Safari Constructions (2005) Limited v Concept Builders Queenstown Limited
[2023] NZHC 2387
•31 August 2022
IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY
I TE KŌTI MATUA O AOTEAROA WAIHŌPAI ROHE
CIV-2022-425-081
[2023] NZHC 2387
BETWEEN SAFARI CONSTRUCTIONS (2005) LIMITED
First ApplicantSAFARI CONSTRUCTION (2015) LIMITED
Second Applicant
SAFARI CONSTRUCTION LIMITED
Third ApplicantSAFARI CONSTRUCTION 2019 LIMITED
Fourth ApplicantSAFARI GROUP (NZ) LIMITED
Fifth ApplicantAND
CONCEPT BUILDERS QUEENSTOWN LIMITED
First Respondent
MARTIN LAWN
Second Respondent
Hearing: 29 August 2023 Counsel:
M V Kilkelly for Applicants P F Dalkie for Respondents
Judgment:
31 August 2022
JUDGMENT OF CHURCHMAN j
SAFARI CONSTRUCTIONS (2005) LIMITED v CONCEPT BUILDERS QUEENSTOWN LIMITED [2023] NZHC 2387 [31 August 2022]
Introduction
[1] This is an application to discharge freezing orders made against the first and second respondents in December 2022. Although the respondents are, strictly speaking, the applicants in this interlocutory application, for consistency and simplicity in this judgment I refer to the applicants and the respondents by their roles in the substantive proceedings.
[2] On 22 December 2022, the applicants (collectively Safari) applied without notice for freezing and ancillary orders in respect of the assets of the first and second respondents. On 23 December 2022, Osborne J granted the orders.1 The orders have since been continued by consent on a number of occasions.
[3] On 16 March 2023, the applicants and other related companies filed substantive proceedings against the first and second respondents (and others) seeking damages for their role in a fraudulent scheme whereby they are said to have overcharged Safari by invoicing for contractors who did not exist (ghost contractors) and for the time of people who were real contractors but who had not worked the hours claimed. The applicants also claim the costs of their investigation into the fraudulent scheme and for financing costs that the expense of the scheme has caused them.
[4] The applicants also brought parallel proceedings in the Employment Relations Authority against their former employee and senior project manager, Mr Martin Dunning, relating to his alleged involvement in the scheme and other claims. The applicants and Mr and Mrs Dunning reached a settlement dated 15 May 2023. The applicants have subsequently filed an amended statement of claim with the High Court removing them as respondents.2
1 THL (2005) Ltd v JDR Ltd [2022] NZHC 3627 [December 2022 HC decision].
2 The applicants had also obtained freezing orders against a third implicated contractor, Mr Staley. The applicants have also now settled with Mr Staley in relation to his involvement in the alleged scheme, and have removed him from the substantive proceedings.
[5] The respondents have filed a statement of defence to the substantive proceedings. The defence for the respondents is principally that they were unwitting accomplices to a fraud perpetrated by Mr Dunning.
[6]A trial is scheduled for the second half of 2024.
[7] The first and second respondents have now applied to discharge the freezing orders over their assets.
Background
[8]I now summarise the background to the substantive proceedings.
[9] On 3 November 2022, two of Safari’s employees received an anonymous email alleging that the respondents had conspired with Mr Dunning, a Safari employee, to fraudulently invoice Safari for the labour of workers who did not exist, the so-called “ghost contractors”.
[10] Safari conducted an investigation in November 2022, which appeared to substantiate those allegations, and also identified a number of occasions where contractors appeared to have engaged in overcharging by invoicing for real employees when those employees were not onsite.
[11] Safari obtained freezing orders from the Employment Court in respect of Mr Dunning’s assets on 16 December 2022. When Mr Dunning was served with the Employment Court’s orders, Mr Dunning is said by the applicants to have made a number of implied admissions to the director of Safari, Mr Robert Neil, by text which further implicated the respondents, and it seems he made explicit admissions to Mr Neil and an investigator during a meeting with Mr Neil on 21 December 2022. Safari applied to the High Court for the orders mentioned above the next day, which Osborne J granted the following day after that.
[12] In support of the application to the Employment Court, the applicants filed affidavits from Mr Neil, Mr Damien Taylor, Mr John Borland and Mr Paul Proudfoot. In the High Court, the applicants filed an affidavit of Mr Neil dated 22 December
2022, a memorandum of counsel of the same date, an undertaking as to damages given by Mr Neil, and draft orders.
[13] In addition to the freezing orders, Osborne J made ancillary orders requiring the respondents to disclose their assets by affidavit. Mr Lawn filed an affidavit on 25 January 2023 and another on 24 February 2023 as the first was incomplete.
[14] The respondents say they were unwitting accomplices to a fraud perpetrated by Mr Dunning. However, they have admitted they knew the ghost contractors were not working for the first respondent, Concept Builders Queenstown Ltd (Concept), and that they were charging a $15 per hour per labourer “administration fee” for placing the ghost contractors on Concept invoices.
Submissions
Respondents’ submissions in support of discharging the freezing orders
[15] In support of their application to discharge the freezing orders, Mr Dalkie, on behalf of the respondents, submits that the freezing orders should never have been made, on the basis that the decision was wrong in fact and in law. The respondents say the decision was wrong in fact because there were no facts before the court supporting the contention that the respondents would dissipate or dispose of the assets or to suggest there was, or was likely to be, any real risk of default. The respondents say the decision was wrong in law because without such evidence, the essential element to make a freezing order was missing and there was therefore no power to make a freezing order and one should never have been made.
Applicants’ submissions in opposition to discharging the freezing orders
[16] The applicants say that as the victim of a long-running fraud, Safari is entitled to seek the Court’s assistance in preventing any judgment it obtains against the respondents being rendered useless. They invite the Court to continue the freezing orders already made, saying if anything the case for the orders is stronger now than it was when they were first granted in December 2022. The applicants submit the need for the orders is clear given the strength of the evidence against the respondents, the
danger the Court can infer of dissipation given the conduct alleged and evidence of the respondents’ financial dealings, and the lack of any suggestion that the freezing orders are causing the respondents hardship.
Law relating to freezing orders
[17] Where an applicant has obtained freezing orders on a without notice basis, the applicant carries the onus of proof at the with notice hearing of satisfying the court that the orders should be continued or renewed. Where the respondents have applied to discharge the order prior to an on-notice hearing taking place, as here, the onus of proof remains on the applicants.3 The hearing thus proceeds on a de novo basis.4
[18] The relevant principles on an on-notice application to discharge freezing orders made without notice are therefore the same as for obtaining them. The applicants must establish that:5
(a)they have a good arguable case on an accrued cause of action;
(b)there are assets of the respondents to which the orders can apply;
(c)there is a danger that the respondent might abscond, or might remove, dispose of, deal with, or diminish the value of the assets, so as to render the respondents judgment-proof (a risk of dissipation); and
(d)the balance of convenience and overall justice favour the continuation of the orders.
Discussion as to the approach to this hearing
[19] Before turning to the relevant principles in this case, I first address some of the challenges raised by the respondents in respect of Osborne J’s December 2022 decision.
3 Fortune Mile International Ltd v Judge [2014] NZHC 3146 at [15].
4 Euro‐National Corporation Ltd v Petricevic Financial Services Ltd (1989) 2 PRNZ 351 (HC) at 354; and see also Shen v An Ying Group Ltd (2006) 3 NZCCLR 35 (HC) at [75]; and Ilion Technology Corporation v Johannick HC Auckland CIV-2004-404-3358, 17 August 2004 at [8].
5 Mockingbird Properties Ltd v Jhim Homes Ltd [2022] NZHC 3247 at [35].
[20] Put simply, the respondents approach this application as if it were an appeal of that December 2022 decision. However, this is plainly not correct. As stated above, the onus of proof in satisfying the court that the orders should be continued or renewed still rests on the applicants, and this hearing proceeds on a de novo basis. The matters raised in the respondents’ submissions challenging Osborne J’s decision are therefore of limited relevance. For instance, the respondents challenge the authorities relied on by Osborne J and the applicants, saying they do not stand for the propositions they are said to stand for. The respondents point to cases which they suggest are better comparators and which they say support their arguments.
[21] Moreover, in challenging Osborne J’s decision, it seems the respondents view the Court’s finding that there was evidence supporting a grant of freezing orders as an exercise of discretion, the discretion being to ignore an essential element that must be established in order to grant such a remedy. They say a Judge cannot exercise a discretion to ignore an essential element that must be established, and in doing so Osborne J made an error of law. I do not accept this argument. This is essentially a challenge to the Court’s finding that there was evidence supporting a grant of freezing orders dressed up as an unlawful exercise of discretion capable of being overturned on appeal. This approach is not correct.
[22] The respondents’ submissions are relevant only insofar as they inform the substantive analysis, according to the principles enumerated at [18] above. I take them into account in my analysis of those principles as they apply in this case.
[23] In addition, I note that insofar as the respondents address the substantive principles relating to freezing orders, they focus predominantly on whether the applicants have a good arguable case. I have considered the respondents’ position on the remaining issues according to the balance of their submissions.
Analysis
Good arguable case
[24] A good arguable case is established if it is one that is capable of tenable argument and supported by sufficient evidence, bearing in mind the early stage at which the application is likely to be brought.6
[25] The evidence underlying the applicants’ case is set out in Mr Neil’s affidavits and the recent affidavit of Mr Taylor.
[26] The respondents submit that following the settlement reached between the applicants and Mr Dunning and his wife and associated companies, the case is weak and speculative and is not based on material facts as pleaded. The respondents submit that despite their request for particulars, there is an absence of such particulars, and the applicants do not plead their case in respect of the first and second respondents specifically. The respondents submits that the applicants have pleaded their case on a speculative basis of a guess or an assumption, and that that is impermissible.
[27] The Court has previously accepted that the applicants have a good arguable case that the respondents were recipients of payments fraudulently arranged with Mr Dunning.7
[28] It appears to me that the developments that have occurred since the Court reached this conclusion in the December 2022 decision have only strengthened the applicants’ case. In particular, the respondents have admitted in their statement of defence that they have overcharged Safari by charging an “administration fee” in respect of the ghost contractors; there is an unsigned brief of evidence from a contractor whom the applicants suspect of being used to overcharge them, in which he states he was no longer working in Queenstown when Concept continued to charge for his labour; and the applicants say emails discovered by the respondents imply that from at least 2016 Mr Lawn was aware that at least one ghost contractor did not exist.
6 Dotcom v Twentieth Century Fox Film Corporation [2014] NZCA 509 at [18].
7 December 2022 HC decision, above n 1, at [20]–[23].
[29] The applicants’ amended statement of claim, dated 20 June 2023, sets out four causes of action: deceit; money had and received; misleading and deceptive conduct in breach of s 9 of the Fair Trading Act 1986; and an institutional constructive trust. I do not propose to set out in detail in this decision the matters pertaining to each cause of action and the test for each. It is clear that all four causes of action may give rise to a liability in cases of invoice fraud.8 Without making any substantive conclusions at this stage, I turn to consider whether there appears to be a good arguable case in respect of each.
[30] In respect of deceit, I accept that there is a good arguable case that: the respondents made many repeated false representations, by rendering invoices to Safari for “Ghost Contractors” who did not exist or by overcharging for the number of hours worked by real contractors; the respondents had no actual and honest belief in the genuineness of the representations; the respondents intended that the applicants should have acted on the representations; the applicants acted to their detriment in reliance on the representations; and the applicants suffered loss as a result.
[31] There appears to be a prima facie breach of the prohibition against misleading and deceptive conduct in trade, as set out in s 9 of the Fair Trading Act.
[32] It appears in respect of monies had and received, on the evidence as alleged at this point, that Safari paid out large sums of money in reliance on the fraudulent invoices. I accept that if this is indeed the case, any monies had and received by the respondents in respect of the invoices are repayable to the applicants without proof of fault, simply because the retention of those monies would be unjust.
[33] The applicants submit there are strong inferences available on the basis of the conduct alleged that the monies paid to Concept were to the personal benefit of Mr Lawn, with Concept providing the “vehicle” for the fraud. The applicants say therefore that any funds advanced to Mr and Mrs Lawn are held for it on constructive trust. There are a number of elements required to be shown in order to establish a
8 See for example Fletcher Steel Ltd v Nahal Contractors Ltd HC Auckland CIV-2006-404-498, 26 February 2008; and General Distributors Ltd v Hilliard HC Auckland CIV-2008-404-1057, 16 March 2009.
constructive trust over property. I make no conclusion on this point as to whether there is a good arguable case there is such a constructive trust made out here. However, due to my conclusions in respect of there being a good arguable case in respect of the other causes of action, this is not fatal to the freezing orders being continued.
[34] In terms of the lack of particulars in the applicants’ pleading, I accept the applicants’ explanation, namely that the information required to plead their case with the level of particularly requested by the respondents was, until recently, entirely within the knowledge and control of the respondents. The law is clear that there is no requirement to plead with precision information within the knowledge of defendants which becomes available to the plaintiffs only after discovery.9 This is no bar to the applicants having a good arguable case in these circumstances.
Assets to which the orders can apply
[35] There is no dispute that there are assets within New Zealand to which the freezing orders apply. These are set out in Mr Lawn’s affidavits.
Risk of dissipation
[36] The respondents submit there is no evidence before the Court (and there was no such evidence before the Court in the December 2022 decision) demonstrating a risk of dissipation. The respondents submit that in making the orders in the first place without such actual evidence of dissipation amounted to an error in fact and in law on the part of Osborne J.
[37] As I have outlined above, the focus of the Court in this hearing is not on the information that was before Osborne J but on the situation existing now.
[38] The test for satisfying the Court that there is a “risk” of dissipation is “not unduly exacting.”10 The applicant must point to circumstances from which a “prudent, sensible commercial [person], can properly infer a danger of default”.11 All that the
9 Tri Media International Ltd v The Wellington Company Ltd HC Wellington CIV 2008-485-2768, 30 June 2009 at [50].
10 Raukura Moana Fisheries Ltd v The Ship Irina Zharkikh [2001] 2 NZLR 801 at [122].
11 At [122].
applicant must demonstrate is evidence of a “danger” or “risk”.12 Affirmative proof of such dissipation is not necessary.13 The Court is entitled to rely on inferences available on the evidence, bearing in mind the early stage of the proceeding.14
[39]As the Court stated in Covington Group Holdings Ltd v Zhong (No 3):15
If there is evidence of fraud or some other dishonest activity committed by the defendant, the threshold for establishing the defendant’s likely disposition for disposal of assets should not prove great, but the threshold will correspondingly be more difficult to cross if the claim does not relate to such conduct but merely to some lesser breach, such as breach of a commercial contract.
[40] In Worldwide Holidays Ltd v Wang, the Court observed that a “sustained prima facie case of fraudulent conduct” was “more than sufficient” to meet the threshold for there being a risk of dissipation.16 Similarly, in Hannay v Mount the Court of Appeal considered there was “a real danger that any judgment which the investors might obtain against the [respondents] will be wholly or partly unsatisfied because their assets will be disposed of, dealt with or diminished in value in the interim”, given the respondents’ conduct in transferring large sums of money to their company without a credible explanation against the background of a prima facie case of dishonesty in misusing investors’ funds.17
[41] In this case it is alleged that the respondents were participants in a fraud that continued for almost five years. I accept that evidence of fraudulent conduct is evidence of dishonesty and a lack of trustworthiness. And as I have noted, I consider there is a prima facie case that the respondents have engaged in fraudulent conduct in this case. Concept itself appears to have minimal liquid assets, and it has transferred out, as I understand it, approximately $1,082,037 in loans and advances to Mr Lawn, or in investments in one of his companies, over an unknown period of time. There is, of course, no requirement for the applicants to establish any nefarious intent.18 A risk by itself is sufficient. I consider the respondents are able to take steps to render
12 Wellington Tenths Trust v Skiffington [2017] NZHC 1646 at [42].
13 Bank of New Zealand v Hawkins (1989) 1 PRNZ 451 (HC) at 454.
14 Wing Hung Printing Ltd v Saito Offshore Pty Ltd [2010] NZCA 502, [2011] 1 NZLR 754.
15 Covington Group Holdings Limited v Zhong (No 3) (2004) 17 PRNZ 819 (HC) at [58(e)].
16 Worldwide Holidays Ltd v Wang [2017] NZHC 738 at [28].
17 Hannay v Mount [2011] NZCA 148 at [26].
18 Oaks Hotels & Resorts NZ Ltd v Body Corporate 358851 [2013] NZHC 2695 at [18].
themselves judgment-proof. There is no requirement for actual proof that the respondents have dissipated their assets. I am satisfied there is a risk of such dissipation in this case.
Balance of convenience and overall justice
[42] Finally, it appears clear that the balance of convenience and overall justice in this case favour the freezing orders remaining in place over the respondents’ assets.
[43] Freezing orders often cause a degree of hardship, and the applicants acknowledge this. However, r 32.6(3) of the High Court Rules 2016 makes provision for ordinary living expenses, legal expenses and ordinary business expenses, and this ameliorates such hardship. In his first affidavit, Mr Lawn nominated an account for the purpose of meeting the expenses listed at r 32.6(3). The applicants took no issue with that selection or free use of the account which was identified for this purpose.
[44] Indeed, there is no evidence of any hardship being caused by the orders whatsoever. Mr Dalkie did not rely on hardship as a ground supporting his application.
[45] I accept that on the allegations, the applicants have sustained significant losses as a result of the respondents’ allegedly fraudulent actions. Safari has already been put to some cost in dealing with the effects of the fraud, in undertaking an investigation as well as instituting and continuing legal proceedings against a large number of parties.
[46] In the circumstances, therefore, I am satisfied that the balance of convenience, and the overall justice, lies clearly in favour of the freezing orders continuing.
Conclusion
[47] An application to discharge freezing orders proceeds on a de novo basis. The concerns that the respondents have raised about Osborne J’s decision are not relevant.
[48] The onus rests on the applicants to satisfy the Court that the orders should continue. I am satisfied that the test for freezing orders to be granted is met in this case. I determine that the orders should continue.
Result
[49] The freezing orders initially made in THL (2005) Ltd v JDR Ltd [2022] NZHC 3627 are to continue.
Churchman J
Solicitors:
Meredith Connell, Auckland for Applicants Hazelton Law, Wellington for Respondents
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