Chambers and others as Trustees of the Chambers Family Trust v High Reach Rentals Limited HC Auckland CIV-2010-404-5214 [2011] NZHC 271 (30 March 2011)

Last Updated: 25 June 2011

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV-2010-404-5214}

BETWEEN VICKI LEA CHAMBERS, NEIL SURTEES, SHANNON GORDON CHAMBERS AS TRUSTEES OF THE CHAMBERS FAMILY TRUST

First Appellants

AND SHANNON GORDON CHAMBERS Second Appellant

AND HIGH REACH RENTALS LIMITED First Respondent

AND JASON MICHAEL HULBERT Second Respondent

Hearing: 2 November 2010

Appearances: J Strauss for First and Second Appellants

C A Anderson for First and Second Respondents

Judgment: 30 March 2011

_{JUDGMENT OF COOPER J}

This judgment was delivered by Justice Cooper on

30 March 2011 at 5.00 p.m., pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

Solicitors:

Nielsons Lawyers, PO Box 13723, Onehunga 1643

North Harbour Law, PO Box 104 Orewa

Copy to:

J Strauss, PO Box 2202, Auckland 1140

CHAMBERS & Others AS TRUSTEES OF THE CHAMBERS FAMILY TRUST V HIGH REACH RENTALS LIMITED HC AK CIV-2010-404-5214 30 March 2011

Introduction

[1] The appellants, who were defendants in the District Court, appeal against a summary judgment that was entered against them.

[2] The subject matter of the dispute was the proceeds of sale of a helicopter. The respondents, (plaintiffs in the District Court) claimed that a substantial part of the proceeds of sale had been wrongly misappropriated by the appellants. They advanced causes of action based on breach of contract, breach of agency, conversion and the knowing receipt of funds which the appellants knew they were not entitled to. The respondents claimed judgment in the sum of $69,686.08, general damages in the sum of $10,000, exemplary damages for an amount the Court deemed fair and just, plus interest and costs.

[3] The appellants raised a simple defence. They asserted that there was an agreement between the second appellant and the second respondent, pursuant to which approximately $85,000 was due to the second appellant at the time the helicopter was sold. It was in accordance with that agreement that the second appellant paid the disputed part of the proceeds of sale to the first appellants, who were trustees of the Chambers Family Trust.

[4] The District Court Judge rejected the defence raised by the appellants. In his judgment of 26 July 2010 Judge Gibson held that the respondents were entitled to judgment in the sum of $69,686.86, together with $5,000 exemplary damages and that the second respondent was entitled to a further an award of $3,000 general damages for distress, anxiety and inconvenience.

[5] The appellants now appeal relying on the alleged agreement between the second appellant and the second respondent. It is asserted that the Judge failed to have regard to the provisions of that agreement and that, in terms of the principles applicable to applications for summary judgment, a genuine issue had been raised which ought not to have been determined on the basis of affidavit evidence without cross-examination.

[6] From this point I will refer to the principal actors as Mr Chambers and

Mr Hulbert rather than by their status as parties in the proceeding and appeal.

Background

[7] Mr Chambers and Mr Hulbert were friends and business associates of long standing. Their friendship was such that Mr Hulbert was a trustee of the Chambers Family Trust and Mr Chambers the sole executor of Mr Hulbert’s estate. Mr Hulbert was the principal and major shareholder of the first respondent, High Reach Rentals Ltd (“High Reach”). High Reach was originally Chambers Helicopters Ltd, of which Mr Chambers and another person were the directors and shareholders.

[8] Chambers Helicopters Ltd was incorporated in February 2007. During September 2007 that company an order for a helicopter which had the registration number ZK-IXP (“the helicopter”). A deposit of $50,200 was paid, towards a purchase price of $505,008 (inclusive of GST). Mr Chambers intended at the time to fund the balance of the purchase price by forming a syndicate. However, during January 2008 Mr Chambers and Mr Hulbert reached agreement that Mr Hulbert would “take over” the helicopter and assume responsibility for payment of the balance of the purchase price.

[9] They agreed that Chambers Helicopters Ltd would be used as the corporate entity to own and operate the helicopter on the basis, however, that control of the company would be transferred to Mr Hulbert who would become the sole director and holder of 85 per cent of the shares, with Mr Chambers retaining a 15 per cent shareholding. Mr Chambers and Mr Hulbert would both be entitled to use the helicopter and each was to contribute $200 per hour towards fuel and maintenance for their use of the helicopter. It was hoped to defray some of the costs of finance by chartering the helicopter.

[10] Mr Hulbert claimed that he paid a cash contribution to the purchase price in the sum of $67,000. In addition, he arranged funding to cover the balance of the purchase price. The name of Chambers Helicopters Ltd was changed to High Reach Rentals Ltd. Mr Chambers duly arranged for share transfers so that Mr Hulbert held

85 per cent and Mr Chambers 15 per cent of the shares in High Reach. From February 2008 until March 2009 Mr Chambers and Mr Hulbert both used the helicopter but the evidence was that Mr Chambers did so more frequently. In April

2009, Mr Hulbert asked Mr Chambers to sell the helicopter and in May 2009 he did so, to a company called McPhee Engineering Ltd. The sale price was $478,125.

[11] Of that sum, Mr Chambers arranged for $322,907.26 to be paid to the finance company to discharge the company’s loan. That left a balance of $155,217.74 which Mr Chambers paid to the account of the Chambers Family Trust. $70,217.74 was then transferred to High Reach. $85,000 was retained in the Chambers Family Trust account.

[12] Of the $70,217.74 paid to High Reach, $53,125 was then paid by the company to the Inland Revenue Department for GST owing on the sale of the helicopter. The remaining balance of $17,092.74 was paid by High Reach to Mr Hulbert.

The dispute

[13] In their summary judgment application High Reach and Mr Hulbert alleged that the $85,000 had been wrongfully retained by the Chambers Family Trust. It was claimed that under the Companies Act 1993,1 all of the proceeds of sale should have been directly paid to High Reach and not to the Trust.

[14] If that had occurred and the payment to Inland Revenue had been made in the sum of $53,125 there would have been a balance left in the sum of $102,092.74. The plaintiffs claimed essentially that sum should then have been distributed in accordance with the respective shareholdings in High Reach of Mr Hulbert and Mr Chambers. Mr Hulbert’s evidence was that he and Mr Chambers had agreed that he would be entitled to 85 per cent of the sale proceeds if and when the helicopter was sold. That would have meant a payment to Mr Hulbert of $86,778.83 and a

_{payment to Mr Chambers of $15,313.91.}

1 Sections 36,52 and 378.

[15] The payment to Mr Hulbert of the sum of $17,092.74 meant that $69,686 had effectively been misappropriated and this was the principal element of the plaintiffs’ claim in the District Court. In addition, general damages were sought by Mr Hulbert personally in the sum of $10,000 and there was a claim for exemplary damages in an amount that the Court deemed just, together with interest and costs.

[16] As I have already indicated, the defence raised was that it was part of the agreement between Mr Hulbert and Mr Chambers that Mr Chambers was in fact entitled to all of the $85,000 that had been retained, out of the proceeds of sale. That sum was made up of his initial deposit of $50,200, a further cash contribution claimed to have been made to the purchase of the helicopter of $17,300 and another sum of $18,200 representing costs that he had incurred personally on equipping and maintaining the helicopter.

The District Court judgment

[17] The Judge rejected Mr Chambers’ proffered defence. He summarised

Mr Chambers’ case at [8] of the judgment as follows:

[8] The second defendants answer to the claim, as encapsulated in their notice of opposition, is that the agreement reached between the parties in January 2008 included in addition to the deposit already paid, terms to the effect that the second defendant would contribute a further $17,300 to the purchase price with the second plaintiff to pay the balance. The defendants also assert it was agreed the second defendant would store the helicopter and assume responsibility for the maintenance of the helicopter for which he would be reimbursed in due course and that both the second plaintiff and second defendant would contribute $200 per hour towards fuel and maintenance for the use of the helicopter by them and that further the second defendant arranged and paid for upgrades at the request of Mr Hulbert, the second plaintiff, including the installation of night instruments, a cargo hook and a wireless cell phone interface at a total cost of $18,200 for which he was entitled to be reimbursed. Consequently, on the defendants view the second defendant was entitled to receive from the net proceeds of sale the refund of his initial deposit of $50,200, a refund of his further cash contribution of $17,300 and reimbursements for the cost of the upgrades and add-ons as aforesaid, a total of $85,000 which the defendants retained from the sale proceeds.

[18] He then addressed the relevant principles applicable to applications for summary judgment. Mr Strauss, for the appellants, does not quarrel with the Judge’s

summary, but contends that the principles were not properly applied in the balance of the judgment, in which the Judge summarised the causes of action and held that:

(a) Once the helicopter was sold, the proceeds of sale should have been paid to High Reach since, although Mr Chambers had authority to sell the helicopter, he did so as agent for High Reach and should have accounted to the company for the sale proceeds. By transferring the proceeds of sale to the Chambers Family Trust, an entity of which he was both a trustee and beneficiary, Mr Chambers had converted High Reach’s property.

(b) Mr Chambers had actual knowledge that the helicopter and therefore the proceeds of sale belonged to High Reach and the other trustees of the Chambers Family Trust must have failed to inquire both as to whether the funds had been properly received, or they were entitled to hold them. As a consequence, the cause of action based on knowing receipt of funds was also made out.

(c) Similarly, the distribution of the net proceeds of sale was in breach of the agency agreement as claimed by Mr Hulbert.

(d) The contract between Mr Hulbert and Mr Chambers had been breached, because there was an implied term of the contract that Mr Chambers “would not seek to obtain assets from the company in excess of his entitlement as a shareholder”.

(e) The respondents were entitled to $5,000 in exemplary damages because Mr Chambers’ behaviour was high-handed, designed to arrogate to himself as a minority shareholder the right to determine the distribution of the shareholders’ funds while leaving Mr Hulbert in the position of having to pay the Goods and Services Tax on the transaction after Mr Chambers had removed his claimed share of the net proceeds of sale. The Judge held that Mr Chambers’ actions had

met “the threshold of outrageousness sufficient to justify an award of

exemplary damages against Mr Chambers”.

(f) Mr Chambers was also entitled to $3,000 in general damages in respect of the distress and inconvenience that he had suffered as a result of his former friend’s misappropriation.

The appeal

[19] Mr Strauss for the appellants relies on Mr Chambers’ affidavit sworn in opposition to the application for summary judgment. Mr Chambers said that he had paid a deposit of $50,200 for the purchase of the helicopter. Then, Mr Hulbert had approached him asking if he could take over ownership of the helicopter but on the basis that Mr Chambers would still be able to use it. Mr Hulbert did not have sufficient funds available to pay for the helicopter and had to arrange finance as well as seeking a contribution from Mr Chambers. He had asked for $20,000, which Mr Chambers agreed to pay, but in the event he could only make a contribution of

$17,300. The 15 per cent shareholding in High Reach was in recognition of his initial payment of $50,200 and subsequent contribution of $17,300.

[20] In his affidavit, Mr Chambers referred to a demand for helicopters during the “frost season”. I infer that this is a reference to the practice of using helicopters to hover over growing crops so as to mitigate the effects of frost. He said that following a discussion between him and Mr Hulbert it had been agreed that night instruments and certain other equipment would be installed so that the helicopter could be hired out for that purpose. Mr Chambers said that he had covered the cost of that new equipment, in the sum of $18,200, but on the understanding that he would be reimbursed in due course.

[21] He sold the helicopter, retaining $85,000 which was most of the money that he was owed. He referred to several thousand dollars still owing to him “in respect of storage and maintenance of the helicopter” but said that he had been advised it was unnecessary to go into the details at this stage.

[22] He confirmed what was said in the notice of opposition in which it was claimed, amongst other things, that Mr Hulbert and he had agreed that:

(a) Mr Chambers would store the helicopter and assume responsibility for its maintenance, for which he would be reimbursed later.

(b) In due course, Mr Hulbert would repay Mr Chambers for his contributions to the purchase price of the helicopter.

(c) Mr Chambers would also be reimbursed for his payment of $18,200 in

respect of upgrades and “add-ons”.

[23] Mr Strauss’s fundamental submission is that because of the close relationship between Mr Hulbert and Mr Chambers the arrangements between them regarding the purchase and use of the helicopter were “very loose”. In the absence of a written record of their agreement, he submitted that it was difficult, if not impossible to determine exactly what the terms of their contract were and this could not be done on the basis of the affidavits provided in the context of the summary judgment application.

[24] Mr Strauss pointed out that the initial version of events given by Mr Hulbert in his first affidavit was that the helicopter had been bought subsequent to an agreement between him and Mr Chambers. However, it was Mr Chambers’ evidence that the helicopter had already been ordered and he had paid a deposit before Mr Hulbert became involved. It was clear from Mr Hulbert’s affidavit in reply that Mr Hulbert accepted that Mr Chambers’ evidence as to the timing was correct.

[25] Insofar as Mr Hulbert challenged the additional contribution of $17,300 and questioned his liability for amounts spent on additional equipment, those were issues that could only be determined at the trial. There was some support for Mr Chambers’ contentions as to the claimed additional contribution in the High Reach accounts that were produced by Mr Hulbert. To grant summary judgment, the Court had to reject the evidence of Mr Chambers that it had been agreed he would be reimbursed his contribution to the purchase price as well as the other items he had

claimed to have spent. Mr Strauss submitted that the Court did not appear to have considered Mr Chambers’ version of events at all.

[26] In response, Ms Anderson submitted that there were no documents to which Mr Chambers would point in support of his assertion that he would be repaid the sums in question, that the alleged oral agreement alleged by Mr Chambers was inherently improbable and that with no other evidence to substantiate Mr Chambers’ assertions the Judge had been correct to enter judgment on the respondents’ application.

Approach

[27] It is unnecessary to go into any great detail about the approach that is required in dealing with applications for summary judgment. While the plaintiff must demonstrate that a defendant has no defence to a claim, and a fair trial must not be foreclosed by making premature findings of fact on affidavit evidence (where there has been no cross-examination), matters raised by a defendant in opposition must be examined to ensure that the issues raised are credible. Allegations of fact

made in the defendant’s affidavits must not be accepted uncritically.2

[28] It is also to be born in mind that the matter comes to this Court as an appeal. In accordance with the decision of the Supreme Court in Austin, Nichols & Co Inc v Stichting Lodestar3 it remains necessary for the appellant to show that the decision of the District Court is incorrect, but the Court must reach its own view about the correctness of the decision.

Discussion

[29] It must be acknowledged that the direct evidence given by Mr Chambers. on the most important issue, namely what was agreed between him and Mr Hulbert

_{consists effectively of an assertion that his 15 per cent shareholding in High Reach}

2 See the summary by the Court of Appeal in Tai Yuan Ma & Others v Ming Shan Holdings Ltd [2010] NZCA 325 at [22] – [30].

3 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141.

was a security for his “investment” combined with a cross reference to the notice of

opposition which alleges that there was an agreement that:

In due course [Mr Hulbert] would repay [Mr Chambers] his contribution to the purchase price of the helicopter.

[30] Mr Strauss emphasises the absence of any written agreement and the fact that the relationship between Mr Hulbert and Mr Chambers was that of friends. However, a basic difficulty that Mr Chambers must overcome is that the shareholding structure of High Reach is roughly consistent (although not precisely so) with the extent to which Mr Hulbert and he had contributed to the purchase of the helicopter. In fact, on Mr Hulbert’s evidence, his contribution to the capital cost was greater than 85 per cent, in the vicinity of 90 per cent. The fact that Mr Hulbert became the sole director of the company is consistent with the fact that he bore most of the costs of the funding of the helicopter.

[31] On the other hand, if the position was as Mr Hulbert alleged it to be, it may be thought surprising that the shareholding in High Reach did not precisely reflect the disparity in the respective financial contributions made to the purchase price of the helicopter.

[32] There was, moreover, plainly a factual dispute on the issue of whether Mr Chambers paid a contribution beyond his initial $50,200. In his first affidavit Mr Hulbert deposed that the purchase of the helicopter was funded as to $67,000 by his own contribution, as to $50,200 by Mr Chambers and as to the balance by a loan that he arranged. Mr Chambers in his affidavit made the simple assertion that apart from his initial contribution of $50,200 he had made a further contribution of

$17,300. In response to Mr Chambers’ affidavit Mr Hulbert confirmed in an affidavit in reply that the only payment made by Mr Chambers was the $50,200. He then filed a third affidavit to which he annexed the accounts and bank statements of High Reach, stating that they had become available since his previous affidavit.

[33] As Mr Strauss pointed out, the accounts that Mr Hulbert produced, for the years ending 31 March 2008 and 31 March 2009, both showed a current account for Mr Chambers in the sum of $68,916. This lends weight to Mr Chambers’ assertion

that he made the further capital contribution of $17,300. Ms Anderson noted that the accounts pre-dated the sale of the helicopter, but I do not see that as a point of any significance. On the face of it the accounts demonstrate that Mr Chambers’ assertion as to his contribution of a further $17,300 may be correct. The question is whether that possibility, the apparent error which Mr Hulbert initially made in his first affidavit as to the timing of the purchase of the helicopter, and the fact that the shareholding in High Reach was not in fact in strict accordance with what it should have been on Mr Hulbert’s version of events, should have the consequence that the summary judgment should be set aside.

[34] Mr Chambers contends that on the sale of the helicopter his contribution of (as he would have it) $67,500 would be returned to him as a debt to which he was entitled. Ms Anderson submits that it would have made no sense for Mr Hulbert to enter into an agreement along those lines, which would have taken no account of any diminution of value of the helicopter over the open-ended period of time during which High Reach might own it, or his own much more significant contribution towards the cost of buying the helicopter.

[35] Ms Anderson also argues that it is unlikely that Mr Chambers, who on the evidence was a director of seven companies and apparently an experienced businessman, would have agreed to arrangements which did not record more precisely his claimed entitlement to be reimbursed. This submission was made against the background of ss 36(1)(c) and 52 of the Companies Act which, respectively, give each share in the company the right to an equal share in the distribution of surplus assets, and confer on directors the right to authorise any distributions. As noted, Mr Hulbert was the sole director.

[36] I accept that Ms Anderson has raised various points of substance in endeavouring to support the outcome in the District Court. However, I also consider that Mr Strauss makes a valid point when he notes that the Judge did not directly confront, and give reasons for rejecting, Mr Chambers’ evidence about what had been agreed. If that evidence were accepted, there would have been contractual justification for his stance that the money paid to the Trust was money to which he was entitled. This was in fact the main factual dispute that needed to be dealt with.

While the Judge recorded his acceptance that the distribution of the net proceeds of sale ought to have been to the shareholders in proportion to their shareholding,4 that was said in terms that were entirely conclusionary.

[37] One of the implications of the approach required by Austin Nichols5 is that this Court on appeal must examine the matter and reach its own view. In circumstances such as this it would be open for this Court to conclude that the District Court decision was nevertheless correct. However I do not consider that would be justified given the apparent errors in Mr Hulbert’s initial affidavit about the timing of the agreement, the evidence that suggests that Mr Chambers may also be right about having made the additional capital contribution of $17,300, and the other issue I have mentioned concerning the shareholdings in High Reach.

[38] The first of those issues is related to the explanation that Mr Chambers gave for the shareholding in High Reach: that he had secured a good deal on the purchase of the helicopter which Mr Hulbert wanted to take over, but asked Mr Chambers to maintain his own investment, and to make a further contribution so as to reduce the money that he would otherwise need to borrow. There are obvious difficulties with that explanation, about which it is probably unnecessary or undesirable to say more in this Court. Nevertheless, I do not consider Mr Chambers’ explanation for an agreement along the lines for which he contends is so implausible that it should be rejected out of hand.

[39] These considerations lead to the conclusion that the claim should not have been disposed of on the summary judgment application.

[40] Reference should also be made to Mr Chambers’ claim that he was entitled to the sum of $18,200 as a reimbursement for expenditure on the helicopter. The Judge dealt with this issue in the following passage:6

[24] The second defendant in his affidavit in support of the notice of opposition alleged that he arranged and paid for certain upgrades to the helicopter including the installation of night instruments and other

4 _{At [23].}

5 _{Above n 3.}

6 At [24].

instruments at a total cost of $18,200. No evidence is provided by Mr Chambers to verify the cost of the alleged improvements to the helicopter nor does he describe them in other than general terms but the second plaintiff, in his affidavit in reply, accepts that night instruments and a cargo hook were added to the helicopter by the second defendant. However he asserts such improvements were undertaken solely at the second defendant’s behest and without the second plaintiff’s authorisation or the authorisation of the first plaintiff. He states that the second defendant retained effective control of the helicopter and used it particularly for hunting a sport Mr Chambers was interested in and the night instruments and cargo hook were acquired solely for that purpose.

[41] I accept that in this respect the Judge has again rejected evidence given by Mr Chambers who claimed in his affidavit that he had agreed with Mr Hulbert that the night instruments and other equipment would be installed in the helicopter to assist in it being hired out and that he would cover the cost in the interim on the understanding that he would be reimbursed in due course. Given that there was no evidence that Mr Chambers had ever presented invoices to High Reach in respect of the items installed, the Judge may have been justified on the approach that he took on this matter. However, it cannot be seen in isolation, and given the conclusion I have reached about the main issue in dispute, this matter should also be resolved after a full hearing with cross-examination.

Result

[42] For the reasons I have given, the appeal is allowed.

[43] The judgment entered in the District Court is set aside. It will be necessary for the matter to proceed to a substantive hearing in that Court, and it is remitted there for that purpose.

[44] The appellants are to have their costs calculated on the basis of category 2 band B.