Mrs X v Company B
[2014] NZHC 2126
•4 September 2014
ORDER PROHIBITING PUBLICATION OF NAMES, ADDRESSES OR IDENTIFYING PARTICULARS OF THE PARTIES AND OF THE ENTITITES ANONYMISED IN THE JUDGMENT
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2013-409-001783 [2014] NZHC 2126
UNDER the Land Transfer Act 1952 AND
UNDER
the Property (Relationships) Act 1976
BETWEEN
MRS X Applicant
AND
COMPANY A Respondent
Hearing: 18 and 21 July 2014 Appearances:
A M Corry for Applicant
J E Bayley for RespondentJudgment:
4 September 2014
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
on application as to non-lapsing of notice of claim
MRS X v COMPANY A [2014] NZHC 2126 [4 September 2014]
Table of Contents
Introduction ............................................................................................................[1] The subject-matter of this proceeding – the Company A properties ......................[3] The notice of claim.................................................................................................[7] The other notice and the Company B land ...........................................................[10] The interest claimed in this case ..........................................................................[14] Ownership of the Company A properties .............................................................[19] Property 1 [21] Property 2 [25] Property 3 [27] Property 4 [29] The terms and funding of the Company A purchase ............................................[32] Ownership and control of Company A.................................................................[37] Caveat lapsing - the applicable principles............................................................[43]
Does Mr X have a reasonably arguable beneficial interest in any of the Company
A properties through a constructive trust? ...........................................................[44] The beneficial interest identified in the notice of claim and that pursued at the hearing [44] The formulation of Mrs X’s constructive trust claim [46] Comparing the interest claimed and Ms Corry’s formulation [48]
The ingredients of a constructive trust – (1) contribution to the property in
question ................................................................................................................[56] The ingredients of a constructive trust – (2) reasonable expectation of an interest which Company A should reasonably expect to yield .........................................[60]
Mrs X’s evidence and Ms Corry’s submissions [60] The absence of evidence of reasonable expectation [70] Conclusion [86] The “sham” argument...........................................................................................[91] The claim in the notice of claim [91] Submissions for Mrs X [92] Sham transactions – alter ego – the authorities [95] Application of the authorities [108] Conclusion [111] Costs ................................................................................................................... [113] Orders ................................................................................................................. [115]
Introduction
[1] Mrs X and Mr X were together for 25 years, marrying in 1990 and separating in April 2013.
[2] By the efforts and skill of one or both (they disagree on which permutation) they arranged the purchase and holding of numerous properties. They arranged the formation of numerous entities, mainly trusts but also companies, which acquired properties.
The subject-matter of this proceeding – the Company A properties
[3] This proceeding concerns Mrs X’s notice of claim (pursuant to s 42 Property (Relationships) Act 1976 (PRA)) over four neighbouring [location redacted] properties (the Company A properties) being –
(a) Property 1 [address redacted]. (b) Property 2 [address redacted]. (c) Property 3 [address redacted]. (d) Property 4 [address redacted].
The current title for Property 4 brings together two properties which had been earlier dealt with under separate titles.
[4] The respondent in this proceeding, Company A (Company A), is the legal owner of the Company A properties having purchased the land from four entities associated with the Xs in December 2008.
[5] The full shareholding in Company A is owned by Trustee Company F (Trustee Company F) as trustee of the F Trust.
[6] Although Mrs X has requested a copy of the Deed of the F Trust, the Deed has neither been provided to her nor produced by the respondent in evidence.
The notice of claim
[7] On 2 December 2013 Mrs X lodged a notice of claim affecting the four Company A properties. The notice of claim was expressed to be a notice of claim under s 42 PRAct. The notice states the interest claimed as being –
A constructive trust or express or implied trust or common intention trust between Mr X and Company A (as the Registered Proprietor) exists whereby Mr X is the beneficial owner of the estate. The beneficial ownership of Mr X is the subject of legal proceedings whereby the Applicant Mrs X will ask the Court to determine and declare that the ownership entities utilised by Mr X to take legal title to the estate are illusory or a sham and the beneficial owner of the said estate is owned by the Applicant and Mr X jointly.
[8] The notice goes on to state that under the PRAct an interest is claimed by virtue of the marriage (of Mrs X with Mr X) on 2 July 1990.
[9] Company A promptly initiated the caveat lapsing procedures under s 145A Land Transfer Act 1952 (the LTAct) which apply also to notices of claim.1 Mrs X applied within the required time for an order that the notice of claim not lapse. An interim order to that effect was made.
The other notice and the Company B land
[10] At the same time as hearing Mrs X’s application in relation to the Company A properties, I heard her application for an order that her notice of claim over separate land not lapse (the Company B proceeding).
[11] Company B (Company B) is the registered proprietor of a property at [address redacted], [location redacted]. Company B holds the [address redacted] properties as trustee of the H Trust.
[12] On 28 April 2014 Mrs X claimed an interest in the Company B land by way again of a notice of claim under s 42 PR Act. The claim was in terms of a beneficial
1 Property (Relationships) Act 1976, s 42(3).
interest in a trust (“constructive express, implied or common intention”) of which Company B was the trustee. Unlike the present case, no claim was made in relation to the Company B ownership structure that it was a sham or illusory – such a claim has been made by Mrs X in relation to the Company A ownership structure relevant to the proceeding.
[13] A judgment in relation to the Company B notice is issued contemporaneously with this judgment.2
The interest claimed in this case
[14] The starting point for analysis is the interest as claimed in the notice of claim.
[15] The Court, on a caveat-lapsing application, is empowered to sustain a caveat only if the applicant establishes his or her title to the interest (or other entitlement) “therein specified”.3 Accordingly, it is not relevant to consider any other interest for which the applicant might argue.
[16] Mrs X’s notice of claim necessarily recognises that Company A is the legal owner of the Company A properties. There are therefore two layers to her claim, namely:
(a) The assertion that Mr X has a beneficial interest in the Company A
properties because either –
(i)He has a beneficial interest in a trust (constructive, express implied or common intention) of which Company A is trustee; or
(ii) Mr X is the “true beneficial owner of the Company A
properties because Company A is an illusory or sham entity used by Mr X as the owning entity; and
2 Mrs X v Company B [2014] NZHC 2125.
3 Land Transfer Act 1952, s 144.
(b) Mrs X claims an interest in Mr X’s interest in the Company A
properties, under the PRAct, by virtue of her marriage.
[17] Company A did not challenge Mrs X’s entitlement to lodge a s 42 PRA claim
against any beneficial interests acquired by Mr X in the course of the marriage.
[18] The issues in this proceeding relate to whether Mr X has a reasonably arguable beneficial interest in the Company A properties for each of the reasons identified in the notice of claim as recorded at [7] above.
Ownership of the Company A properties
[19] Mrs X filed a single notice of claim in relation to the four Company A
properties, the legal ownership of each of which is in Company A.
[20] The following narrative sets out the background to the acquisition and holding of the four properties by entities associated with Xs.
Property 1
[21] The title to Property 1 brings together two properties previously held on separate titles ([title reference redacted] and [title reference redacted]). From caveat details, the properties were purchased in apparently 1994 and 1996 respectively with settlement later occurring in 1995 and 1999 respectively. The trustees for the time being of the M Trust took title. Initially those trustees were individuals (Mr X and professional trustees) but by 1998 the trustees were Mr X and Trustee Company G. Mr X was in turn director of Trustee Company G.
[22] The M Trust was a trust settled by Mrs X’s mother on 25 September 1990.
Mr and Mrs X and their children are discretionary beneficiaries.
[23] In April 2006, Property 1 was sold by the trustees of M Trust to the trustees of the V Trust (another X entity) (a step taken in Mrs X’s words “to ensure that this property would not attract tax”). The trustee of the V Trust was [company name redacted].
[24] On 24 December 2008, Company A entered into an agreement to purchase Property 1 from [company name redacted] for [price redacted] (“the Company A purchase”). In the Company A purchase agreement, Company A at the same time agreed to purchase Property 2, Property 3 and Property 4 from the legal owners of those properties.
Property 2
[25] Property 2 is represented by title [title reference redacted]. From caveat details, the property was purchased in apparently 1995 with settlement later occurring in 1997. The trustees, for the time being, of the W Trust took title. Initially those trustees were individuals (Mr X and professional trustees) but by 1998 the trustees were Mr X and Trustee Company G. Mr X was in turn director of Trustee Company G.
[26] In February 2006, [company name redacted] took over as the sole trustee of the W Trust. On 24 December 2008, [company name redacted] joined with the other vendor entities and through the Company A purchase agreement sold Property 2 to Company A.
Property 3
[27] Property 3 is represented by title [title reference redacted]. The property was purchased by Mr X in 1996 and acquired by Company H from Mr X in December
1999. Company H was incorporated the same month with its shares held by
[company name redacted].
[28] On 24 December 2008, Company H joined with the other vendor entities in the Company A purchase agreement, agreeing to sell Property 3 to Company A.
Property 4
[29] Property 4 is represented by title [title reference redacted]. From caveat details, the property was purchased in apparently 1996 with settlement later occurring in December 1997. The trustees for the time being of the S Trust (Mr and
Mrs X and a professional trustee) took title. By 2006, the trustees were Mr X and
[company name redacted].
[30] The S Trust was a trust settled by a solicitor ([name redacted]) on 3 October
1997. The discretionary beneficiaries include Mr and Mrs X and their children and grandchildren.
[31] On 24 December 2008, the trustees joined with the other vendor entities in the Company A purchase agreement, agreeing to sell Property 4 to Company A.
The terms and funding of the Company A purchase
[32] The sale price of the Company A properties ([amount redacted]) was inclusive of GST.
[33] Company A was to obtain first mortgage finance of up to [amount redacted].
[34] The vendor entities were to advance on second mortgage vendor finance of
[amount redacted] for two years or by extension to a re-zoning date.
[35] Upon Company A obtaining a GST refund, Company A was to pay [amount redacted], in reduction of the vendor finance debt, with payment guaranteed by Mr I personally.
[36] The Company A properties were zoned rural at the time of the sale. Further steps were to be taken to pursue rezoning. The Company A purchase provided that the purchase price would be deemed to be increased by a further [amount redacted] if rezoning were achieved.
Ownership and control of Company A
[37] Company A was incorporated in September 2008, with Mr I acquiring its shareholding and becoming sole director. He remained so until November 2013.
[38] In the meantime, Mr X had on 29 August 2012 settled the T Trust, with
[company name redacted] as sole trustee.
[39] On 19 December 2012, Mr I entered into an agreement to sell for [amount redacted] his shares in Company A to [company name redacted] as trustee of the T Trust. An arrangement was agreed upon for the repayment of Mr I’s credit current account with Company A of $150,000 on settlement. The agreed settlement date was
30 April 2013.
[40] Settlement of the I/T Trust agreement never took place. Company A has produced no evidence as to why the sale to T Trust did not proceed. Mr G, who gave the only evidence for Company A in opposition, did not refer to the agreement between Mr I and T Trust at all, jumping in his narrative directly from 2008 to late-
2013.
[41] Companies Office records then show on 2 December 2013 that Mr I sold the Company A shares to Trustee Company F for $600,000. Mr G is also shown in the Companies Office records at that time as being the sole shareholder and director of Trustee Company F. Mr G does not produce a copy of the I/Trustee Company F agreement. Equally, he has not provided to the Court or to Mrs X a copy of the deed settling the F Trust. Rather, he simply deposes that Mrs X is not a beneficiary and Mr X only a discretionary beneficiary of that trust. He deposes that F Trust’s only interest in Company A is as a shareholder, not a landowner.
[42] Because the source documents relating to the F Trust were not produced, Mr Bayley understandably in his written submissions only supported the proposition that Mr X’s sole interest (in connection with the Company A properties) was “as a discretionary beneficiary” of the F Trust, by reference to Mr G’s narrative evidence.
Caveat lapsing - the applicable principles
[43] Having regard to the additional layer of interest involved in Mrs X’s notice of claim, the principles which I adopt in relation to her application for an order that her notice of claim not lapse are:
(a) The burden of establishing that Mr X has a reasonably arguable case for the interest described in the notice of claim is upon Mrs X;
(b)Mrs X must show that Mr X has an entitlement to or beneficial interest in the estate referred to in the notice of claim by virtue of a trust expressed or implied: s 137(1)(a) LT Act (the other criteria in s
137 not applying in this case);
(c) The summary procedure involved in an application of this nature is wholly unsuitable for the determination of disputed questions of fact – an order for removal of the notice of claim will not be made unless it is clear that the notice cannot be maintained either because there was no valid ground for lodging it or that such valid ground as then exists no longer does so;
(d)When an applicant has discharged the burden, there remains a discretion as to whether to remove the notice of claim, which will be exercised cautiously;
(e) The Court has jurisdiction to impose conditions when making orders.
Does Mr X have a reasonably arguable beneficial interest in any of the
Company A properties through a constructive trust?
The beneficial interest identified in the notice of claim and that pursued at the hearing
[44] Mrs X implicitly asserted by her notice of claim that the beneficial interest held by Mr X was as a beneficiary of a constructive trust, an express trust, an implied trust or a common intention trust.
[45] At the hearing, Ms Corry argued, in terms of an interest derived as a beneficiary of a trust, only that there was a constructive trust. Arguments as to the other three forms of trust referred to in the notice of claim were not pursued and I do not further consider them.
The formulation of Mrs X’s constructive trust claim
[46] Ms Corry first invokes the recognition by the Court of Appeal in Lankow v Rose4 that equity in some circumstances of contribution may require the imposition of a constructive trust over property taken or retained in the name of one member of a domestic relationship. As formulated by Tipping J, the summarised facts which a defendant facto claimant must show are:5
1. Contributions, direct or indirect, to the property in question;
2. The expectation of an interest therein;
3. That such expectation is a reasonable one;
4.That the defendant should reasonably expect to yield the claimant an interest.
Tipping J continued:6
If the claimant can demonstrate each of these four points, equity will regard as unconscionable the defendant’s denial of the claimant’s interest, and will impose a constructive trust accordingly.
[47] In her written synopsis for Mrs X, Ms Corry, having referred to Lankow v
Rose, explained the constructive trust for which she contended in the following way:
62.That constructive trust might be imposed in favour of the Applicant or her husband or for them jointly and that imposition of constructive trust is relationship property. For a recent example see Clark v Clark [2012] NZHC 2159.
63.The Applicant and her husband, by their combined efforts during the relationship, built up their assets, including the Company A properties, for their joint benefit.
64.The Applicant and her husband purchased the Company A properties with the common intention of directly and indirectly contributing to the property and increasing its value.
65. The Applicant’s contribution commenced prior to the incorporation
of Trustee Company F, on its purchase of the land for the F Trust.
66.The Applicant in making her contributions had a reasonable expectation that she would share in the assets accumulated and maintained during the relationship.
67. The Applicant’s husband has retained all powers of control of
Trustee Company F and the Trustees work under his direction. The
4 Lankow v Rose [1995] 1 NZLR 277 (CA).
5 At 294 per Tipping J.
6 At 294.
current registered proprietors were therefore not bona fide purchasers at the time title was passed, allowing the Applicant to make an equitable claim.7
68.The transfer of the Applicant’s share of the Company A properties, by her husband, was for no consideration. Equity therefore presumes that where consideration is adequate, it is clear that the transferee is retaining beneficial ownership.
69.Even if consideration was adequate and valuable, the applicant is entitled to claim for the opportunity of capital gain/current market value as at date of hearing (s2).
70.The Applicant’s beneficial interest in the Company A properties under the constructive trust falls within the s2 property definition. Her interest is not discretionary but fixed under the constructive trust.8
(Ms Corry’s reference to the “Company A properties” is a reference to the four
Company A properties).
Comparing the interest claimed and Ms Corry’s formulation
[48] The interest claimed in the notice of claim is a constructive trust between Mr X and Company A whereby Company A is trustee and Mr X beneficiary. Mrs X’s fundamental need to assert that Company A owed a duty such as arising from trusteeship or similar, is obvious – arrangements or entitlements as between Mr and Mrs X cannot impact on Company A’s rights to deal with the Company A properties unless Company A owed duties in that regard.
[49] It is evident from Ms Corry’s written submissions, as I have set them out at [48], that the submissions blur the expectations of Mrs X (not the form of constructive trust asserted in her notice of claim) and the expectations of Mr X which are reflected in the constructive trust claimed in the notice of claim (which is as between Mr X and Company A).
[50] In her written synopsis, Ms Corry, (before coming to her discussion of the constructive trust argument), had developed extensive submissions in relation to Mrs X’s contributions to acquisitions by the Xs or their interests over the years.
Although not expressly addressed in her submissions, it might have been inferred that Ms Corry was pursuing an argument that, in its eventual ownership of the Company A properties, Company A holds the land on some form of “indirect” constructive trust because of earlier contributions which Mrs X made to the joint “X” assets proceeds of which Mr X may have later used in the funding of the acquisition of the Company A properties.
[51] In his submissions, Mr Bayley met that argument by observing (correctly) that Mrs X had given no reliable evidence that she had made any financial contribution to the acquisition of the Company A properties by the four entities which sold them to Company A.
[52] Ms Corry clarified in her reply submissions that the argument was not pursued on the basis that Company A is her constructive trustee for the Company A properties (or the Company B properties). Ms Corry confirmed that the constructive trust posited is one between Company A and Mr X (and in the case of Company B properties, between Company B and Mr X). It is contended that Mrs X’s claim then arises because, at the very least, Mr X’s beneficial interest would represent property acquired in the course of the marriage.
[53] Ms Corry in the course of her written synopsis referred to the judgment of Asher J in Clark v Clark.9 She submitted that Clark v Clark illustrates that a constructive trust might be imposed in favour of the applicant or her husband or for them jointly and that the entitlements arising under the constructive trustee are relationship property.
[54] In fact, the judgment in Clark v Clark is not in terms of some form of “joint” constructive trust where the trustee holds for the husband and the wife. The Judge’s analysis of the constructive trust in Clark v Clark10 is entirely in terms of the beneficial interest of Mr Clark (not Mrs Clark) in the land in question. It was only at
that point11 that Asher J turned to consider whether Mr Clark’s interest in the land
was relationship property.
[55] The same approach to analysis needs to apply in this case. I therefore start with the assertion that Mr X holds a beneficial interest in a constructive trust over the Company A properties.
The ingredients of a constructive trust – (1) contribution to the property in question
[56] The ingredients of a constructive trust are as analysed by Tipping J in Lankow v Rose.12 The initial requirement is that there be contributions, direct or indirect, to the property in question. For the reasons I come to in relation to the next ingredient (expectation of an interest) it is strictly unnecessary that I reach a firm conclusion as to whether Mrs X has pointed to reasonably arguable contributions on the part of Mr X to each of the four Company A properties. There is force in Mr Bayley’s submission that Mrs X’s evidence is lacking in relation to contributions (a situation which might be considered unsurprising given that the subject matter is Mr X’s and
not Mrs X’s contributions and given also Mr X’s apparent reluctance to provide all the documentation (including the deed of the F Trust). But Ms Corry herself chose not to present in any detail an analysis of the alleged contributions of Mr X to each of the Company A properties. The more generalised approach which she took in her oral submissions had been reflected in the written synopsis which I have already quoted above at [47]. I now repeat the two particular paragraphs which reflect the degree of overlap in submissions as to contribution to assets generally in the course of the marriage and as to contributions to the Company A properties in particular. Ms Corry submitted:
The Applicant’s contributions commenced prior to the incorporation of
trustee company F, on its purchase of the land for the F Trust.
The Applicant in making her contributions had a reasonable expectation that she would share in the assets accumulated and maintained during the relationship.
[57] There are significant difficulties with Mrs X’s contention that contributions to the Company A properties gave rise to a constructive trust. First, there is the fact of the sale of the Company A properties to Mr I’s company, Company A, in October
2008. Company A, which is the respondent in this proceeding, became the registered proprietor of the four properties. The vendor entities became creditors of Company A to the extent that Company A did not otherwise finance the purchase. At that point, any claim Mr X or the four vendor entities had would have been in the proceeds of sale, not in the land. Secondly, when the T Trust looked to buy the Company A properties (August 2012) and the F Trust eventually did (December
2013) the purchase was of the shareholding of Company A and not of the land itself. Given that the Company A properties had been owned from 2008 by the company Company A, any beneficial interest through a constructive trust which Mr X acquired when the F Trust took its interest in 2013 can only have been through a contribution to the share purchase. Any constructive trust lay in that property, namely the shares.
[58] Had it been necessary to do so, I would almost certainly have found that Mrs X’s assertion of a constructive trust must fail by reason of the absence of any relevant contributions to the Company A properties.
[59] As it is, I find that the asserted constructive trust must fail by reason of the requirements as to expectation of an interest, for the reasons I now come to.
The ingredients of a constructive trust – (2) reasonable expectation of an interest which Company A should reasonably expect to yield
Mrs X’s evidence and Ms Corry’s submissions
[60] Ms Corry, in her written synopsis and particularly in her oral submissions, focussed substantially on a primary proposition. The proposition comes from the reference in Mrs X’s notice of claim to the “illusory or sham” nature of ownership entities. Ms Corry, in addressing the commonality of issues in the Company A and Company B proceedings, enunciated her primary proposition thus -
The substance of the Applicant’s case in each proceeding is that the properties are relationship property, the companies and trusts are her husband’s alter ego …
[61] What the alter ego argument contains is the assertion that Mr X had put in place arrangements that ensured he (and not the other persons or entities which apparently had ownership) was in control of the holding and disposition of assets. I discuss below, in the context of the “sham” argument, at [96] – [112] to the proposition that Company A is Mr X’s alter ego.
[62] Mrs X put it this way in her evidence: -
In all matters Mr X exerts real control over all of the entities he has created to “own” our assets. This includes taking full part in every decision, negotiation and litigation. He usually has one or more of our children present with him at the High Court and in private settlement discussions so that they can learn “the family business”.
[63] By Mrs X’s evidence and Ms Corry’s alter ego submissions, Mrs X invited the Court to see through Company A’s apparent ownership so as to identify Mr X as the true owner of the Company A properties.
[64] In other words, it follows from the substance of Mrs X’s case that neither Mr nor Mrs X needed to have any expectation of the owning entity because Mr X’s control of all assets meant that he as the true owner would deal with all assets owned in a way which shared the benefits between at least himself and his wife (and presumably also their next generations).
[65] This aspect of Mrs X’s evidence largely explains the minimal focus in Ms Corry’s submissions on the expectation requirements of a constructive trust. In Ms Corry’s single paragraph dealing with the expectation requirement for a constructive trust, as I have already quoted it, Ms Corry asserted:
The Applicant in making her contributions had a reasonable expectation that she would share in the assets accumulated and maintained during the relationship.
[66] That was clearly on her evidence Mrs X’s expectation. But Mrs X’s
constructive trust argument involves Mr X as the beneficiary having a proprietary
claim against Company A. That argument calls for an examination of the expectations of Mr X not Mrs X.
[67] I focus on what the evidence establishes as being (reasonably arguably) the expectation of Mr X that he would receive an interest in the Company A properties. Is it reasonably arguable that Mr X had a reasonable expectation of an interest in any of the four properties which the directors of Company A should reasonably expect to yield to Mr X?
[68] Mrs X’s evidence does not identify an instance where either she or her husband overrode the decision-making of trustees over trust assets or of directors in relation to the governance of companies. In this regard, I observe the important distinction in the case of trusts between the trustees’ legal ownership and control of trust assets on the one hand and any rights reserved to settlors and appointors under trust deeds.
[69] The following matters in evidence indicate that neither Mr X nor Mrs X could have reasonably anticipated that Mr X had a beneficial interest in the Company A properties:
· Mr and Mrs X from the outset of their relationship adopted various entities for property-owning by X interests including –
o buying and holding in their own names;
o maintaining trusts settled by others (including Mrs X’s mother);
o establishing new trusts;
o establishing new companies;
· Lawyers and accountants were retained to:
o advise in respect of entity formation;
o to advise in respect of administration including taxation implications;
o act as trustees;
· Some purchases were expressly entered into by Mrs X as agent for a trust and later settled by trustees of the trust;
· From time to time trust companies established by professional firms or by the Xs themselves accepted appointments as trustees;
· Mrs X’s involvement as a trustee of the X entities continued into the period when the Company A properties were acquired – Mrs X became in
1997 a trustee of the S Trust (the owner of Property 4) and remained so until replaced by a corporate trustee some eight years later;
· Mrs X accepted in her evidence that decisions were taken in relation to the X entities for taxation reasons and that Mr X’s intention (through the structure of ownership entities) was to have “zero personal exposure to any adverse claims”;
· The 2004 notes kept by Mr F (one of the accounting advisers) reflect discussions occurring in relation to the usual conduct of entities such as “will have equity – where to distribute?” and “$2m owed by N Trust” (a reference to the N Trust);
· The various entities kept separate financial accounts;
· Company A purchased the Company A properties not from Mr X but from the four vendor entities.
The absence of evidence of reasonable expectation
[70] The Company A properties were sold to the present registered proprietor (Company A) in December 2008, appreciably before Mr and Mrs X came to separate.
[71] The sale to Company A was a business transaction in the normal sense, albeit with special features. Significantly, there was the bonus consideration element which would arise in the event rezoning was achieved. There was also the significant ([percentage redacted] of purchase price) vendor finance left in. That said Mrs X’s evidence identifies no particular aspect of the December 2008 purchase by Company A which entitled Mr X to reasonably expect that Company A would yield to him either then or later an interest in the Company A properties. To the contrary, Company A was taking on itself significant contractual liabilities to pay for the properties it was purchasing.
[72] Ms Corry in her submissions nevertheless sought to draw out of the December 2008 transaction some entitlements of Mr X which she suggested established a reasonable expectation of an interest. She did so in a six point paragraph in her written synopsis. I will deal with each of those points against the background of the evidence as I have discussed it:
(a) “Equity in the property did not pass to Company A”.
This proposition is conclusory. It assumes the answer. Company A agreed to purchase the property for [price redacted], obtained its own finance for [percentage redacted] of the consideration, committed to a vendor finance mortgage debt for the balance, and thereafter reduced its vendor finance debt by [amount redacted] by using its GST refund. In the absence of any other agreement, Company A had clearly purchased both the legal and beneficial interests in the property;
(b)“Mr X paid the interest on the SBS loan which Company A took out in December 2008, ie after he had sold the X interests to Company A”.
For this proposition, Ms Corry relied on the notes of evidence of a cross-examination which Ms Corry conducted of Mr X in the Family Court in relation to spousal maintenance. Although Mr Bayley did not object to Mrs X’s production of the notes of evidence as an exhibit, I do not assume that the parties were entitled to refer to that
evidence, at least without leave of the Family Court.13
In any event, at its highest, the material on which Ms Corry seeks to rely indicates that as part of the December 2008 transaction, Mr X agreed to personally guarantee the first mortgage borrowings of Company A. Mr X thus enabled Company A to complete the purchase. Mr X in fact had to start covering the interest costs approximately a year after the purchase when Mr I and his company, [company name redacted], were as a result of the impact of the Global Financial Crisis unable to maintain payment of the interest debt. Such later circumstances do not alter the commercial character of the sale effected in December 2008. They represent the circumstances which ultimately led to X interests purchasing the shares in Company A. Until that time the ownership of the Company A properties was exactly where both parties intended it to be, namely in Company A.
(c) “Capital gain remained with Mr X (his entities).”
Mrs X gave no evidence to the effect that the sale price from the four vendor entities to Company A in December 2008 (either as broken down to the four parcels of land or totalled at [price redacted]) was not a market value. To the extent that the vendor entities and Company A agreed that Company A would pay an additional consideration of [amount redacted] in the event that rezoning of the Company A properties was achieved, Mrs X has presented no evidence indicating that [amount redacted] was anything other than a
realistic commercial sum as between vendor and purchaser to allocate
13 See Family Proceedings Act 1980, s 169.
the benefit of any rezoning (on which the X interests had been working for some years).
(d)“The purchaser, Company A, transferred the GST refund available to Company A on the so called acquisition back to Mr X or his nominated entities”.
Rather than detracting from the arms-length appearance of the transaction, the provision in the agreement requiring Company A to pay the [amount redacted] from its GST refund is in keeping with an arms-length transaction in which the purchaser is required to use its GST refund entitlement for what was effectively a deposit. The agreement expressly records that the payment was in reduction of the amount secured by the vendor advance as one would expect on a commercial transaction.
[73] For convenience, I will now deal with Ms Corry’s fifth (“e”) point.
[74] Ms Corry submitted that an additional entitlement which suggested that Mr X
had a reasonable expectation of an interest was:
Mrs X has deposed to being present with [solicitor name redacted] and her
husband when this ‘side agreement’ was made in 2008.
[75] Ms Corry’s use of quotation marks around the expression “side agreement” is not without significance. Ms Corry did not refer me to any passage in her evidence in which Mrs X expressly refers to a “side agreement” whether between Mr I and the vendor entities (most relevantly) or between Mr X and his solicitor [name redacted], (arguably less relevantly).
[76] The most pertinent passage in Mrs X’s evidence is in her first affidavit when she deals with the background to the Company A properties. Mrs X identified that in
2008 the X interests were having difficulty with cash flow and were under pressure from the SBS (as their financier). She refers to Mr X’s insisting that the Company A properties be retained so as to try to achieve rezoning which could be expected to enhance value by [amount redacted]. Mrs X refers to approaches to three prominent
businessmen with a view to “a scheme to retain the Company A properties and the SBS lending”. Mr I (of [company name redacted]) was one of the three. Mrs X then sets out (accurately but for her last detail) the details of the contract between the vendor entities and Company A. The contract is what it is. In the last detail which she ascribes to the contract Mrs X states that Mr X was to pay Company A’s SBS loan and did so. In fact, the agreement did not provide for that. There is no evidence, apart from Mrs X’s assertion, to support the suggestion that Mr X paid the interest on Company A’s first mortgage finance from the outset. The evidence such as it is, produced by Mrs X, indicates that Company A began paying the interest at a later time when Mr I’s [company name redacted] was encountering financial difficulties as the result of the Global Financial Crisis.
[77] Mrs X, in her evidence then includes a paragraph from which Ms Corry
apparently drew her submission that a “side agreement” was made in 2008.
[78] Mrs X deposed:
It was known to Mr I, his adviser [name redacted], Mr X and our Solicitor [name redacted] and to me that Mr I was fronting his company Company A as the Purchaser and owner of the Company A properties with clear title and new lending but Mr X still had control and beneficial ownership, for example;
a)He has paid the loan to SBS throughout the period since the property was acquired by Company A on 24 December 2008.
b)He has retained the beneficial right to the increase in value of the land once rezoned.
c)He has security over the land by way of a mortgage with a priority amount of [amount redacted] (that is, via his various entities).
Significantly, Mrs X does not make any allegation as to a particular discussion or agreement concerning a beneficial interest vesting in Mr X after the vendor entities sold the Company A properties to Company A. Mrs X simply asserts that certain matters were “known to Mr I [and others]”. Mrs X does not identify the source of such “knowledge”. But the paragraph I have quoted indicates by the use of the words “for example” (before three matters are stated) that it is on such matters that Mrs X relies for the assertion that Mr I and his adviser and Mr and Mrs X and their adviser had such knowledge. As Mrs X’s evidence reads, her assertion of knowledge
is drawn as an inference from the three stated matters, not from any express discussion between the relevant parties on a particular date or dates.
[79] I therefore test the inference of a “knowledge” on the part of all parties or a “side agreement” by reference to the three particular matters (a, b, and c) identified by Mrs X in the paragraphs I have quoted at [78] above.
[80] First, Mrs X states (in “a”) that Mr X had paid the loan to SBS throughout the period since Company A acquired the property in December 2008. There is, as I have noted, no documentary evidence to support that assertion. Such evidence as has been produced by Mrs X indicated that Mr X arranged for Company A’s interest payments to be covered at a later date when Mr I’s company was facing financial difficulties. The X interests’ subsequent taking over of payments had the effect of protecting the vendor entities’ second mortgage debt and the benefit of the bonus consideration should rezoning be achieved. The interest payments do not indicate that after Company A had acquired the Company A properties, the vendor entities (or Mr X) were to have any beneficial interest in those properties.
[81] Secondly, Mrs X states (in “b”) that Mr X retained the “beneficial right to the increase in the value of the land once rezoned”. In her evidence in this paragraph Mrs X conflates two different concepts, the first being a beneficial interest in the land and the second being a right to benefit from the increases in value of the land if rezoned. The latter right provided in the contract – what I have referred to as the bonus consideration – was a right to payment. It did not purport to create a beneficial interest whether in the vendor entities or Mr X personally.
[82] Thirdly, Mrs X stated (under “c”) that Mr X had, through “his various entities”, security over the Company A properties by way of a mortgage with a priority amount of [amount redacted]. The [amount redacted] figure is a reference to a provision in the contract whereby in the event the Company A properties were rezoned, the additional [amount redacted] consideration would be treated as an additional advance (over and above the original [amount redacted] vendor finance) and would be secured by the same mortgage. The taking of mortgage security by the vendor entities for their vendor finance does not indicate the type of beneficial
ownership which Mrs X suggests earlier in the paragraph. To the contrary, the agreed security reflects the fact that the vendor entities were giving up their ownership interests in the Company A properties. To the extent they retained a registerable interest, it was by way of repayment of vendor finance enforceable through their mortgage security. The notice of claim in this case is not against the vendor entities in relation to their mortgage security. It is against Company A in relation to an alleged beneficial interest in the Company A properties themselves.
[83] Mrs X has not adduced any evidence which establishes arguably that by some “side agreement” reached with Company A in 2008, reasonable expectation was created whereby Company A should yield to Mr X a beneficial interest.
[84] I turn then to the sixth proposition which Ms Corry pointed to – a reasonable
expectation of an interest. The sixth proposition (”f”) was:
In other proceedings between Company B and Company C [name redacted] of Company C has given evidence as to his being asked to front as the Company A properties owner.
[85] What [name redacted] may have said in other proceedings is not evidence in this proceeding. It ought not to have been referred to by counsel in submissions. In any event, [name redacted] would have been able to speak only to how it was anticipated he or Company C might have become involved with the Company A properties. Neither he nor Company C became involved. What matters is how Mr I and Company A became involved, the evidence on which is summarised above.
Conclusion
[86] Company A acquired ownership of the Company A properties in December
2008. The sale to Company A obtained for the X interests (the four vendor companies) the definite right to payment of [amount redacted] and the prospect of an additional [amount redacted] payment if rezoning of the Company A land properties occurred. The evidence indicates that no beneficial interest in the land was preserved to the four vendor entities or transferred to Mr X personally. Company A has continued, without interruption, to own the Company A properties since
December 2008. The changes in Company A’s shareholding do not alter Company
A’s ownership of the land.
[87] There is no evidence to establish that the relevant parties arguably created in Mr X a reasonable expectation that he would take a beneficial interest in the Company A properties. What the various X interests were to receive was spelt out in the contract. If some other deal were to be later done (as in fact occurred after Mr I dealt with his own financial exigencies) that was a matter for future negotiation.
[88] Ms Corry made submissions as to the arrangements surrounding the later sale of the shares in Company A in 2012 and 2013. There was initially an agreement to sell the shares to the T Trust, in 2012, replaced by the sale which did occur to the F Trust.14 The T Trust transaction preceded the couple’s separation: the F Trust transaction followed it. Ms Corry submitted that with Mr X’s controlling hand apparently across the purchase transactions, the Court may infer in this jurisdiction that Mr X may have decided to have the purchase effected by a trust in which Mrs X’s interests were cut down, Mrs X not being a discretionary beneficiary of the F
Trust. It is unnecessary that I make any finding as to what are the arguable inferences from this structure of the share purchase. Ms Corry’s inference may be correct. But the transaction was a purchase of shares in Company A. It did nothing to alter the ownership of the Company A properties by Company A. Neither the
2013 purchase of the shares nor the interests of invested beneficiaries in the F Trust as new owner of the shares transferred any beneficial interest in the Company A properties away from Company A.
[89] Mrs X has failed to discharge the burden upon her of establishing that Mr X has a reasonably arguable case for the constructive trust claimed in the notice of claim.
[90] The “substance” of Mrs X’s claim (as Ms Corry put it in her submissions) appeared to rest more heavily on the proposition that Company A’s ownership as to the Company A properties was a sham and that Mr X personally had such a level of
control over the various entities, including Company A, that each entity should be
14 See above at [37] – [42].
regarded as Mr X’s alter ego and its assets treated as Mr X’s assets both legally and
beneficially.
The “sham” argument
The claim in the notice of claim
[91] In the notice of claim, Mrs X records that she will ask the Court to determine and declare:
(a) That the ownership entities utilised by [Mr X] to take legal title to the [Company A properties] are illusory or a sham and the beneficial owner of the said estate is owned by [sic] the Applicant and Mr X jointly.
Submissions for Mrs X
[92] Ms Corry presented her submissions as to Mr X’s control at two levels.
[93] First, there is a submission that for each acquisition of each property during Mr and Mrs X’s marriage, an entity was formed at the direction of Mr X and that Mr X had complete control over such entities with the consequence that the entities were his alter ego.
[94] Secondly, in relation to the Company A properties, Ms Corry submitted that the transfer of the Company A properties to Company A was a sham transaction or that Company A was to be regarded as Mr X’s alter ego.
Sham transactions – alter ego – the authorities
[95] I first note that although the notice of claim asserts that Company A’s ownership is both sham and illusory, Ms Corry developed her submissions on the basis that the ownership entities were shown. The concept of sham fits more appropriately with Ms Corry’s argument as “sham” conveys the idea that the parties never intended the trust entity to take effect. Where the allegation is that a trust was illusory, that arises where that is a true construction of the trust documents, rather
than the outcome of the parties’ intentions. Ms Corry’s submissions turn on
intentions.
[96] Ms Corry submitted that the Court may lift the corporate veil if there is sufficient evidence that a corporate structure is a sham. She noted that the Courts have refused to permit sham transactions created as “a mere cloak or screen for another transaction”. She relied upon the oral judgment of Tompkins J in Beric v Beric Holdings Limited15 (which was not on point). She relied also on the old
English Chancery decision in Yorkshire Railway Wagon Co v Maclure,16 from which
she drew the “mere cloak” reference.
[97] In her oral submissions, Ms Corry referred me also to the judgment of High Court of Australia in the well known decision in Kennon v Spry.17 Ms Corry referred to the case as one in which the Court disregarded a formal ownership structure. But the case did not turn on the proposition that the Spry Trust was an alter ego or puppet of Dr Spry.18 Equally there was no finding that the Spry Trust was a sham.19 The outcome of the case turned on a finding of unusual circumstances concerning the rights and duties associated with the assets of Spry Trust with the consequence that they were found to be “property of the parties to the marriage” under s 79 Family Law Act 1975 (Cth).20
[98] Ms Corry in her oral submissions referred also to the judgments of the United Kingdom Supreme Court in Prest v Petrodel Resources Limited.21 In Prest the Court recognised a limited power to pierce the corporate veil and to disregard the separate personality of a company. Such might occur where a person was under an existing legal obligation or liability or restriction which he or she deliberately evaded or the enforcement of which he or she deliberately frustrated by interposing a company
under his control.22 But Prest does not permit an expansive approach to lifting the
15 Beric v Beric Holdings Limited (1986) 2 FRNZ 522 (HC).
16 Yorkshire Railway Wagon Co v Maclure (1882) 21 ChD 309 at 318.
17 Kennon v Spry [2008] HCA 56, (2008) 238 CLR 366, 251 ALR 257, 83 ALJR 145.
18 See the commentary by Peter Hannan, “Kennon v Spry: An extended reach for s 79?” (2010) 1
Fam L Rev 18 at 28, fn 64.
19 At 28 – 29.
20 At 28.
21 Prest v Petrodel Resources Limited [2013] UKSC 34, [2013] 3 WLR 1.
22 At [35].
corporate veil so as to ignore the separate entity. To the contrary, Lord Sumption emphasised the obligation upon the Courts to recognise distinct legal personalities in the following passage:23
In the present case, Moylan J held that he could not pierce the corporate veil under the general law without some relevant impropriety, and declined to find that there was any. In my view he was right about this. The husband has acted improperly in many ways. In the first place, he has misapplied the assets of his companies for his own benefit, but in doing that he was neither concealing nor evading any legal obligation owed to his wife. Nor, more generally, was he concealing or evading the law relating to the distribution of assets of a marriage upon its dissolution. It cannot follow that the court should disregard the legal personality of the companies with the same insouciance as he did. Secondly, the husband has made use of the opacity of the Petrodel Group’s corporate structure to deny being its owner. But that, as the judge pointed out at para 219 “is simply [the] husband giving false evidence.” It may engage what I have called the concealment principle, but that simply means that the court must ascertain the truth that he has concealed, as it has done. The problem in the present case is that the legal interest in the properties is vested in the companies and not in the husband. They were vested in the companies long before the marriage broke up. Whatever the husband's reasons for organising things in that way, there is no evidence that he was seeking to avoid any obligation which is relevant in these proceedings. The judge found that his purpose was “wealth protection and the avoidance of tax”. It follows that the piercing of the corporate veil cannot be justified in this case by reference to any general principle of law.
[99] Lord Sumption’s approach is remarkably close to that of Neazor J in the
1989 decision of Cijffers v Cijffers.24 In that case His Honour dealt with the assertion parallel to that in this case that corporate entities were mere facades or shams. He recorded:25
The justification for going behind the companies’ ownership was expressed in an affidavit of the wife in terms:
I say that the defendant uses the facade of limited liability merely to facilitate the more profitable accumulation of property; to conceal the true ownership of assets. That whatever assets are nominally the property of companies, the real ownership of these assets is in the defendant.
The case was put as one where it is proper on the facts to raise the corporate veil. That is an approach not to be embarked upon lightly: per McMullin J in Savill v Chase Holdings Wellington Ltd [1989] 1 NZLR 257, 306; and nothing said in the affidavits or argument persuades me that there is any arguable case that the exercise would disclose a beneficial interest of the
23 At [36].
24 Cijffers v Cijffers (1989) 5 FRNZ 694 (HC).
25 At 702 – 703.
husband in the assets of the company. The contention in the wife’s affidavit does not disclose why the existence of the companies should be regarded as a “facade” to disguise the husband’s ownership of assets. There is no direct evidence as to when the companies were formed, but it appears from the certificates of title produced that one has existed since at least 1984 and others since 1987. If the formation of the companies and acquisition of assets by them was to defeat the wife’s rights in respect of matrimonial property, I can only say that the husband was incorporating a long lead time in his plans.
[100] Neazor J found that there was no reasonably arguable case made out by Mr Cijffers that Mr Cijffers had an interest in the caveated land and ordered that the notice of claim be discharged.
[101] Turning specifically to trusts (rather than companies), Ms Corry referred to the Court of Appeal judgment in Official Assignee v Wilson.26 In Wilson, the Court of Appeal upheld the judgment of the High Court.27
[102] Chisholm J in the High Court had rejected the Official Assignee’s assertion that a family trust settled by a bankrupt was a sham and dismissed an application that the trust property should vest to the benefit of the bankrupt’s creditors. Chisholm J adopted the classic formulation of Diplock LJ in Snook v London & West Riding Investments Limited28 in which His Lordship, adopting earlier authorities, held that for acts or documents to be a “sham”, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.29 Chisholm J referred to four decisions
of the New Zealand Court of Appeal which had adopted that test.30 Chisholm J
found that the evidence fell short of establishing a common intention by the settlor and the trustee that the actual documents in which they were involved were not to create legal rights and obligations which they gave the appearance of creating. A regrettable lack of documentation did not reveal a façade or false front. Genuine
transactions were involved with the substance exactly as it purported to be.31
26 Official Assignee v Wilson [2007] NZCA 122, [2008] 3 NZLR 45.
27 Official Assignee v Wilson [2006] 2 NZLR 841 (HC).
28 Snook v London & West Riding Investments Limited [1967] 1 All ER 518 (CA).
29 At 528.
30 Official Assignee v Wilson, above n 26.
31 At [106].
[103] Turning to an alternative formulation that the Court should treat the trust as the alter ego of the settlor as “external controller”, Chisholm J noted that counsel for the Official Assignee had raised the alter ego issue to support the inference that the trust was a sham in the conventional sense. His Honour accepted that that was a correct approach to analysis: the fact that a trust is the alter ego or puppet of a settlor does not of itself make the trust a sham because, among other things, the requisite
common intention for sham will not necessarily be present.32
[104] His Honour concluded that although the trustees had obviously been heavily influenced by the settlor, they were not his puppets or alter ego. In any event that fact alone could not have saved the Official Assignee’s case because there was no sham in the conventional sense.33
[105] On appeal, the Court of Appeal upheld Chisholm J’s approach, stating:34
We are satisfied that Chisholm J’s treatment of the alter ego trust argument was correct. Alter ego trusts are not an independent cause of action, nor are they the same as shams. In the trust context, alter ego arguments are confined to evidence to help establish a sham, which is how he treated the matter.
[106] For Company A, Mr Bayley relied upon passages I have identified in the leading authorities.
[107] I accept that it is those authorities which are applicable in this case.
Application of the authorities
[108] I have earlier, at [70] referred to the history of Mr & Mrs X’s establishment of trusts and of companies for the acquisition of holding of assets. Echoes of the observations Lord Sumption in Prest and of Neazor J in Cijffers reverberate. Mr and Mrs X organised their affairs so as to vest assets in companies and trusts throughout their marriage. There were identified and obvious business reasons for
doing so in terms of protecting the X interests. The sale of the Company A
32 At [55] – [57].
33 At [106].
34 Official Assignee v Wilson, above n 25, at [72].
properties to Company A, albeit later in the marriage, fits into the same pattern of steps taken to protect the X interests.
[109] Mrs X’s evidence falls far short of establishing that the couple’s earlier adopting of trusts and companies was then a façade. It equally falls short of establishing that the transactions involving the sale to Company A (and subsequent transactions over the shareholding) were in some way shams or façades. Those involved with the X interests, including Mr X, were taking steps in accord with their conventional approach to deal with particular situations (in the case of Company A, pressure from the bank) as situations arose from time to time.
[110] There is also a fundamental lack of evidence of a common intention as required in terms of Official Assignee v Wilson. In particular, it cannot be reasonably argued on the evidence adduced that Company A (through Mr I) and the four vendor entities in November 2008 joined in a common intention that Company A’s purchases and holding of the Company A properties would be a sham masking Mr X’s ownership.
Conclusion
[111] Mrs X has failed to satisfy the onus upon her of establishing that Mr X had a reasonably arguable interest in the Company A properties either because he was the beneficiary under a constructive trust or because there was a sham involved in Company A’s ownership.
[112] This conclusion makes it unnecessary to further consider Mrs X’s entitlement to lodge a notice of claim in relation to property of Mr X pursuant to s 42 PRA: Mr X has no caveatable property interest in the Company A properties which would enable Mrs X to sustain a s 42 notice against Company A’s land.
Costs
[113] Counsel recognised that costs would follow the event and I will make orders accordingly.
[114] The proceeding is a Category 2 proceeding and is appropriately in Band B. Counsel in having costs fixed will have to take into account the agreement to limit the attendances required in the two proceedings through the order to have a single hearing.
Orders
[115] I order –
(a) The application for an order that Caveat No.[redacted] not lapse is dismissed;
(b)The order of 24 June 2014 that the caveat not lapse until further order of the Court is rescinded;
(c) The applicant is to pay the respondent’s costs of the proceeding on a
2B basis, together with disbursements to be fixed by the Registrar.
ADDENDUM
[116] Having now received submissions as to suppression, I recognise that the issues between Mr and Mrs X involve in part the commercial dealings and interests of a number of associated entities. To the extent that such interests are involved, it would be potentially prejudicial to those entities if outsiders gained insight into what are essentially matters of internal concern such as governance and accountability. In the summary context in which this caveat proceeding arises, such prejudice would outweigh any legitimate public interest. (Different considerations may well arise if there is ultimately a judgment on similar issues following that). For now, there will be a suppression order in terms of the banner appearing at the top of this judgment.
There will also be an order precluding public search of the file without order of the
Court.
Associate Judge Osborne
Solicitors:
A M Corry, Barrister, Christchurch
Rhodes & Co, Christchurch
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