Torbay Holdings Ltd v Napier
[2015] NZHC 2477
•9 October 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-007660 [2015] NZHC 2477
BETWEEN TORBAY HOLDINGS LIMITED
First Plaintiff
TORBAY REST HOME LIMITED Second Plaintiff
AND
DUNCAN JOHN NAPIER AND SARA ANN NAPIER
First Defendants
DUNCAN JOHN NAPIER, SARA ANN NAPIER AND CHRISTOPHER JOHN DAVIS AS TRUSTEES OF THE NAPIER FAMILY TRUST
Second Defendants
.../proceedings contd over
Hearing: 15 June - 4 July 2015 Appearances:
DPH Jones QC and AC Krzanich for Plaintiffs in CIV-2012-
404-007660 and Defendant in CIV-2013-404-001406
DJ Napier for Defendants in CIV-2012-404-007660 and
Plaintiffs in CIV-2013-404-001406Judgment:
9 October 2015
JUDGMENT OF WOOLFORD J
This judgment was delivered by me on Friday, 9 October 2015 at 2:30 pm pursuant to r 11.5 of the High Court Rules 1985.
Registrar/Deputy Registrar
……………………………………
TORBAY HOLDINGS LIMITED & ANOR v NAPIER & ORS [2015] NZHC 2477 [9 October 2015]
CRI-2013-404-001406
BETWEEN DUNCAN JOHN NAPIER, SARA ANN NAPIER AND CHRISTOPHER JOHN DAVIS AS TRUSTEES OF THE NAPIER FAMILY TRUST
Plaintiffs
ANDSANDSPIT BAY HOLDINGS LIMITED Defendant
Solicitors: Sellar Bone & Partners, Auckland
Counsel: DPH Jones QC, Auckland
Copy to: Duncan Napier
INDEX
Paragraph Introduction ..........................................................................................................[1] Factual background .............................................................................................[9]
Credibility ...........................................................................................................[29]
Mr Napier’s employment contract ...................................................................[38] Mrs Napier’s employment contract ..................................................................[45] Declared income .................................................................................................[46] Reimbursement or payment of company expenses .........................................[53] Fruit and vegetable supplier ............................................................................[71] Whangaripo Valley Road property...................................................................[85] Indebtedness of Mr and Mrs Napier and Napier Family Trust ..................[107] Misappropriation of company funds ............................................................. [115] Quantum of losses ........................................................................................... [117] Tracing of the funds ........................................................................................[135] Salary overpayments ..................................................................................[135] Unauthorised payments ..............................................................................[137] Causes of action ................................................................................................[151] Breach of fiduciary duties ..........................................................................[152] Money had and received.............................................................................[163] Deceit .........................................................................................................[180] Knowing receipt..........................................................................................[183] Remedies – constructive trust.....................................................................[198]
(a) Is there a pre-existing equitable right to property?.................[205] (b) Can that right be traced into the claimed property? ...............[207] Negligence ..................................................................................................[233]
Counterclaim ....................................................................................................[239] Claim by Napier Family Trust against Sandspit Bay Holdings ...................[248] Result .................................................................................................................[262]
Introduction
[1] Torbay Holdings Limited and Torbay Rest Home Limited, the first and second plaintiffs in the first proceeding (CIV-2012-404-007660), were incorporated in 2001 to own and operate a rest home business. Torbay Holdings purchased the land and buildings, while Torbay Rest Home ran the business and paid rent to Torbay Holdings. The first defendants, Duncan Napier and his wife Sara Napier, were appointed as administration manager and nurse manager of the rest home respectively. Mrs Napier was a director of the companies from incorporation until 3
September 2012. Mr Napier was also a director of the companies between 27 June
2008 and 11 June 2012. The second defendants are Mr and Mrs Napier and an independent solicitor as trustees of the Napier Family Trust, which is a minority shareholder in both companies.
[2] Mr Napier and his wife effectively ran the rest home business. They had cheque signing authority over the companies’ bank accounts and day-to-day control of their finances. The other shareholders had very limited involvement in the business. They trusted Mr and Mrs Napier. There were no effective checks and balances.
[3] The first and second plaintiffs’ claim against the defendants is straightforward. They say that over the period 1 April 2005 to 30 April 2012, Mr and Mrs Napier treated the companies’ funds as their own and took in excess of
$1.9 million for their own purposes and the purposes of the Napier Family Trust. They say such payments were unauthorised. The statement of claim sets out seven different causes of action including breach of directors’ duties, monies had and received, knowing receipt of misappropriated monies and negligence.
[4] On the other hand, the defendants deny any impropriety and say that all cheque payments made by them were either to pay legitimate rest home expenses or to reimburse payments they had made on behalf of the rest home. The statement of defence includes a counterclaim for money the defendants say is owing to them.
[5] The trustees of the Napier Family Trust have brought a separate claim (CIV-
2013-404-001406) against Sandspit Bay Holdings Limited. The Trust is a minority
shareholder in Sandspit Bay Holdings, a company that purchased and developed a property in Grey Lynn in Auckland. The other shareholders in Sandspit Bay Holdings are also shareholders in Torbay Holdings and Torbay Rest Home. There is therefore a commonality of shareholding in the three companies.
[6] The Napier Family Trust made advances to Sandspit Bay Holdings, which are recorded in the company’s current account. The trustees now want their money back. Sandspit Bay Holdings resists returning the advances made by the Napier Family Trust because it says that the advances were made using funds misappropriated from Torbay Holdings and Torbay Rest Home.
[7] Evidence on behalf of Torbay Holdings, Torbay Rest Home and Sandspit Bay Holdings was given by Michael Single and Mark Kayes, the two remaining directors of the companies.
[8] Mr Napier represented himself during the four week hearing and cross- examined the other parties’ witnesses at some length. He also gave evidence and was subject to cross-examination himself. Mrs Napier did not make any appearance nor was she represented by counsel. She was also not called as a witness by her husband.
Factual background
[9] Mr Napier and his wife met Mr Single and his wife through a homebirth prenatal group in 1994. They became friends. In 1996, Mr Napier and his wife became directors of Henderson Toys Limited, which operated as a toy retailer in Henderson. The toy business encountered financial difficulties in about 2000. Henderson Toys ceased trading in April 2001 when the company’s landlord terminated its lease because the company could not meet its obligations. Mr Napier had guaranteed the lease in his personal capacity and the landlord sought payment from him.
[10] In 2002, at the suggestion of Mr Single, Mr Napier entered into a scheme of arrangement with his creditors by which seven cents in the dollar was paid to them. Mr Napier’s personal indebtedness was recorded at the time as $179,214. Mr Single
also introduced Mr Napier to the solicitor who put the scheme together and advanced funds to Mr Napier to cover the cost of the scheme.
[11] Mr Single has interests in a number of rest homes. In 2001, around the time that Henderson Toys ceased trading, Mr Single was looking to invest in another rest home business. Mr Napier introduced Mr Single to the owners of an existing rest home business in Torbay. The business was subsequently purchased by Mr Single and Mr Napier, as part of a group of investors. Two new companies, Torbay Holdings and Torbay Rest Home, were incorporated for the purposes of the purchase. The investors received shares in both Torbay Holdings and Torbay Rest Home in accordance with the amounts each had invested. Mr Single’s family trust was allocated 40 per cent of the shares. Mr Kayes’ family trust was allocated 20 per cent of the shares as was a trustee company associated with John Bell. The Napier Family Trust was also allocated 20 per cent of the shares. The Napier Family Trust contributed $120,000, of which $100,000 was borrowed from the ASB Bank and
$20,000 was borrowed from Fairleigh Lodge Holdings Limited (of which the Single family trust was a 70 per cent shareholder).
[12] Mr Single, Mr Kayes and Mrs Napier were all appointed directors of both Torbay Holdings and Torbay Rest Homes. Mr Napier was not initially appointed as a director because of his personal debts and the scheme of arrangement he was proposing for his creditors. A representative of Bell Trustees Limited was not appointed as a director because the company was a passive investor.
[13] When the rest home was purchased it was made up of 39 residential rooms and 13 units, which meant that the rest home had a capacity of 52 residents. The residential rooms were part of the assets of the rest home and comprised of a bedroom and separate bathroom, but no shower. The units were, however, owned by individual residents and had a bedroom, lounge, kitchenette and en-suite bathroom with shower. The residential room residents paid more because there was a rental component in their charges. The unit owners paid for their food and other amenities, but because they owned their units paid a lesser amount.
[14] Mr Napier was appointed as administration manager of the rest home, while Mrs Napier was appointed as nurse manager of the rest home. Mr Napier had no other employment, but Mrs Napier continued with her existing part-time work as a nurse tutor at UNITEC.
[15] Mr Napier remained administration manager from 2001 until the end of April
2012. During this period he had responsibility for the financial management of the rest home as well as its physical maintenance. He was also required to support his wife who was responsible for the physical wellbeing of the residents.
[16] Mr Napier was in charge of the rest home finances. He was responsible for calculating and paying its expenses, including staff wages, suppliers’ bills, and preparing and filing the monthly Pay As You Earn (PAYE) returns and bi-monthly Goods and Services Tax (GST) returns. He was also required to maintain the companies’ primary books of accounts. To do so, Mr Napier used Mind Your Own Business (MYOB), an accounting software package. Part of his role was to liaise with the companies’ accountant, Scott Williams, and provide him with all the necessary financial information for the end of year accounts and annual tax returns.
[17] Mrs Napier had signing authority on the bank accounts of Torbay Holdings and Torbay Rest Home from the outset. Before Mr Napier gained signing authority, she would sign blank cheques and give them to her husband. Mr Napier had signing authority from August 2008, after he became a director of the companies.
[18] The rest home had been operating for a number of years before it was purchased in 2001. Most of the staff remained and the same systems and processes continued. Bulk food supplies had been obtained from Gilmours who, under the previous owners, had delivered them to the rest home. Mr Napier, however, chose to do the food shopping for the rest home personally. Initially he also used Gilmours, but later changed to Pak n’ Save as well as various butchers. Mr Napier says that he begrudgingly used his personal credit card to purchase food for the residents on the day the business was taken over in June 2001 because no account had been opened at Gilmours. Thereafter, he says, Mr Single deliberately used him as a free funding
source for the business. He also says that he refused to give any personal guarantee to open supplier accounts because of lessons learnt in the failure of Henderson Toys.
[19] I reject any contention that Mr Single deliberately used Mr Napier as a free funding source for the business. If personal guarantees were required to set up accounts for trade suppliers, then Mr Napier should have raised the issue with the directors and sought their assistance. Mr Napier instead told one employee that Mr Single did not allow accounts. This claim is simply not credible. Accounts are preferable for ease of recording and managing business expenditure. I accept Mr Single’s evidence that it was always his preference that accounts were kept so that monthly invoices were rendered and accounts paid by cheque or direct credit.
[20] The rest home also operated a petty cash book, which had a float of $300. The total amount of petty cash deposited between 1 April 2005 and 30 April 2012 was $56,496. This equates to approximately $8,000 per annum or $160 per week. Petty cash was used for minor payments such as lawn mowing, stationery and diesel for the rest home van.
[21] In addition there was also a comfort ledger system for each resident by which small amounts of cash were kept in the rest home office for minor expenditure by residents. The cash was sourced from residents themselves or their families and was kept separate from the petty cash book.
[22] Each year Mr Napier was required to supply the companies’ accountant, Mr Williams, with the information needed to complete the annual accounts for Torbay Holdings and Torbay Rest Home. Mr Williams relied on the information supplied by Mr Napier to draft the annual accounts. He did not audit the accounts and only occasionally saw source documents (such as when a unit was sold). His was a compilation engagement only, and he was not required to check whether the information was correct or not. Mr Williams found Mr Napier to be disorganised. He says a pattern emerged each year – after much effort and many e-mails, Mr Napier would eventually supply him with the bare minimum of information that was necessary for him to draft the annual accounts. Mr Napier would blame his disorganisation on the fact that he did not have the latest version of MYOB.
[23] The annual accounts prepared by Mr Williams on information supplied by Mr Napier between 2005 and 2011 showed the rest home business generally breaking even. No dividends were paid to the shareholders of Torbay Rest Home.
[24] In September 2011, Mr Williams made contact with Mr Single to express concern that two Inland Revenue Department (IRD) payments had not been made in the financial year ended 31 March 2011. Mr Single arranged to meet with Mr Napier to discuss the issue, but the meeting did not take place until late November 2011. Mr Napier provided evidence that the payments had been made and explained that everything was in order. Mr Single was satisfied with Mr Napier’s explanation that the failure to make the IRD payments was a one-off mistake and would not be repeated. That was not correct. Mr Napier was hiding far more major problems.
[25] In April 2012 Mr Single received a telephone call from a distraught Mr Napier. He said he had “f…d up” by not filing the necessary returns with the IRD and the directors of the companies would be in trouble for unpaid PAYE and GST. Later that same day, Mr Single received a letter from the IRD at his home address advising him that payments of PAYE, GST, Kiwi Saver contributions and other employer deductions had not been made by either Torbay Holdings or Torbay Rest Home for over a year. The money that was owed was approximately $275,000, of which approximately $196,000 was core tax with the remainder being penalties and interest.
[26] Mr Single immediately took over the rest home finances and commenced a comprehensive investigation. Together Mr Single and Mr Williams made arrangements with the IRD to pay the core tax and interest on that sum by way of instalments. Mr Napier agreed to sell the shares owned by the Napier Family Trust in another company, Secret Squirrel Investments Limited, to Mr Single for $72,500 cash, which sum would be paid immediately to the IRD in partial satisfaction of the tax debts of Torbay Holdings and Torbay Rest Home. Mr Napier left his employment as administration manager within a month. He says he was unfairly dismissed, but he has not taken a personal grievance claim. Mrs Napier stayed on as nurse manager for another four months while investigations into the rest home
finances continued, but she too left in August 2012. Mr Napier says that she too was unfairly dismissed.
[27] As part of his investigations, Mr Single requested copies of all cheques drawn on the accounts of Torbay Holdings and Torbay Rest Home from 1 April 2005 to
30 April 2012, a period of just over seven years. He reviewed the cheques and identified what he considered to be suspect payments. These have all been set out in spreadsheets comprising one A3 page for Torbay Holdings and 28 A3 pages for Torbay Rest Home. The suspect payments totalled $71,830.78 for Torbay Holdings and $1,584,171.44 for Torbay Rest Home, making a grand total of $1,656,002.22. Mr Single also identified what he says are salary overpayments totalling
$281,086.93. He also analysed related company transactions seeking a complete picture of how the rest home business had been run by Mr Napier.
[28] As part of his investigations, Mr Single arranged for the financial accounts for the year ended 31 March 2012 to be completed. Using source documentation obtained by Mr Single, the 2012 accounts prepared by the companies’ accountant, Mr Williams, showed a loss of $319,332. According to Mr Williams, there has subsequently been a substantial turnaround in the business following Mr Napier’s departure. In 2013 the business made a profit despite substantial increases in building maintenance and legal costs. The 2014 accounts also show a healthy profit.
Credibility
[29] Before I proceed to deal with the essential issue whether there has been any misappropriation of the companies’ funds by Mr and Mrs Napier, I must record my assessment on questions of credibility. I have already made some reference to credibility when setting out the factual background.
[30] However, credibility assumes real importance in certain key areas. This is particularly the case where conflict arises between Mr Single and Mr Napier as to what had been discussed and agreed between them. Having given this matter careful consideration, I have no hesitation in concluding that Mr Single was an honest and reliable witness. His evidence accorded with the objective facts. He was careful and consistent in his approach.
[31] On the other hand, Mr Napier possesses a strong personality and is obviously a man of intelligence. However, he was inclined to perceive matters and events in a manner that was distorted so as to fit with his perception of what would suit his purposes.
[32] For example, he seized upon an unsigned and undated job description for his wife, apparently drafted in January 2010, to allege that she had “a $1,000 per day discretionary budget indicated in her employment agreement,” when the clause in the unsigned and undated job description merely stated “Authorised to purchase the requested product/service in order to maintain the current levels of daily care and resident well-being requirements up to a limit of $1,000.”
[33] Those who challenged or disagreed with him or propounded a different view were accused by Mr Napier of being duplicitous or dishonest. He accused Mr Single of covering up for serious tax evasion. He accused Mr Kayes of deliberately speaking to third parties in an attempt to reduce his access to funds so he would not be able to defend the proceeding. He accused Mr Williams of manipulating the companies’ financial statements and improperly reducing taxable income. He accused the companies’ lawyer, Luke Crawford, of abusing the summary judgment process by falsely making demand of his wife of a sum allegedly owed by her to Fairleigh Lodge Holdings.
[34] Some of Mr Napier’s evidence and explanations struck me as being contrived and not capable of belief. He acknowledged being responsible for filing Fringe Benefit Tax (FBT) returns for Torbay Rest Home, yet never did so. Although he claims he did not know what the FBT rules were, he must have known that extra benefits which he says were part of his employment package, such as gym membership, would have been subject to FBT. He had a working knowledge of PAYE and GST returns, which he filed on a regular basis as part of his financial responsibilities. Nonetheless, he says that the companies’ accountant told him that FBT returns were not required. If that was the case, he omitted to tell the companies’ accountant about the extras which he says were part of his employment package.
[35] Over the period from 2005 to 2012, Mr Napier wrote out 522 cash cheques totalling $509,341.62. The rest home is not, however, a cash business. I find Mr Napier’s evidence and explanations for the large number of cash cheques to be unconvincing and contrived. This reflects on his general credibility.
[36] Mr Napier criticises Mr Single for not engaging a suitably qualified accountant to conduct what he called a forensic audit of the rest home’s financial records. He claims that such an audit would exonerate him. This is disingenuous on Mr Napier’s part because he knows that without complete source documentation, such an audit cannot be completed. His own expert accountant, John Leonard, was clear that without the records Mr Napier says he prepared it is not possible to establish what expenses were being reimbursed. Mr Napier knows those records are not available.
[37] Where direct conflicts exist between critical parts of the evidence of Mr Napier, as opposed to that of Mr Single, Mr Kayes, Mr Williams (the companies’ accountant), and Mr Crawford (the companies’ lawyer), I am compelled to prefer the latter group’s evidence to that of Mr Napier.
Mr Napier’s employment contract
[38] Mr Napier says he agreed to take on the role of part-time administration manager for $41,500 per annum when the rest home was purchased in 2001, but never received a copy of his employment contract. He says that because he was working from home Mr Single had agreed that Torbay Rest Home would cover the cost of all power supplied to his home and the cost of all telephone accounts of himself and his wife. Mr Napier also says that a gym membership was paid for by Torbay Rest Home as part of his remuneration. As to the use of his private motor vehicle, Mr Napier says that it was initially agreed that he would be reimbursed by way of a mileage allowance as this was not subject to tax and was a deductible expense for Torbay Rest Home. Mr Napier says that after he completed the first two months’ claims, Mr Single realised how expensive this was to be for Torbay Rest Home and, accordingly, it was agreed that all Mr Napier’s motor vehicle expenses would be paid by Torbay Rest Home. Mr Napier also says that he soon found he was
working more than the agreed hours and therefore Mr Single agreed in 2002 that he would receive commission of five per cent on the sale of all units at the rest home. He says that these commissions formed part of his remuneration from April 2002.
[39] Mr Single, on the other hand, says that it was agreed that Mr Napier would only be entitled to reimbursement of reasonable telephone costs and motor vehicle expenses which related to the business of the rest home. Mr Single also acknowledged that Mr Napier was entitled to claim reasonable home office expenses such as stationery and computer costs, which may include a proportion of the power supplied to his home. Put simply, any expenses claimed by or payable to Mr Napier had to relate to legitimate rest home expenses. Mr Single specifically denies that it was agreed that any commission would be payable to Mr Napier on rest home units sales.
[40] There is a copy of a written employment contract between Torbay Rest Home Limited and Mr Napier. It is dated 11 December 2002. Mr Napier is described as an administration manager with flexible hours of employment of approximately six hours per day. His remuneration was an annual salary of $41,500 together with full reimbursement of vehicle expenses and other discretionary payments as mutually agreed between the parties. The agreement is signed by both Mr Single and Mr Napier.
[41] When questioned about the employment agreement, Mr Napier initially said he did not know whether he had actually ever signed it. He then said he thought the document should have been dated 11 December 2001: “I think that’s [2002] just a straight typo”. The agreement is a two-page document with the date 11 December
2002 on the first page. There is a facsimile record at the top of both pages which indicated that it was faxed on 13 December 2002.
[42] Mr Napier later in his evidence acknowledged that it was his signature on page 2 of the document, but continued to question its date. He also had doubts about its authenticity because the second page was not dated nor was it initialled on the first page. Mr Napier said he would love to see the version that he initialled, as he
was “pretty sure” he would have initialled it. Mr Napier therefore thought that there should be another employment agreement which Mr Single had not provided.
[43] I do not share Mr Napier’s doubts about the authenticity of the employment agreement signed by Mr Napier and Mr Single, which is dated 11 December 2002. It is the only contemporaneous document available. Mr Napier’s evidence consisted of initial denial, then obfuscation, and finally impugning others. The written employment contract does not specifically provide for Torbay Rest Home to pay all power accounts and telephone accounts of Mr Napier nor does it refer to gym membership. It does, however, provide for full reimbursement of motor vehicle expenses and other discretionary payments as mutually agreed between the parties. I accept that Mr Napier was therefore entitled to reimbursement of telephone costs and motor vehicle expenses incurred in the conduct of rest home business, together with limited home office expenses as agreed by Mr Single. Although the employment agreement refers to full reimbursement of vehicle expenses, it is an implied term of the agreement that those expenses must relate to rest home business. It cannot have been the intention of the parties that Torbay Rest Home would pay for the unlimited private use of a motor vehicle by Mr Napier.
[44] I am also of the view that there was no agreement for the payment of commission on the sale of rest home units as claimed by Mr Napier. He says that this agreement was reached with Mr Single in April 2002. If that agreement was reached with Mr Single in April 2002, it would undoubtedly have been specifically provided for in the employment contract dated 11 December 2002. It is not. The contract merely lists “management of apartment sales” as one of Mr Napier’s responsibilities. Mr Napier has not been able to point to any e-mail, document, settlement statement or invoice which supports his evidence that a commission was payable. I reject his evidence on this issue in its entirely.
Mrs Napier’s employment contract
[45] Mrs Napier chose not to give evidence, and there was no effective challenge by Mr Napier to Mr Single’s evidence about the terms of her employment contract. Although Mr Single has not been able to locate a copy of Mrs Napier’s written
employment contract, he says that Mrs Napier’s initial salary was $52,000 per annum, which reflected the fact that she was not working full-time at the rest home as she continued to be employed as a part-time nurse tutor at UNITEC. She also had the use of three different company cars over the relevant period, each of which was purchased new and in respect of which all servicing was paid for by Torbay Rest Home. Her reasonable petrol costs and other business related expenses such as her mobile phone were also paid by the company. Finally, Mr Single says that Mrs Napier’s salary was increased regularly over the relevant period by $2,000 increments, such that by 2012, the salary for her part-time role as nurse manager was
$60,000. There is no claim that Mrs Napier was entitled to any other payments, either as commission or otherwise.
Declared income
[46] Although Mr and Mrs Napier had been appointed on individual salaries, Mr Napier, who was responsible for the payment of the wages and salaries of all rest home employees, did not keep their own salary payments separate. Instead, it appears that Mr Napier combined their salary entitlements and then split payments between the Napier Family Trust, himself and his wife. For example, there were regular fortnightly payments coded as wages between 5 April 2006 and 13 December
2006 as follows:
Date Napier Family Trust D J Napier S J Napier $ Fortnightly total 05.04.06 –
13/12/06
2,200.00
512.20
197.96
2,910.16
This is broadly consistent with a combined salary of $94,000, with tax deducted at the lowest tax rate of 19.5 per cent.
[47] However, in subsequent years the amounts paid by Mr Napier to the Napier Family Trust, himself and his wife varied considerably and increased substantially. For example, the following payments coded as wages were made in five consecutive fortnightly periods in 2011:
Date Napier Family Trust D J Napier S J Napier $ Fortnightly total 31/08/11 1,000.00 1,990.47 1,365.62 4,356.09 14/09/11 - 5,653.94 365.62 6,019.56 28/09/11 1,200.00 1,990.47 655.18 3,845.65 12/10/11 2,500.00 3,653.95 369.72 6,523.67 26/10/11 2,500.00 1,811.09 355.18 4,666.27
Occasionally, other payments made as wages were made, but not as part of the fortnightly payroll process.
[48] The substantially increased salary payments are, however, just part of the overall picture. For example, on 14 September 2011, when Mr Napier paid himself and his wife $6,019.56 coded as wages, he also wrote out a Torbay Rest Home cheque in the sum of $3,419.80. This was used to pay a personal expense, being an interior design consultant employed by Mr Napier and his wife in the construction of their new house at Whangaripo Valley Road. On the same day, Mr Napier also cashed two other cheques made payable to cash, drawn on the account of Torbay Rest Home in the sums of $1,240.91 and $1,595.00. In total therefore, on that one day, 14 September 2011, Mr Napier and his wife obtained the benefit of $12,275.27.
[49] Mr Napier did not explain the considerable variations in salary payments, but sought to justify the substantial increase in the amount of salary paid overall on the basis that Mr Single had agreed that Torbay Rest Home would pay five per cent commission on the sale of all units. He claims that this was part of his salary from April 2002 and was subject to PAYE. I have already rejected Mr Napier’s claim. As noted above, the fortnightly total paid as wages for the eight month period between April and December 2006 remained constant at $2,910.16. Yet within that same period, two units were sold for sums in excess of $100,000 each in August and September 2006. If Mr Napier’s claim is correct, then commission in excess of
$10,000 would have been paid or payable to Mr Napier. There is however no record of any such payment or any calculation of any amount owing or any change to the fortnightly total paid as wages.
[50] Torbay Rest Home has been able to obtain from the IRD monthly details of the income which Mr and Mrs Napier declared as having been received from Torbay Rest Home. Over the relevant seven year period, Mr and Mrs Napier declared the
receipt of a combined income of $975,753.59 from Torbay Rest Home. Mr Single has, however, calculated that based on their agreed salaries, Mr and Mrs Napier should only have received $694,666.58 or a little under an average of $100,000 per annum.
[51] For example, for the financial year ended 31 March 2010, Mr Napier declared income of $93,956.00, notwithstanding the salary shown on his employment contract of $41,500. The amounts declared by Mr Napier varied considerably from month to month in that year and ranged from $4,692.00 (January
2010) to $17,461.00 (August 2009). Mrs Napier declared income of $64,554.00 for the same financial year, which is also approximately $6,500 in excess of her agreed salary. These declared incomes do not reflect the actual amounts received by Mr Napier and his wife in the financial year ended 31 March 2010 because they were income splitting, that is, choosing to pay most of their income directly to the Napier Family Trust. The Napier Family Trust received $65,900 in the financial year ended
2010, after the deduction of income tax on Mr and Mrs Napier’s declared salaries.
[52] I find as a matter of fact that Mr Napier overpaid himself and his wife
$281,087.01 over the relevant seven year period. This is the sum of their income declared to the IRD, less their agreed salaries. This is also consistent with the total payments coded as wages which went to the Napier Family Trust, Mr Napier and Mrs Napier, less their agreed salaries as calculated by Mr Single.
Reimbursement or payment of company expenses
[53] Mr Napier explained the process he followed for the reimbursement of company expenses as follows. He listed the amounts that he had personally spent in cash or on his personal credit card on an A4 piece of paper with the appropriate expense account listed beside it, that is, food, motor vehicles, repairs and maintenance. He then totalled the expenses. If there were sufficient funds available in the Torbay Holdings or Torbay Rest Home bank account he would write out a cheque for the sum owed to him, which he then coded against a creditor account called National Bank. The cheques could be made out to cash or to himself
personally or to a third party creditor, such as the builder who was constructing a new house for him and his wife at Whangaripo Valley Road.
[54] If there were insufficient funds available in the Torbay Holdings or Torbay Rest Home bank account, he would then write the sum owed to him and yet to be reimbursed on another A4 piece of paper. This was an account that he balanced to reimburse himself for expenses incurred personally on behalf of Torbay Holdings or Torbay Rest Home when sufficient funds were available.
[55] Mr Napier says that he placed all receipts in bank coin bags and retained them in a cardboard storage box. The A4 pieces of paper were filed in two separate ring binders, which he says were handed to Mr Single. Mr Napier says he has not seen those ring binders since he handed them to Mr Single, nor have they been provided by the plaintiffs in the discovery process. He applied for further discovery, but no reimbursement schedules have been provided. He believes they are under the control of the plaintiffs.
[56] Mr Napier says that Mr Single had instigated this procedure and was fully aware of the process. He says no company credit card or company fuel card was ever issued to him and because retail stores and petrol stations would not accept cheques, he had “no choice from June 2001, but to follow this procedure”.
[57] I specifically reject Mr Napier’s claim to have handed the two separate ring binders containing the reimbursement schedules to Mr Single, if they ever existed. If they had been handed to Mr Single, he would have realised their significance in resolving the issues surrounding the very large number of suspect payments drawn on the Torbay Holdings and Torbay Rest Home bank accounts. Mr Napier attributes a malign motive to Mr Single in not disclosing the reimbursement schedules, but from the outset Mr Single clearly hoped that the missing money was all a mistake and not something more sinister. Mr Single wrote to Mr Napier on 7 May 2012:
It is my sincere hope that we are dealing with a gross dereliction of duty and some form of problem with MYOB. The magnitude of the problem is such that we must undertake a thorough review…
There is little doubt that the next month will be extremely stressful and as discussed I am concerned for you. We need to continue to work together to
resolve matters, but I ask “Duncan is there anything you wish to tell me that will help explain this situation”.
[58] As noted above, Mr Single requested copies of all company cheques over the relevant seven year period. He reviewed the cheques and identified what he considered to be suspect payments. He then requested bank traces on these suspect payments. These have all been set out in spreadsheets - comprising one A3 page for Torbay Holdings and 28 A3 pages for Torbay Rest Home. These were compiled by an accountant from Deloitte.
[59] As an example, in one six week period between 6 October 2011 and
21 November 2011, Mr Single identified 61 suspect cheque payments. These ranged from $44.70 to $6,454.12. The cheques totalled $97,616.49, or an average of $1,600 each. 38 of the 61 cheques were made out to cash and were cashed by Mr Napier. The cash cheques totalled $58,849.87. 10 of the 61 cheques were traced to Mr Napier’s bank account or a joint account of Mr Napier and his wife. The cheques made out to Mr Napier or to Mr Napier and his wife totalled $17,333.34. Finally, 13 of the 61 cheques were paid to third parties. The cheques made out to third parties totalled $21,433.28.
[60] Mr Napier claimed that all the cash cheques he wrote were either to reimburse himself for expenses he had paid on behalf of Torbay Rest Home or to pay third parties who had supplied goods and services to the rest home. He also claimed that the cheques traced to his bank account, or the joint bank account with his wife, were also reimbursements for expenses he had paid on behalf of Torbay Rest Home. Finally, Mr Napier claimed that the cheques traced as being paid to third parties were also either reimbursement for expenses which he had paid on behalf of Torbay Rest Home, or which were payable as part of his employment agreement, or which were to pay third parties who had supplied goods and services to the rest home.
[61] Mr Napier acknowledged that his primary means of paying third parties who had supplied goods and services to Torbay Rest Home was by using his personal ASB Visa credit card. Over the same six week period between 6 October 2011 and
21 November 2011, Mr Napier had used his card to make 188 separate purchases.
They ranged from $3.77 at New World Albany to $3,074 at Good Guys Wairau
Valley. The purchases totalled $31,824.50 or an average of $169.28 each.
[62] Mr Napier was asked in evidence to review all the cheques and the credit card statements for the same six week period. By comparing the date and amount of the cheques with entries on his credit card statements, Mr Napier was able to identify three of the 38 cash cheques. On 31 October 2011, he had cashed a cheque for
$1,113.49, which corresponded to a purchase, three days earlier on 28 October 2011, shown on his credit card statement of $1,113.49 from North Harbour Hyundai. He claimed that this was a legitimate expense of Torbay Rest Home. Also on
31 October 2011 he had cashed a cheque for $1,954.65, which also corresponded to a purchase three days earlier on 28 October 2011, shown on his credit card statement of $1,954.65 from a law firm, Armstrong Murray. Mr Napier could not recall if this was a personal expense or a rest home expense. If it was a personal expense, he claimed it was in reimbursement of an expense or expenses for the rest home which he could not now recall or reconstruct from the available records. Finally, on
3 November 2011, Mr Napier had cashed a cheque for $3,074 which corresponded to a purchase three days earlier on 30 October 2011, shown on his credit card statement of $3,074 from the Good Guys in Wairau Valley. He said this was for the purchase of two new fridges for the rest home prior to the Ministry of Health audit in November 2011.
[63] Mr Napier was not able to identify who received the cash sums totalling
$52,707.73 from the remaining 35 cash cheques which were cashed by him over the six week period, nor was he able to point to any receipts or entries on his credit card statements, which either singly or together may have been reimbursed by the cash cheques. He did explain however that because of the tight cash flow of Torbay Rest Home, he had saved up receipts until such time as the rest home was in a position to be able to reimburse him.
[64] Despite identifying three of the 38 cash cheques, Mr Napier was not able to point to any receipts or entries on his credit card statements which either singly or together might have been reimbursed by the 10 cheques totalling $17,333.34 which were traced to his account or the joint account of himself and his wife.
[65] As noted above, there were also 13 cheques totalling $21,433.28 traced as being paid to third parties. Of the 13 cheques, Mr Napier identified six as relating to expenses of Torbay Rest Home, three as being payable in terms of his employment contract and two as relating to the construction of the new house for him and his wife at Whangaripo Valley Road. He did not know whether the remaining two cheques represented personal or rest home expenses. Mr Napier claimed, however, that those cheques made out to third parties involved in the construction of his new house were in reimbursement of expenses he had incurred on behalf of the rest home.
[66] Mr Napier was also asked in evidence to review all 188 purchases shown on his credit card statements for the same six week period. Of the goods and services totalling $31,824.50 purchased by him, Mr Napier identified a total of $19,418.52 as relating to expenses of Torbay Rest Home and a total of $6,846.36 as personal expenses. He could not recall whether purchases of $5,559.62 represented personal or rest home expenses or a mixture of both.
[67] I certainly have my doubts about the accuracy of Mr Napier’s identification of a number of cheques payable to third parties and a number of purchases shown on his credit card statements as being likely rest home expenses. For example, cheques for $2,132.40 paid to Matakana Kitchens and Joinery Limited on 10 October 2011 and $5,124.54 paid to Crane Distribution NZ Limited, a plumbing wholesaler and retailer, on 7 November 2011 are more likely to be for goods and services supplied to Mr Napier in the construction of his new house, rather than rest home expenses. Mr Napier has not been able to provide any invoices or receipts for these amounts. Similarly, there are a number of purchases on Mr Napier’s credit card statements which are more likely to be his personal expenditure, rather than rest home expenses as claimed by him. These include a purchase of $440 from Mico Plumbing and Pipeline on 29 October 2011 and a payment of $500 to Mahurangi College, where Mr Napier’s sons went to school, on 4 November 2011. Again, Mr Napier has not been able to provide any invoices or receipts for these amounts.
[68] In these comments, I do not seek to impose any burden on Mr Napier. The plaintiffs retain the burden of proving their case, but the plaintiffs never had
possession of Mr Napier’s credit card receipts, notwithstanding Mr Napier’s claims
to the contrary.
[69] Even giving Mr Napier the benefit of every doubt and accepting his explanations in their totality, he is unable to account for approximately half (in excess of $48,000) of the total sum of $97,616.49 which he wrote out in company cheques, over a six week period. Those are simply the company cheques from that period which have been identified by Mr Single as suspect.
[70] Clearly, there is a substantial gap between the amounts which have been claimed as reimbursements and the actual, traceable expenditure by Mr Napier.
Fruit and vegetable supplier
[71] During the course of his investigations Mr Single became aware of an unpaid account for the supply of fruit and vegetables to the rest home for a sum of
$37,156.92, which had been unpaid for two and a half years. Mr Single was initially sceptical, thinking it simply could not be true, but the supplier was adamant their invoices had not been paid. Mr Single therefore checked the bank reconciliations and requested copies of the cheques which had been coded as payments to the fruit and vegetable supplier.
[72] In the bank reconciliations dated 12 December 2011, 19 December 2011 and
23 December 2011, Mr Napier had coded the following cheques as payments to the fruit and vegetable supplier:
Date Cheque number $ Amount 05/12/2011 106584 3,195.90 05/12/2011 106585 3,690.50 05/12/2011 106586 4,289.70 16/12/2011 106592 2,130.58 19/12/2011 106601 1,155.96 19/12/2011 106602 834.00 19/12/2011 106603 8,016.65 13/12/2011 106606 3,169.70 21/12/2011 106607 2,496.69
[73] When copies of the cheques were obtained from the bank, it was ascertained
that the cheques had been written out by Mr Napier to the following payees:
Date Cheque number Payee 05/12/2011 106584 Cash 06/12/2011 106585 Cash 06/12/2011 106586 Cash 16/12/2011 106592 Not traced 19/12/2011 106601 D Napier 19/12/2011 106602 D Napier 19/12/2011 106603 CJS Builders 13/12/2011 106606 Cash 21/12/2011 106607 Cash
[74] Mr Napier had signed the rear of the cash cheques indicating that he had presented them at the bank and obtained the cash sums for which the cheques had been made out. CJS Builders were the builders who were constructing the new house for Mr Napier and his wife at Whangaripo Valley Road.
[75] When he ascertained this, Mr Single instructed his lawyers to write to Mr Napier’s lawyers seeking an explanation. Mr Crawford therefore wrote to Mr Napier’s lawyer by letter dated 14 September 2012. Mr Napier’s lawyer did not reply. At trial, Mr Napier said that Torbay Rest Home did not have a trade account with the fruit and vegetable supplier, but that he had paid the account monthly and “left the balance in the creditor file until I reimbursed myself”. In effect, Mr Napier said that the above cheques were reimbursements of accounts he had previously personally paid to the fruit and vegetable supplier.
[76] I do not accept Mr Napier’s explanation as credible. First, the average monthly account from the fruit and vegetable supplier was in the region of $2,500. The cheques coded as payments to the fruit and vegetable supplier in December 2011 totalled $28,979.68, or over 11 months supplies. Mr Napier says that he did not reimburse himself until there were sufficient funds in the Torbay Holdings or Torbay Rest Home bank account to do so. However, the debiting of cheque number 106603 on 19 December 2011 for $8,016.65 payable to CJS Builders brought the Torbay Rest Home account to $56,053.58 OD.
[77] The balance of the account on the 19th of each of the previous 10 months was:
Date $ Amount 19/11/2011 10,162.80 OD 19/10/2011 40,467.10 OD 19/09/2011 47,860.72 OD 19/08/2011 29,837.32 OD 19/07/2011 27,893.57 OD 19/06/2011 15,492.48 OD 19/05/2011 36,102.92 OD 19/04/2011 36,938.86 OD 19/03/2011 35,216.18 OD 19/02/2011 51,890.40 OD
[78] The Torbay Rest Home bank account was therefore less overdrawn on the
19th of each of previous ten months, which indicates to me that Mr Napier could easily have reimbursed himself earlier.
[79] Secondly, Mr Napier did not produce any receipts for the payments for which he said he was reimbursing himself. He did, however, provide two earlier receipts from the fruit and vegetable supplier dated 4 and 8 February 2010, which are consistent with the advice given to Mr Single by the supplier that he had not been paid since mid-2010.
[80] Thirdly, Mr Napier did not produce any reimbursement schedules he said he had completed at the time. I have already rejected Mr Napier’s explanation that he gave the reimbursement schedules to Mr Single.
[81] Fourthly, there is no rational explanation for writing three separate cheques for cash sums totalling $11,176.10 on the same day, 5 December 2011, if they were all for reimbursement of payments made by Mr Napier to the same fruit and vegetable supplier, unless it was to disguise the total cash sum withdrawn by Mr Napier on that day.
[82] Fifthly, if there truly were insufficient funds available to reimburse Mr Napier for legitimate rest home expenses, an honest administration manager would have raised the issue with his fellow directors and sought agreement from them on
measures to ensure that legitimate rest home debts were paid promptly. He did not do so.
[83] Sixthly, if Mr Napier had not been reimbursed for many months for legitimate rest home expenses which he had paid using his personal credit card, he would have been incurring interest costs on his credit card balance. He did not however claim such interest costs, which is inconsistent with his claims of delayed reimbursement.
[84] Mr Single subsequently made arrangements to pay the fruit and vegetable supplier from Torbay Rest Home funds by instalment over a number of months.
Whangaripo Valley Road property
[85] In 2009, Mr Napier and his wife purchased a 20.8 hectare lifestyle block of land at Whangaripo Valley Road, Wellsford. They paid $475,000 for the land using a loan for that amount from the ASB Bank. This was a year after Mr Napier became a director of Torbay Holdings and Torbay Rest Home, having successfully completed a scheme of arrangement with his creditors.
[86] Mr Napier and his wife then decided to build a new 382 m² house on the property and lodged plans with the Auckland Council in November 2010. Building consent was granted in February 2011 and construction started shortly after that. The new house was completed within a year. A Code Compliance Certificate was issued by the Council in January 2012.
[87] The plaintiffs instructed a quantity surveyor to estimate what it would have cost in 2011 to have built the house specified in plans lodged with Council. Their cost estimate was $1,425,904.71 or approximately $3,700/m².
[88] Mr Napier disputes the cost estimate. He says that the house cost half the quantity surveyor’s estimate or approximately $700,000. He says that the Napier Family Trust borrowed a further $640,000 from the ASB Bank to complete the construction of the house, so that the funds injected by him and his wife personally were minimal.
[89] Mr Napier produced little documentation at trial in support of his claims. The most relevant was an estimate from the builder, CJS Builders, dated 10 December
2010, which gave a total estimate of $688,094.13. The estimate specifically stated that no allowance was made for tanks or pumps, kitchen, floor coverings other than tiles, exterior paving, door hardware, handles etc. Mr Napier also produced two other documents, an invoice from Metalcraft Roofing for $34,231.28, showing a different specification for the roofing material from that specified in the plans lodged with the Council and an invoice from a blocklayer for $8,734.25.
[90] Mr Napier spent some time going through the builder’s estimate explaining what had and had not been changed. However, it would have been a simple matter for Mr Napier to have produced his complete building file in order for the house cost to be more accurately calculated. He chose not to do so, which is consistent with his approach of resisting discovery and disclosing only the minimum documentation which would suit his purposes. In the discovery process, Mr Napier only disclosed invoices totalling about $457,000, which were mainly from the builder and Timberworld, the supplier through which the builder sourced most of his materials. Mr Napier did not call the builder to give evidence at trial.
[91] Mr Single has identified the following cheques as having been written out by Mr Napier on the bank accounts of Torbay Holdings and Torbay Rest Homes, which he says were obviously used to pay in part for the construction of his new house at Whangaripo Valley Road:
Date Cheque number Payee $ Amount 24/03/2011 106108 Timberworld 10,054.47 21/04/2011 100254 Timberworld 10,930.28 26/05/2011 106210 Carter Holt Harvey 5,161.08 03/06/2011 106236 CJS Builders 6,160.50 10/06/2011 106245 Northland Valuers 368.00 13/07/2011 106297 Carter Holt Harvey 1,758.14 17/08/2011 106359 Northland Valuers 345.00 23/08/2011 106366 Timberworld 2,780.31 14/09/2011 106399 Board & Batten 3,419.80 19/09/2011 106404 CJS Builders 4,400.00 19/09/2011 106405 Northland Valuers 345.00 03/10/2011 106435 Dominator Rodney 506.00 10/10/2011 106447 Matakana Kitchens & Joinery 2,132.40 17/10/2011 106476 Global Tile 1,239.77
25/10/2011 106490 Global Tile 844.80 26/10/2011 106495 Elite Window Solutions 246.11 04/11/2011 106512 Board & Batten 1,667.50 04/11/2011 106517 Malcolm Flowers Insurances 2,324.47 07/11/2011 106494 Crane Distribution 5,124.54 22/11/2011 106548 Timberworld 370.28 05/12/2011 106579 Town & Country Plumbing 3,374.23 12/12/2011 106587 CJS Builders 5,394.86 12/12/2011 106589 CJS Builders 381.96 19/12/2011 106603 CJS Builders 8,016.65 30/12/2011 106616 Timberworld 1,147.35 19/01/2012 106664 Auckland Council 155.00 24/01/2012 106670 Town & Country Plumbing 299.00 25/01/2012 106662 John Petersen 1,382.50 27/01/2012
106687
Kiwivac Central Vacuum
Systems
1,875.90
27/01/2012 106688 Sgraffito Picture Framers 1,297.00 31/01/2012 106689 Mason Contractors 671.60 31/01/2012 106690 CJS Builders 1,231.88 31/01/2012
106692
Insite Security & Investigation
Services
644.00
01/02/2012 106693 Kitchens by Mark Paterson 2,771.27 29/02/2012 106726 Timberworld 484.94 09/03/2012 106750 MPH Commercial Cleaning 435.00 14/03/2012 106755 MPH Commercial Cleaning 180.00 26/03/2012 106778 Malcolm Flowers Insurance 1,022.98 30/03/2012 106786 Living Architecture 517.50 12/04/2012 106797 Kitchens by Mark Paterson 5,123.25 18/04/2012 106806 Sequoya 1,484.06 24/04/2012 106818 Basically Floors 3,404.00 $101,473.38
[92] Mr Single identified two more cheques, payable to CJS Builders and S M Gravitt trading as Pakiri Builders, in April 2012 as being used to pay in part for the construction of the house at Whangaripo Valley Road, but Mr Napier was adamant that these payments were for work done at the rest home. I accept Mr Napier’s evidence on this point as the payments were made three months after Auckland Council issued a Code Compliance Certificate for the house.
[93] Mr Napier says that all these cheques were reimbursements to him for personally paying legitimate expenses of Torbay Rest Home. They amount to over
$100,000 in the 14 month period. These are in addition to the very large number of cash cheques or cheques made out to himself and/or his wife. Over the same period
(March 2011 to April 2012) cash cheques from Torbay Holdings and Torbay Rest Homes totalled $298,991.99, while cheques written out to himself and/or his wife totalled $104,750.15. These amount to over $500,000 or in excess of $8,400 per week. Mr Napier claims that these all represent legitimate rest home expenses which he has paid. His claim is just not credible. I accept that the $101,473.38 paid to third party suppliers using Torbay Holdings and Torbay Rest Homes cheques were payments for goods or services in relation to the construction of a new house on Mr and Mrs Napier’s property at Whangaripo Valley Road.
[94] Apart from the large number of cheques drawn on the account of Torbay Holdings and Torbay Rest Home and made payable to third parties involved in the construction of Mr and Mrs Napier’s new house at Whangaripo Valley Road, it is instructive to look more closely at Mr and Mrs Napier’s bank statements. As an example, on 6 October 2011 the balance of Mr and Mrs Napier’s joint bank account was $244.02. Four deposits totalling $10,766.70 were made on 11 and 12 October
2011. Then on 12 October 2011, a payment of $10,959.50 to CJS Builders was debited to the account. After the payment of $10,959.50 to CJS Builders, the balance of the account came back down to $101.22. The payment to CJS Builders had therefore, in effect, been funded by four deposits totalling $10,766.70 on 11 and
12 October 2011.
[95] The first deposit on 11 October 2011 was the sum of $3,980.50. On that day, Mr Napier had written two cash cheques on the account of Torbay Rest Home – one for $2,239.71 and the other for $1,740.81, together totalling $3,980.52. It appears that, having cashed the cheques, Mr Napier immediately deposited the same sum into the bank account of himself and his wife. As to the second deposit, Mr Napier arranged for the direct credit of the sum of $4,350 from the account of Torbay Rest Home into the bank account of himself and his wife, also on 11 October 2011. Mr Napier has coded the payment as wages even though the payment was outside the normal fortnightly payroll process. In fact, a further $3,653.95 was paid by direct credit from the account of Torbay Rest Home into the bank account of Mr Napier and his wife the very next day – 12 October 2011. This was also coded as wages, but was part of the normal fortnightly payroll process. This is in itself a
marked increase from the sum of $1,990.47 that Mr Napier had paid himself in the fortnightly payroll payment processed on 28 September 2011.
[96] The third and fourth deposits were the sums of $2,136.20 and $300 respectively, being a deposit and a transfer from another account of Mr and Mrs Napier on 12 October 2011. On that day, Mr Napier wrote another cash cheque drawn on the account of Torbay Rest Home for $2,486.15, $50 more than the sum of the two deposits. Mr Napier has not supplied copies of bank statements showing activity at the time on the account from which the $300 was transferred, but it can be inferred that the deposit of $2,136.20 was sourced from the cash cheque written out by Mr Napier on the same day.
[97] I am therefore of the view that of the payment of $10,959.50 to CJS Builders on 12 October 2011, $10,766.70 was directly funded by money sourced from Torbay Rest Home.
[98] As to the two cash cheques for $2,239.71 and $1,740.81 written out by Mr Napier on 11 October 2011, there does not appear to be any substantial purchases made by Mr Napier for the rest home on his personal credit card in the previous days which would warrant that level of reimbursement. Mr Napier’s purchases from
1 October 2011 are recorded as follows:
Date Payee $ Amount 01/10/2011 Gilmours North Shore 168.48 01/10/2011 Life Pharmacy Albany 83.95 01/10/2011 Warehouse Albany 74.20 01/10/2011 Amazon.uk 39.51 03/10/2011 New World Warkworth 69.81 02/10/2011 Amazon.uk 36.57 04/10/2011 New World Albany 11.38 05/10/2011 New World Warkworth 17.87 04/10/2011 Wilmot Motors 83.89 04/10/2011 Warehouse Albany 58.94 04/10/2011 Wilmot Motors 145.34 04/10/2011 Mobil Warkworth 26.93 06/10/2011 New World Warkworth 42.52 05/10/2011 PGG Wrightson Wellsford 49.90 05/10/2011 Pak N Save Albany 409.00 07/10/2011 New World Warkworth 99.84 06/10/2011 Lighting Direct Albany 1,508.84
08/10/2011 Matakana Motors 80.92 07/10/2011 NZTA - Tolling 50.00 07/10/2011 Warkworth Mitre 10 187.20 07/10/2011 Wilmot Motors 115.87 08/10/2011 AB Electrical Services 241.50 09/10/2011 New World Albany 100.53 10/10/2011 New World Warkworth 42.36 10/10/2011 Gilmours North Shore 148.87 09/10/2011 Lighting Direct 381.86 09/10/2011 Mitre 10 Mega Glenfield 19.27 10/10/2011 Gull Snells Beach 104.44 09/10/2011 Amazon Eu 44.71 11/10/2011 Matakana Store 12.03 11/10/2011 Amazon.uk 90.82
[99] Mr Napier acknowledged that the largest payment listed above, a purchase from Lighting Direct of $1,508.84 on 6 October 2011, was a personal expense relating to the construction of his new house at Whangaripo Valley Road, but unconvincingly claimed that a further purchase from Lighting Direct of $381.86 three days later, on 9 October 2011, was a rest home expense. Mr Napier also acknowledged that the purchases from Gilmours North Shore and New World Warkworth could be personal or a mixture of personal and rest home expenses. He claimed all expenditure at service stations was payable by Torbay Rest Home as part of his and his wife’s employment contracts.
[100] On the other hand, Mr Single acknowledged that the payment of $409.00 to Pak’n Save Albany on 5 October 2011 would have been a legitimate rest home expense, as would a proportion only of the petrol cost component of purchases from service stations dated 4 October (x 3), 7 October, 8 October and 10 October 2011.
[101] I have already rejected Mr Napier’s claim to be entitled to five per cent commission on the sale of all rest home units. The payment of $4,350 coded as wages on 11 October 2011 was therefore irregular, being outside the normal fortnightly payroll process and cannot be justified on any level. It was clearly an unauthorised payment.
[102] As to the cash cheque for $2,486.15 written out by Mr Napier on 12 October
2011, part of the sum appears to be justified as reimbursement of legitimate rest
home expenses, because on the same day Mr Napier used his credit card to purchase meat to the value of $985.96 from the Browns Bay Butchery. Mr Napier’s purchases
on 12 October 2011 are recorded as follows:
Date Payee $ Amount 12/10/2011 New World Warkworth 63.53 12/10/2011 Browns Bay Butchery 800.00 12/10/2011 Browns Bay Butchery 185.96 12/10/2011 Platter Auckland 132.00 12/10/2011 Wine Box Café North Shore 40.00 12/10/2011 Village Bookshop Matakana 80.00 12/10/2011 Shell Northcross 122.38 12/10/2011 Shell Greville Road 72.46 12/10/2011 Shell Greville Road 13.00
[103] Mr Napier claimed that the three separate purchases at Shell Northcross and Shell Greville Road on 12 October 2011 were payable by Torbay Rest Home as part of his and his wife’s employment contracts. He also claimed that the expenditure at the Wine Box Café was a rest home expense, could not remember the Platter expense, but acknowledged that the purchases at New World Warkworth and the Village Bookshop on 12 October 2011 were personal expenses.
[104] I have recorded above that Mr Napier wrote out cash cheques for $2,239.71 and $1,740.81 on 11 October 2011 and $2,486.15 on 12 October 2011, which together with a wages payment of $4,350 on 11 October 2011, in effect, funded a payment to CJS Builders of $10,959.50 on 12 October 2011. However, he also wrote out cash cheques for:
(a) $600 on 5 October 2011;
(b) $1,969.00, $1,654.00 and $1,171.50 on 6 October 2011; (c) $1,971.60 and $1,869.50 on 7 October 2011; and
(d) $1,731.45 on 10 October 2011.
[105] Mr Napier also paid Dominator Rodney Limited $506.00 on 3 October 2011 and Matakana Kitchens and Joinery Limited $2,132.40 on 10 October 2011. Those
cheques were drawn on the account of Torbay Rest Home, as was a cheque made out to himself on 7 October 2011 in the sum of $1,260.00.
[106] Comprehensive evidence matching cash cheques with payments into the bank account of Mr and Mrs Napier has not been provided. Despite this, the analysis above highlights an example of a payment relating to the construction of Mr and Mrs Napier’s new house at Whangaripo Valley Road which was funded by money from Torbay Rest Home. I have found that $101,473.38 was paid directly to third party suppliers of goods and services relating to the construction of the new house at Whangaripo Valley Road using Torbay Holdings and Torbay Rest Homes cheques, and that a payment of at least $10,766.70 to the builder of the new house was sourced from cash deposits into the bank account of Mr and Mrs Napier.
Indebtedness of Mr and Mrs Napier and Napier Family Trust
[107] By the end of 2011, Mr and Mrs Napier and the Napier Family Trust had substantial debt levels. It is also obvious that Mr Napier and his wife were living well beyond their means. For instance in the month of December 2011, the Napier Family Trust made loan repayments of principal and interest totalling $10,399.80, while Mr and Mrs Napier made loan repayments of $4,500. Mr Napier and his wife also had three credit cards right at their credit limits, with one at $30,000 and two at
$21,300, in respect of which they paid interest of $1,175.94. In total, therefore, Mr and Mrs Napier and the Napier Family Trust paid $16,075.74 in respect of their various loans in December 2011 alone.
[108] Mr and Mrs Napier’s combined annual income at the time, according to their employment agreements with Torbay Rest Home, was $101,500 or a gross monthly income before tax of $8,458. In other words, Mr and Mrs Napier paid twice their gross monthly income in repayments of principal and interest in December 2011. However, as recorded above, Mr Napier overpaid his own and his wife’s salary. In December 2011, he paid himself and his wife and the Napier Family Trust a net
$12,575.91 after tax. But even that was insufficient to meet the repayments of principal and interest on their various loans in December 2011.
[109] Mrs Napier’s bank statement for the month of December 2011 is unavailable, but when she was teaching at UNITEC she received a net income of approximately
$1,500 a month. It is not known whether she received that sum in December 2011.
[110] In the month of December 2011, as identified above, Mr Napier also wrote out a number of cheques drawn on the Torbay Rest Home account, payable to suppliers of goods or services relating to the construction of his new house at Whangaripo Valley Road. These totalled $18,315.05.
[111] Mr Napier also wrote out 20 cash cheques as follows in December 2011:
Date Cheque number Payee $ Amount 01/12/2011 106561 Cash 274.08 01/12/2011 106580 Cash 182.25 06/12/2011 106583 Cash 2,840.68 06/12/2011 106584 Cash 3,195.90 06/12/2011 106585 Cash 3,690.50 06/12/2011 106586 Cash 4,289.70 12/12/2011 106588 Cash 600.00 13/12/2011 - Cash 604.95 15/12/2011 106593 Cash 1,949.78 15/12/2011 106594 Cash 2,478.60 15/12/2011 106595 Cash 3,951.89 16/12/2011 106598 Cash 2,130.58 19/12/2011 106599 Cash 1,804.66 21/12/2011 106606 Cash 3,169.70 21/12/2011 106607 Cash 2,496.69 21/12/2011 106609 Cash 1,050.00 23/12/2011 106610 Cash 900.00 29/12/2011 106612 Cash 4,430.98 29/12/2011 106613 Cash 600.00 30/12/2011 106615 Cash 1,794.23 $42,435.17
[112] As noted, Mr and Mrs Napier and the Napier Family Trust had substantial loans with the ASB Bank. On 15 December 2011, the Napier Family Trust’s bank account was due to be debited with repayments of principal and interest totalling
$3,466.60 in respect of five different loans, numbered 01, 02, 03, 06 and 07. The Trust’s account balance, however, stood at $42.39. Mr Napier therefore deposited the sum of $3,951.90 into the account on 15 December 2011. I infer that this was the cash cheque listed above in the sum of $3,951.89 drawn on the account of Torbay
Rest Home and cashed by Mr Napier on 15 December 2011. Also on the same day, Mr Napier arranged for a deposit of $300 into the account from Torbay Holdings. Then on 17 December 2011, Mr Napier arranged for a payment of $800 to his wife’s ASB Visa credit card, which was at its credit limit of $30,000. Once that payment was made the balance of the Napier Family Trust account came back down to
$27.69.
[113] A similar sequence of events occurred when substantial repayments of principal and interest were due on 29 December 2011. On 29 December 2011 the balance of the account was $27.69. On that day Mr Napier deposited the sum of
$4,000, having cashed a cheque in the sum of $4,430.98 drawn on the account of Torbay Rest Home on the same day. Again, I infer the deposit came from the cash cheque.
[114] In addition to the 20 cash cheques listed above, Mr Napier also wrote out the following cheques drawn on the Torbay Rest Home account, either to himself and to
himself and his wife, in December 2011:
Date Cheque number Payee $ Amount 12/12/2011 106577 DJ & SA Napier 670.12 19/12/2011 106601 DJ Napier 1,155.96 19/12/2011 106602 DJ Napier 834.00 23/12/2011 106611 DJ & SA Napier 2,357.60 29/12/2011 106591 D Napier 509.45 $5,527.13
Misappropriation of company funds
[115] Coming to the key issue in this case, drawing on the close analysis I have done of the transactions above, I have no doubt that Mr Napier has misappropriated company funds to which he was not entitled. The following factors have all contributed to my conclusion:
(a) Mr Napier cashed a large number of cheques totalling $509,341.62, which are now impossible to trace or reconcile.
(b)If cash cheques were used by Mr Napier as reimbursements for rest home expenses, there would be no need to write out separate cash cheques all on the same day, and cash them separately. If these were for reimbursement, it would make more sense to total them and write one cheque.
(c) The number and amount of cheques cashed, made payable to Mr Napier or Mr Napier and his wife, and made payable to third parties increased substantially when Mr and Mrs Napier were building their new house at Whangaripo Valley Road. The increase in cash
cheques alone was as follows:
Year $ Amount 2006 1,200.00 2007 29,236.10 2008 22,375.00 2009 59,340.50 2010 77,046.51 2011 215,359.44 2012 (four months only) 103,579.07
Mr Napier says that the reimbursement process remained the same since the rest home was bought in 2001. The substantial increase in cash cheques suggests otherwise.
(d)The debts of Mr and Mrs Napier and the Napier Family Trust were unsustainable on the legitimate income earned by Mr and Mrs Napier from Torbay Rest Home.
(e) False coding was used in the MYOB accounts. For example, in a reconciliation report of 19 December 2011, Mr Napier coded a cheque, dated 19 December 2011 for $8,016.65 made payable to CJS Builders (the builders who were constructing his new house at Whangaripo Valley Road) as a payment to a fruit and vegetable supplier. If it was a reimbursement of company expenses, it should have been coded as such. In the same reconciliation report, two other cheques dated the same day for $1,155.96 and $834.00 made payable
to D Napier were also coded as payment to a fruit and vegetable supplier. Another example is a cash cheque for $381.96 dated
9 December 2011 coded to a meat supplier, but traced to the bank account of CJS Builders.
(f) Mr Napier’s claim that he was entitled to commission on the sale of rest home units is rejected. There is no evidence whatsoever to support it.
(g)The considerable variation and substantially increased amounts paid to Mr and Mrs Napier and the Napier Family Trust, coded by Mr Napier as salaries, are not consistent with proper regular and consistent salary payments.
(h)The mixing of personal and rest home expenses on Mr Napier’s personal credit card has made the reconciliation of expenses impossible. Mr Napier acknowledges that some purchases shown on his credit card statement, such as from New World Warkworth may have included purchases of food for his family as well as the rest home. An honest administration manager would have made every effort to separate out personal and business expenses.
(i)Mr Napier was very obstructive at the first meeting with Mr Single and his wife following the notification from the IRD in April 2012. Mr Napier refused to allow Mr Single to look at the company accounts on the computer or to take it away to be inspected. Mr Napier deliberately dropped company bank statements on the floor and shuffled them up with his hands. Mr Napier said he could not find other records. He blamed his predicament on the accounting software package, MYOB.
(j)Mr Napier has continued to be obstructive throughout the discovery process. In evidence, he acknowledged going to the rest home in June
2012 and removing box files of receipts, but says he left the all-
important reconciliation schedules behind. This is inconsistent with his claim in the brief of evidence he read to the Court, in which he said the folders containing the reconciliation schedules were handed to Mr Single. He claims that the plaintiffs must now be in possession of them and have failed to disclose them. I reject that claim. The plaintiffs would have disclosed them if they had them.
[116] Mr Napier was able to conceal the misappropriation of the companies’ funds for many years, initially by withdrawing money which would otherwise have been company profit. He also used a $130,000 loan facility, obtained from the bank to buy back a rest home unit, a purchase which did not proceed. Then Mr Napier curtailed legitimate rest home expenses. No wage increases were given to staff and maintenance was deferred. In the latter stages of the misappropriation, suppliers such as the fruit and vegetable supplier were not paid or were paid late, and tax payments were not made. It was the non-payment of substantial amounts of tax which finally lead to the misappropriation being exposed.
Quantum of losses
[117] Having determined that Mr Napier has misappropriated company funds to which he was not entitled, the issue then arises as to how to assess the quantum of the losses to Torbay Holdings and Torbay Rest Home. This assessment is separate from the calculation of salary overpayments.1
[118] In Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd the plaintiff sought to recover money which had been paid to a company (TPL) on trust, where that money had been paid into another company (VTFL) and mixed with VTFL’s money, whose accounts were such a “black hole” and a “maelstrom” that the money was indistinguishable. The Master of the Rolls, Lord Neuberger of Abbotsbury MR (with whose judgment Richards and Hughes LJJ concurred) set out the traditional
law in such cases as follows:2
1 See [52].
2 Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2011] 3 WLR 1153.
138. … I do not doubt the general principle, reiterated by Lord Millett in Foskett [2001] 1 AC 102, that, if a proprietary claim is to be made good by tracing, there must be a clear link between the claimant's funds and the asset or money into which he seeks to trace. However, I do not see why this should mean that a proprietary claim is lost simply because the defaulting fiduciary, while still holding much of the money, has acted particularly dishonestly or cunningly by creating a maelstrom. Where he has mixed the funds held on trust with his own funds, the onus should be on the fiduciary to establish that part, and what part, of the mixed fund is his property. Unless constrained by authority, I should therefore be very reluctant to accede to the defendants' case on this point. In fact, it seems to me that authority actually supports my view.
139. In Cook v Addison (1869) LR 7 Eq 466, 470 Stuart V-C said this:
"It is a well-established doctrine in this court, that if a trustee or agent mixes and confuses the property which he holds in a fiduciary character with his own property, so as that they cannot be separated with perfect accuracy, he is liable for the whole."
Ungoed-Thomas J considered and applied this principle in Re Tilley's Will
Trusts [1967] Ch 1179, saying this:
"The words in that passage 'so as that they cannot be separated with perfect accuracy' are an essential part of the Vice- Chancellor's proposition, and indeed of the principle of Lupton v. White. If a trustee mixes trust assets with his own, the onus is on the trustee to distinguish the separate assets, and to the extent that he fails to do so they belong to the trust."
…
141. It seems to me to follow from this that both principle and authority establish that, as Lewison J concluded, once it is shown that money held on trust for TPL was paid into a "maelstrom" account, the administrative receivers, representing VTFL for this purpose, bear the burden of showing that money in that account is not that of TPL. Both legal principle and fairness to other creditors of the defaulting fiduciary suggest that the extent of that burden should not be other than the normal civil standard of proof, namely the balance of probabilities. So, if, after considering the evidence, the court concludes that it is more probable than not that a particular sum of money held in the name of in VTFL is not attributable to any of the funds held by VTFL on trust for TPL or its identifiable substitute, then the court should refuse any tracing remedy in respect of such money.
additional amounts payable to the IRD by way of interest on the unpaid core tax and
71 Republic of Brazil v Durant, above n 67, at [40].
72 Shannon Agricultural Consulting (in liq) v Shannon [2015] NZHC 1133.
the cost of negotiating and dealing with the IRD to assess the amounts involved and remedying the situation.
[234] Counsel relies on Pounamu Properties Ltd v Brons, in which Duffy J found that Pounamu’s manager and a gratuitous agent, Mr Brons, was liable to Pounamu for loss caused by carelessly and incompetently preparing and furnishing Pounamu’s GST and income tax returns.73 Mr Brons was the only person in New Zealand who was responsible for managing the company’s affairs as the sole director was overseas. This created the requisite proximity to impose a duty of care. No policy
reasons militated against the imposition of tortious liability. Duffy J stated:
[222] … I consider that Mr Brons was under a duty to recognise the limitations of his abilities and to act only when he could do so competently, and to advise Pounamu when he lacked the requisite competency. …
[223] … If Mr Brons could not competently deal with the tax affairs of Pounamu, I consider he was under a duty to Pounamu to make that clear from the outset. I consider that by assuming the burden of preparing and furnishing tax returns on Pounamu's behalf, he was undertaking to perform this task adequately. …
[235] In Pounamu, a duty of care seems to have been necessary to secure liability for not adequately preparing tax returns because Mr Brons, although the only New Zealand manager and under fiduciary duties to Pounamu, was not a director. Directors such as Mr Napier are clearly liable under their Companies Act duties for failing to pay IRD debts and submit IRD returns.74 However, breach of a Companies Act duty has not been pleaded here.
[236] In most cases in which a director takes on the responsibility of performing the company’s tax obligations, such as paying tax and organising the necessary tax compliance forms, the Companies Act duties will be sufficient to found liability. The duty of care found by Duffy J supplements that statutorily recognised duty in relation to managers in a fiduciary position who undertake to perform a company’s tax
obligations.
73 Pounamu Properties Ltd v Brons [2012] NZHC 590.
74 McGreal Floor Coverings Ltd (in liq) v McGreal [2014] NZHC 2884; Boutique Tanneries Ltd
(in liquidation) v Handley HC Auckland CIV-2006-404-2713, 24 July 2008.
[237] In this case, Mr Napier was both Torbay Holdings and Torbay Rest Home’s administration manager from the outset and additionally a director from 2008, with a responsibility over the payroll and tax. He undertook to perform those tasks and had a duty to the companies to notify the other directors if he was unable to do so, given the seriousness of the consequences for the Torbay companies. I am of the view that Mr Napier breached his duty of care to Torbay Holdings and Torbay Rest Home to ensure that the companies meet their tax obligations if he could do so competently, and to advise the other Torbay directors where that was not possible.
[238] As to alleged losses, Torbay Holdings and Torbay Rest Home did not lead any evidence of additional tax obligations accruing to the companies in relation to the salary overpayments. Nor did they lead evidence of the cost of negotiating and dealing with the Inland Revenue Department to assess the amounts involved and remedy the situation. The companies’ accountant, Mr Williams, estimated the additional amounts paid to the Inland Revenue Department by way of interest were between $18,000 and $20,000. I therefore find Mr Napier liable under this cause of action for the lesser amount of $18,000.
Counterclaim
[239] The defendants’ responses to the plaintiffs’ claims above was to deny any impropriety, and claim that all payments were either legitimate rest home expenses or reimbursement of payments made on behalf of Torbay Rest Home. In addition, the defendants counterclaim for $35,847.72, which they say is further expenditure which they are owed, as well as an unquantified sum for unpaid wages and
$15,708.10 for unpaid holiday pay. The defendants also claim another $212,345, as the current account balance apparently owing to the Napier Family Trust, and another $200 apparently owing to Mr Napier, according to the financial statements of Torbay Holdings.
[240] Finally, the defendants claim $66,300 (net), being an advance to Torbay Rest
Home from the Napier Family Trust.
[241] As to the sum of $35,847.72, which the defendants say is expenditure for which they are awaiting reimbursement, Mr Napier did not make any reference to
expenditure awaiting reimbursement in his brief of evidence, nor did he produce any documentation relating to the sum of $35,847.72. The defendants’ claim to this sum is therefore dismissed as unproven. The same applies to the claims for unpaid wages and holiday pay. These are also dismissed as unproven.
[242] The sum of $212,345, which the defendants say is the current account balance owing to the Napier Family Trust shown in the financial statements of Torbay Holdings, consists of an initial contribution by the Trust together with accrued interest and a fully imputed dividend declared to shareholders in the year ended 31 March 2008. The Trust’s initial contribution to the purchase of the business was largely funded by a bank loan. Although the plaintiffs say that the bank loan was only able to be repaid because of unauthorised payments from Torbay Holdings and Torbay Rest Home, the fact is no specific proof of this has been adduced, that the initial contribution was not made with any unauthorised payments from the companies, and no unauthorised payments have been used to subsequently increase the current account balance. The plaintiffs in their closing submissions conceded that, based on the books of account, this should be paid to the Trust. In those circumstances, the Trust is entitled to payment of its current account balance, it having sought and been refused payment. The sum of $212,345.00 can be offset against the sums I have found the Trust owes to Torbay Holdings and Torbay Rest Homes.
[243] The sum of $200 is also shown in the financial statements of Torbay Holdings as owing to Mr Napier. The plaintiffs say that the sum of $200 is a nominal credit balance in favour of Mr Napier brought about by the unauthorised payment of funds from Torbay Rest Home to Torbay Holdings to extinguish a debt of
$11,000, which he owed and still owed. I have, however, reached the view that Mr Napier is liable for 70 per cent of the suspect payments identified by Mr Single. In those circumstances, it is important not to double count Mr Napier’s liability and accordingly Mr Napier is entitled to payment of the sum of $200.
[244] Finally, the claim for $66,300, which is said to be an advance by the Napier Family Trust to Torbay Rest Home, arose out of Mr Napier’s failure to pay the companies’ tax obligations. An agreement was reached very soon after the problem
with the IRD became apparent between Mr Single, on behalf of the Single Family Trust, and Mr Napier, on behalf of the Napier Family Trust. It was agreed that the Single Family Trust would purchase the shares owned by the Napier Family Trust in Secret Squirrel Investments for the sum of $72,500. It was also agreed that the funds would be paid to the IRD to pay the arrears of PAYE and GST owing by Torbay Holdings and Torbay Rest Home as an advance to the companies on the following terms:
(a) Interest rate zero; and
(b)Term repayable upon sale of business currently in progress subject to abatement for penalties to be levied by IRD.
[245] The financial statements of Torbay Rest Home disclosed a current asset in the sum of $6,200 in the name of the Napier Family Trust so the net amount of the advance is $66,300, which is the amount specified in the counterclaim.
[246] Mr Napier submits that the word penalties in the agreement, signed on
20 April 2012, should not include use of money interest charged by the IRD. However, it is my view that the proper interpretation of the agreement, being the presumed common intention of the parties, is that the word penalties includes any sum of money charged by the IRD as a consequence of the failure to file tax returns and/or pay the assessed tax on time. There is no logical reason why the parties to the agreement should distinguish interest from standard penalties for non-filing of returns or from variable penalties for non-payment of assessed amounts.
[247] In any event, it was clearly the intention of the parties that the advance would not be payable until the business was sold. It has not been sold yet so the advance is not repayable. The defendant’s counter-claim for $66,300 is therefore dismissed.
Claim by Napier Family Trust against Sandspit Bay Holdings
[248] In the second claim heard in this trial (CIV-2013-404-001406), the Napier
Family Trust claims that on or about 20 January 2009, it advanced the sum of
$70,000 by way of loan to Sandspit Bay Holdings. The terms of the loan advanced
were recorded in a written Deed of Acknowledgement of Debt dated 20 January
2009. The loan advance of $70,000 was to remain outstanding as a debt, repayable by Sandspit Bay Holdings to the Trust on demand. There was also provision for the payment of interest on the debt. Finally, the debt was to include any further advances which may be made by the Trust to Sandspit Bay Holdings after the date of the deed.
[249] The Trust claims that between 20 January 2009 and 31 March 2012, it advanced additional amounts to Sandspit Bay Holdings which were recorded in the shareholders’ current account balances contained in the annual financial statements prepared by Sandspit Bay Holdings. As at 31 March 2012, the balance of the loan recorded in the shareholders’ current accounts was the sum of $96,479.00. Despite formal written demand, Sandspit Bay Holdings has failed to pay any sum to the Trust in breach of the loan agreement.
[250] Sandspit Bay Holdings admits that the Trust paid $70,000 to it between
6 December 2008 and 15 January 2009, but claims that the sums advanced were not the Trust’s money and no debt was therefore owed to the Trust. It says any funds advanced were illegitimately received from Torbay Holdings or Torbay Rest Home. Sandspit Bay Holdings also claims that execution of the Deed of Acknowledgement of Debt was obtained as a result of the Trust’s deception and the agreement is unenforceable.
[251] Sandspit Bay Holdings also admits the receipt of further funds from the Trust,
such that the current account balance in Sandspit Bay Holdings’ books as at
31 March 2012 was $96,479, but claims that no money is owing to the Trust because any credit balance in the shareholder’s current account is not beneficially held for the Trust or otherwise payable to it. Sandspit Bay Holdings claims that any such funds are impressed with a trust in favour of the Torbay companies. Finally, it claims it would be contrary to public policy to enable the Trust to recover such funds.
[252] The following advances are able to be identified:
Date Recipient $ Amount Mode of Payment 28/04/2008
Sellar Bone for credit Sandspit
Bay Holdings19,000.00
Cheque (drawer
Napier Family
Trust)
28/04/2008
Sellar Bone for credit Sandspit
Bay Holdings
22,666.67
Cheque (drawer DJ
& SA Napier)
04/06/2008 Sandspit Bay Holdings 2,085.22 Deposit 28/08/2008 Sandspit Bay Holdings 16,667.00 Deposit 03/11/2008 Sandspit Bay Holdings 188.77 A/P 01/12/2008 Sandspit Bay Holdings 10,000.00 Deposit 01/12/2008 Sandspit Bay Holdings 188.77 A/P 05/01/2009 Sandspit Bay Holdings 188.77 A/P 15/01/2009
Sellar Bone for credit Sandspit
Bay Holdings
40,000.00
ASB bank cheque
15/01/2009
Sellar Bone for credit Sandspit
Bay Holdings
20,000.00
Westpac bank
cheque
02/02/2009 Sandspit Bay Holdings 188.77 A/P 25/02/2009 Sandspit Bay Holdings 1,013.65 Deposit 02/03/2009 Sandspit Bay Holdings 188.77 A/P 23/03/2009 Sandspit Bay Holdings 1,050.00 Deposit 25/03/2009 Sandspit Bay Holdings 2,719.30 Deposit 01/04/2009 Sandspit Bay Holdings 188.77 A/P 27/04/2009 Sandspit Bay Holdings 4,000.00 Deposit 08/06/2009 Sandspit Bay Holdings 5,900.00 Deposit 10/06/2009 Sandspit Bay Holdings 855.00 Deposit 28/07/2009 Sandspit Bay Holdings 3,250.00 Deposit 18/08/2009 Sandspit Bay Holdings 3,000.00 Deposit 16/10/2009 Sandspit Bay Holdings 2,900.00 Deposit $156,239.46
[253] The financial statements of Sandspit Bay Holdings for the year ended
31 March 2012 show the opening balance of the Napier Family Trust’s current account as at 31 March 2011 was $156,267, which represents the above advances plus a cheque clearance fee of $25 and some rounding of the payments. The Trust’s current account as at 31 March 2012 shows drawings of $59,788, which when subtracted from the figure of $156,267 leaves a closing balance of $96,479. This is the figure claimed by the Trust in this claim.
[254] Mr Single explained that the drawings were a book entry only and not a cash payment. All the shareholder current accounts were treated the same way. Sandspit Bay Holdings had an investment in Secret Squirrel Investments. In the year ended
31 March 2012, it was decided for tax reasons to transfer the investment in Secret Squirrel Investments from Sandspit Bay Holdings itself to the individual shareholders of Sandspit Bay Holdings personally. The drawings reflected that change of ownership.
[255] There were, therefore, 22 separate advances made by the Napier Family Trust to Sandspit Bay Holdings over approximately 18 months. Three of these advances were in the form of cheques written by Mr Napier on the Torbay Holdings bank
account:
Date Payee $ Amount 28/07/2009 Sandspit Bay Holdings 2,500.00 18/08/2009 Sandspit Bay Holdings 3,000.00 16/10/2009 Cash 2,900.00
[256] The first cheque for $2,500 was deposited with cash of $750 to make up the deposit of $3,250 shown in the list of 22 advances above. The additional cash sum disguises the cheque amount, as only the total deposit sum appeared on the Sandspit Bay Holdings bank statement. Mr Napier claims that all three cheques are for reimbursement of legitimate expenses he paid on behalf of Torbay Holdings or Torbay Rest Home. He cannot, however, identify which particular expenses in respect of which the cheques are in reimbursement.
[257] The Trust’s claim is in substance similar to the cross-claim brought by the Trust against Torbay Holdings for an order that the Trust’s current account in the sum of $212,354 be repaid. This advance was also made possible by borrowing funds which were allegedly substantially paid off using misappropriated funds from the Torbay companies. Counsel for the Torbay companies conceded in closing submissions that the debt of $212,345 owing to the Trust was payable in that claim. The distinction between the obligation to pay that debt, and the debt in this case, is not entirely clear.
[258] Because of the intermingling of Mr Napier’s legitimate income and unauthorised payments, it is impossible to identify which advances are from legitimate income and which are from unauthorised payments. Mr Single claims that
Mr Napier and his wife were plainly unable to afford to make such advances without access to funds unlawfully taken from Torbay Holdings and Torbay Rest Home.
[259] Apart from the overpayment of salaries for Mr Napier and his wife over this period, Mr Single points to suspect payments to Mr Napier and/or his wife totalling
$249,341.56 and cash cheques totalling $62,531.10 over the same period. I have earlier found that 70 per cent of such payments cannot be justified, or in the case of this 18 month period, $218,310.86. This level of unauthorised payments was therefore sufficient to fund all the advances made by the Napier Family Trust to Sandspit Bay Holdings over this period of $156,239.46. However, although the transfers to Sandspit Bay Holdings from the Trust have been identified, no payments into the Trust’s account have been identified as corresponding to the transfers out.
[260] Further, unlike the cross-claim, the result of a finding that the money used to fund advances to Sandspit Bay Holdings was beneficially owned by Torbay Holdings and Torbay Rest Home would not be to allow Sandspit Bay Holdings to retain the cash advanced. Instead, it would lead to a finding that the proportion of the advance attributable to the Torbay companies was held on a constructive trust for them. A constructive trust has not been pleaded. Beneficial ownership by the Torbay companies does not remove the obligation on Sandspit Bay Holdings to account to the Napier Family Trust for money owed to it.
[261] Sandspit Bay Holdings did not elaborate on the defences it offered to the claim, other than to say that the requirement to account would be unjust. However, no legal basis was provided which would allow the money owing to the Napier Family Trust to be wiped. Again, it is important not to double count Mr Napier’s liability. In those circumstances, where it is clear that a debt is owing, I am obliged to find that Sandspit Bay Holdings must account to the Napier Family Trust for the sum of $96,479. This is consistent with the finding against Torbay Holdings in the first claim.
Result
[262] Mr Napier is personally liable for the portion of the salary overpayment that he received, being $242,349.65, and the total unauthorised payments of
$1,159,201.55, making a grand total of $1,401,551.20 for money had and received, to which $18,000 is to be added as damages for negligence in failing to complete and file tax returns for the plaintiffs. Finally, the sum of $200 is to be deducted for money shown as owing to Mr Napier in the financial statements of Torbay Holdings. There will accordingly be judgment against Mr Napier in favour of Torbay Holdings and Torbay Rest Home in the sum of $1,419,351.20. Although this judgment is given on the claim for money had and received, Mr Napier is also liable for breach of his director’s duties and associated fiduciary duties as well as knowing receipt of monies misappropriated from Torbay Holdings and Torbay Rest Home.
[263] Mrs Napier is personally liable for the total salary overpayments of
$281,087.01, and that portion of the unauthorised payments she received being
$439,223.52, making a grand total of $720,310.53 for money had and received. There will accordingly be judgment against Mrs Napier in favour of Torbay Holdings and Torbay Rest Home in the sum of $720,310.53. This judgment is only given on the claim for money had and received. Mrs Napier is not liable for breach of her director’s duties and associated fiduciary duties, nor is she liable for knowing receipt of monies misappropriated from Torbay Holdings and Torbay Rest Home.
[264] Mr and Mrs Napier and Mr Davis, as second defendants, are liable as trustees of the Napier Family Trust for the total salary overpayments of $281,087.01 and that portion of the unauthorised payments the trustees received, being $9,176.70 traced payments and $17,816.37 cash deposits, making a grand total of $308,080.08 for money had and received. The sum of $212,345.00 is to be deducted for money shown as owing to the Napier Family Trust in the financial statements of Torbay Holdings. There will accordingly be judgment against Mr and Mrs Napier and Mr Davis as trustees of the Napier Family Trust in favour of Torbay Holdings and Torbay Rest Home in the sum of $95,735.08. Although this judgment is given on the claim for money had and received, the trustees of the Napier Family Trust are also liable for knowing receipt of monies misappropriated from Torbay Holdings and Torbay Rest Home because Mr Napier’s knowledge is imputed to the Trust.
[265] Although I have given individual judgments against Mr and Mrs Napier and the Napier Family Trust, which in total amounts to $2,235,396.81 (because of the
joint receipt of money by Mr and Mrs Napier), Torbay Holdings and Torbay Rest Home are only entitled to recover up to the maximum sum of $1,458,288.56, being the total of the salary overpayments $281,087.01, the unauthorised payments of
$1,159,201.55 (70 per cent of the identified suspect payments) and $18,000 damages
for Mr Napier’s negligence.
[266] In addition, I declare that the property owned by Mr and Mrs Napier at Whangaripo Valley Road, Wellsford (Identifier 388817 North Auckland; Prior reference NA 107B/811; 20.8150 hectares being Lot 1 Deposited Plan 397416) is held on constructive trust for Torbay Holdings and Torbay Rest Home to the value of
$233,066.68. This declaration will give a means to Torbay Holdings and Torbay
Rest Home to enforce the judgment in their favour against both Mr and Mrs Napier.
[267] The cross claim against Torbay Holdings and Torbay Rest Home is allowed in part. Torbay Holdings owes $200 to Mr Napier and $212,345 to the Napier Family Trust, which sums have been deducted from money owing by Mr Napier and the Napier Family Trust to Torbay Holdings and Torbay Rest Home.
[268] In the second proceeding, the claim by the Napier Family Trust against Sandspit Bay Holdings is allowed. There will accordingly be judgment against Sandspit Bay Holdings in favour of the Napier Family Trust in the sum of
$96,479.00.
[269] Finally, as to costs, Torbay Holdings and Torbay Rest Home are entitled to costs on CIV 2012-404-007660, while the Napier Family Trust is entitled to costs on CIV 2013-404-001406. If the parties are unable to agree on costs, memoranda should be filed within 28 days of the date of this judgment.
……………………………….
Woolford J
23
3
1