Haines v Memelink and Another as trustees of the link trust No 1
| Jurisdiction | New Zealand |
| Judge | Dobson J |
| Judgment Date | 24 March 2022 |
| Neutral Citation | [2022] NZCA 82 |
| Docket Number | CA463/2021 |
| Court | Court of Appeal |
[2022] NZCA 82
Dobson, Brewer and Edwards JJ
CA463/2021
IN THE COURT OF APPEAL OF NEW ZEALAND
I TE KŌTI PĪRA O AOTEAROA
Commercial — appeal against a refusal to set aside a bankruptcy notice issued by the respondent as creditors against the appellant as debtor — the date for assessment of whether the debtor had established a cross claim — existence of counterclaim at the time the application was made — Insolvency Act 2006 — High Court Rules 2016
J D Dallas for Appellant
DGO Livingston and M F Moughan for Respondents
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A The appeal is allowed.
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B The bankruptcy notice issued by the respondents is set aside.
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C The respondents must pay one half set of costs to the appellant for a two-hour appeal on a band A basis and usual disbursements.
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D The High Court costs order in favour of the respondents is set aside. Costs in the High Court are to lie where they fall.
(Given by Dobson J)
This is an appeal against an Associate Judge's refusal to set aside a bankruptcy notice issued by the respondents as creditors against the appellant as debtor. 1 The parties wage litigious war on many fronts, making a variety of claims against each other. The state of the ledger between them fluctuates depending on the outcome of various proceedings and the position with the claims asserted by each against the other.
The debt to which the present bankruptcy notice relates is a costs order made in 2020 by Grice J in the High Court jointly against the appellant and another party for the sum of $1,758.22, which reflected the netting off of costs entitlements to both parties in that litigation. 2
The bankruptcy notice was served on 12 February 2021 and the appellant responded with an application to set it aside on 15 February 2021 (the application). Associate Judge Johnston heard argument on 25 May 2021 and delivered the judgment under appeal declining to set the notice aside on 29 June 2021.
Between service of the notice and argument of the application, Churchman J issued a costs decision in another proceeding between the parties in favour of Mr Haines on 13 May 2021, for a total of $22,919.25. 3 Counsel for Mr Haines, Mr Dallas, filed a memorandum dated 15 May 2021 in the High Court attaching a copy of Churchman J's judgment in his client's favour, and submitting that the existence of that judgment meant that there could be no reasonably arguable basis for opposing a setting aside of the bankruptcy notice.
Written submissions in support of the application were filed before delivery of Churchman J's judgment, and made passing reference to the then anticipated debt that would be owed by the respondents in an amount that was expected to more than offset
The judgment under appeal made no reference to either Churchman J's judgment in favour of the appellant or Mr Dallas's memorandum drawing it to the Court's attention. On the day after the judgment under appeal was delivered, Mr Dallas filed a memorandum requesting recall of the judgment on the ground that Churchman J's judgment had not been taken into account. If it had been, Mr Dallas submitted that the bankruptcy notice ought necessarily to have been set aside.
The respondents opposed any recall of the judgment under appeal on the grounds that the appellant had not put Churchman J's judgment in evidence on the application, or in amended grounds for the application. It was also submitted that if the ledger between the parties was to be reopened, then there were other liabilities that would need to be taken into account in the respondents' favour.
The Associate Judge issued a Minute on 16 July 2021 declining to recall his judgment. He acknowledged that there was an administrative record of the filing of Mr Dallas's memorandum, but no copy of it could be located. The Churchman J judgment had not been taken into account because it did not feature in the application, the evidence, or the written submissions. The Associate Judge confirmed that he was unaware of the Churchman J judgment having issued when he released his own judgment. He declined recall because if the respondents attempted the next step of commencing a proceeding to bankrupt the appellant then an updated accounting of the state of the ledger between the parties would be required, inevitably including the effect of Churchman J's judgment.
The primary ground on appeal was that the Churchman J judgment should have been taken into account, necessarily resulting in the bankruptcy notice being set aside. Mr Dallas advanced a number of other grounds for setting the notice aside and respondents' counsel raised a number of other reasons for opposing its setting aside. Whilst we acknowledge those in summary terms below, it is the primary ground that determines the appeal.
The purpose of issuing a bankruptcy notice is to establish an act of bankruptcy, which provides the ground for seeking an order bankrupting the debtor. Section 17 of the Insolvency Act 2006 (the Act) provides:
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.
For a bankruptcy notice to be effective, it can reasonably be expected that in cases where there are multiple final orders between the parties, their quantum would be netted off as they stand at the time the notice is issued. The scope of potential cross claims is defined in s 17(7) of the Act. Any asserted cross claim in existence when a debtor applies to have the bankruptcy notice set aside can be raised on such an application. The potential effect of the bankruptcy notice is suspended from the point at which the debtor moves to set it aside, until determination of that application. It would be counterproductive and could lead to unnecessary litigation if applications to set aside bankruptcy notices were required to be determined on the state of the ledger between the parties as of the day on which the bankruptcy notice was issued.
Section 17(1)(d) makes clear that notice of intention to assert a cross claim must be given to the Court within the time limit referred to in s 17(4) — that is, 10 working days from receipt of the notice. It must also be supported by an affidavit. Further matters asserted by the debtor may qualify as cross claims where they arise between the filing of an application to set aside a bankruptcy notice and argument of that application. Such matters could be taken into account in determining the application, subject to compliance with the necessary procedural steps in the High Court Rules for giving notice of the intention to rely on those matters and placing evidence of them before the Court. Depending on timing, leave to raise the new matters may be required, and is likely to be granted if the creditor opposing the application cannot make out material prejudice.
Rule 24.10 of the High Court Rules 2016 operates to automatically extend the time period in s 17(4) of the Act until the application to set aside has been determined. Therefore the date for assessment of whether the debtor has established a cross claim is the date of hearing the application to set aside the bankruptcy notice. Subsequent events cannot be taken into account in determining whether the debtor has a valid cross claim. 4
A debtor served with a bankruptcy notice is restricted as to what can be raised as a cross claim in opposition to it. A cross claim that could have been raised as a defence in the action in which the judgment debt was obtained will not qualify. 5 On the other hand, there must be a degree of mutuality or connection between the cross claim and the judgment debt to which the...
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