HKE AL SAFFAF AND C SIEW & ANOR HC AK CIV2006-404-1164

HKE AL SAFFAF AND C SIEW & ANOR HC AK CIV2006-404-1164 21 June 2006IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV2006-404-1164IN THE MATTER OF the Insolvency Act 1967 AND IN THE MATTER OF The bankruptcy of HUSAIN KHALIL EBRAHIM Al SAFFAF CINDY SIEW-LI YEOH C/- LEVEL 6, 48 GREYS AVE AUCKLAND, COMPANY DIERCTOR AND COSMOS FARMS LIMITED (FORMERLY AMITA ENTERPRISE LIMITED) Judgment Creditors AND HUSAIN KHALIL EBRAHIM AL SAFFAF Judgment Debtor Hearing: 16 June 2006 Appearances: G P Blanchard for Judgment Creditors G W Hall for Judgment Debtor Judgment: 21 June 2006 at 4:45 pmJUDGMENT OF ASSOCIATE JUDGE JP DOOGUESolicitors: Kensington Swan, Private Bag 92101, Auckland Buddle Findlay, PO Box 1433, Auckland[1] The judgment creditors and the judgment debtor were respectively plaintiffs and defendant in proceedings which were heard by Asher J in 2005 and which were followed by a judgment dated 8 November 2005. Subsequently His Honour delivered a further judgment on matters of quantum on 17 February 2006. The result was that judgment was entered for an amount in excess of $2.6 million against the judgment debtor. A bankruptcy notice was served on the judgment debtor on 21 March 2006 requiring payment of $2,655,045.42. That notice was dated 7 March 2006. The judgment creditors allege that it has not been complied with and the judgment debtor does not deny that. On 25 May 2006 the judgment creditors issued a creditors' petition which was duly served on Mr Al Saffaf. [2] On 4 April 2006 the judgment debtor filed a Notice of Application for an order staying bankruptcy proceedings. In the grounds set out in the Notice of Interlocutory Application the judgment debtor stated that the application was made on the following grounds:(b) The judgment debtor has appealed the judgments to the Court of Appeal; (c) The judgment debtor's appeal is brought bona fide and will be heard on 2 and 3 August 2006. (d) There are strong arguments in favour of the judgment debtor's appeal of the judgments; (e) In the absence of a stay the judgment debtor will suffer serious or irreparable loss as a result of being adjudicated bankrupt so that any benefit that the judgment debtor may derive from a successful appeal would be likely to be rendered nugatory. (f) If a stay is granted the judgment creditors will not be injuriously affected; (g) It is just and equitable to grant a stay.[3] The judgment debtor filed an appeal against the first judgment in the Court of Appeal. It was dated 1 December 2005. A second Notice of Appeal dated 15 March 2006 against the second judgment followed. [4] In the course of the first judgment, Asher J made express findings of credibility before rejecting the judgment debtor's account of matters. The Notice of[5] Appeal against the first judgment does not expressly say so, but it seems apparent that if the judgment debtor is to be successful on the appeal it will be necessary for him to demonstrate that Asher J's findings on credibility were wrong and that his conclusions of fact were also wrong. As well there maybe legal arguments including the approach taken to circumstances in which cancellation was available and certain issues relating to contractual mistake. [6] The appeal has been set down for hearing in the Court of Appeal on 2 and 3 August 2006, some six weeks away. Most of the steps required for the matter to be got ready for hearing have been concluded. It remains for the parties to prepare their legal submissions.Legal principles[7] Mr Hall submitted to me that the Court has an unfettered discretion to stay a bankruptcy proceeding on such terms as it considers appropriate.Statute[8] Under s 26(4) of the Insolvency Act 1967, the Court has a discretion to stay or dismiss a creditor's petition that is based on an act of bankruptcy arising out of a failure to comply with a bankruptcy notice based on a judgment debt, on the ground that an appeal is pending from that judgment. [9] Section 26(4) states:(4) When the act of bankruptcy relied on is that specified in paragraph (d) or paragraph (k) of subsection (1) of section 19 of this Act, the Court may, if it thinks fit, stay or dismiss the petition on the ground that an appeal is pending from the judgment or order.[10] Section 19(d) of the Insolvency Act provides that a debtor has committed an act of bankruptcy if:(d) a creditor has obtained a final judgment or final order against the debtor for any amount, and, execution thereon not having been stayed, the debtor has served on him in New Zealand, or, by leave of the Court, elsewhere, a bankruptcy notice under this Act, and he does not, within 14days after the service of the notice in a case where the service is effected in New Zealand, and in a case where the service is effected elsewhere then within the time limited in that behalf by the order giving leave to effect the service, either comply with the requirements of the notice or satisfy the Court that he has a counterclaim, set-off, or cross demand which equals or exceeds the amount of the judgment debt or sum ordered to be paid, and which he could not set up in the action in which the judgment was obtained, or the proceedings in which the order was obtained.[11] Further, under s 26(7), the Court may at any time make an order staying the proceedings under a creditor's petition, for such time and on such terms and subject to such conditions as the Court thinks fit.Authorities[12] Mr Hall referred me to the following principles and supporting authorities that he said the Courts have taken into account when exercising the discretion to stay a bankruptcy proceeding pending an appeal. Mr Blanchard said he agreed with Mr Hall's submissions concerning the applicable law and principles. I, too, accept Mr Hall's submissions. [13] The first matter is the bona fides of the judgment debtor in prosecuting the pending appeal: BNZ v Leishman (HC Wellington, CP 362/91, B 137/92, 21 May 1992, Master Williams QC); Wallace v McDermott (HC, Wellington, CIV-2003- 485-2140, 15 March 2004, Master Gendall); NZI Finance Ltd v Julian (HC, Auckland, CP 2877/88, 31 July 1989, Hillyer J); Re Frykberg ex parte Phipps (HC Auckland, B1452/93, 28 October 1993, Master Kennedy-Grant). [14] In Spratt & McKenzie law of insolvency (2 nd ed, 1972) the commentary suggests (at paragraph 26/8) that:where the appeal is bona fide, the usual order should be to stay the petition generally, with liberty to apply, and where it is evidently frivolous, the adjudication should be made: Ex parte Heyworth, Re Rhodes (1884) QBD 49, Re Flatau, Ex parte Scotch Whisky Distillers Limited (1888) 22 QBD 83"[15] Mr Hall also submitted that the merits of the appeal are not generally an appropriate matter for the Court to contemplate unless it considers that the appeal has absolutely no prospect of success: see for example Timaru Herald Company Ltdv Henderson (HC Christchurch, A 74-85, 17 October 1986, Hollland J) in which Holland J noted:Likewise, I do not consider that the merits of the appeal is an appropriate matter for this Court to comment on other than to record that it has not been established that the defendant cannot possibly succeed on the appeal.[16] Mr Hall said that although that comment arose in the context of an application for the stay of execution of a judgment where an appeal was pending from that judgment, it is equally relevant to the stay of bankruptcy proceedings when an appeal is pending. [17] The next issue is whether the stay of the proceeding would unduly prejudice the judgment creditor: Blair Wright Limited v Marshall (HC, Auckland, CP 557/90, 22 November 1991, Barker J); Newmans Tours v Rainier Investments Ltd (HC, Auckland, CL 67/89, 14 April 1992, Barker J). In Blair Wright, the Court noted (at page 3):[the defendant deposed he had no assets]. If the defendant's affidavit is correct, I cannot see how the plaintiffs are going to be greatly prejudiced by the delay caused by the appeal, provided the appeal is prosecuted promptly. This is the only judgment debt of the defendant and bankruptcy could render the appeal nugatory.[18] In Blair Wright, the Court ordered a stay of any bankruptcy proceeding pending the determination of the appeal on the condition that the appeal was set down within a certain time. [19] The court also considers what stage the appeal has reached and whether there has been delay in prosecuting the appeal: BNZ v Leishman; Newmans Tours Ltd v Rainier Investments Limited; Wallace v McDermott. [20] As well, the court examines whether bankruptcy proceeding may render the appeal nugatory as the judgment debtor will be unable to prosecute the appeal:Newmans Tours Ltd v Rainier Investments Ltd; NZI Finance Ltd v Julian;McLaughlin v Nottingham (HC Gisborne, CP 27/88, 7 July 1989, Robertson J); Blair Wright v Marshall; Tilley v Resin Weld New Zealand Limited & Anor (HC Auckland, CP 117/90, 22 August 1990, Sinclair J).[21] In Newmans Tours Ltd v Rainier Investments Ltd Baker J said at 5:.The normal situation in a case of this nature is to allow a party to exercise a right of appeal where failure to order a stay would in practical terms render an appeal nugatory." (Rainier Investments, at page 5)[22] Sinclair J said in Tilley v Resin Weld New Zealand said at 7:"While I acknowledge that the financial information is not all that it should have been, I am of the view that sufficient has been placed before the Court to satisfy it that if execution did take place, thenthe second defendant will probably be declared bankrupt. That then would render the appeal nugatory.(Tilly v Marshall, page 7).Application Of Principles To The Present Case[23] Applying the principles set out above, I am not able to conclude that the appeal is not bona fide. Certainly, the judgment debtor may well have real problems in attacking the finding of fact made by the Judge and his findings on credibility. On the other hand, it is not clear to me that the judgment debtor can only succeed by taking the route of attacking the Judge's factual findings. As I have noted there are legal issues pleaded by the judgment debtor on his appeal as well. [24] The next matter I examine is whether a grant of a stay of proceedings would unduly prejudice the judgment creditor. This case is similar to the matter of Blair Wright referred to above. The judgment debtor's statement of financial position shows assets of $1,560 and liabilities of $1,416,900.86. [25] I interpolate that one of the items that is included in the list of liabilities is a sum of $685,000 which apparently is part of the amount which Asher J adjudged the judgment debtor to owe one of the judgment creditors. It is unclear why only part of the liability to the judgment creditors in terms of the judgment was included in the statement of financial position. [26] But for present purposes it is sufficient to note that Mr Al Saffaf is unable to pay the judgment debt as it currently stands and has no assets or income of any significance. Therefore, there is no prejudice to the judgment creditors if the appealis heard and ultimately fails, as Mr Al Saffaf has no assets which could be disposed of in the interim period, to the detriment of the judgment creditor's judgment debt. [27] Mr Blanchard submitted that relevant prejudice could be caused to the judgment creditors because of the delay that the appeal will cause. While the hearing might only be six weeks away it is unlikely a judgment will come out immediately. He said that such delays may well prevent the Official Assignee from attacking transactions under the provisions of ss 54 - 58 of the Insolvency Act. [28] The next matter that I consider is whether or not allowing the bankruptcy proceedings to proceed would render the judgment debtor's appeal rights nugatory. [29] Mr Blanchard said that the judgment debtor cannot rely upon this ground because the rights that the judgment debtor is purporting to exercise on appeal are valueless. This really amounted to a re-statement of Mr Blanchard's submission that the judgment debtor has little prospect of success on appeal. [30] Mr Blanchard said that even allowing for successful appeals on all the matters that the judgment debtor raises, he will still owe $150,000 to the judgment creditors. He cannot pay those amounts and execution by way of bankruptcy is inevitable. [31] Mr Blanchard also pointed to the contents of the affidavit of Mr Rollason who is the managing director of a company called Structured Finance (NZ) Limited ("SFL"). SFL provided finance for the development of the Crescent Road, Parnell property to Mr Al Saffaf's company, Dilmon Holdings Limited. He said that Mr Al Saffaf gave an unconditional guarantee of the loan obligations of Dilmon. He said that Dilmon is likely to be wound-up shortly. He did not expressly say in his affidavit what, if anything, could possibly be recovered from Dilmon in a liquidation. He said that Dilmon will probably end up owing SFL $2,165,378.82. Mr Hall pointed out that that is the amount that SFL claims but there has not been a judgment entered for such sum.[32] It is relevant to note, in connection with the SFL claim, that the judgment debtor did not mention this liability, even as a contingent liability, in the affidavit material which he placed before the Court. Mr Hall said that no harm was done because the judgment creditors knew about the liability and it had been the subject of evidence in the proceedings before Asher J. [33] With respect to Mr Hall, I do not regard that as an adequate explanation for the judgment debtor failing to make disclosure of this liability in the application that he filed. The judgment debtor seeks to have a discretion exercised in his favour and persons in that position do not help themselves by being less than completely candid about their financial circumstances. [34] One or two other matters were mentioned by counsel. These included the possibility of a payment being made into Court by Mr Al Saffaf ahead of the hearing of the appeal. I accept, though, that were any substantial figure ordered to be paid into Court that would exhaust the judgment resources and his appeal would not proceed. [35] Mr Hall submitted to me that in the circumstances it was just and equitable for the stay of bankruptcy proceeding to be granted pending the determination of the appeals.Decision[36] The judgment debtor is not entitled to a stay as of right. The Court's decision is a discretionary one. In considering whether there it is just and equitable to make an order for stay, all the circumstances, and not just the interests of the judgment debtor, must be considered. [37] Even on the basis of the debtor's own figures, and excluding the sums for which judgment has been entered, his liabilities exceed his assets by some $730,000. If the SFL contingent liability is added, the debtor's net indebtedness is in excess of $2,800,000.[38] I consider that Mr Blanchard is correct when he says that it is inevitable that the judgment debtor will be bankrupted. The judgment debtor does not assert that any of his creditors have agreed to give him respite. [39] I also agree that even after taking the most optimistic view of the judgment debtor' prospects on appeal, a decision in his favour will do no more than cancel out his indebtedness to the judgment creditors. [40] I must also record my disapproval of the judgment debtor's lack of candour about the SFL debt. [41] I do not consider, either, that it is in the interests of justice to defer the hearing of his bankruptcy petition for a period that could stretch out for some months after the hearing of the appeal in August - given the Court of Appeal's workload. [42] For all of those reasons, I am not prepared to grant the judgment debtor's application. It is dismissed. The judgment debtor shall pay costs on a 2B basis plus disbursements as fixed by the Registrar. ________________________________ J P Doogue Associate Judge