OFFICIAL ASSIGNEE v YARROW [2020] NZHC 2594

OFFICIAL ASSIGNEE v YARROW [2020] NZHC 2594 [2 October 2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV 2020-404-001749[2020] NZHC 2594IN THE MATTER OF the bankruptcy of PAUL STEVENYARROW (bankrupt)BETWEEN OFFICIAL ASSIGNEE IN BANKRUPTCYOF THE PROPERTY OF PAUL STEVENYARROWPlaintiffAND PAUL STEVEN YARROWFirst DefendantAND MICHAEL CHANEL FINNIGANSecond DefendantAND DUNCAN DOVICO TRUSTEES LIMITEDThird DefendantAND JOHN SANDERSONFourth DefendantAND SALVATORE RUSSOFifth DefendantHearing: On the papersCounsel: G A D Neil & H L Hui for the PlaintiffJudgment: 2 October 2020JUDGMENT OF CAMPBELL JThis judgment was delivered by me on 2 October 2020 at 4 pmPursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy RegistrarIntroduction and parties[1] The plaintiff is the Official Assignee in bankruptcy of Paul Steven Yarrow(Mr Yarrow). The Official Assignee's substantive claims in this proceeding arise outof dealings between Mr Yarrow (who is the first defendant), the P S Yarrow Trust No. 4(PSYT4), and the P S Yarrow Family Trust (No. 3) (PSYFT3). Each defendant eitheris, or has been, a trustee of both trusts.[2] At the same time as commencing the proceeding the Official Assignee hasapplied, without notice, for a freezing order under Part 32 and for a direction that Part18 of the High Court Rules is to apply to the proceeding. The freezing order is soughtover property held by the fourth and fifth defendants as the current trustees of thePSYT4.[3] The application is supported by a comprehensive affidavit made by VethashniNaicker and by two memoranda of counsel. The background facts set out below arebased on Mr Naicker's affidavit.Background facts[4] Mr Yarrow was a director of Yarrows (the Bakers) Limited (Yarrows) from14 July 2004 until he was adjudicated bankrupt on 19 September 2017. Yarrowsborrowed substantial sums from Westpac New Zealand Limited (Westpac).[5] On 31 July 2006 Mr Finnigan (the third defendant) settled the PSYFT3.Mr Finnigan and Mr Yarrow were appointed its trustees. The same day Mr Finniganand Mr Yarrow, as trustees of the PSYFT3:(a) Entered into an agreement to purchase a property in Northcote Point,Auckland (the Property) for $1,300,000.(b) Entered into a term loan agreement with the vendors for $700,000 (theVendor Finance), which was payable on 30 March 2007 and wassecured by a mortgage over the Property.(c) Entered into a deed acknowledging indebtedness to Mr Yarrow forcontributions he made towards the purchase of the Property in the sumof $464,695.45. The deed provided that the debt was payable ondemand, but that the creditors could not make demand within a periodprescribed by the then tax legislation (a period that appeared to be notless than seven years).[6] On 7 August 2006 the Property was transferred to Mr Finnigan and Mr Yarrow(as trustees of the PSYFT3), and a mortgage was registered over the Property in favourof the vendors. In April 2007 the principal sum of $700,000 owing under the mortgagewas paid to the vendors, and the mortgage was discharged.[7] In 2008 Yarrows was facing increasing financial stress. On 31 December 2008it was moved within Westpac to be managed by its Credit Restructuring Group. On28 January 2009 Mr Yarrow executed a guarantee in favour of Westpac of theindebtedness of Yarrows to a limit of $5,000,000 plus some interest and costs.[8] Two days later, on 30 January 2009, Mr Yarrow settled the PSYT4. Mr Yarrow,Mr Finnigan and the third defendant (DDTL) were appointed its trustees.[9] On 3 July 2009:(a) DDTL was appointed an additional trustee of the PSYFT3.(b) Mr Yarrow, Mr Finnigan and DDTL as trustees of the PSYFT3 enteredinto an agreement to sell the Property to themselves as trustees of thePSYT4 for $1,300,000.(c) Mr Yarrow, Mr Finnigan and DDTL as trustees of the PSYT4 enteredinto a deed acknowledging indebtedness to themselves as trustees ofthe PSYFT3 for $1,300,000. The deed recorded that the debt wasrepayable on demand, but that PSYFT3 could not make demand before30 June 2029.[10] The Property was then transferred to Mr Yarrow, Mr Finnigan and DDTL astrustees of the PSYT4 on 6 July 2009.[11] On 18 May 2011 Westpac made demand on Mr Yarrow for payment of$5,000,000 under his guarantee, requiring Mr Yarrow to pay by 24 May 2011.Mr Yarrow failed to make that payment. The demand recorded that the amount owingby Yarrows to Westpac at that date was NZD29,000,000 and AUD8,000,000.[12] On 30 May 2011 Yarrows was placed into receivership. It was subsequentlyplaced into liquidation on 19 December 2011.[13] On 30 June 2011 Mr Finnigan and DDTL were removed as trustees of thePSYT4, and Mr Yarrow appointed Mr Russo as a replacement trustee. From that timethe trustees of the PSYT4 were Mr Yarrow and Mr Russo.[14] On 31 March 2012 Mr Yarrow, purporting to be the sole trustee of the PSYFT3,purported to enter into a deed acknowledging debt to himself of $1,130,652. The deedrecorded that "the Creditor may not make demand before 30 June 2026". The OfficialAssignee regards this deed as invalid and ineffective, because it was not entered intoby the other two trustees of the PSYFT3.[15] On 12 December 2012 Mr Yarrow removed Mr Finnigan and DDTL as trusteesof the PSYFT3. From that time Mr Yarrow was the sole trustee of the PSYFT3.[16] On 14 October 2013 Mr Yarrow forgave and released the PSYFT3 frompayment of the debt it owed him of $1,130,652 (Yarrow Gift). On 22 October 2013Mr Yarrow as sole trustee of the PSYFT3 forgave and released the PSYT4 frompayment of the debt it owed to the PSYFT3 of $1,300,000 (PSYFT3 Gift).[17] In April 2015 the Bank of New Zealand obtained judgment against Mr Yarrowin the sum of $26,701.74. The Bank then had issued a bankruptcy notice in respect ofMr Yarrow. Mr Yarrow failed to comply with the notice. In May 2016 the Bank fileda creditor's application seeking Mr Yarrow's bankruptcy.[18] In August 2016 Westpac made a further demand on Mr Yarrow under theguarantee. The demand was in the sum of $14,850,285.71 (including interest). On25 August 2016 this Court ordered that Westpac be substituted as the creditor in thebankruptcy proceeding. On 19 September 2016 Westpac served a substitutedcreditor's application on Mr Yarrow.[19] On 10 August 2017 Mr Yarrow appointed Mr Sanderson and Mr Russo asadditional trustees of both the PSYFT3 and the PSYT4. From that date the trustees ofeach trust were Mr Yarrow, Mr Sanderson and Mr Russo (though Mr Russo hadalready been appointed a trustee of the PSYT4 on 30 June 2011).[20] On 18 August 2017 Mr Yarrow retired as a trustee of the PSYT4. The trusteesof the PSYT4 since then were Mr Sanderson and Mr Russo. That remains so.[21] On 19 September 2017 Mr Yarrow was adjudicated bankrupt.The Official Assignee's substantive claims[22] The Official Assignee makes several claims in the proceeding. The claimshave the aim of attaining one of two objectives:(a) The retransfer of the Property from the PSYT4 to the PSYFT3, and thereactivation of the $1,130,652 debt released by Mr Yarrow fromPSYFT3 under the Yarrow Gift. The debt would then be enforceableby the Official Assignee against the PSYFT3 and against the Property.The Official Assignee describes this objective as Option 1.(b) Alternatively, the reactivation of the debt released by Mr Yarrow underthe Yarrow Gift (so that the $1,130,652 debt is immediately enforceableby the Official Assignee against the PSYFT3), and the reactivation ofthe debt released by the PSYFT3 under the PSYFT3 Gift (so that theOfficial Assignee can as creditor of the PSYFT3 enforce and assert acharge or lien against the debt that is owed to the PSYFT3 by thePSYT4). The Official Assignee describes this objective as Option 2.[23] The Official Assignee seeks to do so by making several claims under:(a) Subpart 6 of Part 6 of the Property Law Act 2007 (the PLA). Subpart 6empowers the Court to set aside dispositions that prejudice creditors.(b) Sections 205, 206 and 207 of the Insolvency Act 2006.Option 1[24] Each option involves the Official Assignee seeking to undo variousdispositions. Under Option 1 the Official Assignee seeks to set aside:(a) The sale and purchase agreement dated 3 July 2009 under which thePSYFT3 agreed to sell the Property to the PSYT4.(b) The transfer of the Property to the PSYT4 under that agreement.(c) Further transfers of the Property to successive trustees of the PSYT4.(d) To the extent that the deed dated 31 March 2012 between Mr Yarrowpersonally and Mr Yarrow claiming to be the sole trustee of thePSYFT3 is effective (which the Official Assignee denies), the deferredpayment term in the deed preventing Mr Yarrow from demandingpayment of the debt until 30 June 2026.(e) The Yarrow Gift.(f) To the extent that the debt forgiven by Mr Yarrow under the YarrowGift has become time-barred, the (deemed)1 release or surrender of thatdebt by Mr Yarrow to the PSYFT3.[25] The Official Assignee issued, on 27 August 2020, a notice of cancellation unders 206 of the Insolvency Act seeking to set aside each of those transactions. The notice1 PLA, definition (d) of "disposition".was issued on the basis that the transactions are dispositions of property to whichsubpart 6 of Part 6 of the PLA applies, or that they are insolvent gifts in terms of s 205of the Insolvency Act.Option 2[26] Option 2 is pursued in case the Court does not cancel the agreement for thesale and purchase under which the PSYFT3 agreed to sell the Property to the PSYT4,or the transfer of the Property to the PSYT4 under that agreement. In that case theOfficial Assignee seeks to set aside:(a) The deferred payment term in the deed of acknowledgement of debtdated 3 July 2009 between the PSYFT3 and the PSYT4 in respect ofthe purchase price of the Property. That term prevented the PSYFT3from demanding payment until 30 June 2029.(b) To the extent that the deed dated 31 March 2012 between Mr Yarrowpersonally and Mr Yarrow claiming to be the sole trustee of thePSYFT3 is effective (which the Official Assignee denies), the deferredpayment term in the deed preventing Mr Yarrow from demandingpayment of the debt until 30 June 2026.(c) The Yarrow Gift.(d) The PSYFT3 Gift.(e) To the extent that the debt forgiven by Mr Yarrow under the YarrowGift has become time-barred, the (deemed) release or surrender of thatdebt by Mr Yarrow to the PSYFT3.[27] These transactions were all the subject of the Official Assignee's notice ofcancellation under s 206 of the Insolvency Act.Requirements for a freezing order[28] In order to obtain the freezing order the Official Assignee must satisfy me that:2(a) It has a good arguable case on its claims.(b) Mr Sanderson and Mr Russo have assets to which the order can apply.(c) There is a danger that the Official Assignee's prospective judgment willbe wholly or partly unsatisfied because the assets of the prospectivejudgment debtor might be:(i) Removed from New Zealand; or(ii) Disposed of, dealt with, or diminished in value.[29] If those matters are satisfied, I will have to consider where the interests ofjustice (or, as the Court of Appeal has put it, the balance of convenience) lies.3Good arguable case?Option 1[30] The Official Assignee says that each of the dispositions set out at [24] areprejudicial dispositions of property in terms of subpart 6 of Part 6 of the PLA, becausethey satisfy the following elements under that subpart:(a) They were dispositions of Mr Yarrow's property;(b) Mr Yarrow was insolvent at the time, or became insolvent as a result,of making the dispositions; alternatively, Mr Yarrow believed, orreasonably should have believed, that he would incur debts beyond hisability to pay; and2 High Court Rules 2016, rr 32.2 and 32.5.3 Murren v Schaeffer [2018] NZCA 318, (2018) 24 PRNZ 285, at [17].(c) They were made with intent to prejudice a creditor, or by way of gift.[31] As to the first element, several of the dispositions were self-evidentlydispositions of Mr Yarrow's property. The only ones that require comment are thedispositions entered into by the PSYFT3. The Official Assignee submits that thesewere dispositions of property over which Mr Yarrow had a lien or charge, and thereforethat they were dispositions of Mr Yarrow's property. The lien or charge is said to arisefrom Mr Yarrow having incurred liability as a trustee of the PSYFT3, with the lien orcharge forming part of their estate in bankruptcy. I accept that this submissionprovides (at the very least) a good arguable case on this first element.4[32] As to the second element, based on other guarantees that Mr Yarrow hadalready given before the first of the dispositions (which occurred on 3 July 2009), thereis a good arguable case that Mr Yarrow was insolvent at the time of the transactions(or became insolvent as a result of making them).5[33] As to the last element, I agree with the Official Assignee's submission that thefacts rather speak for themselves. Some of the dispositions were plain gifts. The onlydisposition that requires discussion is the sale of the Property from the PSYFT3 to thePSYT4. This might be said to be for full value, in the form of the debt back. However,leaving aside the point that the debt could not be called up until 30 June 2029, paymentof full value does not necessarily prevent a finding of intent to prejudice a creditor.6I therefore find a good arguable case for showing this element.[34] The Official Assignee also says that the Yarrow Gift was an insolvent gift unders 205 of the Insolvency Act. I find that the Official Assignee also has (at least) a goodarguable case on this point. Clearly it was a gift. Because it was made within fiveyears of Mr Yarrow being adjudicated bankrupt, there is a presumption that Mr Yarrowwas unable to pay his debts at the time he made the gift: s 205(2) of the Insolvency4 The Official Assignee relied on, among other authorities, Official Assignee v Menzies (2011)3 NZTR 21-001 and Octavo Investments Ltd v Knight [1979] HCA 61, 144 CLR 360.5 For this purpose, there is authority that a guarantor must be treated as if the guaranteed debt wasdue and owing: Re Ridler (1882) 22 Ch D 74 (CA); Regal Castings Ltd v Lightbody [2008]NZSC 87, [2009] 2 NZLR 433 at [114] to [119] per Tipping J.6 Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433.Act. The fourth and fifth defendants will have to rebut this presumption. For now theOfficial Assignee has a good arguable case.Option 2[35] Under this option the Official Assignee seeks to set aside a similar set ofdispositions, set out at [26]. For much the same reasons as I have just set out, I findthere is a good arguable case that those dispositions:(a) Were dispositions of Mr Yarrow's property;(b) Were made at a time when Mr Yarrow was insolvent (or that he becameinsolvent as a result of making them); and(c) Were made with intent to prejudice a creditor, and in the case of theYarrow Gift and the PSYFT3 Gift, were gifts.Possible defences[36] An applicant for a freezing order without notice must disclose to the Court allmaterial facts, including possible defences known to the applicant. Counsel'smemorandum has addressed some possible defences in the course of its submissionson why it has a good arguable case (for instance, the possible defence that because fullvalue was paid for the Property by the PSYT4, the sale to the PSYT4 could notprejudice creditors).[37] Counsel also notes that Mr Yarrow, Mr Sanderson and Mr Russo served anotice of objection in response to the Official Assignee's notice of cancellation unders 206 of the Insolvency Act. Those objections raise two points of substance.[38] The first is that the objectors say that as from 31 July 2006 Mr Yarrow did notincur any personal liability for indebtedness in respect of his trusteeship of thePSYFT3. This objection seems to rely on clauses in various deeds ofacknowledgement of debt. The clauses provide that the trustee's liability is limited tothe assets of the trust. I agree with the Official Assignee's submission that theseclauses appear merely to limit liability, rather than exclude personal liability.[39] The second is that the objectors say that Mr Yarrow as trustee of the PSYFT3was not entitled to be indemnified out of the assets of that trust, and therefore had nolien or charge over that trust's assets. The objectors do not explain this objection. Thedeed of trust for the PSYFT3 contains an express indemnity in favour of the trustees.The express indemnity appears to be limited to liabilities incurred by a trustee in anybusiness in which the trust has been employed, and so may not apply in the presentcircumstances. But I agree with the Official Assignee's submission that a trustee'sright of indemnity arises under the general law, and is not excluded by the expressindemnity clause (or otherwise by the trust deed).[40] Accordingly, I find that neither objection affects my view that the OfficialAssignee has a good arguable case.Do Mr Sanderson and Mr Russo have assets to which the order can apply?[41] It is clear that Mr Sanderson and Mr Russo have assets to which the order canapply. In addition to the Property (which remains registered in their names) it appearsthey own shares in a New Zealand company.Is there a risk of dissipation?[42] I am satisfied, based on the material in Mr Naicker's affidavit, that there is adanger that the Official Assignee's judgment will be wholly or partly unsatisfiedbecause the assets of Mr Sanderson and Mr Russo might be removed from NewZealand or dissipated (disposed of, dealt with, or diminished in value). This is for thefollowing reasons:(a) The events upon which the Official Assignee's claims are basedindicate that Mr Yarrow has embarked upon a course of conductdesigned to put a substantial asset out of the reach of his creditors.(b) Mr Yarrow concealed from the Official Assignee, in his statement ofaffairs, both his involvement in the PSYFT3 and his release of thePSYFT3 of the $1,130,652 debt. Mr Yarrow then failed to providerecords (that were requested by the Official Assignee) that would haveenabled the Official Assignee to identify his release of the debt.(c) The evidence indicates that Mr Sanderson is Mr Yarrow's friend, andMr Russo is his relative. Mr Yarrow resides in the Property.(d) Mr Russo has been a trustee of the PSYT4 since 30 June 2011. He wasa trustee at the time that many of the challenged transactions took place.He appears to have acted with Mr Yarrow in receiving the forgivenessof debt that the PSYT4 owed the PSYFT3.(e) Mr Sanderson failed to respond to a statutory information request madeby the Official Assignee.(f) Mr Sanderson and Mr Russo have recently attempted to sell theProperty. Although public advertisement of the Property has sinceceased, Mr Sanderson and Mr Russo have failed to respond to theOfficial Assignee's request for information as to whether the Propertyhad been withdrawn from market or sold.(g) The response of Mr Sanderson and Mr Russo to the Official Assignee'srequest to provide an undertaking to preserve the Property, and theirresponse to the Official Assignee's notice under the Insolvency Act, isnot the response that one would expect from trustees who wereindependent of Mr Yarrow.Balance of convenience[43] I am well satisfied that the balance of convenience favours making the orders.The evidence shows that there is a good foundation to the claims, and a concerningcourse of conduct by Mr Yarrow. At this stage there is nothing to suggest anyparticular prejudice that will be suffered by Mr Sanderson or Mr Russo (or thebeneficiaries of the PSYT4) if a freezing order is made.Undertaking as to damages[44] An applicant usually has to provide an undertaking as to damages, unless thereare special circumstances: rr 32.2(5) and 32.6(4). The Official Assignee submits thatthere are special circumstances, in that the application is brought by the Crown.[45] I accept that there is a default presumption that both (i) there should be adispensation for the Official Assignee to provide an undertaking and (ii) the Crownwill meet any order as to damages that may be made by the Court.7 On that basis, Ido not require the Official Assignee to provide an undertaking as to damages.Other terms and form of the freezing order[46] The Official Assignee proposes that the duration of the freezing order (in termsof r 32.7) be 30 working days, and that the notice period under r 32.8 (for thedefendants to apply for discharge or variation) be three working days. I am satisfiedthat both are appropriate.[47] A draft freezing order is attached to the Official Assignee's application. Iapprove its terms.Application for order that Part 18 is to apply[48] The Official Assignee also applies for an order that Part 18 of the High CourtRules is to apply to this proceeding.[49] The Official Assignee's claims under ss 206 and 207 of the Insolvency Actwould ordinarily be commenced as an originating application under Part 19: r 24.35.The other claims would be commenced by ordinary proceeding.7 Official Assignee v Sharma & Family Trustee Ltd [2016] NZHC 1843 at [12].[50] Part 18 requires properly particularised statements of claim and defence,whereas Part 19 requires only notices of application and opposition. The OfficialAssignee submits that the originating application procedure under Part 19 isinappropriate for this proceeding, because the parties will benefit from the moreparticularised pleadings and the interlocutory processes available under Part 18. Iagree. The Part 19 procedure would be inappropriate for a proceeding of this likelycomplexity.[51] As to the choice between an ordinary proceeding and a proceeding under Part18, the difference largely is one as to the mode of evidence at trial. The starting pointunder Part 18 is evidence by affidavit. I do not see that causing any prejudice to thedefendants in this case, given that affidavit evidence would have been the defaultposition for the key claims if the proceeding had been under Part 19, that a party canin any case require a deponent to be cross-examined, and that a Judge could at a laterstage direct under r 18.15 that evidence be given other than by affidavit.Result[52] I make the orders set put in paragraphs 1(a)–(d) of the Official Assignee'sapplication dated 25 September 2020. I approve the form of the freezing orderattached to that application.______________________Campbell JSolicitors/Counsel:Meredith Connell, Auckland