BODY CORPORATE 68792 v MEMELINK [2018] NZCA 509

BODY CORPORATE 68792 v MEMELINK [2018] NZCA 509 [19 November 2018]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA298/2017[2018] NZCA 509BETWEEN BODY CORPORATE 68792First AppellantBODY CORPORATE 378945Second AppellantAND HARRY MEMELINKRespondentHearing: 30 July 2018 (further material received 30 October 2018)Court: French, Collins and Moore JJCounsel: A O'Connor for First AppellantP S J Withnall and D G Dewar for Second AppellantQ S Haines for RespondentJudgment: 19 November 2018 at 11 amJUDGMENT OF THE COURTA The appeal is dismissed.B The appellants are jointly and severally liable to pay the respondent costs fora standard appeal on a band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Moore J)Introduction[1] Mr Memelink is involved in a long running dispute with two bodies corporateover unpaid levies. The bodies corporate seek to have him adjudicated bankrupt. In areserved judgment of 8 May 2017, Associate Judge Smith declined to do so.1Body Corporate 68792 (the first appellant) and Body Corporate 378945 (the secondappellant) appeal that decision. They claim the Associate Judge erred in exercisinghis discretion not to adjudicate Mr Memelink bankrupt when he concluded:(a) Mr Memelink was able to pay his debts;(b) the circumstances in which the debt was incurred did not justifyadjudication; and(c) adjudication would be pointless.[2] Following the hearing before us, Associate Judge Johnston, having refusedMr Memelink's application for an adjournment, adjudicated Mr Memelink bankrupt.2The creditors were a Lower Hutt law firm and the orders were based on bankruptcynotices relating to costs judgments in the High Court (for $108,200.06), and inthis Court (for $13,767.52) following Mr Memelink's unsuccessful claim againstthe firm.[3] As a consequence, we issued a minute on 30 August 2018 inviting the partiesto file memoranda as to whether the adjudication rendered the appeal moot. Counselfor the first and second appellants responded by way of joint memorandum.The appellants indicated it was premature to say whether the consequences ofMr Memelink's adjudication had such an effect. They noted that on 11 September2018 Mr Memelink filed an originating application in the High Court seeking an orderannulling his bankruptcy.3 At the time of filing, the application had yet to be called,although the appellants indicated it would be opposed. They observed that whetherthe appeal was moot turned heavily on the outcome of Mr Memelink's application.1 Body Corporate 68792 v Memelink [2017] NZHC 905 [decision under appeal].2 Collins & May Law v Memelink HC Wellington CIV-2018-485-363, 29 August 2018.3 Pursuant to the Insolvency Act 2006, s 309.They also noted that in the event he was successful, the appellants would seek leaveto advance further matters which have arisen subsequent to the hearing before us.[4] Notwithstanding the above, we can see no good reason to further delay thedelivery of this judgment pending the determination of Mr Memelink's application toannul Associate Judge Johnston's bankruptcy order.Background[5] The appellants operate properties situated in Lower Hutt. Mr Memelink holdsinterests in a number of units in each property. Whether this is in his personal capacityor as a trustee of the Link Trust (No 1) is unclear.[6] In June 2014, an unrelated body corporate was substituted as creditor inbankruptcy proceedings commenced the previous year by the Inland RevenueDepartment. Shortly afterwards, in August 2014, the first appellant joined as asupporting creditor. Over the next two years the proceedings were frequentlyadjourned. Typically, this was after Mr Memelink had offered to pay outstanding debtsshortly before the matter was called. In February 2015, the second appellant joined asa supporting creditor.[7] In May 2016, the original body corporate withdrew,4 leaving the first andsecond appellants to apply for substitution. Associate Judge Smith granted theirapplications based on claims for $120,426 and $4,353.25 by the first appellant and$81,340.83 and $16,331.96 by the second appellant.5[8] By August 2016, when the matter was called before Associate Judge Smith, thesums had been paid. The Associate Judge concluded there was "not (yet) a case foran adjudication order".6 Although describing Mr Memelink as "a habitual debtor, whodisputes numerous apparently valid claims against him and (in a number of cases) haspaid at the last minute, when there was no other option open to him", he was not4 Body Corporate 81012 v Memelink [2016] NZHC 1008.5 Body Corporate 68792 v Memelink CIV-2013-485-5775, 28 June 2016 (Minute).6 Body Corporate 68792 v Memelink [2016] NZHC 1906 [August 2016 adjournment decision]at [57].prepared to dismiss as unfounded Mr Memelink's challenge as to liability andquantum.7 The Associate Judge granted a further adjournment subject to certainconditions.8[9] Mr Memelink did not comply with the conditions imposed, apparently becausehe continued to challenge liability and quantum. Responding to these defaultsthe Associate Judge observed that the conditions he had imposed contemplatedMr Memelink continuing to pay his levies pending resolution of his dispute in otherforums.9 Notwithstanding this, the Associate Judge granted Mr Memelink "onefurther opportunity to put his house in order and bring himself into compliance".10[10] By 1 November 2016, Mr Memelink had partially complied. However, not allthe conditions imposed were met. The Associate Judge put it this way:11While there remain serious concerns over Mr Memelink's failure to complystrictly with the conditions (particularly given the number of indulgencesthe Court has already granted to him), the facts remain that I am here primarilyconcerned with Mr Memelink's insolvency, and he has demonstrated that atleast when he is forced by the court to do so, he can pay.[11] The Associate Judge thus halted the first appellant's proceeding pending thedetermination of Mr Memelink's claim against it. However, this was subject toMr Memelink paying all levies falling due on and after 1 December 2016, diligentlypursuing his claims and filing an affidavit as to means.12[12] Perhaps unsurprisingly, Mr Memelink also failed to comply with these orders.He did not pay the levies as they fell due and his affidavit as to means was deficientin a number of respects. When the matter was next called before the Associate Judgeon 7 March 2017 Mr Haines, for Mr Memelink, advised that $16,000 had been paid tothe first appellant. Nevertheless, the Associate Judge considered the non-compliance7 At [52].8 At [58].9 Body Corporate 68792 v Memelink HC Wellington CIV-2013-485-5775, 18 October 2016(Minute), at [1].10 At [6].11 Body Corporate 68792 v Memelink [2016] NZHC 2658 at [19].12 At [25(b)].serious. He directed the first appellant to file an affidavit detailing the defaults beforedeciding whether to lift the halt order.13Decision under appeal[13] On 15 March 2017, the Associate Judge heard the appellants' application to liftthe halt order. In support, the appellants pointed to further defaults by Mr Memelinkto pay levies as they fell due. They also pointed to Mr Memelink's continued failureto provide details of his assets and liabilities. They submitted that this conduct was anartefact of an underlying insolvency and that even if Mr Memelink was to meet hisliabilities it was inevitable, given his past conduct, that issues of non-payment wouldre-emerge.[14] In his decision of 8 May 2017, the Associate Judge determined he hadjurisdiction to make an adjudication order despite the fact the debt on which thecreditor's application was based had been paid.14 He lifted the halt order becauseMr Memelink had failed to pay his levies promptly and had failed to diligently pursuehis claim against the first appellant.15 However, he declined to exercise his discretionto adjudicate Mr Memelink. He said he was not satisfied Mr Memelink was unable tomeet his debts.16 He observed it was not the role of the Court in its bankruptcyjurisdiction to punish debtors or to monitor a debtor's compliance with futureobligations.17The discretion to refuse adjudication[15] The Associate Judge's decision not to adjudicate Mr Memelink was foundedon s 37 of the Insolvency Act 2006 (the Act). This permits the Court to exercise itsdiscretion to refuse to adjudicate a debtor if they are able to meet their debts.The provision confers a "wide discretion", informed by various factors.18These, relevantly, include:13 Body Corporate 68792 v Memelink CIV-2013-485-5775, 7 March 2017 (Minute) at [4] and [5].14 Decision under appeal, above n 1, at [66].15 At [67]–[70].16 At [79].17 At [89] and [90].18 Re Epirosa HC Wellington B498/91, 6 March 1992 at 5–8.(a) whether the debtor is able to pay his or her debts over time, bearing inmind that bringing finality within a reasonable period of time is theessence of bankruptcy proceedings;(b) the circumstances in which the debt was incurred, and whether thecreditor has acted unreasonably in petitioning bankruptcy as opposedto taking some other course of action;(c) whether adjudication is conducive or detrimental to commercialmorality and the interests of the general public; and(d) whether adjudication would be pointless in the sense that creditors areunlikely to receive any payment.[16] The appellants accepted the orthodox position that because s 37 involves anexercise of discretion, this appeal cannot succeed unless they establish that theAssociate Judge erred in principle, took into account irrelevant considerations,disregarded relevant considerations or, more generally, made a decision which wasplainly wrong.19[17] We now turn to consider whether the Associate Judge erred in exercising hisdiscretion by reference to the three factors he took into account.Was Mr Memelink able to pay his debts?Legal principles[18] A key factual issue is whether the Associate Judge was correct when he decidedMr Memelink was a debtor unwilling to pay his debts rather than one who was unableto do so. That is because the scheme of the insolvency legislation is to provide anappropriate means of dealing with insolvency, and not debt collection.20 It iswell established that proof of ability to pay debts does not include proof of willingness19 Baker v Westpac Banking Corp CA212/92, 13 July 1993 at 4.20 Heath and Whale on Insolvency (online ed, LexisNexis) at [3.10.6].to pay debts. In Re Stirling, ex parte Webb Ross & Co Smellie J considered theprecursor to s 37 and concluded:21[T]he provisions of s 26(2) show a clear intention on the part of the legislaturethat bankruptcy is not to be visited upon a person able to pay his debts. If thedebtor chooses not to pay the creditor can seek execution. The Insolvency Actindeed may be seen as an enactment which strengthens the dichotomy betweeninsolvent debtors and solvent debtors — creditors of the latter have theirremedies in execution, remedies which are not to be used against insolventdebtors.Appellants' submissions[19] Mr Withnall submitted the Associate Judge was wrong in finding thatMr Memelink was a debtor unable to pay his debts. In particular he submitted theAssociate Judge was wrong to infer that the various late payments Mr Memelink madewere evidence of his solvency. Mr Withnall described this conduct as, at best,equivocal, emphasising that Mr Memelink's pattern of obfuscation and last minutepayments following extensive indulgences in fact suggested insolvency. He also notedthat those payments made were usually in rounded sums suggesting that some, at least,were funded from borrowings. Furthermore, Mr Withnall pointed to Mr Memelink'srepeated failures to provide adequate details of his means and what evidence he didprovide was incomplete and unsupported. This led Mr Withnall to submit that theproper inference was that the payments made represented the "emergency plugging ofholes in a dyke which was likely springing leaks somewhere else".Analysis: Did the Associate Judge err in deciding Mr Memelink was able to pay?[20] We agree with the Associate Judge's conclusion that when the evidence isconsidered as a whole it reveals Mr Memelink as someone who is unwilling, ratherthan unable, to meet his debts.[21] The Associate Judge rightly described Mr Memelink as an habitual debtor whodisputes apparently valid claims made against him but who tends to pay at the lastminute when there is effectively no alternative option.2221 Re Stirling, ex parte Webb Ross & Co [1990] 1 NZLR 569 (HC) at 575.22 August 2016 adjournment decision, above n 6, at [52].[22] We also regard it as significant that there appears to be a legitimate and ongoingdispute as to quantum and liability. It is apparent that much of Mr Memelink's conductis founded in his deep mistrust of the appellants' levies. He believes he has a legitimateclaim against the first appellant. In our view, absent clarity around liability andquantum, the Associate Judge was correct to decline to adjudicate Mr Memelink.In this regard we note there was a sufficient dispute about the quantum of levies owedby Mr Memelink for him and the first appellant to commission a report from Deloitteon the extent of his indebtedness.[23] Furthermore, we agree with the Associate Judge that the shortcomings inMr Memelink's affidavit as to means, while "reprehensible", cannot "trump the simplefact that Mr Memelink apparently can pay his debts, and has now done so(or demonstrated that he stands ready to do so)".23What were the circumstances in which the debt was incurred?[24] This is the second factor the Associate Judge considered. Under this headMr Withnall submitted that the debts in question arose as part of the ordinary quid proquo of owning units in a body corporate. In other words when the levies fell due, theamount was utterly predictable. However, despite this Mr Memelink's failure wentback years.[25] While Mr Withnall is no doubt correct, it is also plain that there remains whatappears to be a genuine dispute as to liability and quantum. The Associate Judge wascorrect to view the history of non-compliance against that backdrop. Furthermore, inour view it is relevant that the first appellant does not have a judgment againstMr Memelink for the substantial part of the unpaid levies claimed and neither does thesecond appellant for the ongoing unpaid amounts incurred after 16 August 2016.[26] Mr Withnall also pressed for finality. He submitted this favoured the makingof the orders. However, in our view, the Associate Judge was correct when he23 Decision under appeal, above n 1, at [89].observed that the Court's role in its bankruptcy jurisdiction has nothing to do with debtcollection.24Would adjudication be pointless?[27] This was the third factor the Associate Judge considered. In submitting thisground operated in favour of adjudication Mr Withnall relied on Asher J's commentsin L v P [Bankruptcy]: that it does not automatically follow that because a debtor isable to pay his or her debts, adjudication should be refused.25[28] Given the relatively narrow purpose of the court's bankruptcy jurisdiction, wehave real misgivings that it would be right to adjudicate a debtor simply because he orshe represents a commercial nuisance. In circumstances such as the present, wherethere is evidence that the debtor is able to pay their debts, we consider as indeed wasindicated in L v P that much more would be required.[29] We are satisfied that the Associate Judge was correct when he observed thatwhile Mr Memelink's commercial practices are rightly a cause for concern they appearto be largely motivated by his sincere belief in the merits of his claim against the firstappellant. This is not a case of a debtor cynically exploiting the creditor in the role ofa bank.26Conclusion[30] The appellants have failed to discharge the onus of showing theAssociate Judge erred in declining to adjudicate Mr Memelink bankrupt. We wouldadd that the Associate Judge's view is one we would independently have reached, evenif this were not an appeal against the exercise of a discretion.Result[31] The appeal is dismissed.24 At [90].25 L v P [Bankruptcy] [2009] NZFLR 330 (HC) at [18].26 At [96].[32] It is agreed between the parties that costs should follow the event on a standardappeal basis. We therefore order the appellants are jointly and severally liable to paythe respondent costs for a standard appeal on a band A basis and usual disbursements.Solicitors:Thomas Dewar Sziranyi Letts, Lower Hutt for Second Appellant