Kersjes v Official Assignee
[2017] NZHC 419
•10 March 2017
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2014-441-122 [2017] NZHC 419
UNDER the Insolvency Act 2006 IN THE MATTER
of the bankruptcy of Sander Kersjes
BETWEEN
SANDER KERSJES AKA SANDER ALEX KERSJES AND ALEX KERJES Applicant
AND
THE OFFICIAL ASSIGNEE Respondent
Hearing: 10 March 2017 Appearances:
D M Kerr for the applicant
P J Chisnall for the respondentJudgment:
10 March 2017
ORAL JUDGMENT OF ASSOCIATE JUDGE SMITH
[1] Mr Kersjes applies for an order under s 294 of the Insolvency Act for an early discharge from bankruptcy.
[2] Mr Kersjes was adjudicated bankrupt on 12 March 2015. His bankruptcy followed the failure of a number of businesses he had established in the hospitality industry in the Hawkes Bay region. A company which Mr Kersjes had established to operate those businesses, Why Hospitality Ltd, together with a number of subsidiaries of that company, were put into voluntary liquidation in April 2014. Mr Kersjes attributes the failure of his businesses to under capitalisation and the failure of his marriage – his ex-wife and he separated in January 2014, leaving Mr Kersjes with what appears to have been primary responsibility for looking after the couple’s four young children (Mr Kersjes explained in the course of his
examination today that there is a 50/50 custody sharing arrangement with his ex-
KERSJES v THE OFFICIAL ASSIGNEE [2017] NZHC 419 [10 March 2017]
wife, but that he is paying the bulk of the expenses for the children. He is not receiving any cash contributions from his ex-wife).
[3] One of the children, whose ages range between six and twelve, suffers from leukaemia, and trips are required up to Starship Hospital in Auckland for treatment about every four weeks.
[4] Mr Kersjes had given a number of personal guarantees of his business obligations and one of the creditors who held a guarantee, Toops Wholesale Ltd, obtained judgment against him in November 2014 for the sum of $180,832.17. Toops Wholesale then pursued bankruptcy proceedings, and Mr Kersjes was adjudicated bankrupt on 12 March 2014.
[5] Mr Kersjes completed the required statement of affairs for the Official Assignee on or about 9 April 2015. In the ordinary course of events, then, and subject to any objection, he would be automatically discharged from bankruptcy on
9 April 2018.
[6] In his statement of affairs it appears that Mr Kersjes listed not only his own creditors but also the creditors of his businesses which had been put into liquidation. In fact the evidence shows that there are only six creditors to whom Mr Kersjes was personally liable when he was adjudicated bankrupt. One of those creditors is Toops Wholesale, with a total debt of approximately $184,750.00 (including costs). The total of the other five debts is approximately $39,600.00. Of that $39,600.00, two creditors account for approximately $36,730.00: the Commissioner of Inland Revenue with a debt of $21,678.23, and Cover Staff International (Wellington) Ltd with a debt of $15,058.62.
[7] Mr Kersjes’ statement of affairs disclosed no assets of any consequence, and the Official Assignee has not uncovered any assets not disclosed by him.
[8] Mr Kersjes says that he and his children have been living in rented accommodation in Havelock North since his bankruptcy, and they have been obliged to move address on a number of occasions.
[9] After the liquidation of his companies Mr Kersjes obtained part-time employment managing a bar, but he says that he was not happy in that work, which was neither secure nor compatible with family life. He decided that he would like to work as an advocate for employees, an area where he had gained some knowledge and experience through his work in the hospitality industry.
[10] As an undischarged bankrupt, Mr Kersjes was of course not entitled to run a business as an employment advocate, at least without first obtaining the Official Assignee’s consent. Mr Kersjes approached a local chartered accountant, Mr Nel, who proposed that, if the Official Assignee were to give consent, Mr Kersjes’ employment advocacy business could be run through the trust account operated by Mr Nel’s firm.
[11] In April 2015 Mr Kersjes applied to the Official Assignee for consent to operate the proposed employment advocacy business. In his application he stated that he wished to enter into business “to secure a better financial position for my family and regain a sense of self worth”. The proposed business would entail the giving of employment advice, securing closure for clients, and marketing. At least initially, no staff would be employed. Compliance with all tax and regulatory requirements would be attended to or supervised by Mr Nel.
[12] The Official Assignee provisionally approved the application, subject to a number of conditions, on 30 April 2015. Full approval was given by the Official Assignee on 11 May 2015, again subject to conditions. Mr Kersjes began trading in his new business in late 2015.
[13] The business has traded successfully over the period of a little over a year since Mr Kersjes began trading. In accordance with conditions imposed on the Assignee’s consent to allow Mr Kersjes to enter into business, Mr Nel’s firm has provided quarterly reports for the period ended 31 March 2016, 30 June 2016, 30
September 2016 and 31 December 2016. The reports show that Mr Kersjes has been trading profitably. Mr Kersjes has been receiving a monthly salary of $9,280.50, leaving a small element of profit. As at 31 December 2016, the balance sheet for the
business showed business assets in the form of a cash sum of $17,267.00 held in
Mr Nel’s firm’s trust account.
[14] After approximately one year of trading under Mr Nel’s supervision, Mr Kersjes was beginning to encounter difficulties in operating his business. As an undischarged bankrupt he was unable to obtain credit, and so he has been unable to run accounts with suppliers or pay for business expenses on credit. Nor has he been able to use internet or telephone banking services. When he needs to incur business expenses he says that he often needs to pay for these from the “salary” paid to him from Mr Nel’s firm, and later seek reimbursement from the firm’s trust account. There can sometimes be delays between incurring a business expense and receiving reimbursement, and Mr Kersjes says that he regularly finds himself with insufficient funds to meet day-to-day personal expenses such as groceries, for several days.
[15] Mr Kersjes refers to other difficulties in running his business as it presently has to be run, including paying airfares from his wages if he needs to attend a mediation for a client in another city, and difficulties in meeting his (internet) advertising costs. He says that he has increasingly found himself in high demand, and that most of his clients are now outside the Hawkes Bay region. He considers that he has found a niche servicing the needs of disadvantaged employees throughout New Zealand.
[16] In addition, Mr Nel’s firm’s costs are often over $2,000.00 per month, and
Mr Kersjes says these costs have a huge impact on the profitability of the business.
[17] Mr Kersjes says that he would like to employ someone to provide administrative and office support, but he is presently unable to employ staff. He would also like to be able to employ someone to provide childcare support for his four children (so far he has been reliant on supportive parents and a small group of friends).
[18] The terms on which Mr Kersjes is presently permitted to operate his business limit him to provide services to employees. He believes there is potential to expand the business to provide services to employers, who would be more likely to pay for
his services on a time basis, rather than the contingent fees he charges to employees. He sees that development of the business as likely to make the business more stable.
[19] In addition, Mr Kersjes refers to the general stigma of being an undischarged bankrupt having had an adverse affect on the business. He refers to instances where competitors have attempted to exploit that status, on one occasion by referring to it in an online blog posted by an employment lawyer.
[20] Mr Kersjes applied for an order for early discharge from bankruptcy on
25 November 2016. His application has been served on his known creditors, and advertised under r 24.37 of the High Court Rules.
[21] On 22 February 2017 the Official Assignee filed her report on the application. The report did not raise any significant matter in opposition to the application (eg breaches by Mr Kersjes of his obligations owed as an undischarged bankrupt). The Official Assignee noted that Mr Kersjes’ business is viable, and submitted that any order the court might make for early discharge should be subject to conditions, including a condition that Mr Kersjes pay the sum of $301.21 per week towards repayment of his creditors from the date of any discharge order until 9 April 2018 (the date on which an automatic discharge from bankruptcy would occur after the normal three year period). The Official Assignee suggested that the balance of
$17,267.00 held in the accountant’s trust account as at 31 December 2016 was an after-acquired asset which should be paid by Mr Kersjes for the benefit of his creditors. The Official Assignee also proposed as a condition on any order for discharge that might be made, that Mr Kersjes continue to engage a chartered accountant to oversee the taxation and statutory obligations of the business, to ensure compliance for the duration of his contributions.
[22] No creditor has filed a notice of opposition to the application, or sought to examine Mr Kersjes. The two largest creditors, Toops Wholesale and the Commissioner of Inland Revenue, have filed memoranda stating that they do not oppose the application.
[23] Following the filing of the Official Assignee’s report, Mr Kersjes submitted an affidavit from a chartered accountant, Mr Hensman. In his affidavit, Mr Hensman deposed that he had read Mr Nel’s recent report. In respect of the $17,267.00 held in the trust account, Mr Hensman expressed the view that those funds constitute essential working capital for the business, and must be retained in the business to ensure positive cashflow. His evidence is that the funds represented all the savings the business had, and they were required to enable Mr Kersjes to pay ongoing expenses, including day-to-day business expenses, as well as tax.
[24] Mr Hensman says that, because the business has been successful, Mr Kersjes will have terminal income tax to pay for the current year, and he will then have to pay provisional tax every four months. In addition, he will have to pay GST two- monthly. In Mr Hensman’s view, if the business’ funds were removed and paid to the Official Assignee, Mr Kersjes would be left with no tax savings.
[25] Mr Hensman attached a personal budget for Mr Kersjes, which he had prepared following a detailed review of Mr Kersjes’ business and personal finances. Mr Hensman notes that Mr Kersjes is a solo father with four young children, and that his weekly budget for family expenses showed a deficit of expenditure over salary of
$214.00 per week. In Mr Hensman’s opinion, Mr Kersjes requires an increase in his salary from the business to around $11,000.00 per month, for him to continue to meet these expenses. In Mr Hensman’s view, Mr Kersjes could not contribute to his creditors the sum of $301.21 per week proposed by the Official Assignee. However Mr Hensman expresses the view that it would be realistic for Mr Kersjes to pay
$5,000–$10,000 over the next twelve months.
[26] In accordance with ss 294(3) and 177 of the Insolvency Act, Mr Kersjes attended at the court today and was examined on oath. Counsel had earlier helpfully filed written submissions, and I heard briefly from them orally following the conclusion of the examination.
Discussion and conclusions
[27] There is no dispute about the broad principles the court applies on applications for early discharge from bankruptcy.
[28] A leading authority is the decision of the Court of Appeal in ASB Bank v Hogg, in which the Court of Appeal gave guidance on the exercise of the court’s discretion. The broad approach was described in the judgment in the following terms:1
“In conferring a discretion expressed in the broadest terms, the legislation recognises that each case will be different, that the relevant factors may vary from case to case and that the exercise of the discretion must be governed by the circumstances of the particular case having regard to the guidance provided by a consideration of the scheme and purpose of the legislation. In providing for automatic discharge after three years, the legislation recognises that it is not in the public interest that the bankruptcy should endure indefinitely. In providing for earlier discharge, s 108 [now 294 of the Insolvency Act 2006] recognises that continuing the bankruptcy to the end of the three years may not be in the public interest. Whether or not it is will be a matter for decision on the particular facts. In that regard, guidance is provided by s 109(2) [s 296 of the Insolvency Act 2006] which lists matters on which the assignee is to report to the High Court in such a case. The Court is to consider the assignee’s report as to the affairs of the bankrupt, the causes of the bankruptcy, the manner in which the bankrupt has performed the duties imposed on him or her under the Act and his or her conduct both before and after the bankruptcy, and also any other fact, matter or circumstance that would assist the Court in making its decision. Clearly the Court apprised of the matter will consider the legitimate interests of the bankrupt, the creditors, and wider public concerns, but it is neither required nor entitled to impose threshold requirements in the exercise of the discretion so as to derogate from the breadth of the powers conferred under s 110 [see now s 298 of the Insolvency Act 2006]. The applicant has the onus, in the sense of adducing evidence, to show good cause for ordering an early discharge, but his obligation goes no further than that.”
[29] What is generally required is a balancing of the relevant interests, including the interests of the bankrupt, the interest of creditors, the public interest, commercial morality generally, and any conduct of the bankrupt (particularly conduct which might weigh against the making of an order).
[30] In this case, I am satisfied that it is appropriate to make an order for early discharge, subject to conditions. There is nothing in Mr Kersjes conduct, or the reasons for his bankruptcy which would tell against the making of the order sought, and the application is not opposed by any creditor. In the balancing exercise I am required to undertake, a number of factors weigh strongly in favour of the making of an order for early discharge. First, Mr Kersjes has sufficiently demonstrated that his
business is viable, and that the conduct of it is currently being impeded to a degree
1 ASB Bank v Hogg [1993] 3 NZLR 156 (CA), at p 157.
by the restrictions of operating the business as an undischarged bankrupt. Secondly, Mr Kersjes has demonstrated considerable resourcefulness in providing for his family as he has managed to do to date, and I am satisfied that his interests (and more importantly those of his children) are likely to be enhanced by the making of the order sought. The family stability is likely to be enhanced significantly if a discharge order is made, and I think that is particularly important to this family, where the children are young and one of them has been diagnosed with a serious illness.
[31] Turning to the conditions, I accept Mr Hensman’s evidence that the cash-flow concerns of the business do not allow for the full payment to creditors of the amount which was held in the accounting firm’s trust account as at 31 December 2016 (on the hypothetical assumption that the same amount is still there).
[32] On the question of weekly payments to creditors, counsel have conferred, and the following conditions have been proposed:
(a) that Mr Kersjes agree to pay contributions at the rate of $200 per week, but paid monthly, towards repaying creditors, from the date the order is granted until 9 April 2018 (being the usual date of automatic discharge from bankruptcy for Mr Kersjes).
(b)that Mr Kersjes continue to engage a chartered accountant to oversee the taxation and statutory obligations of the business to ensure compliance for the duration of his contributions.
(c) that with regard to the surplus funds held in the accountant’s trust account, the sum of $5,000 to be transferred to the Official Assignee within thirty days of 10 March 2017 (the anticipated date of any early discharge order), such sum to be held for the benefit of Mr Kersjes’ creditors after the deduction of the costs as provided by ss 274–280 of the Insolvency Act 2006.
[33] I accept that those conditions are entirely appropriate. I do no more than add the further condition that, during the period from the date of this judgment until
9 April 2018, Mr Kersjes is not to enter into any form of self employment, other than as an employment advocate.
Result
[34] I therefore make an order for discharge from bankruptcy, subject to the following conditions:
(a) that Mr Kersjes makes contributions at the rate of $200 per week, but paid monthly, towards repaying creditors, from the date of this order until 9 April 2018 (being the date which, but for this order, would have been the date of automatic discharge from bankruptcy for Mr Kersjes).
(b)that Mr Kersjes continues to engage a chartered accountant to oversee the taxation and statutory obligations of the business to ensure compliance for the duration of his contributions.
(c) that with regard to surplus funds held in the accountant’s trust account, the sum of $5,000 is to be transferred to the Official Assignee within thirty days of the date of this order, such sum to be held for the benefit of Mr Kersjes’ creditors (after the deduction of costs as provided by ss 274–280 of the Insolvency Act 2006).
[35] There remains a matter relating to certain commercially sensitive material which was submitted with the Official Assignee’s report. Associate Judge Matthews made an interim order in respect of this material on 28 February 2017. The learned Associate Judge directed that the reports attached to a memorandum of counsel for the Official Assignee were to be sealed pending further order of the court. His Honour directed that the original memorandum, with reports, was to be placed in a sealed envelope in the file, labelled accordingly. I am satisfied that the material which was the subject of Associate Judge Matthew’s interim order should not appropriately be made available to creditors, or otherwise searchable. I accordingly
order that the interim order made by the Associate Judge on 28 February 2017 be made a final order.
Associate Judge Smith
Solicitors:
Lunn and Associates, Napier for the applicant
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