000 and potentially more), and Ruawai’s separate claim against the purchaser
of the farm and home blocks for losses suffered by use of confidential information relating to a potential purchaser for the farm block;
h)Although Mrs Yelcich had been bankrupt in the past (in 1996), that too was through no fault of her own: it was in respect of a debt from a bakery business, which she had had to close after an employee had defrauded the business of substantial sum of money.
Discussion
[17] Mr Finnigan’s argument was predicated on two underlying points. The first was that the debtors had no assets and there were no matters which warranted the investigatory powers available in a bankruptcy. The second was that there was no conduct on the part of the debtors, nor any other reason, which called for the sanction of bankruptcy. I will deal with these points in that order, although the second is the more significant.
[18] Mr White, for Odin, accepted in the hearing that no further investigation was needed into the circumstances giving rise to the debt or to identify assets that might be available to creditors. This was an appropriate acknowledgment:
a) The background has been explored extensively in four previous court proceedings – an application by Ruawai to sustain a caveat against the home block, Odin’s application for summary judgment, an appeal to the Court of Appeal on this court’s refusal to grant a stay of all of the judgment, and Davies’ claim for summary judgment against the debtors.
b)The only assets left in Mrs Yelcich’s name are the shares in the three land owning companies. It is clear that the value of the Matakohe and Mangawhai land (estimated to have fallen to $2 million or less by July
2009) is insufficient to meet the money secured by the first mortgage to Davies (which had risen to approximately $8.7 million as at July
2009), and any value in Ruawai’s shares is highly doubtful. Although this court and the Court of Appeal have accepted that there is an
arguable case for sale as undervalue, the Court of Appeal has said that alleged heads of claim which would carry it beyond the $629,000 of potential undervalue identified in this court are weak factually and legally.[3] Ruawai’s separate claim against the purchaser of the farm block (is likely to go to meet money due to Davies).
c) In addition to his shareholding in the companies, Mr Crawford has an interest in his family home, but again the debt secured against that land appears to exceed the value of the land. He has also disclosed a debt due to another company in which he holds shares (Te Opi Developments Limited) but says that that is likely to be uncollectible.
[3] Crawford & Anor v Odin Enterprises Pty Ltd & Ors [2009] NZCA 199 at [50].
[19] I accept that there is nothing further to investigate in respect of Mrs Yelcich. I am not convinced that that is the case for Mr Crawford. He has not provided any documentary evidence to support his views that there is no equity left in his home or value in the debt related to Te Opi (and hence the value of shares in that company). I do accept, however, that if those matters prove to be as Mr Crawford has said, there will be no recovery from those assets.
[20] The critical matter for this application is the conduct of the debtors. Notwithstanding Mr Finnigan’s portrayal of the background circumstances, I am not persuaded that these debtors should escape the consequences of what I regard as unreasonable risk taking. They knew that both the assets that were being purchased, and any assets which might otherwise be available to support their guarantees were fully committed in the purchases. They should have known that they had no ability to extricate themselves from these debts in the event that their “rose tinted” view of the prospects of the development did not eventuate. Their failure to make provision for the costs of development (an essential step to unlock any profits in the development) suggests that the enterprise was ill-fated from the start. This view is supported by their inability to refinance the loans in early 2007, before the start of the global financial crisis and tightening of lending.
[21] Mr Finnigan invited me to regard the debtors as commercially naive and relieve them of responsibility on that basis. I can accept the possibility that
Mrs Yelcich was commercially naive, but I do not consider that this should be a basis for allowing her to escape the consequences of her decisions. She chose to embark on a complex commercial venture (development of bare land) without any relevant experience, either in this field or in finance. Although there is no evidence to support her contention that her previous bankruptcy was a consequence of an unpreventable fraud, she appears to have learnt nothing from that experience (in particular, the possibility of unforeseen events occurring). There is no evidence that she took any advice on the venture.
[22] It does not assist Mrs Yelich, in my view, for her to say that she was merely a figurehead for her bankrupt husband. One of the purposes of bankruptcy is to prevent persons who have been reckless in undertaking business activities from engaging in further questionable business ventures. It cannot be appropriate commercial behaviour to assist someone to engage in commercial activity when that other person is prohibited from engaging personally in that activity during a period of bankruptcy.
[23] Mr Crawford appears to be in a slightly different position. He did not provide any details as to his skills or work experience but it appears that about the same time he was also engaged in a separate property development of a 147 hectare property at Whakapirau. He sold that land for $4.9 million in January 2006, with all of the sale proceeds apparently having been applied to clear debt. He cannot have amassed that level of debt without having some understanding of the commercial world and the obligations that go with it.
[24] Both Mr Crawford and Mrs Yelcich have said in evidence that the ends (which they identify as high valuations and potential realisations) justified the means. Although they do not identify the means, I take it that they refer to the level of borrowing and the commitment of all of their available personal resources to fund the purchase. I have already said that I consider that to have been imprudent risk taking, particularly in deciding to purchase the Mangawhai land before starting, let alone completing, the development of the Matakohe land. It is not a sufficient answer, in my view, to say that the lenders took the same view that there was a reasonable basis for this level of borrowing. The debtors were still taking on
obligations with a high level of risk and without the resources (in terms of skills and finance) to justify that level of risk.
[25] Mr Finnigan referred me to several cases where the court had had regard to the absence of assets (and hence benefit to creditors), and to the fact that the debts had arisen for reasons that were not of the debtor’s own making.[4] He relied in
[4] Re Taylor (1992) 4 NZBLC 102,875; McHardy v Wilkinson Davies Marinas Ltd (in receivership) CA54/93, 7 April 1993; Re Wong ex parte Turners & Growers HC Auckland B1104/93, 1 October 1993; Re Sellar, ex parte Hesketh Henry Solicitors Nominee Co Ltd HC Auckland B1621/93, 16 March 1994; D’Esposito ex parte Westpac Banking Corporation B16/98, 30 June 1998.
particular on Re Taylor[5] where an order for adjudication was refused, after the court
[5] Re Taylor (1992) 4 NZBLC 102,875 (HC).
found that the debtor’s inability to repay a loan was a consequence of a successful business having failed as a consequence of adverse economic conditions (after the stock market crash of 1987). However, that case can be distinguished from the present one on the basis that the borrowing was for an established and previously successful business, and the court’s finding that there was no public interest element involved.
I do not propose to review the other cases (with one exception). Each case depends on its own facts. It is sufficient for present purposes simply to record that in the cases where adjudication was refused[6] the court was satisfied that there was no wider public interest which required an order. I will comment briefly, however on the one case which Mr Finnigan recognised as closest to the present on its facts: Baker v Westpac Banking Corporation[7]. In that case, the debtor had entered into a transaction under which she received a transfer of land and gave mortgages back to the transferor (with whom she was said to have been infatuated). The transactions were intended to be short term only, and designed to facilitate a further sale. However, by the time the matter came before the court (after the mortgages had been transferred to other parties), the land was considered to have been of little value because of title complexities, planning difficulties and a decline in property values. The Court of
Appeal upheld an order for adjudication, notwithstanding the absence of assets and the absence of any commercial improprietory or recklessness on the debtor’s part, placing weight on the background of mortgage indebtedness.
[6] Re Taylor (1992) 4 NZBLC 102,875 (HC) and Re Sellar, ex parte Hesketh Henry Solicitors Nominee Co Ltd HC Auckland B1621/93 16 March 1994.
[7] Baker v Westpac Banking Corporation CA212/92, 13 July 1993
[26] I do not overlook the ages of the debtors (Mrs Yelcich was 67 and Mr Crawford 56 at the time of the hearing) or their personal circumstances (Mrs Yelcich is still living in the house on the home block but as rented accommodation, and although Mr Crawford is still living in his own home there is over $1 million worth of debt secured against it, which exceeds its value). However, Mr Finnigan did not contend that the debtors would suffer any particular stigma or unreasonable prejudice, save in respect of their ability (through Ruawai) to pursue the claims for sale at undervalue and for breach of confidence.
[27] I do not see the latter as a compelling factor. The debtors owe Odin $879,000 after allowing for the potential claim at undervalue (the judgment has been stayed in respect of that amount). Mr Finnigan argued that the Court of Appeal had left open the possibility of the claim being greater than that. Whilst that is so, in doing so the Court of Appeal commented that those other aspects of the claim were weak factually and legally. The Official Assignee is able to take an objective view of the merits of both claims and assess whether the costs of pursuing them are warranted. Mr Finnigan argued that there would be problems funding the claims. I do not see that they will be any different from the difficulties of funding the claims at present. As I understand it, the undervalue claim is currently not been pursued (because any recovery will be taken up by Davies). In addition, Mr Boris Yelcich is also a plaintiff in the breach of confidence claim and presumably he will have the same ability to continue that claim (and fund Ruawai’s costs also) if Mr Crawford and Mrs Yelcich are made bankrupt.
[28] I also take into account that the present judgment debt arises under a guarantee. There is a lengthy and well established line of authority to the effect that there is a public interest in the honouring of guarantees (to which I referred) in my decision in Richards v Auckland Finance Ltd.[8] I also note in passing that the debtors have a given a joint guarantee of another debt of $110,000. Although there is no detail before the court as to when that debt was incurred, it is clearly one that they will be unable to meet.
[8] Richards v Auckland Finance Ltd HC Auckland CIV-2008-404-002324, 9 July 2009 at [29].
[29] As a further factor arising out of the public interest in persons meeting guarantee obligations, I note the importance placed by Master Lang (as he then was)
in Re Rossell[9] on the importance of the manner in which the debt was incurred (referring to Re Fidow).[10] Master Lang distinguished between debts which have arisen in a commercial context and debts that had arisen completely beyond the control of the debtor (as in Re Taylor) or through circumstances that could be viewed
as domestic in nature. He said that debts which arose in a commercial context were unlikely to permit a submission that adjudication should not follow.[11]
[9] Re Rossell ex parte Auckland Finance Ltd HC Auckland CIV 2002-404-000580, 3 April 2004.
[10] Re Fidow [1989] 2 NZLR 431, 441.
[11] Re Rossell ex parte Auckland Finance Ltd HC Auckland CIV 2002-404-000580, 3 April 2004 at [12].
[30] Finally, I come back to Mr Finnigan’s submission that I should take account of a public interest in Odin being called to account for its sale at undervalue. This submission implies a deliberate course on the part of Odin. An argument of collusion between Odin and the purchaser was advanced and rejected in Ruawai’s application to sustain a caveat over the farm and home blocks. There is no further evidence before the court on this application to cause me to revisit that conclusion. Without that I see no merit to Mr Finnigan’s submission. It is not for me to determine whether Odin failed to take reasonable care to obtain the best price for those blocks. However, even if it fell short of that duty, that does not give rise to a countervailing public interest militating against an order in this case.
Decision
[31] The debtors have not persuaded me that there is no wider public interest to be served by an order for adjudication. They are clearly and grossly insolvent (both also have other debts). Their major debts are substantial, and have arisen as a result of imprudent risk taking in commercial ventures. They chose to embark on a second stage (purchase of the Mangawhai land) before they had taken the first stage (the Matakohe land) to a point where there was a reasonable prospect of it becoming a profitable venture. In doing so, they committed themselves so heavily that they had no ability to see the projects through to fruition, and were acutely vulnerable to the economic downturn that ensued.
[32] I consider that an order for adjudication is conducive to commercial morality and the wider public interest. I consider that the circumstances warrant the debtors being visited with the disqualification of bankruptcy.
[33] I make an order adjudicating Craig Sterling Crawford and Lois Jean Yelcich bankrupt. The order is made at 4 pm today.
[34] The judgment creditors are entitled to costs on both applications on a 2B basis, although they are entitled to only one set of costs for preparation for, and conduct of, the hearing. They are also entitled to disbursements as fixed by the
Registrar.
Associate Judge Abbott
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