COOK V THE OFFICIAL ASSIGNEE IN BANKRUPTCY OF THE PROPERTY OF PETER WILLIAM COOK HC AK CIV-2007-404-000141

COOK V THE OFFICIAL ASSIGNEE IN BANKRUPTCY OF THE PROPERTY OF PETER WILLIAM COOK HC AK CIV-2007-404-000141 27 November 2008IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2007-404-000141IN THE MATTER OF the Insolvency Act 1967 BETWEEN PETER WILLIAM COOK Applicant AND THE OFFICIAL ASSIGNEE IN BANKRUPTCY OF THE PROPERTY OF PETER WILLIAM COOK Respondent Hearing: 27 November 2008 Appearances: DB Thomas for Applicant G Caro for Respondent Judgment: 27 November 2008JUDGMENT OF ASHER JSolicitors: Thomas & Co., New Lynn, Auckland Ministry of Economic Development, Private Bag 92 513, Wellesley Street AucklandIntroduction[1] Peter William Cook was adjudicated bankrupt on 25 July 2007. In his capacity as a trustee of the Timzee Wimzee Family Trust, he has filed an appeal from the decision of the Official Assignee. The basis of his appeal is that the Official Assignee erred when he set aside the following gifts: a) The forgiveness of debt of $27,000 from Peter William Cook to Peter William Cook as trustee of the Timzee Wimzee Family Trust in a deed of forgiveness of debt dated 19 September 2003. b) The forgiveness of debt of $3,000 from Peter William Cook to Peter William Cook as trustee of the Timzee Wimzee Family Trust in a deed of forgiveness of debt dated 6 October 2004. [2] The basis for the Official Assignee's setting aside of the gifts was that they comprised voidable gifts under s 54 of the Insolvency Act 1967 ("the Act"). [3] This hearing is to determine that appeal. In addition the Court is asked to determine an application by the Official Assignee for an order under s 58(2) that Mr Cook as trustee pays him $30,000, being the value of the two gifts. He also seeks interest on that sum from 25 July 2007, being the date of adjudication and bankruptcy. [4] In addition to pursuing the appeal, should he fail Mr Cook as trustee opposes this application under s 58(6) on the basis that: a) the two payments of $27,000 and $3,000 were received in good faith; b) there was an alteration of position in reliance; and c) it would be inequitable to order recovery.The issue[5] It was common ground between the parties that the Insolvency Act 1967 applies. This is because these proceedings relate to a "past event" as defined in s 444 of the Insolvency Act 2006 under the heading "Transitional Provisions". [6] In relation to the appeal, the key issue is whether in terms of s 41(2) of the Act Mr Cook as trustee proves that he, as the donor of the gift, was at the time of the making of the gift or at any time thereafter able to pay his debts without the aid of the property comprising the gift. The setting aside of the $3,000 forgiveness of debt is no longer challenged, although the recovery of that amount is still opposed. It should be recorded that there was no dispute about the fact that the payments of $27,000 and $3,000 were gifts. It was also common ground that Mr Cook was not adjudicated bankrupt within two years of the making of the gifts, but was adjudicated bankrupt within five years, and that this requirement of s 54(2) was therefore established.Background[7] On 19 September 2003 Mr Cook was the sole director and shareholder of a company, D & P Systems Limited ("the company"). Mr Cook had provided a personal guarantee in favour of an electrical goods supplier to the company, Rexel Electrical Supplies Limited ("Rexel"), which guarantee was dated 10 September 2002. As at 19 September 2003 the company was indebted to Rexel in the amount of $38,618.58. [8] On 15 September 2003 Mr Cook created the Timzee Wimzee Family Trust ("the Trust"). On or about that date the Trust entered into an agreement to purchase a property. In addition to arranging substantial mortgages Mr Cook advanced to the Trust the sum of $30,000 which became the Trust's cash contribution to the purchase. On 18 September 2003 a deed of acknowledgement of debt of the Trust to Mr Cook for the $30,000 was signed. On 19 September 2003 a deed of forgiveness was signed, forgiving $27,000 of the debt. The further $3,000 was forgiven by deed dated 6 October 2004.[9] The company was placed into liquidation on 10 October 2005 and Mr Cook was adjudicated bankrupt on 25 July 2007. [10] It is necessary to consider in more detail Mr Cook's financial position as at 19 September 2003. However, before doing so I will refer to the principles to be applied when determining solvency under s 54(2).Principles to be applied[11] Section 54(2) of the Insolvency Act 1967 provides:54 Voidable gifts (2) Any gift of property shall, if the donor is not adjudged bankrupt within 2 years after the making of the gift but is adjudged bankrupt within 5 years after the making of the gift, be voidable as against the Assignee, unless the party claiming under the gift proves that the donor was at the time of the making of the gift or at any time thereafter up to his adjudication able to pay all his debts without the aid of the property comprised in the gift, and that if the gift was a settlement, the interest of the settlor in the property passed to the trustees of the settlement on the execution thereof.[12] It is clear from the words of s 54(2) that the legal burden of proving the donor's ability to pay all debts is placed on the party claiming under the gift ("the donee"). Here that is Mr Cook in his capacity as trustee for the Trust. Unless such a party "proves" the ability to pay all debts the gift is voidable. I bear in mind, however, that a claiming party might transfer the evidential burden to the Official Assignee if it adduced evidence to show that the donor was at the relevant time able to pay all debts without the aid of the property comprising the gift. [13] The question arises whether contingent debts such as a guarantee are to be taken into account for the purposes of deciding on the donor's ability to pay debts under s 54(2). [14] "Provable debts" are defined as including contingent debts. Section 87(1) of the Act provides:87 Provable debts(1) Except as provided in subsections (2) and (3) of this section, all debts and liabilities, present or future, certain or contingent, to which the bankrupt is subject at the time of his adjudication, or to which he becomes subject before his discharge by reason of any obligation incurred before the time of his adjudication, shall be debts provable in bankruptcy.Lord Selborne LC recognised that a contract of guarantee created a debt that is to be treated as due and owing in Re Ridler (1882) 22 ChD 74 when he stated at 80:To hold that a guarantor can make a voluntary settlement of the whole of his property and support it by showing that when he made it the person guaranteed had assets enough to pay the amount guaranteed, would go far to defeat the contract of suretyship. We must look at the matter as if the event had already happened the possibility of which the parties must have had in contemplation when the guarantee was given of the debtor being unable to pay. I do not think that any close inquiry as to the supposed capacity of the person guaranteed to pay the debt ought to be entered into. I do not say that there might not be a state of things in which the liability of the guarantor might be so remote that it need not be regarded; but if he conveys away all his property by a voluntary settlement I think it doubtful whether the settlement could in any case be supported in the event of his ultimately being called on under his guarantee. [emphasis added][15] Re Ridler was considered in Regal Castings Ltd v Lightbody [2008] NZSC 87, a case concerning s 60 of the Property Law Act 1952. Tipping J stated at [118]:The effect of the decision in Ridler is that, for present purposes, a guarantor must be treated as if the guaranteed debt was due and owing.And at [121]:It is also clear that it is not appropriate to enter into any detailed inquiry as to how readily, if at all, Capro [the guaranteed person] could have discharged its indebtedness to Regal.It is clear, therefore, that with the possible exception of the patently obvious solvency of the primary debtor, a debt of guarantee is to be taken into account for the purposes of s 54(2). [16] In Re Crawford (a bankrupt) HC WAN CIV-2005-483-235 5 May 2006, MacKenzie J applied the principle in Re Ridler in the context of s 54(2). I proposedoing so in this appeal. This means that the guarantee of the company debt to Rexel is a debt for the purposes of s 54(2).Was Mr Cook able to pay his debts in terms of s 54(2)?[17] Helen Thomas, Mr Cook's sister, has sworn an affidavit in support of Mr Cook's appeal. She attaches to it certain exhibits indicating the state of Mr Cook's personal bank accounts and the bank account of the company as at September 2003. She has also annexed a copy of credit checks relating to Mr Cook and the company. The Official Assignee has also presented to the Court in affidavits filed, some information as to the background financial dealings of Mr Cook and the company. [18] Mrs Thomas gave evidence and was cross-examined. She is not a trustee of the Trust but clearly has an interest in setting aside the disposition, not so much on behalf of her brother but on behalf of his children. I found her to be an honest witness. However, I cannot place any weight on her general assertions that Mr Cook was able to pay his debts without the aid of the property comprising the gift. She acknowledged in the course of cross-examination that outside of the bank statements that she had attached to her affidavit, she had no knowledge whatsoever of Mr Cook's debtors or creditors. [19] The statements she annexed show that Mr Cook's personal bank balance as at 19 September 2003, the date of the gift, was $1,078.51. Apart from a credit check, this is the extent of the financial information available about Mr Cook's personal financial affairs. Mr Cook has not provided an affidavit attesting to his solvency or giving any information about his financial position. [20] The company's bank accounts showed a credit of $66,064.21 as at 19 September 2003. Credit checks show no judgments or other adverse entries for either Mr Cook or the company, although there were credit check inquiries being made at about the relevant time in respect of both of them.[21] As to the company's affairs, an accountant working in the insolvency and trusts service, Mr T Clothier, has sworn an affidavit. He calculates that as at 19 September 2003 the company was indebted to Rexel in the sum of $36,618.00. That has not been challenged. He annexed the Rexel transaction ledger from 6 January 2003 to 22 November 2005. In addition to showing the amount owed as at 19 September 2003 the ledger shows that when the company was placed into liquidation on 10 October 2005 it owed Rexel $129,004.14. [22] This limited amount of information is quite insufficient for the Court to reach any conclusion on Mr Cook's solvency. He appears to have a debt of $36,618 and to have only $1,078.51 in his bank account. There is no information provided about whether he had other bank accounts. He may also have had other bank accounts substantially in debit. On the face of this information his debts exceeded his assets, and he was therefore not able to pay his debts. [23] While one of the company's bank accounts was in credit there may have been other company accounts in debit. There was no information supplied about the company's financial affairs generally, and no accounts supplied. The existence of a credit balance in one company account has no great probative value. Moreover, the financial position of a company in which he was shareholder cannot be determinative of Mr Cook's overall personal financial position. [24] Further, Mr Cook and the company may well have owed substantial amounts to other unknown parties. When the company went into liquidation it owed total debts of $600,158.22 and a total net deficiency as against all claimants of $318,996.64. It is not possible to draw any particular inference from this but the very high extent of the company's indebtedness two years later certainly does not support the submission that Mr Cook was solvent at the time of making the gift. [25] Thus, as at 19 September 2003 Mr Cook was indebted as guarantor to Rexel in the sum of $36,618.00. It has not been shown that he had sufficient funds at his disposal to pay that amount if a call was made. Mr Cook is in America and appears to be taking little interest in his financial affairs. Mrs Thomas has pursued this application and given evidence on the basis that she is his attorney so far as the Trustis concerned. Notwithstanding her evidence, I must find that Mr Cook as trustee has not proven that he was at the time of the making of the gift, or at any time thereafter up to his adjudication, able to pay his debts without the aid of the property comprising the gift. [26] The appeal from the decision of the Official Assignee setting aside the gift fails.The application of s 58[27] The Official Assignee has filed a notice in Court in terms of s 58(1) of the Insolvency Act 1967. In such a situation the Court may under s 58(2)(b) order that the person to whom the disposition was made shall pay a sum to the Assignee. Mr Thomas for Mr Cook has submitted that under s 58(6) recovery should be denied wholly or in part under the Court's discretion in that section. [28] Section 58(2) and (6) provides:58 Assignee may recover property or value thereof (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— (b) Order that the person to whom the disposition was made, or his personal representative, or any person claiming through him (not being a person claiming through him who received the property comprised in the disposition or any part of it or any interest in it, as the case may be, in good faith and for valuable consideration or who claims through such a person), shall pay to the Assignee or appointee 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 or appointee 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.[29] Gallen J observed in the judgment Re Kerr [1993] 2 NZLR 378 at 382-383, that there are three cumulative requirements before subsection (6) can be satisfied. First, the property must have been received in good faith. Secondly, the party receiving the property must have altered its position in the reasonably held belief that the transfer of the property was validly made and would not be set aside. Thirdly, it must be shown that it would be inequitable to order recovery or recovery in full of the property. [30] In that case counsel accepted that the onus of proving the three criteria rested on the applicant. Given the absence of any words clearly indicating an onus of the type that exists in s 58(2)(b), I do not consider an approach which turns on any legal onus to be necessary. However, there is clearly some evidential burden on a person seeking to invoke the discretion to establish the facts that could lead to its exercise. In the end the Court must be satisfied that the three requirements are established. [31] The meaning of "good faith" is not defined. In Re Humphries, Cowan v Official Assignee HC NEL B15/86 17 May 1989 McGechan J stated at p 13, relying on G S Rea v W J Jones & Co [1988] BCR 437 at 445):"Good faith" requires the recipient to be shown 'to have honestly believed that the transaction would not involve any element of undue preference' of the recipient.[32] The recipient in this case is in fact the donor Mr Cook, although in a different capacity as trustee. For the reasons I have already given there is evidence that Mr Cook was not able to pay his debts. There is no evidence that Mr Cook honestly believed that he was not preferring the Trust when he forgave the debt owed by the Trust. Indeed, the natural inference given his failure to explain why he so suddenly created the Trust and made the gift is to the contrary. It indicates that he was endeavouring to prefer the Trust. The first requirement is therefore not established.[33] As to the second requirement, I am not satisfied that the Trust as the party receiving the property altered its position in the reasonably held belief that the transfer was validly made. I consider it likely that the purchase would have occurred in any event. [34] Finally, I am not satisfied that it would be inequitable to order recovery or recovery in full. While Mr Cook's children are discretionary beneficiaries of the Trust, he is a residuary beneficiary and notionally at least may benefit at the expense of his creditors from any retention of the gift. It is equitable that the creditors have access to Mr Cook's assets. There is nothing before me to indicate any inequity warranting a refusal to order recovery. [35] I am satisfied, therefore, that this is an appropriate case to order a transfer of the gifted amounts to the Official Assignee. [36] Mr Cook for the Official Assignee has also sought interest. There is no express provision in s 58 for the payment of interest. Section 58(3) does however give the Court the power to make such orders "as it thinks fit". I consider it appropriate to make an order for the payment of interest at the rate of seven per cent per annum. As requested by the Official Assignee that interest will be payable from the date Mr Cook was adjudicated bankrupt on 25 July 2007. [37] I am informed that a sum of money in excess of $30,000 is held subject to undertakings in the trust account of the Trust's solicitors. Given that fact, the appropriate direction is for an order under s 58(2)(b) for the payment of a sum to the Official Assignee.Result[38] The appeal against the decision of the Official Assignee setting aside the gift is dismissed.[39] In terms of s 58(2)(b) of the Insolvency Act 1967 the sum of $30,000 presently held in the trust account of the Trust's solicitors is to be paid to the Official Assignee, together with interest at seven per cent per annum from 25 July 2007.Costs[40] Mr Cook in his capacity as trustee is to pay costs to the Official Assignee calculated on a 2B basis for a one-half day hearing. Although there are two applications, costs are to be calculated on the basis of one application.. Asher J