Levin v Ikiua HC Auckland Civ-2007-404-6810
[2009] NZHC 879
•24 July 2009
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2007-404-6810
IN THE MATTER OF OPC MANAGED REHAB LTD (IN LIQUIDATION)
BETWEEN H D LEVIN AND B P JORDAN Plaintiffs
ANDPATRICK IKIUA First Defendant
ANDKENETI APA Second Defendant
ANDTESSA APA Third Defendant
ANDMARK CROSBIE Fourth Defendant
ANDDAVID SMITH Fifth Defendant
Hearing: 16, 17, 18, 19, 20 February 2009
Appearances: B H Dickey and G A D Neil for Plaintiffs
C Walker and M Smith for Defendants
Judgment: 24 July 2009
JUDGMENT OF HEATH J
This judgment was delivered by me on 24 July 2009 at 11.45am pursuant to Rule 11.5 of the High
Court Rules
Registrar/Deputy Registrar
Solicitors:
Meredith Connell, PO Box 2213, AucklandGilbert Walker, PO Box 1595, Auckland
LEVIN AND JORDAN V IKIUA AND ORS HC AK CIV 2007-404-6810 24 July 2009
Contents
The applications [1] The background facts [4] Distributions to and by beneficiaries of OPC Trust [28] The foundation for the claims [35] Findings of fact [46] The ACC debt: issue estoppel
(a) The problem [49]
(b) Is there an “issue estoppel”? [55] The s 298 claim [72] Money had and received [87] The subrogation claims
(a) Introductory comments [94]
(b) What is a trading trust? [96]
(c) Insolvency of trading companies and human trustees [103] (i) A trading company [104] (ii) A human trustee [109]
(d) Liquidation of the corporate trustee [114] (e) Subrogation in respect of recipient trusts [128] Claims against directors [138] Result [148]
The applications
[1] OPC Managed Rehab Ltd (OPC) is in liquidation. Accident Compensation
Corporation (ACC) is the only creditor that has had a proof of claim admitted.
[2] The liquidators of OPC discovered that, for much of its trading life, OPC had purported to act as trustee of the OPC Managed Rehab Trust (the OPC Trust). They ascertained that, notwithstanding non-payment of the alleged debt owing to ACC, significant sums of money had been distributed by OPC to the beneficiaries of the OPC Trust between January 2001 and January 2003.
[3] The liquidators now seek recovery of some or all of those moneys. In broad terms, the causes of action reduce to four:
a) OPC disposed of property to insiders, during the relevant specified period, for inadequate consideration: s 298 of the Companies Act
1993 (the Act).
b) Money had and received.
c) A right of subrogation to the indemnity of the trustees of three trusts, all of whom received distributions as beneficiaries of the OPC Trust.
d) Breach of directors’ duties.
The background facts
[4] Oceania Pacific Corporation Ltd was incorporated on 23 March 1999. Mr Ikiua and Mr Apa were its directors. They held the shares in Oceania in equal proportions. On 25 March 1999, Oceania entered into a one year fixed term contract with ACC to provide rehabilitation case management services during the period 1
May 1999 to 1 May 2000.
[5] On 10 June 1999, Mr Apa and his wife settled the Keneti and Tessa Apa Family Trust (the Apa Trust). They appointed themselves as trustees. Together with various family members, they were discretionary beneficiaries of that trust.
[6] OPC was incorporated on 11 April 2000. Mr Ikiua and Mr Apa were appointed as its directors. Oceania was the sole shareholder.
[7] On or about 15 May 2000, OPC entered into an agreement with ACC to provide rehabilitation case management services for members of the Pacific Island communities. That contract was for a period of one year.
[8] Under the 2000 agreement, OPC was required to invoice ACC for its services. ACC paid invoiced amounts to OPC’s nominated bank account. A term of that contract prohibited either party from assigning or otherwise transferring any benefits, rights, liabilities or obligations without the prior written consent of the other party.
[9] The contract between OPC and ACC began in early June 2000. The agreement ran on slightly beyond the anticipated one year term, ending on 23 June
2001.
[10] During the currency of the 2000 contract, in about November 2000, Mr Ikiua and Mr Apa received both legal and accounting advice on the establishment of a trading trust. They understood that the object was to transfer the beneficial interest in the company’s business in favour of beneficiaries of the proposed trust.
[11] A Deed of Trust (dated 1 December 2000) was prepared primarily on the advice of an accountant, Mr Kennerley. A firm of solicitors (Gaze Burt) provided some professional assistance, in relation to its terms. The most substantive advice from the solicitors was contained in a letter dated 20 December 2000, which suggested amendments that are incorporated into the signed version. For that reason, even though the Deed is dated 1 December 2000, it must have been signed after 20
December 2000.
[12] Gaze Burt’s communication of 20 December 2000 responded to a letter from Mr Ikiua dated 5 December 2000. Mr Ikiua confirmed, in that letter, that he understood that “the directors will remain responsible for irresponsible trading”.
[13] Gaze Burt, in their letter of 20 December 2000, foresaw problems arising if Mr Ikiua and Mr Apa were to remain as directors of OPC, while also being discretionary beneficiaries of the trust. The “need to introduce some level of independence into the overall structure” was raised by the solicitors.
[14] Gaze Burt also commented on what Mr Ikiua, had described (in his letter) as a key purpose of the trading trust: namely, asset protection. The solicitor stated that a trading trust did “not go very far in providing that”. He drew attention to s 38 of the Trustee Act 1956, entitling a trustee to be indemnified out of trust assets, and pointed out that any attempt to override that statutory indemnity was probably ineffective.
[15] The discretionary beneficiaries of the OPC Trust included trusts in which Mr
Ikiua and Mr Apa held beneficial interests, as well as charitable institutions.
[16] ACC continued to deal with OPC on the basis of the 2000 contract. Neither Mr Ikiua nor Mr Apa disclosed to ACC that the business undertaking was now held on trust for discretionary beneficiaries, including their family trusts. To the outside world, including its trade creditors, OPC continued to operate as before.
[17] Internally, changes were made in the way in which financial statements were prepared to reflect the basis on which assets of OPC were now held. Also, arrangements were made for a GST number, for the trust, to be obtained. Procurement of a separate GST number occurred some months after OPC began to trade as trustee.
[18] An issue involving alleged overcharging was raised by ACC at the beginning of 2001, not long after the time at which the OPC Trust was settled. Mr Ikiua accepted that, “inadvertently”, OPC had overcharged ACC during this period. OPC withdrew its claims and reissued relevant invoices. So, at the time OPC began trading as a corporate trustee, it was aware of allegations of overcharging that had some merit.
[19] By the end of January 2001, all trusts intended to benefit from distributions made out of the OPC Trust’s fund had been established. The Apa Trust was settled in June 1999 (see para [5] above) and the Ikiua Family Trust was formed on 8
December 2000. The Pacifica Life Trust (the Pacifica Trust) was incorporated, under the Charitable Trusts Act 1957, on 17 January 2001. I refer to the three trusts, collectively, as the “recipient trusts”.
[20] Mr Ikiua and Mr Apa were trustees of both the Ikiua Family Trust and the Pacifica Trust. Mr Crosbie was an independent trustee of the Ikiua Family Trust. Mr Smith was an independent trustee of the Pacifica Trust. Mr and Mrs Apa were the only trustees of the Apa Trust.
[21] While the income that OPC earned from the ACC contract was treated as trust property, Mr Ikiua and Mr Apa were careful to ensure that all trade creditors of OPC were paid in full, before making distributions to discretionary beneficiaries of the OPC Trust.
[22] The 2000 contract was renewed. A new contract was signed on 24 June
2001. It ended when notice given by ACC expired on 22 August 2002. On termination of the contract, ACC conducted an audit of claims during the contractual periods. As a result, ACC formed the view that $695,190 (excluding GST) had been overpaid to OPC.
[23] As part of ACC’s audit procedures, Mr Ikiua was interviewed by an ACC investigator, Mr Williscroft, in October 2002. ACC contends that Mr Ikiua admitted that OPC had overcharged. The admission is said to relate to invoices raised in respect of claimants whose rehabilitation needs were being managed by OPC but who had ceased to receive “weekly compensation”.
[24] On 13 August 2003, ACC issued a statutory demand to enforce payment of the money it contended had been overpaid. From then until October 2005, arguments about the validity of the statutory demand made their way through the Court system. The High Court upheld the demand in full: OPC Managed Rehab Ltd v Accident Compensation Corporation (High Court, Wellington, CIV 2003-485-
1839, 24 June 2004, Associate Judge Gendall). On 4 October 2005, the Court of Appeal upheld the statutory demand in respect of the lesser sum of $377,520: OPC Managed Rehab Ltd v Accident Compensation Corporation [2006] 1 NZLR 778 (CA).
[25] Mr Ikiua’s alleged admission to Mr Williscroft formed the basis of the Court of Appeal’s decision that there was no “real and substantial” dispute as to $377,520, being part of the overpayments alleged to have been made by ACC: at [68]. However, that finding must be read in the context of the lack of evidence on the reason for the alleged dispute proffered by OPC at the appeal hearing. O’Regan J, for the Court of Appeal, said:
[66] We acknowledge that Mr Ikiua’s affidavit records that he has not engaged in a detailed response to the allegations made by the ACC witnesses because he sees the fundamental issue as being whether there is a “debt due”. But once it is found that the “debt due” test has been met, the onus to show a fairly arguable basis on which it is not liable falls on OPC, and Mr Ikiua’s stance of not engaging in disputing ACC’s evidence means that much of ACC’s evidence is effectively uncontested. OPC must have recognised that there was a risk that its “no debt due” argument might not succeed. If it had a fallback position, it should have ensured that appropriate evidence was before the Court.
[26] Liquidation proceedings, previously stayed to await the outcome of the appeal, were resurrected on 1 December 2005. OPC was put into liquidation by this Court, on 26 January 2006. Messrs Levin and Jordan were appointed as its liquidators.
[27] ACC lodged two proofs of claim in the liquidation. They total $715,684.75, of which only the amount established as due by the Court of Appeal judgment has been admitted. The liquidators’ decision to admit that claim has not been challenged.
Distributions to and by beneficiaries of OPC Trust
[28] By the time liquidators had been appointed, moneys earned from the contract with ACC had either been distributed to the various beneficiaries of the OPC Trust or used to meet day to day operating expenses.
[29] Mr Levin, one of the liquidators of OPC, gave unchallenged evidence about the distributions made through the OPC Trust to its beneficiaries. Although, on my assessment, his arithmetic does not quite match the amounts claimed, the differences are immaterial to the questions I am required to decide.
[30] Mr Levin deposed that, in the period between 20 December 2000 and 30
January 2003:
a) $717,846.44 was distributed to the Apa Trust, inclusive of a sum of
$35,842.84 directed to pay Mr and Mrs Apa’s loan account with OPC.
b) $742,507.06 was distributed to the Ikiua Family Trust. c) $144,070.51 was distributed to the Pacifica Trust.
[31] Mr Levin gave uncontradicted evidence that, in the period between 13 July
2000 and 28 August 2002, a gross sum of $3,434,074.40 was paid by ACC to OPC
for services rendered.
[32] Mr Apa said that $816,389 was distributed by the trustees of the Apa Trust in the period between 2 March 2001 and 16 October 2007. This is more than the sum that Mr Levin says was distributed to the Apa Trust by the OPC Trust. Payments were made for the renovation of a family home in Samoa; to support Mr Apa’s father, who is ill in Samoa; to pay for private education for Mr Apa’s children; to meet the costs of renovation of Mr and Mrs Apa’s family home; the cost of family holidays and charitable donations.
[33] Mr Ikiua gave evidence that, of the money distributed by the OPC Trust to the Ikiua Family Trust, $473,900 had been distributed by the trustees of that trust. The balance of the funds received through the OPC Trust were applied to meet the family’s living expenses and charitable donations.
[34] The trustees of the Pacifica Trust spent all of the money distributed to it by the OPC Trust on the provision of a weekly Friday night event for Pacific Islanders; including procurement of overseas speakers and paying for their airfares and accommodation. The Pacifica Trust relied on support from the OPC Trust to meet its operational expenses and other outgoings.
The foundation for the claims
[35] The liquidators allege that a document, prepared in January 2001, demonstrates an intention on the part of Mr Ikiua and Mr Apa to operate an “empty shell” policy. This allegation is based on handwritten notes on the cover page of a financial report for the OPC Trust, produced on 15 February 2001. The notes appear
to articulate a policy for the way in which distributions to beneficiaries would be effected. The last of the entries is: “Produce empty shell for each month”.
[36] The note evidences an intention, on the part of Mr Ikiua and Mr Apa to make distributions each month which, after payment of all of OPC’s outgoings, would create a nil balance in the accounts. That view is confirmed by evidence of Mr Graham, an independent forensic accountant, whose review of OPC’s monthly budgets showed that “from January 2001 all funds over and above those required to provide for that month’s salaries, creditors and GST were distributed to the beneficiaries of the [OPC] Trust”. Mr Graham deposed that in the period from December 2000 to October 2002, over $1,600,000 was distributed by OPC to the beneficiaries of the OPC Trust.
[37] Mr Levin suggested that the “empty shell” policy was undertaken with the object of defeating creditors from the outset. Otherwise, he could see no reason for the company to trade as a trust or to distribute moneys regularly to beneficiaries. I do not accept that theory of the case. It is clear that Mr Ikiua and Mr Apa ensured that trade creditors were paid as they fell due each month, before determining what distributions should be made to the beneficiaries of the OPC Trust. The ability to distribute profits more flexibly is a legitimate purpose of the use of a trading trust: see para [102] below. What was actually done by Mr Ikiua and Mr Apa is inconsistent with an intention to defeat creditors.
[38] The liquidators call in aid s 298 of the Act. The relevant parts of that section are set out at para [74] below. The liquidators put their case under s 298 on the basis of alternative assumptions.
[39] On the assumption that OPC did not lawfully transfer beneficial interest in its assets to the beneficiaries of the OPC Trust, they contend that, contrary to s 298(2), distributions to relevant insiders were made for inadequate consideration. Even assuming the assets were validly settled on the OPC Trust, the liquidators maintain that the income received from ACC was “property” of OPC to which s 298 applies.
[40] On either basis, the liquidators’ case is that all distributions must be repaid by all discretionary beneficiaries who received moneys through the OPC Trust. Almost all of those moneys were distributed to the Ikiua Family Trust, the Apa Trust or the Pacifica Trust. They are the distributions in issue in this proceeding: see paras [30]- [34] above.
[41] The liquidators also allege that all distributions made to or for the benefit of the Ikiua Family Trust, the Apa Trust and the Pacifica Trust ought to be regarded as recoverable under the restitutionary cause of action for money had and received. It is contended that the distributions were made without the approval of the board (or shareholder) of OPC. No consideration flowed from the recipients of the distributions to OPC. Because the distributions were made to persons or entities with which Mr Ikiua and Mr Apa were personally associated, it is submitted that it would be unconscionable for the recipients to retain the benefit of the distributions, as against the liquidators.
[42] If I were to find that assets were validly settled on the OPC Trust, s 298 did not apply and the claim based on money had and received did not succeed, the liquidators seek to be subrogated to the rights of the trustees of the recipient trusts, in respect of moneys distributed to them through the OPC Trust.
[43] In addition, the liquidators claim that Mr Ikiua and Mr Apa breached various duties owed by each of them to the company. These claims are brought under the umbrella of s 301 of the Act, which is the procedural mechanism by which claims against directors (whether for breach of statutory or co-existing common law and equitable duties) can be made: see Benton v Priore [2003] 1 NZLR 564 (HC).
[44] The factual basis on which directors’ duties are alleged to have been breached is the distribution, from 5 March 2001 to 30 January 2003, of surplus capital of OPC to the detriment of the one creditor of that company, ACC. The liquidators seek an order that Mr Ikiua and Mr Apa restore $1,450,618.41 to OPC.
[45] The liquidators accept that claims based on breach of duties by the directors can only be made in respect of acts or omissions that occurred within six years from the date on which the proceeding was issued, 7 November 2007.
Findings of fact
[46] Mr Ikiua and Mr Apa were naïve businessmen who decided to alter the basis on which OPC traded, on advice from their accountant. They followed the advice of the accountant and adopted most of the suggestions of the solicitor to whom they referred the draft Trust Deed. They exercised care in embarking on the establishment of the OPC Trust, believing it was a genuine (and better) method of carrying on business. They had no intention to defeat OPC’s creditors. They were careful to ensure that all known creditors were paid in full before they authorised distributions to the recipient trusts.
[47] As a result of the arrangements that were put in place after the 2001 allegations of overpayments (see para [53] below) neither Mr Ikiua nor Mr Apa knew (or ought to have known) that a debt to ACC was accumulating. As a result, after ensuring current creditors were paid, they were entitled to distribute wealth to beneficiaries of the OPC Trust.
[48] Mr Ikiua and Mr Apa first became aware of the alleged overpayment that led to liquidation on 2 October 2002, when Mr Ikiua was interviewed by Mr Williscroft.
The ACC debt: issue estoppel
(a) The problem
[49] A preliminary question is whether I am entitled to determine independently the amount (if any) that is owed by OPC to ACC. Mr Ikiua and Mr Apa have always denied that OPC overcharged ACC. The question is whether the judgment of the Court of Appeal, holding that there was no “real and substantial dispute” in respect of the sum of $377,520, binds the defendants to this proceeding.
[50] Difficulties have arisen from the way in which ACC sought to establish its right to liquidate OPC. The problem is exacerbated because the evidence I heard in this proceeding goes further than that placed before the High Court and the Court of Appeal on the statutory demand proceeding.
[51] The question is whether an issue estoppel arises out of the Court of Appeal decision, even though the parties to that appeal were different from those engaged in the present proceeding. The parties in the Court of Appeal were OPC and ACC. The parties in this proceeding are the liquidators of OPC, the directors of OPC and the trustees of the three recipient trusts.
[52] In the Court of Appeal, OPC sought to set aside the statutory demand on the ground that the claim, based on overpayment, was not a “debt” for the purposes of the statutory demand proceeding. That can only have been done in reliance on legal advice. The point was doomed to fail. Unsurprisingly, the Court of Appeal rejected the submission. However, reliance on that narrow legal point meant that significant evidence called before me was not before the Court of Appeal when it made its decision: see para [66] of the Court of Appeal’s judgment, set out at para [25] above.
[53] In this proceeding, both Mr Ikiua and Mr Sio (the “entitlements manager” of OPC) gave evidence that, in conjunction with ACC representatives, measures were put in place after the 2001 allegations of overpayments to avoid a re-occurrence of the problem. A number of the liquidators’ factual assertions were met by Mr Sio. He said that he prepared schedules of claims to be paid each month. Those schedules were sent to ACC, so that any issues could be raised. Only after any issues raised by ACC had been resolved did Mr Sio refer the schedule to Mr Apa to arrange for invoices to be raised. On Mr Sio’s evidence, ACC never queried any contractual entitlement to the moneys claimed under the various invoices. Mr Sio’s unchallenged evidence leaves me in real doubt about whether any debt in favour of ACC actually exists.
[54] However, the liquidators have admitted the ACC’s proof of claim in the sum of $377,520, in reliance on the Court of Appeal’s judgment. The directors of OPC could have challenged the admission of that debt, but have not done so.
(b) Is there an “issue estoppel”?
[55] Mr Dickey, for the liquidators, submitted that the Court of Appeal judgment on the statutory demand application created an issue estoppel to prevent the directors of OPC and the trustees of the three recipient trusts from contending that the debt of
$377,520 did not exist. He submitted that such a conclusion followed from Shiels v
Blakeley [1986] 2 NZLR 262 (CA).
[56] Mr Walker, for the defendants, submitted that the directors of OPC and the trustees of the Apa Trust, Ikiua Family Trust and Pacifica Trust did not have a sufficient “community or mutuality of interest” with OPC to justify a finding that they are the “privies” of OPC, for “issue estoppel” purposes. He referred to Shears v Chisholm [1994] 2 VR 535 (SC) as authority for the proposition that directors do not become privies merely because the board is the organ through which the company operates. While acknowledging that Hillyer J came to a different conclusion in Laughland v Stevenson [1995] 2 NZLR 474 (HC), Mr Walker submitted that that case was distinguishable on the basis that the director admitted the company was his alter ego.
[57] In Shiels v Blakeley, Somers J (for the Court of Appeal) described this area of law, at 268, as one in which Courts should seek “to achieve a result consonant with justice and good sense and to prevent a defendant being vexed with the same issue by the same person or his privies on more than one occasion”. There is no reason why the same principle should not apply to a party in the position of a plaintiff, such as the liquidators in this case.
[58] In Wire Supplies Ltd v Commissioner of Inland Revenue [2007] 3 NZLR 458 (CA), the Court of Appeal was faced with arguments about the extent to which companies and their shareholders participating in schemes devised to extinguish tax obligations were bound by decisions in relation to other companies that were also involved in the scheme. The problem was that other claims had been litigated fully (one having gone as far as the Privy Council: Miller v Commissioner of Inland Revenue [2001] 3 NZLR 316 (PC)) yet, the Commissioner was being put to the time, trouble and expense of arguing the same or similar issues on facts that were
materially identical. The Court concluded, on the facts before it, that issue estoppel only arose in respect of one of the appellants before it: at [30].
[59] Shiels v Blakeley involved a challenge to the power to amend a trust deed establishing the Waterfront Industry Superannuation Fund. The validity of the amendment had been questioned in two earlier proceedings in the High Court, in both of which Mr Shiels had had an indirect interest. The two proceedings had challenged the amendment on different grounds. The question was whether Mr Shiels was prevented, on issue estoppel grounds, from bringing a further proceeding. An application to strike out his claim was removed into the Court of Appeal for determination. The application succeeded.
[60] Issue estoppel is a form of res judicata. The object of each is to prevent the initiation of new proceedings challenging a decision in which the parties are, in substance, the same. The rule is based on the public interest in finality of litigation and the private interest of parties in not being put to further expense in respect of an issue that has already been litigated: see Lockyer v Ferryman (1877) 2 App Cas 519 (HL) at 530, per Lord Blackburn.
[61] In Shiels v Blakeley, after discussing relevant authorities, the Court of Appeal said, at 268:
We conclude that there must be shown such a union or nexus, such a community or mutuality of interest, such an identity between a party to the first proceeding and the person claimed to be estopped in the subsequent proceeding, that to estop the latter will produce a fair and just result having regard to the purposes of the doctrine of estoppel and its effect on the party estopped.
[62] The procedures available on liquidation to challenge the existence or amount of a creditor’s debt tend to support the desirability of an issue estoppel in a case such as this.
[63] In a liquidation, the first step is for a creditor to establish its status as such. It is well established as a matter of law (in both bankruptcies and liquidations) that a judgment debt is not necessary to found a bankruptcy or liquidation proceeding: for example, Ronaldson v Dominion Freeholds Ltd [1981] 2 NZLR 132 (CA) at 138. In
this case, ACC sought to establish its claim through the statutory demand procedure. The existence of a relevant debt was contested. A Court may only dismiss such an application if satisfied there is no “real and substantial dispute” that the debt is owing or due: s 290(4)(a) of the Act. The Court of Appeal, on the evidence before it, found against OPC on that point.
[64] Once liquidation has commenced the creditor must lodge a proof of claim. That claim is either admitted or rejected (in whole or in part) by the liquidator: see s 304 of the Act and regs 6 and 8 of the Companies Act 1993 Liquidation Regulations 1994. A liquidator’s decision to admit or reject a claim can be reviewed (with leave) under s 284(1)(b) of the Act; see also regs 15 and 16 of the Companies Act 1993 Liquidation Regulations 1994.
[65] Even the existence of a judgment against the company in liquidation will not deprive the liquidator of the right to investigate the nature and grounds of a claim made against the company; although, that right would generally be exercised only if a judgment were obtained by default: see Re van Laun [1907] 1 KB 155 and Re Home and Colonial Insurance Co Ltd [1930] Ch 102.
[66] In this case, the liquidators have admitted ACC’s proof of claim in respect of the sum of $386,909.91. They have not admitted the claim, insofar as it relates to the balance of the overcharging alleged by ACC. The amount admitted represents the debt found due by the Court of Appeal, plus costs awarded in the statutory demand and liquidation proceedings.
[67] The position in respect of the admitted claim is that there is a decision of the Court of Appeal confirming the existence of a debt in that sum. There are orders for costs against OPC. No challenge has been brought against admission of the debt, either as to liability or quantum.
[68] In my view, there is a public interest in preventing re-litigation of the existence of a debt in the sum found by the Court of Appeal. The liquidators, funded by ACC, ought not to have been put to the time, trouble and expense of revisiting a
point that has already gone to the Court of Appeal, on which the directors of OPC
had ample opportunity to lead relevant evidence to show a genuine dispute.
[69] In my view, the admitted claim falls within the principle established in Shiels v Blakeley. In light of the controlling interest of OPC’s directors in the recipient trusts, there is a sufficient identity between the parties to the proceeding in the Court of Appeal and the present proceeding to justify a finding that the respondents are estopped from denying the existence of the debt found to exist. I must proceed on the basis that the debt admitted by the liquidators does exist.
[70] I make my finding of issue estoppel on a narrow basis, confining it to a case (such as this) where the directors of the company in liquidation control the trusts to which distributions have been made and the liquidators are acting on behalf of a single creditor. While there is one independent trustee in respect of each of the Ikiua Family Trust and the Pacifica Trust, all of the recipient trusts are, I find, controlled by Mr Ikiua and Mr Apa.
[71] I leave open the question whether an estoppel would arise if distributions had been made to persons unconnected with the company and there were creditors other than the one involved in the statutory demand proceeding participating in the liquidation.
The s 298 claim
[72] Mr Dickey submits that there was no valid settlement of the property of OPC on the OPC Trust. He points to the absence of any evidence of an agreed price at which the trustee would acquire company property and to Mr Ikiua’s evidence that he and Mr Apa, when settling the trust, did not turn their minds to that issue.
[73] Mr Dickey submits that the distributions made by OPC to beneficiaries of the OPC Trust fall within s 298(2) of the Act and are recoverable at the suit of the liquidators from the trustees of the recipient trusts. Further, he submits that there is no discretion to deny recovery, once the statutory prerequisites for a claim are made out. If he were right on the latter point, it would mean that (potentially) the
beneficiaries could be required to repay over $1,000,000 to the liquidators even though a debt of only $377,520 has been admitted by the liquidators.
[74] Section 298(2) provides:
298 Transactions for inadequate or excessive consideration with directors and certain other persons
…
(2) Where, within the specified period, a company has disposed of a business or property, or provided services, or issued shares, to—
(a) A person who was, at the time of the disposition, provision, or issue, a director of the company, or a nominee or relative of or a trustee for, or a trustee for a relative of, a director of the company; or
(b) A person, or a relative of a person, who, at the time of the disposition, provision, or issue, had control of the company; or
(c) Another company that was, at the time of the disposition, provision, or issue, controlled by a director of the company, or a nominee or relative of or a trustee for, or a trustee for a relative of, a director of the company; or
(d) Another company that, at the time of the disposition, provision, or issue, was a related company,—
the liquidator may recover from the person, relative, company, or related company, as the case may be, any amount by which the value of the business, property, or services, or the value of the shares, at the time of the disposition, provision, or issue exceeded the value of any consideration received by the company. (my emphasis)
Section 298(3) and (4) provide further assistance, in respect of the way in which the value of a business will be ascertained and the period within which dispositions will be subject to attack. The latter is restricted to a period of three years before the commencement of the liquidation: s 298(4)(b).
[75] Mr Walker, for the respondents, submits that it is irrelevant whether a particular form of words was used by those who controlled OPC to settle the undertaking of the company on the OPC Trust. He submits that, in law, it is sufficient for the company to establish that it expressed an intention, by words or conduct, to do so.
[76] Mr Walker relies on the principle that an inter vivos express trust can be achieved through the transfer of trust property to trustees or by the declaration by the settlor that he or she is a trustee. He referred to Milroy v Lord (1862) 4 De GF & J
264 (CA) at 274, per Turner LJ.
[77] Mr Walker also referred to Dhingra v Dhingra [1999] EWCA Civ 1899 (CA). In that case, the Court of Appeal was asked to review a Recorder’s finding that a trust had been declared, in respect of certain assets. Delivering the judgment of the Court of Appeal, Lindsay J, with whom Schiemann LJ agreed, said:
Before I turn in more detail to the grounds on which the father relies before this court today, it would be well to remind myself of some unquestionable propositions of law. Mr Dhingra, the appellant, has mentioned Snells Equity
29th ed. which, of course, is a very standard work. There are five brief propositions that one ought to have in mind as stemming from that work. First of all, as far as concerns personalty, which is what we are here concerned with, a declaration of trust may be by word of mouth or even inferred from conduct, (Snells Equity page 123); secondly, no particular form of words in necessary, (Snells Equity page 124); thirdly, where the property in relation to which the trust is declared is already in the name of the declarer of the trust, the trust is, as it is put, "Completely constituted the moment that the trust is declared", (Snells Equity page 121); fourthly, once the trust is completely constituted it can be enforced by a beneficiary even if he or she is a mere volunteer (Snells Equity page 120). The notion that equity will not assist a volunteer therefore has no application in this case because this is a case where a trust was declared and therefore was completely constituted from its first moment of existence; fifthly and lastly, in general a completely constituted trust cannot be revoked by the settlor unless the settlor has reserved a power of revocation in the settlement itself, (Snells Equity page 127). Those are elementary propositions which need to be borne in mind as the story unfolds. (my emphasis)
[78] Section 298(2) deals with a situation, where the company has disposed of property to a defined insider for inadequate consideration. Property held on trust by a company is not its own property: see para [85] below.
[79] I reject Mr Dickey’s submission that the undertaking of OPC was not validly settled on the OPC Trust. In doing so, I act on the principle that all that is required is an expression of an intention to transfer property to a person for a specific purpose. The words and acts of the two directors amount to conduct from which a corporate intent can be inferred. Therefore, even though the property was not transferred to OPC (as trustee) by the settlor, it was open to OPC (in its own right) to direct
transfer of the property to itself, for the purpose of holding it on trust for the beneficiaries of the OPC Trust.
[80] I am satisfied, from the evidence of Messrs Ikiua and Apa, the contemporaneous documentation and their conduct after the OPC Trust was formed in late 2000, that there was a clear intention that the undertaking of OPC be held on trust for the beneficiaries. The fact that beneficial ownership in the undertaking was transferred is supported also by contemporaneous financial statements which, from January 2001, show the business as being operated by OPC, as corporate trustee for the OPC Trust. I add that Preamble B to the Trust Deed of the OPC Trust expressly contemplates “that further money, investments and property may from time to time be paid to or transferred into or vested in the name or control of the trustee”.
[81] Nevertheless, on the authority of Octavo Investments Pty Ltd v Knight (1979)
27 ALR 129 (HCA), Mr Dickey submitted that OPC had both legal and beneficial ownership of all assets, at least in the sense described in that case. He also relied on Anzani Investments Ltd v Official Assignee [2008] NZCA 144. Each case deals with a voidable transaction regime.
[82] With respect, I do not consider that those cases are on point. Section 298(2) is directed at recovery of inadequate consideration paid for a business or other property. The provision is concerned with the disposal of a company business or asset. If an application had been made in time, the section would have applied to the original transaction by which OPC disposed of the business to itself (as a trustee) without consideration. But, in my view, the section is not concerned with the distribution of trust property to its beneficial owners.
[83] A decision to distribute money to the beneficial owners of the company’s undertaking is made by the directors of the corporate trustee. If the directors decided to distribute money to the beneficiaries, knowing debts incurred on behalf of the trust remained unpaid, any loss caused to the creditor by that decision ought to be visited on the directors: see paras [142] and [146] below. That is the creditor’s protection.
[84] I reserve my opinion on whether Octavo is applicable to the voidable transaction regime in force in New Zealand. The issue does not arise for decision in this case. Anzani does not apply in the context of s 298.
[85] In my view, it is self-evident that property held on trust by a company does not form part of its assets. The point is best illustrated by reference to a company to which the Trustee Companies Act 1967 applies. Such a company is entitled to administer deceased estates. But, if a trustee company goes into liquidation, the assets it controls on behalf of the beneficiaries of the deceased’s estate cannot be used as part of the assets available for distribution among creditors by a liquidator.
[86] That being so, there is a fatal flaw in the liquidators’ claim under s 298. There is no “property” of the company on which s 298(2) can bite. On that narrow ground, the s 298(2) application fails.
Money had and received
[87] Mr Dickey submits that it would be unconscionable to allow the distributed moneys to be retained by the trustees of the recipient trusts because they must be deemed to have the same knowledge as the coincidental directors of OPC who authorised the distributions and, on the liquidators’ case, were aware that ACC was being overcharged.
[88] In invoking the restitutionary remedy, Mr Dickey relies on Moses v
Macferlan (1760) 97 ER 676, in which Lord Mansfield stated the ancient rule:
This kind of equitable action, to recover back money, which ought not in justice to be kept, is very beneficial, and therefore much encouraged. It lies only for money which, ex æquo et bono, the defendant ought to refund: it does not lie for money paid by the plaintiff, which is claimed payable in point of honour and honesty, although it could not have been recovered from him by any course of law; as in payment of a debt barred by the Statute of Limitation, or contracted during his infancy, or to the extent of principal and legal interest upon an usurious contract, or, for money fairly lost at play: because in all these cases, the defendant may retain it with a safe conscience, though by positive law he was barred from recovering. But it lies for money paid by mistake; or upon a consideration which happens to fail; or for money got through imposition (express or implied); or extortion; or oppression; or an undue advantage taken of the plaintiff’s situation, contrary to the laws
made for the protection of persons under those circumstances. In one word the gist of the action is, that the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity to refund the money.
Reliance is also placed on Lipkin Gorman v Karpnel Ltd [1991] 2 AC 548 (HL) at
572 (Lord Goff of Chieveley) and Martin v Pont [1993] 3 NZLR 25 (CA). [89] Mr Walker submits that the cause of action must fail for three reasons:
a) First, there is no evidence of any distribution of trust assets that could be held contrary to good conscience, as understood from the authorities dating back to Moses v Macferlan.
b)Second, the liquidators cannot bring this claim personally; if it were to exist, it is one on which the company should sue in its own name.
c) Third, some, at least, of the cause of action is time-barred; namely, payments made before 2 November 2001.
[90] The liquidators accept the proposition that payments made more than six years before the proceeding was filed (2 November 2007) cannot be recovered.
[91] I am satisfied that Mr Walker is right and that no claim for money had and received exists.
[92] I do not consider that any unconscionable conduct has occurred. Moneys were distributed to beneficiaries in circumstances where Mr Ikiua and Mr Apa had paid all outstanding creditors known to them and had no knowledge of the accumulation of any further debt to OPC, by way of overcharging: see paras [46] – [48] above. In that situation, there can be nothing unconscionable about the decision to distribute moneys.
[93] For those reasons, the claim based on money had and received does not succeed.
The subrogation claims
(a) Introductory comments
[94] The liquidators accept that there are no assets remaining within the OPC Trust to which OPC’s right of indemnity would attach. For that reason, their claim for subrogation is made in respect of rights of indemnity available to the trustees of the three recipient trusts.
[95] In order to determine whether the liquidators are entitled to be subrogated to the indemnity available to the trustees of the recipient trusts, it is helpful to consider the nature of a trading trust and the way in which the indemnity available to a trustee operates, both before and after an intervening insolvency.
(b) What is a trading trust?
[96] In Australia, the trading trust emerged, in the late 1970s, as an alternative to the use of a private company for the operation of a family business. Professor H A J Ford, of the University of Melbourne, once described the “fruit of this union of the law of trusts and the law of limited liability companies [as] a commercial monstrosity”: Ford, Trading Trusts and Creditors’ Rights (1981) 13
Melb U L Rev 89 1. The Professor identified the scope for frustrating creditors of the corporate trustee as a major policy concern.
[97] The term “trading trust” was coined to identify a business operated by an assetless company, in the capacity as a trustee for named beneficiaries. The use of a company as trustee, in those circumstances, gave rise to the expression “corporate trustee”, as a shorthand means of describing the company’s business activity.
[98] The appointment of an assetless corporate trustee is inconsistent with the interests of beneficiaries of a trust. Generally speaking, either the settlor of the trust or a person carrying the right of appointment, would want to secure a responsible individual or company to assume the office of trustee to be confident that the
interests of the beneficiaries were protected. Touching on this subject, Baragwanath J, in Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA), said:
[63] Chester is and was an assetless trustee. Under s 51(2)(d) and (e) of the Trustee Act 1956 among the grounds on which application may be made to the High Court to make an order substituting one trustee for another is that the trustee has been adjudged bankrupt or, if it is a corporation, it has ceased to carry on business, has been placed in liquidation or has been dissolved. In a paper “Trust Busting and the Impact of Insolvency” presented to the Accountants Trust Conference, Auckland, May 2001, Paul Heath QC and Michael Whale observed at p 12:
“Those provisions reflect the policy judgment by the Legislature that individuals who become bankrupt or companies which are placed in liquidation are generally unfit to act as trustees.”
and at p 2:
“Trust law has developed on an underlying expectation that any settlor would want a solvent trustee to be appointed for beneficiaries to sue in the event that the interests of the beneficiaries are defeated by breach of trust on the part of a trustee.”
I agree with the former comment and observe as to the latter that, while the prospect of suit of the trustee might not be at the forefront of a settlor's mind, stability and responsibility are certainly to be expected.
[99] As an asset protection mechanism, the use of an assetless corporate trustee achieves the object of limited liability of the company’s shareholders for debts of the company and the absence of assets against which a creditor may levy execution to obtain payment of a debt. But it does not absolve the directors of the corporate trustee to make good any losses caused by their wrongful actions.
[100] The main difference between a company trading in its own right and one acting as corporate trustee is that, while legal ownership of property remains with the company, beneficial ownership has been transferred to the beneficiaries of the trust in the latter situation: see Hon B H McPherson, The Insolvent Trading Trust (in PD Finn (ed), Essays in Equity (The Law Book Co Ltd, 1985). Usually, the individuals named as potential beneficiaries will be discretionary objects of the trust, so that no one person may be seen as having an absolute interest in the property that may be distributed to beneficiaries: see Gartside v Inland Revenue Commissioner [1968] AC
553 (HL).
[101] Because the use of an assetless corporate trustee has the potential to defeat the interests of genuine creditors of a company, there is (rightly) a healthy degree of cynicism surrounding its use. However, it is as well to remember that a trading trust may be used for legitimate purposes, without its directors or shareholders having any intention to defeat the rights of creditors with whom it does business. In each case the intention of those who settle the trust and trade through this commercial vehicle will need to be considered.
[102] The benefits of establishing a trading trust are discussed in Dal Pont and Chalmers, Equity and Trusts in Australia and New Zealand (2nd ed 2000 LBC Information Services) at 695. Four advantages are identified:
a) Use of a trading trust can avoid the level of restrictive regulations imposed on other companies.
b)A more tax-effective distribution of business income can be achieved through the use of a discretionary trading trust.
c) The discretionary trust can offer flexibility in changing circumstances; particularly, in respect of the selection of beneficiaries and the amounts distributed.
d)Because trust property lies outside of assets that are available to satisfy the claims of creditors of the corporate trustee, the trading trust may be a useful asset protection mechanism in the event of insolvency.
(c) Insolvency of trading companies and human trustees
[103] To understand the conceptual underpinnings of a trading trust and to determine how best to analyse what should happen when one is put into liquidation, it is instructive to compare what happens on insolvency to a company trading in its own right (on the one hand) and a trust of which an individual is a trustee (on the other).
(i) A trading company
[104] The original purpose of a limited liability company was to provide a degree of protection to those who wished to invest in entrepreneurial activity. In the formative years of the company structure, one statute required companies with limited liability to have at least 25 members, so that they could pool their resources and know that they did not have liability beyond the amount required to meet calls for up to the par value of their shares: see the Limited Liability Act 1855 (UK). The role of limited liability company was underscored, as a vehicle for entrepreneurial activity, by the seminal judgment in Salomon v Salomon [1897] AC 22 (HL), which confirmed that a company was an entity in its own right, distinct from those who held shares in it.
[105] At the time of the reforms which led to our Companies Act 1993, the need to strike a balance between enabling use of the company structure to provide an appropriate degree of risk management for those undertaking business activity and regulating to prevent the abuse of limited liability was identified as a major public policy goal: see the Law Commission’s report, Company Law Reform and Restatement (NZLC R 9 1989) at 5, para 21. The Commission recognised that striking that balance was “a matter of judgment on which views will differ”.
[106] The Act is designed to confer economic and social benefits derived from the ability to manage business risk in a manner that ensures the fact of limited liability is disclosed to those with whom the company deals. One of the ways in which the risk of abuse is managed is through the imposition of obligations on directors to ensure that distributions of the company’s wealth are not made unless the company is solvent. Directors must exercise proper care in the performance of their functions, use their powers for proper purposes and not take the risk of incurring debt when they have no reasonable grounds to believe the debt can be paid from company funds: see, generally, ss 131, 135 and 137 of the Act.
[107] In relation to a director’s obligations when authorising the distribution of wealth to shareholders, the Act abandoned the old “capital maintenance” doctrine, which was designed to require shareholders to contribute money or other assets
equal, to the par value of their shares. Sections 52 and 56 of the Act now prevent directors from making distributions of the company’s wealth to shareholders unless the company passes the solvency test, set out in s 4. I discussed the change from the capital maintenance doctrine to the “solvency” regime in Re DML Resources Ltd (In liquidation) [2004] 3 NZLR 490 (HC) at [49]-[60].
[108] If OPC held both legal and beneficial ownership of its assets it would have been necessary for the directors, before distributing money to shareholders, to have ensured that the company could satisfy the solvency test: s 52. On liquidation, the question whether those distributions were made in accordance with s 52 could have been investigated by the liquidators. If the liquidators were satisfied that the company was not solvent at the relevant time they could issue proceedings under s 56 of the Act to recover the distributions from shareholders or sue the directors, if they breached their obligations under s 52.
(ii) A human trustee
[109] In contrast, if an individual had acted as trustee of the OPC Trust and carried on business as a sole trader, by providing the services rendered to ACC, a quite different position would have pertained on insolvency.
[110] A fundamental difference between a trust and a company is that a trust is not a distinct legal entity. The term “trust” is descriptive in nature and is intended to capture any situation in which an individual or a company holds property for the benefit of third parties. In Hardoon v Belilios [1901] AC 118 (PC) at [123], it was said that the relation of trustee and beneficiary was “to prove that the legal title was in [the trustee] and the equitable title in [the beneficiary]”.
[111] An individual trustee (in contrast to a corporate trust) is, in legal terms, indivisible: one cannot separate personal liability as an individual from liability as a trustee. A creditor of the individual is left to sue the human being who acts as a trustee, irrespective of the capacity in which the debt was incurred. In the event that the individual is adjudged bankrupt, trust assets do not pass to the Official Assignee. Section 104 of the Insolvency Act 2006 states:
104 Property held in trust by bankrupt
Property held by the bankrupt in trust for another person does not vest in the
Assignee.
[112] While trust assets do not vest in the Official Assignee on bankruptcy, the trustee’s right to be indemnified out of trust assets in respect of any liability reasonably incurred as a trustee does. Usually, the right will arise from statute (s 38 of the Trustee Act 1956) or the terms of the trust instrument. The right of indemnity is a “right” or “claim” (a chose in action) in relation to property, for the purposes of s 101(1)(a) of the 2006 Act: see also the definition of “property” in s 3 of that Act. Delivering the judgment of the Court of Appeal in Official Assignee of O’Neill v O’Neill (1898) 16 NZLR 628 (CA), Denniston J said, at 635:
… We see no reason why the undoubted right of O’Neill to receive and to sue for this was not “a thing “in action” belonging to and vested in the bankrupt at the commencement of the bankruptcy, and consequently passing to his assignee, and divisible among his creditors, under section 63 of “The Bankruptcy Act, 1892”. Whether moneys recovered under such right could be considered as earmarked as the bank’s property or be available for all the creditors need not now be considered. ….
Although the definition of “property” in the 2006 Act has been truncated from that appearing in s 2 of the Insolvency Act 1967, the words “claim” or “right” clearly encompass a chose in action.
[113] The distribution of trust property is not governed by the same rules that apply to property passing to the Official Assignee that is divisible among creditors. When an individual is adjudged bankrupt, his or her property falls to be distributed in accordance with the priorities established by s 274 of the 2006 Act. But, because trust property does not pass to the Official Assignee, the statutory regime does not apply to it. Rather, the Courts have used equitable principles, developed in respect of trust property, to determine how such property should be distributed. Professor Ford outlines those principles in Trading Trusts and Creditors’ Rights, at 19-28.
(d) Liquidation of the corporate trustee
[114] Against that background, what is the legal position when a company is the sole trustee and it is put into liquidation?
[115] The position of a corporate trustee poses a dilemma because the choice of a company as trustee is counter-intuitive. As indicated earlier (see para [98] above) trust law has developed on an underlying expectation that a settlor would want a responsible trustee to be appointed, to protect the interests of the beneficiaries. A solvent trustee can be sued if he or she were to commit a breach of trust. However, a trading trust is premised on the opposite assumption: namely, it is preferable to trade through a corporate trustee with limited liability and no assets other than the right of indemnity.
[116] Unlike the position on bankruptcy, assets of a company do not vest in a liquidator. Rather, the liquidator’s obligation is to investigate the affairs of the company, get in its assets (including any claims that may exist against directors or others) and to distribute the company’s property among its creditors in accordance with the scheme set out in Schedule 7 to the Act. Therefore, in identifying the assets with which the liquidator may deal on behalf of the company, in its own right, any property held in trust will be excluded from property available for distribution to company creditors. But, at least until such time as the company is removed as trustee under s 52 of the Trustee Act 1956, the liquidator, as the person responsible for controlling the company, will also make decisions in relation to trust assets held by the company in liquidation.
[117] Though it is strictly unnecessary to address the point, the view expressed,
obiter, by the Court of Appeal in Paganini v Official Assignee (CA308/98, 22 March
1999) that a liquidator somehow obtains an equitable right to the company’s property is inconsistent with the weight of other authority (for example, Commissioner of Revenue v Linter Textiles Australia Ltd (In Liquidation) (2005) 215
ALR 1 (HCA)) and appears wrong in principle. Unless the company is acting as a trustee, it retains both legal and beneficial interests in the property available for distribution among its creditors. The liquidator is no more than the person
responsible for getting in and distributing the company’s property. He or she has no proprietary interest in the assets.
[118] As trustee, the company had a right of indemnity out of trust property in respect of any loss caused by its acts or omissions. That remains company property. The liquidator, by controlling what the company does, can exercise the right to indemnity and divide the fruits of it among the creditors.
[119] The general propositions in relation to the right of indemnity are summarised by Professor Ford in Trading Trusts and Creditors' Rights, at 4-6. In certain circumstances, a creditor of a trustee is entitled to be subrogated to the trustee’s right to indemnity out of trust assets. The purpose of the right of subrogation is to avoid any injustice caused by a beneficiary receiving assets, as a result of credit provided to the trustee that has not been repaid. The right of subrogation is said to be protected through an equitable lien over trust assets: for example, see Jennings v Mather [1902] 1 KB 1 (CA) at 6 and 9. Equity regards the creditor’s claim as having primacy over that of the beneficiary: see Re Johnson (1880) 15 Ch D 548 at 552, per Sir George Jessel MR.
[120] In this context, the concept of subrogation involves putting one person (a creditor) in the place of another (the trustee) to ensure that the right of indemnity from trust assets is exercised, so that the creditor’s debt can be paid. Subrogation arises through operation of law, rather than by agreement between the parties: for example, see Napier v Hunter [1993] AC 713 (HL) at 736.
[121] Professor Ford, Trading Trusts and Creditors’ Rights, at 19, explains how the right of subrogation developed:
The right of a trust creditor to take advantage of a trustee's right to exoneration out of the trust estate appears to have been accorded under the practice of the Court of Chancery when supervising the distribution of a fund following a suit for administration of a deceased estate. It was not simply a matter of it being convenient for the court of equity to recognize the creditor's claim and to allow him to be paid without requiring him first to proceed at common law. When the Court of Chancery took into its own hands the administration of an estate, it restrained creditors from pursuing their legal remedy at common law [Harrison v Kirk [1904] AC 1 (HL) at 5 per Lord Davey]. When the Court made the decree for administration it
operated as a judgment for all the creditors and the creditors then had to prove their debts under the administration decree. A creditor who seeks the benefit of a trustee's right of indemnity against a beneficiary personally would have to make the trustee bankrupt.
The need to adjudge a person bankrupt, or put a company into liquidation, is required because the creditor’s primary right is to sue the trustee personally. Only if the trustee were not to have sufficient assets to meet the debt would recourse to the trust fund be necessary, through the right of indemnity.
[122] An equitable lien is a right against property arising by implication of equity to secure the discharge of an actual or potential indebtedness: for example, see Wossildo v Catt (1934) 52 CLR 301 (HCA) at 310. In the present context, such a lien operates to ensure the creditor is provided with a proprietary right to access the trust property to secure payment of its debt.
[123] Ordinarily, to enforce a right of subrogation, the creditor would bring a proceeding seeking a declaration of entitlement to subrogate and of the existence of an equitable lien, with consequential relief directed to realisation of that interest to secure payment of the debt.
[124] The need to subrogate only arises if the trustee were not prepared to exercise the right of indemnity. It should not be necessary to issue proceedings to enforce the right in a case where a liquidator has been appointed to a corporate trustee. By that stage, the liquidator is the person controlling the actions taken by the trustee, is in a position to realise trust assets through the indemnity and can distribute the proceeds among creditors in terms of the statutory priorities.
[125] A creditor stands outside the trust instrument. A creditor cannot seek judgment against the trust fund or, it would seem, levy execution against the trust fund in respect of the debt owed by the trustee: Vacuum Oil Pty Ltd v Wiltshire (1945) 72 CLR 319 (HCA) at 335 and Jennings v Mather. A creditor may or may not have knowledge that the trustee is contracting with him or her in that capacity. But, even where there is no knowledge, a creditor whose debt arises out of a judgment based on liability in tort is regarded as a creditor of the company, qua trustee. In that situation the indemnity continues to exist, provided the trustee
exercised the degree of care required of a reasonable prudent person in relation to the activity out of which liability arose: Bennett v Wyndham (1862) 45 ER 1183.
[126] Ironically, from the point of view of a creditor who might seek subrogation to the trustee’s right to indemnity from trust assets, the creditor will only take the benefit of the indemnity in the condition left by the trustee. Therefore, if the trustee were to misconduct itself, in relation to a liability incurred, the right of indemnity is lost: see Vacuum Oil Pty Ltd v Wiltshire at 325. It follows that a creditor’s right of subrogation will attach if the trustee has acted properly, but not if the acts were improperly undertaken.
[127] If there were assets within the OPC Trust to which the corporate trustee’s right of indemnity would attach, there would be no need for any subrogation. The liquidators, who control OPC, as corporate trustee, could exercise the indemnity and then distribute the assets garnered in accordance with the statutory priorities on liquidation. Because no assets remain within the OPC Trust, the liquidators need to access rights of indemnity held by the trustees of the recipient trusts, if they were to recover the distributions made.
(e) Subrogation in respect of recipient trusts
[128] Mr Dickey relies on the principles articulated in Ford & Lee, Principles of Trusts (Thomson Lawbook Co) at paras 14.110 and 14.6050, as well as Laws NZ, Equity, at para 81.
[129] As I read Ford & Lee, para 14.110 is directed to the right of indemnity out of trust assets, to which I have already referred; and para 14.6050 is directed at subrogation in administration proceedings, where the Court is exercising a jurisdiction in equity in respect of the trust assets held by the corporate trustee in liquidation. Likewise, the passage from para 81 of Laws NZ, Equity refers only to the right of indemnity in respect of the trust assets under the control of the trustee of that trust.
[130] It is trite that a right of indemnity can only exist in respect of specific trust property. Again, I use the example of a trustee company, established under the Trustee Companies Act 1967. Such a company will have its own assets (for example, those required to provide the infrastructure for the company’s operations) and outgoings (for example rent or mortgage payments and salaries). It will also have, under its control, trust assets, in respect of individual deceased estates.
[131] Section 6(1) of the 1967 Act makes it clear that the assets of every trustee company are charged with all liability of the company for any default in the administration of estates under its control. But, provided the trustee company has acted properly, there would be nothing to prevent its right of indemnity from being exercised, in respect of the particular estate in issue. Because the assets of each estate are held for different purposes, there can be no ability or justification for recourse to assets of trusts, other than the one in respect of which the right to indemnity arises.
[132] The difference between the right to indemnity in respect of the distributing trust and the right to seek subrogation in respect of each of the recipient trusts turns on the different characterisation of the role of the corporate trustee of the distributing trust. In the context of this case, OPC was the trustee of the OPC Trust. Before OPC went into liquidation, ACC claimed to be its sole creditor. OPC was entitled, as trustee, to seek recourse against available trust assets to meet the ACC debt. On liquidation, if assets had been available, the liquidators of OPC could have exercised the indemnity on ACC’s behalf.
[133] However, once a distribution was made to the recipient trusts, OPC had no right to an indemnity against those trust funds. That right of indemnity belonged to the trustees of each of the recipient trusts. Therefore, the only right that could be exercised, on behalf of OPC, was as a creditor of the trustees of one or more of the recipient trusts; assuming status as a creditor could be proved.
[134] To establish an ability to seek subrogation to the right of indemnity enjoyed by the trustees of the recipient trusts, it would be necessary for OPC to establish a
valid claim in law or in equity that could attach to the assets of the recipient trust. Otherwise, status as a creditor could not be proved.
[135] If OPC had made payments to a recipient trust in circumstances where trustees of the latter dishonestly assisted OPC to commit a breach of trust or received the distribution in a dishonest manner, the company in liquidation (as the creditor of the trustees of the recipient trusts) would be entitled to bring proceedings to enforce the right of indemnity available to those trustees to secure payment of the amount owing: for example, see Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 All ER 97 (PC).
[136] In my view, the liquidators’ claim for subrogation in respect of the recipient trusts must fail on two grounds:
a) First, they have not pleaded any cause of action that would entitle them (or OPC) to the status of creditor of the individuals who are trustees of each recipient trust.
b)While there is evidence about the asset position of Mr Ikiua and Mr and Mrs Apa, there is no evidence that either Mr Crosbie or Mr Smith respectively are unable to meet any claim that might be made against them on that basis.
[137] I add three comments about the grounds set out in para [136] above:
a) While I have referred to the liquidators not having pleaded any cause of action, I do not think it would have been possible for such a claim to be proved in any event. That is because of my finding of fact that, at the time at which distributions were made by OPC to recipient trusts, Mr Ikiua and Mr Apa believed that all creditors had been paid in full.
b)In relation to the ability to pay issue, the absence of proof of the financial position of Messrs Crosbie and Smith would not have
relieved Mr and Mrs Apa for liability for distributions to the Apa
Trust.
c) A claim for subrogation of this type is the property of the company – not the liquidators. Any such claim should be brought in the company’s name.
Claims against directors
[138] Although OPC was a corporate trustee, the directors of OPC continued to owe obligations as directors of a company. Not only did they have the ability to direct OPC’s business but they also had control over decisions about distribution of trust funds to beneficiaries.
[139] If a director knowingly distributes trust assets over which he or she has control in priority to a creditor (in respect of a trust debt), the director breaches a duty not to give away assets of the company for the benefit of third parties to the detriment of a person known to be a creditor: see Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242 (CA).
[140] Nicholson v Permakraft (NZ) Ltd was a case involving the distribution, by way of dividend, of moneys to shareholders in circumstances where the directors ought to have known that valid debts were likely to remain unpaid. To similar effect, see Hilton International Ltd v Hilton [1989] 1 NZLR 442 (HC) at 475.
[141] Both Nicholson v Permakraft (NZ) Ltd and Hilton International Ltd were decided before the Act came into force. Those cases would now be dealt with under the distribution provisions of ss 52 and 56 of the Act, to which I refer in paras [107] and [108] above. However, the principles hold good in a situation such as the present case.
[142] The principle I take from Nicholson v Permakraft (NZ) Ltd derives from the breach of duty owed by a director to the company when authorising a distribution of assets, when loss to a creditor is likely to result. Deliberately, I refrain from reliance
on the wider proposition that such a duty may be actionable at the suit of a creditor, a much more debatable proposition.
[143] I can deal with other claims based on breach of directors’ duties quite briefly. Most of the claims are premised on the proposition that the directors operated the “empty shell” policy in a manner that defeated ACC, as creditor. I have already found that Mr Ikiua and Mr Apa did not embark on a policy designed to defeat ACC’s interests and claims on that basis fail on that ground.
[144] The balance of the claims seek to impose liability on Mr Ikiua and Mr Apa on the basis that they carried on the business of OPC in a reckless manner (s 135 of the Act), failed to act in good faith and in the best interests of OPC (s 131), failed to exercise powers or perform duties with reasonable care and skill (s 137) and failed to exercise powers for a proper purpose (s 133). All of those allegations are premised on the “empty shell” policy and, likewise, must fail.
[145] A separate claim for breach of fiduciary duty is made on the basis that Mr Ikiua and Mr Apa were conflicted in their respective roles as directors of OPC and as the effective controllers of OPC, in its capacity as corporate trustee. Again, such a claim does not withstand analysis once my finding about Mr Ikiua’s and Mr Apa’s bona fides is taken into account, particularly the care they took to ensure that all company creditors known to them were paid before distribution to beneficiaries were made. And, even if there were a breach, it has caused no loss to the company, other than the sum of $8000.80 to which I refer in para [146]: see Gilbert v Shanahan [1998] 3 NZLR 528 (CA) at 535-536.
[146] However, once Mr Ikiua and Mr Apa became aware of the overcharging claim, both were in breach of their duties to the company in making distributions of
$4000.40 to the Ikiua Family Trust and $4000.40 to Big Planet Corporation Ltd, on
31 January 2003. Such breaches could be put on the basis of breach of fiduciary duty or the principle established in Nicholson v Permakraft (NZ) Ltd. Although, Big Planet Corporation is not a party to this proceeding, Mr Ikiua and Mr Apa are both responsible for that payment. Therefore, $8000.80 was paid after 2 October 2002, at which time both Mr Ikiua and Mr Apa knew that OPC could not pay the ACC debt,
if established. I see no reason why the liquidators should not recover that sum under s 301.
[147] I acknowledge that my findings in respect of the state of knowledge of Mr Ikiua and Mr Apa in relation to the overcharging alleged are different from those made by the Court of Appeal. The reason for that is clear: I have more evidence than was before the Court of Appeal. While I regard myself as bound by the ultimate conclusion reached by the Court of Appeal (that there was no “real and substantial dispute” as to the debt of $377,520) the principles on which issue estoppel is based do not bind me to any findings of fact that the Court of Appeal made in order to reach that conclusion.
Result
[148] Judgment is entered in favour of the liquidators against Mr Ikiua and Mr Apa (as directors of OPC) in the sum of $8000.80. Interest on that sum is awarded from the date of payment (31 January 2003) to the date of judgment, at the rates prescribed, from time to time, under s 87(1) of the Judicature Act 1908. Judgment is entered against the liquidators in favour of Mr Ikiua and Mr Apa (in their capacities as trustees of the recipient trusts), Mrs Apa, Mr Crosbie and Mr Smith.
[149] All questions of costs are reserved. However, I make it clear that I regard Mr Ikiua and Mr Apa at fault for the cost that has been incurred by ACC in progressing this proceeding, at least up to the point at which the essence of Mr Sio’s witness statement was conveyed to the solicitors for the liquidators and they had time to investigate its veracity. My provisional view is that a significant order for costs ought to be made against Mr Ikiua and Mr Apa in any event, but I reserve final judgment on that issue until I have more information. I am conscious that there may also be other relevant factors; including the possibility of a without prejudice save as to costs letter sent before the proceeding was heard.
[150] The Registrar is directed to set the proceeding down for a telephone conference before me on the first available date after 21 August 2009. Each counsel shall file a memorandum at least three working days before the allotted hearing
indicating, in brief terms, the position taken on questions of costs. I will hear from counsel at the telephone conference and, if necessary, make timetabling directions at that stage for the exchange of submissions on costs.
[151] I thank counsel for their assistance in a difficult case.
P R Heath J
Delivered at 11.45am on 24 July 2009
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