Green Meadow Holdings APS v Sargison [2018] NZHC 2216 (5 October 2018)

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UNDER	the Building Societies Act 1965
IN THE MATTER	of Kiwi Deposit Building Society (in Dissolution)
BETWEEN	GREEN MEADOW HOLDINGS APS First Plaintiff LILAC POND HOLIDNGS APS Second Plaintiff
AND	PAUL GRAHAM SARGISON AND SIMON DALTON _Defendants

Hearing:	22 June 2018
Appearances:	D McGill and D Bennington for the Plaintiffs S McAnally for the Defendants
_Judgment:	_{5 October 2018}

Duncan Cotterill (D McGill/D Bennington), Auckland, for the Plaintiffs Keegan Alexander (S O McAnally) Auckland, for the Defendants Counsel:

GREEN MEADOW HOLDINGS APS v SARGISON AND DALTON [2018] NZHC 2216 [5 October 2018]

Security for costs application [4] Building Societies – legislation [5] This building society [10] The dissolution [14] The trustees’ application for directions [18] The start of this proceeding [20] The plaintiffs’ pleadings [21] Strike out application – principles [25] Priority of creditors [26] The absence of a liquidation [34] The defendants as trustees [38] The first cause of action [41] The second cause of action [43] The proposed fourth cause of action [45] The proposed fifth cause of action [48] The proposed third cause of action [50] Outcome [62]

[1] Traditionally people joined building societies to finance the purchase of a home. That was shown in s 9 of the Building Societies Act 1965:

that of raising, by the subscriptions of members, a fund for making advances to members out of the funds of the society on security by way of mortgage of land, or on the security of the shares of members, or on other or no security, in accordance with this Act.

But that changed in the 1980s. Building societies may now do much more. As financial institutions they have much wider functions. Section 9 has been repealed and replaced with this:

(1) Subject to any restrictions or prohibitions contained in the rules of a society, the functions of every building society registered under this Act shall

(a) to provide services of any kind for its members or other persons, including, without limiting the generality of the foregoing, to provide services consisting of, or relating to,—

(b) to acquire by purchase, lease, exchange, or in any other way, land or any interest in land:

[2] This case is about a modern building society, the Kiwi Deposit Building Society. Its members were all companies. The society was established for its members to hold and trade investments. Many of the investors were based outside New Zealand. The plaintiffs, Danish companies, held preference shares in the society with special rights to “track” their investments, property holdings in England and Sweden. The society has failed. It is insolvent. It was put into dissolution in April 2013. The defendants are the trustees carrying out the dissolution. They have realised the assets of the society, including the plaintiffs’ “tracked” investments, and made partial distributions to creditors. There appear to be no funds available for members. The plaintiffs take issue with that. They say that they should receive the proceeds of the tracked investments, not the creditors. They sue the trustees, who have responded with a strike-out application. In a draft amended pleading the plaintiffs also say that the trustees have mismanaged the dissolution. If they had done their job properly, there would be no shortfall.

[3] In my judgment the creditors of the society take priority and the plaintiffs cannot claim that their “tracked investments” should not be applied to meet creditors’ claims. Their cause of action alleging mismanagement by the trustees is not pleaded properly and does not show that they will receive any distribution, even if they were to prove mismanagement. That could potentially be repaired. The plaintiffs should be given the opportunity to do so.

[4] There is a preliminary procedural matter. The defendants applied for security for costs on the ground that the plaintiffs, Danish entities, did not have any presence in New Zealand and any New Zealand orders for costs would not be enforceable in Denmark, even though the plaintiffs had submitted to the jurisdiction of the New Zealand courts by suing here. Counsel advised that the security for costs application had been resolved. The parties have agreed on arrangements under which security is being paid in staged amounts. I was not required to decide security for costs.

[5] Under the Building Societies Act 1965, a building society is a body corporate.¹

It is required to have at least two directors.²Building societies have rules for their governance.³It is not necessary to hold shares to become a member.⁴The liability of members is limited under s 27:

(1) The liability of a member of a society in respect of any share on which no loan or other investment has been made shall be limited to the amount actually paid or in arrear on the share.

(2) The liability of a member in respect of any share on which a loan or other investment has been made shall be limited to the amount payable thereon under any mortgage or other security or under the rules of the society.

(3) The liability of a member to whom a loan or other investment is made under rules made in accordance with section 24 shall not be greater than it would be if the rules treated him or her as being, by reason of the making of the loan or other investment, the holder of a share in the society.

[6] Part 8 of the Building Societies Act deals with dissolution and winding up. Section 115 says:

(1) A society may be dissolved by an instrument of dissolution, with the consent of three-fourths of the members, holding not less than two-thirds of the number of shares in the society, testified by their signatures to the instrument of dissolution.

(b) the number of members, and the amount standing to their credit in the society’s books:

(d) the intended appropriation or division of the funds and property of the society:

(e) the names of 1 or more persons to be appointed as trustees for the purposes of the dissolution, and their remuneration.

(3) Alterations in the instrument of dissolution may be made with the like consent, testified in the same manner.

(4) The instrument of dissolution, and all alterations therein, shall be registered in the manner provided by this Act for the registration of rules, and shall be binding on all the members of the society.

[7] Under s 116(2) the provisions of the Act continue to apply in relation to the society as if the liquidators, or other persons conducting the dissolution or, as the cases may be, the trustees appointed under the instrument of dissolution, whether the board or directors of the Society.

[8] A building society can also be dissolved by the appointment of a liquidator. Under s 118, the court may appoint a liquidator on the application of a member authorised by special resolution to apply to the court, by a judgment creditor for a sum exceeding $100 or the Financial Markets Authority. Under s 118(4):

(4) Subject to the provisions of this Act and of any regulations made under this Act, a society shall be deemed for the purposes of any liquidation under this section to be a company, and the provisions of Parts 16 and 17 of the Companies Act 1993 relating to the liquidation of companies, so far as they are applicable and with the necessary modifications, shall apply accordingly.

[9] Section 119 provides for limits on the liabilities of members on dissolution or liquidation consistent with s 27:

Where a society is being dissolved or is in liquidation, a member to whom a loan or other investment has been made under a mortgage or other security, or under the rules of the society, shall not be liable to pay the amount payable thereunder except at the time or times and subject to the conditions set out in the mortgage or other security, or in the rules, as the case may be.

registered offices in the same building in central Auckland. The other, Aequus Trust

Mr Lachlan Williams signed the application on behalf of all the founding members, as director of all the New Zealand companies and under a power of attorney for Aequus Trust. He and a Mr Scott Macaw appear to have been responsible for setting up and running the society. Mr Williams was the society’s secretary and one of the directors. There was also a director in Denmark. Under its rules the society had the functions in s 9A of the Building Societies Act. The rules give the society wide powers to invest money for any purpose connected with its functions, and for other purposes: to borrow and lend money, and to accept deposits from its members.⁵The rules say this as to dissolution:

12.2 Where there are insufficient funds to meet all of the liabilities and obligations of the society, s 27 of the Act shall apply (subject to the terms on which the shares were issued) such that:

a) the liability of a member, who holds shares but who has not borrowed money from the society, shall be limited to the amount that has been actually paid, or is in arrears, on his/her shares; and

b) the liability of a member, who holds shares and who has also borrowed money from the society, shall be limited to the amount that has been actually paid, or is in arrears, on their shares plus the amount of the loan or other advance (including principal and interest) secured by a mortgage or other security.

12.3 Where there is a surplus of funds on dissolution, the surplus shall be distributed to the members in proportion to the number of shares they hold (subject to the terms on which the shares were issued).

[11] The rules allow for the issue of new shares in classes with special terms, including preference shares and “tracking” shares.⁶During 2009, Green Meadow Holdings ApS became a Class B shareholder holding 400,000 Class B shares of £1.00 each. At the same time the building society became the sole shareholder of the Bank of Bournemouth Limited, an English company that owned a commercial property

there. There is evidence how Green Meadow came to be a shareholder and the Bank of Bournemouth shares were transferred to the society but it is not necessary to go into the details here. But I record that Nicola Fanelli, who operates an asset management business in Switzerland, was persuaded to arrange for the investments to be held by the society as Mr Macaw advised him in 2009 that the building society would fall under the definition of ‘financial institution’ in the Reserve Bank of New Zealand Act

1989 and as such would be subject to Reserve Bank oversight. Mr Fanelli has fronted for the plaintiffs in this proceeding. The identities of the people behind the plaintiffs have not been disclosed.

[12] The terms of issue of the Class B shares, which prevail over the society’s rules, are directed at protecting investments earmarked for Green Meadow. That was done by provisions for tracking, preference, ring-fencing, restrictions on distributions and dividends, voting and rights on liquidation. The terms included:

The Class B share shall be linked to the investment assets (with the intention that the capital and income of the Class B share shall reflect, as closely as possible, the capital of, and any income or distributions derived from the investment assets). All other paragraphs of these terms of issue shall be interpreted and construed so as to give effect to this paragraph 2.

‘Investment assets’ is defined to mean the assets from time to time of the investment holding company which was identified as the Bank of Bournemouth Limited.

Pari passu between themselves; and (b) in priority to any other class or share or security,

In respect of any dividends, other distributions or capital returns by the building society which are received or sourced from the investment assets (and/or any other funds and other assets of the building society which are referable solely to the investment asset).

(a) declare an in specie distribution in respect of the investment assets (or any other assets of the building society which are referable solely to the investment assets) other than to the holders of the Class B shares;

(b) enter into any transaction (or series of related transactions) to dispose of the investment assets (or procure that the investment holding company enters into any such a transaction);

(c) transfer or dispose of any shares in the investment holding company, or permit the investment holding company to issue shares or other securities to any person other than the building society;

(d) Issue any further Class B shares, any options to acquire Class B shares, or any securities which are or may be convertible into Class B shares;

(e) Issue any other class of shares or securities which rank equally with, or in priority to, the Class B shares in respect of any dividends, other distributions, or capital returns, which are sourced from the investment assets;

without the approval of the holders of the Class B shares in the form of a Class

Each Class B share entitles the holder to be eligible to receive special dividends, as determined by the board from time to time in its absolute discretion. The amount of any such dividends shall not exceed the lesser of:

(b) the funds of the building society lawfully available for the payment of distributions.

8.1 Upon the liquidation or dissolution of the building society, each Class B share entitles the holder to receive the amount equal to X% of the Residual Investment Value. For the purpose of this paragraph 8.1:

(a) “X%” shall be the percentage which is equivalent to the fraction, the numerator of which is 1 and the denominator of which is the number equal to the total number of Class B shares on issue; and

(i) The amount determined by the liquidator (or other person conducting the dissolution) of the building society to be the realised value of the investment assets; less

8.2 If, upon the liquidation or dissolution of the building society, the liquidator (or other person conducted the dissolution) proposes to distribute part or all of the assets of the building society to the holders of shares, the investment assets can only be distributed to the holders of Class B preference shares (and not the holders of any other class of shares).

8.3 In respect of any surplus on the liquidation or dissolution of the building society which is not part of the Residual investment value, Class B shares shall rank ahead of the foundation shares but behind all other classes of shares (unless such shares are expressly stated to rank behind the Class B shares).

[13] Shortly afterwards Lilac Pond Holdings ApS became a Class D shareholder holding 7,500,000 Class D shares of €1.00 each. The terms of issue of the Class D shares are similar to those for the Class B shares, save that the investment holding companies are defined as Lark Sverige AB, which had its office in Kalmar, Sweden and owned a commercial property there, and Ely Investments Ltd, which had its office in Hampshire, England and owned a property in Torquay.

[14] On 18 April 2013, a resolution under s 115 of the Building Societies Act was passed for the dissolution of the society. An instrument of dissolution under s 115(2) shows that Mr Scott Macaw signed as director for Green Meadow and for Lilac Pond Holdings. Mr Lachlan Williams signed as director of many of the other shareholders. The instrument says:

On 18 April 2013 not less than three-fourths of the members of Kiwi Deposit Building Society (“the Society”), holding not less than two-thirds of the number of shares in the Society, consented to the dissolution of the society.

Pursuant to s 115(2) of the Building Societies Act 1965 it is agreed and declared as follows:

(a) The liabilities and assets of the Society as at 31 December 2012 are set out in detail at Appendix 1, with total assets being NZD133,579,109, and total liabilities being NZD121,211,226.

(b) The number of members is 24, to which NZD12,367,883 stands to their credit in the Society’s books.

(d) The intended division of the funds and property of the Society shall observe the following process, subject to (d)(vi):

(i) A moratorium be put in place – no deposits in or depositor redemptions out

(ii) Assets off – balance sheet/ held on a custodian basis are to be distributed to their beneficial owners

(iii) Investment Assets referred to in the terms of issue of the class B and D shares are to be distributed to the class B and D shareholders

(iv) Secured creditors are to have their claims met from the realisation of applicable security

(v) Secured creditors (in the event of security shortfall) and unsecured creditors are then to have residual divided amongst them relative to their outstanding claims after satisfaction of the Trustees’ remuneration and expenses

(vi) The Trustees appointed as per (e) below are to retain the services of PKF-Ross Melville, auditors, to advise as required on accounting matters to ensure the accurate and appropriate distribution of the Society’s assets as at the date of this instrument (to which end, a successful instrument may be issued at a late date with updated content)

(e) Paul Graham Sargison and Simon Dalton, of Auckland, were appointed the trustees to oversee the dissolution, their remuneration being set out at Appendix 2.

[15] Messrs Sargison and Dalton are experienced insolvency practitioners. Despite what the instrument said, the society was insolvent. Mr Dalton says that the true book value of assets was about $50m (after removing assets held in trust), not the $133m indicated by the instrument. He says a lot of the society’s assets were either unsecured loans or purchases of shareholdings in overseas entities. Most of those overseas entities were Danish-based investment vehicles and all turned out to be bad investments.

(a)	Employees	$34,018.94
(b)	Trade creditors	$207,222.18
(c)	Investment creditor	$11,259,555.92
(d)	Customers (deposits)	$26,039,369.64
		$37,540,166.68

Mr McAnally advised that none of the depositors (those claiming over $26m) are members of the society. The investment creditor claims under a loan on which interest continues to accrue.

[17] The trustees say that there will be a shortfall for creditors and there will be no funds to distribute to members. Attached to Mr Dalton’s affidavit of 19 February 2018 is a schedule showing recoveries of NZD22,732,947. The trustees’ fourth report, dated

Bank of Bournemouth Ltd	$2,218,500.00
Lark Sverige AB	$9,793,565.00
Ely Investments Ltd	$1,564,417.00

Those funds have been used to pay the costs of dissolution and creditors, not the plaintiffs. As matters stand now, there is no prospect of Green Meadow and Lilac Pond receiving anything from the dissolution of the building society.

[18] In 2016 Messrs Sargison and Dalton applied to the court without notice for directions on how to deal with the claims of creditors of the building society. The application may be analogous to an application by liquidators under s 284 of the Companies Act for directions as to the conduct of a liquidation.⁷It was proposed that they should give notice with information to actual and potential creditors, advising what they as trustees considered the amount of the creditor’s claim to be, and giving the creditor the right to challenge that by starting proceedings within three months. They also sought a direction allowing them to pay any claims to Treasury, where the address of the creditor was not known. Justice Davison dismissed the application because he considered that as the society was insolvent, it should be put into liquidation rather than dissolution.⁸

⁷As an example, see Re Auckland Maritime Investment Ltd (in liq) [2014] NZHC 2317.

[19] Counsel advised that Messrs Sargison and Dalton tried to see whether they could arrange for the society to be put into liquidation but on making enquiries they found out that most of the New Zealand members had been removed from the companies register and no longer existed. It would not be possible to appoint a member to apply to the court for a liquidation order because there were not the required numbers to pass a special resolution under s 118(3)(a).

[20] The trustees served on the plaintiffs a notice dated 5 October 2017 under s 75 of the Trustee Act 1956 requiring the plaintiffs to take any legal proceedings against the Building Society or the trustees in respect of their preferential shareholdings and

the conduct of the dissolution. The notice advised that if a proceeding was not started within three months, the trustees would apply to the court for an order enabling them to complete the dissolution without regard to these claims. This proceeding, started on 22 December 2017, stopped that. The point to note here is that the plaintiffs, based overseas, had to start the proceeding without all the information that they might have wished for.

[21] The statement of claim has two causes of action. In the first they plead that by distributing the funds of the building society to unsecured creditors, the trustees have disregarded the terms of the instrument of dissolution and the judgment of Justice Davison of 22 April 2016, and they have refused to distribute the investment assets to the plaintiffs as required under the instrument of dissolution. In doing so the trustees breached their duty to adhere to the terms of the deed that appointed them as trustees. In the second they plead that they and the unsecured creditors were all beneficiaries under the trust created by the instrument of dissolution. By preferring the unsecured creditors over the plaintiffs, the trustees breached their duty of impartiality amongst the beneficiaries. By using the proceeds of the investment assets to benefit the unsecured creditors, the trustees benefitted one set of beneficiaries at the expense of another. They breached Justice Davison’s direction to liquidate the society. In both causes of action they seek equitable compensation.

[22] In response to the strike-out application they have provided a proposed amended statement of claim with three further causes of action. I shall consider the strike out application with regard to the proposed new pleading. The third cause of action alleges that the defendants failed to act as prudent trustees in realising assets and examining creditors’ claims. As to the realisation of assets, they plead as an example the sale of the Kalmar property, which had a market valuation of SEK160 million in December 2013. The trustees sold it in May 2014 for SEK123 million. The plaintiffs say that in selling the property at less than market value the trustees failed to act prudently. As to creditor claims, they allege that the trustees have failed to examine all claims of creditors adequately. They suggest that some creditors’ claims may be linked to Messrs Macaw and Williams and should accordingly be rejected.

[23] The fourth cause of action is a claim against the trustees as trustees de son tort. The pleading goes that as the building society was insolvent at the date of dissolution, the instrument of dissolution was not a valid exercise of the power to dissolve the building society, and the appointment of Messrs Sargison and Dalton as trustees was accordingly not valid and enforceable. As they were not validly appointed, they have acted as trustees de son tort. The trustees are liable for not distributing the proceeds of sale of the investment assets to them, but paying creditors instead.

[24] The fifth cause of action is a claim against the defendants as constructive trustees for dealing with the trust fund in a manner inconsistent with the trust fund. The cause of action assumes that the trustees were validly appointed under s 115 of the Building Societies Act, but as the society was insolvent from the date of dissolution, the trustees did not have the power to proceed with the dissolution of the society. The trust created by the instrument of dissolution failed because of non-

compliance with the statutory requirement that the society be solvent at the time of the purported dissolution. The trustees therefore held the assets under a trust imposed by law. As the express trust failed, the entire equitable interest in the society’s assets (including the Class B and D investment assets) remained vested in the grantor/settlor of the express trust being the existing members of the building society. The trustees are alleged to owe fiduciary duties to the plaintiffs as existing members of the building society to preserve the trust assets, including the investment assets, but failed to do so by selling the investment assets and distributing them to creditors.

[25] The defendants apply for strike out on the ground that the statement of claim does not disclose reasonably arguable causes of action. On such applications, it is common to recite the test stated by the Court of Appeal in Attorney-General v Prince⁹and endorsed by Elias CJ and Anderson J in Couch v Attorney-General:¹⁰

(a) Pleaded facts, whether or not admitted, are assumed to be true. This does not extend to pleaded allegations which are entirely speculative and without foundation.

This reflects the court’s reluctance to terminate a claim or defence short of trial.

(d) The jurisdiction is not excluded by the need to decide difficult questions of law, requiring extensive argument.

(e) The court should be particularly slow to strike out a claim in any developing area of the law, perhaps particularly when a duty of care is alleged in a new situation.

That test is appropriate when a pleading is substantively deficient, as where no cause of action known to the law is disclosed, or on facts assumed to be true the plaintiff will fail at law. A pleading may also fail because it is procedurally defective, for example, in not meeting the pleading requirements of the High Court Rules, such as not giving adequate particulars. If the court finds that a pleading is substantively defective, it is more likely to strike it out because it cannot be saved or amended. Any new proceeding reworking the same allegations would be pointless. On the other hand, procedural deficiencies may be repaired and it may be appropriate to give the

opportunity to amend. For this aspect, see the comment of Tipping J in Marshall Futures Ltd v Marshall distinguishing between a pleading “which is a total write-off and one which is capable of effective repair”.¹¹As a general rule, the court does not, however, strike out a pleading because the court may consider that the plaintiff will not be able to prove the matters alleged in that pleading. In the leading decision on defendants’ summary judgment applications, Westpac Banking Corporation v MM Kembla New Zealand Ltd, the Court of Appeal said:¹²

Except in clear cases, such as a claim upon a simple debt where it is reasonable to expect proof to be immediately available, it will not be appropriate to decide by summary procedure the sufficiency of the proof of the plaintiff’s claim. That would permit a defendant, perhaps more in possession of the facts than the plaintiff (as is not uncommon where a plaintiff is the victim of deceit), to force on the plaintiff’s case prematurely before completion of discovery or other interlocutory steps and before the plaintiff’s evidence can reasonably be assembled.

In a strike out application, the court is concerned with the quality of the pleadings, not the adequacy of proof and the Court of Appeal’s dictum applies even more so.

[26] In one way or another, in their first, second, fourth and fifth causes of action, the plaintiffs say that the trustees have erred by applying the proceeds of the investment assets to the creditors of the society instead of themselves as preferential shareholders. They say that under the terms of their shareholding, the proceeds of the investment assets cannot be used to pay creditors.

[27] As a general rule, an unpaid creditor can require that assets of the debtor be made available to meet the creditor’s claim. Prudent debtors will have working capital to meet their funding requirements. Secured creditors can of course enforce rights against those assets charged in their favour. Unsecured creditors can obtain judgment and enforce execution remedies against a debtor’s assets. There are exceptions, for

example, tools of trade and necessary household assets¹³and interests in a joint family home.¹⁴But those exceptions only go to prove the rule.

[28] The creditor’s right of recourse to the assets of the debtor is found in other areas of the law. Executors are required to pay debts of the deceased before any legacy. Even if the will makes no provision for payment of debts, executors are liable on a devastavit if they do not pay the creditors.¹⁵On the dissolution of a partnership, outside creditors are paid out before partners.¹⁶Under trust law, creditors obtain priority through a trustee’s right of indemnity from trust assets, which is secured by an equitable lien over trust assets, a property interest that ranks in priority over the claims of beneficiaries and which creditors may enforce by subrogation.¹⁷In admiralty law, there is a ranking of maritime claims which all come ahead of ownership interests in a vessel.¹⁸It is the same in company law. In Principles of Corporate Insolvency Law, Professor Goode noted that the interests of creditors are in principle to be given precedence over all other interests.¹⁹In Cambridge Gas Transportation Corporation v Official Committee of Unsecured Creditors of Navigator Holdings plc, Lord Hoffmann said that liquidation and bankruptcy recognised an existing priority for creditors:²⁰

...The purpose of bankruptcy proceedings, on the other hand, is not to determine or establish the existence of rights, but to provide a mechanism of collective execution against the property of the debtor of creditors whose rights are admitted or established....

The important point is that bankruptcy, whether personal or corporate, is a collective proceeding to enforce rights and not to establish them.

¹⁶Partnership Act 1908, s 47(b)(i) – for a fuller discussion, see Roderick I’Anson Banks Lindley and

Banks on the Law of Partnership (20th ed, Sweet and Maxwell, London, 2017) at 27.80 and 25.47.

¹⁷See the useful summary by Brereton J in Lemery Holdings Pty Ltd v Reliance Financial Services

¹⁸Bevan Marten Maritime Law in New Zealand (online ed, Thompson Reuters, Wellington, 2016)

¹⁹Roy Goode Principles of Corporate Insolvency Law (4th ed, Sweet and Maxwell, London, 2011)

²⁰Cambridge Gas Transportation Corporation v Official Committee of Unsecured Creditors of

[29] It should therefore not come as any surprise that creditors of building societies have similar priority. In Re Auckland Permanent Co-operative Building and Investment Society, the Court of Appeal said:²¹

The ordinary creditors take in priority both to the shareholders whose shares have matured and also to the shareholders who have given a notice of withdrawal which had expired before the liquidation of the society.

The liquidation of that society was carried out under the Companies Act 1882 and the Building Societies Act 1880. Those statutes were generally silent as to the ranking of claims in a liquidation. The Court of Appeal applied common law principles. Re Auckland Permanent Co-Operative Building and Investment Society was a liquidation case, where the society was insolvent. Here the building society is in dissolution, but not in liquidation. The plaintiffs say this makes a difference. But as a general rule the dissolution of the society does not affect creditors’ rights to enforce their claims against a society. In Browne v Royal Permanent Building Society, A’Beckett J said:²²

Even assuming that all the provisions of the third subsection had been complied with [a provision equivalent to s 116 of the New Zealand Act] I would still say that subsection merely provides a means by which a society or its members may settle among themselves a scheme for dissolution and cannot bind anyone else. It would be an extraordinary thing if, by proceeding under this section, they could frustrate the legal rights of a creditor. I do not regard this scheme for dissolution as obstructing the rights of creditors any more than the rights of creditors or a private person would be obstructed because his debtor had made some arrangement for certain of his creditors.

[30] The Building Societies Act 1965 does not change that. Third parties have the usual rights to enforce obligations against a building society. Rules of a society bind members and officers, not third parties.²³As to incurring obligations, that is illustrated by s 9E, which is in similar terms to s 18 of the Companies Act 1993. Under s 9E(1), a third party’s rights against a society apply notwithstanding any potential invalidity of appointments of officers or agents, unless the third party has the required knowledge. Lenders are not required to inquire whether borrowing restrictions have been observed.²⁴As to enforcing obligations, a society cannot resist creditors having

²²Browne v Royal Permanent Building Society [1892] VicLawRp 72; (1892) 18 VLR 397 at 399.

recourse against the society’s assets to satisfy their claims. There is nothing in the Act or the rules of this society to suggest otherwise.

[31] Nor do the terms on which the Class B and Class D shares were issued change this position. As shareholders the plaintiffs rank in some respects ahead of other shareholders: their shares are linked by “tracking” to the investment assets through the society’s shareholding in the investment holding companies, are ring-fenced, have special dividend rights and rights on liquidation. But none of these provisions can put them ahead of the society’s creditors. The shares in the investment holding companies are assets of the society: they do not belong to the plaintiffs as shareholders. A shareholder of a company does not have a beneficial interest in its assets,²⁵and the same applies to a shareholder of a building society. The structure of the arrangement here is that shareholders hold shares in the society, which in turn holds shares in the investment holding companies, which own the investment assets. This belies any idea that the investment assets or the shares in the investment holding companies were held on trust for the plaintiffs. That is reinforced by provisions in the terms of issue that recognise that the plaintiffs have rights in common with other shareholders: rights to notices of meetings, financial statements and other information required to be given to shareholders (cl 5), voting rights (cl 6), dividends after any distributions of investment assets (cl 7(b)) and rights on liquidation (cl 8). Beneficiaries of trusts do not typically share such rights with shareholders of corporate trustees. The terms of issue do not protect the plaintiffs from the proceeds of the investment assets being applied to meet creditors’ claims first.

[32] On dissolution creditors do not lose their priority. That is clear from Brown v Royal Permanent Building Society. An instrument of dissolution binds members, but not creditors.²⁶But under s 115(2)(c) the instrument is required to say how creditors’ claims are to be met.²⁷The next clause specifies “the intended appropriation or division of the funds...”, which suggests that creditors’ claims come before members.

²⁵Mahon v The Station at Waitiri Ltd [2017] NZCA 387, (2017) 18 NZCPR 760 at [33]–[37].

[33] In this case the instrument did not follow that order. Instead the sequence in clause (d) is investment assets for Class B and D shareholders, secured creditors, trustees’ remuneration and expenses, then unsecured creditors, without any provision for members generally. That makes no difference. Any resolution by members of a building society that they will pay out certain members first, even if it means that creditors will receive less, cannot stand up against creditors’ undoubted priority. Any resolution that certain assets should not be used to pay creditors when there is insolvency is ineffective against creditors.

[34] The plaintiffs seem to accept that creditors would come ahead of them, if the society were in liquidation. The liquidation provisions of the Companies Act 1993, Part 16, apply to liquidations of building societies.²⁸Sections 312, 313 and Schedule

7 rank claims in a liquidation, with creditors to be paid out before any distribution of a surplus to shareholders. But the plaintiffs claim that it makes a difference that the society is not in liquidation. They take the trustees to task for not having followed Justice Davison’s direction that the society should be put into liquidation.

[35] Justice Davison did not make a liquidation order. The trustees did not have standing to apply for liquidation and did not apply for it. He held that the society should be put into liquidation because of its insolvency and directed the trustees to report to the society’s members with a view to steps being taken under s 118 to put the society into liquidation.²⁹The trustees give a partial explanation through the advice of counsel: most members no longer exist, so a quorate meeting cannot be convened. And it appears that no creditors are so concerned at the state of affairs as to make their own liquidation application. That does not mean that the society cannot be put into liquidation, although it may be very involved: it would mean restoring members to the Companies Register by applications under s 329 of the Companies Act, ensuring that they all have directors and then convening a meeting to pass a resolution under

[36] Of course, liquidation is more appropriate when a society is insolvent and creditors’ claims cannot be met in full. The Companies Act provisions which apply to liquidation of a building society provide a clear framework for realising and distributing assets in an orderly way. Creditors’ rights to sue and to enforce court orders are stayed and replaced with rights to claim in the distribution of assets. The amounts of claims are fixed at the date of liquidation. Subject to the ranking of claims, creditors share pari passu in distributions.

[37] The absence of liquidation does not mean that the society must be left in limbo. The defendants have been appointed trustees to carry out the dissolution. The society was no longer carrying on business. It had assets which needed to be realised and the proceeds distributed. The creditors’ claims come ahead of the shareholders’. The continuation of the dissolution is an informal liquidation, but without the framework provided by liquidation law.

[38] Under s 115(1)(e) of the Building Societies Act those appointed to carry out a dissolution are trustees, but in this case the defendants are not trustees in the strict sense. On dissolution the assets did not vest in the defendants but continued to belong to the society until distributed to creditors and shareholders. The defendants are better considered as special purpose directors with control of the society’s assets, able to exercise the powers of the board when the society was not in dissolution,³⁰and required to carry out the dissolution. In that sense their function is similar to a liquidator’s. They are agents of the society, able to bind it without incurring personal liability, although they control their principal. The use of “trustee’’ indicates that the defendants owe duties of good faith, to act impartially and for proper purposes. They also owe duties of skill and care. While the instrument of dissolution sets out in general terms how the dissolution is to be carried out, that does not mean that the trustees are to ignore supervening rights of third parties. Just as a trustee cannot ignore the rights of trust creditors when exercising powers under a trust deed, nor can a trustee

_{under an instrument of dissolution. By analogy with company
directors’ duties to take}

into account the interests of creditors,³¹the trustees have a duty when carrying out the dissolution to have regard to creditors. As trustees, they may apply to the court for directions.³²

[39] It is arguable for the plaintiffs that the trustees owe their duties directly to the shareholders. That is, shareholders as beneficiaries under the dissolution may sue the trustees without the difficulties of derivative claims and the rule in Foss v Harbottle.³³

The matter may not be so straightforward for creditors, because the trustees do not owe their duties to them. If trustees do not pay creditors generally, their only recourse may be to have the society put into liquidation, so that an application for breach of duty may be brought under s 301 of the Companies Act. And if trustees prefer some creditors ahead of others, the remedy may be under the voidable transactions provisions of the Companies Act. That also requires the society to be put into liquidation.

[40] There is however no evidence that these trustees have disregarded creditors or preferred some ahead of others. The plaintiffs instead say that the trustees were wrong to pay creditors ahead of them. That comes back to their first, second, fourth and fifth causes of action.

[41] To repeat, the first cause of action pleads that by distributing the funds of the building society to unsecured creditors, the trustees have disregarded the terms of the instrument of dissolution and the judgment of Justice Davison of 22 April 2016, and have refused to distribute the investment assets to the plaintiffs as required under the instrument of dissolution. In doing so the trustees breached their duty to adhere to the terms of the deed that appointed them as trustees. The loss claimed is the value of the investment assets.

[42] The difficulties with that pleading is that it treats the instrument of dissolution as setting out comprehensively what the trustees must do and ignores the society’s obligation to pay its creditors from its assets before it distributes any surplus from realisations to its shareholders. That obligation applies, regardless of the terms of the instrument of dissolution. Justice Davison’s dismissal of the trustees’ application for directions did not relieve the society from paying its creditors. The pleading does not show an arguable cause of action. It is struck out.

[43] The second cause of action equates the plaintiffs and the creditors as beneficiaries under a trust created by the instrument of dissolution. The defendants are alleged to have breached their duty of impartiality by preferring the creditors to the plaintiffs. Justice Davison’s decision is invoked again, as is the loss of value of the investment assets.

[44] The creditors have rights independent of the instrument of dissolution, which does not bind them. Those are rights to be paid out of the assets of the society ahead of shareholders. The attempt to equate creditors and shareholders as beneficiaries under a trust is misconceived. Justice Davison did not hold that the plaintiffs and creditors ranked equally in the dissolution. The pleading is not tenable and is struck out.

[45] For the fourth cause of action the plaintiffs allege that the instrument of dissolution is invalid because the society was not solvent at the date of dissolution. The defendants were accordingly not authorised to act as trustees in the dissolution, but acted as trustees de son tort, even after they found out that the society was insolvent. The defendants should have paid the plaintiffs the proceeds of the investment assets or applied to the court for directions. Equitable compensation is sought.

[46] In hindsight it can be seen that liquidation ordered under s 118 was preferable to dissolution by shareholder resolution under s 115, as the trustees have had to carry out the winding up of the society without the structure given by Part 16 of the Companies Act, but does that mean that the dissolution resolution was invalid? The Building Societies Act does not state that shareholders cannot resolve under s 115 to put an insolvent society into dissolution. There may be circumstances where shareholders consider that urgent action is required to bring business to a halt, as in the case of a “run” on the society.³⁴While that might also be addressed by an application to the court to appoint an interim liquidator under s 246 of the Companies Act, that would first require a special resolution under s 118(3)(a) of the Building Societies Act to authorise the application. A resolution under s 115 may be more efficient. It is interesting that in this case the instrument of dissolution provides at cl (d)(i):

A pointer that Parliament intended that insolvent societies could not be put into dissolution under s 115 might be a provision requiring a directors’ solvency resolution or similar,³⁵but there is no such indication, nor any statutory purpose requiring such an implication.

[47] Besides, the alleged invalidity does not advance the plaintiffs’ case. Even if the defendants were not validly appointed, they still enabled the society to meet its obligations to its creditors. The invalidity argument does not trump the creditors’ priority. This cause of action is also unsound.

[48] This cause of action again tries to play on the society being in dissolution under s 115 when it is insolvent. It assumes that the trustees were validly appointed under s 115 of the Building Societies Act, but as the society was insolvent from the date of dissolution, the trustees did not have the power to proceed with the dissolution of the society. The “trust” created by the instrument of dissolution failed because of

³⁴For example, the run on the United Building Society in 1988 (which did not end in dissolution).

non- compliance with the statutory requirement that the society be solvent at the time of the purported dissolution. The trustees therefore held the assets under a trust imposed by law. As the express trust failed, the entire equitable interest in the society’s assets (including the Class B and D investment assets) remained vested in the grantor/settlor of the express trust being the existing members of the building society. The trustees are alleged to owe fiduciary duties to the plaintiffs as existing members of the building society to preserve the trust assets, including the investment assets, but failed to do so by selling the investment assets and distributing them to creditors.

[49] I do not accept that a trust was created under the instrument of dissolution, for the reasons in [38] above. The defendants took control of the assets of the society, but not ownership. There was therefore no express trust to fail. Besides, the insolvency of the society does not amount to a failure of a trust. There is no resulting or constructive trust. The society remained indebted to its creditors, who take priority over the plaintiffs. In arranging for creditors to be paid, the defendants as agents of the society enabled it to meet its obligations. The pleading does not show any plausible basis for the plaintiffs to be paid before the creditors. This proposed cause of action also fails.

[50] Whereas the other causes of action allege unsuccessfully that the creditors’ priority can somehow be defeated, the third cause of action alleges that the defendants have mismanaged the dissolution. It differs from the other causes of action because it implicitly accepts that creditors take priority. For this claim to be worth running the plaintiffs must be able to show that once the defendants have compensated for the alleged losses they have caused, there will be funds to distribute to the plaintiffs. The defendants say that creditors come to $37,540,166.68 and that recoveries come to

$22,732,947, leaving a shortfall of $14,807,219.68 for creditors. There will be nothing for the plaintiffs until the creditors have been paid in full. The plaintiffs will need to prove losses greater than the shortfall for creditors.

[51] The proposed third cause of action tries to set out a case for mismanagement in two ways: breaches of the duty of care and skill in realising assets and in accepting

creditors’ claims. For the first it alleges a breach in the sale of the Kalmar property at an undervalue. While the property had a market value of SEK160 million, the defendants sold it for SEK 123 million. The defendants are alleged to have sold it on a forced sale basis when that was not necessary and to have made concessions in sale negotiations that reduced the price significantly. For the second the allegations are general only. The list of creditors includes 32 trusts, but it is not possible to tell whether the beneficiaries of those trusts are connected to Messrs Williams and Macaw. The plaintiffs do not believe any claims by Messrs Williams or Macaw should be accepted because they were fraudulent, but the frauds are not specified. They complain that they have not been provided with information to assess the claims themselves. They also say that some creditors made investments under terms that they accepted the risk of failure of the investment and therefore they can have no claim against the society. They allege that the defendants failed to investigate the claims adequately. The plaintiffs do not however specify the claims that they say should have been rejected or the values of those claims.

[52] While they have not pleaded it, the plaintiffs say that the defendants rejected an offer by Mr Fanelli in an email of March 2014 to arrange:

18,500,000 (the estimated net realisable value of these assets in your first report dated 30 January 2014) for you to encash when you have finally been able to identify the bona fide claims from all the unsecured creditors of KDBS. This would be on condition that the actions to sell the properties cease as soon as the guarantee is in place and that the shares of the various companies holding these property assets are transferred to other entities that will be provided by us.

The plaintiffs also complain that interest continues to run on the debt for the investor creditor.

[53] The defendants point out that on the assumed loss of SEK37 million on the sale of the Kalmar property, the New Zealand currency equivalent was about NZ$6 million on 11 June 2018. That is not enough to clear the shortfall for creditors.

[54] The pleading as to mismanagement in accepting claims does not give adequate particulars as required by r 5.26 of the High Court Rules. While the defendants gave them a list of creditors in 2014, the plaintiffs do not say which ones the defendants

should not have accepted, the amounts of those claims and the reasons for rejecting them. There is nothing in the pleading to suggest that when any damages for undervalue realisations are added on, the value of wrongly accepted claims will result in a recovery for the plaintiffs. The pleading is accordingly procedurally deficient for not showing a case for the plaintiffs to recover any damages for alleged mismanagement by the defendants.

[55] The defendants offered comments on the merits. The sale of the Kalmar property followed a lengthy three-stage international tender using an independent firm. Mr Fanelli, a director of the asset owning company, was kept informed throughout. They were not required to obtain the plaintiffs’ approval when considering claims. They took proper steps to investigate and identify beneficial ownership of creditors (because of anti-money laundering legislation). Of the total claims of creditors only $26,475 related to Messrs Macaw and Williams. A claim against the society by a Macaw entity had been settled. The reliance on the terms and conditions is misplaced, as “account securities” were held on a bare trust for the investor. I take that as meaning that they were custodial assets held by the building society for its customers under terms where the customers took the risk on investment decisions. I was advised that the investment creditor made an interest-bearing loan to the society. I take it that because the society is not in liquidation, interest has continued to run.³⁶On this strike out decision, I cannot assess the ultimate merits.

[56] The third cause of action cannot be struck out as substantively deficient. It is arguable for the plaintiffs that the trustees owed a duty of care and skill to them as members of the society in carrying out the dissolution to obtain a proper price when realising assets and in investigating claims by creditors. Nor can I say whether the plaintiffs will be able to prove their case. But they are required to set out a properly particularised case to show how they will be able to recover damages from the defendants once the claims of creditors are taken into account. The present pleading does not do that. It is procedurally defective. It is speculative in making general allegations only.

³⁶If the society were in liquidation, interest would stop at the date of liquidation under s 306 of the

[57] The normal response is to strike the pleading out, but without prejudice to starting again with a sound pleading. The proposed third cause of action would not be allowed to stand on the basis that the plaintiffs would see if they had a case after they had obtained discovery of the defendants’ documents. The plaintiffs would not be able to obtain procedural pre-commencement discovery under r 8.20 of the High Court Rules to allow them to formulate their claim.³⁷Equally they are not allowed to plead a speculative case in the hope that something might come out of discovery.³⁸

[58] But there is another matter that may assist the plaintiffs. They may be able to obtain disclosure of the defendants’ records independently of procedural discovery directions. The plaintiffs may require disclosure of records even in the absence of the current proceeding. That arises from the court’s jurisdiction to supervise the dissolution of the building society. The defendants have acknowledged the court’s supervisory jurisdiction by applying for directions under s 66 of the Trustee Act. Their role as “trustees” under s 115(2)(e) of the Building Society Act requires that they be accountable to shareholders for their conduct of the dissolution. That is reflected in the requirement under s 116(3) to file an account and balance sheet showing how assets and liabilities have been applied and discharged. Liquidators are similarly accountable and may be required to allow inspection of records of the society and the liquidation by creditors and shareholders.³⁹In Erceg v Erceg the Supreme Court confirmed the court’s power to order trustees to disclose trust records to beneficiaries to ensure that a trustee administered a trust according to the trust deed and accounted to beneficiaries:⁴⁰

Drawing these threads together, we consider the matters that need to be evaluated in relation to an application for disclosure of trust documents include the following:

Where a number of documents are sought, each document (or class of document) may need to be evaluated separately, given that different

³⁷Exchange Commerce Corporation Ltd v New Zealand News Ltd [1987] NZCA 94; [1987] 2 NZLR 160 (CA); Hetherington Ltd v Carpenter [1997] 1 NZLR 699 (CA); and Welgas Holdings Ltd v Petroleum Corporation of New Zealand Ltd (1991) 3 PRNZ 33 (HC).

³⁸Red Stag Timber Ltd v Juken New Zealand Ltd [2018] NZHC 2459 at [24]–[29].

³⁹Companies Act 1993, s 256(1)(a)(ii) and see Levin v Lawrence [2013] NZCA 394 for the ‘good cause’ requirement.

considerations may apply to basic documents such as the trust deed and more remote documents such as the settlor’s memorandum of wishes.

(b) The context for the request and the objective of the beneficiary in making the request

The case for disclosure will be compelling if meaningful monitoring of the trustee’s compliance with the trust deed in the administration of the trust could not otherwise occur. In this regard, it may be relevant that disclosure has been made to other beneficiaries. However, assuming no improper motive on the part of the beneficiary seeking information, the fact that disclosure has previously been made to other beneficiaries will rarely be a decisive factor against disclosure.

The degree of proximity of the beneficiary to the trust (or likelihood of the requesting beneficiary or others in the same class of beneficiaries benefitting from the trust) will also be a relevant factor.

Recognition should be given to the need to protect confidential matters of a personal or commercial nature. The Court should also take into account any indications in the trust deed itself about the need for confidentiality in relation to commercial dealings or private matters in relation to particular beneficiaries.

If the information sought by the person requesting the information would be difficult or expensive to generate or collate, that may be a factor against requiring its disclosure.

(f) Whether the documents sought disclose the trustees’ reasons for decisions made by the trustees

(g) The likely impact on the trustee and the other beneficiaries if disclosure is made

In particular, would disclosure have an adverse impact of the beneficiaries as a whole that would outweigh the benefit of disclosure to the requesting beneficiary? In the case of a family trust, this may include the possibility that disclosure would embitter family feelings and the relationship between the trustees and beneficiaries to the detriment of the beneficiaries as a whole. However, on the other hand, non-disclosure may have a similar effect.

The impact that disclosure will have on the settlor and/or on third parties will need to be considered.

This may require that copies of documents supplied to a beneficiary are redacted to ensure non-disclosure of confidential information.

Examples would include undertakings and inspection by professional advisers only and other safeguards to ensure the documentation is used only for the purpose for which it was disclosed

[59] The defendants have not applied for disclosure under the court’s supervisory jurisdiction. But they are at a disadvantage for being based overseas and having little direct knowledge of the dissolution. They face the usual difficulties of litigating from off-shore and in a legal system with which they are unlikely to be familiar. While the defendants assert that they have given information to the plaintiffs, I am in no position to say whether it is adequate. Having been given notice under s 75 of the Trustee Act, the plaintiffs had to start this proceeding with limited knowledge of all the facts.

[60] In those circumstances it is appropriate to allow the plaintiffs more time to reconsider their proposed claim for mismanagement of the liquidation in the light of further disclosure by the defendants. I contemplate that the defendants may allow inspection of dissolution records under the principles in Erceg v Erceg. As guidance only, the classes of documents to be inspected should be limited to the matters the plaintiffs have pleaded or referred to in their evidence. The plaintiffs have a proper basis for seeking disclosure as being contingently interested in the funds for distribution. There may need to be redactions of documents for confidentiality, for example, identity of beneficiaries of creditors who are trustees. The plaintiffs should pay the defendants costs in allowing inspection.

[61] I appreciate that the defendants are keen to complete the dissolution. As interest continues to run on the debt to the investment creditor, the delay will be to the detriment of the other creditors. Notwithstanding that, justice requires that the plaintiffs be given further time to formulate a procedurally compliant cause of action for mismanagement. The challenge for the plaintiffs is to give a proper pleading showing that there will be no creditor shortfall and there will be a surplus for shareholders. Full particulars will be required.

[62] While the first, second, fourth and fifth causes of action are misconceived for trying to overcome the creditors’ undoubted priority, the proposed third cause of action is procedurally defective. It remains to be seen whether the plaintiffs can show that they suffered losses because of the defendants’ alleged mismanagement.

[63] The defendants sought a direction that they are entitled to charge their costs of defending the proceeding against the funds of the society that they are holding. Under the classification in Alsop Wilkinson v Neary, this is a “beneficiaries dispute” where the plaintiffs allege breach of trust by the defendants and seek damages.⁴¹That is ordinary hostile litigation where costs follow the event and do not come out of the trust estate. The final outcome is not known yet. The defendants are on notice that if they fail, they may be ordered to pay costs personally.

[64] As between the parties, the defendants have generally prevailed on the strike out application. The opportunity given to the plaintiffs to replead does not count as a win for them.

(a) The first and second causes of action in the statement of claim are struck out. The plaintiffs may not plead the fourth and fifth causes of action in their proposed amended pleading.

(b) The plaintiffs have until 16 November 2018 in which to file and serve a proposed amended statement of claim with a cause of action for breach of duty of care and skill. It must be properly pleaded, including showing how there will be a surplus after creditors’ claims are met and giving particulars of loss.

(c) The application is adjourned to the chambers list on 30 November 2018 at 2.15 pm to review any new pleading by the plaintiffs and, if necessary, to give further case management directions.

(d) Leave is reserved to apply for further directions in the interim if required.

If the parties cannot agree, memoranda may be filed and I will decide costs on the papers.

High Court of New Zealand Decisions

Green Meadow Holdings APS v Sargison [2018] NZHC 2216 (5 October 2018)