CHRISTOPHER DAVID BARR V THE OFFICIAL ASSIGNEE AS ADMINISTRATOR OF THE ESTATE OF GRAHAM GEOFFREY BARR HC WN CIV 2001-485-591

CHRISTOPHER DAVID BARR V THE OFFICIAL ASSIGNEE AS ADMINISTRATOR OF THE ESTATE OF GRAHAM GEOFFREY BARR HC WN CIV 2001-485-591 30 August 2005IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV 2001-485-591IN THE MATTER OF the Insolvency Act 1967 AND IN THE MATTER OF the Bankruptcy of Graham Geoffrey Barr BETWEEN CHRISTOPHER DAVID BARR Applicant AND THE OFFICIAL ASSIGNEE AS ADMINISTRATOR OF THE ESTATE OF GRAHAM GEOFFREY BARR Respondent Hearing: 12 August 2005 Appearances: K Jefferies for Applicant M Reddy for Respondent Judgment: 30 August 2005 at 4.45pmJUDGMENT OF ASSOCIATE JUDGE ABBOTTSolicitors: Gibson Sheat, PO Box 2966, Wellington[1] Graham Geoffrey Barr was adjudicated bankrupt on 4 March 2002. He was discharged from bankruptcy on 4 March 2005. [2] By notice pursuant to s.58 of the Insolvency Act 1967 dated 18 February 2005 the Official Assignee has set aside a payment of $40,000 made by Graham Barr on or about 21 May 2001 to his brother Christopher David Barr (the applicant on or about 21 May 2001). The grounds for setting aside given in the notice were that the payment was: a) A gift which is voidable against Official Assignee under s54(1) of the Insolvency Act 1967; b) A preference of a creditor which is voidable against the Official Assignee under s56(1) of the Insolvency Act 1967; or c) An alienation of property made with intention to defraud the creditors of Graham Barr which is voidable against the Official Assignee under s.60 of the Property Law Act 1952. [3] The notice was served on the applicant on 28 February 2005 (pursuant to an order for substituted service). On 18 March 2005 the applicant applied for an order that the payment not be set aside.Background[4] Graham Barr was adjudicated bankrupt on the petition of the Commissioner of Inland Revenue. There was an extensive history to the adjudication. He and his wife Lyndsay Barr had fallen into arrears with tax payments, resulting in the Commissioner obtaining judgment and issuing bankruptcy proceedings against them in 1997. These were dismissed in March 1998 after a compromise was reached.[5] There appears to have been a dispute as to whether the terms of the compromise were met. The Commissioner issued further bankruptcy notices alleging money was still due under the judgments. Those were set aside by this Court in November 1999 on the basis that the Barrs had an arguable case that payments made had cleared the underlying judgment debt, and that the terms of compromise did not reserve the Commissioner's ability to revert to the underlying judgment if other terms of the compromise were breached. [6] Graham Barr's tax problems did not end there. In October 2001 the Commissioner obtained judgment against him for $156,675. He was eventually adjudicated bankrupt for failure to pay that judgment. [7] In an affidavit sworn on 7 June 2005 and filed in support of his application to challenge the notice, the applicant asserts that Graham and Lyndsay Barr borrowed approximately $40,000 from him between 1991 and 2001 to help them meet their commitments, including tax payments. He says that "some time in 2000" he informed Graham Barr that he needed money for a property in England (where he was then living, and continues to live). He says that after various discussions it was agreed that he would buy Graham and Lyndsay Barr's property at 8 Kiwi Road, Raumati. He refers to finance for that purchase being approved on 11 December 2000 and settlement being completed on 21 May 2001. He says that he borrowed the whole of the purchase price, and on settlement received $40,000 from Graham and Lyndsay Barr in settlement of their obligations to him for the loans he had made (which for some unexplained reason he claims then amounted to $45,000). [8] Graham and Lyndsay Barr continue to live in 8 Kiwi Road as the applicant's tenants. [9] The applicant claims that at the time he received the $40,000 he understood that Graham Barr had no debts other than the bank loan secured against Kiwi Road (which was repaid on settlement). He says he was aware that the Inland Revenue Department had obtained a judgment against Graham in June 1997, but understood that that had been repaid in full. He does not state explicitly whether or not he knew of Graham's on-going tax problems.[10] The Official Assignee has filed an affidavit by one his insolvency officers producing documents obtained from the applicant's solicitors in response to a request made for copies of documents referred to in his affidavit. Those documents reveal that the judgment which the Commissioner obtained in October 2001 was for taxes and associated penalties unrelated to the earlier judgment. [11] It is against this background that the Official Assignee has issued his notice setting aside the payment of $40,000 to the applicant upon settlement of the sale of Kiwi Road. [12] There is no dispute over the fact that the payment was made, that it came from the proceeds of sale of the property, and that it was within two years prior to Graham Barr's adjudication. [13] In his written and oral submissions in support of the application, counsel for the applicant advanced the following grounds: a) The notice should be set aside on the grounds that Graham Barr has been discharged from bankruptcy and the Official Assignee has not sought to extend the period of bankruptcy; b) The payment was not a gift but repayment of a loan; c) The applicant was not a creditor of Graham Barr, but of Graham and Lyndsay Barr jointly; d) The payment was not made at a time when Graham Barr was unable to pay his debts; e) The payment was not made with a view to giving the applicant preference. f) The Court should exercise its discretion to order that the payment not be set aside, in the circumstances of the case.[14] The Official Assignee opposes the application. He accepts that the applicant has a right to apply to the Court for an order reversing the notice but submitted that: a) The notice is in compliance with procedure under the Insolvency Act, and is valid subject to any order the Court may make; b) The payment was made with the dominant intention of preferring the applicant to the Commissioner of Inland Revenue; c) The applicant has failed to show that the payment was received in good faith, that he has altered his position in relation to it and that it would inequitable to order recovery. [15] The Official Assignee seeks an order confirming that the payment of $40,000 to the applicant is set aside, and an order that the applicant pay that sum to the Official Assignee within 28 days.Failure to extend bankruptcy period[16] Although he raised this, counsel for the applicant did not develop the point in argument. There is no issue about the notice having been filed and served prior to Graham Barr's discharge for bankruptcy, or about the application to set it aside having been filed within time. I do not see anything in the point in circumstances where the notice was filed and served within the bankruptcy period. Unless the applicant succeeds in his application to set that notice aside, it operates to avoid the disposition and the right to the $40,000 thereupon vests in the Official Assignee.Whether voidable as a gift[17] The Official Assignee's notice was issued before he had evidence of the circumstances surrounding the payment. Although still submitting that the payment could be viewed as a gift as there was no evidence of consideration, counsel for the Official Assignee did not pursue that argument further. Instead she based her argument on the payment being both a voidable preference and an alienation ofproperty with intent to defraud creditors. On the evidence before the Court I am satisfied that the payment was not a gift but was intended to be a repayment of loans made to Graham and Lyndsay Barr between 1999 and 2001.Whether voidable as a preference[18] The Official Assignee's entitlement to a set aside the payment derives from ss.56 and 58 of the Insolvency Act 1967, the relevant parts of which (for present purposes) read:56.Voidable preferences—(1)Every conveyance or transfer of property, and every payment made by any person unable to pay his debts as they become due from his own money, shall be voidable as against the Assignee, if— (a)It is in favour of any creditor with a view to giving that creditor a preference over the other creditors; and (b)The person making, suffering, paying, or incurring the same is adjudged bankrupt within 2 years after the making, suffering, paying, or incurring of the same.58.Assignee may recover property or value thereof—(1)In any case where, under any of the provisions of . . . section 54 (except subsection (3)) of this Act, sections 56, 57, and 162 of this Act, and section 60 of the Property Law Act 1952, any disposition is voidable as against the Assignee if the Assignee wishes to set aside the disposition, he shall do so by filing the prescribed notice in the Court and serving a copy thereof on the persons on whom service is required in accordance with regulations made under this Act. (2) Subject to the provisions of subsections (4) and (5) of this section, in any case where any such disposition is set aside, the Court may— (a) Order that the person to whom the disposition was made shall transfer to the Assignee the property or any part of it or any interest in it retained by him: (b) Order that the person to whom the disposition was made shall pay to the Assignee such sum, not exceeding the value of the property when the disposition was set aside, as the Court thinks proper. (6)Recovery by the Assignee of any property or the value thereof (whether under this section or under any other provision of this Act or under any other enactment or in equity or otherwise) may be denied wholly or in part if— (a)The person from whom recovery is sought received the property in good faith and has altered his position in the reasonably held belief that the transfer or payment of the property to him was validly made and would not be set aside; and (b)In the opinion of the Court it is inequitable to order recovery or recovery in full, as the case may be.[19] The following issues arise: a) Whether the payment is voidable under s.56 of the Insolvency Act and, b) If so, whether recovery should be denied on the basis that the applicant received the money in good faith, has altered his position in the reasonably held belief that the payment was validly made and would not be set aside, and that it would be inequitable to order recovery. [20] The applicant challenged the existence of a voidable preference on two grounds: a) He claimed at the time of the payment his brother, Graham Barr, was not a person "unable to pay his debts as they become due from his own money", and b) The payment was not made with a view to giving the applicant a preference over other creditors. [21] On the first point, he submitted that at the time of the payment, Graham Barr had no debts other than the money owed to his brother; he contends this on the basis that although he owed money to the Commissioner that obligation was in dispute at that time. [22] I do not accept that Graham Barr was in a position as at 21 May 2001 to pay his debts as they became due. By his own admission he was having to borrow from the applicant from 1999 to 2001 to meet his commitments. I accept that some debts to the Commissioner had been compromised in 1998 (leading to the setting aside in late 1999 of a bankruptcy notice founded on that debt). It is clear, however, from a letter written to Graham Barr's solicitors by the solicitors for the Commissioner dated 23 August 2001 that the Commissioner had Court proceedings underway at that time for later tax debts. Summary judgment was entered for those debts on 10October 2001. Those debts must have arisen before 21 May 2001. I note that Graham Barr, in his affidavit of 7 June 2005 in support of the application, admits that he owed money, but disputed the amount. [23] Counsel for the applicant raised in his application, but did not develop at the hearing, the further ground that the applicant was a creditor of both Graham and Lyndsay Barr, rather than just Graham Barr. I do not accept that there is any merit to it. Even if it was a joint obligation, the applicant was a creditor of Graham Barr and the payment was made in respect of the debt he owed. [24] That leaves the second, and more significant ground for challenge, namely whether the payment was made with a view to giving the applicant preference over the Commissioner. The parties were agreed that it is for the Official Assignee to show that the payment was made by Graham Barr with the "dominant intention" of preferring the applicant. Both counsel referred to the following passage from Re Dartnall 26 January 2001 Auckland High Court B1789-IM 98, Williams J:[7] It is well established that the onus of proving that the payment by the debtor was made with the dominant intention of giving the creditor preference is on the Official Assignee on the balance of probabilities, but the onus of proof under s.58 lies on the bankrupt or the creditor. Authority for the former proposition is to be found in Official Assignee v Wairarapa Farmers' Co-operative Association Ltd [1925] NZLR 1, 8 where Salmond J held: The question of fraudulent preference is a question of the bankrupt's motive in making the payment in question. There is no fraudulent preference unless his real, dominant, and substantial motive was a desire to prefer the particular creditor over his other creditors. It is not enough that he knew that the necessary result of the payment was to give that creditor an advantage over the others and to prevent the equal distribution of his assets among his creditors. It is necessary that this should have been the operative reason for which he made the payment. If his real reason was something else – some benefit, for example, to be obtained for himself – the transaction cannot be attacked as a fraudulent preference. This is so even though the act of the bankrupt may have been consciously dishonest as amounting to a use of his money for his own purposes instead of distributing it equally among his creditors. The only fraudulent preference recognised by the Bankruptcy Act is the act of an insolvent debtor in preferring one creditor to another, not the act of preferring himself to his creditors. That passage has been followed on a number of occasions.[8] It is also clear that whilst the onus is on the Official Assignee to show that the bankrupt's dominant intention is to prefer the payee, the Official Assignee does not have to demonstrate that it was the debtor's sole intention, and that the debtor's overall financial position must be considered (Ebbett v Official Assignee (1992) 4 NZBLC 102, 516)[25] Counsel for the Official Assignee argued that the requisite dominant intention was evident from the following facts: a) The undisputed fact that Graham Barr had only one major asset. b) That asset was sold, and all available sale proceeds went to the applicant. c) The Commissioner, a substantial creditor, received nothing. [26] Counsel for the applicant argued that the dominant intention was to repay bona fide loans, following a request from the lender (the applicant). [27] A similar argument was advanced, and rejected in Re Dartnall, where proceeds of the sale of assets were similarly used to repay personal loans to one creditor. The loans in that case were also from family interests, although in that case through a trust. [28] In the context of a continuing tax problem, the need to borrow from the applicant to meet financial obligations other than the accruing tax debt, and the fact that he was in effect disposing of the whole of his remaining asset, I am satisfied that the payment of all available proceeds of sale to the applicant was with the intention of preferring the applicant. [29] I also take into account that although the applicant states in his affidavit that he has purchased a property in the United Kingdom he does not say when that purchase occurred. [30] The final issue is whether the applicant has made out grounds for denying the Official Assignee recovery under s.58(6) of the Act.[31] The following principles apply in the exercise of the discretion under s.58(6): a) The requirements for relief are cumulative:It must be shown by the parties seeking relief that the payment was received in good faith, that his or her position has been altered in the reasonably held relief that the payment was validly made and would not be set aside and that it would be inequitable to order recovery; see Westpac v Nangeela (supra) and MacMillan Builders Ltd v Morningside Industries Ltd [1986] 2 NZLR 12, 17.Re Moseley; Bulled & Moseley v Official Assignee 13 October 1992, CA 191/92, p.8 b) The parties seeking relief must candidly put all relevant information before the Court. Re Moseley p.9c) The onus of proof rests on the applicant. Re Kerr [1993] 2 NZLR 378 [32] The applicant claims he was unaware of any debts other than the mortgage over Kiwi Road (which was repaid after the proceeds of sale for the payment to the applicant was made). He says that he understood the debt to Inland Revenue had been settled. However, he does not make clear whether, and if so what, he knew of the ongoing issues with Inland Revenue, nor does he expand on his statement that the loans were made to assist his brother to meet financial obligations. In my view it is highly unlikely that he would have agreed to purchase 8 Kiwi Road without having first had a full explanation from his brother as to his financial position, including the accruing tax liabilities. [33] The applicant also refers to his need for money for his property in England, but gives no evidence at all as to how he used the $40,000 and particularly as to whether he applied the money towards that property. Even if that did occur, he givesno evidence as to how this amounts to a change of position which affects the Court's discretion, nor as to any belief as to the payment having been validly made. [34] Finally, the applicant gives no evidence of inequity that would follow if the payment was to be set aside. He will continue to be a creditor in the bankrupt estate, and to have the same rights with respect to the money as the Commissioner. [35] Counsel for the applicant raised the delay in applying to set aside as another factor for the exercise of discretion against the Official Assignee. If the applicant had pointed to any prejudice as a result of that delay, there may have been something in this point. There is no such evidence. [36] I find that the applicant's evidence falls well short of establishing that all requirements of s.58(6)(a) have been met, or that it would be inequitable for the Official Assignee to recover such of the money as would otherwise have fallen into Graham Barr's estate on bankruptcy.Alienation of property to defeat creditors[37] The Official Assignee also relies on s.60 of the Property Law Act 1952. Given the decision I have reached under s.56 of the Insolvency Act, there is no need for me to deal with this ground in any detail. However, I note that the matters to be established under s.60 are, for present purposes, no different from those that have been established under s.56, and if it was necessary I would find that there had been an alienation of property under s.60 of the Property Law Act 1952.Decision[38] The application by David Christopher Barr is dismissed. [39] The Official Assignee seeks orders under s.58 of the Insolvency Act 1967. I make the following orders:a) The disposition of the sum of $40,000 made by the bankrupt Graham Geoffrey Barr on or about 21 May 2001 to Christopher David Barr is set aside; and b) Christopher David Barr is to pay the sum of $40,000 to the Official Assignee within 28 days of the date of this order. [40] The Official Assignee is entitled to costs of an incidental to this application on a 2B basis, with disbursements to be fixed by the Registrar. ______________________________Associate Judge D.H. Abbott