R v Douglas
[2012] NZHC 1746
•19 July 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CRI 2011-004-012988 [2012] NZHC 1746
THE QUEEN
v
WAYNE LESLIE DOUGLAS NEAL MEDHURST NICHOLLS OWEN FRANCIS TALLENTIRE
Hearing: 14 - 18, 21 - 25, 28 - 31 May, 6 - 8 June 2012
Counsel: NRW Davidson QC, N Williams and M Thomas for the Crown
B Gray QC, R Sussock and G Tompkins for the Accused Douglas and
Nicholls
N Gedye, T Mullins, M Heard and S Ellis for the Accused Tallentire
Date: 19 July 2012
REASONS FOR VERDICT OF WYLIE J
Distribution:
N Davidson QC: [email protected]
N Williams: [email protected]
M Thomas: [email protected]
B D Gray QC: [email protected]R Sussock: [email protected] G Tompkins: [email protected] N Gedye: [email protected]
T Mullins: [email protected]
M Heard: [email protected]S Ellis: [email protected]
R V DOUGLAS & ORS HC AK CRI 2011-004-012988 [19 July 2012]
INDEX
Paragraph Introduction ............................................................................................................[1] Judge alone trial .....................................................................................................[6] Relevant rules of law and practice .......................................................................[11]
Overall factual setting ..........................................................................................[19] a) Messrs Douglas and Nicholls — Capital + Merchant Finance Limited .....[20] b) The business of Capital + Merchant Finance Limited — the Trust Deed ...[23] c) The lending committee — the lending manager...........................................[33] d) The background to the Numeria Transactions.............................................[39] e) The Numeria 1 transaction ..........................................................................[56] f) The background to the Clyde transactions...................................................[75] g) The Clyde 1 transaction ...............................................................................[86] h) The Clyde 2 transaction .............................................................................[103] i) The Clyde 3 transaction .............................................................................[119] j) Result of the Clyde transactions.................................................................[127] k) The Numeria 2 transaction ........................................................................[130] l) The demise of Capital + Merchant Finance Limited .................................[146]
Matters of Law Common to All Counts.............................................................[148] a) The charges — elements of the offence ......................................................[148] b) Previous s 220 cases ..................................................................................[151] c) Were the trustee’s requirements met through disclosure?.........................[163] d) The obligations of issuers and directors ....................................................[189] e) Property — what was it?............................................................................[195] f) Control .......................................................................................................[201] g) The circumstances in which the property was dealt with ..........................[206] h) The requirements of Perpetual Trust Limited ............................................[213] i) Intention .....................................................................................................[239] j) Reliance on others ......................................................................................[250] k) Loan advances used to repay earlier advances .........................................[262]
Count 1 — the Numeria 1 transaction................................................................[267] a) Did the accused have control over property? ............................................[269] b) Did the circumstances require each of the accused, Messrs Douglas
and Nicholls, to deal with the property in accordance with the
requirements of any other person? ............................................................[285] c) Did the accused know of those circumstances? .........................................[291] d) Did Messrs Douglas and Nicholls intentionally deal with the property
otherwise than in accordance with those requirements? ...........................[296]
Count 2 — the Clyde 1 transaction ....................................................................[334] a) Did the accused have control over property? ............................................[336] b) Did the circumstances require each of the accused, Messrs Douglas,
Nicholls and Tallentire, to deal with the property in accordance with
the requirements of any other person?.......................................................[341] c) Did the accused know of those circumstances? .........................................[345] d) Did Messrs Douglas, Nicholls and Mr Tallentire, intentionally deal
with the property otherwise than in accordance with those
requirements? ...........................................................................................[352]
Count 3 — the Clyde 2 transaction ....................................................................[391] a) Did the accused have control over property? ............................................[392] b) Did the circumstances require each of the accused, Messrs Douglas,
Nicholls and Tallentire, to deal with the property in accordance with
the requirements of any other person?.......................................................[393] c) Did the accused know of those circumstances? .........................................[394] d) Did Messrs Douglas, Nicholls and Tallentire intentionally deal with
the property otherwise than in accordance with those requirements? ......[395]
Count 4 — the Numeria 2 transaction................................................................[430] a) Did the accused have control over property? ............................................[431] b) Did the circumstances require each of the accused, Messrs Nicholls
and Tallentire, to deal with the property in accordance with the
requirements of any other person? ............................................................[432] c) Did the accused know of those circumstances? .........................................[433] d) Did Messrs Nicholls and Tallentire intentionally deal with the property
otherwise than in accordance with those requirements? ...........................[434] Conclusion..........................................................................................................[474]
Introduction
[1] Messrs Douglas, Nicholls and Tallentire have been charged under the Crimes Act 1961. The charges arise out of the affairs and ultimate demise of Capital + Merchant Finance Limited. Messrs Douglas and Nicholls were directors of the company. Mr Tallentire was initially the company’s Chief Executive Officer. In October 2006, he became a director.
[2] Messrs Douglas, Nicholls and Tallentire face three counts — counts 1 to 3. Mr Nicholls and Mr Tallentire face an additional count — count 4. All counts are laid pursuant to s 220 of the Act and all allege what is known as theft in a special relationship. Each count charges that the relevant accused received or was in possession of or had control over investors’ funds, in circumstances that each knew required him 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 each intentionally dealt with the funds otherwise than in accordance with those requirements.
[3] Particulars are given of each charge. I deal more fully with the particulars shortly. Counts 1 and 4 relate to what were called in the trial the “Numeria” transactions, and counts 2 and 3 relate to what were called the “Clyde” transactions:
(a) Count 1 alleges that on or about 15 November 2004, the accused arranged a loan advance from Capital + Merchant Finance Limited to Capital + Merchant Group Limited in the amount of $7,660,000 in breach of various requirements in the debenture trust deed. This transaction was referred to in the trial as the “Numeria 1” transaction.
(b)Count 2 alleges that on or about 1 November 2006, the accused arranged a loan advance from Capital + Merchant Finance Limited to a company called Clyde Investments Limited in the amount of
$7,700,000 in breach of various requirements contained in the
debenture trust deed. This transaction was referred to as the
“Clyde 1” transaction.
(c) Count 3 alleges that on or about 3 November 2006, the accused arranged a loan advance from Capital + Merchant Finance Limited to Clyde Investments Limited in the amount of $4,400.000, in breach of various requirements contained in the debenture trust deed. This transaction was referred to as the “Clyde 2” transaction.
(d)Count 4 alleges that on or about 30 March 2007, two of the accused, Messrs Nicholls and Tallentire, arranged for the sale of a company called Numeria Leasing Limited by Numeria Finance Limited to Capital + Merchant Finance Limited for $8,290,000, in breach of various requirements contained in the debenture trust deed. This transaction was referred to as the “Numeria 2” transaction.
[4] I have reached the following verdicts:
(a) Mr Douglas and Mr Nicholls are each guilty as charged in count 1.
Mr Tallentire is not guilty of count 1.
(b)Mr Douglas, Mr Nicholls and Mr Tallentire are each guilty as charged in count 2.
(c) Mr Douglas, Mr Nicholls and Mr Tallentire are each guilty as charged in count 3.
(d) Mr Nicholls and Mr Tallentire are not guilty of count 4. [5] These are my reasons for returning those verdicts.
Judge alone trial
[6] This matter proceeded as a Judge alone trial.
[7] In R v Connell,1 the Court of Appeal stated that a Judge hearing a criminal trial without a jury is required to deliver:
... a statement of the ingredients of each charge and any other particularly relevant rules of law or practice; a concise account of the facts; and a plain statement of the Judge's essential reasons for finding as he does. There should be enough to show that he has considered the main issues raised at the trial and to make clear in simple terms why he finds that the prosecution has proved or failed to prove the necessary ingredients beyond reasonable doubt. When the credibility of witnesses is involved and key evidence is definitely accepted or definitely rejected, it will almost always be advisable to say so explicitly.
[8] In R v Eide,2 the Court of Appeal confirmed this principle, but made the following additional observations in respect of fraud prosecutions:
The problems with short-form judgments are particularly acute in fraud prosecutions. The parties (that is, the prosecutor and accused) are obviously entitled to know the key elements of the Judge’s reasoning. In a case of any complexity, this will not be possible unless the Judge provides an adequate survey of the facts. As well, in this context a Judge is addressing an audience which is wider than the prosecutor and accused. If the verdict is guilty, the Judge should explain clearly the features of the particular scheme which he or she finds to be dishonest. There is a legitimate public interest in having the details of such a scheme laid out in comprehensible form. Similar considerations apply if the verdict is not guilty. Further, some regard should be had to how the case will be addressed on appeal. A judgment which is so concise that some of the key facts in the case are required to be reconstructed by this Court on appeal is too concise.
[9] In the more recent case of Wenzel v R,3 the Court of Appeal again endorsed the Connell approach and affirmed the comments in Eide regarding fraud cases.
[10] As I have noted, the charges against the accused are all brought under s 220 of the Crimes Act 1961. They do not allege fraud. Rather, they allege theft. In my view, it is nevertheless appropriate to give full reasons to explain the verdicts I have reached. The charges arise out of the collapse of a finance company. There has been and still is considerable public interest in such matters. Further, I am advised that there is other litigation threatened or pending in relation to the affairs of Capital + Merchant Finance Limited. As a result, I am addressing an audience that is wider
than just the accused and the Crown as prosecutor. There is a legitimate public
1 R v Connell [1985] 2 NZLR 233 (CA) at 237–238.
2 R v Eide [2005] 2 NZLR 504 (CA) at [21].
3 Wenzel v R [2010] NZCA 501 at [39]-[40].
interest in me setting out my reasoning relatively fully. In doing so however, I record that this was a complicated trial involving significant oral and documentary evidence and resulting in a large number of competing arguments. It is neither feasible nor necessary to detail in full the very extensive evidence that was presented nor counsels’ comprehensive and lengthy submissions. Rather, I propose to address some of the more significant rules of law and practice that I have taken into account as the sole Judge of the facts in this case. I will then set out my findings in relation to the overall factual setting, address various matters of law common to all counts and then consider each count separately, discussing the principal evidence that bears on each accused and each count and the relevant submissions made by counsel. I will set out my reasoning and conclusions in relation to each element of each charge, and in relation to each accused.
Relevant rules of law and practice
[11] First, and notwithstanding the setting, I record that this was a criminal trial. It follows that the Crown must prove each essential ingredient or element of each count beyond reasonable doubt before I may bring in a verdict of guilty on that count.
[12] The starting point is the presumption of innocence. The onus is on the Crown. It must prove that each of the accused, Mr Douglas, Mr Nicholls and Mr Tallentire, is guilty beyond reasonable doubt. Proof beyond reasonable doubt is a very high standard of proof, which the Crown will have met only if I am sure that each of the accused is guilty. It is not enough for the Crown to persuade me that either Mr Douglas, or Mr Nicholls, or Mr Tallentire is probably guilty, or even that any of them is very likely guilty of any of the charges he faces. A reasonable doubt is an honest and reasonable uncertainty left in my mind about the guilt of each of the accused, after I have given careful and impartial consideration to all of the evidence
relevant to that accused.4
4 R v Wanhalla [2007] 2 NZLR 573 (CA) at [49]; Woolmington v Director of Public Prosecutions [1935] AC 462 (HL) at 481; R v Hansen [2007] NZSC 7 (SC) [2007] 3 NZLR 1 at [52]; R v Harbour [1995] 1 NZLR 440 (CA) at 448.
[13] Secondly, it should be noted that none of the accused gave or called evidence at this trial. None of them had any obligation to do so. That Mr Douglas, Mr Nicholls and Mr Tallentire did not give or call evidence does not add to the case against any of them. It is for the Crown to prove the guilt of each in relation to each of the counts alleged against him, and neither Mr Douglas, Mr Nicholls, nor Mr Tallentire had to prove his innocence.
[14] Thirdly, I record that the Crown called two experts, a Mr Charles Cable, a partner in an international accounting firm with specific experience and expertise in valuations and corporate financing, and a Mr Alan Blackie, a retired banker with particular experience of wholesale credit lending and risk assessments, and with expertise in relation to banking and credit practice. The Crown also called evidence from a Mr Blair Bulloch. Mr Bulloch was a designated member of the Serious Fraud Office and much of his evidence related to matters of fact. He is a Chartered Accountant with significant investigative experience and some of his evidence can properly be considered to be expert evidence. Other witnesses who gave evidence on matters of fact also had expertise in diverse and specialised areas: for example, Mr Timothy Downes, one of the receivers appointed by Capital + Merchant Finance Limited’s primary creditor, in receivership matters: Mr Edward McKee-Wright who was involved with one of the corporate entities which features in count 3 and who has specialist expertise, in factoring: Mr Ian Waddell, a share broker with expertise in that area: and Mr Natvar Vallabh, a specialist research analyst.
[15] Expert witnesses are, of course, permitted to give opinions on subjects within their area of expertise.5 They did so. I remind myself, however, that this was a trial by Judge alone and not a trial by experts. It was for me to determine how much weight or importance I should give to the opinions of the experts, or indeed, whether I should accept their opinions in the context of all of the evidence I heard.
[16] Fourthly, the Crown invited me to draw various inferences, particularly as to the intention of each of the accused. Whether I draw these inferences is for me, as Judge of the facts. I remind myself that an inference is a conclusion drawn from
facts that I accept are reliably established. It is not a guess.
5 Evidence Act 2006, s 25.
[17] Finally, I record that this trial was held back to back with another trial — CRI 2010-004-0022101 — involving Messrs Douglas and Nicholls. Counsel agreed, and I accepted, that the two trials should be held the one after the other, and that the reasons for verdicts in each trial should be given only after the conclusion of both trials. There was, however, no agreement in relation to the evidence, and each trial was run separately from the other. I have been careful to ensure that in considering my verdicts in this trial, I have taken into account only the evidence which was given in this trial.
[18] This potted and truncated summary of relevant rules of law and practice is not, and is not meant to be, exhaustive.
Overall factual setting
[19] To understand the matters at issue in this trial, it is necessary to delve into various corporate and trust structures.
a) Messrs Douglas and Nicholls — Capital + Merchant Finance Limited
[20] Capital + Merchant Finance Limited was incorporated on 18 January 2002. Messrs Douglas and Nicholls were the original directors of the company. As at
14 May 2002, the sole shareholder in the company was another company called Longbow Limited, and its shares in turn were owned by a company called Capital + Merchant Group Limited. The owner of the shares in Capital + Merchant Group Limited was another company called Investment Capital Trust Limited. Investment Capital Trust Limited’s directors and sole shareholders were Messrs Douglas and Nicholls. Investment Capital Trust Limited was the corporate trustee of a trust known as the Investment Capital Trust. Investment Capital Trust Limited held the shares in Capital + Merchant Group Limited on trust for the beneficiaries of the Investment Capital Trust. The Investment Capital Trust was created under a trust deed dated 27 March 2002. The settlor was an Auckland solicitor. Under the trust deed, the original beneficiaries were the trustees of two other trusts, the Independence Trust and the Boston Trust. The Independence Trust had been settled by Mr Douglas, and he was a discretionary beneficiary of the trust. The Boston
Trust was a trust associated with Mr Nicholls, and he was a discretionary beneficiary of the trust.
[21] Through this chain of corporate entities and trusts, Messrs Douglas and Nicholls effectively owned and controlled Capital + Merchant Finance Limited. I set out a diagram prepared by the Crown (amended to reflect answers given in cross-examination)6 broadly illustrating the ownership structure of Capital + Merchant Finance Limited as at 5 June 2003.
[22] Messrs Douglas and Nicholls were the only directors of Capital + Merchant Finance Limited until September 2002, when a Mr Kelly Wright was appointed as an independent non-executive director. Mr Wright resigned on 12 October 2006, and Mr Tallentire then became a director. Mr Tallentire had previously been the company’s Chief Executive Officer. A Mr Trevor James was a director between 30
March 2005 and 31 October 2006. A Mr Robert Sutherland was appointed a director on 30 November 2006 and a Mr Colin Ryan was appointed a director on
19 November 2006. Mr Douglas remained a director until February 2007 and
6 All of the diagrams used have been amended to reflect answers given by Mr Bulloch in cross-examination.
Mr Nicholls remained a director throughout, except for a short period between
November 2005 and March 2006.
b) The business of Capital + Merchant Finance Limited — the Trust Deed
[23] Capital + Merchant Finance Limited was a finance company. It offered a range of financial and investment services to persons and corporates. The range of financial services offered included term loans, revolving credit facilities and related fee-based facilities.
[24] In practice, the company was involved predominantly in property development loans and in financing construction projects. It made some business loans but this was not its core activity.
[25] Prospectuses issued by the company also recorded that the company might, from time to time, invest in other entities or ventures that were engaged in the financial services sector, or that allowed the company to broaden the investment and/or financial services it was able to offer.
[26] In order to offer these financial and investment services, Capital + Merchant Finance Limited borrowed money from the public. To comply with s 33 of the Securities Act 1978, it issued a number of prospectuses and investment statements and its fundraising was controlled by a debenture trust deed.
[27] Capital + Merchant Finance Limited offered two types of investment product, either capital secured deposits or investment deposits:
(a) Capital secured deposits were marketed as being more secure than investment deposits. They were secured by a first-ranking charge over the company’s undertaking. There was also mortgage indemnity and impairment insurance in place in respect of these funds. Unless the consent of the insurer was obtained, a loan made from capital secured deposits was limited to 66.66 percent of the value of the secured property as evidenced by an independent registered valuation,
and to advances up to a maximum of NZD $5 million for a term no longer than 24 months secured over land valued at no more than NZD $7.5 million.
(b)Investment deposits were also secured by a first ranking charge but they were not protected by any insurance policy. There were no lending criteria for these funds and they were used to provide term loans, revolving credit facilities, bridging loans and similar fee based loans.
[28] The debenture trust deed was dated 5 April 2002. The trustee was Perpetual Trust Limited. The deed was signed by Messrs Douglas and Nicholls as directors of Capital + Merchant Finance Limited. It set out in considerable detail the company’s obligations with respect to investors’ funds and it contained various restrictions on how Capital + Merchant Finance Limited, as the issuer of the debt securities securing the funding, could deal with the monies it received from the public.
[29] Relevantly, for present purposes, the trust deed contained specific obligations in relation to what were called “related party transactions”. Clause 6 2 of the trust deed provided as follows:
6 2The Company and each of the Charging Subsidiaries covenants with the Trustee that none of them will, without the prior written consent of the Trustee
(a) Restriction on Related Party Transactions
enter into any Related Party Transaction (as defined in clause 6 3) except in the ordinary course of business and where the terms thereof are evidenced in writing and the consideration therefore is on the basis of an arms length transaction as between two unrelated parties contracting in an open market.
[30] There were also various general covenants contained in the trust deed. Relevantly, cl 6 4 read as follows:
6 4 General Covenants
Each of the Company and the Charging Subsidiaries hereby covenants with the Trustee that it will —
…
(b) Carry on Business
carry on and conduct its business in an efficient, prudent and businesslike manner,
…
(g) Compliance with Laws, Etc
duly and promptly comply with all laws, directives and consents the non-compliance with which might give rise to a Charge or have a material adverse effect on the Company or may adversely and materially affect the rights or security of the Trustee or any Stockholder or Depositer under this Deed
[31] Pursuant to cl 7 1 of the trust deed, the directors of Capital + Merchant Finance Limited were required to furnish various accounts and reports to the Trustee. In particular, pursuant to cl 7 1(h), they were required to file quarterly directors’ certificates with Perpetual Trust Limited in a form that was set out in sch 5 to the trust deed. That schedule detailed all of the information that was to be included in a directors’ certificate. One of the requirements was that all related party transactions, and the amounts of those transactions, had to be listed in the certificate.
[32] As from August 2006, and in response to the then increasingly gloomy financial outlook, Perpetual Trust Limited required the directors of Capital + Merchant Finance Limited to provide monthly certificates.
c) The lending committee — the lending manager
[33] Capital + Merchant Finance Limited employed a Mr Scott Smith as its lending manager. He reported direct to Mr Tallentire as the Chief Executive Officer, and if Mr Tallentire was unavailable, then to Messrs Douglas and Nicholls.
[34] It was Mr Smith’s role to oversee the loan book. If a loan application was presented to the company, he would undertake a first review. He would go through the application and see what the purpose of the loan was. He would consider what security was proposed, and what the “exit strategy” was (ie how was the borrower was going to repay Capital + Merchant Finance Limited). The substance and
creditworthiness of the borrower was considered. He asked himself whether the borrower had any previous history with the company. He would look at the valuations provided as part of the application. He would ask himself whether the borrower was putting any equity into the proposal. If he considered that the proposal justified further consideration, he would arrange a meeting of the lending committee.
[35] The lending committee comprised Mr Smith, Mr Tallentire, Mr Douglas and Mr Nicholls. It would consider applications referred to it, and then made the decision whether or not to proceed with the loan. Meetings of the lending committee were relatively informal. Normally, the lending committee met as a group, in person, but if one of the members was not available, the other members would call that member by telephone and discuss the application with him. An absent member could approve an application over the telephone. Normally, Mr Smith would make a note of that. Sometimes, absent members would send an email to the committee.
[36] The lending committee did not have set agendas. Nor were minutes taken. If a loan was approved, Mr Smith would then prepare a basic summary sheet summarising the loan proposal. This was then signed by the persons who were approving the loan. This document was called the lending committee summary. It was the approval document setting out the loan proposal, and detailing any other considerations that the committee had imposed when it approved the application.
[37] If a decision was made to proceed with a loan, Mr Smith would prepare the necessary letter of offer, and process the loan documents. He would instruct solicitors and they, in turn, would prepare the loan documentation. Mr Smith would facilitate the draw down, and oversee the loan over its term.
[38] Mr Smith said that normally, the company would look to obtain a guarantee. He said that any valuation had to be addressed to the company and that it had to be from a valuer who the company was comfortable with. He said that if the company was presented with a valuation from a valuer whom it was not happy with, then it would either get a peer review of the valuation, or ask the borrower to provide a valuation from a valuer who was acceptable to the company. Mr Smith said that
when the company was considering a business loan, it would normally require general security agreements if it was lending to a corporate entity.
d) The background to the Numeria Transactions
[39] The background to these transactions began on 5 June 2003, when Investment Capital Trust Limited purchased a company called Numeria Holdings Limited from another company called Wiltshire Equities Limited.
[40] Prior to the purchase, Numeria Holdings Limited was wholly owned by Wiltshire Equities Limited and it in turn was wholly owned by a Mr Evan Christian. Numeria Holdings Limited owned all of the shares in a finance company known as Numeria Finance Limited. Numeria Finance Limited had its own debenture trust deed, and it raised funds from the public to provide loans to a range of businesses and individuals. It also owned a company called Numeria Leasing Limited that leased Eftpos machines to businesses. Numeria Holdings Limited also owned a beach property situated at 55 Bluebell Parade, Omaha, which it had purchased from Mr Christian. It owed Mr Christian $1,650,000 in respect of that purchase.
[41] A Mr Paul Connell, a Chartered Accountant and a director of Numeria Finance Limited, gave evidence that Numeria Holdings Limited acquired the beach property on settlement from Mr Christian, presumably for immediate on-sale to Investment Capital Trust Limited.
[42] Prior consent was sought and obtained from Perpetual Trust Limited for the proposed sale of the shareholding in Numeria Finance Limited. The application was made by Numeria Finance Limited pursuant to the terms of its debenture trust deed under which, coincidentally, Perpetual Trust Limited was also the trustee.
[43] In order to complete the purchase of Numeria Holdings Limited from Wiltshire Equities Limited, Investment Capital Trust Limited obtained a loan from Capital + Merchant Finance Limited. It made application to Capital + Merchant Finance Limited in this regard on 29 May 2003 seeking a loan advance of
$2 million. The application was signed by Mr Douglas and Mr Nicholls.
[44] On 5 June 2003, Capital + Merchant Finance Limited offered Investment Capital Trust Limited a revolving credit facility in the maximum sum of $2,805,000. The loan offer was signed by Mr Tallentire, and it was accepted by Messrs Douglas and Nicholls on behalf of Investment Capital Trust Limited as borrower. This advance was a related party transaction pursuant to Capital + Merchant Finance Limited’s debenture trust deed and it was disclosed in the directors’ quarterly certificate to Perpetual Trust Limited for the period ended 30 September 2003. That report was signed by Mr Nicholls and Mr Wright.
[45] Pursuant to the agreement for sale and purchase between the parties, the total purchase price for the shares in Numeria Holdings Limited was $2,725,729. This sum was calculated by reference to the combined value of the two assets that Investment Capital Trust Limited would control once the transaction was settled. The first asset comprised the shares in Numeria Holdings Limited, which were valued in the agreement at $1,075,729. The second asset was the beach property at Omaha, which was recorded in the agreement as being worth $1,650,000.
[46] On settlement, the sum of $1,650,000 was paid directly to Mr Christian and
$980,729 was paid to the vendor company for the shares. The sum of $95,000 was retained by Investment Capital Trust Limited until Numeria Finance Limited had entered into an agreement with its major supplier, Provenco Group Limited. That agreement was never signed and the retained sum of $95,000 was not paid over by Investment Capital Trust Limited.
[47] At the conclusion of the transaction, Investment Capital Trust, through Investment Capital Trust Limited, owned Numeria Holdings Limited, and therefore controlled its assets. It had also taken an assignment of the loan that had been made by Mr Christian to Numeria Holdings Limited to facilitate that company’s purchase of the beach property.
[48] Mr Wright was the Chief Executive Officer of Numeria Finance Limited and following the settlement, Numeria Holdings Limited sold 34 percent of the shares in Numeria Finance Limited to Parker Vernon Investments Limited, an entity associated with Mr Wright. The sale price for those shares was $200,000. The result
was that Numeria Holdings Limited retained 400,066 shares in, or 66 percent of, Numeria Finance Limited, and Parker Vernon Investments Limited acquired 200,034 shares in, or 34 percent of, Numeria Finance Limited.
[49] The beach property at Omaha was sold by Numeria Holdings Limited to a company called Paua Capital Limited. The sale process commenced on 2 July 2003 and concluded on 16 July 2003 when the property was transferred.
[50] The shares in Paua Capital Limited were owned by a solicitor, a Mr Patrick
Wilson.
[51] The evidence established that Mr Wilson and the law firm, Stace Hammond, in which Mr Wilson was a partner, frequently acted for Capital + Merchant Finance Limited, its various associated entities and its directors throughout the period covered by the indictment. Mr Wilson had provided advice to Messrs Douglas and Nicholls from the outset, and he had put in place the ownership structure for the Capital + Merchant Group. There was a close working relationship between Mr Wilson and Stace Hammond on the one hand, and Capital + Merchant Finance Limited and its directors on the other.
[52] As from 2 July 2003, both Messrs Douglas and Nicholls became directors of Paua Capital Limited, and Paua Capital Limited became the trustee of the Paua Capital Trust. The Paua Capital Trust was settled on the same day. The settlor was Mr Nicholls. The trust deed recorded that the initial purpose of the Paua Capital Trust was to acquire the Omaha beach property for the private enjoyment of the beneficiaries. Mr Nicholls and his wife were discretionary beneficiaries of the trust.
[53] Also on 2 July 2003, Mr Douglas and Mr Nicholls as directors of Paua
Capital Limited resolved:
(a) to purchase the Omaha beach property for $1,650,000 from Numeria
Holdings Limited;
(b) to fund the transaction via a loan from Investment Capital Trust
Limited.
Paua Capital Limited was to assume responsibility for the debt that Numeria Holdings Limited owed to Investment Capital Trust Limited consequent on the assignment of the loan incurred when the property was purchased by Numeria Holdings Limited from Mr Christian, and enter into a deed of acknowledgement of debt recording that it owed Investment Capital Trust Limited $1,650,000.
[54] A sale and purchase agreement was entered into between Numeria Holdings Limited and Paua Capital Limited for the sale and purchase of the property. The date is not particularly clear, but it appears to be 2 July 2003. The sale and purchase agreement was signed on behalf of Numeria Holdings Limited as vendor by Messrs Douglas and Nicholls. It was signed on behalf of Paua Capital Limited as purchaser by Messrs Douglas and Nicholls.
[55] The transaction was settled and as a result, Paua Capital Limited obtained a loan from Investment Capital Trust Limited of $1,650,000. Paua Capital Limited used the loan to purchase the property from Numeria Holdings Limited. The property was transferred to Paua Capital Limited on 16 July 2003 to be held on trust for the Paua Capital Trust.
e) The Numeria 1 transaction
[56] Against this background, on 30 November 2004, Investment Capital Trust Limited sold its shareholding in Numeria Holdings Limited to Capital + Merchant Group Limited. As noted, this transaction was referred to as Numeria 1 during the trial and it is the subject of count 1 in the indictment.
[57] The prospective sale and purchase was discussed at a board meeting Capital
+ Merchant Finance Limited held on 17 March 2004, but it did not then progress.
[58] The transaction had its substantive genesis in a memorandum prepared by
Mr Tallentire dated 4 November 2004. The memorandum was addressed to the
directors of Capital + Merchant Group Limited — Messrs Douglas and Nicholls. At the time, Mr Tallentire was the Chief Executive Officer of Capital + Merchant Finance Limited. In the memorandum, Mr Tallentire:
(a) supported the purchase by Capital + Merchant Group Limited of the shares in Numeria Finance Limited then owned by Numeria Holdings Limited;
(b)considered that Capital + Merchant Finance Limited, and its parent Capital + Merchant Group Limited, would benefit immediately from a tax perspective, that Capital + Merchant Group Limited and Capital + Merchant Finance Limited would be able to diversify their lending books away from their dependency on property lending, and that Capital + Merchant Finance Limited would be able to access Numeria Finance Limited’s bank borrowing programme; and
(c) outlined the benefits he perceived for Numeria Finance Limited.
Mr Tallentire referred to financial forecasts that he said had been prepared by Mr Wright as Chief Executive Officer of Numeria Finance Limited, and that he noted had been approved by that company’s board. He then set out a series of calculations based on those forecasts showing the contribution he considered was available to Capital + Merchant Group Limited and its tax group through the purchase of all of the shares in Numeria Finance Limited held by Numeria Holdings Limited. The calculations showed a cashflow benefit for Capital + Merchant Group Limited over the three-year period 2005 to 2007. Using these calculations, he then calculated the sale value of Numeria Holdings Limited on a number of different bases. He proposed that Capital + Merchant Group Limited should purchase capital notes that Numeria Finance Limited had issued to Investment Capital Trust Limited for $1,660,000 and that it should purchase the shares in Numeria Holdings Limited and pay Investment Capital Trust Limited $6 million immediately, a further
$2 million provided the 2006 results were to forecast, and a further $2 million thereafter provided the 2007 results were also to forecast. He proposed that the transaction would be funded by way of a related party loan on a commercial arm’s
length basis, and that Capital + Merchant Finance Limited should lend Capital + Merchant Group Limited $7,660,000 to pay for the capital notes and shares.
[59] Messrs Douglas and Nicholls decided to proceed with the transaction. Matters then proceeded relatively quickly, and on 8 November 2004, Investment Capital Trust Limited entered into two agreements with Capital + Merchant Group Limited, whereby Investment Capital Trust Limited agreed to sell to Capital + Merchant Group Limited:
(a) its shareholding in Numeria Holdings Limited for $10 million. The agreement recorded that $6 million was to be paid on the settlement date, and that the balance was to be paid, subject to performance, in two instalments on 1 June 2007 and on 1 June 2008; and
(b)the convertible capital notes issued to it by Numeria Finance Limited for $1,660,000. The purchase price for the capital notes was to be paid in one lump sum on settlement.
The agreements were signed by Messrs Douglas and Nicholls as directors of Investment Capital Trust Limited (as trustee of Investment Capital Trust) and as directors of Capital + Merchant Group Limited.
[60] On 15 November 2004, Capital + Merchant Group Limited applied to Capital
+ Merchant Finance Limited for a loan of $7.66 million to finance the transaction. The loan application was signed by Mr Douglas and Mr Nicholls as directors of Capital + Merchant Group Limited. It stated that the purpose of the loan was to enable Capital + Merchant Group Limited to fund the purchase of Numeria Holdings Limited. The loan application reproduced the financial forecasts from Mr Tallentire’s memorandum.
[61] On the same day, 15 November 2004, Capital + Merchant Finance Limited’s lending committee approved the loan to Capital + Merchant Group Limited. The loan committee summary recorded that there was no valuation, that the loan was based on cashflow projections and that Numeria Finance Limited was expected to
become very profitable in the next two-year period. It also recorded that the funds were to come from investment deposit loans held by Capital + Merchant Finance Limited. The term of the loan was to be two years with interest at 13 percent per annum. It was to be secured by a general security agreement to be given by Capital
+ Merchant Group Limited. The lending committee summary approving the loan was signed by Mr Smith, Mr Tallentire and Mr Douglas.
[62] A loan agreement was prepared by Kensington Swan. It is undated. It was signed by Messrs Douglas and Nicholls on behalf of both Capital + Merchant Finance Limited as lender and Capital + Merchant Group Limited as borrower.
[63] The transaction proceeded and on 30 November 2004, Capital + Merchant Finance Limited paid $6 million into Kensington Swan’s trust account. That payment represented the part of the advance to Capital + Merchant Group Limited that enabled it to purchase the shares in Numeria Holdings Limited. The funds were then transferred to Investment Capital Trust Limited, and on the same day, it repaid
$5,926,794.13 to Capital + Merchant Finance Limited. This repayment settled earlier related party loans Capital + Merchant Finance Limited had made to Investment Capital Trust Limited, including the loan made in 2003 to enable Investment Capital Trust Limited to purchase Numeria Holdings Limited. The balance of $73,205.87 was retained by Investment Capital Trust Limited.
[64] On 10 December 2004, a security agreement was put in place. The agreement was between Capital + Merchant Group Limited and Capital + Merchant Finance Limited. It recorded that the security for the loan was the shares in Numeria Holdings Limited and the convertible capital notes issued by Numeria Finance Limited and held by Capital + Merchant Group Limited. The document was signed by Messrs Douglas and Nicholls as directors of Capital + Merchant Group Limited, and as directors of Capital + Merchant Finance Limited.
[65] On 24 December 2004, $1,660,000 was withdrawn from Capital + Merchant Finance Limited’s bank account. This was the balance of the advance to Capital + Merchant Group Limited to enable it to purchase the capital notes from Investment
Capital Trust Limited. Investment Capital Trust Limited’s bank account shows that
the company received the money on 24 December 2004.
[66] The money flow was in large part circular. From an investor’s perspective, the related party loan to Investment Capital Trust Limited was replaced with a related party loan to Capital + Merchant Group Limited.
[67] In broad terms, the sale of Numeria Holdings Limited to Capital + Merchant
Group Limited can be illustrated by the following diagram:
[68] The loan by Capital + Merchant Finance Limited to Capital + Merchant Group Limited was a related party transaction as those words were defined in cl 6 3 of the debenture trust deed. Capital + Merchant Group Limited was the holding company of Capital + Merchant Finance Limited and therefore a “related party” as those words were defined in the debenture trust deed. Clause 6 2(a) was engaged.
[69] Capital + Mercant Group Limited did not obtain the prior written consent of Perpetual Trust Limited as trustee under the debenture trust deed, before the money was advanced to enable it to purchase Numeria Holdings Limited and the capital notes. Rather, the transaction was disclosed as a related party transaction in the directors’ quarterly report to Perpetual Trust Limited for the period ended
31 December 2004. That report was signed by Messrs Douglas and Nicholls. It was disclosed as being a $10 million facility. The directors continued to disclose the transaction in all relevant subsequent certificates.
[70] As a result of these transactions, Investment Capital Trust Limited as trustee of Investment Capital Trust made a capital gain of $5,019,443. That capital gain was recorded in the financial statements of the trust for the year ended 31 March 2005. It was calculated by reference to the difference between the sum Investment Capital Trust Limited had paid for Numeria Holdings Limited in June 2003, and the price paid by Capital + Merchant Group Limited to Investment Capital Trust Limited to acquire Numeria Holdings Limited in November 2004.
[71] This capital gain was distributed to various trusts associated with Messrs Douglas and Nicholls. On 30 November 2004, Investment Capital Trust Limited as trustee of the Investment Capital Trust resolved to approve the sale of the shares in Numeria Holdings Limited to Capital + Merchant Group Limited and to further approve the distribution of the capital gain made on disposal to beneficiaries of Investment Capital Trust, by crediting the beneficiaries’ loan accounts as follows:
(a) Independence Trust — $2,194,651.38; (b) Francis Trust — $630,140.24;
(c) Boston Trust — $116,993.37;
(d) Boston Investment Trust — $427,658.01; and
(e) Paua Capital Trust — $1,650,000.
The resolution was signed by Messrs Douglas and Nicholls as authorised representatives of Investment Capital Trust Limited, as trustee of Investment Capital Trust. Investment Capital Trust sent letters dated 30 November 2004 recording the distributions to Mr Douglas on behalf of the Independence Trust and the Francis Trust, and to Mr Nicholls on behalf of the Boston Trust, the Boston Investment Trust and Paua Capital Trust. The letters were signed by Messrs Douglas and Nicholls as authorised representatives of Investment Capital Trust Limited as trustee for Investment Capital Trust.
[72] Each of the trusts received the distribution allocated to it.
[73] The loan from Investment Capital Trust Limited to Paua Capital Limited in relation to the Omaha beach property was offset by the distribution, leaving a zero balance. This effectively meant that the Paua Capital Trust, which had been settled by Mr Nicholls and of which he was a discretionary beneficiary, obtained ownership of the beach property at Omaha without making any payment for it.
[74] The distribution is illustrated in the following diagram:
f) The background to the Clyde transactions
[75] The Clyde 1 and the Clyde 2 transactions the subject of counts 2 and 3 in the indictment, and a third transaction known as Clyde 3, resulted in the transfer of the beneficial ownership and control of the Capital + Merchant Group and another group known as the Cymbis Group from Messrs Douglas and Nicholls to Mr Tallentire.
[76] In order to understand the transactions, it is helpful to set out the ownership structures of the various entities involved prior to the transactions that took place.
These structures are illustrated in the following diagram:
[77] I have earlier set out a diagram illustrating the Capital + Merchant Group structure as at June 2003 above. As can be seen from the structure portrayed on the left of the diagram immediately above, when the Clyde 1 transaction took place in early November 2006, there were some changes in the Capital + Merchant Group structure.
(a) Longbow Limited had gone. Capital + Merchant Finance Limited was owned directly by Capital + Merchant Group Limited.
(b)Investment Capital Holdings Limited had been incorporated. It was a wholly-owned subsidiary of Investment Capital Trust Limited. Its directors were Messrs Douglas and Nicholls. It was the trustee of a trust known as the Bluewater Trust.
(c) The Bluewater Trust had been created by a trust deed dated
10 October 2006. The settlor was a solicitor, a Mr Connolly, of Stace Hammond. The general beneficiaries of the trust were the Independence Trust (associated with Mr Douglas), and the Boston Trust (associated with Mr Nicholls).
(d)Capital + Merchant Business Finance Limited had been incorporated on 17 May 2006. It was a wholly-owned subsidiary of Capital + Merchant Group Limited.
[78] The next corporate group shown in the middle of the diagram was known as the Cymbis Group. This group had been created to replicate the Capital + Merchant model in Australia.
(a) Cymbis Finance Australia Limited had been incorporated in Australia on 10 August 2004. As the name implies, it was a finance company that raised funds from the issue of debenture stock to the public. The money raised was used to provide development finance for property projects in Australia.
(b)Cymbis Finance Australia Limited was 80 percent owned by Cymbis Holdings Pty Limited, and 20 percent by Cymbis Holdings (No 2) Pty Limited. Both companies were registered in Australia.
(c) Cymbis Holdings Pty Limited was wholly owned by Cymbis
New Zealand Limited, a New Zealand registered company. Cymbis
New Zealand Limited in turn was owned as to 63 percent by Cymbis Trustees Limited as trustee of the Cymbis Trust, and as to 37 percent by Eques Securities Limited as trustee of the Opua Trust.
(d)Cymbis Holdings (No 2) Pty Limited was wholly owned by Cymbis New Zealand (No 2) Limited, a New Zealand registered company. Cymbis New Zealand (No 2) Limited was wholly owned by Eques Securities Limited as trustee of the Opua Trust.
[79] As noted, the trustee of the Cymbis Trust was Cymbis Trustees Limited, and the shareholders and directors of that company were Messrs Douglas and Nicholls. The trustee of the Opua Trust was Eques Securities Limited. The shareholders and directors of Eques Securities Limited were members of the law firm, Stace Hammond.
[80] The final group on the right-hand side of the diagram comprised the entities associated with Mr Tallentire. The Clyde Trust had been settled by Mr Tallentire, with Clyde Investments Limited as its trustee. Mr Tallentire was the sole shareholder of Clyde Investments Limited.
[81] As noted above, Mr Tallentire wished to acquire the Capital + Merchant Group and the Cymbis Group from Messrs Douglas and Nicholls. He was investigating his options in this regard. By way of example, he emailed a Mr Waddell, who was a share broker with Waddell Johnson McCarthy & Company Limited based in Wellington, on 4 September 2006. The email recorded as follows:
…I currently have a price of $5 mill. cash and $8mill secured debt or similar and paid down over 24 months. This purchase would have to be subject to no due diligence and is available to me as soon as I have found a way to do it. I am working on this.
My intention was to buy the businesses outright and then use a holding company and managemnt (sic) company to operate them. To reduce my debt and service the holding company debt I intended selling shareholdings in the holding company.
I (sic) real problem is dealing with the internal issues such a transaction will create. I am dealing with this currently. CN’s related party lending possible loan losses if any etc. etc.
My own view was that laying hands on $5 mill. without due diligence was a big ask so I had not approached you yet.
I think there maybe a profitable play in this. Are you interested???
[82] There were also discussions regarding the matter between Capital + Merchant Finance Limited’s Chief Financial Officer, Mr Smyth, and Messrs Douglas, Nicholls, Tallentire and Wilson. I come to those discussions shortly when considering count 2.
[83] Between 4 September 2006 and 1 October 2006, Mr Smith obtained valuations of Cymbis Finance Australia Limited from Mr Vallabh, an independent analyst retained by Waddell Johnson McCarthy & Company Limited.
[84] On 5 October 2006, a heads of agreement was entered into between Messrs Douglas and Nicholls, Mr Tallentire, Investment Capital Trust Limited and Cymbis Trustees Limited. The document was signed by Mr Douglas, Mr Nicholls and Mr Tallentire personally, by Messrs Douglas and Nicholls on behalf of Investment Capital Trust Limited, and by Messrs Douglas and Nicholls on behalf of Cymbis Trustees Limited. Mr Smyth witnessed all of the signatures. In brief, the document recorded as follows:
(a) Messrs Douglas and Nicholls were the appointors of the Investment
Capital Trust and the Opua Trust;
(b)Messrs Douglas and Nicholls agreed to assign their powers of appointment to Mr Tallentire on the terms set out in the agreement;
(c) the acquisition value was $13 million;
(d)subject to the arrangements referred to in the document being completed to the satisfaction of Messrs Douglas and Nicholls, and to them receiving the $13 million acquisition value, they would assign to Mr Tallentire the powers of appointment held by them.
[85] The transaction proceeded on a staged basis, albeit not totally in accordance with the heads of agreement.
g) The Clyde 1 transaction
[86] As a first step, Clyde Investments Limited sought to borrow $7.7 million from Capital + Merchant Finance Limited. It submitted an application seeking finance to Capital + Merchant Finance Limited dated 1 November 2006. The application was addressed to Mr Smith. It was signed by Mr Tallentire on behalf of Clyde Investments Limited. According to the application, the purpose of the funding was “to provide finance to Cymbis Trustees Limited as trustee of the Cymbis Trust”. No further explanation was given as to what the advance was to be used for.
[87] Capital + Merchant Finance Limited decided to grant the finance sought. Its lending committee approved a loan to Clyde Investments Limited of $8.7 million on the same day, 1 November 2006. This allowed for the capitalisation of interest and fees. The lending committee summary was signed by Mr Tallentire, Mr Smith and Mr Smyth. It also had the words “approved by emails” in Mr Smith’s handwriting on the document.
[88] Also on 1 November 2006, Capital + Merchant Finance Limited wrote to Clyde Investments Limited as trustee of the Clyde Trust advising that the company had approved the loan application for a revolving credit facility of up to $8.7 million for a term of 24 months, secured by a specific security agreement over Clyde Investments Limited’s interests in the shares of Cymbis New Zealand Limited and Cymbis New Zealand (No 2) Limited, as well as any other documentation or security that Capital + Merchant Finance Limited or its solicitor reasonably deemed necessary or expedient to secure the loan advance. The ordinary interest rate was
12 percent per annum, with a penalty interest rate of 18 percent per annum. The letter of offer was signed by Mr Smith. Mr Tallentire accepted the terms of the loan being offered by Capital + Merchant Finance Limited on behalf of Clyde Investments Limited as trustee of the Clyde Trust.
[89] A loan agreement was then entered into by Clyde Investments Limited (as trustee of the Clyde Trust) as borrower, and by Capital + Merchant Finance Limited as lender. It was also dated 1 November 2006, and provided for the revolving credit facility, and the securities noted above. The document was signed by Mr Tallentire on behalf of Clyde Investments Limited, and by Mr Smith and Mr Douglas on behalf of Capital + Merchant Finance Limited.
[90] A further loan agreement was entered into on 1 November 2006. Clyde Investments Limited as trustee of the Clyde Trust, agreed to make available to Cymbis Trustees Limited, as trustee of the Cymbis Trust, a revolving credit facility of $8.7 million. The agreement was signed by Mr Tallentire on behalf of Clyde Investments Limited and Mr Douglas on behalf of Cymbis Trustees Limited.
[91] On 3 November 2006, Capital + Merchant Finance Limited advanced
$7.7 million to Clyde Investments Limited. The money was transferred from Capital
+ Merchant Finance Limited’s bank account to Stace Hammond’s trust account.
[92] On the same day, a letter was sent to Stace Hammond from Capital + Merchant Finance Limited, Clyde Investments Limited, Cymbis Trustees Limited and Bluewater Investment Holdings Limited. Mr Nicholls signed on behalf of Capital + Merchant Finance Limited, Mr Tallentire on behalf of Clyde Investments Limited, Mr Nicholls on behalf of Cymbis Trustees Limited, and Mr Nicholls on behalf of Bluewater Investment Holdings Limited. (There appears to be an error in the letter of instruction. It referred to Bluewater Investment Holdings Limited as being the trustee of the Bluewater Trust. This was incorrect. According to the Bluewater Trust trust deed, the trustee was Investment Capital Holdings Limited.) The letter instructed Stace Hammond to deal with the sum of $7.7 million transferred to its trust account as follows:
(a) the $7.7 million was to be transferred to Clyde Investments Limited as trustee of the Clyde Trust as a loan advance from Capital + Merchant Finance Limited;
(b)the $7.7 million was then to be transferred from Clyde Investments Limited, as trustee of the Clyde Trust, to Cymbis Trustees Limited, as trustee of the Clyde Trust, as part of the advance recorded in the loan agreement between Clyde Investments Limited and Cymbis Trustees Limited dated 1 November 2006;
(c) $7.1 million of the monies then held by Cymbis Trustees Limited as trustee of the Cymbis Trust was to be applied to purchase various loans from Capital + Merchant Finance Limited:
(d)the remaining $600,000 was to be held in the name of Cymbis Trustees Limited as trustee of the Cymbis Trust, to be distributed to the trustee of the Bluewater Trust and held pending further instructions;
(e) the $7.1 million paid pursuant to (c) above to Capital + Merchant Finance Limited was to be paid into Capital + Merchant Finance Limited’s account with Westpac Banking Corporation.
[470] To my mind, this report is important when considering the state of mind of Messrs Nicholls and Tallentire at the time. The wording used by Mr Smyth on its plain reading suggests that approval was given by Perpetual Trust Limited, as the trustee of both Capital + Merchant Finance Limited and Numeria Finance Limited. While that report post-dates the transaction, it is a reasonable inference that Messrs Nicholls and Tallentire may have shared Mr Smyth’s understanding at the time of the transaction.
[471] I also take into account the fact that contemporaneous with the purchase, Numeria Leasing Limited entered into new finance arrangements with the ANZ National Bank. As part of that refinancing, a comprehensive assessment was made of Numeria Leasing Limited’s position. The bank approved funding in the sum of $12 million. This provides substantial support for the view that Numeria Leasing Limited’s business was generally healthy and valuable, and that it had good prospects. It does not mean that the directors acted prudently when proceeding on Mr Vallabh’s valuation. Indeed, it heightens the need for additional caution because the ANZ National Bank was going to be a prior charge holder. However, it does suggest that Messrs Nicholls and Tallentire may not have intentionally breached the requirements contained in the debenture trust deed.
[472] Accordingly, I am not persuaded beyond reasonable doubt that Messrs Nicholls and Tallentire intended to breach the requirements of the debenture trust deed. In my judgment, there is a reasonable possibility that they did not intend to do so.
[473] Accordingly, I find Messrs Nicholls and Tallentire not guilty in relation to count 4.
Conclusion
[474] These are my reasons for the verdicts which I delivered on 19 July 2012.
Wylie J
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