Eaton v LDC Finance Limited

[2013] NZHC 728

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2008-409-001140 [2013] NZHC 728

BETWEEN  STEPHEN DESMOND EATON, SEDDON JAMES MARSHALL Plaintiffs

ANDLDC FINANCE LIMITED First Defendant

ANDPRICEWATERHOUSECOOPERS Second Defendant

ANDPERPETUAL TRUST LIMITED Third and Counterclaim Defendant

ANDBUDDLE FINDLAY Fourth Defendant

ANDANDREW JOHN HARDING, MURRAY SCHOLFIELD

Second Counterclaim Defendants

CIV-2013-409-000580

AND BETWEEN            RICHARD GRANT SIMPSON, DAVID IAN RUSCOE

Applicants

ANDSTEPHEN DESMOND EATON, SEDDON JAMES MARSHALL First Respondents

ANDANDREW JOHN HARDING, MURRAY SCHOLFIELD

Second Respondents

ANDPRICEWATERHOUSECOOPERS Third Respondent

Hearing:         9 April 2013

On the Papers

EATON & Anor V LDC FINANCE LIMITED HC CHCH CIV-2008-409-001140 [11 April 2013]

Judgment:      11 April 2013

JUDGMENT OF FOGARTY J

Introduction

[1]      The Court has before it two originating applications.   The parties to these applications are all in agreement.  The applications relate to a settlement agreement of commercial litigation.  The applications are necessary because two of the parties to this settlement represent the interests of others.   In the 2013 proceedings the applicants are receivers of LDC Finance Limited, with responsibility to the secured and unsecured creditors of that company.   In the 2008 proceedings, the plaintiffs Messrs Eaton and Marshall, represented unsecured depositors of the partnership of Messrs Harding and Scholfield, which traded as Finance and Investments (F & I).

The receivers’ application

[2]      Messrs Simpson and Ruscoe are now the receivers of LDC Finance Limited. They were appointed receivers following the judgment against that company of the High Court, delivered by myself, of 23 May 2011.  That judgment was appealed, and was set down for hearing in April 2013.   In mediation, the parties to those proceedings,   and   other   parties  in   potentially  related   proceedings   reached   a settlement. That settlement was subject to approval by the High Court.

[3]      The receivers seek the following directions:

(1)That they are acting reasonably in entering into a settlement of the proceedings and withdrawing the appeal, on the terms set out in the conditional settlement agreement entered into between the applicants and   the   respondents,   dated   6   March   2013   (“the   settlement agreement”).

(2)That  they  be  directed  to  proceed  to  confirm  and  implement  the proposed settlement on the terms set out in the settlement agreement; and

(3)This application be treated as confidential, and that no person may search the Court file in relation to this application without the leave of a Judge, sought on not less than 20 working days notice to the parties.

[4]      Section 34(1) of the Receiverships Act 1993 provides:

34     Court supervision of receivers

(1)     The court may, on the application of a receiver,—

(a)     give directions in relation to any matter arising in connection with the performance of the functions of the receiver:

(b)     revoke or vary any such directions.

[5]      The settlement is a compromise of the judgment of the High Court, which was wholly in favour of the plaintiffs Messrs Eaton and Marshall, as representatives of the F & I depositors.

[6]      I am satisfied from the affidavit of the receiver Mr R G Simpson that from the perspective of the receivers, having obligations to pursue the interests of the secured and unsecured creditors of LDC, that the settlement is the result of a prudent assessment of the litigation risks.  These risks being the delay and costs inherent in the pending appeal to the Court of Appeal from the High Court judgment, and of the prospect that leave might be granted by the Supreme Court, whatever the outcome of the Court of Appeal judgment.

[7]      The settlement includes having regard to the uncertainty and hardship that would be experienced by investors in LDC and F & I as a result of the inevitable lengthy period required to resolve all these matters before the Court.

[8]      It is commonplace for settlements of litigation to be confidential.   This is because they are private contracts, to which the parties to them only are privy.  In the case of a commercial receivership, I would need to be persuaded that any of the

secured or unsecured creditors of LDC require to know the terms of the commercial settlement, beyond what they can derive from the usual reports of the receivers of the progress of the receivership and distributions.  I note that direction (3) allows for an application to be made by anyone, including secured or unsecured creditors of LDC to obtain further information by leave of a Judge of the High Court.

[9]      For  these  reasons,  I am  satisfied  that  the three  directions  sought  by  the receivers are appropriate, and are made accordingly.

Application by Messrs Eaton and Marshall for orders enforcing trust

[10]     The current procedural status of Messrs Eaton and Marshall is that they are representatives of all the unsecured depositors of F & I, by order of the High Court. As such, they were authorised and did bring these proceedings, successfully.  The terms of their appointment do not entitle them to compromise the judgment of the High Court in their favour.  The purpose of the application to the Court is to have that authority conferred on them by the High Court.

[11]     The application seeks the following directions and orders:

(a)     That this application and the affidavit or affidavits in support of it be served on the depositors (“F&I depositors”) in the former firm of Finance and Investments (“F&I”) by sending to them at their last known postal or email address a letter in the form attached to this application.

(b)     (i)      That the plaintiffs be appointed under section 59 of the Trustee Act 1956 (“Trustee Act”) as trustees, for the benefit of the F&I depositors, of the right of action against the first defendant (“LDC”)  to  recover  deposits  in  F&I which  were  securitised against advances from LDC; and

(ii)     Having been so appointed the plaintiffs be authorised in terms of sections 64 and 64A of the Trustee Act to dispose of the right of action by settling it and giving effect to the settlement as per the terms of the conditional agreement reached between the parties on 6 March 2013; and

(iii)    Authorising and directing the plaintiffs to disperse the funds arising from settlement to the F&I depositors pro rata according to the levels of their respective investments, such distributions to consist of an interim distribution of the majority of funds within 2 months of the Court’s final direction and the balance

when all matter relating to F&I’s affairs are completed after allowing for legal fees and other disbursements in relation to the continued conduct of this matter.

(c)     In the alternative:

(i)     That the plaintiffs be appointed as trustees under sections 51 or

59 of the Trustee Act 1956 of the fund together with accrued interest,  paid into  this  Court  pursuant  to  the  order  made  at

paragraph  305(a)  of  the  judgment  of  Justice  Fogarty  dated

23 May 2012; and

(ii)     That  the  plaintiffs  be  authorised  and  directed  in  terms  of sections 64 or 64A of the Trustee Act to dispose of the fund by settling claims against it by LDC in accordance with the terms of the conditional agreement reached between the parties on 6

March 2013; and

(iii)    Authorising and directing the plaintiffs to disperse the funds arising from settlement to the said depositors pro rata according to the levels of their respective investments, such distributions to consist of an interim distribution of the majority of funds within 2 months of the Court’s final direction and the balance when all matters relating to F&I’s affairs are completed after allowing for legal fees and other disbursements in relation to the continued conduct of this matter.

(d)     Directing the plaintiffs, before the final distribution of the trust funds as referred to above, to have prepared a report setting out the funds they have received as trustees for the depositors in respect of the assets of Messrs Harding and Scholfield, the funds or portion of the funds referred to in paragraph 305(a) of the said judgment of Justice Fogarty dated 23 May 2012, and all amounts dispersed in dividends to depositors, paid in legal fees, expert witness fees, filing fees and other expenses   together   with   the   proposed   final   dividend   and   any provisional allowances for further costs to enable the F&I depositors to be informed of the receipt and expenditure of the funds concerned and to file that report as an annexure to a verifying affidavit in this Court and to make it available to the F&I depositors.

(e)     Directing that the costs of and incidental to this application be paid from the trust fund referred to in paragraph 305(a) of the judgment of Justice Fogarty dated 23 May 2012 in the event that the plaintiffs are not  otherwise  in  possession  of  sufficient  funds  to  cover  these payments.

(f)     That this application be kept confidential, and that no person may search the Court file in relation to the application without the leave of a Judge sought on not less than 20 working days notice to the parties.

[12]     Section 59(1) of the Trustee Act 1956 provides:

59     Vesting orders as to stock and things in action

(1)     Subject to the provisions of subsections (2), (3), and (4), in any of the following cases, namely—

(a)     where the court appoints or has appointed a trustee, or where a trustee has been appointed out of court under any statutory or express power:

(b)     where  a  trustee  entitled,  whether  by  way  of  mortgage  or otherwise, alone or jointly with another person to stock or to a thing in action—

(i)     is under disability; or

(ii)     is out of the jurisdiction of the court; or

(iii)    cannot be found; or

(iv)    being a corporation, has ceased to carry on business or is in liquidation or has been dissolved; or

(v)     neglects  or  refuses  to  transfer  stock  or  receive  the dividends or income thereof, or to sue for or recover a thing in action, according to the direction of the person absolutely entitled thereto for 28 days next after a request in  writing  has  been  made  to  him  by  the  person  so entitled; or

(vi)    neglects  or  refuses  to  transfer  stock  or  receive  the dividends or income thereof, or to sue for or recover a thing in action for 28 days next after an order of the court for that purpose has been served on him:

(c)     where it is uncertain who was the survivor of 2 or more trustees entitled to stock or to a thing in action:

(d)     where it is uncertain whether a trustee entitled alone or jointly with another person to stock or to a thing in action is alive or dead:

(e)     where there is no personal representative of a deceased person entitled to stock or to a thing in action or where it is uncertain who is the personal representative of a deceased person who is entitled to stock or to a thing in action:

(f)      where stock is standing in the name of a deceased person whose personal representative is under disability:

(g)     where stock or a thing in action is vested in a trustee whether by way of mortgage or otherwise and it appears to the court to be expedient—

the court may make an order vesting the right to transfer or call for a transfer of stock, or to receive the dividends or income thereof, or to sue for or recover the thing in action in any person as the court may appoint.

[13]     Section 64 provides:

64     Power of court to authorise dealings with trust property

(1)     Subject to any contrary intention expressed in the instrument (if any) creating the trust, where in the opinion of the court any sale, lease, mortgage, surrender, release, or other disposition, or any purchase, investment, acquisition, retention, expenditure, or other transaction is expedient in the management or administration of any property vested in  a  trustee,  or  would  be  in  the  best  interests  of  the  persons beneficially interested under the trust, but it is inexpedient or difficult or impracticable to effect the same without the assistance of the court, or the same cannot be effected by reason of the absence of any power for that purpose vested in the trustee by the trust instrument (if any) or by  law,  the  court  may  by  order  confer  upon  the  trustee,  either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions (if any) as the court may think fit, and may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne, and as to the incidence thereof between capital and income:

provided that, notwithstanding anything to the contrary in the instrument (if any)  creating the trust, the court, in proceedings  in which all trustees and persons who are or may be interested are parties or are represented or consent to the order, may make such an order and may give such directions as it thinks fit to the trustee in respect of the exercise of any power conferred by the order.

(2)     [Repealed]

(3)     The court may from time to time rescind or vary any order made under this section, or may make any new or further order:

provided that no such rescission or variation of any order shall affect

any act or thing done in reliance on the order before the person doing the act or thing became aware of the application to the court to rescind or vary the order.

(4)     An application to the court under this section may be made by the trustees, or by any of them, or by any person beneficially interested under the trust.

[14]     Section 64A provides:

64A   Power of court to authorise variations of trust

(1)     Without limiting any other powers of the court, it is hereby declared that where any property is held on trusts arising under any will, settlement, or other disposition, or on the intestacy or partial intestacy of any person, or under any order of the court, the court may if it thinks fit by order approve on behalf of—

(a)     any person having, directly or indirectly, an interest, whether vested or contingent, under the trusts who by reason of infancy or other incapacity is incapable of assenting; or

(b)     any  person  (whether  ascertained  or  not)  who  may  become entitled, directly or indirectly, to an interest under the trusts as being at a future date or on the happening of a future event a person  of  any  specified  description  or  a  member  of  any specified class of persons, so however that this paragraph shall not include any person who would be of that description, or a member of that class, as the case may be, if the said date had fallen or the said event had happened at the date of the application to the court; or

(c)     any unborn or unknown person; or

(d)     any person in respect of any discretionary interest of his under protective trusts where the interest of the principal beneficiary has not failed or determined—

any arrangement (by whomsoever proposed, and whether or not there is any other person beneficially interested who is capable of assenting thereto) varying or revoking all or any of the trusts, or enlarging the powers  of  the  trustees  of  managing  or  administering  any  of  the property subject to the trusts:

provided that, except by virtue of paragraph (d), the court shall not approve an arrangement on behalf of any person if the arrangement is to his detriment; and in determining whether any such arrangement is to  the  detriment  of  any  person  the  court  may  have  regard  to  all benefits   which   may   accrue   to   him   directly   or   indirectly   in consequence of the arrangement, including the welfare and honour of the family to which he belongs:

provided also that this subsection shall not apply to any trust affecting property settled by any Act other than the Administration Act 1969.

(2)     Any rearrangement approved by the court under subsection (1) shall be binding on all persons on whose behalf it is so approved, and thereafter the trusts as so rearranged shall take effect accordingly.

(3)     In this section—

discretionary interest means an interest arising under the trust specified in paragraph (b) of subsection (1) of section 42 or any like trust

principal beneficiary has the same meaning as in the said subsection

(1)

protective trusts means the trusts specified in paragraphs (a) and (b)

of the said subsection (1) or any like trusts.

[15]     I am satisfied that it was prudent for Messrs Eaton and Marshall to enter into the  settlement  negotiations  prior  to  the  Court  of  Appeal  hearing,  against  a

presumption that any settlement they reached would require retrospective approval of the Court.

[16]     I am satisfied that there is power in s 59(1)(a) by this Court to appoint Messrs Eaton and Marshall as trustees of the entitlements of the F & I depositors.   I am satisfied from my knowledge of the history of their appointment as representatives.

[17]     Alternatively,  the  application  seeks  Messrs  Eaton  and  Marshall  to  be appointed under s 51 of the Trustee Act, in respect of the order made by the High Court in [305](a):

There is an order directing that the sum of $7,792,197.36, together with accrued interest, be paid into Court for the benefit of the depositors.

Then further orders are sought that Messrs Eaton and Marshall be authorised to settle in accordance with their agreement.

[18]     I am satisfied that the Court has the power to make these orders, either under ss 59 or 51, and under ss 64 or 64A.

[19]     Second, I am also of the view that the law of equity already recognises now Messrs Eaton and Marshall to be trustees of the interests of the unsecured depositors by reason of the obligations they assumed at the general meeting of the depositors who appointed them to their role to conduct the litigation.

[20]     Therefore, I am of the view that this application is a prudent one, and worthy of sympathetic consideration.

[21]     Quite properly, the advisors of Messrs Eaton and Marshall have recognised that the application should, however, be first notified to the depositors, in order that the Court be able to receive any objections by any depositors, and consider those objections before deciding whether or not to grant the application.

[22]     In the fiduciary position that Messrs Eaton and Marshall find themselves in, it is arguable that this application does not need to be served on the beneficiaries.  In that sense, it is not necessary for all the papers to be served.   This is clearly the

thinking behind this application, which proposes that rather than the formal application to this Court and supporting affidavits, running to well over 100 pages, being served, the more appropriate course is that a letter be sent to the depositors. The draft letter is attached to this judgment.

[23]     Given that I am of the view that Messrs Eaton and Marshall are already trustees, and given the history of their dealings with the unsecured depositors, I am satisfied that their duties as trustees will be satisfied by the sending of the draft letter. Upon it being sent, after the period of two weeks has elapsed, this Court will then consider any applications, submissions or responses from the beneficiaries.  Having done that, then the Court will move to consider granting these applications.

[24]     As this judgment already indicates, I am satisfied that the decision which the trustees have made seems to be a prudent one.  Any of the beneficiary depositors opposing the settlement would need to include in their opposition reasons why the settlement should not be entered into.  Such submissions would have to address the risk of the appeal succeeding.

[25]     The fact that any one beneficiary disagrees with the settlement would not mean that this Court would not approve the settlement, and, as part of that package, empower the trustees to enter into it.

[26]     I think it is important that the F & I investors know of my views in this regard.   Accordingly, I direct that notice of this application and the affidavit or affidavits in support of it be given to the F & I depositors by sending to them at their last known postal or email address:

(1)The letter attached to this judgment.  The letter should be amended so that at the end of the first sentence of the penultimate paragraph the letter be extended by the addition of the date, being two weeks after the date of the letter.

(2)       A copy of this judgment.

[27]     Depending on what responses, if any, are received, counsel in support of this application should report to this Christchurch Registry.  That report will be brought to  my immediate  attention.    I will  then  move  to  consider  whether  any  further preliminary orders should be made, or whether I should proceed to consider making the formal appointments under ss 59 or 51 of the Trustee Act and under ss 64 or 64A, as  set  out  above.    That  would  include,  depending  on  which  route  I  go,  then authorising and directing the trustees to disburse the funds.

Solicitors:

Gibson Sheat, PO Box 2966, Wellington 6140

Anthony Harper Lawyers, PO Box 2646, Christchurch 8140

Lane Neave, PO Box 13149, Christchurch 8141

Gilbert Walker, PO Box 1595, Shortland Street, Auckland 1140

Copy to:

JBM Smith, PO Box 5722, Lambton Quay, Wellington 6145

PRW Chisnall/J D Haig, PO Box 5817, Lambton Quay, Wellington

D J Goddard QC, PO Box 1530, Wellington 6140

19 March 2013

Dear Depositor

On [date] we wrote to you to keep you informed as to progress on this case.

We told you we had settled the case against LDC and all other parties for a significant sum but that the settlement was subject to approval by the High Court.

The sum in dispute was that portion of your deposits which F&I had pledged to LDC as security for money it had borrowed from LDC. During the receivership, LDC’s and F&I’s receivers took that money from F&I and lodged it into a bank account operated by the receivers in LDC’s name.  This amount was frozen in LDC’s receiver’s account pending the outcome of this case. The amount was $7,792,197.36. During the time the case was running this sum earned interest.

We have settled the case (again, subject to Court approval) for $5,800,000 plus a small amount of interest (yet to be determined) arising from the latest term deposit on which the fund has been held. That means, that the dividend you receive including dividends already paid will amount to more than $0.40 in the dollar (paid pro rata).

We have now filed the necessary application in the High Court to obtain the Court’s

approval.

Consideration has been given to the service of the application for approval on you, the depositors. Service means that you are provided with the application for approval (or access to it) so that, if you wish, you may obtain legal advice, or take any other step you think necessary.

In this case it is not intended to serve the documents on you individually. Rather, the Court has authorised us to serve you by sending you this letter to inform you that the case has been settled, that the application to confirm settlement has been made, and that if you wish to see the application and the evidence filed in support of it, you should apply to Edward Cox of Gibson Sheat in Wellington by post at level 9, 1 Grey Street, PO Box 2966 Wellington 6140 or email at  [email protected].

We have also been required to send with this letter the attached judgment which the Court has prepared. It indicates that the Court is likely to approve the terms of settlement and make the orders sought unless there is any objection any of you wish to make to the Court.

If you wish to look at the application documents you should ask to do so within [2 weeks of the date of this letter]. This may not seem very long but we wish to get this process completed so that people who have been waiting for their money for some time may finally get paid.

If you do wish to look at the documents then the parties will need to consider how this shall be done and seek further directions from the Court (if necessary). The reason for this is that some of the parties have requested that the Court file (as it relates to the application) be kept confidential. The plaintiffs have agreed to this because this does not directly affect your payment. But, nevertheless, if any of you do wish to see the documents then it is expected that a way to enable you to do so can be devised without affecting the application for confidentiality.

Yours sincerely, Etc