Jeffreys v Morgenstern [2014] NZHC 671 (4 April 2014)

Last Updated: 15 May 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-008432 [2014] NZHC 671

BETWEEN	STEPHANIE BETH J EFFREYS AND TIMOTHY WILSON DOWNES Plaintiffs/Respondents
AND	ARTHUR SYLVAN MORGENSTERN First Defendant/Applicant TANYA MAY LAVAS Second Defendant

Hearing:	2 April 2014
Appearances:	C Walker for First Defendant/Applicant N Malarao and K M Wakelin for Plaintiffs/Respondents
Judgment:	4 April 2014

_{JUDGMENT OF VENNING J}

This judgment was delivered by me on 4 April 2014 at 4.00 pm, pursuant to Rule 11.5 of the High

_{Court Rules.}

Registrar/Deputy Registrar

Date...............

Solicitors: Meredith Connell, Auckland

Gilbert Walker, Auckland

JEFFREYS & ANOR v MORGENSTERN [2014] NZHC 671 [4 April 2014]

Introduction

[1] Arthur Morgenstern was a director of Kingdon Undertaking Ltd (previously Morning Star Enterprises Ltd) (MSE). Ms Jeffreys and Mr Downes (the liquidators) are the liquidators of MSE and also of a number of other companies Mr Morgenstern was formerly a director of.

[2] On 27 February 2014 Rodney Hansen J entered judgment in favour of the liquidators against Mr Morgenstern in the sum of $3,499,999.¹

[3] Mr Morgenstern has lodged an appeal with the Court of Appeal from that judgment. By this application he seeks an order staying execution of the judgment pending determination of the appeal.

Background

[4] In the proceedings the liquidators sued Mr Morgenstern (and Ms Lavas):

(a) as liquidators of Kingdon Development Ltd (in liquidation) (KDL) in relation to KDL’s entry into a rental underwrite deed (first and second causes of action); and

(b) as liquidators of Axon House Car Parking Ltd (in liquidation) (formerly GS and LD Lease Ltd (GLL) in relation to GLL’s entry into a car parking deed providing an incentive payment (third and fourth causes of action); and

(c) as liquidators of MSE in relation to:

(i) MSE’s guarantee of KDL’s obligations under the rental underwrite deed (fifth and sixth causes of action); and

¹ Jeffreys v Morgenstern [2014] NZHC 308.

(ii) Mr Morgenstern and his partner Ms Lavas’ sale to MSE of their shares in Morning Star (St Lukes Garden Apartments) Ltd (since struck off) (MS St Lukes) alleging:

1. a transaction at an undervalue under s 298 of the Companies Act 1993 (the Act) (seventh cause of action); and

2. breaches of directors’ duties under ss 131, 135 and 137 of the Act ( eighth, ninth and tenth causes of action).

The judgment

[5] Rodney Hansen J dismissed the claims in relation to the rental underwrite deed, including MSE’s guarantee of that deed and the car parking deed (first through sixth causes of action). He also dismissed the seventh cause of action alleging a transaction at an undervalue (s 298 of the Act).

[6] However Rodney Hansen J found that Mr Morgenstern had breached his duties under ss 131, 135 and 137 of the Act and that this had caused a loss of

$3,499,999 to MSE. He required Mr Morgenstern to contribute that amount to MSE

under s 301 of the Act.

[7] In summary the Judge found:

[121] The rental underwrite and car park indemnity were integral to the sale of Axon House. The commercial wisdom of that transaction has not been questioned. The sale price was in excess of a registered valuation of the property. It yielded a profit on the development.

[122] Both commitments were contingent in nature and at the time they were entered into Mr Morgenstern had good reason to expect that neither would give rise to a liability. In the event that they did, it was reasonable for him to expect that the companies concerned would be in a position to honour them. Their inability to do so was not something he could reasonably have foreseen.

[123] Neither commitment involved illegitimate risk-taking. There are no grounds for Mr Morgenstern to be required to contribute to or make good the losses that ensued.

[124] The sale to MSE of the shares of Mr Morgenstern and Ms Lavas in MS St Lukes is a horse of a very different colour. By the time of the sale the financial position and prospects of MSE had deteriorated. The St Lukes development had been dogged by delays and there were major questionmarks over when it would resume. Its profitability was uncertain. The sale of the shares gave rise to a direct conflict of interest. Prudence, care and transparency was required. An independent expert’s valuation of the shares was a minimum requirement.

[125] The valuation obtained by Mr Morgenstern fell well short of that standard. It could not be relied on to justify the sale price. However, the evidence to support the liquidators’ opinion that the shares had no value is itself deficient. They had not been able to prove the extent by which the sale price exceeded the consideration. The claim under s 298 of the Act accordingly fails.

[126] However, the way in which the sale was transacted constituted clear breaches of Mr Morgenstern’s duties as a director to act in good faith, not to carry on the business of MSE in a manner likely to create a substantial risk of serious loss to the company’s creditors and to act with reasonable care. He is required to make good the loss suffered by MSE as a result of these breaches.

[8] Rodney Hansen J arrived at the judgment sum in the following way:

[120] ... The breaches have been by Mr Morgenstern and, as they led to all shares being transferred, the resultant loss to the company was $3.5 million dollars. I conclude that is the sum that he should be ordered to pay, less $1 being the price at which the shares were subsequently sold to St Lukes Holding Ltd.

Preliminary point – further evidence

[9] Mr Morgenstern filed an affidavit to support the application for stay. Ms Jeffreys filed an affidavit in response on behalf of the liquidators. Mr Morgenstern then filed an affidavit in reply. At the outset of the hearing Mr Malarao sought to produce a further affidavit to the Court. The purpose of the affidavit was to put a number of documents before the Court which, Mr Malarao submitted, showed an attempt by Mr Morgenstern or interests associated with him to dispose of assets. Mr Walker objected to the affidavit being accepted. He submitted if it was to be considered Mr Morgenstern should have the opportunity to file a further affidavit confirming that the property in issue was not his personal property. I took the affidavit in on a de bene esse basis. I have decided it is unnecessary to refer to or consider that affidavit to deal with this application. Accordingly I have not taken it into account.

Jurisdiction/principles

[10] The application for stay is made under r 12 of the Court of Appeal Rules. There is no presumption either way on such an application, although the applicant has the burden of satisfying the Court it should exercise its discretion to grant a stay.

[11] “The object, ... where it can fairly be achieved, must surely be so to arrange matters that, when the appeal comes to be heard, the appellate court may be able to do justice between the parties, whatever the outcome of the appeal may be”: Minnesota Mining & Manufacturing Co v Johnson & Johnson Ltd cited by the Court

of Appeal in New Zealand Insulators Ltd v ABB Ltd.²

[12] Typically the Court engages in a balancing exercising involving the following factors where relevant:

(a) whether the appeal may be rendered nugatory by the lack of a stay; (b) the bona fides of the applicant as to the prosecution of the appeal;

(c) whether the successful party will be injuriously affected by the stay; (d) the effect on third parties;

(e) the novelty and importance of questions arising; (f) the public interest in the proceeding;

(g) the overall balance of convenience; and

(h) the apparent strength of the appeal: Keung v GBR Investment Ltd.³

[13] I address each of those factors as relevant picking up the particularly material aspects of the submissions addressed on them.

² Minnesota Mining & Manufacturing Co v Johnson & Johnson Ltd [1976] RPC 671 at 676 per

_{Buckley LJ cited by New Zealand Insulators Ltd v ABB Ltd [2006] NZCA 330; (2006) 18 PRNZ 459 at 13 (CA).}

³ Keung v GBR Investment Ltd [2010] NZCA 396.

The applicant’s case

[14] Mr Walker acknowledged that in a number of cases involving monetary judgments a stay is granted on terms that payment of the judgment is made (or secured) and the focus is on securing the repayment in the event the appeal is successful. However he submitted those authorities were not relevant in the present case. Mr Walker submitted there was no prospect of Mr Morgenstern paying or securing the judgment. Mr Morgenstern has no assets which would enable him to do so. If a stay was not granted the liquidators would inevitably apply to bankrupt Mr Morgenstern. Mr Walker submitted that could render Mr Morgenstern’s appeal rights nugatory because the Official Assignee might not pursue any appeal.

[15] Mr Walker also submitted Mr Morgenstern had brought the appeal in good faith and there was a good prospect of success. He noted the Judge had dismissed a number of the liquidators’ claims. Further, if a stay was not granted, Mr Morgenstern and his family would be put through the stress and consequences of bankruptcy which would also have potential financial consequences to his creditors for no good reason.

[16] Mr Walker submitted the only interest of the liquidators in pursuing Mr Morgenstern to bankruptcy could be to engage the claw back provisions of the Insolvency Act 2006. He submitted that issue simply did not arise as Mr Morgenstern had not preferred other creditors. He submitted that the balance in this case came down in favour of a stay.

[17] Mr Walker submitted the Court should not effectively put off a decision on whether Mr Morgenstern should face bankruptcy to a later stage but should “grasp the nettle” at this stage and grant the stay so as to prevent any such application.

The liquidators’ case

[18] Mr Malarao submitted that as a general principle, in monetary judgments a stay would be granted only if the judgment was paid or secured, (provided the Court could be satisfied any such payment would be repaid in the event of a successful appeal). The liquidators, as officers of the Court had confirmed that any payment

made to secure the judgment would be returned in the event the appeal was successful. He submitted that if Mr Morgenstern was not able to pay or refused to pay the judgment debt, then the stay should be refused.

[19] Mr Malarao accepted the appeal was pursued bona fide and raised arguable points. (The respondent liquidators have themselves raised a cross-appeal in relation to the causes of action where they did not succeed before Rodney Hansen J).

[20] However, Mr Malarao submitted that the information provided by Mr Morgenstern as to his financial circumstances was general in the extreme and was not supported by any relevant documentation. He also submitted there was a real imperative in the liquidators being able to commence bankruptcy proceedings given that time was running. The course of the proceedings had been characterised by delay. If Mr Morgenstern did not pay the judgment debt the liquidators should be able to commence bankruptcy proceedings to engage the claw back provisions of the Insolvency Act.

Will a refusal to stay render the right of appeal nugatory?

[21] If the stay is not granted the respondents will pursue bankruptcy proceedings against Mr Morgenstern. Mr Morgenstern may, as a result, be bankrupted before the

_{appeal is heard (although that is by no means certain, either as to timing or the}

_{outcome of what, no doubt, will be an opposed adjudication application).}⁴

_However,

even if Mr Morgenstern was to be adjudicated bankrupt, I do not accept that would, of itself, render the appeal nugatory.

[22] There is a difference between judgments where, given the nature of the relief

_{ordered, failure to grant a stay may truly be said to render the appeal nugatory and}

_{monetary judgments.}⁵

_{The present judgment is for a monetary sum. At worst from}

Mr Morgenstern’s point of view he may ultimately be bankrupted before the appeal is heard. But even Mr Walker accepted that, in theory, the Official Assignee could carry on the appeal. He submitted that in practice Mr Morgenstern was more likely

_{to carry on the appeal and to do so (more) successfully than the Official Assignee. I}

⁴ _{Insolvency Act 2006, ss 36, 37 and 42 confirm the discretion available to the Bankruptcy Court.}

⁵ NZ Insulators Ltd v ABB Ltd, above n 2.

do not accept that. If the appeal has merit, the Official Assignee could pursue it. If successful, and Mr Morgenstern was not otherwise insolvent, his bankruptcy could be set aside. It is not as though Mr Morgenstern will be funding the appeal under either scenario. Mr Walker has made it clear in his submissions that Mr Morgenstern does not have the funds to pursue the appeal himself. Mr Morgenstern relies on the assistance of others to fund the appeal. Mr Reesby, a financier to whom Mr Morgenstern is indebted, is funding this application. If the Official Assignee considered there was merit in the appeal, and the funder was willing to assist then the appeal could still be pursued.

[23] Although a different case, in Keung & Ors v GBR Investment Ltd the Court of

Appeal noted that there was force in the submission that an appeal was not necessarily rendered nugatory simply because the result of the judgment was a

_liquidation.⁶

_{There was still the possibility of funding an appeal by the liquidator.}

[24] Further, even if the refusal to stay resulted in Mr Morgenstern’s bankruptcy and the Official Assignee refused to pursue it, as the Court of Appeal noted in Phillip Morris (New Zealand) Ltd v Liggett & Myers Tobacco Co (New Zealand) Ltd & Anor the fact an appeal may be rendered nugatory by the lack of a stay is not in and

of itself determinative.⁷

The bona fides of the appeal

[25] Mr Malarao conceded that Mr Morgenstern was genuine in his desire to pursue the appeal. As noted, the respondents also intend to cross appeal if the appeal is maintained.

Will the liquidators be injuriously affected if the stay is granted?

[26] The liquidators argue that any further delay will prejudice them. They are anxious to commence bankruptcy proceedings against Mr Morgenstern so as to engage the claw back provisions of the Insolvency Act. Mr Walker submitted in

_{response that the prejudice in the delay was theoretical only. Mr Morgenstern’s}

⁶ _{Keung & Ors v GBR Investment Ltd, above n 3.}

⁷ Phillip Morris (New Zealand) Ltd v Liggett & Myers Tobacco Co (New Zealand) Ltd & Anor

[1977] 2 NZLR 41.

evidence was that there were no insolvent transactions and the liquidators had not pointed to any insolvent transaction which might be able to be clawed back if bankruptcy was postponed. Mr Walker submitted the liquidators had been investigating Mr Morgenstern and his affairs since July 2008. The fact Mr Morgenstern had been making payments to some of his creditors and had very substantially reduced some of the personal debts was a factor in Mr Morgenstern’s favour rather than the contrary. It did not support a submission that he had been preferring some creditors over others and certainly not over the liquidators, who only became creditors as a consequence of the judgment.

[27] I consider there to be a real advantage to the liquidators if they are able to execute the judgment by commencing bankruptcy proceedings. In the event Mr Morgenstern was adjudicated bankrupt the Official Assignee would be able to investigate his personal affairs with more authority than the liquidators of the companies that Mr Morgenstern was involved have been able to.

[28] But even if the application for adjudication were to be adjourned on the basis of a pending appeal, there is a real practical advantage to the liquidators in bringing the application for adjudication and thereby engaging the claw back provisions of the Insolvency Act.⁸

[29] It is necessary to consider Mr Morgenstern’s evidence. On his own evidence Mr Morgenstern’s liabilities far exceed his assets. In his affidavit in support of the application Mr Morgenstern identifies his assets as:

(a) $22,000 in total in all his bank accounts;

(b) a 2004 Mercedes SL, estimated at no more than $55,000;

(c) a 1995 Isuzu horse truck, estimated worth no more than $15,000; (d) twelve horses used for polo, estimated at no more than $30,000;

⁸ Insolvency Act 2006, s 193(a), for example.

(e) a half share in a 26 foot fishing boat, estimated at no more than

$25,000;

(f) a half share in the home furniture; and

(g) personal effects.

[30] Against that he says that his liabilities include the following:

(a) $2 million owed to Fidelity Ltd and Structured Finance Ltd (companies associated with Mr Reesby, who is funding this application);

(b) $176,000 owed to a trust associated with Mr Reesby; (c) $202,773 owed to Gilbert Walker;

(d) $120,000 owed to GE Moneys secured over his vehicles; (e) $35,000 owed to BDO;

(f) $35,000 owed to Shieff Angland, Lawyers, (although he disputes this);

(g) $32,000 owed on a BNZ credit card;

(h) $17,000 owed on an ANZ Bank credit card; (i) $13,000 owed on a Westpac credit card;

(j) $7,000 owed to St Kentigern Trust Board in respect of school fees;

and

(k) $2,000 owed on an Elders Finance in credit card debt.

[31] In addition, Mr Morgenstern has substantial contingent liabilities under personal guarantees he has given to support the borrowing of companies of which he is the sole director. Mr Morgenstern says two of those companies, St Lukes Holdings Ltd and Morning Star Development Ltd, are currently engaged in undertaking property development work. In the case of St Lukes Holdings Ltd (which he is also the sole shareholder of) he says that secured lenders are owed more than the assets are worth. He says he is not being paid for his work and is undertaking it “to extinguish my personal guarantees to the secured lenders and avoid bankruptcy”.

[32] A similar situation prevails in relation to the property development undertaken by Morning Star Development Ltd at Masons Road. Mr Morgenstern says he has not been paid any fees for his services and he has undertaken the work in order to extinguish his personal guarantee to the BNZ and to avoid bankruptcy.

[33] Mr Morgenstern’s financial position both as to capital and income is, on any view, extremely bleak. Mr Morgenstern says he has filed nil returns to the IRD for the last five tax years at least. His present income is solely from a new business commenced less than a year ago. He has only earned approximately $22,000 from that, although he expects to earn up to $150,000 in the next year.

[34] Despite his personal financial position, Mr Morgenstern and his family live on a substantial property at 781 North Road. Mr Morgenstern is the director and shareholder of Hamina Enterprises Ltd (Hamina) which owns the property at 781

North Road. Mr Morgenstern says Hamina holds the property as trustee and that he is not a beneficiary of the trust. However he did not provide a copy of the trust document. There is no information to disclose the settlor, the beneficiaries and how or whether the classes of beneficiaries could be extended for example.

[35] I do not accept Mr Walker’s submission that the fact Mr Morgenstern’s evidence is “uncontested” means the Court must accept it without question. The liquidators do not accept his evidence. Mr Morgenstern makes a number of bald assertions in his affidavits and does not support them with documentation. It is not for Mr Morgenstern to negotiate this point, as he seeks to do in his affidavit by

_{suggesting that if the Court considers further details are required, he would provide}

_{them but would need 10 working days to do so.}⁹

_{The obligation is on an applicant}

_{such as Mr Morgenstern to put his best case forward in support of his application.}

[36] Further, and even in the absence of cross-examination the Court has some reservation about Mr Morgenstern’s evidence. Apart from the fact of the broad assertions, as Mr Malarao pointed out, Mr Morgenstern stated plainly in his affidavit

_{in support of the application that:}

The fees and disbursements of my solicitors and counsel for this application and the appeal will be paid by Martyn Reesby or entities associated with him. Mr Reesby has agreed to lend me the funds for these costs, adding it to my existing debt to his associated entities

[37] He then goes on to explain why Mr Reesby would be prepared to do that. However, Mr Walker advised the Court that arrangements were yet to be made in relation to the costs for the appeal. I accept that in principle Mr Reesby may have agreed to fund the appeal, but it is clear the detail of that has not been resolved. Mr Morgenstern’s evidence suggests otherwise.

[38] Mr Walker submitted that, in terms of s 195 of the Insolvency Act, the arrangements Mr Morgenstern had made with his creditors were genuine and that while his liabilities might exceed his assets, none of the other creditors were pressing him at present. However, on Mr Morgenstern’s own evidence there is a strong argument that s 195 of the Insolvency Act applies and that a number of the payments Mr Morgenstern has made were insolvent transactions.

[39] Mr Morgenstern himself says that:

For the last five years, I have been working to satisfy creditors progressively and have succeeded in reducing my personal debts and exposure to guarantees very substantially. I am committed to continuing to work to pay of [sic] my creditors. Bankruptcy would put a practical end to that.

[40] It appears that a number of payments have been made to creditors over the last five years to avoid or stave off potential action and bankruptcy. Given Mr Morgenstern’s current financial position, it is inevitable the payments he has made to

creditors would be investigated by the Official Assignee on his ultimate bankruptcy. The claw back only starts to apply on the date application for adjudication is made. I consider there to be a real disadvantage to the liquidators in the event a stay is granted which would postpone the start of the claw back period.

The effect on third parties

[41] Mr Walker submitted that Mr Morgenstern’s family and creditors would be affected if he was pursued to bankruptcy, or even if an application was made. The effect on his family is a factor but it is by no means a powerful factor. Mr Morgenstern’s family are frankly more likely to be affected by the financial situation he is in at present as evidenced by the credit card debt and the outstanding school fees as much as any application for bankruptcy.

[42] Nor do I consider Mr Morgenstern’s other creditors will necessarily be affected by stay being declined. If bankrupted, the Official Assignee’s inquiry into Mr Morgenstern’s personal affairs may benefit all creditors. Next, to the extent it is submitted Mr Morgenstern would not be able to remain as a director of the companies which are presently involved in the development projects – St Lukes Holdings Ltd and Morning Star Development Ltd (which Mr Walker submitted were at the sell down stage) it should not be difficult to appoint an alternative director acceptable to the financiers for the limited purpose of overseeing the sell down. Mr Morgenstern could even be engaged as a consultant to those companies. In any event, even if some of the other creditors are prejudiced, that has to be balanced against the fact that the existing judgment creditors would be affected if the stay is not granted.

Novelty and importance

[43] There are no novel or particularly important questions involved in the appeal. The law Rodney Hansen J applied is well established. It is a question of its application to the facts. Nor is there any public interest in the proceeding.

The apparent strength of the appeal

_{[44] In some recent cases the apparent strength of the appeal has been}

_considered.¹⁰

_{For present purposes I accept that the appeal is arguable, but it does}

face the difficulty as noted, of Rodney Hansen J’s factual findings that by the time of the relevant sale MSE’s financial position had deteriorated and Mr Morgenstern as director was in a position of conflict. Further, part of Mr Morgenstern’s argument, (the fall back argument) is that even if the Judge was correct to have found Mr Morgenstern was in breach of his duty, the sum that he should be required to

_{contribute to the company should be no more than $591,946.}

[45] On the information before the Court and as was conceded by Mr Walker, Mr Morgenstern would not be able to pay even that reduced sum. In those circumstances even if he succeeded on the fall back argument it would not

_{practically advance Mr Morgenstern’s position.}

The overall balance of convenience

[46] I accept Mr Morgenstern is apparently unable to pay the judgment debt. I do not, however accept that his appeal will be rendered nugatory if the stay is declined. Mr Morgenstern has not provided full information to the Court, such as the detail of payments made to creditors over the years, or a copy of the trust deed for example. Further, Mr Morgenstern’s personal financial situation is so poor and the arrangements made with creditors is so questionable, that there must be a real issue of whether he has preferred creditors in the past. On his evidence he is effectively insolvent and has been for some time.

[47] Weighing the relevant factors I am not at all satisfied that the grounds for a stay are made out in this case.

[48] The application for stay is declined.

Costs

[49] The respondents are entitled to costs against the applicant on a 2B basis together with disbursements as fixed by the Registrar.

[50] The respondents also seek costs against Mr Reesby on the basis that he has funded this application. I am not prepared to make an order for costs against Mr Reesby. I accept Mr Walker’s submission that such orders are exceptional and in particular, having regard to the comments of the Privy Council in Dymocks

_{Franchise Systems (NSW) Pty Ltd v Todd (No 2) Mr Reesby cannot be said to be a}

_{real party to the litigation before the Court.}¹¹

_{Mr Reesby has not initiated or}

_{controlled the application. I decline the application for costs against him.}

Venning J