Wiltshire Investments Ltd v Halstead HC Auckland CIV 2005-404-6473
[2010] NZHC 691
•10 May 2010
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2005-404-006473
BETWEEN WILTSHIRE INVESTMENTS LIMITED Plaintiff
ANDERIC JOHN HALSTEAD Defendant
ANDWARREN GRAEME TURLEY AND ANNE BARBARA TURLEY AS TRUSTEES OF THE WAEJO TRUST First Third Party
ANDWARREN GRAEME TURLEY Second Third Party
Hearing: 3 August 2009
Counsel: R J Macdonald for defendant
J A Carnie for first third party
Judgment: 10 May 2010 at 11:00am
JUDGMENT OF ASSOCIATE JUDGE ABBOTT
This judgment was delivered by me on 10 May 2010 at 11:00am, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Short & Partners, PO Box 137241, Auckland 1151 for defendantClendons, PO Box 1305, Auckland 1140 for the first third party
WILTSHIRE INVESTMENTS LIMITED V HALSTEAD HC AK CIV 2005-404-006473 10 May 2010
[1] This proceeding started as a claim by the owner of commercial premises for recovery of unpaid rent against the guarantor of a lease. The guarantor (the defendant Mr Halstead) paid the landlord and sought indemnity from the owners of the restaurant business formerly run from the premises (the first third parties, as trustees of the Waejo Trust). The trustees had agreed to indemnify Mr Halstead in
1996 when buying out his interest in the business.
[2] The trustees did not contest Mr Halstead’s claim (they had passed a resolution to terminate the trust approximately two years before the claim was brought). Mr Halstead obtained judgment by default, but limited to the assets of the Waejo Trust.
[3] Mr Halstead now seeks an order for examination of the trustees pursuant to r
17.12 with a view to enforcement of his judgment. He says that the trustees have potential claims against other parties (including the trustees in their personal capacities as beneficiaries) which he is entitled to investigate.
[4] The trustees oppose the application. They say they have provided all relevant information as to the financial position of the trust and an order for examination would result in unnecessary expense and inconvenience to the parties. They contend that the issues which Mr Halstead wishes to examine (possible claims which the trustees may have against other parties, including claims against them in their capacity as beneficiaries) are outside the scope of any examination.
Background
[5] In 1996 Mr Halstead and the trustees formed a company, Ibiza and Isobar Restaurants Limited (the company), with a view to running a restaurant business. The company took a lease of commercial premises from the plaintiff, Wiltshire Investments Limited. Mr Halstead and one of the trustees, Mr Turley, each gave a guarantee of the company’s obligations under the lease.
[6] The relationship between Mr Halstead and the trustees broke down shortly after the business commenced. The trustees agreed to buy out Mr Halstead’s interest in the company. As the landlord was unwilling to release Mr Halstead from his guarantee, as part of the settlement the trustees agreed to indemnify Mr Halstead in respect of any loss arising out of the failure to release him from liability under his guarantee (as well as other obligations). The deed of settlement also provided that each party would do all things reasonably required to give effect to the provisions and intent of the deed.
[7] The settlement was completed in about November 1996. By late 1999 the company was experiencing financial problems. It had increasing difficulty paying rent. Between late August 1999 (when rent of $14,000 was outstanding) and about January 2002, the trustees were in regular communication with the landlord about the rent arrears. In January 2002 the landlord gave notice that it intended to take steps to recover the arrears.
[8] The company was placed into receivership in June 2002. Mr Turley was adjudicated bankrupt in October 2002. By that time arrears of rental and operating expenses had built up to approximately $235,000.
[9] Mr Halstead learned of the problems under the lease in 2003 when the landlord informed him of its intention to seek recovery under his guarantee. As the landlord was also pursuing a claim against the receiver, its claim against Mr Halstead under the guarantee was not pursued until November 2005. The landlord then brought a claim against Mr Halstead for $238,000 plus interest and costs.
[10] Mr Halstead joined the trustees as third parties on 4 July 2006, claiming indemnity under the 1996 settlement. The trustees say that the Waejo Trust was wound up on 30 June 2006 because it had no assets.
[11] On 13 February 2008, Mr Halstead obtained judgment against the trustees for the sum of $90,000 paid to the landlord to settle its claim, together with the sum of
$47,740.82 for costs paid in defending the landlord’s proceeding and bringing the third party claim, and a further sum of $2,400 for costs for the application for
judgment. That judgment was sealed on 12 June 2008. The trustees say that there are no assets available to meet the indemnity or judgment.
[12] Mr Halstead applied on 4 December 2008 for an order pursuant to r 621 (now r 17.12) of the High Court Rules that the trustees be examined as to the income and expenditure and assets and liabilities of the Waejo Trust, and its means of satisfying the judgment. The parties attempted to resolve the matter, with the trustees providing copies of accounts for the two years prior to the resolution to wind up in June 2006 and certain other documents. Mr Halstead did not accept that this was adequate disclosure. The trustees then filed notice of opposition.
Applicable principles for jurisdiction to order examination
[13] The Court has power under r 17.12 to order a judgment debtor to attend the court and be examined. The relevant parts of that rule read:
17.12 Order for examination
(1)Whether or not a notice has been served under rule 17.10, an examining party may apply for an order—
(a) at any time after the proceeding has commenced, if that party seeks a charging order under subpart 5 of this Part; and
(b) in all other cases, at any time after judgment is sealed.
(2) An examining party may apply to the court for an order requiring the examinee to attend the court or a person whom the court appoints, and to be orally examined on oath about—
(a) the standard issues in subclause (3); and
(b)any additional issues suggested by the examining party that the court considers are necessary.
(3) The standard issues are—
(a) if judgment has been given, about the examinee's—
(i) receipts and payments for the preceding 52 weeks;
and
(ii) assets and liabilities; and
(iii) income and expenditure; and
(iv) means of satisfying the judgment:
....
(4)When granting the application, the court may order the production of documents at the examination and may impose terms and conditions it thinks just in respect of the conduct of the examination or otherwise.
[14] At the time that Mr Halstead filed his application, the power to order an examination was to be found in r 621 of the former High Court Rules. Rule 17.12 is in similar form to former r 621. Counsel were unable to refer me to any decisions under r 17.12, but given the similarity between the rules they accepted that the principles which apply to r 621 will apply. The relevant principles for the present application are:
a) The Court has a discretion whether to grant an order for examination: First Fishing Co Limited v Wairau Energy Centre Limited[1] and Carters A Division of Carter Holt Harvey Limited v McGuigan.[2]
[1] First Fishing Co Ltd v Wairau Energy Centre Ltd (1991) 4 PRNZ 222 (HC) at 224.
[2] Carters A Division of Carter Holt Harvey Ltd v McGuigan HC Wellington CIV-2007-485-1746, 7 July 2008.
b)The Court’s approach once judgment has been entered is quite different from its approach pre-judgment. Once judgment has been entered, the judgment creditor has “a cast iron justification for wanting to know” the judgment debtor’s assets: AMP Finance Limited v Linecorp Investment Limited & Ors.[3]
[3] AMP Finance Ltd v Linecorp Investment Ltd & Ors HC Auckland CP351/90 14 June 1991, at 7.
c) Where the judgment debtor is a trustee, examination relates to the assets of the trust, not the trustee’s personal assets: AMP Finance Limited v Linecorp Investment Limited & Ors.[4]
[4] At 6.
d)The general provision (r 17.12(3)(a)(iv)) allowing examination as to “means of satisfying the judgment” refers to any means other than the judgment debtor’s income, expenditure, assets and liabilities with
which the judgment debtor may be able to satisfy the judgment: Hunt v Muollo.[5]
[5] Hunt v Muollo [2003] 2 NZLR 322 at [8].
e) The rule is modelled on the Civil Procedure Rules 1998 (UK).
English authorities make it clear that the examination is intended to be vigorous: First Fishing Co Ltd v Wairau Energy Centre Ltd.[6]
The opposing contentions
[6] First Fishing Co Ltd v Wairau Energy Centre Ltd above n 1 at 223.
[15] Mr Halstead seeks the order for examination to allow him to enquire into the assets and trading activities of the Waejo Trust. In so doing, he is seeking to ascertain whether there are any matters which could lead to reinstatement or increase of the trust’s assets. It is not in dispute that the trust was wound up on 30 June 2006. The trustees say that at that point it had no assets. It would be a proper exercise of the court’s discretion to decline an examination if the court was satisfied that the examination could not lead to any increase in trust assets from which to satisfy Mr Halstead’s judgment.
[16] Mr Halstead says both that it is permissible to examine how the trust has come to have no assets and that, arising out of such inquiries, there are potential avenues open to the trustees to recapture former assets of the trusts. Mr Halstead wishes to explore potential recovery from distributions made to beneficiaries which may not have been permitted by the trust deed, possible inappropriate expenditure (suggested by entries in the trust’s accounts), and a possible failure to provide value for a vehicle that was transferred out of the trust.
[17] Counsel for Mr Halstead acknowledged that an order is not made “mechanically”: First Fishing Co Ltd v Wairau Energy Centre Ltd,[7] but argued that it was nevertheless intended to be a relatively routine matter once judgment was entered (noting that the rule permits an application to be made without notice or a hearing: r 17.12(5)). He submitted that a judgment creditor generally could expect to
obtain an order, with the Court’s discretion being focused primarily on whether the size of the judgment debt warranted the administrative time of the Court (particularly before the judgment debtor was required to complete a financial statement under r 17.10): Carters A Division of Carter Holt Harvey Ltd v McGuigan.[8]
[7] At 224
[8] Carters A Division of Carter Holt Harvey Ltd v McGuigan above n 2 at [9].
[18] Counsel submitted that there were ample grounds for the Court to exercise its discretion in Mr Halstead’s favour. He referred to the size of the debt, the limited disclosure by the trustees (only year-end accounts for the period from 1 April 2003 to date of winding up), an absence of contact by the trustees as the debt was accruing, a lack of explanation of the trading activities which gave rise to the debt, and a course of conduct whereby the trustees distributed income to themselves as beneficiaries when there was rent outstanding for which they had made no provision. He sought:
a) An order for the trustees to attend this court for examination;
b) An order that the trustees produce for examination:
i) accounts for the Waejo Trust from 1999 to 2006;
ii)details of the distributions made to the beneficiaries of the trust or related parties;
iii) the minute book of the trust; and
iv) the trust’s bank statements from 1999 to 2006; and
c) An order that Mr Halstead be entitled to examine the trustees on any matter which might lead to an increase in the trust fund.
[19] Counsel for the trustees submitted that Mr Halstead was not seeking to establish existing resources of the trust, but rather to establish information for the purpose of pursuing a claim personally against a trustee. He submitted that this fell outside the purposes of an examination set out in the rule, relying on McCormack v National Australia Bank Ltd.[9] He argued that the rule did not permit examination on potential liabilities (as distinct from assets) of a trust, including potential claims against the trustees, nor did Mr Halstead have standing to enquire into the trustees’ administration of the trust (that fell outside a creditor’s entitlement to subrogation to
an existing claim).
[9] McCormack v National Australia Bank Ltd (1992) 106 ALR 647 (FCA).
[20] Counsel for the trustees also argued that there was no purpose to an order because the trustees had disclosed all necessary information, including the circumstances which had led to the judgment debt. He submitted that they should not be put to the considerable time and expense of an examination which would achieve nothing in terms of establishing any further means to satisfy the judgment debt.
Discussion
The scope of r 17.12
[21] Counsel for the trustees’ first submission was that Mr Halstead could not bring this case within the criteria of r 17.12. He relied on dicta in McCormick v National Australia Bank Ltd[10] to the effect that a comparable rule of the Supreme Court of the Australian Capital Territory did not provide for an unlimited examination of a debtor in respect of his financial affairs.
[10] McCormack v National Australia Bank Ltd (1992) 106 ALR 647 (FCA) at 649.
[22] Counsel focussed this part of his argument on Mr Halstead’s wish to examine the trustees on payments out of the trust. He submitted that Mr Halstead was not entitled to examine on payments made to Mrs Turley in the 2004, 2005 and 2006 financial years, or any other payments out of the trust in prior years. He referred to
r 17.12(3)(a)(i), which limits inquiry to payments made in the 52 weeks preceding judgment. He argued that although the other standard issues were not similarly limited in time, the limitation in respect of payments should not be circumvented by a wide interpretation of the other provisions. On that reasoning he submitted that “means of satisfying the judgment” (r 17.12(3)(a)(iv)) should be limited to current and future cash resources, and not to historical resources (money paid out of the trust). He contended that distributions made to Mrs Turley and the children in the
2004 to 2006 financial years were matters of administration which could not be challenged, but, even if that was open to debate, they could not be the subject of examination as they were outside the 52 week period.
[23] I am not persuaded that the limitation of 52 weeks in r 17.12(3)(a)(i) constrains the interpretation of the standard issues in the rest of r 17.12(3)(a). It is sufficient, in my view, that there is a case for examination under any one of the sub rules (i) – (iv). The legislature did not see the need to limit the other sub rules in that way, and I see no need to imply a limitation. I also take into account r 17.12(2)(b) which expressly permits the court to allow examination on matters going outside the standard issues. This indicates an intention to allow examination on any matter which may permit the debt to be satisfied, rather than a narrow reading.
[24] It is no answer to the application, in my view, to say that because there has been no income to distribute since June 2006 at latest, and hence no payment out of trust property within 52 weeks prior to the judgment, that the circumstances surrounding prior payments (as distinct from examining what payments have been made) cannot be undertaken. The issue in that circumstance is whether it is an inquiry into the “means” of the trust. This leads me to the trustees’ second point.
Improper purpose to the examination
[25] The second argument advanced for the trustees was that Mr Halstead was pursuing the examination for the purpose of eliciting information which would allow him to bring a claim personally against the trustees. He referred to a contention by Mr Halstead that the trustees had made the distributions to Mrs Turley and children in breach of the trust deed, and in breach of duties to creditors of the trust. Counsel
submitted that this clearly fell outside of the intent of r 17.12, which was to examine the means (that is, the property) of the trust rather than potential claims by which the creditor might satisfy its judgment (not being claims in respect of the property of the trust).
[26] Counsel for Mr Halstead did not dispute the principle underlying this argument. However, he said that Mr Halstead was entitled to examine on any property, including choses in action such as potential claims[11] that were open to the trustees. He argued that Mr Halstead should be permitted to examine the trading activities with a view to allowing him to exercise (by right of subrogation the right of the trustees to apply trust assets to discharge a trust-related liability (referred to as the right of exoneration).[12] Counsel argued that the trustees’ right of exoneration arose at the latest when the company defaulted on payment of rent and operating expenses in the latter part of 1999, and from that point forward the trustees should not have distributed any assets to themselves as beneficiaries without ensuring that there were assets available to meet their right of exoneration.
[11] McCormack v National Australia Bank Ltd (1992) 106 ALR 649; Bloomsbury International Ltd vNouvelle Foods (Hong Kong) Ltd [2005] 2 HKLRD 64 at [24] – [26].
[12] H A J Ford and W A Lee Principles of the Law of Trusts at [14.6030].
[27] The critical question is whether any money paid out of the trust is recoverable by the trustees. There is no dispute that Mr Halstead has a right of subrogation to rights of the trustees to recover trust assets (pursuant to their right of exoneration).[13]
This right extends to receiving from persons receiving trust assets, by reason of the trustees’ continuing equitable proprietary interest (so long as the person receiving did not take in good faith, for value and without notice of the trustees’ rights): Octavo Investments Pty Ltd v Knight;[14] Chief Commissioner of Stamp Duties v Buckle.[15]
[13] H A J Ford and W A Lee Principles of the Law of Trusts at [14.6030].
[14] Octavo Investments Ltd v Knight (1979) 144 CLR 360 at 370.
[15] Chief Commissioner of Stamp Duties v Buckle (1998) 192 CLR 226 at [49].
[28] If there is a potential claim which has the effect of returning assets to the trust, an inquiry into such a claim would be an inquiry into a means of satisfying the judgment debt (r 17.12(3)(a)(iv)). In the present case Mr Halstead contends that he should be entitled to inquire into distributions made either to Mr Turley (as settler)
or to Mr or Mrs Turley (as beneficiaries) pursuant to clauses 13.3 and 14.1 of the trust deed which prohibits such distributions whilst they were trustees. If that occurred it would seem to give rise to a claim for return of such distributions to the trust. The recent decision of this court in Levin v Ikiua[16] supports a right of Mr Halstead in this respect. In that case, a creditor of a trustee claimed to be subrogated to a right of the trustee, to follow trust assets to a recipient (available where the
recipient had notice of the trustee’s entitlement and had not given value). The court recognised the creditor’s right to subrogation.
[16] Levin v Ikiua [2010] 1 NZLR 400.
[29] Counsel for the trustees relied on McCormack v National Australia Bank Ltd where the court ruled that a creditor could not examine on matters related to a possible application to the Family Court to vary a maintenance agreement. I do not see any inconsistency between the reasoning in that case and the case relied on by counsel for Mr Halstead, Bloomsbury International Ltd v Nouvelle Foods (Hong Kong) Ltd where the creditor was permitted to examine as to the debtor’s rights of action against others. The inquiry is still as to means of the trust. This is not a case of an impermissible use of the inquisitorial power as a form of pre-trial discovery for a claim by Mr Halstead against the trustees personally (for example, for breach of a possible duty owed to him). The proposed examination is in relation available assets (a right of recovery for the trust) rather than as to a liability of the trustees. In any event, I would also regard it as a matter that the court should allow a creditor to examination about (r 17.12(2)(b)).
[30] Counsel for the trustees argued that an investigation into distributions amounted to an inquiry into the trustees’ actions, and a creditor does not have standing to do that: AMP Finance Ltd v Linecorp Investments Ltd.[17] Whilst I accept that there may be a relatively fine line at times, between an inquiry into the trust’s assets and into a trustee’s actions, it is permissible to examine how the judgment debtor came to have no assets,[18] even if this also reveals information which could be useful in some other claim that Mr Halstead might consider.[19] Mr Halstead is not seeking to challenge the trustees’ actions as such; he is simply seeking to establish
whether there is a case for recovering distributions by way of identifying former trust property that may have been alienated in breach of the terms of the trust and thus giving rise to a right to recovery.
[17] AMP Finance Ltd v Linecorp Investments Ltd above n 3.
[18] First Fishing Co Ltd v Wairau Energy Centre Ltd (1991) 4 PRNZ 222 at 224.
[19] Gulf Harbour Town Centre Ltd v Hook HC Auckland CP343SD/99, 27 February 2002.
[31] Counsel for the trustees also argued that consulting income in the years 2004 to 2006 which provided the source of the distributions to Mrs Turley and the children in those years, did not belong to the trust. He submitted that it was derived from Mrs Turley’s employment, rather than from use of the assets of the trust; as such he argued that it had not been distributed as “beneficiary income”.
[32] Whilst I accept that the consulting income may have been earned through Mrs Turley’s labour, that is not to say that it is not trust income. It is recorded in the trust’s accounts as trust income, paid to the trust by a third party. I consider that it is a matter of proper inquiry.
[33] The Judge before whom the examination is conducted will be able to ensure that the examination does not stray into areas which do not relate to potential recovery of trust assets.
Unnecessary expense and inconvenience
[34] Although this point has been addressed, at least in part, by my decision on the other grounds for argument, I will address it further, albeit briefly. The starting point, generally, will be that a creditor will have reasonable justification for seeking an order for examination once he or she has judgment against the examinee. That is not the same thing as saying that this is merely a routine matter. The court has still to exercise a discretion taking into account relevant matters. This is my understanding of the decision of this court in Carters a Division of Carter Holt
Harvey Ltd v McGuigan.[20] In that case the court accepted that there was reasonable
justification for the order, subject to weighing that entitlement against the amount of the debt in question, and the potential cost and inconvenience of the process (particularly as the debtor had not, at that point been asked for a statement of assets
and liabilities). Having said that, in any weighing of interests, the cost and inconvenience to the debtor who does not or cannot meet a judgment debt, must rank behind the interests of the judgment creditor and the right to find assets from which his judgment can be satisfied.
[20] Carters A Division of Carter Holt Harvey Ltd v McGuigan above n 2 at [9].
[35] I have referred to Mr Halstead’s wish to establish whether there were distributions to Mr and Mrs Turley in breach of the trust deed, which could give rise to an ability to recover those distributions or some of them, for the trust. I cannot see any value in an examination in respect of distributions to Mr Turley, as there is no prospect of recovery given that he is bankrupt. I consider that Mr Halstead ought to be able to inquire, however, into distributions to Mrs Turley and the children (I suspect it is unlikely that this could lead to any recovery from the children, but that is a matter that would be better decided by the Judge conducting the examination – there is no evidence before me as to their ages or any property in their names). I have also accepted that the consulting fee income in 2004 to 2006 could be income of the trust and therefore subject to the same proscriptions on distribution in clauses
13.3 and 14.1 of the trust deed. Counsel for Mr Halstead has also pointed to various items of expenditure recorded in the trust’s accounts such as “cafe supplies” and “uniforms” which would appear to be distributions rather than genuine expenditure. Finally, counsel for Mr Halstead referred to a Range Rover vehicle that was in the accounts for 2006 and said that he wished to confirm that the trust had received proper value for that vehicle when it was transferred out in that financial year (ahead of winding up of the trust). I accept that these are all proper matters for examination. It is not for the court on this application to assess the effectiveness of the examination in terms of recovery, as long as there is some prospect.
[36] Lastly, although the cost and inconvenience to the trustees must be of lesser weight to Mr Halstead’s right to explore avenues of recovery from the trust assets, I will consider it as a factor. It is not a significant one in this case. I accept that there will be time involved in collating documents, and then attending court for the examination, but that need not be significant if the trustees cooperate, particularly in the collation and production of documents ahead of time.
Decision
[37] I make an order that Warren Graeme Turley and Anne Barbara Turley attend the court and be orally examined on oath as to the income and expenditure and assets and liabilities of the Waejo Trust, and its means of satisfying the judgment in this proceeding out of existing or potential property of the trust, and as identified in this judgment.
[38] In addition, I order Warren Graeme Turley and Anne Barbara Turley to produce to Mr Halstead (through his solicitor) at least 5 working days before the examination:
a) Financial statements for the trust from the financial year ending
31 March 2000 onwards;
b) The minute book of the trust;
c) Records of distributions or payments made to Anne Barbara Turley or other beneficiaries related to Warren Graeme Turley and Anne Barbara Turley from August 1999 onwards; and
d) Bank statements for the trust from August 1999 onwards.
[39] Counsel did not address me on costs. I see no reason to depart from the usual order that costs should be awarded in favour of the successful party. It the parties are unable to agree, counsel may file memoranda, with any response to be made
within a further 10 working days.
Associate Judge Abbott
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