McKee v Official Assignee

[2013] NZHC 340

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2008-404-3442 [2013] NZHC 340

UNDER  the Insolvency Act 2006

IN THE MATTER OF     the bankruptcy of DONALD RUSSELL McKEE

BETWEEN  DONALD RUSSELL MCKEE Applicant

ANDOFFICIAL ASSIGNEE Respondent

Hearing:         26 February 2013

Appearances: R S Pidgeon for Applicant

G Neil for Respondent

Judgment:      26 February 2013

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

Pidgeon Law (R S Pidgeon) P O Box 6535 Auckland 1141, for Applicant

Email:    [email protected]

Meredith Connell, P O Box 2213 Auckland 1140, for Respondent

Email:    [email protected] /  [email protected]

MCKEE V OFFICIAL ASSIGNEE HC AK CIV-2008-404-3442 [26 February 2013]

[1]      This  case  concerns  Mr  McKee’s  discharge  from  bankruptcy.    He  was adjudicated bankrupt on a creditor’s application on 23 October 2008.  That was after the Insolvency Act 2006 had come into force.  If he had been adjudicated bankrupt under the Insolvency Act 1967, he would have been eligible for automatic discharge

after three years, unless the Official Assignee or a creditor had objected.[1]   However,

[1] Insolvency Act 1967, s 107(1) and (3).

the automatic discharge provision of the Insolvency Act 2006 is different.

[2]      Under s 290, a bankrupt is automatically discharged from bankruptcy three years after the bankrupt files a statement of affairs under s 46 or s 67, but he may apply to be discharged earlier.  According to the Official Assignee, Mr McKee did not  file  his  statement  of  affairs  under  s  67  of  the  Insolvency Act  2006  until

24 September  2012,  more  than  three  years  after  his  adjudication.    Because  his statement of affairs was not filed until 24 September 2012, Mr McKee would have to wait until 24 September 2015 to be eligible for automatic discharge under s 290. That means that he would serve nearly seven years as an undischarged bankrupt.  It is already 4 years 4 months since his adjudication.

[3]      Mr McKee has applied for an early discharge under s 294 of the Insolvency Act.  However, in submissions today, Mr Pidgeon said that Mr McKee also sought a declaration that he had already attained an automatic discharge under s 290 because he had filed his statement of affairs under s 67 by 9 December 2008.  Mr McKee’s application did not expressly seek orders asking for a declaration to that effect. Mr Pidgeon sought leave to amend his application to cover that aspect as well.

[4]      I am satisfied that there is no prejudice to the Official Assignee in allowing that amendment to Mr McKee’s application.  Mr Neil submitted that there would be prejudice because, if a declaration were made to that effect, the Official Assignee would lose the right to object to Mr McKee’s discharge under s 290 as the time for the Official Assignee to lodge any objection to an automatic discharge would have

already  passed.    I  am  not  satisfied  that  that  is  a  relevant  head  of  prejudice.

If Mr McKee’s application had sought the declaration when it was first filed, the

Official Assignee would still be out of time to object to an automatic discharge. [5]  It will accordingly be necessary to consider:

(a)       When did Mr McKee file his statement of affairs as required by s 67?;

and

(b)      Should his application for an early discharge be granted?

When   did   Mr   McKee   file   a   statement   of   affairs   under   s   67   of   the

Insolvency Act?

[6]      Section  67  of  the  Insolvency Act  requires  the  bankrupt  to  file  with  the Official Assignee a statement of his affairs in the prescribed form unless the bankrupt has already filed such a statement under s 46.  The requirement to file under s 46 applies when a bankrupt makes his own application for adjudication.

[7]      Under s 68 the Official Assignee is required to give a notice in a prescribed form, requiring the bankrupt to file a statement of affairs.  Under s 69 the bankrupt must file that statement of affairs within 10 working days after receiving the Official Assignee’s notice under s 68.  There are associated provisions under the Insolvency (Personal Insolvency) Regulations 2007 as to the form of the statement of affairs and as to how the notice is to be filed.   In particular, under reg 72(3) a statement of affairs must be filed by personal delivery, fax or post.

[8]      The  statement  of  affairs  by  the  bankrupt  is  a  key  document  in  the administration of the bankruptcy.  It provides the Official Assignee with important information for the administration of the bankruptcy.  Of course it need not be the only information on which the Official Assignee may rely.   Creditors may also supply the Official Assignee with other information, but the statement of affairs is still the starting point for the Official Assignee.   It can provide the basis for the Official Assignee to make other enquiries, to start proceedings to get assets in for creditors, and to begin examinations of the bankrupt or of other persons under Part 3 of the Insolvency Act.

[9]      When Parliament provided that the three years before automatic discharge should run from the date of filing the statement of affairs rather than from the date of bankruptcy, it intended to encourage bankrupts to comply with the requirement for the filing of the statement of affairs.[2]

[2] Insolvency Law Reform Bill (14-2) (select committee report) at 3–4

[10]     In this case, two days after he had been adjudicated bankrupt, the Official Assignee’s  office  wrote  to  Mr  McKee  at  his  address  on  Great  North  Road, Grey Lynn, Auckland.    That  letter  included  the  notice  required  by  s 68  of  the Insolvency Act 2006 as to filing a statement of affairs.  The letter also set out other information relating to bankruptcy.

[11]     Shortly afterwards, an officer of the Official Assignee spoke by telephone with Mr McKee.  She obtained some basic information from him.  He told her that he did not have any assets or income.   Her note records that the restrictions of bankruptcy  were  explained  to  him,  and  that  she  would  re-send  a  copy  of  his statement of affairs to his Post Office box.   Mr McKee did not take any steps in response to that.

[12]     On 2 December 2008 another officer contacted Mr McKee to establish if the statement of affairs had been completed and returned.   Her file note of that conversation included the following:

Bankrupt appeared rather upset at the bankruptcy procedure and has refused to complete his SOA even with the assistance of the OA.   Stated that he didn’t care whether his bankruptcy was discharged after three years or not as he has lost everything.  Further indicated that he had nothing in the way of assets and no trust existed as mentioned by him to OA previously, doing odd jobs every now and then, and will apply to WINZ for benefit.   While aggressively stating all of the above to me, the bankrupt utilised “abusive language”. The bankrupt then terminated the call.

[13]     The officer concerned did not follow up the matter further.  Mr McKee has seen that file note.  He disputes part of it.  He has used rather extravagant language, alleging that parts of it are a fabrication.  I put the matter into context.

[14]     The officer made a record of the conversation at the time.  Mr McKee has had to try and recall a conversation some four years after the event.   It is clear from

statements he made at the time, and also from his evidence today, that he was at a low ebb.  He was down because all of his efforts and hard work had come to nothing. He was left with nothing.   That makes me cautious about accepting at face value everything he says.

[15]     However, I accept that he met with his accountant shortly afterwards and under the helpful advice of his accountant he completed and signed a statement of affairs.  The accountant kept a copy of the statement of affairs.  It is that copy that was provided to the Official Assignee in September 2012.  Mr McKee says that the statement he signed  was posted to the Official Assignee after meeting with  his accountant.  That would put the date of posting at about 7 to 9 December 2008.  He says he posted it, most likely, from the Three  Lamps Post Office at  Ponsonby, Auckland.

[16]     The  Official Assignee,  however,  says  that  the  statement  of  affairs  never reached his office.   That is confirmed at paragraph 3.6 of the report the Official Assignee filed for this proceeding.

[17]     Section 67 requires the bankrupt to file a statement of affairs with the Official Assignee.  Filing with the Assignee means that the statement of affairs must reach the office of the Assignee.   If the document should, for some reason, go astray in transit then the document will not be treated as filed.  Mr Pidgeon did suggest that the postal acceptance rule for formation of contracts might apply in this situation, but I do not accept that submission.  This is a statutory requirement.  It is inappropriate to import rules of contract law for the formation of contracts into this context.  The Regulations, particularly reg 72(3), are consistent with the requirement that the documents must reach the office of the Official Assignee.

[18]     On the evidence, there are two possibilities.  One is that the documents were prepared but not sent or, if they were sent, did not reach the office.  The second is that they reached the office but were not put on Mr McKee’s file.  I understand that the Official Assignee adopts a system of electronically recording documents that are submitted.  Ultimately, the burden is on Mr McKee to establish that the statement of affairs did reach the office of the Official Assignee.

[19]     In  the  face  of  the  evidence  from  the  Official Assignee’s  report  that  the statement of affairs was not received until September 2012 I find that Mr McKee has not satisfied me that the statement of affairs did reach the Official Assignee’s office in December 2008.  It is simply speculative for me to suggest that it failed to reach the  Official  Assignee  either  by  some  mishandling  by  Mr  McKee  or  some mishandling by the post office.  In the end the bankrupt carries a responsibility for ensuring that the statement of affairs reaches the Official Assignee’s office and the bankrupt carries the consequences if the documents do not reach the Official Assignee’s office in time.

[20]     In  support  of  his  submissions,  Mr  Pidgeon  referred  me  to  Australian authority.[3]     Australia also has a test for discharge after three years from filing a statement of affairs but Australian legislation also has other more prescriptive provisions.[4]    A bankrupt may not apply for early discharge earlier than six months after the filing of a statement of affairs.  Australian case law has shown that that is not capable of waiver.[5]   It has been necessary for the Commonwealth Parliament to pass an amendment to the Australian Bankruptcy Act 1966, s 33A, under which the court can backdate the filing of a statement of affairs if a bankrupt reasonably believes he has filed a statement of affairs.

[3] Trihakis v Official Receiver [1999] FCA 1426; Nilant v Macchia [2000] FCA 1528, (2000) 104

FCR 238; Sobey v Duncan [2005] FMCA 1170; Lelleton v White [2009] FCA 1165.

[4] Bankruptcy Act 1966 (Cth), s 149.

[5] Nilant v Macchia [2000] FCA 1528, (2000) 104 FCR 238.

[21]     Perhaps  because  of  the  restrictive  nature  of  the  Australian  rules,  some Australian decisions have taken a generous view of the requirement and accepted evidence from bankrupts that documents have been sent, even if they have not managed to reach a particular file in the registry or the Trustee’s office.  I do not see the need to take that kind of approach in New Zealand  because our Act is not restrictive in the same way as the Australian Act.   Here, even if a bankrupt has delayed in filing a statement of affairs, the bankrupt is still able to make an application for early discharge.  The ability to apply for early discharge relieves any

hardship arising out of delay in filing a statement of affairs.

[22]     For the above reasons, I decline to find that Mr McKee filed his statement of affairs in December 2008.

Should Mr McKee’s application for an early discharge be granted?

[23]     On discharge applications, it is usual to refer to the principles laid down by the Court of Appeal in ASB Bank v Hogg:[6]

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 s 294 of the Act] 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) [now s 296 of the Act] 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 as to 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 [now s 298 of the Act]. 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.

[6] ASB Bank v Hogg [1993] 3 NZLR 156 (CA) at 157–158.

[24]     When a bankrupt applies for an early discharge, the onus is on the bankrupt to show why he should be discharged ahead of the standard three years.  On the other hand, where the Official Assignee contends that the bankruptcy should continue for a further period beyond the standard three years, the onus is on the Official Assignee.

[25]     On  discharge  applications  I  have  found  it  useful  to  take  what  I  call  a

“purposive” approach, that is, to assess the application in the light of the purposes of

bankruptcy.[7]   I have identified the purposes of bankruptcy as:

[7] Jamieson v Official Assignee [2012] NZHC 949, [2012] NZCCLR 8; Darby v Official Assignee

[2013] NZHC 22

.

(a)       The administration of the estate of the bankrupt for creditors; (b)      Making a bankrupt accountable for his insolvency;

(c)       Punishing the bankrupt for any misconduct;

(d)Protecting the community from risks associated with the bankrupt being in business again;  and

(e)       Allowing the bankrupt to resume commercial activities freed from the liabilities for which he was adjudicated bankrupt.

I consider these in turn.

Administration of the bankruptcy

[26]     The Official Assignee says that the administration of the bankruptcy has been completed.   Accordingly, this aspect does not provide any grounds for extending Mr McKee’s bankruptcy.  That is an important concession because the purpose of the statement of affairs is to assist the Official Assignee in the administration of the bankruptcy.  Ordinarily it might be expected that a delay in the filing of a statement of affairs would delay the Official Assignee administering the bankruptcy in the interests of creditors.  It appears that even though the statement of affairs was filed in September 2012, the Official Assignee has nothing further to do by way of administration.   There is  therefore no  reason  to  use the delay in  providing the statement of affairs as a ground for prolonging Mr McKee’s bankruptcy.

Ensuring accountability

[27]     The Official Assignee does not suggest that this ground requires the period of bankruptcy to be extended.  I agree.

Punishment for misconduct

[28]    The Official Assignee submits that there is pre-adjudication misconduct surrounding Mr McKee’s management and directorship of companies that calls for censure.   Mr McKee had been director of companies that took part in property development.  One development was in Middleton Road, Newmarket; the other was at 703 Great North Road.   For the Great North Road property the company was Great North Investments Ltd.  By early 2004, that company had substantial liabilities which it was not able to meet.  Mr McKee accepts that he began the development under-capitalised.   Mr McKee caused Great North Investments Ltd, the company undertaking the development, to transfer the property to GN Property Ltd, another company of which  he  was  director  and  shareholder.   The  consideration  for the transfer was $530,000 including GST.   That sum was not paid.   When he was examined today, it transpired that this transfer was suggested by an accountant, and that a lawyer was meant to document it fully.  The scheme apparently had been that Great North Investments Ltd would grant some security to Mr McKee for $150,000 in consideration of his contributions for labour and services in the property development, and the transfer would be made subject to that security.

[29]     That seems to have been a device under which GN Property Ltd would hold the property subject to that security, and give Mr McKee some preferential standing as a secured creditor.  What this would have meant is that Great North Investments Ltd would have been left with no assets but a claim for $530,000 for the unpaid purchase price, and nothing available for creditors.

[30]     In March 2004 Mr McKee passed a resolution that Great North Investments Ltd be put into liquidation.  He appointed the accountant to be the liquidator of the company.  But by 2005 that accountant had retired as liquidator and he was replaced with fresh liquidators elected in the true interests of creditors.   They brought proceedings against GN Property Ltd and Mr McKee.  There was a settlement under which  GN  Property  Ltd  was  to  pay  $150,000  to  Great  North  Investments  Ltd (in liquidation)  and  Mr  McKee  personally  guaranteed  GN  Property  Limited’s obligations under the deed of settlement.   There was only one payment of $5,000 made under the settlement.  The settlement deed has attached to it copies of financial

statements, including a statement of affairs for Mr McKee himself.  It is clear that he was hopelessly insolvent at the time.

[31]     The upshot is that this transaction in 2004 was meant to be some device to give Mr McKee a preferred position.   It was never documented properly and he never got himself into a preferential position but, if he had, it would have been set aside under provisions under the Companies Act 1993 by which such devices can be attacked as preferential.   It was a shabby device to defeat creditors.   It does not reflect well on Mr McKee that he was prepared to take part in it.   The Official Assignee also submitted that it showed conduct that might be in breach of s 419 of the Insolvency Act.  I do not speculate on that in case a prosecution does ensue.

[32]     The Middleton Road development failed because of the crash in 2007 and

2008 when finance dried up.  A finance company was unwilling to continue funding that development.  Mr McKee says it was the failure of finance for Middleton Road that led to his ultimate bankruptcy.  But it appears to me that by again undertaking a property development while under-capitalised he eventually was caught short when funding dried up.  It was that failure of funding that led to his inability to complete the settlement with the liquidators of Great North Investments Ltd.

[33]     What I draw out of that is that Mr McKee had taken significant risks in undertaking these developments:  they had failed and led to losses to creditors.

[34]     Mr  McKee’s  creditors  who  have  proved  in  the  bankruptcy  come  to

approximately $520,000.   The liquidators of Great North Investments were owed

$162,000 following litigation.  The Inland Revenue was owed $164,000 for income tax.   The petitioning creditor was W Stevenson & Sons Ltd, owed $65,000 for building materials supplied. All the other creditors are either banks or financiers. As such, all creditors seem to be - if I can call them this - “experienced creditors” rather than ordinary consumers and members of the public.

[35]     Mr Neil examined Mr McKee as to his conduct since adjudication.   In his submissions, Mr Neil pointed to some technical breaches in terms of delay in filing a statement of affairs because the 10 day limit was grossly exceeded, and of not

providing information to the Official Assignee.   I regard those as minor breaches which should not weigh significantly in the exercise of any discretion.

[36]     It turned out that during his bankruptcy, Mr McKee has undertaken some part-time jobs.  Mr McKee puts his earnings from those jobs at no more than about

$500 per week.  It has been spasmodic work as and when he can obtain it – that is, doing odd jobs for acquaintances, usually little more than providing basic labour. Mr McKee did not obtain the consent of the Official Assignee to undertake that work.   Mr McKee did not file any returns of income with the Commissioner of Inland Revenue declaring income for that work.  Mr McKee was on a benefit but did not tell WINZ about these earnings.

[37]     This does show a failure to observe the law so far as insolvency law is concerned.   Mr McKee did not stay in touch with the Official Assignee about his earnings and his earning activities after adjudication.  It does cause concern.  I accept that  in  Mr McKee’s  position  he would  have found  it  difficult  to  find  full-time employment.  Taking part-time work, and trying to eke a living out of part-time jobs, even if self-employed, may well be the pattern for many undischarged bankrupts. While that does count as misconduct – and it is more than technical – I accept Mr Pidgeon’s position that it could still be regarded as minor.   In particular it is important to bear in mind the response that the law should make to it.

[38]     If I were to prolong Mr McKee’s bankruptcy on account of this kind of conduct, Mr McKee would find himself in a bind.   He is unlikely to change his behaviour in terms of getting by as an undischarged bankrupt.  That behaviour would only prolong his status as an undischarged bankrupt.   It is better to recognise the reality and consider his discharge, rather than hold him in circumstances where there is no room to get ahead.

[39]     Summing up on misconduct, the Official Assignee accepts that if there is to be any censure for pre-adjudication conduct, then any punishment has already been served.   Pre-adjudication conduct does not call for an extension of Mr McKee’s bankruptcy.   As  to  post-adjudication  misconduct,  while there are signs  of post- adjudication misconduct it is not misconduct that in my view needs to be addressed

by prolonging the bankruptcy.   It may, instead, be a reason for bringing the bankruptcy to an end.

Risk to the community

[40]     The factor of risk to the community is to be balanced against the need to free Mr McKee so that he can operate as a useful member of society again.  Mr Pidgeon relied on the dicta of Vaughan Williams LJ in Re Gaskell:[8]

[8] Re Gaskell [1904] 2 KB 478 (CA) at 482.

After all, the overriding intention of the Legislature in all Bankruptcy Acts is that the debtor on giving up the whole of his property shall be a free man again, able to earn his livelihood, and having the ordinary inducements to industry.   Sometimes it is not right that the bankrupt should be free immediately;  he must pass through a period of probation; theoretically there may be cases in which he ought not to be free at all, but prima facie he is to give up everything he has, and on doing that he is to be made a free man.

That has been cited a number of times in New Zealand in discharge cases.

[41]     Mr McKee has useful skills.  He has a background in project management in the construction industry.  I am impressed that, freed from bankruptcy, he would be able to conduct himself more usefully than if he were kept as an undischarged bankrupt.   There is therefore a public benefit in him being discharged from bankruptcy.

[42]     However, I also see risks.  There are two potential areas of risk.  The first is if Mr McKee were to become involved in property development again.  His experience in property development in the recent past is that he has entered into ventures under- capitalised, has been reliant on finance, has not been able to honour commitments and that has resulted in the failure of ventures and losses not only to himself but also to his financiers, his trade suppliers, and also sub-contractors.

[43]     At this stage in his life – Mr McKee is now 58 years of age – he will not be able to raise significant capital again so as to go into property development.  If he were to undertake property development again, there is a real risk that he would go

back into it, under-capitalised, and run the same risks as he has run before.

[44]     An added risk factor is that this is his second bankruptcy.   He was also adjudicated bankrupt in 1992.  He had an automatic discharge in 1995.  He attributes that bankruptcy to the sharemarket crash of 1987, but it is significant that he was also involved to a certain degree in property management activities and property development.  He says he was the sole employee of a company but lost everything in that activity.  The fact that he has been bankrupt once before is an associated risk factor which I must take into account.

[45]     I am also concerned if Mr McKee were to become a company director.  The risk associated with him becoming a company director is that he may well establish a company and try and use that company as a shield to avoid personal insolvency.  The protection of limited liability might lead him to believe that he can run up debts without having to give too much attention to the consequences.   I want him to be aware that  if  he re-enters business  again,  and  he runs up  credit,  those are real liabilities which will have an impact if he does not honour them.  I can bring that home to him if I make it clear to him that he will be personally liable, and that can be achieved by preventing him from holding office as a company director.

[46]     Accordingly, I intend to make an order discharging Mr McKee but subject to conditions.  The discharge will take effect from when the orders are finalised.  The order will be subject to conditions:

(a)      that Mr McKee is not to hold office as a company director for a period of one year – a condition under s 299(1)(b) of the Insolvency Act; and

(b)that Mr McKee is not to enter into or carry on or take part in the management and control of any property development business for a period of five years – a condition under s 299(1)(a).  But that is not to prevent him from carrying on business as a project manager.   The intention is that he should be able to offer his project management services.   What I intend is that he should not himself undertake the risks of property development.

[47]     I have sketched out the terms for his discharge.  They need to be fleshed out. I would be grateful if counsel could confer and draft an order for my consideration. Once I approve, I will make a final order for discharge.   I will next be sitting in bankruptcy next week.  I suggest that the matter be called in the bankruptcy list on Tuesday 5 March 2013 at 11:45am.   I trust that counsel will have a draft order ready by then.

...........................................

R M Bell

Associate Judge