LSF Trustees Ltd v Footsteps Trustee Co Ltd (in liq)
[2017] NZHC 2619
•8 November 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2016-505-1506 [2017] NZHC 2619
UNDER Sections 289 and 290 of the Companies
Act 1993
IN THE MATTER OF
an application to set aside a statutory demand
BETWEEN
LSF TRUSTEES LIMITED Applicant
AND
FOOTSTEPS TRUSTEE COMPANY LIMITED (IN LIQUIDATION) Respondent
CIV-2017-404-1519
UNDER Sections 289 and 290 of the Companies
Act 1993
IN THE MATTER OF an application to set aside a statutory demand
BETWEEN TAL 41 LIMITED Applicant
ANDFOOTSTEPS TRUSTEE COMPANY LIMITED (IN LIQUIDATION) Respondent
Hearing: 8 November 2017 Appearances:
L Herbke for the Applicants
K G Crossland for the RespondentsJudgment:
8 November 2017
LSF TRUSTEES LIMITED v FOOTSTEPS TRUSTEE COMPANY LIMITED (IN LIQUIDATION) [2017] NZHC 2619 [8 November 2017]
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
[1] The applicants apply under s 290 of the Companies Act 1993 to set aside statutory demands under s 289. The statutory demand served on LSF Trustee Ltd requires it to pay Footsteps Trustee Company Ltd (in liq):
$65,757.72 including GST due and owing to it in respect of its indemnity (provided to it under the written trust deed for the Footsteps Trust) under the Trustee Act 1956 as former trustee of the Footsteps Trust, for the debts it reasonably incurred including outstanding amounts owed to the Auckland Council ($41,438.92) in respect to the units and amounts listed in the attached Schedule A and to Body Corporate 200871 for $24,318.80 in respect to the units and amounts listed in the attached Schedule B and the indemnity.
The statutory demand served on TAL 441 Ltd requires it to pay Footsteps Trustee
Company Ltd (in liq):
$313,249.10 including GST due and owing to it in respect of its indemnity (provided to it under the written deed of trust for the Footsteps Trust) and under the Trustee Act 1956 as former trustee of the Footsteps Trust, for the debts it reasonably incurred including outstanding amounts owed to the Auckland Council ($169,522.88) in respect to the units and amounts listed in the attached Schedule A) and to Body Corporate 200871 ($143,726.22) in respect to the units and amounts listed in the attached schedule B) and the indemnity.
In both cases, there is a common issue whether the respondent is a creditor of the applicants. The cases have a common background involving the removal of assets from an insolvent corporate trustee.
The parties
[2] Footsteps Trustee Company Ltd was a corporate trustee of the Footsteps Trust, established under a deed of 29 October 2010. The deed of trust is not in evidence. The company’s directors are Mark Lyon and his son, Richard. Richard is the sole shareholder. Mark Lyon is in prison for criminal offending. He has not sworn an affidavit.
[3] The company owned 25 of 28 units in a building at 15 Karaka Street, Newton, Auckland. The property is in unit title ownership. The body corporate manager is Strata Title Administration Ltd. The company apparently planned to use the units for residential accommodation but its plans were thwarted because of non- compliance with rules in the Auckland District Plan. I am advised that the building has been boarded-up and is no longer used. There is doubt as to how much value there is in the units themselves, as opposed to the land. The company did not pay rates to the Auckland Council, and it did not pay levies to the body corporate. Because it did not pay levies to the body corporate, it was unable to vote at meetings of the body corporate and has therefore not been able to resist resolutions imposing levies.
[4] The Auckland Council took steps to recover rates. It served a statutory demand, requiring payment of the sum of $165,738.26 for rates going back to 2012. The company applied to set aside the statutory demand, but that application was unsuccessful. Associate Judge Doogue dismissed the application on 21 July 2016.1
The body corporate sued the company for unpaid levies and obtained judgment
against the company in April 2016 for $88,115.59.2
[5] LSF Trustee Ltd was incorporated in 2014. Its directors are Mark Lyon and his solicitor. It is said to be the trustee of the Lyon Super Fund Trust. The deed for that trust has not been put in evidence. LSF Trustee Ltd denies that it is or ever has been a trustee of the Footsteps Trust.
[6] On 7 April 2016, Footsteps made a written agreement with LSF Trustee Ltd to sell it four units on the top floor of the building at 15 Karaka Street. The purchase price was not a payment as such to Footsteps. Instead, LSF Trustee Ltd undertook to make payments of outstanding rates and unpaid body corporate levies. The total amount payable under the agreement was, on my calculation, $46,679.98. The agreement also gave LSF Trustee Ltd a pre-emptive right to purchase other units
within the building at 15 Karaka Street.
1 Footsteps Trustee Company Ltd v Auckland Council [2016] NZHC 1669, [2016] NZAR 1324.
2 Body Corporate 200871 v Footsteps Trustee Company Ltd [2016] NZDC 6188.
[7] TAL 41 Ltd was incorporated on 19 April 2016. Its only director is its solicitor. It is also a corporate trustee. By deed dated 20 April 2016, Footsteps was removed as trustee of the Footsteps Trust. The parties to the deed are Mr Mark Lyon, Footsteps Trustee Company Ltd and TAL 41 Ltd. The deed shows that under his power as appointor Mr Lyon removed Footsteps Trustee Company Ltd as trustee and appointed TAL 41 Ltd as the new trustee. The deed also declares that all real and personal property now vested in the retiring trustee will from the date of the deed vest in the new trustee, upon the trusts from which the retiring trustee is discharged, subject to the powers and conditions express and implied in the deed of trust. Unlike many deeds under which trustees retire and new trustees are appointed, there is no provision for one trustee to indemnify the other.
[8] Footsteps Trustee Company Ltd was ordered into liquidation on 10 March
2017 on the application of the Auckland Council. Mr van Delden and Ms Finnigan are the liquidators. Ms Finnigan says that the creditors’ claims in the liquidation come to some $343,000. The claims are for unpaid rates, body corporate levies and accounting fees. There is a preferential claim of $7,000 for the costs on the liquidation application. There is no evidence of any assets of the company, apart from the debts claimed in the statutory demands.
Footsteps’ indemnity claims
[9] Ms Finnigan says that Footsteps, as trustee, is entitled to be reimbursed for debts it incurred as trustee. That right to be reimbursed survived the company’s removal as trustee. The company still has the right to be indemnified from the assets of the trust. As LSF Trustee Ltd is the current legal owner of some trust assets, the liquidators consider that it is the appropriate person for enforcement of its right to reimbursement and, as TAL 41 Ltd is the replacement trustee, the company can also look to it for reimbursement.
[10] The debt claimed in the statutory demand by LSF Trustee Ltd is for rates and body corporate levies for the four units transferred to LSF Trustee Ltd under the agreement of April 2016. The debt in the demand served on TAL 41 Ltd is for rates and body corporate levies for the 21 units vested in it on the change of trustee.
[11] Under s 289(1) of the Companies Act, a statutory demand is a demand by a creditor in respect of a debt owed by a company. The demand must be made in accordance with that section. One requirement is that the debt must exist before the statutory demand is served.3
[12] For there to be a debt, the company must be under a legal duty to pay a sum of money to the person issuing the statutory demand. The debt must not be subject to a contingency. It must be a fixed sum. In Robt Jones Holdings Ltd v Northern Crest Investments Ltd Associate Judge Gendall declined to uphold those parts of a statutory demand which were for unliquidated damages.4 In OPC Managed Rehab
Ltd v Accident Compensation Corporation,5 the Court of Appeal recognised that in
addition to liabilities in contract and under statute, obligations to pay arising in restitution may in some cases be the subject of a statutory demand. In this case, however, we are dealing with the law of trusts. That is within the exclusive jurisdiction of equity (as opposed to its concurrent and auxiliary jurisdictions). In matters of trustees’ rights of indemnity, equity does not follow the law, because there is no law.
TAL 41 Ltd
[13] For the demand against TAL 41 Ltd, Footsteps is relying on the trustee’s right of indemnity out of trust assets for liabilities incurred. Footsteps does not allege any contractual right of indemnity against TAL 41 Ltd. While it refers to the trust deed for Footsteps Trust, that deed has not been put in evidence and there is no proof that the trust deed has a provision for indemnity in favour of the trustee for debts incurred. The deed under which Footsteps was replaced by TAL 41 Ltd as trustee also does not contain any indemnity provision. It is arguable whether an indemnity could be implied. In the circumstances of this case, where trust assets have been removed from an insolvent trustee, the people who arranged the transaction may have intended to leave Footsteps assetless and without any ability to
pay its debts. Given that apparent underlying intention, the court could not by
3 Keene v Okere Holdings Ltd (1996) 7 NZCLC 261,034 (HC).
4 Robt Jones Holdings Ltd v Northern Crest Investments Ltd (2010) 11 NZCPR 206 (HC).
5 OPC Managed Rehab Ltd v Accident Compensation Corporation [2006] 1 NZLR 778 (CA).
implication say that there is a right of indemnity. That would impose an obligation which the parties did not intend.
[14] Instead there is right of indemnity at equity, which goes back at least to the days of Lord Eldon.6 It is now recognised in s 38(2) of the Trustee Act 1956:
38 Implied indemnity of trustees
…
(2) A trustee may reimburse himself or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers; but, except as provided in this Act or any other Act or as agreed by the persons beneficially interested under the trust, no trustee shall be allowed the costs of any professional services performed by him in the execution of the trusts or powers unless the contrary is expressly declared by the instrument creating the trust:
provided that the court may on the application of the trustee allow such costs as in the circumstances seem just.
That section does not, however, set out the entire law as to trustees’ rights of indemnity. There is a convenient summary in the judgment of Brereton J in Lemery Holdings Pty Ltd v Reliance Financial Services Ltd Pty Ltd:7
The relevant principles concerning a trustee’s right of indemnity against trust assets include the following, for which I am indebted in large part to the analysis by Austin J in Trim Perfect Australia Pty Ltd (In Liq) v Albrook Constructions Pty Ltd [2006] NSWSC 153 at [20].
First, as against a third party, a trustee is personally liable for debts and liabilities incurred in its capacity as trustee: Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319; Octavo Investments Pty Ltd v Knight (1979)
144 CLR 360 at 367.
Second, however, the trustee has a right of indemnity out of the trust assets for expenses or liabilities incurred by the trustee, by recoupment of expenditure and exoneration from liability: Octavo Investments v Knight (at
367); Chief Commissioner of Stamp Duties for New South Wales v Buckle
(1998) 192 CLR 226 at 245.
Third, this right of indemnity, recoupment and exoneration is secured by an equitable lien over the trust assets, which arises by operation of law and
6 Worrall v Harford (1802) 8 Ves 4 at 8.
7 Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344, (2008) 74 NSWLR 550 at 553-554. See also S and S Ltd v XYZ Ltd [2016] NZHC 26, (2016) 4
NZTR 26-029 at [38] and Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at 16.6.
confers a proprietary interest, in the nature of a security interest, in the trust assets, and takes priority over the claims of beneficiaries: Octavo Investments v Knight (at 367, 370); Chief Commissioner of Stamp Duties for New South Wales v Buckle (at 246).
Fourth, this equitable lien extends to all of the trust assets, save only those that are specifically excluded by the trust instrument: Dowse v Gorton [1891] AC 1990; Octavo Investments v Knight (at 367).
Fifth, being an equitable lien, the security is enforceable by the trustee only by judicial sale or appointment of a receiver, and not by foreclosure or by sale out of Court: Tennant v Trenchard (1869) LR 4 Ch App 537; ANZ Banking Group Ltd v Intagro Projects Pty Ltd [2004] NSWSC 1054 at [14]; Melbourne Tramways Trust v Melbourne Tramway & Omnibus Company Ltd (1887) 13 VLR 487 at 490; Re Pumfrey (1882) 22 Ch D 255 at 265; Re Stucley [1906] 1 Ch 67; Davies v Littlejohn (1923) 34 CLR 174 at 184; Hewett v Court (1983) 149 CLR 639 at 663; E I Sykes and S Walker, The Law of Securities: an account of the law pertaining to securities over real and personal property under the laws of Australian jurisdictions, 5th ed (1993) Sydney, Lawbook Co Ltd at 198.
Sixth, the right of indemnity accrues at the time the obligation is incurred: Xebec Pty Ltd (In Liq) v Enthe Pty Ltd (1987) 18 ATR 893; Southern Wine Corporation Pty Ltd (In Liq) v Frankland River Olive Co Ltd (2005) 31
WAR 162 at [30]; and is not subsequently lost by cessation of office, whether by retirement or removal: Xebec v Enthe (at 898); Coates v McInerney (1992) 7 WAR 537; Southern Wine Corporation (at [30]); Dimos v Dikeakos Nominees Pty Ltd (1996) 68 FCR 39 at 43.
Seventh, upon bankruptcy or liquidation of a trustee, its right of indemnity vests in its trustee in bankruptcy or liquidator: Official Assignee of O’Neill v O’Neill (1898) 16 NZLR 628; Jennings v Mather [1901] 1 KB 108 at 117; Savage v Union Bank of Australia Ltd (1906) 3 CLR 1170 at 1188, 1196; Octavo Investments v Knight; Re Suco Gold Pty Ltd (In Liq) (1983)
33 SASR 99.
Eighth, if the trust property is transferred to a new trustee, the lien survives and the new trustee takes subject to the lien of the old trustee – except perhaps in the exceptional case of a bona fide purchaser for value without notice: Belar Pty Ltd (In Liq) v Mahaffey [2000] 1 Qd R 477 at [20]; Octavo Investments v Knight (at 370); Chief Commissioner of Stamp Duties for New South Wales v Buckle (at 246); Re Exhall Coal Co Ltd (1866) 55 ER 970.
Ninth, a trustee is entitled to retain possession of trust property against a beneficiary until its indemnity is exercised: Octavo Investments v Knight (at 369-370); Chief Commissioner of Stamp Duties for New South Wales v Buckle (at 246); Re Exhall Coal Co Ltd (at 972); Re Enhill Pty Ltd [1983] 1 VR 561.
[15] After carefully examining the authorities, Brereton J also found that a former trustee is not necessarily entitled to retain assets for the indemnity against a new trustee. That is consistent with the automatic vesting of assets under s 47 of the Trustee Act 1956. The summary also shows that the exercise of powers by a trustee
under the equitable lien is by way of judicial sale or appointment of a receiver. Brereton J says nothing about a former trustee being able to sue a new trustee personally. His summary does not suggest that such a personal claim is available in the absence of any contractual indemnity.
[16] A trustee’s indemnity for expenses goes to reimbursement, exoneration, retention and realisation.8 A trustee who incurs a liability may discharge it out of his own pocket and then reimburse himself from the trust fund. Alternatively, he may discharge the liability by paying directly from the trust fund to exonerate himself. The trustee may retain the trust fund until he has been indemnified for present liabilities and contingent or future liabilities, and a trustee may realise trust
assets to meet his expenses and liabilities. That position changes when the trustee is replaced. The equitable lien allows the former trustee recourse to trust assets owned by the new trustee, but only with the court’s assistance.
[17] In this case, there is no difficulty in holding that the debts incurred by Footsteps as trustee may be the subject of the indemnity. The council rates and body corporate levies were outgoings payable on trust assets. The accounting fees were not the subject of the statutory demand, but I would have no difficulty in accepting that the accounting fees incurred by a trustee are expenses properly incurred. While Footsteps may have an equitable lien over trust assets now held by the new trustee, TAL 41 Ltd, the question is whether its indemnity gives it a personal claim against TAL 41 Ltd so as to make Footsteps a creditor.
[18] Relevantly, Footsteps has no contractual rights against TAL 41 Ltd. That is because of the absence of any indemnity provision in the deed of April 2016. Instead, Footsteps can only rely on equity under s 38(2) of the Trustee Act 1956. Under the summary given by Brereton J in Lemery, Footsteps continues to have an equitable lien over the assets of the trust, now held by TAL 41 Ltd. When it had legal title to the trust assets, it could use its powers as trustee to reimburse itself from
trust property, to exonerate itself from liability. It could retain assets until liabilities
8 See Lynton Tucker and others (eds) Lewin on Trusts (19th ed, Sweet & Maxwell, London, 2015)
at 21-043.
were cleared, and could realise those trust assets. Once the assets vested in the new trustee, it kept its equitable lien.
[19] An equitable lien is a form of equitable charge. For an equitable charge in the strict sense, an owner sets aside property which is to be security for the discharge of some debt or obligation without there being any change of ownership either at law or equity. It is to be distinguished from an equitable mortgage. The charge arises voluntarily by the actions of the parties. An equitable charge gives the holder of the charge a right of realisation by judicial process – that is, by the court appointing a
receiver appointed or ordering a sale.9 An equitable lien is different from an
equitable charge because it arises by implication of equity, that is independently of the intentions of the parties. It remains a charge over property and may be enforced in the same way as an equitable charge – that is, by judicial process for a court- appointed receiver or an order for sale.10
[20] Because an equitable charge arises out of the actions of the parties, a charge may support personal covenants for payment. But because the lien arises independently, by implication of equity, there need not be personal covenants for payment. When trustees are replaced, there may often be contractual indemnities in deeds recording the retirement of one trustee, the appointment of another and the transfer of assets. But, absent such contractual arrangements, there is no personal liability under an equitable lien. It is no more than a charge against assets which may be enforced by judicial process. For Footsteps to enforce its lien against trust assets held by the new trustee, TAL 41 Ltd, its remedy is to apply to the court for an order for sale of the assets. In the absence of any personal covenant by TAL 41 Ltd, Footsteps is limited to the rights of enforcement of the lien, that is, by judicial process. There is no debtor-creditor relationship between TAL 41 Ltd and Footsteps Trustee Company Ltd.
[21] Trustees may also have personal rights of indemnity against beneficiaries. This personal right of indemnity is not available against trustees. Moreover, any
9 Swiss Bank Corporation v Lloyd’s Bank Ltd [1982] AC 584 per Buckley LJ at 594-595; Carreras
Rothmans Ltd v Freeman Matthews Treasure Ltd [1985] Ch 207 (CA) at 227.
10 Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington,
2009) at 30.3.1.
liability would arise only on a court order being made. The power to order a beneficiary to indemnify a trustee is discretionary and subject to the order of the court.11
[22] The text of s 38(2) of the Trustee Act also makes it plain that the trustees may have reimbursement out of trust property. In Lemery, Brereton J was concerned only with a proprietary remedy. In short, a new trustee holds trust assets subject to an equitable lien in favour of the former trustee. The new trustee holds the trust assets on the basis that the former trustee may exercise his powers against those trust assets. But that vulnerability does not by itself impose a personal duty on the new
trustee to pay the trust debt. If I can use Hohfeld language,12 this is not a relationship
of claim and duty but of power and liability.
[23] Mr Crossland’s written submissions referred to decisions in New Zealand and Australia: Coates v McInerney, Foote v Foote, Forrest Trustee Ltd v Auckland Council and Rothmore Farms Pty Ltd v Belgravia Pty Ltd.13 Those cases in their various ways illustrate the principles stated by Brereton J in Lemery. But none is authority for the proposition that a new trustee is under a personal duty to indemnify a former trustee in the absence of any contractual provision to that effect.
[24] In my judgment, there is a genuine dispute as to the liability of TAL 41 Ltd under the statutory demand of 21 June 2017. It is not clear that TAL 41 Ltd is under a personal duty to reimburse Footsteps for liabilities incurred as trustee. It is arguable that the assets it holds are subject to powers which Footsteps may exercise to enforce its indemnity. But that is not the same as saying that TAL 41 Ltd is under
a duty to pay.
11 Ahmed Terzic “Subrogation to the Trustee’s Personal Right of Indemnity” (2017) 91 ALJ 736.
12 Wesley Hohfeld “Some Fundamental Legal Conceptions as Applied in Judicial Reasoning”
(1913) 23 Yale LJ 16.
13Coates v McInerney (1992) 6 ACSR 748 at 749-750; Foote v Foote [2013] NZHC 2590, [2013] NZAR 1386; Forrest Trustee Ltd v Auckland Council [2013] NZHC 1440; and Rothmore Farms Pty Ltd (in liq) v Belgravia Pty Ltd [2005] SASC 117, (2005) 239 LSJS 105.
LSF Trustee Ltd
[25] The agreement between Footsteps and LSF Trustee Ltd made on 7 April
2016 has these provisions under the heading “Background”:
I. LSF has offered to purchase four (4) of the Footsteps Units being units GE, GD, GC and GB all located on the top floor of the Building being the units in Title Identifiers NA129C/784, NA129C/785, NA 129C/787 and NA129C/786 (S&P Units) for a price calculated as being Footsteps levy liability to Strata Title ($16,573.06) plus the liability of Footsteps to Council for rates levied in respect of the S&P Units (30,106.92) and upon the basis that Footsteps grants LSF the pre-emptive right to purchase each of the other twenty-one (21) units comprising the Footsteps Units (Option Units).
J. Footsteps has accepted this offer and agreed to transfer the S&P
units to LSF in consideration of LSF paying Footsteps/Strata Title
$16,573.06 and notifying Council of the change in ownership of the
S&P units and assuming all liability to Council for rates in respect of the S&P units and Footsteps granting LSF the right to purchase pre- emptively the Option Units upon such terms as are agreed and failing agreement the same terms as Footsteps are offered by a third party for the Option Units.
K. The Parties having reached such agreement intend by the Deed to record it.
[26] In the agreement, the parties agreed to perform and execute such further documents as may be required to give effect to the agreement and to pay on the terms recorded.
[27] The parties did not use the ADLS standard agreement for sale and purchase. The agreement does not fix a date for settlement. The agreement does not make payment of body corporate levies and payment of Auckland Council rates interdependent with the transfer of title.
[28] Under a conventional agreement for sale and purchase, outgoings are apportioned on settlement. The seller of an apartment in a unit title complex would be required to pay all body corporate levies and all rates up to the date of settlement. The agreement in this case adjusted that normal course. The agreement required LSF to pay a sum for body corporate levies and a further sum for rates. Under the rating legislation, Footsteps (as ratepayer) is liable for rates levied during its
ownership. LSF Trustee Ltd as the new owner would have to answer to the council for any rates unpaid by the former owner but it could seek reimbursement from Footsteps. The contractual effect of the agreement is to adjust that so that LSF Trustee Ltd cannot not have recourse against Footsteps. That is because it is required to pay rates which were originally payable by Footsteps.
[29] A similar position arises under the Unit Titles Act 2010. Under s 124(2), the body corporate may recover unpaid levies from the owner at the time the levy became payable and from the unit owner at the time proceedings are started. Again, by contract, Footsteps and LSF Trustee Ltd have agreed that LSF Trustee Ltd will pay $16,573.06 for unpaid body corporate levies.
[30] The evidence shows that on settlement on 15 April 2016, LSF Trustee Ltd paid the $16,573.06 to Strata Title Administration Ltd by electronic banking. The liquidators have filed late evidence to show that that did not clear the indebtedness of Footsteps to the body corporate. Only about $4,000 was applied to body corporate levies, with the balance applied to debt-collection costs. While the intention of the agreement was to clear the indebtedness of Footsteps for body corporate levies, the payment did not achieve that intended purpose. Nevertheless, it is arguable for LSF Trustee Ltd that it has complied with the promise in the agreement by paying a stipulated sum. That provides an arguable defence as to its contractual liability to pay the levies.
[31] So far as the Auckland Council is concerned, in October this year LSF Trustee Ltd paid a sum of about $47,000 towards outstanding rates. That was performance of its contractual obligation to pay an amount towards rates. The amount it paid is more than it contracted to pay.
[32] The liquidators do not accept the validity of the sale to LSF Trustee Ltd. They may have good grounds for having that sale set aside. It may be a transaction to defeat creditors and might be set aside under Part 6 of the Property Law Act 2007. It might also be set aside under ss 298 and 299 of the Companies Act 1993. It may be voidable for other grounds as well. There is no evidence that the transaction has been set aside yet. Until it is set aside, LSF Trustee Ltd is entitled to maintain its
position that it has taken title to the units and has performed its obligations under the agreement.
[33] Mr Crossland invited me to treat the agreement as unsound because those behind LSF Trustee Ltd are the same people as behind Footsteps. There was common knowledge shared by both companies and the sale was patently at an under- value. Even if I were to accept those submissions, there remains a difficulty for Footsteps. If I were to ignore the agreement for sale and purchase and to treat the units now owned by LSF Trustee Ltd as subject to an equitable lien in favour of Footsteps, that would still not give Footsteps a personal claim against LSF Trustee Ltd. Its equitable lien would give it no more than the right of recourse to the assets by judicial process. For those reasons, I find that the contractual obligations under the agreement for sale and purchase has been arguably performed and that there is no claim available to Footsteps outside the terms of that agreement.
Result
[34] The upshot is that in both cases there are good grounds for disputing whether Footsteps is a creditor of either of the applicants. Footsteps may have other remedies. It may enforce its equitable lien against the units in the ownership of TAL 41 Ltd. And it may be able to have the sale to LSF Trustee Ltd set aside. But the debt claims – the claims to be a creditor – are genuinely disputable under s 290(4)(a) of the Companies Act. I do not regard the outcome as entirely satisfactory, but the liquidators are limited to the remedies available for equitable liens which do not extend to personal debt claims against new trustees. I regard it as an unsatisfactory feature of the law that assets held in trust can be moved relatively easily from an insolvent corporate trustee and that the remedies of trust creditors are cumbersome. But that simply reflects the present state of the law. I cannot alter that.
[35] I make orders setting aside the statutory demands against TAL 41 Ltd and against LSF Trustee Ltd.
Costs
[36] I have heard from counsel as to costs. Mr Herbke provided copies of correspondence between his office and the respondents’ lawyers sent “without prejudice save as to costs”. The first letter was sent on 13 October 2017. The offer in that letter was rejected on 16 October 2017. There was then a further communication on 7 November 2017 with a deadline of 5.00 pm for a response. Because proposals in those letters were not accepted, the applicants seek increased costs. They also say that costs should be ordered against the liquidators personally.
[37] On the other hand, Mr Crossland proposes that costs lie where they fall. He points to deficiencies in the application. There was a failure to provide adequate evidence at the outset and to spell-out the applicants’ positions fully in the applications. The matter at issue was a tricky point of law, and he considered that my decision may be of some value to insolvency practitioners generally – that is, there is a public interest element. He pointed to the difficulties of evidence being filed late, particularly by LSF Trustee Ltd. The liquidators took a pragmatic approach, as to the applicants continuing to instruct Barter Law when Barter Law had taken part in the matters in issue. He said that the case had exposed an unattractive gap in the law. In answer to my question, he acknowledged that while the liquidators had made oral requests for payment, no letters were sent before the statutory demands were served.
[38] On both sides, I consider that there are unsatisfactory aspects – less so on the side of the liquidators. They had limited material to work with. In particular they had not been provided with all the documents that ought to be handed over to liquidators by the officers of a company in liquidation. Notwithstanding that, the liquidators could have done better if they had been in less of a rush and had written to the applicants, setting out the basis for their belief that there was a personal liability for debts incurred by Footsteps as a trustee. The liquidators issued the statutory demands without taking legal advice. This was a tricky area of the law. I consider that at a minimum they should have taken legal advice first to ensure that there was a debt on which they could rely.
[39] Equally, there are unsatisfactory aspects on the applicants’ side. Their initial applications were minimal in the extreme, containing bare assertions with little substantiating evidence. Instead, the substantiating evidence only came in with affidavits in reply. I do not regard the correspondence between the lawyers as generating any entitlement to increased costs. Correspondence between lawyers as to the merits of a proceeding is always helpful in terms of allowing each side to evaluate their own case against the contentions of the other side’s lawyer. It can lead to issues being narrowed and to settlement. But there is to be no punishment if one side decides to take a case to court rather than to concede to the other side’s arguments. The exchange of correspondence does not give any reason for increasing costs.
[40] In these circumstances, I order that costs will follow the event, but I qualify standard costs:
[a] On each application, I fix the time for filing the application at 1 day rather than the standard 2 days (that is to reflect the fact that both applications were minimal);
[b] For each of the case management steps under step 49, I allow 0.2 of a day – for preparation for callover, filing a memorandum for callover, and for appearance at callover;
[c] For preparing submissions, I allow only one set of costs – that is, the cost of preparing submissions is to be divided equally between the applications;
[d] On each application for the hearing I allow a quarter of a day, to reflect the fact that the hearing has required half a day; but
[e] the applicants will recover their disbursements for filing their interlocutory applications and for service of the applications.
[41] I reject the proposal that the liquidators should answer personally for the costs. I see nothing in the conduct of the liquidators which merits making them personally responsible for the costs of the application. If the respondent were not in liquidation, and the liquidators were directors instead, there would be no basis for costs against the directors. Correspondingly, there is no case for an order for costs against the liquidators personally. While no letter was sent before the demands were served, that has increased the costs of the liquidation because the liquidators were unsuccessful. That factor does not require an order for increased costs.
[42] Costs are to be fixed by taking into account the matters I have set out. I trust counsel will agree. The orders for costs can only be enforced by the applicants having them taken into account to reduce any sums which the liquidators may claim are due under Footsteps’ equitable lien. Otherwise the cost orders do not appear enforceable.
…………………………....
Associate Judge R M Bell
Solicitors:
Barter Law, Auckland, for the Applicants
Shieff Angland, Auckland, for the Respondents
9
15
0