Fuati v Jin
[2023] NZCA 165
•11 May 2023 at 9.30 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA219/2022 [2023] NZCA 165 |
| BETWEEN | MUSABAYOUFU FUATI |
| AND | ZUORU JIN |
| Hearing: | 22 February 2023 |
Court: | Gilbert, Ellis and Davison JJ |
Counsel: | P C Murray for Appellant |
Judgment: | 11 May 2023 at 9.30 am |
JUDGMENT OF THE COURT
The appeal is dismissed.
____________________________________________________________________
REASONS OF THE COURT
(Given by Ellis J)
On 24 August 2020, in the context of litigation between them, the High Court made a costs award against Mr Fuati. The upshot was that Mr Fuati owed a judgment debt of $25,271.90 to Mr Zuoro Jin.[1]
[1]Fuati v Peng [2020] NZHC 2150.
A few months later, the Commissioner of Police (the Commissioner) commenced High Court proceedings against Mr Fuati and others under the Criminal Proceeds Recovery Act 2009 (CPRA).[2] In November 2020, the Commissioner obtained without notice restraining orders against specified property said to be owned or under the control of Mr Fuati and his wife, Tayier Suliya, under ss 24 and 25 of the CPRA. These orders were confirmed on an on notice basis in December 2020 and have been consistently renewed (with some variation) since then.
[2]The Commissioner alleges that Mr Fuati, together with Mr Daniel Hu, operated a large-scale money laundering operation, involving the informal transfer of funds between New Zealand and China.
The statutory effect of these restraining orders is that the property specified in them is under the Official Assignee’s custody and control and is not to be disposed of, or dealt with, by any person other than as provided for in the orders.
On 11 April 2022, Associate Judge Taylor adjudicated Mr Fuati bankrupt, on the petition of Mr Jin.[3] Mr Fuati now appeals that decision on the basis that he has not committed an act of bankruptcy. More particularly, he maintains (as he did unsuccessfully in the High Court) that the restraining orders operate as an implied stay of execution upon the earlier judgment debt and that he has an arguable cross-claim against Mr Jin making it just and equitable that he not be adjudicated bankrupt.
Background
The claim giving rise to the judgment debt
[3]Jin v Fuati [2022] NZHC 718 [High Court judgment].
In 2018, Mr Fuati and another man brought a claim in the High Court against Mr Jin and Ms Yuchen Peng in which the plaintiffs said they had loaned Ms Peng over 4,000,000 Chinese Yuan (or around NZD 900,000) for her currency exchange business. The loans were said to have been made through a series of transactions from an account held by a third party, Mr Wei Wang.
Mr Fuati alleged that Ms Peng had only made a partial repayment of the NZD 150,000, and that she had transferred large amounts of their money to Mr Jin. Mr Jin and Ms Peng denied the claims. Ms Peng’s defence was that the transactions were not loan advances at all, but transactions in the course of operating the currency exchange business with the plaintiffs. Mr Jin said he had engaged Ms Peng to provide currency exchange services, and money he received from Ms Peng was pursuant to fulfilment of the terms of that agreement. He said he knew nothing about the business arrangements between Ms Peng and the plaintiffs.
There were a series of interlocutory matters, and a number of them resulted in costs awards against Mr Fuati and the other plaintiff. These included the judgment debt of $25,271.90. On 20 July 2020, the plaintiffs discontinued their claim, for what they said at the time were resourcing reasons. On 22 September 2020, Lang J made an order under r 15.23 of the High Court Rules 2016 requiring the plaintiffs to pay the defendants 2B costs for the proceeding.[4]
The insolvency proceedings
[4]Fuati v Peng [2020] NZHC 2466.
At the time the restraining orders were made, Mr Fuati had not paid the judgment debt owed to Mr Jin. So on 12 January 2021, at Mr Jin’s behest, a bankruptcy notice was issued for the judgment debt of $25,721.90. Substituted service on Mr Fuati was effected on 28 May 2021. Mr Fuati did not respond to the notice. Mr Jin applied to have Mr Fuati adjudicated bankrupt on 6 September 2021. Mr Fuati was served on 12 October 2021.
According to Mr Fuati, he then had discussions with the Commissioner of Police about obtaining the release of restrained funds to meet his debt to Mr Jin. According to Mr Fuati, the Commissioner has declined to agree to this. The position taken by the Commissioner in the CPRA proceedings is that Mr Fuati does have access to other funds.
In the High Court, Mr Fuati opposed the adjudication application on the grounds that:
(a)he was not unable to pay his debts (if the restrained funds were released) and so it was just and equitable that he not be adjudicated bankrupt; and/or
(b)because the restraining order prevents Mr Jin from levying execution of the costs judgment against Mr Fuati’s assets, it operated as an implied stay of execution of the judgment debt.
The Associate Judge’s decision
Implied stay
After considering the overseas authorities relied on by Mr Fuati, the Judge considered it arguable that restraining orders operate as an implied stay on a judgment debt for the purposes of s 17(1)(b) of the Insolvency Act 2006 (the IA).[5] The Judge noted the substance of Mr Fuati’s argument, being that a restraining order should operate as a stay because the restraining order prevents Mr Jin from levying execution of the judgment against Mr Fuati’s assets.
[5]High Court judgment, above n 3, at [47].
At that stage, Mr Jin contended that restraining orders under the CPRA must yield to the interests of creditors in the case of bankruptcy under the IA.
The Judge found that although it seemed arguable that a restraining order does operate as a stay, there was no evidence before the Court from Mr Fuati that he had no assets other than those restrained under the CPRA, and there was evidence to the contrary. In those circumstances, he could not be satisfied that a stay should be implied and he adjudicated Mr Fuati bankrupt accordingly.[6]
Arguable cross-claim
[6]At [47]–[49].
Mr Fuati filed an affidavit setting out the basis upon which he said he proposed to reactivate his discontinued claim against Mr Jin and Ms Peng. The Judge summarised this evidence as follows:[7]
[19] In his second affidavit, Mr Fuati deposes that in January 2022, Police provided discovery in relation to his criminal charges. From that discovery, he says he has identified new evidence informing his claim against [Mr Jin] and Ms Peng. He now intends to restart his claim against them in the High Court.
[20] Mr Fuati deposes that in May 2017, he agreed to loan money to Ms Peng to help her with her foreign exchange business. Ms Peng has kept all the money Mr Fuati sent her and has refused to pay it back. He says he has evidence to show Ms Peng received funds from him, including an affidavit sworn by Jun. He says further that the reason he withdrew his previous proceeding was because he was told that Mr Wang, a key potential witness, lived in China, was unable to fly to New Zealand to give evidence and was unwilling to give evidence by video conference.
[21] Mr Fuati deposes that the new Police discovery includes evidence that Ms Peng acknowledged she received the funds into her bank account on 2 and 24 March 2018. He says the evidence points to Ms Peng taking the funds he lent her for herself. He deposes that he has become aware that Mr Wang lives in New Zealand and that, had he known that fact earlier, he would not have withdrawn his previous proceeding.
[22] Mr Fuati says the total amount of his claim against Ms Peng and [Mr Jin] is at least NZD 528,873. That amount exceeds the amount of [Mr Jin’s] bankruptcy claim against Mr Fuati. He says that if he is not bankrupted he will file his renewed claim against Ms Peng and [Mr Jin] within five working days.
[7]Footnotes omitted.
But the Judge did not accept Mr Fuati had a triable cross-claim. He noted Toogood J’s assessment in 2019, that each of Mr Fuati’s original claims against Mr Jin appears to be factually flawed and misconstrued in law.[8] The Associate Judge did not accept that Mr Fuati’s evidence about the new material that had come to light (the relevance and correctness of which was disputed) improved his case.[9]
[8]High Court judgment, above n 3, at [50], quoting Fuati v Peng [2019] NZHC 1859 at [24].
[9]At [57].
He adjudicated Mr Fuati bankrupt accordingly.
Mr Fuati’s appeal
Mr Fuati now appeals the Judge’s decision. He maintains the position that the restraining orders operate as an implied stay of execution and that the insolvency legislation takes precedence over the CPRA. In the alternative, he contends that he has an arguable cross-claim which makes it just and equitable that he not be adjudicated bankrupt.
On 1 September 2022, Miller J granted the Commissioner leave to intervene in the appeal on the basis that the first aspect of Mr Fuati’s grounds of appeal — whether a restraining order made under ss 24 and/or 25 of the CPRA operates as an implied stay on the execution of a judgment — concerns a matter of public importance. The Commissioner’s submissions were limited to that issue. We record our gratitude to Mr Wiseman and Mr Purdon for them.
The relevant Insolvency Act provisions
Section 13 of the IA governs when a creditor can apply for adjudication. It provides:
13 When creditor may apply for debtor’s adjudication
A creditor may apply for a debtor to be adjudicated bankrupt if—
(a) the debtor owes the creditor $1,000 or more or, if 2 or more creditors join in the application, the debtor owes a total of $1,000 or more to those creditors between them; and
(b) the debtor has committed an act of bankruptcy within the period of 3 months before the filing of the application; and
(c) the debt is a certain amount; and
(d) the debt is payable either immediately or at a date in the future that is certain.
Here, there is no dispute that the judgment debt owed by Mr Fuati to Mr Jin would, ordinarily, be a qualifying debt in terms of paragraphs (a), (c) and (d). And in terms of paragraph (b), s 17 provides that that a debtor commits an act of bankruptcy if:
…
(a) a creditor has obtained a final judgment or a final order against the debtor for any amount; and
(b) execution of the judgment or order has not been halted by a court; and
(c) the debtor has been served with a bankruptcy notice; and
(d) the debtor has not, within the [relevant time limit],—
(i)complied with the requirements of the notice; or
(ii)satisfied the court that he or she has a cross claim against the creditor.
…
There is no doubt that the costs order made by the High Court in August 2020 is a qualifying order in terms of (a) or that a bankruptcy notice has been served. So as noted earlier, the two questions raised by the appeal are:
(a)whether it can be said that the execution of that order was (impliedly) “halted by a court”, in terms of s 17(b) of the IA, when it made the restraining orders over Mr Fuati’s assets; or
(b)in terms of s 17(d) of the IA, whether Mr Fuati can satisfy the Court that he has a cross-claim against Mr Jin.
We address each in turn.
Do the restraining orders operate as an implied stay of execution on the judgment debt?
The CPRA
In order to answer the first question, it is necessary to begin by saying something about the scheme and operation of the CPRA.
Section 3(1) of the CPRA sets out the Act’s primary purpose:
(1) The primary purpose of this Act is to establish a regime for the forfeiture of property—
(a) that has been derived directly or indirectly from significant criminal activity; or
(b) that represents the value of a person’s unlawfully derived income.
Because proceedings under the CPRA are civil in nature, it is irrelevant whether criminal charges have been commenced, withdrawn, or determined.[10]
[10]Criminal Proceeds (Recovery) Act 2009, ss 10 and 16.
The CPRA permits the court to make a number of different kinds of orders, including restraining orders, asset forfeiture orders and profit forfeiture orders. As their names suggest, restraining orders are interim in nature and forfeiture orders are final.
Restraining orders
The point of a restraining order is to ensure the preservation of property pending resolution of forfeiture proceedings. Although restraint does not always precede forfeiture, it is an important and often-utilised mechanism under the CPRA.
A restraining order prohibits disposing of, or dealing with, the specified property other than as provided for in the order.[11] While “disposing of” is not defined, s 5 states that, “dealing with”:
[11]Sections 24–26.
(a) means to use or deal with property in any way and by any means; and
(b) includes,—
(i) if a debt is owed by a person, making a payment to any person to reduce that debt; and
(ii) removing property from New Zealand; and
(iii) receiving or making a gift of property; and
(iv) registering an interest in property
Restraining orders can be made against real or personal property of any kind, whether situated in New Zealand or abroad, whether tangible or intangible and whether moveable or immovable.[12] The definition of “property” also includes an interest in property.
[12]Section 5, definition of “property”.
There are two different bases on which restraining orders can be made. Restraint of tainted property is authorised by s 24(1), which provides:
24 Making restraining order relating to specific property
(1)A court hearing an application for a restraining order relating to specific property may, if the court is satisfied it has reasonable grounds to believe that any property is tainted property, may make an order that the property (restrained property)—
(a) is not to be disposed of, or dealt with, other than is provided for in the restraining order; and
(b) is to be under the Official Assignee’s custody and control.
The term “tainted property”:[13]
(a) means any property that has, wholly or in part, been—
(i) acquired as a result of significant criminal activity; or
(ii) directly or indirectly derived from significant criminal activity; and
(b) includes any property that has been acquired as a result of, or directly derived from, more than 1 activity if at least 1 of those activities is a significant criminal activity.
[13]Section 5, definition of “tainted property”.
The phrase “significant criminal activity” is defined in s 6(1) of the CPRA as an activity engaged in by a person that if proceeded against as a criminal offence would amount to offending:
(a) that consists of, or includes, 1 or more offences punishable by a maximum term of imprisonment of 5 years or more; or
(b) from which property, proceeds, or benefits of a value of $30,000 or more have, directly or indirectly, been acquired or derived.
Restraint under s 24 is, accordingly, predicated on the nature of the specified property itself. No respondent need be identified but if one is, there is no need to show grounds to believe they have engaged personally in significant criminal activity, provided the property was wholly or in part derived from such activity.[14]
[14]Section 50(4) of the CPRA nonetheless makes the prior existence of a restraining order a prerequisite in cases where an asset forfeiture order is sought over property in which no person has claimed an interest. In those circumstances, restraint acts as a form of notice.
By contrast, s 25(1) requires the court to be satisfied that there are reasonable grounds to believe that an identified person has received an unlawful benefit; it is not necessary for the property restrained itself to be tainted. Property can be restrained with the intention of meeting a profit forfeiture order that is in the sum of the unlawful benefit. Section 25(1) provides:
25 Making restraining order relating to all or part of respondent’s property
(1) A court hearing an application for a restraining order relating to all or part of a respondent’s property may, if the court is satisfied it has reasonable grounds to believe that the respondent has unlawfully benefited from significant criminal activity, make an order that the property it specifies in the order (restrained property)—
(a) is not to be disposed of, or dealt with, other than is provided for in the restraining order; and
(b) is to be under the Official Assignee’s custody and control.
Section 7 provides that a person has unlawfully benefitted from significant criminal activity if the person has “knowingly, directly or indirectly, derived a benefit from significant criminal activity (whether or not that person undertook or was involved in the significant criminal activity)”.
A restraining order under s 25 may relate to all or specified parts of a respondent’s property.[15]
[15]Section 25(2).
Section 28 of the CPRA permits a court to place conditions on a restraining order. It relevantly provides:
(1) A court may make a restraining order subject to any conditions the court thinks fit including, without limitation, conditions that provide for the following to be met out of a respondent’s restrained property:
(a) the reasonable living costs of the respondent and any of his or her dependants:
(b) the reasonable business expenses of the respondent:
(c) the payment of any specified debt incurred by the respondent in good faith:
(d) any other expenses allowed by the court.
(2) Despite subsection (1)(d), a court may not allow any legal expenses to be met out of a respondent’s restrained property.
(3) In determining whether or not to make a restraining order subject to a condition, the court must have regard to the ability of a respondent to meet the reasonable living costs, expenses, or debt concerned out of property that is not restrained property.
…
And ss 30 and 31 make provision for the exclusion — in certain specified circumstances — of severable interests from proposed restrained property or restrained property:
(a)Under s 30(2), a court is required to exclude a severable interest from an order made under ss 24 or 25 if the applicant (who cannot be the respondent) proves on the balance of probabilities that:
(i)the applicant has an interest in the property to which the restraining order relates; and
(ii)the applicant has not unlawfully benefited from the significant criminal activity to which the restraining order relates.
(b)Under s 31, where a mortgagee successfully applies to exclude their severable interest from proposed restrained or restrained property and it is necessary to sell the property in order to exclude that interest, the proceeds not payable to the mortgagee themselves become restrained property.
Sections 33 and 34 contemplate the making and granting of applications “for a further order” made either at the time a restraining order is made or subsequently. Such applications can be made by the applicant for the restraining order, a person with an interest in the relevant restrained property, the Official Assignee and (with leave) any other person. Section 35 provides that a “further order” may include:
(a)an order varying the restrained property to which a restraining order relates; [and]
(b)an order varying any condition to which a restraining order is subject …
Lastly, in the context of the present case it is noteworthy that, unlike the CPRA’s predecessor, the Proceeds of Crime Act 1991, the CPRA does not specifically deal with the interrelationship between restraining orders and bankruptcy. Section 60(2) of the earlier Act provided:
(2) Where—
(a) Property of a person is in the custody and control of the Official Assignee in accordance with a restraining order; and
(b) The person becomes bankrupt,—
the property shall cease to be in the custody and control of the Official Assignee under this Act and shall be deemed to be vested in the Assignee of the bankrupt’s property under section 101 of the Insolvency Act 2006.
Forfeiture orders
The two types of restraining order authorised by ss 24 and 25 are mirrored in the two types of civil forfeiture orders authorised by subpt 3 of pt 2 of the Act: assets forfeiture orders and profit forfeiture orders. Applications for such orders require the Commissioner to satisfy the High Court on the balance of probabilities that the property is either tainted (for a s 50 assets forfeiture order) or that the respondent has unlawfully benefitted from significant criminal activity and has interests in property (for a s 55 profit forfeiture order).
Applications for assets forfeiture orders, are, like their restraint counterpart
(s 24), focused on the quality of specified property, not the owner of the property (even if such an owner is identified). It has been accepted that an application for forfeiture of tainted property is a proceeding in rem.[16][16]Solicitor-General v King (1999) 17 CRNZ 471 (HC) at 486–487. That decision involved an application for forfeiture of tainted property under the predecessor to the CPRA: the Proceeds of Crime Act 1991.
Section 50(3) provides that the outcome of a successful s 50 application is that the identified property:
(a) vests in the Crown absolutely; and
(b) is in the custody and control of the Official Assignee.
And like their restraint counterpart (s 25), applications for profit forfeiture orders rest on the concept of unlawful benefit. Under s 55(1), the High Court must make a profit forfeiture order where it is satisfied on the balance of probabilities that a respondent has unlawfully benefited from significant criminal activity, and has interests in property.
Section 55(2) requires that a profit forfeiture order is to specify:
…
(a) the value of the benefit determined in accordance with section 53; and
(b) the maximum recoverable amount determined in accordance with section 54; and
(c) the property that is to be disposed of in accordance with section 83(1), being property in which the respondent has, or is treated as having, interests.
Section 55(4) recognises that a profit forfeiture order creates a debt to the Crown, and the maximum recoverable amount specified by the High Court in the order is recoverable as a debt by the Official Assignee on behalf of the Crown.[17]
[17]See further Commissioner of Police v Harrison [2021] NZCA 540, [2022] 2 NZLR 339 at [53].
As contemplated by s 55(2)(c), s 83(1) governs how a profit forfeiture order is to be discharged by the Official Assignee. It states:
(1) If the High Court makes a profit forfeiture order, the Official Assignee must, as soon as practicable after the expiry of the specified period (as described in subsection (2)), dispose of the property specified in the order and apply the money resulting from the disposal as follows:
(a) first, by paying the costs recoverable by the Official Assignee under section 87:
(b) secondly, by paying to the Legal Services Commissioner the amount (if any) payable by way of legal aid granted to the former interest holder (less any contributions paid by the former interest holder):
(c) thirdly, by paying, in the order of priority set out in section 86E of the Summary Proceedings Act 1957, any of the following amounts imposed on the former interest holder:
(i) any amount of reparation (as defined in section 79 of the Summary Proceedings Act 1957):
(ii) any offender levy (as defined in section 79 of the Summary Proceedings Act 1957):
(iii) any other type of fine (as defined in section 79 of the Summary Proceedings Act 1957):
(d) fourthly, by paying to the Crown the following amount, less the sum of the payments made under paragraphs (a) to (c),—
(i) if the sum resulting from realising the property is equal to, or more than, the maximum recoverable amount specified by the Court under section 55, the maximum recoverable amount:
(ii) if the sum resulting from realising the property is less than the maximum recoverable amount, the sum resulting from realising the property:
(e) fifthly, by paying any remaining money to the former interest holder.
And s 84 specifically deals with the relationship between a profit forfeiture order and subsequent bankruptcy proceedings. It provides:
84 Bankruptcy in relation to profit forfeiture order
(1) If, after a profit forfeiture order is made, the Official Assignee is given notice in writing of the filing of a creditor’s application in respect of the person under section 13 of the Insolvency Act 2006, the Official Assignee must, until the petition has been withdrawn or been disposed of, refrain from taking, or continuing to take, any of the following actions:
(a) selling or disposing of the property specified in the order:
(b) paying the amounts specified in section 83.
(2) If a person whose property is the subject of a profit forfeiture order becomes bankrupt, the property that is the subject of the profit forfeiture order, if it has not yet been disposed of, ceases to be in the custody and control of the Official Assignee and is deemed to be vested in the Assignee of the bankrupt’s property under section 101 of the Insolvency Act 2006.
(3) A profit forfeiture order made against a person is provable in the bankruptcy of that person.
(4) To avoid doubt, subsection (3) applies despite anything in section 232(2) of the Insolvency Act 2006.
Any property owned or controlled by the respondent can, accordingly, be realised to satisfy the debt created by a profit forfeiture order, whether at the time the profit forfeiture order is made, or subsequently in debt recovery proceedings undertaken by the Official Assignee (if the forfeited property is insufficient to satisfy the maximum recoverable amount). However, unlike property that is forfeited under an assets forfeiture order, property that is forfeited under s 55 of the CPRA does not immediately vest in the Crown. Instead, the proceeds from the Official Assignee’s disposal of that property are paid in part satisfaction of the respondent’s debt. To the extent a debt to the Crown remains after such disposal and the respondent is adjudicated bankrupt, the debt is provable in bankruptcy in the usual way.
Mr Wiseman submitted, and we accept, that an application for a profit forfeiture order is a proceeding in personam, as it is a proceeding that would, if successful, create a debt owed to the Crown for which the respondent is personally liable.
The “implied stay” cases relied on by Mr Fuati in the High Court
As noted earlier, Mr Fuati seeks to resist adjudication based on a number of (mainly Australian) cases in which it has been accepted that orders restraining the use or disposal of a debtor’s property, give rise to an implied stay of execution upon a judgment debt relied on by a creditor in bringing bankruptcy proceedings.
In Deputy Commissioner of Taxation v Stuart-Jones, Mathews J in the Federal Court of Australia undertook a useful and comprehensive overview of the “implied stay” authorities as at the date of that judgment (2000).[18] We use that overview as the basis for what follows.
[18]Commissioner of Taxation v Stuart-Jones [2000] FCA 1022, (2000) 102 FLR 296.
Stuart-Jones itself involved a debtor who had been convicted and imprisoned for drug-related offences. The Supreme Court of New South Wales then made a restraining order under s 10 of the Drug Trafficking (Civil Proceedings) Act 1990 (NSW).[19] Some time later, a bankruptcy notice was served on her and — following her failure to comply with it — a bankruptcy petition was presented. In opposing the petition Ms Stuart-Jones relied on ss 40(1)(g) and 41(3)(b) of the Bankruptcy Act 1966 (Cth), which respectively provide that:
(a)a debtor commits an act of bankruptcy by failing to comply with the requirements of a bankruptcy notice issued by a creditor ‘‘who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed”; and
(b)a bankruptcy notice shall not be issued in relation to a debtor “if, at the time of the application for the issue of the bankruptcy notice, execution of a judgment or order to which it relates has been stayed”.
[19]Since renamed the Criminal Assets Recovery Act 1990.
Ms Stuart-Jones argued the bankruptcy notice was invalid because the restraining order meant that the creditor was not in a position to issue immediate execution upon his judgment, which was accordingly deemed to be stayed in terms of s 41(3)(b).
As Mathews J noted, Ms Stuart-Jones relied on a line of authority, beginning in the United Kingdom in the 19th century, to the effect that a ‘‘stay’’ under bankruptcy legislation included an implied stay, in circumstances where the creditor is not in a position to issue immediate execution upon the judgment in question.[20]
[20]Commissioner of Taxation v Stuart-Jones, above n 19, at [7].
The Judge began her analysis by referring to Re Solomon where the Federal Court had observed it was well established that:[21]
(a)for the purposes of s 41(3)(b) of the Bankruptcy Act (Cth), execution is deemed to have been stayed where a judgment creditor is not ‘‘in a position to issue immediate execution upon it”; and
(b)a judgment creditor may not levy execution against property comprised in the appointment of the receiver without leave of the court that appointed the receiver, and that any attempt to do so without leave was a contempt of court.
[21]At [9], quoting Re Solomon; Ex parte Reid (1986) 10 FCR 423 at 425–426 (citations omitted).
Mathews J noted the same approach had been followed in:[22]
(a)Penning v Steel Tube Supplies Pty Ltd, where a bankruptcy notice was held to be invalid when a creditor (not the creditor who had issued the notice) had already obtained an order from the Federal Court appointing a registered trustee to take control of the debtors’ property;[23] and
(b)Director of Public Prosecutions v Kunz, where the Federal Court had accepted that restraining orders under the Customs Act 1901 (Cth) vesting the debtor’s property in the Official Trustee in Bankruptcy operated as a stay of execution in terms of s 41(3)(b) and that a subsequent judgment creditor needed to seek to have the restraining orders varied before a bankruptcy notice could be issued.[24]
[22]At [10] and [11].
[23]Penning v Steel Tube Supplies Pty Ltd (1988) 18 FCR 568.
[24]Director of Public Prosecutions v Kunz (1993) 43 FCR 374.
Next, the Judge referred to the judgment of the Full Court in Wiltshire-Smith v Mellor Olsson.[25] There, the Family Court had appointed a receiver and manager over a business operated by the debtor. The question was whether an order over only part of the debtor’s property (the business) could operate as a stay of execution that invalidated a subsequent bankruptcy notice. The Court in that case made the following observations:[26]
Once it is recognised that a petitioning creditor may be disqualified from issuing a bankruptcy notice by reason of a restraint imposed by order of a court on all the property of the judgment debtor thereby removing his ability to make payment, there is no reason why a court order imposed on some only of the property of the judgment debtor which has the same practical effect should not be recognised as a relevant circumstance sufficient to disentitle a judgment creditor from proceeding immediately to execution. In our opinion such an order will have this consequence where in practical reality, although not strictly in law, the order ‘in any way prevent(s) the debtor from paying his debt’ … or where it ‘deprives or may well deprive the judgment debtor of assets which he could otherwise use to pay the judgment creditor and thus comply with the bankruptcy notice’ … the factual inquiry to determine the practical effect of the order is whether in the eyes of ordinary fairness in business it will be said that the order has in a business sense prevented the debtor from paying.
[25]Commissioner of Taxation v Stuart-Jones, above n 19, at [12], considering Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572.
[26]Wiltshire-Smith v Mellor Olsson, above n 26, at 586–587 (emphasis added).
In Wiltshire-Smith itself, however, the Court found that as a matter of fact, there was no extant order of the Family Court preventing the debtor paying the judgment debt when the bankruptcy notice was issued, and so the sequestration order had been correctly made.[27]
[27]At 590 and 591.
Next, Mathews J referred to the Full Court’s decision in Boscolo v Botany Council.[28] There, the debtor contended a Family Court order restraining him from ‘‘transferring, assigning or further encumbering’’ a particular parcel of land constituted a stay of execution that invalidated a subsequently issued bankruptcy notice. The plurality (Jenkinson and O’Loughlin JJ) referred to Wiltshire-Smith with apparent approval, but found Mr Boscolo had not discharged the onus on him to establish that the restraining order prevented him from paying the amount claimed in the bankruptcy notice. Although Sackville J agreed with that conclusion, he was doubtful that a court order restraining dealings with only some of a debtor’s property might amount to an implied stay of execution. His Honour noted that the decision on Wiltshire-Smith went beyond what was decided in Re Solomon and Penning. In a passage quoted by Mathews J, he expressed concern that such an approach would create undesirable uncertainty for creditors:[29]
The test formulated in Wiltshire-Smith v Mellor Olsson takes the matter further. It makes the fate of a creditor’s petition founded on non-payment of a judgment debt, where the judgment itself has not been stayed, dependent on a factual inquiry that is likely to be difficult and, from the creditor’s perspective, uncertain. It is one thing to deem a judgment to be stayed where a court order prevents execution being levied on any of the debtor’s property. It may be another to deem a judgment stayed where a court order affects only part of the debtor’s property. In the second case, the impact of the court order on the debtor’s ability to pay his or her judgment debts may well depend on facts and circumstances that are incapable of ascertainment by the creditor, short of a prolonged court hearing.
[28]Commissioner of Taxation v Stuart-Jones, above n 19, at [14], considering Boscolo v Botany Council FCAFC570/96, 16 October 1996.
[29]At [15] (citations omitted, emphasis added). We note that special leave to appeal the decision in Boscolo was later declined by the High Court of Australia. In declining leave, the Court said: “Assuming, but without accepting, the correctness of the decision in Wiltshire-Smith v Olsson … the question in this case is simply a question of fact. No issue of general public importance emerges”.
Next, the Judge turned her attention to a parallel but arguably contrary line of cases in which the effect of a Mareva injunction on a subsequently issued bankruptcy notice had been considered.[30] Those cases indicate that a Mareva injunction is not seen as impliedly staying execution in terms of s 41(3)(b). In Re Ousley, Heerey J had referred to the decisions in Re Solomon and Penning, but approved the following statement by Hedigan J in the judgment below:[31]
The principle underlying Mareva injunctions is to prevent the court’s process being frustrated or abused by the dissipation of assets so as to affect the enforcement of orders lawfully made by the court. This description emphasises the limited scope of the Mareva injunction which exists to enable a court to protect its process from abuse in relation to the enforcement of its orders and not to create additional rights. … [I]t is neither a species of anticipatory execution nor a method to give a form of security in advance for a judgment which might be ultimately obtained. Moreover the plaintiff does not obtain any rights in the assets, the subject of the order, as a consequence of any Mareva injunction granted, prior to the obtaining of judgment. A plaintiff may later acquire such rights if he obtains judgment and successfully levies execution upon them, but until that event occurs the plaintiff’s only rights are against the defendant personally. Put another way, it creates rights in personam but not in rem.
[30]At [16].
[31]Re Ousley; Ex parte FCT (1994) 48 FCR 131 at 138 (citations omitted, emphasis added).
Mathews J noted that the Federal Court in Re Ling; Ex parte Enrobook Pty Ltd had similarly concluded that the issue of a Mareva injunction did not constitute a stay of execution for the purposes of s 41(3)(b).[32] In that case, after referring to the decision in Wiltshire-Smith and others, Lehane J went on to consider the precise nature of Mareva injunctions. His Honour said that speaking of Mareva injunctions as ‘freezing’ orders may be somewhat misleading, given that they operate as a personal restraint against the party to whom it is directed.[33] He went on to state that:[34]
… it would be an odd conclusion that the existence of a Mareva injunction of the kind now under consideration prevented a mortgagee or chargee of property, the mortgagor of which is restrained from dealing with it, from taking possession of the property, selling it and using the proceeds to discharge the secured debt. I know of no authority suggesting such a conclusion and cannot see how it could be supported in principle. By contrast, although the authorities are sparse and ancient, it seems to be clear that unless the order appointing a receiver expressly preserves the rights of mortgagees, a mortgagee of property in the possession of a receiver appointed by the court may not, without leave, take possession of the property or sell it: see, for example, Underhay v Read (1887) 20 QBD 209… .
More importantly, however, the purpose of a Mareva injunction is to prevent a defendant from dissipating assets, or putting them beyond the reach of creditors, in circumstances where there is a real fear that, unless restrained, the defendant will do so. Its purpose is not to prevent creditors from exercising their rights. And the way in which such an injunction is commonly framed — the way in which Lockhart J’s order is framed — reflects the limited purpose: all it does in terms is restrain, in this case, Mr Ling from dealing with assets. There appears to be no good reason why the exercise or enforcement of a creditor’s rights, including by execution, where no dealing by Mr Ling is required to effect it, should be regarded as contrary to the order.
[32]Commissioner of Taxation v Stuart-Jones, above n 19, at [17], considering Re Ling; Ex parte Enrobook Pty Ltd (1996) 142 ALR 87. The debtor in Re Ling unsuccessfully appealed to the Full Court: Ling v Enrobook Pty Ltd (1997) 74 FCR 19.
[33]Re Ling; Ex parte Enrobook Pty Ltd, above n 33, at 92.
[34]At 93 (citations omitted).
As noted earlier, the case of Stuart-Jones itself was concerned with a restraining order made under proceeds of crime legislation. Section 10(1) of the relevant Act provided that the effect of such an order was to prevent any person from disposing of, attempting to dispose of, or to otherwise deal with or attempt to otherwise deal with, an interest in property to which the order applies. Under s 10(4), the court making a restraining order could, if it considered necessary, order the Public Trustee to take control of some or all of the interests in property to which the restraining order relates.[35] Section 10(8) essentially set out the limited circumstances in which a restraining order does not prevent the levying of execution against the property in satisfaction, or partial satisfaction, of a debt. None of those circumstances were made out in Ms Stuart-Jones’ case.
[35]No such order was, however, made in Ms Stuart-Jones’ case.
Mathews J concluded that it was “at least arguable” that a restraining order under s 10 would have the effect of preventing the levying of execution against the person’s property in circumstances outside those described in s 10(8) and, if that were so, a restraining order made against the whole of a debtor’s property would mean that a judgment creditor was not in a position to issue immediate execution upon it. In that way, she said, “a restraining order would bear a closer resemblance to the appointment of a receiver or trustee than to a Mareva injunction” and so “may well” constitute a stay of execution for the purposes of s 41(3)(b) of the Act. [36]
[36]Commissioner of Taxation v Stuart-Jones, above n 189, at [26].
Ultimately, however, it was unnecessary for her Honour to form a concluded view on that issue because the restraining order in Ms Stuart-Jones’ case applied to only part of her property, namely her interest in a specific piece of real property. So Mathews J concluded:[37]
Put at its highest this might, in accordance with the majority judgment in Boscolo, operate as a stay of proceedings so long as, in a practical and business sense, it prevented the debtor from paying the judgment debt. The onus of proving this matter lies squarely upon the debtor.
[37]At [26].
The Judge found that because Ms Stuart-Jones had not discharged that onus there could be no implied stay.[38]
The later Australian cases
[38]At [26], [27] and [29].
At the hearing before us, Mr Zhang advised that his recent research had unearthed two further Australian cases, subsequent to Stuart-Jones, that were not referred to the Judge in the High Court: Sood v Crown Diagnostic Imaging Pty Ltd and Ollis v Rayner.[39] Both Sood and Ollis were also criminal proceeds cases.
[39]Sood v Crown Diagnostic Imaging Pty Ltd [2006] FCA 1721, (2006) 156 FCR 240; and Ollis v Rayner [2007] FCA 2012, (2007) 165 FCR 477.
Because Ollis refers to Sood with approval, and in some detail, we do not propose to address Sood separately, but rather by way of the discussion in Ollis.
In that case, the respondents had obtained judgment against Mr Ollis in the sum of $39,411.55. A restraining order was later made under s 10 of the Criminal Assets Recovery Act 1990 (NSW) against Mr Ollis’ interests in certain specified property. While that order was on foot, a bankruptcy notice was issued and served on Mr Ollis by the judgment creditor. The date specified in the notice passed and a creditor’s petition was presented. The making of a sequestration order against Mr Ollis’ estate was opposed by him on the grounds that the restraining order had impliedly stayed the execution of the judgment on which the respondents relied and so the bankruptcy notice should not have issued.[40]
[40]Ollis v Rayner, above n 40, at [1]–[5].
The issue on appeal was, again, whether the restraining order operated as a stay for the purposes of s 41(3)(b) of the Bankruptcy Act 1966 (Cth). Bennett J noted that while there was no direct authority on this aspect of the relationship between the Criminal Assets Recovery Act and the Bankruptcy Act, there had been consideration of comparable Commonwealth legislation for criminal assets forfeiture and recovery.[41]
[41]At [10].
As to those cases, the Judge observed:
[11] The Full Court said in Wiltshire-Smith v Mellor Olsson … that, for the purposes of ss 40(1)(g) and 41(3)(b) of the Bankruptcy Act, there need not be an express order of a court staying execution of the particular judgment on which the creditor relies. The Full Court … approved the observations of Beaumont J in Re Solomon; Ex parte Reid … that, for the purposes of s 41(3)(b), execution is deemed to have been stayed where the judgment creditor is not in a position to issue immediate execution upon it. Circumstances preventing the judgment creditor from issuing execution include action by the judgment creditor to prevent payment of the debt or the appointment of a receiver over the debtor’s property by order of the court so that the debtor, “in practical reality” is prevented from paying the debt … The onus is on the debtor to prove affirmatively that the claim in respect of which the bankruptcy notice was issued could and would have been paid but for some act or omission which has the practical effect, in a business sense, of preventing the debtor from paying the debt (Boscolo v Botany Council … ).
But then Bennett J referred to the more recent decision in Sood, where Gyles J had considered whether an order under s 18 of the Proceeds of Crime Act 2002 (Cth) effectively stays execution upon an outstanding judgment against the party subject to that order, for the purposes of ss 40(1)(g) and 41(3)(b). Bennett J noted that although Gyles J’s own view was that the concept of a stay had now been “stretched beyond recognition” he had proceeded on the basis that he was required to consider and apply the test laid down by the Full Court in Wiltshire-Smith.[42] So the question was whether, in the eyes of ordinary fairness, it could be said that the s 18 order has, in a business sense, prevented the debtor from paying.[43] Bennett J recorded that, after considering the relevant authorities, Gyles J had concluded that the ability of the debtor to seek an order under s 24 of the Proceeds of Crime Act permitting payment of the judgment debt meant that execution is not stayed in the relevant sense. Gyles J rejected the debtor’s submission that it was unrealistic to think that such an application could be made after service of the bankruptcy notice and prior to the time for compliance.
[42]Ollis v Rayner, above n 40, at [12], quoting Sood v Crown Diagnostic Imaging Pty Ltd, above n 40, at [11].
[43]Ollis v Rayner, above n 40, at [12]. The exact words used by Gyles J in Sood v Crown Diagnostic Imaging Pty Ltd, above n 40, at [11], were: “[h]aving considered the authorities in the light of the submissions from counsel in this case, I am left with the feeling that this area of the law needs to be sorted out by the High Court or the legislature. The concept of stay of execution has been stretched beyond recognition. It is difficult to find a basis in the words of the statute for the fine distinctions drawn in the cases. However, in the meantime, I must do the best I can.”
In Ollis, Bennett J agreed with Gyles J that “…where the debtor had the ability to seek an order permitting payment of the judgment debt, the payment is optional for the debtor in a practical sense” and that there was nothing to indicate that the legislature had contemplated that the Proceeds of Crime Act would interfere with the ordinary operation of the bankruptcy law beyond the effect of specific sections (not presently relevant) introduced to deal expressly with that topic.[44]
[44]Ollis v Rayner, above n40, at [13]. Gyles J had also noted the creditor’s absence of standing under the Proceeds of Crime Act to seek himself to vary the restraining order: Sood v Crown Diagnostic Imaging Pty Ltd, above n 40, at [13].
Bennett J went on to note that in Sood, the Judge had referred to Mathews J’s indication in Stuart-Jones that the operation of the restraining order as a stay was “at least arguable” but had himself come to a different conclusion. Gyles J had placed some weight on the factor referred to but not taken into account by Mathews J, including in particular the ability of the debtor to make an application, which was in his Honour’s view, decisive. Gyles J had also been of the view that the restraining order was akin to a Mareva injunction in its effect, contrary to the view of Mathews J.[45]
[45]Ollis v Rayner, above n40, at [15], considering Sood v Crown Diagnostic Imaging Pty Ltd, above n 40, at [13].
So in Ollis, Bennett J concluded:
[16] I agree, with respect, with the considered view of Gyles J. It is not inconsistent with the reasoning of Mathews J in that her Honour acknowledged that the restraining order may not operate as a stay if, in a practical and business sense, the debtor could pay the debt. Taking action by making an application to vary a restraining order may be no more impractical, in a business sense, than realising an asset or withdrawing monies to pay a judgment debt.
This case
We begin with the definition of “act of bankruptcy” in s 17 of the IA, which we have set out at [20], above. The definition relevantly requires a final judgment or order against the debtor for any amount, and that the “execution of the judgment or order has not been halted by a court”. On their face, these words do not lend themselves easily to the idea that the first court order (against a debtor) can be indirectly (and impliedly) stayed by another court order (against the debtor as respondent) in an unrelated proceeding, about which the judgment creditor is likely to be unaware.[46] That interpretation also accords with common sense; as noted by Sackville J in Boscolo, the uncertainty created for creditors by the possibility that a halt on the execution upon the relevant judgment can arise by implication, is inherently unattractive.
[46]Section 41(3)(b), the relevant provision in the Bankruptcy Act 1966 (Cth) at play in the Australian cases, is at least arguably wider in that it does not refer directly to the execution of the judgment being “halted by a court” but, rather, that a bankruptcy notice shall not be issued “if, at the time of the application for the issue of the bankruptcy notice, execution of a judgment or order to which it relates has been stayed” (emphasis added).
We also agree with the approach taken in the more recent Australian authorities (Sood and Ollis) that — regardless of whether an implied stay might arise in circumstances where a debtor is practically prevented by some other court order from meeting a judgment debt — it does not arise in a case like this. As the Judges noted in those cases, the CPRA-equivalent legislation itself provides the appropriate pathway to be followed. A judgment debtor whose assets are proposed to be, or have been, restrained to an extent where the debtor contends they are unable to meet a judgment debt can and should apply to the court under s 28 and/or s 33 for a condition or further order permitting payment of the debt to be made. Mr Fuati has, in fact, already availed himself of that pathway when he has sought the release of restrained funds to meet his living expenses.
We acknowledge of course that an application for such a condition or further order may be opposed by the Commissioner and may be declined by the court. For example, the Commissioner might argue that where there are reasonable grounds to believe that the restrained property is tainted, and the restraining order (like any assets forfeiture order that may follow) operates in rem and should not be interfered with to satisfy some personal liability of Mr Fuati.[47] Alternatively, the Commissioner may have evidence (as it seems from the material before us that he does in this case) that Mr Fuati has other (unrestrained) assets available to him from which he can meet the judgment debt.
[47]We deliberately refrain from commenting on the merits of such an argument here.
But in the event that such arguments were successfully advanced, it could not then be said that the court’s refusal to vary a restraining order would operate as an implied stay upon the execution of the judgment debt which gave rise to the variation application. In that event, an express stay could, perhaps, be sought, although it is difficult to see the basis on which one might be granted.
If neither a relevant variation nor an express stay was granted and payment of the judgment debt was not forthcoming, it seems to us there could be no question that the debtor would have committed an act of bankruptcy and adjudication would ordinarily follow. The restrained funds would remain in the possession and control of the Official Assignee and would eventually be disposed of in accordance with any final forfeiture orders made under the CPRA.
Importantly, none of the above involves the CPRA taking precedence over the IA, or vice versa. It is simply a matter of applying both statutes sensibly, on their terms in a way that enables them to operate together. Thus, our preferred interpretation of the definition of “act of bankruptcy” in the IA — which would not permit a restraining order under the CPRA to give rise to an implied stay upon execution of a judgment debt — is fortified by our view that a proper application of the CPRA renders the interpretation for which Mr Fuati contends unnecessary. It follows that this aspect of his appeal must fail.
An arguable cross-claim?
This aspect of Mr Fuati’s appeal is predicated on his contention that he intends to “recommence” his previously discontinued claim against Mr Jin and a Ms Peng. He says he believes he has new grounds for his claim following disclosure made by police in January 2022 in the context of the current criminal proceedings against him.
There was no real dispute as to the applicable principles. Where a judgment debtor seeks to set aside a bankruptcy notice based on a cross-claim, they are required to demonstrate that they have a “genuine triable demand”; the debtor must show a prima facie case, with “a fair chance of success”.[48]
[48]Clark v UDC Finance Ltd [1985] 2 NZLR 636 (HC) at 637.
In Robertson v ASB, this Court noted that when determining whether there is a genuine triable claim, the Court is unable to, and cannot be expected to resolve disputed questions of fact. Equally, however, the Court need not accept uncritically evidence that is inherently lacking in credibility.[49] It is also well established that it is not enough that the claim is genuinely triable; the debtor must also “genuinely [propose] to pursue” the cross-claim.[50] In other words, the Court should not set aside a bankruptcy notice if there is no genuine intention to pursue the cross-claim, even if the claim itself might be triable.
[49]Robertson v ASB Bank Ltd [2014] NZCA 597 at [32].
[50]Sharma v ANZ Banking Group (New Zealand) Ltd (1992) 6 PRNZ 386 (CA) at 389.
The parties made detailed, evidence-based, submissions both for and against the “triability” of Mr Fuati’s proposed new claim and about his bona fides in saying he would pursue it. We agree with Associate Judge Taylor that the ‘fresh’ evidence claimed to be available by Mr Fuati does not improve his case against Ms Peng or Mr Jin to the level of an arguable claim. Despite a large part of Mr Fuati’s argument for recommencement of his cross-claim turning on the recent availability of an important witness (Mr Wang) and his presence in in New Zealand, there is no evidence before the Court that suggests he has made any attempt to arrange for Mr Wang to give evidence.
Ultimately, we agree with Mr Zhang that the proposed reactivated claim faces a more fundamental difficulty. Rule 15.24 provides that a plaintiff who discontinues a proceeding (proceeding A) against a defendant may not commence another proceeding (proceeding B) against the defendant if proceeding B arises out of facts that are the same or substantially the same as those relating to proceeding A, unless the plaintiff has paid any costs ordered to be paid to the defendant under r 15.23 relating to proceeding A.[51] Self-evidently, Mr Fuati has not paid the costs of the discontinuance; it is his failure to comply with the order that he do so that gave rise to his adjudication.
Result
[51]High Court Rules 2016.
It follows from our analysis above that:
(a)the restraining orders give rise to no implied stay here; and
(b)Mr Fuati does not have an arguable cross-claim.
Mr Fuati’s adjudication must therefore be confirmed. The appeal is dismissed.
Solicitors:
Nigel L Faigan, Auckland for Appellant
Advent Ark Lawyers, Auckland for First Respondent
Crown Solicitor, Auckland for Intervener
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