Pounamu Properties Limited v Brons [2012] NZHC 590 (30 March 2012)

Last Updated: 5 May 2012

IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY

CIV-2008-470-000617 [2012] NZHC 590

BETWEEN POUNAMU PROPERTIES LIMITED Plaintiff

AND MARCUS LEIGH BRONS First Defendant

AND GEORGINGA JANE CRAWFORD Second Defendant

Hearing: 2, 5-6, 9-10 and 12 August 2010 (Rotorua) and

23-27 and 30 May, 2-3 and 8-9 June 2011 (Auckland) (Heard at Rotorua and Auckland)

Counsel: N W Ingram QC and J L Clark for the Plaintiff

M J Sharp and E H Wiessing for the Defendants

Judgment: 30 March 2012

_{JUDGMENT OF DUFFY J}

This judgment was delivered by Justice Duffy on 30 March 2012 at 11.30 am, pursuant to

r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

Counsel: N W Ingram QC P O Box 6569 Wellesley Street Auckland 1141 for the Plaintiff

Solicitors: Edwards Clark Dickie P O Box 105629 (DX CP24032) Auckland City

Auckland 1143 for the Plaintiff

Holland Beckett Private Bag 12011 Tauranga Mail Centre (DX HP40014) Tauranga 3143 for the Defendants

POUNAMU PROPERTIES LTD v BRONS and ANOR HC TAU CIV-2008-470-000617 [30 March 2012]

[1] The plaintiff, Pounamu, brings claims in equity and under the common law against the first defendant, Mr Brons, as well as a claim in equity against the second defendant, Ms Crawford.

[2] The equitable claims against Mr Brons raise the following issues:

(i) Whether the relationship between Pounamu and Mr Brons gave rise to fiduciary obligations that Mr Brons owed to Pounamu, either as a manager or a de facto director of Pounamu;

(ii) The nature and scope of any such obligations;

(iii) Whether in his dealings with Pounamu’s property, Mr Brons

breached those obligations; and

(iv) If he has, the nature of the relief that should be awarded against Mr Brons.

[3] Pounamu’s claim against Ms Crawford alleges that she knowingly received property from Pounamu that was transferred to her by Mr Brons in breach of his fiduciary obligations to Pounamu. The success of this claim hinges, in part, on Pounamu being able to prove its claim against Mr Brons and on Pounamu being able to prove that Ms Crawford had the necessary degree of knowledge that equity requires to found this claim.

[4] Pounamu’s common law claims against Mr Brons are based in tort and allege that in his dealings with Pounamu’s property and otherwise managing its business affairs in regard to payment of tax, he acted negligently.

[5] Mr Brons contends that his relationship with Pounamu is governed exclusively by the law of contract and tort, so that there is no room for the intervention of equity. If he is correct, the main plank of Pounamu’s equitable claims against Mr Brons and Ms Crawford will fail. Regarding the common law, Mr Brons

also relies on the Limitation Act 1950 and argues that the alleged conduct giving rise to these claims occurred outside the six year time limit in s 4.

[6] Ms Crawford contends that she purchased property off Pounamu for value and without notice of any breach of fiduciary duty on the part of Mr Brons.

Background

[7] Pounamu is a limited liability company incorporated under the Companies Act 1993. At all material times, the shareholding and management of Pounamu were as follows. Mr Brons held 30 per cent of the shares in Pounamu and he was the person responsible for managing the company. The remaining 70 per cent of the shares were held by Ralph Egan, who was also the sole director of Pounamu. He is a citizen of the United States of America and he resided in Utah. Mr Egan visited New Zealand infrequently; thus the day to day decision-making for Pounamu was left to Mr Brons.

[8] Both Mr Egan and Mr Brons were members of the Church of the Latter Day Saints, and it was through their membership of this faith that they met. In 1998, they discussed commencing property development in New Zealand using a limited liability company as the vehicle for such investment. Pounamu was incorporated for this purpose.

[9] When Pounamu was incorporated, Mr Egan injected just over NZ$1M into the company by way of a loan to it. This money was used by Mr Brons to acquire property on behalf of Pounamu. He also borrowed funds from the Bank of New Zealand (BNZ) on behalf of Pounamu to assist further in this purpose.

[10] The first property to be purchased was property in Manukau Heights. This was later sold; it does not feature in this proceeding. Pounamu also bought a block of land at Tairua. This property does not feature directly in the proceeding, but it does have some relevance indirectly as, depending on how they are read, some of the relevant written communications in evidence may be understood to refer to this property.

[11] As part of its development plans, Pounamu acquired 221-223 Papamoa Beach Road, Papamoa, which was a site with an existing dwelling-house. The site was subdivided under the Unit Titles Act 1972 into six units. The existing dwelling- house was on lot 6. Pounamu then built four townhouses on four of the titles, (units 2 to 5). Unit 1 was a bare lot. How Mr Brons dealt with the Papamoa properties is at the core of the proceeding.

[12] In October 2001, for the purpose of assessing their worth as mortgage securities, Mr Brons obtained valuation reports from Middleton, registered valuers, for lots 2 to 6. The values were:

(a) Lot 2, $525,000; (b) Lot 3, $450,000; (c) Lot 4, $590,000;

(d) Lot 5, $510,000; and

(e) Lot 6, $615,000, including goods and services tax (GST) and with an allowance of $4,000 for chattels; (from now on, I will refer to the value as being $615,000).

[13] By March 2002, units 2 to 5 were subject to a sale and purchase arrangement by which a partnership of two persons, one of whom was the former brother-in-law of Mr Brons, contracted to buy the properties and then on-sold them to others. Under these arrangements, the sale prices of the units were considerably less than their values in the Middleton valuations. Initially, the contract prices for each lot were:

(a) Lot 2, $367,500; (b) Lot 3, $315,000;

(c) Lot 4, $413,000; and

(d) Lot 5, 357,000;

[14] After the sale and purchase agreements were executed, the parties revisited the price to be paid for each lot. The settlement prices were adjusted so that units 2 and 3 were reduced by $17,500 each, and units 4 and 5 were reduced by $37,500 each. However, a new obligation was added to the purchase by the purchasers being required to pay penalty interest of $20,000 on each purchase. Later, the parties agreed that to assist the purchasers to complete the purchase of units 2 to 5, Pounamu would advance them unsecured loans of $92,500 for lots 2 and 3, and

$105,000 for lots 4 and 5. When these loans are added proportionately to the reduced settlement prices, on paper Pounamu would appear to be potentially entitled to receive the following from the purchasers:

(a) Lot 2, $416,250; (b) Lot 3, $363,750;

(c) Lot 4, $448,000; and

(d) Lot 5, $392,000.

These sums are less than the Middleton valuations. Further, Pounamu’s ability to receive these sums hinged on it being entitled to claim the $20,000 penalty interest on each sale, and to recover the unsecured loans from the purchasers. Failure to achieve this would bring the settlement prices back to the first adjusted value of:

(a) Lot 2, $350,000; (b) Lot 3, $297,500;

(c) Lot 4, $375,500; and

(d) Lot 5, $319,500.

[15] As matters turned out, Inland Revenue queried the charging of penalty interest, which, unlike the settlement price, was not rateable for GST. And the purchasers never repaid the unsecured loans Pounamu advanced to them.

[16] As regards unit 6, in August 2002, it was transferred to Georgina Crawford, who is the wife of Mr Brons. The recorded settlement price was $325,000. This sum is considerably less than the Middleton valuation for lot 6, which was confirmed by Middleton on 14 June 2002.

[17] In short, Pounamu contends that Mr Brons is responsible for lots 2 to 6 being sold at significant undervalues and that his actions were a breach of the fiduciary obligations that he owed to Pounamu. Accordingly, Pounamu seeks to recover the lost value, along with any profit arising from the sales of lots 2 to 5, as well as the return of lot 6. On the other hand, Mr Brons contends that he owed no such duties to Pounamu and that there are explanations for the sales of the properties which make their settlement prices acceptable. Thus, there is no basis for the remedies that Pounamu seeks.

Pleadings

[18] The first three causes of action in Pounamu’s latest pleading (the second amended statement of claim) set out the equitable claims. The first cause of action alleges that in his role as manager of Pounamu, Mr Brons sold unit 6 to Ms Crawford in breach of the fiduciary obligations of fidelity and loyalty that he owed Pounamu. The second cause of action alleges that Ms Crawford has knowingly received unit 6. The third cause of action alleges that Mr Brons breached fiduciary obligations to Pounamu in relation to the sale of units 2 to 5. The fourth cause of action repeats the alleged failings of Mr Brons when it comes to the sale of all the units and contends that he did so negligently. This cause of action also includes allegations that when it came to managing the tax affairs of Pounamu, Mr Brons acted negligently. I propose to deal with the equitable claims first in relation to each cause of action and then to deal with the negligence claims. Regarding the equitable claims, one issue that is common to them all is whether or not Mr Brons owed Pounamu fiduciary obligations. I propose to deal with this issue first.

Did Mr Brons owe Pounamu fiduciary obligations?

Legal principles

[19] Pounamu claims that Mr Brons arranged the sale of units 2 to 6, acting for and on its behalf in circumstances where Mr Brons, as manager of Pounamu and/or as a deemed director and/or de facto director of Pounamu owed fiduciary obligations to Pounamu, including the obligation to avoid any conflict of interest and duty.

[20] Mr Brons accepts that his relationship with Pounamu does not have the indicia of the usual employer/employee relationship. He describes it as being akin to that of a “gratuitous agent”. The description of “gratuitous” is added because there were no clear arrangements for payment of Mr Brons’ services to Pounamu.

[21] Mr Brons’ acceptance of a relationship of principal and agent would necessarily carry with it an acceptance that fiduciary obligations would attach to this relationship. All agents owe fiduciary obligations of loyalty and fidelity to their principals: see Bowstead & Reynolds On Agency at [6-032] and [6-036]. Thus, even a gratuitous agent must act to ensure that he does not act in a self-dealing way, allow himself or an associate to profit at the principal’s expense or to allow any other conflict of interest to harm the principal.

[22] In any event, I do not consider that anything much turns on the particular category in which Mr Brons’ relationship with Pounamu is classed. Categories of this type can provide short-cuts to determining if fiduciary obligations are present, because with some relationships fiduciary obligations are always owed: for example, trustees to beneficiaries or solicitors to their clients. However, in all cases where fiduciary obligations are present, it is because equity recognises that the circumstances of the relationship where the person acts for or on behalf of another are such that they give rise to a relationship of trust and confidence: see Bristol and West Building Society v Mothew [1998] Ch 1 (CA) at 18 per Millett LJ:

A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence ... As Dr Finn appointed out in his classic work Fiduciary

Obligations, (1977) p. 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.

[23] Thus, there is little point in searching to see whether Mr Brons meets the tests for being a de facto director. If he were a de facto director, he would owe the fiduciary obligations that usually attach to directors of companies. However, much the same fiduciary obligations could attach to him whether or not he was a de facto director if the circumstances as between him and Pounamu supported the presence of those duties.

[24] Before looking to see if the circumstances here do give rise to fiduciary obligations, it is helpful to ascertain what these duties are, particularly as Mr Brons argues that the duties that Pounamu asserts he owes are not fiduciary.

[25] In Bristol and West Building Society, Millett LJ provided a helpful concise summary of the distinguishing obligation of a fiduciary. He drew what are sometimes separately described as fiduciary obligations under the one heading of loyalty and fidelity. At 18 he stated:

The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary.

[26] In Arklow Investments Ltd v Maclean [2000] 2 NZLR 1 (PC) at 4, the

Privy Council described the duty of loyalty as encapsulating:

... a situation where one person is in a relationship with another which gives rise to a legitimate expectation, which equity will recognise, that the fiduciary will not utilise his or her position in such a way which is adverse to the interests of the principal.

This passage from Arklow was relied upon by Tipping J in Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [80]:

... all fiduciary relationships, whether inherent or particular, are marked by the entitlement (rendered in Arklow as a legitimate expectation) of one party to place trust and confidence in the other. That party is entitled to rely on the other party not to act in a way which is contrary to the first party’s interest.

[27] There is nothing new about these principles, or the potential breadth of their application. The strict prohibition that equity places on a fiduciary not to profit at a beneficiary’s expense was referred to by the Privy Council in New Zealand Netherlands Society “Oranje” Inc v Kuys and the Windmill Post [1973] 2 NZLR 163 (PC) at 166:

Their Lordships are in agreement with these contentions in so far as they stress the necessity to give consideration to the nature of the relationship between Kuys and the society and to the question whether that relationship imposed upon him, in relation to the particular transaction under investigation, duties of a fiduciary character. The obligation not to profit from a position of trust, or, as it is sometimes relevant to put it, not to allow a conflict to arise between duty and interest, is one of strictness. The strength, and indeed the severity, of the rule has recently been emphasised by the House of Lords (Boardman v Phipps [1967] 2 AC 46; [1966] 3 All ER

721). It retains its vigour in all jurisdictions where the principles of equity are applied. Naturally it has different applications in different contexts. It applies, in principle, whether the case is one of a trust, express or implied, of partnership, of directorship of a limited company, of principal and agent, or master and servant, but the precise scope of it must be moulded according to the nature of the relationship. As Lord Upjohn said in Boardman v Phipps (supra):

"Rules of equity have to be applied to such a great diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of each case" (ibid, 123; 756).

[28] In Amaltal Corporation Ltd v Maruha Corporation [2007] NZSC 40, [2007]

3 NZLR 192 at [21], the Supreme Court recognised that even in commercial relationships of a generally non-fiduciary kind, there may be aspects of the relationship that engage fiduciary obligations of loyalty. These will arise because in that particular aspect of the relationship, one party is entitled to rely upon the other for the loyal performance of some function:

... in the nature of that particular aspect of the relationship one party is entitled to rely upon the other, not just for adherence to contractual arrangements between them, but also for loyal performance of some function which the latter has either agreed to perform for the other or for both or has, perhaps less formally, even by conduct assumed.

[29] For cases where it is necessary to determine if the alleged breaches of obligation are fiduciary, as opposed to breaches of common law duties, the test applied by Millett LJ in Bristol and West Building Society was to consider the nature of the obligation in issue (at 18):

The nature of the obligation determines the nature of the breach. The various obligations of a fiduciary merely reflect different aspects of his core duties of loyalty and fidelity. Breach of fiduciary obligation, therefore, denotes disloyalty or infidelity. Mere incompetence is not enough. A servant who loyally does his incompetent best for his master is not unfaithful and is not guilty of a breach of fiduciary duty.

[30] Thus, not every breach of duty by a fiduciary is a breach of his or her fiduciary obligations; a fiduciary who acts negligently, but not disloyally, will not be in breach of his or her fiduciary obligations. Instead, he or she will be seen to have breached duties of care ordinarily recognised by the law of negligence. It follows that a negligent breach of duty would be assessed and dealt with in accordance with the usual tests that are applied in cases of negligence. In such cases, the presence of a fiduciary relationship is no more than part of the factual context in which the negligent breach of duty has arisen.

[31] The principles that were referred to and, where material, applied in Bristol and West Building Society have been approved and adopted by New Zealand courts: see Amaltal Corporation Ltd v Maruha Corporation, in which the Supreme Court approved Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 (CA) where the Court of Appeal had applied Bristol and West Building Society; and see Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR

433.

[32] Thus, whether Mr Brons owed fiduciary obligations of loyalty and fidelity to Pounamu will turn on the nature of his relationship with that company, and whether the necessary degree of dependency, imposition of trust and confidence to give rise to those obligations were present.

Facts

[33] In his evidence, Mr Egan said that he visited New Zealand “a couple of times while Mr Brons was actively involved in the management of Pounamu”. Mr Brons did not dispute the infrequency of Mr Egan’s visits to New Zealand. Given that a limited liability company can only act through the natural persons who act on its behalf, the infrequency of Mr Egan’s visits suggests to me that Pounamu would have needed someone on the ground in New Zealand who could carry out the type of responsibilities usually carried out by a company’s directors. Furthermore, this appears to have been recognised by Mr Egan and Mr Brons at the time Pounamu was incorporated.

[34] At the time Pounamu was incorporated, Mr Brons made it clear that he did not want to be a director. Nonetheless, he assumed a role as manager of the company that gave him similar powers to those that are usually held by working directors of companies. Pounamu’s constitution included a special provision relating to Mr Brons’ role in the company. Clause 2.1 of the special provisions provided that the clauses in that part of the constitution were paramount and where such clauses were inconsistent with clauses in the remainder of the constitution, those in the special provisions would prevail, except to the extent that other clauses reflected mandatory statutory provisions. The clause went on to vest the manager with unlimited powers to act on Pounamu’s behalf regarding financial matters. The clause read as follows:

The manager shall have the right to act on behalf of the company for all financial matters, including the establishment of overdraft facilities, mortgages, contracts or any other financial obligation.

[35] Mr Brons does not dispute that he occupied the role of manager and from time to time exercised the powers given to the manager by the special provisions of the company’s constitution. However, he contends that his role in Pounamu was limited to him taking responsibility for management of the day to day operations of the company, either in the capacity of employee, or as a gratuitous agent. Nonetheless, he has conceded that, although he considers himself to have been an

employee of Pounamu, none of the usual trappings that would constitute a legal relationship of employment were present, for example, employment agreements and payment of a salary or wages. Whilst he dealt with Inland Revenue on behalf of Pounamu, he accepts that he made no PAYE returns and no ACC returns regarding himself.

[36] Although Mr Brons argues that he was entitled to payment from Pounamu of

$50,000 per annum, which was to be a salary, in closing submissions, he accepted that any such payment in reality flowed from a shareholders’ agreement with Mr Egan as to how Mr Brons’ efforts would be rewarded ultimately in the share of profit by payment of this amount over and above their otherwise agreed 70/30 profit split. Following this concession, Mr Brons was forced to rest this aspect of his case on the argument that his managerial role had been carried out without any contractual obligation to do so and, accordingly, the best way to describe his role was that of a “gratuitous agent”.

[37] Whilst Mr Brons now seeks to diminish his role in Pounamu’s affairs, the evidence shows that, from the outset, Mr Brons regularly exercised a significant autonomy and independence in the management of Pounamu’s business operations, which went beyond what the company’s day to day operations would have required.

[38] Once Pounamu was incorporated and was in funds from Mr Egan, Mr Brons began looking for properties to develop. The first property that Pounamu acquired for development was at Manukau Heights. Mr Brons found the property. He purchased it without consultation with Mr Egan. Later, without first consulting with Mr Egan, Mr Brons committed Pounamu to selling this property. When engagement with solicitors and other professionals was required, Mr Brons arranged it.

[39] In April 2001, Mr Egan sought a report from Mr Brons on the Manukau Heights property. Mr Brons responded by advising that he would keep Mr Egan informed if a good offer was received. On 20 April 2001, Mr Brons signed on behalf of Pounamu an unconditional agreement for the sale and purchase of the property, with settlement due on 14 May 2001. Yet it was not until 14 May 2001 that Mr Brons reported to Mr Egan that he had decided to sell the Manukau Heights

property. The expression he used in the communication was “I have decided to sell”. The tone of the communications between the two men does not suggest any concern on the part of either of them at Mr Brons assuming this degree of authority and control over Pounamu’s property.

[40] Regarding the property at Tairua, on Pounamu’s behalf, Mr Brons found the property, purchased it, raised finance to assist with the purchase and engaged with solicitors to complete the purchase. He dealt with contractors for construction of logging roads at Tairua. Without consultation with Mr Egan, Mr Brons extended a mortgage of $200,000, being a vendor finance mortgage, over the property for a period of 12 months.

[41] It was also Mr Brons who found the property at Papamoa. He dealt with solicitors in relation to the purchase and subdivision of the property into six strata titles under the Unit Titles Act 1972. He dealt with solicitors and financiers when it came to raising finance to build the units on lots 2 to 5 of the strata titles. He signed building contracts for the buildings to be erected on the lots at Papamoa, and later he approved the variation of those contracts. He also provided, or offered to provide, guarantees for Pounamu’s borrowing. He offered a guarantee to the BNZ, and he provided a guarantee to financiers, Cairns Lockie, in respect of mortgage finance for the Papamoa properties.

[42] When the Papamoa development was in its early stages, a builder, who was then to construct the units on lots 2 and 5, showed interest in acquiring two. Mr Brons entered into agreements for sale and purchase with the builder in respect of these units, without reference to Mr Egan. Pounamu argues that the lack of consultation with Mr Egan in that instance is significant in that the transaction involving the builder purchasing completed units from the developer was seen as unusual by the company’s bank, the BNZ, which led the BNZ to seek confirmation that the transaction was at arm’s length and that the purchaser had the ability to settle on completion. Even so, Mr Brons did not refer the proposed agreements to Mr Egan before signing them on Pounamu’s behalf.

[43] The evidence shows that Mr Brons undoubtedly exercised significant autonomy and authority in Pounamu’s business. The actuality of his management role was consistent with the apparent breadth of the authority given to him under the constitution. He did not conduct himself with the restraint to be expected of someone whose authority is limited to dealing with day to day matters.

[44] Whilst Mr Brons has asserted that Mr Egan was responsible for any major decisions and transactions, Mr Brons’ conduct in relation to the acquisition of, and dealings with, the various properties Pounamu acquired without reference to Mr Egan demonstrates the significant autonomy and authority that Mr Brons enjoyed in the operation of Pounamu. While this was all happening, Mr Egan never questioned the level of control Mr Brons was exercising, and Mr Brons was not hesitant about revealing to Mr Egan the level of control he had assumed. This shows that, at the material time, both of them were comfortable with Mr Brons acting in this way.

[45] Indeed, I consider that the extent of Pounamu’s business operations depended on Mr Brons assuming the level of control that he did. The impression I have gained is that at the beginning, and probably until Pounamu began experiencing financial difficulties to such an extent that Mr Egan became concerned he might not recover his investment in the company, Mr Egan took little active interest in the management of the company. This is consistent with the impression Pounamu’s banker, the BNZ, gained of Mr Egan. In a bank memorandum dated 31 October 2001, Mr Egan was described as a “sleeping partner”. I am not being critical of Mr Egan. What occurred may simply have been a reflection of the parties’ agreement at the outset that Mr Egan would provide the funds for the company to engage in property development, while Mr Brons would be responsible for bringing the developments to fruition.

[46] Mr Brons was the only New Zealand based person who could act on Pounamu’s behalf. No one else was engaged by Pounamu to work for it on a regular basis. It did not have an accountant to assist with its financial affairs. Legal professionals were only engaged when needed for a specific transaction. Thus, apart

from Mr Brons, there was no New Zealand based person who could show concern

for Pounamu and be alive to protecting Pounamu’s interests.

[47] It is trite but true that a company can only act through natural persons and it is through their conduct that a company is protected from actions or events contrary to its interests. The circumstances I have outlined regarding Pounamu’s business operations go to show that Pounamu was extremely vulnerable. The welfare of its interests rested on how Mr Brons acted towards it. Any assistance and protection that Mr Egan could offer Pounamu was impeded by his being overseas and his unfamiliarity with real estate development in New Zealand. Mr Egan’s evidence, which I find to be credible, was that whilst he had had some success in real estate development in the United States, he was unfamiliar with the material law and way of handling property development in New Zealand. Thus, when it came to Pounamu’s developments, Mr Egan had a general grasp of how such developments should be approached, but no knowledge of the particular requirements. These were the types of circumstances that would naturally give rise to an expectation that Mr Brons would not use his position in a way that was adverse to Pounamu’s interests, and especially that he would not place his own interests, or the interests of those with whom he was personally associated, before the interests of Pounamu. I consider that the circumstances here present a classic example of the circumstances when equity will impose on someone in Mr Brons’ position fiduciary obligations of loyalty and fidelity.

[48] Pounamu’s reliance on Mr Brons is somewhat analogous to the reliance the Maruha Corporation placed on Amaltal Corporation when it came to the handling of the tax affairs and profit guarantee calculations of their joint venture company, Amaltal Taiyo Fishery Co Ltd, in Amaltal Corporation v Maruha Corporation. The Supreme Court in that case found that where one party in a commercial relationship agrees to perform some function for the other party, the latter is entitled to rely on the former for the loyal performance of that function. The material facts were that the New Zealand based party, Amaltal Corporation, had agreed to provide its personnel and facilities to enable Amaltal Taiyo to discharge its tax obligations. Maruha was a foreign entity and unfamiliar with the New Zealand tax system regarding fishing companies. In fact, the assistance that was provided was partially

directed to achieving tax benefits for Amaltal at the expense of Amaltal Taiyo and Maruha. The Supreme Court found that the circumstances in which Amaltal had offered assistance gave rise to a fiduciary relationship, which required those responsible for the assistance to be loyal to all parties. At [22], the Supreme Court said:

In this case it is plain that Amaltal and Maruha came to an understanding that Amaltal would provide ATL [Amaltal Taiyo Ltd] with personnel and facilities for undertaking its accounting and tax returns, including dealings with IRD. Amaltal seconded its employee and agent Mr Holyoake to ATL for this purpose. In one sense, of course, Mr Holyoake was carrying out his tasks for ATL. But in the context of the arrangements between Amaltal and Maruha, he was also engaged on behalf of both of them. In short, Mr Holyoake was the agent of Amaltal which was in turn, in relation to the accounting functions, the agent of Maruha. The way in which the parties allocated responsibility for these functions created a situation of principal and agent, an inherently fiduciary relationship, in that aspect of their arrangements. Maruha as principal was entitled to expect that Mr Holyoake would behave even-handedly and impartially as between the two shareholder companies; that he would be loyal to both. Instead, encouraged by Amaltal, Mr Holyoake was disloyal to Maruha. He misrepresented the position regarding the requirements under the profit guarantee, procured overpayments and was complicit in their transfer to his employer, Amaltal. When Maruha’s representative attempted to check his work he deflected the inquiry about taxation, thereby preserving the advantage which Amaltal was unlawfully enjoying.

[49] Whilst the material relationships in this case differ from those in Amaltal Corporation v Maruha Corporation, the core circumstances display the same qualities of a vulnerable and dependent party having engaged and relied on another to perform a task for it being entitled to expect loyalty from the person performing that task. I am satisfied that Mr Brons owed fiduciary obligations to Pounamu.

[50] Moreover, there is nothing unusual in finding that a company manager who occupied the role that Mr Brons did will owe fiduciary obligations to Pounamu. Other instances where such persons have been found to owe fiduciary obligations to a registered company include: Warman v Dwyer [1995] HCA 18; (1995) 182 CLR 544 (HCA); Green and Clara Pty Ltd v Bestobel Industries Pty Ltd [1982] WAR 1; and Canadian Aero Services Ltd v O’Malley [1974] SCR 592 (SCC).

[51] Since I have found that Mr Brons owes fiduciary obligations to Pounamu, there is nothing to be added to any consequential liability he may be under for breach of those obligations if I consider whether he is also a de facto director. The relevance of him being a de facto director is that it could then be said he owes the fiduciary obligations that a director would owe to Pounamu. However, the scope of those fiduciary obligations would be no greater when it came to the obligations of loyalty and fidelity than is the scope of the obligations which I have found him to owe to Pounamu by reason of his relationship with the company. I do not, therefore, propose to make any findings on whether he was a de facto director of Pounamu.

[52] The relevant transactions are the sale of unit 6 to Ms Crawford and the sales of units 2 to 5. I shall deal with the sale to Ms Crawford first.

The sale of unit 6

[53] As mentioned earlier, the recorded settlement price for unit 6 was $325,000. The transfer was registered in August 2002. In October 2001, a registered valuer had assessed the property’s value as $615,000. This value was confirmed by the vendor on 14 June 2002.

[54] The original plan was for the house on the Papamoa property to be removed and replaced with six new townhouses on strata titles. Once the strata titles were issued, Pounamu had proceeded to build four townhouses (units 2 to 5); the original house, which was then unit 6, remained standing. It is not clear as to when Mr Brons formed the idea of acquiring unit 6. His evidence is that he did not form this view until March 2001. However, there is evidence that he had communicated this idea to the BNZ in or about February 2000. Mr Egan does not seem to have contemplated Mr Brons acquiring unit 6 until the matter was raised with him later in 2001. I do not think that much turns on when Mr Brons first formed the idea of acquiring unit 6.

[55] There is a factual dispute as to when the agreement responsible for the sale to Ms Crawford was executed. Pounamu contends that the material sale and purchase agreement is an agreement dated 19 August 2002. Mr Brons and Ms Crawford contend that the material agreement was executed in October 2001. The date on

which the agreement took effect is relevant to their defence under the Limitation Act. Their agreement is that the proceeding was commenced on 28 July 2008 and the standard six year limitation period provided in s 4 of the Limitation Act had already by then expired. Whilst the first and second causes of action are based in equity and, therefore, are outside the scope of s 4, Mr Brons and Ms Crawford argue that, by analogy, equity follows the law, and so the standard six year timeframe should be applied here. If they are correct, it would mean that Pounamu’s claim regarding the sale of unit 6 is now time-barred. Whilst they dispute there is any basis for doing so, they accept that if either the 2002 agreement is found to be the cause of unit 6’s transfer, or the first and second cause of action are found to fall within s 28 of the Limitation Act, then there is no time bar.

[56] Pounamu argues that the October 2001 agreement was never fulfilled and that the 19 August 2002 agreement was a fresh agreement which caused the transfer of unit 6. If Pounamu is correct, there is no issue regarding limitation periods, as the proceeding was commenced within six years of the agreement’s execution. As an alternative argument, Pounamu contends that if the operative agreement was the October 2001 agreement, the circumstances of the transfer of unit 6 meet the criteria of s 28 of the Limitation Act, which means that the time for commencing them did not start to run until 2005.

[57] To determine whether it was the 2001 or the 2002 agreement that actually generated the sale to Ms Crawford, it is helpful to look at the context in which the agreements were executed.

[58] The development at Papamoa was funded with finance from the BNZ, which had lent $1,000,000 on 29 February 2000 for an initial term of six months. This was on the basis that four of the units to be built on the site were to be completed and made ready for sale. By late 2001, nothing had been sold and two of the four new townhouses were incomplete. The BNZ had extended the term of the finance but by August 2001, it sought repayment. Pounamu was short of funds and could not repay the BNZ.

[59] The email correspondence between Mr Brons and Mr Egan between July and November 2001 reveals the financial pressure Pounamu was facing. In July 2001, the BNZ was pressing for repayment of its loan by August 2001. An email from Mr Brons to Mr Egan, dated 25 July 2001, records that Mr Brons had extended Pounamu’s mortgage (to $200,000) on the land at Tairua for another 12 months. The email also stated that the BNZ wanted Pounamu to settle the mortgage on the Papamoa property by the end of August 2001. The email sets out Mr Brons’ expectation that he would soon be able to auction the new townhouses. He considered it would be optimistic to assume that all would be sold. He thought, at best, two would be sold, with all four being sold within the following few months; thus allowing Pounamu to settle its debts with the BNZ. The email then records Mr Brons’ comment:

I am still interested in retaining ownership of the beachfront unit [unit 6] in Papamoa, but if you want to cash up all of the property, we will need to settle up this between us.

Mr Brons also comments that it looked like it would be a long process before Mr Egan received a return on his investment (of around $1.1M) in Pounamu, and queried whether he wanted to retain any of the property for himself. At this time, Pounamu owned unit 6.

[60] The general impression to be gained from Mr Brons’ mode of expression in the emails is that he did not treat Pounamu as a legal entity that was separate from himself and Mr Egan, but rather as a vehicle for their business investment.

[61] On 13 September 2001, Mr Brons emailed Mr Egan advising that the BNZ had given notice that it wanted Pounamu to refinance within 28 days. Mr Brons advised that he was looking for alternative financiers. In this email, Mr Brons mentions purchasing unit 6 with the existing house on it. He states that he was looking at options for financing the purchase. The email states:

I’m now looking at options for financing this purchase. I am thinking that it would be more affordable for me to buy the property as is and finance the development of the site on my own when we have completed the other units and I can invest my part of the profits back into the house. I would need to establish a value for it from a registered valuer. I think it would be around

$300-$350,000, most of which is in the land value. I could maybe finance half of the price immediately and have Pounamu hold the balance in consideration of the projected profits from the sale of the units.

Mr Brons then went on to note that one major problem was that the BNZ held a mortgage over all the units and was unlikely to relinquish the mortgage until Pounamu’s debt to the BNZ had been repaid.

[62] By 10 October 2001, Mr Brons was advising Mr Egan that Pounamu had been unable to arrange alternative finance and the BNZ, citing Pounamu’s delays in completing the project and failure to achieve any sales, was unwilling to extend its finance. Mr Brons was still searching for alternative financiers, but the view he expressed to Mr Egan was that “time is running out”. On 19 October 2001, Mr Brons sent another email advising that the BNZ would consider refinancing if Pounamu significantly reduced its debt with the BNZ, otherwise Pounamu needed to secure other finance options.

[63] The impression given in Mr Brons’ emails to Mr Egan is confirmed by a BNZ

memorandum dated 31 October 2001, which recorded Pounamu’s borrowing at

$1,360,000. This was secured over the titles of the units at Papamoa; there was a guarantee from Mr Brons and a charge over a term deposit of $21,000. The memorandum recorded that the bank saw its prospects of recovery from Mr Brons under the guarantee as poor. The memorandum noted that the bank had issued an ultimatum that if Pounamu had not refinanced by 10 November 2001, the bank was going to commence action to recover its debt, with the first step being the issue of a notice under the Property Law Act 1952.

[64] This was the context in which Mr Brons and Mr Egan discussed the sale of unit 6 to Mr Brons. There are two copies of the October 2001 agreement. The first copy, which was in the possession of Mr Egan, records the sale of unit 6 from Pounamu to Mr Brons and Ms Crawford for the sum of $305,000. The agreement provided for a deposit of $32,000, with the balance of the purchase price to be by way of mortgage finance secured against the property. The agreement was conditional upon the purchasers obtaining $275,000 finance from the Auckland Savings Bank (ASB), or a nominated lender. The last day for arranging

the finance was 8 November 2001. There is then a second version of the agreement, which is dated November 2001, and is the copy that was in Mr Brons’ possession. In this agreement, the purchasers are described as Mr Brons and Ms Crawford, or nominee. The sale price is altered from $305,000 to $325,000. The deposit remains the same. The amount required for finance has been increased to $290,000. The agreement has been initialled by Mr Egan, and the top of the copy of the agreement contains a fax header sheet referring to an address in Utah.

[65] I consider that how the parties conducted themselves after the 2001 agreement is pivotal to determining whether or not it was this agreement that effected the sale to Ms Crawford. In this regard, I consider that the contemporaneous evidence of their conduct is a better source of understanding what occurred than the explanations subsequently given by them in their evidence to this Court.

[66] At the same time as the agreements in 2001 were executed, Mr Brons was discussing obtaining alternative sources of finance from Cairns Lockie, mortgage brokers. An offer of finance, dated 30 October 2001, was forthcoming.

[67] On 1 November 2001, Mr Brons emailed Mr Egan advising that he had received the offer from Cairns Lockie. In the email, he refers to the loan offer as it related to the four townhouses being reduced by $20,000, which he said meant that he had to raise the price to buy unit 6 to $325,000 “so that there would be enough to repay the BNZ”. He went on to say: “So when you sign the S and P I faxed to you, please correct this figure to $325K and the deposit to $32,500 and initial the changes”. The request was followed up by Mr Brons’ comment: “I am getting pretty desperate for some money to at least pay off our bills to date. If you can help me with this, I would appreciate it”.

[68] Then, on 2 November 2001, Mr Brons wrote to Mr Egan advising that he had re-worked the balance sheets to account for the refinancing and interest costs and accounting for the unfinished state of the beach house (unit 6) and road section (being lot 1). He went on to say the project at Papamoa would make a small profit on paper but with money tied up in land at Tairua, a loss would show. He said if the

development at Tairua were completed and sold, a profit of about $1.2M could be made, but this would take a while to complete and sell. He went on to give his explanation for why the developments in which Pounamu had engaged had not come to fruition earlier and why the profits that had earlier been envisaged had not eventuated. He made the comment: “Hindsight is a wonderful thing”; and then went on to clarify what he intended with the purchase of unit 6 “for a reduced figure”. He described it in this way:

I intended to help Pounamu by paying off the outstanding amount of the finance not taken up by the refinancing offer (about $275K plus GST which is about $325K net). The balance of the value was to be my pay out from Pounamu for three years of work for which I have not really been paid. This would have made up the balance of the market price. The alternative was not a good one, namely a refinancing package which would have been at

11.25%, 20K capitalised interest and $15K of fees attached. This would have just added 50K plus GST more to Pounamu’s debt which was creeping up all the time. What I hadn’t accounted for was that there is now no profit left in Papamoa since the project will likely to be aborted 60% complete and the final 40% was the most profitable etc. Anyway I want a compromise to the scheme we discussed today, since I will now walk away from the project with nothing for my hard work other than 3 years of worry and some good surfing. My suggestion is that when we sell the beach house we (meaning you and I) split the difference between the $325K purchase price and the eventual sell price, this will at least give me a deposit on a place to live when we have to move out. I think this is more than fair since the difference is likely to be about $175K on a sale price of $500K. Half of which will be

$87K. The added benefit will be that if I give you the money personally (which is legal), Pounamu will not have to pay GST on the sale which will save Pounamu a further $60K. It is legal because you live overseas and I will pay GST on the purchase price. Once GST has been paid by an individual who doesn’t claim it back it is then tax free. Also individuals in NZ are not subject to capital gains tax. If you like I can clear it to a foreign account or invest it in NZ or whatever you like. The balance sheet reflects the above.

[69] Emails from later in November 2001 show Mr Brons working towards completing obtaining finance from Cairns Lockie, and moving to complete the townhouses on lots 2 to 5.

[70] An ASB customer note, dated 23 November 2001, records the ASB approving a loan of $440,000, the purpose of which is described as assisting with the purchase of owner-occupied property, costing $325,000, and to refinance two rental properties. Thus, it seems that as at 23 November 2001, Mr Brons was pursuing obtaining the necessary finance to enable the purchase of unit 6 to proceed.

[71] Mr Brons’ conduct changes in the latter part of 2001. At this time, his conduct is inconsistent with unit 6 being under contract to him and Ms Crawford. In January and February 2002, he had discussions with a local real estate agent, Mr Melville, regarding a sale of the Papamoa development as a single complex which included unit 6. Mr Brons also raised this possibility with Mr Egan in an email of 31 January 2002 in which Mr Brons informed Mr Egan that he had counter- offered to sell all the units for a total of $2.5M. When Mr Brons was cross-examined about this inconsistency, he sought to explain it on the basis that he and Ms Crawford would have put aside their rights under the 2001 sale and purchase agreement for the good of Pounamu. This explanation is not credible. It is impossible to see why Mr Brons and Ms Crawford would have given up their rights as purchasers of unit 6, which was their present home, simply to help Pounamu. The better view is that unit 6 was included in the discussions about selling the entire development at Papamoa because by then, the 2001 agreement had been abandoned.

[72] On 12 February 2002, Pounamu’s solicitor, Mr Willacy of Cooney Lees and Morgan, wrote to Mr Egan regarding the financing from Cairns Lockie. The letter records that the details of the refinancing were now finalised, with a settlement date of 20 February 2002, New Zealand time. Pounamu was to borrow the sum of approximately $1.5M, which was to be used to repay the loan of approximately

$1.4M to the BNZ. The letter sets out the details of the new loan, which came from more than one source. Unit 6 was included as part of the security for the new loans, which is inconsistent with Mr Brons and Ms Crawford having acquired property rights in it.

[73] Then on 5 March 2002, Mr Brons wrote to Mr Egan to update him on the progress of the development. Part of this email relates to the sale of units 2 to 5. It discusses the proposed purchase price for the sale of four completed townhouses. What is interesting is that having set out the position Pounamu would be in once the four townhouses were sold, Mr Brons went on to say (emphasis added):

3. We can settle all GST, taxes and finance with a little left over.

4. We still have the beach house and the front section which we can sell separately. We will still hold a mortgage against the beach house of

about $366,000 against its value of $615,000. The land is unencumbered and worth about $150K.

This statement, which was made on 5 March 2002, shows that at that time, unit 6 was still owned by Pounamu and that the sale to Mr Brons and Ms Crawford had not proceeded. It is not consistent with Pounamu being subject to the terms of the October 2001 sale and purchase agreement.

[74] Mr Egan responded on 4 March 2002, advising Mr Brons that from his understanding, the proposal made in Mr Brons’ email was acceptable, but he was requested to run through the numbers again. Mr Egan made the comment that the outcome of implementing the proposal was likely to place them in no better than a break-even situation.

[75] The email correspondence that followed included requests from Mr Egan for further information and querying when he should come to New Zealand.

[76] On 27 April 2002, Mr Egan wrote to Mr Brons querying the status of the sale of the townhouses, and the “status of the beachfront home”. He emailed Mr Brons on 16 May 2002 seeking further news on the status of the sale. This request was made again on 17 May 2002, and then, on 19 May 2002, he requested Mr Brons to contact him. Clearly, Mr Egan’s understanding at this time was not consistent with unit 6 having been sold to Mr Brons and Ms Crawford. If Mr Egan believed at this time that the October 2001 sale and purchase agreement remained in force, he is hardly likely to have queried the status of unit 6.

[77] On 14 June 2002, there is a letter from Middleton to Pounamu regarding its confirming that, in Middleton’s opinion, the value of the beachfront unit would be no less than $615,000, including chattels of $4,000 and GST, if any.

[78] On 24 June 2002, Mr Egan signed a director’s resolution for Pounamu, which provided, amongst other things, for the sale proceeds from the sale of the four townhouses to be used to repay the loans that had been arranged by Cairns Lockie. The resolution set out the repayment of the mortgages, which amounted to $622,124, plus any additional interest, to obtain discharge of two mortgages registered against

lots 4 and 5, and payment of the sum of $600,000, plus additional interest, to Southern Cross Finance Limited and Harding Finance Limited and Rellim Holdings Limited to obtain a discharge of mortgages registered against units 2 and 3. Interestingly, the resolution also provided that the mortgage registered against unit 6 was to remain in place, and the amount left owing would be $325,000. As this mortgage secured Pounamu’s indebtedness, its remaining on the title of unit 6 is another factor that is not consistent with that property having sold under the October

2001 contract.

[79] On 25 June 2002, Mr Egan wrote to Mr Brons advising that he had received documents relating to the sale of unit 5, but “nothing that gives sales particulars of price and terms”. He went on to say, “this is probably a good time to get the terms of the beachfront house settled”. Again it is obvious that if Mr Egan regarded Pounamu as bound by the October 2001 sale and purchase agreement, he would not have made this comment. During these comments, there is no response from Mr Brons to the effect that unit 6 is no longer available to Pounamu on the basis that it had already bound itself in October 2001 to sell the property to Mr Brons and Ms Crawford.

[80] Then on 8 July 2002, Mr Willacy wrote to Mr Brons regarding the sale of the beach property from Pounamu to Mr Brons. The letter advised that there was a telephone conversation between them on 5 July 2002 regarding Mr Brons’ “proposed purchase of the beach property from Pounamu ...”. The letter records that Mr Brons advised that he wished to buy the beach property from Pounamu for $325,000, with settlement to occur some time in August 2002. It said that the ASB had approved finance for the purchase. The letter went on to record that there was a recent valuation for this property at $611,000 (which excluded the $4,000 chattels). Mr Willacy then said that he was assuming that the $325,000 price had been set at that level as it would pay off the principal sum that would be owing to Southern Cross Finance Limited and others. Mr Willacy went on to say that there was not an easy solution to Mr Brons’ proposal, that if he bought the property for

$325,000, the difference between the market price for the property and what he paid for it (the difference being $286,000) would be treated as a dividend from Pounamu to Mr Brons. In addition, there could be gift duty implications. The effect of any such dividend was said to be to increase Mr Brons’ taxable income by $286,000 and

he would have to pay tax on that amount. Mr Willacy offered another solution, which was to wind up Pounamu and distribute its assets to the shareholders. Mr Willacy thought that might enable Mr Brons to get unit 6 tax free if the value of his shares was equivalent to the value of unit 6. However, the approach was said to require all company debt to be repaid first and the consent of Mr Egan. Mr Brons was advised to obtain tax advice from a chartered accountant who was familiar with Pounamu’s financial position. Once again, the stance recorded in the letter is not consistent with the sale under the October 2001 agreement having proceeded.

[81] Then on 14 August 2002, Mr Willacy wrote to Mr Egan advising, amongst other things, that in relation to unit 6, he had been instructed to prepare an agreement to sell the property from Pounamu to Mr Brons and Ms Crawford. The sale price was $325,000, with settlement being 20 August 2002. Mr Egan was asked to confirm that Mr Brons had authority to sign the agreement on behalf of Pounamu and it was said if he did not, then the agreement would need to be faxed to Mr Egan. It is hard to see why Mr Brons would have issued such instructions if unit 6 had already been sold pursuant to the October 2001 agreement.

[82] An ASB memorandum, dated 15 August 2002, records that Mr Brons and Ms Crawford were requesting an additional $10,000 to “complete a property purchase and refinance”. The additional funds were said to be required due to a statutory land charge and additional legal fees. The memorandum noted that the home loan approved in November 2001 was finally required “now that title for rental property in Lower Hutt has been changed into Marcus’ name after matrimonial settlement”. The purpose of the loan was said to be to assist the purchase of an owner-occupied property costing $325,000 and to refinance two rental properties. This is also consistent with unit 6 not having sold as yet.

[83] On 16 August 2002, Mr Egan wrote to Mr Willacy expressing his concern about the sale of unit 6 at the proposed price. The email read:

No, Marcus is not keeping me informed and no it is not OK to sell him the property at $325K. I believe a beachfront property is worth much more than that price. Marcus may have some compensating reason why that price makes sense, but I need to know the details. As soon as I get more information from him I will let you know.

Mr Egan’s conduct here is consistent with his present stance that unit 6 was not sold

under the terms of the October 2001 agreement.

[84] A file note Mr Willacy prepared on 16 August 2002 records a telephone conversation he had with Mr Egan in which Mr Egan is recorded as saying that he may consent to Mr Brons buying unit 6 for $325K, but he needed more information. This is consistent with Pounamu still retaining ownership of unit 6.

[85] On 16 August 2002, Mr Willacy wrote to the ASB advising that in return for mortgage finance from the bank, the three properties would be provided as security to be owned as following: a Lower Hutt property in the name of Mr Brons; a Hamilton property in the name of Ms Crawford; and the Papamoa property in the name of Ms Crawford. Following that, on 19 August 2002, an agreement for sale and purchase of unit 6, showing Ms Crawford as the purchaser from Pounamu, was executed. The purchase price was $325,000, plus GST, if any. Mr Brons signed as vendor on behalf of Pounamu, and Ms Crawford signed as purchaser. On 20 August

2002, Mr Willacy recorded a telephone conversation he had with Mr Egan in which Mr Egan is said to have conditionally approved the sale but was waiting for further information from Mr Brons. Mr Willacy was emailing Mr Egan a delegation for Mr Brons to sign on behalf of Pounamu. There is no evidence that Mr Egan executed this document. Mr Egan was informed that the property was being bought by Ms Crawford, with settlement due on 20 August 2002. Mr Egan is recorded as saying he trusted Mr Brons and that “as long as everything was as we said, we can settle”. Then on 23 August 2002, the transfer of unit 6 to Pounamu to Ms Crawford was registered.

[86] Apparently it was not until the proceedings were commenced and discovery was obtained from the ASB that a copy of the October 2001 agreement came to light. The parties’ failure to refer to that agreement at any material time from November

2001 onwards is consistent with the parties having abandoned the agreement.

[87] Whilst there was a perceived need for the agreement in October 2001, once finance became available through Cairns Lockie, it seems that there was no longer the need at that time for the sale of unit 6. It may have been that Pounamu’s

retention of unit 6 and its availability as security for the finance obtained through Cairns Lockie was a factor here. Whatever the reason may have been at the time, the parties’ contemporaneous conduct is fully consistent with them deciding not to complete the transfer of ownership under the October 2001 agreement.

[88] Indeed, I consider that insofar as the October 2001 agreement may have remained in force during 2002, the act of Mr Brons, on behalf of the vendor, Pounamu, and Ms Crawford, as purchaser, to execute the August 2002 agreement evidences their mutual agreement to discharge the earlier October 2001 agreement. Nor do I consider it appropriate to go beyond the face of that discharge to inquire into whether the parties’ intent was any different from that.

[89] In the alternative, when the defendants’ conduct at the material times is examined, their arguments, as to why the 2001 agreement is what led to the sale of unit 6, do not make sense. They were both named as purchasers in the October 2001 agreement. Their preparedness to enter into the August 2002 agreement is inconsistent with what they now assert was their understanding at the time that they had an enforceable contract of sale in the form of the October 2001 agreement. I cannot see why they would have agreed to bind themselves by the August 2002 agreement if at the time they saw themselves as having an existing binding agreement for the sale of unit 6. Their explanations to support this proposition do not withstand scrutiny.

[90] The defendants have referred to evidence that they contend shows that the agreement of October 2001 was the basis for the transfer of ownership in unit 6 from Pounamu to Ms Crawford. They point to their discussions after October 2001 with the ASB regarding their acquisition of unit 6. But these discussions are just as consistent with the defendants simply having it in mind to buy unit 6.

[91] In his evidence, Mr Brons referred to a time in January 2002 when the defendants found themselves unable to complete negotiations with his former wife, Donna, and being unable to reach agreement with the persons who had a caveat over Ms Crawford’s property in Hamilton, as a result of which the defendants’ “purchase of the beachfront property came to a halt”. I consider that not only did the purchase

come to a halt but that this evidence shows that the agreement of October 2001 was effectively abandoned. Consistent with this is the conduct of Mr Brons in early

2002. At the time, he was looking for alternative sources of finance for Pounamu. As part of this exercise he was offering unit 6 as part of the security for this finance. He attempted to explain this offer now on the basis that he and Ms Crawford would have given up ownership of unit 6 had Pounamu needed to use the unit to secure finance for itself. I consider this explanation to be untenable. There is no evidence to support either defendant being prepared to adopt such an altruistic stance when it came to Pounamu’s interests. The explanation lacks commercial reality.

[92] Furthermore, in August 2002, Mr Egan initially refused to agree to the sale of unit 6 at the price of $325,000 and sought further information. He said in his emails that the property was worth more than that and he made it clear that he would not sell it unless more was offered. Throughout the time that Mr Egan was displaying reluctance to agree to the sale of unit 6 at the price noted in the August 2002 agreement, it was never suggested to him by the defendants that Pounamu had already bound itself to sell unit 6 at that price by executing the October 2001 agreement. That was the obvious answer if the October 2001 agreement were still on foot. That no one raised this shows that in August 2002, none of the relevant parties were treating the October 2001 agreement as still in effect.

[93] Looked at overall, I can see no proper foundation to support the defendants’ contention that the October 2001 agreement is responsible for the sale of unit 6. I consider that their evidence in this regard was no more than an attempt to place the timing of the sale of unit 6 outside the limitation period that their defence relies upon. I am satisfied, however, that the sale of unit 6 was brought about by the agreement of August 2002 and thus no limitation issues arise. In this regard, I also note that the claim regarding unit 6 is based in equity, which only by analogy would adopt the six year period in s 4 of the Limitation Act.

Was the sale of unit 6 under the August 2002 agreement a breach of Mr Brons’

fiduciary obligations to Pounamu?

[94] Pounamu contends that the sale of unit 6 to Ms Crawford was achieved through Mr Brons’ breach of the fiduciary obligations of loyalty that he owed to Pounamu. To support this, Pounamu relies on the following evidence: the Middleton valuation of unit 6 at $615,000; the price of $325,000 that Ms Crawford paid for unit 6; and the additional contribution of Mr Brons’ promise to pay outstanding debts (of approximately $280,000) that Pounamu owed when, at the time he made the promise, Mr Brons knew that he could not pay those debts.

[95] The defendants contend that unit 6 was not purchased at undervalue. However, they have not produced any expert evidence to say what unit 6 was worth at the time it was sold to Ms Crawford. Consequently, they have nothing to contradict the Middleton valuation. In the circumstances, I am satisfied that the Middleton valuation of unit 6 is sound. I am confirmed of this view by the fact that when Inland Revenue investigated the sale and treated it as having been made at an undervalue, they adopted a similar value for unit 6. It follows that I find that the payment of $325,000 constituted payment of only approximately 50 per cent of the property’s value.

[96] The defendants do not attempt to support the value of unit 6 as being at or close to $325,000. Rather, they argue that, in addition to that payment, there should be offset money that Mr Brons was due from Pounamu. Mr Brons described this as his “profit entitlement” and on other occasions in his evidence as his “profit distribution” and, in particular, “what was owed to [him] for [his] $50,000 per year living allowance for all [his] work for the company”. At another part of his evidence, Mr Brons referred to purchasing unit 6 at “undervalue on account of profits”. And finally in another part of his evidence, Mr Brons referred to: “the arrangement that I would get unit 6 at undervalue on account of the profit share I would be due for all the work I had done for the company”.

[97] Ms Crawford does not deny that she purchased the property below market value either. In her statement of defence, she says that she purchased unit 6 knowing that the purchase price of $325,000 was less than the market value of the property, but that Mr Egan had agreed to that price in return for Mr Brons forgoing a salary entitlement that he was due from the company.

[98] It is a general principle of equity that a fiduciary cannot personally benefit either directly or indirectly from transactions with a beneficiary; such disloyalty constitutes a breach of the fiduciary obligation: see the discussion in Sojourner v Robb [2006] 3 NZLR 808 (HC) at [126]. This well-settled principle of equity has been extended to apply to the relationship between a registered company and its directors: see Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378.

[99] A breach of this type can result in the transaction being voided and/or the errant fiduciary being liable to compensate for losses or account for profits that flow from the objectionable transaction: see discussion in Sojourner v Robb [2007] NZCA

493, [2008] 1 NZLR 751 at [30]:

Under the ordinary equitable principles which apply in self-dealing cases, the fairness of the consideration is no answer to a later claim for an account of profits (see, for instance, the remarks of Tipping J in Estate Realties Ltd v Wignall [1991] 3 NZLR 482 at pp 493 – 494 and the discussion in Chirnside v Fay [2007] 1 NZLR 433 (SCNZ) at paras [16] – [19] per Elias CJ and para [121] and following per Blanchard and Tipping JJ).

[100] However, when such disloyalty is displayed by conflicted company directors, these equitable principles are modified by s 141 of the Companies Act, which allows transactions between a company and a self-dealing or conflicted director to be upheld if the person seeking to uphold the transaction proves the company received fair value in the exchange.

[101] In Sojourner v Robb, the Court of Appeal recognised that if satisfaction of s 141’s requirements precludes avoidance of a contract, it would be anomalous to allow a related claim against conflicted directors for an account of profits. For that reason, in the context of a claim for an account of profits, the Court of Appeal was prepared to modify the equitable principle against self-dealing in line with s 141, and

to proceed on the basis that in such circumstances, the liability of conflicted directors depended on whether the sale was for fair value (at [30]):

But if s 141(2) has the consequence in this case that the transaction between Aeromarine 1 and Aeromarine 2 could not be avoided, it would be anomalous to allow a related claim to be advanced against Mr and Mrs Robb [the conflicted directors] and (perhaps Aeromarine 2) for an account of profits. This is because there is a sense in which an account of profits is the other side of the coin to an actual or notional rescission of the relevant contract (compare Chirnside v Fay at para [16] per Elias CJ).

[102] In Catley v Waipa Corporation Ltd [2010] NZCCLR 24 (HC), the Court found that it would be equally anomalous if the burden of proof that s 141 applied to avoidance of such transactions was not applied to related claims where some other remedy (such as an account of profits) was sought. At [20], the Court said that:

The imposition of a burden on an allegedly conflicted fiduciary to prove payment of fair value is consistent with equitable principle: see Thomson v Eastwood (1877) 2 App Cas 215 at 236 and Erlanger v New Sombrero Phosphate Company (1878) 3 App Cas 1218 at 1230. It follows that I accept Mr Catley’s submission that because s 141 underlies the modified equitable rule which was applied in Sojourner v Robb to a claim like the present one, the burden of proof should likewise accord with that in s 141(5).

[103] In the present case, the fiduciary obligations are owed by a company manager. The modification of equitable principles that was made in Sojourner v Robb and in Catley should apply here as well. It would be anomalous to permit a conflicted director to be able to avoid the consequences of the breach of fiduciary obligations by proving fair value was paid in the objectionable transaction, but not to do so where the conflicted party was a manager of the affected company. Thus, the burden would lie on those seeking to uphold the sale to prove that the consideration Pounamu received in return for the sale of unit 6 constituted fair value.

[104] Another way in which a conflicted fiduciary who owes fiduciary obligations to a company can avoid the application of the equitable principle against self- dealing, even when the transaction is at undervalue, is if the company’s shareholders later ratify the transaction. Provided the company is clearly solvent, the shareholders have the power to ratify such transactions: see Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Co Ltd [1983] Ch 258 (CA) at

269 and Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246

(CA) at 296. The Privy Council in North-West Transportation Co v Beatty (1887) 12

App Cas 589 at 593 expressed the principle in this way:

... a director of a company is precluded from dealing, on behalf of the company, with himself, and from entering into engagements in which he has a personal interest conflicting, or which may possibly conflict, with the interests of those whom he is bound by fiduciary duty to protect; and this rule is as applicable to the case of several directors as to a managing or sole director. Any such dealing or engagement may, however, be affirmed or adopted by the company, provided such affirmance or adoption is not brought about by unfair or improper means, and is not illegal or fraudulent or oppressive towards those shareholders who oppose it.

[105] In Re Duomatic Ltd [1969] 2 Ch 365 at 373, the Court stated that provided that all the shareholders assent, it matters not that the approval is expressed informally and not by resolution at a general meeting.

[106] One of the exceptions to the principle that the shareholders can ratify a breach of fiduciary obligation is where the subject transaction can be characterised as a transaction between a company and its shareholder, which is in substance an unlawful distribution: see Re Halt Garage (1964) Ltd [1982] 3 All ER 1016 at 1039-

44; Aveling Barford Ltd v Perion Ltd (1989) 5 BCC 677 at 683; and Jenkins v

Harbour View Courts [1966] NZLR 1 (CA).

[107] In “Avoidance of Transactions as a ‘Fraud on Creditors’ at Common Law”, an essay in Howard Bennett and John Armour (eds) Vulnerable Transactions in Corporate Insolvency (Hart Publishing, 2002), John Armour referred to Re Halt Garage at [7.41]:

The leading case of Re Halt Garage (1964) Ltd concerned payments ostensibly made by way of remuneration to the company’s husband and wife directors, who were also its shareholders. Because of illness, the wife was unable to perform any active services for the company. Oliver J concluded that the payments to her were:

So out of proportion to any possible value attributable to her holding of office that the Court is entitled to treat them as not being genuine payments of remuneration.

Rather, they were in substance gifts. Furthermore since the company had no divisible profits, such gifts amounted to an unlawful return of capital to the wife qua shareholder. The test expounded by Oliver J did not depend on

good faith but rather upon the genuineness of the transaction, which did not depend on the label the parties chose to give it and was ... to be deduced objectively.

[108] Later in the same essay at [7.42], Mr Armour referred to the test of genuineness as applied by Hoffman J in Aveling Barfoot Ltd v Perion Ltd:

to recharacterise a sale of land by a company to a counterparty who was treated as equivalent to its shareholder. The sale was at a very significant undervalue (between 25 per cent and 50 per cent of market value) and although the company was solvent at the time of the transaction, it had no distributable profits. Hoffman J concluded that, analysed objectively, the transaction was not a genuine sale, but rather a ‘dressed-up distribution’ which was unlawful in light of the company’s lack of distributable profits.

[109] The principle that a company cannot make “gifts” from its assets, rather than from profits, to its directors or its shareholders was recognised early on. In Re George Newman & Co [1895] 1 Ch 674 (CA), the directors/shareholders of what seems to have been a family operated company failed to distinguish between themselves and the company, and treated the company’s assets as their own. When it came to the use of company money to improve the house of one of the director/shareholders, which was taken from borrowings of the company, as it had no profit to distribute, the Court of Appeal of England and Wales found that the money had been applied in “breach of trust”. It mattered not that the use of the company’s money in this way had been approved at the time by all the shareholders. At 685, the Court of Appeal said:

The transaction was a breach of trust by the whole of them; and even if all the shareholders could have sanctioned it, they never did so in such a way as to bind the company. It is true that this company was a small one, and is what is called a private company; but its corporate capacity cannot be ignored. Those who form such companies obtain great advantages, but accompanied by some disadvantages. A registered company cannot do anything which all its members think expedient, and which, apart from the law relating to incorporated companies, they might lawfully do. An incorporated company’s assets are its property and not the property of the shareholders for the time being; and, if the directors misapply those assets by applying them to purposes for which they cannot be lawfully applied by the company itself, the company can make them liable for such misapplication as soon as any one properly sets the company in motion. All this is familiar law and must be borne in mind in deciding the present case.

[110] In New Zealand, the common law maintenance of capital rule has been replaced by the provisions of the Companies Act. Section 52 of the Act permits

distributions which include direct transfers of property for the benefit of shareholders by the purchase of property where the statutory test for solvency is satisfied. That test is to be found in s 4 of the Companies Act.

[111] In Re DML Resources Ltd (in liq) [2004] 3 NZLR 490 at [64], Heath J set out the three cumulative elements to a distribution:

There are three cumulative elements to a “distribution” as defined. They are:

(a) the direct or indirect transfer of money or property (or the incurring of a debt) by a company,

(b) to or for the benefit of the shareholder, and

(c) in relation to shares held by that shareholder.

The concepts captured by those elements are the transfer of property (or the incurring of a debt) by the company; the corresponding provision of a benefit to or for its shareholders; and receipt of the benefit by, or on behalf of, the shareholder in its capacity as a shareholder. A link must be established between the outflow of wealth from the company and the benefit received by or on behalf of a shareholder.

[112] However, distributions falling outside the solvency test are not permitted. Hence, when it comes to the replacement of the common law capital maintenance doctrine with the statutory provisions in the Companies Act, there is little substantive change when it comes to the limitations on shareholders’ power to ratify payments to shareholders at undervalue. As was the case under the common law, I consider that shareholders cannot unanimously agree to or ratify a sale of a company’s property at undervalue to one or more of their number if the company could not at the time of the sale satisfy the solvency test.

[113] The modified equitable principle regarding self-dealing fiduciaries allows Mr Brons, or persons closely associated with him, to buy unit 6 from Pounamu if fair value is paid for the unit. Were it not for this modification, Mr Brons would have been in breach of his fiduciary obligations when, acting on behalf of Pounamu, he sold unit 6 to Ms Crawford. Thus, he relies on the modified principle as a defence to what would otherwise be a breach of fiduciary obligations. Insofar as Ms Crawford seeks to uphold the sale to her, she also relies on this defence as part of her resistance to Pounamu’s claims against her.

[114] The defence based on payment of fair value includes the proposition that part of the consideration for unit 6 was made up by offsetting a salary entitlement that Mr Brons was due. I have already referred at [36] of this judgment to the acknowledgement that Mr Brons has made regarding the foundation for his salary. Furthermore, in the fourth amended statement of defence, Mr Brons alleges that Mr Egan agreed that in return for Mr Brons’ work as manager of Pounamu, he would be entitled to a salary of $50,000 per year “which would be paid as a shareholder distribution of profits at times when [Pounamu] could afford it”. Hence, Mr Brons’ entitlement to this payment was as a shareholder. So any approval that Mr Egan might have given to a transaction that included distribution of profit (Mr Egan disputes he ever approved Mr Brons receiving a share of profit as part of the consideration for unit 6) could only assist Mr Brons if the requisite conditions in the Companies Act for making a distribution were met. If they were not, the distribution would be one that did not satisfy the Companies Act and, therefore, it would be an unlawful distribution. In the latter case, since a company’s shareholders cannot approve or ratify an unlawful distribution, there could be no question of any agreement by Mr Egan constituting ratification by Pounamu of a sale at undervalue to a person associated with its fiduciary.

[115] The defence based on payment of fair value for unit 6 includes the proposition that Mr Egan’s agreement was binding on Pounamu, such that it could not now complain about the bargain that was struck with Ms Crawford. The defence is raised as an answer to the claim that here a company has sold its asset to an associate of its fiduciary. It is in substance akin to an affirmative defence where equity places the burden of proving payment of fair value on the allegedly errant fiduciary.

[116] Thus, it is for the defendants to prove all the necessary elements of their “payment of fair value” defence, including whether at the material time Pounamu could properly have made a profit distribution to Mr Brons. This approach is consistent with well established law regarding equitable defences: see Heinl v Jyske Bank (Gibraltar) Ltd [1999] Lloyd’s Rep Bank 511:

Secondly and more significantly, affirmation of a breach of trust or fiduciary duty is, like concurrence, release, or acquiescence, an equitable defence. It is well established of such defences that those who invoke them must show that the beneficiary or person to whom the duty is owed had a sufficient knowledge of the facts constituting the breach and its consequences to make it fair and equitable, in all the circumstances of the case, that he should be barred from obtaining the relief to which he would otherwise have been entitled; cf. Re Paulings Settlement Trusts [1962] 1 WLR 86, 107 ...

[117] I would add to the principle applied in Heinl the requirement that where the equitable defence includes reliance on acts that in certain circumstances would be contrary to statute law, it is for the party raising the equitable defence to prove that those circumstances were not present. This is contrary to the approach in Re DML Resources Ltd (in liq) [2004] 3 NZLR 490 (HC) regarding who carries the burden of proof in claims brought by a company challenging the legality of a distribution. In Re DML Resources Ltd (in liq), Heath J said at [87]-[88] that if the nature of the transaction is unclear, the burden of proof is on the party challenging the transaction to prove that any net benefit conferred on the shareholder by the company has been received by the shareholder in its capacity as a shareholder. However, I consider that when the legality of a distribution falls to be considered as part of a defence (proof of payment of fair value), the burden of which lies on the defendant to prove, it makes more sense for the burden of proving the legality of the distribution to rest on that party as well.

[118] This position should certainly be the case here. Pounamu has not claimed as part of its case that Mr Brons received an unlawful distribution of profit. The whole issue of a profit distribution is raised by the defendants as part of their defence of having paid fair value for unit 6. As one answer to the allegations of breach of fiduciary obligations arising from the sale of unit 6, the defendants assert that there is an undocumented component of the sale of unit 6 that comprises Mr Brons’ profit share from Pounamu, which was offset against a notional balance of sale; thus bringing the total consideration paid for unit 6 up to fair value. Thus, the burden of proving all elements of this defence, including the legality of the profit distribution, should lie on the parties raising the defence. To adjust the burden back to the plaintiff when it came to one aspect of this defence, namely the legality of the profit distribution, flies in the face of common sense.

[119] In summary, three well settled legal principles are brought into play. First, the principle applying to breach of fiduciary obligation by a person who has preferred his own interests and those of his wife over those of the company to which he owed fiduciary obligations. Secondly, the principle which precludes shareholders from making distributions of a company’s assets if those distributions are restricted by the requirements of the Companies Act. Thirdly, the prohibition on shareholders’ ability to ratify improper acts on the part of its officers/agents that amount to a distribution of a company’s assets.

Analysis

[120] On the face of it, the legal mechanism that caused unit 6 to pass from Pounamu to Ms Crawford is a sale and purchase agreement that has consideration of approximately 50 per cent of the unit’s estimated market value. Like natural persons, companies can make bad bargains. But they cannot make bad bargains with those who owe them fiduciary obligations. Such persons are obliged to pay fair value if they or their associates purchase a company’s assets. Mr Brons’ explanation is to invite the Court to look behind the legal transaction, as contained in the August 2002 agreement, and to take into account a collateral, undocumented oral transaction; namely, an offset achieved by recognising a payment of his “profit entitlement” from Pounamu.

[121] No one has suggested that the parol evidence rule applies here. All parties have both proceeded on the basis that the consideration for unit 6 was more than the sale price recorded on the August 2002 agreement. The dispute between them is over what was actually agreed between them to bring the price up to a fair value. This is why I have proceeded on the basis of assessing the competing explanations as to what was the additional factor, which necessarily entails an assessment of the legal strengths and weaknesses of each explanation.

[122] Regarding the defence of payment of fair value, Mr Brons has failed to establish that, at the material time, he was legally entitled to take a profit share that amounted to the difference between the estimated market value of unit 6 ($615,000, plus GST, if payable) and the $325,000 provided in the August 2002 agreement.

Without the inclusion of this offset, the $325,000 cannot qualify as being a fair value.

[123] In any event, the defendants have failed to satisfy me that Mr Egan had agreed to the offset by way of profit share. First, Mr Egan denies agreeing to this, and I find him to be a believable witness. At the material time, once the units at Papamoa were sold, Pounamu was looking to break even. This was in circumstances where Mr Egan had originally advanced Pounamu just over $1M. Furthermore, Mr Brons accepted, when under cross-examination, that the break-even point when Mr Egan could expect to regain his $1M advance was once development of the Tairua property was completed. As that was some way off, Mr Egan was hardly likely to agree to Mr Brons taking a profit share without enjoying a similar benefit himself. If Mr Brons is to be believed, Mr Egan was willing to permit Mr Brons to draw a profit share of approximately $280,000, whilst Mr Egan went without any profit share and, at best, expected to receive payment of the $1M advance that he had originally made to Pounamu. This lacks commercial reality. I cannot see anyone doing this, let alone Mr Egan, who has denied doing so. Thus, I do not believe that Mr Egan agreed to the sale of unit 6 on the terms at which the defendants now contend.

[124] There is nothing that suggests that even though none of the steps in s 52 of the Companies Act were taken, Pounamu had sufficient profit to make a distribution to Mr Brons. Thus, the question of whether equity would overlook the failure to comply with s 52 when it came to the defendants’ reliance on the equitable defence of affirmation/ratification does not arise.

[125] The general factual impression I have gained from the evidence is that in August 2002, Pounamu’s financial circumstances were precarious. Apart from the sale of unit 6, it sold the townhouses (units 2 to 5) in circumstances that suggest the company was desperate to sell. More about this is discussed in the section of the judgment dealing with those sales. At the same time, there is no evidence that suggests that Pounamu had to sell unit 6 for anything other than a fair value and that a sale at less than fair value was forced upon it by circumstances. The choice available to Pounamu at the time would have been to sell to Mr Brons or

Ms Crawford for fair value, or to sell on the open market by agreement, by tender or by auction. There is no evidence that a sale to a third party either by any of those means could not have realised the estimated market value or something close to that amount.

[126] Mr Brons has also tried to combine his claimed entitlement to payment of profit share with payment for the work that he had done for Pounamu. At paragraphs 10 and 11 of his statement of defence, he alleges that Mr Egan agreed that Mr Brons would be entitled to a salary of $50,000, which would be paid as a shareholder distribution of profits at times when Pounamu could afford it. In his closing submissions, Mr Brons contended that the $50,000 per annum salary was:

in reality a shareholders’ agreement with Mr Egan as to how Mr Brons’ efforts would be ultimately rewarded in the share of profit, by payment of this amount over and above the otherwise agreed 70/30 profit split.

[127] Seen in this way, Mr Brons’ argument constitutes an acknowledgement that payment of his “salary” of $50,000 per annum hinged on Pounamu making a profit. But until the company did, he could have no expectation of being paid this “salary”. It would follow, therefore, that for as long as Pounamu made no profit, there was no salary which Mr Brons could apply towards payment of the purchase price for unit 6. By attempting to claim that he could use his salary entitlement to make up the difference in value between the $325,000 paid for unit 6 and its market value ($615,000), Mr Brons is using an anticipated future benefit (which was payable only when a profit was earned) as a present day payment to give market value to Pounamu for unit 6. This he cannot do.

[128] The only entitlement to salary for past services that could be used as consideration towards the purchase of unit 6 would be if this “salary” was actually owed as a present debt. But this could only be so if Mr Brons could show that there was a contract of employment, or some other agreement under which he was entitled to be paid, or, alternatively, that he could sue on a quantum meruit basis for past services. There is no evidence that he was employed under a contract for services that gave rise to a salary. There is no evidence that he paid himself a salary or that

he was entitled to a salary which he decided to forego due to Pounamu not having the money to pay him. He has acknowledged this in his defence.

[129] Mr Egan’s evidence was that any money Mr Brons could expect to receive for the role he played in the property developments of Pounamu was tied to his entitlement as a shareholder to receive a share of the profit. Mr Egan’s evidence fits with what occurred and the position as outlined by Mr Brons in his closing submissions. I can see no legal basis for Mr Brons being able to claim payment for past services either as an employee or on a quantum meruit basis. These are the only ways in which he could lay claim to such payments.

[130] Looked at overall, I consider that Mr Brons’ attempts to justify the difference between the $325,000 payment and the estimated market value of unit 6 are no more than self-serving attempts to bolster the price that was paid for unit 6 to something that would resemble a fair value. There is nothing that Mr Brons offers by way of an explanation that persuades me that Pounamu in fact received fair value for unit 6. Nor is there anything to establish that Mr Egan, acting on Pounamu’s behalf, bound the company to sell unit 6 at the undervalue of $325,000.

[131] Mr Egan has offered his own explanation for how unit 6 came to be sold under an agreement for $325,000. His evidence was that, in addition to the payment, Mr Brons had promised to assume payment of debts of Pounamu. At the time, regarding the Tairua property, there was a debt of $200,000 and there was a tax liability of $80,000. Those debts were not immediately due for payment. Mr Brons points to Mr Egan’s later failure to enforce the payment of those debts as demonstrating no such agreement was reached. In addition, Mr Brons says that if he had assumed responsibility for those debts, then he could have paid them. This is in response to Mr Egan’s claim that at the time he assumed the obligation, Mr Brons knew that he could not discharge it.

[132] In accordance with the legal principles to which I have referred earlier, I do not consider that Mr Egan is obliged to prove why he was prepared to agree to a sale of unit 6 when it comes to proof of Pounamu’s claim.

[133] However, I find that Mr Egan’s explanation is credible insofar as he has persuaded me that he was not prepared to agree to unit 6 being sold at $325,000. The contemporaneous communications show that Mr Egan was not prepared to agree to the sale of unit 6 at that price alone; his email to Mr Willacy records Mr Egan’s knowledge that the property was worth more than that.

[134] The material emails also reveal that Mr Egan was looking for Mr Brons to outline a proper basis for the sale of the unit. No such outline appears to have been recorded. But the fact that the sale ultimately went ahead with a sale price of

$325,000 suggests to me that there was some communication between Mr Brons and Mr Egan in which Mr Egan was persuaded that there would be something in addition to $325,000 for unit 6.

[135] Mr Brons’ assumption of debts that were due in the future and which equated with the balance of the difference in value between the Middleton valuation (which Mr Egan knew of) and the contract price could well have been enough to satisfy Mr Egan. Thus, on balance, I am satisfied that Mr Brons must have offered something that brought the value of the consideration for unit 6 up to close to the Middleton valuation. Mr Brons said that the “clarification” that Mr Egan wanted was given to him by Mr Brons’ advice that the sale of unit 6 to Ms Crawford, plus the sale of the townhouses, would allow Pounamu to clear its pressing debts.

[136] Mr Brons’ evidence is that he never agreed to pay any such debts. His

evidence was that:

[A]ll I ever said was that the purchase price that Georgina and I would pay would clear off the mortgage loan secured on the Papamoa property, which it did. Also there were simply no other company liabilities at this time which needed to be paid.

Elsewhere in his evidence, Mr Brons accepted that there was the Tairua debt, which was not immediately payable, and debts to Inland Revenue.

[137] However, I think that the clarification that Mr Egan sought from Mr Brons was something more to do with obtaining assurance that a proper price was being paid for unit 6, which Mr Egan knew to be worth more than $325,000. I cannot see

Mr Egan agreeing to the sale without first learning that something more than

$325,000 was being offered. I also consider that Mr Egan’s evidence that the additional consideration was Mr Brons assuming debts of Pounamu has some commercial reality about it. At the time, he was agreeable to unit 6 being sold. The emails show he wanted a proper value paid for unit 6. If Mr Brons offered a proposition that accorded with those requirements, it is reasonable to assume that Mr Egan would have agreed to go along with it.

[138] There is then the question of Mr Brons’ ability to make good the discharge of those debts. The general impression I gained was that once Pounamu’s debts were paid, there was little by way of profit; thus Mr Brons could not have expected to receive in the future any substantial sums of money from Pounamu. The evidence does not disclose Mr Brons having any other likely sources of income that would have enabled him to discharge liabilities of approximately $280,000 if called upon to do so. Nor did I see any evidence that would suggest he could have borrowed sums of that amount. In his evidence, when he was asked how either he or Ms Crawford could have paid an extra $280,000, he said that he did not think there would be an issue with equity as he and Ms Crawford had three combined properties worth approximately $1M (this included unit 6), but that there would have been a problem with servicing a loan of $280,000. He said that at the time, he did not have any income of a steady nature and that he was relying on Ms Crawford to service the loans they had taken out. He completed his evidence by saying, “if we had made an application at that stage it’s difficult to say what they would have said, but it may not have been in our favour”.

[139] I consider that, given the fiduciary obligations that Mr Brons owed to Pounamu, he was under an obligation to disclose fully any difficulties that he might have encountered in repaying debts that he had assumed responsibility to pay. Mr Egan’s evidence is that no disclosure of this nature was made when the agreement for Mr Brons to assume payment of Pounamu’s debts was made. I have also seen nothing that would cause me to think that Ms Crawford could have helped Mr Brons out here. I am not satisfied, therefore, that any offer on his part to pay Pounamu’s debts was made in circumstances where Mr Brons knew that he could discharge those liabilities, or where he made full disclosure to Pounamu regarding

the difficulties he might have in meeting them. The failure to make such full disclosure is a further breach of his fiduciary obligations to Pounamu. However, when it comes to proof of the claim, I do not consider that anything turns on this. For reasons I have already outlined, I consider that it is for the defendants and not for Mr Egan to prove that the sale of unit 6 accords with the law. I have already found that they have failed to discharge this burden.

Credibility of Mr Brons

[140] I digress at this point to express my view on the general impression I gained of Mr Brons’ credibility. This view of his credibility is something I took into account when reaching a view on whether I preferred Mr Egan’s evidence to that of Mr Brons when it came to deciding the circumstances of the sale of unit 6, including when the sale occurred and on what terms.

[141] Mr Brons did not impress me overall as a credible witness. He was too fond of portraying circumstances in a way that suited his interests. At one point during the course of the trial, I was obliged to give him a warning regarding potential self- incrimination. This was in relation to questions he was asked in cross-examination regarding information he had supplied to the BNZ when Pounamu was seeking to raise finance from that bank and he was to provide a personal guarantee of any borrowing. The evidence shows that in June 1999, Mr Brons provided the BNZ with a statement of position which showed him earning a monthly income of $4,000 from Pounamu, $4,000 from a company called Wireless Networks and $1,000 from a rental property in Stokes Valley. At the time, he was receiving no salary from either Pounamu or Wireless Networks. Furthermore, by 1999, Wireless Networks was no longer a registered company, as it was struck off the Companies Office Register in

1998. Documents from the BNZ showed that Mr Brons’ statement of position had been referred to when the BNZ had decided to lend Pounamu the funds it sought. Under cross-examination, Mr Brons accepted that he had provided false information to the BNZ to help Pounamu obtain finance from the bank. He sought to explain this on the basis that he had to provide a guarantee if Pounamu was to obtain finance from the BNZ. He accepted that, in hindsight, it had not been a good reason to lie to the bank, but acknowledged that it had appeared to be so at the time.

[142] As a means of reducing the GST that was payable on the sales of units 2 to 5, he reduced the purchase price and then imposed penalty interest of $20,000 for each sale agreement, due to late settlement. He accepted that there was no proper basis for claiming this amount of penalty interest. This is how Inland Revenue also saw matters, as it later re-adjusted Pounamu’s GST claims to disallow what occurred.

[143] Some of Mr Brons’ email communications with others reveal that he had other ideas for avoiding payment of tax. The ideas are naive and they would have been discovered easily enough by Inland Revenue. What is of concern is the dishonest approach they reveal on the part of Mr Brons.

[144] The occasions of demonstrable dishonesty to suit his purpose, the absence of any record from 1999 onwards of being entitled to a salary from Pounamu of

$50,000, and the unreality of the idea that Mr Egan, who had expended just over

$1M in advancing funds to Pounamu, would agree to Mr Brons receiving an advance of anticipated profit share all cause me to conclude that Mr Brons was never in a position where he could claim to be due anything from Pounamu. Consequently, he could never claim that he was owed a payment that could be credited towards acquiring unit 6 at fair value.

[145] On the other hand, I found the evidence of Mr Egan to be an honest attempt to provide the Court with an account of events that had occurred eight to 10 years earlier. The account he gave of events fitted with the contemporary material and it made sense. There was nothing about his evidence that caused me to doubt the honesty of his evidence.

[146] I am satisfied that unit 6 was sold to Ms Crawford at undervalue, and accordingly in breach of the fiduciary obligations that Mr Brons owed to Pounamu. It follows that Pounamu has proved liability in its first cause of action.

[147] The final aspect to the first cause of action is a claim for the sum of

$32,222.22, being a tax liability that Pounamu incurred as a result of the sale of unit 6 at undervalue to Ms Crawford. Inland Revenue treated the sale as being for the sum that was stipulated in the sale and purchase agreement. The way in which

Mr Brons constructed the sale of unit 6 to Ms Crawford left Pounamu open to Inland Revenue taking this approach. I consider that the tax liability that Pounamu incurred was a direct result of Mr Brons’ breach of fiduciary obligations regarding the sale of unit 6. I find, therefore, that Pounamu is entitled to receive the value of the payment it was required to make by way of equitable compensation.

[148] Before I deal with the remedies that Pounamu has against Mr Brons, I

propose to deal with Pounamu’s claim against Ms Crawford.

Claim against Ms Crawford

[149] Ms Crawford and Mr Brons married in 2001. They had known each other for

29 years, but they had been apart for some time and only became re-acquainted in

1999. Ms Crawford said that she had little involvement in the purchase of unit 6. She described Mr Brons, when she married him, as being involved with property investments through Pounamu for a number of years and that he had little or no income from the company. The result was that the couple were completely reliant on her income as a midwife.

[150] She said Mr Brons had told her that he was due a share of the profit that would compensate him for all the work he had put into the company over the years. She accepted that Mr Brons had discussed with her the possibility of them buying unit 6 from Pounamu. She said she was not particularly interested in purchasing a property and that her only other experience of purchasing a property was in Hamilton many years before, which she thought had been bought for roughly

$40,000 and there was still a small mortgage on the property.

[151] Ms Crawford said she was happy with the arrangements whereby the couple lived in unit 6, and she was reluctant to go into further debt to buy the property. She said that Mr Brons advised her that Pounamu was in serious need of money and it would help if they, as a couple, could raise money to purchase unit 6 for themselves. She said they went through an exercise of what they could afford to pay by way of further loan payments if they took a mortgage to buy unit 6. They worked out they could borrow about $300,000. She acknowledged that she knew Mr Brons had

obtained a valuation for unit 6. She said she recalled Mr Brons telling her that the registered valuation was a little more than they could afford, but the difference would be made up “from what he would be owed by the company for the work he had done”. She said that in those circumstances, she agreed to sign a contract to purchase unit 6 for a little over $300,000 in October 2001. This is contrary to the evidence of Mr Brons, who, under cross-examination, admitted that he did not discuss with Ms Crawford his proposal of offsetting $150,000 of back salary against the differential between the purchase price and the market price. Thus, Ms Crawford’s belief that Mr Brons was owed money by Pounamu can only have been based on assumptions she had made. This is not a case where she can contend that she relied on statements by Mr Brons that he was entitled to the credit that both defendants now rely upon to answer Pounamu’s claims against them.

[152] Her explanation for unit 6 being in her name was that at the last minute, she and Mr Brons decided that the unit would be registered solely in her name for financial and other reasons. She did not elaborate on these reasons and nor Mr Brons address this topic in his evidence. At the time, she was the principal earner for the household; she was working full-time as a midwife, which meant she was in a financial position to service the mortgage. Accordingly, she was willing to sign the agreement in 2002 to purchase the property in her own name for $325,000. Later, she was assessed by Inland Revenue for tax on the undervalue at which unit 6 was purchased, but that this was handled by Mr Brons and she did not know the details.

[153] Ms Crawford accepted that she knew Pounamu was in financial difficulty in the lead-up to the sale of the units because she saw Mr Brons under pressure. She rejected any suggestion that she had purchased unit 6 with “knowledge of some sort of wrongdoing that (Mr Brons) had committed against the company to obtain the property”. She said that at the time she purchased the property, she believed it was a genuine sale that assisted the company.

[154] Under cross-examination, Ms Crawford agreed that she knew there was a valuation for unit 6. She could not recall whether Mr Brons had told her the amount the valuer had set in the valuation. She said she was not particularly interested in the

amount. When asked to explain why she had not been concerned to find out the value of unit 6, she responded by saying that she was a midwife doing midwife things, whereas Mr Brons was the property developer doing property developing things. She said Pounamu had no money and needed to raise funds to be able to continue with what it was doing, and that is why she agreed to the purchase of unit 6. She described herself as not being interested in the financial arrangements that were made. She could not explain why, in relation to the October 2001 agreement, the original purchase price of $305,000 had been increased to $325,000. She accepted that this increased the borrowing to $290,000. On cross-examination, it was suggested to her that, as a purchaser of a property where she was borrowing approximately 90 per cent, she should want to know the value of the property so she would know that she was not borrowing more than the property’s worth. Her response was: “Look I believe my husband’s a man of integrity, he was in charge of those financial situations so I trusted him to make those decisions for me”. She said she asked Mr Brons whether or not they could afford unit 6, but she did not ask how much it was worth. Nonetheless, she did accept that she knew the property was worth more than $325,000. When asked how she knew that, she said, “because I live there”. She said she had no idea of how much more than $325,000 the property was worth. When further pressed about her knowledge of the property being worth more than $325,000, Ms Crawford said:

I’m not sure but I also was very aware that Marcus was owed money by Pounamu ... I was aware that there was an agreement between Marcus and Ralph Egan to subsidise that property from the money that he had been working for for the last few years.

[155] Ms Crawford was vague when it came to her answers to cross-examination questions about her knowledge of the tax issues regarding the sale price of unit 6. However, when Mr Brons was cross-examined, he acknowledged that he had obtained advice on the tax implications of the sale of unit 6 at the proposed price of

$325,000 and that he had probably discussed the import of that advice with Ms Crawford. Any such discussion would necessarily have covered the fact that the sale price was less than market value, as this was the basis for the concerns about the tax implications of the sale. Since the tax implications would have been in the forefront of Mr Brons’ mind after receiving the tax advice, I consider that it is likely

that he did discuss it with Ms Crawford. Her evidence included an acknowledgment that there were some discussions with him about tax, but she was vague about when they occurred and if they revolved around the time when Inland Revenue investigated the sale and required Mr Brons to pay tax on the sale. I am satisfied that some discussion of the tax implications of the sale at around the time the unit was purchased happened and that this would have included reference to the sale price being less than market value.

[156] The impression I gained of Ms Crawford is that she is someone who was focused primarily on her role as Mr Brons’ wife and her work as a midwife. She did not strike me as someone who is knowledgeable about commercial and business matters, nor having an interest in such concerns. I doubt that she has any understanding of the separate identity the law attributes to companies that are registered under the Companies Act, or the fiduciary obligations the law imposes on persons. From her perspective, Mr Brons was carrying out property development work and receiving no income, whereas she was the person who was ensuring the couple were able to fund their daily lives. In such circumstances, it is understandable that she would have assumed that at some time in the future, Mr Brons would receive remuneration for the work she saw him carrying out on behalf of Pounamu. It is hard to see why a wife would willingly shoulder the lion’s share of providing for the couple’s livelihood while her husband worked for nothing, without her having some expectation that this was a temporary state of affairs that would ultimately lead to her husband receiving some financial benefit for his efforts. I do not consider that she would have made any distinction between whether this remuneration would have come to him by way of salary for services as an employee, rather than profit share, which he could have been due as a shareholder in Pounamu.

[157] I have no doubt that Ms Crawford realised the price that she was paying for unit 6 was considerably less than its true value. As she herself acknowledged, simply by living in the house, she would have gained a fair appreciation of the worth of the other properties around her. Also, she could not have been blind to the fact that a beachfront property at Papamoa would be worth more than $325,000. Furthermore, the difference between the price she was paying for unit 6 and its true

value would have been touched on by Mr Brons when discussing the tax implications of the sale with Ms Crawford.

[158] Ms Crawford has received a property for which she paid $325,000, when its value was almost double. She knew that the price she paid was less than the unit’s true value. She has attempted to account for the sale at $325,000 by saying that she believed that money her husband was due for his services to Pounamu would make up the difference between what she paid for unit 6 and what was its real worth, which is also an acknowledgement that she knew at the time she acquired unit 6 that the payment of $325,000 did not reflect the market value of unit 6. Her understanding of how unit 6 was acquired included recognition of a collateral agreement that accounted for making up the balance between the price she paid and the true value of unit 6. It follows that, whilst she became the legal owner of unit 6, from her perspective, Pounamu was due further payment and this was to be made by someone else; namely, Mr Brons. In such circumstances, I consider that it would also have been obvious to her that if Mr Brons had wrongly claimed payment from Pounamu, there would be nothing to make up the difference between the price she paid and the true value of unit 6, and that she would, therefore, be gaining unit 6 at Pounamu’s expense.

[159] From a restitutionary perspective, it can be said, therefore, that since Ms Crawford has always understood that she has not paid fully for unit 6, she would hold part of the property on trust for whomever else was entitled to claim beneficial ownership of unit 6. Since I have found that Mr Brons sold unit 6 in breach of his fiduciary obligations to Pounamu and that he was never owed any payment from Pounamu, it would follow that Pounamu would be entitled to trace the interest in unit 6 that Mr Brons wrongfully took from it. Thus, on this view, Ms Crawford would hold half of unit 6 on a constructive trust for Pounamu.

[160] Regarding Ms Crawford’s knowledge of other matters related to the purchase of unit 6, I am satisfied that there is no evidence to show that she knew that Mr Brons had no right to claim the payment from Pounamu that was relied on to make up the full purchase price for unit 6. I also consider that this is not a circumstance where she could be said to have shut her eyes to the obvious. What

would be obvious to many people who had some knowledge of business and company affairs was not, I think, obvious to her. Nor do I consider that she could be said to have wilfully and recklessly failed to make the enquiries that an honest and reasonable person would make. I reach this conclusion because I do not think that the information she had was sufficient to put her on notice to the point where she could be said to have recklessly ignored the need for enquiries. Viewed subjectively, she had no actual knowledge of, nor was she wilfully blind to, the actual circumstances.

[161] Nonetheless, the circumstances of the sale were such that an honest and reasonable person would have realised that there were aspects of the sale of unit 6 that were open to question and had the potential for Pounamu to lose a valuable asset. First, there was the failure to record in the sale and purchase agreement the full intended payment for unit 6. When the overall price of something is made up of a cash contribution, plus a setting off of money owed by the vendor to someone associated with the purchaser, the proper approach is to specify the full price in the sale and purchase agreement and to record the various components that go to make up payment of that price. Ms Crawford knew that the sale and purchase agreement did not fully record all the aspects of the purchase of unit 6. Secondly, there was the decision to record only Ms Crawford as purchaser on the sale and purchase agreement when part of the purchase was funded by Mr Brons. No adequate explanation has been given for why Mr Brons was not included as a purchaser. Thirdly, Ms Crawford received no record of any form specifying how Mr Brons was making up the difference in value. Whilst she may have believed he was entitled to a payment from Pounamu, I consider that an honest and reasonable person would not have gone ahead with the purchase without first sighting some written confirmation of that payment and how it was being applied against the purchase price. I also consider that an honest and reasonable person would have realised that without any proper record of the contribution from Mr Brons, there was always a prospect that no such contribution would be forthcoming and that if this occurred, the sale might proceed on the strength of the sale and purchase agreement signed by Pounamu and Ms Crawford. Whilst Ms Crawford may not have believed her husband was capable of transferring Pounamu’s property to her without full payment being made in return,

I consider that the circumstances would have alerted an honest and reasonable person to the prospect of this occurrence.

[162] I also consider that given the circumstances I have described, an honest and reasonable person would have made enquiries of her solicitor regarding the legality and propriety of the proposed terms of sale. Had such enquiries been made, I consider that Ms Crawford would then have received information that would have made her realise she was purchasing unit 6 in circumstances where the unit was being sold by Mr Brons and where he could be seen to be preferring her interests to those of Pounamu, and consequently was in breach of his fiduciary obligations to the company. Furthermore, I consider that any such enquiries would have informed Ms Crawford that any accounting she did would be to either Pounamu or Inland Revenue or to both.

Knowing receipt

[163] Pounamu has claimed in knowing receipt against Ms Crawford. The cause of action arises from Lord Selbourne LC’s famous dictum in Barnes v Addy (1874) LR

9 Ch App 249 at 251-252 of the two circumstances in which strangers can become liable to account in equity as a result of another’s breach of trust or breach of fiduciary obligation. The present cause of action is concerned with the liability of a person as a recipient of trust property (or property affected by fiduciary obligations) or its traceable proceeds. The other circumstance described by Lord Selbourne LC forms the basis of what is now known as dishonest assistance.

[164] There is a considerable divergence of authority as to the requisite conditions for when a stranger will become liable in equity, most of which, in recent times, has been focused on the second limb of Barnes v Addy (dishonest assistance). A comprehensive account of this divergence of views is given by Chambers J in his article, Dishonest Assistance (2011) 17 NZBLQ 18. The divergence arises over the concept of dishonesty and the type of knowledge that is required to establish a defendant has dishonestly assisted. Regrettably, there are similar tensions and controversies regarding knowing receipt. These relate to the jurisdictional basis of the cause of action and the need for knowledge, as well as its scope.

[165] Recent statements in English cases show that some see the basis of the cause of action as being restitutionary (with strict liability), rather than in personam (with a requirement for knowledge). In Royal Brunei Airlines v Tan [1995] 2 AC 378, Lord Nicholls at 386 observed that different considerations apply to knowing receipt and dishonest assistance with recipient liability being restitution based, whereas dishonest assistance (otherwise known as accessory liability) was not. In Twinsectra v Yardley [2002] UKHL 12, [2002] 2 AC 164, which was a case of dishonest assistance, Lord Millett at [105] distinguished knowing receipt from dishonest assistance by observing that recipient liability does not depend on fault because it is a restitutionary cause. His Lordship expressed the view that with knowing receipt, there is no need to show the recipient had knowledge of the breach of trust, let alone dishonesty.

[166] In Equiticorp Industries Group Ltd (in stat man) v The Crown (No 47) [1998]

2 NZLR 481 at 638, Smellie J discussed the emerging tensions between the approach favoured by some in England who saw knowing receipt as a restitution based cause of action involving strict liability, with the defences a bona fide purchaser for value without notice and change of position, as opposed to those who saw the cause of action as fault-based, and rejected reliance on restitution.

[167] In Powell v Thompson [1991] 1 NZLR 597, Thomas J was prepared to embrace in part the restitutionary based approach to knowing receipt, but in Equiticorp Industries Group Ltd v Hawkins [1991] 3 NZLR 700 at 728, Wylie J expressed his disapproval of any departure from fault-based liability to strict liability.

[168] The High Court of Australia in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 at [130]- [158] expressed its disapproval of a restitutionary based approach that did not require knowledge on the part of the recipient.

[169] The difficulties created by the divergent opinions on the foundation and requisite elements of knowing receipt are exacerbated by the further divergence of opinion amongst those who favour a requirement for knowledge, on what constitutes “knowledge”. In England, some who favour a requirement for knowledge take the view that “knowledge” must be actual knowledge or a wilful failure to enquire: see

Eagle Trust Plc v SBC Securities Ltd [1993] 1 WLR 484 at 492. Andrew Butler in Equity and Trusts in New Zealand 2nd ed at [18.4] discusses the English view favouring a narrow definition of “knowledge” and postulates that the trend may be moving back to the broader position, as exemplified in Westpac Banking Corp v Savin [1985] 2 NZLR 41 where the Court of Appeal approved the five categories of knowledge in Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509, which included categories of constructive knowledge at (d) and (e):

(a) Actual knowledge;

(b) Knowledge which is obtainable but for shutting one’s eyes to the

obvious;

(c) Knowledge which is obtainable but for wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make;

(d) Knowledge of circumstances which would indicate the facts to an honest and reasonable person; and

(e) Knowledge obtainable from inquiries which an honest and reasonable person would feel obliged to make, being put on inquiry as a result of his or her knowledge of suspicious circumstances.

[170] In New Zealand, whilst there has been discussion regarding the necessity for knowledge with some favouring strict liability (for example, Thomas J in Powell v Thompson), the position still seems to be that expressed in Westpac Banking Corp v Savin, which requires knowledge of the breach of trust but in terms where constructive notice will suffice. This was recognised by Wylie J in Equiticorp v Hawkins at 728. The position remains the same today, despite the fact that in Westpac New Zealand Ltd v Map & Associates Ltd [2011] NZSC 89, [2011] 3 NZLR

751 at [27], the Supreme Court preferred a narrower view of knowledge (actual or wilful blindness) than was applied in Westpac Banking Corp v Savin. However, this was decided in the context of dishonest assistance. Courts have always been less ready to rely on constructive knowledge to establish this cause of action. Unlike knowing receipt, dishonest assistance is clearly fault-based; it applies to persons who are seen to have assisted with a breach of trust or fiduciary obligation, but who have not themselves come into contact with, or benefited from, the affected trust property. Nonetheless, the defendants to this cause of action can be personally liable for a

range of equitable remedies, including equitable compensation. It is understandable, therefore, that a stricter test for knowledge would be applied to them. There is nothing in the Supreme Court’s judgment that would cause me to think that their Honours’ view of the type of “knowledge” required for dishonest assistance should influence what is required to establish knowledge in a case of knowing receipt. So I propose to be guided by the approach taken in Westpac Banking Corp v Savin.

[171] As already discussed, in Westpac Banking Corp v Savin, the Court of Appeal at 52 approved of the five categories of knowledge expressed in Baden, including categories (d) and (e) of constructive knowledge.

[172] At [147]-[158] of this judgment, I have set out my findings, and reasons for them, on Ms Crawford’s knowledge regarding the sale of unit 6 to herself. Those findings place Ms Crawford in (d) and (e) of the categories of knowledge in Baden. Thus, I am satisfied that Pounamu has established its claim in knowing receipt against Ms Crawford.

Alternative views on liability

[173] Given the unsettled state of knowing receipt, I consider that it is worthwhile to express alternative views on why Ms Crawford is liable to account to Pounamu. At [157]-[159], I found that Ms Crawford had always understood that she was not solely responsible for the purchase of unit 6. The $325,000 which she advanced is just over half the true value of unit 6. On her understanding of matters, there is room for equity to find that she holds part of the beneficial ownership of unit 6 in trust for another. Here equity can do so in more than one way.

[174] In Westpac Banking Corp v Savin at 63-64, Sir Clifford Richmond referred with approval to a passage from Snell’s Principles of Equity (27th ed, 1973) at 186-

187:

1. Knowing receipt or dealing.

A person receiving property which is subject to a trust may receive it as an express trustee, a constructive trustee, a volunteer, or a bona fide purchaser for value without notice of the trust. He receives it as

an express trustee where he has agreed to accept this office. He becomes a constructive trustee if he falls within either of two heads, namely –

(i) that he received trust property with actual or constructive notice that it was trust property and that the transfer to him was a breach of trust; or

(ii) that although he received it without notice of the trust, he was not a bona fide purchaser for value without notice of the trust, and yet, after he had subsequently acquired notice of the trust, he dealt with the property in a manner inconsistent with the trust.

Under 1(ii) of this formulation of the relevant equitable principles, a person who receives trust property without notice of the trust, but who is not a bona fide purchaser for value, may be liable if on learning of the trust, he or she then deals with it in a manner inconsistent with the trust.

[175] Thus, where volunteers are concerned, equity has never required knowledge at the time the subject property is received; all that is necessary is that on later receipt of the requisite knowledge, the legal owner of the property refuses to recognise the equitable interest of the wronged beneficiary: see Karak Rubber Co Ltd v Burden (No 2) [1972] 1 WLR 602 at 632-633.

[176] This aspect of the equitable principle relating to knowing receipt is similar to the principles applied in equitable tracing to volunteers who receive trust property without notice that they have done so as a result of a breach of trust. In such cases, it is a principle of equitable tracing that a volunteer who derives title otherwise than for value can be in no better position than the wrongdoer, notwithstanding innocence of any wrongdoing: see Foskett v McKeown [2001] 1 AC 102 at 103 (HL(E)).

[177] When these principles are applied to Ms Crawford’s position, the following becomes clear. She has relied on Mr Brons to provide almost half the consideration to acquire unit 6. His contribution to the consideration has failed. If that failure is seen as rendering Ms Crawford a volunteer as regards part of her interest in unit 6, the next question is whether by her conduct she has demonstrated a willingness on her part to deal with unit 6 in a manner that is inconsistent with recognising Pounamu’s interest in the property. I consider that her stance in this proceeding is

inimical to recognising that Pounamu has not received fair value for its property as a

result of Mr Brons’ breach of fiduciary obligations. It follows that under principle

1(ii) of Snell’s Principles of Equity, Ms Crawford could be said to hold a beneficial half interest in unit 6 on a constructive trust for Pounamu.

[178] There is a further way of viewing Ms Crawford’s position that supports her being liable to Pounamu as regards a part share of unit 6. When one party becomes the legal owner of property as a result of another providing part of the purchase money, a resulting trust can arise by operation of law. It is presumed that the legal owner holds a part of the property which represents the use of the other party’s money on a resulting trust for the benefit of that party. The concept of a resulting trust arising in this way can be rebutted by the presumption of advancement, which displaces the presumption of a resulting trust. The position is well explained in Tinsley v Milligan [1994] 1 AC 340 by Lord Browne-Wilkinson:

If (the plaintiff) proves that property is vested in the defendant alone but the plaintiff provided part of the purchase money ... the plaintiff establishes his claim under a resulting trust unless either the contrary presumption of advancement displaces the presumption of resulting trust or the defendant leads evidence to rebut the presumption of resulting trust. Therefore, in cases where the presumption of advancement does not apply, the plaintiff can establish his equitable interest in the property ...

Lord Browne-Wilkinson affirmed this view in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] UKHL 12; [1996] AC 669 (HL) at 708. And these principles were recently applied by the Court of Appeal in Crampton-Smith v Crampton-Smith [2011] NZCA 308, [2012] 1 NZLR 5. Earlier in Lankow v Rose [1995] 1 NZLR 277 at 294, Tipping J described how a resulting trust arises in this way:

A resulting trust arises when properties owned at law by one person and another person has provided all or some of the consideration for its acquisition ... The reason why the person with the legal title is required to yield a beneficial interest to the claimant is that equity will not allow the owner of the legal estate to deny the claim a benefit interest. In equity the conscience of the legal owner is required to acknowledge the other party’s beneficial interest in the property. A refusal to do so is regarded as unconscionable conduct on the part of the legal owner justifying the intervention of equity.

[179] The Property (Relationships) Act 1976 has removed the presumption of resulting trust and the presumption of advancement as between husband and wife, civil union partners and de facto partners: see s 4 of that Act. But the Property (Relationships) Act does not displace these presumptions when it comes to third parties who might seek to rely on the presumptions in equitable actions in order to recover their property from persons who have placed the property otherwise beyond reach through vesting its legal ownership in their spouse, civil union partner or de facto partner.

[180] In the present case, it seems to me to matter not whether there is a presumption of a resulting trust or a presumption of advancement. On the facts as argued by the defendants, from the perspective of Pounamu, Ms Crawford can be seen either to hold part of unit 6 on a resulting trust for the benefit of Mr Brons, or it can be said that he has gifted to her (under the presumption of advancement) the interest in unit 6 that he would otherwise have been said to have acquired under a resulting trust.

[181] Insofar as it can be said that Ms Crawford holds part of unit 6 on a resulting trust for Mr Brons, Pounamu could in turn claim that this beneficial interest is something that it can recover by way of imposing a constructive trust (based on Mr Brons’ breach of fiduciary duty) on his beneficial interest in the resulting trust that Ms Crawford holds for him. Alternatively, if the presumption of advancement is seen to apply, it can be said that Mr Brons had nothing to give (due to his breach of fiduciary duty) and that as a volunteer recipient of part of unit 6, Ms Crawford cannot resist Pounamu’s entitlement to recover its property to that extent. Thus, when looked at either way, Ms Crawford would hold a part of unit 6 on a constructive trust for the benefit of Pounamu.

[182] Another approach is to view a resulting trust arising for the benefit of Pounamu. This approach also reflects the reality of the situation where Ms Crawford has paid half the consideration, thinking that her husband is providing the other half. In fact, Pounamu might be said to have sold her the legal title to the house for half the price. In such a case, a presumption might arise that Pounamu did not intend to advance the other half of the beneficial interest for free, strengthened by the fact that

unit 6 was sold to her in breach of fiduciary duty. So on this analysis, the company would still have part of the equitable interest in unit 6.

[183] This situation is slightly different from a purchase money resulting trust. Pounamu did not advance purchase money to buy unit 6 and then transfer title solely to Ms Crawford. Instead, Pounamu already had title and transferred that title to Ms Crawford for half of the consideration that it was actually worth. The issue then becomes whether a resulting trust can still arise where:

(a) The transferee has provided some, but not all, of the consideration for a transfer; and

(b) The company did not provide the purchase money for the property, but provided the property itself.

[184] According to Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009), this situation is similar to a purchase money resulting trust. The author states at [12.3.3]:

If A already owns the property and transfers it to B, or transfers part of it to B, the position is the same as if A had purchased the property in the name of B. B holds the property by way of resulting trust for A, the transferor.

[185] The author gives the example of Re Vinogradoff [1935] WN 68, where a woman transferred her own assets into the joint names of herself and her granddaughter. The Court held that the presumption of advancement did not apply, so the granddaughter held the assets subject to a resulting trust. The author also refers to Re Muller [1953] NZLR 879, where a testator had deposited money with a company for investment, opening two accounts in the names of a niece and a nephew with his money. As there was no evidence of any intention to benefit the children, the Judge held that the presumption of resulting trust in favour of the deceased stood. More recently, Associate Judge Doogue held in British Mercantile and Loan Trust Company Ltd v George Street Investments Ltd HC Auckland CIV-2006-404-3922,

21 August 2006 at [27] that:

I agree that it is arguable that there was a contribution to the extent that the registered proprietor of the property, Trump Towers, transferred it to Bella

Vista without requiring the payment of the full price. If such a contribution is able to be proved at trial, the presumption would arise and in the absence of other evidence there would be a reasonably arguable case for a resulting trust.

[186] I consider, therefore, that there is New Zealand authority to suggest that where Pounamu already owned the property and transferred it to Ms Crawford for less than full price, a presumption of resulting trust could arise such that she holds part of the beneficial interest on trust for Pounamu.

[187] The presumption of resulting trust is only a presumption. If there is clear evidence that contradicts the transferor’s intention to have the property held on resulting trust, then a resulting trust does not arise. Normally, such evidence will show that the transfer was intended to be a gift or a loan, or that adequate consideration has been provided, or that the presumption of advancement applies.

[188] Nothing on the facts suggests that the advance of the other half of the beneficial interest was intended to be a gift or a loan to Ms Crawford. As Pounamu and Ms Crawford do not have the relationship required for the presumption of advancement, that does not apply either.

[189] The question remaining is whether the fact that there was a sale and purchase agreement of the property shows a contrary intention to imposing a resulting trust. This depends on an objective interpretation of the circumstances as to whether there was implicit agreement that the property was worth more than what Ms Crawford had paid. Despite the sale and purchase agreement providing for the sale at

$325,000, in this case both defendants contend that the consideration paid for unit 6 was more than that. They both accept that $325,000 was a payment at undervalue. Neither of them has suggested that the contribution Mr Brons was to make to the purchase price was by way of a loan to Ms Crawford. Indeed, the scenario they have described could not support that outcome. It follows that here there is nothing that could displace a presumption of a resulting trust.

[190] I have gone over the various alternative ways in which the circumstances that have occurred with the sale of unit 6 can result in Ms Crawford holding part of that property on trust for Pounamu. I consider that what lies at the heart of all the

approaches I have considered is the fundamental tenet of equity that equity intervenes to prevent those with rights at law from enforcing their rights when in the eyes of equity it would be unconscionable for them to do so: see Lankow v Rose at

294 and Fortex Group v Macintosh [1998] 3 NZLR 171. A more recent example where a court in this country has recognised unconscionability as a ground for imposing a constructive trust is Commonwealth Reserves v Chodar [2001] 2 NZLR

374 (HC). A similar approach has been followed in England. In Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 at 455, Nourse LJ in a case of knowing receipt adopted a test of unconscionability to determine if a defendant had the necessary knowledge:

All that is necessary is that the recipient’s state of knowledge should be such

as to make it unconscionable for him to retain the benefit of the receipt.

[191] I consider that in the circumstances of this case, where Ms Crawford knows full well that she has not paid the full value for unit 6 and where she accepts she relied on someone else to be making up the difference, the failure of that reliance makes it unconscionable for her to deny Pounamu’s entitlement to claim a beneficial interest in part of unit 6.

[192] The evidence shows that this is not a case where Pounamu was unlawfully deprived of an asset it did not want to sell. Pounamu was prepared to sell unit 6 for a price within the range of the Middleton valuation of $615,000. In such circumstances, it cannot recover all the beneficial interest in unit 6. An exercise needs to be undertaken to determine the appropriate proportionate share that Pounamu can claim to be held on a constructive trust for its benefit.

[193] As was recognised in Commonwealth Reserves v Chodar at [37], a constructive trust is a means to an end and in this regard it is “simply a mechanism to enforce personal accountability with proprietory consequences” so that in this way a constructive trust forces the “disgorging of money or property by the constructive trustee”.

[194] For completeness, I add that I see no problem in principle with finding that

Ms Crawford holds part of unit 6 on a constructive trust for Pounamu. No issue

regarding indefeasibility of title of registered land arises. In Frazer v Walker [1967] NZLR 1069 (PC) at 1078–1079, Lord Wilberforce made it clear that indefeasibility does not bring an end to in personam claims at law or in equity. This has been affirmed in Regal Castings Ltd v Lightbody [2009] 2 NZLR 433 at [155]-[156], where the Supreme Court held that despite the Torrens system:

[T]he in personam jurisdiction exemplifies the role which equity has always performed of preventing people from relying on their rights if it would be unconscionable for them to do so ... provided that equitable intervention would not undermine the statutory purposes of the Act.

Sale of units 2 to 5 and other management issues

Third cause of action

[195] In the third cause of action, Pounamu claims that units 2 to 5 (the townhouses) were also sold at undervalue by Mr Brons in breach of fiduciary obligations that he owed to Pounamu. The townhouses were sold to Evelyn Stutz and Hugh Savage. The former wives of Mr Savage and Mr Brons were sisters. Whilst Mr Brons and Mr Savage knew each other, there is nothing about their relationship that would cause me to conclude that Mr Savage was a close associate of Mr Brons. Nor is there anything to suggest that Mr Brons went out of his way to prefer Mr Savage’s interests over those of Pounamu. Unlike the sale of unit 6, the sales of the townhouses carried no direct or indirect benefit for Mr Brons.

[196] There is no doubt that the sales of the townhouses to Ms Stutz and Mr Savage have unusual features that worked to the detriment of Pounamu, but that on its own is not enough to found a basis for finding those sales were another occasion of Mr Brons acting in a self-dealing and disloyal way. All that they demonstrate is ineptitude on Mr Brons’ part when it came to marketing and selling the townhouses. The fiduciary obligations that Mr Brons owed to Pounamu do not extend to avoiding the negligent discharge of duties as manager of the company. A fiduciary’s duty to take reasonable care is not specifically a fiduciary duty: see Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 (CA) citing Bristol and West Building Society v Mothew [1996] All ER 698 at 710 per Millett LJ; and see discussion at [29]-[30] herein.

[197] I find, therefore, that the claim for breach of fiduciary obligations regarding the sales of the townhouses must fail. It follows that as regards the third cause of action, Pounamu cannot prove liability against Mr Brons. Unless Pounamu can establish that Mr Brons owed it some other actionable duty, its claim in relation to the sales of the townhouses must fail.

Fourth cause of action

[198] Pounamu’s fourth cause of action alleges actionable negligence on the part of Mr Brons for the role he played in the sales of the townhouses. Pounamu also contends that Mr Brons’ negligent mismanagement of its affairs led to it incurring tax liabilities to Inland Revenue.

[199] Mr Brons contends that he has breached no actionable common law duties to Pounamu. He has sought to characterise himself as a gratuitous agent. He argues that such agents cannot owe actionable duties of care in contract and that any duties of care that they might owe are founded in tort. As for the standard of care, he argues that there is a difference in quality as between the standard of care that an agent for reward owes and that which a gratuitous agent owes. The former is said to be expected to meet the standard as “is reasonably necessary for the due performance of the undertaking”, whereas with a gratuitous agent, Mr Brons, relying on a passage in Halsbury’s Laws of England, argues:

Where an agent acts without reward he is only bound to use such skill as he has, except where he has represented himself as possessing skill, in which case the amount of skill requisite is such as may reasonably be expected under the circumstances. The care and diligence required are such as persons ordinarily use in their own affairs.

[200] The leading New Zealand authority on the duties and standard of care to be applied to a gratuitous agent is Nicholls v Peers (1993) 4 NZBLC 103,313. The Court of Appeal unanimously approached the issue on the basis that where there is no contract to define an agent’s duties, a negligent agent will be liable in tort. The imposition of a duty of care in negligence on such an agent is to be determined by the usual principles that are applied in New Zealand when determining if a duty of care would arise in a particular circumstances:

... the liability of a negligent sub-agent will be determined in accordance with normal principle, as to which reference may be made to South Pacific Manufacturing Company Ltd v New Zealand Security Consultants & Investigations Ltd; Mortenson v Laing ... [1992] 2 NZLR 282.

Although he referred to a gratuitous sub-agent, Hardie Boys J had earlier made it clear that his reasoning would apply to all gratuitous agents.

[201] Regarding the standard of care to be applied to such agents, the Court of Appeal in Nicholls v Peers adopted the approach taken by Stuart-Smith LJ in Chaudry v Prabhakar [1988] 3 All ER 718 at 721, which found that the standard of care for an agent’s tortious liability is “that which is reasonably to be expected in all the circumstances”.

[202] In the fourth cause of action, Pounamu pleads the existence of duties of care, but is more or less silent as to their legal foundation. The only reference to the duties’ foundation is in [28] of the second amended statement of claim, where Pounamu pleads that Mr Brons was in breach of “contract” insofar as he failed to exercise all due care, skill and diligence in performing his duties. However, Pounamu does not plead how the “contract” arose. Moreover, as Pounamu denies Mr Brons was entitled to any payment for his services to Pounamu, it is difficult to see what basis there might be for asserting a contract.

[203] I consider that the reference to a “contract” is an error and that the better view is to approach the claim as one based in tort. Pounamu has taken this approach in its closing submissions where it has referred to its reply to Mr Brons’ statement of defence, in which Pounamu denied “the application of s 4 of the Limitation Act in equity by analogy to the fourth cause of action on the ground that such cause of action is a claim in tort and not in equity” (emphasis added). I consider that given Pounamu’s closing submissions and the reply to the statement of defence, there can be no doubt as between the parties that the alleged negligence in the fourth cause of action is based in tort. The more specific reference to tort in Pounamu’s reply and its closing submissions describes the basis on which it relies for establishing the actionable duties of care it asserts Mr Brons owed it. The reference to “contract” in the second amended statement of claim is clearly an error.

[204] Pounamu’s fourth cause of action claims in negligence against Mr Brons under three heads. The first complaint is that the sales of all units were conducted in a negligent way. The second complaint is Mr Brons’ negligent provision of tax returns and payments to Inland Revenue. The third complaint is about the negligent way in which Mr Brons made advances to the purchasers of the townhouses, as well as reducing the purchase price of the townhouses. In its closing submissions, Pounamu advised the Court that it no longer advanced a claim based on the negligent reduction of the prices for the townhouses as any “such loss is necessarily incorporated into the loss claimed in relation to the sale of units 2 to 5 at an undervalue”.

Sales of units 2 to 6

[205] I see no need to determine if Mr Brons acted negligently and is liable in tort for the loss that Pounamu has suffered from the sale of unit 6. I have already found that Mr Brons is liable in equity for his actions over the sale of unit 6 to Ms Crawford.

[206] The sale and purchase agreements for the townhouses were first executed and then varied between 5 March 2002 and 30 June 2002. Settlement of the sales of units 2 and 3 occurred on 21 August 2002 and settlement of units 4 and 5 occurred on 23 September 2002, at which time Evelyn Stutz was the nominated purchaser under the sale and purchase agreements. These dates are important because the proceedings were commenced on 28 July 2008. Thus, the sale and purchase agreements and the variations thereto fall outside the limitation period in s 4 of the Limitation Act. Mr Brons has pleaded this as an affirmative defence. Pounamu denies that any of the matters pleaded in the fourth cause of action are statute-barred by s 4.

[207] Insofar as it could be said that Mr Brons was negligent when it came to the sales of the townhouses, the question for the purpose of s 4 is when any cause of action in the tort of negligence would have accrued: when Pounamu contractually bound itself to sell the townhouses to Mr Savage and Ms Stutz, or when the

settlement of those sales occurred. If it is the former, the claim in this regard would be out of time, but if it is the latter, the claim is within time.

[208] In Davys Burton v Thom [2008] NZSC 65, [2009] 1 NZLR 437 at [38], the

Chief Justice identified when a cause of action in negligence will accrue:

A cause of action in negligence does not exist until there is, first, an act or omission of the defendant which breaches a duty of care owed by the defendant to the plaintiff and, secondly, loss or injury by that act or omission suffered by the plaintiff.

[209] Once Pounamu entered into sale and purchase agreements to sell the townhouses, I consider that Pounamu had bound itself to sell them on the agreed terms. If the terms of the sales were negligently mishandled by Mr Brons, all the elements of that negligence would have been present once the agreements were concluded. The later variations, if also the result of negligence by Mr Brons, would have opened the agreements up to claims that ran from the time the variations were agreed. But those variations also occurred outside the six year time limit in s 4.

[210] The sales of the townhouses were not settled until after 28 July 2002, which falls outside the six year limitation period. Mr Savage and Ms Stutz had difficulty meeting the settlement by the due date and the settlement date was extended more than once. This was done by Mr Brons on behalf of Pounamu. In correspondence to Inland Revenue, and in a memorandum to another law practitioner, Mathew Ward- Johnson (which was apparently prepared for the purpose of instructing Mr Ward- Johnson to recover money owing by Ms Stutz), Mr Willacy described the settlements of the four townhouses as having not gone:

... smoothly. The settlements were a protracted affair spread out over six months. Numerous extensions were given to the purchaser to allow them an opportunity to settle.

[211] The need for the settlement extensions meant that on each occasion settlement was postponed, Pounamu had an opportunity to refuse to extend time and, therefore, to implement the necessary steps to end the sale. I have given thought to whether it might be possible to claim that to the extent that any request to defer settlement was made after 28 July 2002, Mr Brons acted negligently by choosing to

allow the sales to continue rather than to cancel them. Insofar as Pounamu had available rights of cancellation, after 28 July 2002 the decision not to exercise them in the circumstances may have been negligent as it bound Pounamu to a bad bargain with persons who had already by then demonstrated that they could not be relied upon to discharge their legal obligations to Pounamu. However, the claim for negligence was not advanced in this way, either on the pleadings or in evidence. Thus, Mr Brons has not been put on notice of a negligence claim brought on this basis. I consider, therefore, that it is not open to me to look at the negligence claims relating to the sales of the townhouses in this way, and accordingly I put it to the side.

[212] It follows that I am satisfied that any claim based on Mr Brons’ negligent mishandling of the sales of the townhouses is time-barred by s 4. I do not, therefore, propose to consider those claims any further.

Mismanagement of tax affairs

[213] The next complaint of negligence relates to Mr Brons’ management of Pounamu’s tax affairs. The allegedly negligent actions and omissions relate to Mr Brons’ preparation and furnishing of various tax returns. Because Mr Brons contends that they are time-barred by s 4 of the Limitation Act, it is necessary first to consider when the alleged negligence occurred. The first is in relation to a payment of income tax by Pounamu for the financial year ended 31 March 2003. This is said to have caused Pounamu to incur the imposition of a shortfall penalty amounting to

$12,143.48. Regarding the application of s 4, I consider that any negligent action or omission that may have occurred would have been completed at the time the return for the financial year ended 31 March 2003 was prepared and furnished. Since this could not have been completed until some time after 31 March 2003, I consider this claim to be within s 4.

[214] The next claim is for alleged negligence by Mr Brons in the preparation and furnishing of GST returns on behalf of Pounamu for the period between 31 May

1999 and 30 September 2002. The total liability that Pounamu incurred for defects in returns furnished over this period comes to $4,666.50. However, under the

legislation for GST, returns are furnished on either a two month or a six month basis. The return for the period 30 September 2002 would have covered either a two month or a six month period. The other liability would relate to returns that were furnished before this return. Pounamu has not identified what portion of the $4,666.50 relates to the return for the period ending 30 September 2002 and what portion of this sum is for the earlier returns, which are outside the six year time limit imposed by s 4. Without this information, it is not possible to tease out the portion of the $4,666.50 that might be recoverable from the portion that is time-barred. As matters stand, Pounamu has failed to identify the degree to which it can recover some of the

$4,666.50 and, therefore, this claim must fail for want of proof.

[215] Regarding the sale of unit 6 to Ms Crawford, Inland Revenue later re- assessed that sale as being at an undervalue to Ms Crawford, which resulted in penalties and interests on the adjusted GST payable by Pounamu on that sale. The late penalties came to $1,623.99, and interest in late paid tax came to $13,922.04, being a total of $15,546.03. I have found that the sale of unit 6 occurred in August

2002, which brought it within the limitation period. The GST return was for the period ended 31 August 2002, which is also within the limitation period. Accordingly, I consider this claim to be within s 4.

[216] The next claim relates to the negligent preparing and furnishing of a GST return for the period ended 30 September 2002. This negligence is alleged to arise from Mr Brons over-claiming for expenditure and omitting to make payment on the due date in relation to the assessed liability for GST in respect of the sale of the townhouses. It is contended that as a result, Pounamu incurred a shortfall penalty charge of $237.77, late penalty payments of $774.52 and interest on late paid tax of

$11,611.62, being a total of $12,623.91. I am satisfied that any negligence relating to the preparation and furnishing of the subject GST return occurred after 28 July

2002 and, accordingly, falls within s 4.

Advances to Savage and Stutz

[217] The third category of complaint relates to the actions of Mr Brons in agreeing on behalf of Pounamu to make advances to Mr Savage and Ms Stutz to enable the

purchases of the townhouses to proceed. These advances were unusual. The present concern is to determine if they, or any one of them, may be time-barred by s 4. A number of these advances totalling $56,000 were made to Mr Savage and Ms Stutz before 28 July 2002. I consider that irrespective of any negligence on the part of Mr Brons that may attach to those advances, they are now time-barred by s 4. The remaining advances were made within the six year time limit.

Did Mr Brons owe a duty of care?

[218] The existence of a duty of care in tort is determined by a staged test. First, there is an enquiry into the proximity between the parties and secondly, an enquiry into the policy concerns that might flow from the imposition of a duty of care. From these enquiries, the Court then asks whether, in the light of all the circumstances, it is just and reasonable that a duty of care be imposed: see Rolls Royce (NZ) Ltd v Carter Holt Harvey Ltd [2005] 1 NZLR 324 (CA).

[219] The enquiry into proximity involves assessing whether or not the parties were situated so as to be close to each other, such that the defendant’s act or omission closely and directly affects the plaintiff. Tests regarding the foreseeability of harm to the defendant and concepts of being “neighbours” have often been applied. The enquiry includes looking at the physical, circumstantial and causal connection between the parties.

[220] In the present case, Mr Brons was the sole person in New Zealand who was responsible for managing Pounamu’s affairs. The company could not have operated without his assistance. I consider that in these circumstances, there was the requisite degree of proximity between Pounamu and Mr Brons. At all times, it would have been reasonably foreseeable to Mr Brons that the management steps he took as Pounamu’s agent would affect Pounamu.

[221] Regarding the second enquiry into policy concerns, I see no difficulty with imposing a duty of care on someone in Mr Brons’ position. Tortious duties of care have commonly been applied to gratuitous agents: see the discussion in Reynolds and Bowstead on Agency at [6-025] to [6-031].

[222] Mr Brons has asserted that he had no specialist knowledge when it came to managing Pounamu’s tax affairs. He accepted that Mr Egan had wanted Pounamu to employ an accountant but said he could not do so because Pounamu had no funds to pay an accountant. Whatever may be the circumstances regarding employment of an accountant, I consider that Mr Brons was under a duty to recognise the limitations of his abilities and to act only when he could do so competently, and to advise Pounamu when he lacked the requisite competency. At [6-026], Bowstead and Reynolds on Agency states that whilst a gratuitous agent cannot be liable for failure to do what he undertook to do without consideration, he will certainly be liable in tort for negligently failing to complete, or to complete with due care, work which he has undertaken and upon which he has embarked.

[223] If Mr Brons could not competently deal with the tax affairs of Pounamu, I consider he was under a duty to Pounamu to make that clear from the outset. I consider that by assuming the burden of preparing and furnishing tax returns on Pounamu’s behalf, he was undertaking to perform this task adequately. Pounamu could reasonably expect that if its manager was not up to preparing and furnishing its tax returns competently, he would recognise this, inform Pounamu accordingly and refrain from doing this work. Since Pounamu was obliged to meet its tax obligations, if Mr Brons had refused to assume the task, it is likely that some way of funding an accountant would have been found. Mr Egan’s view that Pounamu should engage an accountant suggests that he would have acted to ensure an accountant could be paid if Mr Brons had made clear his limitations.

[224] Furthermore, the law of agency recognises, even with a gratuitous agent, that an agent has no authority to act illegally and that the agent may be liable to compensate the principal where the principal is not complicit in any illegality, but suffers loss as a result of the conduct: see Bowstead and Reynolds on Agency at [6-

003].

[225] The careless, incompetent actions of Mr Brons regarding the preparation and furnishing of Pounamu’s income and GST tax returns have caused Pounamu to fail to discharge its tax responsibilities and liabilities properly, and consequently it has incurred penalties under the relevant tax legislation. Thus, the negligence of

Mr Brons has caused Pounamu to suffer loss through the interest and penalties incurred. I am satisfied, therefore, that Pounamu is entitled to claim as damages for this loss the total sum of $40,333.42.

Advances to Savage and Stutz

[226] After 28 July 2002, Mr Brons, on behalf of Pounamu, made a number of unsecured advances, which were to the benefit of Mr Savage and Ms Stutz. Those persons operated under two trading names: Omagh Property Developments and Peak Financial Strategies. Whilst the second amended statement of claim refers to Peak Financial Strategy Limited, the communications that were made under that name omit any reference to limited liability, and Mr Savage gave evidence that Peak Financial Strategy was not registered under the Companies Act. The evidence shows that Mr Savage and Ms Stutz traded under either name. I have concluded, therefore, that the best approach is to view Mr Savage and Ms Stutz as the legal and beneficial recipients of advances made to either Omagh Property Developments or Peak Financial Strategy and accordingly, I shall refer to them only. The advances were as follows:

(a) On 19 August 2002, $10,000; (b) On 20 August 2002, $92,500; (c) On 26 August 2002, $40,000;

(d) On 20 September 2002, $105,000; and

(e) On 12 December 2002 $400.

[227] All the advances were unsecured, despite being for the purpose of assisting

Mr Savage and Ms Stutz to purchase the townhouses. The advance of $10,000 on

19 August 2002 was made to assist Mr Savage and Ms Stutz purchase units 2 and 3. The advance of $92,500 made on 20 August 2002 was another loan to Mr Savage and Ms Stutz to enable them to complete the purchase of units 2 and 3. The advance of $40,000 was to lend funds to Mr Savage and Ms Stutz for use as a deposit on the

purchase of units 4 and 5. In a letter to Mr Willacy, Mr Brons said that he had lent Mr Savage and Ms Stutz the $40,000 because they “did not have sufficient money to show in their bank account in order to secure their loan”. The advance of $105,000 was to lend funds to Mr Savage and Ms Stutz to enable them to complete the purchase of units 4 and 5.

[228] The parties do not appear to have addressed in evidence or in closing submissions the basis for the advance of $400 on 12 December 2002. I cannot, therefore, make findings on that advance.

[229] There are, therefore, four advances that require further scrutiny. The first is the advance of $92,500 to assist with the settlement of the sales of units 2 and 3. The loan was unsecured for a period of 12 months. It was not repayable before that date in the event of Mr Savage and Ms Stutz on-selling the units to third parties. The loan was purportedly made to Peak Financial Strategies Limited and was personally guaranteed by Mr Savage and Ms Stutz. As I have already stated, there was no such registered company. Mr Savage and Ms Stutz signed on behalf of Peak Financial Strategies and as guarantors. But they were in reality the only borrowers; thus, their guarantees added nothing in terms of security. The loan was at an interest rate of eight per cent per annum. The loan has never been repaid, nor is it likely to be repaid.

[230] The same happened in the case of the loan of $105,000 to assist with the settlements of the sales of units 4 and 5. Only, in this instance, a loan agreement was prepared but not executed by Mr Savage and Ms Stutz.

[231] The loans of $10,000 and $20,000 to provide Mr Savage and Ms Stutz with funds for the deposits for the sales of the townhouse were not documents.

[232] For a vendor of townhouses to provide loans like this to purchasers is extraordinary. First, the fact the purchasers needed so much assistance says much about their general creditworthiness. In such circumstances, if a reasonable vendor were to persist with selling to such purchasers, it could be expected to require firm security to protect itself from potential default. Purchasers like Mr Savage and

Ms Stutz were the very type of persons to whom lending large sums of money unsecured was risky. Secondly, a reasonable vendor would not make such advances and instead, let events take their natural course. If that meant that the purchasers could not settle by the due date, a reasonable vendor would then have considered the prospect of exercising rights to cancel the sales and selling to others. Whilst Mr Brons has described circumstances where Pounamu was required to sell the townhouses, there is no evidence that he took advice regarding sales by auctioning the townhouses or sales by tender.

[233] The prices at which the townhouses sold to Mr Savage and Ms Stutz were approximately 80 per cent less than the valuations of the townhouses in the Middleton valuations, which were prepared in October 2001 and later confirmed by updated reports in early 2002. Thus, Pounamu was potentially selling the townhouses at a discount, which in principle amounted to a loss for Pounamu. Thus, the wisdom and reasonableness of doing something that carried a risk of further loss (non-payment of unsecured loans) needed to be assessed against other available options.

[234] There is no evidence that Mr Brons carefully investigated other available options before proceeding with the unsecured loans to Mr Savage and Ms Stutz. I consider that any reasonable vendor in Mr Brons’ position would have sought information from reliable sources on alternative sale options before proceeding as he did. Indeed, I find it difficult to conceive of any reasonable vendor in any circumstances proceeding on the basis of the sales in their ultimate form. In his evidence, Mr Egan described the terms of the loans as ludicrous, which is an apt description.

[235] The evidence shows that in March 2002 when Mr Egan approved the sales to Mr Savage and Ms Stutz, he was aware of the proposed sale prices, the valuations of the townhouses and that the sales would be achieved using some vendor finance. Mr Brons’ email to Mr Egan of 5 March 2002 refers to leaving in vendor finance of

$312,000 for 12 months. But the email does not say that the finance would be unsecured. When a director’s resolution to approve the sale was prepared and sent to Mr Egan for execution, it said nothing about vendor finance. I am satisfied that the

information given to Mr Egan was insufficient to inform him fully of the basis on which the townhouses were sold to Mr Savage and Ms Stutz. Accordingly, I do not think that his approval of these sales can be said to bind Pounamu in a way that would preclude it from now complaining that Mr Brons has negligently lent its money to Mr Savage and Ms Stutz.

[236] The provision of the unsecured loans to provide deposits to help Mr Savage and Ms Stutz raise finance from elsewhere is of the same character as the other loans. This is not the conduct to be expected of a reasonable vendor.

[237] I am satisfied that no reasonable person with the knowledge available to Mr Brons would have acted as he did when it came to the four advances to Mr Savage and Ms Stutz. I am also satisfied that Pounamu, through Mr Egan, was never fully informed of the true character of the loans. It follows that regarding all four loans, the conduct of Mr Brons falls short of the standard of care the law of negligence imposes on a gratuitous agent in his circumstances.

[238] The difficulties Mr Savage and Ms Stutz were experiencing in settling the purchases of the townhouses, which resulted in postponement of the settlements of the agreements, made the likelihood of them being unable to pay the unsecured loans reasonably foreseeable. The fact that Pounamu has not been paid and has no means of redress against the borrowers is entirely due to Mr Brons being prepared to lend to them on such an unreasonable basis. It follows that Pounamu is entitled to recover this loss in the form of damages from Mr Brons.

Remedies

[239] Pounamu has sought a raft of equitable remedies against both Mr Brons and

Ms Crawford, as well as common law damages against Mr Brons.

[240] For the reasons already stated, I have found that Ms Crawford is liable as a knowing recipient of unit 6. In principle, I consider that she can be treated as holding a share of unit 6 on a constructive trust for the benefit of Pounamu. However, I consider that the parties should have a further opportunity to address the

Court on whether this is an appropriate remedy and, if so, the appropriate quantum of that share, given the Middleton valuation of $615,000, which makes $290,000 the difference between $615,000 and the $325,000 that Ms Crawford paid towards the property. Any order that unit 6 is held in part on a constructive trust for Pounamu will need to ensure that the proportionate share that is subject to the trust is properly quantified. I leave that to the parties to address in further submissions on remedies.

[241] Pounamu may choose, instead of seeking a declaration of constructive trust, to argue for other equitable remedies in substitution of a trust, such remedies being an account of profits or equitable compensation.

[242] I have also found that Pounamu is entitled to recover damages from Mr Brons arising from its claims in negligence against him. The quantification of those damages and interest to be derived from that sum will be dealt with in a separate judgment, after the parties have had a further opportunity to address the Court on remedies, taking into account the findings made herein.

[243] There is also the question of the remedies to be obtained against Mr Brons for the first cause of action. What can be recovered against him will turn on the remedies that are granted against Ms Crawford.

[244] In the second amended statement of claim, one of the remedies sought against Mr Brons was an order for equitable compensation calculated on the basis of the difference between the value of unit 6 at the time of sale (being not less than

$615,000) and the sale price of $325,000, together with equitable interest thereon down to the date of judgment calculated at commercial rates on a compounding basis. I consider that if a constructive trust is not imposed on the part of Ms Crawford’s interest in unit 6, this would be an appropriate way to measure an award of equitable compensation as against either defendant. I leave open the issue of compound interest for further submission.

[245] Pounamu is entitled to equitable damages of $32,222.22, being the tax

liability it incurred as a result of Mr Brons’ sale at an undervalue to Ms Crawford.

The question of interest on this sum is left to be dealt with when quantifying the monetary remedies to which Pounamu is entitled.

[246] I leave the question of other equitable remedies against Mr Brons, and whether an alternative remedy to constructive trust should be applied to Ms Crawford until I have heard further from the parties. The findings on liability that I have made should better inform the parties as to the appropriate remedies for which they may contend.

Result

(i) Pounamu has proved the first cause of action against

Mr Brons.

It has failed to prove the third cause of action against

Mr Brons.

(ii) Pounamu has proved the second cause of action against

Ms Crawford.

(iii) Pounamu has proved part of the fourth cause of action against

Mr Brons.

(iv) Pounamu has established its entitlement to some of the remedies sought.

The balance of the remedies available to Pounamu are to be finally determined in a later judgment.

(v) Costs are reserved until delivery of the judgment on remedies.

Duffy J