Levin v Martin
[2017] NZHC 1354
•20 June 2017
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CIV-2017-419-000087 [2017] NZHC 1354
UNDER Section 348 of the Property Law Act 2007 IN THE MATTER
of the liquidation of TM INVESTMENTS (WAIKATO) LIMITED (In liquidation)
BETWEEN
HENRY DAVID LEVIN AND VIVIEN JUDITH MADSEN-RIES AS LIQUIDATORS OF TM INVESTMENTS (WAIKATO) LIMITED (IN LIQUIDATION)
Applicants
AND
TROY NATHAN MARTIN AS TRUSTEE OF TM TRUST Respondent
Hearing: 20 June 2017 Appearances:
S J Rawcliffe for the Applicants
No appearance by or on behalf of the RespondentJudgment:
20 June 2017
JUDGMENT OF WOOLFORD J
Solicitors: Harkness Henry, Hamilton
Copy to: Respondent
LEVIN & MADSEN-RIES v MARTIN [2017] NZHC 1354 [20 June 2017]
Introduction
[1] This is an application for orders under s 348 of the Property Law Act 2007. The applicants are Henry David Levin and Vivien Judith Madsen-Ries as liquidators of TM Investments (Waikato) Ltd (in liq) (“Company”). The respondent is Troy Nathan Martin, who is being sued in his capacity as trustee of the TM Trust. An order is sought that a payment of $249,163 to Mr Martin as trustee of the TM Trust be set aside on the basis that the applicants have been prejudiced by the disposition of Company property and that the amount of $249,163 be vested back in the Company. The effect of this will be that the TM Trust will owe the Company the amount, which can be recovered for the benefit of the creditors.
[2] Mr Martin was served with the proceedings, but he has failed to file a notice of opposition. He has also chosen not to appear, either by himself or by counsel, to oppose the application today. The applicants’ claim is therefore to be determined by way of formal proof.
Factual background
[3] The Company was incorporated on 20 September 2014 for the purpose of property investment. Between the date of incorporation and the date of liquidation it purchased, renovated and sold properties, including 8A Bracken Street, Leamington, Cambridge; 6A Tennyson Street, Leamington, Cambridge; and 65B Vogel Street, Cambridge.
[4] Mr Martin also had a proprietary interest in other properties, including
3 Balloch Street, Fairfield, Hamilton.
[5] After analysing the Company’s financial statements and records it is clear to the applicants that there was an intertwining of the Company’s, Mr Martin’s and TM Trust’s interests and funds. An investigation by the Commissioner of Inland Revenue in 2008 also found that the Company:
(a) claimed GST on expenditure for properties that were owned by
Mr Martin and not the Company; and
(b) failed to account for GST when selling two properties.
[6] As a result of the investigation by the Commissioner of Inland Revenue in
2008, the Company entered into an agreement with the IRD dated 22 December
2008 setting out agreed adjustments and agreeing on short-fall penalties.
[7] The Company did not however have funds to pay the IRD as the funds which had been received from the sale of the Vogel Street property in October 2007 had virtually all been paid out of the account to Mr Martin, TM Trust and TM Group.
[8] The Company entered into two payment arrangements with the IRD. The first was agreed on on 1 March 2010. This arrangement was not complied with. A second payment arrangement was entered into between the Company and the IRD on
30 July 2014. Again, the payment arrangement was not complied with.
[9] After careful investigation, the applicants are of the opinion the Company was unable to meet its obligations under either payment arrangement, which was known, or should have been known, by Mr Martin at the time they were entered into.
[10] Payments were made to Mr Martin, TM Trust and other related entities when these payments should have been made to the IRD. The result was that the IRD ended up being owed a substantial amount of money when the Company was placed into liquidation. The applicants are of the view that the Company’s debt arose from the Company not taking reasonable care or taking an unacceptable tax position in relation to certain transactions, which are set out in detail in an affidavit sworn by Mr Levin on 29 March 2017.
[11] From the analysis undertaken by the applicants, they have formed the view that the Company was probably unable to pay its due debts from its incorporation on
20 September 2004 as it reported an adjusted working capital deficit (and that it had more current liabilities than current assets) from FYE 2005. It reported negative net assets (excluding related party assets and liabilities) from FYE 2007. The debts that resulted in the Company being placed into liquidation started to accrue in March
2006 and the applicants have formed the view that the Company was certainly unable to pay its due debts from that date.1
[12] The Commissioner of Inland Revenue was the creditor who put the Company into liquidation and asked Mr Levin and Ms Madsen-Ries to be appointed as liquidators.
[13] At the time of liquidation, the IRD claimed $105,566.31 plus petitioning creditor’s court awarded costs of $3,637.63, as a creditor of the Company.
Disposition at issue
[14] The disposition at issue was made after 31 March 2010 and occurred in the following manner. TM Trust owed the Company $281,362 as at 31 March 2010. The money owed by TM Trust to the Company was an asset of the Company. It appears also that an asset described in the 2010 accounts as a “tax refund due” of
$5,860 has been recategorised as an addition to the amount TM Trust owed the Company in the 2011 accounts. During the financial year ended 31 March 2011, the Company loaned a further $25,728 to TM Trust, bringing the total owed by TM Trust to $307,090. However, by 31 March 2011 the Trust’s indebtedness to the Company had reduced by $255,023 to $52,067.
[15] The Company’s general ledgers and financial statements for FYE 2011 record that $249,163 of the loan asset was used by the Company to satisfy the Company’s indebtedness to Mr Martin in relation to the amounts the Company owed him under the following:
(a) Current account of $127,163 (journal 07); and
(b) Term loan of $122,000 (journal 06). together totalling $249,163 and being the disposition.
1 In separate proceedings, TM Investments (Waikato) Ltd (in liq) v Martin [2017] NZHC 665, Gordon J accepted that the Company was insolvent from at least 31 March 2006.
[16] The book value of the loan asset at the time of the disposition was $307,090. The applicants have analysed the transactions making up the loan asset in order to demonstrate that TM Trust received real value, which was (at least) equivalent to the disposition.
[17] In summary, the applicants are of the opinion that TM Trust received cash (or cash equivalent) of $397,600 between FYE 2007 and FYE 2011. To this needs to be added the effect of a tax refund allocated, increasing the debt owed by the TM Trust by $5,860 to bring the total to $403,460. From this funds introduced of $96,371 were set off resulting in the loan asset of $307,090; an asset, but for the disposition that could have been realised for the benefit of all the Company’s creditors.
[18] The applicants have also formed the view that the Company must have known that when it made the disposition it was hindering, delaying or defeating the IRD’s recourse to the loan asset. The Company was aware prior to the disposition (and by 9 March 2010) that it owed $120,245 to the IRD. At that point the Company was also aware that it owned the loan asset, the realisation of which (or even part thereof) would have resulted in the IRD being paid in full without (further) material delay. Instead, the Company chose to enter into an instalment arrangement which would see the IRD being paid, if the arrangement was completed, over a period of approximately four years. The Company had no source of income to fund the instalments, so needed to rely on the injection of funds by the shareholder in order to complete the arrangement. In making the disposition the Company effectively swapped a situation over which it had control (the realisation of the loan asset) to one which it had no control (obtaining funding from its shareholder). In other words, the Company had no way of making the payments on its own and it obtained no commitment regarding shareholding funding to cure this.
[19] The applicants are therefore of the opinion that the Company must have known that by making the disposition it was (at best) hindering or delaying the IRD’s recourse to the loan asset and by doing so exposing the IRD to a significantly enhanced risk of not recovering the amount it was owed. The Company must have known that its assets were insufficient to pay both what it owed to parties related to it (that is the current account liability and term loan owing to Mr Martin) and to the
IRD. The Company must have known that the effect of the disposition would be to cause the IRD, rather than Mr Martin, to suffer the inevitable loss.
[20] Finally, the liquidators have also formed the view that the first IRD arrangement and potentially the second IRD arrangement were probably designed to delay and ideally defeat the IRD’s or a liquidator’s recourse to the loan asset. Both arrangements included small instalments of payments for an extended period with the promise of a large “balloon” payment in the future. It was clear that the Company would never be able to meet the balloon payments, but this was not disclosed to the IRD.
Conclusion
[21] In the absence of any contradictory evidence, I accept the evidence of
Mr Levin without reservation and make the following orders:
(a) The disposition of $249,163 is set aside and the sum of $249,163 vests in the Company.
(b)Mr Martin, as trustee of TM Trust, is to pay interest at the judicature rate of five per cent on the sum of $249,163 from 31 March 2011 to the date of today’s judgment, being 20 June 2017. The daily rate is
$34.13. The per annum rate is $12,458.15. The number of days is
2,273 and the total interest payable is therefore $77,577.49.
(c) Mr Martin, as trustee of TM Trust, is also to pay the costs incidental to this proceeding on a 2B basis plus disbursements. These costs are
of $8,808.50 and disbursements of $282.60, totalling $9,091.10.
Woolford J
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