Henderson Reeves Connell Rishworth Lawyers Limited v Busch
[2013] NZHC 2521
•26 September 2013
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
CIV-2011-488-257 [2013] NZHC 2521
BETWEEN HENDERSON REEVES CONNELL RISHWORTH LAWYERS LIMITED Creditor
ANDPATRICIA ELAINE BUSCH Debtor
Hearing: 23 September 2013
Appearances: J Browne for Creditor
Patricia Elaine Busch in person (by telephone) Judgment: 26 September 2013
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 26 September 2013 at 1:00pm
pursuant to Rule 11.5 of the High Court Rules.
...................................
Registrar/Deputy Registrar
Solicitors:
Henderson Reeves, Whangarei, for Creditor
J T Law, Wellington, for Rabobank
Copy for:
Mrs P E Busch
HENDERSON REEVES CONNELL RISHWORTH LAWYERS LIMITED v P E BUSCH [2013] NZHC 2521 [26 September 2013]
[1] This is an opposed application to adjudicate Mrs Busch bankrupt. The law firm, Henderson Reeves Connell Rishworth, provided legal services for Mrs Busch for which it was not paid in full. Her debt has been assigned to Henderson Reeves Connell Rishworth Lawyers Limited, the applicant.
[2] The main question is how the court should exercise its discretion under ss 36 and 37 of the Insolvency Act 2006. There are some preliminary matters to be addressed. The procedural history to this application is not as straightforward as most bankruptcy applications.
Procedural history
[3] This proceeding started in April 2011. The original applicant was Bell Bruun. She alleged that she was a creditor of Mrs Busch for $8,200 and that Mrs Busch committed an act of bankruptcy under s 19 of the Insolvency Act by paying other creditors in preference to herself. Bell Bruun experienced difficulties in serving Mrs Busch. Bell Bruun then added a further act of bankruptcy under s 21 of the Insolvency Act, based on Mrs Busch’s alleged actions in avoiding the process- server. Mrs Busch paid Bell Bruun the debt and costs. The application was not withdrawn. Instead, Mrs Busch’s son Craig (the so-called “Lion Man”) was substituted as creditor. When he did not continue with the application, Henderson Reeves Connell Rishworth Lawyers Ltd was substituted as creditor.
[4] In its application filed in September 2011, Henderson Reeves Connell Rishworth Lawyers Ltd said that it was a creditor of Mrs Busch for $185,705.22, as assignee of the debt owed to the partnership of Henderson Reeves Connell Rishworth. The debt was for fees for work carried out by Henderson Reeves Connell Rishworth itself, and also for fees charged by barristers engaged to act on behalf of Mrs Busch. The barristers’ fees far exceeded Henderson Reeves’ own bills. The application relied on the act of bankruptcy under s 21 of the Insolvency Act — the second act of bankruptcy in Bell Bruun’s application.
[5] Mrs Busch opposed. Her principal grounds of opposition were:
(a) that she did not owe the debt, but the correct debtors were Zion Wildlife Gardens Ltd (in receivership and liquidation) and Country Developments Ltd (in receivership);
(b) She denied committing any act of bankruptcy; and
(c) Henderson Reeves was already suing her for the debt in the District
Court.
[6] Henderson Reeves Connell Rishworth Lawyers Ltd had begun a proceeding in the District Court to obtain judgment against Mrs Busch. The bankruptcy application was put on hold to await the outcome of the proceeding in the Whangarei District Court. Judge McElrea heard it on 15 June 2012. He noted that there were two main issues for decision – whether Mrs Busch was the client liable for payment of the fees, and whether the firm could sue for fees of barristers instructed by it to act for Mrs Busch. Judge McElrea found for Henderson Reeves on both questions. He gave judgment to Henderson Reeves for $149,795.13 (after making some adjustment for interest) and awarded costs of $9,377.50 and disbursements of $2,146.49, a total of $161,319.12.
[7] Mrs Busch appealed against that decision.
[8] On 30 October 2012 Mrs Busch made a complaint to the New Zealand Law Society about the fees charged by Henderson Reeves.1 The Law Society advised Henderson Reeves Connell Rishworth on 14 November 2012. On 16 November
2012 Henderson Reeves wrote to the Law Society about the proceedings. On 4
December 2012 the Law Society resolved under s 138(1)(f) of the Lawyers and Conveyancers Act 2006 not to take any further action. Section 138(1)(f) provides that no further action may be taken if, in the opinion of the Standards Committee of the Law Society
...there is in all the circumstances an adequate remedy or right of appeal, other than the right to petition the House of Representatives or to make a complaint to an Ombudsman, that it would be reasonable for the person aggrieved to exercise.
[9] Following that, Mrs Busch applied to the Legal Complaints Review Officer to review the decision of the Standards Committee. So far, a Legal Complaints Review Officer has not given a decision on her application for review. I was advised that Mrs Busch has asked for a hearing rather than have the matter heard on the papers. A Legal Complaints Review Officer may confirm, reverse or modify any decision of a Standards Committee, may exercise any powers that could have been exercised by the Standards Committee and may direct a Standards Committee to
reconsider a matter.2
[10] While both Mrs Busch’s application for review and her appeal to this court were pending, it was necessary to consider the effect of section 161 of the Lawyers and Conveyancers Act 2006:
161 Stay of proceedings for recovery of costs
(1) If, under section 141, a Standards Committee gives notice to a practitioner or former practitioner or an incorporated firm or former incorporated firm that it has received a complaint under section
132(2) about the amount of a bill of costs rendered by that practitioner or former practitioner or incorporated firm or former incorporated firm, no proceedings for the recovery of the amount of the bill may be commenced or proceeded with until after the complaint has been finally disposed of.
(2) Where a Standards Committee makes a final determination on a complaint made under section 132(2), it must certify the amount that is found by it to be due to or from the practitioner or former practitioner or incorporated firm or former incorporated firm in respect of the bill and under the determination.
(3) The certificate of the Standards Committee or, as the case may be, the decision of the Legal Complaints Review Officer on a review of the determination is final and conclusive as to the amount due.
(4) For the purposes of this section, a complaint is finally disposed of—
(a) if—
(i) the Standards Committee has made a final determination on the complaint or has, under section
138, decided to take no action, or, as the case may require, no further action on the complaint; and
(ii) the complainant has not, within the time allowed, applied to the Legal Complaints Review Officer for a review of the determination or decision; or
(b) if the Legal Complaints Review Officer has conducted a review of the determination or decision made by the Standards Committee on the complaint and has reported the outcome of the review to—
(i) the complainant; and
(ii) the practitioner or former practitioner or incorporated firm or former incorporated firm; and
(iii) the Standards Committee.
[11] There was no stay of the District Court proceeding under s 161 because Mrs Busch had not complained to the Law Society about the fees while that proceeding was pending. Instead, it was lodged while the appeal to this court was pending. Henderson Reeves Connell Rishworth Ltd raised the matter with the Court in a memorandum of 7 February 2013. Henderson Reeves submitted on the basis of the judgment of Stevens J in Simpson Grierson v Gilmour,3 that s 161 does not stand in the way of a court determining the issue of liability insofar as it relates to the existence of a contract of retainer.
[12] In a minute of 19 February 2013 Ellis J accepted the submission of Henderson Reeves that the appeal should be heard because the appeal was on the question of liability, not quantum, and s 161 did not apply.
[13] Allan J heard Mrs Busch’s appeal on the liability issue. In his judgment of
23 May 2013,4 he dismissed her appeal and made an order for costs against her for
$10,547.00 plus disbursements, a total of $11,542.00.
[14] On 10 July 2013 Henderson Reeves Connell Rishworth Lawyers Ltd served a bankruptcy notice on Mrs Busch requiring her to pay the amount of the order for
costs – $11,542.00. Mrs Busch had until 24 July 2013 to comply with the
3 Simpson Grierson v Gilmour (2009) 19 PRNZ 865 (HC).
4 Busch v Henderson Reeves Connell Rishworth Lawyers Ltd [2013] NZHC 1189.
bankruptcy notice or to apply to have it set aside. She did not take any such steps before the end of 24 July 2013.
[15] On 25 July 2013, Mrs Busch filed a document dated 22 July 2013 which she
called “Application for Counterclaim to the Bankruptcy Notice”.
[16] The document contains an allegation that Henderson Reeves breached their fiduciary duty to her, giving rise to a claim for damages. She swore an affidavit with that document. The affidavit has been signed by Mrs Busch but has not been sworn in accordance with the rules. The main point to be noted for present purposes is her allegation that Henderson Reeves breached a fiduciary duty by failing to bring a halt to work when it was clear that cash-flow to pay any bills had dried up.
[17] On 26 July 2013, Henderson Reeves filed an amended creditor’s application for adjudication. This application says that Henderson Reeves is a creditor of Mrs Busch for $171,866.12 made up of $161,319.12 for the District Court judgment and $11,542.00 for the order for costs in the High Court appeal. Two acts of bankruptcy are pleaded: the avoidance of creditors under s 21 of the Insolvency Act, being the avoidance relied on by Bell Bruun in her first amended application, and the non-compliance with the bankruptcy notice served on her on 10 July 2013.
[18] Mrs Busch has filed a notice of opposition. She has also sworn an affidavit in opposition.
[19] Another creditor, Rabobank New Zealand Ltd, has filed an appearance in support. It says that it is a creditor of Mrs Busch in the sum of $2,703,000 plus interest and costs, but says that it has a second mortgage over Mrs Busch’s property at Karapiro Road, Cambridge. The first mortgagee is owed $656,568.46 (as at 15
June 2012).
[20] Mrs Busch has filed an extended notice of opposition in response. While not all of the matters she raises appear to be entirely relevant, she says:
(a) Her complaint to the Legal Complaints Review Officer is still pending. She mentions two matters on which she challenges the amounts charged by Henderson Reeves.
(b) She denies committing an act of bankruptcy with regard to Bell
Bruun.
(c) She denies committing an act of bankruptcy with regard to the service of the bankruptcy notice.
(d) She still maintains that she was not the client responsible for paying
Henderson Reeves.
(e) She alleges wrongdoing by Rabobank, the receivers it appointed, one of the barristers engaged by Henderson Reeves, Rabobank’s lawyer, her son and people associated with her son.
(f) Her inability to access records held at the Wildlife Gardens; and
(g) Her personal circumstances.
[21] Mrs Busch has also sworn an affidavit for this hearing.
[22] Mrs Busch is not represented and did not appear in court for the hearing of this application. She has recently moved to the Wairarapa. She took part in the hearing by telephone.
Amended pleading by Henderson Reeves
[23] Henderson Reeves’ first application of 5 September 2011 relied on only one act of bankruptcy – the alleged avoidance of creditors under s 21 of the Insolvency Act. The amount of the debt claimed in that application was $185,305.22, being the amount for which Henderson Reeves sued Mrs Busch in the District Court proceeding. At that stage judgment had not been given.
[24] In the amended application, an added act of bankruptcy has been pleaded – non-compliance with the bankruptcy notice. The amount of the debt has been amended to take into account the judgment of the District Court and the later order for costs in the High Court. Part 24 of the High Court Rules applies to insolvency proceedings. Rule 24.3 provides:
The other Parts of these rules and the general practice of the court apply when this Part applies unless they are modified by or are inconsistent with the Act or this Part.
[25] There is nothing in Part 24 to stand in the way of an applicant amending its application. Accordingly, the general rule as to amendment, r 7.77, applies. Under r 7.77 it is open to Henderson Reeves to amend its pleading, including adding a fresh act of bankruptcy even though that act of bankruptcy has arisen since Henderson Reeves filed its original application.5
What is the effect of Mrs Busch’s application to the Legal Complaints Review
Officer on this proceeding?
[26] Mrs Busch has applied to the Legal Complaints Review Officer to review the decision of a Standards Committee not to take any action on her complaint under s 132(2) of the Lawyers and Conveyancers Act. While I have been informed of her application, none of the relevant documents have been put in evidence. I take it however that her case is that even though Henderson Reeves has obtained judgment against her for its unpaid fees, she is still entitled to complain under the Lawyers and Conveyancers Act about the amounts of the bills.
[27] She defended the District Court proceeding on the basis that there was no contract of retainer between her and Henderson Reeves. Having taken that position she could not have complained under the Lawyers and Conveyancers Act about the fees. That is because s 132 gives a right to complain to the “person who is chargeable with a bill of costs”. She denied that she was chargeable and did not challenge the amount of the fees as an issue in the District Court proceeding. If she had complained to the Law Society about the fees while Henderson Reeves’
proceeding was pending, she ran the risk of her complaint being treated as an
5 See High Court Rules, r 7.77(3).
admission that she was the person chargeable. In hindsight it can be seen that she might have managed the matter by defending the District Court claim as she did but also telling the Court that she did not accept the amounts of the bills and reserving the right to complain under s 132. On the court finding that there was a contract of retainer she could have advised of her intention to complain and asked that judgment not be entered until she had exhausted her rights under Lawyers and Conveyancers Act. A stay under s 161 could have taken effect on her making a complaint before judgment was entered. She did not raise the matter in the District Court. She appeared without a lawyer but with a Mackenzie friend in the District Court and without any assistance in the High Court. I do not think that a layperson such as Mrs Busch can be expected to be alive to the best way to preserve different rights of objection to be considered by separate bodies. The matter is not straightforward.
[28] Is it now too late for Mrs Busch to complain about the amounts of the bills under the Lawyers and Conveyancers Act? Ordinarily a judgment is conclusive as to matters that it has decided and also as to matters that could have been put in issue but were not. When the District Court gave Henderson Reeves judgment against Mrs Busch it established her liability for fees in the amount of $149,795.13 plus interest and costs. The judgment stands in the way of her contending that the fees are excessive. Two decisions seem to recognise that a judgment as to the amount of fees may prevent the Law Society inquiring into a complaint as to fees. The first is under the Law Practitioners Act 1982. Section 155 of that Act provided for a stay of proceedings by a practitioner suing for fees when the fees were to be revised under
that Act. In Erwood v Glasgow Harley the Court of Appeal said:6
[48] Gallen J could have simply set aside the summary judgment in its entirety and restrained the respondent from proceeding with its action for recovery of the bill of costs until the costs revision process, including appeals, had been completed. There was power to do that under s 155(2) of the Law Practitioners Act as the bill of costs had been referred for revision by the High Court and the statute must be read as permitting orders restraining recovery to be made subsequent to the original order of referral by the Court. The alternative approach, taken by the Judge, was to enter summary judgment for liability adjourning the issue of quantum until the Law Practitioners Act process was complete. In general the former approach will be preferable, as it avoids any suggestion the Court is foreclosing the scope of challenge to the bill of costs under the Law
6 Erwood v Glasgow Harley [2002] 1 NZLR 251 (CA).
Practitioners Act. In principle summary judgment should not be entered on liability, under R 137 of the High Court Rules, where there is a risk of findings after a trial on quantum which are inconsistent with holding there was no defence to the claim.
(Emphasis added)
In Simpson Grierson v Gilmour Stevens J said:7
[65] I accept that any such determination should not trench on the jurisdiction and powers of the Standards Committee. Normally, the focus of the inquiry into the complaint will be on the reasonableness or otherwise of a bill of costs. It may be that other issues arise indirectly, for example, with regard to the scope and terms of a contract of retainer. This possibility was contemplated by the Court of Appeal in Erwood at [45]. Therefore, where such an issue could arise, a Court should be careful to ensure that nothing it did in the course of a judicial proceeding should cut across the jurisdiction and powers of the Standards Committee.
(Emphasis added)
[29] These warnings that the courts should arrange matters so that the jurisdiction and powers of those authorised to review lawyers’ bills are not affected recognise that otherwise a court judgment may leave the person charged without effective recourse to have their bills investigated because liability for a given amount has already been established. That therefore suggests that no useful purpose would be served by Mrs Busch continuing with her application to the Legal Complaints Review Officer.
[30] In rare cases in its bankruptcy jurisdiction, the court can go behind a judgment. A leading authority is Corney v Brien.8 Fullagar J said:
Generally speaking, a judgment at law for a sum of money creates an obligation of its own force. The pre-existing obligation, which the judgment was intended to enforce, merges in the new obligation so created, and, for most purposes as between the parties, is conclusive evidence of the existence of the obligation which it creates. It may in some circumstances be set aside by the court which entered it, but unless and until it is set aside, that is, generally speaking, its effect. It has, however, been well settled for very many years that in a court having jurisdiction in bankruptcy a judgment has no such conclusive effect. The court will in many cases, as it is commonly
7 Simpson Grierson v Gilmour (2009) 19 PRNZ 865 (HC).
8 Corney v Brien (1951) 84 CLR 343 (HCA).
said, “go behind” the judgment and enquire into the existence of the debt upon which it is said to be founded. It is sometimes put that the court will “go behind” the judgment for the purpose of enquiring into the consideration for it...
No precise rules exist as to what circumstances call for an exercise of the power, but certain things are, I think, clear enough. If the judgment in question followed a full investigation at a trial in which both parties appeared, the court will not reopen the matter unless a prima facie case of fraud or collusion or miscarriage of justice is made out. ...
[31] There is no suggestion of fraud or collusion in this case. However, there is the question of a possible miscarriage of justice. There is nothing to suggest a miscarriage of justice in the District Court proceeding. Mrs Busch ought to have signalled her intention to complain about Henderson Reeves’ bills before judgment was entered against her. It was unfortunate that she did not do so, but that by itself does not amount to an injustice. The District Court was correct to enter judgment because Mrs Busch had not put her proposed challenge to the amount of the bills as a ground for not entering judgment once it was established that she was the person chargeable.
[32] By the time this Court was to hear her appeal, her challenge to Henderson Reeves’ bills was in issue. Henderson Reeves considered whether the Court could decide the appeal while Mrs Busch’s application to the Legal Complaints Review Officer was pending. Its written submission of 7 February 2013 is relevant. It recorded the sequence of events of Mrs Busch’s complaint, set out s 161, referred to relevant cases and the nature of Mrs Busch’s complaints and submitted that the appeal could still proceed. Paragraph 12 of the submission said:
It is submitted that the s 161 stay does not prevent the appeal from proceeding as all the High Court effectively is doing is ruling on the point as to whether Mrs Busch or the companies she controlled is liable for the fees. The situation is analogous to Gilmore (sic) as really liability is being determined as opposed to quantum. Mrs Busch can continue with the LCRO process in the usual way.
(Emphasis added)
[33] Ellis J accepted that submission in directing that the appeal should be heard only on the question of liability. Allan J decided the case accordingly. But as Henderson Reeves assured the Court that Mrs Busch could continue with her
application to the Legal Complaints Review Officer in the usual way, it cannot now rely on the judgment to say that Mrs Busch cannot challenge the amounts of its bills. In my judgment there would be a miscarriage of justice if Henderson Reeves were now allowed to rely on the finality of the judgments it obtained to prevent Mrs Busch using the procedures under the Lawyers and Conveyancers Act to complain about the bills. Accordingly it appears that it is still open to the Legal Complaints Review Officer to consider Mrs Busch’s review application on the merits. While there is not a stay exactly within s 161 of the Lawyers and Conveyancers Act, a similar position has been reached. To avoid a miscarriage of justice Henderson Reeves cannot assert that its bills are beyond challenge under the Lawyers and Conveyancers Act.
[34] Henderson Reeves generally anticipated the point. It saw the matter as potentially going to a stay under s 161 rather than the way I have put it. It submitted that a bankruptcy proceeding is not a proceeding for the recovery of a debt and is outside s 161. As I have decided the matter on the basis of avoiding a miscarriage of justice, that submission does not apply.
[35] Henderson Reeves further says that even if it cannot rely on the District Court judgment as fixing the amount of fees payable by Mrs Busch, it can still rely on this Court’s order for costs against Mrs Busch in her unsuccessful appeal. It cites Doody v Body Corporate 343562 in support.9 I accept that. Mrs Busch was ordered to pay costs on a 2B basis under the High Court Rules. The fixing of these costs did not require a consideration of Henderson Reeves’ fees to Mrs Busch. The costs were
ordered in a hearing to consider whether there was a contract of retainer between Mrs Busch and Henderson Reeves. The amount of the fees charged under the retainer was not in issue in the appeal. Mrs Busch’s liability under the order for costs arises independently of her challenge to the amounts of the fees. Henderson Reeves may rely on the order for costs.
[36] I sum up on this part of the decision. Mrs Busch’s application for review is
still to be decided. It could arguably result in an adjustment to Henderson Reeves’
fees. The policy that the courts should not allow their proceedings to impinge on the
9 Doody v Body Corporate 343562 [2012] NZHC 25 at [83].
procedures under the Lawyers and Conveyancers Act for investigating the amounts payable for lawyers’ bills and the need to avoid a miscarriage of justice mean that the judgment of District Court should not be relied on as finally establishing the amount of Mrs Busch’s liability under Henderson Reeves’ bills. On the other hand it is still entitled to rely on the order for costs under the appeal as a relevant debt in its bankruptcy application.
Did Mrs Busch commit an act of bankruptcy under s 21 of the Insolvency Act
2006?
[37] Section 21 of the Insolvency Act says:
A debtor commits an act of bankruptcy if the debtor, with intent to defeat or delay his or her creditors avoids them by, for example, leaving or keeping away from the debtor’s home, or by staying within that home.
[38] The pleading of the act of bankruptcy is:
The debtor has committed an act of bankruptcy pursuant to s 21 of the Insolvency Act 2006, pleaded in the first amended creditor’s application for adjudication order of Bell Bruun dated 21 July 2011 as follows:
(i) On 12 May 2011, Dean Troy Hemming of Northland Document Services (1990) Ltd, an agent for Bell Bruun, arrived at Zion Wildlife Gardens, the place of residence and work of the debtor;
(ii) Mr Hemming asked to see the debtor and on learning that she was out, requested that she call him. The debtor failed to do so;
(iii) Mr Hemming returned to Zion Wildlife Gardens on 20 May 2011;
(iv) On requesting to see the debtor she informed her staff, in the hearing of Mr Hemming, that she would not make herself available to see him;
(v) On being requested to speak to Mr Hemming on the telephone, the
debtors refused to do this too’
(vi) Consequently, the debtor’s actions were calculated to defeat or delay her creditor, Bell Bruun, and she therefore constituted an act of bankruptcy as defined in s 21 of the Insolvency Act 2006.
[39] A director of Henderson Reeves has sworn a verifying affidavit in the standard form. That was sworn in September 2011 in support of Henderson Reeves’ original application for adjudication. In her affidavit in opposition, Mrs Busch has
denied that she has committed an act of bankruptcy. Henderson Reeves has not adduced any other evidence as to Mrs Busch committing an act of bankruptcy under s 21 of the Insolvency Act. The verifying affidavit is not by itself proof. Once Mrs Busch has put the act of bankruptcy in issue, the verifying affidavit cannot be used as evidence that Mrs Busch did commit an act of bankruptcy.10 Mr Browne acknowledged that there was no evidence to prove the act of bankruptcy under s 21. Instead Henderson Reeves had chosen to rely on the act under s 17.
[40] In the absence of evidence, I cannot find that Mrs Busch committed an act of bankruptcy under s 21 of the Insolvency Act 2006.
Did Mrs Busch commit an act of bankruptcy under s 17 of the Insolvency Act?
[41] The bankruptcy notice is valid. In particular, it is based on a final order for costs made in this court. Service of the bankruptcy notice has been proved by the affidavit of a process server. Mrs Busch co-operated with service.
[42] Mrs Busch took no steps after the notice was served on her, other than to file her counterclaim document on 25 July 2013. Mrs Busch cannot use the counterclaim document to say she did not commit an act of bankruptcy for these reasons:
(a) The last day for her to comply with the bankruptcy notice was 24 July
2013. Her document is out of time. The act of bankruptcy had already occurred.
(b) If she wanted to set aside the bankruptcy notice she needed to file an application to set aside. Her counterclaim document does not expressly seek that relief. The document is not in the form of an application to set aside the bankruptcy notice.
(c) The substantive matter she raises in the counterclaim — in particular her claim that Henderson Reeves ought to have stopped doing work
10 Re Somerville (1909) 28 NZLR 1055 (SC) at 1060.
for her once the money ran out — was something she could have raised in the proceeding in the District Court, but she did not do so. It was more of a defence than a matter of set-off or counterclaim. It cannot be a cross-claim under s 17(7) of Insolvency Act.
(d)The claim is in any event weak. As Mr Browne submitted, Mrs Busch was the one responsible for funding and paying the legal fees. Even though she maintained that her companies were liable and not herself personally, she was director of those companies and knew what funds they held. She was in a position to instruct her lawyers to discontinue work for her if there were not enough funds available to meet the fees she had been charged. It also seems unlikely that this defence would have eliminated all the debt for fees charged by Henderson Reeves.
[43] Accordingly, I find that Mrs Busch committed a relevant act of bankruptcy on
24 July 2013 when she did not comply with the bankruptcy notice served on her on
10 July 2013. As she did not file a relevant setting aside application within time, the time for complying with the notice was not extended under r 24.10.11
How should the court exercise its discretion under ss 36 and 37 of the
Insolvency Act?
[44] At this stage, Henderson Reeves has satisfied the requirements of s 13 of the Insolvency Act. It has established that Mrs Busch owes it more than $1,000, that she committed a relevant act of bankruptcy under s 17 of the Insolvency Act within three months before it filed its amended application, the debt under the order for costs made in this Court is for a certain amount and the debt is payable immediately.
[45] On those requirements having been established, the court has a discretion to adjudicate Mrs Busch bankrupt under s 36 of the Insolvency Act but, as a reverse
side of the same coin, it may also in its discretion refuse to adjudicate her under s 37:
11 Rule 24.10(1) provides that when an application to set aside has been filed but cannot be heard until after the time for complying with the bankruptcy notice has expired, the time for compliance is treated as extended until the application has been determined.
37 Court may refuse adjudication
The Court may, at its discretion, refuse to adjudicate the debtor bankrupt if—
(a) the applicant creditor has not established the requirements set out in section 13; or
(b) the debtor is able to pay his or her debts; or
(c) it is just and equitable that the Court does not make an order of adjudication; or
(d) for any other reason an order of adjudication should not be made.
[46] In opposition, Mrs Busch relies on the court’s discretion not to adjudicate her
bankrupt.
[47] As to the exercise of the discretion, Henderson Reeves cited Re Fontein ex parte Bank of New Zealand and Re Smith ex parte Trustees Executors Ltd12 for the following principles:
(a) Although the making of an order for adjudication under s 13 is discretionary, when a judgment creditor satisfies the prerequisites of s 13, the onus is on the opposing debtor to show why an order should not be made.
(b)A creditor who establishes the jurisdictional facts is not automatically entitled to an order. On the other hand, it is for an opposing debtor to show why an order should not be made.
(c) In the exercise of the discretion, it is proper for the court to consider not only the interests of those directly concerned – the petitioner, other creditors, the debtor – but also the wider public interest.
(d)In determining whether an order should be made the wider public interest must be taken into account to determine whether adjudication is conducive or detrimental to commercial morality and the interests
of the general public.
12 Re Fontein ex parte Bank of New Zealand HC Auckland CIV-2009-404-7769, 22 November
2010 and Re Smith ex parte Trustees Executors Limited [2013] NZHC 384.
(e) On a bankruptcy application the court must have regard to the public interest in a way which transcends the interest of the immediate parties to the proceeding. The public interest in exposing and controlling an insolvent debtor is one which exists quite independently of the separate question of debt collection by his immediate creditors.
(f) Absence of assets is a factor but even the undoubted absence of assets will not necessarily preclude an order, for the circumstances may be such that the debtor ought in the public interest to be visited with the disqualifications that go with bankruptcy.
(g)Another matter that may be relevant is the potential for further investigation. Bankruptcy makes available to creditors an array of procedures for investigating the financial circumstances of the debtor. Those procedures are likely to prove more effective than an investigation conducted by other means.
(h)The oppressive use of the bankruptcy procedure may be a ground for refusing an order.
(i) The court needs to balance the various considerations relevant to the use, and to determine whether in the end the debtor has succeeded in showing that an order ought not to be made.13
[48] These principles require the court to have regard to the interests of different parties – the applicant, the debtor, other creditors and also the public. Without gainsaying the above principles, I have found that concepts such as “public interest” operate in different ways, sometimes for and sometimes against adjudication. In
other cases I have found it useful to consider the exercise of the discretion, not by
13 These principles are derived from McHardy v Wilkins & Davies Marinas Ltd CA54/93, 7 April
1993; Re Fidow [1989] 2 NZLR 431 (HC): Re Nisbett ex parte Vala [1934] GLR 553 (SC); Eide v Colonial Mutual Loan Assurance Society Limited [1998] 3 NZLR 632 (SC); Baker v Westpac Banking Corporation CA212.92, 13 July 1993.
reference to diverse interests, but by reference to the purposes of bankruptcy.14 The same factors are also relevant in the exercise of other discretions under the Insolvency Act – for example, discharge from bankruptcy and approval of proposals under Part 5, Subpart 2 of the Insolvency Act. The purposes of bankruptcy that I have identified are:15
(a) The administration of the bankrupt’s estate by an independent trustee
in the interests of creditors;
(b) promoting the accountability of debtors for their liabilities;
(c) protecting the community from the debtor incurring liabilities insolvently;
(d) punishment for misconduct; and
(e) freeing debtors from their liabilities so that they can begin afresh.
[49] Except to re-state that cases where a bankruptcy is imposed by way of punishment are extreme cases and very much a rarity, I do not repeat the descriptions of these purposes given in my earlier judgments.
Mrs Busch’s personal circumstances
[50] Mrs Busch is aged 72 years. She does not enjoy good health. She has recently moved to the Wairarapa. She used to own a farm property at Karapiro near Cambridge. She says that the farm was worth $1,450,000 when she used it as security to raise funds to fund her son’s zoo venture at Three Mile Bush on the outskirts of Whangarei. She describes the farm as her last asset. It was sold by mortgagee sale on 10 September 2013 for $852,000. She says that that will cover
the first mortgage, but there will not be anything left for Rabobank, the second
14 Evia Rural Finance v Cribb [2012] NZHC 579.
15 Jamieson v Official Assignee [2012] NZHC 949, [2012] NZCCLR 8; Darby v Official Assignee
[2013] NZHC 22; Sheppard v Blanchett [2012] NZHC 789.
mortgagee. She effectively has no other significant assets. Her only source of income is superannuation.
[51] Her son, Craig Busch, is the so-called “Lion Man”. He had established a zoo venture at Three Mile Bush. He ran into financial difficulties. Mrs Busch came to his aid. She invested very substantial sums to bail him out. She took shareholdings in two companies and became director of all of them. While she had effective control of the zoo – Zion Wildlife Gardens – she and her son fell out. There has been litigation between them since 2008. Henderson Reeves acted for her during part of this period. The zoo failed financially, when it was unable to meet its commitments to Rabobank who appointed receivers. Mrs Busch had lived on site until then, but the receivers required her to leave the zoo. She has been without a permanent base after having had to leave the zoo. She has not been able to afford a lawyer. She says that she has applied for legal aid to assist her with her litigation, but has not been granted legal aid. She was unable to attend the hearing in person, but took part by telephone.
[52] The proceedings in which she is involved have been placed on hold to await the outcome of this proceeding. Mrs Busch does not presently have legal representation in those proceedings.
[53] In her recent affidavit in opposition to the bankruptcy application, she makes generalised allegations of misconduct against her son, one of the barristers instructed by Henderson Reeves, Rabobank and the receivers appointed by it and sundry others. I have not been able to discern any substantial basis for her to take proceedings against any of these people. Moreover she does not have the means to do so.
[54] She also says that a new “Lion Man” series has been shown on television globally via Animal Planet. She says that this film series is in breach of intellectual property rights held by companies in which she has an interest. She considers that there may be some prospect of recovery if proceedings were taken against those responsible for the new “Lion Man” series.
[55] Her evidence is not enough to satisfy me that she has an arguable claim in her own right (as opposed to a claim by any company in which she has an interest).
[56] The only significant debts identified are the debts owing to Henderson Reeves and Rabobank. She has no significant assets. In her present circumstances she does not appear to have any prospect of being able to meet these liabilities in the immediate future. She is insolvent.
[57] Her plight is unenviable. After having come to her son’s help, she has lost everything. She has endured years of stress through the disputes with her son. Her health has suffered.
How then should the court exercise its discretion?
[58] This is not one of those cases of such serious misconduct that bankruptcy ought to be imposed by way of punishment.
[59] While she is insolvent, Mrs Busch does not pose any significant threat to the commercial community. In her personal circumstances, at her age and with her poor health, there is no significant prospect of her engaging in any commercial activity. The risk that she will run up more credit without the means to pay is slight and does not of itself justify making her bankrupt.
[60] While punishment and protection of the community generally do not figure as relevant considerations, the other features of bankruptcy are relevant.
[61] There is the need for accountability. Two decisions of Master Kennedy-Grant go to the application of the accountability requirement in adjudication decisions. In Re Coll ex parte Consumer Finance Ltd he said:16
He has incurred those liabilities by giving guarantees. He has not honoured his guarantees. He is not in a position to honour his guarantees. The guaranteeing of financial advances to companies by directors of those companies is standard practice in New Zealand. It is an almost invariable requirement of lenders. Without the additional security provided by such guarantees, lenders would very often not make advances. The directors of
16 Re Coll ex parte Consumer Finance Ltd HC Rotorua B69/979, 18 September 1997 at 7.
companies obtain the benefit for their companies of advances made in reliance on their guarantees. It would not, in my view, be conducive to commercial morality - the proper consideration by directors of whether they can give guarantees and the proper construction by directions of whether, once having given guarantees, they should honour them - if I were to dismiss the petition. I am satisfied that the proper order in this case is one of adjudication.
[62] In Re D’Esposito ex parte Westpac Banking Corporation he said:17
I have had occasion to comment before on the fact that the giving of personal guarantees is an integral part of the financing of business. Failure to honour personal guarantees can have serious consequences for the creditors to whom they have been given. The general expectation among the business community and on the part of those who finance business must be that guarantees, if given, will be able to be honoured, that the guarantors have assets against which the persons to whom the guarantees are given may proceed if the guarantees are not honoured.
[63] The point being made in these passages is that when debtors assume responsibilities, and are not able to meet those liabilities, there are consequences. Adjudication in bankruptcy can be an appropriate response to ensure accountability. Mrs Busch’s liability to Rabobank is under a guarantee. The above dicta are directly applicable here. A similar approach applies to Mrs Busch’s liability for legal fees to Henderson Reeves. Having instructed Henderson Reeves to undertake legal work for her (including engaging barristers to act on her behalf) on the basis that she would be responsible for paying their fees, it is not acceptable that her failure to pay the fees be left in abeyance. That would fail to address accountability. Mrs Busch has no other means of meeting these liabilities. In the absence of ability to meet those liabilities, bankruptcy promotes accountability for the debts she has incurred.
[64] Given Mrs Busch’s insolvency, it is an appropriate response to place her affairs under the control of the Official Assignee who will administer them in the interests of creditors. The Official Assignee will be able to investigate her affairs under the provisions of the Insolvency Act. He will be able to review the litigation with her son. He may be able to assess whether it is worthwhile pursuing that litigation in the interests of creditors. He may be able to examine other transactions by Mrs Busch to see whether there is a prospect of further recovery for creditors.
Mrs Busch has not shown that any of these matters can be dismissed out of hand.
17 Re D’Esposito ex parte Westpac Banking Corporation HC Napier B16/98, 30 June 1998 at 19.
[65] The final aspect, the discharge from liabilities, can also serve a useful purpose. Mrs Busch presently seems to have no realistic prospect of being able to address her debts in any significant way. A discharge from bankruptcy will clear her of her debts and remove what is undoubtedly an ongoing cause of stress to her.
[66] In considering whether bankruptcy should be ordered, it is appropriate to take into account alternatives to bankruptcy – see s 8 of the Insolvency Act. There has been no suggestion of a proposal to creditors under Part 5, Subpart 2 of the Insolvency Act. The debts are too large for the summary instalment regime under Part 5, Subpart 3 of the Insolvency Act,18 or the “no asset” procedure under Part 5,
Subpart 4, to apply.19 There is no evidence that Mrs Busch has made any attempt to
negotiate a compromise with her creditors.
[67] She referred to the new “Lion Man” series as something that could be pursued. However, that is entirely speculative. She has not identified what intellectual property rights she or any companies she is associated with could assert. She has not shown how that series constitutes a breach of any rights held by her or any companies she is associated with. She does not have the means to pursue any such litigation. Instead, it might be something the Official Assignee would investigate to see if there is any prospect of recovery for creditors.
[68] I am satisfied that there is no practical alternative to bankruptcy available in this case.
[69] I also record that there is no evidence of anything on the part of her creditors such as oppressiveness or similar misconduct that would count against Mrs Busch being adjudicated bankrupt.
Outcome
[70] Overall I am satisfied that Mrs Busch has committed a relevant act of bankruptcy and that she is insolvent. She has not persuaded me that I ought to
exercise the discretion under s 37 against bankruptcy. Accordingly, I make an order
18 The limit is $40,000. See Insolvency Act 2006, s 343 (1).
19 Insolvency Act 2006, s 363.
adjudicating Mrs Busch bankrupt. The time and date of the order is 26 September
2013 at 12.00 noon.
[71] I award Henderson Reeves costs as sought in Mr Browne’s submissions in the sum of $5,130.00 plus disbursements of $1,096.87, a total of $6,226.87.
………………………….....
Associate Judge R M Bell
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