Sued by FM Custodians for debts totalling $803,800, Paddy Hannan defeated attempts to bankrupt him after attacking the manner in which his business interests were handled in receivership.
Mr Hannan had earned the ire of Hutt City Council with landfill operations in Waiu Street, Wainuiomata. Noise and dust upset neighbours. Abatement notices were issued. Criminal prosecutions followed. The Environment Court was called into play. This was not the only legal issue facing Mr Hannan. In 2014, FM Custodians Ltd called up its loan, appointing Auckland chartered accountant Kevin Whitley as receiver of Mr Hannan’s business operations. Mr Hannan had guaranteed the loan. In March 2014, Mr Hannan and his companies were held liable to repay $803,800.
Three years later, FM Custodians attempted to bankrupt Mr Hannan on the unpaid debt. Probably to FM Custodians surprise, Mr Hannan turned up at the bankruptcy hearing. He had not contested its earlier court action demanding $803,800 and he had proved difficult to find for service of bankruptcy proceedings. FM Custodians had eventually served notice by email.
In court, Mr Hannan attacked the manner in which Mr Whitley had carried out the receivership. He alleged company assets should have been sold off earlier. Mr Whitley said costs had been run up dealing with ‘distressed assets’ owned by Mr Hannan’s companies. Getting the Wainuiomata properties into a saleable state required considerable expense including repair of environmental damage and complying with council requisitions for subdivision of the Waiu Street properties. Surveying, engineering and landscaping costs alone ran to $231,700. This on top of receivership fees of $481,100. Included in receivership costs is the sum of $34,300 paid to Mr Hannan in the first few months of the receivership for consulting advice. The original debt plus ongoing costs now run to over two million dollars.
Mr Hannan said eventual sale of his business assets had covered all of the $803,800 guaranteed debt; he should not be bankrupted now for unpaid ongoing costs. Associate judge Smith agreed. Realisations totalling $909,700 were in the receiver’s hands at the time bankruptcy proceedings were started. This more than cleared the debt on which FM Custodians were attempting to bankrupt Mr Hannan. The receiver had not formally elected to allocate these amounts against receivership costs. Mr Hannan was entitled to take advantage of the ‘first in-first out’ rule, Judge Smith said. Realisations were applied first to repayment of the original $803,800 debt. Terms of the $803,800 court judgment were not wide enough to include liability for ongoing costs. Mr Hannan is potentially contractually liable for these costs under terms of his guarantee. FM Custodians has to start again with new legal action against Mr Hannan if it now wants to pursue him for receivership costs, Judge Smith ruled.
FM Custodians Ltd v. Hannan – High Court (17.05.18)
18.108