Westpac New Zealand Limited v Clarke

[2022] NZHC 892

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2013-404-4571

[2022] NZHC 892

IN THE MATTER

of the Insolvency Act 2006

IN THE MATTER

of the bankruptcy of STUART FRANCIS CLARKE

BETWEEN

WESTPAC NEW ZEALAND LIMITED

Judgment Creditor

AND

STUART FRANCIS CLARKE

Judgment Debtor

Hearing:	3 March 2022
Counsel:	G Bogiatto for the Judgment Debtor
Judgment:	29 April 2022

JUDGMENT OF ASSOCIATE JUDGE SUSSOCK

This judgment was delivered by me on 29 April 2022 at 4.30pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors/Counsel:

G Bogiatto, Barrister, Auckland

WESTPAC NEW ZEALAND LTD v CLARKE [2022] NZHC 892 [29 April 2022]

Introduction

[1]    Mr Clarke was adjudicated bankrupt on 27 March 2014. He first filed a statement of affairs on 12 November 2014. However, it was deemed incomplete pursuant to s 6 of the Insolvency (Personal Insolvency) Regulations 2007. Mr Clarke did not provide the complete information until 20 August 2021. He will therefore only be eligible for automatic discharge from bankruptcy on 20 August 2024.

[2]    Mr Clarke now seeks an order for immediate discharge pursuant to s 294 of the Insolvency Act 2006.

[3]    The Official Assignee has filed a report, dated 10 February 2022, recording that they do not oppose the application and abide the decision of the Court.

Issues

[4]    The issue is whether it is in the public interest for Mr Clarke to be discharged from bankruptcy now.

[5]    In addition, there are several procedural issues that arise as the creditors were not served and the application was not notified strictly within the time periods required by the Insolvency Act. Mr Clarke was also not examined in the hearing. I deal with these issues after first considering whether it is in the public interest for Mr Clarke’s bankruptcy to end earlier than it otherwise would.

Relevant legal principles

[6]    In determining an application pursuant to s 294 of the Insolvency Act, the Court is required to exercise a discretion. The Court of Appeal held in the leading case on the exercise of discretion, ASB Bank Ltd v Hogg:1

In conferring a discretion expressed in the broadest terms, the legislation recognises that each case will be different, that the relevant factors may vary from case to case and that the exercise of the discretion must be governed by the circumstances of the particular case having regard to the guidance provided by consideration of the scheme and purpose of the legislation. In providing for automatic discharge after three years, the legislation recognises

1      ASB Bank Ltd v Hogg [1993] 3 NZLR 156 (CA) at 157 – 158.

that it is not in the public interest that the bankruptcy should endure indefinitely. In providing for earlier discharge, s 108 [now s 294] recognises that continuing the bankruptcy to the end of the three years may not be in the public interest. Whether or not it is will be a matter for decision on the particular facts. In that regard, guidance is provided by s 109(2) [now s 296(2)] which lists matters on which the assignee is to report to the High Court in such a case. The Court is to consider the assignee’s report as to the affairs of the bankrupt, the causes of the bankruptcy, the manner in which the bankrupt has performed the duties imposed on him or her under the Act and his or her conduct both before and after the bankruptcy, and also as to any other fact, matter or circumstance that would assist the court in making its decision. Clearly the Court apprised of the matter will consider the legitimate interests of the bankrupt, the creditors and wider public concerns, but is neither required nor entitled to impose threshold requirements in the exercise of the discretion so as to derogate from the breadth of the powers conferred under s 110 [now s 298]. The applicant has the onus, in the sense of adducing evidence, to show good cause for ordering an early discharge, but his obligation goes no further than that.

[7]    In Havenleigh Global Services Ltd v Henderson,2 a decision following the Official Assignee’s objection to Mr Henderson’s automatic discharge, Associate Judge Osborne (as his Honour then was) referred to an Australian decision Re Riley, ex parte the Debtor where Lockhart J said:3

In considering whether a bankrupt should receive a discharge it has been laid down repeatedly that the court must have regard not only to the interests of the bankrupt and his creditors but also to the interests of the public and the commercial reality. In the exercise of its discretion the court must also consider the conduct of the bankrupt relevant to his bankruptcy.

[8]Associate Judge Osborne further referred to Re Webb where Robertson J held:4

(a)in the absence of misconduct the bankrupt should normally receive his discharge (after three years);

(b)where the object of bankruptcy has been achieved both in relation to the bankrupt and the community generally, the discharge should be granted;

2      Havenleigh Global Services Ltd v Henderson [2016] NZHC 2969.

3      At [390], citing Re Reilly, ex parte the Debtor (1979) 23 ALR 357 (FCA) at 365.

4      Re Webb HC Gisborne B69/88, 4 August 1989.

(c)it is not generally in the interests of the community to discharge a bankrupt by granting an order of discharge subject to conditions which impose such a burden upon him that he can have no hope of bettering his condition.

[9]    Counsel for Mr Clarke referred to a further passage in Havenleigh where the Court noted that the Insolvency Act was designed to promote innovation, responsible risk taking and entrepreneurialism by not excessively punishing business failure.5

[10]   Counsel for Mr Clarke further relied on Official Assignee v Cameron where the bankrupt had been adjudicated bankrupt five years previously but had filed three statements of affairs which, with the exception of the last, were considered to be deficient by the Official Assignee. The Official Assignee had applied for directions as the Official Assignee’s position was that only the last statement of affairs was compliant but it sought directions on whether that was correct. Associate Judge Bell held that the earliest statement of affairs was compliant and Mr Cameron was therefore automatically discharged.6

[11]   In Burchell v Commissioner of Inland Revenue, Mr Burchell had not filed a compliant statement of affairs yet Associate Judge Bell still considered it was appropriate to discharge him from bankruptcy as it was almost 10 years since Mr Burchall was adjudicated bankrupt and “there is now no good reason why he should be subject to the disabilities of bankruptcy.”7

Relevant factual background

[12]   Prior to being adjudicated bankrupt, Mr Clarke worked as a chartered accountant in Auckland. He traded under the name of Clarke & Kane until 2005 before setting up on his own account as CK Management Consultants Ltd.

5      Havenleigh Global Services Ltd v Henderson, above n 2, at [405].

6      Official Assignee v Cameron [2014] NZHC 2820.

7      Burchell v Commissioner of Inland Revenue [2021] NZHC 1136 at [44].

[13]   Westpac filed an application for the appellant’s adjudication on 6 December 2013 following proceedings by Westpac to recover the balance outstanding under a loan of $750,000 obtained for the purchase and development of a commercial building in Hamilton. Mr Clarke provided a personal guarantee for the loan with the balance outstanding approximately $300,000. An order adjudicating him bankrupt was made on 27 March 2014.

[14]   Mr Clarke annexed to his affidavit filed in support of his application a schedule obtained from the Official Assignee’s office setting out the names of his creditors and the amounts claimed. Mr Clarke comments on each of the creditors in his affidavit, in some cases recording that he does not believe he is indebted to that creditor or that he has no idea what the debt relates to. Mr Clarke explains that at the time he was adjudicated bankrupt he was in a state of shock as everything he had worked for in the preceding 30 years appeared to have been lost. He says that his mental health issues prevented him from making the best decisions. He further records that his father died in December 2014 and that there were several family issues that had to be dealt with in connection with family trusts for which he was trustee.

[15]   In addition, Mr Clarke’s mother’s health declined at this time and she passed away in June 2015, with Mr Clarke recording that she never recovered from the shock of his father’s death. Mr Clarke acknowledges that with hindsight “he stuck his head in the sand” over this period and put his obligations to the Official Assignee “on the backburner”.

[16]   Mr Clarke says that on 12 November 2014, approximately eight months after his adjudication, he provided his statement of affairs to the Official Assignee which he believed had been completed to the best of his ability. A copy of that statement of affairs is attached to his affidavit. Part A which is headed “Personal Details” requires each debtor to complete budgeting information. This section is not completed with a handwritten comment “to be provided” noted on the form.

[17]   Mr Clarke’s evidence is that correspondence continued with the Official Assignee’s office up until December 2017.

[18]   On 13 February 2018, Mr Clarke pleaded guilty to the following charges under the Insolvency Act:

(a)materially contributing to or increasing the extent of his insolvency by unjustifiable spending or extravagance in living – s 419(2) of the Insolvency Act ($84,160.91 over 21 weeks);

(b)being an undischarged bankrupt, taking part in the management or control of a business without the consent of the Official Assignee or the Court, without reasonable excuse (ss 149(1)(a) and 436(1)(b));

(c)failing without reasonable excuse to file a statement of affairs in the prescribed form of the Official Assignee (ss 67 and 433(1)(a));

(d)failing to keep and preserve proper record of transactions (s 429(1));

(e)failing or refusing, without reasonable excuse, to answer any question put to him by the Official Assignee (s 440(1)(c));

(f)concealing funds, totalling $78,048.49, in an ANZ Bank account in the name of Wellpark Trustees No.5 Ltd (s 420(2)(a));

(g)fraudulently removing property to the value of $500 or more by transferring his shares in Trinity Street Properties Ltd to Wellpark Nominees 2013 Ltd and then transferring his shares in Wellpark Trustees Ltd and Wellpark Nominees 2013 Ltd in each company to the other company to create a circular shareholder (s 420(2)(c)).

[19]Mr Clarke was sentenced on 12 March 2019 to three years imprisonment.8

[20]   Mr Clarke successfully appealed this sentence with Woolford J on 4 February 2020 reducing the sentence to two years and three months imprisonment.9

8      Ministry of Business, Innovation and Employment v Clarke [2019] NZDC 4645.

9      Clarke v Ministry of Business, Innovation and Employment [2020] NZHC 63.

[21]   While in prison Mr Clarke deposes that he wrote to MBIE seeking clarification of his status as a bankrupt. Correspondence with the Official Assignee’s office is attached, although the correspondence is not dated.

[22]   There was then further correspondence with the Official Assignee’s office in 2021 culminating in a letter on 26 August 2021 from the Official Assignee advising that Mr Clarke’s statement of affairs had been accepted with effect from 20 August 2021 and that his discharge from bankruptcy would occur three years from that date.

[23]   Mr Clarke says that he believes he has some years ahead of him for a constructive working life. His desire is to recommence his career as he says:

I have an extensive fund of knowledge and broad commercial experience, now made more relevant and tempered by the events of the last 7 years. I have learnt valuable lessons which I believe I can translate into advice and the benefit of real-world experience in dealing with commercial trauma and ‘what not to do’.

[24]He relies on the following circumstances in seeking discharge now:

(a)he was adjudicated bankrupt on 27 March 2014, more than eight years ago;

(b)he is 65 years old;

(c)he owns no assets and his sole source of income is a WINZ benefit of

$485 per fortnight;

(d)in his advancing years he wants to become financially independent as best as his circumstances will allow;

(e)he has a number of medical issues, some of which are exacerbated by his current circumstances;

(f)to his shame, he has served a period of imprisonment from 12 March 2019 to 29 June 2020 for breaches of the Insolvency Act committed during his period of bankruptcy;

(g)the conditions attaching to his parole that he not be employed expired at the end of November 2021 and so he is now free to gain employment and work towards becoming financially self-sufficient;

(h)he was bankrupted on a personal guarantee given on behalf of another entity.

Position of the Official Assignee

[25]   The Official Assignee has filed a report confirming that the applicant will only be eligible for automatic discharge from bankruptcy on 20 August 2024. The report discusses the administration of the bankruptcy listing the multiple assets held in Mr Clarke’s name, many of which were held by Mr Clarke as independent trustee for clients’ trusts.

[26]   The report records that creditors have filed claims totalling $2,057,797.29 and that there are two further potential creditors who have not yet filed with claims together of approximately $90,000. When referring to the causes of bankruptcy, the report simply notes that the applicant attributed the cause of his bankruptcy to liabilities due to guarantees.

[27]   As will be clear from the conviction and sentence of imprisonment for Mr Clarke, the Official Assignee records that it was initially hampered in the administration of the bankrupt’s estate due to Mr Clarke’s failure to comply with s 69 of the Act. However, the Official Assignee reports that otherwise the applicant has cooperated with the Official Assignee and there is nothing untoward to report with regard to his current conduct. The report concludes that the Official Assignee has no objection to the applicant’s discharge and will abide the Court’s decision.

[28]   The Official Assignee filed a supplementary report on 1 March 2022 confirming that it had served all creditors (although not within the relevant time frames as discussed below). The report reiterated that the Official Assignee did not wish to be heard on this application, has no objection and will abide the Court’s decision.

Is it in the public interest to discharge Mr Clarke now?

[29]   One of the charges that Mr Clarke pleaded guilty to was not completing his statement of affairs. Although counsel for Mr Clarke submits that the bankrupt disputes the claim by the Official Assignee that he did not file an adequate statement of affairs, Mr Clarke has previously pleaded guilty to an offence for failing to do so. I do not therefore need to consider whether the original or any of the later statements of affairs were adequate. The only question at this point is whether it is appropriate for Mr Clarke to be granted an early discharge.

[30]   As recorded above, the condition attaching to his parole that he not be employed expired at the end of November 2021 and so he will be free to work if the discharge is granted.

[31]   The report of the Official Assignee appears to confirm that the administration of the bankruptcy is complete with searches of the relevant databases not revealing any further assets.

[32]   As the period for which Mr Clarke has been bankrupt is now over eight years, I consider that there has been accountability in terms of the bankruptcy. I further note that the accountability for his failure to comply with his obligations with the Insolvency Act has been met by his period of imprisonment.

[33]   The Official Assignee does not record that there is any other misconduct which requires punishment or extension of the bankruptcy.

[34]   The question of risk to the community is more difficult. Mr Clarke deposes that he wishes to operate in a similar way to how he operated prior to bankruptcy. I am concerned at some of the statements made in Mr Clarke’s affidavit. In paragraph 2 of his affidavit, Mr Clarke states that he “enjoyed a flourishing business, and my practice grew due to my personal attributes of being accessible, with low overheads, a large circle of growing clients and colleagues, and only charging reasonably for my services”.

[35]    Mr Clarke was bankrupted on a personal guarantee given in respect of one of his companies’ borrowings. At the time of his bankruptcy, it appears Mr Clarke did not have assets available to meet the balance nor the balances owing to other creditors. As counsel for Mr Clarke submitted during the hearing, however, being realistic it is unlikely that Mr Clarke will be able to borrow money in the future with the commercial community likely to be very cautious in their dealings with him.

[36]   From the Official Assignee’s report it appears that previously Mr Clarke acted as a trustee for a number of trusts. In addition, Mr Clarke was a director of a number of companies prior to his bankruptcy. Trustee and director’s duties are significant.

[37]   In the circumstances, provided that the procedural matters below can be resolved, I consider that it is appropriate to discharge Mr Clarke from bankruptcy but on the condition that he does not accept appointment as a trustee or as a director until the date on which his bankruptcy would automatically have discharged, being 20 August 2024.

Procedural matters – service, advertising and public examination

[38]   Rule 24.37 of the High Court Rules 2016 requires the applicant under s 294 at least 20 working days before the hearing date to:

(a)serve on the Official Assignee, and every creditor whose debt has been proved, notice of the application for discharge under section 294; and

(b)advertise the notice of the application and hearing date.

[39]The creditors in this case were short-served by one working day.

[40]   Furthermore, whilst an advertisement was placed in the New Zealand Herald, it was only 18 working days prior to the hearing, rather than the required 20. Counsel for Mr Clarke confirmed that no one had approached him for copies of the documents filed or indicated any intention to appear at the hearing or oppose the application. In the circumstances, Mr Clarke seeks abridgements of the time required.

[41]   As well as the above requirements, r 24.38 requires the Official Assignee at least 10 working days before the hearing to both lodge a copy of their report pursuant to s 296 of the Act but also to serve a copy of the report on the bankrupt and all creditors known to the Official Assignee. The Official Assignee records in their supplementary report that six of the creditors were short-served by a few days because the Official Assignee was awaiting confirmation that they agreed to be served by email.

[42]   All creditors except Baycorp and Stepping Stone Finance advised the Official Assignee that they did not object to the application. Baycorp was served within time but Stepping Stone Finance was served on 21 February 2022, only eight days prior to the hearing. Stepping Stone Finance advised the Official Assignee that they would let the Official Assignee know by 28 February 2022 if they intended to object and had not informed the Official Assignee that they intended to do so by 1 March 2022 when the supplementary report of the Official Assignee was filed.

[43]   Mr Clarke’s counsel refers to s 418 of the Insolvency Act which provides that a proceeding under the Act will not be invalidated or set aside for a defect in a step that must be taken as part of the application “unless a person is prejudiced by the defect”.

[44]   In addition, r 1.19 of the High Court Rules provides a discretion to extend or shorten the time appointed by the rules on such terms, if any, as the Court thinks fit.

[45]   In the circumstances I consider that as no one appears to have been prejudiced by the shortening of the service period or late advertising, it is appropriate for the abridgements sought to be granted.

[46]   Section 294(3) of the Insolvency Act further requires the hearing of a bankrupt’s application for discharge to be in accordance with s 177 which provides for an examination of the bankrupt in Court. The Official Assignee did not wish to examine Mr Clarke and nor did counsel for any creditor. In the circumstances of this case, where Mr Clarke was bankrupted more than eight years ago and where the

Official Assignee and creditors do not oppose that discharge, it is appropriate to dispense with the examination under s 177.

Result

[47]   The application pursuant to s 294 of the Insolvency Act 2006 by Mr Clarke to be discharged from bankruptcy immediately is granted on the following condition:

(a)Mr Clarke is not to accept appointment as a trustee or a director until 20 August 2024 at the earliest.

Associate Judge Sussock