North Harbour Trustee Company Limited v Laurie Collins Marine Group Limited (in liq) HC Auckland CIV-2010-404-8494

[2011] NZHC 517

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-8494

UNDER  the Companies Act 1993

BETWEEN  NORTH HARBOUR TRUSTEE COMPANY LIMITED

Applicant

ANDLAURIE COLLINS MARINE GROUP LIMITED (IN LIQUIDATION) Respondent

Hearing:         19 May 2011

Appearances: Mr N R Campbell and Mr D Mitchell for Applicant

Mr M L Dillon for Respondent

Judgment:      24 May 2011 at 11:00 AM

JUDGMENT OF ASSOCIATE JUDGE MATTHEWS

This judgment was delivered by me on 24 May 2011 at 11 am, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

NORTH HARBOUR TRUSTEE CO LTD V LAURIE COLLINS MARINE GROUP LTD (IN LIQUIDATION) HC AK CIV-2010-404-8494 24 May 2011

Introduction

[1]      This is an application under s 290(4) of the Companies Act 1993 to set aside a statutory demand issued by the respondent to the applicant dated 17 December

2010.

[2]      The issue in this case is whether the applicant  can show that there is a genuine and substantial dispute as to the existence of the debt: Taxi Trucks Ltd v Nicholson[1].

[1] [1989] 2 NZLR 297

[3]      The demand dated 17 December 2010 seeks payment from the applicant of

$485,500, a sum described as a debt comprising transfers of money from the respondent to the applicant, of which payment is said to be due.

[4]      The applicant is a professional trustee and was at all material times one of three trustees of the McKenzie Trust.  The other two trustees were Noel McKenzie and his wife Maureen McKenzie.

[5]      In the annual accounts for the McKenzie Trust for the year ending 31 March

2008, the statement of financial position shows a current liability to Laurie Collins Marine Brokers, current account, in the sum of $202,000.   The statutory demand relates in part to this stated liability.  The balance of the demand comprises a number of transfers of funds in the subsequent financial year from the respondent to the trust.

Grounds on which liability for the sum claimed is disputed

[6]      The applicant submitted that there is a genuine dispute that the sum claimed in the demand is owing, for three reasons.

1.Although the sums which together make up the total in the demand were transferred from the respondent, prior to its liquidation, to the McKenzie Trust, they were not transferred to the applicant.  The trust

had  an  account  with  Hong  Kong  Shanghai  Banking  Corporation

(HSBC) in the name of the trust, but at no point during its term of office as a trustee did the applicant have authority over, or operate, the bank account to which all the transfers of money in question were made. At all times it was operated solely by Mr and Mrs McKenzie.

2.The transfers of funds were not advances to the trust by the respondent, they were repayments of advances that Mr and Mrs McKenzie had previously made to the respondent.

3.If the applicant has any obligation to repay the sum claimed by the respondent that obligation is limited to the extent of the assets of the

McKenzie Trust which are nil.

Facts

[7]      A substantial amount of material was placed before the Court.  In this passage of the judgment I record only those matters which are relevant and appear not to be in contention.  Reference will be made to further material placed before me as I deal with each issue.

1.The trust owned a property in Scott Road, Hobsonville.  A mortgage was secured over the property to FM Custodians.  FM Custodians was a provider of finance for the business activities of Laurie Collins Marine, and Mustang Marine, separate companies in which Mr McKenzie was the sole shareholder.

2.GE Finance owned boats which were to be sold by one or other of Laurie Collins Marine and Mustang Marine.  It had an expectation of receiving money as boats were sold.

3.Sums of money totalling the amount claimed in the statutory demand were paid by Laurie Collins Marine to the bank account of the trust during the period in question.

4.The applicant was appointed as one of three trustees of the McKenzie Trust in October 2006, retired as a trustee of the McKenzie Trust in June 2009, and did not at any point during its term of office have any authority to operate the bank account with HSBC.   It was operated solely by Mr and Mrs McKenzie.

First argued defence

[8]      As  will  emerge  later  in  this  judgment  the  respondent,  relying  on  the description of the sum of $202,000 in the statement of financial position of the respondent  at  31  March  2008  as  a  current  liability  on  current  account,  and classifying similar transfers of money from the respondent to the applicant after that date in the same way, argued that the entire sum claimed comprises advances which are repayable to the respondent.  Conversely the applicant maintains that they were not advances, but were repayments of advances from the trust to the respondent made for the purpose of funding the availability of boats from GE so they could be sold by the respondent.  The first argued defence proceeds on the basis that even if the sum  claimed is  made up  of  advances  from  the respondent  to  the trust,  the applicant has no liability for it, but it will be necessary to refer to that position as an element of the factual material relevant to the first issue.

[9]      Mr Campbell argued that although the bank account was in the name of the McKenzie Trust, the trustees who opened and operated the account (Mr and Mrs McKenzie) are in fact the customer of the bank as a trust is not in itself a legal entity.

[10]     Trustees must be unanimous in decisions and actions they take on behalf of a trust.   This principle is well established and is summarised thus in Dal Ponte & Chalmers Equity & Trusts in Australia and New Zealand, 2nd Ed. 2000, at p 628:

Private trusts are governed by the rule of trustee unanimity, such that trustees must agree unanimously to any course of action.  The unanimity rule is a corollary to the non-delegation principle for if trustees cannot delegate, it follows that they must all perform the duties attendant upon the execution of the trust …  Actions of one trustee taken independently of co-trustees are beyond the trustees’ powers.

[11]     A contract made with one trustee without the sanction and approval of the other trustee or trustees cannot be enforced against the latter:  Rodney Aero Club Inc v Moore[2], ASB Bank Ltd v Davidson[3].

[2] [1998] 2 NZLR 192

[3] [2005] 8 NZBLC 101,596 (CA)

[12]     In Lang v Southern[4] Panckhurst J said, having stated the basic principle:

… However the act of one trustee done with the sanction and approval of a co-trustee may be regarded as the act of both, though such sanction and approval must be strictly proved.

[4] HC Christchurch AP15/01, 24 July 2001

[13]     In his submissions for the respondent Mr Dillon accepted that the applicant would not be liable for the actions of its co-trustees in accordance with the principle enunciated in Rodney Aero Club and ASB Bank v Davidson, but for evidence of its sanction and approval of the transfers.   The respondent argued this sanction and approval was established in two ways.

[14]     First, Mr Dillon submitted that the applicant could not escape knowledge that its  mortgage  liability against  the  Hobsonville  property was  being  reduced.    He submitted that it would take wilful blindness regarding the source of the funds for that reduction to avoid knowing that they came from advances from the respondent. This was based on the premise that the funds transferred from the respondent to the HSBC  account  of  the  trust  were  then  paid  by  the  trust  to  FM  Custodians  as mortgagee  of  the  trust’s  Hobsonville  property.    This  is  the  use  to  which  Mr McKenzie said the funds were put.

[15]     There are three difficulties with this submission.

1.      The 2008 accounts record that there was an opening liability to FM of

$1,300,000, an advance made of $2,900,000, and equal interest charges and payments in the sum of $447,323.00.  No repayments are shown.

2.The applicant did not have any part in operating the bank account of the trust,  and  there  was  no  evidence  that  the  applicant,  or  any  person

involved with it or took any active part in, the making of payments to

FM.

3.      Although a letter written by Mr Newdick, a director of the applicant, on

29 September 2008 records his having instructions that proceeds of certain boat sales had been paid to the trust and used by the trust for interest on the trust mortgages on the Hobsonville property, that letter does not record use of  any part of the money for repayments, nor knowledge on Mr Newdick’s part that the funds used by the trust for payments to FM Custodians were advances by the respondent.  I refer to this letter again, below.

[16]     I find the evidence does not establish wilful blindness on the part of Mr

Newdick as submitted.

[17]     Secondly, Mr Dillon submitted that the applicant had actual knowledge of “the source of the funds”, this being inferred from the fact that the directors of the applicant  signed  the  2008  financial  statements  showing  a  current  liability,  as  a current account item, of $202,000.00 to the respondent.   Therefore, he submitted, sanction and approval, in terms of Lang v Southern, were established.

[18]     Developing  this  argument  Mr  Dillon  referred  me  to  Russell  v  Klimac[5]

[5] 10/9/2002, Whangarei Registry, AP14/02

Baragwanath J.  His Honour said[6]

The paradigm “ratification” resulting from such willed conduct is so potent as apparently to arise without need for communication to anyone … For it to be established, leading authorities require “full knowledge of all the material circumstances in which the act was done”… although if there was an intent to ratify the act and take the risk whatever the circumstances may have been will suffice.

[6] At [25]

[19]     And at [26] His Honour said:

… a party may be estopped by his conduct from denying authority of an alleged agent; in that event he is treated as having ratified.  Bowstead and Reynolds say at para 2-075:

Estoppel  Ratification merges almost imperceptibly into estoppel.

When … silence or inactivity is known to and relied on by the third party, an estoppel may in appropriate cases arise against the principal who may be estopped from saying that he has not ratified.

In Yona International Limited v La Reunion Francaise SA d’Assurances [1996] 2 Lloyd’s Rep 84, 106, Moore-Bick J stated that ratification can be inferred from silence where the principal “allows a state of affairs to come about which is inconsistent with treating the transaction as unauthorized.

[20]     There is no dispute that directors of the applicant company signed the 2008 current accounts.   There is no evidence that the applicant or its officers had knowledge  of  any  of  the  prime  records,  the  contents  and  effects  of  which  are recorded in the signed accounts, but the applicant knew that the 2008 accounts recorded a debt from the trust to the respondent of $202,000.00.

[21]     However, the accountant who prepared the accounts Mr A R Hall has sworn an affidavit in this proceeding in which he has stated:

I believe the transfers from Laurie Collins to the HSBC account in the name of the McKenzie Trust referred to in the Burns affidavit should not be treated as a loan from Laurie Collins to the trustees of the McKenzie Trust.  It is my opinion based on a review of relevant documentation the transfers are capital payments by Laurie Collins from funds held by Laurie Collins on behalf of Mustang Marine in partial repayment of the loan due to the trustees of the McKenzie Trust relating to the purchase of the General Finance boats.

[22]     At the hearing I understood counsel for both the applicant and the respondent to take this statement as referring not only to the recorded debt of $202,000.00 in the

2008 accounts, but also to the transfers of funds of $283,500.00 in the subsequent period.

[23]     Examination of the affidavits suggests to me that in fact this statement relates only to the transfers of funds subsequent to 1 April 2008, amounting to $283,500.00. This is because of the reference in the passage quoted to “the Burns affidavit” which, in my view, refers back to paragraph 9 of Mr Hall’s affidavit where he prefaces the paragraph “in response to paragraph 6 of the Burns affidavit…” and then refers to 13 transfers amounting to $283,500.00.   Further, in paragraph 12, Mr Hall refers to reviewing HSBC statements for the period from 1 April 2008 to 31 March 2009 which he says are summarised in a schedule “attached to the Burns affidavit”.   In

paragraph 13 Mr Hall refers to certain transactions summarised in his Exhibit AH4, which, again, are all subsequent to 1 April 2008.

[24]     However, I am conscious throughout my assessment of the evidence in this case that it is given by affidavit and has not been tested by cross-examination.  There is a sufficient lack of clarity in the affidavit of Mr Hall to leave it open to the inference apparently drawn by counsel that in paragraph 14 his reference to the transfers from Laurie Collins to the HSBC bank account was a reference to all transfers comprised in the debt claimed by the respondent.  If this is the position it amounts to a statement that in relation to the transfers prior to 31 March 2008 the accounts  are  wrongly  drawn,  where  they  show  the  sum  of  $202,000.00  as  an advance.  If that is the case, acceptance of those accounts by the applicant, recorded by the signatures of its directors, cannot be taken as having the effect urged on me by counsel for the respondent, namely that the applicant knew that $202,000.00 had been advanced to the trust by the respondent, even though it knew the accounts said that.  The result is it had knowledge of an erroneous record.  On the other hand, if it relates solely to the post 1 April 2008 transfers, it is evidence that the sums claimed by the respondent for that period are not advances to the trust, but repayments to the trust.

[25]     The  letter  of  29  September  2008  referred  to  above  also  shows  that  Mr Newdick knew that funds from the respondent went to the trust’s mortgagee, FM, but not that the funds were advances from the respondent (see para [15] above).

[26]     So far as the transfers after 1 April 2008 are concerned, Mr Dillon argued that the sanction and approval of the applicant was to be inferred from its silence, on the basis acknowledged by the Court in Russell v Klimac.  I refer to four aspects of the evidence to decide this issue.

[27]     First, nothing in the affidavits of Mr Newdick, a director of the applicant, gives the Court any indication of the applicant having any knowledge of the transactions which have given rise to the alleged debts.

[28]     Secondly,  the  evidence  of  the  directors  of  the  respondent  supports  the converse position.  Mrs McKenzie said in her affidavit that her husband undertook the majority of the transactions concerning the McKenzie Trust (though she was aware of the operations  of the trust),  she and  her husband  operated the HSBC account, and she believed that only they had authority to do so.  Mr McKenzie said he authorised all the transfers to the McKenzie account at HSBC.  He said that the applicant was not a party to the McKenzie account which he and his wife controlled. He also said there was no agreement between the respondent company and the applicant regarding any of the transfers.  He said the applicant had no involvement in them; its involvement in the trust was as a professional trustee viewing the annual financial statements and attending to gifting requirements.

[29] Thirdly, Mr Dillon relied on the letter from Turner Hopkins, solicitors, under the hand of Mr Newdick a director of the applicant, written to GE Commercial Finance on 29 September 2008 to which I have referred earlier, [15] and [25]. The letter was written in relation to an issue that had arisen between the respondent company, prior to its liquidation, and GE Commercial as the result of the sale of two boats subject to a bailment in favour of GE. Evidently the proceeds of sale of the vessels had not been sent to GE. Mr Newdick recorded that his firm had been advised that monies from the sales of these vessels had been applied to the business expenses of the respondent, payment of interest and other outgoings in relation to the GE floor plan advances, sales commissions, and interest on the first and second mortgages on the Hobsonville property. However, the figures he gave for the application of funds from the boat sale transactions are not precise, and the letter does not demonstrate that Mr Newdick had a detailed knowledge of the transactions in the period in question that gave rise to the transfers from the respondent to the applicant. The letter shows that he had been told that the sums of $360,000.00 and

$63,000.00 had been applied in payment of first and second mortgage interest respectively on the McKenzie Trust Hobsonville property, but it does not record the payments to the trust’s mortgagee were from advances to the trust by the respondent, nor do the figures either precisely or even closely resemble the figures which the respondent claims are a debt due.

[30]     To elaborate on the latter point, the first boat sale referred to occurred in

February 2008 and after accepting a trade-in the proceeds of sale appear to be

$120,000.00 (without taking into account any sale expenses).   This bears no resemblance to the sum said to be owing at 31 March 2008 ($202,000).     In the following  year,  late  in  June  or  early  in  July,  the  second  boat  was  sold  for

$335,000.00 less a trade-in of $75,000.00 which, again ignoring expenses, would appear to net $260,000.00.  The trade-in was sold shortly afterwards for $63,000.00 suggesting that this transaction brought in funds of $323,000.00.  Again, there is no resemblance between this figure and the sums said to have been transferred from the respondent to the trust in the post 1 April 2008 period of $283,500.00.

[31]     Fourthly, Mr McKenzie maintains that the payments from the respondent to the trust were not advances to the trust but were repayments of advances made by the trust to the respondent to fund boat purchases.  I accept that there are grounds to test the veracity of this evidence, but even if it is not correct, that would not assist in establishing the knowledge of the applicant.

[32]     I am not  prepared  to draw an inference that the applicant sanctioned  or approved  advances  from  the  respondent  on  the  evidence  before  me.    For  that inference to be drawn there must be sufficient evidence that the applicant knew about the transfers, and by its silence or inactivity in relation to them could fairly be taken as ratifying or accepting that they had the status of advances from the respondent to the trust.   That position was not established in evidence on this application.

[33]     That is not to say that on full analysis it cannot be shown that Mr Newdick as a director of the applicant company had sufficient knowledge of the transactions to establish sanction or ratification of the actions of the co-trustees sufficient for the applicant to itself be liable for those actions.  However, on an application of the kind before me I am not prepared to draw the inferences of knowledge of the status of the transfers as advances, urged on me by counsel for the respondent.

[34]     I have not overlooked counsels’ submissions in relation to the evidence put before the Court in FM Custodians Ltd v Noel Raymond McKenzie & Ors[7]. The case concerned the transactions which has led to the application before me. The judgment relates to whether FM Custodians Ltd or GE Finance was entitled to a fund of money from the proceeds of sale of the Hobsonville property.   To determine this, it was necessary for the Court to undertake a detailed analysis of the financial transactions

between the McKenzie Trust, FM Custodians, GE and Laurie Collins Marine Group. Counsel drew my attention to a number of matters of fact agreed by the parties to that litigation which are recorded between paragraphs [6] and [9] of the judgment. Evidently it was agreed by the parties to that litigation, which included the present applicant as one of the first defendant trustees of the McKenzie Trust, that funds from the sales of the two boats referred to were transferred to the McKenzie Trust bank account and at least partially used by the trust in paying mortgage interest to FM.  Nothing in the agreed statement of facts indicates agreement by the applicant that all or any part of the sum claimed in the statutory demand in issue in this application constituted an advance from the respondent to the trust.  Further, nothing in the agreed facts or in the judgment assists the respondent in establishing that the applicant had sufficient knowledge of the transactions, at the time, so that ratification of the transfers as advances from the respondent to the applicant can be inferred.  In terms of the judgment in Russell v Klimac, the evidence before me stops well short of establishing that the applicant had full knowledge of all material circumstances.

[7] HC Auckland CIV-2009-404-3285, 26 July 2010

[35]     Therefore I am not satisfied that the applicant is responsible for the actions of its co-trustees, in transferring monies from the respondent to the trust through the HSBC bank account, or otherwise.  It follows that the applicant has established that there is an arguable defence to the respondent’s claim that the transfers to the trust were not transfers to the applicant.  For this reason the statutory demand must be set

aside.

[36]     I  turn  now,  briefly,  to  the  second  ground  of  defence  advanced  by  the applicant.  Given my finding in relation to the first ground of defence, I need deal with this only briefly.  As I have indicated Mr McKenzie stated in his affidavit that the funds making up the sum of $202,000.00 recorded in the accounts at 31 March

2008 of both the McKenzie Trust and of the respondent company were sums transferred to the trust to repay funds that he and his wife had borrowed, as trustees of the trust, from FM Custodians and then advanced to Mustang Marine for the purpose of purchasing boats for the business of the respondent.  Mr McKenzie said that the transfers subsequent to 1 April 2008 were also to reimburse him and his wife as trustees of the trust for funds lent to Mustang to purchase boats.

[37]     Counsel for the respondent submitted that the Court is not required to accept uncritically evidence given in an affidavit, where there is no cross-examination, where that evidence can be seen to conflict with other written records.   Counsel referred to the entry in the accounts showing that the payments made from the respondent to the trust prior to 31 March 2008 were advances, and to statements made by both Mr McKenzie and Mrs McKenzie in proposals they put forward under the  Insolvency Act  by  which  all  the  monies  in  question  were  characterised  as advances from the respondent to the trust.

[38]     Were  it  necessary  for  me  to  do  so  I  would  be  reluctant  to  accept  Mr McKenzie’s affidavit on its face, given these contrary statements, even taking into account the view now put forward by Mr Hall in his affidavit, either in relation to all the sums transferred to the trust or, at least, the transfers after 1 April 2008 (see [23]- [24] above).   The version of events now put forward by Mr McKenzie does not seem, either, to be consistent with the position put forward in FM Custodians Ltd v McKenzie  & Ors,  referred  to  above.    However,  for  the  reasons  given  it  is  not necessary to make a finding on this second claimed ground of defence.

[39]     The third ground of defence put forward by the applicant is that if there is any liability on the part of the applicant, it is limited in extent to the assets held by it in its capacity as trustee of the McKenzie Trust.   Generally, trustees have unlimited personal liability for debts to third parties (Dal Ponte and Chalmers Equity Trusts in Australia and New Zealand at 660 (above)).

[40]     Mr Campbell noted that in the trust deed for the McKenzie Trust there is a form of limitation on the liability of the trustee to the assets of the trust (clause 19(c), but he did not rely on this to support his argument.  He accepted that the limitation in the deed would be ineffective against the third party with whom a trustee deals, in the absence of agreement that it would apply.  Rather, Mr Campbell argued that there was agreement between the applicant and Mr McKenzie, the sole director of the respondent company at the relevant time, that liability should be limited to the assets of the trust.

[41]     To  establish  the  agreement  Mr  Campbell  referred  to  the  affidavit  of  Mr

McKenzie.  He stated that:

My understanding of [the applicant’s] involvement in the McKenzie Trust was as a professional trustee whose liability was limited to the assets of the trust.

[42]     He said that he was aware of the clause in the trust deed which provides a limitation  of  liability  for  trustees,  and  that  he  had  always  understood  that  any liability that could possibly arise for the applicant in regard to the transfers of funds in  issue in  this  proceeding would  in  any event  be limited to  the  extent  of the McKenzie Trust’s assets.

[43]     Other than by reference to clause 19(c) of the trust deed he did not give any reference for having either of the understandings stated.

[44]     In  an interview with a representative of the liquidator of the respondent company, Mr McKenzie was asked the following question:

Did you have any specific discussion with Mr Newdick or anyone else at Turner Hopkins that repayment of these advances of $228,000.00 and subsequent $283,000.00 would be limited to the assets in the trust from to time?

Mr McKenzie answered:

No that was never discussed.

[45]     When asked whether anything was put in writing about this issue he said:

No.    Turner  Hopkins  in  my  mind  or  Mike  Newdick  have  no  liability

whatsoever to what’s occurred here.

[46]     Whilst there are no formal requirements for an agreement to limit the liability of a trustee to the assets of the trust, nonetheless an agreement must be established on the evidence.   Mr McKenzie did not say that such an agreement was reached; rather he said the matter was never  discussed  with Mr Newdick and stated his understanding of the situation without substantiation.

[47]     In his first affidavit in support of this application Mr Newdick referred to the liability of the applicant being limited by clause 19(c) of the trust deed.  He said that Mr  McKenzie  was  aware  and  acknowledged  any  liability  of  the  applicant  was limited to the assets in his hands from time to time as a trustee of the trust.

[48]     In his second affidavit he stated:

I confirm my understanding any obligations entered into by [the applicant] in its capacity as a trustee of the McKenzie Trust were limited to the assets of the McKenzie Trust and were extinguished entirely upon retirement by [the applicant] of its position as an independent and professional trustee of the McKenzie Trust.

[49]     I am not satisfied that agreement was reached between the respondent and the applicant that in their dealings any liability on the part of the applicant would be limited to the assets of the trust.   The respondent correctly submitted that an agreement requires a consensus and an intention that the consensus should form a binding agreement (Verissimo v Walker[8]).  The evidence does not satisfy me that an

agreement was ever made. This ground of defence is not made out.

Outcome

[8] [2006] 1 NZLR 760

[50]     For the foregoing reasons the statutory demand issued by the respondent to the applicant dated 17 December 2010 is stayed.

Costs

[51]     Costs are reserved, at the request of counsel for the applicant.  Memoranda are to be filed within five working days.

J G Matthews

Associate Judge

Solicitors:

Turner Hopkins, Auckland

Martelli McKegg Wells & Cormack