McLennan v Livaja [2016] NZHC 889 (5 May 2016)

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UNDER	The Land Transfer Act 1952
IN THE MATTER	of an application under section 145A for an order that a caveat not lapse
BETWEEN	IAIN MCLENNAN and BORIS VAN DELDEN as liquidators of Neil Timber Limited (in Liquidation) Applicants
AND	BORIS LIVAJA First Respondent IWONA GRAZYNA KOTOWSKA- LIVAJA Second Respondent ORION TRUSTEE NO. 1 LIMITED Third Respondent

Hearing:	12 April 2016
Appearances:	Mr Dale for Applicants Mr Judd for Repondents
_Judgment:	_{5 May 2016}

MCLENNAN & ANOR as liquidators of Neil Timber Limited (in Liquidation) v LIVAJA & ORS [2016] NZHC

[1] The applicants are the liquidators of a company called Neil Timber Limited (NTL). They have lodged a caveat against property belonging to the respondents and have filed an originating application for an order that that caveat not lapse. The caveat is expressed in the following terms:

Ian McLennan and Boris Van Delden as liquidators of Neil Timber Ltd (in liquidation) claim that the property is owned by the registered proprietors as constructive trustees in respect of which the liquidators are beneficiaries on behalf of the creditors.

[2] NTL seeks an order pursuant to s 145A of the Land Transfer Act 1952. The applicants allege that NTL has an equitable interest in certain funds that were used to purchase a previous property for the benefit of the second respondent and that they are entitled to trace those funds into the property which is the subject of the caveat.

[3] The second respondent is implicated in the present proceedings due to her previous relationship with Mr John Ede. She and Mr Ede began a relationship in

24 June 2004. During the period of their relationship, and for some time thereafter, Mr Ede was associated with NTL. It appears that Mr Ede was interested in purchasing the company and was working within the business in order to prepare the way for the sale to proceed. He established a second company, Neil Timber Trustees Company Limited, to be the purchaser of NTL. However, the purchase never eventuated.

[4] By late 2004, the second respondent’s marriage to Mr Ede had broken down. On 14 January 2005, the second respondent settled the D’Angellis Trust. The trustees were listed as the second respondent and FM Trustees 325 Ltd. The couple officially separated on 14 March 2005 and negotiated a relationship property agreement. The terms of the agreement required Mr Ede to transfer ownership of a property at 1/1 Ambrico Place to the second respondent. For one reason or another, this did not eventuate. Instead, Mr Ede arranged for $330,000 to be paid towards the purchase of a property at 30/1 Ambrico Place. The agreement for sale and purchase is dated 27 February 2006 and describes the purchaser as “Neil Timber Trustee Company Ltd or Nominee(s)”. The Nominees were the second respondent and FM

Trustees 325 Limited as trustees for the D’Angellis Trust. Mr Ede arranged for a further $20,000 to be paid to the second respondent to contribute to the cost of improvements to the Ambrico Place property. This transaction satisfied Mr Ede’s obligations under the relationship property agreement.

[5] The applicants allege that NTL has an equitable interest in the funds that were used to purchase and improve 30/1 Ambrico Place. The circumstances leading up to that payment are discussed in further detail below.

[6] In 2007, the second respondent settled a further trust called the Fata Morgana Trust. The assets of the D’Angellis Trust were then transferred to the new trust. The trustee of the new trust was a company called Fata Morgana Ltd, of which the second respondent was the only director. The second respondent married the first respondent on 23 September 2009 and the first respondent was subsequently appointed as a beneficiary of the Fata Morgana Trust in November 2009. Between

2009 and 2014, the first and second respondents incurred significant expenditure in relation to weather tightness issues at the Ambrico Place property.

[7] In December 2014, the property at 30/1 Ambrico Place was sold and the net proceeds of $350,000 were used to purchase a property at 113G Sturges Road in Henderson. The property was purchased by the first, second and third respondents as trustees of the Orion Trust. On 13 January 2016, the company lodged a caveat over the property at 113G Sturges Road. Following steps taken to lapse the caveat, the application in this proceeding was filed on 11 February 2016 and in due course a notice of opposition was filed.

[8] It appears that in or around January 2006, Mr Ede negotiated an opportunity for NTL to purchase a large plot of land known as “Bannings Way”. Mr Ede (possibly assisted by others) devised a complex scheme for dealing with the property, as part of which Mr Ede would receive $360,000 in “commission” for facilitating the apparently profitable sale of the land.

[9] As part of the transaction a loan facility of $565,000 was made available to NTL. However, NTL did not receive the money directly. Rather, the money was paid into the trust account of Mr Ede’s solicitors, Lovegrove Lawyers. Mr Ede then took his “commission” of $360,000, utilising those funds to pay for the purchase of

30/1 Ambrico Place and to pay $20,000 towards the cost of renovating the property. Other money was transferred to Mr Ede’s company, Neil Timber Trustees Ltd. The remaining $205,000 was paid to NTL itself.

[10] The details of some of these transactions are not clear and have only been pieced together as a result of the information provided by Mr Boaden, the former director of NTL, as well as the documents in the possession of the liquidators. However it is clear that following a complaint from the liquidators about the conduct of Mr Ede he was prosecuted and was found guilty on 23 charges brought under the Insolvency Act 2006, the Crimes Act 1961 and the Companies Act 1993. He was sentenced to a period of three years and one month’s imprisonment and is banned from acting as a director until 12 February 2018.

[11] The principles which apply in respect of an application under s 143 of the Land Transfer Act are referred to in Boulton v Senior.¹These are set out in the judgment as follows:

"(1) Any person may lodge with the Registrar a caveat against dealings in any land or estate or interest under this Act if the person-

(a) claims to be entitled to, or to be beneficially interested in, the land or estate or interest by virtue of any unregistered agreement or other instrument or transmission, or of any trust expressed or implied, or otherwise; or

(b) is transferring the any land or estate or interest to any other person to be held in trust."

¹Boulton v Senior HC Blenheim CIV-2004-406-19, 10 February 2004 per France J.

[5] Section 143 of the Land Transfer Act sets out the procedure for removal of a caveat. The applicable principles to an application under s 143 are summarised by Master Faire in Allen v Hogan Developments Limited (2001) 4 NZ ConvC 193,420 at para [12] as follows:

"[a] Section 143 of the Land Transfer Act 1952 gives no guide as to the circumstances in which the Court may make an order that a caveat be removed. Catchpole v Burke [1974] 1

[b] If it is clear that there was no valid ground for lodging a caveat, or that the interest which in the first place justified the lodging of the caveat no longer exists, such a caveat should be removed. Sims v Lowe [1988] NZCA 253; [1988] 1 NZLR 656 (CA) at p 659

[c] The onus under s 143 of the Land Transfer Act 1952 lies on the caveator to show that he has a reasonably arguable case for the interest he claims. Castle Hill Run Ltd v NZI Finance Ltd [1985] 2 NZLR 104 at pp 104-106

[e] For the purpose of this application, the caveator therefore must show that it is entitled to, or to be beneficially interested in, the estate referred to in the caveat by virtue of an unregistered agreement or an instrument or transmission or of any trust expressed or implied. Section 137, Land Transfer Act

[f] What the caveator must establish is an arguable case for claiming an interest of the kind in s 137 of the Land Transfer Act 1952

[g] Even if the caveator establishes an arguable case for the interest in the land claimed, the Court retains a discretion to make an order removing the caveat although it will be exercised cautiously. Pacific Homes Ltd (in rec) v Consolidated Joineries Ltd (1996) 3 NZ ConvC (digest)

[i] The summary procedure for removal of a caveat against dealing is wholly unsuitable for the determination of disputed questions of fact. Accordingly it has been said:

... that an order for the removal of such a caveat will not be made under s 143 unless it is patently clear that the caveat cannot be maintained either because there was no valid ground for lodging it or that such valid ground as then existed no longer does so. Sims v Lowe [1988] NZCA 253; [1988] 1 NZLR 656 at pp 659-660..." (See also Glanville v Medial Holdings Ltd, High Court Auckland, M 46-IM03, 25 February 2003,

Heath J; and Pratt v Hodge, High Court Hamilton, M 216/02, 20 May 2003, Master Faire; and Hinde McMorland & Sim "Land Law in New Zealand" 10.020.)”

[12] I accept that the above is a correct statement of the relevant principles and shall apply the principles stated in this judgment.

[13] The applicants wish to trace the funds into the hands of the respondents on the basis that NTL has an equitable interest in that property, it having provided the funds for the purchase. It is therefore necessary to consider the circumstances in which the payment of the funds was made.

[14] There is no doubt that the property at 30/1 Ambrico Place was purchased using funds provided by the company. However, the case for the applicants is that there was no justification for those in charge of the company, Mr Boaden (as director) and Mr Ede (arguably, as shadow director), to make the payment that they did. There are a number of possible analyses of the consequences of the payment to Mr Ede.

[15] The first is that, to put it bluntly, Mr Ede misappropriated the money from the company and Mr Boaden did not take steps to resist him or actively assisted in doing so. If that analysis were to be adopted, it would be a short route to the conclusion that the company’s property was used to acquire the residence at Ambrico Place. This would be essentially to view the transaction as a fraudulent one which resulted in a transfer of the company’s property to the D’Angellis Trust.²There is of course the fact that Mr Ede was convicted of fraud. Further, the apparent absence from the company records of proper justification for the very large payment that was made to

Mr Ede raises doubts about whether what was described as a “commission” arrangement was in fact bona fide. As well, the concealment of the arrangement from his creditors³does not add to confidence about the genuineness of the

_{arrangement. I accept that this last element, if it is considered on its
own, would not}

²See Westdeutsche Landesbank Girozentrale v Islington London Body Corporate [1996] UKHL

give rise to an inference that the money had been misappropriated. The concealment may have been simply to avoid the money being intercepted and distributed amongst Mr Ede’s creditors. But it is also consistent with a fraudulent taking that the transaction was not disclosed to the Official Assignee because to disclose it would have brought with it a high probability of an investigation of the circumstances in which Mr Reid had obtained the money. There would be little difficulty in such circumstances in concluding that the applicant has the necessary standing to trace its property into the property that was acquired therefrom. Of course, any defences that might be available to the proprietor of the property into which tracing is sought would have to be considered.

[16] Further possibilities include that the payment was made in breach of directors’ duties and in contravention of fiduciary obligations that Mr Ede owed to the company. It is necessary to give consideration to the basis upon which fiduciary obligations may have come into existence which Mr Ede owed to NTL.

[17] The shares in NTL which was incorporated in 2003 were held by Mr Boaden, who was the only director of the company. There is evidence, though, that Mr Ede functioned as what the liquidators have described as a “shadow director”. Mr Boaden now lives in Australia. He apparently made some comments about the role that Mr Ede played in the decision-making process of the company, in effect saying that Mr Ede was in day to day control of the company and associated companies. The liquidators have given evidence that the records of the company are consistent with such being the case. Bearing in mind that the applicants need only establish an arguable case, there is room for the view that Mr Ede was a de facto director of the company within the provisions of s 126(1)(a) of the Companies Act

1993. If the foregoing conclusion is correct, then it is at least arguable that Mr Ede as a de facto director of the company, like any other director, was subject to duties which were fiduciary in nature.⁴

[18] If that was the case, NTL paid $360,000 of its property for a purpose that was contrary to the law because the purpose was to enable a person who was a shadow

director to have the use of beneficial funds to which he was not legally entitled. There is no documentation available to the liquidators which would suggest that Mr Ede obtained the necessary consents in the absence of which, his profiting by obtaining commissions arising from transactions to which the company was a party, was not permissible. There is no documentation of the circumstances in which NTL apparently agreed to this step being taken.

[19] The final obvious possibility is that the the payment was made bona fide. Mr Judd referred me to the fact that in March 2016 Mr Boaden sent an email to a third party who has an interest in the transactions involving the payment of the

$360,000 to Mr Ede saying that the money used to purchase Ambrico Place did not belong to the company but was remuneration owing to Mr Ede. Unfortunately, that email does not appear to be an accurate representation of what actually occurred.

[20] Another point to note is that there is no doubt that Mr Ede defrauded his creditors by making the arrangement for the $360,000 to be paid to discharge his obligations to settle his property relationship claims brought on behalf of the second respondent. He was bankrupt at the time that he contrived to make this payment. In his careful analysis of the situation, Mr Judd said that the bankruptcy of Mr Ede was irrelevant. Whether that is so or not is a subject to which I shall return below.

$360,000 to Mr Ede was arguably made in breach of the fiduciary duties that he owed to the company as a shadow director. Alternatively, it seems arguable to me that Mr Ede misappropriated the $360,000. The applicants, on behalf of NTL, are therefore entitled to assert an equitable interest in the funds.

[22] I shall briefly review the principles that govern the claim for equitable tracing and then set out how they applied to the factual situation under consideration.

[23] First, it is a requirement that there be some basis for equity to intervene by granting the remedy of tracing. It will intervene where a fiduciary has acquired property in contravention of his/her equitable obligations.⁵

[24] Further, stolen property can be the subject of tracing orders in equity.⁶

[25] It is arguable in this case that in extracting the money as he did from the company, Mr Ede either breached his fiduciary obligations as a shadow director or alternatively that he stole the money. The funds can therefore be traced into the Ambrico Place property. Setting to one side for the moment any issues regarding intermingling of property, the funds can then be traced to the proceeds of sale from Ambrico Place, which can in turn be traced into the Sturges Road property.

Do the applicants have an equitable claim in respect of the Sturges Road property?

[26] It is not sufficient for the applicants to demonstrate that NTL has an equitable interest in funds which can be traced to the Sturges Road property. Tracing is merely a process that is used to identify property which might appropriately be subject to a claim in equity. Once that property has been identified, it is necessary to demonstrate that there is a valid claim against that property which would justify the award of a remedy.

[27] While it might be clear that equity would have recognised the existence of a proprietary remedy against Mr Ede for receiving the property in breach of his fiduciary duties or because he was a dishonest recipient of the money, it does not follow that a constructive trust will be recognised as being impressed upon the property in the hands of those who received the property from him.

[28] In the present case, the applicants claim that the respondents hold the Sturges

Road property as constructive trustees. The plaintiffs referred me to a passage in a text which described that claim in the following terms:⁷

⁷Peter Blanchard (ed) Civil Remedies in New Zealand (2nd ed, Thomson Reuters, Wellington,

“[C]onstructive trust”, or at least “constructive trusteeship”, has been used in the context of the equitable liability of third parties who become involved in a breach of trust or fiduciary duty. Equitable liability in respect of both knowing receipt and dishonest assistance has regularly been pleaded as “constructive trust liability”, even though typically the defendant has either never received or no longer has trust assets. However, what is usually meant in such cases is that the defendant is rendered personally liable to account to the plaintiff as though he or she were a trustee. The description of the defendant’s liability as constructive trusteeship is thus entirely misleading: the liability is personal, not proprietary.

[29] This is consistent with the applicants’ submission that “indefeasibility does not protect the respondents from in personam claims”.

[30] However, it is necessary to bear in mind that although the constructive trust in question might be analysed differently it is possible for such a trust to be found in circumstances such as the present:⁸

Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity.

[31] The next issue, then, is whether the applicants can show that it is arguable that the second respondent ought to have appreciated that there was a likelihood that the money used to purchase the property at 30/1 Ambrico Place came from a questionable dealing on the part of Mr Ede. No submissions were made to me about the level of detail which equity requires that the recipient would have to have about the circumstances importing dishonesty. I will assume that the owner of the property need only show that it was likely from all the surrounding circumstances that the recipient held the subjective belief that there was probably something suspicious about the transaction. Can that be said of the recipient in this case?

[32] Earlier in this judgment, when attempting to assess if Mr Ede had received the money in breach of fiduciary obligation or dishonestly, I set out various factual matters that the court was required to take into account. At this point in the judgment, though, the critical issue is not how the court would judge the honesty or otherwise of Mr Ede but rather the state of mind of the second respondent in

_{receiving the property. It would not be inconsistent with the enquiry
made at the}

earliest stage to conclude that, in fact, the second respondent did not have reason to believe that the property she was receiving had been dishonestly obtained.

[33] The second respondent knew that Mr Ede was an undischarged bankrupt having been adjudicated in 2004, which must have meant that he could not pay his debts in their entirety. Further, it must have been obvious to the second respondent that it was most unlikely that Mr Ede’s financial position had in a period of two years since his adjudication improved from being in deficit by $7 million to actually having $360,000 which he was able to legitimately regard as his own property and which he did not have to share with his creditors. It is difficult to accept that the second respondent would not have known about the broad outline of the financial circumstances of Mr Ede given that, as I have said, she did not separate from him until the end of 2004. And yet here was Mr Ede paying 100% of the debt that he owed arising out of the relationship property agreement that the parties had entered into.

[34] Dishonesty relevant to these questions, though, would seem to involve knowledge of dishonesty affecting the circumstances in which the paying party himself obtained the property. Any avoidance of the bankruptcy regime affected creditors of Mr Ede but not the company. It would be possible for Mr Ede to have obtained the $360,000 by legitimate means even though he might have been dishonest by not making that money available to the Official Assignee to distribute between his creditors.

[35] My conclusion is that the fact that Mr Ede was bankrupt was not a matter which relevantly affected the conscience of the second respondent when receiving these funds and which requires her to be treated as a trustee of the funds for the benefit of the company. I do not consider that it is reasonably arguable that she believed that the property had been acquired as a result of Mr Ede practising dishonesty on the company, even though my conclusion is that that is probably what occurred.

[36] For those reasons, it is not arguable that the second respondent acquired the Ambrico Place property, and subsequently the Sturges Road property, subject to a constructive trust in favour of the company.

[37] On the basis of my findings above, it is unnecessary for me to consider the arguments based upon intermingling of funds, laches and other discretionary elements which the respondents say would justify the court declining to grant a tracing remedy in this case.

[38] For all of these reasons, I conclude that the applicants have not demonstrated a reasonably arguable case that they have an equitable interest in the Sturges Road property, sufficient to support a caveat.

[40] Costs are awarded to the respondents and are to be calculated on a 2B basis together with disbursements to be fixed by the Registrar.

High Court of New Zealand Decisions

McLennan v Livaja [2016] NZHC 889 (5 May 2016)