Gold Band Finance v Henderson HC Christchurch CIV 2010 409 559

[2010] NZHC 1738

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV 2010 409 000559

IN THE MATTER OF     the Insolvency Act 2006

ANDIN THE MATTER OF  the bankruptcy of DAVID IAN HENDERSON

BETWEEN  GOLD BAND FINANCE Creditor

ANDDAVID IAN HENDERSON Debtor

Hearing:         3 September 2010

Appearances: G K Riach and K Hill-Dunn for Creditor and Havenleigh Global

Services Ltd, a creditor in support
J W A Johnson and C Webber  for F M Custodians Limited

Judgment:      27 September 2010

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

as to substitution of creditor

[1]      In the Companies List at Christchurch on 23 August 2010 the Court made an order joining FM Custodians Limited as a second creditor in this proceeding.

[2]      Shortly afterwards,  I noted  the lack  of jurisdiction  to  add  a  creditor  (as against substitute a creditor) by reason of the wording of s 44 Insolvency Act 2006, a jurisdictional  point  which  I  had  previously  dealt  with:  see  Havenleigh  Global Services Ltd v Henderson HC Christchurch CIV 2009-409-2757, 18 June 2010.  The consequence of the jurisdictional restriction is that a second creditor, if it wishes to be substituted in an existing proceeding, must do so at a hearing at which the initial

creditor either offers no evidence or does not proceed with due diligence.

GOLD BAND FINANCE V DAVID IAN HENDERSON HC CHCH CIV 2010 409 000559 27 September 2010

[3]      At the hearing on 23 August 2010, I adjourned the proceeding to 4 October

2010 on the basis that that length of adjournment was what was requested by the existing creditor and the supporting creditor, Havenleigh, in order to progress discussions   towards   settlement,   and   that   length   of   adjournment   suited   FM Custodians   Limited   which   needed   to   complete   the   document   and   service requirements following its addition as a creditor.

[4]      It is clear from Mr Johnson’s submissions that FM Custodians Limited would have instructed him to make submissions in favour of either immediate substitution or a shorter adjournment had I not made the order adding FM Custodians Limited.

[5]      Having detected the jurisdictional issue, I offered counsel the opportunity to make further submissions in relation to jurisdiction and associated matters.

The jurisdiction to substitute a creditor

[6]      Section 44 of the Act provides

44  Substitution of creditor

(1)      The  Court  may  substitute  another  creditor  (Creditor  2)  for  the creditor making the application for adjudication (Creditor 1), if—

(a)Creditor 1 has not proceeded with due diligence or at the hearing of the application offers no evidence; and

(b)      the debtor owes Creditor 2 $1,000 or more.

(2)In   that   case,   Creditor   2   must   file   another   application   for adjudication, but can rely on the act of bankruptcy to which Creditor

1's application related.

Submissions

[7]      Mr Johnson for FM Custodians Limited accepted that the Court has no jurisdiction to add a creditor.  The nub of his submission was that FM Custodians Limited should be immediately substituted as creditor because Gold Band Finance Limited has not proceeded with due diligence on its application and has not offered evidence in support of its application.

[8]      He submits that the following factors are in favour of the Court’s discretion, namely:

a.   Any creditor on an application such as this appears for all creditors of the debtor and not just in its own interests.

b.It would be contrary to the policy of the Act for the alleged prejudice a creditor might suffer to be considered in the exercise of that discretion in the overall interests of creditors.

c.   An existing application by Mr Henderson to set aside a bankruptcy notice issued FM Custodians Limited is irrelevant – it is a separate matter and the existence of that notice, or of a judgment, are not prerequisites for substitution.

[9]      Mr Riach for Gold Band Finance Limited submitted that this was not a case in which the Court should exercise substitute.   He submitted, in terms of the jurisdiction under the two limbs of s 44 of the Act that this was not a case in which the creditor had failed to offer evidence at the hearing or had failed to proceed with due diligence.

[10]     He submitted that any public interest in the proceeding while relevant is not decisive.  He noted that two creditors (the applicant and Havenleigh Global Services Limited) pursued, or supported, the adjournment.   He noted that FM Custodians Limited  was  the  only creditor  to  appear  in  the  proceeding and  take  a  different position.

[11]     Mr Riach further submitted that with Mr Henderson having applied to set aside a bankruptcy notice issued by FM Custodians Limited, there are practical and possibly financial consequences if FM Custodians Limited is subsequently found not to have the status of creditor.   He noted that if at that point Gold Band Finance Limited has been removed as applicant it will then be required to substitute in again, with further cost and delay.  Mr Riach submitted that these considerations support

the concept of Gold Band Finance remaining the applicant in this proceeding as long as it wishes while issues affecting Gold Band Finance Limited’s status are resolved.

Did the call in Companies List constitute a hearing?

[12]     In Havenleigh Global Services Ltd v Henderson at [13] I said this in relation to s 44 of the Act:

[13]      Section 44 of the Act provides two situations where creditor 2 (being owed  $1000  or  more)  may  be  substituted  for  creditor  1,  namely  where creditor 1 has not proceeded with due diligence, or at the hearing of the application offers no evidence.  One of those grounds is required to be met before substitution can be ordered under s 44: see Re Bruns ex parte Trust Bank Central Ltd (1992) 6 PRNZ 382, decided in relation to s 26(9) of the

1967 Act.  The two pre-conditions to substitution, however, should not be given an unnecessarily restricted meaning.  They clearly cover the common

situation in the insolvency list when creditor one does not want to proceed

on the day of the hearing because creditor one and the debtor have entered into either settlement discussions or have in mind a specific settlement arrangement, with the consequence that an adjournment is sought.  Creditor one itself does not wish to withdraw its application but (often at the request of the debtor) is content to have an adjournment of some weeks to allow the debtor to make his or her arrangements.

[13]     Mr Johnson adopted that approach to s 44 of the Act as the correct approach. With particular regard to whether an applicant offers no evidence at the hearing of the application, he submitted that the day of hearing in the Companies List is indeed a “hearing” as it is referred to in s 44(1)(a) of the Act.

[14]     This  approach  accords  with  the  way  in  which  a  creditor’s  application proceeds.   When the creditor files its application, the Registrar must fix a hearing date for the application and insert that date in the summons to the debtor: r 24.14

High Court Rules.  The Court may subsequently order for any good reason that the application be heard on any date the Court considers expedient: r 24.15.  The debtor must file his opposition documents by 1pm on the last working day before the hearing of the application: r 24.18.   Through the summons to debtor, Schedule 1, Form B5 High Court Rules, the debtor is advised that if he/she has not paid the required amounts by the hearing date, the applicant is entitled to ask the Court to adjudicate the debtor bankrupt.  The debtor is further advised by the summons that

he/she is not required to attend the hearing but if he/she does not attend the hearing the Court will proceed in his/her absence.

[15]     The Insolvency Act and Part 24 of the High Court Rules work together. Their provisions as to what may happen on the hearing date are to be read together.

[16]     Inescapably, the “hearing” referred to in s 44 is the hearing date allocated by the Registrar or such altered or adjourned hearing date as is thereafter directed.

[17]     The conclusion flows from the regime of the legislation.  Equally, it accords with  the  practice  of  the  High  Court  in  its  Companies  List  where  orders  for substitution are routinely made both at the initially allocated hearing and at subsequent hearings.

[18]     Contrary to Mr Riach’s submission, the Court does have jurisdiction at any hearing, whether that initially allocated or a later hearing which may have been allocated on the basis the application is to be defended.

When is there a failure to proceed with due diligence?

[19]     Whether a creditor is proceeding with due diligence is fact dependent.  The concept of “due diligence” in s 44 of the Act is not one which the Court needs to define.

[20]     It is possible, nevertheless, to identify with some greater precision the degree of diligence which is “due” under s 44 of the Act.   That can be done from a consideration of the legislation more generally.  I adopt what I said in Havenleigh Global Services Ltd v Henderson at [12]:

[12]      The Insolvency Act provides a regime whereby creditors may obtain an order adjudicating a debtor bankrupt.  There is intended to be a degree of immediacy to the process, as is indicated by the fact that a creditor’s application must be filed within three months after the alleged act of bankruptcy.  Once an application is before the Court, it is very much within the  control  of  the  Court,  the  creditor  requiring  under  s 15  of  the  Act permission to withdraw any application.  The rationale for such provisions is that bankruptcy proceedings are brought for the general body of creditors and not for the particular application creditor: see Brookers Insolvency Law

and Practice, loose leaf, Vol 1 IN15.01.  These underlying considerations do not themselves determine the extent to which and way in which further creditors may become parties to an existing proceeding – for that it is necessary to focus on s 44 itself.

[21]     The case of Re J (a debtor) [1967] NZLR 763 illustrates a substitution of creditors where the petitioning creditor had failed to proceed with due diligence. In that case, counsel for the petitioning creditor notified the Court at the hearing that the petitioning credit had accepted payment of the full amount of the debt owing to it and costs and she asked that the petition be dismissed. McGregor J (at p 764) noted that the petitioning creditor could elect whether to accept payment of his debt or to proceed with the petition, and that the petitioning creditor had elected to accept payment and not to proceed with the petition. Understandably his Honour concluded that the petitioning creditor had failed to proceed with due diligence.

[22]     In Ronaldson v Dominion Freeholds Ltd [1981] 2 NZLR 132, at 138, the Court of Appeal dealt with an appeal from an order of substitution made in the High Court. Sinclair J at first instance had substituted a creditor upon the basis that the petitioning creditor in accepting payment from a debtor of the amount owing had not proceeded with its petition with “due diligence” and had offered no evidence. In the Court of Appeal counsel for the appellant submitted that the respondent had not shown that the petitioning creditor had failed to proceed with due diligence on the petition. The Court of Appeal noted that Sinclair J had held, in any event, that the petitioning creditor had offered no evidence. The Court of Appeal upheld the decision on that basis. McMullin J (for the Court) at [138] noted that it was therefore unnecessary to examine whether the petitioning creditor, in accepting payment of its debt, could be said not to have proceeded with due diligence.

[23]     Mr Riach for the applicant submitted that the concept of “not proceeding with due diligence” connotes a pejorative failure on the part of the creditor such as a persistent   failure   to   have   formalities   completed   or   be   seeking   numerous adjournments.  If by “pejorative” Mr Riach was intending to suggest that the Court’s assessment has to constitute something in the nature of a disparaging comment on the applicant’s behaviour, that is to state the matter too narrowly and emotionally.

The test is a quintessentially objective test, which has regard to the specific facts of the case against the background of the insolvency legislation.

Application of s 44 to this case

[24]     There is no rule implied by s 44 of the Act that qualifies conduct as a lack of due diligence or an offering of no evidence simply because there is one or more adjournment.  Equally, there is no rule that a failure to proceed on the first hearing date cannot fall into either category.

[25]     Mr Riach noted the practice in the Companies List at least in Christchurch whereby the Court frequently at the first call of an adjudication application countenances a single longer adjournment rather than one or more shorter adjournments, while the debtor seeks resolution either with the applicant creditor or with his/her creditors generally.  Mr Riach was implicitly urging the Court to accept an analysis whereby there is a rule that a request for an adjournment at the outset cannot amount to conduct within one of the two categories of s 44 of the Act. Mr Riach’s argument is not valid.   The frequent practice of the Court does not constitute a rule of law.  Any practice, though frequently followed, must give way to the appropriate application of the law where the facts of a particular case warrant departure.

[26]     In the event, in this case, where at the first hearing the applicant and another creditor sought an adjournment for the purposes of exploring a resolution of the debtor’s indebtedness to them, I might have found that one or other of the limbs of s

44 of the Act was made out.  That would still have left the Court with a discretion as to whether to substitute.   Given that it was the first hearing, I might well have exercised my discretion, for one adjournment, not to have excluded Gold Band Finance from the proceeding by substituting either Havenleigh Global Services or FM Custodians, or both.

[27]     On the other hand, with a further creditor standing by to step in, the Court might well find at the second call of this proceeding that a failure to proceed on that

date will constitute one or other of the limbs of s 44 of the Act.  That will be for submission on the day if necessary.

Disposition

[28]     It is appropriate that the hearing of this proceeding which was previously adjourned to 4 October 2010 remains for that date.  It is unnecessary to speculate as to what the position will be as between Gold Band Finance Limited and Havenleigh Global Service Limited on the one hand and the debtor on the other at that date.  A resolution in that regard may well be decisive on the issue of substitution.  On the other hand, the present applicant may seek a further adjournment on that date.   In either event, FM Custodians Limited will have its right to make application for

substitution on the day.

Solicitors:

Harmans Lawyers, Christchurch
Wynn Williams & Co., Christchurch