MAO v KIM and LEE [2021] NZHC 3253

MAO v KIM and LEE [2021] NZHC 3253 [30 November 2021]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2019-404-1039[2021] NZHC 3253IN THE MATTERANDof the Insolvency Act 2006IN THE MATTER of the bankruptcy of LIANSEN MAOBETWEEN LIANSEN MAOApplicantAND HYUN BIN KIM and DUK YOUNG LEERespondentsHearing: 5 August 2021Appearances: C Lewis for the RespondentsNo appearance by Mr Mao but he requested for the matter to bedetermined on the papers in his submissions in reply dated 3August 2021Judgment: 30 November 2021JUDGMENT OF ASSOCIATE JUDGE SUSSOCKThis judgment was delivered by me on 30 November 2021 at 4.30pmpursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors:Hesketh Henry, AucklandCopy to:Liansen MaoIntroduction[1] On 16 December 2019 Mr Liansen Mao, the judgment debtor/applicant,applied to set aside the bankruptcy notice issued on behalf of the judgmentcreditors/respondents, Mr Hyun Bin Kim and Mr Duk Young Lee.[2] The basis for the application was that Mr Mao had a number of claims thatwere equal to or greater than the judgment debt and so the bankruptcy notice ought tobe set aside.[3] Service of the proceedings on Mr Mao took several months and requiredsubstituted service orders to be made.[4] In the meantime, service had been effected on his daughter, Ms Mao andproceedings had been filed against the respondents and Best Capital Ltd. Theproceedings named Mr Mao's daughter, Ms Jiawen Mao, as first plaintiff, Mr Mao assecond plaintiff and Yintian Company Ltd as the third plaintiff. The respondentstogether with Best Capital Ltd applied to strike out those proceedings. After severalamendments to the pleadings, the strike out application was heard and a decisionissued on 1 April 2021 striking out the whole of that claim.[5] One of the bases for striking out the claim was that the full amount of theshortfall had been paid by the first plaintiff on 22 September 2020. There is no longer,therefore, any amount due under the bankruptcy notice. A GST refund was receivedfrom the Inland Revenue Department ("IRD") for approximately $145,000 and theremaining $67,132.40 was paid by Ms Mao, who was a co-guarantor for the debt.[6] The need to determine this application is because of the question of costs. Therespondents say they are entitled to indemnity costs under the guarantee. Theapplicant submits however that the respondents are not entitled to indemnity costsbecause the application to set aside was only necessary because of the respondents'mistake in paying GST on the sale of one of the properties in the first place. In theapplicant's submission this led to there being a greater shortfall than there wouldotherwise have been. If only the actual shortfall of $67,000 had been claimed, theapplicant submits that he and his daughter would have been able to pay it and therewould have been no need for the bankruptcy notice to be issued and no need for theapplication to set aside.Issue[7] The issue is whether the application to set aside was properly brought to allowthe question of costs to be determined.Factual background[8] Pursuant to a loan agreement dated 13 July 2016 and a variation dated 7 June2017 the Respondent advanced a loan to Yintian Co Limited ("Yintian") for$1,000,000 ("Loan Agreement").[9] The applicant and his daughter, Ms Jiawen Mao, were the guarantors for theloan under a deed of guarantee and indemnity ("Guarantee"). Pursuant to the LoanAgreement, Yintian granted a mortgage over 31 Chester Avenue, Greenhithe ("31Chester") in favour of the Respondents.[10] On or about 11 October 2017, Yintian defaulted under the Loan Agreement andthe Applicant and Ms Mao defaulted under the Guarantee.[11] On or about 2 February 2018 the respondents sold 31 Chester by way ofmortgagee sale for a total amount of $1,130,000. As at 2 February 2018 therespondents were owed $1,323,143.32 pursuant to the loan agreement. After theproceeds were applied to the amount owing, there was a shortfall in the amount of$193,143.32.[12] On 27 February 2018 the respondents filed proceedings against Yintian and theguarantors, including the applicant, in the District Court to cover the shortfall.[13] On 26 February 2018, the respondents applied to the District Court for ordersthat personal service of the District Court claim on Yintian, Jiawen Mao, YintianZhang and the applicant be dispensed with. Substituted service on the applicant wasordered on 10 May 2018.[14] On 3 October 2018 the respondents sought and obtained Default Judgment("Default Judgment") in respect of the District Court claim on the basis that nodefences had been filed. By that time the claim had been amended to update theamount owing to $216,773.92 (the Default Judgment).[15] On 24 October 2018, the respondents obtained charging orders on propertiesregistered to the applicant to secure the Default Judgment.[16] On 6 June 2019, a bankruptcy notice was issued in respect of the DefaultJudgment in the amount of $216,773.92.[17] The bankruptcy notice was served on the applicant's daughter, Ms Mao, on 13September 2019. The respondents made various attempts to serve the bankruptcynotice on the applicant but were unsuccessful.[18] On 21 October 2019, a statement of claim was filed by Ms Mao as first plaintiffand naming the applicant as the second plaintiff against Best Capital Limited and therespondents (as second and third defendants) – CIV-2019-404-2197 ("Best CapitalProceedings").[19] On 22 October 2019, the IRD refunded the GST portion of the sale of 31Chester so that the amount owing under the bankruptcy notice was reduced to$67,132.40.[20] On 29 November 2019, the respondents obtained orders from the Courtdirecting substituted service on the applicant.[21] On 3 December 2019, the respondents served the applicant with the bankruptcynotice by way of substituted service. The bankruptcy notice recorded the amountowing as the amount originally claimed of $216,773.92.[22] On 16 December 2019, the applicant filed this application to set aside thebankruptcy notice.[23] Nine months later, on 22 September 2020, the amount remaining outstandingunder the bankruptcy notice of $67,132.40, was paid in full by Ms Mao.[24] This led to the bankruptcy proceeding against Ms Mao being withdrawn withthe issue of costs to be determined on the papers. A costs order was made on 27October 2020 for costs of $21,414.20 to be paid on an indemnity basis.[25] Since this application by Mr Mao was filed, the application has been adjournedby consent until judgment was delivered on the judgment creditors' application tostrike out the judgment debtor's statement of claim in Best Capital Proceedings.Judgment on the strike out application was issued on 1 April 2021, striking out thestatement of claim.1[26] Following the strike out, further sets of proceedings were filed, one in the nameof the applicant, CIV-2021-404-1475 and the other in his daughter's name, CIV-2021-404-1055. The judgment creditors/respondents are named as defendants in thoseproceedings. All defendants have brought applications to strike out those proceedings,with the applications due to be heard on 24 February 2022.Application to set aside a bankruptcy notice – the principles[27] Section 17(1) of the Insolvency Act 2006 provides that a debtor commits anact of bankruptcy if:(a) a creditor has obtained a final judgment or a final order against thedebtor; and(b) execution of the judgment or order has not been halted by a court; and(c) the debtor has been served with a bankruptcy notice; and(d) the debtor has not, within the time limit specified in subsection 4 (10working days after service):1 Mao v Best Capital Ltd [2021] NZHC 735.(i) complied with the requirements of the bankruptcy notice; or(ii) satisfied the court that they have a cross-claim against thecreditor.[28] Subparagraphs 17(1)(a), (b) and (c) are not in issue.[29] I further record at the outset that s 30 of the Insolvency Act provides that theoverstatement in a bankruptcy notice of the amount owing by the debtor does notinvalidate the notice, so the fact that the bankruptcy notice required payment of$216,773.92 when only $67,132.40 was due following the refund from the IRD doesnot invalidate the notice.[30] The notice was not complied with even in respect of the reduced amount withinthe required timeframe of 10 working days. So in the absence of a cross-claim, MrMao will have committed an act of bankruptcy.[31] If Mr Mao cannot satisfy the Court that he has a cross-claim as defined in s17(7) of the Insolvency Act, the bankruptcy notice will have its statutory effect andthere is no jurisdiction to set it aside or stay its effect on any other ground.[32] The definition of cross-claim in s 17(7) has two limbs, with a debtor requiredto establish:(a) firstly, that the counterclaim, set-off, or cross demand is equal to, orgreater than, the judgment debt or the amount that the debtor has beenordered to pay;2 and(b) secondly, it must be a counterclaim, set-off, or cross demand that couldnot have been used as a defence in the action or proceedings in whichthe judgment or the order was obtained.32 Insolvency Act 2006, s 17(7)(a).3 Section 17(7)(b).[33] To satisfy the Court that there is a cross-claim, a debtor must demonstrate thathe or she has a genuine triable cross-claim,4 as to both liability and quantum.5 A debtoris required to show that:(a) there is a prima facie case that has a fair chance of success;6(b) there is a degree of mutuality between the subject of the cross-claimand the underlying judgment debt;7(c) the counterclaim, set-off, or cross-demand is sounding in money:8(d) the cross-claim is against the creditor, not a third party;9 and(e) the debtor generally proposes to pursue the cross-claim.10[34] Importantly in this case, a debtor must establish that they could not use thecross-claim as a defence in the action or proceeding on which the judgment or orderproviding the basis for the bankruptcy notice was entered.11[35] The phrase "could not" has generated substantial jurisprudence:(a) the "could not" test is designed to ensure that all issues between theparties both ways be tried at once and that a bankruptcy notice only beset aside if the debtor has a cross-claim which either legally or factuallycould not be set up in the same proceeding;12(b) a mere failure to take advantage of an opportunity because ofinconvenience does not constitute an inability;134 Clark v UDC Finance Ltd [1985] 2 NZLR 636 (HC).5 Sharma v ANZ Banking Group (1992) 6 PRNZ 386 (CA); Robertson v ASB Bank Ltd [2014] NZCA597 at [24].6 Clark v UDC Finance Ltd, above n 4 at 647.7 Re Elvin, ex parte Sandilands [1990] 3 NZLR 124 (HC).8 Robertson v ASB Bank Ltd, above n 5, at [23].9 Re Faloon, ex parte Bank of New Zealand HC Wellington B175/97, 12 August 1997.10 Sharma v ANZ Banking Group, above n 5 at 389.11 Clark v UDC Finance Ltd, above n 4, at 639.12 Hardie v Booth [1992] NZLR 1 356 at 362.13 Clark v UDC Finance Ltd, above n 4, at 640.(c) it is not the task of the Court to re-open issues that have previously beenlitigated.14Discussion[36] The cross-claim relied on by the applicant has been struck out. Mr Mao nowseeks to rely on the proceedings filed following that strike out and which themselvesare the subject of a strike out application. Those proceedings relate to the question ofGST paid on the property transaction specifically.[37] In submissions filed for these proceedings, Mr Mao appears to set out a numberof reasons why the GST issue was not raised in the original District Court proceedingsfor the shortfall. These include that he was in China so it was not possible to file anynotice of opposition or counterclaim on time in the District Court and that he wasunaware of the mistake because all correspondence was between the judgmentcreditors and his daughter. But as the courts have previously held, a mere failure totake advantage of an opportunity does not constitute inability. Furthermore, noapplication has been made to set aside the District Court judgment.[38] In addition, the bankruptcy notice was for more than the amount of the GST soeven if the mistake had not been made, there would still have been a shortfall. MrMao says in response that if only the shortfall of $67,132.40 had been claimed hewould have been able to pay it. But there is no evidence of this and the $67,132.40was only finally paid nine months after service of the bankruptcy notice.[39] In all the circumstances, I do not consider that the applicant has establishedthat he has a valid cross-claim that could not have been raised in the originalproceedings.Result[40] For the reasons set out above, the application to set aside the bankruptcy noticeis therefore dismissed.14 Aluminium Plus Wellington Ltd (in liq) v Shaw [2017] NZHC 2607 at [69].Costs[41] As Mr Mao has failed in his application, the respondents are entitled to costs.The respondents seek indemnity costs on the application relying on a term of the loanagreement. The loan agreement is not in evidence in this proceeding and so the exactterms of the indemnity provision are not before me. Furthermore, the respondent hasnot filed evidence of the costs incurred in order to assess reasonableness.[42] I ask the parties to confer and attempt to agree costs. If agreement cannot bereached, the respondents may file a memorandum with a supporting affidavit with therelevant documents by 9 December 2021 followed by the applicant by 20 December2021.________________________________Associate Judge Sussock