THE OFFICIAL ASSIGNEE IN BANKRUPTCY OF THE PROPERTY OF NOEL RICHARD JOHNSON V ANNETTE FRANCES JOHNSON CA CA252/06

THE OFFICIAL ASSIGNEE IN BANKRUPTCY OF THE PROPERTY OF NOEL RICHARD JOHNSON V ANNETTE FRANCES JOHNSON CA CA252/06 15 August 2007IN THE COURT OF APPEAL OF NEW ZEALAND CA252/06 [2007] NZCA 348BETWEEN THE OFFICIAL ASSIGNEE IN BANKRUPTCY OF THE PROPERTY OF NOEL RICHARD JOHNSON Appellant AND ANNETTE FRANCES JOHNSON Respondent Hearing: 2 August 2007 Court: Hammond, Robertson and Ellen France JJ Counsel: D G Smith and G Caro for Appellant N R Johnson for Respondent Judgment: 15 August 2007 at 4 pmJUDGMENT OF THE COURT A The appeal is dismissed. B The respondent is entitled to usual disbursements which have been incurred in the conduct of the appeal.____________________________________________________________________REASONS OF THE COURT(Given by Robertson J)Introduction[1] This is an appeal against the judgment of Venning J delivered on 8 October 2003 in which he rejected a claim by the Official Assignee that a matrimonial property agreement (MPA) be declared void against him because of the operation of s 47 of the Property (Relationships) Act 1976 (PRA). The section provides that an MPA was void if it was intended to defeat creditors. [2] The appeal is advanced on two main grounds. First, that on the basis of the established facts the Judge ought properly to have drawn an inference that Mr Johnson entered into the arrangements he did to defeat creditors. Secondly, the MPA was a voluntary alienation of property by an insolvent debtor and as such Venning J should have attributed or imputed an intention to defeat creditors to Mr Johnson. [3] There were some supplementary issues raised with regard to the valuation of property and the calculation of interest, which are relevant only if we conclude that the appeal should be allowed.Factual situation[4] This case is part of a lengthy saga of litigation, the factual circumstances having been exhaustively recorded in earlier related cases. The facts can be summarised as follows. [5] Mr Johnson (the respondent's husband) for many years ran a painting contracting business, Auckland Industrial Coatings Limited (AIC). He later became involved in another company, Ritec (NZ) Limited (Ritec), which marketed a product called Clear-Shield. In 1991 and 1992, Ritec sold a number of franchises to market Clear-Shield. [6] During the latter part of 1992 and into 1993, some franchisees began to express dissatisfaction with Clear-Shield. This dissatisfaction was addressed to Ritec. No threats of personal litigation were made against Mr Johnson.[7] Mr and Mrs Johnson entered into a MPA on 11 October 1993. The couple owned significant assets including shares in three companies (AIC, Ritec, and Clear-Shield Auckland Ltd), their matrimonial home at Riverlea Road, a subdivided rental unit at Riverlea Road, a number of factory units, two motor vehicles and a yacht. [8] The general effect of the agreement was that Mr Johnson received the shares in AIC and Ritec (plus some other small assets) and Mrs Johnson received the real estate and the bulk of the rest of their property. [9] In 1997 six franchisees commenced litigation against Mr Johnson in which they sought damages against him and to have the MPA set aside. The damages claim was dealt with first. [10] On 21 December 1999 Goddard J found against Mr Johnson on allegations of deceit: HC AKL CP6/97 21 December 1999. She awarded damages in excess of $900,000 against Mr Johnson. The judgment was appealed but this was dismissed by this Court: Johnson v Felton CA32/00 13 December 2000. [11] Mr Johnson was adjudicated bankrupt on 31 October 2001. The Official Assignee was joined as a co-plaintiff to the PRA proceedings. On 28 May 2003 Associate Judge Faire held that this proceedings ought to be split with the claim by the Official Assignee being dealt with first and the claims by the franchisees second. [12] Venning J was required to deliver two judgments. The first delivered on 8 October 2003 (addressed the claim by the Official Assignee – which is currently under appeal) and the second on 12 February 2004 (concerned the claim by the franchisees): Felton v Johnson (2004) 24 FRNZ 83 (HC). [13] In his 12 February 2004 judgement, Venning J found that the franchisees were creditors, that the MPA had the effect of defeating creditors and that the two- year time limit imposed by s 47(2) did not prevent them from bringing their claim. This judgment was reversed by a majority decision of this Court: Johnson v Felton[2006] 3 NZLR 475. This was upheld in the Supreme Court: Felton v Johnson[2006] 3 NZLR 475 at 511. [14] There was an application for leave to bring this appeal out of time which was granted: Official Assignee v Johnson CA240/05 27 July 2006.High Court decision[15] In the 8 October 2003 judgment Venning J held that: (a) There was an imbalance of $552,250 between what Mrs Johnson received under the MPA and her equality entitlement. The Judge reached this conclusion by ascribing no value to the Ritec shares and a limited value only to the AIC shares; (b) The Official Assignee had not proved that Mr Johnson had entered into the MPA with the dominant intention of defeating his creditors; and (c) Although the agreement had the effect of defeating Mr Johnson's creditors (the franchisees) the limitation in s 47(2) meant that relief was not available to the Official Assignee under this subsection because he had not been appointed within two years of the MPA being entered into. [16] This appeal is focussed on the second issue, although the first is part of the applicable narrative. [17] Venning J articulated his finding that Mr Johnson had not entered into the MPA to defeat creditors thus:[53] In summary, the position as at 11 October 1993 when the matrimonial property agreement was concluded is this. Mrs Johnson was concerned to protect her financial position particularly her family home. Although a number of the Ritec franchisees were expressing dissatisfaction with the operation of the franchises and the support provided by Ritec nolegal proceedings had been taken against Ritec and there was no suggestion by any of them of a claim against Mr Johnson personally. The last solicitor's correspondence, which went nowhere near making such a threat, was in early 1993 some six months before the agreement. Mr Lennox-King was not, in October 1993 threatening Mr Johnson personally with proceedings. There were issues between Mr Lennox-King and Mr Johnson but that did not prevent them working together in relation to AIC and Ritec for the balance of 1993 and into 1994 including making the decision for the sale of AIC to Mr Ainsley. The disquiet expressed by the franchisees (whose contracts were with Ritec not Mr Johnson personally) and Mrs Johnson's wish to confirm her personal position caused the Johnsons to take advice. They took advice and on the basis of that made the matrimonial property agreement. [55] I conclude that at the time the matrimonial property agreement was entered in October 1993 Mr Noel Johnson's dominant intention was to separate his business assets from his personal assets to ensure the protection of matrimonial and other assets as far as possible against the future failure of the businesses. It was not however to defeat creditors. There is no evidence that creditors were threatening Mr Johnson or that Mr Johnson had any reason to consider he would be sued personally. In October 1993 he still considered Ritec was viable. Although the franchisees had a number of issues, they were not threatening to take action against Mr Johnson personally. To the extent that franchisees had complaints and Mr Lennox- King had expressed concerns they were part of the background to the Johnsons entering the agreement, but no more than that.Legislation[18] Section 47 of the PRA, as in force at the relevant time, provided:47 Agreements to defeat creditors void(1) Any agreement, disposition, or other transaction between spouses or de facto partners with respect to their relationship property and intended to defeat creditors of either spouse or de facto partner is void against those creditors and the Official Assignee. (2) Any such agreement, disposition, or other transaction that was not so intended but that has the effect of defeating such creditors is void against such creditors and the Official Assignee during the period of 2 years after it is made, but only to the extent that it has that effect. [19] Section 47, along with other similar provisions such as s 60 of the Property Law Act 1952, represents "the endeavour of the law to afford recoupment by creditors of impermissible dispositions but protection of those dispositions deemed proper and innocent of a fraudulent design": Cannane v J Cannane Pty Limited[1998] 192 CLR 557 at 589 per Kirby J; Felton at [12] (SC). Defeat, in this context,does not mean a reduction in assets. What must be established is an action improperly taken to deprive money from creditors that they would otherwise have had recourse to: Walsh v Powell (1982) 1 NZFLR 103 at 108 (HC). [20] In order to successfully engage s 47(1), the onus is on the creditor to establish that at the time the MPA was entered into (in this case on 11 October 1993) the intention in entering the agreement was to defeat creditors: Neill v Official Assignee[1995] 2 NZLR 318 per MacKay J at 325 (CA). The intention to defeat does not need to be shared by both parties – it would be enough if Mr Johnson had the intention even though Mrs Johnson did not: General Finance Acceptance Ltd v Cooper (1984) 3 NZFLR 108 (HC).Proper inferences[21] The Official Assignee submits that Venning J failed to draw the proper inference from the facts he found to be established. The Official Assignee points to three key facts and argues that, when these are taken together, the only reasonable inference is that Mr Johnson had the intention to defeat creditors.Fact 1 - Mr Johnson's previous deceitful conduct[22] It is contended that the finding by Goddard J amounted to a finding of knowing deceit: at 30. Goddard J found Mr Johnson: (a) made misrepresentations about the accounting model for the sale of Clear-Shield at least recklessly; (b) must have known he was only telling half the story; and (c) presented deceptive promotional material. [23] If the misrepresentations amounted to knowing deceit then it is submitted it would be reasonable to infer that Mr Johnson knew that "his time of reckoning would come". The representations were made prior to signing the MPA.Accordingly, it is proper to infer that the disquiet expressed by the franchisees would have been a motivating factor for entering the MPA. [24] In the course of the hearing before us, a good deal of attention was directed to the nature of the findings made by Goddard J. [25] There was no question that the franchisees established deceit on the part of Mr Johnson in his dealings with them. Mr Smith's argument was, to a large extent, predicated on the basis that this was knowing deceit. It is important to note what the Judge actually said (at 30):It is also clear that all representations made were done so for the purpose of encouraging or inducing the recipients to purchase Clear Shield franchises. The Court must therefore turn to the critical issue: that is whether the misrepresentations were made knowingly, without belief in their truth, or recklessly. With regard to the accounting model, that misrepresentation must have been made, at the least, recklessly. The projections were not based on any New Zealand experience to date. Further, the productivity figures used had been knowingly manipulated to create a more favourable impression. It seems to me that the defendant was prepared to create that impression without being fully frank. Furthermore, the defendant was quite prepared to present promotional material that was deceptive and enhanced the persuasiveness of that by making a number of other misrepresentations. In each case the defendant must have known he was portraying only half of the full story. At the very least he was reckless as to whether the information he was imparting was true or not. I cannot accept that he unwittingly imparted material misinformation. The plaintiffs must succeed in their action in deceit.[26] Counsel was unable to point to any stronger finding and accepted that his argument could only be advanced on the basis that it had subsequently been found that Mr Johnson had acted in a way which was at least reckless and thereby committed deceit.Fact 2 – Disparity in valuation[27] The valuations of Venning J (which are not challenged in this Court) meant Mr Johnson took only 10.4 per cent of the matrimonial property on signing the MPA. The disparity arises in part from the real estate being taken by the parties at government valuation (GV) and not at a market valuation, which the husband and wife knew, which was about double the GV. The shares (which were considered byVenning J to be overvalued) were taken at Mr Johnson's self valuation which was partially influenced by the price at which there had been a sale of some shares in Ritec to Mr Lennox-King. [28] The Official Assignee agreed that an inference of an intention to defeat creditors could be drawn from this disparity.Fact 3 – Incongruity between the recitals and solicitors file note[29] The recitals in the MPA recorded:E. The husband is concerned as to the possible effect of a claim under the Act by the wife on the businesses operated by the husband known as Auckland Industrial Coatings, Clearshield and Ritec and is concerned to remain in control of those businesses to ensure his future earning potential. F. The wife is concerned to protect her home in the event of any claim by the husband under the Act and to protect her home from market fluctuations associated with the businesses operated by the husband.[30] At the time the MPA was entered into, Mrs Johnson's solicitor made the following file note:The division of property between husband and wife results in an asset value to Annette of $730,000 and an asset value to Noel of $685,000. However, in the case of Noel's assets the bulk of that figure is made up of shares in private companies (Auckland Industrial Coatings Limited, Ritec NZ Limited and Clearshield Auckland Limited). These shares have not been professionally valued and represent Noel's estimation of value but also partly based on sales of shares to a partner in those companies. Noel's reason for the matrimonial settlement is to protect the family home, recreational assets and some of the investment properties from potential claims arising out of the conduct of the businesses. There is at the time of executing the Agreement a potential claim against Ritec NZ Limited. At this stage there is no suggestion that that claim will be made personally against Noel nor does such a claim appear possible. However, the contemplated claim has made Noel and Annette believe that there is a need to separate the business assets from what they see as their personal assets.[31] Mr Smith acknowledged that his case was predicated on the intention of Mr Johnson and not Mrs Johnson, so a file note by Mrs Johnson's solicitor was of limited relevance and there was no evidence that Mr Johnson's solicitor had seen it.[32] The Official Assignee, while conceding that this third factor carries less weight, submitted that it points to the fact that there was an awareness of a potential claim against Ritec and that this was a motivating factor for entering the agreement. [33] The Official Assignee also argued that Venning J was in error to place emphasis on the fact that the franchisees had not actively pursued their cause of action against Mr Johnson at the time the MPA was signed. It is contended that this cannot be a relevant factor if at the time the creditors did not realise that Mr Johnson's actions amounted to deceit. [34] It was also contended that Venning J was in error in rejecting the argument that Mr Johnson knew his day of reckoning would come and that this was the motivating factor for entering the MPA. [35] Mr Smith drew to our attention comments of William Young J (as he was then) in his minority judgment: Johnson v Felton [2006] 2 NZLR 475 (CA). The Judge, having set out Venning J's comments (recorded above in [15]) went on to say:[34] Not allowed for in this analysis are the three features of the case which, with varying degrees of force, might be thought to throw some doubt on the conclusion reached by Venning J. [35] The first is that the ultimate findings of liability which Goddard J made against Mr Johnson were based on the tort of deceit. It might be thought that Mr Johnson would have been conscious of having deceived the franchisees and, if so, he would probably have recognised that a time of reckoning would come. In that context Mr and Mrs Johnson were perhaps fortunate that Venning J was influenced by the muted nature of the complaints from franchisees prior to October 1993. [36] A second factor of significance is the availability of inferences associated with the extent to which the matrimonial property agreement favoured Mrs Johnson. Given the findings made by Goddard J as to Mr Johnson's deceit vis a vis the franchisees, it would have been open to Venning J to infer a link between Mr Johnson's awareness of his deceit and the subsequent entering into of an agreement which was so favourable to Mrs Johnson. Interestingly, Venning J's analysis of the extent to which there was an imbalance between the values of the assets as received by Mr and Mrs Johnson appears in the section of his judgment addressed to whether the agreement defeated creditors which came after the section of his judgment in which he found against the Official Assignee on the s 47(1) claim.[37] A third significant feature of the case is the incongruity between the reasons for the matrimonial property agreement as set out in its recitals and those recorded by the solicitors. Incongruity of this sort is a well recognised badge of fraud.[36] Although William Young J was in dissent, McGrath and Glazebrook JJ, specifically at [103], indicated their agreement with these comments.Assessment[37] In cases under s 47(1), the intent to defeat creditors must be an actual intent. As with all questions of fact, the Court is entitled to draw logical inferences from a directly proven set of circumstances. The allegation that a party has entered an MPA with intent to defeat creditors is a serious one and the evidence advanced in support of that proposition must be assessed with commensurate caution. [38] Under r 47 of the Court of Appeal (Civil) Rules 2005, this appeal is by way of rehearing, and in the course of such an exercise this Court may draw inferences of fact: r 48(3). Undoubtedly therefore this Court has the power, if it is so persuaded, to draw the inference sought by the Official Assignee. But in so doing this Court, has to be satisfied that the trial Judge was wrong in not drawing the suggested inference". [39] The drawing of inferences is a routine part of normal human activity and is a proper and legitimate course for a Court to follow. However, Courts will always be vigilant to ensure that they are not involved merely in guesswork, supposition or conjecture. Where a number of legitimate possibilities could flow from a factual scenario, drawing an inference will be difficult. [40] Mr and Mrs Johnson married in the early 1970s. Mrs Johnson had a child and owned a home. [41] In about 1990, the couple had sought advice from estate planners but the matter was not pursued.[42] There was a difficult patch in their relationship in about 1992. Mrs Johnson was keen, after discussing matters with a friend, to investigate the possibility of an MPA. [43] Although death duties were abolished in 1992, it remained commonplace for people to use the PRA regime to divide matrimonial assets between a husband and wife who remained living together. [44] On the basis of the finding of Goddard J that Mr Johnson had been reckless in his dealings with those who purchased franchises for Clear-Shield, it is not established that he knew (or should reasonably have known) that his dishonest activity would come home to roost. That is not an inevitable state of mind to impute to a person who is over-confident and careless about the proper accuracy of what they are saying and doing about a business venture. [45] There is no evidence that there had been any suggestion prior to October 1993 that the dissatisfaction which had begun to emerge from any franchisees was seen as a problem for anyone other than the company. There was no suggestion that Mr Johnson could have personal responsibility for the company debts – the law on that issue was in the 1990s (and still is to some extent) distinctly controversial. [46] It was many years later that the claim was made against Mr Johnson and although Mr Smith contends that that is because the finding of deceit was only made later, that avoids the proper enquiry. The focus must be on what Mr Johnson's intention was at the time the MPA was signed. The finding of reckless deceit is of limited probative value in this case. [47] The valuation exercise which was undertaken is again open to more than one interpretation. Nothing was advanced which suggests that the use of government valuation for real estate was, in this kind of exercise, an indication of improper behaviour.[48] Ascribing a value to private company shares held essentially by the parties is notoriously difficult. In this case the self-valuation by Mr Johnson did have the hard objective core that there had been a transaction in the shares the previous year to Mr Lennox-King. In October 1993 Mr Lennox-King was the Chief Executive Officer of the Company. His dissatisfaction, disgruntlement and claims arose only after he and the Johnsons jointly decided to sell and Mr Johnson introduced his claim for monies owing by the company to him. That was in mid 1994. [49] As Mr Smith responsibly accepted, the lack of equality between the parties on the valuations they adopted was not sufficient to be of no consequence. It is only, with the benefit of hindsight, when a revaluation assessment is undertaken that the glaring discrepancy emerges. We do not consider the established facts as at the date of execution provide material upon which to draw the inference invited. [50] The variance between the recital and the file note, again is a matter which is capable of diverse interpretation and application. If Mr and Mrs Johnson had been through a rocky period in their relationship, a desire by the husband to ensure that he was in control of the commercial interests is unremarkable. As Mrs Johnson had brought a house to the marriage, her wanting to protect the family home is again commonplace. [51] Applying traditional tests as to the drawing of inferences, there were good and sufficient reasons quite unrelated to the reckless manner in which Mr Johnson had been dealing with franchisees to enter into an MPA. There were commonplace reasons for a man and a woman (who had been married for 20 plus years) wanting to engage the arrangements which Parliament has provided. [52] To take subsequent events and read them back into the environment which existed at the time of execution in October 1993 is inappropriate. It is, however, the only basis on which it would be possible to conclude that Mr Johnson had an intention to defeat creditors.[53] The alternative expression of the argument (that this was a voluntary alienation by an insolvent debtor) again requires the incorporation into 1993 of matters which only emerged at a later stage. They are factors which are not shown to have impinged on the activities at the relevant time. On the basis of reckless behaviour, we cannot agree that the MPA meant that Mr Johnson was making a voluntary alienation of property as an insolvent debtor. Mr Johnson and his wife were dividing between themselves the property in respect of which each had an interest. On the exercise undertaken no-one was insolvent and no voluntary alienation occurred. [54] The previous year Mr Lennox-King had paid good money for shares. He was behaving in October 1993 as if he had obtained a valuable commodity. There is not a factual basis upon which, by direct evidence or available inference, the Court could conclude that in signing the MPA Mr Johnson was seeking to defeat his creditors.Result[55] The appeal is dismissed. [56] The respondent, who was without legal representation, is entitled to usual disbursements which have been incurred in the conduct of the appeal.Solicitors: G Caro, Minstry of Economic Development for Appellant