IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2013-404-000071 [2013] NZHC 715

IN THE MATTER OF	CGKH Limited (in receivership)

BETWEEN	ANTHONY CHARLES HARRIS Applicant

AND	ANDREW DAVID MORSE AND ROWAN MAY PATRICIA WHITE First Respondents

AND	JANICE HAMILTON, GRANT ANDREW BROWN AND JOHN KEVIN MCAREE AS TRUSTEES OF THE BLACK ROBIN TRUST
Second Respondents

Hearing:	8 April 2013

Appearances: H L Thompson for the Applicant
D J R Malcolm for the Respondents

Judgment:	11 April 2013

JUDGMENT OF GILBERT J

This judgment was delivered by me on 11 April 2013 at 11.00 am pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar
Date:

Counsel:	H L Thompson, Auckland:  howard@mbtlawyers.co.nz
D J R Malcolm, Taupo:  info@mdrlegal.co.nz

Solicitors:	McMahon Butterworth Thompson, P O Box 106073, Auckland 1142
MDR Legal Limited, 4 Tamamutu St, Taupo 3330

HARRIS V MORSE AND ORS HC AK CIV 2013-404-000071 [11 April 2013]

[1]       The applicant, Mr Harris, is the receiver of CGKH Limited (the Company) which traded as Kitchen House.  The Company manufactured, supplied and installed pre-fabricated kitchen units and associated fittings.  Mr Harris seeks directions under s 34 of the Receiverships Act 1993 regarding an amount of $177,876.11 (the Fund) which was paid from Company funds into a solicitor’s trust account shortly before the Company was placed in receivership.

[2]       Mr Harris considers that the Fund should be paid to the secured creditors on the basis that it is Company property charged under the secured creditors’ General Security Agreement (GSA).  However, he seeks directions from the Court because some of the Company’s customers have claimed that the Fund represents deposits and other payments made by them for the purchase of undelivered kitchens and are held by the Company for their benefit pursuant to an express trust. Alternatively, the purchasers contend that the secured creditors are estopped from claiming the Fund in reliance on the GSA.

Was there an express trust?

[3]       Three “certainties” must be satisfied to establish the alleged trust; certainty of intention, certainty of subject matter and certainty of objects.  The terms of the trust must be sufficiently clear that it can be said with certainty in respect of any given customer that a particular payment is held on trust for that customer.

[4]       The burden of proving a trust rests on the party alleging it, in this case the respondents.1

[5]       The intention to create a trust may be inferred from words or conduct.  No particular form or words are required. The question is whether, in all of the circumstances, an intention to create a trust can be inferred.

[6]       The Company was formed on 25 March 2009 for the purpose of purchasing

the business known as “Kitchen House” from another company which went into

1 Thexton v Thexton [2001] 1 NZLR 237 (HC).

receivership  on  23  February  2009.    The  three  directors  of  the  Company  were Brian Smaill,  his  brother  Walter  Smaill,  and  Ralph  Marshall.     They  asked Gregory Philpott, who had previously run the business, to continue to run it.  He did so until the Company ran into financial difficulty in mid-2011.  The Company was placed in receivership on 22 February 2012 by HSBC as the first ranking secured creditor.  The second ranking secured creditors appointed Mr Harris as a second receiver on 2 May 2012.

[7]        Shortly  after  the  Company  commenced   operations,   Mr  Philpott  and Mr Brian Smaill (who I shall refer to as Mr Smaill because his brother played no role in subsequent events) discussed various issues relating to the business, including the size of deposit that should be sought from customers and whether any form of security should be given to protect deposits.   Mr Philpott wrote to Mr Smaill on
7 April 2009:

One of the issues that we need to address fairly early on is the security of deposits.

…

When kitchen companies go into receivership the deposit is generally “lost”
by the customer as they become an unsecured creditor.

…

The only kitchen business to offer any form of “guarantee” on deposits is…
- but when that guarantee is scrutinised it is not of any real validity…

The  actual  placing  of  deposits  into  any  form  of  trust  arrangement  is administratively difficult.

…

Do we need to offer any “trust” arrangement to alleviate any concern – which   will   only   be   from  customers   who   actually   know   about   the receivership.

…

[8]       Consensus  was  reached  that  the  Company  would  require  payment  of  a

20 per cent deposit on signing of the order.  Having canvassed the views of others in the business, Mr Philpott suggested in an email on 9 April 2009 that:

Some form of “guarantee” or “insurance” on the deposit would alleviate any customer concerns and also give us a competitive advantage.  So long as the whole process is seamless and not complicated.

Mr Philpott asked how this should be progressed.  Mr Smaill replied that day:

Leave it with me.

I will see what can be arranged by next Friday.

In the meantime there is not a lot we can say regarding the safety of deposits.

[9]       Various  issues  were  discussed  at  a  meeting  on  14  April  2009  between Mr Philpott and Mr Smaill.   The agenda for this meeting, which was prepared by Mr Smaill, records:

The goal is to have it so that the deposit is 100% safe – BDS to talk to HSBC.  Perhaps a Letter from the bank on bank letterhead.  Full refund in the case of receivership.

Bankers guarantee. Goal is to achieve this by 17th April 2009.

[10]    However, nothing further was done at that time.  In particular, no separate account was ever established for holding deposits.  The Company’s standard terms and conditions on order forms and other documentation were not amended to record any arrangement for deposits to be held on trust.   The Company’s standard order form provided for the payment of a 20 per cent deposit on signing of the order but said nothing about any trust. All deposits and other payments made by purchasers on account of the purchase price were paid into the Company’s sole bank account with Hong Kong and Shanghai Banking Corporation Limited (HSBC) and no attempt was made to account separately for these payments.

[11]     Two years passed without any modification to the Company’s trading terms. The issue resurfaced in June 2011 as a result of the Company experiencing cashflow difficulties.    Dean Fox,  the  chief  financial  officer  of  Criterion  Group  Limited, suggested that deposits paid to the Company should in future be held in a separate bank account.  Criterion Group provided head office functions to the Company and shared premises with it.  Criterion Group was also a furniture manufacturer and was similarly controlled by interests associated with the Smaill family.  On 8 June 2011,

Mr   Fox   sent   an   email   to   Colin   Goh,   a   contract   accountant   working   for

Kitchen House, as follows:

Colin as discussed going forward from tomorrow I would like to separately hold customers KH deposits in another Bank Account.

This will mean that on a Daily Basis we will need to transfer funds received
(that relate to deposits) to this other account.

In order to understand what amounts relate to deposits you will need to obtain this information from the stores… I will let you decide how best to implement this.

Then when the kitchen has been despatched the deposit should then be transferred back to the KH main bank account.

In terms of accounting for this we will need to record the deposits in a separate GL prepayments account… and we must make sure it is reconciled monthly.

…

[12]     On 10 June 2011, Mr Goh advised Mr Fox of the amount received as deposits over the preceding two days.  Mr Fox forwarded Mr Goh’s email to Mr Marshall, Mr Philpott and Mr  Smaill with the following comment:

This money should be held separately… however KH has no funds to pay its
creditors.

We need to make a decision about the future of KH.

[13]	Mr Marshall was the only person to respond.  He sent an email expressing his view on 11 June 2011:

KH is integral part of Criterion future and growth in kitchen category so must be supported.

Holding deposits separately until kitchen is in production is a key part of go forward model in my view.

[14]     However, there is no evidence that the other directors agreed to this proposal or that any decision was made.  The proposal was certainly not implemented.  The standard terms and conditions remained unaltered.  The deposits were not paid into a separate bank account or otherwise held or accounted for separately.

[15]     That remained the position when, on 12 October 2011, the Company granted a General Security Agreement in favour of HSBC.   However, it appears that the Company was still considering the possibility of holding deposits on trust for customers at that stage because the definition of “Secured Property” was amended in an addendum to the GSA as follows:

Clause 1.1, Definition of “Secured Property”

The following words are added to the end of the definition:

but does not include any deposit received from customers or the Debtor or any money held by the Debtor on behalf of any person to the extent that such customer and/or other person may be entitled to claim the return of such money or any part of it from the Debtor.

[16]     The modification to the definition of “Secured Property” in the GSA shows that a trust arrangement for customers’ deposits and other payments remained a live prospect at the time the GSA was signed in October 2011.  However, it provides little assistance in establishing whether such monies were held on trust at that time.  If the deposits and other monies paid by the customers were already held on trust, the provision would be unnecessary because those monies would not form part of the Company’s property and could not be secured by the GSA.  Further, the exclusion from the definition of “Secured Property” is only effective to the extent that the customer can claim the return of the money.   That would only be the case if that money was held on trust for that customer.

[17]     The Company’s cashflow difficulties which had prompted reconsideration of the trust proposal were, at least temporarily, resolved by a term loan of $199,000 from HSBC which was drawn down on 13 January 2012.  Prior to this drawdown, the balance in the Company’s account was $19,019.56.  This loan may explain why the trust proposal did not progress.  In any event, deposits continued to be dealt with as before; they were paid into the Company’s sole bank account and no attempt was made to account for them separately.   The standard terms and conditions of trade were not changed.

[18]     On 31 January 2012, HSBC appointed receivers to Criterion Group.   On

13 February 2012, anticipating that receivers were likely to be appointed to the

Company  given  that  it  was  also  insolvent,  Mr  Smaill  transferred  the  sum  of

$177,876.10 from the Company’s account to a solicitor’s trust account to be held in the name of the Company.  Mr Smaill did this without discussing it with his fellow directors.  Mr Smaill says that he took this action because he wanted to keep the monies “out of the hands” of HSBC and any receivers appointed by HSBC.  He did not consider that HSBC had any security interest over these funds based on his interpretation of the GSA.  He wanted these monies set aside to enable customer deposits to be refunded in the event receivers were appointed.   However, at that stage, he still hoped to salvage the Kitchen House business by introducing further working capital for the Company.  This did not eventuate because he was unable to reach agreement with his brother to join him in providing the necessary capital.

[19]     The amount transferred to the solicitor’s trust account was calculated by Mr Smaill using the most up to date information he had at the time.  It is accepted that this information may not have been accurate but the precise position is not yet known because the receiver does not wish to incur further costs before obtaining directions from the Court.

[20]    HSBC appointed Brendan Gibson and Grant Graham as receivers to the Company on 22 February 2012.  They demanded that the Fund be paid to them as receivers.  This was done, but they did not need to have access to the Fund to satisfy the amount owed to HSBC.  As a result, they did not have to determine whether the monies were held on trust for customers.

[21]     It is clear that although the prospect of holding customer deposits on trust was discussed in April 2009, no such arrangement was agreed or implemented at that time.  The trust proposal was discarded in favour of the Company seeking a letter from HSBC confirming that in the event of the Company going into receivership all deposits would be refunded.  This proposal was not implemented either and no changes were made to the Company’s terms of trade.  Deposits and part payments of purchase price were paid into the Company’s sole bank account and were Company funds.

[22]     No  further  consideration  was  given  to  the  prospect  of  holding  customer deposits on trust until the Company experienced financial difficulties in June 2011.

The fact that this proposal was again raised in June 2011 confirms that no such arrangement had been implemented by that time.

[23]     The difficulties of administering a trust arrangement which had concerned Mr Philpott in April 2009 were identified by Mr Fox in his email of 8 June 2011. Further, the Company did not have sufficient funds to pay its creditors at that stage. This would have made it difficult, if not impossible, for the Company to set aside funds in trust and still be able to pay its creditors and carry on trading.  It seems clear that the trust proposal was not pursued, presumably for these reasons.  Instead, the cashflow difficulties and consequent need to protect customer deposits were resolved with the term loan from HSBC.   In any event, no changes were made to the way deposit payments were dealt with or accounted for.

[24]     Mr Smaill did not intend to dispose of Company monies by creating a trust when he transferred monies to the solicitor’s trust account on 13 February 2012.   He merely intended to facilitate the implementation of what he understood the existing arrangements to be, namely, that HSBC had no security over customer deposits and that these monies should be preserved by the Company for return to customers if he could not persuade his brother to join him in providing further working capital to salvage  the  Company’s  business.    This  explains  why  Mr Smaill  acted  without consulting his fellow directors at a time when the Company was clearly insolvent and the appointment of receivers was likely to be imminent.

[25]     In my view, the transfer did not evidence an intention to create a trust.  The effect of the transfer was simply to move Company funds from the Company’s account with HSBC to a solicitor’s trust account held in the Company’s name.  The transfer did not alter the Company’s entitlement to these funds.

[26]     The evidence falls well short of establishing that the Company intended to hold deposits or other part payments of purchase price on trust for customers. Certainty of intention has not been established and this is sufficient to dispose of the trust claim.  However, for the reasons briefly outlined below, there was no certainty as to subject matter either.

[27]    Mr Malcolm submitted that the monies were to be held on trust for the customers until the kitchens were assembled at the factory.  At that stage the monies would become Company funds.  He further submitted that the trust extended beyond the deposits and included all payments towards the purchase price.  The difficulty with these submissions is that no concluded position was reached as to how far the trust would extend or for how long.

[28]      The   correspondence   in   April 2009   referred   only   to   deposits.   The correspondence in June 2011 was similarly confined to deposits, whereas the addendum to HSBC’s GSA refers to “any deposit received from customers” or “any money held on behalf of any person”.  It cannot be said that there is any certainty as to the subject matter of any trust and, in particular, whether it was to extend beyond the 20 per cent deposit as was contended by Mr Malcolm.

[29]     A further difficulty is that no settled position was reached as to the duration of  the  trust.    Mr Malcolm  suggested  two  possibilities  during  the  course  of  his submissions.  One was that the monies would be held until production commenced. The other was that the monies would be held on trust until the kitchen had been assembled  in  the  factory.    Neither  of  these  suggestions  is  consistent  with  how Mr Fox envisaged that any trust arrangement would operate when he turned his mind to this in June 2011.  His proposal was that the monies would remain on trust until the kitchen was despatched.   Mr Marshall, on the other hand, envisaged that the monies would be held on trust until the kitchen was in production.  It seems that no resolution was reached as to which of these three possibilities would apply: commencement of production; assembly; or despatch.

[30]     It is not possible to determine the subject matter of the trust without knowing whether it is confined to the deposits or extends to other monies and, if so, what other monies.  Nor is it possible to determine whether monies are held on trust for a particular customer at any given time without knowing the stage of production or delivery that had to be attained before the funds were released from the trust arrangement and became Company funds.

[31]      For the reasons I have given, I consider that the monies comprising the Fund form part of the assets of the Company and do not represent trust monies held for the benefit of customers.

Estoppel

[32]    The first respondents relied in the alternative on an alleged estoppel by representation.  The notice of opposition filed on their behalf expressed this ground of opposition as follows:

The Company’s staff have made representations to customers that customer deposits were being held in trust. The directors of the company Brian Smaill and Walter Smaill have allowed the customers to rely upon that assumption and   are   now   estopped  from  denying   those   representations   as   it   is unreasonable for those same directors (now as creditors of their Company) to claim these deposits through their receiver.

[33]     Mr Philpott said that he understood that customer deposits were being held in trust.    He  claims  that  this  understanding  was  based  on  assurances  given  by Mr Smaill, but he does not specify what those assurances were.  He referred only to the emails in April 2009 which culminated with the agenda prepared by Mr Smaill for the 14 April 2009 meeting.  Mr Smaill does not refer to any trust arrangement in this agenda.  He records his intention to seek a letter from HSBC confirming that deposits would be refunded in the event of receivership.  This was how he aimed to achieve the “goal” of ensuring that deposits would be “100% safe”.

[34]     I cannot see how Mr Philpott could have understood from his discussions with Mr Smaill and this correspondence that customer deposits would be held on trust.  Neither he nor Mr Smaill favoured a trust arrangement.  Mr Philpott had recognised that a trust arrangement would be administratively difficult and he therefore suggested some form of guarantee or insurance.  The matter was left on the basis that Mr Smaill would seek a letter from HSBC in the nature of a guarantee of a full refund of deposits in the event of receivership.  The trust idea was not pursued.

[35]     Further, as manager of the Company, I would expect Mr Philpott to have taken steps to ensure that deposits were being held on trust if he truly understood that this was the arrangement with customers.  I would also have expected him to ensure

that the Company’s terms of trade reflected this important protection for customers, especially given his concern arising out of the earlier receivership of Kitchen House, a company he had managed, and the competitive advantage he identified of having such an arrangement.

[36]     Mr Philpott nevertheless claimed that he “clearly understood and believed that customer deposits were being held in trust” and said:

On the basis of that understanding I set about instructing and reassuring front line staff that they could engage with customers and talk honestly and competently about the safety of deposit [sic] with customers and business carried on from that point.

It is significant that Mr Philpott did not go as far as to say that he authorised staff to assure customers that their deposits would be held on trust.  It would not have been appropriate for him to have done so.

[37]     Mr Smaill was not challenged on his evidence that he did not authorise Mr Philpott to instruct staff that customer deposits would be held in trust.   The contemporaneous documents support the conclusion that Mr Smaill gave no such authorisation.   In his email to Mr Philpott on 9 April 2009, he said that pending arrangements being made “there is not a lot we can say regarding the safety of the deposits”.  Mr Smaill did not make any such arrangements and there was no basis for Mr Philpott to conclude otherwise.

[38]     In any event, only two customers gave evidence that they were told anything about a trust.

[39]     Malcolm Scott said in his affidavit that he and his wife paid a deposit of

$2,000 on 19 November 2011.  He said:

When this deposit was made Kitchen House employees told us that the money would be placed into a Trust Account for our protection should anything  unexpected  occur  and  our  kitchen  was  not  delivered.     The placement being to protect our property (deposit) so that it could be returned to us.

[40]     Lisa Breedveld said in her affidavit that she and her partner ordered a kitchen on 2 February 2012.  She said that they were not comfortable paying a 20 per cent

deposit, being $2,500, because they had previously lost money from investments. They therefore decided to make further enquiries.  They spoke to a person they understood was the manager of Kitchen House in Tauranga who assured them that deposits were held in a separate trust account and that “if the agreement didn’t go forward for any reason then our money would be returned to us”.

[41]     No other customer gave evidence of a representation that could form the basis of an estoppel.  I cannot infer from the evidence of these two customers that all other customers were similarly assured that their deposits would be held on trust. This is particularly so in the light of Ms Breedveld’s evidence that she and her partner only received such assurances after they made specific enquiries because of their particular concerns.

[42]     Even assuming that the staff concerned had actual or ostensible authority on behalf of the Company to represent to customers that their funds would be held on trust and that statements to this effect were made to Ms Breedveld and Mr Scott, this could only give rise to an estoppel against the Company.  It would not give rise to an estoppel against the secured creditors, Brisma Limited and Walsma Limited as trustees of the Smaill Brothers’ family trusts, precluding them from claiming monies secured by their GSA.

[43]     Mr Malcolm recognised this difficulty and acknowledged that there was no evidence that the Smaill brothers, as the sole directors of these creditor companies, were aware of these representations being made.  On the contrary, Mr Smaill advised Mr Philpott in April 2009 that nothing could be said about the safety of deposits until proper arrangements securing them had been put in place.   In my view, this is an insurmountable difficulty for the asserted estoppel.  The secured creditors cannot be estopped by representations which they did not authorise or make and of which they were unaware.

Conclusion

[44]     For the reasons I have given, I find that the monies paid by customers to the

Company as deposits or as part payments of the purchase price of kitchen units were

not intended to be, and were not, held on trust.  I reject the alternative estoppel argument.  The result is that the Fund forms part of the assets of the Company and is available  for  distribution  to  the  Company’s  creditors  in  accordance  with  all applicable priorities.

Result

[45]     I direct the applicant to distribute the Fund in accordance with all applicable priorities on the basis that it forms part of the assets of the Company and is not held on trust for the Company’s customers.

[46]     The applicant does not seek costs and I therefore make no order as to costs.

M A Gilbert J