Reynolds v Calvert

[2013] NZHC 1159

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

CIV-2012-412-000910 [2013] NZHC 1159

BETWEEN  GRANT BRUCE REYNOLDS AS LIQUIDATOR OF JAMES DEVELOPMENTS LIMITED (IN LIQUIDATION)

Plaintiff

ANDHILARY JANE CALVERT AND HGW TRUSTEES LIMITED AS TRUSTEES OF FRONGOPOLUS TRUST

Defendants

Hearing:         6 May 2013

(and with additional submissions in writing dated 14 and 20 May
2013)

(Heard at Dunedin)

Appearances: J McCartney QC for Applicant/Plaintiff

M R Sherwood King for Respondents/Defendants

Judgment:      21 May 2013

JUDGMENT OF ASSOCIATE JUDGE OSBORNE [as to plaintiff ’s summary judgment application]

A loan is re-documented

[1]      In 2006, things were going well for the fortunes of Chris James.  He had a family trust,  the  Frongopolus  Trust.    The  trustees  (the  defendants  in  this  case) decided to purchase an 8,925 m² block of land, at Jacks Point, Queenstown, in order to build there a very substantial home for the James family.

[2]      To finance the purchase, Mr James had his company, James Developments

Limited (“JDL”), advance $740,000 on 3 October 2006 to the trustees.  The money

was cleared through another company (Campbell’s Stores Limited), but went to the trustees on the same date.

[3]      The advance and credit were recorded in the financial statements of JDL and the Trust respectively for the financial year ending 31 March 2007.  And so, too, for the year ending 31 March 2008.

[4]      By mid-2009, JDL was  heading towards liquidation.   It  had received an adverse High Court civil judgment in April 2009.

[5]      The firm of Harvie Green Wyatt were the accountants for the James family and their entities.   Todd Miller, of that firm, was the partner responsible for the James’s entities.  He was also, and remains, a director of the firm’s trustee company, HGW Trustees  Limited,  which  as  a  co-trustee  of  the  Frongopolus  Trust  is  the second-named defendant in this proceeding.

[6]      By July 2009, Mr Miller had draft financial statements ready for JDL for the year ending 31 March 2009.

[7]      A meeting was convened in relation to JDL on either 1 or 2 July 2009. Present were Mr James and his accounting and legal advisers.  They were Mr Miller (accountant), Michael Van Aart (solicitor) and Colin Withnall (Queen’s Counsel). For discussion were issues associated with JDL's imminent liquidation.   The shareholders shortly afterwards, on 6 July 2009, placed JDL in liquidation.

[8]      At the meeting, the discussion included recognition that the $740,000 debt of the Trust was liable to be called up by a liquidator of JDL.  It was one of the assets of JDL  which  could  be  “a  problem”.    A decision  was  made  to  re-document  the transaction.   The re-documentation which ensued was through a resolution of the director which Mr James signed and dated 1 July 2009. The resolution recorded:

James Developments Limited                   Resolution of Director

Background:

On 3 October 2006 a cash withdrawal of $740,000 was made from the  company  bank  account.  This  withdrawal  was  incorrectly

narrated in the company computer ledger, and subsequently in the company financial statements, as an advance  to the Frongopolus Trust.  The correct treatment of this advance was as a repayment of earlier advances from Chris James ($500,000) and Heriot Holdings Limited ($240,000).  Heriot Holdings Limited is wholly owned by Chris James.

Resolved that:

The 2009 company financial statements be amended to correctly record the $740,000 withdrawal on 3 October 2006 as a repayment to the advances made by Chris James $500,000 and Heriot Holdings Limited $240,000.

[9]      The draft JDL financial statements for the year ending 31 March 2009 were amended to show that the advance of $740,000 to the Trust was no longer an asset of JDL.     They  were  subsequently  finalised  in  that  form  so  as  to  reflect  the disappearance of the Trust’s debt to JDL.  The $740,000 advance was instead treated on JDL’s new financial statement as if it had been a repayment of advances from Mr James ($500,000) and Heriot Holdings Limited (“Heriot”) (240,000) respectively.

[10]     The journal entry for the alteration of the treatment of the $740,000 debt in the Trust was not completed until 21 September 2009 (more than two months after the liquidation of JDL), when an entry was made to re-code the debt to Campbell Stores Limited.

[11]     The initial liquidators of JDL do not appear to have identified the significance of  the  previous  existence  of  the  trustees’ $740,000  debt.    The  debt  no  longer appeared in JDL’s accounts.   The initial liquidators were replaced by the current liquidator, Mr Reynolds, (the plaintiff in this proceeding) in November 2010.  He, too, remained initially unaware of the prior existence of the $740,000 debt.  But by his investigations, he identified the relevant background as I have summarised it.

[12]     Under s 261 Companies Act 1993, Mr Reynolds examined Mr James on 30

May 2012 and Mr Miller on 8 June 2012.  This process led Mr Reynolds, on 26 June

2012, to demand from the trustees’ payment of the $740,000 together with interest. The trustees, through their solicitors, denied that there was any basis for the liquidator’s  demand  either  as  to  principal  or  interest.    Around  the  same  time, however,  Mr  James  and  Heriot  presented  (through  Mr  Harvie  of  Harvie  Green

Wyatt) their proofs of debt for sums which were meaningful only if the July 2007 re- documentation is ignored.  That is to say the proofs of debt assume that there was no settlement by JDL of the debt owed to Mr James and Heriot.

[13]     Mr Reynolds pursued further documentation from various parties.   He also continued to pursue, unsuccessfully, payment of the $740,000.

[14]     In November 2012, Mr Reynolds issued this proceeding.   The trustees had continued to deny they owed anything to JDL.   On the day before Mr Reynolds swore his affidavit in support of the summary judgment application, a letter from the trustees’s solicitor stated:

The $740,000 Advance – Limitation Defense [sic]

My  clients  stand  by  the  treatment  of  this  sum  in  the  accounts  of  JDL resulting from the directors’ minute of 1 July 2009. Without prejudice to that stance, however, it is noted that the advance was made on 3 October 2006, being now more than six years ago.  Would you please advise what records you hold that you would contend meet the requirements of s 26 of the Limitation Act 1950 should your view of the transaction prevail.

The basis of the defence

[15]     Thus, the final position of the defendants before this proceeding was issued was to assert that, contractually, no debt existed.  In the event that that defence was not upheld, the defendants invoked the limitation period in relation to a contractual claim for repayment of a debt payable on demand.

[16]     When  it  came  to  the  time  for  filing  the  defendants’  opposition  in  this proceeding, the assertion that the $740,000 debt did not exist was abandoned.  Their defence does not involve any denial that the $740,000 debt existed.   Rather, the defendants place their reliance on the limitation period.

The plaintiff ’s case

[17]     By his amended statement of claim, the liquidator asserts that he may obtain orders for the recovery of the $740,000 on three different bases:

(a)       A contractual claim for repayment of the debt (with interest);

(b)A claim  for payment  of the $740,000  pursuant  to  the terms  of a resulting trust (with interest);

(c)      An order under s 348 Property Law Act 2007 requiring payment of the $740,000 (with interest) as reasonable compensation for a prejudicial disposition.

Claim in contract for repayment of debt

The debt as a term loan

[18]     The liquidator’s primary position is that the implied agreement of the parties at the time the loan was made was that it be a term loan.  Ms McCartney  submits that a number of matters support that conclusion including:

(a)      Both JDL and the Trust carried the debt in their financial statements in that year and the following year as a term advance/term debt;

(b)The advance represented money intended to be held and used by the Trust to develop a very substantial family home for the James family suggesting that until demand or notice for repayment was given and a reasonable time had passed to find the necessary funds, no right to repayment would arise;

(c)      With Mr Todd as the accounting adviser involved by the parties on both sides of the transaction, the implied agreement of the parties may reasonably be  informed  by  reference  to  the  applicable  accounting standards  which  define  a  term  (or  “non-current”)  liability  (the character given in financial statements of both parties to the debt) as a liability expected to be recovered more than 12 months after reporting

date.1

1      See particularly New Zealand Equivalent to International Accounting Standard 1, Presentation of

[19]     If the debt was not due to be repaid until (at earliest) 31 March 2009 (being

12 months from the balance date of 31 March 2008) the earliest date at which the contractual claim on the debt would have become statute-barred would be 1 April

2014. The plaintiff’s claim would therefore be within time.

[20]     There is substantial merit in reaching the conclusion that there was a term loan in this case.

[21]     The defendants sought to argue against that conclusion largely through an additional affidavit provided by Mr Harvie, one of the directors of the second-named defendant, who deposed that he was authorised to give affidavit evidence on behalf of the defendants.  It is Mr Harvie’s evidence that the logic of the debt being listed as a term liability in the financial statements of the Trust was that it was:

… not expected to be called upon within 12 months of the balance date of

[the Trust].

Mr Harvie, in his evidence, then qualified the meaning of that expectation by saying:

The reality  to  us  as  accountants  and  also  as Trustees  …  is  that  it  was repayable on demand at any time, albeit that demand was not expected to be made in the ensuing 12 months.

[22]     Significantly, this evidence came not from Mr Todd who was the accountant who  in  fact  looked  after  the  James’ interests,  but  from  another  partner  of  the accounting firm who is also a director of the trustee company.  It is not explained in the defendants’ evidence why Mr Harvie’s view should carry any weight either in relation to the parties actually involved or by reference to the rules of construction relating to evidence of subjective intention.

[23]     Mr Reynolds has a strong case to succeed on the contractual claim upon the basis that it is not statute-barred, but it is not beyond argument that the advance may

have been repayable on demand.

Financial Statements (NZ IAS 1), at 60-65 and 69-76; considered in Ministry of Economic Development v Feeney DC Auckland CRI 2008-004-29199, 2 August 2010 per Judge J M Doogue at [150]-[153].

Date of the advance

[24]     Mr Reynolds’ initial statement of claim pleaded that the advance was made on or about 3 October 2006.  This proceeding was not filed until 20 November 2012. Hence the pleading by the defendants from the outset that the claim was statute- barred.

[25]     Mr Reynolds responded to the defence in part by amending the statement of claim to plead that the advance of the $740,000 occurred “in the period from about 3

October  2006  to  6  December  2006”.    That  pleading  is  then  particularised  by reference to events between 3 October 2006 and 6 December 2006 when the trustees used the sum paid over on 3 October 2006 to purchase the Jacks Point property.

[26]     Ms McCartney appropriately accepted that the amended pleading could not carry the day for the liquidator in a summary judgment context.  At best, the liquidator’s amended position in relation to the date of the advance might be considered arguable.  On the evidence adduced, I doubt that it is even that.

Acknowledgement of the debt

[27]     Section 25(4) Limitation Act 1950 (which is the statute which was applicable at the relevant times) provides (amongst other things) that if a right of action has accrued to recover any debt, and the person liable therefor acknowledges the claim, the right shall be deemed to have accrued on, and not before, the date of acknowledgement.

[28]     By his amended statement of claim, Mr Reynolds alleges that the trustees acknowledged the debt by recording it in their financial statements for the years ending 2007 and 2008.  He alleges that the statements in the accounts (signed by the accounting firm Harvie Green Wyatt) amounted to acknowledgments by an agent of the Trust (the accountant) to the agent of JDL (the same accountant).  Ms McCartney in her submissions referred also to evidence that the defendants, as trustees of the Trust, signed a resolution approving the financial statements for the years ending

2007 and thereafter.   The amended claim itself, on which the summary judgment

application is based, does not however plead the trustees’ resolution as material.  I therefore do not take it into account on this application.   I note also an evidential difficulty for the plaintiff, namely that there appears to be no evidence that the resolution was delivered to JDL.

[29]     As identified by Mr Sherwood King for the defendants, there are substantial difficulties in the plaintiff’s pleading that the trustees acknowledged to JDL the existence of the debt through the financial statements signed by their accountants. Reservations in the financial statements themselves indicate the limits of the accountants’ role.  Mr Sherwood King also referred to a passage in Andrew McGee’s text Limitation Periods which is arguably applicable as much to accountants as to the

auditors to whom it refers.  Professor McGee states:2

The auditors merely express a view on whether the accounts comply with the statutory requirements – they are not the agents of the company for the purposes of acknowledging debts.

[30]     There is a further difficulty with the liquidator’s argument in identifying a relevant person to whom the acknowledgement was allegedly given.  The agency of the recipient accountant in this case is again questionable.

[31]     It is at least arguable that no acknowledgment of the debt was provided by the trustees to JDL as alleged by Mr Reynolds.

Concealment of the debt

[32]     The merit of Mr Reynolds’ claim against the trustees comes into sharper focus when one moves to consider the concealment of the debt.   Mr Reynolds invokes s 28(b) Limitation Act 1950.  Relevantly, s 28 of the Act provides:

28       Postponement of limitation period in case of fraud or mistake

Where,  in  the  case  of  any  action  for  which  a  period  of  limitation  is prescribed by this Act, either—

2      Andrew McGee Limitation Periods (6th ed, Sweet & Maxwell, London, 2010) at [18.023]; Terence Prime and Gary Scanlon The Law of Limitation (2nd ed, OUP, Oxford & New York,

2005) at [2.7.5.1] and [2.7.6.2]; both texts citing Re Transplanters (Holding Company) Limited

[1958] 1 WLR 822 (Ch).

(a)       The action is based upon the fraud of the defendant or his agent or of any person through whom he claims or his agent; or

(b)      The right of action is concealed by the fraud of any such person as aforesaid; or

(c)       … , —

the  period  of  limitation  shall  not  begin  to  run  until  the  plaintiff  has discovered the fraud …, or could with reasonable diligence have discovered it:

Provided …

[33]     Mr Reynolds says that the debt, and the right to sue for it, was concealed.  He says that that was done when Mr Miller and Mr James caused the $740,000 asset showing in JDL’s draft financial accounts for the year ending 31 March 2009 to be removed.  If the Court adopts one of the Oxford Dictionary definitions of “conceal”, namely:

To not allow to be seen or noticed…

the debt was, from the time it was re-documented in early July 2007, concealed from anyone reading the financial statements.

[34]     Ms McCartney submitted that the purpose of such concealment by JDL’s director and accountant is to be seen in the transcripts of their subsequent examinations by the liquidator in May and June 2012.

[35]     Soon after Mr Reynolds commenced his examination of Mr James on 30 May

2012,  he  and  Ms  McCartney  (who  assisted  Mr  Reynolds  at  the  examination) focussed on the discussion of the financial accounts of JDL which took place at the July 2009 meeting. The following exchange is recorded:

Ms McCartney: Was he [the accountant, Todd Miller] asked whether there were assets that could be a problem?

Mr James: Yes.

[36]     In the subsequent examination of Mr Miller on 8 June 2012, Mr Miller stated that there had been a discussion, in relation to what at that stage was documented as

the $740,000 debt of the trust, about an advance to Mr James or an entity related to

Mr James and advances back from the entities:

So it was basically decided to show the net position.

The following exchanges were then recorded.

Ms McCartney:  … so, who gave the advice that the advances from Heriot Holdings and Chris could be set off against the advance to Frongopolus Trust?

Mr Miller:  I think I was asked if there was any options and the only option I

could see was doing an offset but I never said categorically that it would be

…

Ms McCartney:  Something that was to stand up. Mr Miller:  No.

and the transcript goes on to record:

Ms McCartney:   And what the resolution says is the withdrawal was incorrectly narrated in the company computer ledger and subsequently in the financial statements as an advance to the Frongopolus Trust.   And then it reads the correct treatment of this advance was a repayment of earlier advances from Chris James of $500,000 and Heriot Holdings Limited of

$240,000. Alright. Mr Miller: Mmmm.

Ms McCartney:  Now who gave the advice that the correct treatment of that advance [to the Frongopolus Trust] was repayment of these early advances.

Mr Miller: As I said, it comes back to that meeting where we had those three entries so it was just agreed there that we would show a net advance.

Ms McCartney: Alright and when you say it was just agreed there, who gave that advice?

Mr Miller: Well I presumed that the draft accounts showing the asset and the two credit advances and as I said the only thing I could see in saying that I didn’t think there was no guarantee that it would stack up as if we just showed the net position.

Ms McCartney: Alright.  Because you would only be able to achieve that net position if as at the date of the advance in October 2006 there were in fact advances  shown  of  $500,000  from  James  and  $240,000  from  Heriot Holdings.

Mr Miller:  And I think that the money for Chris came in after that date of

2006.

Ms McCartney: Yes. And did you know that at the time.

Mr Miller: We were purely just going off his draft accounts.

Ms McCartney:  Alright.   So when you asked about earlier advances who gave you the advice as to when those advances came in from Chris James.

Mr Miller:  We just looked at the 2009 accounts with the three figures and offset them.

Ms McCartney:   Okay.   I note that at the bottom of the resolution first to amend and that amendment would only stack up wouldn’t it if Chris James’ advance of $500,000 was in fact outstanding as at the date of this $740,000 advance.

Mr Miller: Yeah, assuming you are right.

Ms McCartney:  Did you look back at the previous financial accounts at the time?

Mr Miller: Not to the best of my memory, no.

and the transcript further continues:

Ms McCartney: That there could be no offset sorry that the suggestion in the resolution that the advance to Frongopolus Trust is wrong cannot be correct.

Mr Miller: Yeah, that’s correct.

Ms McCartney:   Alright.   But what it was wasn’t it, it was James Developments Limited and their legal advisers and accountants looking for a way to get the asset of $740,000 of the balance sheet, wasn’t it?

Mr Miller: Yes.

Ms McCartney: That’s what it was.

Mr Miller: That is what it boils down to essentially doesn’t it?

Mr Miller: Yes.

and of final relevance in this context, the examination later continued:

Ms McCartney:  Alright now I just want to record this so that we have got it recorded  although  I  think  that  it  is  superfluous.  The  treatment  of  the

$740,000 is a major financial transaction isn’t it.

Mr Miller: Yes.

Ms McCartney:  Yeah.  So can I put to you the only reason why it took so long to correct the advance was because it was never incorrect in the first place.  It was just a device to get it off the balance sheet for the purpose of the liquidation.

Mr Miller: That’s probably fair…

[37]     Notwithstanding Mr Miller’s central role in the decisions made in relation to JDL’s financial statements at the pre-liquidation meeting in July 2008, Mr Miller did not initially give the substantive evidence in opposition to this summary judgment application.  It was explained he was overseas at the time opposition was to be filed. The substantive evidence was given instead by his partner, Mr Harvie, and by Mr James.  (Mr Miller subsequently swore a brief affidavit principally in relation to an application for discovery made by the liquidator.   In the affidavit, he does depose that he has read Mr Harvie’s affidavit.  To the extent Mr Harvie touches on matters within Mr Miller’s knowledge, Mr Miller confirms the contents of the Harvie affidavit).

[38]     Mr Harvie, in his affidavit, responds briefly to paragraphs in Mr Reynolds’ affidavit.  In particular, he comments on Mr Reynolds’ reference to the examination of Mr James and Mr Miller and the identification in Mr Miller’s examination of the removal from the JDL financial statements of the advance to the Trust as “a device” to get the $740,000 out of the accounts of JDL.  Mr Reynolds had deposed that the device was ineffective to remove the asset given that the JDL liabilities which were purportedly then set off in the finalised accounts were made after the advance to the Frongopolus  trustees.    (Mr  Reynolds  agrees  that  the  adjustments  made  to  the finalised JDL 2008 accounts did not have the effect of removing the advance as an asset of JDL).  Mr Harvie deposes that the accounts were therefore restored to their original position and for that reason the proofs of debt were filed by Mr James and by Heriot in the liquidation of JDL.  Mr Harvie does not comment on the recognition of Mr Miller’s identification of the alteration to the accounts as a “device”.

[39]     Mr James also filed an affidavit in opposition.  He deposes that the advance to the Trust was a loan and was recorded as such in the accounts of both entities.  Mr James comments on the passages in Mr Reynolds’ affidavit to which I have referred. He deposes that the steps “to adjust JDL’s financial accounts” were taken on the professional advice of JDL’s then lawyers and subsequently completed by JDL’s accountants.  He agrees with Mr Reynolds and Mr Harvie that the adjustments did not have the effect of removing the advance as an asset of JDL, so the proofs of debt

in the liquidation of JDL were subsequently filed by Heriot and himself (Mr James). Mr James categorically rejects the allegations that he had engaged in a device to attempt to conceal the debt from the liquidator.  He deposes:

All steps have been undertaken in a transparent way with the fully documented records.   I have also been interviewed by the Liquidator and provided answers to the best of my recollection. Accordingly, any allegation of  fraud  against  me  is  wholly  without  foundation  and  I  find  such  an allegation very offensive.

[40]     Mr  James,  in  his  affidavit  evidence,  does  not  refer  to  his  personal circumstances  at  the  time  of  the  re-documenting  of  the  JDL advance.    At  his examination with the liquidator, Mr James explained that at the relevant time (July

2009) he was seriously ill and had been hospitalised for a lengthy period.   He referred to having had very little to do with JDL during that period.  He said that he had been “out of it”.  He said that he had never put the money in question into the Frongopolus Trust saying it had gone to the company called Campbell Stores.  He said he was reminded by others at the meeting of what had happened.  He said at his examination  that  a mistake  in  relation  to  the $740,000  needed  to  be  addressed because the money had been put into a different company (apparently a reference to Campbell Stores).

[41]     It is against the background of that evidence, as it stands in this interlocutory context, that the Court must consider whether the plaintiff has established, beyond argument, that s 28(b) Limitation Act 1950 is engaged.

[42]     The first requirement under s 28(b) is that there has been a concealment of the right of action.   It may well be, in terms of the normal meaning of the verb “conceal”, that the right of action was concealed in this case by the Frongopolus Trust by a director of its corporate trustee (the second-named defendant).

[43]     The second requirement under s 28(b) is that it was the fraud of the defendant which concealed JDL’s right of action.   Fraud, under the Limitation Act, has its extended meaning which includes equitable fraud which, in turn, includes serious breach  of  the  fiduciary  duties  upon  a  trustee  or  company  director.3      But  even

applying that standard of fraud, it cannot be said that the defendant has no arguable defence.   While the defendants have in their evidence put an emphasis upon the understanding and intentions of Mr James rather than on the understanding and intentions of the defendants (either Ms Calvert or the trustee company) there is enough in the evidence to indicate that the normal conclusion which arises in a summary judgment context in relation to an allegation of fraud must apply – the appropriate forum for resolution of that factual issue must be at trial.  Mr James has referred to the presence of the solicitors at the pre-liquidation meeting.   He has alleged that they gave advice in support of what was being done.  While that is the evidence of Mr James rather than of one of the defendants, it is material a court may well take into account in any assessment of fraud.

[44]     It remains a significant gap in the defendant’s evidence that Mr Miller, the only director of the second-named defendant to attend the pre-liquidation meeting, did  not  give  evidence  (parallel  to  that  of  Mr  James)  denying  that  the  JDL re- documentation was simply a device in an attempt to conceal the debt from the liquidator.  Mr Miller’s answers at his examination on 8 June 2012, both in relation to whether he thought the re-documentation would “stand up” or “stack up” and whether the re-documentation was “just a device to get it off the balance sheet for the purpose of the liquidation” must leave the defendants seriously exposed to an adverse factual finding in relation to fraud at a trial.   But the plaintiff has not satisfied me that a trial Judge will have to find that the concealment of the right of action was obtained by the fraud of the defendants (or one of their number).

Resulting trust

[45]     For a second cause of action, the liquidator repeats all his earlier pleadings as to the debt of $740,000 owed by the trustees to JDL.   He then alleges that the

$740,000 was advanced by JDL to the trustees and was applied by them for the purchase of the Jacks Point property.  He then asserts that the property is held on a

resulting trust for JDL.

approved on appeal – Collier v Creighton [1996] 2 NZLR 257 (P.C.).

[46]     Mr Reynolds seeks summary judgment not only on the first cause of action

(the debt claim), but also on the second cause of action in resulting trust.

[47]     Although Ms McCartney presented a brief (three line) written submission in support of summary judgment on this cause of action, she responsibly did not press the application on this basis in her oral submissions.  She invited the Court to ignore that aspect of the summary judgment application.

[48]     The concession was appropriately made.   On the plaintiff ’s own case, the

$740,000 was advanced by JDL as part of the purchase price by way of a loan.  Mr Sherwood King, for the defendants, appropriately referred to the incompatibility of the concepts of loan and resulting trust as enunciated by Fisher J, delivering the judgment of the Court of Appeal in Potter v Potter.4   As the heading to the relevant paragraph in the Court of Appeal’s judgment indicates, the concept of a resulting trust is incompatible with a loan.

Prejudicial disposition – ss 344-350 Property Law Act 2007

[49]    The plaintiff’s amended statement of claim and amended application for summary judgment invoked sub-part 6 of Part 6 of the Property Law Act 2007 (encompassing ss 344–350 which has as its purpose the restoration for the benefit of creditors of property or its value) acquired through prejudicial dispositions made by a debtor.

[50]     I turn to consider the elements of this cause of action as they arise under sub- part 6 of Part 6 of the Property Law Act and are relied upon by the liquidator.

Standing of liquidator

[51]     The liquidator had standing to bring this application: s 347(1)(a) Property

Law Act 2007.

[52]     The date for a claim by the liquidator commences on the date of liquidation, which in this case is 6 July 2009: Palmer v Official Assignee.5

A disposition of property

[53]     By s 345(2)(f), the meaning of the term “disposition” in sub-part 6 of Part 6

Property Law Act includes:

a transaction entered into by a person with intent by entering into the transaction to diminish, directly or indirectly, the value of the person’s own estate and to increase the value of the estate of another person.

[54]     The term “transaction” is not defined and is to be given its normal meaning. The Oxford English Dictionary gives as primary meanings of “transaction”:

Management of business; piece of especially commercial business done.

[55]     The agreement representing JDL and the Trust respectively was an agreement to enter a transaction, the transaction being the re-documentation of the loan which JDL had made to the trustees in October 2006.   Put another way, the transaction involved JDL’s showing as written off from its books the debt owing by the trustees. The Trust was thereby protected and its equity apparently improved by the elimination of a debt.  The value of JDL was directly or indirectly diminished, either through an immediate inability to recover the debt or through the imposition of greater time and greater difficulty in the recovery of the debt (the latter having proved to be the case).

[56]     By  s  346(1)  of  the Act  (which  is  within  Part  6)  sub-part  6  applies  to dispositions of property made after 31 December 2007.  This disposition qualifies in terms of timing.  It also qualifies as a disposition of “property”, as “property” in the Act includes everything that is capable of being owned, including tangible or intangible property.

A debtor who was insolvent at the time of the transaction or became insolvent as a result

[57]     By s 346(2) of the Act, sub-part 6 requires the disposition to be by a debtor who fits into one of three categories.  The relevant category for this proceeding is under s 346(2)(a), whereby sub-part 6 applies to a debtor who:

… was insolvent at the time, or became insolvent as a result, of making the

disposition …

[58]     The evidence filed in this case, in the form of the financial statements of JDL on the balance dates either side of the transaction, establishes that JDL was insolvent at the time of the transaction.

Intent to prejudice a creditor

[59]     By s 346(1)(b) of the Act, sub-part 6 applies only to a disposition of property undertaken:

… with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.

[60]     Ms McCartney invokes the concept of “prejudice” under the interpretation

provision, s 345(1)(a) where it is provided for the purposes of sub-part 6:

… a disposition of property prejudices a creditor if it hinders, delays, or defeats the creditor in the exercise of any right of the course of the creditor in respect of the property …

[61]     Ms McCartney also referred to the relevant concept of prejudice as defined by the Supreme Court in Regal Castings Ltd v Lightbody.6    The Regal Castings discussion remains relevant notwithstanding that the case was decided under the former provision, s 60 Property Law Act 1952, when the relevant criterion of intent was an intent to defraud creditors.   In Regal Castings, Blanchard and Wilson JJ

spoke of the debtor having alienated property:7

6      Regal Castings Ltd v Lightbody [2009] 2 NZLR 433 (SC).

7 At [54].

…  thereby  hindering,  delaying  or  defeating  creditors’  recourse  to  that

property …

[62]     This was the terminology adopted by Parliament in the 2007 Act when the term  “alienation”  was  replaced  with  “disposition” and  “disposition” was  further defined to include, amongst other concepts, the definition of a “transaction” to which I have referred above.8

[63]     Ms  McCartney’s  case  in  relation  to  the  liquidator’s  continuing  right  of recourse is not challenged.   Indeed, the evidence for the defendants including particularly that of Mr Harvie accepted the subsisting entitlement of the liquidator (subject to limitation issues).   This explained why both Mr James and Heriot had filed proofs of debt in the JDL liquidation which assumed that the 2009 transaction as a nullity.  For the defendants, Mr Sherwood King responsibly did not challenge the liquidator’s continuing right of recourse (subject to the limitation period).

[64]     Once that point is reached, it is also beyond argument that the rights of the creditors of JDL have been hindered or delayed.  Self-evidently, the period of delay has been from the time the initial liquidator was appointed on 6 July 2009 and has continued until now.

[65]     The liquidator must establish that not only were creditors of JDL prejudiced but that the transaction was entered into by JDL’s director, Mr James, with an intent to prejudice JDL’s creditors.  Ms McCartney submits that the intention in this case is clear beyond argument.  Mr Sherwood King submits that the correct time for testing the allegations of fact relating to intent must be at trial.  He lays particular emphasis on Mr James’ receipt of legal advice and his reliance on it as deposed to as he asserted at his examination by the liquidator.

[66]     The defendants have chosen to call no evidence as to what particular legal advice was given to them or to Mr James.  It is common ground that the historical financial records relevant to the 2006 payment were not before Mr James and the others who attended the pre-liquidation meeting in early July at which the re- documentation was agreed upon.  Mr James and the defendant trustees now accept

that the re-documentation ought not to have occurred.  He does not explain how in the days before the liquidation of JDL, he understood it was appropriate to treat a payment that was actually made from JDL on 3 October 2006 to another party (other than himself and Heriot) as a repayment of advances made by himself and Heriot.

[67]     It is against that background that I examine what has been said by those put forward by the defendants as witnesses. First, there is the evidence of Mr James. Secondly, there is the evidence of Mr Miller, the accountant who was a director of the second-named defendant.  (I set to one side the evidence of Mr Harvie who was not directly involved with the transaction).

[68]    It is common ground that those who attended the early July 2007 pre- liquidation meeting had before them draft financial statements for JDL which correctly showed the $740,000 advance to the Frongopolus Trust as an asset.  The purpose of the discussion and the subsequent re-documentation which occurred is recorded in the following exchange between Ms McCartney (for the liquidator) and Mr James:

Ms McCartney:  Was he [Mr Miller] asked whether there were assets that could be a problem.

Mr James: Yes.

[69]     As I have recorded, it was recognised by those at the meeting that the debt of the Trust was liable to be called up by a liquidator.

[70]     But Mr James, although the director of JDL, was not himself a trustee of his family trust.  Those at the meeting clearly looked to Mr Miller (as identified through the question which Mr James accepts was asked) to identify any assets which would be a problem and to suggest what might be done, whether in relation to the draft financial statements which were before them, or otherwise.  I therefore turn to what Mr  Miller  has  said.    I  have  earlier  quoted  from  his  examination.9      Mr  Miller confirmed that the only option that he could see was to “do an offset”, but that he never said categorically that it would stand up.

[71]     He added to that in his subsequent explanation as to why he showed a “net advance”:

Well I presumed that the draft accounts showing the asset and the two credit advances and as I said the only thing I could see in saying that I didn’t think there was no guarantee that it would stack up as if we just showed the net position.

[72]     In response to Ms McCartney’s questions, he confirmed that to the best of his memory, he had not looked back at the previous financial accounts at the time of the meeting and the decision to re-document the loan.

[73]     He accepted propositions put by Ms McCartney both that it was a matter of

JDL and their legal advisors and accountants looking for a way to get the asset of

$740,000 off the balance sheet and that it was probably fair to describe the re- document as just his advice to get [the loan] off the balance sheet for the purpose of the liquidation.

[74]     In his affidavit evidence filed in this proceeding, Mr Miller has not resiled from anything said at his examination.  It is clear beyond argument on the evidence that it was Mr Miller who drove the discussion which led to the re-documentation of the loan.  As one of the debtor trustees, he was to obtain for the Trust out of the pre- liquidation meeting the very transaction which he knew might not stack up (clearly meaning to later scrutiny and pursuit by a liquidator).

[75]     The focus of the discussion at the pre-liquidation meeting began, as Mr James himself conceded, with an identification of assets of JDL that could be a problem. The intention, beyond argument, must have been to remove the problem, especially for the benefit of those who were the debtors in relation to any advance that represented a JDL asset.  The solution agreed upon was to re-document the loan to represent it as if it had comprised two repayments to Mr James and Heriot (in relation to debts which had in fact substantially arisen after the date of the $740,000 advance to the Frongopolus Trust but prior to liquidation).

[76]     It is strongly arguable that the relevant individual intended to advantage the

Frongopolus Trust.   It is strongly arguable that there was also an intention (either

through actual intention or recklessness) to prejudice JDL’s creditors who, in the liquidation (shortly afterward to follow), would potentially lose access to repayment by the Frongopolus Trust.  In Regal Castings,10  it was s 60 Property Law Act 1952 (the previously applicable statute) which was under consideration.  Nonetheless, the observations of Blanchard and Wilson JJ as to the debtor’s intention in alienating property in that case resonate in this case:11

Whenever the circumstances are such that the debtor must have known that in alienating property, and thereby hindering, delaying or defeating creditors’ recourse to that property, he or she was exposing them to a significantly enhanced risk of not recovering the amounts owing to them, then the debtor must be taken to have intended this consequence, even if it was not actually the debtor’s wish to cause them loss.

[77]     Ultimately,  and  with  some  regret,  given  the  strength  of  the  evidence,  I conclude that there is a factual issue (intent) – the intent of the debtor – which can only be properly determined at a trial.   Mr James, as director of JDL, may have known that through the re-documentation of the Frongopolus loan, he was advantaging the Frongopolus Trust and disadvantaging the creditors of JDL, but I cannot be sure beyond argument.  The re-documentation which Mr Miller, as one of the trustee directors and the accounting adviser to those involved, knew may not stack up has not stacked up.   In the meantime, the creditors of JDL have been predictably  and  substantially prejudiced  by  the  transaction  through  which  those involved re-documented the loan made to the Frongopolus Trust.

[78]     For these reasons, I conclude that the claims for summary judgment on the Property Law Act cause of action must fail.  But, there is a further reason I now turn to – that it is arguable that the “compensation” available under sub-part 6 is not applicable in this case.

Compensation under s 348(2)(b) Property Law Act

[79]     The liquidator seeks an order under s 348 Property Law Act setting aside the transaction and requiring the defendant trustees to pay reasonable compensation to

JDL.

10     Regal Castings v Lightbody, above n 6, at [54].

11 At [54].

[80]     Jurisdiction  to  set  aside  the  transaction  arises  under  s  348(1)(b)  of  the Property Law Act, if the Court is satisfied that JDL has been prejudiced by the re- documentation of the loan.

[81]     The Court has jurisdiction to award compensation on a s 348 setting aside by reason of s 348(2)(b) of the Act.  Section 348(2) provides:

348     Court may set aside certain dispositions of property

(1)      …

(2)      The order [setting aside a disposition under s 348(1)] must do 1, but not both, of the following:

(a)       vest the property that is the subject of the disposition in the person (for any applicable purpose) specified in section 350:

(b)       require a person who acquired or received property through the disposition to pay, in respect of that property, reasonable compensation to the person (for any applicable purpose) specified in section 350.

[82]     A fundamental feature of s 348(2) of the Act is that compensation is not available where the Court vests the property which was the subject of the disposition in a person, such as a company in liquidation.  In other words, the deprived person may have its asset back, but does not receive compensation under s 348(2)(b).  Or the deprived person may leave the property with the other person who received the property and instead obtain compensation for its loss.  But not both.

[83]     The  at  least  arguable  difficulty  for  Mr  Reynolds  in  this  case  is  that  he primarily puts his case on the basis that the debt of the trustees to JDL has, at all times remained a debt, notwithstanding the re-documentation in the accounts of JDL and the trust.  That that is so was, in fact, common ground in the cases presented by both sides and in the submissions of counsel.   There is therefore a tension, unresolvable in a summary context, between the plaintiff’s first cause of action (recovery of a debt) and the plaintiff’s third cause of action (for compensation under s 348(2)(b) of the Act).  On Mr Reynolds’ own case, he asserts the entitlement to the debt has remained vested in JDL.   While the Court, if granting relief under the Property Law Act, would not be making an order under s 348(2)(a) vesting the debt back in JDL, the reality is that an order of compensation under s 348(2)(b) would

offend the intention of s 348(2) which is that the deprived party should not be awarded both the re-vesting of the property and compensation for the loss of the property.

[84]     The trustees therefore have an arguable defence to the prejudicial disposition claim contained in the third cause of action on this ground also.

Costs

[85]     The practice in relation to costs in this situation is that identified by the Court of Appeal in NZI Bank Ltd v Philpott.12

Orders

[86]     I order:

(a)       The plaintiff’s application for summary judgment is dismissed;

(b)      The costs of the application are reserved;

[87]     The proceeding is adjourned to a telephone conference at 3.00 pm, 18 July

2013 (Associate Judge Osborne) – counsel are to confer and are to file by 11 July

2013 a joint memorandum as to all matters relevant to the allocation of trial and to pre-trial directions.

Addendum

[88]     When this judgment was in draft, I received three memoranda, the first two being dated 14 May 2013 and the last dated 20 May 2013.

[89]     In the first, Ms McCartney drew my attention to the judgment of the High

Court of Australia in The Stage Club Limited v Millers Hotels Pty Ltd,13  which had

12     NZI Bank Ltd v Philpott [1990] 2 NZLR 403 (CA).

13     The Stage Club Limited v Millers Hotels Pty Ltd (1981) 150 CLR 535.

not been referred to in submissions.  Ms McCartney relies on the case as informing the issue as to whether a debt appearing in an entity’s financial statements was “acknowledged” and whether the acknowledgement was to the creditor.   Mr Sherwood King responded by submitting that there were numerous points of difference between the balance sheet “acknowledgement” in The Stage Club case and what is argued to be such in this case.  Mr Sherwood King noted that The Stage Club case was determined only after that trial; the execution of the accounts was by directors; and that there had been actual delivery to the creditor.  The High Court split 3:2 on the decision.  I do not find The Stage Club should affect this decision in a summary context.

[90]     In the second memorandum Mr Sherwood King sought to raise a number of additional points relating to the plaintiff’s third (Property Law Act) cause of action. Mr Sherwood King’s written submissions for the hearing (in two paragraphs) had contended that this cause of action was flawed, without detailed elaboration.   Mr Sherwood King had  focussed on the reference to “debtor” in  sub-part 6 of the Property Law Act.   He had noted that JDL was the creditor in the relevant relationship.  I indicated to Mr Sherwood King at the hearing and have found that it is at least arguable that JDL is a debtor for the purposes of this part of the Act (ie a debtor to the creditors of JDL, the insolvent and subsequently liquidated company). But I have gone on to find that the defendant has an arguable defence for other reasons.  It is therefore unnecessary that I traverse Mr Sherwood King’s additional points, received after the hearing.   At one point, he correctly observes that the plaintiff’s pleading of its third cause of action is at present difficult to follow and would require substantial amendment if the plaintiff sees fit to pursue it.  The Court need take Mr Sherwood King’s additional submissions no further than that in this judgment.

[91]     The third memorandum was from Ms McCartney.  She challenges the right of

Mr Sherwood King to file his additional memorandum as he did not comply with

Practice  Note  3.14    I  do  not  need  to  consider  whether  there  are  exceptional

14 Practice Note 3, Further Submissions by Counsel [1968] NZLR 608.

circumstances to justify the granting of leave to file additional submissions in this case – I have dismissed the application for other reasons.

Associate Judge Osborne

Solicitors:

J McCartney QC, PO Box 2419, Auckland

Mackay & Gilkison, PO Box 5240, Wellington
M R Sherwood King, PO Box 1187, Wellington