Jellyman v Fitzgibbons Floor Coverings Limited HC Christchurch CIV 2010-409-99
[2010] NZHC 2228
•13 December 2010
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2010-409-000099
IN THE MATTER OF the Insolvency Act 2006
AND
IN THE MATTER OF the bankruptcy of JENNIFER JELLYMAN BETWEEN JENNIFER JELLYMAN
Judgment Debtor
ANDFITZGIBBONS FLOOR COVERINGS LIMITED
Judgment Creditor
Hearing: 13 December 2010
Appearances: G A Hair for Judgment Creditor
G A Cooper for Judgment Debtor
Judgment: 13 December 2010
Reasons: 15 December 2010
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
as to Reasons for Bankruptcy Adjudication
[1] On 13 December 2010, at 4.41 p.m., I made an order for the adjudication of the debtor. I indicated that reasons would follow. These are they.
Background
[2] Fitzgibbons obtained a judgment against Ms Jellyman in the District Court at
Christchurch almost 15 months ago.
JELLYMAN V FITZGIBBONS FLOOR COVERINGS LIMITED HC CHCH CIV-2010-409-000099 13
December 2010
[3] The background to judgment was this. Ms Jellyman had a trading name “The Design Establishment”. She also had a company, Provincial Living Limited. Fitzgibbons sells floor coverings. The judgment it obtained ($45,609) related to floor coverings it had supplied effectively as a sub-contractor to The Design Establishment. Fitzgibbons’ case in the District Court was that it was dealing with Ms Jellyman trading as The Design Establishment. She had incorporated Fitzgibbons’ floor coverings in work done for her clients, had billed those clients, had received payment from those clients but had not paid Fitzgibbons. There has never been an issue as to the fact that Fitzgibbons has not been paid.
[4] Fitzgibbons was not paid following the judgment entered against Ms Jellyman. A bankruptcy notice was served on Ms Jellyman in January 2010. She still made no payment. In February 2010 Fitzgibbons issued and served this proceeding, with the hearing date allocated on 3 May 2010.
[5] On 30 April 2010 (the last day for filing) Ms Jellyman filed a notice of intention to oppose the adjudication application. The specific ground of opposition was that the debt involved was that of Provincial Living Limited trading as The Design Establishment, and not of Ms Jellyman. At the same time, Ms Jellyman filed an application in the District Court for an order setting aside the District Court judgment, relying on the same ground. She explained her delay in bringing the application partly by reference to the fact that she did not have funds to bring the application and had applied for legal aid.
[6] Responsibly, counsel for Fitzgibbons thereafter agreed to a number of adjournments to enable the District Court to determine the setting aside application. The application was heard in early-November and Judge P A Moran gave judgment on 26 November 2010 refusing the application and ordering costs to be paid. His Honour found that Ms Jellyman did not have any substantial ground of defence, she having chosen to trade personally under the trading name The Design Establishment. The existence of Ms Jellyman’s company, Provincial Living Limited, was not known to Fitzgibbons.
[7] That sole ground of opposition having failed, one might have anticipated that Fitzgibbons would now have a clear run to adjudication when the proceeding was called at its adjourned hearing date on 13 December 2010. Not so.
Amended grounds of opposition
[8] On the last working day before this hearing, Ms Jellyman filed new grounds of opposition in which she said that an order of adjudication should be refused because:
i) It is just and equitable not to make an order.
ii) The creditors will be repaid over a reasonable time. iii) There are no assets that creditors will benefit from.
iv) There is no public interest in making an order of adjudication.
v)The application for adjudication is an oppressive use of the bankruptcy process.
[9] Ms Jellyman by affidavit referred to the background to her financial situation, identified her current financial position and addressed matters set out in her notice of opposition. I will return to the detail of that.
[10] Mr Cooper made submissions which focused heavily on the discretion which the Court has in determining whether or not to adjudicate a debtor bankrupt. Mr Cooper referred to dicta in seven cases, each dealing with aspects of the discretion.
[11] For his part, Mr Hair addressed matters by reference to one case in which the Court considered matters relevant to the discretion (Re Reid ex parte Tararua District Council HC Palmerston North CIV-2009-454-000622, 15 October 2010, Associate Judge Gendall).
Adjudication – discretion – the principles
[12] Section 36 Insolvency Act 2006 provides:
36 Court may adjudicate debtor bankrupt
The Court may, at its discretion, adjudicate the debtor bankrupt if the creditor has established the requirements set out in section 13.
[13] The s 13 requirements involve a debt of $1000 or more which is for a certain amount and is payable either immediately or at a date in the future that is certain, and the commission of an act of bankruptcy by the debtor within a period of three months before the filing of the application.
[14] Section 37 reinforces the discretion in s 36 by providing:
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.
[15] The debtor in this case does not suggest that s 36(a) or (b) applies. Rather, the debtor relies on s 37(c) and (d).
[16] The onus of establishing the grounds for adjudication under s 13 is upon the creditor. The onus of satisfying the Court that it is just and equitable not to order adjudication or that for other sufficient cause no order ought to be made is upon the debtor: McHardy v Wilkins & Davies Marinas Ltd (in rec) (CA54/93, 7 April 1993) at 3.
[17] The cases and the textbooks are replete with discussion and examples of factors which have informed the Court in the exercise of its discretion under ss 36 and 37. Reference may be made to Heath and Whale on Insolvency (looseleaf ed,
LexisNexis) at 3.10(f), and to Lindsay Hampton & Others (eds) Brookers Insolvency Law & Practice (looseleaf ed, Brookers) at [IN37.01] to [IN37.15]. The cases and commentaries illustrate the importance of assessing the particular circumstances of the debtor before the Court.
Consideration of Ms Jellyman’s circumstances
Prospect of payment to creditors
[18] Ms Jellyman wishes to be able to continue operating her company, Provincial Living Limited, as a platform for the repayment of her creditors and the creditors of the company. She says that the company traded well until 2009, was then adversely affected by the economic crisis, and was scaled down in an attempt to minimise costs.
[19] She refers to not having actively promoted the company through the period of the proceedings. She refers to favourable economic times ahead for redecoration and refurbishment because of the effects of the Canterbury earthquake and the impact of the 2011 Rugby World Cup. She refers to “four jobs on the horizon”, each said to be worth approximately or in excess of $6000-$10,000. These appear to be references to turnover and not to profit.
[20] Ms Jellyman predicts a repayment of all creditors in approximately 36 months if the company continues to trade. She says that if she is not able to continue as a director of the company then the company will cease to earn an income and none of the creditors will be paid.
[21] Against this background I turn to consider Ms Jellyman’s evidence as to assets, liabilities and income.
[22] Ms Jellyman refers to her personal assets (including those shared with her husband) as being $18,470 (including $15,000 of household chattels).
[23] Ms Jellyman’s liabilities (apart from the judgment debt of $45,609 owed to
Fitzgibbons) stand at $77,400, which is mainly made up of a $75,000 tax liability.
The exact nature of that tax liability is not disclosed by Ms Jellyman, but I
understand from Mr Cooper that it is not a preferential debt.
[24] Ms Jellyman has exhibited the financial statements of Provincial Living Limited for the years ending 31 March 2007, 2008 and 2009. (She has not been able to produce financial statements for the year ending 31 March 2010 because she one of her creditors is her accountant, which has led to problems in that relationship.) The assets of the company as at 31 March 2009 were modest. Accounts receivable and stock on hand were valued at some $69,000, to be contrasted with some $49,000 of accounts payable.
[25] The company’s income from sales in 2009 was some $506,000 (up from
$490,000 the previous year) and resulted in a nett profit before tax of $41,000. In
2009 the Jellymans took salary of some $41,000, but exceeded that with the total drawings of $49,000.
[26] Ms Jellyman deposes (without financial statements to support it) that total gross receipts of the company for the year ending 31 March 2010 amounted to
$79,456 and that in the part-year period to 10 December 2010 the total gross receipts of the company had been $6551. Ms Jellyman forecasts total gross receipts of at least $150,000 in the year ending 31 March 2011 (by which I take her to mean that in a period of slightly more than three months she expects to achieve sales of some
$143,000). She refers to that producing a profit of about $60,000, some 50 per cent more than the 2009 year when income topped $600,000.
[27] Ms Jellyman has updated the state of the company’s indebtedness by producing a list of creditors, which are said to total $170,249.17 in December 2010. (They appear to include this creditor.) She records that $15,825.11 has been paid to some creditors. The effect of that is that some creditors have been paid in full, some have been paid in part and others have been paid nothing on account. Ms Jellyman does not refer to any of the company creditors as also being creditors of herself, through guarantee. The reality is, however, that if her continuing involvement in the company is her key to clearing her personal liability, then Ms Jellyman’s future financial arrangements need to cover both the company debt ($170,000) and the
personal debt ($123,000), meaning there is some $246,000 to clear (allowing for the duplication of Fitzgibbons’ debt in those totals).
[28] Ms Jellyman refers to her personal income and expenditure as being:
Four-weekly income (pension and wages) $2702
Four-weekly expenditure $3451
[29] Notwithstanding those figures, Ms Jellyman in her affidavit deposes to having a surplus of $273 in a four-weekly period. How that is arrived at, given the underlying figures, is not explained.
[30] It is clear that Ms Jellyman is depending upon profit within the company to forecast repayment of creditors.
[31] Ms Jellyman does not depose what approach or approaches she has made to other creditors. She proposes, in order to repay Fitzgibbons, payments as follows:
i) A prompt lump sum of $8000.
ii) Monthly payments over 28 months of $1250. iii) A final payment of $1149.
[32] Such an arrangement would forecast repayment of most of the judgment debt
(but not interest and not costs on the setting aside application) within 30 months.
[33] If the Court assumes that the remaining c. $200,000 of company and personal indebtedness is to be paid off over the same period, it would entail Ms Jellyman making additional payments of between $6000 and $7000 per month to the other creditors.
[34] On the evidence before the Court, I can have no confidence whatsoever that projected payments of that level are either immediately or in the future realistic. The trading of the company has clearly been wound down. Its earnings in recent times
have been minimal, to the point that they must have been loss-making. The known prospects of turnover “on the horizon” for the coming six months are limited to something in the order of $40,000.
[35] A proposal for this creditor would only make commercial sense if parallel proposals to other creditors were workable. I am not satisfied that even the proposal for this creditor (leaving aside others) is workable.
[36] In these circumstances, it was entirely predictable that Fitzgibbons would find the proposal unacceptable.
[37] To the extent that Ms Jellyman placed primary reliance upon the prospect of payment to creditors, I reject that as a reason for exercising a discretion not to adjudicate her.
Public interest
[38] Developing upon what were essentially submissions made by Ms Jellyman in her additional affidavit, Mr Cooper submitted that there was no public interest in making an order for adjudication as Ms Jellyman poses no commercial risk to the community. The indebtedness she incurred is put down to financial difficulties due to the global financial crisis and not because of irresponsible conduct of her business affairs.
[39] Ms Jellyman deposes to having confronted the economic difficulties at the beginning of 2009 by terminating leases on the business premises and on the company car, and by running her work from home.
[40] There are authorities which indicate that it will occasionally be in the public interest to mark out an individual who has spectacularly failed in financial matters in a way which will warn others who then contemplate dealings with that debtor that there is a history of failure: Re Fidow (a debtor) [1989] 2 NZLR 431 per Fisher J at
445. As Fisher J did in Re Fidow, I acknowledge that there may be a proper consideration of a punitive element of bankruptcy, but I do not regard it as a significant aspect of this case.
[41] Mr Cooper further developed the public interest through submissions that it is not in the public interest to adjudicate a debtor bankrupt if the bankruptcy will be pointless. A lack of assets from which the assignee might recover something for the creditors is a factor which should inform the exercise of the discretion. That may be particularly so where the conduct of the debtor has been blameless: see McHardy at 3.
[42] I cannot find the debtor’s behaviour in this case as blameless. In relation to three house projects, Ms Jellyman obtained carpet from Fitzgibbons, sold it as part of her contract to her clients, pocketed the money and did not account for any of it to Fitzgibbons. Regardless of financial difficulties which may have followed, it would be wrong to categorise Ms Jellyman’s conduct as less than blameworthy. Indeed, it raises the spectre of a person in financial difficulty who robs Peter in order to pay Paul. I adopt what Associate Judge Gendall said in Re Reid at [49]:
A hallmark of commercial morality is always an expectation that a person who assumes an obligation will have the willingness and the ability to meet the obligation.
[43] In these circumstances, when the debtor’s position involves a forlorn instalment proposal, I do not consider there is any public interest factor of strength to weigh against adjudication.
[44] Through adjudication the assignee will have the opportunity on behalf of creditors to investigate the possibility of other assets. In the meantime the debtor will have been precluded from continuing to operate a business which on its most recent information has been either of marginal profitability at best or loss-creating at worst.
[45] Adjudication does not take away from Ms Jellyman her right to work in her trade. She will continue to have that right, but through employment in another business.
Oppression
[46] Against this background, I do not find anything in the making of an adjudication order to be oppressive in the sense of having effect beyond normal incidents of such orders.
Finality
[47] I must also weigh the interests of Fitzgibbons in obtaining finality. Fitzgibbons accepted the appropriateness of adjournments and time for Ms Jellyman to pursue her District Court application as her ground for opposing adjudication at that time related purely to the argument that the debt was a company debt.
[48] Had the Court today been minded to investigate further the prospects of Ms Jellyman’s proposal working out satisfactorily, that would almost certainly have entailed an adjournment with a requirement for evidence as to the support or otherwise by other creditors. The Court could not have visited upon Fitzgibbons a situation where the Court effectively forced Fitzgibbons into a compromise while other creditors were free to take their own steps by way of litigation. It is Ms Jellyman who, ten months after receiving her bankruptcy notice, now seeks to explore a payment proposal and to have the Court exercise the discretion which could properly have been the subject of negotiation and Court application at that time.
[49] It is relevant to the Court’s exercise of discretion that there should be an end to litigation in this proceeding as in others.
Absence of progress payments
[50] Ms Jellyman has not explained why she evidently chose to pay some creditors (some in full and others in part) but not others (including Fitzgibbons) over the last year. There may have been immediate reasons for payment of some creditors. But Fitzgibbons might equally have considered that it was entitled to some immediate consideration.
[51] It weighs against exercising the discretion in Ms Jellyman’s favour that she asked the Court belatedly to exercise the discretion upon the basis of a future prospect of instalments when nothing has been paid by way of instalments since the debt was incurred in the first half of 2009.
Exercise of discretion
[52] Weighing up these matters, the debtor has not satisfied me either that it would be just and equitable that the Court not make an order of adjudication or that for any other reason an order of adjudication should not be made. None of the factors individually or collectively relied upon by Ms Jellyman cuts across the creditor’s prima facie entitlement to an order of adjudication.
[53] For these reasons, the Court made an order of adjudication and ordered that
Ms Jellyman pay costs on a 2B basis together with disbursements as fixed by the
Registrar.
Associate Judge Osborne
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