Lawton v Redemptech Holdings Pte Limited
[2022] NZHC 21
•17 January 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2015-404-002634
[2022] NZHC 21
BETWEEN KENNETH GEORGE LAWTON
Plaintiff/Applicant
AND
REDEMPTECH HOLDINGS PTE LIMITED
First Defendant/Respondent
STEPHEN GEOFFREY BENNETT
Second Defendant/RespondentGRAHAM ANTHONY VANKAN
Third Defendant/Respondent
Hearing: 6, 7 December 2021 Appearances:
M C Black and L Wallace for Plaintiff/Applicant
B L Gray and Mr Cumberland for Defendants/Respondents
Judgment:
17 January 2022
JUDGMENT OF VENNING J
This judgment was delivered by me on 17 January 2022 at 3.30 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date……………
Solicitors: Craig Griffin & Lord, Auckland
Race Douglas Burke, Dunedin
Counsel: M C Black, Auckland
B Gray/Mr Cumberland, Dunedin
LAWTON v REDEMPTECH HOLDINGS PTE LIMITED [2022] NZHC 21 [17 January 2022]
Introduction
[1] Kenneth Lawton obtained judgment against Redemptech Holdings Pte Ltd (RHL) in the sum of $823,917.32.
[2] Mr Lawton now seeks an order that an interim charging order issued on 6 September 2017 be made final over RHL’s estate right, title, interest and beneficial interest (whether vested or contingent) in:
(a)a loan payable to RHL from Redemptech Energy SPV1 Pte Limited (RESP);
(b)certain trade and receivables;
(c)specific loans payable to RHL by Mr Bennett and Mr Vankan; and
(d)certain income revenue payable to RHL.
Mr Lawton also seeks related and consequential orders and costs.
[3] The application is opposed by RHL and its directors, Mr Bennett and Mr Vankan.
Background
[4] The general background to the proceedings can largely be taken from the judgment of Jagose J following the challenge by RHL to a previous charging order and subsequent enforcement process undertaken by Mr Lawton.1
[5]On 15 December 2015, Mr Lawton obtained judgment in the amount of
$823,917.32 on RHL’s admission of Mr Lawton’s claim for that sum.
[6] An interim charging order was then made in Mr Lawton’s favour over RHL’s “estate, right, title, interest and beneficial interest (whether vested or contingent) in
1 Lawton v Redemptech Holdings Pte Ltd [2017] NZHC 3104. I have applied the definitions above to the text.
any money, shares or other personal property, including held under or because of any express or implied trust”. A final charging order was made in similar terms in February 2016. In March 2016, this Court ordered the Sheriff to sell RHL’s property to meet the judgment sum.
[7] The interim charging order charged RHL’s identified property with payment of its judgment debt to Mr Lawton. In particular the interim charging order applied to:
(a)RHL’s 32.050% ownership (as the General Partner) and interest in Redemptech Supporters LP (RSL);2
(b)the one hundred percent (100%) one share in Redemptech Limited (Redemptech) the initial general partner of the RSL;
(c)the International Patent Application number relating to a high efficient electric generator, PCT/US2012/069449; international filing date: 13 December 2012;
(d)the exclusive global rights to licence the HEG Technology, held and or owned by RHL.
[8] For context, RHL is part of a group of related entities involved in the development and commercialisation of high efficiency generator technology (HEG technology). The HEG technology was invented by Dr Robert Holcomb, who transferred his patents and intellectual property rights in the HEG technology to Redemptive Technologies Limited (RTL), a company registered in the British Virgin Islands and beneficially owned by Dr Holcomb.
[9] RTL engaged RHL under a management services agreement as RTL’s corporate manager, to undertake commercial development of the HEG technology.
[10] Redemptech Supporters LP (NZ) (RSL) is a New Zealand limited partnership, whose members provided capital for the commercial development of the HEG
2 Later adjusted to 27%: see [15].
technology, in anticipation of a 20 per cent share of licence fee revenue to be derived from the HEG technology’s commercial application.
[11] Redemptech was the initial general partner in the limited partnership and owner of 99.5% of the capital of the limited partnership. It subsequently transferred 34% to RTL in exchange for a share in the royalty/licensing rights. Mr Delugar was the initial limited partner, holding 0.5% of the limited partnership’s capital. Mr Delugar was also a partner in Denham Bramwell, RHL’s solicitors at the time. Redemptech funded the ongoing development of the technology by selling down its remaining interest in the RSL to investors from time to time.
[12] In January 2012 RTL agreed to transfer its 34% of the capital of the limited partnership to RHL.
[13] RHL was served with the interim charging orders in January 2016. In February 2016, Mr Lawton sought and obtained a final charging order over the property identified in the interim order’s paragraphs (a), (b), and (d), and leave “to apply further for orders to enforce the charging order over the International Patent Application referred to in the interim charging order”.
[14] In March 2016, this Court issued a sale order to the Sheriff at Auckland, authorising him to seize RHL’s land and chattels, and sell them to pay the judgment debt to Mr Lawton. The Sheriff approved a notice of sale for publication in the business and public notices sections of the New Zealand Herald in April 2016.
[15] The Sheriff also appointed John Whittfield, an insolvency practitioner, to issue and receive tender documents, and approve particulars and conditions of tender, which specified the subject property in identical terms to those set out at the interim order’s paragraphs (a), (b), and (d), with the exception of the reference to the percentage figure at (a).
[16] In May 2016, on conclusion of the tender, the Sheriff issued a transfer notice confirming sale and transfer to Mr Lawton of the property set out at paragraphs (a),
(b) , and (d) of the interim order, now specifying the percentage figure in (a) at 27 per cent. Mr Lawton paid $180,000 for the transfer of the property.
[17] In July 2016, Mr Lawton obtained a summons for RHL’s director, Stephen Bennett, to attend this Court for examination on RHL’s means of satisfying the judgment debt to Mr Lawton. The examination occurred on 22 September 2016.
[18] Following the examination and in light of information gained during it, Mr Lawton obtained a further interim charging order in September 2017. The further interim charging order dated 6 September 2017 but issued on 13 September 2017 charged:
(a)a loan payable to RHL from RESP;
(b)trade and other receivables comprising current assets of RHL payable by RTL;
(c)loans payable to RHL from Mr Bennett and Mr Vankan to the value of SGD 523,125;
(d)loans payable to RHL by Mr Bennett and Mr Vankan to the value of SPD 84,000; and
(e)loans payable to RHL from Mr Bennett and Mr Vankan to the total value of USD 43,340; and
(f)income revenue of USD 50,000 payable each month to RHL as recorded in the management services agreement dated 9 February 2009 with RTL, which amounts are payable or accrue to the benefit of the liable party by RTL.
[19] In his judgment delivered on 13 December 2017 Jagose J dismissed RHL’s application to set aside the first enforcement process.
[20] The current application for final charging orders is the second amended application. On 8 November 2017 Mr Lawton had applied for a further final charging order and directions for sale and transfer of other assets owned by RHL. That application was adjourned for a further date to be allocated. Between the delivery of Jagose J’s judgment and mid-2021 there was a limited exchange of correspondence between Mr Lawton’s and RHL’s advisers regarding requests for further financial information relating to RHL.
[21] On 8 July 2021 Mr Lawton filed an amended notice of application. Then, on 4 August 2021, he filed the present amended application number (No. 2) for final charging orders, which is the application now before the Court.
The parties’ positions
[22] In short, Mr Lawton alleges that RHL either has assets to satisfy the charging order or that since the issue of the earlier charging orders and the interim charging order on 13 September 2017 Mr Bennett and Mr Vankan have amended RHL’s financial records and taken other steps with the intention of defeating his ability to enforce the judgment against the charged interests. As a consequence, the transactions are either invalid or Mr Bennett and Mr Vankan have incurred personal liability for payment of the judgment debt under r 17.56.
[23] The defendants’ response is that Mr Lawton is seeking to charge assets that are not properly assets of RHL and cannot be charged and subsequently executed to enforce his judgment. They deny that Mr Bennett and Mr Vankan have any personal liability for the judgment sum.
Charging orders
[24] Relevantly, for present purposes r 17.53 provides a charging order may charge personal property, including:
(a)debts;
(b)rights in a partnership;
(c)shares in a New Zealand company;
(d)an estate right or interest in a trust.
[25]Under r 17.54 the charging order is interim in the first instance.
[26] The effect of an interim charging order is that the assets subject to that charging order cannot be paid over or assigned: r 17.55. With the possible exception of an interim charging order over debts, the interim order does not give priority, but acts as a stop order.3
[27] If a person served with the interim charging order breaches the order the Court may order them to pay the amount paid over or at least sufficient to pay the judgment debt: r 17.56.
[28] Rule 17.60 provides that once a charging order is final the Court may direct the issue of a sale order against third parties’ property and sell any of the charged property to satisfy the judgment debt.
The RESP loan
[29]The interim charging order which is sought to be made final applies to the:
loan payable back to [RHL] from [RESP] … which is recorded in [RHL’s] financial statements for the financial year ended 31 December 2014, … a loan agreement dated … 18 March 2014, … and in the Notes of Evidence from the examination of Stephen Bennett … .
[30] On 18 March 2014 RHL and RESP entered an agreement pursuant to which RHL advanced USD 1,370,000 to RESP (the RESP loan). The agreement included the following terms:
Loan Duration
3.1The duration of the Loan shall be the time elapsed, from the date of this Loan Agreement, to 7 days past the receipt of project funding by the Borrower, from PLG Capital Funding Group LLC.
Interest
3 Re Ben Green Advertising Co Ltd, ex parte E F Jones Ltd [1932] NZLR 1511.
4.1 So long as the Loan or part thereof remains unpaid, [RESP] shall pay [RHL] interest thereon at the rate of 5% per annum payable in arrears if demanded by [RHL].
[31] In his evidence at the examination and in his affidavit of 22 November 2017 Mr Bennett explained the background to the loan.
[32] As well as being directors of RHL, Mr Bennett and Mr Vankan are also directors of RESP. In March 2014 RESP was seeking funding for the HEG project. PLG Capital Funding Group LLC (PLG) had agreed to provide funding for the project but required payment of a deposit of USD 1.37 million in order to process the loan.
[33] RHL agreed to provide funding to RESP to provide the deposit of USD 1.37 million. It did so by selling part of its interest in the limited partnership to Mr Lawton and the Joel Danford/Bamf Family Trust (and others). A put option was also available.
[34] While RHL provided the funds and the deposit was paid to PLG, the funding from PLG never materialised. Mr Bennett says that RESP has been endeavouring to obtain a refund from PLG ever since but to date has been unsuccessful.
[35] The defendants’ position is that the loan is not due for repayment as the project funding has not been received from PLG. It is impractical to suggest that interest could be paid as RESP has no funds. Further, RHL has not demanded interest. Mr Gray submitted the interest clause existed to cover the situation if RESP failed to pay the loan following receipt of the project funding. The failure of PLG to provide the project funding was the cause of all parties’ losses in the matter.
[36] Despite the broad wording in the application, Mr Black advised that the final charging order sought was directed at the interest that RHL was entitled to demand. He submitted that the express words of the loan agreement are clear.
[37] The principles as to the construction of commercial documents have been discussed and considered in detail in the cases of Investors Compensation Scheme v West Brunswick Building Society; Vector Gas v Bay of Plenty (Vector); and Firm PI 1
Ltd v Zurich Australian Insurance Ltd (Firm).4 An objective approach to the interpretation of a commercial contractual interpretation is required.
[38] In Firm PI 1 Ltd the majority of the Supreme Court accepted that, in interpreting commercial contracts, the Courts should have regard to their commercial purposes and to the structure of the parties’ bargain.5 However later Arnold J noted:6
[that] where contractual language, viewed in the context of the whole contract, has an ordinary and natural meaning, a conclusion that it produces a commercially absurd result should be reached only in the most obvious and extreme of cases.
[39] I accept Mr Gray’s submission that the loan duration clause is clear. The principal of the loan only becomes repayable by RESP seven days after the receipt of project funding from PLG. The intent was that RHL’s advance of the USD 1.37 million would be repaid from the substantive loan funding to be advanced by PLG to RESP. As that has not occurred, the loan principal of USD 1.37 million is not presently repayable.
[40] The position in relation to interest is somewhat different. The interest clause provides that until the loan is repaid RESP will pay RHL interest at five per cent per annum in arrears, if demanded, by RHL. Unless and until RHL is repaid the USD 1.37 million it advanced to RESP, RHL has the right to demand interest. Although they may have common directors, RHL and RESP are separate legal entities. There are sound commercial reasons why RHL may want to demand interest. As a matter of construction, RHL has the right to demand interest. If demand is made, the interest is payable.
[41] However, at the present time Mr Bennett and Mr Vankan as directors of both RHL and RESP have had little incentive to demand interest from RESP on behalf of RHL. No demand has been made.
4 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL); Vector Gas v Bay of Plenty (Vector) [2010] 2 NZLR 444; and Firm PI 1 Ltd v Zurich Australian Insurance Ltd (Firm) [2014] NZSC 147, [2015] 1 NZLR 432.
5 Firm PI 1 Ltd v Zurich Australian Insurance Ltd (Firm), above n 4, at [79].
6 At [93].
[42] Therein lies the problem for Mr Lawton with this aspect of his application. RHL has not demanded interest under the loan agreement with RESP. In the case of a debt a charging order may charge a debt “due or accruing due to the liable party…”.7 The debt must be actually due or accruing at the time of the application for the charging order. An application relating to a debt that may or may not be due in the future is not sufficient.8 In the present case there is no interest debt due or accruing to RHL unless and until a demand is made.
[43] Mr Black submitted that the interest could be regarded as due by reason of an existing obligation and as such it could be attached, relying on the cases of Campbell v King and Boylan v Bloxsome.9
[44] However, those cases are distinguishable and, properly analysed, do not support Mr Lawton’s case. In Campbell v King the judgment creditor sought to charge the interest of the judgment debtor in the salary payable by a county council to him as engineer.10 At the time the charging order nisi was served there was no salary due to the debtor, but after the order nisi was served his next tranche of salary for three months accrued and became due and payable. Cooper J confirmed that an accruing debt is a debt which is represented by an existing obligation even if not yet actually payable. For the debtor’s salary to be attached it must be already earned and due and payable. Where there is nothing due or accrued at the time of the service of the charging order nisi there is no debt or sum of money due or accruing due to which any order can apply. As there was no salary due at the time the order nisi was served the application to make it final was dismissed.
[45] In Boylan v Bloxsome Connolly J upheld the charging order against the debtor.11 Objection was taken to it on the basis it had issued on 30 January purporting to charge salary, income or wages due to the debtor on 31 January. Connolly J accepted that, as at 30 January, while payment was not due, a sum of money was due
7 High Court Rules 2016, r 17.53(b)(i).
8 Rae v Crumpe (1889) 7 NZLR 723; Andrews v Farmer [1924] NZLR 504; Dunlop and Ranken Ltd v Hendall Steel Structures Ltd [1957] 1 WLR 1102.
9 Campbell v King (1909) 12 GLR 333; and Boylan v Bloxsome (1892) 11 NZLR 49.
10 Campbell v King, above n 9.
11 Boylan v Bloxsome, above n 9.
to the debtor every day he worked. That sum was accruing and became payable at the end of the month. The charging order was therefore effective.
[46] The concept of debts due and accruing due was also considered by Tipping J in the Re Peter Austin Ltd.12 Tipping J cited the following statement of Lindley LJ in Tapp v Jones with approval:13
An accruing debt, therefore, is a debt not yet actually payable, but a debt which is represented by an existing obligation.
[47] In the present case there is no existing interest deb. Nor is there any accruing obligation in relation to interest under the loan. In the absence of a demand, there is nothing to trigger the obligation to pay interest and thus, no accruing debt.
[48] Mr Black sought to address that issue by reliance on the comments of the Court in Catley Farms Ltd v ANZ Banking Group (NZ) Ltd, where the Court noted that, in the case of a promise to pay a present debt on demand, an action can be brought at once without any demand other than the writ (proceeding).14 But an application to make a charging order final is not a writ or a proceeding as such and, in any event, the current application is directed at RHL not RESP which is the party liable to pay in response to the demand. No demand has been made of RESP.
[49] For the above reasons the principal of the RESP loan and interest that is potentially payable under it are not debts that can be charged under r 17.5(3).
Trade and other receivables - RTL
[50] Next, Mr Lawton seeks a final charging order in respect of trade and other receivables payable by RTL to RHL.
[51]The interim charging order which is sought to be made final applies to:
Trade and Other Receivables comprising current assets of [RHL] repayable by [RTL] … recorded in [the RHL] Financial Statements for the financial year ended 31 December 2014 …”.
12 Peter Austin Ltd, Re [1990] 2 NZLR 245.
13 Peter Austin Ltd, Re, above n 12, at 252, citing Tapp v Jones (1875) LR 10 QB 591 at 527..
14 Catley Farms Ltd v ANZ Banking Group (NZ) Ltd [1982] 1 NZLR 430.
[52] RHL’s financial statements for the 2014 financial year recorded trade and other receivables (which were solely due from RTL) at SGD 5,529.616.
[53] The background to the accrued receivables is to be found in the Management Services Agreement (MSA) between RTL and Redemptech Ltd dated 9 February 2009 (subsequently assigned by Redemptech to RHL on 31 December 2010).15 At article 6, compensation and expenses were provided as follows:
Section 6.1 [Redemptech] Fee. In consideration of [Redemptech] performing the Services hereunder in accordance with the terms and conditions of this Agreement, RTL shall pay the [Redemptech] Fee to [Redemptech] in monthly [instalments] on the first business day of each calendar month. All sums payable to [Redemptech] under this Agreement are exclusive of any goods and services tax (GST) which shall, where applicable, be paid in addition at the rate in force at the due time for payment.
Section 6.2 Expenses. RTL shall, within fifteen (15) days after request therefore, reimburse [Redemptech] for all out-of-pocket expenses reasonably incurred by [Redemptech] in the performance of its obligations hereunder (including, without limitation, provision of the Services). Project-specific expenses shall be reimbursed to [Redemptech] on the basis of cost plus 5%. Project-specific expenses may include, without limitation, (i) materials and equipment related to technology development, (ii) external consultants and employees engaged to assist in a specific technology development project, (iii) patent filing and maintenance costs, and (iv) travel expenses and allowances. [Redemptech] may invoice RTL for expenses actually incurred on a monthly basis, or expenses projected to be incurred during the coming month. If projected expenses are invoiced, [Redemptech] shall, in the month following the incurrence of the expenses, provide supporting documentation reflecting the actual expenses incurred.
Section 6.3 Development and License Fee. As compensation for its role in the development of RTL's technology and the management of its global licensing, [Redemptech] shall receive (i) 1% of any license fee, royalty, or similar revenue received by RTL, and (ii) 5% of any equity interest received by RTL in lieu of license fees, royalties or similar revenue. The amount specified in the foregoing (i) shall be payable to [Redemptech] within seven business days following receipt of such revenue by RTL, and the equity interest specified in the foregoing (ii) shall be transferred to [Redemptech] simultaneously with RTL's acquisition thereof.
[54] As noted earlier, RTL engaged Redemptech and, after the assignment, RHL, to act as RTL’s corporate manager to undertake commercial development of the HEG technology. The defendants’ position in relation to the RTL receivables is that there
15 In consideration of the assignment of the MSA RHL acknowledged its obligation to repay USD 100,000 to Redemptech upon demand and agreed to pay interest at the rate of seven per cent per annum in arrears if demanded.
had always been a clear understanding between RHL and RTL that, although RHL would invoice RTL for the services provided under the MSA on a monthly basis, no invoices would be payable during the research and development phase.
[55]Mr Bennett explained the simple reason was:
[that] until such time that matters had been advanced beyond the research and development phase and the HEG Technology was being licensed, no revenue was being generated. As RTL’s only source of income was the revenue that it was to receive from the licensing of the HEG Technology, it would be unable to commit to monthly expenditure of $US50,000.00 for the provision of the management services because until such as time as matters had progressed beyond the research and development phase to the licensing phase there would be no revenue stream from which RTL could make payment.
[56] Mr Bennett says that, while that arrangement was not expressly recorded in the MSA it was always agreed and understood. Further, in March 2017 Dr Holcomb walked away from RTL and his partnership with Mr Bennett and Mr Vankan which placed doubt over the realisation of future license fee revenue in RTL.
[57] As noted, the 2014 financial year recorded trade and other receivables (which were solely due from RTL) at SGD 5,529.616. The RTL receivables figure has varied since the 2014 accounts. For example, the 2016 accounts signed off by Mr Bennett and Mr Vankan in January 2018 confirmed the RTL receivables for that 2016 year were SGD 6,737,370.
[58] However, amended accounts were subsequently produced in July 2018 for RHL for the 2015 and 2016 years. In those accounts the RTL receivables were reduced by over SGD 4 million and were recorded at the reduced figures of: SGD 1,965,499 in 2015 and SGD 2,113,511 in 2016.
[59] Mr Bennett accepted the accounts had been adjusted and explained the accountants made the adjustments:
[t]he ones that were filed, pushed to our accountants Richton on 22 January were returned and required the amendments. So that’s what happened between there. The accountant, our accountants in Singapore, a firm called Richton, required us to make those amendments which were why there's a change in the accounts between January and July of each of those years.
And later:
Now, the reason for the amendment with the accountants is the recharges, which makes up the lion’s share of spend, was actually paid for using the [RSL] partnership interests, 34% [RSL] partnership interests, that was provided by [RTL] to [RHL], the 34,000,000 by (inaudible 12:43:10) back. Essentially, [RTL] provided funds to pay for its own recharges. Now, what the account (inaudible 12:43:22) for recognises we were including recharges in our balance sheet when we should not have been doing that because the recharges themselves were being paid for by the RSL sales related to the 34% RSL interests, and effectively deducted their 34,000,000 paid back. So, their position which we’ve understood was that they should not be part of the financial statements (inaudible 12:43:48) which is why that recharge amount was removed and kept off balance sheets as a tally.
[60] Mr Black submitted the amended accounts were unreliable. He pointed to a further example, namely an invoice for USD 2,100,000 which, although issued in 2016, was not disclosed in either the original or the amended 2016 accounts.
[61] In the end result, not much may turn on the precise figure, as even the SGD 2 million in 2016 would be sufficient to meet Mr Lawson’s judgment. The position is, however, complicated by the delay between the issue of the interim charging order and the application for the final charging order. Given that a charging order acts as a freeze or stay, a delay in applying for a final order creates difficulties where the debtor is engaged in trading. Receivables due to a trading services entity will, by their nature vary, if and when payments are made, and further services are rendered.
[62] A further and major complication in the present case for Mr Lawton is the deed of acknowledgement of debt between RHL and RTL which acknowledges that RHL owes RTL USD 34 million. The background to that is RTL’s agreement to sell its interest in the limited partnership (representing 34 per cent of RSL’s total committed capital) to RHL that was concluded on 12 January 2012. Payment was recorded as satisfied by RHL entering the deed of acknowledgement of debt relating to the USD 34 million. The debt was payable on demand after 12 January 2013.
[63] After taking accounting advice Mr Bennett said RHL determined to account for both the 34 per cent RSL partnership interest asset and the co-existent USD 34 million debt liability “off the balance sheet”. The intention always was that RHL would sell down the 34% RSL partnership interest it held to continue funding the
ongoing research and development of the technology until RTL’s operations were revenue generating.
[64] In short, RHL and Mr Bennett’s position is that at the time of the issue of the interim charging order on 6 September 2017 the receivables due to RHL from RTL were more than offset by the USD 34 million debt owed by RHL to RTL. Mr Gray submitted that any receivables owed by RTL to RHL should be set-off against the outstanding debt of USD 34 million.
[65] Mr Balbinder Singh Gandar, a director of RTL, has confirmed that, following the previous order directing the sale of 27% of RHL’s interest in the RSL partnership to Mr Lawton on 4 May 2016, RTL responded by issuing RHL with a notice of demand on 24 May 2016 requiring it to pay the USD 34 million or to return the partnership interest. With the transfer of 27% of the partnership interest to Mr Lawton under the previous sale order it was impossible for RHL to return the partnership interest. The debt of $34 million remained owing and repayment has been demanded.
[66] Mr Gandar said RTL had suspended action on the demand pending a possible settlement with Mr Lawton and a potentially more favourable outcome for RTL, however, the demand remains unsatisfied.
[67] I accept the evidence of Mr Bennett regarding the 34 million debt owing by RHL to RTL. It fits with the background to the commercial relationship between the parties and is supported by the acknowledgement of debt documentation and the evidence of Mr Gandar.
[68] As a result, the debt RTL owes RHL is more than offset by the debt RHL owes RTL. That raises the issue of competing priorities between the debts owed by RHL to Mr Lawton and RTL. While a final charging order over property other than land will give priority over all subsequent equitable interests, with the possible exception of debts, an interim charging order does not give any priority.16
16 Oranga Holdings Ltd v Duke [1994] 3 NZLR 732; and Marr v Arabco Traders Ltd HC Auckland A1195/77, 21 August 1987.
[69] It is unnecessary to consider the possible exception in this case because the interim charging order in issue and which Mr Lawton seeks to have made final was dated 6 September and issued on 13 September 2017, both dates being after RTL had issued its demand. RTL’s pre-existing demand takes priority over Mr Lawton’s subsequent interim charging order.
[70] The case of Fraser and Others v Oystertec PLC and Others17 referred to by Mr Black discusses the issue of set off in the context of the United Kingdom third-party debt order regime. The principles and authorities referred to in that case are applicable to the present case. Oystertec had obtained an interim third-party debt order against D, a former shareholder. D held three credit accounts with Y Bank. Oystertec served the interim order on Y Bank. Y Bank resisted Oystertec’s application for a final order on the basis, inter alia, it was entitled to a set-off as D owed it more under a loan facility than was held in his accounts and the bank was entitled to make demand at any time.
[71] While the Court held that, as the bank had not made demand before the interim order was served on it, and so the moneys owing to it were not due and owing, it is apparent from the reasoning that if the bank had made demand, the Court would have permitted the set off and accepted that the bank would have had priority. As it was, the Court exercised its discretion to decline to make the orders final. In the course of the decision the Court referred to the authority of Tapp v Jones, Pooley garnishee, where Blackburn J had stated:18
I agree that no greater right is given to the creditor than the debtor had. It is obviously just that if a cross debt were due to the garnishee at the date of the attachment there should be a right of set-off in his favour, and I should strive hard to give effect to it if I could, though there would be difficulties in the way.
[72] Similarly, in the present case, Mr Lawton can be in no better position to seek to recover the debt RTL owed RHL than RHL was in. If RHL had sought to recover the receivables debt (whatever the quantum) from RTL, any such action would have been met by the RTL’s right to set off the $34 million debt owed to it by RHL. In this
17 Fraser and Others v Oystertec PLC and Others [2004] EWHC 1582 (Ch).
18 Tapp v Jones, Pooley garnishee (1875) LR 10 QG 591, 593; and see also OA v Grange Service Station [1968] NZLR 510 at 511.
case RTL’s right to set off has priority as RTL had made demand before service of the interim charging order.
[73] Mr Black sought to avoid the consequences of that for Mr Lawton by referring to the initial charging order. However, the Court is only concerned with the application to make the particular interim charging order issued in September 2017, final.
[74] Nor does the case of Hoverd Industries Ltd v Supercool,19 another case referred to by Mr Black, assist Mr Lawton’s case. In the Hoverd Industries case, the Court of Appeal held there was no present debt against which the set off claimed could be applied. In the present case there is such a present debt.
The RTL security registration
[75] As a related point concerning RTL, during the course of submissions Mr Black raised the issue of a security registration granted by RTL in favour of Redemptech which was completed on 16 February 2018. The security interest was in the sum of NZD 11,378,849. Mr Black noted that the security registration was created after the interim charging order issued on 13 September 2017 and after the defended hearing before Jagose J on 30 November 2017. He submitted that the actions of Mr Bennett and Mr Vankan as directors in executing the security rendered them personally liable. Mr Black submitted that, by executing the charge, Mr Bennett and Mr Vankan breached r 17.55 and have incurred personal liability under r 17.56.
[76] Redemptech was the initial general partner of RSL from 2009 to 2011, and the original corporate manager of RTL, before it assigned its rights under the MSA to RHL. Mr Gray submitted that Mr Bennett and Mr Vankan as directors of RL registered the security against Redemptech’s loan to RTL out of an abundance of caution. There was no intention to override Mr Lawton’s rights under the enforcement process. The security was registered to protect Redemptech’s interest “beyond the plaintiff’s judgment sum”.
[77]The applicable rule, 17.55, provides:
19 Hoverd Industries Ltd v Supercool [1995] 3 NZLR 577.
17.55 Effect of interim charging order
A person served with an interim charging order may not, except under rules 17.56 to 17.61 or with the leave of the court,—
…
(b)make, concur in making, or permit any conveyance, transfer, assignment, or disposition of any estate, right, or interest, or of any share in a partnership or company, of the liable party named in the interim charging order.
[78] A security interest meets the definition of a conveyance, assignment or disposition of a right. However, the introductory words of r 17.55(b) referring to the prohibited actions, namely to: “concur in making, or permit any such conveyance, assignment, or disposition” are qualified by the reference to “of the liable party”. The “liable party” in the present case is RHL, not RTL. To the extent it can be said that the security interest has conveyed, assigned or disposed of any such right or interest, the right or interest conveyed, assigned or disposed of is an interest of RTL not RHL. Rule 17.55(b) is not engaged and as a consequence r 17.56 does not apply.
The USD 50,000 monthly payment
[79] It is convenient to consider at this point the last item charged under the interim charging order, the income revenue of USD 50,000 payable each month to RHL under the MSA with RTL.
The interim charging order applies to:
Income revenue of $50,000.00 USD payable each month to RHL as recorded in a MSA between RTL … which amounts are payable and accrue to the benefit of RHL by RTL. The said income revenue stream is recorded in the MSA... and is also recorded in RHL’s financial statements for the financial year ending 31 December 2014 ... Ownership and entitlement to the said income revenue is also recorded in RSL’s resolution of partners in about December 2011 ...
[81] The terms of the MSA are clear. There is a contractual obligation that the fee shall be paid on the first business day of each month.
[82] Mr Bennett said that RHL invoiced RTL for the work it did and paid tax in Singapore accordingly. However, he said that there was effectively a side agreement
between the parties that the invoices were only to be paid by RTL after it became able to generate license fee revenue. While that does not accord with the express contractual terms, which would generally prevail,20 that does not assist Mr Lawton in this case. The short point is again that any demand for payment of this accruing debt is met by the same answer, namely that RTL is able to set-off the $34 million owed to it by RHL against any claim by Mr Lawton standing in RHL’s position to recover the invoiced monthly income revenue.
Directors’ loans
[83] That leaves the issue of the directors, Mr Bennett’s and Mr Vankan’s loans. The interim charging order charges:
(c)Loans payable ... to RHL by [Mr Bennett and Mr Vankan] to the value of SGD 523,125 as recorded in RHL’s financial statements for the financial year ended 31 December 2014. ...
(d)Loans payable … to RHL from [Mr Bennett and Mr Vankan] to the
value of SGD 84,000 as recorded in HSBC bank statement … which bank statements were produced at the examination on 22 September 2016. … And
(e)Loans payable back to RHL from … [Mr Bennett and Mr Vankan] to the total value of USD 43,340 as recorded in an email from Stephen Bennett to Ken Lawton dated 1 June 2017. …
[84] There is a conceptual difficulty with the applicant’s reliance on a record of the loans as at December 2014 when the interim charging order did not issue until September 2017. The interim charging order can only apply to assets in existence at the date of the charging order. Mr Bennett confirms that he and Mr Vankan agree that as at 31 December 2014, they had loan accounts totalling SGD 523,125 with RHL. However, the defendants’ position is that the accounts were effectively operated as shareholder current accounts with RHL with money coming in and going out from time to time and that, by September 2017, there was nothing owing by the directors to RHL. Mr Bennett’s evidence is that the accounts filed with the Accounting and Corporate Regulatory Authority (ACRA) in Singapore confirm that as at 31 December 2016 the amount due by the directors to RHL was SGD 2,420 and that by 31 December 2017 RHL owed the directors SGD 76,976.
20 Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UHSC 24.
[85] A principal issue between the parties on this point is whether the proceeds of sale of shares in Living Water Holdings Limited (LWHL) to a third party for $500,000 were introduced to RHL by the directors. The shares were held by Otakiri Trustee Company Limited (Otakiri), the trustee of both the SG and KA Bennett Family Trust and of the GA and ME Vankan Family Trust. The defendants say Otakiri agreed to sell the shares and advance the sale proceeds to them as loans by their respective trusts, which they then applied for the benefit of RHL by repaying its creditors, thus reducing their overdrawn current accounts.
[86] Mr Whittfield, the accountant appointed to assist the Sheriff in relation to the original sale order, provided two affidavits and was cross-examined. In his first affidavit he analysed the $500,000 received from the sale of the LWHL shares. He noted there were no bank accounts available and that the RHL accounts made no reference to funds introduced by directors as income. The accounts recorded that there was no remuneration of directors. Mr Whittfield considered the $500,000 could not be applied to reduce the directors’ loan accounts because, inter alia, there was no evidence of ‘trust resolutions’ and the $500,000 had not been recorded in the bank statements of RHL, rather it had been disbursed by the solicitors directly.
[87] A preliminary point is the accounting treatment of the $500,000 and Mr Black’s submission that, at best from the directors’ point of view, the $500,000 was a loan by them to RHL (rather than being applied automatically as a set off in the shareholders current account) so that even if they introduced funds of $500,000 they were unsecured creditors and the $500,000 could not be set off against the money they had drawn from RHL.
[88] In the course of his cross-examination, Mr Whittfield confirmed the uncontroversial proposition that Mr Bennett and Mr Vankan had apparently used directors’/shareholder’s current accounts for recording the sums they introduced into RHL and the funds they had withdrawn during each financial year. I do not consider there is any basis for Mr Black’s submission that the $500,000 was a separate loan – there was no for formal loan agreement and if the money was introduced by Mr Bennett and Mr Vankan for the benefit of RHL, it is properly regarded as part of the
usual practice of funds in and funds out of the current accounts so that it would have reduced the amount of any debit balance in their current account.
[89] I return to the issue of whether the $500,000 was introduced into RHL by Mr Bennett and Mr Vankan (as to $250,000 each). The background to the LWHL share sale is set out in the initial affidavits of Mr Lawton, Mr Whittfield, and Mr Bennett. Mr Whittfield accepts the documents show that on 13 May 2015, $300,000 was paid by Denham Bramwell Lawyers on the instructions of Otakiri in consideration of the release of security held by Joel Danford/Bamf Family Trust (the Danford interests) over all the shares of LWHL. This was paid to allow the sale of the shares in LWHL to a third party. In addition, Mr Whitfield noted that, apart from the $300,000 paid to the Danford interests:
(a)$133,000 was paid to Legacy Energy NZ Limited to repay a loan owed by RHL. That loan was documented;
(b)$50,000 was paid to MD and NT Jack;
(c)legal fees of $2,270.10 incurred by Otakiri were deducted;
(d)the balance of $14,729.90 was paid to Mr Bennett on the instructions of Otakiri.
[90] In his first affidavit in support of the final charging orders Mr Whitfield noted there was no documentation confirming any trustee resolutions relating to the alleged advance of funds to Mr Bennett of $250,000 and Mr Vankan of $250,000 as beneficiaries of the Otakiri Trust. He could find no reference to the directors, Mr Bennett’s and Mr Vankan’s loans being repaid via personal loans from them or as beneficiaries of their respective trusts.
[91] Mr Whitfield analysed the transaction as follows – Otakiri held and owned shares in LWHL. LWHL had given the security over all its shares in favour of the Danford interests. A third party offered to purchase a specific number of shares held by Otakiri Trust for $500,000. The Danford interests agreed to release their security
on receipt of $300,000. Otakiri then instructed Denham Bramwell, Lawyers, to make the various payments referred to. Mr Whittfield was not satisfied the evidence supported the defendants’ position that the $500,000 had been introduced by the directors to RHL.
[92] The defendants’ case is that the Danford interests were an investor in the technology (like Mr Lawton) but wanted security for his put option. The security provided was over the shares in LWHL, a company that Mr Bennett, Mr Vankan and a Mr Curd were involved in. When the Danford interests exercised the put option and sought repayment from RHL, to enable repayment the directors authorised Otakiri to sell its shares in LWHL and distribute the proceeds of sale to Mr Bennett and Mr Vankan personally to enable them to repay the Danford interests and another creditor of RHL. They say they effectively introduced the money for RHL’s benefit even though it never passed through RHL’s bank accounts.
[93] Mr Edward Taylor, the sole director of Otakiri and a chartered accountant of Auckland, swore an affidavit in response to Mr Whittfield’s affidavit. In it he confirms that Otakiri held 11,737 shares in LWHL. He reviewed and approved the application by the beneficiaries of the two family trusts, Mr Bennett and Mr Vankan to sell 3,515 shares in LWHL to a third party for $500,000 in order to provide funds as a loan from the trust to Mr Bennett and Mr Vankan in the sum of $250,000 in each case. That was recorded in trust minutes dated 15 April 2015, which he attached to his affidavit. The
$250,000 loans were also recorded in the balance sheets of the respective family trusts, and in the case of Mr Vankan, a loan agreement dated 15 April 2015 was completed for the purposes of Australian tax reporting requirements.
[94] Mr Taylor also confirmed that Otakiri did not provide a loan to RHL or make direct payment funding of any of the obligations of RHL. Mr Taylor said that he authorised the payments to be made direct from the Denham Bramwell Trust Account on the instructions of Mr Bennett and Mr Vankan.
[95] In his affidavit in reply sworn on 6 October 2021 Mr Whittfield did not directly refer to the evidence of Mr Taylor, although he did note that the directors had supplied documents relating to the loan from Otakiri with the trustee’s verification of the loans.
However, he noted that, except for Legacy Energy Limited, there was no documentation to show the recipients of the funds were creditors of RHL. Mr Whitfield suggests it is double accounting to claim that the $500,000 funds from directors was used to offset the starting balance of SGD 523,125 as confirmed as existed on 31 December 2014 and at the same time to claim the funds were used to pay other parties. He says the directors cannot claim to have paid $500,000 into the directors’ loans in and loans out account and also not show the disbursement of those same funds to the nominated parties.
[96] It is fair to observe that the accounting surrounding the sale of the LWHL shares and the disposition of the sale proceeds is not orthodox. However, taken overall and having regard to the documentation, the evidence leads me to conclude that Otakiri sold the shares at the directors’ request, advanced the sale proceeds to Mr Bennett and Mr Vankan (as to $250,000 each) as a loan and that Mr Bennett and Mr Vankan then directed Denham Bramwell to disburse the monies in accordance with the settlement statement authored by that firm. Otakiri did not advance the $500,000 to RHL as a loan.
[97] Further, the majority of the $500,000 introduced by the directors was applied to pay debts of RHL. The Danford interests were investors which had exercised their put option and had demanded repayment of their investment. Unlike Mr Lawton, the Danford interests had taken security to support the put option. The security was in the form of Otakiri’s shares in LWHL. The repayment of $300,000 to the Danford interests served two purposes. It provided the release of the security which enabled the sale of the shares in LWHL to a third party which in turn enabled Mr Bennett and Mr Vankan to repay the Danford interests. In doing so, they repaid an obligation that RHL otherwise would have had to repay the Danford interests’ investment.
[98] Next, as Mr Whittfield accepted, the $133,000 paid to Legacy Energy NZ Limited repaid a loan provided by that company to RHL. Again, a debt of RHL was repaid by funds provided by the directors personally.
[99] The evidence about the $50,000 paid to MD & NT Jack is limited. Mr Curd, a witness called by Mr Lawton, explained it as repayment of an advance he had made
to Mr Jack at Mr Bennett’s request (apparently on behalf of RHL). For some reason it was considered that structuring it that way would make the money more accessible. For present purposes it seems the $50,000 was repaid to Mr Curd, thus discharging an obligation Mr Bennett had incurred to him apparently on behalf of RHL.
[100] The legal fees related to the transactions including the release of Mr Danford’s security.
[101]The only monies disbursed to either of the directors personally was the
$14,729.90 paid to Mr Bennett’s account.
[102] In summary, the $500,000 was sourced from Otakiri’s sale of shares in LWHL. In each case $250,000 was loaned by Mr Bennett and Mr Vankan’s family trusts to them personally and they then applied the funds to make the above repayments. It would have been preferable if the money had been paid to Mr Bennett and Mr Vankan and they had then paid it into RHL so that RHL could then have paid its creditors rather than the shorthand version of the transaction which occurred. However, the ultimate effect is the same. Mr Bennett and Mr Vankan incurred loan obligations to their respective trusts for $250,000 each and authorised those funds (with the minor exception of the $14,729.90) to be applied to pay debts of RHL Journal entries within RHL could be created to confirm the correct position.
[103] Mr Bennett has also produced a reconciliation of amounts paid into and withdrawn from the directors’ current accounts to support the defendants’ position. He has also produced several accounts to support the entries. While I accept Mr Whittfield’s point that the reconciliation is Mr Bennett’s own work, and not all the base documents have been produced, on balance I accept that the evidence establishes that the directors applied $485,270.10 to the benefit of RHL from their own funds (sourced by the loans from the family trusts) and their current account should be credited accordingly. That (and the additional information provided by Mr Bennett) supports Mr Bennett’s evidence that, as at September 2017, the current accounts were close to zero, if not in favour of the directors.
[104] In any event, the Court would not take a strict approach and ignore the reality of the transactions overall. In the exercise of its discretion it would not make a final order without providing credit for the funds applied to the benefit of RHL.
[105] That leaves the issue of the two further sums claimed under the interim charging orders.
[106] The first is the sum of SGD 84,000 as recorded as advanced to the directors in the HSBC bank statements. Mr Bennett has deposed the total advances were actually
$88,000. The payments were made between 13 July 2015 and 23 December 2015. The attempt to enforce a final charging order over these payments suffers from the same conceptual difficulty. On the evidence, the sum did not remain outstanding as at September 2017. Again, I accept that on balance, Mr Bennett’s evidence shows that these funds were offset by payments the directors made into RHL.
The further sales of the Partnership Interests
[107] The final sum in issue is the sum of USD 43,340. Mr Lawton says that Mr Bennett and Mr Vankan owe that sum to RHL. He relies on an email of 1 June 2017 from Mr Bennett to him and Peter Webb (at Denham Bramwell) in which Mr Bennett said:
From January 2016 – January 2017, Limited Partner(s) (Redemptech Holdings Pte Ltd / Redemptech Ltd) sold down US$530,000 of its own Partnership Interest (US$425,000 sold by Holcomb in the USA; US$100,000 sold by Graham/Stephen) and applied as follows:
…
$21,670 Vankan personal loan
$21,670 Bennett personal loan
…
[108] The defendants accept that the total of USD 43,340 was advanced to them from the sales of interests in the limited partnership, but say the sales were of Redemptech’s partnership interests, not RHL’s so that any debt is owed to Redemptech, not RHL.
[109] The advances have not been accounted for in Mr Bennett’s reconciliation, so that if Mr Lawton is correct, and the money is owed to RHL rather than Redemptech, it would still be outstanding and could be the subject of a final charging order.
[110] The defendants’ position is that the original charging order prohibited any change to Mr Lawton’s 27 per cent or RHL’s remaining 0.191 per cent partnership interest so that the sales were by Redemptech not RHL. Mr Bennett says that is consistent with a further email from Mr Bennett to Denham Bramwell of 29 November 2017, just prior to the hearing before Jagose J:
In order to respect the Charging Order (dated 23 December 2015) imposed on [RHL] by Ken Lawton’s legal action, while at the same time still funding the ongoing development of the HEG technology, etc. etc., for the benefit of all parties, Redemptech Limited (New Zealand) determined with [RHL] that future RSLP transactions after the Charging Order were to be by way of a contra, using the RSLP interest owned by Redemptech Limited and sold by [RHL] as the manager for the HEG technology.
In this way, if the Lawton dispute had not previously settled, the 27.191% RSLP interest held by [RHL] at the time of the Charging Order would remain untouched. The RSLP interest is currently reflected 0.191% RSLP owned by [RHL] and 27% RSLP interest owned by Ken Lawton (in-dispute). This dispute is up for a High Court hearing on Thursday 30 November 2017.
Redemptech Limited is currently finalising its accounts for the year ending 31 March 2017 and confirms the RSLP movement between the companies for your records as follows:
Redemptech Limited (Limited Partner)
27% RSLP (31 March 2016 per Annual Financial Statements for Redemptech Supporters LP)
Less 2.345% contra (Redemptech Limited – Redemptech Holdings Pte Ltd RSLP transactions) for the value raised (refer attachment for details)
24 655% RSLP (31 March 2017)
Redemptech Holdings Pte Ltd (Limited Partner)
27 191% RSLP (31 March 2016 per Annual Financial Statements for Redemptech Supporters LP)
0.191% RSLP (31 March 2017) – Redemptech Holdings Pte Ltd
27 000% RSLP (31 March 2017) – Lawton (in-dispute).
[111] However, Mr Lawton has produced a series of prior emails which he says shows that the sales were actually of RHL’s interests in the partnership, not from Redemptech’s interests. The most relevant is an email of 16 February 2017 from Mr
Vankan to which he attached a list of RSL investors and their holding. The list disclosed sales and a related reduction of RHL’s interest in the RSL partnership of 2.25 percent coinciding with the sales. There is also a message sent from Mr Bennett’s phone attached to an email sent by Mr Holcomb on 23 March 2017 to Mr Delugar in which Mr Bennett refers to the previous charging and sales orders. Mr Bennett says that the 27% held by RHL is basically in dispute and that “We are still selling [RSL] through Singapore because we have [RSL] in NZ that can replace what was sold in the unlikely event this even goes to court and even more unlikely event, Lawton wins the case.” The references to Singapore and NZ can be taken to be references to RHL and Redemptech respectively.
[112] With one exception, the relevant sales agreements themselves also refer to the sales by RHL. The sales took place between December 2016 and March 2017, after the initial charging order and subsequent sale order in May 2016.
[113] The sales did, however, occur at a time when the defendants were challenging the previous charging and sales orders. The correspondence from the defendants referred to above confirms that at the time Mr Bennett and Mr Vankan considered (ultimately wrongly) that they would succeed in having the orders in Mr Lawton’s favour set aside, but if not, RHL’s interest in the RSL partnership (and sale to Mr Lawton) could be re-instated by a book transfer recording the sales were to be treated as from Redemptech rather than RHL. That is what occurred and is recorded in an email Mr Bennett’s sent to Denham Bramwell of 9 January 2018, in which he recorded that he had ceased to be a director of Redemptech and attached the revised schedule recording that RHL’s 27% interest in RSL had been transferred to Mr Lawton (and that RHL’s remaining interest was 0.191%). Redemptech’s share was recorded as being reduced by 2.345% to reflect the sales to the other investors.
[114] Mr Lawton suggests that shows that the defendants were willing to alter records to suit their purpose. However, when the entire chain of relevant correspondence is read and considered in context, it shows that the defendants considered they would be able to set the charging order and subsequent sale order which transferred RHL’s 27% interest in RSL aside, but if not, they intended to make RHL’s interest whole by the “book” transfer of RSL interests from Redemptech. That
is actually what occurred. Strictly, by entering agreements to sell RHL’s interest in the RSL partnership, the defendants acted in breach of the charging and sale orders, but nothing turns on that as they were able to make RHL’s (and through it) Mr Lawton’s interest in RSL whole again by treating the sales as from Redemptech.
[115] On that basis, and for that reason, the payment totalling USD 43,340 to Mr Bennett and Mr Vankan is properly regarded as a debt owing by them to Redemptech, not RHL.
Result
[116] For the above reasons the application to make the interim charging orders final is dismissed.
Costs
[117] Costs should follow the event. There is no basis for increased costs on the material before the Court. One set of costs on a 2B basis would seem appropriate. However, I formally reserve the issue of costs in the event there is information the Court does not have.
Venning J
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