Primary Services New Zealand Ltd v Colombo Projects Ltd
[2020] NZHC 101
•7 February 2020
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2019-409-000404
[2020] NZHC 101
BETWEEN PRIMARY SERVICES NEW ZEALAND LIMITED
Plaintiff
AND
COLOMBO PROJECTS LIMITED
First Defendant
AND
ANDREW MICHAEL FONAGY
Second Defendant
AND
JOHN RICHMOND PAYNTER
Third Defendant
AND
ORA TRUSTEES LIMITED
Non-party
Hearing: 30 January 2020 Appearances:
J L Bates for Plaintiff (applicant for freezing orders)
No appearance for Defendants or Non-party on this application
Judgment:
7 February 2020
JUDGMENT OF OSBORNE J
[freezing order]
Introduction
[1] The plaintiff, Primary Services New Zealand Ltd (Primary Services), seeks a freezing order under Pt 32 High Court Rules 2016 restraining Ora Trustees Ltd (Ora) Ltd from dealing with certain assets. Ora is the trustee of the Wharerimu Trust which was settled in 2014 by the second defendant, Andrew Fonagy, for the benefit of himself and his family members.
PRIMARY SERVICES NEW ZEALAND LIMITED v COLOMBO PROJECTS LIMITED [2020] NZHC 101 [7
February 2020]
[2] In the substantive proceeding Primary Services is suing Colombo Projects Ltd (Colombo) for $850,000 and other sums claimed pursuant to a loan contract. It sues Mr Fonagy and John Paynter pursuant to their guarantees of the indebtedness of Colombo. Primary Services has obtained judgment in the proceeding against Colombo. The judgment has not been met.
[3] Primary Services says beginning in December 2016 Mr Fonagy, at a time he was indebted to Primary Services and had defaulted on his payment obligations, began making dispositions of property now in the legal ownership of Ora. In this interlocutory application, Primary Services seeks freezing orders against Ora on all three grounds set out in r 32.5(5) High Court Rules.
[4] For this hearing, Mr Bates for Primary Services placed greatest emphasis on the third ground set out in r 32.5(5), namely that the Court may be satisfied, having regard to all the circumstances, that:1
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.
[5] Primary Services asserts that the two grounds set out in r 32.5(5)(a) are also established.
Procedural background
[6] Ora, through its solicitor, filed a notice of opposition and evidence in opposition beginning on 2 December 2019. This hearing was then scheduled, with written submissions timetabled. Counsel duly filed their submissions.
[7] On 28 January 2020 Ora sent two memoranda to the Court. Ora’s solicitor had ceased to act for Ora. Ora wished to act in person, did not intend to be represented at this hearing and asked the Court to take into account the written submissions filed before determining this interlocutory application.
1 High Court Rules 2016, r 32.5(5)(b).
[8] Matters have proceeded on that basis at the hearing, the only party represented at the hearing being Primary Services. I have nevertheless fully considered the written submissions previously filed by Ora’s solicitor.
Other interlocutory orders
[9] Primary Services’ application for a freezing order against Mr Fonagy was heard and determined in August 2019.2 The Court found that Primary Services had a good arguable case against Mr Fonagy in relation to the substantive claim and on the evidence, it was seriously arguable that Mr Fonagy was engaged in the process of attempting to dispose of assets and/or put them beyond the reach of the New Zealand courts in an attempt to avoid liability under his guarantee.3 An interim freezing order was made against Mr Fonagy, which remains in place.
[10] In Ora’s written submissions for this hearing, it has expressly accepted that there may be an arguable case (on the substantive claim) against Mr Fonagy.
Freezing orders under Part 32 High Court Rules
[11] Rule 32.5 provides, where a debt is being pursued, for the making of freezing orders, where a debt is being pursued, against persons other than the prospective judgment debtor.
[12] Jurisdiction to make a freezing order under r 32.5 arises (amongst other situations) where the applicant has a good arguable case on a prospective cause of action that is justiciable in the Court.4
[13] Ora has conceded, consistently with this Court’s previous judgment in relation to Mr Fonagy that the “good arguable case” test is satisfied here.
[14] One of the three circumstances in which the Court may make an order against a third party is that identified in r 32.5(5)(b), which provides:
2 Primary Services New Zealand Ltd v Fonagy [2019] NZHC 1869.
3 At [12] – [13].
4 High Court Rules 2016, r 32.5(1)(b)(i).
(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—
…
(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.…
[15] Mr Bates made helpful submissions in relation to the threshold requirement under r 32(5).
[16] This Court has previously recognised that in substance r 32.5(5) is derived from the decision of the High Court of Australia in Cardile v LED Builders Pty Ltd.5 The Court recognised the standard of proof in relation to such an application is a “reasonably arguable case on legal as well as factual matters”.6 Accordingly, there is a consistency of approach in relation to the applicant’s prospects of obtaining a judgment against the defendant on the one hand and the prospects of thereafter being able to obtain a disgorging of assets or compensation on the part of the third party through a court process.
[17] I respectfully adopt, as helpfully informing the Court’s approach, the observation of Hargrave J in Robmatjus Pty Ltd v Violet Home Loans Australia Pty Ltd.7 His Honour recorded a submission on behalf of the defendant and the non-parties that, in order to establish that a relevant process “may” ultimately be available, the plaintiffs must establish “a compelling cause of action” for relief as a result of a court process being instigated.8 The submission was that a mere possibility that some process may ultimately lead to relief of the relevant kind is not sufficient for the purposes of the rule. His Honour held:9
5 Cardile v LED Builders Pty Ltd [1999] HCA 18, (1999) 198 CLR 380 at [57]. See Yos v Heng HC Wellington CIV-2009-485-2346, 1 December 2009 at [13].
6 Cardile v LED Builders Pty Ltd, above n 5, at [68].
7 Robmatjus Pty Ltd v Violet Home Loans Australia Pty Ltd [2007] VSC 165. That case related to the Supreme Court (General Procedure) Rules 2005, with r 37A.05 being in materially identical terms to (New Zealand) r 32.5 – see Robmatjus at [47] – [51].
8 At [59].
9 At [59].
I do not accept this submission. Although I accept that a merely theoretical possibility will not fall within the rule, I do not think that a plaintiff need establish a “compelling cause of action”. It will be enough if a plaintiff can satisfy the Court that, in all the circumstances of the case, there is a real case to be investigated under the process or processes relied upon as potentially yielding a means of satisfaction of the judgment from the assets of the non- parties.
[18] In Robmatjus, the plaintiff as its intended recovery process was invoking a provision under the Property Law Act 1958 (Vic) in relation to voluntary conveyances to defraud creditors. Hargrave J found that there was a real case to be investigated under the relevant provision and that the process involved was one which was or might ultimately be available to the plaintiff in order to set aside the relevant transaction.10 Having made that finding, Hargrave J observed that it was unnecessary to reach a firm conclusion into other processes relied upon by the plaintiffs in argument, including recovery by a liquidator of the defendant company under the Corporations Act 2001 (Cth). His Honour nevertheless observed that it seemed to him that the possibility of such claims being pursued by a liquidator of the defendant was a real one and that one or more of those processes may well be available to a liquidator of the defendant (assuming that the plaintiff succeeded in obtaining judgment in the proceeding).11
[19] Once the Court is satisfied that the threshold tests have been satisfied, the Court considers the balance of convenience. In Murren v Schaeffer, the Court of Appeal recognised the requirement to consider where the balance of convenience lies when the threshold test under r 32.5(5)(a) has been established.12 The same requirement must apply when the threshold test under r 32.5(5)(b) is relied on.
[20] In so formulating the correct legal approach to the application of r 32.5(5), I have not overlooked a written submission for Ora whereby it was asserted that the key cases on freezing orders demonstrate that the Court will be reluctant to grant such orders against a validly established trust structures in the absence of fraud. Reference was made to three decisions in particular.13 The cases referred to for Ora do not call for an approach other than I have identified above. Observations in those cases were
10 At [60] – [65].
11 At [66].
12 Murren v Schaeffer [2018] NZCA 318, (2018) 24 PRNZ 285 at [17].
13 Westpac Banking Corporation v Gill (1987) 2 PRNZ 52 (HC); Allen v Commissioner of Inland Revenue (2004) 21 NZTC 18,718 (CA); Medtronic New Zealand Ltd v Finch [2013] NZHC 1253.
made in the context of trusts which appeared to have been validly established and the trustee had owned assets all along. In Medtronic New Zealand Ltd v Finch, the defendants do not appear to have had any identifiable interest in the trust assets.14 In each of the cases relied upon for Ora, the Court was not satisfied that there was any proper basis on which a judgment could be enforced against the assets of the trust.15
Primary Services’ Property Law Act Claim – 22 O’Shannessey debt
The evidence
[21] Primary Services has presented a considerable volume of evidence, in order to deal with the different transactions which it asserts entitle it to relief under r 32.
[22] Given Mr Bates’ primary focus on Primary Services’ Property Law Act claims I too will first focus on the evidence in relation to those.
[23] Since Primary Services commenced this proceeding, it has issued a separate proceeding against Ora and others in which it makes applications for relief pursuant to ss 347 – 348 Property Law Act 2007 (the Property Law Act proceeding).
[24] In the Property Law Act proceeding, Primary Services makes the following allegations, each of which is supported by affidavit evidence filed in this proceeding:
(a)On or about 23 December 2014, Mr Fonagy arranged to establish the Wharerimu Trust by Deed of Trust.
(b)Mr Fonagy was designated a discretionary beneficiary, eligible beneficiary, and the primary beneficiary (until his death).
(c)Through the debtor’s powers of appointment, he was able to and did appoint Fontur Ltd (Fontur), which he directed and owned as the sole trustee of the Wharerimu Trust.
14 Medtronic New Zealand Ltd v Finch, above n 13, at [24].
15 See, for instance, Medtronic New Zealand Ltd v Finch, above n 13, at [24].
(d)On or about 21 December 2015 Primary Services entered into a Loan Facility Agreement with Colombo as borrower. Colombo, along with Mr Fonagy and Mr Paynter as guarantors, requested Primary Services as lender to provide a loan facility of $850,000 to Colombo together with interest, with the payment obligations being guaranteed by Mr Fonagy and Mr Paynter as guarantors and principal debtors.
(e)On or about 26 May 2016, Colombo, Mr Fonagy and Mr Paynter defaulted on their payment obligations and the Colombo loan.
(f)On or about 11 August 2016, 22 O’Shannessey Ltd (22 O’Shannessey) was duly incorporated under the Companies Act 1993.
(g)On or about 17 August 2016, 22 O’Shannessey purchased the property at 22 O’Shannessey Street, Auckland, the purchase being partly funded by a loan of $350,876.05 by Mr Fonagy to 22 O’Shannessey.
(h)On or about 21 December 2016, Mr Fonagy assigned his rights under his 22 O’Shannessey loan to the Wharerimu Trust by way of an express gift as recorded in writing in a resolution of the Wharerimu Trust executed by Mr Fonagy on the same date.
(i)On or about 22 June 2018, the Wharerimu Trust was registered as a Cook Islands international trust.
(j)On or about 22 June 2018, Ora replaced Fontur as sole trustee of the Wharerimu Trust.
[25] Mr Fonagy in his affidavit in opposition confirms that (after his default on payments under covenants to Primary Services – occurring from 26 May 2016) he had lent $350,876.05 to 22 O’Shannessey (as since pleaded in Primary Services’ Property Law Act proceeding). Mr Fonagy deposes that 22 O’Shannessey executed a Deed of Acknowledgment of Debt, acknowledging that the debt was repayable upon demand.
[26] In July 2019, Primary Services learned that the O’Shannessey Street property had been listed for sale.
Primary Services’ Property Law Act claim
[27] Primary Services asserts that Mr Fonagy’s gift to 22 O’Shannessey was a disposition to which s 346 Property Law Act applies. That provision states:
346 Dispositions to which this subpart applies
(1)This subpart applies only to dispositions of property made after 31 December 2007—
(a)by a debtor to whom subsection (2) applies; and
(b)with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.
(2)This subsection applies only to a debtor who—
(a)was insolvent at the time, or became insolvent as a result, of making the disposition; or
(b)was engaged, or was about to engage, in a business or transaction for which the remaining assets of the debtor were, given the nature of the business or transaction, unreasonably small; or
(c)intended to incur, or believed, or reasonably should have believed, that the debtor would incur, debts beyond the debtor’s ability to pay.
[28] As Mr Bates submits, by reason of the second limb of s 346(1)(b), that subpart of the Act applies to Mr Fonagy’s gift to 22 O’Shannessey.
[29] Mr Bates submits that Mr Fonagy is debtor to whom s 346(2) applies because he was either insolvent at the time or became insolvent as a result of making the gift. In the absence of any detailed evidence from Mr Fonagy as to personal assets from which he might have met his then-current debts (notwithstanding having failed to pay them for some time), Mr Bates invites the Court to draw the inference that Mr Fonagy could not make payment to Primary Services because he was insolvent. Significantly, in Mr Fonagy’s limited evidence relating to solvency, Mr Fonagy identified not assets which he personally owned directly but rather the alleged value of property (not evidenced by a formal valuation report) which is owned by Colombo.
Application of the test
[30] I apply the approach to what Primary Services must show which was set out by Hargrave J in Robmatjus.16 I therefore ask myself – is there a real case to be investigated under a process relied upon by Primary Services as yielding from the assets of the non-party a means of satisfaction of the judgment?
[31] I am satisfied that there is a real case to be investigated in relation to Mr Fonagy’s gift being a disposition to which the subpart of the Act applies.
[32] The process Primary Services pursues in the Property Law Act proceeding is by way of application under s 348 of the Act. Under s 348(1) the Court may make an order setting aside the gift on an application made for that purpose if satisfied that Primary Services has been prejudiced by a disposition of property to which the subpart applies.
[33]As I have said, there is a real case to be investigated in that regard.
[34] Accordingly, pursuant to s 348(2) of the Act, the Court may order either that the $350,876.05 debt vest in Mr Fonagy or that Ora pay compensation in that sum to Mr Fonagy (to be held by him or a trustee for the purposes of execution or similar process on the part of Primary Services).
Balance of convenience
[35] In making this application, Primary Services submitted a draft freezing order in the terms required.17
[36] As such the requested order, while restraining the removal of any listed assets from New Zealand, would permit Ora the use of identified assets for the purposes provided by the High Court Rules, including the making of payments in the ordinary course of business.
16 Robmatjus Pty Ltd v Violet Home Loans Australia Pty Ltd, above n 7.
17 High Court Rules 2016, r 32.6(1); form G 38.
[37] In the written submissions provided for Ora, it was not suggested that (in the event the Court found the threshold tests for a freezing order established) the balance of convenience would favour Ora.
[38]I am satisfied that it does not.
[39] In the circumstances of the evidence provided, particularly in relation to Mr Fonagy’s conduct, the balance distinctly favours Primary Services.
Primary Services’ other claims – shares in BVM Ltd and Ponsonby 235 Ltd
[40] In the Property Law Act proceeding, Primary Services seeks parallel orders under s 348 Property Law Act in relation to shares now owned by Ora in two additional companies, BVM Ltd (BVM) and Ponsonby 235 Ltd.
[41] There is a parallel to be drawn between the 22 O’Shannessey gift and Mr Fonagy’s disposition of his BVM shares. Until 21 December 2017, Mr Fonagy had owned all the shares in BVM, gifting them to the Wharerimu Trust on that date (appreciably after Mr Fonagy had defaulted in his obligations to Primary Services).
[42] In relation to BVM shares, as in relation to the 22 O’Shannessey gift, there is a real case to be investigated under the process relied upon by Primary Services as potentially yielding a means of satisfaction of the judgment.
[43] There is again some parallel in the position of Ponsonby 235 Ltd. In relation to that company, however, it was the previous trustee of the Wharerimu Trust (Fontur) which held a 50 per cent shareholding. Fontur transferred that shareholding to Ora on 14 December 2018 (again significantly after Mr Fonagy had first failed to meet his debt to Primary Services).
[44] In the terms the Wharerimu Trust was settled, Mr Fonagy was a discretionary beneficiary and held significant powers as appointor and protector. Mr Fonagy, in his evidence, has identified the significant alteration of Mr Fonagy’s powers by way of “restatement”.
[45] Primary Services invokes the decision of the Supreme Court in Clayton v Clayton as establishing that powers of the nature held by Mr Fonagy up until they were “restated” in mid-2018 may be regarded as interests tantamount to ownership.18
[46] I find, in parallel with Mr Fonagy’s other dispositions, that there is a real case to be investigated under the Property Law Act, which potentially may yield a means of satisfaction of any judgment, in relation to Mr Fonagy’s surrender of its powers over the Wharerimu Trust in mid-2018. The decision in Clayton may potentially yield a means of satisfying any judgment Primary Services obtains including by reference to any value in Ora’s 50 per cent shareholding in Ponsonby 235 Ltd.
[47] The balance of convenience considerations in relation to these claims are the same as for the 22 O’Shannessey debt.
Outcome
[48] There will accordingly be a freezing order. As there is uncertainty as to when the substantive proceedings will be completed, the order will not state that it is limited to a particular date but, in terms of r 32.8 High Court Rules, leave will be reserved to Ora on notice to apply for discharge or variation.
Costs
[49] Primary Services seeks costs on a 2B basis together with disbursements. Mr Bates has provided a schedule of those which I find, with one exception, to be correctly calculated.19
Orders
[50] Primary Services has a good arguable case on an accrued or prospective cause of action that is justiciable by the Court.
18 Clayton v Clayton [2016] NZSC 29, [2016] 1 NZLR 551.
19 The exception related to a disbursement for accommodation which has been allowed on a reduced basis to take account of a second guest.
[51] The Court has considered Primary Services’ application for a freezing order, and has heard Mr Bates in support. The Court is satisfied, having regard to all the circumstances disclosed by affidavit evidence filed in support of the application, that a process in the Court is or may ultimately be available to the Primary Services, as a result of a judgment or prospective judgment, under which Ora may be obliged to disgorge assets or contribute toward satisfying the judgment or prospective judgment.
[52]A freezing order is made in respect of the following assets:
(a)The shareholding of Ora in:
(i)BVM Ltd;
(ii)22 O’Shannessey Ltd;
(iii)Ponsonby 235 Ltd;
(b)The proceeds of sale to which Ora may become entitled following the sale (if any) of any property owned by the above-named companies.
[53] Subject to paragraph [54], this order restrains Ora from removing any of the assets listed in paragraph [52] from New Zealand, or from disposing of, dealing with, or diminishing the value of, those assets, whether they are in or outside New Zealand.
[54] This freezing order does not prohibit Ora from dealing with the assets covered by the order for the purpose of:
(a)paying ordinary living expenses;
(b)paying legal expenses related to the freezing order; or
(c)disposing of assets, or making payments, in the ordinary course of business, including business expenses incurred in good faith.
[55] Ora may apply to the Court by interlocutory application to discharge or vary the order. If Ora applies, it must give Primary Services notice of not less than five working days.
[56] Primary Services’ undertaking as to changes is to be attached to the sealed form of this order.
[57]As special terms:
(a)This order does not affect anyone outside New Zealand until it is declared enforceable by a court in the relevant country (in which case it affects a person only to the extent that it has been declared enforceable), unless the person is:
(i)a person to whom this order is addressed, or an officer of that person, or an agent appointed by power of attorney of that person; or
(ii)a person who:
(A)has been given written notice of this order at that person’s residence or place of business within New Zealand; and
(B)is able to prevent acts or omissions outside the jurisdiction of this Court that constitute, or assist, a breach of this order.
(b)This order does not prevent, in respect of assets located outside New Zealand, any third party from complying with:
(i)what it reasonably believes to be the third party’s obligations, contractual or otherwise, under the laws of the country in which those assets are situated or under the proper law of any contract between the third party and Ora; and
(ii)any orders of the courts of that country, provided that reasonable notice of any application for such an order is given to Primary Services’ solicitors.
[58] Ora shall pay to Primary Services in any event costs in the sum of $6,094.50 together with disbursements in the sum of $869.81.
Osborne J
Solicitors:
Brown & Bates, Napier for Plaintiffs Meredith Connell, Auckland for Non-party
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