Department of Internal Affairs v Xiao
[2018] NZHC 2599
•4 October 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2018-404-001017 [2018] NZHC 2599
UNDER The Insolvency Act 2006 IN THE MATTER OF
The bankruptcy of XIAOLAN XIAO
BETWEEN
THE DEPARTMENT OF INTERNAL AFFAIRS
Judgment Creditor
AND
XIAOLAN XIAO Judgment Debtor
Hearing: 1 October 2018 Appearances:
S McMullin for the Judgment Creditor
X Xiao in person the Judgment DebtorJudgment:
4 October 2018
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
This judgment was delivered by me on Thursday 4 October 2018 at 4 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Meredith Connell, Auckland
THE DEPARTMENT OF INTERNAL AFFAIRS v XIAO [2018] NZHC 2599 [4 October 2018]
Introduction
[1] In a formal proof judgment dated 28 September 2017, this Court made orders under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act) restraining the judgment debtor, Mr Xiao, from carrying out any financial activities that would cause him to be deemed to be a financial institution as defined in the legislation.1 The Court also made a restraining order against Ping An Finance (Group) New Zealand Company Ltd (Ping An), together with substantial penalties in excess of $5m.
[2] Mr Xiao was a director of the company. It is now in liquidation. Costs were awarded against Mr Xiao and Ping An in the sum of $44,850.00. Pursuant to r 14.14 of the High Court Rules 2016, both parties are jointly and severally liable for the costs awarded.
[3] A subsequent attempt by Mr Xiao to set aside the formal proof judgment was unsuccessful. Mr Xiao has appealed the judgment declining to set aside, to the Court of Appeal. However, he has failed to comply with the requirements of the Court of Appeal rules and that appeal has been deemed to be abandoned.
[4] In these proceedings, Mr Xiao seeks to set aside a bankruptcy notice issued by the judgment creditor, the Department of Internal Affairs (the Department), on the basis of the unpaid costs award of $44,850.00.
[5] Mr Xiao seeks to invoke the inherent jurisdiction of this Court to set aside the notice on the grounds of abuse of process. He advances three main grounds:
(a)That he has appealed to the Court of Appeal against the refusal to set aside the formal proof judgment;
(b) There was no basis for him being personally liable for the costs award
(sole responsibility rests with the company, Ping An); and
1 Department of Internal Affairs v Ping An Finance (Group) New Zealand Company Ltd [2017] NZHC 2363 [Ping An - substantive judgment].
(c)The formal proof/default judgment was irregularly obtained. Mr Xiao said he was significantly disadvantaged by not being able to find a Mandarin speaking lawyer who would act on civil legal aid and he had no notice of the hearing date.
Relevant legal principles
[6] Section 17(1) of the Insolvency Act 2006 (the 2006 Act) provides that a debtor commits an act of bankruptcy where he or she fails to comply with the requirements of a bankruptcy notice served on him or her by a creditor within 10 working days.
[7] There is no failure to comply with a bankruptcy notice under s 17 if the debtor satisfies the Court within time that he or she has a cross claim against the creditor. Cross claim is defined in s 17(7) to mean a counterclaim, set-off, or cross demand which the debtor could not use as a defence in the action or proceedings in which the judgment was obtained.
[8] Rule 24.10 of the High Court Rules 2016 extends the time for compliance with the bankruptcy notice until any application seeking to set aside the bankruptcy notice has been determined and only where a valid application has been made.
[9] An order setting aside a bankruptcy notice may be granted in accordance with the High Court’s inherent jurisdiction.
[10] In Re Wise, ex parte Benecke,2 it was held that s 19(1)(d) of the Insolvency Act
1967 (the predecessor to s 17 of the 2006 Act) is not a bar to the exercise of the Court’s inherent jurisdiction to control the abuse of its process by setting aside a bankruptcy notice on grounds other than the existence of a counterclaim, set-off or cross demand. The grounds on which the jurisdiction may be exercised are procedural defects in the obtaining of the judgment on which the bankruptcy notice is based, or the existence of arguable grounds of defence to the claim for which judgment was given. A third possible ground is where it is necessary to prevent injustice.
2 Re Wise, ex parte Benecke HC Auckland, B227-228/95, 21 June 1995.
[11] In Holmes Construction Ltd v Rees3 it was held that the correct approach, if the inherent jurisdiction of the Court is to be invoked, is to do what Master Kennedy-Grant did in Re Wise, ex parte Benecke; adjourn the application to set aside to check progress with the hearing of the relevant appeals, on the condition that the debtor takes practical steps to prosecute those appeals diligently.
[12] In Re Krukziener, ex parte Hanover Finance Ltd4 Associate Judge Abbott referred to the decision in Re Wise in the following way:
The first two circumstances identified by Master Kennedy-Grant in Re Wise call into question the judgment itself. A procedural defect suggests an element of unfairness in letting the judgment stand. The “arguable grounds of defence” suggests a substantive reason for questioning the soundness of the judgment (hence the case law built up around stay pending an appeal, but perhaps also a defence that had not been identified at the time of the underlying judgment or which has emerged since). In all of these cases, there is an issue as to the safety of the underlying judgment. The Court will intervene in those cases on the grounds that it would be an abuse to allow a bankruptcy proceeding to be pursued if there is good reason to doubt the judgment on which it is based. There is no suggestion in the present case of a procedural defect, a legitimate defence being overlooked, or (now that the appeal has been determined) that there was any error in the judgment.
(emphasis added)
[13] Associate Judge Abbott held that a debtor who cannot rely on the specific grounds under s 19(1)(d) (now s 17(1)(d)(ii)), but seeks to have the Court exercise its inherent jurisdiction to set aside a notice on the grounds of potential injustice (but not impugning the underlying judgment debt), must show very special circumstances.5
[14] Res judicata and issue estoppel can arise in the context of an application to set aside a bankruptcy notice, where the claims relied upon by the debtor in the bankruptcy proceedings are essentially the same as the claims that were rejected by the Court in the proceeding on which the bankruptcy notice was based.6 The abuse of process ground for the exercise of the inherent jurisdiction is thus unlikely to be available to a debtor whose real argument is one which could have been brought before the Court
3 Holmes Construction Ltd v Rees HC Auckland, CIV-2006-404-4219, 9 February 2007 at [34].
4 Re Krukziener, ex parte Hanover Finance Ltd HC Auckland, CIV-2007-404-2896, 12 August 2008 at [29].
5 At [36].
6 Re Hampton, ex parte Minter Ellison Rudd Watts [2012] NZHC 1715 and Re Māori Trustee, ex parte Hill [2017] NZHC 2377 at [17].
which entered the judgment relied upon by the creditor. Because the Act provides the express ground for setting aside a bankruptcy notice, the concept of resorting to the inherent jurisdiction is contradicted.7
Background
[15] Mr Xiao was the sole director and manager of Ping An (now in liquidation). Ping An operated as a financial services company offering money remittance and foreign exchange services.
[16] As a financial services company, Ping An had obligations under the AML/CFT Act to carry out customer due diligence, maintain records, monitor customer accounts and transactions, and to report suspicious transactions.
[17] In its 11 January 2017 statement of claim, the Department alleged five causes of action that Ping An breached those obligations. By way of relief, the Department sought pecuniary penalties against Ping An, orders against Ping An and Mr Xiao restraining them from acting as financial institutions,8 and costs.
[18] An earlier attempt by the Department to bring proceedings by way of originating application was unsuccessful. Downs J refused leave to the Department to proceed by way of originating application. Contrary to the submission of Mr Xiao, nothing turns on the Department’s failure to obtain leave to proceed by way of originating application.
[19] Neither Ping An nor Mr Xiao filed a statement of defence in response to the Department’s statement of claim of 11 January 2017. As Toogood J held, it is likely that Mr Xiao “took the view that there would be no seriously adverse consequences if he simply ignored the Department’s claims.”9
7 Re Saker ex parte Blackler HC Wellington, CIV-2008-485-124, 26 May 2008 at [26]; see also Re
Hampton, ex parte Minter Ellison Rudd Watts, above n 6, at [60].
8 As defined in s 5 of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009.
9 Department of Internal Affairs v Ping An Finance (Group) New Zealand Ltd [2018] NZHC 530 at
[13] [Ping An – set aside].
[20] By memorandum dated 3 March 2017, the Department requested the proceeding be listed for formal proof under r 15.9 of the High Court Rules. That memorandum was filed by email and copied to Mr Xiao by way of a Gmail address that Mr Xiao had used to correspond with counsel (the March email). Mr Xiao said that he never received that email or notice that the Department was proceeding to a formal proof hearing.
[21] A formal proof hearing was held on 12 April 2017 before Justice Toogood. In his judgment, delivered on 28 September 2017, the Judge held that the Department had proved all five causes of action. His Honour ordered Ping An to pay a pecuniary penalty in excess of $5m. It made orders restraining Ping An and Mr Xiao from acting as a financial institution until further order of the Court.10
[22] Toogood J further ordered that Mr Xiao and Ping An pay the Department’s costs on a 2C basis. The total costs award (including disbursements) was $44,850.00.
[23] By application dated 12 October 2017, Mr Xiao applied to set aside the default judgment of Toogood J. The application was supported by affidavit evidence. Mr Xiao alleged that he did not appear at the formal proof hearing because he did not receive the March email. He submitted that his defence had substance.
[24] Justice Toogood heard Mr Xiao’s application on 2 March 2018. At that hearing
Mr Xiao made submissions and was cross-examined on the claims he had made in his
affidavit. By judgment delivered on 26 March 2018, Toogood J dismissed Mr Xiao’s application, making a further award of costs to the Department. Toogood J found Mr Xiao unconvincing, and considered he had “set out to mislead the Court”.11
[25] By notice of appeal dated 16 April 2018 Mr Xiao applied to appeal this
26 March judgment. Mr Xiao did not apply to this Court (or the Court of Appeal) to stay the execution of the costs award. The appeal was formally dismissed on
28 August 2018 when it was treated as abandoned.
10 Ping An - substantive judgment, above n 1, at [138].
11 Ping An – set aside, above n 9, at [21].
[26] The bankruptcy notice was served on Mr Xiao on 31 May 2018. The amount sought remains unpaid.
[27] In an email from the Court of Appeal to the parties dated 24 August 2018, Mr Xiao was advised that his appeal has been abandoned pursuant to r 43 of the Court of Appeal (Civil) Rules 2015. He was also advised that in order to pursue the appeal he would need to file an application for an extension of time pursuant to r 43. That application needs to be received for filing no later than Wednesday 17 October 2018. Mr Xiao claims that he has applied for an extension of time although the documents filed with the Court of Appeal appear not to have been served on the Department.
Analysis and decision
[28] It is clear that Mr Xiao cannot establish that he has a basis for setting aside the bankruptcy notice on the statutory grounds in s 17(7) of the Insolvency Act 2006. He does not have a cross claim against the Department which he could not have used as a defence in the proceedings before Toogood J.
[29] The critical issue I must determine is whether, aside from s 17(7), Mr Xiao’s concerns about the safety of the underlying judgments of Toogood J, give rise to an abuse of process.
[30] I find that Mr Xiao has not discharged the burden of establishing that there are proper grounds for the Court to exercise its inherent jurisdiction so as to prevent an abuse of process. The concerns that Mr Xiao advances do not give rise to any serious cause to question the safety of the underlying judgments at issue.
[31] The matters that Mr Xiao complains of have all been ventilated before Toogood J and Mr Xiao has thus far failed to take the necessary steps to keep alive his appeal against those judgments. There is no risk of abuse of process or serious irregularity that might somehow form the basis for setting aside the notice or granting an adjournment pending determination of the appeal.
[32] In any event, I note that there remains the possibility Mr Xiao may be able to revive his appeal by making the necessary application under r 43 of the Court of Appeal (Civil) Rules 2005. However, that is a matter for the Court of Appeal and in the circumstances here provides no basis for my setting aside the bankruptcy notice. Mr Xiao has not sought or obtained a stay of execution of the costs judgment or any of the other judgments of Toogood J. If the Court of Appeal should allow Mr Xiao to revive his appeal then the consequences of that might need to be considered at the adjudication stage of any bankruptcy proceeding. However, I am faced with an application to set aside a bankruptcy notice and not any request to halt an adjudication proceeding.
[33] There is no merit to the contention that Mr Xiao cannot have any liability for the costs award on the basis that the costs are the sole responsibility of Ping An.
Mr Xiao was named as a defendant in the substantive proceedings before Toogood J. Restraining orders were made against him personally. He had a full opportunity to argue his case seeking to have those orders set aside but he was unsuccessful. There is no reason to doubt the safety of the costs award and Mr Xiao’s joint and several responsibility for it.
[34] Mr Xiao’s third point, namely that the judgments of Toogood J were irregularly obtained, also has no merit. Mr Xiao was given the opportunity of making submissions and giving evidence before Toogood J. His Honour expressly concluded that there was no procedural irregularity prior to the entry of judgment, that the judgment imposing penalties on Mr Xiao and Ping An was properly founded on the evidence and there was no realistic basis to conclude that there had been a miscarriage of justice.12
[35] As the Department submitted, the judgments of Toogood J are final and
Mr Xiao is estopped from challenging them in this Court.13
12 Ping An – set aside, above n 9, at [24]. In argument Mr Xiao also referred to the recent decision of Powell J in Department of Internal Affairs v Qian Duoduo Ltd [2018] NZHC 1887 where relatively modest penalties were imposed under the AML/CFT Act. However, the completely different circumstances of that case provide no basis for Mr Xiao to challenge the judgments of Toogood J in this proceeding.
13 Re Hampton ex parte Minter Ellison Rudd Watts, above n 6, at [51] and Re Māori Trustee, ex parte
Hill, above n 6, at [17].
[36] I accept that Mr Xiao may have had some difficulty in obtaining a civil legal aid lawyer who speaks Mandarin. However, no issue about the safety of the underlying judgment arises from his lack of legal representation. Mr Xiao represented himself before me. He presented submissions in English in a competent fashion and with minimal assistance from his interpreter. Mr Xiao has lived in New Zealand since
1989 and I find that he has exaggerated the extent to which his lack of proficiency in English might have prejudiced him. A lawyer who speaks Mandarin would clearly have been an advantage but in the circumstances here, far from necessary.
[37] In his written documents Mr Xiao has raised a further issue, namely the contention that the costs award amounts to disproportionately severe treatment contrary to s 9 of the New Zealand Bill of Rights Act 1990 (the 1990 Act).
[38] In response, the Department has submitted that s 9 has no application to this case. The 1990 Act does not guarantee rights in respect of individual property; they were expressly omitted from the Act.14 It further contends that Mr Xiao has not been treated in a way that was incompatible with his dignity or worth as a person and in any event his treatment cannot be said to be disproportionately severe.
[39] There was limited argument before me on the application of s 9. However, I accept the submission of the Department that there is no breach of s 9. Even if that section were to apply (and there must be obvious doubts about that) the high threshold of “disproportionately severe” has not been met.15
[40] None of the objections raised by Mr Xiao to the bankruptcy notice have any validity. The application to set aside that notice must be dismissed.
Result
[41] The application by Mr Xiao to set aside the bankruptcy notice issued against him by the Department and dated 28 May 2018 is dismissed.
14 Andrew Butler and Petra Butler The New Zealand Bill of Rights Act: A Commentary (2nd ed, Lexis
Nexis, Wellington, 2015) at [10.6.3] and [10.9.6].
15 Taunoa v Attorney-General [2007] NZSC 70, [2008] 1 NZLR 429 at [172].
[42] The Department, the judgment creditor, has succeeded and I find it is entitled to be awarded costs on a 2B basis together with disbursements. I order that Mr Xiao
is to pay those costs and disbursements.
Associate Judge P J Andrew
6
1