Gerald Stanley Rea and Paul Graham Sargison v Ronald Leslie Russell

JurisdictionNew Zealand
CourtCourt of Appeal
JudgeAsher J
Date16 November 2012
Docket NumberCA86/2012

[2012] NZCA 536



O'Regan P, French and Asher JJ


Gerald Stanley Rea and Paul Graham Sargison
Ronald Leslie Russell

S O McAnally for Appellants

G J Judd QC for Respondent

Appeal from High Court (“HC”) decision that certain payments were not voidable transactions under s292 Companies Act 1993 (“CA”) (insolvent transaction voidable) during two years prior to liquidation of finance company, payments of $928,937 were made to trust (respondent sole trustee) — after consideration of tracing, HC held any proprietary claim of trust was excluded during particular period because company accounts were in overdraft — went on to find that payments made by company to trust were restoring trust funds it had received and therefore were not transactions within meaning of s292 CA — whether there was a revolving credit facility — whether transactions were “real” when trustee did not know about them or give anyone authority to receive them on his behalf — whether payments were payments of a debt or restoration of property.

Held: To be an insolvent transaction in terms of s292(2) CA, it was essential the payment had the character of being in satisfaction of a debt owed by the company to the recipient. If the payment did not have this characteristic, it was not an insolvent transaction. The onus was on the liquidator to prove that relevant payments were made into overdrawn accounts.

There was nothing to show that there was in fact a revolving credit facility (save for the discredited loan ledger). There was nothing to indicate that Five Star provided a credit arrangement to the trust. On any overview, Five Star had received more funds than the trust had received. It was the analysis of the receiver of the trust (which was insolvent) that found the company in fact owed the trust money, which Five Star repaid.

Given that Five Star owed money to the trust, even if the payments to the trust were described or documented as loans, the effect of the payment would still be that the trust had enjoyed a preference. In terms of s292(2)(b) the payment enabled the trust to receive more towards satisfaction of the debt owed to it than otherwise.

It was submitted that the transactions were not real because R could not be said to have received the payments when he knew nothing about them and had given no authority to anyone to receive them on his behalf. This submission was inconsistent with R's concession that he was the proper defendant. There was no doubt that he was the sole trustee at the time, and there was nothing to indicate that the account into which the monies were paid was a sham and not maintained for the benefit of the trust. R did not depose that K was not authorised to accept payments into the trust's bank accounts. This was fatal to the submission.

Tracing was not a cause of action or a remedy, and was to be distinguished from the ability of a claimant to follow an asset. Tracing was a means, recognised by the Courts, whereby property in which a party had a proprietary claim could be followed into different property, and that different property recovered in lieu of the original property. The repayments of traceable proceeds might not be payments made under s292(2)(b) towards satisfaction of a debt owed by Five Star to the trust, in that such payments might not have the character of the repayment of a debt at all, but rather be the recovery of an asset.

In the case of payment into an overdrawn account, there was no new asset created, as there was no debt of the bank to the account holder created, and the account holder gained no chose in action against the bank. The monies paid by the account holder could no longer be identified and there was no property or replacement asset that could be restored (Re Registered Securities Ltd).

Thus it was not possible to trace into an overdrawn account as the money wrongfully paid was not represented by property. The overdrawn account was not an asset and no traceable chose in action was created. Assuming the trust had a proprietary claim against Five Star, that claim was extinguished once the payments from the trust were made to Five Star's overdrawn account. The claims available to the trust thereafter were not of a proprietary nature.

The AJ was wrong to conclude that in the absence of bank statements for the post March 2007 period, there was not enough evidence to show that the accounts were in overdraft. It was obvious that if the bank accounts were significantly in overdraft in the months prior to 31 March 2007, that they remained in overdraft as the company moved towards receivership on 5 September 2007. The financial position of the company was hopelessly insolvent at the time of its receivership, and the suggestion that in the last six months of its existence it might have gone out from overdraft and into credit and then back into deep insolvency was improbable. There was evidence that the later payments must also have been into accounts in overdraft and could not be traced.

The payments were made in reduction of Five Star's indebtedness to the trust and had the effect of reducing the imbalance in favour of the trust by the amount of $928,937. They were insolvent transactions and as such were voidable.

Section 292(4B) CA, which created an exception in the event of an ongoing commercial relationship, did not apply. There was nothing to indicate that the payments by the company to the trust were integral to an ongoing business relationship, or indeed that there was an ongoing business relationship. They were not been shown to have been made to induce further credit. The relationship between Five Star and the trust could not be defined, but appeared to be based on the convenience of the shareholders who, for undocumented and unexplained reasons, wanted to move funds between the two entities. This was very different from the case of a supplier of credit in the case of a bank, or the supplier of goods in the case of a retail purchaser relationship, where there was an ongoing commercial relationship. Section 292(4B) CA did not apply.

In the circumstances there was no reason for the Court to make any orders under s295 CA (other orders). R as trustee of the trust that received the payments was liable for the full $928,937.

Appeal allowed.


A The appeal is allowed.

B The payments made by Five Star Finance Ltd (in liquidation) to Ronald Leslie Russell as trustee of the Bowden No. 14 Trust between 26 September 2006 and 23 August 2007 totalling $928,937.79 are voidable and are set aside.

C Mr Russell is to pay to the applicants Messrs Rea and Sargison the sum of $928,937.79.

D The respondent will pay the costs of the appellants for a standard appeal on a Band A basis together with usual disbursements.


(Given by Asher J)

Table of Contents

Para No





The decision


Were these payments insolvent transactions under s 292 of the Act?

The words of the section


The burden of proof


A revolving credit facility?


Transactions not “real”


Payments of a debt or restoration of property?


Payments into an account in overdraft


The payments following 31 March 2007


Conclusion on whether there were insolvent transactions


Section 292(4B)


Section 295







Five Star Finance Ltd was one of the many New Zealand finance companies that became or were shown to be insolvent following the onset of the global financial crisis in 2007. It had been financed primarily by deposits from the public. The company went into receivership on 5 September 2007 and was put into liquidation by Court order on 13 June 2008. Following the liquidation, the liquidators found that Five Star Finance Ltd had creditors' claims of $43,834,842.58. Recoveries so far have come to $551,887.24.


This appeal concerns allegedly voidable transactions made in the two years prior to the liquidation between 26 September 2006 and 23 August 2007. The payments amounted to $928,937.79 and were made to a trust, the Bowden No. 14 Trust. The respondent Ronald Leslie Russell was the sole trustee of that Trust during the period in question.


On 22 February 2011 the liquidators served a notice under s 294 of the Companies Act 1993 (“the Act”) to have these transactions set aside as voidable under s 292 of the Act. The application was heard by Associate Judge Bell. On 24 January 2012 he gave a decision concluding that the payments did not come within s 292 of the Act and that the liquidators were not entitled to an order setting them aside. 1 The liquidators, Gerald Stanley Rea and Paul Graham Sargison, appeal that decision.


The evidence before the High Court was in four short affidavits, two from the appellant Mr Sargison who is one of the liquidators of Five Star Finance Ltd (“the company”), one from the respondent Mr Russell, and one from an insolvency practitioner, Mr Boris van Delden, who was appointed by the Court as the receiver of the Bowden No. 14 Trust (“the trust”).


The Associate Judge in his decision referred to a number of matters that are not in dispute. It was accepted that the respondent, Mr Russell, who was the appointed trustee of the trust at the time of the payments, was the appropriate defendant. It was also accepted that the payments in question of $928,937.79 were made during the two year period referred to in s 292. Mr Russell did not contest the company's insolvency at the time the payments were made, and the Associate Judge's conclusion that it was insolvent is not challenged in this appeal.


Mr Russell deposed that the trust was established by his brother-in-law...

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1 books & journal articles
  • Tracing, Value and Transactions
    • United Kingdom
    • The Modern Law Review Nbr. 79-3, May 2016
    • 1 May 2016
    ...task.3Relfo vVarsani [2014] EWCA Civ 360.4Conlan vConnolly [2011] WASC 160; CY Foundation Group vCheng Chee Tock n1above;ReavRussell [2012] NZCA 536.5Agip (Africa) Ltd vJackso n [1991] Ch 547; El Ajou vDollar Land Holdings [1993] 3 All ER 717;Nimmo vWestpac Banking Corp [1993] 3 NZLR 218; B......

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