APG Holdings (in Liq) v Wilson HC Auckland CIV 2010-404-1216

[2010] NZHC 1310

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-001216

BETWEEN  APG HOLDINGS (IN LIQUIDATION) First Plaintiff

ANDDAVID MURRAY BLANCHETT & GRANT EDWARD BURNS

Second Plaintiffs

ANDRITA WILSON Defendant

Hearing:         12 July 2010

Appearances: M D Branch and S Rawcliffe for Plaintiff

L Herzog for Defendant

Judgment:      15 July 2010 at 3:30 pm

JUDGMENT OF ASSOCIATE JUDGE BELL

This judgment was delivered by me on 15 July 2010 at 3:30 pm pursuant to Rule 11.5 of the High Court Rules. Registrar/Deputy Registrar

Date: ………………….

Solicitors/Counsel:

Harkness Henry, Private Bag 3077, Waikato Mail Centre, Hamilton

Quinn Law, PO Box 25-608, St Heliers, Auckland

L Herzog, PO Box 1001, Shortland Street, Auckland

APG HOLDINGS (IN LIQUIDATION) V R WILSON HC AK CIV-2010-404-001216  15 July 2010

[1]      This is an application for summary judgment claiming $1,081,097.53.  The statement of claim in the proceeding has two causes of action.  The first is a claim under contract for repayment of funds advanced.   The second is a cause of action under s 298(2) of the Companies Act 1993.

[2]      At first, APG Holdings Ltd (in liquidation) was the only plaintiff. Where a claim  is  made  under  s  298  of  the  Companies  Act,  the  proper  claimant  is  the liquidator rather than the company in liquidation.  The liquidators therefore applied to be joined as co-plaintiffs.    Mr Herzog did not strongly oppose.   I see no good reason for refusing joinder.  David Murray Blanchett and Grant Edward Burns are joined as second plaintiffs.

[3]      APG Holdings  went into liquidation on 9 February 2007 by shareholder resolution.  It had formerly been called Capital Events Ltd but changed its name in September 2006.  The liquidators have investigated the accounts of the company and have found that between March 2004 and July 2006, the company made a number of payments to the defendant totalling $1,081,097.53.   The details of these payments are recorded in paragraph 7 of the amended statement of claim.  The defendant does not dispute  that  she  received  the  payments.  The  plaintiffs  seek  recovery of  the payments.

[4]      The defendant is the daughter of Ranjit Keshvara.   He was director of the plaintiff from 11 March 2004 to 23 July 2004.  While Mr Keshvara was director of the plaintiff, the shareholder of the company was Kap Nominees (2) Ltd.  The sole shareholder of Kap Nominees (2) Ltd was Kap Nominees Ltd.  Mr Keshvara was the sole shareholder of Kap Nominees Ltd.

[5]      In July 2004, Kap Nominees (2) Ltd transferred its shareholding to Capital Events Holdings Ltd.  The shareholders of Capital Events Holdings Ltd were Terry Wilson and Andrew Tauber.  They hold the shares on trust but the beneficiaries of those  trusts  are  unknown.    Terry  Wilson  was  the  sole  director  of  the  plaintiff between 23 July 2004 and 1 October 2006.   The defendant is the wife of Terry Wilson.  Accordingly she was always a relative of a director of the company, being the daughter of a director and later the wife of a director.

[6]      The defendant was never a shareholder of the plaintiff or of any company which held shares in the plaintiff.  She was never an employee of the plaintiff and did not perform any services for the plaintiff.

[7]      The defendant’s notice of opposition says:

a)       The defendant has an arguable defence to the plaintiff’s claim;  and

b)        Appearing in the affidavits filed in support of the notice of opposition. [8]     This form of notice of opposition is not satisfactory.  It does not spell out the

particular grounds relied upon by the defendant to oppose the application.

[9]      The defendant’s affidavit includes this:

My defence is that all the amounts either provided to me by cheque or direct credited to my bank account from the plaintiff were not loans/advances.  I have nothing to do with the plaintiff company.  All amounts provided to me by  cheque  or  direct  credited  to  my  account  were,  as  I  understand  the situation, done so at the request and direction of my husband, Terry Wilson, and his business partner, Mr Andrew Tauber, at a time that I understood they both controlled the plaintiff company when it was known as Capital Events Ltd.  My understanding is that all payments made to me were my husband’s drawings from the company.   I also understand that equal amounts in drawings  at  approximately  the  same  times  were  credited  to  entities controlled by Mr Andrew Tauber.

[10]     The plaintiff’s causes of action are in the alternative.   The first, based in contract, assumes that the defendant agreed to repay money she received from the company.   This is an appropriate cause of action where a company has advanced funds repayable on demand and wishes to recover payment.

[11]     The second cause of action is under s 298(2) of the Companies Act:

(2)       Where, within the specified period, a company has disposed of a business or property, or provided services, or issued shares, to—

(a)A person who was, at the time of the disposition, provision, or issue, a director of the company, or a nominee or relative of or a trustee for, or a trustee for a relative of, a director of the company; or

(b)A  person,  or  a  relative  of  a  person,  who,  at  the  time  of  the disposition, provision, or issue, had control of the company; or

(c)Another company that was, at the time of the disposition, provision, or issue, controlled by a director of the company, or a nominee or relative of or a trustee for, or a trustee for a relative of, a director of the company; or

(d)Another company that, at the time of the disposition, provision, or issue, was a related company,—

The liquidator may recover from the person, relative, company, or related company,  as  the  case  may  be,  any  amount  by  which  the  value  of  the business, property, or services, or the value of the shares, at the time of the disposition, provision, or issue exceeded the value of any consideration received by the company.

...

(4)      For the purposes of subsections (1) and (2) of this section, specified period means —

(a)The period of 3 years before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and

(b)In the case of a company that was put into liquidation by the Court, the period  of  3  years  before  the  making  of  the  application  to  the  Court together with the period commencing on the date of the making of the application and ending on the date on which, and at the time at which, the order of the Court was made; and

(c)       If—

(i)An application was made to the Court to put a company into liquidation; and

(ii)       After the making of the application to the Court a liquidator was appointed  under  paragraph  (a)  or  paragraph  (b)  of  section

241(2),—

the period of 3 years before the making of the application to the Court together with the period commencing on the date of the making of that application and ending on the date and at the time of the commencement of the liquidation.

[12]     Under  this  section,  a  payment  of  money is  a  disposition  of  property.  A

liquidator must establish:

a)        The company has made a disposition of property within the specified period;

b)       The disposition has been to a person within subsection (2)(a)–(d);  and

c)        The value of the disposition exceeds the value of any consideration received by the company.

[13]     On the last point, “consideration received” suggests that a defendant need not provide consideration, so long as the company receives consideration.

[14]     In this case, the payments were all within the specified period. The defendant is within the class of recipients as the relative of directors of the company. Ascertaining value is straightforward, because money was paid.

[15]     Section 298(2) is restitutionary – it allows the liquidators to recover back for the company the value of dispositions to the extent that they are not matched by consideration of equal value, independently of contractual arrangements between the company and the recipient.

[16]     In this case, the combining of causes of action in contract and in restitution allows  the  plaintiffs  to  outflank  any  defence  denying  that  the  company  made advances repayable on demand.

[17]   The principles on which plaintiffs’ summary judgment applications are considered are well known and do not need repetition. Mr Branch helpfully referred to the outline of those principles in the judgment of Associate Judge Gendall [12]– [20] in Vance v Bradbury (2009) 10 NZCLC 264,469, a case under s 298, and I gratefully adopt them.

[18]     To establish a prima facie case, the plaintiffs need only prove the payments made to the defendant.   In that situation, the defendant has an evidential onus to show a basis for her receipt and retention of the payments made.  When companies make payments to directors’ daughters and wives, there can be no presumption of advancement.

[19]     In the hearing, two possible defences emerged:

a)        The payments to the defendant were in fact payments of salary to her husband;  and

b)Any indebtedness of the defendant to the company was reduced by payments her husband had made to the company.

Salary for Mr Wilson

[20]     Before July 2004, Mr Keshvara was sole director of the company and his company, Kap Nominees (2) Ltd, was the shareholder of the company.  During this period, Terry Wilson was not a director of the company.  No company in which he held shares was a shareholder of the company and he was not himself a shareholder of the company.

[21]     There is no evidence that Terry Wilson was an employee of the company.  If he had been an employee of the company, PAYE would have been deducted from salary paid to him.  There is no evidence of PAYE deductions for any salary paid to him.  There is no evidence that he provided any services for the company before July

2004.  The payments made in March and April 2004 total $475,000.40.  There is no basis for any claim that any of those payments were salary for the defendant’s husband.

[22]     The   payments   made   between   November   2004   and   July   2006   total

$606,097.13.   If the payments to the defendant were payments of salary for her husband, there would be accounting entries in the company books to reflect this. Accounting records would show that payments to the plaintiff were offset by a declaration of salary and accounting entries for the salary would clear off the payments made to the defendant entered in the general ledger recording advances made to her.  The accounting records put in evidence do not show any such treatment of the payments to the defendant.

[23]     The company’s tax return for the year ended March 2004 did not show any payments of shareholder’s or director’s shareholders’ salary.  The company did not file any later tax returns.  Mr Wilson’s tax returns for the 2004 and 2005 years did not show any income received from the company.  As Mr Wilson did not declare to the Inland Revenue that he received any income from the company in those years, he

can hardly say that payments to his wife were income in his hands, or that the payments to his wife can be set off for income.

[24]     In his tax return for the 2006 income year, Mr Wilson did show a return of income of $525,000 from the company.  However, I accept the plaintiff’s submission that this claim does not pass the threshold of credibility and does not have a proper evidential foundation.   The tax return was not filed until August 2008, after the plaintiff had made demand on Mrs Wilson for the funds.  Mr Wilson is bankrupt.  He loses nothing by declaring a notional income of $525,000 to the Inland Revenue, when there is no prospect of his ever paying the tax.  This is to be compared with the

2005 and 2005 tax  returns which had  already been filed.   It was therefore not possible to create the appearance of a payment of shareholders’ salary as was later done for 2006.

[25]     For Mr Wilson to be paid remuneration, there are the requirements of the

Companies Act to be complied with.  Section 161 of the Companies Act 1993 says:

161     Remuneration and other benefits

(1)       The board of a company may, subject to any restrictions contained in the constitution of the company, authorise—

(a)The payment of remuneration or the provision of other benefits by the company to a director for services as a director or in any other capacity:

(b)The payment by the company to a director or former director of compensation for loss of office:

(c)       The making of loans by the company to a director:

(d)       The giving of guarantees by the company for debts incurred by a director: (e)        The entering into of a contract to do any of the things set out in paragraphs

(a), (b), (c), and (d) of this subsection,—

if the board is satisfied that to do so is fair to the company.

(2)       The board must ensure that forthwith after authorising the making of the payment or the provision of the benefit or the making of the loan or the giving of the guarantee or the entering into of the contract, as the case may be, particulars of the payment or benefit or loan or guarantee or contract are entered in the interests register.

(3)       The payment of remuneration or the giving of any other benefit to a director in accordance with a contract authorised under subsection (1) of this section need

not be separately authorised under that subsection.

(4)       Directors who vote in favour of authorising a payment, benefit, loan, guarantee, or contract under subsection (1) of this section must sign a certificate stating that, in their opinion, the making of the payment or the provision of the benefit, or the making of the loan, or the giving of the guarantee, or the entering into of the contract is fair to the company, and the grounds for that opinion.

(5)       Where a payment is made or other benefit provided or a guarantee is given to which subsection (1) of this section applies and either—

(a)The provisions of subsections (1) and (4) of this section have not been complied with; or

(b)Reasonable grounds did not exist for the opinion set out in the certificate given under subsection (4) of this section,—

the director or former director to whom the payment is made or the benefit is provided, or in respect of whom the guarantee is given, as the case may be, is personally liable to the company for the amount of the payment, or the monetary value of the benefit, or any amount paid by the company under the guarantee, except to the extent to which he or she proves that the payment or benefit or guarantee was fair to the company at the time it was made, provided, or given.

(6)       Where a loan is made to which subsection (1) of this section applies and either—

(a)The provisions of subsections (1) and (4) of this section have not been complied with; or

(b)Reasonable grounds did not exist for the opinion set out in the certificate given under subsection (4) of this section,—

the loan becomes immediately repayable to the company by the director, notwithstanding the terms of any agreement relating to the giving of the loan, except to the extent to which he or she proves that the loan was fair to the company at the time it was given.

[26]     There are no company records of any sort to  show that s 161 has been addressed in any way at all.  In particular, there is no interest register and there is no director’s certificate under s 161(4). Similarly, there is no record of agreement by shareholders under s 107(1)(f) and (4) that shareholders have agreed to Mr Wilson’s remuneration.

[27]     I find that the payments made to the defendant cannot be regarded in any way as payments of salary to her husband.

Payments by Mr Wilson to the company

[28]     The  plaintiffs  put  in  evidence  an  accounting  document  of  the  company headed “General ledger as of July 18 2006”.   This ledger shows payments to the

defendant but it also shows payments to companies called Basin Ridge Management Ltd and Honk Land Ltd and also payments Terry Wilson made and received.  Basin Ridge Management Ltd and Honk Land Ltd are companies associated with Andrew Tauber.

[29]     The payments relating to the Terry Wilson are:

19 July 2004  $  25,989.71
10 August 2004  $  23,989.71

26 August 2004 (half share of payment by

Terry Wilson and Andrew Tauber)  $166,468.50

11 October 2004  $  10,989.71

1 July 2005 (payment to Terry Wilson) 29 August 2005 13 September 2005 (payment to Terry Wilson) 13 September 2005 30 September 2005 (payment to Terry Wilson)	$100,000.00 $350,000.00	$10,000.00 $  6,000.00 $  6,000.00
1 November 2005	$  50,000.00
17 November 2005	$  75,000.00
-	$  22,000.00
Net total of Terry Wilson’s payments	=	$796,437.63 =========

 

14 February 2005  $  16,000.00

Totals:                   $818,437.63    $22,000.00

[30]     The defendant’s argument was that her husband’s payments to the company could be set off against the company’s payments to her.

[31]     The normal rule is that a set off may only be maintained where the claims to be set off against each other exist between the same parties and in the same right: Hamilton Ice Arena Ltd v Perry Developments Ltd [2002] 1 NZLR 309 at [8]. As the Court of Appeal said:

The concept of extinguishment is difficult if the cross claim is made by different parties.

[32]     There are, however, two potential viable explanations that might allow the defendant to raise the net payments made by her husband by way of defence to the plaintiff’s claim against her:

a)       While the company made payments to her, the payments made by her husband reduced her indebtedness to the company.

b)While the payments were nominally made to her, they were in fact intended for her husband and she received the payments as his agent. His payments to the company were in reduction of his indebtedness to the company.

[33]     The evidence to support either explanation is not strong.  The explanations by the defendant and her husband do not give much support for either potential explanation.   For example, the claim that the payments were salary tells against either explanation.  The accounting records put in evidence do not identify payments to the defendant as payments for her husband and payments by him are not shown as being for her benefit. There is no evidence as to what the defendant did with the money.

[34]     Nevertheless, there is a risk of a potential injustice to the defendant if I were not to give her the opportunity to try to establish that payments made by her husband went in reduction of her indebtedness to the company.   It is not uncommon for married couples to arrange matters so that payments for one may be directed to the other.   As between the couple, payments made to the wife may be relationship property.  The wife’s indebtedness may be taken into account in a division of and the husband’s  payments  to  the  company may  be  relationship  property.    Between  a married couple, matters are often arranged informally, not by making formal written records.

[35]     Provisions such as s 298 are directed against diversion of company assets to relatives of those in control of a company. It cannot be unfair for those relatives to show that those in control have in turn put back wealth into the company.

[36]     In  these  circumstances,  the  defendant  may  be  able  to  establish  that  the payments made by her husband can be taken into account against her liability to the company.   The matters I have outlined are not defences themselves, simply considerations that have led me to allow her to defend the proceeding.

[37]     I also note that even if the defendant is able to establish that her husband’s payments can be taken into account, there may be further issues that could stand in the way of her defence.

[38]     The records of payments show that the payments made by the husband to the company are less than payments the wife received from the company.  The shortfall is $284,659.90.  I am satisfied that the defendant has no defence to that part of the plaintiffs’ claim. In particular, the company has not received any consideration for that sum under s 298(2).

[39]     The  plaintiffs  are  accordingly  entitled  to  recover  judgment  from  the defendant in the sum of $284,659.90, plus interest at 5% from 18 July 2006, being the last date of payment, to the date of judgment.  The plaintiffs will also have costs on a 2B basis, plus disbursements as fixed by the Registrar.

[40]     The defendant is to file a statement of defence by 6 August 2010.

[41]     The case is to be given a case management conference after 6 August 2010 for further directions to be given and for any outstanding costs issues to be resolved.

R M Bell

Associate Judge