Norris Ward McKinnon v Kaye
[2016] NZHC 3089
•16 December 2016
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CIV-2016-419-193 [2016] NZHC 3089
IN THE MATTER of the Insolvency Act 2006 AND IN THE MATTER
of the bankruptcy of Anthony Pratt Kaye
BETWEEN
NORRIS WARD MCKINNON Judgment Creditor
AND
ANTHONY PRATT KAYE Judgment Debtor
CIV-2016-419-194
IN THE MATTER of the bankruptcy of Morva Kaye
BETWEEN NORRIS WARD MCKINNON Judgment Creditor
ANDMORVA KAYE Judgment Debtor
Hearing: 1 December 2016 Appearances:
Mr Beresford for Judgment Creditor
Mr and Mrs Kaye in personJudgment:
16 December 2016
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
16.12.16 at 3.30 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
NORRIS WARD MCKINNON v KAYE & ANOR [2016] NZHC 3089 [16 December 2016]
[1] Mr and Mrs Kaye were adjudicated bankrupt 3 October 2016. They now seek an order annulling their adjudication.
[2] The following statement of the background is taken from the submissions which Mr Beresford filed on behalf of the judgment creditor and which accurately summarise matters.
2.1. …. Mr & Mrs Kaye were unsuccessful in litigation against NWM.
As a result the High Court awarded NWM costs of $104,232.93, and the Court of Appeal awarded NWM costs of $14,814, against Mr & Mrs Kaye. These Court ordered costs remain unpaid.
2.2 NWM served bankruptcy notices on Mr & Mrs Kaye on 6 and 9 July
2016 respectively. Mr & Mrs Kaye failed to comply with the bankruptcy notices. NWM then (on 27 July 2016) filed applications
to have Mr & Mrs Kaye adjudicated bankrupt. The applications
record Monday 3 October 2016 as the date for the hearing of the bankruptcy applications.
2.3On around 2 August 2016, Mr & Mrs Kaye filed interlocutory applications on notice which sought a stay of the costs ordered by the High Court pending the Kayes’ application for leave to appeal to the Supreme Court. Mr & Mrs Kayes’ own notices state that they will each apply to the Court for a stay of proceedings on “3 October
2016 at 10:00 am”.
2.4NWM then served the bankruptcy applications and summonses on Mr & Mrs Kaye. The applications, summonses and affidavits of service are exhibited to the affidavit of Hannah Jones (exhibits C to J). The evidence is clear that the hearing date was properly brought to the notice of Mr & Mrs Kaye.
2.5However, Mr & Mrs Kaye failed to appear on 3 October 2016 and were duly adjudicated bankrupt.
2.6 On 18 October 2016, Mr & Mrs Kaye filed the current applications.
Mr Kaye says in his affidavit in support that “he misread the date for
hearing of the judgment creditor’s application as 30 October instead of 3 October 2016”. Mr Kaye also claims that the “interposition of alpha-numeric symbols is a recognised phenomenon.” Mrs Kaye says in her affidavit in support that she was working long hours and she asked Mr Kaye to respond. It is submitted that nothing in the evidence of Mr & Mrs Kaye justifies annulment.
[3] The basic point the judgment debtors make is that they allege that when they were served with the bankruptcy documents they made a mistake in that they misread the hearing date which had been inserted into the application for adjudication order.
[4] The application (adjudication application) relevantly stated:
1.The creditor, Norris Ward McKinnon, 711 Victoria Street, Hamilton will on Monday 3 October 2016 at 10 a.m. ask the court to make orders:
i. Adjudicating Anthony Pratt Kaye bankrupt;
[5] There was a similar application filed in the case of Mrs Kaye.
[6] The applicants say that they misread “3 October” as “30 October” and did not
appear at court on the hearing date.
[7] The summons to debtor which is required in every case for an application for adjudication to accompany the application, in this case relevantly read:
1. You are summoned to attend before the High Court at Hamilton on the
Monday 3rd day of October 2016 …
Emphasis added
[8] The judgment debtors are therefore contending that the “3rd day of October”
was absent from the Summons to Debtor.
[9] They also assert that had they not missed the date for filing a notice of opposition they would have filed an opposition alleging:
a) They had regularly made payments to their other creditors over a period of several years;
b)They intended to seek the “support of the court to formalise arrangements” to pay the judgment creditor off and;
c) The claim upon which the judgment creditor based the application on,
$119,000.00, was not properly payable because of certain remarks that Gilbert J made in the course of a judgment considering security for costs issues between the parties in the substantive proceeding;
d)The petition was vexatious and punative and amounted to unreasonable conduct on the part of the judgment creditor and:
e) There are no commercial morality or community protection issues involved;
f) An annulment is required to “alleviate the distress and pressure caused” particularly to Mrs Kaye who has health problems;
g) The judgment debtor seeks the “assistance of the court to put in place a creditor’s arrangement” to benefit creditors;
h)Annulment is required to, in effect, give rise to a stay of proceedings while the judgment debtor’s bring a complaint against Norris Ward before the New Zealand Law Society.
[10] A further step in the proceedings which needs to be briefly mentioned is that the judgment debtor’s, having failed in the litigation in the High Court, thereafter took proceedings by way of appeal to the Court of Appeal. In the course of that appeal the contentions which the judgment debtors put forward alleging negligence on the part of the judgment creditor were the subject of further consideration with the Court of Appeal concluding that the advice given in the actions which were taken on behalf of the judgment debtor’s by the solicitor at the
judgment creditor firm were not open to criticism and was not negligently given.1
Applications for annulment
[11] The section of the Insolvency Act pursuant to which annulment is sought is as follows:
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
1 Kaye v Norris Ward McKinnon [2016] NZCA 32.
[12] It will be helpful in the context of this case to refer to the remarks of Smith AJ in Page v Official Assignee and Whanganui District Council.2 At paragraph [41] and [42] the Judge said:
[41] The need under s 309(l)(a) is to show some defect in the bankruptcy adjudication proceeding, and Mr Page has failed to point to any such defect. Courts dealing with bankruptcy adjudication applications do not sit as appeal courts from the judgments on which bankruptcy applications are based — if there is some challenge to the judgment on which the judgment creditor relies in seeking an adjudication order, that challenge should be made either by appealing the judgment relied upon or, in an appropriate case, applying to the court in which the judgment was given to set that judgment aside.
[42] In this case, Associate Judge Matthews made that point clearly in a minute dated 16 November 2015. His Honour said:
To assist Mr Page, I note that at least at present, there is no indication that the judgment of the Environment Court on which the original adjudication was based has ever been challenged by way of an appeal to the High Court. Any such appeal would now be years out of date. On an application to set aside a bankruptcy which was based on an existing and unchallenged order of a court, this Court is most unlikely to go behind that judgment, because at the time of the adjudication this Court accepts the formal records of judgments issued by other courts.
[13] I make reference to those remarks because in the present case the judgment debtors’ arguments assume that the court dealing with the bankruptcy matter is able to take into account its own assessment of the merits of the underlying case even if that is different from the view that the court in which the judgment was entered, the High Court, and that of the Court of Appeal on the hearing of the appeal which the judgment debtor is brought. I shall deal with that aspect of the matter as it applies to this case below. Because I do not consider that it is open to the court to undertake its own assessment of the merits of the original judgments, the focus of this judgment will be on the alternative grounds which deal with procedural matters, namely the adequacy of the service on the judgment debtors. I accept that such questions can be considered because they raise what Smith AJ described as some defect in the
bankruptcy procedure.
2 Page v Official Assignee and Whanganui District Council [2016] NZHC 1988 at [41].
Lack of notice?
[14] In order for the court to be justified in annulling the adjudication in this case, it needs to be satisfied, as a minimum, that the judgment debtors failed to attend the court hearing on 3 October because they did not know that was the date that their case was to be called.
[15] A central feature of the case is that while the judgment debtor’s accept that they were served with the documents informing them about the hearing date, they made a mistake when reading those documents and it was for that reason that they did not come to the court on the date when the bankruptcy proceedings were listed for hearing.
[16] In this part of the judgment it will be necessary to determine whether, as a result of that mistake, the court ought to reach a determination that the judgment debtors were not given adequate notice of the hearing.
[17] The explanation which the judgment debtors give in this case is put forward by Mr Kaye. Essentially he asserted that when he saw the numeral “3” adjacent to the word “October” he elided the two and read the document as referring to a date of the “30” October. He alleged that what he described as an “alphanumeric” error of this kind is recognised phenomenon and he provided an internet reference which he said supported his view.
[18] Mr Kaye accepted though that in the case of the way in which the date was written on the summons to debtor,3 no such error could have arisen. That is because, as I have already noted, the summonses relevantly summoned the judgment debtor is to the High Court on “the Monday 3rd day of October…”.
[19] His explanation was that he did not notice this alternative statement of the date. He said that when the process server served the documents (which I find
occurred on the evening of 8 July 2016) he and his wife were so flustered and
3 That is a separate and distinct document from the application for adjudication order which allegedly contained the problematic formatting leading the judgment debtors to misunderstand the hearing date.
embarrassed that he mis-read the document and the mistaken date became lodged in his mind as being the actual date for which they were summoned to the High Court, namely, 30 October 2016.
[20] He agreed with Mr Beresford in cross-examination that 30 October was a Sunday. I interpolate that the significance of that question and answer is that if Mr Kaye had checked the date he would have immediately appreciated that the date he and his wife were required to appear at the court could not have been 30 October.
[21] I should also add, that neither of the judgment debtors gave any evidence of having entered the hearing date in a diary or something similar or having marked the calendar to remind them of when the hearing was. Had they done that, it is also likely that their error would have been exposed.
[22] I asked Mr Kaye if, having read the documents on the night of 8 July, he referred to them again subsequently in the weeks that followed service. His answers were inconclusive. It seemed to me that the relevance of this point was that even if it is plausible, as I find it is, that on the night of the service of the documents the judgment debtors were upset and thrown off-balance by the arrival of the process server, there were still some weeks between the date of service and 3 October which provided adequate opportunity for them to read the documents in a less pressured situation and to verify the correct hearing date.
[23] The issue therefore that arises is principally one of fact but there also is a legal issue which needs to be briefly considered.
[24] I raised with the parties the question of whether any error, no matter arising from what cause, concerning the hearing date which resulted in a party to court proceedings missing the hearing date, would suffice to justify the making of an annulment order. Or was it the case that the discretion to annul would not be exercised where the parties had not taken reasonable care to ascertain the true position for example by reading the documents carefully.
[25] The only point of relevance received in response was that which Mr Beresford made to the effect that it could not be consistent with the requirements of the administration of justice that any judgment debtor who claimed that he had been mistaken about the date of hearing need only put that ground for an order to justify an annulment. Mr Beresford’s contention was to the effect that to adopt such an approach would simply be unworkable and would result in legitimate applications by judgment creditors being obstructed and delayed where such a consequence was not justified.
[26] I was not referred to any authority on the point but I consider that the contentions which Mr Beresford makes are correct. However that still leaves the question of what an applicant in the position of the judgment debtors in this case has to establish. I consider that the legal requirements can be formulated by stating that the court is unlikely to exercise its discretion to order an annulment unless it is satisfied that the applicant took reasonable steps to protect his or her own interests and in particular made a reasonable effort to ascertain what the true hearing date was.
[27] I accept that in determining what is a reasonable effort is not necessarily excluding considerations personal to the party served. Obviously questions of literacy, familiarity with the English language, illness and the like could all affect the ability of the parties serve to come to a correct understanding of what the document meant.
[28] However in this case, there were no exceptional circumstances of that kind present. Mr Kaye was prior to retirement, apparently, an accountant.
[29] Mrs Kaye told me she is an accountant and has Associate status with the New Zealand Institute of Accountants. She is employed at the Hamilton City Council working in the area of auditing. She told me that she had been working every day for a month at the time when the proceedings were served and she also suffered from unspecified ill-health. She said that she did not remember seeing the summons to debtor before it was shown to her in the witness box in the present hearing.
Conclusions on absence of notice
[30] My conclusions are, first, that the applicants have not established that they actually believed as a result of reading the application served on them that the hearing would take place on 30 October. I do not consider that Mr Kaye can rely upon an Internet reference which he asserts establishes that so-called alphanumeric errors of this kind are not uncommon. Mr Kaye did not qualify himself as an expert to give evidence on these matters.
[31] Alternatively, even if the application that was served on the parties was confusing, and that it might be true that they initially confused ‘Monday 3 October” with “30 October” (which is apparently the thrust of the evidence) any ambiguity about the date would have been resolved by adopting a reasonable interpretation of the date that was set out in the summons to debtor. The format adopted for the date in that case made it quite clear that the judgment debtors/applicants were required to come to court on 3 October.
[32] Even if the judgment debtors’ alleged mistake was brought about by being flustered and under pressure at the time that the documents were served, there was adequate time for them to subsequently read the documents and that is what they should have done, had they behaved prudently.
[33] Had they done so and taken other prudent steps such as checking a calendar, they would have discovered their mistake.
[34] Even if they were still in doubt about the matter, they could have resolved it by contacting the solicitors for the judgment creditor or the Court Registry.
[35] Those considerations, in my view, dispose of the application so far as Mr Kaye is concerned. Certainly so far as he is concerned, I am not persuaded that he in fact made a mistake about the date and alternatively, if he did, it was not a mistake that was reasonable and that would excuse him from attending the court on 3
October 2016.
[36] The position with Mrs Kaye requires brief but additional consideration. While I accept that Mrs Kaye was under stress at the time when the documents were served, there was adequate time for her to consider them subsequently. If she did not read the summons to debtor, which I infer there is the reason why she says she has never seen that document before, then she did not take reasonable steps to protect her own interests in the matter and she should not be entitled to rely upon any mistake she may have made concerning the hearing date.
The merits of the case.
[37] It was the contention of the judgment creditor that in any case, the position of the judgment debtors is without merit. The argument was to the effect that even if there had been difficulties with service, the judgment debtors were plainly insolvent and had committed an act of bankruptcy therefore there would be no point in setting aside the adjudications by way of an order of annulment.
[38] I was not referred to authorities concerning the approach that is to be adopted when there has been a failure to inform a party to proceedings of the date when she has to come to court. It seems likely that in such a case the proceedings have so fundamentally miscarried that the only proper course is to set aside any steps taken in the proceeding because proper service is so fundamental to the court acquiring jurisdiction under dispute, it is unlikely that an applicant who has not been served or accurately informed about the hearing date needs to prove that fact alone in order to
have the proceeding set aside: Craig v Kanseen.4 This last-mentioned case was one
where a summons upon which a court order was made was not served upon the appellant. This the court concluded resulted in the order being a nullity and the appellant had a right “ex debitio justitiae” to have the order set aside.
[39] Consistently with that conclusion, there was no enquiry into the merits of the
case. If the decision was a nullity, considerations of the merits of the claimant’s case
would be irrelevant.
4 Craig v Kanseen [1943] 1 All ER 108 followed in New Zealand in R v Nahka (No 2) [1974] 1
NZLR (CA).
[40] The case is slightly different here in that the judgment debtors agree that they were served with the documents but they say that they were misled as to the date on which the case was to be called in the court. Plainly, if a summons to a debtor or some other document which was served upon him misstated the date of the hearing, the result would usually be the same as if they had not been served at all. He did not have the opportunity to come to the court and be heard and the decision was made without reference to him.
[41] While the present case was not, as was Craig v Kanseen, based upon the inherent jurisdiction of the court, but on a statutory right to annulment, where questions of procedure are involved it is likely that the discretion under the Insolvency Act should be exercised by analogy with the cases on the inherent jurisdiction.
[42] The conclusion must be that if there had been such a defect of procedure followed in the circumstances of this case, the judgment would be set aside without consideration of the merits of the decision which the court made.
[43] However even although I have concluded that the judgment debtors cannot contend that the bankruptcy orders ought to be annulled on the grounds that they made mistakes about the hearing date, it would appear that they also put forward an alternative ground – although they did not describe it as such. The contentions on which that ground is based is that even assuming that valid service had been carried out, the court in its discretion ought not to have bankrupted the judgment debtors. Therefore, under s309 of the Act the court has a further ground upon which it can consider whether or not to annul the adjudication. I will consider a possibility of such an order being made next.
Discretion to make Order under s 309(1)(a)
[44] The judgment debtors contended that the court ought to set aside the orders of adjudication because there was a counterclaim or because it was unfair or an improper exercise of the court’s discretion to adjudicate them bankrupt given the background circumstances of this case. They raised a number of points which they say support their arguments. These were: the so-called set-off argument; the merits
of the case which they said were on their side; considerations personal to each of the judgment debtors; the existence of a complaint which they have made to the Law Society about the judgment creditor; the failure of the judgment creditor to negotiate; an assertion that the dismissal of their claim by the High Court and Court of Appeal and the ordering of costs amounted to a miscarriage of justice; and the fact that nothing would be achieved by bankrupting them.
Set-off
[45] The argument concerning set-off is based upon observations which Gilbert J delivered in the course of his judgment on the security for costs application which was filed in the substantive proceedings.5
[46] The substantive proceeding in which that application for security for costs was made was between the judgment creditor as the plaintiff and the judgment debtors. The claim was brought to recover unpaid fees from the judgment debtors. The judgment debtors counterclaimed for negligence. Prior to the trial, and prior to the hearing of the security for costs application, the judgment creditor offered to compromise the proceedings on the basis that it would pay to the judgment debtors the sum of $140,000 and that it would write off unpaid fees. Unfortunately, the judgment debtors declined that settlement offer and as a result the matter went to trial which resulted in the negligence claim failing and the judgment debtor is being subjected to a large order for costs, as I have earlier recounted in this judgment.
[47] In the security for costs application, Gilbert J decided that it would not be appropriate to make an order.
[48] The central reason behind the Judge’s conclusion was that the Kayes had a reasonable claim for negligence although there were possible difficulties about proving loss. He considered that if a security for costs order were to be made they would be prevented from bringing their negligence case to trial. He therefore
declined to order security.
5 Norris Ward McKinnon v Kaye [2013] NZHC 554, [25].
[49] Before concluding his judgment the Judge made the following remarks:
[26] Although Norris Ward will be exposed for their cost, it recognises that the Kayes have a good arguable case and they may be able to recover some of the losses they have claimed. Norris Ward is therefore prepared to forego its fees and pay $140,000 to settle the Kayes claim. If that offer is not accepted by the Kayes and the matter proceeds to trial those money’s will be available to meet part or all of Norris Ward’s costs of trial. That sum far exceeds any amount that could reasonably be ordered by way of security for costs in a case like this.
[50] Essentially what the Judge was observing, as I understand it, was that Norris Ward had saved themselves the $140,000 as a result of the judgment debtor’s decision not to settle at that figure. The money saved would go some of the way to meet the costs of the trial.
[51] I do not consider that this gives rise to any rights on the part of the judgment debtors. I am unable to understand their argument that they somehow acquired an equitable set-off which they are able to maintain against the claim which the judgment creditor subsequently brought to recover the costs awarded to it as the successful party in the negligence proceedings and the appeal proceedings which followed that case.
The Law Society complaint
[52] I will defer consideration of the ground involving considerations personal to each of the judgment debtors until a later point in the judgment and consider next the matter of the Law Society complaint.
[53] The judgment debtors also contended that by bringing the bankruptcy proceedings on behalf of the judgment creditor, the judgment creditor’s solicitors were acting in breach of Lawyers and Conveyancers’ Act Rule 2.3 which is to the following effect:
A lawyer must not use, or knowingly assisted in using, the law or legal processes for the purpose of causing unnecessary embarrassment, distress, or inconvenience to another person’s reputation, interests or occupation.
[54] The judgment debtor’s say that they have made a complaint to the Law Society alleging a breach of standard 2.3. I understand that their argument is that the bankruptcy proceedings should not have been permitted to go ahead while their complaint awaited determination.
[55] This case has some similarities with another decision of this Court, Henderson Reeves Connell Rishworth Lawyers Limited v Busch6 which I will discuss shortly.
[56] It was accepted by the judgment creditor is that there is jurisdiction on the part of the Law Society to review legal costs which have been invoiced to a client. It may be that the judgment debtors hope in this case that if they are successful in a complaint against the judgment creditor that there will be also a determination that the fees charged are excessive. None of this is made explicit in the material which the judgment debtors have filed.
[57] There is a discussion about the interrelationship between court judgments and the costs revision process in the decision of Henderson Reeves Connell Rishworth Lawyers Limited where Bell AJ considered the authorities. The problem, as I see it in this case, is that by the time judgment has been entered it is too late for the client to raise with the Law Society questions of liability and the quantum of legal fees. The judgment is conclusive. In cases where the court is given notice prior to entering judgment on a claim for the fees by the solicitors, and a challenge to the fees is currently before the Law Society, then the usual practice the Court will adopt is to stay the proceeding until the outcome of the fees review is known.
[58] I accept the submission for the judgment creditor that in the circumstances of this case the availability of the complaint process to the Law Society could not justify the current proceedings being stayed or dismissed.
[59] The current proceedings are concerned with the solvency of the judgment debtors. The complaint process is concerned with alleged non-compliance by a
6 Henderson Reeves Connell Rishworth Lawyers Limited v Busch CIV-2011-488-257, Bell AJ 28
September 2013, Whangarei.
lawyer with professional standards. The two cases do not intersect. They are independent of each other. This ground has no substance.
Failure to negotiate
[60] I accept that in general terms it is to be expected that lawyers advising a client must keep the client advised of alternatives to litigation.7 That obligation would not seem to be binding upon solicitors who are parties to the litigation in their own right and are not involved solely as counsel for solicitors for a client. Even leaving aside that issue, I consider that the contentions put forward by the judgment debtors lack reality. In the first place, the judgment creditor had an entitlement by way of a debt which had been fixed by Court order. In the usual course of affairs, the judgment creditor was within its rights to expect payment of the entirety of its
debt and to take enforcement steps. The judgment creditor is not obliged to enter into a compromise.
[61] In any case, Mr Kaye on behalf of the judgment debtors accepted that it would be usual for a judgment debtor to be required to take the initiative and make an offer of part payment of a debt in circumstances of this kind. However, he argues, he did speak to counsel for the judgment creditor prior to the issue of bankruptcy proceedings and he considered that in some way the discussion (which seemed to have amounted to the judgment debtors again asserting the righteousness of their position) should have been responded to by the judgment creditor making an offer of settlement.
[62] I see no grounds upon which the Court should agree with that conclusion and to the added contention that because the judgment creditor did not commence negotiations the situation therefore was one where the judgment debtors’ ought not to have been adjudicated in the first place.
[63] The second aspect of the matter in regard to which the position of the judgment debtors is not grounded in reality, is that the best possible offer that they could have made was some $60 per week which, according to
Mr Beresford’s calculations, would have meant that repayments would take over 30
years. I do not consider that this is a ground for annulment.
Miscarriage of justice in original proceedings
[64] The contention of the applicants was that the circumstances which resulted in the substantial costs order being made against them and which is the basis for the bankruptcy proceeding was unjust or not in accordance with the law. The cases will be rare where the court will go behind the judgment which gives rise to the insolvency event which the judgment creditor relies upon. In rare cases in its bankruptcy jurisdiction, the court can go behind a judgment. In Corney v Brian
Fullagar J said. 8
Generally speaking, a judgment at law for a sum of money creates an obligation of its own force. The pre-existing obligation, which the judgment as intended to enforce, merges in the new obligation so created, and, for most purposes as between the parties, is conclusive evidence of the existence of the obligation which it creates. It may in some circumstances be set aside by the comi which entered it, but unless and until it is set aside, that is, generally speaking, its effect. It has, however, been well settled for very many years that in a court having jurisdiction in bankruptcy a judgment has no such conclusive effect. The comi will in many cases, as it is commonly said, "go behind" the judgment and enquire into the existence of the debt upon which it is said to be founded. It is sometimes put that the court will
"go behind" the judgment for the purpose of enquiring into the consideration for it...
…
No precise rules exist as to what circumstances call for an exercise of the power, but certain things are, I think, clear enough. If the judgment in question followed a full investigation at a trial in which both parties appeared, the court will not reopen the matter unless a prima-facie case of fraud or collusion or miscarriage of justice is made out.
[65] In this case, the judgment debt comprises a costs order which was made in the High Court following the dismissal of the claim which the judgment debtor has brought against the judgment creditor. Following that decision, the judgment creditors appealed to the Court of Appeal which extensively discussed the High Court judgment before coming to the conclusion that it should be upheld. The Court of Appeal itself made an order for costs and those, too, being unpaid, comprise part of the debt which was the basis of the bankruptcy notices served on the judgment
debtors at the outset of the bankruptcy litigation. An application for leave to appeal to the Supreme Court was declined. In the light of that background, it cannot be contended that the making of the costs orders against the judgment debtors prima facie discloses a miscarriage of justice. The complaints which the judgment debtors have made have been given full consideration by the courts already and have been found to lack substance.
General discretionary considerations
[66] The last grounds which the judgment debtors raise in support of an
application to annul I have grouped together as “general considerations”.
[67] The judgment debtors asserted that nothing will be achieved which is advantageous to the judgment creditor by adjudicating them bankrupt.
[68] The starting point is that the judgment debtors are obviously insolvent. They have committed an act of bankruptcy. The usual outcome in such circumstances is that an order of adjudication will be made.
[69] It is necessary to make reference to only two authorities in this area. The first is the decision of Fisher J in Re Fidow:9
Section 26(1) of the Act provides that the Court on being satisfied that the allegations stated in a creditor's petition are true, may in its discretion, adjudge the debtor bankrupt. I find that the allegations in this petition are true.
For these reasons I conclude that in terms of s 26(1) - and putting to one side all discretionary matters - there are prima facie grounds for an adjudication here.
[70] The Court of Appeal in Baker v Westpac Banking Corporation stated:10
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 Elks v NZI Finance Limited (CA253/89 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
9 Re Fidow [1989] 2 NZLR 431, 439.
10 Baker v Westpac Banking Corporation, CA 212/94, at 4.
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
[71] It is relevant when considering the exercise of discretion to adjudicate in the first place for the court to recognise that it is in the public interest that those who incur debts and then default on them in circumstances where they are insolvent ought to be accountable for their conduct.
[72] It is also relevant to the exercise of the discretion to enquire into the circumstances in which the debts were incurred as this may reveal aspects of the insolvent’s conduct which in turn informs the question of how the discretion to bankrupt or not ought to be exercised.
[73] In this case, the judgment debtors embarked upon litigation in circumstances where it was plainly the case that they would not be able to meet an order for costs if unsuccessful. As it turned out the position of the judgment creditor was strongly vindicated by the judgment which was entered in the High Court and the judgment on appeal.11 The fact that the judgment debtors were self-represented ought to have been a factor that they took into account in deciding to proceed with the litigation. As I have already noted, a settlement offer, which in retrospect appears to have been
generous, was made prior to the commencement of the proceedings but the judgment debtors continued. Policies which assure access to the law do not immunise those who make poor decisions from the financial consequences arising from exercising their rights. While they are free to launch litigation, that does not mean that they are free from any consequences when the party in whose favour a costs award is made seeks to recover it. A party who is out of pocket as a result of the judgment debtor’s legal proceedings also has a right to obtain a contribution to the financial loss that it has suffered from defending the proceedings.
[74] This case is not one where a judgment debtor finds him or herself insolvent because of the onset of unexpected circumstances. It was not the case for example
where a judgment debtor found herself in the position of facing liability under a
11 Norris Ward McKinnon v Kaye [2015] NZHC 1025 and Kaye v Norris Ward McKinnon [2016] NZCA 32 respectively.
guarantee that had been provided in circumstances where there was no immediate concern that the principal debtor might default. It was inherently risky for the judgment debtor to continue with moderately complex litigation against the judgment creditor in this case.
[75] Mr Kaye also asserted that he and his wife have faced distress and humiliation as a result of the making of the orders. In particular, it was submitted that Mrs Kaye would suffer a marked fall from grace if she was bankrupted because she would lose her associate chartered accountant status. As well she would no longer be able to be employed because her position involved her in financial management.
[76] Mr Beresford disputed that that would be the consequence of an order adjudicating Mrs Kaye bankrupt.
[77] I accept that it is likely that an adjudication will result in the suspension of Mrs Kaye’s rights to practice as an accountant. Further, it is possible that she would be prejudiced in her employment with the Hamilton Council as a result of an order of bankruptcy. The position is not entirely clear and such a result cannot be said with certainty to follow. While in the broad sense, Mrs Kaye is employed in the financial area of the Council, my understanding is that she is involved in audit work. There is no evidence that she actually handles money which would not be an appropriate activity for an undischarged bankrupt to be involved in.
[78] It is regrettable that someone in Mrs Kaye’s position at an advanced stage in her career and at a point where she is hopeful of obtaining full chartered accountant status should find her way blocked by her adjudication as a bankrupt. On one view of matters, there is no warrant for treating Mr and Mrs Kaye separately. While I have the impression that Mr Kaye might have perhaps been the more influential of the two when it came to decisions about the litigation, Mrs Kaye, because of her background in finance and business must have appreciated the risks that were being assumed by bringing the litigation and she nonetheless allowed herself to be a party to it.
[79] On the other hand, there must be a real possibility that she would lose her present position and either lose her employment or be relegated to a less significant role if she were to continue as an undischarged bankrupt. Also, it is unlikely that she would be able to restart her career as an accountant if she were to remain a bankrupt.
Conclusion
[80] In my judgement, had the Court been apprised of the circumstances of Mrs Kaye at the time when it made the adjudication order it would have determined that an adjudication order was not appropriate in her case and I therefore conclude that she ought not to have been adjudicated bankrupt. There will be an order annulling her bankruptcy pursuant to s 309 (1)(a) Insolvency Act 2006.
[81] I consider that the case of Mr Kaye is distinguishable. While he is at an advanced stage in life, he is retired. The imposition of an order of adjudication is not going to materially cause financial hardship. He has no employment to lose as a result of the making of an adjudication order. He does not have a current professional status which he would lose as a result of the adjudication being made. His application for an annulment order is declined.
[82] It follows that the stay application which Mr and Mrs Kaye filed should be dismissed and there will be an order accordingly.
[83] Because of the shared success in relation to this proceeding I do not consider that any order for costs ought to be made and costs are to lie where they fall.
J.P. Doogue
Associate Judge
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