Goldstone v Goldstone
[2019] NZHC 1649
•16 July 2019
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
I TE KŌTI MATUA O AOTEAROA TAURANGA MOANA ROHE
CIV-2018-470-152
[2019] NZHC 1649
UNDER the Insolvency Act 2006 IN THE MATTER
of an application for vesting orders
BETWEEN
ANDREA JEANETTE MARY GOLDSTONE
Applicant
AND
REECE CLIVE GOLDSTONE
Respondent
AND IN THE MATTER of an application under s 119(2) Insolvency Act 2006 to vest property BETWEEN
REECE CLIVE GOLDSTONE
Applicant
AND
THE MINISTER OF FINANCE ON BEHALF OF THE CROWN
Respondent
AND
ANDREA JEANETTE MARY GOLDSTONE
Second Respondent
Hearing: 5 March 2019 (heard at Tauranga) Appearances:
T Bartlett for A J M Goldstone M King for R C Goldstone
Judgment:
16 July 2019
JUDGMENT OF TOOGOOD J
This judgment was delivered by me on 16 July 2019 at 5.00 pm Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
GOLDSTONE v GOLDSTONE [2019] NZHC 1649 [16 July 2019]
TABLE OF CONTENTS
Introduction [1]
The facts [6]
The applications [14]
The legislative scheme [17]
A survey of cases under s 119 [22]
Re Shallish [23]
Re Marlow [24]
Re Hubball [25]
Re Julius [26]
Panther v Panther [27]
The Fish Man [30]
The relevant circumstances in an application under s 119 [41]
What does s119(3) permit the Court to do in this case? [43]
Filling gaps in the legislation – implied powers [45]
The central issue [48]
The proceedings under the Property (Relationships) Act 1976 [49]
What the Court must decide in this case [54]
What is the effect of the bankruptcy and the Assignee's disclaimer on the
status of the property as relationship property under the PRA? [56] What, if any, jurisdiction would the Family Court have to make orders in respect of the property under the PRA if it is vested in Reece, or in Reece
and Andrea jointly. [62]
What is the fairest outcome for the competing applications for vesting orders under the Insolvency Act? [66]
Factors relevant to the fairness assessment [67]
Matters not relevant to the fairness assessment [69]
The factors to be weighed in the fairness assessment [72]
Conclusion and orders [82]
Costs [84]
Introduction
[1] When a person is adjudicated bankrupt, all property belonging to or vested in them is vested in the Official Assignee and any rights in the property belonging to the bankrupt are extinguished.1 The property of a bankrupt that is unsaleable, or not readily saleable, or that may give rise to a liability to pay money or perform an onerous act may be determined by the Assignee to be “onerous property”.2
[2] The Assignee may disclaim onerous property,3 and within 10 days, give notice to every person whose rights are, to the Assignee's knowledge, affected by it.4 A disclaimer brings to an end, on and from the date of the disclaimer, the rights, interests, and liabilities of the Assignee and the bankrupt in relation to the property disclaimed,5 but it does not affect the rights, interests, or liabilities of any other person, except in so far as is necessary to release the Assignee or the bankrupt from a liability.6 Thus, although the debt owed by a bankrupt to a mortgagee of the disclaimed property is extinguished, the right of the mortgagee under the mortgage agreement to exercise the power of sale subsists. There is nothing in the Insolvency Act to prevent disclaimer of mortgaged land and nothing in the Act, or the Land Transfer Act 1952, that provides for what happens to the title of disclaimed land.7
[3] The effect of a disclaimer is that ownership of and all rights in the onerous property is vested in the Crown as bona vacantia,8 but the bankrupt remains the registered proprietor and holds title as trustee for the Crown’s benefit until the Crown takes steps to vest the property in another party.9
1 Insolvency Act 2006, s 101(1).
2 Section 117(4)(a)(ii).
3 Section 117(1).
4 Section 117(3).
5 Section 118(a).
6 Section 118(b).
7 Fish Man Ltd (in liq) v Hadfield [2017] NZCA 589, [2018] 2 NZLR 428 at [33].
8 Fish Man Ltd (in liq) v Hadfield (CA) at [34], approving Rural Banking and Finance Corporation of New Zealand Ltd v Official Assignee [1991] 2 NZLR 351 (HC) at 360.
9 Fish Man Ltd (in liq) v Hadfield (CA) at [35].
[4] The bankrupt or a person alleging loss or damage as a result of disclaimer may apply to the High Court under s 119 of the Insolvency Act 2006 (the Act) for an order that the disclaimed property be vested in him or her. That section reads:
119 Position of person who suffers loss as result of disclaimer
(1)A person suffering loss or damage as a result of disclaimer by the Assignee may—
(a)claim as a creditor in the bankruptcy for the amount of the loss or damage, taking account of the effect of an order made by the court under paragraph (b):
(b)apply to the court for an order that the disclaimed property be delivered to, or vested in, that person.
(2)The bankrupt may also apply for an order that the disclaimed property be delivered to, or vested in, the bankrupt.
(3)The court may make an order under subsection (1)(b) or (2) if it is satisfied that it is fair that the property should be delivered to, or vested in, the applicant.
[5] This case concerns competing applications under s 119(2) of the Act for vesting orders in relation to a property that was the former family home of the applicants, both of whom are former bankrupts who were married but are now divorced.
The facts
[6] Evidence has been given by affidavit and a common bundle of documents. There has been no cross-examination of the deponents. In general, there is no material disagreement between the parties about the facts.
[7] After around two years of living together in a de facto relationship, Andrea Jeanette Mary Goldstone (Andrea) and Reece Clive Goldstone (Reece) married on 2 November 2002. On 24 October 2003, they purchased a property at 619 Mountain Road, Oropi, Tauranga (the Mountain Road property), which they proposed to develop as a lifestyle block. At most relevant times, there were two dwellings on the property: a cottage and what was intended to be a new home, to be built by Reece who was a builder by trade.
[8] Andrea and Reece had three sons: Sabastian, born on 1 June 2007; Zak, born 10 February 2009; and Lorenzo, born 13 June 2011. They all lived in the cottage. It is common ground that the Mountain Road property was the family home and that it was relationship property under the Property (Relationships) Act 1976 (the PRA).10
[9] Reece operated his building business as a sole trader under the name “R & A Construction”. Andrea and he also had a small, hobby partnership (Goldstone Holdings Partnership) that raised dry stock on the lifestyle block and Reece also ran a small piggery. Between November 2006 and November 2007, Reece took time off work to build the new house. Andrea was the sole income earner from her employment as a lecturer until Sabastian was born in June 2007. The couple got into financial difficulties, particularly over tax, and on 10 November 2014 both Andrea and Reece were adjudicated bankrupt on the application of the Inland Revenue Department. They had borrowed heavily using the Mountain Road property as security. The Official Assignee obtained a valuation of the property showing its value at 4 December 2014 as being between $350,000 and $400,000. At that date, Andrea and Reece owed
$442,707.17 to the mortgagee, Credit Union North.
[10] The Official Assignee decided that the Mountain Road property was "onerous property" in terms of s 117(4)(a)(ii) of the Act because of the excess of the amount secured under the mortgage over the property's value. The Assignee disclaimed the Mountain Road property under s 117(1) of the Act on 24 December 2014 and gave notice under s 117(3) accordingly. Although ownership of, and all rights in, the property vested in the Crown as a consequence of the disclaimer, Credit Union North retained its rights and powers as mortgagee under the registered mortgage, including the power of sale in the event of a default by the mortgagors.
[11] Andrea and Reece separated on 7 April 2015 and their marriage was dissolved on 21 October 2017. Andrea and the children moved out of the Mountain Road property at the time of the separation, but Reece remained living there, for a few months at least. Reece estimates that the construction of the new house on the property was about 70 per cent completed at the date of separation. A valuer has made a
10 Section 8(1)(a).
retrospective assessment of the uncompleted value of the Mountain Road property, at the date of separation, of $425,000. The amount secured by the mortgage at that date was $439,333.
[12] Andrea and Reece were discharged from bankruptcy on 23 December 2017 and 24 December 2017 respectively. Credit Union North maintained its security over the Mountain Road property.
[13] The loan account statement shows regular fortnightly payments of $1,330.00 being made from what Reece says was Andrea’s and his joint bank account, to cover the deductions of interest. The evidence shows those payments having been made from the date of the adjudications, but I assume they had been made at that rate for some time prior to that. Reece says he has provided all of the funds to cover the mortgage payments which continued at the same rate up to the date of hearing at least. From the date of separation, Reece has met all outgoings on the Mountain Road property, including continuing to make the payments under the mortgage agreement and paying rates and insurance premiums. I infer that the making of the regular loan payments, rates and insurance premiums has satisfied Credit Union North sufficiently, notwithstanding the bankruptcies, to prevent or dissuade it from exercising its power of sale.
The applications
[14] Andrea's application under s 119(2) was filed first, on 10 October 2018. In it, she seeks an order vesting the Mountain Road property in Reece and herself jointly, “preferably as tenants in common in equal shares”.
[15] On 28 November 2018, Reece filed his application seeking an order that the property be vested in him solely. On 25 January 2019, after the two proceedings had been consolidated, he filed a notice of opposition to Andrea's application, asserting that it was not fair that the Mountain Road property should be vested in Andrea and him jointly, either as tenants in common in equal shares or otherwise.
[16] The Crown does not seek to be heard on either application and has given notice that it will abide the Court’s decision.
The legislative scheme
[17] Section 119(3) provides little guidance to the High Court about the grounds on which it may make an order vesting disclaimed property on the application of a bankrupt or a person alleging loss or damage. It says simply that the Court may make an order if it is satisfied that it is fair that the property should be delivered to, or vested in, the applicant.
[18] The Court's discretion under s 119(3) was described by Moore J in Robinson v IAG New Zealand Limited11 as "broad and largely unfettered". I agree that all of the surrounding circumstances should be taken into account so far as they bear on what the Court may consider just, but the Court's decision must reflect the context in which the application is made.
[19]Section 119(3) must be interpreted bearing in mind that, under the Act:12
Property means property of every kind, whether tangible or intangible, real or personal, corporeal or incorporeal, and includes rights, interests, and claims of every kind in relation to property however they arise.
[20] Moreover, it is significant that the right to apply for delivery or vesting of disclaimed property is not confined to the bankrupt. Any person suffering loss or damage as a result of disclaimer by the Assignee may apply to the Court for an order that the disclaimed property be delivered to, or vested in, that person.13
[21] The principles for the exercise of the Court's discretion under s 119(3), therefore, should be the same whether the application is made by a bankrupt or a person claiming to have suffered loss or damage as a result of the disclaimer. The circumstances that are relevant to the exercise of the discretion, however, are likely to vary depending on the capacity of the person bringing the application.
11 Robinson v IAG New Zealand Limited [2016] NZHC 3149 at [50].
12 Section 3.
13 Section 119(1)(a) and (b).
A survey of cases under s 119
[22] Although counsel referred to a number of decisions of this Court and the Court of Appeal relating to applications under s 119, no case has been cited in which there have been competing applications by bankrupts who were formerly joint owners of the subject property. Section 119(3) does not expressly address such a circumstance.
Re Shallish
[23] In Re Shallish, Mr Shallish and Ms Malone, a de facto couple, purchased and jointly owned property.14 After their separation Ms Malone was adjudicated bankrupt. Mr Shallish then took responsibility for and occupied the property, meeting its outgoings such as mortgage payments and rates. The Official Assignee gave notice disclaiming its interest in Ms Malone’s interest in the property. Mr Shallish continued to meet the property’s outgoings after the disclaimer. He entered into a relationship property agreement with Ms Malone that recognised the steps he had taken in respect of the property and acknowledging that the property became his sole and separate property. But Ms Malone did not execute a transfer of her interest in the property. Mr Shallish, therefore, sought an order under s 119 vesting Ms Malone’s share of the property in him. Fisher J granted the application, noting that the effect of the disclaimer had been to saddle Mr Shallish with the entirety of the property’s obligations, which then outweighed his corresponding equity.15 The Judge also noted that it was “significant” that Ms Malone effectively consented to the order through the relationship property agreement.16
Re Marlow
[24] Re Marlow17concerned Mr and Mrs Marlow’s joint ownership of a property in Waipawa that was secured by a mortgage. Mr Marlow was adjudicated bankrupt. Given the negative equity in the property resulting from the mortgage, the Official Assignee disclaimed Mr Marlow’s interest in the property. The Marlows then applied for that interest to be vested in Mrs Marlow so that it could be sold to a third party (the
14 Re Shallish HC Invercargill CIV-2010-425-439, 16 September 2010.
15 At [14].
16 At [16].
17 Re Marlow [2012] NZHC 1486, (2012) 13 NZCPR 639.
mortgagee consented to this sale, notwithstanding that it would suffer a shortfall, by providing a release of its mortgage). Associate Judge Gendall allowed the s 119 application, noting that Mrs Marlow could suffer damage through the disclaimer if her husband’s interest in the property were not vested in her because “it might in some way upset the previously negotiated and agreed sale of the property to the third party”.18 It was also noted that all parties, including the mortgagee, consented to the vesting and subsequent sale of the property.
Re Hubball
[25] In Re Hubball, the applicants were adjudicated bankrupt and the Official Assignee subsequently disclaimed their property.19 The property had been subject to two mortgages but both mortgagees indicated that they would not have recourse to their power of sale. A significant period of time had elapsed since the Official Assignee’s disclaimer without any of the applicants’ former creditors applying for the property to be vested in them. Further, both applicants had been discharged from bankruptcy and there was no suggestion of any ongoing claim against them. Whata J made an order vesting the property in the applicants.
Re Julius
[26] Re Julius involved a married couple, Mr Rongo-Raea and Ms Julius.20 They bought a property together, mortgaged it and later separated. Mr Rongo-Raea was then adjudicated bankrupt and the Official Assignee disclaimed his interest in the property. Ms Julius continued to pay all of the outgoings in respect of the property. She wished to take out a further mortgage as the sole owner of the property so applied for an order under s 119 vesting Mr Rongo-Raea’s share in her. Following Re Shallish, Associate Judge Smith was satisfied that the removal of Mr Rongo-Raea's obligations as a result of the disclaimer constituted loss to Ms Julius and that it was fair to vest the property in her.
18 At [13].
19 Re Hubball [2014] NZHC 2637.
20 Re Julius [2016] NZHC 588.
Panther v Panther
[27] The next case is Panther v Panther.21 Mr and Mrs Panther married, purchased two properties and subsequently separated. While relationship property negotiations were underway, Ms Panther adjudged herself bankrupt. The Official Assignee disclaimed Ms Panther’s half-share in each property. Mr Panther applied to have his former-wife’s half-shares vested in him to regularise the titles and enable the properties to be sold. Heath J granted the application for the following reasons:
(a)A significant amount was owing to the mortgagee (which had provided a mortgage over both properties) to the point that there was negative equity in each property and Mr Panther was servicing the mortgages.
(b)One of the properties had weathertight problems and was unsaleable without significant remedial work (which would be paid for by Mr Panther).
(c)Mr Panther had entered into a sale and purchase agreement for the other property but was unable to complete the sale due to the state of the title.
[28] The Judge also noted there was no opposition from the Crown or the mortgagee. He made the order accordingly. There was also the prospect of relationship property proceedings arising between the parties, but none had yet been commenced. As will be seen, relationship property proceedings assume some relevance in the current case. Heath J dealt with the relationship property aspect in this way:
[10] When considering the application on a without notice basis on 6 April 2016, I decided that it should be served on Ms Panther because there might be questions relating to relationship property that could have affected the exercise of the discretion to grant relief in favour of her husband. Ms Panther was served with the proceedings on 7 April 2016. An affidavit of service has been filed. No steps have been taken…
…
[14] In those circumstances, I am satisfied that an order should be made. While Ms Panther has not taken steps in the current proceeding, her
21 Panther v Panther [2016] NZHC 809.
relationship property rights remain unaffected. Some adjustment could be sought in the course of any such proceedings, should that be necessary to accommodate the order that I have made and any consequences that flow from that.
[15] The purpose of having Ms Panther served was to ensure that there were no specific issues that could be avoided. As she has elected to take no steps, I am prepared to act on the basis that any prejudice to her may be cured through the exercise of the Family Court’s ability to adjust.
[29] As I will explain, I regard Panther v Panther as being distinguishable from this case.
The Fish Man
[30] The judgment of Fogarty J in Fish Man Ltd (in liq) v Hadfield22and the subsequent decision on appeal23 are of particular interest. The Fish Man Limited was a corporate vehicle for Mr Hadfield’s business: selling ornamental fish. Unfortunately, the company suffered financial downturn and Mr Hadfield fell behind in meeting his PAYE and GST tax liabilities. The Fish Man was placed into liquidation. The liquidators then lodged a caveat over a property owned by Mr Hadfield. The caveat contended The Fish Man had a beneficial interest in the property arising from breach of fiduciary duties by Mr Hadfield to the company. Mr Hadfield’s wife also lodged a claim over the same property pursuant to s 42(2) of the PRA and caveated it. Mr Hadfield was then adjudicated bankrupt. When he fell behind in tax liabilities, he had continued to use revenue of the company to meet mortgage payments over the property.
[31] Following Mr Hadfield’s adjudication as bankrupt, the property vested in the Official Assignee. A little over five months later, the Official Assignee disclaimed the property. Following a property value boom over approximately three years, the property acquired a significant net value. The liquidators sought an order under s 119 vesting the property in The Fish Man (in liq) on the grounds that the company had spent $49,159 to satisfy Mr Hadfield’s mortgage repayments. In the alternative, it argued that it had a proprietary interest in the property by virtue of a constructive trust.
22 Fish Man Ltd (in liq) v Hadfield [2016] NZHC 1750, [2016] NZAR 1198.
23 Fish Man Ltd (in liq) v Hadfield [2017] NZCA 589, [2018] 2 NZLR 428.
[32] After Mr Hadfield was discharged from bankruptcy, he applied for an order under s 119 vesting the property in him. Mrs Hadfield then filed a counterclaim arguing that she was entitled to a half share in the equity of the property; throughout the relationship she had been paying half of the mortgage over the property. She also sought protection under s 20B of the PRA, which provides for a protected interest in the family home.
[33] Fogarty J held that Mr Hadfield had been released from his debt to The Fish Man by virtue of s 304(1) of the Insolvency Act, which provides that a bankrupt is released from all debts provable in the bankruptcy upon discharge. That meant that Mr Hadfield did not owe The Fish Man any money. The Judge then went on to consider the company’s proprietary claim in the property, which was said to stem from Mr Hadfield’s use of the company’s funds to meet his personal mortgage repayments at a time when The Fish Man was insolvent. However, the Judge held that, because the money had been used to repay a debt rather than acquire an asset, it could not be traced such as to provide The Fish Man with any sort of proprietary interest in the property. After a comprehensive summary of relevant case law, he said:
[92] I think that trying to turn mortgage payments into a proprietary interest in the equity of a home, at least on this set of facts, is pushing tracing out of its natural confined scope.
…
[94] In this case, it is a fact that Mr Hadfield did not use company money to acquire an asset. The overall purpose and effect of his actions was to use small sums of money belonging to the Fish Man to pay off a small part of debt he owed personally in relation a mortgage on his property. The overall effect of the payment was to prevent ANZ from exercising a power of sale under the mortgage. It cannot be said that Mr Hadfield acquired any property in making these payments. It follows that this is not a case where tracing is available.
[34] Fogarty J held that The Fish Man had no claim to the property under s 119. He then turned to consider whether to vest the property in Mr Hadfield or Mrs Hadfield. Noting the competing claims, one under s 119 and the other under the PRA, the Judge called for further submissions as to “how [the parties] would like the title to be reconstituted, jointly, or one of them or the other, and possibly as to separate
portions”.24 Failing any agreement, Fogarty J indicated that he favoured re-vesting the home in Mr and Mrs Hadfield in equal shares.
[35] The Fish Man appealed to the Court of Appeal. It contended that s 304(1) of the Act did not disentitle it from seeking relief under s 119 following Mr Hadfield’s discharge from bankruptcy. Irrespective of whether it had a proprietary interest in the property, the liquidators argued that the company had suffered “loss or damage” under s 119(1) of the Act as a result of the disclaimer by the Assignee. On appeal, Mrs Hadfield also sought an order that the property be vested in her under s 119.
[36] Before deciding in whom to vest the property, the Court of Appeal noted that the exercise of the s 119 power must be considered against the fact that, if orders were not made vesting the property in a party, it would be owned by the Crown. As to whether the Fish Man could make a claim, it said:
[39] We see no reason why a creditor cannot make a claim under s 119(1). However, loss in the sense of loss merely as an unpaid creditor is not enough; there must be a specific loss arising directly from the disclaimer. The loss must arise not only as a result of the existence of the underlying debt, but because of the disclaimer itself.
(Citations omitted)
[37] The Fish Man argued that this was not fatal to its application, because almost two years later, after an upsurge in property values and with the benefit of hindsight, the disclaimer caused loss. If the property had been retained it could then have been sold and a profit made for the benefit of creditors. This line of argument was rejected by the Court:
[43] A party either has or has not suffered loss or damage at the time of disclaimer and there is no principled basis on which to suggest that a further change in the party’s notional position at some later date should be treated as the loss or damage resulting from the disclaimer…
[44] … It cannot have been intended that a creditor be able to sit on their appeal rights whilst the property remains valueless, and then benefit from any subsequent increase in value through a vesting under s 119.
24 At [99].
[38] The Court held, therefore, that The Fish Man had suffered no loss or damage under s 119; the property could offer no value to it at the time of the disclaimer. It also agreed with Fogarty J that the company had no other proprietary interest in the property.
[39] The Court then addressed the competing claims of Mr Hadfield and Mrs Hadfield. It noted that the order sought by Mr Hadfield included an undertaking that he would pay a sum of money to The Fish Man if the property were vested in him, but that this amount was unspecified. On appeal, Mr Hadfield strongly opposed the order sought by The Fish Man but did not make any particular submissions on his behalf. Not surprisingly in these circumstances, the Court appeared to favour Mrs Hadfield’s claim over that of her husband:
[87] It is not in dispute that, after the disclaimer, Mrs Hadfield assumed responsibility for making the mortgage payments to avoid a foreclosure by ANZ. She has duly met those payments and as a consequence ANZ has not foreclosed and the mortgage is still in place with the Hadfields occupying the property.
…
[89] Mrs Hadfield has a claim under the PRA to half the relationship property, and this property would include the home in which she and Mr Hadfield have lived. However, this potential claim does not give rise to a proprietary interest in the land, and conventional property principles will apply to her claim.
[90] Given Mrs Hadfield’s claim to a protected interest on Mr Hadfield’s bankruptcy under s 20B of the PRA, we accept that she is a person who suffered loss or damage as a consequence of the disclaimer. The effect of the disclaimer was different for her, as distinct from other creditors. She had a right in respect of the Property. And as we have said, it is also the case that she has met the mortgage payments on the Property both before and after Mr Hadfield’s bankruptcy. It was her mortgage payments that stopped a mortgagee sale at a time when the Property had no value.
(Citations omitted)
[40] The Court of Appeal concluded that it was clear that Mrs Hadfield would be entitled to a vesting order for “at least a part interest” in the property.25 But it noted that it had not received submissions on her position in relation to the specific orders
25 At [91].
to be made. The matter was remitted back to the High Court to determine how the title was to be constituted between Mr and Mrs Hadfield.
The relevant circumstances in an application under s 119
[41] Perhaps unsurprisingly, the result of that survey of the cases is, I think, that relevant circumstances to be considered in the determination of an application for a vesting order under s 119(1) are those that relate to the disclaimed property, including without limitation:
(a)the applicant's former interest in it, if any;
(b)how and when such interest was acquired;
(c)if the applicant had no interest in the disclaimed property, what other relationship formerly existed between the applicant and the property;
(d)whether the applicant has maintained or increased the value of the property to be vested or prevented its transfer to a third party;
(e)the circumstances in which the disclaimed property became vested in the Assignee through bankruptcy;
(f)the rights and interests of third parties, if any, and, in particular, whether they consent to the vesting; and
(g)the consequences of any vesting for the applicant and any other persons.
[42] No third-party interests are involved in this case. As I have said, Credit Union North's interests as mortgagee are protected by its security over the Mountain Road property and they will subsist until the debt secured by the mortgage is repaid.
What does s119(3) permit the Court to do in this case?
[43] To reiterate, s 119(3) says that the Court may make an order on a bankrupt’s application under subs (2) if it is satisfied that it is fair that the disclaimed property
should be delivered to, or vested in, the applicant. Read strictly, that wording does not provide for the making of an order vesting the property in the applicant jointly with another person or entity. Moreover, the subsection does not expressly permit the Court to make any vesting order subject to terms or conditions on which the vesting shall take place, such as directing that the disclaimed property should be vested as a joint tenancy or a tenancy in common, or on trust.
[44] In the absence of any express statutory guidance on the exercise of a discretion under an enabling provision such as s 119(3), it is necessary for the Court to consider the legislative wording and the statutory purpose of the legislation.26 In the Northland Milk case, the Court of Appeal held that courts should endeavour to make an enactment work and give practical effect to the legislative intention by filling any gaps in a manner that is consistent with it.27
Filling gaps in the legislation – implied powers
[45] Having regard to the broad definition of “property” in the Act,28 I consider that Parliament must have contemplated that there would be cases in which a simple vesting order would not adequately accommodate the need for the Court to make a decision that is fair. The fairness of an order under the section, whether on a creditor's or a bankrupt's application, may be predicated in some cases on a vesting subject to certain terms or conditions.
[46] Approaching Andrea’s application for a joint vesting in that way, I hold that the Court has an implied power to make an order vesting the Mountain Road property in Reece and Andrea jointly, as either tenants in common in equal shares or otherwise, if it is fair to do so. Fogarty J indicated that he favoured a similar approach in Fish Man.29 There are tenable arguments in support of the submission that it would be fair for the Court to make that order. But Reece's application for an order vesting the property in him solely falls squarely within the terms of s 119(3) and there are tenable arguments that an order in his favour would also be fair.
26 Interpretation Act 1999, s 5(1).
27 Northern Milk Vendors Association Inc v Northland Milk Ltd [1988] 1 NZLR 537 (CA) at 537, affirmed in R v Salmond [1992] 3 NZLR 8 (CA) at 13.
28 Cited above at [19].
29 At [96]-[100].
[47] Parliament must be taken to have appreciated the possibility that there may be competing applications, relating to the same disclaimed property, by a creditor or others under s 119(1)(b) and by a bankrupt under s 119(2), or that more than one person may qualify in respect of any disclaimed property as a person having a right to make an application under s 119(1)(b). That was the situation faced by the Court of Appeal in Fish Man.30 Although the Court of Appeal held the liquidator could not bring an application under s 119, since it had not suffered loss, it went on to consider parallel applications by Mr and Mrs Hadfield. The Court did not reach a determinative conclusion as to in whom it would be fairest to vest the property, because Mrs Hadfield did not specify the orders she sought in terms of a potential partial claim to the property. But the judgment clearly shows the Court of Appeal countenancing an approach which considered competing claims under s 119 and the contemplation of vesting the property jointly in the parties who brought them, albeit that the tailoring of that joint vesting was not concluded. Giving effect to the legislative intention of providing for vesting orders in favour of qualifying persons, rather than leaving disclaimed property in the hands of the Crown, I hold that the Court has an implied power to resolve competing applications by deciding which of the different outcomes sought is the fairest in the circumstances.
The central issue
[48] Looking at these matters on that basis, the central issue to be determined in this proceeding is whether it is fairer for the Mountain Road property to be vested in Reece alone, or for it to be vested in Andrea and Reece jointly and, if so, on what terms. An obvious consideration is whether the Court has the power under Northland Milk principles to make a vesting order subject to conditions that address the responsibilities of the parties as owners. They include issues over occupation; the need to meet the outgoings, especially making such payments to Credit Union North as would prevent the lender from exercising its power of sale as mortgagee; and whether, when and on what terms the property should be sold. I address that problematic issue more fully below.
30 See above at [34]-[41].
The proceedings under the Property (Relationships) Act 1976
[49] Andrea and Reece are parties to proceedings under the PRA seeking orders for the division of relationship property. Andrea's view is that if the Mountain Road property is vested in Reece and her jointly in this proceeding, questions concerning the division of the property between them should be determined by the Family Court under the relationship property proceedings. She recognises that account should be taken of Reece’s financial contributions, which are said to exceed $130,000. Her argument is that, because the Mountain Road property was formerly the family home and was indisputably relationship property at the time Reece and she were adjudicated bankrupt, it is fair that the property should be vested in them jointly and the issue of ownership and proper recognition of Reece's financial contributions should be determined in the Family Court under the PRA.
[50] Reece disagrees and says that, because Andrea has made no financial contribution to the mortgage or the outgoings on the Mountain Road property since it was vested in the Crown, it would not be fair for any share in the property to be vested in her. He says it is only because he has been making the necessary payments that the property has not been sold by the mortgagee and remains available for vesting.
[51] Ms Bartlett’s argument on Andrea’s behalf is founded on the assumption that, if the Mountain Road property is vested in both Reece and Andrea by an order in this proceeding, it will become relationship property (as defined in s 8(1)(a) or (e) of the PRA) and that the Family Court will have jurisdiction under the PRA to consider the issues and make appropriate orders:
(a)determining the respective shares of the parties in the relationship property of the parties, including the Mountain Road property;
(b)dividing any relationship property or any part of that property between the parties;
(c)declaring the status and ownership of any property of either party not being relationship property;
(d)vesting specific items of relationship property in each of the parties absolutely or in such shares as the Court deems just;
(e)determining rights of occupation of the Mountain Road property;
(f)implementing the division between the parties;
(g)determining costs and disbursements; and
(h)making any other order that the Court deems just.
[52] Ms Bartlett argues that the proceedings currently before the Family Court under the PRA will provide a vehicle for the determination of the following issues:
(a)The entitlement of the parties to share equally in –
(i)the family home (that is, the Mountain Road property);
(ii)the family chattels;
(iii)any other relationship property.31
(b)Whether there are extraordinary circumstances that make equal sharing of property between Reece and Andrea repugnant to justice.32
(c)The contributions of the spouses to the marriage.33
(d)Whether the conduct of either party should be taken into account, although the conduct must have been gross and palpable and must have significantly affected the extent or value of the relationship property.34
31 Property (Relationships) Act 1976, s 11.
32 Section 13.
33 Section 18.
34 Section 18A.
(e)Whether there should be compensation for the contributions made after separation.35
(f)Whether there should be compensation for dissipation of relationship property after separation.36
(g)Recognition of the interests of any minor or dependent children of the marriage and, if it is considered just, making an order settling the relationship property or any of that property for the benefit of the children of the marriage.37
(h)The right to occupy the Mountain Road property.38
(i)Whether occupational rental is payable.39
(j)The value of the property.40
[53] On behalf of Reece, Mr King accepts that, if the Court vests the Mountain Road property in Andrea and Reece jointly, it would become relationship property under the PRA and says that would be unfair. He submits, however, that the Mountain Road property would become separate property (as defined in s 9(4)(a) of the PRA) if it is vested in Reece alone, but says that Andrea could ask the Family Court to consider under s 9(4)(a) whether it is just to treat the Mountain Road property as relationship property.
What the Court must decide in this case
[54]In the light of those submissions, and applying the approach I have set out at
[41] above, it is necessary for the Court in this proceeding:
35 Section 18B.
36 Section 18C.
37 Section 26.
38 Section 27.
39 Section 33.
40 Section 2G.
(a)To determine the effect of the bankruptcy and the Assignee's disclaimer on the status of the property as relationship property under the PRA.
(b)To consider what, if any, jurisdiction the Family Court might have to make orders in respect of the property under the PRA if it is vested in Reece, or in Reece and Andrea jointly.
(c)In the light of the answers to those questions, to determine the fairest outcome for the competing applications for vesting orders under the Insolvency Act.
(d)In assessing what is fair, to have regard to what financial contributions related to the property have been made by the parties.
[55] Deciding such residual issues as there may be between the parties under the PRA will be a matter for the Family Court, if it has jurisdiction to do so.
What is the effect of the bankruptcy and the Assignee's disclaimer on the status of the property as relationship property under the PRA?
[56] The parties accept that the property was undoubtedly relationship property under the PRA immediately before they were adjudicated bankrupt. Section 101(1) of the Insolvency Act, however, makes it clear that the Mountain Road property and any rights in respect of it vested in the Assignee automatically upon the adjudication, and any rights Andrea and Reece may have had in the property were extinguished. It reads:
101 Status of bankrupt’s property on adjudication
(1)On adjudication,—
(a)all property (whether in or outside New Zealand) belonging to the bankrupt or vested in the bankrupt vests in the Assignee without the Assignee having to intervene or take any other step in relation to the property, and any rights of the bankrupt in the property are extinguished; and
(b)the powers that the bankrupt could have exercised in, over, or in respect of any property (whether in or outside New Zealand) for the bankrupt’s own benefit vest in the Assignee.
[57] The vesting of the Mountain Road property in the Assignee and the extinguishment of Andrea’s and Reece’s rights in it must mean that the property ceased to be relationship property at the time of the adjudication on 10 November 2014. The property was further alienated from the parties by the disclaimer, the effect of which was to vest the property in the Crown.41 At the date of Andrea and Reece’s separation in April 2015, therefore, the property was no longer relationship property, notwithstanding that it had been the family home formerly and despite Andrea’s and Reece’s continuing duties, as registered proprietors under the Land Transfer Act, as trustees for the Crown.
[58] I acknowledge that the definition of “property” in the PRA includes “any estate or interest in any real property … any thing in action [and] any other right or interest”42 (emphasis added). Counsel suggested in argument that the right of a bankrupt to apply for a vesting order under s 119(2) might be a right that could be treated as relationship property. I am not persuaded that is an arguable proposition:
(a)The right to apply under s 119 is a personal right, conferred by statute. Since the exercise of the right depends on the applicant being a person suffering loss or damage as a result of disclaimer by the Assignee or a bankrupt, it is not a right that is transferable.
(b)At most, the section is inchoate; conferring no more than an opportunity to make an application to the Court.
[59] As well, and fatally in my view, s 102(1) of the Insolvency Act defeats any argument that Reece or Andrea acquired a right or interest (whether in the Mountain Road property itself or otherwise), after the adjudication and before the discharge from bankruptcy in December 2017, that might arguably fall within the jurisdiction of the Family Court in the PRA proceedings already on foot. The section makes it clear that any property acquired by Andrea or Reece between the commencement of bankruptcy and the discharge from bankruptcy also vested in the Assignee automatically and any rights Andrea and Reece may have had in the acquired property were extinguished.
41 As discussed at [3] above.
42 Section 2.
[60] This is not a case like Panther v Panther where Heath J indicated that, with the prospect of relationship property proceedings being initiated, questions relating to relationship property might have influenced the exercise of the Court’s discretion under s 119 and the related fairness assessment.43 That is because only the wife in that case was adjudged bankrupt. The non-bankrupt husband’s interest in the property, and his wife’s potential claim to have that interest treated as relationship property, remained unextinguished since it was never vested in the Assignee.
[61] I have not forgotten that the courts in Fish Man appeared to endorse an approach that took into account, in part at least, Mrs Hadfield’s claims under the PRA when determining how to exercise the s 119(3) discretion. But the relevance of the PRA in that case does not resonate in this one, for two reasons. First, Mrs Hadfield was not a bankrupt but was the wife of a bankrupt who was looking to protect her rights to a half-share of relationship property. She registered an interest over the property subject to s 42(2) of the PRA prior to her husband being adjudged bankrupt. Although his own interest in the property was extinguished when the property was subsequently disclaimed, Mrs Hadfield’s separate, registered interest was preserved by s 118(2). Second, Mr and Mrs Hadfield remained married throughout the proceeding. If the property was vested in one or both of them under s 119, it could have come back within the jurisdiction of the Family Court as relationship or separate property. That possibility was eliminated in the case of Andrea and Reece by the dissolution of their marriage.
What, if any, jurisdiction would the Family Court have to make orders in respect of the property under the PRA if it is vested in Reece, or in Reece and Andrea jointly.
[62] It follows that, if this Court makes a vesting order in either Andrea and Reece jointly or Reece solely, the party or parties in whom the Mountain Road property is vested will acquire the property afresh, without re-acquiring any rights they may have had to the property under the PRA arising from their now-dissolved marriage. That means that an order vesting the property in Reece, or in Reece and Andrea jointly, would result in the same outcome for the purposes of the PRA as if, for example, Credit
43 See above at [28].
Union North had obtained a vesting order on an application under s 119(1)(b) and on- sold the property to one or both of them after the date of the separation.
[63] It also follows that, if the Mountain Road property is vested in Andrea and Reece jointly by an order under s 119 of the Insolvency Act, the Family Court will not have jurisdiction to make any orders, either in connection with that property or otherwise between the parties, that might appropriately recognise and compensate Reece for the payments related to the Mountain Road property he has made since the separation.
[64] For these reasons, I do not accept Ms Bartlett’s submission that vesting the Mountain Road property in Andrea and Reece jointly will make it relationship property under s 8(1)(a) or (e) of the PRA. Such vesting would not give the Family Court jurisdiction to achieve fairness between the parties having regard to the considerations that apply to decisions under the PRA such as the financial and other contributions to the marriage and to the subject property, and the interests of the children. I also reject Mr King’s argument that vesting the Mountain Road property in Reece alone would render it separate property under the definition in s 9(4) of the PRA. It would not leave open the opportunity for Andrea to apply to the Family Court for a determination under s 9(4)(a) of the PRA on the basis that it is just in the circumstances to treat the Mountain Road property or any part of it as relationship property.
[65] I conclude, therefore, that the Mountain Road property is not now, and cannot become, either relationship property or separate property that would come within the jurisdiction of the Family Court under the PRA, whether on the basis of the current PRA proceedings in that court, or on the basis of any fresh application to it made by either Andrea or Reece.
What is the fairest outcome for the competing applications for vesting orders under the Insolvency Act?
[66] Because of my conclusion that the Family Court will have no jurisdiction to make orders under the PRA related to the Mountain Road property once it is vested by
an order under s 119(3) in this proceeding, I put to one side those aspects of the parties’ arguments about relative fairness that assume otherwise.
Factors relevant to the fairness assessment
[67] Considering the evidence and counsel’s submissions, I identify the following facts that I find to be proved on a balance of probabilities as being relevant to the Court’s assessment of what is the fairest order to make under s 119(3):
(a)The Mountain Road property was acquired jointly with both Andrea and Reece contributing to the deposit to purchase the property and taking on the liability of a mortgage.
(b)Andrea, Reece and their children lived at the property for almost 12 years until their separation in April 2015.
(c)Until the date of separation, Andrea and Reece shared jointly the responsibility for meeting the expenses of the household, including the mortgage payments, rates and insurances for the Mountain Road property.
(d)From the date of separation, Reece has paid the rates and insurance premiums; made the mortgage payments and paid for some maintenance. Andrea’s ability to make financial contributions to the property was limited, in part at least, because she had the responsibilities of being the primary caregiver for the children (who are now aged between 12 and 8) and to provide accommodation for herself and the children elsewhere. Reece has paid maintenance and other expenses such as school fees.
(e)At the date of the bankruptcy adjudications, Andrea’s and Reece’s joint liability to Credit Union North exceeded the estimated value of the Mountain Road property by an amount between $40,000 and $90,000. In effect, the property was a joint liability rather than a joint asset.
(f)At the date of separation, the balance owing to the mortgagee had been reduced by $3,374.17, and the value of the property was around
$425,000, being within the range estimated for the value at the date of adjudication. That means, in my assessment, that payments made in respect of the mortgage by Andrea and Reece up to the date of separation had little or no effect on the value of their equity in the property.
(g)Since the date of separation, Reece has paid approximately $123,000 in payments under the mortgage, but it is not clear how much of that sum was paid as interest and how much as reduction of principal. Reece has also paid the rates and insurance premiums, power bills and some maintenance costs.
(h)Reece’s payments since the date of separation had the effect of preventing a mortgagee sale, thereby preserving the availability of the Mountain Road property for a vesting application under s 119. Fairness requires that Reece’s financial contributions to the property since the separation should be taken into account in his favour in some tangible manner.
[68] Looking at factors (a), (b) and (c), the contributions of both Reece and Andrea to the purchase of the Mountain Road property; the fact that it was the family home which they occupied for almost 12 years and that it was relationship property; and the joint sharing of household expenses should be considered as factors favouring the parties equally. They are neutral factors, therefore, in the assessment of the fairest outcome under s 119(3).
Matters not relevant to the fairness assessment
[69] Reece has provided an account of Andrea’s conduct in her role as manager of the financial affairs of the business partnership. In short, he says that she caused the bankruptcy by mismanagement. Andrea denies that she was primarily responsible for managing their financial affairs. She denies the allegation of mismanagement and says that, although she prepared some of the financial returns, an accountant engaged by
Reece and Reece himself also undertook those responsibilities. She says that Reece was well aware that he was not paying tax that was due on the income for his business. Andrea says that, although Reece made the mortgage payments and paid the rates, she covered most of the household expenses from her net salary after the deduction of PAYE income tax. Andrea says the bankruptcy was caused by Reece’s mismanagement of his business accounts and his failure to pay tax on his business income.
[70] I am unable to conclude from the evidence that either one or the other of the parties was responsible, or more responsible, for the bankruptcy and I regard the cause or causes of the bankruptcy as a neutral factor in assessing the relative fairness of the applicants’ propositions.
[71] Because they appear to have nothing to do with the issues the Court is required to determine, I also put to one side as irrelevant the parties’ allegations, counter- allegations and submissions about:
(a)the circumstances of Andrea’s relationship with a former partner in Australia;
(b)Reece’s behaviour leading to the making of a temporary protection order in April 2015;
(c)disagreements between the parties over the upbringing of their children;
(d)who was responsible for the deterioration of the condition of the cottage; and
(e)a dispute over who should be permitted to occupy the Mountain Road property after the separation.44
44 I do not regard Reece’s occupation of the former family home for about three months after the separation as material.
The factors to be weighed in the fairness assessment
[72] I have dismissed Ms Bartlett’s submission on Andrea’s behalf that issues about the fair disposition of the property are best resolved by the Family Court under the PRA and I have also dismissed as irrelevant the parties’ arguments over the matters just listed. I have held also that the prior status of the Mountain Road property as the family home and, therefore, relationship property under the PRA, and Andrea’s and Reece’s financial contributions to the property and the household are neutral factors because they operate in favour of both applicants.
[73] That leaves as the only relevant considerations the mortgage payments and the payments of rates, insurance premiums and some maintenance costs since the adjudication when the property ceased to be vested in the applicants. For the six- month period from 10 November 2014 until the parties separated on 7 April 2015, I regard those payments as having been made by Andrea and Reece jointly. From the separation in April 2015 until the date of hearing just under four years later, Reece continued to make those payments without any contribution from Andrea. Although the amounts paid by Reece during that period total approximately $130,000, they have had little impact on the differential between the value of the Mountain Road property and the amount of indebtedness to Credit Union North.
[74] The market value of the property has increased significantly, however, since the separation. The value of the property with the house in its current, uncompleted state was estimated to be around $620,000 in February of this year. The positive difference between the current value and the loan balance of approximately $400,000 at the same date, a figure of $220,000, must be due entirely to inflation or a general increase in property values. There is no evidence of any work having been done on the property to increase its value.
[75] The payments made by Reece, therefore, have not increased what would have been the owners’ equity in the Mountain Road property had it not been vested in the Assignee and then the Crown. The payments, however, have had the highly material effect of avoiding a mortgagee sale. As a result, during a period in which the market value of the property has increased by over 50% of the value at the time of
adjudication, the property has remained as bona vacantia vested in the Crown and, therefore, susceptible to a vesting order under s 119. I note in passing that, for PRA purposes, the property had no value or, if anything, a negative value, at the date of separation.
[76] Those considerations weigh heavily in favour of the fairest outcome being a vesting of the property in Reece solely.
[77] I have considered the extent to which fairness requires the Court to give weight to the limitations on Andrea’s ability to contribute to the property-related payments since the separation caused by her having the principal responsibility for the care and upbringing of the children. On the evidence, I infer that having the principal care of children aged between 12 and 8 must inevitably have limited Andrea’s ability to make a financial contribution to the retention of the Mountain Road property, but I cannot say to what extent. I am not satisfied, therefore, that Andrea’s financial position weighs sufficiently against Reece’s actual financial contributions to the property to make a joint vesting in the parties the fairest outcome.
[78] Moreover, because the Family Court would have no jurisdiction to make orders that would resolve the practical issues arising from joint ownership of a family home, vesting the property in Andrea and Reece jointly would be not only impractical but wholly unworkable.
[79] The force of that conclusion is demonstrated by a list of just some of the issues that joint ownership of the Mountain Road property would raise and require resolution:
(a)Who would have the right to occupy the property and on what terms?
(b)Who would carry out and fund maintenance of the property?
(c)How would decisions be made about the completion of the construction of the house to realise a further potential increase in the value of the property? And who would pay for that?
(d)Who would meet the continuing outgoings on the property for mortgage interest, rates and insurance?
(e)How would the financial contributions to these matters be recognised if they were not shared equally?
(f)When, in what circumstances and on what terms would the property be sold in order to release the owners’ equity?
[80] In the absence of the ability of the Family Court to determine these issues under the PRA, an elaborate ownership structure and decision-making framework would need to be included in the terms of the vesting order. It would overreach the reasonable scope of the Court’s implied power to make a vesting order subject to terms and conditions to make the complex orders that would be necessary to produce a fair and workable outcome for a vesting of the Mountain Road property in Andrea and Reece jointly.
[81]And it is not clear either how the value of Reece’s financial contribution of
$130,000 since the date of separation should be compensated in circumstances where the payment of those funds has led fortuitously to an increase in the property’s value of more than $200,000. Would fairness dictate that Reece should be credited with the full value of the increase? It is difficult to see why not but, in that case, the net value of the property in which the joint owners would share would be nil, because the liability to Credit Union North would more or less equate to the owners’ shared equity.
Conclusion and orders
[82] For these reasons, I am satisfied that the fairest way in which the Court may exercise its discretion under s 119(3) in respect of the cross-applications is to vest the Mountain Road property in Reece solely.
[83]Accordingly:
(a)I dismiss the application by Andrea Jeanette Mary Goldstone for a vesting order under s 119(3) of the Insolvency Act 2006.
(b)I make an order under s 119(3) of the Insolvency Act that the property at 619 Mountain Road, Oropi, Tauranga, being all of the land comprised in Lot 3 on Deposited Plan 80463, South Auckland Registry under CT SA64C/586, shall be vested in Reece Clive Goldstone solely, subject to all encumbrances, from the date of this order.
Costs
[84] I understand that there are legal aid implications for any determination as to costs. I reserve costs for the filing and exchange of memoranda. For practical reasons related to my availability, it is preferable that any decision of the Court as to costs is made prior to 2 August 2019.
[85] Any application for costs shall be filed and served by 4pm on 23 July 2019. Any memorandum in reply shall be filed and served by 4pm on 30 July 2019. Costs shall then be determined on the papers, unless the Court directs otherwise.
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Toogood J
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