Scott, ex parte Bank of New Zealand

[2023] NZHC 1058

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTEPOTI ROHE

CIV-2011-412-000777

[2023] NZHC 1058

UNDER

the Insolvency Act 2006

IN THE MATTER

of the bankruptcy of MICHAEL CRAIG SCOTT (also known as Makoure Scott)

EX PARTE

BANK OF NEW ZEALAND

Judgment Creditor

Hearing:

4 May 2023

Counsel:

G M Stuart for Judgment Debtor

D M L Dingwall for the Official Assignee
A Moore for the Bank of New Zealand and P, R and M Heslip (creditors in the bankruptcy)

Judgment:

5 May 2023

JUDGMENT OF ASSOCIATE JUDGE PAULSEN

This judgment was delivered by me on 5 March 2023 at 2.30 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date

RE SCOTT ex parte BANK OF NEW ZEALAND [2023] NZHC 1058 [5 May 2023]

[1]                 Michael Scott was adjudicated bankrupt in the High Court at Dunedin on     23 April 2012. The Official Assignee did not receive Mr Scott’s statement of affairs. It was not until 26 March 2021 that the Official Assignee accepted information from Mr Scott in lieu of a formal statement of affairs. The Official Assignee’s position is that Mr Scott will not, therefore, be discharged from bankruptcy until 26 March 2024.1

[2]                 Mr Scott applies for a discharge from bankruptcy pursuant to s 294 of the Insolvency Act 2006 (the Act). The Official Assignee has provided its report as required by s 296 of the Act. The Assignee’s position is that it will not oppose the application and will abide the decision of the Court. The creditors who made claims in Mr Scott’s bankruptcy have been served with the application. While none have taken any formal steps to oppose it, two creditors have advised they are not content for Mr Scott to be discharged as a bankrupt.

[3]                 Pursuant to s 294(3) and s 177 of the Act, I directed that Mr Scott be examined by the Court. There were specific matters that had a bearing on his application that I wished to ask him about. Because Mr Scott lives in Australia, I arranged for the examination to be conducted by audio-visual link. By memorandum of 28 April 2023, Mr Scott’s counsel, Ms Stuart, advised that Mr Scott would not attend the examination as he has no access to audio-visual facilities and that Mr Scott would not return to New Zealand until the issue of his bankruptcy was resolved.

[4]                 Upon receipt of counsel’s memorandum, I had the matter called in the bankruptcy list on 4 May 2023. At that time, Ms Stuart advised that there were difficulties getting instructions from Mr Scott and that she had intended to file an application to withdraw, but appreciated that no such order could be made at the hearing.

[5]                 This application has now been before the Court a very long time and there is no certainty that Mr Scott will ever make himself available for examination. It would, in my view, be prejudicial to him to adjourn the matter indefinitely. This is because under s 290(2) of the Act Mr Scott will not be automatically discharged from bankruptcy on 26 May 2024 where he has not completed his examination. Some

1      Insolvency Act 2006, s 290(1).

finality is required, and I consider the proper course is to dispense with the requirement that Mr Scott be examined,2 and deal with the application on its merits and on what evidence is before me.

The application

[6]                 Mr Scott’s application seeks an order “annulling the adjudication”, yet it is quite clear that the application is made under s 294 of the Act for a discharge, and the matter has proceeded on that basis.

[7]The grounds advanced in support of the application appear to be that:

(a)Mr Scott did in fact file a statement of affairs with the Official Assignee;

(b)Mr Scott has not earned any income since his adjudication other than benefit payments and he has no other assets; and

(c)the Official Assignee does not oppose the application.

[8]                 The application appears to have been prepared on the basis that as the Official Assignee would not oppose it, the order for discharge would be made as a fait accompli. That is not the case. While the position adopted by the Official Assignee  is important, I must deal with the application on its merits.

[9]                 Mr Scott filed an affidavit in support of the application. It consists of just eight short paragraphs, which largely mirror the wording of the application.

[10]              The affidavit does not provide sufficient information to support the making of the order sought. The only other information available to me is contained in the Official Assignee’s report, the contents of the Court’s file relating to Mr Scott’s bankruptcy and some limited additional information provided by Mr Scott’s counsel during a telephone conference on  1  December  2022  and  in  a  memorandum  of 22 December 2022. Importantly, Mr Scott did not file any reply to the matters raised

2      Burchell v Commissioner of Inland Revenue [2021] NZHC 1136 at [13]–[14].

in the Official Assignee’s report. While the Official Assignee is prepared to abide the decision of the Court, the material in the report is plainly adverse to Mr Scott and required a response from him if I was not to accept it.

Timeline

[11]              From the information available to me I have put together a timeline of events relevant to this application as follows:

Date

Description

26 September

2011

The Bank of New Zealand (BNZ) obtained summary judgment against Mr Scott for $482,929.66.

19        December

2011

BNZ sold Mr Scott’s property at Careys Bay, Dunedin as mortgagee and applied the sales proceeds to his indebtedness.

10 February 2012

BNZ applied to the High Court for an  order to  adjudicate  Mr Scott bankrupt.

6 March 2012

Application to adjudicate Mr Scott bankrupt served on Mr Scott.

23 April 2012

Associate Judge Osborne made an order adjudicating Mr Scott

bankrupt.3 Mr Scott did not appear at the hearing.

27 April 2012

The Official Assignee sent Mr Scott a letter to ask him to file a statement of affairs. Investigations later showed that Mr Scott no longer resided at the address to which it was sent and that Mr Scott was in the United Kingdom.

4 May 2012

The Official Assignee sent a request to Mr Scott to file a statement of affairs via email.

21 February 2013

The Official Assignee called Mr Scott and left a message asking Mr Scott to make contact but he did not do so.

August 2013

The Official Assignee emailed Mr  Scott  and  his  lawyer  (Mr Toepfer) a blank statement of affairs form and impressed the importance of returning it. This included that Mr Scott

would remain a bankrupt indefinitely unless the statement of affairs was returned.

20 January 2015

The Official Assignee sent Mr Scott and his lawyer another letter outlining the consequences of failing to file a statement

of affairs.

22 January 2015

The Official Assignee closed the administration of the estate.

28 May 2019

Mr Scott’s lawyer (Mr Wakefield) contacted the Official Assignee. They sent him a blank statement of affairs form for Mr Scott to complete.

16 December

2020

Mr Scott complained to the Official Assignee regarding his continued bankruptcy.

3      Re Scott, ex parte Bank of New Zealand HC Dunedin CIV-2011-412-777, 23 April 2012.

4 February 2021

Mr Scott told the Official Assignee that he had already completed a statement of position (from August 2012). The Official Assignee denies this.

19 February 2021

Mr Scott sent the Official Assignee a statement of position form dated August 2012.

26 March 2021

The Official Assignee accepted the information from Mr Scott in lieu of a formal statement of affairs after some queries were answered.

5 July 2022

Mr Scott filed an application seeking an order “annulling” the order declaring him bankrupt on 23 April 2021.

25 August 2022

The application was called before Associate Judge Lester who in a minute recorded that he was not prepared to dispense with

service to the Official Assignee nor the creditors, and ordered a report from the Official Assignee.

14 September

2022

The Official Assignee filed its report. The report outlined that claims filed in Mr Scott’s bankruptcy totalled $673,184.63 and that Mr Scott had original artworks, miscellaneous household items and skis which sold at auction by the Official Assignee for $3,114.80. In April 2012, Virgin Galactic transferred USD 100,000 into Mr Scott’s account to refund a commercial space flight he paid for. All but $892.90 of this money was not recovered and spent (presumably by Mr Scott) between 31 July 2012 and 12 December 2012. Mr Scott has interests in two trusts. He advised the Kakahu Trust only had the property sold by mortgagee sale and no other assets. Mr Scott did not provide information on the Kahu Trust. Mr Scott previously claimed to have valuable artwork, but no evidence of this was found on

investigation.

20 October 2022

The application came before the Court again and counsel for two creditors, the BNZ and Paul, Rachel and Mark Heslip, advised that they will abide the decision of the Court.

17 November

2022

The application came before me in the Bankruptcy List and in a minute of 23 November 2022 I raised concerns with counsel and directed a telephone conference on 1 December 2022 with

counsel to discuss those matters.

1 December 2022

I had a telephone conference with Mr Scott’s counsel who advised that Mr Scott had left New Zealand when he was bankrupted and had not returned. She advised that Mr Scott wishes to return to New Zealand, but not as a bankrupt. I raised concerns regarding service of the application upon all creditors and counsel agreed to provide further proof of service.

22 December

2022

Mr Scott’s counsel filed a memorandum with the Court in response to queries raised at the 1 December 2022 teleconference. The information provided included email correspondence from two creditors. DW Hasler Builders Ltd confirmed service of the application and commented they were “not happy” about the outcome but said “[g]iven the time that has passed however it would seem that early discharge from

bankruptcy will make no material difference in outcome for us”. Arthur Stone Builder Ltd also confirmed service and said:

“As we are a small business that has received no payment we object to the application”.
26 March 2024	Date where Mr Scott will be eligible for automatic discharge from bankruptcy under s 290(1) of the Insolvency Act.

The statutory provisions

[12]              Under s 294 of the Insolvency Act, a bankrupt may apply for an order for discharge from bankruptcy.

[13]Section 298(1) sets out the Court’s powers on such an application as:

298     Court may grant or refuse discharge

(1)When the court hears an application under section 294 for discharge, or conducts the examination of the bankrupt under section 295, the court may, having regard to all the circumstances of the case,

(a)immediately discharge the bankrupt; or

(b)discharge the bankrupt on conditions (which may include a condition that the bankrupt consents to any judgment or order for the payment of any sum of money); or

(c)discharge the bankrupt but suspend the order for a period; or

(d)discharge the bankrupt, with or without conditions, at a specified future date; or

(e)refuse an order of discharge, in which case the court may specify the earliest date when the bankrupt may apply again for discharge.

(2)If the court discharges the bankrupt on the condition that the bankrupt consents to any judgment, and the bankrupt does consent, the court may vary the judgment as it thinks appropriate.

[14]              Rule 24.38 of the High Court Rules 2016 provides that at least 10 working days before the hearing of an application under s 294 the Official Assignee must lodge with the Court and serve on the debtor and all known creditors the Official Assignee’s report. The requirements as to the content of such report are set out in s 296 of the Act as follows:

296     Assignee’s report

(1)The Assignee must prepare a report and file it in the court when-

-

(a)the bankrupt has applied under section 294 for a discharge; or

(b)the Assignee has summoned the bankrupt to be examined under section 295.

(2)The Assignee must report as to

(a)the bankrupt’s affairs; and

(b)the causes of the bankruptcy; and

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

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

(e)the bankrupt’s conduct before and after adjudication; and

(f)any other matter that would assist the court in making a decision as to the bankrupt’s discharge.

Approach to s 294 of the Insolvency Act

[15]              The leading case under s 294 of the Insolvency Act (then s 108 of the Insolvency Act 1967) is ASB Bank Ltd v Hogg.4 In assessing applications, the Court takes an “interest-based” approach, having regard to the interests of the bankrupt, creditors, the public and commercial morality.5 The Court of Appeal said:6

In conferring a discretion expressed in the broadest terms, the legislation recognises that each case will be different, that the relevant factors may vary from case to case and that the exercise of the discretion must be governed by the circumstances of the particular case having regard to the guidance provided by a consideration of the scheme and purpose of the legislation. In providing for automatic discharge after three years, the legislation recognises that it is not in the public interest that the bankruptcy should endure indefinitely. In providing for earlier discharge, s 108 recognises that continuing the bankruptcy to the end of

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

5      Huang v Qeynos New Zealand Ltd [2022] NZHC 1426 at [21] citing Havenleigh Global Services Ltd v Henderson [2016] NZHC 2969 at [10] and Re Whitelaw HC Hamilton CIV-2004-419-1647, 10 September 2010 at [20].

6      ASB Bank Ltd v Hogg, above n 4, at 157–158.

the three years may not be in the public interest. Whether or not it is will be a matter for decision on the particular facts. In that regard, guidance is provided by s 109(2) which lists matters on which the assignee is to report to the High Court in such a case. The Court is to consider the assignee’s report as to the affairs of the bankrupt, the causes of the bankruptcy, the manner in which the bankrupt has performed the duties imposed on him or her under the Act and his or her conduct both before and after the bankruptcy, and also as to any other fact, matter or circumstance that would assist the Court in making its decision. Clearly the Court apprised of the matter will consider the legitimate interests of the bankrupt, the creditors and wider public concerns, but it is neither required nor entitled to impose threshold requirements in the exercise of the discretion so as to derogate from the breadth of the powers conferred under s 110. The applicant has the onus, in the sense of adducing evidence, to show good cause for ordering an early discharge, but his obligation goes no further than that.

[16]              Two further points should be noted at this stage. First, under the Insolvency Act 1967 bankrupts were automatically discharged from bankruptcy “upon the expiration of 3 years from the date of adjudication”.7 Under the Act, bankrupts are generally automatically discharged three years after they file a statement of affairs, not from the date they are adjudicated bankrupt.8 This change was made to incentivise bankrupts to file a statement of affairs promptly.9

[17]              Second, as noted in ASB Bank Ltd v Hogg above, the onus is upon the bankrupt to show “good cause” why they should be discharged. Here, the Official Assignee has chosen to abide the decision of the Court which I understand is not unusual in cases where there has been at least three years of bankruptcy, and it is considered there is no further purpose of the bankruptcy in terms of asset recovery.10 This does not abdicate the Court from its responsibility to assess the application under s 294 using the interests-based approach to satisfy itself it is appropriate to make an order for discharge. I consider Mr Scott’s case under the headings below.

7      Insolvency Act 1967, s 107(1).

8      Insolvency Act 2006, s 290(1).

9      Burchell v Commissioner of Inland Revenue, above n 2, at [40].

10     Zhang v Official Assignee [2022] NZHC 3052 at [25].

The delay in filing the statement of affairs

[18]              In his affidavit Mr Scott says that he filed his statement of affairs in August 2012 through his then barrister. He attached a copy of a document headed “Statement of Position” dated August 2012 which is the statement he says was sent to the Official Assignee. The burden is on Mr Scott to ensure the statement of affairs reaches the Official Assignee and to prove to the Court that this has occurred.11 He has not done so. I am satisfied Mr Scott did not file a statement of affairs document in August 2012.

[19]              The first time that Mr Scott asserted to the Official Assignee that in August 2012 he had filed a statement of position document was in February 2021. However, the timeline of events shows attempts by the Official Assignee to have Mr Scott file a statement of affairs during 2013, 2015 and 2019.

[20]              Even if Mr Scott understood in August 2012 that his barrister had filed a statement of affairs, he must have been aware by 2013 that the Official Assignee had not received it. He was advised of the consequences of not filing a statement of affairs and did nothing about it.

[21]              Further, the Official Assignee noted that had Mr Scott’s statement of position been received then, it would not have been accepted by the Official Assignee because it did not comply with the minimum requirements for such documents.12 When that document was in fact provided to the Official Assignee in February 2021, the Official Assignee advised Mr Scott’s lawyer that it was not acceptable and Mr Scott should complete and file his statement of affairs in the Assignee’s standard form, but he did not do so. It was only with the assistance of Mr Scott’s lawyers that information was provided to the Official Assignee which they were prepared to accept in lieu of a statement of affairs.

[22]              I note, also, that in July 2012 (following Mr Scott’s bankruptcy) an amount of USD 100,000 was paid into his bank account in the United Kingdom which was withdrawn or spent in the period 31 July 2012 to 12 December 2012. It would appear

11     McKee v Official Assignee [2013] NZHC 340 at [18].

12     Insolvency (Personal Insolvency) Regulations 2007, reg 6.

that Mr Scott’s statement of position document was not an accurate reflection of his financial position as it makes no mention of this.

Interests of the bankrupt

[23]              Mr Scott has provided no reason why he wishes to be discharged from bankruptcy. His counsel advised that he wishes to return to New Zealand but does not wish to re-enter New Zealand as a bankrupt. There is nothing preventing Mr Scott returning to New Zealand as far as I am aware and no suggestion that his status as a bankrupt will prevent him from obtaining employment or taking advantage of business or commercial opportunities that he wishes to pursue. I understand he is a self- employed artist.

Interests of the creditors

[24]              Two of the creditors, DW Hasler Builders and Arthur Stone Builder, advised they were not content with Mr Scott being discharged as a bankrupt. They did not request to be formally heard before this Court. However, I accept, as DW Hasler Builders noted, given the passage of time and the Official Assignee having closed the administration of the estate, Mr Scott’s discharge would not make a material financial difference for the creditors.

Interests of the public and accountability

[25]              Under this heading I consider the correct starting point is the view expressed in Asher J in Kelly v Structured Finance Ltd, that:13

The public interest is best approached from the perspective of protecting the public from the insolvent debtor. The issue is not the punishment of the debtor, but avoiding the risk of further conduct to the detriment of the community, in particular in this case the commercial community.

[26]              Mr Scott has provided almost no evidence as to the causes of his bankruptcy and given the content of his statement of affairs that his “family estate was unlawfully sold by the BNZ” he appears to accept no personal responsibility for it. Consistent

13     Kelly v Structured Finance Ltd [2009] 2 NZLR 785 (HC) at [63].

with this, the Official Assignee’s report notes that Mr Scott attributes the cause of his bankruptcy to the actions of the BNZ.

[27]              It appears that Mr Scott had interests in at least two trusts but he has failed to provide any information in relation to those trusts and the Official Assignee reported that:

It is not known whether the bankrupt is owed money by the [Kahu Trust], has transferred assets to the trust or whether the trust has any assets of value.

[28]              In relation to Mr Scott’s present financial circumstances and what he has been doing since he was adjudicated bankrupt, during the entire period it appears he has been living overseas. Mr Scott says no more than:

I have not earned sufficient funds to pay anything to the Official Assignee, as I have only been living on a benefit since I was adjudicated bankrupt. I have no savings or assets, other than my clothing and other low value items of personal use.

[29]Mr Scott provided nothing to corroborate that evidence.

[30]              Further, bankruptcy imposes significant obligations and disabilities upon a bankrupt which include, but are not limited to:14

(a)assisting the Assignee in the realisation of assets and distributing the proceeds under s 138 of the Insolvency Act;

(b)not carrying on any business without the consent of the Official Assignee and not to work in the business of a relative under s 149;

(c)not leaving New Zealand without  the consent  of the Assignee under s 433(1)(f);

(d)not incurring credit for more than $1,000 under s 433A;

14     See Burchell v Commissioner of Inland Revenue, above n 2, at [39] citing Paul Heath and Michael Whale (eds) Heath and Whale on Insolvency (online ed, LexisNexis) at [5.17] and [5.21]–[5.22].

(e)contributing to payment of debts under s 147; and

(f)not being a director of a company under s 151 of the Companies Act 1993.

[31]              By absenting himself from New Zealand for the entire period of his bankruptcy Mr Scott has not been subject to the bankruptcy regime or needed to observe any of these restrictions upon his conduct.

[32]              A further factor that weighs strongly against granting Mr Scott a discharge from bankruptcy is the public interest in maintaining the integrity of the bankruptcy regime in ensuring bankrupts comply with their obligations and are held accountable should they not do so. In this context, I am not using the term “accountable” as a synonym for “punishable”. It is not in the public interest to punish debtors. Rather, holding bankrupts accountable requires that they do not breach their legal obligations and that breaches may lead to detrimental, but proportionate, consequences.

[33]              The facts of this case are, to my mind, unique. It appears that prior to or very soon after he was adjudicated bankrupt, Mr Scott left New Zealand and has never returned. He had large debts and, from the few assets that the Official Assignee has been able to realise, his creditors have received no distributions from his bankruptcy. He has been uncooperative with the Official Assignee in failing to provide a statement of affairs or other information they may require, such as information concerning the trusts with which he was involved. As a consequence, the Official Assignee has not been able to pursue lines of enquiry that may (I put it no higher than that) have led to the identification of assets for the creditors. Further, it appears that following his bankruptcy, Mr Scott received a payment into a United Kingdom bank account of USD 100,000 which was a refund paid by Virgin Galactic upon a ticket on what was to be the first commercial space flight. Mr Scott did not disclose this refund to the Official Assignee. That money has not been recovered but should have been available to creditors. This is, in my view, a case where Mr Scott has disregarded his legal obligations to the detriment of his creditors. In such circumstances, to grant him a discharge would represent a failure to hold him accountable for the several serious breaches of his obligations.

[34]              A recent case under s 294 is Zhang v Official Assignee.15 There, Ms Zhang was bankrupted on the application of Westpac New Zealand Ltd which had obtained a substantial judgment against her. Ms Zhang did not accept this and filed successive appeals challenging the judgment and her adjudication. All appeals were unsuccessful. Ms Zhang was adjudicated bankrupt in 2019, but delayed filing her statement of affairs until August 2022. Associate Judge Gardiner’s judgment came out three years and six weeks after Ms Zhang was adjudicated bankrupt. The Official Assignee considered, and the Court agreed, that Ms Zhang delayed filing her statement so she could apply for an early discharge. The Court said her failure to file her statement of affairs impeded the Official Assignee’s administration of her estate and wasted a considerable amount of the Official Assignee’s time as they attempted to contact her. The Court held:

[39]   There is a public interest in Ms Zhang’s application being dismissed as a message to other bankrupts that they may not deliberately delay filing their statement of affairs and then apply for early discharge with impunity. I concur with the Official Assignee’s position that it is not appropriate that a bankrupt in Ms Zhang’s position be put in the same position as a cooperative and diligent bankrupt who files a statement of affairs promptly after adjudication.

[40]   I am mindful that the Official Assignee has concluded that there are no assets in Ms Zhang’s estate and they have therefore ceased actively administering her estate. Mr Jones confirmed that the recently filed statement of affairs does not change that position. However, the public interest considerations described outweigh the lack of any practical purpose to the bankruptcy in terms of potential asset recovery.

[35]              One of the differences between Zhang and this case, is that Mr Scott has been bankrupt for far longer than Ms Zhang. It is not generally desirable that a bankruptcy continue for such an extended period and it is likely that refusing Mr Scott’s application will provide no benefit to his creditors. If Mr Scott had simply overlooked his obligation to file a statement of affairs but otherwise complied with his obligations and posed no risk to commercial community, I would have had no hesitation in granting the application. But in circumstances where Mr Scott has provided insufficient evidence to support his application, has failed to attend for examination

15     Zhang v Official Assignee, above n 10.

and shown disregard for his obligations and the interests of his creditors, it is plainly not such a case and I will not grant his application.

Conclusion

[36]Mr Scott’s application is dismissed.

[37]There shall be no order as to costs.

O G Paulsen Associate Judge

Solicitors:

Aspiring Law, Wanaka

Official Assignee, Southern Region Galloway Cook Allan, Dunedin