Graham v Arena Capital Ltd ((in Liquidation))
| Jurisdiction | New Zealand |
| Judge | Mander J |
| Judgment Date | 17 February 2016 |
| Neutral Citation | [2016] NZHC 194 |
| Docket Number | CIV-2015-404-1500 |
| Court | High Court |
| Date | 17 February 2016 |
[2016] NZHC 194
CIV-2015-404-1500
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
Application by the liquidators of the defendant company for directions in relation to a category of deposits made to the company's bank account — the deposits had been made by investors on or after the date on which the Financial Markets Authority (“FMA”) was granted initial asset preservation orders (APOs) over the defendant's assets — the liquidators sought directions that the funds formed part of the assets of the defendant and should be treated in the liquidation in the same way as any other funds held in a bank account — the defendant purported to operate a foreign exchange trading business but was operating in essence a simple Ponzi scheme — whether the funds deposited by the investors were held on trust — consideration of constructive and Quistclose trusts — principles applicable to tracing in such circumstances — whether that trust obligation was owed exclusively to the post-APO depositors — if not, whether there were material factors and circumstances which entitled them to be treated in the liquidation differently from the pre-APO depositors — whether the post-APO depositors had different rights in the liquidation from other investors in the defendant company.
G Colson and L W Brazier for Plaintiffs
M J Borcoski and T J Brown for Defendants
JUDGMENT OF Mander J
The liquidators of Arena Capital Ltd (in liquidation) (Arena) have applied for directions under the Companies Act 1993 in relation to a category of deposits made to the company's bank account. 1 These deposits were made by investors on or after the date on which the Financial Markets Authority (FMA) was granted initial asset preservation orders (APOs) over Arena's assets.
The liquidators seek directions that these funds form part of the assets of Arena and be treated in the liquidation in the same way as any other funds held in Arena's bank account prior to 15 May 2016. The liquidator's application is resisted by the post-APO depositors. Ancillary orders are also sought which are not the subject of contest.
Arena purported to operate a foreign exchange trading business. Despite deposits being received from clients for the purpose of investment, the company did not conduct any foreign exchange trading nor any other form of investment activity. A single bank account was operated by Arena into which these deposits were received. “Profits” the clients were led to believe existed were in fact fictitious. Monies disbursed to clients to maintain the façade of an active operation were paid out from deposits from other clients. Arena was operating in essence a simple Ponzi scheme.
The FMA obtained initial interim APOs over Arena's assets on 15 May 2015. The terms of the APO prohibited Arena from transferring, charging or otherwise dealing with money, including the bank account. There was, however, no prohibition on deposits continuing to be received into the account. It does not appear that any media release or publicity was given to the making of the APOs until 21 May 2015. In the interim, the bank account continued to receive investors' deposits.
Seventeen Arena clients made deposits into the account on or after 15 May 2015 to a total sum of $249,000. Up until that date, the pattern of activity of the account involved a large number of deposits by investors, some payments out to investors and those associated with the management and ownership of the company, and payments of wages and transfers to third parties usually related to Arena.
Of the seventeen post-APO depositors, eleven had previously made deposits to Arena prior to 15 May and two received withdrawals before the APOs were in place, although for lesser sums than they had deposited. One post-APO depositor had deposited a sum and withdrawn a greater sum prior to the APOs being in place (the greater sum presumably being a “profit” from purported foreign exchange trades) but had then deposited a further larger sum after the imposition of the APOs.
In general terms, the liquidators presently have available to them the bank account with a balance of $728,690.12 as at the date of receivership, and other assets of the company with an estimated value of $300,000. Contingent recoveries from related parties and from clients to whom Arena paid fictitious profits are to be thesubject of legal remedies. There is a single trade creditor claim for $1,400 and three claims by people whose status as employees are disputed by the liquidators. As a result, the only persons having a substantive claim to the Arena assets are the clients of the company. The present application, therefore, essentially involves a contest between the interests of the post-APO depositors and those of Arena's earlier investors.
It was the liquidator's preferred course to seek directions the subject of the present application as part of a “final” directions application once all assets of Arena had been realised. However, the post-APO depositors claim they are in a different position from other investors as a result of their deposits being made on or after the date of the APOs. A number of investors indicated they would issue proceedings to recover their post-APO deposits. As a result, the liquidators have taken the initiative of seeking directions as to whether the post-APO depositors have different rights in the liquidation from other Arena investors.
The post-APO investors claim a proprietary interest in their deposits. That interest is premised on them having the benefit of either a statutory trust, a remedial constructive trust, and/or a resulting trust (a Quistclose trust) over the funds they deposited with Arena after the making of the APOs.
Importantly, the post-APO investors submit their deposits are capable of identification and can be directly traced to funds currently held in Arena's bank account. As a result, they argue those funds should be paid to them in priority to any other distribution.
The liquidators dispute the post-APO depositors' entitlement to priority. They submit the post-APO depositors are in no different position from other Arena investors who contributed to the existing balance of the bank account. Insofar as the monies held in the bank account are subject to a trust obligation, it is one that is owed by Arena to all its investors without distinction.
It is therefore necessary, firstly, to examine whether the funds deposited by the investors with Arena are held on trust. If so, whether that trust obligation is owed exclusively to the post-APO depositors and, if not, whether there are material factors and circumstances which entitles them to be treated in the liquidation differently from the pre-APO depositors.
It is not contested that monies paid by all Arena investors are, in the circumstances, subject to a statutory trust as a result of the effect of securities legislation.
The Financial Markets Conduct Act 2013 (FMCA) came into force on 1 December 2014. However, the effect of transitional provisions means that aspects of the Securities Act 1978 continue to have application to certain offers of securities until 1 December 2016. Arena's activities straddle the commencement of the FMCA, however, the effect of these transitional provisions is immaterial. Whether under the previous or current legislation, the effect of the relevant provisions is the same.
It is undisputed that the arrangements between Arena and its investors constituted a financial product being either a debt security, a managed investment product or a derivative. 2 Arena did not discharge its disclosure obligations and investors, therefore, had a right to have any monies paid reimbursed or any derivative withdrawn. In any event, the money paid was never invested and so was required to be held in trust by the company pending its investment or repayment. 3
A remedial constructive trust is a potential remedy which New Zealand Courts have acknowledged may be available where equity requires a proprietary remedy in the absence of recognised situations giving rise to an institutional constructive trust or an express or resulting trust. In Fortex Group Ltd (in rec and liq) v MacIntosh, the Court of Appeal recognised that in appropriate circumstances a remedial constructive trust could be imposed. 4
In Fortex, the plaintiffs sought an order to the effect that the balance of funds paid by employers into a superannuation scheme managed by a trust company but banked into the general account of the employer, were held on constructive trust. The Court of Appeal, while recognising the potential remedy, declined to impose a remedial constructive trust because there were insufficient equitable grounds for the plaintiffs to be preferred over the secured creditors in the liquidation. Tipping J (delivering the judgment of himself, Gault and Keith JJ) held that parties seeking the Court to impress a trust on some asset in the defendant's hands must do so on a principled basis, vis-à-vis both the person owning the asset and any third party who has an interest in the asset. Furthermore, they: 5
… must be able to point to something which can be said to make it unconscionable – contrary to good conscience – for the [party against whom the order is sought] to rely on their rights at law.
In that case, the parties against whom the order was sought were secured creditors and it was necessary for those seeking the imposition of a remedial constructive trust to demonstrate that it would be unconscionable for the secured creditors to rely on their rights.
In rejecting a submission that there was an element...
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