Five Star Finance Limited (in liq) v Williams HC Auckland CIV 2009-404-5422

[2010] NZHC 404

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

CIV-2009-404-005422

BETWEEN  FIVE STAR FINANCE LTD (IN

LIQUIDATION) Plaintiff

ANDJEANNE SHIRLEY WILLIAMS Defendant

Hearing:         9 March 2010

Appearances:  S McAnally for Plaintiff

S Carey for Defendant

Judgment:      17 March 2010 at 5:00 pm

JUDGMENT OF ASSOCIATE JUDGE BELL

This judgment was delivered by me on 17 March 2010 at 5:00 pm

pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date: ………………….

Solicitors/Counsel:

Keegan Alexander, PO Box 999, Auckland

Shanahans Solicitors, PO Box 15149, New Lynn, Auckland

S Carey, PO Box 848, Shortland Street, Auckland

FIVE STAR FINANCE LTD (IN LIQUIDATION) V J S WILLIAMS HC AK CIV-2009-404-005422  17 March

2010

[1]      Five  Star  Finance  Ltd  (in  liquidation)  has  applied  for  summary  judgment against  Jeanne  Shirley  Williams  for  its  claim  that  she  received  payments  totalling $505,000 knowing they had been disposed of in breach of fiduciary duty.  Hoffman LJ  (as  he  then  was)  stated  the  requirements  for  this  cause of  action  in  El  Ajou  vDollar Land Holdings Plc [1994] 2 All ER 685 at 700:

For this purpose the plaintiff must show, first, disposal of his assets in breach

of fiduciary duty;  secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff;   and thirdly, knowledge  on  the  part  of  the  defendant  that  the  assets  he  received  are traceable to a breach of fiduciary duty.

[2]      The principles applied in an application for summary judgment are set out in the judgment of the Court of Appeal in Jowada Holdings Ltd v Cullen Investments Ltd v Pacific Retail Group CA 248/02 5 June 2003 at [28]:

In  order  to  obtain  summary  judgment  under  Rule  136  of  the  High  Court

Rules a plaintiff must satisfy the Court that the defendant has no defence to

its  claim.  In  essence,  the  Court  must  be  persuaded  that  on  the  material before  the  Court  the  plaintiff  has  established  the  necessary  facts  and  legal basis for its claim and that there is no reasonably arguable defence available to the defendant.  Once the plaintiff has established a prima facie case, if the defence  raises  questions  of  fact,  on  which  the  Court’s  decision  may  turn, summary judgment will usually be inappropriate.   That is particularly so if resolution  of  such  matters  depends  on  the  assessment  by  the  Court  of credibility or reliability of witnesses. On the other hand, where despite the differences on certain factual matters the lack of a tenable defence is plain on the  material  before the  Court, to the extent  the  Court  is  sure  on the  point,

summary judgment will in general be entered.  That will be the case even if legal arguments must be ruled on to reach the decision.  Once the Court has

been  satisfied  there  is  no  defence  Rule  136  confers  a  discretion  to  refuse summary judgment.   The general purpose of the rules however is the just, speedy  and  unexpensive  determination  of  proceedings,  and  if  there  are  no circumstances   suggesting   summary   judgment   may   cause   injustice,   the application will invariably be granted.  All these principles emerge from the known decisions of the Court including Pemberton v Chappell [1987] NZLR 1, 3-4, 5; National  Bank  of  New Zealand  v  Loomes  (1989)  1  PRNZ  211, 214;  and Sudfeldt v UDC Finance Ltd (1987) 1 PRNZ 205, 209.

[3]      The dictum of Lord Diplock in Eng Mee Yong v Letchumanan [1980] AC 331

at 341 has been applied in summary judgment cases:

Although  in  the  normal  way  it  is  not  appropriate  for  a  Judge  to  attend  to resolve  conflicts  of  evidence  on  affidavit,  that  does  not  mean  that  he  is bound  to  accept  uncritically,  as  raising  a  dispute  of  fact  which  calls  for further  investigation,  every  statement  on  an  affidavit  however  equivocal, lacking in precision, inconsistent with undisputed contemporary documents

or other statements by the same deponent, or inherently improbably in itself

it may be.

[4]      I also record the need for judicial caution to be balanced with a robust and realistic  judicial  attitude  when  the  particular  facts  of  the  case  call  for  it:  Bilbie Dymock Corporation Ltd v Patel & Banjaj (1987) 1 PRNZ 84 at 85-86.

[5]           The  plaintiff  is  one  of  the  companies  in  the  Five  Star  group  of  companies. Another member of the group, Five Star Debenture Nominee Ltd, raised funds from the  public  and  advanced  them  to  the  plaintiff  secured  by debenture.   The  plaintiff went  into  receivership  on  5  September  2007  and  was  ordered  to  be  put  into liquidation on 13 June 2008.  At the start of the liquidation the shortfall of assets to liabilities was in the order of $51.7 million.   The liquidators say that to date there have been no more than nominal recoveries.

[6]      The  plaintiff’s  directors  were  Anthony  Walpole  Bowden,  Nicholas  George Kirk and Marcus Arthur Macdonald.  Its shareholder was Four Star Investments Ltd, now also in liquidation.

[7]      Neil Williams is  the  husband  of  the  defendant. One of the  plaintiff’s witnesses, Ivan Heys, was a director of the plaintiff from 1992 until 1998 when he resigned.   He says that Mr Williams attended board meetings, played an active part in  discussions  at  board  meetings  and  was  treated  by  other  directors  as  much  a director of the company as they were. But he was not recorded as a director because he was then an undischarged bankrupt. The plaintiff alleges that Mr Williams was a quasi director during the period in issue in this case but he denies that. He says that Mr Kirk employed him, not the plaintiff or any other Five Star company. However, he did sign cheques for the plaintiff. While the extent is not clear, I find that he did have some part in the management of the plaintiff.

[8]      Another company associated with these people is Happy Days Ltd (In Liquidation). It was incorporated in March 1995.  It ran a restaurant at Great South Road, Manukau City. Happy Days Ltd was put into liquidation on 27 May 2008.

At all relevant times the directors of Happy Days  Ltd were Nicholas  George Kirk and Marcus Arthur Macdonald. It had the same address for service as the plaintiff.

[9]      Because the defendant refers to an agreement for the sale of shares in Happy Days Ltd, it is necessary to set out some of the evidence as to the shareholding in the company.  In 2002 the initial ordinary 100 shares were held:  50 by Nicholas George Kirk, 30 by Five Star Finance Ltd, 15 by Jeanne Shirley Souness and 5 by Mayling Lee. Souness was the defendant’s  surname  before  she  married  Neil  Williams. Annual  returns  filed  with  the  Companies  Office  show  that  these  shareholders continued  to  own  these  shares.  But  they  also  show  an  additional  175,000  shares issued  and  held  by  the  plaintiff. The  defendant’s  husband  says  that  these  are redeemable preference shares and have no value. For this application, the plaintiff left the value of the 175,000 shares open.

[10]     The annual returns for  Happy Days Ltd put in evidence include those from

2004  to  2007.  Nicholas  George  Kirk  as  a  director  of  Happy  Days  Ltd  filed  the returns  for  2004  and  2005.  Simon  Downs  of  Five  Star  Consumer  Finance  Ltd (another  Five  Star  company)  filed  the  2006  return.  Sam  Chan,  a  South  Auckland accountant, filed the 2007 return.

[11]     Mr   Williams   says   that   the   annual   returns   do   not   correctly   show   the shareholding. He alleges that the 100 ordinary shares were owned: Nicholas Kirk 27, Marcus MacDonald 26 and the defendant 47. He says that directors told him that the reason  for  Five  Star  Finance  Ltd  no  longer  being  a  shareholder  is  that  directors wanted Five Star Finance Ltd to have the benefit of tax losses of Happy Days Ltd. I do  not  find  this  explanation  convincing.  If  the  ability to  claim  tax  losses  turns  on retaining  shares  then  it  is  more  likely  that  Five  Star  Finance  Ltd  did  remain  a shareholder than that it made fraudulent tax returns.

[12]     Bruce Wong had managed the Happy Days Restaurant.   Together with Roy Stephens  of  Australia,  he  formed  a  company  Ballater  Ltd.   Mr  Wong  owned  two shares and Mr Stephens 9,998 shares. Ballater later changed its name to Happy Days (2000) Ltd.

[13]     Texas Pacific Consulting Pty Ltd was an Australian company incorporated by

Mr Stephens.

[14]     The affidavit of Bruce Wong filed for the defendant shows that on 15 March

2000, Happy Days Ltd entered into a written agreement for sale and purchase for the business of the Happy Days Restaurant at 898 Great South Road, Manukau City. The purchaser  was  Ballater  Ltd.   The  sale  price  was  $4,350,000,  being  $1,800,000  for plant, fittings and fixtures, $2 million for goodwill, $500,000 for a wholesale licence and  $50,000  for  stock  in  trade.   The  purchase  was  to  be  funded  by the  purchaser taking over liabilities of Happy Days Ltd:         a loan advance of $3,850,000 from the plaintiff,  a  loan  from  the  National  Bank  of  $109,000,  and  other  loans  owing  by Happy Days Ltd up to $391,000. Mr Wong guaranteed payment of the loans to the National Bank and the plaintiff.

[15]     Mr Wong says that while the agreement provided for Five Star Finance Ltd to fund  the  purchase  for  a  year,  it  was  envisaged  that  Mr  Stephens  or  his  company would  be  able  to  inject  funds  into  Ballater  Ltd.  Mr  Wong  also  says  that  he understood from Mr Stephens that the funding would be channelled through Texas Pacific Consulting Pty Ltd.   The purchase of the business of Happy Days Ltd was settled on 1 April 2000.  Mr Wong says that from 31 March 2002, he no longer had any  involvement  with  Happy  Days  (2000)  Ltd  and,  as  far  as  he  was  aware,  the ownership of the business reverted to Happy Days Ltd but continued to be traded by Happy  Days  (2000)  Ltd.   He  says  that  he  agreed  to  transfer  the  business  back  to Happy  Days  Ltd  in  consideration  of  being  released  from  his  personal  guarantee under the agreement for the sale and purchase of the business.

[16]         Mr  Williams  says  in  his  affidavit  that  when  Mr  Wong  did  not  wish  to continue with the Happy Days Restaurant business, the directors of Happy Days Ltd agreed that Happy Days Ltd (the original company) would take back the restaurant business in consideration of releasing Mr Wong from his personal guarantee under the  original  agreement  for  sale  and  purchase.  He  says  that  the  directors  had accounting  advice  that  there  were  tax  advantages  in  continuing  to  operate  the business under the Happy Days (2000) Ltd company so that while Happy Days Ltd became  the  “owner”  of  the  restaurant  business,  it  was  traded  under  the  company Happy Days (2000) Ltd.  No evidence was given as to these tax advantages.

[17]     One of the liquidators has included in his affidavits accounting records from the plaintiff said to be loan ledgers, as records of advances to various entities.  There are  records  for  Ballater  Ltd.   The  records  show  an  opening  amount  of  $4,350,000 due at 31 March 2000.   From 1 July 2000 there are many advances to Ballater Ltd. The  ledgers  attached  to  the  affidavit  show  little  in  the  way  of  interest  charges. Eventually, the advances were written off – a total of $8,405,762.

[18]     There were similar records for a loan account to “Happy Days”.   The total amount  of  advances  to  Happy  Days  from  31  March  2003  to  1  August  2007  was $4,067,719.28.  These were also written off.

[19]     The liquidator also attaches records for a loan account in the name of Texas Pacific.  The total advanced to Texas Pacific was $1,768,678.89.  The liquidator says that there is no company in New Zealand called Texas Pacific Ltd.  He has checked the Companies Office register.   The liquidator confirms that there are no records of any loan contracts or other commercial arrangements between Five Star Finance Ltd and Texas Pacific Consulting Pty Ltd.

[20]     The liquidator noted that there have been write-offs of these loans.   In some cases,  the  amounts  were  transferred  to  other  entities  associated  with  the plaintiff’s directors.  The  liquidator  says  that  Texas  Pacific  Consulting  Pty  Ltd  made  no payments to the plaintiff.

[21]     All  this  is  background  material  against  which  the  payments  made  to  the defendant can be considered. Between 11 July 2003 and 1 August 2007, Five Star Finance Ltd made 26 payments  to  Mrs  Williams,  three  of  $15,000  and  23  of $20,000.  Seven of the payments were by cheque.  In all cases, her husband was one of the people who signed the cheques in favour of the defendant.  Six of the cheques were also signed by Mr Kirk.  The rest of the payments were by direct transfers from the plaintiff’s bank account to Mrs Williams’ bank account.

[22]     The company records show that these payments to the defendant were charged to various loan accounts. One was to Bowden No. 6 Ltd.  The liquidator has searched Company Office records and found that a company by that name does not

exist.  Three are charged to Ballater Ltd.  One is not charged to a loans ledger.  The rest are all charged to Texas Pacific Ltd. The narrations in the ledgers for all these payments,  except  that  to  Bowden  No.  6  Ltd  and  the  one  not  charged  to  a  loans register, are “HDL shares” or similar wording.

[23]     At this point the plaintiff has proved its case to the extent that the evidential burden passes to the defendant. If the defendant had not taken any steps to oppose the application, the plaintiff would be entitled to summary judgment. It has shown that   the   plaintiff   made   payments   to   the   defendant   for   no   apparent   cause   or consideration  and  that  there  should  be  restitution  in  favour  of  the  plaintiff.  If  the defendant wishes to oppose on the grounds that she has an arguable defence that she was  entitled  to  receive  and  keep  the  payments,  then  she  must  adduce  evidence showing  that.  So  if  she  wanted  to  say  that  she  was  a  shareholder  and  these  were dividend payments, or that she was being paid for goods or services provided to the plaintiff, or was being repaid money she had lent the plaintiff, then she had to give evidence of this. Of course, the legal burden remains on the plaintiff throughout to show that she has no arguable defence.

[24]     Mrs Williams’ response is to say that in February 2004, she, Mr Kirk and Mr

Macdonald signed an agreement with Texas Pacific Consulting Pty Ltd to sell their

100 shares to Texas Pacific Consulting Pty Ltd.   She has attached to her affidavit a copy  of  an  agreement  for  sale  and  purchase  of  shares  of  26  February  2004.   The agreement provides for a purchase price of $3 million, with settlement to take place on 31 March 2004 “or such later date as agreed between the parties”.  Paragraph 9 of the agreement also says:

This agreement and the transaction hereby evidenced is entirely conditional on the contemporaneous settlement of the sale by the company (Happy Days Ltd) to Happy Days (2000) Ltd of the business of Happy Days Restaurant, Manukau  City in accordance  with the terms  of the agreement  for sale and

purchase dated 15 March 2000.

[25]     Clause 5 of the agreement provides, amongst other things, that on settlement the vendor shall deliver to the purchasers confirmation that all moneys owing to Five Star Finance Ltd (other than those trade and other creditors to be assumed by Happy Days (2000)) have been paid in full.

[26]     Her affidavit says:

13   The agreement provided for the sale of shares for the sum of $3 million. Obviously I was very happy to sign that agreement when it was presented to me.

14   After signing the sale and purchase agreement I received payments on a reasonably regular basis, which I assumed were in relation to the shares that

I had sold.  The plaintiff is now claiming the refund of those payments.

15   The payments were received from Five Star Finance Ltd, but given Mr Kirk  and  Mr  MacDonald’s  role  in  this  company,  I  assumed  that  payment arrangements had been structured through Five Star Finance Ltd, and I had no reason to question these payments.

16  I received the payments from Five Star Finance Ltd in good faith and in the belief that they had been made to me in consideration for the sale of my shares in Happy Days Ltd.

[27]     Her explanation may mean: (a) the payments from the plaintiff to her were really for  the  sale  of  shares  in  Happy Days  Ltd  and  that  is  a  good  reason  for  her keeping  the  payments,  or  (b)  even  if  the  payments  were  made  incorrectly,  she received the payments in good faith and is innocent of any wrongdoing. Her notice of opposition raises both and also says that she altered her position in reliance on the payments.

[28]     Her claim that payment arrangements had been structured through Five Star Finance  Ltd  does  not  mean  that  Five  Star  Finance  bought  the  shares.  Clearly  the agreement does not show this. There is no evidence that Texas Pacific  Consulting Pty Ltd onsold the shares to Five Star Finance. There was no submission that Five Star Finance bought the shares in Happy Days Ltd.

[29]     Nor  does  her  claim  mean  that  Five  Star  Finance  Ltd  was  a  conduit  for payments  from  Texas  Pacific  Consulting  Pty  Ltd  to  the  defendant  and  other shareholders.  The  plaintiff’s  evidence  is  quite  clear  that  it  did  not  receive  any payments  from  Texas  Pacific  Consulting  Pty  Ltd  –  referable  to  the  agreement  the defendant  relies  on  or  otherwise.  The  liquidator  has  analysed  the  “Texas  Pacific” loan  ledger  and  found  that  any  credits  are  only  for  write  offs,  none  of  them connected to the agreement of 26 February 2004.

[30]         Her claim can only mean that Five Star Finance Ltd financed the purchase of the shares by Texas Pacific Consulting Pty Ltd and the payments made to her were being  charged  to  Texas  Pacific  Consulting  Pty  Ltd.  The  inference  which  she impliedly asks to be drawn is that that any recovery should be from Texas Pacific Consulting  Pty  Ltd,  not  from  her.  In  this  regard  her  husband  exhibits  a  loan  trial balance of the plaintiff dated 9 December 2004 which shows a balance of $1,241.66 for a loan to Texas Pacific with a next payment of $10,000.

[31]     I do not accept that explanation:

a)        There  are  no  loan  documents  between  Five  Star  Finance  Ltd  and Texas Pacific Consulting Pty Ltd.   It would be normal practice for a finance company providing finance to a third party for the purchase of shares  in  another  company  to  require  extensive  documentation  and securities, especially where the amount lent is significant, as it was in this case.

b)There  is  nothing  to  show  that  Texas  Pacific  Consulting  Pty  Ltd actually  did  borrow  any  money  from  the  plaintiff.  Nothing  that  is except  the  loan  ledger,  but  given  the  way  successive  entries  were made on this ledger only to be subject to wholesale write offs later, the  ledger  does  not  give  support  to  Texas  Pacific  actually  having borrowed from the plaintiff.

c)        The first of the payments to Mrs Williams was made on 11 July 2003

before the alleged agreement of February 2004.

d)The second payment was not made until 31 March 2005, more than a year after the settlement date in the agreement.

e)        The  agreement  provides  for  payment  of  the  purchase  price  in  one sum, not payment by instalments.

f)            If Five Star Finance had actually financed the purchase of the shares by Texas Pacific Consulting Pty Ltd, it would be expected that other shareholders would receive similar payments from Five Star Finance Ltd.  But the plaintiff has shown that Mrs Williams was the only one

to receive these payments.

g)        It is not clear how the shares of Happy Days Ltd could have a value of

$3,000,000 in 2004.  The business was sold in 2000. Mr Williams has attached to his affidavit a copy of financial statements for Happy Days Ltd for the  year ending 31 March 2001. These show the company’s financial performance for the year before the sale to Ballater Ltd. The company  received  income  only  from  the  restaurant,  bar  and  bottle store.  Before adjustments for depreciation and extraordinary items, it made  a  loss  of  $329,617.  The  statement  of  financial  position  shows net   assets   of   $770,000.   (The   statement   does   not   show   any indebtedness  to  the  plaintiff  in  2000,  a  matter  not  addressed  in  the evidence.)  The  financial  statements  for  the  year  ending March  2001 reflect  the  sale  of  the  business  to  Ballater  the  year  before.  Mr Williams’   affidavit   also   exhibits   a   report   by   Sam   Chan,   South Auckland accountant, for 6 months’ trading from 1 April 2003 to 30 September  2003.  This  is  in  the  period  when  Bruce  Wong  was  no longer  in  the  business  and  it  had  reverted  to  Happy  Days  Ltd.  The report  shows  a  new  source  of  income,  casino  rental,  but  the  six months’  trading  for  all  operations  gave  a  net  profit  of  only  $630. Neither  of  these  reports  gives  a  basis  for  thinking  that  the  trading performance of the company could justify a price of $3,000,000 for all the shares in February 2004.

h)When  Ballater  Ltd  bought  the  business  of  Happy  Days  Ltd  it  took over debt to the sum of $4,350,000.  According to the loan ledgers of Five Star Finance  Ltd,  Ballater retained that indebtedness even after the business reverted to  Happy Days  Ltd.   The loan ledgers of  Five Star  Finance  Ltd  show  further  advances  made  to  Happy  Days  Ltd. Advances  of  $2,060,000  were  made  on  31  March  2003  under  loan

ledgers 1005, 1006  and  1011. Ballaters’  indebtedness  at  8  August

2002 stood at $5,677,625 and up to 31 March 2003, there were further advances of $2,320,887. Roy Stephens was the majority shareholder

in Ballater Ltd/Happy Days (2000) Ltd. He was also the man behind Texas  Pacific  Consulting  Pty  Ltd.  Given  that  the  business  did  not have an impressive trading history and that the entities associated with the business, Happy Days Ltd and Ballater Ltd, were already heavily indebted  to  the  plaintiff,  I  see  no  commercial  reason  why  Roy Stephens would sign an agreement for his Texas Pacific company to pay $3,000,000 for the shares in Happy Days Ltd.

i)The  parties  to  the  agreement  for  the  sale  of  the  shares  are  not  the shareholders shown in annual returns made to the Companies Office. Any  third  party  buying  shares  in  a  closely  held  company  such  as Happy Days Ltd would be concerned that those selling the shares had title.  The agreement does not address this.

j)There was no transfer of shares.  After the settlement date, the shares remained  in  the  ownership  of  Kirk,  Five  Star  Finance  Ltd,  Souness and  Lee,  as  shown  by  the  annual  returns  filed  with  the  Companies Office after 31 March 2004.  If the shares had been acquired by Texas Pacific Consulting Pty Ltd, there was no reason for those associated with the  former shareholders to continue to file returns showing them remaining as shareholders.

k)There was no change of directors, something that normally follows a change in control of a company.

[32]     It is clear that the sale of the shares did not happen and that Five Star Finance Ltd did not have any reason to make any payments to Mrs Williams on account of this supposed sale of shares. Her explanation is ludicrous.

[33]     The defendant does not suggest any other reason for the company’s payments

to her.   The payments should be seen for what they are:   her husband, at the very

least in some management role in  the  company,  and  Mr  Kirk,  a  director,  have authorised payments to her without any proper reason. As such, these payments are

an  improper  diversion  of  company funds  to  the  wife  of  someone  occupying  some form of managerial position.  This is nothing less than misappropriation of company funds and is recoverable by the company.

[34]     Those who authorised the payments breached fiduciary duties they owed the company.   Their use of company funds was not for the purpose of the company, but

for the personal benefit of Mrs Williams.

[35]     Mrs Williams did not ask any questions about the payments she received:

I assumed that payment had been structured through Five Star Finance Ltd, and  I  had  no  reason  to  question  these  payments.  (paragraph  15  of  her affidavit).

[36]     Her failure to inquire is surprising.  On her assumption that payments she got from  Five  Star  Finance  were  for  the  sale  of  shares  in  Happy  Days  Ltd  to  Texas Pacific Consulting Pty Ltd, there was plenty to make anyone ask questions:

a)        Why  did   she   receive   a   payment   in   2003   before   there   was   an agreement?

b)        How much of the sale price of $3 million was she to receive?

c)        Why  was  payment  made  in  instalments  beginning  a  year  after  the settlement date, instead of in one lump sum on the settlement date?

d)Why  is  it  that  the  shares  had  been  sold  for  $3  million  when  the business of the company was sold only four years earlier on the basis of there being no equity in the business?

No ordinary person would receive these payments without asking questions.

[37]     For Mrs Williams, Mr Carey urged me not to make any findings as to Mrs

Williams’ state of mind when she had not yet given oral evidence and been subject

to  cross-examination.   Findings  as  to  her  knowledge  could  not  be  made  in  the absence of a fully defended hearing.

[38]     Mr Carey also submitted that the law as to the state of knowledge required is not  settled  in  New Zealand  and  it  would  not  be  right  to  enter  summary  judgment when the law is not settled. In that regard he cited Westpac Bank v Kembla [2001] 2 NZLR 298 at [75]-[76]. That passage of the Court’s judgment needs to be read in context. The defendant banks in that case had applied for summary judgment against the plaintiff and claimed that they had not received funds beneficially. The Court’s comment:  “This  area  of  law  is  marked  by present  confusion”  went  to  the  issue  of beneficial receipt by banks. It does not apply here. Mrs Williams is not a bank and does  not  say  that  she  received  the  payments  as  an  agent.  She  was  the  beneficial recipient of the payments. Although Mr Carey did not cite it, there is also a recent decision of the Court of Appeal in Chean v De Alwis [2010] NZCA 30, where the Court remarked that the law was not settled. Again, that has to be read in the context of that case, involving a trust imposed by statute.

[39]     In discussions of the requisite state of knowledge references are made to the five-fold categorisation of knowledge accepted by Peter Gibson J in Baden v Société Générale  pour  Favoriser  le  Développement  du  Commerce  et  de  l’Industrie  en France SA [1993] 1 WLR 509 at 575-576:

a)        actual knowledge;

b)        wilfully shutting one’s eyes to the obvious;

c)        wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;

d)knowledge  of  circumstances  which  would  indicate  the  facts  to  an honest and reasonable man;

e)        knowledge   of   circumstances   which   would   put   an   honest   and reasonable man on inquiry.

[40]     The  first  three  are  considered  to  be  actual  knowledge  and  the  last  two constructive knowledge. Mr Carey submitted that the evidence did not establish that Mrs  Williams  did  not  have  an  arguable  defence  that  she  did  not  have  actual knowledge  under  any  of  the  first  three,  that  liability  for  constructive  knowledge under the last two was controversial and that any findings should be made only on a full hearing.

[41]     In  New Zealand  the  trend  of  authority  has  been  to  hold  that  constructive knowledge is sufficient and that all five categories of knowledge within the Baden categorisation are sufficient to fix the recipient with liability:  Westpac Banking Corpv  Savin  [1985] 2 NZLR 41, Powell  v  Thompson  [1991] 1 NZLR 597 at 608-609, Equiticorp Industries Group Ltd v Hawkins [1991] 3 NZLR 700 at 728, Lankshear v ANZ Bank [1993] 1 NZLR 481 at 493-494, Equiticorp Industries Ltd v The Crown [1998] 2 NZLR 481 at 629-639.

[42]     Authorities  in  other  jurisdictions  running  the  other  way  tend  to  focus  on supposed  difficulties  of  applying  equitable  notions  of  notice  in  the  context  of commercial transactions, where security of receipt is so often important.   Reference is often made to the dictum of Lindley LJ in Manchester Trust v Furness [1895] 2 QB 539 at 545:

In  dealing  with  estates  in  land  title  is  everything,  and  it  can  be  leisurely investigated; in commercial transactions possession is everything, and there is  no  time  to  investigate  title;  and  if  we  were  to  extend  the  doctrine  of constructive notice to commercial transactions we should be doing infinite mischief and paralysing the trade of the country.

[43]     In  this  Court  Westpac  Banking  Corporation  v  Savin  remains  the  binding authority.  The  Court  of  Appeal  held  that  the  bank  in  that  case  was  liable  for  the receipt of money paid into an overdrawn account on the basis that the bank was fixed with constructive notice of its customer’s breach of fiduciary duty. See Richardson J (as he then was) at 54:

The  only  reasonable  conclusion  is  that  it  had  constructive  notice  of  the breach of fiduciary duty on the part of Aqua Marine and must account to the plaintiffs for their property.

[44]     To similar effect are the findings  of  McMullin  J  at  60  and  Sir  Clifford

Richmond at 71.

[45]     While the members of the court addressed the bank’s liability as  arising in equity for receiving money paid out in breach of a trust liability, in coming to their decision they referred to decisions where the causes of action were at common law: Reckitt  v  Barnett,  Pembroke  and  Slater  Ltd  [1929] AC 176 and Nelson  v  Larholt [1948] 1 KB 339. In both cases there were claims in conversion and money had and received. Independently of equity, the common law applied a constructive knowledge test to receipt of misappropriated funds. Another example is Lloyds Bankv The Chartered Bank of India, Australia & China [1929] 1 KB 40 where Scrutton LJ said at 56:

In my view it is established that a third party, dealing in good faith with an agent acting within his ostensible authority, is not prejudiced by the fact that

as  between  the  principal  and  his  agent,  the  agent  is  using  his  authority  in

such a way that the principal can rightly complain that the agent is using his authority for his own benefit and not for that of his principal.  ... But it is otherwise  where  the  third  party  has  notice  of  irregularity  putting  him  on inquiry as to whether the ostensible authority is being exceeded.

[46]     Scrutton LJ applied a constructive knowledge test to find the bank liable in conversion – on the facts in that case the bank ought to have been put on inquiry.

[47]     Denning J (as he was then) noted that equity and common law worked on the same principle of liability in Nelson v Larholt at 342-343:

The  relevant  legal  principles  have  been  much  developed  in  the  last  thirty- five  years.  A  man’s  money  is  property  which  is  protected  by  law.  It  may exist  in  various  forms,  such  as  coins,  treasury  notes,  cash  at  bank,  or cheques, or bills of exchange of which he is “the holder” but, whatever its form, it is protected according to one uniform principle. If it is taken from the  rightful  owner,  or  indeed,  from  the  beneficial  owner,  without  his authority, he can recover the amount from any person into whose hands it can be traced, unless and until it reaches one who receives it in good faith and for value and without notice of the want  of authority. Even if the one who received it acted in good faith, nevertheless if he had notice – that is, if

he knew of the want of authority or is to be taken to have known of it – he must repay. All the cases that occur in the books, of trustees or agents who

draw cheques on the trust account or the principal’s account for their own

private purposes, or of directors who apply their company’s cheques for their own account, fall within this one principle. The rightful owner can recover

from  anyone  who  takes  the  money  with  notice,  subject,  of  course,  to  the

limitation that he cannot recover twice over. This principle has been evolved

by the courts of equity and law side by side. In equity it took the form of an action   to   follow   moneys   impressed   with   an   actual   trust,   or   with   a constructive trust owing to a fiduciary relationship. In law it took the form of an  action  for  money  had  and  received  or  damages  for  conversion  of  a cheque. It is not longer appropriate, however, to draw a distinction between law and equity. Principles have not to be stated in the light of their combined effect.

[48]     As the common law accepted a constructive knowledge test independently of equity,  and  the  common  law  principles  were  developed  and  applied  by  judges familiar  with  the  legal  ramifications  of  commercial  transactions,  there  seems  little need to revert to an actual knowledge test because of concerns as to the unacceptable intrusion of equitable concepts into commercial transactions.

[49]     Denning J held that recovery was available at law and in equity against any recipient  except  someone  receiving in  good  faith,  for  value  and  without  notice.  In this case, the defendant was a volunteer – she did not provide any value. Any claim she makes that she gave consideration by way of the agreement for the sale of shares in  Happy Days  Limited  is  rejected.  Strictly,  it  is  not  necessary for  the  plaintiff  to establish knowledge of the defendant for her to be liable. However, in addition to the fact that the plaintiff framed its claim in equity as knowing receipt, the defendant’s knowledge is relevant to her further defence of change of position.

[50]     On the constructive notice test, the defendant cannot rely on her assumption that  the  money she  was  receiving  from  Five  Star  Finance  Ltd  was  for  her  sale  of shares  in  Happy  Days  Ltd  for  the  reasons  set  out  above  in  paragraph  [31]  above. There is no connection at all between either the 2000 sale of the business by Happy Days Ltd or the 2004 purported sale of shares by Happy Days Ltd’s shareholders to Texas Pacific Consulting Pty Ltd and the payments to her.   The defendant was not employed by Five Star Finance Ltd and did not hold any position in that company. There  is  no  evidence  of  her  having  provided  services  to  that  company  or  of  that company  being  indebted  to  her  in  any  way. She  was  not  a  shareholder  of  that company.  She had not invested in that company.  There was no reason for Five Star Finance Ltd to make any payments to her. She was a volunteer. In this situation, any reasonable  person  in  her  position  would  know  that  she  had  no  right  to  the  money paid  to  her.   The  defendant  cannot  plausibly say  that  she  has  an  under-developed sense of curiosity and never thought to ask. Nor can she say that by her standards she

was entitled to keep money misappropriated from the plaintiff. In this context, as in the  test  for  dishonesty  in  an  accessory  liability  claim,  the  standards  are  not subjective:  see Lord Nicholls in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 at 389:

The standard of what constitutes honest conduct is not subjective. Honesty is not  an  optional  scale,  with  higher  or  lower  values  according  to  the  moral standards   of   each   individual.   If   a   person   knowingly   misappropriates another’s property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.

So it is with knowing receipt claims.

[51]     Under  the  knowing  receipt  claim  the  defendant  had  notice  that  the  money came to her when those arranging the payments had no right to do so and she had no right  to  keep  the  payments.  It  is  not  necessary to  have  a  full  defended  hearing  to inquire further into her actual state of knowledge.

[52]     In case it is thought that New Zealand should now change its test for the state

of knowledge required in knowing receipt  cases,  I  note  that  the  English  Court  of

Appeal applied an unconscionability test in BCCI (Overseas) Ltd v Akindele [2001]

Ch 437 rather than focusing on categorising states of knowledge. Nourse LJ said at

455:

What then, in the context of knowing receipt, is the purpose to be served by

a  categorisation  of  knowledge? It  can  only  be  to  enable  the  Court  to determine whether, in the words of   Buckley   LJ   in   Belmont   Finance

Corporation Ltd v Williams Furniture Ltd (No. 2) [1980] 1 All ER 393, 405,

the recipient can “conscientiously retain the funds against the company” or, the words of Sir Robert Megarry VC in In Re Montagu’s Settlement Trusts

[1987] Ch 264, 273, “[The recipient’s] conscience is sufficiently affected for

it to be right to bind him by the obligations of a constructive trustee”.  But, if that is the purpose, there is no need for categorisation.  All that is necessary

is  that  the  recipient’s  state  of  knowledge  should  be  such  as  to  make  it unconscionable for him to retain the benefit of the receipt.

For these reasons, I have come to the view that, just as there is now a single test of dishonesty for knowing assistance, so ought there to be a single test for knowledge for knowing receipt. The recipient’s state of knowledge must

be such as to make it unconscionable for him  to  retain  the  benefit  of  the receipt. A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisations have led. Moreover, it should  better enable the courts to give common sense decisions in the commercial context

in which claims of knowing receipt are now frequently made, paying equal

regard to the wisdom of Lindley LJ, on the one hand, and of Richardson J, on the other.

[53]     The reference to Richardson J is to the judgment of the Court of Appeal in

Westpac Bank v Savin at 53:

Clearly  Courts  would  not  readily  import  a  duty  to  inquire  in  the  case  of commercial  transaction  where  they  must  be  conscious  of  the  seriously inhibiting effects of a wide application of the doctrine.   Nevertheless there must be cases where there is no justification on the known facts for allowing a commercial man who has received funds paid to him in breach of trust to plead the shelter of the exigencies of commercial life.

[54]     This  test  of  unconscionability  in  the  BCCI  case  is  consistent  with  dicta  in New Zealand  cases  emphasising  unconscionability: see  for  example  Wylie  J  in Equiticorp v Hawkins at 728:

Again it is a question of conscience.  It is much easier to find unconscionable the  retention  of  a  benefit  to  which  the  defendant  cannot  claim  a  just entitlement, than it is to find unconscionable a careless but innocent failure to  appreciate  the  probable  truth  behind,  and  the  consequences  of,  known facts or to inquire further into those matters.

[55]     Under an unconscionability test, the defendant’s state of knowledge makes it inequitable for her to retain the funds. This was not a commercial transaction.  She provided no consideration for the payments. The payments were so unusual that her silence is staggering. There was no reasonable basis for her to assume that Five Star Finance Ltd was financing the purchase of shares in Happy Holidays Ltd which she continued to own. In the words of Wylie J she cannot claim a just entitlement. It is wholly inequitable for her to retain the company funds paid out to her.

[56]     The defendant also raises change of position as a defence.   Her evidence on the point is sparse:

I  have  subsequently  used  the  funds  received  to  alter  my  position,  on  the belief that they were paid to me for the sale of the shares that I held in the company,  something  I  would  not  have  done  had  I  known  that  I  was  not entitled  to  the funds.   In  the  main,  the  funds  have  been  spent  on  overseas travel.

[57]     This  is  no  more  than  an  allegation.  More  is  required  to  show  an  arguable defence. See United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 at [34]. The defendant’s vague assertion is not enough to show an arguable defence.

[58]     Mere  expenditure  of  money  is  not  enough  to  show  a  change  of  position. There must be a net loss of wealth:  see Lord Goff in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 at 580:

I  wish  to  stress  however  that  the  mere  fact  that  the  defendant  has  spent money,  in  whole  or in  part,  does  not  of itself  render  it  inequitable that  he should be called upon to repay, because the expenditure might in any event have been incurred by him in the ordinary course of things. I fear that the mistaken  assumption  that  mere  expenditure  of  money  may  be  regarded  as amounting to a change of position for present purposes has led in the past to opposition by some to recognition of a defence which in fact is likely to be available only in comparatively rare occasions.

[59]     In any event, a change of position defence is one that arises in strict liability claims,  as  in  claims  for  money  had  and  received.  It  does  not  arise  in  claims  of knowing  receipt. Liability  in  knowing  receipt  turns  on  the  knowledge  of  the recipient.   Once  the  recipient  is  found  to  have  knowledge,  actual  or  constructive, then the recipient cannot claim that they have changed their position in good faith in reliance on the payment. Lord Goff acknowledged as much in Lipkin Gorman at 580:

It is, of course, plain that the defence is not open to one who has changed his position in bad faith, as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution.

[60]     Similarly,  in his obiter  comments in the BCCI case at page  456 Nourse  LJ linked  the  change  of  position  defence  with  strict  liability  claims  in  contrast  with fault-based liability:

...  I  beg  leave  to  doubt  whether  strict  liability  coupled  with  a  change  of position   defence   would   be   preferable   to   fault-based   liability   in   many commercial  transactions,  for  example,  where,  as  here,  the  receipt  is  of  a company’s funds which have been misapplied by its directors.

[61]     The assertion of change of position does not assist this defendant in this claim

of  knowing  receipt.  As  she  had  knowledge  of  the  facts  allowing  the  plaintiff  to recover the payments or she cannot plausibly say that she did not have knowledge, she cannot say that she changed her position in good faith.

[62]     Accordingly, I find the defendant liable to the plaintiff in knowing receipt for the sum of $505,000.

[63]     Interest is claimed under s 87 of the Judicature Act 1908.  It is appropriate to apply the maximum rate of interest to recognise that the proceeds of judgment will ultimately  go  back  to  investors  in  the  Five  Star  Finance  group  of  companies  who invested in those companies at interest rates no lower than those under the Judicature Act  rates. Those  associated  with  directors  and  management  who  have  wrongly received company funds cannot fairly say that investors should have a lower return on  funds  misappropriated.  Interest  will  run  from  the  date  of  payment  on  each payment as set out below:

$15,000  11 July 2003

$15,000  31 March 2005

$20,000  19 August 2005

$20,000  9 December 2005

$20,000  4 January 2006

$20,000  2 February 2006

$20,000  1 March 2006

$20,000  20 March 2006

$20,000  4 April 2006

$20,000  1 May 2006

$20,000  12 June 2006

$20,000  3 July 2006

$20,000  1 September 2006

$20,000  22 September 2006

$20,000  2 October 2006

$20,000  30 October 2006

$20,000  1 December 2006

$20,000  3 January 2007

$20,000  1 February 2007

$20,000  1 March 2007

$15,000  31 March 2007

$20,000  2 April 2007

$20,000  1 May 2007

$20,000  1 June 2007

$20,000  2 July 2007

$20,000  1 August 2007

[64]     In all cases, interest will run at 7.5% per annum to 30 June 2008, and from

1 July 2008 at 8.4% per annum.

[65]     I award the plaintiff costs of $8000 plus disbursements to be approved by the

Registrar.

R M Bell

Associate Judge