Haines v Memelink
[2022] NZCA 82
•24 March 2022 at 3.00 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA463/2021 [2022] NZCA 82 |
| BETWEEN | QUENTIN STOBART HAINES |
| AND | HARRY MEMELINK AND CISCA FORSTER AS TRUSTEES OF THE LINK TRUST NO 1 |
| Hearing: | 21 February 2022 |
Court: | Dobson, Brewer and Edwards JJ |
Counsel: | J D Dallas for Appellant |
Judgment: | 24 March 2022 at 3.00 pm |
JUDGMENT OF THE COURT
AThe appeal is allowed.
BThe bankruptcy notice issued by the respondents is set aside.
CThe respondents must pay one half set of costs to the appellant for a two-hour appeal on a band A basis and usual disbursements.
DThe High Court costs order in favour of the respondents is set aside. Costs in the High Court are to lie where they fall.
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REASONS OF THE COURT
(Given by Dobson J)
Introduction
This is an appeal against an Associate Judge’s refusal to set aside a bankruptcy notice issued by the respondents as creditors against the appellant as debtor.[1] The parties wage litigious war on many fronts, making a variety of claims against each other. The state of the ledger between them fluctuates depending on the outcome of various proceedings and the position with the claims asserted by each against the other.
[1]Haines v Trustees of Link Trust (No 1) [2021] NZHC 1575 [Judgment under appeal].
The debt to which the present bankruptcy notice relates is a costs order made in 2020 by Grice J in the High Court jointly against the appellant and another party for the sum of $1,758.22, which reflected the netting off of costs entitlements to both parties in that litigation.[2]
[2]Haines v Memelink [2020] NZHC 188. At that time the trustees of the Link Trust No 1 were Mr Memelink and Lynx Trustees Ltd. Ms Forster has replaced Lynx Trustees Ltd as trustee. Ms Forster is listed as a party to this judgment as she authorised the service of the bankruptcy notice which is the subject of this appeal.
The bankruptcy notice was served on 12 February 2021 and the appellant responded with an application to set it aside on 15 February 2021 (the application). Associate Judge Johnston heard argument on 25 May 2021 and delivered the judgment under appeal declining to set the notice aside on 29 June 2021.
Between service of the notice and argument of the application, Churchman J issued a costs decision in another proceeding between the parties in favour of Mr Haines on 13 May 2021, for a total of $22,919.25.[3] Counsel for Mr Haines, Mr Dallas, filed a memorandum dated 15 May 2021 in the High Court attaching a copy of Churchman J’s judgment in his client’s favour, and submitting that the existence of that judgment meant that there could be no reasonably arguable basis for opposing a setting aside of the bankruptcy notice.
[3]Haines v Memelink [2021] NZHC 1063.
Written submissions in support of the application were filed before delivery of Churchman J’s judgment, and made passing reference to the then anticipated debt that would be owed by the respondents in an amount that was expected to more than offset the debt relied on in the bankruptcy notice. The anticipated offset was not however a prominent feature of either the written submissions or Mr Dallas’s oral argument on the application, the latter of which occurred after the Churchman J judgment was delivered.
The judgment under appeal made no reference to either Churchman J’s judgment in favour of the appellant or Mr Dallas’s memorandum drawing it to the Court’s attention. On the day after the judgment under appeal was delivered, Mr Dallas filed a memorandum requesting recall of the judgment on the ground that Churchman J’s judgment had not been taken into account. If it had been, Mr Dallas submitted that the bankruptcy notice ought necessarily to have been set aside.
The respondents opposed any recall of the judgment under appeal on the grounds that the appellant had not put Churchman J’s judgment in evidence on the application, or in amended grounds for the application. It was also submitted that if the ledger between the parties was to be reopened, then there were other liabilities that would need to be taken into account in the respondents’ favour.
The Associate Judge issued a Minute on 16 July 2021 declining to recall his judgment. He acknowledged that there was an administrative record of the filing of Mr Dallas’s memorandum, but no copy of it could be located. The Churchman J judgment had not been taken into account because it did not feature in the application, the evidence, or the written submissions. The Associate Judge confirmed that he was unaware of the Churchman J judgment having issued when he released his own judgment. He declined recall because if the respondents attempted the next step of commencing a proceeding to bankrupt the appellant then an updated accounting of the state of the ledger between the parties would be required, inevitably including the effect of Churchman J’s judgment.
The primary ground on appeal was that the Churchman J judgment should have been taken into account, necessarily resulting in the bankruptcy notice being set aside. Mr Dallas advanced a number of other grounds for setting the notice aside and respondents’ counsel raised a number of other reasons for opposing its setting aside. Whilst we acknowledge those in summary terms below, it is the primary ground that determines the appeal.
The law
The purpose of issuing a bankruptcy notice is to establish an act of bankruptcy, which provides the ground for seeking an order bankrupting the debtor. Section 17 of the Insolvency Act 2006 (the Act) provides:
17 Failure to comply with bankruptcy notice
(1) 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 time limit specified in subsection (4),—
(i) complied with the requirements of the notice; or
(ii)satisfied the court that he or she has a cross claim against the creditor.
(2)The form that the bankruptcy notice must take is set out in section 29.
(3)The debtor must have been served with the bankruptcy notice in New Zealand, unless the court gave permission for the service of the notice on the debtor outside New Zealand.
(4) The time limit referred to in subsection (1)(d) is,—
(a)if the debtor is served with the bankruptcy notice in New Zealand, 10 working days after service; or
(b)if the debtor is served outside New Zealand, the time specified in the order of the court permitting service outside New Zealand.
(5)In this section, a creditor who has obtained a final judgment or a final order includes a person who is for the time being entitled to enforce a final judgment or final order.
(6)In this section, if a court has given permission for enforcing an arbitration award that the debtor pay money to the creditor,—
(a) final order includes the arbitration award; and
(b)proceedings includes the arbitration proceedings in which the award was made.
(7)In subsection (1)(d)(ii), cross claim means a counterclaim, set-off, or cross demand that—
(a)is equal to, or greater than, the judgment debt or the amount that the debtor has been ordered to pay; and
(b)the debtor could not use as a defence in the action or proceedings in which the judgment or the order, as the case may be, was obtained.
For a bankruptcy notice to be effective, it can reasonably be expected that in cases where there are multiple final orders between the parties, their quantum would be netted off as they stand at the time the notice is issued. The scope of potential cross claims is defined in s 17(7) of the Act. Any asserted cross claim in existence when a debtor applies to have the bankruptcy notice set aside can be raised on such an application. The potential effect of the bankruptcy notice is suspended from the point at which the debtor moves to set it aside, until determination of that application. It would be counterproductive and could lead to unnecessary litigation if applications to set aside bankruptcy notices were required to be determined on the state of the ledger between the parties as of the day on which the bankruptcy notice was issued.
Section 17(1)(d) makes clear that notice of intention to assert a cross claim must be given to the Court within the time limit referred to in s 17(4) — that is, 10 working days from receipt of the notice. It must also be supported by an affidavit. Further matters asserted by the debtor may qualify as cross claims where they arise between the filing of an application to set aside a bankruptcy notice and argument of that application. Such matters could be taken into account in determining the application, subject to compliance with the necessary procedural steps in the High Court Rules for giving notice of the intention to rely on those matters and placing evidence of them before the Court. Depending on timing, leave to raise the new matters may be required, and is likely to be granted if the creditor opposing the application cannot make out material prejudice.
Rule 24.10 of the High Court Rules 2016 operates to automatically extend the time period in s 17(4) of the Act until the application to set aside has been determined. Therefore the date for assessment of whether the debtor has established a cross claim is the date of hearing the application to set aside the bankruptcy notice. Subsequent events cannot be taken into account in determining whether the debtor has a valid cross claim.[4]
[4]Sharma v Wati HC Auckland CIV-2009-404-6367, 30 November 2011 at [4]; and Sharma v Wati HC Auckland CIV-2009-404-6367, 30 September 2011 at [17]–[18]. This Court refused leave in Sharma v Wati [2012] NZCA 195, (2012) 21 PRNZ 161 at [12] on the basis that it saw no merit in any of Mr Sharma’s grounds for the reasons given in the judgments below.
A debtor served with a bankruptcy notice is restricted as to what can be raised as a cross claim in opposition to it. A cross claim that could have been raised as a defence in the action in which the judgment debt was obtained will not qualify.[5] On the other hand, there must be a degree of mutuality or connection between the cross claim and the judgment debt to which the bankruptcy debt relates.[6]
Making out an act of bankruptcy is not determinative of the debtor’s status. It becomes a ground for seeking the debtor’s adjudication at which time any current claims and cross claims between the parties will be relevant.[7]
The bankruptcy regime deliberately provides for different standards applying respectively to creditors, and to debtors: creditors are limited to claims that have status as final judgments or orders, whereas debtors can raise claims at the stage where they are not determined, so long as they are genuinely triable[8] and there is some degree of mutuality between the debt and the cross claim.[9] The date for the assessment of the quantum of the cross claim is also the date of the hearing of the application to set aside the bankruptcy notice.[10] The counter claim must also be equal to, or greater than, the judgment debt to which the bankruptcy notice relates.[11]
If a creditor obtains a final judgment or order in respect of additional claims against the debtor subsequent to service of the bankruptcy notice, then the creditor has the option to serve a new bankruptcy notice that relies on the new final judgment or order.
There has been a long-standing rule that the inclusion of multiple judgment debts in one bankruptcy notice is impermissible as it would prevent a debtor separately challenging each judgment debt, or paying one and challenging the other.[12] There are exceptions, for example where the debtor has a common response to all the debts or the nature of the debts is the same.[13] The appropriate scope of the rule might well be revisited, but we did not hear argument about it, and it is best left for an occasion when there is argument on this point.
Analysis on the primary issue
[5]Insolvency Act 2006, s 17(7)(b). See also Clark v UDC Finance Ltd [1985] 2 NZLR 636 (HC) at 639; Thomasen v Nigro CA124/76, 19 July 1978 per Quilliam J; and Robertson v ASB Bank Ltd [2014] NZCA 597 at [22].
[6]Re Elvin, ex parte Sandilands [1990] 3 NZLR 124 (HC) at 126–127.
[7]See Prescott v Auckland Council [2017] NZHC 2698 at [23]; and Commissioner of Inland Revenue v Faloon [2016] NZHC 760, (2016) 27 NZTC 22-076 at [11] citing this Court in Baker v Westpac Banking Corporation CA212/92, 13 July 1993.
[8]Sharma v ANZ Banking Group (NZ) Ltd (1992) 6 PRNZ 386 (CA) remains the leading authority as endorsed by this Court in Robertson v ASB Bank Ltd, above n 5, at [19]–[24].
[9]Re Elvin, ex parte Sandilands, above n 6, at 126–127.
[10]In Re GEB, A Debtor [1903] 2 KB 340 (CA) at 348.
[11]Insolvency Act 2006, s 17(7)(a).
[12]See In re Mills, A Debtor (1913) 32 NZLR 801 (SC), citing In re Low, Ex parte Argentine Gold Fields Ltd [1891] 1 QB 147 (CA) at 148; Far North District Council v Pollock [2014] NZHC 2473 at [10]; and Body Corporate 341188 v Kelly [2016] NZHC 2230 at [24].
[13]See Erwood v Maxted [2012] NZCA 110 at [60]; Monschau v Bamber [2018] NZHC 2566 at [30]; and Re Ebbett ex parte Fletcher Merchants Ltd HC Tauranga B109/92, 9 October 2002 at 2.
There was a difference between counsel on the extent to which Churchman J’s judgment was adverted to at the hearing before the Associate Judge. Certainly it was not prominently referred to, and we take from the fact that the Associate Judge did not consider it that it was not relied on as sufficient to make out a cross claim.
For the respondents, Mr Livingston submitted that the Churchman J judgment was not properly before the Associate Judge and was therefore appropriately ignored. He submitted that it ought to have been exhibited to an affidavit, and that it lacked enforceability until an order had been sealed reflecting the result in that judgment. Mr Livingston also argued, in essence, that if this liability which was quantified after the bankruptcy notice was issued could be taken into account, then other items in the broader ledger of amounts owed and owing between the parties should also be taken into account to establish that (on the respondents’ contention) the appellant still owed more to the respondents than the respondents owed to the appellant.
It is clear that the Churchman J judgment operates as a defence to the Grice J costs order, and the requirement of mutuality (as discussed at [16]) is satisfied. Additionally, no argument has been raised that Mr Haines was not personally beneficially entitled to the Churchman J judgment.
Had the Churchman J judgment been sufficiently drawn to the Associate Judge’s attention at the hearing we are confident he would have recognised it as a cross claim, the existence of which was sufficient to require the bankruptcy notice to be set aside. Certainly that is the position this Court takes, with the consequence that the appeal must succeed.
As to Mr Livingston’s criticisms that the Churchman J judgment was not before the Court in adequate form at the hearing, arguments on such applications necessarily grapple with the substance of the debtor’s alleged indebtedness and the status of any cross claims asserted when challenging a bankruptcy notice. Here Churchman J’s judgment had been issued some 12 days before the hearing and inarguably came within the definition of a cross claim in s 17(7) of the Act. It was a public document of which the Court could take judicial notice, so it needed no evidentiary verification. Nor did it require a sealed order for it to be recognised as a cross claim.
The respondents were not taken by surprise by the existence of the judgment. Nor could they claim to be prejudiced by having to deal with its effect at the hearing. They were the named respondents in the proceeding and so received a copy of the judgment when it was delivered.
That is sufficient to dispose of the appeal. However, counsel also devoted resources to a range of additional arguments respectively to challenge and to support the status of the bankruptcy notice.
Other issues
Mr Haines had raised a number of other potential claims against either the trustees or Mr Memelink personally, as additional grounds for resisting the bankruptcy notice. The Associate Judge considered and rejected each of these as insufficient to make out a cross claim for more than the debt relied on in the bankruptcy notice.
The largest claim related to an invoice Mr Haines had issued to the trustees for $1,150,000 in legal fees. The liability for it was challenged and the trustees had complained to the New Zealand Law Society about Mr Haines’ conduct in relation to it. Section 161 of the Lawyers and Conveyancers Act 2006 provides that a practitioner cannot pursue recovery of an invoice until any complaint in relation to it has been finally disposed of. The status of Mr Haines’ claim to that fee means that he could not take steps to recover the amount involved until the Law Society proceedings have been completed, and there is a ruling upholding his entitlement to charge all or part of it. Accordingly, it was not a genuinely triable claim and we agree with the Associate Judge that it could not avail Mr Haines in his application to set aside the bankruptcy notice.
Mr Haines also claimed, in relation to one aspect of wider transactions between the parties, that the trustees owed him $83,426.00. The evidence relied on for that alleged debt was an entry in draft financial statements prepared for the trust by an accountant. Those financial statements included within non-current assets a negative entry for that amount described as “Advance – Q. Haines (JL Trust A/c)”. The item appeared in draft financial statements for two years. The matter was not addressed by Mr Memelink. The Associate Judge rejected the evidence of the entries in the draft accounts as insufficient to make out a genuinely triable issue as to the existence and quantum of any claim for its repayment. In the fog of claims and counterclaims between the parties, we agree. If a debt of that amount was outstanding it is reasonable to assume that substantially better evidence of the indebtedness would be proffered. On the scant basis advanced, it does not constitute a qualifying cross claim.
For the trustees, Mr Livingston argued that if Churchman J’s judgment was to be taken into account in determining the application, then the ledger of amounts owed and owing by each side ought to be expanded to take into account a series of costs judgments made previously in other proceedings. His submissions included a schedule of seven costs judgments delivered in favour of one party or the other up to the date of the issue of the bankruptcy notice, together with a further five judgments that were issued between 1 March and 7 September 2021. On the respondents’ calculations (including Mr Haines’ entitlement under Churchman J’s judgment) Mr Haines still owed the trustees $19,676.51.
There was no evidence that any of the other judgments in favour of the trustees were the subject of outstanding bankruptcy notices that had not been dealt with. Certainly, none of them were relied on in the bankruptcy notice under challenge. Unsurprisingly, Mr Dallas disputed the inclusion of some of the items in the schedule. First, he argued for the exclusion of costs orders made after the date of hearing. There were two awards in favour of the trustees totalling $12,113.54 in that category. That is clearly correct.
Secondly, Mr Dallas argued that some of the costs ordered against Mr Haines were in favour of Mr Memelink personally and were not amounts that could be claimed by the trust. In those cases, the asset was that of Mr Memelink’s trustee in bankruptcy so it was beyond Mr Memelink’s power to assign such costs entitlements to the trust.
Mr Moughan presented argument opposing these points. He submitted that there were exclusions from the estate of the bankrupt that would not vest in the trustee in bankruptcy. Arguably, if a cause of action touches only the person of a bankrupt, then it is excluded from the bankruptcy estate. He instanced the proceeds of a claim for personal injury (where such a cause of action exists) and that the right to appeal a bankruptcy is similarly personal to the bankrupt. Any such initiative is taken at the bankrupt’s own risk and with any cost recovery similarly accruing personally to the bankrupt. Arguably, costs awards in such litigation remained personal to Mr Memelink and he was entitled to assign that asset to the trust, especially where the trust had backed his pursuit of the proceedings.
It is unnecessary to determine the entitlement of the trust to pursue recovery of costs orders made in Mr Memelink’s favour. Nor do we address other contentions raised for the inclusion or exclusion of various items in Mr Livingston’s schedule. The short point is that none of them were included in the bankruptcy notice that was the subject of the application. A creditor cannot belatedly seek to justify a bankruptcy notice by reliance on a final order or judgment that is not included in the bankruptcy notice. As recognised at [16] above, this reflects the different standards applying to creditors and debtors, which are an appropriate aspect of the bankruptcy regime.
Result
The appeal is allowed.
The bankruptcy notice issued by the respondents is set aside.
Costs
The judgment under appeal invited memoranda on costs if agreement was not reached on a provisional indication recorded in the judgment. Counsel did not separately address High Court costs in argument before us. We set aside any costs order that was made in favour of the trustees pursuant to the judgment under appeal. It is appropriate that each side bear its own costs in that Court.
As to costs on the appeal, Mr Dallas sought costs if it was successful. Mr Livingston submitted that in that event costs ought to lie where they fall because of the unsatisfactory and inadequate way in which the Churchman J judgment was put in issue in seeking to set aside the bankruptcy notice. That point is relevant. However, the appeal had to be argued because of a somewhat artificial stance adopted that a relevant costs judgment, in existence when the application was argued, ought to be disregarded. In the circumstances we award one half of band A costs for a two‑hour appeal in favour of the appellant, together with relevant disbursements.
Solicitors:
JD Dallas, Wellington for Appellant
Livingston & Livingston, Wellington for Respondents
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