Sullivan v Clode
[2017] NZHC 1973
•17 August 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-3017 [2017] NZHC 1973
UNDER the Insolvency Act 2006 IN THE MATTER OF
the bankruptcy of BRENT DOUGLAS CLODE
BETWEEN
MICHAEL GRANT SULLIVAN, DUTHCO TRUSTEES (SULLIVAN) LIMITED AS TRUSTEES OF THE SULLIVAN FAMILY TRUST NO.1
Judgment Creditors
AND
BRENT DOUGLAS CLODE Judgment Debtor
Hearing: 17 August 20017 Appearances:
M D Pascariu for the Judgment Creditors
S R J Hamilton for the Judgment DebtorJudgment:
17 August 2017
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
MinterEllisonRuddWatts, Auckland, for the Judgment Creditors
Foley Hughes, Auckland, for the Judgment Debtor
Counsel:
Simon R J Hamilton, Auckland, for the Judgment Debtor
SULLIVAN & ORS v CLODE [2017] NZHC 1973 [17 August 2017]
[1] There are two matters. The creditors apply for Mr Clode to be adjudicated bankrupt. Mr Clode applies under s 42 of the Insolvency Act 2006 to halt the proceeding so that he may continue his appeal against the judgment on which the creditors’ bankruptcy notice is based.
[2] The creditors obtained judgment against Mr Clode in proceeding CIV-2014-
404-2717. In a judgment of 8 July 2016, Palmer J dismissed claims by Mr Clode and Synergy Management Ltd.1 He declared that an agreement of 3 July 2014 was void under s 43 of the Fair Trading Act and he ordered Mr Clode and Synergy Management Ltd to pay the trustees of the Sullivan Family Trust $150,000 plus interest and costs. Costs were later fixed at $60,380.00. Mr Clode had been required to pay security for costs. Once those were taken into account the unpaid amount of costs is some $35,000. Mr Clode is also liable for a costs order for about $4,000 made on the security for costs application. These are all final judgments or orders. There has been no order staying execution. I was advised that the total amount of
outstanding under all the judgments and orders is some $225,000.
[3] The creditors’ bankruptcy notice is based only on the judgment of $150,000 plus interest. Mr Clode did not comply with the bankruptcy notice served on him in December 2016. The creditors filed their application in February 2017. Mr Clode filed his application under s 42 to halt the proceeding in April this year.
[4] In the meantime, Mr Clode has appealed against the judgment of Palmer J. He filed the appeal in August 2016 and paid security for costs in September 2016. He filed his case on appeal in November 2016 and an amended notice of appeal. He has filed his submissions for the appeal. It is to be heard on Monday, 4 September
2017.
[5] The creditors’ application and the halt application were set down for hearing
on 25 July 2017. I adjourned the case until today because Mr Clode said he would pay the debt into court. That payment was to be made by 15 August 2017. If it were
1 Clode v Sullivan [2016] NZHC 1561.
paid the bankruptcy application would be halted pending the appeal. Mr Clode did not make that payment and I am therefore required to decide the applications on the merits.
[6] As Mr Pascariu submitted, the creditors have satisfied the requirements of s 13 of the Insolvency Act 2006. The debt they rely on is more than $1,000. Mr Clode committed an act of bankruptcy within three months before the application was filed because he did not comply with the bankruptcy notice served on him. The creditors’ right to obtain an adjudication is subject to the court’s discretion under ss 36 and 37 of the Insolvency Act. It is also subject to the court’s powers to halt a bankruptcy application. There is a general power to halt under s 38 of the Insolvency Act. There are more particular powers under ss 42 and 43. Section 42 says:
42 Halt or refusal of application when judgment under appeal
(1) This section applies if the creditor’s application for adjudication
relies on one of the following acts of bankruptcy:
(a) the debtor failed to comply with a bankruptcy notice (see section 17):
(b) a judgment against the debtor for non-payment of trust money is not satisfied within 5 working days after the date
of the judgment (see section 28).
(2) If the debtor has appealed against the judgment or order underlying the bankruptcy notice or the judgment for non-payment of trust money, as the case may be, and the appeal is still to be decided, then the court may—
(a) halt the creditor’s application for adjudication; or
(b) refuse the application.
Mr Clode has met the threshold requirements of the section. The creditors are relying on his non-compliance with the bankruptcy notice under s 42(1)(a) and he has appealed against the judgment on which the notice is based, s 42(2).
Background
[7] I refer to the proceeding in which the creditors obtained judgment against
Mr Clode. Mr Clode and Synergy Management Ltd sued Mr Sullivan under a
settlement agreement. The agreement was meant to settle Mr Clode’s claims relating to a property development at Thompson Park in Mount Wellington, Auckland. Mr Clode is a self-described property developer. Mr Sullivan is a developer and is associated with a building company, Clearwater Construction Ltd.
[8] The litigation concerned a property at 8 Thompson Park Road, Mount Wellington. The site had on it a building that had been used as a workshop and office space. A company called Box Property Investments Ltd bought the property in 2006. The people behind Box Property Investments Ltd were Mr Sullivan and a Mr Jans. That company decided to invest in developing the property as apartments in 2010. In 2011 Mr Jans asked Mr Clode to do some design work for Box Property Investments. Mr Clode did some design work but the extent of his work and the value of it were in contention. In December 2010 Mr Clode and Mr Jans parted company. At that time Mr Clode had expectations of being paid substantially for the work he had carried out.
[9] In August 2012 Box Property got a resource consent to develop a 94 unit apartment complex on the site. Mr Sullivan had misgivings about this because he considered that the construction costs would be in the range of $22-$24 million. Mr Jans and Mr Sullivan had different views as to the potential profit that might be made.
[10] In March 2013 Mr Jans approached Mr Clode to become involved in the development again. Mr Jans also suggested to Mr Sullivan that he sell his interest in Box Property so that Mr Jans could enter into a 50/50 partnership with Mr Clode. Neither Mr Clode nor Mr Sullivan was interested in working with each other.
[11] Later in 2013 a new company was established by Mr Jans. Thompson Park Holdings Ltd purchased the Thompson Park Road property for $4 million. It obtained funding from a second-tier financier. Mr Sullivan was not involved in the purchase. Mr Jans and Mr Clode did further development work which included obtaining resource consent for an extra 13 units. The financier’s loan fell due in April 2014. That financier assigned its rights under the loan secured by mortgage to
another financier. That new financer served a notice under s 119 of the Property Law
Act 2007 in June 2014. Mr Jans could not obtain finance.
[12] At this stage, certain documents were prepared. First, there was what is called a professional services agreement by the company in favour of Mr Clode. That was made in June 2014 but was backdated to September 2013. This was intended to show that Mr Clode had “intellectual property” in the development. I use the term “intellectual property” as a term of art, as used by developers. It is not “intellectual property” in the sense understood by lawyers and patent attorneys. Thompson Park Holdings was to pay Mr Clode $5,000,000.00 plus GST plus interest for his intellectual property. There was another professional services agreement, this time in favour of Synergy Management Ltd. Under this agreement, Synergy (rather than Mr Clode) held the intellectual property. $5,000,000.00 was due to the company instead of to Mr Clode. That was backdated to 16 December 2013. Palmer J found that the purpose of these professional services agreements was to “run interference” with any intended mortgagee sale. They were intended to show securities against the title in place before the securities given in favour of the financier.
[13] At the time, Thompson Park Holdings’ contractor had stopped work and there were other creditors pressing for payment. Mr Sullivan came to the rescue. There were negotiations between Mr Sullivan and Mr Clode. Mr Clode offered his shareholding in the company and his intellectual property in the project. He used his professional service agreements, both to himself and to Synergy Management Ltd, as bargaining chips.
[14] An agreement was made on 3 July 2014. Under it, Mr Clode was to receive
$150,000 on settlement and $300,000 from the first drawdown of funding for the project finance, a unit in the development (which would be valued at $500,000 odd) and later a further $100,000. With that agreement, the trustees paid the debt to the financier, paid Mr Clode his $150,000 and paid off the other creditors of Thompson Park Holdings Ltd. They took over on 22 July 2014.
[15] Mr Clode sued for the payments to be made under the agreement. The Sullivan family trustees resisted, and alleged misrepresentation and breach of the Fair Trading Act by Mr Clode in respect of these professional service agreements. There were other issues. Palmer J found that the professional services agreements were shams and that the trustees had entered into the agreement with Mr Clode as a result of misrepresentations by him. He also found misleading and deceptive conduct under s 9 of the Fair Trading Act. He held that the trustees had validly and effectively cancelled the settlement agreement. He declared the agreement void as from 3 July 2014 under the Fair Trading Act and he ordered repayment of $150,000.
[16] The appeal against that judgment is in the name of both Mr Clode and Synergy Management Ltd. The company has, however, been removed from the register and is no longer an active party to the appeal. The notice of appeal sets out properly particularised grounds. Experienced counsel has been instructed for the appeal. The materials shown to me include the submissions for the appeal. They seem to be the result of careful thought and show properly developed arguments in support of the appeal.
Mr Clode’s financial position
[17] In April this year the creditors served on Mr Clode notice under r 17.10 of the High Court Rules. That notice required Mr Clode to complete and serve a statement setting out his receipts and payments for the last 52 weeks, assets and liabilities, income and expenditure and means of satisfying the judgment. A response was required within 10 working days. Mr Clode did not comply with the notice.
[18] In his first affidavit in support of the halt application, Mr Clode says that he is the development manager for apartments being constructed in Takapuna. He says that there are two six-storey buildings which are to have 92 apartments and are over a basement carpark. It is a $65 million project which is fully funded and has $40 million of pre-sales. He says that he is to be remunerated for his work as development manager at $300,000 a year. Payments are to be made when milestones are reached. In that affidavit he anticipated that the first drawdown would be about
$200,000 and he would be able to pay about $150,000 of that to the creditors. He
stated that he would be in a better position to pay the sum after the appeal has been heard, even if he was unsuccessful in his appeal. He says that the does not have any other creditors.
[19] Mr Clode could have helped his case if he had provided the information required under the r 17.10 notice. I do not regard the matters set out in his first affidavit as completely filling the gap. He has given more information in his updating affidavit in reply. He says that he has paid $100,000 into his solicitor’s trust account. There is an email from his solicitor confirming that $100,000 is called. The source of the funds is not stated. So far, neither Mr Clode nor his solicitor has given an undertaking that the funds will be held pending further order of the court. He also says that in July 2017 he was paid a further sum of $23,000 for his work on the Takapuna apartments. That has also been paid to his solicitor. That is apparently required to meet the costs of the appeal hearing. That evidence does not square entirely with his evidence in the first affidavit that he expected to be paid
$200,000. As Mr Pascariu pointed out, an unsatisfactory aspect is that Mr Clode did not make good on the arrangement made on 25 July to pay the judgment sum into court. The kindest explanation for Mr Clode is that he was unable to do so.
[20] In his reply affidavit, he says that he has interests in two properties in Grey Lynn. These interests are under a trust. He says that the value of these properties after mortgages are taken into account is $667,000 and he is entitled to a half interest
– approximately $233,000. While he has attached some information as to the values of the properties, he offers no independent evidence of the trusteeship or his interest in the properties.
[21] Mr Clode has an associate, Mr Lance Gilbertson, who says in an affidavit that he wants to help Mr Clode. He says that he is the beneficiary of his late father’s estate. Probate was granted in July this year for his father’s will. He died on 25 June
2017. Mr Gilbertson is one of the executors. He expects to receive a very substantial distribution from his father’s estate. The estate will not be distributed yet for the usual reasons under ss 47 and 48 of the Administration Act 1969. But Mr Gilbertson is prepared to pay $100,000 if the appeal by Mr Clode fails. The payment would be within five working days of the Court of Appeal giving its
decision. That is not set out as a distinct undertaking in Mr Gilbertson’s affidavit but
during the hearing I was advised that that is what Mr Gilbertson was prepared to do.
[22] The thrust of those submissions was to show that even if Mr Clode’s appeal were to fail, the creditors still had good prospects of being paid most if not all of the judgment. It shows that $100,000 will be held in a solicitor’s trust account and a further $100,000 will be covered by an undertaking from Mr Gilbertson. Mr Clode suggests that his work on the Takapuna apartments will generate enough income to allow him to meet any further outstanding amount under the judgments, even when costs orders are also made.
[23] Against that, the assurances still have to be treated with some caution, given the fact that Mr Clode did not perform in the way that he indicated under the arrangement for this case to be adjourned in July 2017.
Principles applied in applications under s 42 of the Insolvency Act
[24] In Yeoh v Al Saffaf2 Associate Judge Doogue identified some factors as relevant. That case was decided under s 26 of the Insolvency Act 1967 but the principles he identified remain relevant under s 42 of the 2006 Act. He referred to these:
(a) the bona fides of the debtor in prosecuting the appeal;
(b)the merits of the appeal are generally not an appropriate matter for the court to consider unless the court is of the view that the appeal has absolutely no prospect of success;
(c) whether the stay of the proceeding would unduly harm the creditors;
(d)what stage the appeal has reached and whether there has been a delay in prosecuting the appeal; and
2 Yeoh v Al Saffaf HC Auckland CIV-2006-404-1164, 21 June 2006.
(e) whether the bankruptcy proceeding may render the appeal nugatory.
[25] Those principles were followed in Re Pillay ex parte ANZ National Bank Ltd3 and Re Wright ex parte Health Distributors Ltd.4 In the Pillay case Associate Judge Faire noted that the power to halt under s 42 involves a discretion similar to the power to give interim relief pending an appeal under the Court of Appeal (Civil)
Rules. He noted that the overall balance of convenience counts. He also noted other factors such as the effect on third parties, the novelty and importance of the question on appeal and the public interest in the proceeding. I do not regard those last matters as having any relevance in this case.
Applying the principles in this case
[26] It is a common feature of applications under s 42 that the debtor who is appealing is not able to pay the judgment debt. That requires the halt application to be considered on the basis that if the appeal fails the debtor will remain insolvent. There is a countervailing consideration in this case. If Mr Clode does succeed on his appeal, not only will the creditors lose their standing to apply for his adjudication in bankruptcy, but they will become debtors of Mr Clode. The amount which Mr Clode is claiming under the agreement of 22 July 2014 far exceeds any orders for costs for which Mr Clode might remain liable, even if his appeal succeeds.
[27] As to the merits of the appeal, I follow the approach that a consideration of the merits is not appropriate at this level unless I can be satisfied that the appeal has absolutely no prospect of success. I have not analysed the submissions in support of the appeal with great attention, but on my rather light reading of them, I am satisfied that proper care has been taken to present reasoned arguments in support of the appeal, prepared by experienced counsel. I cannot say that Mr Clode’s appeal has no prospect of success at all.
[28] Mr Pascariu referred me to passages in the judgment of Palmer J which he said would give the creditors additional grounds for supporting the judgment. While
3 Re Pillay ex parte ANZ National Bank Ltd HC Auckland CIV-2009-404-4175, 2 December 2009.
4 Re Wright ex parte Health Distributors Ltd HC Hamilton CIV-2010-419-121, 5 November 2010.
there might be something in the point, Mr Pascariu’s submissions do not take me to the stage where I am satisfied that those were clinching arguments which would doom the appeal.
[29] The effect of adjudicating Mr Clode bankrupt now rather than awaiting a decision of the Court of Appeal is highly relevant. If Mr Clode is bankrupted today, his assets will vest in the Official Assignee (apart from any held in trust). Those assets include his right of appeal. It will be open to the Official Assignee to review the case. From what I have seen of similar cases, the Official Assignee at Auckland takes advice on pending proceedings including pending appeals, and considers carefully whether to continue with the appeal or not. The appeal from Palmer J’s judgment is complex. Any lawyer instructed to review the matter for the Official Assignee is going to require time to go through the papers carefully to evaluate whether it is worthwhile for the appeal to be continued. The inevitable effect is that the hearing in early September in the Court of Appeal would have to be vacated. If it is decided to continue with the appeal a fresh fixture in the Court of Appeal might not be available for another six months. That delay would be unsatisfactory when compared with the advantages of a prompt hearing within three weeks. That assumes, of course, that there would be an adjournment. If an adjournment were not granted, then Mr Clode’s appeal would fail and that failure could mean that the bankruptcy would have made the appeal nugatory. There is a reasonably serious risk of that occurring.
[30] The creditors are critical of the steps taken by Mr Clode in prosecuting the appeal. They suggest a lack of good faith on the part of Mr Clode. They allege delay in prosecuting the appeal. Mr Clode was one day late in filing the appeal but he says that was a problem with couriers. An extension of time for the appeal was granted without opposition from the creditors. I do not regard that lateness as fatal to Mr Clode’s case. He was also late in paying the security for costs. He paid only after being chivvied by the creditors. But that delay is not critical to the conduct of the hearing in the sense that it did not delay a hearing being allocated. Mr Clode filed his case on appeal on the last day allowed under r 40 of the Court of Appeal Rules. The creditors say that shows a lack of effort by Mr Clode. I do not accept that. The critical timing element is the date for filing the case on appeal. So long as
it is brought within three months of the appeal being filed, it is within time. It does not matter whether the debtor files it on the last day. I cannot see from those circumstances any lack of good faith on the part of Mr Clode. Instead, it seems to me that Mr Clode is strongly motivated to proceed with the appeal. He has incurred substantial fees which he has paid. He seems to be strongly motivated to have the case heard because he considers there are good prospects of him not only being released from the debt but also obtaining judgment against the creditors. That suggests that he is not running the appeal simply as a stalling device.
[31] The creditors make the point that Mr Clode does have a poor record. He has been bankrupted once. He has been associated with failed companies and financial failures. There is a judgment against him showing that he has used sham documents. There is other litigation in which he has been found to have misused the process of the court.5
[32] I accept that Mr Clode has a bad business reputation and he has a record for taking part in questionable transactions. But even shady characters are entitled to appeal. It is not reserved for the righteous. I do not find a lack of good faith by Mr Clode in pursuing his appeal.
[33] The appeal will be heard in some three weeks’ time. The Court of Appeal will no doubt need time to consider the appeal. A decision on the appeal is likely to be available within the next three months. I do not consider that that delay would work an undue prejudice to the creditors. If Mr Clode were adjudicated bankrupt now, his creditors might obtain the $100,000 which is in his solicitor’s trust account. They may have to share part of that with the lawyers who have done further work on the appeal and also the Official Assignee’s costs will be taken out. If the creditors are required to wait, and they still succeed on the appeal, they will be assured of the payment of the $100,000 and also the further $100,000 promised by Mr Gilbertson. That seems to be a better deal for the creditors than an immediate order for
adjudication.
5 Fern Ltd (in liq) v Financial Trust Ltd HC Auckland CIV-2009-404-4055, 30 November 2010 at
[72].
[34] The creditors submit that they are entitled to the fruits of their money judgment. But in seeking his adjudication they are not seeking the fruits of their judgment. Instead they are trying to impose on Mr Clode the consequences of his not being able to meet the judgment. There is a difference between execution of judgment and applying for adjudication in bankruptcy because of insolvency.
Outcome
[35] In all the circumstances I do not see any serious prejudice to the creditors if the adjudication application is put on hold to await the outcome of the appeal. In these circumstances I order a halt under s 42. That halt applies subject to certain conditions which need to be satisfied first.
[36] The first is that Mr Clode is to give his solicitor an irrevocable instruction not to release the $100,000 paid into the trust account without the consent of the creditors or an order for the court. The solicitors are to give their own undertaking to the court and to the creditors to hold the funds pending agreement of the parties or further order of the court.
[37] In addition, Mr Gilbertson is to give an undertaking, in enforceable form, that if Mr Clode fails in his appeal, Mr Gilbertson will pay the creditors $100,000 within five working days of the Court of Appeal giving its decision.
[38] To allow those conditions to be satisfied, I adjourn this application until Thursday 24 August 2017 at 11:45am. The undertakings required are to be put in place by 23 August 2017. The case is to be called on 24 August 2017 to ensure that those undertakings are all in place. I will not be sitting on 24 August 2017, but I trust this decision will be clear enough to the parties and to the Judge who sits that it will be straightforward to check that those conditions have been met.
[39] I reserve leave to the parties to apply for this proceeding to be re-listed once the Court of Appeal has given its decision on Mr Clode’s appeal or if his appeal is abandoned or dismissed.
[40] Costs on this application are reserved, to await the ultimate outcome of the appeal. I regard this matter as one where a decision of the court was required. It is understandable that the creditors treated the halt application with some wariness. The court’s consideration was required.
……………………………….
Associate Judge R M Bell
3