Official Assignee v Elite Telecomms Ltd
[2023] NZHC 2048
•3 August 2023
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2022-442-38
[2023] NZHC 2048
UNDER Sections 206(6) and 207 of the Insolvency Act 2006 IN THE MATTER
of the Bankruptcy of Mila Amber
BETWEEN
THE OFFICIAL ASSIGNEE
Applicant
AND
ELITE TELECOMMS LTD
Respondent
Hearing: 24 May 2023 Appearances:
P R W Chisnall and S A Davies for Applicant
M R C Wolff and A R Williamson for Respondent
Judgment:
3 August 2023
JUDGMENT OF ASSOCIATE JUDGE PAULSEN
This judgment was delivered by me on 3 August 2023 at 11.00 am pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
THE OFFICIAL ASSIGNEE v ELITE TELECOMMS LTD [2023] NZHC 2048 [3 August 2023]
Table of Contents
Para No
The statutory provisions [4] The issues
[12]
Background
[15]
Evidence of Mr Collins
[28]
Ms Amber’s solvency
[45]
Was the sale of 46 Weka Street intended by Ms Amber to prejudice a creditor?
[54]
Did Elite act in good faith?
[62]
Would a reasonable person in Elite’s position suspect Ms Amber was or would become unable to pay her due debts?
[70]
Did Elite provide value for the property in the reasonably held belief that the transfer of the property was valid and would not be cancelled?
[74]
Summary of conclusions
[76]
Remedies
[78]
Result
[82]
[1] Elite Telecomms Ltd (Elite) is a company incorporated in the United Kingdom.1 In December 2017, Mila Amber sold her property at 46 Weka Street, Nelson to Elite on terms that required payment of the purchase price over 25 years, without interest. At the time, Ms Amber was engaged in a dispute with the Inland Revenue Department (IRD) over her tax liabilities and she was adjudicated bankrupt on the Commissioner of Inland Revenue’s application in December 2020.
[2] The Official Assignee (the Assignee) considers the sale of 46 Weka Street was a scheme to defeat the IRD’s entitlement to payment of Ms Amber’s tax debt, and an irregular transaction under s 206 of the Insolvency Act 2006 (the Act). It applies for orders under s 207 of the Act cancelling the transaction and for the retransfer of the property to the Assignee.
[3] Elite argues the sale was not an irregular transaction, and the Court cannot make an order cancelling the transaction when it acted in good faith;2 a reasonable person in its position would not have suspected, and it did not suspect, that Ms Amber was or would become unable to pay her due debts;3 and it gave value for 46 Weka Street in the reasonably held belief the transfer was valid and would not be cancelled.4
The statutory provisions
[4] The statutory provisions that apply to this proceeding are not straightforward. To assist comprehension of what follows, I set them out below.
[5]The application is made under s 206 of the Act, which provides:
206 Procedure for cancelling irregular transactions
(1)The procedure set out in this section applies to the following irregular transactions:
…
(d) a disposition of property to which subpart 6 of Part 6 (setting aside of dispositions that prejudice creditors) of the Property Law Act 2007 applies.
1 The company was also registered in New Zealand as an overseas company from 8 January 2018.
2 Insolvency Act 2006, s 208(a).
3 Section 208(b).
4 Section 208(c).
(2)The Assignee who wishes to cancel an irregular transaction to which this section applies must
(a)file a notice with the court that meets the requirements set out in subsection (3); and
(b)serve the notice on
(i) the other party to the transaction; and
(ii) any other party from whom the Assignee intends to recover.
(3)The notice must
(a)be in writing; and
(b)state the Assignee’s postal, email, and street addresses; and
(c)specify the irregular transaction to be cancelled; and
(d)describe the property or state the amount that the Assignee wishes to recover; and
(e)state that the person named in the notice may object to the cancellation of the transaction by sending to the Assignee a written notice of objection that is received by the Assignee at his or her postal, email, or street address within 20 working days after the Assignee’s notice has been served on that person; and
(f)state that the written notice of objection must contain the reasons for objecting; and
(g)state that the transaction will be cancelled as against the person named in the notice if that person does not object; and
(h)state that if the person named in the notice does object, the Assignee may apply to the court for the transaction to be cancelled.
(4)The irregular transaction is automatically cancelled as against the person on whom the Assignee has served the Assignee’s notice, if that person has not objected by sending to the Assignee a written notice of objection that is received by the Assignee at his or her postal, email, or street address within 20 working days after the Assignee’s notice has been served on that person.
(5)The notice of objection must state the reasons for objecting.
(6)An irregular transaction that is not automatically cancelled may still
be cancelled by the court on the Assignee’s application.
[6] The Assignee relies upon s 206(1)(d) and (6) and considers the sale of 46 Weka Street to Elite was a disposition of property to which sub-pt 6 of pt 6 (setting aside of dispositions that prejudice creditors) of the Property Law Act 2007 applies.
[7] Section 344 of the Property Law Act sets out the purpose of sub-pt 6 of pt 6 as follows:
344 Purpose of this subpart
The purpose of this subpart is to enable a court to order that property acquired or received under or through certain prejudicial dispositions made by a debtor (or its value) be restored for the benefit of creditors (but without the order having effect so as to increase the value of securities held by creditors over the debtor's property).
[8] Section 345 is an interpretation section for the purposes of the subpart and relevantly provides:
345 Interpretation
(1)For the purposes of this subpart,
(a)a disposition of property prejudices a creditor if it hinders, delays, or defeats the creditor in the exercise of any right of recourse of the creditor in respect of the property; and
…
(d) a debtor must be treated as insolvent if the debtor is unable to pay all his, her, or its debts, as they fall due, from assets other than the property disposed of.
(2)In this subpart, unless the context otherwise requires,—
disposition means—
(a)a conveyance, transfer, … or other alienation of property,
whether at law or in equity:
…
[9] Section 346 defines the scope of transactions to which sub-pt 6 applies and relevantly provides as follows:
346 Dispositions to which this subpart applies
(1)This subpart applies only to dispositions of property made after 31 December 2007
(a)by a debtor to whom subsection (2) applies; and
(b)with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.
(2)This subsection applies only to a debtor who
(a)was insolvent at the time, or became insolvent as a result, of making the disposition; or
…
[10] Section 207 of the Act sets out the orders the Court may make when cancelling an irregular transaction under which the property of a bankrupt was transferred as follows:
207 Court may order retransfer of property or payment of value
(1)On the cancellation of an irregular transaction under which property of the bankrupt, or an interest in property of the bankrupt, was transferred the court may make an order for
(a)the retransfer to the Assignee of the property or interest in the property; or
(b)payment to the Assignee of a sum of money that the court thinks appropriate, but the sum must not be greater than the value of the property or interest in the property when the transaction was cancelled.
(2)The court may make any other order for the purpose of giving effect to an order under subsection (1).
(3)An order under subsection (1) is in addition to any other rights and remedies available to the Assignee, and this section does not restrict those rights.
[11] Section 208 places limits upon the extent to which the Assignee may recover property using the procedure prescribed in the Act:
208 Limits on recovery
The court must not make an order under section 207 against a person
(A) if A proves that when A received the property or interest in the property
(a)A acted in good faith; and
(b)a reasonable person in A’s position would not have suspected, and A did not have reasonable grounds for suspecting, that,
(i) in the case of an insolvent gift, the bankrupt was, or would become, unable to pay his or her debts without the aid of the property that the gift is composed of; or
(ii) in the case of any other irregular transaction referred to in section 206(1), the bankrupt was, or would become, unable to pay his or her due debts; and
(c)A gave value for the property or interest in the property or altered A’s position in the reasonably held belief that the transfer of the property or interest in the property to A was valid and would not be cancelled.
The issues
[12] It cannot, in my view, be disputed that the transfer of legal title of 46 Weka Street by Ms Amber to Elite was a disposition of property for the purposes of s 345(2) of the Property Law Act.
[13]The issues that need to be determined are:
(A)whether, in selling and transferring title to 46 Weka Street to Elite,
Ms Amber intended to prejudice a creditor;5
(B)whether Ms Amber was insolvent at the time she transferred 46 Weka Street to Elite, or became insolvent as a result of making the disposition;6 and
(C)whether recovery by the Assignee should be limited because:7
(i)Elite acted in good faith; and
(ii)a reasonable person in Elite’s position would not have suspected, and Elite did not have reasonable grounds for suspecting, that Ms Amber was or would become unable to pay her due debts; and
(iii)Elite gave value for 46 Weka Street in the reasonably held belief that the transfer of the property was valid and would not be cancelled.
5 Property Law Act 2007, s 346(1)(b).
6 Section 246(1)(a) and (2)(a).
7 Insolvency Act, s 208(a), (b)(ii) and (c).
[14] Mr Wolff submits, and I accept, the Assignee has the burden of proof in relation to the matters in [13(a) and (b)] above, but Elite bears the burden of proof in relation to all matters in [13(c)].
Background
[15] Ms Amber was the sole registered owner of 46 Weka Street between 11 February 2005 and 18 December 2017. She had been married to Gaimhreadhan O’Coileain. They had two children together. They separated in 2005. I understand Mr O’Coileain lives overseas.
[16] Ms Amber and Mr O’Coileain ran a bed and breakfast business from 46 Weka Street through a company. The company went through several name changes but came to be unsubtly called Abbey Services (Killed by Tax Maladministration) Ltd. I will refer to the company as Abbey Services.
[17] Ms Amber and Mr O’Coileain were never recorded as directors or shareholders of Abbey Services, but between April 2006 and October 2011, and again between March 2012 and November 2013, 46 Weka Street was the registered office of the company. For a time, the children of Ms Amber and Mr O’Coileain, who were then minors, were shareholders in the company.
[18] Mr Collins and Mr O’Coileain are old friends. In 2013, Mr Collins agreed to a request from Mr O’Coileain to become a director of Abbey Services. He became a director from 17 November 2013. On 18 and 19 November 2013, all the shares in the company were transferred to him. Mr Collins remained a director and the sole shareholder of Abbey Services. In August 2014, the company was put into liquidation upon the application of the Commissioner. However, Mr Collins says he agreed to be a director for just a few days and he has no knowledge of being a shareholder of the company. I will return to this later in the judgment.
[19] The IRD had been conducting an investigation into Ms Amber’s tax affairs since July 2013. By 6 December 2017, shortly before the sale of 46 Weka Street, Ms Amber had been informed in correspondence from the IRD that she owed more than $110,000 in overdue tax, shortfall penalties and overpaid Working for Families
Tax Credits. With further assessments, it was later determined that by December 2017 Ms Amber owed the IRD $364,939.90. Ms Amber was adjudicated bankrupt on the application of the Commissioner in December 2020.
[20] In November 2017, Mr Collins travelled to New Zealand and stayed with Ms Amber at 46 Weka Street. He says he did so with a view to buying a residential property in New Zealand. Despite Mr Collins’ friendship with Mr O’Coileain, he says he did not know Ms Amber before his visit. Mr Collins says he persuaded Ms Amber to sell 46 Weka Street to Elite, although initially she did not want to sell the property.
[21] On 11 December 2017, Ms Amber entered into a written agreement to sell 46 Weka Street to Elite for $847,008.74.8 The terms of the agreement are unusual in several respects. In particular:
(A)Elite was to take possession on 14 December 2017 (or such other date as was agreed) being just one clear working day after the agreement was signed.
(B)No deposit was payable.
(C)There is no provision for interest on late settlement.
(D)The purchase price was to be paid by 25 unequal annual payments, and would not therefore be paid in full until 14 December 2042.
(E)There was no provision for interest on the unpaid purchase price over the 25-year period that it was to be paid.
(F)No payments were due to be made until 14 December 2018, a year after settlement. The first payment of $10,000 was to be made on or before 14 December 2018 and each subsequent instalment was to be nine per
8 Mr Collins says the sale price was agreed because Ms Amber is Filipino and wanted an amount equivalent to 30 million Philippine pesos.
cent greater than the previous annual instalment in accordance with a schedule of payments attached to the agreement.
[22] Of particular note, because of their unusual nature, are cls 19, 20 and 22 of the agreement which relevantly read as follows:
19.0Settlement & Payment of the Purchase Price
19.1The Purchaser shall take possession of the subjects on 14 December 2017 (or such other dates as may be mutually agreed).
19.2The agreed purchase price of $847,008.74 will be paid to the Vendor in 25 unequal annual instalments to be paid on or before each successive anniversary of the date of entry. If the Purchaser defaults on payment it is agreed between the parties that the Vendor may exercise immediately, the option to repossess the property and retain all payments paid up to and including the date of default.
19.3The first annual instalment is to be a payment of $10,000.00 paid on or before 14 December 2018 (unless an earlier or later entry date is agreed). Each subsequent annual instalment is to be 9% greater than the previous annual instalment in accordance with the schedule of payments attached and marked as “B”.
19.4The parties agree that the Vendor has a contractual right to immediately repossess the subjects of sale without compensation to the Purchaser and retain all instalments paid up to and including the date of repossession in the event that the Purchaser makes any arrangement with its creditors or motions for liquidation or bankruptcy are filed.
20.0Re-sale
20.1It has been agreed that the Vendor will neither have first refusal nor the option to veto any subsequent re-sale of the subjects of sale. Nor will the Vendor place a caveat or inhibit the subsequent re-sale of the subjects. It has been agreed that the Purchaser must immediately notify the Vendor of all material details if they ever intend to re-sell the subjects of sale or if they receive any offer or genuine and serious enquiries to purchase.
20.2In the event that the Purchaser re-sells the whole or any part of the current subject of sale at 46 Weka Street, Nelson, the Purchaser will repay to the Vendor the whole balance owing of the agreed purchase price of $847,008.74 on the settlement date of the new sale.
20.3For the avoidance of doubt, no interest under any circumstance will be due to the Vendor from the Purchaser at any time on either the purchase price or late instalments of the purchase price. Neither will the Vendor take a charge on the subjects of sale.
20.4The Purchaser agrees to keep insured against all usual hazards the subjects of sale from the date of their entry and taking of possession until the full purchase price has been paid to the Vendor.
…
22.0Repayment
22.1The Purchaser has the option to pay at any time the whole or part of the remaining balance of the purchase price without penalty, and upon repayment of the full balance of the purchase price Clauses 19.2, 19.3, 19.4, 20.1 and 20.2 will lapse.
[23] Elite was registered as the owner of the property on 18 December 2017, and Mr Collins returned to his home in Scotland that same day.
[24] Ms Amber continues to reside at 46 Weka Street as a tenant paying rent to Elite. The rent is now $412 per week. Elite also rents out a cottage on the property for $463. Ms Amber has been taking in lodgers, and the Assignee considers that she continues to have an involvement in a bed and breakfast business operated from the property, as it has been listed on accommodation booking websites.
[25] Mr Collins says Elite has made payments to Ms Amber under the agreement for sale and purchase totalling $59,847.13 as follows:
(A)The first payment of $10,000 due on 18 December 2018 was paid “within time”.
(B)The second payment of $10,900 due on 18 December 2019 was paid “before time”.
(C)The third payment of $11,881 due on 18 December 2020 was paid “before time”.
(D)The fourth payment of $12,950.29 due on 18 December 2021 was “credited well before the deadline”.
(E)The fifth payment of $14,115.82 due on 18 December 2022 was made to Ms Amber’s daughter because she was struggling to pay her university expenses.
[26] However, the Assignee says the position is that four payments have been made to Ms Amber totalling $45,731.29 and that the dates they were made on are significant as being well before the dates they were due. It says:
(A)the $10,000 due on 18 December 2018 was paid on 6 August 2018;
(B)the $10,900 due on 18 December 2019 was paid on 26 November 2018;
(C)the $11,881 due on 18 December 2020 was paid on 13 June 2019;
(D)the $12,950.29 due on 18 December 2021 was paid on 3 December 2019; and
(E)there is no evidence that Ms Amber received a fifth instalment of
$14,115.82, and it is not accepted it has been validly paid.
[27] Although no issue is taken with the procedure adopted by the Assignee, I note that on 30 March 2022 the Assignee filed with the Court an originating application under s 206 of the Act seeking cancellation of the transaction. The notice satisfies the requirements of s 206(2) and (3) of the Act. The application was served on Elite on 17 May 2022 by substituted service by order of Associate Judge Johnson. On 14 June 2022, Elite served on the Assignee a notice of objection. On 28 July 2022, the Assignee commenced this proceeding seeking the orders set out at [2] above. Elite filed its opposition on 26 August 2022, and an amended notice of opposition and affidavit of Mr Collins on 5 December 2022.
Evidence of Mr Collins
[28] Mr Collins attended the hearing by audio-visual link for cross-examination. He was the only witness for Elite. It is necessary for me to make an assessment of his evidence. I did not find Mr Collins to be a credible witness. I do not accept his evidence in its material respects because it is implausible and, often, defies belief.
[29] Mr Collins says he was introduced to Ms Amber in October 2017 by Radek Tauš, but Mr Collins had several links to Ms Amber well before then. Mr Collins was
a lifelong friend of Ms Amber’s husband, Mr O’Coileain. Mr Collins agreed in late 2013 to be appointed as a director in Abbey Services, being the company through which Ms Amber and Mr O’Coileain operated a bed and breakfast business. Mr Tauš, is an employee of Elite based in the United Kingdom, and was prior to 18 November 2013, a shareholder of Abbey Services, as was a Joseph Angelo, who, following Elites’ purchase of 46 Weka Street, was appointed Elite’s agent in New Zealand for the purposes of the Residential Tenancies Act 1986. I therefore find it very unlikely that Mr Collins’ first introduction to Ms Amber was as he describes.
[30] Similarly, I do not accept Mr Collins’ evidence that Elite wanted to purchase a residential property in New Zealand, because he had seen reports of attractive capital gains to be made here. Elite is a telecommunications company in the United Kingdom. It has no prior business in New Zealand, and it was not seriously suggested it had plans to expand its existing business here. Speculating on the prospect of making a capital gain on a single residential property was a fundamental departure from its usual business. Further, some of Mr Collins’ evidence as to his thought processes around the purchase was simply odd, such as when he said:
Mila is a good cook and I thought, well this is nice, because I am going to be able to come over at the company’s expense. Mila will cook for me, wash my clothes, that sort of thing, obviously as a bachelor I am not the world’s greatest cook if you understand me.
[31] Mr Collins says that before coming to New Zealand he contacted Mr O’Coileain to see whether he had a financial interest in the Weka Street property. This, too, is peculiar when (according to his evidence) he had never met Ms Amber, had not been to New Zealand, had not inspected the property, and had no indication from Ms Amber she might consider selling it.
[32] He also says that despite Ms Amber not being initially prepared to sell the property, he persuaded her to do so and the terms agreed were good for both Elite and Ms Amber. He is plainly wrong about that, and I cannot accept that as an experienced businessman he could possibly consider that was the case. Viewed objectively, the terms were neither fair nor reasonable from Ms Amber’s perspective.
[33] Ms Amber transferred the property to Elite and received no immediate payment whatsoever. She had no ability to use the proceeds of sale to buy herself another home. She lost the benefit and personal security that ownership of her own home provides as well as the prospect of capital gains. She could not invest the sale proceeds or earn interest on her money. The amount of interest Ms Amber might have earned had the sale price been paid at settlement and invested would have been very substantial. Taking a nominal interest rate of four per cent, in the first year alone, Ms Amber would have earned $33,880 in interest.9
[34] The agreement also disadvantaged Ms Amber in other ways. She is now paying rent to Elite which, over the course of a year, would far exceed what she might pay by way of outgoings had she remained the owner of the property. She has lost the ability to rent out other parts of the property that she is not using, which is what Elite is now doing.
[35] The payment of the purchase price by instalments put Ms Amber at significant risk. The agreement provides that she will not caveat the title and has no right of first refusal nor an ability to veto any re-sale of the property by Elite. She became an unsecured creditor of Elite. There is nothing to prevent Elite from dealing with the property in a manner that may defeat her right to payment. For instance, Elite can use the property as security for borrowings. While the agreement provides that if Elite sells the property (or any part of it) it will pay Ms Amber the balance of the purchase price, she has no security for payment and is dependent upon Elite having the ability to pay.
[36] Looking at the transaction from Elite’s perspective, the terms are plainly highly advantageous. It obtained ownership of the property without having to pay anything immediately. Elite did not have to borrow to acquire the property or use its own funds to do so. Elite’s liability to Ms Amber is fixed because “no interest under any circumstance” is to be paid. Elite can use the property as security or sell it at any time. It can also, and does, rent the property to Ms Amber and others, receiving
9 I accept that she could have earned interest on the instalments as they were paid over the 25 years.
income which can be expected to significantly exceed the purchase price as well as the outgoings on the property.
[37] Mr Collins says Elite will incur maintenance costs in respect of the property and that he has budgeted $20,000 per year for that, but it can be safely inferred this is not a genuine estimate. Apart from saying there is “ongoing maintenance on the roof” and the driveway is being “redone”, Mr Collins did not say what maintenance is required and he provided no evidence of actual costs that have been incurred. The only figure he mentioned was an estimate for $1,700 to repair the cottage roof.
[38] Mr Collins gave evidence as to benefits of the agreement according to Ms Amber. None of the matters advanced stand scrutiny. He says Ms Amber could not afford outgoings on the property, but the rent she is paying Elite would almost certainly exceed such outgoings. He says Elite allows Ms Amber to live in the property so she will not have to move her furniture to a new house, and she likes to garden. Prior to the sale, Ms Amber had no need to move and could garden at will. Mr Collins says that if interest had been payable to Ms Amber under the agreement she would have had to pay tax on it. It is hard to see how it is beneficial to avoid tax by foregoing all income. Mr Collins refers to Ms Amber wanting to return to the Philippines when she turns 65 in around 2034, but that does not provide a reason to sell her home on such disadvantageous terms in 2017. Mr Collins also says the agreement is advantageous for Ms Amber because if he dies she would get the property back and keep the instalments paid, but the agreement contains no such provision.
[39] Distancing himself from Ms Amber and her affairs prior to 2017, Mr Collins says that he had agreed to be a director of Abbey Services from just 17 November to 20 November 2013 at the request of Mr O’Coileain. He denied knowing he was ever a shareholder of the company or that he authorised the name change to Abbey Services (Killed by Tax Maladministration) Ltd. He says his appointment as director was necessary because the then director, Joseph Angelo, needed to resign suddenly for personal reasons. Mr Collins says that Irena Zdenka was to file his resignation as a director when she was appointed on 20 November 2013. However, the Companies Register shows Mr Angelo resigned on 19 November 2013, the same day as Ms Zdenka was appointed. There was no apparent need for Mr Collins to be appointed
a director. It is also suspicious that he apparently made no effort to check that he had been removed as a director, if his appointment was intended as a temporary measure.
[40] Mr Collins acknowledges that he was aware that Ms Amber and her family had been investigated by the IRD but says, variously, he believed her tax issues had been or shortly would be resolved, and that the IRD were to pay Ms Amber a five figure sum. The bases for these beliefs were said to be that in Ireland and Scotland tax matters are resolved quickly, and because he had been shown an email from Mr O’Coileain setting out what Ms Amber needed to present to be back-paid her entitlements. Mr Collins had discussed Ms Amber’s long-term tax issues with her and Mr O’Coileain. He had seen correspondence with the IRD about them. He is an experienced businessman. I do not accept he is so naïve as to consider that the IRD would, after several years of investigation, suddenly, and with no prior indication, accept Ms Amber’s position and pay her a five figure sum.
[41] Mr Collins relies upon correspondence that he says was provided to him by Mr O’Coileain about the disputes with the IRD. However, Mr O’Coileain was not clear what had been sent to Mr Collins. When recently forwarding one email to Mr Collins he wrote, “I think this must be one of the background emails that I forwarded to your (defunct) Yahoo! email from my (defunct) email address”. When asked whether he knew about a debt claimed by the IRD that was referred to in one of those emails, Mr Collins said the email was a “best guess at the emails that I had been
… sent in October 2017 or November 2017”. It appears Mr Collins’ evidence is based on the contents of correspondence he may not have seen prior to the Assignee making this claim.
[42] Mr Collins gives hearsay evidence as to what Ms Amber told him and, despite plainly having a good relationship with both her and Mr O’Coileain, neither has made an affidavit to confirm his evidence. The closeness of his relationship with Ms Amber is demonstrated by the fact that Elite made a loan to her for a car, made a large payment to her daughter to assist with university expenses, and made instalment payments under the agreement well ahead of when they were due.
[43] While Mr Collins says Elite’s purchase of 46 Weka Street was a commercial arrangement, I do not accept that. He very closely identifies with Ms Amber’s cause in her dispute with the IRD and wanted to assist her. Several times throughout his evidence he referred at length to the injustices the IRD had inflicted upon Ms Amber, for example:
Had I known, or even suspected, that the New Zealand tax authorities would respond in such an unfair and brutal way after not paying Ms Amber her entitlements, creating non-existent debts out of thin air, and denying her the fundamental right to have a debt proven to the civil standard of proof before insolvency proceedings were commenced, I would not have endangered Elite Telecomms Limited’s finances by concluding an agreement to purchase her property. It is only relatively recently that I have discovered that the New Zealand tax authorities have a different concept of fair and just behaviour to other common law jurisdictions …
[44]I now turn to consider the issues that arise.
Ms Amber’s solvency
[45] The Assignee must establish that Ms Amber was insolvent at the time, or became insolvent as a result, of the transfer of 46 Weka Street to Elite.10
[46] Mr Wolff submits there is no evidence that Ms Amber was insolvent at the relevant time and the Assignee should have called Ms Amber to give evidence as to her financial position, or at the very least produced her bank statements. He refers me to correspondence written by Ms Amber’s daughter and Mr O’Coileain in 2015 to 2017, which discuss Ms Amber’s difficult circumstances, and submits they are unreliable. Mr Wolff also submits that Ms Amber’s statement of affairs completed upon her bankruptcy in 2020 is not a reliable guide as to her financial position at the time of the sale of the property.
[47] The thrust of Mr Wolff’s submissions is that Ms Amber’s financial position as of December 2020 does not necessarily reflect her circumstances as of December 2017. I do not accept that is the case. All the evidence shows that apart from disposing of her only valuable asset to Elite, Ms Amber’s financial position did not otherwise materially change between those dates.
10 Property Law Act, s 346(2)(a).
[48] The starting point is s 345(1)(d) of the Property Law Act which provides that a debtor must be treated as insolvent if the debtor is unable to pay all her debts as they fall due from assets other than the property disposed of (in this case 46 Weka Street).
[49] On 24 December 2020, upon her bankruptcy, Ms Amber completed a statement of affairs document which identifies that she had no assets other than a motor vehicle, with an estimated resale value of $1,200 and, importantly, in the previous five years (that is since 24 December 2015) she had not sold, transferred or given away any assets worth more than $5,000 other than the Weka Street property. In the same document, Ms Amber disclosed her income was only $36,178.48 comprising a benefit and income received from boarders. There is nothing in the evidence to suggest her income had been greater in 2017.
[50] Mr Collins gives evidence relevant to Ms Amber’s financial position at the time of sale, including:
When I arrived in New Zealand in November 2017, I spoke to my host, Ms Amber, and she confirmed that things were very tight for her financially because the New Zealand authorities were not paying her what she was entitled to.
[51] He said in cross-examination that Ms Amber explained to him that things were “very, very tight”, and that:
… it is very, very wrong that somebody who is buying their clothes from a thrift shop, who is, you know, basically one of the poorest people in New Zealand, there is this enormous tax debt[.]
[52] Mr Collins also confirms that during his visit in 2017, Ms Amber told him that since she had been granted permanent residency in New Zealand, she could now find gainful employment that had not been available to her.
[53]The evidence establishes that Ms Amber had a debt to the IRD of more than
$110,000 in December 2017 and she had no means of paying that debt other than from the sale of 46 Weka Street. When she sold 46 Weka Street, she was no longer in a position to pay her debt because of the terms upon which Elite acquired it. She was insolvent as at the date of transfer of the property for the purposes of ss 345(1)(d) and 346(2)(a) of the Property Law Act.
Was the sale of 46 Weka Street intended by Ms Amber to prejudice a creditor?
[54] A disposition of property prejudices a creditor if it hinders, delays, or defeats the creditor in the exercise of any right of recourse of the creditor in respect of the property.11 Elite’s submission is that there is no direct evidence of any intention by Ms Amber to prejudice the IRD or any other creditor, nor can such an intention be found when there is insufficient evidence of Ms Amber’s asset position as of December 2017.
[55] Mr Wolff sought to distinguish this case from Official Assignee v Scott, where the Assignee was able to identify and list the assets and liabilities of the bankrupt at the time the dispositions of property were made.12 Mr Wolff submits that, here, no such exercise has been undertaken, and, without a full statement of Ms Amber’s asset and liability position, her intentions cannot be accurately assessed.
[56] Mr Chisnall referred to the Supreme Court decision in Regal Castings Ltd v Lightbody which concerned the predecessor to s 346(1), s 60(1) of the Property Law Act 1952.13 The Supreme Court interpreted s 60(1) consistently with the wording of the current legislation:
[52] The expression “intent to defraud” in s 60(1) of the Property Law Act was not happily chosen. But it has been regarded as shorthand for intent to hinder, delay or defeat a creditor in the exercise of any right of recourse of the creditor in respect of property of the debtor. That is how the concept is now expressed in s 345(1)(a) of the Property Law Act 2007. The existence of any such dishonest intent on the part of the debtor is a question of fact and the onus of proving it is upon the party attacking the transaction.14
[53] That much is clear. But what constitutes such an intent? To answer that question it is essential to distinguish between the debtor’s purpose and his or her intention, as William Young P did in his dissenting judgment, and as, with some justification, he considered the majority’s reasons did not. It is not necessary to show that the debtor wanted creditors to suffer a loss; that it was his purpose to cause loss. It is, however, necessary to show the existence of an intention to hinder, delay or defeat them and that the debtor has accordingly acted dishonestly.
11 Property Law Act, s 345(1)(a).
12 Official Assignee v Scott [2013] NZHC 2904 at [42].
13 Regal Castings Ltd v Lightbody [2008] NZSC 87; [2009] 2 NZLR 433, relied upon in Official Assignee v Scott, above n 12, at [46]
14 Re Hale (a bankrupt) [1989] 2 NZLR 503 (CA) at 508 per Richmond J.
[57] In reliance upon Regal Castings, Mr Chisnall submits that in transferring 46 Weka Street to Elite on the terms that she did, Ms Amber was hindering, delaying or defeating the IRD’s recourse to the property and exposing it to a significantly enhanced risk of not recovering the amounts owing. In those circumstances, she must be taken to have intended this consequence, even if it was not actually her purpose to cause the IRD loss.
[58] In support of the submission, Mr Chisnall submits (and I accept) that Ms Amber was aware in December 2017 she owed a significant debt to the IRD. While Mr Collins says Ms Amber denies receiving correspondence sent to her by the IRD, there is ample evidence that she received correspondence from the IRD sent by post and email. While Mr Collins also gave evidence that Ms Amber believed that her financial position would improve, she has not given evidence about that despite being on good terms with him and supplying him with correspondence to advance Elite’s defence.
[59] Mr Chisnall submits (and again I accept) that Ms Amber must have known she had no means of paying the IRD other than by recourse to 46 Weka Street. It can also be inferred from the very unusual terms of the sale agreement that Ms Amber’s purpose could only have been to remove her principal asset so that it was unavailable for payment of her debt to the IRD. The fact that payment of the purchase price was to be made by instalments over 25 years meant it would not be capable of being utilised to meet Ms Amber’s debt in a meaningful way and within any reasonable timeframe.
[60] I am satisfied that Ms Amber intended by the sale of 46 Weka Street to hinder, delay and, potentially at least, to defeat the IRD’s recourse to the property and its proceeds of sale to pay her debt, and therefore intended to prejudice her creditor in terms of s 346(1)(b) of the Property Law Act. I have regard to the following factors:
(A)Ms Amber knew at the time she sold the property that she owed the IRD at least $110,000.
(B)She must have known that she had no ability to pay the debt except from the sale of 46 Weka Street.
(C)The sale was not, in my view, an arms-length transaction and was conducted in unusual circumstances, very rapidly and with no marketing and no testing of the market.
(D)The sale allowed Ms Amber to dispose of her only substantial asset preventing the IRD from having direct recourse to the property to obtain payment.
(E)The sale was on highly unusual and disadvantageous terms for reasons I have already given. Most importantly, Ms Amber received no payment whatsoever immediately and was effectively an unsecured creditor for the entire sale price, which was to be paid over 25 years, without interest.
(F)Ms Amber appears to have had no other reason to sell the property other than as a means to defeat the IRD’s claim. Importantly she has remained living in the property.
[61] In light of this finding it is not necessary for me to consider an alternative argument advanced for the Assignee that the sale of 46 Weka Street was made without receiving reasonably equivalent value and exchange in terms of s 346(1)(b) of the Property Law Act.
Did Elite act in good faith?
[62] The term “good faith” is not defined in the Insolvency Act, but there is case law as to its meaning. I have obtained guidance from the judgment of Greig J in Meo v Official Assignee.15 It was an appeal seeking to reverse the decision of the Assignee setting aside an unregistered mortgage given by a bankrupt shortly before his adjudication. One of the issues was whether the mortgage was given in good faith.
[63] Greig J noted that good faith is a special or technical term in bankruptcy law the lack or absence of which does not necessarily connote dishonesty or impropriety
15 Meo v Official Assignee (1987) 3 NZCLC 100,280 (HC).
in motive or intention.16 The existence or absence of good faith is to be found “from inferences as to the results of the creditor’s conduct in relation to the claims and rights of other creditors”.17
[64]He approved what was said by Skerrett CJ in Re Kerr as follows:18
A creditor does not act in good faith if he acts with knowledge of facts which show, or which ought to show, that the transaction was itself an act of bankruptcy, or if the transaction itself gives him notice of facts and circumstances which show that it was intended to be a fraud on the bankruptcy laws, or which render it incumbent on the creditor to make further inquiry. If the transaction itself is of a very unusual character, if it consists in the withdrawal from bankruptcy of substantial assets in favour of a particular creditor to the exclusion of other possible creditors, or if the motive and object of the transaction is to protect the particular creditor at the expense of other possible creditors, then it cannot be said that the creditor acted in good faith, unless he made such reasonable inquiries as were proper to satisfy him that the bankrupt might properly enter into the transaction without infringing the rights and remedies of his other possible creditors.
[65] Mr Wolff submits that Mr Collins (on behalf of Elite) acted in good faith. He submits that based on what Ms Amber told him Mr Collins believed her financial position was improving because her son would soon be finishing school and starting work, she had been granted residency and no longer was limited as to her employment options, and she was expecting back payments from the New Zealand government for social support payments she had not received. Mr Wolff also submits that at no point did Mr Collins believe that the transaction was going to be injurious to creditors or that it would involve any element of undue preference.
[66] Mr Wolff also submits that transaction was structured in a way that suited both parties because:
…[Elite] could assist Ms Amber financially with regular payments for the property whilst also reducing her maintenance and rates outlay all the while allowing her to occupy the property until she wished to return to the Philippines.
[67] The evidence satisfies me that Mr Collins was aware that Ms Amber was in dispute with the IRD, and that she had a significant tax debt. He discussed the matter
16 At 100,285.
17 At 100,285.
18 Re Kerr [1927] NZLR 177 at 186.
with Mr O’Coileain before coming to New Zealand and says he received correspondence, including an email sent by Ms Amber’s daughter to her school on 5 August 2015 referring to a letter Ms Amber received from the IRD stating she owed
$65,107.43. Although Mr Collins said that he went to the Nelson library to confirm information he had been given that Ms Amber’s tax difficulties had or would soon be resolved, he had seen nothing from the IRD to that effect and when asked whether he had queried Ms Amber about the tax debt referred to in her daughter’s email, he replied “No, because there was no reason to.” I do not accept Mr Collins believed that Ms Amber’s taxation liability was going to be resolved.
[68] As noted earlier, I reject Mr Collins evidence that his introduction to Ms Amber and the property was in 2017, and I also do not accept the transaction was an arms- length one structured to suit both parties. The sale was on highly unusual terms that benefited only Elite. I can see no reason for Ms Amber to agree to such terms except, as Mr Chisnall submits, that the sale was a scheme designed to avoid Ms Amber’s pressing creditor, the IRD.
[69] Elite has not satisfied me that it acted in good faith when it acquired the property. Section 208 does not therefore apply to limit the Assignee’s rights of recovery. While it is not strictly necessary, I will also consider why Elite cannot satisfy the other requirements of s 208 either.
Would a reasonable person in Elite’s position suspect Ms Amber was or would become unable to pay her due debts?
[70] There does not appear to be any difference between counsel as to the relevant law. The test is an objective one of whether a reasonable person in Elite’s position, with the information it had, would suspect Ms Amber was or would become unable to pay her due debts. Counsel agree that a suspicion requires more than a mere idle wondering whether certain facts exist or not; it is “a positive feeling of actual apprehension or mistrust”.19
19 Trans Otway Ltd v Shephard [2005] NZSC 76, [2006] 2 NZLR 289 at [21], citing Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 303.
[71] Elite contends that Mr Collins’ knowledge of Ms Amber’s circumstances, was not sufficient to give rise to a suspicion that she would not be able to pay her due debts because of the assurances he says he had been given by Ms Amber and Mr O’Coileain.
[72] Mr Wolff submits that Ms Amber told Mr Collins that the debts claimed by the IRD were incorrect and her financial position was improving. He also submits, relying on the evidence of Mr Collins, that it was not unusual for the IRD to make mistakes and Mr Collins had received reassurance from his long-time friend, Mr O’Coileain, that Ms Amber was owed money by the IRD. He also submits that if Mr Collins had any suspicion about Ms Amber’s solvency, he would have asked for more information. Mr Wolff then submitted the correspondence Mr Collins saw concerning money owed to the IRD did not discuss the debts in great depth. I do not accept these submissions.
[73] There is nothing to support the assertion that the IRD commonly makes mistakes, let alone that it did so in respect to Ms Amber. Mr Collins was aware Ms Amber was in dispute with the IRD, was on notice that she owed the IRD significant sums, and, in my view, knew that she was in no position to pay the IRD. I do not accept any reasonable person, and certainly not an experienced businessperson, would accept such assurances Mr Collins says he was given. A reasonable person, knowing what Mr Collins knew, would certainly have a strong suspicion Ms Amber would not be able to pay her debt to the IRD if she disposed of her only valuable asset.
Did Elite provide value for the property in the reasonably held belief that the transfer of the property was valid and would not be cancelled?
[74] Mr Wolff submits that “value” does not require adequate or sufficient consideration, but it must be real and substantial. Mr Chisnall takes a different view and, in reliance upon the decision of MacKenzie J in Fisk v McIntosh, submits that while full value is not required, there cannot be a significant discrepancy between the value provided and the true value.20
[75] I need not decide this issue because, regardless of the view that I might take on it, Elite has failed to satisfy me the value it gave for the property was provided in a
20 Fisk v McIntosh [2015] NZHC 1403, [2016] NZCCLR 10 at [92].
reasonably held belief that the transfer was valid and would not be cancelled. It could never have understood that to be the case in circumstances where the transfer was part of the scheme to defeat the IRD.
Summary of conclusions
[76]I have made the following findings:
(A)the transfer of 46 Weka Street by Ms Amber to Elite was a disposition of the property for the purposes of pt 6 sub-pt 6 of the Property Law Act;
(B)the disposition was made with intent to prejudice the IRD, a creditor of Ms Amber;
(C)that Ms Amber became insolvent upon making the disposition; and
(D)that the limits upon the Court in making an order cancelling the transfer of the property to Elite in s 208 of the Act do not apply because:
(i)Elite did not act in good faith;
(ii)a reasonable person in Elite’s position would have suspected, and Elite did suspect, that Ms Amber was unable to pay her due debts; and
(iii)Elite did not give value for the property in the reasonably held belief that the transfer of the property to it was valid and would not be cancelled.
[77] I turn now to consider what remedy should be provided to the Assignee under s 207 of the Act.
Remedies
[78] The Assignee submits the Court should exercise its power under s 207(1)(a) of the Act and cancel the transaction under which Elite acquired 46 Weka Street and order that the property be retransferred to the Assignee.
[79] Elite’s position is that if the Court is to cancel the transaction it should adopt the approach that provides the least disruptive outcome for Elite. It also submits that if the property is retransferred to the Assignee, it will be sold to discharge Ms Amber’s debts which will be wasteful and result in unnecessary marketing, agency and other costs. It submits the appropriate course, therefore, would be to order under s 207(1)(b) payment to the Assignee of such sum as is appropriate to satisfy Ms Amber’s debts, and costs of the administration of her bankrupt estate.
[80] In response, the Assignee submits there will be difficulties in making a pre- estimate of all the costs that will be incurred in Ms Amber’s bankruptcy. More significantly, there could be costs and risks associated with the collection of any sum the Court ordered Elite to pay. There is no evidence that Elite has any assets in this country (other than the property in issue) or as to its ability to pay any sum ordered by the Court, or even whether it is solvent. The Assignee argues it should not stand as an unsecured creditor of an overseas company.
[81] I accept the Assignee’s submissions. I do not see why the Assignee (and ultimately Ms Amber’s creditor) should assume the risk that Elite cannot or does not pay any sum that it is ordered to pay. Further, I do not see why Elite should retain the benefit of the property when it participated in a scheme to defeat the IRD. I note that, on the evidence, I am satisfied Elite has received significantly more by way of rent from Ms Amber and the other tenants than it has paid Ms Amber under the agreement for sale and purchase and by way of outgoings on the property. An order that Elite retransfer the property to the Assignee will not see it out of pocket.
Result
[82] The transaction whereby 46 Weka Street was transferred by Ms Amber to Elite is cancelled, and I make an order under s 207(1)(a) of the Act that the property is to be transferred to the Assignee.
[83] In anticipation of the possibility that further orders may be required to effect the transfer of the property, counsel for the Assignee shall submit as soon as possible a draft order for sealing.
[84] The Assignee is entitled to costs. Counsel shall also confer in an attempt to reach agreement on the quantum of such costs, but if they cannot do so, they may submit memoranda of no more than five pages and I will determine the matter on the papers.
O G Paulsen Associate Judge
Solicitors:
Insolvency & Trustee Service (D M L Dingwall), Christchurch Morrison Kent, Wellington
cc Paul Chisnall, Stout Chambers, Wellington
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