EBR Holdings Ltd (in liq) v van Duyn
[2017] NZHC 1698
•21 July 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2009-090-1560 [2017] NZHC 1698
BETWEEN EBR HOLDINGS LTD (IN
LIQUIDATION) First Plaintiff
VIVIEN JUDITH MADSEN-RIES and
HENRY DAVID LEVIN Second Plaintiff
AND
JOHANNES VAN DUYN (SENIOR) AND GERARDA JACOBA MARIA VAN DUYN & ORS
Defendants
McLAREN GUISE ASSOCIATES LTD Third Party
Hearing: 7, 8, 9, 10, 13, 14, 15, 16, 17, 21 and 22 February 2017 Counsel:
P C Murray and K H Morrison for Plaintiffs
I M Hutcheson and K F Quinn for Defendants
S-J Telford and L G Cox for Third PartyJudgment:
21 July 2017
JUDGMENT (NO. 2) OF HEATH J
This judgment was delivered by me on 21 July 2017 at 4.30pm pursuant to
Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Meredith Connell, Auckland Forest Harrison, Auckland Morgan Coakle, Auckland Counsel:
I Hutcheson, Auckland
EBR HOLDINGS LTD (IN LIQUIDATION) v VAN DUYN & ORS [2017] NZHC 1698 [21 July 2017]
CONTENTS
Introduction [1] Procedural history [10] Context [20] The Fidelity Life investments and loans
(a) Introductory comments [35]
(b) The investment policies
(i) Policy 764 [36] (ii) Policy 958 [40] (iii) Payment of premiums [42]
(c) The loans
(i) Introductory comments [43] (ii) Loan 764A [47] (iii) Loan 764B [55] (iv) Loan 958A [58] (v) Loan repayments [61]
The liquidators’ claims: analysis
(a) Structure [62]
(b) EBR’s current account claims
(i) Introductory comments [67] (ii) Onus of proof [72] (iii) What debts are payable? [78] (iv) The set-off defence [89] (v) The assignment issue [98] (vi) The taxation issue [114] (vii) The market rental issue [117]
(c) Remaining issues [120]
(d) Breach of directors’ duties
(i) The claims [122] (ii) The nature of the “statutory” duties [128] (iii) Post-liquidation duties of directors [136] (iv) Analysis [154] Interest and costs (i) Interest [180] (ii) Costs [184]
(e)
The McLaren Guise claims
(a) Introductory comments [191]
(b) The alleged breaches of duty [196] (c) Parallel proceedings [198] (d) The terms of McLaren Guise’s engagement
(i) Introductory comments [214]
(ii) The 1989 and 2006 Standards [220]
(e) Have the alleged breaches of duty been established?
(i) Correctness of the financial statements [228] (ii) The “technical insolvency issue” [237] (iii) Conflicts of interest [241]
(f) Costs [245] Result
(a) The liquidators’ claim [248]
(b) Third party claim [249]
Introduction
[1] Eurovision Building Removals Ltd was incorporated as a limited liability company on 3 January 2002. Its business was operated by three members of the van Duyn family: Mr Johannes van Duyn senior, and his sons Mr René van Duyn and Mr Johannes van Duyn junior.1 The business involved the purchase, storage, renovation, resale and relocation of houses.
[2] On 25 June 2008, the company changed its name to EBR Holdings Ltd (EBR). About a month later, on 24 July 2008, a new company was incorporated. That company was given EBR’s original name (Eurovision Building Removals Ltd). EBR ceased its business activities at that time. In substance (but not necessarily legal form), EBR’s business was transferred to the new company, which continued its trading activities.
[3] On 30 January 2009, on the application of the Commissioner of Inland Revenue (the Commissioner), the High Court made an order putting EBR into liquidation. Ms Vivien Madsen-Ries and Mr David Vance were appointed as liquidators. On 27 June 2011, Mr David Levin replaced Mr Vance as one of the joint liquidators. I refer to Ms Madsen-Ries and Mr Levin together as “the liquidators”.
[4] Through its liquidators, EBR sues to recover current account debts that it alleges are owed by Mr van Duyn senior, Mrs Gerarda van Duyn, and their two sons, Mr van Duyn junior and Mr René van Duyn. EBR also sues the trustees of two family trusts2 associated with the van Duyn family. Unless the context otherwise requires, I refer to the van Duyn family members, together with their related entities and trusts, as the “van Duyn interests”.
[5] Separately, the liquidators (in their capacity as such) bring claims against the directors of the company for breaches of various duties owed by them under the Companies Act 1993 (the Act), and to have certain payments made by EBR declared
to be voidable.3 Although the claims are brought by both EBR and the liquidators
1 The periods during which each was a director of EBR are set out at para [20] below.
2 See paras [32] and [34] below.
3 Under the Companies Act 1993, s 292.
personally, for convenience I shall refer to the plaintiffs collectively as the liquidators. Save for a few occasions in which the identity of the relevant plaintiff is important for contextual reasons, the only exception to that approach will be when I set out the formal orders of the Court.
[6] The liquidators’ claims are based on the last financial statements of EBR, for the year ended 31 March 2008. They were prepared by EBR’s accountants, McLaren Guise, and signed by the then-directors of EBR, Mr René van Duyn and Mr Johannes van Duyn junior. The financial statements record:
(a) A debt of $129,258, owed by Mr René van Duyn to EBR;
(b) A debt of $125,209, owed by Mr van Duyn junior to EBR; and
(c) A debt of $55,502, owed jointly by Mr van Duyn senior and Mrs van
Duyn to EBR.
[7] The debts are said to arise out of payments made by EBR to Fidelity Life Ltd (Fidelity Life). The payments were made in respect of insurance policies and loans that were personal to each of the van Duyn family members. There is now no dispute that a total sum of $184,760 is owed by those members of the van Duyn family to EBR. There is, however, a dispute about the allocation of the debt as among the family members.
[8] If the liquidators were successful in their claims, the van Duyn interests seek a full contribution from their former accountants, McLaren Guise, to meet any amounts awarded. They have joined McLaren Guise as a third party to the proceeding for that purpose. The van Duyn interests allege that McLaren Guise were negligent in the way in which the financial statements were prepared.
[9] McLaren Guise denies that it has acted negligently. It rejects any suggestion that it should be responsible for any debts or other liabilities that the van Duyn interests may be found to owe to EBR.
Procedural history
[10] The present proceedings were initiated in the District Court at Waitakere as long ago as 11 August 2009. Initially, EBR sought summary judgment on the current account claims. The amounts claimed were taken directly from the approved 2008 financial statements.4 The application was heard on 3 May 2010, and a reserved judgment given on 7 September 2010.5 Judge Recordon, while having concerns about the quality of the evidence offered by the van Duyn interests to resist the claim,6 was not satisfied that the liquidators had excluded the existence of an arguable defence.
[11] In reaching that decision, the District Court Judge placed significant weight on evidence from Mr Nigel Harrison. He was the partner at McLaren Guise with responsibility for overseeing preparation of the financial statements. His affidavit in opposition to the summary judgment application provided an evidential foundation for the possibility that the amounts paid to Fidelity Life had been erroneously treated
as part of the current account debts and were properly payable by EBR.7 An
affidavit in opposition to the application was also provided by Mr Edward Phillipps, an insurance broker who had been instrumental in arranging the Fidelity Life policies and loans. Material evidence given at that time by both Mr Harrison and Mr Phillipps was undermined at the hearing before me.
[12] On 23 November 2011, the District Court gave leave to the defendants to join McLaren Guise as a third party. At some point thereafter, a non-party discovery order was made against Fidelity Life to obtain relevant documents it held. A number of judicial conferences followed, for case management purposes.
[13] An issue then arose about whether the claims were within the civil jurisdiction of the District Court. The question was whether the $200,000
jurisdictional limit8 applied to the total amount claimed, or any one individual cause
4 See para [6] above.
5 EBR Holdings Ltd v van Duyn DC Waitakere CIV-2009-090-1560, 7 September 2010 (Judge
Recordon).
6 Ibid, at paras [38]–[46].
7 Ibid, at paras [38], [40] and [45]. The relevant parts of the affidavit are set out at para [202]
below.
8 District Courts Act 1947, s 29.
of action. While the total claim was for $309,969, each of the claims was for an amount below $200,000. On 12 June 2014, the jurisdictional point was determined in favour of the van Duyn interests. As a result, the proceeding was transferred to this Court for determination.9 Following that transfer, the liquidators amended their statement of claim to include personal claims under the Companies Act 1993 against the directors. The District Court has no jurisdiction to determine such claims.
[14] Eventually, the hearing of the substantive claim came before me on 16 May
2016. On 23 May 2016, for reasons associated with late changes of position on behalf of the van Duyn interests that required the liquidators to reconsider their own position, that hearing was aborted.
[15] On 25 May 2016, I granted leave for the van Duyn interests to file and serve an amended statement of defence and third party claims, subject to stringent conditions that included the payment of admitted portions of some debts and wasted costs.10 Full reasons for that decision were given on 1 June 2016.11 Those reasons explain the background to the orders in some detail.
[16] I made orders on an “unless” basis, requiring the van Duyn interests to pay a total sum of $217,559, on or before 30 June 2016.12 That sum was paid. Mr van Duyn senior and his wife acknowledged that they owed $128,462, while Mr van Duyn junior admitted that he owed $24,097. On the calculations put forward by the van Duyn interests, EBR owed money to Mr René van Duyn.
[17] I also ordered that the van Duyn interests pay the sum of $65,000 to McLaren
Guise by the same date, as wasted costs.13 Those costs were paid.
[18] While the liquidators have accepted payment of the sums admitted by the van
Duyn interests, they dispute whether the correct incidence of debt has been
9 EBR Holdings Ltd v van Duyn DC Waitakere CIV-2009-090-1560, 12 June 2014 (Judge Wilson
QC).
10 EBR Holdings Ltd (in liq) v van Duyn [2016] NZHC 1112 at paras [8]–[12].
11 EBR Holdings Ltd (in liq) v van Duyn [2016] NZHC 1169.
12 EBR Holdings Ltd (in liq) v van Duyn [2016] NZHC 1112 at para [9].
13 Ibid.
recognised. On any view, if judgment were entered in favour of EBR, those payments will need to be brought to account in determining any amount payable.
[19] The substantive hearing began on 7 February 2017, over eight years after EBR was put into liquidation. The hearing ended after 12 days on 22 February 2017, at which time I reserved my judgment. Further submissions were made in writing, the last of which was filed on 27 March 2017.
Context
[20] Mr van Duyn senior and Mrs van Duyn, have each held a 50 percent stake in EBR since its incorporation in 2002. Although Mr van Duyn senior has always been the guiding mind behind EBR’s business and financial activities, he was not appointed as a director until 12 September 2005. He resigned that office on 19 June
2008, just over one month before the new company was incorporated.14 Mr van
Duyn junior and Mr René van Duyn were directors of EBR from its incorporation until its liquidation in 2009. Mrs van Duyn has never been a director of the company.
[21] The four members of the van Duyn family I have identified gave evidence before me, as did Ms Diane Burns. She is Mr van Duyn senior’s and Mrs van Duyn’s daughter. At relevant times, Ms Burns undertook clerical work on site for the company.15
[22] Mr van Duyn senior and the Commissioner have a history of conflict. Their disagreements have continued for many years, and in respect of various entities. When EBR began to operate, the Commissioner was concerned to ensure similar problems did not arise. Problems that were encountered towards the end of EBR’s trading life led to the Commissioner taking steps to liquidate the company.
[23] The flavour of the historical disputes can be gleaned from a letter written by the former accountant for the van Duyn interests, Mr Henk Aalders, to the
Commissioner on 14 May 2003. In addressing concerns about previous
14 See para [2] above.
15 For more detail, see para [31] below.
arrangements between the Commissioner and Mr van Duyn junior in respect of his tax liabilities, Mr Aalders wrote:
For the sake of good order I record my understanding of the content of our telephone conversation of earlier today.
…
3)I undertake to commence preparation of accounts to establish [Mr van Duyn junior’s] tax liability, (which undertaking is confirmed provided that you will undertake to restore the arrangement) and file his outstanding return within 14 days from today.
4)I file either Accounts or a satisfactory explanation of what became of Eurovision Housemovers (1972) Limited ird 1737025 (formerly John Glanfield Limited.). Please note that IRD 1737025 changed its name on 1 March 2002 to Jeffersen Brambles Associates Limited. A search at the Companies Office will confirm this. At an interview at your Department with Miss/Mrs Lee-Ann Wright, I think also on 1
March 2002, it was understood that the van Duyn boys be free from the shackles of their fathers involvement in their trading activities
and that they start afresh and not be required to carry the
responsibility of their fathers administration who is now a sick man and has retired from active participation of the business. It was
acknowledged that Ird 1737025 was insolvent and was unable to pay
its debts and Mrs Wright was asked to commence winding up procedures against it. My recollection is that Mrs Wright advised that it cost money to wind up a company and that there seemed little point in doing this. I made it plain that I would not be preparing Accounts for an already “doomed” company since Mr van Duyn Sr was sick and had now retired and there was no money to pay me. I understood that this was accepted by her. I seem to recollect that you too were present at that meeting. What else would you expect our office to do under those circumstances other than file nil returns? We are happy to complete GST deregistration documents once you send them to us.
5) I file Annual Accounts for the new Company Eurovision Building
Removals Limited to 31 March 2002
6) I review GST returns for IRD 1737025
…
Could it be that perhaps in your letter of 30 April 2003, you have assumed and held the son Hans responsible for breach of conditions, which his father also Hans was responsible for and which the father had tried to put behind him during our meeting with you and Mrs Wright?
…
(Emphasis added)
[24] Mr Aalders’ 2003 explanation can usefully be compared with a letter that Mr van Duyn senior wrote to the Commissioner at a time when steps were being taken to liquidate EBR. This letter was put to Mr van Duyn senior in evidence. I specifically asked him whether he was the author of the letter. Mr van Duyn senior was adamant that it was written by him. He wrote:
28 November 2008
…
I feel compelled to write you some sort of explanation as to why we find ourselves in the present predicament with your Department.
The Resource Management Act has been very detrimental to us by being prosecuted by Rodney District Council and Waitakere City Council for breach of regulations which resulted in a $20,000.00 fine plus horrendous solicitors fees.
…
In March I turn 72, I’ve had very limited education due to the War but
enough to read and write and put some simple figures together.
Regardless of all this the responsibility of Eurovision Building Removals Limited has been mine and not my sons Hans jnr and Rene Van Duyn as they have always been on the field and had no involvement of running the office, I did my best but obviously it was not good enough – the lack of administration experience and education had the better of me – as such my sons should not be guilty for the sins of their father.
…
We have offered and tried to do the proper thing – it has not worked – we have no work – no cashflow and are not able to sell the properties we offered to your Department – the equity is almost eroded by pressures from the Bank, the ability to sell and the drop in value, the continuation of the Recession and worsening…..we have no Staff left, yet we have a large family, many Grand and Great Grandchildren as such we are wealthy as they are all healthy, we love our Paradise – no one can take that away from us.
….
(Emphasis added)
[25] Mr van Duyn senior is now almost 80 years old. He suffers from a diabetic condition and the effects of a relatively recent stroke. While his short term memory is poor, I am satisfied that his longer term memory is better than he suggested in evidence. I find that Mr van Duyn senior was the person who controlled all aspects of the family’s business. I am satisfied that he was not appointed as a director of
EBR until 2005, in order to distance himself from management of the company,
given the Commissioner’s view of his past activities.16
[26] There is plenty of evidence in the contemporary correspondence to indicate that Mr van Duyn senior was, during the lifetime of the company, an astute businessman who was not prejudicially affected by English being his second language. The best example of Mr van Duyn senior’s ability to communicate in written English, and the extent of his knowledge of circumstances that impacted on EBR’s operations can be found in another letter which he wrote, and which he again assured me he authored.
[27] In his letter to Fidelity Life, dated 5 September 2008, Mr van Duyn senior evidenced an intricate knowledge of his business interests, notwithstanding his attempts in the witness box to paint himself as someone who was, in fact, “unsophisticated”. I reproduce some extracts from the letter to demonstrate that point:
…
As promised I now send you a full explanation of our assets, our mortgages, our equity and the difficulties at present due to the present recession and negative attitude of Banks in their lending policy towards Builders, Developers and Individuals which is seriously affecting our business as Building Removal Contractors and the sale of removal buildings.
You will read in the letter I sent you from the Barrister who described me as hardworking and competent but unsophisticated. I do not feel offended by this as after all I have with my sons achieved considerable assets and for limited-education individuals we have been open, honest, resilient high achieving survivors mainly due to the faith that you have always placed in me over many years which is so appreciated.
Below are the properties, valuations and liabilities;
25 & 43 Crosland Road – National Bank – both on the market.
2380 State Highway 16 – Fidelity Assurance
2 Garfield Road – Fidelity Assurance
2207 South Head Rd – Fidelity Assurance
16 See the letter sent by Mr Aalders to the Commissioner on 14 May 2003, set out at para [23]
above.
6 Awaroa Road – Fidelity Assurance – on the market.
16a Powell Street – Bank of New Zealand
2568 – Paparoa/Oakleigh Rd – Bank of New Zealand
Powell Street is not far from completion and shall be put on the market soon.
2568 Paparoa/Oakleigh Road is a 65 acre property which we have subdivided into 6 lifestyle blocks. We are currently awaiting the 224
Certificate – we have that application in to Kaipara District Council.
A mortgage of $400,000.00 is all that is owed on the land. On top of this we have spent and paid for some $200,000.00 for roading, earthworks and Northpower and Telecom have laid all power and phone cables to all the sites.
We have also moved houses onto each block at considerable cost – all Architect plans, Engineers costs, Surveyors costs, Building Consents and Contribution Fees to Council have all been paid.
…
Furthermore our equipment is all freehold as such we have no Hire Purchase on anything at all.
…
It appears that the economy is at the bottom of the barrel, Summer is starting, confidence is around the corner in the Banking Circles.
Hopefully Fidelity will be able to bear with us a bit longer to enable us to catch up with the backlog of mortgages.
Our properties have considerable equity in all of them.
….
[28] Mrs van Duyn had little knowledge of the way in which EBR operated. She, I find, was the homemaker. Mr van Duyn senior took responsibility for their business and financial affairs. Mrs van Duyn was content to leave responsibility for those aspects of their lives to her husband. I find that Mrs van Duyn played no role in the management of EBR.
[29] Both Mr René van Duyn and Mr van Duyn junior gave evidence. Neither
evidenced any real understanding of the way in which EBR’s business operations
were undertaken. They did the manual work required in a business of this type.17
17 See para [1] above.
Throughout, they left business and financial activities to their father. Their evidence supports my finding that Mr van Duyn senior, even during periods in which he was not a director of EBR, was the person with sole responsibility for the management of its affairs.18
[30] I am satisfied that neither of the van Duyn brothers knew how to read a balance sheet. Although they received copies of financial statements that included shareholders’ account and current account schedules, they did not (for example) understand that figures expressed in brackets meant that they owed money to the company. They, I find, relied on their father to address financial considerations. Both of them exhibited surprise at the extent of the debts that the liquidators claim each owes to EBR. Put in the most simplistic way, because no money actually passed through their respective personal bank accounts, they did not understand why they were said to owe money to EBR.
[31] Ms Burns was EBR’s receptionist. She acted as a personal assistant to Mr van Duyn senior. By way of illustration, she had responsibility for answering inquiries from customers, undertaking clerical tasks (such as coding bank statements), and printing and collating email correspondence which came to her through a generic address accessible from a single computer in the office.
[32] Mr Aalders was the accountant to the van Duyn family interests. He was a long-time friend of Mr van Duyn senior, and fulfilled a role of family accountant and business adviser from (at least) the mid-1980s. Mr Aalders prepared EBR’s financial statements for the years ended 31 March 2003 and 2004. The bulk of the work in preparing those financial statements was undertaken by a qualified employee, Ms Trinie Zaragosa. With effect from 1 April 2005, when Mr Aalders sold his accounting practice to McLaren Guise, Ms Zaragosa went to work for McLaren Guise. She continued to take responsibility for the preparation of EBR’s financial statements and tax returns, under the supervision of Mr Harrison.
[33] Mr van Duyn senior, Mrs van Duyn, Mr René van Duyn and Mr van Duyn junior are the trustees of the Awaroa Family Trust (the Awaroa Trust). The Awaroa
18 See para [25] above.
Trust owns the property from which EBR carried on business. There was no written lease agreement between the Awaroa Trust and EBR. Although the financial statements of EBR show some rent being paid to Awaroa Trust, it was not fixed at market rates. The relationship between the Awaroa Trust and EBR was intended to be structured in a manner designed to leave them in a “tax neutral” position — whereby it was intended that no tax would be payable by the entities. The narration of a bill of costs sent by Ross Devitt and Associates (the solicitors then acting for the Awaroa Trust) on 4 July 2000 indicates that both Mr Aalders and Mr Phillipps were involved in structuring the purchase and financing arrangements for the acquisition of three properties in Helensville. The bill of costs is headed: “Purchase and financing – Awaroa/Garfield Roads and Family Trust”.
[34] South Head Trustees Ltd (South Head) is the trustee of the South Head Trust. The South Head Trust was settled by Mrs van Duyn on 29 September 2003. Mr René van Duyn and Mr van Duyn junior were directors of South Head from its incorporation on 29 September 2003 until it was removed from the Register of Companies on 23 June 2014. Mr van Duyn senior was a director of South Head from 12 September 2005 to the removal date. Mrs van Duyn is the sole shareholder of South Head. Following an application by EBR and the liquidators, this Court
made an order restoring South Head to the Register.19
The Fidelity Life investments and loans
(a) Introductory comments
[35] The current account claims involve the classification of payments made by EBR to Fidelity Life, in relation to two investment policies and four loans. The insurance policies and loans were all arranged through Mr Phillipps. Primarily, he dealt with Mr van Duyn senior. While the van Duyns had a superficial understanding of the insurance and loan arrangements, the documentation was complex, and the policy wording unusual. I am satisfied that the van Duyn family members did not fully apprehend the legal consequences of the documents they
signed. However, they are bound by them.
19 Under s 329 of the Companies Act 1993.
(b) The investment policies
(i) Policy 764
[36] On 1 July 1994, Mr René van Duyn and his wife, Christene, entered into (what was called) a “Future Finance Plan” with Fidelity Life. The lives of each of Mr René van Duyn and his wife were insured for a sum of $69,000. In addition, Mr René van Duyn invested in (what was called) a “100% Capital Stable Fund”, stated to be on “Basis A”.
[37] The values guaranteed in the “GMV Schedule” on “Basis A” were payable into a “Basic Maturity Account”. That term is defined as follows:
2. MATURITY ACCOUNTS
(i) Basic Maturity Account All premiums paid, less premiums for insured benefits and policy fees will be credited to the Basic Maturity Account as follows:
1.At least 100% of the first four years’ regular premiums or increases in regular premiums less deductions above where the basis of guarantee set out in the Schedule is Basis A. The amount credited for other bases of guarantee in respect of the first four years’ regular premiums and increases in regular premiums will be determined by the Company [Fidelity Life].
2.All further premiums including single premiums and casual deposits, less deductions above, on the basis set out in the GMV scheduled (as attached hereto).
The amounts credited are, subject to the conditions of this Policy, guaranteed to be payable on the Maturity Date of this Policy.
The date of commencement of the policy was 1 July 1994, with a term of 32 years.
[38] Policy 764 contemplated that its surrender value could be used as security for any loan that the proposers (Mr René van Duyn and his wife) entered into. Respectively, cl 3 of the “Policy Document” and cl 3 of the “Benefit Clause” provide:
3. PAYMENTS
All payments made in connection with this Policy (whether to or by the
Company) shall be at the registered office of the Company [Fidelity Life]
and shall be made in the lawful currency of New Zealand. The Company shall (subject to the due observance and the fulfilment of the terms and conditions of this Policy) pay to the Proposer or persons deriving title under him/her, subject to the production of letters of administration or grant of probate as the case may be, pay the benefits set out in this Policy.
The Company is entitled to subtract any indebtedness to the Company from the benefits payable in terms of this Policy.
3. SURRENDER VALUE
The Surrender Value at any time is the current value of the Total Maturity Account at that time as determined by the Company, taking into account the underlying assets and actuarial advice. When this Policy has acquired a Surrender Value it may be surrendered for that Surrender Value, less any indebtedness to the Company.
If by taking part or all of the Surrender Value in cash, the sum at risk to the Company in respect of any Life Assured is increased, then the Company is entitled to ask for proof of insurability in respect of the increase in risk.
(Emphasis added)
[39] On 24 April 2000, Policy 764 was transferred by Mr René van Duyn and his wife to himself and his brother, Mr van Duyn junior. Thereafter, contractually, the brothers were responsible for meeting premium payments under Policy 764.
(ii) Policy 958
[40] The proposers for Policy 958 were Mr van Duyn junior and his mother. Policy 958 is also a “Future Finance Plan” issued by Fidelity Life. Mr van Duyn junior was to be the life assured under the policy. The material terms of the policy document were the same as those for Policy 764.20
[41] In the proposal document, the purpose of the plan was described as “principal accumulation policy to repay residential house mortgage”. The amount for which Mr van Duyn junior’s life was assured was $125,000. The date of commencement of the policy was 1 August 2000, with a duration of 25 years. As with Policy 764, the rate of return was assessed on “Basis A”, with the investment option being described as “100% capital stable fund”. Contractually, Mr van Duyn senior and Mrs van
Duyn were the persons responsible for making premium payments under Policy 958.
20 See paras [36] and [38] above.
(iii) Payment of premiums
[42] Based on the financial statements of EBR for the period between 1 August
2002 and 31 March 2008:
(a) EBR paid $113,331.16 to Fidelity Life, as premiums in respect of
Policy 764. In the financial statements of EBR for the year ended 31
March 2008, this amount was apportioned as to 50 per cent each to
Mr René van Duyn and Mr van Duyn junior.21
(b)EBR paid $55,502 to Fidelity Life in respect of Policy 598. That amount has been classified as part of the current account debt owed by Mr van Duyn senior and Mrs van Duyn jointly to EBR.22
(c) The loans
(i) Introductory comments
[43] From June 2000, Policy 764 and Policy 958 were each used to enable some of the van Duyn interests to borrow funds. Of the four loans entered into between June 2000 and November 2006, three were commercial in nature. The other was residential.
[44] Three of the loans were specifically linked to Policy 764:
(a) The first, in June 2000, enabled the Awaroa Trust to acquire the commercial property from which EBR carried on its business. I call this Loan 764A.23
(b)The second, in May 2005, enabled Mr van Duyn senior to borrow money to settle a personal judgment debt, of about $184,000. I call
this Loan 764B.24
21 See para [39] above.
22 See para [41] above.
23 See paras [47]–[54] below.
24 See paras [55]–[57] below.
(c) The third, in November 2006, enabled South Head to borrow funds so that it could acquire a property in Rodney District. I call this Loan
764C.25
[45] One loan was linked to Policy 958. It was made in September 2000, to enable a residential property to be purchased for Mr van Duyn junior. The loan contract was entered into between Fidelity Life (as lender) and Mr van Duyn senior, Mrs van Duyn and Mr van Duyn junior (as borrowers). I call this Loan 958A.26
[46] Both Policy 764 and Policy 958 were entered into well before EBR’s incorporation on 3 January 2002.27 Loans 764A and 958A were also advanced before incorporation.28 Nevertheless, it is common ground that EBR, in the period between 2002 and 2009, made payments to Fidelity Life in respect of Policy 764, Policy 958, Loan 764A, Loan 764B and Loan 958A. No payments were made by
EBR in respect of Loan 764C.
(ii) Loan 764A
[47] On 24 April 2000, Policy 764 was transferred by Mr René van Duyn and his wife to himself and Mr van Duyn junior.29 That seems to have been done to enable the van Duyn brothers to apply for a loan from Fidelity Life. The mortgage broker, Mr Phillipps, completed a mortgage application in their names. That was signed by the brothers on 14 May 2000. The transfer of Policy 746 from Mr René van Duyn and his wife to himself and his brother was registered by Fidelity Life on 10 May
2000.
[48] A loan application for $250,000 was approved by Fidelity Life. Loan 764A was advanced on terms that required mortgages to be given over three properties in Helensville30 as well as an “assignment to Fidelity of Fidelity Life [Policy 764]”.
The legal character of that assignment is not plain from the approval letter of 22 May
25 See para [46] below.
26 See paras [58]–[60] below.
27 See paras [36]–[41] above.
28 See paras [44] and [45] above.
29 See para [39] above.
30 See paras [50]–[51] below.
2000.31 The van Duyn brothers accepted the loan offer on 24 May 2000. On that date, a sum of $200,000 was advanced to them. The loan was for a period of 15 years.
[49] On 13 June 2000, the solicitors acting for the van Duyn brothers wrote to Fidelity Life indicating an intention to refinance the May 2000 loan. Refinancing was to occur through another loan to the Awaroa Trust. The solicitors advised Fidelity Life that Mr van Duyn senior and Mrs van Duyn were “independent arm’s length trustees”. Mr van Duyn junior and Mr René van Duyn were shown as the other trustees. The June 2000 loan was for $250,000.
[50] The documentary evidence establishes that the sum of $250,000 was advanced to the trustees of the Awaroa Trust so that they could purchase properties at Awaroa and Garfield Roads from Mr van Duyn senior and his wife. The property at
2 Garfield Road was used as the premises from which EBR operated. One of the properties at Awaroa Road comprised a second hand shop and workshop. Five retail outlets were situated on the other property at Awaroa Road.
[51] The purchase price for the three sections was $755,000, of which $509,900 was advanced by Mr and Mrs van Duyn to the Awaroa Trust. That sum was subsequently repaid through a gifting programme. The three properties that were the subject of the security required by Fidelity Life for its loan to the van Duyn brothers were stated as “the sole assets” of the Awaroa Trust.
[52] The new loan was to be advanced on 19 June 2000. Policy 764 was to remain as partial security for the loan. The policy is shown as having been transferred from Mr René van Duyn and Mr van Duyn junior to Fidelity Life on 26
June 2000, with registration of that transfer effected on 4 July 2000.32
[53] A mortgage of land was entered into between the trustees of the Awaroa Trust
(as mortgagor) and Fidelity Life (as mortgagee) on 23 June 2000. The “priority
31 The nature of the assignment is discussed at paras [98]–[112] below.
32 The effect of the transfer to Fidelity Life is discussed at paras [98]–[112] below.
sum” was stated as $250,000. The mortgage was to co-exist with the use of the policy as security. Relevantly, cl 20(a) of the mortgage provided:
20. CONTINUANCE OF SECURITY
(a) The mortgagor hereby covenants and agrees with the mortgagee that the mortgagor will from time to time and at all reasonable times execute and do all such assurances acts and things including the giving of further collateral security as the mortgagee may reasonably require for the purpose of more effectively constituting and fortifying the security hereby given and for the purpose of rendering more effectual the repayment of the principal sum interest and other monies hereby secured and in particular but without prejudice to the generality of the above the mortgagor in order to secure the repayment of the principal sum and interest and other monies secured by this mortgage hereby charges in favour of the mortgagee the assurance policy or policies described in the Schedule hereto (and as the same may at any time or from time to time be varied, amended or added to or howsoever altered) or any supplemental or additional policy or policies of life assurance substituted or varied therefor and all monies at any time and from time to time assured by or to become payable under or by virtue of the said policy or policies of life assurance or any such additional substituted or varied policy or policies and for the purposes thereof the assurance policy or any policy or policies of life assurance substituted therefore are to be assigned to the mortgagee.
…
(Emphasis added).
[54] Clause 25 of the mortgage dealt with the topic of collateral security. It provided that the mortgage was “collateral to the mortgage of the policy”. The schedule to the mortgage referred specifically to Policy 764 as the policy in respect of which the security was granted. That was consistent with the terms of the approval letter of 22 May 2000.
(iii) Loan 764B
[55] On 18 September 2003, the District Court at Waitakere entered judgment in favour of Mr William O’Brien against Mr van Duyn senior, for a sum of $92,901.17. The judgment arose out of the sale by Mr van Duyn senior of two houses, which had not been relocated in accordance with a building permit. As a result of interest added following a supplementary judgment of 8 June 2004, the total amount payable
was $101,263.92, plus costs. Although it is said that Mr van Duyn senior was legally aided, he was ordered to pay $65,000 in costs.33
[56] Mr van Duyn appealed against the order for costs. In a judgment given on 11
October 2004, Allan J dismissed the appeal.34 As at 27 April 2005, the effect of the combined judgments was that Mr van Duyn senior had been ordered to pay Mr O’Brien a total of $183,519.39.
[57] Mr van Duyn senior had to borrow money to pay the judgment debt. He applied to Fidelity Life for a loan, described in the approval letter from Fidelity Life of 12 May 2005 as “a mortgage top up of $200,000”. The advance was to be made to Mr van Duyn senior, with the trustees of the Awaroa Family Trust acting as covenantors. The assignment “of Fidelity Life Policy [764] was [to be maintained in full force and effect], as part of the security arrangements”. As a consequence of the additional borrowing, premiums contractually payable by Mr van Duyn junior and Mr René van Duyn under Policy 764 increased.
(iv) Loan 958A
[58] On 14 August 2000, Mr van Duyn senior and his wife applied to Fidelity Life for a loan of $120,000. This was “to purchase residential land and house and double garage and extra unit for owner occupancy and rental tenant”. The application was joined, in a separate document, by Mr van Duyn junior, for the same purpose.
[59] Loan 958A was approved by Fidelity Life, by letter dated 24 August 2000. As well as two properties over which security was to be given by way of mortgage, the letter provided additional security in the form of an assignment to Fidelity of Policy 958. The mortgage into which Mr van Duyn senior, Mrs van Duyn and Mr van Duyn junior entered on 21 September 2000 contained identical terms to those set out in cl 20(a) and cl 25 of the earlier mortgage entered into in respect of Loan
764A.35
33 O’Brien v van Duyn DC Waitakere NP790/00, 18 September 2003 and 8 June 2004 (Judge
McElrea).
34 van Duyn v O’Brien HC Auckland CIV-2004-404-3234, 11 October 2004.
35 See paras [53] and [54] above.
[60] By the end of September 2000, Policies 764 and 958 were being used as security in respect of Loans 764A and 958A respectively.
(v) Loan repayments
[61] Based on financial statements of EBR for the period between 1 August 2002 and 31 March 2008:
(a) EBR paid a total of $113,331.16 to Fidelity Life in respect of Loan
764A.
(b)Rent of $245,137, payable to the Awaroa Trust for use of the Garfield Road property was deducted from EBR’s accounts. The moneys were paid and rent was applied during the financial years ended 31 March
2003 and 31 March 2008.
(c) EBR paid a total of $54,781.68 to Fidelity Life in respect of Loan
764B. Those payments were made during the financial years ended
31 March 2006 to 31 March 2008. Although Loan 764B was made by Fidelity Life to Mr van Duyn senior, these payments have been treated, in the financial statements of EBR, as drawings on the current accounts of Messrs René van Duyn and Mr van Duyn junior in the proportion of 50 per cent each.
The liquidators’ claims: analysis
(a) Structure
[62] I propose to deal with the complex questions that arise in the following sequence:
(a) Are the current account debts for which EBR sues payable?
(b)Did the directors of EBR breach duties owed by them to the company?
[63] A number of sub-issues arise under each of those headings:
(a) On the current account claims, do the financial statements of EBR for the year ended 31 March 2008 reflect the correct allocation of funds paid by EBR to Fidelity Life?
(b)Mr René van Duyn and Mr van Duyn junior claim a set-off in relation to any amounts they may owe by way of current account debt. The asserted set-off arises out of their claim that they paid, under a guarantee, a debt owing by EBR to ANZ. If I were to find that any relevant payments were made, should each be entitled to use his one- half share of the payment by way of set-off?
(c) In relation to claims for breaches of duties as directors:
(i)Do directors of a company (after the commencement of liquidation) owe statutory or fiduciary duties to a company to ensure that their current account debts are paid promptly, so as not to put the liquidators to unnecessary investigation costs?
(ii) If so, have the directors breached the pleaded duties?
(iii)Are the directors entitled to a defence to claims of breach of duty based on their reliance on McLaren Guise to protect their interests?36
(d)Are any of the claims barred by the Limitation Act 1950, the statute in force at the relevant time?
[64] Three specific issues arise in relation to the calculation and incidence of the current account indebtedness:
36 Section 138 of the Companies Act 1993 must be considered in the context of all of these claims, except the alleged breach of s 194, in respect of which s 300(2) applies. Section 138 is set out at para [172] below.
(a) The first requires consideration to be given to the way in which Policy
764 was assigned to Fidelity Life on 26 June 2000.
(b)The second concerns the way in which the financial statements were prepared for taxation purposes. The question is whether McLaren Guise ought to have prepared taxation returns based on a “group” structure.
(c) The third involves the question whether some adjustment should be made in respect of “fair market rental” payable by EBR to Awaroa Trust, as owner of the land from which EBR operated.
[65] Mr Hutcheson, for the van Duyn interests, submits that all three of those issues are relevant to whether the liquidators can rely on the 2008 signed financial statements to prove the current account indebtedness.
[66] On the third party claims, it is necessary to consider whether McLaren Guise owed actionable duties to the van Duyn interests. In general terms, the van Duyn interests allege that McLaren Guise owed to them duties to exercise reasonable skill and care, and to provide sound, competent and careful advice to the standard of a reasonably competent accountant in the preparation of all financial accounts and statements. They allege that those duties were breached, and they have suffered claimable losses as a result. By way of defence, McLaren Guise denies that it owed duties to the van Duyn interests as pleaded. As there is no specific letter of engagement between McLaren Guise and its clients, the scope of its engagement must be determined by reference to the services that Mr Aalders was providing at the time that McLaren Guise acquired his practice.
(b) EBR’s current account claims
(i) Introductory comments
[67] Current account debts owed by directors or shareholders to a company are recoverable at the suit of the company. In these claims, EBR is the plaintiff.
[68] The first set of financial statements that McLaren Guise prepared for EBR was for the financial year ended 31 March 2005. As they were to be prepared shortly after McLaren Guise purchased Mr Aalders’ practice (with effect from 1 April 2005), Mr Harrison (as the partner responsible for preparing the accounts) decided to follow the same approach as Mr Aalders had taken.
[69] McLaren Guise did not undertake any independent assessment of how the payments to Fidelity Life should be treated before finalising 2005 accounts. Those financial statements were prepared on the basis of accounting work undertaken by Ms Zaragosa, who had previously carried out that work under the supervision of Mr Aalders.
[70] Section 194 of the Act puts a statutory duty on directors of a company to ensure that proper accounting records are kept.37 The term “kept” embraces concepts of creation, maintenance and retention. Financial statements of a company are prepared from the accounting records. If the accounting records were kept in accordance with s 194(1), the financial statements should reflect the true position of the company.
[71] Although only the 2008 financial statements were signed by directors, Mr
René van Duyn and Mr van Duyn junior, the comparative figures contained in the
2007 statements form part of those accounts. The 2008 financial statements showed that Mr René van Duyn owed EBR $129,258 and that his brother owed $125,209. The liquidators rely on those statements as prima facie evidence, by way of admissions, by the two brothers, that each of those debts are owed by each of the brothers respectively. Mr van Duyn senior and his wife are together recorded as owing the company $55,502 on their current account, as at 31 March 2008.
(ii) Onus of proof
[72] The existence of a debt is something that EBR must prove on a balance of probabilities. The first question is whether the Court may only look beyond the
37 Section 194 of the Companies Act 1993 is set out at para [80] below.
signed accounts if the van Duyn brothers can demonstrate that the financial statements were incorrect.
[73] On the liquidators’ argument, I would need to be satisfied on the balance of probabilities that a different amount was owed. Mr Murray, for the liquidators, relied on cases such as Thom Contractors Ltd (in liq) v Thom,38 Chesterton Holdings Ltd (in liq) v Durney39 and CGES Ltd (in rec and in liq) v Kelly40 to support that stance. With respect, I take a different view.
[74] The authorities to which I was referred by Mr Murray tend to conflate notions of legal and evidential onus. In those cases, it was not necessary to dwell on the difference between them. For that reason, it is not surprising that the Judges who decided them did not embark on a review of the applicable principles.
[75] In my view, the legal onus remains on EBR to prove that the alleged debtors owe money to EBR in the amounts claimed. The standard of proof is the balance of probabilities. In the absence of evidence to the contrary, that standard will be met if signed financial statements acknowledge a debt owing to one of the signatories.
[76] In a case where the alleged debtor can point to evidence that tends to cast doubt on whether the amount claimed is owing, the Court must determine both liability and quantum by reference to whether the liquidator has proved a debt on a balance of probabilities, having regard to the totality of evidence adduced on the issue. For example, in this case, if I took the view that the financial statements were unreliable, they should be put to one side and the claims determined on the balance of available evidence.
[77] I endorse the approach taken by Judge McElrea in Kiwibilt Engineering Ltd
(in liquidation) v Pavlovich.41 In that case, the Judge was confronted with claims by liquidators that were based on accounts that had been prepared before the date of
38 Thom Contractors Ltd (in liq) v Thom HC Auckland CIV-2008-404-6829, 28 April 2009 (Keane
J)at para [17].
39 Chesterton Holdings Ltd (in liq) v Durney HC Napier CIV-2011-441-007, 19 May 2011 (Associate Judge Gendall), from para [27].
40 CGES Ltd (in liq and rec) v Kelly [2016] NZHC 1465 (Gendall J) at para [15].
41 Kiwibilt Engineering Ltd (in liquidation) v Pavlovich [2004] DCR 193 (Judge McElrea).
liquidation, and approved by directors. His Honour took the view that, in those circumstances, “there would be a strong inference from the accounts of a debt owing to the company”.42 Judge McElrea continued:
[12] … But even in that case it must be open to a director to show that the account was not correct. This is not to say that there is a legal onus of proof upon such person, but only that in the absence of evidence to the contrary, the normal and proper inference to be drawn from the accounts would be that the amount shown had been advanced to the director. It is, if you like, an “evidential onus”, although speaking of it as an onus of proof can be misleading. It is simply an application of the usual rules of evidence that apply in a commonsense way in all cases, civil and criminal. Triers of fact are entitled to draw conclusions (or “inferences”) from proved facts if in the circumstances they are logical conclusions to draw. Whether the inference can properly be drawn depends on all the evidence including whether there is any evidence pointing in the opposite direction.
(iii) What debts are payable?
[78] I start from the proposition that the relevant 2008 financial statements were signed by Mr René van Duyn and Mr van Duyn junior. That is an act of approval of those financial statements, and an admission that the amounts owing by them are payable.
[79] No direct evidence has been given by any of the van Duyn family as to why the debts should be allocated in a manner different to that recorded in the financial statements. Their position, based on expert evidence, appears to be that it is appropriate for insiders who have current accounts with a company to decide among themselves how various payments should be allocated. Indeed, at one point, that evidence even went so far as to suggest that it was open to insiders to make those types of reallocation decisions after liquidation intervened.
[80] Section 194(1) of the Act requires directors to keep accounting records that
“correctly record the transactions of the company”.43 Relevantly, s 194 provides:
194 Accounting records must be kept
(1) The board of a company must ensure that there are kept at all times accounting records that—
42 Ibid, at para [12].
43 Section 194(1) of the Companies Act 1993 is set out in full at para [70] above.
(a) correctly record the transactions of the company; and
(b) will enable the company to ensure that the financial statements or group financial statements of the company comply with generally accepted accounting practice (if the company is required to prepare such statements under this Act or any other enactment); and
(c) will enable the financial statements or group financial statements of the company to be readily and properly audited (if those statements are required to be audited).
…
[81] Necessarily, to comply with the requirements of s 194(1)(a)–(c), the directors must ensure that the company keeps and maintains records that explain the nature and purpose of particular transactions; in this case, the amounts owed by members of the van Duyn family to EBR on their current accounts. I am satisfied from the evidence given by Ms Madsen-Ries and Mr Dennis Parsons (a forensic accountant called by the plaintiffs) that the current accounts were correctly stated in the financial statements, on the basis of the prime records from which the figures in the
2008 financial statements were compiled.
[82] If adjustments had been necessary, they would have been made by journal entry. In the context of a case such as this, a journal narration should have explained why liability to pay a particular amount had been shifted from one insider to another. No such step was taken during the lifetime of EBR.
[83] Without a considered journal entry of that type completed before liquidation, it would be easy for insiders to alter the incidence of debt in a manner that left liquidators of a failed company with claims against only those unable to pay. A liquidator must be entitled to take the signed financial statements as a sound starting point for consideration of whether, and if so to what extent, a debt is owing to the company. Other evidence would then be considered to raise the question whether a debt shown as owing in financial statements by A is, in fact, owed by B.
[84] The 2008 financial statements record a debt owed by Mr van Duyn senior and Mrs van Duyn to EBR, in the sum of $55,502. While Mr van Duyn senior did not sign the financial statements for the year ended 31 March 2008, he was a director on
the date at which those statements have been prepared. Be that as it may, during the course of the aborted trial in May 2016, in an endeavour to reallocate responsibility for the agreed amounts owing to EBR by members of the van Duyn family, Mr van Duyn senior and Mrs van Duyn signed an admission in the sum of $128,462, to reflect the amount they said was owing by them. By doing so, they have implicitly acknowledged that a sum of at least $55,502 was owing by them to EBR. The impact of their admission of the higher sum was a reduction of the amount owing by Mr van Duyn junior to $24,097 and the creation of a debt owed by EBR to Mr René van Duyn in the sum of $30,406.
[85] The liquidators come to the affairs of EBR as strangers, with no contemporaneous knowledge of the reasons why certain funds were advanced, and for what reason. The statutory scheme recognises the need for them to rely on financial statements prepared and approved before liquidation intervenes. Applying what was said by Judge McElrea in Kiwibilt Engineering Ltd: “in the absence of evidence to the contrary, the normal and proper inference to be drawn from the
accounts would be that the amount shown had been advanced to the director”.44
[86] Attempts by the van Duyn family to reallocate amounts shown as owing to EBR in the financial statements for the year ended 31 March 2008 have been built on shifting sands. Evidence suggesting a need to reallocate is so confusing and contradictory that I do not place any weight on it.
[87] My reasons for concluding that I should rely on the signed accounts may be summarised as follows:
(a) Mr van Duyn junior and Mr René van Duyn each acknowledged liability to pay the debts allegedly owing by the liquidators when they signed the financial statements for the year ended 31 March 2008.
(b) When signing admissions of claim after my judgment of 25 May
201645 Mr van Duyn senior and his wife admitted that they owed
44 Kiwibilt Engineering Ltd (in liquidation) v Pavlovich [2004] DCR 193 (Judge McElrea) at para
[12], set out at para [77] above.
45 EBR Holdings Ltd (in liq) v van Duyn [2016] NZHC 1112 at paras [8]–[12]. Reasons for this
$128,462 to EBR. That is $72,960 more than the amount shown as owing by them in the 2008 financial statements. I find that they admitted liability for an amount in excess of that shown in the accounts because they wished to remove any liability on the part of Mr René van Duyn.46 That strategy, if successful, would have had the consequence that Mr René van Duyn could have recovered some funds for the benefit of the family (generally) by his participation as a creditor in the distribution of assets gathered by the liquidators.
(c) None of the members of the van Duyn family have been able to point to any evidence that justifies a change to the indebtedness disclosed in the signed financial statements. While EBR was trading, the van Duyn interests were happy enough to gain the benefits of using company income for personal purposes and were not concerned, on an annual basis, to satisfy themselves that the moneys were payable by those shown in the financial statements as debtors of the company.
(d)Mr Aalders, who was the accountant for EBR and the van Duyn interests, could have given evidence about the way in which the accounting arrangements were structured to ensure all moneys payable to Fidelity Life were made through EBR. He was not called, even after attempts were made after the aborted trial to reallocate the debts in a manner different to that suggested in the defences advanced
to the summary judgment claim in the District Court.47 I infer that
Mr Aalders’ evidence would not have supported the most recent
attempts at reallocation of debt.48
(e) Mr Harrison, after liquidation and without any evidential foundation to justify them, took steps to alter the financial statements that had
been signed by the directors in 2008 to demonstrate that EBR paid to
judgment were given on 1 June 2016: EBR Holdings Ltd (in liq) v van Duyn [2016] NZHC 1169. See also paras [15] and [18] above.
46 See para [84] above.
47 Generally, see para [11] above.
48 On the ability to draw such inferences, see, for example, Ithaca (Custodians) Ltd v Perry Corp
[2004] 1 NZLR 731 (CA) at paras [151]–[154], citing Jones v Dunkel (1959) 101 CLR 298.
Fidelity Life moneys properly due by it. Not even the van Duyn interests now contend that the moneys paid to Fidelity Life were owed by EBR. I reject suggestions made by Mr Harrison in evidence that he was entitled to make changes to the financial statements after liquidation intervened to portray the transactions with Fidelity Life in a more favourable light for his clients.
(f) Mr Robert Walker, an expert accounting witness called on behalf of the van Duyn interests, provided a “complex” analysis in an endeavour to recast the allocation of indebtedness on the basis of what he perceived to be “valid” and “invalid”. I found his evidence confusing, unhelpful and lacking in any analytical rigour. Mr Walker’s evidence was not grounded on a firm factual foundation. Rather, it seemed to be premised on the notion that it was acceptable for an accountant acting for a company after liquidation had intervened to recast financial statements based on what he or she considered to be “fair”, from the perspective of the directors and shareholders. No legal authority was proffered to support that approach. Nor does any exist.
(g)Mr Walker’s approach cannot be justified. It is a markedly different approach from one that involves a reconstruction by making adjustments designed to correct inaccurate information in financial statements. Such corrections are justifiable, either because a contrary approach is required by an analysis of the underlying accounting records, or on the basis of some other reliable evidence. Mr Walker’s view is based on opinion. Nothing that Mr Walker said went close to persuading me that there was some doubt about the initial allocation of indebtedness disclosed in the signed 2008 financial statements. I put his evidence to one side.
(h)Mr Timothy Livingstone, an accountant called on behalf of the van Duyn interests, also gave evidence about the allocation of debt. He is currently the accountant representing the van Duyn interests, so
cannot be regarded strictly as an independent expert. In saying that, I do not intend to be critical of Mr Livingstone. He acknowledged that he was giving evidence based on information conveyed to him by his clients. He had no first hand information that suggests the approach he has taken is any more reliable than that shown in the financial statements. I am not prepared to act on his evidence.
(i)One of the liquidators, Ms Madsen-Ries, undertook an analysis of the accounting records of EBR for the relevant financial years, and concluded that the amounts recorded as owing (in the 2008 financial statements) by members of the van Duyn family could be supported. She reviewed that analysis based on the adjustments proposed after the aborted May 2016 hearing, but did not alter her evidence. Mr Parsons gave evidence that corroborated Ms Madsen-Ries’ analysis. I found their evidence compelling. It supports the current account claims. It also demonstrates that the primary accounting records kept by EBR support the classification of the current account debts.
[88] On balance, I regard the extrinsic evidence of reallocation as unreliable. Based on the signed 2008 financial statements, I am satisfied that the liquidators have proved on a balance of probabilities that the following debts are payable:
(a) Mr van Duyn senior and Mrs van Duyn – $55,502 (b) Mr René van Duyn – $129,258
(c) Mr van Duyn junior – $125,209.
(iv) The set-off defence
[89] Mr van Duyn junior and Mr René van Duyn contend that they are entitled to set-off, against any debt I might find payable by them, amounts that were paid to ANZ to discharge their guarantees of debts that EBR owed to the bank. Mr Hutcheson supported that contention by reference to McCullough v Base Control
Ltd (in liq).49 In McCullough, Allan J considered the circumstances in which set-off was appropriate, in the context of a case in which persons owing moneys to a company had discharged debts under guarantees.
[90] The first difficulty for the van Duyn brothers is evidential in nature. The evidence establishes that the moneys paid to ANZ came from South Head, not Mr van Duyn junior and Mr René van Duyn personally. As with the current account evidence, there is nothing reliable to show that moneys were advanced by Mr René van Duyn and Mr van Duyn junior to South Head for the purpose of enabling the latter to discharge the debt owed to ANZ. If any entity were entitled to subrogate to the claims of ANZ, it would be South Head. That is a sufficient reason, of itself, to defeat the defence.
[91] From a legal perspective, there are two linked reasons why, in any event, I would have found against the claims of set-off by Mr René van Duyn and Mr van Duyn junior, had it been established that they had repaid ANZ’s indebtedness under their guarantee. The first concerns the nature of subrogation. The second involves the need for mutuality at the time of liquidation, if set-off were to be accepted.
[92] Rights of subrogation follow the rights of the entity whose debt is discharged by the guarantor’s payment. Mutuality does not exist when a person steps into the shoes of another creditor and exercises that person’s rights against the company. If a preferential debt was incurred, for example, the guarantor would stand in the position of the preferential creditor.50 But he or she would first be required to pay any debt owed to the company so that all assets were available for distribution among creditors rateably.51
[93] The mutuality point was made forcefully by the Court of Appeal in New
Zealand Society of Accountants v ANZ Banking Group (New Zealand) Ltd.52 In that case, the Society of Accountants was entitled, under s 17 of the New Zealand Society
49 McCullough v Base Control Ltd (in liq) HC Auckland CIV-2008-404-3375, 24 November 2008 (Allan J).
50 Companies Act 1993, sch 7, cl 4.
51 As an illustration of this principle, see Re a Debtor [1927] 1 Ch 410 (ChD) at 419 (Astbury J), and 419–420 (Clauson J).
52 New Zealand Society of Accountants v ANZ Banking Group (New Zealand) Ltd [1996] 1 NZLR
283 (CA).
of Accountants Amendment Act 1963, to be subrogated for moneys owed to clients of a Chartered Accountant who had misappropriated some $10 million over a period of 20 years, from 1970 to 1991. The moneys had been paid out of a statutory fidelity scheme. Delivering the judgment of the Court of Appeal, Thomas J expressed the principle in these terms:53
Thirdly, we believe that our view is consistent with the fundamental nature of subrogation. As Mr White [for the Society] submitted, a person who exercises his or her rights of subrogation does not acquire an independent cause of action. They step into the shoes of the person whom they are subrogating. They sue on his or her cause of action and, unless separately pleaded, they have no cause of action themselves against the defendant. Although they have the right to sue by way of subrogation, they do not sue in their own right. They are subrogated to the rights of the original claimant. All this is clear. See Sydney Turf Club v Crowley [1971] 1 NSWLR 724, per Mason JA at p 734, affirmed on appeal (1972) 126 CLR 420; and Hobbs v Marlowe [1978] AC 16, per Lord Diplock at p 37. It would be incongruous with this concept if a defendant could plead the contributory negligence of the person who has exercised rights of subrogation when that person is simply standing in the shoes of another person in order to pursue the claim of that person.
(Emphasis added)
[94] By contrast, in McCullough, Allan J took the view that sufficient mutuality had been shown to bring s 310 of the Act into play.54 Relevantly, s 310(1) of the Act provides:
310 Mutual credit and set-off
(1) Where there have been mutual credits, mutual debts, or other mutual dealings between a company and a person who seeks or, but for the operation of this section, would seek to have a claim admitted in the liquidation of the company,—
(a) an account must be taken of what is due from the one party to the other in respect of those credits, debts, or dealings; and
(b) an amount due from one party must be set off against an amount due from the other party; and
(c) only the balance of the account may be claimed in the liquidation, or is payable to the company, as the case may be.
53 Ibid, at 287–288.
54 McCullough v Base Control Ltd (in liq) HC Auckland CIV-2008-404-3375, 24 November 2008 (Allan J) at [34].
…
[95] Allan J accepted that set-off could be claimed by the two persons who owed money in their personal capacity to the company in liquidation but who had discharged indebtedness owed by that company to ASB Bank as guarantors. They stood as guarantors in their capacity as trustees of a family trust. Allan J said:
[31] In my opinion, it is not sufficient merely to point to the status of the appellants as trustees. Rather, it is necessary to go beyond that and to inquire as to the nature and extent of the obligation actually assumed by the appellants. In NZHB Holdings Ltd v Bartells (2005) 5 NZCPR 506, Baragwanath J held that there is a presumption that trustees who enter into obligations assume personal liability for the discharge of those obligations unless an appropriate limitation of liability appears in the documents concerned. The mere addition of words such as “as trustee” will be insufficient to achieve protection from personal liability, although a phrase such as “as such trustee but not otherwise” may well do so: In Re Robinson’s Settlement [1912] 1 Ch 717 at 728-9.
[32] Here, Mr Carmine [a trustee] was protected by language in the security documents having the effect of limiting his liability to the value of the trust assets. There was no similar limitation in respect of the appellants. They therefore assumed unlimited personal liability on the guarantees. The use of the expression “As Trustees For B J & N D McCullough Family Trust” which appears in the executed guarantee immediately below the signatures of the three trustees makes no difference.
[33] No doubt the appellants were entitled to an indemnity from the assets of the trust in so far as they were available to meet such liability, but the obligation to the Bank was nevertheless personal. This case is, I think, to be distinguished from those in which mutuality was found to be absent. The Judge held against the appellants on this point but it appears that the argument addressed to him may have been more limited than occurred in this Court and that, in particular, his attention was not drawn to the unlimited liability faced by the appellants as guarantors.
[34] In my opinion there was sufficient mutuality here for s 310 to apply.
[96] Strictly speaking, I do not need to decide whether Allan J was right to equate a personal liability to one incurred by a person in his or her capacity as a trustee. My provisional view is that the Judge was right to find “sufficient mutuality” for s 310 of the Act to apply. I say that because, in the absence of agreement limiting a trustee’s liability to the extent of trust funds, a trustee is personally liable for any amount owed to a stranger. On that basis, it does not matter, for set-off purposes, whether
the debt is owed qua trustee or not. A trust is not a separate legal entity.55
55 Generally, see Levin v Ikiua [2010] 1 NZLR 400 (HC) at paras [109]–[113]. This discussion was
[97] I apply the Court of Appeal’s decision in New Zealand Society of Accountants, and distinguish McCullough for the reasons I have given. In those circumstances, the claim of subrogation to defeat the requirement to pay the current account debt must also fail on legal grounds.
(v) The assignment issue
[98] As part of the arrangements made in relation to Loan 764A, Policy 764 was assigned to Fidelity Life on 26 June 2000. By Loan 764A, Fidelity Life had advanced a sum of $250,000 to enable the Awaroa Trust to acquire the commercial property from which EBR carried on its business.56 The assignment was noted on Policy 764. Mr Hutcheson argued that the assignment to Fidelity Life meant that payments made by EBR under Loan 764A could not be treated as having been made on behalf of any of the van Duyn interests.
[99] The assignment of Policy 764 is recorded in a document attached to Policy
764, which is called a “Memorandum of Transfer”. That document does not disclose the form of the assignment in issue. The date of transfer is shown as 26 June 2000. The transfer was registered by Fidelity Life on 4 July 2000. The form of the “Memorandum of Transfer” accords with that contained in Schedule 8 to the Life Insurance Act 1908.
[100] The nature and type of assignment was a topic not addressed fully in counsel’s submissions. The point is of some importance because of the possibility that an assignment might create new rights. In dealing with a situation in which assignment of the policy itself is contemplated, the learned authors of The Law of Assignment observe:57
An assignment of a life policy itself would amount to the creation of a fresh insurance on a different life. In other words, this would not be a case of transfer but a case of creating new rights. Accordingly, such a purported assignment will be ineffective.
not affected by the subsequent Court of Appeal judgment: Ikiua v Levin [2010] NZCA 509, [2011] 1 NZLR 678.
56 See paras [44](a) and [47]–[53] above.
57 Marcus Smith and Nico Leslie The Law of Assignment (2nd ed, Oxford University Press, Oxford, 2013) at [17.61] (footnote omitted).
[101] The Life Insurance Act provides special rules relating to life insurance policies. Such documents have long been regarded as a special type of chose in action. While, even before the 1908 Act, assignment of a policy was enforceable in equity if made by way of transfer or charge,58 s 43(1) of that Act is directed specifically to an “ordinary transfer” of a policy. The fact that special provisions are contained in the 1908 Act to deal with the assignment of life insurance policies
differentiate that type of transfer from other forms of assignment of choses in action, which are the subject of specific provisions of the Property Law Act 2007.
[102] Section 43(1) of the Life Insurance Act 1908 sets out prerequisites for an assignment of a policy by way of ordinary transfer. It states:
43 Registration of transfer of policy
(1) Every assignment of a policy by way of ordinary transfer shall be by transfer endorsed upon the policy, in the form or to the effect set forth in Schedule 8, and signed, or, in the case of a corporation, sealed, by the transferor and transferee; and shall be registered in a book to be provided by the secretary for that purpose, and the date of such registration shall be inserted in the form of transfer, which shall also be signed by the secretary, and thereafter such assignment shall have the effect of vesting the policy absolutely in the assignee, who shall thereupon become the holder of the policy and may thereafter sue in his own name on the policy assigned, and the receipt of such assignee shall be a valid discharge both at law and in equity for all money payable under the policy:
provided that every transfer or assignment of a policy made before 1
September 1885 (being the date of the coming into operation of the Life Assurance Policies Act 1884 Amendment Act 1885), by separate deed or assignment shall be deemed to be valid.
…
[103] Sections 43(2)–(4) of the Life Insurance Act provide some further insight into the way in which assignments are treated for the purpose of that legislation. They provide:
…
(2) Except in the case of assignments by way of ordinary transfer, an assignment shall be registered by leaving the same with the policy at
58 Ashley v Ashley (1829) 3 Sim 149, 57 ER 955 (Ch). See Roger Fenton Garrow & Fenton’s Law
of Personal Property in New Zealand: Volume 1 (7th ed, LexisNexis, Wellington, 2010) at
10.6.7.
the office of the company, whereupon the secretary shall, if in his opinion the assignment is in due form and properly executed, endorse on the policy a memorandum in the form or to the effect set forth in Schedule 9, and shall retain the assignment in the office of the company, and return the policy, with the said endorsement thereon, signed by himself, to the person leaving the same, unless the assignment is by way of surrender to the company liable under the policy, in which case he shall retain the policy.
(3) No assignment shall be of any validity until registered as herein provided, but this requirement shall not apply to assignments to the company issuing the policy.
(4) If any assignment is upon any trust, such trust shall be effected by way of declaration of trust by some separate instrument, and no notice of any such trust shall be inserted in the assignment or endorsed upon the policy.
…
[104] For the purposes of s 43(2) of the Life Insurance Act, no form of the type set out in Schedule 9 was produced in evidence. Nor was any evidence given about the way in which registration of the assignment was undertaken by the Secretary of Fidelity Life, for the purposes of s 43(1).
[105] Section 60 of the Life Insurance Act preserves the Court’s ability to enforce
equities as among those claiming rights to life insurance policies. It provides:
60 Courts may enforce equities
Notwithstanding the provisions of this Act as to registration, nothing herein shall operate to prevent any Court of competent jurisdiction from enforcing any equities which may exist as between the parties to any transaction or matter relating to any policy or any interest therein, or in any money payable thereunder.
[106] Discussing the interrelationship between the need for compliance with s 43(1) of the Life Insurance Act and the statutory injunction that assignments which do not follow the form required by that provision will be invalid,59 the author of Garrow & Fenton’s Law of Personal Property in New Zealand observed:60
This requirement, found in s 43(3), needs to be read against s 60, which provides that notwithstanding the provisions in the Act relating to registration nothing in it operates to prevent any court of competent
59 Life Insurance Act 1908, s 43(3).
60 Roger Fenton Garrow & Fenton’s Law of Personal Property in New Zealand: Volume 1 (7th ed, LexisNexis, Wellington, 2010) at 1116.
jurisdiction from enforcing any equities which may exist as between the parties to any transaction or matter relating to any policy. Nor does it prevent the court from enforcing any equities between the parties relating to any interest in a policy, or in any money payable under it. Thus the right to enforce equitable interests is expressly preserved under the Act.
[107] In National Bank v Official Assignee of Estate of Claridge,61 the Court of Appeal considered the nature of an assignment to a bank, in the context of a contest about whether Mr Claridge was entitled, on his bankruptcy, to the protection then afforded by s 65 of the Life Insurance Act.62 The issue was whether Mr Claridge, having assigned an unmatured policy of insurance to the bank, ceased to be the holder of the policy.
[108] For present purposes, National Bank v Official Assignee of Estate of Claridge63 assists in determining whether an assignment registered by way of a memorandum of transfer in accordance with Schedule 8 to the Life Insurance Act necessarily operates as an absolute transfer of the policy to the insurer. Although, in Claridge, the assignment was completed in accordance with Schedule 8, the Court of Appeal held that the assignment was by way of charge only. Delivering the
judgment of the Court of Appeal, Sim J held that when “the transfer to the bank was registered, Claridge ceased to be the holder of the policy, for the holder of a policy is defined by s 41 to be the person for the time being legally entitled to the policy”. That person was the bank. However, the Court of Appeal considered that “as between the bank and Claridge, he remained in equity the owner of the policy”.64
[109] Although not stated expressly, the Court of Appeal appears to have regarded Mr Claridge as having made an equitable assignment by way of charge of the policy in favour of the bank before his adjudication. That is supported by the Court’s conclusion that Mr Claridge was not entitled to invoke the protections against bankruptcy set out in s 65 of the Life Insurance Act and “ought to have treated the policy as a security within the meaning of the Bankruptcy Act, and valued it
accordingly”.65
61 National Bank v Official Assignee of Estate of Claridge [1925] NZLR 305 (CA).
169 See paras [10] and [11] above.
René van Duyn and Mr van Duyn junior], the amount claimed against him, was for insurance payments properly attributed to the Awaroa Family Trust and South Head Trust. I have taken [Mr van Duyn senior’s and Mrs van Duyn’s] advice as being true in making the adjustment shown in the financial statement summary in respect of the claim made against him personally.
8.Both, Awaroa Family Trust and the South Head Trust made various loan advances to the company by way of working capital, which is shown in the financial statements annexed and marked “D” in Vivien Judith Madsen-Ries affidavit. Both trusts made advances to the company since its incorporation in 2002 and the company owes both trusts substantial amounts as seen in the financial statements exhibited to Vivien Judith Madsen-Ries affidavit.
(Emphasis added)
[203] In evidence before me, Mr Harrison accepted that he met only once with Mr van Duyn senior, Mr van Duyn junior and Mr René van Duyn to discuss the implications of the liquidation, in particular the alleged current account indebtedness. That meeting took place on 3 April 2009, some four months before August 2009, which is the time up to which Mr Harrison deposed that he believed
the 2008 financial statements were correct.170 The summary judgment proceedings
were issued on 11 August 2009.
[204] Mr Harrison accepted that the 3 April 2009 meeting was relatively short. A narration in Mr Harrison’s costing records contains the following description: “Meeting with Mr van Duyn Snr and the two sons with possible options for old company in liquidation”. Mr Harrison acknowledged that he had not made any written record of what was said at that meeting.
[205] Mr Hutcheson cross-examined Mr Harrison on the brief of evidence he had prepared in anticipation of the hearing. This exchange occurred:
Q. In your evidence you say that your recollection of the meeting is that you said you would need to review the ledgers to see how the current accounts were made up and could then give thought to whether it was possible to put through transactions to cancel out the current accounts and prepare interim financial statements to present to the liquidator. That’s your evidence?
A. Yes.
170 See para 6 of Mr Harrison’s affidavit in opposition to the application for summary judgment in
the District Court, set out at para [202] above.
Q. So you conveyed something like that to them at that meeting, is that right?
A. Yes.
Q. So I think we’re agreed that your initial response and approach to it was to look to try and reverse the entries and remove the current account liability issue, is that fair?
A. Not reverse the entries but new entries from the other entities.
Q. New entries to effectively set off what was in the current account, is that what you were doing?
A. Yes.
[206] After that exchange, I asked Mr Harrison about Mr van Duyn senior’s evidence that he had used the word “nullify”.171 My questions and Mr Harrison’s answers are recorded as follows:
THE COURT:
Q. Would the word “nullify” be a fair word to use?
A. It’s not something I would normally use, no.
Q. No, but would it be fair description? A. But it’s a description, yes.
[207] I have no doubt that Mr Harrison’s second answer was in fact an acknowledgement of the correctness of the proposition I was putting to him. While attempting to distance himself from the suggestion that he had told those present at the meeting that he could “nullify” the debts, Mr Harrison never expressly denied having said that. I find that he did use the word “nullify” in his discussions with Mr van Duyn senior, Mr van Duyn junior and Mr René van Duyn at the meeting on 3
April 2009.
[208] Mr Lynch was called as an expert witness to give evidence for McLaren Guise in relation to the steps Mr Harrison took to recast the 2008 financial statements. Initially, somewhat surprisingly, Mr Lynch seemed to support the approach taken by Mr Harrison. However, ultimately, he retreated from the
proposition that an accountant could create new entries after liquidation to achieve a
171 See para [186] above.
“tax neutral” structure that might have been intended by the accountant who was advising the entity on tax issues, but had never before been reflected in the entity’s financial statements.
[209] The essence of Mr Lynch’s evidence on this point can be gleaned from cross- examination by Ms Quinn, for the van Duyn interests, and my own questions to him:
CROSS-EXAMINATION CONTINUES: MS QUINN
Q. So the fact that [the current account debt] actually gets included in the financial statements of EBR, from well under McLaren Guise’s preparation of the accounts from 2005 right through to 2007, makes those accounts incorrect, doesn’t it?
A. Well yeah in that respect, there’s a transaction there that isn’t valid and so the directors, when they’ve met their obligation to prepare their financial statements have got a charge in there that’s not justified.
Q. As Mr Harrison said, this was a journal entry by the accountants?
A. Yes to give effect to the structure that the client was used to having each year, that was put in place through Mr Aalders –
THE COURT:
Q. Come on, you can’t actually mean that surely –
A. Well –
…
Q. Look the proposition that seems to be coming out of what you’re saying is this. An accountant completes a journal entry to create a fictitious transaction that is claimable as a tax deduction, point 1. The accountant does not discuss that with the client, point 2. The accountant is justified in presenting the fictitious transaction because it supports a tax neutral structure. That’s what you have actually said, if you’d been listening to what you’ve said. That can’t be right, can it?
A. No, no.
[210] The proceedings issued by the liquidators against McLaren Guise were met with an application to strike out, based on a protection arising out of witness
immunity. Associate Judge Christiansen declined to strike out the proceeding,172 but
172 EBR Holdings Ltd (in liq) v McLaren Guise Associates Ltd [2015] NZHC 607.
his decision was reversed on review.173 Brewer J struck out causes of action in deceit/injurious falsehood and negligence, but left a claim based on misuse of confidential information for determination.
[211] The liquidators appealed against Brewer J’s decision. The Court of Appeal reversed his decision and restored the Associate Judge’s order dismissing the strike out application.174 In short, the Court held that the case was “ill suited for development [on the law relating to expert witness immunity] by resort to the strike out jurisdiction”.175
[212] One of the allegations in the parallel proceeding is that Mr Harrison gave untruthful evidence about the contents of the financial statements. In giving the judgment of the Court of Appeal, Brown J said:176
[51] Finally, we note that a particular feature of this case which does not arise in the authorities cited in argument is the fact that, although he swore an affidavit which was on the face of it contrary to the interests of EBR, on one view of the matter Mr Harrison was endeavouring to correct material which he had previously prepared and which was being placed before a Court (albeit by EBR). Indeed passages from the District Court judgment declining the summary judgment application, which are recited in the amended statement of claim, included the following:
“[45] In my view the liquidators have not discharged the onus. Leading me to this conclusion are:
a) The accounts have been rewritten by their original author, a professional, as having originally been inaccurate.
… ”
[52] The code of conduct for expert witnesses states that an expert witness has an overriding duty to assist the Court impartially on relevant matters within the expert's area of expertise. It provides that, if an expert witness believes that his or her evidence or any part of it may be incomplete or inaccurate without some qualification, that qualification must be stated in his or her evidence.
[53] There is no explicit requirement that an expert witness must take steps to correct evidence previously provided which the expert considers to be inaccurate in some material respect. However an expert witness could not
173 EBR Holdings Ltd (in liq) v McLaren Guise Associates Ltd [2015] NZHC 1996, [2016] 2 NZLR
96.
174 EBR Holdings Ltd (in liq) v McLaren Guise Associates Ltd [2016] NZCA 622.
175 Ibid, at para [38].
176 Ibid, at paras [51]–[54].
be criticised for doing so. Should the witness thereby lose the benefit of any immunity because the amendment is adverse to the interests of the party who relies on the expert's original advice? On the facts was Mr Harrison's affidavit a genuine correction of a prior inaccuracy?
[54] The allegation is made in the present case that Mr Harrison knew that the material statements in his affidavit were false. If they were false, then that may reasonably militate against the availability of the immunity. For this reason as well we consider that it is undesirable to engage with the important issue of principle on the basis of assumed facts.
(Footnotes omitted).
[213] I considered whether I should refrain from making findings of fact on these issues. I decided that it was necessary to make such findings, notwithstanding that the same issues arise in the parallel proceedings. The most important consideration is that the present proceeding involves a claim by the van Duyn interests against McLaren Guise that must be determined having regard to the findings I have made about their liability to pay current account debts. It would be wrong to refrain from making relevant factual findings on that claim simply because the liquidators have an outstanding proceeding against McLaren Guise based on different causes of action. Any question of issue estoppel can be raised in the parallel proceeding. I express no view on whether that doctrine will apply.
(d) The terms of McLaren Guise’s engagement
(i) Introductory comments
[214] EBR’s financial statements for the financial years prior to 31 March 2005 were prepared by Mr Aalders. There is no evidence of what terms were agreed between Mr Aalders and the van Duyn interests. Having said that, Mr Aalders’ role appears to have been wider than that of a compilation accountant.177 For example, Mr van Duyn senior explained that Mr Aalders had a more significant role in explaining the meaning of the accounts than was adopted by Mr Harrison. His
evidence also satisfied me that he regarded Mr Aalders as more of a general business
adviser than someone who was engaged simply to compile financial statements.
177 See paras [220]–[225] below.
[215] Two examples illustrate why I regard Mr Aalders as having fulfilled functions going beyond those of a compilation accountant. The first involves the role of Mr Aalders, when dealing with the Commissioner on behalf of Mr van Duyn senior, and other members of the family. His letter of 14 May 2003 is an example.178 The second concerns his intimate involvement in structuring the purchase and financing of the properties in Helensville.179 That level of involvement is consistent with the length of the friendship between Mr van Duyn senior and Mr Aalders, and the fact that Mr van Duyn senior sought some advice from Mr Aalders (who had retired from active practice and was living in Australia) when the liquidators issued proceedings in the District Court.
[216] I am satisfied that no written agreement exists to record the terms on which McLaren Guise were engaged to act for the van Duyn interests. In the absence of any contractual agreement which limits the scope of any duty owed by an accountant to its client, an accountant will owe a duty to use reasonable skill and care to complete the engagement.180 In the context of the present case, an issue arises as to whether McLaren Guise was obliged to give positive advice to prepare the financial statements in a manner that would have resulted in a more favourable outcome for members of the van Duyn family.
[217] Mr Aalders was not called to give evidence about the terms on which he was engaged by the van Duyn interests. As a result, there was no opportunity for counsel for McLaren Guise to cross-examine him on that issue. I have already mentioned the difficulties that arise, from an evidential perspective, by the absence of Mr Aalders as a witness.181
[218] Ms Telford contended that McLaren Guise had not assumed all accounting and advisory functions that it appears Mr Aalders had provided to the van Duyn interests. Rather she submitted that McLaren Guise acted as a “compilation
accountant” only.
178 See para [23] above.
179 See para [33] above.
180 For an in-depth discussion of such duties, see CT Walton (ed) Charlesworth & Percy on
Negligence (13th ed, Sweet & Maxwell, London, 2014) at ch 9.
181 See para [87](d) above.
[219] An expert witness, Mr Lynch, gave evidence to support that view, and produced, in two forms, the Statement of Compilation Engagement Standards, published by the New Zealand Society of Accountants and the New Zealand Institute of Chartered Accountants respectively in 1989 and 2006 (the 1989 and 2006
Standards, respectively). The 2006 Standard applies to situations in which “a member is appointed on or after 31 March 2007 and to a member’s conduct after that date on any existing agreement to undertake a compilation of financial information”.182 The 2006 Standard was subsequently amended in July 2013. That amendment can have no impact in the present case.
(ii) The 1989 and 2006 Standards
[220] As McLaren Guise first acted for the van Duyn interests on 1 April 1985, the
1989 Standards applies, in the absence of an engagement letter varying the terms on which the member of the New Zealand Society of Accountants was to undertake his or her functions. The partners of McLaren Guise were members of the Society at relevant times. Clause 2 of the 1989 Standard stated that “with effect from 1 April
1990, compliance with the Compilation Engagement Standards is mandatory in terms of Rule 11 (paragraph 97) of the Code of Ethics.”183
[221] The 1989 Standard describes the function of a Compilation Engagement and the responsibility to be taken for financial information:
FUNCTION OF A COMPILATION ENGAGEMENT
4. A compilation engagement is a professional engagement in which a member is asked to carry out procedures – normally the collection, classification and summarisation of information – but is not requested to provide any assurances regarding the financial information resulting from the compilation procedures.
RESPONSIBILITY FOR THE FINANCIAL INFORMATION
5. While the member is responsible for compiling the financial information from data supplied to the member by the client, the responsibility for the financial information lies with the client. The involvement of the member in compilation of the financial information does
182 New Zealand Institute of Chartered Accountants “Service Engagement Standard 2: Compilation of Financial Information” (2006) at cl 8.
183 New Zealand Society of Accountants “Statement of Compilation Engagement Standards No 1”
(1989) at para [2].
not relieve the client of responsibility for the accuracy of the financial information and the assertions contained in it.
6. The member is not responsible for the formation of an opinion on the financial information, and the member must state that no audit or review has been performed. The member should also consider disclaiming all responsibility to third parties who might wish to rely on the financial information.
7. It is essential that there is a clear understanding between member and client as to the extent and nature of the member’s duties and responsibilities. It is desirable that such understanding is evidenced in writing.
[222] The skill and competence required of a compilation accountant is discussed in the 1989 Standard. Relevantly, it states:
COMPILATION STANDARD 3
Skills and Competence
The compilation should be performed with due professional care by persons who have adequate training, experience and competence in the compilation of financial information.
Discussion
3.1 Rule 7 (paragraph 85) of the Code of Ethics states: “A member who accepts or undertakes professional work must have the Competence necessary to carry out the work. Accordingly, a member must refrain from undertaking or continuing any assignment which the member is not Competent to carry out, unless the member obtains such advice and assistance as will enable the member to complete the assignment in an efficient, proper and timely manner.”
3.2 The member requires specialised skills and competence which are acquired through a combination of general education, technical knowledge obtained through study and formal courses, and practical experience under proper supervision.
3.3 In addition, the member requires a continuing awareness of developments, including relevant pronouncements on accounting matters, and other regulatory and statutory requirements.
3.4 The member should refrain from undertaking or continuing an assignment which the member is not competent to carry out, unless competent advice and assistance is obtained so as to enable satisfactory completion of the assignment. If neither the member nor a person in the member’s firm has the professional competence to perform a specific part of the assignment, technical advice may be sought from experts such as other accountants, lawyers, actuaries, engineers, or valuers.
[223] Clause 4.1 of the 1989 Standard makes it clear that any “delegation of work to assistants should be in a manner that provides reasonable assurance that such work will be performed by persons who have the skills and competence required in the circumstances”. That provision is relevant to the extent of Mr Harrison’s supervisory responsibilities in relation to the work delegated to Ms Zaragosa, who was employed by McLaren Guise after it had acquired her former employer’s practice.
[224] There does not appear to be any material difference between the obligations of a compilation accountant under the 1989 and 2006 Standards. The 2006
Standards set out the obligations in more detail, but the basic duties remain the same. For example, cl 29 of the 2006 Standards state the obvious: a compilation accountant “must not compile financial information, or permit their name to be associated with compiled financial information that they believe to be false, incorrect or misleading or open to misconstruction, by reason of the mis-statement, omission or suppression of a material fact or otherwise”.
[225] For the purpose of this decision, I find that McLaren Guise was engaged by the van Duyn interests as compilation accountants. I do not need to determine whether they assumed wider business advisory functions because the particulars of the alleged breaches of duty are directed to the accounting function.184 All of the allegations focus on the need for an accountant to ensure it collects adequate information from the client, correctly classifies that information for accounting purposes, and draws to the attention of the client any aspects of concern, on which the client’s instructions may be required.185
[226] I am satisfied that McLaren Guise’s engagement by the van Duyn interests was governed by the default terms of the 1989 Standard. In my view, the effect of cl 8 of the 2006 Standard is that the 1989 Standard continued to apply throughout the period of the engagement.
[227] As a result of that finding:
184 See para [196] above.
185 See para [196] above.
(a) McLaren Guise was not required to provide any assurances about finance information resulting from the compilation procedure.186
(b) The responsibility for providing financial information to McLaren
Guise rested with the van Duyn interests.187
(c) McLaren Guise was not responsible for the formation of an opinion on the financial information, in the absence of an audit or review.188
(e) Have the alleged breaches of duty been established?
(i) Correctness of the financial statements
[228] I deal together with two of the allegations made by the van Duyn interests against McLaren Guise.189 The van Duyn interests allege that McLaren Guise:
(a) Failed to make inquiries of the van Duyn interests to ensure the primary information supplied to complete the financial statements was correct; and
(b)Failed to raise with the directors and shareholders of EBR that their respective current accounts were overdrawn.
[229] Mr Harrison did provide some information about the tax position of the entities operated by the van Duyn family when he sent the 2008 financial statements for signature. That was done by email sent on 13 November 2008, not long before the signed accounts were returned on 4 December 2008. At the foot of the covering letter, Mr Harrison wrote:190
Please note to maximise future tax benefits some of the inter-entity transactions have not been taken up this year to divert losses away from [the new company] Eurovision.
186 New Zealand Society of Accountants “Statement of Compilation Engagement Standards No 1”
(1989) at para [4].
187 Ibid, at para [5].
188 Ibid, at para [5], set out at para [221] above.
189 See para [196](a) and (c) above.
190 See para [2] above for an explanation of when the new company was incorporated.
[230] As to the first of the claims, Mr Harrison has deposed that he believed the financial statements were correct until shortly before the liquidators issued the summary judgment proceedings in the District Court.191 By then, he had, on my findings, conveyed to Mr van Duyn senior, Mr van Duyn junior and Mr René van Duyn that the current account indebtedness could be “nullified”.192
[231] I have found that the 2008 financial statements accurately recorded the current account indebtedness.193 In those circumstances, McLaren Guise could not have been negligent in obtaining source information to prepare financial statements. They had assumed obligations as compilation accountants under (I have found) the
1989 Standard.194 Under that Standard, responsibility for provision of the relevant
financial information rests on the client.195 If the financial statements were accurate, the primary information from which they were prepared must also have been correct. In those circumstances, notwithstanding Mr Harrison’s post-liquidation conduct, McLaren Guise cannot be liable to the van Duyn interests under this head of claim.
[232] The second aspect of this claim is an alleged failure on the part of McLaren Guise to draw the attention of Mr van Duyn senior, Mrs van Duyn, Mr van Duyn junior and Mr René van Duyn to the overdrawn current accounts shown in the financial statements. Under the 1989 Standard, McLaren Guise was under an obligation to perform its compilation engagement “with due professional care” through “persons who have adequate training, experience and competence in the
compilation of financial information”.196 Any obligation to draw particular issues to
a client’s attention must be implied as part of the duty on any professional person to
exercise skill and care in the performance of their tasks entrusted to them.
[233] Some evidence was given by Mr van Duyn senior about the way in which
Mr Aalders explained financial information to him and the contrast with the approach taken by Mr Harrison. When I put a question to Mr van Duyn senior about
191 See para [201] above.
192 See paras [203]–[206] above.
193 See para [86] above.
194 See para [225] above.
195 See cl 5 of the 1989 Standard, set out at para [221] above.
196 See cl 3 of the 1989 Standard, set out at para [222] above.
the way he would respond to receipt of financial statements from the accountants, the following exchange occurred:
QAnd when the accountant sent out documents, yellow sticky, “Sign here,” did you just sign there or did you ask questions?
ANo I never signed it, actually the mistake was my sons make, they signed it because he [Mr Harrison] start pushing, he start pushing for me hasn’t got it back. But you know we didn’t know, we were supposed to be called in his office like Mr Aalders did and he called us in the office and he said, “Look fellas, you’ve got to sign these.” And he advise you, where to sign, what it all means. This man, he never did anything.
[234] Having regard to my findings that Mr van Duyn senior was the family member most familiar with financial matters and capable in dealing with them, I found Mr van Duyn senior’s continued protestations about the need for full explanations from the accountants implausible. While it might have been helpful for Mr Harrison to give more information to the van Duyn interests when providing the financial statements to them, I am not satisfied that in failing to do so he breached any duty to them. On this issue, the fact that Ms Zaragosa was available to assist Mr Harrison suggests that he did not depart materially from the practices of Mr Aalders. Again, the lack of evidence from Mr Aalders makes it difficult to assess the respective approaches reliably.
[235] While it would have been helpful for McLaren Guise to draw the amounts owing on current account more directly to the attention of their clients, I do not consider that they breached any obligation owed as a compilation accountant by failing to do so.
[236] In any event, I would not have found that any breach caused loss to the van
Duyn interests. I summarise my reasons for reaching that conclusion:
(a) Any “tax neutral” structure was agreed between Mr Aalders and the van Duyn interests before McLaren Guise acquired Mr Aalders’ accounting practice in 2005. At the time the practice was transferred to McLaren Guise, financial statements were being prepared annually by Ms Zaragosa in the form in which Mr Harrison continued to apply.
While he ought to have drawn the attention of the van Duyn interests to the amount of the current account debt, his failure to do so cannot be said to have caused any loss to them. The debt was accruing and they have an obligation to pay.197
(b)In any event, the causal chain was broken when the van Duyn interests terminated their professional relationship with McLaren Guise in late December 2009 or in January 2010. From that time on, the van Duyn interests continued to deny liability for the current account debts notwithstanding that they obtained alternative professional advice. It was not until the aborted hearing in May 2016 that they made any acknowledgement that moneys were owed by
members of the family to EBR.198
(ii) The “technical insolvency issue”
[237] The van Duyn interests claim that McLaren Guise failed to advise them that
EBR was in a state of “technical insolvency”.
[238] This claim was not developed by Mr Hutcheson in closing submissions. It seems to rest on the premise that, at some time prior to liquidation, Mr Harrison ought to have drawn to the van Duyn interests’ attention the fact that a state of insolvency existed. There is evidence that, in or about July 2007, the Commissioner had issued a statutory demand for payment of outstanding taxes.
[239] Without making any findings about whether Mr Harrison spoke to the directors of EBR (Mr van Duyn senior was still a director of the company in 2007) around that time, had he done so, it would have been necessary to advise the van Duyn interests to pay the debts that were owed. If that advice had not been given, the van Duyn interests would have been at risk of claims based on voidable transactions if EBR had been placed into liquidation subsequently if they, in some
way, had sought to extricate themselves from the need to pay valid debts.
197 See also, para [240] below.
198 Generally, see paras [6], [15], [18] and [84] above.
[240] I discern no basis on which a claim against McLaren Guise could be made under this head. Even if (on some basis that neither I nor counsel for the van Duyn interests has been able to articulate) McLaren Guise had some potential liability to the van Duyn interests, they have suffered no loss from any failure to draw a state of insolvency to their attention. Indeed, even if the state of insolvency had been drawn to the van Duyn interests’ attention, any attempt to reconstruct the incidence of indebtedness would likely have foundered on the grounds that a voidable transaction had occurred. This ground of claim must fail.
(iii) Conflicts of interest
[241] The van Duyn interests claim that McLaren Guise failed to provide advice of potential conflicts of interest arising out of the manner in which accounting for related entities was treated. The premise for this claim is that had the conflicts been explained, the current account debts would, in some way, have been extinguished.
[242] This claim must also fail. It was Mr Aalders who set up the structures to deal with the van Duyn interests’ business activities. McLaren Guise was merely compiling the accounts. They had no role that could affect the various entities’ interests in such a way as to give rise to a conflict of interest.
[243] Further, I am not satisfied that the van Duyn interests have shown that if the possibility of conflict had been brought to their attention they would have required a different structure or process to be followed. In particular, it is most unlikely that they would have instructed separate accountants to deal with entities having potentially different interests.
[244] In my view, the van Duyn interests have not established any actionable claim against McLaren Guise.
(f) Costs
[245] I have considered whether, and if so to what extent, I should order the van
Duyn interests to pay the costs of McLaren Guise even though their claim has been
unsuccessful. Rule 14.7 of the High Court Rules sets out a series of factors that can be taken into account in deciding whether to refuse or reduce costs.
[246] None of those applies expressly, but r 14.7(g) entitles the Court to reduce costs if “some other reason exists which justifies the court … refusing costs or reducing costs despite the principle that the determination of costs should be predictable and expeditious”.
[247] In my view, Mr Harrison’s conduct delayed resolution of this proceeding in a manner that justifies reduction of costs that would otherwise be ordered. I propose to limit the costs payable to McLaren Guise to the sum of $65,000 awarded when the “unless” orders were made on 25 May 2016.199
Result
(a) The liquidators’ claims
[248] On the liquidators’ claims I enter judgment in favour of EBR as follows:
(a) Mr van Duyn senior and Mrs van Duyn shall pay the sum of $55,502. (b) Mr René van Duyn shall pay the sum of $129,258.
(c) Mr van Duyn junior shall pay the sum of $125,209.
(d)Interest on those sums is awarded on the following basis, according to the rates identified above:200
(i)Interest is awarded against Mr van Duyn senior and his wife from 11 August 2009 up to (and including) 30 June 2016,
when they paid the sum of $128,462 to the liquidators.201
199 See para [17] above.
200 See para [182] above.
201 See para [15] above.
(ii) Interest is awarded against Mr René van Duyn on his debt of
$129,258 from 11 August 2009 up to the date of judgment.
(iii) Interest is awarded against Mr van Duyn junior on the sum of
$125,209 from 11 August 2009 up to (and including) 30 June
2016, when a sum of $101,112 was paid to the liquidators. Thereafter, interest is awarded on the sum of $24,097 from 1
July 2016 to the date of judgment.
(e) One set of costs and disbursements are awarded in favour of EBR, to be paid on a joint and several basis by Mr van Duyn senior, Mrs van Duyn, Mr van Duyn junior and Mr René van Duyn. The costs shall be fixed on a 2B basis, with an uplift of 50%. All costs and disbursements that were the subject of the wasted costs order made on
25 May 2016 shall be deducted from the amount to be calculated. Costs and disbursements shall be fixed by the Registrar.
(b) Third party claim
[249] Judgment is entered in favour of McLaren Guise on the third party claim brought by the van Duyn interests. No order for costs is made in respect of preparation for or the substantive hearing of the present proceeding. The sum of
$65,000 paid as a result of the wasted costs order made on 25 May 2016 may be
retained by McLaren Guise.
P R Heath J
Delivered at 4.30pm on 21 July 2017
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