Duke Trustee (2015) Limited v Downsview Finance Limited
[2017] NZHC 602
•29 March 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-2180 [2017] NZHC 602
UNDER Section 290 of the Companies Act 1993 IN THE MATTER
of an application to set aside a statutory demand
BETWEEN
DUKE TRUSTEE (2015) LIMITED Applicant
AND
DOWNSVIEW FINANCE LIMITED Respondent
Hearing: 13 March 2017 Appearances:
Ms C Rieger for the Applicant
Mr S Carey for the RespondentJudgment:
29 March 2017
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
29.03.17 at 3.30 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
DUKE TRUSTEE (2015) LIMITED v DOWNSVIEW FINANCE LIMITED [2017] NZHC 602 [29 March
2017]
[1] This is an application to set aside a statutory demand which the respondent,
Downsview Finance Limited (“Downsview”) served on the applicant on or about 15
June 2016. The statutory demand recited that the applicant, Duke Trustee (2015)
Limited (“Duke”), was:
Indebted to Downsview Finance Limited (“the Creditor”) in the amount of FOUR MILLION, FOUR HUNDRED AND FORTY NINE THOUSAND, FOUR HUNDRED AND TWELLVE DOLLARS AND NINETY FIVE CENTS ($4,449,412.95) (“the debt”), being the sum due and owing in respect of loans made by the creditor together with interest on those loans.
[2] The total number of loans which the respondent relied upon to support the statutory demand were 10 in number, but the respondent agreed before the Court that two of those loans had been re-paid.
[3] I agree with the submission of Mr Carey, for the respondent, that:
57.Those monies, of themselves, are sufficient to maintain the statutory demand: in order for the statutory demand to be set aside, Duke must show the existence of a substantial dispute over enough of the statutory demand to take the demand below the prescribed amount, which is currently $1,000.
[4] Therefore, provided one of the loans allegedly made exceeded the sum of
$1,000, that would be sufficient to support the statutory demand. There is one loan of approximately $1.5 million, to be discussed shortly, which was the liability that was the subject of most discussion at the hearing before me and which the respondent principally relied upon.
[5] On the other hand, Ms Rieger, for the applicant company, contended that her client was able to point to the existence of a substantial dispute in regard to that debt.
Principles
[6] The following principles govern applications to set aside statutory demands pursuant to s 290 of the Companies Act 1993:1
1 Risecorp Investment Trustee Ltd v Staywell Hospitality Management Ltd [2015] NZHC 1277 at [11]-[13].
(a) The party applying to have the statutory demand set aside must show that there arguably is a genuine and substantial dispute as to the existence of the debt;
(b) It is not enough merely to assert that a substantial dispute exists – material, short of proof, is required to support the claim that the debt is in dispute;
(c) If the material is available, the dispute should normally be resolved by other means;
(d) Genuine disputes of fact will not usually be resolved on affidavit evidence; and
(e) The task for the court is not to resolve the dispute but to determine whether there is an arguable substantial dispute sufficient to warrant the statutory demand being set aside.
The alleged advance of $1,527,501.
[7] It was the case for the respondent that Mr Mason, who was the principal of a number of companies and the settlor of some trusts, originally arranged for one of his companies, Capital Project Management Limited (“CPML”), to borrow the
$1,527,501 from the respondent.
[8] The respondent claims that the liability was subsequently “transferred” to the Rainbow Family Trust on 27 August 2010. It is also asserted that, on 9 March 2015, the liability was then transferred by agreement to the Duke Foundation Trust. The applicant, it is alleged, became the trustee of the Duke Foundation Trust on 10
December 2015. A substantial dispute can potentially arise with regard to each of the matters that the respondent would need to have resolved in its favour in order to establish that the liability originally owed by CPML is now the legal responsibility of the Duke Foundation Trust, and therefore the applicant as trustee of that trust.
[9] The respondent company was formerly under the control of Mr J G Russell. Mr Russell was adjudicated bankrupt in 2015 and Mrs Rogers thereafter became the sole director. She gave evidence in these proceedings for the respondent, as did Mr Mason for the applicant.
[10] Mr Mason, in his affidavit in support of the originating application, said that Duke owed no money to Downsview. It was his position that the debt was the result of a number of journal entries.
[11] A significant aspect of Mrs Rogers’ evidence is that the principal events with which the current case is concerned took place before she became a director of the company. Mrs Rogers gave evidence that the advance was made at the request of Mr Mason for CPML. She says that the loan from the respondent to CPML of
$1,527,501 was applied to the payment of a debt that CPML owed to a company called Emborion International Limited (“Emborion”) which the respondent paid on CPML’s behalf on 23 September 2008. She said that the respondent provided the initial loan for this purpose by way of a cheque. She said that the loan was on demand, but with the proviso that the demand would not be made before 12 months had elapsed. She said there was “no separate loan agreement”. Mrs Rogers said the interest rate of 10% was agreed orally with Mr Mason. She does not say who the counterparty to such an agreement was. She also does not say what the basis of her information is, bearing in mind that she was not a director of the company at the material time.
[12] In his evidence, Mr Mason did not make any comment about the initial advance being made to Emborion at his request. This was a key matter of evidence on which a specific refutation from Mr Mason might have been expected.
[13] Mrs Rogers, however, gave evidence concerning the following matters. First,
a sum of $1,527,501 was withdrawn from the respondent’s bank account on 2
October 2008. Prior to that occurring, Mr Russell sent a letter to CPML in the following terms:
This is to advise that on 23 September 2008 Downsview Finance Limited advanced the sum of $1,527,501 to Capital Project Management Limited in reliance upon a general security agreement …
[14] I note that this letter was addressed by Mr Russell to CPML at his, Mr Russell’s, address. Mr Carey said that it was done this way because Mr Russell was the accountant to CPML. Whether that is correct or not, I observe that this evidence is equivocal as to whether its contents came to the attention of Mr Mason.
[15] It would appear that a general security agreement (“GSA”) was entered into on 20 September 2008, which provided security for loans generally. The grantor of the GSA was CPML and the secured party was the respondent. The “covenantor” under the GSA was stated to be Christopher John Mason and, at the end of the document, there was a signature endorsed on the agreement as “signature of covenantor”. The case for the respondent is that this was Mr Mason’s signature.
[16] Mr Carey noted the coincidence of the date of the execution of the GSA, 20
September 2008, and the date when the advance was allegedly made by the respondent to the applicant, 23 September 2008.
[17] The case for the applicant is that Mr Mason, as director of the applicant, disputes that he ever signed the transfer agreement dated 27 August 2010. It is therefore alleged that the chain of transactions upon which the case for the respondent relies was broken at that point.
[18] Ms Rieger also submitted that, irrespective of whether the transfer of the debt occurred as Mrs Rogers contended, the alleged debt was not owed for the following additional reasons:
a) the alleged debt has not fallen due as demand for the debt has not been made on the applicant; and
b) the alleged debt is, in major part, a product of the “Russell template”
which has been deemed invalid as it is a tax avoidance device.
[19] However, it is apparent that the applicant also contests the existence of the debt allegedly contracted in 2008. Mr Mason gave an affidavit in the proceedings in his capacity as director of the applicant. The position that Mr Mason took in his affidavit in support of the application to set aside the statutory demand was that, as he put it:
I consider that no debt is owed to Downsview …
[20] He also stated:
Downsview are aware that Duke does not owe them money. They have taken a step which they are not entitled to take against Duke.
[21] So far as the series of transactions which resulted in the transfer of the liability from CPML to the applicant is concerned, Mr Mason’s position appears to be that the document which the respondent relied upon as affecting this transfer of liability dated 27 August 2010 may not have been genuine. He said:
I have concerns about the document that they have provided. It does not appear to be my signature on the document and there is no details of the person who has allegedly witnessed the document. Other documents that I have signed over the years are witnessed by one or two people both of who are aware of the requirements of signing and providing the full name and address. I do not believe this signature is mine or that this document is legitimate.
[22] He then went on to set out his view that the transaction was based upon a number of journal entries and there was no debt actually owed. He stated his understanding that the Russell taxation reduction template, which Mr Russell had designed for his companies, had been found to be tax avoidance. He then went on to say:
He [John Russell] is now claiming through his business associated (sic) that I owe money to Downsview on the basis of a scheme that he created that was illegal and that also meant I had to enter my own negotiations with the IRD to ensure that my tax position was preserved.
[23] He made other points, including that “Downsview has been unable to provide evidence that any money was advanced or paid to Duke” and that he and his advisors had made it clear that the debt was disputed.
[24] The respondent’s case is that a critical contemporaneous document, which would seem to support the existence of the debt, is the GSA. It was executed on the same day that Mr Russell stated in the letter of 23 September 2008 that the respondent had advanced $1,527,501 to CMPL in reliance on the GSA. Mr Mason did not dispute that the confirmation letter was sent and nor did he deny that the GSA was executed. The coincidence of the dates of the loan and the GSA strengthens the case for the respondent considerably.
[25] In regard to the alleged agreement to transfer the liability from CPML to the Rainbow Trust, which was the first link in the chain attaching liability for the advance of approximately $1,500,000 to the respondent, Mr Mason’s evidence is that he had “concerns” about the document. As quoted above, he said he did not believe that the signature was his or that the document was legitimate.
[26] Mrs Rogers, in a further affidavit in opposition, observed that Mr Mason appeared to be disputing his signature to the agreement transferring liability from CPML to the applicant. In contrast, she asserted that it did appear to be his signature.
[27] Mrs Rogers then dealt with the assertion that Mr Mason made that:
Other documents that I have signed over the years are witnessed by one of two people both who are aware of the requirements of signing and providing the full name and address. I do not believe that this signature is mine or that this document is legitimate.
[28] In relation to the witness to the signature, Mrs Rogers noted that it appeared from Mr Mason’s statement that he was unsure who the witness was. Mrs Rogers said that she had located a tax code declaration from an employee of Mr Mason’s by the name of Ms Chun, which she annexed to her second affidavit and which she said was consistent with the signature witnessing the transfer document.
[29] I note that Mr Mason did not deal with this assertion in his affidavit in reply. He did not comment on the fact that Ms Chun had been an employee of his.
Disputes concerning the making of the original loan
[30] One argument which the applicant puts forward is that no money was ever advanced to the Mason entities. This argument overlooks the fact that the case which the respondent puts forward is that the advance was intended to provide payment to a third party, Emborion, rather than to one of the Mason group entities. There can be no doubt that, if a debtor requests to borrow money from a creditor on the basis that the funds will be paid to a third party, a debt comes into existence when the payment to that third party is actually made. There does not actually have
to be a cash transaction involving a movement of funds directly from the creditor to the debtor.
[31] It is clear that the various entities under the control of Mr Mason entered into a taxation reducing arrangement devised by Mr J G Russell.2 Mr J G Russell was also the chartered accountant who attended to the affairs of the Mason entities. As described in the judgment of Venning J in Commissioner of Inland Revenue v Bell Road Developments Ltd, Emborion was one of the companies that was connected to the business making venture of Mr Mason’s entities, with the purpose that its
involvement would be used as a means of reducing the assessable income from profitable undertakings carried on by Mr Mason’s entities.3 As noted in the judgment, Emborion was in receivership at the time and had accumulated tax losses.4
It is not necessary to understand the exact way in which the alleged payment would have been used in order to mitigate the tax position of the Mason entities. Its significance in the present context is that it shows that there was a connection with Emborion, which was the company to which the loan of approximately $1.5 million was allegedly made by the respondent at the request of the Mason entities.
[32] As noted earlier in this judgment, Mr Mason accepts that his companies were involved in the Russell Template tax avoidance mechanisms. As has already been noted as well, Emborion appeared to be part of the tax avoidance structure adopted in Commissioner of Inland Revenue v Bell Road Developments Ltd.5
[33] It is of course possible that a payment might have been made to Emborion by the respondent without the consent of the Mason entities. The evidence that the respondent puts forward about the circumstances in which that debt came into existence is augmented by the second affidavit that Mrs Rogers has filed. She says in her second affidavit that:
a. …In essence, it was an advance to repay a creditor of CPML called
Emborion International Limited.
2 The details of the scheme are to be found in the judgment of Venning J in Commissioner of
Inland Revenue v Bell Road Developments Ltd [2014] NZHC 1841.
3 At [3].
4 At [3].
5 Commissioner of Inland Revenue v Bell Road Developments Ltd, above n 2.
CPML did not have funds to repay this creditor, and as a result borrow the
$1,527,401 from Downsview. The request was made by Mr Mason to Mr
Russell, who was at the time the director of Downsview. The advance was recorded in the signed GSA that is attached to my first affidavit as Exhibit 4, and confirmed in the letter from Downsview to CMPL (sic) of the same day, which is Exhibit 3 to my first affidavit.
b. There was no separate loan agreement. The interest rate of 10% was
agreed orally with Mr Mason…
[34] That provides some evidence of a connection between the applicant and Emborion. But it does not prove that in this case there was a requirement for a payment to Emborion. It does not particularise how the obligation to pay Emborion came about in the first place.
[35] On the other hand, Mr Mason does not provide a forthright denial that there was an agreement to obtain an advance from the respondent, which could be used to make a payment to Emborion. Whether there was such a payment made to Emborion and whether it was for the purposes of tax avoidance, which Mr Russell had been instructed to pursue for the Mason entities, are not matters about which there can be any certainty, given that the respondent concedes there was no written agreement to that effect. Such evidence is really an inference drawn from the fact that, if Mr Russell took steps to arrange an advance to the applicant, then it must have been for such purposes.
[36] While the alleged loan agreement is not documented, there are other more or less contemporaneous documents in existence, which suggest that the advance was made at the request of Mr Mason. There is the letter referred to above, but more significantly there is the GSA which, if signed by Mr Mason, provides reinforcement for the case which the respondent puts forward.
[37] It is difficult for the applicant to contend that it had no need of funding at a point where it signed the GSA, which was designed to secure loans from the respondent. The company was obviously a financier. It has not been explained what Mr Mason’s reasons were for executing the GSA at the time that he did. In the absence of such explanation, the inference to be drawn is that, in September 2008, he intended that an advance would be made at the request of CPML and that he would be personally liable for it.
The transfer of liability
[38] Even if it is proved that Mr Mason agreed to the advance being made by the respondent, just because the first document was signed by Mr Mason does not mean that he must also have signed the document dated 27 August 2010. He has said that he does not believe that he signed the document or that the document is genuine. He also queries who the person was who witnessed the document, as I have previously noted. In answer to the latter objection, the respondent points out that the signature of the witness may be that of a genuine person who actually worked for the Mason entities. However, if the signature of Mr Mason is not a genuine signature, it is possible that the signature of the person who is alleged to have witnessed the document is not genuine either.
[39] There is no admissible evidence establishing that the agreement was actually witnessed by Ms Chun, the former employee of Mr Mason.
[40] Part of the difficulty which the respondent faces in this regard is that Mr Russell, who was at the centre of the making of these arrangements, has not given evidence in the proceeding. Even if he had given evidence, it may not have been sufficient to resolve the impasse that I consider exists in regard to the document of 27 August 2010. I do not doubt that there are good reasons which may explain why Mr Russell has not given an affidavit for the respondent. But the fact is that there is a dispute about the genuineness of the 27 August 2010 document that the respondent relies upon, which I believe cannot be resolved in the context of the present proceedings.
[41] I agree that Mr Mason’s denials are not particularly forthright. However, I consider that it would risk injustice for the Court to conclude that there was no substantial dispute about whether the Duke Foundation Trust agreed to assume liability for the advance from the respondent. Such a conclusion should not be reached without the hearing of full evidence at trial and the examination of witnesses who might be expected to provide evidence on this subject.
[42] By a narrow margin, I conclude that Mr Mason, in stating that he does not believe that the signature is his or that the document was legitimate, has done enough to lay the foundation for a substantial dispute.
Result
[43] The result is that the application for an order setting aside the statutory demand is granted. The parties should confer on the question of costs and, if they are unable to resolve that issue, they are to file memoranda not exceeding four pages
within 10 working days of the date of this judgment.
J.P. Doogue
Associate Judge
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