Downtown House (no.2) Limited v Ensom
[2019] NZHC 2566
•1 October 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-2452
CIV-2019-404-899 [2019] NZHC 2566
BETWEEN DOWNTOWN HOUSE (NO.2) LIMITED
Plaintiff
AND
MARK ROBERT ENSOM
Defendant
Hearing: 1 October 2019 Appearances:
D J Chisholm QC and W M Irving for the Plaintiff A S Ross QC and P C Murray for M R Ensom
Judgment:
1 October 2019
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Russell McVeagh (W Irving/J C Suyker), Auckland, for the Plaintiff Atmore & Co (G Atmore), Auckland, for the Defendant
Copy for:
David Chisholm QC, Auckland, for the Plaintiff Adam Ross QC, Auckland, for the Defendant Paul Murray, Auckland, for the Defendant
(Case Officer: Catherine Koo)
DOWNTOWN HOUSE (NO.2) LIMITED v ENSOM [2019] NZHC 2566 [1 October 2019]
[1] In April 2019, Downtown House (No.2) Ltd obtained summary judgment against Mr Ensom for $1,842,651.74.1 It sued him as director of Pomegranate Recording Ltd under his guarantee of a loan made by Downtown House (No.2) Ltd. Mr Ensom has not made any payments under the judgment. He has applied for a stay of execution under r 17.29 of the High Court Rules. Downtown House (No.2) Ltd has served him with a bankruptcy notice for the judgment debt. He has also applied to set aside the bankruptcy notice.
[2] The judgment sum of $1.8 million is not the full amount for which Downtown House (No.2) Ltd sued Mr Ensom. Downtown House (No.2) Ltd is continuing with its proceeding to seek judgment for the full amount of its claim. Mr Ensom has joined to the proceeding a third party, Mr Sam MacDonald. Associate Judge Matthews has given directions for the proceeding to be heard for five days in August 2020. The court will hear Downtown House (No.2) Ltd’s claim against Mr Ensom for the outstanding amount and Mr Ensom’s claim against Mr MacDonald. The claim against Mr MacDonald is for breach of contract and for contribution. Mr Ensom says that Mr MacDonald should pay 40 per cent of whatever amount he is liable to Downtown House for, including payments he has already made to Downtown House.
[3] Mr Ensom has also appealed against my decision. The point taken on appeal is narrow. In the summary judgment hearing it was submitted that I should not enter summary judgment against Mr Ensom, even if liability were established. I declined to exercise that discretion. My refusal to exercise that discretion is the subject of the appeal. The appeal is being prosecuted diligently. It is set down for hearing at the end of this year.
[4] The bankruptcy notice was issued in May. Mr Ensom applied to set aside the bankruptcy notice and for a stay of execution in June. I understand that the application was made within time.
[5] The application to set aside the bankruptcy notice pleaded that the bankruptcy notice was defective, but that point is no longer being pursued.
1 Downtown House (No.2) Ltd v Ensom [2019] NZHC 724.
[6] Mr Ensom’s ground for seeking a stay of execution is based on his third party claim against Mr Sam MacDonald. He relies on the relationship between Mr MacDonald and Downtown House (No.2) Ltd. Downtown House (No.2) Ltd is not ordinarily a financier. It carries on business in property investment. Its directors are Tiffany Olsen, her sister, Georgia, and her mother, Lynley. They are also the shareholders of the company. Georgia is married to Mr MacDonald.
[7] Mr Ensom’s evidence, primarily the evidence he gave on the summary judgment application, shows that over the years he has been involved in projects with Mr MacDonald. Their standard arrangement was that Mr Ensom would have a 60 per cent share in a project, and Mr MacDonald would have a 40 per cent equity share. Their projects were invariably profitable – at least until the one which led to the present proceedings involving a property in Great North Road, Grey Lynn, Auckland.
[8] Mr Ensom’s evidence is that Mr MacDonald took part in the Great North Road project in just the same way as the two of them had taken part in earlier projects. His case is that just as they shared profits together, they should also share losses together in the same 60/40 ratio. His evidence shows Mr MacDonald’s participation in the Great North Road project, including arranging finance. His evidence includes correspondence which Mr MacDonald received. If Mr MacDonald was not party to a project, it is unlikely that he would have been a party to the correspondence. I am satisfied that the evidence shows Mr Ensom has an arguable case against Mr MacDonald for a claim for some contribution towards the losses sustained, including Mr Ensom’s liability to Downtown House. Mr Ensom’s claim against Mr MacDonald is not only for a share of the summary judgment amount but also for other payments which Mr Ensom made to Downtown House. The total amount of the claim is in the order of $1.37 million.
[9] Mr Ensom says his claim against Mr MacDonald will not be heard until August 2020. By then it will be too late because Downtown House has already served the bankruptcy notice on him and clearly intends to proceed promptly against him to have him bankrupted. He will not be able to pay the full judgment sum. If he is bankrupted, it is unlikely that the claim against Mr MacDonald would be pursued. Mr Ross explained that while the claim against Mr MacDonald may be sound, there would be
difficulties funding it, if Mr Ensom is bankrupt. I accept that the Official Assignee is unlikely to embark on complex litigation without making sure that there is funding to cover his costs.
[10] Mr Ross submits that Downtown House has not been rational in pursuing Mr Ensom to bankruptcy and there is an obvious purpose of trying to shield Mr MacDonald. He is, after all, married to one of Downtown’s shareholders. For that reason it was contended that relief ought to be given under r 17.29 of the High Court Rules 2016. The rule says:
17.29 Stay of enforcement
A liable party may apply to the Court for a stay of enforcement or other relief against the judgment upon the ground that a substantial miscarriage of justice will be likely to result if the judgment were enforced, and the Court may give relief on just terms.
[11] Mr Ensom’s case is that if a stay of execution is granted, then the bankruptcy notice must also be set aside. That is because a bankruptcy notice can only be issued on a final judgment on which execution has not been stayed.2
[12] Before I deal with r 17.29, I note other provisions under which relief can be granted to a judgment debtor when faced with a bankruptcy notice or a bankruptcy application. When a judgment debtor wishes to appeal against a judgment which is the subject of a bankruptcy proceeding, the court has power to grant relief. That may be under r 20.10 of the High Court Rules, when there is an appeal to this court, and under r 12(3) of the Court of Appeal (Civil) Rules 2005, when there is an appeal to that court. In addition, when a bankruptcy application is pending, the court can order a halt under s 42 of the Insolvency Act 2006, while the appeal is heard. The court exercises its discretion under s 42 in a similar way to applications for a stay pending appeal. If the judgment has been obtained by default, the court may give relief in its discretion to prevent an abuse of process. That jurisdiction was recognised by Master Kennedy-Grant in Re Wise.3 As well, once a bankruptcy application is under way, the court has a general power to halt a proceeding under s 38 of the Insolvency Act. I
2 Insolvency Act 2006, s 17(1)(b).
3 Re Wise HC Auckland B227-228/95, 21 June 1995.
mention these matters to indicate that r 17.29 is not the only way for the court grant relief to a judgment debtor when bankruptcy is threatened.
[13] As to r 17.29, in Bay Cities Real Estate Ltd v Re/Max New Zealand Ltd, White J said:4
[19] …
(a)The onus is on an applicant for the stay of enforcement to persuade the Court to exercise its discretion.
(b)A “substantial miscarriage of justice” must be involved bearing in mind that “substantial miscarriage” means “something more than minor or insubstantial” and that it is not a substantial miscarriage of justice for a party that has had the use of another‘s money to be required to repay that money or for a creditor to be able to take whatever steps it sees fit to pursue recovery: Marac Finance v Twilight Trustee HC Auckland CIV-2008-404-7291, 25 February 2009 at [9].
(c)A substantial miscarriage of justice must be “likely to result” if the judgment were enforced. It is not sufficient that a miscarriage of justice “might” result; it must be “likely to result”, i.e. probably result: Crawford and Yelcich v Odin Enterprises Pty Ltd [2009] NZCA 199 at [29].
(d)The Court must seek to recognise and reconcile the conflicting interests of both parties in such manner as will best serve the overall interests of justice: Enright v Gold Exports Ltd (1989) 3 PRNZ 243 (HC) at 246. A balancing exercise is involved.
(e)A miscarriage of justice is unlikely to result where a party is required to pay to another an amount that is owing to it and the paying party is free to pursue its claim against the other party in the normal way: Econotek Construction Ltd v Kale HC Gisborne, CP8/87, 7 January 1998 at 8.
(f)Other factors which may be relevant include: the apparent strength or weakness of the claim; the ability of the applicant for the stay to meet the judgment that is being enforced; and the potential bankruptcy or liquidation of a party seeking to pursue an apparently strong claim: Roberts’ Family Investments Ltd v Total Fitness Centre (Wellington) Ltd [1989] 1 NZLR 15 (HC); NZ Apple & Pear Marketing Board v Wallis (1990) 4 PRNZ 713; Goldsmith v Drummond HC Christchurch CP201/97, 21 July 1998; and Raffles Education Corporation Ltd v Mills HC Auckland CIV-2008-404-5258, 16 February 2009.
4 Bay Cities Real Estate Ltd v Re/Max Ltd HC Napier, CIV-2010-441-134, 8 June 2011, at [19].
[14] While I have referred to Mr Ensom’s evidence in support of his stay application, Downtown House has not expressly addressed his complaint that he is being squeezed by being threatened with bankruptcy immediately while not being able to pursue his claim against Mr MacDonald until later. Nor has Mr MacDonald responded to the matter himself. In the substantive proceeding he has filed a statement of defence but so far he has not provided any evidence. He simply denies liability. He has separate representation from Downtown House.
[15] Given the relationship between Downtown House and Mr MacDonald, I accept that there is some point to Mr Ensom’s complaint that a squeeze is being put on him; the effect is that if he is made bankrupt he may be unable to pursue Mr MacDonald; and the Olsen family may receive some advantage if the husband of one of its shareholders is not exposed to liability. That has the flavour of a substantial miscarriage of justice. The point that I am recognising here is like one that was raised in the summary judgment application, where it was submitted that I should not enter judgment at that stage. In the summary judgment application, Mr Ensom relied on Gough Finance v C J Harvesting Ltd, where the defendant wished to pursue a claim against a company related to the plaintiff.5 Relief was granted there.
[16] While this is in a family context rather than a commercial context, the same point seems to arise here. When it comes to the enforcement stage, I accept that there is some point to Mr Ensom’s complaint. But that only takes him so far. His complaint is that he will lose the opportunity to pursue Mr MacDonald for $1.37 million. That leaves the problem that he has a residual liability of 60 per cent, for which he cannot seek relief from Mr MacDonald. Downtown House says that the amount of the debt as at today is $2,032,041.60 - the amount of the judgment plus interest which has continued at the contractual rate since judgment. Even allowing for the $1,037,000 which Mr Ensom wishes to recover from Mr MacDonald, there is still a liability of $1 million for which Mr Ensom is alone responsible. He has so far paid nothing.
[17] The purpose of a bankruptcy notice is to test the solvency of the debtor. The debtor is presented with a demand based on a final judgment. He is required to comply
5 Gough Finance v C J Harvesting Ltd HC Rotorua CIV 2006-463-914, 6 September 2007.
with the bankruptcy notice. The usual method of compliance is to pay the amount of the debt. Failure to comply with the notice is an act of bankruptcy and can lead to a bankruptcy application.
[18] In the circumstances of this case, I deal with the matter by ordering a conditional and temporary stay of execution. Downtown House is not to execute the judgment for any amount over $1 million plus interest at the contractual rate running from today. I have taken $1 million as the difference between the amount of the judgment debt to date and the amount of Mr Ensom’s claim against Mr MacDonald. It is a rounded figure. Mr Ross did not take issue with that.
[19] The stay of execution is temporary. It will last until 30 October 2019. I amend the bankruptcy notice. The amount payable under the bankruptcy notice is $1 million. Mr Ensom will have until 31 October 2019 to comply with that notice. I am adjourning this application to set aside the bankruptcy notice until the bankruptcy list on Thursday 31 October 2019 at 11:45am. If Mr Ensom has paid the $1 million by then, he will not have committed an act of bankruptcy. If he has not complied with the adjusted notice by then, I will dismiss the application to set aside the bankruptcy notice. On that happening, there will be an act of bankruptcy on which a bankruptcy application can be started. It will be for Downtown House to make any bankruptcy application and to decide what amount to plead as the debt due. The stay will no longer apply.
[20] While Downtown House may issue a bankruptcy application, I remind the parties of the court’s other powers to order a halt under ss 38 and 42 of the Insolvency Act. I am not indicating now whether or how those powers might be exercised.
[21] Because I have not finally disposed of the application to set aside the bankruptcy notice, the question of costs will be addressed at the hearing on 31 October 2019.
……………………………….
Associate Judge R M Bell
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