OFFICIAL ASSIGNEE V C A FRY AS TRUSTEE OF THE FRY FAMILY TRUST AND ORS HC AK CIV 2009-404-000439 [2009] NZHC 51 (4 February 2009)

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
                                                                      CIV 2009-404-000439


              IN THE MATTER OF             the bankruptcy of Colin Ashlyn Fry

              BETWEEN                      OFFICIAL
ASSIGNEE
                                           Plaintiff

              AND                          COLIN ASHLYN FRY AS TRUSTEE
OF
                                           THE FRY FAMILY TRUST
                                           First Defendant

 
            AND                          MICHAEL JOSEPH WASS AS TRUSTEE
                                           OF THE FRY FAMILY
TRUST
                                           Second Defendant

              AND                          MALCOLM JOHN RICHARDS
AS
                                           TRUSTEE OF THE FRY FAMILY
                                           TRUST
       
                                   Third Defendant

              AND                          WHOLE BODY MEATS (2006) LIMITED
 
                                         Fourth Defendant

              AND                          WAYNE ASHLYN FRY
         
                                 Fifth Defendant


Hearing:      (On the papers)

Judgment:     4 February 2009 at 5:15pm


    
                           ORDER OF WYLIE J


                      This judgment was delivered by Justice Wylie
               
              on 4 February 2009 at 5.15pm
                       pursuant to r 540(4) of the High Court Rules


               
                Registrar/Deputy Registrar
                                           Date:




OFFICIAL ASSIGNEE V C A FRY AS TRUSTEE
OF THE FRY FAMILY TRUST AND ORS HC AK CIV
2009-404-000439 4 February 2009

[1]     The plaintiff is the Official Assignee at Auckland.
He is the administrator
and executor of the bankrupt estate of the first defendant, Mr Fry.


[2]     Mr Fry was the settlor, and
is a trustee, of the Fry Family Trust. His co-
trustees are the second defendant and third defendant. The fourth defendant operated
a trading butchery business known as Whole Body Meats. The fifth defendant is
Mr Fry's son. He is a director and shareholder of the
fourth defendant, and of two
other companies, Counties Livestock Transport Limited and Carefree Holdings
Limited.


[3]     The Fry
Family Trust was the initial owner and operator of Whole Body
Meats. In the course of trading, and as a trustee of the trust, the
first defendant,
Mr Fry, incurred significant indebtedness totalling some $110,000.                There was
partial payment to one
creditor.        The end result seems to be that prior to his
adjudication as a bankrupt, Mr Fry had incurred $95,645.73 of indebtedness
in his
capacity as a trustee of the trust.


[4]     The various creditors have made claims with the plaintiff in the bankruptcy
of Mr Fry.


[5]     Pursuant to the trust deed Mr Fry is indemnified as a trustee of the trust out of
the property of the trust
in respect of all claims made against him, other than claims
arising out of neglect or default, as a result of his trusteeship of
the trust.


[6]     The plaintiff asserts in his statement of claim that the claims made with him
in Mr Fry's bankruptcy are trust
debts. He has made demand on the trust for
repayment of those debts pursuant to the indemnity, and asserts that the trust has
failed
or refused to pay the moneys to him, or to the creditors. The plaintiff claims a
charge or lien over the trust property, to the extent
of the claims made against Mr Fry
as trustee, and he has sought judgment against the trust in that sum. He also seeks a
declaration
that the property of the trust stands charged in his favour, and an order
pursuant to s 64 of the Trustee Act 1956 that the property
of the trust be sold to
satisfy his charge.

[7]    It is also alleged in the statement of claim that the trust transferred the
business and assets of Whole Body Meats to the fourth defendant with the intention
of defrauding creditors of the trust. It is asserted that the fourth defendant had actual
constructive or imputed knowledge of that intention, and that the plaintiff is a person
prejudiced by the transfer. He seeks a declaration
that the transfer of the business
and the assets from the trust to the fourth defendant is void, and an order directing
the transfer
of the business and assets from the fourth defendant to the trust.


[8]    Similarly it is asserted that the trust held shares in
Counties Livestock
Transport Limited, the fourth defendant, and Carefree Holdings Limited, and that the
trust transferred those shareholdings
to the fifth defendant with the intention of
defrauding its creditors. It is asserted that the fifth defendant had actual constructive
or imputed knowledge of that intention, and that the plaintiff is a person prejudiced
by the transfer of its shareholding. Again
the plaintiff seeks orders declaring that the
transfer of shares from the trust to the fifth defendant is void.


[9]    He also
seeks orders under the Trustee Act 1956 appointing a new trustee or
new trustees in place of the first, second and third defendants.


[10]   The notice of proceeding was filed on 27 January 2009. No statements of
defence have yet been filed.       Indeed as I understand
it the second and third
defendants have not yet been served.


[11]   On 30 January 2009 the plaintiff sought an ex parte application
for an asset
preservation order pursuant to r 239 of the old High Court Rules, and made an
interlocutory application for summary
judgment. The plaintiff seeks to prevent the
further dissipation of the assets it says the trust has alienated, pending the
determination
of its claims.


[12]   Two affidavits have been filed by the plaintiff in support of this application,
first an affidavit by a Mr
Everton, and secondly an affidavit by a Ms Seaman.


[13]   Mr Everton is the general manager of two of the first defendant's creditors.
He records that those creditors entered into an agreement with Mr Fry for the

provision of goods and services to Whole Body Meats.
Invoices were rendered.
They were not paid. He records that in March 2004 the creditors sought and
obtained summary judgment against
Mr Fry. Thereafter, Mr Fry made application to
set aside the judgments, asserting amongst other things that the proper defendant
should have been the Fry Family Trust.           He records that the application was
dismissed, and that the judgments currently
stand. He notes that Mr Fry failed to pay
either debt, and that as a result, a bankruptcy notice was issued against him. Mr Fry
failed
to comply with the terms of the bankruptcy notice, and the creditors' petition
and a summons to him were issued. When this came before
the Court, Mr Fry
sought a stay or adjournment to allow time for an appeal to be filed against the
District Court's judgment. That
application was granted, with directions that any
appeal be filed by a set date. No appeal was filed, and in February 2006 Mr Fry
was
adjudicated bankrupt. He records that proofs of debt have been filed with the
Official Assignee, but that to date no monies have
been received by the creditors.


[14]   Ms Goldberg is a deputy assignee employed by the plaintiff. She has been
primarily responsible
for the administration of Mr Fry's bankrupt estate. She records
that in the course of investigating his property and affairs, she
has ascertained that
Mr Fry's indebtedness relates to debts that he incurred while acting as a trustee of
the Fry Family Trust. 
    She refers to the trust deed and states that Mr Fry is
indemnified by the trust for all losses or liabilities he incurred while
acting as trustee.
She notes that the Official Assignee is seeking to enforce the indemnity, and seeking
to void the transfer of
the trust assets, so as to bring them back into the assets of the
trust for the availability of creditors. She notes that the assets
of Whole Body Meats
were transferred to the fourth defendant for $78,730. She records that there may
have been another purchaser, who was interested
in purchasing and who was
prepared to purchase the assets for $400,000. On that basis, she suggests that the
business may have been
transferred by the trust to the fourth defendant at an
undervalue. She then deals with the trustees' indemnity, and notes that the
plaintiff
has sought to enforce the same by letter dated 7 August 2007. She notes no response
has been received to that letter. She
then deals with the dissipation of the trust
assets. Ms Goldberg notes there are a number of companies associated with the
trust,
namely the fourth defendant, Counties Livestock Transport Limited, and
Carefree Holdings Limited. She notes that the accountant for
the various companies

has provided their financial statements pursuant to a summons. It seems from her
affidavit that:


     
  a)        Whole Body Meats Limited was incorporated in May 2006, some
                  three months after Mr Fry's adjudication.
The sole shareholder on
                  incorporation was the Fry Family Trust. The transfer of Whole Body
                  Meats
to the company occurred between May 2006 and March 2007.
                  No monies were paid. Rather there was a debt back of $78,730
owed
                  by the company to the trust in consideration of the transfer.
                  Subsequently the business
and assets were transferred to the fifth
                  defendant. There is no documentation available to date suggesting
   
              that value was provided by the fifth defendant for the transfer.


        b)        Counties Livestock Transport Limited
was incorporated in March
                  2001. The trustees were the initial shareholders. In or around January
             
    2007, the shareholding was transferred on a number of occasions; first
                  to the second and third defendants,
then to the second defendant
                  solely, and finally to the fifth defendant.


        c)        Carefree Holdings
Limited was incorporated in March 2001. The
                  shareholders were initially the trustees of the Fry Family Trust. The
                  shareholding was transferred from the trustees to the fifth defendant in
                  August 2006. Carefree
owns a number of properties, including a
                  property on Native Road, Franklin, and a property known as the
      
           Flockhouse Agricultural Training Farm at Parewanui Road,
                  Rangitikei. The Flockhouse Agricultural Training
Farm property is
                  subject to a mortgagee's sale by Basecorp Finance Limited. It sought
                  tenders,
which closed on Wednesday 17 December 2008. Settlement
                  date of any sale is stated as being 23 January 2009.


[15]
   Ms Goldberg states her belief that the trustees have taken steps to transfer
assets from the trust following Mr Fry's adjudication,
because they knew or
anticipated that the trust would be called upon to satisfy the indebtedness by the
Official Assignee.      
  Based on Mr Fry's failure to exercise his right of

indemnification, and to then cause or allow the assets of the trust to be
transferred
away from it, she believes that the trust was attempting to defeat the creditors'
claims. In her view there is a real
risk that Mr Fry's associates may seek to transfer
the assets, or alternatively to realise them and to then dissipate the profits.
Her
concern is exacerbated given the ease with which shares can be transferred. It is for
that reason that asset preservation orders
are sought to prevent the further transfer of
the shares in Whole Body Meats Limited, Counties Livestock Transport Limited,
and Carefree
Holdings Limited, and to preserve the asset base of those companies.


The application


[16]   The application was made under r
239 of the High Court Rules.


[17]   The High Court Rules have since been replaced ­ see s 8 of The Judicature
Act (High Court Rules) Amendment Act 2008. The new rules came into
effect in
large part on 1 February 2009.


[18]   There are transitional provisions contained in Part 2 of the Act. The present
proceedings
are "pending proceedings" in terms of s 9 of the Act, because they were
commenced before the commencement of s 8. They were not completed
by 1
February 2009.        In terms of s 9(2), a pending proceeding must be continued,
completed and enforced under the new High
Court Rules set out in Schedule 2 as
substituted by s 8.


[19]   The equivalent provision to r 239 in the old High Court Rules seems
to be a
freezing order under r 32.2, although this is not noted in the destination schedule in
McGechan on Procedure. A freezing
order permits the Court to restrain a respondent
from removing any assets located in or outside New Zealand, or from disposing of,
dealing with or diminishing the value of those assets.


[20]   In a helpful memorandum filed in support of the application, Mr Neil,
counsel for the plaintiff, has referred to the various requirements for an order under
r 239. He refers to a need for a good arguable
case, the fact that the respondent must

have assets within jurisdiction, and the risk of dissipation. He also refers to the
balance
of convenience and overall justice.


[21]    Given the limited time available to deal with this matter, I have proceeded on
the
basis that it is appropriate to apply the criteria which applied to orders under the
old r 239.


Good arguable case


[22]    I
am satisfied that the plaintiff has a good arguable case. In particular, the
first cause of action advances a simple claim against
the trustees in reliance on
Mr Fry's right to be indemnified contained in the trust deed. Given the indemnity, it
would seem that,
prima facie, the plaintiff, standing in the shoes of Mr Fry, is
entitled to a charge or lien against the trust's assets to the extent
of the claim. In my
view, the first cause of action does raise a good arguable case.


[23]    So does the second cause of action.
I have regard to the review of the law
relating to s 60 of the Property Law Act 1952 undertaken by the Supreme Court in
Regal Castings
Limited v LightBody  [2008] NZSC 87 at  [52] to [59]. I note that
Mr Fry declined to call upon the trust to enforce the indemnity, instead allowing
himself to be adjudicated
bankrupt. Within a short period thereafter, the fourth
defendant was incorporated, and the trust transferred the butchery business
and its
assets to the fourth defendant. Thus the assets of the business were removed from
the asset base of the trust.     It is
arguable that the business and assets were
undervalued. No monies were paid ­ rather a debt was created. The effect was to
substantially
reduce the assets available to the creditors of the trust. In my view
there is a good arguable case for inferring an intention on
the part of the trust to
defeat its creditors.


[24]    The same applies to the third cause of action against the fifth defendant.
As
far as I can glean from the affidavits filed, the shareholdings were transferred at a
time when the trust had significant indebtedness.
There appears to be a total absence
of documentation or consideration. The Official Assignee has endeavoured to obtain
any documentation
evidencing the transfer, but has been unable to do so. On the

face of it, there is a good arguable case for the Court inferring
an intention to defraud
creditors on the part of the trust.


[25]    On balance, I am satisfied that there is a good arguable case
on the principal
causes of action.


Assets within jurisdiction


[26]    The plaintiff also has to establish that the defendants
have assets within the
jurisdiction.


[27]    The main assets the Official Assignee seeks to have restrained are the
business and
the business assets, and the shareholdings in the fourth defendant, in
Counties Livestock Transport Limited, and Carefree Holdings
Limited.                That
property comprises assets of the defendants and it is clearly within the jurisdiction of
the Court.


Risk of dissipation


[28]    The plaintiff also has to establish a real risk that the assets would be
dissipated or moved out
of the jurisdiction.


[29]    In my view that risk exists. On the material filed to date, it seems that the
activities of the trust
in transferring its assets when it was obliged to indemnify Mr
Fry, with what it appears may be an intention to defraud its creditors,
together with
the wider circumstances surrounding the transfers, establish that there is a real risk
that if a freezing order is
not made, the assets could be further dissipated. There is
then a risk that any final judgment in favour of the plaintiff could be
rendered
nugatory, because the trust would have no assets against which the Official Assignee
could enforce the judgment.       
   Any hardship to the defendants is in my view
outweighed by that which might be suffered by the Official Assignee acting on
behalf
of the unsecured creditors of Mr Fry and the trust if preservation orders are
not made.

Basecorp Finance Limited/Other parties


[30]   An order is sought against Basecorp Finance Limited, as the first mortgagee
of the farm asset owned by Carefree Holdings
Limited. In my view that order is
appropriate, and can properly be made against Basecorp Finance Limited under
r 32.4, provided that
Basecorp Finance Limited is permitted to first take sums
properly due and owing to it, to take sale costs, and to discharge the second
mortgage registered against the property. In those circumstances, it seems unlikely
that Basecorp Finance Limited will be affected
to any significant extent by the orders
proposed.


[31]   I also note that the plaintiff seeks orders against not only the defendants,
but
also against Counties Livestock Transport Limited, and Carefree Holdings Limited.
Those orders can be made under s 32.4, and
I am satisfied that a link between those
entities and the defendants and the plaintiff has been established.


Undertaking


[32]
  There is no undertaking as to damages on the Court file. Rule 32.2(5)
requires that an applicant for a freezing order must sign
a signed undertaking.


[33]   The plaintiff submits that he is a statutory officer, appointed under the
Insolvency Act and the State Sector Act, and that he is a functionary of
the Crown.
He refers to s 65ZC of the Public Finance Act 1989, which reads as follows:

       Except as expressly authorised by
any Act, it is not lawful for any person to
       give a guarantee or indemnity on behalf of or in the name of the Crown.

He submits
that any undertaking given by him would be a guarantee or indemnity on
behalf of or in the name of the Crown, and that to require
such an undertaking would
be in conflict with the Public Finance Act provision referred to above. Counsel
referred me to the decision
of The Registrar of Companies v Nearzero Inc, HC
Nelson, CIV 2007-442-240, 22 May 2007 where Gendall AJ accepted that these
provisions
applied to and that no undertaking was necessary from the Registrar of
Companies in that case.

[34]   I accept this and agree with
his analysis.


Court order


[35]   A draft order was submitted by the plaintiff. Subject to some amendments to
paragraph 4 and
to the addition of paragraph 5, I approve that draft order.


[36]   Accordingly, the Court orders as follows:


       a)      Pending
further order of this Court, Wayne Ashlyn Fry (together with
               his servants or agents or otherwise) is restrained from
disposing or
               causing to be disposed or otherwise charging or dealing in any manner
               whatsoever with,
or diminishing the value of, whether beneficially
               held or otherwise, the following shares:


               i)   
 all shares held in Whole Body Meats 2006 Limited;


               ii)    all shares held in Counties Livestock Transport Limited;
and


               iii)   all shares held in Carefree Holdings Limited.


       b)      Pending further order of this Court, Whole
Body Meats 2006 Limited,
               Counties Livestock Transport Limited and Carefree Holdings Limited
               (together
with their servants or agents or otherwise including their
               director Wayne Ashlyn Fry) are restrained from disposing
or causing
               to be disposed or otherwise charging or dealing in any manner
               whatsoever with, or diminishing
the value of any property legally or
               beneficially owned or held by Whole Body Meats 2006 Limited,
               Counties
Livestock Transport Limited and Carefree Holdings
               Limited.


       c)      Pending further order of this Court, Colin
Ashlyn Fry, Michael Joseph
               Wass and Malcolm John Richards as trustees of the Fry Family Trust
               or otherwise
(together with their servants or agents or otherwise) are

              restrained from disposing or causing to be disposed or
otherwise
              charging or dealing in any manner whatsoever with, or diminishing
              the value of any property
legally or beneficially owned or held by the
              Fry Family Trust.


       d)     Pending further order of this Court,
Basecorp Finance Limited
              (together with its servants or agents or otherwise) is restrained from
              releasing
to any person or entity, disposing or causing to be disposed
              or otherwise charging or dealing in any manner whatsoever
with,
              whether beneficially held or otherwise, all proceeds derived from the
              sale of the property commonly
known as the Flockhouse Agricultural
              Training Farm situated at Parewanui Road, Rangitikei, and described
         
    in Certificate of Title WN48B/812 with the exception of such sums as
              are required to meet:


              i) 
    the reasonable costs of sale;


              ii)     to discharge all monies properly due under its registered
            
         mortgage No. 7327614.2; and


              iii)    to discharge all monies properly due to Dorchester Finance
        
             Limited under the second registered mortgage no. 7750624.1.


       e)     Leave is reserved to the defendants, and to any other party affected by
    
         this order, to apply on notice to the plaintiff seeking to vary or
              discharge the same.


[37]   The costs
of this application are reserved.




                                                Wylie J