Stuff Limited (fka Fairfax New Zealand Limited) v Arnold
[2019] NZHC 240
•22 February 2019
IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY
I TE KŌTI MATUA O AOTEAROA WAIHŌPAI ROHE
CIV-2018-425-62
[2019] NZHC 240
UNDER The Insolvency Act 2006 BETWEEN
STUFF LIMITED (formerly known as FAIRFAX NEW ZEALAND LIMITED)
Judgment Creditor
AND
KAREN FRANCES ARNOLD
Judgement Debtor
Hearing: 13 February 2019 (By AVL Hearing) Appearances:
R K P Stewart for Judgment Creditor
K F Arnold (in-person Judgment Debtor)
Judgment:
22 February 2019
JUDGMENT OF ASSOCIATE JUDGE LESTER
Background
[1] The judgment creditor, Stuff Ltd, has applied to have the judgment debtor, Ms Arnold, adjudicated bankrupt. The judgment debtor now applies for leave to oppose that application out of time. Both those applications were heard before me on 13 February 2019.
[2] The judgment debtor was served on 27 July 2018 with a bankruptcy notice demanding payment to Stuff Ltd of $187,360.81 being the amount due under a costs award made against her on 4 July 2018 by Mallon J. The judgment debtor unsuccessfully brought a defamation proceeding against the judgment creditor as first
STUFF LTD v ARNOLD [2019] NZHC 240 [22 February 2019].
defendant and against the Mayor of Invercargill, now Sir Timothy Shadbolt as second defendant. The judgment creditor filed an application on 13 August 2018 seeking to have the judgment creditor adjudicated bankrupt. A separate costs award in favour of Sir Timothy was also made, in the sum of $186,188.38. Sir Timothy has not appeared in support (or in opposition) to the application by the judgment creditor to bankrupt the judgment debtor.
[3] The bankruptcy application was served on the judgment debtor on 24 August 2018, with its first call on 4 October 2018. Initially, the judgment debtor’s position was that as she did not have the funds to pay the debt she would not oppose the bankruptcy process. The judgment debtor, for whom paid directorships are two of her three disclosed sources of income, sought clarification as to whether bankruptcy would prevent her holding those directorships. After some delay while an opinion was sought from an amicus, the judgment debtor discovered the constitutions of the companies of which she was a director prohibited undischarged bankrupts from holding directorships. Ms Arnold advised the Court of this at a telephone conference on 21 November 2018.
[4] On 22 November 2018, Ms Arnold was given the opportunity by the Court to seek leave to file an opposition to the adjudication out of time. There was a further call of the application to adjudicate in the bankruptcy list on 13 December 2018, by which time the judgment debtor had filed an application for leave to oppose the judgment creditor’s application for adjudication and paid security for costs of $1,000 as previously ordered.
[5] The judgment debtor’s opposition, according to the notice of opposition she seeks leave to file, is based on the following ground:
3. (a)it would not be just nor equitable to [adjudicate her bankrupt], neither for [the judgment debtor] nor [her] unsecured creditors.
[6]In the application for leave to file the opposition out of time she says:
It is my submission that it would therefore be best that the court exercises its discretion and does not adjudicate me bankrupt, allowing me to continue to act and earn income as a company director, in what is a strictly governance
role. That would allow me, in turn, to continue to repay my unsecured creditors at the full rate.
[7]The judgment debtor further states:
It is my submission that the judgment creditor, in applying for adjudication, has done so with my company directorships in mind.
[8] The above is the suggestion by the judgment debtor that the bankruptcy process is being misused.
[9] The notice of opposition to the adjudication application asserts that the bankruptcy is being used to cause the judgment debtor “personal harm and embarrassment”.
The judgment creditor’s opposition to leave application
[10] The judgment creditor’s opposition records that r 24.18 of the High Court Rules requires the judgment debtor’s notice of opposition to have been filed no later than the last working day before the hearing of the application. The judgment creditor says that the delay in filing the application for leave has not been justified.
[11] The judgment creditor says that leave should be declined as ultimately it would not be unjust or unequitable to adjudicate the judgment debtor and therefore granting leave to oppose would be pointless. The judgment creditor denies the bankruptcy process is being used to embarrass the judgment debtor.
The applicable law
[12] Associate Judge Osborne (as he then was) adopted the following general principles in relation to an adjudication application in Re Rabobank Australia Ltd, ex parte Tootell1 as follows:
•The creditor has the onus of establishing the allegations in its application;
•The Court may in its discretion refuse to adjudicate a debtor bankrupt (notwithstanding the jurisdiction is established) if it is just and
1 Re Rabobank Australia Limited, ex parte Tootell [2013] NZHC 2975 at [6].
equitable not to make an order or there is any other sufficient reason not to make an order (see s 37(c)-(d) of the [Insolvency Act 2006]);
•The debtor has the onus of satisfying the Court that either it is just and equitable or that some other sufficient reason exists for the Court’s not making an order of adjudication; and
•The Court is not to refuse an order of adjudication on the grounds of expediency or convenience.
[13] Focusing on the Court’s discretion under s 37 of the Insolvency Act, Associate Judge Osborne in the Rabobank decision2 summarised and adopted the following list of relevant factors from Re Epirosa:3
· What are the wishes of all affected parties, including the applying creditor, other creditors, and the debtor?
· Does the debtor have the ability to meet his or her debts over time and, if so, does that meet the requirements of achieving finality within a reasonable period?
· What were the circumstances in which the debt was incurred and do those circumstances suggest that the creditor is acting unreasonably in pursuing adjudication?
· Will adjudication be pointless?
· Will the debtor, if adjudicated, be rendered unable to support himself or herself?
· Does the debtor have such a standing in the community that significant issues of stigma or embarrassment will result?
[14] Notwithstanding the judgment creditor taking the point about the application being out of time, the real focus of the argument at the hearing was on whether it would be just and equitable not to make an adjudication order. Mr Stewart realistically recognised that the application for leave to oppose adjudication out of time was primarily going to turn on the merits of the opposition that Ms Arnold sought to file. Given the process adopted to determine whether it was possible for Ms Arnold to be granted leave to continue as a director notwithstanding bankruptcy, it could not be said that she had not engaged in the bankruptcy process or that she did not keep the parties and the Court informed. It was only with her learning that the constitutions of the
2 At [7]-[8].
3 Re Epirosa HC Wellington B498/91, 6 March 1992 at 5-8.
companies themselves precluded her being a director that she sought to defend the application. Accordingly, there was at least a reasonable explanation for the delay.
What the judgment debtor seeks to achieve
[15] The notice of opposition to the application for adjudication which the judgment debtor seeks leave to file refers to a settlement offer made by the judgment debtor. The offer proposed that the equity from the sale of the judgment debtor’s house be split between the two creditors, that is the two defendants from the defamation proceedings (potentially $50,000 each), plus a further $50,000 each to be paid at the rate of $33,333 a year for three years. Accordingly, the offer was $100,000 each to the judgment creditors, half “up front” with the balance to be paid over three years. Once interest on the costs judgment is allowed for, the proposal amounts, on a rough and ready assessment, to 50 cents in the dollar over three years.
[16]The offer as originally put in an email dated 6 August 2018 provided that the
$100,000 to be offered to each judgment creditor would be interest free. The offer was declined.
[17] The application for leave says that declining the adjudication application would allow the judgment debtor “to continue to repay my unsecured creditors at the full rate”. The judgment debtor at the hearing said that the settlement offer set out in [15] was no longer available to the judgment creditor and that she had not considered what she would do to deal with the judgment creditors should she not be adjudicated bankrupt. It was, however, Ms Arnold’s argument that not adjudicating her would be in the best interests of her other unsecured creditors as she intended to pay her other creditors in full and that is consistent with her application for leave.
[18] Mr Stewart emphasised that what Ms Arnold proposed involved her preferring some unsecured creditors over the judgment creditors.
[19] The judgment debtor has not sought to advance a creditors’ proposal under pt 5 of the Insolvency Act 2006. Given the need for such a proposal to be supported by three-quarters in value and majority in number of creditors who attend and vote at
the creditors’ meeting4 and given the level of indebtedness disclosed in her application and the opposition from the present judgment creditor at least, it is clear that a proposal would not gain the necessary support.
Security for costs in the defamation proceedings
[20] In the defamation proceedings, an application for security for costs was made by one or both of the defendants. The judgment creditor has, since it first called for payment of the costs award by letter dated 10 July 2018, referred to the judgment debtor’s affidavit in the security for costs application sworn on 3 May 2017, where she said:
I am able to meet my debts as they fall due, and I will be able to meet any costs award made against me in this proceeding.
[21] There is the suggestion that the judgment debtor may have understood that the likely adverse costs award would be in the region of $125,000.
[22] Ms Magill on behalf of the judgment creditor, in an affidavit affirmed on 14 January 2019 said:
Ms Arnold’s complaint that the estimate of quantum at the time the issue of security for costs was raised was $125,000 is irrelevant in light of her statement that she could pay “any” award of costs made against her. In any case, it is untrue. The statement in question was made by counsel on behalf of Stuff to Ms Arnold’s counsel in a letter dated 20 March 2017. It informed Ms Arnold that scale costs for “trial preparation and appearance” for a three week trial (which is what eventuated) could be expected to be $120,000 per defendant. (emphasis as per original)
[23] Ms Magill also notes that the estimate she refers to did not include scale costs for the steps that had already been taken, nor did it include disbursements.
[24] The judgment debtor’s affidavit confirming her ability to pay costs was sworn on 3 May 2017.
[25] There is some unparticularised suggestion in the papers that the judgment debtor has incurred further debts since swearing her affidavit. I raised this with
4 Insolvency Act 2006, s 331(3).
Ms Arnold at the hearing and she advised with reference to an email written by her solicitor on 6 August 2018 that three advances of $28,000, $22,000, and $70,000 had occurred since she swore her affidavit with those sums being committed to legal costs
– a total of $120,000.
[26] At the hearing Ms Arnold referred to a property in the Catlins owned by a Trust of which she is a trustee. That property is apparently worth $100,000 with a mortgage of $50,000. The bank that has a charge over Ms Arnold’s personal home is also, on Ms Arnold’s advice during the hearing, the lender for the Catlins property and as is commonly the case the bank’s security is over both properties for both advances.
[27] Ms Arnold advised that if she was bankrupted as a result of the mortgage on her home extending to the Trust debt, there would be no equity in her home. That stands in contradiction to the proposal that she made in August 2018 which assumed on the sale of her home there was equity of approximately $100,000 from which the initial “up front” $50,000 payment to each judgment creditor would be sourced.
[28] The proposal in August 2018 was predicated on Ms Arnold having approximately $100,000 equity in her home. It is of concern that the judgment debtor has not provided a fuller explanation in respect of her sworn evidence in the security for costs context, given the natural emphasis placed on that evidence by the judgment creditor since 10 July 2018, when the judgment debtor seeks to invoke the just and equitable ground under s 37 of the Insolvency Act.
[29] Even without incurring the further indebtedness of $120,000 referred to in [25] above, said to have occurred after Ms Arnold’s affidavit of 3 May 2017, she was not in a position to meet costs awards of the type indicated in counsel’s letter of 20 March 2017. Ms Arnold was represented by very experienced counsel in the defamation proceedings. An application for security for costs put the spotlight directly on the risk of adverse costs and with the defendants estimating total adverse costs at
$250,000 for steps after their letter, it is not clear how Ms Arnold’s sworn evidence can be reconciled with the account that she has now given, particularly when she now says there is no equity in her home.
Discussion
[30] In a practical sense, the judgment creditor seeks to achieve a creditors’ proposal “through the back door”, albeit at this stage Ms Arnold had not decided what she would do about the judgment debts if she was not bankrupted. The statutory process by which creditors can be required to accept a compromise is set out in the Insolvency Act. The Court does not know the attitude of other creditors, but the present judgment creditor’s judgment is of such a size as to mean that a proposal would not succeed.
[31] This Court cannot, through a challenge to the adjudication process, require a creditor to accept a proposal from the judgment debtor – indeed there is no proposal presently on the table.
[32] I am not prepared to grant the judgment debtor’s application for leave to file her opposition to adjudication out of time. While the delay in making the application is to some extent explicable through her wanting to investigate whether she could remain a director, at the end of the day I do not consider the judgment debtor has a reasonable prospect of success in opposing the adjudication application.
[33] The judgment debtor was reconciled to bankruptcy provided she could continue as a director. Had that been possible, then it would seem the judgment debtor would have accepted bankruptcy. Her assets would have come under the control of the Official Assignee with the possibility that the Official Assignee may have required the judgment debtor to contribute something from her ongoing income. Payments to her unsecured creditors would have been subject to the Official Assignee carrying out her duty in the usual way.
[34] In the present situation, the judgment debtor will not be able to maintain her present directorships, although there is no evidence that she cannot undertake other paid employment. While she cannot be a director, she can, with the permission of the Official Assignee, be involved in business activities. Ms Arnold will be able to remain on the Invercargill City Council if she is made bankrupt – she did not suggest that she would be unable to support herself if adjudicated.
[35] The judgment debtor chose to pursue her defamation claim and did so with notice of the likely adverse costs should she proceed with the litigation. She swore an affidavit saying she could meet costs in the face of, what it turns out to have been, a reasonably accurate estimate of what the adverse costs would be. Now, when one of the parties having obtained a costs award seeks to adjudicate the judgment debtor in the face of her sworn affidavit that she could pay a costs award, the judgment debtor asks the Court to exercise its discretion in her favour without a full and frank sworn explanation as to why her sworn evidence has turned out to be inaccurate.
[36] Bankruptcy inevitably has an effect on those who are directors or self-employed or involved in the management of a business or for whom bankruptcy means they cannot practice, for example as a solicitor. That is the natural consequence of bankruptcy and one which the judgment debtor seeks to avoid. That is a factor, as I have said, that is common to many individuals in the judgment debtor’s position. Generally, of itself the inability to be a director or manage a business is not enough to amount to a ground for declining an order of adjudication as such is a standard consequence of the adjudication process.
[37] There is no evidence from other creditors of the judgment debtor in support of her application. She has not provided a full statement of assets and liabilities, and she does not suggest she can or is willing to meet the costs awards in full albeit over time.
[38] The judgment debtor chose to proceed with her litigation in the face of the known costs risk; known, because of the application for security for costs and with the likely size of an adverse costs award brought expressly to her notice. I consider there to be some analogy to the cases discussed in Brookers Insolvency Law & Practice at IN37.05(2) as to the significance given by the Court on the need of debtors to honour personal guarantees that they have given.5
[39] Here, while not a case of a guarantee, the judgment debtor was advised of the risk of a future liability (adverse costs) and formally confirmed her ability to meet that liability in her affidavit. Having done so, there is nothing unjust or inequitable in requiring her to meet that commitment given under oath to this Court. In my opinion,
5 Insolvency Law & Practice (online loose-leaf ed, Thomson Reuters) at IN37.05(2).
the circumstances in which the debt was incurred stand against the Court’s discretion being exercised in Ms Arnold’s favour.
[40] I do not accept that adjudication would be pointless. It is not a given that the holder of the mortgage over Ms Arnold’s home and her Trust would require all equity from the sale of the house, given the equity in the Catlins property. No formal disclosure of the Trust’s financial position was provided.
[41] That Ms Arnold’s stated position is that she intends to pay her unsecured creditors other than the judgment creditors, for whom she confirms she has no present plans to pay if not adjudicated bankrupt, also stands against her application.
[42] Nor do I accept there is a basis for the proposition in the notice of opposition that the bankruptcy is being used to cause the judgment debtor “personal harm and embarrassment”. In support of this assertion, Ms Arnold referred to the fact that when on 22 November 2018 she appeared in the bankruptcy list, Stuff had a reporter there from The Southland Times. Ms Arnold said she spoke to the reporter who admitted that The Southland Times had never sent a reporter to cover such appearances before.
[43] Ms Arnold also notes that the Court lists on the Ministry of Justice website for 22 November 2018 did not include reference to her appearance on that day. She says, “I believe counsel gave The Times a heads up”. Ms Arnold confirmed during the hearing that she was not referring to Mr Stewart. I raised this with Mr Stewart who noted (quite correctly) that he is under a duty to inform his client of the appearance scheduled for 22 November 2018. With his lay client being the owner of The Southland Times, that a reporter was sent to the Court to cover a matter of public interest is, I accept, not a matter of itself which points to any misuse of the bankruptcy process. I accept Mr Stewart’s submissions that it cannot be suggested that a creditor applying to bankrupt a City Councillor is not a newsworthy event. The defamation hearing itself and its outcome received significant media attention.
[44] I also accept Mr Stewart’s submission that there is no evidence of hardship to other creditors, other than that inherent in the bankruptcy process.
[45] While Ms Arnold may wish to avoid the consequences of bankruptcy, such is true of many debtors in her position. An order is not refused on grounds of expediency or convenience. At its most basic, Ms Arnold’s argument is that she will be unable to continue to hold directorships and that bankruptcy will mean she cannot pay off some of her unsecured creditors. Such does not make bankruptcy unjust or inequitable.
[46] The application for leave to extend time to file an opposition to the adjudication process is dismissed.
Costs
[47] The judgment creditor is entitled to costs on a 2B basis in respect of the application for leave with those costs to be met firstly from the sum paid for security.
[48] That leaves the judgment creditor’s application for adjudication also adjourned to 13 February 2019. It follows from what I have said above that the judgment creditor is entitled to the order it seeks. It is common ground that the debt is unpaid.
Order
[49] Accordingly, there is an order adjudicating the judgment debtor bankrupt. The judgment creditor is entitled to costs on a 2B basis on the application to adjudicate, together with disbursements as fixed by the Registrar.
Associate Judge Lester
Solicitors:
Izard Weston Lawyers, Wellington
Copy to counsel: R K P Stewart, Barrister, WellingtonK F Arnold (in person judgment debtor)
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