THE COMMISSIONER OF INLAND REVENUE V MK JOHNSTON HC WANG CIV-2008-483-151 [2009] NZHC 1144 (27 August 2009)

IN THE HIGH COURT OF NEW ZEALAND
WANGANUI REGISTRY
                                                                         CIV-2008-483-151

                UNDER                         the Insolvency Act 2006

                IN THE MATTER OF              the bankruptcy
of MICHAEL KEITH
                                              JOHNSTON (as a partner in the Michael K
                         
                    and Marama M Johnston Partnership)

                BETWEEN                       THE COMMISSIONER OF INLAND
                                              REVENUE
                                              Judgment Creditor/Respondent

                AND                           MICHAEL KEITH JOHNSTON
                                              Judgment Debtor/Applicant


Hearing:        26 August 2009

Appearances: J.H. Waugh - Counsel for Applicant M. Johnston
             D.B. Padmanabhan - Counsel
for Commissioner of Inland Revenue
             J. Woodcock - Counsel for Official Assignee

Judgment:       27 August 2009 at 3.30
pm


              JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL


   This judgment was delivered by Associate Judge Gendall on 27 August
2009 at
               3.30 p.m. pursuant to r 11.5 of the High Court Rules.




Solicitors: Horsley Christie, Solicitors, PO Box
655, Wanganui
            Inland Revenue Department, Legal & Technical Services, PO Box 1462, Wellington
            Crown Solicitor,
PO Box 441, Wanganui




THE COMMISSIONER OF INLAND REVENUE V MK JOHNSTON HC WANG CIV-2008-483-151 27
August 2009

[1]    Michael
Keith Johnston ("the applicant") was adjudicated bankrupt on an
application brought by the Commissioner of Inland Revenue ("the Commissioner")
at the High Court at Wanganui on 20 February 2009.


[2]    On 28 May 2009 the applicant filed an interlocutory application for an
annulment of this adjudication. His application indicated that it was made in reliance
on s. 309(1)(a)-(d) of the Insolvency Act
2006. On 30 June 2009 the Commissioner
filed a Notice of Opposition to the Annulment Application together with an
application for
leave to file this opposition out of time. A report of the Official
Assignee under s. 309 Insolvency Act 2006 dated 30 June 2009
was filed in this
Court together with a memorandum from the Official Assignee dated 7 July 2009.


[3]    Although as I have indicated
above the present application states specifically
that it is made in reliance on s. 309(1)(a)-(d) Insolvency Act 2006, before me
Mr.
Waugh, counsel for the applicant, confirmed that the applicant relies solely upon the
ground outlined in s. 309(1)(a) Insolvency
Act 2006.


[4]    For the sake of completeness I set out s. 309 Insolvency Act 2006 in its
entirety. It reads:
        "309   Court
may annul adjudication
        (1)    The Court may, on the application of the Assignee or any person interested,
              
annul the adjudication if--
               (a) the Court considers that the bankrupt should not have been adjudicated
          
          bankrupt; or
               (b) the Court is satisfied that the bankrupt's debts have been fully paid or
             
       satisfied and that the Assignee's fees and costs incurred in the
                     bankruptcy have been paid; or
     
         (c) the Court considers that the liability of the bankrupt to pay his or her
                     debts should be revived
because there has been a substantial change in
                     the bankrupt's financial circumstances since the date of adjudication;
                     or
               (d) the Court has approved a composition under subpart 1 of Part 5.

        (2)    In the
case of an application on one of the grounds specified in subsection
               (1)(a) to (c) to (1)(a) to (c) by an applicant
who is not the Assignee,--
               (a) a copy of the application must be served on the Assignee in the
                  
 manner and within the time that the Court directs; and
               (b) the Assignee may appear on the hearing of the application as if the
                 
  Assignee were a party to the proceeding.
       (3 )    The adjudication is annulled--
               (a) from the date of adjudication,
in the case of an application on the
                    ground specified in subsection (1)(a):
               (b) from the date
of the Court's order of annulment, in the case of an
                    application on one of the grounds specified in subsection
(1)(b) to (d)
                    to (1)(b) to (d).

       (4)      In the case of an application for annulment on the ground that
the
                adjudication should not have been made because of a defect in form or
                procedure, the Court may,
in addition to annulling the adjudication,
                exercise its powers under section 418 to correct the defect and order
that
                the application for adjudication be reheard as if no adjudication had been
                made.
       (5)
     If the Court annuls the adjudication on one of the grounds specified in
                subsection (1)(a) to (c) to (1)(a) to
(c),--
                (a) the Court may, on the Assignee's application, fix an amount as
                     reasonable remuneration
for the Assignee's services and order that it
                     be paid, in addition to any costs that may be awarded:
      
         (b) that amount must be paid into a Crown Bank Account:
                (c) the Assignee is not entitled to remuneration
under section 406 for
                     those services.


[5]    Turning to consider the ground advanced for the applicant to
support his
contention that he should not have been adjudicated bankrupt, before me Mr. Waugh
for the applicant confirmed that this
was based on:

       "The material fact that the applicant was suffering from a serious mental illness at
       the point of adjudication
and this was not brought to the attention of the Court
       before the adjudication order was made. Had this material fact been
brought before
       the Court prior to adjudication steps could have been taken to prevent the
       adjudication occurring given
the applicant's financial situation."


[6]    In support of the present application the applicant put before the Court two
medical
certificates from his Wanganui doctor Dr. John Kay dated 25 May 2009 and
22 July 2009. These stated, in the case of the first certificate:

       "Mike (the applicant) has been treated for depression by me with medications from
       mid 2006 to mid 2007. He was under
a lot of stress at the time and was unable to
       cope. The depression would have had some effect on his ability to handle his
day to
       day affairs."


       and, in the case of the second certificate:

       "... I have been treating (the applicant)
for depression during the period of his
       impending bankruptcy. His depression would have significantly impaired his ability
       to handle his own affairs properly and significantly impaired his ability to seek the
       professional help needed to handle
these affairs."


[7]    In addition, before me Mr. Waugh for the applicant contended that on his
own valuation of his assets and
liabilities he would be in a position to clear his debts
either by an orderly sale of assets or alternatively by raising a lump sum
loan to pay
off the core debt involved. So far as the debt to the Commissioner of Inland
Revenue is concerned, however, Ms. Padmanabhan
for the Commissioner confirmed
that since the date of adjudication, this debt has grown somewhat and now stands at a
total sum of
$814,296.04. In addition she stated that there are still certain PAYE

schedules outstanding from the applicant which may worsen
this position. The debt
owed to the Commissioner at the time of adjudication was $769,756.91.


[8]     In his submissions Mr. Waugh
for the applicant noted that his mental illness
was not brought to the attention of the Court at any time prior to the order for
adjudication being made. The applicant
had appeared for himself on 10 December
2008 when a final adjournment was granted and then on 18 February 2009 when the
order for
adjudication was made. In making that order for adjudication I noted that
the debt in question to the Commissioner related to a judgment
obtained in July 2005
and included taxes owing back to 1999. The promises made in open Court by the
applicant on 10 December 2008
"to pay $160,000.00 off the debt to the
Commissioner within a few days of 10 December 2008" had not been honoured.
The debt at that
time was substantial being over $750,000.00 and I noted on 18
February 2009 that there was no alternative but for an order for adjudication
to be
made.


[9]     It is the applicant's contention here that if on 18 February 2009 he had been
granted a further adjournment
then he would have been able to seek advice or
assistance, enter into some payment arrangement with the Commissioner and either
raise
money against or realise certain of his significant assets to settle his debt over
time.


[10]    As I have noted above, the Official
Assignee has filed his report dated 30
June 2009 together with a memorandum dated 25 August 2009. That memorandum
confirms that the
Official Assignee opposes the present application. He appeared at
the hearing before me in terms of s. 309(2)(b) Insolvency Act 2006.


[11]    The report from the Official Assignee and the accompanying memorandum
notes that the applicant estimates the value of partnership
property held by himself
and his wife at approximately $1,620,000.00. This is based upon the rateable capital
value of that property.
The Official Assignee notes, however, that this rateable
capital value does not reflect the actual estimated market value of the
properties. As
to this, three properties have already been sold by the Official Assignee well below
rateable value but at a market
value as assessed by real estate agents in Wanganui.

According to the Official Assignee, the market value of the five remaining
properties
still to be sold assessed by those real estate agents is $250,000.00-$270,000.00. The
Official Assignee notes that the
estimated market value of those properties is
consistent with advice provided by the applicant himself to the Court on 10
December
2008 when he claimed those properties were worth only up to about
$400,000.00.


[12]   The Official Assignee records that, even
factoring in refunds due to the
applicant of $56,573.70, the residual debt to the Commissioner now standing at
$814,296.04 significantly
outweighs even the most optimistic assessment of the
value of the applicant's total assets of approximately $675,000.00. In addition
the
Official Assignee notes that the applicant has provided no evidence to the Court of
how he intends to realise or raise loans
against the property in question to clear his
growing debt.


[13]   On the suggestion put to me by Mr. Waugh that the applicant
intends to take
"basic steps" to increase the values of the properties in question (by painting etc) the
Official Assignee notes
that there is no evidence before the Court as to what "basic
steps" would be taken and how they would dramatically increase the value
of any of
those properties.


[14]   In relying on s. 309(1)(a) Insolvency Act 2006 in his present application, the
applicant effectively
advances the ground that this provision applies here because a
material fact was not brought before the Court when the adjudication
order was
made. This fact relates to the mental illness of the applicant. Had the Court known
this, according to Mr. Waugh steps
could have been taken to prevent the adjudication
occurring given what he suggests is the applicant's financial situation.


[15]
  The grounds for interfering with the Court's discretion exercised on a
properly brought adjudication application were established
in Re Hunter Ex Parte
Commissioner of Inland Revenue [2000] 19NZTC 1572. There, Robertson J. dealt
with the previous equivalent provision in s. 119 Insolvency
Act 1967 noting that the
jurisdiction available under this section is a narrow one (para. 68).

[16]   Where an applicant relies
on what is now s. 309(1)(a) Insolvency Act 2006
there must be:


       (a)       Some defect in procedure; or


       (b)     
 Abuse of process; or


       (c)       A material fact not brought before the Court making the adjudication
                 order.


[17]   Putting the best complexion on the applicant's medical certificates provided
by his Wanganui doctor (and these certificates
do not specifically state the relevant
period of time during which the illness is suffered, the extent of the illness or the
treatment
specified) it seems a long bow to draw to suggest that the applicant was
medically incapable of seeking advice or assistance at the
various times when the
Commissioner's adjudication application was under consideration.


[18]   There can be no doubt that both
the applicant and his wife were aware of the
proceedings and indeed Mrs. Johnston was present with the applicant at the hearing
of
this matter on 10 December 2008. At that hearing an adjournment noted as a final
adjournment for some two months was granted and
the applicant's promise to pay
$160,000.00 to the Commissioner "within a couple of weeks" was noted. That
payment was not made.


[19]   As I understand the position no suggestion has been made that the applicant's
wife also suffers from medical depression.
       It seems unusual that given the
seriousness of the situation explained to them at the hearing on 10 December 2008
that the
applicant and his wife should both have chosen to take no steps nor seek any
assistance in this matter over the next two month period.


[20]   Turning now to the Official Assignee's 30 June 2009 report, this outlines the
applicant's unrealised asset position, and
appears to show assets of between
$340,000.00 and $370,000.00 against liabilities to the Commissioner at that point of
some $790,000.00
and Official Assignee's costs which now stand at something in

the vicinity of $25,000.00. No independent evidence has been produced
by the
applicant to counter or question these figures advanced by the Official Assignee in
his considered report.


[21]   On this
basis I am satisfied that the claims made by the applicant regarding
the value of his unrealised properties must be considered as
substantially inflated.
As I have noted, there is no independent verification of those values from any party,
whereas the Official
Assignee's values are supported by independent reports from a
local real estate agent and recent sales.


[22]   In my view, even
if in February 2009 the applicant had been allowed more
time to endeavour to settle the substantial debts which were outstanding
this would
have made little difference to the ultimate position and the final decision of this
Court that, given his insolvency,
an order for adjudication was inevitable. The
extremely long delay since the original District Court judgment in July 2005 for the
Commissioner's core debt here in my view entrenches the presumption of insolvency
on the part of the applicant ­ Fredrickson v Centurion
Finance Ltd, 11 February
2005, Sargisson A.J., HC Auckland B259-01.


[23]   That said, and given the clear opposition of the Commissioner
and the
Official Assignee to the applicant's present application, I reject the applicant's
contention that s. 309(1)(a) Insolvency
Act 2006 applies here. I find that it cannot be
said here that there was a significant material fact not brought before the Court
prior
to adjudication of such a nature that it would have affected the outcome and resulted
in no order for adjudication being made
when the order was issued in February 2009.


[24]   As I see the position, in the present case the applicant's bankruptcy is
achieving
the very purpose for which the procedure was intended, namely the
liquidation of his assets at achievable values and the payment of what are substantial
outstanding debts to
his creditors.


[25]   Clearly, if the realisation of those assets achieves funds in excess of the
applicant's indebtedness, the
Official Assignee can himself bring an application
under s. 309(1)(b) Insolvency Act 2006 to annul the bankruptcy, or the applicant
can

re-apply at that point for annulment or for early discharge under s. 294 Insolvency
Act 2006.


[26]   For all these reasons,
and given also that on the material before the Court
there is no doubt that the applicant is unable to pay his debts and remains
insolvent,
his present application for an annulment fails.


[27]   If there is any issue with respect to costs, then these are reserved
and can be
the subject of appropriate memoranda from counsel.




                                                     `Associate
Judge D.I. Gendall'