R v Douglas

[2012] NZHC 3409

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CRI 2010-004-022101 [2012] NZHC 3409

THE QUEEN

v

WAYNE LESLIE DOUGLAS NEAL MEDHURST NICHOLLS

Hearing:         12 December 2012

Counsel:         N Davidson QC and M Thomas for the Crown

B D Gray QC and R Sussock for the Prisoners

Judgment:      14 December 2012

[RESERVED] JUDGMENT OF WYLIE J

This judgment was delivered by Justice Wylie on 14 Dec 2012 at 10.15 am

Pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

Distribution:

NRW Davidson QC: [email protected]

M Thomas: [email protected]

B Gray: [email protected]

R Sussock: [email protected]

R V DOUGLAS & ANOR HC AK CRI 2010-004-022101 [14 December 2012]

Introduction

[1]      Messrs  Douglas  and  Nicholls  were  charged  with  three  counts  under  the

Crimes Act 1961.

(a)      Count  1  was  laid  pursuant  to  s  220  of  the Act.    It  alleged  that Messrs Douglas  and  Nicholls  had  control  of  $14,444,064.25  of investors’ funds, in circumstances that they knew required them to deal   with   the   funds   in   accordance   with   the   requirements   of Perpetual Trust Limited, as trustee under a debenture trust deed dated

5  April  2002,  and  that  they  intentionally  dealt  with  those  funds otherwise than in accordance with those requirements.

(b)Counts 2 and 3 were laid pursuant to s 242 of the Act.  They alleged that false statements were made in prospectuses.  Count 2 related to a prospectus dated 30 June 2003, and count 3 related to a prospectus dated 10 September 2004.

All  three  counts  arose  out  of  loans  made  by  a  finance  company controlled  by Messrs Douglas and Nicholls, Capital + Merchant Finance Limited, to four separate companies associated with the purchase and development of a property portfolio situated in Palmerston North known as The Hub.

[2]      In this judgment, I refer to the four separate companies that borrowed the monies from Capital + Merchant Finance Limited as “the borrower companies”, to the loans themselves as “The Hub loans”, and to the debenture trust deed between Capital + Merchant Finance Limited and Perpetual Trust Limited as “the debenture trust deed”.

[3]      The trial took place before me sitting as a Judge alone.   It commenced on

23 April 2012, and concluded on 4 May 2012.

[4]      There was a further trial involving Messrs Douglas, Nicholls and another person involved with Capital + Merchant Finance Limited, which started shortly

after the conclusion of this trial.  By agreement, verdicts on this trial were delayed until both trials were completed.

[5]      The verdicts were given by me on 19 July 2012.[1]    I found Messrs Douglas and Nicholls not guilty in relation to each of the counts in the indictment, and discharged them.   I delivered lengthy reasons for verdict, setting out why I had concluded that Messrs Douglas and Nicholls were not guilty.

[1] R v Douglas & Anor [2012] NZHC 1467.

[6]      On 16 August 2012, I received a memorandum from the Crown.  The Crown asked me to reserve three questions of law, pursuant to s 380(1) of the Crimes Act.

[7]      The three questions of law which the Crown asked me to reserve are as follows:

(a)      In relation to count 1 in the indictment, did I err by concluding that The Hub loans were not related party transactions under the Capital + Merchant Finance Limited debenture trust deed?;

(b)In relation to counts 2 and 3 in the indictment, did I err by concluding that The Hub loans were not related party transactions under Financial Reporting Standard Number 9: Information to be Disclosed in Financial Statements?;

(c)      In relation to counts 2 and 3 in the indictment, did I err by concluding that the requirement to disclose related party transactions in financial statements contained in the registered prospectus was governed solely by the Securities Regulations 1983, to the exclusion of applicable accounting policies, in particular, Standard Accounting Practice Number 22:  Related Party Disclosures?

[8]      In a minute to counsel dated 17 August 2012, I queried whether or not the questions of law the Crown asked me to state for the opinion of the Court of Appeal

related to matters decided by me, and I, and sought submissions on what question(s), if any, should be reserved for the Court of Appeal.

[9]      The Crown’s application has been opposed by Mr Gray QC on behalf of

Messrs Douglas and Nicholls from the outset.

Factual Background

[10]     The factual background is complicated.   I set it out in some detail in my reasons for verdicts.  I will not seek to repeat it here. An interested reader is referred to [17] to [101] of my reasons for verdicts.

Submissions

[11]     Despite  my  minute  of  17 August  2012  noted  above,  Mr  Davidson  QC, appearing for the Crown, did not seek to amend the questions of law contained in the Crown’s initial memorandum.

[12]     Mr Davidson argued first that it is open to me to state the questions of law for the opinion of the Court of Appeal, notwithstanding that the trial has concluded.  He then submitted that the questions the Crown wishes me to pose for the Court of Appeal are questions of law.  He referred to the transcript, and pointed to evidence given by a Mr Stokes, who was a key prosecution witness, as to the nature of the relationship between him and Messrs Douglas and Nicholls.  Mr Stokes was the sole director of each of the borrower companies.   The shares in three of the borrower companies were owned and incorporated by a company called Eton Capital Limited, which was also controlled by Mr Stokes.  The shares in the fourth borrower company were initially owned by a Mr Wilson, who was Mr Stokes’ solicitor, but they were subsequently  transferred  to  Eton  Capital  Limited.     Mr  Davidson  noted  that Mr Stokes   had   given   evidence   that   he   was   simply   the   front   person   for Messrs Douglas and Nicholls.   He argued that the borrower companies were, in effect, owned and controlled by Mr Stokes for the benefit of Messrs Douglas and Nicholls, and that as a result, The Hub loans to the borrower companies were related party transactions that were required to be disclosed under the debenture trust deed.

He submitted that Mr Stokes’ evidence in relation to his role as a front-person had not been directly challenged in cross-examination.   In essence, Mr Davidson was asserting that  I had failed to draw from  Mr Stokes’ unchallenged evidence, the inference in favour of the Crown that the loans were related party transactions, and that this inference was the only inference reasonably possible.

[13]     Mr  Gray  submitted  that  I  had  carefully  analysed  the  available  evidence adduced at the trial.   He pointed out that the evidence was not all one way.   He argued that my factual findings could not be said to be against the weight of the evidence, or unsupported by the evidence, and that it was the facts as found by me that are now relevant, rather than any passages in the transcript that the Crown now seeks to rely on.  He put it to me that the Crown is essentially seeking a retrial, on a case that the Crown now says it would like to have argued, but failed to argue at trial.

Analysis

[14]     Section 380(1) of the Crimes Act 1961 provides as follows:

380     Reserving question of law

(1)       The  court  before  which  any  accused  person  is  tried  may,  either during or after the trial, reserve for the opinion of the Court of Appeal, in manner hereinafter provided, any question of law arising either on the trial or on any of the proceedings preliminary, subsequent, or incidental thereto, or arising out of the direction of the Judge other than a question arising on any of the proceedings preliminary  to  the  trial  and  already  determined  by  the  Court  of Appeal under section 379A.

[15]     In indictable cases tried by a jury, rulings on points of law are made during the trial, and the Crown can seek to reserve points of law prior to verdict.  In a Judge alone trial, the Crown has no opportunity to reserve a point of law prior to verdict, as there   are   no   rulings   (other   than   on   interlocutory   matters)   before   verdict. Section 380(1) expressly provides that the Court may reserve for the opinion of the Court of Appeal a question of law, and that this can occur either during or after the trial.  It has previously been observed that there is no sensible reason why the words

of  the  section  should  not  be  given  their  ordinary meaning.[2]      I agree  with  that

observation and accept that it is open for me to reserve a question of law in terms of s 380(1), notwithstanding that the trial has been concluded.

[2] R v Collis [1990] 2 NZLR 287 at 290 (CA).

[16]     It should, however, be remembered that the great majority of criminal trials are decided on their facts.  There is no right of appeal against an acquittal.  Rather, the Court is given a discretion to reserve a question of law for the opinion of the Court of Appeal. As has been noted elsewhere, the statutory provisions reinforce the common law policy that a person who has been acquitted of a criminal charge by a Court of competent jurisdiction after a trial on the merits should be spared the

“renewed jeopardy of an appeal against the acquittal”.[3]

[3] Auckland City Council v Wotherspoon [1990] 1 NZLR 76 at 85 per Fisher J.

[17]     The Court may reserve a question of law for the opinion of the Court of Appeal — but it goes without saying that the question of law must be one decided by the Court.   I accept that the questions the Crown has asked me to reserve for the opinion of the Court of Appeal are, as worded, questions of law.   Question (a) as worded turns on the construction of a document — the debenture trust deed. Questions (b) and (c) as worded turn respectively on the construction of a financial reporting   standard,   and   a   statement   of   standard   accounting   practice.     The construction of such documents involves matters of law.  The difficulty, however, is that I did not reach any of the conclusions of law attributed to me by the Crown. Rather, I made factual findings, taking into account all of the evidence that was presented to me.

[18] In relation to the first question, the Crown in its submissions, refers to two paragraphs in my reasons for verdict, [130] and [162]. Both paragraphs occur in the section of my reasons for verdict where I was discussing count 1 and specifically whether or not Messrs Douglas and Nicholls intentionally dealt with monies deposited by investors in Capital + Merchant Finance Limited otherwise than in accordance with the requirements contained in the debenture trust deed.

[19]     Paragraph 130 read as follows:

The question for me in dealing with this aspect of count 1 is whether the loans made by Capital + Merchant Finance Limited to Venice Investments

Limited, Rhode Capital Limited, S.I.R Investments Limited and At The Hub Investments   Limited  were   related  party  transactions   pursuant  to  the debenture trust deed.

As can be seen, I simply identified the question which I was required to deal with. The paragraph does not support the question of law the Crown now says should be referred to the Court of Appeal.

[20]     In [162], I stated as follows:

Given this evidence, and the contemporaneous documentation, I cannot conclude beyond reasonable doubt that the negative covenant in cl 6 2(a) of the debenture trust deed has been breached by the accused or either of them. While the circumstances are certainly suspicious, I accept that there is a reasonable possibility that there was no related party transaction. The Crown has failed to prove a breach of cl 6 2(a) beyond reasonable doubt.

Again,  as  can  be  seen,  I  expressly  recorded  that  I  was  not  satisfied  beyond reasonable doubt that the debenture trust deed had been breached, because of the evidence which had been put before me, and because of the contemporaneous documentation to which I had been referred in the course of the trial.

[21]     I identified the relevant evidence in my reasons for verdict, particularly in [137], [138] and [139].  I there summarised the evidence given by Mr Stokes and by his solicitor, Mr Wilson.  I discussed the Crown case.  I noted the equivocal nature of some of the evidence in [142] and [143].

[22]     I then discussed the contemporaneous documentation.  I referred to a deed of trust and indemnity signed, it seems, in late 2003.  This document was a key plank in the Crown case.  It both opened and closed its case by reference to it.  It was entered into between Messrs Douglas and Nicholls, a company owned and operated by them called   Investment   Capital   Trust   Limited,   Mr   Stokes   and   another   entity, Hamana Holdings  Limited,  as  trustee  of  the  Scholarly  Investment  Trust.    Both Hamana Holdings Limited and the Scholarly Investment Trust were controlled by Messrs Douglas and Nicholls.   Pursuant to the deed, Mr Stokes confirmed that he held all “his interest” in the borrower companies upon trust for Hamana Holdings Limited.  In my reasons for verdict, I set out the terms of the deed, and then went on to deal with difficulties posed by the evidence which had been put before me.   In

particular, I noted evidence that the shares in the borrower companies were not owned by Mr Stokes, but rather by Eton Capital Limited (except for the shares in one of  the  borrower  companies,  Rhode  Capital  Limited,  which  were  owned  by Mr Wilson at the time).  There was further evidence that the shares in the borrower companies were owned by Eton Capital Limited on trust for Eton Capital Trust, and that the only beneficiary of the Eton Capital Trust was the Child Cancer Foundation. I recorded that Mr Stokes was the appointer under the Eton Capital Trust, but that he had  not  made  any  appointment  in  favour  of  Messrs  Douglas  and  Nicholls,  or anybody else.  I noted that, on the evidence, Mr Stokes did not own the shares in any of the borrower companies, and I observed that it followed that Mr Stokes was unable to declare that he held the shares in the borrower companies on trust for Hamana Holdings Limited.   I recorded that the Crown did not suggest that the documentation was a sham.  I then went on to discuss evidence given by a legal and commercial expert called by the Crown, a Mr Jordan.  Mr Jordan accepted that there was a real possibility that Eton Capital Limited held the shares in the borrower companies   on   trust   for   the   Eton   Capital   Trust.      He   acknowledged   in cross-examination that Messrs Douglas and Nicholls were not beneficiaries of the Eton Capital Trust.   He accepted that, on this basis, there were no related party transactions in terms of the debenture trust deed.

[23]     The Crown now argues that the evidence it called at trial in relation to the deed of indemnity and trust, and from Mr Jordan, does not advance matters, and that I should have ignored it and simply relied on Mr Stokes’ evidence that he was, in effect, a “front man” for Messrs Douglas and Nicholls.

[24]     That is not the way in which the Crown ran its case at trial.   The deed of indemnity and trust was produced by the Crown.   Mr Jordan was called by the Crown.   The Crown was unaware of the pre-existing deed of trust recording that Eton Capital Limited held the shares in the borrower companies for the Eton Capital Trust.   The Serious Fraud Office had not unearthed that deed in the course of its investigations.   The deed was put to Mr Stokes initially, and then to subsequent witnesses, by Mr Gray for the accused.  All were asked to comment on it and on its effects.  All of this evidence formed part of the case before me.  I considered it as I was required to do, and I made factual findings in relation to it.

[25]     In essence, I found that the existence of the Eton Capital Trust could not be ignored  or  discounted.    I  concluded  that  the  Crown  had  not  proved  beyond reasonable doubt that there had been a breach of the debenture trust deed, because there was a reasonable possibility that there were no related party transactions.   I reached that conclusion given the equivocal nature of some of Mr Stokes’ evidence, the evidence of the Crown’s legal expert, Mr Jordan, on, inter alia, the consequences of the Eton Capital Trust’s interests in the borrower companies, and the contemporaneous documentation.   My findings were based on my analysis of the evidence before me.   I did not reach the legal conclusion attributed to me by the Crown, and with respect to the Crown, it is not now open to it to go back and revisit the way in which the case was argued and put at trial.  To do so would be unfair to the accused.   I decline to state a case for the opinion of the Court of Appeal in relation to question (a).

[26]     I now turn to question (b).

[27]     The Crown’s submissions refer to [230] in my reasons for verdict.   That paragraph read as follows:

I am not persuaded beyond reasonable doubt that the accused had a direct or indirect beneficial interest in the borrower companies.   It follows that the Crown has failed to establish beyond reasonable doubt that FRS 9 required that the transactions at issue in this trial should have been disclosed in the financial statements accompanying the fourth prospectus.   There is a reasonable possibility that the loans made by Capital + Merchant Finance Limited to the borrower companies did not fall within the definition of loans to directors contained in the standard.

Again, as can be seen, I did not conclude that The Hub loans were not related party transactions under Financial Reporting Standard Number 9.  Rather, I made a factual finding that the Standard did not apply, because the Crown had failed to  prove beyond reasonable doubt that Messrs Douglas and Nicholls had a direct or indirect beneficial interest in the borrower companies.

[28] I dealt with the application of Financial Report Standard Number 9 in [221] and following of my reasons for verdict. I referred to the Standard in [225]. I noted the evidence of one of the Crown’s accounting experts, Ms Hodgkins, in relation to the issue. I noted that she considered that Financial Reporting Standard Number 9

applied, because in her view, the borrower companies were beneficially owned by the Scholarly Trust, which in turn, was controlled by Messrs Douglas and Nicholls. She considered that Messrs Douglas and Nicholls, their spouses, children, parents and siblings, were discretionary beneficiaries of the Scholarly Trust, and that they therefore had a beneficial interest in the borrower companies.

[29]     In [227], I referred to the cross-examination of Ms Hodgkins in this regard.  I noted that she acknowledged that Financial Reporting Standard Number 9 could only apply, if Messrs Douglas and Nicholls or their family members, were beneficial owners of the operating companies.  She also acknowledged that if that was not the case for any reason, then Financial Reporting Standard Number 9 would not apply.

[30]     I   then   went   on   to   briefly   analyse   the   evidence,   namely   that   the Scholarly Investment Trust was a discretionary trust, and that Hamana Holdings Limited, as trustee of that trust, could use its discretion to make a distribution to any of the beneficiaries who were listed in the deed of trust.  I acknowledged that the list of potential beneficiaries included Messrs Douglas and Nicholls.   I observed that Ms Hodgkins’ view in her evidence-in-chief related to the application of Financial Reporting Standard Number 9 ignored other evidence that the shares in the borrower companies were owned by Eton Capital Limited, on trust for Eton Capital Trust, an entity in which neither Mr Douglas nor Mr Nicholls had any interest.  I also noted that Ms Hodgkins’ evidence ignored the law that a discretionary beneficiary has no beneficial interest in the assets of a trust.

[31]     Again, the finding that I reached in [230] is essentially a finding of fact.  The existence of the Eton Capital Trust was pivotal to the finding which I reached.  My finding turned on my earlier conclusion that the Eton Capital Trust was not a related party, and that Messrs Douglas and Nicholls had no interest in that trust.

[32]     I am not persuaded that it is appropriate to state a case in relation to question (b) for the opinion of the Court of Appeal.  I did not reach the conclusion attributed to me.  Rather, the conclusion that I did reach was set out in [230] of my reasons for verdict.   It was based primarily on my factual findings, made by reference to the evidence that was put before me, both by the Crown and by the defence.

[33]     I now turn to question (c).

[34]     The Crown refers in its submissions to [219] and [237] of my reasons for verdict.

[35]     Paragraph 219 reads as follows:

Mr Gray’s submission is consistent with the relevant statutory provisions, in particular with s 18(1A) in the Financial Reporting Act and also with ss 4(1) and 39(2) in the Securities Act.  It is also consistent with the expert evidence I  have  heard.    Moreover,  in  the  present  case,  the  auditor’s  report  to prospectus number 4 recorded that the financial statements annexed to the prospectus had been prepared as required by cls 16–31 of the sch 2 to the Securities  Regulations,  that  they  complied  with  those  regulations,  and subject to those regulations, with generally accepted accounting practice in New Zealand.   I accept that it was open to Capital + Merchant Finance Limited to include in its prospectus financial statements prepared pursuant to the   Securities   Act   and   the   detailed   requirements   in   the   Securities Regulations, and that it chose to do so.

Paragraph 237 reads as follows:

I can see no error in Mr Gray’s legal analysis, and given the answers, in particular by Mr Jordan, it seems to me that there must be a reasonable doubt as to whether or not SSAP 22 applies to require disclosure of the lending to the borrower companies.   As I have already noted, the Crown does not suggest that the Securities Regulations of themselves required disclosure.

[36]     I accept that the matters detailed in these paragraphs involve in part questions of law and also questions of fact.   The difficulty that the Crown faces is that the application  of  Statement  of  Standard Accounting  Practice  Number  22  was  put squarely to its expert legal witness, Mr Jordan.   He accepted that  the Standard applies where the circumstances are appropriate, and where there is no applicable rule of law.   He also accepted that, on the facts of the present case, there was an applicable rule of law, namely the Securities Regulations 1983, and in particular, sch 2 to those regulations, and that they make exclusive provision for the content of financial  statements  contained  in  debt  securities  prospectuses.    He  went  on  to concede that Statement of Standard Accounting Practice Number 22 does not apply to financial reports contained within prospectuses for debt securities, because the Securities  Regulations  make  their  own  provision  in  that  regard,  and  that  the disclosure   of   the   loans   to   the   borrower   companies   complied   with   the

Securities Regulations, even if not with Statement of Standard Accounting Practice

Number 22.

[37]     Once again, the findings I expressed in [237] turn on my assessment of the evidence that was presented to me.  I concluded that there must be reasonable doubt on the law and on the facts as to whether or not Statement of Standard Accounting Practice Number 22 applied to require disclosure.    Given Mr Jordan’s acknowledgement, no other conclusion was open to me.   I did not reach the bald conclusion attributed to me by the Crown and detailed in question (c).  Again, I am not persuaded that it is appropriate to state a case for the opinion of the Court of Appeal in relation to question (c).

[38]     Finally, I note that Mr Davidson argued that my findings have the potential to affect other cases in which the Serious Fraud Office is involved.  That may or may not be the case; it is not a factor which I have taken into account in exercising my discretion under s 380(1).  In any event, the conclusions made by me were largely based on the particular facts of the case which were before me.  I simply concluded that on the materials before me, the Crown had failed to prove its case beyond reasonable doubt.  It is difficult to see how this finding could materially impact on other prosecutions.

[39]     The Crown’s application is declined.

Wylie J