Copland v Goodwin [2013] NZHC 652 (28 March 2013)

Last Updated: 9 April 2013

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

CIV-2012-412-000519 [2013] NZHC 652

UNDER the Insolvency Act 2006

IN THE MATTER OF the bankruptcy of WAYNE ERNEST GOODWIN

BETWEEN BRIAN STEWART COPLAND Judgment Creditor

AND WAYNE ERNEST GOODWIN Judgment Debtor

Hearing: 19 March 2013

Appearances: J C D Guest for Judgment Creditor

A C Beck for Judgment Debtor

Judgment: 28 March 2013

_{JUDGMENT OF ASSOCIATE JUDGE MATTHEWS}

[1] This is an opposed application by the judgment creditor, Mr Copland, to adjudicate the judgment debtor, Mr Goodwin, bankrupt.

[2] On 1 May 2006 Mr Copland, Mr Goodwin, and Corporate Capital Investment Co Limited signed a memorandum settling a proceeding by Mr Copland against Mr Goodwin which had been issued in the Dunedin High Court. The memorandum recorded obligations by Mr Goodwin to pay Mr Copland two sums of money, US$465,000 and NZ$30,000, the latter for costs. The former payment was due by

_{29 September 2006, the latter by 31 August 2006.}

BRIAN STEWART COPLAND V WAYNE ERNEST GOODWIN HC DUN CIV-2012-412-000519 [28 March

2013]

[3] Neither payment was made. On 11 October 2006 the Court entered judgment against Mr Goodwin for both sums on the basis of an admission of claim held under the settlement agreement.

[4] On 23 July 2012 Mr Copland applied for the issue of a bankruptcy notice, and also applied without notice for an order for substituted service of the notice, and any subsequent bankruptcy application. On 28 July 2012 orders were made on the application, and on 31 July the bankruptcy notice was served at the offices of Ross Dowling Marquet & Griffin, solicitors, as permitted by the order. On 15 August Mr Copland applied for an order adjudicating Mr Goodwin bankrupt on the basis that he had failed to comply with the requirements of the bankruptcy notice within

10 working days of service, and had therefore committed an act of bankruptcy.

[5] On 5 October 2012 Mr Goodwin, who had instructed a firm of solicitors and counsel, filed a notice of intention to oppose the adjudication application on the basis that there was an application pending before the Court to set aside the judgment on which it was based.

[6] On 6 November the Court heard the application to set aside the judgment and on 30 November issued a reserved decision dismissing the application. The bankruptcy application, which had been adjourned at its first call, was called again on 3 December. It was adjourned once more to 11 February and on that date adjourned for a defended hearing. Three days prior to that call Mr Goodwin, with different solicitors and counsel instructed, filed an amended notice of intention to oppose the application. The ground given in the first notice of opposition is not repeated (the application had been argued and dismissed). Instead Mr Goodwin says:

(a) The bankruptcy notice was not served in accordance with the

Insolvency Act 2006, and there has been no act of bankruptcy.

(b) The judgment debtor has a counterclaim against the judgment creditor that he was not able to raise in the proceeding on which the debt is based.

(c) It is an abuse of process for the judgment creditor to proceed with a bankruptcy application knowing that he was in breach of the agreement on which the judgment debt was based.

[7] On 25 February Mr Goodwin issued a separate proceeding against

Mr Copland, which is the basis of the counterclaim referred to in ground (b).

[8] Section 13 of the Insolvency Act 2006 provides that a creditor may apply for a debtor to be adjudicated bankrupt if he owes the creditor $1000 or more, has committed an act of bankruptcy in the period of three months prior to the application, and the debt, being a certain amount, is payable immediately or at a certain future date.

[9] Section 17 of the Insolvency Act 2006 provides:

17 Failure to comply with bankruptcy notice

(1) A debtor commits an act of bankruptcy if –

(a) a creditor has obtained a final judgment or a final order against the debtor for any amount; and

(b) execution of the judgment or order has not been halted by a court;

and

_{(c) the debtor has been served with a bankruptcy notice; and}

_...

(d) the debtor has not, within the time limit specified in subsection (4),

-

(i) complied with the requirements of the notice; or

(ii) satisfied the Court that he or she has a cross claim against the creditor.

(4) The time limit referred to in subsection (1)(d) is, -

(a) if the debtor is served with the bankruptcy notice in New Zealand,

10 working days after service;

(b) if the debtor is served outside New Zealand, the time specified in the order of the Court permitting service outside New Zealand.

[10] The Insolvency Act does not set out a statutory basis for defence of an application for adjudication. Rather, s 37 provides that a court may, at its discretion, refuse to adjudicate a debtor bankrupt if one of four bases is established:

(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.

[11] Thus it will be seen that if service of a bankruptcy notice is invalid, s 17(1)(c) is not satisfied, so s 13(b) is not established. That gives a foundation for exercise of the Court’s discretion to refuse adjudication, by virtue of s 37(a). If service is valid, the discretion may be exercised on one of the other bases.

First ground of opposition: was the bankruptcy notice served on Mr Goodwin as required by law?

[12] Mr Beck says:

(a) Section 17 of the Insolvency Act 2006 requires that a bankruptcy notice be served on a debtor. The Act does not provide for any form of substituted service. The order for substituted service in this case was made under the High Court Rules, but the High Court Rules do not apply to service of bankruptcy notices.

(b) Alternatively, if a substituted service order can be made in respect of a bankruptcy notice, the order made in this case was invalid. Rule 6.8 of the High Court Rules allows directions to be made for service to be effected by means other than personal service on the relevant party, but may only be invoked if reasonable efforts have been made to serve the document by a method permitted or required by the Rules. Here, there

was no evidence before the Court that this had occurred so the order made was without jurisdiction.

(c) There is no adequate proof before the Court that the notice was served in accordance with the substituted service order that was made.

I will deal with these contentions in this order.

First argument: can a substituted service order be made in respect of a bankruptcy notice?

[13] Rule 6.1 of the High Court Rules sets out four methods for serving a document “that is required by these rules to be served”. Rule 6.8 allows an order to be made for substituted service if reasonable efforts have been made to serve a document by a method permitted or required under the Rules. Mr Beck says that the reference in r 6.8 to service by a method permitted or required by the Rules refers to the methods of service set out in r 6.1, and the methods of service in r 6.1 only apply to serving documents that are “required by these rules to be served”. He says there is no provision in the High Court Rules requiring service of a bankruptcy notice – that requirement is in s 17 of the Insolvency Act. Therefore, he argues, r 6.8 does not apply to bankruptcy notices.

[14] Mr Beck elaborates on this argument by noting that there are good reasons to require service of a bankruptcy notice on a debtor personally: time runs from the date of service, and failure to comply results in an act of bankruptcy which in turn may lead to adjudication. Mr Beck relies on Campbell v Campbell:1

In suits in which status is an issue, as in divorce suits or bankruptcy proceedings, the courts have always shown special anxiety lest the party against whom proceedings have been brought be left in ignorance of them, and have required a high standard of proof of service.

1 Campbell v Campbell [1965] NZLR 653 (SC) at 655.

[15] Mr Beck also relies on Re Rewiri ex parte Commissioner of Inland Revenue2 where, in dealing with an application for substituted service of all documents in a proceeding to adjudicate Mr Rewiri bankrupt, Heath J observed:

[11] While, in the year 2002, bankruptcy legislation is not regarded as quasi-penal in the same way that it was in 1950 when Re Thomson was decided, it is significant that a bankruptcy adjudication is an order which operates in rem. An order of adjudication operates to alter the status of the debtor: the debtor can no longer deal with his or her financial affairs – instead, assets of the debtor vest in the Official Assignee for realisation and distribution among his or her creditors pari passu: see s42 Insolvency Act

1967. An order of adjudication also operates to prevent creditors from enforcing claims personally against a debtor. From the time of adjudication

claims must be proved in the bankruptcy and creditors are only entitled to a

distribution in payment of their debts pari passu among creditors of equal priority: see, in particular, ss32 and 87 Insolvency Act 1967.

[12] Those consequences of an order of adjudication differentiate bankruptcy from other proceedings of a personal nature. They are the reasons why r836 of the High Court Rules require, in mandatory terms, a copy of the creditor’s petition and summons to debtor to be served on the debtor.

[13] An additional factor of significance is the fact that the population of New Zealand is now much more mobile or transient than it was when the Insolvency Act 1967 was passed. Accordingly, debtors are not always to be found within the district in which a particular debt is incurred.

[14] In my view, an application for substituted service in bankruptcy proceedings must be considered against that background. It is the duty of the Court to scrutinise such applications with care.

[16] Rule 836(1) of the High Court Rules as they stood at the time of Rewiri required the creditor’s petition for bankruptcy, and the summons to the debtor, to be served on the debtor. The present equivalent is r 24.16. Neither of these rules refers to a bankruptcy notice.

[17] Prior to the enactment of the High Court Rules which relate to insolvency, the Insolvency Rules 1970 applied. Rule 27 provided for the Court to make orders for substituted service of bankruptcy summonses and petitions, as applications for adjudication were then known, and r 25 provided that a bankruptcy notice was to be served, and service proved, “in the like manner as is by the Act and by these Rules

_{prescribed for the service and proof of service respectively of the creditor’s petition”.}

2 Re Rewiri ex parte Commissioner of Inland Revenue (2002) 16 PRNZ 415 (HC).

Thus the Insolvency Rules 1970 provided specifically for orders for substituted service to be made in respect of bankruptcy notices.

[18] Neither of these rules was re-enacted in the High Court Rules. Rule 836, and now r 24.16, require service of the application and summons on the debtor, as previously required by r 26 of the Insolvency Rules. The power of the Court to make an order for substituted service of an adjudication application and summons was clearly given by r 6.8, because r 24.16 specifically requires the application and the summons to the debtor to be served on the debtor, within a certain time limitation, which is within the terms of r 6.1(1)(a). The result is that substituted service of these documents can be ordered under r 6.8 if the prerequisites to an order in that rule are proved. But there is no similar trail in relation to bankruptcy notices.

[19] Rule 24.9(1) provides:

A bankruptcy notice that is to be served in New Zealand must be served within one month from the date of its issue.

[20] This rule fixes the time period for service in New Zealand, this being required by s 17(3) Insolvency Act (unless a Court permits otherwise). The rule then allows extensions of this time period if certain criteria are met. This is the only rule in the High Court Rules that expressly deals with service of a bankruptcy notice.

[21] Mr Guest says that bankruptcy notices are documents issued by the High Court on application, and as court documents the rules relating to substituted service should be construed to apply to bankruptcy notices. They can be compared, for example, to statutory demands under s 289 of the Companies Act which may be issued by parties who maintain they are owed an undisputed debt, and are not issued by the court. Mr Guest said that a bankruptcy notice should be considered as a notice to which the High Court Rules apply. Mr Guest also says that s 418 of the Insolvency Act may be invoked:

418 Defects in proceedings

(1) A proceeding under this Act must not be invalidated or set aside for a defect (which includes misdescription, misnomer, or omission) in a step that must be taken as part of, or in connection with, the proceeding unless a person is prejudiced by the defect.

(2) The Court may order the defect to be corrected and may order the proceeding to continue on the conditions that the Court thinks appropriate in the interests of everyone who has an interest in the proceeding.

[22] Mr Guest says that Mr Goodwin is not prejudiced by the defect, as the notice came to his attention in accordance with the order for substituted service, and is specifically acknowledged by Mr Goodwin in his affidavit in support of his first notice of opposition to the application for adjudication. Whilst Mr Goodwin takes exception to the method of service which was directed, he does not allege any prejudice from the bankruptcy notice not having been served on him personally. Rather, after describing the method of service, Mr Goodwin’s affidavit is concentrated on his application to set aside the judgment, to which I have referred earlier.

Discussion of the first argument

[23] A bankruptcy notice is a document which requires a debtor, in relation to a judgment debt or sum ordered to be paid under a final order of the Court, to pay the sum owing plus costs or give security for it that satisfies the Court or the creditor, or compromise the amount owing on terms that satisfy the Court or the creditor. It must state the consequences if the debtor does not comply with it and it must be served on the debtor in “the prescribed manner”.3 The Act does not prescribe a manner of service beyond the requirements in s 17(3) that the consequences of failure to comply with it only apply if the debtor has been served with it in New

Zealand, unless permission has been given by the Court for service outside this country. There is no requirement in the Insolvency Act 2006 that service must be effected on the debtor personally.

[24] Rule 24.9 adds a further requirement for service by imposing a time limit of one month from the date of issue of the notice by the Court for notices that are to be served in New Zealand, which is all notices except those in respect of which the

_{Court has given permission for overseas service under s 17(3).}

3 Insolvency Act 2006, s 29.

[25] In my opinion the effect of r 24.9(1) is to require service within one month in New Zealand, on the debtor. It reflects s 17(3), which prescribes a condition to be satisfied before a bankruptcy notice to a debtor gives rise to the consequences set out in s 17. Rule 24.9 can only sensibly be construed to provide that service on the debtor must take place, and within one month from the date of issue, if service is to take place in this country. To read r 24.9 as only imposing a time limit for service would fail to give workable effect to s 17 which is one of the bases upon which an act of bankruptcy is established, thus founding the basis for adjudication. And service is not abstract; it is an action requiring a recipient. That recipient can only be the debtor.

[26] For these reasons I find that a bankruptcy notice is a document “required by these rules to be served” (r 6.1) and therefore a substituted service order under r 6.8 can be made in respect of a bankruptcy notice.

Second argument: was a substituted service order validly made, given that there had not previously been any attempt to serve the bankruptcy notice on Mr Goodwin personally?

[27] Rule 6.8 provides that certain orders for substituted service may be made if reasonable efforts have been made to serve a document by a method permitted or required under the Rules.

[28] It is common ground that prior to Mr Copland applying to the Court for an order by way of substituted service, no attempt had been made physically to serve the bankruptcy notice on Mr Goodwin.

[29] Mr Beck says that service pursuant to a substituted service order is a last resort and there must be a reasonable attempt to effect personal service beforehand. In this case the judgment creditor has taken a pre-emptive strike, as Mr Beck put it, which is not contemplated by the rule. There is no evidence before the Court that personal service could not have been readily effected, apart from the evidence showing that in other instances personal service has encountered difficulties and substituted service has been required. Mr Beck says Mr Copland knew

Mr Goodwin’s last address and some attempt at service could have been made accordingly. He says that even though a requirement that the bankruptcy notice be re-served would result in the Court receiving another application for adjudication relatively shortly, that is the necessary consequence of following the rules which, particularly in bankruptcy matters, must be followed carefully.

[30] Mr Guest says that the order was not challenged by an application for review under s 26P of the Judicature Act 1908 and r 2.3. Nor was an application made to set aside the bankruptcy notice. He says that the rules should not be interpreted in such a way that parties who have to serve a document must endeavour to do so by some means or other when they know in advance that there is no prospect of service actually being effected, for example when they do not have any address at all for the intended recipient, or do have an address but it is known that the person is no longer there. Mr Guest refers to r 1.2, which sets out the objective of the High Court Rules, namely to secure the just, speedy and inexpensive determination of a proceeding. He says that making reasonable efforts to serve a document should be interpreted as including investigating practical aspects of whether service can be physically effected on the intended party and consequently forming a view that endeavouring to serve personally would be futile.

[31] Mr Guest again relies on s 418 of the Insolvency Act, (above [21]).

[32] In my opinion r 6.8 cannot be interpreted in the way Mr Guest suggests. It is clear from the opening clause of the rule that the reasonable efforts which must be made are to be directed at service by a method permitted or required by the rules. Those permitted are set out in r 6.1 and are all directed at physical conveyance of the document from the possession of the serving party. I accept without hesitation that this interpretation of the rule may lead to time wasting where there is little if any information about the whereabouts of the party to be served and this may fail to secure, in that instance, the objective set out in r 1.2, at least in respect of this step in a process. However, I am mindful of the context of service in this case, and the cautionary note sounded in the cases referred to in [14] and [15].

[33] I made the order in question. After further consideration and hearing argument I have formed the view that the substituted service order I made without notice was made without a proper evidentiary foundation and should not have been made without evidence that reasonable efforts had been made to serve the notice, by one or other of the physical means noted in r 6.1. I return later to the consequences of this finding.

Third argument: is there adequate proof before the Court that the notice was served in accordance with the substituted service order that was made?

[34] On this point Mr Beck takes issue with the evidence before the Court in relation to service. In two affidavits by Ms J A King, an administrative assistant with the firm of solicitors representing Mr Copland, she deposes to service of the order for substituted service and the bankruptcy notice, and of the summons to debtor, creditor’s application for adjudication, the affidavit supporting the creditor’s application and, again, the order for substituted service. In each case, she says:

I served the documents on the abovenamed judgment debtor at the offices of

Ross Dowling Marquet & Griffin, solicitors ...

[35] In an affidavit by Mr Copland dated 14 February 2013 he says that he has no knowledge of the first ground in the amended notice of opposition, regarding service. In an affidavit dated 15 August 2012 he says that the statements in the application for adjudication were, to the best of his knowledge, information and belief, true. In the application it is stated that the bankruptcy notice was served on Mr Goodwin on 31 July 2012. Mr Beck’s point is that in all three of these affidavits evidence is given that service was effected on the judgment debtor. He says that is incorrect – service was on a solicitor pursuant to the service order. Thus, he says, there is no proof of service on the court file.

[36] That argument cannot prevail. The order for substituted service is that personal service of the bankruptcy notice and any subsequent application on the judgment debtor be dispensed with and instead service be deemed to have been effected on the judgment debtor by delivering such documents and a copy of the order for substituted service to the offices of the solicitors concerned. There is

ample evidence that occurred. Therefore service is deemed to have been effected on the judgment debtor.

Second ground of opposition: does Mr Goodwin have a counterclaim against Mr Copland that he was not able to raise in the original proceeding on which the debt is based?

[37] In the new proceeding filed by Mr Goodwin in the Dunedin High Court against Mr Copland, he says that the settlement agreement included a requirement that a defamatory reference to him be permanently deleted from a certain website. He accepts that the references were removed in May 2006 but says they have subsequently been restored to the same website and not removed since. He says that as it was reinstated there has been a breach of what he describes as an essential term of the settlement contract. He says that for this reason he cancelled the contract on

30 April 2012. He seeks a declaration that the contract was properly cancelled and cannot be enforced, a declaration that Mr Copland is not entitled to pursue this bankruptcy application on the basis of the admission of judgment signed as part of the settlement, and damages under four headings. First, he claims payment of

$530,000 which he says was the value of a property in Te Anau which was sold by Mr Copland. Secondly, he seeks reimbursement of $88,250 which Mr Copland recovered from the sale of a property in Mosgiel, and applied to the debt. Thirdly, he seeks legal and other costs he says he has incurred in taking action to prevent Mr Copland from enforcing the judgment, and fourthly, he claims damages for loss of business, inconvenience, anxiety and distress in a sum of $100,000.

[38] Mr Beck says that this bankruptcy application should not proceed because of this claim against Mr Goodwin. He says that the bankruptcy jurisdiction is discretionary and the Court needs to be assured that it would not be using its powers unfairly, especially if the claim on which the creditor has relied in issuing a bankruptcy notice is suspect in some way. He says the settlement agreement cannot be safely relied on because of the alleged breach of it by Mr Copland. When asked about the figures given in the statement of claim (as no basis for assessment of those figures is pleaded), Mr Beck says that the sum of $530,000 claimed as damages resulting from sale of the Te Anau property is an estimate of its value.

[39] Mr Guest says that Mr Goodwin did not make an application to have the bankruptcy notice set aside. This procedure was available to him under s 17(1)(d). He would have been required to satisfy the Court that he had a cross claim against Mr Copland equal to or greater than the judgment debt, which could not have been raised by Mr Goodwin in the action in which the judgment was obtained. He says that the second of these criteria is satisfied, as the claim relates to alleged breach of the settlement agreement, so the claim now brought could have been the subject of an application to set aside the bankruptcy notice. Instead, the Court is being asked to give Mr Goodwin a second chance to challenge the notice well after the first opportunity was lost. It should not do so.

[40] Mr Guest says that if it does do so, the Court must assess the claim which is relied on by Mr Goodwin to determine whether it has true substance and is a claim which Mr Goodwin genuinely proposes to pursue. This is an assessment which the Court must make when considering whether to set aside a bankruptcy notice under s

17 of the Act.4

[41] Mr Guest says that the claim could be pursued by the Official Assignee, and in any event it has been fully canvassed before this Court twice, on the applications to set aside the judgment entered pursuant to the settlement agreement. Mr Guest says the new proceedings have been raised late in the piece and solely for the purpose of stopping this bankruptcy proceeding. The agreement was drawn up with both parties having legal representation, the recitals do not mention removal of the material from the website nor the importance of so doing, and the operative clauses of the settlement agreement were complied with. It was not Mr Copland, but a different person who then placed the material back on the website at a later date. He says Mr Goodwin found out about it in 2009, at the latest, because it was raised in the application to set aside the judgment at that time. There is no evidence that Mr Copland was in a position to exercise any control over the person who placed the material on the website. He notes that whilst the Judge who presided over the conference in which the settlement was reached noted in a minute an undertaking

_{about removal of the material, that undertaking was given by the person on whose}

4 Sharma v ANZ Banking Group (1992) 6 PRNZ 386, (CA).

website the material was displayed, and not by Mr Copland. Therefore, Mr Guest says, any obligation on Mr Copland was at most on a “best endeavours” basis. It is impossible to imply any term that Mr Copland would guarantee the actions of the party who put the material back on the website. Therefore Mr Copland has not breached the settlement agreement, so it has not been validly cancelled, there is no sustainable cross claim, and the bankruptcy proceeding should continue.

[42] Turning to the statement of claim, Mr Guest says there are no particulars given of the allegations that Mr Goodwin has been unable to raise credit and has experienced substantial difficulties in carrying on business both nationally and internationally, as alleged in the statement of claim.

[43] Further, he says that the Te Anau property was sold pursuant to an order made by the Court on an unopposed summary judgment application and there is no evidence or pleading showing how a loss of $530,000 was incurred.

[44] Mr Guest says that in Re Krukziener,5 the judge referred to Sharma v ANZ,6 where the Court observed that it would intervene where the safety of the underlying judgment is called in question, noting that it may be an abuse to allow a proceeding to be pursued if there is good reason to doubt the judgment on which it is based.7

But the Judge also noted that the position of the creditor must be considered as well, and Mr Guest says that here the interests of the creditor outweigh the interests of the debtor.

Discussion of this ground of opposition

[45] As this is not an application to set aside the bankruptcy notice, but opposition to an adjudication order being made at the Court’s discretion, pursuant to s 37, establishing a cross claim (as Mr Goodwin maintains he can) does not determine the issue. Nonetheless it is in my view a factor which should be taken into account. The

_{claim as presently before the Court is lacking in particulars to such an extent that it}

5. Re Krukziener HC Auckland CIV-2007-404-002896, 12 August 2008, per Associate Judge Abbott.

6 _{Above n 4.}

7 Re Krukziener, above n 5, at [29].

falls well short of satisfying me that there is a genuine cross claim which might equal or exceed the amount of the judgment debt. First, there are no particulars given of the alleged inability of Mr Goodwin to raise credit, nor of his alleged substantial difficulties in carrying on business. Further, it is not shown how either or both of these, even if proved, translate into a claim for $100,000, as claimed in the prayer for relief.

[46] Secondly, there is no basis given for the claim for $530,000 in respect of the sale of the Te Anau property pursuant to a court order obtained, without opposition, by Mr Copland. Although counsel told me it was assessed as being the value of the property, that is not pleaded. Nor is there any evidence before me to substantiate that proposition.

[47] Thirdly, the material on the website to which Mr Goodwin takes exception was placed there by the operator of the website, not Mr Copland. The pleading against him is that he was required to cause the material to be permanently deleted from the website. This is not supported by the wording of the settlement agreement on which Mr Goodwin bases his claim. The document required Mr Copland to cause the material on the website at that time “to be removed as soon as reasonably practicable”. He did. He had no greater obligation. Although in paragraph [6] of the Minute issued by the judge he directed that the material was “not to reappear” on the website, that direction was made in terms of an undertaking given by the website owner, not Mr Copland. Only the former had the power to do so. I do not construe the order as directing Mr Copland to maintain a position that he was powerless to maintain. His obligation was prescribed by the contract he entered.

[48] For these reasons I am not satisfied the claim has substance, in terms of ANZ

v Sharma.

[49] The proceeding was filed well over six years after judgment was entered, and has been under consideration by Mr Goodwin since at least 2009 when it formed the basis of the first application to set the judgment aside. It was filed shortly after this bankruptcy application was served. This may cast an element of doubt over

Mr Goodwin’s intention to pursue it, but I see no need to draw an inference adverse

to him on this point in order to reach my conclusion on this application.

[50] If Mr Goodwin is adjudicated bankrupt the cause of action will vest in the Official Assignee under s 64. It would be for the Official Assignee to assess the claim and determine whether it should proceed. If it were to proceed the proceeds of the claim, if successful, would be an asset in the bankruptcy, distributable to creditors. If the sum recovered were greater than the debts proved in the bankruptcy, there may be grounds for the bankrupt to be discharged. All this shows that rather than being lost sight of, the claim would be independently assessed on its merits and the Official Assignee would make a decision on the steps to be taken.

Third ground of opposition: is it an abuse of process for Mr Copland to proceed with a bankruptcy application knowing he was in breach of the agreement on which the judgment debt was based?

[51] Mr Beck says that Mr Copland has been aware of the challenge to his rights to claim payment for some time, having been a party to the previous applications to set aside the judgment. He has known of Mr Goodwin’s cancellation of the settlement contract since he received the cancellation letter on 30 April 2012. He says that the Court has a discretion to afford relief to debtors where there is an arguable defence to the creditors’ underlying claim8 and the Court should intervene to prevent injustice to the judgment debtor.

[52] For the reasons I have already canvassed I do not consider that this bankruptcy proceeding is being used unfairly. I accept that the Court has a discretion, and have noted the terms of s 37. However, this ground is no wider, in this case, than the more specific challenge to the bankruptcy proceeding brought on the basis of the claim which Mr Goodwin maintains he has against Mr Copland. It must be remembered that the settlement agreement was entered well over six years ago, with both parties having independent legal advice. The obligation recorded in

_{the agreement was to remove the material complained of from the website, and that}

8 Re Krukziener, above n 5.

occurred. A third party, not on the evidence connected in any way to Mr Copland apart from having been a witness instructed by him for that proceeding, has subsequently reinstated the material on his website, action over which Mr Copland has no control. Two attempts to set aside the judgment have failed. It has taken nearly seven years for proceedings to be brought to challenge the settlement agreement, even though the possibility of that course has been open since Mr Goodwin found out about the entries on the website, and despite Associate Judge Faire having noted that the challenge to the settlement agreement might be the

subject of a separate proceeding.9 The argument that Mr Copland knows he is in

breach of the settlement agreement has no foundation stronger than an allegation in a pleading, and even that runs into difficulty that the alleged breach is based on a pleaded obligation which is not contained within the agreement said to have been breached. These factors satisfy me that this application by Mr Copland is not an abuse of process.

Should the Court exercise the discretion given by s 37?

[53] The second and third grounds of opposition to the application for adjudication have failed. On the first ground Mr Goodwin has satisfied me that the substituted service order should not have been made, as the required evidentiary foundation was not established. Nonetheless, the order was effected, and Mr Goodwin does not suggest that he did not receive the bankruptcy notice. The sole defect in the process is that no evidence was provided that reasonable efforts had been made to serve Mr Goodwin personally before a substituted service order was sought.

[54] Notwithstanding this, the substituted service order stands and is in force unless and until set aside. The order was not challenged at the time by application for review under s 26P of the Judicature Act 1908 and r 2.3, as Mr Guest correctly submits. It is not established, therefore, that service of the bankruptcy notice on the debtor as required by s 17(1)(c) of the Insolvency Act has not taken place.

_{Therefore, Mr Goodwin committed an act of bankruptcy, entitling Mr Copland to}

9 Copland v Goodwin HC Dunedin CIV-2004-412-346, 11 June 2010, at [24].

apply for adjudication under s 13. The first ground in s 37 for exercise of the Court’s discretion not to adjudicate is not therefore made out. That leaves the Court to decide whether to exercise its discretion on the basis that it is just and equitable not to order adjudication, or for some other reason (s 37(c) and (d)).

[55] The bankruptcy notice was served on Mr Goodwin’s solicitor, who was acting for him on a current matter at the time (though not in relation to his indebtedness to Mr Copland). Mr Goodwin received the notice and did not apply to set it aside. Later he received an application for adjudication, and opposed it only on the ground that he had applied to set aside the judgment on which the debt relied on for adjudication was based. That application failed. Then Mr Goodwin changed solicitors and counsel and filed an amended opposition to the application, six months after the application was filed. Until then there had not been any mention of any concern about the order for substituted service which had been made over six months earlier. Whilst the lapse of this period of time may be explained by the lack of an evidentiary foundation for a substituted service order only being identified when Mr Goodwin instructed his replacement solicitors and counsel, the basis on which he engaged actively in opposing adjudication in the meantime shows that his real concern lay in the validity of the judgment on which the adjudication application was based. The relevance of this is that there does not appear to be any prejudice to Mr Goodwin from the identified flaw in the evidentiary basis for the order. He has exercised his right to oppose adjudication on the ground of a challenge to the original judgment.

[56] The principles to be applied by the Court in exercising its discretion under s 37 are described in Baker v Westpac Banking Corporation10 thus:

... 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. A creditor who establishes the jurisdictional facts as set out in s23 [now s 13] 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. The court will give proper weight to the commercial judgment of the petitioner but the oppressive use of the bankruptcy process may be ground for refusing an order. Another ground may be the undoubted absence of assets but that will not necessarily preclude an order given the range of

10 Baker v Westpac Banking Corporation CA212/92, 13 July 1993.

interest involved including the public interest in the continuing oversight of a bankrupt’s affairs and the disqualifications that go with bankruptcy. In the end the court must balance the various considerations relevant to the case and determine whether the debtor has succeeded in showing that an order ought not to be made.

[57] The sole factor weighing in Mr Goodwin’s favour is the lack of an attempt to physically serve him with the bankruptcy notice before application for a substituted service order was made.

[58] To be weighed against that are the following factors. First, he received the notice followed by the adjudication application and fully participated in the subsequent process by opposing the application and applying to set aside the judgment on which it was made. Secondly, he has not at any time taken steps to have the substituted service order set aside, an avenue of review available to him at law. Thirdly, two attempts to have the judgment set aside have failed, the judgment stands and has stood, unsatisfied, for a period well in excess of six years. Fourthly, Mr Copland has a significant interest in receiving the judgment sum to which he is entitled. Fifthly, there is a significant public interest, in my view, in judgments of this Court being met. Mr Goodwin has failed to meet the judgment. There are grounds for concern for the commercial community in this circumstance. Sixthly, there appears to be little strength in the claim Mr Goodwin has brought against Mr Copland and, in any event, that can be independently assessed by the Official Assignee.

[59] Balancing these factors directs me to the view that the discretion under s 37 should not be exercised in favour of Mr Goodwin.

[60] Finally, as noted earlier in this judgment, Mr Guest sought to rely on s 418 of the Insolvency Act. Section 418 is expressed in mandatory terms - a proceeding under the Act must not be invalidated or set aside for a defect in a step that must be taken as part of or in connection with the proceeding unless a person is prejudiced by the defect. I have already found that Mr Goodwin has not been prejudiced by the defect in the evidence that led to the substituted service order being made ([55]). That defect was in a step (service) that must be taken as part of or in connection with a bankruptcy proceeding based on a bankruptcy notice. Therefore s 418 directs that

this proceeding must not be invalidated or set aside on the ground that the evidentiary foundation for a substituted service order was not made out. Rather, the Court has power under s 418(2) to order that the defect be corrected, and may order the proceeding to continue on conditions it thinks appropriate in the interests of those who have an interest in the proceeding – which of course includes Mr Copland.

[61] The defect could only be corrected by an order directing that an attempt be made to serve Mr Goodwin personally, that being the missing step in the application for substituted service. I cannot see any advantage to Mr Goodwin in making a direction of that kind. At best this might achieve physical service of the bankruptcy notice, but Mr Goodwin has had it for several months already and taken steps in the adjudication process which has followed. I therefore decline to make an order to correct the defect.

Outcome

[62] I decline to refuse to adjudicate Mr Goodwin bankrupt. Mr Beck asked that if I reached this point I defer making a bankruptcy order for a period of two weeks to enable payment to be made. He indicated that he did not have instructions to make this request. Mr Guest did not make any submission in opposition.

[63] I am not persuaded that there is any reason to defer adjudication. If Mr Goodwin pays the debt to Mr Copland and is otherwise in a position to satisfy the requirements of s 309, an application for annulment can be made under that section.

[64] I adjudicate Mr Goodwin bankrupt. This order is effective at 9.00 am today. Mr Copland is entitled to costs on a 2B basis with disbursements fixed by the

_Registrar.

J G Matthews

Associate Judge

Solicitors:

Downie Stewart – Email: [e-mail] / [e-mail]

Jenny Beck Law – Email: [e-mail]