Smith v Trustees Executors Limited

[2013] NZHC 384

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-001155 [2013] NZHC 384

IN THE MATTER OF     the Bankruptcy of GERALD MURRAY SMITH

BETWEEN  GERALD MURRAY SMITH Judgment Debtor

ANDTRUSTEES EXECUTORS LIMITED Judgment Creditor

Hearing:         28 February 2013

Appearances: C R Pidgeon QC for Judgment Debtor

C A E Carey for Judgment Creditor

Judgment:      1 March 2013

JUDGMENT OF COURTNEY J

This judgment was delivered by Justice Courtney on 1 March 2013 at 4:00 pm

pursuant to R 11.5 of the High Court Rules

Registrar / Deputy Registrar

Date……………………..

Solicitors:           Pidgeon Law, P O Box 6535 Wellesley Street, Auckland 1141

Fax: [phone]
JTLaw, P O Box 25443, Wellington 6140
Fax: [phone] – C Carey – Email:[email protected]

Counsel:             C R Pidgeon QC, P O Box 105924, Auckland

Fax: [phone] – Email: [email protected]

SMITH V TRUSTEES EXECUTORS LTD HC AK CIV-2012-404-001155 [1 March 2013]

[1]      Trustees Executors Ltd (TEL) has applied for an order adjudicating Gerald Murray Smith bankrupt.  It is common ground that TEL satisfies the prerequisites for adjudication in s 13 of the Insolvency Act 2006.   However, Mr Smith, who is 73 years old and has no assets, opposes the application and seeks to have this Court exercise its discretion to refuse adjudication on the grounds provided in s 37(c)[1] and

(d)[2].  Having heard from Mr Pidgeon QC, for Mr Smith, and Ms Carey, for TEL, I

refused TEL’s application for adjudication with my reasons to follow in writing.

These are my reasons.

[1] That it is just and equitable that an order not be made. 

[2] That for any other reason an order should not be made.

[2]      Although the making of an order for adjudication under s 13 is discretionary, when a judgment  creditor satisfies the prerequisites of s 13 the onus  is on the opposing debtor to show why an order should not be made.  The general principles upon which the discretion under s 37 are to be exercised were set out by Faire AJ in Fontein v Bank of New Zealand[3] and I gratefully borrow from his summary:

[3] Fontein v Bank of New Zealand HC Auckland CIV-2009-404-007769.

1)“A creditor who establishes the jurisdictional facts set out in s 23 is not automatically entitled to an order.  On the other hand, it is for an opposing  debtor  to  show  why  an  order  should  not  be  made.” McHardy v Wilkins & Davies Marinas Ltd (Court of Appeal, Wellington, CA54/93, 7 April) at p 3.

2)“… in the exercise of the discretion under s 26 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.”  McHardy v Wilkins & Davies Marinas Ltd at p 3.

3)In determining whether an order should be made, the wider public interest   must   be   taken   into   account   to   determine   whether adjudication is “conducive or detrimental to commercial morality and the interests of the general public.”   Re Nisbett, ex parte Vala [1934] GLR 553 at p 556.

4)“… on a bankruptcy petition the Court must have regard to public interest in a way which transcends the interest of the immediate parties to the proceeding … The public interest in exposing and controlling an insolvent debtor is one which exists quite independently of  the  separate  question  of  debt  collection  by  his immediate creditors.”  Re Fidow [1989] 2 NZLR 431 at p 444.

5)Absence of assets is a factor but “… even the undoubted absence of assets will not necessarily preclude an order, for the circumstances may be such that the debtor ought in the public interest to be visited

with the disqualifications that go with bankruptcy.”   McHardy v

Wilkins & Davies Marinas Ltd at p 3.

6)Another matter that may be relevant is the potential for further investigation.  Bankruptcy makes available to creditors an array of procedures  for  investigating  the  financial  circumstances  of  the debtor.  Those procedures are likely to prove more effective than an investigation conducted by other means.”   Re Fidow (supra) at p

444.

7)The oppressive use of the bankruptcy procedure may be a ground for refusing   an   order:   Baker   v   Westpac   Banking   Corporation. CA212/92, 13 July 1993 at 4-5.

8)The Court needs to balance the various considerations relevant to the case, and to determine whether in the end the debtor has succeeded in showing that an order ought not to be made”.  McHardy v Wilkins

& Davies Marinas Ltd (supra) at p 4.

[3]      The circumstances on which Mr Smith relies in opposing the application are these.  He is 73 years old.  He has no assets.  His only income is a benefit paid by Work and Income.  He has repaid the principal of the loans and the ordinary interest that accrued on them.  The amount that is now outstanding to TEL relates to penalty interest and costs. These facts are not disputed.

[4]      For most of his life Mr Smith ran his own wool business which he eventually sold.  It is not clear from the evidence when he sold the business but it appears to be in the mid-2000s.  The business was sold on a vendor finance basis with the balance of the purchase price secured to Mr Smith’s family trust, the Netherwood Trust.  The Netherwood Trust owned a property at Upland Road, Auckland and it purchased two properties  in  Orakei  Road, Auckland.    TEL made  loans  of  $1m  and  $575,000 respectively to  fund  the  purchases  and  Mr  Smith  guaranteed  those  loans.    The repayments were met from the interest being paid by the purchaser of the wool business.

[5]      After two years of paying interest under the mortgage to Netherwood the purchaser of the wool  business  defaulted,  walking away from  the business  and leaving the Netherwood Trust and Mr Smith with no means of meeting the mortgage repayments to TEL.   The property at Upland Road was sold in May 2009, which reduced  the  TEL mortgage.    Mr  Smith  successfully  secured  a  loan  offer  from

Kiwibank for $1.103m which, according to him, would have cleared or very nearly cleared the outstanding amount owed to TEL at that time.

[6]      There is dispute over why the TEL mortgage was not refinanced with the Kiwibank funds at that time.  TEL, by its mortgage administrator, Roger Fairbairn, says that a Property Law Act notice expired on 17 August 2009 and mortgagee sale processes were begun.  Mr Smith says that TEL was unable to give him a figure to enable final payment to be made.  He also claims that a TEL employee, Ian Kennedy, told him that penalty interest would not be charged which it was.  I do not need to resolve these issues.  They are by way of background only.  Their relevance is that Mr Smith’s financial problems were not of his making but were caused by the default of the purchaser of his business.

[7]      During the course of 2010/2011 efforts were made to sell the Orakei Road properties.  Once again, there is dispute between the parties with each asserting fault by the other.  TEL complained that Mr Smith made the mortgagee sale process very difficult, interfering with it and refusing to allow access to one of the properties, forcing TEL to apply for an order for vacant possession.   Later he lodged caveats without justification.   Mr Smith complained that TEL approached the sale process with a rigid view that the two properties had to be sold together, a strategy that was always bound to fail because the number of purchasers in the market for two properties was far less than the number of purchasers who just wanted to buy a single property.  Mr Smith also complains about the application of funds from the sale of Upland Rd.   These various complaints have already been aired in other proceedings and cannot be re-opened in this forum.  To the extent that the conduct of the parties during the mortgagee sale process is relevant, I have no doubt that there was fault on both sides.

[8]      The matters that I consider relevant to the exercise of my discretion are, first, TEL’s conduct and attitude towards Mr Smith, secondly, TEL’s motivation for bringing its application and, thirdly, the effect that adjudication would have on the parties involved and more widely.

[9]      The first aspect of TEL’s conduct that is relevant is a statement said to have been made by Ian Kennedy of TEL.  In his affidavit, Mr Smith described a telephone call in 2010 during which Mr Kennedy said that “his intention was to destroy me, take my properties and put me on the street”.  Mr Kennedy no longer works for TEL. TEL has not deposed as to any attempt having been made to contact Mr Kennedy or, if  they  have,  whether  Mr  Kennedy  was  able  to  confirm  or  refute  Mr  Smith’s assertion.  Mr Fairbairn makes no reference to it at all.  I therefore proceed on the basis that there is no challenge to Mr Smith’s claim about what Mr Kennedy said to him.

[10]     The second is TEL’s refusal to treat seriously offers made by prospective purchasers simply on the grounds that TEL staff believed (wrongly as it turned out) that they were associated with Mr Smith.  To the extent that this might have resulted in an argument about whether TEL obtained the best price, that is a matter that has already been determined in the context of previous applications and is not to be re- opened at this stage.  However, to the extent that it shows TEL’s attitude to Mr Smith and this bankruptcy petition I do find it to be relevant.

[11]     Mr Fairbairn deposed in his affidavit that offers from prospective purchasers were rejected “if they were forwarded or appeared to be from a related party (or a party purchasing for Mr Smith)”.   He then referred to an offer received the day before  the  scheduled  mortgagee  auction  from  a  party  described  as  Ankerglen Property Ltd, of which one Glenis Claydon was the sole director.   Mr Fairbairn observed that Ms Claydon was a real estate agent and “is believed to be a party associated with Mr Smith from his previous career as a realtor”.

[12]     In fact, neither of these assumptions was correct.   Mr Smith has filed an affidavit in reply which is unchallenged to the effect that, although he worked as a real estate salesman in his early 20s, for the rest of his working life he was involved fulltime in the wool industry.  He does hold a real estate agent’s licence which he obtained as a hobby but has never used it.  Further, Ms Claydon’s husband, Kerry Claydon, has deposed in an affidavit that neither he nor his wife had any knowledge of Mr Smith either as a real estate agent or as an individual prior to their becoming interested in the Orakei Road property.   He also said (and was not challenged by

TEL) that the offer he and his wife made through Ankerglen Property Ltd was an unconditional offer for $1.1m which they were happy to increase but TEL was unresponsive:

I was puzzled by the attitude of the judgment creditor, Trustees Executors Ltd, who would not accept the unconditional offer nor were interested in talking to me about increasing the offer we had made.   The gentleman I spoke to in that company told me that they had been “lead [sic] up the garden path by Gerry” and were not interested in our offer.

[13]     I have no doubt that Mr Smith has been difficult to deal with.  It is very likely that  many  people  in  his  position  are  difficult  to  deal  with.     However,  it  is unacceptable to make threats of the kind attributed to Mr Kennedy in dealing with those in financial distress, particularly when it is not of their making.   I am also satisfied that TEL’s attitude towards Mr Smith has been coloured by the entirely incorrect assumptions that its staff has made about him in relation to his association with prospective purchasers.  I find that TEL’s application is brought in large part to punish Mr Smith for being so difficult.

[14]     The third matter I take into account is that adjudication of Mr Smith would not improve TEL’s position at all nor benefit the commercial community.  TEL does not dispute that Mr Smith has neither assets nor income that might go towards reducing the outstanding amount.   There are no other creditors.   Mr Smith’s insolvency  has  not  come  about  through  any  failing  on  his  part.    There  is  no suggestion of dishonesty or incompetence.  There is no suggestion that, in his many years of operating his wool business, Mr Smith posed any commercial risk to those in the business community with whom he dealt.  There is no suggestion that if he were to take up a position in the commercial world again there would be any risk associated with him.  In this regard, Mr Smith has been offered the directorship of a wool company, a recognition of his long experience in the industry but one which he could not take up if he was bankrupted.

[15]     In these circumstances I find that adjudication would not serve any practical purpose for TEL and, to the contrary, would prevent Mr Smith from contributing in a useful way to the industry in which he has worked all his life.  Those facts, coupled

with TEL’s previous conduct and doubtful motivation in bringing the application led

to my decision to refuse the application.

P Courtney J