Mao v Kim
[2022] NZHC 2836
•1 November 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-001881
[2022] NZHC 2836
UNDER the Insolvency Act 2006 IN THE MATTER OF
the bankruptcy of JIAWEN MAO
BETWEEN
JIAWEN MAO
Applicant
AND
HYUN BIN KIM and DUK YOUNG LEE
Respondents
Hearing: 15 September 2022 Appearances:
Applicant in person
C Fourie for the Respondents
Judgment:
1 November 2022
JUDGMENT OF ASSOCIATE JUDGE GARDINER
This judgment was delivered by me on 1 November 2022 at 10.30 a.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
Solicitors:
Hesketh Henry, Auckland Copy for: J Mao
MAO v KIM & LEE [2022] NZHC 2836 [1 November 2022]
Introduction
[1] The applicant, Jiawen Mao, applies to set aside a bankruptcy notice served on her by the respondents, Hyun Bin Kim and Duk Young Lee. Ms Mao also applies to disqualify Hesketh Henry from acting for the respondents and for a stay of this proceeding.1
[2]The respondents oppose all three applications.
Background
[3] In 2016, the respondents advanced funds to Yintian Co Ltd under a Development Loan Agreement (the Loan Agreement). Ms Mao and her father, Liansen Mao, guaranteed the loan under a Deed of Guarantee and Indemnity (the Guarantee). Yintian Co granted a mortgage over 31 Chester Avenue, Greenhithe in favour of the respondents.
[4] Yintian Co defaulted under the Loan Agreement and Ms Mao and her father defaulted under the Guarantee.
[5] On or about 2 February 2018, the respondents sold 31 Chester Avenue by way of mortgagee sale. The mortgagee sale was conducted on the basis that the vendor and the purchaser were registered for the purposes of GST which required the respondents to account to the IRD for GST. After the proceeds of sale were applied to the amount owing to the respondents under the Loan Agreement, there was a shortfall of $193,143.32.
[6] On 27 February 2018, the respondents filed proceedings in the District Court against Yintian Co, and Ms Mao and her father as guarantors, to recover the shortfall. On 3 October 2018, the respondents sought and obtained a default judgment in the sum of $209,931.92 together with interests and costs on the basis that no defences had
1 Applicant’s memorandum filed 6 September 2022.
been filed (the Default Judgment). By that time, the claim had been amended to update the amount owing to $216,773.92 (including interest and costs).
[7] On 6 June 2019, a bankruptcy notice was issued in respect of the Default Judgment in the amount of $216,723.92 (the First Bankruptcy Notice). The bankruptcy notice was served on Ms Mao on 13 September 2019.
[8] On 11 October 2019, Ms Mao and her father commenced proceedings against Best Capital Ltd and the respondents in this Court (the First Mao Proceedings).2 The first two causes of action concerned 31 Chester Avenue, and alleged that the respondents breached s 176 of the Property Law Act 2007 when they sold the property by failing to obtain the best reasonably obtainable price; and that they were misleading and deceptive by failing to lend further funds once a house was relocated onto the property. A third cause of action concerned a development loan agreement concerning another property. The first statement of claim alleged that Best Capital and the respondents prejudiced Ms Mao and her father by mistakenly paying GST on the sale of the Chester Avenue property when Ms Mao was not GST registered (the GST issue). The GST issue was withdrawn in an amended statement of claim drafted by solicitors for Ms Mao.
[9] On 22 October 2019, the IRD refunded the GST portion of the sale on 31 Chester Avenue, so the shortfall became $67,132.40.
[10] On 23 December 2019, the respondents filed an application for an order adjudicating Ms Mao bankrupt based on her failure to meet the First Bankruptcy Notice.
[11] Nine months later, on 22 September 2020, Ms Mao paid the amount remaining outstanding under the First Bankruptcy Notice of $67,132.40. The application for adjudication was withdrawn under a joint memorandum dated 23 September 2020.
2 CIV-2019-404-2197.
[12] On 27 October 2020, the respondents applied for their costs incurred in relation to the First Bankruptcy Notice and the ensuing bankruptcy proceedings. The Court awarded indemnity costs of $21,414.20 against Ms Mao on 27 October 2020 (Indemnity Costs Order), relying on cl 9.1 of the Guarantee and s 274(1)(b) of the Insolvency Act 2006.3
[13] On 1 April 2021, Associate Judge Sussock struck out Ms Mao’s statement of claim in the First Mao Proceedings.4 The causes of action concerning Chester Avenue were struck out because the Judge considered that they were matters which should have been raised in the earlier proceedings brought in the District Court to recover the shortfall.5 The Judge recorded that the District Court proceedings were commenced in February 2018 and Ms Mao and her father were served by substituted service on 10 July 2018 including by email with a copy sent to the solicitor acting for them in another proceeding.6 Ms Mao and her father chose not to file any statement of defence or make an appearance in the proceedings. Associate Judge Sussock also found that neither cause of action was pleaded sufficiently to withstand strike-out. She awarded indemnity costs in the amount of $30,333.31 against Ms Mao and her father on the basis that the proceedings were an abuse of process and were brought with the ulterior motive of delaying the bankruptcy proceedings.7 These costs have not been paid.
[14] In May 2021, Ms Mao filed fresh proceedings in this Court (Second Mao Proceedings), naming Hesketh Henry as the first defendant and the respondents as the third and fourth defendants.8 Mr Mao brought separate proceedings against the same parties.9 The Second Mao Proceedings raised the same GST issue pleaded in the original statement of claim in the First Mao Proceedings. The respondents applied to strike out the statement of claim as did the other named defendant.
[15] On 20 October 2021, the respondents obtained a Bankruptcy Notice against Ms Mao (Second Bankruptcy Notice) in respect of the Indemnity Costs Order.
3 Minute of Associate Judge Bell CIV-2019-404-1036, 27 October 2020.
4 Mao v Best Capital Limited [2021] NZHC 735.
5 At [51], [52], [55], [56] and [71].
6 At [47]–[49].
7 At [75]–[79].
8 CIV-2021-404-1475.
9 CIV-2021-404-1055.
[16] On 19 April 2022, Ms Mao was served with the Second Bankruptcy Notice by substituted service.
[17] On 2 May 2022, Ms Mao filed an interlocutory application to set aside the Second Bankruptcy Notice.
[18] On 9 June 2022, Ms Mao filed an interlocutory application seeking an order disqualifying Hesketh Henry from acting for the respondents on the basis that this amounts to “a duress” against Mr and Ms Mao.
[19] On 22 August 2022, Davison J struck out the statement of claim in the Second Mao Proceedings.10 He found that any claim against the respondents or Hesketh Henry for alleged failures in the way they conducted the mortgagee sale, including relating to the GST issue, could only be founded on s 176 of the Property Law Act and that any such claims should have been raised in the District Court proceedings.11 Furthermore, that was the second time Ms Mao had raised essentially the same claim for damages in this Court, referring to the First Mao Proceedings. Davison J struck out all the causes of action as an abuse of process.
[20] On 14 September 2022, Ms Mao filed an application dated 1 September 2022 in the District Court to set aside the Default Judgment. That application raises the GST issue as grounds for setting aside that judgment.
[21] By way of memorandum dated 4 September 2022, Ms Mao applies for this proceeding to be stayed until the application to set aside the Default Judgment is determined.
Legal principles
[22]Section 17 of the Insolvency Act 2006 (the Act) 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
10 Mao v Henry [2022] NZHC 2084.
11 At [69] and [88].
(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), —
complied with the requirements of the notice; or
(ii)satisfied the court that he or she has a cross claim against the creditor.
…
(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.
(emphasis added)
[23] In Robertson v ASB Bank Ltd, the Court of Appeal reaffirmed the earlier decision of Sharma v ANZ Banking Group (NZ) Ltd.12 In so doing, the Court in Robertson held:
(a)the onus is on the debtor to show that they have a genuine triable cross claim;13
(b)the debtor must show a genuine triable claim in terms of both liability and quantum;14
(c)not only the existence of a cross claim must be established but also that it is equal to or greater than the judgment debt and could not have been used as a defence in the proceeding in which that judgment was entered;15
12 Robertson v ASB Bank Ltd [2014] NZCA 597; Sharma v ANZ Banking Group (NZ) Ltd (1992) 6 PRNZ 386 (CA).
13 Robertson v ASB Bank Ltd, above n 11, at [22].
14 At [22].
15 At [22].
(d)the summary nature of the procedure is wholly unsuitable for the determination of disputed questions of fact;16 but
(e)the court need not accept uncritically evidence that is inherently lacking in credibility, for example where it is inconsistent with contemporary documents or inherently improbable.17
[24] Set-off affords a defence to an action wholly or in part, depending on the amount, and is by its nature limited to money claims.18 Whereas common law set-off of mutual debts is confined to liquidated claims, the equitable right to set-off is not limited to liquidated cross claims but extends to unliquidated claims for damages.19 In both cases, the cross claim must be a money claim.
[25]In the bankruptcy context, the High Court of Australia has said:20
The words of the section are that the debtor must satisfy the court that he has “a counter-claim, set-off or cross demand which equals or exceeds the amount of the judgment debt.” In the first place it is accordingly clear that the counter- claim, set-off or cross-demand must be something sounding in money. What the section contemplates is a claim to the enforcement of a right sounding in money. It must be a real claim; it is insufficient that the debtor believes that he has a claim, and the authorities show that the matter to which the court looks is this – whether it is just that the claim should be determined before the bankruptcy proceedings are allowed to continue; in other words, whether it is a claim which it is proper and reasonable to litigate.
[26] The Court of Appeal observed that although the words “equal to, or greater than, the judgment debt” in s 17(7)(a) suggest a need to quantify a liquidated sum, Casey J in Clark v UDC Finance Ltd21 held that an unliquidated claim in tort could meet that criterion. The Court said that approach, not questioned in Sharma, reinforces the requirement for the Court to be satisfied that a genuine triable claim exists both as to liability and quantum.
16 At [32]
17 At [32].
18 Grant v New Zealand Motor Corp Ltd [1989] 1 NZLR 8 (CA) at 5.
19 At 5 and 6.
20 Vogwell v Vogwell (1939) 11 ABC 83 (HLA) at [85], as quoted by the Court of Appeal in Robertson v ASB Bank, above n 11, at [23].
21 Clark v UDC Finance Ltd [1985] 2 NZLR 636 (HC).
Does Ms Mao have a genuine triable cross claim?
[27] Ms Mao’s application to set aside the Second Bankruptcy Notice was originally advanced on the basis that she had a cross claim against the respondents under the Second Mao Proceedings.22
[28] However, as noted, since Ms Mao filed her application, the statement of claim in the Second Mao Proceedings has been struck out as an abuse of process. Specifically, it was held that all claims relating to the way Hesketh Henry and the respondents conducted the mortgagee sale should have been raised in the District Court proceeding, as already determined in the First Mao Proceedings. Further, that the claims were without merit and could not possibly succeed.
[29] Therefore, the statement of claim in the Second Mao Proceedings does not represent a genuine triable cross claim.
[30] Ms Mao now makes the argument that the Bankruptcy Notice should be set aside because she has applied to set aside the Default Judgment. Ms Mao’s application to set aside the Default Judgment is advanced on two bases.23 First, that neither she nor her father attended the hearing. She says that she did not receive notice of the hearing in the District Court that led to the Default Judgment being entered against her and her father. Second, she raises the same GST issue pleaded in the First and Second Mao Proceedings.
[31] Further, Ms Mao says that she has filed a counterclaim in the District Court against the respondents and Hesketh Henry for a greater sum than the Default Judgment. After the hearing and at my request she provided a copy of the purported counterclaim. The claim repeats allegations made in the Second Mao Proceedings, namely that because the respondents mistakenly paid GST to the IRD she and her father were overcharged interest on the shortfall, overcharged legal fees, and incurred a further $20,000 in costs. Further, Ms Mao and her father repeat the claim that the
22 Applicant’s interlocutory application to strike out/set aside judgment creditors’ bankruptcy notice dated 29 April 2022.
23 Applicant’s interlocutory application to set aside judgments dated 4.10.2018 and sealed [on] 3.5.2019 dated 1 September 2022.
respondents wrongly lodged a charging order against their properties which required them to sell their properties by force. They seek judgment of $177,000 for the interest and legal fees, compensation for their losses arising out of the charging order, and “other” damages of $50,000.
[32] I find that neither the application to set aside the Default Judgment or the purported counterclaim are cross claims within the meaning of s 17(7) of the Act.
[33] I will deal with the application to set aside the Default Judgment first. This application is not a cross-claim within the meaning of s 17(7) of the Act because it is not a claim for money. It is an application to set aside a judgment. If Ms Mao is successful, that will revive the proceedings and give her the opportunity to file a defence and a counterclaim against the respondents (the plaintiffs in that proceedings). But the application to set aside the Default Judgment is not itself a cross claim for money.
[34] As regards the purported counterclaim, it has several problems. First, to pursue it, Ms Mao will need to first succeed in her application to set aside the Default Judgment. Otherwise, she will need to file a separate proceeding.
[35] Second, the Second Bankruptcy Notice is for costs the respondents incurred in bringing bankruptcy proceedings against her when she failed to respond to the First Bankruptcy Notice. Even if Ms Mao were successful in overturning the Default Judgment and/or obtaining relief against the respondents in the District Court, this does not change the fact that legally, they are entitled to the benefit of those indemnity costs awarded by the Court. It is clearly necessary and in the public interest for Court orders to be enforced,24 particularly in a timely manner, and would be unjust for the respondents to now have to further await payment while Ms Mao advances her claims in the District Court.
24 Copland v Goodwin [2013] NZHC 652 at [58]; and see Commissioner of Inland Revenue v Faloon
[2016] NZHC 760 at [46] and Dench v Gates [2013] NZHC 3134 at [5].
[36] Ms Mao argues that had the respondents not made a mistake in paying GST on the sale of the property, the shortfall claimed from her and her father would have been
$67,132.40. She says that if that had been claimed, her father would have been able to pay it. She provides evidence of her father’s bank statement at the time, showing a balance of around $80,000. Ms Mao argues that there would have been no need for the First Bankruptcy Notice to be issued and consequently no need for her application to set aside the First Bankruptcy Notice. Therefore, the Indemnity Costs Order would not have been made and, as a result, there would have been no Second Bankruptcy Notice.
[37] This logic is misconceived. As this Court found in both the First and Second Mao Proceedings, Ms Mao and her father must take responsibility for failing to defend the proceedings for the shortfall in the District Court. In the Second Mao Proceeding, Davison J found that Ms Mao was aware from 15 February 2018 that Hesketh Henry had paid GST to the IRD and deducted this sum from the sale proceeds.25 Ms Mao and her father were served with the District Court proceedings by substituted service, including by email with a copy sent to the solicitor acting for them in another proceeding. They chose not to file a statement of defence or enter an appearance. The respondents were then put to the expense of issuing the First Bankruptcy Notice and filing bankruptcy proceedings, before Ms Mao paid any amount towards the Default Judgment.
[38] Ms Mao’s argument also lacks credibility given that even after the judgment debt was reduced because of the GST refund in October 2019 to $67,132.40 — an amount Ms Mao says her father would not have trouble paying — it was not paid for another nine months.
[39] Third, and most critically, Ms Mao’s counterclaim is not genuine and triable. Davison J considered the issues she now raises again in her counterclaim relating to the respondents wrongly claiming interest on the loan, bringing ‘unnecessary’ proceedings against her and her father because of the respondents’ own mistake and lodging the charging order. It was alleged that the respondents and Hesketh Henry
25 At [79]–[80].
were liable in negligence, had breached their fiduciary duties to Ms Mao and her father, and had breached s 9 of the Fair Trading Act 1986. Davison J described Mr Mao’s claims against Hesketh Henry as follows:26
Liansen’s first and second causes of action against Hesketh Henry are for negligence and breach of fiduciary duty. Although his pleading lacks essential detail, the key factual allegations upon which the claim in negligence is founded is that Hesketh Henry mistakenly accounted to the IRD for the GST of $147,391.30 and as a result of that sum not being applied to reduce the outstanding loan which was guaranteed by Liansen, and the charging of interest and legal costs for enforcement proceedings and the registration of a charging order on the title of Liansen’s property at 41 Candia Road, Liansen was prevented from refinancing his development funding for the property, undertaking a proposed subdivision and sale of a minimum of 10 lots, resulting in a forced sale of the property for a price which was half of its market value resulting in a loss of around $1 million in profit.
[40] Davison J recorded that Mr Mao’s causes of action against the respondents, alleging negligence and breach of fiduciary duty, were based on the same factual allegations as the equivalent claims made against Hesketh Henry.
[41] As well as finding that these causes of action should have been brought in the District Court proceedings and were therefore an abuse of process27 Davison J found that the causes of action were without merit and had no prospects of success.28 In relation to the respondents, Davison J found:29
… Following Yintian Ltd’s default under the loan agreement and Liansen’s liability under the terms of his guarantee crystallising, the relationship between the parties was that of debtor and creditor. They had directly opposing interests and in that context there could be no duties owed by Kim and Lee to Liansen, and his claim based on alleged duties owed could not possibly succeed, and should be struck out on that ground.
[42] Mr Mao’s causes of action against Hesketh Henry and the respondents based on s 9 of the Fair Trading Act was described as:30
… In the case of Hesketh Henry, Liansen alleges that the misleading and deceptive conduct was the firm's mistaken payment of the GST to the IRD following the settlement of the sale of 31 Chester Avenue and thereafter producing a statement recording the deduction of the GST from the proceeds
26 Mao v Henry [2022] NZHC 2084 at [66].
27 At [69] and [73].
28 At [71]–[72] and [75]–[76].
29 At [75]
30 At [77].
of sale, which statement is thereby alleged to have been misleading. In the case of Kim and Lee, Liansen alleges that they delayed responding to his requests relating to discharging the charging orders on his and Jiawen’s properties resulting in him being charged additional penalty interest. He also alleges that they produced a misleading settlement statement with which they proceeded to obtain judgment against him in the District Court for an incorrect amount.
[43] Again, Davison J found that these allegations fell within the scope of claims that could have and ought to have been made by Mr Mao in the context of the District Court proceedings and struck the cause of action out as an abuse of process.31 Additionally, he found that all the causes of action based on s 9 of the Fair Trading Act were claims brought outside the three year period prescribed by s 43A of that Act and were consequently out of time and must be struck out.32
[44] Critically, Davison J recorded that the statements of claim of Ms Mao and Mr Mao were substantially the same, although Ms Mao also claimed against the real estate agents. Consequently, Ms Mao’s statement of claim and the causes of action against Hesketh Henry and the respondents gave rise to the same issues and considerations as her father’s statement of claim.33 Accordingly, he struck out all of Ms Mao’s causes of action against Hesketh Henry and the respondents for the same reasons as those he gave for Mr Mao’s claims, including that they could not possibly succeed.34
[45] I conclude that the counterclaim Ms Mao seeks to advance in the District Court concerns the same events, and essentially the same causes of action, that were heard and determined by Davison J in the Second Mao Proceedings. This Court has already found that the causes of action have no prospect of success.
[46] For these reasons, Ms Mao has not satisfied me that she has a genuine triable cross claim against the respondents for an amount equal or greater to the Indemnity Costs Order on which the Second Bankruptcy Notice is based.
31 At [78].
32 At [82].
33 At [83] at [104].
34 At [93] and [94] and [95] and [106] and [107] and [109] and [110].
Should the proceedings be stayed?
[47] Ms Mao asks for the proceeding to be stayed until her application to set aside the Default Judgment is determined.
[48] There is no jurisdiction to stay a bankruptcy notice under the Act. There is jurisdiction to “halt” an application for orders adjudicating a defendant bankrupt under ss 38, 42 and 43. A halt may be ordered under s 42 where a creditor’s application for adjudication relies on the debtor failing to comply with the bankruptcy notice and the debtor has appealed against the judgment or order underlying the bankruptcy notice. In this case, the judgment underlying the bankruptcy notice is the Indemnity Costs Order. Section 38 is expressed in more general terms and provides the Court with a broad discretion to halt the application if it considers that appropriate in the circumstances. These provisions do not apply to a bankruptcy notice.
[49] As Ms Mao did not stipulate the rules upon which she relied to request a stay of this proceeding, the respondents inferred that she relied on r 17.29 of the High Court Rules 2016. Under this rule, the Court has a discretion to stay enforcement of a judgment where a substantial miscarriage of justice would likely result.
[50] I am satisfied that there is no reason why the proceeding should be stayed. A “substantial miscarriage of justice” generally does not include where a creditor has taken the appropriate steps to pursue recovery.35 Further, whether such a miscarriage of justice has occurred depends on factors such as the apparent strength or weakness of the claim or counterclaim and any explanation as to why that claim was not raised as an answer to the claim on which the judgment is based.36 Ms Mao’s setting aside application raises the GST issue Davison J struck out in the Second Mao Proceedings. As the respondents submit, she seeks to address matters that should have been addressed in 2018. The Indemnity Costs Order is now two years old and staying this proceeding would only result in further and unnecessary delay.
35 Marac Finance v Twilight Trustee Ltd HC Auckland CIV-2008-404-7291, 25 February 2009 at [9].
36 Raffles Education Corporation Ltd v Mills HC Auckland CIV-2008-404-5258, 16 February 2009 at [13].
Should Hesketh Henry be disqualified from acting?
[51] Ms Mao contends that she is in a position of “duress” if Hesketh Henry continues to act for the respondents in bankruptcy proceedings. At the time of making the disqualification application, Ms Mao had an unresolved action against Hesketh Henry under the Second Statement of Claim. Accordingly, Ms Mao argued that it was inappropriate for Hesketh Henry to act for the respondents because:
(a)Hesketh Henry’s conduct and advance were in issue in the Second Statement of Claim; and
(b)Hesketh Henry might be required to give advice of evidence of a contentious nature in this proceeding.
[52] Since the application for disqualification was filed, all actions against Hesketh Henry in the Second Statement of Claim have been struck out.
[53]To that, Ms Mao says that she may appeal part of the judgment of Davison J.
[54] Davison J found that the claims against Hesketh Henry were without any merit whatsoever. Ms Mao has not as of today filed an appeal of that judgment. Accordingly, I am not persuaded that there are grounds for disqualifying Hesketh Henry from acting in this proceeding.
Result
[55] The applications are dismissed. The respondents are entitled to their costs and reasonable disbursements. If the parties are unable to reach an agreed costs order the respondents may file a memorandum of not more than three pages within 15 working days. The applicant may file a memorandum in response of not more than three pages within a further ten days.
Associate Judge Gardiner
6
0