Paterson v Lepionka & Co Investments Ltd
[2016] NZHC 1331
•16 June 2016
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2015-485-000973 [2016] NZHC 1331
IN THE MATTER of the Insolvency Act 2006 AND
IN THE MATTER
of the bankruptcy of GARTH BOWKETT PATERSON
BETWEEN
G B PATERSON Applicant
AND
LEPIONKA & COMPANY INVESTMENTS LTD
First Respondent
AND
OFFICIAL ASSIGNEE Second Respondent
Hearing: 16 June 2016 Appearances:
M B Lawson for Bankrupt (Applicant)
M J Tingey for Judgment Creditor (First Respondent) (TGH Smith for Official Assignee (Second Respondent) excused)
Judgment:
16 June 2016
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
on annulment application
Introduction
[1] On 5 April 2016, Garth Bowkett Paterson (Mr Paterson) was adjudicated bankrupt on the application of Lepionka & Company Investments Ltd (Lepionka). Mr Paterson had entered no formal appearance. He applies for an order annulling his
bankruptcy.
PATERSON v LEPIONKA & COMPANY INVESTMENTS LTD [2016] NZHC 1331 [16 June 2016]
Factual background
The judgment debt
[2] Mr Paterson incurred a judgment debt to Lepionka when Mr Paterson’s counsel withdrew an application for an interim injunction. Mr Paterson and a company, GLW Group Limited (GLW), had made the application. The Court awarded costs and disbursements (in a total sum of $8,875.24) against Mr Paterson and GLW (jointly and severally). The costs, being costs on an interlocutory
application, became payable on 1 October 2015 when they were fixed.1
The bankruptcy procedures
[3] The judgment debt was not paid. Lepionka had a bankruptcy notice served upon Mr Paterson. He did not comply with the notice. He thereby committed an act of bankruptcy.2
[4] Lepionka applied for an adjudication order. The hearing date of the adjudication application was 5 April 2016. Mr Paterson did not file a notice of opposition or enter any other appearance. Neither he nor GLW made payment of the judgment debt before the 5 April hearing.
[5] On the morning of the hearing of the adjudication application, the Court first heard in a separate proceeding Lepionka’s application for summary judgment. The application was unopposed. I entered summary judgment for Lepionka in a total sum of $3,825,601.20.
[6] The adjudication application was called immediately after the summary judgment application. I heard from Mr Reid for Lepionka. I received Mr Reid’s certificate of indebtedness. I referred Mr Reid to an email which Mr Paterson had sent to the Deputy Registrar on the morning of the hearing. I then adjudicated Mr
Paterson bankrupt.
1 High Court Rules, r 14.8(1)(b).
2 Insolvency Act 2006, s 17(1).
Application for annulment
The grounds of Mr Paterson’s application
[7] On 19 April 2016, Mr Paterson applied for an order annulling his bankruptcy. In the notice of application he also applied for an order setting aside the summary judgment referred to at [5] above. That aspect of the original application has not been a subject of this hearing.3
[8] The grounds of Mr Paterson’s application as they remain and relate to annulment centre on the availability of a bank cheque to cover the judgment debt. The argument culminates in the proposition that Mr Reid, in providing counsel’s certificate of indebtedness at the adjudication hearing, had made due inquiry under r 24.20 High Court Rules and/or had not fully informed the Court.
[9] Lepionka opposes the application.
The reports of the Official Assignee
[10] The Assignee provided a report as to the bankruptcy, and has since provided an updating report. In summary, she reports:
(a) notice of Mr Paterson’s bankruptcy was published as required on 14
April 2016;
(b)Mr Paterson was previously (on 19 October 2015) adjudicated bankrupt in Australia and was understood to be pursuing an appeal of that order;
(c) Mr Paterson and his solicitor, Mr Lawson, had advised the Assignee that Mr Paterson would pursue an annulment of the New Zealand
order;
3 While Mr Paterson remains bankrupt, he lacks standing to make an application to set aside the summary judgment. In any event, such application should have been made on the file of the relevant proceeding.
(d)the Assignee advised Mr Paterson and Mr Lawson that Mr Paterson was required to complete his statement of affairs4 and assist with the bankruptcy administration unless the Court made an order of stay;
(e) Mr Paterson has not completed a statement of affairs. He has not declared to the Assignee any ownership of assets; and
(f) the Assignee has nevertheless from other sources identified possible debts of Mr Paterson which might be claimed by creditors totalling
$10,751,656.98 (the validity of which the Assignee cannot verify).
[11] To 16 May 2016, the Assignee incurred costs and disbursements in the
administration of Mr Paterson’s bankrupt estate in a total sum of $7,308.41.
[12] The Assignee records her objection to the annulment of Mr Paterson’s
bankruptcy on the grounds that:
(a) Mr Paterson has failed to complete a statement of affairs; and
(b)Mr Paterson has not provided evidence as to how his debts (together with the Assignee’s costs and disbursements) are to be paid.
As the Assignee did not wish to further address those grounds, I excused her appearance at the hearing.
[13] This annulment application was first called on 28 April 2016 when Associate Judge Smith made directions for this hearing. When doing so, his Honour ordered that proceedings in the bankruptcy be stayed pending further order of the Court. In those circumstances, Mr Paterson cannot be criticised for failing to take steps in relation to the administration of his bankruptcy since 28 April 2016. That did not cut across the Assignee’s entitlement to request the Court on any annulment to fix an amount for her reasonable remuneration under s 309(5)(a) Insolvency Act 2006 and
to seek an order for the costs associated with this application.
4 Insolvency Act 2006, s 67.
Annulment of adjudication – s 309 Insolvency Act
[14] Under s 309(1) Insolvency Act the Court may annul an adjudication in four situations. Section 309 relevantly provides:
309 Court may annul adjudication
(1) The court may, on the application of the Assignee or any person interested, annul the adjudication if—
(a) the court considers that the bankrupt should not have been adjudicated bankrupt; or
(b) the court is satisfied that the bankrupt’s debts have been fully paid or satisfied and that the Assignee’s fees and costs incurred in the bankruptcy have been paid; or
(c) the court considers that the liability of the bankrupt to pay his or her debts should be revived because there has been a substantial change in the bankrupt’s financial circumstances since the date of adjudication; or
(d) the court has approved a composition under subpart 1 of Part
5.
…
(4) In the case of an application for annulment on the ground that the adjudication should not have been made because of a defect in form or procedure, the court may, in addition to annulling the adjudication, exercise its powers under section 418 to correct the defect and order that the application for adjudication be reheard as if no adjudication had been made.
(5) If the court annuls the adjudication on one of the grounds specified in subsection (1)(a) to (c),—
(a) the court may, on the Assignee’s application, fix an amount as reasonable remuneration for the Assignee’s services and order that it be paid, in addition to any costs that may be awarded:
….
[15] On this application, Mr Paterson relies on the single ground contained in s 309(1)(a) of the Act.
[16] Once one of the threshold grounds under s 309 of the Act is established the Court has a discretion whether or not to annul an adjudication.5 Section 309 provides the only procedure by which annulment may be sought.6 In Kipping v UDC Finance Ltd, I observed that, while s 309 appears to give the Court a broad discretion, the discretion is narrowly exercised.7
[17] In Kipping, I reviewed a number of authorities which dealt with the scope of the s 309(1)(a) ground. I said:
[58] I adopt as accurately summarising the position the commentary in
Heath and Whale on Insolvency:
9.26 Annulment where bankruptcy order “ought not to have been made” overview
The phrase “ought not have been made” may convey the impression of a wide basis under which the Court may annul an order of adjudication in bankruptcy. A survey of the cases reveals however that the Court is generally parsimonious in the exercise of its power to annul and narrowly construes this ground.
This is consonant with the status of an adjudication order being a final order and the Court being functus officio. Applications where the grounds supporting the annulment application are ones available when the Court was considering the adjudication application appear always to fail.
There seem to be three groups of applications brought under this ground. These are where there has been an abuse of process of the Court, where there is a defect in form or procedure, and where a material fact was not drawn to the Court’s attention at the adjudication hearing due to human error.
[Footnotes omitted].
[59] Two leading authorities illustrate this jurisdiction.
[60] In his judgment in Re Byron, Tompkins J gave as examples of the Court's exercise of its special power to annul adjudication the following:
(a) Where an infant had been adjudicated;
5 Re Guest, ex parte BNZ Finance Ltd [1991] 1 NZLR 250 (HC).
6 Paul Heath and Michael Whale (eds) Heath and Whale on Insolvency (online looseleaf ed, LexisNexis) at 9.24.
7 Kipping v UDC Finance Limited [2012] NZHC 1707 at [57].
(b) Where the petition for adjudication had not been properly presented;
(c) Where an adjudication was made while a suit by the debtor against the petitioning creditor was pending.
His Honour concluded in relation to the power under what is now s
309:
It is in my opinion the appropriate and only power to be invoked where an order of adjudication should not have been made for any reason.
[61] Similarly in Re Hunter, Robertson J referred to the three examples given in Re Byron. His Honour referred also to cases identified in Insolvency Laws of New Zealand and observed:
… all relate to the situation where the procedures were wrong, where the notice was bad, abuse of process, and not to the situation of the exercise of a discretion.
[Footnotes omitted].
[18] I adopt my conclusions in the judgment in Kipping v UDC Finance Ltd, with the recognition that the s 309(1)(a) ground of annulment has a strong focus on a defect in form or procedure. That focus is reinforced by the implicit reference in s 309(4) to the s 309(1)(a) ground of annulment in that subs (4) refers to an annulment on the ground that the adjudication should not have been made “because of a defect in form or procedure”.
Mr Paterson’s grounds of application
The specific grounds
[19] The specific grounds of application identified in Mr Paterson’s notice were:
(a) That on the 5th day of April 2016 the Applicant was adjudicated bankrupt in the High Court in Wellington.
(b) That in support of the bankruptcy petition, Counsel for the Petitioning Creditor provided a Certificate of Indebtedness to the effect that the debt of $8,931.36 remained unpaid.
(c) That the sum of $8,931.36 had been tendered by Bank Cheque in payment of the same debt in respect of liquidation proceedings in the High Court at Napier.
(d) That the same bank cheque had been forwarded to the solicitor for the First Respondent in payment of the sum due.
(e) That by email dated 21 March 2016 the Solicitor for the First Respondent had requested that the Bank cheque in payment of the Costs award be forwarded to him.
(f) That the Solicitor for the First Respondent was, by email dated 24
March 2016 advised that the Bank cheque had been posted to him.
(g) That the Petitioning Creditor alleges that the said bank cheque has not been received.
(h) That no enquiry was made of Counsel for the Applicant or the
Applicant as to the whereabouts of the cheque.
(i) That the amount due pursuant to the judgment debt has been tendered in payment of the debt. If that bank cheque has been lost in the post then it was simply a matter of having the cheque reissued.
(j) That in providing the Certificate of Indebtedness Counsel for the
Petitioning Creditor has mislead (sic) the Court.
…
(q) That the bankruptcy proceedings and liquidation proceedings being advanced by the Respondent Company are an abuse of the Court’s process and are designed to avoid the substantive issues surrounding the First Respondents (sic) behaviour coming before the Court.
…
Mr Paterson’s explanation of the bank cheque
[20] In 2015, Lepionka was pursuing liquidation proceedings against GLW. GLW was, as I have noted, the other plaintiff against whom the $8,875.24 costs and disbursements were awarded in October 2015.
[21] In Lepionka’s liquidation proceeding against GLW, the judgment debt was identified as one of several debts which GLW owed. The liquidation proceeding against GLW was called in Court on 21 March 2016. It is common ground that Mr Lawson appeared for GLW that day, holding four bank cheques, which he said were sufficient to discharge the liabilities to Lepionka. Mr Lawson initially asked for an order that the cheques be paid into Court rather than to Lepionka. After discussion between counsel, it was agreed that the bank cheques would be held by a firm of solicitors “pending written agreement between the parties or direction by the Court”.
What happened to the bank cheque for Lepionka?
[22] The four cheques which Mr Lawson was holding included one for $8,931.368 in relation to Lepionka’s costs judgment. Lepionka’s solicitor, Callum Reid, and Mr Lawson had further discussions that day. In a follow-up email on 21 March 2016, Mr Reid requested that the bank cheque for the costs order be released (meaning to Lepionka).
[23] Mr Lawson on 24 March 2016 responded to Mr Reid by email stating:
Please find attached by way of service a Statement of Defence to the
Plaintiffs amended SoC.
A hard copy will be forwarded by mail together with the bank cheque in payment of the third cause of action.
[24] The email exchange was clearly intended by counsel to be a “written agreement” in relation to the bank cheque for the costs judgment in terms of Associate Judge Smith’s Minute. It is common ground that the other three bank cheques were subsequently provided by Mr Lawson’s firm to the stakeholding solicitors. There is no evidence from Mr Lawson’s firm as to where the $8,931.36 cheque was held from 21 March 2016.
[25] Mr Reid has provided the main evidence for Lepionka in opposition. Mr Reid refers to the events of 5 April 2016 when the adjudication application in relation to Mr Paterson was to be called. He deposes that (having not received the bank cheque directly) he contacted Mr Lepionka, a director of Lepionka. He told Mr Lepionka that he had not received the promised bank cheque. He says that Mr Lepionka confirmed that he (Mr Lepionka) had also not had communication from Mr Paterson. Mr Lepionka instructed Mr Reid to seek an order for adjudication.
[26] At that point, Mr Reid completed the certificate of counsel provided for in r 24.20 High Court Rules, in the following terms:
I, CALLUM FRANCES JOHNSTON REID certify that, after having made due enquiries, that the debt of $8,931.36 remains unpaid by the judgment debtor and is owing to the judgment creditor.
8 $8,875.24 plus interest.
[27] Another development on 5 April 2016, before the hearing, was that the Registrar received an email communication directly from Mr Paterson timed at 1.07 am. The email was referred to me before the start of the hearing. Early in the email, Mr Paterson stated:
Please be advised that the amount outstanding in CIV-2015-485-973 has been paid in to trust in matter CIV-2015-441-104, as there is some concern that the monies being claimed by Lepionka & Company Investments Ltd (“LCIL”), may not in fact be owing. A copy of the Bank Cheque is attached.
Later in the email, Mr Paterson referred to and detailed grievances which GLW (and Mr Paterson as guarantor) have. These are grievances against Lepionka over Lepionka’s conduct in relation to a mortgage (over GLW’s land) which mortgage Lepionka had acquired.
[28] It is now clear that, contrary to Mr Paterson’s statement in the email, the amount of the judgment debt had not been “put into trust” whether through a bank cheque or otherwise. But at the time of the hearing on 5 April 2016, neither the Court nor Mr Reid could have known that Mr Paterson’s email statement was incorrect.
The bankruptcy hearing
[29] Mr Reid appeared on the hearing of the adjudication application (which immediately followed the summary judgment hearing. There was no appearance for Mr Paterson. Mr Reid explained to the Court the background of the judgment debt. He explained what had occurred at the hearing on 21 March 2016. He explained the order made by Associate Judge Smith in relation to the bank cheques. He referred to his explanation to the Court. He deposed that he had requested that Mr Lawson release the bank cheque for Lepionka’s judgment debt and that Mr Lawson had agreed to release the bank cheque. He exhibited his email of 21 March 2016 and Mr Lawson’s email of 24 March 2016. He confirmed that the bank cheque had not been received since by his firm or Lepionka. He concluded that he was therefore satisfied that it was proper for him to provide his r 24.20 certificate.
[30] At the 5 April hearing, I accepted the appropriateness of Mr Reid’s
certificate. I provided to Mr Reid a copy of Mr Paterson’s email. I gave Mr Reid an
opportunity to peruse it but in the circumstances did not require him to address me further.
[31] I recorded these matters in summary form in a Minute before I made the adjudication order, noting:9
[2] Mr Reid, for the creditor, was able to provide his certificate that the debt remains due and owing. In doing so, he has responsibly explained to the Court a background relating to other proceedings in the Napier Registry between Mr Paterson’s company and the creditor in which a cheque for the judgment debt has come under discussion. I am satisfied from Mr Reid’s explanation that he was entitled to present his certificate this morning and, indeed, the Court should respect counsel’s judgement in presenting such a certificate.
[3] The second matter, I note, is that the Court received the Registrar an email communication from the debtor this morning at 1.07 am in which the debtor touched on some of the matters that Mr Reid has explained as background this morning. The email from the debtor does not constitute a document formally before the Court. I have looked at it to consider whether it raised any matters in relation to which I should exercise a discretion if not to do anything else than to adjourn the proceeding for a further period. I am satisfied that nothing in the email raises matters of that nature.
Reliance on the bank cheque
[32] In his application, Mr Paterson does not assert that he (or GLW) effected payment of the costs judgment. Rather, the relevant ground in his notice of application was that:
… the sum of $8,931.36 had been tendered by Bank Cheque in payment of the same debt in respect of liquidation proceedings in the High Court at Napier.
[33] Responsibly, Mr Lawson has not suggested today that what he described as the “tendering of the bank cheque” for $8,931.36 at the March hearing constituted a payment of that sum to Lepionka. Even the posting of the cheque to the creditor, when the cheque is subsequently lost in the post, does not normally amount to
payment.10
9 Lepionka & Co Investments Ltd v Paterson HC Wellington CIV-2015-485-000973, 5 April 2016 [Minute of Associate Judge Osborne].
10 Wardle v Agricultural and Rural Finance Pty Ltd; Agricultural and Rural Finance Pty Ltd v
Brakatselos (No 2) [2012] NSWCA 388.
[34] In his supporting affidavit, Mr Paterson referred to the events of the 21 March
2016 liquidation hearing and the email exchanges which followed. He then deposed:
As a result, I believed, as did my solicitor, that the sum of $8,931.36 had been paid in satisfaction of the Costs Order to which the Bankruptcy Notice and the third cause of action in the liquidation proceedings related. There was certainly no indication from Mr Reid that he did not receive the hard copy of the Statement of Defence or the bank cheque.
I am now aware that it is claimed that the bank cheque has not been received. If that is the case, then it is simply a matter of cancelling the bank cheque and having it reissued. I have contacted the Bank of New Zealand and it is confirmed that the bank cheque has not been presented. The funds remain in the BNZ and it is simply a matter of having the cheque re-issued.
[35] Later in his affidavit, in the context of criticism of Mr Reid, Mr Paterson adds that Mr Reid “was also aware that he had been advised that the cheque had been mailed”. This statement, of course, is at odds with Mr Paterson’s 5 April 2016 email in which he had asserted that the money had been “paid in to trust”.
[36] Mr Lawson has not filed an affidavit. Nor has any member or employee of his firm. There is accordingly no evidence to explain whether the bank cheque which Mr Lawson’s email of 24 March 2016 stated “will be forwarded by mail” was in fact subsequently sent. Any covering letter, which one could have expected to have accompanied such a bank cheque, has not been produced. Equally, no evidence has been given to contradict Mr Paterson’s 5 April 2016 email statement that the money had in the meantime been “paid in to trust”.
Discussion
[37] Whereas Mr Paterson’s notice of application asserts that the bank cheque was “tendered in payment” at the 21 March 2016 liquidation hearing, payment (whether by bank cheque or otherwise) was not in fact proffered to Lepionka by Mr Paterson (or anyone else) either at the 21 March 2016 hearing or at any time up to and including 5 April 2016. On 5 April 2016, Lepionka remained a creditor for the full amount of the costs judgment. I was informed from the bar (by Mr Lawson) that the sum of $8,931.36 has subsequently been sent as a direct credit to a bank account for Lepionka. Such a subsequent payment is irrelevant in the context of this annulment
application under s 309(1)(a) Insolvency Act 2006, which must be judged by events as at 5 April 2016.
[38] Even Mr Paterson’s reference to the “tendering” of the cheque on 21 March
2016 is at best misleading. The bank cheque was not in the normal sense tendered to Lepionka in payment. Rather, Mr Lawson asked the Court to become stakeholder of cheques for sums which GLW asserted were in dispute.
[39] Both in the presentation of Mr Paterson’s application for annulment and in the submissions of Mr Lawson there has been criticism of Mr Reid. Mr Lawson went so far as to place his criticism of Mr Reid in the context of lawyers’ duties of honesty, integrity and fairness.
[40] As I understand it, the criticism levelled at Mr Reid is captured in this
passage in Mr Lawson’s synopsis:
Mr Reid was aware that agreement had been reached between Counsel for
[release of the bank cheque to Mr Reid] to occur.
Mr Reid was aware that the cheque had been posted to Gibson Sheat and he acknowledges receipt of that advice by email on 24 March 2016, 12 days before the bankruptcy hearing on 5 April.
It is submitted that in these circumstances, making due enquiry [under r
24.20 High Court Rules] as to whether there had been any communication or whether the debt remained unpaid would have required contacting Counsel
for the debtor and seeking advice as to whether the cheque had in fact been
posted and advising that it had not been received.
[41] The criticism of Mr Reid is misconceived on a number of levels and is unjustified. He properly discharged his responsibilities to the Court in his conduct of the bankruptcy proceedings, both on 5 April 2016 and before. That is for several reasons:
(a) The duty upon the Lepionka’s solicitor to “make due enquiries” relates to a single question or matter, namely whether the debt remains unpaid. Rule 24.20 gives the certificate the status of prima facie evidence that the debt remains unpaid. That is what is certified. The solicitor is not required to make other enquiries, let alone to seek
clarification from what might be termed a “non-recipient” party, such as to whether a payment may have been sent or may have gone astray.
(b)Enquiries under r 24.20 will almost inevitably qualify as due enquiries as to the non-payment if the solicitor checks with those who would be the most likely recipients of any payment which may extend beyond the creditor itself to persons such as the creditor’s solicitor and depending on the circumstances, an accountant such as one with book keeping responsibilities.
(c) Contrary to Mr Paterson’s evidence, Mr Lawson’s email of 24 March
2016 stated not that the bank cheque “had been posted to Gibson Sheat” but rather that it “will be forwarded by mail”. If the email had referred to a prior act of posting, it may have been professionally appropriate (I put it no higher than that) for Mr Reid to have made an enquiry of Mr Lawson as to what had become of an item stated to have been posted. Given that Mr Lawson had stated that the bank cheque “will be forwarded by mail”, Mr Reid did not have any obligation to check with Mr Lawson that something had happened which Mr Lawson said would happen. Mr Lawson sought to distinguish the situation of 5 April 2016 from the “classic” situation in which a debtor has stated that “the cheque is in the mail” by reference to the fact that the email of 24 March 2016 emanated from the debtor’s solicitor. But the focus of enquiry under r 24.20 is not on whether payment might have been attempted and/or gone astray but on whether it has been received. The right of Mr Reid’s client was to instruct Mr Reid to request adjudication on 5 April 2016, payment not having been received, and that is what Mr Reid did.
(d)To the extent that there was a relationship between the liquidation proceeding against GLW and the adjudication application against Mr Paterson (through the joint and several judgment debt and the availability of the four bank cheques at the 21 March 2016 liquidation hearing) Mr Reid responsibly outlined that position to me at the
adjudication hearing. In doing so, he referred to the Court orders made on 21 March 2016 and the subsequent GLW/Lepionka agreement as to the release to Lepionka of the bank cheque for the judgment debt. At that point, the task of considering whether as a matter of discretion (and in the absence of an application for adjournment) to adjourn the proceeding for further enquiry to be made became a matter for the Court in its discretion. I determined that the hearing should proceed.
(e) From Lepionka’s perspective, Mr Paterson was competently represented – it was for Mr Lawson, not Mr Reid, to ensure that Mr Paterson’s interests were protected. Through to this hearing, Mr Paterson has not provided any admissible evidence that the bank cheque was ever posted by Mr Lawson’s firm. There has been no explanation in evidence as to why Mr Lawson’s firm apparently took no steps to require a receipt for a bank cheque to be sent by mail or made follow-up enquiries to ensure that the bank cheque had been received. This lack of evidence has persisted notwithstanding Mr Tingey’s observation by email to Mr Lawson on 18 May 2016 that evidence as to whether the bank cheque had been correctly addressed and posted was lacking and his (implicit) notification to Mr Lawson that the Court would be asked to draw inferences from the lack of evidence that the bank cheque was posted by Mr Lawson’s firm.
[42] Counsel addressed me to some extent also on the background of litigation between the parties and associated entities. It is a complicated background and now includes a recent judgment of the Court of Appeal in Coltart v Lepionka & Co Investments Ltd.11 The Court of Appeal allowed an appeal from a judgment in which the High Court ordered the removal of two caveats from the title to a property which GLW had mortgaged to Westpac Banking Corporation. Lepionka had taken an
assignment of the mortgage. The appellant, Mr Coltart, claimed an interest in
GLW’s equity of redemption of the mortgage. The Court of Appeal found that Mr
11 Coltart v Lepionka & Co Investments Ltd [2016] NZCA 102.
Coltart arguably had such an interest and went on to find that it was arguable that
Lepionka breached its duty to exercise its powers as mortgagee in good faith.
[43] Once it was accepted for Mr Paterson (as it has been) that he could not pursue the setting aside of the summary judgment on this application, the relevance of claims or cross-clams which Mr Paterson might arguably have against Lepionka falls away. Lepionka was entitled to resort to the bankruptcy jurisdiction for the judgment debt.
[44] In relation to the proposition that Mr Paterson should not have been adjudicated bankrupt, the continuing litigation relating to GLW’s mortgage takes matters no further for Mr Paterson. As it is, Mr Reid at the adjudication hearing referred the Court to the events at and surrounding the liquidation hearing on 21
March 2016 and the Court has the opportunity, of its own motion, to consider whether adjournment was called for. The events prior to 5 April 2016 did not cut across Lepionka’s right to request that an adjudication order be made that day.
Application of the law
[45] Before considering as a matter of discretion whether to order an annulment of Mr Paterson’s adjudication, he must first have satisfied me, in terms of s 309(1)(a) of the Act, that he should not have been adjudicated bankrupt. I consider the requirement by reference to the three situations recognised in Re Hunter12 and the Heath and Whale13 commentary to which I have referred.
[46] First, there was no defect in form or procedure in Lepionka’s application or the hearing of it. Lepionka observed correctly each of the steps required in relation to its bankruptcy notice and its application for an adjudication order.
[47] Secondly, Mr Paterson is unable to point to any material fact which was not drawn, whether by human error or otherwise, to the Court’s attention at the adjudication hearing. Mr Reid, at the hearing, did not simply provide his certificate.
He responsibly referred me to the events surrounding the liquidation proceeding. He
12 Hunter v Commissioner of Inland Revenue (2000) 19 NZTC 15,722 (HC).
13 Heath and Whale, above n 6.
explained the existence of the four bank cheques and the subsequent email correspondence which foreshadowed but did not result in the satisfaction of the judgment debt.
[48] Thirdly, I do not find any evidence of an abuse of the process of the Court. A judgment creditor, faced with non-payment of the judgment debt, issued a bankruptcy notice which remained unmet. Lepionka then pursued the adjudication procedure according to its entitlement and obtained an order of adjudication. The adjudication procedures under the Insolvency Act were appropriately used.
[49] I conclude, in relation to the jurisdiction under s 309 of the Act, that Mr
Paterson has not established the ground he invokes (under s 309(1)(a)).
The discretion under s 309 Insolvency Act
[50] As I have found that the jurisdiction to annul Mr Paterson’s adjudication in bankruptcy does not arise under s 309(1)(a) of the Act it is strictly unnecessary that I determine how the discretion which would have arisen under s 309 ought to have been exercised. I therefore limit myself to the identification of several matters raised with brief analysis. In doing so, I identify some but not all of the matters raised by Mr Tingey as being relevant to the discretion.
[51] First, even had the bank cheque been received by Lepionka by 5 April 2016, Lepionka would have been entitled to decline to accept the bank cheque having regard to the interest and costs which had accrued in a sum significantly greater than the $1,000 minimum figure applicable in this jurisdiction. The Court cannot construct an assumption that Lepionka would have accepted a partial payment. Lepionka would have been entitled to proceed with the same outcome as occurred on
5 April 2016.
[52] Secondly, by reason of the summary judgment entered (for $3,825,601.20) immediately before the hearing of the adjudication application, Lepionka would have remained a creditor of Mr Paterson at the time of his adjudication even had the costs judgment been earlier satisfied. The grounds of adjudication (failure to meet the
bankruptcy notice) remained available to Lepionka. Lepionka did not require substitution as a creditor because it was already the applicant in the proceeding.14
[53] Although the Court, in adjudicating Mr Paterson bankrupt, proceeded on the basis that the costs judgment remained outstanding, Lepionka was equally entitled to proceed as a creditor by reference to the summary judgment which had been entered. Mr Lawson has correctly identified the fact that Lepionka’s application would have required amendment in relation to the new judgment debt and that the Court was likely to have acquired service of the amended application therefore necessitating an adjournment. That is so, but in relation to the discretion to annul an adjudication it is relevant, as Mr Tingey submits, that for the time being this debtor had a judgment debt of over $3,800,000.
[54] Thirdly, there is substantial uncertainty as to the level of indebtedness (in a New Zealand context) of Mr Paterson beyond Lepionka’s summary judgment. Both the Assignee in her reports and Mr Reid in supplementary evidence have referred to the outcome of enquiries which suggest the real likelihood of other substantial indebtedness of Mr Paterson. Lepionka has produced evidence of Mr Paterson’s bankruptcy in Australia, where Mr Paterson resides and has his business interests. The Australian Official Trustee identified no realisable assets in Australia in Mr Paterson’s estate, but creditors of AUD$646,405.
[55] Between his New Zealand adjudication on 5 April 2016 and the first call of this annulment application on 28 April 2016, Mr Paterson chose to not provide to the Assignee a completed Statement of Affairs. The Assignee has been unable to ascertain or provide accurate detail of Mr Paterson’s financial position. Equally, Mr Paterson himself has not done so in evidence in this proceeding. Given these various circumstances, the Court cannot readily assess the utility of annulling Mr Paterson’s bankruptcy or the implications for creditors.
[56] Mr Paterson has deposed that his application for cancellation of the relevant insolvency order in Australia was unsuccessful and that he now intends seeking a
composition or arrangement with his Australian creditors. On the evidence, such as
14 Lane v Questnet Ltd HC Auckland CIV-2007-404-6164, 4, 5 November 2008 per Asher J at [29].
it is, there must be a significant likelihood that he will similarly need to seek a composition of his New Zealand creditors. Section 309(1)(d) Insolvency Act provides a route by which such a composition may be dealt with post-adjudication. The interests of creditors and of Assignees/Trustees on both sides of the Tasman in a co-ordinated resolution, when the Assignee or Trustee has already been appointed, militates against the exercise of the discretion in favour of Mr Paterson which leaves him to deal alone with creditors.
[57] Fourthly, the Court must weigh the fact that each step taken by Lepionka and its solicitors was a proper step in the proceeding against the fact that Mr Paterson took no steps in the proceeding to protest his position.
[58] Fifthly, the Assignee has already incurred costs and disbursements in the proper steps initially taken in relation to Mr Paterson’s bankrupt estate and in reporting on this application. Mr Paterson has not referred in his evidence to an ability or offer in relation to payment of the amounts identified by the Assignee.
[59] In conclusion, all these matters properly taken together, might have informed the exercise of the discretion. They are likely to have weighed against annulment.
Outcome
[60] Mr Paterson’s application fails in that he has not established the s 309(1)(a) ground of application by reference to the circumstances relating to the bank cheque and Mr Reid’s certificate. Even had that ground been established the Court is unlikely to have exercised its discretion to grant annulment.
Equitable considerations – an alternative ground?
[61] In his notice of application, Mr Paterson asserted as ground (p) that it is just and equitable that the judgment be set aside and/or stayed. The “judgment” in question, by reason of the ordering of the notice of application, was implicitly the summary judgment.
[62] In his affidavit, Mr Paterson deposed as to attempts to redeem the GLW mortgage. He referred to the subsequent Court of Appeal judgment which found evidence of arguable breach. These matters were referred to in that part of Mr Paterson’s affidavit in which he dealt with the summary judgment and his application for setting aside the summary judgment.
[63] Mr Lawson has confirmed in his oral submissions that the just and equitable ground is not raised in relation to annulment. It is in any event not available in relation to annulment.
Costs
[64] I heard from Mr Lawson at the conclusion of his submissions as to costs. As against Lepionka, he accepted that were the annulment application to be dismissed costs must follow the event and that a 2B15 award would be appropriate.
[65] The Assignee has requested that her costs associated with the application be the subject of memoranda following this judgment. It is appropriate that the Assignee has an award of costs and disbursements of the application, but with the amount reserved for written submissions.
[66] Mr Tingey notes that Lepionka’s costs judgment against Mr Paterson is likely to be hollow. Having regard to that reality, I will make an order that the order for costs of the annulment application be treated as costs and disbursements of the adjudication application for the purposes of the priority of any distributions from Mr Paterson’s estate.
[67] Mr Tingey has also informed the Court and Mr Lawson that Lepionka may instruct him to seek an award of non-party costs against Lawson Robinson. Such an application should be on notice by memorandum with supporting evidence. I will
reserve that issue, with timetabling.
15 High Court Rules, Category 2 under r 14.3(1) and band B under r 14.5(2).
Assignee’s remuneration
[68] As the Court is not annulling Mr Paterson’s adjudication, there is no need to consider the Assignee’s remuneration pursuant to s 309(5)(a) of the Act. She will have her usual entitlement to remuneration under other provisions of the Act.
Orders
[69] I order:
(a) The application dated 19 April 2016 is dismissed.
(b)The interim order by which proceedings in the bankruptcy were stayed pending further order of the Court (made by Associate Judge Smith on 28 April 2016) is rescinded with immediate effect. This order is timed at 3.12 pm today.
(c) The applicant is to pay to the first respondent the costs of the application which I fix on a 2B basis, together with disbursements to be fixed by the Registrar.
(d)As between the applicant and the second respondent, the applicant is to pay the second respondent’s reasonable costs and disbursements associated with the application, with the amount to be fixed by the Court upon receipt of written submissions.
(e) As between the first respondent and any non-party I direct:
(i) the first respondent shall file and serve on the non-party within
10 working days any memorandum in support of an award of non-party costs together with all supporting affidavit evidence on matters other than matters of record;
(ii)the non-party shall file and serve within 20 working days of the service of any memorandum pursuant to [69](e)(i) its
memorandum in opposition together with all supporting affidavit evidence; and
(iii)the Court will deal with such costs on the papers unless either party requests an oral hearing.
Procedural orders
[70] The bankruptcy proceeding was pursued by Lepionka in the Wellington Registry (correctly) as the proper registry. But Mr Paterson filed his annulment application as a new proceeding in the Napier Registry rather than (as it should have been) as an application on the bankruptcy file.
[71] I direct that all documents on the Napier Registry file (CIV-2016-441-43) be transferred to the Wellington Registry (under CIV-2015-485-973) which shall become the proper Registry.
Associate Judge Osborne
Solicitors:
Lawson Robinson, Napier
Bell Gully, Wellington
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