Hansa Ltd (in liq) v Hibbs
[2017] NZHC 2014
•22 August 2017
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2016-409-001214 [2017] NZHC 2014
BETWEEN HANSA LIMITED (IN LIQUIDATION)
First Plaintiff
DAMIEN GRANT AND STEVEN KHOV
Second Plaintiffs
AND
PAUL CLIFFORD HIBBS First Defendant
CAMERON GLADSTONE INVESTMENTS LIMITED Second Defendant
HALDON RANGE VINEYARDS LIMITED
Third Defendant
CONTAINERS DIRECT LEASING LIMITED
Fourth Defendant
Hearing: 16 August 2017 Appearances:
A S Botterill for Plaintiffs
No Appearance for First DefendantJudgment:
22 August 2017
JUDGMENT OF GENDALL J
Introduction
[1] This proceeding involves what is known as a classic Ponzi scheme. The first
plaintiff, Hansa Limited (In Liquidation) (“Hansa”), formerly known as Hansa
Capital Limited, was placed into liquidation by this Court on 24 November 2016.
HANSA LIMITED (IN LIQ) v HIBBS [2017] NZHC 2014 [22 August 2017]
[2] The first defendant, Paul Clifford Hibbs (Mr Hibbs), is the sole director of Hansa, having been appointed and acted as such since the company was first incorporated.
[3] In this proceeding:
(a) The second plaintiffs who are the liquidators of Hansa (“the liquidators”) claim that Mr Hibbs breached ss 131, 133, 135, 136 and
137 Companies Act 1993 (“the Act”). As a result and pursuant to s 301 Companies Act 1993 the liquidators seek an order be made that Mr Hibbs contribute to the assets of Hansa. Specifically, before me the liquidators sought judgment by way of formal proof against Mr Hibbs pursuant to r 15.9 High Court Rules.
(b)Hansa claimed against the second to fourth defendants in this proceeding for money had and received.
[4] On 28 February 2017 Hansa obtained judgment by default against the second, third and fourth defendants with regard to the money had and received claim noted at para [3](b) above.
[5] Then, on 27 March 2017, given that Mr Hibbs had failed to file a statement of defence in this proceeding, an order was made that the claim against him would proceed by way of formal proof. That hearing occurred on 16 August 2017. This judgment relates to that formal proof hearing.
[6] To expedite matters the formal proof hearing principally considered Hansa’s s 136 claim. This was the claim that Mr Hibbs, as the person involved with the company from its outset and its sole director, breached duties under s 136 of the Act by causing Hansa to continue to trade and incur obligations, notwithstanding that no reasonable ground existed to believe that the company would be able to meet its obligations when required to by its creditors.
[7] Hansa and the liquidators seek compensation from Mr Hibbs in his capacity as director of the company under s 301(1)(b)(ii) of the Act for alleged breaches of duties imposed on him both under s 136 and under other provisions in the Act as follows:
(a) Section 136 – as noted above by causing the company to continue to trade and incur obligations, notwithstanding that no reasonable ground existed to believe that the company would be able to meet its obligations when required.
(b)Section 131 – a failure to act in good faith and in the best interests of the company.
(c) Section 133 – a failure to exercise powers as a director for a proper purpose.
(d)Section 135 – a failure to ensure the business of the company was not carried on in a manner that created a substantial risk of serious loss to its creditors.
(e) Section 137 – a failure to exercise the care, diligence and skill expected of a reasonable director in the same circumstances.
[8] In addition, if breaches are established, issues still arise here as to whether Mr Hibbs ought to contribute to the assets of Hansa pursuant to s 301(1)(b)(ii) of the Act by way of compensation. In this respect, Hansa and the liquidators seek an order that Mr Hibbs be ordered initially to contribute $7,062,597.67. This is said to be the full extent of Hansa’s indebtedness incurred between 4 November 2008 and
24 November 2016. In addition, a further order is sought against Mr Hibbs for all liquidators’ fees outstanding in respect of Hansa’s liquidation. Finally, the usual order for costs and disbursements on this proceeding is sought.
Background facts
[9] As I have noted Hansa was incorporated on 15 March 2005.
[10] Mr Hibbs was the sole director of Hansa from its incorporation until
24 November 2016 which, as I have noted, is the date of its liquidation. It seems that at all material times Hansa purported to carry on an investment business which involved investing clients’ money and then managing those investments.
[11] During the time of its operations, Hansa formed agreements with around
17 clients (“the investors”) for investment and management of their funds (“the
Investment Agreements”).
[12] Particulars of those Investment Agreements were: (a) The investors transferred funds to Hansa.
(b)Hansa was to invest those funds into investment portfolios managed by Hansa/Mr Hibbs.
(c) The investors were to retain ownership of the investment funds and were to have rights to withdraw any part of the funds as and when required.
(d)The investors were to have rights to terminate the Investment Agreements with Hansa as and when required in which case Hansa was to account for outstanding funds in the various portfolios.
(e) Hansa was to charge an annual fee of one per cent on the outstanding funds in the portfolios.
(f) Hansa was to provide periodic investment statements reporting returns on the investments.
[13] Funds transferred by the current creditors to Hansa pursuant to the
Investment Agreements totalled something in excess of $10,224,000.
[14] Initially, some investors were provided with partial withdrawal of their funds by Hansa when this was requested.
[15] However, unknown to the investors, Hansa failed to invest and manage the funds in accordance with the Investment Agreement. Instead through Mr Hibbs as the sole director/decision-maker it was operating a Ponzi scheme under which investors’ funds were misappropriated and fresh investors’ money used to pay withdrawals to existing investors.
[16] And, Mr Hibbs directed payments totalling $1,918,760.04 for the benefit of the second to fourth defendants in this proceeding and other parties with whom he had interests. Of concern too is the fact that the liquidators have indicated that transfers of $5,849,595.66 are yet to be identified.
[17] In about 2016, Hansa stopped providing withdrawals when requested to do so by investors. Hansa also failed to account for outstanding funds in the investment portfolios when several investors terminated their Investment Agreements. This obviously led to Hansa’s liquidation. Following liquidation and the appointment of the liquidators to Hansa, it seemed at that time that the company was indebted to investors in the sum of at least $4,574,525.84.
[18] Now, the liquidators confirm that they have further information to conclude that Hansa is actually indebted to the investors in the sum of at least $7,062,597.67.
Procedural history
[19] These proceedings were issued against Mr Hibbs and the other defendants on
12 November 2016.
[20] They were served on Mr Hibbs on 21 December 2016. An affidavit of service dated 18 January 2017 confirming this is before the Court.
[21] Mr Hibbs’ statement of defence was due to be filed some considerable time ago. No defence was filed by or on behalf of Mr Hibbs. Nor, as I understand it, has Mr Hibbs made any contact with the liquidators concerning this proceeding.
[22] Hansa and the liquidators now seek judgment against Mr Hibbs, as I have noted, by way of formal proof pursuant to r 15.9 High Court Rules. Rule 15.9 states:
15.9 Formal proof for other claims
(1) This rule applies if, or to the extent that, the defendant does not file a statement of defence within the number of working days required by the notice of proceeding, and the plaintiff seeks judgment by default for other than a liquidated demand.
(2) The proceeding must be listed for formal proof and no notice is required to be given to the defendant.
(3) After a proceeding is listed for a formal proof hearing, no statement of defence may be filed without the leave of a Judge granted on the ground that there will or may be a miscarriage of justice if judgment by default is entered, and on such terms as to time or otherwise as the Judge thinks just.
(4) The plaintiff must, before or at the formal proof hearing, file affidavit evidence establishing, to a Judge's satisfaction, each cause of action relied on and, if damages are sought, providing sufficient information to enable the Judge to calculate and fix the damages.
(5) If the Judge before or at the formal proof hearing considers that any deponent of an affidavit filed under subclause (4) should attend to give additional evidence, the Judge may direct accordingly and adjourn the hearing for that purpose.
[23] In terms of the r 15.9(4) requirement outlined above, Hansa and the liquidators are required to file affidavit evidence to establish to the satisfaction of this Court the causes of action pleaded and their damages calculation. The onus is on the plaintiffs throughout to convince this Court that judgment should be entered against Mr Hibbs.
[24] In Tech Voice Limited (In Liquidation) v Ovenden,1 Davidson J noted in a similar formal proof hearing that:
…the plaintiff’s submissions and evidence are therefore untested and, given the immediate and wider implications of judgment, the Court in the circumstances must be careful in reaching conclusions.
[25] Affidavit evidence has been filed in this proceeding as follows:
(a) A detailed affidavit dated 31 July 2017 from Damien Mitchell Grant, the first-named second plaintiff and one of the liquidators.
1 Tech Voice Limited (In Liquidation) v Ovenden [2015] NZHC 2766 at [2].
(b)A supplementary affidavit from Damien Mitchell Grant (in support of without notice interlocutory application for a freezing order) dated
13 December 2016.
(c) An affidavit of Clyden George Manikkam dated 12 December 2016 (again in support of without notice interlocutory application for a freezing order).
(d)An affidavit of John Andrew Docherty dated 9 December 2016 (again in support of without notice interlocutory application for a freezing order).
(e) An affidavit of Brenton John Joseph Hunt dated 12 December 2016 (again in support of without notice interlocutory application for freezing order).
(f) An affidavit of Kelly Buckley dated 14 August 2017 relating to
quantum issues and the liquidators’ fees and disbursements.
Causes of action against Mr Hibbs
[26] The claims for compensation in this proceeding brought against Mr Hibbs are advanced on the basis that as the sole director of Hansa he has breached his duties to the company under the procedural mechanism which is provided for in s 301 of the Act.
[27] Section 301 provides:
301Power of court to require persons to repay money or return property
(1) If, in the course of the liquidation of a company, it appears to the court that a person who has taken part in the formation or promotion of the company, or a past or present director, manager, administrator, liquidator, or receiver of the company, has misapplied, or retained, or become liable or accountable for, money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company, the court may, on the application of the liquidator or a creditor or shareholder,—
(a) inquire into the conduct of the promoter, director, manager, administrator, liquidator, or receiver; and
(b) order that person—
(i) to repay or restore the money or property or any part of it with interest at a rate the court thinks just; or
(ii) to contribute such sum to the assets of the company by way of compensation as the court thinks just; or
(c) where the application is made by a creditor, order that person to pay or transfer the money or property or any part of it with interest at a rate the court thinks just to the creditor.
(2) This section has effect even though the conduct may constitute an offence.
(3) An order for payment of money under this section is deemed to be a final judgment within the meaning of section 17(1)(a) of the Insolvency Act 2006.
(4) In making an order under subsection (1) against a past or present director, the court must, where relevant, take into account any action that person took for the appointment of an administrator to the company under Part 15A.
[28] It is clear from the Court of Appeal decision in Lower v Traveller2 that the principal purpose of s 301 is to compensate those who have suffered loss as a result of illegitimate trading. In addition, the Court of Appeal has described s 301 as being analogous to a derivative type of action. In its decision in Sojourner v Robb3 the Court of Appeal said:
[Section 301 provides:] a procedural shortcut by which a liquidator, creditor or shareholder may pursue the claims which a company in liquidation may have against…[its] directors.
[29] The Court also went on to state in the decision Peace and Glory Society Limited (In Liquidation) v Samsa4 that s 301 also provides a means of enforcement against directors who have:
…been guilty of negligence, default, or breach of duty or trust in relation to
the company.
2 Lower v Traveller [2005] 3 NZLR 479 (CA).
3 Sojourner v Robb [2008] 1 NZLR 751 (CA) at [15].
4 Peace and Glory Society Limited (In Liquidation) v Samsa [2010] 2 NZLR 57 (CA) at [47].
[30] Section 301 claims involve a two-stage evaluation:
(a) Has there been a breach of duty owed by a director to the company?
(b)If so, to what extent should the director contribute to the losses of the company?
[31] The s 301 claims advanced here against Mr Hibbs by Hansa and the liquidators are for breach of his duties as the sole director of the company from its inception up to the date of its liquidation. It is necessary first to turn to consider the specific duty breaches alleged against Mr Hibbs. As I have noted above, these relate to ss 131, 133, 135, 136 and 137 of the Act, although I confirm that before me counsel focused principally upon the alleged breaches of s 136. I will now address these aspects.
Breach of duty under s 136
[32] The elements of a claim brought under s 136 were summarised by O’Regan J
in Fatupaito v Bates5 as follows:
In order to establish a breach of s 136 the liquidators must show that Mr Bates agreed to the company incurring an obligation at a time when he did not believe (the subjective test) on reasonable grounds (an objective test) that the company would be able to perform that obligation when required to do so.
[33] To comply with his duty under s 136 a director like Mr Hibbs must believe that the company will be able to perform the obligation when it is required to do so. This imparts a subjective element to the application of s 136.
[34] In Goatlands Limited (In Liquidation) v Borrell6 this Court considered the degree of certainty with which a director must believe that the company will be able to perform the obligation in question in order to satisfy the requirements of s 136. The Court said it was not enough for the director to believe that the company had “a reasonable likelihood” of being able to perform the obligation. To meet the s 136
threshold a director must believe that the company “will be able” to perform the obligation rather than “will be likely to be able to perform the obligation”.
[35] Further, a director’s belief that the company will be able to perform the obligation within the meaning of s 136 must be held on reasonable grounds which imparts an objective element.
[36] In Lawrence v Jacobsen7 this Court determined that under the then equivalent to s 136 the objectivity test is that of the “reasonable prudent director” faced with the circumstances of the company.
[37] In Jordan v O’Sullivan8 Clifford J summarised the principles of the objectivity test as follows:
The need for the director’s belief to be based on objectively reasonable grounds means the director must have sufficient knowledge of the company’s position and ability to meet the obligation so as to give rise to reasonable grounds. It is implicit that the director must take sufficient steps to obtain this knowledge – claiming ignorance will not be a defence.
[38] In applying these principles to the present case there can be little doubt in my view that Mr Hibbs has breached his duty here under s 136. By accepting investor deposits, Hansa has incurred debt to investors totalling something in excess of $7 million. This, it seems, was orchestrated entirely by Mr Hibbs. None of these debts were repaid by Hansa when they were due and in fact the debts are still owing by the company.
[39] There is evidence before the Court that Hansa and Mr Hibbs represented to investors that their funds would be invested into various investment portfolios. However, none of this happened and invested funds have not been recovered in the liquidation.
[40] Instead, it is clear the funds in question were used for purposes other than the agreed investments. As I have noted above, this was a classic Ponzi scheme. The liquidators have provided evidence before this Court to show that funds were used
improperly for payments to related entities of Mr Hibbs and to pay out other
investors through “fictitious returns”.
[41] From the evidence before the Court it is beyond question that at the time when these debts were incurred by Hansa, the company was not able to repay them. As the funds were never invested as Mr Hibbs represented into the investment portfolios, Hansa was quite unable to withdraw the funds and pay them to the investors when required to do so.
[42] The evidence before the Court confirms that it was Mr Hibbs who arranged this and had the knowledge that Hansa would not invest the funds, despite making representations to the contrary to the investors. It follows therefore that there can be no suggestion Mr Hibbs could have believed Hansa “would be able” to pay the debts when they were to be due. Even if this may not have been the case and Mr Hibbs believed Hansa “would be able” to repay the debts, clearly he did not have reasonable grounds for such a belief, considering his illegitimate actions here and his decision to operate this arrangement as a Ponzi scheme.
[43] As Jordan v O’Sullivan notes, it is clear a prudent director would have obtained sufficient knowledge of Hansa’s financial position before agreeing to the company continuing to incur the debts in question. Even if Mr Hibbs might claim he believed the company would be able to repay the debts, then under all the circumstances here this belief could not have been considered to be reasonable. Furthermore, and in any event, Mr Hibbs himself failed to invest the funds through Hansa as he had represented to the investors.
[44] There can be no doubt here in my view therefore that for these reasons
Mr Hibbs clearly acted in breach of his duties under s 136.
Breaches of duty under ss 131, 133, 135 and 137
[45] Given my conclusion noted at para [44] above, strictly speaking it is not necessary for me to go further and consider the possibility here that Mr Hibbs also breached his duties as a director under ss 131, 133, 135 and 137. For completeness, however, I will mention these aspects briefly.
[46] Section 131 of the Act provides that a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.
[47] There can be no doubt in my view that in all the circumstances here Mr Hibbs is in breach of his duty under s 131 in that he failed to act in good faith and in the best interests of the company when he:
(a) Failed to invest the investor funds into investment portfolios pursuant to the Investment Agreements;
(b)Caused Hansa to represent to the investors their funds were properly invested and would be repaid as and when required;
(c) Misappropriated Hansa’s funds and transferred them for no value to
related entities controlled by him and third parties.
(d)Took these actions when no director with any understanding of fiduciary duties would or could have done so.
[48] Mr Hibbs clearly put his personal interests ahead of those of Hansa also by illegitimately transferring money into related entities and creditors of those entities in this huge and ongoing Ponzi scheme he had created.
[49] Turning now to s 133 of the Act, in terms of that section, a director has an obligation to exercise his or her powers for a proper purpose.
[50] Again here, I am of the view that Mr Hibbs failed to exercise his powers as a director for a proper purpose when he:
(a) Caused Hansa to enter into Investment Agreements and receive investment funds pursuant to those agreements without any belief reasonable or otherwise that Hansa would comply with the agreements;
(b) Misappropriated Hansa’s funds, as noted above, instead of investing
the funds into the investment portfolios;
(c) Caused Hansa to falsely represent to investors that their funds were invested in accordance with the Investment Agreements and that these funds would be repaid as and when required.
[51] The Ponzi scheme created by Mr Hibbs meant that the funds provided by creditors were used for purposes other than proper investment on their behalf. There is also no doubt here that in doing what he did, Mr Hibbs failed to exercise his powers for a proper purpose and he was clearly in breach of s 133 of the Act.
[52] Turning now to s 135, under this reckless trading provision, a director has an obligation not to agree to and/or cause and/or allow the business of a company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
[53] Here, there can be no doubt that Mr Hibbs allowed Hansa’s business to be carried on in a manner likely to create a substantial risk of serious loss to its creditors when he allowed the company to incur ongoing and substantial debts provided by investors, knowing that none of the funds were to be invested as represented but rather were to be used for his own and other purposes. The payments made to related entities and to pay out other investors through “fictitious returns” was a major misappropriation of the funds and resulted in the investors suffering serious loss. It is without question, in my view, that Mr Hibbs also acted here in breach of his duties under s 135.
[54] Finally, turning now to s 137, under this provision a director has an obligation when exercising powers or performing duties to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances.
[55] Once again, there can be no doubt in my view that in all the circumstances here, Mr Hibbs breached his duties to the company under s 137 when he:
(a) Failed to ensure Hansa invested the funds provided into investment portfolios in accordance with the Investment Agreements;
(b)Failed to take reasonable steps to ensure that the company generated sufficient income to repay funds once demanded by the investors;
(c) Misappropriated Hansa’s funds and transferred them for no value to
related entities he controlled;
(d)Failed to obtain equivalent value for payments made by Hansa to related entities Mr Hibbs controlled.
Quantum of relief sought
[56] Given my above conclusions that Mr Hibbs clearly breached his duties as a director to Hansa principally under s 136 but also under ss 131, 133, 135 and 137 of the Act, it is now necessary to assess the measure of contribution that he ought to make to the company pursuant to s 301.
[57] The Court of Appeal in Mason v Lewis9 confirmed that in deciding what quantum ought to be appropriate under s 301, the starting point is to look to the deterioration in the company’s financial position between the date inadequate corporate governance became evident, (the breach date) and the date of liquidation.
[58] In the present case, I am satisfied that Mr Hibbs began breaching his duties as a director from as early as 4 November 2008, being the date the first investment was made by the current creditors. Additional investments were made right up to the date of liquidation, being 24 November 2016. Accordingly, Mr Hibbs who was responsible for this wilful misappropriation of funds advanced to Hansa under the Ponzi scheme he orchestrated is liable for all debts of the company incurred between
4 November 2008 and 24 November 2016. Evidence before the Court shows that
these amount to $7,062,597.67.
9 Mason v Lewis [2006] 3 NZLR 225 at [109].
[59] Mr Hibbs was the sole director of Hansa from its incorporation. All the debts in question were incurred during the time when he was in that role. I am satisfied, too, there is a clear causative link between Mr Hibbs’ actions here and the loss caused to Hansa in the sense that as a result Hansa incurred substantial debts when it had no reasonable prospect of repaying them. Finally, I am satisfied, too, that Mr Hibbs’ culpability here is high. He had clear knowledge that Hansa would breach its duties to the creditors, having orchestrated this, and indeed he was actively involved in facilitating both his own breach of his director’s duties and Hansa’s breaches of its obligations to its creditors.
[60] I find therefore that Mr Hibbs must be held liable here for all debts of Hansa during the operative time, amounting to the sum of $7,062,597.67.
[61] In the present case, Hansa and the liquidators also seek to recover the full costs of the liquidation and the costs and disbursements of this proceeding.
[62] In Mako Holdings Limited (In Liquidation) v Crimp10 William Young J ordered the defendants to pay a sum that would mean all creditors in the liquidation were paid in full. At [75] of this decision he noted:
I appreciate that Messrs Crimp and Carswell may feel somewhat aggrieved at my willingness, subject to any further argument as to costs, to require them to pay the costs of this litigation on what will, in substance, be a solicitor and own client basis…Unless full costs are awarded the creditors will not get paid and, unless Judges take a firm line with those who choose to act in this way, we will wind up creating incentives for directors to strip their companies on the basis that they can argue about it later.
(emphasis added)
[63] In seeking to recover the full costs of the liquidation, the liquidators say the overall effect of the orders sought would be to shift the financial consequences of Mr Hibbs’ own breaches of duty and his decisions for Hansa from the creditors of
the company to Mr Hibbs himself where they should properly lie. I agree.
10 Mako Holdings Limited (In Liquidation) v Crimp (HC) Invercargill CP23/99, 28 November
2000.
[64] In Richard Geewiz Gee Consultants Limited (In Liq) v Gee11 Brown J considered that a director who breached his duties should appropriately be liable to pay compensation for the amount of costs and disbursements incurred in the liquidation generally. This point was also later dealt with in Madsen-Ries v Petera12 where Lang J said that in some cases it would be appropriate for a director to meet some or all of the liquidation costs even though this was not required in that case.
[65] Lastly, in Grant v Guo13 Woolford J ordered a director who breached his obligations to be personally liable for all of the liquidation costs in a situation where there was poor record keeping and a failure to co-operate but also where the liquidation may not have occurred at all if the director knew of the company’s actual financial position.
[66] In the affidavit of Kelly Buckley dated 14 August 2017 filed in this proceeding the outstanding liquidators’ fees and disbursements incurred for Hansa total $396,002.90. Ms Buckley, who is the finance manager of the liquidators, has provided sworn evidence to this effect which is uncontradicted. Verification of the amounts concerned are attached in material exhibited to Ms Buckley’s affidavit.
[67] I am satisfied that these liquidators’ costs should be included in the orders
which are to follow.
[68] Lastly, before me Hansa and the liquidators sought costs and disbursements on this proceeding. I am satisfied that these should be awarded on a full indemnity basis here. An order to this effect is to follow.
Result
[69] The claim by Hansa and the liquidators against Mr Hibbs succeeds in its entirety and judgment is now entered against Mr Hibbs and orders made as follows:
11 Richard Geewiz Gee Consultants Limited (In Liq) v Gee [2014] NZHC 1483.
12 Madsen-Ries v Petera [2015] NZHC 538.
13 Grant v Guo [2015] NZHC 2480.
(a) An order is made pursuant to s 301 of the Companies Act that the first-defendant Mr Hibbs is to pay to the plaintiffs the total amount of the outstanding creditors’ claims in Hansa’s liquidation incurred between 4 November 2008 and 24 November 2016 totalling
$7,062,597.67.
(b)A further order is made pursuant to s 301 that the first defendant Mr Hibbs is to pay to the plaintiffs the liquidators’ fees and disbursements in Hansa’s liquidation from the date of their appointment up to the date of this judgment amounting to
$396,002.90.
(c) A further order is made that the first defendant Mr Hibbs is to pay the plaintiffs’ reasonable costs and disbursements on this proceeding calculated on a solicitor/client full indemnity basis pursuant to r 14.6(4) High Court Rules as approved by the Registrar.
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Gendall J
Copies to:
Waterstone Insolvency
First Defendant Mr Paul Hibbs
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