Judd v Hodgkinson
[2018] NZHC 491
•21 March 2018
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
I TE KŌTI MATUA O AOTEAROA AHURIRI ROHE
CIV-2017-441-86
[2018] NZHC 491
UNDER the Insolvency Act 2006 IN THE MATTER OF
an application for an order for adjudication
BETWEEN
MICHELLE KERRIAN JUDD
Judgment Creditor
AND
RICHARD WILLIAM HODGKINSON
Judgment Debtor
Hearing: 1 March 2018 Counsel:
J L Bates for Judgment Creditor
M Macfarlane and T Sage for Judgment Debtor
Judgment:
21 March 2018
JUDGMENT OF ASSOCIATE JUDGE SMITH
[1] The judgment creditor, Ms Judd, applies for an order adjudicating the judgment debtor, Mr Hodgkinson, bankrupt.
[2] On 22 June 2017, Ms Judd obtained a judgment against Mr Hodgkinson in the Family Court at Napier, in the sum of $78,553.76. Mr Hodgkinson has not paid that sum or any part of it.
[3] Ms Judd issued a bankruptcy notice against Mr Hodgkinson on 21 August 2017. When he did not pay the amount stated in the bankruptcy notice within the 10 working day period allowed by the notice, or apply under s 17 of the Insolvency Act 2006 (the Act) to set aside the bankruptcy notice, she filed her application for a bankruptcy adjudication order.
JUDD v HODGKINSON [2018] NZHC 491 [21 March 2018]
[4] Mr Hodgkinson filed a short notice of opposition to the bankruptcy adjudication application, and a supporting affidavit. He does not deny that the debt is owing to Ms Judd, nor does he deny that he committed an act of bankruptcy when he failed to comply with the bankruptcy notice which had been served on him. Rather, he says that the Court has a discretion to refuse to make a bankruptcy adjudication order, and that the Court should exercise that discretion in his favour on the particular facts of this case.
Relevant statutory framework
[5]Section 13 of the Act provides:
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.
[6]Section 17 of the Act materially provides:
(1)A debtor commits an act of bankruptcy if—
(a)a creditor has obtained a final judgment or a final order against the debtor for any amount; and
(b)execution of the judgment or order has not been halted by a court; and
(c)the debtor has been served with a bankruptcy notice; and
(d)the debtor has not, within the time limit specified in subsection (4),—
(i)complied with the requirements of the notice; or
(ii)satisfied the court that he or she has a cross claim against the creditor.
…
(4)The time limit referred to in subsection (1)(d) is,—
(a)if the debtor is served with the bankruptcy notice in New Zealand, 10 working days after service; or
…
(7)In subsection (1)(d)(ii), 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.
[7]Section 37 of the Act provides:
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.
Background
[8] Ms Judd and Mr Hodgkinson were married on 12 November 2005. Mr Hodgkinson was then 56, and Ms Judd was 40. Each had children from prior relationships.
[9] Prior to the marriage, Ms Judd had worked as a beauty therapist, but that employment ceased when she moved to live with Mr Hodgkinson at a Havelock North property (the property) owned by a trust associated with Mr Hodgkinson, the Richard Hodgkinson Trust (the Trust). The current trustees of the Trust are the Hawke’s Bay Trustee Company Limited and Mr Kenneth John Graham.
[10] The Trust was established in 2004, shortly before Mr Hodgkinson’s first marriage failed, and well before he began his relationship with Ms Judd.
[11] The parties resided throughout their marriage at the property. They separated on 11 June 2012.
[12] Following their separation, there has been substantial litigation between Ms Judd and Mr Hodgkinson. First, there was Ms Judd’s claim for spousal maintenance which was eventually resolved by the Family Court judgment of 22 June 2017. This is the judgment on which Ms Judd’s adjudication application is based. Secondly, Ms Judd commenced a proceeding in this Court in 2014 (the constructive trust proceeding), in which she sought a 40 per cent share in the property.
[13] In a judgment given on 17 December 2014 in the constructive trust proceeding, Williams J awarded Ms Judd the sum of $65,000 to reflect her contributions to the property, roughly reflecting $10,000 per year for each year of her marriage to Mr Hodgkinson.1
[14] An appeal by Mr Hodgkinson and the trustees of the Trust against the judgment of Williams J in the constructive trust proceeding was dismissed by the Court of Appeal on 17 August 2016.2
[15] As for Mr Hodgkinson’s personal circumstances, he inherited a family orchard in 1993, and it appears that he was moderately successful as a businessman, first as an orchardist and later as a fruit retailer, operating a company called Hodgie’s Fresh Fruit Company Limited (Hodgie’s). Mr Hodgkinson is a director of Hodgie’s, but says that he will shortly retire in favour of one of his sons if the business is to be carried on.
[16] In his affidavit sworn in opposition to the adjudication application, Mr Hodgkinson stated that he has very little in the way of assets. He has personal possessions “of no particular value”, a term loan of $300,000 owed to him by Hodgie’s, and $216,312 owing to him on his current account with Hodgie’s. However, Hodgie’s has little in the way of assets, and it appears that neither of these sums is collectable. Mr Hodgkinson said that he expects that Hodgie’s will be put into liquidation when the business comes to an end. In addition to those modest assets, he
1 Judd v Hawke’s Bay Trustee Company Limited & Anor [2014] NZHC 3298.
2 Hawke’s Bay Trustee Company Limited v Judd [2016] NZCA 397.
stated that he has a relationship property claim against Ms Judd, on the basis that the
$65,000 awarded to her by the judgment of Williams J in the constructive trust proceeding is relationship property, in which he is entitled to a share.
[17] Mr Hodgkinson said that he has no income apart from New Zealand superannuation. He does some work part-time in the Hodgie’s business, and when it is profitable (as usually it has been in the past in a small way) he draws a salary from Hodgie’s. His evidence was that Hodgie’s was not currently profitable, and would not even be able to pay the interest on one of the loans (as it has in the past).
[18] Mr Hodgkinson lives in a unit on the property, and he uses an older Audi car which is also owned by the Trust.
[19] Mr Hodgkinson is a discretionary beneficiary of the Trust. The other beneficiaries are his children and grandchildren. Ms Judd was not a beneficiary of the Trust.
[20] The property was purchased with the aid of a substantial advance to the Trust by Mr Hodgkinson. He stated that gifts were made by him to the Trust on a regular basis until 2011, at the maximum rate allowed at the time for making gifts without becoming liable for gift duty ($27,000 per annum). The gift duty legislation was repealed in 2011, and on his accountant’s advice Mr Hodgkinson ceased making annual gifts.
[21]On 24 June 2014, the balance owing by the Trust to Mr Hodgkinson was
$973,753. By two gifts made on 25 and 26 June 2014, Mr Hodgkinson forgave the whole of the remaining debt owing to him by the Trust.
[22] The gifts made by Mr Hodgkinson (by way of forgiveness of debt) on 25 and 26 June 2014 were made respectively one day and two days after the completion of a hearing in the Family Court, in which Ms Judd was asking for awards of past maintenance and ongoing maintenance from Mr Hodgkinson. The Family Court issued its first judgment on 15 July 2014, ordering that Mr Hodgkinson pay $34,650
by way of past maintenance, together with ongoing weekly maintenance of $360 per week from the date of judgment until 12 June 2015.
[23] Mr Hodgkinson successfully appealed that award to the High Court; in a judgment given by Faire J on 19 December 2014 the matter was remitted to the Family Court for further consideration. The Family Court heard the remitted case on 9 February 2017, and issued a judgment on 24 May 2017.
[24] Mr Hodgkinson did not appeal the Family Court judgment of 24 May 2017. Following an award of costs made against him on 22 June 2017, his liability to Ms Judd was crystallised in the sum of $78,553.76, being the sum on which her present bankruptcy adjudication application is based.
[25] Ms Judd challenges the propriety of the gifts totalling $973,753 made by Mr Hodgkinson on 25 and 26 June 2014. She contends that those gifts were made while the parties were in the midst of the Family Court proceeding, and that the money should have remained available to Mr Hodgkinson so that he could meet any maintenance obligations the Court might find that he owed to her. Ms Judd contends that the making of those gifts is a matter which the Official Assignee should be allowed to investigate. She refers to s 205 of the Act, which contains certain “clawback” provisions in respect of gifts made by a bankrupt within the period of five years immediately before adjudication. Section 205 of the Act provides:
(1)A gift by a bankrupt to another person may be cancelled on the Assignee’s
initiative if—
(a)the bankrupt made the gift within the period beginning 2 years immediately before adjudication and ending 5 years immediately before adjudication; and
(b)the bankrupt was unable to pay his or her debts.
(2)A bankrupt is presumed to have been unable to pay his or her debts for the purpose of subsection (1)(b) unless the party claiming under the gift proves that the bankrupt was immediately after the making of the gift, or at any time after that up to his or her adjudication, able to pay his or her debts without the aid of the property that the gift is composed of.
[26]As Mr Macfarlane put it in his submissions for Mr Hodgkinson:
If Mr Hodgkinson is adjudicated bankrupt on 1 March 2018, then the gift to his family trust falls within the 2 to 5 year period in s 205(1)(a). This means the gift may be cancelled by the Official Assignee, unless the family trust proves that Mr Hodgkinson was immediately after the making of the gift, or at any time after that up to his adjudication, able to pay his debts without the aid of the property that the gift is composed of: s 205(1)(b). That will be the case asserted by the Trust. There is no suggestion that as at the date of the gift Mr Hodgkinson was unable to pay his debts with or without the gift, nor in the interim period to 22 June 2017.
[27] In broad terms, Mr Hodgkinson says that it would be pointless to make an order adjudicating him bankrupt. He is now a superannuitant aged 68, with only a modest salary from some part-time work he is doing for Hodgie’s. He has offered Ms Judd a lump sum of $25,000 (financed by his sister), but that offer has been rejected. So has an alternative offer by Mr Hodgkinson to pay the debt in instalments of $50 per week. Mr Hodgkinson says that bankruptcy would be a waste of public money, and get Ms Judd nothing, or at least far less than he has offered.
[28] With his affidavit, Mr Hodgkinson produced a copy of the financial statements for Hodgie’s for the year ended 31 March 2017. The statement of financial performance shows a net profit of $6,165, of which $6,000 was applied to shareholder remuneration. Mr Hodgkinson is the only shareholder. The statement of financial position shows the liabilities to Mr Hodgkinson, and an excess of liabilities over assets of $493,573.
[29] Mr Hodgkinson also produced with his affidavit a copy of the financial statements for the Trust as at 31 March 2017. The statement of financial position shows total assets of $1,528,339, and total liabilities of $4,065. The total assets figure of $1,528,339 includes fixed assets (including the property) of $916,265, investments (primarily company shares and bank deposits) of $406,387, and current accounts totalling $119,494 (including $90,780 owed by Mr Hodgkinson to the Trust).
[30] Mr Hodgkinson is a director of two other companies, the Norman Company Limited and Mt Erin Fruit Services Limited. He is not a shareholder in the Norman Company Limited, which he says has for some time been one of his son’s companies. Mr Hodgkinson’s evidence is that the Norman Company Limited no longer carries on business, and that he expects to resign as a director of the company. Mr Hodgkinson owns the shares in Mt Erin Fruit Services Limited jointly with Hawke’s Bay Trustee
Company Limited, but he says that this company has not carried on any business for some years and it is to be wound up.
[31] Mr Hodgkinson also filed an affidavit sworn by a chartered accountant, Mr Stephen Dine, who has long been Mr Hodgkinson’s accountant. Mr Dine is a principal of the trustee, Hawke’s Bay Trustee Company Ltd, which he describes as his firm’s corporate trustee vehicle. Mr Dine confirmed that Mr Hodgkinson does not control the Trust.
[32] Mr Dine said that the Trust continues to provide Mr Hodgkinson with the use of the property and the Audi vehicle, which Mr Hodgkinson has had for many years.
[33] In respect of the deeds of forgiveness of debt, Mr Dine said that the trustees accepted the forgiveness as part of the long-expected estate planning which had been ongoing prior to Mr Hodgkinson’s relationship with Ms Judd. That estate planning was known to the Family Court hearing the maintenance proceeding.
[34] Mr Dine acknowledged that there are monies owing by the Trust to Mr Hodgkinson, but said that that has been the case for many years, and it has never been the intention that Mr Hodgkinson would be required to repay the Trust.
The legal submissions
Ms Judd
[35] Mr Bates submits that an order for adjudication would be far from pointless, and that Ms Judd has a clear interest in obtaining the adjudication order she seeks. She has not been acting in an unreasonable fashion, and she has no effective enforcement mechanisms available to her after Mr Hodgkinson made the gifts to the Trust totalling
$973,753.
[36] The gifts made by Mr Hodgkinson in June 2014 are matters the Official Assignee can and should investigate; it is not for the Court in this proceeding to investigate them but for the Official Assignee, with her powers of investigation and
examination in the administration of a bankrupt’s estate.3 There is a live issue as to the recoverability of substantial gifts made to a trust in which Mr Hodgkinson is a beneficiary, and in which he exercises control.
[37] In addition to the possible remedy in respect of the gifts under s 205 of the Act, Mr Bates refers to ss 346 to 305 of the Property Law Act 2007 (the PLA).
[38] Mr Bates refers to the nature of the debt in this case, being maintenance which was supposed to be available to Ms Judd so that she would be able to maintain herself. Having regard to the nature of the debt, and the timing of the gifts made by Mr Hodgkinson, Mr Bates submits that there is a public interest in the adjudication application which transcends the interests of the immediate parties to the proceeding.
[39] In respect of Mr Hodgkinson’s claim to a one-half share of Ms Judd’s award of $65,000 obtained in the constructive trust proceeding, Mr Bates submits that the claim could have and should have been raised in opposition to the spousal maintenance claim made by Ms Judd in the Family Court. The claim, however, would fail in any event as amounts received by a relationship partner under a trust are not relationship property.4
[40] In respect of the gifts made by Mr Hodgkinson on 25 and 26 June 2014, Mr Bates notes that the spousal maintenance hearing in the Family Court took place the day before the first of those gifts, on 24 June 2014. Section 205 creates a presumption that Mr Hodgkinson was insolvent when those gifts were made, and he has produced nothing in this proceeding to displace that presumption. Ms Judd does not have access to Mr Hodgkinson’s records in relation to his indebtedness at material times, and it was for Mr Hodgkinson to demonstrate that he was solvent at the relevant time.
[41] On the nature of the Family Court judgment eventually quantified by Judge Lendrum in May 2017, Mr Bates submits that the judgment was merely declaratory of a statutory indebtedness (in the form of a liability to pay maintenance
3 Citing Re Rabobank Australia Ltd ex parte Tootell [2013] NZHC 2975.
4 Property (Relationships) Act 1976, s 10.
in the period from the date of separation, 11 June 2012, until 23 June 2014) which already existed when the gifts were made. There is no evidence that Mr Hodgkinson was able to pay his debts immediately after making the gifts or at any time after that up to the present time, without the aid of the property that was gifted.
[42] In the alternative, Mr Bates submits that the spousal maintenance claim was a contingent liability of Mr Hodgkinson at the times he made the gifts, and that s 205 of the Act is broad enough to include within the concept of “debts” contingent liabilities. Mr Bates submits that there remains a need for an inquiry and an assessment if need be by further litigation, as to whether the donee of the gifts (the Trust) is able to prove that Mr Hodgkinson was able to pay his debts at the time he made the gifts.
[43] Mr Bates further submits that Mr Hodgkinson’s assertions that there is no value in the companies in which he has held an interest, have yet to be tested. The Official Assignee would have full power to issue statutory demands for payment of the loans owed to Mr Hodgkinson, and if the amounts are not paid, to apply to wind the debtor companies up. The directors and shareholders of those companies might well consider that there is good reason to avoid that prospect for the preservation of tax losses and/or for other reasons (e.g. preserving the value of relevant trading names).
[44] Mr Hodgkinson has not discharged his onus of establishing that it is just and equitable that the Court does not make an order of adjudication. Indeed, an injustice would arise if the applications were not granted, as a decision refusing the adjudication order would preclude a proper investigation of Mr Hodgkinson’s conduct by the Official Assignee.
Mr Hodgkinson
[45] Mr Macfarlane relies on s 37(c) and (d) of the Act. He submits that Mr Hodgkinson is a 68 year old retiree, and it would not be in the public interest to disqualify him from continued involvement in the Hodgie’s business, as a director and manager, especially at this stage of his life.
[46] Further, there is no trail of creditors who have been left out of pocket in this case. The debt arises from the parties’ failed marriage, and not from Mr Hodgkinson’s
business dealings. There is no public interest in preventing Mr Hodgkinson from continuing in Hodgie’s, and nor is there any public interest in continuing oversight over his affairs. He poses no risk to society, and the only creditor is his ex-wife.
[47] As for the possible use of s 205 of the Act by the Official Assignee, the relevant time for the assessment under s 205 is either:
(a)immediately after making the gift (i.e. on 25 and 26 June 2014); or
(b)at any time after that up to the date of adjudication (i.e. between 25 June 2014 and whatever may be the date of adjudication).
[48] Mr Macfarlane submits that there is simply no evidence that Mr Hodgkinson was unable to pay his debts immediately after the making of the gifts, or at any time up until the Family Court judgment on 22 June 2017.
[49] Mr Macfarlane acknowledges that, when s 205 of the Act was amended in 2009 by replacing the phrase “due debts” with “debts”, the effect was that, when proving solvency, account can be taken of all debts that have not yet fallen due, such as contingent liabilities. But he submits that the Family Court litigation brought by Ms Judd against Mr Hodgkinson did not create a contingent liability on Mr Hodgkinson before judgment because:
(a)There is no previous authority which supports that assertion.
(b)The case is different from cases in which the courts have held that a contingent debt to a landlord of business premises under a personal guarantee is covered by s 205.
In this case, the nature and extent of any liability for maintenance could not be calculated until there was a judgment of the Court. In particular, the quantum of any liability Mr Hodgkinson might have could not have been known, as the case was unusual in the respect that it was accepted that Mr Hodgkinson did not have sufficient income from which to pay maintenance – any order the Court made for maintenance would be an
order that he have recourse to his capital. There is also the principle that people voluntarily enter into personal guarantees, but they do not voluntarily enter into maintenance litigation with capital outcomes.
(c)At the time of the gifting in June 2014, the possible liability Mr Hodgkinson had for payment of spousal maintenance would not have fallen within the definition of “provable debts” in s 232 of the Act.
(d)In cases of company insolvency, the courts have said that when taking contingent debts into account it is not necessary to have regard to any potential claim against the company (no matter how specious). Whether a claim is a debt due must be assessed objectively from the perspective of a reasonable and prudent businessman, and only those claims that are reasonably temporarily proximate, and where there is no credible defence, should be brought to account as “debts”.5 There is a difference between debts and damages but, once liability and quantum have been established in any claim for damages, the resulting judgment sum will be a debt owing. That means that the question is the same – if there is sufficient certainty that a claim will crystallise in the relevant period, then it must be taken into account.6
[50] In this case, there was no certainty that Ms Judd’s spousal maintenance claim would crystallise into a judgment debt within a reasonably proximate period, and thus have to be taken into account by Mr Hodgkinson.
[51] For those reasons, there would be nothing for the Official Assignee to investigate, and an order for adjudication would be pointless.
5 Citing David Browne Contractors Ltd v Petterson [2017] NZSC 116.
6 At [92].
Discussion and conclusions
Principles applicable to the exercise of the discretion under s 37(c) and (d) of the Act
[52] The Court’s general discretion was described by the Court of Appeal in Baker v Westpac Banking Corporation as follows:7
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.
[53] In Rabobank Australia Ltd ex parte Tootell,8 Associate Judge Osborne referred to the decision of Master Williams QC in Re Epirosa.9 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?
(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?
7 Baker v Westpac Banking Corporation CA 212/92, 13 July 1993 at 4, per Richardson J.
8 Rabobank Australia Ltd ex parte Tootell [2013] NZHC 2975.
9 Re Epirosa, ex parte Diners Club NZ Ltd, (HC) Wellington, B498/91/B532/91; 6 March 1992.
(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?
[54]The other decision to which I refer at this point is the judgment of Fisher J in
Re Fidow.10 In that case, the learned Judge noted:11
…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 parties to the proceedings…The public interest in exposing and controlling an insolvent debtor is one which exists quite independently of the separate question of debt collection by his immediate creditors.
[55] In Strachan v Moodie, I made a bankruptcy adjudication order in circumstances where the judgment debtor had no assets, but was living relatively comfortably in a property owned by a family trust. I noted that the judgment debtor, Dr Moodie, appeared to have deliberately structured his affairs so that he would not have any assets to pay any significant sum for which he might become liable. I noted that Dr Moodie was perfectly entitled to establish the two family trusts that were in issue in that case, or to transfer assets to them, but went on to observe that “anyone who does that
10 Re Fidow (a debtor) [1989] 2 NZLR 431.
11 At 443.
inevitably invites the possibility of bankruptcy if he or she becomes subject to a substantial adverse judgment.”12
[56] In Strachan v Moodie, I referred to two judgments of Master Lang, both involving judgment debtors who had transferred assets to family trusts. In the first of those judgments, Re Marra, the learned Judge dealt with the issue of “public interest and commercial morality” in the following terms:13
[36] I consider that an objective observer would be dismayed to find that Mr Marra was able to walk away unscathed from his present situation. That kind of outcome would in my view be detrimental to the public interest and would do nothing to enhance commercial morality, particularly in the field of compliance with tax obligations. This is one of those cases where, regardless of the other circumstances, Mr Marra should have visited on him the consequences flowing from an order of adjudication.
[57] The second judgment of Master Lang was Re Pulman ex parte The Hire Company Ltd. The Master noted in this case that a complete absence of assets may mean that adjudication will serve no practical purpose. But a submission that a debtor has no assets will be closely scrutinised. His Honour noted:14
Such a claim made conveniently ignore the fact that assets have been transferred to a family trust, or that assets do in fact exist, although not in the name of the debtor. Sometimes a debtor’s assets may only be recoverable by using the powers given to the Official Assignee under the Insolvency Act 1967.
Application of the principles in this case
[58] The starting point is that Ms Judd is prima facie entitled to the adjudication order she seeks. The onus is on Mr Hodgkinson to show that it would be just and equitable for the Court to refuse to make the order, or that for some other reason an order of adjudication should not be made.
[59] The Re Epirosa factors provide a helpful framework for the Court’s exercise of its discretion, although as I noted in Strachan v Moodie15, the Court’s task is to
12 Strachan v Moodie [2014] NZHC 3167, at [44].
13 Re Marra (2004) 21 NZTC 18,494 (HC).
14 Re Pulman ex parte The Hire Company Ltd HC Auckland CIV-2006-404-4697, 20 April 2007, at [28].
15 Above n 12, at [38].
consider all of the facts of the case and balance competing factors in deciding whether it would be just and equitable to decline to make an adjudication order (or that there is other sufficient reason to follow that course).
[60] The first of Re Epirosa factors appears to be neutral: Ms Judd wants the adjudication order but Mr Hodgkinson does not. The views of any other creditors of Mr Hodgkinson are not known, except that the Court can infer from Mr Dine’s affidavit that the Trust does not support the adjudication application. However, the Trust is not an “arms-length” creditor, and it has an obvious interest in opposing the application, as it would be the target of any application the Official Assignee might make under s 205 of the Act. In those circumstances I do not place any weight on the fact that the Trust might oppose the making of an adjudication order.
[61] The second of the Re Epirosa factors is the ability of Mr Hodgkinson to meet his debts over time. This consideration clearly favours Ms Judd: it is accepted that Mr Hodgkinson does not have the ability to pay the debt over any reasonable period.
[62] The third Re Epirosa factor is the circumstances in which the debt was incurred, and whether those circumstances suggest that the debtor has acted unreasonably in pursuing adjudication. I accept that there might have been nothing adverse to Mr Hodgkinson in the circumstances in which his liability for the spousal maintenance arose. It appears that it was accepted in the Family Court that he did not have the income to pay any significant sum for maintenance, and that whether a capital sum should be ordered for past maintenance was at least arguable. But by the same token I do not consider that Ms Judd is acting unreasonably in pursuing an adjudication order. Specifically, I do not accept the submission that adjudication will be pointless.
[63] Whether an order for adjudication will be pointless was the fourth of the factors identified by Master Williams in Re Epirosa. In this case, I accept Mr Bates’ submission that the possibility of a claim by the Official Assignee under s 205 of the Act is a real possibility, which cannot be discounted at this stage. First, it seems clear that the Trust has sufficient assets and that any judgment obtained against it could be enforced. More fundamentally, however, I accept Mr Bates’ submission that it will be for the Trust to counter the s 205(2) presumption that Mr Hodgkinson was unable to
pay his debts immediately after the making of the gifts (or at any time after that up to the date of his adjudication), without the aid of the money which was the subject of the gifts to the Trust.
[64] Mr Hodgkinson has not produced any evidence to show that he would have been able to meet all his debts as they fell due without recourse to the sums gifted to the Trust, in the period between 25 June 2014 and the present time. I think it was for him to produce at least some supporting evidence to show that he was solvent throughout the period, but he has not done that. I note in that regard that the financial statements for the Trust show that, as at 31 March 2017, he owed $90,780 to the Trust on his current account, and the corresponding figure owed by Mr Hodgkinson to the Trust as at 31 March 2016 was $61,838. It appears that the closing debit balance as at 31 March 2015 was $54,023. While Mr Dine says that it was never the intention that the Trust would require Mr Hodgkinson to repay his debt to the Trust, it appears that the sums have never been forgiven by the Trust. On the face of it, the present debt to the Trust would appear to be repayable upon demand. However, I do not consider it necessary or appropriate in this proceeding to determine whether the amounts shown in the Trust’s accounts as owing by Mr Hodgkinson to the Trust are in fact payable by him. It is enough to find, as I do, that that issue appears to be an appropriate one for consideration by the Official Assignee in the context of a possible application under s 205 of the Act.
[65] In circumstances where I cannot discount the reasonable possibility that the Official Assignee might mount a successful application against the Trust under s 205, I do not consider that an order for adjudication would be pointless. But even if the Trust were able to show that Mr Hodgkinson remained solvent throughout the relevant period, I think the circumstances of the making of the gifts to the Trust, and in particular the timing of the gifts, tells against the equity for which Mr Hodgkinson now contends.
[66] The gifts were made one day and two days respectively after the hearing of Ms Judd’s spousal maintenance claim, and I am unable to accept that the timing was pure coincidence. Mr Hodgkinson had not made any gifts to the Trust since 2011, and the only sensible inference is that, in making the gifts he made on 25 and 26 June 2014,
his intention was to make himself “judgment-proof” in the event that Ms Judd obtained a substantial judgment against him. As I observed in Strachan v Moodie, there is nothing to prevent people establishing family trusts, and transferring assets to them, but anyone doing that inevitably invites the possibility of bankruptcy if he or she suffers a substantial adverse judgment which cannot be met.
[67] In my view, it is not necessary to determine whether the application for spousal maintenance or the hearing on 24 June 2014 did or did not create a “debt” or a “contingent liability” of Mr Hodgkinson to Ms Judd. It is enough to find on the balance of probabilities, as I do, that one of Mr Hodgkinson’s intentions in making the two gifts was to ensure that he would be unable to meet any substantial judgment Ms Judd might obtain against him. I am concerned here with broad equitable considerations and the public interest, and in my view neither considerations of equity nor the public interest favour allowing Mr Hodgkinson to avoid the ordinary consequence of his actions in making the gifts (bankruptcy), in circumstances where he appears to have deliberately organised his affairs in such a way as to deprive Ms Judd of the fruits of any judgment she might obtain against him.
[68] As the Court of Appeal noted in Baker v Westpac Banking Corporation, I am required to have regard to the wider public interest. In my view that interest includes not only allowing the Official Assignee to properly investigate any possible claim against the Trust under s 205, but also the discouragement of other litigants who may seek to make themselves judgment-proof immediately after a court hearing but before judgment is given, by giving away their assets.16
[69] The fifth of the Re Epirosa factors is whether Mr Hodgkinson, if adjudicated, would be rendered unable to support himself. There is very little evidence on this. It is clear that he has been taking only very modest drawings from Hodgie’s (salary only
$6,000 in the year ended 31 March 2017), and he appears to have been receiving drawings from the Trust. There is insufficient evidence for me to conclude that he would be unable to support himself if an order for adjudication were made.
16 Baker v Westpac Banking Corporation CA 212/92, 13 July 1993.
[70] The last of the Re Epirosa factors raises the question of a debtor’s standing in the community, and whether any significant stigma or embarrassment might result from an order for adjudication. In my view, there is nothing under this head that might, whether considered alone or with other factors, displace Ms Judd’s prima facie entitlement to an adjudication order. Mr Hodgkinson is now 68, and is not running a professional practice, or a business the reputation of which might be seriously damaged by an order for adjudication.
[71] Weighing all of the evidence and counsel’s submissions, I conclude that Mr Hodgkinson has failed to show under s 37(c) that it is just and equitable that the Court should not make an order of adjudication. Nor has he raised any other sufficient reason for the Court to decline to make the adjudication order sought.
[72] Accordingly, I make an order adjudicating Mr Hodgkinson bankrupt, with costs on a 2B basis, plus disbursements as fixed by the Registrar.
[73]The foregoing orders are timed at 3pm on 21 March 2018.
Associate Judge Smith
Solicitors:
Inger Bates, Lawyers, Napier for Judgment Creditor Sainsbury Logan & Williams, Napier for Judgment Debtor
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