McIntosh v Fisk and Anor

JurisdictionNew Zealand
JudgeHarrison,French JJ,Harrison J,Miller J
Judgment Date16 March 2016
Neutral Citation[2015] NZCA 74
Docket NumberCA384/2015
CourtCourt of Appeal
Date16 March 2016
Between
Hamish McIntosh
Appellant
and
John Howard Ross Fisk and David John Bridgman
Respondents

[2015] NZCA 74

Court:

Harrison, French and Miller JJ

CA384/2015

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal against a High Court (“HC”) decision which held the appellant was not entitled to retain the profit component of an investment — cross-appeal by the respondent liquidators against the finding that the appellant's original deposit of funds satisfied the requirement of giving value or valuable consideration — the appellant had deposited funds into an investment company, however the company operated a Ponzi scheme — a year before its liquidation, the company repaid the appellant's deposit of $500,000 plus fictitious profits of $454,047 ($954,047 in total) — on the liquidators' application to recover the payment, the HC found that the appellant had given value for and was entitled to retain his original deposit but he was ordered to repay the profit because he had neither given value nor altered his financial position in the reasonably held belief that this element of the payment was valid — whether the appellant could establish either that he had given value or acquired for valuable consideration all or part of the payment; or, if not, whether he had altered his position in the reasonably held belief that the transfer was valid and would not be set aside.

Counsel:

J B M Smith QC and J L W Wass for Appellant

M G Colson and R Pinny for Respondent and Cross-Appellant

JUDGMENT OF THE COURT
  • A The appeal is dismissed.

  • B The cross-appeal is dismissed. C There is no order as to costs.

REASONS

Harrison and French JJ

[1]

Miller J (dissenting on cross-appeal)

[97]

Harrison AND French JJ

(Given by Harrison J)

Table of Contents

Para No

Introduction

[1]

Facts

[6]

Statutory defences

[14]

First defence: giving value or valuable consideration

[16]

(a) High Court

[16]

(b) Principles

[19]

(i) Legal relationship

[19]

(ii) Antecedent debt or obligation and discharge tests

[22]

(c) Payment

[30]

(i) Deposit

[30]

(ii) Balance

[41]

(d) Comparative jurisprudence

[53]

Second defence: alteration of position

[57]

(a) Legal principles

[57]

(b) Mr McIntosh's financial circumstances

[63]

(c) Decision

[72]

(i) Purchase of 33 Palliser Road

[72]

(ii) Lost opportunity

[79]

Result

[94]

Introduction
1

Subject to proving certain preconditions, the liquidator of a failed company is entitled to recover any payments made by the company to a creditor within the two year period before liquidation unless the creditor can prove that either he or she (1) gave value or valuable consideration for the payment or (2) has altered his or her position in the reasonably held belief that the payment was valid. 1 While these alternative defences are simply expressed, the application of the first to the facts at issue on this appeal and cross-appeal is not without its conceptual difficulties, and our decision on it will directly affect the rights and obligations of the company and many of its creditors.

2

Ross Asset Management Ltd (RAM) managed funds deposited for investment by members of the general public. The company was the corporate ego of

David Ross, a Wellington accountant. It appeared to be most successful, reporting substantial profits on investments in nominated securities. But the truth was otherwise
3

Mr Ross operated an elaborate fraud, known colloquially as a Ponzi scheme. The reported securities were largely non-existent. He used new investments to repay maturing deposits, including a substantial but fictitious profit component. When it was placed in liquidation RAM's liabilities exceeded its assets by at least $100 million. The company was, and had been for many years, hopelessly insolvent.

4

Hamish McIntosh was a depositor. Some four years after his original deposit, and about a year before its liquidation, RAM repaid Mr McIntosh's deposit of $500,000 plus fictitious profits of $454,047, a total of $954,047. On the liquidators' application to recover the payment MacKenzie J found that Mr McIntosh had given value for and was entitled to retain $500,000 of it. 2 But he was ordered to repay the balance of $454,047 because he had neither given value nor altered his financial position in the reasonably held belief that this element of the payment was valid. In legal terms, this part constituted a voidable transaction 3 or a prejudicial disposition. 4

5

Mr McIntosh appeals; the liquidators cross-appeal.

Facts
6

The relevant facts are not in dispute and for these purposes can be stated shortly.

7

Mr McIntosh met Mr Ross in March 2007. He agreed to deposit $500,000 with RAM to establish and manage what he called an international equity portfolio. He had borrowed the $500,000 from Westpac which he paid to RAM in April 2007. He described his goal as to achieve consistent medium to long-term capital growth from a diversified share portfolio.

8

The legal relationship between the parties was governed by a contract whereby Mr McIntosh appointed RAM as his agent for the purpose of managing and administering his portfolio. The company was to hold the funds upon a bare trust for Mr McIntosh. Another company, Dagger Nominees Ltd, was appointed to hold any assets comprised in the portfolio or managed by RAM. The agreement was terminable on 30 working days' notice. RAM undertook to discharge its duties in a proper manner. Management fees were payable. A limitation of liability to a figure three times a year's fees did not apply to fraud.

9

Mr McIntosh's deposit suffered the same fate of misappropriation as Mr Ross practised on all other depositors. MacKenzie J described Mr Ross' modus operandi more fully as follows:

[9] Mr Ross did not operate his business in accordance with that contract. Cash or shares transferred by investors for investment under the agreement were not immediately transferred to Dagger and held on trust for the individual investors. They became part of a pool of shares and cash held by Ross group companies: RAM, Dagger, Bevis Marks Corporation Ltd, and United Asset Management Ltd. RAM paid from that pool the operating expenses of RAM, personal drawings of Mr Ross, payments to investors, and payment for the few share purchases which were actually made. Funds obtained from investor deposits were used first to meet any Ross Group expenditure or withdrawals sought by other investors. If there was insufficient cash available to meet those requirements, shares were sold.

[10] Mr Ross reported to the investor clients in terms which indicated to them that investments had been made in shares and other securities in accordance with the management agreement. The reports listed individual shareholdings of specific securities, at prices and returns which matched what was occurring in the market for the particular security. An investor who compared his portfolio statement to stock exchange reports would not have seen any price discrepancy. The fictitious investments were recorded in the RAM investor database records as being held through “Bevis Marks”, a nonexistent dummy broker.

[11] The scale of the difference between what was reported to investors and what actually happened is very vividly demonstrated by the liquidators' summary of investor related receipts and payments from 2006 to the date of liquidation in 2012. Taking the year ending 31 March 2012 as an example, the investor statements reported total assets held for all investors of $387 million. Those assets were made up of $114 million of investor contributions, and the reported but fictitious returns on investments. The actual assets available to investors were $15 million. The cash flow analysis shows that $27.9 million of investor related receipts were actually received. This included investor deposits of $12 million. $27.8 million of investor related payments were made. This included $27 million of investor withdrawals.

10

Mr McIntosh understood from RAM that his investment was profitable. By September 2011, however, he decided to terminate his contract with the company. He wanted to use the $500,000 deposit and what he understood were accumulated profits for another purpose.

11

In November 2011, RAM made six payments to Mr McIntosh totalling $954,047 in settlement of his withdrawal notice. RAM's investment report sent to Mr McIntosh with the funds purported to show that the monies were realised from the sales of eight separate share parcels. MacKenzie J's findings are not challenged that (1) none of the shares existed and none of the monies paid to Mr McIntosh were derived from the sale of shares held on Mr McIntosh's behalf; 5 (2) the monies paid to Mr McIntosh were derived from the sales of other shares and securities, intercompany transfers within the Ross group and deposits paid by other investors; 6 and (3) there was a deficit of assets to liabilities throughout the relevant period, starting at $18 million on 31 March 2008 and rising to $109 million by 6 November 2012. 7

12

There is no challenge also to MacKenzie J's findings that the liquidators had satisfied all the statutory conditions necessary to establish a right of claim against Mr McIntosh to repay the money. In particular (1) the payment of $954,047 constituted a disposition of property by RAM or a transaction; 8 (2) the payment was made by a debtor; 9 (3) RAM was insolvent at the time of the payment because it was unable to pay its debts as they fell due; 10 (4) the payment was made with intent to defeat RAM's creditors; 11 and (5) the payment enabled Mr McIntosh to receive more than he would have received on RAM's liquidation. 12 There was no question that Mr McIntosh received the money in good faith and without knowledge or suspicion that RAM was insolvent.

13

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1 firm's commentaries
  • Voidable transactions and Ponzi schemes – the Supreme Court ruling
    • New Zealand
    • Mondaq New Zealand
    • 10 July 2017
    ...Insolvency Working Group regarding the voidable transactions regime and Ponzi schemes can be accessed here. Footnotes 1 McIntosh v Fisk [2015] NZCA 74. 2 Allied Concrete Ltd v Meltzer [2015] NZSC 7. 3 Cunningham v Brown 265 US 1 (1924) at 8. 4McIntosh v Fisk [2017] NZSC 78 at [270] per Glaz......

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