Official Assignee v Deobhakta

[2013] NZHC 1834

IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY

CIV-2009-470-403 [2013] NZHC 1834

UNDER  The Insolvency Act 2006

BETWEEN  THE OFFICIAL ASSIGNEE Applicant

ANDVINAY AVINASH DEOBHAKTA Respondent

Hearing:                   16 July 2013

Appearances:           Mr P V Cornege for the Official Assignee

Mr D Hayes for Respondent
Mr V A Deobhakta Respondent in person

Judgment:                25 July 2013

JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE

This judgment was delivered by me on

25.07.13 at 4 pm, pursuant to

Rule 11.5  of the High Court Rules.

Registrar/Deputy Registrar

Date ...................

THE OFFICIAL ASSIGNEE v DEOBHAKTA [2013] NZHC 1834 [25 July 2013]

Background

[1]      The bankrupt, Mr Deobhakta, was adjudicated bankrupt on 9 December 2009 in the High Court at Tauranga on the creditor’s application of ASB Bank, based on a judgment debt in the amount of $571,659.18.   He was due to be automatically discharged from bankruptcy on 17 February 2013.  However the Official Assignee objected by way of Notice of Objection dated 5 February 2013.

[2]      Mr  Deobhakta  has  remained  bankrupt  since.    Pursuant  to  s  296  of  the Insolvency Act (“the Act”), the Assignee filed a report with the Court.   An examination pursuant to s 295 of the Act, which was required because of the objection, took place before me in the High Court at Tauranga on 16 July 2013.  An account of the evidence given and the issues that arose at that hearing is set out in this judgment.

Principles

[3]      It is important not to lose sight of the statement in ASB v Hogg of the need to keep in mind the scheme and purpose of the legislation.1   That requires the Court to consider whether the interests of the bankrupt in being able to resume financial autonomy are outweighed by considerations which include the interests of the creditors and the wider public concerns that are engaged.

[4]      In overview, the Official Assignee argues that there should be an extension of the statutory control over the bankrupt’s affairs which is provided for in the Act and that after he is released from bankruptcy there should be additional conditions.  The reason why this outcome is required, in the Assignee’s view, is:

(a)       Because of non-co-operation on the part of the debtor so that the true

extent of the bankrupt’s debts has still not been ascertained in the three-year period since adjudication;

1 ASB Bank v Hogg [1993] 3 NZLR 156 (CA).

(b)There is reason to believe that the debtor has diverted away from the Official Assignee and concealed the existence of income and property that he has acquired during the course of his bankruptcy.

(c)      That the cavalier attitude to creditors evinced by the conduct and omissions of the debtor give rise to concerns that the debtor continues to pose a risk for the public and the commercial community because of his financial responsibility and therefore should remain under the supervision of the Assignee for an extended period.

[5]      Section  296(2)(c)  and  296(2)(d)  are  particularly  relevant  to  the  present application:

296       Assignee’s report

...

(2)       The Assignee must report as to—

...

(c)         the bankrupt's performance of his or her duties under this Act; and

(d)        the manner in which the bankrupt has obeyed orders of the Court;

and

...

Duty to advise OA of income received and changes in personal status

[6]      The approach that the Official Assignee took was to focus attention on the extent to which Mr Deobhakta may not have cooperated with the Official Assignee in disclosing income, fees etc that he received during the course of the bankruptcy. As well, the Official Assignee questioned whether Mr Deobhakta had breached his obligations as an undischarged bankrupt by carrying on business as a self-employed lawyer during the period of his bankruptcy.   As well as having significance in its own right, the outcome of this part of the enquiry also threw considerable light on Mr Deobhakta’s personal reliability and the credibility of his evidence generally.

The Crafar Farms Relationship

[7]      On 11 November 2011 the bankrupt appeared on a television programme together with Mr A Crafar and two associates.  It was later reported in a newspaper article that during the programme Mr Deobhakta said that he and two assistants were working full-time to put a deal together for the Crafars.   The subject of interest explored in the course of that programme and in subsequent media comment was the

attempts  that  Mr  Crafar  and  members  of  his  family  were  making  to  resume ownership of dairy farms which were owned by family company/ies but which had been placed in receivership.  On 1 October 2010 Mr Deobhakta said in an e-mail that he had received an instruction to act for Crafar Farms Ltd in relation to their dispute. Subsequently the news media reported Mr Deobhakta speaking as a representative of the  family  when  announcing  a  deal  that  had  allegedly  been  reached  with  the receivers.   There is no suggestion that Mr Deobhakta would have represented the Crafars other than in a professional or commercial sense.

[8]      In an article that appeared in the press on 15 December 2011 Mr Deobhakta was reported as supporting himself “with a salary from Crafar farms”.  When asked about this during his examination he said he did not know why the media would write that.  In other words, he wished the Court to believe that it was a mistake on the part of the journalist concerned.

[9]      On 24 January 2012 Mr Deobhakta issued a media statement which stated in part that:

6.My personal position with the Crafarms project is that I commence working for the group on seven February.

[10]     On 20 February 2012, Mr Deobhakta sent an e-mail to the Official Assignee which included the following:

You may have heard the good news the Crafarms funding has come through. I now wish to collect my fee (close to $11m) and immediately.

[11]     During the course of his examination on 16 July 2013 Mr Deobhakta resisted any suggestion that he had ever been employed by Mr Crafar.   He said that he thought at the time he had probably been employed as a law clerk by Eastern Bay Law.  Subsequently he agreed that when asked to provide a statement of income that he received he confirmed that he had worked for the Eastern Bay Law between February and July 2011.

[12]     Further on in his examination he accepted that the statements concerning the

$11 million were a “fantasy”.  However for present purposes, there would seem to be

little doubt that Mr Deobhakta’s evidence is not correct to the extent that it suggested

that his relationship with Mr Crafar was in his capacity as a law clerk with PBL.

The invoice to Mr and Mrs Batt

[13]     A  further  important  aspect  of  the  examination  concerned  the  part  that Mr Deobhakta played in the invoicing of $35,000 arising out of the sale of property identified as “Archie Bunker”, owned by a Mr and Mrs Batt.  Quite some time after the transaction had occurred an accountant representing the Batts pointed out that no invoice had been received.  Mr Deobhakta responded by email that he would attend an  invoice  and  apparently  he  did  so.    He  later  gave  as  his  view  to  the  Batts accountant that the invoiced amount was GST deductible.

[14]     When questioned about this, Mr Deobhakta said he could not remember a great deal about it but that this invoice was not from him but was from his father-in- law’s company, MSM Limited.  He initially said that his only involvement was to draft the invoice at the request of his father-in-law (presumably for the company). Mr Cornegé asked Mr Deobhakta why it was necessary for him to draft an invoice when after all his father-in-law was operating the company, in Mr Deobhakta’s telling of matters.  Mr Deobhakta said that the father-in-law was a semi-literate man who had operated a gas station for a living.  The implication was that he was not a person of great commercial skill.  Mr Cornegé then asked if that was the case how it was  that  the  father-in-law  could  have  been  giving  advice  to  the  banks  about valuations obtained in respect of the business  which was for sale and in regard to which the invoices were issued.  He further pointed out that it was Mr Deobhakta who gave advice about whether the invoice could be claimed as a GST input.

[15]     I regret to say that Mr Deobhakta’s response to these questions was not satisfactory.  It is advisable that the matter of Mr Deobhakta’s credibility should be left at that point.  I have to record, that Mr Deobhakta, to his credit, acknowledges that he was an error in making some of the statements that he did to the Official Assignee such as the claim that he was going to receive a fee or commission of $11 million from the Crafar farms deal.

[16]     A further matter that needs to be dealt with, though, is the submission that is made  to  me  by  Mr  Deobhakta’s  counsel,  Mr  Hayes  that  because  the  Official Assignee had not called evidence to controvert what Mr Deobhakta said about the various  matters  in  dispute,  I could  not  resolve  factual  issues  against  his  client. Mr Cornegé  on  the  other  hand  submitted  that  the  procedure  involved  in  an examination of a debtor under s 295 of the Act was inquisitorial in nature and that there was no burden upon the Official Assignee to establish that the bankrupt was wrong about  factual  matters which were argued in support of his  case that the discharge from bankruptcy ought not to be deferred.

Significance of evidence

[18]     Mr Deobhakta was under an obligation under s 144 of the Act to provide the Assignee with details of his income and expenditure since adjudication.  He is also under an obligation under s 145 of the Act to notify the Assignee of change in personal information.  That includes questions about his employment.  In at least two important respects, the evidence before the Court establishes that Mr Deobhakta failed to discharge that duty.  He failed to advise the Official Assignee concerning his relationship with Mr Crafar and the commission/fee earning arrangement that he had entered into with Crafar Farms Ltd.  His explanation of the transaction with the Batts was also unsatisfactory.

[19]     Those matters in turn are relevant to the matter of the bankrupt’s performance of his duties under the Act.2

Cooperation with Official Assignee

[20]     The Official Assignee placed material before the Court which established that Mr Deobhakta took a combative stance when dealing with the Official Assignee. For example, Mr Deobhakta sent an e-mail to the Official Assignee on 11 November

2011,3   which  related  to  a  payment  of  $1  million  which  he  had  in  an  earlier

communication said that he would be paying on to the High Court towards satisfaction of the debts which gave rise to his bankruptcy.  In his e-mail he said he

2 Insolvency Act 2006, section 296(2)(c).

3 Exhibit “L”.

would  be  “knocking  off”  $100,000  because  of  allegedly  defamatory  comments which the Official Assignee’s staff member had made about him and that he would be “knocking off” a further hundred thousand dollars because the Official Assignee’s counsel and prosecution proceedings had “quite unnecessarily” required a condition that the debtor surrender his passport.4    I understand that the defamatory comments that  he  complained  of  were  communications  by  Ms  King,  an  employee  of  the Official Assignee, to the Law Society at a point where Mr Deobhakta was seeking to obtain a practising certificate.  Ms King advised the Law Society that Mr Deobhakta

would be facing serious charges of contravening the Insolvency Act 2006 by leaving the jurisdiction without the consent of the Official Assignee.

[21]    As it happens, Mr Deobhakta was prosecuted for such matters but was discharged without conviction.   He claims that it was therefore wrong to describe those charges as being serious.

[22]     The point however is that the approach that Mr Deobhakta took is hardly consistent with that of the bankrupt who takes his obligations seriously under the Insolvency Act 2006.  This is relevant to the factor referred to in s 296 Insolvency Act 2006 at subparagraph 2(e) that is concerned with the bankrupt’s conduct before and after adjudication.

The stance that Mr Deobhakta took at the hearing

[23]  The bankrupt now accepts that valid criticisms have been levelled against him. He puts his unsatisfactory conduct down to the fact that he has been suffering from depression for which he has received professional treatment over the last year.  He has also had the benefit of counselling and has support of his current employers, Ngaitai Iwi.  As a result he has come to see the error of his ways, he says.

[24]     The  Court  has  to  assess  carefully  whether  Mr  Deobhakta  has  genuinely turned  his  back  on  the  type  of  conduct  he  evinced  as  recently  as  a  year  ago. Mr Hayes said that there had been a genuine change of heart and it was not simply a

matter of the bankrupt taking such a position because it was tactically helpful at the

4 E-mail 11 November 2011 to Marie King.

point where the bankrupt was opposing the Official Assignee in attempting to block his discharge.

[25]     Mr Hayes also submitted that to the extent that it was relevant, it could not be said that the conduct of the bankrupt which led to his initial adjudication was particularly culpable.  He made brief background to such circumstances which may be briefly summarised as follows.   The original debt was incurred with ASB as a result of Mr Deobhakta’s wife wishing to raise money so that she could start a business dealing in jewellery.  Funding for that came by way of a mortgage which Mr Deobhakta gave over the family home in Tauranga.  Apparently the business was not a success and it proved not possible to service the loan secured over the family home which was eventually sold by mortgagee sale.  Mr Deobhakta asserts that that sale took place at a substantial undervalue.  Whether that is so or not is not a matter which is before the Court for determination on the present application.

[26]     I would agree that it is easy to imagine more culpable cases such as where there has been a history of reckless trading causing great harm to unsecured creditors.

The order which the Official Assignee seeks

[27]     Mr Cornegé told me that the Official Assignee does not in fact seek to defer the  bankrupt’s  discharge  from  bankruptcy  but  rather  seeks  that  conditions  be attached to the discharge.  Specifically, it is proposed that the bankrupt be subject to a condition that he does not undertake self-employment for a period of 18 months. Counsel referred me to the fact that Mr Deobhakta has employment with the Ngaitai Iwi as a programme manager which has a duration of approximately 18 months. That  being  so,  he  submitted,  there  would  be  no  real  detriment  arising  from attachment of the proposed condition.  There is no doubt that the Court can attach

conditions to a discharge.5

[28]     Mr Cornegé did not dispute that the question of whether or not conditions ought to be attached can only be sensibly assessed in the context of the statutory objectives established by the Act.

[29]     An explanatory note that accompanied the original  Bill which led to the statute as finally enacted included the following objectives:6

(i)      provide a predictable and simple regime for financial failure that can be administered quickly and efficiently, imposes the minimum necessary compliance and regulatory costs on its users and does not stifle innovation, responsible risk taking, and entrepreneurialism by excessively penalising business failure;

(ii)     distribute the proceeds to creditors in accordance with their relative pre- insolvency entitlements, unless it can be shown that the public interest in providing  greater  protection  to  one  or  more  creditors  outweighs  the economic and social costs of any such priority;

(iii)    maximise  the  returns  to  creditors  by  providing  flexible  and  effective methods of insolvency administration and enforcement which encourage early intervention when financial distress becomes apparent;

(iv)    enable individuals in bankruptcy to participate again fully in the economic life of the community; and

(v)promote   international   co-operation   in   relation   to   cross-border insolvency.

Discussion

[30]     The bankrupt has not conducted himself in a creditable way during the course of  his  bankruptcy.    His  conduct  has  been  characterised  by  almost  exclusively concern for his own interests with little regard being had to the interests of the creditors.   The tone of the communications which were put before the Court in evidence frequently adopt the starting point that it is everyone else’s fault and the debtor is blameless.  He has on a number of occasions threatened to withdraw co- operation with the Official Assignee’s staff when they have declined to go along with his requirements.  If that were not enough, on one occasion he informed staff of the Official Assignee that once his bankruptcy was concluded he may well make representations  to  the  Law  Commission  with  the  objective  of  bringing  about  a

review of the way that the Official Assignee was exercising his powers.   He has threatened legal proceedings against those staff and other members of the public.

[31]     The most likely explanation for this conduct is that it is symptomatic of a failure to appreciate that as a bankrupt who has caused loss to a considerable number of people, it is incumbent upon him to accept that it is the role of the Official Assignee to manage the estate in such a way that mitigates the harm that the debtor has caused.

[32]     The conduct of the bankrupt in relation to the Crafar matter is also of concern because it shows that at least on that occasion he lost touch with commercial reality. This could be an indicator that in future the debtor could be tempted to engage in imprudent financial dealings with resultant harm to creditors.

[33]     As well, there has been a lack of candour about sources of income.  While it is not spelt out in detail in the report which the Assignee has lodged pursuant to s 296 of the Act, it is apparent that the bankrupt has obtained employment which has not been disclosed to the Official Assignee and the income from which has similarly not been reported.  An example of this is the commission of $30,000 charged on the sale  of  a  property  known  as  “Archie's  Bunker”  which  was  charged  to  Mr  and Mrs Batt in or about June of 2010.

[34]     Further, it is correct, as Mr Cornegé submitted, that there are no pressing reasons why Mr Deobhakta should be released  from bankruptcy.   He has what appears to be secure employment available to him for 18 months.   Even if he did wish to resume the practice of law he does not need to do that as a self employed principal.  However, against that, is the statement found in the judgment of the Court of Appeal in ASB v Hogg to which I have already made reference, that the legislation recognises that it is not in the public interest that the bankruptcy should endure indefinitely.  Those considerations apply as much to cases involving applications for early discharge as they do to cases where the Official Assignee seeks to defer a discharge.

[35]     The key issue to my mind, is whether Mr Deobhakta remains a risk to the commercial community and whether the proposed conditions would mitigate that risk.  It is also necessary to balance such benefits against the undoubted policy of the Act that a bankrupt should be enabled to participate again fully in the economic life of the community, to quote the explanatory notes referred to above.

[36]     Mr Deobhakta seeks to explain the negative aspects of his conduct during the bankruptcy as being attributable to the fact that he essentially lost his way.   This came about because of the sharp adverse reaction on his part to having failed in a financial sense.  He now says he perceives that his attempts to lay the blame at the feet of other people were mistaken.   Nonetheless, there were still strands of such self-justifying explanations apparent on the evidence which he gave before me.  On the positive side, he at least recognises that his past thinking required correction and he has been obtaining assistance to get back on its feet.

[37]     The fact that he was still prepared to advance unsustainable propositions as part of the evidence which he gave before me at the hearing is a matter to be regretted.   However, that matter is probably symptomatic of a more fundamental character issue that is of relatively limited relevance to the question of whether he ought to be discharged from bankruptcy.  That said, the fact that he put such material before the Court did not assist his cause.

[38]     Finally I note that Mr Deobhakta has now been bankrupt for three years and five months.  The longer the period of bankruptcy, the greater the burden that may be supposed the bankrupt has had to bear.   That matter is relevant to the discretion which the Court is required to exercise.

[39]     While it is correct that the reason why Mr Deobhakta wishes to be discharged is so that he can ultimately recommence practice as a self-employed lawyer, he

would not be limited to self employment in that profession only if he were to be discharged.  That said, having regard to where his maximum potential for earning income lies, it seems likely that Mr Deobhakta will in fact attempt to set up as a self- employed lawyer.  Because he will need to satisfy the requirements of the Law

Society before he does so, some control on his future actions is to be expected from that source.

Conclusion

[40]     My overall view is that little, if anything, would be achieved by attaching

conditions to Mr Deobhakta’s discharge.

[41]     I consider that the Official Assignee took the correct course when deciding to bring the matter to the attention of the Court for it to decide.  However, in the end, I am not persuaded that attaching the conditions that the Official Assignee seeks will produce any particular advantage.

[42]     I therefore grant the bankrupt an immediate discharge without conditions pursuant to s 298 of the Act.

J.P. Doogue

Associate Judge