Waitomo Adventures Ltd v O'Hagan
[2014] NZHC 247
•21 February 2014
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CIV-2013-419-822 [2014] NZHC 247
UNDER THE Insolvency Act 2006
IN THE MATTER of a Bankruptcy
BETWEEN WAITOMO ADVENTURES LIMITED Judgment Creditor
ANDBRENT O'HAGAN Judgment Debtor
Hearing: 14 February 2014
Appearances: Mr T Braun for Judgment Creditor
Mr Hayes for Judgment Debtor
Judgment: 21 February 2014
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
21.02.14 at 4.30 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
WAITOMO ADVENTURES LIMITED v O'HAGAN [2014] NZHC 247 [21 February 2014]
Background
[1] Waitomo Adventures Limited (”Judgment Creditor”), has applied to have Mr O’Hagan (“Judgment Debtor”), adjudicated bankrupt. The Judgment Debtor has opposed the application for adjudication. The following statement of the background to these proceedings is taken from the submissions made on behalf of the judgment creditor at the hearing before me on 13 February 2014. I consider that it accurately summarises the position:
1.The Judgment Debtor brought personal grievance proceedings against the Judgment Creditor in the Employment Relations Authority (“ERA”). The ERA ordered that the Judgment Creditor pay the Judgment Debtor $9,585.60, and that the Judgment Debtor pay the Judgment Creditor $17,995.00. The Judgment Debtor appealed to the Employment Court.
2.The Judgment Debtor was unsuccessful in the Employment Court proceedings. In a separate costs judgment the Judgment Debtor was ordered to pay costs to the Judgment Creditor of $72,229.77 (“Judgment Sum”).1
3. On 11 September 2013, the Judgment Debtor was served with a
Bankruptcy Notice.2
4.On 9 October 2013, the Judgment Creditor was served with the following documents:3
(a) Creditor’s Application for Adjudication Order;
(b) Affidavit Supporting Creditor’s Application for
Adjudication;
(c) Summons to Debtor; and
(d) Affidavit of Service of Toni Dawn Smillie.
5.On 5 November 2013, the Judgment Debtor filed a Notice by Debtor of Intention to Oppose Application.
6. The Judgment Debtor has raised four grounds of opposition:4
(a) The judgment of the Employment Court that gave rise to the debt for costs was obtained with false evidence. The Judgment Debtor has commenced proceedings in the Tauranga High Court alleging this, and seeking that the judgment be set aside (“High Court Proceedings”). This is
1 O’Hagan v Waitomo Adventures Limited [2013] NZEmpC 58.
2 Affidavit of Service of Toni Dawn Smillie dated 25 September 2013.
3 Affidavit of Service of Toni Dawn Smillie dated 16 October 2013.
4 Notice by Debtor of Intention to Oppose Application dated 6 December 2013.
an entirely separate proceeding, and the Judgment Debtor has not sought to appeal the Employment Court Judgment.
(b) The Judgment Debtor has complained to the police that Nicholas Andreef, the director of the Judgment Creditor, gave false evidence in the ERA and the Employment Court;
(c) The Judgment Debtor has complained to the New Zealand Law Society that Roger Clark, the barrister who acted for the Judgment Creditor in the Employment Court, acted corruptly. We note that this complaint was dismissed by the NZLS Standards Committee, and the Judgment Debtor has applied for a review of this determination to the Legal Complaints Review Officer (“LCRO”).
(d) The Judgment Debtor made a settlement offer to the Judgment Creditor which was more than the Judgment Creditor is likely to receive if the Judgment Debtor is bankrupted and therefore the Judgment Creditor is only applying for the adjudication to punish and humiliate the Judgment Debtor.
Relevant aspects of Bankruptcy Law
[2] The present proceeding involves consideration of ss 13, 17 and 36 of the
Insolvency Act 2006 (“the Act”). The first of these sections provides as follows:
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.
[3] An act of bankruptcy is committed in the following circumstances which are described by s 17 of the Act:
17 Failure to comply with bankruptcy notice
(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),—
(i) 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.
(5) In this section, a creditor who has obtained a final judgment or a final order includes a person who is for the time being entitled to enforce a final judgment or final order.
(6) In this section, if a Court has given permission for enforcing an arbitration award that the debtor pay money to the creditor,—
(a) final order includes the arbitration award; and
(b) proceedings includes the arbitration proceedings in which the award was made.
(7) In subsection (1)(d)(ii), cross claim means a counterclaim, set-off, or cross demand that—
(a) is equal to, or greater than, the judgment debt or the amount that the debtor has been ordered to pay; and
(b) the debtor could not use as a defence in the action or proceedings in which the judgment or the order, as the case may be, was obtained.
[4] In the circumstances of this case, there is no denial that a bankruptcy notice was allowed to expire and discharged. There is no cross-claim available to the Judgment Debtor. The next step involves consideration of the powers of the Court under s 37 of the Act where an act of bankruptcy has been proved. That section provides as follows:
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) or any other reason an order of adjudication should not be made.
[5] Section 38 of the Act provides:
38 Court may halt application
(1) The court may at any time halt the creditor's application for adjudication.
(2) The court may halt the application on the terms and conditions (if any), and for the period, that the court thinks appropriate.
[6] While the Act provides that the Court may halt an application at any time and on such terms and conditions as the Court thinks appropriate. There is no guidance in the section as to the circumstances in which the Court may order a halt. However, one of the circumstances in which a halt can be directed is where s 43 applies which essentially covers the situation where the Judgment Debtor denies that the debt is owing. The proceedings are halted in the insolvency Court to give the parties an opportunity to resolve at trial whether or not the debt is owed. In the circumstances of the present case, that section does not have any application because the question of whether the Judgment Debtor owes the amount claimed has been finally settled by a judgment in the Employment Court against which no appeal has been brought and in circumstances where the time has now expired.
The grounds upon which the Judgment Debtor seeks a halt or dismissal of the bankruptcy proceedings
[7] The case before the Employment Court which Mr O’Hagan brought was that there had been a constructive dismissal. Mr O’Hagan essentially claimed that he had exposed fraudulent conduct on the part of Mr Andreef and that he could no longer continue to be associated with the company because he would be implicated in the fraud which amongst other things would involve acting in a way that was inconsistent with the ethical requirements of a chartered accountant. For that reason he considered that he had no option but to resign.
[8] The Employment Court judgment criticised Mr O’Hagan for failing to follow proper processes when raising his concerns that there had been irregular transactions involving cash payments which the company received. The Employment Court dismissed the claim of constructive dismissal. Judge Inglis also found Mr O’Hagan to have breached his good faith obligation as an employee by failing to maintain a productive employment relationship and by undertaking a convert investigation.
[9] Mr O’Hagan claimed that at a meeting between the two men that took place in May 2009, Mr Andreef impliedly admitted (in substance) that there had been such irregularities but also told Mr O’Hagan that these occurrences were historical and that in future it would be necessary to do matters differently. Mr O’Hagan says that having heard that concession from Mr Andreef, the question of whether there had been fraudulent diversion of cash receipts was no longer a live issue and that from that point, he had no alternative but to resign because of his need professionally to distance himself from such conduct.
[10] I was told that at the hearing in the Employment Court Mr Andreef denied that he had diverted cash or extracted it from the company. He supported his position by giving evidence that he received monthly reports at the same time as Mr O’Hagan. Because the alleged irregular dealings required alteration to monthly reports to bring them into conformity with the state of the accounts after any money had been wrongly extracted, Mr Andreef’s position therefore was that he would not have had the opportunity to modify the accounts to conceal the withdrawals before
Mr O’Hagan saw them. Mr Andreef unequivocally denied that he had been involved in misfeasance.
[11] Mr O’Hagan’s view is that Mr Andreef gave false evidence in the Employment Court both on the issue of timing of the reports, which was subsidiary and indirectly relevant to the main fact dispute about whether he had actually taken money and also when he gave evidence concerning the main point and directly denied that he had diverted money.
[12] The statement of claim which Mr O’Hagan has filed in the High Court at Tauranga places emphasis on inconsistencies in the evidence that Mr Andreef gave between the hearing in the Employment Relations Authority (“ERA”) and that which he gave before the Employment Court. It is alleged that in the former hearing he accepted that he had received the reports before Mr O’Hagan did. The significance of this evidence was that, if correct, it acknowledged that he had an opportunity to “doctor” the financial records before other staff members saw them.
[13] The Judge in the Employment Court took a distinctly negative view of Mr O’Hagan’s conduct. In particular she was critical of the fact that right from the outset at the May 2009 meeting Mr O’Hagan had in his possession the results of a clandestine investigation that he had carried out. He did not disclose that at the May
2009 meeting.
[14] Because Mr Andreef was under time pressure when the May 2009 meeting took place, he invited Mr O’Hagan to resume the discussions subsequently. The position that Mr Andreef took was that he was perplexed by the allegations that Mr O’Hagan had made. Mr O’Hagan had made an outright accusation of fraud on the part of Mr Andreef. But even at later discussions between the two, Mr O’Hagan concealed from Mr Andreef the existence of his analysis which covered a period earlier in 2009. I interpolate that the investigations which Mr O’Hagan carried out were based upon the reservation’s records which the company maintained. This information was periodically deleted from the company system.
[15] Judge Inglis’ conclusion that Mr O’Hagan wrongly concealed the information that he had found by carrying out a covert investigation is clearly correct. Mr O’Hagan was employed by the company. Information which he located as a result of his work in the course of his employment belonged to the company. He was under an obligation to his employer to disclose fraud that he had detected. Mr Andreef was the relevant person to whom he ought to have reported the information. It was essential that he did so because there might have been an explanation for what he perceived as the irregularities with the company’s accounting. There might not have been any fraudulent diversion of funds at all.
[16] The Employment Court correctly considered it an open question whether there had been fraudulent diversion of funds and also, if there had been, whether it might have been attributable to some other employee of the company. The essence of the Court’s reasoning was that there was no justification why Mr O’Hagan should not have put his cards on the table with Mr Andreef.
[17] If Mr O’Hagan had done a competent job of investigation and if the data were as compelling as he considered them to be, there was no risk of Mr Andreef fobbing him off. If he had produced the information that he considered pointed to irregularities and did not receive a satisfactory explanation for it from the company, then he might have been obliged to resign and he might have been entitled to disclose to third parties that there had been fraud. But Mr O’Hagan was in breach of his obligations in refusing to supply the results of his investigation.
[18] Mr O’Hagan wishes to persevere with the task of showing that Mr Andreef committed fraud. He now seeks the opportunity to attack the Employment Court’s conclusions by referring to evidence of indirect relevance to the conclusion as to whether Mr Andreef committed fraud. What he wants to demonstrate is that in this subsidiary area, Mr Andreef gave false evidence and that therefore all the other evidence that he gave in the Employment Court, including the evidence refuting that at the first meeting he admitted fraud, was false.
[19] I have mentioned the alleged inconsistency between the evidence that
Mr Andreef gave in the ERA and the Employment Court. Mr Hayes who is counsel
was of the recollection that the Employment Court Judge declined to enquire into what had been said at the ERA and said that she was only interested in the evidence actually given before her.
The application to set aside
[20] The Judgment Debtor relies upon the ground that he is taking steps by way of an action brought in the High Court at Tauranga to set aside the judgment of the Employment Court on the grounds that it was obtained by means of fraudulent evidence which Mr Andreef gave to the Court. I propose to next consider whether this development in the case would justify the Court in making a halt order or alternatively declining to adjudicate Mr O’Hagan bankrupt on the grounds that it would not be just and equitable to do so.
[21] For present purposes it can be taken that in an action based upon fraud to set aside, the plaintiff will have to establish that the judgment was obtained by conscious and deliberate dishonesty.5
[22] The following statement concerning the principles which underlie the action to set aside a judgment which is obtained by fraud is taken from Halsbury’s Laws of England:6
Fraud is an extrinsic, collateral act which vitiates the most solemn proceedings of courts of justice. A judgment obtained by fraud or collusion, even, it seems, a judgment of the House of Lords, may normally be treated as a nullity. An exception to the generality of these propositions should probably be made where a purchaser has acquired title to property in good faith and for value upon the faith of a judgment in rem. Apart from this they may be accepted without qualification in favour of persons who were not party to the judgment, whether it was in rem or in personam. On this principle the recovery of penalties, which it is not intended to enforce, in a friendly claim instituted in order to prevent hostile claims, is no bar to a second claim by another party for penalties for the same offence.
[23] The justification for allowing a party to apply to set aside a judgment obtained by fraud was described in the following terms in the Supreme Court case of
Commissioner of Inland Revenue v Redcliffe Forestry:7
5 The Ampthill Peerage [1977] AC 547 (HL).
6 Halsbury’s Laws of England (5th ed, 2009, online ed) vol 12 Civil Procedure at [1204].
[31] ... This is because cases invoking the fraud exception allege there has been dishonesty, usually involving perjury, in the evidence given at trial which has deceived the trial court into making erroneous determinations of fact ...
[32] The rationale for allowing a fraud exception to finality is that it is right that a party who can show that his or her ability to mount an effective case was compromised by the fraudulent conduct of the other party, should not be bound by our judgment which was thereby obtained.
[24] The second of those paragraphs brings out the essential feature of these types of cases that they represent a departure from the important doctrine of finality of judgments. In general circumstances, there must be an end to litigation. The law closely limits any right on the part of the parties to call into question the judgments of the courts (legitimate appeal rights and review rights excepted). A key fact that was alleged by Mr O’Hagan was that Mr Andreef had extracted cash from the business and had reconstructed the accounts to disguise the removal of the money so that the extracted cash was not included in the figures reported. This allegation was central to both the hearings before the ERA and the Employment Court.
[25] However, whether the Court should exercise the discretion in favour of the debtor or not requires the Court to undertake an examination of all of the circumstances that can reasonably be enquired into in the context of an application to halt an adjudication. That enquiry will necessarily be limited because of the restricted range of evidence and argument that is available to the Court at this point.
[26] In this case no evidence is provided in the form of an affidavit. What has been provided is a copy of the proposed statement of claim which the debtor has filed in the Tauranga Registry. In the statement of claim the plaintiff pleads that:
[4] A material issue in the proceedings was whether the defendant director (Mr Andreef) had opportunity to reconstruct the reconciliations to disguise the removal of cash from the company before the plaintiff received the monthly reconciliations.
[5] With knowledge the evidence was false and contradicted his previous sworn evidence in the Employment Relations Authority in particular that he had access to the reconciliations at all material times, Mr Andreef consciously
7 Commissioner of Inland Revenue v Redcliffe Forestry [2012] NZSC 94, [2013] 1 NZLR 804 per
McGrath J
and deliberately presented evidence to the Employment Court that he had no access or opportunity to alter the End of Month (“EOM”) figures at the material time.
Discussion
[27] The equitable proceeding to impeach a judgment on the grounds that it was obtained by fraud is not intended to provide a chance for a party to relitigate the first hearing. Such an approach would be to confuse an impeachment action with an appeal.
[28] In determining whether an order ought to be made setting aside the judgment the Court enquires into whether the material which the plaintiff relies upon is fresh material which could not have been reasonably discovered before the hearing that is under scrutiny took place.8
[29] The proceeding which has been brought to set aside the judgment in this case is aimed at persuading the High Court that it should take a different view of the veracity of a witness whose testimony was key to the outcome of the Employment Court proceedings. The means by which that is to be achieved is by contrasting the account which Mr Andreef gave concerning the timing of receipt of the monthly reports and the key question of whether he received them prior to other employees. That issue however was one that had been explored in the ERA proceedings. Assuming that it was relevant, Mr O’Hagan had the opportunity in the Employment Court to cross-examine Mr Andreef concerning his evidence in the ERA to draw his attention to the difference between the two accounts given. If it is correct that the Judge declined to allow that matter to be explored and evidence before her, her decision cannot be outflanked by bringing proceedings to set the judgment aside on the ground of fraud which would provide an opportunity for the Judge in the High Court to do what the Judge in the Employment Court would not.
[30] If there is a complaint that the Judge in giving the ruling that she did in the
Employment Court was in error, then the correct remedy which Mr O’Hagan ought to have availed himself of was to bring an appeal against the direction.
8 Laws of New Zealand Equity (online ed) at [138].
[31] Mr O’Hagan seeks either a dismissal of the bankruptcy proceeding or a halt to those proceedings while he brings his action in the High Court. That leads to a consideration of the Court’s discretion to grant either of those orders. The jurisdiction in either case is conferred on terms which grant the Court an unfettered discretion. The likelihood or otherwise of success in those proceedings would seem to be relevant to the exercise of the discretion.
[32] This Court is obviously not required to come to any firm conclusion on the likelihood of the judgment being set aside on the grounds of fraud. However this Court would only be justified in granting a halt to the insolvency proceedings in circumstances where it considered that there was a matter of substance that ought first to be heard in the High Court proceedings. If the latter proceedings appear to offer little prospect of success to the Judgment Debtor, then the Court would not be justified in halting the insolvency proceedings.
[33] This Court has had a limited opportunity to assess the prospects of success that Mr O’Hagan has in regard to the application to set aside the judgment. Necessarily the evidence before the Court and the argument was limited. The weaknesses in the case seem to be the fact that the point was one that ought to have been raised in the Employment Court. Secondly, the alleged fact that Mr Andreef contradicted himself in what was a subsidiary point of evidence about when he received the end of month report does not seem to be very substantial platform upon which to launch a claim that Mr Andreef perjured himself about the matters that were an issue. Further, whether or not Mr Andreef admitted at the first meeting in May that there had been irregularities going on historically, which he denied, that did not exonerate Mr O’Hagan from not putting his cards on the table. Even if there was a misunderstanding and Mr O’Hagan was mistaken about the admission at the first meeting, Mr Andreef made it clear in subsequent dealings that he did not accept that there had been irregularities and still Mr O’Hagan concealed the existence of the other investigations that he had carried out.
[34] While I am not persuaded that the prospects of success are high in the impeachment proceedings, I consider that the Court ought not to denied the opportunity for Mr O’Hagan to bring those proceedings to a conclusion before the
bankruptcy issue is finally disposed of. While I accept that there are good reasons why the Judgment Creditor should be able to obtain an order of adjudication based upon the debt for the Employment Court costs, I do not consider that any particular hardship would result to the Judgment Creditor providing that any halt to the proceedings are subject to appropriate conditions.
[35] For the Judgment Creditor, Mr Braun submitted that Mr O’Hagan would be able to continue with his High Court action even if he were adjudicated bankrupt. I do not accept that that can be assumed. I do not know, obviously, what Mr O’Hagan’s financial position is. Nor do I know what other debts he has. The Court does not have any information either about what the approach of the Official Assignee would be to making funds available from the estate of Mr O’Hagan to fund the litigation in the High Court. Given the nature of the civil proceedings, substantial funding will be required if Mr O’Hagan is to bring his proceedings to trial in the High Court.
[36] The result of the foregoing matters is that the Court cannot be sure that Mr O’Hagan would not be hindered from pursuing his proceedings in the High Court were an adjudication order to be made. I consider that it would not be just to make an order for adjudication at this point. Equally, though, it would not be fair to dismiss the bankruptcy proceedings. It would be preferable to make an order to halt the proceedings pursuant to s 38(1) of the Act.
[37] Before concluding I mention two other points. The first concerns the fact that Mr O’Hagan made a complaint to the police that Mr Andreef had given perjured evidence. Advice is now been received from the police that they do not intend to take their enquiries any further and there will be no action on the complaint. The second concerns the appeal from the dismissal of a complaint against the counsel that represented the Judgment Creditor at the Employment Court hearing, Mr Clark. That complaint was to the effect that Mr Clark as counsel had connived in the presentation of perjured evidence to the Employment Court. Mr O’Hagan has now initiated proceedings before the Complaints Review officer seeking a reversal of the earlier rejection of the complaint. In my view that matter is irrelevant to the present bankruptcy proceedings. The Court cannot regard such proceedings as having the
potential to displace the order for costs which was made in the Employment Court. It is therefore irrelevant for present purposes.
[38] The order I make is that the bankruptcy proceedings are to be subject to a halt order until further order of the Court. Continuation of the halt order will be subject to the plaintiff taking reasonable steps to expedite the High Court proceedings hearing. I grant leave to the Judgment Creditor to bring this proceeding back before the Court after 1 June 2014 in the event that it apprehends that this condition has not been adhered to. If the Judgment Creditor wishes to avail itself of leave it should file an application seeking further directions together with an affidavit updating the Court as to progress with the High Court proceedings and, of course, serve the same on the Judgment Debtor.
[39] The parties should confer on the issue of costs and, if they are unable to agree, are to file memoranda not exceeding five pages on each side within 10
working days of the date of this judgment.
J.P. Doogue
Associate Judge
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