Darby v Official Assignee
[2013] NZHC 22
•29 January 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2007-404-3034 [2013] NZHC 22
IN THE MATTER OF the Insolvency Act 1967
BETWEEN PATRICK ANTONY DARBY Applicant
ANDOFFICIAL ASSIGNEE Respondent
Hearing: 12 August, 1, 2, 8 and 13 September 2011
Appearances: G Neil and K Kuang for Official Assignee
P A Darby in person
Judgment: 29 January 2013
RESERVED JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 29 January 2013 at 4:00pm
pursuant to Rule 11.5 of the High Court Rules.
...................................
Registrar/Deputy Registrar
Solicitors:
Meredith Connell, P O Box 2213 Auckland
Email: [email protected]
DARBY V OFFICIAL ASSIGNEE HC AK CIV-2007-404-3034 [29 January 2013]
[1] Patrick Antony Darby was adjudicated bankrupt on 15 February 2008. Ordinarily he would be entitled to be discharged from his bankruptcy after three years. However, the Official Assignee lodged an objection to his discharge. This is the decision on Mr Darby’s application for discharge.
[2] The decision comes far too long after the hearing. I apologise to the parties for the delay in giving it.
[3] The grounds for Mr Darby’s application include:
(a) The Official Assignee allegedly delayed in arranging any public examination concerning his discharge;
(b) The Official Assignee allegedly failed to file a report under s 109(2)
of the Insolvency Act 1967;
(c) There were no unanswered questions during the bankruptcy;
(d) There is no benefit to the creditors in prolonging the bankruptcy;
(e) No creditor has objected to Mr Darby’s discharge from bankruptcy;
(f) No creditor has given notice of any intended opposition under s 109(4) to Mr Darby’s discharge;
(g)The effect of the delays by the Official Assignee has been to prolong the bankruptcy unjustifiably;
(h)Mr Darby is a pensioner in his sixties, requiring constant medical attention.
[4] The Official Assignee’s primary concerns are:
(a) Mr Darby is alleged to prey on the more vulnerable members of society and use them for his personal gain;
(b)He is said to have been deliberately untruthful to the Official Assignee in both his first and his second bankruptcies;
(c) Mr Darby is alleged to display an absence of commercial morality in the way he conducts his business;
(d)Mr Darby’s alleged disregard for standard commercial practices continued into his bankruptcy, when he continued to conduct his own business in breach of restrictions under the Insolvency Act 1967;
(e) Mr Darby’s is alleged to have used an alias while conducting business
during his bankruptcy.
(f) Mr Darby has two prior convictions for fraud;
(g)Mr Darby has prior convictions under the Companies Act 1993 and the Financial Reporting Act 1993 in respect of his management of Hillcrest Services Limited;
(h)Mr Darby allegedly lacks remorse for the loss he has caused his creditors;
(i)Mr Darby has allegedly taken steps to hide assets from the Official Assignee and place assets out of the reach of liquidators and receivers of companies connected to Mr Darby.
[5] Mr Darby was bankrupted under the Insolvency Act 1967. The petition for his adjudication was filed before the Insolvency Act 2006 came into force. Under the transitional provisions of the Insolvency Act 2006, in particular s 444(2), the Insolvency Act 1967 continues to govern Mr Darby’s bankruptcy. So he has applied under s 108 of the 1967 Act.
[6] Mr Darby was adjudicated bankrupt on the petition of Rita Hockey. She was a judgment creditor for the sum of $76,701.86 under an order for costs made by Stevens J in May 2007.1 The act of bankruptcy was non-compliance with a bankruptcy notice. Mr Darby applied to set aside the bankruptcy notice but that application was dismissed when he failed to appear at the first call. He relied on the grounds in his application to set aside the bankruptcy notice as grounds to oppose his adjudication. One of those grounds was that he was appealing against the costs order of Stevens J and his adjudication would make the appeal nugatory. Associate Judge
Abbott dismissed that as a factor. More significantly for this case, Associate Judge Abbott accepted the petitioner’s submission that Mr Darby was a “commercial hazard”. At para [25] he said:2
Coupled with the protracted history of the proceeding in which the costs judgment was given, these matters all combine in my view to a view that Mr Darby lacks commercial judgment in these matters, and cannot accept what has been made clear to him on previous occasions, namely, that he pursued the Wiseline v Hockey litigation far beyond its sensible ambit and that the current judgment for costs is the consequence of that.
[7] Creditors who proved in Mr Darby’s bankruptcy are:
(a) Rita Hockey $76,701.86 (b) Capital and Merchant Finance Ltd (in receivership) $2,054,183.773
(c) Public Trust, as executor of estate
of John Edward Holloway $270,000.004
(d) Hillcrest Services Ltd (in receivership) $60,424.775
(e) Bank of New Zealand $9,800.00
TOTAL: $2,471,111.40
Rita Hockey is also owed costs of $2,892.51 on the order of adjudication.
1 Wiseline Corporation Ltd v Hockey HC Auckland CIV-1999-404-936, 8 May 2007 per Stevens J.
2 Re Darby ex parte Hockey HC Auckland CIV-2007-404-3034, 15 February 2008 per Associate
Judge Abbott.
3 Capital+Merchant Finance Ltd v Darby HC Auckland CIV-2007-404-1742, 30 October 2007 per
Associate Judge Gendall.
4 Holloway v Darby DC North Shore NP2004-044-284, 15 January 2008 per Judge Cadenhead.
5 Costs judgment of Venning J in Hoole v Darby HC Auckland CIV-2006-404-5235, 30 March
2007.
[8] So far the only recoveries in Mr Darby’s bankruptcy come to $6,351.80:
$3,453.81 from the receivers of Hillcrest Services Ltd obtained on executing Anton Piller orders; and $2897.99 for commission paid by Sovereign Insurance from Mr Darby’s earlier occupation selling insurance superannuation products. The recoveries have been applied towards the costs of the administration of the estate. The Official Assignee is investigating recovering funds from the sale proceeds of vehicles held by Mr Price, liquidator of a number of companies with which
Mr Darby is associated.6 The Official Assignee says that it is too early to say
whether there is any prospect of any distribution to creditors.
[9] The Official Assignee alone has objected under s 107(3) of the Insolvency Act to Mr Darby being discharged from bankruptcy after three years. No creditor has applied for leave under s 107(3) to object. No creditor has given notice under s 109(4) of additional grounds for opposing Mr Darby’s discharge. However, the Official Assignee is not alone in his concern at Mr Darby being discharged. The children of the late John Holloway, beneficiaries in his estate, have written to the Official Assignee expressing their support for his opposition. Two insolvency practitioners, Mr Hoole, one of the receivers of Hillcrest Services Ltd, and Mr Price, the liquidator, have made affidavits giving evidence supporting the Official Assignee’s opposition.
Principles for deciding discharge applications
[10] Under s 107(1), a bankrupt is entitled to be discharged three years after adjudication, unless he is sooner discharged by court order. However, under s 107(3) the Official Assignee or, with the leave of the court, a creditor may object to the automatic discharge.
[11] When there is an objection to discharge, s 109 requires the bankrupt to be publicly examined and for the Assignee to file a report. The report of the Official
Assignee must address the affairs of the bankrupt, the causes of the bankruptcy, the
6 The companies are Barry’s Car Sales Ltd, Bronwyn Estate Ltd, Pinnacle Brokers Ltd, Pinnacle Business Brokers Ltd, Wiseline Corporation Ltd, Spaceways Holdings Ltd, Doulton Holdings Ltd, Ardmore Equities Ltd, National Restorations Ltd, National Recyclers Ltd, Phoenix 888 Ltd, Phoenix Holdings 2008 Ltd and Civic Holdings Ltd. They are not the only companies with which Mr Darby is or has been associated.
manner in which the bankrupt has performed the duties imposed under the Act or obeyed the orders of the court, the bankrupt’s conduct before and after the bankruptcy and any other fact, matter or circumstance that would assist the court in making its decision. These matters clearly go to the exercise of the court’s discretion under s 110:
(1) At the hearing of any application for an order of discharge under section 108 of this Act, or at any examination under section 109 of this Act, the Court, having regard to all the circumstances of the case, may:
(a) Grant an immediate order of discharge:
(b) Grant an order of discharge subject to such conditions (including consenting to any judgment or order for the payment of any sum of money) as it thinks fit, or suspend an order for discharge for such time as it thinks fit:
(c) Grant an order of discharge with or without such conditions as it thinks fit to take effect at a specified future date:
(d) Refuse an order of discharge, in which case the Court may specify the earliest date on which the bankrupt may apply again to the Court for an order of discharge.
(2) Section 107 of this Act shall be read subject to any order of the
Court under this section.
(3) Where the Court has granted an order of discharge subject to the bankrupt consenting to any judgment and the bankrupt consents, the Court may from time to time vary the judgment as it thinks fit.
[12] In its commentary to s 298 of the Insolvency Act 2006 (the successor to s 110 of the Insolvency Act 1967), Brookers Insolvency Law & Practice says:
... the approach of the court may be summarised as follows:
1. The onus is on the Assignee to satisfy the Court that it is in the public interest that the bankruptcy should continue for a further period.
2. The Court has a broad discretion which must have regard to all the circumstances of the particular case.
3. In the absence of good reasons, the bankrupt should normally obtain a discharge. However, public interest factors may mean that an order of discharge should be refused.
4. Guidance in the exercise of the Court’s discretion is provided by s 296(2) which lists matters on which the Assignee is to report to the High Court. Thus, the Court may consider the manner in which the
bankrupt has performed the duties imposed on him or her under the Act in his or her conduct both before and after the bankruptcy and any other matters which may assist the Court in making its decision.
5. The relevant matters therefore include: the interests of the bankrupt; the interests of the creditors; the public interest; commercial morality and the conduct of the bankrupt.
[13] Cases such as ASB Bank v Hogg7 and Re Anderson8 reflect this. They were decided under the 1967 Act. The summary is equally applicable to discharge applications under s 108 of the 1967 Act. While it is routine to address the interests of the bankrupt, the interests of the creditors, the public interest, commercial morality and the conduct of the bankrupt (the interests-based approach), it can be more useful to go directly to the underlying purposes of bankruptcy law and to assess whether they require the bankruptcy to be extended in the particular case before the court. Support for this approach is found in ASB Bank v Hogg:9
In conferring a discretion expressed in the broadest terms, the legislation recognises that each case will be different, that the relevant factors may vary from case to case and that the exercise of the discretion must be governed by the circumstances of the particular case having regard to the guidance provided by a consideration of the scheme and purpose of the legislation.
[14] The purposes of bankruptcy are: administration of the estate of the bankrupt, making the bankrupt accountable for his insolvency, punishing the bankrupt for misconduct, protecting the community from the bankrupt and allowing the bankrupt to take up commercial activity again freed from his liabilities. Looking to these purposes is useful not only on discharge applications, but also in the exercise of the discretion on bankruptcy applications10 and in the consideration of alternatives to
bankruptcy.11
[15] The interests-based approach does not necessarily allow these discrete purposes of bankruptcy to be addressed separately. “Public interest” can encompass claims for punishment, the need to protect the community and the public benefits of discharge. “Commercial morality” may encompass both the requirement for
accountability as well as calls to punish. There can be a convergence of some
7 ASB Bank v Hogg [1993] 3 NZLR 156 (CA).
8 Re Anderson HC Hamilton B213/89, 14 April 1992, Penlington J.
9 At 157.
10 Evia Rural Finance v Cribb [2012] NZHC 570.
11 Sheppard v Blanchett [2012] NZHC 789.
aspects of public interest and the interests of the bankrupt in the discharge from bankruptcy. Assessing a discharge application by reference to the purposes of bankruptcy gives a more focussed approach.
Administration of the bankruptcy
[16] On adjudication the property and rights of the bankrupt vest in the Official Assignee. The Insolvency Act gives the Official Assignee powers to gather in the assets of the bankrupt, realise them, and distribute them to creditors. The bankrupt is required to co-operate fully with the Official Assignee in providing information as to his assets, making over assets, giving up accounting records and other documents and to submit to examinations as to his property. On adjudication, proceedings and execution of judgments against the bankrupt are halted, because the Official Assignee is managing matters in the interests of all creditors. Transactions by the bankrupt may be set aside as voidable gifts, voidable preferences and voidable securities to bring about equality among all creditors.
[17] The aim of the administration of the bankruptcy is to realise the assets of the bankrupt in the interests of creditors. When the cases refer to the interests of creditors, they are addressing the interests of the creditors in having the affairs of the bankrupt administered with a view to assets being distributed to them.
[18] The Official Assignee is able to exercise his powers in the administration of the bankrupt’s estate by getting in property, accepting proofs of debt and distributing assets, even after the bankrupt’s discharge: Palmer v Official Assignee.12 An annulment under Part 11 of the Insolvency Act brings the Official Assignee’s administration of bankruptcy to an end, not the bankrupt’s discharge under Part 10. Because administration of the bankruptcy can continue after discharge, this aspect of bankruptcy does not commonly require the period of bankruptcy to be extended
beyond the normal three years under s 107.
12 Palmer v Official Assignee [2011] 1 NZLR 846 (HC) at [13]–[61] especially [45]–[47].
Making the bankrupt accountable for his insolvency
[19] The purpose of this element is to ensure that when a person incurs liabilities, in particular when he obtains credit, he is required to answer for a failure to pay. This element can be seen in two decisions of Master Kennedy-Grant. In Re Coll ex parte Consumer Finance Ltd he said:13
He has incurred those liabilities by giving guarantees. He has not honoured his guarantees. He is not in a position to honour his guarantees. The guaranteeing of financial advances to companies by directors of those companies is standard practice in New Zealand. It is an almost invariable requirement of lenders. Without the additional security provided by such guarantees, lenders would very often not make advances. The directors of companies obtain the benefit for their companies of advances made in reliance on their guarantees. It would not, in my view, be conducive to commercial morality - the proper consideration by directors of whether they can give guarantees and the proper construction by directions of whether, once having given guarantees, they should honour them - if I were to dismiss the petition. I am satisfied that the proper order in this case is one of adjudication.
And in Re D’Esposito ex parte Westpac Banking Corporation he said:14
I have had occasion to comment before on the fact that the giving of personal guarantees is an integral part of the financing of business. Failure to honour personal guarantees can have serious consequences for the creditors to whom they have been given. The general expectation amongst the business community and on the part of those who finance business must be that guarantees, if given, will be able to be honoured, that the guarantors have assets against which the persons to whom the guarantees are given may proceed if the guarantees are not honoured.
[20] The point being made in these passages is that when debtors assume responsibilities and are not able to meet those liabilities, there are consequences. These decisions show that adjudication in bankruptcy can be an appropriate response to ensure accountability.
[21] The disabilities imposed by bankruptcy - the restrictions on incurring credit, on leaving the country without the consent of the Official Assignee, on carrying on business, on holding office as a director and on carrying out certain callings - all go
towards accountability. This factor may count against alternative proposals for
13 Re Coll ex parte Consumer Finance Ltd HC Rotorua B69/97, 18 September 1997 at 7.
14 Re D’Esposito ex parte Westpac Banking Corporation HC Napier B16/98, 30 June 1998 at [19].
addressing insolvency.15 However, the requirement for accountability is not by itself likely to require an extension to a bankruptcy.
Punishing the bankrupt for misconduct
[22] It is unfashionable to label bankruptcy as having a punitive element. There is a tendency to flinch from referring to this aspect, perhaps because of a residual memory of the Marshalsea Prison when the law provided for the detention of bankrupts who could not honour their creditors. Nevertheless it is a fact of life that bankruptcy has a punitive element. There is a stigma that attaches to bankruptcy. It also carries disabilities. Bankruptcy may be imposed on account of misconduct in
some limited cases. This aspect can be seen in the discharge decision Re Atwill:16
But I think also that some penalty must be imposed on him in respect of his past misconduct and irresponsibility...
And in Re Trott & Joy, where Tompkins J considered whether a proposal should not be approved on the grounds of misconduct:17
An insolvent’s misconduct may be so irresponsible and its effects on creditors or others so devastating that a Court may conclude that it is in the public interest that the person responsible should not escape the stigma of bankruptcy. Rather, it may be in the public interest that such a person should be marked as a bankrupt and further, that he should suffer the various disqualifications that go with bankruptcy. Those disqualifications are after all designed to protect the unsuspecting community from the ravages of irresponsible financial conduct. And the stigma of bankruptcy is itself a deterrent to others from behaving in a like manner.
The kind of misconduct Tompkins J had in mind was deliberate and wilful squandering of assets, excessively extravagant living and misconduct of a gross character – more serious misconduct than Adams J may have had in mind in Re Atwill. Punishment is not required for every business failure or insolvency. While it may apply only in a minority of cases, there are cases that are so serious that
bankruptcy is required instead of less onerous alternatives.
15 See for example Sheppard v Blanchett [2012] NZHC 789 at [62]–[63].
16 Re Atwill [1958] NZLR 873 (SC) at 876.
17 Re Trott & Joy HC Auckland B1471/88, B1472/88, 14 April 1989 at 28.
[23] As the report by the Official Assignee under s 109(2) is required to address the manner in which the bankrupt has performed his duties under the Insolvency Act and the bankrupt’s conduct before and after bankruptcy, misconduct by the bankrupt must be a relevant consideration and may give grounds for extending the time before discharge.
Protecting the community
[24] Some of the disabilities imposed on a bankrupt are directed at protecting the community. A person unable to pay his debts as they fall due should not be allowed to incur further credit because that will cause loss to others. The restrictions on carrying on business and holding office as director are similarly aimed at protecting the public.
[25] On a discharge application there can be a question whether the discharge of the bankrupt will present an unacceptable risk to the community. Obviously there may be some element of risk whenever any person, who has been insolvent, is free to re-engage in business without restriction. The mere possibility of loss is not enough to bar a discharge. Assessment is required to establish whether the risk is unacceptable.
Allowing the bankrupt to take up commercial activity again, freed from his liabilities
[26] There can be a public benefit in releasing bankrupts from their liabilities and allowing them to re-engage usefully in the community again. It is also in the interests of the bankrupt. Any bankrupt seeking a discharge will raise this as a relevant consideration. In Re Gaskell18 the English Court of Appeal put the matter this way:
... the overriding intention of the Legislature in all Bankruptcy Acts is that the debtor on giving up the whole of his property shall be a free man again, able to earn his livelihood, and having the ordinary inducements to industry...
18 Re Gaskell [1904] 2 KB 478 (CA) at 482.
Similarly in ASB Bank v Hogg, the Court of Appeal held that in providing for automatic discharge after three years, the legislation recognised that it is not in the public interest that the bankruptcy should endure indefinitely.19
Matters raised by Mr Darby
[27] Mr Darby complains about delays by the Official Assignee, in particular in arranging a public examination and in providing his report. Section 109 of the Insolvency Act requires the Official Assignee to call on the bankrupt to appear before the Court to be publicly examined concerning his discharge “as soon as practicable”. While the Official Assignee gave notice of his objection to Mr Darby’s discharge on 9 February 2011, he did not arrange for the public examination straight away. Mr Darby filed an application to strike out the objection, but on 14 June 2011
Associate Judge Abbott indicated that a better course for Mr Darby would be to apply for his discharge. Mr Darby filed his application under s 108 in response and that went to hearing, with Mr Darby being examined. Mr Darby properly addressed any delay by the Official Assignee to call for the public examination by making his s 108 application. No further remedy for the alleged delay is required: Anderson v
Official Assignee.20
[28] As for the Official Assignee’s report, Lang J directed it to be filed and served by 4 August 2011.21 It was not in fact filed until 5 August 2011, but that aspect is trifling. Mr Darby had the opportunity to consider and address it. He filed a number of submissions in response. The hearing ran for five days, with a break of nearly three weeks between the first and second days. Mr Darby was not prejudiced.
[29] Mr Darby also says that delays by the Official Assignee have prolonged the bankruptcy unjustifiably. I do not accept that there has been delay on the part of the Official Assignee. Mr Darby’s affairs are complex and have required considerable investigation and examination. If Mr Darby had established that he should have
been discharged on the expiry of the three years under s 107(1), there might be
19 At 157.
20 Anderson v Official Assignee [1996] 2 NZLR 167 (HC) and Anderson v Official Assignee CA
150/96, 25 February 1997.
21 Minute of Lang J dated 21 July 2011.
something in his point. However, as I find that he should not be discharged yet, he cannot say that the Official Assignee has prolonged his bankruptcy unjustifiably.
[30] Mr Darby takes the point that no creditor has objected to his discharge or has given notice under s 109(4). He does not contest the Official Assignee’s right to object, but instead suggests that less weight should be given to it because the Official Assignee is running the objection alone. There is nothing in the point. It is normally the Official Assignee who objects to discharges. The Official Assignee is usually in a better position than creditors to assess whether an objection should be made. That is because of the Official Assignee’s general expertise in administering bankruptcies and his knowledge of the particular bankrupt obtained during the administration. In many cases there is an important public interest in objecting to a discharge. Individual creditors may not wish to pursue that public interest, whereas the Official Assignee is well suited to do so.
[31] The other matters Mr Darby set out in his s 108 application go to the merits of his case. They are considered under the substantive part of the decision. At this point it is enough to say his bankruptcy has raised serious questions; there are good grounds for extending his bankruptcy notwithstanding any absence of benefit for his creditors; and Mr Darby’s personal circumstances have been taken into account, although they carry little weight.
Evidential matters
[32] The Official Assignee filed a report under s 109(2) of the Insolvency Act and at the hearing also relied on seven volumes of documents running to over 1,500 pages. Those volumes were referred to in the report and form part of the report. The Official Assignee also filed a supplementary report providing information on an examination of Roger Barton, on identification of Mr Darby when he used an alias and attaching a letter from Mr Hoole. Mr Darby objected that many of the matters set out in the reports were hearsay statements. If the admissibility of the contents of the report were to be governed only by the Evidence Act 2006, there would be some merit in that objection. Many documents relied on are business records and are admissible under s 19 of that Act, but others are not. Some might not meet the
requirements of s 18 because the maker of the statement could have been available as a witness without undue delay or expense.
[33] However, the Official Assignee is entitled to rely on r 35 of the Insolvency
Rules 1970:
Where for the purposes of any application to the Court by the Assignee it is necessary that evidence be given by him in support of the application, the evidence may be given by a report of the Assignee to the Court, and need not be given by affidavit, unless so required by the Court; and any such report of the Assignee to the Court shall be received by the Court as sufficient evidence of the matters reported upon in the absence of proof to the contrary.
Under this rule, the reports are received as sufficient evidence of the matters reported upon in the absence of proof to the contrary. This allows the Official Assignee to rely on hearsay statements, until evidence is given that effectively rebuts statements in the report.
[34] None of the evidence given by Mr Darby persuaded me that I should not accept the matters set out in the reports and accompanying documents. However, in weighing evidence, I have placed more importance on matters where Mr Darby was examined, than those on which he was not.
Factual matters
Mr Darby’s first bankruptcy
[35] This is Mr Darby’s second bankruptcy. He and his wife were adjudicated on their own petitions on 29 May 1990 and automatically discharged on 29 May 1993. He and his wife had combined debts of $479,400.95. Their bankruptcies followed their being found liable in the Papakura Video Ltd litigation.22 In that case Mr Darby was found to have reconstructed accounts, which were the subject of contractual warranties. The evidence of the plaintiff’s witnesses was accepted in preference to Mr Darby’s. Mr Darby contested liability fruitlessly. The litigation
took time. Mr Darby’s bankruptcy meant that the creditors received little from him.
22 Herbison v Papakura Video Ltd [1987] 2 NZLR 527 (HC); [1987] 2 NZLR 720 (HC); and [1988]
1 NZLR 292 (HC).
Mr Darby blamed his professional advisers for his misfortune.23 Evidence in this case suggests that in his first bankruptcy Mr Darby may not have accounted properly to the Official Assignee for all his assets: his collection of Chevrolet cars was not realised for the benefit of his creditors.
Wiseline Corporation Ltd v Hockey litigation
[36] This case ran from 1999 to 2007. Mr Darby had become acquainted with Mr Russell Hockey when they were both selling insurance for the Prudential Insurance Company New Zealand Ltd. Together in 1997 they formed a joint venture in the field of insurance succession planning. Wiseline Corporation Ltd was the vehicle through which Mr Darby and his wife invested in the joint venture companies, Pinnacle Business Brokers Ltd and Pinnacle Brokers Ltd. Mr Darby alleged that Mr Hockey removed funds from the Pinnacle companies for his own use without authority, sought to transfer the assets and business of the Pinnacle companies to himself personally, had the companies grant him securities and tried to remove Mr Darby as director. Mr Darby started proceedings in the name of Wiseline Corporation Ltd in 1999. Not long after the proceedings started, Mr Hockey died. Under his will his widow was the executrix and received the entire estate. However, for all practical purposes Mr Hockey’s estate was bankrupt. It was an insolvent estate under the Insolvency Act 1967. The Official Assignee was appointed administrator of the estate.
[37] The litigation was convoluted and complex. Nicholson J had charge of most of it. In an early decision he referred to “a tangled web of proceedings”.24 He considered the claims were of doubtful merit.25 Mr Darby was effectively running the proceedings through “one man”, insolvent shell companies. Security for costs was ordered and bank bonds were given, but these expired, leaving Mrs Hockey without any effective security for a costs order. Nicholson J was concerned at
Mr Darby’s legal and practical judgment and his proclivity to make applications and
take positions which lacked proper timing and real merit, and caused Mrs Hockey
23 That should not necessarily be taken as meaning his counsel in the proceeding.
24 Wiseline Corporation v Hockey (2001) 16 PRNZ 29 (HC) at [5].
25 Wiseline Corporation v Hockey HC Auckland M143-SD99, 20 March 2002 at [18]–[20] per
Nicholson J.
considerable legal expenses and delayed resolution. Up to 2004 costs orders of about $48,000 were made against the plaintiffs, but not paid.
[38] Stevens J reviewed the proceedings in his 2007 costs decision.26 The proceeding against the estate of Mr Hockey had been recognised as stayed. Spaceways Holdings Ltd discontinued its claim. A 12 page schedule to the judgment of Stevens J lists the salient steps in the litigation. Further scale costs were ordered against the plaintiffs. In addition Mr Darby was ordered to pay costs as a non-party. Stevens J found that Mr Darby had promoted the litigation substantially for his own benefit and had controlled the proceedings, so that he was the real party to the litigation. Stevens J was satisfied that but for Mr Darby’s involvement, the claims would not have been pursued. He rejected a number of technical but unmeritorious objections raised by Mr Darby. Mr Darby was bankrupted for non-payment of a bankruptcy notice issued on the costs order of Stevens J.
Hillcrest Services Ltd, Barry’s Car Sales Ltd and Capital + Merchant Finance Ltd
[39] Barry’s Car Sales Ltd was a motor vehicle dealer operating at 303 Great South Road, Takanini, Auckland. Mr Darby was the sole director. Hillcrest Services Ltd was a finance company that lent money to finance purchases of vehicles sold by Barry’s. Mr Darby became a director of Hillcrest in 2004, although he was in effective control earlier than that. Hillcrest also operated from 303 Great South Road. Barry’s had initially obtained finance from Motor Trade Finances Ltd. From
2004 Hillcrest obtained finance from Capital + Merchant Finance Ltd under a revolving credit facility. Hillcrest signed a general security agreement in favour of Capital + Merchant giving a first-ranking charge over all its present and after- acquired property. Mr Darby guaranteed Hillcrest’s obligations under the credit facility and the GSA. The facility was initially for $700,000 but was increased. In May 2005 Capital + Merchant agreed to extend the facility to $1.5 million to allow Hillcrest to buy a book of receivables from Motor Trade Finances Ltd. However, Motor Trade Finances assigned the book of receivables to Barry’s, not to Hillcrest. The facility expired in March 2006. Negotiations to renew the facility came to
nothing. Hillcrest was in default. It owed Capital + Merchant $1.5 million.
26 Wiseline Corporation v Hockey HC Auckland CIV-1999-404-936, 8 May 2007.
Capital + Merchant found out that there was another company, Bronwyn Estate Ltd, also under the effective control of Mr Darby. All the drawdowns from Capital + Merchant had been paid into an overdrawn bank account of Bronwyn Estate Ltd. Borrowers were also making repayments into the Bronwyn Estate account. Mr Darby had also allowed the Bronwyn Estate Ltd account to be used to fund the operating expenses of Barry’s and Hillcrest. These arrangements were news to Capital + Merchant and outside the terms on which funds had been advanced to Hillcrest. Capital + Merchant appointed receivers on 3 August 2006. The receivers tried to uplift company records from Mr Darby but he did not co-operate.
[40] On 4 September 2006, Lang J made orders on the receivers’ application for funds to be frozen, for Mr Darby, Bronwyn Estates Ltd and Barry’s Car Sales Ltd to provide a list of all receivables which were claimed to be in the legal or equitable ownership of any entity other than Hillcrest, and to provide copies of all contracts relating to all receivables. Later in September 2006 before Lang J further orders for discovery were made against these defendants. The receivers were not satisfied with compliance with these orders and became concerned that Mr Darby and the entities associated with him would not preserve the information necessary to allow the receivers to recover the principal asset in the receivership, namely the receivables.
[41] In October 2006 the receivers obtained Anton Piller orders for documentation relating to the receivables and also all computer systems containing electronic data relating to the receivables. Mr Darby was not co-operative when the Anton Piller orders were executed. There was an altercation which led to separate criminal proceedings. The costs of applying for the Anton Piller orders and executing them cost the receivers about $58,000.
[42] The receivers applied for costs. Venning J heard the application in March
2007.27 Venning J found that Mr Darby was not co-operative and had actively opposed the implementation of the court orders. He had obstructed the receivers from inspecting and taking copies of documents. There was a consistent course of conduct of stalling and frustrating the receivers. Venning J found that Mr Darby
was not a convincing or reliable witness, and was evasive. He also found that
27 Hoole v Darby HC Auckland CIV-2006-404-5235, 30 March 2007 perVenning J.
Mr Darby had effective control of Bronwyn Estates Ltd. He found that Mr Darby had threatened to get rid of information by threatening to destroy a computer. He had also edited files and altered information from the computer before making it available to the receivers. Venning J held that the receivers were justified in seeking the Anton Piller orders, held that costs should be awarded even though the case had not gone to a final hearing, and also held that solicitor-client costs should be made. He ordered Mr Darby to pay costs of $57,924.77.
[43] There was an appeal to the Court of Appeal from Venning J’s costs decision on the Anton Piller orders. The Registrar of the Court of Appeal fixed security for costs on the appeal. The appellants, including Mr Darby, applied to review the Registrar’s decision but that decision was upheld by Wilson J. The appellants then
applied for leave to appeal to the Supreme Court.28 The Supreme Court declined
leave.
[44] Later in 200729 Lang J gave an interim judgment, ruling on substantive issues that had arisen in the receivership. Mr Darby had argued that the receivables in question were assets of Barry’s Car Sales, not assets of Hillcrest Services Ltd, and were accordingly not caught by the general security agreement given by Hillcrest Services Ltd to Capital + Merchant Finance Ltd. The receivers, on the other hand, contended that Hillcrest was the beneficial owner of the receivables. The hearing ran for eight days. Lang J found for the receivers and against Mr Darby. He made a declaration that Hillcrest Services Ltd was the beneficial owner of all receivables written by Barry’s Car Sales Ltd up to 3 August 2006 (the date of receivership). He also held that Hillcrest was entitled to all original documents relating to the receivables, and that they were subject to the general security agreement.
[45] In a later judgment of 22 July 2008, Lang J gave judgment against Mr Darby
and Barry’s Car Sales Ltd for breach of fiduciary duty. No judgment was made
against Bronwyn Estate Ltd because it had by then been put into liquidation.
28 Bronwyn Estate Ltd v Hoole [2008] NZSC 1, (2008) 18 PRNZ 834.
29 Hoole v Darby [2008] NZCCLR 22 (HC) per Lang J.
[46] Capital + Merchant Finance Ltd sued Mr Darby and the trustees of his family trust on guarantees that they had given as security for the advances to Hillcrest Services Ltd. Associate Judge Gendall gave judgment on Capital + Merchant’s summary judgment application on 30 October 2007.30 Mr Darby opposed unsuccessfully on the merits. Capital + Merchant Finance Ltd was successful in its claim for the outstanding advance plus interest and costs, but was unsuccessful on
some peripheral aspects of relief.
[47] Applications for Barry’s Car Sales Ltd and Bronwyn Estate Ltd to be put into liquidation were also contested. The applications were brought by the receivers and by Hillcrest Services Ltd. The debts relied on in the liquidation applications were the orders for costs made by Venning J in March 2007. Mr Darby was granted leave to appear for both Barry’s Car Sales Ltd and Bronwyn Estate Ltd. He opposed, but unsuccessfully. The fact that the companies were appealing against the order for costs of Venning J, and that Bronwyn Estate Ltd and Barry’s Car Sales Ltd both asserted claims against the plaintiff did not stand in the way of Associate Judge Robinson making liquidation orders for both companies on 28 February 2008.
Other investors in Hillcrest Services Ltd
[48] Capital + Merchant Finance Ltd was not the only one to suffer through investments in Hillcrest Services Ltd. Mary Ogle, Julianna Cooke, Julie Vaetoe and Vivienne Karakia each had investments with Prudential Insurance Ltd. Sovereign Insurance Company later took over Prudential’s New Zealand business. Sovereign assigned Mr Darby to them as their investment advisor. In each case Mr Darby suggested that the investors transfer their investment from Sovereign to Hillcrest. Each lady says that Mr Darby did not explain his own personal connection with Hillcrest. Their investments in Hillcrest were:
Mary Ogle $30,000
Julianne Cooke $16,000
Julie Vaetoe $16,500Vivienne Karakia $60,000
30 Capital+Merchant Finance Ltd v Darby HC Auckland CIV-2007-404-1742, 30 October 2007 per
Associate Judge Gendall.
They say that they were paid interest. Three of them also received part-payments in reduction of principal owing to them, but all of them did suffer losses.
[49] The experience of a purchaser from Barry’s Car Sales Ltd is also of interest. In 2003 Julie Grey bought a second-hand car, subject to finance, from Barry’s Car Sales Ltd for $6,995. She dealt with Mr Darby as director of Barry’s Car Sales Ltd. She signed a blank offer for the purchase of the vehicle but did not receive any documentation relating to the finance. She made payments on the vehicle. Eighteen months after purchase she tried to sell the vehicle and found out that there was still
$8,000 said to be owing on the vehicle, more than the purchase price. She had dealt with Mr Darby and asked for documentation about the loan agreement with Hillcrest, and when she found out the amount alleged to be owing on the vehicle, Mr Darby simply told her to contact Hillcrest. At no stage did he tell her about his own connection with Hillcrest. She took the matter to the Disputes Tribunal which ordered Hillcrest to pay a sum back to her.
Ministry of Economic Development prosecution
[50] The Ministry of Economic Development prosecuted Mr Darby for three offences as director of Hillcrest Services Ltd:
(a) Breach of s 194 of the Companies Act 1993 in failing to cause
Hillcrest to keep proper adequate accounting records;
(b)Breaches of ss 15 and 38(a) of the Financial Reporting Act 1993 in failing to ensure that financial statements for Hillcrest were audited; and
(c) Breaches of ss 18(1) and 38(b) of the Financial Reporting Act 1993 in failing to ensure that financial statements for Hillcrest, together with an auditor’s report on those statements, were delivered to the Registrar of Companies.
District Court Judge Field found all three charges proved.31
Holloway claim
[51] Mr Holloway, a retired Army officer, sued Mr Darby and Pinnacle Brokers
Ltd in the North Shore District Court for losses on a loan to Mr Hockey. He lost
$105,000 plus interest. In his judgment of 15 January 2008,32 Judge Cadenhead found Mr Darby liable for the losses sustained by Mr Holloway.
Other convictions
[52] Mr Darby has convictions for obtaining by false pretences from 1970 and from 1994. The Court of Appeal’s decision on his appeal from his 1994 conviction33 shows, amongst other things, that Mr Darby assumed a false identity on the sale of a motor vehicle.
Motor vehicles
[53] Mr Darby has been a keen collector of motor vehicles, in particular old Chevrolets. Motor vehicle registration records for some vehicles show him as registered owner before his first bankruptcy in 1990. The motor vehicle registration records record a change of ownership in May 2009, during his second bankruptcy. However, in his first bankruptcy, Mr Darby signed a statutory declaration that he had no vehicles. His wife, who went bankrupt at the same time, made a similar declaration. He also maintained that the vehicles were not assets available to his creditors in his second bankruptcy. His explanation is that he disposed of the vehicles before his first bankruptcy, even though the registration records were not changed to reflect the change of ownership.
[54] After his discharge from his first bankruptcy, he says that he bought back some of the vehicles. He claims to have disposed of them in 2006, before his second
31 Ministry of Economic Development v Darby DC Auckland CRN-2008-004-501668, 501669 and
501671, 3 August 2009.
32 Holloway v Darby and Pinnacle Brokers Ltd DC Auckland MP2004-044-284 per Judge
Cadenhead.
33 R v Darby CA522/95, 14 June 1996.
bankruptcy by giving them to Roger Kaye, an acquaintance. His explanation for giving them to Roger Kaye is that Mr Kaye is alleged to have suffered a loss in respect of investment in a property in Maxted Road. The vehicles concerned were located on the Maxted Road property. The ownership of the vehicles has still to be established. I am not required to decide the ownership of those vehicles in this decision. However, I found Mr Darby’s explanation unconvincing and implausible. In particular, at the time of the disposal of the vehicles to Mr Kaye, Hillcrest Services Ltd was in financial trouble. Mr Darby clearly faced exposure under his guarantee. The story about compensating Mr Kaye for losses in respect of the Maxted Road property does not make sense because, when interviewed, Mr Kaye disclaimed any personal interest in the property. The registered proprietor of the Maxted Road property had been Bronwyn Estate Ltd, and Mr Kaye was a shareholder and director of that company. When interviewed by Mr Price, Mr Kaye said that Maxted Road was for Norah, Mr Darby’s wife, who had since died.
Management of Hillcrest Services Ltd
[55] The Companies Office records of Hillcrest Services Ltd show the shareholders as Poelima Millar and Darryl Chowan. They are both associates of Mr Darby. Neither of them had relevant commercial experience or ability. The records also show that Mr Millar resigned as director on 9 March 2004 when Mr Darby was appointed director. Mr Darby’s case is that he was not director of the company before 9 March 2004. He admits to being an authorised signatory of the company but would not admit to his role going beyond that. His connection with the company goes back many years. Documents of Mr and Mrs Darby that the Official Assignee took possession of on Mr Darby’s first bankruptcy included legal files relating to Hillcrest Services Ltd. Mr Darby allowed that he had been director of the company in the 1980s.
[56] During the three years before he was appointed director, Mr Darby signed 50 agreements on behalf of the company under which Hillcrest Services Ltd lent money. When Hillcrest Services Ltd entered into written loan agreements as borrower, he signed on behalf of Hillcrest Services Ltd. Mr Darby gave instructions to debt collectors and repossession agents. He arranged the company’s insurance, and made
a claim on behalf of the company. He dealt with Capital + Merchant Finance Ltd when the revolving credit facility agreement was first negotiated. Significantly, he and his wife gave a guarantee to Capital + Merchant Finance Ltd, not the nominal director, nor the notional shareholders.
[57] Notwithstanding Mr Darby’s denials I find that, even before he was appointed director, he was in effective control of the company and running it for his own benefit, rather than for the benefit of the shareholders.
Use of wife’s credit card after her death
[58] Mr Darby’s wife, Norah, died in December 2004. At the time of her death she held an ANZ Visa credit card. After her death, Mr Darby continued to use the credit card, amongst other things, to meet business expenses. Mr Darby continued to make purchases on the card during 2008 after his adjudication in February. The ANZ bank issued its Visa card statements to Norah Darby as the cardholder, notwithstanding her death. There was nothing to show that the ANZ bank was advised that Mr Darby was in fact operating the card in her name.
Operations of Pinnacle Business Brokers Ltd
[59] At the time of his adjudication in February 2008 Mr Darby was director of Barry’s Car Sales Ltd, Pinnacle Brokers Ltd, Pinnacle Business Brokers Ltd, Spaceline Holdings Ltd and Wiseline Corporation Ltd. Mr Darby resigned his directorships. He arranged for an old acquaintance, Mr Roger Barton, whom he had known since the Prudential days, to accept appointment as director. Mr Barton was examined by the liquidator of these companies under s 261 of the Companies Act
1993. The record of the examination formed part of a supplementary report by the Official Assignee. In the examination, Mr Barton said that he did not take any part in the management or running of the companies from the time he was appointed. He had no idea about filing annual returns. According to him, Mr Darby told him that nothing was happening with the companies. Mr Darby asked him to give evidence for Barry’s in the Auckland District Court but he was not able to assist the court.
[60] Notwithstanding what Mr Barton has said, some business activity was maintained.
[61] On 17 February 2009 Pinnacle Business Brokers Ltd sold a car to a Mr Fleet. Mr Darby agreed that he filled in parts of the agreement for sale and purchase. A consumer information notice from Pinnacle Business Brokers Ltd for the sale of a vehicle to a purchaser named “Rapana” in April 2009 is also in Mr Darby’s handwriting. During 2009 Pinnacle Business Brokers Ltd issued warrants to repossess for the recovery of motor vehicles where purchasers had defaulted. In a number of cases, Barry’s Car Sales Ltd was the original vendor, and the agreements had been assigned to Spaceline Holdings Ltd, then to Pinnacle Business Brokers Ltd.
[62] Pinnacle Business Brokers Ltd also issued debt collection instructions to a debt-collecting agency. The business letterhead for correspondence by Pinnacle Business Brokers Ltd during 2009 gave a contact email address of [email protected] and a postal address of P O Box 272-1134 Papakura. These were addresses used by Mr Darby. Veda Advantage Ltd addressed an invoice of May 2009 to Mr Darby. Lawyers instructed to take court proceedings for the company received instructions from Mr Darby. When questioned about this, Mr Darby downplayed his involvement. The tenor of his evidence was that he was simply giving Mr Barton a hand. I do not believe him. Mr Darby was the one responsible for continuing these business activities, even though he had been adjudicated bankrupt.
The move from 1/65 Hunua Road to 495 Airfield Road
[63] After the failure of Hillcrest Services Ltd, a recycling and car sales business was established at 1/65 Hunua Road, Papakura. The company that carried on business there was National Recyclers Ltd. The company was incorporated on
7 April 2008, after Mr Darby’s bankruptcy adjudication. According to Companies
Office records, the director and shareholder was Warren James Pope.
[64] Mr Pope ran a catering business at the Papakura Club. Mr Pope was an associate of Mr Darby. The Companies Office documents show Mr Pope’s residential address as 1/65 Hunua Road. Those were industrial premises, not a
residential address. The contact details given for Mr Pope were: P O Box 272-1134
Papakura, and telephone 64 021 941 336. These were the post office box and telephone numbers that had been used by Mr Darby for Hillcrest Services Ltd and Barry’s Car Sales Ltd. Mr Darby also used these contact details for Pinnacle Business Brokers Ltd.
[65] Mr John Price visited 1/65 Hunua Road on 20 March 2008. He found a car sales business in operation on site. Mr Darby was running the business. Mr Darby had computers which Mr Price thought would be of interest to the receivers of Hillcrest Services Ltd. He called the receivers but when they arrived, Mr Darby refused them access. Mr Price found a hire purchase agreement completed in Mr Darby’s handwriting.
[66] National Recyclers Ltd contacted Turners Auctions Ltd with a view to doing business. A copy of a Turners Auctions Ltd new client application form dated 8 June
2008 was made by National Recyclers Ltd. It is in Mr Darby’s handwriting. Contact details given include the mobile number 021 941 336, P O Box 272 1134 Papakura, and an email address, [email protected]. These were means of contacting Mr Darby. The form was signed by Mr Pope, not by Mr Darby. An email of 11 June
2008 by the national credit manager of Turners Auctions Ltd recorded that Mr Darby had contacted Turners, wanting to do business under the Pinnacle name. Turners Auctions Ltd declined to do business with National Recyclers Ltd or with Mr Darby.
[67] An officer of the National Enforcement Unit of the Ministry of Economic Development interviewed Mr Pope on 12 September 2009. According to the interview, Mr Pope agreed to become director, but did not know that Mr Darby was an undischarged bankrupt. He confirmed the nature of the business carried on at
1/65 Hunua Road. He accepts that he was stupid and naive to get involved. While he had given his consent to being a director of the company, Mr Darby was the one doing all the decision-making. These matters were put to Mr Darby in cross- examination. Mr Darby claimed that his role was much less than that described by Mr Pope. I do not accept Mr Darby’s downplaying of the extent of his involvement.
[68] The lease of the premises at 1/65 Hunua Road was to come to an end and new premises had to be found. They were at 495 Airfield Road, Ardmore. The owner of that property is Ardmore Airport Ltd. It had granted a ground lease of the property to the Barr partnership.
[69] On 22 April 2008 the Barr partnership entered into an agreement to sell its interest under the ground lease to Phoenix Holdings (2008) Ltd or nominee for the sum for $269,000 inclusive of GST. Phoenix Holdings (2008) Ltd was incorporated on 7 April 2008. Mr Pope was the initial director. Contact details for Mr Pope are the same as given in the Companies Office documents for National Recyclers Ltd. The shareholders of the company were Mr Pope and Rabiad Charoenthep, a Thai lady who worked as a cook for Mr Pope. Later, Mr Pope resigned as director and Ms Charoenthep became director.
[70] The lawyer who acted for Phoenix Holdings (2008) Ltd on the purchase was Mr Komene Jones. The people who instructed Mr Jones on behalf of Phoenix Holdings (2008) Ltd were Ms Charoenthep and a man using the name “Patrick Ryan”. That man has been identified as Mr Darby. Mr Darby says that his role was simply to help Ms Charoenthep out, given her limited command of English and her limited experience with legal matters. Notwithstanding Mr Darby’s denials, I am satisfied that his involvement was more extensive than that. He was the one giving the instructions.
[71] Phoenix Holdings (2008) Ltd assigned its interest under the agreement with the Barr partners to Phoenix 888 Ltd. Phoenix 888 Ltd was incorporated on 7 May
2008. Ms Charoenthep was the sole director and shareholder. While the Companies Office records give her residential address, the contact telephone number given for her is the telephone number for Mr Darby – 64 021 941 336. Again, Mr Darby has downplayed his involvement in Phoenix 888 Ltd, but I am satisfied that he was the one giving the instructions.
[72] On 12 May 2008 Phoenix 888 Ltd entered into an agreement to sell the leasehold property at 495 Airfield Road to Ardmore Equities Ltd for $538,000. Much of the handwriting on that document is Mr Darby’s.
[73] Ardmore Equities Ltd was incorporated on 7 May 2008. The director and shareholder of the company is Mr Pope but his contact details – that is, address, post office box, telephone number – are the same contact details as the ones given for National Recyclers Ltd, that is, contact details for Mr Darby.
[74] Ardmore Equities Ltd instructed Palmer Theron as lawyers to act for it on the purchase. The people who instructed Palmer Theron were Mr Pope and a man giving his name as “Pat Ryan”. That was Mr Darby. The records of Palmer Theron, including their correspondence to Ardmore Equities Ltd, and their file notes, show that Mr Darby was closely involved in giving instructions for the purchase. Palmer Theron acted for Ardmore Equities Ltd in dealing with the lawyers for Ardmore Airport Ltd on obtaining the landlord’s consent to the assignment of the ground lease. Mr Pope was required to guarantee performance by Ardmore Equities Ltd. Finance for the purchase was obtained from a bank. A lease was granted to National Restorations Ltd. The rent from the sub-lease was only enough to cover the rent payable to Ardmore Airport Ltd under the ground lease. The director of National Restorations Ltd did not guarantee performance under the deed of sub-lease.
[75] National Restorations Ltd was incorporated on 8 May 2008. The director of the company is Lynton Douglas Ryan. He lives at Ellerslie, but the contact details given for him (a Royal Oak post office box and the telephone number 64 021 941
336) were contact details for Mr Darby. Mr Ryan was a panelbeater. He had no relevant experience as a company director. When interviewed, he explained that Mr Darby asked him to become a director. He signed, not appreciating the significance of becoming a company director. When these matters were put to Mr Darby, he denied them. I do not accept Mr Darby’s denials.
[76] The purchase of the ground lease was completed in June 2008. With that, the business carried on at 1/65 Hunua Road was moved to 495 Airfield Road. I find that Mr Darby had effective control throughout. According to Companies Office records, he was not a director of any of the companies concerned but he was for all intents and purposes the de facto director. None of the persons who were nominally directors had the skills or experience to carry out the functions of a company director.
[77] Ardmore Equities Ltd borrowed $241,000 from the ASB Bank as part of the finance to buy 495 Airfield Road. The resale by Phoenix Holdings (2008) Ltd at
$538,000, twice the price paid for the purchase, raises the question whether this was a “hydraulicking” fraud. However, the Official Assignee did not submit that it was and there is no evidence that the ASB Bank suffered any loss as a result.
Miscellaneous factual matters
[78] In addition to the above matters, some of the documentation put in evidence dealt with the ownership of 104 Maxted Road, Ramarama (owned in turn by Bronwyn Estate Ltd, by Light Holdings Ltd and by Peng Soon Ong); with the ownership of 303 Great South Road Ltd by Kingsway Autos Ltd (another company associated with Mr Darby) and its sale to AR & RH Investments Ltd (a company owned by friends of Mr Darby); and with a storage unit at Unit F, 80 Kerwyn
Avenue, East Tamaki, initially owned by Bronwyn Holdings Ltd34 and then by Kaos
Investments Ltd (both companies’ shareholders and directors were associates of Mr Darby). These matters were not put to Mr Darby in his examination. They are not pivotal to the decision in this case. At most they show Mr Darby’s fondness for establishing and operating entities fronted by other people. There is not enough evidence to show that Mr Darby received any of the proceeds of sale of 303 Great South Road.
Findings about Mr Darby
[79] Mr Darby is not a competent businessman. He has not been able to operate businesses without losses to others. That is shown up most clearly with Barry’s Car Sales Ltd and Hillcrest Services Ltd. With the borrowing from Capital + Merchant Finance Ltd he assumed significant credit risks but was not able to manage them successfully without loss to both himself and the financier. He was caught short when the revolving credit facility expired. He was not able to negotiate a renewal of the facility because of his inability to provide information the finance company required and he had no fallback arrangement. He took credit from less sophisticated
people, Mary Ogle, Julianna Cooke, Julie Vaetoe and Vivienne Karakia, to their
34 Not the same as Bronwyn Estate Ltd.
disadvantage. The same applies to the loss suffered by John Holloway. He did not keep proper accounting records, as shown by the way he operated Barry’s Car Sales Ltd and Hillcrest Services Ltd. His channelling of funds advanced by Capital Merchant through Bronwyn Estate Ltd’s overdrawn bank account to pay the operating expenses of Hillcrest and Barry’s shows his lack of basic good business competence. His failure to document the financing part of Julie Grey’s purchase from Barry’s led to Barry’s liability to her in the Disputes Tribunal. His convictions on the prosecutions brought by the Ministry of Economic Development under the Companies Act and the Financial Reporting Act show up his lack of knowledge of good business practice, if not worse.
[80] He has limited, if any, appreciation of his lack of business expertise. He did not show any appreciation that he had any responsibility for the failures of Hillcrest Services Ltd or Barry’s Car Sales Ltd or the losses suffered by their creditors. As far as he was concerned, the receivers of Hillcrest were to blame, because they should have recovered debts from Hillcrest’s receivables. That overlooks the facts that he had not kept proper accounting records, he had failed to co-operate in handing them over and he had contested the receiver’s claims that the receivables belonged to Hillcrest. In his view the ladies who had lent to Hillcrest had done so of their own free will, so he was not to blame.
[81] There is a lack of transparency in the way he carries on business and in transactions he enters into. He uses aliases, as seen by his use of “Pat Ryan” in Phoenix 888 Ltd, Phoenix Holdings (1988) Ltd and Ardmore Equities Ltd and his use of his wife’s credit card after her death. He uses other people as fronts for himself, as seen with these companies, as well as National Recyclers Ltd, National Restorations Ltd and Hillcrest Services Ltd, before he became its director. People he used as fronts included Warren Pope, Lynton Ryan, Roger Kaye, Roger Barton, Ribiab Charoenthep, Poelima Millar and Darryl Chowan. Transactions were often not what they appeared. Ardmore Equities Ltd’s purchase from Phoenix Holdings (2008) Ltd was not an arm’s length purchase, although it was set up to look that way. Capital + Merchant did not know that the funds it had advanced to Hillcrest were in fact going into an overdrawn account of Bronwyn Estate Ltd and that Mr Darby considered that it had little effective security over transactions it had financed. Julie
Grey was led to believe that Hillcrest was a company with no connection with Mr Darby. Exactly what has happened with the motor vehicles Mr Darby owned as far back as before his first bankruptcy is still to be established and I am not required to do so for this decision, but it is difficult to accept at face value the explanations given by Mr Darby.
[82] Hypocritically Mr Darby holds himself out as creditworthy. A refrain in his examination was to say, “Never a day early, never a day late” as his way of showing that he honoured his debts. The more he said it, the less he was persuasive.
[83] One of Mr Darby’s techniques in dealing with claimants is to contest liability and put the claimants to the costs and effort of court proceedings. Mr Darby unsuccessfully contested Mrs Hockey’s claim for costs against him in the Wiseline litigation, tried to set aside her bankruptcy notice and unsuccessfully contested her bankruptcy petition. He contested Capital + Merchant’s claim to security over receivables– and its summary judgment application against him – fruitlessly. He contested the Hillcrest receivers’ claims to business records of the company, putting them to the trouble of obtaining Anton Piller orders and putting them to the trouble of applying for further orders to implement the orders. He contested their application for costs against him. He disputed Mr Holloway’s claim in the District Court. He contested the applications for Barry’s and Bronwyn Estate Ltd to be put into liquidation. Although his opponents were successful in all these cases and obtained the relief they were seeking, they got little tangible for the effort they went to. To that extent, using litigation as a tactic to stall and to dispute liability has been useful for Mr Darby.
[84] Mr Darby takes advantage of unsophisticated people – the people he uses as his fronts and some of those he persuades to put money into companies under his control.
[85] Mr Darby has disregarded the law in significant respects. He intentionally refused to comply with the Anton Piller orders. He has breached the prohibition under s 62 of the Insolvency Act against a bankrupt carrying on business and taking part in the management of a company. He carried on motor vehicle dealer operations
after his bankruptcy using Pinnacle Brokers Ltd. He actively managed the businesses of National Recyclers Ltd and National Restorations Ltd. He was the person in effective control of the acquisition of the leased premises at 495 Airfield Road. It is significant that he used the subterfuge of fronts to hide his business activities.
[86] While it may be possible to say that some of the significant losses he has caused are the result of his lack of business skill, there are also more serious aspects to his ways of doing business. Much of his conduct has been deliberate – the disobedience of the Anton Piller orders, the use of fronts, the flouting of the prohibition on doing business while bankrupt, the use of litigation as a stalling device. In much of this he has been intentionally dishonest. Moreover he has not shown any compunction or remorse for the losses he has caused.
Assessment against the purposes of bankruptcy
[87] The Official Assignee did not submit that the administration of the bankruptcy required that Mr Darby should not be discharged. While Mr Darby may not have been fully co-operative, it is realistic to accept that the Official Assignee can continue the administration in the interests of creditors even after Mr Darby’s discharge. This aspect does not require the discharge to be deferred.
[88] Accountability, making a debtor answer for his insolvency, has been achieved by the adjudication in bankruptcy. Adding on to the time before discharge is not required under this head.
[89] Next is the question whether Mr Darby’s discharge should be deferred as punishment for his misconduct. His conduct before and after adjudication needs to be considered separately. The relevant conduct before adjudication goes to how he became insolvent – “the causes of his bankruptcy”.35 The conduct must be so serious that it requires that the bankruptcy must be continued beyond the standard three years under s 107. There is much to criticise in Mr Darby’s conduct up to his
bankruptcy. Many insolvencies follow business failure, but business failure alone is
35 Insolvency Act 1967, s 109(2).
not enough to apply the punitive aspect of bankruptcy law. Mr Darby’s case goes beyond business failure: there is his abusive litigation against Mrs Hockey without the means to pay costs orders in her favour, the exploitation of naive investors and the misuse of funds advanced by Capital + Merchant. His refusal to co-operate with the receivers of Hillcrest is an aggravating feature. However, taken together, these matters do not require the time for discharge to be extended. Any punishment for misconduct before adjudication has been secured by the standard three years.
[90] Mr Darby’s conduct after adjudication is another matter. While an undischarged bankrupt, he is prohibited from entering into and carrying on any business and from taking part in the management of any company.36 He has flouted that prohibition. He has tried to do so by setting up others as fronts for his activities, people whose lack of business experience did not let them know better. He continued to deny his involvement in his examination in this case.
[91] That was serious misconduct. It was deliberate. Having been bankrupt once already, Mr Darby could not have been under any doubt as to the effects of bankruptcy. It was dishonest, in using others to mask his own activities and in using an alias to hide his identity. It was sustained. It extended to a number of companies. It meant that Mr Darby was not “doing the time”. His conduct must be condemned. His bankruptcy would be no more than a token if his defiance of the disabilities that go with bankruptcy were not followed with consequences for him. His conduct after adjudication calls for punishment.
[92] A discharge from bankruptcy will free Mr Darby to engage in commercial activity again. The need to protect the community may be a ground for refusing a discharge. That requires an assessment of risk. If a person’s insolvency has resulted in bankruptcy, the probability of that person becoming insolvent may be higher than for a person with no record of insolvency. But that risk alone is not enough to refuse a discharge. The risk that that person may fail again is accepted. After all, the Insolvency Act provides generally for automatic discharge after three years. It is
only some cases, the ones outside the run of the mill, where discharge may be
36 Insolvency Act 1967, s 62.
deferred. An assessment that the risk is unacceptable may require refusal of discharge to protect the community.
[93] In this case there are factors that add to the risks to the community if
Mr Darby is discharged from bankruptcy:
(a) He has poor business skills and lacks appreciation of those shortcomings;
(b) He is not creditworthy;
(c) He is not reliable or transparent in his business dealings; (d) He takes advantage of naive and unsophisticated people; (e) He lacks honesty;
(f) His compliance with the law is selective;
(g) He is unwilling to take responsibility for his actions;
(h)He tends to dispute unnecessarily claims made against him, to the extent of putting people to expensive legal proceedings; and
(i) He has been bankrupted once before.
[94] There is one factor that might count as lessening the risk – Mr Darby’s age. He is now 67 years old. As he is entitled to, he receives New Zealand superannuation. It might be thought that he would be of less risk to the community because he has an assured income for which he does not have to exert himself. However, Mr Darby seeks his discharge because he does want to be free to go back into business again. So this factor does not go far to reduce the risk.
[95] Notwithstanding Mr Darby’s age, the community still needs to be protected
from him. I have very little confidence that if he were to go into business again, he
would manage it lawfully, successfully and without loss to those he might deal with. Some would be wise to Mr Darby, just as Turners Auctions Ltd was astute enough to refuse to deal with him. But it is not safe to assume that others would be aware of his background. That is clear from the way he was able to use others while he was undischarged. The need to protect the community counts against discharge on the expiry of the standard three years.
[96] The final aspect of bankruptcy to be considered is the potential benefits of discharge. In the general run of cases, there is a public good in a bankrupt being discharged from debts that he has been unable to pay and in being free to go into business again. Similarly the bankrupt has a personal interest in being able to re- engage commercially. But in this case that aspect is outweighed by the matters going the other way – the need to punish Mr Darby and the need to protect the community. Mr Darby should not yet be discharged. Nevertheless this factor remains relevant to the exercise of the discretion as highlighting that it is not desirable that discharge be eliminated altogether, except in the most serious of cases.
Outcome
[97] The Official Assignee asks for an order that Mr Darby remain undischarged for at least a further three years. Alternatively he suggests a conditional discharge. For his part, Mr Darby asks for an immediate unconditional discharge, but as a second best would accept some conditions.
[98] The order needs to match the need to punish Mr Darby and to protect the community. The need to punish does not require an indefinite deferral of discharge. While serious, Mr Darby’s misconduct is not so depraved that he should never be discharged.
[99] Similarly, while the need to protect the community is a sound reason for not discharging Mr Darby now, it cannot justify never discharging him. At some point he must be discharged, even if that carries risks.
[100] The Official Assignee cited cases where discharges had been refused under s 110: Re Knight,37 Re Armitage,38 Re Wenzel,39 Edwards v Official Assignee,40 and Re Caigou.41 While the facts in each case were different, the Courts found that there had been misconduct by the bankrupt after adjudication, usually involving continuing business activity without the consent of the Official Assignee, and that there was an ongoing need for the community to be protected. In some cases there
were further aggravating circumstances. The least serious was Re Caigou, where a discharge was refused on the expiry of the standard three years, but without further orders, leaving it open to the bankrupt to co-operate with the Official Assignee, with the intimation that might give grounds for reconsidering the matter. In all other cases, the decisions were given more than six years after adjudication. Mr Darby’s case is generally comparable with them. In the light of these cases, the Official Assignee’s submission of a further three years is appropriate, both as an extended term for punishment for misconduct after adjudication and as a finite period for protection of the community.
[101] Mr Darby was born in May 1945. On the expiry of six years from his adjudication he will be nearly 69 years old. By that age he is less likely to have any interest or ability to go into business again. The risks to the community should be largely reduced.
[102] I do not regard it as necessary to require Mr Darby to make a fresh application at the end of the six years or to attach any conditions to his discharge.
[103] Accordingly, I make an order under s 110(1)(c) of the Insolvency Act 1967 that Mr Darby’s discharge from bankruptcy will take effect on 14 February 2014. The discharge will not be subject to any conditions.
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R M Bell
Associate Judge
37 Re Knight HC Auckland B1256-IM00, 9 November 2007.
38 Re Armitage HC Auckland CIV-2007-404-4280, 8 April 2011 and [2012] NZCA 439.
39 Re Wenzel HC Auckland CIV-2005-404-6852, 15 April 2008 and 10 July 2008.
40 Edwards v Official Assignee CA236/03, 1 April 2004.
41 Re Caigou HC Christchurch M513/92, 30 October 1996.
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