Queensland Maintenance Services (NZ) Limited (in liquidation) v Zullo Property Group (NZ) Limited
[2016] NZHC 1755
•29 July 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-003177
CIV-2016-404-000981 [2016] NZHC 1755
BETWEEN QUEENSLAND MAINTENANCE
SERVICES (NZ) LIMITED (IN LIQUIDATION)
First Applicant
GARETH RUSSEL HOOLE AND CLIVE ROBERT BISH
Second Applicants
AND
ZULLO PROPERTY GROUP (NZ) LIMITED
First Respondent
ZULLO HOLDINGS (NZ) LIMITED Second Respondent
BRIGHT HORIZONS NEW ZEALAND CHILDCARE LIMITED
Third Respondent
FRANK ZULLO Fourth Respondent
Hearing: 19 July 2016 Appearances:
A W Johnson and R Akroyd for the Applicants
M Heard and L Clews for the RespondentsJudgment:
29 July 2016
JUDGMENT OF HINTON J
This judgment was delivered by me on 29 July 2016 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules
Solicitors:
……………………………………………………………………
Registrar/Deputy Registrars
Martelli McKegg, Auckland
Lee Salmon Long, Auckland
QUEENSLAND MAINTENANCE SERVICES (NZ) LIMITED (IN LIQUIDATION) v ZULLO PROPERTY GROUP (NZ) LIMITED [2016] NZHC 1755 [29 July 2016]
[1] A company in liquidation and the liquidators, have filed proceedings raising a number of claims under the Companies Act 1993, against the respondents. In the meantime, they seek to preserve assets in the hands of the respondents, so that any judgment has teeth.
[2] The orders sought are:
(a) that caveats already lodged, not lapse; (b) a freezing order; and/or
(c) a pre-judgment charging order. [3] The key issues are:
(a) Whether, for purposes of the caveat application, there is a prima facie case that a transfer of properties by the applicant company prior to liquidation, was fraudulent and whether, as a consequence, an institutional constructive trust arises, which may be protected by caveat.
(b)Whether, for purposes of a freezing order, the applicants have to each provide an undertaking as to damages, or there are “special circumstances” that excuse them, and what should be the extent of any freezing order.
Relevant background
[4] As at 30 June 2013, Queensland Maintenance Services (NZ) Ltd (QMS (NZ)) was the registered owner of properties in Matamata and Wiri (the two QMS (NZ) properties), and also of shares in a subsidiary, Playgrounds 2 (NZ) Ltd (Playgrounds). It also owed $629,341 to Queensland Maintenance Services Pty Ltd (QMS (Australia)) and the balance to Queensland Property Developments Pty Ltd
(QMS Property (Australia)). The applicants’ financial accounts to 30 June 2013
record net assets of $3,291,008.
[5] QMS (Australia) had been placed in administration in January 2012 and in liquidation in August 2012. In April 2012, the administrators had made demand of QMS (NZ) for the sum of AUD$495,640.90, presumably the equivalent of NZD$629,341.
[6] On 19 December 2013, Mr Zullo, as director of QMS (NZ), signed a minute recording a resolution to declare a shareholder dividend of $3.25 million to Zullo Holdings (NZ) Ltd (Zullo Holdings), as owner of QMS (NZ), and that payment be made by way of crediting Zullo Holdings’ current account with QMS (NZ). Mr Zullo also signed a solvency certificate confirming that QMS (NZ) was able to pay its debts as they became due in the ordinary course of business and the value of its assets were greater than the value of its liabilities.
[7] On 21 March 2014:
(a) QMS (NZ) and Zullo Holdings entered into an agreement recording that the debt already created by the declaration of the dividend was subject to interest at commercial lending rates and granting to Zullo Holdings, a general security agreement over the assets of QMS (NZ).
(b)QMS (NZ) and Zullo Holdings entered into sale and purchase agreements whereby the two QMS (NZ) properties were sold to Zullo Holdings for a total of $1.9 million. Those two properties were then on-sold into another Zullo company.
(c) QMS (NZ) transferred its shares in Playgrounds to Zullo Holdings.
The principal assets of Playgrounds were two further properties.
[8] The end result is shown in the financial statements for QMS (NZ) as at
30 June 2014, which show negative net assets of $570,049, primarily resulting from
a debt still owing to QMS (Australia) of $629,341. QMS (NZ), which purportedly had enough equity in December 2013 to declare a dividend of $3.25 million, had apparently paid that dividend in such a way that it was materially negative.
[9] QMS (Australia) then placed QMS (NZ) into liquidation, on the basis of its unpaid debt.
The caveat application
[10] The applicants submit that Mr Zullo, and the various companies he controlled, put in place a deliberate scheme to remove all of the assets of QMS (NZ), leaving the two creditors in a position where they were unable to recover their debts. They say such a scheme amounts to actual fraud and they rely on the Court of Appeal decision in Paugra Holdings Ltd (in liq) v Harvestfield Holdings Ltd to sustain the caveats.1
[11] Paugra was the purchaser of a property under a long-term sale and purchase agreement at a price of $6 million, but had no funds on settlement. By settlement, the value of the property had gone up to $11 million. Paugra borrowed $6 million from a related company, settled the purchase, and then transferred the property to the related company at $6 million, depriving itself of the $5 million profit. Paugra then went into liquidation, owing money to the IRD. The High Court found there was a prima facie case that Paugra had committed a fraud on the IRD, but that the existence of fraud was not sufficient to create a constructive trust in an otherwise consensual transaction. The Court of Appeal (overturning the High Court), held that a transaction that otherwise appears to be consensual, is non-consensual if one of the parties was acting unlawfully. A transaction may be non-consensual, notwithstanding the fact that the same interests control both companies. Further, where there has been a non-consensual transfer of land as a result of a fraud perpetrated on the vendor by the purchaser, the vendor is able to claim an institutional constructive trust in respect of its interest in the property. On that basis,
the Court of Appeal held that it was reasonably arguable that Paugra had a caveatable
1 Paugra Holdings Ltd (in liq) v Harvestfield Holdings Ltd [2014] NZCA 164.
interest in the property it had apparently voluntarily transferred to the related company.
[12] For Paugra to apply here, I would need to be satisfied that there is a prima facie case of fraud. In Paugra, that was clearly so. In this case, it is not so clear. There are certainly suspicious circumstances and apparently strong arguments in favour of the applicants, at least on the non-fraud causes of action. However, in terms of the fraud claim, I have to take into account at this untested stage of the proceeding, as Mr Heard pointed out:
(a) The respondents received professional advice as to appropriateness of the dividend being declared, including as to solvency.
(b)There was professional evidence that restructuring of the Zullo Group, to similar effect to that which occurred, had been intended for some years.
(c) The respondents received professional advice (not so clear in extent or effect) regarding the subsequent loan/security agreement over the dividend, and regarding transfer of properties and other assets to satisfy it.
(d) There was a long delay between QMS (Australia)’s being placed in
liquidation and the declaration of the dividend in December 2013.
(e) The declaration of the dividend itself may not have been unlawful. It is the combined series of events that is alleged to have such a net effect. This is not as clear cut as the facts in Paugra.
(f) Furthermore, in distinction to Paugra, this was not a clear-cut case of transfer of the QMS (NZ) assets at an under-value. There is no good evidence of values of the two QMS (NZ) properties at April 2014. The applicants refer to QVs, which I find unhelpful in this regard, as they seldom reflect market value, but it is not irrelevant that the QVs,
advanced in evidence by the applicants, are very close to the actual on-sale prices.
[13] In all of the circumstances, I would not be prepared to find there was prima facie fraud to justify sustaining the caveats. That is not to rule out the possibility of a finding of fraud at a substantive hearing.
[14] There being no other basis for sustaining the caveats (it is accepted, for example, that the claim for a remedial constructive trust cannot sustain a caveat), I decline to order that the caveats be sustained.
[15] As I set out below, I have reached the view that a (limited) freezing order should be made. As Mr Johnson conceded, that would have impacted in any event on the caveat application, as caveats are only sustained to the extent necessary.
Freezing orders
[16] The requirements for a freezing order are well-established. The applicant must have a good arguable case on its substantive claim; assets to which the order can apply; and must demonstrate a real risk that those assets will be dissipated or disposed of, such as to render a respondent “judgment-proof”.
[17] The respondents deny the applicants’ claims, but agree a freezing order can be made, provided undertakings are given and the order is appropriately limited. In making that very sensible concession, the respondents effectively concede that the key requirements are likely to be established. For the record, I consider they are. The applicants clearly have a good arguable case in respect of more than one of their various causes of action, which include disposition of property that prejudices creditors; directors’ breach of duties and recovery of shareholder distributions.
[18] Also, in light of the various dispositions made by the relevant companies at times when some of them, at least, were in financial difficulty and/or subject to demand, there is sufficient evidence to establish a real risk that assets will be dissipated or disposed of, so as to render a respondent judgment-proof.
[19] I turn to consider the two points remaining in contention: the extent of the freezing order, and whether the applicants can be excused from giving undertakings as to damages.
Extent of freezing order
[20] The applicants seek a freezing order over all of the assets that have been disposed of, which involves in effect four properties having a combined value of something to the order of $3 million.
[21] They point out that the orders sought in the substantive proceeding, which include a declaration that the dividend was unlawful, would lead to a judgment in excess of $3 million.
[22] The respondents reply that the only external creditors of QMS (NZ) are QMS (Australia) and QMS Property (Australia), with total debts of $785,864. Assuming the liquidators were successful in recovering the full claim of over
$3 million, they would distribute to the creditors pari passu, which would involve a total payment of $785,864 and the balance would go back, by way of distribution to Zullo Holdings, being the shareholder who received the dividend of $3.25 million. Further, the respondents point out, under s 56(5) of the Companies Act, if in an action brought against a director or shareholder, the court is satisfied that the company could, by making a distribution of a lesser amount, have satisfied the solvency test, the court may permit the shareholder to retain or relieve the director from liability in respect of an amount equal to the value of any distribution that could properly have been made.
[23] It is not necessarily the case therefore that any ultimate judgment will be for the full sum claimed.
[24] I have decided to limit the quantum of assets subject to the freezing order to
$1 million, being an amount I consider to be in excess of the true underlying amount of the claim. I return to this point.
The need for the applicants to give an undertaking – are there “special circumstances”?
[25] Rule 32.2(5) of the High Court Rules (the Rules) provides that an applicant for a freezing order must file a signed undertaking that they will comply with any order for the payment of damages, to compensate the respondent for any damage sustained in consequence of a freezing order.
[26] Rule 32.6(4) provides that, unless there are special circumstances, the court must require the applicant for a freezing order to give appropriate undertakings, including an undertaking as to damages.
[27] Those provisions are further reinforced by rule 32.6(5), which provides that if an applicant has, or may later have, insufficient assets within New Zealand to discharge the obligation created by an undertaking as to damages, the court may require the applicant to provide security for that obligation.
[28] It is clear from rule 32 as a whole that a signed undertaking as to damages is an important component or adjunct to the making of a freezing order. In fact, rule 32.2(5) seems to impose an absolute obligation on an applicant to file a signed undertaking in the first place. Under r 32.6(4), the applicant may then ask the court not to require such an undertaking on the ground of special circumstances. The undertaking, as filed, would not take effect until the order was made.
[29] Undertakings as to damages, as well as providing protection to respondents for any economic losses flowing from having assets wrongfully restrained, incentivise applicants to act responsibly.
[30] Neither of the applicants filed an undertaking with their application for a freezing order, which, in accordance with the language of r 32.2(5), they should have. They each submit that special circumstances exist, such that r 32.6(4) applies.
[31] The first applicant says the special circumstances are that it has been denuded of all of its assets, as a result of the actions of the respondents. Because it has no
assets, any undertaking it provided would be of no substance. The first applicant says, however, that an undertaking can be provided if I require it.
[32] The first applicant relies on the Court of Appeal decision in Auckland Steel Fixers Ltd (in liq) v Watson.2 In that decision, which interestingly raises the same points about freezing orders as this one does, it appeared that the applicant had, in the first instance, filed an undertaking as to damages,3 as I suggest is required by the Rules. In the High Court, Heath J expressed concern about the absence of any substance to the undertaking.4 The Court of Appeal did not remove the requirement for an undertaking, but rather said:5
While we accept the company’s undertaking lacks substance, we accept that special circumstances apply in this case given that the applicant’s financial position and impecuniosity has been caused, at least on the information currently before the Court, by the actions of Mr Watson against whom proceedings have been issued and who is also one of the trustees of the trust.
[33] I accept that the same position, at least on the information currently before the Court, applies here. As was the case in Auckland Steel Fixers, an undertaking should still be provided. As the respondents point out, if the first applicant’s undertaking is called upon, the respondents will become creditors of the first applicant. That in itself may afford them remedies otherwise unavailable.
[34] I note, for the sake of completeness, Mr Heard’s submission that the Court of Appeal is wrong in the finding or statement that I have quoted. He says it cannot be special circumstances for an applicant to say they would not be in the position they were, if not for the wrongful conduct of the respondent, because the very purpose of an undertaking as to damages is to protect a respondent accused of wrongful conduct by an applicant. He says, in effect, that such an approach would completely undermine the mandatory provision of an undertaking. I would agree if that were the true rationale. However, the point in Auckland Steel Fixers, and similarly here, goes beyond an accusation of wrongdoing, to an accusation of wrongdoing causative of
impecuniosity. In my view, that will generally constitute special circumstances, at
2 Auckland Steel Fixers Ltd (in liq) v Watson [2015] NZCA 274.
3 See [12].
4 Auckland Steel Fixers Ltd (in liq) v Watson [2015] NZHC 1176.
5 At [20]. The same course was followed by Dunningham J in Willburn Furniture Restorations
Ltd (in liq) v Gledhill [2016] NZHC 99.
least to the extent of the court’s accepting a very limited value undertaking and not
requiring security, which is otherwise possible under r 32.6(5).
[35] I therefore, as in Auckland Steel Fixers, require an undertaking from the first applicant but recognise it may have limited value, if any.
[36] The second applicants also say there are special circumstances that mean I should not require them to give an undertaking as to damages. The claimed special circumstances are that the second applicants are officers of the Court and not bringing the action in their personal capacity.
[37] They rely in this regard on the High Court decision of Official Assignee v Fry, where they submit Wylie J determined that the Official Assignee was not required to provide an undertaking in respect of an application for a preservation order for two reasons: first, that the Official Assignee was a statutory officer, and second, that s 65ZC of the Public Finance Act 1989 applied, whereby it was not lawful for any person to give a guarantee or indemnity on behalf of or in the name of
the Crown.6
[38] I do not need to address the Public Finance Act point because, whether right or not in terms of the Official Assignee, the liquidators accept it is not applicable to them as they are not functionaries of the Crown.
[39] However, the liquidators say that, like the Official Assignee, they are statutory officers. They say they are not bringing the current claim to further their own private interests. Rather, they have a statutory “duty” to bring the claim. They point by way of analogy to the court’s reluctance to order liquidators to provide security for costs.
[40] It is correct that the liquidators are officers of the Court. However, I do not consider that alone constitutes special circumstances, nor does there appear to be any precedent to that effect. I do not consider that Wylie J’s decision is authority for the
proposition that an officer of the court does not have to provide an undertaking. On
6 Official Assignee v Fry HC Auckland CIV-2009-404-439, 4 February 2009.
a careful reading of that judgment, it seems to me to turn solely on the
Public Finance Act provision.
[41] I also do not agree that the liquidators have a statutory “duty” to bring a claim. That is overstating the position. Liquidators do have various duties, including the principal duty which is to take possession of, protect, realise, and distribute the assets, or the proceeds of the realisation of the assets, of the company to its creditors. But there is nothing requiring liquidators to bring all possible proceedings in furtherance of their duties. I accept that, when liquidators do bring a claim, that will generally be in fulfilment of a statutory role.
[42] I also agree with the respondents that the analogy with security for costs is not applicable. Amongst other things, security for costs relates to ultimate payment of cost orders, whereas freezing orders jump the judgment gun and can have significant consequences for a defendant.
[43] I am also not very persuaded by the argument that liquidators, having no personal interest in the outcome of the proceedings, constitutes special circumstances. First, as the respondents point out, there are many situations where claims are brought by a party with no personal interest in the outcome, including trustee actions, actions by receivers and actions by interveners. There is nothing to say all these people are excused from undertakings. Secondly, the fact that the liquidators may have no personal interest, belies the fact that someone generally stands to benefit, and in this case there is one significant creditor, QMS (Australia), which apparently currently has funds of about $240,000. Lying behind QMS (Australia) is the Australian Tax Office (the ATO), the only entity that apparently stands to gain from the liquidation of QMS (Australia). The ATO is allegedly owed about AUD$20 million by QMS (Australia). The ATO, at least, could provide an indemnity to the liquidators, or an undertaking.
[44] Apparently, neither QMS (Australia) nor the ATO is providing an indemnity, nor for that matter even funding the substantive proceedings. I have no evidence as to whether they have been asked to do either, and I do not think it matters. I have to proceed on the basis that the liquidators are operating, unsupported by the creditors
who have allegedly suffered losses which are the subject of the substantive proceedings.
[45] In such circumstances, it is not altogether clear to me that there is no private gain to the liquidators from bringing the claim. They presumably are interested enough to bring the claim on an entirely contingent basis. I accept, of course, that they are fulfilling a statutory duty in doing so.
[46] I have decided, nonetheless, with some reluctance, that there are special circumstances such that I will not require the liquidators to provide an undertaking as to damages. These are as follows:
(a) Some of the causes of action, at least, appear to be strong. There are real question-marks over the lawfulness of the actions taken by QMS (NZ).
(b)The first applicant is the sole claimant under about half of the causes of action and, if those causes of action were standing on their own, I would have granted the freezing order on the undertaking solely of the first applicant, for the reasons given. The additional causes of action brought by the liquidators turn on the same facts, or very largely so, and so should not extend the trial process and therefore not extend any potential damages claim.
(c) I accept that the liquidators are officers of the court and are fulfilling a statutory role, which is relevant, albeit not a stand-alone special circumstance.
(d)It may be understandable that QMS (Australia) and the ATO are not wishing to back this proceeding. The money held by QMS (Australia) is not a large amount in the context of the issues facing the liquidators of that company. The ATO is one step further removed and may be concerned about throwing good money after bad.
(e) The properties at issue, or at least some of them, appear to be investments rather than trading assets, such that the likelihood of a damages claim is reduced. I will allow the first respondent an opportunity to make a reasonable proposal as to a property or properties, to the value of $1 million, that are least likely to be impacted from a damages perspective. I will also reserve leave to the respondents to apply to vary the freezing order so that, if there is, for example, a need to sell and invest the proceeds, that can be facilitated. I will also impose terms around the applicants taking all necessary steps to speedily dispose of the substantive proceedings.
Pre-judgment charging order
[47] The pre-judgment charging order can be ruled out. The applicants need to prove that there is a disposition with intent to defeat. Mr Johnson more or less acknowledged there is no qualifying disposition. I find there is none.
Conclusion
[48] The application to sustain the caveats is dismissed.
[49] The application for a pre-judgment charging order is dismissed.
[50] I direct the parties to file within seven days, either a joint memorandum as to the form of freezing order that will comply with the findings and indications I have made, or alternatively, individual memoranda, with their own proposed form of orders and brief reasons why the other parties’ proposal is not appropriate.
[51] I note the respondents’ undertaking referred to in the Minute of Lang J dated
18 May 2016. The application for interim orders will not be determined in terms of [4] of that Minute until final order, following receipt of the parties’ memoranda. The undertaking will therefore remain in place until then.
[52] My tentative position is there should be no order as to costs. In my view, both parties have had a measure of success. However, I have not given the parties an opportunity to be heard in that regard, so if a different view is taken by either party, they should file a memorandum within the same seven-day time period. I will then afford the other party a reply.
----------------------------------------- Hinton J
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