MURRAY v THE OFFICIAL ASSIGNEE [2014] NZHC 1710

MURRAY v THE OFFICIAL ASSIGNEE [2014] NZHC 1710 [25 July 2014]IN THE HIGH COURT OF NEW ZEALANDWHANGAREI REGISTRYCIV-2014-488-44[2014] NZHC 1710UNDER The Insolvency Act 2006IN THE MATTER of an appeal in terms of s 226 of the Actagainst the decision of Official Assignee,Joanne Basher (file ref 866805 atChristchurch on 12 March 2014 decidingto terminate a no-asset procedureBETWEEN SHELLEY FAY MURRAYAppellantAND THE OFFICIAL ASSIGNEERespondentHearing: 24 June 2014Appearances: A Holgate for the AppellantG Caro for the RespondentJudgment: 25 July 2014JUDGMENT OF ELLIS JThis judgment was delivered by me on Tuesday 25 July 2014 at 10.00 ampursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDate:.Counsel/Solicitors:A Holgate, Barrister, WhangareiC Perry, Matthews Perry Lawyers, Kensington, WhangareiG Caro, Insolvency and Trustee Service, Auckland[1] Ms Murray appeals against a decision made by the Official Assignee on 12 March 2014, terminating the no-asset procedure (NAP) into which Ms Murray had been admitted under s 363 of the Insolvency Act 2006 (the IA).Background: the no asset procedure[2] The NAP did not exist in New Zealand law prior to the enactment of the IA. It is dealt with in Part 5, Sub-part 4 of that Act. The object of the procedure is to"provide another option for individuals with minimal debt and few assets, who have no means to repay the debt".1 It is intended to offer such persons a procedure that is less onerous than bankruptcy.[3] Section 363 of the IA sets out the criteria governing entry to the NAP. It provides that:(1) The Assignee may admit a debtor to the no asset procedure if the Assignee is satisfied on reasonable grounds that –(a) the debtor has no realisable assets; and(b) the debtor has not previously been admitted to the no asset procedure; and(c) the debtor has not previously been adjudicated bankrupt; and(d) the debtor has total debts (excluding any student loan balance) that are not less than $1,000 and not more than $40,000; and(e) under a prescribed means test, the debtor does not have the means of repaying any amount towards those debts.[4] Subsection (2) relevantly provides that the "realisable assets": include any assets (for example, gifted assets) that might be recoverable by the Assignee if the debtor were adjudicated bankrupt on the date of application for entry to the no asset procedure and if the irregular transaction provisions in subpart 7 of Part 3 applied.[5] The effect of Sub-part 7 of Part 3 is stated in s 192(2) to be that:1 Ministry of Economic Development, Draft Insolvency Law Reform Bill: Discussion Document, Wellington, April 2004, at 36. the irregular transactions listed in subsection (1)(a) to (d) may be cancelled on the Assignee's initiative, and that, in appropriate cases, the Assignee may recover property or money from a party to an irregular transaction with the bankrupt.[6] "Irregular transactions" are defined in subs (1) as certain specified transactions undertaken by the bankrupt before adjudication, including "a transaction at undervalue".[7] Transactions at undervalue are dealt with specifically in ss 211 and 212, which provide that the Assignee may recover any inadequacy of consideration in a transaction entered into by the bankrupt in the two year period prior to adjudication, if the bankrupt was unable to pay his or her debts when entering into, or as a result of, the transaction. More specifically, s 211 provides that: the Assignee may recover from a person (X), who is a party to a transaction with the bankrupt, the amount C in the formula A − B = C,where –(a) A is the value that X received from the bankrupt under the transaction; and(b) B is the value (if any) that the bankrupt received from X under the transaction.[8] Under s 364, the Assignee must not admit a debtor to the procedure if he is satisfied on reasonable grounds that:(a) the debtor has concealed assets with the intention of defrauding his or her creditors, for example, by transferring property to a trust; or(b) the debtor has engaged in conduct that would, if [he or she] were adjudicated bankrupt, constitute an offence under this Act; or(c) the debtor has incurred a debt or debts knowing that the debtor does not have the means to repay them; or(d) a creditor intends applying for the debtor's adjudication as a bankrupt and it is likely that the outcome for the creditor if the debtor is adjudicated bankrupt will be materially better than if the debtor is admitted to the no asset procedure.[9] If a debtor has applied to the Assignee for entry to the NAP, the Assignee must as soon as practicable send a summary of the debtor's assets and liabilities to each known creditor of the debtor.2[10] Once a debtor (D) is accepted into the no asset procedure, her creditors (C) must not begin or continue any step to recover or enforce a debt:3(a) that D owes C at the time when D applies for entry to the NAP; and(b) that would be provable in D's bankruptcy if D were adjudicated bankrupt.4[11] Section 372 provides that a debtor's participation in the procedure terminateswhen (inter alia) the Assignee terminates the debtor's participation under s 373. In turn, s 373(1) provides that the Assignee may terminate the debtor's participation inthe procedure if:(a) the debtor was wrongly admitted to the no asset procedure, for example, because the debtor concealed assets or misled the Assignee; or(b) the Assignee is satisfied that the debtor's financial circumstances have changed, enabling the debtor to repay an amount towards his or her debts.[12] Section 376 provides that a creditor who objects to the admission of a debtor to the NAP on the grounds that:(a) the debtor did not meet the criteria for entry to the no asset procedure; or(b) there are reasonable grounds for the Assignee to conclude that the debtor was disqualified under section 364;may apply to Assignee for termination.2 Insolvency Act 2006, s 365.3 Section 369(1).4 A narrow class of debts do, however, remain enforceable: s 369(2).[13] If the Assignee terminates a debtor's participation on the ground that the debtor has concealed assets or misled the Assignee, the Court (on the application of the Assignee) may make an order for the preservation of the debtor's assets pending an application for the debtor's adjudication.5Background: facts[14] In 1999, Waipoua Land Limited (WLL) transferred property at Te Hape Road, Whangarei (the property) to Ms Murray for $142,500. Ms Murray was a director of WLL. Her father was the sole shareholder.[15] The sale and purchase agreement dated 2 April 1999 and signed by Ms Murray and her father (on behalf of WLL) simply stated:This deed records the sale of 38 Te Hape Rd to Shelley Fay Murray at fair market value.Purchase price $142,500.00 Deposit $ 40,000.00 Balance $102,500.00 Interest rate for late payment 10% from settlement dateThe parties agree that the balance of the purchase price shall be on demand regarding interest and principle [sic].[16] The $40,000 deposit was funded by a mortgage obtained by Ms Murray from ANZ. Over the next 10 years or so it seems that Ms Murray reduced the mortgage amount somewhat, but she says that in 2012 she began missing payments. There was, however, no independent documentary evidence provided to support that contention.[17] In 2012 (or possibly earlier) Ms Murray engaged the services of Hammonds Law (Hammonds), a firm of solicitors in Dargaville in relation to a relationship property dispute. Hammonds rendered their final account on 31 October 2012. Ms Murray disputed the bill and refused to pay. Then:(a) on 15 November 2012, Hammonds issued a demand for payment;5 Section 374.(b) on the same day, Ms Murray's father sent Ms Murray a letter (onbehalf of WLL) which stated:We hereby demand from you interest and principle [sic] owing to Waipoua Land LTD on the above property as contained in our agreement of 2nd April 1999.(c) on 6 December 2012, Ms Murray transferred the property back to WLL;(d) since that time Ms Murray has continued to live at the property and to pay rent of $200 per week to WLL;(e) on 5 April 2013, the Disputes Tribunal ordered Ms Murray to pay Hammonds $5,433.25. She appealed unsuccessfully from this decision;(f) on 6 December 2013, Ms Murray received $40,000 from WLL;(g) on 7 December 2013, she repaid the bank $33,900.60 to discharge the mortgage;(h) on 13 December 2013, Hammonds served Ms Murray with a bankruptcy notice;(i) on 16 December 2013, Ms Murray applied for entry into the NAP.[18] As part of the NAP application process, Ms Murray filled out a formal Statement of Affairs. One of the questions asked in the standard form was:In the past 5 years have you sold, transferred or given away any assets worth more than $5000? Eg property, motor vehicles, livestock, cash etc.[19] Ms Murray answered this question "No".[20] On 18 December 2013 the Assignee wrote to Ms Murray saying that a Companies Office search had revealed that she had a potential involvement in WLLand noting that there had been no reference to the company in her Statement of Affairs. Ms Murray replied that she: purchased 38 Te Hape Road from Waipoua Land Ltd with a 40,000deposit from ANZ Bank. The balance of the purchase price and interest was on DEMAND. Because [Ms Murray] did not manage to pay off the loan from ANZ, Waipoua Land Ltd then demanded interest and principal from [Ms Murray] and Repossessed the house. [Ms Murray] now rents the house from Waipoua Land Ltd.[21] Further questions followed, to which Ms Murray's response was recorded by the Assignee as follows:The 2 directors of the company are [Ms Murray] and her Dad. Assets of the company are a farm and a house, [Ms Murray] attempted to purchase the house from the company but could not pay the loan, the bank were going to repossess the house but the company stepped in and recalled the house on demand, the company then repaid the loan to the bank, [Ms Murray] does not have to repay the company.[22] In a further questionnaire completed by Ms Murray's father (on behalf of WLL), and in answer to the question "Does the Company owe the debtor any money?" he ticked "no".[23] On 21 January 2014 Ms Murray was admitted to the NAP.[24] On 3 February 2014 Hammonds filed an application to object to Ms Murray'sadmission to the NAP on the grounds that the firm knew that the property had been purchased by Ms Murray for $142,500 but, when it was transferred back to WLL, its market value was $310,000. Accordingly, Hammonds advised that it was not satisfied that the transfer was for value or (given that Ms Murray was, at the relevant time, both the vendor and a director of WLL) that it was bona fide.[25] The Assignee investigated further. On 12 March 2014 she terminated Ms Murray's participation in the NAP on the basis that she was "wrongly admitted" tothe procedure (s 373(1)(a)). In the formal notice of termination the Assignee said:I have decided ... you were wrongly admitted on the grounds that there isevidence in my view that an irregular transaction occurred with the transfer of the house property at under value within two years of entering into the Procedure and this warrants investigation. This transaction disqualified youfrom entering into the No Assets Procedure and also meant in my opinion, that you had a realisable asset available to benefit creditors.The appeal[26] Ms Murray's appeal is brought under s 226 of the IA, which relevantly provides:(1) A person (including the bankrupt or a creditor) whose interests, monetary or otherwise, are detrimentally affected by an act or decision to which this section applies may apply to the Court to reverse or modify the act or decision.(2) This section applies to -(a) an act or decision of the Assignee;......(4) The Court may confirm, reverse, or modify the act or decision....[27] The proper approach to an appeal under this section is not entirely settled.[28] The Court of Appeal in Glynbrook 2001 Ltd v Official Assignee, stated that:6When considering the question of the standard of review under s 86 [of the Insolvency Act 1967 (now s 226)], it is necessary to distinguish between the discretionary powers of the High Court under s 86 to confirm, reverse ormodify the Official Assignee's act or decision and to make such order as itthinks fit and the nature of the statutory provisions under which the Official Assignee acted or decided. This distinction is important because the standard of review by the High Court will depend on whether or not the Official Assignee was making a decision that is subject to a general right of appeal or exercising a discretionary statutory power, which is subject to a more limited right of appeal.(Footnotes omitted)[29] Section 373(1) states that "The Assignee may terminate" and thus appearson its face to involve the exercise of a discretion. If that is so, then in accordance with (inter alia) Kacem v Bashir an appellant must show that the Assignee:76 Glynbrook 2001 Ltd v Official Assignee [2012] NZCA 289 at [84].7 Kacem v Bashir [2010] NZSC 112 at [32] citing May v May (1982) 1 NZFLR 165 (CA) at 170 and Blackstone v Blackstone [2008] NZCA 312, (2008) PRNZ 40 at [8].(a) Made an error of law or principle;(b) Taken into account irrelevant considerations;(c) Failed to take into account relevant considerations; or(d) Made a plainly wrong decision.[30] But in Re Girkins, the only other decision to date involving an appeal fromthe Assignee's decision under s 373, Allan J stated:8Although the opening words of s 373(1) are permissive in character — "TheAssignee may " – the Assignee is plainly under a duty to terminate where a debtor is wrongly admitted because debts were understated. The scheme of the Act would be subverted if the Assignee exercised his discretion in favour of the debtor in such circumstances.[31] At [19] he stated:Although there is something of a divergence of views in cases involving appeals under the Insolvency Act 1967, the better view in my opinion is that the Court must make its own assessment, but is entitled to pay due regard to the decision of the Assignee and to take into account the Assignee's functions and the overall scheme of the legislation.[32] I respectfully agree, and proceed on that basis.Discussion[33] As advised in her notice of 12 March 2014, the Assignee says that termination was required by s 373(1)(a) because Ms Murray was wrongly admitted to the NAP because she had a realisable asset at the time she applied for entry into the procedure.9 That "asset" is said to be the inadequacy of the consideration received for the transfer of the property by Ms Murray to WLL in December 2012.[34] For the Assignee, Mr Caro submitted that such inadequacy is a "realisableasset" under s 363(2) because it might have been recoverable by the Assignee under the provisions of Part 3, Sub-part 7 if Ms Murray had been adjudicated bankrupt on8 Re Gifkins HC Auckland CIV-2009-404-281, 25 May 2009 at [35].9 Contrary to s 363(1)(a).the date of her application for entry to the NAP. That submission was based on theAssignee's power under ss 211 and 212 to recover money or property from a party to an irregular transaction (here, the transfer of the property at undervalue) entered into by a bankrupt in the two year period prior to adjudication.10[35] In the present case, Ms Murray applied for entry into the NAP on 16 December 2013. The transfer of the property to WLL in December 2012 is thus squarely within that two year period.[36] In December 2012, the property was valued at $310,000. WLL paid $40,000 to Ms Murray. The company was owed $102,500 from the 1999 agreement. The Assignee says that, in terms of the s 211 formula,11 the inadequacy of the consideration is to be calculated thus:A:$310,000 – B:($40,000 + 102,500) = C:$167,500.[37] Mr Holgate for Ms Murray submitted, however, that the 1999 agreement also provided for 10 per cent interest on the $102,500, which was payable on demand, from the date of the agreement. He said demand was made by WLL on 15 November 2012 and that any calculation of inadequacy therefore needs to take interest into account. Using Ms Murray's interest calculation, which involved applying a (non-compounding) 10 per cent interest rate from the date of the 1999 agreement to the date of transfer back, the s 211 formula would look like this:A:$310,000 – B:($40,000 + $102,500 + $140,118.41) = C:$27,381.59[38] As Mr Caro pointed out, the consideration paid by WLL remains at least marginally inadequate, even under this calculation. But in light of the dispute it is, I think, necessary for me to determine whether interest was payable under the 1999 agreement at all.[39] There can be little doubt that the agreement is poorly worded. I have set it out in full at [15] above. While it refers to an interest rate of 10 per cent for "late10 If the bankrupt was unable to pay his or her debts when entering into, or as a result of, the transaction.11 See [7] above.payment" it does not say whether it is simple or compound interest that is payable. And in terms of when payment of the principal is actually due, it says that "thebalance of the purchase price shall be on demand regarding interest and principle".It can reasonably be assumed that the word "payable" should be inserted between the words "be" and "on".[40] I consider that the most straightforward reading of the agreement is that the principal is payable on demand and that if (after receiving such a demand) payment is made late, interest will run.[41] I accept that there is another possible interpretation of the agreement. That interpretation is that the balance of $102,500 was due on settlement date and that anypayment made after that date was "late". The effect of that would be that 10 per centinterest on the principal amount would run from the date of settlement but was payable only on the making of a demand (for payment of both the interest and the principal). But I do not favour this interpretation, for the reasons that follow.[42] First, I consider the former interpretation (see [40] above) is more consistent with the literal words of the agreement.[43] Secondly, the idea inherent in the alternative interpretation - that the principal was somehow "due" on settlement but "payable" only on demand - seems to me to be contradictory. Nor is the date of settlement specified in the agreement.[44] Thirdly, the 1999 transaction did not involve an arms' length agreement, between unrelated parties. If it had been, then I accept that it might reasonably be expected that the parties would have provided for interest to be payable. But as I have said, Ms Murray was a director of WLL at the time of the original transfer. The other director was her father. In those circumstances it seems to me to be objectively quite plausible that the company agreed to forego interest all together unless and until a demand was made and not met.[45] The difficulties created by the opaque wording of the 1999 agreement are further compounded by the terms of the 15 November 2012 letter from WLL which,while purporting to demand the payment of the "interest and principle owing" underthe agreement, does not specify:(a) the amount of interest owing (if any); or(b) the date by which payment was to be made.[46] As regards the latter point, I have concluded above that the agreement provides that interest was only payable in the event of late payment. Given the absence (from both the agreement and the demand) of any specified due date, it is difficult to see how payment can ever be said to have been late. And if it were necessary to imply into the demand a reasonable time for payment to be made, the reality is that Ms Murray had transferred the property back to the company in less than three weeks from receiving the demand.12[47] In short, therefore, I do not consider that the 1999 agreement can sensibly be read as requiring interest to be paid at 10 per cent absent a triggering "late payment". And, even if a reasonable due date were to be implied into the demand, there was no relevant lateness. The calculation set out at [36] above therefore applies and the inadequacy of the consideration paid for the 2012 transfer is therefore prima facie a realisable asset.13[48] Mr Holgate nonetheless submitted that there was no realisable asset because,in reality, there was no "equity" arising from the sale of the property to WLL. More specifically, he said that there was no such equity because:(a) it was unlikely that the property would have fetched $310,000 if there was a forced sale; and12 Both Ms Murray and her father (for WLL) appear to have regarded that transfer as constituting payment. In light of the amount of money at issue it would not, in my view, be reasonable to imply that payment was required immediately. Any assessment of a reasonable due date would need to take into account the time it would take Ms Murray to raise the money or to effect a transfer back.13 I also accept Mr Caro's submission that for there to be a "realisable asset" as defined in s 363(2)the Assignee need only be satisfied that the asset "might be recoverable by the Assignee" notthat she would, in fact, be able to recover it.(b) after the "sale" back to WLL, Ms Murray rented the property from the company at less than market rental ($200 per week).[49] As to the first matter, Ms Murray has provided no independent evidence that some kind of forced sale was imminent or, indeed, at whose instigation such a sale might have taken place. I consider it most unlikely that WLL/her father would have exercised any mortgagee rights. And, as I have said, Ms Murray did not provide evidence from ANZ of any default by her, let alone evidence of threatened mortgagee action by the bank. One would expect such evidence to have been readily available, if it had existed. Nor was evidence placed before the Court as to what price would likely be achieved had the property gone to market (on either a forced or unforced basis).[50] As to the second matter, Mr Caro pointed out that Ms Murray has also provided no independent evidence of what the market rental for the property would be. She merely deposes that it "would be" $390 per week (which she says has resulted in a benefit to her of $14,440, which continues to increase). Mr Caro also said that, in any event, s 211 does not provide for post-transaction set-offs of this kind. Again, I can only agree with both these submissions.[51] Added to all of the above is the shadow cast over Ms Murray's position bythe timing of WLL's demand (namely the same day that Hammonds issued their own demand) and Ms Murray's non-disclosure of the transfer in her Statement of Affairs. Had it simply been a matter of non-disclosure I might have been minded to acceptMr Holgate's submission that the filling out of such forms is difficult for laypersons,although the question asked in this case seems to me to have been a very clear one. Coupled with the timing of the transfer, however, Ms Murray's non-disclosure necessarily raises doubts about her bona fides.[52] On balance, therefore, I consider that the Assignee was correct to conclude that Ms Murray was wrongly admitted to the NAP on the grounds that she had a realisable asset.[53] In case I am wrong in that, however, I also record that I consider Ms Murray was disqualified under s 364 from admission into the NAP on two other grounds advanced by Mr Caro, namely that:(a) in terms of s 364(a), there are reasonable grounds for concluding that Ms Murray concealed assets with the intention of defrauding her creditors (ie Hammonds); and(b) in terms of s 364(d), there were reasonable grounds for concludingthat Hammonds intended applying for Ms Murray's adjudication and, in the event of her adjudication, it was likely that the outcome for Hammonds would be materially better than if she had been admitted to the NAP.[54] As to s 364(a), I consider that Ms Murray's transfer of the property back toWLL at under-value constituted "concealing" that asset and that, in effecting the transfer, Ms Murray intended to "defraud" Hammonds. In that respect I accept MrCaro's submission that the existence of such an intent in the present context should be determined in accordance with the dicta of the Supreme Court said in Regal Castings Ltd v Lightbody.14 As the Court made clear in that case the appropriate test is whether Ms Murray must have known that, in alienating property, and thereby hindering or defeating Hammonds' recourse to it, she was exposing them to a significantly enhanced risk of not recovering the amount owing to them.15[55] In the present case:(a) the timing of the transfer; and(b) the non-arms length nature of the transfer; and(c) the inadequacy of the consideration for the transfer; and14 Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433.15 There is, of course, no basis for Ms Murray or her father to contend that WLL was an innocent third party.(d) the subsequent non-disclosure of the transfer to the Assignee;all support the conclusion that Ms Murray had the requisite knowledge.16[56] As far as s 364(d) is concerned the evidence is clear that Hammonds intended to apply for Ms Murray's adjudication immediately prior to her application for entry into the no assets procedure. It is also clear that had bankruptcy been pursued the outcome for Hammonds would have been "materially better" than it would be under the NAP. As Mr Caro said, Ms Murray's other debts totalled approximately $11,500, so if the inadequacy of consideration for the transfer can be recovered, Hammonds would be likely be paid in full.[57] Mr Holgate submitted that any "materially better" assessment would need totake into account:(a) the Assignee's costs in administering Ms Murray's estate;(b) the costs of investigating the transfer (which might include examination under oath); and(c) The cost of any proceeding to undo the undervalue transaction (if such could be proved).[58] He said that after taking into account those costs (which were not the subject of evidence), it could not therefore be said with any certainty that there would in fact be funds left for Hammonds. He said that Hammonds bore (and has not discharged) an onus to prove that they would have been materially better off had adjudication proceeded.[59] I do not accept that submission. Hammonds' role in the present matter is toapply to the Assignee for termination under s 376 on one of the two groundsspecified in that section. Obviously, it is in Hammonds' interest to provide to the16 Mr Holgate's submission that the transfer of the property to the company took place nearly a year before the bankruptcy notice was served is, with respect, facile. Ms Murray was fully aware that Hammonds was pursuing the debt at the time the transfer was effected.Assignee as much information as possible in support of the application. But the relevant termination decision is ultimately made by the Assignee under s 373 and such a decision will only be made if the Assignee is satisfied of the matters there set out. Those points seem to me also to be reflected in the fact that Hammonds are not a party to this appeal.[60] Accordingly, and in the absence of evidence to the contrary, it can reasonably be assumed that the Assignee has taken into account the costs of the sort referred to by Mr Holgate. I record in that respect that Mr Caro also submitted Hammonds would receive priority for any funding of the Assignee to commence s 211 proceedings, and that Hammonds' debt would be prioritised under s 274(1)(c).[61] More importantly, however, in light of what I consider to be the appropriate approach in this appeal (as to which see [26] to [32] above) it is now for this Court to make its own assessment of whether termination is warranted. And for all the reasons I have already given, my assessment is that termination of the NAP was thecorrect decision in Ms Murray's case. As I have said, Hammonds were not a party to this appeal and, in my view, were under no obligation to prove anything either to the Assignee or to this Court.[62] For the reasons I have given, I consider that the Assignee was right toterminate the NAP in Ms Murray's case. The appeal is dismissed accordingly. 2B costs should follow the event in the usual way.____________________Rebecca Ellis J