SHEPHERD v WOOD NORTHLAND 2011 LTD (IN LIQUIDATION) [2017] NZHC 3023

SHEPHERD v WOOD NORTHLAND 2011 LTD (IN LIQUIDATION) [2017] NZHC 3023 [7 December 2017]IN THE HIGH COURT OF NEW ZEALANDWHANGAREI REGISTRYI TE KŌTI MATUA O AOTEAROAWHANGĀREI TERENGA PARĀOA ROHECIV-2017-488-000097[2017] NZHC 3023UNDER the District Courts Act 2016, s 124IN THE MATTER of an appeal against a decision of theDistrict Court of WhangareiBETWEEN JENNIFER MARY SHEPHERDAppellantAND WOOD NORTHLAND 2011 LIMITED(IN LIQUIDATION) AND THOMASLEE RODEWALDRespondentsHearing: 4 December 2017Counsel: JA Browne for AppellantTM Braun and MK Brady for RespondentsJudgment: 7 December 2017JUDGMENT OF DOWNS JThis judgment was delivered by me on Thursday, 7 December 2017 at 11 ampursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors/Counsel:Henderson Reeves Lawyers, Whangarei.Whitfield Braun Ltd, Hamilton.The appeal[1] On 24 July 2017 Judge D J McDonald found Ms Jennifer Shepherd liable torepay Wood Northland 2011 Ltd (Wood Northland 2011) and its liquidator $40,000.1Ms Shepherd received the money in $20,000 payments on 2 and 16 April 2012. TheJudge concluded the liquidator had established the restitutionary claim of "money hadand received". The Judge considered it unnecessary to determine other causes ofaction. Ms Shepherd appeals.2 She contends the Judge was wrong to conclude shewas required to repay the money. Her central appeal ground invites attention to whenWood Northland 2011 became insolvent, and alleged prejudice arising from the lateintroduction of evidence on this subject.[2] For reasons explained below, I consider the precise timing of Wood Northland2011's insolvency is something of a red herring, whereas incontrovertible insolvencyof another company—Bay Lumber Ltd (Bay Lumber)—has significance.The facts as found by the Judge[3] Ms Shepherd is the partner of Mr Martin Nicholls. They have been in arelationship since August 2011. Ms Shepherd is a chiropractor. On 8 February 2012Ms Shepherd incorporated Bay Chiropractic Ltd, of which Ms Shepherd was bothdirector and shareholder.[4] In 2002 Mr Nicholls and his then wife, Ms Giacomelli, incorporated BayLumber. Mr Nicholls was a director; so too Ms Giacomelli between 2004 and 2011.Bay Lumber was a sawmilling company. It operated a mill in Kerikeri.[5] In 2010 Mr Nicholls incorporated Wood Northland Ltd (Wood Northland), andwas its sole shareholder and director. Wood Northland bought green or freshly sawntimber from Bay Lumber, processed it, and on-sold it to wholesalers.1 Wood Northland 2011 Ltd v Shepherd [2017] NZDC 15049.2 The appeal is governed by Austin, Nichols & Co v Stichting Lodestar [2007] NZSC 103, [2008] 2NZLR 141.[6] On 11 October 2011 Mr Nicholls and his father incorporated Wood Northland2011. Mr Nicholls was its director; his father the sole shareholder. Wood Northland2011 was incorporated "to ensure ... any transactions of that company could be hiddenfrom Mr Martin Nicholls' wife, with whom he had separated".3 The new companytook over the business of Wood Northland.4 Bay Lumber was in serious financialdifficulty.[7] Mr Nicholls used Wood Northland 2011 to collect debts owed to Bay Lumberand to repay its creditors to keep it afloat. Indeed, from approximately March 2012,Wood Northland 2011's primary business was the collection of money on behalf ofBay Lumber.[8] Mr Nicholls' efforts were not, however, enough. On 16 February 2012Bay Lumber was placed in receivership. On 26 March 2012, Bay Lumber was alsoplaced in liquidation.[9] On 2 April 2012 Mr Nicholls paid $20,000 from Wood Northland 2011 toMs Shepherd's bank account. He did likewise on 16 April 2012. The $40,000 wasderived from either the sale of timber owned by Bay Lumber, funds otherwise payableto Bay Lumber, or some combination of each.[10] Mr Nicholls paid the $40,000:(a) To ensure it was not available to the liquidators of Bay Lumber.(b) And, so Ms Shepherd could start a new chiropractic business, whichwould then provide income for Ms Shepherd, and through herrelationship with Mr Nicholls, Mr Nicholls too.[11] Mr Nicholls knew "in all probability" the money should have been paid to BayLumber.53 Wood Northland 2011 Ltd v Shepherd, above n 1, at [9].4 The Judge said another reason for Wood Northland 2011's existence might have been "to hidetransactions from the ultimate receiver" of Bay Lumber; at [9].5 At [50](b).[12] Ms Shepherd quickly learnt the money had been paid into her account byMr Nicholls. She knew too Bay Lumber was then in "deep financial trouble".6However, on balance, Ms Shepherd did not know she had been preferred toBay Lumber.[13] Ms Shepherd used much of the money vis-à-vis Bay Chiropractic Ltd to fit-outits premises, so it could open for business on 22 June 2012. Ms Shepherd spent thebalance of the $40,000 on living expenses.[14] Ms Shepherd gave inconsistent and inaccurate accounts about the money:(a) Ms Shepherd initially said she had no recollection of receiving it.(b) Her original statement of defence said the money was transferred intoher account without her knowledge. Ms Shepherd said Mr Nichollstold her the $40,000 represented drawings and salary payable to him byWood Northland 2011. But, Ms Shepherd said she obtained no benefitfrom the money, which quickly left her account (before she even knewof it).(c) In an affidavit of 31 January 2017, Ms Shepherd said she believed themoney was a gift from Mr Nicholls' parents, and all of the money hadbeen spent on living expenses.(d) Ms Shepherd's amended statement of defence said the money was paidwith the authority of MMN Ltd, a company owned and directed by MrNicholls' parents. So, essentially, the payment was a gift to her fromher partner's parents. Bay Lumber leased property from MMN, andowed it much unpaid rent.(e) Ms Shepherd's trial case was that most of the money was spent on thefit-out of Bay Chiropractic Ltd's premises.6 Wood Northland 2011 Ltd v Shepherd, above n 1, at [45].Consequently, Ms Shepherd and Mr Nicholls had reconstructed "what they sayoccurred in the hope it would defeat the liquidator's claim".7Grounds of appeal[15] The Judge concluded Wood Northland 2011 was either insolvent or nearly sowhen Mr Nicholls made the payments to Ms Shepherd in April 2012. Mr Browne forMs Shepherd contends the Judge erred in relation to this finding. The company wasnot placed in liquidation until 28 October 2014, two and a half years after the paymentsto Ms Shepherd. Evidence of insolvency was adduced late and over Ms Shepherd'sobjection. Mr Browne contends Ms Shepherd was not able to answer this evidence asshe did not have adequate opportunity to respond. Mr Browne argues if the finding ofinsolvency is unsafe, the cause of action of money had and received cannot besustained.[16] Alternatively, Mr Browne contends the Judge was wrong to dismissMs Shepherd's defence under s 296 of the Companies Act 1993.[17] For the respondent, Mr Braun submits the Judge was correct to allow theliquidator to adduce evidence of Wood Northland 2011's insolvency becauseMs Shepherd raised an affirmative defence under the Companies Act, whichnecessarily meant solvency was a live issue. Mr Braun also contends Ms Shepherdwas not materially disadvantaged by the late introduction of evidence on this issue.Analysis[18] The Judge's factual findings make irrelevant the precise timing ofWood Northland 2011's insolvency (before 28 October 2014) for, contrary toMr Browne's submissions, the action of money had and received was established inany event.[19] Money had and received continues to attract disagreement as to exactly whatit entails. The simplest formulation is from Lord Ellenborough CJ:87 Wood Northland 2011 Ltd v Shepherd, above n 1, at [48].8 Hudson v Robinson (1816) 4 M & S 475.... an action for money had and received is maintainable whenever the money ofone man has, without consideration, got into the pocket of another.[20] Woolford J recently described money had and received this way inTorbay Holdings Ltd v Napier:9[164] A claim for monies had and received is a personal restitutionaryremedy based on the concept of unjust enrichment. It requires only receipt ofmoney by a defendant who has no right to retain it or who has improperlydisposed of it. The claim does not depend on proof of any wrongdoing orimpropriety on the part of the recipient, or on ongoing retention of the moneyor its value. The cause of action is complete when the money is received. [166] As noted above, a claim for money had and received does not dependon proof of any wrongdoing or fault on the part of the recipient. However, theunderpinning of the claim for money had and received in unjust enrichmentconsequently requires some element of unjustness in the defendant retainingthe money he had received. This has been highlighted in other cases:An action for money had and received is based on the receipt of moneyby a defendant who no longer has the right to retain it or has improperlydisposed of it. Other than that, the claim does not depend on proof ofany wrongdoing or fault on the part of the recipient.[167] This dictum recognises that the action for money had and received isnot a claim based in the personal conscience of the recipient. Instead, theunjustness assessment is focused on determining whether the retention of themoney would unjustly enrich the defendant, who has no real right to themoney. To this extent, the claim is complete when the money is received, ifretaining the money would be unjust, as the defendant has no right to retain it.Heath J, in a recent case, saw some element of unconscionability or unjustnessas being a key requirement to make out money had and received claims. Thisrecognises the underlying focus of money had and received claims, in unjustenrichment.[21] Torbay reached the Court of Appeal.10 For that Court, Asher J analysed the"well recognised" action a little differently.11 The Judge said only two things arerequired: "... first, the payment of money by A to B and, second, proof that the moneywould not have been paid but for a mistake of fact A made".12 His Honour citedBowstead on Agency as a convenient starting point if the case involved agency and the"principal has entrusted money to his agent for a particular purpose which the agent9 Torbay Holdings Ltd v Napier [2015] NZHC 2477, [2015] NZAR 1839 (emphasis added)(footnotes omitted).10 Napier v Torbay Holdings Ltd [2016] NZCA 608, [2017] NZAR 108.11 At [18].12 At [19].has not carried out, [as] the principal can recover that money as had and received tohis use".13 Asher J also observed:14The claim for money had and received is a personal claim, not a proprietaryor in rem claim. It does not depend on proof of any wrongdoing or improprietyon the part of a recipient. It does not turn on the continued existence orretention of the money received. Although unjust enrichment may be seen asunderpinning a claim for money had and received, there is no actualrequirement of unjust enrichment.[22] Woolford J's analysis was upheld in both fact and law.[23] To return to this case, Wood Northland 2011 acted as Bay Lumber's agent tocollect money owing to Bay Lumber. Indeed, that was Wood Northland 2011'sprimary business by the time of the payments. The money paid to Ms Shepherd waseither from the sale of timber owned by Bay Lumber, otherwise payable toBay Lumber, or a combination of the two. Consequently, the money paid toMs Shepherd was not hers. The money ought to have been paid to Bay Lumber, andin turn, available to its creditors. Instead, Wood Northland 2011 paid the money toMs Shepherd absent any consideration on her part within a little over three weeks ofBay Lumber being placed in liquidation.[24] It follows money had and received was established in terms of the agencyprinciple identified by the Court of Appeal in Torbay: Mr Nicholls knew "in allprobability" the money should have been paid to Bay Lumber.15 Instead, he paid it toMs Shepherd.[25] Mr Browne contended the money was a gift to Ms Shepherd, and it would beinequitable for her not to be able to maintain the benefit of that gift. However, it isclear equity's frame of reference is broader than Ms Shepherd's interests. The moneyought not to have been paid to her. And, she made no inquiry as to its source whenshe became aware of it (shortly after it reached her account).13 Napier v Torbay Holdings Ltd, above n 10, at [20].14 At [21] (footnotes omitted).15 Wood Northland 2011 Ltd v Shepherd, above n 1, at [50](b).[26] More importantly, the contention of a gift is at best awkward. If Mr Nicholls'parents had wished to give money to Ms Shepherd, there were more obvious andorthodox ways to do so as against using the medium of Wood Northland 2011.16 Thetiming of the payments underscores this point. Bay Lumber had been placed inliquidation only weeks earlier. The fluidity of Ms Shepherd's explanations does nothelp either. Most people would immediately recall a gift of $40,000. And be candidabout it.[27] It follows Wood Northland 2011's insolvency was not a necessary ingredientof the cause of action on the facts as found below. As observed, money had andreceived was established on an agency basis. The cause of action was also establishedon the broader formulation identified by Woolford J in Torbay: proof Ms Shepherdreceived the money in circumstances in which would be unjust for her to retain itsbenefit.Ms Shepherd's affirmative defence under the Companies Act[28] Mr Browne contends this "crucial" issue was the primary one below and onappeal.[29] Section 296(3) of the Companies Act provides:296 Additional provisions relating to setting aside transactions andcharges(3) A court must not order the recovery of property of a company (or itsequivalent value) by a liquidator, whether under this Act, any otherenactment, or in law or in equity, if the person from whom recovery issought (A) proves that when A received the property—(a) A acted in good faith; and(b) a reasonable person in A's position would not have suspected, andA did not have reasonable grounds for suspecting, that the companywas, or would become, insolvent; and16 The second payment to Ms Shepherd's bank account was narrated "L and Bev", an apparentreference to Mr Nicholls' parents.(c) A gave value for the property or altered A's position in thereasonably held belief that the transfer of the property to A was validand would not be set aside.[30] As will be apparent, the test is cumulative; a defendant must establish eachlimb of the defence created by the section.[31] Judge McDonald was "highly suspicious ... Ms Shepherd knew exactly whatthe financial position of Bay Lumber was".17 This because:18... Bay Lumber Limited was insolvent, and as a result Wood NorthlandLimited was likely in some difficulty given that it relied on Bay LumberLimited for its income.[32] However, the Judge concluded Ms Shepherd had established on the balance ofprobabilities she acted in good faith. For the respondent, Mr Braun did not seek tochallenge this conclusion.[33] The Judge concluded Ms Shepherd had not established the second and thirdlimbs. In relation to the second limb, Mr Browne stressed Ms Shepherd was not adirector, shareholder, employee or creditor of either Wood Northland 2011 orBay Lumber. And, Ms Shepherd had a tendency to leave even her own financialmatters to Mr Nicholls; she had little reason to take any interest in Mr Nicholls'business affairs.[34] I consider the Judge's reasoning on this limb unimpeachable for the reasons hegave:19In my view a person in Ms Shepherd's position, looking at it objectively,would know that Wood Northland 2011 Limited was insolvent or on the vergeof insolvency. Bay Lumber Limited had been liquidated. Her partner had leftthat company. He left with little or no assets at all. Wood Northland 2011Limited was associated with Bay Lumber Limited. The money was paiddirectly from Wood Northland 2011 Limited to her. The first paymentappeared on her bank statement like that. There was no direct contact inrelation to the alleged gift between Ms Shepherd and Mr and Mrs NichollsSnr. Looked at objectively, Ms Shepherd would have been suspicious that alarge amount of money from Wood Northland 2011 Limited, a companycontrolled by her partner with whom she was living, found its way into her17 Wood Northland 2011 Ltd v Shepherd, above n 1, at [67].18 At [67].19 At [72].bank account at a time when the principal company her partner was runninghad gone into liquidation. Viewed objectively that would have been more thanidle wondering, Ms Shepherd must have [had] a suspicion that her partner MrMartin Nicholls' various companies were insolvent, as Bay Lumber Limitedwas, and that would include Wood Northland 2011 Limited. Her variousexplanations as to where the money came from, who it was directed towards,who was entitled to it and what it was, in my view demonstrate that she washighly suspicious that the money was being paid to her to defeat creditors ofher partner's company.[35] Judge McDonald also concluded Ms Shepherd had not made out the third limbbecause Ms Shepherd lent the money to her company and it ultimately repaid the debtto her. Mr Browne emphasises the fit-out could not have proceeded without themoney, and its treatment as a loan to the company did not affect Ms Shepherd'salteration of position in reliance on it. There is force in these submissions.[36] However, the third limb also required Ms Shepherd to establish a reasonablyheld belief the payment of the money to her would not be set aside. Judge McDonald'sreasoning in relation to the second limb is equally applicable here. Ms Shepherd'scompeting explanations in relation to the money underscore this conclusion, whichwas all but inevitable.[37] The appeal is dismissed...Downs J