Ironstone Holdings Limited v Prasad
[2013] NZHC 3529
•20 December 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-5557 [2013] NZHC 3529
IN THE MATTER OF the Insolvency Act 2006
BETWEEN IRONSTONE HOLDINGS LIMITED Judgment Creditor
ANDBHASKAR PRASAD Judgment Debtor
CIV-2012-404-3263
BETWEEN MORRIS WAYNE McLEARY
and
SUZANNE CHRISTINE McLEARY Plaintiffs
ANDBHASKAR PRASAD First Defendant
EVANGELINE SARITA PRASAD Second Defendant
Hearing: 16 December 2013
Appearances: N King for Bhaskar Prasad
E Grove for Ironstone Holdings Ltd
C Jones for Official Assignee
J D Noble for Mr and Mrs McLeary(Judgment creditors of Mr Prasad) No appearance for Mrs Prasad
Judgment: 20 December 2013
JUDGMENT OF ASSOCIATE JUDGE BELL
This judgment was delivered by me on 20 December 2013 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules.
...................................
Registrar/Deputy Registrar
IRONSTONE HOLDINGS LIMITED v BHASKAR PRASAD [2013] NZHC 3529 [20 December 2013]
[1] There are four questions to be decided:
(a) Should Mr Prasad’s bankruptcy be annulled under s 309(1)(a) of the
Insolvency Act 2006?
(b) Should Mr Prasad’s bankruptcy be annulled under s 309(1)(b) of the
Insolvency Act?
(c) Should Mr Prasad’s bankruptcy adjudication remain suspended?
(d) What is the effect of Mr Prasad’s bankruptcy on the order for sale
made in the McLearys’ proceeding?
Should Mr Prasad’s bankruptcy be annulled under s 309(1)(a) of the Insolvency Act?
[2] Under s 309(1)(a) the court has a discretion to annul an adjudication in bankruptcy if the court considers that the bankrupt should not have been adjudicated bankrupt. If the court annuls the bankruptcy on that ground, the annulment takes effect from the date of adjudication.1 Mr Prasad says that he should not have been adjudicated bankrupt because the amount claimed by Ironstone Holdings Ltd in its bankruptcy notice and its bankruptcy application was overstated.
[3] Mr Prasad was adjudged bankrupt on Ironstone’s application on 19 March
2013. The relevant history includes not only the bankruptcy proceeding, but also the original claim by Ironstone Holdings Ltd and steps taken after Mr Prasad was made bankrupt.
[4] Ironstone Holdings Ltd leased commercial premises in Karangahape Road, Auckland, to Mr Prasad in January 2010. He used the premises for a night-club. He abandoned the premises on 18 April 2011. He was in arrears with the rent.
Ironstone sued Mr Prasad in the District Court at Manukau. It claimed not only the
1 Insolvency Act 2006, s 309(3)(a).
rent payable when Mr Prasad quit the premises, but also rent falling due afterwards. Its case was that there was no surrender of the lease and it did not cancel the lease. It seems also to have claimed the costs of reinstatement. Mr Prasad did not defend the proceeding. Ironstone obtained judgment by default against Mr Prasad on 1 June
2012 for $155,916.10.
[5] This court issued a bankruptcy notice on the District Court judgment. The sum payable under the bankruptcy notice was $155,952.40 (the amount of the judgment in the District Court plus the costs of an evidential certificate). Attached to the bankruptcy notice was a copy of the certificate of judgment for the Manukau District Court judgment. Ironstone served the bankruptcy notice on Mr Prasad on
21 September 2012. The time for Mr Prasad to comply with the bankruptcy notice expired on 8 October 2012. Mr Prasad took no steps to comply with the notice, nor did he apply to set aside the notice. Ironstone filed a bankruptcy application on
11 October 2012, and served the application on Mr Prasad on 26 October 2012. Mr Prasad filed a notice of intention to oppose the application and filed an affidavit. His notice said that he intended to dispute the act of bankruptcy on the grounds that the lease had been cancelled, the rental arrears were in dispute, and he had a defence against the claim for rent, and he had a counterclaim. His affidavit stated that he had applied to the District Court at Manukau to set aside the judgment. He exhibited the setting-aside application and an affidavit in support of the setting-aside application. That affidavit set out complaints against Ironstone relating to alleged noise restrictions on the use of the premises for a night-club and alleged health hazards. He also alleged that Ironstone had failed to advise the District Court that he had quit the premises and that the lease had been cancelled. Mr Prasad had instructed lawyers to prepare and file the notice of intention to oppose the bankruptcy application and the setting-aside application in the District Court.
[6] At the first call of the bankruptcy application Associate Judge Sargisson adjourned the case to 21 February 2013 to await the outcome of Mr Prasad’s setting- aside application in the District Court.
[7] Mr Prasad’s application to set aside the District Court was to be heard in that
court on 21 February 2013. Ironstone appeared, but there was no appearance for
Mr Prasad. Mr Prasad blames his lawyer for the non-appearance. The lawyer who appeared for Ironstone advised the court that Mr Prasad’s lawyer had given a notice of withdrawal as counsel. That notice had not apparently reached the District Court file. Judge Hinton dismissed the setting-aside application and awarded costs on a solicitor/client basis to Ironstone Holdings Ltd.
[8] The bankruptcy application was called in this court on the same day. Ironstone appeared, but there was no appearance for Mr Prasad. Associate Judge Sargisson recorded that the application to set aside the District Court judgment had been dismissed. She adjourned the bankruptcy application to 19 March 2013.
[9] On 14 March, Ironstone’s lawyers wrote to Mr Prasad recording that the District Court had dismissed his setting-aside application, and advising that the bankruptcy proceeding had been adjourned and was to be called on 19 March 2013. The letter said:
If you fail to appear at the hearing on 19 March, or if you fail to provide any credible reason to the court as to why you should not be declared bankrupt, it is likely that the court will make an order adjudicating you bankrupt at that hearing.
[10] Ironstone has shown that the letter was sent by courier to Mr Prasad’s
residential address. Mr Prasad sent an email in response to the lawyers on 18 March
2013. He said he had new lawyers acting for him.
[11] When the bankruptcy application was called on 19 March 2013, Ironstone appeared but there was no appearance for Mr Prasad. Associate Judge Sargisson made an adjudication order.
[12] On 3 May 2013, Mr Prasad filed in the Court of Appeal an application for leave to appeal out of time. The grounds he gives for his appeal are that he was not aware of the adjudication until more than one month afterwards, that while he instructed lawyers, his lawyer had not attended court hearings and he was adjudged bankrupt without any appearances. The bankruptcy proceeding was based on the default judgment, when he had applied to have that judgment set aside. His lawyers did not appear on the setting-aside applications.
[13] At the same time, he also applied to this court to “allow proceedings and stay administration of the estate”. The application was stated to have been made under ss 76 and 416 of the Insolvency Act. Under s 76(2) the court may allow proceedings that would otherwise be halted under s 76(1) to continue on terms and conditions the court thinks appropriate. The proceedings that are halted are proceedings to recover any debt provable in the bankruptcy. Under s 416 this court or the Court of Appeal may make an order suspending an adjudication until an appeal against the adjudication has been heard. In his application and in his affidavit in support, Mr Prasad made it clear that he sought a stay in the administration of the estate to allow him the opportunity to set aside the default judgment Ironstone had obtained against him.
[14] On 23 May 2013 Associate Judge Faire made an order that administration of the estate be stayed pending disposal of Mr Prasad’s appeal, or pending further order of the court. Associate Judge Faire made that order in reliance on an undertaking given by Mr Prasad that he would diligently prosecute and take all steps necessary to progress this application for leave to appeal to the Court of Appeal and, if granted leave, he also undertook that he would not increase or borrow or grant securities over any property, or cause the equity in his property to be reduced or otherwise dissipate assets owned by him before the application for leave had been determined or the appeal had been determined.
[15] It appears that Mr Prasad’s leave application in the Court of Appeal is on hold. On 26 September 2013, Wild J issued a minute in response to memoranda filed by the parties. He asked to be informed of the outcome of Mr Prasad’s setting- aside application in the District Court. He added:
I trust counsel will also be aware that this Court’s concern is that it not deal with Mr Prasad’s application for leave to appeal unless and until Mr Prasad has exhausted remedies open to him in the courts below.
[16] In the meantime, Mr Prasad applied to the District Court a second time for Ironstone’s default judgment to be set aside. Judge Cunningham heard the application on 24 September 2013. She did not set the judgment aside, but varied the judgment so that the amount payable was $33,779.15. She found that there were special circumstances which allowed Mr Prasad to apply to set aside the second
time. In the setting-aside application Mr Prasad did not rely on the question of noise restrictions. Instead, Mr Prasad’s application was made on the basis that he was entitled to cancel the lease because of a plumbing problem. Judge Cunningham rejected that because it was a minor problem and took only a couple of days to fix once it had been drawn to the landlord’s attention. She held that Mr Prasad did not have grounds to cancel the lease. She also found that Ironstone had not cancelled the lease. She held that Mr Prasad was liable for rent and outgoings up until he left the premises on 18 April 2011, but she was not satisfied with the balance of Ironstone’s claim. She said at paragraph [15] of her decision:
I am therefore left with insufficient evidence that the landlord has taken proper steps to mitigate its loss. There is no detail about efforts that were taken to re-lease the premises and all I have is a bald statement that they were re-instated to their original condition.
[17] The Judge appears to assume that Ironstone was under a duty to mitigate. If Mr Prasad was not entitled to cancel and his repudiation of the lease was not accepted, and Ironstone did not cancel or re-enter, then it is arguable for Ironstone that it was entitled to recover rent from Mr Prasad for the balance of the lease, relying on the principle in White & Carter (Councils) Ltd v McGregor.2 I do not read Judge Cunningham’s decision as precluding Ironstone from continuing with a claim against Mr Prasad for unpaid rent falling due up to the expiry of the lease. Such a claim would be subject to enquiries whether the lease was brought to an end
before its expiry date and, if so, whether any damages claim is subject to questions of mitigation.
[18] Mr Prasad made his application for annulment in November 2013. In the meantime, Mr Prasad has issued a fresh proceeding in his own name against Ironstone in the Manukau District Court. He claims losses of $97,286.49. The notice of claim is not in the form of a pleading used in this court. Mr Prasad alleges that Ironstone was in breach of a duty to keep the building in good order and repair. On this point he seems to be referring to the water leaking issue addressed by Judge Cunningham in her decision. He also alleges that Ironstone knew that there was a
tenant living upstairs, and that the premises were not suitable for a night-club.
2 White and Carter (Councils) Ltd v McGregor [1962] AC 413 (HL).
[19] The District Court judgment, as varied by Judge Cunningham in her decision of 24 September 2013, does not determine conclusively the claims between Ironstone and Mr Prasad. Ironstone still has an undetermined claim for rent due under the lease after 18 April 2011 and repair costs. Mr Prasad still has his claim against Ironstone for breaches of covenant. Those claims have not been determined. There is not enough evidence in this application for me to make any final findings as to their merits.
[20] Mr Prasad says that he has issued another proceeding against the McLearys. They had obtained judgment against him on his guarantee of a lease of premises in Onehunga. The tenant was his company B P Automotive Ltd. He alleges that the McLearys converted plant and equipment of the company after cancellation of the lease.
[21] Ordinarily on an annulment application, the bankrupt cannot attack any judgment on which a bankruptcy notice is founded. That is because on bankruptcy the right to challenge the judgment vests in the Official Assignee: Boaler v Power.3
Mr Prasad has found a way around this problem. Associate Judge Faire’s order stayed the administration. That order is best considered as an order made under s 416 of the Insolvency Act suspending the adjudication pending the appeal to the Court of Appeal. I am less confident that a debtor’s application to set aside a judgment is a proceeding for which leave can be granted under s 76(2) of the Insolvency Act. Because the adjudication is suspended, the right to apply to set aside a judgment has not vested in the Official Assignee. Mr Prasad is still free to
make it.4
[22] Because Mr Prasad found a way to have the judgment against him varied, care is required in considering his annulment application. Simply because bankrupts have not in the past been able to attack a judgment against them does not mean that
his annulment application should be dismissed.
3 Boaler v Power [1910] 2 KB 229 (CA) at 232, followed in New Zealand in Wilson v UDC Finance Ltd HC Christchurch B348/89, 5 December 1989, and Kipping v UDC Finance Ltd [2012] NZHC 1707.
4 Brooks v Clyne & Bennie (1988) Ltd [2013] NZHC 3501 shows another way round the problem.
There the bankrupt obtained an annulment under s 309(1)(b) and later applied to set aside the judgment.
[23] In Re Franck; ex parte Pilszky,5 Fisher J said in relation to the same
annulment ground under Australia’s bankruptcy legislation:
In light of the various contrasting avenues open to a bankrupt to approach the Court to have the sequestration order set aside, it is in my opinion necessary to attach significance to the ‘careful provisions’ of s 154, and in particular the words ‘ought not to have been made’. In my opinion it can be said that a Judge ‘ought’ not to have made an order only if he was ‘bound’ not to make the order. In circumstances where it was open to a Judge to make an order in the exercise of his discretion, it can only be said he ‘ought not to have made the order’ if none of the circumstances could justify the making of an order. Alternatively it can be established that an order ‘ought’ not to have been made because subsequent evidence discloses that all the true facts were not before the Court when the order was made: Re Cook (1946) 13 ABC 245 at 249.
[24] In Holdgate v Blocassa Ltd, the Court of Appeal said: 6
In exercising its discretion under that provision, a court must approach the matter on the basis of the facts as they were at the time of adjudication. Those facts may not necessarily have been before the court which made the adjudication, but they must be the true facts at that time.
[25] In Brooks v Clyne & Bennie (1988) Ltd,7 the bankrupt had successfully applied to have the District Court judgment set aside on the grounds that he had not signed the guarantee on which the judgment creditor relied. Associate Judge Matthews held that if the court hearing the bankruptcy application had known that there were sound reasons for the judgment of the District Court to be set aside, the court would not have made an adjudication order, but would have given time for a setting-aside application to be heard in the District Court. He applied Holdgate v Blocassa to hold that at the time of the adjudication there were sound reasons for the judgment of the District Court to be set aside, and thus the bankruptcy adjudication was flawed.
[26] That decision is useful guidance for the present case, although this case is not on all fours. In this case, the District Court had already heard and dismissed one application to set aside the District Court default judgment. When the later setting-
aside application was heard, Judge Cunningham did not set aside the judgment
5 Re Franck, ex parte Pilszky (1987) 77 ALR 511 at 517, as cited in Re Guest, ex parte BNZ Finance Ltd [1991] 1 NZLR 250 (HC) at 254.
6 Holdgate v Blocassa [2007] NZCA 132 at [21].
7 Brooks v Clyne & Bennie (1988) Ltd [2013] NZHC 3501.
entirely, but only reduced the amount payable under the judgment. Nevertheless,
Associate Judge Matthews’ approach can be applied.
[27] For the annulment application, the decision to adjudicate Mr Prasad bankrupt has to be assessed on the facts that although Ironstone had obtained a judgment against Mr Prasad for $155,916.10, that judgment was liable to be varied by being reduced to $33,779.15. It is beside the point that this court could not have known that when the bankruptcy order was made.
[28] Mr Prasad can raise these matters for his claim that the bankruptcy order ought not to have been made:
(a) The amount of the judgment debt in the bankruptcy notice was over- stated;
(b)The amount of the judgment debt in the bankruptcy application was over-stated.
[29] There are no other matters on which he can rely to ask for an annulment. He cannot complain about the matter being heard in his absence, because Ironstone had told him that the bankruptcy application was still alive and when it was to be heard. Leaving aside the amounts claimed by Ironstone in the bankruptcy notice and the bankruptcy application, there was no irregularity in the way that Ironstone obtained the order of adjudication.
[30] The arguable overstatement of the judgment sum in the bankruptcy notice goes to the validity of the bankruptcy notice and accordingly to whether Mr Prasad committed an act of bankruptcy. Section 30 of the Insolvency Act deals with overstatements in bankruptcy notices:
30. Effect of overstatement of amount owing
(1) Overstatement in a bankruptcy notice of the amount owing by the debtor does not invalidate the notice, unless—
(a) the debtor notifies the creditor that the debtor disputes the validity of the notice because it overstates the amount owing; and
(b) the debtor makes that notification within the time specified in the notice for the debtor to comply with the notice.
(2) A debtor complies with a notice that overstates the amount owing by—
(a) taking steps that would have been compliance with the notice had it stated the correct amount owing (for example, by paying the creditor the correct amount owing plus costs); and
(b) taking those steps within the time specified in the notice for the debtor to comply.
[31] Before the notice could be invalidated Mr Prasad had to take certain steps after he was served. Within 10 days of being served, he had to notify Ironstone that he disputed the validity of the notice because the amount claimed was over-stated. To comply with that notice, he would have to take steps that would amount to compliance if the correct amount had been stated in the notice. He had to do that within the time provided for compliance. In short, he would have had to pay Ironstone the sum of $33,779.15 plus costs within 10 working days of service or take one of the other compliance steps within the same time.
[32] Mr Prasad did not do that. He can only contend that the notice is invalid for overstatement if he took the steps required under s 30. He cannot contend that he complied with the notice because he did not take the appropriate steps within the
10 working days for compliance.
[33] For Mr Prasad it is objected that, in the light of the subsequent judgment of District Court Judge Cunningham, the discrepancy in the bankruptcy notice is so gross that the bankruptcy notice should be set aside, notwithstanding s 30. But s 30 applies, whatever the extent of the over-statement. If Parliament had intended that where there was a gross overstatement the notice should be set aside entirely, without requiring the debtor to take any steps, it would have said so. Instead, s 30 is consonant with the policy underlying s 418 of the Act that defects generally do not lead to a step being invalidated unless a person is prejudiced by the defect. Mr Prasad has not identified any prejudice under s 418. If Mr Prasad had applied to the court to set aside the notice on the grounds of the overstatement, the court’s likely remedy may have been to give him time to make his setting-aside application
or the court may have amended the notice to accord with any subsequent setting- aside decision made by the District Court.8
[34] I apply s 30 and find that Mr Prasad committed an act of bankruptcy because he took no steps to comply with the notice within 10 working days of service.
[35] In its bankruptcy application, Ironstone said that the amount Mr Prasad owed it was $158,551.60. That took into account interest that had accrued since judgment had been entered in the District Court on 1 June 2012. Mr Prasad was alive to the point that the application overstated his liability. His notice of intention to oppose the application shows that he contested the amount of the debt Ironstone relied on. He was given the opportunity to apply to the District Court to have the judgment set aside. In the end it was his second application to set aside that succeeded.
[36] Following the approach of Associate Judge Matthews in Brooks v Clyne & Bennie (1988) Ltd, if the court had known on 19 March 2013 that the judgment Ironstone was relying on would be reduced to $33,779.15, that would not have required the court to refuse to adjudicate Mr Prasad bankrupt. Ironstone could still rely on an indisputable debt that Mr Prasad owed and which he had not paid. In these circumstances, the court would still have made an order of adjudication. The requirements of s 13 of the Insolvency Act were met.
[37] The overstatement of the judgment sum in the bankruptcy notice and application does not mean that the order for adjudication ought not to have been made. His application under s 309(1)(a) does not succeed.
Should Mr Prasad’s bankruptcy be annulled under s 309(1)(b) of the Insolvency Act?
[38] In his second affidavit, Mr Prasad has advanced the possibility of paying off all his creditors. At the moment, that is little more than an idea. It has not developed to the state where Mr Prasad has a concrete proposal to place before the court or his
creditors.
8 Re Ebbett ex parte Fletcher Merchants Ltd HC Tauranga B109/92, 9 October 1992 – an example of a bankruptcy notice being amended on a setting-side application.
[39] Mr Prasad’s general idea is to raise a loan sufficient to pay off all his creditors. The family home at 2 Fictree Terrace will be security. His bankruptcy will be annulled upon his creditors being paid off and the Official Assignee’s fees and costs met.
[40] He has instructed a mortgage broker to arrange finance. At the hearing I was advised that the proposal might work by the Official Assignee transferring Mr Prasad’s interest in the family home to Mr Prasad’s daughter, with the daughter and Mrs Prasad paying the Official Assignee enough to clear the debts from the proceeds of the loan.
[41] The offer of finance is not yet certain. The only document put in evidence did no more than give hope that finance might be arranged, rather than showing a concrete offer of finance. The Official Assignee had not been consulted about how the transaction would work. The Official Assignee’s submissions could certainly not be taken as a wholesale acceptance of Mr Prasad’s proposal.
[42] The court might make orders allowing an annulment to take effect upon creditors being paid, but at present matters have still to move a considerable distance before that position can be reached.
[43] Mr Prasad identifies his creditors as:
Mortgage to the BNZ $240,156.45
Ironstone Holdings $33,719.15
Consumer Finance $4,637.60
Westpac $4,214.17ASB $21,681.39
Inland Revenue Department $928.95
McLearys _$62,000.00
Total: $367,337.71
[44] It will be seen that Mr Prasad acknowledges liability to Ironstone Holdings Ltd only for the amount to which Judge Cunningham reduced the judgment. He has made no allowance for any liability to pay rent for the Karangahape Road premises after April 2011 until the end of the term.
[45] In most cases when a bankrupt is discharged under s 309(1)(b), creditors are paid and that brings finality in the bankrupt’s debts. But Mr Prasad proposes something different. In his second affidavit he has attached a statement of affairs in which he includes, as assets, a claim against Ironstone Holdings Ltd for $97,286.49 and a claim against the McLearys for $142,662.00. Although he proposes to pay Ironstone the amount owing under its judgment and the McLearys the amount owing under the judgment they have obtained against him, he also proposes after the annulment to take proceedings against Ironstone and the McLearys. Mr Prasad cannot pay his creditors and then, after an annulment under s 109(1)(b), start proceedings against those creditors on causes of action that had accrued before his bankruptcy. That is because of the effect of insolvency set off under s 254. Any claims that Mr Prasad might have against those creditors are subject to insolvency set-off, which takes effect by operation of law. On adjudication of bankruptcy, Mr Prasad’s claims against his creditors are set-off against the creditors’ claims to
achieve a net balance.9 In Stein v Blake Lord Hoffmann said:10
Do the causes of action survive?
The principles so far discussed should provide an answer to the first of the issues in this appeal, namely, whether if A against whom B has a cross-claim becomes bankrupt, A’s claim against B continues to exist as a chose in action so that A’s trustee can assign it to a third party. In my judgment the conclusion must be that the original chose in action ceases to exist and is replaced by a claim to a net balance. If the set-off is mandatory and self- executing and results, as at the bankruptcy date, in only a net balance being owing, I find it impossible to understand how the cross-claims can, as choses in action, each continue to exist.
[46] In a similar way, Mr Prasad’s claims against Ironstone Holdings Ltd and the McLearys cannot continue to exist independently, once insolvency set-off has occurred under s 254.
[47] There is, moreover, a policy objection to the course proposed by Mr Prasad. An annulment under s 309(1)(b) is intended to bring a settlement of claims between creditor and debtor. Mr Prasad’s proposal will instead lead to a continuation of existing disputes.
[48] The better way to deal with the claims which Mr Prasad wants to run against Ironstone and the McLearys is to follow the procedures under the Insolvency Act - in particular, the Official Assignee’s admission or rejection of the claims by the creditors under Part 3 subpart 9 of the Insolvency Act. The Official Assignee will be able to consider claims submitted by creditors, and to assess whether to make adjustments to them on account of matters raised by Mr Prasad. The Official Assignee’s decision may be challenged by either creditors or Mr Prasad under s 238 of the Insolvency Act. These procedures should offer a better way of resolving the claims which Mr Prasad asserts he can make against Ironstone and the McLearys. This means that before Mr Prasad would be able to make a proposal for an annulment under s 309(1)(b), the Official Assignee will need to have accepted or rejected any claims by creditors and any challenges to the decision of the Official
Assignee will have been resolved.11
[49] There is one further aspect that may be relevant to any application Mr Prasad may make under s 309(1)(b). The court has a residual discretion whether to annul an adjudication, even if the bankrupt has satisfied all the creditors’ debts and the Official Assignee’s fees and costs. Bankruptcy involves matters of public interest
that extend beyond the interests of the creditors and the bankrupt.12
[50] Since 2008 Mr Prasad has run three businesses that have failed. Between July 2008 and March 2010, Mr Prasad’s company, BP Automotive Ltd ran a mechanical workshop at 37 Church Street, Onehunga. The landlords, the McLearys, re-entered for non-payment of rent in March 2010. The landlords obtained judgment against Mr Prasad on a guarantee for $62,163.00.
[51] Mr Prasad ran the night-club at Ironstone’s premises in Karangahape Road, Auckland, from January 2010 until he quit the premises in April 2011, again leaving rent unpaid, resulting in his liability to Ironstone.
[52] Later he ran some form of educational business in Dominion Road,
Auckland, under the name “Ellipse Institute”. That business also failed although
Mr Prasad blames the New Zealand Qualifications Authority for closing down the business. The failure of three businesses in a fairly short time suggests that there may be greater risk attaching to Mr Prasad carrying on business on his own account than would go with other bankrupts being discharged from bankruptcy or having their bankruptcies annulled.
[53] Other aspects of Mr Prasad’s conduct which cause concern are:
(a) He did not disclose his debt to the McLearys in his initial annulment application;
(b)One of his assets is a boat and trailer. The Official Assignee says the boat is secured to the Bank of New Zealand but the bank believes that there is equity in the boat. According to the Official Assignee, the bank has not been successful in locating and repossessing it. On the other hand, Mr Prasad says that the bank has already seized the boat.
(c) Mr Prasad transferred his shareholding in Ellipse Institute Ltd to a relative, Fergie Prasad, and his shareholding in Accounting 2000 Ltd to a relative, Beverley Prasad, both on 19 September 2012, two days before he was served with Ironstone’s bankruptcy notice.
(d)The McLearys have experienced service difficulties. Mr Prasad told a process-server that his wife was in Australia – when she was not. Members of the Prasad family told a process-server that Mrs Prasad did not live at the family home, although she was ultimately served there. In September this year the McLearys had to apply for substituted service of their application to vary the order for sale because the Prasad family would not co-operate in service.
[54] Mr Prasad should be aware that this kind of behaviour will not endear himself to his creditors or impress the court.
[55] If Mr Prasad does intend to make an application in the future for annulment of his adjudication under s 309(1)(b), he may wish to give some attention to the public interest aspect of bankruptcy, in particular, whether there is a continuing need for the community to be protected from him. Court decisions on bankrupt’s applications for early discharge may be useful guidance for him.
[56] At present, there is no basis for annulling his bankruptcy under s 309(1)(b).
Should the suspension of Mr Prasad’s bankruptcy continue?
[57] Mr Prasad has used the suspension of the adjudication as he intended to obtain a decision from the District Court on his application to set aside the Ironstone default judgment. In addition, he has also filed a notice of opposition and affidavit in opposition to the McLearys' application to amend the orders for the sale of the Prasads’ family home. As will become apparent in the answer to the fourth question, the McLearys' application to vary the terms of the order for sale has become moot because of Mr Prasad’s bankruptcy. Mr Prasad’s wish to be heard on the application to vary the terms of sale does not arise. The reasons given for the suspension of his adjudication no longer apply.
[58] Mr Prasad may still continue his application for leave to appeal against the order of adjudication and, if leave is granted, he will be able to continue with his appeal even if the adjudication is not suspended.13
[59] On the other hand, there are good reasons for lifting the suspension. It will allow the Official Assignee to begin administration of Mr Prasad’s estate. In particular, the Official Assignee will be able to examine creditors’ claims and to decide whether to accept, modify or reject them in the light of the matters that Mr Prasad wants to raise against those creditors. Prompt determination of creditors’ claims will make it possible for Mr Prasad to make his application under s 309(1)(b). Lifting the suspension will also allow the Official Assignee to investigate Mr Prasad’s transfers of shares in Ellipse Institute Ltd and Accounting 2000 Ltd.
[60] For the above reasons, there is no good reason for maintaining the suspension of Mr Prasad’s bankruptcy pending the appeal. I set aside the suspension order made by Associate Judge Faire on 23 May 2013.
What is the effect of Mr Prasad’s bankruptcy on the order for sale made in the
McLearys’ proceeding CIV-2012-404-3263?
[61] In CIV-2012-404-3263 the McLearys obtained an order under s 339 of the Property Law Act 2007 for the sale of the Prasads’ property at 2 Figtree Terrace, Goodwood Heights, Manurewa, Auckland. The McLearys were entitled to apply for the order because they had standing as judgment creditors who had lodged a
charging order over the property.14 I made an order for sale on 21 August 2012. The
McLearys did not give immediate effect to the order for sale. They understood that the Bank of New Zealand was to sell the property by way of mortgagee sale. Later, they were advised that the Bank of New Zealand no longer intended selling the property. In August 2013 the McLearys applied to amend the order for sale made in August 2012. Mr Prasad filed a notice of opposition.
[62] Since the initial order for sale made in August 2012, Mr Prasad has been adjudicated bankrupt. The order for sale is caught by s 77 of the Insolvency Act
2006:
77Execution process must not be begun or continued after adjudication advertised
(1) A creditor must not begin or continue an execution, attachment, or other process in respect of the bankrupt's property or person, for the recovery of a debt provable in the bankruptcy, after—
(a) the Assignee has advertised the bankrupt's adjudication; or
(b) the Assignee has given notice of the adjudication to the creditor.
(2) After advertisement of the adjudication or notice by the Assignee to the creditor, a creditor must not seize or sell any property by way of distress for rent due and owing by the bankrupt, but the creditor may continue with the distress procedure if already begun.
[63] The order for sale was made to enable the McLearys to receive from Mr Prasad’s share of the proceeds of sale the amount owing under their judgment against him in the Manukau District Court. Mr Prasad’s judgment debt to the McLearys is provable in Mr Prasad’s bankruptcy. The order for sale is a form of “execution, attachment or other process in respect of the bankrupt’s property” within s 77(1). Mr Prasad’s bankruptcy was advertised on 28 March 2013. Section 77 prevents the McLearys from continuing with enforcement of the order for sale.
Result
[64] Mr Prasad’s application to annul his bankruptcy on the grounds that the adjudication order ought not to have been made has not succeeded. It is premature to consider any application for his bankruptcy to be annulled under s 309(1)(b). There are now good reasons for lifting the suspension of his bankruptcy adjudication and there are no longer good reasons for continuing the suspension. The order for sale made in CIV-2012-404-3263 can no longer be enforced because it has been overtaken by Mr Prasad’s adjudication in bankruptcy.
[65] Aside from the suspension of his adjudication pending appeal being lifted, nothing in this decision is intended to deal with Mr Prasad’s appeal against his adjudication. The outcome of his application for leave to appeal and any subsequent appeal is for the Court of Appeal, not for the High Court.
[66] I make these orders:
(a) I dismiss Mr Prasad’s application to annul his bankruptcy under
s 309(1)(a) of the Insolvency Act.
(b)I set aside the order of Associate Judge Faire of 23 May 2013 suspending Mr Prasad’s adjudication in bankruptcy pending his appeal to the Court of Appeal.
(c) I declare that the McLearys can no longer enforce their order for sale under CIV-2012-404-3263.
(d) I reserve leave to apply for further orders.
[67] The parties did not submit on costs. Any party seeking costs should file a memorandum no later than 14 February 2014. Any submissions in response are to be lodged no later than 21 February 2014. I will decide costs on the papers.
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Associate Judge Bell
Solicitors:
Graeme Skeates Law, Auckland, for Ironstone Holdings Ltd
Sinisa Law, Otahuhu, Auckland, for Bhaskar Prasad
Boyle Mathieson (J D Noble) Henderson, Auckland, for Mr and Mrs McLeary
Insolvency and Trustee Serivce (C Jones) Auckland, for Official Assignee
Counsel:
C T Patterson (E Grove) Barrister, Auckland, for Ironstone Holdings Ltd
Noel King, Manukau, for Bhaskar Prasad
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