HILLCREST SERVICES LIMITED (IN RECEIVERSHIP) AND ANOR V PA DARBY AND ORS HC AK CIV 2006-404-005235

HILLCREST SERVICES LIMITED (IN RECEIVERSHIP) AND ANOR V PA DARBY AND ORS HC AK CIV 2006-404-005235 14 September 2006IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2006-404-005235UNDER the Receiverships Act 1993 BETWEEN GARETH RUSSEL HOOLE AND KEVIN DAVID PITFIELD IN THEIR CAPACITY AS THE RECEIVERS AND MANAGERS OF HILLCREST SERVICES LIMITED (IN RECEIVERSHIP) First Plaintiffs AND HILLCREST SERVICES LIMITED (IN RECEIVERSHIP) Second Plaintiff AND PA DARBY First Defendant AND BRONWYN ESTATE LIMITED Second Defendant AND BARRYS CAR SALES LIMITED Third Defendant Hearing: 14 September 2006 Appearances: M D Arthur/B J Burt for Plaintiffs R Fenton for Defendants Judgment: 14 September 2006 at 4.15 pmJUDGMENT OF VENNING J7KLVMXGJPHQWZDVGHOLYHUHGE\PHRQ6HSWHPEHUDWSPSXUVXDQWWR5XOH  RIWKH +LJK&RXUW5XOHV 5HJLVWUDU'HSXW\5HJLVWUDU 'DWH«««««Solicitors: Chapman Tripp, Auckland Barter & Co, Albany Copy to: R Fenton, AucklandIntroduction/parties[1] The first plaintiffs are the receivers and managers of the second plaintiff (Hillcrest). Hillcrest was placed into receivership on 3 August 2006. [2] The first defendant is a director of Hillcrest. He is also a director of the second and third defendants. [3] The third defendant is a company operated by the first defendant. It carries on business as a car dealer.Background[4] On 9 March 2004 Hillcrest entered into a revolving credit facility with Capital + Merchant Finance Limited (Capital). To support the facility Hillcrest executed a general security agreement in favour of Capital on 9 March 2004. [5] Pursuant to the facility Capital made a number of advances to Hillcrest. The advances Capital made to Hillcrest were paid out in response to draw-down requests from Mr Darby on behalf of Hillcrest. The payments were made to the accounts directed by Mr Darby. [6] On 30 March 2006 Hillcrest failed to pay the amount then due to Capital under the facility. The failure to pay constituted default under the security which led ultimately to the appointment of the first plaintiffs as receivers of Hillcrest. [7] During the course of the arrangement Hillcrest has reported to Capital with monthly schedules setting out receivables due to Hillcrest. Prior to receivership, Mr Hoole met with Mr Darby. Mr Darby advised Mr Hoole that as a "matter of convenience" the repayments by Hillcrest's clients (the receivables) were being deposited into a bank account not in Hillcrest's name. That account was later disclosed as belonging to Bronwyn Estate, the second defendant. The receivers havelater confirmed that from and including the draw-down request on 17 June 2004 the first defendant, Mr Darby, requested the draw-downs be paid into a bank account held by the second defendant (Bronwyn Estate). [8] The plaintiffs seek to recover the receivables reported to Capital by Mr Darby but paid to Bronwyn Estate.Plaintiff's claim[9] In the substantive proceedings the plaintiffs seek, inter alia: a) A declaration that Hillcrest is entitled to the payments made to the defendants in respect of receivables reported to Capital; b) judgment against the second defendant for the outstanding amount of the draw-down payments paid by Capital into the Bronwyn Estate bank account at the direction of the first defendant on behalf of Hillcrest; and c) judgment against the first defendant personally for breach of ss 131, 135B, 136 and 137 Companies Act 1993.Interim relief[10] On issue of the proceedings the plaintiffs sought interim relief by way of injunction:• preventing payments out of the bank account in the name of Bronwyn Estate;• requiring payments into that bank account be held in a separate account pending further order of the Court; and• requiring the defendants to deliver up documents relating to the disbursements of funds advanced to any of the defendants by Capital, receivables reported by Hillcrest and the bank accounts into which the payments had been deposited.Procedural progress[11] The matter came before the Court on 4 September 2006. Lang J made orders on the application that day and confirmed the orders on 6 September 2006. Inter alia, Lang J ordered that a suspense account be created into which the receivables were to be paid. The matter was adjourned by Lang J for review by this Court today. It was anticipated that there would be a full hearing to review the orders. [12] Counsel discussed the matters at issue on Monday this week. Following that meeting the plaintiffs filed an updated memorandum to advise the orders the plaintiffs sought. It was anticipated the defendant would not oppose the continuation of the orders made by Lang J but that there may be an issue as to the other orders sought.Orders sought[13] Counsel for the plaintiffs noted in the memorandum that the plaintiff sought the following orders:1 Orders 1 to 6 (inclusive) made by this Court on 4 September 2006 shall continue to apply. 2 The defendants shall allow the plaintiffs to inspect and, at the plaintiffs' expense, take copies of: 2.1 all documents, both hard-copy and electronic, relating to: (a) the disbursement of funds advanced to any of the defendants by Capital + Merchant Finance Limited ("CMFL") pursuant to CMFL's loan agreement with Hillcrest Services Limited ("Hillcrest"); (b) the receivables reported, from time to time, by the second plaintiff, Hillcrest, to CMFL ("the Receivables");2.2 the bank statements for the accounts into which payments in respect of the Receivables have been, and are being, deposited; and 2.3 the bank statements for account 12-3079-0225571-000 in the name of the second defendant and held with ASB Bank Limited (referred to as the "the Bronwyn Estate Bank Account" in the orders made by this Court on 4 September 2006). 3 The defendants shall, within seven days: 3.1 provide the plaintiffs with a list of those of the Receivables that the defendants accept belong to Hillcrest; and 3.2 deliver up to the plaintiffs all documents, both hard-copy and electronic, relating to those of the Receivables that the defendants accept belong to Hillcrest. 4 Upon request by the plaintiffs or any one of them, the defendants shall consent forthwith to the release (from the separate account referred to in the orders made by this Court on 4 September 2006) of any payment that the defendants agree was made pursuant to any of the Receivables that the defendants accept belong to Hillcrest. In the event of dispute, leave is reserved for any party to apply to the Court on 48 hours' notice. 5 Unless all parties agree, no party nor any representative of a party shall advise or instruct the debtor(s) under any Receivable to deposit that debtor's payments into any account other than the Bronwyn Estate Bank Account. 6 Leave is reserved to any party to make further application to the Court. 7 Costs are reserved.Defendants' position[14] At the outset of the hearing today Mr Fenton advised that although after the meeting with counsel for the plaintiffs he had anticipated there would not be opposition to a number of the orders sought his instructions had recently changed. Mr Darby was present in Court. Mr Fenton confirmed that despite the change in position he was still instructed to appear on behalf of the defendants and presented submissions to the Court on behalf of the defendants. He also presented a memorandum and further affidavit by Mr Darby. The affidavit was only sworn this morning. The plaintiffs have not had an opportunity to respond to it. Mr Arthur confirmed that the plaintiffs wished to respond to it and to file a further affidavit.[15] Mr Fenton confirmed that the defendants opposed the orders sought at paras 1 and 2 of the plaintiffs' memorandum. The defendants do not oppose the orders sought at para 3.1 but seek further time for compliance under 3.2. They oppose order 4. The defendants consent to the orders sought at 5, 6 and 7. [16] The basis of the defendants' opposition is primarily that the current orders unduly constrain the operation of the second and third defendants, particularly the third defendant. Mr Darby deposes in the affidavit sworn this morning that:4. Until I can make a detailed analysis of the individual customer contracts, it is not possible to determine the dollar value of the Hillcrest-owned debts and the dollar value of the Barrys-owned debts. 6. In the meantime it is imperative that Barrys have at least a partial income so that it can meet its day to day obligations.[17] Mr Darby also objects to the disclosure of the Bronwyn Estate bank accounts as sought in order 2.3 as he says there are a number of entries in the accounts which are confidential. Mr Fenton submitted that an independent accountant should be appointed (paid for by the plaintiffs) to go through the Bronwyn Estate accounts and delete "irrelevant" entries from those accounts before they are disclosed to the plaintiffs.Decision[18] I have had the opportunity to review the file. I have also had the benefit of submissions from counsel. On the basis of the information before the Court, I am very clear in my view that the additional orders sought by the plaintiffs in the memorandum are appropriate and necessary in the present case. Given that the plaintiffs wish to respond to Mr Darby's affidavit I do not propose to deal in substance with the merits of the defendants' challenge to the orders made by Lang J. It is sufficient to record that I am satisfied it is also appropriate they remain in force until further order of the Court. I have come to those views for the following reasons.[19] The evidence before the Court discloses that:• Draw-downs under the facility at the request of the first defendant, Mr Darby on Hillcrest's letterhead were directed by Mr Darby not to Hillcrest, but to the bank account of Bronwyn Estate.• The monthly reporting of receivables by Hillcrest (on Hillcrest's letterhead and under a schedule headed Hillcrest) returned to Capital showed receivables which the defendants now say were not due to Hillcrest but which in fact are the sole property of the third defendant.• Monies received from receivables due to Hillcrest have been paid into the bank account of Bronwyn Estate. [20] The parties differ as to their analysis of the accounts. The plaintiffs say the receivables due to Hillcrest fall into four categories.• Hillcrest loans – loan documents that record the lender as Hillcrest. Payments from these have gone into the Bronwyn Estate bank account.• Barrys Car Sales loans - assigned to Hillcrest.• Barrys Car Sales receivables – while these have not been assigned both the third defendant and Hillcrest are registered on the PPSR as the secured party. The plaintiffs say that could only be achieved by assignment from the third defendant to Hillcrest which is also consistent with the form of the spreadsheet that represented to Capital that Hillcrest was the owner of these receivables.• Motor Trade Finance book – conditional sales by the third defendant containing notification that the receivable would be transferred to Motor Trade Finance Limited (MTF). The first defendant sought further funding from Capital to buy back the book of receivables that had been sold to MTF. He obtained an increase of $700,000 to enable that. Hillcrest confirmed to Capital that the receivables and securities had been transferred from MTF to Hillcrest on three occasions.The plaintiff's case is that if the receivables formerly held by MTF are held by the third defendant then the third defendant holds them for Hillcrest pursuant to an equitable assignment. [21] The defendants say receivables in issue fall into five categories. Mr Darby deposes that the five categories are:• loans from Hillcrest to retail customers;• hire purchase debts arising from sale of a car by Barrys with a hire purchase debt owing to MTF which was assigned back to Barrys by MTF;• hire purchase debt, but which had been assigned back to Barrys by MTF prior to late May 2005 and was not part of the receivables due to Hillcrest;• hire purchase debt arising from sale of a car by Barrys which was not assigned to MTF or anyone else;• a debt arising from a loan made by Barrys to a retail customer which was assigned to Hillcrest. [22] The difference between the parties is the defendants' submission that the receivables Mr Darby has identified in points 3 and 4 are, on Mr Darby's submission, clearly due to the third defendant not Hillcrest. The difficulty with that submission however is that, as Mr Arthur showed by reference to the schedules, while some of the receivables are made up of advances by Hillcrest and also by advances from the third defendant, the amount of the receivable due does not distinguish which party the balance is due to. [23] I am not prepared to release the orders made by Lang J on the basis of Mr Darby's contested assertions, which are not accepted by the plaintiffs. Mr Darby has emphasised in his affidavit and counsel Mr Fenton confirmed in submissions the hardship to the third defendant in particular caused by the existence of the orders. Given the actions of the defendants to date and the way the defendants treated thedraw-downs from Capital and the receivables due to Hillcrest the Court can have no confidence at this interlocutory stage in Mr Darby's contested assertion in today's affidavit that:5. I can tell that approximately half of the accounts are Hillcrest's and half are Barrys'. This why I am suggesting that if a final settlement cannot be arrived at now, and an interim measure needs to be adopted, then a 50/50 split (between Hillcrest and Barrys) of the income from the repayments being made by the customers would be appropriate.[24] Mr Fenton also repeated the submissions he made to Lang J when the orders were made initially, namely that monies cannot be traced into overdrawn accounts such as the Bronwyn Estate account. [25] However, as Mr Arthur submitted, the plaintiffs' claim against Bronwyn Estate is that Hillcrest is entitled to the monies paid to it either as a creditor of an on demand loan (which is denied by Mr Darby) or on the basis that the payments received by Bronwyn Estate, which are the property of Hillcrest, are held by Bronwyn Estate as trustee. As such Hillcrest is entitled, as beneficiary, to an account from Bronwyn Estate as trustee for those funds. Hillcrest is entitled as of right to information relating to such funds and would be entitled to pursue a claim against Bronwyn Estate as trustee for repayment of those trust funds. That is a different point to the one that Mr Fenton has raised. [26] The appropriate course is for the interim orders to remain in force in the meantime. [27] I turn to the additional orders sought by the plaintiffs. [28] In relation to order 2 the defendants' principal objection to the provision of Bronwyn Estate bank accounts is that the accounts may contain confidential information. However, that is not a sufficient reason to prevent the second defendant being required to provide copies of the accounts for the relevant period when monies belonging to Hillcrest were paid into its account. Mr Darby also admits that during the relevant period the second defendant received monies due to Hillcrest. The second defendant and Mr Darby chose to mix Hillcrest's monies with those of thesecond defendant. It will ultimately be for the Court to determine the relevance of the various transactions through the Bronwyn Estate accounts. The plaintiffs, as receivers, must, however, be entitled to carry out their own investigation into the accounts of Bronwyn Estate for the relevant time period. Mr Darby and Bronwyn Estate have put themselves in that position by the misuse of the Bronwyn Estate accounts and the misapplication of funds received from Capital. Again, given the background to this proceeding, the Court can have no confidence in Mr Darby's assertion that certain transactions are not relevant and are confidential. Mr Darby's concerns as to confidentiality are in my judgment overstated. The accounts can only be used for the purpose of this proceeding. The receivers are professional accountants. They will be well aware of their obligations in relation to the use of such documents. The other documents are also directly relevant to the matters in issue. [29] In relation to the time for the provision of information under order 3 I agree that seven days as sought by the plaintiffs should be sufficient. The receivers were appointed on 3 August 2006. The information sought in order 3 is information which should have been available to them on behalf of Hillcrest on the date of appointment. It is Hillcrest's information. The defendants have known of these proceedings since early September. The first defendant should be able to respond within seven days and provide the information sought in order 3.1 (as indeed Mr Darby seemed to agree by his consent to that order). Once that information is provided the receivers need only attend the defendants' office and they can then uplift the documents themselves. The information sought only relates to receivables that the defendants accept belong to Hillcrest. [30] The defendants object to order 4 on the basis there is no enforceable reciprocal provision for the release of the non-Hillcrest receivables to the third defendant. However, order 2 of the orders made by Lang J is to that effect. There is no merit in the defendants' opposition to the order sought. [31] Finally, Mr Fenton raised the issue of the undertaking given by the receivers. That was raised and dealt with by Lang J in his minute of 6 September 2006. The position has not changed.ResultOrders:1 Orders 1 to 6 (inclusive) made by this Court on 4 September 2006 shall continue to apply. 2 The defendants shall forthwith allow the plaintiffs to inspect and, at the plaintiffs' expense, take copies of: 2.1 all documents, both hard-copy and electronic, relating to: (a) the disbursement of funds advanced to any of the defendants by Capital + Merchant Finance Limited ("CMFL") pursuant to CMFL's loan agreement with Hillcrest Services Limited ("Hillcrest"); (b) the receivables reported, from time to time, by the second plaintiff, Hillcrest, to CMFL ("the Receivables"); 2.2 the bank statements for the period from 1 May 2004 to 4 September 2006 for the accounts into which payments in respect of the Receivables have been, and are being, deposited; and 2.3 the bank statements for the period from 1 May 2004 to 4 September 2006 for account 12-3079-0225571-000 in the name of the second defendant and held with ASB Bank Limited (referred to as the "the Bronwyn Estate Bank Account" in the orders made by this Court on 4 September 2006).3 The defendants shall, within seven days: 3.1 provide the plaintiffs with a list of those of the Receivables that the defendants accept belong to Hillcrest; and 3.2 deliver up to the plaintiffs all documents, both hard-copy and electronic, relating to those of the Receivables that the defendants accept belong to Hillcrest. 4 Upon request by the plaintiffs or any one of them, the defendants shall consent forthwith to the release (from the separate account referred to in the orders made by this Court on 4 September 2006) of any payment that the defendants agree was made pursuant to any of the Receivables that the defendants accept belong to Hillcrest. In the event of dispute, leave is reserved for any party to apply to the Court on 48 hours' notice. 5 Unless all parties agree, no party nor any representative of a party shall advise or instruct the debtor(s) under any Receivable to deposit that debtor's payments into any account other than the Bronwyn Estate Bank Account.6 Leave is reserved to any party to make further application to the Court. 7 Costs are reserved. (Italics added to identify amendments to the draft)Directions: a) Plaintiffs to file and serve an amended statement of claim by 19 September 2006. b) Defendants to file and serve any application to discharge the orders made by Lang J by 19 September 2006. c) Plaintiffs to file and serve any notice of opposition by 25 September 2006. d) Defendants to file and serve statement of defence by 26 September 2006. e) The Registrar is to arrange a further one day hearing of the defendants' application in b) hereof in consultation with counsel. If possible, the hearing should be before either Lang J or myself. __________________________ Venning J