Klass Holdings Limited v Turner

[2018] NZHC 735

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE

CIV-2017-419-247

[2018] NZHC 735

IN THE MATTER OF

the Insolvency Act 2006

AND

IN THE MATTER OF

the Bankruptcy of MAPUNA TERESA LYNETTE TURNER

BETWEEN

KLASS HOLDINGS LIMITED

Judgment Creditor

AND

MAPUNA TERESA LYNETTE TURNER

Judgment Debtor

Hearing:	18 April 2018
Appearances:	T M Braun and M A Harris for the Judgment Creditor Ms Turner in Person
Judgment:	19 April 2018

JUDGMENT OF ASSOCIATE JUDGE SMITH

[1]                The judgment debtor (Ms Turner) applies to set aside a bankruptcy notice (the bankruptcy notice) served on her on 1 September 2017.

Background

[2]                The bankruptcy notice claimed the sum of $42,624.57, that sum being said to be the amount due on a final judgment obtained against Ms Turner in the Morrinsville District Court on 9 August 2017. In fact, the date of the judgment was 14 November 2013, when judgment was entered against Ms Turner by default for the total sum of

KLASS HOLDINGS LIMITED v TURNER [2018] NZHC 735 [19 April 2018]

$38,639.79, including interest and costs. 9 August 2017 was the date on which the Morrinsville District Court issued a certificate of that judgment.

[3]                The debt arose out of an agreement to lease dated 13 February 2012, entered into between OK Holdings Limited (OK Holdings) as landlord, and Ms Turner, on behalf of a company to be formed, as tenant. Ms Turner also signed the agreement to lease as guarantor.

[4]                The premises were commercial premises situated in Te Aroha, and it appears that Ms Turner’s intention was to operate a food selling business from the premises.

[5]                The agreement to lease provided for an annual rent of $14,400 plus GST. The lease commencement date was 1 December 2011, and the initial term was two years. There were three further terms of renewal possible (each of three years), and the final expiry date (assuming renewals) was to be 30 November 2022.

[6]                The agreement to lease provided for a default interest rate of 15 percent per annum.

[7]                Ms Turner acknowledges that she fell behind with the rent payments, and she accepts that there are arrears, which she believes should be only approximately $7,000. She denies any liability for interest, and says that she cannot understand how the amount claimed has increased approximately six-fold since the original debt was incurred.

[8]                Ms Turner says that she was eventually evicted from the premises. At about that time she had some discussions with Mr Stephen Joe, a director of the judgment creditor, in which she indicated that she expected to be able to pay the arrears from funds she expected to receive as a beneficiary in the estate of her partner, who was then terminally ill. The partner (Mr Samson) died on 31 May 2012, but it appears that no funds have yet been forthcoming from the estate for Ms Turner. In any event, she did not make any payment to the judgment creditor.

[9]                Ms Turner did not file any defence to the claim in the District Court. In her affidavit sworn on 15 September 2017, she said:

I was not able to put forward these points in the original Court proceedings because apart from a lack of financial resources, I was of the mistaken view that only members of the legal fraternity were entitled to lodge counterclaims or even challenge and dispute such proceedings.

[10]            Mr Kevin Stephen Joe provided an affidavit for the judgment creditor. He referred to Ms Turner’s failure to pay the rent for the premises, and to a demand made by OK Holdings on 23 May 2013. The demand was not met, and proceedings were commenced in the District Court in October 2013.

[11]            Ms Turner produced a further affidavit from Mr Ngahina McLaren. Mr McLaren is a home handyman who carried out work for Ms Turner on the premises, painting the inside and the outside of the property. He reckoned that approximately

$5,000 worth of work was done, including an allowance for tools, and that Ms Turner was never given credit for that amount.

[12]            Ms Turner expressed concern in her affidavits as to the effect any bankruptcy adjudication order might have on her capacity to act as a trustee of an iwi trust, or to accept other Māori-based positions of responsibility.

The substitution of Klass Holdings Ltd as judgment creditor

[13]            The bankruptcy notice as issued showed OK Holdings as the creditor. In his affidavit sworn in opposition to the setting aside application, Mr Joe said that OK Holdings was in fact removed from the register of companies on 8 July 2016, as all assets and liabilities of OK Holdings had been transferred to Klass Holdings Limited (Klass), and there was no longer any point in continuing to run OK Holdings.

[14]            Klass applied to the Court for an order removing the name of OK Holdings as judgment creditor and substituting Klass as judgment creditor. Its application was supported by a memorandum dated 29 September 2017 advising the Court that OK Holdings’ assets (which would have included its judgment against Ms Turner) had

been transferred to Klass prior to its removal from the register. On 6 October 2017 the following orders were made by Associate Judge Doogue:

(a)That [Klass] be added as the plaintiff/judgment creditor/respondent to these proceedings pursuant to r 4.56(1)(b)(ii), on the grounds that this is necessary to settle all questions involved in the proceeding; and

(b)[Ok Holdings] be removed as the plaintiff/judgment creditor pursuant to r 4.56(1)(a) on the grounds that the proceedings were improperly and/or mistakenly commenced in the name of [OK Holdings].

[15]            Section 17 of the Insolvency Act 2006 (the Act), which provides generally that a judgment debtor who fails to comply with a bankruptcy notice commits an act of bankruptcy, states at subsection (5) that “a creditor who has obtained a final judgment” is deemed for the purposes of the section to include a person who is for the time being entitled to enforce that final judgment. In this case Klass, as assignee (of the asset comprised in the judgment) from OK Holdings, came within that category, and subject only to the possibility that Klass may have required leave to enforce the judgment as an “enforcement process” under r 17.9 of the High Court Rules, I am satisfied that it is the party properly named as judgment creditor. If and to the extent that leave was necessary, I am satisfied it was sufficiently given in the orders made by Associate Judge Doogue on 6 October 2017, when His Honour substituted Klass as judgment creditor/plaintiff, implicitly allowing it to continue with the “proceedings” that had been mistakenly commenced by OK Holdings (“proceedings” in the context could only have referred to the request for the issue of the bankruptcy notice). In the circumstances, I think His Honour’s orders, and in particular the order substituting Klass as judgment creditor, had the effect of correcting the bankruptcy notice to name Klass, and not OK Holdings, as the creditor.

Applications to set aside bankruptcy notices – legal principles

[16]Section 17 of the Act provides:

17       Failure to comply with bankruptcy notice

(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

(b)if the debtor is served outside New Zealand, the time specified in the order of the court permitting service outside New Zealand.

(5)In this section, a creditor who has obtained a final judgment or a final order includes a person who is for the time being entitled to enforce a final judgment or final order.

…

(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.

[17]            Under s 13 of the Act, a creditor may apply to have the debtor adjudicated bankrupt on the basis of an act of bankruptcy committed within the period of three months before the filing of the bankruptcy adjudication application.1

[18]            The Courts have applied the following broad principles in dealing with bankruptcy adjudication applications. Where the judgment debtor seeks to show that

1      Insolvency Act 2006, s 13(b).

he or she has a cross-claim under s 71(1)(d)(ii), the debtor must show that he or she has a cross-claim of true substance which he or she genuinely proposes to pursue.2 The cross-claim must be equal to or greater than the amount of the judgment debt, and the debtor must show that he or she could not, by law, use the cross-claim as a defence in the action or proceeding in which the judgment or order providing the basis for the bankruptcy notice was entered.3 If he or she relies on factual inability to use the cross- claim at that time, he or she must establish some cogent circumstances, because the primary emphasis is on the legal nature of the impediment.4

[19]            In a limited range of cases, the Court may set aside a bankruptcy notice in its inherent jurisdiction, if it is necessary to do so to prevent injustice. Generally, a debtor must show very special circumstances before the Court will set aside a bankruptcy notice on this ground.5

Ms Turner’s arguments in this case

[20]            The grounds stated by Ms Turner in her application to set aside the bankruptcy notice were:

(a)the amount claimed is in excess of the original debt;

(b)OK Holdings is engaging in corporate bullying;

(c)OK Holdings is defaming her character;

(d)OK Holdings is not a bank or finance company with any authority to increase the debt as it purports to do.

[21]            In her submissions, Ms Turner also contended that she should have been given credit for work carried out by her and others (including Mr McLaren) on the premises, the value of which would have been enough to extinguish the amount claimed from her under the agreement to lease.

2      Sharma v ANZ Banking Group (1992) 6 PRNZ 386; [1992] 3 NZBORR 183 (CA).

3      Clark v UDC Finance Limited [1985] 2 NZLR 636.

4      Hardie v Booth [1992] 1 NZLR 356 (HC).

5      Re Krukziener ex parte Hanover Finance Ltd HC Auckland CIV-2007-404-2896, 12 August 2008.

[22]            At the hearing, it became apparent that Ms Turner had not noted the provision in the agreement to lease under which default interest was provided for at the rate of 15 percent per annum. She said that when she entered into possession of the premises she did so under an oral agreement made with Mr Joe’s father, that the rent would be only $600 per month. Nevertheless, she acknowledged that she signed the agreement to lease as tenant and as guarantor. She said, “The law works against me here because it’s all written down and I signed it. And I don’t recall the 15 percent interest.”

[23]            Ms Turner advanced various other matters in her submissions, and said that she remains willing to enter into some arrangement for time payment with the judgment creditor. She disclosed in her affidavits that she receives government superannuation together with some other modest income in trustee’s fees, and has no significant assets. However, she is still expecting to receive some money from her late partner’s estate.

[24]            Generally, Ms Turner asked that the judgment be set aside (or that she be given an opportunity to take steps to have it set aside), and that the bankruptcy notice be set aside.

Error in the amount of the District Court judgment

[25]            In her submissions, Ms Harris drew to my attention the fact that the amount stated in the bankruptcy notice was overstated by $2,055.68. It appears that the creditor failed to give Ms Turner credit for a payment of $1,670 made by her towards rent and outgoings on 26 November 2012, before the default judgment was entered. As a result, the amount of the default judgment was overstated by $1,912.26 (the

$1,670, plus $242.26 in interest that should not have been charged on the $1,670 from the date of payment to the date of judgment). The certificate of the judgment, issued by the District Court on 9 August 2017, is overstated by that total figure of $1,912.26, together with a further proportion of interest of $2,897.98 awarded at a financial means assessment hearing held on 22 February 2016 ($143.42).

[26]            Ms Harris invites me to exercise my discretion under s 418 of the Act to amend the amount stated in the bankruptcy notice, on the basis that Ms Turner should be given a further 10 working days to comply with the amended bankruptcy notice.

Discussion and conclusion

Preliminary Issue – amendment of the bankruptcy notice

[27]Section 418 of the Act provides:

418     Defects in proceedings

(1)A proceeding under this Act must not be invalidated or set aside for a defect (which includes misdescription, misnomer, or omission) in a step that must be taken as part of, or in connection with, the proceeding, unless a person is prejudiced by the defect.

(2)The court may order the defect to be corrected, and may order the proceeding to continue, on the conditions that the court thinks appropriate in the interests of everyone who has an interest in the proceeding.

[28]            In Bartercard Exchange Ltd v de Vries, I held that, depending on the amount of any overstatement in a bankruptcy notice, there is jurisdiction to correct the notice. That will be the case unless the overstatement is so egregious that the notice should fairly be regarded as a nullity.6

[29]            That is, of course, subject to any prejudice that might be caused to Ms Turner if the bankruptcy notice is corrected. She has not suggested that any prejudice would be caused, and clearly none will be. The necessary correction of the bankruptcy notice (as to the amount claimed) will reduce the amount that has been claimed from her, and the necessary correction of the date of the District Court judgment (14 November 2013, not 9 August 2017) is equally immaterial to her.

[30]            There will accordingly be an order under s 418 of the Act correcting the bankruptcy notice to show the amount claimed in paragraph 1(a) as $40,568.89, and the date of the judgment in the Morrinsville District Court as 14 November 2013.

[31]            Ms Harris submitted that in some of the cases where bankruptcy notices have been amended the debtor has been allowed additional time to comply with the notice. I do not consider that is necessary or appropriate in this case, where the corrections I have made involve a modest reduction in the amount demanded, and a correction to

6      Bartercard Exchange Ltd v de Vries [2015] NZHC 703, at [56].

the date of the judgment that could not have prejudiced Ms Turner. It is clear from Ms Turner’s evidence that she has no present ability to comply with the bankruptcy notice, and that that would have been the case whether the amount demanded had been

$42,624.57 or the corrected amount of $40,568.89.

Ms Turner’s grounds for setting aside

[32]            I will deal with each of the grounds raised by Ms Turner in her application in turn.

The amount being claimed is in excess of the original debt

[33]            Whether or not Ms Turner may have made some initial oral agreement to lease the premises at $600 per month, it is clear that from 1 February 2012 (the date from which unpaid rent was claimed) she assumed the obligation to pay rent as set out in the agreement to lease at the rate of $14,400 per annum plus GST. She acknowledged at the hearing that she signed the agreement to lease, including the provision under which she was liable to pay default interest at the rate of 15 percent per annum.

[34]            The starting point must be that the “original debt” is the amount for which judgment was entered, namely $38,639.79. Ms Turner did not appeal the judgment, and in the period of approximately four and a half years since it was entered she has not applied to set the judgment aside. No order has been made staying execution of the judgment.

[35]            Quite apart from the question of the finality of the judgment, Ms Harris produced a summary of the unpaid rent for the premises, showing arrears totalling

$18,262.67 to 31 January 2013. There would have been further monthly rent payments of $1,665.56 due from 1 February 2013 to the date judgment was entered on 14 November 2013, and there may have been some outgoings payable by Ms Turner in that period. With interest added at the default rate of 15 percent per annum, and costs (costs of $4976.30 were awarded by the District Court on 14 November 2013), there does not appear to be any arguable basis on which I could find that Ms Turner has a genuine, triable claim that the amount being claimed is in excess of the original debt.

OK Holdings is engaging in corporate bullying, and OK Holdings is defaming Ms Turner’s character

[36]            Neither of these grounds would provide a basis for setting aside the bankruptcy notice, even if they were established. OK Holdings/Klass Holdings appear to be doing no more than exercising their right to enforce the District Court judgment, and there is nothing to support any counterclaim on the basis that either of those parties has defamed her. No specific defamatory statement has been identified by Ms Turner, and any statements made in the Court proceedings are subject to absolute privilege, and cannot form the basis of a defamation claim.7

OK Holdings is not a bank or finance company with any authority to increase the debt as it purports to do

[37]            As we have seen, Ms Turner agreed to pay default interest at the rate of 15 percent per annum, and that interest appears to have been allowed for in the judgment entered on 14 November 2013. As with any judgment for a sum of money, the amount of the judgment itself carries statutory interest at five percent per annum from the date of judgment to the date of payment.8

Additional arguments raised by Ms Turner

[38]            First, Ms Turner contends that she is entitled to have the value of work carried out by her on the premises credited to her, under a principle she referred to as “reciprocity”.

[39]            I do not think this could form any basis for setting aside the bankruptcy notice. First, the matters in respect of which Ms Turner claims a credit were all known to her and could have been raised in the District Court proceeding in which judgment was entered against her. She is precluded by s 17(7)(b) of the Act from raising these matters now. I add that I do not accept Ms Turner’s explanation for her failure to appear and defend the proceeding in the District Court, if she considered that she had

7      Defamation Act 1992, s 14(1).

8      District Courts Act 1947, s 65A(2), and s 7 and Schedule 1(2) of the Interest on Money Claims Act 2016.

an arguable defence. Any simple enquiry would have confirmed that she was entitled to represent herself in the District Court.

[40]            Even if that were not the position it appears that any claim to a credit would not have been substantial when compared to the amount of the judgment. The only evidence is Mr McLaren’s estimate that his work might have been worth $5,000, but that was not supported by any details (e.g. hours worked and hourly rate) and there is nothing to suggest that any agreement was reached with OK Holdings relating to the work. Furthermore, Ms Turner assumed an obligation under the agreement to lease to meet 50 percent of the outgoings. The outgoings included “cleaning, maintenance and repair charges including charges for repainting, decorative repairs, and the maintenance and repair of building services …”

[41]            Ms Turner raises a number of other matters which are not relevant to the decision I now have to make, which is whether or not the bankruptcy notice should be set aside. Considerations such as whether or not bankruptcy would adversely affect her ability to act as a trustee or officer of iwi or other trusts or organisations would be a matter to be considered on any application the creditor might bring for an adjudication order. Similarly, Ms Turner’s willingness to pay some money over time would be a matter for her to discuss with the creditor – it cannot provide a basis for the Court to decline to set aside the bankruptcy notice.

[42]            I conclude that Ms Turner has not made out her case for an order that the bankruptcy notice be set aside. Her application is dismissed accordingly.

Result

[43]            The bankruptcy notice is corrected under s 418 of the Act, by altering the amount claimed in it from $42,624.57 to $40,568.89, and by stating the date of the District Court judgment as 14 November 2013.9

[44]            Ms Turner’s application to set aside the (corrected) bankruptcy notice is dismissed.

9      That correction is in addition to the correction earlier made, under which the name of Klass was substituted as judgment creditor.

[45]            Klass is entitled to costs in the usual way. Costs are awarded on a 1B basis, with disbursements as fixed by the registrar.

Associate Judge Smith

Solicitors: Whitfield Braun, Hamilton for the Judgment Creditor