Official Assignee in Bankruptcy in the Property of Bainbridge v Menzies HC Auckland CIV-2009-404-003391 [2011] NZHC 594 (21 June 2011)

Last Updated: 3 July 2011

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV-2009-404-003391}

BETWEEN THE OFFICIAL ASSIGNEE IN BANKRUPTCY IN THE PROPERTY OF KEITH JAMES BAINBRIDGE

Plaintiff

AND ANNIE CATHERINE MENZIES AND SIMON MIDDLETON PALMER AS TRUSTEES

Defendants

Hearing: 20 June 2011

Appearances: Mr K W Fulton for plaintiff

Ms J McCartney SC for defendants

Judgment: 21 June 2011 at 4:30 PM

JUDGMENT OF LANG J

_{[on application by defendants for adjournment of trial]}

This judgment was delivered by me on 21 June 2011 at 4.30 pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

_{Date...............}

OFFICIAL ASSIGNEE V MENZIES & ANOR HC AK CIV-2009-404-003391 21 June 2011

[1] This proceeding has its genesis in the bankruptcy of Mr Keith Bainbridge. That occurred in 2005. The only creditor in Mr Bainbridge’s bankruptcy is Mr Humphrey O’Leary, to whom Mr Bainbridge owes approximately $940,000. That debt arose as a result of an arbitral award that Mr O’Leary obtained against Mr Bainbridge in respect of a leaky building that Mr O’Leary purchased from Mr Bainbridge.

[2] The defendants are the current trustees of the Kahurangi Trust. Mr Bainbridge was formerly a trustee of that trust, but he resigned some time ago. Mr Palmer is a solicitor, and is therefore a professional trustee. Ms Menzies is married to Mr Bainbridge.

[3] The plaintiff seeks to recover loans that Mr Bainbridge made to the trust prior to his adjudication, and also to set aside a relationship property agreement that Mr Bainbridge entered into with Ms Menzies. In addition, the plaintiff seeks to recover the amount by which Mr Bainbridge sold a commercial property situated at 13A Summit Drive to the trust for less than its market value. Finally, the plaintiff seeks an order or declaration that he is entitled to an equitable lien over the trust’s property to secure the monies that the trustees owe him. Ms Menzies has counterclaimed seeking an interest in that property on the basis that the trustees hold it as constructive trustees on her behalf.

[4] The proceeding is scheduled to be subject to a trial of five days duration commencing on 25 July 2011. The plaintiff has served his evidence and the defendants are due to respond no later than 27 June 2011.

[5] The defendants now apply for an order adjourning the trial. The plaintiff opposes the adjournment and seeks confirmation that the fixture will proceed as scheduled.

Grounds for adjournment

[6] The defendants contend that the Court allocated the fixture at a time when a relatively narrow band of issues needed to be determined. They say that the position has now changed, and that a trial of at least two weeks duration will be required.

[7] They also contend that the plaintiff is denying them access to funds that they need in order to conduct their defence. This submission arises from the fact that the plaintiff lodged a caveat over the Summit Drive property. This Court subsequently granted an application by the plaintiff for an order sustaining the caveat.1 It determined that the plaintiff arguably held an equitable lien over the property arising out of Mr Bainbridge’s right to be indemnified out of assets owned by the Kahurangi Trust in respect of liabilities that he incurred as a trustee. That decision is currently

subject to appeal, and counsel for the defendants advised me during the hearing that the Court of Appeal can offer the parties a fixture on 27 July 2011.

[8] The defendants say that they are unable to use the property to obtain funding to defend the proceeding because of the existence of the caveat. They ask the Court to adjourn the trial until such time as the Court of Appeal has determined whether the plaintiff was entitled to lodge the caveat against the property.

The likely duration of the trial

[9] Counsel for the defendants contends that a trial of more than five days is now required because the Court will be required to determine a significant number of issues. She submits that up to two weeks will be required.

[10] I accept that more issues now need to be determined than was the case when a five day fixture was allocated in July 2010. I am uncertain, however, whether the defendants’ view regarding the likely length of the trial is necessarily correct. Although the number of issues has grown, I am not at all sure that this will translate into increased trial time. Many of these matters may largely be the subject of

_{submission, and may not result in extensive cross-examination of deponents.}

1 The Official Assignee v Menzies and Palmer HC Auckland CIV-2010-404-005457, 14 February 2011

Moreover, in the event that the trial does require more than five days, the Court will do its best to ensure that additional hearing time is provided. For these reasons the anticipated increase in trial duration would not justify the postponement of the trial.

Denial of access to funds

[11] Of greater importance for present purposes is the defendants’ claim that the plaintiff is effectively denying them access to their only realistic source for funding to defend the plaintiff ’s claims.

[12] Initially, the defendants did not file any evidence at all to substantiate this assertion. Very late in the piece, at 3.29 pm on Friday 17 June 2011, the defendants filed an affidavit by Mr Palmer. The affidavit contains an assertion that the defendants “seek to borrow monies for the purpose of defending the Official Assignee’s claim”. Mr Palmer does not, however, amplify this statement. Neither does he explain how the actions of the plaintiff might be preventing the defendants from obtaining funding to enable them to defend the plaintiffs’ claim.

[13] For this reason there is currently no evidential basis for the assertion that the plaintiff is preventing the defendants from obtaining funding to enable them to defend the proceeding. I also add that the plaintiff has consistently said that he will consider permitting the defendants to use the property to obtain further funding provided they put forward a realistic proposal.

[14] The only remaining issue is whether the defendants may nonetheless suffer an injustice if the adjournment is not granted.

Where do the interests of justice lie?

[15] The issue to be determined when a party applies for the adjournment of a trial is whether the interests of justice require the application to be granted. The interests of justice are wider than the interests of the party seeking the adjournment. They also encompass the interests of the other party to the proceeding, and the administration of justice generally.

[16] Counsel for the defendants submitted that the caveat will make it virtually impossible for the defendants to obtain further finance to enable them to fund their defence. Although the defendants have asserted in the past that there is sufficient equity in the property to meet the plaintiff’s claims in full, they now believe that might not be the case.

[17] Mr Palmer has disclosed the existence of a further guarantee that the trustees have provided to the ANZ Bank. This supports borrowings by another party of up to

$900,000. The loan is also secured by way of mortgage over a property that has a current market value in the range of $589,000 to $775,000 exclusive of GST. Counsel advised me that, if the property at 13A Summit Drive is sold, the bank will require the amount secured by the recently disclosed guarantee to be repaid in full. This will obviously have a significant effect on the equity of that property.

[18] Any application for further finance would inevitably require the defendants to disclose that the defendants require the funds in order to enable them to defend the plaintiff’s claims, which currently seek approximately $1.1 million from the defendants. If the plaintiff succeeds and the equitable lien is upheld, the plaintiff’s claims would be likely to take priority over any funds that the defendants might now borrow. This realistically means that the defendants are likely to find it difficult to obtain further funding that depends upon the Summit Drive property for security. There is nothing before me to suggest that the defendants have access to other trust assets that would enable them to fund the defence.

[19] I am therefore prepared to accept the submission, notwithstanding the fact that it amounts in part to evidence from the bar, that the existence of the plaintiff ’s caveat will make it very difficult for the defendants to borrow further funds to fund the defence.

[20] It is, of course, open to the defendants to fund their defence personally. The plaintiff accepts, however, that Ms Menzies’ tax returns suggest that she does not have the means to do so. Although Mr Palmer may have the means to fund the defence, he is unlikely to want to do so given the fact that he has no personal interest in the outcome of the litigation. He has also already been the subject of a very

significant adverse award of costs as a result of a successful application by the plaintiff for summary judgment in respect of one of the counterclaims that the defendants filed.2

[21] Counsel for the defendants advised me from the bar during the hearing that the defendants wish to sell the property and thereby realise any equity in it. She said that they have, in fact, already taken steps to place the property on the market. She argued that this was the only way in which the defendants could meet the costs of defending the plaintiff’s claims. She submitted that the existence of the caveat will also make it very difficult for the defendants to sell the property.

[22] The defendants submit that the plaintiff will not be significantly prejudiced if the trial is delayed for a short period to enable the appeal to be determined. They point out that six years have now passed since Mr Bainbridge’s adjudication, and the plaintiff has been responsible for at least some of the delay that has occurred.

[23] The plaintiff justifiably points to the fact that the trial was allocated many months ago, and the defendants have had ample opportunity both to advance the appeal expeditiously and to apply for an adjournment of the trial at a much earlier date. They also point out that there is no certainty as to when the Court of Appeal will deliver its decision. They say that this Court should require the defendants to adhere to the scheduled trial date, and to serve their evidence in accordance with directions that have already been made.

[24] The plaintiff also submits that the defendants should focus on obtaining a substantive determination of the legal issue that lies at the heart of the caveat proceeding. That submission must, however, be measured against the fact that the substantive trial will take at least a week and would obviously require significantly greater resources to fund. The appeal, on the other hand, could be disposed of in less than a day, and counsel for the defendants has indicated that she is prepared to argue

_{it on a pro bona basis (at least for the present time).}

2 Official Assignee v A C Menzies & Anor HC Auckland CIV-2009-404-003391, 4 May 2011

[25] I accept that the defendants are in a difficult position. The existence of the caveat means that they are not at liberty to deal with the property as they would be if it was free of that encumbrance. In particular, it means that they must try to seek an accommodation with the plaintiff if they wish to deal with the property, and that may not be easy to achieve given the interest that the plaintiff is endeavouring to protect.

[26] I consider, however, that the defendants’ current focus on selling the property is important. The plaintiff will have no option but to withdraw his caveat in the event that the defendants are able to sell the property for current market value. At that point the Court would expect the plaintiff will to consider any reasonable proposal that the defendants might put forward in relation to using some of the net proceeds of sale to fund the defence of the proceeding.

[27] I do not consider that the existence of the caveat should unduly hamper the sale process. Potential purchasers will know that the vendor is obliged to provide them with clear title to the property upon settlement. If that expectation proves to be incorrect, the parties ought to be able to reach agreement regarding the terms upon which the caveat can be withdrawn without prejudice to either party’s ultimate rights in respect of the sale proceeds. If they cannot reach agreement, it remains open to the defendants to apply (on an urgent basis if necessary) for an order removing the caveat on terms designed to protect the positions of both parties.

[28] For those reasons I am not satisfied that the interests of justice require the trial to be adjourned at this point. I am aware that alternative dates are available in the Court of Appeal in 25 August and 14 September 2011. The defendants remain free to argue their appeal on those dates if they still wish to challenge the plaintiff’s entitlement to lodge the caveat against the property.

Result

[29] The application for adjournment of the trial is dismissed.

[30] I vary the pre-trial directions so as to give the defendants until 5 pm on 1 July

2011 to serve their evidence.

Costs

[31] The plaintiff is entitled to costs on the application on a category 2B basis together with disbursements as fixed by the Registrar.

Next event

[32] I am conscious that pleading issues remain extant. The defendants now need to concentrate on preparing their evidence and should not be distracted from that task between now and 1 July. The Registrar is to arrange a conference before the trial Judge on the first available date after 1 July 2011 so that outstanding issues can be

_addressed.

Lang J

Solicitors:

Meredith Connell, Auckland

Palmer & Associates, Auckland

Counsel:

Mr K W Fulton, Auckland

Ms M J McCartney SC, Auckland