Bankruptcy no protection against a claim accruing after the period of bankrutpcy

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The decision in the case of Chapman v Weathertight Homes Tribunal & Another concerns a builder that was named as a respondent to Weathertight Homes Tribunal proceedings after his period of bankruptcy came to an end.
It challenges the commonly held perception that a discharged bankrupt gets a “fresh start” after his period of bankruptcy expires.

Facts
Between June 1998 and October 1998, Chapman Builders Ltd was engaged to undertake building work at a residential property in Hillsborough, Auckland. All work was undertaken by the sole director of that company, Mr Chapman.
The house was sold to Mr and Mrs Colaco on May 26, 1999. On November 8, 2000, Mr Chapman was adjudged bankrupt. He was automatically discharged from bankruptcy on November 8, 2003, which had the effect of releasing him from all debts that were provable in his bankruptcy.

In 2005 Mr and Mrs Colaco discovered cracks in the cladding of the building. An assessor’s report was sought via the Department of Building and Housing, and on October 1, 2010, proceedings were issued in the Weathertight Homes Tribunal.
Six respondents were named, but four were able to remove themselves. The claim sought $280,000, being the estimated sum to repair the house from water ingress issues.

Mr Chapman also applied to remove himself from the proceeding. The grounds of his removal application was that any liability that he might otherwise have had was released on his discharge from bankruptcy in November 2003.
This argument was rejected by adjudicator Pezaro, and it was this argument that Mr Chapman specifically brought to the High Court for judicial review.
Mr Chapman’s argument was based on the proposition that a person who is adjudged bankrupt is entitled to a “fresh start”, having had all of his debts extinguished.

The relevant sections of the Insolvency Act 1967 were sections 87, 98 and 114. He submitted that as at the time of his bankruptcy, all elements of the tort of negligence that could be proven against Mr Chapman by Mr and Mrs Colaco were present.
At paragraph 15, Justice Heath considered the two important conflicting policy reasons when deciding this point.

The first was the need to discharge a bankrupt’s existing debts in order for him to make a fresh start untrammelled by past debt, with the converse policy being that a creditor must have sufficient knowledge that facts exist which could justify the issue of proceedings.

He then went on to state:
”In my view, if a claim has not accrued at the time of adjudication (or before discharge, if based on a pre-adjudication obligation), there is no debt of liability for which the putative creditor can prove under
s 87(1).”

He went on to find that as at the time of being made bankrupt or during the course of his period of bankruptcy, a cause of action had not accrued for Mr and Mrs Colaco.
Central to this finding was the fact that cracks in the cladding were not discovered until 2005, after Mr Chapman’s discharge from bankruptcy.
Accordingly, the High Court upheld the adjudicator’s decision that Mr Chapman should not be removed from this proceeding.

This decision will provide discharged bankrupts with less comfort about the reality of a “fresh start” post their period of bankruptcy.
On the authority of this decision, it is now clear that they can still be liable for historic building work where the damage is not manifest (or the cause of action has not accrued), within the period of bankruptcy.

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