IN THE Court of appeal OF new Zealand
	
CA332/2015
[2015] NZCA 274

BETWEEN	
AUCKLAND STEEL FIXERS LIMITED (IN LIQUIDATION)
Appellant	

AND	
THOMAS ALLAN WATSON AND ELVINA THERESA WATSON
First Respondents

THOMAS ALLAN WATSON AND ELVINA THERESA WATSON AND WALKER TRUSTEE LIMITED AS TRUSTEES OF THE WATSON FAMILY TRUST
Second Respondents	

Hearing:	
18 June 2015	

Court:	
Cooper, Venning and Williams JJ	

Counsel:	
G A D Neil for Appellant
No appearance for Respondents	

Judgment:	
18 June 2015 at 4 pm	

Reasons:	
25 June 2015	

JUDGMENT OF THE COURT

A	The appeal is allowed.
B	A freezing order should be issued by the High Court in accordance with the order that was applied for in that Court amended as follows:
	(a)		in respect of paragraph 4(a) so as to limit the freezing order to the proceeds of sale of the property at 19 Claude Road, Manurewa Auckland to the extent of $130,000;
	(b)	as to paragraph 7 so as to refer to a date of 29 June 2015 beyond which the freezing order will not have effect; and
	(c)		as to paragraph 7 so as to provide for application on notice of three working days.
C	The matter is to be called for mention in the duty judge list in the High Court at Auckland at 10 am on Monday 29 June.
D	Costs are to lie where they fall.
____________________________________________________________________

REASONS OF THE COURT

(Given by Venning J)
[1]	This is an appeal from a decision of Heath J delivered on 28 May 2015 dismissing an application by Auckland Steel Fixers Ltd (in liquidation) (the company) for a freezing order under pt 32 of the High Court Rules.  The application before the Judge and this appeal were both pursued on an ex parte basis.  After hearing from Mr Neil on 18 June 2015 this Court granted the appeal and made consequential orders (set out above) with reasons to follow.  These are the reasons.
Background facts
[2]	The company was incorporated in 2000.  It ceased trading in or around late 2010.  At material times Mr Watson was the company’s sole director.  Mr Watson, Mrs Watson and Walker Trustee Ltd are trustees of the Watson Family Trust (the Trust).  The Trust holds 98 of the 100 shares in the company.  Mr and Mrs Watson hold one share each.  
[3]	The company defaulted on its tax obligations and was ultimately placed into liquidation on 21 June 2013 on the Commissioner of Inland Revenue’s application.  
[4]	Following a review of the company’s records the liquidators determined that, despite the company’s worsening financial position between 2008 and 2011, the company continued to pay salaries to Mr and Mrs Watson and, materially for present purposes, at a time when the liquidators say the company was insolvent, a dividend of $104,899 was paid to the Trust in the financial year ending 2009.  
[5]	Mr Watson was put on notice of claims against him for breach of the duties he owed the company as a director by letter dated 31 July 2013.  
[6]	Despite that initial letter of claim, the substantive proceedings were not commenced until 29 April 2015.  The proceedings are against Mr Watson (first defendant), Mrs Watson (second defendant) and the Trust (third defendant).  
[7]	The claim against the Trust is directed at the recovery (under s 56(1) of the Companies Act 1993), of the distribution of $104,899 paid to it.
[8]	On 26 May 2015 the company made an ex parte application for a freezing order against a property owned by the Trust at Claude Road, Manurewa.  It brought the application on the basis that there was a real risk that the Trust would transfer or otherwise dissipate its assets, namely the property at Claude Road to avoid paying any judgment debt.  It had come to the attention of the liquidators that the property might have been sold.  When a process server visited the property on 13 May to serve the proceedings he noted there was a “for sale” sign prominently displayed on the property advertising an auction for 12 May 2015 and a “sold” sticker had been placed over the sign.  
[9]	The matter initially came before Heath J on 27 May 2015.  On the information before the Court the Judge was not satisfied that the relevant risk of dissipation had been made out.  He also noted the order sought was directed at the Claude Road property which appeared futile as the property might have been sold already.  The application did not seek to attach the proceeds of sale.  Finally, the application was not backed by an undertaking from a solvent entity.  The Judge reserved leave for counsel to see him in chambers to advance the application.
[10]	Counsel exercised that leave and saw the Judge in chambers on 28 May 2015.  The applicant also filed an amended application directed at the proceeds of sale of the Claude Road property in the event that the property was sold.  
Heath J’s decision of 28 May 2015
[11]	In his decision of 28 May, Heath J again declined to grant the freezing order sought.  The Judge assumed (without deciding) that the company had a good arguable claim against the Trust.  He accepted the property (and/or the proceeds) were in New Zealand.  However, the Judge remained of the view the applicant had failed to establish the element of risk of dissipation had been adequately proved.  He noted that the liquidators had initially written to Mr Watson notifying him of the claim for alleged breach of director’s duties on 31 July 2013.  The claims were rejected in correspondence of 21 August and 17 September 2013.  The Trust had not taken any steps to dispose of its assets following the demand in 2013.  There did not appear to be any linkage between the demand made in 2013 and the sale of the property almost two years later.  There had been no relevant correspondence with Mr Watson, Mrs Watson or the Trust between 17 September 2013 and the letters of 12 May 2015.
[12]	The Judge was also concerned about the absence of any substance to the undertaking as to damages.  He did not consider s 65ZC of the Public Finance Act 1989 precluded the Commissioner of Inland Revenue, as the principal creditor, from providing an undertaking.
Decision
[13]	Before us, Mr Neil (who had not appeared before Heath J), restructured and refocused the applicant’s case.  Mr Neil accepted the Judge was correct to note that it could not be said the property had been sold in order to defeat the company’s claim.  However, Mr Neil referred to the wording of High Court Rule 32.5(4) and submitted that taken as a whole, the actions of Mr Watson and the trustees satisfied the test that there was a danger the prospective judgment might be unsatisfied because the Trust’s assets might be disposed of, or otherwise diminished in value.  
[14]	Rule 32.5(4) provides:
32.5	Order against judgment debtor or prospective judgment debtor or third party
… 

(4)	The court may make a freezing order or an ancillary order or both against a judgment debtor or prospective judgment debtor if the court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because—
	(a)	the judgment debtor, prospective judgment debtor, or another person might abscond; or
	(b)	the assets of the judgment debtor, prospective judgment debtor, or another person might be—
		(i)	removed from New Zealand or from a place inside or outside New Zealand; or
		(ii)	disposed of, dealt with, or diminished in value (whether the assets are in or outside New Zealand).
[15]	Mr Neil emphasised that now the property had apparently been sold and its value would be held in cash or in a bank account the Court could be satisfied, having regard to all the circumstances, particularly the actions of Mr Watson in the past, there was a danger that any prospective judgment the company might obtain against the Trust would be wholly or partly unsatisfied because the Trust’s assets might be disposed of, or diminished in value.  
[16]	To support that submission Mr Neil focused on the background to the default in the company’s tax obligations, for which Mr Watson had been responsible, noting that the company incurred a substantial tax liability between 30 September 2007 and 31 August 2011.  Mr Watson as director had caused or allowed the company’s property to be dissipated by the distribution of $104,899 to the Trust during that time period.  He submitted the records disclosed that ex post facto accounting had been used to make the dividends to the Trust and to Mr and Mrs Watson, and also to allocate salaries to Mr and Mrs Watson after the company had ceased trading at a time when the company had substantial tax arrears as known to Mr Watson and his advisers.
[17]	Mr Neil submitted that the Court could take no reassurance from the existence of the third trustee in this case as the third trustee was the corporate trustee of the firm of accountants who had been responsible for advising Mr Watson.  The accountants had responded to the initial claim in 2013 and had been responsible for the preparation of the accounts and resolutions leading to the declaration of the dividend.  He emphasised that it appeared the dividend had been provided for in accounts which, although they related to the 2009 year, were prepared in October and November 2011 and were not signed until February 2012.  
[18]	On the basis of the restructured case presented to us we accept an inference is available that the company’s affairs, including the declaration of the dividend to the Trust, were conducted in order to avoid the company’s tax obligations.  In the circumstances we accept, in terms of the relevant rule, that there is a likelihood the proceeds may be disposed of or diminished in value so that the prospective judgment may not be met in full.  The inference arises from the past conduct of the company’s affairs by a trustee of the Trust.  
[19]	However, as Mr Neil conceded, the application is too broadly focused at present.  The application must be restricted to the assets of the Trust and limited to the extent of the claim against the Trust for the dividend paid to it.
[20]	Rule 32.6(4) requires an applicant for a freezing order to give an undertaking as to damages unless there are special circumstances.  While we accept the company’s undertaking lacks substance, we accept that special circumstances apply in this case given that the applicant’s financial position and impecuniosity has been caused, at least on the information currently before the Court, by the actions of Mr Watson against whom proceedings have been issued and who is also one of the trustees of the Trust.  
[21]	For those reasons the appeal was allowed in the terms recorded in the results judgment issued on Thursday, 18 June 2015.

Solicitors: 
Meredith Connell, Auckland for Appellant