Managh v Morrison HC Napier Civ-2009-441-000522
[2011] NZHC 2124
•11 July 2011
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IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2009-441-000522
UNDER The Companies Act 1993 and the Property
Law Act 2007
IN THE MATTER OF The liquidation of Dandelion Limited
| BETWEEN AND AND | JOHN FRANCIS MANAGH AS LIQUIDATOR OF DANDELION LIMITED (IN LIQUIDATION) Applicant CHRISTOPHER WILLIAM MORRISON & GREGORY MICHAEL MORRISON AS THE TRUSTEES OF THE C W MORRISON FAMILY TRUST First Defendants CHRISTOPHER WILLIAM MORRISON & PETER CLENNELL FENWICKE AS THE TRUSTEES OF THE C W MORRISON 1996 BUSINESS TRUST Second Defendants |
Hearing: 6 July 2011
Appearances: K P Sullivan for Applicant M Kelly for Defendants
Judgment: 11 July 2011
JUDGMENT OF COURTNEY J
Solicitors: Counsel: | Nowland Gordon & Associates, P 0 Box 70, Wellington 6011 Fax: (04) 499-5181 K P Sullivan, P 0 Box 5817, Wellington 6145 Fax: (04)499-4059 Fax. (09) 377-0361 |
Introduction
In 2008, a year before its liquidation, Dandelion Ltd (in liquidation) assigned
causes of action against a firm of solicitors and a real estate agent to a trust that existed for the benefit its former director, Christopher William Morrison and his family (the Family Trust). Under the assignment the proceeds of the causes of action would be split between the Family Trust and another trust also established for the benefit of Mr Morrison and his family (the Business Trust). The liquidator of Dandelion asserts that the assignment is a voidable transaction and has applied under s 292 of the Companies Act 1993 for an order setting it aside. Although the trustees of the Family Trust and the Business Trust acknowledge that Dandelion was insolvent at the time of the assignment, they maintain that it is not a voidable transaction because it did not enable the Family Trust to receive more towards the debt owed to it by Dandelion than it would otherwise have received in the liquidation, as required by s 292(2)(b).Because of disagreement between the liquidator and the defendants as to the
status of the assignment and the imminent expiration of the limitation period the liquidator and the defendants both commenced proceedings in the High Court at Wellington in 2010 asserting the assigned causes of action. The present application will determine which of Dandelion or the Family Trust is entitled to bring the claims. There is some urgency in the present application because a judicial settlement conference is scheduled for those proceedings in a few weeks. I indicate now that I consider the assignment to be a voidable transaction under s 292. For that reason, and because of the shortness of time available to me, I give my reasons for that decision only and do not go further to consider the liquidator's alternative application for a declaration under the Property Law Act 2007 that the assignment is a nullity.The liquidator also sought an order setting aside the assignment of a general
security agreement and any interest secured over the assets and undertakings of Dandelion granted by Dandelion in favour of the Business Trust or the Family Trust. At the commencement of the hearing, however, Mr Kelly, for the trustees of both the Family Trust and the Business Trust, advised that they accepted that the general
security agreements were voidable and that an order could be made by consent setting those agreements aside.
Is the assignment a voidable transaction? The causes of action
The defendants in the Wellington proceedings are a firm of solicitors, Izard
Weston, and two related firms of real estate agents, Tremain Commercial Ltd and Tremain Real Estate Ltd (together Tremain) The allegations are of negligence, breach of contract and breach of fiduciary duty arising from the sale of the following properties in Napier:
9 Humber Street owned by the Business Trust
7 Humber Street owned by Dandelion
The leasehold interest in 39 Pandora Road owned by Dandelion.
In 2003 the Business Trust and Dandelion agreed that all three properties
would be sold. In 2004 they entered into a sale and purchase agreement to sell 7 and
9 Humber Street to Globe Holdings Ltd (Globe). The leasehold interest in 39 Pandora Road was not part of that agreement. Tremain was engaged as the real estate agent on the sale and Izard Weston as the solicitors.
The Globe agreement was conditional on the purchaser obtaining consent
regarding the height of the intended construction on or before 16 September 2004. Consent was not obtained by that date and Globe did not seek an extension. Another party (Nicholls) was, by then, interested in purchasing both 7 and 9 Humber Street and also the leasehold interest in 39 Pandora Road. This would have been a better outcome because Dandelion wanted to sell both the Humber St and Pandora Rd properties.On 23 September 2004 Dandelion and the Business Trust instructed Izard
Weston that they wished to conclude an agreement with Nicholls. They were not
advised that the Globe contract would have to be formally cancelled before they could do so. The same day they instructed Tremain that they wished to conclude an agreement with Nicholls and that Tremain should cancel the Globe contract. At 9:54 on 24 September 2004 Tremain emailed Globe recording an earlier conversation that Globe's interest in 7 and 9 Humber Street were at an end. Almost immediately, at 10:59 am, Globe's solicitors responded waiving the special condition and declaring the Globe contract unconditional.
On Izard Weston's advice that Dandelion and the Business Trust could
enforce the cancellation of the Globe contract, they executed an agreement to sell all three properties to Nicholls (subject to cancellation of the Globe contract). Tremain's email had not, however, validly cancelled the Globe contract because under the terms of the contract, email was not an effective means of giving notice. As a result, Dandelion and the Business Trust were committed to the Globe contract and lost the Nicholls contract. The Globe contract was for $4m to purchase 7 and 9 Humber Street and the Nicholls contract was for $5m to purchase 7 and 9 Humber Street and also the leasehold interest in Pandora Road.Subsequent efforts to sell the Pandora Road lease were unsuccessful. In late
2004 Dandelion borrowed $500,000 from Davidson Armstrong & Campbell Solicitors Nominee Company Ltd (DAC), with Mr Morrison guaranteeing the debt. The Pandora Rd property did not sell. Dandelion could not pay the ground rental and the lease was forfeited to the lessor. Dandelion could not repay the DAC loan; its only assets of significance were the causes of action against Izard Weston and Tremain. But Dandelion could not fund the necessary litigation and could not reach an agreement with DAC under which DAC would fund the litigation.In March 2008, with Mr Morrison and his interests locked in litigation with DAC and Dandelion admittedly insolvent, Mr Morrison executed the assignment of the causes of action. Dandelion's inability to repay the DAC debt (which now exceeds $700,000) eventually led to Dandelion's liquidation in 2009 and Mr Morrison's bankruptcy.
Is the assignment a voidable transaction?
[11] The assignment was on the following terms:
The director of DF [sic- Family Trust] and the trustees of CMFT [Christopher Morrison Family Trust] agree that all rights in any proceedings against a party sued for Negligence relating to DL's failed property sale at 39 Pandora Road, Napier in 2004 be assigned to CMFT for the sole benefit of that party, consideration being full funding of any litigation, expected to commence in March 2009.
The estimated litigation costs is $100,000.
It is further agreed that upon any settlement being achieved that CMFT will rebate to DL any net proceeds after the following have been settled:
1.All legal expenses.
2. The next $500,000 is payable to CMFT.
3.Any residual balance will be due to the C W Morrison 1996 Business Trust, a joint claimant in this matter, up to a maximum of $1m.
4.Any amount in excess of the above will be split evenly between the parties to this agreement.
[12] Under s 292(1) a transaction by a company is voidable by the liquidator if it is both an insolvent transaction as defined in s 292(2), and entered into within the specified period. The only issue in this case is whether the transaction was an insolvent transaction as it is defined in s 292(2) which provides that:
An insolvent transaction is a transaction by a company that:
(a)Was entered into at a time when the company is unable to pay its due
debts; and(b)Enables another person to receive more towards satisfaction of a
debt owed by the company than the person would receive, or would be likely to receive, in the company's liquidation.
[13] As at the date of the assignment, the Family Trust was a creditor to the extent of only $3,820. It now asserts that it is owed a good deal more than this and intends to file proof of debt with the liquidator. For the purposes of considering the nature of the assignment, however, I proceed on the basis of the facts that existed in March 2008 when the debt owing to the Family Trust was very small. In comparison, even at that stage, the debt owing to DAC (the only other creditor of significance) was
over $500,000. As I have already noted, Dandelion's claims against Izard Weston and Tremain represented the company's only significant asset.
[14] Mr Kelly submitted that the liquidator could not, on the available evidence, show that the Family Trust will achieve a net return from the assignment and therefore cannot show that the assignment enabled it to receive more than it would or would be likely to receive in the liquidation. Mr Kelly argued that, on the wording of s 292(2)(b) the liquidator must show that the transaction will, in fact, result in a greater recovery than would otherwise be the case. I do not accept that argument.
[15] On its ordinary meaning "enable" relevantly means:1
a. Give power to; strength; make adequate or competent
b. Make able, give the means to be or to do something
[16] I consider that "enable" in s 292(2)(b) only requires that the creditor is given the means to improve its position over that of other creditors, not that it will necessarily succeed in doing so. It is perfectly obvious that the assignment of the causes of action has the effect of providing the means to advance the litigation. But s 292(2)(b) does not connote certainty of outcome and the liquidator is, therefore, not required to prove what the outcome of the litigation will be.
[17] There is, of course, a threshold, which is expressed in the words "would receive or would be likely to receive". Mr Kelly argued that the fact that the parties presently wish to pursue the litigation does not mean that a recovery will result or that the Court can conclude that the litigation has a determinable value. As a result, it is not possible to be satisfied that the assignee would receive more than it would be likely to receive in the liquidation. The words "would be likely to receive" suggest a threshold akin to the standard of the balance of probabilities. It requires an assessment by me as to the value of the cause of action that is not dissimilar to the assessment of a loss of chance.
[18] I consider that that the facts that appear from the affidavit evidence before me do allow for an assessment of the kind envisaged by s 292(2)(b). I cannot, of course,
Shorter Oxford Dictionary (5thed Oxford University Press, Oxford 2002) at 819.
put an exact value on the causes of action. However, the evidence that I do have discloses evidential support for the allegations made in the respective statements of claim. Mr Sullivan advised me that the substance of the defence being advanced is denial of negligence on the basis that the second agreement had not been formally signed at the time notice was to be given cancelling the first agreement. There is also an issue as to quantum based on the fact that the first contract was UST exclusive and the second contract GST inclusive (this latter defence is apparently the subject of a separate allegation of negligence against the defendants). On the information that I have I consider that there is sufficient substance in the claim to conclude that the Family Trust would be likely to receive more from the litigation than it would from the liquidation.
In reaching this conclusion I am have not overlooked that, under the assignment the Family Trust would fund the litigation. I do not accept Mr Kelly's argument that, because of this the assignment had no deleterious effect on Dandelion. For the purposes of this application I assume that the claim will succeed; in that event the net costs to Dandelion would be significantly reduced by the inevitable award of costs that would follow.
Nor have I overlooked that fact that not all the proceeds from the litigation would have gone to Dandelion in any event. The claim is quantified as the difference between the purchase prices on the two agreements together with consequential losses. The difference in the purchase prices was $1m. The claim for consequential losses of slightly over $2m brings the total of the damages claimed to more than $3m. But not all of the losses claimed were sustained by Dandelion; because the Business Trust owned one of the Humber Road properties a proportion of the losses would have accrued to that entity, though the exact split is impossible to identify.
My assessment, for the purposes of this application, is that Dandelion will make a recovery and because the DAC debt is so much greater than the debt owed to the Family Trust at the relevant time, the assignment enables the Family Trust to receive more towards its debt than it would have been likely to receive in the liquidation. It is therefore a voidable transaction for the purposes of s 292.
Result
[22] The application is granted I make the following orders:
(a)In accordance with [3] above, an order setting aside the general
security agreement and any interest identified at paragraphs 1.3 and 1.4 of the liquidator's application 7 March 2011 as voidable transactions;(b)An order setting aside the assignment of the causes of action against
Izard Weston and Remain as a voidable transaction.
[23] Parties may address the issue of costs by way of memorandum filed on behalf of the liquidator by 22 July 2011, in reply by the defendants by 5 August 2011, with any response by the liquidator by 12 August 2011.
P Courtney
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