|
|
Home
| Databases
| WorldLII
| Search
| Feedback
Court of Appeal of New Zealand |
Last Updated: 30 January 2018
|
For a Court ready (fee required) version please
follow this link
|
|
|
IN THE COURT OF APPEAL OF NEW ZEALAND
|
|
|
BETWEEN
|
Appellant |
|
AND
|
Respondents |
|
Hearing: |
20 May 2014 |
|
Court: |
Randerson, Winkelmann and Lang JJ |
|
Counsel: |
D E Smyth and P J Kennelly for Appellant
D J Chisholm QC and S J Davys-Brown for Respondent |
|
Judgment: |
INTERIM JUDGMENT OF THE COURT
____________________________________________________________________
REASONS OF THE COURT
(Given by Lang
J)
Table of Contents
|
|
Para No
|
|
Introduction
Grounds of appeal Did Sharon consent to the debt being incurred? Background
The Hansard family restructures its affairs
Subsequent events
Sharon’s argument
Failure to comply with s 129 of the Companies Act 1993 Failure to act unanimously as trustees of the D & S Trust The High Court judgment
Decision
Did Sharon subsequently ratify the transactions? Decision The debt of $509,863
The debt of $712,795
Estoppel The ingredients of estoppel
This case
Did David act in breach of his fiduciary duty to the D & S Trust by entering into the transactions? Was Sharon entitled to advance a defence based on knowing assistance? Result |
Introduction
[1] This appeal concerns a dispute between the trustees of trusts associated with two generations of the Hansard Family. The respondents, Gerald and Diana Hansard, are the trustees of the GG Family Trust No 2 (“the GG Trust”). Their son David and his estranged wife Sharon are the trustees of the D & S Hansard Family Trust (“the D & S Trust”).[1]
[2] The trustees of the GG Trust allege that David and Sharon, in their capacity as trustees of the D & S Trust, are indebted to the GG Trust in the sum of approximately $1.22 million. A significant portion of that debt arose in 2001 when the GG Trust advanced monies to David and Sharon’s company, MH Publications Ltd (“MHP”). As will be seen shortly, the GG Trust alleges that the D & S Trust assumed responsibility for MHP’s debt in or about 2005.
[3] MHP appears to have operated profitably until about 2008, when it was significantly affected by the global financial crisis. Then, at or about the same point, David and Sharon separated.[2] They have yet to resolve relationship property issues. The GG Trust called up the debt after David and Sharon separated. This led to the claim that lies at the heart of the present appeal.
[4] David has never disputed the validity of the debt, and has admitted the GG Trust’s claim. Sharon has never accepted the validity of the debt, and she opposed the GG Trust’s claim in the High Court seeking judgment against the D & S Trust. In a judgment delivered on 4 July 2013, Ellis J entered judgment against the D & S Trust[3] for the sum of $1,222,658.00.[4]
Grounds of appeal
[5] In his written submissions, Sharon’s counsel argued that the transactions underlying the alleged debt never occurred. He contended that they were mere accounting entries, and do not reflect transactions that actually took place. In reality, however, these submissions reflected an underlying argument that the trustees of the D & S Trust are not liable in respect of the debt because they did not act unanimously in incurring it. This argument relies upon the assertion that Sharon never consented to the debt being incurred, and she never ratified any decision David may have made that the Trust would incur the debt.
[6] The second subsidiary ground of appeal is that Sharon is not liable because David breached his fiduciary duty to the beneficiaries of the Trust by incurring a debt for which the GG Trust provided no or inadequate consideration.
[7] The final ground of appeal is that Gerald and Diana dishonestly assisted David to breach his fiduciary duties to the D & S Trust.
Did Sharon consent to the debt being incurred?
Background
[8] Gerald and Diana settled the GG Trust by Deed of Trust dated 6 March 1966. Their three children are discretionary beneficiaries of that trust.
[9] On 20 September 1993, Gerald and Diana settled another trust known as the G & D Hansard Trust (“the G & D Trust”). Their three children are also discretionary beneficiaries of this trust, which has provided the children with various forms of financial assistance since 1993.
[10] Sharon and David were married in 1999. They had incorporated MHP four years earlier in 1995. David and Sharon were the sole directors and shareholders of MHP, which operated a printing business. MHP initially conducted its operations from a farm property in North Auckland, but David and Sharon moved to Auckland in or about 2002. Thereafter MHP conducted its operations from premises in Albany.
[11] Between 2001 and 2003, the GG Trust advanced funds to MHP in order to assist it with operating capital. This included funding for the purchase of equipment. The most significant advance was made in July 2001, when the GG Trust advanced the sum of $655,000 in order to enable MHP to purchase a printing press. During this period, financial statements prepared for both the GG Trust and MHP recorded the advances as loans. By 31 March 2003, MHP had reduced the loan of $655,000 to $580,000. By that stage it had also obtained a further advance from the GG Trust in the sum of $56,825, and it also owed the GG Trust rental in respect of another printing press in the sum of $75,970. It therefore owed the GG Trust the total sum of $712,795 as at that date.
The Hansard family restructures its affairs
[12] Gerald and Diana settled the D & S Trust by a trust deed dated 19 September 2003. The beneficiaries of the trust were David, Sharon and their children. Driven largely by Gerald, the formation of the new trust formed part of a wider proposal to restructure the family's affairs. From the perspective of at least Gerald and David, the restructuring involved the transfer of assets used by MHP into the D & S Trust. Thereafter, MHP was to rent the assets from the D & S Trust. The object of the restructure was to protect the assets, and to create a rental income stream for the D & S Trust. In return, the proposal called for the D & S Trust to assume responsibility for the debts then owing by MHP to the GG Trust.
[13] In addition, Gerald and Diana wished to provide David and Sharon with a residence. At that time David and Sharon were living in a house in Orewa that the G & D Trust had acquired in 2002. The proposal involved the G & D Trust transferring the Orewa property to the D & S Trust by way of capital distribution.
[14] There was considerable correspondence relating to the restructuring proposal between Gerald, David, and MHP's office staff. This also involved MHP's accountant and Annan & Co, the law firm Gerald had engaged to implement the proposal. Gerald instructed Annan & Co to form the D & S Trust as a first step, with the balance of the restructure to follow. The correspondence demonstrates that Annan & Co received their instructions largely from Gerald and David, and that they were under some pressure from Gerald to complete the restructure prior to 31 March 2004.
[15] Annan & Co forwarded the trust documentation to David and Sharon for execution on 19 November 2003, but the lawyers and accountants then encountered considerable difficulty identifying and obtaining values for the assets that were to be transferred to the D & S Trust. Although Annan & Co ultimately got to the point of preparing draft documents recording the restructuring, they fell out with Gerald about fees before the documents could be finalised and executed. In large part the absence of any formal documentation underlies the problems that the parties now face.
[16] The evidence demonstrates, however, that from late 2003 the parties began to proceed on the basis that the restructure was to proceed. Although the deed of trust is dated 19 September 2003, it is clear that David and Sharon did not sign it until late November or early December 2003. The capital distribution of the Orewa property to the D & S Trust then took place in December 2003, with the documents recording the transaction valuing the property at $580,000.
[17] By 31 March 2004, the GG Trust had transferred vehicles and equipment having a value of $509,863 directly to the D & S Trust. These included two printing presses and a collator. Those assets are shown at their depreciated value in the fixed assets section of the financial statements of the D & S Trust for the year ended 31 March 2004, as is the corresponding debt owing to the GG Trust as a result of the transfer of those assets. The financial statements of the GG Trust for the year ended 31 March 2004 also show that debt as being owed by the D & S Trust. MHP's financial statements for the same year record that it continued to own fixed assets having a value of $596,992, and that it still owed the GG Trust the sum of $712,795.[5]
[18] The financial statements produced in respect of the following year appear to reflect the full implementation of the restructuring, notwithstanding the fact that no formal documentation had been finalised or signed. MHP's financial statements for the year ended 31 March 2005 showed that its fixed assets had reduced to the value of $24,228, a reduction of $572,764. Those of the D & S Trust, on the other hand, showed that its fixed assets had increased in value during the year from $976,071 to $1,682,895. This represents an increase in value of $706,824. Part of the increase was due to the fact that the Orewa property was included for the first time in the assets of the D & S Trust in these financial statements. As we have already observed, it was valued at $580,000 at the time it was transferred to the D & S Trust. It was subsequently revalued at $750,000 in the year ended 31 March 2005.
[19] MHP’s financial statements for the year ended 31 March 2005 also showed that MHP no longer owed the debt of $712,795 that it formerly owed to the GG Trust. The financial statements for the GG Trust and the D & S Trust, on the other hand, showed loans of $509,863 and $712,795 owing to the former by the latter. These were the debts resulting from the acquisition of assets from the GG Trust the previous year, coupled with the apparent assumption by the D & S Trust of responsibility for the loan formerly owed by MHP to the GG Trust.
[20] In each case the transfer of assets and liabilities was effected by way of journal entry in the accounting records kept by MHP’s accountants for MHP, the GG Trust and the D & S Trust.
Subsequent events
[21] To the extent that they can now be found, the financial statements for the GG Trust, the D & S Trust and MHP in respect of subsequent years proceed on the basis that the restructuring proposal was fully implemented.
[22] Other aspects of the proposal have also been given legal and accounting effect. The D & S Trust has derived income since 2004 through the rental it has received in respect of equipment that it leases to MHP. It has paid tax on that income, and has claimed depreciation on the equipment. MHP has claimed the rental it has paid to the D & S Trust as a deductible expense, and has been relieved of any liability to repay the GG Trust in respect of advances that it received from the GG Trust prior to the implementation of the proposal.
[23] The income stream that the D & S Trust received from the restructuring has enabled it to make distributions to beneficiaries, and to meet some of David and Sharon's household expenses. David and Sharon also continued to receive shareholder salaries from MHP during this period.
[24] The GG Trust has not charged the D & S Trust interest on the amounts owing as at 31 March 2005. For that reason the amount currently owing still stands at approximately $1.22 million.
[25] The financial statements of the D & S Trust similarly demonstrate that since the year ended 31 March 2005 it appears to have consistently accepted responsibility for both the debt of $509,863 relating to the assets it acquired from the GG Trust during the year ended 31 March 2004, and the debt of $712,795 formerly owing by MHP to the GG Trust. All three entities have therefore structured their financial affairs since 2005 on the basis that the initial transfer of the assets and liabilities actually occurred.
Sharon’s argument
[26] Sharon’s counsel contended as a preliminary point that it was inconceivable that loans of this magnitude were not properly documented as being loans repayable on demand by the GG Trust. We agree that it would have been preferable for the loans to have been formally documented in this way. We also agree, however, with the Judge’s observation that the lack of documentation reflects the fact that these transactions occurred within a family context, and it is likely that this resulted in an extremely lax approach being taken to their documentation.[6] It also appears that the family’s intention was for the transactions to be properly documented, but the breakdown in Gerald’s relationship with his solicitors prevented that from occurring.
[27] Sharon’s counsel also took issue with the value of the assets allegedly transferred to the D & S Trust. In his written submissions, he had argued that during the year ended 31 March 2004 MHP transferred assets to the value of $509,863 to the D & S Trust in return for a debt back in the same amount. He accepted during argument, however, that the GG Trust had transferred assets to the D & S Trust during that year having a pre-depreciation value of $509,863. Those assets were then shown in the trust’s financial statements for that year at their depreciated value.
[28] Sharon’s counsel called into question, however, the value of the assets that MHP transferred to the D & S Trust during the 2005 year. Sharon’s counsel accepted that the financial statements of the D & S Trust showed it had acquired some assets that formerly belonged to MHP during the year ended 31 March 2005. He submitted, however, that these appeared to have a total value of just $72,231. He therefore argued that the D & S Trust had acquired a liability to the GG Trust in the sum of more than $1.2 million in return for receiving assets having a very significantly lesser value. This is an issue to which we return later in the judgment.
[29] Sharon’s counsel argued the issue of unanimity on two bases. First, he contended there was no evidence to confirm Sharon and David had complied with the requirements of s 129 of the Companies Act 1993 in relation to the transfer of assets from MHP to the D & S Trust during the 2005 year. Secondly, he argued there was no evidence that Sharon and David had acted unanimously in their capacity as trustees of the D & S Trust in agreeing to assume responsibility for the two debts.
Failure to comply with s 129 of the Companies Act 1993
[30] Section 129 of the Companies Act 1993 relevantly provides as follows:
129 Major transactions
(1) A company must not enter into a major transaction unless the transaction is—
(a) approved by special resolution; or
(b) contingent on approval by special resolution.
(2) In this section,—
assets includes property of any kind, whether tangible or intangible
major transaction, in relation to a company, means:
(a) The acquisition of, or an agreement to acquire, whether contingent or not, assets the value of which is more than half the value of the company’s assets before the acquisition; or
(b) The disposition of, or an agreement to dispose of, whether contingent or not, assets of the company the value of which is more than half the value of the company’s assets before the disposition; or
(c) A transaction that has or is likely to have the effect of the company acquiring rights or interests or incurring obligations or liabilities, including contingent liabilities, the value of which is more than half the value of the company’s assets before the transaction.
...
[31] We agree there is no evidence that the disposition of assets by MHP to the D & S Trust during the 2005 year was ever authorised by a special resolution of MHP’s shareholders or contingent upon such a resolution as s 129 requires. Failure to comply with the requirements of s 129 does not, however, affect the validity of the transaction for present purposes. Section 17(1) of the Companies Act provides that no transfer of property by a company will be invalid merely because the company did not have the capacity, the right or the power to transfer that property. That is so even where the transfer is not in the best interest of the company.[7] As a result, the fact that David and Sharon may not have complied with the requirements of s 129 is of no moment in the present context.
Failure to act unanimously as trustees of the D & S Trust
[32] Sharon’s counsel relied upon the fact that cl 19 of the deed that formed the D & S Trust required the trustees to act unanimously in any decisions that they made on behalf of the trust. This reflects the general principle that a trustee may not delegate his or her functions to another person even if that person is a co-trustee unless authorised to do so by the trust instrument or by law. Subject to these exceptions, to bind a trust estate, the particular act must be the act of all of the trustees.[8]
[33] In this context Sharon’s counsel relied upon the following observation by Hammond J in Rodney Aero Club Inc v Moore:[9]
The unanimity rule is a corollary to the non-delegation principle. For, if trustees cannot delegate, it must follow that they must all perform the duties attendant upon the execution of the trust. There is no such thing in trustee law – at least absent a provision in the trust instrument – for some such concept as a “managing trustee”, or suchlike. Both in theory and in practice, the settlor requires several persons to execute the office, and to watch over each other.
[34] Sharon’s counsel pointed out that the GG Trust cannot point to any contemporaneous documentation proving that Sharon participated in any decision by the trustees of the D & S Trust under which they agreed to assume responsibility for the debts formerly owed to the GG Trust by MHP.
The High Court judgment
[35] Ellis J found that this defence faced a fundamental difficulty in that lack of unanimity would not invalidate transfers of property to and from third parties who had no notice of any irregularity. The Judge held that the evidence fell well short of establishing that Gerald and Diana knew that Sharon and David did not both consent to the transactions that were to occur as part of the restructuring.
[36] The Judge also found that although Sharon may not have paid great attention to the details of the restructure, the evidence showed that she would have been generally aware of it.[10] Even if she did not expressly consent to the transactions when they occurred, the Judge held that she nevertheless subsequently ratified them by repeatedly signing financial statements recording the transfer of assets to the D & S Trust and the assumption by the D & S Trust of responsibility for loans owing to the GG Trust.[11] The Judge also held that Sharon had derived personal benefit from some aspects of the restructure.
Decision
[37] We consider the evidence entitled the Judge to conclude that Sharon had a general understanding of the restructuring proposal even if she did not know all of the details. On 19 November 2003, Ms Amanda Smith of Annan & Co wrote to David and Sharon enclosing documentation relating to the formation of the D & S Trust. She also asked them to provide her with certain information, including their IRD numbers. The letter began as follows:
Mr Gerald Hansard has given us the following details in relation to the plant and property to be transferred to the D & S Hansard Family Trust. Ideally, we would appreciate receiving from you a copy of the latest depreciation schedule for the plant. We would then be able to calculate depreciation from 1 April 2003 through today to get the most up to date value of the plant. We also need to receive from you the quantum of the rental to be paid by M H Publications Limited for the assets. Please also confirm if there are any outstanding loans to M H Publications Limited which have been secured in relation to any of the plant. There may be an obligation to notify any lender of the sale of the assets.
Gerald has also indicated to us that the camper and boat would be transferred into the trust. We would like to receive further details from you including make, model, motor size, registration number etc.
[38] Ms Smith then made two file notes dated 24 November 2003 recording events that occurred on that date. These show that she first received a telephone call from Gerald, who was enquiring as to progress. She then realised that the firm was still awaiting receipt of the signed trust documentation from David and Sharon. She contacted David by telephone, and was told they had not yet received the documents. Ms Smith then left a message on David and Sharon’s home telephone number asking Sharon whether the documents had arrived. Sharon called Ms Smith later the same day, and advised her that the documents had just arrived. She said that she and David would sign and return the documents shortly. Ms Smith records that she then telephoned Gerald with the good news.
[39] The same file note records that Ms Smith subsequently spoke to Sharon again on 17 December 2003. On this occasion it appears that Sharon told Ms Smith that there was a holdup in obtaining David’s IRD number, and that Ms Smith should contact David directly to resolve that issue.
[40] This evidence makes it clear that Sharon must have had a general understanding of at least some aspects of the restructuring proposal. In particular, she was aware from the letter dated 19 November 2003 that it included the transfer of assets to the new trust. There is no evidence, however, that Sharon knew in advance the value of the assets that the D & S Trust was to acquire or the debt that it would incur as a result.
[41] That is also the position in respect of the assumption by the D & S Trust of responsibility for the debt of $712,795 that MHP formerly owed to the GG Trust. Although David said he discussed the restructuring proposal with Sharon, his evidence was in general terms and she denied that he had provided her with any detail regarding the proposal. There is also no contemporaneous documentary evidence confirming that Sharon was aware of that particular aspect of the restructuring arrangement when it was obviously being discussed by others, including David and Gerald.
[42] Although the financial statements for all three entities reflect the apparent assumption of responsibility for that debt by the D & S Trust during the 2005 year, the issue does not appear to have been the subject of discussion until after 31 March 2005. On 26 May 2005, Gerald sent his accountant, Mr Hamish Giller, a copy of an internal balance sheet prepared in respect of MHP by facsimile. This recorded that MHP still owned fixed assets totalling $596,992, and that it still owed the GG Trust the sum of $712,795. The document also contains the following handwritten note from Gerald to Mr Giller:
Attention Hamish
David wants to know if that which shows as owing to GG Hansard Family Trust by MH Publications can be altered as owing to D & S Family Trust.
Frankly I thought it already was owed to G & D Hansard Family T[rust] by D & S Trust. I will ring you later today for an answer.
Gerald
[43] Mr Giller’s firm subsequently created journal entries in the financial records of the two trusts recording that the debt formerly owing by MHP was henceforth owed to the GG Trust by the D & S Trust. That outcome obviously does not reflect the proposal referred to in Gerald’s handwritten note.
[44] Although the journal entries gave effect to the transactions, they could obviously not bind any of the parties to them until they agreed to the underlying transactions.[12] This required the trustees of the D & S Trust to consent to, or approve, the transactions. There is no evidence that Sharon agreed to the acquisition of the assets or the assumption of liability for either loan before the relevant journal entries were made. For that reason she cannot be liable in respect of either loan unless, as Ellis J found, Sharon’s subsequent actions were sufficient to amount to ratification of those transactions.
Did Sharon subsequently ratify the transactions?
[45] Counsel referred us to several cases as authority for the proposition that a trustee can subsequently ratify the action of another trustee done on behalf of the trust. Of these, Meeseena v Carr is the earliest and most frequently cited. In that case Lord Romilly MR observed:[13]
I had some doubts at first whether, as the discretion was to be exercised by the two trustees and one only had acted, the discretion had been properly exercised; but I have come to the conclusion that as the other trustee approved and sanctioned what was done by the one who made the payments, no breach of trust was committed.
[46] In that case two trustees had been appointed to administer a deceased’s estate. The trustees had the power to pay the income from one-fifth of the residuary estate to the deceased’s son. They also had the power to purchase an annuity for the benefit of the son using the capital of the estate. The trustees had advanced payments directly to the son that amounted to more than the income from the onefifth share, and not in the form of an annuity for his benefit. The advances in question were made by one trustee. The question for the Court was whether the advances were outside the powers of the trustees and therefore invalid. Lord Romilly MR considered that the advances were within the powers of the trustees, and the fact that only one trustee had made the advances was not fatal given the fact that the other trustee approved and sanctioned what was done.
[47] In this context the learned authors of Lewin on Trusts observe:[14]
If trustees take a decision not by meeting together but by circulating a proposal in writing to which they all assent, the fact that one trustee gives his assent some days or even weeks after another will not in our view vitiate the exercise if there is no reason to think that circumstances have changed in the meantime. A retrospective assent from one trustee, purporting to approve what has already been done by others without it, will not do. But all the trustees may ratify what has previously been done by some only of them, presumably on the footing that they are entitled to avoid the circuity of seeking to set aside the prior purported exercise only to exercise the power again in the same way.
(emphasis added and footnotes omitted)
[48] In Lang v Southen, Mr Southen sought payment for plumbing services he had performed for a trust. [15] Mr Lang, one of two trustees, had no direct interaction with Mr Southen. His co-trustee had entered into the contract for the plumbing services with Mr Southen. Panckhurst J found that Mr Lang had left the day to day management of the building project that the trust was undertaking to his co-trustee. Panckhurst J also held that such sanction and approval was sufficient to authorise the earlier entry into the plumbing contract on Mr Lang’s behalf. This was therefore a case involving prospective approval of a class of decisions that would be made by the co-trustee in furtherance of the purpose of the trust. That is different to retrospective ratification.
[49] In Niak v Macdonald, a trustee (Mr Macdonald) had advanced trust funds to himself and had subsequently used those funds to purchase a yacht.[16] The advance was not approved by the other two trustees, and was therefore made in breach of the requirement for unanimity.[17] Mr Macdonald had subsequently granted a security interest over the yacht to a bank to secure certain debts that he owed the bank. Mr Macdonald was removed as a trustee, and the remaining trustees seized the yacht and sold it. The issue then arose as to who was entitled to the sale proceeds.
[50] The bank was ultimately held to be entitled to the sale proceeds because it was found not to have knowledge of the breach of trust. The bank had also argued, however, that the remaining trustees were estopped from claiming that the advance was unauthorised on the basis of various actions they had taken, including the approval of financial statements for the trust that showed the advances. In rejecting the bank’s argument, this Court observed:
[20] For the reasons given, our conclusion is that Mr Macdonald’s use of the Trust funds to purchase the yacht was an unauthorised use of those funds. He may have believed it was in order to utilise the funds, because no objection had been taken to past dealings, but the fact remains that the Trustees did not in the manner required authorise a loan to him. On the evidence Mr Macdonald clearly purchased the yacht in his own name but in doing so, utilised money which was the property of the Trust which he was not entitled to use. The Trustees did not subsequently authorise or ratify the unauthorised use of the funds.
[51] Subsequent approval of financial statements may therefore not be sufficient to amount to ratification of actions taken without the unanimous approval of trustees. This is because, in order to ratify a transaction, the person ratifying must know the essential detail of the act or decision in question. It is not sufficient to show that he or she was aware of a change in the trust’s financial position, even if that change carries with it the necessary implication that some sort of transaction must have occurred. For a trustee to validly ratify a decision, it must be shown that there was more than a passive acquiescence to a decision made by another trustee.[18] The ratifying act must show that the trustee considered the exercise of his or her power as a trustee and consented to the action taken.[19]
Decision
The debt of $509,863
[52] The first financial statements for the D & S Trust were prepared in respect of the year ended 31 March 2004. As we have already observed, these clearly showed that the D & S Trust had acquired four assets during the 2004 year.[20] We took Sharon’s counsel to concede during argument that the D & S Trust had acquired assets to the value of $509,863 directly from the GG Trust during the 2004 year. The financial statements also clearly showed that the trust had also incurred a liability to the GG Trust in the sum of $509,863. The same debt is also shown in the trust’s financial statements in respect of subsequent years. Sharon must be taken to have been aware of these transactions, because she signed the financial statements in respect of the 2005 year on 22 March 2006. She also signed two subsequent sets of financial statements for the D & S Trust showing that the debt remained owing.
[53] More importantly, after 2004 Sharon permitted the D & S Trust to charge MHP rental in respect of the four assets it had acquired from the GG Trust during that year. We therefore conclude that the evidence clearly established that Sharon must have known of and subsequently ratified the acquisition of those particular assets and the incurring of the resulting debt.
The debt of $712,795
[54] The financial statements in respect of the 2005 year similarly make it plain that the D & S Trust had assumed a liability in the sum of $712,795 to the GG Trust during the 2005 year. Sharon must have been aware of that fact. The real issue is whether the evidence also established that Sharon understood the nature of the transaction. An important feature of the transaction was that the D & S Trust was assuming a liability of $712,795 in return for acquiring assets of a considerably lesser value.
[55] The most reliable evidence regarding the value of the assets transferred by MHP to the D & S Trust during the 2005 year appears to be that given by MHP’s accountant. She confirmed that MHP had transferred assets to the value of approximately $308,000 to the D & S Trust during that year. If this evidence is correct, the D & S Trust assumed responsibility for a loan that was more than $400,000 greater than the value of the assets it received from MHP in return. In order to ratify the assumption of the debt, Sharon needed to know and understand this fact.
[56] The trust’s financial statements for the 2005 year were of little assistance in this regard. They did not clearly identify and set out the assets that the D & S Trust had acquired from MHP in return for assuming liability for the loan, or the value of those assets. It would not have been immediately obvious to Sharon, or anybody else who read the financial statements for that year, that the D & S Trust had acquired assets valued at $308,000 in return for assuming liability for the loan.
[57] It is also significant, in our view, that David’s evidence makes it clear that even now he does not properly understand the manner in which the transactions proceeded. In his brief of evidence he said that the GG Trust advanced the sum of $509,863 to the D & S Trust in order to enable it to acquire business assets from MHP. This is clearly incorrect, because the D & S Trust acquired those assets directly from the GG Trust and not from MHP.
[58] David’s brief of evidence also recorded that “the previous advances made by the GG Trust to MHP totalling $712,795 would be treated as repaid to the GG Trust and then re-advanced to the D & S Trust, because the assets were now owned by the D & S Trust and leased to MHP”. Importantly, David did not say that he was aware that the D & S Trust was agreeing to assume responsibility of a loan for $712,795 in return for receiving asserts worth just $308,000.
[59] We accept that Sharon may have believed the D & S Trust was assuming responsibility for loans because it was acquiring business assets in return. We are not satisfied, however, that the evidence established that she was ever aware that the proposal involved a substantial disparity in value between the assets the D & S Trust was to acquire and the loan for which the trustees were thereafter to be responsible. Unless Sharon knew of that fact and agreed to it, she could not ratify any earlier decision by David that the D & S Trust was to assume responsibility for a loan of that amount. The argument based on ratification fails as a result.
[60] It follows that the GG Trust has not established that Sharon is liable to repay the loan of $712,795 on the basis that she ratified the agreement.
Estoppel
[61] The respondents’ reply to Sharon’s defence based on alleged lack of unanimity also pleads estoppel. This argument appears to rely on the same facts as the ratification argument. The reply alleges that the trustees of the D & S Trust are now estopped from denying their liability to repay the two loans because of their actions in permitting the D & S Trust to acquire assets from MHP, and their acceptance of the financial benefits they received as a result.
[62] The Judge’s conclusion regarding the related issues of unanimity and ratification meant she was not required to deal with this issue. Counsel for the GG Trust dealt with the claim based on estoppel briefly in his written submission but Sharon’s counsel did not. Given that the GG Trust expressly raises a claim based on estoppel in the pleadings, however, it is appropriate for us to now consider whether such a claim might be available given the fact that we have reached a different conclusion from the High Court Judge in relation to Sharon’s liability in respect of the loan for $712,795. We do not propose to reach any firm conclusion at this stage as to whether the claim based on estoppel is made out. We will only determine whether it is arguable on the basis of the evidence adduced at the trial.
The ingredients of estoppel
[63] It is now well established that it is necessary for a party advancing a claim based on estoppel to establish four elements:[21]
- (a) The party against whom the estoppel is alleged has acted in a manner that has caused the claimant to have a certain belief or expectation.
- (b) The claimant has reasonably relied upon that belief or expectation.
- (c) The claimant will suffer detriment if the belief or expectation is departed from.
- (d) It would be unconscionable for the party against whom the estoppel is alleged to depart from the belief or expectation.
This case
[64] We consider it is at least arguable that in accepting the assets from MHP and the financial benefits that they subsequently derived from them, the trustees of the D & S Trust created or encouraged a belief by the trustees of the GG Trust that the D & S Trust accepted all aspects of the restructuring arrangement including the assumption of responsibility for the loan of $712,795. Whether or not their acts in signing and approving financial statements on behalf of MHP and the D & S Trust are also relevant to this issue would depend on whether they knew that the trustees of the GG Trust would receive and were likely to rely upon those documents.
[65] It is also plainly arguable that the GG Trust has acted reasonably and to its detriment in ordering its financial affairs since 2005 in the belief that this was the case. Any alteration to the status quo at this point is likely to have significant consequences for the GG Trust in relation to important issues such as taxation, and may also require the GG Trust to fund a potentially costly accounting exercise. In addition, the trustees of the D & S Trust have benefited financially since 2005 from their acquisition of the business assets from MHP during that year. These factors mean that it would now arguably be unconscionable to permit the D & S Trust to now deny responsibility to repay the loans. It may be necessary, however, for any relief that might be given to the GG Trust to take into account the disparity between the amount of the loan and the value of the assets and benefits that the D & S Trust acquired when it assumed responsibility for the loan.
[66] It would be inappropriate for this Court to finally resolve this issue without giving counsel a further opportunity to make submissions in relation to it. For that reason we are issuing this decision as an interim judgment. At the conclusion of the judgment we give directions in relation to the filing and service of further submissions if the trustees of the GG Trust wish to pursue this aspect of their claim. In relation to the issue of relief in this context, we draw the attention of counsel to this Court’s recent discussion of the topic in Wilson Parking New Zealand Ltd v Fanshawe 136 Ltd.[22]
Did David act in breach of his fiduciary duty to the D & S Trust by entering into the transactions?
[67] Sharon’s counsel advanced this aspect of the appeal under the heading “Restructuring and lack of benefit to the D & S Trust”. The thrust of the argument is that David breached his fiduciary duty to the D & S Trust by committing it to a bargain that was significantly to its disadvantage.
[68] This argument could only apply to the debt of $712,795 for which the D & S Trust assumed responsibility during the 2005 year. It cannot apply in respect of the debt of $509,863 that the D & S Trust incurred the previous year when it acquired assets having that value from the GG Trust. The D & S Trust clearly received full consideration when it incurred that debt.
[69] Our conclusion in relation to the issues of unanimity and ratification means, however, that it is unnecessary for us to consider this ground of appeal. The fact that the GG Trust has not established that Sharon ratified David’s decision to enter into the transaction involving assumption of responsibility for the loan of $712,795 means that it effectively falls away.
Was Sharon entitled to advance a defence based on knowing assistance?
[70] This argument was only faintly pressed before us, and was not clearly articulated. Given that we have not found it necessary to determine the ground of appeal based on breach of fiduciary duty by David, it is also unnecessary for us to consider whether Gerald and Diana as trustees of the GG Trust provided knowing assistance to any breach of fiduciary duty by David. We consider, however, that it would not have been possible for Sharon to establish this aspect of the claim in any event.
[71] Without citing any authority, Sharon’s counsel submitted that the defence will be available where “there are tell-tale signs of dishonesty which include acting in reckless disregard of others’ rights, or becoming involved in circumstances where an honest person would flatly decline to become involved or would ask further questions.” This argument appears to rely for its factual basis upon an assertion that Gerald and Diana dishonestly sought to gain an advantage for the GG Trust by assisting David to shift responsibility for a debt from an insolvent entity (MHP) to a solvent entity (the D & S Trust). In doing so, they knew their actions would be likely to deprive Sharon and her children of the home in which they have lived for many years.
[72] The leading authority in New Zealand in relation to dishonest assistance is the judgment of the Supreme Court in Westpac New Zealand Ltd v MAP & Associates Ltd.[23] In that case, the Court described the dishonest state of mind required as follows:[24]
[27] The key ingredient in the cause of action for dishonest assistance is the need for a dishonest state of mind on the part of the person who assists in the breach of trust. We agree with the statement in Barlow Clowes that such a state of mind may consist in actual knowledge that the transaction is one in which the assistor cannot honestly participate.[25] But it may also consist in what we would describe as a sufficiently strong suspicion of a breach of trust, coupled with a deliberate decision not to make inquiry lest the inquiry result in actual knowledge. For the purpose of this alternative, it is necessary that the strength of the suspicion that a breach of trust is intended makes it dishonest to decide not to make inquiry. That state of mind, which equity equates with actual knowledge, is usually referred to as wilful blindness. It involves shutting one’s eyes to the obvious and can thus fairly be equated with the dishonesty involved when there is actual knowledge.
[73] This argument faces several obvious difficulties. First, there is no evidence that Gerald and Diana had any reason to believe that MHP was, to use the words of Sharon’s counsel, “balance sheet insolvent”. In fact, the internal balance sheet that Gerald sent to Mr Giller on 26 May 2005 showed that MHP had net assets as at 31 March 2005 of $573,329. This figure took into account the debt of $712,795 then owing by MHP to the GG Trust. Secondly, MHP appears to have been trading profitably as at 31 March 2005. It did not encounter financial difficulties until several years later.
[74] More importantly, there is simply no evidence that Gerald and Diana sought to use the restructuring to dishonestly assist David to act in a way that disadvantaged Sharon and his children. The transactions that Sharon now calls into question occurred three to four years before David and Sharon ultimately separated. The D & S Trust was formed for the benefit of David and Sharon in anticipation of the restructuring taking place. Gerald and Diana would hardly have caused the G & D Trust to make the capital distribution of the Orewa property to the D & S Trust if they believed when they did so that their son’s marriage was in trouble.
[75] We are therefore satisfied that the Judge was entitled to find that this defence was not established on the evidence.
Result
[76] The appeal is dismissed to the extent it relates to the appellant’s liability to pay to the respondents the sum of $509,863. In respect of the remaining sum of $712,795, directions for further submissions are given in [77] of the judgment. Costs are reserved.
[77] If the trustees of the GG Trust wish to pursue their claim for relief based on estoppel, their counsel should file and serve further submissions in relation solely to that issue within 14 days. Sharon’s counsel will then have 14 days within which to file submissions in response, with submissions in reply (if any) to be filed within seven days thereafter. The Court will then issue a final judgment dealing with that aspect of the GG Trust’s claim.
Solicitors:
Kennelly
Law, Orewa for Appellant
LeeSalmonLong, Auckland for Respondents
[1] All of the parties to the appeal share the surname Hansard. As Ellis J did in the High Court, we will refer to them by their Christian names.
[2] There is a dispute between David and Sharon regarding the date upon which they separated. Sharon maintains they separated in 2008, whilst David contends they separated in 2010.
[3] This was effectively a judgment against both David and Sharon as trustees of that trust.
[4] Hansard v Hansard [2013] NZHC 1692 at [69].
[5] This is a rounded figure. The actual amount appears to have been $712,794.43.
[6] At [45].
[7] Companies Act 1993, s 17(3).
[8] Luke v South Kensington Hotel Co (1879) 11 Ch 121 (CA) at 125–126; Rodney Aero Club Inc v Moore [1998] 2 NZLR 192 (HC) at 195.
[9] At 195.
[10] Hansard v Hansard, above n 4, at [44].
[11] At [44].
[12] See Temples Wholesale Flower Supplies Pty Ltd v Commissioner of Taxation [1991] FCA 162; (1991) 29 FCR 93 at 101–103 for the proposition that journal entries cannot, on their own, establish that a transaction has occurred. See further Ararimu Holdings Ltd (in stat man) v Equiticorp Financial Services Ltd [1991] MCLR 464 (CA) at 474–475, where the Court of Appeal held that corresponding journal entries on both sides of the transaction were “a plain acknowledgement that [the transaction] had been effected.”
[13] Messeena v Carr (1870) LR 9 Eq 260 at 262–263.
[14] Thomas Lewin and others Lewin on Trusts (18th ed, Sweet & Maxwell, London, 2008) at [29–209].
[15] Lang v Southen HC Christchurch AP15/01, 24 July 2001.
[16] Niak v MacDonald [2001] NZCA 123; [2001] 3 NZLR 334 (CA).
[17] The fact that Mr MacDonald had advanced money to himself was not, as the appellant suggested, a breach of trust as the trust deed authorised self dealing. See Niak v MacDonald, above n 16 at [17]–[18].
[18] See Gilbey v Rush [1906] 1 Ch 11 (Ch) at 23–24.
[19] Libby v Kennedy [1998] OPLR 213 (Ch) at [32]–[33].
[20] See above at [17].
[21] Burbery Mortgage Finance and Savings Ltd (in rec) v Hindsbank Holdings Ltd [1988] NZCA 220; [1989] 1 NZLR 356 (CA) at 361 and Gold Star Insurance Co Ltd v Gaunt [1998] 3 NZLR 80 (CA) at 86.
[22] Wilson Parking New Zealand Ltd v Fanshawe 136 Ltd [2014] NZCA 407.
[23] Westpac New Zealand Ltd v MAP & Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 751. See also the decision of this Court in Spencer v Spencer [2013] NZCA 449; [2014] 2 NZLR 190 at [120]–[131] as to the meaning of dishonesty.
[24] Footnote added.
[25] Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd [2005] UKPC 37, [2006] 1 WLR 1476.
NZLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.nzlii.org/nz/cases/NZCA/2014/433.html