DONALD STUART DRUMMOND v JACK PHILIP GOLDSMITH [1999] NZCA 186 (14 September 1999)

IN THE COURT OF APPEAL OF NEW ZEALAND

ca52/99

	between	donald stuart drummond
		Appellant

	and	jack philip goldsmith
		Respondent

Hearing:	2 September 1999
Coram:	Elias CJ Gault J Anderson J
Appearances:	A J Forbes QC for Appellant A J Davis for Respondent
Judgment:	14 September 1999

judgment of the court delivered by ANDERSON J

[1] Mr Drummond appeals against an order of the High Court, made on 15 February 1999, adjudicating him bankrupt on the petition of Mr Goldsmith.The act of bankruptcy relied upon by the petitioner was failure to comply with a bankruptcy notice requiring payment of a judgment debt in the sum of $287,646.19.

[2] The appellant and respondent were shareholders in a land owning company in the Waikato intended to be used as the basis of a deer farming operation. Mr Goldsmith was also the company's accountant.In 1990 Mr Goldsmith began making advances to the company and by 26 November 1993, when refinancing was undertaken, the total capital he had advanced to the company was in excess of $100,000.Mr Goldsmith's first affidavit in the bankruptcy proceeding refers to capital advances amounting in total to $178,561, of which it seems about $118,000 may have been outstanding on 26 November 1993.Mr Goldsmith's figures indicate that by 2 November 1998, irrespective of any sums owing for interest, the outstanding principal in respect of those advances was $30,700.

[3] By November 1993 the company was in default in respect of an existing mortgage which Mr Goldsmith had personally guaranteed to the extent of 25% of liability.He arranged with Mr Drummond to refinance that mortgage from his own resources on the security of a first mortgage and debenture. There is no dispute that by agreement he advanced $284,211.19 under that arrangement.There is a significant conflict between Mr Drummond and Mr Goldsmith as to whether, as Mr Drummond contends, interest was to be at 8.5% per annum, or, as Mr Goldsmith contends, at a 3% premium over Westpac Bank rates with provision for penalty interest.Mr Drummond assumed personal liability under the mortgage and debenture.In the years following Mr Goldsmith advanced further monies amounting to almost $42,000.The company fell into default and in late 1997 Mr Goldsmith made demand under the debenture for $881,000 in respect of advances including the amount required to refinance in 1993.The demand was not met and the plaintiff appointed a receiver, Mr Allott of Christchurch, Chartered Accountant.

[4] Mr Goldsmith sought summary judgment against Mr Drummond for his personal liability.That application was defended on the basis of the conflict over the interest provisions.Mr Drummond also disputed the position in relation to advances other than the advance for refinancing in November 1993. A Master gave summary judgment in respect of that principal sum of $284,211.19 together with judgment as to liability in relation to interest on that principal, as well as costs of $3000 and disbursements.The liquidated total sum of $287,481.19 was the judgment debt upon which the bankruptcy petition was based.

[5] Mr Goldsmith sealed the judgment and issued a bankruptcy notice on 4 May 1998.The appellant's response was to seek to stay the judgment but he failed and incurred further costs in the process.A creditor's petition was issued out of the Hamilton High Court on 24 July 1998 with a first call set for 31 August 1998.On that date the appellant appeared and was represented by counsel.When the bankruptcy petition was eventually heard, after adjournments at the request of Mr Drummond, the appellant represented himself.It may be inferred from the terms of the judgment under appeal that Mr Drummond had some difficulty in constructing a cogent argument but he did rely on s 25 of the Insolvency Act 1967, which provides as follows:-

If the petitioning creditor is a secured creditor, the Court shall not make an order of adjudication unless the creditor satisfies the Court that the amount of the debt exceeds the value of the security by at least $200.

[6] Mr Drummond appeared to rely on s 25 although in November 1998 the receiver had eventually managed to sell the land in question for $350,000 plus GST.That sum, of course, exceeded the liquidated total of the summary judgment, but the legal and accounting situation was not as straightforward as Mr Drummond's apparent view of the matter.The land was not sold by virtue of the power of sale under the mortgage but was sold by the receiver acting in that capacity under the debenture.Accordingly the receiver was required to apply the proceeds of the sale in terms of s 30 of the Receiverships Act 1993.By virtue of subs (2) Mr Allott was required to apply the proceeds, first, in reimbursement to himself for his expenses and remuneration.

[7] In the course of the receivership, which had been marked by litigation at the suit of Mr Drummond against the receiver in the discharge of his functions, significant legal, administration and other receivership costs had been incurred.Mr Allott had been put in funds for the purpose of the receivership by advances from Mr Goldsmith and by the time the land was sold the receiver's costs and fees had totalled $122,153.As Mr Allott, in his capacity as receiver, was indebted to Mr Goldsmith to that extent, he was entitled to discharge his liability for that sum as the first charge required to be paid by virtue of s 30(2).The net amount received from the sale exclusive of those general receivership costs was $310,500 which was forwarded to Mr Goldsmith as the charge holder.He was entitled to appropriate the $122,153 to repayment of receiver's advances.As to the balance he was entitled to apply such sum as would satisfy the longest outstanding advances, which were those made prior to the refinancing in November 1993.On this approach, irrespective of any question of interest and advances made later than November 1993, Mr Drummond's indebtedness in respect of the liquidated element of the summary judgment debt was in the order of $130,000.Even on the basis of Mr Drummond's mitigated interest approach, the total indebtedness to Mr Goldsmith is claimed to be in the order of $463,000, although Mr Goldsmith contends that the true sum is nearer $1 million.The Official Assignee has apparently accepted a proof of debt for almost $1 million.

[8] In a dispute involving persistent litigation on the part of Mr Drummond the judgment under appeal is not inappropriately succinct.It notes that Mr Drummond made a great deal of allegations against the receiver and against Mr Goldsmith but that these had no evidential basis, notwithstanding the opportunity that Mr Drummond had had to place evidence before the Court.It referred to allegations of a failure to accept an offer to purchase the farm, but the evidence showed that the offer was not only less than that ultimately obtained but also was withdrawn.The Judge correctly held that Mr Goldsmith was entitled to apply the funds acquired from the receiver to the first advances in time.Mr Drummond's affidavit attempting to dispute several of the early advances was said by the Judge to be a little hard to follow.Our view, for the reasons appearing later in this judgment, is that the particular assertions are unsubstantiated and unconvincing.Section 25 of the Insolvency Act 1967 was held not to apply, Mr Drummond was found to be insolvent and the debt to be outstanding.An order for adjudication was accordingly made and an order for costs in the sum of $10,000 was also made against Mr Drummond.

[9] In this Court counsel for the appellant challenged the judgment on an analytical basis which, with respect, perhaps overemphasised the significance of what were in the nature of remarks by the Judge about the context of the proceeding.One of the matters mentioned concerns the conduct of the litigation in the High Court at Hamilton between Mr Drummond and the receiver, a matter of peripheral relevance, if any, to the state of accounts between Mr Drummond and Mr Goldsmith.Leave was sought on behalf of the appellant to adduce evidence from a solicitor practising in Hamilton in relation to that litigation.We reserved the question of leave pending the development of counsel's argument.Apart from any question of improvident unavailability, we do not think the proposed evidence has sufficient cogency to warrant the grant of leave and it is declined.

[10] We think this is a straightforward case of a substantial and unpaid judgment debt which has been resisted tenaciously but on insubstantial grounds. For the reasons already given it is plain that the receiver's expenses and remuneration must be deducted from the net amount received on the sale of the farm property.Although on the face of it $122,000 may seem high, advances to that extent have actually been made by Mr Goldsmith.Even if they were arguably overstated by, say, almost $100,000, the judgment debt would remain unpaid.In fact, however, they have not been challenged.Were there no such costs at all the judgment debt would remain unsatisfied if unpaid advances made prior to November 1993 exceed about $22,000.On this issue, Mr Drummond's impugning the figure of $30,700 is unpersuasive.

[11] Mr Drummond has challenged the pre November 1993 advances, relying in particular on a schedule appearing in paragraph 32 of his affidavit sworn on 15 February 1999.This is the paragraph which the High Court Judge found "a little hard to follow".As well, the allegations in relation to that paragraph were found, we think correctly, to be reliant on allegations unsupported by admissible evidence.Two examples from the paragraph demonstrate its lack of cogency.Reference is made to a disputed advance of $50,000 referred to in relation to Mr Williamson.Analysis of the accounts shows that although an advance to which that probably relates was made on 3 October 1990, the very next entry shows a repayment of $49,000.To treat the result as a disputed advance of $50,000 is to misrepresent the position.Another example is a reference of $25,400 in relation to "farm GST". The accounts show a debit for GST in that amount and a prompt crediting upon receipt of reimbursement by the Inland Revenue Department.The net debit is therefore not the amount of the GST but the interest chargeable for the period between the advance and the reimbursement.This is only a few hundred dollars. In respect of only two examples on a schedule relating to $123,900, Mr Drummond's dispute in respect of over $75,000 is entirely misconceived.The amount of the other items was attacked but merely by assertion, unsupported by evidence.

[12] It is plain to this Court, as it was to the High Court, that whatever the exact figures may be the judgment debt remains significantly unsatisfied.The objections taken by Mr Drummond to Mr Goldsmith's conduct and accounts have no evidential substance.On the most optimistic view which Mr Drummond could entertain in relation to evidence on the principal sums advanced by Mr Goldsmith, the appellant is manifestly insolvent.There was no proper evidential basis for the High Court to be satisfied that it would be just and equitable to dismiss the petition.In the result the order for adjudication of bankruptcy has not been shown to be wrong.On the contrary, we consider it was inevitable.

[13] One of the aspects of the judgment under appeal was the very high order for costs in the sum of $10,000.Counsel for the appellant realistically acknowledged that having regard to Mr Drummond's financial circumstances the question of costs is of such an academic nature that if he failed on the appeal in substance he would feel diffident about urging the Court to allow the appeal against costs.We are obliged to him for his candour.Whilst we think that the order for costs is unusually high and ought not be taken as a precedent, we do not think it appropriate to intervene in respect of them.

[14] For these reasons the appeal is dismissed.Emulating the pragmatism of counsel for the appellant we make no order as to costs.

Solicitors:

Stringer & Son, Christchurch, for Appellant

Clark Boyce, Christchurch, for Respondent