Vance v Vey Group Ltd (in liq and rec)
[2022] NZHC 75
•2 February 2022
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
I TE KŌTI MATUA O AOTEAROA TE PAPAIOEA ROHE
CIV 2018-485-505
[2022] NZHC 75
UNDER the Companies Act 1993 and the Receiverships Act 1993 IN THE MATTER OF
Vey Group Limited (in receivership and liquidation)
BETWEEN
DAVID VANCE and IAN MILLARD
Plaintiffs
AND
VEY GROUP LIMITED (IN LIQUIDATION AND RECEIVERSHIP)
First Defendant
LESLIE WILLIAM FUGLE
Second DefendantCOMMISSIONER OF INLAND REVENUE
Third Defendant
Hearing: 2 and 3 September 2021 via VMR Counsel:
R L Roff for Plaintiff
R L Pinny for Liquidators of First Defendant
F E Geiringer and J K Mahuta-Coyle for Second Defendant (interlocutory applicant)
K I S Naik-Leong for Third Defendant
Judgment:
2 February 2022
JUDGMENT OF MALLON J
Table of contents
Introduction [1]
Review of Orana debt [2]
Background [2]
VANCE v VEY GROUP LIMITED (IN LIQUIDATION AND RECEIVERSHIP) [2022] NZHC 75 [2 February 2022]
Grounds for challenge [10]
Review standard [11]
Liquidators’ decision [16]
Documentation [25]
Nature of the transactions [30]
Limitation [46]
Conclusion [64]
Application to terminate liquidation [65]
Application for approval of share transfer [69]
Result [71]
Introduction
[1] Vey Group Limited (Vey) was initially placed into receivership, then into liquidation, following a successful application made by the trustees of the Orana Trust (Orana) that Vey, through Mr Fugle, was being conducted in a manner that was oppressive, unfairly discriminatory and unfairly prejudicial to Orana as minority shareholders.1 Mr Fugle now applies to the Court to review the liquidators’ decision to admit a debt claimed by Orana in the liquidation.2 If that application is successful, he also applies for an order terminating the liquidation of Vey.3 Lastly, he applies for an order authorising the transfer of legal title to 49 shares in Vey from the trustees of Orana to Mr Fugle.4
Review of Orana debt
Background
[2] Orana brought an application under s 174 of the Companies Act seeking relief from the unfairly oppressive, unfairly discriminatory and unfairly prejudicial conduct of Mr Fugle. At that time, he was the sole director of Vey and was in a position to
1 Companies Act 1993, s 174; Vance v Vey Group Ltd [2018] NZHC 1994; Vance v Vey Group Ltd [2019] NZHC 1676, [2020] NZCCLR 5 [Vance v Vey Group Ltd (HC, 2019)] at [66]–[72]; Vey Group Ltd v Vance [2020] NZCA 232, [2020] NZCCLR 24 [Vey Group Ltd v Vance (CA, 2020)] at [36], [61] and [68]–[69]; and Vance v Vey Group Ltd [2020] NZHC 2592 [Vance v Vey Group Ltd (HC, 2020)].
2 Companies Act, s 284(1)(b). Leave was earlier granted by the Court: Vance v Vey Group Ltd HC Palmerston North CIV-2018-485-505, 12 April 2021, Minute of Thomas J.
3 Section 250.
4 Section 248.
control it. There were a range of issues in the conduct of Vey of concern to Orana. One of them was a dispute between Orana and Mr Fugle over a debt claimed by Orana against Vey.
[3]A demand for that debt was initially made on 25 June 2018 in the sum of
$1,334,334 and the demand was accompanied by the documentation that Orana relied on in support of that claim. Mr Fugle denied there was any such debt. The dispute over the validity of the debt meant that Mr Fugle and Vey could not agree on the price at which Mr Fugle could buy Orana’s shareholding. And unless Orana’s shareholding was purchased, Orana could not extract itself from Mr Fugle’s oppressive conduct.
[4] Mr Fugle’s concern about the claimed debt was that prior to his and the trustees’ involvement in Vey, the financial affairs of Orana and Vey were problematically intertwined. This led him to have concerns about the validity of the debt and the accuracy of the financial statements of Vey during this period. For this reason he had not prepared or signed financial statements for Vey since 2015. He considered the proper course was for Orana to sue for, and therefore have to prove, the validity of the debt. I found that Mr Fugle ought to have engaged with the trustees to see if the intertwined affairs could be unravelled, the debt resolved by agreement and accurate financial statements for Vey prepared.5 However, he had refused to do so. The relief initially ordered was directed to this so that the majority shareholders could purchase the Orana shareholding on a fair basis if that is what they wished to do.6
[5] The Court of Appeal accepted my conclusion that Mr Fugle had acted in a manner that was oppressive, unfairly discriminatory and unfairly prejudicial in the various ways found, including in his refusal to engage with the trustees on the Orana debt. By this time, Mr Fugle had not followed the process directed in the relief I had ordered. The Court of Appeal ordered that Vey be placed in receivership.7 In doing so it described “the essential purpose” as including the receivers “ascertain[ing] the true liabilities of the company (including the debt due to Orana)”.8 The receivers were to report to the High Court on the best realisation process.
5 Vance v Vey Group Ltd (HC, 2019), above n 1, at [72].
6 At [82].
7 Vey Group Ltd v Vance (CA, 2020), above n 1, at [69].
8 At [70].
[6] In carrying out their brief from the Court of Appeal, the receivers (Richard Nacey and John Fisk of PricewaterhouseCoopers) assessed the liabilities of Vey to include a debt of $1,041,000 owed to Orana. They recommended that the shareholders have a period of three months to consider the option of selling Orana shares to the majority shareholders group or to agree on selling Vey’s major asset either “as is” or following remedial work. No agreement could be reached, however, because Mr Fugle continued to maintain that it was not established that Vey owed Orana the sum claimed. He continued to hold that position on the basis that a s 174 application was not a debt recovery proceeding.9
[7] This meant that, like the original relief ordered in the High Court, the Court of Appeal relief had not resolved matters because of Mr Fugle’s intransigent attitude to the Orana debt. This led to Orana applying to the High Court for Vey to be placed into liquidation. Mr Fugle opposed this. He contended that the High Court should either order that the majority shareholders could purchase the Orana shares at fair value but not contingent on resolving the disputed debt or that the debt be determined at an arbitration. Neither of these options were appropriate. Over an extended period, Mr Fugle had been given the opportunity to put forward any information in support of his claim that the debt was not legitimate and had failed to do so.10 And a buy-out of the minority shareholding on a fair basis was not achievable without resolution of the Orana debt.11 An order for liquidation was made. It was not to take effect for three months to give the parties a further opportunity to negotiate a settlement if they wished to avoid the liquidation taking effect.12
[8] Perhaps unsurprisingly against that history, no negotiated settlement was reached and Vey was put into liquidation on 9 December 2020. The court-appointed receivers were appointed as the liquidators. The liquidators’ report to the Court dated 19 March 2021 advised that the liquidators considered Vey to be insolvent on a balance sheet basis with the estimated value of the claims against Vey to exceed the estimated
9 Vance v Vey Group Ltd (HC, 2020), above n 1, at [12].
10 At [18].
11 At [19].
12 At [21].
value of Vey’s assets by at least $235,000.13 They also considered Vey to be insolvent on a cash flow basis if the liquidation were terminated and the business continued to be operated in the manner in which it operated prior to the appointment of the receivers. The liquidators considered that the unsecured creditors’ claims “likely” to be admitted in the liquidation included the Orana debt of $1,040,810.
[9] As the liquidators note, the report records an indication of the liquidators’ likely decision in the absence of any further relevant documents being produced. None has been produced and Mr Fugle has, by bringing this review application, effectively accepted that this should be treated as the liquidators’ decision. The liquidators accept in these circumstances that its decision is reviewable.
Grounds for challenge
[10] Mr Fugle challenges the liquidators’ decision to admit Orana’s claim as unreasonable. He raises three grounds for his challenge:
(a)there are a large number of transactions between Orana and Vey or between one of them and a third party and for the vast majority of them, there is little in the way of contemporaneous record to show their nature and purpose;
(b)it was wrong in these circumstances to treat the transactions as a running current account, netting every transaction, and a more detailed assessment of their nature and purpose was necessary; and
(c)transactions that occurred prior to 1 January 2011 and which were not documented by deeds of debt acknowledgement are now time-barred and the liquidators erred in law by admitting them as a result.
13 Affidavit evidence from Richard Nacey dated 23 August 2021 provides an updated but not materially different position. See [68] of this judgment.
Review standard
[11] A debt against a company may be admitted as a claim against that company in liquidation.14 Following a claim by an unsecured creditor, the liquidator “must, as soon as practicable, either admit or reject a claim”.15 With the leave of the Court, a creditor may apply to the Court to “confirm, reverse, or modify an act or decision of the liquidator”.16
[12] The power to review a liquidator’s actions will be exercised in cases of fraud, where the liquidator’s discretion has not been exercised in good faith, or where the liquidator has acted unreasonably.17 This standard of review reflects that a liquidator’s principal duty is to act in a reasonable and efficient manner when distributing funds to creditors.18
[13] In the present case, the question is whether the liquidators’ decision to accept the claim was unreasonable. This does not necessarily require the Court to undertake a meticulous examination of the facts and law to determine whether the liquidators’ decision can ultimately be determined to be right.19 The test is whether the decision was unreasonable. A claim that is rejected by a liquidator might still be pursued by seeking leave to commence proceedings against the company.20 An example of where this may be appropriate is where the liquidator has rejected the claim because it is of such complexity that it should be determined via the usual court processes (which will include discovery and cross examination).21
[14] However, where a liquidator has not acted reasonably (for example, the liquidator did not request or consider relevant evidence or new and relevant evidence
14 Companies Act, s 303.
15 Section 304(3).
16 Section 284(1)(b).
17 Heath and Whale on Insolvency (online looseleaf ed, LexisNexis) at 22.8(a), citing Consolidated Technologies Development (NZ) Ltd v McCullagh (2006) 9 NZCLC 264,056 (HC) at [15] and Callis v Pardington (1996) 7 NZCLC 261,211 (CA) at 261,216.
18 Companies Act, s 253.
19 Noyce v Parnell Property Investments [2015] NZHC 2037 at [41].
20 Companies Act, s 248(1)(c).
21 Heath and Whale on Insolvency, above n 17, at 20.39, citing Clarence Holdings Ltd v Mount Albert TVs (1993) 8 NZCLC 262,072 (HC); Hook v Gulf Harbour Development Ltd (in liq) HC Auckland CIV-2002-404-1931, 23 November 2005; and Bunting v Buchanan [2012] NZHC 766 at [45].
is before the Court that was not available to the liquidator), the Court may make a fresh assessment of whether a claim should be admitted.22 In this case, the liquidators accept that if they erred in their view about whether some component of the Orana debt was statute barred then that would be an unreasonable decision. They say, however, that the nature of the transactions that make up the debt (and specifically whether it was a shareholder current account) and whether there was sufficient evidence to accept the debt are matters that require judgment by the liquidators in respect of which the Court should only intervene if they are unreasonable.
[15] The liquidators’ position on the review standard and approach is consistent with the authorities the parties have put before me. I proceed on this basis.
Liquidators’ decision
[16] Some greater background is necessary to understand how the Orana debt was alleged to have arisen. Vey was established to acquire a Wellington property.23 All of its shares were held by Orana, of which members of the Turvey family were the trustees and beneficiaries. That remained the position until 29 September 2016 when 51 per cent of the shares were transferred to interests associated with Mr Fugle. By this time, Patricia and Daryn Turvey (mother and son) were estranged and Patricia was aligned with Mr Fugle.
[17] While Orana was the 100 per cent shareholder, there were transactions between Vey and Orana. It is the net position of these transactions that comprises the Orana debt accepted by the liquidators. The Orana and Vey transactions included:
(a)Orana purchasing the Wellington property on 8 June 2001 for $405,000. Vey provided a loan for the purchase price payable on demand. This loan was recorded in a deed of acknowledgement of debt dated 8 June 2001.
22 Noyce v Parnell Property Investments, above n 19, at [45].
23 Daryn Turvey has filed an affidavit providing greater background to the establishment of Vey and the purchase of the Wellington property. He says he purchased the property with his own funds and a loan from the BNZ and that his father was not involved.
(b)Vey purchased the Wellington property from Orana on 30 September 2005 for $1,018,000. The purchase price was funded by a cash payment of $250,000, an agreement of Vey to meet Orana’s obligations under a $148,000 debt to BNZ and a vendor loan, repayable on demand, of $620,000. The vendor loan was recorded in a deed of acknowledgement of debt dated 30 September 2005.
[18] The receivers were directed by the Court of Appeal to, amongst other things, “ascertain the true liabilities of the company (including the debt due to Orana debt)”. The receivers’ report dated 14 August 2020 concluded that there was a liability of
$1,041,810 owing by Vey to Orana as at 15 May 2019 plus interest where applicable. This amount comprised “a shareholder current account” balance of $840,810 and a
$200,000 shareholder advance, which was due for repayment in 2025.
[19] In reaching this conclusion the receivers said that Vey’s financial records were inadequate “due to a significant number of both historical and more recent transactions that were not properly recorded in the financial accounts”. They said:
Where a lack of records is evident, we have contacted the respective party (or Director in control of the Company during the time period in question) and requested further clarification. Where this has been provided, we have included it in our analysis.
[20] In relation to the Orana debt specifically, the receivers divided the transactions making up Orana’s claim into “verifiable” and “incomplete”. The verifiable transactions were those that were supported by source documents prepared by a third party. The incomplete transactions were those “supported by accounting records or source documents but [which] cannot be verified with certainty”. A table setting out those transactions that fell into each category was as follows:
[21] The total claim of $1,040,810 comprised a net sum of $762,000 verifiable transactions and a net sum of $260,000 incomplete transactions. The receivers’ report said:
We consider the full amount of Orana’s claim totalling $1,040,810 to accurately represent the true value of the Company’s indebtedness to Orana. Although there are five categories in the category table that are listed incomplete, we consider that on the balance of probabilities, these categories should be included in the value of Orana’s claim.
[22] The receivers’ report went on to discuss each of the verifiable and incomplete transactions. For example, the largest “incomplete” item was the “Unpaid Cash Contribution in the Purchase of 72 Webb Street”. The receivers explained:
The settlement statement dated 1 November 2005 details a $250,000 cash contribution as a component of the consideration provided for the Company’s purchase of the Property from Orana. However, Orana claims that the
$250,000 remains outstanding. This fact is disputed by Mr Fugle due to the wording of the settlement statement suggesting that the contribution was provided by the Company. However, we note that this transaction occurred well prior to Mr Fugle’s involvement with the Company and therefore his knowledge on this matter is likely to be limited.
We note the following;
• The amount of $250,000 is verified by the settlement statement prepared by Impact Law as a component of the consideration provided by the Company to Orana in its purchase of the Property;
• The amount of $250,000 is recorded as outstanding in the Company’s accounting records; and
• No specific deposit totalling $250,000 can be identified in the Company’s bank statements.
Accordingly, we are of the view that the documentation available is sufficient to verify that, on the balance of probabilities, the cash contribution of
$250,000 remains outstanding by the Company to Orana.
[23] The receivers discussed Mr Fugle’s objection to the existence of the Orana debt and discounted it because there were no documents to support the allegations that he made.
[24] The liquidators provided an initial report to the Court and a further report dated 19 March 2021. The 19 March 2021 report was to assist the Court in considering Mr Fugle’s application to terminate the liquidation. The report referred to Orana having lodged a claim in the liquidation for $1,225,698 in respect of its shareholder current account balance. This included accrued interest of $153,000 and $32,000 on “two specific advances where interest is payable”. The liquidators said:24
The shareholder current account balance dates back a number of years and reflects both running account transactions and specific advances and transactions. The … Receivers conducted a thorough review of the documentation relating to this claim and assessed its value as $1,040,810 (excluding interest).
… The report by the … Receivers provides a detailed explanation of each line item …
… The interest claimed by Orana … relates to loans of $620,000 and $200,000 which were made to the Company in 2005 and 2018 respectively. … Based on the information currently available, the liquidators consider the total amount owing to the Orana Trust to be $1,225,698.
Mr Fugle continues to dispute the existence of Orana’s … claim, but has not provided documentation supporting his position when requested by the liquidators. In the absence of such evidence the liquidators expect to admit the full Orana … claim. …
Documentation
[25] Mr Fugle submits that, apart from the two loans that are recorded in deeds, Vey made no record of the purpose of any transaction that is now said to make up the Orana
24 An example of Mr Fugle not providing documentation to support his claim relates to the proceeds of sale of the Mulberry Street property. Mr Fugle claimed that it was paid to Vey because it had paid for the costs of doing up the property prior to sale. However, despite being given the opportunity to do so, no documents to support this claim were ever produced.
debt (for example, a director’s resolution) and nor has Vey acknowledged that the debts were owed. He submits that the then trustees of Orana, who were also the directors of Vey at the relevant time, should not now benefit from the lack of documentation.
[26] As I understand it, Mr Fugle’s real point about the absence of documentation of this kind is that it has led to assumptions made by the liquidators about their nature that are not reasonable and has meant that limitation defences were not considered. I consider these matters below. However, to the extent he contends that any transactions not supported by a director’s resolution or an acknowledgement from Vey should have been rejected by the liquidators, I disagree.
[27] The liquidators indicated an intention to accept the Orana claim on the basis of the “thorough review” carried out when Orana was in receivership. The receivers were careful to look for documentation that supported each item that made up the claim. That is confirmed by the detailed explanation provided in Mr Nacey’s affidavit.25 Some documentation they considered to be less verifiable than others (hence their “verified” and “incomplete” categories). The experienced court-appointed receivers were nevertheless satisfied on the balance of probabilities that the items claimed were valid.
[28] As a general principle, it is not the case that only certain kinds of documentation can provide sufficient evidence of a debt. The submissions for the liquidators summarise the various documentation that supported each component of the debt. Specifically:
(a)$405,000 2001 loan from Vey to Orana: deed of acknowledgement signed by all parties.
(b)($104,404) Proceeds from sale of Mulberry Street: Orana’s solicitor records showed that, although the property was owned by Orana, on instructions the proceeds were paid into Vey’s bank account.
25 Mr Nacey’s affidavit also sets out why Mr Fugle’s objections were not accepted.
(c)($416,146) Orana’s share of proceeds of sale of Dowse Drive: settlement statement, the accompanying letter from Orana and Vey’s solicitor to BNZ and a deposit slip held by the solicitor record 100 per cent of proceeds paid to Vey for a property in which Vey and Orana held a 40 per cent and a 60 per cent interest respectively.
(d)($620,000) 2005 vendor finance of purchase of property by Vey: deed of acknowledgement of debt, agreement for sale and purchase, solicitor’s settlement statement, contemporaneous minutes, registered valuation for the property prior to sale.
(e)($152,537) interest on 2005 vendor finance to date of liquidation: deed of acknowledgement of debt and a letter of demand dated 28 June 2018.
(f)($250,000) unpaid cash contribution on sale of property: the obligation to pay is recorded in the signed minutes and the settlement statement. The bank statements show that this was not paid at or around the time of the property sale.26
(g)($192,408) Orana’s payments towards BNZ loan: contemporaneous Orana minutes, lawyer’s settlement statement, and Mr Fugle’s affidavit record that Vey assumed the BNZ loan as part of the consideration for the 2005 property sale; Orana’s bank statements show that Orana continued to make payments of the BNZ loan from 2006 to 2010; and file note of a discussion between Findex (Vey’s accountant) and Vey directors that Orana’s payments towards the BNZ loan treated as part of the shareholder current account.
26 A transfer of $250,000 is recorded in the bank statements nine months later. It is accounted for in the net transactions described at [28(i)]. For the item at [28(f)], the liquidators treated the cash contribution as unpaid because this is the approach Orana took; there were no documents linking the payment by the Company in June 2006 to the cash contribution required as part of the sale; and it was consistent with the approach taken by the Company accountant. Whether this contribution was treated as another bank transfer or payment of the cash contribution has a neutral impact on the calculation of quantum of the Orana debt at the date of liquidation.
(h)$394,334 rent on Vey property paid to Orana: Orana’s general ledger and bank statements.
(i)$22,501 net bank transfers and advances: Orana’s general ledger for financial years ended 2006 to 2012, Orana’s bank statements between 2005 and 2011 and Vey’s bank statements where available.
(j)($79,869) Orana’s payment of Vey related costs: Orana’s general ledger and bank statements recording payments made by Orana to third party suppliers to Vey; and Orana resolutions, together with invoices and trust account statements for 2015 year.
(k)($200,000) 2015 loan from Orana to Vey: signed deed of acknowledgement of debt, and trust account statements and bank records from Orana’s solicitor showing the payment of $200,000 to Vey.
(l)($32,351) interest on 2015 loan to the date of liquidation: deed of acknowledgement of debt and 28 June 2018 letter of demand.
[29] There was, therefore, a range of reasonably reliable documentation supporting each of the items. I conclude that the liquidators’ decision to accept the receivers’ analysis that there was sufficient documentation to support the validity of the Orana debt was reasonable.
Nature of the transactions
[30] Mr Fugle takes issue with several items that make up the Orana debt. First, he takes issue with how the liquidators treated the receipt by Vey of sale proceeds of Orana properties in 2002 (Mulberry Street: $104,404) and 2004 ($416,146) as payments against the 2001 Vey loan ($405,000).
[31] Mr Fugle submits there is nothing to show the payments were linked other than that the payment of the sale proceeds came after the loan. He notes that the sale proceeds payments total $520,550 which does not match the loan amount. He queries
why Orana would have paid $115,549 extra if they were a repayment of the loan. He submits the payments may have been the repayment of a loan, the advance of a new loan or an injection of capital and which of these it was significantly alters the position regarding the Orana debt. He submits that at the least the liquidators ought to have interviewed Daryn Turvey about the transactions and it was not reasonable for the liquidators to make assumptions about their nature without having done so.
[32] The liquidators’ response is that it is not in dispute that at the time Orana paid Vey the two sums, it was indebted to Vey (as recorded in the deed of acknowledgement). Therefore, there is a logical reason why Orana would pay the sale proceeds from the two properties to Vey. There is also a logical reason why Orana would use these proceeds to pay more than the Vey debt, namely, to provide working capital to the Turvey family company.
[33] The receivers’ report refers to them having discussed matters with the Vey directors at the relevant time. Mr Turvey has previously confirmed the receivers’ spreadsheet that itemises each component of the claim is accurate with the exception of the rental income. Mr Turvey’s evidence in this Court is that all of the admitted Orana claim is owing and indeed in his view it has been understated. Mr Nacey’s affidavit evidence is that they contacted Mr Turvey to discuss matters and he attended the PWC offices three times to meet with them. Mr Nacey does acknowledge that these discussions were mainly focussed on Mr Turvey’s claim against Vey. However he also says that Mr Turvey was aware that Orana was claiming a debt from Vey arising from the inter-party transactions over the years and “at no point suggested to us that those transactions were intended to be a capital contribution instead”.
[34] In these circumstances, there is no basis for a finding that the liquidators’ decision on this component of the debt is unreasonable. Relevant enquiries were made and a judgment was made by experienced liquidators.
[35] Next, Mr Fugle challenges the liquidators’ treatment of the Orana payments to BNZ on Vey’s behalf. Although there are records showing Orana making payments to the BNZ for Vey, Mr Fugle notes that there is no record of Vey having agreed to this. Assuming Vey did agree to this, Mr Fugle submits that Orana may have had a
cause of action for Vey’s immediate and ongoing breach of that agreement. Such a claim was never pursued. Nor was there any agreement that Vey would instead repay these amounts to Orana. Mr Fugle submits in these circumstances that the last date on which Orana could have pursued a claim against Vey was 31 May 2016, being six years after the final payment to BNZ on 31 May 2010 and that a limitation defence therefore applied.
[36] The liquidators refer to the documents that support the arrangement that Vey would assume the BNZ obligations but that Orana continued to meet those obligations (see above at [28]). The liquidators also refer to evidence from Mr Nacey that Vey’s accountant treated these payments as forming part of the shareholder current account and creating a debt obligation on the part of Vey. This was how it was recorded in both Vey’s and Orana’s accounts. There is also a file note prepared by Vey’s accountant that records that he discussed this treatment of the payments to BNZ with the Orana trustees, the Vey directors and Mr Fugle in August 2014. Mr Fugle also acknowledged in his affidavit dated 2 May 2019 that the BNZ loan had been assigned to Vey, albeit that he considered Vey’s liability was overstated. Orana amended the claim as a result of this and the liquidators accepted the amended calculation.
[37] I consider the liquidators treatment of the continued payments by Orana to BNZ was reasonable. It was open to them to treat the payments as forming part of the shareholder current account and creating a debt obligation on the part of Vey. The limitation defence is considered below.
[38] Mr Fugle raises the same point in relation to other payments made by Orana to third parties on behalf of Vey. He says a limitation defence applies for the same reason. It also applies to Vey’s detriment in relation to rent payments made to Orana. Mr Fugle accepts that it makes sense to treat Vey’s payment of $250,000 to Orana less than a year after Vey’s agreement to pay that sum to Orana as part of the consideration of the 2005 property sale. He says, however, that the nature of the other 36 payments is unclear because there is no documentation in relation to them.
[39] The liquidators refer to the documentation set out above ([28]). They accept that everything making up the Orana debt except the term loan of $200,000 plus
accrued interest has been treated as a shareholder current account. They accept that whether the debt is a shareholder’s current account is significant because it impacts on the appropriate approach to limitation.
[40] The liquidators say that their approach is consistent with the relationship between the parties and the way in which the debt arose; the way these transactions were recognised in Vey’s financial statements over a period of years; the treatment by Vey’s accountant and discussed with Vey’s directors and Mr Fugle; and standard accounting practice for reconciling intermingled funds between related entities. The alternative would be to treat them as a capital contribution that is not repayable. The liquidators note that there is no evidence to support this and Mr Fugle has not pointed to any.
[41] I do not accept that the liquidators needed to effectively cross-examine Mr Turvey on every individual payment made between Vey and Orana, or by Orana on behalf of Vey, over the years. That would not be consistent with the requirement that the liquidators undertake their duties in a cost-effective and efficient manner. It is not for the liquidators to carry out a mini trial when the documentary evidence and discussions with all relevant parties sufficiently demonstrate the nature and purpose of the intermingled transactions.
[42]Mr Nacey’s evidence included the following:
4.3A shareholder current account is a running account which records funds introduced and funds withdrawn by the shareholder over the life of the company. This excludes capital contributions and dividends which would be shown in the Statement of Movements in Equity in the financial statements. … Shareholder current accounts are very common in family held or closely held companies.
4.4As I mentioned above, as part of our investigations as receivers and liquidators we spoke with Mr Holmes of Findex [Vey’s accountant]. We also reviewed the available historic financial statements for both Orana and the Company and Findex’s underlying workings for each of the balance sheet items listed in the Company’s financial statements.
4.5Mr Holmes advised us that Mr Turvey would provide him with various receipts and bank statements and it was his role to try and reconcile the transactions between the two entities. There were usually a significant number of transactions between the two entities
throughout the financial year. In some cases, these amounts were significant advances linked to a particular transaction; in other cases, day to day expenditure was incurred by the party who was not receiving the benefit of that expenditure or income was paid to the party who was not the person legally entitled to those funds.
4.6These transactions would then be reconciled as part of preparing the annual financial accounts, with the net movement of funds between the two entities being recorded as the movement in the shareholder current account.
4.7Mr Holmes’ approach was consistent with the usual accounting practice when dealing with intermingling between related entities.
[43] Mr Fugle objects to Mr Nacey’s affidavit as submission, beyond the proper scope of his role as a liquidator, and irrelevant. I disagree. Mr Nacey is an experienced liquidator who is qualified to give evidence of his enquiries and his experience that he relied on in making his judgment on the nature of the transactions and their treatment in the financial records.
[44] I accept that the liquidators’ decision to treat everything but the term loan as a shareholder’s current account was reasonable for the reasons they give. The liquidators were entitled to rely on their experience with intermingled funds in closely held companies, the treatment of the debt in the financial statements so far as they were available, and the view of Vey’s accountant who discussed it with relevant personnel including Mr Fugle. Mr Fugle is merely raising matters, as he has done all along, without putting forward anything to support it.
[45]I now turn to the limitation point.
Limitation
[46] Mr Fugle contends that some components of the Orana debt that arose prior to 1 January 2011 are statute barred and the liquidators’ decision did not consider this. The significance of 1 January 2011 is that the Limitation Act 2010 came into force. That Act provides that it is a defence to a money claim if a defendant proves that the claim was filed at least six years after the date of the act or omission on which the claim is based.27 In the case of a claim on an obligation that is not enforceable until a
27 Section 11.
demand is made, the six year time period runs from the date on which the debtor defaulted after the demand was made.28
[47] The Limitation Act 1950, which still applies to rights of action based on an act or omission before the new Act came into force,29 contained no such provision. Recovery of money debts was subject to the six year limitation from “the date on which the cause of action accrued” for claims founded on contract, or 12 years if the obligation arose under a deed.30 When the cause of action accrued was determined by case law.
[48] The general principle from the case law was that, if the terms of a loan are silent about when the obligation to repay arises, the lender’s right to repayment arises at the time the money is advanced. No demand was necessary and the cause of action commenced at the outset on implied promise to repay.31 The same applied where a loan was said to be repayable “on demand”. The law treated the words “on demand” as adding nothing to the implied promise immediately to repay. Those words were viewed as simply reinforcing and declaring what the law takes to be implicit anyway.32 However, the parties could expressly or by necessary implication demonstrate that a demand was required in order to create a liability to repay. In that case, time did not start to run until the making of the demand.33
[49] In Joachimson v Swiss Bank Corporation it was held that, in the ordinary case,34 a current account held by a customer with a bank was subject to an implied term that the customer make an express demand of repayment as a condition precedent to the right to sue the banker.35 This reflected the practical realities of banking. If it were otherwise, “the banker would be bound to seek out his customer and pay him,
28 Section 5(1)(a). Mr Fugle’s position is that this changes the former position in respect of a loan simpliciter repayable on demand. The liquidators do not necessarily have the same view but it is unnecessary for me to decide this. I have not had full argument on the point and for present purposes it is academic because Mr Fugle’s challenge relates only to debts arising prior to 1 January 2011.
29 Limitation Act 1950 (repealed), s 59.
30 Section 4.
31 DFC New Zealand Ltd v McKenzie [1993] 2 NZLR 576 (HC) at 582.
32 At 583.
33 At 583.
34 The parties could enter into a special contract if they did not wish the usual implied term to arise. See Joachimson v Swiss Bank Corporation [1921] All ER Rep 92 (CA) at 102.
35 At 96, 99 and 101.
and the customer would be bound at any time and without notice to receive the amount due” and this was not how banks and customers operated.36
[50] The same view was taken of a shareholder’s current account with a company in Miller v Belmil Products Ltd.37 That case involved a private company in which the plaintiff and her husband were the shareholders and directors. Directors’ fees and dividends were credited to, and their drawings were debited against, their respective shareholder’s current accounts each year. The plaintiff and her husband separated. The wife sought judgment against the company for the balance in her shareholder’s current account. The defence was that any money credited to that account prior to 5 February 1968 was statue barred.
[51]The High Court rejected that defence. In doing so it said:38
I take the view that the statute is inapplicable for another reason. The current accounts of the shareholders were open accounts running from a date shortly after incorporation. The claim of the plaintiff is for a debt due by the company, claiming such balance as was rightly due at the termination of the account, disregarding for that purpose any debits against the account improperly made. It has long been held from the earliest times that a statute of limitations does not run in respect of an open current account. I need only refer to Astrey’s Case … In the present case … [t]he account of each shareholder was a running account from inception. … There was no evidence in the present case of any agreement between the shareholders in the company, whether express or implied, that a balance struck at any given time in the accounts was to constitute a debt owing as from that date to the shareholder and recoverable by him without demand. On the contrary, the facts of the case make it perfectly clear, in my opinion, that there was in the case of the present company the customary implied term between the shareholders and company that the amount shown to be due to or owing by a shareholder on current account at any given date was not recoverable by the shareholders or company in the absence of prior demand for payment of such debt as might be shown to be due. … The same principle applies to the state of the current account between banker and customer, as shown by the leading case of Joachimson …
[52] The Supreme Court of Australia in Brooker v Pridham took the same approach as that taken in Miller.39 Brooker concerned deposit accounts held by a company that had their genesis in share capital subscribed by members of a family who also deposited surplus capital funds with the company for working capital. The company
36 At 96, 99 and 101.
37 Miller v Belmil Products Ltd [1976] 1 NZLR 311 (HC).
38 At 316.
39 Brooker v Pridham (1986) 10 ACLR 428 (SASC).
later merged and subsequently went into liquidation. The liquidator rejected proofs of debt lodged in respect of the deposit accounts on the ground that they were each statute barred. This was upheld by the Court at first instance but was overturned on appeal.
[53] On appeal the Court referred to the general principles referred to above including that it may be an express or implied term, and may be inferred from the circumstances and the conduct of the parties (citing Joachimson), that demand is a condition precedent to liability to repay, and in that case the cause of action does not arise until demand is made.40 In finding that the claims were not statute barred the Court said:41
The evidence discloses little about the original agreements pursuant to which the deposit accounts came into existence. The effect of what was proved was that the surplus capital funds referred to above were left on deposit with the company for working capital purposes, that interest was paid at a rate above savings bank rates, that, it being a family company, the depositors used these deposits as a savings bank, crediting dividends and drawing out funds as required, and that at all times these deposits were shown in balance sheets as a separate item from sundry creditors. It is, of course, common enough for proprietors of a business, who have formed a company to take over the business or who have constituted a family or other trust, to leave funds on loan as use as working capital. The intention is usually that such funds, subject to withdrawals from time to time, will remain for an indefinite period of time for use in the business.
In many cases, of course, liability to repay is governed by the terms of an agreement in writing. … Where, however, there are no express terms, an agreement as to the circumstances in which liability to repay arises must be implied from the surrounding circumstances and the conduct and relationship of the parties. … I feel no doubt that in the generality of cases in which loan moneys are provided as working capital following the incorporation of a company to take over a business or the establishment of a trust, those concerned would assume that some notice of demand was a necessary prerequisite of liability to repay.
… All must have assumed that such a creditor could not withdraw the entire balance of his account without some notice. The relationship of the parties, the course of conduct in relation to the operation of the accounts and the common assumption that the funds would be in use as working capital, combine to compel the implication of an agreement that liability to repay would not arise until at least some notice was given …
[54] Turning to the circumstances in the present case, Mr Fugle accepts that the vendor loan made by Orana to Vey of $620,000 is not statute barred. This is because
40 At 430.
41 At 430-431
the deed of acknowledgement of debt provided that repayment was to be on the same terms as the 2001 deed of acknowledgement of debt when Orana purchased the property from Vey. That deed adopted the wording accepted in the leading High Court case in DFC New Zealand Ltd v McKenzie as requiring a demand be made before time for limitation purposes began to run.42
[55] These two deeds had a no further advances clause. It is clear in any event that the other components of the Orana debt were not intended to be governed by those deeds. Mr Fugle submits that the liquidators have proceeded on the assumption that Vey has no limitation defence to any component of the debt when that is not necessarily the case. He says there is no general principle that time for limitation purposes for all current accounts does not begin until demand is made. He says the two authorities relied on in Miller do not support that conclusion.
[56] One of the cases relied on in Miller is Astrey’s Case. It seems that only a brief case note, in the following terms, is available:43
In this case it was held unanimously, that where there was an account current for twenty years, as receiver of rents, and much more in paying and receiving mutually, yet this was not barred by the statute of limitation; but if the account were stated or ended, and then the party forbears to prosecute for six years, he is barred by the statute. And here Astrey (who was the executor of Mrs. Mosse, his mother in law, who was executrix of her husband Mr. Mosse) was decreed to account for the profits of lands received by Mr. Mosse before his death, in trust for the plaintiff.
[57] I accept that the brevity of the case note limits how much reliance ought to be placed on it. That said, it does distinguish between running current accounts that are not barred by the statute of limitations and “stated or ended” accounts which are. In re Footman Bower & Co is an example of a running current account between a supplier and a customer in which the relationship is recorded in one entire account and the true nature of the debt is a single and undivided debt for the amount of the balance due on the account for the time being.44
42 DFC New Zealand Ltd v McKenzie, above n 31, at 584.
43 Astrey’s Case [1678] 22 ER 1055, 2 Freem Chy 55 (Ch) (footnotes omitted).
44 In re Footman Bower & Co [1961] CH 443 (HC) at 450.
[58] The other case relied on in Miller is Joachimson. I accept that this case was concerned with bank and customer current accounts. However, it does support the general principle that, absent an express agreement otherwise, it can be inferred from some relationships that the obligation to repay does not arise unless and until demand is made and the cause of action does not accrue until that time. For the reasons stated in Brooker, a shareholder’s current account is an example of where that inference is available. Miller is an example of this.
[59] The present case is an example where this inference can also be readily drawn. Vey was a closely held family company supported by funding from the family through the Orana Trust. If an obligation on Vey to repay shareholding funding arose immediately on it being provided, the purpose of the funding would be defeated. Mr Nacey’s evidence supports this conclusion. He said:
In my experience it is not uncommon for shareholders to provide financial support for a company over a lengthy period of time … with the expectation that either when the funds are needed by them … or when the company no longer requires the shareholder financial support, those funds would be repaid. (The converse is also common, where a shareholder has drawn funds from the company through the shareholder current account, over a lengthy period of time.) This is particularly the case for closely held companies.
While that financial support is a liability to the company, to treat that financial support as being unenforceable after six years as if it were a single transaction owing to an unrelated third party would have ramifications which I believe are inconsistent with the nature of that financial support. For example, it would force a shareholder to either make demand on a Company for repayment at time when repayment may not be in the Company’s best interests or lose the ability to require a repayment at a later, and more convenient, time. I believe such an approach is entirely at odds with the close relationship between the parties and the nature of the series of transactions which give rise to the shareholder current account.
[60] Despite Mr Fugle’s objections to Mr Nacey’s evidence, I consider Mr Nacey’s evidence is relevant and admissible.45 His experience speaks to the practical realities that underpin the Courts’ decisions in Joachimson and Brooker, that the cause of action on the current accounts in those cases did not commence until a demand was made are real.
[61] I also do not agree with Mr Fugle’s submission that the liquidators have found that there was a shareholder current account by looking at the position that developed
45 See [43] above.
over the course of the relationship rather than the position at the outset. The position at the outset was a closely-held family company supported by the family (Mr Turvey said the financial support came from him rather than his father but that is by the by). As was the case in Miller, the conduct of the parties over time is consistent with the intention at the outset that intermingled funds would occur and would be netted out as part of a shareholder current account each financial year.
[62] Lastly, I do not accept the suggestion that a different intention should be inferred because of the two deeds of acknowledgment of debt. The suggestion is that this showed the parties knew of the need to make it plain if demand was to be a condition precedent for limitation purposes. However, the deeds of acknowledgement were prepared and signed in relation to property transfers between Orana and Vey for which there were large vendor finance loans. Those property transfers required legal involvement and it is unsurprising that the lawyer involved documented the terms of the vendor loan in each case. The fact that they did so does not suggest the parties meant something different in respect of other payments made by Orana for Vey, or to and from Vey and Orana. Rather, the more likely inference is that Orana and Vey did not see the need to document every transaction as funding was provided or credited. For the purposes of the family company and trust, the financial accounts showing a net position of transactions sufficiently recorded the running shareholder current account.
[63] The liquidators concluded that, with the exception of the 2015 term loan, the Debt was a shareholder’s current account, repayable when demand was made on 28 June 2018 and therefore not statute barred. I consider the liquidators correctly turned their minds to whether any component of the Orana debt was statute barred and correctly concluded it was not. This conclusion makes it unnecessary to deal with other arguments advanced by the liquidators (acknowledgement) and the trustees (part payment).
Conclusion
[64] Mr Fugle’s application to overturn the liquidators’ decision to accept the Orana debt is dismissed. The decision on the existence and quantum of that debt was reasonable and a limitation defence was not available in respect of it.
Application to terminate liquidation
[65] Mr Fugle applies for an order terminating the liquidation.46 This is sought on the basis that Mr Fugle has made satisfactory provision for all Vey’s creditors to be paid in full. He has sought to do that by placing $913,000 in trust with his solicitors. This is intended to cover Vey’s unpaid tax, the amount Mr Turvey is owed as a secured creditor, costs associated with the receivership, the liquidators’ costs and then a sum of $200,000 for Orana’s debt. That sum envisages that Mr Fugle would succeed on his review application, at least to some extent. Mr Fugle considers he can obtain funding to carry out the necessary remediation work on the Wellington property and that, once that is carried out, there is considerable value in the property.
[66] The liquidators and Inland Revenue would not oppose the application if Vey met all its liabilities. Mr Fugle has made submissions about how that could happen if the sum held in trust is not sufficient. The Orana trustees remain concerned about whether Mr Fugle is a suitable person to be operating a company given the conduct that led to the oppression claim. Mr Fugle counters that the factors that led to that claim have been resolved.
[67] Although it was directed that the two applications be heard together (against Mr Fugle’s opposition), it is unnecessary that I decide the application. This is because Mr Fugle’s application is not pursued if the application for review of the liquidators’ decision to accept the Orana debt is wholly unsuccessful. Mr Fugle has undertaken to withdraw that application if so. As it has been wholly unsuccessful, I do not consider the application for liquidation termination further. It is treated as discontinued.
[68] It is, however, interesting to note that, on the updated position as at 19 August 2021,47 the balance sheet solvency position shows a shortfall of $223,000. This is only a little more than the interest that has accrued on the Orana debt. It is also just a little less than the liquidators’ fees and expenses as at 19 August 2021. It is unfortunate that Mr Fugle’s intransigent attitude to the Orana debt has led to this position. Mr Fugle would have been free to make arrangements to remediate the Wellington property if
46 Companies Act, s 250.
47 See n 13.
he had paid the Orana debt and negotiated a fair price for the 49 shares held by Orana much earlier.
Application for approval of share transfer
[69] After Vey was entered into liquidation, Mr Fugle advanced an offer to Mr Vance and Mr Millard in their capacities as trustees for the purchase of the 49 per cent share held in Vey. The offered consideration was $200,000. The trustees accepted that offer. Share transfer documents were executed and the agreed purchase price was paid in late December 2020. It was overlooked by all parties in the transaction that Court approval was required for any share transfer of a company in liquidation. That approval is now sought on an unopposed basis.
[70] Accordingly, I order that the plaintiffs are authorised under s 248 of the Companies Act 1993 to transfer their 49 shares to Mr Fugle on the terms they have agreed. Vey must promptly update the share register in accordance with the share transfer instruments.
Result
[71] The application under s 284(1) of the Companies Act to review the liquidator’s decision to accept the Orana debt is dismissed. The application under s 250 of the Companies Act terminating the liquidation is not pursued given that result on the s 284(1) application and is treated as discontinued. The application under s 248 to approve the transfer of the trustees’ 49 per cent shareholding is approved on the terms on which it was made.
Mallon J
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