BANK OF NEW ZEALAND V ELLERM HC CHCH CIV 2011-409-001211

BANK OF NEW ZEALAND V ELLERM HC CHCH CIV 2011-409-001211 11 October 2011IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYCIV 2011-409-001211IN THE MATTER OF the Insolvency Act 2006AND IN THE MATTER OF the bankruptcy of DAVID JOHNELLERMBETWEEN BANK OF NEW ZEALANDJudgment CreditorAND DAVID JOHN ELLERMJudgment DebtorHearing: 11 October 2011(Heard at Christchurch)Appearances: K Paterson for the Judgment CreditorMr Ellerm in personJudgment: 11 October 2011JUDGMENT OF ASSOCIATE JUDGE OSBORNE[1] The bank has applied for an order adjudicating Mr Ellerm bankrupt. With his former partner, Claire Norton, Mr Ellerm is a judgment debtor to the Bank. MrEllerm's debt is $2,942,690.22, Ms Norton has a liability only in relation to part of that amount. Judgment was entered against each on 31 May 2011. The debt arises from a combination of the financial inability of Mr Ellerm's and Ms Norton'scompany, Ellerm & Norton Limited, to see through the finalisation of a three stage subdivision at Lake Brunner and their own inability to meet current account liabilities to the Bank. Mr Ellerm and Ms Norton guaranteed the debt to the Bank. The Bank served a bankruptcy notice on Mr Ellerm on 27 June 2011. He did not seek to set aside the notice nor did he make payment. The presumption of insolvency therefore arose.[2] The application for adjudication is based on that demand. Mr Ellerm, in his evidence, has candidly accepted his insolvency and given some detail of his personal position to which I will return. His central case is that as a matter of the Court'sdiscretion he should not be adjudicated.[3] A creditor's right to apply for adjudication is set out in s 13 Insolvency Act2006. Each of the four requirements of that section is made out in this case. The Court under s 36 of the Act then has a discretion to adjudicate the debtor bankrupt. Under s 37 the Court may refuse adjudication pursuant to that discretion in four given situations, the fourth of which is a catch-all. The situations are(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.[4] Subsections (a) and (b) are not applicable for the reasons I have already stated. That leads to a correct categorisation if Mr Ellerm's opposition is fallingwithin either s 37(c) or s 37(d).[5] An authoritative statement as to the exercise of the discretion is that contained in the judgment of Court of Appeal in Baker v Westpac Banking Corp1where Richardson J said, at p 4, in relation to what was then s 26 of the Insolvency Act 1967 (but remains relevant under the current legislation) –―It is proper for the Court to consider not only the interests of those directlyconcerned — the petitioner, other creditors, the debtor — but also the wider public interest. A creditor who establishes the jurisdictional facts as set out in s 23 is not automatically entitled to an order. On the other hand, it is for an opposing debtor to show why an order should not be made. 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 interest in the continuing oversight of the bankrupt's affairs and the disqualifications that go with bankruptcy. In the end the Court must balance the various considerations relevant to the case and determine whether the debtor has succeeded in showing that an order ought not bemade.1 Baker v Westpac Banking Corp 13/7/93, CA212/92.[6] In the commentary in Brookers Insolvency Law & Practice at IN37.03 the authors summarise and I agree that the main factors affecting the Court's exercise ofits discretion are:a) The creditor's entitlement to an order;(b) The wishes of the petitioner, the creditors, or the debtor;(c) The public interest;(d) Whether such discretion is just and equitable; and(e) The ability of the debtor to pay his or her debts.[7] Before turning to those considerations in detail I will refer to Mr Ellerm'sbackground and his personal circumstances. He has helpfully summarised his background at the opening of his submissions in which he states –I am currently 53 years old. Since the age of 20 I have been self-employed and have operated various private business ventures in Christchurch. In November 1988 I incorporated the company Ellerm & Norton Ltd for the purposes of pursuing property development opportunities at Lake Brunner. I chose my own personal and unique surname name for the company. There has never been any intention to not fulfil my responsibilities in terms of any outstanding debts to creditors. I am a 50% shareholder in that company along with Ms Norton who owns the other 50% share holding.[8] I interpolate that it is to Ms Paterson's credit that no suggestion has beenraised by the Bank that Mr Ellerm is other than entitled to say that he has always intended to fulfil his responsibilities in terms of his and his company's debts. Mr Ellerm in his evidence also provided up-to-date details about his personal circumstances relevant to this insolvency jurisdiction. He there repeated details of his age and referred to his responsibility for children including the financial support he offers to Ms Norton in relation to their 19 and 13 year old sons. He says –I am currently working part time contracting when work is available but are now limited in my ability to work since receiving a treatment injury during total left hip replacement in September 2009.[9] He refers to the permanency of that injury and difficulties over the rehabilitation plan and adds -I currently reside on the farm property that the BNZ currently have for mortgagee sale. My personal assets are household furniture and a car with acombined value of $10,000. The value of my 50% shareholding in ENL hasirrevocably been eroded by the Bank's actions. Given my employmentopportunities in the foreseeable future I will have no way of repaying theBank's claim for debt.[10] Against that background, I can immediately dispose of the fifth factor listed in Brookers namely the ability of the debtor to pay his or her own debts. Mr Ellerm has fairly conceded that he cannot.[11] I then briefly summarise how Mr Ellerm and Ms Norton's project came toproduce the indebtedness that now exists by virtue the judgment debt. The background to the Lake Brunner development lay in a carefully thought out three stage development in what is a most attractive part of the South Island. Ellerm & Norton Limited obtained finance from the Bank and gave security over some of its land. The first stage of the project was completed but in late 2008 the project was clearly affected in a very substantial way by the global financial crisis. Unfortunately for the company its term loans were to become due for repayment in January 2009. Mr Ellerm and Ms Norton also had a current account indebtedness in excess of the agreed limit. As a mark of personal commitment to the project and the Bank, Mr Ellerm caused a sum of approximately $145,000.00 to be deposited to the Bank from personal sources in October 2008. The Bank, after a number of discussions and meetings including Mr Ellerm, decided in December 2008 that it should call for repayment of the loans which was its contractual entitlement. In the following year, that led to a sell-down of some of the property held by the company. As the parties entered 2010 there was a move to the Bank realising of securities which had been granted over the land by the company.[12] It is a fair summary of Mr Ellerm's opposition, which is to be found in the narrative of his affidavit rather than appearing in a bullet-pointed way in a notice of opposition, that he is aggrieved at various aspects of the Bank's administration of the banking relationship from the time the global financial crisis set in and later through the marketing of the property and the realisation of the Bank's security.[13] I will refer to what Mr Ellerm has said in the course of examination of the factors as listed by Brookers which I now turn to.The creditor's entitlement to an order;[14] There is no issue in this case as to the Bank's prima facie entitlement to an order of adjudication. The Bank is a judgment creditor for the sum claimed. It has followed the bankruptcy notice procedure which has meant that Mr Ellerm and Ms Norton have essentially had two occasions on which to raise issues whether of counterclaim or set-off in relation to what is now the Bank's judgment debt. MrEllerm has raised issues of the following nature.[15] First Mr Ellerm has raised a concern that the Bank's marketing of theproperty may have involved one or more of the following:Assessments from valuers which pitched the value of what is called―the farm property or ―the cottages too low.A failure to appoint a real estate agent with more experience relevant to a project of this nature.The express advertising of the sale as a ―mortgagee sale.A failure to put money or resources into the marketing of the property.A failure to explore or give time for consideration of the underlying zoning of the property and the possibility of re-zoning.Selling at least the cottages effectively by mortgagee sale (the cottages are at present under two contracts for sale).[16] Secondly, Mr Ellerm has referred to a grievance as to the building up of approximately $1,000,000 of interest during an extended period when realisations have produced on his assessment some $900,000. If I understand him correctly, Mr Ellerm invites me to draw the inference that that suggests a commercially unrealisticapproach or at least an approach which has simply produced a poor commercial result.[17] Thirdly, although to his credit he did not stress this in his submissions asdeveloped today, he had earlier provided evidence as to the Bank's taking of the full proceeds of sale of realised property without allowing the Inland Revenue Department to take a portion on account of GST. As I understand it, Mr Ellerm now accepts on advice that the course adopted by the Bank was within its rights. Mr Ellerm's point in this regard extends from his perception that with the Inland Revenue Department as an organ of state it may be suggested that the Bank of New Zealand should have also operated in some sense of comity as something akin to an organ of state because it had come under the Government's guarantee scheme. MrEllerm did not press this aspect of claim in his submissions today.[18] Lastly, Mr Ellerm formally abandoned a point taken when he appeared beforeme at a previous hearing in relation to the Bank's decision not to pursue Ms Norton. It is evidenced on the papers that had been on the Court file in any event that the Bank may have for its own humanitarian reasons decided not to pursue Ms Norton which was a decision in any event for the Bank. Mr Ellerm accepts that on the authorities it is not a matter that is to be prayed in aid by another debtor that his co- debtor has been released. That must be so in relation to guarantee obligations that exist in this case.[19] The first factor then is a creditor's entitlement to an order. The Bank seeks adjudication based on its judgment debt. The debtor did not take any opportunity to assert a counterclaim and set-off at the time and the amount of the debt which we are speaking of is vastly beyond the minimal resources that Mr Ellerm could meet. Even were there a counterclaim or set-off potentially available to Mr Ellerm I am not satisfied in relation to a judgment debt of this nature that it would be proper to keep the Bank out of its rights of taking this step while Mr Ellerm considers whether or not to pursue a counterclaim or set-off. Significantly, he has at no time signalled in the course of this proceeding an intention or determination to pursue such a set-off or counterclaim. Rather his prayer to the Court is simply to not adjudicate him because he or the company may have a set-off or a counterclaim. I am far from satisfied thatany set-off or counterclaim would remotely approach the level of the judgment debt obtained. In the circumstances, I do not need to assess the evidence of the Bank in opposition, which pointed to care taken in relation to the realisation exercise. The evidence is simply not before the Court to entitle me to come to a conclusion that Mr Ellerm might have a counterclaim or set-off which exceeds the judgment debt. As the judgment of the Court of Appeal in Baker's case indicates, the debtor has the obligation to establish why an order should not be made. The first ground therefore cannot succeed.The parties' wishes[20] The second ground relates to the wishes of the applicant, the creditors or the debtor. There is no evidence as to the position of other creditors and I put that to one side. It is clear for the reasons I have set out that the debtor in this case does not want adjudication. On the other hand the Bank as applicant does. I do not considerthere is anything in the balance of this case sufficient to detract from the creditor'sentitlement to an order.The public interest[21] Ms Paterson referred in relation to the public interest consideration to Nisbett, ex p Vala2 in which it was said that the public interest ground involves considering whether the decision is―conducive or detrimental to commercial morality and the interests of the general public.[22] On this point that the Court has some considerable sympathy for Mr Ellerm who clearly undertook a carefully considered subdivision in times which looked and proved promising initially. He was able with the economic times that then prevailed to achieve the outcome that had been hoped for in relation to the first stage. The economy then turned with the onset of the global financial crisis.2 Nisbett, ex p Vala [1934] GLR 553[23] Ms Paterson referred me also to what Master Kennedy Grant had said in re Dixon, ex p National Bank of New Zealand Limited3 where his Honour said –The debtor chose to commit herself. The message must be given to all who involve themselves in commercial ventures that they must do so only after exercising their own independent judgment, that it is not sufficient to goalong with one's husband or one's wife or one's friend, that one must reachan independent and sensible decision, and that, if one fails to do, one must live with the consequences, which may include bankruptcy. Proper consideration of the wisdom of a commercial course is necessary in the interests of commercial morality and the public good.[24] There can be no criticism of Mr Ellerm in relation to the initial decision he took on this subdivision. But he and Ms Norton and their company must be taken to have entered the term loan and current account commitments they entered into knowing that if the market turned against their venture the Bank would have all the contractual rights of enforcement and security. There are aspects of the observations of Master Kennedy-Grant which might appear offensive to Mr Ellerm if they were applied to him. Parts of the observations do not apply. No-one is suggesting that the planning of Mr Ellerm and Ms Norton in relation to their subdivision was other than independent and sensible. The issue here is not about attributing blame for the decision made to undertake the risks of subdivision. A question to be asked in relation to the public interest is this. Where business people undertake ventures of a speculative nature, should they be able, when an economic downturn or other uncertain but foreseeable risks cause a large-scale business failure, to have the Court to exercise a discretion against adjudication? There is nothing in the circumstances of this case to suggest that the usual consequences of insolvency should be cut across. To the contrary, Ms Paterson has referred to a number of features which might properly attract some scrutiny and investigation on the part of the Official Assignee. This is not necessarily a criticism of Mr Ellerm and Ms Norton for anything they have done or not done. Ms Paterson points to two particular areas ofMr Ellerm's affairs which the Official Assignee might investigate –the existence of a family trust, and its financial relationship to Mr Ellerm.3 re Dixon, ex p National Bank of New Zealand Ltd HC New Plymouth 15/3/93, B87/92the making of payments to other creditors.[25] It is proper that there be scrutiny in the public interest and on behalf of creditors before any assumption is made that Mr Ellerm and/or related entities simply bring assets to the benefit of their creditors. In these circumstances I find that the public interest favours adjudication.Is adjudication just and equitable?[26] The fourth factor relates to the justice and equity of an order. The discussion I have entered into in relation to the various matters raised by Mr Ellerm leads me to the same conclusion as I have reached in relation to the other factors. Commercialpeople at arms' length, being on one side a Bank and on the other a property developer, entered into a transaction and contracts which had obvious commercial risk. The guarantors must be taken to have understood that those risks could, in the event of the commercial failure of the developer, result in bankruptcy.[27] I have already dealt with the fifth factor, inability of the debtor to pay debts.Conclusion[28] In these circumstances I find that the Bank is entitled today to an order ofadjudication. That finding is made with sympathy on the Court's part to the situationwhich Mr Ellerm finds himself and understanding that he has sought to acquit himself honourably in the difficult financial situation which has occurred.[29] Adjudication will offer Mr Ellerm the prospect inherent on the bankruptcy require, namely the opportunity to draw a line across what is massive debt, and to make a new financial start.Orders[30] There will also be the following orders –There is an order of adjudication.The debtor is to pay costs on a 2B basis together with disbursements to be fixed by the Registrar.The order is timed at 4.02 pm.____________________Associate Judge OsborneSolicitors:Buddle Findlay, PO Box 322, Christchurch 8140 – Kelly.paterson@buddlefindlay.comMr D J Ellerm, 136 Cashmere Bay Road, R D 1, Kumara, 7875