Synnott v Wood
[2014] NZHC 1705
•21 July 2014
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2014-409-000200 [2014] NZHC 1705
IN THE MATTER OF the Insolvency Act 2006 AND
IN THE MATTER OF
the bankruptcy of LEON DEREK WOOD
BETWEEN
RICHARD JEFFREY SYNNOTT and TONY WILLIAM WHITE (as trustees of the R J Synnott No 2 Family Trust) Judgment Creditors
AND
LEON DEREK WOOD Judgment Debtor
Hearing: 17 July 2014 Appearances:
L D Wood (Judgment Debtor) as Applicant in Person
G M Downing and G C Engelbrecht for Judgment Creditors
(Respondents)Judgment:
21 July 2014
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
as to application to set aside bankruptcy notice
Introduction
[1] The judgment creditors obtained a judgment against the judgment debtor, Mr
Wood, upon formal proof on 3 April 2014. The judgment debt is $22,837.84. [2] The creditors issued a bankruptcy notice.
[3] Mr Wood applies for an order setting the bankruptcy notice aside.
SYNNOTT v WOOD [2014] NZHC 1705 [21 July 2014]
Setting aside of bankruptcy notice – the jurisdiction
[4] The Court’s jurisdiction to set aside a bankruptcy notice arises under s 17
Insolvency Act 2006.
[5] In order to avoid committing an act of bankruptcy, the debtor may file an application in order to satisfy the Court that he or she has a cross-claim against the creditor. “Cross-claim” is defined in s 17(7) to mean a counterclaim, set-off, or cross demand that is equal to or greater than the judgment debt which the debtor could not use as a defence in the proceeding in which the judgment was obtained.
[6] In dealing with an application to set aside a bankruptcy notice, the Court retains its inherent jurisdiction to prevent abuse of process. I adopt the conclusion of Master Kennedy-Grant in the leading decision on this aspect of jurisdiction, Re Wise.1 His Honour concluded:2
(a) I do have jurisdiction to grant relief to the debtors;
(b) The jurisdiction is the inherent jurisdiction of the Court to control the abuse of its process;
(c) The grounds on which the jurisdiction may be exercised are:
(i) procedural defect in the obtaining of the judgment in which the bankruptcy notice is based; and/or
(ii) the existence of arguable grounds of defence to the claim for which judgment was given;
(d) The grounds on which the jurisdiction may be exercised may extend beyond those stated in (d) to any ground on which the Court feels it necessary to intervene to prevent injustice but I make no finding on that point in this judgment;
(e) The correct procedure for invoking the inherent jurisdiction of the Court is not the filing of an affidavit under rule 41 but the filing of an interlocutory application to set aside the bankruptcy notice on one of the ground stated in (c) above or, possibly, the broader ground stated in (d) above;
1 Re Wise (alt cit Re Wise ex parte Benecke) HC Auckland B227/95, 21 June 1995.
2 At 6.
[7] Re Wise has been consistently recognised and applied.3
Grounds of Mr Wood’s application
[8] Mr Wood identifies two sets of grounds in his application.
[9] First Mr Wood says that he has a counterclaim which exceeds the judgment debt and which he could not use as a defence in the proceeding in which the judgment was obtained. He says that his counterclaim is of about $50,000.00 and that it could not be used as a defence because he could not access his records of work for the Trust of which the judgment creditors are the trustees.
[10] Mr Wood’s second ground is that it would be an abuse of process were the creditors to rely on the bankruptcy notice because there was a defect in the process or an arguable defence to the claim in the creditor’s proceeding. He offers three particulars of that ground, namely –
(a) There was a defect in the process because judgment was entered by formal proof when the matter was set down for timetabling and not formal proof as required under the High Court Rules.
(b) Mr Wood had signed a document retiring as a trustee on
4 September 2013 with the result that there was no need for the creditors on 19 September 2013 to commence the proceeding by which they, interlaid, applied to have Mr Wood removed as a trustee.
(c) A caveat placed over the property of the Trust was placed through the mistake of a third party and the applicant did not misconduct himself in the administration of the Trust to obtain a personal advantage.
I will discuss these three particulars under separate heads.
3 For a recent case see Re Dench, ex parte Gates [2013] NZHC 1133 at [9] per Associate Judge Bell; see also the commentary in Insolvency Law and Practice (online looseleaf ed, Brookers) at [IN 17.11].
Ground one – a cross-claim against the creditors
The specific claim
[11] Mr Wood asserts a counterclaim of about $50,000 for services to the trust of which the creditors are the remaining trustees.
[12] Mr Wood was a trustee of the R J Synnott No 2 Family Trust. Messrs Synnott and White (now the creditors in this proceeding) were co-trustees. They filed a proceeding in this Court in 2013 seeking orders for the removal of Mr Wood as a trustee and for damages for breach of trust. The claim for breach of trust related to an agreement which Mr Wood entered into with a personal creditor. As a form of security for payment of a debt, Mr Wood agreed that the creditor could caveat the title to the trust property, which subsequently caused problems for the trust. After the creditors issued their trustee proceeding, Mr Wood then resigned as trustee. Messrs Synnott and White obtained on formal proof the damages judgment which creates the judgment debt owed by Mr Wood.
[13] Mr Wood has deposed that as trustee he did a lot of work over a period of eight years. In his affidavit he identifies a number of activities he undertook as trustee. Over the years he had neither charged for nor received money for those activities. In September 2013 he was contacted by a solicitor from the firm who acted for the Trust (McFadden McMeeken Phillips) who indicated that the other trustees wanted Mr Wood off the Trust because he had breached the Trust Deed in relation to the lodging of a caveat over Trust property (to which I will return below at [65]). In his affidavit Mr Wood explains his reaction and the way in which he then calculated a $50,000.00 claim –
I was very upset and said I will raise an invoice for my work for that whole period of 8 years or so that I had been working for the Trust remembering that Richard [Synnott] had said I will not do this work for nothing. There will be some financial benefit for me. I sent the invoice to McFaddens. This invoice was for about $50,000 which I calculated as roughly how much time I had spent each week working for the Trust over the years at a reasonable hourly rate for my services. I wasn’t happy because I had a long history together with Richard and Richard had had his assets stabilised and made money and someone else had made the mistake not me and now I was being kicked off the Trust for something I did not do.
Discussion – a right to remuneration for services?
[14] Mr Wood’s claim for $50,000.00 is predicated on an entitlement to be remunerated out of trust funds for services as trustee. Mr Wood deposes (in the passage I have quoted) that the $50,000.00 claim is based on a reasonable hourly rate for those services.
[15] Section 38(2) Trustee Act 1956 is a statutory enactment of the equitable non- profit rule for trustees. It provides:
(2) A trustee may reimburse himself or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers; but, except as provided in this Act or any other Act or as agreed by the persons beneficially interested under the trust, no trustee shall be allowed the costs of any professional services performed by him in the execution of the trusts or powers unless the contrary is expressly declared by the instrument creating the trust:
Provided that the court may on the application of the trustee allow such costs as in the circumstances seem just.4
[16] The R J Synnott No 2 Family Trust Deed, dated 22 September 2004, has a provision in its Schedule of Trustees’ Powers to employ people to do work and specifically provides:
… any trustee other than the Settlor (being a person engaged in any profession or business) may be so employed to act and that trustee or the Trustees’ firm is entitled to charge and receive all usual professional and other charges for work done by the trustee or the Trustees’ firm in connection with the Trust Fund including acts which the Trustees could have done personally.
[17] Mr Wood was a person engaged in business. Mr Downing accepts that it is at the very least arguable that the trustees were empowered to employ him to undertake
trust work.
4 For the equitable non-profit rule see Robinson v Dett (1734) 3 P Wms 249, 24 ER 1049 (Ch);
Contradictors v Attorney General [1999] 2 NZLR 523 (CA) at [9], per Richardson P.
[18] In his affidavit, Mr Wood gives evidence of numerous activities he undertook on behalf of the trust over a period of some eight years. His evidence appears to point towards a limited understanding of any right of the trustees to be remunerated but he deposes:
… Richard [Synnott] said I will be looked after later on. I said that’s fine.
[19] Mr Wood’s evidence concludes in relation to the topic of financial
compensation:
… I put a lot of time and thought into the Trust. I never actually charged the Trust a bill though until this dispute blew up. I did a lot of work for Richard and that takes time away from work I could have been doing for myself.
[20] Messrs White and Synnott both filed affidavits in opposition. Under the heading “No trustee remuneration” they chose to give evidence in the same terms which read identically in both affidavits:
3.The Trustees of the Trust have not authorised any Trustee to be remunerated, nor has any Trustee ever sought remuneration from the Trust.
4.The Trustees of the Trust have never amended the Trust Deed to allow a Trustee to be remunerated for the provision of the type of services now claimed by Leon Wood. The Trustees of the Trust have never approved by Trustee Resolution that any Trustee may be remunerated by the Trust for any reason whatsoever.
5. The extent of Leon Wood’s involvement with the Trust was limited
to signing several Trust documents. …
[21] I find these paragraphs unsatisfactory in a number of ways. First, Messrs Synnott and White suggest on oath that there was no provision in the trust deed for remuneration of trustee work of the kind identified by Mr Wood, when there plainly was. Secondly, the focus on a “trustee resolution” is not helpful when Mr Wood’s evidence relies solely on statements made by Mr Synnott.
[22] Thirdly, the statement that no trustee has ever sought remuneration from the Trust is plainly incorrect because Mr Wood, in September 2013, did precisely that – I infer that Messrs Synnott and White were rather intending to suggest that Mr Wood’s September 2013 request is the only such request.
[23] Fourthly, the bald statement that “the extent of Leon Wood’s involvement with the trust was limited to signing several trust documents” was an inadequate response to Mr Wood’s sworn evidence as to a number of specific activities beyond the signing of documents.
[24] In the present context it must be concluded that Mr Wood has an arguable case that he rendered services to the trust of a kind for which the trustees were entitled to remunerate him.
[25] The more problematic issue on Mr Wood’s evidence is whether the trustees employed him to attend to those (arguable) activities for the trust. For a commitment to payment, Mr Wood refers only to discussions of Mr Synnott. In their evidence, both Mr Synnott and Mr White deny that there was ever an agreement that a particular trustee would receive remuneration.
[26] In his evidence, Mr Wood relies solely upon discussions with Mr Synnott. Given the need for trustee unanimity there is an obvious difficulty with his claim for remuneration. But in the present context, I cannot be sure that it is hopeless. There is a lack of detailed evidence at this point. The incomplete understanding of the parties about rights for trustees to be remunerated is reflected both in their evidence and in the fact that the Trust Deed clause permitting trustees to be employed for remuneration was not mentioned.
[27] The focus in the Trust Deed provision is on the employment of a trustee (with a right to receive usual charges for work done) then flowing. It may be established on fuller evidence that the sort of formal resolution which Mr Downing was adverting to in his submissions was not a realistic step in relation to day-to-day decisions of the trust. It may be that the way in which the trust was run left Mr Synnott from time-to-time to arrange matters of employment. Nothing in the evidence filed assists me in reaching any conclusive view as to whether Mr Wood was employed to act at any point on the trust’s business. If he was, then under the charging clause he is permitted to claim usual charges for the work done.
[28] I recognise that on Mr Wood’s own evidence, and in particular the absence of any suggestion that Mr White was directly involved in any discussion as to Mr Wood’s remuneration, that the best ultimate finding in favour of Mr Wood might be that Mr Synnott unilaterally made commitments to Mr Wood as to payment. That might leave Mr Wood with enforceable rights against Mr Synnott personally but would not assist him in a claim against the trust. Such complications are a matter for a later substantive determination if claims are pursued.
[29] For now, the correct conclusion is that for some period of his trusteeship, Mr Wood may have an arguable claim that he was employed and thereby entitled to be paid.
[30] In the course of his oral submissions (although not of his written synopsis), Mr Downing submitted that even were Mr Wood to have a factual basis for a cross- claim, the Court would have had to deny him any relief. Mr Downing relied upon the principle that a fiduciary who breaches fiduciary obligations to a beneficiary disentitles himself or herself to remuneration even if the beneficiary had the benefit of the services and suffered no loss.
[31] In the circumstances of this case, where Mr Wood appears in person, I am not prepared to consider this further submission against Mr Wood’s interest. The trustees already have their judgment for the compensation they pursued. If Mr Wood was at some earlier point employed by the trust and had an accrued right to charge for that work there may be arguments deployed to justify the retention of Mr Wood’s entitlement and the Court in its equitable jurisdiction may have discretions to exercise. This summary context, with relatively limited evidence and a respondents’ argument which was not foreshadowed, is not the forum in which to resolve the permeations raised by Mr Downing’s submission.
Discussion – a genuinely triable claim
[32] For a cross-claim to be recognised in this jurisdiction the debtor must demonstrate that he or she has a cross-claim of true substance which he or she
genuinely proposes to pursue: Sharma v ANZ Banking Group (NZ) Ltd.5
[33] Mr Wood’s invoice for services to the trust, presented in September 2013, could be supportable only if an application were made to the Court under s 38(2) Trustee Act 1956. Mr Wood’s failure to make an application to the Court in the six months before the bankruptcy notice was served and his continuing failure thereafter preclude the conclusion that the claim is genuine. The circumstances indicate that it is being enunciated as an argument to stave off bankruptcy rather than as a claim which is to be genuinely pursued because of a real prospect of a recovery.
[34] This inference from Mr Wood’s inactivity subsequent to judgment is
reinforced by his ploy when he was served with the trustee proceedings in November
2013. Mr Wood sent Mr Synnott a text on 7 November 2013 in which he referred to
the proceeding issued by the creditors’ solicitor:
He is sueing (sic) he drops it or Ill (sic) put a claim for trustee fees of
$50,000 plus GST.
[35] The threat in the text was a tactic which failed.
Discussion – an inability to pursue the cross-claim in the 2013 proceeding?
[36] Any cross-claim which Mr Wood might assert would fail to meet the requirements of s 17(7)(b) of the Insolvency Act because Mr Wood had ample opportunity in November 2013 before the formal proof hearing to bring an application under s 38(2) of the Trustee Act. He could have pursued the cross-claim he now asserts.
[37] The relevance of inability to use a defence was described by Tipping J in
Hardie v Booth6 in these terms:7
The inability of which [the provision] speaks is primarily a legal inability. Factual inability is also available but that requires some cogent circumstance.
5 Sharma v ANZ Banking Group (NZ) Ltd (1992) 6 PRNZ 386 (CA) at 389, per Cooke P.
6 Hardie v Booth [1992] 1 NZLR 356 (HC).
7 At 362.
[38] Mr Wood was in a position both legally and factually in November 2013 to pursue his request for costs. He could have done so in the very same trustee proceeding by a cross application. That is indicated by his evidence sworn for this proceeding – he deposes that the $50,000.00 figure in his November 2013 invoice came about because that was his rough calculation based on the time spent each week at a reasonable hourly rate. Mr Wood further deposes that he experienced difficulties getting access to records relevant to his work for the trust. But such shortage of documentation could go only to the ultimate proof of his claim and not to the initial mounting of the claim. The fact that Mr Wood produced an invoice for the very sum he now asserts as a cross-claim and presented it to the trustees in November 2013 establishes the ability he had to make a claim at that time.
[39] Mr Wood’s cross-claim, even if genuinely triable, would not constitute a cross-claim in terms of the definition under s 17(7)(b) of the Insolvency Act.
Ground two – inherent jurisdiction – defect in the process
The specific ground
[40] Mr Wood asserts that there is a defect in the Court’s process because the creditors obtained judgment by way of formal proof when the matter was set down for timetabling and not formal proof as required under the High Court Rules.
What happened
[41] The creditors, in their trustee proceeding had asserted breaches of trust on the part of Mr Wood. By way of relief they sought his removal as trustee and damages flowing from the breaches.
[42] Mr Wood then resigned as trustee, obviating the need for an order removing him.
[43] Mr Wood did not file a defence or enter any other formal appearance. He wrote to the Court advising that he had been prevented by his brother from having access to a storage unit which meant that he had not been able to obtain documents
which he required. The letter said that some of the allegations in the statement of
claim were untrue. He also recorded that he had “lodged a claim for my services”.
[44] Associate Judge Matthews issued a Minute on 12 February 2014 in which his
Honour recorded:
The appropriate course is for the plaintiffs to decide whether they wish to seek judgment by one of the means that apply when a statement of defence has not been filed, and whether, given the email from Mr Wood, it is appropriate to do so.
In the meantime I direct that the case will be listed for a call in the
Insolvency and Civil List in the High Court at Nelson on 3 April 2014.
[45] At that point r 15.9 High Court Rules applied to the proceeding as Mr Wood had not filed his statement of defence.
[46] The trustees, having received the Associate Judge’s Minute, determined to proceed by way of formal proof. Counsel filed a memorandum to that effect with an affidavit (of Tony White) as required under r 15.9(4). The affidavit detailed the breaches relied upon by the trustees and the losses of $22,837.84 resulting from the breaches.
[47] The proceeding came before Associate Judge Matthews as listed on 3 April
2014. Notwithstanding Mr Wood’s failure to file a defence or to seek leave to be heard Mr Wood appeared at the hearing on 3 April 2014 and his Honour allowed Mr Wood to address him. In Reasons for Judgment delivered by Associate Judge Matthews that day8, his Honour recorded that Mr Wood had made statements to the same effect as his earlier letter to the Court. His Honour found that the plaintiffs were entitled to judgment by formal proof. Judgment was entered for the plaintiffs in the sum of $22,837.84 (inclusive of costs).
Discussion
[48] Mr Wood asserts that the judgment by formal proof came about through a defective procedure because the proceeding was listed for timetabling and not for
formal proof.
8 Synnott v Wood CIV-2013-442-302, 3 April 2014.
[49] In fact the proceeding was not listed “for timetabling”. Rather it was directed to be called in the April List on 3 April 2014. The Associate Judge’s Minute of
12 February 2014 made it clear that in the meantime the plaintiffs would need to decide whether they wished to seek judgment by one of the means which apply when a statement of defence had been filed.
[50] The plaintiffs elected to take the formal proof course prescribed by r 15.9
High Court Rules and filed their memorandum and evidence accordingly. From that point the listing was for formal proof purposes.
[51] There is no merit in Mr Wood’s assertion of a defective process either in the
literal terms of the rules or in the substance of the process.
[52] Had there been a failure to meet the procedural requirements of r 15.9(2), then r 1.5(1) High Court Rules would require the failure to be treated as an irregularity and not as a matter nullifying the judgment. There is nothing in the merits of Mr Wood’s position to require the Court under r 1.5(2) to make an order altering the effect of the judgment.
Ground three – inherent jurisdiction – unnecessary proceedings
The specific ground
[53] Mr Wood asserts that as he had signed a document retiring as trustee on
4 September 2013 there was no need for the trustee proceedings to be issued which was done on 19 September 2013.
[54] Mr Wood explains this proposition in his affidavit. He deposes that he had on
4 September 2013 signed the Deed of Retirement. He deposes that:
I was waiting for a letter from the other trustees to come to me in writing to ask me to resign. I thought this was the proper way for it to be sorted.
[55] Mr Wood goes on to depose that he told the other trustees’ lawyers (“McFaddens”) that he was holding a signed copy and was just waiting for the letter of request from the trustees.
[56] Mr Wood deposes that on 17 September 2013 he received by email a further letter from McFaddens enclosing the Deed of Retirement and further documents for signature. He was requested to provide the documents within the next five working days. McFaddens’ letter said that the trustees were going to have to consider caveat proceedings and Trustee Act proceedings for his removal if the documents were not returned within five working days.
[57] Mr Wood deposes that he emailed the documents back to McFaddens on
20 September 2013.
[58] Mr Wood says that he does not know why the trustees continued with the High Court proceedings at that point as he had resigned. Mr Wood adds that the trustees may still have wanted damages from him but that he had not been served with any amended statement of claim to that effect.
What happened
[59] Mr White has attached the full email correspondence exchange from
10 September 2013. That material reveals that Mr Wood had failed to exhibit in his evidence a number of documents by which he was seeking to impose further requirements on the trustees or their solicitor. For instance, on 17 September 2013
Mr Wood emailed McFaddens stating that he would not sign a Deed of Retirement unless he received an apology from the trustees’ solicitor. McFaddens were having to deal not only with the trustee retirement issue but also the caveat affecting the trust’s property. McFaddens, on 19 September 2013, sent a letter to Mr Wood responding to his earlier correspondence. They stated that High Court proceedings had been commenced for Mr Wood’s removal as a trustee and that the caveat lapsing procedure had been initiated.
[60] It was the following day (20 September 2013) that Mr Wood emailed copies of an executed Deed of Retirement.
[61] The High Court proceeding was then served upon Mr Wood. He subsequently provided the original copy of the executed Deed of Retirement to McFaddens.
[62] It will be rarely if ever that an insolvent has a bankruptcy notice set aside on this ground advanced by Mr Wood. Through the trustee proceeding the creditors obtained the judgment for damages on which they now proceed. The time to raise arguments as to any unnecessary aspect of the trustee proceeding was in that proceeding.
[63] In any event, when all the evidence is considered, Mr Wood has not established the basic proposition that the trustee proceeding was unnecessary. The full correspondence shows that there is no merit in Mr Wood’s criticism of the trustees for commencing their proceeding when they did. Any earlier date on which Mr Wood may have signed the Deed of Retirement does not assist him, given that he did not release the document. Indeed the fact that he appears to have then retained the executed deed for more than two weeks before providing it to the trustees would count against him in the exercise of any discretion.
[64] The creditors were plainly entitled to commence their trustee proceeding when they did. No abuse of process was involved at the time. There is no abuse of process relevant to the present proceeding.
Ground four – inherent jurisdiction – mistake in the lodging of the caveat
Mr Wood’s ground
[65] Mr Wood asserts that the caveat which was placed over the trust’s property was placed as a result of a mistake in his lawyer’s drafting of the caveat arrangements under the settlement agreement which Mr Wood entered into with another creditor. Mr Wood says that he did not misconduct himself in the administration of the trust to obtain a personal advantage. In short, Mr Wood’s proposition is that any personal advantage he obtained in relation to trust property came about accidentally.
[66] What Mr Wood seeks to establish under this head, when properly analysed, is the consideration of a defence which he might have raised in the trustee proceeding. By their statement of claim the trustees had particularised their allegations of breach of trust and had sought relief including by way of damages for losses suffered as a result of Mr Wood’s actions. The explanations (mistake and absence of misconduct) which Mr Wood now seeks to put forward are the very matters which should have been pleaded as defences if they were to be pursued.
[67] The judgment obtained by the plaintiffs on 3 April 2014 precludes Mr Wood’s present attempt to rely on matters in the nature of a defence. There is no suggestion that Mr Wood has filed an appeal in relation to the judgment.
[68] It is not an abuse of process for the creditors issue a bankruptcy notice in reliance upon the unsatisfied judgment.
[69] Given this finding it is unnecessary that I further consider the evidence of Messrs White and Synnott who challenge Mr Wood’s explanation of the mistake which he asserts occurred in relation to the caveat. If necessary, I would have concluded that their evidence does not clearly establish that Mr Wood deliberately caused a caveat to be lodged over the trust’s land for his own benefit. Mr Wood’s evidence is contrary, with some documentary support. Those, however, are matters in the nature of defence allegations which Mr Wood ought to have brought to bear in the trustee proceeding. I do not need to determine whether there is any substance in Mr Wood’s explanation of his conduct and I do not do so.
Costs and disbursements
[70] Costs and disbursements must follow the event.
Orders
[71] I order:
(a) The judgment debtor’s interlocutory application dated 8 May 2014 is dismissed.
(b)The time for payment of the debt referred to in the Bankruptcy Notice dated 10 April 2014 is extended to 1 August 2014.
(c) The judgment debtor is to pay to the judgment creditors the costs of the proceeding on a 2B basis, together with disbursements to be fixed by the Registrar. I certify for the reasonable costs of travel and accommodation of counsel for the judgment creditors.
Associate Judge Osborne
Solicitors:
McFadden McMeeken Phillips, Nelson
L D Wood (in person).