Kiwi Deposit Building Society

[2016] NZHC 782

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

CIV-2016-404-521

[2016] NZHC 782

UNDER

The Trustee Act 1956

IN THE MATTER OF

KIWI DEPOSIT BUILDING SOCIETY

AND

IN THE MATTER OF

an application by PAUL GRAHAM SARGISON AND SIMON DALTON

Applicants

Hearing:	On the papers
Counsel:	S O McAnally for Applicants
Judgment:	22 April 2016

JUDGMENT OF DAVISON J

This judgment was delivered by me on 22 April 2016 at 4.30pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:
Keegan Alexander, Auckland

Kiwi Deposit building Society [2016] NZHC 782 [22 April 2016]

Introduction

[1]                  On 18 April 2013, the applicants, Messrs Paul Graham Sargison and Simon Dalton, were appointed as trustees by an Instrument of Dissolution (the Instrument) for the purposes of the dissolution of a building society, Kiwi Deposit Building Society (KDBS).

[2]                  Contrary to what is set out in the Instrument, KDBS is insolvent. In the absence of powers and procedures setting out the appropriation or division of funds and property of KDBS in the circumstances, the applicants seek directions from the Court by originating application to proceed with a proposed process for the orderly dissolution of KDBS and the making of distributions to its creditors.

Background

[3]                  KDBS was incorporated under the Building Societies Act 1965 (the Act) on 13 March 2009. Its application for incorporation lists 20 founding members. In an affidavit dated 16 March 2016, Mr Dalton describes KDBS’s background as follows:

KDBS was formed as part of what might loosely be described as a group of finance companies largely based in Denmark. The “parent” of the group is apparently a company registered in Denmark called Defap Enterprises ApS. One of the directors of Defap Enterprises is an Australian resident in Denmark, Scott Macaw, who was, we believe, instrumental to the incorporation of KDBS. A great deal of money has flowed in and out of KDBS from or to members of the Defap group.

[4]                  The applicants were appointed as trustees by an instrument of dissolution (the Instrument) dated 18 April 2013.1 According to Mr Dalton, the purpose of the proposed dissolution of KDBS is set out as follows:

KDBS traded until our appointment on 18 April 2013. I understand that the directors have largely attributed the need for dissolution to an unexpected loss on a Danish subsidiary investment. That certainly is the case in part but its problems have always run deeper it seems.

1      In line with the requirements of s 115 of the Building Societies Act 1965, the Instrument was arrived at with the consent of three-fourths of the members, holding not less than two-thirds of the number of shares in KDBS.

[5]                  Pursuant to the requirements of s 115(2) of the Act, the Instrument provides that:

(a)the assets of KDBS are NZD$133,579,109 and liabilities are NZD$121,211,223;

(b)the number of members is 24; and the amount standing to their credit in the Society’s books is NZD$12,367,883;

(c)the claims of depositors is NZD$108,018,438 and other creditors is NZD$84,052;

(d)the intended appropriation or division of the funds and property of KDBS is as follows:

(i)A moratorium to be put in place – no deposits in or depositor redemptions out

(ii)assets off-balance sheet/held on a custodian basis are to be distributed to their beneficial owners

(iii)Investment Assets, referred to in the terms of issue of the class B and D shares, are to be distributed to the class B and D shareholders.

(iv)Secured creditors are to have their claims met from the realization of applicable security.

(v)Secured creditors (in the event of security shortfall) and unsecured creditors are then to have residual divided amongst them relative to their outstanding claim after satisfaction of the Trustees’ remuneration and expenses.

(vi)The Trustees appointed as per (e) below are to retain the services of PKF-Ross Melville, Auditors, to advise as required on accounting matters to ensure the accurate and appropriate distribution of the Society’s assets as at the date of this instrument (to which end, a successor instrument may be issued at a later date with updated content).

(e)Messrs Sargison and Dalton are to be appointed as trustees to oversee the dissolution, with their remuneration being calculated in accordance with a schedule of hourly rates.

[6]                  The applicants say that contrary to the position represented in the Instrument, KDBS is “hopelessly insolvent”. In Mr Dalton’s affidavit, he explains:

As the instrument of dissolution might suggest, it appeared that what was contemplated was a solvent dissolution requiring fairly straightforward realisation of the assets and distribution of them in accordance with the instrument. The instrument shows a surplus of assets over liabilities and we were not… on notice of anything to the contrary.

[7]                  Mr Dalton deposes that KDBS appears to have realisable assets of around NZD$18 million, with liabilities of around NZD$27.8 million. He explains further:

This means that creditors are unlikely to receive more than 63% of their claims.

For that reason, there is no prospect of any surplus being available to KDBS’ members. That being so, we have focussed our efforts on getting the best result we can for the creditors generally.

Submissions

[8]                  In Mr McAnally’s submission, s 115 contemplates a situation where an arrangement between a solvent building society and its members is made, setting out a means by which the society is to be dissolved. Section 115 however is not designed to accommodate a situation such as this, where the instrument of dissolution has in fact misstated the society’s assets and liabilities, and the society is actually insolvent.

[9]                  Mr McAnally says that the provisions of the Act are strikingly “minimalist” in the sense that the Act provides little or no guidance as to the powers and roles of trustees, and specifically, to whom the trustees owe their duties and the precise nature of them. Further, there is nothing to guide how trustees appointed under an instrument of dissolution are to go about the process of dissolution in circumstances where the society is actually insolvent, he says.

[10]              Mr McAnally submits that the liquidation provisions of the Companies Act 1993 are not applicable here, because KDBS has not in fact been put into liquidation, even though the circumstances are such that KDBS should have been put into liquidation rather than be the subject of a dissolution by consent.

[11]Mr McAnally proposes that the matter be dealt with as follows:

(a)First, the applicants, as trustees, are not bound by the Instrument. An instrument of dissolution is binding only on members of the society.

(b)Secondly, where there is any inconsistency between the Instrument and KDBS’s rules, and its wider obligation to creditors, the latter must prevail.

(c)Thirdly, the insolvency of KDBS, and the misstatement of its assets and liabilities in the Instrument, means that in the first instance, the trustees must satisfy KDBS’s obligations to its creditors before any consideration can be given to the rights of members under the rules.

[12]                Mr McAnally submits that, as a matter of principle, and in the context of a solvent dissolution, the trustees’ fiduciary obligations would ordinarily be owed to the members of the Society in a manner that is analogous to the powers and duties of directors of a company. However, for present purposes, because KDBS is hopelessly insolvent, and there is no prospect of any distribution of funds and property to its members, then just as with an insolvent company, the trustees must at the very least have regard to the interests of KDBS’s creditors.

[13]              In Mr McAnally’s submission, the jurisdiction to apply for directions in this case is contained in s 66 of the Trustee Act 1956 which provides:

Right of trustee to apply to court for directions

(1)Any trustee may apply to the court for directions concerning any property subject to a trust, or respecting the management or administration of any such property, or respecting the exercise of any power of discretion vested in the trustee.

(2)Every such application shall be served upon, and the hearing may be attended by, all persons interested in the application or such of them as the court thinks expedient.

[14]              Mr McAnally says it is not expedient to comply with the notice requirement contained in s 66(2) because the only class of persons potentially affected by the present application are the creditors of KDBS. Here, notice is likely to be a difficult

and time-consuming exercise given the geographical spread of KDBS’s creditors. In some instances, substituted service would not be possible given the law of the country in which service is effected2 – for example, Denmark, which only permits service through court-appointed officials. Further, Mr McAnally submits, the members of KDBS are not “interested in the application” for the purposes of s 66(2), since there will be no surplus available for appropriation or division of the funds and property, among them.

[15]              Thus, in all the circumstances, Mr McAnally says the application should appropriately be dealt with by the Court on a without-notice basis.3 Hence the application to commence by originating application is made.4

[16]              The directions are set out in the without notice originating application for directions, dated 16 March 2016. The directions sought are intended to enable and facilitate the applicants in conducting what would effectively be a liquidation of KDBS, and specifically giving priority to the interests of KDBS’s creditors rather than its members.

Analysis

[17]              I agree with Mr McAnally’s submission that s 115 contemplates a situation where a society is actually solvent. Clearly KDBS is not. In my assessment, the most appropriate course is to proceed with the dissolution of KDBS by appointment of a liquidator. My reasons are as follows.

[18]              First, if Mr McAnally’s trustee/director analogy is correct in the context of dissolution of a society, it cannot be the case that a trustee can, at the same time, also assume the role of a liquidator. The Companies Act 1993 has specifically provided that a person who has been a director of a company may not be appointed or act as a liquidator of that company.5 That is because the interests being protected are not aligned.

2      High Court Rules, r 6.32(4).

3      High Court Rules, rr 19.10 and 7.46(3).

4      High Court Rules, r 19.5.

5      Companies Act 1993, s 280(1)(c).

[19]              Secondly, the authorities to which Mr McAnally refers clearly stipulate that an instrument for dissolution “cannot bind anyone” other than a society and its members.6 The trustees were appointed for the purposes of dissolution by virtue of the Instrument so, in my view, the powers and duties vested in them must affect only the parties bound by the Instrument (ie, the Society and its members). It seems inappropriate, therefore, to hold that creditors are subject to the decisions of trustees, when the Instrument itself is not intended to bind or interfere with the rights of third parties (including creditors).

[20]              Thirdly, Parliament has clearly stipulated what it considers to be the appropriate course to be undertaken when dissolving a society in circumstances where it is insolvent. Section 118 of the Act provides that, so far as applicable and with the necessary modifications, a society shall be deemed for the purposes of any liquidation under the Act to be a company, and the provisions of parts 16 and 17 of the Companies Act 1993, relating to the liquidation of companies, shall apply. Section 253 of the Companies Act sets out the principal duty of a liquidator, which is:

(a)to take possession of, protect, realise, and distribute the assets, or the proceeds of the realisation of the assets, of the company to its creditors in accordance with this Act; and

(b)if there are surplus assets remaining, to distribute them, or the proceeds of the realisation of the surplus assets, in accordance with section 313(4)—

in a reasonable and efficient manner.

[21]              Other duties of a liquidator are also set out in ss 255 to 258A. Therefore, it is in my view unnecessary and inappropriate to require trustees under an instrument of dissolution to act, in the first instance, in accordance with the interests of a society’s creditors, when specific provisions for such a context are already (and legislatively) in place.

[22]              Fourthly, the real position is that KDBS is unable to pay its debts.7 For the purpose of transparency, KDBS should be put into liquidation on the grounds that it is

6      That appears to be consistent with the scheme of the Building Societies Act. See ss 115(4) and 118.

7      Companies Act, s 2: “Insolvent”.

unable to pay its debts. That position is quite different from that envisaged by s 115 of the Act, which contemplates a situation where a society is solvent.

[23]              For these reasons, I decline to make an order giving the directions sought by the applicants. The proper and appropriate course is for the applicants to report to the members of KDBS and inform them of KDBS’s insolvent position, and notify them of the process set out in s 118 for putting KDBS into liquidation. If any or all of the trustees are able and willing to assume that role, subject to meeting the qualifications of liquidators,8 they are to make that plain to the members authorising an application for the appointment of a liquidator.

Conclusion

[24]For the reasons given, the application is dismissed.

Davison J

8      Companies Act, s 280.