Loo v Quinlan and Kelly (in their capacity as liquidators)

• Jurisdiction: New Zealand
• Judge: Kós P
• Judgment Date: 26 October 2021
• Neutral Citation: [2021] NZCA 561
• Docket Number: CA348/2021
• Court: Court of Appeal

Between

Choo Boon Loo

Appellant

and

Philip Alexander Quinlan and Morgan John Kelly (in their capacity as liquidators)

First Respondents

Halifax New Zealand Limited (in liquidation)

Second Respondent

Philip Alexander Quinlan and Morgan John Kelly (in their capacity as trustees)

Third Respondents

Elysium Business Systems Pty Limited

Fourth Respondent

Jason Paul Hingston

Fifth Respondent

Atlas Asset Management Pty Limited (As trustee for the Atlas Asset Management Trust)

Sixth Respondent

Fiona McMullin

Seventh Respondent

Andrew Phillip Whitehead and Marlene Whitehead (as trustees for the Beeline Trust)

Eighth Respondents

Andrew Phillip Whitehead

Ninth Respondent

Jeffrey John Worboys

Tenth Respondent

Hong Kong Capital Holdings Pty Limited

Eleventh Respondent

[2021] NZCA 561

Court:

Kós P, Cooper and Goddard JJ

CA348/2021

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

Companies, Equity, Insolvency — appeal by the liquidators against a High Court decision which held that investor entitlements to funds were to be quantified on the date the New Zealand entity entered administration — the High Court and Federal Court of Australia issue joint decisions which also held that, except for certain assets traceable to certain categories of investors, all investor funds were part of a single deficient fund to be distributed on a pari passu basis — appeal against a discretionary decision — whether the date should be as close as possible to the date of distribution

Counsel:

I Jackman SC, E A J Hyde and R J Pietriche for Appellant

A Leopold SC, E Holmes and M Kersey for First to Third Respondents

S Couper QC and J V Gooley for Fourth Respondent

Appearances excused for Fifth to Eleventh Respondents

• A The appeal is dismissed.

• B Costs are reserved.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Kós P)

1 A cross-border insolvency. Halifax Investment Services Pty Ltd, an Australian corporation, and Halifax New Zealand Ltd were financial services providers. 1 Clients could use Halifax online platforms to acquire exchange traded financial products (such as shares) and enter into derivatives contracts. Client cash contributions, shares and other exchange traded financial products, and money and other property connected with derivatives trading, were held by Halifax on trust. Halifax however used client assets to fund their own activities, in breach of trust, and mingled client funds and assets in a manner inconsistent with those trusts. The deficiency and mingling prevented tracing of most individual customer assets. As a result, it is uncontested

that client assets were (and are now) held by Halifax on trust, in a single deficient mixed fund. Thereafter the Halifax companies failed. 2

2 Halifax customers had “accounts” recording the investments they had chosen to acquire through the various trading platforms operated by Halifax. The deficiency and mingling of trust funds, and the inability to trace, meant that these accounts were, for most investors, bookkeeping fictions that did not correspond with proprietary claims to specific investments of the kind recorded in those accounts. However somewhat unusually, the liquidators permitted customers to keep the nominal market positions shown in their accounts open, and retained investments that corresponded with investors' aggregate open positions. 3 Rather than cashing up in what were seen by many investors, at the end of 2018, as adverse market conditions, liquidators allowed customers to either close out their nominal positions or hold those positions open. The value of the investments retained by the liquidators to reflect those open positions rose substantially from late 2018 to the present day. 4 Correspondingly, the nominal value of the open positions retained by some investors increased — in some cases, very substantially, in others, less so. And the nominal value of the open positions retained by some investors fell over the same period.

3 As so often occurs, a rise in the value of an asset owned collectively brings with it a dispute. Who was to take the benefit of the overall investment gains resulting from these open positions? All beneficiaries of the trust, or just those beneficiaries whose positions had improved? The answer to that question requires analysis of what these “positions” were, as a matter of law. But let us take Mr Loo's position. On 23 November 2018, the value of the assets shown in his personal account was AUD 361,570 and in his company's account was AUD 856,309. 5 Mr Loo does not contend for a specified date on which entitlements should be calculated (arguing as he

does for a date as close as possible to the date of distribution). But by way of example, on 30 January 2020 the value of the assets shown in his personal account was AUD 639,730, and in his company's account was AUD 1,482,193

4 The liquidators sought directions in relation to the distribution of the funds held by Halifax in Australia and New Zealand. The Federal Court of Australia and the High Court of New Zealand conducted a joint hearing, but issued separate judgments. 6 Happily for good order, Markovic J (in the Federal Court) and Venning J (in the High Court) reached the same conclusion. The date of valuation of investor-beneficiary contributions was to be 27 November 2018, being the date Halifax NZ went into administration. That meant all customer-beneficiaries would share in the benefit of increases in value of the fund after that date. To put it another way, Mr Loo's percentage interest in the single deficient mixed fund remained the same regardless of the increase in value of what might be called “his position”.

5 Mr Loo appeals to this Court against the judgment of Venning J. The appeal was heard in conjunction with the Full Court of the Federal Court of Australia, itself hearing Mr Loo's appeal against the judgment of Markovic J. Accordingly we sat, using remote hearing technology, with Middleton, Beach and Moshinsky JJ of that Court. As below, each Court has reached its own decision on its own appeal, but it was agreed by all parties that the two Courts might confer before doing so. 7 That approach was followed.

Background

6 Halifax AU was a financial services provider through which investors could access several different online trading platforms. Halifax NZ acted as a broker for exchange traded products but also as a broker for Halifax AU and provided access to investors to the Halifax AU trading platforms. 8 Halifax NZ was also a licensed derivatives issuer.

7 On 23 November 2018 Halifax AU entered voluntary administration. That triggered the administration of Halifax NZ on 27 November 2018. On 20 March 2019 Halifax AU was placed in liquidation. On 22 March 2019 Halifax NZ was placed in liquidation. On 18 September 2019 the administrators of Halifax NZ (and also Halifax AU) were appointed by the New Zealand Financial Markets Authority as trustees of a trust created pursuant to reg 246 of the Financial Markets Conduct Regulations 2014.

8 When the administrators were appointed to Halifax AU, the combined funds across Halifax AU and Halifax NZ totalled AUD 192.6 million but investor assets were recorded in their accounts as totalling AUD 211.6 million — leaving a shortfall of AUD 19 million. Investor funds, save for the funds of those investors in Categories 3 and 5, 9 were intermingled in a single (deficient) mixed fund between Halifax AU and Halifax NZ. 10

9 Following their appointment, the administrators — who were later also appointed as liquidators — did not immediately liquidate the fund. Rather, they permitted investors either to close out existing investments or to keep their positions open for the time being. Investors could not otherwise enter new investment transactions. 11 As noted above, the liquidators retained investments that corresponded to the aggregate open positions in investors' accounts.

10 The liquidators did so for several reasons. Most important was that numerous investors contended their investments were traceable. The contended proprietary rights would entitle them to an in specie distribution. But closing out all positions would prevent an in specie distribution. This consideration was prescient — such a claim was upheld vis-à-vis investors in Categories 3 and 5, to whom in specie distributions were ordered. A second consideration was that the vast majority of investors who expressed a view on closing out opposed such a move. Finally, there were concerns over threats of litigation from investors if the liquidators closed out positions without judicial direction.

11 Concerns of possible litigation from other investors who opposed permitting positions to remain open caused the liquidators to apply for directions from the Federal Court of Australia and High Court of New Zealand as to whether they would be justified in refraining from closing out any and all extant investments until the determination of all substantive issues in the proceeding. The Federal Court and High Court made the direction sought. 12

12 The liquidators then applied to the Federal Court for directions as to the distribution of funds held by Halifax AU. Subsequently a similar application was made to the High Court in relation to Halifax NZ.

13 The appellant, Mr Loo, was appointed to represent all Category 1 Halifax investors. Category 1 investors are those whose proportionate entitlement to the deficient mixed funds will be higher after the realisation of all extant investments than their entitlement was on the date the administrators were appointed. 13 Category 1 includes both investors who closed out positions and investors who chose not to do so — with a higher proportion being the latter.

14 The fourth respondent, Elysium Business Systems Pty Ltd, was appointed to represent all Category 2 investors. Category 2 investors are those whose proportionate entitlement to the...