Simpson v Jenks [2013] NZHC 3533 (20 December 2013)

Last Updated: 20 December 2013

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2013-409-549 [2013] NZHC 3533

IN THE MATTER OF the Corporations (Investigation and

Management) Act 1989

BETWEEN RICHARD GRANT SIMPSON, TREVOR FRANCIS THORNTON and GRAEME CARSON MCGLINN

Applicants

AND SUSAN JOYCE JENKS Respondent

Hearing: 2-3 December 2013

Additional submissions filed 11 December 2013

Counsel: F B Barton, G A Cooper and J W C Nicolle for applicants J V Ormsby, H D J Holderness and S M K Hoffman for respondent

Judgment: 20 December 2013

_{RESERVED JUDGMENT OF DOBSON J}

Contents

The nature of the originating application ....................................................................................... [1] The factual background .................................................................................................................... [6] The issues ......................................................................................................................................... [35] The evidence .................................................................................................................................... [39] Factual findings ............................................................................................................................... [44] The “investment vehicle” analysis ................................................................................................. [59] December 2009 transfer in breach of Mr Hubbard’s authority/breach of fiduciary duty? ...... [69] Breach of authority as agent ........................................................................................................ [74] Breach of fiduciary obligation...................................................................................................... [90]

Is ASL liable for Mr Hubbard’s breach of authority, directly or indirectly? ........................... [102] Would ASL also be liable for Mr Hubbard’s breach of fiduciary duty? ...................................[119] Unjust enrichment......................................................................................................................... [131] Summary ........................................................................................................................................ [150] Costs ............................................................................................................................................... [153]

SIMPSON v JENKS [2013] NZHC 3533 [20 December 2013]

The nature of the originating application

[1] This originating application was brought by the applicants in their capacity as the statutory managers of Aorangi Securities Limited (ASL), seeking orders that the respondent¹ (Mrs Jenks) and her deceased husband were not investors in ASL on the date of their appointment on 20 June 2010. The applicants also sought an order that their costs be paid out of the assets of ASL.

[2] The statutory managers have interpreted the accounting records of ASL as showing Mrs Jenks’ New Zealand investment being with Southbury Group Limited (SGL) at the date of their appointment on 20 June 2010. SGL was another company that, like ASL, was under the control of Mr Alan Hubbard of Timaru in the relevant period. The statutory managers have therefore resisted Mrs Jenks’ claims to be recognised as a creditor of ASL.

[3] The statutory management of ASL has progressed to the point where some distributions to recognised creditors have occurred, but sufficient funds are still under the statutory managers’ control to make any appropriate payment if Mrs Jenks is recognised as a creditor. In very approximate terms, the recognised depositors amount to some $95 million, and Mrs Jenks’ investment under Mr Hubbard’s control at the date of appointment of the statutory managers was some $5.82 million. Accordingly, the impact would be to reduce the proportionate entitlement of other creditors by approximately five or six per cent.

[4] The statutory managers are appointed, and operate, under the provisions in Part III of the Corporations (Investigation and Management) Act 1979 (the Act). The originating application was made in reliance on s 58 of the Act, which provides for a statutory manager to apply to the Court for directions concerning, inter alia, the property of a company in statutory management and how they ought to exercise powers under the Act. The application was also made in reliance on s 42 of the Act which creates a statutory moratorium, preventing any claimant commencing or

_{continuing proceedings against a company once it is in statutory management.}

¹ Mrs Jenks is described in the intituling of the originating application as the “first respondent”.

No reference is made to any second or subsequent respondents.

[5] Effectively, the statutory managers were seeking directions as to whether they were correct in excluding Mrs Jenks as a creditor of ASL, recognising that the statutory management of the company prevents her pursuing a claim against ASL.

The factual background

[6] Mr and Mrs Jenks, who have throughout been United States residents, were introduced to Mr Hubbard by a mutual connection in 1987. The Jenks had experience with property investment, and initially sought investment advice from Mr Hubbard in relation to property investment in New Zealand. In about 1990, Mr Hubbard presented them with the opportunity of buying a farming property near Methven in Canterbury. They took up his offer, and acquired 2,999 out of the 3,000 shares in Braeval Farms Limited (BFL), the company that acquired the relevant farm, and that had previously been owned and controlled by Mr Hubbard. Mr Hubbard remained the holder of the last share.

[7] From the outset of their relationship, Mr Hubbard volunteered a form of guarantee. A fax on 22 September 1987 included:

... although we do not have to, we are all prepared to personally guarantee the return of your funds safely ... I give you this information so you can sleep easy and know when I say you have our guarantee, that it is real.

[8] The communication was on the letterhead of Mr Hubbard’s accountancy

practice, then called Hubbard Churcher & Co (HCC).

[9] In 1998, the Jenks acquired a commercial building in Moorhouse Avenue,

Christchurch, that was purchased in BFL’s name.

[10] They also purchased a residential property in central Christchurch in their own names in 1989.

[11] All the investments proved to be successful. There were spasmodic contributions of additional capital for investment in New Zealand sent by the Jenks to Mr Hubbard, as well as irregular payments from the accumulated funds managed by Mr Hubbard for remittance to the Jenks in the United States.

[12] From January 2004, the Jenks signalled an intention to simplify their New Zealand investments. It appears a trigger for doing so was concerns over Mr Jenks’ health. Arrangements were already in train to sell the farm, and sales of the other properties occurred by mid 2005.

[13] The Jenks were influenced in the on-going nature and form of their New Zealand investments by concerns at the prospect of their liability for capital gains tax as United States taxpayers. For a period after sale of the farm, the substantial proceeds were directed to be held as shareholder funds in BFL.

[14] In early 2007, Mr Hubbard offered to buy all the Jenks’ shares in BFL on a basis that was backdated to 1 July 2006. I infer that the Jenks had by then decided to address whatever capital gains tax consequences would arise from a sale of that shareholding.

[15] For a period thereafter, Mr Hubbard managed the cash generated by their New Zealand property investments, as a part of the operation of the business operated within HCC.

[16] The pattern of communications between the Jenks and Mr Hubbard in this period involved the Jenks referring to their investments “with Hubbard Churcher”. Mr Hubbard’s reports, on HCC letterhead, did not specify where monies were invested, but rather identified an opening value, the income earned in the relevant reporting period, and the balance at the end of that period.

[17] In late July 2009, Mr Hubbard retired from the HCC partnership. That event caused him to re-arrange the manner in which he managed investments for a significant number of clients. For his part, Mr Jenks was grappling with terminal cancer and was concerned to ensure that their investments were in as tidy a form as possible, to facilitate easier administration by Mrs Jenks after his death.

[18] On 8 September 2009, the Jenks wrote to Mr Hubbard, acknowledging Mr Jenks’ deteriorating health. Because of the Jenks’ changing circumstances, they requested that Mr Hubbard write to Mrs Jenks to:

... clearly state the manner in which our funds are held with Hubbard & Churcher, and how our account will be handled in the event of your inability to take responsibility for the account yourself ... Susan will need clear instructions of how to access the funds as she needs to do so in the event you are unavailable.

The manner in which the account is set up (joint tenants with right of survivor) assures the ownership passes to Susan upon my demise. She will call you at this time to have the account placed in her sole name. She is to maintain sole control of these funds until her death, at which time the account assets will be transferred to our trust as described below.

[19] After a telephone discussion with Mrs Jenks on 26 October 2009, Mr Hubbard wrote to Mr and Mrs Jenks on 27 October 2009 (the October letter). That letter advised that he had retired from HCC, but that he was still working full time and would continue to look after “all the investment funds of our many clients

...”. The October letter identified an alternative person who would become responsible for handling matters on behalf of the Jenks should anything happen to Mr Hubbard. The letter also stated:

In respect of your funds, these are invested with Aorangi Securities Fund managed by our office. The Fund’s main investments are 1^st mortgages, mainly on farm properties, and we only lend to other clients of the office. We have no bad debts and I, myself, have $40 million invested in the Fund and I would lose this before any client suffered any loss, so you can also regard me as a guarantor of all your New Zealand funds.

[20] Mr Hubbard’s October letter included a statement of deposits and payments in the quarter between 30 June and 30 September 2009, showing a balance at the end of that period of $6,147,046.09. Mr Jenks died in November 2009.

[21] A handwritten journal for ASL maintained by Mr Hubbard included an entry as at 31 December 2009 transferring $5,594,642.90 held on behalf of the Jenks to SGL.

[22] On 15 February 2010, Mr Hubbard sent a report to Mrs Jenks, enclosing a statement for the six months to 31 December 2009. After allowing for monthly interest, and deduction of a remittance of some $696,000 to her in November, the

statement included a balance at 31 December 2009 of $5,594,642.90. There was no reference to where the funds were held, and nor was there any reference to the funds having been transferred out of ASL where Mr Hubbard had reported them being deposited in October 2009.

[23] The statutory managers were appointed on 20 June 2010. On 30 June 2010, Mr Hubbard purported to complete a journal entry to effect the re-transfer of Mrs Jenks’ funds from SGL to ASL. The statutory managers would not permit that to occur.

[24] The statutory managers have subsequently completed a reconstruction of the general ledger for ASL that tracks a transfer in of some $5.99 million in the Jenks’ account on 30 June 2009, credits interest earned and debits commission charged for the period through to 31 December 2009, at which point the ledger for the Jenks is reduced to a zero balance to reflect a transfer of the total deposit to SGL. The statutory managers have relied on that general ledger, among other accounting records, to recognise those clients with deposits at the date of the appointment of the statutory managers as creditors of ASL.

[25] On 8 October 2010, Mr Hubbard completed an eight page report to Mrs Jenks, providing his explanation for the appointment of the statutory managers, citing numerous criticisms of the steps leading up to their appointment and his view of inadequacies in their work since that time. Mr Hubbard referred to street marches in Timaru in his support, and expressed the view that “I am reasonably hopeful that I can be released from all these tribulations prior to Christmas”. The report included

the following:²

Now ... in regard to your deposit, I sent you a statement at 30^th June showing a balance of $5,821,441.05. These funds are on deposit with Aorangi Securities. As I indicated earlier Aorangi Securities is now under statutory management but because of the assets I have introduced into Aorangi Securities, which were done voluntarily by myself to have a capital base for the issue of the prospectus, Aorangi Securities is solvent and my equity is between $40 Million - $50 Million and subordinated to other depositors.

The Statutory Managers are based in Christchurch and have very little understanding of the current position and, apart from writing inaccurate

² At [25]–[26] and [30]–[31].

reports, they have done little to realise the assets of Aorangi Securities. However, following criticism by my lawyers, they (the statutory managers) have now sought my cooperation and I have worked out a programme for them which will see approximately 20% of Aorangi Securities portfolio realised by 31^st March next and a total of at least 50% realised by September

2011. I am also arranging a Bank loan for Aorangi Securities that would also enable a further payment to be realised by the end of the current year.

...

I very much regret what has happened but I hope you can see my point of view, that I am a victim of a conspiracy. I have never done anything wrong and have been faithful and careful with all my clients’ funds.

If, for any reason, you are in urgent need of funds, please let me know and I

will do my utmost to see that this request can be honoured.

[26] It was not entirely clear on the evidence, but I infer that by the time of Mr Hubbard’s report to Mrs Jenks in October 2010, he was aware that the statutory managers had refused to give effect to the journal entry he had purported to complete on 30 June 2010, to transfer Mrs Jenks’ deposit from SGL to ASL.

[27] In what appears to be an internal memorandum completed by Mr Hubbard in

March 2011 about Mrs Jenks’ investments, Mr Hubbard recorded:

Ray Jenks died last year³ and Mrs Jenks is the sole owner of the funds in question. These are invested in Aorangi Securities under her own name. I have written to Mrs Jenks and confirmed this and have assured her that, as I have a substantial equity in Aorangi Securities myself, she will ultimately get repaid when we are out of Statutory Management.

The funds in question were transferred into Aorangi Securities late in June when the books had not been posted up. The Statutory Managers would not allow me to post up the journal entries and, as the books for Aorangi Securities were only intermittently posted up, this was not done at the time.

[28] In an undated document that the statutory managers consider was prepared on about 30 June 2010, Mr Hubbard listed a schedule of mortgages and loans by ASL. He purported to break down the loans that had been made by ASL into first, second and “other” mortgages totalling some $167 million. That was matched by “clients’ deposits” of some $98.3 million, and a deposit from Mr and Mrs Hubbard of some

$68.7 million, to balance with the total of loans advanced of some $167 million.

[29] A further component of the same schedule set out a different breakdown of the liabilities comprising the $167 million. It was stated as follows:

With Jenks and [other US investors] deposits included

Clients’ Deposits 98,324,168 [Other US investor] 1,456,254 [Other US investor] 1,456,254

Raymond and Susan Joyce Jenks 5,821,441
Hubbard Managed Funds 3,832,018
Hubbard Managed Funds 5,000,000
--------------
115,890,135
AJ & MJ Hubbard 51,212,905
----------------
$167,103,040
----------------

[30] The difference between these two schedules was that the inclusion of the Jenks’ deposit, plus that of two other US investors, was offset by a corresponding reduction in the Hubbards’ own investments.

[31] The largest of the entities that had been under Mr Hubbard’s control was South Canterbury Finance Limited (SCF). As a retail deposit-taker, it had gained the advantage of the government’s Retail Deposit Guarantee Scheme, which had been instituted in response to the global financial crisis.⁴ SCF was placed in receivership by its secured lenders. SGL had granted a general security agreement in favour of SCF to secure substantial advances that SGL had from SCF. In November 2010, the receivers of SCF exercised the powers under that general security agreement to appoint receivers over SGL.

[32] The view the statutory managers took ignored the October letter as creating any constraint on transferring Mrs Jenks’ funds out of ASL. They treated the

31 December 2009 journal as effective, but that Mr Hubbard could not effect a transfer of Mrs Jenks’ deposit back from SGL to ASL on 30 June 2010. The consequence would be that Mrs Jenks would remain a depositor with SGL. The receivers (and later the liquidators) of SGL have subsequently reported that it is most unlikely that there would be any assets available to meet claims by unsecured

creditors which would include Mrs Jenks as a depositor with that company. The accounting records of SGL, as reconstructed by its receivers, treated Mrs Jenks’ deposit as a “shareholder loan”, but for the purposes of the present proceedings, it was common ground that that characterisation was incorrect as she was not a shareholder in SGL.

[33] Mr McGlinn, one of the statutory managers, gave evidence as to how the statutory managers had responded to Mr Hubbard’s view of the inclusion of Mrs Jenks’ investment in the deposits held by ASL. Mr McGlinn stated that the statutory managers were not prepared to recognise the full list of deposits as Mr Hubbard had listed them in the form set out in [29] above, because the statutory managers did not accept the validity of the value Mr Hubbard attributed to his own assets that the summary balance sheet treated as available to ASL. There had apparently been variations in the identity and values of assets Mr Hubbard was prepared to commit in this way, and Mr Hubbard had not effected transfer of legal ownership of any assets into ASL’s name. This led the statutory managers to reject Mr Hubbard’s construction in favour of what they treated as the extent of liabilities reflected by the accounting records at the date of their appointment.

[34] In submissions, Mr Barton adverted to numerous subsequent changes of stance on behalf of the Hubbard interests in committing the personal assets that were contemplated by Mr Hubbard at the time of preparation of the schedule, to make good the shortfall to depositors. Mr Barton advised that proceedings commenced by the statutory managers to pursue those commitments were subsequently settled on terms that remain confidential. The evidence did not extend to any detail of the assets eventually realised by the statutory managers, relative to the assets apparently contemplated by the summary balance sheet prepared by Mr Hubbard. In general terms, it appears that realisation of such assets as the statutory managers secured for ASL has exceeded initial expectations. That has contributed to the more recent positive prospects for a full, or near to full, pay out for depositors, which would exceed initial projections.

The issues

[35] The statutory managers relied on the accounting records to exclude Mrs Jenks as a depositor in ASL at the time of their appointment. Furthermore, they consider Mrs Jenks’ exclusion was confirmed by Mr Hubbard’s attempts to transfer her investment back from SGL to ASL as at 30 June 2010. On the present application, the statutory managers argued that the state of the records and their analysis of them creates an onus on Mrs Jenks to establish either that the records as interpreted by them were wrong, or that there is some other basis on which she would have a claim against ASL so as to require them to treat her as a creditor.

[36] Mrs Jenks challenged her exclusion on a number of alternative grounds. First, that Mr Hubbard’s journal transfer as at 31 December 2009 was not an investment in SGL on her personal behalf, but rather was an investment by ASL in SGL so that she remained a depositor in ASL throughout.

[37] Alternatively, if the transfer effected by journal entry as at 31 December 2009 was of her funds and in her name, then it was undertaken by Mr Hubbard without authority and/or in breach of the fiduciary obligations he owed her to manage her investments in her best interests. In that event, his breach could either be attributed to ASL because he was the effective controller of it, or ASL became liable for his breach of trust by virtue of its knowing assistance in that breach being committed.

[38] It was apparent that the parties had co-operated in defining the issues, and oral argument was commendably focused. However, after the hearing, I was concerned that issues relevant to a full analysis of the rights and obligations as between Mrs Jenks and ASL might require analysis of additional points. On

6 December 2013, I requested additional submissions from counsel, and received the further submissions on 11 December 2013. These addressed influences on the scope of any fiduciary duty owed by Mr Hubbard, and the prospect that exclusion of Mrs Jenks from the creditors recognised by the statutory managers might result in unjust enrichment of the remaining depositors whose payments from ASL in statutory management would be larger than they would otherwise be, by the extent of the amount Mrs Jenks claims.

The evidence

[39] The evidence in support of the statutory managers’ originating application comprised three affidavits from Mr McGlinn, one of the three principals in Grant Thornton, who are the appointed statutory managers. Those affidavits traversed the relevant components of the statutory management affecting their decision to exclude Mrs Jenks. Mr McGlinn’s affidavits annexed a substantial volume of documentation relevant to the issue.

[40] In addition, the statutory managers obtained a report from Mr Bruce Gemmell, a chartered accountant practising in Christchurch as a director of Ernst & Young Transaction Advisory Services Limited. Mr Gemmell completed an affidavit appending his report which confirmed the statutory managers’ view that Mrs Jenks was not a creditor of ASL at the time of their appointment.

[41] Mrs Jenks filed three affidavits providing extensive background on the long- standing relationship between the Jenks and Mr Hubbard. In terms of the period immediately relevant to the proceedings, she deposed that she had relied upon the October letter as confirming that their investments would be held in ASL. She also relied on the repetition in that letter of his personal guarantee of the Jenks’ investments. She deposed that she had not heard of SGL, and would not have authorised a transfer of her investment out of ASL into SGL.

[42] Mrs Jenks’ solicitors also obtained an opinion from an independent accountant, Mr Richard Austin, who practises as a director of a wealth management company in Christchurch, which provides investment advice to individuals and family trusts. Mr Austin had previously been the president of the New Zealand Institute of Chartered Accountants.

[43] Mr Austin accepted that there were two ways of viewing the characterisation of the Jenks’ investment with Mr Hubbard. One was the view adopted by the statutory managers, supported by Mr Gemmell’s report. However, Mr Austin preferred an alternative view which he had concluded was more consistent with all the contemporaneous documents. Reflecting on the history of the Jenks’ investments as managed by Mr Hubbard, Mr Austin characterised the investments as having been

managed by three investment vehicles used sequentially by Mr Hubbard. In earlier periods, these had been BFL and HCC. Then from mid 2009, ASL was used as the investment vehicle. On that analysis, Mr Austin opined that the journal transfer on

31 December 2009 was not of the Jenks’ money, but an investment by ASL itself in SGL. It would follow that SGL did not accept an independent obligation to repay the Jenks, but rather SGL was indebted to ASL for the extent of the funds transferred, and the obligation to the Jenks remained with ASL.

Factual findings

[44] The 31 December 2009 journal entry relied on by the statutory managers is in barely legible handwriting, unsupported by any contemporaneous note explaining the reason for the transfer, the basis of Mr Hubbard’s assumption of authority to make it, or any other narration to give it some context. It is extraordinary that in

2009 a business with some $160 million in assets and liabilities should rely, for its prime accounting records, on such a journal entry to transfer some $5.59 million.

[45] Mr McGlinn put in evidence a similar handwritten journal that recorded an earlier transfer, as at 30 June 2009, of the Jenks’ investment from SGL to ASL. In doubting the efficacy of that journal entry, Mr McGlinn cited the absence of cash transferring from SGL to ASL in support of it, and his understanding that the ledgers

of SGL had not been updated to reflect the entries.⁵

[46] Mr McGlinn was not tested on the apparent inconsistency between his doubting the June 2009 entry as being without substance, but accepting the

31 December 2009 journal. To the extent that Mr McGlinn had regard to the absence of cash transferring at the end of June, that was also the case at the end of December. It may be that Mr McGlinn considered SGL could not have paid the amount in cash at the end of June 2009, whereas, if necessary, ASL could have paid the amount in cash at the end of December 2009. To the extent Mr McGlinn was influenced by the absence of complementary accounting entries from SGL’s records in relation to the June transaction, it was not apparent to me that any contemporaneous entries from

_{SGL’s records were cited and relied upon by Mr McGlinn in relation to the}

⁵ McGlinn first affidavit, 15 March 2013, at [67]–[70].

December 2009 transaction. To the extent that accounting records for SGL were reconstructed later, they were wrong in relation to Mrs Jenks’ relationship with that company.

[47] There is ample justification for Mr Austin’s opinion that Mr Hubbard’s bookkeeping was “unorthodox and chaotic”. Also, Mr Austin considered that “form tended to follow substance” to the extent that Mr Hubbard would treat a transaction as occurring, and after the event take the steps perceived by him as appropriate to reflect it in accounting records. In the present context, consistency of approach throughout the period in which Mr Hubbard was in control of the relevant entities, is desirable. Where his intentions were sufficiently clear, potentially inadequate accounting records ought to be treated as reflecting his intentions. It is illogical to recognise the 31 December 2009 journal as transferring the Jenks’ investment from ASL to SGL, unless the investment had previously been in ASL. The means by which it got there is suggested to be the June 2009 journal. Consistently with that, a remittance to the Jenks of $696,500.83 in November 2009 was funded by ASL.

[48] Putting to one side any constraint created by the October letter on ASL transferring the Jenks’ funds, I am satisfied that the December 2009 journal would otherwise be effective to procure the transfer that is reflected in it. The journal is a component of accounting records that were relied on in other contexts, and there can be no issue as to Mr Hubbard’s ability to commit both ASL and SGL to the consequences of journal entries of that type at that time.

[49] There are circumstances arising in the first half of 2010 that appear to be inconsistent with the Jenks’ investment being in SGL during that period. First, ASL assumed the liability to account for non-resident withholding tax (NRWT) on the interest payable to the Jenks for the whole of the financial year to 31 March 2010. The statutory managers have discovered an internal exchange of memoranda from a member of the staff at HCC to Mr Hubbard, and his reply, on 15 and 16 February

2010. The employee raised a concern that Mr Hubbard continued to reverse out the NRWT paid on the Jenks’ funds by ASL. The employee was concerned that ASL’s failure to account for the NRWT put it “in a position of evading tax”. Mr Hubbard’s response explained that he had “a special arrangement with the New Zealand and

US tax authorities” pursuant to which the withholding tax was only paid once a year. Mr Hubbard did not question his employee’s characterisation of the Jenks’ investment at that time as being with ASL, or that NRWT was ASL’s liability.

[50] At one point in his evidence, I took Mr McGlinn to suggest that ASL had only accounted for NRWT on the income the Jenks would have earned through part of the year. Alternatively, that ASL assumed a continuing obligation to pay the NRWT to Inland Revenue, even if ASL was to be reimbursed by another entity under Mr Hubbard’s control that was liable to pay interest to the Jenks for part of the year. I took Mr Barton’s clarification of the matter with Mr McGlinn, who remained in Court, to acknowledge that ASL did account for NRWT for the whole year to

31 March 2010, but that there could have been a reconciliation of SGL’s obligation to reimburse ASL for its part of that liability, by way of journal entry after the end of the financial year. My attention was not drawn to any records that reflected such an apportionment of liability for the NRWT.

[51] The inference most naturally arising from ASL’s assumption of liability to account for NRWT for the whole of the financial year is that it was holding and using the Jenks’ funds, in return for which it was liable to pay them interest for doing so, after accounting to Inland Revenue for tax on that interest income.

[52] Secondly, when Mr Hubbard reported to Mrs Jenks on the New Zealand investments for the quarter to the end of March 2010, he made no reference to her funds being other than with ASL. It would be reasonable to expect Mr Hubbard to advise any change to where the funds were invested, given the unqualified advice to Mrs Jenks in the October letter that the Jenks’ funds were with ASL.

[53] As against those possible inconsistencies with the Jenks’ money being with SGL in the first half of 2010, Mr Hubbard’s conduct as at 30 June 2010 after the statutory managers had been appointed could only be consistent with a belief that their funds had been with SGL before that date. Mr Hubbard’s explanation quoted in [27] above suggests that he treated the re-transfer to ASL to have happened “late in June”, and that this was an example of the form of accounting records following the substance of how Mr Hubbard treated matters. The instances suggesting he treated

the funds as being with ASL are certainly consistent with an intention that they would go back there.

[54] Nonetheless, I am satisfied that the available records justify the accounting view that the Jenks’ funds were invested with SGL at the date of appointment of the statutory managers.

[55] I am satisfied that Mr Hubbard treated himself throughout the relevant period as being committed to the personal guarantee he had given the Jenks to repay their investment with him. I am also satisfied that Mr Hubbard treated the assets he would draw on to honour that guarantee in the event that the Jenks’ investments could not otherwise be repaid, as comprising the assets that Mr Hubbard identified as available to ASL, to make up any shortfall in meeting its liabilities to depositors.

[56] During argument, a number of factual propositions were alluded to that were not the subject of sufficient evidence to found definitive factual findings. I raised with Mr Barton my concern that, for example, I could not determine relatively how precarious the financial states of ASL and SGL were at the end of 2009, on more than an impressionistic basis. I took Mr Barton as accepting that that was so, and also accepting that, to the extent such issues do become relevant, the statutory managers’ originating application should be decided on what was available.

[57] A somewhat more emphatic stance is conveyed in Mr Barton’s post-hearing written submissions. By that stage, the statutory managers’ stance was that all of the entities controlled by Mr Hubbard were in a precarious financial position from early

2009, and that the evidence is insufficient to make a definitive finding that an investment in one of them was materially more risky than in another.

[58] Another issue in the same uncertain position is whether Mr Hubbard’s estate should now be treated as insolvent, or otherwise not worth suing on any personal guarantee he gave to the Jenks. So, too, with the issue of whether all depositors in ASL who will benefit from payments had been given personal guarantees by Mr Hubbard in materially similar terms to the Jenks. I prefer the statutory managers’ stance on such uncertainties, as conveyed at the hearing. This is an application for

directions, and the Court should have regard to all relevant considerations. It is inappropriate to omit such considerations from the analysis to the extent they become relevant, merely on the basis that Mrs Jenks would have to discharge an onus, for example, in refuting the utility of suing on Mr Hubbard’s personal guarantee.

The “investment vehicle” analysis

[59] Mr Austin’s review of the history of the Jenks’ investments with Mr Hubbard led him to identify three periods in which use was made of different investment vehicles to hold their investments. The relevance of his analysis was to provide justification for his conclusion that the funds transferred to SGL on 31 December

2009 comprised an investment by ASL. That would mean that ASL was a creditor of

SGL, and Mrs Jenks remained an investor in ASL.

[60] Because of the view I have come to on the constraints created by the October letter, I can deal with Mr Austin’s thorough analysis quite shortly.

[61] The first investment vehicle utilised was BFL. That became “a vehicle” in the sense that the company owned the Methven farm and the Jenks’ acquisition was effected by the purchase of all but one of its shares. Thereafter, BFL also acquired the commercial property that Mr Hubbard recommended the Jenks purchase in central Christchurch. It appears that the company also operated accounts with HCC for investment of accumulated income and any additional capital remitted by the Jenks from the United States.

[62] In the period that Mr Austin attributes BFL as the investment vehicle for the Jenks, they also acquired a residential property in Christchurch that was not owned by BFL. It could therefore not be said that it was used as the exclusive vehicle to hold their investments in the relevant period. It was too distanced in time and circumstances to have any material impact on the analysis of the legal structure used to hold Mrs Jenks’ funds in the period after her husband’s death.

[63] The second period identified by Mr Austin is from approximately 2006 to mid 2009 when the funds from realisation of assets previously held by BFL were

invested at Mr Hubbard’s direction through HCC. Mr Austin cited the form of reports that Mr Hubbard sent to the Jenks during this period, which were presented on HCC letterhead, and the terms of periodic correspondence and instructions from the Jenks which referred to their investments “with Hubbard Churcher”.

[64] I am not satisfied there was sufficient evidence for Mr Austin to attribute to the HCC partnership a status equivalent to a nominee company or some form of corporate trustee that assumed legal ownership of investments on behalf of clients of the partnership. It seems most likely that the partnership operated a trust account that would receive and disburse income earned on investments. The investments themselves were placed in the name of the Jenks with the various Hubbard controlled entities.

[65] What the records in evidence suggest is that throughout that period Mr Hubbard managed the Jenks investments and placed them, not with his firm but with other trading or investment entities under his control. He was able to do so without asserting that the partnership enjoyed legal ownership of the funds, subject to some form of trustee’s obligation to account to the Jenks as beneficial owners of those assets. Rather, as agent for the Jenks he asserted authority to deal with their assets, with legal ownership remaining in their names.

[66] Coming to the third period, in which Mr Austin characterised ASL as the investment vehicle, again there is an absence of any evidence recording the assumption of legal ownership of those funds in the name of ASL, subject to some trustee obligation to account to the Jenks as the beneficial owners of it. Rather, ASL appears to have accepted deposits from investors that it recorded in their own names, and accounted to the investors who remained legal owners of their funds.

[67] If ASL was operating “a fund” and making prudent investments such as by spreading the investor’s risk in more than one investment, then it seems unlikely that it would transfer out of that fund the entire investment it had been holding for the Jenks. Transferring the whole amount is more consistent with Mr Hubbard treating himself as moving the Jenks’ money from ASL to SGL. Further, the records show that ASL was an existing investor in SGL as at the end of December 2009. If ASL

treated legal ownership of the Jenks’ funds as being in its own name, then it would be adding to an existing investment that it had in SGL and there would be no need to acknowledge a new investment in SGL at that time, in the name of the Jenks.

[68] I am accordingly not satisfied that the journal transfer from ASL to SGL on

31 December 2009 comprised an investment by ASL. Instead, I accept the statutory managers’ characterisation that the accounting record reflects Mr Hubbard’s purported movement of Mrs Jenks’ funds from ASL to SGL.

December 2009 transfer in breach of Mr Hubbard’s authority/breach of

fiduciary duty?

[69] Given the moratorium on claims against ASL because it is in statutory management, there has not been an opportunity for Mrs Jenks to formally plead the elements of such claims. Although the order sought by the statutory managers was confined to a determination of whether Mrs Jenks was an investor in ASL at the date of their appointment, issue was joined on these claims to ascertain whether Mrs Jenks can otherwise make out status as a creditor of ASL.

[70] Mrs Jenks’ claim to be included among the creditors of ASL raised a sequence of contentions. These were advanced on the premise that Mrs Jenks had to accept the statutory managers’ reconstruction of the accounting records, so that her funds had been transferred to SGL on 31 December 2009. In that event,

_{Mr Hubbard’s conduct, in making the transfer on 31 December 2009, was either:}

in breach of the authority he then enjoyed as agent for Mrs Jenks, or

that the transfer breached fiduciary obligations he owed to her in managing her money in her best interests.

[71] If either contention was made out, it was then argued that liability for Mr Hubbard’s breach could be attributed to ASL, and ASL would have to account for the consequences of it. The first component of Mr Ormsby’s analysis on this part of the case treated Mr Hubbard’s transfer of Mrs Jenks’ funds from ASL to SGL as a

novation of the contract she had had with the former, with the latter. Mr Ormsby sought to argue that the circumstances could not give rise to an effective novation.

[72] However, Mr Ormsby’s contractual analysis of the concepts of assignment and novation is not relevant where Mr Hubbard clearly had the requisite authority to act for both ASL and SGL in such a transaction. The focus has to be on the adequacy of Mr Hubbard’s authority, as Mrs Jenks’ agent, to procure her involvement in the relevant transactions. That leads to a consideration of the relationship between Mr Hubbard and those companies, as it bears on whether they have to accept liability for his conduct. The rationale in terms of a contractual analysis as between ASL and SGL is therefore incidental to a consideration of the scope of Mr Hubbard’s authority to deal with Mrs Jenks’ money on the terms he purported to.

[73] Mr Ormsby’s approach relegated, but did not overlook, the direct implications for ASL of the references to ASL in the October letter. That aspect is determinative, but it is convenient to analyse it in the context of Mr Ormsby’s other arguments.

Breach of authority as agent

[74] Reviewing the earlier history of the relationship between Mr Hubbard and the Jenks, the clear impression is that the Jenks gave Mr Hubbard a broad discretion to invest their money on their behalf. Since the Jenks had sold their property interests, the form of reports provided by Mr Hubbard detailed monthly net interest earned but did not identify the payer that was the source of that income.

[75] During his lifetime, Mr Jenks appears to have taken a closer interest in the detail of what Mr Hubbard was doing with their money, than Mrs Jenks did. Mr Jenks may have had some appreciation that Mr Hubbard had, in earlier periods, switched their investment among various investment entities under Mr Hubbard’s control.

[76] In the period towards the end of Mr Jenks’ life, this had become a long-term relationship that had been successful for the Jenks, characterised by a relatively close personal relationship with Mr Hubbard and implicit trust in him, particularly in light

of his personal guarantee. Between about 2006 and 2009, Mr Hubbard had made transfers of the Jenks funds from one entity under his control to another, and Mrs Jenks accepted that those transactions occurred without Mr Hubbard seeking the Jenks’ prior approval. There is no evidence that the Jenks subsequently criticised Mr Hubbard for doing so without their prior approval. However, I accept Mrs Jenks’ evidence that she had never been aware of SGL, so that, until the present dispute arose, she was not aware that their funds had also been invested there on earlier occasions.

[77] The case for Mrs Jenks was that her husband’s death, and the process of addressing the arrangements that would pertain after he had died, redefined the relationship with Mr Hubbard. Their letter of 8 September 2009 made requests that were explicitly premised on the couple’s changing circumstances. The component of the letter quoted at [18] above indicated that Mrs Jenks required a clear statement of the manner in which their funds were to be held. The request also contemplated Mrs Jenks making requests for funds, potentially in circumstances where Mr Hubbard would be unavailable. The terms of the Jenks’ request anticipated a different situation, being one in which Mr Jenks was no longer involved, and potentially Mr Hubbard as well.

[78] Mr Hubbard’s reply some five weeks later does not explicitly acknowledge that it is in response to the 8 September request, and there had been at least a telephone conversation between Mrs Jenks and Mr Hubbard the day before his reply. However, at least one purpose of the letter was to address the Jenks’ request to settle new arrangements that would apply after Mr Jenks’ death. It is clear that matters were not to go on just as they had been while Mr Jenks had been able to manage the relationship from the Jenks’ perspective.

[79] Mr Hubbard’s response, the most material part of which is quoted at [19] above, commits to a straightforward arrangement with the Jenks’ money invested in “Aorangi Securities Fund”, which was described as mainly an investor in first mortgages. The clear inference from Mr Hubbard’s reference to the company not having any bad debts, and his having $40 million invested that he would lose before clients suffered any loss, was to provide an assurance that Aorangi Securities Fund

was a relatively safe investment, and that their funds would, in a practical sense, be guaranteed by the commitment of substantial personal assets by Mr Hubbard.

[80] The September and October 2009 exchange of letters, considered on their own, do not justify the implication of any broad discretion for Mr Hubbard to change the form in which the Jenks’ funds could be invested. On the terms of Mr Hubbard’s reply alone, the position was that the Jenks’ funds would remain invested with the Aorangi Securities Fund, unless and until there was a prospective agreement to do something else.

[81] The ability to test the impact of the prior relationship more thoroughly is hampered by the absence of evidence from both Messrs Hubbard and Jenks. Accordingly, it is difficult to determine the extent to which that lengthy prior relationship justifies the implication of a broader discretion being available to Mr Hubbard than is apparent from the terms of the exchange of letters in September and October 2009. There is some scope for inferring that long-standing clients learned to take Mr Hubbard on his own terms: he was personally very successful, guaranteed clients like the Jenks against losses from managing their money, and seems to have had a somewhat paternalistic attitude as to what he considered to be in the clients’ interests, without consulting with them about it.

[82] In his post-hearing submissions, Mr Barton submitted that no legal status could attach to the October letter. He argued that Mrs Jenks had not changed her position in any way in reliance on it, and indeed that no one had done anything on the basis of the letter. Mr Barton did not accept that the letter created any constraint on Mr Hubbard’s pre-existing discretion to deal with the Jenks’ investments. In denying that the letter could have legal consequences, he suggested it could be described as “puffery”.

[83] The impact of the exchange of letters, and the October letter in particular, cannot be downplayed in that way. The death of Mr Jenks was going to change the Jenks’ requirements, and therefore the nature of the relationship between Mrs Jenks, as survivor, and Mr Hubbard. The October letter defined the terms that would apply to the new circumstances between financial adviser/fund manager and client. It

would be untenable for Mr Hubbard to argue three or six months after writing the letter to Mrs Jenks that it should or could be ignored. Objectively, it must be seen as intended to affect legal relations between them, and was intended to be relied upon.

[84] Although in a narrow personal sense Mr Hubbard may have perceived it as a gratuitous statement, in that he did not earn anything from the arrangement, that was not the case for ASL.⁶

[85] The statement to Mrs Jenks that her funds “... are invested with Aorangi Securities Fund ...” was a statement of present fact, with no qualification such as “at present” or “until I consider it appropriate to transfer them elsewhere”. It is reasonable to infer that Mr Hubbard had to consult with Mrs Jenks before changing the nature of her investments away from that in Aorangi Securities Fund as represented in the October letter.

[86] Certainly, Mrs Jenks’ evidence was to the effect that she thought such a constraint applied. With respect, Mrs Jenks cannot be expected to be entirely objective in reconstructing the approach she would have taken after she received the October letter, given her appreciation by the time she gave evidence of the significance of asserting such a constraint. Her evidence on the point is to be treated with caution for that reason. Nonetheless, the terms of the October letter, and both the immediate context in which it was conveyed and the broader circumstances of the relationship, support that interpretation.

[87] On the terms of the exchange of letters, the source of the assets available for Mr Hubbard to discharge obligations under his guarantee was ASL. An analysis of Mrs Jenks’ position has to take into account the relationship between Mr Hubbard’s personal guarantee on which she relied, and ASL as the location of the assets

_{available to meet that guarantee in the event of any loss. That assumed some}

⁶ See [107] below.

relevance given the potential for a claim to arise in Mr Hubbard’s incapacity or

absence.⁷ The terms of Mr Hubbard’s later explanation to Mrs Jenks in October

2010 tend to confirm that he depended on the personal assets he was committing to

ASL to honour his guarantee to her.

[88] In all the circumstances, I find that the October letter procured a sufficient change in the nature of Mr Hubbard’s role in managing the investments for Mrs Jenks after her husband’s death for there to be an implied constraint that Mr Hubbard was not to transfer Mrs Jenks’ funds out of the deposit, as he had stated it to be with ASL. Effectively, it was a constraint that he could not move her funds from ASL without explaining the differences to Mrs Jenks and obtaining her instructions.

[89] The statutory managers erred in dismissing the October letter as having no legal effect. They have denied any constraint on the breadth of Mr Hubbard’s discretion to invest Mrs Jenks funds as he saw fit. Given a finding that there was such a constraint, it follows that it was breached by Mr Hubbard. I return below to the consequences of such a finding for ASL.

Breach of fiduciary obligation

[90] Mr Ormsby’s alternative formulation of a breach of obligations by Mr Hubbard did not depend on the scope of his authority as an agent. Rather, it amounted to a claim on behalf of Mrs Jenks that the trust and reliance placed on Mr Hubbard in managing her money gave rise to fiduciary obligations. That basic proposition was not seriously disputed. Mr Ormsby characterised Mr Hubbard’s fiduciary obligations as including an obligation to deal with Mrs Jenks’ funds only in her interests, and not to deal with those funds in his own interests. Again, it is not contested that such a constraint arises where fiduciary obligations of the type

_{appropriate to this relationship arose.}

⁷ Correspondence between them had included exchanges about Messrs Jenks’ and Hubbard’s respective health issues. Given the health difficulties Mr Hubbard had described, and his age, it was reasonable for the Jenks to be concerned that he may become unavailable to deal with their investments.

[91] Mr Ormsby’s next proposition was that Mr Hubbard transferred Mrs Jenks’ funds from ASL to SGL for his own purposes, in a transaction that was contrary to her best interests and therefore in breach of his fiduciary obligation to deal with her funds at all times in her best interests.

[92] Mr Barton resisted this last proposition, submitting that Mrs Jenks could not make out an appreciation by Mr Hubbard at the time, that he was exposing Mrs Jenks’ investment to materially greater risk by transferring her money from ASL to SGL. He denied that there was any evidence that the transfer was procured for Mr Hubbard’s own interests.

[93] Mr Ormsby invited the inference that SGL was in need of support and Mr Hubbard was prepared to risk Mrs Jenks’ funds in the meantime, contemplating he would be able to transfer them back to ASL if necessary where they would be covered by his guarantee. Accordingly, Mr Ormsby submitted that Mr Hubbard was doing so for his own purposes, rather than in pursuit of her best interests. In disputing this, Mr Barton submitted that there was insufficient evidence to find that an investment in SGL in late 2009 was materially more risky than an investment in ASL.

[94] Mr McGlinn accepted that all of Mr Hubbard’s entities (SCF, SGL and ASL) were in dire straits at the end of 2009. Further, Mr McGlinn doubted the efficacy of a journal transfer completed in June 2009 to take the Jenks’ money out of SGL and put it into ASL, because of his perception that SGL would have lacked the resources to be able to pay that amount to ASL at that time. There is no suggestion that SGL’s financial health had improved by the end of 2009.

[95] In an internal memorandum completed by Mr Hubbard on 29 September

2009 reviewing the position of ASL, he acknowledged that, as at the end of May

2009, ASL had a loan advanced to SGL of $30 million, which was one of ASL’s exposures that were of concern to the HCC partners. Mr Hubbard commented that SGL’s position looked “precarious” at that time. The interdependence of Mr Hubbard’s various entities meant that if SCF failed, SGL “... could have nil shareholder funds”. The remainder of that memorandum addressed the prospects for

ASL, and did not include any events that pointed to an improvement in the position of SGL. Mr Barton’s post-hearing submissions claimed that Mr Hubbard was attempting to support all of his entities by committing personal assets to them. However, there is no evidence that Mr Hubbard was also taking steps to support SGL by committing other unencumbered assets in a comparable way, or to as meaningful an extent, as he consistently stated he was committing to ASL.

[96] SGL had a somewhat different business, making equity investments in other businesses intended to generate a return, rather than making secured mortgage advances, which had been the stock business of ASL. Given the relatively dire state of SGL, it is not credible to suggest Mr Hubbard transferred Mrs Jenks’ funds to achieve a higher return for her.

[97] On an evaluation of all the evidence, I am satisfied that Mr Hubbard would have appreciated that Mrs Jenks was exposed to a materially increased risk of suffering a loss if her funds were with SGL rather than ASL at the end of December

2009. An important component of the difference in relative risk was Mr Hubbard’s commitment to providing otherwise unencumbered personal assets to make up any shortfall for depositors in ASL. To the extent that any subjective justification for the transfer relied on Mr Hubbard’s perception that he would always be able to place her funds back with ASL, then history has shown him to be wrong in making that assumption, and it placed him in breach of his fiduciary obligations to her.

[98] Mr Hubbard was facing Serious Fraud Office charges at the time of his death, but none of the witnesses or parties in the present proceedings argued that his relevant conduct was fraudulent. Mr Barton did argue that statements included in the October letter were factually incorrect. For instance, Mr Hubbard had stated that the main investments in ASL were first mortgages, mainly on farm properties, when that was no longer accurate. He also stated that he had $40 million invested in the fund that he would lose before any client suffered any loss, when there was no formal subordination of the investment by the Hubbards of their own cash or properties in ASL. Despite those points, the statutory managers did not argue that Mr Hubbard had been deliberately untruthful.

[99] Mr Hubbard had enjoyed considerable financial success over a sustained period of time. His substantial entities, including SCF, ASL and SGL, were managed by him in an interdependent way, most acutely when they were under financial pressure. Mr Hubbard did what he perceived was necessary to keep them all afloat. He assumed the ability to notionally move assets from one to another by journal entry, presumably to retain apparent credibility of the balance sheets of each entity. Transferring Mrs Jenks’ funds to SGL is consistent with such a pattern of behaviour.

[100] It appears that Mr Hubbard did not have to account to Mrs Jenks for any cash payments in the first six months of 2010. He was most likely indifferent to the prospect that SGL could not have met a demand by Mrs Jenks for any significant repayment because, so long as he controlled ASL, the extent of his personal assets committed to that company were sufficient to honour the commitments to her. It is consistent with such thinking that, in February 2010, Mr Hubbard treated ASL as the investee entity liable for interest payments to Mrs Jenks and the NRWT on that income. I infer that SGL’s liquidity difficulties were more acute than ASL’s. Accordingly, if Mrs Jenks had made a demand for any substantial payment in the first half of 2010, it seems most likely that Mr Hubbard would have transferred her deposit by journal entry back to ASL, and have funded the payment to her out of ASL.

[101] That analysis is the most favourable to Mr Hubbard that could credibly be adopted. However well meaning, and irrespective of any misguided subjective justification Mr Hubbard had for taking Mrs Jenks’ money out of ASL, his conduct in doing so breached the fiduciary obligations he owed her, to deal with her money only in her best interests.

Is ASL liable for Mr Hubbard’s breach of authority, directly or indirectly?

[102] Mr Ormsby argued that Mr Hubbard’s personal liability for breaches on either of the bases alleged could be attributed to ASL. That is, first, the breach of the scope of his authority as agent after the October letter, in that he could not transfer Mrs Jenks’ funds out of ASL without her prior approval. Secondly, as a trusted

fiduciary charged with managing her money, he was prohibited from dealing with her funds for his own purposes.

[103] On both alternatives, Mr Ormsby argued that because Mr Hubbard was the controlling mind of ASL, the steps he took could be attributed to ASL and ASL was therefore a party to Mr Hubbard’s breach of duty, requiring it to share liability with him for the consequences of it. Alternatively, the breach of Mr Hubbard’s fiduciary duty was facilitated by ASL in that it knowingly assisted his breach of trust in the

form classically described in equity as dishonest assistance.⁸

[104] It is perhaps understandable that the case for Mrs Jenks should focus on her own perception of what was obviously a very personal relationship with Mr Hubbard. However, in terms of the legal analysis, it is necessary to analyse Mr Hubbard’s relationship with ASL, and ASL’s own part in dealing with her.

[105] The closeness of the individual and corporate personalities is relevant, first, at the time of the October letter. That letter was written on a personal letterhead printed for Mr Hubbard, and signed in his personal capacity. The letter confirmed his retirement from HCC, but associated his comments about ASL with that company, by use of the first person plural:

... We only lend ... we have no bad debts ...

[106] It is entirely clear that Mr Hubbard controlled, and could therefore speak for and commit, ASL. The company was identified with his representations about its business, and the statement of fact that Mrs Jenks’ funds were invested with it.⁹ I am satisfied that Mr Hubbard made those representations and statements in a context that was binding on ASL.

[107] There was no suggestion that Mr Hubbard personally charged Mrs Jenks for any of the investment activity undertaken on her behalf. The form of reports to her did not specify the extent of deductions made for charges imposed, or the identity of

_{the charging entity. However, I consider it safe to infer that ASL was charging}

⁸ _{Royal Brunei Airlines v Tan [1995] 2 AC 378 (PC) at 392.}

⁹ ASL was slightly misdescribed in Mr Hubbard’s letter as “Aorangi Securities Fund”, but it was

agreed that nothing turned on that.

commission from a gross 10 per cent per annum interest payable to the depositor at approximately 0.5 per cent, before deducting NRWT.¹⁰ In that event, Mr Hubbard was acting as a gratuitous agent for the sake of the commission income being earned by ASL. There is therefore an indirect form of consideration for the representations in ASL’s name in the October letter. Businesses like ASL depended on securing funds from investors, so it had an incentive to persuade Mrs Jenks to leave her

money with it. ASL was earning commission for doing so.

[108] The courts have evolved the tests necessary to establish certain forms of estoppel. Relevantly to situations such as the present, the former requirement for

_{five elements has evolved into a more flexible test of unconscionability requiring:}¹¹

the creation or encouragement of a belief or expectation;

a reliance by the other party;

_{detriment as a result of that reliance.}

[109] In denying the prospect of anything in the nature of an estoppel, Mr Barton submitted that Mrs Jenks could not establish reliance on the October letter. In the circumstances, it is a little artificial to expect some specific contemporaneous evidence that Mrs Jenks relied on the terms of that letter. The detail provided in it had been sought because once her husband died, she wanted a more straightforward arrangement for her New Zealand investments, and for them to be in a form that was identifiable for her, as well as being on terms enabling her to access funds as the need arose. The October letter provided just that, and her reliance on it can reasonably be assumed.

[110] It is clear that the relevant parts of the October letter in which Mr Hubbard

_{was “speaking” for ASL created a reasonable belief and expectation for Mrs Jenks}

10. The basis for accounting to Mrs Jenks is not clear. Two statements, the earlier covering the period from 30 June 2009 to 30 September 2009 and the later covering 30 June 2009 to

31 December 2009, both purport to credit interest monthly at 10 per cent. The amounts cited are slightly different, and neither statement reflects interest exactly at 10 per cent on the number of days in the relevant month. (Mr McGlinn’s 15 March 2013 affidavit, annexure A at 214, 217.)

¹¹ Gillies v Keogh [1989] 2 NZLR 327 (CA) at 345-347.

that the funds were with, and would stay with, ASL. As to the existence of detriment, that is also clearly present once her expectation was thwarted by Mr Hubbard and ASL transferring her funds elsewhere, where they would not be protected by the assets backing Mr Hubbard’s guarantee.

[111] Accordingly, the necessary elements for an equitable estoppel are made out against ASL directly, and ASL was thereafter estopped from denying that it was holding her funds, until Mrs Jenks was consulted and consented to the funds being re-invested elsewhere.

[112] Mr Hubbard could not effect a transfer in breach of his authority as agent or his duties as a fiduciary on 31 December 2009 without ASL’s participation. That participation also comprised a breach of the representation made in ASL’s name in the October letter that founded an estoppel against ASL. There is a tenable argument that ASL was a party to what was a form of equitable fraud committed by Mr Hubbard in removing Mrs Jenks’ funds from ASL, which would give rise to liability on ASL to restore the pre-existing situation.

[113] However, more directly, ASL was a party to the representation that it would hold Mrs Jenks’ funds, at least until she requested repayments or provided informed instructions for ASL to invest the funds elsewhere. Accordingly, ASL was not at liberty to treat Mrs Jenks’ funds as having been transferred to another entity under Mr Hubbard’s control when the statutory managers were appointed on 20 June 2010. It was not open to ASL to deny the on-going effect of the representation made on its behalf in the October letter. Similarly, Mr Hubbard’s attempt to cure his earlier breaches by purporting to re-transfer funds on 30 June 2010 was of no effect so that the statutory managers’ purported response to that attempt equally lacks legal effect.

[114] I am not persuaded that this analysis is aided by the concept of attribution. That is generally applied in statutory contexts where liability, or the circumstances in which it can be avoided, is defined by reference to the conduct of natural persons. The question is whether the legal consequences of conduct undertaken by an identified natural person in the name of a company can be attributed to the company. Examples of the contexts in cases considering attribution include the obligation

under the then Securities Amendment Act 1988 to notify an interest in more than five per cent of the shares in a public issuer,¹² and the exemption from liability for a ship owner in relation to loss of cargo put on board his ship if the casualty is established as happening “without his actual fault or privity”, as that expression has been used in successive Merchant Shipping Acts.¹³

[115] The rationale is that attribution to the company of acts by an individual will be appropriate if that person is the controlling mind of a company, as assessed in the context relevant to the conduct or omission in issue.¹⁴

[116] The purpose of attribution in the present context would be to fix ASL with liability for something done in its name, but for which it might otherwise deny liability. The first relevant action is the direction to transfer Mrs Jenks’ funds from being under ASL’s control, to being a deposit held by SGL. That action was procured by Mr Hubbard in his capacity as agent for Mrs Jenks. The fact that Mr Hubbard also enjoyed the power to carry out his own instruction does not alter the analysis of whose act it was. The next action was effecting the transfer, by way of journal entry, from ASL to SGL. That was the act of ASL and there could be no denying its involvement in that part of the transaction. For the reasons outlined, ASL was effectively estopped from taking those steps, and there is no need to resort to attribution.

[117] Accordingly, the statutory managers are obliged to recognise a deposit held on behalf of Mrs Jenks as at 20 June 2012 that reflected the balance as at

31 December 2009, together with the net interest, after deduction of commission and NRWT, consistently with the pattern of credits and debits as represented to Mrs Jenks.

[118] Given ASL is estopped from denying the representation made in its name in

October 2009, it is unnecessary to determine the remaining arguments, which seek the same result by claiming liability for ASL indirectly, as a result of breaches of

¹² _{Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 NZLR 7 (PC).}

¹³ Particularly s 502 of the Merchant Shipping Act 1894 (UK), in Lennard’s Carrying Co Ltd v

_{Asiatic Petroleum Co Ltd [1915] AC 705.}

¹⁴ Meridian, above n 12, at [14].

obligation owed personally by Mr Hubbard. Against the contingency that I may be wrong in finding ASL estopped in this way, and out of deference to the scope of arguments on the other bases for claim, I will also address them. They are genuine alternatives, in the sense that they proceed from the assumption that the

31 December 2009 journal transfer had legal effect, but triggered claims for breach of obligations owed to Mrs Jenks for carrying it out.

Would ASL also be liable for Mr Hubbard’s breach of fiduciary duty?

[119] The alternative formulation of Mrs Jenks’ claim against ASL was that if Mr Hubbard’s action in transferring her investment to SGL was in breach of fiduciary obligations he owed her, then it was a breach that was knowingly facilitated by ASL.

[120] Mr Ormsby sought to attribute liability to ASL as an accessory in relation to Mr Hubbard’s breach of his fiduciary obligations, when he procured the purported transfer of her funds from ASL to SGL.

[121] To attribute such liability to ASL requires fixing it with knowledge that Mr Hubbard was acting in breach of fiduciary obligations owed to Mrs Jenks, and that ASL was consciously facilitating that breach of duty by permitting Mrs Jenks’ funds to be transferred out of its own control, and into SGL.

[122] In enforcing the consequences of breaches of trust, equity will, in certain circumstances, extend liability to those who have facilitated such breaches. In Royal Brunei Airlines, the Privy Council ruled that accessory liability can be made out against a third party facilitating a breach of trust where there is dishonest assistance.¹⁵ That concept does not require proof of subjective dishonesty by the

accessory, but is to be equated with conscious impropriety.¹⁶ Negligently allowing a

breach of trust to occur is not sufficient.

[123] In Royal Brunei Airlines, the breach of trust had been committed by a company that had subsequently become insolvent. The issue was whether the

¹⁵ _{Royal Brunei Airlines v Tan, above n 8.}

¹⁶ At 389D.

individual who was the alter ego of the company could be fixed with accessory liability. That situation was the converse of the roles played in this case by Mr Hubbard and ASL. On the basis of the individual’s acknowledgement that he permitted the company to apply the money in a way he knew was not authorised by the trust of which the company was trustee, the Privy Council attributed his

knowledge to the company:¹⁷

Set out in these bald terms, the defendant’s conduct was dishonest. By the same token, and for good measure, [his company] also acted dishonestly. The defendant was the company and his state of mind is to be imputed to the company. (emphasis added)

[124] More recently, the House of Lords has split in Twinsectra Ltd v Yardley on the standard of conduct that Lord Nicholls had required in Royal Brunei Airlines in order to attribute liability to an accessory to a breach of trust.¹⁸ In a powerfully reasoned dissent, Lord Millett took the view that Lord Nicholls was adopting an objective standard of dishonesty by which an accessory against whom a claim is brought would be assessed. The accessory was to be assessed by the standard that would be observed by an honest person in similar circumstances.¹⁹ On Lord Millett’s approach:²⁰

Neither an honest motive nor an innocent state of mind will save a defendant whose conduct is objectively dishonest. ... equity looks to a man’s conduct, not to his state of mind.

[125] The majority of the House of Lords in Twinsectra considered Lord Nicholls had only intended to attribute liability to an accessory where it was established that the accessory appreciated that what he was doing would be regarded as dishonest by honest people.²¹ If the accessory honestly believed that the principal whose breach of trust was in issue was entitled to deal with property as the principal did, then the accessory could not be liable for so-called dishonest assistance in that breach of

_trust.²²

¹⁷ _{At 393B.}

¹⁸ _{Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164.}

¹⁹ _{At [121].}

²⁰ _{At [123].}

²¹ _{At [32] per Lord Hutton.}

²² At [23] per Lord Hoffmann.

[126] In terms of actual knowledge, acceptance at face value of Mr Hubbard’s subsequent explanation to Mrs Jenks would mean that Mr Hubbard was not conscious that he was in breach of obligations owed to her when he switched her money from ASL to SGL. If that explanation was accepted, then he was blinded to the impropriety because he overlooked the constraint he and ASL undertook in the October letter, and by his perception that he would continue to control both these entities so could therefore swap Mrs Jenks’ money back again at will. His subjective justification would likely be bolstered by the commitment of his own resources to ASL, which he treated as more than sufficient to fund a complete repayment to her.

[127] The extremely close coincidence of identities between Mr Hubbard, in his personal capacity, and ASL makes it a little artificial to be assessing the state of ASL’s knowledge as an accessory, in relation to the discrete conduct by Mr Hubbard in his capacity as the agent or fiduciary subject to trustee obligations when dealing with what is deemed to be trust property. For the purposes of analysing this aspect of the argument for Mrs Jenks, as Lord Nicholls did in Royal Brunei Airlines, the state of knowledge as imputed to Mr Hubbard is also appropriately attributed to ASL.

[128] On the wider test for establishing liability against an accessory as analysed by Lord Millett, I am satisfied that ASL would be liable in respect of the breach of Mr Hubbard’s fiduciary obligations. A fully informed, honest person observing the transaction procured by Mr Hubbard on 31 December 2009 would protest that Mr Hubbard and ASL should not be transferring Mrs Jenks’ money out of ASL because they had told her the money would be held by ASL on terms that she could expect to be informed before it was placed elsewhere.

[129] On the difference of opinion among their Lordships in Twinsectra, I would support the application of the purely objective standard in circumstances such as the present.

[130] The outcome would not be clear-cut if Mrs Jenks was required to make out the narrower basis for liability as an accessory reflected in the majority speeches of Lords Hoffmann and Hutton in Twinsectra. The task of establishing the actual

understanding of the character of ASL’s participation when Mr Hubbard as its controlling mind is not available to be cross-examined on it, makes a reconstruction of the actual knowledge attributable to ASL in December 2009 problematic. Had the outcome depended on this issue, I would have been inclined to require further argument on the full range of sources that might appropriately be drawn on in order to draw inferences.

Unjust enrichment

[131] I issued my minute of 6 December 2013 in part because of a concern that exclusion of Mrs Jenks from distributions to depositors in ASL might create a form of unjust enrichment. Neither party had addressed the competing merits in that context. I am grateful to counsel for promptly identifying the essence of the issues. Given my conclusions on ASL’s liability to recognise Mrs Jenks as a creditor, it is unnecessary to assess whether equity would otherwise avail Mrs Jenks to prevent the statutory managers excluding her from those entitled to payment as unsecured creditors. I will nonetheless briefly sketch the analysis that could avail her in this regard.

[132] If, contrary to the decision I have made, the statutory managers’ entitlement to exclude Mrs Jenks from the recognised creditors of ASL had been confirmed, that would lead to distribution among the recognised depositors of the portion of the available assets that would otherwise be paid to Mrs Jenks if she was included. If that ignored a viable basis on which Mrs Jenks could make a claim against ASL, then conceptually at least the Court would be authorising a form of unjust enrichment.

[133] Mr Barton has firmly rejected any such prospect. First, he submitted that unjust enrichment is not yet recognised as an independent cause of action in New Zealand.²³ Notwithstanding the absence of its independent status, unjust enrichment is a concept that can avail a litigant to establish liability in relation to

_{some other cause of action.}

23. Citing Villages of New Zealand (Pakuranga) Ltd v Ministry of Health (2006) 8 NZBLC 101,739 (HC) at [99].

[134] As to the factual circumstances, Mr Barton submitted that three core elements

_{of unjust enrichment would need to be satisfied:}

first, that ASL depositors must have received a benefit;

secondly, that the depositors must have benefited at the expense of

_{Mrs Jenks; and}

_{thirdly, it must be unjust for the depositors to retain such benefit.}

[135] On the view Mr Barton took of the facts, it was impossible for Mrs Jenks to make out those elements. He denied that distribution of the available assets to remaining depositors (that is, excluding Mrs Jenks) would create a benefit for the recipients when they were the depositors of ASL at the relevant time, and she was not. It would follow that they are not benefiting at her expense, so it could not be unjust for them to retain that benefit. Mr Barton focused on the contrast between Mrs Jenks, who claimed to be a depositor, and others who are recognised as such. However, in a wider context the contrast could be between all those recognised as unsecured creditors of ASL and Mrs Jenks as a claimant to creditor status.

[136] Mr Barton also argued that to recognise any proprietary interest that Mrs Jenks may have had in the Hubbard assets committed to meet any shortfall in ASL, a specific security arrangement would have been required, and sufficiently identified assets set aside for the purposes of meeting any claims by Mrs Jenks. On the facts, Mr Barton submitted that that was not the position, as instanced by the uncertainty over which assets the Hubbard interests were subsequently prepared to commit to ASL, and the numerous inconsistencies in relation to potentially available assets that had apparently preceded the statutory managers’ settlement with the Hubbard interests.

[137] For Mrs Jenks, Mr Ormsby submitted that Mrs Jenks had an appropriate expectation of benefit arising out of either an express trust or a constructive trust, or a form of equitable estoppel in relation to Mr Hubbard’s commitment of assets to ASL. Mr Hubbard’s commitment of otherwise unencumbered assets in favour of

ASL investors was originally voluntary. Once Mr Hubbard, or those acting for his interests, perfected the commitment by way of transfer of legal title to the relevant assets, the statutory managers would hold those assets on trust for the benefit of the depositors in ASL whose interests had triggered Mr Hubbard’s original commitment. The group Mr Hubbard intended to benefit from a commitment of such assets to ASL inarguably included Mrs Jenks. However, the lack of specific assets to which the trust would attach at all times up to settlement of the statutory managers’ proceedings against the Hubbard interests does not enable an express or an institutional constructive trust to be asserted.

[138] Alternatively, Mr Ormsby argued for a remedial constructive trust to be imposed because of the need to respect Mr Hubbard’s intention as settlor to pass an interest to beneficiaries who included Mrs Jenks. The statutory managers cannot take assets free of that remedial constructive trust where the commitment was made intending Mrs Jenks to be a beneficiary, the settlor did all he could to ensure that she was, and the statutory managers have subsequently held the settlor to his commitment to transfer assets, but denied him the capacity to recognise the legal status of Mrs Jenks as one of the beneficiaries of his commitment of assets.

[139] Mr Ormsby contended there is a form of unconscionability for statutory managers, having received the Hubbard assets that were committed inter alia to honour his commitment to Mrs Jenks, to then deny Mr Hubbard the corresponding capacity to include her within those who would benefit from his commitment of those assets. He urged that as broad an approach as was contemplated by Tipping J in Fortex Group Ltd (In Receivership and Liquidation) v MacIntosh should be

applied here:²⁴

... this kind of trust does not exist at all until the Court imposes it. Thus all that is necessary, from the point of view of subject-matter, is for there to be some asset or assets in the defendant’s hands in respect of which the Court considers it appropriate to impress a trust in favour of the plaintiffs.

[140] In Fortex, the company had operated a staff superannuation scheme and had banked into its general account some of the members’ contributions to the

²⁴ Fortex Group Ltd (In Receivership and Liquidation) v MacIntosh [1998] 3 NZLR 171 (CA) at

175.

superannuation scheme. To comply with the trust deed for the superannuation scheme, the employer was supposed to account to the trustee monthly, but a practice had developed of paying the contributions only on an annual basis. The account to which the contributions were instead credited was operated in overdraft. On the appointment of receivers, members of the superannuation scheme claimed either an express, constructive or remedial trust to enable them to take priority over secured and unsecured creditors in relation to the contributions that had been lost. In the High Court, the employee members succeeded in making out a restitutionary remedial trust but that finding was overturned in the Court of Appeal.

[141] Secured creditors were entitled to priority in relation to all of Fortex’s assets, which were going to be insufficient to meet all the secured creditors’ claims. To deprive them in the circumstances where some form of remedial trust was to be recognised, the Court of Appeal held that it would have to find that it would be

unconscionable to allow the secured creditors to prevail:²⁵

The plaintiffs must be able to point to something which can be said to make it unconscionable – contrary to good conscience – for the secured creditors to rely on their rights at law. If such can be shown, equity may restrain the exercise of those rights to the extent necessary to afford the plaintiffs appropriate relief.

[142] The Court of Appeal was not persuaded there was any unjust enrichment. Secured lenders to Fortex had advanced money in reliance on security that they would get it back. In those circumstances, they were not “enriched” if all that occurred was a return of investments, let alone unjustly so. They were entitled to their money back and could rely on their security to achieve that end.

[143] The difference in the present circumstances is that the assets Mrs Jenks relied on were not those of ASL. She invested in reliance on Mr Hubbard’s promise to commit his own resources if the need ever arose. The statutory managers have subsequently acquired and realised assets that the Hubbard interests have been

_{prepared to commit to ASL in part to reflect the promise given to Mrs Jenks.}

²⁵ At 175.

[144] The plaintiffs’ claim in Fortex had also relied on the argument that the secured creditors could be fixed with knowledge of Fortex’s misapplication of the superannuation contributions. That concept was rejected. There is no parallel in the present case. When considering whether Mrs Jenks’ exclusion should offend the conscience of the recognised depositors, or creditors more generally, it is reasonable to infer that at least some of the depositors were given assurances of a personal guarantee by Mr Hubbard, defined in more or less similar terms to that which he gave Mrs Jenks. It is not necessary to attribute an awareness that Mrs Jenks was included among those provided with the guarantee, when assurances in similar terms would reflect a commitment to apply as many personal assets as were necessary to prevent loss to depositors with whom Mr Hubbard dealt on materially the same terms.

[145] I would assess the conscionability of excluding Mrs Jenks from the perspective of other fully informed depositors, and potentially creditors more generally, having regard to the circumstances in which Mr Hubbard gave the commitment, where one variant of it had subsequently been enforced by the statutory managers. The prospect of a windfall is even more stark if the statutory managers treat realisation of the Hubbard assets as available to them to meet claims by all creditors of ASL (rather than just to other depositors who received a similar guarantee to that given to Mrs Jenks). Where the statutory managers have acquired assets as a result of enforcing a previous promise by Mr Hubbard to supplement ASL’s assets to whatever extent was necessary to avoid losses to depositors, and those assets are subsequently applied to meet liabilities to creditors other than depositors, then to the extent that payments to those creditors are increased by the exclusion of Mrs Jenks’ claim, other groups of creditors would be receiving a windfall. It would be unconscionable to permit that to occur.

[146] The Court of Appeal in Fortex also found it impossible to characterise the misdirected superannuation contributions as trust money when they were paid into an account operating in overdraft and thereupon ceased to exist.

[147] The present case is different in that the statutory managers identified a potential asset reflected in Mr Hubbard’s previous commitments to allocate

unencumbered assets to prevent losses to depositors. The statutory managers have secured legal ownership and subsequent realisation of such assets in the context of claims that were premised, at least in part, on the previous commitments Mr Hubbard had made for the purpose of supporting personal guarantees of the type he gave to Mrs Jenks. Once secured, the proceeds are readily identifiable and able to be impressed with a trust obliging the statutory managers to deal with them in accordance with the premise on which they pursued their claims to them.

[148] Accordingly, were it necessary, I would find that the circumstances gave rise to a remedial constructive trust, with Mrs Jenks included in the class of beneficiaries.

[149] I would also be comfortable that if depositors were fully informed as to the background to Mr Hubbard’s original commitments, then they would recognise an unconscionability in the statutory managers pursuing relevant assets in reliance on the breadth of Mr Hubbard’s assurances to depositors including Mrs Jenks. That unconscionability would arise in light of the knowledge that the statutory managers had also denied the effect of Mr Hubbard’s attempts to include Mrs Jenks in those who would benefit from his commitment of such assets.

Summary

[150] The terms of agency arrangements between Mr Hubbard and Mrs Jenks included a constraint that prevented Mr Hubbard moving her funds from ASL without her prior informed consent. Mr Hubbard’s conduct in December 2009 in purporting to do so also breached the fiduciary obligation imposed on him to deal with those funds only in Mrs Jenks’ interests.

[151] Given Mr Hubbard’s close identity with, and authority to bind, ASL, the unqualified statement he made in October 2009 that Mrs Jenks’ funds were invested in ASL was binding on ASL. In those circumstances, ASL is estopped from denying that it continued to hold Mrs Jenks’ funds. The statutory managers are therefore obliged to treat Mrs Jenks as a depositor with ASL at the date of their appointment.

[152] Alternatively, where the statutory managers have recovered certain assets that

Mr Hubbard had contingently treated as available to prevent loss to depositors in

ASL, and that commitment was made, inter alia, to support Mr Hubbard’s guarantee to Mrs Jenks, it would be unconscionable to exclude Mrs Jenks and doing so would procure an unjust enrichment. Accordingly, funds available for distribution to depositors from that source at least would be impressed with a trust obliging the statutory managers to include Mrs Jenks in the class of beneficiaries.

Costs

[153] The application was properly brought by the statutory managers and they are entitled to all reasonable costs out of the funds of the company in statutory management.

[154] Mrs Jenks has successfully opposed the statutory managers’ proposals. In that event, Mr Ormsby submitted that she should be fully indemnified for all reasonable costs. On the other hand, Mr Barton submitted that, irrespective of outcome, each party should bear their own costs.

[155] I consider the outcome is most appropriately reflected in a costs award in favour of Mrs Jenks on a usual basis. She is entitled to costs and usual disbursements on a 2B basis.

Dobson J

Solicitors:

Anderson Lloyd, Christchurch for applicants

Wynn Williams, Christchurch for first respondent