DEBT RELIEF (NZ) LIMITED (IN LIQUIDATION) V AE WYCHERLEY HC WN CIV 2007-485-1969

DEBT RELIEF (NZ) LIMITED (IN LIQUIDATION) V AE WYCHERLEY HC WN CIV 2007-485-1969 11 February 2008IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV 2007-485-1969BETWEEN DEBT RELIEF (NZ) LIMITED (IN LIQUIDATION) Plaintiff AND ALAN EDWARDS WYCHERLEY Defendant Hearing: 7 February 2008 Appearances: J. Toebes - Plaintiff N.M. Pender - Defendant Judgment: 11 February 2008 at 3.30 pmJUDGMENT OF ASSOCIATE JUDGE D.I. GENDALLThis judgment was delivered by Associate Judge Gendall on 11 February 2008 at 3.30 p.m. pursuant to r 540(4) of the High Court Rules 1985.Solicitors: Lance Pratley Law, Solicitors, PO Box 1064, Wellington 6140 N.M. Pender, Barrister, PO Box 25-425, Wellington 6146 Buddle Findlay, Solicitors, PO Box 2694, WellingtonIntroduction[1] In the present application before the Court, the plaintiff seeks summary judgment against the defendant for the sum of $132,422.67 plus interest and costs, although before me the amount sought by way of summary judgment was reduced slightly – more on this later. [2] The application is opposed by the defendant.Background Facts[3] The plaintiff is in liquidation, it having been placed into liquidation on 4 December 2006 after an interim liquidation order was made on 14 November 2006. This proceeding is effectively brought by the liquidators of Debt Relief (NZ) Limited as plaintiff. [4] From about June 2004 the defendant was involved with the plaintiff on some basis either as a consultant, manager or a quasi director of the plaintiff company. For this, he says he was to be paid at an hourly rate of $30.00 per hour for the time worked, up to a maximum of 50 hours per week. [5] Between June 2004 and November 2006 the defendant initiated and received the following payments from the plaintiff totalling $132,422.67: a) Monies received by the defendant's use of a cash point EFTPOS card issued to the plaintiff company as customer (but which as I understand it had the defendant as authorised user): (i) Service station withdrawals $11,231.45 (ii) Supermarket withdrawals $14,612.35 (iii) Payments for food, restaurants etc $ 6,277.52 b) Cash cheques drawn on the plaintiff company's bank account signed by the defendant solely and subsequently cashed amounting to $51,648.00.c) Payments made by the plaintiff company to the "Miranda Trust"being rental payments for the defendant's home amounting to - $42,830.00. d) Payments to an orthodontist, Mr. Matt Barker for work undertaken on one of the defendant's children totalling $5,825.35. [6] The defendant does not deny that these funds were those of the plaintiff company nor that he has received the major part of the benefit of the same. On this, however, there is a dispute by the defendant with respect to three payments which he maintains he made purely for the plaintiff's benefit. The first, a cash cheque payment of $10,000.00 was made on 23 August 2005. The second, a restaurant payment of $255.00 was made on 9 March 2006 and the third a café account payment of $826.00 was made on 12 December 2005. For the purposes of the present summary judgment application the plaintiff is prepared to accept that the payments of $255.00 and $826.00 can be deducted from the amount claimed. This leaves a balance due of $131,341.67. There is no such concession, however, with respect to the $10,000.00 cash payment made on 23 August 2005. More on this aspect later. [7] The liquidators of the plaintiff company seek to recover these monies from the defendant on the grounds first that he has either misappropriated or misapplied them from the plaintiff company, secondly that he was otherwise not entitled to the monies in question or, thirdly that the payments are recoverable as they were made to the defendant under an illegal contract pursuant to s.6 Illegal Contracts Act 1970. As to this allegation of an illegal contract, the plaintiff maintains that this arises because the defendant throughout was acting in reality as the true director or manager of the company in clear breach of a Banning Order under s.111 Insolvency Act 1967 made against him on 7 February 1995 which still remained in force. [8] In response the defendant contends he was purely a consultant to the plaintiff company. This was the case, he says, even though there was no written consultancy contract with the plaintiff. He goes on to claim that all the payments to him were made under this consultancy contract, a contract which as I have noted was said toprovide for consultancy services to the plaintiff company and other related companies from 2004 until the end of 2006 for a maximum of 50 hours per week at $30.00 per hour. The defendant insists that all the monies taken by him were for amounts due to him under this consultancy contract, even though it appears no records may have been kept, nor GST invoices supplied, by the defendant for these services. [9] Any suggestion that the defendant instead may have been an employee of the plaintiff company is firmly denied by him. That is why he says no statutory deductions of PAYE or returns with respect to the payments made to him were required or completed. [10] And it is clear that the defendant was not formally named as a director or shareholder of the plaintiff company. The sole named director in the company records is Keith Ross Mackie ("Mr. Mackie") who has himself filed an affidavit in this proceeding dated 24 October 2007. [11] So far as the relationship between the director, Mr Mackie and the defendant was concerned, at paragraph 54 of his 5 October 2007 affidavit the defendant deposes:"54. Keith (Mr Mackie) knew that I was a discharged bankrupt and was sympathetic to my predicament. He verbally agreed that I could hold an EFTPOS card for each of the business bank accounts and also have a company credit card. I could use the cards to pay for my living expenses provided that: a) I collected receipts and accounted for all expenses that I incurred, whether work or personal. b) Any money spent on personal expenses would be deducted from fees owed to me.c) I was not allowed to spend more than my maximum limit (50 hours per week at $30.00 per hour).[12] Unfortunately, it seems that the defendant issued no GST invoices to the plaintiff company for, nor provided any details to the plaintiff of, the fees he claims to have earned under the consultancy contract. Nor is there any evidence before the Court that he "collected receipts and accounted for all expenses that he incurred."Nevertheless, he contends these omissions do not alter his entitlement to be paid a fair remuneration for the services he carried out for the plaintiff company. [13] So far as the reference to bankruptcy in the defendant's affidavit is concerned he acknowledged elsewhere that on a first occasion on 19 March 1992 he was adjudicated bankrupt. Then on 10 November 1994 the Official Assignee applied to the High Court for a Banning Order against him under s. 111 Insolvency Act 1967. That Banning Order was made. Next in 1996 the defendant acknowledges that he was again adjudicated bankrupt this time on the basis of unpaid fees due to his lawyer. He states the order at that time was made due to a misunderstanding and after this was resolved that bankruptcy adjudication was annulled. Then on a third occasion this time on 12 April 1999 the defendant was again adjudicated bankrupt. He claims, however, that this related to a debt due to only one creditor who was seeking repayment from both the defendant and another person jointly. [14] The terms of the Banning Order under s.111 Insolvency Act 1967 specifically prohibited the defendant from: a) Entering into or carrying on any business or class of business, either alone or in partnership with any person; b) Being engaged in the management or control of any business carried on by or on behalf of family of the bankrupt; c) Acting as the director or taking part directly or indirectly in the management of any company or class of company." [15] That Banning Order remains in force today. Before me, however, counsel for the defendant endeavour to argue first that there was no causal link between theexistence of the Banning Order and the recovery of the monies claimed from the defendant, and secondly, that the order was not properly made and should in any event have been limited in time. As I understand the position, however, the defendant did not appeal the making of the Banning Order nor has he made any formal application under s.111(3) to cancel or vary the order.Counsel's Arguments and My Decision[16] In seeking summary judgment here, the plaintiff relies upon Rule 136 High Court Rules, which states:"136. The Court may give judgment against a defendant if the plaintiff satisfies the Court that the defendant has no defence to a claim in the statement of claim or to a particular part of any such claim."[17] Under Rule 136 the onus is on the plaintiff to satisfy the Court that the defendant has no defence to the claim. [18] In Pemberton v Chappell [1987] 1 NZLR, Somers J said at 3:"At the end of the day Rule 136 requires that the plaintiff 'satisfies the Court that a defendant has no defence'. In this context the words 'no defence' have reference to the absence of any real question to be tried. That notion has been expressed in a variety of ways, as for example, no bona fide defence, no reasonable ground of defence, no fairly arguable defence. See for example Wallingford v Mutual Society [1880] 5 App Cas 685, 693; and Fancourt v Mercantile Credits Limited [1983] 154 CLR 87, 99; Orme v de Boyette [1981] 1 NZLR 576. On this the plaintiff is to satisfy the Court; he has the persuasive burden. Satisfaction here indicates that the Court is confident, sure convinced, is persuaded to the point of belief, is left without any real doubt or uncertainty. And: Where the defence raises questions of fact upon which the outcome of the case may turn it will not often be right to enter summary judgment. Theremay however be cases in which the Court can be confident – that is to say, satisfied – that the defendant's statements as to matters of fact are baseless."[19] Although the Court must be cautious in summary judgment applications, a Judge is not bound:"[t]o accept uncritically, as raising a dispute of fact which calls for further investigation, every statement on an affidavit, however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself it may be." Eng Mee Yong v Letchumanan [1980] AC 331 at 341. [20] Thus, whilst it is for the plaintiff to show that its case is unanswerable, and that the defendant has no arguable defence, the Court ought to assess any defence, or narrative, presented by the defendant in a "robust and realistic" manner: Bilbie Dymock Corporation v Patel (1987) 1 PRNZ 84 (CA) at 85. [21] Put another way, it is clear that under the summary judgment procedure, although:"The onus is upon the plaintiff there is upon the defendant a need to provide some evidential foundation for the defences which are raised. If not, the plaintiff's verification stands unchallenged and ought to be accepted unless it is patently wrong." - AGC v McBeth [1992] 3 NZLR54 at page 58.[22] Turning now to counsel's arguments, the plaintiff advances two alternative grounds which it contends are sufficient for a grant of summary judgment in its favour. Broadly, these grounds are: a) There is no evidence before the Court of any contract between the defendant and the plaintiff company to entitle him to payments as a consultant and the payments that he "helped himself to" ormisappropriated from the company are simply personal expenses which he must repay. b) The payments are recoverable in any event, as they were made to the defendant under an illegal contract. In this regard, the defendant's role with the plaintiff company was illegal as he acted as its true director or manager at a time when he was the subject of the Banning Order. Thus any contract he might have had was illegal under s.6Illegal Contracts Act 1970. [23] It is convenient to turn first to consider the second argument noted above.The Defendant's Role was Illegal[24] There is no argument that the defendant was not named in the Companies Office records for the plaintiff company as a director. Notwithstanding this, the plaintiff contends that he acted as its true director, or manager despite being the subject of a Banning Order under s.111 Insolvency Act 1967. The terms of this Banning Order are set out at paragraph 14 above. [25] S.126 Companies Act 1993 defines "Director" as a person occupying the position of director of the company by whatever name called. It goes on to include as a director, a person who exercises or who controls the exercise of the powers which fall to be exercised by the Board and a person in accordance with whose directions or instructions a named director may be required or is accustomed to act. [26] I turn now to consider what evidence is before the Court on these issues. In doing so the following points become apparent: a) The affidavit of Craig Alexander Sanson sworn 4 September 2007 provided in support of this application annexes as Exhibit "A" previously sworn affidavit evidence provided by him in other proceedings related to the plaintiff company. He deposes that this exhibited affidavit relates to applications for the appointment ofreceivers, liquidators and interim liquidators and for other directions regarding a number of companies in the "Debt Relief Group". The substance of the applications made in that proceeding according to Mr. Sanson were that all of the companies in the "Debt Relief Group"were established by and operated under the control of the defendant, Mr. Wycherley, even though he was prohibited by the 7 February 1995 Banning Order from entering into or carrying on business or taking part in the management of any company. b) Significantly, at paragraph 9(g) of that exhibited affidavit, Mr. Sanson sets out a brief summary of relevant quotes from an interview he conducted with Mr. Mackie on 15 November 2006 where he says it was obvious that the defendant, Mr. Wycherley, managed the plaintiff, Debt Relief's business and that Mr. Mackie was simply a "puppet director". The relevant parts of that summary from the interview include:"(i) Craig: You are officially the Director of Debt Relief. Keith (Mr Mackie): Yes Craig: So what Directors duties did you perform? Keith: Strangely enough the owner, Alan Wycherley performed mainly those sort of duties. I felt like notwithstanding that title I was an employee. Craig: But Alan's not on the record as being a Director. Do you understand that? Keith: Oh yeah. (ii) Keith: When I look back now, he (Alan Wycherley) needed me to be a director of those companies because he couldn't be that himself. Craig: What do you mean? Keith: I don't know that specifically, but believe it might be because of his background. Some of the things hemight have done in the past, someone said he'd been a bankrupt. But I don't know that for a fact. Keith: So I believe I was a director of convenience to get these things off the ground. (iii) Craig: So what other things would Alan do in relation to the Company? Keith: He was the marketing guy, he was the leader of the company, the entrepreneur the salesman, the employer of people, the interviewer of people. (iv) Keith: It was his (Alan's) company as far as we were all concerned Craig: Despite your name being on it and his not Keith: That's right. Craig: In terms of guiding the direction of the Company, who would do that? Keith: Alan's plan for the future, that's what he would do. He would often get us together and talk about what he was going to do with New Phone and Debt Relief ".c) At no time have either the defendant or Mr. Mackie in any way in either the affidavits they have placed before the Court in this proceeding or otherwise, endeavoured to explain or comment upon or sought to deregate from the above statements made by Mr. Mackie on 15 November 2006 and outlined in the evidence of Mr. Sanson. Mr. Sanson's 4 September 2007 would have been available to them when they provided their affidavits for this proceeding. And yet, rather surprisingly, Mr. Mackie does not refer to or mention in any way the unequivocal statements he made at the interview with Mr. Sanson on 15 November 2006, statements which were to the effect that the plaintiff company was in reality the defendant's company, it was thedefendant who performed the duties that a director of the company would perform and that he Mr. Mackie was simply " a director of convenience."d) Instead, in his affidavit sworn 24 October 2007 filed in this proceeding, Mr. Mackie ignored the earlier comments attributed to him at the 15 November 2006 interview with Mr. Sanson and deposed:"I have been asked in particular to confirm the following points: 4.1 I knew right from the start that Alan had been bankrupt, that he could not be a Director of any company and that he could not control or manage a business. 4.2 I engaged Alan to act as a business development consultant to the plaintiff, Debt Relief and other related companies, from 2004 until the end of 2006. 4.3 Alan was engaged for a maximum of 50 hours per week (this was for all work done for any of the companies). His hourly rate was $30.00 per hour. 4.4 Alan looked after all sales and marketing and supervised the junior staff. I dealt with all the business administration, including setting up the business processes, paying the bills and PAYE, and dealing with all other financial arrangements. 4.5 Alan was a signatory to the company bank accounts and was authorised to incur expenses on behalf of Debt Relief and the other related companies, provided that he accounted for those expenses. 4.6 I also agreed that Alan could use the company bank accounts to pay for personal expenses, provided that these werededucted from fees that the company owed to him. Alan never spent more on personal expenses than he was entitled to be paid for work carried out." (emphasis added)In the light of Mr. Mackie's uncontradicted statements at the 15 November 2006 interview, these comments in his later affidavit can only be viewed with some suspicion. e) In his affidavit dated 5 October 2007 the defendant himself acknowledges:"11. The business concept for Debt Relief was my idea. It grew out of my experience assisting family and friends to negotiate with their creditors and refinance their debt. " AND "48. I agree that the original business concepts for Debt Relief and the other businesses were mine and that I encouraged Keith Mackie to start up the companies. But that is because my background is in sales and marketing and I am more entrepreneurial than Keith. I also enjoy training and motivating junior employees."f) In the second affidavit of Mr. Sanson sworn 23 January 2008 he annexes as Exhibit "A" a four page hand written note he has just located as liquidator in the defendant company's records. The defendant acknowledges this is in his handwriting and that it represents notes taken during a company staff meeting in 2006 over budgeting and cost-cutting issues. This hand written note on page 1 specifically refers to payments to be made to "Management" as follows:"Keith (Mr. Mackie) - $3,500.00 plus GST. Alan (the defendant) - $2,000.00 plus GST."The note also refers to wages for "Wendy, Carol and Lynne", sales forecasts, other costs and a possible profit. No-where is there a mention of "consultancy" or "service" payments to the defendant. Instead, it appears he is budgeting to receive a payment as "management". To my mind, all this would appear to support the view that the defendant was clearly considered to be part of the "Management" of the plaintiff company. [27] Taking into consideration all these matters and weighing up the evidence which is before the Court, I am left with little doubt that the defendant has acted here as a "director" of the plaintiff company in the terms outlined in s.126 Companies Act 1993 and in addition it is clear he has "directly or indirectly been involved in the management of the plaintiff company". As I see it, the clear answers given by Mr. Mackie to Mr. Sanson in the interview on 15 November 2006, are entirely uncontradicted in any direct way and I am satisfied they reflect the real position. [28] I find that the defendant throughout has performed duties for the plaintiff company that a director of that company would perform and in doing so and in being involved in the management of the company he is likely to have breached the Banning Order which was in place. That said, it would seem that the defendant has committed an offence under s.128 Insolvency Act 1967. It follows that any services provided by the defendant to the plaintiff company were illegal as constituting a criminal offence. Further, if there was a contract for services as the defendant maintains, it was an illegal contract in terms of the Illegal Contracts Act 1970 and in addition, the making of any payments under this contract or indeed entering into this contract was clearly not in accordance with the provisions of s.161 Companies Act 1993. [29] As an illegal contract, S.6 Illegal Contracts Act 1970 provides that such a contract is of no effect and no person shall become entitled to any property or disposition made by or pursuant to that contract.[30] It follows therefore that even if, as the defendant's suggest there was a "Consultancy Contract" in existence the defendant must repay to the plaintiff all monies he has received pursuant to this contract in terms of s.6 Illegal Contracts Act 1970. And before me, no application for relief pursuant to s.7 Illegal Contracts Act 1970 was made. Nor under the circumstances here am I of the view that a grant of relief under s. 7 would be appropriate. [31] For all these reasons the plaintiff's summary judgment application therefore succeeds. [32] Judgment is now granted in favour of the plaintiff against the defendant in the total reduced sum of $131,341.67 together with interest on this sum at the prescribed rate of 7.5% per annum from 7 June 2007 to the date of this judgment. [33] Costs are also awarded to the plaintiff against the defendant on a Category 2B basis together with disbursements as fixed by the Registrar. [34] Although this deals with the application before the Court, for the sake of completeness I mention briefly the first ground advanced for the plaintiff noted in paragraph [22] above.Defendant's Claim That He Was Entitled to the Payments as a Consultant[35] The parties accept that there was no written consultancy or service contract between the plaintiff company and the defendant. [36] Before me, Counsel for the plantiff contended that the evidence is "dead against" there being an oral consultancy contract on the terms put forward by the defendant. He points to the lack of any written material of any kind by way of GST Invoices, accounts, records of time worked by the defendant, or any material to justify either a contractual arrangement or any of the payments taken by him from the plaintiff's bank or EFTPOS account. [37] The plaintiff argues that all payments taken by the defendant were simply for unauthorised personal expenses. These included a $10,000.00 cash cheque dated 23August 2005 which the defendant initially says he cashed to allow "Us to buy cars from Turners Auctions on behalf of clients, as Turners at this time only accepted cash or bank cheque."[38] From the second affidavit of Mr. Sanson dated 23 January 2008 it seems clear that despite the plaintiff's claim that this $10,000.00 cash cheque was used to buy cars from Turners, this was not the case. This is confirmed in a letter from Turners Auctions dated 14 November 2007 exhibited to that affidavit. I find, therefore, that the $10,000.00 cheque was also used by the defendant for his personal expenses. [39] Notwithstanding these matters, however, before me counsel for the defendant quite properly noted that all parties accepted that the defendant had carried out significant work at the relevant time for the plaintiff company on some basis. That being so, the defendant submits that it would be totally inappropriate to suggest that he was not to be paid a fair remuneration for the services he carried out for the plaintiff. The defendant maintains that he would be able to provide appropriate invoices for work carried out if he had access to the company's business records. [40] The arrangements entered into between the defendant and the plaintiff company at the appropriate times were indeed confused and it must be said there was virtually no satisfactory record kept of what those arrangements would be. [41] I remind myself, however, that the present application before me is one for summary judgment on which the plaintiff must satisfy the Court that the defendant has no defence. [42] Although, given my findings outlined at paragraphs [30] to [32] above it is strictly speaking unnecessary for me to decide the present application on whether there is a consultancy or other contract in existence under which the defendant is entitled to retain the payments he has awarded himself, if I was required to do so, I would tend to take a somewhat cautious approach on that aspect. In my view, notwithstanding the major deficiencies and contradictions in the arguments advanced for the defendant to support and justify the payments he has taken, the plaintiff hasbeen unable to show that its case, to the entire $131,341.67 claimed in this area is unanswerable. This of course does ignore the requirements of s. 161 Companies Act 1993 and what seems to be the lack here of any Board authorisation of the defendant's arrangements, a factor which might also provide some obstacle to the defendant's defences. Nevertheless, in my view there is a reasonable argument here that, given this is a summary judgment application, those payment arrangements between the defendant and the plaintiff company should be tested at a substantive hearing by proper examination and cross-examination of all the oral evidence. [43] Despite those tentative and preliminary findings on the second ground advanced above, for the reasons outlined earlier in this judgment, culminating in the conclusions reached at paragraphs [27] to [31] above, the plaintiff's summary judgment application has succeeded. [44] Orders granting summary judgment in favour of the plaintiff against the defendant and as to costs are made as outlined at paragraphs [32] and [33] of this judgment.'Associate Judge D.I. Gendall'