Finnigan v Ellis
[2018] NZHC 2878
•7 November 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-1232
[2018] NZHC 2878
UNDER the Insolvency Act 2006 IN THE MATTER OF
the bankruptcy of BRIAN ROBERT ELLIS
BETWEEN
PERI MICHAELA FINNIGAN and
BORIS VAN DELDEN as liquidators of WENZTRO CO-OPERATION LIMITED
Judgment CreditorsAND
BRIAN ROBERT ELLIS
Judgment Debtor
Hearing: 31 October 2018 Appearances:
K Crossland for the Judgment Creditors C LaHatte for the Judgment Debtor
Judgment:
7 November 2018
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 7 November 2018 at 12:15pm
pursuant to Rule 11.5 of the High Court Rules.
…………………………………
Deputy Registrar
Solicitors:
Shieff Angland (K Crossland/J Boparoy), Auckland, for the Judgment Creditors Sellar Bone Partners, Newmarket, Auckland, for the Judgment Debtor
Copy for:
Christopher LaHatte, Auckland, for the Judgment Debtor
FINNIGAN and VAN DELDEN v ELLIS [2018] NZHC 2878 [7 November 2018]
[1] Mr Ellis seeks a halt of the creditors’ bankruptcy application under s 42 of the Insolvency Act 2006 while he appeals against a judgment in their favour. The creditors are the liquidators of Wenztro Co-operation Ltd (in liq). They sued Mr Ellis and two others for breaches of duty as directors or de facto directors under s 301 of the Companies Act 1993. In his judgment of 22 May 2018 Wylie J gave judgment against all three for $765,692.81 together with interest.1 In a later decision of 17 September 2018 he awarded costs of $134,409.75 against Mr Ellis.2 The liquidators issued a bankruptcy notice based on the judgment of 22 May 2018. Mr Ellis did not apply to set aside the bankruptcy notice and did not comply with it. A bankruptcy application issued on 1 August 2018 is based on the same debt.
[2] Mr Ellis appealed against the judgment of 22 May 2018. There have been procedural difficulties. Mr Ellis has not pursued the appeal as promptly as he ought to have, and he has required some indulgences from the Court of Appeal. He has yet to file his case on appeal, but I was assured in the hearing that it was imminent. Mr Ellis says that he has arranged for $155,000 to be held in the trust account of independent solicitors.
[3] Mr Ellis applied for a stay of execution of Wylie J’s judgment of 22 May 2018, but he has not pursued that application. In effect, his application to halt the proceeding under s 42 of the Insolvency Act has been run in its place. The section says:
42 Halt or refusal of application when judgment under appeal
(1)This section applies if the creditor's application for adjudication relies on one of the following acts of bankruptcy:
(a)the debtor failed to comply with a bankruptcy notice (see section 17):
(b)a judgment against the debtor for non-payment of trust money is not satisfied within 5 working days after the date of the judgment (see section 28).
(2)If the debtor has appealed against the judgment or order underlying the bankruptcy notice or the judgment for nonpayment of trust money,
1 Finnigan v Ellis [2018] NZHC 1146.
2 Finnigan v Ellis [2018] NZHC 2440.
as the case may be, and the appeal is still to be decided, then the court may—
(a) halt the creditor's application for adjudication; or
(b)refuse the application.
[4] Mr Ellis has not made a formal application to halt the proceeding under this section. Instead, the question has come up as a matter of case management. The bankruptcy application had its first call on 20 September 2018. I adjourned the case to 4 October 2018 to hear argument whether to halt the application while the appeal was heard. On that day I adjourned the case to 5 October 2018 to await the outcome of a conference in the Court of Appeal. The Court of Appeal conference was to deal with procedural issues. The creditors maintained that Mr Ellis’ appeal had been automatically abandoned. I gather that that argument did not succeed. On 5 October 2018, I adjourned the case to 29 November 2018 at 11:45am to review progress in the Court of Appeal. The creditors filed a memorandum on 11 October 2018. They submitted that while Mr Ellis’ appeal would continue, they should be able to continue with their bankruptcy application pending the appeal. Mr Ellis was appealing only against part of his liability under the judgment. Even if he succeeds on appeal there will be a residual liability. I called a conference and directed a hearing for 31 October 2018.
[5] In Yeoh v Al Saffaf Associate Judge Doogue identified these matters as relevant when exercising the discretion to stay a bankruptcy proceeding pending appeal:3
(a)the bona fides of the debtor in prosecuting the appeal;
(b)the merits of the appeal generally only if the court is of the view that the appeal has absolutely no prospect of success;
(c)whether the stay would unduly harm the creditors;
3 Yeoh v Al Saffaf HC Auckland, CIV-2006-404-1164, 21 June 2006.
(d)the stage the appeal has reached and whether there has been a delay in prosecuting the appeal; and
(e)whether the bankruptcy proceeding may render the appeal nugatory.
That case was decided under the Insolvency Act 1967, but those principles have been applied in later cases, including under the Insolvency Act 2006.4
Background
[6] Wenztro Co-operation Ltd was incorporated in January 2009 to export infant formula to Hong Kong and China. Wenzhou Hongliang Trading Co Ltd placed an order for Wenztro to supply 18,300 cans of infant formula. Wenztro did not deliver. Wenzhou Hongliang sued for its losses and applied for summary judgment. Wenztro did not file any opposition to the summary judgment application but went into voluntary liquidation. The liquidator (appointed by the shareholders, not the current liquidators) did not oppose Wenzhou Hongliang Trading Co Ltd obtaining judgment for $617,396.61.
[7] Wenzhou Hongliang Trading Co Ltd was the major creditor in the liquidation. In total creditors came to $765,692.81. One of them was an employee, Mrs Hollinger, owed $59,000. Mr Ellis himself was a creditor for $82,049.48.5 The rest were for smaller amounts.
[8] In the hearing before Wylie J, the liquidators initially contended that the court should take into account consequential losses of Wenzhou Hongliang and another company for amounts above those for which they had obtained judgment. Wylie J recorded that the issue had been resolved by the liquidators accepting the amount for which it had obtained judgment.6
4 Pillay v ANZ National Bank Ltd HC Auckland, CIV-2009-404-4175, 3 December 2009; Wright v Health Distributors Ltd HC Hamilton, CIV-2010-419-121, 5 November 2010; and Sullivan v Clode [2017] NZHC 1973.
5 Mr Ellis did not claim he was due a set-off, presumably because he comes within the “related person” exception under s 310(2) and (3) of the insolvency set-off provisions of the Companies Act 1993.
6 Finnigan v Ellis [2018] NZHC 1146 at [13]-[16].
[9] In his appeal filed in June 2018, Mr Ellis pleaded that Wylie J had erred in failing to consider and determine the extent to which the creditor, Wenzhou Hongliang Trading Co Ltd, had contributed to the losses. There was contributory negligence in a failure to engage a competent New Zealand agent and a failure to perform a contractual term to approve labelling for the canned product. For relief, Mr Ellis sought a reduction in the amount of judgment to reflect a 50 per cent contribution by Wenzhou Hongliang Trading Co Ltd. That provided the basis for the creditors’ submission that in his appeal Mr Ellis was seeking only a reduction of the amount for which he was liable but was not contending that the entire judgment should be set aside.
[10] In the meantime, counsel instructed for the appeal has drafted amended grounds of appeal. There are three main grounds:
(a)Wylie J erred in finding that Wenzhou Hongliang Trading Co Ltd entered into a long-term supply agreement in December 2010 and that Wenzhou Hongliang was entitled to rely on the long-term agreement when incurring expenses for the long-term development of its milk powder import and distribution business;
(b)Wylie J erred in failing to consider the extent to which Wenzhou Hongliang Trading Co Ltd contributed to the company’s losses; and
(c)Wylie J erred by finding that the breaches of directors’ duties caused the losses claimed in the proceeding and failed to determine the extent to which the losses accepted by Wylie J may have been caused by a subsidiary of Wenzhou which had gone into liquidation.
Mr Ellis now wishes to have Wylie J’s judgment set aside in its entirety, or to reduce
the amount of the judgment. He also asks for the costs order to be quashed.
Discussion
[11] There are two points to be noted about these new grounds of appeal. They say that:
(a)the losses incurred by Wenztro in respect of Wenzhou Hongliang Trading Co Ltd are less than the amount for which Wenzhou Hongliang Trading Co Ltd’s claim was admitted in the liquidation; and
(b)in any event, Mr Ellis should not be held liable for all those losses.
[12] I accept Mr Crossland’s submission that Mr Ellis does not have an arguable point of appeal that the losses suffered by Wenztro were different from those for which the claim was accepted in the liquidation. That is because:
(a)Mr Ellis was a de jure or a de facto director of the company up until liquidation (a finding not challenged on appeal);
(b)as such, he was in a position to arrange for Wenztro to oppose Wenzhou Hongliang Trading Co Ltd’s summary judgment application before it went into liquidation but he did not take any such steps;
(c)the shareholders appointed a friendly liquidator who consented under s 248(1)(c) of the Companies Act to Wenzhou Hongliang Trading Co Ltd’s proceeding continuing after liquidation;
(d)in the proceeding before Wylie J, Mr Ellis took the point that the liquidators could not claim that Wenzhou Hongliang Trading Co Ltd’s losses were greater than the amount for which they had claimed;
(e)Mr Ellis did not, however, seek an order under s 284 of the Companies Act for Wenzhou’s claim to be accepted for a lower amount. He had made a counterclaim seeking relief under s 284 but withdrew it;7 and
7 Finnigan v Ellis [2018] NZHC 1146 at [15].
(f)Wylie J’s ruling as to the amount of Wenzhou Hongliang Trading Co Ltd’s claim seems to have been accepted by the parties during the hearing.8
Given those matters, it is an abuse of process for Mr Ellis to contend that Wylie J erred in accepting that, in respect of the claim under s 301 of the Companies Act, the losses sustained by Wenztro included all the amount for which Wenzhou Hongliang Trading Co Ltd had obtained judgment.
[13] There is, however, the second question: Mr Ellis’ responsibility for those losses. Wylie J held that all three defendants were jointly and severally liable for the entire losses that he had accepted in paragraph [13] of his judgment — $765,692.81. In Mason v Lewis the Court of Appeal said that under s 301 there was a two-stage evaluation: one, whether there has been a breach of duty by a director; and two, if so to what extent the director should contribute to the losses of the company.9 On the second question, the court’s discretion is exercised having regard to causation, culpability and duration of the relevant trading period.10 Discretionary factors such as “conscience, fairness and hardship” can come into account.11
[14] For this halt decision, I cannot say that an appeal that asks the Court of Appeal to review the exercise of the discretionary power to grant relief under s 301 cannot be properly run as a point on appeal. But such an appeal could hope at best only to obtain a reduction in the amount of the judgment sums. Mr Ellis would still face some residual liability under the judgment. His appeal does not claim he was totally free from blame.
[15] That also goes to his appeal against the costs order. Even if he is successful on appeal, some part of the original costs order will not be disturbed. As he will not be able to set aside the liability judgment in its entirety, at least part of the costs judgment will stand. He can only hope to have the amount adjusted.
8 See paragraphs [13]-[16] of Wylie J’s judgment.
9 Mason v Lewis [2006] 3 NZLR 225 (CA).
10 For culpability, see [110] and [112]-[116].
11 Kings Wharf Coldstore Ltd (in rec and in liq) v Wilson [2005] 2 NZCCLR 1042 (HC) at [113], citing Chirnside v Fay [2004] 3 NZLR 637 at [66]– [67].
[16] Accordingly, I accept the liquidators’ argument that even if the appeal is successful in adjusting the relief granted, Mr Ellis will still have some residual liability. I accept the point that there should not be a halt of the proceeding so as to bar the creditors from relying on the Wylie J’s judgments entirely, to the extent it cannot be disputed on appeal. For that Mr Ellis is incontrovertibly liable. His solvency can be tested by allowing the liquidators to continue their application for his indisputable liability to them.
[17] The task is to work out an amount for which he will remain liable even if he is successful on the arguable parts of his appeal. In his appeal as originally filed, Mr Ellis asked the Court of Appeal to reduce his liability to the amount fixed by the purchase price paid for the milk powder product, reduced by 50 per cent on account of contributory conduct by Wenzhou Hongliang Trading Co Ltd. Mr Crossland’s memorandum of 11 October 2018 set out a notional calculation on that basis:
50 per cent of the purchase price $153,262.50 Scale costs $111,778.75 Disbursements $19,709.00 Additional costs $2,922.00 Interest @ 5% $46,010.08
Total: $333,682.33
I tweak the calculation by assuming that with success on appeal there may be an order for costs in favour of Mr Ellis and that the original order for costs may be reduced. But even with success on appeal, there is no risk of Mr Ellis’ liability being reduced to less than $200,000. With liability for $153,262.50, allowances for reduced costs in this court (nothing for increased costs) and costs to Mr Ellis in the Court of Appeal and for interest since judgment was given, he will still have to pay the liquidators at least $200,000. There is of course some estimation in this. It is not possible to give exact figures because of the uncertainties.
[18] Mr Ellis cannot justify a halt to the proceeding on the basis that the appeal may affect his liability for that $200,000. That means that I do not have to go in depth into the other factors under s 42. I assume, in favour of Mr Ellis, that he is appealing in good faith. He has instructed experienced counsel. While there have been some
hiccups with meeting time requirements, the appeal is under way. While the liquidators no doubt are keen to recover all the amounts for which they have judgment, that consideration is not enough to prevent a limited halt being ordered.
Outcome
[19]I make these orders:
(a)The liquidators may continue the proceeding on the basis that they are incontrovertibly creditors of Mr Ellis for $200,000.
(b)They may not claim to be creditors of Mr Ellis for a greater sum than
$200,000 pending the judgment of the Court of Appeal or further order of this court. That halt is subject to Mr Ellis prosecuting his appeal with due diligence.
[20] The creditors’ application is adjourned to Thursday, 29 November 2018 at 11:45am. That call will decide the merits of the bankruptcy application on the basis that the liquidators are creditors for $200,000. I will also hear the parties on costs.
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Associate Judge R M Bell
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