Heartland Bank Limited v Banno
[2015] NZHC 3201
•15 December 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-1009 [2015] NZHC 3201
BETWEEN HEARTLAND BANK LIMITED
Plaintiff
AND
LEANNE LIANG BANNO First Defendant
NZFF 1990 LIMITED Second Defendant
ASIAN CONNECTIONS LIMITED Third Defendant
NZ BEST AND PURE LIMITED Fourth Defendant
NEW ZEALAND PURELEA LIMITED Fifth Defendant
Hearing: 19 November 2015 Counsel:
T P Mullins and D A C Bullock for Plaintiff
No appearance for DefendantsJudgment:
15 December 2015
JUDGMENT OF PALMER J
This judgment was delivered by me on 15 December at 10.30 am pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
LeeSalmonLong, Auckland for Plaintiff
HEARTLAND BANK LIMITED v LEANNE LIANG BANNO [2015] NZHC 3201 [15 December 2015]
Introduction
[1] Heartland Bank Ltd (Heartland) loaned substantial sums to a company, Good Kiwi Ltd (in liquidation) (Good Kiwi), which was associated with Ms Leanne Liang Banno the first defendant. The loans were made on the basis of false invoices. Some of the funds found their way to the second, fourth and fifth defendants which are also associated with Ms Banno. In her single affidavit in these proceedings Ms Banno has not denied the invoices were false or any of the other grounds of Heartland’s case. Neither she nor the other current defendants have filed any statement of defence or appeared in any hearing. Heartland applies for judgment by formal proof against the second, fourth and fifth defendants. It seeks orders to account or equitable damages for those companies’ knowing receipt of Heartland’s funds. I grant the application. My reasons follow.
Formal Proof
[2] Rule 15.9 of the High Court Rules provides, relevantly, that if the defendant in a proceeding 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, the proceeding must be listed for formal proof.
[3] Under r 15.9(4), before or at the formal proof hearing, the plaintiff must 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.
The Facts
[4] Heartland has filed extensive affidavit evidence, particularly from Ms Kare Johnstone, a partner at McGrath Nicol who was one of the receivers of Good Kiwi, and from Mr Brendan Cody, Head of Asset Management at Heartland. I summarise the key points, that I find have been established, as they relate to the orders sought here.
Good Kiwi
[5] Ms Banno operated a business of manufacturing and wholesaling frozen Asian dumplings under the brand “Leanne’s Kitchen” which were sold at various supermarkets and food outlets. The business was operated under a number of entities. One of them was Good Kiwi, of which Ms Banno was the sole director and shareholder.
[6] Heartland provided financing facilities to Good Kiwi from 19 November
2010 to 18 February 2015. This included an invoice financing facility under which Heartland allowed Good Kiwi to make draw-downs on the strength of invoices issued by Good Kiwi.
False Invoices
[7] On 3 February 2015 Heartland was advised by Mr Lyttleton, an adviser to Ms Banno, that all the then outstanding invoices purportedly issued by Good Kiwi were fictitious and fraudulent. That admission was confirmed by Mr Lyttleton in Ms Banno’s presence on 17 February 2015 when it was also made clear that there were no funds available to repay Heartland.
[8] Heartland appointed receivers to Good Kiwi on 20 February 2015. Ms Banno did not respond to communications from the receivers. Ms Banno’s niece, Ms Guan Chung, provided a medical certificate to the receivers to the effect that Ms Banno was suffering from severe depression. Ms Chung tried to assist Heartland and the receivers. However, the receivers were not provided with the books or records of Good Kiwi. There has been only partial, and inadequate, compliance with ancillary orders of the Court for information. Good Kiwi was placed into liquidation on 6 March 2015 on the application of the Commissioner of Inland Revenue.
[9] From at least 15 October 2013, a large number of (very convincing-looking) invoices issued by Good Kiwi to Foodstuffs and Progressive Enterprises did not reconcile with the records of those supermarket companies. For example, Heartland identifies 34 invoices purportedly issued to Foodstuffs from 15 October 2013 to
1 May 2014, totalling $929,900, that are not recorded in Foodstuffs’ schedule of remittances. Heartland submits, and I accept, that the date of 15 October 2013 is a conservative starting date for the funds which have been obtained improperly by Good Kiwi.
[10] From 1 May 2014 Good Kiwi had sold its business to Authentic Food Ltd (without Heartland’s consent or knowledge) and was not trading, yet it represented to Heartland that it had issued invoices totalling $6.7 million and had received
$6.2 million in credits or receipts.
What happened to the money?
[11] Substantial funds were transferred from Good Kiwi to Ms Banno and other companies, including the second, fourth and fifth defendants against whom orders are sought here. Heartland is not now seeking orders against the third defendant because it is now in liquidation. There is no evidence of consideration passing to Good Kiwi for any of these transfers. No explanation for them has been provided.
What is sought and the lack of response
[12] Heartland filed a statement of claim on 13 May 2015 against Ms Banno and four companies associated with her. It was served on the second and fourth defendants on 21 May 2015 and on the first and fifth defendants on 25 May 2015. The third defendant is in liquidation. The proceedings were discontinued against Mr Jeremy Harris, the sixth defendant who had been in a relationship with Ms Banno, and Mr Frank Banno the seventh defendant who was Ms Banno’s former husband who had moved to Australia.
[13] Heartland pleaded seven causes of action. It obtained a freezing order against Ms Banno and ancillary orders requiring disclosure of information on 14 May 2015. It obtained judgment by default against Ms Banno on 1 October 2015 for the amount of $2,111,486.33.
[14] Heartland now seeks judgment by formal proof in relation to three of the causes of action which relate to the knowing receipt, by three of the companies, of
funds derived from Heartland. It seeks either orders of equitable compensation or orders to account to Heartland for the net amounts paid by Good Kiwi to the three companies as follows:
(a) $25,448.00 against the second defendant, NZFF 1990 Ltd (NZFF);
(b) $159,549.50 against the fourth defendant, NZ Best and Pure Ltd (Best
& Pure); and
(c) $140,500.00 against the fifth defendant, New Zealand Purelea Ltd
(Purelea).
[15] None of the defendants have filed a statement of defence. Mr Harris and Ms Banno filed affidavits before the proceedings were discontinued against Mr Harris.
[16] Ms Banno’s two page affidavit of 22 June 2015 stated that she had no net assets and did not possess relevant financial records. It did not deny the allegations against her in the proceedings and did not contradict or explain any of the factual matters that form the basis of Heartland’s case here. It did say that she was willing to work with the receivers, but she has not done so.
[17] Mr Mullins, on behalf of Heartland, says that Heartland’s case has been narrowed for formal proof purposes to matters of which the Court can be confident. He candidly acknowledges that Heartland does not know whether any of the three entities, against which judgment is sought, have funds. But judgment in Heartland’s favour may lead to the appointment of liquidators and administrators who would be able to inquire into the financial state of the entities.
Application of the Law of Knowing Receipt
[18] A person who has actual or constructive knowledge that he or she has received funds in breach of trust, or of a fiduciary obligation, may be liable to repay those funds. That, in general terms, founds the equitable action of knowing receipt.1
[19] Heartland says here that Good Kiwi was a constructive trustee of funds which Good Kiwi acquired fraudulently from Heartland. It says NZFF, Best & Pure and Purelea each received net payments from Good Kiwi, in the amounts Heartland claims, in breach of trust. Heartland says that Ms Banno’s knowledge of the fraud she perpetrated through Good Kiwi, of which she was a director, can be imputed to NZFF and Best & Pure because Ms Banno was a director of each. It says her knowledge can be similarly imputed to Purelea because she was a director of Best & Pure which was the parent company of Purelea. In addition, Mr Harris provided evidence that the NZFF and Best & Pure bank accounts and businesses were run by Ms Banno and her staff and that Good Kiwi’s money was “treated as from her personally”.
[20] In each instance, Heartland notes that there is no evidence any of the three companies provided consideration for the payments they received, that they (and Ms Banno) had the opportunity and obligation to explain the transactions and have failed to do that or to defend the proceedings. They refer to Johnston v Mapp in which Mallon J inferred the defendants knowingly received funds because they
failed to take steps to defend the claims against them.2 They say the case here is
stronger since there is also a failure to comply with ancillary orders of the Court.
[21] I agree that the facts disclosed by Heartland’s evidence, which has not been contradicted, support its claims for knowing receipt against NZFF, Best & Pure and Purelea for the amounts claimed. The evidence is that Ms Banno was the “directing mind and will” of the three companies and her knowledge can and should be
imputed to them.3
1 Tim Clarke “Knowing Receipt and Accessory Liability” in Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Wellington, Thomson Reuters, 2009) 575 at 584–585.
2 Johnston v Mapp [2013] NZHC 2858 at [71].
3 El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 at 695–696.
[22] Heartland seeks either equitable compensation or damages or an order to account against the three companies. Heartland doesn’t mind which form the order takes as either would found repayment of the amount claimed. Equitable compensation or damages has been developed as a remedy reasonably recently in New Zealand but is now regarded as “unexceptional”.4 In this case I agree that there is no difference in effect since the amounts Heartland is seeking are the net profits made by the companies. I make orders to account.
Decision
[23] I order the three defendants to account to Heartland Bank Ltd by paying it the following amounts:
(a) the second defendant, NZFF 1990 Ltd, $25,448.00;
(b) the fourth defendant, NZ Best and Pure Ltd, $159,549.50; and
(c) the fifth defendant, New Zealand Purelea Ltd, $140,500.00.
Palmer J
4 Geoff McLay “Equitable Damages” in Peter Blanchard and others Civil Remedies in
New Zealand (Wellington, Brookers, 2003) at [3.1.2].
0