Official Assignee in the Bankruptcy of X v Y
[2017] NZHC 1117
•26 May 2017
NOTE: PURSUANT TO S 35A OF THE PROPERTY (RELATIONSHIPS) ACT 1976, ANY REPORT OF THIS PROCEEDING MUST COMPLY WITH SS 11B TO 11D OF THE FAMILY COURTS ACT 1980. FOR FURTHER INFORMATION, PLEASE SEE
THE-FAMILY-COURT/LEGISLATION/RESTRICTION-ON-PUBLISHING- JUDGMENTS.
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2016-409-000989 [2017] NZHC 1117
UNDER Section 39 of the Property (Relationships)
Act 1976
IN THE MATTER
of an appeal from a decision of the Family Court under FAM-2015-059-000011 [2016] NZFC 7672
BETWEEN
THE OFFICIAL ASSIGNEE in the bankruptcy of X
Appellant
AND
Y Respondent
Hearing: 3 May 2017 Counsel:
R G Smedley and M M S Gray for Appellant
S P Rennie for RespondentJudgment:
26 May 2017
JUDGMENT OF FAIRE J
This judgment was delivered by me on pursuant to Rule 11.5 of the High Court Rules
……………………………………………………………………
Registrar/Deputy Registrar
Solicitors: Anthony Harper, Christchurch
Rhodes & Co, Christchurch
THE OFFICIAL ASSIGNEE in the bankruptcy of X v Y [2017] NZHC 1117 [26 May 2017]
The appeal
[1] The Appellant, the Official Assignee (“OA”) in the bankruptcy of Mr X (“X”), appeals the judgment of Judge N A Walsh dated 13 September 2016.1 That judgment dismissed an application by the OA for orders pursuant to ss 23(2),
25(1)(b) and 47(2) Property (Relationships) Act 1976 (“PRA”) that a settlement agreement (“agreement”) with Mrs Y (“Y”) under s 21A of the PRA is void against the OA.
[2] The appeal is made in reliance on s 39 of the PRA.
The issues
[3] The first issue in this proceeding and the appeal is whether a property relationship agreement entered into by X and Y on 30 May 2013 following the separation of X and Y in September 2011 and after proceedings had been issued on
9 July 2012 in the Family Court by Y is void against the OA. X was adjudicated bankrupt on 19 August 2014 on the application of the Inland Revenue Department (IRD). This proceeding was filed by the OA in the Family Court on 15 May 2015.
[4] The second issue raised by the OA is that the agreement is void as it is an illegal contract.
The statutory basis for the OA’s application
[5] The OA’s application is made in reliance on s 47(2) of the PRA. Section 47 deals with agreements, dispositions or other transactions between spouses or partners with respect to their relationship property.
[6] Section 47(2) provides:
47 Agreements to defeat creditors void
…
(2) Any such agreement, disposition, or other transaction that was not so intended but that has the effect of defeating such creditors is void
1 Official Assignee v Y [2016] NZFC 7670.
against such creditors and the Official Assignee during the period of
2 years after it is made, but only to the extent that it has that effect.
[7] Section 47(3) provides:
(3) For the purposes of subsection (2), an agreement between spouses or partners with respect to their relationship property is deemed to have been made for valuable consideration if—
(a) a situation described in section 25(2) has arisen; and
(b) the agreement is made for the purpose of settling (wholly or in part)
their rights under this Act with respect to that property.
The facts
[8] Judge N A Walsh helpfully set out a summary of important events occurring in the relationship of X and Y covering 36 paragraphs. Some of those facts including the reason for the breakdown of the relationship are not necessary for a determination of the issues involved in this case.
Events leading to the agreement
[9] The judgment provides a review of the family history, including the acquisition of two major assets, the home and X’s legal partnership in the firm, W & Co.
[10] The parties married on 18 May 1991. Since 6 May 1999 they owned the family home, which was acquired with bank finance. They had two children, now aged in their mid-twenties.
[11] X, a lawyer, purchased a partnership in a law firm on 3 October 2002. To do this he obtained bank finance. The loan for the partnership purchase was guaranteed by Y. The house was used as security for the bank loan. The legal partnership consisted of two interests, namely the partnership itself and a $100,000 advance to the partnership referred to as the “subordinate loan”.
[12] The house was purchased for $190,000 with bank borrowing associated with the purchase of $153,000. The cost of purchase of the partnership interest totalled
$210,594, being a one-fifth share, and which included $100,000 constituting a
subordinated loan back to the partnership. The bank borrowing associated with the purchase and advance was $192,000. Y acknowledged these matters in her evidence.
[13] Judge N A Walsh noted that various additional lending that had been undertaken and Y’s explanation that the 12 month period between August 2004 and September 2005 were difficult and expensive because they were funding their 12 year old daughter’s attendance at boarding school in Dunedin. Y said she did not understand what the further loans were for. She conceded that further two drawdown loans were used to pay off the overdrafts on the joint account and the
$425,000 secured by the bank represented money spent by her and X during their relationship.
[14] X and Y separated in September 2011. Following separation, several settlement proposals were discussed. The issue of the Family Court property relationship proceedings occurred in the course of those proposals being exchanged. In these proceedings, Y disputed a guarantee by her of borrowing on the basis of forgery. Subsequent to separation a payment on account of the potential claim she had against the persons involved in witnessing the alleged fraudulent signatures was
made.2 In my view it is the reason for the confidentiality provision which is
contained in the agreement.
[15] X’s liability to IRD was ascertained by his chartered accountant at
13 September 2012 as $65,710.44. That comprised the following:
Year Balance owing
Penalties and interest
Balance less penalties and interest
2010
$17,126.17
$16,496.25
$692.92
2011
$22,379.27
$ 6,340.78
$16,038.49
2012 (not filed)
$26,205.00 PROV
$26,205.00 PROV
2 See also [20] and [28] below.
[16] Judge N A Walsh recorded X’s asset disclosure in the Family Court proceedings on 2 October 2012 listed the National Bank loan borrowings secured over the family home totalling $427,305.08 and X’s interest in the law firm of
$159,496, which included the subordinated loan of $100,000. The Judge noted, however, the law firm partnership interest disclosed did not take account of any goodwill component. The OA’s witnesses accepted that the accounts which were provided from W & Co disclosed that the firm in its balance sheet had a figure for goodwill of $532,488, which would indicate that X as a sixth share partner by this time would have had an interest in goodwill of $88,748. It is perhaps significant also that although the subordinated loan was included by X in his assets, that loan had already been assigned to Y and legally was therefore not his asset at the time.
[17] For his last two years with the firm prior to exit X did not draw an equal share with his partners. No evidence disclosing a variation of partnership was presented to the Court. On his evidence, a breakdown following separation from Y and his poor performance with the firm resulted in him being asked to accept reduced drawings in the year ending 30 April 2011 of $120,000 and of $90,000 the following year. In his final year, ending 30 April 2013, he received $96,000.
[18] The judgment next set out X’s email to Y of 13 February 2013, which is important because it formed the basis for the agreement which X and Y, with the assistance of lawyers, executed on 30 May 2013. I set out as did the Judge the content of that email:3
Subject: Re: Settlement and my freedom
[Y], this is all getting too difficult and my lawyer is just complicating things with his approach.
I need to get this sorted otherwise it’s all going to turn to cactus on both of us and I will end up in the loony bin.
I note that it is now clear what the overall debt is the only issue is how to apportion that.
I note also that I have always understood that I would be getting the s[h]ort end of the stick but the point is that I need to have some stick otherwise a deal just can’t happen. The bank won’t allow me to have debt without being
3 Official Assignee v Y, above n 1, at [26].
able to provide them with some security. The security will have to be the house.
I also note that of the debt in my name the $150,000 is directly related to the purchase of my interests in the partnership which was purchased for
$190,000.
The balances related to bathroom repairs, living expenses etc. That money had to come from somewhere.
I also note that you are adamant that I leave town and if that’s the only way
you are going to get some peace then I am resigned to doing that.
Here is how I see that something can work but you will have to talk to
Stephen Rennie about this.
1. You keep the house and become responsible for the $150,000 debt.
2.I will cash my interest in the partnership (i.e. resign and leave town) whatever that may be worth and repay as much of my debt that I can. Please note that this includes my current liability which is growing by the day.
3.Whatever of my own debt and joint dent (sic) that remains I will have to restructure into a loan that is secured over the house and I will meet the obligations to pay interest on whatever they may be. I figure that loan will be about $100,000. However that debt needs to be taken off me at some stage by you, either when you sell the house that loan is repaid out if, at any stage, you are in a position to do so you can pay the bank out or simply take over my debt. The house will have to stay in our joint names as long as this debt stays in my name.
4.In terms of me leaving town I will need to try and find a job somewhere and in this environment that won’t necessarily be easy. I will be looking to go to the North Island or places further afield if possible. I will aim to go at the end of April. I will no doubt be taking a significant hit on my income.
What this all means [Y] is that in due course I will be debt free but with no assets and you will get the house. In the short term the house will be security for $150,000 in debt in your name and I think approximately
$100,000 of debt in my name. In the short term I will have to guarantee your loan and you mine. However, I will have to pay the interest on my loan
and you the interest on your loan.
Your (sic) however can deal with the house as you see fit. If you decide to sell the house based on current valuation of $600,000 you would get
$350,000 in your hands and I get nothing. I will have no assets but be debt
free which is all I’m looking for.
Can you please have a think about this and get back to me.
The agreement
[19] In a document dated 30 May 2013, X and Y recorded that they had reached
agreement on the division of property, which was “intended to be made pursuant to s
21A” of the PRA.
[20] Relevant for present purposes, the agreement recorded:
(a) The division of chattels, including a motor vehicle.
(b)The division of bank accounts, and payment of bank debts subject to what was provided in later paragraphs.
(c) In respect of a debt of approximately $425,000 to the National Bank secured over the home and X’s provisional and terminal tax of approximately $80,000 that Y was responsible for $200,000 in respect of the bank debt and X would be responsible for the balance of the debt (which by definition included tax and therefore totalled
$305,000).
(d) The market value of the home was $600,000.
(e) Y was from the date of the agreement to retain sole ownership of the home subject to the existing registered mortgage but limited to
$200,000. X was to take all necessary steps to ensure transfer to Y.
(f) X would take all steps necessary to obtain a written release of Y from any liability for the balance of the debt above $200,000 and obtain an acknowledgement that the amount owing under the mortgage was limited to the principal sum of $200,000.
(g)X had resigned from the legal partnership, and would retain his interest in the legal practice and proceeds of sale of the partnership. He would apply the proceeds in satisfaction of the balance owing to the bank.
(h)Neither party would incur any debts in the other’s name and would be responsible for all debts since the date of separation in their name.
(i)Each party would take all items of property to which he or she may be entitled to under the agreement subject to any debts owing to third parties. The party taking property subject to a debt agreed to indemnify the other party in respect of any liability that the other party may have regarding such debt.
(j)The settlement settled all claims that X and Y have against each other pursuant to the PRA, the Family Proceedings Act 1980 under any other statute or at common law.
(k)The provisions of the agreement are confidential between X and Y and their legal advisors and made specific reference that Y would not sue any matter arising out of the alleged irregularity in respect of a guarantee.
[21] The agreement then under the heading “Miscellaneous” contained a clause acknowledging that both parties were satisfied with the disclosure made. Each agreed that the agreement represented “a fair, reasonable and equitable” division of their property both as to relationship property and separate property taking account of the length of their relationship and their current circumstances. There was also provision made acknowledging that each would sign all documents necessary to implement the agreement and that each acknowledged that they had had independent legal advice before signing it.
[22] The agreement next made provision under the heading “Indemnity of Advisors” to which X and Y acknowledge that the agreement represented a “mutually satisfying compromise to settle matters fully and forever between them and that in as much as it may be contrary to advice received it is what they want for an amicable settlement. Accordingly each indemnifies his / her own and the other’s legal advisors in respect of any claim – whether for professional negligence or
otherwise howsoever which may be made arising out of the settlement given their
wish to settle the agreement upon the terms outlined”.
Subsequent events
[23] Judge N A Walsh noted numerous events that followed the agreement, including X’s non-performance, the legal partnership providing an accounting opinion of the value of X’s interest in the law firm and associated company of the firm at $52,270 and the action signalled as about to be taken by the bank in respect of the bank’s advance.
[24] X gave evidence notifying his departure from town where the family lived in
May 2013 and his cessation of work at W & Co in April 2013.
[25] On 28 November 2013 X’s barrister wrote to Y’s solicitor setting out X’s current situation, recording that the amount that the law firm claims that X was owed was “manifestly unfair” but that X was not in a position to argue and that X would negotiate with the IRD.
[26] On 18 December 2013, a payment of $117,209.66 was made by W & Co to the National Bank to reduce the mortgage secured over the family home. This was the payment of the subordinate loan and interest due on it. This was confirmed by the second deponent who gave evidence on behalf of the OA. I note that some of this material was argumentative and not evidence.
[27] The second deponent also confirmed that in the period of three months from May to August 2013 X met all payment obligations with respect to the National Bank and that during that period Y made no payments. The second deponent also understood that Y regarded this as reducing her $200,000 debt to the bank to a sum of $82,790.34.
[28] Of the $52,270 that X was entitled to upon exit from the partnership at W & Co, $30,000 was paid out to him on 3 June 2013. On the second deponent of the OA’s evidence, the remainder was paid out to Y as part of a larger payment of
$87,730, in settlement of her dispute regarding the forged signature.
[29] Enforcement proceedings were issued in the Family Court on 5 March 2014 and the orders were made on an unopposed basis, with X failing to appear, on 5 June
2014. An order of adjudication was made on 19 August 2014, followed by the OA’s proceedings, which are the subject of this appeal, being filed on 15 May 2015. Proof of debts filed at 13 May 2015 totalled $106,677.14 plus a claim made by the OA for costs. Finally, on 22 March 2016, Y concluded a financial settlement with W & Co.
The evidence at trial
[30] Judge N A Walsh reviewed the evidence of each witness in coming to his conclusion, some of which is detailed above. He recorded that X accepted the following points in cross-examination, namely:
(a) He was hopeful of performing obligations under the agreement.
(b) The law firm’s valuation of his interest in the firm was nowhere near
what he was hoping for in reality.
(c) He did expect a payment in respect of work in progress.
(d)What he received from the law firm for his interest was “the straw that breaks the camel’s back”.
(e) Had he also received a payment on account of goodwill in the order of
$90,000 he would have been able to pay his core debt to the IRD.
(f) The bank statements had been addressed to both X and Y at the family home, but he had taken the lead role in managing their financial affairs.
[31] The Judge recorded that there was no cross-examination or questioning of the parties concerning the alleged forgery of Y’s signature on the later guarantee document.
The Judge’s decision
[32] The Judge considered that there were four issues arising out of the application made to the Court by the OA, namely:
(a) Did the agreement have the effect of defeating creditors?
(b)As the debt of $425,000 is described in the agreement as “a disputed debt” is some of it was X’s personal debt?
(c) Is the provision of the confidentiality clause in the agreement
“adequate” consideration?
(d)Can the Court use its discretion not to order the agreement void if it has found to have the effect of defeating creditors?
[33] In particular, he recorded the OA’s contention that the agreement defeated creditors by denying them access to X’s equity in the family home.
[34] Having considered the evidence in detail, he concluded that X was a broken man by November 2013 and was in a defenceless position and unable to contest the law firm’s exit offer. He was nevertheless of the view that at the time of the signing of the agreement X was of the opinion that he could perform his obligations under it.
[35] On the issue of unequal division of property he concluded:4
[79] I find there was an unequal division of property but not to the stage and degree where the division was manifestly unfair or unjust for the following reasons:
(a) It was critical that X retain his status as a high earning practicing barrister and solicitor;
(b) X expected the law firm to be honourable in its dealings with him by paying out his goodwill and a share of the work in progress;
(c) X wanted, after two years of (hard fought) negotiation an amicable settlement with Y and finality.
4 At [79].
[36] Dealing with the first issue, namely whether the agreement had the effect of defeating creditors the Judge concluded that it did not because:5
(a) At the time of the agreement X sincerely and reasonably believed that he could perform the agreement in the expectation that he would carry on his profession as a high income earning solicitor and receive the anticipated exit payment from W & Co.
(b)W & Co’s non-negotiable position to pay X a much reduced exit payment and X’s mindset to capitulate and walk away from his contractual obligations to Y could not be reasonably foreseen at the time the agreement was completed.
(c) The agreement was a compromise. X was not significantly disadvantaged having regard to concessions made by Y not to pursue potential claims for spousal maintenance and economic disparity. In addition, he considered that the confidentiality clause constituted adequate consideration.
(d)He rejected the contention from the OA that Y had no basis for expecting X’s interest in W & Co to be more than the valuation or the estimate of $52,270 noting that in one of the settlement proposals X had put his interest in W & Co at $249,496 and further, that in his affidavit of assets and liabilities he put the firm interest at $159,496, which included the subordinated loan but without reference to any goodwill component. He also relied on Y’s evidence that X’s representation to her was that the law firm owed him $200,000. The Judge concluded that Y was reasonably justified in believing that X would receive significantly more than $52,270 from W & Co.
(e) He also noted that having regard to X’s chartered accountant’s
calculation of IRD indebtedness totalling $65,710.44, X had the potential based on what he expected to earn as an experienced
5 At [121].
solicitor and what he received by way of exit payment to pay the debt in some form to the IRD. That led the Judge to the conclusion that on an overall assessment the agreement did not have the effect of defeating any present or future creditors.
[37] In response to the second issue of whether the debt to the bank of $425,000 was in part a personal debt of X, the Judge concluded from the evidence before him that it was not. In relation to the third issue, namely whether the confidentiality clause provided adequate consideration, the Judge concluded that it did. With respect to the fourth issue, whether the Court could exercise its discretion not to order the agreement void if it is found to have the effect of defeating creditors, the Judge concluded that if the Court found the agreement had the effect of defeating creditors, it must find that it is void. However, he recast the question as:
Is there any discretion for the Court to protect more than just the non- bankrupt’s spouse’s half share in the equity of the family home after the s 21A Agreement is found to be void?
[38] He answered that re-casted question in the negative. [39] In the result the Judge dismissed the OA’s application.
Submissions of counsel – the OA’s position
[40] The OA’s submission is primarily that the agreement transferred to Y more than she was entitled to under the PRA, and as a result X was unable to pay his creditors and the creditors did not have recourse to assets which X had prior to the agreement, in particular the house. In these circumstances they have been defeated. The agreement is therefore void to the extent that they have been defeated.
[41] This is on the basis that at the time the agreement was entered into, the family home which was to be transferred to Y was valued at $600,000, with Y’s interest subject to a $200,000 mortgage. Y was also entitled to the subordinated loan payout of $117,209 and the family car valued at approximately $2000. Thus, her net assets were $519,209. By contrast, the OA submits that X was to retain one asset worth
$52,270, being his share in the partnership, and liability for debts of $306,792
comprised of $80,000 debt to the IRD and $226,792.34 debt owed to the National
Bank.
The respondent’s submissions
[42] For the respondent it was submitted that the agreement did not defeat creditors. It was submitted that it was an agreement for fully adequate consideration. The respondent submits that the arithmetical approach to adequate consideration that the appellant relies upon should be rejected in favour of a holistic assessment of the agreement. In their assessment, the agreement represents a genuine compromise designed to avoid a continuation of Court proceedings. The parties chose to pursue a “mutually satisfying compromise” rather than an approach which divided their assets arithmetically.
[43] The respondent is also critical of the appellant’s summary of asset and debt allocation made under the agreement. Importantly, for the respondent it was submitted that the subordinated debt should not be attributed to Y, as it is part of the assets X took under the agreement to pay off his debt.
[44] Moreover, in the respondent’s submission the real cause of loss to the creditors was not the agreement, but rather the failure of X to pursue his entitlements from his former law firm W & Co (to goodwill and work in progress), which it was claimed would have been sufficient to enable him to meet his obligations under the agreement.
Analysis
[45] I deal first with the second issue, namely the OA’s contention that the agreement is void as an illegal contract. I accept Mr Rennie’s submission that as this was not pleaded in the appellant’s application to the Family Court, nor was there any leave to amend the application before hearing with the result that no evidence was adduced to support or oppose the relief in this respect, it is plainly now too late to raise the issue and for that reason leave in respect of it should be declined. I accept in the circumstances that that must be the case. That is sufficient to dispose of the second issue raised.
[46] I consider the first issue to be the major issue raised in this case.
[47] It is self-evident from the facts which I have already referred to in this judgment that the OA’s proceeding, and the petitioning creditor’s adjudication of X as a bankrupt all occurred within the two year time limit specified in s 47(2). Further, the debt due to the IRD was in existence substantially and well known to the parties at the time of the agreement. There are therefore no time bars or restrictions which might bar the OA’s application for relief pursuant to s 47(2). The issue simply gets back to “did the agreement have the effect of defeating creditors?” The second issue is the extent to which it had that effect.
The legislative frame
[48] An analysis of the issues raised by this application requires first, reference to the appropriate legislative provisions. I now briefly list them.
[49] Section 101 of the Insolvency Act 2006 provides that on adjudication property belonging to the bankrupt vests in the OA:
101 Status of bankrupt's property on adjudication
(1) On adjudication,—
(a) all property (whether in or outside New Zealand) belonging to the bankrupt or vested in the bankrupt vests in the Assignee without the Assignee having to intervene or take any other step in relation to the property, and any rights of the bankrupt in the property are extinguished; and
(b) the powers that the bankrupt could have exercised in, over, or in respect of any property (whether in or outside New Zealand) for the bankrupt's own benefit vest in the Assignee.
...
[50] Section 20A(1) of the PRA provides that the rights of creditors, and the passing of property to the OA following bankruptcy, are not affected by its passage:
20A Rights of creditors preserved
(1) Secured and unsecured creditors of a spouse or have the same rights against that spouse or partner, and against property owned by the spouse or partner, as if this Act had not been passed.
(2) If, had this Act not been passed, any property would have passed to the Official Assignee on or following the bankruptcy of a spouse or partner, then that property (and no other property) passes to the Official Assignee as if this Act had not been passed.
...
[51] Section 20D of the PRA provides for the calculation of net value of relationship between that may be divided between spouses:
20D Calculation of net value of relationship property
The value of the relationship property that may be divided between the spouses or partners under this Act must be calculated by—
(a) ascertaining the total value of the relationship property; and then
(b) deducting from that total any secured or unsecured relationship debts owed by either or both spouses or partners.
[52] Section 21A of the PRA provides for spouses to settle any differences by any agreement they see fit, but subject to s 47:
21A Spouses or partners may settle differences by agreement
(1) Spouses or civil union partners or de facto partners may, for the purpose of settling any differences that have arisen between them concerning property owned by either or both of them, make any agreement they think fit with respect to the status, ownership, and division of that property.
(2) This section is subject to section 47.
[53] Section 23(2) of the PRA provides, among other things, that the OA may apply for an order or declaration under ss 25(1)(b) or 25(3):
23 Who can apply
…
(2) The Official Assignee in Bankruptcy of the property of either spouse or partner may not apply for an order under section 25(1)(a), but may apply for an order under section 25(1)(b) or an order or declaration under section 25(3).
…
[54] Section 25(1) and (5) of the Act provides the orders available to the Court upon application:
25 When Court may make orders
(1) On an application under section 23, the Court may—
(a) make any order it considers just—
(i) determining the respective shares of each spouse or partner in the relationship property or any part of that property; or
(ii) dividing the relationship property or any part of that property between the spouses or partners:
(b) make any other order that it is empowered to make by any provision of this Act.
...
(5) This section is subject to the other provisions of this Act.
[55] Those provisions must be read in conjunction with the section on which the application is founded, namely s 47(2) which is set out in [6] of this judgment.
Principles from case law
[56] I extract from the authorities the following principles:
(a) The onus is on the OA to establish that the agreement had the effect of defeating creditors.6
6 Neill v The Official Assignee [1995] 2 NZLR 318 (CA) at 325.
(b)There must be an overall assessment of the agreement at the time it was entered into in order to determine whether or not it then had the effect of defeating creditors.7
(c) An agreement for “fully adequate consideration” is not caught by s
47(2) of the PRA as it cannot have the effect of defeating creditors or the OA.8
(d)For a creditor to be defeated the agreement must produce more than a reduction of the assets held by the debtor. The agreement must involve a transfer of property between the spouses in such a way as to deplete the resources of one spouse available to creditors.9
(e) Adequate consideration is distinct from valuable consideration, such that a disposition may have been made for valuable consideration but not for adequate consideration.10
Assessment
[57] I consider that in the parties’ submission the key legal issues in dispute on appeal are:
(a) Whether it is enough that arithmetically Y received substantially more than X in the agreement; and
(b)Whether the Judge incorrectly assessed the adequacy of the division by taking into account:
(i)that while the division was unequal it was not manifestly unfair or unjust;
(ii) the confidentiality clause as part of X’s consideration; and
7 At 322.
8 At 323.
9 At 323; Walsh v Powell (1982) 1 NZFLR 103 (HC).
10 Williams v Official Assignee (1998) 18 FRNZ 162 (HC) at 169.
(iii)the beliefs of X at the time the agreement was completed, including that he would get larger payout than was received, and that he could repay his debts.
[58] The real issue in the case is whether the agreement had the effect of defeating creditors. However, each of these questions is ancillary to that wider issue.
[59] Dealing first with the confidentiality clause, with respect to the findings of Judge N A Walsh, I do not consider that can be a factor weighed in the assessment of adequacy of consideration. The concern of s 47(2) is with creditors whose interests are financial. In weighing the adequacy of consideration in the context of s 47(2), the type of consideration Richardson J had in mind must have been financial. This is supported by the surrounding context of the statement:11
In an ordinary use of language an agreement has the effect of defeating creditors if and only if the agreement moves property between the spouses in such a way as to deplete the resources of one spouse available to creditors. If the transaction between the spouses is for fully adequate consideration, it seems a contradiction to say that the effect is to defeat unsecured creditors. Judged as at the date of the agreement the creditors have the same total resources of the spouse available to them as they had before.
(emphasis added)
[60] Moreover, it would be a perverse result if an agreement which was deemed to have adequate consideration on the basis of confidentiality agreement, but which substantially shifted relationship assets toward one party, did not have the effect of defeating creditors.
[61] This conclusion dovetails with two further issues: whether it is enough that the division was arithmetically unbalanced, and whether it is relevant that an unequal agreement was not “manifestly unfair”.
[62] Thorp J in Official Assignee v Whitehead, considering what was required to have the effect of defeating creditors, found:12
11 O’Neill v Official Assignee, above n 6, at 323.
12 Official Assignee v Whitehead (1982) 5 MPC 110 (HC) at 112.
It must be true, nevertheless, that before a transaction can be said to have had a particular effect, there must be more than a tenuous causal link between the transactions and the effect said to result from it…On the other hand there is no obvious reason why the transaction should have to be the sole or dominant cause…
[63] On ‘defeating’, he considered:13
…that you “defeat” a creditor if you deprive him of assets to which he would
otherwise have had resort.
[64] As between X and Y, I accept that the agreement was a “mutually satisfying compromise” which met their shared and individual interests. But that is not the analysis called for by s 47(2). Rather, if as a result of the agreement the creditors are deprived of assets to which they would otherwise have had resort, the agreement has
had the effect of defeating them.14
[65] Finally, I accept the appellant’s submission that the beliefs of X at the time of the agreement are not relevant in assessing whether the agreement had the effect of defeating creditors. That cannot fall within the terms of s 47(2), which simply calls for an assessment of “effect” (as distinct from s 47(1), which turns on the intention of the parties to the agreement).
[66] However, I consider that to the extent the agreement did in fact provide for a more equitable division than what resulted, and thus that the creditors were defeated not by the agreement but by subsequent events, then matters such as the goodwill payout and X capitulating from payout negotiations with W & Co are relevant to the s 47(2) analysis. This is a corollary of the effect of the agreement being assessed at the time it was entered.
[67] I turn then to assessment on the facts. First, I reject the notion that the agreement was for fully adequate consideration. The substantial asset in the couple’s joint ownership was the house, valued at approximately $600,000 at the relevant
time. Moreover, I do not accept the submission on behalf of the respondent that the
13 At 112; citing Walsh v Powell, above n 9.
14 As Richardson J noted in Neill v Official Assignee, above n 6, at 323, an agreement for fully adequate consideration will not have the effect of defeating creditors because judged at the date of the agreement the creditors have the same total resources of the spouse available to them.
subordinated loan was allocated to X in the agreement. Rather, I consider that the loan was expressly assigned to Y in two Deeds of Assignment dated 28 April 2003 and 31 October 2003. In my view there is nothing in the agreement which alters that. But even if the subordinated loan should properly be attributed to X and not Y, on the basis that it is a part of his interest in W & Co (per cl 5.1 of the agreement), there is still a difference in assets between the parties of approximately $537,000.
[68] This leads to the question of whether the agreement had the effect of defeating X’s creditors. I think this question too is plain on its face, in light of the foregoing. The agreement deprived X’s creditors of assets to which they would otherwise have had resort, namely any interest in the family home. In this way it had the effect of defeating creditors within the terms of s 47(2).
Appropriate order
[69] At the conclusion of the hearing and in a Minute dated 4 May 2017, I invited counsel to file submissions on what the appropriate order might be if I found that s
47(2) of the PRA was engaged.
[70] The OA seeks an order that the agreement is void as against creditors, and that Y be ordered to pay either a sum of $200,501.66 or such a sum that equates to half the current equity (whichever is lesser). That sum is comprised of:
(a) The IRD’s preferential claim for its costs in petitioning X’s
bankruptcy - $3,674.00;
(b) The IRD’s claim being the debt owed by X including penalties and
interest between the date of agreement and adjudication - $86,866.48;
(c) Mr Shamy’s debt, X’s solicitor, who was admitted as a creditor -
$10,350.00;
(d)Fees and expenses properly incurred by the OA in carrying out its duties and exercising its powers, including remuneration - $42,086.55; and
(e) Legal costs of the OA - $60,611.18.
[71] This is on the basis that the effect of s 47(2) is that transactions arising from the agreement are only voided to the extent necessary to remedy the depletion in the bounty available to the creditor.15
[72] By contrast, counsel for the respondent submits that:
(a) The appellant is not truly a subsequent creditor who was prejudiced by the agreement;
(b) This is a test case, such that legal fees should not be included in the
creditor’s claim;
(c) Mr Shamy is not a creditor;
(d) The IRD claim is overstated; and
(e) Payments X has subsequent made totalling $7500 should be deducted from the total.
[73] In Johnson v Felton, Blanchard J for the Court stated in unequivocal terms that the effect of s 47(2) is that transactions which have prejudiced creditors are void against them only during the two year period after the transaction is made.16 Thus, any agreement subject to a s 47(2) claim can only be challenged by a creditor within two years: after that time the agreement is no longer void.
[74] The present appeal is made by the OA. Problematically, Blanchard J made the following remarks in Johnson v Felton:17
[24] The position of the Official Assignee under the section does not arise on this appeal. It does seem to us to be a matter of considerable difficulty. It is uncertain whether it is sufficient for the purposes of
15 Harvey v Gateshead Investments Ltd [2013] NZHC 2253, [2014] 2 NZLR 79 at [63]; citing
Johnson v Felton [2006] NZSC 31, [2006] 3 NZLR 475 at [21].
16 At [21].
17 At [24].
s 47(2) that there has been an adjudication during the two-year period or whether the Official Assignee must also during that time take some step which invokes the section. It is uncertain also whether and to what extent a claim by the Official Assignee would displace the claims of individual creditors. We recommend legislative attention to s 47.
[75] I endorse the comments made by the Supreme Court that legislative attention is required to clarify the position of the OA. But I am required to deal with the law as it presently stands.
[76] In the present case X was adjudicated bankrupt on 19 August 2014, which is within the two year period. These proceedings were filed on 15 May 2015, shortly before the two year election period expired.
[77] On this basis it is tolerably clear that the agreement is void to the extent necessary to cover the IRD’s claims. The IRD is a creditor whose entitlements have been prejudiced by the agreement. As is self-evident from the passages from Johnson v Felton and O’Neill v Official Assignee below at [78] and [79], this sum is properly assessed at $90,540.48. This is the amount Ms Johnson for the OA identified as proof of debts filed as at 13 May 2015, less Mr Shamy’s legal fees and less a costs claim by the respondent in respect of a Family Court award which the OA no longer seeks.
[78] I am not satisfied that Mr Shamy can properly be considered a creditor prejudiced by the agreement. In Johnson v Felton, the Supreme Court left open the question of whether only existing creditors at the time of the transaction could take advantage of s 47(2).18 However, it went on to state:19
…Whether a present or future creditor is in fact prejudiced by a transaction
is a matter which has to be addressed at the time it occurs.
[79] In doing so it endorsed the comments of Richardson J in O’Neill v Official
Assignee:20
18 At [16].
19 At [16].
20 O’Neill v Official Assignee, above n 6, at 322.
But the effect is achieved and predictable when the agreement is entered into. And in speaking of an agreement “which has the effect of defeating such creditors” the second limb contemplates only one assessment. In my view it calls for an overall assessment of the agreement at the time it is entered into in order to determine whether or not it then has the effect of defeating any present or future creditors.
[80] Taking an overall assessment of the agreement at the time it was entered into, I am reluctant to draw the conclusion sought by the OA that Mr Shamy, the architect of the agreement, was prejudiced or had his interests defeated by it.
[81] The OA’s claim for fees, expenses and legal costs is also unconvincing. I am not satisfied that it would be appropriate for the agreement to be void to the extent necessary to cover the OA’s fees and expenses incurred in carrying out its duties.
[82] The $7,500 X has already repaid should be deducted too. On that basis I order the agreement is void to the extent of $83,040.48. Unless this sum is paid within four weeks of the date of judgment, I order the sale of the home on the basis that after payment of secured debt and the costs of sale a sum of $83,040.48 will be paid to the OA, with the balance to be retained by Y. Leave is reserved by the parties to apply for specific directions as to sale in the event that they cannot agree.
[83] Costs are reserved in light of the request made by counsel for Y to address this point separately. In the event that the parties cannot agree on costs, memorandum in support, opposition and reply shall be filed and served within 14
day intervals.
Faire J
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