Solicitor-General v Machirus HC Christchurch Cri-2005-409-177

[2007] NZHC 1931

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CRI-2005-409-000177

IN THE MATTER OF     an application pursuant to the Proceeds of

Crime Act 1991

BETWEEN  THE SOLICITOR-GENERAL OF NEW ZEALAND

Applicant

ANDPETER LLOYD MACHIRUS First Respondent

ANDGARY GEORGE MORELL Second Respondent

Hearing:         19 June 2007

Counsel:         A M Toohey for Applicant

Mr Machirus In Person
J Costigan for Mascot Finance Limited

Judgment:      28 June 2007

JUDGMENT OF PANCKHURST J

An application to vary a restraining order

[1]      The house property at 512 Worcester Street, Christchurch is the subject of a restraining order made by me on 9 February 2007.  The property is mortgaged to a bank.  The bank is in the process of selling the property by tender, pursuant to its power of sale as mortgagee.  Tenders close on 28 June 2007.

[2]      The  sum  secured  under  the  mortgage  is  approximately  $107,000.    It  is anticipated that following a sale, and after deduction of sale expenses, a surplus of

perhaps $140,000 will remain.

THE SOLICITOR-GENERAL OF NZ V P L MACHIRUS HC CHCH CRI-2005-409-000177  28 June 2007

[3]      In these circumstances the Solicitor-General applies to vary the existing restraining order  to  permit  the mortgagee sale to  proceed,  provided  the  surplus proceeds are restrained in the hands of the Official Assignee, so that in the event of an application being made for a forfeiture, or pecuniary penalty, order in the future such application “shall be determined on the basis of the circumstances prevailing immediately prior to the completion of the sale …”.

[4]      This application raises a legal issue: whether there is jurisdiction to restrain the proceeds from a sale of a property and, in effect, substitute the proceeds for the previous restrained property?

Some further background

[5]      Worcester  Street  is  one  of  a  number  of  properties  which  have  been  the subject of restraint orders in the context of criminal charges brought against Messrs Machirus,  Morell  and  others  in  the  District  Court.    Judges  of  this  Court  have delivered a number of decisions pertaining to the properties.

[6]      The most recent decision was one of mine on 9 February 2007 (CRI-2005-

409-000172).   Through oversight a restraining order over Worcester Street and another property (43 Acheson Avenue) was not renewed before 14 November 2006. On 20 November I issued an interim decision in which I found that there was no jurisdiction to extend a restraining order once it had lapsed, but that it was competent for the Solicitor-General to make a fresh ex parte application for a new restraining order.  I made a new order in the same decision.

[7]      An  on  notice  hearing  followed  on  9  February  2007,  culminating  in  my decision to grant a full restraining order for the statutory period of six  months provided for in the Act (s65(1)).  The restraint order in relation to Worcester Street expressly  reserved  to  the  first  mortgagee,  Countrywide  Banking  Corporation Limited, the ability to exercise its rights as a mortgagee.   It follows that the first aspect of the present application (seeking authority to sell the property by tender) is technically redundant.  The mortgagee has a power of sale in terms of the mortgage security and the existing restraining order recognised as much.

[8]      With reference to the variation application, I have before me evidence as to the service of a Property Law Act notice on Mr Morell and confirmation that the property is presently for sale by tender, with tenders to close at 4.00 pm on 28 June

2007.

[9]     The second respondent, Mr Morell, remains the registered proprietor of Worcester Street.   However, as explained in my February decision, Mr Machirus claims an interest in the property on the basis that he exercised an option to purchase it (for the sum of $1.00) in November last, during the hiatus between the lapse of the previous restraining order and the  grant of  a new  ex  parte restraining order on

20 November.   In addition, during that period of a few days, Messrs Morell and Machirus entered into an agreement for sale and purchase by which the property was sold to Linda Westbury, another of their co-accused in the pending District Court trial.  The February judgment records the details of that agreement and records the reasons which persuaded me it was appropriate to continue the restraining order, despite these dealings with the property.

[10]     In anticipation of the hearing of the variation application, efforts were made to serve the application upon Mr Morell and Ms Westbury.   The application was served at Mr Morell’s address for service, but according to Mr Machirus he may remain unaware of the present application.  Ms Westbury was unable to be located for service to be effected.  As with other applications pertaining to the restraint of this, and other, properties, Mr Machirus appeared for himself and made submissions in opposition to the orders sought by the Solicitor-General.

[11]     The two remaining orders sought in the variation application are:

(b)That the net proceeds after payment of the costs of sale and repayment to the mortgagee ANZ National Bank Limited of all amounts due to it under its mortgage securities, shall be paid to the Official Assignee and held on interest bearing deposit until further order of the Court;

(c)   Any subsequent application by the Solicitor-General for a forfeiture order or pecuniary penalty order under the Proceeds of

Crime Act shall be determined on the basis of the circumstances prevailing immediately prior to the completion of the sale of the property to the intent that the Solicitor-General shall not lose his right to claim such orders by virtue of the sale.

Mascot Finance Limited

[12]     This company has registered a  caveat against Worcester Street to secure advances made to Mr Morell.  In fact, Mascot has made advances to Mr Morell and others which borrowings are guaranteed by Mr Machirus.  The total amount of the advances is apparently a sum likely to exceed the amount available after repayment of the first mortgage.  But, arising in part as a result of the convoluted history of the restraining orders against this property, there are questions to be resolved concerning whether all, or only some, of Mascot’s advances enjoy priority over a forfeiture, or pecuniary penalty, order in favour of the Crown (should one or other be obtained at the conclusion of the criminal proceeding).

[13]     In these circumstances the variation application was served on Mascot.  The convenient course may be for it to apply for relief pursuant to sections 17 and 18 of the Act, that is for Mascot’s interest to be quantified and paid before any orders in favour of the Crown are implemented.   But, there is an obvious disadvantage in pursuing this course when it remains unknown whether Messrs Morell and Machirus will be convicted of any relevant serious offences at the criminal trial.  The trial is scheduled to commence on 30 July.

[14]     Instead,  Mascot  consents  to  the  orders  sought  by  the  Solicitor-General, subject to the imposition of three further terms to the variation order.  These are that:

[a]     Mascot may apply to exclude its interest from the restraining order on the basis that its rights are not affected by virtue of the mortgagee sale,

[b]in the meantime Mascot shall be served with all documents filed in this proceeding, and

[c]     in the event of termination of the restraining order, the surplus proceeds of sale shall continue to be held by the Official Assignee until further order of the Court.

Ms Costigan appeared to confirm Mascot’s position, but counsel did not seek to be heard in relation to the merits of the order sought by the Solicitor-General.  Rather, Mascot asks for the imposition of the further conditions I have just outlined, if the Solicitor-General’s variation is granted.

Following a sale, can surplus proceeds be restrained?

[15]     As can be seen from the terms of the orders sought by the Solicitor-General, it is contemplated that the surplus proceeds will be restrained in the hands of the Official Assignee, and became available to meet either a forfeiture, or a pecuniary penalty, order, as the case may be.  This raises the issue whether, following the sale of a previously restrained asset, the net proceeds of sale can be further restrained and subsequently forfeited or applied to meet a pecuniary penalty order.  Particularly the first proposition (that following a sale proceeds may still be forfeited), has been doubted in a number of decisions of this Court.

[16]     Mr Machirus drew attention to these cases, and submitted that following a sale of the restrained property there was no jurisdiction to order restraint of the net proceeds of sale.  It is necessary, therefore, to refer to the previous cases.

The previous authorities

[17]     The first case is R v Dunsmuir [1996] 2 NZLR 1 (CA). The appellant challenged a forfeiture order by which a house property was vested in the Crown following its use for a hydroponic cannabis cultivation. One ground of appeal was that the order for forfeiture should not have been in respect of the whole property, rather only a portion of it. The Court of Appeal held that s15 contemplated the forfeiture of “property” which was tainted and that it was “the interest which was in existence prior to the order, not an interest carved out of the property by the order itself”, which was forfeited. Hence, the argument that part of a house property could

be forfeited was rejected.  The Court considered that if several items of property had been restrained, there would be scope to forfeit one or more items of property to the exclusion of others, but an individual item could not be forfeited in part.

[18]     Whether the proceeds of a property sale may be restrained, was considered in Solicitor-General  v  Gardner  HC  CHCH  M99/97,  4  June  1997.    A  solicitor’s nominee company applied for an order excluding the mortgagee’s interest from the ambit of a restraint order made under the Act.  The Crown opposed the application, in part on the basis that if the interest was excluded and the mortgagee was free to exercise its power of sale, any surplus monies remaining after the sale would not represent “tainted property” in terms of s2 and could not, therefore, become the subject-matter of a restraint order.  I indicated at page 9 of the decision that “despite what occurred in Brough ([1995] 1 NZLR 419 (CA)) I inclined to the view that the Crown submission is correct”. However, this observation comprised only a step in the process of deciding that an innocent mortgagee was entitled to an order pursuant to s48 for exclusion of its interest from the restraining order, regardless of the impact upon the Crown. I shall return to the case of Brough shortly.

[19]     The next case is Solicitor-General v Daley HC CHCH M204/99 1 June 1999. The application was for the variation of an existing restraining order.   The order extended to a farm at Te Puke, although the relevant offending had occurred on another property farmed by Mr Daley at Kaikoura.  The Te Puke property was for sale by tender at the date the restraining order was imposed.   Subsequently, an agreement for sale and purchase was concluded.  With the consent of the Solicitor- General, Mr Daley sought to vary the restraining order by removal of the Te Puke farm from its ambit.  Such was done, including the imposition of a condition that the net proceeds of sale would be retained by the Official Assignee to be available to meet a pecuniary penalty order, if one resulted.   I note that my approval of the consent order was given on the basis that following sale the Crown would lose its opportunity to seek a forfeiture order, but that Brough provided authority for the restraint of sale proceeds to meet a pecuniary penalty order.

[20]     In  Solicitor-General  v  Hurley  HC  HAM  CIV-2003-419-1661,  22 March

2004, Gendall J reached a similar conclusion, albeit in a different context.  In that

case the respondent applied to vary a restraining order so that an agreement for sale and purchase of the restrained property may proceed to settlement.   The Crown opposed the variation, in part on the basis that if the property was sold it would not be possible to subsequently obtain a forfeiture order.   Gendall J accepted this proposition,  holding  that  forfeiture  was  only  possible  in  relation  to  “tainted property”, being property used in the commission of an offence or representing the proceeds of an offence (s2).  Once real property was sold the “taint” was removed, and in particular the net proceeds were not tainted property within the definition contained in the Act.

[21]     In Jones v Solicitor-General HC HAM CIV-2003-419-1224, 23 April 2004, Randerson J likewise adopted the construction that proceeds of sale were not tainted property in terms of s2.   However, he saw this as “a gap in the legislation which ought to be addressed by Parliament …”.   And, in that case consent orders were made which contemplated the sale of the restrained property, on defined terms, with the net proceeds of sale to be held by the Official Assignee on the express basis that the Solicitor-General may subsequently make application for a forfeiture, or pecuniary penalty, order.  Any such application was to be determined on the basis of the circumstances prevailing immediately prior to completion of the sale so that the Solicitor-General’s rights were not prejudiced on account of the sale.

[22]     It  is  readily  apparent  that  the  orders  sought  in  the  present  variation application are at least in part based upon the formula approved by Randerson J in Jones.

Restraint of proceeds to meet a forfeiture order

[23]     To my mind it is necessary to distinguish between forfeiture orders on the one hand, and pecuniary penalty orders on the other.  The statutory scheme of the Act indicates that the two orders are quite distinct in nature.

[24]     Section 15 empowers the Court to make a forfeiture order if it is satisfied the relevant property is tainted.  As noted, tainted property is defined in s2 as property used to commit, or to facilitate the commission of, a serious offence; or property

which comprises the proceeds of a serious offence.  The concept of “proceeds” of a serious offence is defined as any property derived or realised, whether directly or indirectly, from the commission of the offence.  In Part IV of the Act (which deals with restraining orders), s48(1)(a) likewise defines the power to make a restraining order by reference to the existence of reasonable grounds for belief that specified property is tainted in relation to the relevant serious offence.

[25]     As can be seen tainted property is effectively earmarked as susceptible to forfeiture because that property was used in the commission of a serious offence, or represents the proceeds of such an offence.  It seems to me that once the particular property is realised, the sum obtained (whether the full sale price or net proceeds) is different property, and is not tainted.   I think there is some support for this interpretation in Dunsmuir where the Court focused on the interest in property prior to any forfeiture order, not an interest “carved out of the property by the order itself”. The sense is that just as part of the property may not be forfeited, nor may property (money) which has been realised from the sale of the tainted property.  Or, to use the language of counsel in some of the cases, the Act does not permit the proceeds of tainted property to be traced.

[26]     For these reasons I am not persuaded that it is appropriate to order restraint of the net proceeds so that they may be available to meet a subsequent forfeiture order. But, is it appropriate to restrain the proceeds with reference to the making of a pecuniary penalty order?

Restraint of proceeds to meet a  pecuniary penalty order

Statutory provisions

[27]     The jurisdiction to impose a pecuniary order is contained in s25 of the Act. The essential requirement is that the Court must be satisfied the defendant derived benefits from the commission of a serious offence: s25(1).  If so, the value of such benefits is to be assessed in accordance with sections 27 and 28 of the Act.

[28]     Unsurprisingly,  money,  and  property  other  than  money  are  expressly recognised as potential benefits of serious offences: s27(2)(a).   But, so too is “the value of any other benefit” accruing to a defendant by reason of the commission of a serious offence: s27(2)(b).  Further, in assessing the value of the benefits derived by a defendant from serious offending the Court may have regard to the value of the defendant’s property (in general) before and after the relevant offence period: s27(2)(c).  With reference to the last category of benefits, s28 enables the Court, if satisfied that the value of the defendant’s property after the commission of serious offences exceeds the value of such property before the offending, to treat the amount of the excess as benefits of the offending: s28(1) and (2).   However, pursuant to s28(3), this presumption concerning an excess may be displaced if the defendant satisfies the Court that the excess (in whole or in part) was due to causes unrelated to the commission of serious offences.

[29]     With reference to the making of a restraining order to facilitate a pecuniary penalty order following conviction, the Court must be satisfied that there are reasonable grounds for believing that the defendant derived benefits from the commission of serious offences: s43(1)(b).  I think it is important to recognise that, unlike tainted property where a nexus between the offending and the property to be restrained must be demonstrated, no such nexus is required for the making of a restraining order based on benefits derived by the defendant.  Evidence of a benefit, or benefits, and of the existence of property owned or controlled by the defendant, is all that is necessary.   Moreover, “all of the property of the defendant” may be restrained, where the test for restraint is satisfied: s43(2).

Relevant cases

[30]     Brough is some authority for the proposition that proceeds of a land sale may be restrained in the pecuniary penalty context.   A farm property was sold by the defendant before trial, and an order was made restraining the net proceeds of sale. Subsequently, a pecuniary penalty of about $85,000 was ordered and upheld on appeal to the Court of Appeal.  That Court’s judgment recorded the existence of the earlier restraining order, but there was no need to examine the basis for restraint of the sale proceeds.

[31]     I relied on Brough in the case of Solicitor-General v Daley where, however, it was the defendant who sought a variation of a restraining order (so that a farm sale may proceed), but the variation proceeded by consent (see para [19]).

[32]     In Solicitor-General v Hurley, Gendall J considered the issue of restraint of sale proceeds.  Having concluded at para [10] of the decision that, following the sale of tainted property, the proceeds did not retain that status, the Judge continued:

There might be available to the Crown a pecuniary penalty order but that would only arise if the benefits derived by the person from the commission of the offence relate actually to the sale proceeds.  That cannot be shown to be the case.

The case concerned a farm which had been used for cannabis cultivation.   The restraining order was therefore based on s43(1)(a), that the property was tainted through its use to facilitate the commission of a serious offence.  It seems the Judge considered that the sale proceeds  could not be  restrained  pursuant  to  s43(1)(b), unless they were actually a direct benefit derived from the offence.

[33]     With respect, I doubt this reasoning.  As already noted (para [30]), a nexus between the offending and the property to be restrained is not required in a pecuniary penalty  context.    Both  s43(1)  and  s25(1)  contemplate  recourse  to  any  property owned (or controlled) by the defendant to meet the order, provided the Court is satisfied the defendant has derived benefits from the commission of serious offences. Hence, all that is necessary is benefit, and the existence of property, but no nexus between the two.

The argument and the evidence

[34]     Ms Toohey appeared to accept that there was a jurisdictional problem in restraining the sale proceeds to facilitate a forfeiture order.  Instead, the focus of her argument was upon restraint of the net sale proceeds from Worcester Street to facilitate  the  making of  a  pecuniary penalty order  (if  convictions  result  against Messrs Machirus or Morell).

[35]     But this represented a revised approach.  Until now the restraining order over Worcester  Street  has  been  based  on  evidence  that  the  property  was  tainted  on account of its use to secrete and store stolen property, alleged to have been received by Mr Machirus and/or Mr Morell.  Detective Bermingham swore a lengthy affidavit in September 2005 which described a police investigation into a receiving ring.  The gist of the case against a significant number of accused is that building materials, whiteware and various other items were stolen and subsequently received by others in the ring, including Mr Machirus.

[36]     With reference to Worcester Street the affidavit recorded that Mr Machirus purchased the property in June 1992, sold it to a new owner in 1995 (whom the police have been unable to trace), and that the property was then sold to Mr Morell in June 1997.  However, during the period relevant to the criminal investigation Mr Machirus and his partner occupied Worcester Street.  And, upon termination of the police investigation, a search of the property revealed various items alleged to be stolen property.

[37]     In  July  2006,  when  Chisholm  J  extended  the  restraining  order,  despite objection from Mr Machirus, deposition evidence by then available from a preliminary hearing was largely relied upon.   The Judge noticed that many of the counts  in  the  indictment  did  not  charge  serious  offences,  because  the  property alleged to have been stolen and received was not of sufficient value to attract a maximum penalty of five years imprisonment.  Therefore, Chisholm J identified a limited number of counts in the indictment which did charge serious offences.  These were counts 5, 13 and 34, which concerned whiteware (a super tub), two vanity units and  a  gas  oven,  respectively.    On  the  basis  of  this  evidence  Chisholm  J  was persuaded there were reasonable grounds for believing that Worcester Street was tainted property and the restraining order was extended.

[38]     In  February 2007,  following the  inadvertent  lapse  of  the  order  made  by Chisholm J in July 2006, I made a fresh order following a hearing in which both Mr Machirus and Mr Morell participated.   With reference to Worcester Street  I adopted the previous analysis of the evidence by Chisholm J, and concluded that there was sufficient evidence the property was tainted and that a new restraining

order should be made.  At the hearing counsel for the Solicitor-General produced the notes of evidence from the District Court trial, which was aborted very near to the end of the Crown case.  Hence, sworn evidence, which had been the subject of cross- examination, was before me referable to all of the 142 counts in the indictment.  Not all of these charges concerned Mr Machirus or Mr Morell.  Such evidence is relevant to what benefits were received by either or both of these men from the alleged commission of serious offences.   This requires me to look at the offending on a much broader basis than was the case when Worcester Street was restrained as tainted property.

[39]    Ms Toohey submitted that the available evidence did equally provide a sufficient foundation to restrain the net proceeds from the sale of Worcester Street in order to facilitate a pecuniary penalty order.  I accept that there is adequate evidence of a relevant proprietary interest in the property, and of Mr Machirus exercising effective control over it in the recent past, to satisfy that jurisdictional aspect (see paras [9] and [37]).

[40]     But, is there evidence of benefits derived by either of the respondents through the commission of serious offences?  Section 43(6) provides that the Court shall not make a restraining order unless the application contains, or the applicant otherwise supplies, such information as the Court requires concerning the grounds on which the order is sought.  Also, a residual discretion exists as to the grant of a restraining order, even if the statutory grounds are established: Solicitor-General v Ryder HC ROT M82/94 19 May 1994, a decision of Fisher J.

[41]     On my analysis of the indictment Mr Machirus faces 26 charges which allege serious offences (counts 2, 5, 6, 11, 14, 20, 30, 34, 45, 46, 48, 50, 52, 57, 68, 72, 78,

79, 90, 94, 95, 106, 109 110, 112 and 136).   These counts concern property to a value of more than $70,000.   Most of them are against multiple accused, so any benefit to Mr Machirus may be reduced on that account.

[42]     Mr Morell faces a total of eight charges (counts 20, 30, 57, 72, 78, 79, 94 and

95), all of which are joint charges against himself and Mr Machirus.  The value of

the  property  which  is  the  subject-matter  of  these  charges  is  alleged  to  exceed

$13,000.

[43]     Given this spread of charges against the respondents, and recognising that the trial in the District Court had essentially run its course in relation to the Crown case, I am satisfied that the trial evidence does provide reasonable grounds for believing that Mr Machirus and Mr Morell derived benefits from the commission of serious offences.   It may be that, in the event of convictions against them, an assessment pursuant to sections 27 and 28 will reveal the actual value of the benefits received is less than the indictment alleges.  But that remains to be seen.  At this stage, restraint of the sale proceeds is, in my view, justified.

Conclusion

[44]     A variation to the terms of the existing restraining order as it relates to Worcester Street is granted.  The varied terms are those proposed by the Solicitor- General and the additional terms sought by Mascot Finance (see para [14]).

[45]     Costs in relation to the variation application are reserved.

Solicitors:

Raymond Donnelly & Co, Christchurch for Appellant

First Respondent - Mr P L Machirus, 512 Worcester Street, Christchurch
Chapman Tripp, Christchurch for Mascot Finance Limited (Counsel – Ms J Costigan)