Strachan v Moodie [2014] NZHC 3167 (11 December 2014)

Last Updated: 13 February 2015

IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY

CIV-2013-454-000064 [2014] NZHC 3167

IN THE MATTER OF	The Insolvency Act 2006
BETWEEN	ELIZABETH GRACE STRACHAN Judgment Creditor
AND	ROBERT ALEXANDER MOODIE Judgment Debtor

Hearing:	13 November 2014
Counsel:	J Maassen for Judgment Creditor R A Moodie in person
Judgment:	11 December 2014

_{JUDGMENT OF ASSOCIATE JUDGE SMITH}

The application for adjudication

[1] This is an application by Ms Strachan to have Dr Moodie adjudicated bankrupt.

[2] Ms Strachan obtained judgment debts against Dr Moodie in June 2012 and November 2012. As a result, Dr Moodie owes Ms Strachan $222,239.18, together with interest on the judgments.

[3] When Dr Moodie did not pay, Ms Strachan issued a bankruptcy notice against him. Dr Moodie applied to set that notice aside, contending that he had a cross-claim against Ms Strachan (a defamation claim filed in the Wellington registry of this Court) for an amount which would exceed the amount of Ms Strachan’s

_judgments.

ELIZABETH GRACE STRACHAN v ROBERT ALEXANDER MOODIE [2014] NZHC 3167 [11 December

2014]

[4] In a reserved decision given on 11 December 2013, Associate Judge Osborne dismissed Dr Moodie’s application to set aside the bankruptcy notice. Dr Moodie filed an appeal to the Court of Appeal against that decision, but that appeal was dismissed when Dr Moodie failed to post security for Ms Strachan’s costs in the Court of Appeal. The decision striking out his appeal to the Court of Appeal was made on 23 June 2014.

[5] The cross-claim which Dr Moodie advanced in his application to set aside the bankruptcy notice is no longer available to him. The defamation claim against Ms Strachan has been stayed on Ms Strachan’s application, which Dr Moodie did not oppose.

[6] On 14 August 2014 Ms Strachan filed a creditor’s application to have Dr Moodie adjudicated bankrupt. Dr Moodie filed a notice of opposition and an affidavit in opposition.

[7] Dr Moodie acknowledged at the hearing that the debt owing to Ms Strachan remains unpaid. Mr Maassen and Dr Moodie also confirmed that, following the dismissal of Dr Moodie’s appeal to the Court of Appeal against the decision of Associate Judge Osborne, an order which had been made by the Associate Judge on

13 February 2014 staying execution of his judgment pending the determination of the appeal, is to be regarded as no longer being in force.¹

Dr Moodie’s grounds for opposing the adjudication application

[8] Dr Moodie advances two principal grounds of opposition:

(1) The alleged act of bankruptcy results wholly from a judgment of the Employment Court that was issued from a proceeding that miscarried, because the Chief Judge of that court “failed to act appropriately and

_{judicially”; and}

¹ Andrew Beck and others McGechan on Procedure (online looseleaf ed, Brookers) at

[CR12.01(6)].

(2) Dr Moodie is retired, and his sole income is government superannuation. He says that he owns no capital assets, and, in effect, it would be pointless to adjudicate him bankrupt.

The background to Dr Moodie’s first ground of opposition

[9] The Employment Court judgment which is the subject of Dr Moodie’s (trenchant) criticism, is a judgment given on 14 June 2012 in an employment dispute which had arisen between Ms Strachan and Dr Moodie. Briefly, Ms Strachan had worked with Dr Moodie in his Feilding legal practice from 2004 or early 2005. Initially, she worked on an unpaid basis, so that she could gain experience and skill while Dr Moodie would gain assistance in the preparation of his files. Ms Strachan’s involvement in Dr Moodie’s practice developed quickly, and during 2005 she asked that she be remunerated consistently with her input into the practice. There was a dispute over the agreed remuneration, and the Employment Court later found that the parties agreed that Ms Strachan was to share equally in the net profits of the practice with Dr Moodie.

[10] The parties’ employment relationship broke down, and eventually Ms Strachan filed a statement of claim in the Employment Relations Authority, alleging unjustified constructive dismissal. That proceeding was removed to be heard at first instance by the Employment Court.

[11] The Employment Court heard the proceeding over a number of days between February and May 2010, but it was not until June 2012 that the Employment Court judgment was eventually issued.

[12] Dr Moodie applied to the Court of Appeal for judicial review of the decision of the Employment Court, and Ms Strachan applied to strike-out that application.

[13] Dr Moodie’s application for review of the Employment Court judgment was heard by the Court of Appeal on 19 September 2012. In the course of the hearing, Dr Moodie indicated that he also wished to apply for leave to appeal against the Employment Court decision. By consent, the Court of Appeal agreed to deal with Dr Moodie’s oral application for an extension of time to seek leave to appeal.

[14] Dr Moodie’s applications to review the decision of the Employment Court, and for an extension of time to appeal against the Employment Court judgment, were dismissed by the Court of Appeal.

[15] In its judgment, the Court of Appeal noted that its judicial review jurisdiction is limited, and is to be seen in its statutory context, including the relevant appeal provision.² Even the right of appeal against an Employment Court judgment is available only if the Court of Appeal grants leave to appeal, and the Court of Appeal must be satisfied that, because of the general or public importance of the point of law, or for any other reason, the Court ought to hear the appeal.³ There is no right of appeal on questions of fact.

[16] There is a right of review (by the Court of Appeal) provided in s 213 of the

Act, but only limited grounds of review are available.

[17] The Court of Appeal followed its decision in Parker v SilverFern Farms Ltd,⁴ in holding that its jurisdiction on an application for judicial review of a decision of the Employment Court is limited to:⁵

(a) A decision made in circumstances where the Employment Court did not have jurisdiction in the narrow sense of the Court not having been entitled to enter on the inquiry in question;

(b) A decision that the Court had no power to make; or

(c) A decision made in bad faith.

[18] Dr Moodie is aggrieved by what he considers to have been a miscarriage of justice. It is not necessary for the purposes of this judgment to go into detail, but, among other complaints, he contends that evidence called by him in the Employment

_{Court was not properly considered by the Chief Judge, who Dr Moodie says}

² _{Moodie v Employment Court [2012] NZCA 508 [2012] ERNZ 201 at [11].}

³ _{At [12].}

⁴ _{Parker v Silverfern Farms Ltd [2011] NZCA 564, [2012] 1 NZLR 256.}

⁵ Moodie v Employment Court, above n 2, at [15].

exhibited bias against him. Dr Moodie also has a broader concern over the absence of any right of appeal on matters of fact from decisions of the Employment Court.

[19] The Court of Appeal found that there was no evidence of bad faith on the part of the Chief Judge, and that the decisions made by the Employment Court were within its jurisdiction.

[20] Dr Moodie now accepts that, as far as the Employment Court judgment is concerned, he has exhausted his remedies.

Other grounds of opposition

[21] In his affidavit in opposition, Dr Moodie says that health difficulties he has encountered over the last two years have forced his retirement from legal practice. He said at the hearing that there are one or two files with which he has remained involved (including one where a judgment is awaited from the High Court), and that he has retained his practising certificate as a barrister and solicitor. However the GST registration for his legal practice, Moodie & Co, has been cancelled, and for all practical purposes it appears that his long career as a barrister and solicitor is now over. He says he has no assets, and that his only income now is National Superannuation. However he is a beneficiary of two family trusts, which between them appear to hold substantial assets.

[22] The Moodie Family Trust was settled in 1985 to own farm properties in Wellington, and later in the Manawatu. Dr Moodie and his wife and their two children are the beneficiaries of the Moodie Family Trust, and Dr Moodie and his wife are the trustees.

[23] As trustees of the Moodie Family Trust, Dr Moodie and his wife are also shareholders of a company called The Big Barrow Company Ltd. Dr Moodie says that that company has not traded, and unless his son or daughter decide to use it, it will now probably be wound up because of Dr Moodie’s continuing health difficulties. The Moodie Family Trust also owns the workshop and garden equipment, but Dr Moodie says it is now of nominal value. This equipment has been

used to service farms and motels which were or are still owned by the

Moodie Family Trust.

[24] A second family trust, The Tawa Family Trust, was settled in 1998. Dr Moodie describes it as resulting from a Feilding subdivision and development joint venture between the Moodie family and one other family. The Tawa Family Trust owns approximately 5.5 acres of land in Feilding which is now occupied by Dr Moodie and his wife (and their two children when they come home - neither of the children is permanently resident in Feilding). Dr Moodie and his wife and their two children are the beneficiaries of The Tawa Family Trust, but neither Dr Moodie nor his wife is a trustee of that trust.

[25] Dr Moodie says that he has no savings or other assets. The vehicles used by family members, and all household furniture and effects, are owned by one or both of the family trusts. Neither Dr Moodie nor his wife own any property in their personal capacities. He says that he has not made any cash advances to either of the two Moodie family trusts within the past five years.

[26] Dr Moodie did not provide a copy of the trust deed for either of the two family trusts. Nor did he provide financial statements for the family trusts.

[27] Dr Moodie did propose a settlement of Ms Strachan’s claims. He proposed that Ms Strachan could take a sum of $20,000 which was deposited by Dr Moodie at the Wellington High Court as security for costs in his defamation. He submitted that if he were adjudicated bankrupt, Ms Strachan would have to share that $20,000 with the Official Assignee as well as other creditors (he referred to loans totalling approximately $440,000 with the ANZ bank, and tax liabilities yet to be assessed).

[28] Ms Strachan has no interest in that proposal.

[29] Dr Moodie has not provided details of the loans totalling approximately

$440,000, or the extent of tax liabilities. It is not clear whether he has other liabilities.

Issues

[30] The following issues fall to be determined:

(1) Is it open to Dr Moodie to attack the judgment on which the bankruptcy proceeding is based, as a judgment resulting from “a proceeding that miscarried”?

(2) Should the Court, in the exercise of its discretion, decline to make an adjudication order?

[31] I will address those issues in turn.

Issue 1 – Is it open to Dr Moodie to attack the judgment on which the bankruptcy proceeding is based?

[32] The short answer is “no”. Whatever Dr Moodie thinks of the Employment Court decision, the fact of the matter is that the Court of Appeal found no evidence of bad faith on the part of the Chief Judge, and found that the Employment Court had acted within its jurisdiction. The fact that the legislation provided no opportunity for Dr Moodie to challenge the Employment Court’s findings on questions of fact, or to seek judicial review of its decision on the basis of broader grounds than those permitted under the Employment Relations Act, are not concerns that I can or should address in this application for adjudication. Nor do I think it appropriate to attempt to reconsider the issues which were the subject of the Employment Court judgment in the context of the exercise of my discretion. It is enough to note that Dr Moodie was held liable for a substantial sum to Ms Strachan as a former employee, and that the Employment Court proceeding appears to have been only part of a wider battle fought on a number of fronts between Ms Strachan and Dr Moodie. Believing he was in the right in his argument with Ms Strachan in the Employment Court, Dr Moodie ran the case to a hearing and lost.

Issue 2 – Should the Court, in the exercise of its discretion, decline to make an adjudication order?

[33] Section 37 of the Insolvency Act 2006 (the Act) 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.

[34] Dr Moodie does not dispute that Ms Strachan has established the elements of s 13 of the Act, namely that he owes Ms Strachan a sum in excess of $1,000 and that he has committed an act of bankruptcy within the period of three months before she filed her application for adjudication.⁶ Dr Moodie also accepts that he is not able to pay his debts. The issues are whether it is just and equitable that the Court decline to make an order of adjudication, or whether for some other reason an order of

adjudication should not be made.

[35] Once the formal requirements for adjudication have been satisfied, the position is that an applicant creditor is prima facie entitled to an order of adjudication. The order may not be refused on the grounds of expedience or convenience.⁷ Each case must be considered on its own terms.⁸

[36] In Baker v Westpac Banking Corporation, the Court of Appeal discussed the principles applicable to the Court’s exercise of its discretion to make an adjudication order. In delivering the judgment of the Court, Richardson J said: ⁹

...A creditor who establishes the jurisdictional facts...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 a 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 interests involved including the public

⁷ Re Epirosa, ex parte Diners Club NZ Ltd, (HC) Wellington, B498/91, 6 March 1992; B532/91;

_{In re Twidle [1916] NZLR 748 at 749; and Re Fidow [1989] NZHC 298; [1989] 2 NZLR 431 (HC) at 439.}

⁸ _{Cribb v Evia Rural Finance Ltd [2014] NZCA 543 at [32].}

⁹ Baker v Westpac Banking Corporation CA 212/92, 13 July 1993 at 4.

interest in the continuing oversight of a bankrupt’s affairs and the disqualifications that go with the 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”.

[37] Mr Maassen referred to the judgment of Associate Judge Osborne in Re Rabobank Australia Ltd ex parte Tootell.¹⁰ In that case, the Associate Judge referred to Re Epirosa,¹¹ and the list of factors adopted by Master Williams QC as relevant to the exercise of the Court’s discretion:¹²

(1) What are the wishes of all affected parties, including the applying creditor, other creditors, and the debtors?

(2) Does the debtor have the ability to meet his or her debts over time and, if so, does that meet the requirements of achieving finality within a reasonable period?

(3) What were the circumstances in which the debt was incurred, and do those circumstances suggest that the creditor is acting unreasonably in pursuing adjudication?

(4) Will adjudication be pointless?

(5) Will the debtor, if adjudicated, be rendered unable to support himself or herself?

(6) Does the debtor have such a standing in the community that significant issues of stigma or embarrassment will result?

[38] The Associate Judge noted that those are factors which frequently arise, but the Court’s task is to consider all of the facts of the case before it, and balance the relevant factors in deciding whether it is just and equitable to decline to make an

_{order, or whether there is other sufficient reason to follow that course.}

¹⁰ _{Re Rabobank Australia Ltd, ex parte Tootell [2013] NZHC 2975.}

¹¹ Re Epirosa, ex parte Diners Club NZ Ltd, above n 6.

[39] Associate Judge Osborne accepted that Mr Tootell’s assets were plainly insufficient to give any hope of recovery to creditors, but he rejected the “pointlessness” argument advanced by Mr Tootell. The principle reason was that the Associate Judge considered that a relationship property agreement which Mr Tootell had made with Mrs Tootell would be an appropriate subject of enquiry by the

Official Assignee. The Associate Judge said:¹³

Issues of recovery, unless non-recovery is clear-cut, are appropriately for investigation not by this Court on adjudication application but by the Official Assignee with her powers of investigation and examination in the administration of a bankrupt’s estate.

[40] The Associate Judge noted that there was no line of unhappy creditors chasing Mr Tootell for their debts, and that there was no basis for treating him as one who has acted with a degree of fiscal irresponsibility in the way he incurred his debts. The case was not one where bankruptcy would be appropriate as some form of expression of judicial condemnation of commercial irresponsibility.

[41] There is no evidence in this case that other creditors are chasing Dr Moodie for payment, and, on the evidence before me, no sufficient basis to conclude that an order of adjudication would be appropriate as an expression of judicial condemnation of any kind of commercial irresponsibility on the part of Dr Moodie, in the sense of reckless commercial behaviour exposing the community generally to an unacceptable risk of financial loss. The simple fact is that he ran a long and difficult case as a litigant and lost, so incurring the debt which he cannot now pay.

[42] On the other hand, Dr Moodie was in the position of being Ms Strachan’s employer, and it is arguably in the public interest that employers should not be permitted to walk away from their obligations to employees, without consequences. For her part, there is nothing to suggest that Ms Strachan has been guilty of any oppressive or other blameworthy conduct which could weigh against an order for adjudication. She is simply enforcing a judgment as she is entitled to do.

[43] Of the other Epirosa factors listed in paragraph [37] of this judgment, it seems to me that the first factor (the wishes of the affected parties) is neutral:

Ms Strachan believes that an order of adjudication is appropriate, while Dr Moodie says it is not. The second factor (whether Dr Moodie has the ability to meet his debts over time – he says he does not) – favours Ms Strachan.

[44] The fifth and sixth factors (relating to Dr Moodie’s ability to support himself, and the stigma of bankruptcy) either favour Ms Strachan (factor 5) or do not weigh significantly in Dr Moodie’s favour (factor 6). Addressing the fifth factor, it would appear that Dr Moodie would be able to support himself in the event of bankruptcy: on the evidence, his living circumstances would be likely to continue much as before if an order for adjudication were made. On the “stigma” issue, Dr Moodie does wish to avoid bankruptcy if he can, but I do not see that as a particularly significant factor in his favour. His days of professional practice are all but over, and I do not think this is a case where there can be any concern over the impact of a bankruptcy on a professional career. No doubt there would be sadness at seeing the end of a long and colourful career attended by personal bankruptcy, but Dr Moodie does appear to have deliberately structured his affairs so that he would not have any assets to pay any significant sum for which he might become liable. I do not suggest that he was not entitled to establish the two family trusts, or to transfer assets to them (if that is what has occurred), but anyone who does that inevitably invites the possibility of bankruptcy if he or she becomes subject to a substantial adverse judgment.

[45] The principal issues are whether it will be pointless to make an order for adjudication (the fourth Epirosa factor), and if so whether that pointlessness is sufficient in all the circumstances to tip the “just and equitable” balance against the making of an order for adjudication.

[46] Some factors may be said to weigh in Dr Moodie’s favour on that issue. First, he is now in his mid 70’s, and is not in good health. He has wound up his law firm. The combination of those factors suggests that there is unlikely to be any risk to the commercial community in this case if no order of adjudication is made.

[47] A number of bankruptcy cases have considered the exercise of the Court’s jurisdiction in circumstances where the debtor has been a beneficiary of a family trust. In Re Marra, Master Lang (as he was then) considered an application for

adjudication by the Commissioner of Inland Revenue.¹⁴ Mr Marra owed a tax debt in excess of $360,000 which he could not pay. A house property occupied by Mr Marra’s family was owned by Mr Marra’s own family trust. Mr Marra offered the Commissioner the sum of $20,000 in full and final settlement of his tax liability, and contended that the Commissioner had acted unreasonably in declining to accept that sum. The $20,000 had been offered by Mr Marra’s family interests and his mother’s trust was supporting Mr Marra by providing him with a weekly income of approximately $600. Mr Marra provided no evidence of the trust’s worth, and the Commissioner was effectively asked to accept his word that the $20,000 was the largest sum his family interests were prepared to offer.

[48] Like Dr Moodie in this case, Mr Marra said that he had made no dispositions of property within the last five years which could attract the attention of the Official Assignee.

[49] Master Lang observed in respect of the trust:¹⁵

The fact remains, however, that the assets of this trust have not been disclosed to the Court. It was not until the hearing that the Court and the Commissioner became aware that Mr Marra’s car is in fact owned by the trust. No details have been provided of its value or of any other assets the trust may have acquired. The Official Assignee may wish to investigate whether any of the assets presently owned by the trust were acquired by it from Mr Marra. If they were, a debt may still be owing by the trust to Mr Marra.

[50] Under the heading “public interest and commercial morality”, Master Lang said:¹⁶

I consider that an objective observer would be dismayed to find that Mr Marra was able to walk away unscathed from his present situation. That kind of outcome would in my view be detrimental to the public interest and would do nothing to enhance commercial morality, particularly in the field of compliance with tax obligations. This is one of those cases where, regardless of the other circumstances, Mr Marra should have visited on him the consequences flowing from an order of adjudication.

¹⁴ _{Re Marra (2004) 21 NZTC 18,494 (HC).}

¹⁵ At [25].

[51] This case is not concerned with unmet tax obligations, but in my view it would be equally detrimental to the public interest, and would do nothing to enhance commercial morality, if an employer were seen to be able to walk away from obligations owed to a former employee, without any apparent consequence.

[52] Issues involving a judgment creditor with interests in a family trust came before Lang J again in Re Pulman ex parte The Hire Company Ltd.¹⁷ Mr and Mrs Pulman were shareholders in a company which encountered financial difficulties when a major debtor failed to pay a sum of over $1,000,000. The company went into liquidation, and Mrs Pulman was subsequently pursued by The Hire Company Ltd for payment under a personal guarantee she had given.

[53] Lang J noted that a complete absence of assets may mean that adjudication will serve no practical purpose. But a submission that a debtor has no assets will be closely scrutinised. The Judge noted: ¹⁸

...[S]uch a claim may conveniently ignore the fact that assets have been transferred to a family trust, or that assets do in fact exist, although not in the name of the debtor. Sometimes a debtor’s assets may only be recoverable by using the powers given to the Official Assignee under the Insolvency Act

1967.

[54] Mrs Pulman ran the “pointlessness” argument in opposition to the application for an adjudication order. The only asset she owned, a house property, had been sold the previous year and the entire sale proceeds went to the mortgagee. Although Mrs Pulman resided in a substantial home, that home was not owned by her personally, but by the Craig Pulman Property Trust, a trust which had been established some years earlier. Moreover, the trust had purchased the property using monies advanced to it by another trust, which had in turn obtained the necessary funds to advance to the property-owning trust from the sale of a business it had owned. Mrs Pulman’s counsel submitted that the Official Assignee would not be able to gain access to any equity in the property, even if an adjudication order were made.

[55] Lang J accepted that that might turn out to be the case, but observed that it would:¹⁹

¹⁷ Re Pulman ex parte The Hire Company Ltd HC Auckland CIV-2006-404-4697, 20 April 2007.

not be lost on Mrs Pulman’s creditors that she lives in a substantial property having a market value of approximately $1.66 million. She and her husband pay no rent, and the principal outgoings on the property are paid by a trust. The same trust also owns an Audi S8 motor vehicle which is currently on the market for approximately $40,000. The trust also owns the furniture and chattels in the house. These may have a value of up to $40,000. The trust therefore owns assets having a total value of approximately $1.74 million.

[56] The Judge then referred to a substantial mortgage on the property and certain other debts, before concluding that Mrs Pulman’s creditors were entitled to have the Official Assignee investigate the manner in which the trust acquired the home. The Judge considered that if there was a prospect that Mr and Mrs Pulman had personally advanced funds to the trust, the Official Assignee might wish to satisfy himself that the advances had been repaid. Also, there was an issue as to whether a debt owing to Mr Pulman’s parents was validly secured against the title to the property. Those avenues of investigation were considered particularly pertinent given the fact that Mr and Mrs Pulman were two of the three trustees of the trusts, and could therefore be seen to be their controlling influence.

[57] It seems to me that similar considerations apply in this case. Dr Moodie, although without any income other than National Superannuation, appears to be living comfortably enough in the property owned by The Tawa Family Trust, and he is a trustee and beneficiary of the Moodie Family Trust, which appears to be a substantial property owner (farm land, one or more motels, an investment property in Feilding, company shares, and some vehicles and household chattels). Dr Moodie has elected not to put before the Court the extent of the assets and liabilities of these trusts, nor explain how the trusts’ assets were acquired. As in the Re Pulman case, the manner in which the family trusts acquired these assets is an obvious topic of enquiry for the Official Assignee. Dr Moodie has provided no detail of the values of the trust assets, the amounts of any loans which might have been made to the trusts, and whether those loans have now been repaid in full. In my view it was up to him to provide that information, and in those circumstances I cannot be satisfied that there is nothing for the Official Assignee to investigate. Dr Moodie has not

_{persuaded me that it is clear-cut that any order for adjudication would be pointless.}

¹⁹ Re Pulman ex parte The Hire Company Ltd, above n 17, at [40].

[58] Weighing the various considerations, I am not satisfied that it would be just and equitable to decline to make an order of adjudication, or that for any other reason I should refuse to make an adjudication order. Ms Strachan’s prima facie entitlement to an order for adjudication must prevail. Accordingly, I make an order for adjudication. Ms Strachan is to have her costs on a scale 2B basis, with disbursements as fixed by the registrar.

[59] Those orders are timed at 4.00pm on 11 December 2014.

Associate Judge Smith

Solicitors:

Cooper Rapley, Palmerston North for judgment creditor

R A Moodie in person