Jeffreys v Morgenstern [2014] NZHC 2847 (17 November 2014)

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IN THE MATTER	of the Insolvency Act 2006
IN THE MATTER	of the Bankruptcy of Arthur Sylvan Morgenstern
BETWEEN	STEPHANIE BETH JEFFREYS AND TIMOTHY WILSON DOWNES Judgment Creditors
AND	ARTHUR SYLVAN MORGENSTERN Judgment Debtor

Hearing:	5 November 2014
Appearances:	Mr Malarao for Judgment Creditors Mr Tingey for Judgment Debtor
_Judgment:	_{17 November 2014}

[1] The judgment debtor asserts that the judgment creditors obtained the substituted service order in circumstances where there was no full and frank disclosure to the Court of all material facts. For that reason, he applies to rescind the order for substituted service. It is the case for the judgment debtor that if the substituted service order is set aside, then the result is that the Court should deem the bankruptcy notice to never have been served upon him. It would follow from such a conclusion that the judgment creditor is not able to rely upon the purported non-compliance with the bankruptcy order as an act of bankruptcy.

[2] The judgment creditors are the liquidators of Kingdon Undertaking Limited. In Jeffreys v Morgenstern, Hansen J gave judgment against the judgment debtor in favour of the company for breaches of directors’ duties. The judgment debtor was ordered to pay $3,499,999 to his company.¹The judgment creditors issued a bankruptcy notice and had their service agent, Mr Peter Ward, attempt unsucessfully to serve the notice on the judgment debtor. A substituted service order was then made and the bankruptcy notice was served upon the judgment debtor’s solicitors.

[3] The history of the circumstances in which the substituted service order was made is now set out.

2014, counsel for the judgment creditors relied upon a number of factual contentions.

[5] It was stated that the legal firm of Gilbert Walker had confirmed to counsel for the judgment creditors on 8 April 2014 that they were authorised to

[6] It was stated in the application that before service could be effected on Gilbert Walker, the firm advised that Bell Gully would accept service of the bankruptcy notice and that they were no longer authorised to do so. Further, it was said, on 8 April 2014, Bell Gully wrote to counsel for the judgment creditors advising that the judgment debtor had taken an assignment of a security over the assets of the debtor’s company, that was previously held by ANZ National Bank Limited. The letter further stated that the security extended to the judgment which was the subject of the bankruptcy notice and that the judgment creditors had no authority to deal with the assets subject to the security, and consequently no right to issue a bankruptcy notice in respect of the judgment. Further, the letter stated that Bell Gully was not instructed to accept service of the bankruptcy notice.

[7] In support of the application judgment creditors presented evidence of an unsuccessful attempt at service. In an affidavit which Mr Ward swore on 15

April 2014, he deposed that he had received instructions to serve documents on the judgment debtor’s address at 781 North Road in Clevedon. He said that he had previously served documents on the judgment debtor at that address. He described the property as having a long, tree-lined driveway. Mr Ward deposed that on 11 April 2014 at 7.53 am, he had called at the property to serve the documents. The circumstances which Mr Ward set out in his affidavit in brief were that a woman at the address told Mr Ward that the judgment debtor was not there and that he had gone into the city for a meeting. Mr Ward then left his business card and asked her to have the judgment debtor phone him so that they could arrange for a time to meet and he could give the judgment debtor the documents in the envelope which he had with him.

[8] Mr Ward deposed that he left the property and at 9.29 am that day, he received a phone call from the judgment debtor. The judgment debtor said that he had been in the shower when Mr Ward called at the property. Mr Ward deposed that the judgment debtor said he had arranged for his solicitors, Gilbert Walker, to accept service of the documents. Mr Ward said he told the judgment debtor that he did not know about that arrangement. He deposed that the judgment debtor then said that he would call his solicitor about the matter

and then call him, Mr Ward, back within the hour. Mr Ward said that the judgment debtor did not call him back.

[9] I interpolate that in evidence he has given, the judgment debtor does not accept that he did not call back to Mr Ward. He says that he did so to and in the course of that conversation indicated his agreement to meet with Mr Ward to accept service. He does not say that any agreement was then made as to a time and place to meet. I take it that he is therefore saying that he called Mr Ward back indicating that he was prepared to meet and that the conversation ended without either he or Mr Ward actually fixing a time and place to meet so that the latter could affect service of the documents on the judgment debtor.

[10] Whatever the correct position, Mr Ward deposed that later in the same day at around 3 pm, a solicitor from the firm of Bell Gully, called him and advised him that the firm now acted for the judgment debtor and that he was not to go back onto the property and if he did so he would be trespassing.

[11] On 14 April 2014 Bell Gully wrote to the counsel for the judgment creditors repeating the trespass warning that it had given to Mr Ward personally.

[12] Thereafter, the judgment creditors made an application seeking an order for substituted service of the bankruptcy notice. They sought an order that the service of the proceedings could be completed by leaving the documents with Bell Gully.

[13] The matter came before the Court following which a minute was issued in which reservations were expressed about whether it was desirable for substituted service of proceedings to be effected on solicitors acting. The suggestion was made that the papers could be served by affixing them to the front gate of the property.

[14] The terms of the minute dated 3 May 2014 are not unimportant and should be set out in detail:

1. While there is no prohibition upon serving documents for the purposes of substituted service on solicitors acting, I consider that it would be preferable in the circumstances of this case of a varied order for substituted service to be made. I consider that the appropriate form of order would be to affix the documents to the front gate of the property at 781 North Road, Clevedon, with the documents being packaged or labelled conspicuously in order to ensure that they are noticed by the occupants of the property.

[15] That minute drew a response from counsel for the judgment creditors in the form of a memorandum dated 6 May 2014. The terms of which should also be set out verbatim:

2. Counsel has conferred with Mr Ward, the judgment creditor’s process server, who has previously been to the property at 781 North Road, Clevedon, regarding the proposed orders for substituted service.

[16] It is to be noted that it is this memorandum which counsel for the judgment creditors filed which is said to have unintentionally misled the Court.

[17] Following receipt of this additional memorandum, an order was made directing service of the bankruptcy notice on the firm of Bell Gully. The minute dated 27 May 2014 containing that order, so far as relevant, read as follows:

1. I thank counsel for the second memorandum concerning substituted service 6 May 2014. Having regard to the complexities about the entrance to the property I consider that it would be preferable to revert to the original proposal that counsel made ...

[18] The original proposal was for service of the documents to be effected on Bell Gully. The bankruptcy notice was then served on the judgment debtor by delivering it to Bell Gully on 30 May 2014.

[19] The judgment debtor has since given evidence dealing with a number of the matters which Mr Ward raised in his affidavits. He apparently accepted that he was present at the house when his partner told Mr Ward that he was not. He justified this on the basis that there was no proper ground for serving a bankruptcy notice on him having regard to the assignment of the debt he claimed to have received. So far as the trespass warning from the solicitor was concerned, he stated that the property that he, his partner and his daughter live on is a secluded one and it would cause unnecessary concern and upset to his daughter for strangers to come onto the property to serve him with papers particularly early in the morning. He said that after Mr Ward had visited the property, in the course of the conversation which he had with him by telephone, he offered to meet with Mr Ward for service of the papers.

[20] The judgment debtor further takes the position that Mr Ward ought to have disclosed that the judgment debtor had an office at St Lukes where he worked during week days. Mr Morgenstern said that he comes into the Auckland CBD several times a week and he could have been served there. He deposed that Mr Ward’s evidence was incorrect concerning the configuration of the property where he lives. He said that contrary to Mr Ward’s evidence, there is a gate at the property which is of a retractable kind. He said there is only one driveway although there is apparently a branch to the driveway leading to the manager’s house. He annexed to his affidavit photographs of the front of the property purporting to demonstrate the existence of the gate and the configuration of the driveway.

[21] Mr Ward replied with a further affidavit. He disputed that there had been any reluctance on his part to meet with the judgment debtor to effect

service. He produced photographs of the property showing the entrance way without a gate and generally illustrating the view that one has when visiting the property. He was unaware of the existence of a retractable gate. Mr Ward denied the suggestions that the judgment debtor made that he would have realised that he was driving over such a retractable gate.

[22] In response the judgment creditors submitted that it was possible that Mr Ward believed he was driving over a judder bar or cattle grate as opposed to a retractable gate. Mr Morgenstern subsequently produced a photograph in evidence showing the retractable gate after it had risen out of the ground. The evidence generally demonstrates that that gate is quite a distance from the public road and is on the “branch” of the drive leading to the judgment debtor’s residence.

[23] The application for an order rescinding the substituted service order indicates that it is based upon rr 7.46, 7.49 and 7.51 of the High Court Rules.

[24] Rule 7.46 which empowers the Court to make orders on a without notice basis would not seem to provide assistance in deciding the present case.

(1) A party affected by an interlocutory order (whether made on a Judge’s own initiative or on an interlocutory application) or by a decision given on an interlocutory application may, instead of appealing against the order or decision, apply to the court to vary or rescind the order or decision, if that party considers that the order or decision is wrong.

(2) A party may not apply under subclause (1) if the order or decision was made or given—

(a) if it is made by a party who was present or represented when the order was made or the decision given, within

(b) if it is made by a party who was not present and not represented, within 5 working days after receipt by the party of notice of the making of the order or the giving of the decision, and of its terms.

(5) Unless a Judge otherwise directs, the application must be heard by the Judge who made the order or gave the decision.

(a) if satisfied that the order or decision is wrong, vary or rescind the order or decision; or

[26] It is to be noted though that r 7.49 does not apply to orders made by an Associate Judge in chambers, as the order in this particular case was. Presumably the reason for that exclusion from the scope of r 7.49 is based upon the fact that orders made by an Associate Judge in chambers are able to be reviewed before a High Court Judge pursuant to s 26P of the Judicature Act

(1) A Judge may rescind any order that has been fraudulently or improperly obtained.

(2) The Judge may grant any further relief by way of costs that the interests of justice require.

(3) This rule does not limit any other remedies of a party who has been adversely affected by an order that has been fraudulently or improperly obtained.

[28] Counsel for the judgment debtor referred to the decision of Associate Judge Abbott in Yang v Ko.²That case dealt with an application to set aside a summary judgment decision under the prior equivalent of r 7.51.

[29] In that case the Judge stated the principles relating to the rescission of orders in the following terms:³

[24] I consider that the following principles applicable to the exercise of the discretion in the present case can be drawn from these two cases (without being an exhaustive statement of matters which might be taken into account):

(b) The focus of the enquiry is the knowledge and conduct of the party that obtained the order in question: orders are fraudulently obtained when there is intentional misuse of Court processes but improperly obtained when there is innocent misuse;

(c) A key factor in an enquiry into whether an order was improper[ly] obtained is whether the party obtaining it knowingly ignored a legal obligation so that it would be contrary to the interests of justice to allow the order to stand;

(d) The conduct of the party seeking to rescind the order is relevant only insofar as it affects the knowledge of the party who obtained the order;

(e) The fact that the order would not have been granted had the alleged impropriety not occurred is a relevant factor in the exercise of the discretion.

Directed primarily at inter partes orders; it should not be required very often in relation to without notice orders which are readily amenable to rescission on lesser grounds.⁴

[31] Whilst the commentary does not expand on what these “lesser grounds” are, an earlier formulation of the grounds upon which the Court will order rescission of an order obtained without notice is to be found in the judgment of the High Court in Haddow v New Zealand Insurance Co:⁵

It goes without saying that the fact that the Order applied, and above all that the third party had a contractual right to have the matters in issue referred to arbitration, should have been disclosed to the Court on the ex parte application. I find myself compelled to take the view that the utmost good faith, required on the part of an applicant proceeding ex parte was not shown on the application for leave to issue a third party notice; and, that the order made should be and is discharged on that ground: Simpson v Murphy [1947] GLR 411.

[32] The authority of Simpson was a case of the New Zealand Court of Appeal in which the Court concluded that when making an application on a without notice basis, “the utmost good faith is required on the part of those applying”.⁶

[33] Haddow has been endorsed in Martin v Ryan which was a case that dealt with a judicial review application of an ex parte order made in the District Court.⁷Fisher J in the High Court said:⁸

It is trite to say that on all ex parte applications the utmost good faith must be observed. There must be full and frank disclosure of all material facts whether or not they assist the applicant. Failure to observe that duty will normally (although not inevitably: Ellinger v Guinness, Mahon & Co [1939]

4 All ER 16, 25) result in discharge of the order, whether or not the order would have been justified on other grounds: Haddow v New Zealand

demonstrated that the non-disclosure was deliberate or that it amounted to an attempt to deceive the Court.

On these principles it seems clear that an application to discharge the ex parte order made initially to the District Court, and if necessary on appeal, would have succeeded on the ground that all material facts were not disclosed.

[34] Similar comments regarding the “good faith” criterion are also made in the context of applications under r 7.49. MeGechan describes r 7.51 as an “alternative to applying under r 7.49 for review”.⁹In Associated Property Holdings New Zealand Ltd v Smith, Potter J considered an application under the former rr 264 and 266 of the High Court Rules.¹⁰Rule 264 was the equivalent of the current r 7.49 and r 266, the equivalent of the current r 7.51.

The very nature of ex parte orders means that only one side of the case is considered by the Judge, and a Judge reviewing an ex parte application is not hearing an appeal from the application. The purpose of the review is to establish a hearing de novo in the presence of the other party ... (p.347)

[22] There is no doubt as to the considerable onus on an applicant for an ex parte interlocutory order who –

... owes to the Court a duty of utmost good faith (uberrima fides) to make the fullest disclosure to the Court of all facts relevant to the application ... In particular the applicant has a duty to disclose to the Court any known defence to the application together with the facts on which it is based (McGechan 3-481(3)).

[37] The Judge also cited a more “liberal line of authority” at [25] as noted

However, a more liberal line of authority also exists. The choice as to rescission was put quite simply as a discretionary matter in Lazard Bros v Midlands Bank [1933] AC 289 at 307. In Ellinger v Guinness Mahon & Co [1939] 4 All ER 16 at 25, the Court squarely rejected as wrong an argument that a without notice order obtained through non-disclosure of any material fact ought to be set aside, even if the Judge thought that the order was properly made.

¹⁰Associated Property Holdings New Zealand Ltd v Smith HC Auckland CP426 SW99, 3

The more liberal approach is reinforced by the current trend to regard review of a without notice order as establishing a hearing de novo in the presence of the other party: D B Baverstock Ltd v Haycock [1986] 1 NZLR 342, (1986) 1

PRNZ 139. On that approach, the basis on which the original without notice order was obtained assumes relatively less importance.

In the rare case of misstatement or omission with deliberate intent to mislead the Court, it will invariably rescind upon a r 7.49 review. In such a situation, however, application under r 7.51 is more likely.

[38] Mr Tingey also referred to a more recent authority of McPherson v Bergers Securities Ltd in which the Court described the obligation of a solicitor certifying a without notice application to make full and frank disclosure of all material facts, regardless of whether they assist the applicant’s

[39] In the case now under consideration, the judgment debtor by his counsel focused attention on the memorandum which Mr Malarao addressed to the Court on 6 May 2014. Mr Tingey disclaimed any imputation to Mr Malarao of a deliberate intention to mislead the Court but he said that the memorandum was misleading and that is sufficient ground to order rescission under r 7.51.

[40] In my view the approach that Mr Tingey has taken is correct. It is not necessary for an applicant for a rescission order to establish that there was knowing dishonesty on the part of the applicant or the solicitor representing him in applying for the substituted service order. Inadvertently misleading material placed before the Court will be sufficient to justify discharge. Such an outcome is required as without notice applications are made in circumstances where the other side is not given an opportunity to be heard which represents a substantial departure from the usual rules of natural justice that requires that a party ought to be heard in a matter which affects his or her interests. In such circumstances, a high level of protection is required for the respondent party who has not been served and who does not have an opportunity to put matters that it views as relevant before the Court. The

_{interests of such respondents can only be practically protected if the
conduct of}

¹²McPherson v Bergers Securities Ltd HC Auckland CIV-2003-404-2752, 12 June 2003 at [2].

applicants is measured against a high standard of probity. An application which inadvertently misleads has the same practical potential to create prejudice to a respondent who knows nothing about the application as does an application which is knowingly misleading. That is not to say that there is no difference between inadvertent and deliberate misleading of the Court. For other purposes, such as disciplining of legal practitioners and perhaps the ordering and scale of costs, it may be vitally affected by the distinction between the two. But for the purposes of the Court deciding whether or not to rescind an order obtained as a result of supplying materially incorrect information to the Court, the outcome will be the same.

[41] Against that background I will now analyse the evidence that was put forward.

[42] It is necessary to next consider the information which the judgment creditors provided to the Court in support of the application for orders for substituted service of the bankruptcy notice. The enquiry concerns whether the information was misleading in material respects. Both of those questions are required to be considered in the context of the overall factual circumstances that evolved during the course of the applicant making, and the Court dealing with, the application for substituted service.

[43] When the matter came before the Court the relevant papers comprised the without notice application for an order for substituted service, the memorandum of counsel and the affidavit of Mr Ward which has been described above. A minute was issued dated 3 May 2014 which has been set out earlier.

[44] The issue which now needs to be decided is whether the memorandum that counsel filed dated 6 May 2014 was misleading in a material respect. A material matter I take to be one which the Court would treat as relevant to the question before it.

[45] The question before the Court was whether an order for substituted service ought to be made in terms of r 6.8 which so far as relevant provides:

If reasonable efforts have been made to serve a document by a method permitted or required under these rules, and either the document has come to the knowledge of the person to be served or it cannot be promptly served, the court may—

(i) that instead of service, specified steps be taken that are likely to bring the document to the notice of the person to be served; and

(ii) that the document be treated as served on the happening of a specified event, or on the expiry of a specified time:

[46] When the matter first came before the Court, the question was not whether substituted service could be justified in terms of r 6.8 but rather what form the order ought to take. That is to say by what means was substituted service to be effected?

[47] It is well known that making provision for affixing documents to the front door of an address is a common means adopted for substituted service. Executing service by that means will generally mean that it is highly likely that the person occupying the premises will see the documents when they enter their property. That is because they must pass the point at which the documents have been affixed in order to get into the property. There is a high likelihood therefore that such a method will be “likely to bring the document to

[48] At the point where the Court was dealing with the application for substituted service, there was far less information before the Court as to the configuration of the property of the judgment debtor then there now is. That information does however enable the Court to determine whether the

counsel was or was not misleading in a material respect. The question for me to determine was whether the memorandum was inaccurate in describing the characteristics and attributes of the property relevant to where documents could be affixed in a way that would meet the requirements of r 6.8.

[49] The key issue was that counsel advised that there was no front gate. In the rural context, affixing the documents to the front gate would be the equivalent of attaching them to the front door of an urban property. The Court could be confident that a person entering and leaving the rural property would have to pass through the front gate and accordingly, documents attached to the gate would be noticed.

[50] Many applications of this kind are dealt with by the Court each week. The judge considering such an application does not expect to enter into a prolonged enquiry as to the exact attributes of the property where the documents are proposed to be served. In the context of making a chambers application of this kind, it is unlikely that the judge, on being told that there is no front gate and that there is a shared driveway with a post and rail fence at the entrance and with the road number positioned on the top rail of the fence on the left of the entrance, will want to make further enquiries to assess the topography and layout of the property’s entrance way to determine whether there was some point alternative to a gateway that would be a satisfactory place to leave the documents. That is particularly so when there is a viable alternative suggested for substituted service of the documents – in this case the offices of the solicitor.

[51] Mr Tingey closely analysed the evidence about the features of the property and whether the second memorandum which counsel filed materially misled the Court about the configuration of the entrance to the property.

[52] I do not accept that the statement that there was no front gate to the property was materially inaccurate. Mr Tingey strove to persuade me that the fact that there was a retractable gate located on a road some distance inside the boundary of the property and from the highway could reasonably be described

as a front gate. Having regard to the fact that by the time that the second memorandum had been filed, the process server had been “trespassed” from the property, service by affixing the documents to an internal gateway within the property was not a possibility. Counsel who filed the second memorandum was entitled to proceed on the basis that it would be understood that there was no front gate in the sense of being a gate adjoining the highway. I do not consider there was any material misdescription of the situation arising from the assertion in the second memorandum that there was no front gate to the property.

[53] In any case, the internal gate to which I have made reference was one which could be raised and lowered electrically. The process server had never heard of such retractable gates. Plainly the gate was retracted down into its housing under the road when he passed the point where the gate was situated when he visited the property on 11 April 2014. He did not notice that there was such a gate. That such a gate would be unsuitable to affix documents to is self-evident.

[54] Mr Tingey said that the memorandum could have explained that there were supporting posts on each side of the retractable gate which would be suitable for affixing Court papers to even when the gate had been “opened” by lowering it to the point where it was retracted and therefore out of sight under the roadway. This in my view is an over-refined analysis. The Court had mentioned the possibility of affixing the papers to the front gate and it is going too far to suggest that counsel ought to have explained about the gate mechanism and how even when it was out of sight there would have been posts to the side of it to which the papers could be attached. Counsel addressing memoranda to the Court on matters of this kind is not required to go to impracticable lengths due to the risk of being reproached for lack of candour if he does not do so.

[55] Then Mr Tingey criticised the reference in the memorandum to the fact that there was a “shared driveway”. This criticism was based upon an analysis of the configuration of the houses on the property. That there are two

dwellings on the property is apparent. Access to both properties is from the same road that adjoins the highway. Not far distant from the highway there is a branch to the right which leads to the manager’s house or, if one proceed straight ahead, to the judgment debtor’s house. Mr Tingey’s analysis was that describing the driveway as a “shared driveway” in the circumstances was misleading. He said that there was only one driveway to this property which served two houses on one property and therefore it was not apt to describe the arrangement as being one of a shared driveway.

[56] Again, I consider that that analysis is over-refined. Bearing in mind the purpose for which the communications contained in the second memorandum was made to the Court, the use of the expression “shared driveway” was adequate to explain that there were two different parties occupying the property once someone has driven past the point where the margins of the highway ended and the judgment debtor’s property commenced.

[57] In any case, even if it was misleading to so describe the arrangements, the advice given was not material. For reasons that I have attempted to explain earlier, the Court was interested in whether there was a gate to which the papers could be attached. The memorandum had accurately stated that there was no such gate. Further background information about the layout of the driveway was of interest but was not essential to the Court’s assessment of the position. Once it was clear that there was no structure properly describable as a gate, it could not be assumed that there was a point which the Court could be confident that the judgment debtor would have to pass through and at which affixed documents would be likely to be seen by the judgment debtor.

[58] The fact that an entrance served two different occupiers of the property, rather than two occupiers of different properties, is immaterial for another reason. It could possibly be supposed that if two or more people are accustomed to driving past a location where documents have been left pursuant to a substituted service order, each could potentially mistakenly suppose or assume that the documents had been left there for the other party and, as a result, they would not come to the attention of the party who was to be served.

But if that premise is true, it is just as true for both of the different categories under consideration and the fact that they are both entering and leaving the same property by a common drive makes no difference.

[59] Mr Tingey also argued that substituted service could have been affected if the documents had been left in the letter box and that whilst the letter box was not numbered, the only reasonable inference was that the letter box was only used by the judgment debtor. As I have already explained above, the remarks that the Court directed to counsel in the minute dated 3 May 2014 concerning the substituted service arrangement mentioned only the front gate and did not seek information about the letter box.

[60] My conclusion is that there is no substance to the points that the judgment debtor has raised about the allegedly misleading nature of the memorandum which counsel for the judgment creditor filed. It follows from that finding that there ought not to be an order rescinding the substituted service order pursuant to which the judgment debtor was served and therefore the application to set aside the bankruptcy notice cannot succeed on this ground. The application to set aside the bankruptcy notice is dismissed and costs are reserved.

[61] As a result of the outcome of this judgment, it will be necessary to schedule further hearing time to deal with the remaining issues. Those issues are:

[62] The registrar is to allocate a further day fixture before me for completion of the hearing. In case oral evidence is to be given (if cross-

High Court of New Zealand Decisions

Jeffreys v Morgenstern [2014] NZHC 2847 (17 November 2014)