Simpson v Scott HC Tauranga CIV 2010-470-690

[2010] NZHC 2288

IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY

CIV-2010-470-690

IN THE MATTER OF     of Section 13 Insolvency Act 2006

BETWEEN  DAVID MAVITTY SIMPSON Judgment Creditor

ANDLEWTYN MICHAEL SCOTT Judgment Debtor

Hearing:         9 December 2010

Appearances: Mr Harrison for Judgment Creditor

Mr Nicholls forJudgment Debtor

Judgment:      16 December 2010 at 10 a.m.

JUDGMENT OF ASSOCIATE JUDGE DOOGUE

This judgment was delivered by me on

16.12.10 at 10 am, pursuant to

Rule 11.5  of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Counsel:

Gary M Harrison, Barrister, P O Box 4338, Auckland – [email protected]

Edwards Clark Dickie, P O Box 105-629, Auckland – [email protected]

SIMPSON V SCOTT HC TAU CIV-2010-470-690  16 December 2010

Background

[1]      In May of 2010 the District Court at Tauranga entered judgment against the judgment debtor in the sum of $34,500 together with costs.  The judgment creditor who was the successful plaintiff in the District Court proceedings sued to recover his unpaid  legal  costs  and  amounts  that  he  had  paid  to  counsel,  Mr  J  Moody  of Auckland, that he had instructed on behalf of the judgment debtor.  The judgment not having been satisfied, the judgment creditor served a bankruptcy notice on the judgment debtor.   On 30 August 2010 the judgment debtor filed in this Court an application for an order setting aside the bankruptcy notice.   Three grounds were given for seeking the order:

a)        He was going to appeal the judgment entered against him;

b)He had a defence set-off or genuine triable counter-claim that could not be raised in the proceeding and that equalled or exceeded the amount claimed;

c)        The judgment debtor is able to pay his debts.

[2]      At the hearing before me 9 December 2010 the only ground which was dealt with was that in (b).

[3]      It is necessary to mention additional matters of background that are relevant to the application.  In 2006 Mr Scott was in dispute with members of his extended family arising out of family trusts and the estates of his late grandfather and father. On 17 February that year a mediation was convened before Mr W Sowerby.  The mediation continued for two days.   Late at night on the second day heads of agreement were produced for the parties to sign.   Mr Scott signed them.   He now complains that counsel who represented him at the mediation, Mr Moody, did not let him read the document before he signed it but explained its contents orally to him. Mr Scott says that the heads of agreement contained errors which meant that the arrangement evidenced by the heads of agreement was much less favourable to him than what had been negotiated.  That would not have happened he now says if Mr

Moody had let him read it.   Further he says that Mr Moody and the solicitor Mr Simpson, in the days following the mediation, failed to take effective steps to have the agreement between the parties corrected.   He says that he has suffered major financial loss which far outweighs the amount for which judgment was entered against him.  Very little detail is provided of either the deficiencies of conduct for which counsel and the solicitor were allegedly responsible or for the losses said to have stemmed from their failings.  Mr Scott does say, though, that he lost options to acquire farm properties that would have been available to him and also suffered losses through not being able to carry on farming operations.  At the hearing before me on 9 December Mr Scott’s counsel, Mr Nicholls said that senior counsel had been briefed to provide an opinion about whether those losses were recoverable from the judgement creditor and Mr Moody.   That opinion has yet to be received.

[4]      It is clear that within weeks of the mediation Mr Scott raised with his counsel dissatisfaction on his part with the content or drafting of the agreement that followed from the mediation. The areas in which he considers counsel did not do his job included the way in which the incidence of GST in transactions was dealt with. I understand that in more general terms Mr Scott considers that the agreement that he signed off did not embody the substance of what the parties had agreed upon and that it proved impossible to later get the other side to sign amended heads of agreement which did.   Mr Scott declined to pay his lawyers on the basis of his dissatisfaction with the way the mediation had turned out and in 2007 his solicitor, Mr Simpson, commenced proceedings to recover the sums in question through proceedings in the District Court at Tauranga.

[5]      During  the  course  of  the  District  Court  proceedings  the  question  of  the quantum of the legal bills was referred to the Law Society so that a cost revision could take place.   The result of the cost revision was that in place of the sum of

$60,431.44 the cost reviser certified that the amount payable was actually $34,500. The original bills had been rendered by Mr Simpson ($1,687.50) and Mr Moody ($58,743.94).  No appeal or review has been sought of the cost reviser’s decision by either side.

[6]      The hearing of the proceedings in the District Court took place in April and July 2009 and submissions were filed on 6 August 2010.   The judgment of the District Court Judge was given 7 May 2010.

[7]      In his judgment the District Court Judge set out the history of the matter.  He noted that Mr Scott had alleged he had an arguable defence to the claim on the basis that the claimed costs were excessive, aspects of the work charged were unnecessary and the work was not of the requisite standard.  He particularly raised the complaint that Mr Moody failed to allow him to read the heads of agreement before agreeing to its contents at the mediation and Mr Moody’s failure thereafter to secure agreement to incorporate four omitted significant points in the agreement – one of which was the GST point which I have already mentioned.

[8]      Affidavits were filed by Messrs Simpson and Moody in answer.  Even though there was a substantial reduction in the amount certified by the reviser as being owed for legal costs, Mr Scott was unwilling to pay the reduced amount.

[9]      The proceeding was first scheduled for hearing on 22 April 2009 but the Judge granted an adjournment because there had been a change of solicitor and there was a request from the defendant (Mr Scott) to file more affidavits and an amended notice  of  opposition.      Leave  was  granted  to  file  the  documents  I  have  just mentioned.

[10]     The plaintiff did not accept that these orders ought to have been made and the District Court Judge determined on 22 April 2009 that he should “recall” his orders granting  leave  to  amend  the  notice  of  opposition.    The  Judge  regarded  it  as significant that the various complaints that Mr Scott had about the legal charges including the alleged defective standard of representation were all taken into account by the cost reviser.  Nonetheless Mr Scott’s then counsel argued that even if such matters were taken into account by the cost reviser Mr Scott should still be able to defend the summary judgment application on the basis of what essentially were negligence claims.  The Judge recorded that the submission made for Mr Scott that the losses suffered as a result of the legal representatives alleged negligence:

…….had not crystallised by the time of the cost revision hearing such that it was not possible for the defendant to put forward a complete counter-claim and/or sett-off at the cost revision.[1]

[1] Paragraph 32 of judgment.

[11]     Then  at  paragraph  41  and  42  of  his  judgment  the  following  important passages appear:

[41]Mr Scott had the chance to put his alleged defence of set-off with particularity at the time he filed his notice of opposition, on 11

February 2008.  He did not do so.

[42]Had he done so, he would have had to identify his alleged losses, incurred, he says, since the cost revision hearing which preceded the issuing of the Law Society’s certificate.  Instead, he has referred to generalised damages or losses only, which have allegedly only become apparent or manifest at a later stage.  They do not allow any objective assessment of the substance of his alleged set-off.   Mr Scott has had a most handsome reduction of some 50% awarded against Mr Moody’s original total of his bills of costs, by the costs reviser, on the very grounds that Mr Scott continues to allege still adversely affect him.

[12]     The Judge concluded that Mr Scott’s complaints had been adequately taken into account by the cost reviser and alternatively he concluded that the defendant had not demonstrated that he had a set-off of substance which could be mounted as a defence to the summary judgment application.  The result was that he declined leave to file an amended notice of opposition and entered summary judgment against Mr Scott.

[13]     In the present proceeding Mr Scott asserts that he had good reason for not complying with the bankruptcy notice.  That reason was that he had a cross-claim available to him which is equal to or greater than the judgment debt and he could not use it as a defence in the action or proceedings in which the judgment or the order as the  case  may be,  was  obtained.    This  is  the  ground  set  out  in  s  17(7)  of  the Insolvency Act 2006.

[14]     The District Court judgment was perhaps unusual in that it was explicitly discussed in that judgment whether or not Mr Scott ought to be able to raise the cross-claim that he now says he was not able to use as a defence in the proceeding.  I

have set out the reasons why the Judge declined to allow him to do so and will discuss the legal significance of that issue further below.

Legal issues

[15]     I have already made brief reference to s 17 of the Insolvency Act 2006.  It is necessary  to  make  brief  reference  to  additional  legal  issues  that  govern  the application of that section.  The first point is that before a cross-claim can be raised as a ground for excusing non-compliance with a bankruptcy notice the debtor must show that he or she has a cross-claim of true substance which he or she genuinely proposes to pursue:  Sharma v ANZ Banking Group.[2]   Further the debtor must show that he was prevented from using the cross-claim as a defence by law or alternatively by factual inability.  The meaning of the expression “that he could not have set up in

[2] Sharma v ANZ Banking Group (1992) 6 PRNZ 386.

the action or proceeding in which the judgment order was obtained” was considered in Clark v UDC Finance Limited where Casey J said:[3]

[3] Clark v UDC Finance Limited (1985) 2 NZLR, at 639.

Mr Jenkins submitted that the relevant terms of s 19(1)(d) and r 41 should be given a liberal interpretation, enabling the Court to do justice by finding that Mr Clark in these circumstances could not have set up his claim in the action in which he let judgment go by default. The meaning of the corresponding provision was also discussed at some length by Lockhart J in Re Brink, ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433, at p 437:

"The words 'that he could not have set up in the action or proceeding in which the judgment or order was obtained' mean 'which he could not by law set up in the action': See Re Jocumsen [(1929) 1 ABC 82] at p 85; Re a Debtor [1914] 3 KB 726, per Avory J at 730; Re Stokvis (1934) 7 ABC 53, especially per Lukin J at 57, where His Honour said: 'I take a counter-claim, set-off, or cross demand which could not be set up as one which, from point of time, or from its nature, or from absence of empowering provisions, or from positive inhibition so to do, could not be set up in the particular case in which judgment was obtained . . . Mere failure to take advantage of the opportunity can hardly be said to be inability.'"

I  respectfully  agree  with  this  assessment.  The  Court  of  Appeal  in Thomasen's case concentrated on the procedural ability to bring the cross claim, although there seems to have been no question of the debtor's ability in fact to do so. There may be room for some added qualification of a practical nature in the comment by Lukin J about "mere failure" to take advantage of the opportunity, implying that a failure may be justified if it is due,   for   example,   to   supervening  circumstances   making  it   factually impossible for the debtor to do anything about the claim at that time. But the primary emphasis on the legal nature of the impediment suggests that such

other reasons must be carefully scrutinised, and certainly simple neglect to take  even  the  elementary  step  of  seeking  further  information  or  advice cannot avail the debtor. Quite clearly that was the case here. Mr Clark was intimately connected with this development and said he worked with the receiver for some months after his appointment. When UDC moved in to sell the property he did nothing to query its actions or to seek particulars of the sales and the application of the money. His only response to its reports and demands was to explain the group's insolvency and to emphasise his own perilous financial position and inability to pay. In these circumstances his belated discovery of a possible cause of action - well beyond the eleventh hour after such lengthy inactivity - is not enough to persuade me that the conditions to set aside the notice have been satisfied. The only reason he could not have set up these claims at the proper time was his failure to take advantage of the opportunity which was fully open to him

[16]     The other matter of legal principle which applies here is the onus on the debtor to show that he has a cross-claim of true substance which he genuinely proposes to pursue.

Discussion

[17]     I do not consider that the debtor has shown that he has a cross-claim of true substance which he genuinely proposes to pursue.   It is now over four and a half years since the alleged breaches of obligation on the part of the legal practitioners occurred.    To this date nothing has materialised apart from the general unparticularised assertions about the breach of duty.  There has apparently been no attempt to quantify the alleged losses suffered.  A measure of the genuineness of the debtor’s approach to these claims is the statement that his counsel made, which I have recorded above, that Mr Scott is now obtaining an opinion from senior counsel about his proposed claim.  As Mr Harrison for the judgment creditor submitted that advice may be that there is no claim.   Mr Nicholls sought to defend the lack of progress by saying that it would take some time for details of the loss to be worked through.  For example, he said, one of the heads of loss was the legal costs that Mr Scott had been put to through having to prosecute his claim through the Courts when the mediated agreement collapsed.  It was not explained further why that has taken so long.  There was no consideration given to whether the claim could not at least have been formulated by this stage as a draft statement of claim perhaps leaving some of the details of loss suffered to one side for further particularisation at a later date.

[18]     The second point concerns whether the debtor was unable to put the cross- claim forward as a defence at the hearing.

[19]     In Hardie v Booth, Tipping J stated the position in the following terms:4

The inability of which r 41(3) speaks is primarily a legal inability. Factual inability is also available but that requires some cogent circumstance. To take a looser view would be to frustrate the purpose of the rule which is obviously designed to ensure that all issues between the parties both ways be tried at once and that a bankruptcy notice only be set aside if the debtor has a cross-claim which either legally or factually could not be set up in the same proceedings. As Casey J said in Clark's case the primary emphasis is on the legal nature of the impediment and therefore any factual grounds for the suggestion that the cross-claim could not be set up must be carefully scrutinised.

[20]     What occurred here was that the judgment debtor had to obtain leave to amend his notice of opposition because he had not advanced his defence right from the outset in the summary judgment proceedings and, when that application for leave was made, it was declined.  The question is whether for the purposes of s 17 it can be said that he “could not use as a defence” the matters that he sought leave to raise. It is implicit in the District Court Judge’s decision declining leave that he did not accept that the failure to raise the defence in compliance with the Court rules was due to matters beyond the judgment debtor’s control. That is, Mr Scott had the opportunity to advance the defence but through his own default lost that opportunity. The District Court Judge seems to have been influenced by the fact that the proposed defence had not been articulated other than in a generalised way.  That remains the position  even  to  this  time.    The  fact  that  the  asserted  defence  was  able  to  be described in that way was entirely due to matters within the judgment debtor’s control.   There has been no appeal brought against the summary judgment or from the order of the District Court Judge declining to grant leave to amend.   It would be wrong in principle for this Court to approach matters on any basis other than that the order was correctly made as were the conclusions of the Judge upon which it was based.

[21]     The result will be that the application to set aside the bankruptcy notice is dismissed.  Counsel should be able to settle the matter of costs between themselves

4 Hardie v Booth [1992] 1 NZLR 356, at 362.

by agreement.    If that proves unsuccessful then they should file memoranda not

exceeding four pages on each side within 14 days of the date of this judgment.

J.P. Doogue

Associate Judge