Dishonest transaction appeal fails

A Dunedin city councillor, a city accountancy firm and an Otago businessman have lost their appeal in a decision which will send ripples through the business community.

Hilary Calvert and HGW Trustees were the first appellants and Otago businessman and property developer Chris James the second appellant.

HGW is a trustee company for Dunedin accountancy firm Harvie Green Wyatt. Doug Harvie declined to comment when contacted by the Otago Daily Times.

Mr James has been ordered to pay $740,000, plus interest, from July 6, 2009. He could not be reached for comment.

Ms Calvert and HGW have been ordered to pay interest on the sum of $740,000, also from July 6, 2009. Ms Calvert declined to comment when reached by the ODT.

The appeal was triggered because it had wide-ranging implications for thousands of trustees throughout New Zealand, the ODT reported last year.

The appeal centred on the activities of other people in preparing and signing off a set of accounts. The liquidator of James Developments Ltd, Grant Reynolds, sued the trustees of the Frongopoulos Trust, the family trust of Mr James, to recover a debt of $740,000 together with interest.

The trustees did not deny their indebtedness but defended the liquidator's claim on the grounds it was time-barred.

In a decision in March last year, Judge Dunningham said Mr James' family trust ‘‘fraudulently'' tried to conceal $740,000 from his failed company's creditor.

‘‘It was a deliberate, if unsophisticated, device to remove the $740,000 from failed James Development Ltd's (JDL) balance sheet to avoid relinquishing it to the main creditor upon liquidation.''

The Court of Appeal decision, issued by Justices Harrison, Stevens and Miller on April 22 this year, said the relevant facts were not disputed. Sometime in 2006, Mr James' family trust - the Frongopoulos Trust - agreed to buy land at Jacks Point, in Queenstown, for $2.6 million.

On October 3, 2006, JDL loaned the trust $740,000 to be applied towards the purchase price.

The advance was recorded in JDL's accounts as an asset and correspondingly in the trust's account as a liability. Settlement of the transaction occurred on December 1, 2006. The trustees then constructed a substantial residence on the land.

In April 2009, a company called Mana Property Trustee entered summary judgement against JDL for $4 million.

Soon after, Mr James met his professional advisers, including Todd Miller from Harvie Green Wyatt, Colin Withnall QC and solicitor Michael Van Aart. At the meeting, a resolution was signed purporting to convert an asset in JDL's ownership - a loan to the trust of $740,000 - into a payment made in settlement of an existing liability to Mr James and one of his companies.

On July 6, 2009, JDL was placed into voluntary liquidation by a shareholders' resolution. In November the same year, Ms Calvert was appointed a trustee of Frongopoulos. HGW remained as the other trustee.

In November 2010, Grant Reynolds was appointed liquidator in place of Dunedin men Iain Nellies and Gus Jenkins.

After interviewing Messrs James and Miller in 2013, Mr Reynolds made a demand on the trustees to repay the advance of $740,000 plus interest.

Judge Dunningham found Mr Miller was primarily responsible for advising about the steps to be taken to remove the $740,000 loan form JDL's accounts as an asset.

At the trial, Messrs James and Miller had sought to pass blame on to each other and also to the lawyers for fabricating the document.

The judge found Mr Miller was an evasive witness and she was satisfied he drafted the resolution, that the lawyers present were not involved and, most significantly, that when he drafted the resolution, Mr Miller knew Mr James and his associated company had not made the advances which JDL purported to repay.

The justices added the concealment practised by Messrs James and Miller did not end with the fabricated resolution and the falsified accounts. It was a continuum through until May 30, 2012.

Judge Dunningham recited extensive evidence of a deliberate stance adopted by the two men over a nine-month period in giving delayed, evasive and misleading answers to the liquidator's inquiries about the status of the $740,000.

Relating to Ms Calvert, her lawyer, Sherwood King, said she was not bound, in the absence of evidence that she had affirmatively ratified Mr Miller's actions. However, the justices said the submission was misconceived.

Questions of ratification arose only where a trust instrument required trustees to act unanimously and the question was whether one trustee had given his or her informed or conscious consent to the unilateral actions of another trustee.

‘‘Ms Calvert, who did not give evidence at trial, had acted as solicitor for the trust on its purchase of the Jacks Point property. However, it is unnecessary for us to embark on an inquiry into whether Ms Calvert herself was guilty of fraudulent concealment given our finding the trustees' agents were culpable.''