Millionaire Makers International Limited v Portman Project Limited
[2021] NZHC 1610
•1 July 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-2462
[2021] NZHC 1610
BETWEEN MILLIONAIRE MAKERS INTERNATIONAL LIMITED
First PlaintiffAZEL BIRKEDAHL HENRIKSEN
Second PlaintiffAND
PORTMAN PROJECT LIMITED
Defendant
Hearing: 9 February 2021 Appearances:
P L Rice for Plaintiffs
R B Hucker and A J Moana-Howard for Defendant
Judgment:
1 July 2021
JUDGMENT OF DUFFY J
This judgment is delivered by me on 1 July 2021 at 3:00 pm pursuant to r 11.5 of the High Court Rules.
.....................................................
Registrar / Deputy Registrar
Solicitors/counsel:
Schnauer & Co, Auckland Hucker Associates, Auckland
MILLIONAIRE MAKERS INT’L LTD v PORTMAN PROJECT LTD [2021] NZHC 1610 [1 July 2021]
[1] The plaintiffs seek either a preservation order1 or a freezing order2 pending the determination of their substantive claims in relation to money they paid into the defendant’s bank account. The sum of $260,000 (the fund) is currently frozen under an interim preservation order made by this Court on 17 December 2020.3
[2] The plaintiffs claim an interest and a proprietary remedy in the fund on the following bases:
(a)The defendant received the fund in circumstances which in good conscience preclude the retention thereof;
(b)The payment was mistaken; and
(c)Section 43 of the Fair Trading Act 1986 empowers a Court to direct a person who has engaged in misleading or deceptive conduct to refund money or return property.4
[3] The plaintiffs contend that they paid the fund to the defendant pursuant to a defective investor agreement. Put shortly, the plaintiffs allege that Mr Constable, the person who executed this agreement on behalf of the defendant was not properly appointed to his purported office of director. Accordingly, the investor agreement has no legal effect, and the defendant has no legal basis for retaining the fund.
[4] In response, the defendant contends that the investor agreement is legally binding, and the plaintiffs are simply having doubts about their investment decision. The defendants say the plaintiffs have no arguable causes of action and no proprietary interest in the fund they paid to the defendant, which is now held in a Kiwibank account. There is no evidence of a real risk the fund may be dissipated. Thus, they cannot satisfy the requirement for either a freezing order or a preservation order.
1 High Court Rules 2016, r 7.55.
2 High Court Rules, r 32.2.
3 Minute of Peters J dated 17 December 2020.
4 Subsections 43(2) and (3)(e).
Relevant legal tests
[5] The three requirements for a freezing order are: (a) a good arguable case on the substantive claim; (b) assets that the order can apply to; and (c) a real risk that the respondent will dissipate or dispose of those assets.5 The remedy is flexible, and the Court must bear in mind the overall justice of the case.6
[6] The purpose of a preservation order is to facilitate the interlocutory preservation of property or a fund. The fundamental requirement is the existence of property or a fund against which a proprietary remedy claim can be made.7
[7] Accordingly, I have approached the factual and legal issues based on whether they reveal the plaintiffs to have a good arguable case for either a preservation order or a freezing order. This will be established if the allegations in the statement of claim are capable of tenable argument and are supported by sufficient evidence, bearing in mind the proceeding is still at an interlocutory stage.8 I have then considered whether there is a fund/asset to which either a preservation order or a freezing order can attach, and whether there is a real risk of disposal or dissipation. Finally, I have considered where the balance of convenience, (which the parties addressed me on) and the overall justice of the case lies.
Is the investor agreement legally defective?
[8] The first step is to determine whether or not the investor agreement has legal effect. The circumstances in which Mr Constable replaced Mr Lunn as a director of the defendant company require consideration.
Plaintiffs’ case
[9] The plaintiffs describe the defendant as a single purpose development company. It was incorporated on 23 September 2020 to undertake a 15 lot subdivision development (the development). At this time, Mr Lunn was the sole director and a
5 Shaw v Narain [1992] 2 NZLR 544 (CA) at 548.
6 Shaw v Narain, above n 5.
7 Investors Protection Co Ltd v Ray Courtney Architects Ltd (1993) 7 PRNZ 1 (CA).
8 Dotcom v Twentieth Century Fox Film Corp [2014] NZCA 509 at [18] and [31].
five per cent shareholder. The balance of the shares were held by a company on trust for Peter Chevin, who is currently disqualified from being a company director.
[10] The plaintiffs’ evidence is that Mr Chevin is the effective controller of several development companies that are managed through various professional agents and trusts. One such company, Reed Myers, was responsible for marketing the investment in the development.
[11] In November 2020, the development was at an early stage. No resource consents had been obtained and the purchase of the land to be subdivided was yet to settle. The defendant needed funding to pay the deposit.
[12] On 10 November 2020 Reed Myers advertised on the Trade Me website for a new development investor. The advertisement called for investment of $260,000 to replace a current investor who wished to sell out for personal reasons.
[13] In his affidavit Mr Lunn deposes that he was not consulted about the Trade Me advertisement. Further, once it came to his attention it caused him concern. This was because the advertisement in his view gave the impression that: (a) the development was fully sold; (b) funding had been arranged except for the replacement of an existing investor; and (c) the development was on track for completion in May 2021.
[14] However, to Mr Lunn’s knowledge the “current investor” was a fiction, several of the sale and purchase contracts for the proposed new titles were still conditional, no funding had been arranged and development was very unlikely to be completed by May 2021. At the date of the advertisement the defendant still had not obtained resource consent, which was likely to take several months.
[15] When Mr Lunn learnt of the advertisement, he says he complained to Mr Chevin that the advertisement was inaccurate, and that he should have been consulted before it was posted. However, the plaintiffs had already seen the advertisement and met with Mr Chevin. They say that in reliance on representations made in the advertisement and oral representations made by Mr Chevin at their
meeting they entered into the investor agreement and deposited $260,000 into the defendant’s bank account.
[16] The investor agreement, dated 18 November 2020, was signed on behalf of the defendant by Mr Constable, purportedly as a company director. However, Mr Lunn says that Mr Constable was in reality no more than a bookkeeper for Mr Chevin’s group of companies.
[17] Mr Lunn says he did not authorise Mr Constable to enter into the investor agreement on behalf of the defendant, and Mr Constable was not appointed as a new director by a shareholder special meeting. Mr Lunn says Mr Constable simply registered himself as a director of the defendant online and removed Mr Lunn as a director a few days later.
[18] The plaintiffs argue that Mr Constable had no authority to enter into the investor agreement on the defendant’s behalf because he was not a director at the time of signing, he was not authorised to enter into the investor agreement by the lawful director Mr Lunn, and was not held out by the defendant as having authority to enter into the agreement.
[19] The plaintiffs further argue that Mr Constable was not a director at the time of signing the investor agreement because the written resolution of the same day purporting to appoint Mr Constable as a director was unlawful and of no legal effect. This is because the resolution was only signed by a single shareholder, Totara Sea Trustee Ltd (TSTL) rather than the defendant’s two shareholders. TSTL owns 95 per cent of the shares and Lunbros Ltd (Lunbros) holds the remaining five per cent.9 The plaintiffs argue that shareholders can only pass a written resolution in lieu of a meeting if the resolution is signed by not less than 75 per cent of the shareholders entitled to vote, who together hold not less than 75 per cent of the votes entitled to be cast. The shareholders signing the written resolution must therefore constitute three quarters of the shareholders both in head count and voting power.
9 Mr Lunn holds the shares in Lunbros Ltd.
[20] The plaintiffs argue that here TSTL was one of two entities holding shares in the defendant, and therefore TSTL only represented 50 per cent in number of the voters entitled to vote on the resolution. Accordingly, it was not possible for TSTL to pass a resolution under s 122 in lieu of a special shareholder meeting appointing Mr Constable a director.
[21] In such circumstances a duly notified shareholders meeting was required to appoint Mr Constable a director. Only the board could convene such a meeting and all shareholders needed to be sent written notice of the time and place of the meeting and the business of the meeting at least 10 working days beforehand. In this case no special shareholders meeting was convened by the board (Mr Lunn) because none was requested. In the circumstances the plaintiffs maintain there was no valid appointment of Mr Constable as a director.
[22] They further argue that because he was not a director Mr Constable lacked authority to enter into the investor agreement on the defendant’s behalf. Accordingly, no agreement between the first plaintiff and the defendant came into legal existence.
Defendant’s case
[23] The defendant contends that on the morning of 18 November 2020 a shareholder’s resolution appointing Mr Constable as director was signed. Mr Constable then updated the company records with the incorrect date (being 19 November 2020). Mr Constable previously acted as secretary for Mr Chevin’s group of companies. Mr Lunn was removed as a director of the defendant on 23 November 2020 by way of a written resolution which was attached to an email sent by Ivan Vodanovich, the development’s solicitor.
[24] The defendants argue that ss 17 and 18 of the Companies Act 1993 make the investor agreement binding on the defendant. Accordingly, at the point the parties were ad idem and the investor agreement was signed the plaintiffs had a binding contract with the defendant.
[25] Because the Companies Office records disclose that Mr Constable had been appointed as a director, neither the first nor the second plaintiffs were required to make
further enquiry as to Mr Constable’s authority to bind the defendant. There was a contract to be performed, and the defendant cannot dispute that a contract was entered into with the second plaintiff. The defendant says that the second plaintiff intended a contract to result, performed the contract, and with the benefit of ss 17 and 18 of the Companies Act, the second plaintiff cannot now change his mind and maintain that a contract has not been validly entered into, particularly after having relied on the “in house management rule” in the first instance.10 Once a contractual obligation was entered into and the contract was performed, the second plaintiff by his conduct has relied on the validity of Mr Constable’s authority to bind the company. The defendant argues this is the effect of s 17(1) of the Companies Act which provides that no transfer of property is invalid because the company did not have the capacity, the right or power to transfer the property.
[26] The defendant also relies on s 180(1)(c) of the Companies Act which enables a person other than a director to enter into obligations on behalf of the company where the obligation is not required to be in writing.
[27] Finally, the defendant contends that the execution of the investor agreement can be ratified by Mr Constable who is now a director of the defendant by appointment of TSLT.
Analysis
[28] Whether there is a good arguable case that the investor agreement is legally ineffective turns on whether its execution by Mr Constable is legally capable of binding the defendant. I was not directed to any authority on the application of s 158 of the Companies Act which provides:11
158 Validity of director’s acts
The acts of a person as a director are valid even though—
(a)the person’s appointment was defective; or
(b)the person is not qualified for appointment.
10 Royal British Bank v Turquand (1856) 6 E&B 327; 119 ER 886 at 449.
11 My own attempts to find authority on the application of s 158 relevant to the issues of concern here have not unearthed anything of relevance.
[29] However, my attention was drawn to authority on the comparable provision in the previous legislation. Section 183 of the Companies Act 1955 provided that:
183. Validity of acts of directors – the acts of a director or manager shall be valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification.
[30] The effect of s 183 and s 158 is essentially the same. In Re Northwestern Autoservices Ltd12 the majority of the Court of Appeal found that s 183 did not apply to the situation where the person who purported to make the appointment of a director had no power to appoint at all:
It is, I think, implicit in the section and in the article that the appointor must have had power to make the appointment. It is not an apt use of language to speak of a defect in the appointment if there is no power to appoint at all. In that context a defect is an irregularity in the exercise of an existing power. Otherwise purported appointments made by persons without authority or made where there was no vacancy or in other circumstances where an appointment could not be made at the time, would be protected. Such an interpretation would subvert the statutory scheme for the appointment of directors. It could never have been intended. The provisions assume that an appointment was made by persons with power to appoint. A purported appointment by persons lacking power to make such an appointment confers no protection.
[31] There is such similarity between s 183 and s 158 that I see no basis for departing from the reasoning of the majority in Re Northwestern Autoservices Ltd.
[32] I also accept the plaintiffs’ argument that the application of s 158 requires the party reliant on the section to have acted in good faith. Here, at the relevant time, Mr Lunn, the defendant’s sole legitimate director, was opposed to advertising the development and questioned whether this was done honestly and in good faith. The defendant through the actions of Mr Chevin and Mr Constable entered into the investor agreement on the advertised terms without Mr Lunn’s knowledge or consent. In such circumstances the defendant cannot in good faith rely on s 158 to bind the plaintiffs to the investor agreement.
[33] Accordingly I find there is a good arguable case that Mr Constable’s apparent appointment as director was defective. I also find there is a good arguable case that
12 Re Northwestern Autoservices Ltd [1980] 2 NZLR 302 (CA).
s 158 does not protect his appointment as a director. In turn, as Mr Constable had no authority to execute the agreement on the defendant’s behalf, s 158 cannot make the agreement legally binding.
[34] I do not consider that s 17 assists the defendant. Section 17 provides that no act of a company and no transfer of property to or by a company is invalid merely because the company did not have the capacity, the right or the power to do the act or to transfer or take the transfer of property. Here no-one contends the defendant lacked capacity or power to engage in the investor agreement and to effect the exchange of consideration which underlies the agreement. The arguable issue is whether Mr Constable had authority to bind the defendant when he executed the investor agreement, if his appointment was defective. The defendant cannot at law be a party to the investor agreement if Mr Constable lacked authority to bind it.
[35] Nor do I consider that s 18 is of assistance to the defendant here. Section 18(1) relevantly prevents a company from asserting against a person dealing with the company or a person who has acquired property rights or interests from that company that the Act has not been complied with; and a person named as a director of the company is not a director of the company or has not been duly appointed or does not have authority to exercise a power which a director of a company carrying on business of the kind carried on by the company customarily has authority to exercise. Section 18 also relevantly prevents a company from asserting that a person held out by the company as a director has not been duly appointed or does not have authority to exercise a power which a director, employee or agent of a company carrying on business of the kind carried on by the company customarily has authority to exercise. The provision reflects what was formally known in the common law as the “indoor management rule”.13
[36] Section 18 works to stop a registered company from relying on defects or irregularities with the appointment of a director. In the present situation, the outside party who thought it was dealing with the defendant now seeks to rely on the fact the person who purported to act as the defendant’s director did not occupy that role, and
13 Royal British Bank v Turquand, above n 10.
therefore could not legally bind the company to the investor agreement. The plaintiffs might have relied on s 18 if the defendant had tried to extricate itself from the investor agreement on this basis Mr Constable was not a lawful director. However, the section cannot be used by an outside party to achieve the same outcome.
[37] The final provision the defendant relies on is s 180(1)(c) of the Companies Act. This provides that an obligation entered into by a natural person and not by law required to be in writing, may be entered into on behalf of the company in writing or orally by a person acting under the company’s express or implied authority. The difficulty the defendant faces here is that for s 180(1)(c) to operate Mr Constable had to be acting under the defendant’s express or implied authority. At the relevant time Mr Constable was not a director of the defendant. Mr Lunn remained a director until 23 November 2020. Throughout the period of his time as a director Mr Lunn was the only lawfully appointed director. He never appointed Mr Constable as the company’s agent. The defendant cannot therefore point to any express authority giving Mr Constable authority to execute the investor agreement on behalf of the defendant.
[38] Nor can the defendant point to Mr Constable having any such implied authority. The defendant has tried to make something of Mr Constable’s employment status in the group of companies by asserting that he acted as the company “secretary”. The office of company secretary was a formal position recognised in the Companies Act 1955. There is no equivalent in the Companies Act 1993. Whatever role Mr Constable may have played in the group of companies which involved Mr Chevin’s interests there is no evidence that the defendant ever held Mr Constable out as someone with implied authority to act on its behalf. Nor can the defendant rely on the fact Mr Constable was registered on the Companies Office registry as a director of the defendant.
[39] First, the registration as shown on the register records Mr Constable being a director from 19 November 2020, which postdates the execution of the investor agreement by one day. The defendant argues that Mr Constable was in fact appointed on 18 November 2020, but public notice and the effect any such public notice might have on the plaintiffs can only run from the date shown in the Companies Register.
[40] Second, Mr Constable only appears on the Companies Register by reason of his own unlawful act of entering himself as a director when he was not a director of the defendant, and had no authority to take that step. For the defendant to establish Mr Constable was acting with its implied authority it would need to point to conduct on its part at the relevant time that cloaked Mr Constable with such authority. It has not done that.
[41] The defendant argues that Mr Lunn knew Mr Chevin was talking with potential investors in the defendant’s development. It is difficult to see how this can constitute the defendant giving Mr Constable implied authority to enter into the investor agreement on its behalf.
[42] Accordingly, I am satisfied that Mr Constable was not legally capable of executing the investor agreement.
[43] The parties’ position regarding ratification of the investor agreement is not clear. The defendant argues that the agreement is now capable of being ratified by Mr Constable in his role as a director appointed by TSTL. The defendant’s argument does not go so far as to say the investor agreement has been ratified in this way. The plaintiffs argue that because Mr Lunn’s company hold five per cent of the shares in the defendant, the shareholders cannot unanimously ratify the unlawful acts of third parties that are purportedly undertaken on behalf of the defendant.14 Neither the plaintiffs nor the defendant have approached this question on the basis the investor agreement has been ratified. Accordingly, I consider ratification is immaterial and therefore of no help to the defendant.
14 On reading s 107 and 177 of the Companies Act it is clear there is no power for a board to ratify the unlawful actions of third parties. Sections 107 and 177 set out when an ultra vires decision can be ratified. The circumstances here do not fall into one of the types of decisions that can be ratified.
Most of the common law principles for ratification concern directors breaching their duties (see Watts, Campbell and Hare Company Law in New Zealand (2nd ed, LexisNexis, Wellington, 2016) at 582. Here, Mr Constable was not a lawful director. On the point of unanimity, the principle in Re Duomatic Ltd [1969] 2 Ch 365 says that “the assent of all members of a company is effective to bind the company even if the formalities (in the relevant legislation or the company’s constitutive documents) are not complied with”. However, in Ririnui v Landcorp Farming Limited [2016] NZSC 62 at [167], O’Regan J said in obiter that he did not think the Duomatic principle applied in New Zealand. That decision reinforces that the plaintiffs’ argument is correct.
Consequences of investor agreement not being legally effective
[44] The next step is to determine the legal consequences of the investor agreement not being legally effective. First, the investor agreement cannot provide a basis for the defendant to receive and retain the $260,000 advanced by the plaintiffs. The defendant has no other basis for retaining the $260,000. Second, the plaintiffs rely on several causes of action for the return of the $260,000. I shall deal with each in turn.
[45] I accept the plaintiffs’ submission that there is a good arguable case based on the principal in Elders Pastoral Ltd v BNZ15 that a constructive trust will be imposed where a party receives property which it cannot in good conscience retain. Whether a constructive trust is imposed is determined by the knowledge of the recipient, the reasonable expectations of the parties, and commercial fair dealings. At the time that the investor agreement was executed, the defendant’s knowledge was primarily that of its director Mr Lunn. The available evidence suggests that he would not have accepted the plaintiffs’ payment under the circumstances in which it was made. Also, the plaintiffs would not have made the payment had they known the correct facts.
[46] I also accept their submission that there is sufficient evidence to suggest that Mr Chevin and Mr Constable were aware that Mr Lunn would not have allowed the defendant to take money from the plaintiffs without first correcting any misleading impression created by the advertisement.
[47] I do not accept the plaintiffs’ argument that Mr Chevin and Mr Constable can be regarded as agents of the defendant at the relevant time. This is because there is no apparent basis to support the defendant appointing those persons as its agents. Rather, they, of their own motion, purported to assume this role. I do not accept that persons can simply assume the role of being a registered company’s agents in the face of that company doing nothing to effect such appointments.
[48] I accept the plaintiffs’ submission that there is a reasonably available inference that Mr Chevin and Mr Constable attempted to sidestep Mr Lunn by purporting to appoint Mr Constable as a director, who could then enter into the investor agreement
15 Elders Pastoral Ltd v BNZ [1989] 2 NZLR 180 (CA) at 185-186.
on behalf of the defendant without disclosing to the plaintiffs the true position. In this regard the defendant is as much a victim of Mr Chevin’s and Mr Constable’s conduct as the plaintiffs.
[49] The plaintiffs allege the defendant received $260,000 from the plaintiffs in circumstances which engage equitable principles relevant to whether the defendant can in good conscience retain this payment.16 I agree.
[50] I accept the plaintiffs’ argument that the imposition of a constructive trust does not interfere with any contractual relations because here no contract ever came into existence between the plaintiffs and the defendant, for the reasons earlier expressed.
[51]I also accept that the plaintiffs have a good arguable case for recovery of the
$260,000 on the basis of mistake. I do not accept the defendant’s argument that s 22 of the Contract and Commercial Law Act 2017 provides a code where mistake is alleged. Section 22 only applies to circumstances where the mistake relates to a party to a contract or a person claiming through or under a party to a contract. Here, no contract at law ever came into existence.
[52]I do not consider that s 74A of the Property Law Act 2007 bars recovery of the
$260,000. Here the plaintiffs contend they paid monies under the mistaken belief that Mr Constable had authority to enter into the agreement and that there was a binding investor agreement with the defendant. In fact it is arguable that there was at law no contract with the defendant at all. These circumstances fulfil the requirements of a claim for money paid under a mistake. Further, insofar as the claim rests on a mistake of law as to the status of the investor agreement, s 74A(1) of the Property Law Act permits recovery. I accept the plaintiffs’ argument based on the principle in Chase Manhattan Bank NAV Israel – British Bank (London) Ltd17 that receipt of a mistaken payment creates a fiduciary relationship under which the recipient is required to hold the money on constructive trust in favour of the payer.
16 In this regard the first cause of action based on the principle in Elders Pastoral Ltd v BNZ merges with the second cause of action based on money paid under a mistake; see discussion at [52].
17 Chase Manhattan Bank NAV Israel – British Bank (London) Ltd [1981] Ch 105; [179] 3 All ER 1025.
[53] I also accept there is a good arguable case under s 43 of the Fair Trading Act 1986 that a breach of that Act may be found, based upon the allegedly misleading advertisement, which allegedly enticed the plaintiffs into entering into the investor agreement with the defendant. Once such liability is established the plaintiffs may well be entitled to an order pursuant to s 43(2) of the Fair Trading Act directing the defendant to refund them the $260,000 which they paid.18
Analysis
[54] It follows from the above that I am satisfied the plaintiffs have established they have a good arguable case against the defendant relevant to the tests for either a freezing order or a preservation order.
Is the $260,000 a “fund” for the purpose of a preservation order and an asset for the purpose of a freezing order
[55]Rule 7.55 of the High Court Rules relevantly provides:
Preservation of property
(1) A Judge may at any stage in a proceeding make orders, subject to any conditions specified by the Judge, for the detention, custody, or preservation of any property.
(2) An order may authorise a person to enter any land or to do any other thing for the purpose of giving effect to the order.
(3) The Judge may order that a fund be paid into court or otherwise secured if the proceeding concerns the right of a party to the fund.
(4) The Judge may treat an application under this rule as an application for directions under rule 7.43A and give directions accordingly.
[56] The plaintiffs claim the $260,000 paid to the defendant’s bank account is a “fund” for the purpose of r 7.55 and therefore they are entitled to a preservation order.
[57] The plaintiffs contend that the $260,000 paid to the defendant is still held by it in its bank account, that it is an existing sum of money devoted to being applied
18 Such orders are available under s 43(3)(e) of the Fair Trading Act.
towards the development and not yet spent for that purpose. Accordingly, this sum of money is capable of identification.
[58] The plaintiffs contend they claim a proprietary right or remedy to the $260,000 sitting in the defendant’s bank account on the basis of their three causes of action all of which support a proprietary remedy. The first two causes of action (based on the principle in Elders Pastoral Ltd v BNZ and money paid under a mistake of fact) recognise they have retained an equitable interest in the money with the conscience of the defendant being subject to a fiduciary duty to respect their equitable property right.
The claim under the Fair Trading Act can give rise to proprietary relief.19
[59] The defendant’s argument that the $260,000 is not capable of sustaining a preservation order depends on the payment being viewed as money paid under a contract which has therefore resulted in the plaintiffs losing all proprietary interest in the payment. Because I consider it inherent in the plaintiffs’ claims that they retain at the least an equitable interest in the $260,000, I am satisfied the payment is a fund that is capable of protection by a preservation order.
[60] It follows from this finding that there is an asset to which a freezing order can attach.
Risk of dissipation of assets
[61] The defendant argues that there is insufficient evidence of a real risk of dissipation of its assets which is fatal to the plaintiffs’ application for a freezing order.20 The jurisdiction to grant a freezing order is not to be used as a means of providing an applicant with pre-judgment security. The payment of validly owed debts should not be avoided by the making of freezing orders.
[62] The defendant submits that Mr Lunn’s evidence is the sole evidence on which the plaintiffs can rely to establish a real risk of dissipation. The defendant is entitled
19 Fair Trading Act 1985, s 43(3)(e).
20 The three requirements for a freezing order are: (a) a good arguable case on the substantive claim;
(b) assets that the order can apply to; and (c) a real risk that the respondent will dissipate or dispose of those assets.
to expend its funds as it considers necessary from its receipts from the development. The evidence is that the development is a solid project with unconditional presales, and that a deposit has been paid on the land that is being acquired and developed.
[63] On the other hand, the plaintiffs submit that the test for dissipation is not unduly exacting, they must be able to point to circumstances from which a “prudent, sensible, commercial man, can properly infer a danger of default.”21 The plaintiffs reject the defendant’s assertion that there is no evidence of dissipation. The plaintiffs submit that on the contrary there is abundant evidence to suggest that if they are ultimately successful any judgment will not be wholly or partly satisfied. They base this on the following: (a) the defendant is a single purpose company with no assets or savings of its own; (b) it operates its business through a central holding company that uses funds from various companies to pay group expenses. The financial position of the holding company has not been disclosed but the likelihood is that it has no cash resources as it was not able to pay Mr Chevin’s phone bill; (c) there is evidence that monies paid to the defendant have been used to pay the personal expenses of Mr Chevin and his family; (d) Mr Chevin has a history of not paying his debts.
[64] I accept the only evidence to suggest there is a real risk of dissipation is that from Mr Lunn. I also accept that the defendant disputes some or all of Mr Lunn’s evidence. However, it is clear the defendant was incorporated as a single purpose company. It has not shown it has assets or savings of its own. It says it has now paid the deposit for the land to be developed and its pre-sales are now unconditional. However, it has provided no sound evidence of its financial worth.
[65] The alleged conduct of Mr Chevin and Mr Constable (who is now a director of the defendant) does not make the Court confident that those persons are likely to act in the best interests of the defendant, which includes payment of its creditors.22
21 Raukura Moana Fisheries Ltd v The Ship Irina Zharkikh [2001] 2 NZLR 801 (HC) at [122], cited in Complete Ltd (In Liq) v Fuzo Woolfield Ltd [2018] NZHC 715, at [35].
22 See discussion in Arnerich v DHC Assets Ltd [2021] NZCA 225 at [140] and [168]-[170].
[66] Given the way matters are alleged to have unfolded I am satisfied that, on the basis of Mr Lunn’s evidence alone, there is a real risk of dissipation of the fund unless it is protected by way of freezing order.
Balance of convenience against the orders sought
[67] The defendant submits the balance of convenience is neutral as each party’s monetary claim against the other provides adequate compensation. The plaintiffs submit they have provided a valuable undertaking in damages should their claims ultimately fail. The defendant has no assets and no value. Because its money claim is raised by way of set-off and relies on the Court finding the investor agreement is legally effective, the defendant has not needed to provide its own undertaking in damages should its claim fail. Accordingly, the balance of convenience is not neutral and it is wrong to view each party’s money claim against the other as providing adequate compensation to whomever is successful in this proceeding. I accept the plaintiff’s argument.
Overall justice of the case
[68] For the reasons outlined above I am satisfied the plaintiffs meet the requirements for both a freezing order and a preservation order. Standing back and looking at the justice of the case overall does not change my view of those matters. I am satisfied there is a real risk the plaintiffs will suffer an irrecoverable loss if the defendant is not constrained from dealing with the fund in any way until trial. There is nothing about the defendant’s financial circumstances or its conduct, as has been made known to me, that would suggest it will be able to repay the fund should the plaintiffs succeed at trial.
Conclusion
[69]I find the plaintiffs are entitled to the freezing order they seek.
[70] I also find that the preservation order, made by Peters J on 17 December 2020, should continue until further order of the Court.
[71] The plaintiffs have not addressed whether they seek under the preservation order for the $260,000 to be paid into Court or whether its continued retention in the defendant’s bank account is sufficient. Leave is reserved to the plaintiffs to return to Court on this issue.
[72]Leave is also reserved to the parties to file memoranda on costs.
Duffy J
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