Muollo v Garnham
[2017] NZHC 622
•3 April 2017
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2015-485-834 [2017] NZHC 622
IN THE MATTER OF THE INSOLVENCY ACT 2006 IN THE MATTER OF
BANKRUPTCY PROCEEDINGS
BETWEEN
PAULA MUOLLO Judgment creditor
AND
MICHAEL ROBERT GARNHAM Judgment debtor
Hearing: 2 March 2017 Appearances:
Q S Haines for judgment creditor
J W Upson for judgment debtorJudgment:
3 April 2017
JUDGMENT OF CULL J
Introduction
[1] This case concerns an application by the judgment debtor, Mr Garnham, to review Associate Judge Smith’s decision on 18 October 2016 to substitute Ms Muollo as the judgment creditor in bankruptcy proceedings, which were commenced by the Commissioner of Inland Revenue (the Commissioner).
[2] Mr Garnham seeks a review of the decision, claiming that the Associate
Judge lacked the jurisdiction to substitute Ms Muollo as a qualifying creditor of
Mr Garnham’s, under s 44 of the Insolvency Act 2006 (the Act).
MUOLLO v GARNHAM [2017] NZHC 622 [3 April 2017]
Factual Background
[3] On 23 December 2015, the Commissioner applied to adjudicate Mr Garnham bankrupt. Following the first call on 5 April 2016, the proceeding was adjourned to
17 May 2016, to enable the parties to negotiate settlement.
[4] On 16 May 2016, Ms Muollo filed a notice of intention to support the Commissioner’s application to adjudicate Mr Garnham bankrupt. Her notice of intention to support is not in a form expressly contemplated by either the Act or the High Court Rules 2016.
[5] The notice of intention, also intituled as “Appearance in support of application for adjudication in bankruptcy of the judgment debtor”,1 consisted of three paragraphs. They were:
(1)PAULA MUOLLO of Wellington, Real Estate Agent, intends to appear at the hearing of this proceeding.
(2)PAULA MUOLLO supports the application for adjudicating the defendant bankrupt.
(3) PAULA MUOLLO is a creditor of the judgment debtor of the sum of
$300,000.00.
[6] The matter was called on 17 May 2006 and directions were made for a timetable to a defended hearing of the Commissioner’s application, which was to be heard on 30 June 2016.
[7] There was a further adjournment of the proceeding to 15 August 2016. On
12 August 2016, the Commissioner and Mr Garnham jointly advised the Court that they had settled his indebtedness to the Commissioner. The 15 August 2016 fixture was vacated and on 21 September 2016, the Commissioner filed a notice of discontinuance, seeking leave to withdraw from the proceeding, pursuant to s 15 of the Act.
[8] On 26 September 2016, counsel for Ms Muollo filed a memorandum seeking substitution of the Commissioner, with Ms Muollo as judgment creditor and
1 This was the heading on the second page of the notice.
requested the matter to be dealt with on the papers. No notice was given to Mr Garnham. The memorandum sought substitution under s 44 of the Act, on the basis that Mr Garnham owed Ms Muollo a sum greater than $1000 or more, being the threshold amount under the Act.
[9] On 3 October 2016, Associate Judge Christiansen directed Ms Muollo’s application for substitution to be listed for call on 18 October 2016. Counsel for Mr Garnham filed a memorandum on 17 October 2016, seeking a dismissal of the hearing. Because Mr Garnham had not been served with Ms Muollo’s Memorandum of Counsel seeking substitution on 26 September 2016, Mr Garnham’s counsel did not address the substitution memorandum. Mr Garnham disputed that he owed Ms Muollo any sum of money. His Counsel’s memorandum submitted:
2 On 16 May 2016 Mr Garnham was served with a copy of Ms Muollo’s “notice of intention to support [the Commissioner’s] application”. That document asserted that Ms Muollo is “a creditor of the judgment debtor for the sum of $300,000.00”. Ms Muollo has served no further material in support of that contention …
3 Mr Garnham disputes that he owes Ms Muollo any sum of money. He instructs that he has not met Ms Muollo or had direct business dealings with her. He has never entered into any contract, loan arrangement, or any other kind of contractual obligation with Ms Muollo.
[10] The matter was called on 18 October 2016 before Associate Judge Smith. Ms Muollo had filed nothing further than her 26 September memorandum seeking substitution. At the hearing, there was no direction from the Associate Judge whether the matter was to be a hearing in chambers or in open court. Brief oral submissions were made by counsel respectively for Ms Muollo and Mr Garnham.
[11] Mr Upson for Mr Garnham repeated Mr Garnham’s opposition to substitution and to the matter proceeding, without Ms Muollo having filed any evidence in support. The Associate Judge made an order substituting Ms Muollo as a creditor (the Order) and adjourned the proceeding to 15 November 2016, for Ms Muollo to file and serve an application for substitution.
[12] Ms Muollo filed her application and supporting affidavit on 21 October 2016, in which Ms Muollo alleges an interest in 2,530 tiles, which were contained in three
shipping containers in Petone, as security for a loan of $300,000.00 she made to
Mr Terry Serepisos in 2011. Annexed to her affidavit is a quote, valuing the tiles at
$541,167.00 (including GST). The quote, which appears in the form of an invoice, is for 2,530 basaltina tiles at $186 each, plus GST. It appears the quote was obtained on the basis of a description from Ms Muollo from Mr Serepisos, about the type and quantity of the tiles.
[13] Mr Garnham filed an application for “review of the Associate Judge’s decision dated 18 October 2016”, with an affidavit in support and Ms Muollo filed a notice of opposition to the review application.
Issues
[14] There are three issues before the Court:
(a) Does the High Court have jurisdiction to review the Associate Judge’s decision, given that Schedule 1 of the Senior Courts Act 2016, which came into effect on 1 March 2017, revoked r 2.3 of the High Court Rules, permitting a review of Associate Judges’ decisions by the High Court?
(b) Was the Associate Judge’s decision made in chambers or in open
court?
(c) Was the debt alleged by Ms Muollo a qualifying debt under the Act, justifying the substitution of Ms Muollo as creditor?
[15] I will deal with the first two issues under “Review jurisdiction” and the third
issue under “qualifying debt under the Act” respectively.
Review jurisdiction
[16] The first issue is whether the High Court still has jurisdiction to review an Associate Judge’s decision, following the enactment of the Senior Courts Act, Schedule 1 of which revoked r 2.3 of the High Court Rules. Rule 2.3 contained the
power to review an Associate Judge’s decision and applied at the time of the
Associate Judge’s order on 18 October 2016.
[17] Rule 2.3(1) provided:
2.3 Review of decision
(1) An application for a review, under section 26P(1) of the [Judicature] Act, of an order or a decision made by an Associate Judge must be by interlocutory application, which must fully state the grounds for review and what exactly is challenged by the applicant.
…
(5) In all other cases, —
(a) a review proceeds as a full rehearing; and
(b) the Judge may give the order or decision the weight he or she thinks appropriate.
[18] The effect of the enactment of the Senior Courts Act is that the High Court no longer has jurisdiction to review a decision of an Associate Judge. There is a right of appeal to the Court of Appeal only.
[19] However, sch 5 of the Senior Courts Act contains transitional provisions in relation to proceedings that were subject to the former High Court Rules. This saves the High Court Rules that were in force immediately before 1 March 2017. Clause
11(3)(b) of sch 5 of the Senior Courts Act, referring to s 26(P) of the Judicature Act
1908, provides that a proceeding that is pending on 1 March 2017 must be dealt with as if the provisions of the former High Court Rules were in force. This means that r 2.3 still applies to this decision.
Conclusion 1
[20] By virtue of the transitional provisions of the Senior Courts Act, the jurisdiction of the High Court to review an Associate Judge’s decision is preserved for proceedings pending on 1 March 2017. Thus, for the purposes of this decision, r 2.3 applies.
Open court or chambers
[21] The issue of whether the Associate Judges’ decision was made in chambers or open court determines whether this Court has the jurisdiction to review. Mr Garnham contends the order was made in chambers and Ms Muollo says it was in open court.
[22] If an Associate Judge makes a decision in chambers, then that decision is subject to review in the High Court, pursuant to s 26P(1) of the Judicature Act.
[23] If, however, an Associate Judge makes a decision involving the exercise of the powers of the High Court or a Judge under the Act in open court, a right of appeal lies directly to the Court of Appeal pursuant to s 26P(2) of the Judicature Act. This section states:
Any party to any proceedings may appeal to the Court of Appeal against any order or decision of an Associate Judge in those proceedings (other than an order or decision made in chambers).
[24] By virtue of s 26I(2)(ha) of the Judicature Act, an Associate Judge of the High Court has and may exercise the powers and jurisdiction vested in the Court or in a Judge under the Act.
[25] Under s 411(2) of the Act, a Judge or Associate Judge may hear a proceeding under the Act, or any aspect of it, in chambers or in open court.2 There are two matters, however, that must be heard and dealt with in open court and they are:
(a) the public examination of a bankrupt; and
(b)an application for annulment of a bankruptcy or the discharge of a bankrupt.
2 This is subject to two exceptions: the only matters an Associate Judge cannot hear are the issue of a warrant to search for and seize a bankrupt’s property under s 150, and the issue of warrants of arrest under ss 166(3), 180 and 236(2) of the Insolvency Act 2006.
[26] Section 411(2) of the Act must be read in conjunction with a number of provisions in the High Court Rules in determining whether a proceeding must be determined in open court or in chambers.
[27] Rule 24.4(2) of the High Court Rules provides that applications made within the Court’s insolvency jurisdiction, which do not have a prescribed form, must be made by interlocutory application. Rule 7.34(1) provides that an interlocutory application for which a hearing is required must be heard in chambers unless a Judge otherwise directs.
[28] Therefore, there are two possible outcomes in this proceeding:
(a) if it was determined that the Associate Judge reviewed an interlocutory application under the Act in substituting Ms Muollo, then the Associate Judge’s decision must have been made in chambers and can be reviewed by this Court; or
(b)if the Associate Judge’s decision was not dealing with an interlocutory application under the Act and was made in open court then this Court cannot review that decision and the appropriate course of action is an appeal to the Court of Appeal.
Mr Garnham’s position
[29] For Mr Garnham, it is submitted that the High Court should review the Associate Judge’s decision by virtue of the jurisdiction conferred under s 26P(1) of the Judicature Act, r 2.3 of the High Court Rules and s 414(1) of the Act. Section 414 of the Act provides:
414 Rehearings and appeals
(1) The court may review, rescind, or vary any decision of the court or a Judge under this Act.
…
[30] Mr Garnham submits that the Associate Judge’s order was made in chambers
because the Associate Judge did not make any direction that Ms Muollo’s application
would be heard in open court or chambers and Ms Muollo’s substitution application was an interlocutory application, requiring compliance with r 24.4(2). Mr Garnham submits there is no form prescribed for an application under s 44 of the Act. Further, he submits, under r 7.34, the mode of hearing of an interlocutory application must be heard in chambers unless a Judge otherwise directs.
[31] The Court’s attention was also drawn to r 7.41 where a Judge may hear an oral interlocutory application and may make any interlocutory order or grant any interlocutory relief the Judge could have made or granted on a formal notice of the application. It is submitted that because there was no prescribed form, this was an interlocutory application and because the Associate Judge did not make a direction that the matter was to be heard in open court, the hearing occurred in chambers.
[32] Pursuant to r 2.3(5), the review by this Court should proceed as a full rehearing and consistent with other cases, the substitution application should be heard “de novo”3 or “afresh”.4 Mr Garnham, through his counsel, invites this Court to consider the affidavit evidence filed in support of Ms Muollo’s creditor’s application filed after the decision to substitute her as creditor. My attention was drawn to the Memorandum of Counsel for Ms Muollo dated 26 September 2016,
where Ms Muollo sought to be substituted as petitioning creditor, and that the affidavit evidence is Ms Muollo’s articulation of her claim to be a creditor of Mr Garnham. In the memorandum, counsel for Ms Muollo states that she remains a creditor of Mr Garnham for a substantial sum which will be clearly articulated in her affidavit in support of the creditor’s petition.
Ms Muollo’s position
[33] Ms Muollo submits that the matter before Associate Judge Smith was called in open court as part of the insolvency list on 18 October 2016. This was expressly done so as, at that point in time, the Commissioner was still a Petitioning Creditor against Mr Garnham. Ms Muollo submits that at the same time, the Associate Judge heard oral arguments for Mr Garnham and Ms Muollo in this matter. The Associate
Judge specifically noted that the matters raised by counsel for Mr Garnham were
3 Nagra v Creative Homes Ltd HC Hamilton CIV-2006-419-1830, 13 December 2007 at [3].
4 Commissioner of Inland Revenue v Boylan [2015] NZHC 2773, (2015) 27 NZTC 22-032 at [30].
tantamount to a defence to an adjudication order, but were not valid objections to a substitution order. The Associate Judge then made an order substituting Ms Muollo.
[34] Ms Muollo states that the order was made in open court, as it formed part of a substantive bankruptcy proceeding. As a result of this, Ms Muollo submits that the rehearing cannot be seen as a de novo or full rehearing and that only decisions made in chambers can be pursued as such.
Analysis
[35] There are two aspects to the determination of whether this decision was made in open court or in chambers. The first is the approach by the courts to the scope and nature of the Associate Judge’s decision and the second is whether the Court was open, during the oral hearing before the Associate Judge.
[36] The Court of Appeal in Sharma v Wati observed that where an Associate Judge has delivered a fully reasoned decision under the Act either in chambers or in open court, the High Court has generally refused to review the decision under s 414(1) of the Act, on the ground that an appeal to the Court of Appeal is the appropriate pathway.5 There are two cases which illustrate the application of that approach.
[37] In Prasad v Indiana Publications (NZ) Ltd, a bankrupt sought a review of the decision of an Associate Judge declining the bankrupt’s application to annul his bankruptcy.6 Dobson J, noting that the application for annulment was one that must be held in open court under s 411(2), held that the Associate Judge’s decision could not be reviewed by the High Court under s 26P(1) of the Judicature Act.7 His Honour also noted that a review of the Associate Judge’s decision under s 411(1) would not have been appropriate because the Associate Judge’s decision was a thoroughly considered decision.8 The appropriate procedure for review was by
appeal to the Court of Appeal.
5 Sharma v Wati [2012] NZCA 195, (2012) 21 PRNZ 161 at [15].
6 Prasad v Indiana Publications (NZ) Ltd HC Auckland CIV-2010-404-3333, 20 July 2011.
7 At [15] – [18].
8 At [17].
[38] In Balzat v Zhang, a debtor sought a review of the reasoned decision of an Associate Judge dismissing an application to set aside a bankruptcy notice.9 Heath J first identified an application to set aside a bankruptcy notice as an application that must be made by an interlocutory application. As there was no direction by the Court to the contrary, the matter was heard by the Associate Judge in chambers, meaning that the Court had jurisdiction to review the Associate Judge’s decision
under s 26P of the Judicature Act. Heath J noted that, if he had been asked to review the Associate Judge’s decision under s 414(1) of the Act, he would have declined to do so on the basis that there was no point in subjecting a reasoned decision to review when a right of appeal was available under s 414(2) of that Act.
[39] In the case before this Court, the application before the Court was noted on Associate Judge Smith’s record of decision as being for mention only. Following the hearing of oral submissions, the Associate Judge recorded the counsel appearing for the parties, the nature of the application seeking substitution under s 44 and a notation, which records a submission from Mr Upson for Mr Garnham, that he was not served. I have taken this as a reference to the 26 September Memorandum of Counsel filed on behalf of Ms Muollo.
[40] The record sheet then records as follows:
(a) Order substituting Paula Muollo as creditor
(b) Proceeding adjourned to 10am 15/11/2016 for “filing and service of
substituted creditors documents.”
[41] The record is then signed and dated 18 October 2016.
[42] It is plain that the Memorandum of Counsel for Ms Muollo seeking substitution was dealt with as an interlocutory application. The decision of the Associate Judge was an interlocutory decision, which was not a fully reasoned decision, as there was no evidence upon which the Associate Judge could make a
fully reasoned decision. On the authorities and the application of the High Court
9 Balzat v Zhang HC Auckland CIV-2008-404-6062, 22 September 2009.
Rules governing interlocutory applications, I find that the Associate Judge’s order
was made in chambers.
[43] In addition, at the hearing before me, inquiries had been made of the Associate Judge and the registrar who both confirmed that the matter was not dealt with in open court but was dealt with in chambers, as is evident from the notation on the file, being a hearing for mention only.
Conclusion 2
[44] I conclude that there is jurisdiction to review the Associate Judge’s decision
as it was made in chambers and was an interlocutory application under the Act.
Was the debt a qualifying debt under the Act?
[45] I turn now to consider whether the pre-requisites for substitution of a creditor under the Act had been met. Section 44 provides:
44 Substitution of creditor
(1) The court may substitute another creditor (Creditor 2) for the creditor making the application for adjudication (Creditor 1), if—
(a) Creditor 1 has not proceeded with due diligence or at the hearing of the application offers no evidence; and
(b) the debtor owes Creditor 2 $1,000 or more.
(2) In that case, Creditor 2 must file another application for adjudication, but can rely on the act of bankruptcy to which Creditor 1’s application related.
[46] In giving consideration to the requirements under s 44, I am proceeding with
the review as a “full re-hearing”, as r 2.3 of the High Court Rules provides.
[47] The Court may substitute the second creditor only if two requirements are met:
(a) only a “creditor” may be substituted under s 44 of the Act; and
(b) a qualifying creditor must be owed $1000 or more by the debtor.
[48] The substituting creditor has to file another application under s 44(1)(b), although s/he may rely on the earlier act of bankruptcy that the first creditor relied upon, where appropriate.
[49] Section 44(1)(b) refers to the terms “debtor”, “owes” and “creditor” and requires a qualifying debt of $1,000 or more to be owed by the debtor to Creditor 2 seeking substitution.
[50] Section 13 of the Act governs when a creditor may apply for a debtor’s adjudication. Of relevance to this determination, s 13 provides that the debtor must owe the creditor $1000 or more; the debt must be a certain amount; and the debt must be payable either immediately or at a date in the future that is certain.
[51] My attention was also drawn to s 232 of the Act which defines the meaning of provable debt as a debt or liability that the bankrupt owes at the time of adjudication. Under s 231(1) a provable debt is a debt or liability that a creditor of the bankrupt may prove in the bankruptcy. Although there appears to be no references in s 232 to s 13, s 13 governs the position when a creditor may apply for a debtor’s adjudication and the qualifying criteria for the debt on a bankruptcy must apply before a creditor can seek a debtor’s adjudication.
[52] The question I must resolve is whether Ms Muollo, as Creditor 2 has a qualifying debt, which meets the criteria under ss 13 and 44 of the Act.
Mr Garnham’s position
[53] First, Mr Garnham submits that the Associate Judge ought to have required evidence supporting Ms Muollo’s claim before ruling. From the outset, Mr Garnham has challenged the basis for Ms Muollo’s claim and sought a process for his opposition to be effectively voiced. The Associate Judge granted an oral application for substitution, which Mr Garnham submits was contrary to r 7.41(1) of the High
Court Rules.10 He submits that as the Order for substitution was made without any
10 Rule 7.41 of the High Court Rules 2016 concerns when, at a hearing, the Judge may agree to hear an oral application for an interlocutory order.
evidential foundation upon which to satisfy himself there was jurisdiction, the
Associate Judge had no discretion to make the Order without that jurisdiction.
[54] Secondly, Mr Garnham states that had such evidence been obtained, Ms Muollo could not have established standing to apply for substitution because her evidence does not establish that Mr Garnham owes her a qualifying debt and she was not a qualifying creditor, as ss 13 and 44(2) of the Act require. In support of this, Mr Garnham submits:
(a) Pursuant to s 13(a), there is no enforceable debt against Mr Garnham personally, and in any event there is no security agreement enforceable against Mr Garnham.
(b)Pursuant to s 13(c), even if there was an enforceable debt, the alleged debt is not a certain amount.
(c) Pursuant to s 13(d), Ms Muollo does not establish that any alleged debt is immediately payable or payable at a certain future date.
(d)In the alternative, if Ms Muollo could establish an enforceable security interest in the tiles against Mr Garnham then she would be a secured creditor of his, but would have no basis to apply as a secured creditor, given the equivalent value of the tiles and the alleged debt.11
[55] Accordingly, Mr Garnham submits that Ms Muollo was not a qualifying creditor and the Court did not have jurisdiction to make the Order. Mr Garnham seeks orders quashing the Associate Judge’s decision, dismissing Ms Muollo’s
substitution application and an order for costs.
11 Mr Garnham relies on s 14 of the Insolvency Act 2006 in support of this, which states: “The court must not make an order of adjudication on the application of a secured creditor unless the creditor has established that the amount of the debt exceeds the value of the charge by at least
$1,000.”
Ms Muollo’s position
[56] Ms Muollo opposes the application by Mr Garnham. In support of this, Ms Muollo relies on ss 13 and 44 of the Act and submits that:
(a) Mr Garnham owes the applicant a debt exceeding $1,000; and
(b)the Associate Judge heard brief oral submissions from counsel prior to making the Order.
[57] In her affidavit dated 21 October 2016, Ms Muollo describes her current creditor relationship with Mr Garnham. This includes:
(a) Ms Muollo made a loan of $300,000 to Mr Serepisos on 29 June
2011;
(b)Ms Muollo obtained security for the loan in respect of the tiles which were contained in three shipping containers in Petone;
(c) Mr Serepisos defaulted on his loans to Ms Muollo and she wants to claim her right over the tiles;
(d)the tiles were subsequently removed from the original site in Petone at the direction of Mr Garnham; and
(e) Ms Muollo obtained a description of the tiles and obtained a
“quotation” of a current market valuation of $541,167.00.
[58] Mr Haines for Ms Muollo submits that the Act does not provide a definition for the meaning of “debt” and refers instead to s 48 of the Property Law Act 2007, where “debt” includes an obligation to pay money, deliver or transfer property or not do anything. “Debtor” under the Property Law Act means a person (including a trustee) who is under an obligation to pay a debt. He submits that Mr Garnham, who is holding Ms Muollo’s property, owes a debt as defined by s 48 of the Property Law Act.
[59] In respect of the need for certainty of the value of the debt, he refers to Ms Muollo’s affidavit, where she claims there are 2,530 basaltina tiles which have a New Zealand retail price of $186 plus GST each owed to her. It is alleged that Mr Garnham holds those tiles and therefore, Mr Haines submits, the debt is certain and meets the requirements set out in the Act. He submits further that:
(a) Mr Garnham’s submissions are tantamount to a defence to a bankruptcy adjudication application and are not appropriate arguments for an order of substitution. There is no requirement for evidence to be provided in support of a substitution and notice of such a substitution need not be provided to Mr Garnham as judgment debtor.
(b)As Mr Garnham has taken the property of Ms Muollo without right and provided no explanation to the Court why he has done so, the property must be returned immediately and the debt is payable immediately.
(c) Ms Muollo is not a secured party and is the rightful owner of the property by virtue of collecting ownership, as determined by the Police, the official assignee and the liquidators of Mr Serepisos’ entities.
[60] Mr Haines submits that the Order should stand and the matter should be recalled in the insolvency list at the first available opportunity.
Analysis
[61] The evidence now before the Court, to which both parties have referred, namely, the affidavit of Ms Muollo dated 21 October 2016 and its annexures, resolves the issue quite clearly. This evidence was not before the Associate Judge when he made his decision, as Ms Muollo’s application and affidavit was filed subsequent to the Memorandum of Counsel seeking her substitution as a petitioning creditor. That Memorandum refers to a substantial sum owed to Ms Muollo, which will be clearly articulated in her affidavit in support of her petition.
[62] From the evidence filed, the following facts emerge:
(a) The debt claimed by Ms Muollo is not a certain amount. The notice of intention dated 13 May 2016 asserts the sum owed is $300,000.00. However, the affidavit of Ms Muollo dated 21 October 2016 reveals that the claim is for the return of 2,530 tiles in the sum of
$541,167.00.
(b)There is no debt which is payable either immediately or in the near future but rather that “property”, namely the tiles, is sought to be returned.
(c) The value of those tiles is either $300,000.00 (being the original
security to Mr Serepisos) or the “retail price” of the tiles at
$541,167.00 (inclusive of GST).
(d)There is no enforceable debt against Mr Garnham or any enforceable security against him or the company in which he had an interest, which is in liquidation.
(e) The security of $300,000.00 is enforceable against Mr Serepisos.
(f) There is no creditor/debtor relationship between Ms Muollo and
Mr Garnham.
(g) There is an assertion that Mr Garnham has possession of the tiles.
[63] From the above, it is clear that s 13 of the Act is not satisfied and the criteria for a creditor to make an application for a debtor’s adjudication have not been met and cannot be met, on the present facts and the evidence. There is no debt.
[64] This is not to prevent Ms Muollo from establishing a claim against Mr Garnham in respect of the tiles, by way of damages as a remedy for conversion or an order for specific restitution. However, neither of those remedies satisfy the
criteria for a creditor to apply for a debtor’s adjudication. It follows that the pre- requisites under s 44 for substitution of a creditor cannot be met.
[65] As a further consideration, s 14 of the Act provides that the Court must not make an order of adjudication on the application of a secured creditor, unless the creditor has established that the amount of the debt exceeds the value of the charge by at least $1000. In this case, Ms Muollo seeks the return of the tiles, which exceeds the value of her $300,000.00 security by a sum in excess of $240,000.00.
[66] Mr Upson submits, in the alternative, that if Ms Muollo could establish an enforceable interest against Mr Garnham, she would become a secured creditor of Mr Garnham’s as “a person entitled to a charge on or over property owned by a debtor”, in this case, the tiles. If she was successful in establishing an enforceable interest against Mr Garnham, Ms Muollo would have no basis to apply as a creditor, given the alleged equivalent value of the tiles and the debt which she seeks.
[67] I am not satisfied on the evidence, that Ms Muollo had standing as a creditor, to whom Mr Garnham owed a qualifying debt under the Act. The reliance placed upon the definition of debt under s 48 of the Property Law Act by Mr Haines is misplaced, in the context of the requirements for adjudication and bankruptcy. The consequences of adjudication in bankruptcy are significant and the qualifying debt by a creditor must comply with the relevant sections under the Act. In this case, s 13 of the Act provides the threshold for a creditor applying for a debtor’s adjudication and in my view, this has not been met by Ms Muollo.
[68] The importance of the conditions which govern a creditor’s bankruptcy petition and the meaning of a debt for a liquidated sum was emphasised in McGuiness v Norwich and Peterborough Building Society.12 The English Court of Appeal confirmed that a debt for a liquidated sum included a contractual liability where the amount due was to be ascertained in accordance with a contractual formula or contractual machinery which, when operated, would produce a figure.
Claims in tort were invariably unliquidated and the unliquidated nature of the claim excludes it from being a qualifying debt for a petitioning creditor. The Court said:13
These authorities indicate and I think establish that a debt for a liquidated sum must be a pre-ascertained liability under the agreement which gives rise to it. This can include a contractual liability where the amount due is to be ascertained in accordance with a contractual formula or contractual machinery which, when operated, will produce a figure. Ex parte Ward is the obvious example of that. Claims in tort are invariably unliquidated because they require the assistance of a judicial process to ascertain the amount due by way of damages. In some cases the calculation of the award will be straightforward and obvious but the unliquidated nature of the claim excludes it from being a good petitioning creditor’s debt which satisfies the requirements of s 267.
[69] The authorities reinforce the importance of the qualifying debt being a liquidated amount and enforceable immediately or in a date in the future. There are two problems for Ms Muollo. The first is that her claim is for an unliquidated sum and is more properly founded in tort. The second is that although she has security for $300,000.00 taken in the form of tiles with a retail value of $541,167.00, the security is enforceable against Mr Serepisos not Mr Garnham. If, however, Mr Garnham has taken possession of tiles which should be in the possession of Ms Muollo, she needs to take an action in tort to recover them or claim their value.
Conclusion 3
[70] Ms Muollo had no standing as a creditor to apply for adjudication, as she does not have an enforceable debt, being neither a sum certain or payable immediately or in the near future, against Mr Garnham.
Form of relief
[71] For Ms Muollo, Mr Haines submits that for substitution of creditor orders, no evidence is required and nor is there a requirement that notice of the substitution application needs to be provided to the judgment debtor. In support of this submission, Mr Haines relies on New Zealand Casing Company Finance Ltd v Henderson, where Master Gambrill confirmed that the Court has the overall
jurisdiction to decide whether a creditor is permitted to be substituted, when the original creditor withdraws.14
[72] Mr Haines submits that Associate Judge Smith exercised his discretion as he was entitled to do. The creditor did not have to serve any notice and there is no evidence required on the making of a substitution order. He submits that the matters raised by the applicant go to the defended hearing of the substitution order and until there is a determination of the defended hearing, the substitution should stand.
[73] There is authority, decided under the now repealed Insolvency Act 1967, to the effect that the failure to provide evidence in support of a substitution application does not prevent the order being made. In Griffin (a debtor),15 Gallen J considered
the Australian authorities16 and held that substitution of creditors may be made on an
application not supported by evidence and that there was no requirement for the giving of prior notice to the debtor, because there was a theoretical possibility that the petitioning creditor might withdraw at the last minute or be persuaded to do so by an unexpected payment.
[74] The facts in Griffin can be distinguished from those in this case. In Griffin, the debtor paid the debt of the original creditor’s petition and the Official Assignee sought substitution for a debt which was a judgment debt. Mr Griffin did not appear and there was no argument in opposition to the substitution of the Official Assignee.
As Gallen J noted:17
In the absence of any opposition from the debtor Mr Griffin, who was neither present or represented, an order was made substituting the Official Assignee … The order made, apart from references to the payments of costs and disbursements, simply ordered that the Official Assignee at Auckland in his capacity as liquidator of Eastern Perfumers Co Ltd (in liquidation) be substituted as petitioning creditor in the proceedings.
[75] Mr Griffin did not deny or dispute the statements in the petition but considered he only had to oppose the order for substitution. He did not comply with
14 New Zealand Casing Company Finance Ltd v Henderson HC Auckland B1922-IM/99, 2 August
2000.
15 Re Griffin (a debtor) [1985] 2 NZLR 621 (HC) at 625.
16 Hyams v Elder Smith Goldsborough (1976) 133 CLR 637; Dean v QUF Industries Ltd (1981) 51
FLR 317.
17 At 622.
the provisions of the former r 55 of the Insolvency Rules 1970 specifying the statements in the petition he intended to deny or dispute.
[76] It should not be considered a general rule, that evidence is never required or that notice need not be given on an application for substitution. In Hyams, the High Court of Australia held that although a creditor seeking an order of substitution must claim the existence of a debt of the required amount as at the date of the active bankruptcy, the debt did not have to be in existence at that time.18 However, the Court cautioned that if the debt was not in existence at the appropriate time, the Court should not order the substitution. The Court said:19
Of course, if it appears on the face of the material he produces in support of his application that his debt was not in existence at the appropriate time the Court should not order the substitution.
[77] More recent authority demonstrates that the Court does inquire into the factual basis for substitution, where the jurisdiction is uncertain.20
[78] In Norfolk Financial Management Ltd v King, Associate Judge Matthews adjourned the application for substitution by a creditor, who was given a period within which to file evidence in support of its status as a creditor of the debtor.21 The qualifying debt was for legal fees, which were the subject of review by the Legal Complaints Review Officer and the substitution application was withdrawn. Another creditor was substituted for a debt that was the amount of a sealed order for costs and disbursements made by the High Court.
[79] In Body Corporate 68792 v Memelink there was a defended hearing for substitution.22 In New Zealand Casing Company Finance Ltd, the Court referred to cases where there had been argument as to a sum alleged to be owing, where the
Court can and has refused substitution. The Court in New Zealand Casing Company
18 Hyams v Elder Smith Goldsbrough Mort Ltd (1976) 133 CLR 637 (HCA).
19 At 639.
20 Ronaldson v Dominion Freeholds Ltd [1981] 2 NZLR 132 (CA) at 137-138; Jaffe v Stock HC Auckland B1360-IM99, 27 April 2000 at [2], [3] and [11] and Norfolk Financial Management Ltd v King [2014] NZHC 1013 at [3] – [5].
21 Norfolk Financial Management Ltd v King, above n 20.
22 Body Corporate 68792 v Memelink [2016] NZHC 1906 at [4].
Finance Ltd declined the applications for substitution on the basis of the evidence adduced.23
[80] For Mr Garnham, it is submitted that it is wrong in principle for the substitution order to remain, subject to a defended hearing. Mr Upson argues that the prejudice should not be placed upon the debtor in circumstances where there was an insufficient basis for the substitution order to have been made in the first place. In this case, because there was no relationship between the substituted creditor, Ms Muollo and Mr Garnham, there was no debt provable against Mr Garnham or payable.
[81] Mr Upson also relies on r 7.41 of the High Court Rules, stating that the judge may agree to hear an oral application for an interlocutory order if all parties consent to the orders sought or, because of the nature of the order sought, no party would be unduly prejudiced by the absence of a formal notice.24
[82] In this case, Mr Upson appeared for Mr Garnham and submitted both in writing prior to the hearing and orally that Mr Garnham disputed the alleged debt; denied that he was a creditor of Ms Muollo and opposed the application for substitution. He submitted also that there needed to be a sufficient factual foundation for the decision to substitute Ms Muollo. In his memorandum of
17 October 2016, prior to the hearing before Associate Judge Smith, Mr Upson submitted:
Ms Muollo has had ample opportunity to provide support for the alleged debt, but has not done so.
[83] On 18 October 2016, the decision of the Associate Judge was made without the evidence now available to the Court and without hearing from the parties about the nature or substance of the alleged debt. Although the earlier New Zealand and Australian authorities have given rise to the practice of not providing the debtor with notice of a substitution application or substantiating the debt with an evidential
foundation, those authorities should be approached with caution.
23 New Zealand Casing Company, above n 14.
24 High Court Rules 2016, r 7.41 (a) and (d).
[84] The more recent authorities reflect the change in legislative provisions and a more cautious approach to substitution of creditors in a bankruptcy petition. Further, if reliance is to be placed on the earlier authorities, their particular facts and legislative provisions should not be divorced from their findings.
Conclusion 4
[85] In these circumstances, I consider that it is inappropriate that the order for substitution remain, given my conclusion that Ms Muollo had no standing as a creditor to apply for adjudication under the Act.
Summary of conclusions
[86] I am satisfied that:
(a) By virtue of the transitional provisions of the Senior Courts Act 2016, the jurisdiction of the High Court to review an Associate Judges decision is preserved. Thus, r 2.3 of the High Court Rules applies.
(b)There is jurisdiction for the High Court to review the Associate Judge’s decision as it was made in chambers and on an interlocutory application under the Act.
(c) Ms Muollo had no standing as a creditor to apply for adjudication, as she does not have an enforceable debt. There was no certain amount that was payable immediately or in the near future, against Mr Garnham.
(d)It is inappropriate that the Order for substitution remain, given that Ms Muollo had no standing as a creditor to apply for adjudication under s 44 of the Act.
Result
[87] The decision dated 18 October 2016, substituting Ms Muollo as a creditor, pursuant to s 44 of the Act, is quashed.
[88] There will be an order of costs for the judgment debtor on a 2B basis.
Cull J
Solicitors:
Q S Haines, Simpson & Co
J W Upson, Chapman Tripp
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