NZF Money Limited (in receivership) v O'Connor

[2012] NZHC 1963

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-1833 [2012] NZHC 1963

BETWEEN  NZF MONEY LIMITED (IN RECEIVERSHIP)

Plaintiff

ANDPAT REDPATH O'CONNOR First Defendant

ANDMARK HUME THORNTON Second Defendant

ANDPETER KARL CHRISTOPHER HULJICH Third Defendant

ANDJOHN ALAN CALLAGHAN Fourth Defendant

ANDRICHARD ALAN WADDEL Fifth Defendant

ANDNZF GROUP LIMITED Sixth Defendant

Hearing:         18 and 19 July 2012

Counsel:         RB Stewart QC and SM Hunter for Plaintiff PL Rice and AL Sherriff for Sixth Defendant No appearance for First-Fifth Defendants

Judgment:      7 August 2012

JUDGMENT OF RODNEY HANSEN J

This judgment was delivered by me on 7 August 2012 at 2.00 p.m., pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date: ………………………….

Solicitors:           Gilbert/Walker, P O Box 1595, Auckland for Plaintiff

Duncan Cotterill, P O Box 1595, Auckland 1140 1st – 6th Defendant

NZF MONEY LIMITED (IN RECEIVERSHIP) V PAT REDPATH O'CONNOR HC AK CIV-2012-404-1833 [7

August 2012]

Introduction

[1]     The plaintiff (NZF Money) is a finance company which was placed in receivership on 22 July 2011, owing investors in excess of $16m.  In this proceeding the receivers claim that its parent company, the sixth defendant (NZF Group), acquired NZF Money’s shareholding in NZF Homeloans at an undervalue before onselling it at a substantial profit.  Remedies sought include the recovery of $3.3m which NZF Group is said to have received on resale.

[2]      On 5 April 2012, Peters J made interim orders prohibiting NZF Group from dealing with, disposing of, or otherwise dissipating any asset which would otherwise be available to meet the claim.  Her order was confirmed by Collins J on 27 April

2012, subject only to variations which would permit NZF Group to pay legal expenses incurred in relation to the freezing orders and to make payments in the ordinary course of its business, including business expenses incurred in good faith. Collins J accepted that NZF Money had a good arguable case that the first – fifth defendants, as directors of NZF Group and NZF Money at the time of the relevant transactions, breached fiduciary and statutory duties and that NZF Group holds the proceeds of the sale of the NZF Homeloans shares as a constructive trustee in favour of NZF Money.

[3]      I am now asked to consider three matters arising from the freezing order:

(a)      An application by NZF Group Limited to discharge the freezing order over its remaining cash reserves and to approve the payment of certain specific expenses;

(b)An application by NZF Money to vary the freezing order to prevent any further dissipation of the cash reserves of NZF Group;

(c)      An application by NZF Group requiring NZF Money to obtain and disclose an expert valuation report.

[4]      At the conclusion of the hearing I made consent orders which disposed of NZF Group’s application for disclosure of a valuation report being obtained by NZF Group.  I also made orders directing the payment of costs incurred by NZF Group which NZF Money accepted to have been properly incurred but had declined to authorise.  The question which remained unresolved is broadly whether the freezing order over the cash reserves of NZF Group should remain in place and, if so, on what terms.

Further background

[5]      At the time of Collins J’s decision, the cash reserves of NZF Group stood at a little over $2m being the balance of the proceeds of sale of the assets  of NZF Homeloans.  Its other major assets are a 50 per cent interest in NPMH Limited, an interest in New Zealand Mortgage Finance Limited and a 20 per cent interest in a joint venture.   NZF Group says that the interest in NPMH Limited is alone worth

$8.4m.   The other interests are valued at $900,000 and $2m respectively.   These values are doubted by NZF Money.

[6]      At the time Collins J extended the freezing order there was evidence by way of an affidavit from Mr Mark Thornton, the Chief Executive Officer of NZF Group, that the company needed approximately [           ] per month for operating expenses. However, in the ten weeks since the freezing order was granted, NZF Group has sought approval for the payment of expenses totalling [  ].  This has prompted the application of NZF Money to vary the terms of the freezing order.  If NZF Group continues to incur expenditure at this level, its cash resources would be depleted by the time of the trial, scheduled to take place in February.  NZF Money says this would have the effect of defeating the purpose of the freezing order as it has no confidence that NZF Group’s non-cash assets are of significant value.   It is submitted that, if NZF Group wants to continue incurring costs at this level, it should fund the expenditure by realising or borrowing against its non-cash assets.

[7]      For NZF Money, Mr Stewart QC referred to Fitzgerald v Williams[1] to support the proposition that where (as he says is the case here) the plaintiff’s claim is of a proprietary nature, carrying with it the right to trace funds, a defendant should in the first instance be required to resort to his own funds in order to meet living expenses and legal costs.[2]

[1] Fitzgerald v Williams [1996] QB 657.

[2] See also An Ying International Financial Ltd v Li & HC Auckland CIV-2004-404-6952, 6 April

2005, Allan J.

[8]      Mr Rice submitted in response that NZF Money does not have a proprietary claim against NZF Group.   He said the claim is for knowing receipt and that is a personal remedy rather than a proprietary one.  He submitted further that, even if the claim is a proprietary one, NZF Group should continue to be permitted to resort to the cash fund for its operating expenses and the costs of defending the proceeding. He pointed out that the higher than expected expenditure over the last three months was largely attributable to the costs of defending this proceeding and another High Court proceeding, including accounting and valuation expenses.

Discussion

[9]      In confirming the freezing orders, Collins J accepted that there was a good arguable  case  that  the  (respondent)  directors  had  breached  their  fiduciary  and statutory (under the Companies Act 1993) duties to NZF Money and that NZF Group holds the proceeds of the onsale as a constructive trustee in favour of NZF Money.[3]

He plainly accepted the submission on behalf of NZF Money that NZF Group could

be liable for knowing receipt and that the property could be followed or its proceeds traced.

[3] At [26].

[10]     I do not think this is the right time to revisit the jurisprudential basis for the Judge’s findings or to attempt to resolve the competing contentions of the parties as to the nature of the remedy available to NZF Money.  Dicta in cases to which I was referred suggest that it may be misleading to say that NZF Group holds the proceeds

of sale as a constructive trustee.[4]    NZF Money may nevertheless be entitled to a

proprietary remedy.   That is, however, an issue for trial.   For present purposes, Collins J’s finding of a good arguable case stands.

[4] See the discussions in Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400 at 408-409; Dubai Aluminium Co v Salaam [2003] 2 AC 366; and Coulthard v Disco Mix Club Ltd

[2000] 1 WLR 707 at 730-731.

[11]     It is not appropriate, either, that I should revisit the finding of Collins J that there is a serious risk of dissipation.  This finding was based in part on advice by NZF Group to the New Zealand Stock Exchange on 26 March 2012 that it has “an excess of liabilities ... over assets of circa $4m”.[5]    NZF Group says it has assets worth in excess of $14m and significant liability only to noteholders whose claims are subordinated to all creditors.  However, that is dependent on valuations of assets

that are hotly contested and no more capable of resolution now than they were when the matter was dealt with by Collins J.  In my view, there is no basis to discharge the freezing order in relation to the cash assets.

[5] At [31].

[12]     By r 32.6(3) a freezing order must permit the payment of legal expenses incurred in relation to the freezing orders and payments in the ordinary course of business, including business expenses incurred in good faith.  The issue is whether I should prohibit or limit access to cash resources for this purpose, thus obliging NZF Group to resort to realising or borrowing against non-cash assets for the purpose of meeting such expenses.

[13]     NZF Group Limited has provided a cashflow forecast based on projected income and expenditure for the period June 2012 to 31 March 2013.  It shows that over the period expenditure will exceed income by [             ].   If the forecast is accurate and expenditure is met from cash resources, the fund will reduce to approximately [            ] by the time of trial.  The greater part of the depletion will have been caused by legal and other professional expenditure which, according to an updated cash forecast provided at the hearing, is currently projected to total [          ] over  the  period.    Ordinary  operating  expenses  do  not  greatly  exceed  projected income.

[14]     I am troubled by the projected legal and professional expenses, which have increased alarmingly from earlier projections.   A forecast provided by counsel on

22 June 2012 showed expected legal and professional costs of [             ] over the period.  In less than a month, projected costs in these categories burgeoned by almost [             ].  The increase was explained by counsel, including legal costs of [        ] not   covered   by   directors’   and   officers’   insurance   as   previously   believed. Nevertheless, I consider NZF Money is right to be concerned by the extent to which the fund threatens to be dissipated.

[15]     Both parties saw a cap on expenditure from the fund as providing a pragmatic solution but could not agree on the amount.  On the information available to me, I consider that a cap of $1.3m is appropriate.  If current projections are realised, it will require NZF Group to fund expenditure towards the end of the period from other sources.  [  ]  On the other hand, it will provide NZF Money with an assurance that the greater part of the fund will remain intact and avoid ongoing differences over individual items of expenditure.

Result

[16]     The application by NZF Group to vary the freezing order is  granted by imposing a further condition that expenditure on permitted expenses from the ASB50 account in which the fund is held shall not exceed the balance in the account of over

$1.3m.  I leave it to the parties to determine the precise form of the order, reserving leave to apply if they are unable to agree.

[17]     Costs are reserved.