Fisher v Shantung Enterprises Ltd HC Auckland CP 553/95

[2001] NZHC 569

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY CP 553/95

BETWEEN NICHOLAS KENNETH FISHER and
WILLIAM FERGUSSON DAVIES
Plaintiffs

AND SHANTUNG ENTERPRISES LTD
First Defendant

AND ALEX GRAHAM ISBEY
Second Defendant

Hearing: 5 June 2001

Counsel: H Waalkens and C Garvey for the Plaintiffs
M J Tingey and M Morrison for the Defendants

Judgment: 28 June 2001

RESERVED JUDGMENT OF PATERSON J

[1] The plaintiffs, Messrs Fisher and Davies, are the trustees of the Sentinel Trust (the trustees). They allege that they were involved in a joint property venture enterprise with the now deceased second defendant (Mr Isbey). The first defendant, Shantung Enterprises Ltd (Shantung), was allegedly the vehicle through which the joint property venture was operated. A central issue in the proceeding is whether the corporate vehicle was used for the venture or whether Shantung was merely a trustee through which the parties operated a joint venture.

[2] The trustees seek judgment in rem against the sale proceeds of a unit which was part of the property development (the sale proceeds). Although the amended statement of claim filed in September 1997 includes five separate causes of action, only two were addressed in counsel’s opening. First, it was alleged the sale proceeds of the property belonged to the trustees in their entirety because of a constructive trust under which Shantung is the trustee. Secondly and alternatively, it was submitted this Court should impose a remedial constructive trust on the basis of unconscionable conduct of Shantung and its unjust enrichment.

[3] The emphasis changed somewhat in counsel’s closing address. While the trustees continued to maintain their alternative claim for a remedial constructive trust, their other claim was based on a breach of fiduciary duties. It was submitted the settlement proceeds were trust property because of the fiduciary duties Mr Isbey owed to the trustees. These fiduciary duties arose either because the arrangement between the parties was a partnership as defined by s 4 of the Partnership Act 1908, or was a joint venture. In either case, Mr Isbey had a duty to act in a manner which was not detrimental to the interests of the trustees and to go about the business in good faith. Having breached his duties, the breach of trust gave rise either to a tracing remedy or an obligation to restore trust property.

[4] The trustees were appointed trustees of the Sentinel Trust when the trust was created by a deed of trust dated 26 October 1993. Mr Fisher, a solicitor and one of the trustees, was the settlor. The beneficiaries are, in effect, the family of Mr Fordham, a property developer. Mr Fordham has the power to control the trust as he has the statutory power of appointment of new trustees. This statutory power enables him to remove all or any of the trustees for the time being.

[5] Mr Fordham, Mr Isbey and Shantung at various times all became insolvent. Mr Fordham was insolvent when the property venture was commenced in 1993. A clear inference which can be drawn from the facts is that his insolvency was the prime, and perhaps the only, reason for the creation of the Sentinel Trust. Mr Fordham was adjudicated bankrupt on 27 July 1995. Shantung was placed into liquidation on 28 May 1998. It is insolvent and the proceedings are defended by the liquidators. Prior to his death in 1999, Mr Isbey was also adjudicated bankrupt. The Official Assignee as the assignee of his insolvent estate under the provisions of the Insolvency Act 1967 abides the decision of the Court.

Background

[6] Under the Sentinel trust deed Mr Fordham and his family together with charitable purposes are the discretionary beneficiaries of the trust. The capital on termination of the trust is to vest in such child or children of Mr Fordham who shall be born or adopted before the vesting day. While the vesting day is in 2073, an empowering provision in the trust deed permits the trustees to advance the vesting date.

[7] Mr Isbey and the trustees only signed one document at the time they commenced their property venture. It is dated 26 October 1993 (the share deed). While both trustees signed the share deed, neither gave evidence. Mr Fordham provided the evidence in support of the alleged arrangement. An affidavit sworn by Mr Isbey in April 1996, as part of caveat proceedings associated with this proceeding, was admitted in evidence. The versions of the events given by Mr Fordham in this Court and Mr Isbey in his affidavit differed markedly. The weight which can be placed on Mr Isbey’s affidavit evidence is reduced by his non availability for cross-examination. Nevertheless, I do not disregard it completely.

[8] In the share deed Mr Isbey was described as the trustee and the trustees were described as the beneficiaries. Although the share deed was in the form of a deed, Mr Isbey’s signature was not witnessed. However, in my view, nothing turns on this. The term “the shares” as described in the share deed meant 40 of the total shares of 100 in Shantung. The relevant provision of the share deed stated:

“The Trustee hereby declares that he holds the shares and all dividends accrued or to accrue upon the same UPON TRUST for the Beneficiary and their successors and assigns and agrees to transfer, pay and deal with the shares and the dividends payable in respect of the same in such manner as the Beneficiary or their successors and assigns shall from time to time direct.”

[9] Apart from this clause the provisions of the trust deed give little assistance in interpreting its purpose. Its operative provisions are relatively brief, occupying no more than two pages. There are administrative provisions, including a provision under which any new rights issues based on the 40 shares are to be offered to the trustees. It is clear that the trustees executed the deed as trustees of the Sentinel Trust as there is a provision limiting their liability to the assets for the time being of the trust.

[10] Prior to October 1993 Mr Fordham operated as a property developer. His financial position in October 1993 was that he had debts totalling approximately $1 m. and no substantial assets. At the time he entered into the share deed he had been served with a bankruptcy notice. Mr Fisher acted as his solicitor in these bankruptcy proceedings. In January 1994, he made an unsuccessful attempt to enter into a scheme of arrangement with his creditors.

[11] Mr Fordham had signed agreements to purchase various properties before the share deed was signed and before he came to an arrangement with Mr Isbey. The arrangement with Mr Isbey was to allow Mr Fordham to continue his property development business if he were adjudicated bankrupt. He was to have no direct interest in the venture which was to be carried on through Shantung. The trustees were to hold shares in Shantung and any profits were to go to the trustees. Mr Fordham acknowledged that he knew that any income he earned prior to bankruptcy, and which had not been paid to him at the date of bankruptcy, would go to the Official Assignee for the benefit of his creditors. There was an arrangement under which Mr Fordham was to be paid a salary by the trustees and although he did not give specific details, he acknowledged that the trustees did pay him money from time to time.

[12] The relevant property developments were in Auckland at 13, 15 and 17 Kingsland Terrace, 54 and 56 Mt Eden Road, 2 Edwin Street and 21 and 23 Marlborough Street. There were also allegations of an interest in a property at East Coast Bays Road.

[13] The manner of operation can be illustrated by reference to 13 Kingsland Terrace. Mr Fordham, on 28 September 1993, signed an agreement to purchase this property with settlement on or before 31 October 1993. The purchaser was named as Mr Fordham and/or nominee. On 29 October 1993, Mr Fordham signed a deed nominating Shantung to complete the purchase of the property. Under the deed of nomination Shantung agreed to accept the nomination, to settle in accordance with the terms of the agreement for sale and purchase, and to refund Mr Fordham the deposit which he had paid. Settlement was duly effected in the name of Shantung which gave a mortgage over the property to a solicitor’s nominee company to secure funds advanced for the purchase. In February 1994 Shantung sold the property at a price $25,000 higher than the purchase price. On settlement of the sale the mortgage advance was repaid. The solicitors’ statement accounting to Shantung for the sale proceeds recorded that a sum had been transferred to complete the purchase or pay outstanding costs and disbursements on several of the other projects. The balance of $24,773.36 was lodged to the credit of Shantung’s bank account “in accordance with verbal instructions.”

[14] A similar manner of operation was used for properties where the purchase agreement had been signed by Mr Fordham both before and after 26 October 1993. Thus the property at 54 Mt Eden Road was purchased under an agreement for sale and purchase signed in November 1993 and showed Mr Fordham or his nominee as purchaser. A similar deed of nomination was completed.

[15] The Marlborough Street development followed a different course. It involved a third party, Mr Graham, who was related to Mr Isbey. Mr Fordham once again signed the agreement which stated either he or his nominee would be the purchaser. On 25 January 1994 Shantung, Mr Isbey, Mr Graham and the trustees entered into a deed (the Marlborough deed). Under the teams of the Marlborough deed, Mr Fordham agreed to nominate Shantung as to a two-thirds share and Mr Graham as to a one-third share as tenants in common to complete the purchase of the property. A further recital stated:

“Shantung will accept such nomination and complete the purchase of a two-thirds interest in the property pursuant to the agreement as trustee for Alec [ie Mr Isbey] as to a one-half share and the Sentinel Trust as to a one-half share as tenants in common in those shares.”

[16] Shantung in the operative provisions of the Marlborough deed confirmed and acknowledged that it would be registered as proprietor of a two-thirds share interest in the property as trustee for Mr Isbey as to one-half of that interest and for the trustees as to the other one-half. The parties agreed to complete the purchase by raising a first mortgage loan of $250,000 with Mr Graham advancing to the partnership $200,000 to complete the purchase. Mr Graham agreed to contribute a further amount to a maximum of $50,000 to assist in refurbishing the property. This amount and his original loan were to be secured by a second mortgage over the property. On the sale of the property and after repayment of all advances, the net proceeds were to be divided into three equal shares and distributed as to one-third to Mr Isbey, one-third to the trustees and one third to Mr Graham.

[17] There are several disputed factual matters on which it is necessary to make a finding. Those relevant to this decision are:

(a) The legal nature of the arrangement between the trustees and Mr Isbey;

(b) Whether the parties to the Marlborough deed have received their share of the profit;

(c) The profits, if any, made from the other property developments;

(d) Whether Mr Isbey took from Shantung money to which the trustees were entitled.

The arrangement

[18] It was common ground that the legal agreement for the Marlborough Street development was different from the arrangement which related to the other properties. However, the trustees’ position is that the Marlborough Street agreement is an aid to the correct interpretation of the agreement entered into by the trustees and Mr Isbey to develop the other properties.

[19] In respect of these other properties the trustees’ position is that Shantung was a trustee for Mr Isbey and themselves. Shantung, if this submission is correct, was the vehicle through which the joint venture was carried out. The trustees allege they were initially entitled to 40% of the profits but at some later time became entitled to 50% of the profits. On the other hand, Shantung’s position is that it was the trading venture and the trustees’ interest was reflected in their shareholding in Shantung. They were only entitled to distributions made through the mechanism of the corporate structure of Shantung.

[20] The only document entered into between the trustees and Mr Isbey to record their arrangement was the share deed. Mr Waalkens acknowledged that a strict reading of the share deed indicated a shareholding relationship but submitted that an overall assessment of the evidence established that Shantung was, in effect, a trustee. The evidence upon which Mr Waalkens relied was Mr Fordham’s evidence, Shantung’s treatment of the accounts, Mr Isbey’s refusal to permit the trustees to become shareholders in the company, supporting evidence given by a real estate agent and a quantity surveyor, inferences to be drawn from the Marlborough deed, a draft shareholding agreement which was not signed, a payment of $10,000 as part of the profit share of the 54 Mt Eden Road development, a statement made by Mr Isbey in his affidavit of 23 April 1996, and a general inference based on the evidence that Mr Isbey did not regard the trustees as having an interest in Shantung and treated Shantung as though it was a front for him or a sham.

[21] Shantung’s position is that the only agreement entered into between the trustees and Mr Isbey was the share deed. If Shantung was a bare trustee of a joint venture, there would have needed to be another agreement entered into between Mr Isbey and the trustees. Not only have the trustees not given any evidence of such an agreement, but also, the contemporaneous documents do not support tile existence of a further agreement.

[22] The trustees had the onus to establish the existence of an agreement contrary to that indicated by the share deed. In these circumstances the failure of either trustee to give evidence as to what they say the arrangement was is relevant. Mr Fisher was a solicitor who advised Mr Fordham throughout. Mr Fordham acknowledged that throughout his dealings with Mr Isbey, he took advice from Mr Fisher and relied on him to ensure that the arrangements that the Sentinel Trust entered into were legally enforceable. In these circumstances, the absence of direct evidence from the trustees must be a matter which reduces the weight which can be given to Mr Fordham’s evidence. While the terms of the Sentinel trust deed give the trustees wide power to appoint agents to act on their behalf, the entering into of an agreement of the nature alleged is a matter which could not normally be delegated to an agent. Trustees have an obligation to act unanimously and the absence of resolutions either appointing Mr Fordham to negotiate an agreement on the trustees’ behalf, or confirming the agreement allegedly entered into either by Mr Fordham or themselves directly with Mr Isbey, is of significance.

[23] Also significant is the absence of any evidence of direct dealings or correspondence from the trustees’ solicitor suggesting or confirming the arrangement as Mr Fordham stated it to be. Privilege was claimed in all communications between Mr Fisher and Mr Fordham. Mr Tingey submitted, with some logic and force, that it is unlikely that all these communications were privileged. Whatever these communications stated, the fact is that no evidence was produced to the Court which in any way indicates that either the trustees entered into any other arrangement with Mr Isbey, or authorised Mr Fordham to do so on their behalf, or ratified any arrangement which Mr Fordham had made on their behalf. There was no contemporaneous evidence which in any way suggested any other agreement between Mr Isbey and the trustees of the nature alleged by Mr Fordham.

[24] On my view of the evidence, the trustees have fallen well short of satisfying on the balance of probabilities that there was a joint venture agreement under which Shantung acted as a trustee for the parties. My reasons for this view are:

(a) The only contemporaneous agreement entered into was the share deed. Under it, Mr Isbey was to hold 40% of the shares in Shantung “and all dividends accrued or to accrue upon the same” for the trustees. The share deed gave the trustees the right to share in profits of Shantung through the normal dividend mechanism of a company. If Shantung had been a trustee, it is unlikely that there would have been distributions of profits through dividends and it is surprising there was no deed entered into under which Shantung acknowledged the trust. Further, the provision entitling the trustees to the rights arising from the 40 shares indicates an expectation of profits arising from the shares. While the existence of the share deed does not preclude the possibility of a further agreement, the absence of evidence from the trustees of other documentation or agreement leads to a strong inference that Shantung was to be the vehicle through which the joint venture was to be operated.

(b) The absence of any written documentation in October 1993 supporting the evidence given by Mr Fordham, particularly in view of Mr Fordham’s evidence that Mr Fisher, a solicitor who was obviously conversant with trust arrangements, knew of the arrangement and was there to protect his interests;

(c) There was nothing in the correspondence written by Mr Fisher, in his capacity as solicitor for the trustees between October 1993 and the end of 1994, which suggests that the trustees considered they were acting other than as shareholders in Shantung. In January 1994, Mr Fisher sent to Mr Isbey’s solicitors a document which was allegedly prepared by Mr Fordham and set out the responsibilities of the parties involved in the Marlborough Street project. In the letter Mr Fisher stated:

“With regard to the share of profits my instructions are that despite the shareholding in Shantung, the profits are to be divided equally between the Trust, Alec Isbey and R L Graham. This split has been agreed between the parties prior to Christmas.”

While it is possible to take two meanings from this statement, one possible meaning is that the original arrangement provided for profit sharing through the shareholding in Shantung.

(d) There were negotiations in early 1994 when a shareholding agreement was proposed. In a letter to Mr Isbey’s solicitors in May 1994, Mr Fisher stated that he understood that the solicitors had received instructions from Mr Isbey regarding the preparation of a shareholders agreement. There is no reference to a partnership or a joint venture agreement. A draft shareholders’ agreement was forwarded to Mr Fisher for his perusal and comments. Under that agreement Mr Fordham was to be appointed the attorney and agent for the trustees in respect of the shareholding in Shantung. The draft agreement did not provide for Shantung to be a trustee of a joint venture or a partnership operated between the trustees and Mr Isbey. There was no evidence that Mr Fisher or the trustees responded to the letter by suggesting that the shareholders’ agreement did not set out the true arrangement between the parties. Nor, apparently, was any objection raised to a provision in the draft which stated the trustees were to hold 40% of the shares. Nor was there any credible evidence supporting Mr Fordham’s allegations that there had been some type of objection to the proposed terms of the deed.

(e) There was a letter from Mr Fisher to Mr Isbey’s solicitors dated 5 September 1994 which, in part, supports the trustees and which will be referred to in the next paragraph. The significance of the letter is that it was written on the instructions of Mr Fordham and referred to 40% of the net proceeds of the property at 54 Mt Eden Road. This letter undermines Mr Fordham’s evidence that by that time the alleged agreement had been altered to provide that he was to receive 50% of the net proceeds. The letter goes to the reliability of Mr Fordham’s evidence generally.

[25] There was evidence which tended to support the allegations made by the trustees. I do not accept that it gets the trustees to the stage of satisfying the evidential burden on them in this case. My reasons are:

(a) Mr Fordham’s evidence was that Mr Isbey proposed a joint venture under which Mr Isbey would provide the money required for the purchase and development of the properties and Mr Fordham would locate and negotiate the purchase of the properties and be responsible for their development. He said it was initially agreed that the profit split should be 60% to Mr Isbey and 40% to Mr Fordham with an anticipation that once the joint venture started generating funds, they would be applied to purchases in the future. Mr Fordham was to form the Sentinel Trust and the trustees would receive a 40% shareholding in Shantung which was to be incorporated as a vehicle for the joint venture. Once the trustees received a share of profits, these would be used as a contribution to capital and it was anticipated that when this occurred, the profit share would be revised so the trustees’ share would increase to 50% of the profit. His evidence in chief was particularly non-specific as to the vehicle for the property development and it would be possible to use it to support both the trust concept and the share concept. Under crossexamination Mr Fordham accepted that it was agreed the parties work together through a company that would be formed. At the time he had been warned about being involved with Mr Isbey and that was the reason he requested a written agreement. In my view, the net effect of Mr Fordham’s evidence was not persuasive. The non-specific nature of his comments and his acknowledgements under cross-examination were not sufficient to establish that there was another agreement between the parties. If there had been such an agreement, it is remarkable that it was not recorded in writing or that there was no contemporaneous credible evidence of it.

(b) Shantung produced statements of each individual development. It was submitted this individual reporting of each project supported Mr Fordham’s allegations. I do not draw this inference from the evidence. It is normal practice for property developing organisations to account separately for each project. Further, the evidence suggests the parties were already in conflict before the individual statements were prepared.

(c) Another piece of evidence which was said to assist the trustees was that share transfers were never executed and Mr Isbey refused to transfer the shares to the trustees. The evidence on share transfers was inconclusive. There was a share transfer signed by the trustees in favour of Mr Isbey and another share transfer from Mr Isbey to the trustees. Neither of these were registered. The position while being confusing is of no assistance to the trustees.

(d) There was general evidence given by both a real estate agent and a quantity surveyor, both of whom Mr Fordham had instructed during the venture. They gave evidence of general comments made by Mr Isbey which, in my view, were capable of supporting either version of the arrangement. Their evidence did not assist. The circumstances in which the comments were said to be made to them were a long time ago and the comments were non-specific.

[26] The strongest evidence in support of the trustees was the letter of 5 September 1994 from Mr Fisher to Mr Isbey’s solicitors and a reply of 8 September 1994. Mr Fisher’s letter referred to Mr Fordham’s instructions that

“my client is to receive approximately 40% of the net proceeds which are estimated at $95,000. The arrangement is for Mr Fordham to apparently draw $10,000 of his share with the balance being readvanced to Shantung to assist with other developments.”

That the trustees were a front for Mr Fordham is confirmed by this letter.

[27] The letter, however, does suggest that there was a profit sharing arrangement contemplated rather than a distribution of company proceeds. Mr Isbey’s solicitors’ letter in reply enclosed a cheque for $10,000 “being an advance from the proceeds of sale 54 Mt Eden Road, Mt Eden advanced against your client’s anticipated share in the profits from the company pending finalisation.” This letter is equivocal. The request from Mr Fordham was certainly to receive 40% of the net proceeds. The reply enclosing the cheque for $10,000 noted it was an advance from the proceeds of sale and advanced against the trustees’ anticipated shares in the profit from the company pending finalisation. This was not an acknowledgement from Mr Isbey’s solicitors that the sum was distributed as share of profits from a joint venture.

[28] On one construction the payment was an advance against profits from a company. There would have been taxation implications in distributing profits by way of dividend through a company, and an advance of $10,000 against a company profit of $95,000 may have been intended to convey that the advance was being made against profits earned by the company pending processing the profit through the company by the normal method of a dividend distribution. If a profit of $95,000 had been processed in this manner, the trustees’ share of 40% of any dividend declared would have exceeded $10,000.

[29] This evidence could arguably also support a construction that it was a distribution of profits to which the trustees were entitled under a venture in which Shantung was the trustee. However, the equivocal nature of the correspondence is not sufficient, when taken with the other evidence which supports the trustees, to establish beyond the balance of probabilities that there was another agreement other than the agreement recorded in the share deed.

[30] The Marlborough deed provided for Shantung to hold the interests in that venture on behalf of the parties to it. As such, it was suggested Shantung held the interest in the other ventures on a similar basis. Any inference which can be drawn from the Marlborough deed is not sufficient, in my view, to contradict the clear evidence to the contrary.

[31] In summary, the evidence which I accept establishes that it is more likely than not that the share deed recorded the complete arrangement between the parties. The evidence upon which the trustees rely does not establish that there was an agreement of the type contended for by Mr Fordham. Consequently, I do not find that Shantung acted as a bare trustee for a joint venture operated by Mr Isbey and the trustees.

The Marlborough Street Partnership

[32] The Marlborough Street development was not part of the original arrangement between the trustees and Mr Isbey. It was not a Shantung development. Mr Fordham said that the reason for this was that Mr Isbey did not have sufficient funds at that time and Mr Graham therefore provided the funds. It was agreed between the three parties, (Mr Isbey, Mr Graham and the trustees), that the profits of the venture would be shared equally. The trustees allege that they have not received their share of the profits from this development. Shantung’s position is that as a distribution of $80,000 was made to each of the three partners there has, in effect, been an over payment to the trustees.

[33] Mr Fordham, on behalf of the trustees, initially alleged that a sum of $108,000 was retained by Mr Isbey and lodged in a “partnership account” at about the time the partners received their distribution in July 1994. During the hearing he conceded that a portion of this, at least, would have been used to meet the expenses of the development. No credible evidence was produced on behalf of the trustees to establish what retention, if any, was made from the profits of the Marlborough Street development. A signed brief of evidence was provided on behalf of Mr Graham but he was not called to give evidence as Mr Waalkens advised that he did not wish to cross-examine him and did not challenge the evidence. Mr Graham advanced $200,000 to the partnership to finance the purchase of the property and provided a further $43,500 to refurbish it. A separate cheque account was opened for the development and the sum of $43,500 paid into it.

[34] Mr Graham worked fulltime on the site and organised the labourers to complete the renovations. His evidence was that he saw very little of Mr Fordham at the property. Mr Graham had the sole signing authority on the Marlborough Street cheque account and confirmed that all cheques paid from that account related to the Marlborough Street development with the exception of one cheque of $9000. $8000 of this was used to purchase a tractor used by Mr Isbey and himself and he subsequently paid his $4000 share of that amount. Mr Graham also kept an exercise book in which he recorded all costs paid out on the development. When the Marlborough Street property was sold, a calculation was done of the amounts due to Mr Isbey, the trustees and Mr Graham. Each partner received $80,000 which Mr Graham thought was a good profit and fairly represented one third of the profits from the property. He did not think it was possible that the Marlborough Street development made substantially more than $240,000 profit.

[35] Mrs Fatupaito, one of the liquidators of Shantung, also gave evidence. She confirmed the development of the Marlborough Street property was run separately and distinctly from the other property developments undertaken by Shantung. She calculated from the accounts the financial result of Marlborough Street and concluded that in paying $80,000 to each partner, an overpayment of $17,788.89 was made. The retention of $108,000 referred to by Mr Fordham was paid into the Marlborough Street development account and shortly thereafter, $100,000 was removed by telephone transfer. It went into a Shantung 025 account which was the account from which Shantung sourced funds to meet the costs of the Marlborough Street development. Mrs Fatupaito’s evidence was that up until 8 June 1994, Shantung had expended $108,444 on the Marlborough Street development. The sum of $100,000 appears to have been a reimbursement of funds paid on the partnership’s behalf. However, in Mrs Fatupaito’s view, Shantung was not fully reimbursed for that expenditure and there is still $17,788.89 due.

[36] In final submissions, Mr Waalkens reduced the trustees’ claim in respect of the Marlborough Street partnership to $6,709.50. The liquidator, in her loss calculation, added GST to the three distributions of $80,000 each, making a total additional GST expenditure of $30,000. She was inconsistent in doing so as in her evidence, she noted these were distributions of profit rather than management fees. They were evidently noted as management fees in the company accounts. I accept Mr Waalkens is correct in submitting that this GST was not an expense of the Marlborough Street development. He also challenged allocated expenses of $4562.66 saying that this figure was unreliable. I can accept the difficulty the liquidator had in recalculating the accounts. The best assessment I can make is that there was an undistributed profit of approximately $15,000 on the Marlborough Street project. The trustees were and are entitled to $5000 of this amount.

Other Projects

[37] In view of my finding in paragraph 31 above, it is not necessary to determine what profits were made on other projects. I accept the profits were made on other projects but, in my view, they were profits of Shantung and not held in trust for the trustees. The trustees as shareholders will not now benefit from those profits because the company is insolvent and there will be no return to shareholders.

[38] If I had determined that there had been a trust arrangement, I would have also determined that Shantung did not account to the trustees for a portion of their profits. Mr Waalkens, in final submissions, submitted that the following profits were made on the various projects:

Mt Eden Road $114,643.40

Kingsland Terrace $20,000.00

Edwin Street $296,635.00

East Coast Road $50.000.00

Total $481.278.40

The trust’s share of undistributed profits, if calculated on a 40% share, would have exceeded $190,000, and would have exceeded $240,000 if calculated on a 50% share basis.

[39] The suggested profit on Mt Eden Road was taken from statements which Shantung’s company secretary had prepared. Mrs Fatupaito’s analysis was that these statements were not correct and the profit was approximately $52,000. Mr Waalkens criticised some of the adjustments made by the liquidators. While I accept that an accountant has a difficult job in reconstructing accounts after the liquidation of the company, and particularly after its director has died, I also accept that some of the criticisms of the adjustments were warranted. This may be a case where expenses charged to one job should perhaps have been charged to another. In respect of the Mt Eden Road development, there has, in my view, been an overcharge in respect of carpets and survey fees. There must also be a query over labour charges. In my view, it is more likely that the profit on the Mt Eden project was approximately $100,000.

[40] The liquidator accepted that there was a $10,825.19 profit on the Kingsland Terrace projects whereas the secretary of Shantung in an account, had calculated a total profit of $8,288.09. In this case, there is no reason to depart from the liquidator’s figures.

[41] The major profit was from the Edwin Street project where the company had shown a loss of $104,557.26 and the liquidators a loss of $7,672.06. A major expense taken into account by the liquidators was legal fees of $62,624.52 being costs on the present proceedings before Shantung went into liquidation. While there may be an accounting justification for charging these fees in the statements, there can be no justification in treating this amount as an expense incurred on the project itself for the purposes of any dispute between the trustees and Mr Isbey. Another adjustment which needs to be made is that neither Shantung’s statement nor the liquidator’s statement take into account the sale proceeds of the last unit which are, pursuant to an undertaking given in the caveat proceedings, held in a solicitor’s trust account. These total $232,007.36. When these adjustments are made, the profit on Edwin Street was approximately $290,000.

[42] Finally, the evidence does not satisfy me that any profit should be allowed on the East Coast Road property. This was a property where Mr Fordham had signed an agreement to purchase. It appears, however, that Mr Fordham, while he may have offered the property to Ms Isbey, did not complete a deed of nomination. Mr Fordham found out during the discovery process in these proceedings that the original agreement had not proceeded and that a new agreement had been completed in the name of Shantung. Shantung then nominated another Isbey company to complete the purchase and this company subsequently sold the property at a profit. Mrs Fatupaito’s evidence is that Shantung did not contribute funds to the development of the property although Mr Isbey did withdraw $15,000 from Shantung to pay the deposit. By the time the East Coast Road property was purchased, there had been an obvious falling out between Mr Isbey and Mr Fordham and the absence of a deed of nomination from Mr Fordham prevents the trustees, in my view, from making a claim in this proceeding in respect of that property. Mr Isbey may have benefited from an introduction from Mr Fordham but there is no evidence of what profit, if any, Mr Isbey made on the development. The fact that a property which was probably refurbished was sold at a price higher than its purchase price is not evidence of profit.

[43] The result of my findings is that the profits on the various developments carried out by Shantung approximated $400,000 ($100,000 on Mt Eden Road, $10,825.19 on Kingsland Terrace and $290,000 on Edwin Street). If there had been a joint venture, and the trustees had been entitled to 40% of the profit, they would have received approximately $140,000. They received $10,000 from the Mt Eden Road property and there would have then been a deficiency of $130,000. However, because of the findings which I have made, the profits were profits of Shantung to which the trustees were only entitled if distributed by the company. The subsequent insolvency of Shantung means they cannot recover those funds unless the liquidators are able to obtain assets to return Shantung to solvency. The evidence in this case suggests that a prime cause of Shantung’s insolvency was the withdrawal of money from the company by Mr Isbey. However, that matter was not an issue in this proceeding and no firm finding on Mr Isbey’s actions can be made.

The $680,000 payment

[44] Mrs Fatupaito produced a schedule which showed that Mr Isbey had withdrawn more than $680,000 from Shantung. More than $200,000 was spent on a boat and more than $350,000 was classified as farm expenditure. Approximately $99,000 went into a Paratai venture. There were other small withdrawals. The trustees’ position was that this showed Mr Isbey took a considerable sum of money from the company, a great deal of which would have belonged to the trustees.

[45] The liquidators’ position was that this fund came from an advance of $75,000 from an unsecured creditor Mr Ryan, GST refunds and from creditors. I accept that these were all sources of the funds, however, another source was the profits from the various property developments carried out by Shantung. On my calculation, this provided approximately $400,000.

[46] The relevance of the withdrawals of $680,000 was that they establish, in my view, that if there had been a joint venture agreement, Mr Isbey misappropriated funds due to the trustees. On my findings there was not a joint venture so he therefore took funds from Shantung, a company in which he was the majority shareholder and a director. In withdrawing the funds, he may have exceeded his rights as a director and shareholder and ignored the rights of the trustees as shareholders in the company. He may have had to account to Shantung for a portion of these withdrawals if he had remained solvent and lived. However, these are not matters at issue in this proceeding and upon which I can make findings.

Constructive Trust

[47] Any claim to a constructive trust can only apply to the sum of $5000 due to the trustees from the Marlborough Street partnership. The issue is whether the trustees are entitled to an order that the sum be paid from the retention of $232,007.36 which represents the proceeds of the sale of the last unit in Edwin Street.

[48] One basis on which the trustees sought relief was to submit that this was an appropriate case to lift the corporate veil. It was submitted this would mean any property held by Shantung is effectively the property of the bankrupt estate of Mr Isbey. Lifting the veil can only assist the trustees if the lifting gives them a proprietary right over the sale proceeds.

[49] There can be little doubt Shantung played an active role in the Marlborough Street development. It made a provisional distribution of profits to the three partners and, in Mr Graham’s view at least, that distribution roughly equated the actual profits. On my finding, it did with only a relatively small amount remaining undistributed. The liability to pay that amount rests with Shantung and not Mr Isbey. There is no reason to lift the corporate veil in respect of the Marlborough Street development. Even if there were reasons to lift it, it is difficult to see how such a lifting could benefit the trustees in respect of Marlborough Street.

[50] Any possible benefit to the trustees, in lifting the corporate veil, could only arise, in my view, if it enabled the trustees to trace any amount to which they were entitled to the other developments. On the findings already made, they are not entitled to any benefit other than through the shareholder structure. Further, even if lifting the veil could assist the trustees, this is not a case where the Court should consider lifting the veil. The parties chose to operate through a corporate structure. The legal arrangements made at the time indicated the true nature of the transaction was that the property development was being carried out through the corporate structure. The trustees were not entitled to distributions other than through the dividend or return of capital mechanisms of the company. As such, they had no right to company assets. If Mr Isbey subsequently ran the company as his own and took funds from it, then any right of action was against him. Mr Isbey, in his affidavit, made allegations that he was entitled to take over the trustees’ 40% shares in Shantung because of default by the trustees. I cannot assess whether or not this claim was correct and it may be that Mr Isbey acted in a high handed manner and against the interests of the trustees as equitable shareholders. He may have taken funds from the company to which he was not entitled. However, under company law, it is for the company to take action against him, and there is no point in lifting the veil. The trustees can not get access to the profits of the various ventures by this means.

[51] Finally, on this aspect, I note it is not possible to make a finding that Mr Isbey acted unfairly and unconscionably in this matter. While the evidence suggests Mr Isbey may have benefited from taking funds from Shantung, the evidence does not go as far as indicating that he acted unfairly or unconscionably.

[52] The next basis upon which the trustees sought to obtain access to the sale proceeds was that Mr Isbey owed a fiduciary duty to them. This submission cannot assist the trustees. On the findings made, the funds held belong to Shantung and not Mr Isbey. It is therefore not necessary to consider whether Mr Isbey owed fiduciary duties to the trustees in this case. Mr Isbey had duties to Shantung and may have had duties to the trustees as shareholders which they could have enforced through provisions of the Companies Act. They did not seek to do that in this case.

[53] Finally, the trustees seek an order that there was a constructive trust created. The only right which a constructive trust, if established, could give to the trustees is the right to have paid out of the retention moneys the $5000 due to them on the Marlborough Street property. There was no evidence to suggest the $5000 to which the trustees were entitled can be traced to the sale proceeds. In fact, the evidence would suggest tracing of the proceeds of the Marlborough Street sale into any other asset would be almost impossible. If it is accepted Shantung held the $5000 on trust for the trustees, their right to trace has been lost because that fund has been dissipated by Shantung and the factual process of tracing cannot be carried out. Thus, a declaration that there was either an express trust or an institutional constructive trust could not assist the trustees. The only way in which they can benefit and recover the sum of $5000 from sale proceeds is if they can establish a remedial constructive trust.

[54] A remedial constructive trust is imposed by the Court as a measure of justice after the event. It does not arise from the transactions between the parties - see Fortex Group Ltd (In Receivership and Liquidation) v MacIntosh [1998] 3 NZLR 171, and In Re Goldcorp Exchange Ltd (In Receivership): Kensington v Liggett [1994] 3 NZLR 385. Mr Waalkens suggested such a trust should be imposed in this case because of the unconscionability and/or unjust enrichment of Shantung.

[55] Remedial constructive trusts are only created in limited and exceptional circumstances. In my view, this is not such a case. The structure adopted in this case was adopted by Mr Fordham as a means to keep income away from his creditors if he were to go bankrupt. He subsequently went bankrupt. The venture which was set up is also insolvent. It would be somewhat ironic if a person facing bankruptcy was able to set up a structure to defeat creditors and then use that structure to establish a remedial constructive trust to defeat another set of creditors. Further, the amount involved is small. Mr Fordham, in his evidence, did not establish the necessary level of unconsionability which would require this Court to grant a remedy giving priority over the ordinary creditors of Shantung. The claim for a remedial constructive trust must fail.

Result

[56] Although the emphasis at the hearing was for a proprietary right, the trustees in their statement of claim sought judgment for any amount due under the Marlborough deed. A sum of $5000 is due and there will be judgment for the trustees in this sum. They are not entitled to an order that the sum be paid from the sale proceeds and Shantung is discharged from its obligation to hold those sale proceeds in trust.

Costs

[57] These proceedings commenced before 1 January 2000. Steps taken before that date are subject to the costs rules in force at that date while steps taken after that date are subject to the present High Court Rules. My provisional view on costs is that this may not be an appropriate case for any costs award in favour of the trustees. If the parties are unable to agree costs, they may file memoranda. If a party wishes to claim costs, that party should file a separate memorandum within six weeks of the date of the judgment. Any memorandum in reply should be filed and served within a further three weeks.