Gerald Stanley Rea and Paul Graham Sargison v Ronald Leslie Russell

• Jurisdiction: New Zealand
• Judge: Asher J
• Judgment Date: 16 November 2012
• Neutral Citation: [2012] NZCA 536
• Docket Number: CA86/2012
• Court: Court of Appeal
• Date: 16 November 2012

Between

Gerald Stanley Rea and Paul Graham Sargison

Appellants

and

Ronald Leslie Russell

Respondent

[2012] NZCA 536

Court:

O'Regan P, French and Asher JJ

CA86/2012

IN THE COURT OF APPEAL OF NEW ZEALAND

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.

Counsel:

S O McAnally for Appellants

G J Judd QC for Respondent

JUDGMENT OF THE COURT

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.

REASONS OF THE COURT

(Given by Asher J)

Table of Contents

	Para No
Introduction	[1]
Background	[4]
The decision	[13]
Were these payments insolvent transactions under s 292 of the Act?
The words of the section	[20]
The burden of proof	[24]
A revolving credit facility?	[25]
Transactions not “real”	[29]
Payments of a debt or restoration of property?	[32]
Payments into an account in overdraft	[42]
The payments following 31 March 2007	[47]
Conclusion on whether there were insolvent transactions	[51]
Section 292(4B)	[52]
Section 295	[62]
Result	[66]
Costs	[69]

Introduction

1 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.

2 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.

3 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.

Background

4 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”).

5 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.

6 Mr Russell deposed that the trust was established by his brother-in-law Mr Neil Williams for the benefit of Mr Williams' family interests. At the time Mr Williams was working for the company. He played an active part in the management of the company but was not recorded at the Companies Office as being a director. Mr Williams was an undischarged bankrupt. Mr Williams was described by Mr Sargison as being in all but name a director of the company. The directors leading up to the liquidation were Nicholas George Kirk, Marcus Arthur MacDonald and Anthony Walpole Bowden. Mr Russell had known Mr MacDonald as his

solicitor and friend for approximately 30 years and Mr Kirk had been his accountant and friend for approximately 36 years

7 Mr Russell deposed that his interest as a trustee was to have an overview of the trust's asset position and make on advice the decisions whether to retain, dispose of or diversify investments. He referred to three property investments. He stated that he would delegate to Mr Kirk “some of the Trust's administrative activities”. He did not delegate to him the right to make trust decisions in terms of borrowing or entering into financial arrangements, and did not hold him out as having that authority. He deposed that the company transactions which appeared to be as a running account for the trust were not within Mr Kirk's authority. Mr Russell also stated that they were not undertaken with his knowledge, consent or approval. He asserted that he did not delegate to Mr Kirk the ability to carry on or be involved in financial investments. He did not address whether he looked at the trust's bank accounts, nor, if he did, why the transactions with the company did not come to his attention.

8 Mr Sargison in his affidavit in reply to Mr Russell's affidavit did not contest Mr Russell's assertion that he had no knowledge of the payments in issue. However, he produced an undated document signed by Mr Russell and addressed to Mr Kirk at Five Star headed “Re: Management of the Trust”. In this Mr Russell stated that for many years he had delegated to Mr Kirk who in turn delegated to his staff the administration of the trust including income and expenditure and annual accounting and taxation obligations. It was stated in this document that Mr Kirk managed the assets of the trust on Mr Russell's behalf, including the Westpac bank account. It was also stated that all major transactions still required Mr Russell's signature and that this had been the position from the outset. Mr Russell did not file an affidavit in reply. He did not explain the context of this document.

9 There was a loan ledger produced headed “Loan Details – R725”. This purports to record detailed transactions between the company and the trust between 16 July 2002 and 23 August 2007. While the heading says “Advance, no interest – Ronald Russell trustee”, the ledger shows that the trust was charged interest on a revolving credit basis. The ledger shows a peak of $10,414,391.08 of advances to the trust in March 2006 and a closing balance on 23 August 2007 of $7,067,042.80.

10 The liquidators of the company initially took the ledger at face value. However, on 18 December 2007 the High Court appointed Mr van Delden as receiver of the trust. While the trust was found to be insolvent, Mr van Delden took the view that the ledger was of little value and that the only transactions capable of being relied on were cash in and cash out, except where loans were documented, signed by the trustee and funds advanced. There were in fact no documents evidencing any loans between the company and the trust.

11 Mr van Delden's reconstruction showed that by 1 March 2006 the trust owed the company $1.489 million. However, from then on this rapidly changed and payments from the trust to the company extinguished the former's indebtedness so that by 31 August 2006 the company owed the trust $2,114.40. From this point on the inter-company balance favoured the trust. The indebtedness peaked at $1,710,793.36 on 1 December 2006, but by the time the company went into receivership on 5 September 2007, as a consequence of payments made by it, $995,805.57 was all that remained owing to the trust. While the trust had continued to make some limited advances to the company, the company made 39 payments to the trust between 26 September 2006 and 23 August 2007 totalling $928,937.79.

12 It is those 39 payments that the liquidators submit were voidable in terms of s 292 of the Act and which they sought to recover. The Associate Judge accepted that Mr Russell was not aware of any of these payments.

The decision

13 The Associate Judge, having set out the background facts, found that the R725 loan ledger could not be relied on as an accurate record of transactions and proceeded on the premise that the summary of payments in and payments out relied on by the liquidator was accurate. Although on occasions Mr Judd QC for the respondent referred us to the loan ledger document R725 and commented on the lack of any explanation for the payments in and payments out, there has been no cross-appeal in relation to this aspect of the judgment and we proceed on the basis that the Associate Judge's findings as to the payments were correct.

14 Section 292 was amended on 1 November 2007. The Associate...