Madsen-Ries v Thompson
[2015] NZHC 3270
•17 December 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-007159 [2015] NZHC 3270
UNDER the Property Law Act 2007 and the
Companies Act 1993
IN THE MATTER
of the liquidation of Kiwi House Limited
(in liquidation)BETWEEN
VIVIEN JUDITH MADSEN-RIES AND DAVID STUART VANCE
Plaintiffs
AND
JOLYON BRENDAN GEORDIE THOMPSON
First Defendant
PHILIP IAN D'ATH Second Defendant
Hearing: 1 December 2015 Counsel:
NH Malarao and S Shin for Plaintiffs
DG Hurd for DefendantsJudgment:
17 December 2015
JUDGMENT OF ASHER J
This judgment was delivered by me on Thursday, 17 December 2015 at 3 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors/Counsel:
Meredith Connell, Auckland.
Brett Norris Law, Auckland. DG Hurd, Auckland.
MADSEN-RIES v THOMPSON [2015] NZHC 3270 [17 December 2015]
Introduction
[1] This is an application to set aside a formal proof judgment I delivered on
6 June 2012.1 In that judgment, I found that a property transferred from Kiwi House Ltd (in liquidation) (Kiwi House) to the defendants was a disposition to which s 346 of the Property Law Act 2007 (the Act) applied. I ordered that the property be vested back into the name of Kiwi House.
[2] The first defendant, Mr Jolyon Thompson, applies in his own capacity and as a trustee of the Swamp Lake Trust (the Trust) to set aside that judgment. The second defendant Mr Philip D’Ath was also a trustee, but has since been replaced by BAN Trust Co Ltd, which supports Mr Thompson in the application. Relying on further affidavit evidence and additional argument, the defendants say the judgment should be set aside. The liquidators of Kiwi House, the plaintiffs Vivien Madsen-Ries and David Vance, oppose the application. They say that the proposed defence has no merit, and the judgment should stand.
Background
[3] The property concerned is a residential property at 194 Lake Road, Northcote, Auckland. Before its transfer to Mr Thompson and Mr D’Ath as trustees of the Trust on 19 June 2008, the property was owned by Kiwi House. Mr Thompson lives at the property and has previously owned the property in his personal capacity.
[4] Kiwi House was put into liquidation on 6 March 2009. The liquidators filed their application to set aside the disposition of property as prejudicial to creditors on
1 November 2010. The first defendant took no steps in the proceeding and the liquidators sought formal proof. Since then, the proceeding has had an unusual history.
[5] On 22 February 2012, I declined to enter judgment by way of formal proof. Mr Thompson had appeared represented by counsel when the formal proof
application was called in the Duty Judge list on 24 November 2011. After
1 Madsen-Ries v Thompson [2012] NZHC 1260.
considering the affidavit evidence and submissions I concluded that it had not been proved that he had been adequately served.2
[6] On 24 February 2012, I recalled that judgment.3 It turned out that there had been an affidavit filed relevant to the question of proof of service that had not been brought to my attention. It contained evidence indicating the documents presented by Mr Thompson were forged. The 22 February 2012 decision had been made without the benefit of that affidavit.
[7] On 17 April 2012, I declined leave to Mr Thompson to file a further affidavit out of time attesting to his whereabouts on the date it was said he was served.4
[8] Finally, on 6 June 2012,5 I considered in detail all the evidence as to whether Mr Thompson had been validly served. I concluded that Mr Thompson’s documentation of his whereabouts was forged. I rejected other aspects of his evidence and that of other deponents who had sworn affidavits in support of his position. I concluded that Mr Thompson had been properly served and had not filed a statement of defence in accordance with the High Court Rules (the Rules).
[9] I then turned to the question of whether judgment should be entered by way of formal proof.6 The statement of claim referred to the transfer of 19 June 2008 and alleged that there was no consideration for the disposition. It was pleaded that the disposition was with intent to prejudice creditors of the company, or by way of gift, or without reasonable exchange in value. At the hearing, Mr Thompson asserted that it was at least arguable that the 2008 transfer was not a disposition to prejudice creditors, and in particular was not under s 346(1)(b) a disposition made with intent to prejudice a creditor or without receiving a reasonably equivalent value in
exchange.7
2 Madsen-Ries v Thompson [2012] NZHC 237.
3 Madsen-Ries v Thompson [2012] NZHC 277.
4 Madsen-Ries v Thompson [2012] NZHC 790.
5 Madsen-Ries v Thompson, above n 1.
6 At [47]–[104].
7 At [96]–[98].
[10] I approached the argument on the basis that if the defence put forward was seriously arguable then justice might well require a declinature of formal proof and an adjournment and timetable with directions to enable Mr Thompson to defend the case. If on the other hand the defence appeared to be without merit then I should enter formal proof.8 I concluded as follows:
[99] I have had the benefit only of relatively short substantive submissions on the merits from the plaintiffs and Mr Thompson. Because of the unfocussed assertions of Mr Thompson I have taken some time to go through the background factual matters and his assertions. In the end, the transfer of the property to the Trust in 2008 was undoubtedly made without any reasonable exchange in value. The overwhelming impression that the evidence leaves is that Mr Thompson was juggling his assets because he saw profit in doing so without any regard to legal reality or substance. The 2008 transfer appears to have been made to suit Mr Thompson's convenience, and to have not evidenced a genuine transaction.
[100] In 2008 [Mr Thompson] was living in a valuable property, and the two entities that appear from the title to have had an interest in the property, himself and Kiwi House, were to become bankrupt and go into liquidation respectively. [Mr Thompson] argues that by a transaction made for no apparent consideration he had legitimately moved the house property from the name of those two entities and the reach of creditors to a third entity, a trust. The evidence indicates that the trust is operated for his personal benefit. In justifying the trust's claim he is unsupported by his co-trustee, and any document that proves the trust has made any contribution to the property.
[101] I am satisfied that there is no reason to defer the application for formal proof, and that judgment should be entered. I therefore enter judgment on the basis of the first cause of action in the statement of claim. I consider it proven.
[11] Under s 348 I set aside the disposition on the basis that there was no reasonably equivalent exchange in value. I did not consider it necessary to determine the other grounds. I ordered the transfer of the property back to Kiwi House.9
[12] This application raises the same broad issue as that raised in the formal proof hearing: whether judgment against Mr Thompson could lead to a miscarriage of justice. However, this is a new application, Mr Thompson has instructed new
counsel, and the arguments raised in this hearing are much broader than those aired
8 At [46].
9 At [102].
at the formal proof. Without objection from Mr Malarao, I consider the issues afresh.
Summary of law
[13] Mr Thompson’s application is brought under r 15.10 of the Rules which provides:
15.10 Judgment may be set aside or varied
Any judgment obtained by default under rule 15.7, 15.8, or 15.9 may be set aside or varied by the court on such terms as it thinks just, if it appears to the court that there has been, or may have been, a miscarriage of justice.
[14] This rule was amongst the amendments made to part 15, subpart 2 of the Rules on 4 February 2013.10 A formal proof judgment obtained under r 15.9 may be set aside under r 15.10 if it appears to the Court that there has been a “miscarriage of justice”. The rule is on identical terms to its predecessor, r 15.13. As was stated by Jeffries J in KBR MacKinder Ltd v Fine Art Productions Ltd:11
The issue for the court is possible miscarriage of justice if the judgment is allowed to stand.
[15] There is a body of law indicating that when a default judgment is irregularly obtained the defendant is entitled to ex debito justitiae to set it aside.12 The rigidity of this approach is not supported by the breadth of the current rule, or the objective of the Rules to achieve the just, speedy and inexpensive determination of proceedings.13 No absolute rule that all irregular judgments be set aside is required, and such rule could on occasion just delay an inevitable judgment. I respectfully agree with the observation of Hammond J in Korochine 15 Ltd v R P Charans
Investments Ltd,14 that the Court retains an overall discretion. Issues of relevance
10 Subpart 2, part 15 (rr 15.3–15.14) was substituted by a new subpart 2 (rr 15.3–15.11) as from
4 February 2013 by r 21 of the High Court Amendment Rules (No 2) 2012 (SRS2012/409).
11 KBR MacKinder Ltd v Fine Art Productions Ltd HC Wellington A372/84, 17 April 1986 at 4.
12 O'Shannessy v Dasun Hair Designers Ltd [1980] 2 NZLR 652 (HC) at 654; Williams v Van Loghem Investments Ltd [2012] NZHC 829 at [21]; and Nattrass v Rail Tractors Ltd [1928] NZLR 620 (CA) at 625.
13 High Court Rules, r 1.2.
14 Korochine 15 Ltd v R P Charans Investments Ltd HC Hamilton M338/94, 13 December 1994 at
6.
will include the degree of irregularity,15 the strength of the claim and whether there may have been a miscarriage of justice.
[16] In approaching the exercise of the discretion to set aside a judgment regularly obtained, such as is the case here, the principles set out in the Court of Appeal decisions of Paterson v Wellington Free Kindergarten Association Inc16 and Russell v Cox17 apply. The Court is not limited in the considerations to which it may have regard, but three factors have long been considered of dominant importance.
They are:
(a) whether the defendant has a substantial ground of defence; (b) any reasonable explanation for the delay; and
(c) whether the plaintiff will not suffer irreparable injury if the judgment is set aside.
[17] Generally in these applications the focus will be on whether there is a substantial ground of defence. If there is no substantial ground of defence, a well explained delay may still be insufficient for the judgment to be set aside. If there is a very strong ground of defence, even a delay that cannot be reasonably explained may not prevent the Court from setting aside the judgment. The reason for the delay is always a relevant factor, but the merits remain the issue of primary focus.
The liquidator’s claim
[18] Part 6, subpart 6 (ss 344–350) of the Act enables a Court to order that property acquired or received under or through certain prejudicial dispositions made by the debtor be restored for the benefit of creditors. Dispositions at undervalue are gifts for the difference between the amount paid and the amount that should have
been received.18 Under s 345(2)(a) a disposition includes a transfer.
15 Mehta v Grimshaw & Co HC Auckland CIV-2007-404-4855, 10 March 2008 at [23], citing
Gendall J in Arnott v Artisan Holdings Ltd (1998) 12 PRNZ 205 (HC).
16 Paterson v Wellington Free Kindergarten Association Inc [1966] NZLR 975 (CA) at 983.
17 Russell v Cox [1983] NZLR 654 (CA) at 659.
18 Property Law Act 2007, s 345(1)(c).
[19] Section 346(1) is important here. It provides:
346 Dispositions to which this subpart applies
(1) This subpart applies only to dispositions of property made after 31
December 2007—
(a) by a debtor to whom subsection (2) applies; and
(b) with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.
[20] It is common ground that Kiwi House was a debtor to whom subs (2) applied in that it was insolvent at the time of the disposition, and the disposition was made after 31 December 2007. The question is whether Mr Thompson has a substantial ground of defence to the liquidator’s claim that the s 346(1)(b) test is met.
Further grounds and further evidence
[21] I have received a significant quantity of further affidavit evidence and have been referred to a number of documents that were not referred to at the earlier hearing. Mr Malarao for the liquidators has also expanded his submission. He now relies on the additional ground that the disposition should be set aside as it was made with the intent to prejudice a creditor. He has not objected to Mr Thompson re-arguing whether he has a reasonably arguable defence.
[22] I propose to consider all the additional material filed on behalf of Mr Thompson. Although this application involves in part the same test as that applied when the formal proof judgment was entered, it seems to me that does not bar the admission of further evidence. Equally I see no basis for prohibiting Mr Malarao from relying on the additional ground, as I have been unable to discern any prejudice to Mr Thompson if I allow this to occur. The claim that the disposition was intended to prejudice a creditor was set out in the statement of claim, and at the hearing in front of me both parties have provided specific submissions on the issue of intent. Indeed, it has always been the tenor of the liquidators’ position that the disposition was made with this intent.
[23] In relation to the affidavit evidence, I apply the approach set out in Eng Mee Yong v Letchumanan,19 often applied in New Zealand in the summary judgment context, and do not accept uncritically every statement in an affidavit, however lacking in precision or inconsistent with undisputed facts. A Court should not feel constrained to accept affidavit evidence in an application to set aside judgment that is plainly lacking in credibility and demonstrably incorrect.
Summary of submissions
[24] Mr Thompson submits it is seriously arguable that the disposition from Kiwi House should not have been set aside under subpart 6 of the Act. He says that Kiwi House received a reasonably equivalent exchange of value in consideration for the
2008 transfer to the Trust, and as Kiwi House’s largest creditor, the IRD, agreed to the transfer, the liquidators were estopped from applying to set aside the transaction. Alternatively, it is submitted that Kiwi House never had good title to the property anyway, because the 2005 transfer was of no effect and so the liquidators were in no position to apply to set aside the disposition.
[25] The liquidators deny all of Mr Thompson’s claims and submit in addition that the disposition was made with intent of defeating creditors’ claims. The tenor of the liquidators’ argument is that Mr Thompson’s claims are inventions and his application is riddled with factual and legal problems.
[26] In her affidavit filed in support of formal proof, the liquidator Ms Madsen-Ries was critical of Mr Thompson. She observed that she had had numerous dealings with Mr Thompson as liquidator for six companies, including Kiwi House. She stated that one characteristic of his dealings with her and her staff was that he registered changes on public registries until sometimes well after he alleged that the action or transactions had taken place. She gave examples. She also alleged that it was a characteristic of Mr Thompson to shift responsibility for his own actions on to others. For example, she stated in relation to Mr Thompson’s
bankruptcy:
19 Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 341, referred to in Pemberton v Chappell
[1987] 1 NZLR 1 (CA) at 4.
Mr Thompson states that he went bankrupt because the Accident Compensation Corporation did not pay the 80 per cent of his salary that it initially promised to. I note that the Insolvency Trustee’s summary (annexed at exhibit 1 to Mr Thompson’s affidavit) records that the estimated claims against Mr Thompson to be over $1,300,000. This is significantly more than what Mr Thompson could ever hope to receive from ACC.
[27] She also referred to him blaming others for making mistakes in registration. She asserted that it was common for Mr Thompson to be replaced as a director by various other persons whom she named.
The key facts
[28] It is necessary to set out some of the key facts again, although these have been referred to extensively in my earlier judgments.
The 1999 “transfer” to the Trust
[29] Mr Thompson purchased the property in his own name on 18 March 1997 for
$196,000. The purchase was largely funded through a mortgage. The title shows that the property remained in his name until 14 October 2005 when he transferred it to Kiwi House.
[30] Mr Thompson deposed that he executed a deed of trust creating the Trust on
22 December 1999. He provided a trust deed showing Mr Thompson as the settlor and Mr Thompson and Mr D’Ath as the trustees. Affidavits have been provided from Mr Thompson’s lawyers, Davenports, confirming the establishment of the Trust.
[31] He further deposed that in 1999 the property was sold to the Trust. He provided a written document called “Sale of 194 Lake Road, Northcote to Trust” in which Mr Thompson records a “wish to sell” the property to the Trust for $180,000 with Mr Thompson continuing to meet mortgage payments. The agreement included an acknowledgement of debt of the trustees of the Trust to Mr Thompson, in the amount of the bank debt less the release and forgiveness of $27,000. In addition there is a Trust resolution approving the transaction and allowing Mr Thompson and
his family to occupy the house. There was reference to an executed memorandum of transfer which was signed by Mr Thompson and held by Davenports.
[32] I record that I am satisfied at least on a prima facie basis that the Trust was created, and a sale agreement and acknowledgement of debt and transfer signed and held. However, the transfer was not registered, a point to which I will return, and has not been produced or located. The property remained in Mr Thompson’s name. I record that an apparently incorrect reference to the wrong deed of acknowledgement of debt before me in the formal proof hearing has now been
clarified.20 The relevant acknowledgement of debt was in the sale agreement.
The 2005 transfer to Kiwi House
[33] Kiwi House was incorporated on 29 September 2005. At the time there was a registered valuation of the property of $482,000. By memorandum of transfer on
6 October 2005 the property was transferred from Mr Thompson to Kiwi House. Mr Thompson documented the transaction through new lawyers, O’Brien Law Associates (O’Brien Law). Mr Thompson deposes that the sale was intended to be the initial step in a development of the property and adjacent properties then owned by him and his interests.
[34] This 2005 transfer appears to have been carefully documented. Although there is no agreement for sale and purchase, the settlement statement of 7 October
2005 shows that the property was subject to a mortgage to the Bank of New Zealand (BNZ) and that the proceeds of that loan were $335,000, and that “balance – amount outstanding by Kiwi House Ltd to J Thompson” was $149,326.20. Mr Thompson produced a page of what appears to be a deed of acknowledgement of debt of
29 October 2005 from Kiwi House to Mr Thompson for that sum.
[35] While the transfer to Kiwi House was stated by Mr Thompson to be for the purposes of a development, it is common ground that a GST input credit of
$56,045.53 was claimed as a refund on the Kiwi House purchase. During an audit in
November 2005, the Inland Revenue Department (the IRD) discovered that Kiwi
20 Madsen-Ries v Thompson, above n 1, at [51].
House should not have had this refund because Mr Thompson was an “associated person” for the purposes of the Goods and Services Tax Act 1985. The payment was eventually disallowed by the IRD. The GST refund claimed by Kiwi House was reversed on 30 January 2007. The agreed adjustments letter listed under “Adjustments Proposed”:
(1) Reassess all company GST returns filed to “nil” on the bases that
(a) Any taxable activity at 194 Lake Rd will not now be conducted by the
company as its purchase of 194 Lake Rd is to be “cancelled” and
(b) In any event the company’s purchase of 194 Lake Rd from the operator Mr Thompson was a “second hand good” acquired from an associate who himself did not incur any GST.
…
[36] A statutory demand was served by the IRD against Kiwi House on 4 July
2008, and Kiwi House was liquidated on 6 March 2009. Mr Thompson was adjudicated bankrupt on 22 April 2010.
The 2008 transfer to the Trust
[37] I now consider the 2008 transfer that is the alleged disposition to prejudice creditors. Prior to the liquidation and bankruptcy, on 22 January 2008, Kiwi House and Mr Thompson entered into a loan transfer deed whereby Kiwi House’s borrowing from the bank was transferred to Mr Thompson as the new borrower. BNZ released and discharged Kiwi House from all its obligations, which Mr Thompson assumed in a personal capacity. The loan transfer deed refers to a new guarantee of the amount owed to the bank (by now $374,000) guaranteed by Mr Thompson and Mr D’Ath in their capacity as trustees of the Trust.
[38] Mr Thompson said that in or around early March 2008 he made O’Brien Law aware that the 2005 transfer had not been authorised by Mr D’Ath and should not have been carried out, and told them also of the agreement reached with the IRD. He says the lawyers recommended that the Trust pass a resolution confirming that the
2005 transfer was a nullity to be cancelled in accordance with the agreement with the
IRD. The trustees passed such a resolution on 18 March 2008.
[39] On the same date, Kiwi House resolved that the 2005 transfer be reversed and that the property be transferred to Mr Thompson and Mr D’Ath as trustees. The resolution is signed by Mr Thompson as sole director. Mr Thompson signed an Authority and Instruction form for O’Brien Law to transfer the property from Kiwi House to Mr Thompson and Mr D’Ath as trustees.
[40] On 19 June 2008 a transfer of the property from Kiwi House to Mr Thompson and Mr D’Ath as trustees of the Trust was registered. A mortgage to BNZ was also registered. Mr Thompson did not produce a settlement statement or an agreement for sale and purchase. This is the transfer which the plaintiffs say prejudiced creditors.
[41] Mr Thompson produced a letter of 20 June 2008 from O’Brien Law to the trustees of the Trust stating as follows:
We confirm that the transaction whereby Jolyon mistakenly sold the property to Kiwi House Ltd has been reversed and the title now records the trustees as the registered proprietors. We have obtained a search copy of the title and enclose a copy for your records.
[42] The IRD served the statutory demand on 4 July 2008 for the sum of
$23,038.08 for goods and services tax and penalties thereon for the period ended
31 October 2005 to 30 April 2006. Kiwi House and Mr Thompson have not contested that these monies are owing.
Discussion
Was the 2005 transfer to Kiwi House of no effect?
[43] Mr Hurd’s first submission was that Mr Thompson, having in 1999 conveyed beneficial ownership of the property to the Trust, had no capacity in 2005 to convey ownership to Kiwi House. That being the case Mr Thompson’s purported 2008 transfer from Kiwi House was of no legal effect. Further, he argued that Kiwi House never secured beneficial ownership of the property, and Kiwi House had no standing or basis to seek to set aside the 2008 transfer.
[44] These arguments were advanced at the earlier formal proof hearing, but rejected. In this hearing they have been developed further, with reference to documents, not all of which were referred to at the earlier hearing. One difference is that it is now clear that there was provision for at least a notional consideration for the 1999 transfer. It would appear that in the original hearing I was referred to an incorrect document, and that there was in fact a deed of acknowledgement of debt where the Trust acknowledges a debt to Mr Thompson for the full purchase price of
$180,000. I accept that there is prima facie evidence of payment by these means.
[45] However, although there was a deed and notional payment, there was no registration of transfer and no adequate explanation of why no transfer took place. Mr Thompson in his affidavit addressing the 1999 transfer does not address in any satisfactory way the fact that the transfer was not registered. His lawyer Mr Paterson in his affidavit said:
I have a vague recollection that I was instructed not to register the signed memorandum of transfer. This was slightly unusual but certainly not unique in my experience. … I understand that DWLL’s trust summary … indicates that one reason for non-registration was that Mr D’Ath did not want to be registered on the title given that the property was mortgaged. I am not aware when that notation was added to the summary. I was never involved in creating any summaries.
[46] O’Brien Law said that Mr D’Ath did not want to be registered on a title in respect of which there was a mortgage. Mr Thompson himself provided other explanations for his failure to register the transfer into the name of the Trust. Mr Thompson said in his affidavit of 5 December 2011 that the Trust was not registered because “the fixed term loan would have needed to have been broken resulting in penalties and interest”. He was advised, he says, by his lawyers to wait until the end of the fixed term loan to register Mr D’Ath’s name on the title of the property. However, it is to be noted that the fixed term loan came to an end at the latest in 2005.
[47] In 2005 when the transfer was made to Kiwi House, the transfer was from Mr Thompson to Kiwi House and not the Trust. Mr Thompson endeavoured to explain the fact that he, rather than the Trust, transferred the property in 2005 by deposing that he forgot about the Trust and claimed that he had been involved in a
motor car accident in which he had suffered injuries. In my formal proof judgment, I rejected that explanation as inconsistent with the medical reports of the accident which did not report any brain injury or concussion. In the present hearing his explanation has been that he just forgot about the transfer. I have reached the conclusion that those explanations are plainly untrue. Mr Thompson personally effected the sale to Kiwi House as owner. Not only was the property transferred by him but he, not the Trust, received a deed of acknowledgement of debt for
$149,326.20. It is clear that Mr Thompson, who creates multiple legal structures to suit his convenience, did not have any intention to go ahead with any transfer to the Trust in 1999, and continued through to the 2005 transfer to Kiwi House to treat it as his own.
[48] Mr Thompson is in effect asking the Court to accept that there was a transfer of the beneficial interest in the property to the Trust in 1999 when:
(a) the property stayed in his name; (b) the mortgage stayed in his name; (c) he personally paid all outgoings; (d) he personally occupied the house;
(e) he personally transferred the house to Kiwi House in 2005; and
(f) he personally received the consideration (the acknowledgement of debt) for that sale.
[49] It appears to me that Mr Thompson plainly remained the owner of the property after 1999 despite the preparation of documents that might have allowed a transfer to the Trust, and he was the owner at the time of the 2005 transfer as the settlement documents record. Indeed, I consider there was no intention to transfer the property to the Trust at the time the agreement was signed, which means that no sale was completed in 1999 and no beneficial interest was transferred.
[50] Even if Mr Thompson did in fact transfer the property in 1999, any beneficial interest the Trust had was extinguished by 2005. It is clear the agreement to sell, if it was valid, was cancelled by the parties’ conduct. Here the parties acted for eight years as if any agreement to sell had been abandoned. The Trust took no steps to enforce its interest, and Mr Thompson acted in a manner inconsistent with the agreement. As noted above, I do not accept Mr Thompson’s explanation that he forgot about the agreement when he signed the 2005 transfer. Therefore, on an objective analysis of the parties’ conduct, the contract was impliedly cancelled by the time Mr Thompson went to transfer the property to Kiwi House in 2005.
[51] As an additional point it is to be noted that Kiwi House, having been registered on the title, obtained in 2005 an indefeasible title to the property under s 62 of the Land Transfer Act 1952. Kiwi House was undoubtedly a bona fide purchaser for value without notice and obtained an indefeasible title. There is no suggestion of fraud on the part of Kiwi House.
Does IRD’s knowledge provide a defence?
[52] Mr Hurd argued for Mr Thompson that the IRD knew and approved the unwinding of the 2005 transaction and the 2008 transfer to the Trust. He argued that in those circumstances it was unconscionable for the IRD to resile from that earlier approval and for these proceedings to be brought. He submitted that the issue was whether the IRD conducted itself in a way which led Mr Thompson to reasonably believe that the IRD consented to the unwinding.
[53] I do not accept this argument. As Mr Malarao pointed out, the IRD is not the plaintiff in this matter. It is the liquidators who are plaintiffs and they made no such representation. There are other creditors, although they represent only approximately 10 per cent of the total claims. Liquidators are independent and duty-bound to act in the best interests of the company. They are not to be treated as proxies of or receiving instructions from the IRD. They cannot be treated as bound by any actions of the IRD.
[54] In any event, this defence which is presumably based on some sort of estoppel or acquiescence, fails on the facts. The IRD made no unambiguous
representation that it accepted that the 2005 transaction was invalid, or that it should be set aside. As set out, in the adjustment document of 30 January 2007 the IRD recorded under the heading “Adjustments proposed” that the GST for Kiwi House would be re-assessed to nil on the basis that any taxable activity at 194 Lake Road would now be conducted by the company as its purchase of 194 Lake Road was to be “cancelled”, and in any event the company’s purchase of 194 Lake Road from the operator Mr Thompson was a “secondhand good” and did not incur any GST.
[55] These statements do not record any particular position on the part of the IRD to the 2005 or 2008 transaction. They record rather an adjustment that is proposed by the taxpayer. Indeed, the reference to the “purchase” from Mr Thompson can be construed as recognition that there has been a valid purchase. The proposal recorded a “cancellation” that is to take place, although it is to be noted that there was in fact no cancellation document ever entered into. This exchange does not in my view show any actionable representation on the part of the IRD.
[56] It is clear in my view that the IRD did not agree to the 2008 transfer and was not required to consent to any title correction. These are no more than references to possible different ways of treating the 2005 transaction. There is also no satisfactory evidence in my view of any reliance by Mr Thompson on these statements.
Did Kiwi House receive a reasonably equivalent value for the property?
[57] In considering this defence it is necessary first to consider the value of the property in 2008. For the purposes of this proceeding the value throughout has been treated as at least the value adopted by Mr Thompson in 2005 of $483,000. Given that the BNZ mortgage remained on the title, and the value of the mortgage at the time was $335,000, I accept Mr Hurd’s submission that the Trust in taking over that mortgage provided consideration in that sum.
[58] However, that is the extent of any evidence of consideration for the 2008 transfer, save for Mr Thompson’s assertions in his most recent affidavit. The remaining equity of $149,326.20 that had been left owing to Mr Thompson following the 2005 transfer to Kiwi House was not referred to in the 2008 documentation.
[59] Mr Hurd submitted that the debt of Kiwi House to Mr Thompson, recorded by the 2005 acknowledgement of debt of $149,326.20, could be treated as having been discharged at the time of the 2008 transfer. This combined with the transfer of the mortgage of $335,000 provided full consideration. The difficulty with this submission was, as Mr Hurd acknowledged, there is no evidence supporting any release of the debt to Mr Thompson. It remained in place, a debt of Kiwi House, and the Trust received the property in 2008 for the value of the mortgage of $335,000 and therefore at a $150,000 undervalue. It is to be noted that in Mr Thompson’s affidavits of 2011 he said nothing about any release of the Thompson debt. Even in his second most recent affidavit of 5 August 2015 he does not say specifically that there was any release of the Thompson debt. He relies instead on the fact that it was just an unwinding of the Kiwi House transaction.
[60] If the value received in exchange was significantly less valuable to the creditors than the property disposed of, then there was not a reasonably equivalent value in exchange.21 Thus in Regal Castings Ltd v Lightbody where it was found that a transfer of an interest in a property for an unsecured debt to the debtor’s family trust not repayable for seven years, part of the debt being simultaneously gifted on transfer, was a disposition at an undervalue.22 Here, the consideration was $335,000 for a property worth at least $483,000.
[61] Mr Thompson did not in his affidavits address this shortfall until his final affidavit of 27 September 2015. He then asserted that he had released Kiwi House from the Thompson debt. He said, “[t]he reality, however, was that that is what occurred.” I find this belated claim to be plainly untrue. It is unsupported by the contemporaneous evidence, or his earlier evidence.
[62] The statement of defence filed by Mr D’Ath on 21 April 2011 appears to be a detailed response to the allegation that no consideration was given for the transfer. It is significant that he, who was the co-trustee of the Trust at the time of the 2008 transfer, made no mention of any release by Mr Thompson of the $149,326.20. It
can be assumed that Mr D’Ath would not have forgotten about such a forgiveness.
21 Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433.
22 At [60].
Another inconsistency with Mr Thompson’s assertion is that there is no declaration to the Official Assignee by Mr Thompson when he went bankrupt about any such release, or any payment of gift duty for such a release of debt.
[63] Moreover, I accept Mr Malarao’s submission that for forgiveness of debt to be effective it must be recorded in a formal deed. As the Court of Appeal in Commissioner of Inland Revenue v Morris noted:23
It was not disputed that it is a well-established principle of law that the release of a debt amounts to a gift, and that such a release is ineffective unless it is made under seal, or unless some valuable consideration is given in return for the release …
… for the law is clear that for the release to be effective it must be enshrined
in a deed.
[64] I am left with no doubt that Mr Thompson, faced with a company in liquidation and his own pending bankruptcy, chose to try and avoid paying the balance that was owed to creditors by putting the property into a trust and thereby making the equity immune from claims. There was plainly no reasonable exchange in value.
Intent to defeat creditors
[65] Although not essential to my decision, I am also of the view that the transaction was plainly made with intent to prejudice creditors of the company. At the time of the 2008 transfer Kiwi House owned the property with a mortgage of
$335,000 that had priority over all creditors. However, the debt back to Mr Thompson being an unsecured loan left Mr Thompson ranked with all the other creditors, and was not secured on the property. Kiwi House had equity of at least approximately $150,000. The 2008 transfer to the Trust meant that Kiwi House lost its equity in the property. That equity would have been available to all creditors but for the 2008 transfer to the Trust. The creditors would have included Mr Thompson, but he would have only recovered a portion of his loan and the other creditors would
have enjoyed a better return, if there had not been the 2008 disposition.
23 Commissioner of Inland Revenue v Morris [1958] NZLR 1126 (CA) at 1132 and 1137.
[66] Given my finding that Mr Thompson had intentionally transferred the property to Kiwi House in 2005 having dropped any idea of a transfer to the Trust, I consider it to be an inevitable inference that Mr Thompson, when he carried out the transfer to the Trust in 2008 with the liquidation of Kiwi House pending, did so to defeat creditors. Mr Thompson had put the company’s only valuable asset into the name of the Trust, leaving the other creditors with no asset against which to claim. This is exactly the sort of disposition that prejudices creditors and the mischief that s 346 is designed to prevent.
Conclusion
[67] The conclusion I reached at [99] of the formal proof judgment dated 6 June
2012 still applies. I have no doubt that the transfer of the property to the Trust in
2008 was made without any reasonable exchange in value. The overwhelming impression that the evidence leaves is that Mr Thompson was juggling his assets at the cost of his creditors, without regard to legal reality or substance. The 2008 transfer involved no reasonable value in exchange. Further, it was made with the intention and effect of defeating creditors.
[68] Despite careful and well constructed submissions from Mr Hurd, I am unable to see any basis upon which a defence to the liquidators’ claim could be sustained. In deciding whether there is likely to be a miscarriage of justice if the judgment is not set aside, I return to the broad background of the judgment by default being entered into in the first place. Mr Thompson had, I found, been served but had chosen not to file a statement of defence until the matter came before the Court for formal proof. I found that he misled the Court in his assertions that he had not been served.
[69] Judgment was then entered against him on 22 February 2012. He then did nothing about that judgment until he received notice requiring him to vacate the property on 22 July 2015. After seeking but failing to get undertakings from the liquidators not to enforce the notice to vacate the property, on 5 August 2015 he applied for an order setting aside the judgment. He had therefore, knowing all the detail of the judgment entered against him, done nothing for almost three and a half
years, and only made this further application when moved to do so by the practicalities of the situation.
[70] Yet again Mr Thompson’s delays have not been reasonably explained. His cavalier conduct is a further factor working against him in terms of getting the judgment set aside under r 15.10.
[71] There being no substantial defence and the delay not being reasonably explained, there has been no miscarriage of justice. The application will be dismissed.
Result
[72] The application to set aside the judgment is dismissed.
[73] The plaintiffs are entitled to scale costs on a 2B basis against Mr Thompson, together with reasonable disbursements.
[74] At Mr Hurd’s request I postpone the effect of these orders until 31 January
2016 to give Mr Thompson an opportunity to organise his departure from the property.
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Asher J
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