Official Assignee in the Bankruptcy of Bench v Bench

[2017] NZHC 2467

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2017-404-2249 [2017] NZHC 2467

UNDER

Part 32 of the High Court Rules

IN THE MATTER

of the bankruptcy of Clive Stephen
William Bench (Bankrupt)

BETWEEN

THE OFFICIAL ASSIGNEE IN BANKRUPTCY OF THE PROPERTY OF CLIVE STEPHEN WILLIAM BENCH Applicant

AND

JULIA BENCH, TRUSTEE OF THE FORGE TRUST

First Respondent

MICHAEL BRYAN SHARP, trustee of the
Forge Trust

Second Respondent

Hearing:	On the papers
Counsel:	GN Neil for applicant
Judgment:	6 October 2017

JUDGMENT OF FITZGERALD J

[As to without notice originating application for freezing orders]

This judgment was delivered by me on 6 October 2017 at 5 pm], pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:           Meredith Connell, Auckland

The Official Assignee in Bankruptcy of the Property of Clive Stephen William Bench v Julia Bench, Trustee of the Forge Trust [2017] NZHC 2467 [6 October 2017]

[1]      I  have  received  the  applicant’s  (“Assignee”)  without  notice  interlocutory

application for freezing orders filed yesterday afternoon.

[2]      I  have  considered  the  orders  sought,  together  with  the  memorandum  of counsel filed in support of the application, together with the affidavit of Susanna Maria Wewege sworn on 4 October 2017.

[3]      In summary, the Assignee is the Assignee in bankruptcy of the property of

Clive  Stephen  William  Bench  (“Mr Bench”)  who  was  adjudicated  bankrupt  on

14 April 2015.  The Assignee seeks freezing orders in respect of property (primarily real property, but also a cash sum from the recent sale of real property) (“Property”) currently held by the respondents (“Mrs Bench” and “Mr Sharp”) as trustees of the Forge Trust (“Trust”).  Mr Bench’s interest in the Property was transferred by him to the trustees in 2012.  Mrs Bench is Mr Bench’s wife and Mr Sharp is Mr Bench’s former business associate.

[4]      The Assignee says that it has a good arguable case against the respondents (as trustees of the Trust) for the cancellation of the transfer of Mr Bench’s interests in the Property pursuant to s 205 of the Insolvency Act 2005 (“Act”).   Further, the Assignee says that there is a real risk of dissipation in this case, absent these freezing orders being granted.

Jurisdiction

[5]      Mr Neil, in his memorandum filed in support of the application, has properly drawn to  my attention  to the fact that substantive proceedings by the Assignee against the respondents have not yet been commenced.   Notices of cancellation in respect of the transfers have, however, been issued by the Assignee and filed in the High Court, but have not yet been served.  Mr Neil explains that they have not yet been served, given the heightened risk of dissipation of the assets of the Trust once they have been served.

[6]      In that context, once the notices have been served, the respondents will have

20 working days to raise any objection to the cancellation of the transactions referred to in the notices.  If no notice of objection is served on the Assignee, the transactions

will be automatically cancelled in accordance with s 206(4) of the Act.  If a notice of objection is served on the Assignee, he will then need to apply to the Court for orders cancelling the transactions under s 206(6) of the Act.

[7]      I  am  accordingly  satisfied  that  there  is  a  rational  basis  for  underlying substantive proceedings not yet having been commenced.

[8]      I am also satisfied that I have jurisdiction to grant a freezing order prior to substantive proceedings being commenced.  Mr Neil has referred me to the decisions of Heath J in Official Assignee v Scott1 and Palmer J in Official Assignee v Sharma &

Family Trustee Ltd2 in which the Court accepted that such jurisdiction exists.  I have

read those decisions and agree with their Honours’ reasoning.  In particular, the fact that an application for a freezing must be made by way of an originating application under Part 19 (or an interlocutory application under Part 7) is indicative of the fact that underlying proceedings may not yet have been commenced.3

Factual background

[9]      As noted, Mr Bench transferred his interests in the Property to the trustees of on 28 August 2012.  No consideration was paid by the trustees to Mr Bench at that time.

[10]     Mr Neil  submits  that  each  of  these  transfers  was  made  at  a  time  when Mr Bench was unable to pay his debts.  In this context, Ms Wewege explains in her affidavit that at the time the transfers were made, Mr Bench was indebted to the Inland Revenue Department (“IRD”) in respect of an income tax debt totalling close to $400,000.4   Also at that time, Mr Bench was indebted to a company named Rear Units Ltd (“RUL”) in the sum of just over $1 million, in respect of drawings that he had taken from that company prior to its liquidation on 3 February 2012.   The liquidators subsequently made demand on Mr Bench for payment of that sum, by

letter dated 29 April 2014.

1      Official Assignee v Scott [2012] NZHC 2579.

2      Official Assignee v Sharma & Family Trustee Ltd [2016] NZHC 1843.

3      Rule 32.2(4) of the High Court Rules.

4      This had been accruing since 2005.

[11]     In addition, at the time of the transfers, Mr Bench held only nominal sums in his bank accounts and his shareholdings in various other companies were of insufficient realisable value to discharge his debts to IRD and RUL.

[12]     Ms Wewege also deposes that even if Mr Bench’s interests in the various

properties are taken into account, the deed of gift in relation to them totalled some

$650,000.  Plainly those amounts would not have been sufficient to pay Mr Bench’s

debts at the time of the transfers.

[13]     The Assignee also places some reliance on the fact that, at the time the transfers were made, RUL had been placed into liquidation, and at a time when Mr Bench was aware that the liquidators were investigating the position in relation to the company and potential recovery.  Indeed, the liquidators of RUL had published their first report in March 2012, noting that they were investigating potential avenues for recovery.   Their second report was dated 22 August 2012, in which it was recorded that:

In  the  absence  of  any  financial  records  we  are  in  the  process  of reconstructing the director’s advance account to the date of liquidation using the Company’s bank statements.

[14]     The Trust had been settled by Mrs Branch and Mr Sharp on 19 July 2012, with the Property gifted to the Trust on 23 August 2012, i.e. one day after the liquidators’ second report.

[15]     The Assignee also notes that Mr Bench has recently been prosecuted and pleaded  guilty  in  relation  to  charges  laid  under  ss 143A and  143B  of  the  Tax Administration Act 1994 (which may be broadly categorised as evasion-type charges).   Those charges arose in relation to other companies of which Mr Bench was a director, and the estimated total of his offending resulted in a tax loss of approximately $400,000.  Mr Bench was sentenced to 19 months’ imprisonment and ordered to pay reparation of $21,400.

[16]     The Assignee  also  points  to  information  Mr Bench  has  provided  to  the Assignee in the context of his current bankruptcy.  Ms Wewege deposes that he has failed to provide the Assignee with any information regarding civil actions brought

personally against him, which is said to be inconsistent with what appears to be evidence of Mr Bench having been personally sued in 2005 in respect of another company of which he was a director.

[17]     Finally, one of the properties held by the Trust has very recently been sold. Ms Wewege deposes that that property was transferred by the trustees on 18 August

2017 with a sale price of $890,000.   TSB has advised the Assignee that it has received $100,000 of the sales proceeds of that property.   Ms Wewege therefore deposes that it appears that the balance of $790,000 has been released to the trustees.

Approach to the granting of freezing orders

[18]     Mr Neil filed a comprehensive and helpful memorandum in support of the without notice application, setting out the various legal principles that apply. Given the time within which this judgment is being prepared, I do not repeat those legal principles in detail.  However, the following points are of particular relevance:

(a)      A good arguable case is required on the underlying claim before a freezing order will be issued.   In  Hannay v Mount5  the Court of Appeal confirmed that in order to meet this threshold, a plaintiff must show that the cause of action “is at least tenable”.   The Court of Appeal also confirmed that the test does not require the plaintiff to establish a prima facie case, but rather “there must be a sufficiently

plausible found established …”.   The Court also noted that the threshold  must  be  considered  bearing  in  mind  “the early stage at which the application is likely to have been brought”.  I note however, that unlike the context in which many applications for freezing orders are brought, the circumstances in  which this  application has been brought is at a time when the Assignee already has a good deal of information as to Mr Branch’s position and reasonable visibility of

that in relation to the Trust also.

5      Hannay v Mount [2011] NZCA 530 at [19] – [22].

(b)      These  principles  were  more  recently  reinforced  by  the  Court  of

Appeal in Dotcom v Twentieth Century Fox Film Corporation.6

(c)      In   relation   to   the  need   to   establish   a  risk   of  dissipation   or diminishment in value of the assets, the courts have emphasised that affirmative proof of likelihood of disposition or of nefarious intent by the defendant to defeat  creditors  is  not necessary.7       Rather, the applicant for a freezing order must point to circumstances from which “a prudent, sensible commercial [person] can properly infer a danger of default”.8

(d)There  must  also  be  evidence  that  there  are  assets  within  the jurisdiction to which the orders can attach.

Grounds for making the orders

[19]     I consider this aspect of the application under the following three headings:

(a)      Does  the Assignee  have  a  “good  arguable  case  on  a  substantive claim”?

(b)      Are there assets within the jurisdiction?

(c)       Is there a risk of dissipation of asset absent the orders being made?

Good arguable case

[20]     I am satisfied to the requisite standard that the Assignee has demonstrated a good arguable case on the cancellation issue.

[21]     In particular, it appears arguable that the transfers constituted a gift, made to another person, which were made within 5 years immediately before Mr Bench’s

6      Dotcom v Twentieth Century Fox Film Corporation [2014] NZCA 509 at [18].

7      Bank of New Zealand v Hawkins (1989) 1 PRNZ 451 at 454; Moglin v Jo, HC Auckland CIV-

2011-404-1584, 26 August 2011 at [34] and Oaks Hotels & Resorts NZ Ltd v Body Corporate

35885 [2013] NZHC 2695 at [17].

8      Oaks Hotels & Resorts NZ Ltd v Body Corporate 358851 [2013] NZHC 2695 at [18].

adjudication.  The key issue on this claim will no doubt be whether Mr Bench was unable to pay his debts at the time of the transfers.

[22] In light of those matters discussed at [10]-[12] above, I am satisfied that it is at least arguable that this was the position at the time Mr Bench made these transfers. In particular, Mr Bench held only nominal sums in his bank account with known bankers and it appears that his only substantive assets were his interests in the Property. The fact that a significant and continuing debt in relation to the IRD was accruing throughout this period is also indicative that Mr Bench was unable to pay his debts as they became due.

[23]     I am also satisfied that the Assignee has met the requisite threshold in relation its  alternative  claim,  namely  prejudicial  dispositions  pursuant  to  s 346  of  the Property Law Act 2007.   In essence, s 346 of the Property Law Act  applies to dispositions of property made by a debtor who is insolvent at the time, or becomes insolvent as a result of making a disposition, which is made:

With intent to prejudice a creditor or by way of gift, or without receiving reasonably equivalent value in exchange.

[24]     Again, for the reasons set out above, is at least arguable that the dispositions were made as a gift, and at time when Mr Bench was insolvent (or became insolvent as a result of gifting away his interest in what appears to be his only substantive assets).

[25]     In addition, I am also satisfied that it is also arguable that the transfers were made with an intent to prejudice a creditor.  It is notable that the transfers were made in August 2012, shortly after RUL had been placed in liquidation, and at a time when Mr Bench was no doubt aware that the liquidators were investigating the activities of that company.  As noted, Mr Bench had a significant current account owing to that company (though I note this was not reconstituted and demand made in relation to it until approximately two years later).  Nevertheless, Mr Bench was presumably aware of the potential for the liquidators to take steps to recover any current accounts due from directors of the company and it is no coincidence that it was shortly after the

appointment of the liquidators that he (and his wife) took steps to divest themselves of their primary assets.

Assets within the jurisdiction

[26]     The assets are obviously all within this jurisdiction and as noted earlier, this element is satisfied.

Risk from dissipation of assets

[27]     This is of course the essence of any application for freezing orders.  I have carefully considered the evidence advanced by the Assignee.   I am also conscious that positive evidence of “nefarious intent” is not required.

[28]     As noted, it is (quite) arguable that Mr Bench has taken steps in the past to ensure his assets are outside the reach of creditors.  I am not satisfied, however, that this in and of itself would be sufficient to found the granting of a freezing order in this case.  First, these are (historic) actions of Mr Bench, rather than present actions of the trustees themselves.  Further, if this were sufficient to found a freezing order, then freezing orders would almost inevitably follow in circumstances where dispositions by someone who is later adjudicated bankrupt are challenged on this basis.  In my view, something more must be established.

[29]     Adding to Mr Bench’s earlier steps however, is the fact that Mr Bench has also been prosecuted for tax evasion offences, which indicates a predilection to defeat creditors.   There is also some suggestion that Mr Bench has not been fully candid with the Assignee in the course of his bankruptcy (although this appears to be in a relatively minor way, and certainly not of the scale observed by Heath J in Official Assignee v Scott).

[30]     There are two further factors which, in my view, mean that the requisite threshold in this case is established.  The first is the lack of independence between Mr Bench and the trustees.  The second is the fact that one of the properties held by the Trust has recently been sold.

[31]     In  relation to the lack  of independence, one of the trustees  is obviously Mr Bench’s wife.  The second is his former business associate.  While Mr Bench is not the settlor of the trust, it seems he is a discretionary beneficiary.  Like Heath J in Official Assignee v Scott, I am satisfied that a risk of disposition can be inferred from the fact that the trustees are associated with Mr Bench and may act on his direction. I consider that there is at least risk that Mr Bench would be able to persuade or direct the trustees to place the assets of the trust further away from creditors.  In short, the lack of independence between Mr Bench and the trustees “links” the trustees with Mr Bench’s previous steps to put his assets outside the reach of creditors.

[32]     In relation to the recent sale of one of the properties, this means that at least some of the trust assets are in a very liquid form and able to be dissipated extremely quickly.  Again, I note that proof of nefarious intent is not required in this regard.

[33]     I  should  observe,  however,  that  while  I  am  satisfied  that  the  risk  of dissipation is met for the purposes of this application (and particularly in respect of the imminent disposition of liquid assets of the Trust, namely cash), there is not overwhelming or direct evidence of this risk (noting however, that there is often no such direct evidence).   However, I am fortified in my view that the granting of freezing orders at this stage is in the interests of justice, by the fact that the orders are not sought in relation to personal assets, such as personal bank accounts etc, which can often have quite a dramatic and significant effect on the person the subject of those orders.  Rather, the orders are sought in respect of trust property, and not Mrs Bench’s or Mr Sharp’s own personal property.

[34]     For similar reasons, I also consider that the application should be brought back before the Court fairly quickly, so that the trustees can outline any basis upon which they say that there is no risk of disposition of the assets once the s 106 cancellation notices have been served.

Undertaking as to damages

[35]     Again,  Mr Neil  has  properly  directed  my  attention  to  the  fact  that  the

Assignee has not provided an undertaking as to damages.

[36]     This was comprehensively considered  by Palmer J  in Official Assignee v Sharma  & Family  Trust  Ltd.    His  Honour  held  that  there  is  a  general  default presumption that dispensation from the requirement to provide an undertaking will be given to  the Official Assignee on  freezing  order applications.    In  particular, Palmer J set out provisions of Part 6 of the Public Finance Act 1989, pursuant to which it is not lawful for any person to give a guarantee or indemnity on behalf of or

in the name of the Crown.9

[37]     As Palmer J notes, the power to give a guarantee or indemnity on behalf of the Crown is reserved to the Minister of Finance or to other entities specified in regulations.    I  agree  that  an  undertaking  as  to  damages  would  constitute  an indemnity for the purposes of the Public Finance Act.   Palmer J also refers to a number of other authorities in which the courts have recognised that the restrictions and obligations on the Crown constitute a special circumstance justifying dispensing with the requirement on it under r 32.6(4) to provide an undertaking as to damages, when the Official Assignee or other aspect of the Crown applies for freezing orders.

[38]     Accordingly, and adopting the careful and detailed analysis of this issue by Palmer J,  I agree that  I may dispense with  the requirement  on  the Assignee to provide an undertaking as to damages in this case.   This of course recognises the Court’s expectation that the Crown will meet any order of damages made by the Court.

Orders

[39]     I make orders as  set  out  in the schedule of draft  orders attached  to  the Assignee’s without notice application for freezing orders dated 5 October 2017, with the following amendments:

(a)       The opening words of order 5 are amended to read as follows:

Subject to paragraph 6,  and pending further order of the

Court, this order restrains you from …..

9      Section 65ZC of the Public Finance Act 1989.

(b)For the purposes of order 7, “30 working days” is amended to “10 working days”.   I do not consider a period of 30 working days is appropriate in the current circumstances.  In my view, there is no need to  tie  this  date  to  pending  substantive  proceedings.    I  consider  a shorter time period is appropriate, similar to that adopted in Official Assignee v Scott (being only one week).  A 10 working day period in this case will enable sufficient time for the trustees to consider their position and take initial advice, and for there to perhaps be some initial  engagement  in  relation  to  what  steps,  if  any,  the  trustees propose to take in relation to the cancellation notices.

(c)      The time period at order 8 is amended to not less than 2 working day, which I consider appropriate, given the Official Assignee is obviously already well across this proceeding and in possession of all of the relevant materials.

(d)      Costs are reserved.

S Fitzgerald J