Thompson v Madsen-Ries
[2016] NZCA 516
•27 October 2016 at 11.30 am
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA38/2016 [2016] NZCA 516 |
| BETWEEN | JOLYON BRENDAN GEORDIE THOMPSON |
| AND | VIVIEN JUDITH MADSEN-RIES AND HENRY DAVID LEVIN PHILIP IAN D'ATH |
| Hearing: | 20 September 2016 |
Court: | Wild, French and Miller JJ |
Counsel: | D G Hurd for Appellant |
Judgment: | 27 October 2016 at 11.30 am |
JUDGMENT OF THE COURT
A The appeal is dismissed.
BThe appellant must pay the first respondents costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Miller J)
Introduction
On 6 June 2012 Asher J entered judgment on formal proof in favour of the liquidators of Kiwi House Ltd against its director and shareholder, Jolyon Thompson, avoiding the 2008 transfer of a residential property at Northcote, Auckland to a trust controlled by Mr Thompson called the Swamp Lake Trust.[1]
[1]Madsen-Ries v Thompson (No 3) [2012] NZHC 1260.
Subsequently, on 17 December 2015, the Judge dismissed an application under r 15.10 of the High Court Rules to set aside the formal proof judgment, holding not only that the transfer was made without adequate value but also that it was done to defeat creditors.[2]
[2]Madsen-Ries v Thompson [2015] NZHC 3270.
Mr Thompson now appeals the judgment of 17 December 2015. The first respondents are the current liquidators. The second respondent was Mr Thompson’s co-trustee but long ago consented to judgment and has been replaced as trustee by BAN Trustee Co Ltd.
Narrative
For our purposes a relatively brief outline of the narrative will suffice. On 14 October 2005 Mr Thompson sold the property, which is situated at 194 Lake Road, Northcote and is his residence, to Kiwi House Ltd for $483,000, paid by an advance of $335,000 from the Bank of New Zealand and an unsecured advance from Mr Thompson as vendor of $149,326.20. The company then claimed and got a GST refund of $56,045.53 from the Inland Revenue Department (IRD).
The IRD then realised that the refund should not have been paid as the company had purchased the property from an unregistered associate, Mr Thompson.[3] The core GST debt was repaid, but penalties and interest remained outstanding. On 12 December 2007 the IRD issued a statement of position insisting on payment, whereupon Mr Thompson made arrangements to get the property out of the company and into the Swamp Lake Trust. The transfer was completed on 19 June 2008, Mr Thompson assuming responsibility for the BNZ loan and the trustees, Mr Thompson and Mr D’Ath, granting a mortgage to BNZ.
[3]Goods and Services Tax Act 1985, s 3A(3)(a).
On 4 July 2008 the IRD served a statutory demand on the company, and it was placed into liquidation on 6 March 2009.
The liquidators brought proceedings in October 2010 in relation to the disposition and the papers were served on Mr Thompson in due course, with affidavits of service being filed. Mr D’Ath settled with the liquidators, signing an admission of claim. Mr Thompson took no steps. The matter was accordingly set down for formal proof. When it was called on 24 November 2011, counsel appeared for Mr Thompson with instructions that he had not been served.
Evidence was given viva voce. The process server was called, identified Mr Thompson and confirmed that he had been personally served. Mr Thompson denied being served, claiming that he was in Dunedin and Hamilton on the dates of service of the statement of claim and amended statement of claim respectively. Asher J adjourned the matter to 15 December 2011, directing the parties to file affidavits and submissions. At that hearing Mr Thompson produced email confirmation of a flight booking to Dunedin dated 15 November 2010 and a payment to a restaurant in Hamilton. He also produced a Jetstar boarding pass for a Dunedin flight on 16 November 2010. Asher J accepted that service had not been proved, and in a judgment delivered on 22 February 2012 he refused to allow the liquidators to proceed by way of formal proof.[4]
[4]Madsen-Ries v Thompson [2012] NZHC 237.
Unfortunately, it had not been drawn to the Judge’s attention that the liquidators had responded to the evidence of Mr Thompson, filing an affidavit that demonstrated the boarding pass had been altered. It is not now in dispute that the evidence given by Mr Thompson was false; he had indeed been served as the process server had deposed. The Judge recalled his decision on 24 February 2012, leaving the application for judgment by way of formal proof on foot.[5]
[5]Madsen-Ries v Thompson [2012] NZHC 277.
The application was heard on the papers and judgment delivered on 6 June 2012.[6] The Judge approached the application for judgment on the basis that if Mr Thompson had a seriously arguable defence, justice might well require that formal proof be declined. He approached the credibility of Mr Thompson’s assertions as if it were a summary judgment application, noting that he need not accept assertions that were plainly not credible or certainly lacking in the support that would be expected.[7]
[6]Madsen-Ries v Thompson (No 3), above n 1.
[7]At [92].
Mr Thompson’s main defence was that the Swamp Lake Trust had been created in 1999 and that the property had been sold to it at that time. He explained his 2005 transfer to Kiwi House Ltd by claiming that he suffered memory loss in an accident and forgot about the sale to the Trust in 1999. On that basis, he was merely correcting an error when he transferred the property to the Trust in 2008. He also alleged that the IRD had agreed to unwind the sale, and that this somehow bound the liquidators.
Asher J found that Mr Thompson’s explanations lacked precision and the corroboration or supporting evidence that would be expected, and in general terms lacked credibility.[8] The claim of memory loss was unsupported and implausible. He was satisfied that none of the defences was viable. The 2008 transfer was made without reasonably equivalent value being exchanged and the transaction was not genuine.[9] He made an order under s 348 of the Property Law Act 2007 vesting the property in Kiwi House Ltd.[10]
[8]At [93].
[9]At [99].
[10]At [102].
Mr Thompson then took no steps for more than three years. Only when the liquidators took steps in July 2015 to force him to vacate the property did he act, applying to set aside the judgment. That application was heard on 1 December 2015, with judgment delivered on 17 December 2015.[11]
[11]Madsen-Ries v Thompson, above n 2.
The application was brought in reliance on affidavit evidence and additional argument. The liquidators did not object to the Judge considering the issues afresh, although they invited the Judge to set the disposition aside on the additional ground that it had been made with the intent to prejudice creditors. This had been pleaded but the Judge had not found it necessary to address it in his previous decision.
Mr Thompson adduced evidence confirming that the Trust had been created on 22 December 1999 and further that an agreement for sale and purchase had been signed in 1999 under which he had recorded a wish to sell the property to the Trust. No transfer was ever registered and none had been produced or located. He argued that Kiwi House Ltd received a reasonably equivalent exchange of value for the 2008 transfer, in that the vendor finance debt owed to him had been released, and he alleged that as the IRD agreed to the transfer the liquidators were estopped from applying to set the transaction aside.
The Judge rejected these arguments, finding Mr Thompson’s explanations for transferring the property to Kiwi House Ltd in 2005 were plainly untrue; he had personally effected the sale as owner, and he, not the Trust, received a deed of acknowledgement of debt for the vendor finance. The Judge found that Mr Thompson creates multiple legal structures to suit his convenience and did not have any intention to go ahead with any transfer to the Trust in 1999.[12] If an agreement was reached, it must have been cancelled by the parties’ subsequent conduct; Mr Thompson and the Trust acted as if any agreement to sell had been abandoned.
[12]Madsen-Ries v Thompson, above n 2, at [47].
The Judge found plainly untrue Mr Thompson’s claim that the debt of $149,326.20 could be treated as having been discharged at the time of the 2008 transfer, so providing full value in combination with the transfer of the mortgage of $335,000; there was no evidence of any such release of debt, Mr Thompson had not addressed the matter until his final affidavit of 27 September 2015, and Mr D’Ath had made no mention of it in a defence that he had filed before settling the claim.[13]
[13]At [59]–[62].
The Judge rejected the claim that the IRD had agreed to unwind the transaction or somehow could bind the liquidators.[14] We say no more about that as the point was not pursued before us.
[14]Madsen-Ries v Thompson, above n 2, at [53]–[54].
Finally, Asher J also held that the 2008 transaction was plainly made with intent to defeat creditors.[15] It meant that Kiwi House Ltd lost its equity in the property. Mr Thompson was an unsecured creditor, but of course he would have shared pro rata with other unsecured creditors. The Judge declined to set the judgment aside.
The appeal
[15]At [65].
The appeal addresses the Judge’s decision to refuse to set aside the judgment of 6 June 2012 under r 15.10, which provides that:
15.10 Judgment may be set aside or varied
Any judgment obtained by default under [r 15.9 — formal proof for unliquidated claims] may be set aside or varied by the court on such terms as it thinks just, if it appears to the court that there has been, or may have been, a miscarriage of justice.
It is not in dispute that this rule involves the exercise of a discretion, nor that the Judge was correct to approach the rule (as we do on appeal) in the manner set out at [10] above.
Lengthy submissions were filed on both sides. In our view, however, the matter can be dealt with quite shortly, because it is plain that the Judge did not err in the exercise of discretion. The grounds of appeal all depend one way or another on the proposition that Mr Thompson’s account is credible. The Judge found that it was not, and he was correct to do so. Further, the extraordinary delay is sufficient reason in itself to dismiss the appeal.
We expand briefly on these points.
Misdirection on r 15.10
Mr Hurd accepted that the Judge correctly stated the test under r 15.10. Asher J inquired whether Mr Thompson had a substantial ground of defence, whether there was any reasonable explanation for delay, and whether the plaintiffs would suffer irreparable injury if the judgment was set aside. We do not accept that having correctly stated the test the Judge went on to make a mistake in paraphrasing it as requiring that an actual rather than possible miscarriage of justice had occurred. On the contrary, he concluded that a miscarriage was positively excluded.
Mr Hurd also argued that the Judge was wrong to allow the liquidators to rely on the argument that the 2008 transfer was made with intent to prejudice creditors. He complained that the liquidators had failed to make out this ground in the first instance and elected not to rely upon it. We do not agree. The ground was argued, and, as the Judge said, it was not dealt with merely because he found it unnecessary to do so.[16] He found no prejudice to Mr Thompson,[17] and nothing specific is identified now.
Decision to transfer the property to the Trust cancelled
[16]Madsen-Ries v Thompson, above n 2, at [11].
[17]At [22].
Mr Hurd established that the documents entered into in 1999 evidence a genuine sale to the Trust at that time; the Trust was created, resolutions were completed and a deed of sale was executed. Evidence from a solicitor, Mr Patterson, confirmed that the transaction was genuine. Mr Patterson could not recall a memorandum of transfer being signed, but there is evidence from a legal executive that one was.
Asher J gave compelling reasons for finding that the transfer of the property to the Trust, if effected at all, was cancelled by the parties’ subsequent conduct.[18] The evidence of Mr Patterson confirms that the transfer was deliberately not registered. The reason may be that it would have meant reorganising finances, or that Mr D’Ath refused to become party to a mortgage. Nothing done subsequently was consistent with a change of ownership: the mortgagee at the time was not told, and Mr Thompson continued to meet outgoings on the property and to occupy it. Mr Thompson then took steps in 2005 that were wholly incompatible with the transfer to the Trust and which can only evidence an intention on his part, as the controlling influence behind the Trust and the company, to abandon the transfer to the Trust. Asher J’s conclusion that it was done for Mr Thompson’s personal financial advantage was plainly correct. Mr Thompson’s explanation — memory loss — was dismissed as implausible by the Judge, and that conclusion is not challenged on appeal.
[18]At [43]–[50].
Before us, Mr Hurd argued that there was no evidence that Mr D’Ath was party to the cancellation. On the contrary, he signed a resolution in 2008 that recited Mr Thompson had transferred the property in error, on account of illness. He also filed a defence to the liquidator’s claim. We make several points about this. First, the trust was Mr Thompson’s: he was settlor, he held the power of appointment of trustees, he was a beneficiary along with his family, and self-dealing was permitted.
Second, there is no reason, such as an apparent conflict of duty to beneficiaries, to suppose that Mr D’Ath would have had any reason to refuse to unwind the un-implemented 1999 transaction. Doing so did not make him party to Mr Thompson’s unlawful attempt to obtain a GST refund. Mr D’Ath’s behaviour in 2008 is consistent with this; he went along with Mr Thompson’s desire to reverse the 2005 transaction, including the pretext that it was all a mistake.
Third, the most telling evidence before us is Mr D’Ath’s admission of the liquidator’s claim.
Finally, if this submission had any foundation, Mr D’Ath ought to have been called, but he was not. He wants nothing to do with Mr Thompson, but his evidence could have been compelled.
No reasonable exchange of value
Mr Hurd argued that the Judge was wrong to find there was no reasonable exchange of value, for Mr Thompson had released the debt of $149,326.20. He accepted that no formal deed of release or similar document had been located, but argued that release is necessarily implicit in the unwinding of the transaction. We reject these submissions. There was no contemporaneous evidence supporting any release of the debt, and it is of some moment that Mr Thompson made no mention of it in his affidavits filed before the first judgment. It was open to the Judge to find the allegation was plainly untruthful.
It is a notable feature of the case that the debts owed by Kiwi House Ltd were modest: just $32,959.30 for creditors other than Mr Thompson, most of that owed to the IRD. Mr Hurd sought to make something of this, in support of his argument that substantial equivalence was achieved. However, the argument stands or falls on the proposition that Mr Thompson’s debt had been released. The Judge rejected that, and we agree with him. We add that the debt should not be discounted because it is owed to Mr Thompson; he was bankrupted owing substantial sums and it was an asset in his estate.
We inquired of counsel why the liquidators have not been repaid; after all, Mr Thompson has been discharged from bankruptcy and the property must now be worth materially more than it was in 2008 (we were told it is worth about $700,000). The answer may lie in the liquidators’ fees and expenses, totalling about $310,000, or the existence of a mortgage subsequently granted to Kiwibank for other borrowings. Be that as it may, Mr Thompson has made no attempt to settle.
Intention to defeat creditors
Mr Hurd argued that an intention to prefer cannot be inferred simply because a preference is sought for one creditor over another, pointing out that on any reasonable assessment the advantage gained is modest and arguing that the inference that Mr Thompson intended to defeat creditors is not available.
We reject these submissions. Mr Thompson was on the verge of bankruptcy at the time and the timing of the transaction is sufficient evidence of an attempt to take the property out of the hands of his company. The gain may appear modest in hindsight, but it may not have been to him at the time; after all, he had been willing to transfer the property to Kiwi House Ltd for an advantage, in the form of the GST refund, that was not much greater.
Delay
Mr Hurd submitted that Mr Thompson’s delay was reasonably explained. He was bankrupt at the time of the first judgment and only discharged in May 2013, and then had to get himself back on his feet financially. Various events in his personal life got in the way. There is evidence that he contacted counsel about the matter in the second half of 2014.
We accept the respondents’ submission, however, that the delay is not adequately explained. Mr Thompson had to move more expeditiously than he did and the inference is compelling that he acted only because steps had been taken to force him to vacate the property.
Result
We repeat that this is not an appeal from judgment after trial on the merits, but an appeal from a discretionary decision to refuse to set aside a formal proof judgment lawfully entered. We agree with Asher J that denying Mr Thompson a trial will not cause a miscarriage of justice in the particular circumstances of this case. On the contrary, it puts a stop to a shell game in which he has changed the ownership of his family home to exploit and defeat creditors.
The appeal is dismissed. The appellant must pay the first respondents costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Brett Norris Law, Auckland for Appellant
Meredith Connell, Auckland for First Respondents
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