Commissioner of Inland Revenue v Ly

[2012] NZHC 443

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV2011-419-000768 [2012] NZHC 443

IN THE MATTER OF     the Tax Administration Act 1994, Part 32 of the High Court Rules 2008, and sections

347 and 348 of the Property Law Act 2007

BETWEEN  THE COMMISSIONER OF INLAND REVENUE, WELLINGTON

Plaintiff

AND  HON LY

First Defendant

AND  TA LY

Second Defendant

ANDVANDRA LY Third Defendant

ANDVANDRA LY AND THIARY LY AS TRUSTEES OF THE VANDRA LY FAMILY TRUST

Fourth Defendant

ANDHON LY AND TA LY AS TRUSTEES OF THE HON AND TA LY FAMILY TRUST Fifth Defendant

Hearing:         1 December 2011

Appearances: P Courtney for Plaintiff (Applicant)

M Locke and J Nguy for Second and Fifth Defendants (Respondents) Judgment:     16 March 2012

(RESERVED) JUDGMENT OF ANDREWS J

This judgment is delivered by me on 16 March 2012  at 2:30pm pursuant to r 11.5 of the High Court Rules.

..................................................... Registrar / Deputy Registrar

Solicitors:           Crown Law, PO Box 2858, Wellington 6140

Jesse & Associates, PO Box 106773, Auckland City, Auckland 1143

Counsel:             M G Locke, PO Box 1044, Nelson 7040

COMMISSIONER OF INLAND REVENUE V LY & ORS HC HAM CIV 2011-419-000768 [16 March 2012]

Introduction

[1]      The Commissioner of Inland Revenue has applied for orders under s 348 of the Property Law Act 2007 (“the Act”), setting aside dispositions of two residential properties, as follows:

(a)      the  property  at  3  Miriama  Street,  Taumarunui  (“the  Taumarunui house”) on 16 April 2009, to the third respondent, Vandra Ly, and subsequently on 9 June 2009 to the fourth respondents, Vandra Ly and Thiary Ly, as trustees of the Vandra Ly Family Trust; and

(b)the property at 1/46 Sunset Road, Glenfield, Auckland (“the Auckland house”), on 16 April 2009, to the third respondent, and subsequently on 23 December 2010, to the fourth respondents.

[2]      The application is opposed, it being contended that the grounds for such orders are not made out. The Notice of Opposition was filed on behalf of the second, third, fourth, and fifth defendants, the first defendant having left New Zealand on 17

November 2009, and not returned.

Background

[3]      The first defendant, Hon  Ly, and his wife, Ta  Ly, the second defendant, originally from Cambodia, came to New Zealand from Australia in early 1999.  The third defendant, Vandra Ly, is their daughter.  She is an accountant, working as such in Sydney, Australia.  Hon and Ta Ly settled in Taumarunui where they bought the Taumarunui house on 30 July 1999.   The purchase price was met by funds they brought with them from Australia.  They also bought a bakery business at Hakiaha Street Taumarunui (“the Taumarunui bakery”), which they operated as a partnership.

[4]      In  February  2006  Hon  and  Ta  Ly  bought  the  building  in  which  the Taumarunui bakery was located (“the Hakiaha Street building”).  The purchase was funded by finance obtained from NZ Guardian Trust.   Hon and Ta Ly nominated themselves as purchasers “as trustees” of the Hon and Ta Ly Family Trust.

[5]      In  2003  Hon  and  Ta  Ly  bought  a  bakery  business  in  Whakatane  (“the Whakatane bakery”).   They continued to operate the Taumarunui bakery in partnership, while the Whakatane bakery was operated by Hon Ly as a sole trader.

[6]      On 17 April 2003 Hon and Ta Ly bought the Auckland house, with the assistance of a loan from friends (for the deposit) and mortgage funding from the ASB.

[7]      In July 2008 the Inland Revenue Department began an audit investigation into the Taumarunui and Whakatane bakery businesses.   In the course of the investigation there were meetings between the Inland Revenue Department and Hon and Ta Ly concerning their non-compliance with their tax obligations, during 2008 and 2009.    Subsequently, the Inland Revenue Department investigator had discussions with Vandra Ly.  It was disclosed that significant cash income had been received through the businesses, for which no records had been kept, and no returns filed for income tax or GST purposes.  Further, PAYE had not been deducted or paid to IRD in respect of payments to employees.

[8]      Hon Ly, in his personal capacity, was subsequently assessed for core tax of approximately $1 million.  He was also assessed, jointly and severally with Ta Ly, for  core  tax  of  approximately  $431,000.    Ta  Ly,  in  her  personal  capacity,  was assessed for core tax of approximately $326,000, and jointly and severally with Hon Ly for approximately $431,000.   Following payments, refunds, and write-offs, the current tax liability of Hon and Ta Ly (exclusive of interest and penalties), is:

(a)       Hon Ly (personal capacity) $924,395.80; (b)    Ta Ly (personal capacity) $285,819.45; and

(c)       Hon Ly and Ta Ly (jointly and severally) $379,783.97. The assessments were not challenged by either Hon Ly or Ta Ly.

[9]      On 16 April 2009 Vandra Ly bought the Taumarunui and Auckland houses from her parents.  The purchase price for the Taumarunui house was $120,000, and

that for the Auckland house was $430,000.   Vandra Ly paid a deposit of $50,000 towards both purchases.   For the purposes of this proceeding this has been apportioned as $25,000 towards each purchase.  The balance of the purchase price for the Taumarunui house ($95,000) was left owing to Hon and Ta Ly under a term loan  agreement.     The  balance  of  the  purchase  price  of  the  Auckland  house ($405,000) was met in part by mortgage funding from the ASB ($150,000) and in part by the term loan from Hon Ly and Ta Ly.

[10]     The term loan was for ten years.   The principal sum was to be paid on or before 21 April 2019.   Interest was to be paid (if demanded) at 7.5 per cent per annum in instalments of $2,700 per year.  The loan was unsecured.  Payments have been made to the ASB in respect of the Auckland house, but no payments were made to Hon and Ta Ly under the term loan agreement.

[11]     On 21 April 2009 the Taumarunui and Whakatane bakery businesses were sold to Vandra Ly Limited, a company established by Vandra Ly on 20 April 2009. The purchase prices were $35,000 (Taumarunui bakery) and $113,000 (Whakatane bakery) and were left owing, in full, pursuant to a term loan agreement.  This term loan was for five years, repayable on or before 20 April 2014, but was otherwise in the same terms as the term loan agreement relating to the two house properties.  The Taumarunui bakery was subsequently sold to a third party in July 2010 for $35,453. The Whakatane bakery was sold to at third party in October 2010 for $150,000.  The Hon and Ta Ly Family Trust remains the owner of the Hakiaha Street building.

[12]     On 9 June 2009 Vandra Ly entered into an agreement to sell the Taumarunui house to herself  and Thiary Ly,  as trustees of the Vandra Ly Family Trust, for

$100,000.   That sale was not reflected in a historical search of the title to the property, as at 2 June 2011.  In recent years, this property has been let.

[13]     A transfer of the Auckland house from Vandra Ly to the trustees of the Vandra Ly Family Trust was registered on 23 December 2010.  Hon and Ta Ly, and members of their family, remained in occupation of the Auckland house, pursuant to a lease agreement.  Despite a provision for rent to be paid, none was paid.  The Auckland house was sold at auction on 4 December 2011, for $450,000.

[14]     Vandra Ly, in an affidavit in opposition to the Commissioner’s application, sworn on 4 November 2011 said:1

In about 2008 I learned of the mess that my parents had got themselves into, and  I  immediately  set  about  finding  out  what  I  could  do  to  help, investigating ways in which my parents’ situation could be brought into order, and investigating ways of preventing my parents losing everything they had worked for.

My parents had clearly failed to comply with many obligations they had as proprietors of the business, but they are my parents and I wanted to do what I could to retrieve the situation if that was possible, or to prevent them losing everything they had worked so hard for if this was not possible.

Proceedings to recover tax owing

[15]     On 10 June 2011 the Commissioner issued proceedings seeking judgment against Hon Ly and Ta Ly for the core tax owing (as set out at [8], above) together with penalties and interest.  At the same time, the Commissioner filed the present application  for  orders  under  s 348  of  the  Property  Law  Act  in  respect  of  the Taumarunui and Auckland houses, and an application for freezing orders in respect of the two house properties, and the Hakiaha Street building.

[16]     Freezing orders, as sought by the Commissioner, were made on 14 June

2011.2    The freezing order was to expire unless it was continued or renewed on 20

July 2011.  Service was directed to be made on the defendants, and their solicitor. On 20 July 2011, by consent, it was ordered that the freezing orders be continued until further order of the Court.3   The net proceeds of sale of the Auckland house are held by the Registrar of the High Court in an interest-bearing account.

Relevant provisions of the Property Law Act 2007

[17]     The Commissioner’s application to set aside dispositions is brought under s 348 of the Act.  That section is in Subpart 6 of the Act, which deals with setting aside dispositions that prejudice creditors.  The purpose of Subpart 6, as set out in

s 344, is to enable a court to order that property acquired or received under or

1      Affidavit of Vandra Ly, 4 November 2011 at [39] – [40].

2      Commissioner of Inland Revenue v Ly HC Hamilton CIV 2011-419-768, 14 June 2011.

3      Commissioner of Inland Revenue v Ly HC Hamilton CIV 2011-419-768, 20 July 2011.

through certain prejudicial dispositions made by a debtor be restored for the benefit of creditors. A “disposition of property” is defined in s 345.  There is no dispute that the sales of the Taumarunui and Auckland houses come within s 345(2)(a) and (c), which provide that a disposition includes:

(a)       a conveyance, transfer, assignment, settlement, delivery, payment, or other alienation of property, whether at law or in equity:

...

(c)       the  grant  or  creation,  at  law  or  in  equity,  of  a  lease,  mortgage, charge, servitude, licence, power, or other right, estate, or interest in or over property:

...

[18]     Section 346(1) provides that the subpart applies to dispositions of property made after 31 December 2007 by a debtor to whom subs (2) applies, and with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.  Section 346(2) provides that the debtors to whom the sub part applies are as follows:

(2)      This subsection applies only to a debtor who—

(a)      was insolvent at the time, or became insolvent as a result, of making the disposition; or

(b)      was  engaged,  or  was  about  to  engage,  in  a  business  or

transaction  for  which  the  remaining  assets  of  the  debtor were, given the nature of the business or transaction, unreasonably small; or

(c)      intended to incur, or believed, or reasonably should have believed,  that  the  debtor  would  incur,  debts  beyond  the

debtor’s ability to pay.

[19]     Section 347 of the Act specifies who may apply for an order under s 348. This includes “a creditor who claims to be prejudiced by a disposition of property to which this subpart applies” (s 347(1)(a)).

[20]     Section  348  sets  out  the  Court’s  power  to  make  an  order  setting  aside

dispositions of property, as follows:

348     Court may set aside certain dispositions of property

(1)      A court may make an order under this section—

(a)      an   application   for   the   purpose   (made   and   served   in accordance with section 347); and

(b)      if  satisfied  that  the  applicant  for  the  order  has  been

prejudiced by a disposition of property to which this subpart applies.

(2)      The order must do 1, but not both of the following:

(a)      vest the property that is the subject of the disposition     in

the person (for any applicable purpose) specified in section

350:

(b)       require a person who acquired or received property through the disposition to pay, in respect of that property, reasonable compensation to the person (for any applicable purpose) specified in section 350.

(3)       If the order does what is specified in subsection (2)(a), it may also require a person who acquired or received property through the disposition to physically restore some or all of that property that is tangible personal property to 1 or more persons specified in the order.

(4)       Person   who   acquired   or   received   property   through   the disposition means a person who acquired or received—

(a)      under the disposition; or

(b)       through a person who acquired or received property under the disposition.

(5)      The order must not have effect so as to increase the value of a

security held by a creditor over the debtor’s property.

(6)      Subsection (5) overrides subsection (2) and section 350. (7)         This section is subject to section 349.

[21]     Section 349 is a provision which protects persons who acquire or receive property under a disposition if they meet specified criteria, as to having acquired or received  the  property  for  valuable  consideration  and  in  good  faith  without knowledge of the fact that it had been the subject of a disposition to which the subpart applies.   Section 350 specifies the persons in or to whom an order under s 348 vests property, or makes compensation for that property payable.

Issues

[22]     The   Commissioner   contends   that   the   transfers   to   Vandra   Ly   (and subsequently to the trustees of the Vandra Ly Family Trust) of the Taumarunui and Auckland houses are dispositions to which Subpart 6 applies.  He contends that Hon and Ta Ly became insolvent as a result of the transfers.   The Commissioner also contends that the dispositions were made without reasonably equivalent value being received in exchange, and that he has been prejudiced.

[23]     It is not disputed that the transfers to Vandra Ly and the Vandra Ly Family Trust were “dispositions” and that they were made after 31 December 2007.  Nor is it disputed that at the time of the transfers Hon and Ta Ly had no assets other than the properties transferred.  Further, it is not disputed that the Commissioner is a creditor who claims to be prejudiced by the transfers. As there is no dispute that Hon and Ta Ly had no assets other than the properties transferred, I conclude that they became insolvent as a result of making the dispositions.

[24]     The issues for determination are:

(a)      Were the dispositions made with intent to prejudice a creditor, by way of gift, or without reasonably equivalent value being received in exchange (s 346 (1)(b))?

(b)      Did  the  dispositions  prejudice  the  Commissioner  as  a  creditor

(s 348(1)(b))?

(c)       Have the respondents made out any of the defences set out in s 349? (d)       Should the Court make any further orders under s 350(3)?

Were the dispositions made with intent to prejudice a creditor, or without a reasonably equivalent value being received in exchange?

Submissions

[25]     It was not contended by Mrs Courtney on behalf of the Commissioner that the transfers of the house properties were by way of gift.   She submitted that the transfers fell within the third limb of s 346(1)(b).  She submitted that the absence of a “reasonably equivalent value in exchange” could be inferred from two facts in particular: the only cash consideration paid for the Taumarunui and Auckland houses was $50,000 (apportioned as $25,000 for each property) and no payments of either interest or principal had been made on either of the term loans to Hon Ly and Ta Ly over the period of more than two years (since 21 April 2009) that the loans had been in place.

[26]     On  behalf  of  the  respondents,  Mr  Locke  submitted  that  the  term  loan agreements provided valuable consideration, because Vandra Ly is in a position to pay the outstanding balances on the two loans.  That submission, however, must be qualified by Vandra Ly’s statements in her affidavit that if she were repaid the deposit she paid to purchase the two house properties, and received an allowance for rent not paid by her parents, and the value of any increase in value of the properties as at the date of sale, that would assist her to refinance the other properties so as to

pay out the amounts owed to her parents, for the benefit of their creditors.4

Discussion

[27]     In  isolation  of  any of the other  circumstances,  the term  loans  appear  to provide equivalent value in exchange for the two properties, as the purchase prices appear  to  be  appropriate  for  the  value  of  each  property,  and  Vandra  Ly  is contractually bound to pay the loans.  The Commissioner did not contend otherwise regarding the purchase price or the terms of the loans.

[28]     That is not, however, the end of the analysis.  It is necessary to consider the term loans in the light of the surrounding circumstances. These are:

(a)       only $25,000 cash was paid for each house;

(b)      no payments of interest or principal were made on either term loan;

(c)      Hon and Ta Ly and members of their family remained in occupation of the Auckland house, and no rent was paid;

(d)each house has been further transferred to the trustees of the Vandra Ly Family Trust, with no cash consideration being paid and (in the case of the Taumarunui house) with forgiveness of debt to the extent possible without paying gift duty then applicable;

(e)       no advice of the transfers was given to the Commissioner.

4      Affidavit of Vandra Ly, 4 November 2011 at [102]-105].

[29]     In considering these circumstances I am guided by the judgments of the Supreme Court in Regal Castings Ltd v Lightbody.5   In that case Mr Lightbody had personally guaranteed substantial debts owed to Regal Castings.   He and his wife transferred their home into the ownership of a family trust.  No payment was made by the trustees, but they executed an acknowledgement of liability in favour of Mr and Mrs Lightbody which provided that the indebtedness would be repaid in seven

years’ time, with interest at 11 per cent per annum payable in the meantime.  On the

same day as they transferred the property, Mr and Mrs Lightbody together forgave

$54,000 of the debt, and they continued with a gifting programme which was completed by the end of 2002, by which time all of the indebtedness had been released.  Regal Castings was not told of the transfer of the property.  Mr Lightbody was bankrupted and had no assets from which to meet his guarantee obligations.

[30]     Regal Castings applied to have the transfer of the property set aside under s 60(1) of the Property Law Act 1952 (in essence, the predecessor of s 348 of the

2007 Act)  as an  “alienation of property with  intent to defraud  creditors”.   The Supreme Court allowed an appeal from the Court of Appeal (which had upheld the High Court judgment) and held that the trustees of the family trust held a half-share of their interest in the property in trust for the Official Assignee for the benefit of Mr Lightbody’s  creditors.    In  the  judgment  of  Blanchard  and  Wilson  JJ,  given  by

Blanchard J, his Honour commented:6

[Mr Lightbody’s] action in exchanging [his interest in the house property] for an unsecured debt not repayable for seven years and simultaneously gifting away $27,000 of the debt constituted, in our view, a disposition at an under-value.  The exchange was for a debt that did not have to be paid for seven years.

Tipping J commented:7

The key point, for present purposes, is that there can be no doubt Mr Lightbody intended at the time he entered into the transaction that the family home should be transferred to the trust for no substantive consideration.  The consideration  specified  in  the  sale  and  purchase  agreement  was  never intended to be paid.  It was, in any event, left outstanding for seven years, thereby immediately putting the debt due to the Lightbodys by the trustees out of reach of Mr Lightbody’s creditors for a substantial period of time.

5      Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433.

[31]     These comments are applicable in the present case.   I am satisfied that, in combination, the matters set out at [28], above, show that in the present case, also, the transfers were made without a reasonably equivalent value being received in exchange.

[32]     Although not advanced by Mrs Courtney, I am also satisfied that the transfers were made with intent to prejudice a creditor, namely the Commissioner.  Vandra Ly asserted (as recorded at [14], above) that she wanted to do what she could to retrieve the situation or to prevent her parents losing everything they had worked hard for. She went on to say:8

At the same time ... we all recognised that my parents owed IRD a great deal of money, and at no time sought to do anything that would hamper the ability of the IRD or anyone else to recover sums properly recoverable from my parents.

She said later:9

I wanted to preserve my mother and father’s home, without taking any steps that would disadvantage their creditors – which is why no attempt was made to gift the unpaid balance of the purchase price.

[33]     The transfers from Hon and Ta Ly to Vandra Ly were all made after the IRD investigation began.  As Vandra Ly makes clear, she and her parents knew that Hon and Ta Ly owed the Commissioner a great deal of money. The following observation from the judgment of Blanchard and Wilson JJ in Regal Castings is apt in the present case:10

... We have been unable to think of any plausible reason why someone in the position of the Lightbodys would go to the trouble and expense of setting up a family trust and transferring the house to it other than protection of that asset against the claims of creditors.

[34]     In the present case, Hon and Ta Ly transferred their only substantial assets to their daughter Vandra. They knew at the time that they owed a substantial debt to the Commissioner and by transferring the houses they removed from themselves any ability to pay it.  They did not give the Commissioner any notice of the transfers.

Vandra Ly’s assertion that she “wanted to preserve” her parents’ home cannot be

8 Affidavit of Vandra Ly, 4 November 2011 at [41].

explained in any way other than as an intention that the home would not be available to a creditor such as the Commissioner seeking payment of a debt.   This is notwithstanding her assertion that such preservation was to be achieved “without taking any steps that would disadvantage” the creditor.

[35]     The  conclusion  that  the  transfers  were  intended  to  put  the  two  house properties out of reach of Hon and Ta Ly’s creditors is, in my view, inescapable.  As was said in Regal Castings:11

Whenever the circumstances are such that the debtor must have known that in alienating property, and thereby hindering, delaying or defeating creditors’ recourse to that property, he or she was exposing them to a significantly enhanced risk of not recovering the amounts owing to them, then the debtor must be taken to have intended this consequence, even if it was not actually the debtor’s wish to cause them loss.

[36]     I am satisfied in this case that the circumstances of the transfers of the house properties to Vandra Ly and subsequently, her family trust, were such that Hon and Ta Ly must have known that the transfers would have the effect of hindering or delaying (at least) the Commissioner’s recourse to the properties to satisfy their tax obligations, and thereby exposing the Commissioner to a “significantly enhanced risk” of not recovering the tax debt.  They must therefore be taken to have intended this consequence.

[37]     In the circumstances, I am satisfied that the transfers of the house properties were dispositions to which s 346(1) of the Act applies.  As there was no dispute that Hon and Ta Ly became insolvent as a result of making the dispositions, the requirements  of  s 346(2)  are  met.   Accordingly,  the  dispositions  fall  within  the application of Subpart 6, and it is necessary to consider whether an order should be made under s 348.

Did the dispositions prejudice the Commissioner as a creditor?

Submissions

[38]     Mrs Courtney submitted that the prejudice to the Commissioner is obvious. The Commissioner has been  required to make this application in order to have

recourse to the value of the house properties to satisfy Hon and Ta Ly’s tax liabilities. She submitted that in terms of s 345(1)(a) of the Act, the dispositions had clearly hindered or delayed the Commissioner in the exercise of his right of recourse.

[39]     Mr Locke submitted that the Commissioner has not been prejudiced; that nothing that Hon and Ta Ly, or Vandra Ly, had done has hindered or delayed the Commissioner.  If the house properties had not been transferred to Vandra Ly, they would still have had to be marketed by the Commissioner or the Official Assignee. Mr Locke submitted that the Commissioner is no worse a position, as a result of the transfers, than he would have been if the transfers had not taken place.

[40]     Mr Locke also submitted that there can be no prejudice in the present case, as

Vandra Ly can pay the outstanding balances on the term loans.

Discussion

[41]     I do not accept Mr Locke’s submission that there can be no prejudice because Vandra Ly can pay the loan balances.  The short point is that she did not do so at any time before the Commissioner’s application was filed, and has not done so since.

[42]     In Regal Castings,12  Blanchard J said that the exchange of Mr Lightbody’s house for a debt which did not have to be paid for seven years “was bound to hinder or delay Regal’s recourse to Mr Lightbody’s only significant asset”.  That comment applies equally in the present case.

[43]     I am satisfied that in the present case the Commissioner has been hindered or delayed in the exercise of his right of recourse to the house properties.  He has had to apply for orders under Subpart 6 of the Act, and has had to incur the costs and delay involved in doing so.  I am satisfied that the Commissioner has been prejudiced by the dispositions.

[44]     It is necessary to turn now to consider whether the defendants had made out any of the defences set out in s 349 of the Act.

Are any of the s 349 defences made out?

[45]     Section 349(1) provides that the Court must not make an order under s 348 against a person who acquired property for valuable consideration and in good faith without knowledge of the fact that it had been the subject of a disposition to which Subpart 6 applies.  Section 349(2) provides that the Court may decline to make an order, or make an order with limited effect, against a person who received the property in good faith and without knowledge that it had been the subject of a disposition to which Subpart 6 applies, and that person’s circumstances have so changed  since  receiving  the  property  that  it  would  be  unjust  to  order  that  the property be restored, or reasonable compensation be paid, in part or in full.

[46]     The onus of proof is on the person who acquired or received the property.  Mr Locke submitted that Vandra Ly had acquired the Taumarunui and Auckland houses in good faith, for valuable consideration, and without knowledge that it was a disposition subject to Subpart 6 of the Act.  He further submitted that there had been no prejudice to the Commissioner, so no prejudice can have been intended.

[47]     Mr Locke also submitted that the Court should not make an order against the Vandra Ly Family Trust, as a “recipient” of the Auckland property.   He submitted that it would be inequitable to do so, given that members of the Ly family had lived in the house and had not paid any rent.  He submitted that if the family had lived elsewhere they would have had to pay rent.  Accordingly, he submitted, there would be no “net detriment” to the Commissioner if Vandra Ly were compensated to the extent of the unpaid rent.

[48]     Mr Locke’s submission regarding the “change of circumstances” limb under s 349(2)(b) was that Vandra Ly had entered into the lease agreement as a result of the transfer of the Auckland house, and would not have allowed anyone other than family members to live there without paying rent.   Mr Locke submitted (although Vandra Ly did not give evidence on this point) that the unpaid rent had been returned as income, tax paid on it, and deductions claimed.

[49]     Mrs Courtney submitted that none of the defences had been made out.  First, the Taumarunui and Auckland houses had not been acquired for valuable consideration.   Secondly, neither property could be said to have been acquired or received “in good faith and without knowledge” that it was a disposition subject to Subpart 6 of the Act.  Thirdly, there was no evidence of any change in circumstances that would make it unjust to order that the house properties be restored to Hon and Ta Ly, so as to be available in a future bankruptcy.

[50]     Mrs  Courtney  also  submitted  that  to  allow Vandra  Ly  compensation  for unpaid rent, or any other payments she has made, would be to prefer Ms Ly over other creditors, an outcome which is not permissible in a bankruptcy.   While the Commissioner has a statutory preference in respect of PAYE, the Commissioner is in all other respects in an equal footing with all other creditors.  It is open to Ms Ly to claim in the bankruptcy for any amounts she alleges she is owed.

Discussion

[51]     I have concluded at [31], above, that the transfers of the Taumarunui and Auckland houses were made without a reasonably equivalent value being received in exchange.  For the same reasons as set out in relation to that conclusion, I am not satisfied that the house properties were acquired for valuable consideration.

[52]     Similarly, for the reasons set out at [32] to [36], above, I am not satisfied that the two properties were acquired by Vandra Ly without knowledge of the fact that they were dispositions to which Subpart 6 applied.  To the contrary, I am satisfied that she did have such knowledge.  Further, I am satisfied that when the Vandra Ly Family Trust received the Auckland property, it did so with the same knowledge. The Supreme Court held in Regal Castings that as Mr Lightbody was a trustee of the family trust that had received the property, his knowledge tainted the receipt by the trustees of the property.  The trustees had to be “treated as one purchaser who has

knowledge”.13  Vandra Ly is a trustee of the Vandra Ly Family Trust.  Her knowledge

is that of all trustees of the trust.

13     At [70], per Blanchard J.

[53]     Further, I accept Mrs Courtney’s submission that there is no basis on which the Court could find a “change of circumstances” that would make it unjust to make the orders sought.

[54]     I am, therefore, satisfied that the orders sought by the Commissioner should be made.

Should any other orders be made?

[55]     Under s 350(3) of the Act, the Court may, if making an order under s 350(2) that property vests in a trustee for the debtor’s creditors, or the debtor, make any further order considered fit concerning:

(a)       the  administration  of  the  property  or  amounts  paid  by  way  of compensation; and

(b)      proofs of debt; and

(c)       the distribution of assets available to the trustee; and

(d)      any other relevant matters.

[56]     Whether further orders should be made under s 350(30), and the terms of such orders, will necessarily depend on the precise terms of any orders made under s

348 of the Act   I have decided in principle that the application by the Commissioner for orders under s 348 should be granted.

[57]     Draft terms or the orders sought to be made under s 348 were annexed to the Commissioner’s application.  Those draft orders were amended in Mrs Courtney’s written  submissions  filed  in  November  2011,  and  further  amendments  were suggested during the course of the hearing.  Matters have progressed further since that time.  The Auckland house was sold in December 2011.  I am aware that certain orders relating to the Auckland house were made by consent on 20 January 2012.

[58]     In order to ensure that the orders made under s 348 are appropriate, counsel are asked to submit the draft form of the orders to be made as a result of this judgment.   The following comments may assist the parties to determine the appropriate terms of such orders.

[59]     The defendants suggested at the hearing that the Court could, under s 350(3) of the Act, make an order of compensation to Vandra Ly for payments she has made in the course of attempting to assist her parents.   Such payments included the repayment of the $50,000 deposit she paid towards the two properties, and an allowance for rent payable during the period that her parents lived in the Auckland house from April 2009 to August 2010, at $500 per week.  The defendants further contended that Vandra Ly should have the benefit of any increase in value since the

2009 transfer to her.

[60]     The Commissioner did not accept that the failure to pay rent should be taken into account in considering what contributions had been made by Vandra Ly in respect of the Auckland property.   It appears, however, to have been accepted that credit should be given to Vandra Ly for the $50,000 deposit.

[61]     Section 348 of the Act provides only for an order that vests the property (or its proceeds) in a specified person or, alternatively, requires a person to pay reasonable compensation in respect of a property acquired or received through a disposition subject to Subpart 6.  Section 348 does not provide for the unwinding of transactions related to the disposition, such as the term loan agreements between Vandra Ly and her parents, or for payments such as the deposit, or mortgage repayments.    It may be that orders under s 350(3) of the Act could deal with such matters.

[62]     I do not consider it appropriate for Vandra Ly to retain the benefit of any increase in the value of either house  since her purchases of them in 2009, given my findings that the dispositions were made with the intent to prejudice creditors.  Nor do I consider it appropriate to make allowance for the rent that her parents might have paid in the period from April 2009 to August 2010.

Result

[63]     The application by the Commissioner for orders under s 348 of the Act is granted.

[64]     Counsel are invited to consult and submit the draft form of the orders to be made as a result of this judgment.

[65]     I invite counsel to resolve the matter of costs.  Should costs not be resolved, then brief memoranda may be filed: that on behalf of the Commissioner within 28 days of this judgment, and that on behalf of the defendants within a further 21 days. Counsel should indicate whether the matter of costs may be determined on the

papers, or whether a hearing is sought.

Andrews  J