Myriad International Limited v Herzog
[2018] NZHC 1690
•10 July 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA
TĀMAKI MAKAURAU ROHECIV 2017-404-002864
[2018] NZHC 1690
BETWEEN MYRIAD INTERNATIONAL LIMITED
Judgment Creditor
AND
LAWRENCE HERZOG
Judgment Debtor
Hearing: 27 June 2018 Appearances:
J Ropati for the Judgment Creditor
L Herzog in person the Judgment Debtor
Judgment:
10 July 2018
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
This judgment was delivered by me on
10.07.18 at 3:30pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
MYRIAD INTERNATIONAL LIMITED v L HERZOG [2018] NZHC 1690 [10 July 2018]
Introduction
[1] On 2 May 2017 Associate Judge Doogue granted an application by the judgment creditor, Myriad International Ltd (MIL), to set aside a statutory demand issued by the judgment debtor, Mr Lawrence Herzog. Costs were subsequently awarded against Mr Herzog in the sum of $19,047.00.1
[2] Mr Herzog has failed to pay the costs award and a bankruptcy notice has been issued against him. In these proceedings, he seeks to set aside the bankruptcy notice on the grounds that he has a cross claim under s 17 of the Insolvency Act 2006 (the 2006 Act). In the alternative, Mr Herzog seeks to have the Court exercise its inherent jurisdiction to set aside the bankruptcy notice on the grounds that the costs award is unsafe, having been improperly obtained and calculated on a wholly erroneous basis.
[3] The critical issue I must determine is whether Mr Herzog has a cross claim of true substance which he could not have raised as a defence in the proceedings to set aside the statutory demand. I will also briefly address the issue of the exercise of my inherent jurisdiction in relation to the issue of the calculation of the costs award.
Relevant legal principles
[4]Rule 24.10 of the High Court Rules provides:
Setting aside bankruptcy notice
(1)If an application to set aside a bankruptcy notice cannot be heard until after the expiration of the time specified in the notice as the day on which the act of bankruptcy will be complete, the time is treated as extended until the application has been determined.
(2)An act of bankruptcy is not committed by reason only of non- compliance with the notice until the application has been determined.
[5]Section 17(1)(d) of the 2006 Act provides:
17 Failure to comply with bankruptcy notice
(1)A debtor commits an act of bankruptcy if—
1 Herzog v Myriad International Ltd [2017] NZHC 858.
…
(d)the debtor has not, within the time limit specified in subsection (4), —
(i)complied with the requirements of the notice; or
(ii)satisfied the Court that he or she has a cross claim against the creditor.
[6] Section 17(7) of the 2006 Act defines a cross claim as one that must be equal to or greater than the judgment debt and one which the debtor could not use as a defence in the proceedings in which judgment was obtained.
[7]The judgment debtor must establish the following:
(a)Demonstrate that he or she has a cross claim of true substance which he or she genuinely proposes to pursue;2
(b)Establish that the cross claim is equal to or is greater than the judgment debt;
(c)Establish that he or she could not, by law, use the cross claim as a defence in the proceedings in which the judgment debt is based;3
(d)If he or she relies on factual inability to set the cross claim, he or she must establish some cogent circumstances because the primary emphasis is on the legal nature of the impediment.4
Background facts
[8] The background facts are comprehensively set out in the judgment of Associate Judge Doogue of 2 May 2017,5 and I adopt them for the purposes of this judgment.
2 Sharma v ANZ Banking Group Ltd (1992) 6 PRNZ 386 at 389.
3 Clark v UDC Finance Ltd [1985] 2 NZLR 636 at 639-640.
4 Hardie v Booth [1992] 1 NZLR 356 at 362.
5 Herzog v Myriad International Ltd, above n 1.
[9] Myriad International Ltd owns a paper business. Mr Phillip Jones is the sole director. There are 100 shares in MIL. One share is owned by Mr Jones and 99 are owned by the Arnside Family Trust (Arnside). Arnside holds 50 of the shares on trust for Mr Herzog.
[10] Mr Herzog says that since October 2016 there has developed a severely fractured business relationship between himself and Mr Jones. This has led to various Court proceedings, including the successful application by MIL to set aside the statutory judgment. Mr Herzog says that matters between them are deadlocked.
[11] Mr Herzog has brought liquidation proceedings against MIL contending that it is insolvent. In his amended statement of claim of 4 August 2017, he seeks in the alternative, orders under s 174 of the Companies Act 1993 on the grounds that, the alleged conduct of Mr Jones, in favouring his own personal interests over those of the company, constitute prejudicial conduct towards Mr Herzog as a shareholder.
[12] The liquidation proceedings and those under s 174 of the Companies Act have been set down for a three-day trial beginning 10 September 2018.
[13] In December 2017 Mr Herzog filed proceedings in the District Court against MIL seeking judgment in the sum of $163,000.00. It is alleged that MIL has failed to pay invoices to Mr Herzog for consultancy services and a dividend of $36,550.00. In the statement of claim Mr Herzog alleges that in October 2015 he and Mr Jones on behalf of MIL agreed to a remuneration agreement whereby his annual wage from MIL would be 20 percent of Mr Jones’ wages.
[14] The District Court proceedings have never been served on MIL. Mr Herzog says there is no utility in doing so and the better approach is for all outstanding disputes between the parties to be resolved in the context of the upcoming liquidation hearing.
[15] In support of his contention that he has genuine cross claims under s 17 of the 2006 Act, Mr Herzog relies on the following:
(a)An unsatisfied order for costs in his favour against MIL dated 10 March 2017 in the sum of $5,707.50;6
(b)A claim against MIL in the sum of $36,550.00 for an outstanding dividend payment declared on 18 May 2018;
(c)A claim against MIL for unpaid consultancy invoices in the sum of
$80,500.00; and
(d)A claim against MIL in the sum of $23,031.00, being 50 percent of the dividend declared by MIL in the 31 March 2014 financial year.
The opposition by MIL
[16] In opposing the application to set aside the bankruptcy notice, MIL contends that Mr Herzog has failed to meet the criteria in s 17 of the 2006 Act – i.e. he has no cross claim of true substance and has not demonstrated that he was unable as a matter of law to raise the claims as a defence to the proceedings heard before Associate Judge Doogue in March 2017.
[17] Mr Ropati on behalf of MIL submitted that Mr Herzog has not sought a stay of execution of the costs judgment and that he has failed in his attempt to set aside the statutory demand. He also argued that a further statutory demand issued against MIL by Mr Herzog has gone stale and cannot be relied upon by him to demonstrate that he has a cross claim. Mr Ropati further argued that as a consequence of the conclusion of Associate Judge Doogue that there was a substantial dispute between the parties (giving rise to the statutory demand being set aside) that there was no debt owing by MIL to Mr Herzog.
[18] Mr Ropati submitted that Mr Herzog is attempting to rerun the same failed claims that he made in the proceedings before Associate Judge Doogue and that the contention that MIL owes him a substantial amount of money lacks substance or merit.
6 This follows a successful application by Mr Herzog against MIL for the appointment of an auditor under s 179 of the Companies Act 1993 (Herzog v Myriad International Ltd CIV 2017-404-215).
[19] Mr Ropati was critical of Mr Herzog’s failure to serve the District Court proceedings, noting that this demonstrates that he has no genuine desire to prosecute them to conclusion.
[20] In relation to the forthcoming liquidation proceedings, MIL argues that Mr Herzog has no standing to bring those proceedings as a creditor, given that the statutory demand has been set aside. MIL contests Mr Herzog’s assertion that he is a shareholder in MIL and say that there is no basis to the s 174 Companies Act 1993 proceedings.
Analysis and decision
[21] Mr Herzog, who represented himself, focussed much of his argument on what he says was a fundamentally flawed costs award. He says that the sealed costs order does not express what was decided and intended by the order made by Associate Judge Doogue.
[22] However, I find that the critical issue in this case is whether the bankruptcy notice should be set aside on the statutory grounds under s 17 of the 2006 Act. That depends in large part on a careful analysis of the findings of Associate Judge Doogue and a consideration of the particular proceeding that His Honour dealt with at that time.
Are the cross claims Mr Herzog makes of true substance and which he genuinely intends to prosecute?
[23] The statutory demand at issue in the proceedings before Associate Judge Doogue was a demand by Mr Herzog for $40,000.00 plus GST, being allegedly an unpaid invoice for consultancy services provided by Mr Herzog.
[24] The undisputed evidence before Associate Judge Doogue was that Mr Herzog had been paid $40,000.00 by MIL plus GST in 2016 for the 2015 financial year,7 but that subsequent invoices issued, had not been paid.
7 Herzog v Myriad International Ltd, above n1 at [16].
[25] Although Associate Judge Doogue held that there was a substantial dispute between the parties (and on that basis the statutory demand was set aside), his judgment analyses in some depth the basis of Mr Herzog’s claims against MIL. I find that it can properly be inferred from that judgment that Mr Herzog has genuinely triable cross claims against MIL. I find also that Mr Herzog genuinely intends to prosecute them.
[26] At [32] of His Honour’s judgment, Associate Judge Doogue refers to a draft agreement forwarded to the parties by Ms Quinn, a solicitor, which provided under the heading, “Remuneration of Lawrence”, that Mr Herzog should receive the minimum sum of $40,000.00 per annum or 20 percent of the total sum received by Phillip [Mr Jones] in each year. In relation to the account that Ms Quinn gives, Associate Judge Doogue observed:8
The account that Ms Quinn gives favours the view that there were real matters of substance still not agreed upon when the parties met with her. On the other hand, Ms Quinn also says that the meeting ended on the basis that she would prepare a draft agreement. It is difficult to understand why she would be instructed to do that if the parties had not come to at least some agreement in principle concerning remuneration.
[27] At [78], Associate Judge Doogue makes the important finding that he was not deciding the case on its merits. His Honour’s task was to assess whether there were arguable contentions either way and, if there were, to accept that coming to a conclusion which balances the various arguments must be left to a trial court.
[28] I also note that at [39] Associate Judge Doogue records that there is no dispute by Mr Jones that the parties are equal shareholders in MIL. The footnote to the judgment records that Mr Herzog is a beneficial owner of 50 percent of the shares and that these are held on his behalf by the Arnside Family Trust. This, in part at least, is the basis for Mr Herzog’s s 174 Companies Act 1993 proceedings.
[29] I acknowledge that much of the judgment of Associate Judge Doogue is focussed on casting some doubt on the claims of Mr Herzog. However, His Honour’s findings were made in the context of an assessment of whether MIL was able to
8 At [65].
demonstrate that there was a substantial dispute between the parties and in relation to one particular statutory demand, the subject of the proceedings. Ultimately he concluded, as is apparent at [78] of His Honour’s judgment, that there were arguable contentions both ways. I reject the contention advanced by Mr Ropati that because the statutory demand was set aside, there is no debt owing to Mr Herzog. In any event, the statutory demand at issue is not the only cross claim that Mr Herzog makes.
[30] Associate Judge Doogue further held that a critical aspect of the dispute between the parties was whether Mr Herzog actually did anything which would justify the payment of remuneration. In the course of addressing that issue, His Honour refers at [74] to documentary evidence which provides support for Mr Herzog’s claim (at least in part) that he took an active involvement in the management of the company’s affairs.
[31] On that issue Associate Judge Doogue concluded that in order to decide whether or not Mr Herzog and MIL had come to an agreement that he would be paid an annual salary, the Court would need to get an accurate picture of the extent of Mr Herzog’s commitment of time and effort. His Honour observed that if these were found to be at quite a high level, it would seem unlikely that they would have been provided on a voluntary basis.9
[32] In addition to the findings of Associate Judge Doogue, Mr Herzog has filed substantial affidavits supporting the various cross claim claims that he makes. He is a barrister of this Court and has said under oath that he had a legally binding agreement with MIL for the payment of his services. He instructed counsel to defend the application to set aside the statutory demand and has taken steps to bring on his application for liquidation of MIL to a hearing.
[33] The alleged debts that he says MIL owes him and the dysfunction between he and Mr Jones as shareholders, appear to be genuine claims that Mr Herzog intends to prosecute to conclusion.
9 At [77].
[34] In all of the circumstances I conclude that the cross claims he advances are genuinely triable. As the Court of Appeal held in Robertson v ASB Bank Ltd10 it is not necessary to go so far as to say that the claim for an amount equal to or greater than that shown on the bankruptcy notice is probable, or even likely, to succeed.
[35] It is possible, as Mr Ropati submitted, that Mr Herzog has exaggerated the extent of the debt that MIL owes him. However, it is genuinely arguable that the amount at issue will exceed the relatively modest sum of the costs award of
$19,047.00.
Was Mr Herzog able to raise his cross claims as a defence in the proceedings before Associate Judge Doogue?
[36] The proceedings before Associate Judge Doogue involved an application to set aside the statutory demand for $40,000.00 plus GST. The substantive liquidation proceedings and the proceedings based on s 174 of the Companies Act 1993 were not dealt with. As indicated, they are proceeding to trial in September 2018. Indeed, His Honour noted that the parties did not expect that the substantive liquidation application would be dealt with by him.11
[37] As discussed above, in the course of considering the critical issue of whether there was a substantial dispute about the 2016 invoice, Associate Judge Doogue did to some extent consider some of the claims that Mr Herzog now relies on as cross claims for the purposes of s 17. However, His Honour only considered those matters to the extent necessary to determine the critical issue of whether, in relation to one particular statutory demand, there was a substantial dispute. In the context of those limited proceedings, Mr Herzog was not legally able to advance the various cross claims he now relies upon as a defence. In no way can it be said that he has had a hearing on the substantive merits of those cross claims. These remain live issues between the parties which the Court will need to consider at the trial of the substantive liquidation application in September 2018. I reject the contention of Mr Ropati that Mr Herzog is rerunning the same claims. They may have been mentioned in the proceedings
10 Robertson v ASB Bank Ltd [2014] NZCA 597 at [31].
11 Herzog v Myriad International Ltd, above n 1, at [82].
before Associate Judge Doogue but no binding determinations were made and no opportunity arose to have them determined.
[38] The reason Mr Herzog has brought separate District Court proceedings is, as he submitted, an acknowledgement that the decision of Associate Judge Doogue did not in any substantive way resolve his many cross claims. That has not occurred thus far in the liquidation. Mr Herzog has not had the opportunity, as yet, to prosecute them to conclusion.
[39] While it is unusual that the District Court proceedings have not thus far been served on MIL, the concerns that Mr Herzog has about the solvency of MIL have obviously caused him to question the utility of doing so. In the circumstances, I do not infer from the failure to have served the District Court proceedings that Mr Herzog has no genuine desire to prosecute them to conclusion. Mr Herzog’s best option may well be to participate in the liquidation (if successful) as a creditor. Understandably he wishes all matters to be resolved at the upcoming liquidation hearing.
[40] The position of Mr Herzog is akin to a judgment debtor who has a costs award against him arising from an interlocutory hearing, and where the substantive claims involving greater sums at issue, have not yet been heard or determined. The policy behind s 17 is that where those undetermined claims are genuinely triable, the bankruptcy proceedings should not be permitted to continue; the net position of the parties first needs to be determined.
[41] I conclude therefore that Mr Herzog has cross claims as defined in s 17(7) of the 2016 Act – i.e. these are claims which he could not legally have raised as a defence in the proceedings giving rise to the judgment debt.
Alternative submission – inherent jurisdiction
[42] In the circumstances, it is not necessary for me to address the issue of whether I should exercise my inherent jurisdiction to set aside the bankruptcy notice on the grounds that the costs award of $19,047.00 is unsafe.
[43] In the proceedings to set aside the statutory judgment (CIV 2016-404-2625) Mr Herzog has made an application pursuant to r 11.10(1)(b) for a correction of the sealed costs order. That issue will be dealt with separately.
Result
[44]The application to set aside the bankruptcy notice is granted.
Costs
[45] Mr Herzog has been successful on his application to set aside the bankruptcy notice, but he was of course self-represented. In accordance with the Court of Appeal decision Joint Action Funding Ltd v Eichelbaum12 he is not entitled to costs.
[46] However, if there are matters relevant to costs and the parties are unable to agree, memoranda may be filed within seven days.
Associate Judge P J Andrew
12 Joint Action Funding Ltd v Eichelbaum [2017] NZCA 249.
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