CHARLES FLETCHER, PRACTISING AS FLETCHER LAW V JADIE TRUSTEE LTD COA CA846/2010

CHARLES FLETCHER, PRACTISING AS FLETCHER LAW V JADIE TRUSTEE LTD COA CA846/2010 1 December 2011IN THE COURT OF APPEAL OF NEW ZEALANDCA846/2010[2011] NZCA 603BETWEEN CHARLES FLETCHER, PRACTISINGAS FLETCHER LAWAppellantAND JADIE TRUSTEE LIMITEDRespondentHearing: 15 November 2011Court: Arnold, Heath and Fogarty JJCounsel: D A Wood and D Delic for AppellantW T Nabney for RespondentJudgment: 1 December 2011 at 2:30 PMJUDGMENT OF THE COURTA The appeal is allowed.B The orders setting aside the statutory demand and awarding costs in favour of the respondent are set aside.C The application to set aside the statutory demand is dismissed.D Costs are awarded in favour of the appellant:(a) in the High Court, on a 2B basis, together with disbursements (both to be fixed by the Registrar);(b) in this Court, for a standard appeal on a band A basis plus usual disbursements. No certificate for second counsel.____________________________________________________________________REASONS OF THE COURT(Given by Heath J)The appeal[1] On 7 April 2010, Fletcher Law, a legal practice of which Mr Charles Fletcher is the principal, caused a statutory demand to be served on Jadie Trustee Ltd (JTL) in an endeavour to collect a debt (for legal fees, disbursements and GST) alleged to be owing to the firm.1 The amount claimed was $62,197.11.[2] JTL applied to set aside the statutory demand.2 Its primary contention was another entity, Kaimai Trust Ltd (KTL), was the liable party. The application came before Associate Judge Doogue in the High Court at Tauranga. In a judgment given on 16 November 2010, he granted the application.3 Mr Fletcher appeals against that decision.Background[3] Mr Fletcher's wife is Mr Tye's sister. For some 30 years, Mr Fletcher has acted as solicitor for Mr Tye and interests associated with him. In March 1992, Mr Fletcher established the Ed Tye Family Trust and the Jan Tye Family Trust. JTL is the current trustee of each of those family trusts.[4] From 2004 until 2009, Fletcher Law provided legal advice in relation to a subdivision of a farm property at Katikati, on which Mr and Mrs Tye reside. Those attendances were billed in the period from 23 February 2009 to 11 December 2009. Inclusive of disbursements and GST the amount invoiced was in the sum of $62,197.11. The amount alleged to be owing was detailed in a statement of accountforwarded to "The Trustee" of the "Ed and Jan Tye Trusts Partnership", dated11 December 2009.1 Companies Act 1993, s 289.2 Section 290.3 Jadie Trustee Ltd v Fletcher HC Tauranga CIV-2010-470-289, 16 November 2010.[5] A letter of engagement was drawn up by Mr Fletcher and sent to "The Trustees, Ed Tye Family Trust and Jan Tye Family Trust", on or about 29 January 2009. It was never signed or returned by the "client". Having said that, no objection was taken, during the currency of the legal services provided, to the correctness of the identity of the "client" named in that document.[6] Fletcher Law did not address all the bills of costs in a consistent manner. For example:(a) A bill dated 11 February 2009 was addressed to:Mr E T and Mrs J D TyeEd Tye Family Trust & Jan Tye Family(b) The bill of 23 February 2009 was addressed to:The TrusteesEd Tye Family Trust &Jan Tye Family Trust(c) The bill of 31 March 2009 was addressed to:Mr ET & Mrs JD TyeKaimai TrustEd Tye Family Trust & Jan Tye Family Trust[7] Notwithstanding the different ways in which the bills were addressed and the absence of any reference to JTL as the party chargeable, there is a clearly discernable paper trail that evidences the two family trusts as the client.[8] Mr Tye filed an affidavit in support of KTL's application to set aside thestatutory demand. He deposed that KTL was the entity responsible for paying the legal costs. Questions were also raised about their reasonableness. It is striking that Mr Tye, despite holding himself out to provide an affidavit on behalf of JTL, did not confirm that he was a director of that company. The focus of the affidavit was on KTL.[9] Mr Fletcher's evidence is that the work was undertaken for JTL, as trustee of the two family trusts, even though development was to be undertaken in the name of KTL, as trustee of the Kaimai Trust. He deposed that the development funding was sourced from the family trusts. The involvement of KTL is evidenced in bothdocuments prepared for the purpose of the resource consent application to the Western Bay of Plenty District Council and by that company being named as appellant in an appeal to the Environment Court challenging conditions attaching to the resource consent.4[10] In a report sent by Mr Fletcher to Mr and Mrs Tye on 14 February 2008, he indicated the role to be taken by Kaimai Trust in the subdivisional process. Although the letter was written directly to Mr and Mrs Tye, it was headed:ED TYE FAMILY TRUST & JAN TYE FAMILY TRUSTKAIMAI TRUST SUBDIVISION[11] As part of the report, which was written about one year before the instructions in issue were given, Mr Fletcher referred to tax consequences arising out of subdivision of the farm. In particular, Mr Fletcher wrote:3.6 [KTL] was incorporated on 12 July 2002. It was intended to become the Corporate Trustee for a Trust to be settled as the Kaimai Trust.3.7 We have never finalised documentation for the Kaimai Trust.3.8 In 2005, when it became apparent that you and Murray McPherson were concerned that you might be facing a tax liability in respect of the Te Kauri Estate development, we suggested to you that the Kaimai Trust could be established as a special purpose development Trust (not associated with you for tax purposes) and that it could:-Do everything required to obtain the necessary consents from the CouncilUndertake the subdivision and developmentPurchase a portion of the farm property from the current owners, Ed Tye Family Trust and Jan Tye Family Trust, at a relatively high price (justifiable) to crystallise a non taxable capital gain for the Ed Tye Family Trust and Jan Tye Family Trust and reduce the potential taxable income arising out of the Te Kauri Estate development.3.9 No steps have been taken to complete the establishment of the Kaimai Trust or implement the proposal that the Kaimai Trust purchase a portion of the property from the Ed Tye Family Trust and Jan Tye Family Trust.4 See Kaimai Trust Ltd v Western Bay of Plenty District Council EnvC Auckland ENV-2009-AKL-26, 8 May 2009.[12] Those observations were confirmed in Mr Fletcher's affidavit. He stated thatKTL is an assetless company, incorporated to be trustee for the Kaimai Trust. Hesays that because "of our tax advice at the time, it was not necessary to utilise theKaimai Trust to purchase the land that was the subject of the proposed subdivision". Further, as "a result of a significant escalation in the scale of the subdivision it wasconsidered prudent to keep options open and [KTL] fronted the applications toCouncil for Resource Consents and all dealings relating to the subdivision".[13] In his affidavit in reply, Mr Tye suggests that all prior "accounts for thesubdivision have always been paid by" KTL and gives evidence that they exceed $1.5 million. Having said that, he failed to exhibit any documents to explain the way in which the costs were paid.[14] A secondary point was also raised by JTL. It contended that, irrespective of the party chargeable, the fees were unreasonable and ought to be subjected to revision, under the Lawyers and Conveyancers Act 2006.The High Court judgment[15] Associate Judge Doogue framed the issue as whether there was a genuine and substantial dispute as to the party from which the alleged debt could be claimed.5The Judge considered that evidence was required to show that JTL had, by one of its officers or a duly authorised agent, entered into a contractual relationship with Mr Fletcher from which liability for the bills of costs was derived.6[16] The Judge was alive to the secondary objection, namely whether the amounts claimed were reasonable. By letter dated 21 December 2009, solicitors representing Mr and Mrs Tye, KTL and JTL wrote to Fletcher Law disputing the entity liable for the costs and asking for fresh invoices to issue. They also advised that once those invoices had been received, they would indicate whether quantum was accepted. Their alternative position was that a costs revision would be sought.5 Companies Act 1993, s 290(4)(a).6 At [12].[17] Judge Doogue considered there was uncertainty over the identity of the debtor. That, he found, gave rise to a "substantial dispute" about whether JTL owedthe debt. The application was granted on that basis. On the secondary point, Judge Doogue held that, on any view, it was unlikely that the outcome of a costs revision would result in a sum of less than $1000 being owed to Mr Fletcher.7 For that reason, he did not consider that issue further.8Analysis[18] The issue on appeal is whether the statutory demand should have been set aside, on the grounds that "there is a substantial dispute whether or not the debt isowing" by JTL.9 In determining whether a "substantial dispute" exists, a robustapproach is required.10 In United Homes (1988) Ltd v Workman, this Court said:11[34] The Court is not required in cases of this character meekly to accept without question whatever unvarnished statements may happen to be made on affidavit. The Court is entitled to act in a more robust and commonsense manner. The principles developed in cognate fields such as applications to remove caveats, and opposition to summary judgment (eg Eng Mee-Yong v Letchumanan s/o Velayutham [1980] AC 331; Bilbie Dymock Corporation Ltd v Patel (1987) 1 PRNZ 84) apply by analogy.[19] There are a number of facts asserted by either Mr Fletcher or Mr Tye that are not contradicted in evidence by the other:(a) The subdivision was to be undertaken by KTL.(b) JTL owns the farm property in Katikati. It is the trustee of both the Ed Tye Family Trust and the Jan Tye Family Trust.(c) Mr Tye is a director and shareholder of JTL.7 Companies Act 1993, s 289(2)(a) and Companies Act 1993 Liquidation Regulations 1994, reg 5.8 At [15].9 Companies Act 1993, s 290(4)(a).10 United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 (CA). See also Pioneer Insurance CoLtd v White Heron Motor Lodge Ltd [2008] NZCA 450 at [19].11 At [34].(d) Since August 1999, 28 files (including those to which the bills of costs relate) were opened by Fletcher Law in the name of "Ed Tye Family Trust and Jan Tye Family Trust Partnership".(e) Most of the bills of costs are addressed (and all of them refer) to the Ed Tye Family Trust and the Jan Tye Family Trust, sometimes as a"Partnership".(f) Mr Tye (on behalf of JTL) did not object to the bills of costs (either as to the named party chargeable or quantum) until 21 December 2009.[20] Judge Doogue's primary reason for granting the application involved the need for proof that JTL had been properly authorised to enter into a contractual relationship with Fletcher Law. He said:[12] In order for JTL (the trustee at the relevant time) to be liable the Court would have to be persuaded that that company by one of its officers or by a duly authorised agent entered into a contractual relationship with the respondent from which liability for the bills of costs derives. That is, the acceptance, whether express or implied from conduct, would have to be the act of JTL. The most likely way in which such a contractual engagement might have been entered into by the applicant company would be through the exercise of actual or implied authority to contract on behalf of that company with the intermediary being Mr or Mrs Tye or both of them. The answer to the question whether the Tyes would have had authority to bind the trustee, JTL, is a straightforward enquiry into whether they were authorised agents of the company. Whether the Tyes had such authority depends on the circumstances of the case. It may be, for example, that theTyes retained de facto control of the overall affairs of their family's variouslegal entities such as trusts and companies. If the Tyes and the solicitors shared the assumption that was so, then it would be possible for the respondent solicitors to establish that the Tyes had the necessary authority to enter contracts on behalf of JTL even though not formally office holders in that company.[13] There is also to be considered the argument for the applicant that the entity actually liable for the legal costs is Kaimai Trust Limited. The strongest argument which can be advanced in favour of that submission is that the party which received the benefit of some of the professional attendances carried out was Kaimai Trust Limited which was the applicant for resource consent. It cannot be safely assumed, though, where moderately sophisticated corporate and trust structures are in existence the sum being brought into being for different purposes – for example taxation advantages– that it necessarily follows that the party which was to receive the benefit of professional services would therefore be presumptively the party which would have to pay for them.[21] Is there sufficient uncertainty as to the identity of the debtor to support theAssociate Judge's finding that there was a "substantial dispute" on that fundamental point?[22] The Judge relied significantly on the absence of evidence to suggest that JTL was bound by an appropriate officer to accept liability for legal fees incurred in connection with the subdivision. The Judge formed the view that the requisite proofwas unavailable. With respect, that overlooked Mr Fletcher's deposition that Mr Tyewas a director of JTL and the absence of any response to that evidence. Mr Tye could have been expected to contradict the assertion, if it were not true.12[23] Adopting a realistic view, it is likely that both Mr Fletcher and Mr Tye were alive to the need for liability for legal fees to be met by an entity with sufficient funds to pay. It is hardly likely that Mr Fletcher, having set up the relevant structures, would have agreed to provide legal services (which included instructing aQueen's Counsel in Auckland to act in the Environment Court appeal) without assurance of payment. As trusts have no status as legal entities, the fact that the bills of costs all name the Ed Tye Family Trust and the Jan Tye Family Trust provides evidence that the appropriate entity for billing purposes was JTL, as trustee of each of those trusts.[24] Payment of previous accounts may well have been made by KTL (as developer), to secure maximum tax deductions. But, on the undisputed evidence, it would have required an entity of substance to put it in funds to do so. KTL was assetless. In those circumstances, the fact that KTL may have paid past bills is not inconsistent with the existence of a retainer between a lawyer and a solvent entity within the Tye family interests.[25] Approaching the issue on the basis of Mr Tye's proven role as a director ofJTL, we are not satisfied there is a substantial dispute as to identity of the debtor. Mr Tye had authority to enter into the retainer for JTL. We hold that the Judge erred in holding that a substantial dispute existed in terms of s 290(4)(a). The application ought to have been dismissed.12 In any event, Mr Tye's directorship was proved beyond doubt in a company search of JTL,exhibited to an affidavit adduced on appeal.[26] While we agree with the Associate Judge's approach in relation to thereasonableness of the charges,13 the point has now been rendered moot. We understand that a costs revision has taken place and the fees charged were found not to have been unreasonable.[27] As it appears that JTL has a significant asset (the farm), we consider that the best approach is to direct,14 that payment be made within a specified period, while allowing Mr Fletcher to apply to put the company into liquidation if it defaults.Result[28] The appeal is allowed. The order setting aside the statutory demand is set aside, as is the order for costs made in the High Court. We dismiss the application to set aside the demand. We make an order that the amount claimed in the statutory demand shall be paid on or before 9 December 2011, failing which Mr Fletcher may apply to put JTL into liquidation.[29] Mr Fletcher is entitled to costs in this Court and in the High Court:(a) The order for costs made in the High Court is set aside and an order for costs on a 2B basis, together with reasonable disbursements (both to be fixed by the Registrar) is made in favour of Mr Fletcher.(b) Costs are awarded in favour of Mr Fletcher in this Court for a standard appeal on a band A basis, together with usual disbursements.[30] Mr Fletcher is fortunate that the evidence was just sufficient to tip the balance in his favour. A lawyer who, for tax reasons, sets up a complicated development structure should ensure he or she bills a legal entity with which a contract of retainer can be readily proved. In this case, that degree of precision was lacking.Solicitors:Fletcher Law Ltd, Hamilton for AppellantSimpson Aspen Law, Tauranga for Respondent13 See [17] above.14 Companies Act 1993, s 291(1)(a).