ERWOOD V MAXTED AND ANOR CA567/07

ERWOOD V MAXTED AND ANOR CA567/07 30 May 2008IN THE COURT OF APPEAL OF NEW ZEALAND CA567/07 CA631/07 [2008] NZCA 139BETWEEN ROBERT JOHN ERWOOD Appellant AND JANET MAXTED First Respondent AND OFFICIAL ASSIGNEE Second Respondent Hearing: 23 April 2008 Court: Baragwanath, Randerson and Priestley JJ Counsel: R J Erwood by video link G M Downing for First Respondent by telephone P W Chisnall for Second Respondent N Levy as amicus curiae Judgment: 30 May 2008 at 3pmJUDGMENT OF THE COURT A We adjourn the hearing of the recall application to a further fixture. B We declare that the notice of appeal dated 14 March 2008 against the judgment of the High Court annulling Mr Erwood's adjudication on conditions was duly filed. C We extend time for service of that notice for 20 working days.D We direct a temporary stay of the order of the High Court of 21 February 2008 annulling Mr Erwood's bankruptcy until further order of this Court. E We order that the stay on advertising remain until further order of this Court. F We continue the appointment of Ms Levy as amicus curiae to assist Mr Erwood with logistical and procedural matters but to assist the Court on legal issues. G Costs are reserved. H Leave is reserved to all parties to apply for further directions.____________________________________________________________________REASONS OF THE COURT(Given by Justice Baragwanath)Table of ContentsPara NoIntroduction [1]The hearing on 23 April [11]The third notice of appeal [12]The absence of determination by the Official Assignee of the validity of Mrs Harley's proof of debt [14]The draft order and submissions in response [15]Questions for consideration [18]Mr Erwood's capacity [19](i) Retrospective effect of incapacity [27](ii) Prospective effect of incapacity [32](iii) This case [33]The jurisdiction of this Court; adjourment of recall application [35]The effect of the third notice of appeal [37]A temporary stay of the orders of this Court of 19 March 2008? [38]Mrs Harley's proof [39]An application to the High Court? [43]Appointment as amicus continued [44]Costs [45]Leave to apply [46]Introduction[1] The first respondents (the Maxteds) were sued unsuccessfully by the appellant (Mr Erwood) and secured costs orders against him in the High Court (Wild J), this Court and the Supreme Court. Their entitlement to payment is beyond challenge. They sought to enforce the judgment debts by bankruptcy proceedings. [2] There were due for hearing in this Court on 23 April 2008 two appeals by Mr Erwood: one against the issue by the Maxteds of a bankruptcy notice (CA567/07) and the other against a subsequent order of adjudication made on Ms Maxted's application (CA631/07). [3] On 17 March 2008 this Court heard an application by the first respondents to strike out the appeals because of failure by Mr Erwood to comply with an order for security for costs. [4] Following that hearing, at which Mr Erwood was represented by counsel, this Court received on 19 March a report from Dr Louise Aldridge, general practitioner, certifying that she and the psychiatric team at Cornwall House agreed that Mr Erwood was incapable of representing himself in court and required a litigation guardian. He has multiple psychiatric and physical problems which had deteriorated recently, in part because of the stress of the proceedings and the expectations which they placed upon him. [5] For that reason, and because a ground of appeal related to Mr Erwood's capacity, the Court directed that amicus curiae be appointed to assist the Court at the hearing of the appeals. Since Mr Erwood was represented by counsel the Court had seen no need for such appointment at the hearing giving rise to the 19 March judgment or before proceeding to judgment. [6] By judgment of 19 March 2008 this Court ordered that Mr Erwood comply with directions then made to ensure that the appeals would proceed to hearing on 23 April 2008 on a proper basis. By that stage Mr Erwood was already in breach of his obligations under the Court of Appeal (Civil) Rules 2005. The judgmentimposed conditions, which included the payment of $20,000 security for costs in CA631/07. The order provided that if he did not do so the appeals would automatically be dismissed. [7] By application filed on 1 April, Mr Erwood had applied for an order to recall the judgment of 19 March and to set aside the orders which resulted in the striking out of the appeals. [8] On 7 April 2008 the President by Minute recorded that Mr Erwood had failed to provide the security in CA631/07 and the appeals were struck out. He also continued the appointment of Ms Levy as amicus curiae in relation to the recall application. [9] We agreed to hear the recall application on 23 April, when Mr Erwood appeared by video-link and Mr Downing for Ms Maxted by telephone. Mr Chisnall for the Official Assignee and Ms Levy, appointed as amicus curiae, were present in Court. One of Mr Erwood's creditors, Mrs R Harley, was present in Court to observe the proceedings but, while helpfully providing certain uncontroversial clarification at our request, did not participate as a party. [10] In his written submissions of 18 April Mr Downing stated that he understood that Mr Erwood had applied, presumably informally, to recall the judgment of 19 March and that he had not been served with any papers from Mr Erwood. Since the hearing Mr Downing has advised us that at the time of the hearing he had still not been served with Mr Erwood's papers and as a result he was disadvantaged in conducting the Maxted's case over the telephone.The hearing on 23 April[11] At the hearing on 23 April a threshold point raised by Ms Levy, counsel appointed as amicus, concerned Mr Erwood's capacity and the application of rr 82 – 94B of the High Court Rules. She advised that counsel who had represented Mr Erwood on 17 March lacked experience in such matters and had appeared at short notice with very brief instructions. She proposed that, if as a result of the recallapplication there were a substantive hearing, the most practical solution would be for the Court to appoint amicus curiae with instructions to prepare and file a case on appeal and focus on the arguments properly available to Mr Erwood.The third notice of appeal[12] The argument on the recall application disclosed a procedural problem. Mr Erwood had on 14 March 2008 tendered a third notice of appeal, this time against a judgment of Associate Judge Christiansen of 21 February 2008 at a hearing which Mr Erwood did not attend. The judgment annulled his bankruptcy but on condition that he pay not only the $28,891.09 judgment debt to the respondents but a further unrelated sum of $186,685.19 for which Mrs Harley had proved and which Mr Erwood disputes. But the notice was rejected by the Registrar because there had been no waiver of security for costs or consent by the Official Assignee to the appeal. No doubt because of its rejection it was not served on the Maxteds. Nor was security provided. [13] We were satisfied that the third notice of appeal should not have been rejected. The Official Assignee had on 18 February advised Mr Erwood that he would hold security for costs in his pending appeals out of frozen funds held on behalf of Mr Erwood. The annulment was ordered because Mr Erwood's assets exceeded his liabilities. He had had no opportunity to have the Official Assignee formally determine the validity of Mrs Harley's claims, payment of which was a condition of the annulment. It was his right to bring the appeal and, on the basis that there was a surplus held by the Official Assignee to his credit, to have that sum used to provide security. The question arose as to how the Maxteds' claim to their just debt should be reconciled with procedural justice to Mr Erwood, whose right of appeal against the 21 February judgment had been incorrectly withheld.The absence of determination by the Official Assignee of the validity of Mrs Harley's proof of debt[14] A further problem was that Mrs Harley may well be entitled to payment of all (and alternatively part) of the amount for which she had proved. But the Official Assignee had never made in relation to her proof the formal determination of validity under s 89 of the Insolvency Act 1967 which it was his duty to make and against which there is a right of appeal to the High Court. Counsel for the Official Assignee acknowledged that this fact was not drawn to Associate Judge Christiansen's attention when he made the annulment order.The draft order and submissions in response[15] We therefore prepared a draft order which was provided on 23 April to the parties before the Court and on which we invited written submissions. We directed that a copy be provided also to Mrs Harley. [16] We proposed among the draft orders that the third notice of appeal should be deemed to have been accepted by this Court on 14 March 2008; that there be a temporary stay of the orders of 19 March; and that the order of the High Court of 21 February annulling Mr Erwood's bankruptcy on conditions be stayed pending further order of the Court. [17] In the further written submissions of the parties counsel for the Maxteds submits: (a) because his clients were not served with the recall application and related papers, his clients have not had a fair hearing and have been prejudiced; (b) there is no jurisdiction to make orders in terms of the draft; (c) there should be a new hearing of the recall application.Counsel for Mrs Harley supports the Maxteds' challenge to the jurisdiction of this Court to make orders in terms of the draft.Questions for consideration[18] The questions requiring consideration include: (a) Mr Erwood's capacity; (b) the jurisdiction of this Court; and if there is jurisdiction, whether the orders of 19 March should be recalled or stayed; (c) the effect of the third notice of appeal; (d) what procedures should now be adopted; (e) the status of Mrs Harley's proof.Mr Erwood's capacity[19] The question of Mr Erwood's capacity to represent himself has arisen at various stages. At the original High Court trial before Wild J it was managed by the appointment of Queen's Counsel as amicus curiae. The topic was raised by this Court in a Minute of 18 December 2007, when ordering a stay of public advertising of the order of adjudication. Among the grounds on which Mr Erwood had appealed against that order and the validity of the bankruptcy notice on which it was based, this Court recognised two arguable issues: (1) whether the proceedings had been filed in the correct court (Nelson rather than Wellington, for which Mr Erwood contended) and (2) whether Mr Erwood was an incapacitated person who ought to have been represented by a guardian ad litem before the Associate Judge who ordered his adjudication (r 84). We have referred to the direction in the judgment of 19 March for the appointment of amicus, the role accepted by Ms Levy. [20] By letter of 28 March 2008 Ms Quinn, barrister, notified the Court that she had been approached by Mr Erwood seeking assistance. She referred to a letter fromthe Official Assignee to Mr Erwood of 18 February 2008, faxed to this Court the same day, stating " the Official Assignee will hold the security for costs required by the Court of Appeal and retained by this office". While that letter could not have related specifically to the subsequent security order of 19 March, it can be read as broad enough to encompass the $20,000 figure. [21] Ms Quinn, to whom we express our gratitude for seeking to assist the just determination of the case, stated:In my view, Mr Erwood is unable to properly instruct counsel to act for him. While he is intelligent and understands discrete issues, he appears to be unable to comprehend the overall picture and the implications for him.[22] Although we understand the reasons for the opinion expressed by Ms Quinn, we do not purport in this judgment to adjudicate upon the issue of capacity which Mr Erwood seeks to argue on appeal. But it is desirable that we set out the context in which decisions are to be made. Mr Erwood is indeed intelligent and understands discrete issues, such as comprehending the point whether the dismissal of appeals in CA567/07 and CA631/07 could give rise to res judicata on issues sought to be advanced on the third appeal (against the terms of the Associate Judge's order of annulment of the bankruptcy on terms of which he has sought to file notice). But, whatever his actual state of mind, he appeared to be unable to comprehend that the Maxted judgment is unassailable. [23] It is no answer to an insolvency proceeding that the debtor lacks legal capacity. His right, if he is an incapacitated person, is to a fair procedure that will ensure that any legitimate defence is considered. [24] Rule 82 of the High Court Rules defines "incapacitated person" as:A person who by reason of physical, intellectual or mental impairment, whether temporary or permanent, is – (a) not capable of understanding the issues on which his or her decision would be required as a litigant conducting proceedings; or (b) unable to give sufficient instructions to issue, defend or compromise proceedings [25] The rules relating to the conduct of proceedings involving incapacitated persons and minors were amended in 2007 (High Court Amendment Rules 2007 (SR 2007/206 r 8)). The explanatory note to the 2007 amendment states that the changes reflect a number of recent decisions on capacity to conduct proceedings, including Masterman-Lister v Brutton and Co [2003] 1 WLR 1511 (CA) and Dalle- Molle (By His Next Friend Public Trustee) v Manos and Anor [2004] SASC 102, and are consistent with procedural provisions that now apply in England and a number of Australian States. [26] The Court must start from the presumption that Mr Erwood is competent. It must then ask whether Mr Erwood is able to understand the nature of the litigation he is engaged in, its possible outcomes, and the risks associated with it. If not, by r 84 he must be represented by a litigation guardian unless the Court orders otherwise.(i) Retrospective effect of incapacity[27] The next question is the effect that any finding that Mr Erwood is an incapacitated person would have on the present proceedings. [28] Under r 86B, the Court may set aside a step in a proceeding if an incapacitated person did not have a litigation guardian when that step was taken and the Court considers that the incapacitated person was unfairly prejudiced. This suggests that, unlike the English provisions, the presumption is that litigation by an incapacitated person before he or she is recognised as such will be effective. Only if the Court considers that there was unfair prejudice will the proceedings be invalidated (cf Masterman-Lister at [30]). [29] By s 28 of the Insolvency Act 1967 (which by s 444(2) of the 2006 Act applies to the adjudication which occurred before that Act came into force), bankruptcy commences on the date when the debtor is adjudicated bankrupt. A petition for adjudication entails an application to the court (s 23) and therefore comes within the definition of "proceedings" in r 3 of the High Court Rules ("an applicationto the Court for the exercise of the civil jurisdiction of the Court other than an interlocutory application"). [30] It follows that if Mr Erwood were found to be an incapacitated person, and the Court considered that he was unfairly prejudiced at the time that he was adjudicated bankrupt, then that adjudication could be set aside. [31] While the Court has a discretion whether to order bankruptcy, an incapable person who has run up debts which are found to be enforceable does not possess immunity from having his assets distributed among his creditors through the processes of bankruptcy.(ii) Prospective effect of incapacity[32] In terms of any future proceedings, whether in relation to bankruptcy or otherwise, if Mr Erwood is found to be an incapacitated person, r 84 will apply. Rule 84 states that an incapacitated person must have a litigation guardian, unless the Court orders otherwise. In these circumstances, if a litigation guardian is appointed then Mr Erwood's susceptibility to bankruptcy proceedings would be unaffected by his incapacity.(iii) This case[33] There has been no determination of Mr Erwood's capacity. But the costs judgments delivered in proceedings in which his interests were safeguarded by amicus stand and are enforceable by the Maxteds. Insolvency proceedings are one legitimate means of enforcing their judgments. [34] If Mr Erwood were found to be incapacitated, we could see no prospect of any person accepting appointment as litigation guardian for Mr Erwood and being at risk of an adverse costs order under r 91. For the present we are satisfied that if further proceedings cannot be avoided, the just course will be to continue the appointment of Ms Levy as amicus to ensure that Mr Erwood's interests are properly protected.The jurisdiction of this Court; adjournment of recall application[35] We accept Mr Downing's submission that Mr Erwood's failure to serve the Maxteds with either his recall application or the accompanying papers requires a careful response to avoid injustice to his clients. Equally, we must avoid injustice to Mr Erwood in relation to the non-acceptance of his third appeal. [36] We have decided that we cannot in these circumstances make any substantive decision and will adjourn the hearing of the recall application to a further fixture.The effect of the third notice of appeal[37] But there can be no injustice resulting from the draft order, which we now confirm, declaring that the notice of appeal dated 14 March 2008 against the judgment of the High Court annulling Mr Erwood's adjudication on conditions was duly filed. It is necessary to extend time for service of that notice, as we now do under r 5(2) of the Court of Appeal (Civil) Rules, for 20 working days. The decision whether to reduce or dispense with security is conferred by r 35 of those Rules on the Registrar who will no doubt bear in mind advice from the Official Assignee as to what security may be available.A temporary stay of the orders of this Court of 19 March 2008?[38] On further consideration, we have decided there is no need for a temporary stay of the orders of this Court of 19 March 2008. The future of those orders will depend upon the outcome of the application for a recall.Mrs Harley's proof[39] We are satisfied that the declaration and extension of time referred to in [38] provide this Court with jurisdiction to direct, as we do, a temporary stay of the order of the High Court order of 21 February 2008 annulling Mr Erwood's bankruptcyuntil further order of this Court. This order is made under r 12 Court of Appeal (Civil) Rules. [40] We note the advice of the Official Assignee by his counsel's memorandum of 12 May that at present he can see no useful purpose for a creditors' meeting. The stay on advertising will therefore remain until further order of this Court. But we do raise the question whether that does not risk further delay in payment to the Maxteds of all or part of their undoubted entitlement pending ultimate ascertainment of whether other creditors do exist. We invite the Official Assignee to consider the point. [41] We also note his further advice that the issue as to acceptance or rejection of Mrs Harley's proof of debt can conveniently be resolved by his making a decision under s 89 of the Insolvency Act. [42] We therefore invite the Official Assignee to advise when such decision has been made. At that point, the parties should advise whether a fixture is appropriate to consider a continuation of the stay of the annulment order and for the third appeal (if validly pursued).An application to the High Court?[43] Ms Levy suggests that Mr Erwood has applied to the High Court under s 8(1) of the Insolvency Act to rescind or vary the annulment order made by Associate Judge Christiansen (presumably by deleting the conditions). Mr Carruthers QC, instructed for Mrs Harley, is advised that has not occurred. The point warrants examination; if there has been such application there could be the prospect of yet another appeal to consider. If, on the other hand, Mr Erwood's application is successful, the third appeal may be unnecessary.Appointment as amicus continued[44] As Ms Levy proposes, we continue her appointment as amicus curiae to assist Mr Erwood with logistical and procedural matters and also to assist the Court on legal issues.Costs[45] Costs are reserved.Leave to apply[46] Leave is reserved to all parties to apply for further directions.Solicitors: McFadden McMeeken, Nelson for First Respondent Gibson Sheat, Wellington for Second Respondent Russell McVeagh, Wellington for Mrs Harley Counsel: N Levy, Wellington, as amicus curiae C Carruthers QC, Wellington for Mrs Harley