Queensland Maintenance Services (Nz) Ltd ((in Liquidation)) v Zullo Property Group (Nz) Ltd

• Jurisdiction: Queensland
• Court: High Court
• Judge: Hinton J
• Judgment Date: 29 July 2016
• Neutral Citation: [2016] NZHC 1755
• Docket Number: CIV-2015-404-003177
• Date: 29 July 2016

BETWEEN

Queensland Maintenance Services (nz) Limited (in Liquidation)

First Applicant

Gareth Russel Hoole and Clive Robert Bish

Second Applicants

and

Zullo Property Group (Nz) Limited

First Respondent

Zullo Holdings (Nz) Limited

Second Respondent

Bright Horizons New Zealand Childcare Limited

Third Respondent

Frank Zullo

Fourth Respondent

[2016] NZHC 1755

CIV-2015-404-003177

CIV-2016-404-000981

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

Application for an order that caveats not lapse, a freezing order and/or a pre-judgment charging order — the applicant liquidators had filed proceedings under the Companies Act 1993 against the respondents — they sought to preserve assets in the hands of the respondents — the liquidators submitted that a director, and the various companies he controlled, put in place a deliberate scheme to remove all of the assets of a company, leaving two creditors unable to recover their debts — they said the scheme amounted to actual fraud and the caveats could therefore be sustained — the debt claimed amounted to $785,000 but the liquidators sought a freezing order over all assets disposed of, having a combined value of $3 million — no undertaking was given with the application for a freezing order in accordance r 32.2(5) High Court Rules (HCR) (insufficient assets in NZ) — whether there had been actual fraud which would sustain the caveats — whether an undertaking was not required because special circumstances existed under r 32.6(4) HCR (court not to require such an undertaking on the ground of special circumstances) because the company had been denuded of all of its assets, as a result of the actions of the respondents — whether the fact that the liquidators were officers of the Court and were not bringing the action in their personal capacity was a special circumstance.

Appearances:

A W Johnson and R Akroyd for the Applicants

M Heard and L Clews for the Respondents

JUDGMENT OF Hinton J

1 A company in liquidation and the liquidators, have filed proceedings raising a number of claims under the Companies Act 1993, against the respondents. In the meantime, they seek to preserve assets in the hands of the respondents, so that any judgment has teeth.

2 The orders sought are:

• (a) that caveats already lodged, not lapse;

• (b) a freezing order; and/or

• (c) a pre-judgment charging order.

3 The key issues are:

• (a) Whether, for purposes of the caveat application, there is a prima facie case that a transfer of properties by the applicant company prior to liquidation, was fraudulent and whether, as a consequence, an institutional constructive trust arises, which may be protected by caveat.

• (b) Whether, for purposes of a freezing order, the applicants have to each provide an undertaking as to damages, or there are “special circumstances” that excuse them, and what should be the extent of any freezing order.

Relevant background

4 As at 30 June 2013, Queensland Maintenance Services (NZ) Ltd (QMS (NZ)) was the registered owner of properties in Matamata and Wiri (the two QMS (NZ) properties), and also of shares in a subsidiary, Playgrounds 2 (NZ) Ltd (Playgrounds). It also owed $629,341 to Queensland Maintenance Services Pty Ltd (QMS (Australia)) and the balance to Queensland Property Developments Pty Ltd (QMS Property (Australia)). The applicants' financial accounts to 30 June 2013 record net assets of $3,291,008.

5 QMS (Australia) had been placed in administration in January 2012 and in liquidation in August 2012. In April 2012, the administrators had made demand of QMS (NZ) for the sum of AUD$495,640.90, presumably the equivalent of NZD$629,341.

6 On 19 December 2013, Mr Zullo, as director of QMS (NZ), signed a minute recording a resolution to declare a shareholder dividend of $3.25 million to Zullo Holdings (NZ) Ltd (Zullo Holdings), as owner of QMS (NZ), and that payment be made by way of crediting Zullo Holdings' current account with QMS (NZ). Mr Zullo also signed a solvency certificate confirming that QMS (NZ) was able to pay its debts as they became due in the ordinary course of business and the value of its assets were greater than the value of its liabilities.

7 On 21 March 2014:

• (a) QMS (NZ) and Zullo Holdings entered into an agreement recording that the debt already created by the declaration of the dividend was subject to interest at commercial lending rates and granting to Zullo Holdings, a general security agreement over the assets of QMS (NZ).

• (b) QMS (NZ) and Zullo Holdings entered into sale and purchase agreements whereby the two QMS (NZ) properties were sold to Zullo Holdings for a total of $1.9 million. Those two properties were then on-sold into another Zullo company.

• (c) QMS (NZ) transferred its shares in Playgrounds to Zullo Holdings. The principal assets of Playgrounds were two further properties.

8 The end result is shown in the financial statements for QMS (NZ) as at 30 June 2014, which show negative net assets of $570,049, primarily resulting from a debt still owing to QMS (Australia) of $629,341. QMS (NZ), which purportedly had enough equity in December 2013 to declare a dividend of $3.25 million, had apparently paid that dividend in such a way that it was materially negative.

9 QMS (Australia) then placed QMS (NZ) into liquidation, on the basis of its unpaid debt.

The caveat application

10 The applicants submit that Mr Zullo, and the various companies he controlled, put in place a deliberate scheme to remove all of the assets of QMS (NZ), leaving the two creditors in a position where they were unable to recover their debts. They say such a scheme amounts to actual fraud and they rely on the Court of Appeal decision in Paugra Holdings Ltd (in liq) v Harvestfield Holdings Ltd to sustain the caveats. 1

11 Paugra was the purchaser of a property under a long-term sale and purchase agreement at a price of $6 million, but had no funds on settlement. By settlement, the value of the property had gone up to $11 million. Paugra borrowed $6 million from a related company, settled the purchase, and then transferred the property to the related company at $6 million, depriving itself of the $5 million profit. Paugra then went into liquidation, owing money to the IRD. The High Court found there was a prima facie case that Paugra had committed a fraud on the IRD, but that the existence of fraud was not sufficient to create a constructive trust in an otherwise consensual transaction. The Court of Appeal (overturning the High Court), held that a transaction that otherwise appears to be consensual, is non-consensual if one of the parties was acting unlawfully. A transaction may be non-consensual, notwithstanding the fact that the same interests control both companies. Further, where there has been a non-consensual transfer of land as a result of a fraud perpetrated on the vendor by the purchaser, the vendor is able to claim an institutional constructive trust in respect of its interest in the property. On that basis, the Court of Appeal held that it was reasonably arguable that Paugra had a caveatable

interest in the property it had apparently voluntarily transferred to the related company

12 For Paugra to apply here, I would need to be satisfied that there is a prima facie case of fraud. In Paugra, that was clearly so. In this case, it is not so clear. There are certainly suspicious circumstances and apparently strong arguments in favour of the applicants, at least on the non-fraud causes of action. However, in terms of the fraud claim, I have to take into account at this untested stage of the proceeding, as Mr Heard pointed out:

• (a) The respondents received professional advice as to appropriateness of the dividend being declared, including as to solvency.

• (b) There was professional evidence that restructuring of the Zullo Group, to similar effect to that which occurred, had been intended for some years.

• (c) The respondents received professional advice (not so clear in extent or effect) regarding the subsequent loan/security agreement over the dividend, and regarding transfer of properties and other assets to satisfy it.

• (d) There was a long delay between QMS (Australia)'s being placed in liquidation and the declaration of the dividend in December 2013.

• (e) The declaration of the dividend itself may not have been unlawful. It is the combined series of events that is alleged to have such a net effect. This is not as clear cut as the facts in Paugra.

• (f) Furthermore, in distinction to Paugra, this was not a clear-cut case of transfer of the QMS (NZ) assets at an under-value. There is no good evidence of values of the two QMS (NZ) properties at April 2014. The applicants refer to QVs, which I find unhelpful in this regard, as they seldom reflect market value, but it is not irrelevant that the QVs,advanced in evidence by the applicants, are very close to the actual on-sale prices.

13 In all of the circumstances, I would not be prepared to find there was prima facie fraud to justify sustaining the caveats. That is not to rule out the possibility of a finding of fraud at a substantive hearing.

14 There being no other basis for sustaining the caveats (it is accepted, for example, that the claim for a remedial constructive trust cannot sustain a caveat), I decline to order that the caveats be sustained.

15 As I set out below, I have reached the view that a (limited) freezing order should be made. As Mr Johnson conceded, that would have impacted in any event on the caveat application, as caveats are only sustained to the extent necessary.

Freezing orders

16 The requirements for a freezing order are well-established. The applicant must have a good arguable case on its substantive claim; assets to which the order can apply; and must...