Wright v Health Distributors Limited HC Hamilton CIV 2010-419-121
[2010] NZHC 1969
•4 November 2010
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CIV-2010-419-121
IN THE MATTER OF the Insolvency Act 2006
BETWEEN CARLSON COTTLE WRIGHT Judgment Debtor
ANDHEALTH DISTRIBUTORS LIMITED Judgment Creditor
Hearing: 4 November 2010
Appearances: Mr C Gudsell QC for judgment debtor
Mr I Millard QC for judgment creditor
Judgment: 4 November 2010 at 2 pm
Reasons: 5 November 2010
REASONS FOR JUDGMENT OF LANG J
[on applications by debtor for order halting bankruptcy proceeding and by
creditor for order adjudicating debtor bankrupt]
This judgment was delivered by me on 5 November 2010 at 2 pm, pursuant to Rule
11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors/Counsel:
McCaw Lewis Chapman, Hamilton
McBreens, Hamilton
Mr C T Gudsell QC, HamiltonMr I R Millard QC, Wellington
WRIGHT V HEALTH DISTRIBUTORS LTD HC HAM CIV-2010-419-121 4 November 2010
[1] On 12 November 2009, following a defended hearing, Harrison J entered summary judgment against Mr Wright in favour of Health Distributors Limited (“HDL”) in the sum of $1.3 million together with interest: Health Distributors Ltd v Wright HC Hamilton CIV 2009-419-607, 12 November 2009. Inclusive of interest, HDL sealed judgment for the sum of $1,365,863.96. Interest has continued to accrue on the judgment debt at the rate of $314.34 per day.
[2] Mr Wright has appealed to the Court of Appeal against Harrison J’s decision. The Court of Appeal is scheduled to hear his appeal on 28 February 2011.
[3] On 9 February 2010 HDL served a bankruptcy notice on Mr Wright requiring him to pay the judgment debt within 14 days. He failed to do so, and thereby committed an act of bankruptcy in terms of s 17 of the Insolvency Act 2006. As a result, HDL filed an application seeking an order that he be adjudicated bankrupt. Mr Wright responded by filing an application for an order under s 42 of the Insolvency Act 2006 halting or refusing HDL’s application. Both applications were originally due to be heard by Associate Judge Faire on 19 August 2010.
[4] With some assistance from the Associate Judge, the parties reached an interim compromise whereby they investigated the possibility that Mr Wright might be able to provide HDL with partial security for its debt so as to protect its position to some extent pending determination of Mr Wright’s appeal. This involved the appointment of an independent expert by the Court to investigate the feasibility of security being given for the sum of $720,000. The expert was required to determine whether Mr Wright could provide security for that amount “in a manner that provides reasonable confidence that such sum would be realisable... at any time within 12 months from the date of this order”.
[5] In a determination delivered on 20 September 2010, the independent expert concluded that Mr Wright was not able to provide security in that manner. As a result, HDL and Mr Wright were not able to proceed down that path, and it became necessary for the Court to determine their respective applications.
[6] At the conclusion of the hearing on 4 November 2010 I dismissed Mr Wright’s application for an order halting the bankruptcy proceedings. I then granted HDL’s application for an order adjudicating him bankrupt. I now give my reasons for both decisions.
[7] It is convenient to consider Mr Wright’s application for an order halting or refusing HDL’s application to have him adjudicated bankrupt first. If that application is unsuccessful, the Court must go on to determine whether or not to make an order adjudicating Mr Wright bankrupt.
1. Mr Wright’s application for an order halting or refusing HDL’s application
[8] Section 42 of the Insolvency Act 2006 provides:
42 Halt or refusal of application when judgment under appeal
(1)This section applies if the creditor's application for adjudication relies on 1 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 nonpayment 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.
[9] There is no dispute that the Court has the necessary jurisdiction to make an order halting HDL’s application. It is common ground that Mr Wright has failed to comply with a bankruptcy notice, that he has appealed against the judgment that underlies the bankruptcy notice and that his appeal has yet to be decided by the Court of Appeal. The issue is whether the Court should exercise the discretion
vested in it by s 42 in Mr Wright’s favour. In order to determine that issue, it is necessary to identify the principles that apply to the exercise of the discretion.
[10] The Court’s discretion under s 42 is unfettered, in the sense that the statute does not specify any factors that the Court is required to take into account in exercising the discretion. I take the discretion as being one that the Court should exercise in a manner that is just and equitable having regard to all relevant factors. These will include the interests of all affected parties. In this context, however, the interests of the litigants are relevant but not necessarily decisive. In many cases the public interest and the interests of other creditors may need to be taken into account.
[11] These observations are broadly consistent with an observation made by
Associate Judge Doogue in Yeoh v Al Saffaf HC Auckland CIV-2006-404-1164,
21 June 2006 (at [36]), to the effect that all of the circumstances, and not just the interests of the debtor, need to be considered. Associate Judge Doogue also noted at [12] that the courts have considered the following factors to be relevant when asked to exercise their discretion in this context:
a) The bona fides of the judgment debtor in prosecuting the pending appeal;
b)What stage the appeal has reached and whether there has been delay in prosecuting the appeal;
c) Whether an order halting the application for an adjudication order would unfairly prejudice the judgment creditor; and
d)Whether the bankruptcy proceeding might render the appeal nugatory as the judgment debtor would be unable to prosecute the appeal.
[12] In Pillay v ANZ National Bank Limited HC Auckland CIV 2009-404-4175,
3 December 2009, Associate Judge Faire drew an analogy (at [11]) with the principles that the Court applies when considering an application for stay where an appeal is pending. The authority often cited in this context is Dymocks Franchise
Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd (1999) 13 PRNZ 48 at 50 (HC). In that case the Court pointed to additional relevant factors, including the effect that the stay might have on third parties, the novelty and importance of the question involved in the appeal, the public interest in the proceeding under appeal and the overall balance of convenience.
[13] As in any situation involving the exercise of an apparently unfettered discretion, it is neither possible nor desirable to attempt to prescribe rigid criteria. As always, context is everything. In some cases the factors referred to above will assume real importance. In others they may be secondary to other more important factors raised by the case under consideration.
[14] In the present case I consider that the following factors are relevant:
a) The prejudice to Mr Wright if the application is refused. b) The likelihood that the appeal will succeed.
c) Mr Wright’s ability to pay the debt if his appeal does not succeed in extinguishing the debt.
d)The prejudice to HDL and other creditors if Mr Wright’s application is granted.
e) The delay in prosecuting the appeal.
a) The prejudice to Mr Wright if the application is refused
[15] Mr Wright will suffer obvious prejudice in the event that the application is refused. If that occurs, the Court will proceed to continue HDL’s application to have him adjudicated bankrupt. That leaves him at risk of being adjudicated bankrupt before he has had an opportunity to pursue his appeal.
[16] Mr Wright contends that an order of adjudication would effectively render his appeal nugatory. I agree that the appeal would be at risk in the event that an order of
adjudication is made. That follows from the likelihood that the Official Assignee will not permit Mr Wright to continue with the appeal if he is adjudicated bankrupt. That is not, however, a certainty. Mr Wright would be entitled to ask the Official Assignee to allow him to pursue the appeal because it underlies the order of adjudication.
[17] The fact that Mr Wright is likely to be prejudiced in this way is not determinative in any event. Every debtor in Mr Wright’s position faces the same difficulty. Had Parliament wished to make the existence of an appeal an automatic ground for halting bankruptcy proceedings, it would have been a simple matter for it to have said so. The fact that Parliament has left the matter to the Court’s discretion recognises that the existence of an outstanding appeal will not, of itself, necessarily be sufficient to justify the Court halting bankruptcy proceedings.
[18] I accept, however, that this factor favours the Court making an order halting
HDL’s application.
b) The likelihood that the appeal will succeed
[19] In Pillay Associate Judge Faire noted at [17] that the merits of the proposed appeal are not generally an appropriate matter for the Court to contemplate when considering an application under s 42 unless it considers the appeal has absolutely no prospect of success.
[20] I accept that the Court must exercise caution when considering the merits of an appeal. It does not have the benefit of proper argument on the points that are to be taken on appeal. It should also refrain from trespassing into areas that are properly the domain of the appellate court. I agree, however, that in cases where the Court can confidently predict that the appeal has absolutely no prospect of success, that factor can and should be taken into account. The same can be said when the Court can confidently say that the proposed appeal has a very high chance of success. Unfortunately, however, most cases fall somewhere in the middle.
[21] That fact has not stopped the Court of Appeal from taking into account the merits of a proposed appeal in the context of applications for stay where bankruptcy or liquidation proceedings are pending and the debtor wishes to appeal against the judgment upon which those proceedings are based: See Petrecivic v Bridgecorp Management Services Limited (In receivership) [2008] NZCA 286 at [24] to [27]; Property Ventures Investments Limited v Commissioner of Inland Revenue [2010] NZCA 217 at [11] to [15].
Background to HDL’s application for summary judgment
[22] In order to assess where the present case lies, it is necessary to say something about the circumstances that led to judgment being entered against Mr Wright. Harrison J described these in detail at [3] to [19] of his judgment. For present purposes it is sufficient for me to paraphrase the salient points that led to judgment being entered against Mr Wright.
[23] The judgment debt relates to dealings between Mr Wright and a Mr Mark Chu. Together, the two men decided to incorporate HDL for the purpose of acquiring ownership of another company called Health 2000 + Ltd (“H2K”). That company was the franchisor for a number of “Health 2000” retail shops. Its shareholding comprised “A” shares and “B” class shares. Mr Wright already owned
58,000 of the 116,000 class A shares on issue in H2K. He planned to purchase the remaining 58,000 class A shares from his fellow shareholder, Mr Tony Bonne. Mr Wright approached Mr Chu to assist in the acquisition of Mr Bonne’s shares using HDL as an investment vehicle.
[24] In order to facilitate the purchase of the shares in H2K Mr Chu’s company, Riverglade Holdings Limited (“RHL”), advanced Mr Wright funds totalling $1.3 million. Mr Wright used these funds to partly settle the acquisition of Mr Bonne’s shares. After it was incorporated in May 2007, HDL issued RHL with 1,300 shares in consideration of the funds that RHL had earlier provided to Mr Wright.
[25] The proposal called for Mr Wright to acquire and transfer 112,000 A shares in H2K to HDL. This would leave HDL as the owner of all but 4,000 of the 116,000
A shares on issue. The plan went awry, however, when Mr Wright and Mr Chu discovered that H2K’s constitution contained provisions that gave other shareholders pre-emptive rights in relation to any transfer of shares. This meant that HDL could only acquire Mr Wright’s shares in H2K if all the remaining shareholders in that company declined to exercise their pre-emptive rights.
[26] In order to get around this problem, Mr Wright executed a declaration of trust to the effect that he held 112,000 A shares in H2K on trust for HDL as beneficiary. He undertook to transfer those shares to HDL as and when HDL required him to do so.
[27] As time went on, the obstacle presented by the pre-emptive provisions remained unresolved. A further problem also arose relating to imputation tax credits. For these reasons HDL and Mr Wright ultimately came to the conclusion that they would abandon their plan, and that they would unwind their partially completed arrangement.
[28] On 1 July 2008 they and the companies signed a series of interlocking contracts after having taken independent legal advice in relation to them. One of these was a term loan agreement between HDL as lender and Mr Wright as borrower. The agreement recorded that Mr Wright was to repay the principal sum of
$1.3 million to HDL upon the occurrence of an “event”. The word “event” was defined as including the receipt by Mr Wright of a bona fide offer from a third party to acquire all of his shares in H2K.
[29] Mr Wright subsequently received an offer from H2K itself to acquire his shares in H2K. He ultimately sold those shares to H2K for approximately $1.822 million. He did not, however, repay the sum of $1.3 million to HDL as the term loan agreement required him to do. This prompted HDL to issue the proceeding in which Harrison J entered summary judgment against Mr Wright.
[30] Before Harrison J, Mr Wright argued that the term loan agreement did not properly reflect the arrangement that he and Mr Chu had agreed to. He contended that the term loan agreement was effectively a sham, and that the true nature of the arrangement was that of a joint venture. In an affidavit that Mr Wright filed in opposition to the application for summary judgment he deposed:
[26] The joint venture arrangement which had begun in late 2006 had not been achieved and there was clearly going to be a parting of the ways. The term loan agreement, Exhibit 1 to Mr Chu’s affidavit, was to deal with this problem by way of an adjustment of losses or profits when I transferred the A shares to a third party. The idea was that at that time, any loss, and by this stage we were talking about a loss, as share values had changed considerably, would have crystallised, and Mr Chu and I would adjust the financial outcome of our failed joint venture at that time. The term loan agreement makes provision for this in the definition of event at clause 17 and in clause 27, the provision made for the repayment of the principal sum.
[31] Harrison J rejected this argument. He said:
[29] Mr Taylor’s argument cannot possibly succeed. As Mr Millard points out, at best for Mr Wright, he was saying that the agreements failed to record accurately the parties’ shares intention. If that was so, Mr Wright might possibly have a factual foundation for a counterclaim for rectification. But that is not pleaded and Mr Wright has failed to provide an evidential groundwork to establish the essential element of a common intention which is incorrectly recorded in the contracts. Issues of breach of a fiduciary obligation would not arise in that context.
[30] In any event, Mr Taylor’s thesis of the existence of an equitable duty to account could not possibly succeed. It is based upon Mr Wright’s attempt to assert that Mr Chu and he would make a financial adjustment between them on undefined terms some time after July 2008. An immediate problem arises from the generality of Mr Wright’s assertion and from his failure to give particular of the agreement verbally reached with Mr Chu.
[31] The terms of the contractual instruments are unequivocal and complementary. In particular Mr Wright unconditionally acknowledged his indebtedness to HDL for $1.3m. That was the undisputed amount of his liability to the company. He agreed to repay this amount upon receipt of an offer from a bona fide third party to purchase all of his H2K shares, then being 112,000 in total....
[32] Mr Wright proposes to challenge these conclusions on appeal.
[33] It is not possible for me to comment in any detail on the grounds that Mr Wright proposes to advance on appeal, because his counsel did not articulate them during the hearing before me. Several matters stand out, however, from the narrative set out above. The first is that, as counsel for HDL pointed out in his written submissions, Mr Wright cannot dispute the fact that he received a total sum of $1.3 million from, in effect, the judgment creditor. The purpose of those advances was to enable Mr Wright to purchase the shares in H2K from Mr Bonne. He used the funds for that purpose and then signed a formal declaration in which he acknowledged that he held the shares on trust for HDL. Later, when he signed the term loan agreement, he expressly acknowledged that he was indebted to HDL in respect of the sum of
$1.3 million. He undertook to repay that sum when he received a bona fide offer from a third party to acquire the shares that he held in H2K. Thereafter, he received such an offer and sold the shares to the third party for the sum of $1.822 million.
[34] Mr Wright used approximately $1.389 million of the sale proceeds to acquire the Hardley street property and to acquire three retail shops for the business that he operated through his company Manhattan International Limited. He has not, however, paid a dollar back to Mr Chu or his companies. Viewing that series of events objectively, it is difficult to see how Mr Wright will be able to escape liability under the term loan agreement completely.
[35] Secondly, another aspect of Mr Wright’s evidence in opposition to the application for summary judgment is worth considering. He deposed:
29. In fact, the shares in Health 2000 + Ltd were acquired by that company. I was advised that Health 2000 + Ltd was not a third party under the term loan, and so I didn’t give notice of the offer that I had received for the shares. The price I received for the shares was around $15.00 per share. On that basis, the amount that I owe to Health Distributors Ltd is $720,000 less deductions for the amount I refer to below. I am prepared to pay 250,000 into trust for Health Distributors Ltd if that company can secure the unconditional release of my personal guarantee to the ANZ Bank. I will make arrangements for the payment of any balance that may be owing. I do not wish to pay the money to Health Distributors Ltd directly, because I consider that there are a number of other minor matters which need to be taken into account by way of the losses and expenses that have been incurred in the joint venture, and so
the final figure may be subject to some level of adjustment. (Emphasis added)
[36] This passage makes it clear that Mr Wright accepted that the arrangement required him to pay HDL the sum of $720,000 less deductions for “other minor matters” that needed to be taken into account in relation to the joint venture. On the basis of Mr Wright’s own sworn evidence, therefore, he owes HDL a very substantial amount of money.
[37] The matters to which I have just referred suggest that, in the event that Mr Wright persuades the Court of Appeal to disturb the judgment at all, there is a very real possibility that his liability may be confirmed but that the quantum of the judgment may be reduced. I do not share Mr Wright’s optimism that, if his appeal is successful, all matters will remain at large for determination at trial.
[38] This discussion leads naturally to the topic of whether Mr Wright is likely to be able to repay the debt even if it is reduced to the sum that he appears to acknowledge as being currently owing.
c) Mr Wright’s ability to pay the debt if his appeal does not succeed in extinguishing the debt
[39] In order to consider this issue, it is necessary to consider the assets that might be available to Mr Wright to settle the debt.
The house property at 71A Boundary Road, Hamilton
[40] Mr Wright lives in a property situated at 71A Boundary Road, Hamilton. He originally owned the property, but it is now owned by a trust called the Carleen Trust. Mr Wright and his partner, Colleen Kensington, are two of the trustees of that trust. The property is apparently worth approximately $450,000, and has a mortgage registered against it to secure a loan to ANZ National Bank that currently stands at
$238,000.
[41] Mr Wright told the trustee appointed by the Court that the trust still owes him approximately $136,000 in respect of the purchase price that it paid for the property when it acquired it from Mr Wright some time ago. Mr Wright asserts, however, that he holds no beneficial interest in this property, and that it will not be available for distribution to his creditors in the event that he is adjudicated bankrupt. It can therefore be removed from the list of assets potentially available to meet the debt owing to HDL.
Unit 9, 570 Victoria Street, Hamilton
[42] Mr Wright estimates, relying upon an appraisal from a real estate agent, that the current market value of this property is approximately $430,000. The property is subject to a mortgage of $245,000 to the Bank of New Zealand. This leaves equity in the property of $185,000 that is potentially available to meet the debt.
Unit 1, 25 Victoria Road, Mt Maunganui
[43] The current value of this property is unknown. When Mr Chu’s solicitor met with Mr Wright’s solicitor on 8 June 2010, Mr Wright’s solicitor told him that the Victoria Road property had a rateable value of $770,000 and a market value of between $770,000 and $800,000. The property is currently subject to a mortgage in favour of the Westpac Banking Corporation in the sum of approximately $738,000. Mr Wright told the expert appointed by the Court, however, that he expected the property to sell for “a good deal less” than the amount owing to the bank.
[44] Mr Wright has been endeavouring to sell this property, to date without success. Given Mr Wright’s view that the amount that the property is likely to realise on sale will be insufficient to meet the amount owing to Westpac, it must be disregarded for present purposes.
11 Hardley Street, Hamilton
[45] This property is owned by Manhattan Properties Limited, a company wholly owned by Mr Wright. On the material before the Court, the Hardley Street property
is the only asset that Manhattan Properties owns. The expert appointed by the Court estimated that this property is worth $800,000, and that it has mortgages totalling
$459,000 registered against it. It therefore appears to have equity of approximately
$341,000 that could be applied towards the debt.
Manhattan International Limited (“MIL”)
[46] Mr Wright is the sole director and shareholder of this company. It owns six natural health retail outlets in the Auckland area. In submissions made to the expert appointed by the Court, Mr Wright ascribed an aggregate value of $1.2 million to MIL’s business. It currently owes secured creditors the sum of $750,000. On that basis, Mr Wright considered that the business was capable of releasing equity in the sum of $450,000.
[47] In my view this estimate is grossly overstated. MIL’s balance sheet as at 31
March 2010 showed that the company had net liabilities of $259,691. Included within the company’s non-current assets is an item called “intangibles” valued at
$570,000. I take this to be the goodwill to be attributed to the company’s business.
[48] Given the fact that the company made a trading loss of $246,839 for the 2010 year, it would seem highly unlikely that it would be able to attract a goodwill figure of $570,000 as the accounts anticipate. If the figure ascribed to intangibles is removed from the balance sheet, the company had net liabilities of $829,691 as at 31
March 2010.
[49] The company also has a contingent liability in relation to the Mt Maunganui property, because it guaranteed the loan to Westpac that is secured over that property. Given the fact that there is almost certain to be a shortfall when that property is ultimately sold, it seems highly likely that MIL will be called upon to honour its guarantee to Westpac.
[50] Mr Wright contends that MIL has improved its trading performance during the six month period between 1 April and 30 September 2010. Mr Chu has analysed the figures that Mr Wright has provided, however, and has concluded that, even
putting to one side general overhead expenses and depreciation, the shops have produced a trading loss of approximately $44,000 during this period. That figure also excludes interest that the company paid during this period to two secured creditors, Westpac and Pranal International, who are currently owed a total of
$400,000. The interest that the company paid to those creditors was not shown in the figures that Mr Wright has produced. Mr Chu believes that when these factors are taken into account, MIL is inevitably headed for another significant loss in the
2011 year.
[51] Counsel for HDL also pointed out that an analysis of the trading figures between April and September 2010 shows that MIL is gradually running its stock inventory down. Mr Wright has not produced a balance sheet during this period, however, so it is not possible to ascertain whether or not this factor has detrimentally affected the company’s overall financial position.
[52] Mr Wright believes that MIL’s trading performance will be significantly improved during the coming year by the fact that it has closed a store that it previously operated under the name “Active Nutrition”. He acknowledges that there have been capital costs in relation to the closure of the store, but says that those can be met from funds held on deposit by way of bond, and by way of stock transferred to another of the company’s stores.
[53] Viewing this aspect of the company’s operations overall, I accept that the closure of the Active Nutrition store may not adversely affect the company’s position in a capital sense. It may also improve the company’s performance slightly. I have real doubts, however, that the closure of Active Nutrition will add about $180,000 to the bottom line of the company’s Albany store as Mr Wright claims. As counsel for HDL pointed out, the Active Nutrition store only achieved a gross margin of
$144,395 last year and a gross margin of $51,555 for the first five months of this year. Even if all sales transfer to the Albany store it is difficult to see how the Albany store will be able to achieve an additional gross margin of more than
$145,000.
[54] As already indicated, MIL currently has secured creditors totalling approximately $750,000. As at 31 March 2010 MIL’s current liabilities included an overdraft facility of $46,930 with Westpac, a GST liability of $20,084 and accounts payable totalling of $260,211. It is likely that secured creditors remain at around
$750,000, but the absence of an up to date balance sheet means that it is not possible to gauge the current level of the company’s liabilities in respect of its overdraft, GST and unsecured creditors.
[55] As at 30 September 2010 MIL held stock totalling $356,598. This compares with stock totalling $725,767 that the company held as at 31 March 2010. The company’s only other assets of any significance (other than the provision for intangibles) were cash deposits totalling $87,000 and property, plant and equipment valued at $364,682. The cash deposits are likely to have been reduced by $40,000 to meet the release fee and final rental payable in respect of the Active Nutrition premises. It is also unlikely, in my view, that the company would be able to recoup book value for its property, plant and equipment, most of which would comprise fittings and fixtures within its stores.
[56] Even if the company was able to sell all of its stock at current value and realise book value for its property, plant and equipment, it would only recoup the sum of $721,280. When that sum is added to the balance of the funds held on deposit, this might just be sufficient to repay secured creditors. It would leave no surplus, however, to repay the overdraft, GST and unsecured creditors. It also needs to be remembered that the company is likely to be called on to honour its guarantee in respect of the Westpac loan currently secured over the Mt Maunganui property. Mr Wright would owe a statutory duty, as director of the company, to take that likelihood into account before permitting the company to apply any of its funds to meet one of his personal debts.
[57] When all of those factors are weighed in the mix I do not consider that MIL
can realistically be regarded as having any equity at the present time.
Conclusion
[58] This means that Mr Wright’s equity in Unit 9, 570 Victoria Street ($185,000) and MIL’s equity in 11 Hardley Street ($341,000) are the only items in his possession or control that have any value. The equity that those properties could release would be further reduced by approximately $55,000 as a consequence of the legal costs and real estate agent’s commission that would be payable in respect of any sale. In addition, MPL may be liable to pay GST of approximately $104,000 in respect of any sale of the Hardley Street property. This means that, if the properties are sold today for the prices that Mr Wright expects to achieve, they are likely to realise a net sum of approximately $367,000. This is significantly less than the amount that he is likely to be required to repay to HDL.
d) Prejudice to HDL and other creditors if Mr Wright’s application is granted
[59] Mr Wright contends that HDL and other creditors will not be prejudiced if the bankruptcy proceeding is halted until after the Court of Appeal determines his appeal. He points out that all mortgage payments are currently up to date, and that the amount owing to secured creditors has actually reduced in recent months. He is prepared to abide by an arrangement under which he undertakes not to increase the current level of borrowing. He will also provide the Court and HDL with regular statements of his financial position and those of his companies. He argues that under that arrangement HDL will not be prejudiced by the delay that will occur in awaiting the outcome of the appeal.
[60] Mr Wright’s proposal needs to be considered in the light of several relevant factors. First, there are unanswered questions regarding the manner in which the proceeds of sale of the shares in H2K were disbursed. Counsel for HDL points out that Mr Wright received cash totalling $433,000 from the sale of the shares. Of this sum, approximately $110,000 remains unaccounted for.
[61] Secondly, Mr Wright has provided no information regarding the manner in which he is currently funding his living expenses. His only known income for this year is a sum of $4,200 that he received from MIL in repayment of recently
introduced capital. He has not drawn management fees from either of his companies and has not been receiving a salary. He has a credit card debt of approximately
$10,000, so he has presumably used his credit card to fund some of his expenses. It is highly unlikely, however, that Mr Wright has been able to fund his living expenses solely from these two sources.
[62] It is probable, in my view, that Mr Wright has funded his living expenses, and will continue to do so for as long as he can, by drawing on the income generated by MIL and MPL. The assets base of those companies is therefore being dissipated to meet Mr Wright’s living expenses. At present there is no way of monitoring and controlling that dissipation. The proposal that Mr Wright has made does not come close to providing effective control over this area of obvious risk to his creditors.
[63] Thirdly, at the meeting between Mr Chu’s solicitor and Mr Wright’s solicitor on 8 June 2010, Mr Wright’s solicitor said that Mr Wright’s financial position had deteriorated since February 2010. That statement appears to be at odds with Mr Wright’s evidence. Mr Wright’s solicitor also said that there was a monthly shortfall of $5,629 between income received in respect of the Hardley Street, Victoria Street and Victoria Road properties and the monthly outgoings in relation to those properties. Mr Wright has provided no evidence as to how he has been able to keep up the payments in respect of those properties. Again, there must be a suspicion that he is maintaining the payments by extracting funds from his companies. Creditors remain at risk in this regard also.
[64] HDL, along with other creditors, also remains at risk in another way if matters are not brought to a head at this point. In a letter dated 16 February 2010 Mr Wright’s solicitors advised Mr Chu’s solicitors of the manner in which the proceeds of sale of his share had been disbursed. One of the disbursements was a “loan repayment” to Ms Kensington, Mr Wright’s partner. There is no evidence regarding Ms Kensington’s ability to repay that sum in the event that it is found to be voidable as against the Official Assignee. If that issue is to be investigated, it needs to be done promptly rather than in several months time.
[65] It follows that I have concluded that Mr Wright’s creditors are likely to be significantly prejudiced by the delay that will inevitably occur if the proceeding is halted to permit Mr Wright to pursue his appeal.
e) Delay in prosecuting the appeal
[66] Mr Wright filed his appeal against the decision of Harrison J on 9 December
2009, one day within the 20 working day period required by the relevant rules. He did not file the case on appeal until 9 June 2010, the last day permitted by the rules for that step to be taken. When the Court of Appeal offered the parties a fixture on
5 October 2010, Mr Wright’s counsel declined it on the basis that he was not available on that date. For that reason the appeal was allocated the next available date, being 28 February 2011.
[67] It is obviously regrettable that Mr Wright and his counsel did not find a way to accept the fixture on 5 October 2010. Had they done so, it is highly likely that HDL would not have pushed the issue as it has now done. I do not, however, hold Mr Wright responsible for that aspect of the delay. It was clearly caused by the unavailability of his counsel.
[68] There was, however, undue delay in filing the case on appeal. That was a relatively straightforward matter, and could easily have been completed several months earlier than was the case. Had that been done, a much earlier hearing date could have been allocated. I therefore accept that Mr Wright has been guilty of some delay in prosecuting his appeal.
Where do the interests of justice lie?
[69] The only factor that favours Mr Wright’s application is the likely effect that dismissal of the application will have for the prosecution of Mr Wright’s appeal. I consider that that factor is clearly outweighed in the present case by the combined weight of the other factors to which I have referred. I therefore concluded, by a considerable margin, that the interests of justice required the application for an order
halting the proceeding to be dismissed. This means that it is necessary to consider the application for an order adjudicating Mr Wright bankrupt.
2. The application for an order adjudicating Mr Wright bankrupt
[70] There is no dispute that Mr Wright failed to comply with the bankruptcy notice that HDL served upon him on 9 February 2010. He thereby committed an act of bankruptcy. The debt remains unpaid. On that basis jurisdiction exists to make an order of adjudication.
[71] The only factor supporting the exercise of the Court’s residual discretion not to make an order of adjudication is the existence of the appeal and the obstacle that an order of adjudication will provide for the continuation of the appeal. As I have already held, that factor is outweighed by countervailing factors in the present case.
[72] There are, in addition, several factors that support an order of adjudication being made. The first is the size of the debt. Sitting currently at more than $1.4 million, it is a very large debt by any standards. Then there is the fact that Mr Wright has taken no steps to pay even part of the debt during the twelve month period that has elapsed since judgment was entered against him.
[73] The nature of the debt also needs to be factored into the equation. Mr Wright undertook in a formal term loan agreement to repay the sum of $1.3 million to HDL upon the occurrence of a triggering event. The triggering event occurred, but Mr Wright did not honour his obligation. Issues of commercial morality arise as a result. The Court must demonstrate to the commercial community that it is not prepared to allow debtors in this type of situation to walk away from their obligations
[74] Occasionally an order of adjudication may be refused because it would be futile. This may occur where it is clear that the debtor has no assets and other factors also suggest that the Court should exercise its discretion in favour of the debtor. This is not a case falling within that category. Mr Wright owns a car, some shares in public companies and (until recently anyway) some cash that he held on deposit. All
of those assets are available for distribution to his creditors. In addition, the equity in
MPL and Unit 9, 570 Victoria Street, Hamilton can be realised.
[75] There are also matters that the Official Assignee may wish to investigate. The proceeds of sale of the H2K shares appear to have been received and disbursed at around the time Harrison J heard and determined HDL’s application for summary judgment. An issue therefore arises as to whether any of the payments that Mr Wright made from the sale proceeds are voidable as against the Official Assignee. The repayment of the sum of $90,000 to Ms Kensington may fall within this category.
[76] The Official Assignee may also wish to investigate the gifting programme in respect of the Boundary Road property, and call up the balance owing by the Carleen Trust in respect of the purchase price that the trust agreed to pay for that property.
[77] Taking those matters into account I had no hesitation in concluding that it was appropriate to make an order of adjudication.
Result
[78] The application for an order halting the application for adjudication was dismissed.
[79] I made an order adjudicating Mr Wright bankrupt. That order was timed at
2.10 pm on 4 November 2010.
Costs
[80] HDL is entitled to costs on a category 2B basis together with disbursements as fixed by the Registrar.
Lang J
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