Zheng Li Trustee Limited v Henderson
[2016] NZHC 292
•25 February 2016
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2015-485-676 [2016] NZHC 292
UNDER the Insolvency Act 2006 IN THE MATTER OF
the bankruptcy of Ewan Stuart Henderson
BETWEEN
ZHENG LI TRUSTEE LIMITED AND MK TRUSTEE 2013 LIMITED Judgment Creditors
AND
EWAN STUART HENDERSON Judgment Debtor
Hearing: 25 February 2016 Counsel:
D Consedine for the Judgment Creditors
No appearance for the Judgment DebtorJudgment:
25 February 2016
ORAL JUDGMENT OF ASSOCIATE JUDGE SMITH
[1] The judgment creditors (the trustees) apply for an order adjudicating
Mr Henderson bankrupt.
[2] The trustees obtained summary judgment against Mr Henderson in this Court on 27 July 2015. The amount of the judgment was $185,675.11. Mr Henderson was found to be liable for that sum on personal guarantees he had provided, in which he guaranteed the lessees’ liability under leases of certain commercial premises in Wellington owned by the trustees.
[3] An order for costs and disbursements was subsequently made in the trustees’
favour in the sum of $19,377.10.
[4] Mr Henderson did not appeal the summary judgment decision but he did file an appeal against the later costs decision. That appeal was later deemed abandoned
ZHENG LI TRUSTEE LIMITED AND MK TRUSTEE 2013 LIMITED v EWAN STUART HENDERSON [2016] NZHC 292 [25 February 2016]
when Mr Henderson failed to file his case on appeal within the time allowed under the Court of Appeal (Civil) Rules 2005.
[5] On 28 August 2016 the trustees issued a bankruptcy notice based on their unchallenged judgment for $185,675.11. Under the notice, Mr Henderson had ten working days after service to pay the amount claimed, or secure it or enter into a new agreement with the trustees, or obtain the Court’s approval of terms of payment. Alternatively, he could apply within that period to set aside the notice on the grounds that he had a counterclaim set-off or cross claim against the trustees which
(1) equalled or exceeded the amount claimed by the trustees; and
(2)he could not have put forward in the proceeding in which the trustees obtained their judgment.
[6] The bankruptcy notice was served on Mr Henderson on 1 September 2015.
[7] Mr Henderson did not pay or secure the amount claimed in the notice, or take any of the other steps available as stated in the notice. Instead, on
11 September 2015, he filed a document described as a “notice of opposition to bankruptcy notice”. On its face, the document appeared to be in the form of a notice of opposition to a creditor’s application for an adjudication order, and at that point the trustees had made no such application.
[8] The case was called in Court on 6 October 2015, and I noted that the documents filed by Mr Henderson did not appear to disclose any cross-claim which could not have been set up in the proceeding in which judgment had been entered against him. I found that the documents filed by Mr Henderson did not disclose any basis on which the bankruptcy notice could be set aside. To the extent that Mr Henderson may have intended his “notice of opposition” document to be an application to set aside the bankruptcy notice, I dismissed the application.
[9] Mr Henderson has not sought to appeal or review that decision.
[10] On 14 October 2015 the trustees filed an application to adjudicate Mr Henderson bankrupt. The application was based on Mr Henderson’s failure to comply with the bankruptcy notice which had been served on him on
1 September 2015.
[11] The trustees had some difficulties serving Mr Henderson with the application for an adjudication order. They sent the documents by courier to his Thorndon address, inviting him to make contact with the trustees’ solicitors so that formal service could be arranged. Before that could happen, Mr Henderson filed a notice of intention to oppose the bankruptcy application and an affidavit in support of his opposition.
[12] In his supporting affidavit, Mr Henderson acknowledged that the Court papers were received by him by courier. In circumstances where he has proceeded to file a debtor’s notice of opposition and affidavit, and subsequently filed a further affidavit and made written submissions, I am satisfied that the adjudication proceedings have been sufficiently served on him. I therefore make an order under r 6.8(b) directing that the application for adjudication documents are to be treated as having been served on Mr Henderson on the date on which he signed his notice of intention to oppose the bankruptcy application, namely 10 November 2015.
[13] Mr Henderson did not appear when the case was first called on
1 December 2015, but he did send an email to the Court advising that, due to unforeseen circumstances, he was not in a position to attend the hearing. I then gave directions for the filing of any reply affidavits by the trustees, and the filing of written submissions on each side. I directed that the application for adjudication would be heard on a defended basis, on 24 February 2016 at 10am.
[14] Mr Henderson again elected not to appear when the case was called yesterday. He had sent an email to the Court on 23 February 2016 giving notice that he would not be in attendance at the hearing, and setting out some further argument in support of his case. He concluded by noting that “this hearing may or may proceed in my absence”, and expressing the hope that the Court would “see through
the veneer of vindictiveness driving the judgment creditors for what it is”. He stated that “either way I shall live with the judgment delivered”.
[15] Mr Henderson having failed to put forward any reason for not appearing at the hearing (or arranging for a solicitor to appear on his behalf), I proceeded to hear brief submissions from Ms Consedine for the trustees. I adjourned the matter to
2.15pm today with a view to giving an oral judgment at that time.
[16] Section 36 of the Insolvency Act 2006 (the Act) provides that the Court may, in its discretion, adjudicate a debtor bankrupt if the creditor has proved each of the matters set out in s 13 of the Act. Those matters are:
13 When creditor may apply for debtor’s adjudication
…
(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.
[17] Those factors have all been satisfied in this case: the debt is for a certain amount which is well in excess of the minimum $1,000, and Mr Henderson has committed an act of bankruptcy by failing to comply with the bankruptcy notice served on him on 1 September 2015. He did not appeal the judgment on which the adjudication application is based, and there has been no stay of execution of that judgment. The amount owing under it was and is payable immediately.
[18] Section 37 of the Act provides:
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) for any other reason an order of adjudication should not be made.
[19] In this case Mr Henderson does not suggest that he is presently able to pay his debts. His opposition is based on s 37(c) and s 37(d) of the Act.
[20] There is no real dispute between the parties over the principles the Court should apply in exercising its discretion under s 37(c) and (d). The Court’s general discretion was described by the Court of Appeal in Baker v Westpac Banking Corporation as follows:1
It is proper for the Court to consider not only the interests of those directly concerned – the petitioner, client, other creditors, the debtor – but also the wider public interest. A creditor who establishes the jurisdictional facts as set out in s 23 is not automatically entitled to an order. On the other hand, it is for an opposing debtor to show why an order should not be made. The Court will give proper weight to the commercial judgment of the petitioner but the oppresive use of the bankruptcy process may be a ground for refusing an order. Another ground may be the undoubted absence of assets but that will not necessarily preclude an order given the range of interests involved including the public interest in the continuing oversight of a bankrupt’s affairs and the disqualifications that go with bankruptcy. In the end the Court must balance the various considerations relevant to the case and determine whether the debtor has succeeded in showing that an order ought not to be made.
[21] In Rabobank Australia Ltd ex parte Tootell,2 Associate Judge Osborne referred to the decision of Master Williams QC, as he then was, in Re Epirosa.3 In that case, the Master set out a list of factors which he considered relevant to the exercise of the Court of its discretion:
(1)What are the wishes of all affected parties, including the applying creditor, other creditors, and the debtors?
1 Baker v Westpac Banking Corporation CA 212/92, 13 July 1993 at 4, per Richardson J.
2 Re Rabobank Australia Ltd ex parte Tootell [2013] NZHC 2975.
3 Re Epirosa, ex parte Diners Club NZ Ltd (HC) Wellington B 498/91, 6 March 1992.
(2)Does the debtor have the ability to meet his or her debts over time and, if so, does that meet the requirements of achieving finality within a reasonable period?
(3)What were the circumstances in which the debt was incurred, and do those circumstances suggest that the debtor is acting unreasonably in pursing adjudication?
(4) Will adjudication be pointless?
(5)Will the debtor, if adjudicated, be rendered unable to support himself or herself?
(6)Does the debtor have such a standing in the community that significant issues of stigma or embarrassment will result?
[22] Many of those principles were accepted by Mr Henderson in his notice of opposition. For example, Mr Henderson accepts that the onus of satisfying the Court that it is just and equitable not to make an order of adjudication, falls on the debtor. He also accepts that the Court should consider not only the interests of those directly concerned, but also the wider public interest. Mr Henderson acknowledges that, in considering the wider public interest, the Court should have regard, among other things, to the likely impact on the standard of commercial behaviour of its decision whether or not to bankrupt a particular debtor. He accepts that lack of assets is not necessarily a bar to the making of an adjudication order, and that the Court should not find a lack of assets lightly. Mr Henderson also accepts that the uncorroborated evidence of the debtor will be insufficient to establish want of assets (referring, with
another case, to Re Fidow4). He accepts that the fact that there may only be one
creditor does not bar the making of an order for adjudication, and that the overall exercise for the Court is to balance the various factors it considers relevant to the
case.
4 Re Fidow (a debtor) [1989] 2 NZLR 431.
[23] To the specific authorities mentioned above, I also add that in a number of cases the Courts have emphasised the importance, as a “public interest” factor, of holding to account those who have given personal guarantees in commercial situations. I refer, for example, to the decision of Master Lang, as he then was, in Re Rossall, ex parte Auckland Finance Ltd,5 in which the learned Master noted that Mr Rossall was in his predicament because he had failed to honour a personal guarantee, and that the Court had consistently stressed that guarantors who are not prepared or able to meet their commitments were likely to be adjudicated bankrupt.
The Master considered that any other approach by the Court would not be conducive to commercial morality. The public interest and the promotion of commercial morality in that case was held to favour the making of an order for adjudication.6
[24] In Re Fidow, Justice Fisher noted that:7
…it does appear that as a matter of legal authority one should not necessarily decline a bankruptcy merely on the ground that there are no obvious assets for the creditors. Clearly that must be a powerful factor to consider. But there are several other considerations which may be of equal importance.
One of these is the potential for further investigation. A bankruptcy makes available to creditors an array of procedures for investigating the financial circumstances of the debtor. Those procedures are likely to prove more effective than an investigation conducted by other means. I have previously adverted to the possibility that some investigation in this case might be rewarding. I intend no reflection upon Mr Fidow by that comment. In the finish, investigation may reveal nothing that is not already known. But I cannot entirely rule it out as a possible avenue of benefit for the creditors.
The next matter to be borne in mind here is that on a bankruptcy petition the Court must have regard to public interest in a way which transcends the interest of the immediate parties to the proceedings…The public interest in exposing and controlling an insolvent debtor is one which exists quite independently of the separate question of debt collection by his immediate creditors.
[25] Finally on the authorities, I refer to two decisions of Master Lang. The first decision is Re Marra,8 a case in which the house property occupied by Mr Marra and his family was owned by a family trust. It appeared that Mr Marra was being
supported by a weekly income of $600 from his mother’s trust. The assets of the
5 Re Rossall ex parte Auckland Finance Ltd, HC Auckland CIV-2002-404-580/B 1370/02,
30 April 2004.
6 At [40].
7 Re Fidow, above n 4, at 443.
8 Re Marra (2004) 21 NZTC 18,494 (HC).
family trust had not been supplied to the Court. Master Lang observed in respect of the trust:9
No details have been provided of [the value of Mr Marra’s car] or of any other assets the trust may have acquired. The Official Assignee may wish to investigate whether any of the assets presently owned by the trust were acquired by it from Mr Marra. If they were, a debt may still be owing by the trust to Mr Marra.
[26] In a section of his judgment headed “public interest and commercial morality”, Master Lang said:
I consider that an objective observer would be dismayed to find that Mr Marra was able to walk away unscathed from his present situation. That kind of outcome would in my view be detrimental to the public interest and would do nothing to enhance commercial morality, particularly in the field of compliance with tax obligations [the situation with which Marra was concerned]. This is one of those cases where, regardless of other circumstances, Mr Marra should have visited on him the consequences flowing from an order of adjudication.
[27] I referred to and applied the decision of Master Lang in Marra, in a 2014 case, Strachan v Moodie.10 I also referred in Strachan to another decision of Master Lang, Re Pulman.11 In Pulman, Master Lang noted that a complete absence of assets may mean that adjudication will serve no practical purpose. But a submission that a debtor has not assets will be closely scrutinised. The Judge noted
that such a claim may conveniently ignore the fact that assets have been transferred to a family trust, or that assets do in fact exist, although not in the name of the debtor. Sometimes the debtor’s assets may only be recoverable by using the powers given to the Official Assignee under the Insolvency Act.12
[28] Turning to the facts in this case, the starting point is that the trustees are prima facie entitled to the adjudication order they seek. The onus is on Mr Henderson to persuade the Court that it should exercise its discretion to decline
to make the order.
9 Re Marra, above n 8 at [25].
10 Strachan v Moodie [2014] NZHC 3167, 11 December 2014.
11 Re Pulman ex parte The Hire Company Ltd HC Auckland CIV-2006-404-4697, 20 April 2007.
12 At [28].
[29] In the trustees’ favour is the fact that the liability has arisen out of commercial guarantees given by Mr Henderson. As noted above, the authorities have generally tended to see that as a factor pointing in favour of adjudication. Mr Henderson acknowledges that he knew what he was getting into when he signed the guarantees, but he says that the circumstances later changed – he has had major heart surgery on two occasions, and has ongoing associated health concerns.
[30] I accept that Mr Henderson has had these difficulties, but at the same time he appears to have put it out of his power to meet personal liabilities, by ensuring that significant assets he might otherwise have owned are held in a family trust, out of the immediate reach of his creditors. As I put the same issue in Strachan:13
…Dr Moodie does appear to have deliberately structured his affairs so that he would not have any assets to pay any significant sum for which he might become liable. I do not suggest that he was not entitled to establish the two family trusts, or to transfer assets to them (if that is what has occurred), but anyone who does that inevitably invites the possibility of bankruptcy if he or she becomes subject to a substantial adverse judgment.
[31] Also in the trustees’ favour in the balancing exercise I am required to undertake is the fact that there do appear to be matters in this case that might properly be the subject of investigation by the Official Assignee. Mr Henderson says that the home he and his wife occupy in Thorndon is owned by a trust, of which he is a beneficiary, but that there is no equity in the trust. He has produced a copy of a rates form showing a valuation for the home of $890,000, but that valuation date is September 2012. He has produced evidence that there are debts totalling $979,000 secured over the home, but has not produced the financial statements for the trust showing what other assets or liabilities it might have, and in particular whether any debt is owing by the trust to him. His evidence that there is no equity in the trust is largely uncorroborated.
[32] There are other matters disclosed by the evidence which might properly be the subject of investigation by the Official Assignee in the event of an adjudication order being made. Until fairly recently, Mr Henderson appears to have held shares in
the companies Ugbrooke Country Estate Ltd and Quay Properties Ltd. He still holds
13 Strachan v Moodie, above n 10 at [44].
350 shares in the latter company (16.67 per cent of the total shareholding), but says that the equity in the company is worthless, and that in any event he owes the company $290,000 for previously unpaid contributions for which he says he is liable. A document produced by Mr Henderson appears to show that Ugbrooke owns a piece of land having a capital value of $1,820,000 as at 1 July 2014. Mr Zhang, a director of one the trustees, produced Companies Office records showing that Mr Henderson’s wife holds 50 per cent of the shares in Ugbrooke. The Companies Office documents also appear to show that that shareholding may have been transferred from Mr Henderson to his wife as recently as 20 June 2015. Similarly, Mr Henderson appears to have transferred 50 per cent of his shareholding in Quay Properties Ltd to Mrs Henderson on 3 April 2015.
[33] Mr Henderson says that there is no equity available to him in these companies, but if that is so there is no explanation why he saw fit to transfer the shares to his wife when he did. Those transfers appear to be matters which would properly be the subject of investigation by the Official Assignee if an adjudication order were made.
[34] Mr Henderson raises as a “public interest” matter the fact that he has a student loan presently standing at $49,980. He submits that there will be a loss to the taxpayer if there is an adjudication order and this loan has to be written off. That may be so, but I do not regard it as a significant factor in the balancing exercise I have to undertake. If the existence of the student loan were a reason to draw back from making an adjudication order, every debtor in the country who happened to have a student loan would appear to be immune from bankruptcy. That clearly cannot be the case.
[35] Mr Henderson alleges that the trustees and their counsel have acted oppressively towards him in (1) pursuing him on his guarantees when they knew of his health issues and (2) subsequently pursuing the adjudication proceeding. In my view there is nothing in these submissions. The trustees have exercised their legal rights in suing Mr Henderson on his guarantees, and in any event I do not believe that this Court, in its bankruptcy jurisdiction, should be concerned with matters occurring before the summary judgment was obtained. Similarly, the issues which
Mr Henderson has raised relating to costs awarded on the summary judgment application are not relevant now. The time for Mr Henderson to have ventilated any issues he may have had over costs was before the costs judgment was given by Associate Judge Christiansen on 15 September 2015, or on appeal against that costs judgment. As noted above, Mr Henderson has abandoned the appeal he filed against the costs judgment. In those circumstances, it is not for this Court in its bankruptcy jurisdiction to look behind the formal judgment given by the Associate Judge on
15 September 2015, particularly when a right of challenge existed which Mr Henderson elected not to pursue. As far as the present adjudication proceeding is concerned, no costs award has yet been made. In the ordinary run of cases successful creditors in adjudication proceedings are awarded costs in accordance with a standard scale which is set out in the High Court Rules. Accordingly, the various complaints Mr Henderson appears to have about costs awards made in favour of the trustees on a solicitor/client basis, appear to have no relevance in this adjudication proceeding.
[36] Mr Henderson has seen fit to attack the motives and actions of counsel for the trustees, contending that two partners in the firm of solicitors acting for the trustees are also business partners of one or more of the trustees or their directors. While Mr Henderson acknowledges that those solicitors have not acted unlawfully in so doing, he contends that they have nevertheless been acting in a conflict situation and should have refrained from acting for the trustees in these proceedings. I do not think there is anything in the point. A complaint made by Mr Henderson to the New Zealand Law Society, which appears to have raised these matters, was dismissed, and a complaint Mr Henderson makes about these partners “double dipping” (because of their business relationship with the trustees) appears to go only to the costs issue mentioned above, and not to the question with which I am presently concerned, namely whether these trustees, whoever they might be represented by, are entitled to the adjudication order they seek. I mention also Mr Henderson’s allegation that Ms Consedine improperly contacted his doctor’s office in an attempt to locate him when attempts were being made to effect service on Mr Henderson. Mr Henderson’s allegation was not made on oath, and Ms Consedine assures me that she did not make any such contact. In those
circumstances, there is no need for me to consider the matter further (it having no bearing on the issue I have to determine).
[37] Mr Henderson also endeavours to characterise as oppressive conduct on the part of the trustees, a failure to accept (or at least negotiate further) on a settlement offer of $50,000 which he says he made in March 2015. There is nothing in that – creditors do not have to accept offers made which are very substantially lower than the amounts they are claiming, and in this particular case the trustees presumably had obligations to the beneficiaries of their trust to get in all trust assets.
[38] Turning to Mr Henderson’s personal circumstances, he is now 54 years old and says that he has to provide for his wife and two children. He does not explain how he has been doing that since he left the long-term employment he had with the bank in 2013, and during the subsequent period when two businesses with which he was involved failed towards the end of 2014. He appears to have spent the time since leaving the bank doing post-graduate studies – he says that he graduated with MBA and LLM degrees in December 2015.
[39] Looking at Mr Henderson’s position as it is today, it appears that if an adjudication order were made he would remain living in the Thorndon house property owned by the trust, and would presumably be able to live on whatever sources of income have been sustaining him over the last two years.
[40] In his submissions, Mr Henderson refers to the judgment of Thomas J in a
1992 case, Taylor v Greenwood.14 That case was concerned with an application to set aside a bankruptcy notice, and Mr Henderson submits that there are marked parallels between Taylor v Greenwood and his own position. Mr Taylor was 56 years of age, and his insolvency had arisen through no fault of his own. Thomas J noted that he believed that Mr Taylor’s position could be directly traced to the political and economic developments which took place at the time. Significantly, the Judge found bankruptcy would not realise one cent in the dollar for creditors. The Judge found it difficult to conceive of any public interest element which would be served by making Mr Taylor bankrupt. He would not get a job, and it was unlikely that he
would get credit. The Judge considered that making Mr Taylor bankrupt would be purely punitive, and would serve no useful purpose.
[41] I accept Ms Consedine’s submission that there is little to be gained by endeavouring to treat another case which has some similarities on the facts, as a guide to the result in the present case. By way of example only, I do not think it is possible to conclude in this case that bankruptcy would not realise one cent in the dollar for Mr Henderson’s creditors. As I have said, it seems to me that there are factors which the Official Assignee might reasonably enquire into in the event of an adjudication order being made. And Re Fidow is authority for the proposition that
that may be enough, even if on the surface there appear to be no assets.15
[42] The foregoing factors in my view point towards the making of an adjudication order. However there are two factors which give me cause for pause. The first is Mr Henderson’s health, and the second is aptly described by Mr Henderson in his written submissions as follows:
I can confirm that I am currently seeking employment using my new-found commercial and legal skills. It has been less than two months since I have graduated and with Christmas, New Years and summer holidays, the job market is only now beginning to awaken from its slumber. My distressed financial position means that of course I am seeking to re-enter the workforce in order to provide for my family, despite my health problems.
[43] It seems to me that there may be some merit in Mr Henderson’s submission, and some time should be allowed for him to see if he can put his new qualifications to use. Also, to see whether his health position will enable him to take employment which will enable him to either pay the judgment debt or at least reach some arrangements with the trustees to resolve the matter. The new qualifications, and Mr Henderson’s earlier track record as a relatively high earner, persuade me that the complete position might not yet be before the Court. In the circumstances, I propose to adjourn the application for three months, for further consideration in the list on
17 May 2016. As I have said, it appears that Mr Henderson has been a relatively high-earner in the past, and I am prepared to allow him one final opportunity to see what he can do with his new qualifications, and to get matters resolved with the
trustees. I warn him, however, that this should not be regarded by him as some sort of victory. The factors favouring the making of an adjudication order are likely to be still there in three months time (in particular, the 2015 transactions which I have considered might properly be the subject of enquiry by the Official Assignee). It is for Mr Henderson to use the period constructively to endeavour to resolve matters with the trustees if he can. I accordingly adjourn the matter to 10am on
17 May 2016.
Associate Judge Smith
Solicitors:
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