Official Assignee v Yarrow

[2020] NZHC 2594

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV 2020-404-001749

[2020] NZHC 2594

IN THE MATTER OF

the bankruptcy of PAUL STEVEN YARROW (bankrupt)

BETWEEN

OFFICIAL ASSIGNEE IN BANKRUPTCY OF THE PROPERTY OF PAUL STEVEN YARROW

Plaintiff

AND

PAUL STEVEN YARROW

First Defendant

AND

MICHAEL CHANEL FINNIGAN

Second Defendant

AND

DUNCAN DOVICO TRUSTEES LIMITED

Third Defendant

AND

JOHN SANDERSON

Fourth Defendant

AND

SALVATORE RUSSO

Fifth Defendant

Hearing:	On the papers
Counsel:	G A D Neil & H L Hui for the Plaintiff
Judgment:	2 October 2020

JUDGMENT OF CAMPBELL J

This judgment was delivered by me on 2 October 2020 at 4 pm Pursuant to Rule 11.5 of the High Court Rules

…………………………

Registrar/Deputy Registrar

OFFICIAL ASSIGNEE v YARROW [2020] NZHC 2594 [2 October 2020]

Introduction and parties

[1]    The plaintiff is the Official Assignee in bankruptcy of Paul Steven Yarrow (Mr Yarrow). The Official Assignee’s substantive claims in this proceeding arise out of dealings between Mr Yarrow (who is the first defendant), the P S Yarrow Trust No. 4 (PSYT4), and the P S Yarrow Family Trust (No. 3) (PSYFT3). Each defendant either is, or has been, a trustee of both trusts.

[2]    At the same time as commencing the proceeding the Official Assignee has applied, without notice, for a freezing order under Part 32 and for a direction that Part 18 of the High Court Rules is to apply to the proceeding. The freezing order is sought over property held by the fourth and fifth defendants as the current trustees of the PSYT4.

[3]    The application is supported by a comprehensive affidavit made by Vethashni Naicker and by two memoranda of counsel. The background facts set out below are based on Mr Naicker’s affidavit.

Background facts

[4]    Mr Yarrow was a director of Yarrows (the Bakers) Limited (Yarrows) from  14 July 2004 until he was adjudicated bankrupt on 19 September 2017. Yarrows borrowed substantial sums from Westpac New Zealand Limited (Westpac).

[5]    On 31 July 2006 Mr Finnigan (the  third  defendant)  settled  the  PSYFT3. Mr Finnigan and Mr Yarrow were appointed its trustees. The same day Mr Finnigan and Mr Yarrow, as trustees of the PSYFT3:

(a)Entered into an agreement to purchase a property in Northcote Point, Auckland (the Property) for $1,300,000.

(b)Entered into a term loan agreement with the vendors for $700,000 (the Vendor Finance), which was payable on 30 March 2007 and was secured by a mortgage over the Property.

(c)Entered into a deed acknowledging indebtedness to Mr Yarrow for contributions he made towards the purchase of the Property in the sum of $464,695.45. The deed provided that the debt was payable on demand, but that the creditors could not make demand within a period prescribed by the then tax legislation (a period that appeared to be not less than seven years).

[6]    On 7 August 2006 the Property was transferred to Mr Finnigan and Mr Yarrow (as trustees of the PSYFT3), and a mortgage was registered over the Property in favour of the vendors. In April 2007 the principal sum of $700,000 owing under the mortgage was paid to the vendors, and the mortgage was discharged.

[7]    In 2008 Yarrows was facing increasing financial stress. On 31 December 2008 it was moved within Westpac to be managed by its Credit Restructuring Group. On 28 January 2009 Mr Yarrow executed a guarantee in favour of Westpac of the indebtedness of Yarrows to a limit of $5,000,000 plus some interest and costs.

[8]    Two days later, on 30 January 2009, Mr Yarrow settled the PSYT4. Mr Yarrow, Mr Finnigan and the third defendant (DDTL) were appointed its trustees.

[9]On 3 July 2009:

(a)DDTL was appointed an additional trustee of the PSYFT3.

(b)Mr Yarrow, Mr Finnigan and DDTL as trustees of the PSYFT3 entered into an agreement to sell the Property to themselves as trustees of the PSYT4 for $1,300,000.

(c)Mr Yarrow, Mr Finnigan and DDTL as trustees of the PSYT4 entered into a deed acknowledging indebtedness to themselves as trustees of the PSYFT3 for $1,300,000. The deed recorded that the debt was repayable on demand, but that PSYFT3 could not make demand before 30 June 2029.

[10]   The Property was then transferred to Mr Yarrow, Mr Finnigan and DDTL as trustees of the PSYT4 on 6 July 2009.

[11]On 18 May 2011 Westpac made demand on Mr Yarrow for payment of

$5,000,000 under his guarantee, requiring Mr  Yarrow  to  pay  by  24  May  2011. Mr Yarrow failed to make that payment. The demand recorded that the amount owing by Yarrows to Westpac at that date was NZD29,000,000 and AUD8,000,000.

[12]   On 30 May 2011 Yarrows was placed into receivership. It was subsequently placed into liquidation on 19 December 2011.

[13]   On 30 June 2011 Mr Finnigan and DDTL were removed as trustees of the PSYT4, and Mr Yarrow appointed Mr Russo as a replacement trustee. From that time the trustees of the PSYT4 were Mr Yarrow and Mr Russo.

[14]   On 31 March 2012 Mr Yarrow, purporting to be the sole trustee of the PSYFT3, purported to enter into a deed acknowledging debt to himself of $1,130,652. The deed recorded that “the Creditor may not make demand before 30 June 2026”. The Official Assignee regards this deed as invalid and ineffective, because it was not entered into by the other two trustees of the PSYFT3.

[15]   On 12 December 2012 Mr Yarrow removed Mr Finnigan and DDTL as trustees of the PSYFT3. From that time Mr Yarrow was the sole trustee of the PSYFT3.

[16]   On 14 October 2013 Mr Yarrow forgave and released the PSYFT3 from payment of the debt it owed him of $1,130,652 (Yarrow Gift). On 22 October 2013 Mr Yarrow as sole trustee of the PSYFT3 forgave and released the PSYT4 from payment of the debt it owed to the PSYFT3 of $1,300,000 (PSYFT3 Gift).

[17]   In April 2015 the Bank of New Zealand obtained judgment against Mr Yarrow in the sum of $26,701.74. The Bank then had issued a bankruptcy notice in respect of Mr Yarrow. Mr Yarrow failed to comply with the notice. In May 2016 the Bank filed a creditor’s application seeking Mr Yarrow’s bankruptcy.

[18]   In August 2016 Westpac made a further demand on Mr Yarrow under the guarantee. The demand was in the sum of $14,850,285.71 (including interest). On  25 August 2016 this Court ordered that Westpac be substituted as the creditor in the bankruptcy proceeding. On 19 September 2016 Westpac served a substituted creditor’s application on Mr Yarrow.

[19]   On 10 August 2017 Mr Yarrow appointed Mr Sanderson and Mr Russo as additional trustees of both the PSYFT3 and the PSYT4. From that date the trustees of each trust were Mr Yarrow, Mr Sanderson and Mr Russo (though Mr Russo had already been appointed a trustee of the PSYT4 on 30 June 2011).

[20]   On 18 August 2017 Mr Yarrow retired as a trustee of the PSYT4. The trustees of the PSYT4 since then were Mr Sanderson and Mr Russo. That remains so.

[21]On 19 September 2017 Mr Yarrow was adjudicated bankrupt.

The Official Assignee’s substantive claims

[22]   The Official Assignee makes several claims in the proceeding. The claims have the aim of attaining one of two objectives:

(a)The retransfer of the Property from the PSYT4 to the PSYFT3, and the reactivation of the $1,130,652 debt released by Mr Yarrow from PSYFT3 under the Yarrow Gift. The debt would then be enforceable by the Official Assignee against the PSYFT3 and against the Property. The Official Assignee describes this objective as Option 1.

(b)Alternatively, the reactivation of the debt released by Mr Yarrow under the Yarrow Gift (so that the $1,130,652 debt is immediately enforceable by the Official Assignee against the PSYFT3), and the reactivation of the debt released by the PSYFT3 under the PSYFT3 Gift (so that the Official Assignee can as creditor of the PSYFT3 enforce and assert a charge or lien against the debt that is owed to the PSYFT3 by the PSYT4). The Official Assignee describes this objective as Option 2.

[23]The Official Assignee seeks to do so by making several claims under:

(a)Subpart 6 of Part 6 of the Property Law Act 2007 (the PLA). Subpart 6 empowers the Court to set aside dispositions that prejudice creditors.

(b)Sections 205, 206 and 207 of the Insolvency Act 2006.

Option 1

[24]   Each option involves the Official Assignee seeking to undo various dispositions. Under Option 1 the Official Assignee seeks to set aside:

(a)The sale and purchase agreement dated 3 July 2009 under which the PSYFT3 agreed to sell the Property to the PSYT4.

(b)The transfer of the Property to the PSYT4 under that agreement.

(c)Further transfers of the Property to successive trustees of the PSYT4.

(d)To the extent that the deed dated 31 March 2012 between Mr Yarrow personally and Mr Yarrow claiming to be the sole trustee of the PSYFT3 is effective (which the Official Assignee denies), the deferred payment term in the deed preventing Mr Yarrow from demanding payment of the debt until 30 June 2026.

(e)The Yarrow Gift.

(f)To the extent that the debt forgiven by Mr Yarrow under the Yarrow Gift has become time-barred, the (deemed)1 release or surrender of that debt by Mr Yarrow to the PSYFT3.

[25]   The Official Assignee issued, on 27 August 2020, a notice of cancellation under s 206 of the Insolvency Act seeking to set aside each of those transactions. The notice

1      PLA, definition (d) of “disposition”.

was issued on the basis that the transactions are dispositions of property to which subpart 6 of Part 6 of the PLA applies, or that they are insolvent gifts in terms of s 205 of the Insolvency Act.

Option 2

[26]   Option 2 is pursued in case the Court does not cancel the agreement for the sale and purchase under which the PSYFT3 agreed to sell the Property to the PSYT4, or the transfer of the Property to the PSYT4 under that agreement. In that case the Official Assignee seeks to set aside:

(a)The deferred payment term in the deed of acknowledgement of debt dated 3 July 2009 between the PSYFT3 and the PSYT4 in respect of the purchase price of the Property. That term prevented the PSYFT3 from demanding payment until 30 June 2029.

(b)To the extent that the deed dated 31 March 2012 between Mr Yarrow personally and Mr Yarrow claiming to be the sole trustee of the PSYFT3 is effective (which the Official Assignee denies), the deferred payment term in the deed preventing Mr Yarrow from demanding payment of the debt until 30 June 2026.

(c)The Yarrow Gift.

(d)The PSYFT3 Gift.

(e)To the extent that the debt forgiven by Mr Yarrow under the Yarrow Gift has become time-barred, the (deemed) release or surrender of that debt by Mr Yarrow to the PSYFT3.

[27]   These transactions were all the subject of the Official Assignee’s notice of cancellation under s 206 of the Insolvency Act.

Requirements for a freezing order

[28]In order to obtain the freezing order the Official Assignee must satisfy me that:2

(a)It has a good arguable case on its claims.

(b)Mr Sanderson and Mr Russo have assets to which the order can apply.

(c)There is a danger that the Official Assignee’s prospective judgment will be wholly or partly unsatisfied because the assets of the prospective judgment debtor might be:

(i)Removed from New Zealand; or

(ii)Disposed of, dealt with, or diminished in value.

[29]   If those matters are satisfied, I will have to consider where the interests of justice (or, as the Court of Appeal has put it, the balance of convenience) lies.3

Good arguable case?

Option 1

[30]   The Official Assignee says that each of the dispositions set out at [24] are prejudicial dispositions of property in terms of subpart 6 of Part 6 of the PLA, because they satisfy the following elements under that subpart:

(a)They were dispositions of Mr Yarrow’s property;

(b)Mr Yarrow was insolvent at the time, or became insolvent as a result, of making the dispositions; alternatively, Mr Yarrow believed, or reasonably should have believed, that he would incur debts beyond his ability to pay; and

2      High Court Rules 2016, rr 32.2 and 32.5.

3      Murren v Schaeffer [2018] NZCA 318, (2018) 24 PRNZ 285, at [17].

(c)They were made with intent to prejudice a creditor, or by way of gift.

[31]   As to the first element, several of the dispositions were self-evidently dispositions of Mr Yarrow’s property. The only ones that require comment are the dispositions entered into by the PSYFT3. The Official Assignee submits that these were dispositions of property over which Mr Yarrow had a lien or charge, and therefore that they were dispositions of Mr Yarrow’s property. The lien or charge is said to arise from Mr Yarrow having incurred liability as a trustee of the PSYFT3, with the lien or charge forming part of their estate in bankruptcy. I accept that this submission provides (at the very least) a good arguable case on this first element.4

[32]   As to the second element, based on other guarantees that Mr Yarrow had already given before the first of the dispositions (which occurred on 3 July 2009), there is a good arguable case that Mr Yarrow was insolvent at the time of the transactions (or became insolvent as a result of making them).5

[33]   As to the last element, I agree with the Official Assignee’s submission that the facts rather speak for themselves. Some of the dispositions were plain gifts. The only disposition that requires discussion is the sale of the Property from the PSYFT3 to the PSYT4. This might be said to be for full value, in the form of the debt back. However, leaving aside the point that the debt could not be called up until 30 June 2029, payment of full value does not necessarily prevent a finding of intent to prejudice a creditor.6   I therefore find a good arguable case for showing this element.

[34]   The Official Assignee also says that the Yarrow Gift was an insolvent gift under s 205 of the Insolvency Act. I find that the Official Assignee also has (at least) a good arguable case on this point. Clearly it was a gift. Because it was made within five years of Mr Yarrow being adjudicated bankrupt, there is a presumption that Mr Yarrow was unable to pay his debts at the time he made the gift: s 205(2) of the Insolvency

4      The Official Assignee relied  on, among other authorities,  Official Assignee v Menzies (2011)    3 NZTR 21-001 and Octavo Investments Ltd v Knight [1979] HCA 61, 144 CLR 360.

5      For this purpose, there is authority that a guarantor must be treated as if the guaranteed debt was due and owing: Re Ridler (1882) 22 Ch D 74 (CA); Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433 at [114] to [119] per Tipping J.

6      Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433.

Act. The fourth and fifth defendants will have to rebut this presumption. For now the Official Assignee has a good arguable case.

Option 2

[35] Under this option the Official Assignee seeks to set aside a similar set of dispositions, set out at [26]. For much the same reasons as I have just set out, I find there is a good arguable case that those dispositions:

(a)Were dispositions of Mr Yarrow’s property;

(b)Were made at a time when Mr Yarrow was insolvent (or that he became insolvent as a result of making them); and

(c)Were made with intent to prejudice a creditor, and in the case of the Yarrow Gift and the PSYFT3 Gift, were gifts.

Possible defences

[36]   An applicant for a freezing order without notice must disclose to the Court all material facts, including possible defences known to the applicant. Counsel’s memorandum has addressed some possible defences in the course of its submissions on why it has a good arguable case (for instance, the possible defence that because full value was paid for the Property by the PSYT4, the sale to the PSYT4 could not prejudice creditors).

[37]   Counsel also notes that Mr Yarrow, Mr Sanderson and Mr Russo served a notice of objection in response to the Official Assignee’s notice of cancellation under s 206 of the Insolvency Act. Those objections raise two points of substance.

[38]   The first is that the objectors say that as from 31 July 2006 Mr Yarrow did not incur any personal liability for indebtedness in respect of his trusteeship of the PSYFT3. This objection seems to rely on clauses in various deeds of acknowledgement of debt. The clauses provide that the trustee’s liability is limited to

the assets of the trust. I agree with the Official Assignee’s submission that these clauses appear merely to limit liability, rather than exclude personal liability.

[39]   The second is that the objectors say that Mr Yarrow as trustee of the PSYFT3 was not entitled to be indemnified out of the assets of that trust, and therefore had no lien or charge over that trust’s assets. The objectors do not explain this objection. The deed of trust for the PSYFT3 contains an express indemnity in favour of the trustees. The express indemnity appears to be limited to liabilities incurred by a trustee in any business in which the trust has been employed, and so may not apply in the present circumstances. But I agree with the Official Assignee’s submission that a trustee’s right of indemnity arises under the general law, and is not excluded by the express indemnity clause (or otherwise by the trust deed).

[40]   Accordingly, I find that neither objection affects my view that the Official Assignee has a good arguable case.

Do Mr Sanderson and Mr Russo have assets to which the order can apply?

[41]   It is clear that Mr Sanderson and Mr Russo have assets to which the order can apply. In addition to the Property (which remains registered in their names) it appears they own shares in a New Zealand company.

Is there a risk of dissipation?

[42]   I am satisfied, based on the material in Mr Naicker’s affidavit, that there is a danger that the Official Assignee’s judgment will be wholly or partly unsatisfied because the assets of Mr Sanderson and Mr Russo might be removed from New Zealand or dissipated (disposed of, dealt with, or diminished in value). This is for the following reasons:

(a)The events upon which the Official Assignee’s claims are based indicate that Mr Yarrow has embarked upon a course of conduct designed to put a substantial asset out of the reach of his creditors.

(b)Mr Yarrow concealed from the Official Assignee, in his statement of affairs, both his involvement in the PSYFT3 and his release of the PSYFT3 of the $1,130,652 debt. Mr Yarrow then failed to provide records (that were requested by the Official Assignee) that would have enabled the Official Assignee to identify his release of the debt.

(c)The evidence indicates that Mr Sanderson is Mr Yarrow’s friend, and Mr Russo is his relative. Mr Yarrow resides in the Property.

(d)Mr Russo has been a trustee of the PSYT4 since 30 June 2011. He was a trustee at the time that many of the challenged transactions took place. He appears to have acted with Mr Yarrow in receiving the forgiveness of debt that the PSYT4 owed the PSYFT3.

(e)Mr Sanderson failed to respond to a statutory information request made by the Official Assignee.

(f)Mr Sanderson and Mr Russo have recently attempted to sell the Property. Although public advertisement of the Property has since ceased, Mr Sanderson and Mr Russo have failed to respond to the Official Assignee’s request for information as to whether the Property had been withdrawn from market or sold.

(g)The response of Mr Sanderson and Mr Russo to the Official Assignee’s request to provide an undertaking to preserve the Property, and their response to the Official Assignee’s notice under the Insolvency Act, is not the response that one would expect from trustees who were independent of Mr Yarrow.

Balance of convenience

[43]   I am well satisfied that the balance of convenience favours making the orders. The evidence shows that there is a good foundation to the claims, and a concerning course of conduct by Mr Yarrow. At this stage there is nothing to suggest any

particular prejudice that will be suffered by Mr Sanderson or Mr Russo (or the beneficiaries of the PSYT4) if a freezing order is made.

Undertaking as to damages

[44]   An applicant usually has to provide an undertaking as to damages, unless there are special circumstances: rr 32.2(5) and 32.6(4). The Official Assignee submits that there are special circumstances, in that the application is brought by the Crown.

[45]   I accept that there is a default presumption that both (i) there should be a dispensation for the Official Assignee to provide an undertaking and (ii) the Crown will meet any order as to damages that may be made by the Court.7 On that basis, I do not require the Official Assignee to provide an undertaking as to damages.

Other terms and form of the freezing order

[46]   The Official Assignee proposes that the duration of the freezing order (in terms of r 32.7) be 30 working days, and that the notice period under r 32.8 (for the defendants to apply for discharge or variation) be three working days. I am satisfied that both are appropriate.

[47]   A draft freezing order is attached to the Official Assignee’s application. I approve its terms.

Application for order that Part 18 is to apply

[48]   The Official Assignee also applies for an order that Part 18 of the High Court Rules is to apply to this proceeding.

[49]   The Official Assignee’s claims under ss 206 and 207 of the Insolvency Act would ordinarily be commenced as an originating application under Part 19: r 24.35. The other claims would be commenced by ordinary proceeding.

7      Official Assignee v Sharma & Family Trustee Ltd [2016] NZHC 1843 at [12].

[50]   Part 18 requires properly particularised statements of claim and defence, whereas Part 19 requires only notices of application and opposition. The Official Assignee submits that the originating application procedure under Part 19 is inappropriate for this proceeding, because the parties will benefit from the more particularised pleadings and the interlocutory processes available under Part 18. I agree. The Part 19 procedure would be inappropriate for a proceeding of this likely complexity.

[51]   As to the choice between an ordinary proceeding and a proceeding under Part 18, the difference largely is one as to the mode of evidence at trial. The starting point under Part 18 is evidence by affidavit. I do not see that causing any prejudice to the defendants in this case, given that affidavit evidence would have been the default position for the key claims if the proceeding had been under Part 19, that a party can in any case require a deponent to be cross-examined, and that a Judge could at a later stage direct under r 18.15 that evidence be given other than by affidavit.

Result

[52]   I make the orders set put in paragraphs 1(a)–(d) of the Official Assignee’s application dated 25 September 2020. I approve the form of the freezing order attached to that application.

Campbell J

Solicitors/Counsel:

Meredith Connell, Auckland