Prain v Smith
[2021] NZHC 1949
•30 July 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-2355
[2021] NZHC 1949
UNDER the Insolvency Act 2006 IN THE MATTER
of the bankruptcy of GREGORY ROBERT SMITH
BETWEEN
JUSTIN WILLIAM PRAIN
Judgment Creditor
AND
GREGORY ROBERT SMITH
Judgment Debtor
Hearing: 14 June 2021 Appearances:
J Moss for the Judgment Creditor
G Smith, Judgment Debtor, in person
Judgment:
30 July 2021
JUDGMENT OF ASSOCIATE JUDGE SUSSOCK
This judgment was delivered by me on 30 July 2021 at 4pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors/Counsel:
KJ McMenamin & Sons, Christchurch J Moss, Barrister, Christchurch
Copy to:
G Smith, Auckland
PRAIN v SMITH [2021] NZHC 1949 [30 July 2021]
Introduction
[1] Mr Prain has brought bankruptcy proceedings against Mr Smith relying on the failure to pay a costs judgment of $86,661.40 plus disbursements of $1,270. The costs award was made following Mr Prain and Cardno (NZ) Ltd’s successful strike out of proceedings brought by Mr Smith and Mr Colin Stokes.
[2] Mr Smith and Mr Stokes first brought the proceedings in 2014 against a number of parties including Noble Investments Ltd and Apple Fields Ltd for breach of a 2002 contract relating to the purchase of land by Mr Smith and Mr Stokes in a subdivision to be completed by Noble. Apple Fields was the company used by Noble to manage the development of the subdivision. Mr Prain, the director of Apple Fields, was joined as the third defendant and Cardno, a company engaged by Noble to acquire the requisite consents and assist in the planning, as the fourth defendant.
[3] Noble and Apple Fields were removed as first and second defendants following Noble’s liquidation and the removal of both from the Companies Register. Other defendants were also removed following successful summary judgment applications.1
[4]The proceedings continued against Mr Prain and Cardno.
[5] By the time the application for strike out was filed in December 2019, the statement of claim had been amended six (or seven) times.2 The application for strike out succeeded because, despite amendment, the pleadings still failed to disclose a reasonably arguable cause of action because of the failure to give particulars in relation to the alleged dishonest misrepresentations and because the claim in negligence against Cardno was found to be untenable. Furthermore, Associate Judge Lester stated that he would have dismissed the proceeding for want of prosecution under r 15.2 of the High Court Rules had he not been persuaded that it should be struck out.3
1 Smith v Noble Investments Ltd [2020] NZHC 1236 at [26].
2 Smith v Prain [2020] NZHC 1766 at [41].
3 At [2].
[6]Following the strike-out, Associate Judge Lester awarded costs to Mr Prain of
$86,661.40 plus disbursements to be fixed by the Registrar. The costs award was calculated on a 2B basis plus an uplift of 40 per cent. The uplift was applied because Associate Judge Lester considered Mr Smith and his co-plaintiff, Mr Stokes, should have known their case had no merit or prospect of success, raised claims in deceit without being able to plead the particulars required in dishonesty and because the sixth (or seventh) amended statement of claim recycled parts of previously criticised statements of claim.4
[7] The judgment debtor opposes the application for adjudication on the basis that there is doubt whether the costs order made exceeds actual costs and the costs award has been appealed.
Issues
[8]There are two questions to be answered in this case:
(a)Has the judgment creditor proved a prima facie case for adjudication?
(b)Is there any reason not to adjudicate Mr Smith bankrupt now?
[9] On the second question, the Court can either halt or dismiss the application. The judgment creditor, Mr Prain, submits that if I consider that there is a reason not to adjudicate Mr Smith bankrupt, the proceedings should only be halted whilst either the question of actual costs is investigated or the appeal determined.
Application by Cardno (NZ) Ltd to appear in support
[10] Only a few days prior to the hearing, following the filing of submissions on behalf of both the judgment creditor and debtor, Cardno filed a notice of appearance apparently seeking to join the proceedings.
[11] Cardno says that it is also a creditor of Mr Smith for $89,985.20 arising from a costs award in the same judgment that the judgment creditor relies on, Smith v Prain.5
4 At [37]-[53].
5 At [54].
[12] A memorandum was then filed asking that their appearance be excused on the basis that counsel for Cardno had little to add to the judgment creditor’s application and submissions, seeking to rely on those for the purpose of joining the application.
[13] Mr Smith filed a memorandum in response recording his opposition to the joinder of Cardno as a creditor to the proceeding.
[14] There is in fact no power to join a creditor to bankruptcy proceedings, nor to file a notice of appearance. The only step available to another creditor is to apply to substitute if the original creditor does not continue.
[15] Associate Judge Osborne (as he then was) considered the relevant provisions in Lister v Lister as follows:6
[10] As Mr Hallowes identified in his submissions, the statutory regime under the Insolvency Act 2006 and under the High Court Rules provides, in relation to the issuing of bankruptcy notices, for only a single debtor and a single creditor. The provisions of ss 17 to 28 of the Insolvency Act cannot be read in any other way. Nor can one read in any other way the forms for request for issue of bankruptcy notice and the bankruptcy notice itself (Forms B1 and B2 in schedule 1 to the High Court Rules), which are the required forms under r 24.8 High Court Rules.
[11] Thus if a Court’s costs order is against two persons, separate bankruptcy notices are required against each. Similarly, if two separate persons obtain costs orders (whether through one or more judgments), each creditor has to request and have issued its own separate bankruptcy notice.
[12] The requirement for a bankruptcy notice to be that of a single judgment creditor is mirrored in the rules as they apply on any ensuing adjudication application. I adopt what was stated in Havenleigh Global Services Ltd v Henderson:
Section 44 of the Act is to be construed as empowering the Court to substitute as applicant in the proceeding one creditor for another, in the sense that the second now stands in place of the first. The section is not to be construed as allowing the addition of a second creditor, while the first creditor remains an applicant.
[13] That will apply equally in this case if, the creditors having commenced an adjudication application, there was to be a suggestion that another creditor might be joined as creditor. Joinder will not be available. A second creditor may be substituted but not added.
6 Lister v Lister [2018] NZHC 1743, citing Havenleigh Global Services Ltd v Henderson [2010] NZAR 714 at [34].
[16]At the hearing I declined to join Cardno to the proceeding or to hear from them.
Has the judgment creditor proved a prima facie case for adjudication?
Legal principles regarding necessary elements for adjudication
[17] Section 36 of the Insolvency Act 2006 (“the Act”) provides that the Court may, at its discretion, adjudicate a debtor bankrupt if the debtor has established the requirements set out in s 13 of the Act.
[18]Section 13 sets out the requirements as follows:
13 When creditor may apply for debtor’s adjudication
A creditor may apply for a debtor to be adjudicated bankrupt if—
(a)the debtor owes the creditor $1,000 or more or, if 2 or more creditors join in the application, the debtor owes a total of
$1,000 or more to those creditors between them; and
(b)the debtor has committed an act of bankruptcy within the period of 3 months before the filing of the application; and
(c)the debt is a certain amount; and
(d)the debt is payable either immediately or at a date in the future that is certain.
Has the judgment creditor satisfied the prima facie requirements for adjudication? Section 13(a)
[19] There is no question that the debt relied on is for more than $1,000 and that it is currently owing to the debtor, thereby satisfying the first element.
Section 13(b)
[20] The second requirement is that the judgment debtor has committed an act of bankruptcy. The judgment creditor relies on s 17 of the Act, which provides that failure to comply with a bankruptcy notice is an act of bankruptcy.
[21] A bankruptcy notice was served on Mr Smith on 21 December 2020 requiring either payment of the sum awarded in the costs judgment or security for payment or agreement within 10 working days.
[22] No money has been paid or security or agreement reached in response to the bankruptcy notice and so an act of bankruptcy has occurred.
Section 13(c)
[23] The next requirement is that the debt is for a certain amount. The costs order has been sealed and so there is no question that it is for a certain amount.
[24] In this case the costs award was for “$86,661.40 plus disbursements to be fixed by the Registrar”. Associate Judge Lester then went on to say, however:7
There is some suggestion that Mr Prain’s actual costs may have been less than
$86,661.40. If that is the case, then pursuant to r 14.2(1)(f) of the High Court Rules, only costs actually incurred can be recovered.
[25]The combined effect of these two paragraphs is that the costs award is for
$86,661.40 plus disbursements on condition that it is less than the actual costs incurred by Mr Prain. The lawyers acting for Mr Prain also acted for Noble and Apple Fields. Mr Smith says that some of the costs claimed as Mr Prain’s costs are costs for Noble and Apple Fields.
[26] The question of whether Mr Prain’s actual costs exceed the costs award is discussed further below in relation to the exercise of my discretion whether to adjudicate Mr Smith bankrupt now.
Section 13(d)
[27] The final element, that the debt is payable either immediately or a date in the future that is certain, is satisfied as there is a sealed costs order.
Conclusion on prima facie case for adjudication
[28] With the four elements set out in s 13 of the Act satisfied, there is a prima facie case for adjudication.
7 Smith v Prain, above n 2, at [56].
Is there any reason not to adjudicate?
Applicable legal principles
[29] Even where all four elements of s 13 are met, s 37 of the Act provides the Court with a discretion to refuse adjudication including where:
37 Court may refuse adjudication
…
(c)it is just and equitable that the court does not make an order of adjudication; or
(d)for any other reason an order of adjudication should not be made.
[30] In Baker v Westpac Banking Corporation, the general discretion under s 37(c) and (d) was described as follows:8
It is proper for the court to consider not only the interests of those directly concerned – the petitioner, other creditors, the debtor – but also the wider public interest. A creditor who establishes the jurisdictional facts as set out in [the equivalent of s 13 of the Insolvency Act] is not automatically entitled to an order. On the other hand, it is for the opposing debtor to show why an order should not be made. The court will give proper weight to the commercial judgment of the petitioner, but the oppressive use of the bankruptcy process may be a ground for refusing an order. Another ground may be the undoubted absence of assets but that would not necessarily preclude an order given the range of interests involved including the public interest in the continuing oversight of a bankrupt’s affairs and the disqualifications that go with bankruptcy. In the end the court must balance the various considerations relevant to the case and determine whether the debtor has succeeded in showing that an order ought not to be made.
[31] In Re Tootell ex parte Rabobank Australia Ltd,9 Associate Judge Osborne (as he then was) referred with approval to the factors listed in Re Epirosa, ex parte Diner’s Club NZ Ltd.10 These factors include the circumstances in which the debt was incurred and whether those circumstances suggest the creditor was acting unreasonably in pursuing adjudication.
[32] If the Court considers that the case falls within s 37(c) or (d), then the application for adjudication is dismissed. A fresh application would then need to be made if the debt remained unpaid and adjudication was sought. In circumstances
8 Baker v Westpac Banking Corporation CA 212/92, 13 July 1993 at 4 per Richardson J.
9 Re Tootell, ex parte Rabobank Australia Limited [2013] NZHC 2975 at [7] and [8].
10 Re Epirosa, ex parte Diner’s Club (NZ) Ltd HC Wellington B498/91, 6 March 1992.
where it is likely that a debt will be owed but there may be some uncertainty over the amount, the courts halt rather than dismiss the bankruptcy proceedings. The relevant provisions in this case are ss 38 and 42 of the Act, s 38 providing the Court with a general power to halt the proceeding and s 42 a power specific to where there is an appeal.
[33] The cases considering s 38 emphasise that the final decision should balance all of the relevant factors to achieve a just outcome. In Bank of New Zealand v Koroniadis it was held that the lack of any particular matters the Court must take into account makes it clear that Parliament intended the discretion to be flexible, allowing the courts to respond to varying circumstances by affording differing weight according to each case.11
[34] Section 42 provides a more specific power where the judgment relied on in the bankruptcy notice is under appeal. It provides that:12
42 Halt or refusal of application when judgment under appeal
…
(2)If the debtor has appealed against the judgment or order underlying the bankruptcy notice or the judgment for nonpayment of trust money, as the case may be, and the appeal is still to be decided, then the court may—
(a)halt the creditor’s application for adjudication; or
(b)refuse the application.
[35] The Court’s discretion to grant a halt under s 42 is, as for section 38, unfettered by the prescription of express factors or the weight to be accorded to them. In Yeoh v Al Saffaf, this Court held that the following factors were relevant:13
(a)the bona fides of the debtor in prosecuting the appeal (with the merits of the appeal not generally considered unless the appeal has absolutely no prospect of success);
11 Bank of New Zealand v Koroniadis [2013] NZHC 2865 at [11].
12 Insolvency Act 2006, s 42(2)
13 Yeoh v Al Saffaf HC Auckland CIV-2006-404-1164, 21 June 2006 at [2].
(b)the stage the appeal has reached and whether there has been a delay in prosecuting the appeal;
(c)whether the halt of the proceeding would unduly harm the creditors; and
(d)whether the bankruptcy proceedings might render the appeal nugatory.
[36] In Re Pillay ex parte ANZ National Bank Ltd, Associate Judge Faire adopted the above factors, noted that the power to halt under s 42 involves a discretion similar to the power to give interim relief pending an appeal under the Court of Appeal (Civil)
Rules,14 and referred to other relevant factors including:15
(a)the effect on third parties;
(b)the novelty and importance of the question on appeal;
(c)the public interest in the proceeding; and
(d)the overall balance of convenience.16
Should the proceedings be dismissed or halted?
[37] In this case it is likely that even if the appeal succeeds a costs award will be required to be paid. The proceedings have been struck out and costs usually follow the event. In these circumstances it is more appropriate to halt rather than dismiss the application for adjudication, so I begin by considering whether to halt the application under ss 38 and 42.
[38] Section 42 applies specifically to appeals but, as noted above, Mr Smith has not filed a notice of appeal himself. He has, however, filed a notice of appearance in support of Mr Stokes’ appeal. Any adjustment by the Court of Appeal to the costs
14 Court of Appeal (Civil) Rules 2005, r 12.
15 Re Pillay ex parte ANZ National Bank Ltd HC Auckland CIV-2009-404-4175, 3 December 2009 at [11].
16 See the observations of Lang J in Re Wright ex parte Health Distributors Ltd HC Hamilton CIV- 2010-419-121, 5 November 2010 at [13] where “context is everything”.
awarded will adjust the amount Mr Smith owes as the costs award was expressly made on a joint and several basis pursuant to r 14.14 of the High Court Rules 2016.17
[39] Section 42 begins by saying “[i]f the debtor has appealed”, meaning that the section technically may not be available to Mr Smith as it is Mr Stokes, rather than Mr Smith, who has appealed.
[40] Section 38 however provides a broad discretion and so if s 42 does not apply, the question of whether a halt should be ordered can be considered pursuant to s 38. In these circumstances, the factors relevant to the exercise of the Court’s discretion under s 42 would be relevant to the exercise of the discretion under s 38, as there is an appeal in progress in relation to the judgment debt that may affect the amount the judgment debtor is required to pay.
[41] I consider, therefore, that the following factors are relevant to the question of whether to halt the proceedings in this case:
(a)the stage the appeal has reached and whether there has been a delay in prosecuting the appeal;
(b)whether the halt of the application would unduly harm creditors;
(c)whether the bankruptcy proceedings might render the appeal nugatory;
(d)Mr Smith’s ability to pay the debt if the appeal does not succeed; and
(e)whether the creditor is acting reasonably in pursuing adjudication.
(a)The stage the appeal has reached and whether there has been a delay in prosecuting the appeal
[42] The appeal is due to be heard in September 2021, which is relatively soon and so assists Mr Smith in seeking a halt.
17 Smith v Prain, above n 2 at [57].
[43] Mr Stokes, who filed the appeal, applied for a waiver of the requirement to pay security for costs in respect of the appeal. A waiver was not granted by the Registrar and his appeal of the Registrar’s decision was not successful. It is not clear whether these steps caused delay. In any event, neither of these steps were within the control of Mr Smith. I therefore do not take into consideration any delay that these steps may have caused.
(b)Whether the halt of the proceedings would unduly harm creditors
[44] Mr Prain is suffering prejudice to the extent that he is being kept from money owed to him pursuant to the costs award. Other than that, however, there is no evidence of any particular prejudice or hardship being suffered by Mr Prain. Furthermore, he confirms in his affidavit that if he is required to repay the costs judgment following the Court of Appeal decision, he would have the means to repay it.
[45] Mr Smith does not give any evidence as to his financial position or other creditors, resisting payment of the costs award on the basis that the lawful amount owing has not yet been determined rather than on the basis that he can or cannot pay the award. At the hearing, Mr Smith indicated that he would be able to raise a loan to pay the costs award if he was given sufficient time to do so.
[46] Mr Smith further offered to make payment into Court of the 2B costs outstanding on the basis that counsel acting for him in the costs hearing accepted that 2B costs were payable. It was not clear however whether counsel’s acceptance of 2B costs was in a general sense or was in respect of the 2B costs set out in the schedule prepared on behalf of Mr Prain. One of the issues to be determined on the appeal is whether the schedule setting out 2B costs for Mr Prain fairly claims costs for Mr Prain when his lawyers were also acting for Noble and Apple Fields.
[47] Mr Smith asked that if there were a requirement for him to pay part of the costs award into Court, there be sufficient time prior to that amount being required to be paid to allow him to arrange finance.
(c)Whether the bankruptcy proceedings might render the appeal nugatory
[48] In this case, as Mr Smith has not filed the appeal himself but instead has filed a notice of appearance in support, his adjudication would not render the appeal nugatory. This therefore does not support a halt in these proceedings.
(d)Mr Smith’s ability to pay the debt if the appeal does not succeed
[49] As noted above, Mr Smith does not set out his financial position in his affidavit. His opposition to adjudication is on the basis that the costs award is not less than the actual costs incurred by Mr Prain and that there is an appeal of the costs award. During the hearing, Mr Smith indicated that he had the ability to raise finance to pay the debt if the appeal does not succeed. There is no other evidence to suggest that this is not the case.
(e)Whether the creditor was acting reasonably in pursuing adjudication
[50] Although this factor is ordinarily relevant to applications pursuant to s 37 to refuse adjudication rather than to halt, and having determined that a halt is more appropriate in this case, I still consider that this factor should be taken into account, as it is relevant to the balancing exercise that is required.
[51] Mr Prain’s lawyer, Mr Moss, first sent a demand for payment of the costs award on 31 August 2020 together with a copy of the sealed judgment.
[52] Mr Smith responded on 4 September 2020 saying that the costs award was being appealed and that recovery needed to await determination of the appeal.
[53] Mr Moss replied on 6 September 2020 that only Mr Stokes was appealing the costs award and so it was still owed by Mr Smith, going on to ask whether Mr Smith had applied to join Mr Stokes or sought leave to file an appeal out of time.
[54] Mr Smith responded on 7 September 2020 saying that he had filed a notice of appearance within time supporting Mr Stokes’ appeal.
[55] Some time later, on 16 November 2020 Mr Moss set out in some detail for Mr Smith that the appeal did not act as a stay on the costs decision in the High Court and nor had there been an application for a stay of the decision being appealed. The email allowed a further seven days for Mr Smith to pay the full amount or a bankruptcy notice would be issued.
[56]The bankruptcy notice was not however served until 21 December 2020.
[57] Mr Smith emailed Mr Moss and Mr McMenamin on 7 January 2021 pointing out that it was “poor form” to serve him with the bankruptcy notice over the Christmas period and that it had made it virtually impossible to obtain legal advice. Mr Smith referred to the passage from Associate Judge Lester’s judgment, quoted above, where it said that if actual costs were less than the amount awarded, then only actual costs incurred could be recovered. Mr Smith asked for confirmation that only costs incurred for Mr Prain and not for Apple Fields or Noble were being sought.
[58] Mr Smith’s email continued, saying that Mr Moss and Mr McMenamin must know the costs breakdown and claimed that Mr Moss and Mr McMenamin were putting Mr Smith through a bankruptcy adjudication and claiming costs that they knew to be false. Mr Smith said that he would be taking the matter up with the Law Society when they returned from the Christmas break and consulting a barrister but, in the meantime, expected the bankruptcy application to be withdrawn until the correct amounts (if any) had been determined.
[59] Mr Moss confirmed by email the same day that the bankruptcy notice would not be withdrawn and that the appeal did not prevent Mr Smith being liable for the costs judgment in the meantime. Mr Moss said that if the appeal was successful the costs would be repaid. He did not respond to Mr Smith’s inquiry in relation to actual costs.
[60] Mr Smith replied again on 7 January 2021 asking Mr Moss to urgently answer his questions on the amounts that Mr Moss and Mr McMenamin were “falsely claiming” regarding the breakdown of costs between Mr Prain on the one hand and Apple Fields and Noble on the other, Mr Smith having asserted in his earlier email
that most of Mr McMenamin’s attendances related to defending Apple Fields and Noble and pursuing their counterclaim.
[61] Mr Moss did not then reply until 19 January 2021, saying he had returned to work the day before. In his email on that date, Mr Moss simply stated that “Mr Prain has indeed incurred more costs for lawyers instructed on the proceeding than the costs judgment relates to than that he was awarded.” The email went on to say that Associate Judge Lester’s comment about the costs award not exceeding actual costs was a standard comment and that as Mr Prain was not doing that, Mr Prain is entitled to seek the full amount of the judgment from Mr Smith (or Mr Stokes). Mr Moss finished by saying as the amount remained unpaid he was instructed to apply for bankruptcy.
[62]The application for bankruptcy was served on 22 February 2020.
[63] I agree that one of the general principles of costs is that costs awards are less than actual costs (r 14.2(1)(f)). However, Mr Moss and Mr McMenamin acted for other defendants as well. Where the concern was raised at the costs hearing, and expressly referred to in the judgment, the onus must be on Mr Prain to establish that the costs awarded are less than the actual costs arising from Mr Prain’s defence and not those arising in respect of the other defendants. In these circumstances, given Mr Smith’s concerns, a bald statement from Mr Moss without copies of invoices (even redacted) was not reasonable.
[64] At the hearing a bundle of invoices was finally handed up by Mr Moss together with pages of time records, but with no breakdown of those time records. Mr Smith had no ability to consider these and make submissions on them at the hearing.
[65] Mr Smith’s challenge to the judgment debt claimed may more properly have been brought as an application to set aside the bankruptcy notice. However, the timing of service of that notice by the judgment creditor made it difficult for Mr Smith to comply with the tight timeframes within which such an application is required to be brought.
[66] Although the judgment creditor submits that Mr Smith’s opposition is a delaying tactic, it is clear from the chronology of correspondence set out above that Mr Smith did respond, but that his requests for information as to the costs breakdown were not answered.
[67] Even once Mr Smith had filed his opposition to the adjudication proceedings with a supporting affidavit making it clear that his opposition was based on the failure to provide evidence of the costs breakdown, the relevant invoices and costs breakdown were not provided.
[68] As Mr Smith submitted, this proceeding could have been resolved if information had been provided earlier.
[69] It was not until the hearing that the invoices and timesheets were finally offered, but without any costs breakdown or any ability for Mr Smith to consider the 92 pages. The approach of the judgment creditor has not, in my view, been reasonable in the circumstances.
Final weighing of the factors
[70] Weighing all of the above factors, in my view, it is appropriate for a halt to be ordered, as the appeal is due to be heard in September 2021 and a halt will allow the judgment creditor to provide evidence that actual costs for Mr Prain in his personal defence exceed the costs award.
Result
[71] For the reasons set out above, I order that these proceedings are to be halted pursuant to s 38 of the Insolvency Act 2006 until the appeal of the costs award is finally heard and determined.
Costs
[72] In the usual course, costs follow the event. In this case, Mr Smith is seeking an indulgence although, as I have said above, this may have been heard as an application to set aside a bankruptcy notice if the notice had been served at a more
reasonable time. These factors, together with the fact that Mr Smith is acting for himself and so is not entitled to recover costs,18 lead to a preliminary view that costs should lie where they fall. The parties are to confer on costs and if agreement cannot be reached, memoranda may be filed.
Associate Judge Sussock
18 McGuire v Secretary for Justice [2018] NZSC 116 at [88].
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