Official Assignee v 22 O'Shannessey Limited
[2022] NZHC 2930
•9 November 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-000829
[2022] NZHC 2930
UNDER Part 32 of the High Court Rules IN THE MATTER OF
The bankruptcy of Andrew Michael Fonagy
BETWEEN
THE OFFICIAL ASSIGNEE
Applicant
AND
22 O’SHANNESSEY LIMITED
First Respondent
AND
WHARERIMU TRUSTEE LIMITED
Second Respondent
AND
MARAM PROPERTY TRADING LIMITED
Third Respondent
Hearing: 15 September 2022 Appearances:
Paul Murray for the Applicant
Robert Hucker and Mark Swan for the First Respondent No appearance for the Second Respondent
Jai Moss for the Third Respondent
Judgment:
9 November 2022
JUDGMENT OF MOORE J
[Application to rescind freezing order/Application seeking further ancillary order against first respondent]
This judgment was delivered by me on 9 November 2022 at 3:00 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar Date:
THE OFFICIAL ASSIGNEE v 22 O’SHANNESSEY LIMITED &ORS [2022] NZHC 2930 [9 November 2022]
Contents
Paragraph Number
Background.............................................................................................................. [1]
The relevant entities................................................................................................. [6]
Wharerimu Trust................................................................................................... [7]
22 O’Shannessey Ltd............................................................................................. [9]
Maram Property Trading Ltd.............................................................................. [13]
The Official Assignee’s claim................................................................................ [15]
Grant of freezing orders........................................................................................ [28]
Maram’s application.............................................................................................. [33]
Legal principles................................................................................................... [35]
Did the Judge err by finding that a process is available or may be available
to the Assignee under which Maram would be obliged to disgorge assets?....... [37]
Did the Judge err by finding there was a good arguable case against
Maram?............................................................................................................... [48]
(i)Cancellation of the Transactions............................................................ [51]
(ii)Liquidation of O’Shannessey.................................................................. [56]
(iii)Liquidator’s recovery of compensation................................................... [61]
(iv)Conclusion on good arguable case......................................................... [67]
Did the Judge err by failing to consider whether there was a risk that a prospective judgment will be wholly or partially unsatisfied because Maram’s
assets might be dissipated or removed from New Zealand?................................ [68]
Is there is a danger Maram will dissipate assets in an attempt to defeat the prospective judgment?............................................................................................................ [77]
Did the Judge err by granting orders that were too broad?............................... [84]
(i)Value of assets covered by the freezing orders[85]
(ii)Disclosure of bank account numbers...................................................... [90]
Conclusion on Maram’s application.................................................................... [93]
The Official Assignee’s application...................................................................... [95]
O’Shannessey’s argument to rescind the freezing orders [105]
Result..................................................................................................................... [112]
Costs...................................................................................................................... [115]
Background
[1] Andrew Fonagy was adjudicated bankrupt on 17 September 2020. The Official Assignee (“the Assignee”) is administering his estate. As part of this process, the Assignee gave notice under s 206 of the Insolvency Act 2006 (“the Insolvency Act”) stating that it wished to cancel two transactions (“the Notice”). These are:
(a)Mr Fonagy’s gift, transfer and/or assignment to Wharerimu Trust (“the Trust”) of his right, title and interest in a loan of $350,876.05 to 22 O’Shannessey Ltd (“O’Shannessey”) on or about 21 December 2016; and
(b)Mr Fonagy’s gift, transfer and/or assignment to the Trust of his right, title and interest in the Deed of Acknowledgement of Debt (“the Deed”) between Mr Fonagy and O’Shannessey on or about 21 December 2016,
(together “the Transactions”)
[2] Prior to serving the Notice, the Assignee applied without notice for freezing orders against the Trust, O’Shannessey and another related company, Maram Property Trading Ltd (“Maram”). The orders sought included conditions freezing all property held by each of these entities and ancillary orders requiring Maram and O’Shannessey to divulge information.
[3] On 3 June 2022, Toogood J granted the application.1 He later issued a Minute setting out his reasons.2
1 Official Assignee v 22 O’Shannessey Ltd HC Auckland CIV-2022-404-829, 3 June 2022 (Minute of Toogood J). This minute was delivered in writing on the cover page of the Official Assignee’s without notice application dated 26 May 2022.
2 Official Assignee v 22 O’Shannessey Ltd HC Auckland CIV-2022-404-829, 13 June 2022 (Reasons Minute of Toogood J).
[4] The parties indicated that further applications would be filed.3 Peters J continued the freezing orders pending further order of the Court.4 A fixture was set down to deal with the following two applications:5
(a)Maram’s application to rescind the freezing and ancillary orders;6 and
(b)the Assignee’s application for further ancillary orders against O’Shannessey.
[5]These are the applications to be determined by this judgment.
The relevant entities
[6] By way of background, it is necessary to set out the entities involved in the Transactions. These are O’Shannessey, the Trust and Maram – the respondents to the Assignee’s application for freezing orders. The relationship between each provides context for the Assignee’s claim that the entities were used as a vehicle for Mr Fonagy to defeat creditors.
Wharerimu Trust
[7] The Trust is a family trust settled on or about 23 December 2014. The beneficiaries are Mr Fonagy, his wife, their children and his mother. Mr Fonagy initially appointed Fontur Trustee Ltd (“Fontur”) as the trustee. He was the sole director and shareholder of Fontur.
[8] On or about 22 June 2018, the Trust was registered as a Cook Islands International Trust under the Cook Islands International Trusts Act 1984. Fontur was replaced as trustee by Ora Trustees Ltd (“Ora Trustees”), a company registered in the
3 Official Assignee v 22 O’Shannessey Ltd HC Auckland CIV-2022-404-829, 22 June 2022 (Minute of Hinton J).
4 Official Assignee v 22 O’Shannessey Ltd HC Auckland CIV-2022-404-829, 30 June 2022 (Minute of Peters J).
5 Official Assignee v 22 O’Shannessey Ltd HC Auckland CIV-2022-404-829, 24 August 2022 (Minute of Powell J). The Trust also filed an application for orders that Meredith Connell be prevented from continuing to act for the Official Assignee. This was resolved after Meredith Connell elected to withdraw.
6 High Court Rules 2016, r 7.49(1) provides that a party affected by an interlocutory order may apply to the Court to rescind the order if that party considers that the order is wrong.
Cook Islands. On 17 August 2020, Ora Trustees was replaced by Wharerimu Trustee Ltd (“Wharerimu Trustee”), another company incorporated in the Cook Islands. Mr Fonagy’s accountant, Errol Bailey, appears to be the sole director.
22 O’Shannessey Ltd
[9] O’Shannessey was incorporated on 11 August 2016, seemingly for the purpose of purchasing a commercial property. Mr Fonagy was originally the sole director. In the days preceding his adjudication of bankruptcy on 17 September 2020, his wife replaced him as director.
[10] O’Shannessey’s shares have been transferred between similar entities to the Trust. The original shareholder of O’Shannessey was Fontur. On 14 September 2018, Fontur’s shareholding was transferred to Ora Trustees. Then on 10 September 2019, half of Ora Trustee’s shares were transferred to Mr Fonagy’s mother.
[11] On 24 November 2020, Ora Trustees’ shareholding was transferred to another company named Wharerimu Trustee Ltd, this one incorporated in New Zealand. Some 30 minutes later, the shareholding was transferred back to Ora Trustees.
[12] The result of these transfers is that Mr Fonagy’s mother and Ora Trustees each hold half of O’Shannessey’s shares.
Maram Property Trading Ltd
[13] Maram was incorporated on 4 September 2012. The original director resigned on 16 September 2014. Mr Bailey was appointed as his replacement. On 9 April 2020, Russell Craigie was also appointed as a director. Mr Bailey remained as a director until 23 July 2020. Mr Craigie is presently the sole director.
[14] From 24 September 2014 onwards, Maram’s shares were held by companies of which Mr Bailey is the sole director and shareholder. Until 9 August 2019, the relevant entity was Bailey Trustee Services Ltd. Thereafter it was Blanch Trustee Services Ltd.
The Official Assignee’s claim
[15] The thrust of the Assignee’s claim is that Mr Fonagy orchestrated the Transactions for the purpose of liquidating a commercial property and shielding the proceeds from creditors, having anticipated that he would otherwise be unable to repay them.
[16] The loss which appears to have precipitated Mr Fonagy’s bankruptcy is an unsuccessful property development. On or about 21 December 2015, Primary Services New Zealand Ltd (“Primary Services”) entered into a loan facility agreement with Colombo Projects Ltd (“Colombo Projects”). Colombo Projects was incorporated for this purpose.
[17] Mr Fonagy personally guaranteed Colombo Projects’ obligations under the loan facility agreement. Around 26 May 2016, Colombo Projects defaulted on its payment obligations. Primary Services subsequently demanded repayment, culminating in proceedings a few years later.
[18] Shortly after its incorporation in August 2016, O’Shannessey purchased a property at 22 O’Shannessey Street, Papakura, Auckland (“the Property”) for
$850,000. The Property appears to be a commercial premises.
[19] O’Shannessey’s purchase of the Property was partially funded by way of a mortgage loan in favour of FM Custodians Ltd (“FM Custodians”). The balance was by a loan of $350,876.05 from Mr Fonagy (“the Loan”). As part of the Loan, O’Shannessey executed the Deed. One of the terms of the Deed was that the debt was repayable on demand.
[20] On 21 December 2016, Mr Fonagy assigned his rights under the Loan and the Deed to the Trust. This was recorded in a resolution of the trustees dated 21 December 2016. The resolution describes the assignment as a “gift” recognising Mr Fonagy’s “natural love and affection” for the beneficiaries. At the time of this gift, Fontur was the sole shareholder of O’Shannessey and sole trustee of the Trust.
[21] On 18 March 2020, Primary Services obtained summary judgment against Mr Fonagy.7 Associate Judge Paulsen found that Mr Fonagy had no arguable defence and was liable under the guarantee. The Judge granted summary judgment against Mr Fonagy for $850,000 plus interest and costs.
[22] In July 2020, O’Shannessey transferred the Property to Maram. Mr Craigie swore an affidavit in the context of other proceedings which has been adduced in evidence by the Assignee. He deposed that the purchase price was $580,000. FM Custodians loaned Maram $550,000 of that figure. The remainder was withheld by agreement to operate as a bond, whereby Maram would pay upon O’Shannessey carrying out specified repair and maintenance works.
[23] The sale price appears to be sufficient for O’Shannessey to repay its loan to FM Custodians, with no surplus. Maram effectively refinanced O’Shannessey’s debt by funding its purchase of the Property with a mortgage loan from FM Custodians.
[24] The sale of the Property appears to be at an undervalue. As at the date of sale, the capital value (“CV”) of the Property as assessed by Auckland Council was
$1,080,000. This is supported by a valuation from Darroch Property Services. The registered valuer engaged to assess the Property arrived at a valuation of $900,000. While there are limitations on the accuracy of both valuations,8 taken together they indicate that the Property was sold significantly undervalue. As does the fact O’Shannessey purchased the Property for $850,000.
[25] On 17 September 2020, Mr Fonagy was adjudicated bankrupt on his own application. The Assignee began its investigation. This included conducting regular internet searches to check if the Property was being marketed for sale. No evidence was found that it was.
[26] It appears that the Property was sold privately. On 4 May 2022, it was transferred from Maram to the United Church of Tonga in New Zealand Trust Board
7 Primary Services New Zealand Ltd v Colombo Projects Ltd [2020] NZHC 549.
8 These include, for example, that the registered valuer was unable to internally inspect the Property.
(“the Church of Tonga”). The Church of Tonga is said to be a third party with no involvement in the previous transactions.
[27] The inference which the Assignee will seek to draw is that Mr Fonagy embarked upon a course of deceptive conduct designed to put assets of material value outside the reach of his creditors. Mr Fonagy purchased the Property through O’Shannessey knowing that Colombo Projects had defaulted on obligations which he personally guaranteed. He then assigned the debt to the Trust, of which he was effectively trustee and beneficiary, to eschew personal ownership of it. Shortly after summary judgment was granted against him, O’Shannessey sold the Property to Maram, a related party, at a price which enabled it to discharge its mortgage liability but resulted in no surplus. Given that O’Shannessey was incorporated to purchase the Property, this may well have rendered it insolvent and unable to repay the Loan. Maram was then able to sell the Property to a third party, presumably at full value, and realise the capital value with no corresponding liabilities (save for the mortgage to FM Custodians).
Grant of freezing orders
[28] Following the sale of the Property, the Assignee issued the Notice seeking to cancel the Transactions.9 Without having served the Notice, the Assignee applied without notice for freezing orders against all three respondents and ancillary orders to disclose information against O’Shannessey and Maram.10
[29] Toogood J considered that the Assignee had a good arguable case for the cancellation of the Transactions.11 The Judge was also satisfied that the respondents held assets to which the freezing orders could apply, based upon the transactions previously outlined.12
[30] The Judge then found that there was a risk that a prospective judgment against O’Shannessey or the Trust would be wholly or partially unsatisfied because the assets
9 Official Assignee v 22 O’Shannessey Ltd HC Auckland CIV-2022-404-829, 13 June 2022 (Reasons Minute of Toogood J) at [2].
10 At [3].
11 At [7]–[8].
12 At [10].
of the prospective judgment debtor might be removed from New Zealand, disposed of, dealt with or diminished in value.13 The Judge took into account the previous proceedings against Mr Fonagy and Ora Trustees in which freezing orders were granted;14 that the Property appeared to be sold to Maram at a price significantly below market value;15 the relationship between the entities and persons involved;16 that the cash realised from the sale of the Property could be readily dissipated;17 and that the real property owned by the Trust could be liquidated or diminished in value.18
[31] Toogood J considered that there was jurisdiction to make a freezing order against Maram.19 A liquidator of O’Shannessey could pursue Maram after it inevitably fails to compensate the Assignee for the transfer of Mr Fonagy’s interests in the Loan and Deed.20 The disposition of the Property was at a time O’Shannessey was insolvent, arguably with intent to prejudice creditors or without receipt of reasonably equivalent value in exchange.21
[32] The Judge thus concluded that the balance of convenience and overall justice of the case “clearly favoured” granting the orders sought by the Assignee.22
Maram’s application
[33] I will first consider Maram’s application to rescind the freezing and ancillary orders against it.
[34]The issues raised are:
(a)whether the Judge erred by finding that a process is available or may be available to the Assignee under which Maram would be obliged to disgorge assets;
13 At [11].
14 At [12] citing Primary Services New Zealand Ltd v Fonagy [2019] NZHC 1869; and Primary Services New Zealand Ltd v Colombo Projects Ltd [2020] NZHC 101.
15 At [12(a)].
16 At [12(b)–(d)].
17 At [12(e)].
18 At [12(f)].
19 At [13].
20 At [13].
21 At [14].
22 At [15].
(b)whether the Judge erred by finding there was a good arguable case against Maram;
(c)whether the Judge erred by failing to consider whether there was a risk that a prospective judgment will be wholly or partially unsatisfied because Maram’s assets might be dissipated or removed from New Zealand;
(d)whether there is a danger Maram will dissipate assets in an attempt to defeat the prospective judgment; and
(e)whether the Judge erred by granting orders that were too broad.
Legal principles
[35] Rule 32.2 of the High Court Rules 2016 (“the Rules”) empowers the Court to make a freezing order restraining a respondent from removing any assets located in or outside New Zealand or from disposing of, dealing with, or diminishing the value of, those assets. Relevantly, there is jurisdiction to make a freezing order against a third party if:
(a)the applicant has a good arguable case on an accrued or prospective cause of action that is justiciable in the Court;23 and
(b)a process in the Court is or may ultimately be available to the applicant, as a result of a judgment or prospective judgment, under which the third party may be obliged to disgorge assets or contribute toward satisfying the judgment or prospective judgment.24
[36] If those thresholds are met, the Court must then consider where the balance of convenience lies.25
23 High Court Rules 2016, r 32.5(1)(b)(i).
24 Rule 32.5(b).
25 Murren v Schaeffer [2018] NZCA 318 at [17].
Did the Judge err by finding that a process is available or may be available to the Assignee under which Maram would be obliged to disgorge assets?
[37] Mr Moss, for Maram, first argued that the Judge did not have jurisdiction to make the freezing and ancillary orders against Maram. He submitted that the procedural steps required to claim against Maram were “long-winded and remote”. The necessary process would involve a liquidator and was thus, in Mr Moss’ submission, not “available” to the Assignee for the purpose of r 32.5(5)(b) of the Rules.
[38] The process which Mr Murray, for the Assignee, argues is available involves the following steps:
(a)The Assignee will need to apply under s 205 of the Insolvency Act for the cancellation of the Transactions. If that application succeeds, the Assignee will be entitled to demand payment of $350,876.05 from O’Shannessey.
(b)If O’Shannessey is unable to pay the debt, the Assignee will need to apply for the appointment of a liquidator.
(c)The liquidator would then need to bring a successful claim against Maram under s 348 of the Property Law Act 2007 (“PLA”) that Maram’s purchase of the Property was a prejudicial disposition.
[39] In finding that these steps constituted a “process” which “may be available” to the Assignee, Toogood J relied on Robmatjus Pty Ltd v Violet Home Loans Australia Pty Ltd and Deputy Commissioner of Taxation v Ekelmans.26 Although these are Australian cases, the wording of r 32.5(5)(b) appears identical to the relevant Australian provisions. That is unsurprising given that the substance of r 32.5(5)(b)
26 Robmatjus Pty Ltd v Violet Home Loans Australia Pty Ltd [2007] VSC 165; and Deputy Commissioner of Taxation v Ekelmans [2013] VSC 346, (2013) 94 ATR 800.
appears to be derived from the High Court of Australia’s decision in
Cardile v LED Builders Pty Ltd,27 where the Court said:28
“[57] What then is the principle to guide the courts in determining whether to grant Mareva relief in a case such as the present where the activities of third parties are the object sought to be restrained? In our opinion such an order may, and we emphasise the word “may”, be appropriate, assuming the existence of other relevant criteria and discretionary factors, in circumstances in which … some process, ultimately enforceable by the courts, is or may be available to the judgment creditor as a consequence of a judgment against that actual or potential judgment debtor, pursuant to which, whether by appointment of a liquidator, trustee in bankruptcy, receiver or otherwise, the third party may be obliged to disgorge property or otherwise contribute to the funds or property of the judgment debtor to help satisfy the judgment against the judgment debtor.”
(emphasis added and footnote omitted)
[40] This passage expressly contemplates that a process available to the judgment creditor could involve the appointment of a liquidator or other party. Evidently on this approach, the applicant for the freezing order need not be responsible for making every claim in the process said to be available, provided the result is that the third party disgorge funds to help satisfy the judgment in favour of the applicant.
[41] Cardile was followed in Robmatjus Pty Ltd v Violet Home Loans Australia Pty Ltd.29 There, the plaintiff sought freezing orders against the defendant and related non-parties.30 The defendant owed fees to the plaintiff which the owner of the defendant, John Mingos, must have anticipated the plaintiff would claim for.31 The defendant paid a substantial dividend to its sole shareholder, Franklin Dell Pty Ltd, which was the trustee of the Mr Mingos’ family trust.32 The defendant then sold its business to another company owned by Franklin Dell Pty Ltd,33 with no intention that consideration would be paid.34
27 Yos v Heng HC Wellington CIV-2009-485-2346, 1 December 2009 at [13].
28 Cardile v LED Builders Pty Ltd [1999] HCA 18, (1999) 198 CLR 380.
29 Robmatjus Pty Ltd v Violet Home Loans Australia Pty Ltd [2007] VSC 165.
30 At [16].
31 At [24].
32 At [24].
33 At [29].
34 At [33].
[42] Hargrave J considered that there was a real case to be investigated that the defendant and non-parties made voluntary conveyances to defraud creditors.35 Although there was no need “to reach a firm conclusion” on the point, the Judge also considered that the possibility of a liquidator proceeding against the non-parties was a “real one”.36 Those processes “may well” have been available.37
[43] Cardile was similarly followed in Ekelmans.38 Judd J noted that even though the applicant for a freezing order may not be entitled to pursue the recovery of property from a third party directly, an order may still be made in appropriate circumstances to avoid an abuse of the Court’s process.39 The Judge concluded that there was a good arguable case that a trustee in bankruptcy, if appointed, could commence recovery proceedings with the effect of satisfying a prospective judgment.40
[44] In my view, Toogood J was correct to apply this approach to r 32.5(5)(b). The wording is essentially identical to the relevant Australian provisions. The rationale for the approach is sound – it is necessary to prevent related parties from disposing of assets in a manner that abuses the Court’s processes.
[45] I do not accept Mr Moss’ submission that Maram is too far removed from the Assignee’s initial claim for there to be jurisdiction to make a freezing order against it. In circumstances where related parties seek to prejudice creditors by moving assets, it is entirely possible that numerous entities will be used in a sophisticated manner. The recovery process will commensurately involve many steps. The potential complexity of that process does not preclude the making of freezing orders. Whether there is jurisdiction will turn on the applicant’s ability to demonstrate a good arguable case on the required steps. There is no injustice in making freezing orders against numerous entities if there is a good arguable case against them.
35 At [60]–[65].
36 At [66].
37 At [66].
38 Deputy Commissioner of Taxation v Ekelmans, above n 26.
39 At [21].
40 At [98]–[101]. Although the Judge found that some assets held by third parties might be the subject of recovery proceedings where there was a good arguable case, other specified assets were not.
[46] Nor do I consider that there is a need to resort to the inherent jurisdiction of this Court. Mr Moss and Mr Murray both made submissions on whether the inherent jurisdiction to make freezing orders was excluded by the Rules. Given that r 32.5(5)(b) encapsulates the process contemplated by the Assignee, this issue is not determinative.
[47] I conclude that the process indicated by the Assignee engages the jurisdiction to make freezing orders under r 32.5(5)(b).
Did the Judge err by finding there was a good arguable case against Maram?
[48] Mr Moss’ next argument is that the Judge erred by finding there was a good arguable case against Maram. He submitted that the Assignee does not have an arguable case that the Transactions should be cancelled. He further submitted that even if the Assignee is successful in cancelling the Transactions, there must still be a good arguable case that the sale of the Property was a prejudicial disposition. He noted that Primary Services previously withdrew such a claim and that there is a dearth of evidence that O’Shannessey became insolvent as a result of selling the Property.
[49] In order to succeed on this point, the Assignee must establish a good arguable case that:
(a)the Transactions should be cancelled under s 205 of the Insolvency Act, enabling it to demand payment from O’Shannessey;
(b)O’Shannessey should be placed in liquidation on the application of the Assignee; and
(c)a liquidator of O’Shannessey could recover reasonable compensation for the transfer of the Property at undervalue under s 348 of the PLA.
[50]I address each in turn.
(i)Cancellation of the Transactions
[51] The first step is whether the Assignee has a good arguable case that the Transactions should be cancelled under s 205 of the Insolvency Act.
[52] A gift by a bankrupt to another person may be cancelled on the Assignee’s initiative if:41
(a)the bankrupt made the gift within the period beginning two years immediately before adjudication and ending five years immediately before adjudication; and
(b)the bankrupt was unable to pay his or her debts.
[53] A bankrupt is presumed to have been unable to pay his or her debts unless the party claiming under the gift proves that the bankrupt was immediately after the making of the gift, or at any time after that up to his or her adjudication, able to pay his or her debts without the aid of the property that the gift is composed of.42
[54] I am satisfied that the Assignee has a good arguable case for the cancellation of the Transactions. On this point I agree with Toogood J’s analysis that:
(a)The gifts were acknowledged by Mr Fonagy in a resolution dated 21 December 2016.
(b)The dispositions were made more than two years, but no more than five years, before Mr Fonagy’s adjudication of bankruptcy on 17 September 2020.
(c)The presumption that Mr Fonagy is unable to pay his debts applies unless rebutted. Although Mr Fonagy has objected to the cancellation of the Transactions, I consider his grounds of objection insufficient to militate against the Assignee having a good arguable case on this point.
41 Insolvency Act 2006, s 205(1).
42 Section 205(2).
The Assignee’s evidence supports an arguable case that he gifted a significant debt to the Trust for apparently no consideration, in circumstances where he was aware Primary Services would demand repayment of a substantial sum under his personal guarantee. There appears to be no evidence that Mr Fonagy could meet his liabilities from other sources, consistent with him subsequently applying to be adjudicated bankrupt.
[55] It follows, in my view, that the Assignee has a good arguable case for the cancellation of the Transactions.
(ii)Liquidation of O’Shannessey
[56] The Assignee must then have a good arguable case to put O’Shannessey in liquidation.
[57] A company may be put into liquidation on the application of a creditor (including a prospective creditor) to the Court for the appointment of a liquidator.43 Relevantly, the Court may appoint a liquidator if the company is unable to pay its debts.44 A company is unable to pay its debts if:45
(a)the company has failed to comply with a statutory demand; or
(b)execution issued against the company in respect of a judgment debt has been returned unsatisfied in whole or in part.
[58] I am satisfied that the Assignee would have standing to bring an application as a creditor upon successfully cancelling the Transactions. The real issue is whether the Assignee has a good arguable case that O’Shannessey would be unable to pay its debts.
43 Companies Act 1993, s 241(1) and (2)(c)(iv). Creditor is defined by s 240(1) “as a person who, in a liquidation, would be entitled to claim in accordance with section 303 that a debt is owing to that person by the company.”
44 Section 241(4)(a).
45 Section 287(a) and (b).
[59] The Assignee’s evidence on this point includes the fact that O’Shannessey was incorporated only six days before it was used to purchase the Property. In purchasing the Property it acquired liabilities to FM Custodians and Mr Fonagy. It subsequently sold the Property to Maram for less than it paid – the difference likely being the amount of the Loan minus interest on the mortgage. Given that there is no evidence that O’Shannessey conducts any type of business from which it could derive revenue to offset this loss, the Assignee has a good arguable case that it would be unable to pay its debts.
[60] It is accordingly my view that the Assignee has a good arguable case to put O’Shannessey in liquidation.
(iii)Liquidator’s recovery of compensation
[61] The final aspect of this process is whether the Assignee has a good arguable case that a liquidator could recover reasonable compensation for the transfer of the Property at undervalue under s 348 of the PLA.
[62]Prerequisites for an order under s 348 are that there is a disposition of property:
(a)by a debtor who was insolvent at the time, or became insolvent as a result, of making the disposition;46 and
(b)with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.47
[63] Both the creditor who claims to be prejudiced by a disposition of property and the liquidator (if the debtor is a company in liquidation) have standing to apply for an order under s 348.48 The Court may make the order if satisfied that the applicant for the order has been prejudiced by a disposition of property.49
46 Property Law Act 2007, s 346(1)(a) and (2)(a).
47 Section 346(1)(b).
48 Section 347(1).
49 Section 348(1)(b).
[64] An order under s 348 may require a person who acquired or received property through the disposition to pay, in respect of that property, reasonable compensation to the debtor (if the debtor is a company in liquidation).50
[65] I am also satisfied that the Assignee has a good arguable case that a liquidator could seek an order for compensation under s 348 of the PLA, for the reasons which follow:
(a)O’Shannessey is the debtor who transferred the Property to Maram for a purchase price of $580,000. A legal transfer of property constitutes a “disposition”.51
(b)O’Shannessey transferred the Property to Maram at a significant loss, having previously purchased it for $850,000. With no evidence before the Court of any other assets or revenue streams, an available inference from the Assignee’s evidence is that this transaction plunged the company into insolvency. The relative prices at which O’Shannessey purchased and sold the Property, and the valuations of the Property, also indicate that it did not receive reasonably equivalent value from Maram in exchange.
(c)A liquidator of O’Shannessey therefore has standing to apply for an order under s 348.
(d)A liquidator of O’Shannessey was arguably prejudiced by the sale of the Property at undervalue. That sale reduced the funds available to creditors of O’Shannessey, including the Assignee.
(e)The Property has since been sold to a third party, the Church of Tonga. The proceeds of that sale could be used in the payment of reasonable compensation.
50 Section 348(2)(b) and 350(1)(b).
51 Section 345(2)(a).
[66]It follows that the Assignee has a good arguable case on this part of the claim.
(iv)Conclusion on good arguable case
[67] I therefore consider that Toogood J correctly concluded that the Assignee is able to establish a good arguable case on each aspect of the available recovery process.
Did the Judge err by failing to consider whether there was a risk that a prospective judgment will be wholly or partially unsatisfied because Maram’s assets might be dissipated or removed from New Zealand?
[68] Mr Moss then submitted that the Judge erred by failing to consider whether there was a risk that a prospective judgment will be wholly or partially unsatisfied because Maram’s assets might be dissipated or removed from New Zealand. He submitted that this inquiry goes directly to the purpose of the freezing orders – to prevent assets from being dissipated and frustrating the court process. He also referred to Huang v Waihopai Valley Vineyard Ltd as an example of a case where the risk of dissipation was considered in the context of third parties.52
[69] The answer to this question is by no means clear, particularly given the divergent authority on the point. But in circumstances where I am satisfied there is a risk of dissipation, there is no need to determine it. For present purposes, it is sufficient to record that Mr Moss’ argument is not necessarily supported by a plain reading of r 32.5. The relevant sub-rules are reproduced below:
“(4) The court may make a freezing order or an ancillary order or both against a judgment debtor or prospective judgment debtor if the court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because—
(a)the judgment debtor, prospective judgment debtor, or another person might abscond; or
(b)the assets of the judgment debtor, prospective judgment debtor, or another person might be—
(i)removed from New Zealand or from a place inside or outside New Zealand; or
52 Huang v Waihopai Valley Vineyard Ltd [2021] NZHC 348.
(ii)disposed of, dealt with, or diminished in value (whether the assets are in or outside New Zealand).
(5)The court may make a freezing order or an ancillary order or both against a person other than a judgment debtor or prospective judgment debtor (a third party) if the court is satisfied, having regard to all the circumstances, that—
(a)there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because—
(i)the third party holds or is using, or has exercised or is exercising, a power of disposition over assets (including claims and expectancies) of the judgment debtor or prospective judgment debtor; or
(ii)the third party is in possession of, or in a position of control or influence concerning, assets (including claims and expectancies) of the judgment debtor or prospective judgment debtor; or
(b)a process in the court is or may ultimately be available to the applicant, as a result of a judgment or prospective judgment, under which the third party may be obliged to disgorge assets or contribute toward satisfying the judgment or prospective judgment.”
(emphasis added)
[70] Whether the respondent is a judgment debtor or a third party determines which of these sub-rules is applicable. Rule 32.5(4) applies where the freezing order is against a judgment debtor. In that circumstance the Court must be “satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied”.
[71] Rule 32.5(5) applies where the freezing order is against a person other than a judgment debtor. Sub-rules (5)(a) and (b) then specify two alternative grounds of which the Court must be satisfied before making a freezing order against a third party. While sub-r (5)(a) requires that there be a risk of dissipation, sub-r (5)(b) does not. That suggests that such a risk is not an element under sub-r (5)(b).
[72] That interpretation is supported by r 32.5(1). Sub-rule (1) provides that “this rule applies if”, among other things, the applicant has a good arguable case on an accrued or prospective cause of action. The use of “this rule applies” clarifies that a good arguable case (or one of the other specified grounds) is a necessary element of a
freezing order against a judgment debtor or a third party. By contrast, sub-rr (4) and
(5) do not use that formulation.
[73] Sub-rule (5) has been applied in this way in related proceedings. Primary Services obtained a freezing order against Mr Fonagy and subsequently sought one against Ora Trustees.53 Primary Services argued that a process was available to it under which Ora Trustees, a third party, may be obliged to disgorge assets.54 Osborne J considered that there was a real case to be investigated and that the balance of convenience favoured Primary Services.55 The Judge did not consider whether there was a risk of dissipation.
[74] I do note, however, that in Ekelmans the Judge considered this issue.56 The Judge said that the evidence fell short of establishing that any of the third parties are likely to remove assets from the jurisdiction or dispose of assets or deal with them so as to diminish their value to the prejudice of a trustee in bankruptcy’s ability to recover assets beneficially owned by the respondent in order to satisfy creditors of his estate.57 The extent of the risk was that the respondent would exercise his control over the third parties to remove assets from the jurisdiction, not that the third parties would do so independently.58 That risk could be mitigated with injunctions against him.59 Given the absence of a properly contemplated recovery process, the existing freezing orders against third parties were not necessary to protect the processes of the Court and were “without a legitimate purpose”.60 The Judge ultimately adjourned to provide the applicant “an opportunity to adduce evidence on the question of any proposed proceeding to recover the amount due”.61
[75] I also accept that a similar approach was taken by Duffy J in Huang.62 The Judge made freezing orders against the directors and shareholders of Waihopai Valley
53 Primary Services New Zealand Ltd v Colombo Projects Ltd [2020] NZHC 101 at [1] and [9].
54 At [4].
55 At [30]–[39].
56 Deputy Commissioner of Taxation v Ekelmans, above n 26 at [102].
57 At [102].
58 At [118].
59 At [118]–[119].
60 At [120]–[122].
61 At [123].
62 Huang v Waihopai Valley Vineyard Ltd, above n 52.
Vineyard Ltd and in doing so found that those individuals posed a risk of dissipating funds provided by the company.63
[76] Given these conflicting approaches, it is uncertain whether an applicant must establish that a third party poses a risk of dissipating or disposing of assets. As previously noted, however, that issue is not determinative in this case.
Is there is a danger Maram will dissipate assets in an attempt to defeat the prospective judgment?
[77] The dispositive and related issue is whether there is a danger Maram will dissipate assets in an attempt to defeat the prospective judgment.
[78] As foreshadowed, I disagree with Mr Moss’ argument that there is no evidence that Maram poses a risk of dissipating its assets. Establishing that risk requires the applicant to point to circumstances from which a “prudent, sensible commercial man, can properly infer a danger of default”.64 This will often rely upon the inferences that can be drawn from the circumstances of the transactions and relationship between the parties involved, rather than direct statements of intention.
[79] I consider that the Assignee has provided an evidential foundation for the inference that Mr Fonagy orchestrated a series of related-party transactions designed to defeat his creditors. The curious nature of those transactions and intermingled relationships between the parties has previously been described. If the parties were not acting on a common intention it is difficult to discern why the Property would be transferred at undervalue to Maram in this manner. Maram has not provided any evidence explaining why and how it purchased the Property at undervalue. Taking into account the Assignee’s evidence, there is nothing from which the Court can draw a benign inference.
63 At [6] and [56].
64 Murren v Schaeffer [2018] NZCA 318 at [16] citing Raukura Moana Fisheries Ltd v The Ship “Irina Zharkikh” [2001] 2 NZLR 801 (HC); and Third Chandris Shipping Corporation v Unimarine SA [1979] QB 645 at 671.
[80] That conclusion is supported by the fact Primary Services obtained freezing orders against Mr Fonagy and Ora Trustees.65 Of note is that Churchman J found that there was a risk that Mr Fonagy was disposing assets in an attempt to avoid liability under his personal guarantee.66 The cash derived from Maram’s sale of the Property is liquid and could readily be dissipated for that purpose.
[81] Presently Mr Fonagy’s accountant, Mr Bailey, stands behind the companies which own Maram and the Trust’s property. These are the two entities which have benefited from the series of transactions formulated and carried out by Mr Fonagy. The fact he has effective control over both entities further contributes to the risk of dissipation.
[82] I do not overlook Mr Moss’ submission that it is for the Assignee to establish the risk of dissipation and the absence of evidence should not count against Maram. That argument might be sufficient if the Assignee’s claim was speculative. But the Assignee has adduced evidence relating to the circumstances of the transactions and relationship between the parties. It is from these circumstances that the risk of dissipation can be inferred.
[83] I therefore consider that there is a danger Maram will dissipate assets in an attempt to defeat the prospective judgment.
Did the Judge err by granting orders that were too broad?
[84] Mr Moss’ final argument is that the Judge erred by granting freezing and ancillary orders that were too broad in scope. He submitted that two aspects of the orders were excessive:
(a)that the freezing orders related to all of Maram’s property in circumstances where the Assignee’s claim is limited to the value of the Loan; and
65 Primary Services New Zealand Ltd v Fonagy [2019] NZHC 1869; and Primary Services New Zealand Ltd v Colombo Projects Ltd [2020] NZHC 101.
66 Primary Services New Zealand Ltd v Fonagy [2019] NZHC 1869 at [13].
(b)that the ancillary orders required the disclosure of bank account details of third parties who have received payments from Maram.
(i)Value of assets covered by the freezing orders
[85]I will first deal with the value of assets covered by the freezing orders.
[86] If the likely maximum amount of the applicant’s claim is known, the value of the assets covered by a freezing order must not exceed that amount together with interest and costs.67
[87] I do not consider that the Court is able to quantify the likely maximum amount of the claim at this stage. Mr Moss argued that the maximum amount of the Assignee’s claim is $350,876.50 plus an allowance for interest and costs. That figure is equivalent to the value of the Loan which Mr Fonagy gifted to the Trust – one of the transactions which the Assignee seeks to cancel.
[88] That aspect of the claim is only the first step in the recovery process. The claim will subsequently involve a liquidator seeking reasonable compensation from Maram for O’Shannessey’s transfer of the Property at undervalue. As previously noted, the valuations of the Property are far from exact. The Court cannot determine what constitutes reasonable compensation on the basis of this limited information and without the liquidator’s claim having been pleaded. Although the Court should be able to quantify the likely maximum value of the claim at a later stage, at which time the freezing orders could be refined, it cannot yet do so.
[89] It follows that orders covering the entirety of Maram’s property are appropriate at present.
67 High Court Rules 2016, r 32.6(2).
(ii)Disclosure of bank account numbers
[90] The refinement of the ancillary orders to exclude disclosure of bank account numbers was not opposed by Mr Murray and can be dealt with in short order. The conditions of the ancillary order require Maram to disclose:
“(i)a copy of the sale and purchase agreement for the sale of the Property from [Maram] to the [Church of Tonga].
(ii)a copy of the settlement statement and trust statement for the sale of the Property showing how the proceeds of sale have been applied and the net proceeds of sale;
(iii)if [Maram] continues to hold some or all of the net proceeds of sale, how much of those funds are held and where, including any relevant bank account numbers; and
(iv)if [Maram] has paid any of the net sale proceeds to third parties, details of these payments, including when these payments were made and to whom these payments were made along with any relevant bank account numbers.”
[91] Disclosure of bank account numbers, particularly those of third parties, is not necessary to give effect to the orders. The details of where funds are held, when payments were made and to whom are sufficient for freezing orders to be effective.
[92]To that extent, I accept Mr Moss’ argument under this heading.
Conclusion on Maram’s application
[93] Maram’s application has succeeded to a limited extent. The aspect of the ancillary orders requiring disclosure of bank account numbers, including those of third parties, should be removed.
[94] The remainder of Maram’s arguments have been rejected. Save for the amendment to the ancillary orders, the orders made by Toogood J are to persist in their current form.
The Official Assignee’s application
[95] I therefore turn to consider the Assignee’s application for further ancillary orders against O’Shannessey.
[96] The ancillary orders against O’Shannessey directed it to file and serve an affidavit attaching:
“(i)all documentation relating to the discharge of [O’Shannessey’s] mortgage over the Property;
(ii)details of any payments it has received from [Maram], including from the sale of the Property and/or in relation to the discharge of its mortgage over the Property; and
(iii)if it received payments from [Maram], what has happened to those funds. If the funds have been paid from [O’Shannessey] to another party, details of these payments, including when these payments were made and to whom these payments were made along with any relevant bank account numbers. If [O’Shannessey] continues to hold some or all of the funds paid to it, how much of those funds are held and where, including any relevant bank account numbers.”
[97] The director of O’Shannessey subsequently filed an affidavit. She deposed that the vast majority of the proceeds of sale were used to discharge the mortgage to FM Custodians in 2020. On 4 May 2022, Maram paid vendor finance of $35,997.31 to O’Shannessey. Three weeks later, that amount less legal costs was journaled to a solicitor’s trust account named “Wharerimu Trust”.
[98] On 21 June 2022, Mr Hucker, for O’Shannessey, filed a memorandum of counsel stating that there is no basis to continue the freezing order in light of the information disclosed. He said that O’Shannessey held none of the sale proceeds.
[99] On 27 June 2022, counsel for the Assignee wrote to Mr Hucker seeking confirmation if any additional assets or property were currently captured by the freezing order. It was suggested that O’Shannessey voluntarily disclose that information as the Assignee would consent to the discharge of the freezing order if no other assets were subject to it.
[100] Mr Murray advises that no response was received. He now seeks an order directing O’Shannessey to file and serve a further affidavit within 10 working days setting out details of any assets or property currently captured by the freezing order and the location of any such assets or property.
[101] The thrust of Mr Hucker’s objection to the further ancillary orders is that the freezing orders should not be in place at all. That issue is addressed below.
[102] The Court may make an ancillary order if it considers it just.68 One of the purposes for making an ancillary order is to elicit information relating to assets relevant to the freezing order.69
[103] Given counsel’s indication that there are no assets subject to the freezing order, I consider it entirely appropriate for O’Shannessey to file and serve an affidavit confirming that fact. If that is the case, the Assignee has properly agreed to consent to the removal of the orders. There is no purpose maintaining the freezing orders against O’Shannessey if those orders are otiose. Should counsel’s indication be inaccurate, further disclosure will ensure that the Assignee is capable of enforcing the freezing orders.
[104]I therefore consider it appropriate to make the ancillary order sought.
O’Shannessey’s argument to rescind the freezing orders
[105] I will lastly address O’Shannessey’s argument that the freezing orders against it should be rescinded.
[106] Unlike Maram, O’Shannessey did not apply for rescission of the freezing orders under r 7.49 of the Rules. Instead Mr Hucker sought to argue that the freezing orders were due to expire and should not be reinstated on the basis that the orders were wrongly made.
[107] Mr Hucker’s argument is premised on the orders being due to expire. That is not the case. Toogood J originally phrased the duration of the order in the following terms:70
“6As the freezing order has been made without notice to you, it will have no effect after 20 working days from the date of the order, unless on
68 High Court Rules 2016, r 32.3(1).
69 Rule 32.3(2)(a).
70 Official Assignee v 22 O’Shannessey Ltd HC Auckland CIV-2022-404-829, 13 June 2022 (Reasons Minute of Toogood J) at [5].
or before that date it is continued or renewed. On that date you or your counsel are entitled to be heard by the Court in opposition to the continuation or renewal of the order.”
(emphasis added)
[108] The emphasised part of the order is critical. The orders would only expire after 20 working days if they were not continued before that date. After 18 working days, the orders were continued by Peters J.71 She ordered that:
“[2] In the absence of objection from the first and third respondents, I continue the freezing order made by Toogood J on 3 June 2022 pending further order of the Court.”
[109] It follows that the freezing orders will continue until the Court orders otherwise. The proper procedural pathway to seek such an order would be that taken by Mr Moss – to file an application for rescission. Should O’Shannessey wish to argue that the orders should be rescinded, that course is available.
[110] This approach will also provide sufficient notice for the Assignee to respond. At the hearing, Mr Murray appeared to be taken by surprise at Mr Hucker’s argument. Given that Mr Moss had given notice of his application for rescission of the freezing orders and Mr Hucker had not, Mr Murray explained that he had not prepared a response to Mr Hucker’s argument. He advised that if he had been given proper notice, he likely would have filed further evidence in support of the orders.
[111] Taking all of that into account, I do not propose to determine O’Shannessey’s argument that the freezing orders against it should be rescinded. The proper course is for O’Shannessey to file an application for rescission.
Result
[112]Maram’s application is granted in part:
(a)The aspect of the ancillary orders against Maram requiring disclosure of bank account numbers, including those of third parties, is removed.
71 Official Assignee v 22 O’Shannessey Ltd HC Auckland CIV-2022-404-829, 30 June 2022 (Minute of Peters J).
(b)The remainder of the freezing and ancillary orders against Maram remain as formulated by Toogood J.
[113] The Assignee’s application for further ancillary orders against O’Shannessey is granted.
[114] I accordingly order that O’Shannessey file and serve an affidavit within 10 working days of service of this order setting out or attaching details of any assets or property currently captured by the freezing order and the location of any such assets or property.
Costs
[115] My preliminary view is that the Assignee is entitled to costs on a 2B basis, having succeeded on its application for further ancillary orders and in opposing Maram’s application (save for the amendment to the ancillary orders which it did not oppose). I encourage the parties to confer and resolve any costs issues between themselves. If the parties are unable to reach agreement, leave is reserved to file memoranda not exceeding five pages (excluding tables or appendices):
(a)any memorandum on behalf of the Assignee is to be filed and served
no later than 5:00 pm on Friday, 9 December 2022.
(b)any memoranda on behalf of Maram and/or O’Shannessey is to be filed and served no later than 5:00 pm on Friday, 16 December 2022.
Moore J
Barristers/Solicitors:
Akarana Chambers, Auckland Hucker & Associates, Auckland Canterbury Chambers, Christchurch
2
9
0