Graham v Tyler
[2019] NZHC 430
•13 March 2019
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2018-409-000162
[2019] NZHC 430
UNDER the Property Law Act 2007 and the Companies Act 1993 AND
in the matter of Arena Capital Ltd (in liq)
BETWEEN
GRANT ROBERT GRAHAM and NEALE
JACKSON as liquidators of Arena Capital Ltd (in liq)
PlaintiffsAND
JOHN EMRYS TYLER
First Defendant
AND
CHIPMUNK ONE LTD
Second Defendant
Hearing: (By formal proof on the papers) Appearances:
T G H Smith and S M Cathro for Plaintiffs
Judgment:
13 March 2019
JUDGMENT OF OSBORNE J
on formal proof
[1] This proceeding is brought by the liquidators (the liquidators) of Arena Capital Ltd (in liq) (Arena). They seek from the first defendant, John Emrys Tyler, and his company, Chipmunk One Ltd (Chipmunk) sums of money which were paid to the defendants and which the liquidators assert to be recoverable under either the Property Law Act 2007 or the Companies Act 1993 or both.
[2] Arena, also known as Blackfort FX, was used by Lance Ryan and Jimmie McNicholl as the vehicle for a Ponzi scheme. Arena began operating in May 2014
GRAHAM & JACKSON v TYLER & ANOR [2019] NZHC 430 [13 March 2019]
and operated as a pure Ponzi scheme.1 The liquidators were initially appointed by this Court as receivers and managers of Arena on 27 May 2015 and were subsequently appointed Arena’s liquidators.
[3] Messrs Ryan and McNicholl were subsequently convicted of dishonesty offences in a prosecution brought by the Serious Fraud Office. The liquidators’ case is that Arena was insolvent from very shortly after it began operating and certainly no later than 3 June 2014.
[4] Arena purported to open an account for Mr Tyler in June 2014 and an account for Chipmunk in July 2014.
[5]The liquidators’ evidence establishes that:
(a)Mr Tyler made no payments to Arena;
(b)Between 10 July 2014 and 4 May 2015, Chipmunk paid Arena
$119,430;
(c)Between 9 October 2014 and 10 April 2015, Arena paid Mr Tyler
$317,500 (by payment into his bank account); and
(d)Between 23 January 2015 and 7 May 2015, Arena paid Chipmunk
$259,000 (by payment into its bank account).
[6] The liquidators seek judgment against Mr Tyler for $317,500 (together with interest) and against Chipmunk for $259,000 (together with interest).
This proceeding
[7] The liquidators bring this proceeding by leave under Part 18 of the High Court Rules.
1 See Graham v Arena Capital Ltd (in liq) [2017] NZHC 973.
[8] They now proceed to formally prove their case, neither defendant having filed a defence.2
[9] The liquidators rely on the affidavit evidence of the second-named plaintiff, Mr Jackson. For reasons I will come to, I am satisfied in terms of r 15.9(4) High Court Rules that each of the plaintiffs’ causes of action are established and that sufficient information has been provided to enable me to calculate and fix the judgment sums.
[10] The liquidators’ causes of action may conveniently be discussed under the Property Law Act (PLA) claims and under the Companies Act 1993 claims.
The PLA claims
The basis of the claim
[11] Section 344 of the PLA authorises the Court to order that property (or its value) acquired or received through certain prejudicial dispositions made by a debtor be restored to the benefit of creditors.
[12] Sections 346 – 348 of the PLA provide that the Court may make an order vesting property or requiring a person to pay reasonable compensation to an applicant prejudiced by a disposition of property,3 where that disposition4 was made:
(a)by a debtor who was insolvent at the time, or became insolvent as a result, of making the disposition;5 and
(b)with intent to prejudice a creditor, or by way of gift, or without reasonably equivalent value in exchange.6
2 High Court Rules, r 15.9.
3 A liquidator of the debtor company will be an applicant prejudiced by the challenged transactions
– see Reynolds v JPL Trading Limited [2013] NZHC 2287 at [21].
4 “Disposition” is widely defined in the PLA, s 345.
5 PLA, s 346(2)(a).
6 PLA, s 346(1)(b).
[13]Section 345 of the PLA further provides that a disposition of property:
(a)prejudices a creditor if it hinders, delays, or defeats the creditor in the exercise of any right of recourse of the creditor in respect of the property; and
(b)is not made with intent to prejudice a creditor if it is made with the intention of only preferring one creditor over another.
[14] It is the liquidators’ case that the payments made to the defendants (the Payments) were prejudicial dispositions pursuant to the PLA, because:
(a)the Payments were a disposition of property by Arena;
(b)Arena was a debtor;
(c)Arena was insolvent at the time the Payments were made because it was unable to pay its due debts other than from misappropriated investors’ funds; and
(d)the Payments prejudiced Arena’s creditors because:
(i)the Payments were made with an actual intent to defeat creditors’ claims because they were used to sustain a Ponzi scheme; and/or
(ii)Arena did not receive reasonably equivalent value in exchange for the Payments;
(iii)but were not made only with the intent of preferring one creditor over another.
The Payments as dispositions of property by Arena
[15]“Disposition” is defined in s 345 of the PLA as including a payment.
[16] The liquidators served notices on the defendants pursuant to s 294 of the Companies Act relating to the Payments. The defendants served notices of objection but did not dispute that the Payments had been made to them.
[17] The Payments represented funds which were to be held on trust for other investors. The Supreme Court in McIntosh v Fisk recognised that although money paid to Mr McIntosh had been held on trust for other investors, the payments made by Ross Asset Management (RAM) to Mr McIntosh were a disposition to which the PLA applied.7
[18] The evidence in this case, applying McIntosh v Fisk, establishes that the Payments were a disposition of property by Arena.
Arena was a debtor
[19] Just as RAM was found to be a debtor in McIntosh,8 so too was Arena. The evidence here establishes that when the Payments were made:
(a)The Ponzi scheme was well-established, funded entirely by money misappropriated from investors.
(b)At the time the Payments were made, investors in Arena would have had claims against Arena for the recovery of the capital contributions misappropriated by Arena.
[20] Arena’s method of “trading” was even more stark than that of RAM – whereas the latter had some funds actually invested on behalf of investors at some time, Arena never traded genuinely.
[21]Arena is established to have been a debtor in terms of the PLA.
7 McIntosh v Fisk [2017] NZSC 78, [2017] 1 NZLR 863 at [25] – [26].
8 McIntosh, above n 7, at [28] – [29].
Arena was insolvent at the time the Payments were made
[22] Section 345 of the PLA provides that a debtor must be treated as insolvent if the debtor is unable to pay all of its debts, as they fall due, from assets other than the property disposed of.
[23] Here, all the investors who had paid funds to Arena had the right to have their monies reimbursed.9
[24] Arena could not have repaid the misappropriated funds to investors. As soon as the first funds were misappropriated (3 June 2014), the assets held for investors were less than the actual contributions (capital payments) made by investors.
[25] The Payments were made to the defendants between October 2014 and May 2015. Throughout that time there were insufficient assets to pay the debt owing by Arena to investors – and Arena was therefore insolvent at the time.
The Payments were made with intent to defeat creditors’ claims
[26] In the first instance decision in McIntosh v Fisk,10 McKenzie J applied the leading authority of Regal Castings Ltd v Lightbody.11 His Honour held:12
I consider that Mr Ross’ [i.e. the operator of RAM] intent to hinder, delay or defeat RAM’s creditors can be readily inferred. In receiving the funds for investment, Mr Ross immediately misapplied those funds in circumstances where repayment could only have been made from the misapplication of investors’ funds. He must have known that whenever he made a payment to an investor he was exposing other investors to a significantly enhanced risk of not recovering their funds.
[27]The Supreme Court approved that reasoning in holding:13
The reality in the present case was that every time a payment was made to an investor of an amount that was greater than the investor’s pro rata share of the co-mingled trust fund, the position of the remaining investors/creditors was worsened. That is the inevitable consequence of the operation of a Ponzi
9 Graham v Arena Capital Ltd (in liq), above n 1, at [13] – [15].
10 McIntosh v Fisk [2015] NZHC 1403, (2015) 11 CLC 98-033 at [55].
11 Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433.
12 Regal Castings, above n 11, at [54].
13 McIntosh v Fisk, above n 7, at [36].
scheme and must have been apparent to Mr Ross, and through him RAM, as the operator of the scheme.
[28]The required intention to hinder, delay or defeat Arena’s creditors is established
– the reasoning in McIntosh v Fisk is applicable.
The absence of reasonably equivalent value and exchange
[29] I am not required to consider the liquidators’ alternative proposition (that Arena did not receive reasonably equivalent value in exchange) as the intention to hinder, delay or defeat Arena’s creditors has been established.14
Allegation that payments to the first defendant were for the benefit of the second defendant
[30] In his notice of objection to the liquidators’ notice served on the defendants, Mr Tyler asserted that of the payments made to him $227,500 had in fact been paid from the account held by Arena for Chipmunk.
[31] There is no admissible evidence to support that contention. But even were the contention correct, the liquidators would have a claim under the PLA against Mr Tyler in relation to the full sum.
[32] Section 348(4) of the PLA provides that a person who acquired or received property through the disposition means a person who acquired or received property:
(a)under the disposition; or
(b)through a person who acquired or received property under the disposition.
[33] As Mr Smith submits, s 348(4) enables the liquidators to follow the payment through to the ultimate beneficiary, Mr Tyler.
14 Property Law Act 2007, s 346(1)(b).
Outcome – the PLA claim
[34] The liquidators have established their entitlement to the relief they seek and in particular that the relevant payments be set aside pursuant to ss 347 and 348 of the PLA, Arena is entitled to repayment by the first and second defendants respectively of
$317,500 and $259,000.
The Companies Act claim
[35] The liquidators based their claim in the alternative upon s 292 of the Companies Act. Given the above findings, it is unnecessary that I determine their entitlement to relief under that provision.
No defence raised
[36] For completeness I refer to s 349 of the PLA, which provides protection for persons receiving property under a disposition. The protection becomes available where property is acquired for valuable consideration and in good faith without knowledge of the fact that it had been the subject of a disposition to which pt 7 of the PLA applies.
[37] On the plain wording of s 349(1), protection under s 349 is not available to a defendant who takes no step in a proceeding. Section 349(1) applies only where the person in question proves the facts which give rise to the protection.
[38]Here, neither defendant has provided such proof.
Interest
[39] The liquidators seek interest on the judgment sums pursuant to s 10 of the Interest on Money Claims Act 2016 from the date of Arena’s liquidation (being 24 July 2015) to the date of payment.
[40] Such interest was expressly claimed by the liquidators in their statement of claim.
[41] The liquidators of RAM successfully sought interest for the same period (from the date of RAM’s liquidation) in McIntosh v Fisk.15 The Court is required by s 10 of the Interest on Money Claims Act to award interest in this case.
Costs
[42] Counsel for the liquidators have claimed costs on a 2B16 basis together with disbursements. The 2B calculation provided by counsel appropriately amounts to
$20,739.17
Orders
[43]I order:
(a)The payments to the first defendant (as particularised at page 1 of exhibit I of the affidavit of Neale Jackson affirmed 21 December 2018) are set aside pursuant to ss 347 and 348 of the Property Law Act 2007;
(b)The payments to the second defendant (as particularised at page 2 of exhibit I of the said affidavit) are set aside pursuant to ss 347 and 348 of the Property Law Act 2007;
(c)The first defendant is to pay to Arena Capital Ltd (in liq):
(i)The sum of $317,500; and
(ii)Interest on the sum of $317,500 to today’s date in the sum of
$42,089.11.
(d)The second defendant is to pay to Arena Capital Ltd (in liq):
(i)The sum of $259,000; and
15 McIntosh, above n 7, at [26] and [30].
16 High Court Rules, category 2 under r 14.3(1) and band B under r 14.5(2).
17 I have disallowed item 34 for an appearance at the hearing, as the Court dispensed with a formal hearing. I have then allowed an additional item 29, for sealing this judgment, as that had been omitted from counsels calculation.
(ii)Interest on the sum of $259,000 to today’s date in the sum of
$34,334.11.
(e)The first and second defendant shall jointly and severally pay to Arena Capital Ltd (in liq) the costs of this proceeding which I fix in the sum of $20,739 together with disbursements to be fixed by the Registrar.
Osborne J
Solicitors:
Bell Gully, Wellington
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