Body Corporate 68792 v Memelink [2018] NZCA 509 (19 November 2018)

Last Updated: 4 December 2018

IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA

CA298/2017 [2018] NZCA 509

	BETWEEN	BODY CORPORATE 68792 First Appellant BODY CORPORATE 378945 Second Appellant
	AND	HARRY MEMELINK Respondent

Hearing:	30 July 2018 (further material received 30 October 2018)
Court:	French, Collins and Moore JJ
Counsel:	A O’Connor for First Appellant P S J Withnall and D G Dewar for Second Appellant Q S Haines for Respondent
Judgment:	19 November 2018 at 11 am

JUDGMENT OF THE COURT

A The appeal is dismissed.

2. The appellants are jointly and severally liable to pay the respondent costs for a standard appeal on a band A basis and usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Moore J)

Introduction

[1] Mr Memelink is involved in a long running dispute with two bodies corporate over unpaid levies. The bodies corporate seek to have him adjudicated bankrupt. In a reserved judgment of 8 May 2017, Associate Judge Smith declined to do so.^[1] Body Corporate 68792 (the first appellant) and Body Corporate 378945 (the second appellant) appeal that decision. They claim the Associate Judge erred in exercising his discretion not to adjudicate Mr Memelink bankrupt when he concluded:

• (a) Mr Memelink was able to pay his debts;
• (b) the circumstances in which the debt was incurred did not justify adjudication; and
• (c) adjudication would be pointless.

[2] Following the hearing before us, Associate Judge Johnston, having refused Mr Memelink’s application for an adjournment, adjudicated Mr Memelink bankrupt.^[2] The creditors were a Lower Hutt law firm and the orders were based on bankruptcy notices relating to costs judgments in the High Court (for $108,200.06), and in this Court (for $13,767.52) following Mr Memelink’s unsuccessful claim against the firm.
[3] As a consequence, we issued a minute on 30 August 2018 inviting the parties to file memoranda as to whether the adjudication rendered the appeal moot. Counsel for the first and second appellants responded by way of joint memorandum. The appellants indicated it was premature to say whether the consequences of Mr Memelink’s adjudication had such an effect. They noted that on 11 September 2018 Mr Memelink filed an originating application in the High Court seeking an order annulling his bankruptcy.^[3] At the time of filing, the application had yet to be called, although the appellants indicated it would be opposed. They observed that whether the appeal was moot turned heavily on the outcome of Mr Memelink’s application. They also noted that in the event he was successful, the appellants would seek leave to advance further matters which have arisen subsequent to the hearing before us.
[4] Notwithstanding the above, we can see no good reason to further delay the delivery of this judgment pending the determination of Mr Memelink’s application to annul Associate Judge Johnston’s bankruptcy order.

Background

[5] The appellants operate properties situated in Lower Hutt. Mr Memelink holds interests in a number of units in each property. Whether this is in his personal capacity or as a trustee of the Link Trust (No 1) is unclear.
[6] In June 2014, an unrelated body corporate was substituted as creditor in bankruptcy proceedings commenced the previous year by the Inland Revenue Department. Shortly afterwards, in August 2014, the first appellant joined as a supporting creditor. Over the next two years the proceedings were frequently adjourned. Typically, this was after Mr Memelink had offered to pay outstanding debts shortly before the matter was called. In February 2015, the second appellant joined as a supporting creditor.
[7] In May 2016, the original body corporate withdrew,^[4] leaving the first and second appellants to apply for substitution. Associate Judge Smith granted their applications based on claims for $120,426 and $4,353.25 by the first appellant and $81,340.83 and $16,331.96 by the second appellant.^[5]
[8] By August 2016, when the matter was called before Associate Judge Smith, the sums had been paid. The Associate Judge concluded there was “not (yet) a case for an adjudication order”.^[6] Although describing Mr Memelink as “a habitual debtor, who disputes numerous apparently valid claims against him and (in a number of cases) has paid at the last minute, when there was no other option open to him”, he was not prepared to dismiss as unfounded Mr Memelink’s challenge as to liability and quantum.^[7] The Associate Judge granted a further adjournment subject to certain conditions.^[8]
[9] Mr Memelink did not comply with the conditions imposed, apparently because he continued to challenge liability and quantum. Responding to these defaults the Associate Judge observed that the conditions he had imposed contemplated Mr Memelink continuing to pay his levies pending resolution of his dispute in other forums.^[9] Notwithstanding this, the Associate Judge granted Mr Memelink “one further opportunity ... to put his house in order and bring himself into compliance”.^[10]
[10] By 1 November 2016, Mr Memelink had partially complied. However, not all the conditions imposed were met. The Associate Judge put it this way:^[11]

While there remain serious concerns over Mr Memelink’s failure to comply strictly with the conditions (particularly given the number of indulgences the Court has already granted to him), the facts remain that I am here primarily concerned with Mr Memelink’s insolvency, and he has demonstrated that at least when he is forced by the court to do so, he can pay.

[11] The Associate Judge thus halted the first appellant’s proceeding pending the determination of Mr Memelink’s claim against it. However, this was subject to Mr Memelink paying all levies falling due on and after 1 December 2016, diligently pursuing his claims and filing an affidavit as to means.^[12]
[12] Perhaps unsurprisingly, Mr Memelink also failed to comply with these orders. He did not pay the levies as they fell due and his affidavit as to means was deficient in a number of respects. When the matter was next called before the Associate Judge on 7 March 2017 Mr Haines, for Mr Memelink, advised that $16,000 had been paid to the first appellant. Nevertheless, the Associate Judge considered the non-compliance serious. He directed the first appellant to file an affidavit detailing the defaults before deciding whether to lift the halt order.^[13]

Decision under appeal

[13] On 15 March 2017, the Associate Judge heard the appellants’ application to lift the halt order. In support, the appellants pointed to further defaults by Mr Memelink to pay levies as they fell due. They also pointed to Mr Memelink’s continued failure to provide details of his assets and liabilities. They submitted that this conduct was an artefact of an underlying insolvency and that even if Mr Memelink was to meet his liabilities it was inevitable, given his past conduct, that issues of non-payment would re-emerge.
[14] In his decision of 8 May 2017, the Associate Judge determined he had jurisdiction to make an adjudication order despite the fact the debt on which the creditor’s application was based had been paid.^[14] He lifted the halt order because Mr Memelink had failed to pay his levies promptly and had failed to diligently pursue his claim against the first appellant.^[15] However, he declined to exercise his discretion to adjudicate Mr Memelink. He said he was not satisfied Mr Memelink was unable to meet his debts.^[16] He observed it was not the role of the Court in its bankruptcy jurisdiction to punish debtors or to monitor a debtor’s compliance with future obligations.^[17]

The discretion to refuse adjudication

[15] The Associate Judge’s decision not to adjudicate Mr Memelink was founded on s 37 of the Insolvency Act 2006 (the Act). This permits the Court to exercise its discretion to refuse to adjudicate a debtor if they are able to meet their debts. The provision confers a “wide discretion”, informed by various factors.^[18] These, relevantly, include:

• (a) whether the debtor is able to pay his or her debts over time, bearing in mind that bringing finality within a reasonable period of time is the essence of bankruptcy proceedings;
• (b) the circumstances in which the debt was incurred, and whether the creditor has acted unreasonably in petitioning bankruptcy as opposed to taking some other course of action;
• (c) whether adjudication is conducive or detrimental to commercial morality and the interests of the general public; and
• (d) whether adjudication would be pointless in the sense that creditors are unlikely to receive any payment.

[16] The appellants accepted the orthodox position that because s 37 involves an exercise of discretion, this appeal cannot succeed unless they establish that the Associate Judge erred in principle, took into account irrelevant considerations, disregarded relevant considerations or, more generally, made a decision which was plainly wrong.^[19]
[17] We now turn to consider whether the Associate Judge erred in exercising his discretion by reference to the three factors he took into account.

Was Mr Memelink able to pay his debts?

Legal principles

[18] A key factual issue is whether the Associate Judge was correct when he decided Mr Memelink was a debtor unwilling to pay his debts rather than one who was unable to do so. That is because the scheme of the insolvency legislation is to provide an appropriate means of dealing with insolvency, and not debt collection.^[20] It is well established that proof of ability to pay debts does not include proof of willingness to pay debts. In Re Stirling, ex parte Webb Ross & Co Smellie J considered the precursor to s 37 and concluded:^[21]

[T]he provisions of s 26(2) show a clear intention on the part of the legislature that bankruptcy is not to be visited upon a person able to pay his debts. If the debtor chooses not to pay the creditor can seek execution. The Insolvency Act indeed may be seen as an enactment which strengthens the dichotomy between insolvent debtors and solvent debtors — creditors of the latter have their remedies in execution, remedies which are not to be used against insolvent debtors.

Appellants’ submissions

[19] Mr Withnall submitted the Associate Judge was wrong in finding that Mr Memelink was a debtor unable to pay his debts. In particular he submitted the Associate Judge was wrong to infer that the various late payments Mr Memelink made were evidence of his solvency. Mr Withnall described this conduct as, at best, equivocal, emphasising that Mr Memelink’s pattern of obfuscation and last minute payments following extensive indulgences in fact suggested insolvency. He also noted that those payments made were usually in rounded sums suggesting that some, at least, were funded from borrowings. Furthermore, Mr Withnall pointed to Mr Memelink’s repeated failures to provide adequate details of his means and what evidence he did provide was incomplete and unsupported. This led Mr Withnall to submit that the proper inference was that the payments made represented the “emergency plugging of holes in a dyke which was likely springing leaks somewhere else”.

Analysis: Did the Associate Judge err in deciding Mr Memelink was able to pay?

[20] We agree with the Associate Judge’s conclusion that when the evidence is considered as a whole it reveals Mr Memelink as someone who is unwilling, rather than unable, to meet his debts.
[21] The Associate Judge rightly described Mr Memelink as an habitual debtor who disputes apparently valid claims made against him but who tends to pay at the last minute when there is effectively no alternative option.^[22]
[22] We also regard it as significant that there appears to be a legitimate and ongoing dispute as to quantum and liability. It is apparent that much of Mr Memelink’s conduct is founded in his deep mistrust of the appellants’ levies. He believes he has a legitimate claim against the first appellant. In our view, absent clarity around liability and quantum, the Associate Judge was correct to decline to adjudicate Mr Memelink. In this regard we note there was a sufficient dispute about the quantum of levies owed by Mr Memelink for him and the first appellant to commission a report from Deloitte on the extent of his indebtedness.
[23] Furthermore, we agree with the Associate Judge that the shortcomings in Mr Memelink’s affidavit as to means, while “reprehensible”, cannot “trump the simple fact that Mr Memelink apparently can pay his debts, and has now done so (or demonstrated that he stands ready to do so)”.^[23]

What were the circumstances in which the debt was incurred?

[24] This is the second factor the Associate Judge considered. Under this head Mr Withnall submitted that the debts in question arose as part of the ordinary quid pro quo of owning units in a body corporate. In other words when the levies fell due, the amount was utterly predictable. However, despite this Mr Memelink’s failure went back years.
[25] While Mr Withnall is no doubt correct, it is also plain that there remains what appears to be a genuine dispute as to liability and quantum. The Associate Judge was correct to view the history of non-compliance against that backdrop. Furthermore, in our view it is relevant that the first appellant does not have a judgment against Mr Memelink for the substantial part of the unpaid levies claimed and neither does the second appellant for the ongoing unpaid amounts incurred after 16 August 2016.
[26] Mr Withnall also pressed for finality. He submitted this favoured the making of the orders. However, in our view, the Associate Judge was correct when he observed that the Court’s role in its bankruptcy jurisdiction has nothing to do with debt collection.^[24]

Would adjudication be pointless?

[27] This was the third factor the Associate Judge considered. In submitting this ground operated in favour of adjudication Mr Withnall relied on Asher J’s comments in L v P [Bankruptcy]: that it does not automatically follow that because a debtor is able to pay his or her debts, adjudication should be refused.^[25]
[28] Given the relatively narrow purpose of the court’s bankruptcy jurisdiction, we have real misgivings that it would be right to adjudicate a debtor simply because he or she represents a commercial nuisance. In circumstances such as the present, where there is evidence that the debtor is able to pay their debts, we consider as indeed was indicated in L v P that much more would be required.
[29] We are satisfied that the Associate Judge was correct when he observed that while Mr Memelink’s commercial practices are rightly a cause for concern they appear to be largely motivated by his sincere belief in the merits of his claim against the first appellant. This is not a case of a debtor cynically exploiting the creditor in the role of a bank.^[26]

Conclusion

[30] The appellants have failed to discharge the onus of showing the Associate Judge erred in declining to adjudicate Mr Memelink bankrupt. We would add that the Associate Judge’s view is one we would independently have reached, even if this were not an appeal against the exercise of a discretion.

Result

[31] The appeal is dismissed.
[32] It is agreed between the parties that costs should follow the event on a standard appeal basis. We therefore order the appellants are jointly and severally liable to pay the respondent costs for a standard appeal on a band A basis and usual disbursements.

Solicitors:
Thomas Dewar Sziranyi Letts, Lower Hutt for Second Appellant

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^[1] Body Corporate 68792 v Memelink [2017] NZHC 905 [decision under appeal].

^[2] Collins & May Law v Memelink HC Wellington CIV-2018-485-363, 29 August 2018.

^[3] Pursuant to the Insolvency Act 2006, s 309.

^[4] Body Corporate 81012 v Memelink [2016] NZHC 1008.

^[5] Body Corporate 68792 v Memelink CIV-2013-485-5775, 28 June 2016 (Minute).

^[6] Body Corporate 68792 v Memelink [2016] NZHC 1906 [August 2016 adjournment decision] at [57].

^[7] At [52].

^[8] At [58].

^[9] Body Corporate 68792 v Memelink HC Wellington CIV-2013-485-5775, 18 October 2016 (Minute), at [1].

^[10] At [6].

^[11] Body Corporate 68792 v Memelink [2016] NZHC 2658 at [19].

^[12] At [25(b)].

^[13] Body Corporate 68792 v Memelink CIV-2013-485-5775, 7 March 2017 (Minute) at [4] and [5].

^[14] Decision under appeal, above n 1, at [66].

^[15] At [67]–[70].

^[16] At [79].

^[17] At [89] and [90].

^[18] Re Epirosa HC Wellington B498/91, 6 March 1992 at 5–8.

^[19] Baker v Westpac Banking Corp CA212/92, 13 July 1993 at 4.

^[20] Heath and Whale on Insolvency (online ed, LexisNexis) at [3.10.6].

^[21] Re Stirling, ex parte Webb Ross & Co [1990] 1 NZLR 569 (HC) at 575.

^[22] August 2016 adjournment decision, above n 6, at [52].

^[23] Decision under appeal, above n 1, at [89].

^[24] At [90].

^[25] L v P [Bankruptcy] [2009] NZFLR 330 (HC) at [18].

^[26] At [96].