M v H - [2024] NZCA 243
Date of Judgment
19 June 2024
Decision
Summary
M, the appellant, and H entered a de facto relationship in 2006. In 2008, they moved into H’s father’s property, which H had inherited in 2009 after his father’s death. M and H occupied the property as their family home, together with their child. In February 2020, M and H separated. M was granted a permanent occupation order that entitled her and the child to occupy the property to the exclusion of H.
Various discussions ensued between M and H about the property. It was suggested that she buy out his half share interest in the property. He asserted at one stage that it was not relationship property. The parties could not reach agreement.
H had relatively minor debts. His estate, principally comprising his interest in the property, was worth considerably more than his debts.
H filed an application to be adjudicated bankrupt on 23 June 2021. The Official Assignee (Assignee) accepted the application and H was adjudicated bankrupt on 30 June 2021.
After the adjudication, the Assignee and M discussed whether she was prepared to pay off H’s creditors and purchase the property. H however refused to agree to such an arrangement.
The Assignee considered that the property had passed to the Assignee in accordance with ss 20A, 20B and 53A of the Property (Relationships) Act and that M’s rights in the property were therefore restricted to her protected interest, being the specified sum of $103,000. The Assignee said it was open to M to purchase the property for its full value less the specified sum. M rejected this proposal and said that H had entered into bankruptcy in order to prevent her from exercising her rights under the Property (Relationships) Act and that the adjudication was therefore an abuse of process.
In May 2022, M applied for H’s bankruptcy to be annulled on the grounds that H was not bankrupt and/or that his bankruptcy amounted to an abuse of process.
In the High Court, Associate Judge Gardiner considered that the issue was whether the bankruptcy was an abuse of process designed to circumvent the Property (Relationships) Act and prevent M from receiving her share of the property. The Associate Judge considered H’s adjudication would be an abuse of process only if the sole reason for the bankruptcy was to circumvent M’s relationship property claims. The Associate Judge concluded that if that was a reason for the adjudication, it was not the only reason. She was not satisfied that the adjudication should be annulled because it was an abuse of process. M’s application was declined. The Associate Judge also held that M should pay costs to H.
M appealed the decision. She argued that the Associate Judge was wrong to hold that the Court had to be satisfied that H’s sole purpose in applying for bankruptcy was to avoid M’s relationship property claim. Rather, M argued that the correct test for whether a bankruptcy should be annulled for abuse of process was whether the improper purpose was the predominant purpose.
H did not participate in the appeal; nor had he participated in the High Court hearing. The Assignee was represented at both hearings and he opposed M’s application and her appeal.
Bankruptcy and insolvency — Official Assignee — Adjudication of bankruptcy — Annulment — Abuse of process
The central issue to be determined on appeal is whether the Associate Judge was right to reject M’s contention that H should not have been adjudicated bankrupt.
In what circumstances have the courts found that annulment should be ordered on the ground that an adjudication should not have occurred?
The courts may annul an adjudication on the ground that it ought not to have been ordered where: there was no jurisdiction to make the order or some procedural error has occurred; the statute is explicit that a debtor‑initiated adjudicated is predicated on the debtor’s insolvency/inability to pay his or her debts and the debtor is not insolvent; the statute is not explicit that a debtor‑initiated adjudication is predicated on the debtor’s insolvency/inability to pay his or her debts and the debtor is not insolvent; notwithstanding a debtor’s insolvency, the application for adjudication was futile because no bankruptcy purpose could, as a matter of fact, be served by the adjudication; or the application for an adjudication was an “abuse of process” in the sense that it was made for an improper purpose, namely a collateral purpose designed to advantage the applicant which is outside the scope of the bankruptcy regime.
Annulment will not be ordered where grounds for annulment exist, but it is likely that a further application for adjudication would be made. Where an applicant for annulment of an order made on a debtor’s petition establishes there is no balance sheet insolvency, the evidential onus shifts to the debtor to establish that nevertheless he or she was unable to pay his or her debts. Even where relevant grounds are made out, the decision to annul remains a matter of discretion.
Does abuse of process continue to be a ground for annulment of a debtor‑initiated adjudication under the Insolvency Act 2006, which provides that such applications are to be filed with the Assignee, not the court?
The principles developed in abuse of process cases continue to pertain where an adjudication is debtor‑initiated under the Insolvency Act. “Abuse of process” is effectively synonymous with “improper process”, a vitiating concept that is not confined to judicial decisions. Further, the literal wording of the Insolvency Act makes it clear that the ability to apply for an annulment on the ground that “the bankrupt should not have been adjudicated bankrupt” is not limited to creditor‑initiated adjudications.
If abuse of process continues to be a ground, should M be granted leave to argue that abuse of process is established where a debtor seeking to be adjudicated bankrupt had a predominant (rather than sole) improper or collateral purpose for doing so?
Counsel for the Assignee submitted that the “predominant purpose” argument was not raised in M’s notice of appeal and leave is therefore required to pursue it. To the extent that leave is required, it should be granted. Whether the test in an application for annulment based on improper purpose requires the alleged purpose to be the sole or predominant one seems a matter of general moment. It would be artificial to exclude consideration of the issue.
Does establishing such a predominant purpose suffice?
An application for adjudication made for an improper or collateral purpose may be annulled even where it is not the petitioner’s sole purpose. “Substantial” purpose is the appropriate benchmark. Substantiality may well be established if, for example, the application for adjudication would not have been made “but for” the collateral purpose. That enquiry naturally invites consideration of the other questions highlighted in the bankruptcy cases, including whether the debtor is, in fact, insolvent and whether bankruptcy is, in the circumstances, futile. There must be evidence capable of establishing the existence of the collateral purpose.
Do the facts establish that H had a potentially vitiating collateral purpose here?
Yes. The obvious inference to be drawn from the interactions between M and H between September 2020 and June 2021 is that H was looking for ways to prevent M from exercising her rights under the Property (Relationships) Act. The evidence shows that H had no genuine fear of insolvency and that, in seeking to be adjudicated bankrupt, his predominant purpose was to circumvent M’s rights under the Property (Relationships) Act. H’s application to be adjudicated bankrupt was an abuse of process and should be annulled.
The appeal is allowed. The order adjudicating H bankrupt is annulled, with effect from the date of adjudication, being 30 June 2021. The High Court order directing M to pay H’s costs in the High Court is set aside and the question of costs is to be reconsidered by the High Court in light of this decision. The respondent is to pay the appellant’s costs on the appeal on a Band A basis for a standard appeal, together with usual disbursements. The Official Assignee’s costs of administration are to be paid by the respondent and may be secured by way of charge over his share of the Property.
Various discussions ensued between M and H about the property. It was suggested that she buy out his half share interest in the property. He asserted at one stage that it was not relationship property. The parties could not reach agreement.
H had relatively minor debts. His estate, principally comprising his interest in the property, was worth considerably more than his debts.
H filed an application to be adjudicated bankrupt on 23 June 2021. The Official Assignee (Assignee) accepted the application and H was adjudicated bankrupt on 30 June 2021.
After the adjudication, the Assignee and M discussed whether she was prepared to pay off H’s creditors and purchase the property. H however refused to agree to such an arrangement.
The Assignee considered that the property had passed to the Assignee in accordance with ss 20A, 20B and 53A of the Property (Relationships) Act and that M’s rights in the property were therefore restricted to her protected interest, being the specified sum of $103,000. The Assignee said it was open to M to purchase the property for its full value less the specified sum. M rejected this proposal and said that H had entered into bankruptcy in order to prevent her from exercising her rights under the Property (Relationships) Act and that the adjudication was therefore an abuse of process.
In May 2022, M applied for H’s bankruptcy to be annulled on the grounds that H was not bankrupt and/or that his bankruptcy amounted to an abuse of process.
In the High Court, Associate Judge Gardiner considered that the issue was whether the bankruptcy was an abuse of process designed to circumvent the Property (Relationships) Act and prevent M from receiving her share of the property. The Associate Judge considered H’s adjudication would be an abuse of process only if the sole reason for the bankruptcy was to circumvent M’s relationship property claims. The Associate Judge concluded that if that was a reason for the adjudication, it was not the only reason. She was not satisfied that the adjudication should be annulled because it was an abuse of process. M’s application was declined. The Associate Judge also held that M should pay costs to H.
M appealed the decision. She argued that the Associate Judge was wrong to hold that the Court had to be satisfied that H’s sole purpose in applying for bankruptcy was to avoid M’s relationship property claim. Rather, M argued that the correct test for whether a bankruptcy should be annulled for abuse of process was whether the improper purpose was the predominant purpose.
H did not participate in the appeal; nor had he participated in the High Court hearing. The Assignee was represented at both hearings and he opposed M’s application and her appeal.
Bankruptcy and insolvency — Official Assignee — Adjudication of bankruptcy — Annulment — Abuse of process
The central issue to be determined on appeal is whether the Associate Judge was right to reject M’s contention that H should not have been adjudicated bankrupt.
In what circumstances have the courts found that annulment should be ordered on the ground that an adjudication should not have occurred?
The courts may annul an adjudication on the ground that it ought not to have been ordered where: there was no jurisdiction to make the order or some procedural error has occurred; the statute is explicit that a debtor‑initiated adjudicated is predicated on the debtor’s insolvency/inability to pay his or her debts and the debtor is not insolvent; the statute is not explicit that a debtor‑initiated adjudication is predicated on the debtor’s insolvency/inability to pay his or her debts and the debtor is not insolvent; notwithstanding a debtor’s insolvency, the application for adjudication was futile because no bankruptcy purpose could, as a matter of fact, be served by the adjudication; or the application for an adjudication was an “abuse of process” in the sense that it was made for an improper purpose, namely a collateral purpose designed to advantage the applicant which is outside the scope of the bankruptcy regime.
Annulment will not be ordered where grounds for annulment exist, but it is likely that a further application for adjudication would be made. Where an applicant for annulment of an order made on a debtor’s petition establishes there is no balance sheet insolvency, the evidential onus shifts to the debtor to establish that nevertheless he or she was unable to pay his or her debts. Even where relevant grounds are made out, the decision to annul remains a matter of discretion.
Does abuse of process continue to be a ground for annulment of a debtor‑initiated adjudication under the Insolvency Act 2006, which provides that such applications are to be filed with the Assignee, not the court?
The principles developed in abuse of process cases continue to pertain where an adjudication is debtor‑initiated under the Insolvency Act. “Abuse of process” is effectively synonymous with “improper process”, a vitiating concept that is not confined to judicial decisions. Further, the literal wording of the Insolvency Act makes it clear that the ability to apply for an annulment on the ground that “the bankrupt should not have been adjudicated bankrupt” is not limited to creditor‑initiated adjudications.
If abuse of process continues to be a ground, should M be granted leave to argue that abuse of process is established where a debtor seeking to be adjudicated bankrupt had a predominant (rather than sole) improper or collateral purpose for doing so?
Counsel for the Assignee submitted that the “predominant purpose” argument was not raised in M’s notice of appeal and leave is therefore required to pursue it. To the extent that leave is required, it should be granted. Whether the test in an application for annulment based on improper purpose requires the alleged purpose to be the sole or predominant one seems a matter of general moment. It would be artificial to exclude consideration of the issue.
Does establishing such a predominant purpose suffice?
An application for adjudication made for an improper or collateral purpose may be annulled even where it is not the petitioner’s sole purpose. “Substantial” purpose is the appropriate benchmark. Substantiality may well be established if, for example, the application for adjudication would not have been made “but for” the collateral purpose. That enquiry naturally invites consideration of the other questions highlighted in the bankruptcy cases, including whether the debtor is, in fact, insolvent and whether bankruptcy is, in the circumstances, futile. There must be evidence capable of establishing the existence of the collateral purpose.
Do the facts establish that H had a potentially vitiating collateral purpose here?
Yes. The obvious inference to be drawn from the interactions between M and H between September 2020 and June 2021 is that H was looking for ways to prevent M from exercising her rights under the Property (Relationships) Act. The evidence shows that H had no genuine fear of insolvency and that, in seeking to be adjudicated bankrupt, his predominant purpose was to circumvent M’s rights under the Property (Relationships) Act. H’s application to be adjudicated bankrupt was an abuse of process and should be annulled.
The appeal is allowed. The order adjudicating H bankrupt is annulled, with effect from the date of adjudication, being 30 June 2021. The High Court order directing M to pay H’s costs in the High Court is set aside and the question of costs is to be reconsidered by the High Court in light of this decision. The respondent is to pay the appellant’s costs on the appeal on a Band A basis for a standard appeal, together with usual disbursements. The Official Assignee’s costs of administration are to be paid by the respondent and may be secured by way of charge over his share of the Property.