Faloon v Commissioner of Inland Revenue

[2016] NZHC 2063

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

Crown Law Office (Roslyn Park), Wellington, for Respondent

Official Assignee (Guy Caro), Ministry of Business Innovation & Employment, Wellington

Copy for:

Mr C J Faloon, 240B Devonport Road, Tauranga

[1]On 14 April this year I made an order adjudicating Mr Faloon bankrupt.On 9 May 2016 he appealed to the Court of Appeal against his adjudication.In July 2016 he applied under s 416 of the Insolvency Act 2006 for his adjudication to be suspended until the Court of Appeal decides his appeal.His application seeks five orders.The first two are suspending orders – although there are differences in detail in the way they are set out.Third, he seeks an order directing the Commissioner of Inland Revenue to make findings under s HR6 of the Income Tax Act 2007.Fourth, he seeks declaratory orders under s 25(3) of the Property (Relationships) Act 1976.Fifth, he seeks an order directing that alleged errors in a survey office plan SO35388 be corrected under s 52(2)(c) of the Cadastral Survey Act 2002.The last three orders are intended as conditions to any suspension order. That means that those orders could only be made if a suspension order is first made under s 416.

Joinder under r 4.50

[2]On Friday, 26 August 2016, Mr Faloon filed a memorandum which dealt with his suing in a representative capacity as administrator in his father’s estate.The memorandum referred to r 4.50 of the High Court Rules.It seemed to suggest that orders might be made substituting his sister and his nephew as parties to proceedings now that he had been made bankrupt.His memorandum also said that his sister and nephew expressed a desire to attend the hearing today if either a telephone or video links could be set up.No telephone or video link was provided.

[3]Mr Faloon’s sister and nephew are members of the public and as such they are entitled to attend the hearing in person.It is not normal practice to provide telephone or video links to allow the public to listen in to hearings.There can be departures in cases of special interest but I do not regard this as being such a case.

[4]As to his sister and his nephew being substituted, that does not arise in this proceeding.First, I assume in Mr Faloon’s favour that it may be possible for a new party to be added or substituted on an appeal but any such joinder is for the appellate

court, not the court appealed from.It is not for me to add or remove parties to a proceeding in the Court of Appeal.Second, Mr Faloon says that he is suing as an effective or de facto administrator of the estate of his late father.For reasons I gave in the decision appealed from, I regard that as misconceived.The Public Trust is the executor of the father’s estate, and Mr Faloon does not have any right to sue in the name of his father’s estate.Third, this question of representative capacity is irrelevant for the purpose of the bankruptcy issues.A bankruptcy is personal to the debtor.It changes his status.It vests his property in the Official Assignee and also imposes certain disqualifications.In bankruptcy proceedings the parties are the creditor or creditors and the debtor.It is not necessary for other people to be added into the proceeding.“Other people” includes potential trustees.People who might be potentially made trustees following the bankruptcy of an existing trustee do not have standing in a bankruptcy proceeding.And just as they do not have standing in the adjudication proceeding, they do not have standing for an appeal.

[5]Accordingly there is no point in my considering any joinder applications under r 4.50 of the High Court Rules.The position of the sister and nephew remains no different from that of any other members of the public.

Principles under s 416

[6]Section 416 of the Insolvency Act 2006 says:

Suspension of adjudication pending appeal

(1)If an appeal has been filed against an order of adjudication, the bankrupt or any other interested person may apply to the court or the Court of Appeal for an order suspending the adjudication until the appeal is decided.

(2)The court or Court of Appeal may suspend the adjudication on the conditions that it thinks appropriate, including conditions as to anything done or decided, or that ought to have been done or decided, by any person in the period between the adjudication and the order suspending adjudication.

(3)The court or the Court of Appeal may at any time make an order as it thinks appropriate as to anything done or decided, or that ought to have been done or decided, by any person in the period between the adjudication and the date when the appeal is decided if—

(a)the adjudication has been suspended and the appeal fails; or

(b)the adjudication has not been suspended and the appeal succeeds.

[7]The section replaces s 9 of the Insolvency Act 1967 which provided for suspension pending appeal.In Lindsay v Vaucluse Holdings Ltd,1 a decision under s 9 of the 1967 Act, the Court of Appeal held that a bankrupt may pursue an appeal against adjudication without requiring the adjudication to be suspended pending the hearing of the appeal.It said that the section is couched on the basis that the court may suspend the operation of the order, not that it must do so.Section 416 is similarly worded.The Court of Appeal held that it is implicit that an appeal may proceed notwithstanding that there has been no suspension.The court noted that it may often be quite contrary to the public interest and the interests of creditors for a bankruptcy to be suspended pending the appeal.

[8]In decisions under s 416, an approach analogous to that under r 12 of the Court of Appeal (Civil) Rules 2005 has been followed.2Rule 12 allows for interim relief to be granted pending appeal, including staying enforcement of a judgment.In such cases it is common to refer to a dictum of Buckley LJ in Minnesota Mining and Manufacturing Co v Johnson & Johnson:3

1Lindsay v Vaucluse Holdings Ltd CA272/99, 13 December 1999.

2Kroon v Westpac Banking Corporation HC Auckland, CIV-2006-404-4720, 15 May 2007, Harrison v Harrison [2015] NZHC 1054 and Re Parlane, ex parte Young, HC Auckland CIV-2010-404-5478 of 25 July 2011.

3Minnesota Mining & Manufacturing Co v Johnson& Johnson [1976] RPC 671 (CA) at 676.

The object, where it can be fairly achieved, must surely be so to arrange matters that, when the appeal comes to be heard, the appellate court may be able to do justice between the parties, whatever the outcome of the appeal may be.

[9]The Court of Appeal has indicated that in applications under r 12 a number of factors are taken into account.They include:

[a]Whether the appeal may be rendered nugatory;

[b]the bona fides of the appellant;

[c]whether the successful party will be injuriously affected by the stay;

[d]the effect on third parties;

[e]the novelty and importance of the questions on appeal;

[f]the public interest in the proceeding;and

[g]the overall balance of convenience.

[10]It has also sometimes been said that the court will take into account the apparent strength of the appeal,4 but for my part it is invidious for the judge who gave the decision which is appealed to assess the merits of the challenge to the judgment.

4Keung v GBR Investment Ltd [2010] NZCA 396, [2012] NZAR 17 at [11].

The circumstances of this case

[11]The only creditor of Mr Faloon known to the Official Assignee is the Commissioner of Inland Revenue.The Commissioner is a preferential creditor for the costs of the adjudication application in the sum of about $11,800.The Commissioner has not yet claimed in the bankruptcy but in the bankruptcy application I was satisfied that Mr Faloon was indebted to the Commissioner under various costs orders which total some $46,735.63 plus interest.

[12]Under s 67 of the Insolvency Act 2006, a bankrupt is required to give the Official Assignee a signed statement of affairs.In June Mr Faloon attended the office of the Official Assignee in Hamilton and provided a statement of affairs.But he did not sign it and it is not complete.He has given insufficient information as to his liabilities and the litigation he is involved in, and he has not completely identified all his assets.Mr Faloon needs to understand the importance of providing a statement of affairs.If he does not do so, the three years for an automatic discharge under s 290 of the Insolvency Act will not start running.His failure to provide a statement of affairs is also relevant to his application under s 416.He needs to

understand that in seeking relief from the court he needs to “play ball” by playing fair with his creditors as well.Refusing to comply with s 67 is not playing fair with his creditors.

[13]When Mr Faloon was adjudged bankrupt, he had five proceedings pending in the High Court at Wellington:

[a]CIV-2016-485-120 Faloon v Commissioner of Patents;

[b]CIV-2016-485-189 Faloon v Commissioner of Inland Revenue;

[c]CIV-2015-485-931 Faloon v Attorney-General;

[d]CIV-2015-485-734 Faloon v Palmerston North Airport Ltd;and

[e]CIV-2015-485-289 Faloon v Commissioner of Inland Revenue.

[14]The Official Assignee arranged for these proceedings to be put on hold.Counsel for the Official Assignee and counsel for the defendants provided memoranda inviting the court in Wellington to adjourn the proceedings.By a minute of 19 May 2016 Brown J directed that all the proceedings be adjourned to a date in late November 2016.The memoranda filed with the court recorded that in some matters Mr Faloon was contending that he was suing as a trustee, but that the Official Assignee had not, to date, seen any evidence that any assets of Mr Faloon were held on trust, as opposed to being held in his personal estate and which had vested in the Official Assignee on adjudication.

[15]Mr Faloon has taken umbrage at the Official Assignee arranging for the proceedings to be adjourned.The Official Assignee has taken a middle course.There were other options available.The option that Mr Faloon would wish the Official Assignee to take would be to pursue the proceedings vigorously on his behalf or to allow Mr Faloon to prosecute them himself.The other extreme would be for the Official Assignee to consider the proceedings, make his own enquiries whether Mr Faloon did hold any of these proceedings on trust, and if the Official Assignee considered that proceedings were not held on trust then the Official

Assignee might enquire into the merits of the proceedings and then make his own decision whether to continue with the proceedings or not.Proceedings which Mr Faloon holds personally would vest in the Official Assignee on adjudication of bankruptcy.The Official Assignee might abandon them if he saw no merit in continuing them.The Official Assignee has instead taken a course which preserves the status quo until the appeal against adjudication has been heard.

[16]In his appeal against his adjudication, Mr Faloon gives these grounds (at least as I understand them):

[a]he is immune from bankruptcy;

[b]he raises arguments that he has triable claims against the Crown - based on his long-standing grievances arising from the diversion of the Kawau Stream and the taking of land for the Palmerston North airport; and

[c]he wants matters stayed while he pursues his claims against the Crown.

[17]In his appeal, Mr Faloon does not contest that the Commissioner of Inland Revenue is his creditor under the costs orders, that he committed relevant acts of bankruptcy, in not complying with the Commissioner’s bankruptcy notices, and that he is insolvent.He also does not appear to have raised any other matters which would be taken into account in the court’s discretions under ss 36-38 of the Insolvency Act.

[18]For his appeal, Mr Faloon applied for security for costs to be dispensed with but that was unsuccessful.5I was advised by counsel that in the appeal Mr Faloon has applied for an extension of time in which to apply for a hearing and to file his casebook.I was not advised of any decision by the Court of Appeal on those matters.

5Faloon v Commissioner of Inland Revenue [2016] NZCA 344.

[19]It is desirable that appeals against adjudications in bankruptcy be heard and decided promptly.That is because an adjudication in bankruptcy involves a change of status, vests assets in the Official Assignee and imposes disqualifications on the debtor.It is undesirable that there be prolonged uncertainty as to these matters.

[20]Bankruptcy appeals do not normally raise difficult issues.They typically do not require lengthy hearings.They can normally be heard within half a day.That means that bankruptcy appeals are well suited for the fast track process in the Court of Appeal.While I have listened carefully to Mr Faloon’s submissions today, I do not consider that there are any features that suggest that a lengthy hearing is required for his appeal or that the fast track process could not be followed.

Mr Faloon’s application for suspension

[21]The essential basis for Mr Faloon’s suspension application is that he wants to be able to carry on with his proceedings in the Wellington High Court, which were the subject of the minute of Brown J.As I understand it, he wants everything to be put on hold, including his appeal, while he is given a free hand to conduct that litigation.Mr Faloon’s submissions and his application were more extensive than that, but that is the gist of his suspension application.

[22]In my judgment, that does not provide a sound reason to suspend his adjudication pending the hearing of his appeal.Under the arrangements made to put the litigation in Wellington on hold, Mr Faloon is unlikely to suffer undue prejudice if those proceedings should await the outcome of his appeal.It seems likely that those causes of action have vested in the Official Assignee.There is no persuasive evidence that they are held on trust.They are matters close to Mr Faloon’s heart.He is pursuing them only in his own interests.Equally, his claim that he is acting as administrator of his father’s estate is implausible.

[23]The arrangements by the Official Assignee preserve the status quo pending the outcome of the appeal.If his appeal succeeds, Mr Faloon will be in the same position as he was immediately before his adjudication.He will be free to resume that litigation.Equally, if the appeal goes against Mr Faloon, the Official Assignee

will then decide what to do with that litigation.Mr Caro explained that the Official Assignee would first enquire whether Mr Faloon holds any of the causes of action in those proceedings on trust.If the Official Assignee is satisfied that there is no relevant trusteeship, the Official Assignee will consider the merits of the litigation on the basis that those are assets within Mr Faloon’s estate which vested on bankruptcy.That means that any refusal to suspend the adjudication will not make Mr Faloon’s appeal nugatory.

[24]The contrary position, which is to accede to Mr Faloon’s wishes, is likely to result in further unnecessary litigation.It is foreseeable that the matters which have been put on hold in the High Court may take some time to resolve.It is necessary to take into account Mr Faloon’s litigiousness.Notwithstanding his submissions today, he has not satisfied me that there is any substance to his claims now pending in the Wellington High Court.It is clearly more efficient and more desirable to have his appeal heard first, than to put his adjudication on hold while he runs other proceedings.

[25]One of my reasons for making Mr Faloon bankrupt was to bring his litigiousness under some measure of control.That is a check on Mr Faloon’s propensity for litigation.It represents a fruit of judgment which the Commissioner, as the successful party, is entitled to enjoy.If I have erred in my decision to make Mr Faloon bankrupt, the Commissioner will lose that fruit of judgment and Mr Faloon will be free to resume the proceedings.

[26]It is also relevant that Mr Faloon has not provided a complete statement of affairs to date.It shows the one-sided nature of Mr Faloon’s application.He wants matters all his way.He will not correspond by playing fair with his creditors.

[27]As to matters to be taken into account on a stay application, I find as follows:

[a]Mr Faloon’s appeal will not be made nugatory if a suspension is refused.

[b]Mr Faloon’s bona fides are open to question.He is using this appeal to pursue, yet again, matters on which the courts have consistently ruled against him.The issues over the diversion of the Kawau Stream and the taking of land for the Palmerston North airport have been the subject of many decisions in the past.

[c]If there were a suspension, the Commissioner would be injuriously affected because of the exposure to ongoing unmeritorious claims by Mr Faloon - and that also goes for other government bodies.

[d]As to novelty and importance, Mr Faloon has raised issues which he contends have not been raised before in any arguments about the Kawau Stream and the land taking.He seems to want to run a claim under s 85 of the Judicature Act based on his having discharged a mortgage to the Bank of New South Wales (now the Westpac Bank).He has also, for the first time to my knowledge, raised the Property (Relationships) Act.Other Judges have also noticed Mr Faloon’s ingenuity in coming up with new arguments.None of these matters require consideration by the Court of Appeal.They are simply up old arguments in new clothing.

[e]In my judgment, the overall balance favours not suspending the adjudication.

[28]As for the merits of his appeal, I note that in the decision that security for costs should not be dispensed with, the Court of Appeal held that Mr Faloon’s appeal seemed to lack merit.Overall I can see no benefits in suspending his adjudication.To the contrary, there appear to be disadvantages by way of delay in deciding his appeal.I bear in mind that his appeal rights are preserved in any event.

[29]Accordingly I dismiss his application.

Associate Judge R M Bell