ESTABLISHED INVESTMENTS LIMITED (IN LIQUIDATION) V GUARDETTE INVESTMENTS LIMITED HC AK CIV 2008-404-004624

ESTABLISHED INVESTMENTS LIMITED (IN LIQUIDATION) V GUARDETTE INVESTMENTS LIMITED HC AK CIV 2008-404-004624 19 November 2008IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2008-404-004624UNDER Land Transfer Act 1952 IN THE MATTER OF of an application that a caveat not lapse under section 145 and section 145A of the Land Transfer Act 1952 BETWEEN ESTABLISHED INVESTMENTS LIMITED (IN LIQUIDATION) Applicant AND GUARDETTE INVESTMENTS LIMITED Respondent Hearing: 12 November 2008 Counsel: M V Robinson for applicant K F Gould for respondent Judgment: 19 November 2008 at 10:30amJUDGMENT OF ASSOCIATE JUDGE ABBOTTThis judgment was delivered by me on 19 November at 10:30am, pursuant to Rule 540(4) of the High Court Rules. Registrar/Deputy RegistrarSolicitors: Simpson Grierson, Private Bag 92518, Auckland 1141 Bruce McNeice, PO Box 99, Auckland 1140[1] This proceeding involves an application for an order to sustain a caveat lodged against 10 strata titles which comprise an investment property in Charlemont Street, Hamilton ("the property"). [2] The applicant, Established Investments Limited (in liquidation) ("EIL") claims a caveatable interest in the property under a constructive trust. EIL says that the respondent, Guardette Investments Limited ("Guardette") used EIL's funds to acquire or improve the property, and accordingly holds the property for it under a constructive trust. EIL says that its funds were taken by a Mr Alan Armitage who controls and is a beneficiary of the trust ("Guardette Trust") which holds the shares in Guardette. [3] Guardette says that EIL has failed to show any caveatable interest in the property. It says that EIL has not shown an arguable case linking the money taken by Mr Armitage from EIL with the property. Guardette also says that the caveat should lapse for lack of proper description of the caveatable interest. [4] For reasons that I will now set out, I find that EIL has an arguable case for a caveatable interest and that the caveat should not lapse.Background[5] EIL was put into liquidation on 10 July 2003. Since that date EIL's liquidators have been endeavouring to recover the proceeds of $818,000 worth of bearer cheques issued by EIL and cashed by Mr Armitage between May 2001 and April 2003. [6] EIL issued a proceeding in this Court against Mr Armitage in August 2004 seeking recovery of the $818,000. Mr Armitage admitted cashing the cheques and collecting the proceeds, but contended that he paid the money to various persons and entities on the instructions of EIL's director at the time. He said that the majority of the money (about $600,000) was paid to a person whom he named but could nototherwise identify or provide any means of contact. The director of EIL at that time was unable to comment on this allegation as he suffered from Alzheimers disease (he has since died). [7] While EIL was pursuing its claim against Mr Armitage, he was convicted of 21 charges of fraud and sentenced to a term of imprisonment. [8] On 2 April 2007 Mr Armitage's defence to EIL's claim was struck out for persistent failure to comply with discovery obligations. The discovery was being sought to establish what had happened to the proceeds of the cash cheques, and to obtain information about financial transactions between EIL and trusts and companies with which Mr Armitage was actively involved and in which parties associated with Mr Armitage had legal and beneficial interests. [9] Judgment was subsequently sealed for $818,000 plus interest and indemnity costs. EIL issued bankruptcy proceedings against Mr Armitage to enforce its judgment debt. Mr Armitage opposed the bankruptcy petition, essentially on the same grounds as advanced in the defence that had been struck out. He sought but was declined an adjournment to pursue an appeal. This was because he had taken no steps prior to issue of the bankruptcy notice, and the appeal period had passed. He then sought and was granted an adjournment to allow him to make arrangements to pay the judgment debt after indicating that he was a beneficiary of two trusts which were in a position to advance him the necessary money. I recorded Mr Armitage's advice on this point in my minute of that hearing as follows:[8] The judgment debt is a substantial one. I have questioned the debtor today as to the source of any money which might be available to clear the debt. He has advised that he has no assets himself, but contends that he can raise money from trusts of which he is a beneficiary. He has identified two trusts, the Guardette Trust and the Sanctuary Trust, which he says have sufficient assets to clear the judgment. He has identified the trustees of the Guardette Trust as Peter Crump and David Reid, and of the Sanctuary Trust and Peter Crump and Sidney Dunn.[10] The disclosure by Mr Armitage of his interest as a beneficiary in the Guardette Trust led to investigations by the liquidators. They have obtained a copy of the trust deed for the Guardette Trust which shows that Mr Armitage is not only abeneficiary but also holds the sole power to appoint and remove trustees. The liquidators have also produced a memorandum of acknowledgement dated 30 June 2001, signed by the shareholder of Guardette (the same David Reid whom Mr Armitage identified as one of the trustees of Guardette Trust) acknowledging that the shares of Guardette were held in trust for the beneficiaries of the Guardette Trust (being Mr Armitage and his family). Companies office records show that Mr Reid transferred his shares to Peter Walter Crump some time prior to 21 October 2005 (Mr Crump having being appointed director on 19 July 2005). [11] The liquidators also found amongst documents obtained in discovery in the underlying proceeding against Mr Armitage a book of cheques drawn on Guardette Investments Limited's bank account containing a number of blank cheques. The cheques appear to have been signed by Mr David Reid (the signature appears to be the same as that in the memorandum of 30 June 2001). [12] On 9 October 2007 EIL lodged the caveat which is the subject of this proceeding against the 10 titles comprising Guardette's property at Charlemont Street, Hamilton. The caveatable interest claimed is:"As beneficiary under a cestui que trust by virtue of a constructive trust between GUARDETTE INVESTMENTS LIMITED the registered proprietor as trustee and the caveator as beneficiary."[13] Mr Armitage did not procure the necessary funds during the period of adjournment. He was adjudicated bankrupt at the next hearing on 17 October 2007. [14] In early July 2008 Guardette applied to the Registrar-General of Land under s 145A of the Land Transfer Act 1952 to have the caveat lapse. This application followed.Preliminary issue over updating affidavit[15] The Deputy Official Assignee at Auckland, Ms Cindy Seaman, has provided two affidavits in support of this application. In the first she states that investigations by the Official Assignee have revealed that Mr Armitage is a beneficiary of a largenumber of trusts, including the Guardette Trust (which Mr Armitage had identified as a source of funds to meet the judgment debt). The trustee of the Guardette Trust, Peter Walter Crump, is currently sole director and shareholder of Guardette Investments Limited. In a second (updating) affidavit filed the day before the hearing, Ms Seaman states that the Official Assignee has determined that the estate of Mr Armitage (in bankruptcy) has an equitable interest in the property owned by Guardette which is the subject of this application. [16] Counsel for Guardette objected to Ms Seaman's second affidavit being read on the grounds that it was in breach of timetable orders made on 30 July, that it raised new matters, was not strictly in reply, and had no evidential merit. [17] Counsel for EIL responded that it was merely by way of update as to the outcome of the Official Assignee's investigations (to which reference had been made in the first affidavit) and to assist the Court with information at to the status of the bankruptcy which could be relevant to the balance of convenience considerations. [18] Counsel for Guardette was realistically frank in acknowledging that Guardette was not prejudiced by the late filing (he did not seek an opportunity to reply) but contended that the affidavit was objectionable and should not be read for the various procedural reasons he gave. [19] There is a degree of merit to the objections, but equally I take the view that the Court is assisted by having an updated position. Lateness can be dealt with by way of opportunity to respond (which has not been sought) and perhaps by costs. The same applies to new matters being raised, but in this case I consider it is helpful for the Court to know the status of the bankruptcy. As to lack of evidential merit, I accept that Ms Seaman has not set out the factual basis on which the Official Assignee has determined that the bankrupt state has an equitable interest in Guardette's property, but that is a matter of weight rather than admissibility. I can take into account, as a matter of fact, that this is a view that the Official Assignee has reached.[20] I am prepared to uphold the objection to one aspect of the affidavit, being reference to an alleged acknowledgment by Mr Armitage concerning a matter of which he was convicted, and said to be relating to Guardette. This is clearly a new matter, and no evidential support is put forward for the allegation (although I am sure it must exist). [21] I allow the late filing of the affidavit of Ms Seaman dated 11 November 2008 but direct that the second sentence of paragraph 4 of that affidavit not be read.Applicable principles[22] The principles which the Court applies in determining caveat applications are well established. There is no dispute between counsel on them. The relevant principles for the present application are: a) It is for the caveator to show a reasonably arguable case for a caveatable interest as defined under s 137 of the Land Transfer Act; b) If money obtained dishonestly has been used to acquire or improve a property, the party defrauded arguably has a equitable interest in the property: NZ Limousin Cattle Breeders Society Inc v Robertson[1984] 1 NZLR 41; c) The Court must balance the respective interests of the registered proprietor (to deal freely with its property) and of the caveator (to be protected until its interest can be determined); it is for the caveator to show that the balance is in its favour: Holt v Anchorage Management Limited [1987] 1 NZLR 108, 117.Competing arguments and issues[23] Counsel for EIL argued that it has an arguable case for an interest under a constructive trust on the ground that some of the $818,000 which Mr Armitage misappropriated has been applied in Guardette's acquisition or improvement (by way of unit title development) of the Charlemont Street property. Counsel acknowledged that there is no direct evidence of the source of funds used by Guardette but submitted that the claim was arguable on the basis of the misappropriation, the timing of acquisition of the property, and the "controlling hand" of Mr Armitage. He said that it was at least arguable that Guardette would be fixed with Mr Armitage's knowledge on the basis that he would be deemed a director by virtue of his controlling hand in its affairs. Alternatively he submitted that the same controlling influence could well lead to a finding that the Guardette Trust was a sham. He submitted it was consistent with the purpose of the caveat procedure that the caveat remain until EIL's interest was determined either directly in proceedings that it issued or indirectly as a consequence of the claim on behalf of Mr Armitage's bankrupt estate, foreshadowed by Ms Seaman. [24] Counsel for Guardette argued strongly that EIL had not shown that it had a caveatable interest in law or on the facts. He submitted that there was nothing to link EIL's money to Guardette or to the caveated property. He submitted that EIL's case was essentially one for adjournment until either it or the Official Assignee had developed its case further. He submitted that nothing had emerged in the years of investigation to date and that it was unlikely that anything further would. In those circumstances he argued that the balance of convenience strongly favoured Guardette. [25] The issues that the Court has to determine on this application are: a) Does EIL have a legal basis for a caveatable interest? b) Has EIL established a factual basis for a caveatable interest? c) Does the balance of convenience favour sustaining the caveat?Is there a legal basis for a caveatable interest?[26] There are two inter-related aspects to this issue. The first is what interest is claimed under the caveat, and the second is whether it is open to EIL to claim that in law. [27] Counsel for Guardette submitted that the caveat failed to identify with sufficient certainty the nature of the caveatable interest. He submitted that the reference to EIL being "beneficiary under a cestui que trust" was meaningless as a cestui que trust is merely an alternative name for a beneficiary. He said there was no basis put forward, nor available, for an express trust in favour of EIL. He also relied on a difference between the interest claimed in the caveat and the ground for the interest as expressed in EIL's application where the interest was claimed "by virtue of a constructive trust and/or a resulting trust". He submitted that there was no room on the facts for the imposition of a resulting trust (there is no room to imply that a trust was intended). As to a constructive trust, counsel accepted that a trust can arise where a person attempts to acquire or retain property by fraudulent or unconscionable conduct (for example by use of money improperly obtained) but argued that there is no link between Mr Armitage and Guardette or the property which could give rise to an imposition of a trust on this basis. [28] Counsel for EIL advanced its argument on the basis of a constructive trust only. He submitted that even if the reference to cestui que trust was superfluous, the interest was nevertheless sufficiently described by the reference to a constructive trust. [29] I agree with counsel for EIL that its interest was sufficiently described by reference to a constructive trust. I have no doubt that Guardette (guided if not controlled by Mr Armitage) understands the nature of the interest claimed and the basis of that claim: Zhong v Wang (2006) 5 NZ ConvC 194, 308 at [53] and [54]. [30] Although I have still to consider the evidential basis, I find that there could be a legal basis for imposition of a constructive trust either on an institutional or a remedial basis, by reason of EIL's money having been applied in the acquisition orimprovement of the property or Guardette's resistance to that notwithstanding knowledge (through Mr Armitage) of the source of the funds.Has EIL established an evidential basis for its caveatable interest?[31] Counsel for Guardette submitted that even if it could be said that there was a legal basis for an interest under a constructive trust, the evidence simply did not support it. He submitted that there was no evidence to show that any of the money taken by Mr Armitage had gone to Guardette or had been used in the purchase of the property. He noted that the evidence for the liquidators (given by Ms A M Stone, a director of the liquidators' firm) was no more than an expression of belief that the proceeds were "likely to have been spent on the properties". He objected to the admissibility of this evidence but said that in any event it was insufficient to establish even an arguable case that the money had in fact been used in that way. [32] There is no direct evidence that the money taken by Mr Armitage went to Guardette or was used to purchase or improve the caveated property. The Court is entitled, however, to take circumstantial evidence into account in deciding whether there is a serious issue to be decided. The evidence in that respect is: a) Mr Armitage cashed EIL's cheques, for a total sum of $818,000 between May 2001 and April 2003; b) The Guardette Trust was settled on 20 June 2001, with Mr Armitage and his family as beneficiaries and with Mr Armitage having power of appointment of trustees; c) Guardette was incorporated on 29 June 2001; d) On 30 June 2001 the original shareholder of Guardette (David Francis Reid) acknowledged that he held the shares on behalf of the beneficiaries of Guardette Trust (Mr Armitage and his family);e) Guardette purchased the caveated property in or before April 2002 (the transfer was dated 17 April 2002 and was registered on 24 April 2002); f) Guardette applied for deposit of a unit plan in respect of the property on 6 September 2002, with survey and appraisal work having been undertaken for the development from late 2001; and g) Mr Armitage was bankrupt through this period (he was discharged from that bankruptcy in July 2002). [33] I have in mind, particularly, Mr Armitage's reluctance to provide full and frank disclosure in response to EIL's claim, and the mysterious loss of EIL's records (to which I referred in paragraph [10] of my 10 July 2005 judgment in that proceeding). It is highly likely, in my view, that the absence of direct evidence is directly attributable to Mr Armitage's lack of co-operation over discovery in EIL's action against him. [34] Mr Armitage, in the briefest of affidavits sworn on 29 July 2008, says:1. I am a Discretionary Beneficiary of the Guardette Trust established by way of Deed of Trust dated 20th June, 2001, a copy of such Deed being exhibited to the unsworn Affidavit of A.M. Stone. 2. I refer to paragraph 14 of the Affidavit of A.M. Stone and confirm that the proceeds of the cheques, the subject of the Judgment obtained against me by the Applicant, have not been ".spend on the properties held on trust by Guardette Investments ".[35] EIL challenges this evidence on the grounds that it has to be viewed with some scepticism having regard to the history of this matter. However, the dispute over Mr Armitage's evidence cannot be resolved on this application. [36] I am not required to decide whether or not the money which Mr Armitage took from EIL was used to purchase or improve the caveated property. I have merely to decide whether there is a basis for an arguable case that it was. In thatrespect I take into account the purpose of the caveat procedure as set out in Zhong v Wang at [58]:The purpose of the caveat procedure is to enable those with proper claims to proprietary interests to protect themselves against loss by forbidding dealing with the land pending resolution of substantive claims. The underlying purpose of the caveat regime could be undermined if too strict an approach were taken to the detail required to describe the interest claimed and its derivation from the registered proprietor.[37] I am also able to take into account, and draw an adverse inference from, Guardette's failure to disclose the source of its funding for the purchase of the caveated property, or its later development into unit titles. [38] Counsel for Guardette submitted that Mr Armitage and Guardette are separate persons, and that there is nothing concrete linking the two. However, there is ample evidence to support the case that Mr Armitage had control over Guardette: a) Mr David Reid, the original shareholder of Guardette, held the shares in Guardette on behalf of Mr Armitage and his family (the beneficiaries of the Guardette Trust); b) Mr Armitage held, and continues to hold, power of appointment of the trustee(s) of the Guardette Trust; c) Blank cheques of Guardette, signed (apparently) by Mr D Reid, were uplifted from Mr Armitage's possession by the Serious Fraud Office when investigating him for the subsequent fraud charges; d) Mr Armitage lodged the change of shareholding from Mr D Reid to Mr P W Crump (settlor and now trustee of the Guardette Trust); e) Mr Armitage made an unequivocal statement to this Court on the hearing of the bankruptcy petition in 2007 that he had the ability to raise money from two trusts, one of which was the Guardette Trust; andf) Mr Armitage gave the affidavit in opposition to the present application on behalf of Guardette. I consider that this evidence is arguably sufficient for Mr Armitage to be deemed to be a director of Guardette, with his knowledge thus being attributed to Guardette [39] I find that the coincidence of taking of EIL's money, the establishment of Guardette Trust and Guardette, Guardette's acquisition of the caveated property and subsequent development into unit titles, and the lack of disclosure of Guardette's funding, coupled with evidence of Mr Armitage's control of Guardette and Guardette Trust, are sufficient to establish an arguable case for a caveatable interest.Balance of convenience[40] Counsel for Guardette submitted that it was unfair to Guardette to tie up the caveated property given the lack of evidence that EIL's funds had been applied to it. Against that, however, I have to balance the following factors: a) The caveat was in place for nine months before Guardette challenged it; b) Guardette has given no evidence of any particular prejudice that will be suffered if the caveat remains; c) Guardette has had the opportunity to put forward evidence to show the source of the funds it used to purchase the property. If it had shown that the funds were clearly from some other source, that would have been a complete answer. It has chosen not to do that; d) The Official Assignee of Mr Armitage's estate in bankruptcy has also lodged a caveat on behalf of the estate, and is currently contemplating pursuing a claim to the caveated property. Until that has been dealt with it is difficult to see how there can be any prejudice arising out of retention of EIL's caveat.[41] Counsel for Guardette also submitted that EIL could have availed itself of pre-commencement discovery to see whether or not there was any further evidence that could be produced in relation to the use of EIL's funds in the property. I see nothing in this point. I can accept that EIL would have little confidence that that process would have achieved anything significant given Mr Armitage's approach to discovery in EIL's claim direct against him. [42] Finally, counsel for Guardette placed reliance on the fact that EIL had not yet issued its proceedings, and was indicating that it might leave it to the Official Assignee to defend its caveat, rather than take steps itself. I am not persuaded that that is an unreasonable course given the Official Assignee's general interest on behalf of Mr Armitage's estate, and the claim that EIL has against the estate. Mr Armitage, and Guardette to the extent that it is controlled by Mr Armitage, have only themselves to blame if they are concerned about the delay in having that proceeding issued. [43] I find that the balance of convenience lies in favour of EIL, particularly having regard to the background to this matter and to Guardette's failure to put forward evidence showing the source of funds used to purchase and improve the property.Decision[44] I find that EIL has shown that it has an arguable case for a caveatable interest, and that the balance of convenience lies in its favour. [45] Counsel for EIL accepts that it is appropriate that a direction be given for the filing of any proceeding to determine the caveatable interest (even if that proceeding be by the Official Assignee). It may not matter whether EIL or the Official Assignee brings the proceeding (it appears that both are likely to be based on Mr Armitage having contributed to the purchase or improvement of the property). It is appropriate, however, to reserve leave to Guardette to apply for review of the order I am about to make if EIL does not issue the proceeding and the grounds for anyapplication which the Official Assignee may bring would not determine the caveatable interest claimed by EIL. [46] I make the following orders: a) Caveat 7571825.1 lodged by Established Investments Limited (in liquidation) against certificates of title 18376, 18377, 18378, 18379, 18780, 18381, 18382, 18383, 18384, and 18385 is not to lapse pending further order of this Court following determination of EIL's caveatable interest; b) The caveatable interest is to be determined either by a substantive proceeding to be issued by EIL against Guardette Investments Limited, or in any proceeding which the Official Assignee in the estate of Alan Armitage may bring against Guardette Investments Limited to determine the basis on which Guardette Investments Limited hold the caveated property; c) Leave is reserved for Guardette to apply for discharge of this order in the event that neither EIL nor the Official Assignee issues a proceeding to determine Guardette's interest in the property by 19 December 2008, or the Official Assignee issues a proceeding which does not appear to determine the caveatable interest claimed by EIL; and d) EIL having succeeded is entitled to costs on a 2B basis together with disbursements as fixed by the Registrar. ____________________Associate Judge Abbott