Irrigation Services (Wairarapa) Limited v Benton
[2016] NZHC 682
•13 April 2016
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2015-435-16 [2016] NZHC 682
BETWEEN IRRIGATION SERVICES
(WAIRARAPA) LIMITED Judgment Creditor
AND
ALEXANDER ELMON BENTON Judgment Debtor
Hearing: 3 February 2016 and 13 April 2016 Counsel:
J Herd for the Judgment Creditor
J Mahuta-Coyle for the Judgment DebtorJudgment:
13 April 2016
ORAL JUDGMENT OF ASSOCIATE JUDGE SMITH
[1] The judgment creditor (Irrigation) applies for an order adjudicating
Mr Benton bankrupt.
[2] The application is based on Mr Benton’s failure to comply with a bankruptcy
notice served on him on 12 August 2015, in which Irrigation demanded the sum of
$353,134.77 owing under a judgment it had obtained against Mr Benton in this Court on 4 October 2012.1 Irrigation also demanded interest on the amount of its judgment at the rate of $40.08 per day until payment, and its costs for issuing and serving the notice.
[3] Irrigation filed its application for adjudication on 2 September 2015, claiming a total debt (including Judicature Act interest and costs on the bankruptcy notice) of
$396,335.41.
1 Irrigation Services (Wairarapa) Ltd v Benton & Ors [2012] NZHC 2559.
IRRIGATION SERVICES (WAIRARAPA) LIMITED v ALEXANDER ELMON BENTON [2016] NZHC 682 [13 April 2016]
[4] Mr Benton filed a notice of opposition on 19 October 2015. His grounds of opposition stated in the notice were:
(i) it is just and equitable that the Court does not make an order of adjudication;
(ii) the debtor has an unresolved claim against a third party;
(iii) the amount claimed by the judgment creditor is incorrect;
and
(iv) other reasons falling with the Court’s discretion provided by
s 37(4) of the Act
[5] The third of those grounds was abandoned by Mr Mahuta-Coyle in his written submissions dated 2 February 2016.
[6] At the hearing, Mr Mahuta-Coyle did not suggest that the adjudication application should be dismissed; rather, he proposed that the Court should adjourn the application for six months and review the position at that point. The purpose of the six month adjournment was said to be to permit Mr Benton to pursue a third party claim which he says is large enough to exceed the amount claimed against him by Irrigation.
The proposed third party claim
[7] The judgment on which the adjudication claim is based was entered against Mr Benton and his brother Stewart Benton, who were partners in a farming partnership (the partnership) known as the “A E & S W Benton partnership”. Mr Benton and his brother had been farming a property in South Wairarapa which they had acquired from their farther in 1992.
[8] In the early 2000’s, the partnership wished to develop an irrigation scheme on the farm. It engaged a company called Baylis Bros Ltd (Baylis) to drill a test well. The test well was a success, producing a volume of clear water sufficient for the proposed irrigation scheme.
[9] The partnership decided to go ahead with the irrigation scheme, and after some delays obtained a resource consent to draw water from the underground aquifer to which the test bore had been connected.
[10] In 2007 the partnership engaged Irrigation to construct an irrigation scheme based on the new bore. Irrigation equipment was duly procured and placed on the farm, and Irrigation began the necessary commissioning work.
[11] Serious problems arose in the course of the commissioning. Mr Benton says that the process of commissioning the bore was such a failure that it led to the collapse of the bore itself, and clogged the above-ground infrastructure with silt, peat, and other debris that was coming up out of the bore. The partnership blamed Irrigation for the failure, and it refused to pay the balance owing to Irrigation for its work. Irrigation then commenced the proceeding which resulted in the judgment against Mr Benton and his brother.
[12] When the case came on for trial, Collins J rejected the partnership’s claims that Irrigation or its director Mr Mannering had breached contractual or tortious duties to the partnership in installing the pump equipment down the bore, and in commissioning the pump and the scheme. The partnership’s claim that Irrigation’s actions in the commissioning work had caused the collapse of the bore was rejected. The partnership’s counterclaim against Irrigation for losses incurred as a result of the failure of the bore, and the scheme as a whole, was unsuccessful.
[13] A central issue at the trial was whether pumping from the bore when it was being commissioned should have continued when it was apparent that peat and other material was being extracted in addition to water. Collins J found that the bore pump should have been stopped no later than 14 December 2008. However the Judge found that Mr Mannering probably did take advice from a director of Baylis when he became aware of the problems in the commissioning process, and that he received assurances that the pumping should continue.
[14] Collins J said:2
2 Irrigation Services (Wairarapa) Ltd v Benton & Ors, above n 1 at [116].
I have deliberately refrained from determining if [Baylis] had a duty to warn the plaintiff of the advisability of retesting the bore in this case. [Baylis is] not a party to this proceeding. My focus is solely on responsibilities of the plaintiff. I have concluded the plaintiff did not breach its contractual responsibilities, or its duty of care when it did not retest or arrange for the retesting of the bore.
[15] The Judge found in favour of Irrigation: it was entitled to be paid the balance owing under its contract, plus certain variations. The partnership’s counterclaim was dismissed.
[16] Mr Benton says that the failure of the irrigation scheme and the subsequent unsuccessful litigation resulted in ongoing and additional farm costs, redevelopment costs, additional debt and further onerous interest charges. A letter from a farm consultant which Mr Benton produced suggests that the total cost arising from the failed irrigation scheme exceeded $1.5 million.
[17] Mr Benton raises the question of why Baylis was not joined as a defendant on the partnership’s counterclaim in the High Court proceeding, or sued separately for negligence in respect of the advice to continue pumping in the bore during the commissioning. Mr Benton points out that only two companies were involved in constructing the irrigation scheme – Irrigation and Baylis. The partnership had no substantive involvement, and did not in any event have the necessary expertise.
[18] If Irrigation was not responsible for the failures, Mr Benton infers that Baylis must have been. He says that after the irrigation scheme failed and the dispute with Irrigation emerged he did take legal advice, including advice as to whether any other parties should be joined. Baylis was not joined, and legal action was not taken against it. Mr Benton contends that there is valid claim against the partnership’s former solicitors for breach of duty in failing to advise that appropriate action should be taken against Baylis.
[19] Mr Mahuta-Coyle acknowledges that even after the decision of Collins J was delivered in October 2012 it remained open to the partnership to commence a proceeding against Baylis. The partnership’s ability to do that continued for a further two years, when the limitation period for any claim against Baylis expired.
[20] A letter setting out the partnership’s claims against its former solicitors was eventually sent to the former solicitors by Mr Mahuta-Coyle on 19 January 2016. The crucial points where the former solicitors were said to have fallen short of the required professional standards were described in the letter as follows:
18.1Not properly considering and advising the partnership as to the potential liability of [Baylis], and about the prospect of joining [Baylis] as a defendant from the outset.
18.2Incorrectly advising the partnership that any such claim was time- barred.
18.3Following the reserved decision of Justice Collins, which essentially determined that [Baylis’] advice during the commissioning was causative of the loss suffered by the partnership, failing to seek further instructions and pursue [Baylis], or advise the partnership that a claim against [Baylis] could still be pursued and had good prospects of succeeding.
[21] The partnership has never received any substantive response to this letter. Mr Mahuta-Coyle advised by memorandum dated 11 April 2016 that, although a partner in the firm of former solicitors indicated near the end of March 2016 that a response would be provided on or around 6 April 2016, no response has yet been received.
[22] Following the hearing of the adjudicating proceeding on 3 February 2016, I gave leave to the parties to file further affidavits directed to a limited number of topics. Two of those topics were why the partnership did not make the claim against Baylis within the limitation period for such a claim, and why no claim had been made against the former solicitors.
[23] Mr Benton submitted a further affidavit dealing with those issues on
15 February 2016.
[24] Mr Benton says that he did not appreciate that he might have a claim against the former solicitors until recently. He did meet with the solicitor who was the partnership’s trial lawyer in November 2012, and was given a copy of a “hold liable” letter the former solicitors had sent to Baylis on 26 October 2012, following the delivery of the judgment in the High Court. The trial lawyer gave Mr Benton a copy of the letter which had been sent to Baylis, but Mr Benton’s evidence is that he was
not given any advice on the significance of the letter, or other advice with regard to
it. He says that letter was described to him as a “housekeeping matter”.
[25] The former solicitors did file an appeal against the judgment of Collins J, but shortly afterwards (in November 2012) they wrote to Mr Benton advising that the lawyer who had acted for the partnership at the trial had left the firm, and that the firm did not have capacity to continue to act for the partnership. The former solicitors arranged for new solicitors and counsel to advise the partnership.
[26] In early February 2013 the partnership received advice from senior counsel that the prospects of a successful appeal appeared weak, and that the partnership would be best advised to attempt to settle the dispute with Irrigation. By then, it appears that the case on appeal had not been filed, and the appeal was deemed to have been abandoned in any event. No application was made for an extension of time to take that step.
[27] It appears that the principal reason the partnership did not pursue the appeal, or a possible claim against Baylis, was that the partnership’s lender, Rabobank, advised that it was not prepared to provide any additional funding. Rabobank gave that advice on 11 December 2012, and at the same time advised that the partnership’s lending arrangements had expired. It sought repayment of its debt, expressing a preference for a voluntary sale of the farm.
[28] As Mr Benton’s put it in his 15 February affidavit “at this point the partnership’s ability to fund an appeal or pursue substantive action largely evaporated”.
[29] Mr Benton acknowledges that he sent an email to his former solicitors (and to his new solicitor) on 23 November 2012 in which he suggested, on the basis of his own reading of the High Court judgment, that Baylis should be pursued if possible. That appears to have been rendered academic by the letter from Rabobank dated
11 December 2012, in which it called up the partnership’s loans. Mr Benton says that even if the partnership had been given advice by its new solicitors and counsel to bring a claim against Baylis: “by late 2012, early 2013 that would have been made
extremely difficult because of the Bank’s decision to foreclose on the farm…I simply did not have the resources to commence complicated and expensive legal proceedings against Baylis after December 2012.”
Mr Benton’s financial position
[30] In an affidavit sworn on 20 October 2015, Mr Benton acknowledged that all of his financial interests lie within the partnership, with the exception of a piece of land in Featherston having a market value of approximately $80,000 and a sum held in trust by his solicitors to cover his legal fees in this adjudication proceeding. The farm assets and the Featherston land are all subject to a General Security Agreement (GSA) in favour of Rabobank, securing lending to the partnership.
[31] In a further affidavit dated 16 November 2015, Mr Benton advised that
Rabobank had appointed receivers over the partnership.
[32] As at the date of Mr Benton’s November affidavit, Rabobank’s secured lending stood at approximately $4.932 million. The partnership’s reported fixed assets as at June 2014 were $5.352 million, but a drop in the value of the partnership’s Fonterra shares since then, together with receivers’ costs, and marketing costs and commission on a sale of the farm, seemed likely to eliminate any equity the partners might have had in the business.
[33] The receivers entered into an unconditional sale of the farm in March 2016. Mr Benton was given until 24 March 2016 to vacate the farm property.
[34] The receivers did not disclose the sale price to Mr Benton until 5 April 2016. The sale price was $3.5 million. The sale excluded the partnership’s Fonterra shares (which Mr Benton had valued at $789,250 in his November affidavit) and the Featherston section. The receivers estimated that after all assets subject to Rabobank’s GSA had been sold, and allowing for their ongoing costs, there would be a shortfall owing by the partnership to Rabobank.
[35] It is accordingly now clear that the sales of the farm assets, the Fonterra shares, and the Featherston section, are unlikely to yield any funds that Mr Benton could apply in satisfaction or partial satisfaction of Irrigation’s judgment.
Principles applicable to adjudication applications
[36] Section 36 of the Insolvency Act 2006 (the Act) provides that the Court may, in its discretion, adjudicate a debtor bankrupt if a debtor has proved each of the matters set out in s 13 of the Act. Those matters are:
13 When creditor may apply for debtor’s adjudication
A creditor may apply for a debtor to be adjudicated bankrupt if—
(a) the debtor owes the creditor $1,000 or more or, if 2 or more creditors join in the application, the debtor owes a total of
$1,000 or more to those creditors between them; and
(b) the debtor has committed an act of bankruptcy within the period of 3 months before the filing of the application; and
(c) the debt is a certain amount; and
(d) the debt is payable either immediately or at a date in the future that is certain.
[37] Those factors have all been satisfied in this case. The debt is for a certain amount which is well in excess of the minimum $1,000, and Mr Benton has committed an act of bankruptcy by failing to comply with the bankruptcy notice. He did not pursue the appeal against the judgment on which the adjudication application is based, and there has been no stay of execution of the judgment. The amount owing under the judgment was and is payable immediately.
[38] Section 37 of the Act provides:
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.
[39] In this case, Mr Benton does not now suggest that he is able to pay his debts. His opposition is based on s 37(c) and (d) of the Act.
[40] There is no dispute between the parties over the principles the Court should apply in exercising its discretion under s 37(c) and (d). The Court’s general discretion was described by the Court of Appeal in Baker v Westpac Banking Corporation as follows:3
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. A creditor who establishes the jurisdictional facts as set out in [the equivalent of s 13 of the Act] 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. The Court will give proper weight to the commercial judgment of the petitioner but the oppressive use of the bankruptcy process may be a ground for refusing an order. Another ground may be the undoubted absence of assets but that will not necessarily preclude an order given the range of interests involved including the public interest in the continuing oversight of a bankrupt’s affairs and the disqualifications that go with bankruptcy. In the end the Court must balance the various considerations relevant to the case and determine whether the debtor has succeeded in showing that an order ought not to be made.
[41] In Rabobank Australia Ltd ex parte Tootell,4 Associate Judge Osborne referred to the decision of Master Williams QC, as he then was, in Re Epirosa.5 In that case, the Master set out a list of factors which he considered relevant to the exercise by the Court of its discretion:
(a) What are the wishes of all affected parties, including the applying creditor, other creditors and the debtors?
(b)Does the debtor have the ability to meet his or her debts over time and, if so, does that meet the requirements of achieving finality within
a reasonable period?
3 Baker v Westpac Banking Corporation CA 212/92, 13 July 1993 at 4, per Richardson J.
4 Rabobank Australia Ltd ex parte Tootell [2013] NZHC 2975.
5 Re Epirosa, ex parte Diners Club NZ Ltd, (HC) Wellington, B498/91/B532/91; 6 March 1992.
(c) What were the circumstances in which the debt was incurred, and do those circumstances suggest that the creditor is acting unreasonably in pursuing adjudication?
(d) Will adjudication be pointless?
(e) Will the debtor, if adjudicated, be rendered unable to support himself or herself?
(f) Does the debtor have such a standing in the community that significant issues of stigma or embarrassment will result?
[42] In Strachan v Moodie, I noted the Associate Judge’s observation in Tootell that those are factors which frequently arise, but the Court’s task is to consider all of the facts of the case before it and balance the relevant factors in deciding whether it is just and equitable to decline to make an order, or whether there is other sufficient reason to follow that course.6
[43] The other decision to which I refer at this point is the judgment of Fisher J in
Re Fidow.7 In that case, the learned Judge noted:8
…it does appear that as a matter of legal authority one should not necessarily decline a bankruptcy merely on the ground that there are no obvious assets for the creditors. Clearly that must be a powerful factor to consider. But there are several other considerations which may be of equal importance.
One of these is the potential for further investigation. A 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. I have previously adverted to the possibility that some investigation in this case might be rewarding. I intend no reflection upon Mr Fidow by that comment. In the finish, investigation may reveal nothing that is not already known. But I cannot entirely rule it out as a possible avenue of benefit for the creditors.
The next matter to be borne in mind here is that on a bankruptcy petition the Court must have regard to the public interest in a way which transcends the interest of the immediate party to the proceedings…The public interest in exposing and controlling an insolvent debtor is one which exists quite
6 Strachan v Moodie [2014] NZHC 3167, at [38].
7 Re Fidow (a debtor) [1989] 2 NZLR 431.
8 At 443.
independently of the separate question of debt collection by his immediate creditors.
Application of the principles in this case
[44] Irrigation is prima facie entitled to the adjudication order it seeks.
[45] Looking at the list of considerations suggested by Master Williams in Re Epirosa, the principal one relied upon by Mr Benton is the second, namely whether he has the ability to meet his debts over time, consistent with the requirement of achieving finality within a reasonable period.
[46] It is now clear that Mr Benton has no such ability insofar as the farm assets (including the Fonterra shares) and the Featherston section are concerned. The likelihood is that there will be a shortfall for the secured creditor when the sales of those assets are settled. Mr Benton’s position under this head is dependent on the prospective claim against the former solicitors.
[47] There is insufficient information before me to make any useful findings on the merits of the prospective claim against the former solicitors. I accept that, on the face of it, there is some force in Mr Mahuta-Coyle’s point that if the partnership was not involved in the commissioning work, responsibility for the failure must lie with those who were involved, namely Irrigation or Baylis. But Mr Benton was aware that the partnership had a possible claim against Baylis as soon as he read Collins J’s judgment, and there was still time to issue a proceeding against Baylis at that point. The reason the partnership did not issue such a proceeding appears to be that Rabobank would not support such action, and the partnership could not afford to do so. Even if negligence on the part of the former solicitors is proved, it seems likely that there will be significant issues over causation and the quantum of any loss suffered by the partnership. And presumably Mr Benton would only be entitled to one half of any recovery which might be made.
[48] I accept Ms Herd’s submissions based on Kroon, that the starting point should be that it will rarely be the case that the Court will be deflected from adjudicating a debtor on the basis that the debtor has a claim against a third party,
and that it will be for the debtor to show that there is some proper ground to suppose that the claim is a viable one and that the result of the litigation will not long be delayed. 9
[49] I refer also the decision of the Court of Appeal in Ellis v NZI Finance Ltd, where Richardson J, giving the judgment of the Court, said of the Master’s decision:10
The Master noted that the judgment against the appellants had been given 18 months previously. The claim against the financial adviser had not got off the ground. It was impossible for him, the Master, to assess its likelihood of success, but there was no realistic possibility of its being heard for a long time. Its existence was not itself good grounds for depriving a creditor of its normal rights, and, the Master concluded, in its assessment of ordinary commercial risk the petitioning creditor was entitled to pursue its remedies in that way.
[50] In this case, the partnership has had approximately three and a half years since the judgment in which it could have issued a proceeding against Baylis or the former solicitors. It has not done so, and the claim letter sent by Mr Benton’s counsel to the former solicitors in January this year came far too late to deprive Irrigation of its entitlement to have its adjudication application dealt with expeditiously. No proceeding against the former solicitors has been issued at this point, and in my view there is very little likelihood of the claim against the former solicitors being resolved within the period contemplated by Mr Mahuta-Coyle’s request for a six-month adjournment.
[51] I am conscious that Mr Benton’s position is that, since the judgment was entered in October 2012, the partnership has not had the resources to pursue a claim against either Baylis or the former solicitors. But that may be no more than saying that the partnership has been insolvent since October 2012. Mr Benton has now sent a claim letter to the former solicitors, but no substantive reply has been received, and no proceeding has been commenced against them. Nor has Mr Benton explained
how any claim against the former solicitors would be funded.
9 Re Kroon, ex parte Westpac Banking Corporation, 24 April 2007, HC Auckland CIV-2006-404-
4720, at [84].
10 Ellis v NZI Finance Ltd, CA 253/89, 24 July 1990, at 5.
[52] In all of those circumstances I do not consider that it would be just and equitable to decline to make an adjudication order on account of the possibility that the partnership might make some recovery from the former solicitors.
[53] Looking at the other factors mentioned by Master Williams in Re Epirosa, I think the wishes of the creditors is a neutral factor in this case. Irrigation clearly wants to see an order for adjudication; Mr Benton does not. There appear to be other creditors, including Rabobank, the Commissioner of Inland Revenue and Farmlands Trading Cooperative Ltd, but none of those creditors has elected to express a view in this proceeding. The one creditor who has expressed a view is Mr Benton’s mother- in-law, Ms Fox, who lent Mr Benton $100,000. Ms Fox has said that she is opposed to an adjudication order being made, but her opposition appears to be on the basis that she did not wish to enforce her claim if that would mean an enforced sale of the farm, which has been in the Benton family since the 1850s. Ms Fox said in her affidavit that she was prepared to wait for payment.
[54] The central basis for Ms Fox’s opposition has now fallen away. The farm has now been sold and there would seem to be no prospect of Mr Benton paying Ms Fox the $100,000 within any reasonable period.
[55] There is nothing to suggest that Irrigation is acting unreasonably or oppressively in seeking an adjudication order. It is doing no more than pursuing its rights. It is perhaps surprising that it did not take this step considerably earlier, but that has only resulted in a benefit to Mr Benton – he has had approximately three years to organise his financial affairs, including pursuing any third party claims, which he might not otherwise have had.
[56] I accept that there is no basis in the evidence for me to conclude that Mr Benton acted irresponsibly in the events that led to the judgment being entered against the partnership. The partnership appears to have acted on legal advice throughout. However it appears that Mr Benton may have been more proactive in dealing with the judgment debt once it was clear to him (in early 2013) that the appeal against the judgment would not be pursued. He knew then that the partnership did not have the resources to pay the amount of the judgment, and it
appears that it was not until some time in 2014 that a meeting of his creditors was
convened in an attempt to negotiate a “stand-still” agreement. I am not told when in
2014 that meeting was convened, but in any event the attempt to negotiate the stand- still agreement was unsuccessful (apparently because unsecured creditors were unable to reach agreement on priorities).
[57] Further work was then ongoing on a resource consent for a new bore on the farm, but that process was delayed until November 2015. By then, it appears that the partnership’s financial position was beyond rescue.
[58] Mr Mahuta-Coyle submits that an order for adjudication would be pointless. I do not think there is sufficient evidence to support that submission. I am mindful of the fact that there is a public interest in adjudication proceedings, and that Mr Benton and his brother have been running a substantial business for over three years in circumstances where that business was apparently insolvent (in the sense of being unable to pay its debts as they fell due for payment). In that scenario there may well have been transactions or events that would appropriately be investigated by the Official Assignee.
[59] As Fisher J observed in Re Fidow,11 I do not in saying that intend any adverse reflection on Mr Benton – an investigation by the Official Assignee may reveal nothing that is not already known. The point is that in circumstances where there may well have been insolvent trading, there is a public interest in ascertaining whether that has in fact occurred, and allowing the Official Assignee to use the office’s available processes to investigate the position.
[60] Mr Benton has not advanced any submissions based on inability to support himself if an adjudication order is made, and while he may suffer some loss of standing in the community associated with the loss of a farm which has been in the Benton family for over 150 years, the farm has already been lost, quite apart from
any adjudication order.
11 Re Fidow, above n 7.
[61] Balancing the various considerations, Mr Benton has not persuaded me that there are considerations sufficient to displace Irrigation’s prima facie entitlement to an adjudication order. I conclude that there are no factors which would make it just and equitable to decline to make an order of adjudication, and no other reason why an order of adjudication should not now be made.
[62] Ms Herd has today produced a certificate showing that the debt remains unpaid. In those circumstances, I make the following orders:
(a) An order adjudicating Mr Benton bankrupt.
(b)Costs in favour of Irrigation on a 2b basis, plus disbursements as fixed by the registrar.
[63] The foregoing orders are timed at 11.01am.
Associate Judge Smith
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