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Regal Castings Ltd v Lightbody [2007] NZCA 396; [2008] 2 NZLR 153 (7 September 2007)

Last Updated: 2 February 2018

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IN THE COURT OF APPEAL OF NEW ZEALAND

CA234/05
[2007] NZCA 396


BETWEEN REGAL CASTINGS LIMITED
Appellant

AND G M AND G N LIGHTBODY
First Respondents

AND A C HORROCKS, G M LIGHTBODY AND G N LIGHTBODY
Second Respondents

Hearing: 22 August 2006

Court: William Young P, Glazebrook and Arnold JJ

Counsel: J McCartney for Appellant
D K Wilson for Respondents

Judgment: 7 September 2007 at 3 pm

JUDGMENT OF THE COURT

A The appeal is dismissed.

  1. The appellant must pay the respondents $6,000 costs in this Court plus usual disbursements.





REASONS

Para No

Glazebrook and Arnold JJ [1]
William Young P (Dissenting) [87]

GLAZEBROOK AND ARNOLD JJ
(Given by Arnold J)

Table of Contents

Para No
Introduction [1]
Background [4]
High Court [19]
Basis of appeal [25]
Discussion [28]
Legal principles [28]
This case [60]
A voluntary alienation by an insolvent debtor? [63]
Capro’s performance as at 1998 [69]
Length of time between alienation and Capro’s liquidation [77]
Secrecy and reliance [80]
Mr Horrock’s evidence [82]
Conclusion [84]
Decision [86]

Introduction

[1] This appeal raises the question of what must be established to show an intention to defraud creditors for the purposes of s 60 of the Property Law Act 1952 (PLA). Subsection (1) of that section renders voidable at the instance of the person prejudiced “every alienation of property with intent to defraud creditors”. Subsection (3) protects purchasers in good faith without notice of the intention to defraud.
[2] The appellant claimed that the first respondents, Glen and Gaynor Lightbody, transferred their home, which they owned jointly, to a family trust with intention to defraud it as a creditor. The trustees of the family trust are the Lightbodys and the solicitor who set up the trust, Mr Horrocks.
[3] The appellant sought an order under s 60 that the transfer be set aside. Ellen France J refused to grant the order, holding that the appellant had not established that the Lightbodys had the necessary intention to defraud: HC AK CIV 2005-404-352 29 September 2005. The appellant now challenges that finding.

Background

[4] Glen Lightbody was a manufacturing jeweller. He operated through a company known as Capro III Limited (Capro), of which he and his wife Gaynor were directors and shareholders. The appellant was a supplier and refiner of precious metals and supplier of precious stones. Capro had entered into a supply agreement with it. The terms of that agreement were contained in a form headed “Application to open credit account” dated 23 August 1990. The application attached a set of conditions, which Glen Lightbody had signed.
[5] Among other things, the conditions:

(a) Required that goods be paid for “by the 20th day of the month next following date of delivery”;

(b) Provided that the purchaser would pay interest at a rate of 25 per cent per annum for late payment;
(c) Provided that Glen Lightbody accepted “full personal liability” for meeting the terms of the contract should Capro fail to make any payment.
[6] In 1993, Capro was facing financial difficulties. Mr Astley, a shareholder and director of the appellant, suggested that a firm of chartered accountants with expertise in the jewellery trade, BDO Hogg Young Cathie, undertake a review of Capro’s affairs and produce a report. The firm carried out the review and produced a report dated 6 October 1993, which was provided to Capro and to the appellant.
[7] The report concluded:

Having reviewed the company’s accounts in detail to 31st March 1993 based on the information and explanations made by [Glen Lightbody], we are of the opinion the company did not trade at a loss of $39,509 but after amendments to inventory valuation of say $34,177 effectively traded at breakeven.

....

We have reviewed the costing procedures of the company and believe if it adopts the formulas embodied in our report the company should be able to operate at a trading profit in excess of $50,000 based on its current budgeted production levels.

Clearly this means there is no short term solution in respect of the debt owing to [the appellant], in particular as there is over the next 3 months, a need for seasonal finance. Providing budgets are achieved, we do not envisage until the new year real stock reductions and the benefits from profitability to be able to flow to [the appellant].

[Capro’s] entire working capital has been virtually provided by [the appellant] as the company has only a paid up capital and shareholder’s funds as at 31st March 1993 of $6,000. We believe it would take between 3 to 5 years, unless the company outperforms budgets set, for Capro to reduce its indebtedness to [the appellant] to what could be described as normal commercial terms.

If a decision was made to call up the debt at this stage, [the appellant] would suffer a considerable loss due to break-up realisations on the assets employed.

[8] Capro continued to trade. On 28 March 1995, Glen Lightbody re-signed the conditions of purchase attached to his credit account application of 23 August 1990. Mr Innes-Jones, at the time a partner in BDO Hogg Young Cathie, witnessed his signature. This was done to resolve a dispute between the appellant and Capro which apparently needed to be resolved in order to secure ongoing supply.
[9] There was then a meeting in July 1995 at which the appellant agreed to restructure Capro’s outstanding debt. $356,358 would be treated as a term loan which Capro would repay over the following five years, at a rate of $3,000 per month for the first year and at an increased rate thereafter (this was subsequently agreed to be $4,000). The appellant agreed to forgive the outstanding interest, which at that stage was $94,322.20, providing the term loan was repaid as agreed. In addition to the term loan, Capro was to operate a current account with the appellant, on its normal commercial terms.
[10] The agreement was recorded in a letter from the appellant to Capro dated 8 August 1995, which Glen Lightbody countersigned on 10 November 1995. The letter contained an acknowledgement that the guarantee previously given by Glen Lightbody remained in force.
[11] In late 1998, an accountant suggested to the Lightbodys that they talk to Mr Horrocks about setting up a family trust. Mr Horrocks specialised in establishing and operating family trusts. The Lightbodys went to see him and ultimately, by deed of trust dated 12 November 1998, established a family trust, of which they and Mr Horrocks were trustees. They transferred their jointly owned family home to the trust, at a value fixed by a registered valuer ($230,000), together with their shares in Capro, which were valued at $1,000. The sale price was advanced by way of a loan from the Lightbodys to the trust. The Lightbodys then embarked upon a gifting programme, which, bearing in mind their joint ownership, meant that the loan was forgiven by December 2002.
[12] At the time of the transfer Capro owed approximately $220,000 to the appellant on the term loan and $213,000 on current account.
[13] Capro continued to trade, steadily paying off the term loan. In November 2002, Capro changed suppliers from the appellant to another company. However, on 11 April 2003 Capro went into voluntary liquidation. There was some dispute at trial about the reasons for the liquidation. Glen Lightbody said that it was the result of two things. The first was difficulties with their son in 2001 and 2002, which resulted in his being imprisoned. These difficulties affected Glen Lightbody’s ability to focus on the business. The second was an injury which Glen Lightbody suffered in March 2003, which resulted in his being unable to work as a jeweller. The appellant accepted that these factors were real but not that they were the reasons for the company’s going into liquidation.
[14] At the time of the liquidation the Lightbodys thought that the term loan had been repaid, so that the only remaining liability to the appellant was in relation to the current account. In fact that was incorrect, and as at 11 April 2003 Capro owed approximately $15,000 to the appellant under the term loan and $149,000 on its current account.
[15] The appellant then took proceedings in the District Court against Glen Lightbody under his personal guarantee to recover the debt. In a judgment delivered on 4 November 2004, Judge Wilson QC granted the appellant summary judgment for the sum of $15,358.57 (the balance due under the term loan), plus interest at 25 per cent from 11 April 2003 to 4 November 2004, and for the sum of $149,324.40, plus interest at 25 per cent for the same period (the balance due on the current account): CIV 2004-044-818. Glen Lightbody was unable to meet the judgment, and was adjudicated bankrupt on 14 December 2005.
[16] Then, in January 2005, the appellant commenced the current proceedings by way of originating application. The application sought an order that:

... the agreement for sale and purchase of the property at 68 Salisbury Road, Birkdale being more particularly described as all that parcel of land comprising 809 square metres being Lot 4 on DP46944 and being comprised and described in certificate of title NA 1852/71 from Glen Michael Lightbody and Gaynor Noele Lightbody as vendors to Anthony Charles Horrocks, Glen Michael Lightbody and Gaynor Noele Lightbody as purchasers made in or about December 1998 together with the associated transfer No. D344908.2 be set aside.

[17] The application alleged:

The said agreement was made with the intent to defeat creditors of Glen Michael Lightbody in that:

  1. The simple consequence of the transfer to trustees (if upheld) would be that the debt to [the appellant] may be able to be avoided;
  2. The effect of the agreement would be to preclude successful execution of [the appellant’s] debt and subsequent judgment against the property;
  3. The agreement was not at arms length and not to a bona fide third party;
  4. Glen Lightbody retains control over the property to the extent that he can make the equity in the property available when it suits his purposes.
[18] The final point in this extract refers to the fact that the trustees granted a charge over the property in the context of Glen Lightbody obtaining legal aid.

High Court

[19] The evidence before Ellen France J consisted of two affidavits from Mr Astley, and one affidavit from each of Glen and Gaynor Lightbody and Mr Horrocks. In addition, there were brief affidavits from Mr Innes-Jones and from Mr Culav (a valuer who valued the property at $385,000 as at 24 August 2005). Mr Astley, the Lightbodys and Mr Horrocks were cross-examined.
[20] Having set out s 60(1) and (3) of the PLA, Ellen France J identified the initial issue as being whether the transfer of the house was made with intent to defraud a creditor (at [20]). The Judge summarised the legal principles by reference to various authorities. She then said:

[24] The plaintiff, in closing submissions, sought to rely on a presumption of fraudulent intent on a voluntary alienation by an insolvent debtor (see: Freeman v Pope (1870) 5 LR Ch App 538). However, as Ms McCartney [for the plaintiff] accepted, the plaintiff’s case was not pleaded on that basis. Nor was that the subject of any particular focus in the evidence. Accordingly, I do not deal with the case on that basis.

[21] The Judge summarised the appellant’s case as follows:

[25] The plaintiff relies, broadly, on five matters of circumstance surrounding the transfer to the family trust, namely,

(i) The financial circumstances of the company and of the Lightbodys at the time of transfer of the home in late 1998.

(ii) The circumstances of the Lightbodys’ attendances on Mr Horrocks for the purposes of forming the trust and the unsatisfactory nature of the reasons for the formation of the trust advanced by the trustees.

(iii) The control given to the Lightbodys under the trust.

(iv) The inadequacy of consideration for the transfer and the associated gifting programme which saw the transfer price forgiven by December 2002.

(v) The coincidence in timing between the conclusion of the gifting programme, the Lightbodys’ belief the term loan was repaid, and voluntary liquidation.

[22] The Judge then analysed the circumstances in turn and concluded:

[73] Viewing the matter overall, the considerations supporting the plaintiff’s claim are the consequences of alienation and the Lightbodys’ likely appreciation of those consequences. That flows from the debt to [the appellant], the lack of other assets, and the absence of any advice to [the appellant] about what was happening.

[74] On the other hand, there was no particular change in the company’s or the Lightbodys’ circumstances that year. I accept the defendants’ submission it is reasonable to take it that if questions had been asked at the time of transfer, it would have been taken that the company would have continued in the same way as it had been. That is, with the loan for over three years and that the company would have been making the monthly loan payments through to the completion of the term of the loan. On Mr Horrocks’ evidence, Mrs Lightbody, in particular, needed convincing to set up the trust. Further, there is nothing in the documentation at the time to suggest anything untoward. Importantly, there was no immediate attempt to seek to take advantage of the alienation. Indeed, the converse was true. Finally, the transfer was for good consideration.

[75] Overlying these factors is the timing. The plaintiff’s case, given the four and a half year gap between alienation and liquidation, ultimately requires a level of calculation and sophistication on the part of the Lightbodys which I do not believe they had. I consider this is a case where the disponors were aware of the effect of alienation but did not have the requisite intent to defraud.

[23] In view of her finding on this aspect of the case, the Judge did not go on to resolve the other issues that had been raised, including in particular the question whether the trustees could avail themselves of the protection afforded by s 60(3) as bona fide purchasers for value without notice.
[24] In the result, Ellen France J dismissed the appellant’s application.

Basis of appeal

[25] In its notice of appeal the appellant says that the Judge was in error because, on the basis of eight identified factors, “[t]he only logical inference to be drawn ... was that the transfer was to defeat [the appellant] as creditor and was not honest in the creditor/debtor relationship.” The eight factors are:
  1. By the transfer of the house to the trustees of the family trust, the first respondents put the house beyond the reach of the appellant, ... a creditor;
  2. The sale was by way of debt back. By a programme of forgiveness of debt, within four years and while the debt to [the appellant] remained owing, the asset which replaced the house, namely the debt back to the first respondents, had disappeared;
  3. At the time of the said transfer [the appellant] was owed $336,000. The house had a value of about $231,000;
  4. At all material times thereafter, there was never less than $100,000 owed to [the appellant];
  5. At the time of the said transfer, given the performance of the trading company Capro ... and the level of monthly repayments that were being made, there was no prospect of repayment of the term loan portion of the debt which was due in October 2000. Nor was there any ability to pay all of the current account portion of the debt which was due on the 20th of the month following invoice;
  6. At the request of the first-named first respondent, [the appellant] granted an extension of time to repay the debt. The transfer to trust was not disclosed at any time;
  7. In the mistaken belief that the term loan portion of the debt was repaid in full (and as a result [the appellant] could not call up the interest) the first respondents, as shareholders, put Capro ... into liquidation. The liquidation took place about four months after the final balance of the debt back had been forgiven;
  8. The learned judge erred in finding that [the appellant] accepted that there were genuine reasons for the liquidation. The evidence of Jack Astley on behalf of [the appellant] was that the reasons given were “nonsense”.

[26] In her written submissions, Ms McCartney went further and advanced what were alternative propositions in relation to intention to defraud. She argued that the appellant was entitled to the benefit of a presumption of intent, as applied by the Court in Freeman v Pope (1870) LR 5 Ch App 538. Alternatively, the facts in this case were such that the Judge ought to have drawn an inference that there was an intention to defraud.
[27] Ms McCartney also argued that the trustees were not entitled to the benefit of s 60(3).

Discussion

Legal principles

[28] Section 60, like similar sections in other common law jurisdictions, traces its origins back to the Statute of Elizabeth 1571 (13 Eliz 1, c 5). Authorities decided under this statute are relevant to the interpretation and application of s 60: Re Proudfoot [1960] NZLR 577 at 581 (SC); Re Hale (a bankrupt) [1989] 2 NZLR 503n at 506 per Wild CJ (CA); Johnson v Felton [2006] NZSC 31; [2006] 3 NZLR 475 at [13] (SC).
[29] The leading decision of this Court is Re Hale. That case dealt with a transaction which had the effect of preferring one creditor to another. (It involved the execution of a mortgage in favour of one creditor, who was the debtor’s wife, in respect of an existing debt.) Wild CJ accepted (at 506) that the proper approach to s 60 was:

... first to determine whether the transaction is voidable in terms of subs (1) as being made with intent to defraud creditors; if it is, then it is saved only by affirmative proof under subs (3) of alienation to a purchaser in good faith without notice of the intention to defraud creditors.

[30] This statement was qualified by this Court in Dungey v McCallum [1993] 3 NZLR 551 in respect of cases where the impugned transaction results in the transferee obtaining a registered title to land, as here. In that case Hardie Boys J, delivering the judgment of the Court, quoted the passage from Wild CJ and said (at 556 – 557):

We have no difficulty with it as a general statement. But it is necessary to modify it in recognition of the particular status of a land transfer title. Although the mortgage in question in Re Hale was registered, the case did not turn on subs (3) or on indefeasibility of title, and the Chief Justice’s observations were thus not necessary to the decision.

In a case such as the present, where the impugned transaction has resulted in the transferee obtaining a title under the Land Transfer Act, the challenge is as to the indefeasibility of that title. For the challenge to be successful, the Land Transfer Act requires that there be proof of fraud on the part of the registered proprietor. It must therefore be for the plaintiff, not the defendant, to show, in terms of s 60(3), that the latter did not take in good faith and had notice of the debtor’s intention to defraud creditors by the alienation. That being so, it is for the plaintiff to make the appropriate allegations to this effect in his pleadings.

[31] As is noted in Hinde McMorland & Sim Land Law in New Zealand (Looseleaf ed.) at [9.080], this raises an as yet unresolved issue concerning the relationship between the concept of fraud required under the Land Transfer Act and that required under s 60.
[32] In his judgment in Hale, with which Woodhouse J agreed, Richmond J summarised five principles emerging from the authorities on the Statute of Elizabeth (at 508 - 509). The first two of these principles are as follows:

(1) No alienation of property can be caught by the section unless it is first shown to fall within subs (1) as being one made “with intent to defraud creditors”. With the possible exception of a voluntary alienation made by an insolvent debtor (Freeman v Pope (1870) LR 5 Ch App 538) the existence of an intention to defraud is a question of fact to be decided by a consideration of the alienation in the light of all the circumstances (Re Holland [1902] 2 Ch 360, 372; Glegg v Bromley [1912] 3 KB 474, 492). The onus of establishing intent to defraud rests on the party attacking the transaction.

(2) It is not necessary for the purposes of the present case to attempt any precise definition of “intent to defraud”. If there is an intention to prejudice creditors by putting an asset wholly or partly beyond their reach then that will be an intent to defraud creditors provided that in the circumstances the debtor is acting in a fashion which is not honest in the context of the relationship of debtor and creditor. This in essence was the view taken by Russell LJ in Lloyds Bank Ltd v Marcan [1973] 3 All ER 754, 759.
[33] In the first of these points, Richmond J stated the general rule that the existence of an intention to defraud was a question of fact, but recognised a possible exception in relation to a voluntary alienation made by an insolvent debtor, citing Freeman v Pope.
[34] In Freeman v Pope the debtor had voluntarily assigned an insurance policy on his life to the benefit of a Ms Pope, at a time when he owed substantial debts and was being pressed for repayment. Following the assignment he was in a position where he was unable to pay his debts and was accordingly insolvent. After his death several years later some of his debts remained unpaid and, on the application of a creditor, the assignment was set aside. Ms Pope appealed.
[35] The appeal was dismissed. Lord Hatherley LC said (at 541):

[I]t is established by the authorities that in the absence of any such direct proof of intention, if a person owing debts makes a settlement which subtracts from the property which is the proper fund for the payment of those debts, an amount without which the debts cannot be paid, then, since it is the necessary consequence of the settlement (supposing it effectual) that some creditors must remain unpaid, it would be the duty of the Judge to direct the jury that they must infer the intent of the settlor to have been to defeat or delay his creditors, and that the case is within the statute.

[36] Giffard LJ said (at 544 – 545):

There is one class of cases, no doubt, in which an actual and express intent is necessary to be proved – that is, in such cases ... where the instruments sought to be set aside were founded on valuable consideration; but where the settlement is voluntary, then the intent may be inferred in a variety of ways. For instance, if after deducting the property which is the subject of the voluntary settlement, sufficient available assets are not left for the payment of the settlor’s debts then the law infers intent, and it would be the duty of a Judge, in leaving the case to the jury, to tell the jury that they must presume that that was the intent. Again, if at the date of the settlement the person making the settlement was not in a position actually to pay his creditors, the law would infer that he intended, by making the voluntary settlement, to defeat and delay them.

[37] What is being said, it seems, is that in this class of case, the requisite intent will be inferred as a matter of law. There is, in effect, an irrebutable presumption.
[38] This approach was adopted in subsequent cases. For example, in Mackay v Douglas (1872) LR 14 Eq 106 the defendant made a voluntary settlement of property on his wife shortly before he entered into business activities which the Court described as highly speculative, to the point of being reckless. The Court was satisfied that he entered into the settlement knowing that he might become indebted. The business activities soon failed and the creditors of the business sought to challenge the settlement. The Court said that it was not necessary to show that the defendant had an actual fraudulent intent in making the settlement (at 120):

The [Statute of Elizabeth] speaks of cases where the creditors “are, shall, or might be in any wise disturbed, hindered, delayed, or defrauded,” and it is not necessary to shew an intention to do that, because if the settlement must have that effect the Court presumes the intention and will attribute it to the settlor.... So I dare say that [the defendant] had no fraudulent intention, according to his view, in making the settlement, and that he thought it a prudent thing to protect his wife and children. But in doing that he has, within the meaning of this statute, committed a fraudulent act, because, going into trade, he was taking away the only property which would be available for his creditors.

[39] The Supreme Court cited this decision with approval in Johnson v Felton at [15] – [16], although not on the point of proof of intent.
[40] There are numerous other examples of the application of Freeman v Pope by the English courts, more recent ones being the decisions of Harman J in In re Eichholz, Decd [1959] 1 Ch 708 at 722 – 3 and of the Court of Appeal in Lloyds Bank Ltd v Marcan [1973] 3 All ER 754, especially at 758 per Russell LJ and at 760 – 761 per Cairns LJ.
[41] In Kerr on the Law of Fraud and Mistake (7ed 1952) the position emerging from the English authorities is summarised as follows (at 310):

It is not necessary, therefore, in such circumstances [a voluntary alienation by an insolvent debtor], to bring actual proof that the debtor had in his mind an intention to defeat, delay or defraud his creditors; for, if it appears from all the facts of the case that the effect might be expected to be, and has in fact been, to do so, the Court will attribute the fraudulent intention to the settlor. Where the settlor is shown to have been indebted, he must be taken to have known the state of his circumstances, whether he really did so or not; evidence that he did not will not rebut the presumption of fraud.

(Footnotes omitted.)

[42] Freeman v Pope has received frequent mention in the Australian courts. In Cannane v J Cannane Pty Ltd (In Liquidation) (1998) 192 CLR 557 s 121(1) of the Bankruptcy Act 1966 (Cth) was in issue. That subsection provided:

Subject to this section, a disposition of property ... with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy.

[43] Brennan CJ and McHugh J said in their joint judgment (at 565 – 567):
  1. ....The critical term for present purposes is “with intent to defraud creditors”. Provisions of this kind, based on 13 Eliz I c 5, have been considered by courts in various jurisdictions and it is clearly established that the party seeking to avoid a disposition of property has the onus of proving an actual intent by the disponor at the time of the disposition to defraud creditors. The creditors whom the fraudulent disponor of property might intend to defeat need not be existing creditors; they may be future creditors. The intent prescribed by s 121(1) is an intent to defraud any present or future creditors. But, as the intent must accompany the disposition, it must relate to the effect of disposing of property then existing.

....

  1. Although the party impugning the disposition of property must show an actual intent to defraud creditors at the time of the disposition, the intent may be inferred from the making of a disposition which, to adopt the words of Lord Hatherley LC in Freeman v Pope, “subtracts from the property which is the proper fund for the payment of [the] debts, an amount without which the debts cannot be paid”. The “proper fund” may consist in assets out of which future creditors as well as present creditors would be entitled to be paid a dividend in respect of what is owing to them. Therefore a subtraction of assets which, but for the impugned disposition, would be available to meet the claims of present and future creditors is material from which an inference of intent to defraud those creditors might be drawn. Whether that inference should be drawn depends upon all the circumstances of the case.
  2. If the property be disposed of by sale and the sale price received by the disponor is equal to the true value of the property at the time of the disposition, the creditors have an undepleted fund against which to prove their debts. But if property is sold for an undervalue or is given away, that fact is relevant to the intent to be attributed to the disponor in disposing of the property.

(Footnotes omitted. Emphasis added.)

[44] In her judgment Gaudron J said (at 572):
  1. It is to be remembered that the operation of s 121(1) depends on the intent of the bankrupt or, where it is applied in a company winding up, the intent of the company concerned. What is in issue in each case is, as Dixon J said in Williams v Lloyd; In re Williams [(1934) [1934] HCA 1; 50 CLR 341 at 372], a “real intent”. And as Starke J observed in the same case, “[f]raud ... is not to be presumed” [at 361]. That is not to deny that it may take very little to justify a finding of fraud or intent to defraud for the purposes of s 121(1) of the Act if the person or company concerned disposes of assets when facing financial difficulties. Even so, the real intent must be ascertained.

[45] Finally we refer to the judgment of Kirby J. He dissented on the facts, but summarised the principles which he derived from the authorities. Among the points he made were the following (at 591 – 592):
  1. Proof of the intention of a person presents notorious difficulties in every area of the law where it is encountered. Even when the distinction between intention and motive is kept in mind, knowledge of subjective intention will ordinarily, or often, be reserved to the person whose interests may be so affected that an assertion, one way or the other, cannot necessarily be accepted at face value. That is why, at least in a provision such as s 121, it is not necessary to establish that the transferor of the property in question actually had in mind an intention to defraud creditors if the effect of what that person did would reasonably be expected to have such a consequence. Courts will therefore infer the intention in issue, deciding it as a question of fact. This does not mean that the intention so derived is one imputed by the law. It is not a fiction. It is the real intention of the transferor decided objectively rather than upon protestations of innocence on the part of the debtor or outraged accusations on the part of suspicious creditors.
  2. In order to decide whether the requisite intent existed at the relevant time, and whether the disposition was made with that intent, the decision-maker must look at all the circumstances surrounding the impugned transaction. As the cases show, it is often a feature of transactions susceptible to avoidance that the debtor has disposed of property to a close family member or trusted friend, usually, a spouse. However, the recipient of the disposition is no more conclusive of the “intent” in question than is the adequacy of the consideration afforded. These, and like, facts are the building blocks upon which the decision about the “intent” will ultimately be derived from all of the evidence. Obviously, the fact that the transferor is shown not to have been in a sound financial position at the time of the disposition of property in question will commonly be a prerequisite to the operation of the section, for otherwise an intent to defraud creditors will not so readily be inferred. In judging what that “intent” was, a court is entitled to ask itself: what was the purpose of placing the property at such a time in another’s name? If that purpose was to defeat creditors, the trustee (or liquidator) will be in a strong position to establish that the section attaches.

(Footnotes omitted.)

[46] These passages suggest that, as far as the Australian courts are concerned, there is no irrebutable presumption of intent. Rather an inference may be drawn based on the particular circumstances of the case.
[47] Returning to the New Zealand cases, this Court discussed intention to defraud in the context of s 60 in Swann v Secureland Mortgage Investment Nominees Ltd [1992] 2 NZLR 144. In that case, the appellant sold a property to a purchaser who was described as a “man of straw” for $500,000. She was required to leave $350,000 in on second mortgage. The purchaser borrowed $250,000 from the respondent on first mortgage. He used this to pay the remainder of the purchase price ($150,000), and disbursed what was left to various entities (including the respondent and its parent company) as well as keeping some himself. The purchaser immediately defaulted under the first mortgage and the respondent took steps to realise its security. The appellant obtained an injunction to prevent the sale of the house. The purchaser was bankrupted and the respondent and its associated companies went into liquidation. The property was sold for $475,000 and there was then a dispute as to the proceeds. The issue before the Court was whether the appellant’s claim took precedence over the respondent’s claim, the appellant arguing that the first mortgage should be set aside on the ground of fraud.
[48] The evidence at trial was that those involved in the purchase and financing of the house were following a scheme that they had utilised on other occasions. The trial Judge held that fraud had not been proved. Cooke P identified the critical part of the trial Judge’s reasoning as follows (at 147):

The fact that the amount of the advance needed for those purposes eroded, and was known by all to erode, the equity immediately available under the second-ranking security held by [the appellant] was an incidental consequence, not the real purpose behind the transaction. Giving due weight to all those factors, I do not think it has been established that the real purpose was a dishonest one to put the property or part of it beyond the reach of the creditors.

[49] This Court allowed the appeal, holding that there was an intention to defraud. Cooke P emphasised the need to distinguish intention (or immediate purpose) from motive (or underlying purpose). An intention to defraud could be inferred where the defrauding of the victim was the “necessary incident” of the defendants pursuing their scheme (at 147).
[50] Gault J dealt with the matter in more detail. He said (at 152):

In many legal contexts intention is a matter for proof by inference from proved facts in particular circumstances. In cases under s 60 the intent to defraud must be actual intent. It is not sufficient that the consequence of defeating creditors should have been recognised as likely to flow from the particular alienation (see Attorney-General’s Reference (No 1 of 1982) [1983] QB 751, 757). Richmond J said no more than that in Re Hale. I do not interpret his judgment as requiring for the operation of s 60 that defrauding creditors be the real and only object or purpose of the alienation. He was emphasising the need to establish intent to defraud and not merely intent to prefer.

[51] The Judge then went on to say that there is fraud “where a person by deliberate dishonesty is induced to undertake risk to his or her economic interest” (at 152) and that “[w]hile dishonesty is necessary, deceit is not” (at 153). Gault J then said (at 153):

In R v Cooke [1986] AC 909 the House of Lords upheld a conviction for conspiracy to defraud British Rail by members of a restaurant and buffet-car crew who agreed to sell to passengers food and drink not the property of British Rail. As is pointed out in Smith and Hogan on Criminal Law (6th ed, 1988) at p 272:

“Constructive intentions are to be abhorred; but presumably the House in Cooke thought that a jury could properly find that the defendants must have known that their conduct would, inevitably, cause loss to British Rail. If so, it was right to hold that they intended to defraud BR and it should be immaterial that this was not their purpose. The true purpose of conspirators is almost always to make a gain for themselves, not to cause loss to another. Conspirators act out of greed, not spite. Since they know they can make a gain only by causing a loss, they intend to cause that loss. Of course, the intention must be proved.”

In my view this is equally applicable to cases under s 60.

[52] Section 60 was briefly touched on by this Court in Julius Harper Ltd v F W Hagedorn & Sons Ltd [1991] 1 NZLR 530 at 540 – 541, but in a way that does not assist to resolve the status of the “possible exception” to which Richmond J referred in Re Hale.
[53] Finally, there are several decisions of the High Court in which the intention to defraud under s 60 has been discussed, in particular D J & M M Cotter Limited v Dyhrberg HC AK M70/87 10 November 1989, Gray v Wilson HC AK CP179/95 16 January 1998 and Elders Pastoral Holdings Ltd v Grey HC AK CP2-SD/99 17 December 1999. Although the first and third of these cases involved fact situations which fell within the scope of the “possible exception” in Freeman v Pope, the Judges concerned (Barker J and Fisher J respectively) dealt with the cases on the basis that intention to defraud had to be established as a matter of fact.
[54] In Elders Pastoral Holdings Ltd v Grey Fisher J summarised the relevant principles as follows:

[12] In some cases the question of alienation with intent to defraud creditors has raised fine questions of law, both in New Zealand in relation to s 60 and overseas with respect to its numerous statutory equivalents. I do not think that these refined legal questions need to be traversed in the present case, which is essentially one to be decided on the facts. I think it sufficient if, without amplification, I simply identify some of the principles which permit resolution of this case. For present purposes where difficult legal questions arise I adopt the test more favourable to the position of [the first defendants].

[13] Under s 60 an intent to defraud creditors includes an intent to defraud any one or more of the disponor’s creditors. The plaintiff must prove that the disponor had an actual intent to defraud creditors. As with all questions of fact, the Court is entitled to draw logical inferences from a directly proven set of circumstances. The circumstances must include the consequences of the disposition in question, its effect upon the creditors, the foreseeability of that effect at the time of the transaction, and the likelihood that that effect must have been appreciated by the disponor at the time of the transaction. If the disposition was made for good consideration then that must be one of the relevant circumstances in favour of the disponor but obviously it does not preclude the plaintiff from going on to prove an intent to defraud creditors by whatever means, whether in the form of direct and specific evidence or inferences to be drawn from the nature of the transaction or a combination of both. The allegation that a party has disposed of property with intent to defraud creditors is a serious one and the evidence advanced in support of that proposition must be assessed with commensurate caution. This is another way of acknowledging the rather difficult formula often said to apply in these cases that, while the standard of proof is the balance of probabilities, that must nevertheless be approached with appropriate regard to the gravity of the allegation and therefore the higher degree of satisfaction demanded of the tribunal of fact before accepting that the allegation has been made out.

[55] That approach is consistent with that adopted by Brennan CJ and McHugh J in the Cannane case. We consider that it is the correct approach. The establishment of an intention to defraud is not, in our view, a matter for irrebutable presumptions of law. Rather it is a matter of fact, to be determined in the circumstances of particular cases. In appropriate cases, courts will draw an inference of intention to defraud despite a transferor’s claim that he or she had no such intention. In such cases the objective indicators will be decisive. But the exercise is still one of attempting to determine intention as a matter of fact in the particular case.
[56] An inference is a logical deduction from established facts. If in a particular case the facts established show that, at the time it was made, an impugned transaction must inevitably result in loss to a creditor (or, to use Cooke P’s language in Swann v Secureland Mortgage Investment Nominees Ltd, loss to the creditor is a “necessary incident” of the transaction), an inference of intention to defraud will readily be drawn. For example, in a case where a creditor claims against a person who immediately transfers all of his or her assets to a family member for little or no consideration, a court is unlikely to have any difficulty in drawing the necessary inference because the inevitable consequence of the transfer is that the creditor’s claim will be defeated. This is the type of case that the Freeman v Pope line of authorities seems to deal with. It presents the least difficulty in terms of drawing an inference.
[57] But to acknowledge that is not to say that there is an irrebutable presumption of law arising in such circumstances. Nor is it to accept that simply because, as a consequence of an earlier transfer at less than full value, an asset is not available to meet a creditor’s claim, there must have been an intention to defraud at the time of the transfer. The courts have emphasised that an intention to defraud is not established simply by showing that an alienation has the effect of defeating a creditor (see, for example, Gault J in Swann v Secureland Mortgage Investment Nominees Ltd at 152, quoted at [50] above). Intention is to be assessed at the time of the transfer, so that, in terms of the example given at [56] above, the inevitability of loss to the creditor must be apparent at that time.
[58] In cases where it cannot be said that the loss to creditors was an inevitable consequence of the alienation, courts will still draw inferences of intention to defraud if all the circumstances justify doing so.
[59] Against this background we turn to the facts of this case.

This case

[60] The Judge held that, on the facts, she was not satisfied that there was an intention to defraud. As we have said, both Glen and Gaynor Lightbody gave evidence, as did Mr Horrocks, and all were extensively cross-examined. The Judge’s findings were based on her assessment of the credibility and reliability of these witnesses, against the background of the contemporaneous documents and the relevant circumstances. Persuading an appellate court that a trial judge’s conclusions were wrong in such a situation is always difficult.
[61] Ms McCartney argued that in the circumstances of the case the only inference logically available is that there was an intention to defraud. This case involved, she said, a voluntary alienation by an insolvent debtor. Ms McCartney drew attention to nine matters that she said Ellen France J had overlooked. They were:

(a) The significance of November 1998 as the time at which the transfer occurred;

(b) The Lightbodys had obvious reasons for delaying Capro’s liquidation for four and a half years;
(c) The secrecy surrounding the transfer;
(d) The importance of the Lightbodys’ ownership of the house to the appellant’s willingness to enter into the credit arrangement with Capro;
(e) The trust records and minutes were consistent with an intention to defraud;
(f) The fact that the Lightbodys also transferred the shares in Capro to the trust;
(g) The claimed family reasons for the establishment of the trust were not inconsistent with an intention to defraud;
(h) The Lightbodys were, contrary to the Judge’s finding, committed to the establishment of a trust before they went to see Mr Horrocks;
(i) The fact that the Lightbodys retained control of the house despite the transfer.
[62] We do not propose to go through each of these points individually. Rather we will consider Ms McCartney’s principal argument, namely that the transfer to the trust was voluntary and that Glen Lightbody was insolvent when it was made because he was not in a position to repay Capro’s debts to the appellant had he been called upon to do so. If true, this would be a powerful objective indicator of an intention to defraud. We will then consider other relevant circumstances, and in the course of that consideration will address the nine matters which Ms McCartney raised.

A voluntary alienation by an insolvent debtor?

[63] As we have said, Ms McCartney argued that this case involves a voluntary alienation by an insolvent debtor. Ellen France J declined to consider Ms McCartney’s argument based on the Freeman v Pope line of cases (see [20] above). We do not agree with the Judge on that. This was not a matter of pleading, as suggested by the Judge, but was an argument about the proper approach to be taken in this type of case. The argument was open to the appellant.
[64] Mr Wilson for the respondents argued that the transfer was not voluntary – there was a transfer for value, the value of the house being fixed on the basis of a valuation from a registered valuer. He said that the gifting programme should be regarded as a separate matter and that, as at the date of the transfer, it may not have gone ahead for some reason. He also said that in assessing Glen Lightbody’s financial position at the relevant time, the term loan had to be ignored as the term was only part way through so that the future payments had not yet fallen due. This left the current account. The overdue element of that, Mr Wilson said, was a little over $64,900 as at the end of November 1998.
[65] Before addressing these contentions we make two points. Even if the transfer is viewed as being for value despite the gifting programme:

(a) The Lightbodys’ plan at the time of the transfer to carry out the gifting programme would be a relevant consideration when assessing their intention in making the transfer; and

(b) There may be issues about the individual gifts at the times they were made, but we are not asked to address those in the present proceeding.

[66] Ellen France J found that the transfer was not voluntary but was a transfer for value (at [66]). On the face of it, there is support for this view. The house and the shares in Capro were transferred to the trust for consideration of $231,000. This is reflected in the documentation. The trustees entered into a term loan agreement with the Lightbodys in the amount of $231,000. That agreement provided that the loan was to be repaid on 12 November 2002. It provided for ordinary interest at the rate of 11 per cent, with penalty interest at a rate of 13 per cent. Interest was payable annually on 12 November, provided that the Lightbodys made demand one month before the due date.
[67] The fact that the Lightbodys then embarked on a gifting programme which had the effect that the trust’s debt was forgiven by the end of 2002 does not necessarily mean that the transfer was voluntary at the time it was made. As the Judge noted (at [66]), the gifting programme was described by Mr Horrocks as a “normal” one. As Mr Wilson said, at the date of the transaction it was not certain that all of the gifting programme would be completed. Circumstances might have changed, by reason of death for example.
[68] There is an important qualification to this, however. The first step in the gifting programme occurred either on the day of the transfer or a few days later. Glen and Gaynor Lightbody each forgave $27,000 of the trust’s debt at that time (ie, $54,000 in total). While it is true that they may have changed their minds about subsequent steps in the proposed gifting programme, it is unrealistic not to take that first gift into account in assessing whether the transfer took place at full value. To the extent that Ellen France J failed to do so we consider that she was in error.
[69] Accordingly, we consider that the transfer was made at an undervalue (ie, we take into account the immediate gifting), but we do not regard it as voluntary at the time it was made given that the Lightbodys were free to modify or abandon the gifting programme in the future. Despite that, as we said at [65] above, the fact that the Lightbodys intended to undertake the gifting programme remains a relevant consideration in terms of assessing Glen Lightbody’s intention.
[70] As to Glen Lightbody’s financial position at the time of the transfer, we accept Mr Wilson’s submission that what is relevant is the overdue portion of the current account (approximately $64,900), as well as any other indebtedness that Glen Lightbody may have had. Further, we consider that his financial position must be seen against the background of the way in which Capro had operated up until that time and the way it was anticipated that it would operate in the future. Relevant to this is the appellant’s attitude to the company. We take this approach because we consider it unrealistic to assess the question of intention without having regard to the parties’ perception of the future earning potential of Capro. Lenders are often more interested in a debtor’s future earning potential than in the debtor’s underlying assets.

Capro’s performance as at 1998

[71] The Judge said that Capro’s performance in 1998 would not have caused the Lightbodys to think that Capro would not continue in business for the future as it had in the past (at [74]). Over the period from 1990 to 1993, Capro operated with a high level of indebtedness to the appellant. The report which BDO Hogg Young Cathie produced in 1993 pointed out that the appellant had, in effect, provided working capital for Capro. It also noted that Capro would not be able to meet its liabilities to the appellant in the short term, although it should be able to do so in the longer term. This was the basis on which the debt restructuring took place.
[72] The term loan was due to be repaid by late 2000. In fact it took longer, and was not completely repaid at the date of liquidation (11 April 2003), although the Lightbodys thought that it had been repaid by that point. But the appellant’s principal shareholder and director, Mr Astley, was supportive of Capro as a business, at least until November 2002 when Capro changed to another supplier. He confirmed this in cross-examination when he said:

So I would say Glen was between a rock and a hard place. He had left the safe place of [the appellant] and went into the wilderness. I think he still would have been trading profitably if he had stayed with us because I would have looked after him.

[73] It seems, then, that Mr Astley considered Capro to be a viable business in the long term. This is demonstrated by his support for the company over the period 1990 until 2002 and his willingness, if Capro had continued to take its supplies from the appellant, to continue that support. From the Lightbodys’ perspective, circumstances in 1998 when the transfer was made did not indicate that anything would change so as to threaten Capro’s viability. This is especially so as Glen Lightbody had, from late 1995, been taking various steps in an effort to improve the profitability of the company. Put another way, Capro’s business had not become more risky.
[74] Ms Cartney argued that Capro’s accounts for the year ending 31 March 1998 showed a deterioration in Capro’s performance. But that submission was based in part on the mis-recording in the accounts of the amount outstanding under the term loan (recorded in the accounts as $181,754, whereas the true figure was $255,358), and we were not referred to any evidence that the Lightbodys were aware of this error. Further, as the Judge said, Capro’s performance fluctuated over time (at [33]) and 1998 was a year in which its overall position in relation to the appellant did improve (at [35]).
[75] The fact that the transfer was effectively at an undervalue is relevant to an assessment of intention, as is the fact that Capro was in arrears on its current account at the time. Both support the drawing of an inference of intention to defraud. Against them, however, Capro’s trading history must be weighed. On that aspect, we agree with the Judge’s assessment that there was nothing in the operation of the company in 1998 that would have caused any particular alarm or concern for the Lightbodys. The company was continuing to operate with the appellant’s support, and its position in relation to its indebtedness to the appellant was improving.
[76] This conclusion is similar to that reached by the Judge on this aspect. She accepted that the existence of the debt to the appellant and the likely effect of the alienation on that debt were relevant to the assessment of whether there was an intention to defraud. She considered, however, that there were countervailing features in the lack of any particular difficulty arising in late 1998, in the continuing reduction in Capro’s level of debt to the appellant and in the Lightbody’s commitment to that process (at [36]).

Length of time between alienation and Capro’s liquidation

[77] The length of time between the alienation and Capro’s liquidation is also a relevant factor. The transfer took place in November 1998 and Capro was put into liquidation in April 2003, some four and a half years later. A gap of this order is unusual in this type of case. Generally the timing between the alienation and the demand for payment is much closer. Often the creditor’s demand precedes the transaction, so that the transaction can readily be viewed as a response to the demand. As the cases show, a close connection in time is a powerful factor supporting the drawing of an inference of intention to defraud.
[78] Ms McCartney argued that there were very good reasons why the Lightbodys would delay the liquidation of Capro. She submitted that it made sense for them to wait until after the gifting programme had been completed (so that Glen Lightbody had no substantial assets left) and the term loan had been repaid (so that liability for the forgiven interest did not arise).
[79] For our part, we agree with Ellen France J that the length of time that passed before Capro went into liquidation tells against an intention to defraud, and supports the view that the Lightbodys envisaged at the time of the transfer that Capro would continue in business in the long term. It seems clear that, if Glen Lightbody had been called upon to meet all of Capro’s liabilities to the appellant at the time of the transfer, he could not have done so. But it is also clear that all those involved envisaged that Capro would continue to meet its commitments under the term loan and the current account to the appellant’s satisfaction, and so would continue in business, as in fact it did. This provides some support for Glen Lightbody’s claim that he had every intention of ensuring that Capro met its commitments to the appellant. As the Judge said (at [75]), to hold that there was an intention to defraud despite the passage of four and a half years suggests a degree of calculation and sophistication on the part of the Lightbodys that it is difficult to believe they possessed.

Secrecy and reliance

[80] Next, we refer to Ms McCartney’s inter-related submissions concerning the “secrecy” surrounding the transfer and the importance of the Lightbodys’ ownership of the house to the appellant’s willingness to enter into the credit arrangements with Capro. In his evidence, Mr Astley said that the appellant had entered into the repayment agreement with Capro in reliance on the guarantee that Glen Lightbody had given in 1990 when he opened Capro’s credit account. He said that had he known that the Lightbodys had transferred their house in 1998 the appellant would not have continued to “prop up” Capro. Ms McCartney said that there was no challenge to this evidence.
[81] What is at issue, of course, is Glen Lightbody’s intention. He said that he did not see any need to tell the appellant of the transfer as he regarded his personal business and Capro’s business as being separate. In some situations such a claim would be implausible, where, for example, a credit application form sought details of home ownership, other assets and level of indebtedness. But in the present case the credit application simply asked for a residential address, and did not give any prominence to the personal guarantee. Further, there is no evidence that the appellant sought any details of the assets available to Glen Lightbody to meet the guarantee, whether through home ownership or in any other way. Nor is there evidence that there were any discussions of Glen Lightbody’s net worth when the repayment agreement was negotiated in 1995. This being so, we do not consider that these two factors point to the existence of an intention to defraud. They are equally consistent with there being no such intention.

Mr Horrocks’ evidence

[82] Finally, while we accept that there are obvious dangers in giving weight to subjective expressions of intention in this context, we think it significant that the Lightbodys’ solicitor, Mr Horrocks, gave evidence. The Lightbodys did not attempt to hide behind legal privilege. Rather, they called Mr Horrocks, thus exposing both him and his file to the scrutiny of the appellant and the Court. Ellen France J accepted Mr Horrock’s evidence that he had to “sell” the Lightbodys, particularly Gaynor Lightbody, on the idea of establishing a trust. Ms McCartney submitted that, when this evidence is seen in its proper context, the Judge should not have given it the weight that she did. But we do not have a proper basis for saying that the Judge was wrong to accept that evidence. It was very much a matter for her assessment, having seen and heard Mr Horrocks and the other witnesses.
[83] The essence of Mr Horrocks’ evidence was that, as far as he was concerned, the trust was a bona fide family arrangement. The Judge was entitled to accept that evidence. She had before her Mr Horrocks’ file note of his initial meeting, the trust deed, the Lightbodys’ statement of wishes, the transfer documents and the minutes of the meetings of trustees. None, in the Judge’s view, provided support for the appellant’s contentions. Ms McCartney challenged this, but we see nothing in the documents to satisfy us that the Judge was wrong to draw the conclusion that she did.

Conclusion

[84] On balance, then, we consider that the Judge was entitled to conclude that there was no intention to defraud. We accept that there are factors pointing to such an intention and that the Judge erred in treating the transfer as being for full value rather than at an undervalue to the extent of the initial debt forgiveness. But equally there are factors pointing to an absence of an intention to defraud. Overall, we do not consider that the circumstances are sufficiently compelling to enable us to say that the Judge’s conclusion was wrong and must be overturned.
[85] As a consequence of the view which we have reached, we do not need to consider whether the trustees could have availed themselves of the protection afforded by s 60(3), which would involve consideration of the relationship between fraud for the purposes of the Land Transfer Act and the operation of s 60(3). Nor do we need to consider what the appropriate relief would be, given that the house was jointly owned but only Glen Lightbody gave a guarantee to the appellant.

Decision

[86] In accordance with the views of the majority, the appeal is dismissed. The appellant must pay the respondents costs in the sum of $6,000 plus usual disbursements.

WILLIAM YOUNG P (Dissenting)


Table of Contents

Para No

Introduction [87]
The rule in Freeman v Pope [88]
What did Regal have to establish to prove an intent to defraud? [93]
My conclusions as to intent to defraud [101]
Overview [101]
Mr Lightbody was insolvent at the time of the alienation [103]
Mr Lightbody recognised that the transfer of the house prejudiced
Regal as exposing Regal to a risk of loss which would
crystallise if Capro defaulted [106]
The transfer was voluntary [107]
The transaction is therefore properly characterised as dishonest in the
context of the relationship between a debtor and a creditor [108]
The approach of the majority [111]
Section 60(3) of the Property Law Act and indefeasibility of title [121]

Introduction

[87] I would allow the appeal. I can explain why under the following headings:

The rule in Freeman v Pope

[88] Freeman v Pope (1870) 5 LR Ch App 538 arose out of events which occurred in 1863. At that time the debtor had a substantial income (of approximately £1,000 a year) but he was pressed by a number of creditors. He also owed £490 to a bank and £7 to a postmaster. He addressed the situation by borrowing from a Mrs Walpole £350 (which he used to meet the debts of the creditors who were pressing him) and by negotiating an arrangement with the bank under which he was to pay £50 each half year in reduction of the debt. At the same time he assigned to trustees for Julia Pope (the daughter of Mrs Walpole) a policy of insurance on his life (for £1,000), sold a copyhold cottage to Mrs Walpole for £50 and gave Mrs Walpole security over his furniture (worth approximately £550) to secure the advance of £350. When the debtor died in 1868, he had reduced the indebtedness to the bank to £117 and had paid all other debts which were current in 1863 save for the £7 owed to the postmaster and the money he had borrowed from Mrs Walpole. The case concerned the question whether the settlement in favour of Julia Pope should be set-aside at the instance of a tradesman who had supplied goods to the debtor after the settlement had been effected.
[89] The Vice-Chancellor set aside the settlement but with some reservations as he considered that there had been no fraudulent intention (reservations he expressed by reference to how he might have seen the case if trying it as a special juryman). It was against that background that Lord Hatherley LC, on appeal, observed (at 540 and 543–544):

With great deference to the view of the Vice-Chancellor, and with all the respect which I most unfeignedly entertain for his judgment, it appears to me that this does not put the question exactly on the right ground; for it would never be left to a special jury to find, simpliciter, whether the settlor intended to defeat, hinder, or delay his creditors, without a direction from the Judge that if the necessary effect of the instrument was to defeat, hinder, or delay the creditors, that necessary effect was to be considered as evidencing an intention to do so. A jury would undoubtedly be so directed, lest they should fall into the error of speculating as to what was actually passing in the mind of the settlor, which can hardly ever be satisfactorily ascertained, instead of judging of his intention by the necessary consequences of his act, which consequences can always be estimated from the facts of the case.

...

If we had to decide the question of actual intention, probably we might conclude that the settlor, when he made the settlement, was not thinking about his creditors at all, but was only thinking of the lady whom he wished to benefit; and that his whole mind being given up to considerations of generosity and kindness towards her, he forgot that his creditors had higher claims upon him, and he provided for her without providing for them. It makes no difference that Messrs Gurney, the bankers, seem to have been willing to forego the immediate payment of their debt; the question is, whether they could not within a month or less after the execution of the settlement, if they had been so minded, have called in the debt and overturned the settlement? Beyond all doubt they could, on the ground that it did not leave sufficient property to pay their debt; and this being so, we are not to speculate about what was actually passing in his mind. I am quite willing to believe that he had no deliberate intention of depriving his creditors of a fund to which they were entitled, but he did an act which, in point of fact, withdrew that fund from them, and dealt with it by way of bounty. That being so, I come to the conclusion that the decree of the learned Vice-Chancellor [ie setting aside the settlement] is right.

[90] The facts in the present case are not on all fours with those in Freeman. But they are very similar:
[91] If Freeman still represents the law, the sale to the trust must be regarded as fraudulent. On the other hand I accept that a conclusive presumption of fraud now seems somewhat anomalous and there is a distinct lack of contemporary authority in which that conclusive presumption has been applied. Instead, as Arnold J indicates, courts tend to address cases such as this in terms of whether it is appropriate to infer an intent to defraud. As well, it is certainly possible to point to cases in which it has been asserted that an actual intent to defraud must be established. Approaching the case on the basis that this is so has the further advantage of reducing likely awkwardness with s 60(3) and indefeasibility of title principles
[92] Against that background, I am prepared to address the case on the basis that circumstances of the type involved in Freeman permit, but do not require, an intent to defraud to be inferred.

What did Regal have to establish to prove an intent to defraud?

[93] The conclusion that a debtor disposed of assets with an intent to defraud requires:

In most cases in this area, the finding as to the state of mind of the debtor will depend on inference. The characterisation of that state of mind is a matter of evaluation for the Judge.

[94] In Freeman, the presumption which the Court of Appeal in Chancery relied on was that the debtor intended the necessary consequences of his actions. In effect this means that an insolvent debtor can be presumed to appreciate his or her insolvency and to have intended or appreciated the impact on creditors of the settlement. The conclusiveness of this presumption was an important feature in Freeman, this because it was at least likely that the debtor did not link, in his own mind, his settlement for the benefit of Julia Pope with any adverse consequences for his creditors. In the present case, however, it is perfectly clear that Mr Lightbody must have had the debt to Regal in his mind at the time of the transfer to the trust and there is no finding of fact to the contrary. There is also what I take to be a finding of fact that Mr Lightbody knew that the trust would or might serve to protect assets from creditors (see the judgment of Ellen France J at [57]). So the connection in the debtor’s mind between the settlement and its possible effect on creditors which in Freeman had to be presumed was established in this case.
[95] The Judge did not identify with precision the state of mind which she considered Regal had to establish before she could conclude that Mr Lightbody had acted with an intent to defraud. But the overall drift of what she said indicates that she was looking for a fraudulent and targeted purpose, involving the setting up of a trust for the purpose of enabling Mr Lightbody to put his assets on high ground before reneging on the payments he had promised to make to Regal. I say this for the following reasons:
[96] With respect to the Judge, this approach put more of a burden on Regal than the authorities require. Freeman is now of doubtful authority as to the conclusiveness of the presumption that the debtor must be taken to have intended the natural consequences of a particular alienation. But I am not aware that it has ever been challenged as to the proper characterisation of a voluntary alienation of property by an insolvent debtor who is aware of its impact on creditors.
[97] In Lloyds Bank Ltd v Marcan [1973] 3 All ER 754, Russell LJ explained the relevant concept of fraud (at 759):

It must be remembered that in every case under this section the debtor has done something which in law he has power and is entitled to do; otherwise it would never reach the section. If he disposes of an asset which would be available to his creditors with the intention of prejudicing them by putting it (or its worth) beyond their reach, he is in the ordinary case acting in a fashion not honest in the context of the relationship of debtor and creditor.

[98] I would treat this as encompassing actions by which a debtor (to recast Russell LJ’s words):

... disposes of an asset which would be available to his creditors with the knowledge that this will prejudice them by putting it (or its worth) beyond their reach.

[99] On my approach:
[100] There still remains an issue of evaluation. But as a rule, a voluntary alienation by an insolvent debtor which, to the knowledge of the debtor, is to the prejudice of creditors, can fairly be regarded as “not honest in the context of the relationship of debtor and creditor”, cf the passage from Marcan cited above.

My conclusions as intent to defraud

Overview

[101] The Judge should have engaged with the Freeman argument. It did not need to be pleaded (although in my view it was adequately pleaded anyway). As a related point, she was also wrong to look for a targeted fraudulent purpose. Further, she was wrong not to treat the transfer of the house as voluntary. Because of the approach she took, she did not focus closely on the financial position of Mr Lightbody at the time of the alienation or on his state of mind in relation to the debt to Regal and the impact on Regal of the transfer to the trust. It is thus open to this Court to make its own findings of fact, subject of course to any specific findings made by the Judge.
[102] I would characterise the transaction as fraudulent:

I will briefly address each of the steps in this reasoning.

Mr Lightbody was insolvent at the time of the alienation

[103] As indicated, Mr Lightbody was indebted to Regal in the total sum of $430,000 at the time of the establishment of the trust. I accept that some $223,000 was subject to a term loan agreement and was thus not immediately payable. I also accept that the interest of $94,000 had been conditionally released. But the current account was some $65,000 in arrears and Regal would have been perfectly entitled to recover that from Mr Lightbody with the consequence that sooner, rather than later, everything else would have become payable.
[104] What constitutes insolvency for these purposes is discussed in Kerr on Fraud and Mistake (7ed 1952) at 311 and 314. Given that Mr Lightbody’s liability was as a guarantor, Re Ridler (1882) 22 Ch D 74 (CA) is also relevant. In this context, a debtor can fairly be regarded as insolvent if there is not a reasonable match between readily available assets and current (or practically current) liabilities. Mr Lightbody had no assets of any significance apart from his interest in the house. There was no value in Capro. This is indicated by the transfer value attributed to it of $1,000 at the time the trust was set up. That Capro was simply a vehicle through which Mr Lightbody traded is made clear by what happened when he was not able to work. By June 1999, there was doubt as to whether it remained a going concern. The company made a loss in the 1998 financial year and Mr Lightbody’s remuneration was only $50,000. In this context, the requirement to make monthly payments of $4,000 for 56 months was of crushing significance. Given that the account with Regal was overdue by $65,000, Regal was in a practical position to seek to recover, at short notice, the entire indebtedness which I see as either current or practically current for present purposes.
[105] I regard Mr Lightbody as having been insolvent in anyone’s money.

Mr Lightbody recognised that the transfer of the house prejudiced Regal as exposing Regal to a risk of loss which would crystallise if Capro defaulted

[106] It is clear that Mr Lightbody recognised the asset protection potential of transferring the house to the trust. The Judge acknowledged this.

The transfer was voluntary

[107] In this area of the law, substance rather than form should prevail. Over time Mr Lightbody disposed of his entire interest in the house and was left with nothing to show for it. From the very start, this was the consequence which he intended to bring about. The fact that this voluntary alienation took some time to achieve seems to me to be irrelevant. In any event, with the deeds of gift which accompanied it, the transfer must necessarily be regarded as made for inadequate consideration.

The transaction is therefore properly characterised as dishonest in the context of the relationship between a debtor and a creditor

[108] The facts that Mr Lightbody was insolvent, transferred the house for less than adequate consideration and appreciated the potential impact of this on his creditors, and particularly Regal, is sufficient to satisfy me that he acted dishonestly.
[109] I agree that with the relaxation of the Freeman approach, the conclusion that a debtor was fraudulent might conceivably require an evaluation of the extent to which the debtor appreciated his or her insolvency and recognised the likelihood that existing indebtedness might come home to roost. I also agree that Mr and Mrs Lightbody remained committed (at least during the period of the gifting programme) to making the agreed repayments. But given the burden of the debt and the limited income earning potential of Capro and Mr Lightbody, I conclude that Mr Lightbody’s recognition of his insolvency and the likely consequences of the transfer on Regal was sufficient for his conduct to be categorised as fraudulent.
[110] This characterisation of the transaction is supported by (although it does not depend on) a further consideration. In 1995, Capro and Mr Lightbody received a considerable indulgence from Regal in terms of the agreement to put the outstanding debt on a term basis and, conditionally, to release the liability in relation to interest. The document recording this agreement specifically recorded Mr Lightbody’s liability as a guarantor. Had the agreement not been adhered to, Regal would presumably have wound up Capro and pursued Mr Lightbody on his guarantee. In the context of this particular relationship between debtor and creditor, Mr Lightbody acted dishonesty when he made away with his assets during the period of the extension of time granted by Regal.

The approach of the majority

[111] The majority point to a number of factors which they see as pointing away from a fraudulent intention. On my approach, the majority are looking not for a fraudulent intention, but rather a fraudulent motive and that is the primary difference between their approach and mine. For the sake of completeness, however, I will engage directly with the considerations which they rely on. They are:

(a) Only the $65,000 overdue portion of the current account is relevant;

(b) Capro’s future earning potential;

(c) Capro’s fluctuating fortunes and apparent improvement in 1998;

(d) The appellant’s attitude towards Capro and continued assistance past 2000 (when the term loan was due);
(e) The delay between the transfer and liquidation;
(f) The claim that Mr Lightbody had every intention of ensuring that Capro met its commitments;
(g) The view that Mr Lightbody was entitled to keep the transaction a secret from the appellant who, in any event, had never made any inquiries as to Mr Lightbody’s financial position; and
(h) The evidence of Mr Horrocks.
[112] I will deal with each of these in turn.
[113] The overdue portion of the current account debt was $65,000. Capro and Mr Lightbody had no present ability to bring the current account back into order and as explained at [103] – [104], I consider that the whole debt is material for these purposes.
[114] Capro’s future earning potential was questionable given it made a loss in the 1998 financial year. Even if it was assumed that Capro might trade its way out of trouble, this is not inconsistent with Mr Lightbody seeking to protect his position in case the future did not turn out as well as was hoped. In this area of the law, it is not right for debtors make away with assets with the result that current (or practically current) liabilities can only be met from uncertain future earnings. It is of some moment here that the net value attributed to Capro at the time of the transfer was only $1,000.
[115] That Capro’s fortunes fluctuated over time would simply have put Mr Lightbody on notice, at the relevant time, that the business might get better, or it might not. This must be seen as a neutral factor.
[116] Regal’s attitude and continued assistance to Capro cannot be a relevant consideration. What is relevant here is the state of mind of Mr Lightbody.
[117] The long delay between transfer and liquidation seems to me to be irrelevant (unless the inquiry is on motive rather than intent). But in any event, it would not have made sense from the point of view of Mr Lightbody to have allowed Capro to go into liquidation until the gifting programme was complete. Viewed in this light timing considerations are not particularly helpful from the point of view of Mr Lightbody. I note in passing that in Freeman there was a similar delay between settlement and default.
[118] That Mr Lightbody wished to ensure that Capro met its obligations is not inconsistent with an intention to defraud. Mr Lightbody no doubt did hope that Capro would trade its way out of trouble. Such hopes (even if described as intentions) are not inconsistent with a fraudulent intention (as Freeman indicates).
[119] While a prudent creditor in Mr Astley’s position might have examined Mr Lightbody’s financial position, the fact that he did not do so does not speak to Mr Lightbody’s intention. As Marcan indicates, the starting point for any inquiry in this area of the law is that the debtor has carried out an action which is, but for the section, legal.
[120] It is fair to say that the evidence given by Mr Horrocks has left me with an impression which rather differs from that of the majority. I find it very hard to see what commercial justification there could have been for Mr and Mrs Lightbody – with their limited assets – to incur the expenses of setting up and administration of a trust unless it was to protect the house from creditors. This point, however, is relevant to motive rather than intention. And at best from the point of view of Mr Lightbody, the evidence of Mr Horrocks is relevant to whether Mr Lightbody entered into the transaction with the motive of harming Regal.

Section 60(3) of the Property Law Act and the indefeasibility of title

[121] There are a number of ways in which the related issues associated with the s 60(3) defence and indefeasibility of title might be addressed. But given that this is a dissenting judgment, I will deal with them simply.
[122] Mrs Lightbody was as well aware as Mr Lightbody of the circumstances which made this a fraudulent transaction. On the other hand, on the Judge’s findings of fact, Mr Horrocks was not aware of those circumstances. The corollary of a conclusion that the innocence of Mr Horrocks meant that the transfer to the trust was immunised from scrutiny under s 60(3) and the indefeasibility of title provisions of the Land Transfer Act 1952, would be that any fraudulent transaction could be sanitised by the simple expedient of keeping one of the trustees of the recipient trust in the dark about the reasons for the transaction. This would be a fraudster’s charter.
[123] Attribution of actions and knowledge is very much a matter of policy, cf Meridian Global Funds Management Asia Ltd v Securities Commission [1995] UKPC 26; [1995] 3 NZLR 7 (PC). I would have no hesitation in attributing the state of mind of Mr and Mrs Lightbody to the trust given that:

(a) A contrary conclusion would be a fraudster’s charter;

(b) Mr and Mrs Lightbody were what Ms McCartney rightly called the “dominant trustees”; and

(c) Mr Horrocks, on the findings of the Judge, can only have made the most desultory of inquiries about the commercial background to the setting up of the trust and Mr Lightbody did not see fit to explain to Mr Horrocks his difficult financial situation.
[124] For the reasons given above, I would allow the appeal.







Solicitors:
Thomas & Co, Auckland for Appellant
Coupe Davidson Sweetman, Auckland for Respondents

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