Smartpay Limited v Kumar

[2024] NZHC 2088

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2023-404-001015 [2024] NZHC 2088

BETWEEN

SMARTPAY LIMITED

Judgment Creditor

AND

MANAS DHARMENDRA KUMAR

Judgment Debtor

Hearing:	17 June 2024
Appearances:	D Chisholm KC for the Judgment Creditor Judgment Debtor in Person
Judgment:	30 July 2024

JUDGMENT OF ASSOCIATE JUDGE GARDINER

This judgment was delivered by me on 30 July 2024 at 4.00 p.m. pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date.......................................

Solicitors:

Claymore Partners Ltd, Auckland D Chisholm KC, Auckland

SMARTPAY LTD v KUMAR [2024] NZHC 2088 [30 July 2024]

Introduction

[1]    The  judgment  creditor  (Smartpay)  applies  for  the  judgment   debtor  (Mr Kumar) to be adjudicated bankrupt. Mr Kumar opposes the bankruptcy application on the grounds that the bankruptcy notice was not properly served upon him and, alternatively, that the Court should exercise its discretion to refuse adjudication as bankruptcy would be oppressive and punitive.

[2]    Mr Kumar was the major shareholder and director of companies within a group of companies comprising a parent, Optimizer HQ Ltd (HQ), and two wholly-owned subsidiaries, Odev Ltd (Odev) and Optimizer Corporation Ltd (OCL). OCL was put into liquidation on 10 December 2015.

[3]    Smartpay is a creditor of OCL. It brought proceedings against Mr Kumar under s 301(1)(b)(ii) of the Companies Act 1993 for breach of his director duties owed to OCL. In a judgment delivered by His Honour Justice Downs on 13  May 2022,  Mr Kumar was found to have breached ss 131, 135 and 136 of the Companies Act, and failed to understand his duties as a director of OCL.1 Mr Kumar was ordered to pay $850,427.43 (plus interest) to OCL by way of compensation.2 The Court of Appeal dismissed Mr Kumar’s subsequent appeal.3

[4]    Additionally, Downs J ordered Mr Kumar to pay Smartpay, the party which incurred the costs in bringing the action against Mr Kumar, 2B costs and disbursements totalling $86,452.14.4 Mr Kumar did not pay Smartpay the costs. This Court issued a bankruptcy notice based on the unpaid costs order which Smartpay purportedly served on Mr Kumar on 26 July 2023. Mr Kumar applied to set aside the bankruptcy notice but later withdrew that application.

[5]Smartpay’s bankruptcy application is supported by the liquidator of OCL.

1      Smartpay Ltd v Kumar [2022] NZHC 997.

2      Smartpay Ltd v Kumar [2022] NZHC 2685.

3      Kumar v Smartpay Ltd [2023] NZCA 410.

4      Smartpay Ltd v Kumar [2023] NZHC 314.

[6]    Mr Kumar originally sought, in the alternative to his opposition to the bankruptcy application, a halt of the application pending his application for leave to appeal to the Supreme Court. However, that application was dismissed on 19 February 2024.5 With that, there is no basis for a halt and this part of Mr Kumar’s application did not receive any attention at the hearing.

[7]The issues for determination are:

(a)Was the bankruptcy notice properly served on Mr Kumar?

(b)If so, should the Court exercise its discretion to refuse to adjudicate Mr Kumar bankrupt?

Legal principles

Insolvency Act 2006 (the Act)

[8]    The criteria for when a creditor may apply for the debtor’s adjudication are set out in s 13 of the Act:6

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.

[9]Section 17(1) defines when a debtor commits an act of bankruptcy:7

17       Failure to comply with bankruptcy notice

5      Kumar v Smartpay Ltd [2024] NZSC 13.

6      Emphasis added.

7      Emphasis added.

(1)A debtor commits an act of bankruptcy if—

(a)a creditor has obtained a final judgment or a final order against the debtor for any amount; and

(b)execution of the judgment or order has not been halted by a court; and

(c)the debtor has been served with a bankruptcy notice; and

(d)the debtor has not, within the time limit specified in subsection (4),—

1. complied with the requirements of the notice; or

   (ii)satisfied the court that he or she has a cross claim against the creditor.

   (2)The form that the bankruptcy notice must take is set out in section 29.

(3)The debtor must have been served with the bankruptcy notice in New Zealand, unless the court gave permission for the service of the notice on the debtor outside New Zealand.

(4)The time limit referred to in subsection (1)(d) is,—

(a)if the debtor is served with the bankruptcy notice in New Zealand, 10 working days after service; or

(b)if the debtor is served outside New Zealand, the time specified in the order of the court permitting service outside New Zealand.

…

[10]   Section 36 of the Act provides that the Court may, at its discretion, adjudicate the debtor bankrupt if the creditor has established the requirements set out in s 13. Once the formal requirements for adjudication are made out, the judgment creditor is prima facie entitled to an adjudication order.8 This Court has said:9

[26] Whilst the petitioning creditor does not have an automatic right to obtain an order of adjudication, nevertheless the onus in those circumstances is on the debtor to persuade the Court that an order should not be made.

[11]   The Court may, in its discretion, refuse adjudication for the reasons set out in s 37 of the Act. Section 37 provides:

8      See Baker v Westpac Banking Corp CA212/92, 13 July 1993 at 3, 4 and 5–6; and Re Epirosa HC Wellington B498/91, 6 March 1992 at 5 and 8.

9      Kiwibank Ltd v Hutchin [2015] NZHC 1518 at [26].

37       Court may refuse adjudication

The court may, at its discretion, refuse to adjudicate the debtor bankrupt if—

(a)the applicant creditor has not established the requirements set out in section 13; or

(b)the debtor is able to pay his or her debts; or

(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.

[12]   The Court of Appeal has observed that s 37 confers a “wide discretion” informed by various factors.10 Relevant factors include:11

(a)the interests of those directly concerned including the petitioner, other creditors and the debtor;

(b)the wider public interest, including the public interest in exposing and controlling the insolvent debtor;

(c)whether adjudication is conducive or detrimental to commercial morality; and

(d)the potential for further investigation procedures to be made available to creditors by the bankruptcy.

[13]   The oppressive use of the bankruptcy procedure may be a ground for refusing an order.12 The undoubted absence of assets may be another ground, although that will not necessarily preclude an order given the public interest in continuing oversight over the bankrupt’s affairs and the disqualifications that go with bankruptcy.13 The

10     Body Corporate 68792 v Memelink [2018] NZCA 509, [2019] NZAR 127 at [15].

11     Re Fontein, ex parte Bank of New Zealand HC Auckland CIV-2009-404-7769, 22 November 2010 at [8], citing Eide v Colonial Mutual Life Assurance Society Ltd [1998] 3 NZLR 632 (HC) at 4–5.

12     At [9], citing Baker v Westpac Banking Corp, above n 8, at 4–5.

13     Commissioner of Inland Revenue v Brown [2016] NZHC 1232 at [14], citing Baker v Westpac Banking Corp, above n 8, at 4.

Court must balance the various considerations and determine whether in the end the debtor has succeeded in showing that an order ought not to be made.14

Was the bankruptcy notice properly served?

[14]   On 12 June 2023, Smartpay applied without notice for orders that the bankruptcy notice, certified judgment of the Court and all other documents required to be serviced on Mr Kumar in the proceedings be served on him by email to his personal email address, m******@propertymagnets.au. The grounds given were that reasonable attempts had been made to serve Mr Kumar personally; it was unknown whether Mr Kumar resided in New Zealand at that time; and court documents filed by Mr Kumar and his former solicitors gave that email address as his address for service. The application was made under r 6.8 of the High Court Rules 2016 (HCR). Affidavits filed in support of the application set out attempts to personally serve Mr Kumar at his address according to the Companies Office of 31G Parker Avenue, New Lynn, New Zealand.15

[15]   On 26 July 2023, Associate Judge Taylor ordered that personal service of the bankruptcy notice and certified judgment was dispensed with and that Smartpay could serve Mr Kumar by emailing the documents to him at his personal email address, m******@propertymagnets.au.16 The bankruptcy notice was deemed to have been served on being emailed to this address.

[16]   Mr Kumar claims that he was not properly served with the bankruptcy notice because he was situated in India when Smartpay sent the bankruptcy notice to him at this email address and Smartpay did not obtain the leave of the Court to serve him overseas as required by s 17(3) of the Act and/or r 6.30 of the HCR.

14 Re Fontein, ex parte Bank of New Zealand, above n 11, at [8], citing Eide v Colonial Mutual Life Assurance Society Ltd, above n 10; and McHardy v Wilkins & Davies Marinas Ltd (in rec) (CA54/93, 7 April 1993) at 4.

15 Affidavit of Jordan Peter Quintal sworn 8 June 2023;  and affidavit  of Monica Paez  affirmed 8 June 2023.

16 Smartpay Ltd v Kumar HC Auckland CIV-2023-404-1015, 26 July 2023 (Minute of Associate Judge Taylor, Order for substituted service).

[17]   If Mr Kumar is correct, there has been no act of bankruptcy, and Smartpay is unable to apply for his adjudication (as the requirement of s 13(b) of the Act is not met).

[18]   Mr Chisholm KC for Smartpay submits that there was no error in Smartpay’s approach to service of the bankruptcy notice. Defending Smartpay’s application for substituted service under r 6.8, he submits that Smartpay was entitled to assume that Mr Kumar was complying with his positive obligation under s 10(d) of the Companies Act to live in New Zealand as the sole director of numerous New Zealand registered companies. However, Smartpay said in its application that Mr Kumar’s physical location was unclear. Paragraph 2.2 of the application and paragraph 7(c) of the memorandum in support noted that it was not certain whether Mr Kumar resided in New Zealand and that neighbours had advised that Mr Kumar may no longer reside at the Parker Avenue address. The affidavit of Mr Quintal in support said that Companies Office records confirmed that 31G Parker Avenue was Mr Kumar's residential address but that a neighbour had indicated that he had gone back to India. Further, Smartpay’s updating memorandum to the Court dated 21 July 2023 confirmed that Mr Kumar had informed the Court of Appeal that he was "still in" India for the purposes of appearing at the appeal remotely.

[19]    Mr Chisholm emphasises that Mr Kumar has repeatedly represented that he remains a New Zealand resident at all material times:

(a)Mr Kumar's amended notice of appeal to the Court of Appeal  dated 14 November 2022 gave his address for service as 31G Parker Avenue, New Lynn.

(b)Mr Kumar’s affidavit for security for costs in the Court of Appeal affirmed on 14 December 2022 (filed with his submissions on 11 June 2024) stated "I, Manas Kumar of Auckland, herby affirm that:...". This affidavit also referred to his fixed liabilities in New Zealand.

(c)The Annual Returns personally filed  in  the  Companies  Office  by Mr Kumar for Manhattan Global Markets Ltd, Enabled

HQ Ltd, and Manhattan Trading Ltd on 9 May 2023 all confirmed that Mr Kumar’s residential address is 31G Parker Avenue, New Lynn.

(d)Mr Kumar’s intituling for his revised synopsis for the Court of Appeal dated 24 June 2023 continued to  represent  that  his  address  was  31G Parker Avenue, New Lynn.

(e)Mr Kumar's intituling for his oral outline of submissions for the Court of Appeal dated 24 June 2023 represented  that  his  address  was  31G Parker Avenue, New Lynn.

(f)Mr Kumar's affidavit in support of the stay of the bankruptcy affirmed on 3 August 2023 (after the bankruptcy notice was served on him by substituted service) stated, "I, Manas Kumar, company director, from Auckland, hereby affirm...". Paragraph 2 of that affidavit (not known to Smartpay at the time of applying for substituted service) suggested that   Mr   Kumar   would   only   remain   overseas    for    another two to three months.

(g)The Annual Return personally filed by Mr Kumar in the Companies Office for Manhattan Global Markets Ltd on 14 May 2024 confirms that   Mr    Kumar    remains    resident    in    New    Zealand    at  31G Parker Avenue, New Lynn.

[20]   Mr Chisholm submits that r 6.8 is not limited to circumstances where a judgment debtor is evading service  within  New  Zealand;  and  the  fact  that  a  New Zealand resident debtor may be temporarily overseas when a judgment creditor is attempting to serve them does not inhibit the Court from making an order for substituted service under this rule. He refers to Southpac 2015 Ltd v Dziamska,17 where Associate Judge Paulsen ordered substituted service of a bankruptcy notice on a New Zealand resident who was likely to have been overseas at the time, by leaving the documents at the debtor’s normal residential address in New Zealand.

17     Southpac 2015 Ltd v Dziamska [2021] NZHC 2722.

[21]   Mr Chisholm further submits that if the order for substituted service was defective in some way, Mr Kumar should have filed an appeal against the order.18

[22]   Critically, Mr Chisholm submits that when Smartpay effected substituted service of the bankruptcy notice on Mr Kumar by email pursuant to the order for substituted service, he was deemed to have been served in New Zealand, irrespective of where he was physically situated at the time (New Zealand or overseas).

[23]   Therefore, he submits, there has not been service outside New Zealand and the requirement in s 17(3) that a creditor obtain the permission of the Court to serve a bankruptcy notice on a debtor outside New Zealand is not engaged.

Assessment

[24]   The Act does not prescribe that a bankruptcy notice must be served personally or prescribe any other method of service for a bankruptcy notice. However, r 24.9(4) of the HCR provides that a bankruptcy notice must be served in accordance with Part 6 of the HCR.

[25]   Rule 6.1 stipulates the methods which may be used “for serving a document that is required by these rules to be served”. Generally, these are personal service or according to a direction given by the Court. Documents can only be served by email where an email address for service has been specified by the party or their solicitor.

[26]Rule 6.8 permits the Court to direct substituted service:19

(1) If reasonable efforts have been made to serve a document by a method permitted or required under these rules, and either the document has come to the knowledge of the person to be served or it cannot be properly served …

[27]   In Copland v Goodwin20 Associate Judge Matthews held that a bankruptcy notice is a document “required by these rules to be served” in terms of r 6.1, and that substituted service of a bankruptcy notice could therefore be directed under r 6.8.21

18     Copland v Goodwin [2013] NZHC 652 at [54].

19     Emphasis added.

20     Copland v Goodwin, above n 18, at [13].

21 At [26].

[28]   On appeal, the Court of Appeal agreed with the Associate Judge’s reasoning, saying:22

[20]   We regard the insertion of the new r 24.9(4) as intended to make express what was always the position: that the s 17(1)(c) requirement for service is for service in accordance with the High Court Rules. The amendment foreclosed the scope for doubt …

[21]   Our view is in line with the approach taken by the High Court in Re Franck, ex parte Asteron Life Limited. There, after reviewing recent authorities on substituted service, Clifford J granted an order for substituted service of a bankruptcy notice by way of email.

(footnote omitted)

[29]   Therefore, there was nothing incorrect in Smartpay’s approach of applying for an order for substituted service of the bankruptcy notice on Mr Kumar to permit service by email. The application and the order were orthodox.

[30]   However, I do not accept that Mr Kumar was deemed to have been served in New Zealand when Smartpay effected substituted service of the bankruptcy notice on him pursuant to the order for substituted service. The order states that on service being effected Mr Kumar is deemed to have been served; it does not state that he is deemed to have been served in New Zealand.

[31]   It is not disputed that Mr Kumar was situated in India when Smartpay effected service on him. Section 17(3) of the Act requires that a debtor must have been served with the bankruptcy notice “in New Zealand”, unless the Court gave permission for the service of the notice on the debtor “outside New Zealand”. Similarly, r 6.30 requires a document such as a bankruptcy notice to be “served abroad” only with the leave of the Court.23

22 Goodwin v Copland [2014] NZCA 569.

23 High Court Rules 2016, r 6.30. A bankruptcy notice, although issued by a Court, is not a document commencing a civil proceeding or a document by reference to which a person becomes a party to a civil proceeding, because it does not by itself trigger any process for the exercise of the Court’s civil jurisdiction. The consequences of non-compliance with the notice are that the debtor may face a bankruptcy application. Therefore, r 6.30 applies rather than rr 6.27 to 6.28 (which apply in respect of originating documents in the proceedings). See Westpac New Zealand Ltd v Boulton [2014] NZHC 693 at [12].

[32]   The plain and ordinary interpretation of s 17(3) is that the debtor must have been served while physically situated in New Zealand. I do not accept that service by email according to the order for substituted service when Mr Kumar was physically situated in India means that Mr Kumar was served in New Zealand for the purposes of s 17(3) or r 6.30.

[33]   That the two procedures (orders for substituted service under r 6.8 and leave to serve overseas under r 6.30/s 17(3)) are distinct is clear when one considers the criteria the Court applies when determining whether to make an order / grant leave.

[34]   Rule 6.8 is concerned with the method of service and permits the Court to order service by a method other than the methods prescribed by r 6.1 when service by those methods is not possible. So, in this case the Court ordered substituted service on the grounds that attempts had been made to personally serve Mr Kumar and personal service was not possible with Mr Kumar’s whereabouts being unknown.

[35]   Whereas rr 6.27 to 6.30 are concerned with whether the Court should assume jurisdiction over the proceeding (or, in the case of a bankruptcy notice, the bankruptcy proceeding that may ensue if the debtor does not comply with the bankruptcy notice).

[36]   The Court tends to approach applications for leave to serve bankruptcy notices overseas under r 6.30 by applying the test in r 6.28(5), on the basis that it is sensible to “look ahead” to any future bankruptcy application that might be brought by the creditor, relying on non-compliance with the bankruptcy notice.24 Rule 6.28(5) of the HCR provides:

(5)The court may grant an application for leave if the applicant establishes that—

(a)the claim has a real and substantial connection with New Zealand; and

(b)there is a serious issue to be tried on the merits; and

(c)New Zealand is the appropriate forum for the trial; and

(d)any other relevant circumstances support an assumption of jurisdiction.

24     Westpac New Zealand Ltd v Boulton, above n 23, at [14].

[37]   Additionally, the Court considers whether it would be appropriate for any bankruptcy of the debtor to be administered in New Zealand.25

[38]   Thus, faced with the prospect that Mr Kumar may have been situated outside New Zealand, Smartpay should also have applied for leave to serve him overseas under r 6.30/s 17(3) and addressed these criteria in its without notice application. Smartpay did not address these criteria and nor, therefore, did the Court.

[39]   In Commerce Commission v Viagogo AG the Court of Appeal confirmed that although r 6.8 can be invoked where a defendant is overseas, it remains necessary to comply with rr 6.27 and 6.28.26

[40]   As it stands, Smartpay did not have permission to serve Mr Kumar outside New Zealand as required by s 17(3) or r 6.30. It follows that the requirement in s 17(1)(c) of the Act has not been met; and therefore, Mr Kumar has not committed an act of bankruptcy. Consequently, Smartpay does not have standing to bring an application for Mr Kumar to be adjudicated bankrupt in terms of s 13(b).

Correction under s 418 of the Act?

[41]   I have considered whether the Court can cure the failure to obtain leave under s 17(3)/r 6.30 under s 418 of the Act. That section provides:

418     Defects in proceedings

(1)A proceeding under this Act must not be invalidated or set aside for a defect (which includes misdescription, misnomer, or omission) in a step that must be taken as part of, or in connection with, the proceeding, unless a person is prejudiced by the defect.

(2)The court may order the defect to be corrected, and may order the proceeding to continue, on the conditions that the court thinks appropriate in the interests of everyone who has an interest in the proceeding.

[42]   However, I do not consider that s 418 can be used in this way. It is not so much that there has been a defect in a step in the bankruptcy proceeding or in connection

25     Westpac New Zealand Ltd v Boulton, above n 23, at [14].

26     Commerce Commission v Viagogo AG [2019] NZCA 472, [2019] 3 NZLR 559, at [98] and [99].

with the bankruptcy proceeding, rather there has been a failure to take a step altogether (to obtain leave to serve Mr Kumar outside of New Zealand). In Goodwin v Copland the Court of Appeal, in obiter, reached a similar conclusion, saying:27

[32] Whatever the scope of s 418, we do not consider it could be used to establish an act of bankruptcy where none otherwise exists. Thus, if there was neither personal service nor substituted service in accordance with a direction, s 418 could not be used to save that situation. That would not be a defect in a step, but a failure to take a step at all. There would be nothing that s 418 could cure.

Leave to serve Mr Kumar overseas

[43]   Smartpay needs to begin again and apply for another bankruptcy notice. I give Smartpay leave under r 6.30 to serve any such bankruptcy notice and certified judgment on Mr Kumar outside New Zealand, if necessary, for the following reasons.

[44]   I am satisfied that the relevant claim, and the future (potential) bankruptcy application has a real and substantial connection with New Zealand. The debt on which the bankruptcy notice is based, and which will also form the basis of the bankruptcy application, is a judgment of the High Court of New Zealand.

[45]   There is a serious issue to be tried in the bankruptcy proceedings that will follow, namely whether Mr Kumar ought to be adjudicated bankrupt.

[46]New Zealand is the natural and appropriate forum for the trial, because:

(a)the judgment debt arose in New Zealand under New Zealand law;

(b)Mr Kumar holds himself out as being a New Zealand resident;

(c)Mr Kumar is the shareholder and director of several New Zealand companies, including OCL (in liq);

27     Goodwin v Copland, above n 22, at [32].

(d)if Smartpay were required to proceed with the bankruptcy proceedings in India, it would face the added burden of having to apply for the costs judgment to be recognised in that jurisdiction;

(e)the costs and convenience lie in favour of the bankruptcy proceeding being determined in New Zealand; and

(f)the costs and convenience lie in favour of Mr Kumar’s bankruptcy being administered in New Zealand, given OCL (in liq) and his other companies are New Zealand companies, Smartpay and other creditors are New Zealand companies, and due to the ability of the Official Assignee to make enquiries.

[47]    Accordingly, I am satisfied that it is appropriate to grant leave under r 6.30 for the reissued bankruptcy notice and certified judgment to be served outside of New Zealand. I also grant leave, if necessary, for the originating documents for any bankruptcy proceeding that follows — the application for adjudication, summons to debtor and affidavit — to be served on Mr Kumar outside of New Zealand.

Order under s 17(4)(b) — time for compliance

[48]   Under s 17(4) of the Act, the time for compliance with the bankruptcy notice is 10 days if the debtor is served with the bankruptcy notice in New Zealand or “if the debtor is served outside New Zealand, the time specified in the order of the court permitting service outside New Zealand.” Normally, a greater time is allowed for compliance where a debtor is served outside New Zealand. I amend the time for compliance to 20 working days.

[49]   I also note that a time limit requiring the notice to be served within six months of issue was adopted as a standard practice by Associate Judge Osborne in Commissioner of Inland Revenue v Spicer, as a condition of leave under r 6.30.28 I adopt that practice and impose the same condition here.

28     Commissioner of Inland Revenue v Spicer [2016] NZHC 1344.

[50]   As to the method of service, I give Mr Kumar five working days to inform Smartpay  of  an  address  for  service  at  which   he   can   be  personally   served  the bankruptcy notice and certified judgment. If Mr Kumar does not  provide  such an address for service, Smartpay has leave  to serve the  documents on Mr Kumar   by emailing them to him at his personal email address, being: m******@propertymagnets.au.

Result

[51]   Smartpay’s application for an order adjudicating Mr Kumar bankrupt is dismissed.

[52]   Smartpay will pay Mr Kumar, who is self-represented, his reasonable disbursements, to be fixed by the Registrar.

Associate Judge Gardiner