St Laurence Mortgages Limited v Prudent Shipping and Processing

IN THE COURT OF APPEAL OF NEW ZEALAND

CA233/01

BETWEEN	ST LAURENCE MORTGAGES LIMITED
Appellant

AND	PRUDENT SHIPPING AND PROCESSING LIMITED
First Respondent

AND	WILSON INVESTMENT MANAGEMENT LIMITED
Second Respondent

AND	DAVID NOEL WILSON
Third Respondent

AND	MICHAEL GERARD CURTIS
Fourth Respondent

Hearing:	25 February 2002
Coram:	Gault J Blanchard J McGrath J
Appearances:	R J Cullen and D G Dewar for Appellant G J Toebes for Respondents
Judgment:	11 March 2002

JUDGMENT OF THE COURT DELIVERED BY GAULT J

The appeal is against the refusal of an application for summary judgment.
The appellant, as debenture holder, has a charge over all the undertaking and assets of Kings Wharf Coldstore Ltd (in receivership and in liquidation). It is alleged by the appellant that, with the purpose of defeating its security interest, the assets of a business carried on by the debtor company at Wanganui have been transferred to the first respondent (Prudent). Mr Wilson, the third respondent, is the sole director of Kings Wharf Coldstore and is said to have orchestrated the transfer through the second and fourth respondents for his own advantage as beneficial owner of Prudent. Kings Wharf Coldstore is said to have received $28,500 for the assets of the business whereas in the three months following the effective date of the sale the business generated profits for the benefit of Prudent averaging $20,000 per week.
The appellant commenced this proceeding in the High Court alleging two causes of action. The first is against Prudent and Mr Curtis, whose shareholding in Prudent is said to be held for the benefit of Mr Wilson. It is alleged that the transfer of the business was effected by these respondents knowing that it was in breach of the terms of the debenture. The relevant relief sought was:
AN order declaring that the First and Fourth Defendants hold assets acquired by them from the Coldstore (In receivership and liquidation) in trust for the benefit of the said Coldstore (In receivership and liquidation) and the Plaintiff in this proceeding.
AN order directing the First and Fourth Defendants to account for all assets and proceeds of assets received by them pursuant to the agreement recorded on 8 January 2001 between the First Defendant and the Coldstore (In receivership and liquidation).
The second cause of action is against the second and third respondents. It is alleged they caused Kings Wharf Coldstore to enter into the transaction for their own benefit thereby breaching fiduciary duties to the appellant. The relevant relief sought is an order for delivery up and accounting for all proceeds received as a result of the transaction.
On the pleadings, even if it were to be assumed that all factual allegations pleaded are correct, it is difficult to see how the court could make an order recognising or imposing a constructive trust in favour of Kings Wharf Coldstore, which is not a party to the proceeding. Further, it is difficult to see a basis for finding a fiduciary relationship between the director and shareholder of a company (and his management company) and a secured creditor of that company.
The application for summary judgment was opposed and in affidavit evidence Mr Wilson has said that the transaction was not a device to remove assets from Kings Wharf Coldstore. He contends that the Wanganui business effectively lapsed on termination by the landlord of the lease of the premises in which the business operated. A new lease could not be contemplated because of financial pressure on Kings Wharf Coldstore. This left only small items of equipment remaining in the premises which were sold “in the ordinary course of business”, as permitted by the debenture, for which the sum of $28,500 represented fair value.
In his judgment Master Thomson recorded that all respondents have been restrained by injunction from disposing of assets formerly owned by Kings Wharf Coldstore. That is not a matter before this Court.
The Master also recorded that the appellant does not seek an exclusive benefit, but merely a declaration that the relevant assets remain subject to the charge under the debenture. Nevertheless he went on to deal with the claim for an order declaring a constructive trust over the assets in favour of the appellant. In the course of argument in this Court we endeavoured to ascertain why, if it has a security interest capable of being enforced against assets, the appellant needs a constructive trust. This drove counsel back to the claim to have the assets restored to Kings Wharf Coldstore so as to give access to the income stream of the Wanganui business.
The Master expressed the views that there is an issue of sale of assets at undervalue; that the liquidator of Kings Wharf Coldstore is entitled to bring a claim against Prudent for the amount of the undervalue; that any order for constructive trust would arguably cut across such a claim; and that he should not attempt to resolve the dispute without the liquidator (and the prior debenture holder) being joined.
On the claim against the second and third respondents the Master concluded that to find fiduciary duties owed by them to the holder of a debenture granted by Kings Wharf Coldstore would cut across duties they owed to that company whose interests may have been best served by the disposal of assets in view of its insolvency.
The Master considered the matter unsuitable for summary judgment and that, pending final determination, the interests of the debenture holder were adequately protected by the injunction.
We agree that the matter is unsuitable for summary judgment. Even if it can be shown as a matter of law that the remedies sought are available to a debenture holder, there are issues of fact which must be resolved before judgment could be ordered. Some of the factual issues it will be necessary to determine are: whether in fact there were transferred to Prudent assets subject to the charge which were of value in excess of the amount paid; whether the disposition was in the ordinary course of business; whether the lease of the premises in which the business in Wanganui now is conducted and the commercial arrangements by which the revenue stream of the business is generated constitute assets acquired from Kings Wharf Coldstore; whether the nature of the relationships between the respondents and the appellant and their knowledge was such as to found fiduciary duties; whether the second and third respondents have received any assets or proceeds traceable from Kings Wharf Coldstore.
It may be that the attempt by the appellant to seek the equitable remedies claimed arises from concern that the more conventional course for a debenture holder of appointing a receiver and entering into possession of the charged assets is likely to prove unsatisfactory. That may be because of difficulties in linking the assets now used by Prudent in the business to those charged by Kings Wharf Coldstore. Otherwise it is difficult to see why the remedies available under the debenture are not being pursued. There would be no inconsistency in enforcement of the security against the assets on the one hand and an action by the liquidator under s297 Companies Act 1993 to recover the amount of undervalue on the sale of assets on the other hand. On presently available authority, money recovered by the liquidator would not be an asset subject to the charge – see The Law of Company Receivership in Australia and New Zealand (2^nd ed) para 1.18.
If the true nature of the complaint is that the respondents have diverted a valuable income stream for their own benefit and knowingly to the detriment of the creditors of Kings Wharf Coldstore, so as to give rise to restitutionary or other remedies, some more precise pleading than merely an allegation of the sale of certain assets without the consent of the debentureholder will be necessary.
In the complex factual setting disclosed in the affidavits such a claim could not be appropriate subject matter for summary judgment.
The appeal is dismissed with costs to the respondents of $5,000 together with disbursements approved, if necessary, by the Registrar.

Solicitors
Thomas Dewar Sziranyi Druce, Lower Hutt, for Appellant
Buddle Findlay, Wellington, for Respondents

[2002] NZCA 43

11 March 2002