Jacomb v Wikeley
[2013] NZHC 3034
•13 November 2013
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2013-485-3414 [2013] NZHC 3034
UNDER the Insolvency Act 2006
IN THE MATTER OF the bankruptcy of KENNETH DAVID WIKELEY (aka KENNETH DAVID WIKLEY)
BETWEEN MICHAEL JOHN JACOMB TRENA KATHLEEN JACOMB and PETER REGINALD RICHARDSON as trustees of the GENSET TRUST Judgment Creditors
AND KENNETH DAVID WIKELEY
(aka KENNETH DAVID WIKLEY) Judgment Debtor
Hearing: 13 November 2013
Appearances: M Lenihan for Judgment Debtor in support
J G Toebes for Judgment Creditors to oppose
Judgment: 13 November 2013
ORAL JUDGMENT OF ASSOCIATE JUDGE BELL
Solicitors:
JT Law, Wellington, for Judgment Creditors
Jones Young, Auckland, for Judgment Debtor
Counsel:
M Lenihan, Auckland, for Judgment Debtor
Copy for:
Judgment Creditors
Judgment Debtor
JACOMB v WIKELEY (aka WIKLEY) [2013] NZHC 3034 [13 November 2013]
[1] Mr Wikeley has applied to set aside a bankruptcy notice served on him. At the outset of the hearing I discussed with counsel whether this hearing was to be heard in court or in chambers. Applications to set aside bankruptcy notices may be heard either in court or in chambers. Counsel agreed that the matter was to be heard in court. A consequence of that is if there is to be any challenge to this decision it is to be by appeal to the Court of Appeal, not be by way of review.
[2] The creditors obtained judgment against Mr Wikeley on 10 April 2013 under a judgment of Kós J on a guarantee he had given.1 Judgment was given in US dollars for the liability under the guarantee. There was also an award of costs in New Zealand currency. The sums demanded in the bankruptcy notice were US$875,768.42 comprising the judgment for liability under the guarantee, plus interest on the judgment sum, and costs of NZ$48,130.18.
[3] Mr Wikeley relies on three broad grounds to set aside the bankruptcy notice:
1 He invokes the court’s inherent jurisdiction to prevent an abuse of
process. He says that the bankruptcy notice is an abuse of process.
2He says that he has a cross claim under s 17(1)(d)(ii) and s 17(7) of the Insolvency Act 2006.
3He asks the court to order a stay on any bankruptcy proceedings. His documents referred to s 37 of the Insolvency Act 2006, but it emerged during the hearing that he was in fact relying on s 38.
[4] Some preliminary clarification is appropriate. For the first ground, normally, when a judgment debtor invokes the court’s inherent jurisdiction to prevent an abuse of its processes, the application is made in reliance on the principles stated by Master Kennedy-Grant in Re Wise.2 The jurisdiction is usually exercised when there has been some procedural defect in obtaining the judgment on which the bankruptcy notice is based, or there is an arguable ground of defence to the claim for which
judgment was given. These matters do not arise here. Instead, Mr Wikeley is
1 Jacomb v Wikeley [2013] NZHC 707.
2 Re Wise HC Auckland B227/95, 21 June 1995.
relying on events since judgment was given. I am prepared to accept for the purpose of this judgment that it may still be open to the court to exercise its inherent jurisdiction to set aside a bankruptcy notice in cases where a judgment debtor can show that by reason of matters that have arisen since the judgment, the debt has been discharged. Possible events of discharge would be payment, or that the debt has, in some other way, been satisfied in a way recognised in law. I can accept that if a judgment creditor were to persist with a bankruptcy notice after the debt had been paid, the court might view that as an abuse of process. I shall consider Mr Wikeley’s application on that basis.
[5] Mr Wikeley’s cross claim under s 17(7) of the Insolvency Act relies on substantially the same matters as for his claim of abuse of process under the court’s inherent jurisdiction. They are both matters, he says, that led to the judgment debt being wiped out. I will consider those two matters together.
[6] As to the third ground, it is the case that in some decisions the court, on an application to set aside a bankruptcy notice, has ordered a stay of further bankruptcy proceedings. I have in mind in particular the decision of Thomas J in Re Taylor.3
However, I do not regard it as necessary to exercise any powers under s 38 in this case as the matters to be determined fall squarely within the cross claim issues under s 17 of the Insolvency Act and the court’s inherent jurisdiction.
Background
[7] To understand the basis for Mr Wikeley’s application, it is necessary to go into some background. Those are the matters that led up to Kós J giving judgment against Mr Wikeley and matters that have occurred since the judgment was given and before the bankruptcy notice was served on Mr Wikeley. So far as the events leading up to the judgment are concerned, the decision of Kós J sets matters out more fully. What I am about to state is by way of a bare summary only.
[8] The judgment creditors, Michael John Jacomb, Trena Kathleen Jacomb and
Peter Reginald Richardson are trustees of the Genset Trust. In late 2008 and in the
3 Re Taylor (1992) 4 NZBLC 102,875.
first half of 2009 they made four advances by way of loan to Edel Metals Group Ltd. That is a New Zealand company. It was incorporated on 18 November 2008. It was struck off the register in February 2012. It remained struck off when Kós J heard the trustees’ claim against Mr Wikeley but it was restored to the register early this year, before Kós J gave his decision.
[9] The directors of Edel Metals Group Ltd were Mr Jacomb and Mr Gibson. Mr Gibson is an Auckland accountant who acts on behalf of Mr Wikeley. Edel Metals Group Ltd issued 100 million shares with a face value of $1.00 each.
23,750,000 shares were issued to the trustees, and 76,250,000 were issued to a company called Geier Ltd. Geier Ltd is a corporate trustee. Mr Gibson was a director of that company. Geier Ltd held the shares in Edel Metals Group Ltd on trust for Mr Wikeley and interests associated with Mr Wikeley.
[10] Edel Metals Group Ltd was a holding company. It held shares in a Chilean company which was to buy a mineral processing plant and equipment. That investment was unsuccessful.
[11] Kós J found that Mr Wikeley had given a written guarantee to the Genset trustees for one-half of the outstanding debt payable by Edel Metals Group Ltd to the trustees, plus interest for a period of 18 months from the expiry of the loans. Kós J also found that Mr Wikeley transferred 12 million shares in Orion Minerals Group Ltd to the trustees, for the trustees to hold as security for his liability under the guarantee. Kós J found that the guarantee given by Mr Wikeley was enforceable. He rejected the defences put up by Mr Wikeley. Amongst other things, he held that Edel Metals Group Ltd had gross assets of NZ$100m, comprising the uncalled share capital.
[12] In giving judgment for the trustees, Kós J held that they must account for the sales proceeds of any of the security sold in reduction of the judgment debt, and that on satisfaction of the judgment debt by Mr Wikeley, the trustees must transfer to him the remaining Orion Minerals Group Ltd’s shares held by them by way of security.
Events since judgment
[13] There is no order staying or halting the execution of the judgment. Mr Wikeley did not appeal against the judgment. Prima facie the judgment remains enforceable. It is also common ground that Mr Wikeley himself has not paid the trustees anything under the judgment.
[14] As I have already mentioned, the company was restored to the register of companies in early 2013. Mr Wikeley arranged that. He says that Geier Ltd transferred one of its shares to him. Since the company has been restored to the register Mr Wikeley has been acting as a director in the company. There is nothing in the record to show how he came to be appointed director of the company. For a period he has acted as sole director. There is no evidence how it came to be that Mr Jacomb and Mr Gibson ceased to be directors of the company. For present purposes, I am prepared to assume that Geier Ltd had the power to pass a resolution, given its 76 per cent shareholding, to remove directors and appoint a fresh director.
[15] On 16 April 2013 Edel Metals Group Ltd gave notice to its shareholders that it intended to issue further shares in the company. The document that Mr Wikeley relies on for that is signed by Mr Wikeley as sole director. It identifies shareholders of the company as Geier Ltd, the trustees, Primula Ltd, Rosewell Ltd, French Club Ltd as well as himself. The notice states that the board of the company has resolved to issue 200 million new shares to a new investor, and the issue price for the new shares is .01 cents per share. This would equate to an aggregate issue price of
$20,000. This was said to be done to provide the company with working capital for the company to meet its obligations and to satisfy the solvency test under the Companies Act. The notice also states that the company will issue a further
200 million shares in the company at an issue price of .01 cent per share to the existing shareholders of the company, to raise additional capital. This notice is said to be in accordance with clause 14.6(2) of the constitution. Mr Wikeley says that the existing shareholders, including the trustees, did not take up the offer.
[16] On the same date, 200 million shares were issued to Sundome Enterprises Ltd. Sundome paid $20,000 later in April 2013. The result was that Sundome became a majority shareholder in the company. Mr Wikeley also puts in evidence the resolution of shareholders of 16 April 2013. That has been signed on behalf of
Geier Ltd, Friendship Club Ltd, Rosewell Ltd, Primula Ltd and Mr Wikeley, but has not been signed by the trustees. To all intents and purposes, it appears that this resolution was carried out without notice to the trustees.
[17] On 22 April 2013 Edel Metals Group Ltd gave notice to the trustees and to Geier Ltd, calling up the unpaid share capital of $100m and requiring that to be paid within 14 days. That notice was signed by both Mr Wikeley and a person with a Chinese name.
[18] In response, the trustees served a notice on Edel Metals Group Ltd under s 111 of the Companies Act 1993. This was a minority buy-out notice. Since then, the trustees have not honoured the call to pay the $23,750,000 payable under the call of 22 April 2013, and the company has not responded to the notice under s 111 of the Companies Act.
[19] The trustees also applied to the court to extend time to object to the company having been restored to the register. Ronald Young J heard that application. He dismissed it on 23 September 2013.4 That meant that the company’s restoration to the register remained effective.
[20] The trustees do not accept the validity of the actions taken by Mr Wikeley and at his behest since the company was restored to the register. They say that they rely on their rights under s 111 of the Companies Act 1993. They also allege that the actions taken give them a right to relief under s 174 of the Companies Act 1993. They say that they are entitled to issue their minority buy-out notice under s 111 because under ss 117 and 118 of the Companies Act 1993 they did not vote in favour of the resolutions which altered their rights. They point to Edel Metals Group Ltd’s failure to comply with their minority purchase notice. They have threatened proceedings. Equally, Edel Metals Group Ltd has threatened proceedings against the trustees to enforce the call up of the shares. To a certain extent, at this stage there has been preliminary sabre-rattling on both sides.
[21] I can look at the matter generally at this stage. It is quite apparent that Mr Wikeley has used his position of control through Geier Ltd as a majority shareholder to ensure that special resolutions can be passed and that he can exercise effective control over Edel Metals Group Ltd. By ensuring that a call is made on the shares, he has created a claim in favour of Edel Metals Group Ltd which would extinguish the company’s liability to the trustees for the loan of US$1.5m.
Whyte v O’Brien
[22] This is not the first time that a judgment debtor has tried to prevent enforcement of a judgment against him by setting up a cross demand against the judgment creditor. An example of the law’s response to that kind of tactic can be seen in an old Chancery decision, Whyte v O’Brien. 5 The headnote to the decision says this:
A person against whom a verdict had been obtained, having afterwards acquired a demand to a greater amount against that party who obtained it, is not entitled to an injunction to restrain proceedings on the verdict.
The Vice-Chancellor (Sir John Leach) said:
At law, where a defendant claims a set-off, the truth of his claim comes to be tried at the same time with the demand raised by the action, and is decided by the same verdict. If after the verdict the Defendant acquires for the first time a cross demand against the Plaintiff, he cannot, for that reason, by any proceeding at law, defeat or delay the Plaintiff from the benefit of his verdict. It is not reasonable that a cross demand thus subsequently acquired should delay the Plaintiff from the benefit of it his verdict, until the validity of this demand is ascertained by a second trial; and in this case, equity must follow the law. Equitable set-off is where, by reason of the nature of the cross demand, there can be no set-off at law. Here the demand is purely legal.
[23] There, the court has taken a strong stance against such attempts to defeat judgments in favour of successful creditors and to prevent them enjoying the fruits of the judgment. It will be necessary to refer to this stance of the law further. At present, I note that that case would be authority standing in the way of a judgment debtor applying for a stay of execution because he had acquired a fresh cross demand after judgment had already been given against him.
[24] While that seems to be the general rule, that is, that enforcement of judgment will not be prevented because the judgment debtor has acquired a fresh cause of action against the judgment creditor, it will be seen that there is an exception in the case of bankruptcy notices. Under s 17 of the Insolvency Act, it is a proper ground for applying to set aside a bankruptcy notice if the judgment debtor satisfies the court that he has a cross claim against the creditor. Section 17(7) contains a definition of “cross claim”:
17(7) ... cross claim means a counterclaim, set-off, or cross demand that—
(a) is equal to, or greater than, the judgment debt or the amount that the debtor has been ordered to pay; and
(b) the debtor could not use as a defence in the action or proceedings in which the judgment or the order, as the case may be, was obtained.
[25] Because the definition of “cross claim” in subs (7) excludes cross claims that could have been run as defences in proceedings in which judgment was obtained, it is obviously directed at allowing cross claims that have arisen since judgment as a ground for setting aside a bankruptcy notice. In other words, a judgment debtor in the Whyte v O’Brien situation may not be able to obtain a stay of execution, but he may still be able to apply to have the bankruptcy notice set aside.
The test for setting aside for a fresh cross claim
[26] It is also relevant to note the traditional approach taken to applications to set aside when a cross claim is invoked. When a judgment debtor alleges a fresh cross claim, not available when judgment is given against him, the debtor does not have to prove that he has a watertight case. It is sufficient for the debtor to show that he has a genuine triable claim. In Sharma v ANZ Banking Group (NZ) Ltd,6 Cooke P referred to this as a claim of true substance which the debtor genuinely proposes to pursue. He also made the point that on an application to set aside a bankruptcy notice on the grounds of a cross claim, once the court is satisfied that the debtor has
made out the cross claim, there will be no relevant act of bankruptcy. The court does not have any residual discretion to allow the bankruptcy notice to stand.
Mr Wikeley’s cross claim
[27] Now to see how this applies to Mr Wikeley’s case. Mr Wikeley does not assert a claim of his own against the Genset trustees. Instead, he relies on a claim which Edel Metals Group Ltd makes against the trustees. What Mr Wikeley is invoking is the right of a guarantor to raise in defence of any claim brought against him by the creditor, any defence which the primary debtor could have raised including any defence by way of set-off. In effect, Mr Wikeley’s claim is that his debt under the judgment has been extinguished because it was a secondary liability as guarantor. The actions of the primary debtor in making the call for shares for a sum that far exceeds the amount of the original loan extinguishes not only the primary debtor’s liability but also the liability of Mr Wikeley under his guarantee.
[28] Mr Lenihan submitted that that was a claim based on legal set-off. It seems to me that the basis for the claim made by Mr Wikeley is founded in equity. One of the leading decisions in the area is a decision of Willes J in Bechervaise v Lewis.7
Willes J commented: 8
Thus we have a creditor who is equally liable to the principal as the principal to him, and against whom the principal has a good defence in law and equity, and a surety is entitled in equity to call upon the principal to exonerate him.
In this state of things, we are bound to conclude that the surety has a defence
in equity against a creditor...
(Emphasis added)
[29] Derham in Derham on the Law of Set-Off9 has explained the basis of a surety being able to raise the defence:
... The surety’s right to rely on the principal debtor’s defence may be explained on equitable grounds, based upon the right that the surety has in equity to be exonerated by the debtor. The debtor, as the person principally liable to the creditor, should exonerate (or relieve) the guarantor from liability to the creditor through the defence of set-off that the debtor has against the creditor. The burden of the debt should be borne by the principal debtor, and the surety’s right to be exonerated should override the right that
7 Bechervaise v Lewis (1872) LR 7 CP 372.
8 At 377. Although this was a decision of the Court of Common Pleas, at that stage that court had jurisdiction to take account of any defences in equity.
9 Rory Derham Derham on the Law of Set-Off (4th ed, Oxford University Press, Oxford, 2010) at
[8.21].
the debtor otherwise would have had to elect to waive the defence and to prosecute the cross-claim against the creditor in a separate action.
[30] To similar effect, Halsbury’s Laws of England10 says:
On being sued by the creditor for payment of the debt guaranteed, a guarantor may rely upon any right of set-off or counterclaim which the principal debtor could set up against the creditor in reduction of the claim against him under the guarantee. Whenever the set-off or counterclaim relied on does not operate directly to reduce the debt guaranteed, the principal debtor should be made a party, so as to bind him and prevent him afterwards claiming payment from the creditor.
[31] That last sentence is relevant to a procedural point raised by Mr Toebes. He referred to a decision of Winkelmann J in New Zealand Bloodstock Leasing v Jenkins11 where she in turn referred to a decision of Isaacs J in Cellulose Products
Pty Ltd v Truda.12 While that might be the position in a normal civil proceeding, I
am presently hearing an application to set aside a bankruptcy notice. In such cases the only parties are the judgment creditor and the judgment debtor. Other parties cannot be joined. The purpose of the hearing is to determine whether there is a triable claim following the approach in Sharma v ANZ Banking Group. Questions of joinder of further parties should not stand in the way of a judgment debtor if he has shown that his claim is a genuine triable claim of true substance. I need not be troubled by these procedural questions in determining the substantive merits of Mr Wikeley’s case.
[32] In considering Mr Wikeley’s argument under s 17 of the Insolvency Act, it is necessary to see whether the matters he raises can be a cross claim.
[33] “Cross claim” is defined in subsection (7). It includes counterclaims, cross demands and set-offs. Cross claims and counterclaims are swords – they can be invoked to establish liability against the other party. On the other hand set-off goes to defence. It is a shield. It goes in reduction of any liability of the debtor towards
the creditor.
10 Halsbury’s Laws of England (5th ed, 2008) vol 49 Financial Services and Institutions at [1135].
11 New Zealand Bloodstock Leasing Ltd v Jenkins (2007) 3 NZCCLR 811 at [159].
12 Cellulose Products Pty Ltd v Truda (1970) 92 WN (NSW) 561 at 588.
[34] “Set-off”, in the definition of “cross-claim”, cannot mean insolvency set-off, as under s 254 of the Insolvency Act 2006, because that would make the references to counterclaim and cross demand superfluous. But that aside, I see no need to take a limited view of the scope of “set-off” in the definition of “cross claim”. That is, “set-off” could be set-off arising under terms of contract, under common law, under statutes of set-off or at equity. The right of a guarantor to raise any claim available to the principal debtor against any claim made by the creditor is regarded as a set-off. After all, Derham devotes a whole chapter of his text on set-off to the topic. Accordingly, I regard the matters raised by Mr Wikeley as coming within the scope of set-off under s 17(7).
[35] I also accept that Mr Wikeley could not have raised this set-off in the original proceeding in which the trustees obtained judgment against him. The basis for his claim arose only upon Edel Metals Group Ltd making a call on the shares. It was not able to do that until it had been restored to the register. It did not make the calls until after Kós J had given his judgment. It was still a struck-off company at the time of the hearing, and it could not have raised the issue then.
Inherent jurisdiction
[36] Aside from s 17, Mr Wikeley’s argument may also be available in the court’s inherent jurisdiction. As I understand it, his claim is one that the debt has been effectively extinguished because of the set-off available by Edel Metals Group Ltd against the trustees. He says that that set-off is tantamount to payment and extinguishes his liability under the judgment because he is only a secondary debtor, not the primary debtor. As indicated earlier, I accept that those arguments are capable of being raised under the court’s inherent jurisdiction, if for any reason the matter is not regarded as coming squarely within s 17(7) of the Insolvency Act.
How good is the set-off Mr Wikeley relies on?
[37] Mr Wikeley is required to show a genuinely triable claim and under Sharma v ANZ Banking Group (NZ) Ltd it must be a claim of true substance. The approach taken by Mr Lenihan for Mr Wikeley was to show that what had been done was
enough to show a prima facie basis for the set-off to be available to Mr Wikeley and that was good enough to establish a triable claim.
[38] I take a wider view. It is necessary to look at these steps engineered by Mr Wikeley and put them into proper context. In my view there is a high degree of artificiality and contrivance about the whole business.
[39] Mr Lenihan makes the proper points that when the company was established it had an uncalled share capital of $100m and that the Genset trustees took a minority shareholding. They can be taken to have appreciated that they were vulnerable to the majority using their voting power to pass special resolutions which could have adverse effects on them. Mr Jacomb has asserted that there was an agreement that there would not be any calls on the capital. His evidence on that is not substantiated to any degree and cannot be relied on. Mr Lenihan also makes the point that the case before Kós J went to hearing on the basis that the uncalled share capital of $100m was an asset of the company. That was a point taken by the Genset trustees to obtain judgment against Mr Wikeley.
[40] Mr Wikeley tries to dress up the steps that have been taken as having some commercial purpose, namely that what was done was necessary for the company to give itself more working capital. He makes fleeting references to there being assets available to the company.
[41] I regard the steps that were taken as being commercially unusual and explicable only on one proper basis. Mr Wikeley has contrived matters so that he can get rid of his liability to the Genset trustees by engineering this call on the Genset Trustees as shareholders. But the reality is this. The new shareholder, Sundome, is now the majority shareholder of the company. It has become a shareholder by putting $20,000 into the company. It is under the effective control of Mr Wikeley. Mr Wikeley has passed all these resolutions without consulting the Genset trustees. The steps taken are obviously calculated to be to their detriment. The effect is that they will be required to put $23m into the company while still having no more than a minority interest in the company.
[42] I can disregard the calls on Geier Ltd. It is a corporate trustee. Mr Wikeley has a history of involvement in shell companies. In part, I rely on the evidence put before me on the application for directions as to service of the bankruptcy notice. It would be naive to believe that Geier Ltd would be good to meet the call on its shares.
[43] I put that into the context of a potential claim under s 174 of the Companies Act 1993. I canvassed this with Mr Lenihan during the hearing. He accepted that the Genset trustees would be able to obtain some relief under s 174, although in reply he did withdraw somewhat from that and indicated in a guarded way that only limited relief would be given. In my view, it is a foregone conclusion that the Genset Trust Ltd would obtain full relief under s 174. This engineering of a call on shares to defeat the trustees’ rights under their loan is nothing more than a device to defeat the Genset Trust Ltd’s rights against Mr Wikeley under the judgment. In the end, it becomes appropriate to come back to the policy behind decisions such as Whyte v O’Brien. In terms of that judgment, it is not reasonable that the steps taken by Mr Wikeley be used to delay the Genset trustees from the benefit of their judgment.
[44] Because I have a firm view that on any hearing under s 174 the court is bound to give relief to the trustees, I find that there is no true substance to the set-off relied on by Mr Wikeley. That is, I make a finding that the matters he raises are not genuinely triable.
Mr Wikeley’s liability for the costs part of the bankruptcy notice
[45] What I have said so far goes to only part of the sums under the bankruptcy notice, that is, the liability for US$875,706.42. Aside from that, the bankruptcy notice also requires Mr Wikeley to pay costs in the proceeding in which he was sued. Mr Lenihan accepts that Mr Wikeley is liable for costs. For that, Mr Wikeley stands solely liable. He does not have just a secondary liability as guarantor. Mr Lenihan, however, submits that upon Mr Wikeley paying that sum of costs, then the shares in Orion held by the Genset trustees should be transferred to Mr Wikeley.
[46] In this decision, I have found that Mr Wikeley’s set-off arguments would not be effective and therefore his liability under the judgment for the guarantee amount still stands. In other words, I can leave that part of the judgment of Kós J undisturbed and do not need to give any further directions on that aspect.
Outcome
[47] I am satisfied that the entirety of the bankruptcy notice should stand. Accordingly I dismiss the application to set aside the judgment. The effect of that dismissal is that the time for compliance with the notice has now stopped running under r 24.10 of the High Court Rules.
[48] I make an order for costs in favour of the trustees against Mr Wikeley on a category 2 band B basis. If counsel are unable to agree on costs, memoranda may be filed.
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Associate Judge R M Bell
9