Declaring a person bankrupt is a serious action, not only for the person in question but also the Court. Therefore, it is understandable why there are so many considerations to get through before officially adjudicating a person bankrupt.
Typically, a creditor is entitled to an order for adjudication if they have satisfied the requirements under s 13 of the Insolvency Act 2006. Regardless of these requirements, the Court retains discretion whether an order for adjudication is to be made. Section 37 of the Insolvency Act 2006 sets out the instances in which the Court may refuse an application for bankruptcy at its discretion. These are if:
- The creditor has not established the requirements of s 13 of the Insolvency Act 2006; or
- The debtor is able to pay his or her debts; or
- It is just and equitable that the Court does not make an order of adjudication; or
- For any other reason an order of adjudication should not be made.
The onus is on the debtor to show the Court that it should not make an order of adjudication. In considering whether to exercise its discretion, the Court considers not just the interests of those involved, the debtor and the creditor, but also the wider public.
These circumstances where the Court can exercise its discretion to refuse application to bankrupt a person are the subject of this article.
Section 37(a) – Creditor has not established the minimum requirements
The following minimum requirements have to be satisfied under s 13 of the Insolvency Act 2006 before a creditor can apply for the debtor’s adjudication:
- The debtor must owe the creditor a certain amount of money, and the amount owed must be $1,000 or more;
- The debtor has committed an act of bankruptcy within the period of 3 months before the filing of the application; and
- The debt is payable either immediately or at a certain future date.
Sections 17 – 28 of the Insolvency Act 2006 set out various acts of bankruptcy. The most common act of bankruptcy is a failure to comply with a bankruptcy notice issued following the creditor obtaining judgment and/or order against the debtor. Other examples of acts of bankruptcy include (but not limited to) departure by the creditor of New Zealand with intent to defeat creditors, avoidance of creditors, a notice to the creditor that the debtor is about to suspend (or has suspended) payment of the debtor’s debts, and admission of insolvency by the debtor.
If the creditor’s application relies on the act of bankruptcy where the debtor failed to comply with a bankruptcy notice, and the debtor has appealed against the judgment or order forming the basis of the bankruptcy notice, the Court has powers under s 42 of the Insolvency Act 2006 to either refuse or stay application for adjudication.
Additionally, the Court can refuse to adjudicate a debtor with a special status, such as:
- A minor is someone aged under 18. Contracts entered by minors are not enforceable unless there is approval from the Court. Where a minor is the subject of a bankruptcy application (or an adult, but the events in question occurred while the person was a minor) and they have entered into an unfair contract, the minor can dispute the creditor/debtor relationship and on this ground, defend the application. The Court can also enforce a contract on the grounds that it is fair and reasonable to do so, in which case, the minor could be subject to the bankruptcy regime.
- Disabled persons. If a person is suffering from a disability and they are a debtor, they must have a litigation guardian to represent them. People with disabilities are not fully excluded from being classed as debtors, however the Court may refuse an application for bankruptcy if it seems like the person is unable to understand the nature and requirements of the bankruptcy process.
- Foreigners or persons living outside of New Zealand. There is a provision in respect of bankruptcy notices in which said notices must be served in New Zealand unless the Court gives permission for it to be served elsewhere. With cases where the debtor is not residing in New Zealand the factors that the Court takes into consideration include the strength of connection and whether it will be appropriate to hear the application within New Zealand.
Members of Parliament and diplomats. If the debtor is a diplomatic official or a member of Parliament, they may have privileges of diplomatic immunity in civil suits.
This raises the question of whether the debtor has the actual ability to pay their debts, rather than if they are willing to pay their debts but have no funds to do so. The test is whether the debtor is able to pay his or her debts, as opposed to having a positive asset position. As such, showing a positive balance sheet would be insufficient.
In order to succeed under this limb, the debtor must provide sufficient evidence that they are both willing and able to pay off the debt. The Court might consider the debtor’s ability to make an immediate payment, or payment over a period of time. If the Court considers allowing payment over a period of time, the Court must take into consideration the interests of the creditors, how long they have been without the money they are owed and the reasonableness of the proposed payment period.
Debtors may argue that they have a claim against a third party, which after being considered, would bring sufficient funds to repay the creditors. Generally, the existence of the claim by itself, where there is no possibility of it being determined for a while, is not a good ground for the avoidance of adjudication. However, the Court has also commented that in circumstances where the claim seems to be straightforward and it could be resolved in the near term, the Court could exercise its discretion to refuse application for bankruptcy.
Where the Court is not prepared to refuse adjudication but is willing to provide the debtor with additional time to repay the creditors, the Court has jurisdiction under s 38 of the Insolvency Act 2006 to stay application for adjudication for any period the Court thinks appropriate.
Sections 37(c) and (d) – Just and equitable or other reason why order should not be made
The Court takes into account the economic climate, debtor’s age, employment, and prospects of recovery (e.g. through the presence of assets), as well as the overall public interest when an application for refusal of adjudication is considered.
In Re Taylor ex parte Greenwood (1992) 4 NZBLC 102,875, the Court stayed an application for adjudication in circumstances where the debtor had limited job prospects due to his age, had no assets which the Official Assignee could take, found himself in financial difficulty through no fault of his own, and there was no public interest in his adjudication.
However, the Court has since highlighted that each case where similar factors are raised should turn on its own facts. It has been found to be in the public interest to make an adjudication order in similar cases where the debts were greater, there were more creditors, or the debtor found himself in financial difficulty as a result of his own fault.
In Re Aitcheson, ex p BNZ, Salmon J, 9/7/99 HC Auckland B1235/98, the debtor argued that there was a public interest in refusing the application for adjudication as:
- The debt resulted from a personal guarantee given as a director of a company which failed;
- The debtor had no other creditors;
- The debtor has made a reasonable offer to settle;
- The failure of the company was not attributable to the debtor; and
- The bankruptcy would damage the debtor’s reputation in the industry.
While the Court was sympathetic with the debtor, the Court considered there was a public interest in endorsing the commercial importance of holding those who give guarantees to the consequences of their promise. The Court considered that the factors put by the debtor did not outweigh the commercial considerations.
The same view has been upheld in various later decisions. However, in special cases, there could be other factors that could justify the Court exercising its discretion in the context of personal guarantees. For instance, in Re Timmins, ex p Motor Trade Finances Ltd 9/3/99, Master Thomson, HC Wanganui B56/97, adjudication was refused on just and equitable grounds, where the debt was as a result of personal guarantee given as part of requirements for finance for the debtor’s former partner, the former partner had left New Zealand for the USA, the petitioning creditor was the only creditor of the debtor, and the debtor wanted to avoid bankruptcy as she would not be able to continue receiving student loan to finalise her studies. The Court also found that there was no misconduct on the part of the debtor.
The Court could also consider refusing an application for adjudication if the debtor was in such a position of standing in the community that order of bankruptcy would result in excessive stigma and embarrassment. In Re Sellar, ex p Hesketh Henry Solicitors Nominee Co Ltd, Master Kennedy-Grant, 16/3/94 HC Auckland B1621/93, the Court refused to make an adjudication order in circumstances where there was no prospect of recovery in bankruptcy, the debtor was of old age, and due to the nature of his community (the debtor lived in the same community for more than 50 years, has made material contributions to his community and was well known), he would suffer excessive embarrassment.
Loss of employment and future business opportunities could also be relevant considerations. Application for adjudication has previously been refused where adjudication could affect the debtor’s ability to continue being a policewoman, and there was also no public interest in the debtor’s adjudication.
Conclusion
The circumstances which could provide grounds for defending an adjudication application are diverse. In some cases, where the creditor failed to satisfy all pre-requisites to apply for adjudication, it is easier to predict whether the Court would refuse an application for adjudication. In other, especially where defense is based on the ground of public interest, building the case and predicting an outcome can be harder. Our professionals will be able to assist with assessing your position and defending the adjudication application (if necessary).
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Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
Lucia Krajancic
Lucia graduated from Victoria University of Wellington with a Bachelor of Laws and Bachelor of Arts majoring in Criminology and was admitted to the bar in October 2022.
Anna practices in the area of commercial litigation and has appeared as Counsel in the District Court, High Court and the Court of Appeal, having successes in all Courts. Anna has a special interest in corporate, insolvency and relationship property law.