University of Tasmania v Zhang [2013] NZHC 275 (21 February 2013)

Last Updated: 19 March 2013

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2012-419-894 [2013] NZHC 275

IN THE MATTER OF the Insolvency Act 2006

AND

IN THE MATTER OF the bankruptcy of Yuehua Zhang

BETWEEN UNIVERSITY OF TASMANIA, DALLAS HANSON, JIM GARNHAM, PHILLIPA ORMANDY, CAREY DENHOLM, JULIAN YAXLEY, AND KYLIE SHANAHAN

Judgment Creditors

AND YUEHUA ZHANG Judgment Debtor

Hearing: 20 February 2013

Counsel: EM Lonnberg for judgment creditors

PF Gorringe for judgment debtor

Judgment: 21 February 2013

JUDGMENT OF ASSOCIATE JUDGE FAIRE [on application for adjudication]

This judgment was delivered by me on 21 February 2013 at 9:30am pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date...............

Solicitors: McCaw Lewis, PO Box 9348, Hamilton 3240

Grantham Law, PO Box 1346, Taupö 3351

UNIVERSITY OF TASMANIA V ZHANG HC HAM CIV-2012-419-894 [21 February 2013]

CONTENTS

The application ......................................................................................................... 3

The judgment ........................................................................................................... 3

The bankruptcy notice .............................................................................................. 4

The creditors’ application......................................................................................... 4

The jurisdictional requirements................................................................................ 4

The court’s discretion ............................................................................................... 5

The opposition.......................................................................................................... 6

Costs ....................................................................................................................... 12

The application

[1] The judgment creditors apply for an order adjudicating Yuehua Zhang a bankrupt.

The judgment

[2] The judgment creditors obtained a judgment against the judgment debtor in the form of three cost orders in the Federal Court of Australia and High Court of Australia. The orders relate to discrimination proceedings brought by the judgment debtor against the judgment creditors firstly in the Federal Court of Australia and, secondly, in the High Court of Australia.

[3] The judgment debtor moved to New Zealand. The judgment creditors applied on a without notice basis to have the Australian judgments registered in New Zealand under the Reciprocal Enforcement of Judgments Act 1934 on 10 January

2012. The High Court made an ordering registering the Australian orders in New Zealand on 2 February 2012. That is now the judgment that is the foundation for this proceeding.

[4] The judgment debtor was served with a notice of registration in accordance with hcr23.18 on 29 February 2012. The total outstanding amount of the judgment is

$121,964.11, including costs and disbursements.

[5] The judgment debtor had until 4 April 2012 to have the New Zealand judgment set aside under any of the grounds appearing in section 8D of the Reciprocal Enforcement of Judgments Act 1934. No application was filed by the judgment debtor.

The bankruptcy notice

[6] On 13 July 2012, the judgment creditors filed a request for the issue of a bankruptcy notice against the judgment debtor based on the judgment. The bankruptcy notice was issued on 16 July 2012. It was served on the judgment debtor on 23 July 2012. The judgment debtor took no action in relation to the bankruptcy notice within the stipulated timeframe and failed to comply with its terms.

The creditors’ application

[7] The judgment creditors next filed a creditor’s application for an adjudication order on 5 November 2012. The matter had a first call on 10 December 2012. The judgment debtor served a notice of intention to oppose the application and affidavit in support of that opposition on 10 December 2012.

[8] In her affidavit in opposition the judgment debtor claims that she has a counterclaim for an alleged promised refund of her university fees, which is in the order of $20,000. No proceedings, however, have been brought by the judgment debtor against all or any of the judgment creditors in respect to this claim. The judgment debtor has, in any event, made no arrangements for the repayment of the balance of the judgment. The affidavit in opposition refers to a number of matters that require consideration pursuant to the discretion vested in the court pursuant to s 37 of Insolvency Act 2006.

The jurisdictional requirements

[9] The jurisdictional requirements that must be met before an order of adjudication is made are contained in ss 13 and 36 of the Insolvency Act 2006. Section 13 provides:

13 When creditor may apply for debtor's adjudication

A creditor may apply for a debtor to be adjudicated bankrupt if—

(a) the debtor owes the creditor $1,000 or more or, if 2 or more creditors join in the application, the debtor owes a total of $1,000 or more to those creditors between them; and

(b) the debtor has committed an act of bankruptcy within the period of 3 months before the filing of the application; and

(c) the debt is a certain amount; and

(d) the debt is payable either immediately or at a date in the future that is certain.

Section 36 provides:

36. Court may adjudicate debtor bankrupt

The Court may, at its discretion, adjudicate the debtor bankrupt if the creditor has established the requirements set out in section 13.

[10] The judgment debtor challenges the jurisdictional grounds for the making of an order of adjudication in this case and asserts that the requirements of s 13(c) are not met. That is the debt must be a certain amount before an adjudication order is made. The submission relies on the possibility of a counterclaim for a promised refund of the debtor’s university fees, which are said to be in the order of $20,000. I do not accept the judgment debtor’s submissions in this respect. The act of bankruptcy relied upon is non-compliance with a bankruptcy notice. The bankruptcy notice is based on a judgment of this court. No appeal against that judgment has been lodged, nor, for that matter, against the judgments in Australia. There is no evidence of any proceeding issued designed to enforce the counterclaim. The counterclaim could not extinguish the amount of the judgment debt. The bankruptcy proceedings have been issued based on a judgment that defines a precise amount. There is no uncertainty based on the judgment as to the amount due. I am satisfied, therefore, that the jurisdictional requirements for the making of an order of adjudication in this case are met.

The court’s discretion

[11] I must now consider s 37 of the Insolvency Act 2006. Section 37 provides:

37. Court may refuse adjudication

The Court may, at its discretion, refuse to adjudicate the debtor bankrupt if—

(a) the applicant creditor has not established the requirements set out in section 13; or

(b) the debtor is able to pay his or her debts; or

(c) it is just and equitable that the Court does not make an order of adjudication; or

(d) for any other reason an order of adjudication should not be made.

The opposition

[12] The judgment debtor has filed a notice of opposition to oppose the application for adjudication and has set out extensive grounds in opposition as follows:

(a) The creditor’s debt is overstated to the extent that the debtor has a valid counterclaim for the promised refund of the debtors’ university fees. This refund is in the order of $20,000.

(b) The applicant creditor has not established the grounds set out in section 13 of the Insolvency Act 2006 in that the debt is to a certain amount (s13(c)).

(c) The inability to pay the debt owed to the applicant creditor immediately and in full does not arise out of the debtor’s business practices but to the extraordinary nature of the debt.

(d) The debtor is able to pay her ordinary business expenses and to pay the applicant creditor in full over a period of three years.

(e) If the debtor is not adjudicated bankrupt, other creditors will not be at risk of non-payment as a result of the debtor’s practices.

(f) The debtor is willing and able to enter into a Proposal that pays the applicant creditor in full over three years.

(g) If the debtor is adjudicated bankrupt, it will result in the liquidation of the debtor’s companies which employ between then 10 people. These employees will lose their jobs.

(h) If the debtor is adjudicated bankrupt, it will result in other creditors who have unsecured debts, such as the bank overdraft, only being repaid a small percentage of what they are owed.

(i) If the debtor is adjudicated bankrupt, it will likely result in the sale of the real estate and the termination of the tenancies in those properties. This will result in many tenants having to find alternative accommodation, to their financial detriment.

(j) Adjudication as bankrupt is not likely to realise the debt owed to the applicant creditor, due to the secured loans in place over the debtor’s assets.

(k) The judgment on which the applicant creditor relies was a particularly acrimonious personal dispute and the debtor believes that, in making the application for adjudication, the applicant creditor is motivated by malice arising from that dispute rather than by genuine commercial considerations.

(l) It would be unjust and inequitable for the court to grant adjudication.

[13] The first two grounds advanced in opposition relate to the court’s jurisdiction

to order adjudication. I have discussed and dismissed those grounds in [10].

[14] The judgment debtor acknowledges her inability to pay this debt at this time. [15] Because the exercise of a discretion is involved in this case, the case must be

looked at having regard to the specific facts involved. In Eide v Colonial Mutual

Life Assurance Society I summarised the general principles involved in the exercise of the discretion under s 26 of the Insolvency Act 1967 (which is now s 37 of the Insolvency Act 2006) and noted that the important matters were the following:[1]

1) “A creditor who establishes the jurisdictional facts set out in s 23 is not automatically entitled to an order. On the other hand, it is for an opposing debtor to show why an order should not be made.” McHardy v Wilkins & Davies Marinas Ltd (Court of Appeal, Wellington, CA 54/93, 7 April 1993) at p 3.

2) “. . . in the exercise of the discretion under s 26 it is proper for the Court to consider not only the interests of those directly concerned – the petitioner, other creditors, the debtor – but also the wider public interest.” McHardy v Wilkins & Davies Marinas Ltd (supra) at p 3.

3) In determining whether an order should be made, the wider public interest must be taken into account to determine whether adjudication is “conducive or detrimental to commercial morality and the interests of the general public.” Re Nisbett, ex parte Vala [1934] GLR 553 at p 556.

4) “. . . on a bankruptcy petition the Court must have regard to public interest in a way which transcends the interest of the immediate parties to the proceeding. . . . The public interest in exposing and controlling an insolvent debtor is one which exists quite independently of the separate question of debt collection by his immediate creditors.” Re Fidow [1989] 2 NZLR 431 at p 444.

5) Absence of assets is a factor but:

“. . . even the undoubted absence of assets will not necessarily preclude an order, for the circumstances may be such that the debtor ought in the public interest to be visited with the disqualifications that go with bankruptcy.” McHardy v Wilkins & Davies Marinas Ltd (supra) at p 3.

6) Another matter:

“. . . is the potential for further investigation. A bankruptcy makes available to creditors an array of procedures for investigating the financial circumstances of the debtor. Those procedures are likely to prove more effective than an investigation conducted by other means.” Re Fidow (supra) at p 444.

7) There is a need:

“. . . for the Court to balance the various considerations relevant to the case, and to determine whether in the end the debtor has succeeded in showing that an order ought not to

be made”. McHardy v Wilkins & Davies Marinas Ltd (supra)

at p 4.

[16] That approach was expressly approved by the Court of Appeal.[2]

[17] I now consider the matters advanced on the debtor’s behalf and which are relevant to the discretion vested in the court under s 37 of the Insolvency Act 2006. I mention that the submissions were prepared by Ms Hay of counsel who, because of illness was not able to attend. Mr Gorringe very helpfully took on instructions and adopted the submissions. The submissions have covered the areas that could be raised on the judgment debtor’s behalf and I express my thanks to counsel and, of course, also Ms Lonnberg for the judgment creditors’ submissions.

[18] The debtor’ affidavit discusses the background to her dispute with the creditor university. A substantial part of that dispute has been the subject of determinations before the Federal Court of Australia and the High Court of Australia. It is not appropriate to relitigate those matters that were before those courts in this proceeding.

[19] The judgment debtor raises the possibility of a claim against the University of Tasmania for a refund of fees. This is a matter that requires consideration under s 37 as well as the jurisdiction section of this case. The matter can be disposed of quite shortly, however. The potential counterclaim is less than 20 per cent of the judgment debt. Even if due allowance is made for it the debtor will remain liable to the university and the judgment creditors for something in excess of $90,000. The potential counterclaim, therefore, is not a reason to refuse adjudication based on the court’s discretion under s 37.

[20] The debtor seeks to distance this debt from what the debtor describes as other business debts. The debtor acknowledges her obligation to pay this debt. I do not consider that there is any justification for treating this judgment debt any differently from other liabilities incurred by the debtor. What the debtor seeks to do is to pay other unsecured creditors in advance of these judgment creditors. That cannot be

_{justified in law. It would only be justified if the court was considering a Part 5}

Proposal with the particular creditor consenting to be treated in that way. Mr Gorringe referred me to a judgment of Associate Judge Gendall in Apatu v Mauger.[3] In that case, His Honour considered a bankruptcy application that arose from a judgment debt that, in turn, represented a cost award made against the judgment debtor. The judgment discusses this question but concludes there is not enough to exercise the discretion to decline adjudication on that ground. Adjudication was declined on another ground, namely the debtor’s ability to pay her debts, given a reasonable amount of time. The amount of time, however, is not

specified in the judgment. The case does not support the principle that the court can tamper with the priority of payment of unsecured creditors in the exercise of discretion. I conclude that there is no justification in this case for declining to order adjudication on the basis that the judgment debtor would pay all other creditors as the debts fall due, but would delay paying the judgment creditors in this case, except by payment on a periodic basis over three years and more.

[21] Matters were advanced from the Bar, not included in the affidavit, that also affect the exercise of discretion. I was advised that the judgment debtor has since the execution of her affidavit, given up her position with the International Business School at the University of Waikato. I was disappointed to hear that because one would have thought from her current financial position that she would have retained an income stream so that she could, in fact, honour the proposal or at least be in a position to pay something towards the outstanding debt, rather than relying on her investments to do so.

[22] Mr Gorringe also referred in his submissions to the judgment of Master Towle in Morehu ex parte Ganderton where comment is made on the pointless nature of an adjudication order in certain cases, and also the question of whether the financial community required protection against further activities of the debtor.[4]

These are considerations as I mentioned in Eide.[5]

[23] This judgment debtor is a person who has qualified with a PhD and who has had a position in the International School of Business at the Waikato University and

is now engaged in business transactions and activities. It would be quite wrong, in my view, for the court to not adjudicate in this situation. That might give signals suggesting that the court approved of the unequal treatment of unsecured creditors, all of which is contrary to the Insolvency Act 2006 itself, and generally contrary to business morality.

[24] The judgment debtor has assessed her own asset position and has said that if there was any forced sale of the assets it is likely that all that would be achieved would be the repayment of the mortgages. There is no accurate up-to-date statement of assets and liabilities. I did have the benefit of a statutory declaration completed for the university, apparently when the debtor took her position as a lecturer at the University of Waikato. I am not satisfied that there is any proper basis for concluding that, on an asset basis, there is an excess of assets over liabilities. If the assets that are currently generating income should fail to do so in part, there is a real risk, in this case, of the secured creditors pursuing their rights pursuant to the securities leading to forced sales of the assets. That, as the judgment debtor has acknowledged, would lead to a loss on the part of unsecured creditors. The result is that I conclude that there is insufficient asset backing to suggest that this debtor is solvent.

[25] The debtor is concerned about tenancies in the properties she owns and the need for those people to find alternative arrangements if there are sales. She is also concerned about the people who are employed in the companies in which she has an interest. Whilst I applaud her concern for these people, I must take into account the fact that the properties were acquired and the businesses commenced when the judgment debtor knew she had a judgment liability to the judgment creditors in this case. Further, her financial position does not show that degree of strength that gives any confidence that she will be able to survive financially in any event.

[26] Mr Gorringe raised the possibility of a mortgage being granted on a second mortgage basis to the judgment creditors as security for the proposal to pay over time. Understandably, that was simply a submission made from the Bar that has not been thoroughly investigated. The mortgage documents have not been produced and I am not able to say whether or not the granting of such a mortgage would, in itself,

be a breach of the current mortgages. However, of more importance is that if a second mortgage or, for that matter, a charging order is registered against the titles to the real property, the overall result almost inevitably would lead at some stage to a forced sale and a shortfall for unsecured creditors.

[27] It seems to me that the better course, when I weigh up the material that has been put in front, is to make an order of adjudication. The Official Assignee can investigate the assets and the liabilities of this judgment debtor. In the event that that investigation discloses that the Official Assignee might support an early discharge from bankruptcy that might well be something that should be considered and provided appropriate evidence is placed before the court, could be the subject of an application pursuant to s 294 of the Insolvency Act 2006.

[28] I am satisfied that this not an appropriate case to exercise the discretion to decline to adjudicate pursuant to s 37 of the Insolvency Act 2006. Accordingly, I order that Yeuhua Zhang be adjudicated a bankrupt.

Costs

[29] Mr Gorringe acknowledged that this was an appropriate case to order costs on the usual basis. Accordingly, I order that the judgment debtor pay costs based on Category 2, Band B of the High Court Rules, together with disbursements as fixed by the Registrar.

_{[30] This judgment is time at 9:30am on 21 February 2013.}

JA Faire
Associate Judge

---

[1] Eide v Colonial Mutual Life Assurance Society Ltd [1998] 3 NZLR 632 (HC) at 635.

[2] Eide v Colonial Mutual Life Assurance Society Ltd [1998] 3 NZLR 631 (CA).
[3] _{Apatu v Mauger HC Napier CIV-2011-441-832, 6 December 2012.}
[4] _{Morehu ex parte Ganderton, HC Rotorua B 251/89, 21 December 1989.}
[5] Eide, above n 1.