Erickson v Centuron Finance Limited HC Auckland B259-01

[2005] NZHC 1261

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

B NO. 259-01

IN THE MATTER OF     of the Insolvency Act 1967

BETWEEN  EION DAVID FREDRICKSON

Judgment Debtor

AND  CENTURON FINANCE LIMITED

Judgment Creditor

Hearing:         15 December 2004 Appearances: S W M Piggin for Debtor

D Hauer for Official Assignee

Judgment:

JUDGMENT OF ASSOCIATE JUDGE SARGISSON

E-mail:

S Piggin – [email protected]

D Hauer – [email protected]

Solicitors:

John F Heard, PO Box 29-026, Greenwoods Corner, Auckland Meredith Connell, PO Box 2213, Auckland

EION DAVID FREDRICKSON V CENTURON FINANCE LIMITED HC AK B NO. 259-01 []

Introduction

[1]   Centurion Finance Limited obtained judgment against Mr Fredrickson in 1993. Mr Fredrickson failed to satisfy part of the judgment debt. Subsequently, a bankruptcy notice was issued against Mr Fredrickson and he was adjudicated bankrupt on the basis of the notice, on 26 September 2001.

[2]   Mr Fredrickson did not receive an automatic discharge because the Official Assignee filed a notice of objection on 21 November 2002.

[3]   Mr Fredrickson now seeks an annulment of the order of adjudication on two grounds. First, under s 119(1)(a) of the Insolvency Act 1967 on the ground that the order of adjudication should not have been made. In the alternative, he seeks annulment under s 119(1)(b) on the ground that his debts have been fully paid or satisfied.

[4]   On 15 December 2004 I indicated to Mr Fredrickson’s counsel that I was not satisfied that an order should be made under s 119(1)(a) of the Act and I gave leave for further submissions to be filed. I reserved my decision pending receipt and consideration of those submissions. They were filed shortly before the Christmas vacation and I have considered them at the earliest opportunity since then.

[5]   By joint memorandum dated 20 December 2004, counsel have advised that the Official Assignee no longer has any objection to an order for annulment being made.

Application for annulment under Section 119(1)(a): Adjudication should not have been made

[6]   Counsel for Mr Fredrickson relies on two primary reasons to persuade the Court that the order of adjudication should not have been made.

[7]   The first reason is his contention that substituted service was defective. He submitted that:

a)Mr Fredrickson was unaware of the bankruptcy proceedings until after the order of adjudication was made;

b)It is good practice to specify two forms of substituted service, but the creditor (applying ex parte) failed to advise the Court that its solicitors had been negotiating with the debtor’s solicitors, and service on the debtor’s solicitors should have been specified as an alternative method;

c)The order for substituted service was made not only in respect of the bankruptcy notice but "any other document" in the proceeding. An order in respect of future documents (namely, the petition and summons) should not have been made, because otherwise there is a risk that the debtor may never become aware of service; and

d)When his solicitors wrote to the creditor’s solicitors on 18 September 2001 indicating that a “letter” had arrived at the debtor's address but had been returned, this "ought to have raised alarm bells" and been brought to the attention of the Court at the adjudication hearing.

[8]        The second reason counsel relies on is that material facts as to solvency were not before the Court and that an order under s 26 would not have been made if the complete circumstances as to solvency had been known to the Court at the time of hearing. The facts in question are:

a)At the date of adjudication (26 September 2001), Mr Fredrickson had various assets and was in paid employment. He was also due a "substantial" commission payment 10 days after adjudication. At that time he was "far from being in a hopeless financial position";

b)Mr Fredrickson was able to meet his modest IRD debt and would  have been able to meet (by sale of his assets or by borrowing) the Centurion debt (had he received notice of the hearing) within a reasonable time. Further, had he been aware of the proceeding, it is likely the Court would have allowed him at least one adjournment to make a settlement; and

[9]        In a related submission, counsel noted that the act of bankruptcy in failing to pay the amount of the notice is no obstacle to annulment: Re Elshaw (1993) NZTC 10,069.

Application for annulment under Section 119(1)(b): Debts have been fully paid or satisfied

[10]      Counsel for Mr Fredrickson pointed out that the strong preference is for an order under s119(1)(a), but failing such an order Mr Fredrickson seeks an order  under s 119(1)(b). The grounds he relied on are:

a)The petitioner’s debt has been paid and the petitioner has consented to the annulment;

b)Outstanding tax returns for 1995-1997 have been filed and tax paid. The Commissioner of Inland Revenue has confirmed that all debts have been satisfied; and

c)The debtor has paid the amount to a Mr Taylor ordered against him by the Tenancy Tribunal.

Legal principles

[11]      Generally, s 119(1)(a) will not provide grounds for interfering with a discretion exercised on a properly brought bankruptcy petition unless there has been some defect in procedure (such as inadequate personal service: Bond Cargo Ltd v Chilcott (1993) 13 PRNZ 629, 635), abuse of process, or where some material fact was not brought before the court making the adjudication order: Re Hunter, ex parte CIR (2000) 19 NZTC 15,722. Section 11 of the Act provides that certain defects do not justify annulment unless the defect has injuriously affected a person.

[12]      Outside these specific categories, the Court retains a residual discretion under s 119(1)(a). However, it is not a proper use of this power for the discretion under s  26 to be re-exercised outside the parameters laid down for appeal on a hearing for annulment: Re Hunter at [58].

Decision

That adjudication should not have been made

Defect in service

[13]      Mr Piggin argued that Mr Fredrickson’s lack of knowledge of the bankruptcy proceedings was largely due to an improperly made order for substituted service. Mr Piggin denied he was seeking an effective review of the then Master’s decision as to substituted service, but says the mode of service directed is a critical issue in determining whether or not the order of adjudication should have been made.

[14]      Insofar as Mr Piggin's arguments challenge the nature of the order for substituted service itself, he is seeking an effective review of that order, which I cannot undertake here. Suffice it to note that in deciding whether to permit substituted service under r 211, the Court will assess whether the proposed mode of service is likely to bring the proceeding to the attention of the debtor: Re Rewiri (2002) 16 PRNZ 415 at [15]. Thus, the aim of substituted service is not necessarily to ensure the proceedings definitely come to the attention of the debtor, only that there is a reasonable probability that they do so. Significantly, the Court was  satisfied at the time that the one mode of service it prescribed was likely to satisfy the test of the bankruptcy notice and the proceeding being brought to the attention of Mr Fredrickson.

[15]      It is also important to bear in mind the terms of the order itself, which read in relevant part:

"That the Creditor be at liberty to proceed as if personal service of the Bankruptcy Notice in this proceeding and any other document required for the purposes of this proceeding had been effected upon the Debtor…"

[Emphasis added]

[16]      The terms of this order mean that, provided the conditions for substituted service are met, personal service is deemed to have occurred. In this regard I note Grice v Grice [1930] QSR 261, where the relevant procedural rule provided that service effected in accordance with an order for substituted service was to have the

same operation as personal service. The Full Court held that personal service was deemed to have been effected by substituted service occurring in the prescribed manner.

[17]      Mr Piggin also argued that if Centurion’s solicitors had mentioned his solicitor’s letter at the adjudication hearing this might have resulted in an adjournment and advice to his solicitor of the new date for hearing and given him an opportunity to settle.

[18]      For the reasons given in [18] below, the evidence is not sufficient to satisfy me that Mr Fredrickson did not have knowledge of the proceedings. However, even if I were to accept that he had no knowledge of the proceedings and take this into account as a "material fact" for the purposes of s 119(1)(a) which was not before the Court when making the adjudication order, the real issue is whether this lack of knowledge caused Mr Fredrickson any serious injustice.

[19]      Mr Fredrickson has not demonstrated any injustice arising out of his alleged lack of knowledge of the proceedings. He took a total of eight months to settle the debt after his adjudication. If, as he claims in his first affidavit, he could have settled the debt at the time by realising his (minimal) assets or borrowing, the question is why he did not do so  immediately after his adjudication, and then apply for annulment. Mr Fredrickson provided several reasons to explain the delay in  applying, but I do not accept that any of these would have prevented him from paying the debt had he really had the means to do so at the time, as he claims. His delay in paying the debt is simply inconsistent with his alleged ability to pay.  In these circumstances, I am not satisfied that Mr Fredrickson's alleged lack of knowledge of the proceedings itself (or the fact that his partner returned a document to Centurion’s solicitors), meant the adjudication order should not have been made.

[20]      There are also two further matters which impact negatively on Mr Fredrickson's explanation of his lack of knowledge and therefore weigh against the exercise of my discretion:

a)First, Mr Fredrickson has not offered a reasonable explanation as to why his former partner, Ms Sanders, returned the documents served at

Mr Fredrickson’s residence in accordance with the order for substituted service. In the ordinary course of events, one  would expect that while he was away from home, his partner would either keep his mail (including documents delivered personally) for his return, or forward it to him, or draw it to his attention in some other way. One would not expect his partner to unilaterally return his mail to the sender. There is even less reason to expect that his partner would decide to return documents personally delivered for him, without consulting him. It is therefore unusual that this particular correspondence should be returned. A possible adverse inference, which has not been dispelled, is that Mr Fredrickson was expecting the bankruptcy proceedings. The inference is all the stronger, given the prior correspondence from the Centurion’s solicitors that it would issue bankruptcy proceedings if Mr Fredrickson continued to dispute the debt.

b)Secondly, the affidavit evidence of the process server is that two sets of documents were served in accordance with the order for substituted service. The first was the bankruptcy notice and the second included the petition and the summons. Mr Fredrickson however relies only on the fact that one set of documents was returned by Ms Sanders. As he says in his first affidavit, "she told me that she had sent back the envelope to the sender". Mr Fredrickson has not offered any explanation about what happened to the other set of documents, other than simply denying he received it. Nor has he explained how the return of one set of documents would mean he had no knowledge of the other set. The inference is that one set of documents was not returned but was retained for him.

c)I am not at all satisfied in these circumstances that Mr Fredrickson was not made aware of the documents. In short, too much is unexplained by Mr Fredrickson's evidence as to his alleged lack of knowledge of the proceedings.

[21]      For the above reasons, I do not accept that there are sufficient reasons to justify the exercise of my discretion to make an order under s 119(1)(a) based on Mr Fredrickson’s alleged lack of knowledge of the proceedings.

Circumstances as to solvency not before Court

[22]      I do not accept that the Court would not have made the order if it had been aware of the alleged circumstances as to Mr Fredrickson’s financial condition at the time.

[23]      I return to the fact of Mr Fredrickson’s delay in paying the debt. If Mr Fredrickson was actually solvent at the time of adjudication, then he could be expected to have made payment as soon as he became aware of the bankruptcy proceedings. The fact remains that Mr Fredrickson did not pay the judgment debt until May 2002, some eight months after adjudication. His failure to pay the debt does nothing to rebut the presumption of his insolvency at the time of adjudication.  If anything, it entrenches that presumption.

[24]      Nor does the evidence which he referred to as to his financial position support the claim that he was solvent at the time. To avoid bankruptcy, the debtor must have an ability to meet his or her debts within a reasonable time: Re Stirling, ex parte Web Ross & Co [1990] 1 NZLR 569. The evidence raised does not satisfy me that he had such ability. For example, if he could have borrowed the money as he claims, there is no explanation as to why he did not do so immediately after adjudication. If anything, the fact he took eight months to pay the debt suggests he had no such ability at the time of adjudication.

[25]      Finally, the delay in payment does not lend any weight to the  credibility of his case and this is a matter which necessarily influences my discretion. The delay suggests his arguments are hypothetical in character rather than grounded in any real substance. The delay also suggests that until now Mr Fredrickson has acquiesced in his status as a bankrupt. If the factors he raises in support of his application for annulment under s 119(1)(a) had any real merit, they should have been relied on at the time to pursue annulment and not raised over three years after adjudication.

[26]      For these reasons I am not satisfied that the order of adjudication against Mr Fredrickson should not have been made.

Debts have been paid or fully satisfied

[27]      I have reviewed the affidavit evidence and am satisfied that Mr Fredrickson has paid his debts. I therefore find that the ground under s 119(1)(b) is made out.

Other Matters

[28]      It is not necessary to direct service on the judgment creditor given that the judgment creditor by way of letter dated 23 May 2002 has indicated there is no longer any objection to the application for annulment. I accordingly dispense with service.

Result

[29]      The order of adjudication against Mr Fredrickson is annulled under s 119(1)(b) as of the date of this judgment.

[30]      I reserve the matter of costs in the event that there is any outstanding issue between the Official Assignee and Mr Fredrickson as to costs. Any memoranda raising the issue of costs must be filed within seven days.

Dated at Auckland onatam/pm

Associate Judge Sargisson