The appeal is allowed in part. The summary judgment in favour of the respondents other than the sixth respondent is set aside and the matter is to proceed to trial in the High Court. The summary judgment in favour of the sixth respondent is upheld.

We make no award of costs.

____________________________________________________________________

REASONS OF THE COURT

(Given by O’Regan J)

Table of Contents

Para No
Introduction [1]
Brief background [2]
Issues [9]
Factual background [13]
Courtney J’s decision [17]
Issue estoppel [20]
Section 37(6): was Ms Chean a director at the relevant time? [39]
Section 37: proviso [49]
Admission of new evidence [53]
Knowing receipt: is it arguable that Ms Chean did not know
of the breach of trust? [60]
Result [86]
Costs [87]

Introduction

[1] This is an appeal against two decisions of Associate Judge Faire, under which he entered summary judgment against the appellant, Ms Chean, for $150,000 in favour of the sixth respondent and a total of $573,195.49 in favour of the respondents.[1]

Brief background

[2] The respondents invested in a company called Luvit Foods International Limited (Luvit). In total, they invested $1.68 million. The appellant’s husband, James Chean, who was the driving force behind Luvit, had solicited these investments and the respondents had received an information memorandum. There was no registered prospectus. When the respondent discovered their money had been lost, they sued Luvit, Mr Chean and another company associated with Mr Chean, Tennet International Limited (Tennet), seeking a refund of their investments. Their claim was due to be heard in the High Court in April 2007, but Mr Chean declared himself bankrupt just before that hearing.
[3] The matter then proceeded to a formal proof hearing in May 2007 before Courtney J. Her decision was delivered on 23 May 2007.[2] She found that the respondents’ claims against Luvit and Mr Chean based on the Fair Trading Act 1986 were made out. She found that the loss they had suffered was equal to the amount they had invested. She also found that they were entitled to reimbursement of their investments under s 37(6) of the Securities Act 1978. Again, both Luvit and Mr Chean were found to be liable under that section for an amount equal to the investment made by each of the respondents.
[4] The respondents then decided to sue Ms Chean. Their statement of claim was filed in August 2007, and a further amended statement of claim was filed in October 2007. They advanced six causes of action against Ms Chean:

(a) A claim under s 37(6) of the Securities Act;

(b) Breach of trust and breach of the Securities Act (failure to abide by the statutory trust created by s 37(5) of the Securities Act);

(c) Knowing receipt of trust funds (because $723,195.49 of the money invested with Luvit was paid into the personal bank account of Mr and Ms Chean);

(d) Dishonest assistance (based on the allegation that Ms Chean dishonestly assisted in the breach of the statutory trust referred to above);

(e) A claim under s 60 of the Property Law Act 1952 (which relates to alienations of property made with intent to defraud creditors);

(f) Breach of her duty as a director under ss 131, 133, 135 and 137 of the Companies Act 1993.

[5] The sixth respondent, Mr Wee, sought summary judgment in respect of the first cause of action (s 37(6) of the Securities Act), but the other respondents did not do so because there was a limitation issue which, they accepted, made their claims unsuited for summary judgment.
[6] All respondents sought summary judgment under the second cause of action (breach of trust/breach of the Securities Act) and the third cause of action (knowing receipt). They sought an amount equal to the sum paid into the personal bank account of Mr and Ms Chean, $723,195.49. However, the second cause of action was not pursued in the High Court or this Court. We say no more about it.
[7] In the High Court, Associate Judge Faire found that the respondents had made out their case for summary judgment against Ms Chean. He awarded $150,000 to Mr Wee and $573,195.49 to all of the respondents. (The figure of $573,195.49 was the amount deposited in the Cheans’ joint account ($723,195.49) less the $150,000 awarded to Mr Wee.) In his second judgment, the Associate Judge ruled that summary judgment should be entered in favour of the respondents for specified amounts totalling $573,195.49. The Associate Judge entered summary judgment in relation to the first cause of action (s 37(6)) in favour of Mr Wee and in relation to the third cause of action (knowing receipt) in favour of all respondents.
[8] Ms Chean appeals to this Court against both judgments of the Associate Judge.

Issues

[9] The Associate Judge decided that an issue estoppel existed in relation to Courtney J’s findings that the offer of securities in Luvit had been made to the public without a registered prospectus as required by the Securities Act, that the proceeds of the offer ought therefore to have been held in trust under s 37(5) of the Securities Act, and that Luvit and its directors were personally responsible for the refund of those investments under s 37(6). On appeal, counsel for Ms Chean, Mr Orlov, argued that the Judge was wrong in this respect. So the first issue is whether or not issue estoppel did apply in relation to the findings made by Courtney J.
[10] Ms Chean also argued that, even if the issue estoppel point is resolved against her, summary judgment should not have been entered under s 37(6) for two reasons. First, she was not a director at the time of the allotment of shares in breach of s 37. Secondly, even if she were a director for s 37(6) purposes, the proviso to that subsection applies to her. That proviso says that a director will not be liable if he or she proves that the default in repayment of the subscriptions was not due to any misconduct or negligence on his or her part. The second issue is, therefore, whether there is an arguable case that Ms Chean was not liable under s 37(6) either because she was not a director at the time of the allotments or because the proviso may apply to her. In other words, should summary judgment for $150,000 in favour of Mr Wee have been refused?
[11] Mr Orlov sought to adduce further evidence in this Court in support of Ms Chean’s contention that the proviso to s 37(6) applied and to contest other findings made by the Associate Judge. Another issue which requires resolution is whether this Court should admit that further evidence.
[12] In relation to the claim based on knowing receipt, Ms Chean argued that she had an arguable case that she did not know that the money received from the investors was required to be held in trust, and therefore did not knowingly receive the money in breach of trust. The final issue is, therefore, whether summary judgment ought to have been entered in relation to the knowing receipt cause of action.

Factual background

[13] Before turning to the discussion of the issues, we set out the relevant facts. These are recounted in greater detail in the judgments of Courtney J and Associate Judge Faire, and what follows is a brief summary only.
[14] Mr Chean owned a company called Instant Wok International Limited (Instant Wok), which, he claimed, had developed a new form of manufacturing frozen Asian food. He incorporated Luvit, and it acquired all the shares in Instant Wok. Thereafter, the two companies were run as if they were one entity. The major shareholder in Luvit was Tennet.
[15] Mr Chean set about attracting investment in Luvit for the purposes of expanding its business. He held a meeting with potential investors at the factory of Instant Wok, which was attended by a number of the respondents. He then distributed an information memorandum which, Courtney J found, included a number of misleading statements and improperly based financial projections. Further misrepresentations were made at the meeting. Separate meetings were held with the fifth plaintiff at which similar misrepresentations were made, and the information memorandum was also provided to her. Mr Chean later had a discussion with Mr Wee at which misrepresentations were made, and also provided him with the misleading information memorandum. A similar pattern applied in relation to the seventh respondent, Mr Khor. There was then a later round of meetings with Mr Wee, Mr Kum and Mr Khor seeking further investment. In total, the investments made by the respondents were $360,000 by Mr de Alwis, $90,000 by Ms de Alwis, $180,000 by Mr Kum, $306,000 by Ms Kum, $150,000 by Ms Tan, $576,000 by Mr Wee and $18,000 by Mr Khor.
[16] All of the investments were made between March 2000 and September 2001. (Courtney J mistakenly said that $40,000 had been invested by Ms de Alwis in December 2001, but it is clear that this in fact occurred in December 2000.) The last sum invested was $150,000 by Mr Wee on 27 September 2001. Because the statement of claim was filed in August 2007, this is the only investment in respect of which there are no potential limitation issues under s 37(6).[3]

Courtney J’s decision

[17] As mentioned earlier, Ms Chean was not a party to the proceedings before Courtney J. Rather, the defendants were Luvit, Tennet and Mr Chean. It is unclear to us why no action was taken against Ms Chean at that stage. Because Mr Chean declared himself bankrupt, the case proceeded on a formal proof basis. On the basis of the evidence presented to her, Courtney J determined that there were numerous misrepresentations in the information memorandum and that Mr Chean had also made a number of misleading statements at meetings with proposed investors. She was satisfied on the basis of the evidence of an experienced chartered accountant that the representations were untrue and that there was no reasonable basis for the projections contained in the information memorandum. She found that both Luvit and Mr Chean were liable for the losses of the respondents under the Fair Trading Act.
[18] Courtney J also determined that the case against Luvit and Mr Chean under s 37(6) was made out. She found that a registered prospectus was required because the offer of securities had been made to members of the public (though she noted that she had not been addressed on that issue in submissions[4]). She said that it was

“perfectly clear that none of the [respondents] enjoyed a relationship with Mr Chean that came anywhere near” the concept of close business associate in the Securities Act.[5] The offer was therefore to the public and a registered prospectus was required. None existed.

[19] Section 37(4) therefore rendered the allotments of securities “invalid and of no effect”. That in turn triggered an obligation under the then s 37(5) (the relevant provision is now s 36A), which applied where securities are not allotted for any reason. Under s 37(5), Luvit was required to ensure that the subscriptions were kept in a trust account on behalf of the subscribers and that the subscriptions (plus any interest earned) were repaid as soon as reasonably practicable. Courtney J accordingly found that both Luvit and Mr Chean were jointly and severally liable to repay the investments under s 37(6).

Issue estoppel

[20] The application for summary judgment was based on the findings of Courtney J that there had been an unlawful offer to the public without a registered prospectus and the allotment of shares of Mr Wee was therefore invalid and of no effect. This meant both s 37(5) and s 37(6) applied. The latter was the foundation for Mr Wee’s claim against Ms Chean. The former was the basis on which the respondents asserted that their investment money was held on trust and is therefore also relevant to the knowing receipt cause of action.
[21] There was no dispute about the requirements for issue estoppel. Both counsel were content to rely on the description in Spencer Bower, Turner and Handley, where the learned author identifies the following elements of “res judicata estoppel” (a term covering both cause of action estoppel and issue estoppel):[6]

(i) the decision was judicial in the relevant sense;

(ii) it was in fact pronounced;

(iii) the tribunal had jurisdiction over the parties and the subject matter;

(iv) the decision was –

(a) final, and

(b) on the merits;

(v) it determined the same question as that raised in the later litigation; and

(vi) the parties to the later litigation were either parties to the earlier litigation or their privies, or the earlier decision was in rem.

[22] There is no doubt in the present case that elements (i), (ii) and (iii) were fulfilled in this case. Mr Orlov cast doubt on the remaining elements because:

(a) The judgment given by Courtney J was a “default judgment”;

(b) The issues decided by Courtney J were not identical to those arising in the present case;

[23] He also argued that issue estoppel should not apply to Ms Chean because Courtney J had been misled on important matters and because the respondents did not have clean hands.
[24] We will consider each of these in turn.

Default judgment

[25] As noted earlier, the decision of Courtney J followed a formal proof hearing, because Mr Chean had declared himself bankrupt just before the scheduled defended hearing. However, as noted in Spencer Bower, a judgment obtained in those circumstances, even a judgment entered by default, is still a judicial decision for the purposes of res judicata estoppel.[7]
[26] Mr Orlov argued that there was a need for greater caution in applying an issue estoppel where the judgment relied on is a default judgment, and said that in the present case Ms Chean should be allowed to contest the essential findings made by Courtney J at a full hearing of the present action.
[27] A similar argument made by counsel for Ms Chean in the High Court was rejected by the Associate Judge, relying on two New Zealand decisions, Tira Arika v Sidaway[8] and Smith v NZI Bank Ltd.[9]
[28] Mr Orlov did not address this issue in his written submissions, but raised it in oral argument. He relied in particular on the following statement made by Lord Maugham LC in New Brunswick Railway Company v British and French Trust Corporation, Ltd:[10]

In my opinion we are at least justified in holding that an estoppel based on a default judgment must be very carefully limited. The true principle in such a case would seem to be that the defendant is estopped from setting up in a subsequent action a defence which was necessarily, and with complete precision, decided by the previous judgment; in other words, by the res judicata in the accurate sense.

[29] Mr Orlov also pointed to the words of caution expressed by Lord Reid in Carl Zeiss Stiftung v Rayner & Keeler Ltd (No 2).[11]
[30] We agree with the Associate Judge that there is no reason to disapply issue estoppel in the present case. Although the judgment of Courtney J was reached as a result of a formal proof hearing, it was not a default judgment in the sense that it was entered without argument. We see the present case as falling within the class of cases where the issue was decided with precision in the previous judgment (to use Lord Maugham’s words). The key finding by Courtney J was that the offer of securities made by Luvit and Mr Chean was made to the public and was therefore void in terms of s 37 because there was no registered prospectus in respect of the offer. That finding was not made lightly: although the Judge recorded that she did not receive submissions on it, she carefully evaluated the evidence and reached the decisive conclusion that the parties to whom the offer was addressed were not close associates of Mr Chean. Thus, the offer was clearly an offer to the public and a registered prospectus was required.

Identical issues?

[31] Mr Orlov argued that the issues before Courtney J were not the same as those before the Associate Judge in the present case. (This issue was raised for the first time on appeal, Ms Chean’s counsel in the High Court having conceded that the issues were the same.) Mr Orlov said that Courtney J had not considered or determined argument on the extent of Ms Chean’s contribution to the breaches of the Securities Act. That is correct as far as it goes, but it is irrelevant to the present argument because no issue estoppel is claimed in relation to that aspect of the case. The issue estoppel relates to the finding that the offer was an offer to the public, made without a registered prospectus, and therefore void under s 37. The issue before Courtney J was, as the Associate Judge correctly pointed out, exactly the same as that before him. There is therefore nothing in this point.

Ms Chean was not a party

[32] Mr Orlov argued that there could be no issue estoppel applied against Ms Chean because she was not a party to the proceedings determined by Courtney J. He relied on the decision of this Court in Link Technology 2000 Ltd v Attorney-General,[12] which he said was authority for the proposition that issue estoppel does not apply where the appellant was not a party to the previous proceedings. That is not what was decided in Link Technology: rather, the point was that there was no finding of a breach of the rights of the party asserting the issue estoppel. The case was decided on the basis that the earlier decision founding the issue estoppel did not determine the particular issue as part of the decision, although the Judge had made an obiter observation about it.
[33] As the extract from Spencer Bower cited at [21] above makes clear, the requirement is not that the parties to the earlier proceeding are identical, but rather that either a party or a privy of that party be involved in the earlier proceeding. In the present case, Luvit was a party to the proceeding before Courtney J, whose findings concerned the nature of the offer of shares in Luvit, the requirement that the subscriptions be held in trust, and the liability of Luvit and Mr Chean, as director, to refund the subscriptions. The present proceeding requires decisions about precisely the same issues in relation to precisely the same offer of securities and the s 37(6) claim is based on Ms Chean’s role as director of Luvit. In our view, the relationship between Ms Chean as a director and the company of which she is a director is sufficient to make her a privy of Luvit. To use the words of Somers J in the leading decision, Shiels[13] Blakely,13 estopping Ms Chean will produce a fair and just result having regard to the purposes of the doctrine of estoppel and its effect on the party estopped.
[34] In any event, Ms Chean was not just a director of Luvit, but also had a role in preparing its accounts (though the extent of that role is disputed), had signing authority of the bank accounts, tended to filing of its annual returns and similar documentation, occupied an office at its premises, and was a director of Instant Wok. In these circumstances, we have no doubt that she is a privy of Luvit for the purposes of issue estoppel. We see this case as having similar characteristics to those applying in Laughland v Stevenson.[14]

Was Courtney J misled?

[35] Mr Orlov said that the Court should not apply issue estoppel in circumstances where the decision which is the foundation of the res judicata was obtained as a result of the Judge being misled. A similar argument was rejected by the Associate Judge. The argument was that Courtney J had been misled into believing the shares in Luvit issued to the respondents were issued directly by it, when, at least in some

cases, the shares were issued to Tennet and then on-sold to the investors. The Associate Judge rejected the argument because it was clear from the judgment of Courtney J that she had been told that that was the position and the Associate Judge thought the position was that Tennet was a bare trustee.

[36] We agree with the Associate Judge that Courtney J was aware that the shares were issued to Tennet and on-sold. It is clear she was not misled. Such sales with a view to on-sale to the public are treated under the Securities Act on the same basis as direct issues of shares to the public.[15] There is nothing in this point.
[37] Mr Orlov also argued that Courtney J was misled as to the extent of the involvement of the respondents in the management and direction of Luvit. He appeared to be saying that it was arguable that the respondents themselves were responsible for breaches of the Securities Act. That argument failed on the facts in the High Court. We agree with the Associate Judge’s conclusion.

Unclean hands?

[38] Mr Orlov also argued that summary judgment should not be entered on the basis of facts determined by reference to issue estoppel because the respondents have unclean hands. This argument was based on the fact that the respondents had not sued Ms Chean at the same time as they sued Mr Chean and Luvit. He said this meant they were “estopped from seeking estoppel”. We disagree. There is nothing before us indicating that Ms Chean has been prevented from putting forward any defence by reason of having been sued separately. There is nothing before us indicating that she had available to her any argument that may have led to a different conclusion in the proceedings determined by Courtney J. There is no basis for us to disapply issue estoppel.

Section 37(6): was Ms Chean a director at the relevant time?

[39] Mr Orlov argued that Ms Chean had an arguable case that she was not liable under s 37(6) because she was not a director at the relevant time.
[40] Section 37 provides that no allotment of securities offered to the public for subscription can be made unless there is a registered prospectus in place. Any allotment made in contravention of that requirement is invalid and of no effect.[16]
[41] Section 37(5) (as it stood at the relevant time) applied where subscriptions for securities were received by or on behalf of an issuer but, by virtue of s 37 the securities could not be allotted, or for any reason were not allotted. In these circumstances, the issuer was required to ensure that “at all times while held by it, the subscriptions are kept in a trust account on behalf of the subscribers” and that those subscriptions are repaid as soon as reasonably practicable. (A comparable requirement is currently found in s 36A.)
[42] Section 37(6) provides:

(6) If any subscriptions to which this section applies are not so repaid within 2 months after the date on which the subscriptions were received by or on behalf of the issuer (or, in any case to which subsection (2) of this section applies, within 5 months after the date of the registered prospectus), the issuer and all the directors thereof shall be jointly and severally liable to repay the subscriptions, together with interest at a rate prescribed from time to time by regulations made under this Act from the date on which the subscriptions were received by or on behalf of the issuer:

Provided that a director shall not be so liable if he or she proves that the default in the repayment of the subscriptions was not due to any misconduct or negligence on his or her part.

[43] The respondents argued that Ms Chean was a director from the time of Luvit’s incorporation: s 2 of the Securities Act defines a director as including a person occupying that position “by whatever name called”. However, they accepted that she formally took on the office on 15 October 2001, when she signed a consent to be a director. That was after the offers to the respondents to take up shares in

Luvit had been made and after the purported allotments in breach of s 37 had occurred. However, the obligation on directors to repay subscriptions arises only if the company does not repay the subscriptions within two months of the date on which they were received. At the time the obligation arose to repay the $150,000 owed to Mr Wee, Ms Chean had formally become a director.

[44] For summary judgment purposes, we will proceed on the basis that Ms Chean was a director from 15 October 2001. The respondents accept that whether she was a director before that time is arguable: it will depend on inferences drawn from the role which she took within Luvit and is a matter to be determined at trial. The question which arises is, therefore, whether a person who was not a director when an unlawful offer of securities to the public was made, not a director when allotments of securities were made which were void and invalid under s 37, but was a director at the time at which the directors became liable to repay the subscriptions which ought to have been held in trust, can be liable under s 37(6).
[45] A similar issue arose in Paape v Fahey.[17] In that case, Master Thomson set out four possible interpretations of s 37(6). He said that liability may apply to:[18]

(a) Those who were directors on the date the liability arose;

(b) Those who were directors on or before the liability arose;

(d) Those who were directors before, on or after the date on which the liability arose.

[46] Master Thomson said that if liability were restricted to directors as described

in para (a) above, that could undermine the purpose of the subsection, by allowing a director who resigns prior to the date on which the obligation to repay subscriptions arises to escape liability. He considered that para (b) may make sense because “prior directors” could be responsible for the default in repayment, and made a similar comment in relation to para (c) given that the liability of the company to repay subscriptions continues until the date on which they are actually repaid. He saw para (d) as a combination of paras (b) and (c).[19]

[47] In the present case, Ms Chean falls within all of those four categories. In essence, her argument was that she should not be liable because she was not a director when the unlawful allotment which triggered the repayment obligation under s 37(6) occurred. We think it is clear that s 37(6) does not apply only to directors who were in office at the time of an invalid allotment. If the provision was limited in that way, it would say so. On any view, it is clear that s 37(6) applies to a director who is in office at the date on which the repayment obligation arises. Whether it applies to directors who were in office when the illegal allotment was made but were not in office when the repayment obligation arose is a matter to be left for another case. It may be that some clarification is required in that regard, so that liability can be sheeted home to directors in office at the time of an allotment but who have been careful enough to vacate office before the obligation to repay occurs.
[48] We are satisfied that, even if Ms Chean became a director on 15 October 2001, she was a director at the relevant time for liability under s 37(6). Her argument to the contrary fails.

Section 37: proviso

[49] In the High Court, Ms Chean argued that summary judgment should not be entered against her under s 37(6) because it was arguable that the proviso to that subsection applied to her. She said there was an arguable case that the default in the repayment of the subscription money was not due to any misconduct or negligence on her part. This was based on her assertion that a chartered accountant, Mr Ron Evans, had provided advice to Luvit on how share capital was to be raised. Associate Judge Faire noted that this assertion was not supported by evidence from Mr Evans or from Mr Chean. Accordingly, he found that there was no arguable case based on the evidence before him that the proviso might apply to absolve Ms Chean from liability under s 37(6).
[50] Perhaps cognisant of the fact that the Associate Judge’s conclusion on this aspect of the case was unassailable, Mr Orlov sought to introduce new evidence in support of the appeal. For reasons which we will set out later, we refuse leave. Accordingly, we consider the application of the proviso based on the evidence which was before the High Court.
[51] On the face of it, the defence raised by Ms Chean in the High Court appears to be that she had no responsibility for the unlawful allotment of shares which led to the obligation to make repayment under s 37(6). But, as was made clear in the decision of this Court in Reuhman v Paape, the default referred to in s 37(6) is “the failure to make the payment (and presumably also the failure to pay interest, though the statute is silent about this)”.[20] At its highest, the case made by Ms Chean is that she had reason to think the share offer was lawfully made. She therefore had no reason to believe that the obligation to hold the subscriptions in trust applied and she therefore should not be made responsible for repaying the money subscribed by the respondents.
[52] The flaw in this argument is that her evidence as to Mr Evans’ involvement in the share capital raising was equivocal at best. In particular, she does not say that Mr Evans advised that it was lawful to make an offer to the respondents without preparing and registering a prospectus, nor does she say that Mr Evans advised Luvit that the allotments of shares made by Luvit to the respondents were lawful. On the face of it, it is hard to see why advice on the legal requirements for a share offer would be provided by an accountant. If Mr Evans had provided advice of that kind, one would expect it to have been in writing and that the written advice would have been exhibited to Ms Chean’s affidavit. All of the communications between

Mr Evans and Luvit to which Ms Chean refers were addressed to Mr Chean, and there is nothing in Ms Chean’s evidence which indicates that she saw or was even aware of that advice. In short, the Associate Judge was correct in concluding that there was no evidential foundation for Ms Chean’s assertion that it was arguable that the proviso to s 37(6) could absolve her of liability.

Admission of new evidence

[53] We now set out our reasons for declining to admit the fresh evidence.
[54] Ms Chean sought to adduce fresh evidence on appeal, consisting of affidavits sworn by Mr Chean, Ms Chean and an accountant, Mr Stephen Fleming. In a memorandum filed on 5 March 2009, Mr Orlov summarised this evidence as follows:

The High Court has been inadvertently misled by the failure to produce the relevant accounting documents which would have shown that the Appellant/Defendant had a strong arguable defence;

The Judgment of Courtney J was obtained in the circumstances where the Appellant was never a party to the proceeding and was undefended due to wrongful advice by the Appellant’s husband’s then counsel that the husband should go bankrupt to avoid the stress of the litigation, and that this (the bankruptcy and the proceeding) would not affect the Appellant in any way;

The husband’s counsel then continued to act for the Appellant when the counsel’s advice turned out to be incorrect and failed to provide the Court with evidence and arguments that are now included in the Affidavits filed in support of the Application for leave to adduce further evidence.

[55] The evidence appears to have no relevance to the applicability of the proviso. Mr Fleming’s affidavit advances the proposition that $50,000 of the $150,000 provided by Mr Wee was used to purchase shares from Julian Pereira and Christopher Green.
[56] Mr Chean’s affidavit, sworn on 3 April 2009, is brief. It refers to a number of documents, none of which appears relevant to the proviso. Instead, its primary focus is on proving that Mr Wee had significant managerial involvement in Luvit.
[57] Ms Chean’s affidavit, sworn on the same day as Mr Chean’s, is also brief. Again, it has no relevance to the application of the proviso.
[58] The test for admission of new evidence in support of an appeal is that the evidence “must be fresh, it must be credible and it must be cogent”.[21] In the present case, the evidence is not fresh, in that it was clearly available at the time of the High Court hearing. It is not necessary for us to comment on its credibility, because the evidence is also not cogent, in that it does not provide a proper basis for the argument in support of which it is to be adduced. The purpose for its proposed admission is to effectively re-run aspects of the High Court case in respect of which Ms Chean now wishes to take a different approach. We do not consider it appropriate to allow that for the reasons given in Accent Management Limited v Commissioner of Inland Revenue.[22]
[59] For these reasons, we decline to allow the proposed new evidence to be adduced in support of the appeal. But we record that, even if it had been allowed, it would not have changed our conclusion.

Knowing receipt: is it arguable that Ms Chean did not know of the breach of trust?

[60] The claim for knowing receipt was based on the allegation that, as the allotments of shares to the respondents was void under s 37, the subscription money should have been held in a trust account as required by s 37(5)(a). It was argued that s 37(5)(a) imposed a “statutory trust”. Payments totalling $723,195.49, which were said to be sourced from the subscription money were paid to the joint account of Mr and Ms Chean. It was argued that the receipt of those payments by Ms Chean amounted to knowing receipt in breach of the s 37(5)(a) trust.
[61] Although there was no discussion about this at the hearing or in the written

submissions, we first consider whether s 37(5)(a) creates a statutory trust. It does not expressly do so: rather it requires the issuer to ensure subscription money is kept in a trust account on behalf of the subscribers if allotments cannot lawfully be made. In this case purported allotments were made but, as noted earlier, were found to be void. As there was no registered prospectus, no allotments could lawfully be made. That undoubtedly triggered s 37(5)(a), but the issuer (Luvit) and those controlling it failed to do what s 37(5)(a) required: the subscription money was not placed in a trust account. In those circumstances, can it be said the subscription money was subject to a trust?

[62] Interpreting s 37(5) in the light of its purpose of protecting investors, as s 5 of the Interpretation Act 1999 requires us to do, we answer that question “Yes”. It seems to us that s 37(5)(a) would not require placement of subscription money in a trust account on behalf of subscribers if the subscription money were not subject to a trust in favour of subscribers. We note that the new s 36A refers to subscription money being held “on trust” which is somewhat more specific, though it is still couched in terms of a requirement that that be done. That contrasts with the Canadian legislation that was under consideration in St Mary’s Clement Corporation v Construc Ltd, which we discuss later.[23] The relevant provision in that case provided that money received by a company under a construction contract “constitutes a trust fund” for the benefit of unpaid subcontractors. Use of language of that kind removes any argument about the existence of a statutory trust.
[63] Associate Judge Faire said that for a knowing receipt claim to succeed it was necessary for the plaintiff to prove the following:[24]

(a) A trust existed;

(b) The property subject to the trust was received by the defendant or there had been a dealing with the trust property and breach of the trust by the defendant; and

(c) The defendant had knowledge, either actual or constructive, of the existence of the trust and of the fact that there had been a receipt of trust property or a dealing with it which was in breach of the trust.

[64] Associate Judge Faire found that it was clear from the findings made by Courtney J that a void allotment of shares had been made and that s 37(5) therefore applied, requiring that the subscription money be held in trust for the benefit of the subscribers. The evidence clearly established that payments of $723,195.49 had been paid into the Cheans’ joint account. The real issue was, therefore, whether Ms Chean knew the money paid into the joint account was money subject to the statutory trust (or, in a summary judgment context, whether it was arguable that she did not). We agree with the Associate Judge that the key issue is Ms Chean’s knowledge. The Associate Judge surveyed the evidence filed on behalf of the respondents in the High Court, particularly that of Mr de Alwis. Mr de Alwis gave evidence of the payments made from the account that held the subscription money into the joint account of the Cheans. In her affidavit in reply, Ms Chean did not respond to the allegation that she knew that she was dealing with subscription moneys when the money was placed into the joint account.
[65] The Associate Judge therefore concluded that Ms Chean knew that the deposit was a dealing with property (subscription money) that was subject to the statutory trust. In doing so, he proceeded on the basis that she was deemed to have knowledge of the trust because it was created by operation of law and ignorance of the law was no defence.[25] The Associate Judge was satisfied that the payments in breach of the trust had caused the loss to the respondents and that it was appropriate to enter summary judgment for the full amount of the payments into the joint account, less the $150,000 already awarded in favour of Mr Wee under the s 37(6) cause of action.
[66] The Associate Judge considered this aspect of the case in two stages. First, did Ms Chean know that the money paid into the joint account was subscription

money? Second, did she know the subscription money was subject to a trust? We will adopt that same approach.

Did Ms Chean know the money paid into the joint account was subscription money?

[67] The Associate Judge decided this question on the basis that both the statement of claim and the evidence of Mr de Alwis were to the effect that Ms Chean knew that the money paid into the joint account was subscription money and Ms Chean had not contested that assertion. He pointed out that her affidavit was said to be a comprehensive reply to the allegations against her, yet she did not deny this one. We can see no reason to depart from the Associate Judge’s approach to this aspect of the case.

Did Ms Chean know the subscription money was subject to a trust?

[68] The extent of knowledge required to make a stranger to a trust liable for knowing receipt is not settled law in New Zealand.[26] We did not hear argument on that issue and do not address it. The focus of the argument before us was on the extent of knowledge required in a knowing receipt case where the trust in question is a statutory trust.
[69] As to knowledge, the case for Ms Chean in this Court was that Courtney J had observed that Mr Chean was the sole director of Luvit. Mr Orlov said this meant that the respondents were estopped from arguing that Ms Chean was a director and, if she was not, she could not have known of the existence of the statutory trust. We disagree. Courtney J’s observation that Mr Chean was the sole director was not part of the ratio of the case and did not preclude an argument that Ms Chean was a deemed director under the expansive definition of that term in the Securities Act. As noted earlier, that is not something that can be resolved in the present case at the summary judgment stage.
[70] Mr Orlov also relied on Ms Chean’s assertions that she did not operate the joint account or benefit from it except for living expenses, and that Mr Chean had used the account and had lent money back to Luvit from the account. We do not see either of those factors as significant: the question is whether she received the money, not whether she then spent it. Mr Orlov also argued that the “absence of negligence and misconduct” was raised in Ms Chean’s affidavit. That does not appear to us to be relevant either: the knowledge requirement is not based on the need to prove negligence and misconduct, but rather that the trust money was knowingly received.
[71] Mr Orlov challenged the way in which the Associate Judge described the knowledge element of a knowing receipt claim.[27] In particular, he argued that actual, and not constructive, knowledge that the funds received were subject to a trust was required for the claim to be made out.
[72] Mr Neil, for the respondent, acknowledged that, for the purposes of summary judgment, it had not been proved that Ms Chean had had actual knowledge of the existence of the trust (ie of the fact that s 37(5) operated to create a trust over subscription money when an allotment of shares could not lawfully be made) and of the fact that there had been a receipt of trust property or a dealing with it that was in breach of the trust. He said that the respondents needed only to show constructive knowledge for their claim to be made out. He referred to a line of Canadian authority which he said established that where a trust is imposed by statute, strangers to that trust are deemed to have knowledge of it, because ignorance of the law is no excuse. Mr Neil therefore argued that Ms Chean was deemed to have knowledge of the trust in the present case. In particular, he relied on Air Canada v M & L Travel Ltd, where the Supreme Court of Canada said:[28]

Whether the trust is created by statute or by contract may have an impact on the question of the stranger’s knowledge of the trust. If the trust was imposed by statute, then he or she will be deemed to know of it. It the trust was contractually created, then whether the stranger knew of the trust will depend on his or her familiarity or involvement with the contract.

[73] A similar comment was made in St Mary’s Clement Corporation v Construct Ltd.[29]
[74] Neither case, however, supports the broad proposition advanced by Mr Neil. The comments from Air Canada that are quoted above, as far as they relate to trusts imposed by statute, were obiter, because the trust at issue was created by contract. It is also important to note that the Air Canada case involved a claim for knowing assistance, not knowing receipt, and the discussion of the knowledge element therefore took place in relation to the former cause of action. Finally, it is not clear that the Supreme Court intended every stranger to a statutory trust to be deemed to have knowledge of the trust, even if he or she was unaware that the circumstances leading to the imposition of the trust had arisen.
[75] Similarly, the comment referred to in St Mary’s Clement Corporation came in the context of determining liability under a particular statute, not for knowing receipt. The case concerned a statute under which payments received by a construction contractor under the contract constituted a trust fund, held for the benefit of subcontractors who had not been paid for work on the contract. The defendant director’s argument that he was unaware of the statutory provisions that imposed a trust was rejected, the Judge holding that the defendant clearly knew of the material facts that gave rise to the operation of the statutory provisions and that ignorance of the law is no excuse:[30]

[The defendant] claims that he had no acknowledgement of the trust provisions of the Act and that he therefore could not know that any conduct of [the company] amounted to breach of trust. It is surprising to me, to say the least, that an individual with [the defendant’s] length and breadth of experience in the construction industry could be wholly ignorant of the trust provisions of the legislation. However, even if that were the case, ignorance of the law is no defence. A person is deemed to have knowledge of a trust imposed by statute: Air Canada v. M & L Travel Ltd [at 812].

[The company] was essentially a one man operation. When it acted, it did so through, or at the behest of, [the defendant]. This is not a situation of an officer or director who had little involvement in the day to day operations of the corporation. [The defendant] had knowledge of the conduct of [the company] and all of the relevant circumstances of that conduct. Whether or not he knew that particular conduct might, as a question of law, constitute a breach of the trust provisions of the Act is not determinative. If the corporation's conduct constituted breach of trust, and if he knew or ought to have known of the constituent factual elements of the corporation's conduct, then the requirements of s. 13(1) are met.

[76] The statute in question in St Mary’s contained a specific provision which made a director liable for a breach of the statutory trust. The defendant was liable because he was a director (he was in fact the sole director) and had knowledge of the actions of the company which were in breach of the statutory trust. It was not a case of liability for knowing receipt.
[77] We acknowledge that the Court in St Mary’s also found that the director would have been liable at common law for breach of trust.[31] This was because he had full knowledge of the acts which caused the breach of trust by the company and it was he who caused the company to do those acts. He would have been liable for breach of trust even if he did not know that the conduct amounted to a breach of the trust imposed by statute because, as noted above,[32] the Supreme Court of Canada had said in Air Canada that, if a trust is imposed by statute, a stranger to the trust is deemed to know of it.
[78] The context of the Canadian cases differs from that of the present case, however. In St Mary’s the trust was imposed by statute on any payment received by a contractor if any subcontractor was unpaid. The director obviously knew the payment was received under the contract and that the subcontractors were unpaid. His only way of evading liability was to say he did not know that the statute imposed the trust, and the Court determined that this was claiming ignorance of the law as an excuse.
[79] In the present case, the trust requirement was imposed only if allotments could not lawfully be made. If the allotments were made only to close business associates of Luvit, for example, there would have been nothing to trigger the s 37(5)(a) trust requirement. Whereas in St Mary’s the factual underpinning for the statutory trust was obvious to the director who was found liable, that cannot be said in relation to Ms Chean in the present case.
[80] Taken to its extreme, the argument put forward by Mr Neil is that everyone is treated as having knowledge of a trust imposed by s 37(5)(a) in the event that a company accepts subscriptions but, for some reason, the purported allotment of securities to subscribers is void under s 37. That would mean that a creditor who receives payment from an issuer of the amount owed by the issuer to the creditor in circumstances where the creditor knows the payment comes out of the money received on the purported issue of new shares would be liable for knowing receipt even if he or she did not know the purported allotment was unlawful. We very much doubt that is the intention of s 37(5)(a).
[81] Mr Neil’s argument seeks to read more into the Canadian cases than is warranted. What they say is that a person who knows of the facts giving rise to the imposition of a statutory trust cannot say he or she did not know that the law imposed a trust in those circumstances. They do not say that, where the circumstances giving rise to a statutory trust have occurred, all persons are deemed to know that the circumstances have arisen.
[82] In our view, it is necessary in the present case for the respondents to prove that Ms Chean knew that the circumstances triggering a s 37(5)(a) trust (a purported allotment made in such a way that it is rendered void under s 37) had occurred. If she is found to have been a director at the time of the invalid allotments, that may not be a great burden. As noted earlier, Mr Neil accepted that the dispute as to whether Ms Chean was a director at the relevant time was not able to be resolved at the summary judgment stage. We consider therefore whether the respondents satisfied the latter requirement to the standard required for summary judgment on the assumption that Ms Chean was not a director. The question is whether it is arguable, on the evidence that was before the High Court, that Ms Chean did not know that the offers made by Luvit to the respondents were made without there being a registered prospectus and without compliance with other Securities Act requirements. If she did know, she cannot say she did not realise such non-compliance triggered a s 37(5)(a) trust: ignorance of the law is no excuse.
[83] In support of the argument that Ms Chean knew of the non-compliant nature of the offer of securities to the respondents, Mr Neil pointed to the following evidence:

(a) Ms Chean accepted that she handled accounts for Luvit and made deposits of cheques into the joint account and into the accounts of Luvit and Tennet. There was evidence from the respondents that she had been responsible for the Luvit accounts and had signing authority over them. However, she denied any significant role in the keeping of accounting records and preparation of accounts and any responsibility for Luvit’s accounts.

(b) The respondents gave evidence that Ms Chean actively concealed Luvit’s accounts from them, including locking the account documents in her office when she was not present at Luvit’s premises. While that was their evidence, it does not indicate knowledge of the invalidity of the share allotments.

(c) Ms Chean was a director of Instant Wok, and that company and Luvit were treated as if they were one entity. The respondents said she must have known in that capacity that the capital had been raised and that there was no prospectus. Again, that was their evidence and it does indicate knowledge of the purported share allotments. But it does not indicate knowledge that the share allotments were void, thus triggering s 37(5)(a).

(d) Much of the money transferred into the joint account was money that had been attributed to the group (Instant Wok and Luvit) in the group accounts, of which Ms Chean would have been aware as a director of Instant Wok.

(e) $150,000 was transferred into the personal account after Ms Chean formally became a director of Luvit. Ms Chean has been found liable for that sum under s 37(6), so to find her liable for knowing receipt as well would be double counting.

[84] We are unable to accept Mr Neil’s submission that, on the evidence before the High Court, no arguable defence had been raised to the knowing receipt claims. Whether Ms Chean had sufficient knowledge that the purported allotments made to the respondents were such that s 37 rendered them void, so that the funds transferred to the joint account were subject to the s 37(5)(a) trust, is a question to be determined at trial. The extent of the knowledge required as to the non-complying nature of the offers of securities to the respondents may depend on the outcome of the dispute as to whether Ms Chean was a director at the time of the invalid allotments and/or the non-complying offers to the respondents. The degree of knowledge required will be the subject of argument at the trial in the light of the evidence before the Court and the trial Judge’s assessment of it. We do not believe it would be helpful for us to give a view on that issue in the absence of an understanding of the facts and of detailed submissions on the topic.

Other matters

[85] Mr Orlov raised a number of other points in support of the appeal against the knowing receipt finding. It is not necessary to deal with them. Most of them did not directly engage with the Associate Judge’s reasoning.

Result

[86] We allow the appeal in part. We set aside the summary judgment entered in favour of the respondents other than Mr Wee and direct that the matter proceed to trial. We uphold the summary judgment entered in favour of Mr Wee.

Costs

[87] Each side has had a measure of success and in those circumstances we make no award of costs.

Solicitors:
Equity Law, Auckland for Appellant
Meredith Connell, Auckland for Respondents

[1] De Alwis v Chean HC Auckland CIV-2007-404-5357, 4 July 2008 and De Alwis v Chean HC Auckland CIV-2007-404-5357, 15 October 2008.
[2] De Alwis v Luvit Foods International Limited (2007) 10 NZCLC 264,304 (HC).
[3] See [5] above
[4] De Alwis v Luvit Foods International Limited (2007) 10 NZCLC 264,304 (HC) at [34].
[5] At [37].

[6] KR Handley Spencer Bower, Turner and Handley: The Doctrine of Res Judicata (3rd ed, Butterworths, London, 1996) at [19] (“Spencer Bower”).
[7] At [44] and [188].
[8] Tira Arika v Sidaway [1923] NZLR 158 (HC) at 163.
[9] Smith v NZI Bank Ltd [1991] 1 NZLR 621 (HC) at 629.

[10] New Brunswick Railway Company v British and French Trust Corporation, Ltd [1939] AC 1 (HL) at 21.
[11] Carl Zeiss Stiftung v Rayner & Keeler Ltd (No 2) [1967] 1 AC 853 (HL) at 917.

[12] Link Technology 2000 Ltd v Attorney-General [2006] 1 NZLR 1 (CA).
[13] Shiels v Blakely [1986] 2 NZLR 262 (CA) at 268.
[14] Laughland v Stevenson [1995] 2 NZLR 474 (HC) at 477.
[15] See s 6(2).
[16] s 37(4).
[17] Paape v Fahey (2002) 9 NZCLC 262,857 (HC).
[18] At [61].
[19] Ibid.
[20] Reuhman v Paape (2002) 9 NZCLC 262,988 (CA) at [17].

[21] Rae v International Insurance Brokers (Nelson Marlborough) Ltd [1998] 3 NZLR 190 (CA) at 192.
[22] Accent Management Ltd v Commissioner of Inland Revenue CA32/06 21 July 2006 at [20].

[23] St Mary’s Clement Corporation v Construc Ltd (1997) 32 OR (3d) 595 (General Division) at 616.
[24] De Alwis v Chean HC Auckland CIV-2007-404-5357, 4 July 2008 at [53].
[25] Burton v Bevan [1908] 2 Ch 240 (Ch) at 247.

[26] Equiticorp Industries Group Ltd (in stat man) v The Crown (No 47) [1998] 2 NZLR 481 (HC) at 631 – 638.
[27] At [63](c) above.
[28] Air Canada v M & L Travel Ltd [1993] 3 SCR 787 at 812.
[29] See footnote 23 above.
[30] At 616.
[31] At 620 – 621.
[32] At [72].

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