Blanchett v Osmond
[2015] NZHC 467
•17 March 2015
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CIV-2014-419-310 [2015] NZHC 467
BETWEEN DAVID MURRAY BLANCHETT &
COLIN THOMAS MCCLOY AS LIQUIDATORS OF ARAI KORP LIMITED (IN LIQUIDATION) Plaintiffs
AND
MURRAY ATHOL OSMOND & JANET DOREEN OSMOND
Defendants
Hearing: 18 February 2015 Appearances:
Mr M Branch for Plaintiffs
Mr P Cornege for DefendantsJudgment:
17 March 2015
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
17.03.15 at 10 a.m., pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
BLANCHETT & ANOR AS LIQUIDATORS OF ARAI KORP LIMITED (IN LIQUIDATION) v OSMOND &
& ANOR [2015] NZHC 467 [17 March 2015]
Background
[1] The following summary of the background to this proceeding is taken from the submissions of the plaintiff. As I understand it, there is no substantial dispute on the part of the defendant that it accurately sets out the circumstances of the case giving rise to this litigation.
[2] The proceeding is an application for summary judgment for the recovery of possession of land. The property that is the subject of these proceedings is known as Unit J and Accessory Unit 1, Deposited Plan 316404, CT 64118, South Auckland and is located at 10/618 Maungatautari Road, Cambridge (“the Property”).1 The plaintiffs are the liquidators of Arai Korp Limited (In Liquidation) (“Arai”). The defendants oppose the application on the basis that they claim a right of occupation
arising out of an agreement with Aniwaniwa Trustee Limited. The Aniwaniwa
Trustee Limited (as trustee of the Aniwaniwa Trust) is not a party to the proceeding. [3] The key procedural dates and background facts are:
(a) Arai was placed into liquidation by the High Court in Hamilton on
4 April 2014 as a result of an application by the Commissioner of
Inland Revenue;
(b) As at 12 December 2013, Arai owed IRD the sum of $2,056,472.42; (c) Arai is the registered owner of the Property;
(d) The IRD have a charging order registered on the Property. On 8 May
2014 the Liquidators repaid a first mortgage on the Property to Basecorp Finance Limited. The sum repaid was $128,223.56. There are no other mortgages and the only charge relating to the Property registered is the IRD charge.
[4] The defendants, Murray Osmond and Janet Osmond, currently occupy the
Property. Mr Osmond states he and his wife believe that the plaintiffs are not
1 Exhibit B, Affidavit of David Murray Blanchett (“DMB”) sworn 25 July.
entitled to an order for possession of the Property and that they believe Aniwaniwa Trustee Limited is entitled to have the Property transferred to it. Mr Osmond is the sole director of Arai and he is a director of Aniwaniwa Trustee Limited.
[5] In September 2000, Aniwaniwa Trust entered into an agreement with Arai to purchase from that company units J and K which were part of the titles that resulted from the subdivision of the rear property. This pre-dated when Aniwaniwa Trustee Limited became the trustee. At the point when the agreement was signed, Mr and Mrs Osmond were the trustees.
[6] The trustees agreed to pay the price of $500,000. The 2000 agreement included special terms as follows. It was first of all conditional upon:
…the vendor completing the erection of a new home on unit J in accordance with plans to be provided by the purchaser such home to be of concrete block (plastered) and double glazed glass construction with a concrete floor with underfloor heating with a floor area (excluding garaging) of approximately 280 m². Completion shall be once the Master builder’s building contractors completed, the local Council has signed off the building consent and the maintenance period and work is completed
[7] Mr Osmond deposed as follows concerning this transaction:
158. Eexhibit MO38 refers to the floor area for Unit J being 250 m². The proposed estimate of the dwelling house construction on unit J was $250,000 being a $1000 per square metre GST inclusive. That meant the bare land value for unit J and K was $250,000, GST inclusive.
[8] Additionally, the vendor was to comply with conditions of the subdivision consent, which required sealing of the driveway and fencing of the property amongst other things. On 30 January 2004, the vendor, Arai, entered into a contract for the construction of a house on the property at a price of $663,000. Apparently there was no alteration to the price which the purchasers would have to pay for units J and K as a result of this price being obtained. It therefore would appear that the cost of construction, which the vendor had committed to, would exceed the consideration that the purchaser had to pay for the land.
[9] The shareholder of Arai is Aniwaniwa Trustee Limited and the sole shareholder of that company is the second named defendant, Janet Doreen Osmond.2
Further, comment on the background to the various transactions leading to this proceeding is set out below.
Summary judgment principles
[10] The parties are agreed that the following is a correct statement of the summary judgment principles applicable in this case. In Krukziener v Hanover Finance Limited, the Court of Appeal held:3
The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11
PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is
inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 at 341(PC). In the end the Court's assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).
Background on the various transactions leading to proceedings
[11] The transactions between Arai, the defendants and the third parties concerning the property which is the subject of the application for possession needs to be summarised.
[12] In 1985, Mr Osmond purchased a 20 ha block of land near Cambridge. In
1987, the block was divided into two titles. The property from which the subject land was derived was the rear title that was created by this process. It was
2 See DMB and exhibit C at [4].
3 Krukziener v Hanover Finance Ltd [2008] NZCA 187 at [26].
approximately 13.87 ha in extent. The other title does not figure in the subsequent dealings with which this judgment is concerned.
[13] In 1999, Arai was incorporated. Mr Osmond entered into an agreement for sale and purchase to sell the property.
[14] In November 1999, Mr Osmond executed the transfer documents to Arai. In
2000, Arai, which had still not been registered as the legal proprietor of the property, signed an agreement to sell what were described as units J and K to the Aniwanawa Trust. In January 2003, the property was transferred to Arai which thereafter became the legal owner of the property.
[15] In March 2003, Arai agreed to sell 10.835 ha of the property to a nominee, Mr and Mrs Bramley. It was a term of the agreement that if a new title was not issued by the settlement date nominated in the agreement that the entire property of
13.870 ha would be transferred to Mr and Mrs Bramley, and the portion not sold which was described as units J and K would be held on trust by them for Arai.
[16] In April 2003, Arai transferred the whole property to the Bramley family trust. Later that same year, the Bramley family trust, pursuant to the agreement entered into in March 2003, transferred part of the property back to Arai. This part of the property, I am told, was identified as Lot 2 and was approximately 3 ha in extent.
[17] In October 2003, as a result of a subdivision undertaken of Lot 2, a new title was created, SA 23963. At the same time, SA 23963 was subdivided into units A to K. Therefore from this point on separate titles existed for units J and K.
[18] On 4 July 2014, Arai alleges that it gave notice cancelling the agreement that had been entered into in 2000 for the sale of units J and K to the Aniwanawa Trust. The defendants contend that the plaintiff “disclaimed” the agreement.
Defendants’ submissions
[19] The key contention which the defendants put forward is that the company holds the property on trust for ATL, the company which is the trustee of the Aniwanawa Trust.
[20] The type of trust which the defendants invoke is either a resulting trust or a constructive trust.
[21] It also appears that the defendants contend that the Trust is the equitable owner of the property because it is the purchaser under an enforceable agreement for sale and purchase of units J and K.
[22] If it were arguable that ATL would be able to enforce the contract for purchase of the property then it would follow, detailed legal arguments aside, that the defendants would be able to remain residing in the property. They would do so as licensees or tenants of the trust.
Issues
[23] The issues which arise in this dispute are set out below.
[24] First, in relation to the question of whether the defendants’ contention is
correct that the trust is able to enforce an agreement for purchase of the land:
a) Was there a concluded contract between the defendants and Arai, as a result of the agreement for sale and purchase entered into in September 2000?
b) Alternatively, did the parties entered into an implied contract?
c) Is the contract able to be specifically enforced?
i)Was the requirement that defendants must be ready willing and able to perform the contract met?
ii)Did assignment of Osmond-Arai debt constitute part-payment under contract?
iii)Should the defendants be credited with payment of the contract debt which Arai owed the builder?
iv)What effect does the IRD charging order have on enforceability of contract?
v) Does the doctrine of part performance assist the defendants?
[25] Secondly, looking to equity, have the defendants/trust come to equity with clean hands? That doctrine would seem to apply to the contract-based claim because if there is a viable basis for that claim, the contract would have to be enforceable at equity. In regard to the constructive trust argument which I mention below, the assistance of equity is again sought and therefore the same doctrine applies. I will defer consideration of that aspect of the case until near the conclusion of this judgment.
[26] Thirdly, the defendants also raise a claim based on resulting/constructive trust and the following issues would seem to require discussion in that regard:
a) What contribution have the defendants made to the property?
b)What interest, if any, are defendants entitled to in property as result of contributions?
c) Is it arguable that defendants can defeat claim for possession as result of constructive trust?
[27] The defendants also put forward an argument that in all of the circumstances Arai holds the property on resulting trust. It will be necessary to examine that contention briefly as well.
Was there a concluded and enforceable contract between defendants and Arai?
[28] The defendants claim that the trust is the holder of enforceable contractual rights to purchase the property from Arai.
[29] Before considering the contractual position, a preliminary point needs to be dealt with. At this stage, I need to deal briefly with another point which Mr Branch, for the plaintiffs, has raised. He noted that ATL was, strictly speaking, the party who would be entitled to any rights of the kind which the defendants have argued for, but that that party has not been joined to the proceedings and is not before the Court. There is some merit in that submission, although it needs to be borne in mind that it was the plaintiff, as the party initiating the proceedings, who made the election as to who would be constituted parties of those proceedings. Nonetheless, given that the defendants have invoked the Court’s equitable jurisdiction, I consider that the focus should be on the substantive merits of the dispute. Therefore, the Court should pay regard to the fact that if the summary judgment were to be declined, that would give the defendants an opportunity to apply for the joinder of ATL to the proceedings. In that way, it could be anticipated that all necessary parties would be before the Court. Therefore, the absence of one of them ought not to defeat any equitable claims which the defendants are able to demonstrate that ATL would be able to put forward and which they would be able to “coattail” on.
[30] Mr Osmond was the party who entered into the alleged agreement between Arai and the trust in 2000 for the sale of units J and K. It is common ground that, at least initially, the purchaser trust, Aniwaniwa, had two trustees, Mr and Mrs Osmond. Mrs Osmond did not execute the agreement as trustee.
[31] This last feature means that the agreement that is relied upon is the 2000 agreement and if there was a difficulty about the validity or enforceability of that agreement, that would prevent the purchaser under the agreement from enforcing it. Mr Cornege, for the defendants, accepted that “[t]he plaintiffs are correct that the
2000 agreement was not properly executed by the trustees of the trust, when it was
signed solely by Mr Osmond.”4 That is a recognition that both of the trustees of the trust were required to agree to the transaction and to communicate that agreement by signing the document embodying the agreement.
[32] The concession that the 2000 agreement was probably not binding is well made. There is no doubt that unless both trustees of the then trust unanimously agreed to be bound by the 2000 agreement, then the trust cannot enforce it.
[33] Mr Cornege also submitted:5
If the 2000 agreement is not binding, there is plainly an unwritten contract between the parties (the terms of which must be materially similar to the 2000 agreement) which can, as a consequence of part performance, be specifically performed.
[34] The argument, therefore, is that the different defendants are able to claim in the alternative that the trust’s rights arise either under the 2000 agreement or some later implied agreement. That agreement is to be implied from the actions of Mr Osmond in continuing to conduct himself as though the original agreement was still in force. For example, it would be contended, Mr Osmond assigned his rights to the purchase price owing from Arai under the original September 2000 agreement pursuant to which Arai purchased the rear block from him. Thereafter, according to Mr Osmond, Aniwaniwa Trust was able to apply the amounts so assigned against the purchase price that the trust owed under the agreement of 2000 for the purchase of units J and K. Is there an alternative agreement in implied contract?
[35] If the 2000 agreement is to be ignored, then the circumstances in which any replacement agreement came into effect need to be examined. Obviously there was no replacement express written agreement and, accordingly, any agreement must be an implied agreement.
[36] At trial, it would be the obligation of the defendants to prove on the balance of probabilities that such an implied agreement came into effect. At the stage of
summary judgment, they need only show that an argument is available to them that
4 Submissions for the defendants at [8.1].
5 Submissions for the defendants at [8.1].
on the evidence and the inferences available from the facts that they have an arguable defence that an implied contract was entered into of which the trustee of the Aniwaniwa Trust is able to enforce and which therefore conferred on the trustee the status of equitable ownership of the property.
[37] The authorities establish that an implied contract inferred from the conduct of the parties are not lightly to be implied.6 The burden of proof on the issue of contractual intention in the case of an implied contract rests upon the proponent of the contract.7
[38] The explanation for the recognition of implied contract is stated in the following passage from Chitty:8
.. claims or defences are sometimes based on the allegation that the parties between whom there was no express agreement had so conducted themselves in relation to each other that an implied contract was to be inferred from their conduct; and in a number of cases of this kind the allegation has been rejected on the ground that there was no contractual intention.
[39] It would not seem logical to infer such a contract in circumstances where consensus is absent. If it is not open to the Court to recognise purportedly express contracts which are not genuinely consensual (a matter to be discussed shortly), it would seem unlikely that a contract would be inferred from a state of affairs that was purely unilateral.
[40] Mr Osmond, as the controlling personality of the various property transactions, was the one who was exclusively concerned with attending to the legal structures to be adopted and that so far as dealings, other than those with third parties for the purchase of allotments, paperwork seems to have been drawn up after the fact and to give the impression of legal arrangements having been entered into on a considered basis by the opposing parties when such was not the case. Rather than these arrangements representing genuine legal structures, they would seem to have
been fashioned to give apparent legitimacy to outcomes for which Mr Osmond alone
6 Blackpool and Fylde Aero Club v Blackpool BC [1990] 3 All ER 25 (CA).
7 HG Beale (ed) Chitty on Contracts (31st ed, Sweet & Maxwell Ltd, London, 2012) at [2-163].
Citing Modahli v British Athletics Federation [2002] 1 WLR 1192.
8 Above n 12, at [2-163].
was responsible. Those outcomes included transferring assets away from Arai in hopes that it would put them beyond the reach of creditors. The situation has similarities with that which the Court of Appeal dealt with in its judgment in Paugra Holdings Limited (in liq) v Harverstfield Holdings Ltd to which Mr Branch referred me.9 In that case, the principal of a company arranged a sale of an asset which the company owed. The purpose of the transaction was to deprive the vendor company of the full amount of the agreed purchase price and thereby defraud the Commissioner of Inland Revenue.10
[41] The Court of Appeal took the view that: 11
c) The transaction was a non-consensual transaction because Paugra, the separate legal entity, could not lawfully have agreed to receive a reduced purchase price in return for transferring the land to Harvestfield when that constituted a fraud on Paugra itself and the IRD.
[42] The fact that Mr Osmond went through the motions of documenting the various transactions does not mean that the parties to those purported arrangements genuinely intended binding contractual arrangements to come into existence. For example, the decision to enter into a contract and to build a home on the property and hold Arai to the 2000 agreement was a fraud on both Arai and the IRD. That contract was entered into for a total price of $500,000. For that price, Arai was required to provide both the land and a house. Therefore, in order to facilitate that contract proceeding, Arai had to build a residence on the property. The fact that Mr Osmond committed Arai to the building contract involving expenditure of $663,000 inherently amounted to a contract which was non-consensual because it was so adverse to the interests of Arai.
[43] That is exactly the sort of transaction that comes within the category of contracts which the Court described in Paugra.
[44] In circumstances such as these, it would seem that any attempt to present these arrangements to the Court as the product of a real implied contract would be
9 Paugra Holdings Limited (in liq) v Harverstfield Holdings Ltd [2014] NZCA 164.
10 At [38].
11 At [38].
doomed to failure. What would seem more likely is that the Court would take the view that what occurred was the product of Mr Osmond, in at least four different capacities (vendor of land to Arai, director of Arai, trustee of Aniwaniwa Trust and beneficiary or related party to beneficiary of Aniwaniwa Trust) manipulating and controlling the interests of the various entities in such a way as to construct the simulacrum of a number of linking genuine transactions consensually arrived at by the parties hereto. These circumstances do not disclose the existence of an arguable defence.
Is the contract able to be specifically enforced?
The requirement of part-performance
[45] The defendants further claim that it is arguable that any replacement agreement is outside the requirements of s 24 of the Property Law Act 2007 because the agreement has been partly performed. It is this contention that I examine next.
[46] The rationale for application of the equitable doctrine of part performance is that in certain circumstances it would be fraud in the eyes of equity for the party who was the beneficiary of acts done in pursuance of the contract to resist carrying out his or her obligations under the contract by pleading the absence of the written
memorandum of the terms of the contract required by s 24.12
[47] The position of the defendants in this case is that they reached an agreement with Arai to purchase the land for the sum of $500,000 for the payment of which price not only would they receive the land but also a house constructed on it to a value of $250,000.
[48] The acts which the defendants/the trust would put forward as constituting part performance of their oral agreement that they entered into with Arai (which was reduced to writing but was unenforceable for the reasons given above in this judgment) was to make a series of payments. Those payments were not consistent with the terms of the contract which the defendants/the trust say it entered into with
Arai. In my view, the defendants/the trust obtain no assistance from invoking the
12 TA Dellaca Limited v PDL Industries Ltd [1992] 3 NZLR 88.
law of part performance. First of all, there was no obligation on the contract for the purchaser to make payments to the builder. Secondly, even if that point were wrong, the extent of the payments that were made was quite in excess of what the contract called for.
[49] There are other difficulties with the part performance argument. These include the fact that part performance, being concerned with unconscionability, can only apply in cases where there has been a substantial detriment incurred by the party invoking the doctrine. If, as I have concluded elsewhere in this judgment, the trust had no beneficial interest in the money which was simply passed through the trust as a conduit to the builder, the necessary preconditions to the exercise of the doctrine principle are not present.
Is the trust ready willing and able to perform the contract?
[50] It is a requirement of equity that a party seeking to perform a contract must be ready willing and able to perform the contract. The relevance in the present context is that there is no evidence that the trust would be able to pay the purchase price under the contract. However, the response of the defendants is that the trust has already carried out its obligations to the extent that it is able to by paying the purchase price or its equivalent to the plaintiff.
[51] This came about, the defendants submit, because of the set-off of the debt owed back to Mr Osmond and the payments that were made to the builder to pay for the house that was constructed on the property. Consideration will first be given to the alleged assignment of the debt owing from Arai to Mr Osmond
Does the assignment of Osmond-Arai debt constitute part payment under the contract?
[52] It was the position of the defendants that the trust had paid the purchase price in the following circumstances. The purchaser under the contract, the trust, had no assets apparently to pay for the consideration owing under the agreement for sale and purchase. When asked about this, Mr Osmond explained that he had entered into an assignment of the debt which Arai owed to him so that the trust acquired the debt
which would then be able to set-off against the purchase price which the trust owed
Arai.
[53] Mr Osmond explained that he had entered into an assignment on 3 October
2003. The assignment was in the following terms:
To: Aniwaniwa Trustee Limited
I Murray Athol Osmond hereby assign or right title and interest in the net proceeds of the settlement of funds due from my sale of land to Arai limited so as to enable the Aniwaniwa trust to complete the purchase of units J and K from Arai limited and pay for the fit out of the house.
Dated at Cambridge this third day of October 2003
[54] The plaintiffs were critical of this alleged transaction. Counsel pointed out that Aniwaniwa Trust Limited (and not Aniwaniwa Trustee Limited) was not incorporated until some 16 months after the date when the alleged assignment took place. It was his submission that whether or not the purchaser had paid the price under the agreement was central to the defence now put forward, alleging that ATL was the equitable owner of units J and K, or alternatively, that Arai, the registered proprietor, held the units on trust for the trustee of the Aniwaniwa trust, ATL.
[55] It was the contention of the plaintiffs that the assignment did not happen and that the assignment document is not a genuine one. The plaintiffs’ position was that how would Mr Osmond have created an assignment document in favour of a company that did not exist and was not to come into existence until some 16 months later?
[56] As Mr Branch pointed out, Mr Osmond was an experienced commercial lawyer in practice until he was struck off in 1996. He submitted that it was unlikely that the explanation which Mr Cornege put forward about the incorrect evidence concerning the supposed assignment was the result of a genuine mistake
[57] A further unsatisfactory aspect of the evidence was that Mr Osmond first gave evidence that what he had assigned to the trust was the proceeds of sale from himself to Arai.
[58] Mr Osmond, it was said, had sold the front and rear lots of the property to respectively Ran Korp and Arai. Subsequently, Ran Korp assigned the entitlement to the purchase price for the front lot to Arai. Mr Branch, however, disputed that this was possible because the former company was struck-off at the time when it was said that Arai was substituted in its place as vendor by a process of novation. There is therefore difficulty about the alleged novation arrangement that was supposed to have taken place at a point in time after Ran Korp Resources Ltd had been struck- off.
[59] Mr Cornege did not dispute the point that Mr Branch made about Ran Korp being a struck-off company. Therefore I will take the submission by Mr Branch as being correct. Regardless of what effect that has on the overall result of this proceeding, this judgment will proceed on the basis that Mr Osmond was entitled to the proceeds of sale of the rear unit only.
[60] The assignment does not, of course, refer to the proceeds of sale to Ran Korp Resources Ltd. As well, it is to be observed that the assignment is entirely unlimited as to amount. Potentially, after the discharge of any liabilities that Mr Osmond owed and which were secured over the block which he sold to Arai and expenses of the sale, the entitled amount was assigned to the trust. So there was both uncertainty about how much was to be assigned as well as how much the trust would ultimately have to pay under the agreement for sale and purchase from Arai and which it would have to satisfy out of the assigned funds.
[61] The more telling point, and one which Mr Branch raised, is concerned with the substance of what ATL actually had paid under the arrangements that it had with Arai. A key part of what the defendants claim is that the assignment of the Osmond- Arai debt to the trust should be taken at face value. I understand that Mr Osmond
himself estimates that Arai owed him $1,208,896.35.13 But, as Mr Branch has
pointed out, if there was an assignment of the debt then it was the transfer of an unsecured debt owed by an insolvent company. Having regard to the surrounding circumstances, the defendants are not able to support an arguable defence based
upon the fact that any part of this debt was recoverable. The defendants themselves
13 MO2, above n 3, at [253].
have not put any evidence forward showing why such a conclusion was wrong and which would give the Court rational grounds upon which to believe that notwithstanding outward appearances, the Osmond-Arai debt was an asset of substance.
[62] There are therefore two major difficulties with Mr Osmond’s evidence about the assignments. First, there is the question of the inconsistencies in his evidence and outright incorrect statements about them. Ran Korp was said to be involved in the assignment but that was later corrected. Mr Osmond also accepts that a statement on his part that the assignment took place in 2003 could not be correct but does not otherwise explain why he made it. The inconsistencies in this evidence are relevant in the light of the well-known dictum of the Privy Council in Eng Mee Yong
v Letchuman14 to which the Court of Appeal made reference in the Krukziener
decision.15
[63] However, I do not consider it would be justifiable to entirely rule out Mr Osmond’s evidence about an assignment having taken place. I do not however accept that the assignment took place in 2003. I will assume for the purposes of this judgment that if it did occur, it took place in 2005.
[64] The second, and perhaps more significant, difficulty with the evidence about the assignment is the point that Mr Branch referred to which was the unlikelihood that the debt supposedly assigned was worth anything at all. It is at this point that the date when the alleged assignment took place assumes importance. In 2005, it is clear that the company was insolvent and any debt from it would have been virtually valueless. Therefore, it is not realistic for the defendants to contend that assignment of the debt amounted to satisfaction of the obligations of the trust in regard to the price of the property.
Payment for the construction cost of the house
[65] A further explanation as to how the trust might have satisfied the price under the agreement for sale and purchase was put forward. It was claimed by Mr Osmond
14 Eng Mee Yong v Letchuman [1980] AC 331.
15 Above n 6.
that the trust had made payments totalling $672,764.42 to the builder in payment of the amount owing under the building contract.
[66] I note that the obligation to provide the house was that of the vendor/Arai and not the purchaser. It is therefore difficult to see that, even if the trust had paid for the construction of the house, what the legal effect of those payments would be. Possibly they would represent a transfer of valuable consideration from the purchaser to the vendor which impliedly would be set off against amounts which the purchaser owed to the vendor. However, before the point of deciding that issue is even reached it is necessary to examine what actually happened and whether the payments that were allegedly made can be described as payments which the purchaser made. It was said that the payments in question totalled $672,764.42.
[67] Again, the plaintiffs were critical of this evidence. Mr Branch noted that the money which was being used to pay off the debt to Arai in fact originated from Arai itself. However, I do not see that as a critical issue with respect to the evidence. Mr Osmond was in control of Arai. However, as Mr Branch pointed out, no explanation was provided as to how money which was payable to Arai from sales of sections and subdivision could find its way back to Arai to pay off the debt that the trust owed to Arai.
[68] It is necessary to make a brief examination of the nature of the payments which were made to the builder.
[69] The explanation which the defendants put forward must involve the assertion that the funds which Mr Osmond withdrew from Arai, and which eventually passed through ATL en route to the building company, became the beneficially owned property of ATL. If not, ATL was nothing more than a conduit passing on funds that belonged to a third party and it would not be in a position to make the claim that it was its property that it beneficially owned that was contributed.
[70] It is implicit in the defendants’ argument that the money used to pay the builder was that of the trust, owned without restriction or limitation. Starting from that position, the matter can be tested by asking whether the trustee was in fact free
to apply the funds that it received in any way that the trustees chose. Could it be contemplated that the trustee was in a position to decline to pay funds on to Arai/the builder? Did the circumstances in which the trust received a transfer of the debt and the subsequent payment of accounts to the builder disclose that the overall arrangement was one that had been independently considered by the trustee of ATL in order to determine whether best interests of the trust lay?
[71] The answer to those questions and the overall factual context of the case must lead to recognition of the fact that ATL was nothing more than a conduit through which Mr Osmond was passing funds, the ultimate destination for which would be decided by him and not by the trustee of Arai, the latter having first considered its obligations to the trust. There is no suggestion that the agreement of the trustee of ATL (having given due consideration that a trustee properly conducting itself should have to the affairs of the trust) was obtained about where the money was to go to.
[72] If, as I have concluded, there was no arguable contract between ATL, the trustee and Arai in existence, then the question must be asked; on what basis was the trust using its money to discharge Arai’s debt to the builder? Had the alleged arrangement for ATL to purchase from Arai been an arm’s length contract, a party in the position of ATL would not have agreed to pay money for improvements on its property solely in reliance on the hope that in due course Arai, although not bound to, would transfer the property to ATL. It is plain that the transactions only came about because Mr Osmond was in control of ATL, the corporate trustee of Aniwaniwa Trust, entered into a non-consensual transaction on its behalf each time he paid away its funds to the builder, assuming in favour of the defendants that such payments actually were made.
[73] There is no doubt that it is open to a party to discharge on behalf of another the debt that that other party owes to a third party. But the fact was that the structure of the arrangements meant that the trustees did have any obligation to pay the debt to the building company. The substance of the arrangement was that the payments that, for some reason, Mr Osmond routed through the trustee of ATL were applied in satisfaction of the debt that Arai itself owed and not a debt that the trust owed. It would be artificial in the extreme to regard these arrangements as being a payment of
an obligation which the trust owed under the contract to purchase the land and building from Arai.
[74] In overall summary, the defendants are unable to contend that they have already discharged their obligations under the agreement for sale and purchase. There is no evidence that they will be able to do so by alternative means. The agreement that they have with Arai is not enforceable at equity.
Have the defendants satisfied requirements for constructive trust?
[75] Because the defendants have relied upon the doctrine of constructive trusts as a possible basis for relief, it is necessary to make brief mention of the relevance of such trusts.
[76] Constructive trusts come into existence in circumstances where they are required to be recognised for various purposes, but the underlying policy is the avoidance of unconscionability on the part of the legal owner of property.16
[77] For the defendants to have an arguable defence that a constructive trust in favour of ATL arose through the dealings between it and Mr Osmond and Arai, it needs to be shown that the intervention of such a trust is required in order to avoid unconscionable dealing on the part of Arai, the entity that the plaintiffs represent. That would require the defendants to demonstrate an arguable basis for contending that an examination of the particular facts will disclose that the equities favour its position. For the reasons given above in this judgment, the equities are not in favour of the defendants’ position. Further, because the defendants are invoking the assistance of equity, they must not be disqualified from doing so by principles such as that embodied in the equitable maximum that he who seeks equity must have clean hands. I deal with this aspect in the following section of this judgment.
[78] Mr Cornege did not present me with a detailed analysis of the circumstances that gave rise to a possible constructive trust. He referred me to the references in
Equity and Trusts in New Zealand, where the learned authors state that such a trust
16 Lankow v Rose [1995] 1 NZLR 277 (CA).
may arise in circumstances where “e) A vendor has entered into a contract to sell land”.17
[79] However, what is made clear elsewhere in the same text is that before such a trust can come into existence there must be an enforceable contract for the sale of property.18 The defendants have to acknowledge that there is no contract in writing with respect to the purchase of the land which they are able to seek performance of. I have also concluded that the doctrine of part performance does not assist them. It follows that they are not able to invoke the existence of an alleged constructive trust.
Constructive trust based upon contribution?
[80] The next issue to be examined is whether the trust somehow provided funds in circumstances which were accompanied by a reasonable expectation on the part of the parties that in return the trust would receive an interest in the property. 19
[81] As I understand it, this basis for the assertion of a constructive trust is alternative to the argument that the trust had an enforceable contract for the purchase of the property.
[82] The assignment of the purchase price that Arai owed to Mr Osmond could not have taken place before 2005. Only from that time was the trust in the position of being able to satisfy part of the purchase price for the land by setting off the debt that was owed to it against the debt that it owed to Arai. In theory, there was nothing to prevent a set-off taking effect in 2005. However, the debt for the purchase price to Arai only came into existence (if it did it all) at the point where Arai had executed its obligations under the contract. While there was no argument on the point, I assume that that would occur at the stage where Arai provided the documents of transfer and a settlement statement to the trust as a purchaser of the property.
[83] The process has been described in the following terms by the learned authors of Land Law in New Zealand: 20
17 Andrew Butler (gen ed) Equity and Trusts (2nd ed, Thomson Reuters, Wellington, 2009) at
[13.2.1].
18 At [13.2.6] and see Bevin v Smith, above n 7.
19 Lankow v Rose
“after the parties to a contract for the sale of land (commonly called an “agreement for sale and purchase” have completed the search and the acceptance of the vendor’s title, have prepared and executed the various necessary documents, and have rendered and checked a financial statement of the amount required under the contract from the purchaser (commonly called a “settlement statement”), the next stage in the transaction is the settlement. This is the actual exchange of the transfer instrument, and any other documents necessary to vest title in the purchaser on registration, for the money owing by the purchaser as calculated in the settlement statement. It is also frequently the date upon which possession, both legal and physical, is given to the purchaser, and the date at which the incomings, such as rent and outgoings, such as rates, are apportioned between the vendor and the purchaser”.
[84] The events that I have just described never occurred, though. It is necessary for the trust to show that it is reasonably arguable that a set off would still be possible even now if the point was reached where the trustees were able to compel Arai to settle the contract. This as I have attempted to demonstrate when dealing with the contractual arguments, it is not arguable that the trustees will be able to do that. There is no binding contract.
[85] There are additional grounds why a constructive trust ought not to be recognised in the circumstances. Such trusts – or at least that sub-group of them which are based upon contributions made to property – are based upon what has been described as the “reasonable expectations” of the parties.21 I do not consider that it is reasonably arguable that the defendants will be able to demonstrate such a
reasonable expectation. The parties cast their arrangements in the form of a contract, according to Mr Osmond. As I have concluded elsewhere, it is very likely that that contract will be found to be ineffective. Can it be said in the circumstances that
there was a “reasonable expectation” that if the parties’ contract failed then the same result that would have been achieved by an effective contract will be arrived at by imposition of a constructive trust? I would answer that question in the negative. No argument was addressed to me which would identify a basis upon which the court
could come to such a conclusion.
20 Paragraph 20.001
21 Lankow (1994) 12 FRNZ 682, 691
Alternatively, do the circumstances give rise to a resulting trust?
[86] Counsel for the defendants submitted that the circumstances of the various payments which the trust allegedly made, gave rise to a resulting trust. He referred to the speech of Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington London Borough Council, where his Lordship made the following observations:22
Under existing law a resulting trust arises in two sets of circumstances;
(A) Where A makes a voluntary payment to B or pays (wholly or in part) for the purchase of property which is vested either in B alone or in the joint names of A and B, there is a presumption that A did not intend to make a gift to B: the money or property is held on trust for A (if he is the sole provider of the money) or in the case of a joint purchase by A and B in shares proportionate to the contribution.
(B) "It is important to stress that this is only a presumption , which presumption is easily rebutted either by the counter- presumption of advancement or by direct evidence of A's intention to make an outright transfer".
(C)Where A transfers property to B on express trusts, but the trusts declared do not exhaust the whole beneficial interest.
[87] The route by which the defendants’ claim they can establish the position is as follows. They assert that it was the intention of relevant parties that the trust should become the equitable owner of the property once payments had been made under an agreement for sale and purchase.
[88] At the heart of the alleged resulting trust is the same basic consideration that is said to underpin the constructive trust argument. That is to say, the argument is that the trust provided funds for an acquisition of a property in the form of the debt which Mr Osmond transferred to it and the payments that were made for the house construction. There is no need to repeat why I consider that the assignment of debt ought not to be recognised. I have already dealt with those arguments when considering the constructive trust.
[89] That is to say, the argument for a resulting trust founders on the necessity of showing that funds were actually contributed to the property.
[90] This is the same issue that I dealt with in the section of the judgment concerned with constructive trusts. The same answer must be given in this case, namely, that it did not. That is fatal on its own to the contention that a resulting trust came into existence.
[91] The second part of the contract was concerned with the provision of a residence on the property which the vendor, Arai, was required to provide as part of its contractual obligations. The defendants contend, in effect, that this is not an issue in this case. That is because the trust had paid for the construction of the house by means of funds which Mr Osmond had provided.
[92] A resulting trust will be recognised where the court, after examining all the background, is able to ascertain the shared intentions of parties, whether actual inferred or imputed in the light of their course of conduct.23
[93] It does not seem that the inference does in fact arise from the payments for the house. That is to say the inference is unlikely to be drawn where the individual in control of the various entities concerned put into operation a “money go round” which resulted in Arai being, in substance, the party which paid for the house to be constructed in circumstances where the money was routed through the trust. Therefore, I do not consider it is arguable that a resulting trust came into existence.
The equitable doctrine of clean hands
[94] The next issue concerns the equitable doctrine of “clean hands”. That is to say in the context of this case, the Court needs to assess the submission for the plaintiffs. The company cannot expect the assistance of equity if its own actions amount to equitable fraud.
[95] Mr Osmond said in his first affidavit:
71. I arranged for Aniwaniwa trust to pay Arai limited
$889,552.61 for it to meet its obligations to purchase unit J and K and the building of the house and the variation in extras for the house on unit J evidenced by Exhibit N. Arai limited was paid in full by 24 April 2004. I then signed a client instruction and authority form which was prepared by and given back to, Mr Harris.
72.I confirm I did receive the proceeds from the settlements from the solicitors and payments that I received relate to money is that I was owed by Arai limited under both sale and purchase agreements after the prior charges were net. These payments on account of the purchase price of the land as evidenced in those agreements.
[96] How the precise figures are made up does not matter for present purposes. Counsel for the defendant submitted that approximately $900,000 was paid to the company from “the trust/Mr Osmond”. There is no arguable basis in the evidence for contending that part of this amount, the assignment of the debt, took place in
2005. That is because Mr Osmond has accepted that the document could not have been executed in 2003 but does not give any alternative explanation as to when it was actually executed. Counsel has continued to put forward the proposition that it was executed in 2003. However the court must come to its view of the facts based upon the evidence rather than counsel’s submissions if the latter do not appear to be supported by the evidence.
[97] It would appear that the claim is also made that the payments owing under
the building contract were also made by “the trust/Mr Osmond”.
[98] There is no argument that use of trusts as vehicles to own family assets is a legitimate aspect of commerce in New Zealand. However, that is not to say that dispositions to family trusts are unimpeachable in circumstances where the objective is to defeat creditors.24
[99] The coincidence in timing of the assignment of the debt and the payments with the onset of insolvency is clear. That coupled with the lack of an explanation for why it was necessary to circulate the money in the way that Mr Osmond contrived gives rise to a strong inference which is unexplained that the purpose of the arrangements was to defeat the creditors of the company and of Mr Osmond personally. While the act of Mr Osmond in transferring money on to the trust would not have conclusively placed the money beyond the reach of creditors, the addition of a further chain of transactions and the involvement of further entities could possibly be explained as motivated by the need to obscure where the money had gone to. In any event, there is no need to come up with a firm conclusion on this last point.
[100] The payments to the builder during 2004, that coincided with the company being assessed as owing tax of $263,453.19 and additional amounts for penalties during the 2004 year, make the objective of the arrangements clear. Those observations are reinforced by the fact that by 2005, Arai was being prosecuted for failure to file tax returns.
[101] By 2006, assessments which IRD made of tax unpaid by Arai totalled in the order of $438,000 covering the 2004 and 2005 financial years. That Arai was in no position to meet its taxation liabilities is further confirmed by the fact that three years after the default assessments took place for those years, the unpaid tax for which a summary judgment was entered in favour of the Commissioner was in excess of one million dollars.
[102] It will be recalled that that forgiveness of debt was in favour of the new trustee two years before that trustee came into existence. There is therefore good reason to suppose that Mr Branch is correct when he submits that the assignment of debt purportedly granted in 2003 was actually drawn up in 2005 when there was a strong likelihood of the Commissioner taking action against the company for unpaid tax. These circumstances are persuasive that the intention of the arrangements was to move part of the wealth of Arai to a third party, ATL. In the absence of any explanation from Mr Osmond, as part of his sworn evidence in the summary judgment proceeding to explain why the circular payment arrangements in place
were adopted, the inference that arises from the documents and the contemporaneous events that were occurring is that the channelling of the money through the trust was part of a tax evasion exercise.
[103] In these circumstances the mis-dating of the assignment of the debt which Arai owed to Mr Osmond has special significance. It shows an intention to misrepresent the real position to the outside world. The objective was to present the position as being that the assignment, rather than taking place in 2005, was moved back two years thereby making it more distant from the time when the company was demonstrably insolvent.
[104] A further unexplained circumstance of all of these arrangements is why Arai took it upon itself to enter into a building contract to supply a home considerably in excess of the standard required under the contract that it had entered into. This assumes that Arai is able to argue that in providing the house on the property it was discharging a contractual obligation owed to the purchaser. As I have already noted, it is conceded for the defendants that that contract was invalid as not having been properly executed. I have further concluded that no inferred agreement replaced it. But even if Mr Osmond considered that there was an obligation to provide a home, why was it substantially in excess of the standard required under the alleged contract? That, in my view, is consistent with an intention to transfer assets out of Arai which was under threat (and Mr Osmond who would be consequentially under threat as a director of Arai) to the family trust.
[105] The plaintiff takes the position that the defendants who are effectively proxies of the trust, are unable to avail themselves of any equitable remedies such as a declaration that there is a constructive trust over the property in their favour. That is because they do not come to the court with clean hands. The position which the defendants take is that there has been no wrongdoing.
[106] There is long-standing authority concerning the effect of attempts to avoid indebtedness to the revenue in the context of arguments concerning lack of clean hands.
[107] The decision in Gascoigne v Gascoigne concluded that the doctrine was invoked in a case where a husband sought to avoid creditors by placing property in his wife’s name.25 The case was referred to in the High Court judgment of Meng in which Heath J summarised the effect of the decision as follows:26
[69] Gascoigne concerned a lease of land that a husband had taken in his wife's name. A dwelling had been built on the land through use of the husband's own money. The wife's name was used in the transaction, with her knowledge, because the husband was in debt and wanted to protect the property from his creditors. The husband sought a declaration that his wife held the property on trust for him. In the County Court, he succeeded. The wife appealed to the Divisional Court. The appeal was allowed.
[70] After reciting relevant facts, Lush J, for himself and Lawrence
J, dealt with the issue of principle. His Lordship said:
“ … [The County Court Judge's] findings of fact must be taken to mean that the plaintiff, with his wife's knowledge and connivance, concocted the scheme of putting his property in her name, while retaining the beneficial interest, for the purpose of misleading, defeating, and delaying present or future creditors. This was the whole basis of the plaintiff's case, and it could not be put in any other way consistently with his claim to be owner of the property. It was the reason he himself gave for his conduct. Now, assuming that there was evidence to support the finding that the defendant was a party to the scheme which the plaintiff admitted, but without deciding it, what the learned judge has done is this: He has permitted the plaintiff to rebut the presumption which the law raises by setting up his own illegality and fraud, and to obtain relief in equity because he has succeeded in proving it. The plaintiff cannot do this; and, whether the point was taken or not in the county court this Court cannot allow a judgment to stand which has given relief under such circumstances as that. … ”
[108] In my view, the doctrine of absence of clean hands applies in the circumstances. All of the relief which the defendants say the trust would be able to obtain and which would protect their continuing rights, to possession of the property arise in equity. Once any entitlement to apply in equity has ruled out, the basis for
the proposed defence no longer exists. The result is that there is no arguable defence
25 Gascoigne v Gascoigne [1918] 1 KB 223 (DC).
26 Meng v Song [2012] NZHC 3167. Citing Gascoigne v Gascoigne, above n 27, at 226.
available to the defendants which is based upon equitable relief and therefore their suggested arguable defence does not exist.
Conclusions
[109] The conclusions that I have reached in this matter are a follows. First, it is not arguable that ATL has a contract with Arai which it is able to enforce (if granted leave to proceed under s 248 Companies Act 1993). In any case, specific performance would be impossible having regard to the charging order that the IRD has lodged against the property. As well, specific performance would not be available because the purchaser trust has not completed its obligations under the agreement for sale and purchase, the assigned debt from Mr Osmond being of no value.
[110] Further, I have concluded that the series of transactions which are at the heart of this property arrangement, central to which is the assignment of debt to the trust which allegedly took place in 1983 but is clearly a 1985 transaction, took place against a background where Arai was coming under investigation from the IRD. The arrangements entered into were intended to place property beyond the reach of creditors of Arai. Any proceedings in equity which the trust might bring would be defeated on the grounds that the applicant for equitable relief did not come to court with clean hands.
[111] The same considerations apply to any application to the court for a declaration that Arai holds the property as trustee for the beneficial owner, the trust.
[112] As well, it is not arguable that the court would recognise a constructive trust over the property because no contribution was ever made what was proposed was that when the time came to settle the contract with Arai, the trust would take advantage of the debt assigned to it by Mr Osmond. But that point was never reached. The same point disposes of claims to a resulting trust arising from contribution of funds. As well, any payments that were made were attributable to what the parties understood to be a contract for sale and purchase. No basis has been established for suggesting that it is arguable that the parties had a reasonable expectation that if that contract failed, the contribution of funds would be recognised
by way of imposition of a constructive trust protecting the trust’s equitable interest in the property. Finally, the true source of the funds which were contributed to the development of the property were not the beneficial property of the trust and passed through it as a conduit as part of a process controlled and directed unilaterally by Mr Osmond.
[113] In any case, the timing of the arrangements entered into in 2005 for the assignment of the debt (assuming it occurred at all) occurred at a time when the company was insolvent. The extraction of the entire purchase price owed to Mr Osmond from the company at the point that time was inferentially intended to defeat creditors. No basis for reviewing the transaction in a different light has been put forward. The defendants as party to these arrangements do not come to equity with clean hands.
[114] Because the defendants are unable to point to the existence of any type of the equitable interest in the property, it follows that it is not arguable that the trust would ultimately acquire the status of the sole legal proprietor of the property which is competent to limit the defendants to have possession of the property. Therefore the defendants have no arguable defence to the claim which the liquidators bring in right of the legal proprietor of the title in fee simple, Arai, to recover possession of the property.
Results
[115] The defendants’ application for a summary judgment for the recovery of the
possession of land is dismissed.
[116] The parties should confer on the question of costs and if they are unable to agree them memoranda not exceeding five pages on each side are to be supplied
within 15 working days.
J.P. Doogue
Associate Judge
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