R v Whale
[2013] NZHC 731
•12 April 2013
A SUPPRESSION ORDER EXISTS IN RESPECT OF THE PUBLICATION OF THE NAME AND ANY IDENTIFYING PARTICULARS OF THE ACCUSED REFERRED TO IN THESE VERDICTS AS "A".
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CRI-2011-004-018433 [2013] NZHC 731
THE QUEEN
v
ROBERT BARRY WHALE PAUL WILLIAM CROPP A
Hearing: 18-22, 25-28 February, 1, 4-8, 11-15, 21, 25 and 26 March 2013
Counsel: B H Dickey and M Thomas for Crown
P Davison QC and R Woods for R B Whale
J R Billington QC and D Pannett for P W CroppM D Lloyd for A Judgment: 12 April 2013
VERDICTS OF LANG J
This judgment was delivered by me on 12 April 2013 at 4.30 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
R V ROBERT BARRY WHALE HC AK CRI-2011-004-018433 [12 April 2013]
PART ONE: BACKGROUND AND INTRODUCTORY MATTERS [5]
The personnel involved in the governance, management and operation of the companies
[16]
The loan approval process [28] The regulatory framework within which the companies operated [35] Dominion’s Trust Deed [37] North South’s Trust Deed [42]
Fundamental principles
Onus and standard of proof
[48]
Separate trials [52]
Other matters [55]
Elements of the offence
a) Control
b)The obligation to deal with the property in accordance with the requirements of another person
c) Knowledge of the obligation
d)Intentionally dealing with the property otherwise than in accordance with the obligation
[56] [59] [61]
[63] [64]
The allegations in greater detail [66]
Principals and parties [71]
PART TWO: THE ALLEGATIONS BASED ON INTENTIONAL FAILURE TO OBAIN TRUSTEE’S PRIOR WRITTEN CONSENT TO RELATED PARTY TRANSACTIONS
Background to Counts 1, 2 and 3 – the Norfolk Manor project
[74]
Count 1 – the loan to Norfolk Manor [79]
Issues [84]
Did Mr Whale control the investors’ funds that Dominion used to make the advance to Norfolk Manor?
Did Mr Whale know between August 2004 and July 2007 of the restriction that the Trust Deed imposed on Dominion in respect of related party lending?
Did Mr Whale intend to assist Dominion to breach the restriction on related party lending?
[85] [90] [104]
Verdict [109] Count 2 – The loan by Dominion to WAFD [110] Background [111]
1. Mr Whale
Issues
Who controlled the investors’ funds that Dominion used to make the loan to
WAFD?
Did Mr Whale assist Dominion to breach the prohibition on related party lending?
Did Mr Whale know of the prohibition on related party lending as at 31 March
2008?
[123]
[124] [127] [129]
Verdict [150]
1. Mr Cropp
Issues
Did Mr Cropp know of the prohibition on related party lending in Dominion’s
Trust Deed?
[151] [153]
Did Mr Cropp intentionally cause Dominion to breach the prohibition on related party lending?
[169]
Verdict [207] Culpability [208] Count 3 – the WAFD SSA [224] Preliminary issues [231]
Was the payment underlying Count 3 a related party transaction for the
purposes of North South’s Trust Deed?
Did the Trust Deed nevertheless exclude the payment from being a related party transaction?
1. Mr Whale
Issues
Did Mr Whale assist North South to breach the related party restrictions in
North South’s Trust Deed?
Did Mr Whale know of the related party restrictions in North South’s Trust
Deed as at 31 March 2008?
Did Mr Whale intentionally assist North South to breach the related party restrictions in its Trust Deed in respect of the WAFD SSA?
[232]
[255] [266]
[268] [272] [277]
Decision [295]
2. Mr Cropp [296] Verdict [310] Culpability [311]
3. Mr A
The issue
[323]
The Crown case [327] Analysis [344] Decision [361]
Count 4 – The Dynasty SSA
Background
Was the Dynasty payment a related person transaction in terms of North
South’s Trust Deed?
[362]
[370]
1. Mr Whale [375]
Is it possible for Mr Whale to commit an offence under s 220 if he did not become aware of the transaction until after it had occurred?
[377]
Issues [383]
Did Mr Whale intentionally assist North South to breach the related party restrictions in its Trust Deed?
[385]
Decision [396]
2. Mr Cropp [397]
Did Mr Cropp intentionally cause North South to breach the related party restrictions in its Trust Deed?
[399]
Decision [414]
Culpability [415]
3. Mr A
Issue
Did Mr A intentionally assist North South to breach the related person restrictions in its Trust Deed when it made the payment to Dominion on 14
April 2008?
[418] [420]
Decision [428]
Count 5 – The Te Kaha SSA
Background
Was the Te Kaha payment a related person transaction in terms of North
South’s Trust Deed?
1. Mr Whale
Issues
Who was in control of the investors’ funds that North South paid to Dominion
in terms of the arrangement?
Did Mr Whale assist North South to breach the related party restrictions contained in the Trust Deed?
[429]
[435] [441]
[442] [444]
Decision [449]
2. Mr Cropp
Issue
Did Mr Cropp intentionally cause North South to breach the related person restrictions in its Trust Deed?
[450]
[451]
Decision [456]
Culpability [457]
3. Mr A [460]
Decision [472]
PART THREE: THE ALLEGATIONS BASED ON BREACH OF THE OBLIGATION TO CARRY ON BUSINESS IN A PRUDENT AND BUSINESSLIKE MANNER
[473]
Preliminary issue [474]
What would the position be if jurisdiction existed for the Crown to proceed under this particular?
The WAFD Security Sharing Agreement – Counts and 3
[502]
The Dynasty and Te Kaha Security Sharing Arrangements [510]
PART FOUR: VERDICTS [513]
[1] The three accused face charges of theft by a person in a special relationship.1
The charges were initially laid by the Director of the Serious Fraud Office (“SFO”), and arise out of the failure of two finance companies, Dominion Finance Group Ltd (“Dominion”) and North South Finance Ltd (“North South”). Dominion and North South received funds for investment from members of the public (“investors”), and used those funds to make loans to borrowers in both the commercial and domestic sectors. At all material times both companies were wholly owned subsidiaries of the publicly listed company Dominion Finance Holdings Ltd (“Holdings”).
[2] In essence, the Crown contends that each accused intentionally caused or assisted Dominion and North South to make unauthorised loans to related parties using investors’ funds. In respect of some charges the Crown also alleges that the accused intentionally caused or assisted the companies to breach their obligations to conduct their business in a prudent and businesslike manner. In both respects, the Crown contends that they committed the crime of theft by a person in a special relationship.
[3] It is important to emphasise from the outset, however, that the Crown does not allege that the accused acted dishonestly. It is not necessary for the Crown to prove dishonesty in order to establish the charges it has laid. Nor does the Crown contend that the accused stood to gain personally from any of the transactions that form the basis of the charges. There is no evidence that any of the accused gained any direct or indirect benefit from those transactions.
[4] Similarly, the five transactions that underlie the charges did not cause Dominion and North South to collapse. The reasons for their collapse are many and varied, but the ultimate outcome would have occurred regardless of these transactions. In fact, four of the transactions provided desperately needed liquidity to Dominion. They enabled Dominion to continue trading for several weeks longer than it would otherwise have been able to do. That result came, unfortunately, at the
expense of North South's investors. The net result of these transactions appears to be
1 Crimes Act 1961, s 220.
that North South’s investors would have received approximately eight cents more
per dollar invested if the transactions had not taken place.
PART ONE: BACKGROUND AND INTRODUCTORY MATTERS
[5] Dominion’s founders were Mr Terry Butler and his wife Ann. Mr Butler faces the same charges in the indictment as Mr Whale, but the Crown has agreed to defer his trial on those charges because he is currently in very poor health.
[6] At all material times Mr Whale was a director of all three companies. He was also a partner in the law firm Jones Young, and he and members of his staff carried out legal work on behalf of the companies. For the most part this involved the preparation and enforcement of securities given by parties who had obtained loans from the companies.
[7] Mr Cropp was the Chief Executive Officer (“CEO”) of the companies, whilst
Mr A was their [ ].
[8] Dominion was originally incorporated in 1954, and operated as a finance company from that date. It began raising funds from the public in May 1993 through the offer of and subscription to debenture stock. Holdings became a publicly listed company in mid-2004, and held all of the shares in Dominion from that point.
[9] North South was originally incorporated in November 1999, and operated as a finance company as from that date. It raised funds from the public through the offer of and subscription to debenture stock as from August 2001. Holdings acquired the shares in North South on or about 1 April 2006.
[10] Many of Dominion’s borrowers were commercial property developers, and it commonly loaned funds on the security of second ranking mortgages. North South, on the other hand, predominantly loaned monies against the security of first ranking mortgages.
[11] In common with other finance companies, Dominion and North South faced very challenging conditions in late 2007 and early 2008. The collapse of other finance companies meant that investors became wary of reinvesting funds with the companies when investments matured. The companies’ borrowing clients were also struggling to complete and sell property developments in a timely and profitable manner. As a consequence, they were unable to repay loans on due date. This deprived the companies of funds with which to meet their obligations to investors and the banks.
[12] On 9 September 2008, the trustee of Dominion’s investors, Perpetual Trust Limited (“Perpetual”), placed Dominion in receivership. At that time Dominion owed 5,937 investors the sum of approximately $176.9 million. In addition, it owed the sum of $56.2 million to the ASB Bank and the Bank of Scotland International (“BOSI”). In May 2009 the receivers estimated that investors and the banks would recover between 10 cents and 25 cents in the dollar on funds invested. They currently estimate that investors will receive between 16 and 18 cents per dollar of principal invested.
[13] North South’s trustee, Covenant Trustee Company Limited (“Covenant”), placed North South in receivership on 8 July 2008. North South’s investors and the banks then permitted North South to enter into a moratorium on 1 December 2008 under which it commenced a selldown of its assets. Between December 2008 and July 2010, North South was able to return approximately 55.5 cents per dollar of principal invested to first ranking debenture holders.
[14] North South was subsequently placed in liquidation in September 2010. That occurred after the Securities Commission had laid charges against North South’s directors. At that time, North South owed 3,900 debenture holders the sum of approximately $31 million. In addition, it owed two trading banks the sum of approximately $15 million.
[15] The receivers and liquidator estimate that the investors and the banks will recover between 65 and 70 cents in the dollar on principal invested.
The personnel involved in the governance, management and operation of the companies
[16] Holdings, Dominion and North South all had the same directors. They were Mr and Mrs Butler, Mr Paul Forsyth, Mr Whale, Mr Vance Arkinstall and Mr Rick Bettle. Mr Bettle was the Chairman of each board.
[17] The executive directors, in the sense that they were employed by and were involved in the day to day operation of the companies, were Mr and Mrs Butler and Mr Forsyth. Mr Forsyth was a chartered accountant with his own accounting and consultancy practice, but he worked for the companies at their premises in Parnell on four mornings each week.
[18] Although the prospectuses of Dominion and North South also described Mr Whale as an executive director, he was not employed by the companies and did not work from their premises. He remained a partner in his law firm, Jones Young, and carried out legal work on the companies’ behalf from the firm’s premises. Mr Whale derived remuneration from the companies in the form of directors fees, together with fees that he invoiced the companies and/or their clients for legal work that he and his firm carried out on their behalf.
[19] The independent directors were Mr Arkinstall and Mr Bettle. They received financial information from the companies on a regular basis, but only came to the companies’ premises to attend monthly board meetings. For convenience, the directors did not meet separately in relation to each of the companies. Rather, they dealt with issues relating to all three companies at the same meeting.
[20] Mr Butler originally acted as Dominion’s Chief Executive Officer, and Mrs
Butler acted as CFO. As Dominion grew and after Holdings acquired its shares in
2004, the companies employed Mr A as [ ]. He commenced working for the companies in or about October 2005. He also assumed the role as [ ] of North South after Holdings acquired that company in October 2006. Mr A was assisted by three staff members, including Mr Craig Barns, a financial analyst. After Mr A
became [ ], Mrs Butler played a lesser role in the financial management of the company.
[21] Mr Cropp was employed as CEO of all three companies in October 2006. Mr Butler’s role in the “hands on” management of the companies decreased to some extent after Mr Cropp’s appointment as CEO, but it is clear that he continued to maintain a keen interest in the companies’ affairs.
[22] Dominion and North South also had an Audit and Risk Committee, which comprised Mr Arkinstall, Mrs Butler, Mr Forsyth and Mr Martin Sweetapple. The function of this committee was to deal with the companies’ auditors, and to manage areas of risk. Mr Sweetapple had extensive experience in the commercial lending sector, and he was also the companies’ risk manager. He promulgated a Credit Policy Manual prescribing the principles and procedures to be followed in relation to loan applications and risk management.
[23] Dominion and North South employed six lending managers, whose role it was to find new lending opportunities for the companies. These included Mr and Mrs Butler’s son, Mr Hayden Butler, and Mr Brendon Wilson.
[24] Dominion and North South also had a Credit Committee, which was tasked to consider applications by borrowers for loan finance. It comprised Mr Paul Forsyth (chairman), Mr Sweetapple, and Mr Cropp. Mr Butler and Mr A were authorised to act as alternates in the event that one of the permanent members of the committee was not available. The Credit Committee met on an ad hoc basis depending on workload, usually in the mornings whilst Mr Forsyth was in the office.
[25] From approximately September 2007 the companies also had a liquidity committee, which met weekly. This committee was responsible for producing forecasts of the future cashflow needs of the companies. It did this by comparing likely income with known and probable outgoings. Income comprised new and renewed investments, together with loans that were repaid by borrowers. Outgoings comprised the operating costs of the business, together with the amount required to advance new loans and to meet the companies’ obligations to their investors.
[26] The liquidity committee comprised the companies’ financial analyst, Mr Craig Barns, together with Mr Cropp, Mr A and Mr Sweetapple. Lending managers would also be required to attend meetings where loans for which they were responsible were to be discussed.
[27] Mr Barns produced the cashflow forecasts by obtaining data regarding known outgoings and income from the companies’ computer database. He then would meet with individual lending managers before each committee meeting in order to obtain a realistic assessment as to the likelihood of loans being repaid within the forecast period. The meetings of the liquidity committee would then be used to test these assessments further, and to encourage the lending managers to be proactive in placing pressure on borrowers whose loans were impaired or in default.
The loan approval process
[28] Loans of up to $1.5 million could be approved by the unanimous agreement of a sub-committee comprising Mr Forsyth and Mr Sweetapple (with Mr Cropp authorised to act as an alternate). Loans between $1.5 million and $5 million could be approved by a majority of the members of the Credit Committee. Loans greater than $5 million had to be approved by the directors. An application would only be considered by the board, however, if a majority of the members of the Credit Committee supported it. In practice, the board generally approved loans that had been recommended by the Credit Committee.
[29] Meetings of the Credit Committee were held as required, generally between Monday and Thursday when Mr Forsyth was in the office in the morning. The Credit Policy Manual required lending managers to place loan proposals before the Credit Committee in a prescribed form designed to ensure that the committee had adequate information before it to decide whether or not to approve the application. The lending managers would attend meetings of the Credit Committee so that they could answer any questions the committee might have in relation to loan applications they had submitted. Lending managers did not, however, play any formal role in the committee’s decision making process.
[30] Once a loan was approved, the loan application was delivered to the Loans Section, where one of three staff, including Ms Lisa Collins and Ms Diane Powell, would instruct the company’s solicitors to draw up the necessary securities.
[31] Once the solicitors confirmed it was in order to disburse the loan, Ms Collins or one of her colleagues would obtain the authorisation of the CFO to pay the funds into the trust account of the companies’ solicitors. The solicitors would then disburse the loan to the borrower’s solicitors.
[32] The lending managers remained responsible for the loans they had recommended. If a loan fell into arrears, the lending manager who had recommended it would be required to oversee collection of the loan. If necessary, and in conjunction with the loans administration team, they would instruct the company’s solicitors to enforce repayment of the loan.
[33] Mr Whale’s law firm, Jones Young, was generally instructed to prepare security documentation in respect of loans approved by the Credit Committee. Mr Whale carried out that task with the assistance of two legal executives, Ms Vicki Quinn and Ms Lauren Martin.
[34] Dominion sought legal advice in relation to other matters, and in particular in relation to the process by which Holdings became listed on the New Zealand Stock Exchange, from Mr Whale’s partner, Mr Sean Joyce. North South usually consulted the law firm Brookfields if it needed legal advice.
The regulatory framework within which the companies operated
[35] Dominion and North South both offered investors debt securities in the form of a debenture over their assets. As a result, they were subject to the provisions of Part 2 of the Securities Act 1978 (“the Act”). This required them to solicit funds in accordance with an authorised advertisement, an investment statement or a prospectus. The companies complied with this requirement by issuing prospectuses containing the information required by the Act.
[36] The Act also required the offer to be regulated by the terms of a Trust Deed between the company and a nominated trustee. The role of the trustee was to act in the interests of investors who invested monies with the company for investment in accordance with the prospectus. The trustee was required to monitor compliance by the company with the terms of the Trust Deed. If the company failed to comply with its obligations under the Trust Deed, the trustee had the power to appoint a receiver to take over and manage the companies’ assets.
Dominion’s Trust Deed
[37] Dominion entered into a Trust Deed with Perpetual2 on 14 May 1993. The
Trust Deed contained the following restriction on related party lending:
RESTRICTIONS ON DEALINGS
6.02 Each of them the Company and the Charging Subsidiary covenants with the Trustee that none of them will without consent in writing of the Trustee first had and obtained:
DISPOSAL OF ASSETS
(a) DISPOSE of whether by a single transaction or any series of transactions whether related or not any part of its undertaking or assets to any Non-Charging Related Company otherwise than for full consideration in the ordinary course of business such consideration to be paid in cash on settlement to the satisfaction of the Trustee.
...
FINANCIAL ASSISTANCE TO AND GUARANTEES FOR RELATED COMPANIES
(g) MAKE any loan to, subscribe for share capital in, guarantee, or give an indemnity for or otherwise be responsible for the obligations either actual or continent of any Non-Charging Related Company or Related Person.
[38] The Trust Deed provided the following definition of “Related Company”:
“Related Company” means any company which is a holding company or Parent Company of the Company, any company which is a subsidiary of any such holding Company or Parent Company and any Associated Company and any company which is a related company in accordance with the Accounting Standards.
2 At that time called PGG Trust Ltd.
[39] It is common ground that this definition rendered North South a “Related Company” for the purposes of Cl 6.06(a) and (g). North South did not charge its assets in favour of Perpetual under the Trust Deed, so it was also a “Non Charging Related Company” for the purposes of the clause. As a result, Dominion could not dispose of its assets, or loan money, to North South without Perpetual’s prior written consent.
[40] The Trust Deed also imposed reporting requirements on Dominion. It was required to provide Perpetual with monthly reports and half yearly directors’ certificates, both of which were in a prescribed form. Both forms contained certificates confirming that Dominion was complying with the terms of the Trust Deed. They also contained provision for Dominion to disclose any related party lending during the period to which the report or certificate related.
[41] The Trust Deed gave Perpetual the ability to require Dominion to provide it with further information if it considered that to be necessary. In addition, Perpetual had the ability to seek further information directly from Dominion’s auditors. The auditors had an independent obligation to provide Perpetual with a report once they had completed the annual audit of Dominion’s accounts.
North South’s Trust Deed
[42] North South entered into a Trust Deed with Covenant Trustee Company Ltd (“Covenant “) on 10 August 2001. Under the Trust Deed, Covenant agreed to act as trustee under the deed for the benefit of investors.
[43] The Trust Deed restricted North South’s ability to enter into related party
transactions. Clause 5.2 of the deed provided:
5.2 Business Covenants
The Company and each Charging Subsidiary shall not, without the prior written consent of the Trustee:
…
(b) Restriction on other transactions with Related Persons at any time permit the aggregate value of Related Person Transactions outstanding and,
in the case of transfers of assets and provisions of services that are Related Person Transactions, entered into in the preceding 12 months, to exceed 2% of Total Tangible Assets. …
[44] The Trust Deed defined “Related Person” and “Related Person Transaction”
as follows:
“Related Person” means a person, other than a Charging Subsidiary, who is
(a) a related company (as defined in the Companies Act) of the Company or any Charging Group Member,
(b) a person who beneficially owns (or, if that person is a company, which together with its related companies beneficially owns) whether directly or indirectly, 20% or more of the voting securities (as defined in the Securities Amendment Act 1988) of the Company or any Charging Group Member,
(c) a Director or any Family Member of a Director,
(d) a company in which the Company, any Subsidiary, any Director or a shareholder of the Company, or any Family Member of a Director or shareholder of the Company, directly or indirectly beneficially owns
20% or more of the voting securities, or
(e) a trust of which any Director or any shareholder of the Company, or any Family Member of such Director or shareholder is a trustee or beneficiary.
“Related Person Transaction” means any transaction of any nature between a Charging Group Member and a Related Person including, but not limited to
(a) the provision of financial accommodation by a Charging Group
Member to a Related Person,
(b) the investment by a Charging Group Member in the capital or equity of a Related Person,
(c) the transfer of an asset between a Charging Group Member and a
Related Person,
(d) the provision of services by or to a Charging Group Member to or by a
Related Person, and
(e) the giving of a guarantee, indemnity or other commitment by a Charging Group Member to, at the request of, or for the benefit of, a Related Person.
[45] Again, there is no dispute that Dominion is a “Related Person” to North South in terms of these definitions. It did not charge its assets to Covenant, so it was not a “Charging Group Member” under the definitions. North South was only
entitled to enter into a related person transaction without Covenant’s consent provided the value of related person transactions did not amount in the aggregate to more than 2 per cent of North South’ total tangible assets (“TTA”) in any 12 month period. If a related person transaction would take total related person transactions during the preceding 12 month period over that threshold, North South was required to obtain Covenant’s prior written consent before entering into any further such transaction.
[46] Clause 5.3(a) of the Trust Deed also required North South to carry on its
business “in a prudent and businesslike manner”.
[47] As in the case of the Dominion Trust Deed, the North South Trust Deed imposed reporting requirements on North South and its directors. It was required to provide Covenant with financial information on a regular basis, and was also required to provide liquidity reports quarterly. These were to be accompanied by a directors’ certificate in a prescribed form.
Fundamental principles
Onus and standard of proof
[48] The most important principles I need to bear in mind are those relating to the burden and onus of proof. The accused face criminal charges. As a result, the Crown must prove each element of each charge beyond reasonable doubt. That is a very high standard, and it means that I must be sure of the guilt of an accused before I can find him guilty on any charge. I remind myself, as I would be required to remind a jury, that it is not sufficient for the Crown to show that an accused is probably guilty, or that he is very likely guilty. If, after careful and impartial consideration of the evidence, I am sure that an accused is guilty, the Crown will have established the charge to the required standard. If I am not sure of that fact, I will be required to find him not guilty. The Crown is not required, however, to prove each charge to an absolute or mathematical certainty.
[49] In this context a reasonable doubt is an honest and reasonable uncertainty left in the Court’s mind after careful and impartial consideration of the evidence. This means that if I consider a factual scenario upon which an accused relies to be reasonably possible, I must give the accused the benefit of the doubt in relation to that issue.
[50] In the present case Mr Whale and Mr Cropp have elected to give and call evidence. In doing so, they have not assumed any onus or burden of proof. The burden of proof remains on the Crown throughout. Their evidence and that given by their witnesses simply forms part of the overall pool of evidence. In the event that I decline to accept that evidence, I will put it to one side. I will then determine on the balance of the evidence whether the Crown has discharged the onus of proof to the required standard.
[51] Mr A has elected not to give or call evidence. That is his absolute right, and I draw no adverse inference from it. He is perfectly entitled to put the Crown to proof in respect of each charge.
Separate trials
[52] I also need to bear in mind the fact that I need to consider the position of each accused, and each charge faced by each accused, separately. In effect, I am conducting 12 separate trials that are being heard together for convenience. As a result, I need to ensure that I consider the evidence that relates to each charge, and to each accused, separately.
[53] This principle assumes practical importance in the present case in two areas. First, Mr Whale and Mr Cropp were both interviewed at some length by the SFO before they were charged. Statements made by an accused in such circumstances are admissible as evidence for and against that accused, but are inadmissible against the other accused. The evidence that Mr Whale and Mr Cropp gave and called is admissible, however, for and against all three accused.
[54] Secondly, the Crown relies upon email communications to prove several aspects of its case, including knowledge on the part of the accused of the matters contained in the communications. Generally speaking, an email will only be admissible against an accused if the Crown can show that the accused was aware of the email at the time it was sent or shortly thereafter. This will require the Crown to prove that the accused was the sender or a recipient of the email in question, or became aware of it in some other way.
Other matters
[55] It goes without saying that I am required to determine the charges solely on the basis of the evidence adduced during the trial, and that I must reach my verdicts free from the influence of any sympathy or prejudice I may feel for the accused.
Elements of the offence
[56] Section 220 of the Crimes Act 1961 provides:
220 Theft by person in special relationship
(1) This section applies to any person who has received or is in possession of, or has control over, any property on terms or in circumstances that the person knows require the person—
(a) to account to any other person for the property, or for any proceeds arising from the property; or
(b) to deal with the property, or any proceeds arising from the property, in accordance with the requirements of any other person.
(2) Every one to whom subsection (1) applies commits theft who intentionally fails to account to the other person as so required or intentionally deals with the property, or any proceeds of the property, otherwise than in accordance with those requirements.
(3) This section applies whether or not the person was required to deliver over the identical property received or in the person's possession or control.
(4) For the purposes of subsection (1), it is a question of law whether the circumstances required any person to account or to act in accordance with any requirements.
[57] The leading authorities in relation to s 220 are Nisbet v R,3 R v Douglas4 and Tallentire v R.5 Douglas and Tallentire are the decisions of this Court and the Court of Appeal respectively in the prosecutions under s 220 of the directors of the failed Capital + Merchant Finance group of companies.
[58] The Crown must prove the following elements beyond reasonable doubt: 6
(a) the accused (or one of them) had control over property: s 220(1);
(b)the accused was subject to an obligation to deal with the property in accordance with the requirements of any other person: s 220(1)(b);
(c) the accused knew of that obligation s 220(2); and
(d)the accused intentionally dealt with the property in a manner that he or she knew and intended was in breach of the obligation.
a) Control
[59] The touchstone for assessing whether a person has control over property in the present context is whether he or she is in a position to determine how the property, in this case investors’ funds, would be dealt with.7 This is essentially a question of fact8, and is not necessarily answered by the position that the person occupies within a company’s structure.
[60] Wylie J also approved9 the following observations by Courtney J in Bowden v R10:
[12] It is clear that a person connected with a company assumes control over funds held by the company if he or she can lawfully determine how the funds are applied. The mere fact of directorship is not sufficient as that will
3 Nisbet v R [2011] 3 NZLR 4.
4 R v Douglas [2012] NZHC 1746; [2012] NZHC 1467.
5 Tallentire v R [2013] 3 NZLR 548.6 Ibid, at [51].
7 R v Douglas [2012] NZHC 1746 at [202]-[203]; Cropp v R [2012] NZHC 2498 at [30].
8 Cropp v R [2012] NZHC 2498 at [27].
9 R v Douglas [2012] NZHC 1746 at [202]-[203].10 Bowden v R HC Auckland CIV-2010-004-015175, 15 December 2011.
not necessarily mean that the director has this level of control. Conversely, however, I do not consider that personal liability is confined to cases where the director alone controls the use to which funds are put. A director who exercises that power along with others may be found to exercise the requisite level of control.
b) The obligation to deal with the property in accordance with the requirements of another person
[61] Section 220(4) of the Crimes Act 1961 provides that the issue of whether or not a person is required to deal with property in accordance with the requirements of another person is a question of law. In Nisbet v R,11 the Court of Appeal discussed s 220(4) as follows:
[13] Liability cannot arise under s 220 unless the circumstances required the accused to deal with property in accordance with the requirements of another person. Section 220(4) provides that it is a question of law whether the circumstances give rise to that obligation on the part of the accused. Questions of law are the province of the trial Judge and not the jury.
…
[33] We conclude that a requirement will be established under s 220(4) if the facts relied upon by the Crown establish a contractual obligation on the part of the accused to deal with property in a particular way. Whether or not it will arise from a fiduciary relationship will depend upon the circumstances. We leave open, because it does not arise in the present case, the possibility that the requirement might otherwise be imposed by law.
[62] It follows that if a person was under a contractual obligation to deal with property in accordance with the requirements of another person, ss 220(1)(b) and
220(4) will be satisfied.
c) Knowledge of the obligation
[63] As in any other case involving proof of knowledge, the issue of whether or not a person knew that he or she was subject to an obligation to deal with property in accordance with the requirements of any other person is an issue of fact that may be
inferred from the surrounding circumstances.
11 Nisbet v R, above n 3.
d) Intentionally dealing with the property otherwise than in accordance with the obligation
[64] The foundation for liability under s 220 is “the fact of intentionally dealing with property otherwise than in accordance with requirements that the accused knew to have been imposed in relation to that property by another person.”12 The Crown is not required to prove that the accused acted dishonestly.13
[65] As with knowledge, a person’s intention is to be ascertained by drawing logical and reasonable inferences from surrounding circumstances. In Tallentire, the Court of Appeal said:14
[62] A related issue concerns the meaning of “intention”. Usually there will be no direct evidence of such intention and it will be necessary for the prosecution to rely on inferences. In that event the approach of Gault J in Haynes v Ministry of Transport15 is apposite. After referring to the fact that it is usual that a person intends the natural and probable consequences of his or her actions, Gault J stated:
The established means of determining intention are by evidence of words and conduct which are capable of being heard and observed and presented as evidence.
[63] Where it is shown that accused persons knew (or were wilfully blind as to whether) they were breaching the relevant obligation when they acted, an inference of intentional breach will be irresistible. Where such persons claim a lack of awareness, the claim may be rejected as implausible given the surrounding circumstances.
The allegations in greater detail
[66] It is common ground that Dominion and North South were required to deal with investors’ funds in accordance with the contractual obligations imposed upon them by their respective Trust Deeds. These included the restrictions in respect of
related party lending.
12 Tallentire v R, above n 5 at [54].
13 Ibid, at [54] and [57].
14 Ibid.15 (1988) 3 CRNZ 587 (HC) at 591.
[67] As already noted,16 their respective Trust Deeds restricted the companies’ ability to make loans to related parties. Dominion could not make any related party loans without Perpetual’s prior written consent. North South was permitted to make loans to related persons without Covenant’s consent provided the value of such loans within any twelve month period did not exceed 2 per cent of North South’s TTA. If a loan would take North South over that threshold, the company required Covenant’s prior written consent to the transaction.
[68] Contractual obligations of this nature amounted, in my view, to requirements imposed on the companies for the purposes of s 220(1) by virtue of the principles identified in the passage cited above17 from Nisbet. The Crown alleges that, in each of the five transactions with which the charges are concerned, either Dominion or North South used investors’ funds in a manner that breached those obligations. As a consequence, it alleges that the companies breached a requirement for the purposes
of s 220, and that the accused caused or assisted that to occur.
[69] It is also common ground that neither company obtained the prior written consent of its trustee to any of the five transactions to which the charges relate. An issue arises in relation to some of the charges as to whether the transactions relevant to those charges constituted related party transactions in terms of the relevant provisions of the companies’ Trust Deeds. The Crown will need to overcome that hurdle before the Court can go on to consider whether the accused are liable under s
220. Assuming it can, however, I accept the Crown’s submission that the accused will be liable under s 220 if they caused or assisted the companies to breach the related party restrictions in their respective Trust Deeds, and knew and intended that that would occur.
[70] In respect of Counts 3, 4 and 5 the Crown also contends that the accused intentionally caused, or assisted to cause, the companies to breach the contractual obligation under the Trust Deed to conduct its business in a prudent and efficient
manner. I deal with those allegations in Part Three of these reasons.
16 At [36]–[39] and [43]-[45].
17 At [61].
Principals and parties
[71] The companies were the parties to the Trust Deeds with Perpetual and Covenant. As a consequence, any breach of a covenant in either deed was technically committed by the company and not by any individual. A corporate entity can only act, however, through those who control it and/or are responsible for its governance. In the present case, those persons comprised the companies’ executive officers and the directors. Mr Cropp and Mr A were both executive officers, whilst Mr Whale and Mr Butler were at all material times directors.
[72] A person may be liable for committing a criminal act as either a principal or a party. A principal is the person who actually commits the offence.18 A party for present purposes is a person who assists or encourages another person to commit the offence.19 In order to establish that an accused is liable as a party, the Crown must prove that the accused knew the essential matters giving rise to the commission of an offence by the principal. It must also prove that the accused intentionally assisted or encouraged the principal to commit the offence. 20
[73] Where the Crown proves that either company breached its obligations under the Trust Deed, I take the person responsible for causing that breach as effectively being the principal. In order to establish liability on the part of any other accused, the Crown will need to prove that the accused knew that the principal was causing the company to breach its obligations under the Trust Deed. It will also need to prove that the accused intentionally assisted or encouraged the principal, and thereby
the company, to achieve that object.
18 Crimes Act 1961, s 66(1)(a).
19 Ibid, s 66(1)(b)-(d).
20 R v Sharma [2009] NZCA 540; R v Hira [2009] NZCA 144; R v Wilson [2008] NZCA 409.
PART TWO: THE ALLEGATIONS BASED ON INTENTIONAL FAILURE TO OBTAIN TRUSTEE’S PRIOR WRITTEN CONSENT TO RELATED PARTY TRANSACTIONS
Background to Counts 1, 2 and 3 – the Norfolk Manor project
[74] Counts 1, 2 and 3 all arise out of loans that Dominion made to entities involved in a property development project in Auckland. The project involved the construction of eleven apartments on a large site on the corner of Bassett and Remuera Roads.
[75] The project was initially started in 2002 by entities associated with Mr Matthew Ridge. Dominion agreed to fund the purchase of the site and the construction of the apartments. By June 2004, however, it became clear that Mr Ridge would not be able to complete the project. By that stage Dominion had advanced just over $6 million towards the project, but construction had not advanced further than a hole in the ground that was filled with water.
[76] At this time Mr Butler and his wife owned Dominion outright, but were in the process of listing Holdings on the New Zealand Stock Exchange. Dominion’s directors became concerned at the lack of progress on the Bassett Road project. Dominion’s association with Mr Ridge in the project also became the subject of unfavourable comment in the business press.
[77] In or about August 2004, Dominion’s directors decided to resolve both problems by arranging for another developer, Mr John Williams, to take over the project. Mr Williams was known to Mr Butler as a result of previous dealings in property-related matters. Mr Williams incorporated a company, Norfolk Manor Ltd (“Norfolk Manor”), to acquire the Bassett Road site for the sum of $5 million. Dominion agreed to fund Norfolk Manor to acquire the property and to complete the construction of the apartments.
[78] Settlement occurred on or about 24 August 2004. The transaction left a shortfall owing by Mr Ridge of approximately $600,000. He subsequently repaid
that sum in full. Between August 2004 and February 2008 Dominion advanced
Norfolk Manor sums totalling approximately $8.664 million.
Count 1 – the loan to Norfolk Manor
[79] Mr Whale and Mr Butler are charged with Count 1, which relates to the loan that Dominion made to Norfolk Manor. For present purposes, it is obviously only necessary to determine whether the Crown has proved the charge against Mr Whale.
[80] The charge arises out of the fact that the loan by Dominion to Norfolk Manor was part of a wider arrangement between Mr Williams and Mr Butler. Mr Butler found it necessary to enter into the arrangement because Mr Williams was only prepared to take over the Bassett Road project provided he was able to minimise the risk of loss to himself. The terms of the arrangement were recorded in a joint venture agreement that Mr Williams’ solicitors prepared, and Mr Williams and Mr Butler both signed, on 24 August 2004. Mr Whale witnessed Mr Butler’s signature on the document.
[81] Under the joint venture agreement, Mr Butler was to procure funding for the project from Dominion. The agreement also allocated the responsibility for the sale of the units in the complex between Mr Butler and Mr Williams. Four of the eleven units had already been sold off the plans. The joint venture agreement provided for Mr Williams to be responsible for selling two of the remaining apartments, whilst Mr Butler was to be responsible for selling the balance. In effect, the joint venture agreement required Mr Butler to underwrite the sale of five units in the complex.
[82] The agreement also provided that Mr Williams was to receive the first
$500,000 of any profit derived from the project. Thereafter the balance was to be shared equally between family trusts associated with Mr Butler and Mr Williams. Mr Butler also agreed to indemnify Mr Williams in respect of 50 per cent of any loss that the project might produce.
[83] The rights and obligations that Mr Butler assumed under the joint venture agreement meant that the loan by Dominion to Norfolk Manor was a loan to a related
party in terms of its Trust Deed. The Trust Deed therefore prohibited Dominion from making the loan unless it obtained Perpetual’s prior written consent. As already noted, that never occurred. As a result, Dominion breached the related party restrictions in the Trust Deed when it made the loan to Norfolk Manor. Given Mr Whale’s involvement in this transaction, the Crown alleges that he knowingly and intentionally assisted Dominion to breach the provisions of its Trust Deed in this way.
Issues
[84] The following issues need to be resolved in relation to this charge:
(i)Did Mr Whale have control of the investors’ funds that were used to make the loan to Norfolk Manor? If so,
(ii)Did Mr Whale know between August 2004 and July 2007 of the restriction that the Trust Deed imposed on Dominion in respect of related party lending? If so;
(iii)Did Mr Whale intend to assist Dominion to breach the restriction on related party lending?
Did Mr Whale control the investors’ funds that Dominion used to make the advance
to Norfolk Manor?
[85] Mr Whale was one of six directors who approved the loan to Norfolk Manor. As a result, he was one of several persons who had control of the investors’ funds that Dominion used to make the loan to Norfolk Manor. He was therefore one of the persons who caused Dominion to breach the prohibition on related party lending in its Trust Deed.
[86] Mr Whale also played an integral part in implementing the arrangement between Mr Williams and Mr Butler, although he said in evidence he believed he was acting on behalf of Mr Butler and not Dominion in doing so. Although he did
not prepare the joint venture agreement, he acted for Mr Butler in relation to that
document. He also witnessed Mr Butler’s signature on it.
[87] Mr Whale also prepared a Declaration of Trust that Mr Williams signed as Norfolk Manor’s director on 24 August 2004. Under this document, Norfolk Manor agreed to comply with, and take all necessary steps to implement, the terms of the joint venture agreement. It also declared that it held the Trust Fund (comprising the Bassett Road property and the proceeds of sale of any units from the development) as trustee on the terms set out in the declaration. Norfolk Manor acknowledged that when the project was complete, it would distribute any profits in accordance with the terms of the joint venture agreement.
[88] Furthermore, at Mr Williams’ request Mr Whale also drafted a Deed of Trust under which the beneficiaries were persons or entities associated with or related to Mr Williams. This Trust was one of the beneficiaries under the Declaration of Trust that Mr Whale prepared for Mr Williams to sign on behalf of Norfolk Manor on 24
August 2004.
[89] Mr Whale then acted for Dominion in relation to the conveyancing aspects of the Norfolk Manor transaction.
Did Mr Whale know between August 2004 and July 2007 of the restriction that the
Trust Deed imposed on Dominion in respect of related party lending?
[90] In evidence, Mr Whale said that he first began doing legal work for Dominion after he joined the law firm Jones Young in 2001. He said that initially he was only vaguely aware of the existence of a Trust Deed. He said that as time went on he became aware of the Trust Deed with Perpetual, and the need to comply with financial covenants. He knew that the company had to comply with certain ratios, because these were raised and discussed on occasions at board level. He said that his partner, Mr Joyce, held a copy of Dominion’s Trust Deed, but he had never read it himself. He initially assumed that other people, including Mr and Mrs Butler, were dealing with it. Later he assumed that executives such as Mr Cropp and Mr A would be dealing with any issues relating to the deed.
[91] Counsel for Mr Whale submits that there is no independent or documentary evidence to contradict Mr Whale’s evidence on this point. As a result, he submits that the Court must be left in a reasonable doubt as to whether Mr Whale knew of the existence of the restrictions on related party lending at the time of the Norfolk Manor transaction.
[92] Ordinarily, one would expect that a professional person in Mr Whale’s position would only agree to accept appointment as a director of a finance company if he knew and understood the key elements of the legal basis upon which the company was permitted to operate. In Dominion’s case, this was set out in the Trust Deed that it entered into with Perpetual on 14 May 1993.
[93] Although Mr Whale was a director of Dominion in August 2004, the evidence does not disclose when he was first appointed. It is also reasonably possible that in the early days, as he said, he relied upon Mr and Mrs Butler to be conversant with the requirements imposed by the Trust Deed. The fact that Mr Whale primarily acted for Dominion in relation to the preparation of loan securities also means that he did not need to have an in-depth knowledge of the Trust Deed in order to discharge his responsibilities as the company’s solicitor.
[94] Furthermore, there is no contemporaneous documentation to suggest that Mr Whale had an in-depth knowledge and understanding of the Trust Deed in 2004, or that he knew at that time of the restrictions that it imposed on Dominion in relation to related party lending.
[95] There is, however, evidence to suggest that Mr Whale realised at some stage that the Norfolk Manor transaction raised related party issues. When he was interviewed by the SFO on 26 August 2011, the following exchange occurred:
DANBY Either way, whether it was for Terry or whether it was for Dominion, where does that leave the original loan to Norfolk Manor from Dominion?
WHALE It wasn’t disclosed, I [sic] there’s no question about it. I can’t say there was anything other than a loan. I didn’t know that you were supposed to disclose things like that, and then as time went by, I suddenly became more aware of
what should have been disclosed, it just got completely
forgotten. It wasn’t until this all came up four years later.
[96] Mr Whale’s answer does not, in my view, go so far as to demonstrate that he knew at any given time between August 2004 and July 2007 that Dominion was prohibited from making loans to related parties without Perpetual’s prior written consent. It suggests instead that he gradually became aware that Dominion ought to have disclosed the transaction in its accounts.
[97] The Crown also relies upon an email that Mr Whale wrote in September 2006 as demonstrating a reasonably detailed knowledge on his part of Dominion’s obligations under its Trust Deed. At that time Dominion’s directors were considering an application for loan finance in the sum of $10 million. On 21
September 2006, Mr Whale sent the following email to Mr Brendon Wilson, the lending manager who had submitted the application, and to two of his fellow directors:
The level of debt to the one borrower is a bit scary, but he has done everything right so far in relation to all his existing loans.
Overall I approve.
My only concern is to ensure that there is no breach of the Debenture Trust Deed. Clause 6.02(1) provides that the total owed by any group of related companies is not to exceed 10% of “Total Tangible Assets” (TTA). TTA is defined as the aggregate of First Category Assets (cash and the like, and mortgages within 60% of market worth of the land), Second Category Assets (which I’ll come back to), Third Category Assets (hp agreements, factored debts etc, land and cars) and “Other Tangible Assets” (anything else).
For us, the main one we need to look at is “Second Category Assets”. These include “Any loan secured by a mortgage over freehold land repayable within three years which loan, when added to any principal sum secured in priority thereto does not exceed 75% of the Market Worth of the freehold land so secured at the time such loan is advanced”.
The DFG book stands at around $270m. The key of course is the 75% of market worth. Because of the nature of our business, during the course of construction, some of our loans would in fact exceed 75% and would therefore have to be excluded from “Second Category Assets”. It might take a bit of work, but someone will need to do a calculation of TTA, because I suspect it will be close.
I know this sounds picky, but I think it is extremely important – in fact essential – that you are satisfied that we fall within the 10%. Given recent history, the Trustee won’t hesitate to whack us if we step out of line.
[98] Mr Whale wrote this email after Mr Wilson had raised a query regarding the level of exposure Dominion would have to the entity seeking the loan. In evidence, Mr Whale said that he probably wrote this email in conjunction with his partner, Mr Joyce, because Mr Joyce held a copy of Dominion’s Trust Deed, and was much more familiar with its contents than he was.
[99] Mr Joyce confirmed that this was the case when he gave evidence for Mr Whale. He said that Mr Whale had come to him with the query that Mr Wilson had raised about the issue of lending concentration. He (Mr Joyce) had then got out Dominion’s Trust Deed, and considered the provisions in the Trust Deed relating to that issue. Mr Joyce said that he had then dictated a draft reply for Mr Whale to refine and send out.
[100] I accept these explanations as far as they go. The last sentence of the email demonstrates, however, that by September 2006 Mr Whale was well aware that Dominion needed to be very careful to ensure that it met its obligations under the Trust Deed. He also knew that Perpetual was likely to take stern action in the event that it failed to do so. I am satisfied that the last sentence in the email was written by Mr Whale, because it employs the same colloquial approach that Mr Whale generally used in his emails. I consider that the body of the email is likely, however, to have been dictated to Mr Whale by Mr Joyce.
[101] Dominion made further advances to Norfolk Manor after September 2006, but there is nothing in the evidence to suggest that Mr Whale had any involvement in or knowledge of these transactions. It is likely, in my view, that these advances were implemented by Dominion’s executive staff. There would have been no need for Mr Whale or his law firm to have been involved again after the initial advance that Dominion made in August 2004.
[102] I find that I am left in a state of reasonable doubt as to whether, between August 2004 and July 2007, Mr Whale knew of the prohibition on lending to related parties without the prior written consent of its trustee. It is reasonably possible that he did not. Although Mr Whale had clearly become aware of the need for Dominion to take care with its obligations under the Trust Deed by late September 2006, there
is nothing to suggest he had any involvement in the advances that Dominion made to Norfolk Manor after that date. As a consequence, the Crown cannot establish one of the essential elements of the charge.
[103] In case I am wrong on that point, I go on to briefly consider whether the
Crown has proved the remaining element of Count 1.
Did Mr Whale intend to assist Dominion to breach the restriction on related party lending?
[104] The issue in this context is whether, assuming Mr Whale knew of the restriction on related party lending, he also intended to assist Dominion to breach that restriction.
[105] The Crown points out that a person can generally be presumed to intend the consequences of his or her acts. It submits that, if Mr Whale knew that the Trust Deed prohibited Dominion from engaging in related party lending, the actions that he took in relation to the Norfolk Manor transaction mean that he intentionally assisted Dominion to breach those restrictions
[106] I do not consider the issue can be resolved as simply as the Crown puts it. Mr Butler was not a director or shareholder of Norfolk Manor. As a consequence, the loan that Dominion made to Norfolk Manor was not to a related party loan in that sense. It only became a loan to a related party because of the side arrangement between Mr Butler and Mr Williams. But for that arrangement, the loan would have been an arm’s length transaction between two unrelated entities. The evidence is also unclear whether the applicable accounting standards up until 2008 required Dominion to disclose the existence of the underwrite arrangement.
[107] Given that background, I consider Mr Whale’s explanation that he did not turn his mind to the related party issue between August 2004 and July 2007 to be reasonably possible. He may not have appreciated during that period the consequences of the joint venture agreement so far as the related party provisions in Dominion’s Trust Deed were concerned.
[108] For this reason, too, I am left in a state of reasonable doubt in relation to
Count 1.
Verdict
[109] I find Mr Whale not guilty on Count 1.
Count 2 – The loan by Dominion to WAFD
[110] Mr Whale and Mr Cropp both face this charge, which relates to a loan
Dominion made to a company called WAFD Ltd (“WAFD”).
Background
[111] The completion of the Bassett Road development proved to be costly and fraught with delay. At the beginning of March 2008 four units were yet to be sold. By that stage, Norfolk Manor owed Dominion the sum of approximately $8.4 million.
[112] Mr Williams had met his obligation under the joint venture agreement to sell two of the apartments in the development. Mr Butler was therefore responsible for the sale of the remaining units.
[113] Mr Williams wanted to bring the project to a final conclusion. He became insistent in March 2008 that Mr Butler was to honour his obligations under the joint venture agreement by purchasing the remaining units. At that point, apparently for the first time, Mr Butler told Mr Whale that he had not entered into the agreement with Mr Williams in his personal capacity. Rather, he said that he had done so as Dominion’s agent. Mr Butler therefore wanted Dominion to honour the obligations he had undertaken in the joint venture agreement. He also insisted that the other directors had been aware of this arrangement at the time he entered into it.
[114] Mr Cropp had become Dominion’s CEO in October 2006, some two years
after Dominion began funding the development of the property by Norfolk Manor.
He did not become aware of the joint venture agreement between Mr Butler and Mr Williams until mid-March 2008, when he was sent copies of emails between Mr Butler and Mr Whale in which Mr Butler sought clarification from Mr Whale as to the obligations imposed on him by the joint venture agreement. At that point it became evident to Mr Cropp and Mr Whale that Dominion’s other directors had not been aware of the joint venture agreement, and that they had reservations as to whether Dominion was liable to honour those obligations.
[115] Dominion’s board had two issues to resolve by this stage. The first issue was how Dominion was going to deal with the fact that it had failed to disclose the related party issue of which the directors had now become aware in its accounts for the years ended 31 March 2004 to 2007. The second issue was how Dominion was going to deal with Mr Butler’s ongoing obligations under the joint venture agreement. The matter needed to be dealt with urgently, because 31 March 2008 was rapidly approaching. If the problem was not resolved before that date, it would be necessary for Dominion to disclose the full circumstances surrounding the loan to Norfolk Manor in the financial statements for the 2008 financial year.
[116] On Friday 28 March 2008, Mr Cropp instructed Mr Whale to incorporate a company in which all of the shares were to be held by Custodian Nominee Company Ltd (“Custodian”), a nominee company operated by Mr Whale’s law firm. Mr Whale and his partner Mr Young were the directors of that company. Mr Whale was to be the sole director of the new company.
[117] Mr Whale carried out these instructions by forming a company called WAFD Ltd on 31 March 2008. The company was incorporated for the purpose of purchasing the remaining four units in the Norfolk Manor project. Immediately after it was incorporated WAFD entered into an agreement to purchase the four units for the sum of $8.606 million, the sum then owing to Dominion by Norfolk Manor.
[118] In order to complete the purchase, WAFD obtained a loan from NZ Castle Ltd in the sum of $3.35 million. This was to be secured by first mortgage over the units. WAFD then entered into a loan agreement with Dominion under which Dominion agreed to advance WAFD the sum of $5.265 million on the security of a
second mortgage. On settlement, Dominion made journal entries crediting Norfolk Manor with the amount then owing on its loan, and debiting WAFD with the same amount.
[119] The WAFD transaction enabled the loan owing by Norfolk Manor to Dominion to be repaid in full. It also satisfied Mr Butler’s obligations under the joint venture agreement with Mr Williams. In addition, Dominion’s total exposure to the Norfolk Manor project was reduced by approximately $3.35 million.21
[120] The board had not, however, resolved the issue of whether or not Mr Butler had entered into the joint venture with Mr Williams personally or as Dominion’s agent as at 31 March 2008. In order to protect the position for both parties, Mr Whale prepared and arranged for Custodian’s directors to sign a Declaration of Trust shortly after 31 March 2008. Custodian acknowledged in this document that it held the shares in WAFD as bare trustee “for such party … as is determined by resolution of the dispute between [Mr] Butler and [Dominion]”.
[121] The dispute between Dominion and Mr Butler was ultimately resolved at a board meeting held on 12 May 2008. After heated debate, the directors ultimately decided, I infer as a matter of practicality rather than principle, that Dominion would be the party responsible for meeting Mr Butler’s obligations under the joint venture agreement. As a consequence, Custodian held the shares in WAFD as bare trustee for Dominion from that point on.
[122] The Crown alleges in Count 2 that Mr Butler, Mr Cropp and Mr Whale intentionally caused or assisted Dominion to use investors’ funds to make the loan to WAFD in breach of the prohibition on related party lending in its Trust Deed.
1. Mr Whale
Issues
[123] So far as Mr Whale is concerned, the following issues need to be resolved:
21 By virtue of the sum advanced to WAFD by NZ Castle.
(i) Who controlled the investors’ funds that were used to make the loan by
Dominion to WAFD?
(ii) Did Mr Whale assist Dominion to breach that prohibition? If so;
(iii) Did Mr Whale know of the prohibition on related party lending in
Dominion’s Trust Deed as at 31 March 2008? If so;
(iv) Did Mr Whale intend to assist Dominion to do so?
Who controlled the investors’ funds that Dominion used to make the loan to WAFD?
[124] On this point I have no doubt. As already noted, the loan was made through internal journal entries by which Dominion credited Norfolk Manor with the full amount of the loan then owing by it, and debited WAFD in the same amount. There is no suggestion that Mr Whale played any part in that process. As a consequence, he did not cause Dominion to make the loan. For that reason he cannot be viewed as having had control of the investors’ funds when Dominion made the loan to WAFD.
[125] The evidence demonstrates conclusively, and Mr Cropp accepts, that he was the person who decided that Dominion would lend the funds to WAFD. He was also the person who authorised the implementation of the advance in the manner described above. I therefore conclude that Mr Cropp, and not Mr Whale, was the person who had control of the investors’ funds at the critical time.
[126] Mr Whale will only be guilty if he intentionally assisted Dominion to breach the prohibition on related party lending in its Trust Deed.
Did Mr Whale assist Dominion to breach the prohibition on related party lending?
[127] Mr Whale played a practical role in implementing the loan by Dominion to WAFD. He created the legal structure for the transaction by incorporating WAFD, and signed the agreement for the purchase of the four units on its behalf. He also prepared the loan agreement and signed it on WAFD’s behalf. He or his staff then
attended to the completion of the purchase and the registration of the transfer and
Dominion’s mortgage.
[128] All of these steps assisted Dominion to breach the prohibition on related party lending in the Trust Deed.
Did Mr Whale know of the prohibition on related party lending as at 31 March
2008?
[129] Mr Whale’s position is, and has always been, that as at 31 March 2008 he still did not know that Dominion’s Trust Deed prohibited it from lending money to a related party without Perpetual’s prior written consent.
[130] At first sight, this stance would appear difficult to justify. By this stage Mr Whale, a qualified lawyer, had been a director of Dominion for several years. It is difficult to see how a person in his position could not have been aware that Dominion’s Trust Deed prohibited it from engaging in related party lending without its trustee’s prior written consent.
[131] For those involved in Dominion’s governance, the fact that the company did not lend to related parties had also always been a matter of considerable significance. They regarded it as a point of distinction between Dominion and its competitors. Dominion’s prospectus also advised potential investors that Dominion’s Trust Deed restricted it from lending to related parties other than in certain circumstances. Although Mr Whale says he never read any of the prospectuses that he signed, one would assume that he must have been aware of their most important features. One of these was the advice to potential investors that the Trust Deed contained restrictions on lending to related parties.
[132] Mr Whale also sometimes signed the reports and certificates that the companies’ Trust Deeds required them to submit to their respective trustees. These contained specific provisions requiring the companies to disclose any related party lending. Mr Whale says he had a general understanding that these documents contained information relevant to the ratios prescribed in the companies’ Trust
Deeds, but he did not pay much attention to what was written in them. They were prepared by others, and he trusted those persons to make sure that the information provided to the trustees was correct.
[133] Mr Whale would also have known that Dominion had never loaned monies to related parties in the past, and that it had never previously sought Perpetual’s consent to any related party loan. For that reason he would have been aware that Dominion’s decision to loan the sum of $5.62 million to WAFD was a significant event for the company.
[134] In addition, the Crown points out that, by the end of March 2008, the landscape was much different for those involved in Dominion’s governance than it had been during the period covered by Count 1. The disclosure of the joint venture agreement between Mr Butler and Mr Williams meant that the issue of related party transactions was a significant issue for Dominion’s directors by that stage. It had been the subject of email traffic and oral discussion between Mr Cropp and the directors, including Mr Whale, during the fortnight leading up to 31 March.
[135] All of these matters carry weight, and tend to suggest that Mr Whale must have known that Dominion’s Trust Deed prohibited it from lending to related parties. In the face of the factors relied upon by the Crown, Mr Whale’s assertion that he did not know of the prohibition seems somewhat lame.
[136] Mr Whale’s credibility is weakened further by the manner in which he responded to an enquiry from Holdings’ auditors in August 2008 regarding the identity of the party who purchased the four units through WAFD and Jones Young’s nominee company. The auditors had sought confirmation from Mr Whale, in his capacity as a director of both Dominion and WAFD, that the beneficiary of WAFD was not a related party. Mr Whale responded on 29 August 2008 by saying that no further related party disclosure was required other than that he was a director of both companies.
[137] This response was obviously incorrect, because Mr Whale had always known the true position regarding the WAFD transaction. Mr Whale knew that as at 31
March 2008 Custodian had held the shares in WAFD on trust for either Mr Butler or Dominion. He also knew Dominion’s directors had resolved on 12 May 2008 that the company would assume responsibility for Mr Butler’s obligations under the joint venture agreement. He had been present at the board meeting where that decision was made.
[138] When he gave evidence, Mr Whale was unable to explain why he had not told the auditors the full story. He acknowledged that his response to the auditors was obviously misleading. He was at a loss to explain, however, why he had failed to provide a full and accurate response to an issue that was clearly important to the auditors. Mr Whale’s inability to explain his response plainly does not help his cause. The Crown asks me to infer that it is further proof that as late as August 2009
Mr Whale was determined to cover up the true position regarding the WAFD loan.
[139] Counsel for Mr Whale emphasises that, despite the wealth of contemporaneous documentary evidence produced in this case, there is not one documentary exhibit to support the Crown’s contention that Mr Whale knew of the prohibition on related party lending in Dominion’s Trust Deed. He points out that although Mr Whale signed the reports and certificates to trustees, these documents were prepared by others and would not have alerted Mr Whale to the existence of the prohibition. He also submits that Mr Whale was entitled to proceed on the basis that the loan to WAFD had been subject to Dominion’s internal loan approval process, and that this would have picked up any issues with the proposed loan. Furthermore, Mr Whale’s role was primarily to act as Dominion’s solicitor in preparing the necessary documentation. He had not been asked to advise Dominion in relation to the propriety of the loan to WAFD.
[140] I consider the issue of Mr Whale’s knowledge of the prohibition on related party lending to be finely balanced. In order to reject his explanation, however, I must conclude that he was not telling the truth when he said in evidence that he was not aware of the prohibition at the time of the WAFD transaction. Even if I reject Mr Whale’s evidence, I cannot proceed directly from that point to find the charge proved. I would still need to be sure that the balance of the evidence is sufficient to prove the charge beyond reasonable doubt.
[141] Perhaps the most significant aspect of the Crown case in this context is the fact that Mr Whale misled Holdings’ auditors in August 2008. I cannot view that as being anything other than a deliberate act on Mr Whale’s part. I need to be careful about the weight to be given to that issue, however, for two reasons. First, it occurred more than five months after 31 March 2008. The state of Mr Whale’s knowledge and intention in March 2008 may well have been significantly different to that in August 2008. Secondly, before I ascribe significance to Mr Whale’s conduct in August 2008, I would need to be sure that there was no reasonable explanation other than that put forward by the Crown for Mr Whale acting as he did in responding to the auditors.
[142] In considering this issue, it is necessary to have regard to the context in which Mr Whale was dealing with the auditors. In August 2008, Holdings was under significant pressure from the New Zealand Stock Exchange to produce its financial statements for the year ended 31 March 2008. It had already been the subject of disciplinary action for failing to produce those statements earlier. It had also been advised that it would face further sanctions if the statements were not available by 29
August. I consider it is reasonably possible that Mr Whale’s response was motivated by the fact that he knew that disclosure of the true position on 29 August was likely to result in the auditors refusing to sign off the accounts without undertaking further enquiries.
[143] By 29 August 2008, it was also clear that Dominion was likely to be placed in receivership. It had stopped trading some time earlier, and following a meeting held on 20 August 2008 Perpetual had not responded favourably to a proposal involving Dominion’s recapitalisation. As a result, Perpetual was leaning towards receivership as the most appropriate course of action to take. It is reasonably possible that Mr Whale thought that disclosure of the true position regarding the WAFD loan would render the prospect of receivership inevitable. For that reason I decline to draw the inference that the Crown asks me to in relation to Mr Whale’s response to the auditors.
[144] The documentary evidence between mid-March and 20 April 2008 also shows that one of the most pressing issues for the directors was how they were to
deal with the issue of disclosure of the Norfolk Manor transactions both in the future and in respect of past years.
[145] This was undoubtedly a significant issue, and one that is likely to have had significant ramifications for Dominion if information about the joint venture between Mr Butler and Mr Williams entered the public domain at that time. By March 2008 the company’s liquidity position was extremely tight, and neither the stock exchange nor the company’s investors would have reacted well to an acknowledgment that Dominion had failed to disclose the existence of a related party transaction in its account for more than three years.
[146] The issue of disclosure clearly absorbed the directors’ attention during this period, and I consider it is likely to have diverted their attention away from the issue of Dominion’s obligations under its Trust Deed. None of the directors appears to have turned his mind during this period to the fact that the Norfolk Manor transaction may also have caused Dominion to breach its obligations under the Trust Deed. Nor do any of the directors appear to have turned their minds to the same issue when they ultimately learned how Mr Cropp had elected to resolve the Norfolk Manor problem on 31 March 2008.
[147] There can be no doubt that Mr Whale ought to have known of the prohibition on related party lending in Dominion’s Trust Deed. Failure on his part to have been familiar with such an important covenant suggests a casual approach to his role as a director of the company. The same can be said to the approach that he took in respect of the reports and certificates that he signed before they were sent to the trustees.
[148] Overall, the evidence leaves me in a position where I think it probable or very likely that Mr Whale knew of the prohibition in the Trust Deed. However, that is not enough. In order to find the charge proved, I must be sure of that fact. Although I have doubts about the veracity of Mr Whale’s evidence on this point, it leaves me unsure. There is no other contemporaneous documentary evidence to establish knowledge of the prohibition to the required standard. I am therefore left in a state
of reasonable doubt regarding this element of the charge. For that reason the Crown has failed to satisfy the onus of proof in relation to this charge.
[149] Had the Crown been able to prove that Mr Whale knew of the prohibition, it is plain that he would also have known that Dominion was breaching the prohibition by making the loan to Dominion. The assistance that he provided in relation to the transaction would in that event have been sufficient to establish that he intentionally assisted in the breach.
Verdict
[150] Given my conclusion in respect of Mr Whale’s knowledge of the prohibition on related party lending in the Trust Deed, I find him not guilty on Count 2.
2. Mr Cropp
Issues
[151] I have already determined that the loan to WAFD was a loan to a related party, and that Mr Cropp decided that Dominion would make the loan. Mr Cropp therefore caused Dominion to lend money to a related party without Perpetual’s prior written consent, and he controlled the investors’ funds that were used to make the loan.
[152] As a consequence, the issues to be determined in respect of Count 2 in relation to Mr Cropp are:
(i) Did Mr Cropp know of the prohibition on related party lending in
Dominion’s Trust Deed? If so,
(ii) Did Mr Cropp intentionally cause Dominion to breach that prohibition?
Did Mr Cropp know of the prohibition on related party lending in Dominion’s Trust
Deed?
[153] Mr Cropp had extensive experience in the finance industry when he joined the Dominion group of companies in October 2006. This included employment by Elders Finance, which subsequently became part of the Hanover group of companies. He agreed that by the time he joined the Dominion group he had had more than 20 years experience working in companies that operated under Trust Deeds similar to those of Dominion and North South.
[154] Given that background, Mr Cropp could reasonably be expected to be conversant with the essential features of the Dominion and North South Trust Deeds. He accepted in evidence that he believed he was. Presumably the board would have relied upon him in the first instance for confirmation that the company was operating in accordance with the requirements that the Trust Deeds imposed.
[155] Along with Mr Forsyth and Mr Sweetapple, Mr Cropp was also a member of the Credit Committee. Membership of the Credit Committee required an appreciation of the covenants in the Trust Deeds regarding related party lending. Mr Forsyth said in evidence that he (Mr Forsyth) was conversant with those provisions. He said that, prior to 31 March 2008, the Credit Committee had never been required to consider a loan application involving a related party. He said that if such an application had been received, the Credit Committee would first have been required to consider whether it was appropriate for such a loan to be made. If it was, it would then be necessary to obtain the trustee’s approval for the loan.
A’s actual instructions came from Mr Barns.
[466] The fact that Mr Cropp, Mr Barns and Ms Collins were involved in the decision making process that led to Mr A receiving his instructions must give rise to a reasonable doubt as to whether Mr A intended to assist North South to breach the related person restrictions in its Trust Deed. He was entitled to proceed on the basis that any related party issues had been considered and resolved by those who were entrusted with making the decision that the transaction would proceed. Mr A’s role was merely to assist in effecting what others had already decided North South would do.
[467] The fact that Mr A signed the SSA does not advance matters any further. Others had arranged for it to be prepared, and Mr A merely signed it as one of North South's authorised signatories. The fact that Mr Cropp had already signed the document would also have given Mr A comfort that it was in order for him to sign it as well.
[468] The Crown points out that Mr A was subsequently involved in determining when funds would be transferred between the two companies. On 1 May 2008, he sent an email to Mr Cropp advising him that Dominion had the ability to access the further sum of $1 million under the Te Kaha sharing deed if it needed to.
[469] I accept that Mr A may have given Mr Cropp advice from time to time regarding Dominion’s ability to access funds from North South under the Te Kaha security sharing arrangement. In effect, as I have already noted, it was a revolving credit facility that provided Dominion with the ability to gain access to advances from North South of up to $3 million. It is therefore likely that, in his capacity as
[ ], Mr A monitored the facility and advised Mr Cropp from time to time as to the amount that was available to Dominion under it. That fact is not surprising, because Mr A probably viewed the Te Kaha arrangement in the same light as he viewed Dominion’s overdraft facility with the bank. This does not mean, however, that Mr A intended North South to breach the related person restrictions in its Trust Deed. For this reason I do not consider this factor carries great weight.
[470] Finally, there is no evidence to suggest that Mr A had any communications with Covenant regarding this transaction as he had done in relation to the WAFD transaction.
[471] These factors leave me in a state of reasonable doubt as to whether Mr A intentionally assisted North South to breach the related party restrictions in its Trust Deed by entering into the Te Kaha security sharing arrangement.
Decision
[472] The Crown has failed to prove Mr A’s guilt under this particular.
PART THREE: THE ALLEGATIONS BASED ON BREACH OF THE OBLIGATION TO CARRY ON BUSINESS IN A PRUDENT AND BUSINESSLIKE MANNER
[473] These allegations relate to Counts 3, 4 and 5. As already noted, Cl 5.3(a) of the North South Trust Deed required the company to “carry on and conduct its business in a prudent and businesslike manner”. The Crown alleges that North South breached this contractual obligation when it entered into the WAFD, Dynasty and Te Kaha transactions. It contends the accused caused or assisted North South to breach that obligation, and that they did so intentionally.
Preliminary issue
[474] A preliminary issue needs to be determined in relation to this aspect of the Crown case. The issue arises because the accused contend that the obligation under Cl 5.3(a) does not amount to a “requirement” for the purposes of s 220(1). Although counsel for Mr Cropp led the argument on this point, it obviously affects all three accused. If the argument succeeds, none of the accused can be found guilty on Counts 3, 4 and 5 under this particular.
[475] As noted above, criminal liability arises under s 220 when a person intentionally deals with property otherwise than in accordance with the requirements
of any other person. Counsel for Mr Cropp argues that Cl 5.3(a) imposed a general obligation on North South to conduct its business in a prudent and businesslike manner. It did not impose a specific obligation on the company to deal with specified property in any particular way. As a consequence, he contends that any obligation that the clause may impose falls short of constituting a “requirement” for the purposes of s 220(1).
[476] Counsel for Mr Cropp submits that the scope of s 220 must be determined having regard to the legislative history of the section. He says that this points firmly against liability being imposed for breach of a general obligation to act in a particular manner.
[477] As Wylie J noted in Douglas,41 s 220 began life under s 242 of the Crimes Act 1908 as the crime of theft by a person receiving property on account of another. It was replaced by s 222 of the Crimes Act 1961 on 1 January 1962, and became the crime of theft by a person required to account to another.42 The current version of s 220 then replaced s 222 as from 1 October 2003.43
[478] In Nisbet,44 the Court of Appeal noted that the learned authors of Garrow and Turkington’s Criminal Law in New Zealand had observed that there was nothing in the Report of the Law and Order Select Committee on the Crimes Amendment Bill or the 1991 report of the Crimes Consultative Committee to suggest that s 220 was intended to change the substance of the law.45 The explanatory note to the Crimes Amendment Bill also stated that s 220 was designed to be a “simplified version” of s 222.46 Whilst the language of s 220 is more broadly expressed than the former s 222, the Court of Appeal considered that the cases decided under s 222 therefore remain relevant to determining the scope of conduct to which s 220 will apply.47
[479] Insofar as it is relevant, the former s 222 provided as follows:
41 R v Douglas, above n 9 at [161].
42 Crimes Act 1961, s 412(2).
43 Crimes Amendment Act 2003, s 15.44 Nisbet v R above n 3 at [26].
45 Gary L Turkington Garrow and Turkington’s Criminal Law in New Zealand (online looseleaf ed, LexisNexis) at [CRI220.31].
46 Crimes Amendment Bill 1999 (322-1) at v.
47 R v Douglas, above n 9 at [161]; Nisbet v R above n 3 at [26].
Section 222 Theft by a person required to account –
Every one commits theft who, having received any money or valuable security or other thing ... on terms requiring him to ... pay it, or the proceeds of it ... to any other person ... fraudulently converts to his own use or fraudulently omits to ... pay the same ... which he was required to ... pay as aforesaid.
[480] It is worthwhile contrasting s 222 with the relevant parts of s s 220:
(1) This section applies to any person who ... has control over, any property on terms or in circumstances that the person knows require the person - ...
(b) to deal with the property, or any proceeds arising from the property, in accordance with the requirements of any other person.
(2) Every one to whom subsection (1) applies commits theft who intentionally ... deals with the property ... otherwise than in accordance with those requirements.
[Emphasis added]
[481] Section 220 is potentially wider in scope than s 222 in several respects. First, the removal of the word “fraudulently” from the section means that the prosecution is no longer required to prove that the accused acted dishonestly. Secondly, a person would only commit an offence under s 222 if he or she acquired money or valuable security on terms requiring him or her to pay it to any other person. Under s 220, liability will arise if the accused intentionally deals with property “otherwise than in accordance with [the] requirements” imposed by another person. It is arguable that this is wider in scope than an obligation to pay money to another person. It is also arguable that the word “property” in s 220 is wider in scope than “any money or valuable security or other thing” in s 222.
[482] Importantly for present purposes, cases decided under s222 established that liability under the section would only arise where the accused was subject to an obligation to use or apply identified property in a particular way. The courts drew a distinction between this situation and situations where a person was free to deal with money or property received from another person even though the relationship between the parties might be that of debtor and creditor. The Court of Appeal in Nisbet undertook an analysis of these cases in determining that a contractual
obligation to deal with property in a particular manner was sufficient to give rise to a
“requirement” for the purposes of s 220.48
[483] In R v Scale,49 the Court of Appeal held, relying upon Mead v R,50 that s 222 required the Crown to establish that the circumstances imposed upon a person who receives property from another comprise “an obligation which is something more than a mere debt.”51 Liability could be established in those circumstances because they produce a “fiduciary element,” or an “earmarking” of the property in the hands of the recipient.52
[484] In Mead, the Court of Appeal had noted that s 222 used the same wording as s 249 of the draft Code proposed by the Criminal Code of Commissioners in England. The Court said: 53
The reason why s.249 was considered to be necessary is well described in Vol 3 of the History of Criminal Law of England where the author, Sir James Fitzjames Stephen said:
A man may frequently be entrusted with money which he has a right to deal with in a variety of ways, as, for instance ... by investing it in the funds etc., but which he is not entitled to treat as a mere debt due to his principal....If [a recipient of funds] appropriates the money to his own purposes and deceives [the person from whom he has received it]... by pretending to have invested it ... that would usually and properly be regarded as theft.
[485] In Mead, the Court of Appeal also agreed54 with the following observations by the late Professor Garrow when commenting on s 222. He said:
The money or property must have been received upon terms which require the receiver to pay the money over or to hand over the property or its proceeds to any other person. ... The arrangement must, however, create a duty to account as distinct from it being a debt.
[486] Similarly, in R v Prestney,55 Blanchard J said:
48 Nisbet v R, above n 3 at [27]–[33].
49 R v Scale [1977] 1 NZLR 178 (CA).
50 Mead v R [1972] NZLR 255 at 261.51 R v Scale, above n 49 at 181.
52 Ibid, at 182.
53 Mead v R, above n 50 at 260.
54 Ibid, at 261.55R v Prestney [2003] 1 NZLR 21 (CA) at [23].
Guilt under the section depends in relation to this element of the offence not so much upon any question of whether the accused acquires title to the money but upon the nature of the obligation which the accused has expressly or implicitly accepted in relation to its use or application.
[487] The traditional approach to s 222 does not sit easily with the approach suggested by the Crown in relation to Cl 5.3(a). The obligation under Cl 5.3(a) does not relate to any particular property. Rather, it relates to North South’s business as a whole. North South’s business comprises its assets and liabilities. Some of its assets comprise investors’ funds, but the company also owns other assets in its own right. The obligation to conduct business in a prudent and businesslike manner extends to all its assets, however, and not just the funds entrusted to it by investors.
[488] Furthermore, an obligation to carry on business in a prudent and businesslike manner is self-evidently an extremely general obligation that relates to the whole of North South’s business and not to identifiable parts of it.
[489] Viewing Cl 5.3(a) as imposing a requirement on North South for the purposes of s 220 also leads to practical problems. How does one measure what is “prudent” and “businesslike” for the purposes of the section? Conviction under the section may produce significant consequences, including loss of liberty, for the accused. A person who is allegedly subject to an obligation of the type that falls within the scope of s 220 should therefore be able to readily recognise the nature and scope of that obligation. This will not present a problem when a person receives property or money subject to an express requirement that he or she is to use or deal with it in a particular way. It becomes a significant issue, however, when the requirement is that the person must act in a prudent and businesslike manner when carrying on the entirety of a company’s business.
[490] Counsel for Mr Cropp submits that an obligation to act prudently in the present context would need to be assessed in a manner similar to the obligations imposed on trustees by the Trustee Act 1956. That legislation imposes an obligation on a trustee who exercises any power of investment to exercise the “care, diligence and skill that a prudent person of business would exercise in managing the affairs of
others”.56 Where the trustee is a professional trustee or investment adviser, he or she must exercise the “care, diligence and skill that a prudent person engaged in that profession, employment or business would exercise in managing the affairs of others”.57 If criminal liability is imposed in respect of failure to meet these standards of conduct, it will affectively apply to intentional forms of negligence. He submits, and I agree, that intentional negligence would generally fall within conduct that the criminal law categorises as being misfeasance or recklessness. Section 220 says nothing, however, about reckless conduct.
[491] The Crown relies upon Douglas and Tallentire as authority for the proposition that the obligation imposed by Cl 5.3(a) is sufficient to give rise to a requirement for the purposes of s 220. In those cases the Trust Deed in question contained a clause58 in virtually identical terms to Cl 5.3(a) of the North South Trust Deed. It also contained a clause59 requiring the company to act in accordance with any “laws, directives and consents” that might inter alia have a material adverse
effect on the company. Wylie J held that the accused had caused the company to breach its obligation under the first of these clauses when it made loans to related parties without the prior written consent of its trustee. The Court of Appeal did not disturb Wylie J’s conclusion on this point.
[492] In order to assess the strength of the Crown’s argument, it is necessary to examine the factual circumstances in Douglas and Tallentire a little more closely. In that case, as in the present, the accused were charged under s 220 with intentionally using investors’ funds to make related party loans without obtaining the prior written consent of the company’s trustee. The Trust Deed prohibited the company from entering into related party transactions without the prior written consent of the trustee. The only exception to this was where the transaction was entered into in the ordinary course of business, and where the consideration for the transaction was on the basis of an arm’s length transaction as between two unrelated parties contracting
in an open market.
56 Trustee Act 1956, s 13B.
57 Ibid, s 13C.
58 Clause 6.4(b).59 Clause 6.4(g).
[493] Counsel for the accused submitted that the clause requiring them to carry on and conduct the company’s business in an efficient, prudent and businesslike manner was insufficient to give rise to a requirement for the purposes of s 220. Wylie J rejected this argument in the following passage of his verdict:
[233] Turning to cls 6 4(b) and 6 4(g), Mr Mullins submitted that both clauses are incapable of definition adequate to properly support criminal charges. He submitted that cl 6 4 does not relate directly to a dealing with property, and that a lack of prudence pursuant to the clause is equivalent to negligence. He submitted that the clause, together with s 220, potentially transforms a negligent act into a crime. In relation to cl 6 4(g), he noted that the indictment is limited to ss 131 and 133 of the Companies Act. He submitted that there are difficulties in “criminalising” Companies Act provisions via the Crimes Act.
[234] There is some attraction in Mr Mullins’ submissions. However, I am not persuaded that they are fatal to the Crown. Section 220 can have a perhaps unhappy interface with civil law, but nevertheless, it is contained in the Crimes Act. The section provides that if requirements imposed are intentionally breached, there can be a criminal law consequence. The fact that the requirements are derived from a contract and that they are consonant with civil law obligations does not avoid that consequence. Nor does the fact that the contract creating the requirements requires interpretation by the Court.
[235] The provisions in cl 6 4 of the debenture trust deed are general in their application. The provisions in cl 6 2 are more specific. However, the provisions run the one into the other. Capital + Merchant Finance Limited was required to conduct its business generally in a prudent and businesslike way pursuant to cl 6 4(b), and in compliance with the law pursuant to cl 6
4(g). When it did so, it was carrying out its business in the ordinary way. Clause 6 2(a) focuses on individual related party transactions. If each
individual related party transaction was not conducted in a prudent and
business-like way and in compliance with the law, then the company was not, in my judgment, acting in the ordinary course of its business as a responsible lender. I have already touched on this above.
[494] Viewing these observations as a whole, I do not consider they support the Crown’s argument. Wylie J concluded that the company would be carrying out its business in the ordinary way when it conducted its affairs in compliance with the two clauses that were expressed in general terms. When it breached those obligations in respect of individual transactions, however, it ceased to act in the ordinary course of business. As a result, the individual transactions were not transactions that the company could enter into without its trustee’s prior written consent. I do not take Wylie J to be saying that a breach of the general obligations alone would amount to a breach of a requirement for the purposes of s 220.
[495] The judgment of the Court of Appeal in Tallentire does not touch upon this issue, and is therefore of no assistance in the present context.
[496] I consider the approach taken by the Court of Appeal in Nisbet 60 to be instructive in this context. In that case the appellant, Mr Nisbet, had entered into a joint venture with another person to acquire land and develop it into residential sections. The two men incorporated a company to undertake the project, and entered into a shareholders’ agreement setting out the terms on which they agreed to carry out the venture. The agreement contained the following clause:
6.6 The parties will cooperate and use their best endeavours to ensure that all arrangements made in respect of the project finance are given effect in accordance with all agreements and understandings relating to it, and with the collective intentions of the parties that repayment of project finance are made at times and in the manner that accord with all such arrangements, agreements and understandings and will properly facilitate the retirement, redemption and satisfaction of all relevant obligations as appropriate.
[497] The two men anticipated that when the company acquired the land, it would become entitled to a GST refund. They agreed in oral discussions that they would use the refund to repay a short term loan the company had obtained from a finance company. When the company received the refund, however, Mr Nisbet did not use it to repay the loan as had been agreed. Instead, he instructed the company’s accountants to offset the refund against a GST liability that his own company had incurred.
[498] The Court of Appeal held that, on its own, the general obligation imposed on both parties by Cl 6.6 of the Shareholders’ agreement was not sufficient to amount to a requirement for the purposes of s 220.61 Similarly, the agreement they reached during their oral discussions could not give rise to such a requirement without more. The Court considered that the position was different, however, when Cl 6.6 and the oral agreement were viewed in combination. The Court held that the contractual
obligation under Cl 6.6 applied to any agreement or understanding that the two men might reach regarding project finance. The agreement they reached in relation to the
GST refund was clearly an agreement or understanding about an issue relating to
60 Nisbet v R, above n 3.
61 Ibid, at [38].
project finance. As a consequence, Mr Nisbet became contractually bound, and therefore subject to a requirement under s 220, to give effect to that agreement. He was therefore liable under s 220 when he intentionally used the GST refund for a purpose other than repayment of the loan to the finance company.
[499] I consider the effect of the obligation imposed by Cl 5.3(a) of North South’s Trust Deed to be similar to that imposed by Cl 6.6 of the shareholders’ agreement in Nisbet. It creates a general obligation that, on its own, is insufficient to give rise to a requirement under s 220.
[500] For that reason I hold that the Crown cannot establish a charge under s 220 based solely on a breach of the contractual obligation imposed by Cl 5.3(a).
[501] In case I am wrong in that conclusion, however, I will briefly consider what the position would be if jurisdiction existed for the Crown to proceed under this particular.
What would the position be if jurisdiction existed for the Crown to proceed under this particular?
The WAFD Security Sharing Agreement – Counts 2 and 3
[502] The Crown could only establish liability against Mr Cropp under this particular, because neither Mr Whale nor Mr A played any part in deciding that Dominion would make the loan to WAFD, and that North South would make the payment to Dominion on 31 March 2008. Mr Cropp alone bears responsibility for those decisions.
[503] The transactions that took place on 31 March were imprudent on many levels, some of which I have already discussed. For present purposes, however, liability would potentially arise because Mr Cropp caused Dominion and North South to enter into transactions when he knew that they would suffer certain loss as a result of doing so. Mr Cropp knew that Dominion was going to make a loss on the loan to WAFD, because the loan could not be repaid in full from the sale of the Norfolk Manor units. Without a binding commitment from Mr Terry Butler to provide an
underwrite, the decision that Dominion would make the loan to WAFD was intentionally imprudent.
[504] In relation to the payment by North South to Dominion, the position may have been different if Mr Cropp had required Dominion to cede priority under the SSA to North South. Mr Cropp specifically instructed Mr Whale, however, to prepare the WAFD SSA on the basis that the two companies would share in the realisation of the security on a pari passu basis. In taking that step, he ensured that North South was also certain to make a loss on the transaction. I regard that as an act of intentional imprudence as well.
[505] In reaching this conclusion, I do not accept the submission for the accused that the company would only breach its obligations under Cl 5.3(a) where it carried on the whole of its business in a prudent and businesslike manner. That was not the approach taken either at first instance or on appeal in Douglas and Tallentire. Both Wylie J and the Court of Appeal proceeded on the basis that the obligation could be breached in respect of individual transactions.
[506] I consider, however, that the issue of whether or not liability arises in respect of a single transaction is ultimately a question of fact and degree having regard to the transaction in question when viewed in the context of the company’s overall business. Where an individual transaction is insignificant having regard to the company’ total business, liability might not arise. This is because, objectively viewed, the transaction would not demonstrate that the accused has carried on the business in a prudent and businesslike manner. Where, as here, the transaction was significant both in amount and having regard to the company’s total business, an intentionally imprudent transaction may give rise to liability under s 220.
[507] One of the principal reasons North South ultimately received nothing from the WAFD, Dynasty and Te Kaha SSAs is that the SSAs were never registered under the PPSA. It has been suggested for Mr Cropp that Mr Whale’s law firm bears responsibility for that occurring. On the preponderance of the evidence, however, Jones Young does not appear to have been generally responsible for registering securities under the PPSA. It was responsible for registering securities under the
Land Transfer Act 1952, but responsibility for registering documents under the
PPSA appears to have rested generally with Dominion and North South.
[508] None of the emails that Ms Collins sent to Jones Young in relation to the WAFD, Dynasty and Te Kaha SSAs instructed the firm to ensure that the securities were registered. Nor is there any evidence that the companies’ loan staff queried Jones Young as to whether that had occurred. This suggests that the companies did not consider that Jones Young was responsible for registering the SSAs.
[509] I do not consider, in any event, that the companies’ failure to register the SSAs could give rise to liability on Mr Cropp’s part under this particular. I accept Mr Cropp’s evidence that his role as CEO did not extend to ensuring that securities were perfected in this way. He was entitled to rely upon the loans staff to ensure that this was done.
The Dynasty and Te Kaha Security Sharing Arrangements
[510] The Crown case is not nearly as strong in relation to the Dynasty and Te Kaha transactions. Again, only Mr Cropp could realistically be liable in respect of Counts 4 and 5. Neither Mr Whale nor Mr A played any role in making the decision that North South would enter into the Dynasty and Te Kaha security sharing arrangements.
[511] Although there are clearly significant elements of imprudence in respect of both arrangements, I could not be satisfied beyond reasonable doubt that Mr Cropp intentionally caused North South to act imprudently when it entered into them. I consider he could reasonably have believed that Dominion would be repaid given the amount of the loans and the level of security Dominion held. Mr Cropp also instructed Jones Young to prepare the Dynasty and Te Kaha SSAs on the basis that North South would take priority over Dominion in being repaid. For these reasons he could reasonably have believed that North South would be repaid in full. The Crown would not have been able to establish liability against Mr Cropp under this particular.
[512] Finally, I am not sure that Mr Cropp’s culpability would be greatly increased even if the Crown was able to prove that he was also guilty in relation to the WAFD SSA under this particular. It seems to me that his culpability under this head is to a large extent the same as his culpability for intentionally causing North South to enter into the transaction without the prior written consent of its trustee.
PART FOUR: VERDICTS
[513] For the reasons I have given, my verdicts are as follows:
Count 1 (Norfolk Manor)
Mr Whale – Not Guilty.
Count 2 – (Dominion loan to WAFD)
Mr Whale – Not Guilty. Mr Cropp – Guilty.
Count 3 – (WAFD Security Sharing Arrangement)
Mr Whale – Not Guilty. Mr Cropp – Guilty.
Mr A – Not Guilty.
Count 4 – (Dynasty Security Sharing Arrangement)
Mr Whale – Not Guilty. Mr Cropp – Guilty.
Mr A – Not Guilty.
Count 5 – (Te Kaha Security Sharing Arrangement)
Mr Whale – Not Guilty. Mr Cropp – Guilty.
Mr A – Not Guilty.
Lang J
Solicitors:
Meredith Connell, Auckland
Paul Davison QC, Auckland
John Billington QC, Auckland
M D Lloyd, Auckland
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