Mogey v Jull [2014] NZHC 1340 (16 June 2014)

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UNDER	the Insolvency Act 2006
IN THE MATTER	of the bankruptcy of ALBERT EDWARD GEORGE JULL
BETWEEN	LYNETTE ALISON MOGEY and JOHN VICTOR MOGEY Judgment Creditors
AND	ALBERT EDWARD GEORGE JULL Judgment Debtor

Hearing:	10 June 2014
Appearances:	J W S Grant for Plaintiffs M Macfarlane for Defendant
_Judgment:	_{16 June 2014}

This judgment was delivered by me at 4.30 pm on 16 June 2014 pursuant to Rule 11.5 of the High Court Rules

[1] On 26 November 2013 the Court entered judgment against the judgment debtor (Mr Jull) on behalf of each of the judgment creditors on a claim arising from Mr Jull’s directorship of Waipawa Holdings Limited, of which Mr Jull was a director from 1991 until he resigned from that position in December 2004. Each of the judgment creditors was a depositor of funds with Waipawa Holdings Limited, which operated as a finance company, and each lost substantial sums of money. The amounts for which judgment was entered represented only part of the sums lost by each judgment creditor, as limitation issues prevented claims for greater sums.

[2] The judgment creditors issued bankruptcy notices against Mr Jull for the amounts of their respective judgments. Mr Jull did not comply with those notices. The judgment creditors therefore commenced this proceeding seeking orders that Mr Jull be adjudicated bankrupt.

[3] Mr Jull opposes each application. He accepts that he owes the sums claimed but he opposes the making of bankruptcy orders on the sole ground that it is not just and equitable that such orders should be made.

The Court may, at its discretion, refuse to adjudicate the debtor bankrupt if—

(a) the applicant creditor has not established the requirements set out in section 13; or

[5] Mr Jull says that in December 2011 he advised the judgment creditors that his personal assets comprised a vehicle, a life policy, and about $25,000 in his current account. He also told them that he owed $256,306 to his family trust, the AEG Jull Family Trust (the trust). He says that the vehicle has since been sold and that he has

learned that the life policy is owned by his wife. Cash previously held has been spent on legal fees. He says he does not now have any assets.

[6] Mr Jull is 73. He has been retired since 2004. He and his wife live in a home in Taupo owned by the trust. He says his only income is Government Superannuation. He says he does not have any business interests, though he is a director of some companies owned by his family trust.

[7] Mr Jull says that the family trust was established by 1974. He says that he and his wider family are discretionary beneficiaries. There are two trustees of which he was one until he resigned just before the hearing. Based on this Mr Jull says that he can think of no reason why it may be in the public interest that he be bankrupted. He says he has no other creditors or persons claiming against him and there is no further role for him in the liquidations of Waipawa and other related companies. He says that as far as he knows there is nothing of any interest to any person other than the judgment creditors about either him or his involvement in the failed finance companies, and there are no transactions involving him or the family trust which relate to either the judgment creditors or the liquidation of the companies.

[8] Mr Jull’s accountant, Ms Laugesen, says that Mr Jull is a discretionary beneficiary in the trust. His income comprises his superannuation and salary allocated to him for his services to one or more of the three trading companies which are almost 100 per cent owned by the family trust, assuming that they make a profit. As well as these the family trust also owns a “direct investment” in a property holding company, and the trust also owns a residential property at Taupo where Mr and Mrs Jull live. She says Mr Jull owes nearly $500,000 to the trust and to one of the companies, but is owed about $20,000 by one of the other companies. Although Mr Jull owns one share in each of the three trading companies the values of those shares are minimal, totalling approximately $2,000.

[9] Finally, Ms Laugesen says that the family asset owning structure was set up as long ago as 1916 when one of the trading companies was incorporated by Mr Jull’s grandfather, and the Jull Family Trust which was set up in 1974 is consistent with the way the family has held assets over that period.

[10] Mr Jull’s solicitor, Mr Waite, says he has acted on all of the many transactions carried out by the trust for the last 30 years, or by the companies of which it is either the principal shareholder, or in which it holds an interest through another company. He says that the transactions have been correctly recorded and authorised. He says that over the years there have been very few monetary transactions in which Mr Jull has been personally involved. Apart from one financing transaction and the sale of a small time share interest, all other transactions have been through the trust or the companies. He expresses his belief that the trust’s affairs and those of the various family companies have been properly and conventionally managed over the years. He also confirms that Mr Jull is a discretionary beneficiary in the trust.

[11] For the judgment creditors, Mr Irvine, a solicitor from the firm acting for them, produced the titles and rating valuation and other information for two properties at Taupo, both owned by the trust. Their combined rateable values are about $2.6m, but the trust paid about $3.9m for them, in 2003 and 2009 respectively.

[13] The judgment creditors also rely on the facts recorded in the judgment of the Court in favour of the judgment creditors, in which the judgment debts were established. The judgment records that the investments lost by the judgment creditors total approximately $8.5m.

[14] The approach the Court is to take to s 37 of the Insolvency Act was described by the Court of Appeal in Baker v Westpac Banking Corporation¹in these terms:

The principles governing the exercise of the discretion under s26 to grant or refuse an order of adjudication in bankruptcy are well settled and have been discussed by this court in recent years in Ellis v NZI Finance Limited (CA253/89 judgment 24 July 1989) and McHardy v Wilkins & Davies Marina Limited (in receivership) (CA54/93 judgment 7 April 1993). It is proper for the court to consider not only the interests of those directly

concerned – the petitioner, other creditors, the debtor – but also the wider public interest. A creditor who establishes the jurisdictional facts set out in s23 is not automatically entitled to an order. On the other hand, it is for an opposing debtor to show why an order should not be made. The court will give proper weight to the commercial judgment of the petitioner but the oppressive use of the bankruptcy process may be a ground for refusing an order. Another ground may be the undoubted absence of assets but that will not necessarily preclude an order given the range of interests involved including the public interest in the continuing oversight of a bankrupt’s affairs and the disqualifications that go with bankruptcy. In the end the court must balance the various considerations relevant to the case and determine whether the debtor has succeeded in showing that an order ought not to be made. ...

[15] In Re Marra, ex parte Commissioner of Inland Revenue²Master Lang, as he then was, said:

[4] In considering whether or not to exercise its discretion in favour of the debtor the Court will take into account a wide variety of factors. These include the circumstances in which the indebtedness arose, the conduct of the creditor, the debtor’s overall financial position, the practical effect of an order of adjudication and whether (sic) the likelihood of the existence of matters requiring investigation by the Official Assignee. Finally, the Court must consider the public interest and whether or not commercial morality is likely to be enhanced or jeopardised if an order of adjudication is not made.

[16] His Honour then proceeded to discuss the facts of that case in relation to each of the issues he had identified. Whilst these issues are not an exhaustive list of issues that might be relevant to a court determining the exercise of its discretion under s 37, in this case the arguments advanced by counsel can conveniently be considered under the same headings.

[17] As I have said the debts arose from the collapse of Waipawa Holdings Limited. There were two directors, Mr Jull and Mr Pickett. Mr Pickett was instrumental in the collapse of the company. He was jailed for fraud. The depositors lost all but 10.53 per cent of their deposits.

_{that he did not recklessly gamble with depositors’ money. He was
a victim of}

²Re Marra, ex parte Commissioner of Inland Revenue HC Auckland CIV-2003-404-2931,

Mr Pickett’s fraud, and his family has borne part of the loss, as his wife lost most of

[103] Mr Macfarlane points out that Warren Pickett was both an advisor and a de facto director even though he had (on paper at least) resigned his directorship earlier. Mr Macfarlane’s argument was essentially that Ed Jull was justified in relying on Warren Pickett’s advice on all matters in the particular circumstances of [Waipawa].

[104] Mr Toebes argues that Ed Jull’s reliance on Warren Pickett could not be justified. Rather, he said such reliance (as was proved in the evidence) amounted to a complete abdication of his directorial function. It was submitted that Mr Jull displayed no understanding of the company’s financial accounts, no knowledge of the legal obligations that encumbered him, and focused selfishly only on the interest rates [Waipawa] would pay to subscribers because he was himself a subscriber.

[105] There is no doubt in my view that the manner in which Ed Jull carried out his functions as a director of [Waipawa] was a material cause of the ultimate inability of that company to repay subscribers. He failed to ascertain for himself whether a prospectus was required in accordance with s 37 and if it was, he failed to ensure the subscriptions were held for repayment. And, more fundamentally, he failed to discover the true state of [Waipawa’s] finances in time to prevent that company’s collapse and subscribers losing their subscriptions.

[107] In my view, it was not reasonable for Ed Jull to rely on Warren Pickett’s advice that a prospectus was not required. There was a great deal at stake both for the issuer and the directors – not to mention the subscribers who committed millions of dollars to the venture. A prudent director would have known that the net of s 37 is very wide indeed. Independent legal advice was obviously necessary given the scale of the subscriptions and investments in [Waipawa]. Such advice would inevitably have caused the company to take a different tack. Nor more generally, was it reasonable or prudent for Ed Jull to leave almost all governance decision-making in [Waipawa] to Warren Pickett.

[108] In evidence before me Ed Jull demonstrated no real understanding of the financial accounts of the company and he frankly admitted that his contribution to the company was not his expertise in the governance of finance and investment companies, but his own personal and family networks, and his wealth.

[20] It is therefore established that Mr Jull bears responsibility for the losses incurred by the judgment creditors. Whilst Mr Macfarlane is correct to observe that Mr Jull’s conduct was not comprised of positive acts that destroyed the company as Mr Pickett’s was, he held a position in which he could have prevented the collapse and did not. In the present context, where conduct is but one element of the equation, I discern no material difference.

[21] The only criticism levelled at the creditors related to their refusal to accept open settlement offers, the last of which was for a global sum of $140,000, but instead to press for the bankruptcy of Mr Jull when, as Mr Jull would have it, nothing is to be gained by it either for the creditors, or in the public interest.

[22] The creditors take the view that there are very real issues of public interest involved, and that they are quite entitled not to accept by way of settlement the sum offered. I will discuss public interest issues separately, later, but I find that there is no sound basis for any criticism of the judgment creditors’ actions. They hold judgments from this court entitling them to payment of significant sums of money, which in themselves represent only a small part of the total sum which these creditors lost.

[23] On the evidence before me Mr Jull is insolvent. Although neither he, his accountant nor his solicitor produced any of the accounts for the trust or any of the companies of which the trust is the major shareholder, and which evidently formed the backbone of the family’s financial strength, I accept for present purposes that as well as the judgment debts, Mr Jull owes around $500,000 to these companies, and has little if anything by way of personal assets. In round figures, his debts exceed his assets by over $700,000.

[24] The creditors did not seek to argue that the trust should be regarded as Mr Jull’s, and correctly so. This is because there is no suggestion, in this case, that any assets have been transferred from Mr Jull personally, to the trust or to any other

entity, in an attempt to avoid satisfying creditors. It is established on the evidence before the Court that Mr Jull has been active in business, and apparently successfully so, for most if not all of his working life, following a pattern of asset owning which was established as long ago as the early twentieth century, by his grandfather. In short, he has operated in business through a number of companies which are owned almost entirely by a family trust. As a result he has not personally prospered from his endeavours; rather the trust appears to have prospered and by one means or another Mr Jull appears (going by the value of the properties he enjoys in Taupo) to have lived, and to continue to live, a comfortable life without actually owning anything of substance himself.

[25] In this case he is effectively saying that as he has not personally gained, by way of ownership, from his endeavours, so too he should not bear the consequence of bankruptcy, which frequently follows when business ventures cease to prosper and go, as in this case, terribly wrong. Again, I will discuss this later when I consider public interest factors, but I refer to it now because it is a key plank of Mr Jull’s argument that he has nothing, and there is nothing to be gained therefore for the creditors, in having him adjudicated bankrupt.

[26] As a straight-line application of the financial equation presented to me I accept that is the position. If the facts are as presented to the Court, creditors would receive no material distribution from a bankruptcy. I am left, however, with some residual concerns. While Mr Jull says that he does not have any income other than National Superannuation, his own accountant says that he draws salaries from the companies he directs. Those salaries have not been disclosed, nor has there been any disclosure of how much Mr Jull draws, whether by way of loans, discretionary payments of income or advances on a salary which is finally assessed at the end of each financial year. Further, Mr Jull made no reference to the second Taupo property which appears to be worth a sum in the order of $2.4m. In these respects his affidavit appears to lack candour.

[27] Although Ms Laugesen says that any salary he may receive from each of the companies is not established until after the end of the financial year, and is dependent on whether the company concerned makes a profit, that begs the question

of how Mr Jull lives in the meantime. There has been no disclosure of how much he has received by way of director’s fees or salary over recent years, nor of the resolutions of directors on such issues, nor of how much he in fact receives during each financial year by way of an advance on salary for director’s fees, if any. I have a residual doubt, as a matter of plain commonsense, that Mr Jull lives entirely on National Superannuation which is approximately $13,000 net per annum. I accept that this is not the subject of evidence, but there is an inherent improbability that the trustees of the trust (of which Mr Jull was himself one until very recently) leave Mr Jull to live on National Superannuation at about that level when the trust plainly has very significant assets indeed.

[28] A consequence of conducting his affairs in the way Mr Jull selected is that he seems to have lived parts of his life in a state of insolvency. The inevitable consequence of electing that course is that if a liability is incurred personally, a bankruptcy notice cannot be met. That is a risk Mr Jull has voluntarily assumed.

[29] Overall, Mr Jull’s financial position is not a factor supporting his application.

[30] On the evidence of Mr Jull, Ms Laugesen and Mr Waite there is no basis for the Court to have any concern that assets might have been placed in the trust in order to avoid liability to pay the judgment creditors. However, the question I have referred to earlier are matters on which the Official Assignee would establish a clear position.

[31] Mr Macfarlane says that the Court should not conclude that Mr Jull must bear commercial responsibility for everything that occurred over the period of the fraud. His responsibility should be confined to the events which occurred after a point in time when he should have arranged an independent audit which would have uncovered what was going on. The Court should not conclude that Mr Jull is actually responsible for all the losses incurred by investors.

[32] As well, Mr Macfarlane says that in assessing Mr Jull’s culpability the Court should distinguish between conduct which positively causes a loss, and Mr Jull’s conduct which amounted to a failure to realise what was going on and to do something about it. He notes that Waipawa was a closely held company, and a trusted friend was his co-director. He suggests that many directors in that position would have done the same as Mr Jull did.

[33] Drawing on these two propositions Mr Macfarlane says that Mr Jull’s conduct did not offend commercial morality, and failing to bankrupt him would not send a wrong message on the acceptability of Mr Jull’s actions. He submits that the public would not expect a director in the position Mr Jull was in to be adjudicated bankrupt. The only point in doing so would be to mark him out, as he put it, and not allow him to get away with what has occurred. He says it cannot be said that Mr Jull acted recklessly, gambling with depositors’ money. He says that there is no public interest factor in adjudicating Mr Jull bankrupt.

[34] Earlier in this judgment I set out at some length the Judge’s findings in relation to Mr Jull’s actions as a director of this company. Those findings are a clear exposition of Mr Jull’s conduct by a court which heard all the evidence on the events which gave rise to the losses then claimed. It would be inappropriate for the Court, in a different context and without hearing the same evidence, to dilute Mr Jull’s culpability. Whilst his actions were not the cause of the downfall of the company, in the same way that the actions of his co-director were, they were in a different way, and it does not behove Mr Jull to say that his conduct is more acceptable because his co-director was a trusted friend, nor to submit that another director in the same position would have acted the same way. The duties placed on directors are of fundamental importance to the honest and competent operation of a company, and never more so than in relation to a company which borrows and is responsible and accountable for the monies of members of the public. I have not the slightest doubt that Mr Jull’s conduct was completely unacceptable conduct on the part of a director. I reject without hesitation the submission that in this case the public might not expect

I consider that an objective observer would be dismayed to find that Mr Marra was able to walk away unscathed from his present situation. That kind of outcome would in my view be detrimental to the public interest and would do nothing to enhance commercial morality, particularly in the field of compliance with tax obligations. ...

[35] In this case, of course, there is no question of tax obligations, but I see no material distinction between the level of importance of compliance with tax obligations and the level of importance of compliance with statutory and other duties to properly govern companies that raise money from the public.

[36] A decision on exercise of the discretion given to the Court under s 37 is, in my view, to be made by weighing up all the factors of relevance, and coming to a conclusion. I have discussed the factors in turn for clarity of analysis, but exercise of the discretion must be undertaken by weighing up all the factors as a whole. There are certain factors which support the view that Mr Jull should not be adjudicated bankrupt. Principally they are Mr Jull’s age, and the fact that there is no suggestion, and there are no indications, that any capital sums might have been diverted from the cause of honouring obligations to the judgment creditors. These are, however, outweighed by the other factors I have discussed, and taking into account all factors I am led to a clear conclusion that an order for adjudication in bankruptcy is appropriate.

[37] I make an order adjudicating Mr Jull bankrupt. Both the judgment creditors and Mr Jull ask that should I reach this conclusion I direct that the order will take effect at a specified time approximately three days after release of the judgment. For Mr Jull’s part, Mr Macfarlane expressed a wish to have time to file an appeal against this judgment in the Court of Appeal and to seek interim relief pending the appeal being heard. I gather the judgment creditors seek a similar period to give time to the trustees of the family trust to reconsider their decision not to offer to settle the debts in full.

[38] I am prepared to accede to the request made by both counsel. The applicant must file a certificate current as at 11.00 am on Thursday, 19 June 2014 that the debt remains unpaid, no later than 1.00 pm that day. Provided that occurs, the adjudication in bankruptcy will take effect at 1.00 pm on Thursday, 19 June 2014.

[39] Mr Jull will pay the applicants’ costs on a 2B basis plus disbursements fixed

High Court of New Zealand Decisions

Mogey v Jull [2014] NZHC 1340 (16 June 2014)