Official Assignee v Scott
[2012] NZHC 2579
•5 October 2012
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
CIV 2012-470-778 [2012] NZHC 2579
BETWEEN THE OFFICIAL ASSIGNEE AT HAMILTON
Applicant
ANDLEWTYN MICHAEL SCOTT First Respondent
ANDWOOD WALTON TRUSTEES (2010) LIMITED
Second Respondent
ANDALH TRUSTEE CO LIMITED Third Respondent
ANDWOOD WALTON TRUSTEES (2011) LIMITED
Fourth Respondent
ANDASB BANK LIMITED Fifth Respondent
Hearing: (on the papers)
Counsel: S N Cameron for Applicant
Judgment: 5 October 2012
JUDGMENT OF HEATH J
This judgment was delivered by me on 5 October 2012 at 9.30am pursuant to Rule
11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Almao Douch, PO Box 19-173, Hamilton
THE OFFICIAL ASSIGNEE AT HAMILTON V SCOTT HC TAU CIV 2012-470-778 [5 October 2012]
The application
[1] Mr Scott was adjudged bankrupt on 22 July 2011. By operation of law, his property passed to the Official Assignee for realisation and distribution to his creditors, in accordance with statutory priorities.1 Problems have arisen during the administration of Mr Scott’s bankrupt estate. The Official Assignee seeks a freezing order to restrain Mr Scott and trustees of the Ohakana Trust2 from dealing with specified real and personal property, as well as ancillary orders designed to enable him to obtain relevant information about the assets.
[2] The application was filed on 24 September 2012. The following day, I issued a Minute identifying three particular concerns.3 They related to the absence of an undertaking as to damages, whether the evidence was sufficient to establish a risk of dissipation of the assets and whether ancillary orders were needed, given the Official Assignee’s own statutory powers to examine.
[3] Ms Cameron, for the Official Assignee, has filed a supplementary memorandum addressing the three issues. As an undertaking as to damages has now been filed, there is no need to address that specifically. Also, while signalling a need to hear orally from counsel on the “risk of dissipation” issue, having now considered the supplementary memorandum I am prepared to act on it without the need for oral submissions. I am, however, giving a fully reasoned judgment, so that any Judge who may be required to hear an application to set aside or vary the orders is aware the basis on which they have been made.
The factual matrix
[4] The grounds of the Official Assignee’s claim are set out in detailed affidavits sworn by Ms King, a Principal Insolvency Officer with responsibility for administration of the bankrupt estate, and his Senior Investigating Accountant, Mr
Clothier. He has been involved in the analysis of financial information obtained in
1 Insolvency Act 2006, s 101, 217 and 273.
2 See para [10] below.
3 Official Assignee v Scott HC Tauranga CIV 2012-470-778, 25 September 2012.
relation to Mr Scott’s bankruptcy. Mr Clothier deposes that the provable debts in the bankruptcy (totalling in excess of $350,000) were incurred with legal firms instructed to act for Mr Scott in litigation involving the estate of his late father.
[5] In December 2009, about 18 months before his adjudication, Mr Scott received an inheritance distribution from his father’s estate of $470,621.65. A second distribution was made on 15 July 2010 but that was used to meet an order for costs made by Stevens J in the litigation in which Mr Scott had been involved.4
Although there is no specific breakdown of the dates on which particular debts were
incurred, I infer that most involved legal services rendered in the period before the costs order.
[6] In the context of an adjudication date of 22 July 2011, Mr Clothier has analysed the purposes for which the first inheritance distribution was used. In summary:
(a) On 27 January 2010, $52,930 was used to purchase a Nissan Navarra motor vehicle.
(b)On 3 March 2010, $50,000 was used as a deposit to purchase a property at Pillans Road, Tauranga.
(c) On 26 March 2010, $84,584.06 was applied in settlement of the balance of the purchase price for the Pillans Road property.
(d)On 2 April 2010, $265,561.95 was used to reduce a loan obtained to purchase the Pillans Road property.
(e) On 16 April 2010, Mr Scott further encumbered the Pillans Road property by increasing the secured debt by $200,000; this debt related
to some of the relevant legal fees.
4 Scott v McNeilly HC Tauranga CIV 2004-470-94, 25 March 2010 (Stevens J) at para [30]. Costs awarded totalled just over $400,000, plus costs of $7,500 plus disbursements on the application to determine those costs.
[7] Mr Clothier calculates that, as at 16 April 2010, Mr Scott was unable to meet his outstanding liabilities as they fell due from his own money. He estimates that Mr Scott’s liabilities exceeded assets, at that date, by $174,019.
[8] Mr Scott settled The Scott Family Trust on 21 July 2010. The Pillans Road property was sold to the trustees of that Trust on 23 July 2010, at the original price for which Mr Scott had acquired it. Following that transaction, Mr Clothier estimates that Mr Scott’s liabilities exceeded his assets by $483,543.
[9] On 27 July 2010, Mr Scott executed a Deed of Forgiveness of Debt in respect of a sum of $27,000 owing to him by the trustees of the Scott Family Trust. That reduced the debt owing by that Trust to Mr Scott to $106,000. Around this time, Mr Scott also transferred a one-eighth share in a property at Ohakana Island into the name of the trustees of the Scott Family Trust.
[10] Mr Scott settled The Ohakana Trust on the same day, 10 August 2011, after his adjudication. Assets from the Scott Family Trust were then resettled on the Ohakana Trust.
[11] Thereafter,
(a) The Nissan Navarra motor vehicle was sold for $39,500. The date of sale is unknown but it must have occurred before 30 November 2010 as it is included in a GST return for that period.
(b)A tractor previously used for his farm trading operation was transferred.
[12] Assets transferred to the trustees of the Scott Family Trust were included in a Deed of Resettlement between those trustees and the trustees of the Ohakana Trust. Mr Scott and Wood Walton Trustees (2010) Ltd were trustees of the Scott Family Trust, with ALH Trustee Co Ltd and Wood Walton Trustees (2011) Ltd as trustees of the Ohakana Trust. The assets transferred included a boat and a trailer.
[13] As Mr Scott was adjudged bankrupt on 22 July 2011, all of the dispositions of property from Mr Scott to the trustees of the Scott Family Trust occurred within a period of two years beforehand, meaning that they fall within the period during which irregular transactions may be set aside by the Official Assignee.5
[14] I infer from available evidence that Mr Scott formed the Ohakana Trust so that personal property he had initially transferred into the Scott Family Trust was put beyond the reach of potential creditors in the bankruptcy, by disposition to a further trust.
Mr Scott’s conduct
[15] Mr Scott’s interaction with the Official Assignee since adjudication is
relevant to the drawing of inferences on an application for a freezing order. Section
138(1) of the Insolvency Act 2006 casts a general duty on a bankrupt to “assist in the realisation of [his] property and the distribution of the proceeds among the creditors”, “to the best of [his] ability”. Mr Scott’s post adjudication conduct must be judged against that statutory obligation. To say that he has been unco-operative would be a gross understatement.
[16] Mr Scott has twice been summonsed for examination under the Insolvency Act.6 That occurred in August and September 2011. It was necessary for an application to be made to the High Court to have Mr Scott arrested. A warrant was issued. When Mr Scott was brought before the High Court he was bailed to attend at an examination in this Court. That was deferred while the Court determined an argument based on breach of rights, under the New Zealand Bill of Rights Act 1990. Allan J found against Mr Scott on that issue, on 3 November 2011.7
[17] Part of Mr Scott’s bail conditions involved an appearance for examination in
this Court in November 2011. He failed to appear. Ellis J granted another warrant to
5 Insolvency Act 2006, ss 192, 194 and 204. See also Property Law Act 2007, ss 346 and 348 and
Regal Castings Ltd v Lightbody [2009] 2 NZLR 433 (SC).
6 Insolvency Act 2006, s 165.
7 Official Assignee v Scott HC Tauranga CIV 2011-470-842, 3 November 2011.
arrest. Finally, Mr Scott was arrested and examined before the High Court at
Auckland, in December 2011.
Subsequent proceedings
[18] The Official Assignee has issued notices cancelling the sales of the Pillans Road and Ohakana Island properties,8 the gift of $27,000 to the trustees of the Scott Family Trust9 and the transfer of the Nissan Navarra motor vehicle, a boat and home built domestic trailer and Massey Ferguson tractor into the ownership of trustees of the Scott Family Trust10
[19] Mr Scott has objected to cancellation on the grounds that no breach of the Insolvency Act or the Property Law Act occurred. No proceedings have yet been issued based on the notices cancelling the alleged irregular dispositions. The Official Assignee has postponed doing so while this application is pending.
Should a freezing order be made?
(a) General principles
[20] This Court’s jurisdiction to make a freezing order11 is recognised by r 32.2 of the High Court Rules:12
32.2 Freezing order
(1) The court may make an order (a freezing order), on or without notice to a respondent in accordance with this Part.
(2) A freezing order may restrain a respondent from removing any assets located in or outside New Zealand or from disposing of, dealing with, or diminishing the value of, those assets.
8 Under subpart 6 of Part 6 of the Property Law Act 2007.
9 Under the voidable gift provisions of the Insolvency Act 2006.
10 Ibid.
11 Formerly known as a Mareva injunction, derived from Mareva Compania Naviera SA v
International Bulkcarriers SA [1980] 1 All ER 213 (CA). In New Zealand, the jurisdiction is derived from s 16 of the Judicature Act 1908; see also Hunt v BP Exploration Co (Libya) Ltd [1980] 1 NZLR 104 (HC).
12 The Rules now contain detailed provisions dealing with such matters as the power to make ancillary orders (r 32.3), orders in respect of judgment debtors, prospective judgment debtors and third parties (r 32.5) and the form and content of orders (rr 32.6–32.8).
(3) An applicant for a freezing order without notice to a respondent must fully and frankly disclose to the court all material facts, including—
(a) any possible defences known to the applicant; and
(b) information casting doubt on the applicant's ability to discharge the obligation created by the undertaking as to damages.
(4) An application for a freezing order must be made by interlocutory application under Part 7 or originating application under Part 19, which Parts apply subject to this Part.
(5) An applicant for a freezing order must file a signed undertaking that the applicant will comply with any order for the payment of damages to compensate the respondent for any damage sustained in consequence of the freezing order.
[21] In Shaw v Narain,13 the Court of Appeal endorsed a number of observations from Bank of New Zealand v Hawkins,14 about the freezing order jurisdiction. It approved the following summary, taken from the headnote to the reported judgment in Hawkins:
(1) An applicant for a [freezing order] must show that:
(a) It has a good arguable case on its substantive claim. This threshold requirement is more onerous than that normally applied in the case of interlocutory injunctions of a serious question to be determined.
(b) There are assets of the defendant within the jurisdiction to which the orders can apply. Providing the plaintiff adduces evidence of some assets, if the defendant is not forthcoming by way of disclosure of his assets in New Zealand, the Court may infer that this requirement is met.
(c) There is a real risk that the defendant will dissipate or dispose of assets so as to render himself "judgment proof". Mere assertion of belief that the defendant might dissipate his assets, unsupported by solid ground justifying that belief, is insufficient. On the other hand, affirmative proof of likelihood of dissipation or of nefarious intent, is not necessary.
(2) The [freezing order] remedy is no longer confined to foreigners or to the risk of removal of assets beyond the jurisdiction.
(3) The Court, in dealing with an application for a [freezing order], must consider the overall justice in the circumstances, balancing the need to
13 Shaw v Narain [1992] 2 NZLR 544 (CA) at 548.
14 Bank of New Zealand v Hawkins (1989) 1 PRNZ 451 (HC).
protect the plaintiff so as to ensure any judgment is not rendered barren against any prejudice or hardship to the defendant and to third parties.
(4) It is important to preserve the flexibility of the remedy.
[22] In Shaw v Narain,15 the Court of Appeal added that the principles were still evolving:
It is appropriate to emphasise ... the flexibility of the jurisdiction. That also was emphasised by Lloyd LJ in SCF Finance Co Ltd v Masri ([1985] 2 All ER 747 (CA)]) at p 750. A recent example of that very flexibility is in Standard Chartered Bank v Walker (The Times, 31 January 1992).
[23] The Court of Appeal’s emphasis on flexibility reflects the statutory basis for a freezing order (s 16 of the Judicature Act 1908) and the undesirability of any judicial attempt, in advance of a particular set of facts coming before a Court, to circumscribe the nature of the jurisdiction. Section 16 confers on this Court “all judicial jurisdiction which may be necessary to administer the laws of New Zealand”.
[24] It is settled law that a freezing order operates in personam, not in rem. It is not designed to provide an advantage to one claimant over other unsecured creditors.16 The purpose of a freezing order is to protect a claimant’s ability to enforce a judgment when there is cause for concern that a justifiable claim might go unsatisfied as a result of the defendant’s actions. It does not purport to determine the existence or otherwise of a proprietary remedy.17
[25] The Shaw v Narain approach to the threshold issue (“good arguable case”) can be contrasted with the way in which the Court generally approaches that aspect on an application for an interim injunction; “serious question to be tried”.18 It is the draconian nature of a freezing order (one that puts severe restrictions on an entity’s
right to deal with its own assets before a prospective claim has been heard) that
15 Ibid.
16 Mercedes-Benz AG v Leiduck [1996] AC 284 (PC) at 300 (Lord Mustill) and 306 (Lord Nichols of Birkenhead, who while dissenting as to the result of the appeal, agreed with the majority on this expression of principle).
17 Zhong v Wang CA282/05, 5 September 2006 at para [102] (Wild and Heath JJ), with whom
William Young P agreed, on this point.
18 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 142.
justifies a higher threshold requirement on the arguability of a claim than is applied in determining whether an interim injunction should issue.
[26] In Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd,19 the Court of Appeal took the view that criteria involving a “serious question to be tried” and “balance of convenience” were no more than useful labels under which to marshal relevant considerations before standing back and determining whether the interests of justice require an interim injunction to issue. In my view, a similar approach should be taken to the Shaw v Narain factors. Viewed in the context of an application to restrain use of an entity’s own assets pending resolution of claims against it, it is understandable that the strength of a plaintiff ’s substantive claim and whether there is a risk that the relevant defendant will dispose of assets to defeat a plaintiff’s claim will assume importance. That said, they will not necessarily be the only (or determinative) factors in any given case.
(b) Does the Official Assignee have “a good arguable case on his substantive
claim”?
[27] I have considered the notices purporting to cancel the transactions in issue. Having regard to the timing of events and the way in which Mr Scott disposed of property, I am satisfied that there is a good arguable case on the cancellation issue.
[28] The procedure prescribed by the Insolvency Act 2006 to set aside the transactions is for the Official Assignee to apply to the Court for a cancellation order.20 Thereafter, the Court may be asked to make an order for the re-transfer of property to the Official Assignee, the payment of a sum of money or any other order to which the Official Assignee may be entitled to enforce the cancellation order.21
[29] In this case, the impugned transactions includes property that has been transferred (first) to the trustees of the Scott Family Trust and (second) on to the trustees of the Ohakana Trust, all of whom are parties to this proceeding and against
whom, prima facie, the Court could make a re-transfer order. The fact that Mr Scott
19 Ibid.
20 Insolvency Act 2006, s 206(6).
21 Ibid, s 207.
was the settlor of both trusts and a trustee of the Scott Family Trust evidences his knowledge of what was occurring, as between the trusts.
[30] On that basis, I am prepared to hold that, as well as a good arguable case on cancellation, the Official Assignee has a good arguable case in respect of recovery of the assets.
(c) Assets within the jurisdiction
[31] The assets in issue are all within New Zealand. This element is established.
(d) Risk from dissipation of assets
[32] I have discussed the concept of risk of dissipation of assets, in the context of Shaw v Narain.22 The application seeks an order in respect of the Pillans Road property, the Ohakana Island property, the Nissan Navarra motor vehicle, a boat and a home built domestic trailer and a tractor.
[33] The evidence either expressly establishes that those assets are in current ownership of the trustees of the Ohakana Trust; or an inference to that effect can readily be drawn. Those trustees are Wood Walton Trustees (2010) Ltd and ALH Trustee Co Ltd.23
[34] The risk of dissipation is addressed in Ms King’s affidavit. As well as relying on Mr Scott’s conduct in the period since adjudication,24 Ms King expresses concern that the value of the Pillans Road property is being diminished. She adds:
28. Mr Scott does not accept that he has been adjudicated bankrupt.
Annexed as exhibit “O” is Mr Scott’s statement of affairs
strenuously disputing his insolvency.
29.Mr Scott has never completed a budget or provided full information about his assets during the administration of his bankruptcy.
22 See para [21] above.
23 Wood Walton Trustees (2011) Ltd has been joined as trustee of the Scott Family Trust.
24 See paras [15]–[17] above.
30.I am now concerned that Mr Scott is dissipating the value of the Pillans Rd property. He has recently lost his employment as an engineer, and has also increased the mortgage on the property. The mortgage debt balance on 23 December 2011 was $527,860.88. A copy is annexed as exhibit “P”. The mortgage debt balance as at 18
June 2012 is $539,689.43 an increase of $11,829.00. A copy is annexed as Exhibit “Q”.
31.Based on Mr Scott’s actions before and after the bankruptcy adjudication I am concerned that if Mr Scott’s assets are not restrained they may be dissipated.
32.I consider that Mr Scott’s assets need to be restrained by the High Court in the interim so that they can be preserved to meet the claims of Mr Scott’s creditors to his bankruptcy estate.
[35] There is no direct evidence as to risk of dissipation of properties that have been transferred to the trustees of the Ohakana Trust. However, I am satisfied to the requisite standard on an application of this type, that a risk of dissipation of those assets can be inferred from the fact that the trustees are associated with Mr Scott and may act on his direction. Given his attitude towards the bankruptcy and his conduct to date, I infer the likelihood that Mr Scott would persuade (or direct) the trustees to place those assets further beyond the reach of creditors.
(e) Ancillary orders
[36] In my Minute of 25 September 2012, I expressed some concern about the necessity for ancillary orders given the Official Assignee’s powers of examination. On reflection, Mr Scott’s conduct to date, particularly in relation to the examination processes undertaken earlier, persuades me that ancillary relief is appropriate.
[37] As Ms Cameron alluded to in her most recent memorandum, a Court order that Mr Scott provide relevant information to the Official Assignee is more readily enforceable than the examination process. In addition, it allows directors of the corporate trustees to be examined about their knowledge of relevant matters.
Result
[38] I conclude that the elements for a freezing order have been made out. An order is made in accordance with the draft submitted, with the following amendments:
(a) Order 4 shall be expressed in the following way:
Pending further order of the Court, Wood Walton Trustees (2010) Ltd, ALH Trustee Co Ltd and Wood Walton Trustees (2011) Ltd are restrained from disposing of, otherwise dealing with or further encumbering the following assets:
The assets listed in para 4 shall then be identified.
(b) The order set out in para 5(b) shall be amended so that it is directed to
Mr Scott and the directors of the second, third and fourth respondents.
(c) In relation to the draft order, the date to be inserted in para 7 will be
12 October 2012. The order shall record that I have directed the Registrar to list the application before a Judge in Rotorua on that day, at a time to be fixed by him. The order shall make it clear that a Judge will consider whether to extend the order at that time.
(d)Paragraph 9 of the draft order can be deleted and replaced by a provision confirming that an undertaking as to damages has been given.
(e) The order shall record that the order shall lapse unless the official
Assignee issues cancellation proceedings on or before 10 October
2012.
[39] Costs are reserved.
[40] The Registrar may refer the proposed order to me in the event that he is not satisfied that it accurately records the amendments I have made. That may be done
to enable sealing of the order to be undertaken promptly.
P R Heath J
Delivered at 9.30am on 5 October 2012
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