Minter Ellison Rudd Watts v Hampton

[2013] NZHC 2434

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2011-409-002055 [2013] NZHC 2434

In the matter of the

Insolvency Act 2006

AND

In the matter of the

bankruptcy of  DAVID JOHN HAMPTON

BETWEEN

MINTER ELLISON RUDD WATTS

Judgment Creditor

AND

DAVID JOHN HAMPTON

Judgment Debtor

Hearing:

17 September 2013

Appearances:

D J Hampton Applicant in Person P Roy for Respondent

P J Shamy for Inland Revenue Department, as creditor in support

Judgment:

17 September 2013

ORAL JUDGMENT OF ASSOCIATE JUDGE OSBORNE

as to application for annulment or stay of an adjudication of bankruptcy

Introduction

[1] This is an application for annulment or stay of an order of adjudication made against Mr Hampton on 5 June 2013.

Background

[2] Minter Ellison Rudd Watts (“Minter Ellison”) obtained judgment against Mr Hampton on 11 February 2010. The judgment was for $172,452.57 together with interest and costs.   Putting those together, the sum awarded at that date totalled

$220,949.59.

MINTER ELLISON RUDD WATTS v HAMPTON [2013] NZHC 2434 [17 September 2013]

[3] Mr Hampton and his associated entities were at the time and subsequently engaged in a number of proceedings with the Commissioner of Inland Revenue in relation to taxation. I will refer in this judgment, where the references are to the litigation undertaken by Mr Hampton and his associated entities, simply to “Mr Hampton”. Mr Hampton hoped to get funds either freed up or paid in order to satisfy the Minter Ellison judgment. Mr Hampton’s properties were affected by the Christchurch earthquakes, which led to significant difficulties in relation to insurance claims. As time passed, Mr Hampton also hoped to get funding freed up from the insurance settlements in order to satisfy this and other liabilities. In the absence of any payment, Minter Ellison obtained a charging order over a fund from which it received $176,553.86 in December 2012. That was, I note, almost three years after Minter Ellison obtained the judgment.

[4] The balance of the judgment debt together with accruing interest remains unpaid. In 2012 Minter Ellison served on Mr Hampton a bankruptcy notice. In July 2012 Mr Hampton failed in an application to have the notice set aside.1 The notice then expired unmet. Minter Ellison filed and served its application for Mr Hampton’s adjudication in late 2012.

[5]  Mr Hampton obtained Minter Ellison’s agreement to two adjournments in the first half of 2013 to provide him with time to settle the debt. In May 2013, Mr Hampton obtained an opposed adjournment for the same purpose. The application was adjourned to 5 June 2013. Mr Hampton’s memorandum which led to the 7 May adjournment included this conclusion:

The debtor accordingly seeks an adjournment of the hearing of the creditor’s application until the formal High Court hearing concerning the High Court freezing orders.

[6] In granting an opposed adjournment the Associate Judge adjourned the application to a hearing date on 5 June 2013. It was on that date that the adjudication order was made. It was made in the absence of Mr Hampton, who did not appear. At that date the creditor was entitled to proceed, the balance of the payment having been unsatisfied.

1       Re Minter Ellison Rudd Watts, ex p Hampton [2012] NZHC 1715.

Mr Hampton’s application

The application itself

[7]      Mr Hampton applies for orders -

(a)staying the adjudication order for bankruptcy; or

(b)annulling the order.

The reason for Mr Hampton’s non-appearance

[8]   Mr Hampton explains in his grounds of opposition and a supporting affidavit his non-appearance on 5 June 2013. He deposes that he was mistaken in recording the previous day (4 June 2013) as the date to which the proceeding was adjourned. He deposes that he attended Court on 4 June 2013 only to find that there was no insolvency list that date. He made an assumption that the hearing date must have been moved as part of a list to the following week. He realised his error only when he received notice of his adjudication a few days later, whereupon he promptly prepared this application.

[9] Mr Hampton does not suggest that any other party was responsible for his non-appearance on 5 June 2013. The mistake was entirely his own.

The substantive ground of application

[10]   In the notice of application the single ground which relates to the substance of the matters before the Court states:

The monies payable by EQC [in relation to insurance held by a related party, Ms Sisson, as Trustees of Chesterfields Preschools Ltd] have recently been paid into the bank account nominated by the High Court.

[11] In Mr Hampton’s affidavit in support, he exhibits evidence that $29,445.53 had been paid into the nominated bank account on 24 May 2013. I am informed by Mr Hampton that in addition to those funds, some $157,000 had also been received through a private insurer, IAG, and was also held subject to the freezing arrangement.

The Minter Ellison opposition

[12] Minter Ellison oppose the application in regard to both annulment and stay. Minter Ellison say:

(a)The order was regularly and properly made;

(b)Mr Hampton has not fully satisfied his debts. There is a balance of at least $44,395.73 owing on the judgment itself, without reference to the accruing interest since that date and also without reference to the costs of the adjudication proceeding itself.

[13] Minter Ellison also say that Mr Hampton, in his previous explanation to the Court of potential sources of repayment, had misrepresented the true state of available funds and, in particular, to whom those funds might be made available.

[14] The Department of Inland Revenue appeared as a creditor in support of the original adjudication application and again in opposition to Mr Hampton’s present application. The defendant, through Mr Shamy, filed a memorandum in this proceeding. Mr Shamy produces three costs judgments against Mr Hampton which total $32,105 (plus judgment interest). I observe that the $29,445.58 which was paid by EQC in May 2013 is less than the amount owing to the Department on the costs judgments.

[15] Mr Shamy confirmed from the bar that there is, as explained by Mr Hampton, the additional sum of approximately $157,000 held frozen on account of a partial insurance settlement by IAG. This fund is held in the context  of  proceedings between the Commissioner and Mr Hampton.

[16] Mr Hampton and the Department have not reached any agreement as to the level of Mr Hampton’s tax liabilities. The Commissioner has since the delivery of relevant Court of Appeal judgments caused the tax position of the various entities to be reassessed. I am informed by Mr Shamy, again from the bar, that the reassessment in relation to Mr Hampton and Chesterfields Preschools Ltd together

puts the liability at approximately two million dollars with further assessments against other entities, including trading partnerships.

[17] Neither in his submissions nor in his evidence did Mr Hampton give the Court a figure of what he understood to be the Commissioner’s claim against him and his associated entities. It appeared from his submissions that he anticipated that the outcome of successful tort claims which Mr Hampton is bringing against the Commissioner may cancel out or exceed his entire taxation liability. Mr Hampton also indicated to me in reply that he has one extant stream of taxation litigation relating to a notice of proposed adjustment which may of itself affect the tax liability.

[18] For now, the Court must take it that the level of Mr Hampton’s tax liability is uncertain. The funds that are frozen have a continuing purpose in that they may protect the legitimate interests of the Commissioner in recovering what is ultimately found to be liability for tax. The Department has indicated through Mr Shamy that it would therefore oppose any application either by Minter Ellison or by Mr Hampton to have the frozen funds paid out to Minter Ellison in preference to any other creditor (especially the Commissioner).

Stay

[19] Mr Hampton’s submissions as filed focussed  predominantly  on  the proposition that he should be granted further time to pursue the release of frozen funds from which the balance owing to Minter Ellison could be satisfied. A stay might therefore operate in conjunction with my reserving judgment on the annulment appeal.

[20] The anticipation of Mr Hampton is that frozen funds would then be freed up during the period of a further stay. The Minter Ellison debt would thereby be discharged. Mr Hampton would then have the ability in terms of s 309(1)(b) of the Act to obtain an annulment (having satisfied his creditors).

[21]    Mr Hampton characterised the application which he would have to make for a release of frozen funds as a straightforward matter. He repeatedly put emphasis on the fact that the debt to Minter Ellison was incurred in relation to legal attendances

concerning the litigation between Mr Hampton and the Commissioner over taxation issues. Mr Hampton and his associated entities enjoyed a measure of success in that litigation with vindication on an argument that the Commissioner had not honoured an arrangement entered into with the taxpayer. That led to the reassessment of tax which I have referred to earlier.

[22] Mr Hampton submits that the Courts are required to allow parties affected by freezing orders to have access to the frozen funds for the purposes of conducting their day-to-day business and conducting litigation. He submits that there is therefore a strong likelihood that the Minter Ellison judgment debt, relating as it does to the litigation with the Department, would be favourably considered by the Court as appropriately met out of the frozen funds.

[23] I will deal with the application for annulment first, and return to the application for a stay.

The Court’s jurisdiction to annul adjudication

The Act

[24] The Court’s jurisdiction to annul an adjudication arises under s 309(1) Insolvency Act 2006 which provides:

309     Court may annul adjudication

(1)The Court may, on the application of the Assignee or any person interested, annul the adjudication if—

(a)the Court considers that the bankrupt should not have been adjudicated bankrupt; or

(b)the Court is satisfied that the bankrupt's debts have been fully paid or satisfied and that the Assignee's fees and costs incurred in the bankruptcy have been paid; or

(c)the Court considers that the liability of the bankrupt to pay his or her debts should be revived because there has been a substantial change in the bankrupt's financial circumstances since the date of adjudication; or

(d)the Court has approved a composition under subpart 1 of Part 5.

The jurisdiction – Section 309(1) generally

[25] Section 309 provides the only jurisdiction for annulment (or rescission) of an order of adjudication: Re Byron (a debtor), ex parte Commissioner of Inland Revenue.2 Section 414(1) of the Act (which provides the Court with power to review, rescind or vary any decision of the Court) is not available for the purposes of annulling an adjudication.3  Rule 11.9 High Court Rules (permitting a Judge to recall a judgment) is also unavailable for the purposes of annulling an adjudication.4

Section 309(1)(a) specifically

[26] The Court may annul an adjudication if it considers that the bankrupt should not have been adjudicated bankrupt.

[27]   It is settled that the Court should be parsimonious in the exercise of its power to annul. The Court narrowly construes this jurisdiction. The relevant cases are reviewed and the narrow interpretation of s 309(1)(a) is accurately discussed in this regard by the authors of both Heath and Whale on Insolvency5 and Brookers Insolvency Law & Practice.6 In Re Hunter, Robertson J noted that the cases referred to by the commentators:7

… all relate to the situation where the procedures were wrong, where the notice was bad, abuse of process, and not to the situation of the exercise of the discretion.

Section 309(1)(b) specifically

[28] The Court may annul an adjudication if the Court is satisfied that the bankrupt’s debts have been fully paid or satisfied and that the Assignee’s fees and costs incurred in the bankruptcy have been paid.

2       Re Byron (a debtor), ex p Commissioner of Inland Revenue [1964] NZLR 508 (SC). See also Re Guest ex p BNZ Finance Ltd [1991] 1 NZLR 250 (HC). Both cases dealing with s 119 Insolvency Act 1967, the predecessor to s 309 of the 2006 Act.

3       See Re Byron and Re Guest, above n 2, dealing with s 8(1) Insolvency Act 1967, the predecessor to s 414 of the 2006 Act.

4       See Re Guest above n 2, dealing with r 264 of the then High Court Rules, the predecessor to the current r 11.9.

5       P Heath and M Whale (eds) Heath and Whale on Insolvency (looseleaf ed, LexisNexis) at 9.26.

6       Brookers Insolvency Law & Practice (looseleaf ed, Brookers) at IN 309.5(i).

7       Re Hunter ex p Commissioner of Inland Revenue (2000) 19 NZTC 15,722 (HC) at 15,730.

[29] If the bankrupt’s debts (including the relevant fees and costs) have not been fully paid by the time of the annulment application, or the bankrupt does not have settled arrangements in satisfaction of the debt in place with his or her creditors, this jurisdiction cannot be invoked. Partial satisfaction (which is what exists in this case) is insufficient.

Section 309(1)(c) specifically

[30]   The Court may annul an adjudication if the Court considers that the liability of the bankrupt to pay his or her debts should be revived because there have been substantial change in the bankrupt’s financial circumstances since the date of adjudication.

[31] In terms of s 309(1)(c), changes in financial circumstances before the date of adjudication do not provide jurisdiction for an order of annulment. Therefore any changes to Mr Hampton’s financial circumstances before 5 June 2013 including the receipt of the EQC funds in May are irrelevant to the annulment application, at least in relation to this ground.

Section 309(1)(d) specifically

[32]   The s 309(1)(d) jurisdiction, which relates only to compositions under Part 5 of the Act, is irrelevant in this case.

Discussion of the invoked grounds for annulment

[33] Although Mr Hampton did not in his written submissions address the specific grounds on which he might rely, I drew from him in the course of his oral submissions an indication that he relies on s 309 (1)(a) and s 309 (1)(c). I deal with those in order.

Whether Mr Hampton should have been adjudicated bankrupt.

[34]     I adopt the summary of relevant circumstances enunciated by Robertson J in

Re Hunter and also the correct observation by the commentators that this is a narrow

jurisdiction.8 I am not entitled to interfere with an adjudication by an order of annulment simply because I might have decided matters differently on 5 June 2013. When Mr Hampton’s oral submissions are properly analysed, they invite certain assumptions. First, that had Mr Hampton appeared, he would have applied for a further adjournment - indeed that is what he says would have been done. Secondly, that had an adjournment application been made, the only proper outcome would have been for a further adjournment. Mr Hampton believes that the Associate Judge who dealt with the matter on the day, if requested to grant a further opposed adjournment, would have granted such adjournment. That is not the test for annulment. The granting or refusal of adjournment would have been a discretionary matter for the Court. The Court would have weighed up, as it had on at least three previous occasions, whether it is appropriate in relation to a person who committed an act of

bankruptcy in 2012 to grant a further adjournment when the debtor has not been able to pay his debts.9 As it happened, the Court was not confronted with the exercise of that adjournment discretion in June. The decision which confronted the Court in June was whether it should grant to the creditor’s application for an order adjudicating the debtor bankrupt. On the evidence of a prior act of bankruptcy and of a remaining debt, the creditor was entitled to the order it sought.

[35] The judgment was correctly given on that date. The adjudication cannot be described as one which should not have been made.

[36] I add this.  The circumstances confronting Mr Hampton have been difficult. He has been engaged in lengthy, difficult litigation with the Commissioner which has seen assets frozen. Real property has been damaged by the earthquakes with ensuing difficulties over insurance entitlements. But Mr Hampton’s creditors also have a legitimate interest to have their debts promptly paid. The public interest in relation to insolvency issues also requires that bankruptcy proceedings should be resolved promptly. Adjournments, even sometimes relatively lengthy adjournments, may occur where there is a real prospect of prompt payment. In this case, Mr Hampton obtained numerous adjournments in the light of a prospect of prompt payment.

[37] Had Mr Hampton applied for a further adjournment in June, I view it as likely that a further adjournment would have been refused and that Mr Hampton would have been adjudicated bankrupt on that date.

A substantial change of financial circumstances?

[38] Mr Hampton, also invoking s 309(1)(c), submitted that there had been a substantial change in his financial circumstances. As I understood his submission, his focus was upon the information as to financial circumstances which would have been available to the Associate Judge in June had Mr Hampton appeared. Mr Hampton submits that he would have been able to update the Judge as to receipt of the EQC funds which would have indicated to the Judge that he had “kept his side of the bargain” (referring to what he had sought to achieve when asking for an adjournment in May 2013).

[39] I deal with that submission at two levels. First, it does not in fact address the required ingredient of s 309(1)(c) which is a substantial change in financial circumstances after the date of adjudication (my emphasis). Mr Hampton instead focuses on the information that was available to the Judge at the date of adjudication. The financial circumstances (receipt of the EQC funds) were in place at the date of adjudication. Secondly, I am not convinced that the Court would have been satisfied that the basis  upon which the adjournment had been granted in May had been

achieved at the next hearing in June. As I have quoted the final paragraph of Mr Hampton’s May application for adjournment,10 it was through to the period until the formal High Court hearing concerning the High Court freezing orders. When the Court in May adjourned the adjudication application to a further hearing in June, it was for Mr Hampton to achieve a release of the freezing order. I have no evidence of what steps, if any, Mr Hampton took in relation to a High Court hearing (or indeed

application) concerning the freezing orders. There is no evidence that any progress was achieved in that regard. Given the claims of the Inland Revenue Department, I do not share Mr Hampton’s confidence that a release of any money from the frozen funds was a probable outcome of any application to be made for a revocation of the freezing order.  Even had the Court known at the June hearing that the EQC funds

had now also come within the freezing order, I do not believe it would had led a Judge to conclude that justified a further adjournment.

Summary in relation to the s 309(1) annulment jurisdiction

[40] On this basis, neither ss 309(1)(a) or (c) has been satisfied. Accordingly the jurisdiction to annul adjudication is not present.

The stay application

[41] Alongside the oral submissions which he developed as to annulment, Mr Hampton submitted that there should be a stay so as to enable him further time to pursue release of the frozen funds. After Mr Hampton filed these applications. Panckhurst J ordered on 3 July 2013, in the absence of opposition, that:

… a stay is granted in relation to the order of adjudication, such stay to remain until the substantive hearing of the annulment application or the further order of the Court.”

[42] There would have potentially been injustice to Mr Hampton were he not to have his adjudication stayed pending the hearing before me today. Panckhurst J made an order of stay specifically for the intervening period. I have referred11 to the Court’s approach to s 309 as being the sole source of jurisdiction for annulment. The Court will not entertain the possibility of a lengthy stay in relation to an adjudication

application when such stay would be akin to an annulment. Having regard to the public interest involved when a debtor is adjudicated bankrupt, the stay jurisdiction will be very rarely exercised. In my experience, it is exercised in relation to the period between the bringing of an annulment application and the hearing of that application.  I refuse to exercise it in this case for the reasons I have identified12 in

relation to the discretion which arises when considering the adjournment of bankruptcy proceedings. Mr Hampton had repeated opportunities to meet the debt and to make arrangements to meet the debt whether from the frozen funds or elsewhere. In June the creditor was entitled to proceed, and elected to proceed. If there is a real possibility that Mr Hampton’s debts can be cleared from the frozen funds the Official Assignee, with Mr Hampton’s co-operation and assistance, will be

in a position to achieve that. The Inland Revenue Department is a “creditor” for the purpose of Mr Hampton’s bankruptcy.13 While Mr Hampton appears to assume he would have grounds for annulment under s 309(1)(b) if his debt to Minter Ellison is paid, I express doubt as to whether that is so given the Department’s claims.

[43]   I am not satisfied that there should be a further adjournment or a stay whether to enable Mr Hampton to pursue a release of the frozen funds. The thrust of Mr Hampton’s desire is to get access to funds to pay his creditors. If he can get access to funds to pay all his creditors that will bring into play the jurisdiction under s 309(1)(b) and he will be able at that time to obtain a subsequent annulment. Having regard to the existence of creditors, other than Minter Ellison, it may be considered in the public interest appropriate that the Assignee be involved in any process of getting access to frozen funds. The Assignee can appropriately consider the proportionate or preferential interests of the various parties involved. That is not a process that the Court should engage in.

[44] I am accordingly satisfied, as with the annulment application, the stay application be dismissed.

The orders

[45]     I order:

(a)The debtor’s application for an order annulling his adjudication is dismissed.

(b)The debtor’s application for a further stay is dismissed.

(c)The order of stay granted on 3 July 2013 is rescinded.

(d)The debtor is to pay the creditor’s costs on a 2B basis together with disbursements to be fixed by the Registrar. I certify for Ms Roy’s reasonable costs of travel and accommodation;

(e)The debtor is to pay the supporting creditor’s costs on a 2B basis together with disbursements to be fixed by the Registrar. In relation to the supporting creditor, the only item to be allowed in relation to the present application is for Mr Shamy’s appearance at today’s hearing.

Associate Judge Osborne

Solicitors:

D Hampton, Applicant in Person Minter Ellison Rudd Watts, Wellington

Crown Solicitor’s Office, Raymond Donnelly & Co