Shepherd v Wood Northland 2011 Limited (in liquidation) [2017] NZHC 3023 (7 December 2017)

Last Updated: 1 February 2018

IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY

I TE KŌTI MATUA O AOTEAROA WHANGĀREI TERENGA PARĀOA ROHE

CIV-2017-488-000097 [2017] NZHC 3023

UNDER	the District Courts Act 2016, s 124
IN THE MATTER	of an appeal against a decision of the District Court of Whangarei
BETWEEN	JENNIFER MARY SHEPHERD Appellant
AND	WOOD NORTHLAND 2011 LIMITED (IN LIQUIDATION) AND THOMAS LEE RODEWALD Respondents

Hearing:	4 December 2017
Counsel:	JA Browne for Appellant TM Braun and MK Brady for Respondents
Judgment:	7 December 2017

_{JUDGMENT OF DOWNS J}

This judgment was delivered by me on Thursday, 7 December 2017 at 11 am pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel:

Henderson Reeves Lawyers, Whangarei.

Whitfield Braun Ltd, Hamilton.

SHEPHERD v WOOD NORTHLAND 2011 LTD (IN LIQUIDATION) [2017] NZHC 3023 [7 December 2017]

The appeal

[1] On 24 July 2017 Judge D J McDonald found Ms Jennifer Shepherd liable to repay Wood Northland 2011 Ltd (Wood Northland 2011) and its liquidator $40,000.¹

Ms Shepherd received the money in $20,000 payments on 2 and 16 April 2012. The Judge concluded the liquidator had established the restitutionary claim of “money had and received”. The Judge considered it unnecessary to determine other causes of action. Ms Shepherd appeals.² She contends the Judge was wrong to conclude she was required to repay the money. Her central appeal ground invites attention to when Wood Northland 2011 became insolvent, and alleged prejudice arising from the late introduction of evidence on this subject.

[2] For reasons explained below, I consider the precise timing of Wood Northland

2011’s insolvency is something of a red herring, whereas incontrovertible insolvency of another company—Bay Lumber Ltd (Bay Lumber)—has significance.

The facts as found by the Judge

[3] Ms Shepherd is the partner of Mr Martin Nicholls. They have been in a relationship since August 2011. Ms Shepherd is a chiropractor. On 8 February 2012

Ms Shepherd incorporated Bay Chiropractic Ltd, of which Ms Shepherd was both director and shareholder.

[4] In 2002 Mr Nicholls and his then wife, Ms Giacomelli, incorporated Bay Lumber. Mr Nicholls was a director; so too Ms Giacomelli between 2004 and 2011. Bay Lumber was a sawmilling company. It operated a mill in Kerikeri.

[5] In 2010 Mr Nicholls incorporated Wood Northland Ltd (Wood Northland), and was its sole shareholder and director. Wood Northland bought green or freshly sawn

_{timber from Bay Lumber, processed it, and on-sold it to wholesalers.}

¹ Wood Northland 2011 Ltd v Shepherd [2017] NZDC 15049.

² The appeal is governed by Austin, Nichols & Co v Stichting Lodestar [2007] NZSC 103, [2008] 2

NZLR 141.

[6] On 11 October 2011 Mr Nicholls and his father incorporated Wood Northland

2011. Mr Nicholls was its director; his father the sole shareholder. Wood Northland

2011 was incorporated “to ensure ... any transactions of that company could be hidden from Mr Martin Nicholls’ wife, with whom he had separated”.³ The new company took over the business of Wood Northland.⁴ Bay Lumber was in serious financial difficulty.

[7] Mr Nicholls used Wood Northland 2011 to collect debts owed to Bay Lumber and to repay its creditors to keep it afloat. Indeed, from approximately March 2012, Wood Northland 2011’s primary business was the collection of money on behalf of Bay Lumber.

[8] Mr Nicholls’ efforts were not, however, enough. On 16 February 2012

Bay Lumber was placed in receivership. On 26 March 2012, Bay Lumber was also placed in liquidation.

[9] On 2 April 2012 Mr Nicholls paid $20,000 from Wood Northland 2011 to

Ms Shepherd’s bank account. He did likewise on 16 April 2012. The $40,000 was derived from either the sale of timber owned by Bay Lumber, funds otherwise payable to Bay Lumber, or some combination of each.

[10] Mr Nicholls paid the $40,000:

(a) To ensure it was not available to the liquidators of Bay Lumber.

(b) And, so Ms Shepherd could start a new chiropractic business, which would then provide income for Ms Shepherd, and through her relationship with Mr Nicholls, Mr Nicholls too.

[11] Mr Nicholls knew “in all probability” the money should have been paid to Bay

_Lumber.⁵

³ Wood Northland 2011 Ltd v Shepherd, above n 1, at [9].

4. The Judge said another reason for Wood Northland 2011’s existence might have been “to hide transactions from the ultimate receiver” of Bay Lumber; at [9].

⁵ At [50](b).

[12] Ms Shepherd quickly learnt the money had been paid into her account by

Mr Nicholls. She knew too Bay Lumber was then in “deep financial trouble”.⁶

However, on balance, Ms Shepherd did not know she had been preferred to

Bay Lumber.

[13] Ms Shepherd used much of the money vis-à-vis Bay Chiropractic Ltd to fit-out its premises, so it could open for business on 22 June 2012. Ms Shepherd spent the balance of the $40,000 on living expenses.

[14] Ms Shepherd gave inconsistent and inaccurate accounts about the money:

(a) Ms Shepherd initially said she had no recollection of receiving it.

(b) Her original statement of defence said the money was transferred into her account without her knowledge. Ms Shepherd said Mr Nicholls told her the $40,000 represented drawings and salary payable to him by Wood Northland 2011. But, Ms Shepherd said she obtained no benefit from the money, which quickly left her account (before she even knew of it).

(c) In an affidavit of 31 January 2017, Ms Shepherd said she believed the money was a gift from Mr Nicholls’ parents, and all of the money had been spent on living expenses.

(d) Ms Shepherd’s amended statement of defence said the money was paid with the authority of MMN Ltd, a company owned and directed by Mr Nicholls’ parents. So, essentially, the payment was a gift to her from her partner’s parents. Bay Lumber leased property from MMN, and owed it much unpaid rent.

(e) Ms Shepherd’s trial case was that most of the money was spent on the fit-out of Bay Chiropractic Ltd’s premises.

⁶ Wood Northland 2011 Ltd v Shepherd, above n 1, at [45].

Consequently, Ms Shepherd and Mr Nicholls had reconstructed “what they say occurred in the hope it would defeat the liquidator’s claim”.⁷

Grounds of appeal

[15] The Judge concluded Wood Northland 2011 was either insolvent or nearly so when Mr Nicholls made the payments to Ms Shepherd in April 2012. Mr Browne for Ms Shepherd contends the Judge erred in relation to this finding. The company was not placed in liquidation until 28 October 2014, two and a half years after the payments to Ms Shepherd. Evidence of insolvency was adduced late and over Ms Shepherd’s objection. Mr Browne contends Ms Shepherd was not able to answer this evidence as she did not have adequate opportunity to respond. Mr Browne argues if the finding of insolvency is unsafe, the cause of action of money had and received cannot be sustained.

[16] Alternatively, Mr Browne contends the Judge was wrong to dismiss

Ms Shepherd’s defence under s 296 of the Companies Act 1993.

[17] For the respondent, Mr Braun submits the Judge was correct to allow the liquidator to adduce evidence of Wood Northland 2011’s insolvency because

Ms Shepherd raised an affirmative defence under the Companies Act, which necessarily meant solvency was a live issue. Mr Braun also contends Ms Shepherd was not materially disadvantaged by the late introduction of evidence on this issue.

Analysis

[18] The Judge’s factual findings make irrelevant the precise timing of Wood Northland 2011’s insolvency (before 28 October 2014) for, contrary to Mr Browne’s submissions, the action of money had and received was established in any event.

[19] Money had and received continues to attract disagreement as to exactly what it entails. The simplest formulation is from Lord Ellenborough CJ:⁸

⁷ Wood Northland 2011 Ltd v Shepherd, above n 1, at [48].

⁸ Hudson v Robinson [1816] EngR 244; (1816) 4 M & S 475.

... an action for money had and received is maintainable whenever the money of one man has, without consideration, got into the pocket of another.

[20] Woolford J recently described money had and received this way in

Torbay Holdings Ltd v Napier:⁹

[164] A claim for monies had and received is a personal restitutionary remedy based on the concept of unjust enrichment. It requires only receipt of money by a defendant who has no right to retain it or who has improperly disposed of it. The claim does not depend on proof of any wrongdoing or impropriety on the part of the recipient, or on ongoing retention of the money or its value. The cause of action is complete when the money is received. ...

...

[166] As noted above, a claim for money had and received does not depend on proof of any wrongdoing or fault on the part of the recipient. However, the underpinning of the claim for money had and received in unjust enrichment consequently requires some element of unjustness in the defendant retaining the money he had received. This has been highlighted in other cases:

An action for money had and received is based on the receipt of money by a defendant who no longer has the right to retain it or has improperly disposed of it. Other than that, the claim does not depend on proof of any wrongdoing or fault on the part of the recipient.

[167] This dictum recognises that the action for money had and received is not a claim based in the personal conscience of the recipient. Instead, the unjustness assessment is focused on determining whether the retention of the money would unjustly enrich the defendant, who has no real right to the money. To this extent, the claim is complete when the money is received, if retaining the money would be unjust, as the defendant has no right to retain it. Heath J, in a recent case, saw some element of unconscionability or unjustness as being a key requirement to make out money had and received claims. This recognises the underlying focus of money had and received claims, in unjust enrichment.

[21] Torbay reached the Court of Appeal.¹⁰ For that Court, Asher J analysed the “well recognised” action a little differently.¹¹ The Judge said only two things are required: “... first, the payment of money by A to B and, second, proof that the money would not have been paid but for a mistake of fact A made”.¹² His Honour cited Bowstead on Agency as a convenient starting point if the case involved agency and the

_{“principal has entrusted money to his agent for a particular purpose which the agent}

9. Torbay Holdings Ltd v Napier [2015] NZHC 2477, [2015] NZAR 1839 (emphasis added) (footnotes omitted).

¹⁰ Napier v Torbay Holdings Ltd [2016] NZCA 608, [2017] NZAR 108.

¹¹ At [18].

¹² At [19].

has not carried out, [as] the principal can recover that money as had and received to his use”.¹³ Asher J also observed:¹⁴

The claim for money had and received is a personal claim, not a proprietary or in rem claim. It does not depend on proof of any wrongdoing or impropriety on the part of a recipient. It does not turn on the continued existence or retention of the money received. Although unjust enrichment may be seen as underpinning a claim for money had and received, there is no actual requirement of unjust enrichment.

[22] Woolford J’s analysis was upheld in both fact and law.

[23] To return to this case, Wood Northland 2011 acted as Bay Lumber’s agent to collect money owing to Bay Lumber. Indeed, that was Wood Northland 2011’s primary business by the time of the payments. The money paid to Ms Shepherd was either from the sale of timber owned by Bay Lumber, otherwise payable to Bay Lumber, or a combination of the two. Consequently, the money paid to

Ms Shepherd was not hers. The money ought to have been paid to Bay Lumber, and in turn, available to its creditors. Instead, Wood Northland 2011 paid the money to

Ms Shepherd absent any consideration on her part within a little over three weeks of

Bay Lumber being placed in liquidation.

[24] It follows money had and received was established in terms of the agency principle identified by the Court of Appeal in Torbay: Mr Nicholls knew “in all probability” the money should have been paid to Bay Lumber.¹⁵ Instead, he paid it to Ms Shepherd.

[25] Mr Browne contended the money was a gift to Ms Shepherd, and it would be inequitable for her not to be able to maintain the benefit of that gift. However, it is clear equity’s frame of reference is broader than Ms Shepherd’s interests. The money ought not to have been paid to her. And, she made no inquiry as to its source when

_{she became aware of it (shortly after it reached her account).}

¹³ Napier v Torbay Holdings Ltd, above n 10, at [20].

¹⁴ At [21] (footnotes omitted).

¹⁵ Wood Northland 2011 Ltd v Shepherd, above n 1, at [50](b).

[26] More importantly, the contention of a gift is at best awkward. If Mr Nicholls’ parents had wished to give money to Ms Shepherd, there were more obvious and orthodox ways to do so as against using the medium of Wood Northland 2011.¹⁶ The timing of the payments underscores this point. Bay Lumber had been placed in liquidation only weeks earlier. The fluidity of Ms Shepherd’s explanations does not help either. Most people would immediately recall a gift of $40,000. And be candid about it.

[27] It follows Wood Northland 2011’s insolvency was not a necessary ingredient of the cause of action on the facts as found below. As observed, money had and received was established on an agency basis. The cause of action was also established on the broader formulation identified by Woolford J in Torbay: proof Ms Shepherd received the money in circumstances in which would be unjust for her to retain its benefit.

Ms Shepherd’s affirmative defence under the Companies Act

[28] Mr Browne contends this “crucial” issue was the primary one below and on appeal.

[29] Section 296(3) of the Companies Act provides:

296 Additional provisions relating to setting aside transactions and charges

...

(3) A court must not order the recovery of property of a company (or its equivalent value) by a liquidator, whether under this Act, any other enactment, or in law or in equity, if the person from whom recovery is sought (A) proves that when A received the property—

(a) A acted in good faith; and

(b) a reasonable person in A's position would not have suspected, and A did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and

16. The second payment to Ms Shepherd’s bank account was narrated “L and Bev”, an apparent reference to Mr Nicholls’ parents.

(c) A gave value for the property or altered A's position in the reasonably held belief that the transfer of the property to A was valid and would not be set aside.

[30] As will be apparent, the test is cumulative; a defendant must establish each limb of the defence created by the section.

[31] Judge McDonald was “highly suspicious ... Ms Shepherd knew exactly what the financial position of Bay Lumber was”.¹⁷ This because:¹⁸

... Bay Lumber Limited was insolvent, and as a result Wood Northland Limited was likely in some difficulty given that it relied on Bay Lumber Limited for its income.

[32] However, the Judge concluded Ms Shepherd had established on the balance of probabilities she acted in good faith. For the respondent, Mr Braun did not seek to challenge this conclusion.

[33] The Judge concluded Ms Shepherd had not established the second and third limbs. In relation to the second limb, Mr Browne stressed Ms Shepherd was not a director, shareholder, employee or creditor of either Wood Northland 2011 or Bay Lumber. And, Ms Shepherd had a tendency to leave even her own financial matters to Mr Nicholls; she had little reason to take any interest in Mr Nicholls’ business affairs.

[34] I consider the Judge’s reasoning on this limb unimpeachable for the reasons he gave:¹⁹

In my view a person in Ms Shepherd’s position, looking at it objectively, would know that Wood Northland 2011 Limited was insolvent or on the verge of insolvency. Bay Lumber Limited had been liquidated. Her partner had left that company. He left with little or no assets at all. Wood Northland 2011

Limited was associated with Bay Lumber Limited. The money was paid directly from Wood Northland 2011 Limited to her. The first payment

appeared on her bank statement like that. There was no direct contact in

relation to the alleged gift between Ms Shepherd and Mr and Mrs Nicholls Snr. Looked at objectively, Ms Shepherd would have been suspicious that a large amount of money from Wood Northland 2011 Limited, a company controlled by her partner with whom she was living, found its way into her

¹⁷ Wood Northland 2011 Ltd v Shepherd, above n 1, at [67].

¹⁸ At [67].

¹⁹ At [72].

bank account at a time when the principal company her partner was running had gone into liquidation. Viewed objectively that would have been more than idle wondering, Ms Shepherd must have [had] a suspicion that her partner Mr Martin Nicholls’ various companies were insolvent, as Bay Lumber Limited was, and that would include Wood Northland 2011 Limited. Her various explanations as to where the money came from, who it was directed towards, who was entitled to it and what it was, in my view demonstrate that she was highly suspicious that the money was being paid to her to defeat creditors of her partner’s company.

[35] Judge McDonald also concluded Ms Shepherd had not made out the third limb because Ms Shepherd lent the money to her company and it ultimately repaid the debt to her. Mr Browne emphasises the fit-out could not have proceeded without the money, and its treatment as a loan to the company did not affect Ms Shepherd’s alteration of position in reliance on it. There is force in these submissions.

[36] However, the third limb also required Ms Shepherd to establish a reasonably held belief the payment of the money to her would not be set aside. Judge McDonald’s reasoning in relation to the second limb is equally applicable here. Ms Shepherd’s competing explanations in relation to the money underscore this conclusion, which was all but inevitable.

[37] The appeal is dismissed.

...................................

Downs J