National Institute of Water and Atmospheric Research Limited v Shallard

[2020] NZHC 3148

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2019-485-356

[2020] NZHC 3148

BETWEEN

NATIONAL INSTITUTE OF WATER AND ATMOSPHERIC RESEARCH LIMITED
Judgment Creditor

AND

BRUCE DILLON SHALLARD

Judgment Debtor

CIV-2019-485-358

BETWEEN

NATIONAL INSTITUTE OF WATER AND ATMOSPHERIC RESEARCH LIMITED
Judgment Creditor

AND

JOCELYN MARY SHALLARD

Judgment Debtor

Hearing:	27 November 2020
Appearances:	N Malarao and M Hori Te Pa for judgment creditors R Pinny for judgment debtors
Judgment:	3 December 2020

JUDGMENT OF ASSOCIATE JUDGE JOHNSTON

[1]    Before the Court for determination is an application, or, rather, two applications, by the National Institute of Water and Atmospheric Research Ltd pursuant to s 36 of the Insolvency Act 2006 for orders adjudicating Mr Bruce and Mrs Jocelyn Shallard bankrupt. The central issue is whether the Court should adjudicate Mr and Mrs Shallard bankrupt or exercise its discretion to refrain from doing so at this stage.

NATIONAL INSTITUTE OF WATER AND ATMOSPHERIC RESEARCH LIMITED v SHALLARD [2020] NZHC 3148 [3 December 2020]

[2]    It is unnecessary to go into the background in any detail. It is sufficient to record that on 9 April 2019, following an undefended formal proof hearing, Ellis J entered default judgments against Mr and Mrs Stallard for approximately $1.6 m. The claims arose out of a business transaction formally between Mr and Mrs Stallard in their capacities as the trustees of the Stallard (No. 2) Trust and NIWA. I say “formally” because this trust structure stands behind a business that trades as “Bruce Shallard & Associates” and is the vehicle through which Mr Shallard does business. Mr Shallard describes his business as involving “aquaponics” which he says “combine aquaculture and hydroponic vegetable production”. In or around July 2015 NIWA was engaged by Mr Shallard in relation to a project in the United Arab Emirates. NIWA performed the services it was obliged to perform. It rendered invoices, the final three totalling approximately $2.4 m in May 2018. Mr Shallard paid a proportion of these, but the lion’s share have never been paid. NIWA’s claim was for the unpaid balance.

[3]    Between May 2018 and July 2019, NIWA sought to engage with the Shallards to give them an opportunity to make arrangements to repay the debt.

[4]    Summarising the extensive affidavit evidence before the Court from both parties (which runs to three volumes), the position would seem to be that over that period NIWA’s Chief Financial Officer and Company Secretary, Mr Patrick Baker, and others engaged with Mr Shallard in an attempt to resolve matters. In December 2018 the parties reached a settlement. This involved NIWA making substantial concessions. However, the Shallards did not make the payments they had agreed to make with the result that the settlement agreement was cancelled. Further negotiations followed but the parties did  not  reach a second settlement  agreement.  Throughout  this time,  Mr Shallard held out the prospect of his business seeing to fruition a number of projects, which he pitched as having good prospects of success, and promising to pay the outstanding debt. None of these projects have come to fruition as yet. Essentially, NIWA lost confidence in Mr Shallard and commenced recovery proceedings. Having secured judgments against the Shallards, NIWA commenced these bankruptcy proceedings.

[5]    That brings me to the essential issue before the Court which, as framed by counsel for both parties, is whether this is an appropriate case in which the Court

should exercise its discretion pursuant to s 37 of the Insolvency Act to refuse to make an order adjudicating the Shallards bankrupt, or, pursuant to s 38, to halt the proceeding on terms in either case. There is no contest that NIWA is able to make out the grounds for adjudications and that the circumstances are such as to entitle the Court to make such orders.

[6]    On what basis, then, is it contended by the Shallards that the Court should decline to make the orders sought or halt the proceedings?

[7]    In opposing the orders sought by NIWA, Ms Pinny for the Shallards referred me to the Court of Appeal’s judgment in Baker v Westpac Banking Corporation1 in which Richardson J said:

The principles governing the exercise of the discretion under s 26 to grant or refuse an order of adjudication in bankruptcy are well settled and have been discussed by this court in recent years in Ellis v NZI Finance Limited (CA)253/89 judgment 24 July 1989) and McHardy v Wilkins & Davies Marinas Limited (in receivership) (CA54/93 judgment 7 April 1993). It is proper for the court to consider, not only the interests of those directly concerned – the petitioner, other creditors, the debtor – but also the wider public interest.  A creditor who establishes the jurisdictional facts set out in  s 23 is not automatically entitled to an order. On the other hand, it is for an opposing debtor to show why an order should not be made. The court will give proper weight to the commercial judgment of the petitioner but the oppressive use of the bankruptcy process may be a ground for refusing an order. Another ground may be the undoubted absence of assets but that will not necessarily preclude an order given the range of interests involved including the public interest in the continuing oversight of a bankrupt’s affairs and the disqualifications that go with bankruptcy. In the end the court must balance the various considerations relevant to the case and determine whether the debtor has succeeded in showing that an order ought not to be made. On appeal the court is necessarily in a different position from the Master or Judge in the High Court. An appeal against the exercise of a statutory discretion cannot succeed unless it is established that the court from which the appeal was brought erred in principle or took into account irrelevant considerations or disregarded relevant considerations or, more generally, that its ultimate decision was plainly wrong.

[8]    Ms Pinny also referred me to Rabobank Australia Ltd v Tootell2 where Associate Judge Osborne (as he was) emphasised that the ultimate issue for the Court

1      Baker v Westpac Banking Corporation CA 212/92, 13 July 1993 at 4.

2      Rabobank Australia Ltd v Tootell [2013] NZHC 2975.

is whether it is just and equitable to decline to make an order or whether there is any other reason for declining to do so.3

[9]    I accept that those are the  leading  authorities,  and  I  did  not  understand Mr Malarao to contend otherwise.

[10]   On those bases, Ms Pinny invited the Court to have regard to a number of points that she collected under five headings.

[11]   Ms Pinny submitted first that adjudicating the Shallards bankruptcy would be a pointless exercise. In relation to this she said that in the exchanges between the parties the Shallards had provided full disclosure of their financial position. She submitted that their only current unsecured indebtedness were these judgment debts. She contended that the financial information demonstrated that the Shallards are not in a position immediately to pay the amount of the debt. She emphasised that their only income is New Zealand Superannuation and a small private pension Mr Shallard receives so that their annual income is something like $55,000 which is insufficient to meet their living expenses. She acknowledged that Mr and Mrs Shallard had interests in two family trusts other than the Shallard (No. 2) Trust and submitted that “there is no prospect of assets from these trusts being available to their creditors in a bankruptcy”. Therefore, Ms Pinny submitted, bankrupting the Shallards would not advance NIWA’s position in terms of the recovery of the judgment debts.

[12]   Second, Ms Pinny submitted that the Shallards’ bankruptcy would also foreclose any prospect of them pursuing business opportunities that they have and which would enable them to meet their obligations to NIWA. In this context, she elaborated in some detail on the business opportunities which the Shallards say they have. No useful purpose would be served by reiterating those descriptions here. The Court is in no position to make any assessment as to how real or valuable these opportunities are, and in any event, I am not persuaded that it is the Court’s role to do so. It is sufficient to say that these are the very opportunities which the Shallards have been talking about with NIWA since May 2018, and, despite Mr Shallard’s obvious optimism, there is no certainty that they will ultimately bear fruit.

3      At [9] and [76].

[13]   Ms Pinny’s third point was that there is no public interest in the Shallards being adjudicated bankrupt. As I understood this submission it was based primarily on the contention that the Shallards have been open about their financial position, and that there is nothing for the Official Assignee to investigate.

[14]   The fourth point Ms Pinny advanced concerned the property owned by the Shallard (No. 1) Trust in which the Shallards live. Essentially she contended that whilst NIWA may be frustrated that it cannot have recourse to this property, the position is that trustees of the Shallard (No. 1) Trust in their capacity as such, are different from the trustees of the Shallard (No. 2) Trust, and it is clear that the assets owned by the former are not available to the creditors of the latter. That may or may not be the case. But the argument advanced on behalf of NIWA is not that the organisation is entitled to have recourse to that property; simply that the circumstances of the Shallards, and the trust entities with which they are associated, should be investigated by the Official Assignee in the context of their bankruptcies.

[15]   The final point advanced on behalf of the Shallards by Ms Pinny concerns their alternative contention that the proceeding should be halted pursuant to s 38 of the Insolvency Act. This is the argument that the Court should stay the proceeding temporarily to give the Shallards further time to pay their debts. I do not see this as an independent issue. It appears to me that precisely the same considerations should apply. The essential question is whether or not the Court should make the orders sought by NIWA immediately. I can see a distinction between the issue arising under s 37, whether the Court should refuse to make the order sought by NIWA altogether and the issue that might arise under s 38 whether the Court should halt the proceeding temporarily. But the issue would appear to me to arise only where there is an immediate and absolute evidence of the availability of funds.

[16]   Ms Pinny referred me to two cases that she submitted demonstrated the courts making orders akin to those being sought by the Shallards in comparable circumstances.

[17]   By  some  margin,  the  earlier  of  these  cases  was  Re  Otway.4  There,   Lord Esher M.R. concluded that the Court has a discretion as to whether or not to make an order adjudicating a judgment debtor bankrupt and may do so when it concludes that an order would be vain. Of course the scope of this Court’s discretion is now largely dealt with in the legislation. I certainly accept that a relevant factor in any application is likely to be whether any useful purpose will be served by an adjudication. Beyond that the view I take is that Re Otway is far removed from this case and I have not derived any great assistance from it.

[18]   That case involved a life-interest the debtor was entitled to under his mother’s will. He had no other property and the petitioning creditor was found to have petitioned as a means of endeavouring to extort money from the debtor. And, because the only asset was an interest that would automatically terminate on bankruptcy, the effect of bankruptcy in that case would have been to render valueless the only asset that might have otherwise been available to creditors. In light of these factors it is hardly surprising that the order was set aside on appeal. I am also mindful of the observation in Re Leonard – just a year after Re Otway – that:5

The case of In re Otway is no authority for the proposition that the fact of there possibly or probably being no assets to be administered in bankruptcy is a reason sufficient of itself for refusing to make an adjudication of bankruptcy…

[19]   The second case relied on by Ms Pinny is more relevant. It is the judgment of Lang J in Bruce v Crown Money Corporation.6 Crown Money Corporation Limited sought an order adjudicating the debtors – whose companies had undertaken three subdivision projects – bankrupt on the bases of guarantees the debtors gave to Crown. Despite Lang J finding there were grounds for making orders for adjudication, his Honour ultimately gave the debtors further time within which to advance the subdivisions to the point where Crown could be repaid. That case appears to me to be quite different from this.

4      Re Otway [1895] 1 QB 812 (CA).

5      Re Leonard [1896] 1 QB 473 at 475 as cited in Re Carroll, ex parte UDC Finance Ltd HC AK B736/90, 17 May 1990 at 11.

6      Bruce v Crown Money Corporation HC AK CIV-2010-404-1922, 18 August 2010.

[20]   The prospect of the debtors being able to repay the creditor in Bruce v Crown Money Corporation were much better. One subdivision had already been completed. The second sub-division was well-advanced. Titles in relation to the third sub-division were expected to be available early the following year. There were therefore grounds to conclude that giving the debtors further time would result in repayment. Lang J also accepted that to some extent the debtors’ predicaments could be put down to factors outside of their control. After considering any prejudice to Crown, the interests of the other creditors, the interests of shareholders, Lang J concluded it would not be just and equitable to make orders of adjudication. Here, all the Shallards can say is that at some point in the future one or more of the projects they are promoting may go ahead and if that happens then they would expect, ultimately to receive revenue which they could use to meet their obligations to NIWA.

[21]   Mr Malarao invited the Court to consider the arguments advanced on the Shallards’ behalf under three headings:

(a)That there is no public interest in their affairs being administered by the Official Assignee;

(b)That there are no assets available to creditors in any bankruptcy;

(c)The prospect of payment for creditors, including NIWA, relies solely on Bruce Shallard & Associates being able to bring the various business prospects referred to in his evidence to a successful conclusion.

[22]   As to the public interest, Mr Malarao referred me to various cases in which the Court has made it clear that irrespective of what might appear to the Court to be the likely outcome of a bankruptcy, there is a public interest in holding insolvent individuals to account. Mr Malarao emphasised that Mr Shallard’s own evidence indicated that various business judgments made by him were “questionable” and that the net result is an indebtedness for a significant sum – now in excess of $2 m – to a public entity. He emphasised also that the Shallards’ business affairs are organised through various trusts in a way that appears designed to provide them with a measure of protection and that on any view it is not possible to say definitively whether that

structure will withstand careful scrutiny of the sort to which it would be subjected in a bankruptcy. For those reasons, Mr Malarao submitted, this is a case in which there was a genuine public interest in having the Shallards’ affairs scrutinised. I agree.

[23]   As to the question of the available assets on a bankruptcy, Mr Malarao again referred to the complex and trust-heavy structure of the Shallards’ affairs. He did not go so far as to assert that there are assets which would be available to pay the Shallards’ unsecured creditors on bankruptcy, but he submitted that there was every reason for the Court to regard it as appropriate for the Official Assignee to scrutinise the structure of the Shallards’ affairs with a view to determining whether or not that was the case. Again, I agree. Whilst the confident assertion made on the Shallards’ behalf that none of the assets owned by the trustees of the trusts other than the Stallard (No. 2) Trust would be available to meet the obligations of the trustees of that trust, the Court is not in a position to determine that on this application. Rather, that is a matter for the Official Assignee to look into, should she regard it as appropriate to do so.

[24]   In any event, and as Ms Pinny acknowledged, a bankruptcy should not necessarily be declined merely on the ground that there are no assets available for the creditors – it is simply a matter that is to be taken into account. The public interest element in controlling an insolvent debtor exists independently of the separate consideration of the creditor’s prospects of recovery.7

[25]   As to whether or not the Shallards should be given further time to pursue the business interests that Mr Shallard has been holding out as the answer for NIWA from the outset, Mr Malarao expressed some scepticism on the part of NIWA as to whether there was any real prospect of these business opportunities enabling the Shallards to pay their debts and submitted that whether or not that was the case was not a matter that this Court could determine in this proceeding. He submitted that the Shallards’ bankruptcies would not necessarily prevent them from pursuing those options, as he submitted that would depend on the assessment that the Official Assignee made about the business opportunities and whether she was prepared to sanction Mr Shallard continuing to pursue them. I have my doubts as to the prospects of the Shallards being

7      See for example Re Fidow [1989] 2 NZLR 431 at 444.

able to pursue any business opportunities that do exist should they be bankrupt. Be that as it may, the view I take of the matter is that it is not the Court’s responsibility to make an assessment in these proceedings of the likely prospects of complex business ventures being successful, the attitude that the Official Assignee is likely to take to those opportunities or whether or not she is likely to sanction Mr Shallard’s continuing to pursue them while bankrupt.

[26]   In the end, the position appears to me to be this. In circumstances which are admitted by Mr Shallard to demonstrate a lack of judgment, he and Mrs Shallard have become indebted to NIWA, a public body, for a very substantial sum of money. Their affairs are complicated by reason of the existence of various trusts. There is a significant public interest in their affairs being investigated and that the proper process for that is bankruptcy and the administration of their affairs being placed in the hands of the Official Assignee for a period of time to enable them to be scrutinised. Moreover, bankruptcy is in large measure a process designed to protect the public and in my view it would be quite inappropriate for the Court to exercise its jurisdiction not to make the orders sought by NIWA in a case such as this where the judgment debtors

– or at least Mr Shallard – expressly proposes that he go on in further business dealings and to that extent present a risk to the public.

[27]   For those reasons my judgment is that NIWA is entitled to the order it seeks and accordingly, on its application, I make an order adjudicating Bruce Dillon Shallard (in CIV-2019-485-356) and Jocelyn Mary Shallard (in CIV-2019-485-358) bankrupt. The judgment creditor in each case, the National Institute of Water and Atmospheric Research Ltd, will have its costs on a 2B basis together with disbursements as set out in the plaintiff’s memorandum as to costs dated 27 November 2020. These orders will come into force at 4.00 pm on  Wednesday  16  December  2020,  unless  Mr  and Mrs Shallard pay the monies they owe to NIWA together with all interest and costs by that time and date.

Associate Judge Johnston

Solicitors:

Meredith Connell, Wellington for judgment creditors Tripe Matthews Feist, Wellington for judgment debtors