Blanchett v Fagan

[2012] NZHC 1235

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2011-419-1583 [2012] NZHC 1235

UNDER  the Receiverships Act 1993

BETWEEN  DAVID MURRAY BLANCHETT AND JOHN HOWARD RONALD FISK Applicants

ANDROBIN CHRISTOPHER FAGAN AND CAROL ANN FAGAN

First Respondents

ANDBANK OF NEW ZEALAND Second Respondent

Hearing:         9 February 2012

Appearances: A Glenie for Applicants

N J Edwards for First Respondents
No Appearance for Second Respondent

Judgment:      1 June 2012

JUDGMENT OF PETERS J

This judgment was delivered by Justice Peters on  at 5 pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date: ...................................

Solicitors:           Minter Ellison Rudd Watts, Wellington for Applicants email: [email protected]

Whitfield & Co, Cambridge for First Respondents email:  [email protected]

BLANCHETT V FAGAN HC HAM CIV-2011-419-1583 [1 June 2012]

Introduction

[1]      The issue that arises in this case is whether the First Respondents, to whom I shall refer as “the Fagans”, hold funds, or more precisely a chose in action, of approximately $50,000.00 on trust for Llewecar Limited (“the company”).

[2]      The funds are held in an account in the Fagans’ name at the Bank of New

Zealand (“BNZ”), being account number 02-0448-00XXXXX-003 (“account”).

[3]      The ANZ  appointed  the Applicants  (“the Receivers”)  as  receivers  of the company on 24 January 2011.  The Receivers’ case is that the funds in the account are held on resulting trust for the company.  The Receivers have made an originating application for an order that the company is the sole beneficial owner of the account and of the funds in the account, and they seek an order directing the BNZ to transfer those funds at the Receivers’ direction.   The Fagans contend that they have the beneficial interest in the funds in the account and they oppose the application accordingly. The BNZ abides the decision of the Court.

Background

[4]      At all material times Mr and Mrs Fagan have been directors and employees of the company and have each held 5 per cent of the shares in the company.  They and a third party, as trustees of the CRF Family Trust (“trustees and trust”), have held the remaining 90 per cent of the shares in the company.

[5]      Mr and Mrs Fagan are also directors and shareholders of other companies, in which the trustees are also shareholders.

[6]      Mrs Fagan’s evidence was that the company banked with the ANZ until about June 2010.  At about that time, however, a dispute developed between the Fagans, their various companies and the ANZ.  The company maintained a current account at the ANZ, being account number 01-0447-000XXXX-00 (“company’s ANZ 00 account”),   but   also   opened   BNZ   account   number   02-0448-00XXXXX-000

(“company’s BNZ 00 account”).  Also, the Fagans themselves opened four accounts

with the BNZ, including the account that is in dispute.  These four accounts, being

000, 001, 002 and 003 (the latter being the account in issue), were named Carol, Robin, Personal Contingency and Business Contingency respectively.

[7]      It  is  common  ground  that,  between  July  2010  and  January  2011,  funds were transferred from the company’s ANZ and BNZ 00 accounts to the account. The company’s  00  accounts  were  the  sole  source  of  funds  deposited  into  the account. There   were   also   several   payments   from   the   account   back   to   the company’s BNZ 00 account during this period, and also one payment on 29 October

2010 from the account to another company in the Fagan group of companies, namely

3G Teak Limited.  I refer again to this payment below.

[8]      The Receivers contend that the company made the payments to the account as a volunteer and that, as a result, the Fagans hold the funds, or rather the chose in action, on a resulting trust of which the company is the beneficiary.   The Fagans’ case is that the company made the payments in reduction of a substantial debt that the company owed to its shareholders, and accordingly no resulting trust arises.

[9]      In my view, the Receivers’ case must succeed.  Counsel for the parties made helpful submissions and I refer to those submissions as necessary in giving the reasons for my decision.

General ledger

[10]     There is little by way of contemporaneous evidence as to the company’s intentions in transferring funds to the account.   However, the company’s general ledger for the relevant period supports the Receivers’ case that the company retained beneficial ownership of the funds.

[11]     In August 2010 the account was entered in the company’s general ledger as a

company asset and the account remained listed as such until at least 31 December

2010.   The fact that the account was entered and maintained as an asset in the general ledger is consistent with the funds being held for the benefit of the company.

[12]     I  note  also  that  a  print  out  from  the  company’s  accounting  programme records that the account was entered onto the system as an asset by “Carol”, that is by Mrs Fagan, in August 2010.  In giving evidence, Mrs Fagan said that the fact that the print out showed that she had made the entry of the account did not mean that in fact she had made that entry, as it could have been made by another employee who did know the purpose of the account and did not know the company’s intentions.  To summarise her evidence on this point, Mrs Fagan said that several other employees of the company were able to enter data into the accounting programme but that they had different levels of “user privileges”.   Mrs Fagan said that it was possible, for instance, that her son in law had made the entry which culminated in showing the account as an asset of the company, but that he had done so using her login information.

[13]     There was, however, no evidence from any employee confirming that he or she may have made the entry, even though the issue was raised in an affidavit filed by the Receivers.  For that reason I place little weight on Mrs Fagan’s explanation.

[14]     The general ledger also recorded payments to and from the account, so that the balance of the account fluctuated.   In cross-examination Mrs Fagan made the point that the balance in the general ledger may not always have been the same as the balance shown on the bank statements for the account.  With respect to her, however, that misses the point that if the initial entry of the account as an asset was a mistake, as Mrs Fagan contended, there were opportunities to detect that mistake after August

2010.

[15]     Counsel for the Fagans contended that, on the facts of this case, no weight should be placed on the company’s accounting records.  That was because in 2009 the company had moved to a new accounting package, which was more complex than the previous package.  Mrs Fagan’s evidence was that, at the material time, her priority was to ensure accuracy as regards all items making up the profit and loss statement, and that she was not concerned with balance sheet items such as assets and liabilities.   Mrs Fagan’s evidence was that adjustments to balance sheet items were made by the professional accountant, Mr McDonald, to make when compiling the year end accounts.

[16]     While I accept that this may be so, it does not explain the inclusion of this account as a company asset in the general ledger.

Debt to shareholders

[17]     As I have said, the Fagans’ case was that the company made the payments in reduction of debt owed to shareholders.  There is no doubt that as of 31 March 2010 the company owed a substantial debt, $900,000.00, to its shareholders.  This debt is recorded in the company’s financial statements as of 31 March 2010 (“financial statements”).  However, the notes to the financial statements suggest that the entire

$900,000.00 was owed to the trustees, and that the company was not indebted to the

Fagans personally.

[18]     If the payments to the account were in reduction of the company’s debt to the trustees, the payments ought to have been made to an account in the name of all trustees.  The account was only in the name of the Fagans alone.  With respect to counsel for the Fagans, and to Mrs Fagan herself, there is considerable confusion in their submissions and evidence respectively as to whom the debt was owed.  A debt owed to the trustees is a quite different matter to a debt owed to the Fagans.

[19]     The Fagans filed an affidavit from their accountant Mr McDonald, a partner in KPMG Hamilton.  Mr McDonald’s evidence was that, as of 31 March 2010, the trustees were indebted to the Fagans for more than $1.1 million.   Mr McDonald’s evidence was that, had he been required to prepare financial statements for the year ended 31 March 2011, he would have characterised the company’s payments to the account as a reduction of the company’s debt to the trustees and of the trustees’ debt to Mr and Mrs Fagan.  I do not overlook this evidence but I am unable to construe a payment to Mr and Mrs Fagan as a payment in reduction of a debt owed to the trustees.

[20]     I note also  that  there is  no  evidence of any demand by the trustees  for repayment of some or all of the debt and, as counsel for the Receivers submitted, the company’s general ledger does not record any reduction in the debt owed to shareholders.  Again, I do not overlook Mrs Fagan’s explanation that she and her

fellow employees were busy, that the dotting of every i and the crossing of every t on accounting  matters  was  not  their  priority  and  that  they  left  those  matters  to Mr McDonald.  Unfortunately, however, such an approach carries with it a risk that an adverse construction will be placed on the documentary evidence in existence at the relevant time.

[21]     I referred in [7] above to a payment from the account to 3G Teak Limited. Counsel for the Fagans submitted that this payment was consistent with Mrs Fagan’s evidence as to the purpose of the account.  Mrs Fagan’s evidence was that purpose of the account was to obtain some repayment of the debt to shareholders and then to use those funds to make advances to companies in the group that might have a short term need for cash, for instance when GST or provisional tax had to be paid.

[22]     There were several transfers from the account back to the company’s 00 account.   I do not consider that any inference can be drawn from those payments. They are equally consistent with either party’s case.  The payment of $18,000.00 to

3G Teak Limited does lend some support to the Fagans’ case but in my view it does not overcome the inclusion of the account as an asset in the general ledger.   The payment might equally be viewed as an advance from the company to 3G Teak Limited.

Result

[23]     For the reasons given above, I make the directions sought by the Receivers in paragraphs 1(a) and (b) of their application dated 4 November 2011.

[24]     The parties may submit memoranda on costs if they are unable to agree.

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M Peters J