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High Court of New Zealand Decisions |
Last Updated: 3 December 2018
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IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA
TE WHANGANUI-Ā-TARA ROHE
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CIV-2016-485-983
[2018] NZHC 3083 |
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UNDER
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the Insolvency Act 2006
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IN THE MATTER OF
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the bankruptcy of Patrick Bernard Hannan
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BETWEEN
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FM CUSTODIANS LIMITED
Judgment Creditor
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AND
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PATRICK BERNARD HANNAN ALSO KNOWN AS PATRICK BERNARD CHRISTOPHER
HANNAN
Judgment Debtor
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Hearing:
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21 August 2017; further submissions 4 September 2017,
11 September 2017, 27 September 2018 and 3 October 2018;
further hearing 10 October 2018
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Appearances:
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F B Barton (10 October 2018) and M B Couling for the Judgment
Creditor
P B Hannan in Person
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Judgment:
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17 May 2018
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Reissued:
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26 November 2018
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JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 26 November 2018 at 4.00pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors / Counsel:
Anderson Lloyd, Dunedin
Copy to:
Mr P B Hannan
FM CUSTODIANS LTD v HANNAN [2018] NZHC 3083 [26 November 2018]
[1] The judgment creditor (FM) applied for an order adjudicating Mr Hannan bankrupt. In a judgment give on 17 May 2018 (the May 2018 judgment) I dismissed the application, but in a reserved judgment given on 26 November 20181 (the Recall judgment), I recalled the May 2018 judgment, on the basis that relevant statutory considerations had not been taken into account in the May 2018 judgment. FM and Mr Hannan both made submissions on FM's recall application, and they agreed at the conclusion of the hearing of that application that if I decided to recall the May 2018 judgment I should proceed to deliver a new judgment on FM's adjudication application without the need to hear further submissions from the parties.
[2] Having recalled the May 2018 judgment, I now give judgment on FM's application for an adjudication order.
Background
[3] By loan agreement dated 10 July 2012 FM agreed to lend $784,297.26 (the loan) to Paddy Hannan Contracting Ltd (the Company), a company of which Mr Hannan was a director. The loan was repayable upon demand, and pending demand, by 1 December 2014. Interest was payable at an ordinary rate of 12 per cent per annum; in event of default, penalty interest was payable at the ordinary rate plus seven percentage points (i.e. 19 per cent per annum). Interest was payable monthly.
[4] In the event of default, FM was entitled to require the Company to pay the balance of the loan, accrued interest, and all other amounts which the Company owed FM.
[5] The loan was secured by an existing memorandum of mortgage over properties owned by the Company at 7A and 14 Waiu Street, Wainuiomata, and an existing General Security Agreement (GSA) held by FM over all the assets and undertakings of the Company. In addition to those securities, FM obtained a new memorandum of mortgage over two other properties in Waiu Street, Wainuiomata owned by the Company, namely numbers 19A and 19B Waiu Street.
1 FM Custodians Ltd v Hannan [2018] NZHC 3079.
[6] The loan was guaranteed by a number of companies associated with Mr Hannan, and by Mr Hannan personally. The other companies (Resource Technologies Ltd, Big Tree Nurseries Ltd and Drogue Construction Ltd) each agreed to provide a new GSA over its assets and undertakings. With Paddy Hannan Contracting Ltd, I will refer to these companies collectively as "the group".
[7] The Company defaulted on its obligations under the loan, and on 3 February 2014 FM appointed Kevin John Whitley, accountant of Auckland, as receiver and manager of the Company. FM also issued a proceeding in this Court against a number of parties, including Mr Hannan. Mr Hannan did not defend the claims, and on 17 March 2014 summary judgment was entered against all of the defendants for a total of $803,823.19, being the original loan principal of $784,295.64, penalty interest in the sum of $17,349.55, and costs in the sum of $2,178.00.
[8] In 2015 FM issued a bankruptcy notice against Mr Hannan. However it did not proceed with the enforcement action at that time, as discussions were under way with Mr Hannan to see if a settlement could be achieved.
[9] On 14 December 2016 FM issued a second bankruptcy notice against Mr Hannan. Mr Hannan could not then be located for service, and on 9 February 2017 Courtney J made an order for substituted service by advertisement, service on two firms of solicitors, and by email to Mr Hannan at his Resource Technologies email address.
[10] The second bankruptcy notice was duly served in accordance with the substituted service order, but Mr Hannan did not comply with the notice. The present adjudication proceeding was filed on 6 April 2017.
[11] Service of the adjudication proceeding was again effected by substituted service.
[12] The adjudication application was first called on 23 May 2017. Mr Hannan appeared in person, and presented a written application for an adjournment of two
months. He advised the Court that FM had been paid a total of $913,209.97, and that that sum was more than sufficient to cover the debt. I granted an adjournment for one month, on the condition that Mr Hannan file an affidavit confirming that the amount claimed had been paid. Mr Hannan duly filed an affidavit in opposition, and FM provided reply affidavits from Mr Whitley, and Mr Peter Hutchison, the Managing Director of Fund Managers Otago Ltd, the investment fund manager who acted on the loan on FM's behalf.
[13] A further brief affidavit was sworn by Mr Hannan on 3 July 2017 pursuant to leave given to him to do so on 20 June 2017. Mr Hannan's 3 July 2017 affidavit was effectively his notice of opposition to the adjudication application. He asked that the adjudication application be dismissed on one or other of the grounds set out in s 37(b) and (c) of the Insolvency Act 2006 (the Act), or alternatively that the Court grant a stay, or halt, of the application under s 38 of the Act on the basis of certain complaints Mr Hannan has made to the Serious Fraud Office, the Institute of Chartered Accountants for Australia and New Zealand, the Companies Office, the New Zealand Law Society, and the Department of Internal Affairs. Mr Hannan also said that he was formulating a counterclaim against FM, the Receiver and Hutt City Council.
[14] Mr Hannan repeated his contention that monies have been paid in excess of the judgment debt.
[15] The parties subsequently filed written submissions, and I heard oral argument on the application on 21 August 2017.
Further affidavit from the receiver
[16] At the conclusion of the hearing, I directed FM to provide a further affidavit, directed to one aspect of a particular document Mr Hannan had attached to his written submissions. I also directed that FM could file a memorandum addressing any points in the further affidavit it might wish to address.
[17] The document was a report Mr Hannan had received from Mr Gordon Trainer, a chartered accountant with Lomond Group Ltd of Auckland.
[18] An affidavit sworn by Mr Whitley on 31 August 2017 was subsequently filed in response to this direction, and Mr Couling addressed the issue in a memorandum filed by him on 4 September 2017.
Post-hearing submissions
[19] On 29 August, I issued a further minute, requesting the parties' further submissions on a matter that had not been discussed at the hearing.
[20] FM had obtained judgment against Mr Hannan on 17 March 2014, in the sum of $803,823.19. A spreadsheet produced by Mr Couling at the hearing showed that Mr Hannan's account had been credited with payments totalling $777,561.52 after the judgment and before the bankruptcy notice was issued on 14 December 2016. Notwithstanding those credits, the bankruptcy notice said that the amount claimed ($803,823.19) was the amount due "on" the judgment of 17 March 2014. I indicated in my minute that it was not clear to me why the payments credited to the account between 17 March 2014 and 14 December 2016 had apparently not been applied in reduction of the judgment. I raised the issue of whether, if any payments should have been credited against the judgment sum but were not, the bankruptcy notice was valid.
[21] I invited FM to file a memorandum on this issue within five working days, with Mr Hannan entitled to file a reply memorandum within five working days of his receipt of FM's memorandum.
[22] Mr Couling addressed the issue in his memorandum of 4 September 2017. Mr Hannan filed a memorandum in reply dated 11 September 2017.
Mr Hannan's evidence
[23] Mr Hannan raised a preliminary question over his correct name. Judgment was entered against him under the name "Patrick Bernard Christopher Hannan" and that is the name that appeared on the Loan Agreement and guarantee signed by Mr Hannan. He now says that his correct name is "Patrick Bernard Hannan".
[24] That issue is easily dealt with by amendment of the adjudication application and other documents filed in the proceeding, to name the Judgment Debtor as "Patrick Bernard Hannan also known as Patrick Bernard Christopher Hannan". That amendment cannot prejudice Mr Hannan, and I make an order amending the name of the Judgment Debtor accordingly.
[25] Mr Hannan stated in his first affidavit that all payments of interest and principal were made in a timely manner, until the Hutt City Council issued an abatement notice in respect of the landfill operation. He said that that led to FM appointing Mr Whitley as receiver pursuant to FM's GSA.
[26] Mr Hannan produced a statement from FM dated 26 January 2017, showing the following payments that he said he had caused to be made in reduction of the debt:
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Date
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Amount
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4 November 2014
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$200,000.00
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11 August 2015
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$ 17,500.00
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31 August 2015
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$339,517.12
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4 December 2015
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$206,192.85
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$763,209.97
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[27] The source of the payment of $200,000 made on 4 November 2014 is not clear from the evidence. The payment of $17,500 on 11 August 2015 was identified in FM's statement as a deposit on sale of 7A Waiu Street. The payment of
$339,517.12 was identified in FM's statement as the proceeds of sale of a property at 88 Viewmont Drive, and the $206,192.85 represented the sale of Lot 2, being part of a subdivision of the property at 14 Waiu Street.
[28] In addition to those payments, Mr Hannan stated that a further $150,000 was paid from the sale of 19A and 19B Waiu Street in or about October 2015. He produced copies of solicitors' settlement statements showing that these properties were sold for a combined price of $150,000. The receipt of that $150,000 does not appear in the statements produced by FM.
[29] Mr Hannan also queried what had happened to receivables of approximately
$400,000, said to be owed to the group at the time the receiver was appointed.
[30] More generally, Mr Hannan alleged that the values of the properties over which FM held security (the Waiu Street properties, the Viewmont Drive property, and a forestry block at Tinui, Wairarapa) exceeded the principal sum advanced by FM.
[31] Mr Hannan was critical of what he regarded as exorbitant fees spent by the receiver in the course of the receivership. He itemised the fees charged as follows:
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Receiver's fees
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$481,114.85
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Legal fees – all sources
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$294,835.06
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Collection fees (Gross)
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$662,385.90
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Interest
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$327,541.69
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Penalty interest
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$210,801.29
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[32] Mr Hannan asserted that the payment of the fees has been effected by adding them as further advances under the loan agreement. The result, according to Mr Hannan's arithmetic, was that the debt rose from $883,064.91 at the date of the receivership to $2,107,136.18 as at 26 January 2017.
[33] Mr Hannan said that it was beyond his comprehension why FM and the receiver did not move to sell the secured properties earlier, to avoid running up "this huge amount of debt".
[34] Mr Hannan also complained that FM increased the interest rate to
7.75 per cent, when Mr Hutchison, the managing director of the company responsible for the administration of the FM loan, agreed with Mr Hannan and his fellow shareholders that the rate would be 7.5 per cent.
[35] Mr Hannan said that he had been "constantly subverted" by the receiver in his own attempts to organise sales and/or the refinancing of the loan, despite establishing that the Hutt City Council's abatement notices were illegal, updating resource consent applications for the Waiu Street properties, and seeking a rezoning
of the properties from "general business" to "residential", to enhance the value of the landfill site. He produced a copy of an article from the Hutt News of 23 May 2017, in support of his contention that there is a market for residential land in Wainuiomata. He said that he had an engineer prepare a scheme plan for the rezoning, but the receiver would not help him financially, or provide other support.
[36] Mr Hannan referred to proceedings he wished to issue again FM, the receiver and Hutt City Council, alleging negligence, fraud in over-charging and the charging of interest, and failure to comply with relevant credit and consumer legislation. He said that he had been held up in preparing these proceedings, due to the need to have forensic accounting work done and Mr Whitley's refusal to provide relevant information (including copies of invoices requested by Mr Hannan). He did eventually receive copies of invoices relating to the receiver's charges, and the charges for legal fees, but the bulk of them stated "our fee", without providing details of work done.
[37] Mr Hannan produced with his affidavit copies of the deeds of appointment of receiver, all dated 3 February 2014, relating to each of the companies in the group. Each of the deeds recorded that the relevant company was in default of its obligations to FM, and had been served with a demand on 28 November 2013 which remained unsatisfied. Notices under s 119 of the Property Law Act 2007 had been served on or about 4 October 2013 in respect of all members of the group, and each notice had expired and remained unremedied. The deeds recorded that the group companies all remained in default of their obligations under the GSA.
[38] In the operative part of each of these deeds, FM appointed Mr Whitley to act as receiver and manager of both present and after-acquired property, with all the powers conferred on receivers and managers by the GSA and at law. Each deed went on to fix the receiver's remuneration at the usual hourly rates of the receiver for insolvency assignments of this nature, and expressly provided that the receiver could obtain such legal advice or other professional advice in the performance of his duties as receiver as he saw fit, and on such terms (including remuneration) as he saw fit, provided that FM's liability under the clause was not to exceed $80,000 plus any
legal fees and/or other expenses incurred unless otherwise approved in writing by FM.
[39] In his second affidavit, sworn on 3 July 2017, Mr Hannan stated only that he had lodged complaints about FM or the receiver with the various organisations. He said he was in the process of formulating counterclaims against FM, the receiver and Hutt City Council.
The evidence for FM
[40] Mr Whitley filed a lengthy affidavit in support of the application for adjudication. From 3 February 2014 he has been the receiver of each of the companies associated with Mr Hannan that are named in the group.
[41] Mr Whitley said that the principal assets of the group of companies were four blocks of land located in Wainuiomata:
(a) 7A Waiu Street, Wainuiomata;
(b) 214 Waiu Street, Wainuiomata;
(c) 19A and 19B Waiu Street, Wainuiomata.
[42] 7A Waiu Street had been used as a clean-fill operation, and 14 Waiu Street was still being operated as a clean-fill operation.
[43] Mr Whitley said that at the time of his appointment as receiver, 7A Waiu Street was subject to investigations by the Hutt City Council (the Council), and there had been several criminal prosecutions brought by the Council relating to the land. The land at 14 Waiu Street was also subject to enforcement orders of the Environment Court. Mr Whitley produced a copy of an Environment Court order made on 6 December 2013 against Mr Hannan and Paddy Hannan Contracting Limited, in which the respondents were required to take certain remedial steps
relating to a resource consent or consents previously issued in respect of the land at 14 Waiu Street.
[44] Mr Whitley said that none of the properties was in immediately marketable condition when he was appointed receiver. When he visited the properties following his appointment, he noted that 14 Waiu Street was still being used as a clean-fill operation, but was not being operated in accordance with the relevant resource consent. Breaches included the absence of any investigation or engineering reports relating to the compaction of the soil, non-complying material being dumped on the site, and the absence of a noise and dust control bund erected along the neighbour's boundary. There were difficulties with the neighbours, who had become disenchanted with noise and dust issues associated with the landfill use, and both 7A and 14 Waiu Street bordered on sensitive park/reserve land that the Hutt City Council was actively trying to protect.
[45] Mr Whitley concluded that 14 Waiu Street was not being operated in accordance with the existing resource consent for the site, and that the infractions were so serious that he had no option but to shut the operation down. He formed the view that significant investment would be required to make the site compliant, so that the clean fill operation could be resumed.
[46] Mr Whitley described the issues in the receivership as "complex and multifarious", with solutions requiring further advances from FM. There were numerous difficulties, including difficulties in obtaining the co-operation of the group's accountants, and in getting meaningful information from the group's engineers and from the Hutt City Council's files. Both the Council files and the engineering files were inadequate, particularly in failing to specify base RL levels accurately, so that complying heights could be properly measured. Mr Whitley formed the view that the Council had become intransigent in their attitude towards Mr Hannan and his affairs; they were insisting on total and complete compliance with the relevant environmental legislative provisions.
[47] Mr Whitley arranged a meeting with Mr Hannan's engineer. He asked the engineer if he would be prepared to give an engineer's certificate for the land at 14 Waiu Street, but the engineer declined to do so.
[48] Mr Whitley eventually appointed Spencer Holmes Ltd, a firm of professional engineers, to investigate the issues and advise.
[49] Mr Whitley was however able to deal with part of 14 Waiu Street. There was a building on 14 Waiu Street occupied by a tenant, and the tenant wished to buy the building. Mr Whitley agreed to the sale, which required a subdivision of the land and a boundary adjustment. Road access also had to be built across 14 Waiu Street. This was eventually achieved, and in December 2015 the subdivided lot (Lot 2) was sold for a net sum of approximately $205,000.
[50] As for the balance of the property at 14 Waiu Street, Mr Whitley was eventually able to reach agreement with the Council, and a new resource consent was sought.
[51] The new resource consent application, for earthworks, rehabilitation and operation of the clean fill, was ultimately heard in May 2016.
[52] The Council determined that the resource consent application should be publicly notified, and the application was referred to an independent commissioner for hearing. Mr Whitley retained Mr Russell Bartlett QC to advise and conduct his case before the Commissioner. Mr Bartlett advised Mr Whitley to communicate with each and every party who made a submission in opposition to the application. He also advised that additional consulting evidence would be required.
[53] Mr Whitley also engaged a firm of engineers, Geotech Engineers, to advise on the remediation work for 14 Waiu Street. Geotech advised that, to achieve proper compaction, an additional five metres of fill, properly compacted, would need to be laid over the entire site. Both the Council and the neighbours were opposed to that amount of fill being put on the site, and agreement was eventually reached with the
Council that re-compacting the top one metre, and laying an additional three metres over the top of that, would be an acceptable basis for a resource consent application.
[54] The Commissioner reserved his decision, and requested further information after the hearing. That further evidence was obtained and presented.
[55] The resource consent was granted on 27 June 2016. The Council accepted that if effect was given to the new resource consent, the remaining enforcement orders would be unnecessary: the ongoing adverse effects from the unconsented works would be remedied. The agreed solution was a condition that the works authorised by the new resource consent be completed by 18 July 2021.
[56] In the meantime, the time for compliance with the enforcement orders had been extended by the Environment Court on a number of occasions, and the orders had been varied by further orders made on 10 June 2015 and 16 November 2016.
[57] A judicial conference was eventually convened in the Environment Court in May 2017, to resolve remaining issues with the enforcement orders affecting 14 Waiu Street. Following the variation of the enforcement orders there were only two outstanding matters (batters and over-height issue). Those matters were resolved at the judicial settlement conference in May 2017. Mr Whitley said that allowed him to move forward with 14 Waiu Street, and put it on the market. It had not been possible to sell the property before then.
[58] Mr Whitley described the situation with the properties at 14 and 7A Waiu Street as one of dealing with distressed assets, requiring substantial remediation (including repairing environmental damage caused by non-complying activities) to restore any value.
[59] After lengthy discussions with the Council, Mr Whitley decided that it would be necessary to apply for a resource consent in respect of 7A Waiu Street, and to spend some money on planting. That was done, at considerable expense, but the resource consent was not the end of the problems: 7A Waiu Street also had access problems. While 7A Waiu Street abuts the main road into Wainuiomata, the Council
was opposed to access directly onto the main road. Mr Whitley instructed Spencer Holmes Ltd to draft some road access plans, for access across the neighbouring reserve land owned by the Council, to get 7A Waiu Street into a saleable state. That was eventually achieved by October 2014, after eight months' work and at considerable further cost.
[60] Mr Whitley put 7A Waiu Street up for sale by tender in October 2014. The highest tender was for $350,000, but it was on a conditional basis. The tenderer wanted commitments from the Council and the Wellington Regional Council for the provision of certain easements. It appears that all of that was achieved, as the purchaser declared the agreement for sale and purchase unconditional. However, the purchaser failed to settle, and the agreement was subsequently cancelled.
[61] 7A Waiu Street was put on the market again.
[62] Mr Whitley said that it was initially envisaged that the access to 7A Waiu Street would be provided over the adjacent land owned at 19A and 19B Waiu Street. While that did not prove to be feasible, and the eventual solution was access over the neighbouring Council land, the result of the initial planning was that the land at 19A and 19B Waiu Street could not be sold until the access issue for 7A Waiu Street had been resolved.
[63] Mr Whitley produced a chronological description of his receiver's fees, together with copies of his invoices. He rejected Mr Hannan's allegations that excessive time and cost had been spent on the receivership, and said that he had complied with all Mr Hannan's requests for information in respect of the properties. He said also that while FM had made substantial further advances to cover the costs of the receivership (including the costs of substantial earthworks and landscaping, and the creation of road access to the Waiu Street properties), it was not willing to make further funds available for any further applications to the Council which Mr Hannan might have contemplated.
[64] Mr Whitley addressed the matter of the recoverability of group aged receivables totalling $467,304.69 (including GST), as calculated by the group's
former accountants. He said that only $69,669.18 was actually collected. Part of this included a charge back of $183,568.75 to the company that had advised on the erection of a dust and noise control bund at 14 Waiu Street. The bund as erected had to be removed, as it had been erected in the wrong place. The $183,568.75 was the cost of demolishing the bund. Mr Whitley said that the claim against the company that had advised on this work could not be pursued, as prosecution of the claim was dependent on the evidence of a former manager who had since died.
[65] An advance of $35,000 to another party also proved to be irrecoverable when that party was adjudicated bankrupt.
[66] A further sum of $172,500, treated as a receivable by the group's former accountants, represented the estimated proceeds of sale of 19A and 19B Waiu Street. Mr Whitley said it should not have been included as a receivable because the claim was not enforceable at the time. A net amount of $137,484.75 was ultimately recovered on the sale of 19A and 19B Waiu Street, as noted by Mr Hannan in his affidavit.
[67] Actual receivables at the date of the receivership totalled $66,292.12 plus GST, far short of the figure of $400,000 referred to by Mr Hannan. That sum was reduced further by a preferential claim by the Inland Revenue for outstanding GST, of $30,482.94.
[68] As for Mr Hannan's criticism of expenses incurred in the receivership, Mr Whitley pointed out that the figures for receivers' fees and legal fees included GST, which has since been recovered. The receiver's fees also included disbursements, including experts' fees and consent costs. They also included
$34,347.82 (exclusive of GST) paid to Mr Hannan for services as a consultant to the receiver between February and September 2014.
Mr Hutchison
[69] The second affidavit for FM was provided by Mr Hutchison, who has been responsible for managing the loan from FM in this case. Mr Hutchison said that he has worked with Mr Whitley throughout the receivership to facilitate the repayment
of the debts owing to FM. He confirmed, to the best of his knowledge and belief, the statements made by Mr Whitley in his affidavit.
[70] Mr Hutchison confirmed that nothing in the receivership was easy: it was complex, and required further advances from FM just to put the assets into a position where they were saleable. As an example of this, Mr Hutchison said that the construction of a new road onto 14 Waiu Street to create the necessary access cost FM $231,781.75, for surveying, engineering and landscaping fees.
[71] Mr Hutchison attached a loan analysis setting out the details of the costs he associated with recovery under the loan agreement. He identified the following particular costs:
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Council and WCC Rates and Charges
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$ 47,660.35
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Discharge and Consent Fees
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$ 4,242.30
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Real Estate Charges
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$ 6,842.50
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Collection Costs
(Mr Hutchison's time and expenses in attempting to recover the debts)
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$ 15,614.71
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Surveying, engineering and landscaping costs
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$231,781.75
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Insurance Costs
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$ 3,155.46
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Valuation Costs
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$ 33,148.17
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Other Accumulated Costs
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$139,765.91
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[72] Mr Hutchison said that the interest charged on the loan as at 22 May 2017 came to $588,228.39, and penalty interest $198,634.05. The total debt owing by Mr Hannan as at 22 May 2017 was said to be $2,188,832.78.
[73] Mr Hutchison referred to the general terms forming part of the loan agreement and in particular the matters for which the borrower is liable in the event of default. In that situation, FM was entitled to charge interest on the balance of the loan, accrued interest, and all other amounts which the borrower owed FM, at the penalty interest rate under the loan agreement. In addition, clause 15 of the loan agreement provided that all fees, expenses and liabilities at any time incurred or charged by FM, or by FM's agents or employees, in connection with the
administration of the loan or in the course of protecting or enforcing or attempting to protect or enforce FM's rights under the loan, were payable by the borrower.
[74] When expenses were incurred by FM, Mr Hutchison said they were charged to the outstanding loan debt. Interest was charged on a monthly basis in accordance with clause 10 of the loan agreement, and penalty interest was charged in accordance with clause 11.
[75] Mr Hutchison denied Mr Hannan's allegations of negligence and fraud. He contended that the cause of Mr Hannan's difficulties was his mismanagement of his companies. The receivership was never as straightforward as simply selling the assets – there were numerous court hearings, and experts were necessary just to overcome the environmental damage that had been caused, and to advance matters with the Council so the assets could be sold.
Mr Whitley's affidavit of 31 August 2017
[76] At the hearing, I reserved my decision on the admissibility of the greater part of the Lomond Group report that Mr Hannan produced with his submissions. However, I accepted that the evidence about the periodic receiver's reports filed with the Companies Office (which were referred to by Mr Trainer in the Lomond Group report) should be admitted, and I requested a further affidavit from Mr Whitley directed to one particular aspect of the receiver's reports.
[77] Mr Trainer had noted that in the receiver's most recent report, for the period ended 31 January 2017, Mr Whitley said that he expected there would be sufficient funds to pay unsecured creditors. The receiver had taken the same position in each of his six-monthly reports since the commencement of the receivership. I directed the receiver to file an affidavit explaining those statements in his six-monthly reports, noting that if there were sufficient funds to pay unsecured creditors it followed that FM would have been paid and that Mr Hannan would have had no further liability to it on his guarantee.
[78] In his affidavit filed in response to my request, Mr Whitley described his initial view as to the likely return to creditors as "highly contingent on a number of
matters". He referred to the use of 14 Waiu Street as a landfill, and to the resource consent enforcement order issues. While 14 Waiu Street has potential, significant money will have to be spent to realise that potential, and the possibility remains that contaminants will be found in the topsoil.
[79] Mr Whitley referred to a valuation report Mr Hannan obtained from a firm of registered valuers in January 2012, which had put a value of $800,000 on 14 Waiu Street. Mr Whitley expressed the view that without further extensive expenditure on the property its future use potential would not be realised. He expressed the view that if the land was put to tender on an "as-is where is" basis there would be a shortfall to the secured lender.
[80] Mr Whitley acknowledged that a number of his receiver's reports referred to loan balances as at 31 March 2014, and that those balances were not accurate. He set out the correct loan balances, as at the end of each reporting period, as follows:
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End Date of reporting period in receiver's reports
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Loan Figure
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31 March 2014
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$ 972,631.80
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|
31 July 2014
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$1,215,960.87
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31 January 2015
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$1,249,986.30
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31 July 2015
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$1,851,132.83
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31 January 2016
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$1,566,682.86
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31 July 2016
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$1,926,458.96
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31 January 2017
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$2,107,136.18
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[81] Mr Whitley deposed that any realisations in the receivership have been accounted for either as "cash in bank of the receivership" or in partial repayment of FM's debt.
The recall judgment
[82] It is not necessary to refer in detail to the grounds on which I ordered that the May 2018 judgment be recalled. The grounds for recall are fully set out in the Recall judgment. For present purposes, it is enough to say that I accepted that
relevant provisions of the Property Law Act 2007 and the Receiverships Act 1993 relating to the application of the proceeds of sale of certain properties owned by Mr Hannan or the group, after FM obtained its summary judgment, were not taken into account and should have been. I refer to those statutory provisions below.
Applications for adjudication orders — legal principles
[83] Section 13 of the Act provides:
13 When creditor may apply for debtor's adjudication
A creditor may apply for a debtor to be adjudicated bankrupt if—
(a) the debtor owes the creditor $1,000 or more or, if 2 or more creditors join in the application, the debtor owes a total of $1,000 or more to those creditors between them; and
(b) the debtor has committed an act of bankruptcy within the period of 3 months before the filing of the application; and
(c) the debt is a certain amount; and
(d) the debt is payable either immediately or at a date in the future that is certain.
[84] Section 37 of the Act provides:
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.
[85] Section 38 of the Act, referred to by Mr Hannan in his 3 July affidavit, provides:
- Court may halt application
(1) The court may at any time halt the creditor's application for adjudication.
(2) The court may halt the application on the terms and conditions (if any), and for the period, that the court thinks appropriate.
[86] Once the formal requirements for an adjudication order have been satisfied, the position is that the judgment creditor is prima facie entitled to an order of adjudication. Each case must be considered on its own terms, but an adjudication order is not to be refused on the grounds of expedience or convenience.2
[87] 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. Delivering the judgment of the Court, Richardson J said:3
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 necessary preclude an order giving the range of interests involved including the public 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.
[88] In Re Epirosa4 Master Williams QC listed a number of factors considered relevant to the exercise of the Court's discretion to make an adjudication order:
(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?
2 Re Epirosa, ex-parte Diners Club NZ Ltd (HC) Wn B498/91, 6 March 1992; B532/91; and
Re Fidow [1989] NZHC 298; [1989] 2 NZLR 431 (HC).
3 Baker v Westpac Banking Corporation CA 2011/92, 13 July 1993 at 4.
4 Re Epirosa, ex-parte Diners Club NZ Ltd, above n 2, 5-8.
(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?
[89] One of the public interest factors which the Courts have from time to time considered relevant to the exercise of the discretion under s 37(c) or (d) of the Act, is the need for personal guarantees to be honoured. In Re Coll Ex parte Consumer Finance Ltd Master Kennedy-Grant said:5
He has incurred those liabilities by giving guarantees. He has not honoured his guarantees. He is not in a position to honour his guarantees. The guaranteeing of financial advances to companies by directors of those companies is standard practice in New Zealand. It is an almost invariable requirement of lenders. Without the additional security provided by such guarantees, lenders would very often not make advances. The directors of companies obtain the benefit for their companies of advances made in reliance on their guarantees. It would not, in my view, be conducive to commercial morality — the proper consideration by directors of whether they can give guarantees and the proper consideration by directors of whether, once having given guarantees, they should honour them — if I were to dismiss the petition. I am satisfied that the proper order in this case is an order of adjudication.
Discussions and conclusions
[90] An unusual feature of this case, is that FM did not issue the bankruptcy notice on which it relies for approximately two years and nine months after the entry of the judgment on which the bankruptcy notice was based. In the meantime, it realised a number of its securities, and payments were made in reduction of the debt that appear to have exceeded (or may have exceeded) the amount of the judgment and the interest on the judgment to which FM appears to have been entitled.
[91] That situation has arisen as follows.
[92] In its amended statement of claim in the summary judgment proceeding, FM asked only for an order for payment in the sum of $784,295.64 and interest (including penalty interest) to the date of judgment, together with costs in the sum of
$2,178. No declaration was sought, and no declaration was made as part of the
5 Re Coll Ex Parte Consumer Finance (HC) Rotorua B69/97, 18 September 1997 at 7.
summary judgment, that Mr Hannan and the other judgment debtors were to be liable for ongoing interest, post-judgment, at the rates set out in the loan agreement (including penalty interest if applicable). Judgment was entered against Mr Hannan and the other judgment debtors on that basis. In those circumstances, I took the view in the May 2018 judgment that FM's claims merged in the judgment, and that it was entitled, post-judgment, only to interest at the statutory rate of 5 percent per annum on the judgment under r 11.27 of the High Court Rules and s 87 of the Judicature Act 1908.
[93] The evidence shows that FM received the following payments between the date of the judgment in March 2014 and the date the bankruptcy notice was issued on 14 December 2016:
|
Amount received by FM
|
Date
|
|
$200,000
|
4 November 2014
|
|
$15,392.50
|
31 March 2015
|
|
$17,500
|
11 August 2015
|
|
$339,517.12
|
31 August 2015
|
|
$132,164.87
|
(by 31 October 2015)
|
|
$203,952.40
|
4 December 2015
|
|
$1,200
|
7 December 2015
|
|
TOTAL $909,726.89
|
|
[94] As noted at paragraph [28] of this judgment, Mr Hannan said that an amount of $150,000 was received from the sale of 19A and 19B Waiu Street in or about October 2015. That sum did not appear in the spreadsheet showing receipts and payments that Mr Couling produced at the hearing, but Mr Couling did confirm at
the hearing that FM acknowledged total receipts as at 18 August 2017 of
$949,318.27 in the period since the judgment.6 Allowing for a payment of
$39,591.38 received by FM on 30 June 2017, it seems likely that the difference ($132,164.87) between the total receipts shown in the spreadsheet ($817,153.40) and the receipts figure of $949,318.27 confirmed by Mr Couling at the hearing, represented the net amount received by FM in October 2015. That would seem to be broadly consistent with the solicitors' settlement statements produced by Mr Hannan, which showed that 19A and 19B Waiu Street were sold for a combined (gross) price of $150,000.
[95] As we shall see, the precise calculation does not matter. It might have mattered if all of the receipts from post-judgment sales were allocated to the judgment debt and simple interest thereon at 5 per cent per annum, without any allowance for post-judgment costs and expenses incurred by FM — indeed, that is the view to which I came in the May 2018 judgment. But for the reasons set out below I am satisfied that that view was in error, and that substantial post-judgment costs and expenses incurred by FM had to be brought to account in assessing how much was owing when the bankruptcy notice was issued and the adjudication proceeding later commenced. Mr Hannan was in fact heavily indebted to FM at the date the bankruptcy notice was issued (even if not for the precise amount stated in the bankruptcy notice).
[96] When FM applied for the issue of the bankruptcy notice in December 2016, it was not required to (and did not) refer to the payments it had received from the various property realisations since the judgment. However, I think it did impliedly assert (in the form of the draft bankruptcy notice submitted with the request) that the amount for which judgment was entered on 17 March 2014 had not been reduced.
[97] It remained open to Mr Hannan to challenge the amount stated in the bankruptcy notice, even if he did not apply to the Court to set aside the bankruptcy notice (as he did not). Section 30 of the Act provides:
30 Effect of overstatement of amount owing
(1) Overstatement in a bankruptcy notice of the amount owing by the debtor does not invalidate the notice, unless—
(a) the debtor notifies the creditor that the debtor disputes the validity of the notice because it overstates the amount owing; and
(b) the debtor makes that notification within the time specified in the notice for the debtor to comply with the notice.
(2) A debtor complies with a notice that overstates the amount owing by—
(a) taking steps that would have been compliance with the notice had it stated the correct amount owing (for example, by paying the creditor the correct amount owing plus costs); and
(b) taking those steps within the time specified in the notice for the debtor to comply.
[98] In this case, Mr Hannan did not make any challenge under s 30.
[99] I think it is clear enough that the receiver had to spend several hundreds of thousands of dollars, at least, to achieve the necessary resource consents and access that were necessary to achieve some of the sales. For example, Mr Hutchison's evidence that the construction of a new road access onto 14 Waiu Street cost
$231,871.75 for surveying, engineering, and landscaping fees does not appear to be open to serious challenge by Mr Hannan, at least on the evidence in this proceeding. And obviously there were ongoing receiver's and legal costs in a receivership which I accept posed a number of ongoing challenges to the receiver over a fairly lengthy period. On the face of it, then, there is a sound basis for FM's claim that Mr Hannan cannot hope to pay the amount for which FM says he is liable (and Mr Hannan has never suggested that he can).
[100] Following the August 2017 hearing it appeared to me that an argument was open to Mr Hannan that all of the indebtedness on which FM's adjudication application was based arose after the date of the judgment, and there was a question as to whether anything was owing, on the judgment, when the bankruptcy notice was issued. If nothing was then owing on the judgment, there appeared to be a further question as to whether Mr Hannan's failure to use the s 30 procedure to challenge the
amount claimed in the bankruptcy notice meant that FM could rely on the (very substantial) sums of money for which Mr Hannan had become liable after judgment was entered on 17 March 2014.
[101] I put those issues generally to FM in the minute I issued on 29 August 2017, and Mr Couling helpfully filed a memorandum in reply.
[102] Mr Couling's first point was that none of the payments received after 17 March 2014 were payments made by Mr Hannan, and (even if those payments were required to be applied in reduction of the judgment sum) Mr Hannan cannot be entitled to any credit for them.
[103] I do not think that can be right – Mr Hannan was only one of the judgment debtors, the others being the companies in the group with whom he was jointly and severally liable. If the payments made after the judgment were to be applied in reduction of the judgment debt, I can think of no reason why Mr Hannan would be less entitled than the other judgment debtors to the benefit of the payments. The simple reality would be that the payments had the effect (assuming they were applied in reduction of the judgment) to reduce the amount for which Mr Hannan was liable under the judgment debt, with interest thereon.
[104] Mr Couling's second response was to submit that FM had no contractual obligation to apply the receipts after the judgment in reduction of the judgment debt. It was entitled to apply the realisations to costs incurred by it after the judgment, and that is what it did.
[105] The critical question is whether Mr Couling's second response was correct, or whether it was reasonably arguable for Mr Hannan that he was entitled to the full benefit of the proceeds of sale of the various properties sold since the judgment, without bringing to account the very substantial expenses incurred by FM and/or the receiver after the date of the judgment. In the May 2018 judgment, I held that he was.
[106] In the May 2018 judgment, I accepted that FM was entitled under the loan agreement to appropriate any payments or receipts as it saw fit (including to more recently incurred debt), but I was not satisfied on the evidence that that is what occurred. It appeared to me that the receipts were simply credited to Mr Hannan's running account with FM, without any specific appropriation of the receipts to debts or liabilities incurred by FM after 17 March 2014. For example, on 26 January 2017 FM sent its loan transaction statement to Paddy Hannan Contracting Limited (in receivership), and the statement (consisting of numerous pages) appears to have treated all outgoings, including loan instalment payments, interest, and penalty interest, and all receipts, as part of one running account. I noted that the
$339,517.12 received on 31 August 2012 on the sale of 88 Viewmont Street resulted in a corresponding reduction in the then-debit balance ($1,868,820 became
$1,529,302.88).
[107] I also noted in the May 2018 judgment that there did not appear to have been any specific appropriation of the amounts received by FM on the realisation of the various properties after the judgment to post-judgment costs or expenses incurred by it. I considered it at least arguable for Mr Hannan that the rule in Clayton's case applied. The effect of that rule would have been that the amounts received were presumed to have been applied to the earliest of Mr Hannan's and the group's liabilities.7
[108] In the May 2018 judgment I referred to two Australian authorities where the presumption in Clayton's case had been applied: Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation,8 and Laing O'Rourke Australia Construction Pty Ltd v Samsung C&T Corporation.9
“There is no room for any other appropriation than that which arises from the order in which the receipts and payments take place, and are carried into the account. Presumably, it is the sum first paid in, that is first drawn out. It is the first item on the debit side of the account, that is discharged, or reduced, by the first item on the credit side. The appropriation is made by the very act of setting the two items against each other."
[109] I also noted that the rule in Clayton's case had been considered in New Zealand by Williams J in International Investment Unit Trust v Waller and Agnew,10 where the learned Judge observed that the rule has been subject to adverse comment but remained in force (although Courts have distinguished it when they have felt it appropriate to do so).11
[110] Williams J referred to the decision of the Court of Appeal in Re Registered Securities, where the Court said that the rule is founded on presumed intention – it was said to be "in truth a fiction and cannot be allowed to work an injustice".12 Williams J concluded in International Investment Unit Trust that the rule is displaceable by any contrary evidence or inferences as to the parties' intentions.13
[111] In its submissions on the recall application, FM relied on a number of sections in the PLA, including ss 87 and 185. These sections provide:
87 Mortgage secures advances for protection and realisation of security
(1) A mortgage over property secures all amounts reasonably paid or advanced at any time by the mortgagee—
(a) for the protection, insurance, maintenance, preservation, or repair of the mortgaged property; or
(b) to remedy any default by the mortgagor in respect of any other mortgage or encumbrance over the property, to the extent that it has priority over the mortgagee's mortgage; or
(c) for the payment of rates or other outgoings; or
(d) to meet the expenses of the mortgagee in entering into possession, or in doing anything that a mortgagee in possession is required or entitled to do; or
(e) with a view to the realisation of the security (including any additional amount referred to in section 120(2) or 129(2)).
(2) A mortgage over property secures all interest on any amounts paid or advanced for all or any of the purposes referred to in subsection (1) at the agreed rate (if any) at which interest is payable on the principal amount secured by the mortgage.
11 At [50].
12 Re Registered Securities Ltd [1991] 1 NZLR 545, at 553.
13 International Investment Unit Trust v Waller and Agnew, above n 12, at [56].
185 Application of proceeds of sale of mortgaged property
(1) The proceeds arising from the sale by a mortgagee of mortgaged property must be applied—
(a) first, to the payment of all amounts (if any) referred to in subsection (2), together with interest on those amounts at the agreed rate (if any) at which interest is payable on the principal amount secured by the mortgage:
(b) secondly, to the payment of amounts secured by any other mortgage, encumbrance, or security interest over the property to the extent that it has priority over the mortgagee's mortgage:
(c) thirdly, to the repayment of all amounts (if any) paid or advanced by the mortgagee for the purpose referred to in paragraph (b), together with interest on those amounts at the agreed rate (if any) at which interest is payable on the principal amount secured by the mortgage:
(d) fourthly, to the payment of amounts secured by the mortgage (to the extent that those amounts have not been paid under paragraphs (a) to (c)):
(e) fifthly, to the payment of amounts secured by any subsequent mortgage, subsequent encumbrance, or subsequent security interest over the property if—
(i) the subsequent mortgage, subsequent encumbrance, or subsequent security interest is registered; or
(ii) the subsequent mortgage, subsequent encumbrance, or subsequent security interest is unregistered, but the mortgagee has actual notice of it:
(f) sixthly, to the payment of any surplus to the current mortgagor.
(2) The amounts are amounts reasonably paid or advanced at any time by the mortgagee—
(a) for the protection, insurance, maintenance, preservation, or repair of the mortgaged property; or
(b) for the payment of rates or other outgoings; or
(c) to meet the expenses of the mortgagee in entering into possession, or in doing anything that a mortgagee in possession is required or entitled to do; or
(d) with a view to the realisation of the security (including any additional amount referred to in section 120(2) or 129(2)).
(3) For the purposes of—
(a) subsection (1)(b), if there is more than 1 mortgage, encumbrance, or security interest referred to in that paragraph, payment must be made under that paragraph of amounts secured by each in the order of its priority:
(b) subsection (1)(e), if there is more than 1 mortgage, encumbrance, or security interest referred to in that paragraph, payment must be made under that paragraph of amounts secured by each in the order of its priority.
(4) Despite subsection (1), subsection (1)(b) does not apply in relation to another mortgage, encumbrance, or security interest over the property that has priority over the mortgagee's mortgage if—
(a) the person who purchases the property from the mortgagee agrees to accept the transfer or assignment of the property subject to the prior mortgage, encumbrance, or security interest; and
(b) the arrangement referred to in paragraph (a) is consented to in writing by the mortgagee under the prior mortgage, the holder of the prior encumbrance, or the secured party under the prior security interest.
(5) Subsection (1) is subject to section 153.
(6) This section and section 153—
(a) apply to proceeds arising from a sale by a mortgagee of mortgaged property that are applied on or after 1 January 2008; but
(b) do not apply if section 104PPA of the Property Law Act 1952 continues to apply under section 154.
[112] Mr Barton submitted that the effect of these PLA sections was essentially to render the rule in Clayton's case inapplicable – nothing could or should have been credited to Mr Hannan in reduction of the judgment debt before the expenses and amounts reasonably incurred by FM and/or the receiver in achieving the various sales had been appropriately taken in to account, as required by s 185 of the PLA. All of the expenses and costs incurred or advanced by FM in maintaining and subsequently putting the mortgaged properties in a position to be realised had to be deducted from the proceeds of sale. It was only if there was a surplus after that that Mr Hannan would have been entitled to a credit.
[113] Mr Barton then submitted that my application of the rule in Clayton's case was an essential part of the reasoning leading to my conclusion in the May 2018 judgment that "it was at least arguable for Mr Hannan that nothing was in fact owing on the judgment when FM made its request for the issue of the bankruptcy notice,"14 and that my decision to decline to make an adjudication order was accordingly made on an incorrect legal and factual basis. Mr Barton pointed out that I had earlier noted in the judgment that the receiver had "had to spend several hundreds of thousands of dollars, at least, to achieve the necessary resource consents and access that were necessary to achieve some of the sales", but those payments were effectively not brought to account in FM's favour.
[114] Mr Barton further submitted that the same result applies under the Receiverships Act 1993. Section 32(9) of that Act grants a receiver an indemnity out of the assets of the company, and that indemnity extends to receiver's fees and is protected by an equitable lien over the charged assets of the company.15
[115] In his submission on the recall application Mr Hannan endeavoured to draw a distinction between repayment of the judgment on the one hand and repayment of the mortgage debt on the other. He submitted that the provisions of the PLA now cited for FM were simply not relevant. I do not accept that submission. The issue was and is whether the proceeds of sale were to be applied first to the (substantial) post-judgment costs and expenses incurred by FM, or whether they could be applied in reduction of Mr Hannan's indebtedness under the March 2014 judgment. Determination of that issue did in my view require consideration of the provisions of the PLA to which Mr Barton has referred.
[116] I accept that the PLA sections are applicable to the situation here, and expenses such as the $231,871 incurred for surveying, engineering and landscaping fees to allow access to Waiu Street were costs and expenses incurred with a view to the realisation of the relevant security. They were thus expenses that were required by s 185(1) and (2) of the PLA to be reimbursed to FM before any money could have
14 Paragraph [115] of the judgment.
15 Blanchard on Receiverships at [6.08], referring to Moodemere Pty Ltd v Waters [1988] VicRp 31; [1988] VR 215 at 230: a secured creditor is only entitled to the net proceeds of realisation after the discharge of the receiver's lien.
been credited to Mr Hannan in reduction of the judgment debt. As noted in the Recall judgment,16 these PLA provisions were clearly relevant to the parties' presumed intentions, and I am satisfied that the rule in Clayton's case could not be applied to prevent or abrogate their effect. The effect of the statutory provisions (including s 32(9) of the Receiverships Act 1993), was that FM was entitled to have the sale proceeds applied to meet not only expenses incurred with a view to realising securities, but also other ongoing (post-judgment) costs, including ongoing reasonable receiver's fees.
[117] In the May 2018 judgment I considered that the pleaded act of bankruptcy (failure to make payment in accordance with the bankruptcy notice, which stated that the amount claimed was the amount of the March 2014 judgment) appeared not to have occurred, but I do not think that view can stand when considered with FM's entitlement to deduct the post-judgment expenses in accordance with the PLA and Receiverships Act provisions. I accept Mr Barton's submission on the recall application that the issue of whether an act of bankruptcy by failure to comply with a bankruptcy notice has occurred must be capable of being assessed immediately at the end of the 10 working day period allowed for compliance with the notice, and that a debtor's failure to apply to set the notice aside or challenge the amount claimed under s 30 results in an act of bankruptcy having occurred notwithstanding that the notice may have wrongly stated the amount owing. While in the May 2018 judgment I took the view that the Court nevertheless retained a discretion to refuse to make an adjudication order in such circumstances (particularly where it appeared that the overstatement of the amount claimed in the notice has been very substantial), I took that view in circumstances where it appeared there might have been nothing, or very little, owing on the judgment when the bankruptcy notice was issued. Clearly that was not the case, and I am satisfied (if such a discretion exists) that this is not a proper case for its exercise. The reality is that, when FM's post-judgment expenses are taken into account, it is clear that Mr Hannan was and is insolvent, and by a very substantial margin.
[118] Once the act of bankruptcy was proved, as it was, the issue became one of Mr Hannan's solvency, not one of the precise amount of his indebtedness. For that
16 At [31].
reason, there is no need to consider many of the issues raised by Mr Hannan, including his challenge based on what he regarded as exorbitant fees charged by Mr Whitley. I accept in this case that there were very substantial difficulties standing in the way of realising the assets, particularly in respect of the Waiu Street properties, and Mr Whitley's fees would necessarily have been substantial. Those fees were deductible from the proceeds of sale of the mortgaged properties (at least to the extent they were reasonable): Mr Whitley was entitled to a lien for his reasonable fees over the charged assets.17 To the extent Mr Whitley incurred liability under contracts with third parties he was entitled to indemnity out of the secured assets under s 32(9) of the Receiverships Act.
[119] Quite apart from the $231,871 costs incurred for survey, engineering and landscaping fees, it is accordingly clear that, whether or not the actual fees charged by Mr Whitley were reasonable, there was a very substantial additional liability in respect of receiver's fees which was a charge on the security. And under ss 185(1)(a) and (2)(d) of the PLA, FM was entitled to recover interest at the agreed rate on amounts paid or advanced by it for work (such as on the amounts spent on the survey, engineering and landscaping work) undertaken with a view to realisation of the securities.
[120] On any view of it, then, there is a shortfall between Mr Hannan's total indebtedness and the amounts recovered by FM, running into (at least) some hundreds of thousands of dollars.
[121] Mr Hannan did contend that Mr Whitley had no authority to sell the various properties that have been sold, but he did not provide any proper basis for that submission (eg evidence that FM did not have the right as mortgagee to sell the properties over which it held securities, whether under the relevant instruments or (through a receiver) under the implied power of sale contained in Part 1 of Schedule 2 to the Property Law Act 2007, cl 13). And even if there was some basis for that contention (which has not been established), there is no evidence to show that any loss has been occasioned by any such lack of authority. Mr Hannan's initial position was that FM should have moved much earlier to sell the properties over
17 Blanchard on Receiverships at [6.08], above n 15.
which it held security,18 but in his submissions on the recall application he suggested that, had there been a delay in selling the group's properties (because, in his view, Mr Whitley had no authority to sell) higher prices would probably have been achieved in the current market (notwithstanding the increase in other costs including interest). There is simply insufficient evidence to support either of those positions, which appear to be contradictory. All that I think can be said is that there were clearly real problems with the Waiu Street properties, and in my view it was not unreasonable for the receiver to take the view that those problems had to be resolved before the properties were sold. Any way you look at it, substantial sums of money had to be spent to get some of the properties into saleable condition, and FM was entitled to deduct those costs, and interest thereon, from the eventual proceeds of sale. In the meantime, Mr Hannan remained in substantial default under the judgment.
[122] In his submissions on the recall application, Mr Hannan made the following submissions directed to the exercise of my discretion under s 37(c) or (d) of the Act (or in support of an order under s 38 of the Act halting the proceeding) in the event the judgment was recalled.
[123] First, he pointed to the fact that over $900,000 has been recovered against a judgment debt of only $803,823.19, and that those recoveries were all made before the application for adjudication. He said that the largest recovery ($339,527.12 from his half share in the property at 88 Viewmont Drive) was made without significant involvement of the receiver. He also referred to the "inexplicable gap" between the date of the judgment in March 2014 and the issue of the bankruptcy notice in December 2016.
[124] I do not think any of those matters assist Mr Hannan. Focus only on the recoveries ignores the very substantial costs incurred to achieve those recoveries, and the fact that the receiver might not have been extensively involved in the sale of Viewmont Drive (if that was the case) does not affect the issue of Mr Hannan's solvency, or whether an adjudication order should be made. And there was nothing to prevent FM issuing the bankruptcy notice when it did.
18 See paragraph [33] above.
[125] Mr Hannan also referred to a receiver's report of 5 April 2018, in which Mr Whitley said that, following an initial review, it is likely that with ongoing co-operation and working with the Hutt City Council unsecured creditors may get paid. However, the report also appeared to show that there was quite a lot of work ahead before the balance of 14 Waiu Street could be sold. Delays had been encountered in obtaining relevant consents from the Wellington Regional Council, and the Hutt City Council had also not provided a consent Mr Whitley had been expecting. In a section of the report headed "Proposals for the Conduct of the Receivership", Mr Whitley said he would be letting a contract to operate the Clean Fill and remediate 14 Waiu Street to a certified engineered standard, recover and realise assets wherever possible and sell the subject land to satisfy the amount owing under the appointers securities and to the extent there is a surplus to pay other creditors" (emphasis added).
[126] I think it is clear from the italicised part of the passage quoted that it was by no means clear when the balance of 14 Waiu Street could be sold, or whether there would be sufficient to pay unsecured creditors when it was. In the meantime Mr Hannan is clearly unable to pay his debts as they fall due.
[127] In my view there is insufficient certainty that the sale of the balance of 14 Waiu Street (and any remaining group assets) will produce sufficient to pay off FM and other creditors, to justify a halt of the adjudication proceeding, or a further adjournment. Nor is there sufficient certainty that a sale will be achieved within the reasonably near future. For those reasons I decline to halt or further adjourn the adjudication application.
[128] Mr Hannan invited me to conclude that it would be pointless for me to make an adjudication order. But with the act of bankruptcy proved, FM is prima facie entitled to an order for adjudication, and I think there is a public interest consideration which also points in favour of adjudication. The debt in this case was based on a personal guarantee provided by Mr Hannan in a commercial setting, and the Courts have referred on a number of occasions to the public interest in guarantors being fully held to account on their guarantees, including by adjudication in
bankruptcy (at least where the balancing of the public interest with other relevant considerations does not point against the making of an adjudication order).19
[129] I conclude that there is nothing in the evidence to displace FM's prima facie entitlement to the adjudication order it seeks.
Result
[130] I make an order adjudicating Mr Hannan bankrupt. FM is entitled to costs, which I fix on a 2B basis, with disbursements to be fixed by the Registrar.
[131] The foregoing orders are timed at 4.00pm.
Associate Judge Smith
19 Re Coll, Ex Parte Consumer Finance, above n 5.
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