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Finnigan v Yuan Fu Capital Markets Limited (in liquidation) [2013] NZHC 2899 (5 November 2013)

Last Updated: 27 March 2014


IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY



CIV-2012-404-2309 [2013] NZHC 2899

UNDER

INTHE MATTER OF

the Companies Act 1993

an application for orders under section 284 of the Companies Act 1993


BETWEEN PERI MICHAELA FINNIGAN and

BORIS VAN DELDEN PlaintiffS

AND YUAN FU CAPITAL MARKETS LIMITED (In Liquidation) Defendant



Hearing: On the papers

Appearances: M C Brugeyroux for Liquidators

Judgment: 5 November 2013



JUDGMENT OF ASSOCIATE JUDGE R M BELL



This judgment was delivered by me on 5 November 2013 at 9:30am

pursuant to Rule 11.5 of the High Court Rules.

...................................

Registrar/Deputy Registrar










Solicitors:

Morgan Coakle, Auckland, for Liquidators



FINNIGAN and VAN DELDEN v YUAN FU CAPITAL MARKETS LIMITED (In Liquidation) [2013] NZHC

2899 [4 November 2013]


[1] The liquidators of Yuan Fu Capital Markets Ltd have applied for directions, in particular, as to how the assets held by the company are to be distributed. They say that Yuan Fu Capital Markets Ltd did not have a beneficial interest in any of those assets. Instead, it held funds and shares on trust. They are not to be distributed under ss 312, 313 and the Seventh Schedule of the Companies Act 1993 but according to equitable principles. The equitable principle proposed by the liquidators is that all the funds and shares held by the company be distributed pari passu among all the investor creditors who have claimed, after deducting the liquidators’ remuneration. The other creditors, former employees and the Accident Compensation Corporation, would only take if there are any assets not subject to a trust and not used up in the costs of liquidation.

[2] If the provisions of the Companies Act applied there would be little difficulty over the distribution. The liquidators would not have needed to apply to the court for directions. They would have deducted their remuneration, paid the preferential creditors, and then paid the balance, pari passu, to all the investors and the Accident Compensation Corporation. That would have been in keeping with the objective in the long title to the Companies Act of providing straightforward and fair procedures for realising and distributing the assets of insolvent companies.

[3] However, because this case requires consideration of equitable principles, the matter is not so straightforward. Because the claims of the preferential creditors and the Accident Compensation Corporation are relatively small in relation to the assets available for distribution the difference between a pari passu distribution under the Companies Act, rather than according to equitable principles, will be more impacted by the liquidators’ remuneration than by the claims of those other creditors. That is because the liquidators have had to put in an enormous amount of time to investigate the affairs of Yuan Fu Capital Markets Ltd – hours of investigation that would not be required under an ordinary liquidation under the Companies Act.

[4] The liquidators first applied for directions in May 2012. I gave directions for their application to be advertised in Chinese language media in Sydney and

Auckland.1 While no creditors filed any documents opposing the liquidators’ application, it was not possible to make orders during 2012. The liquidators wished to make further enquiries to satisfy themselves that they had provided the court with all relevant information. While no creditors took any steps in this proceeding, the effect of the advertising was to alert other investors to make claims in the liquidation. The liquidators did not file updating evidence until August 2013. Submissions from counsel for the liquidators were filed in early September. I have decided the application on the papers.

[5] The original substantive directions the liquidators sought were:

Tracing

(a) If a creditor’s claim has been accepted by the liquidators and that particular creditor’s investment can be traced to monies and/or shares held by Yuan Fu Capital Markets Ltd, then to the extent that those monies and/or shares can be traced:

(i) Those monies and/or shares shall be transferred to that particular creditor; and

(ii) The transaction costs of transferring those monies and/or shares to that particular creditor are to be deducted from those monies and/or the value of those shares, prior to the same being paid/transferred to that particular creditor.

(b) To the extent that the monies and shares held by Yuan Fu Capital Markets Ltd cannot be traced as being from a particular creditor, those shares are to be sold and;

(i) The net proceeds of sale of the shares; plus

(ii) All monies held by Yuan Fu Capital Markets;

are to be pooled together and treated as assets of the company available to the liquidators and the creditors of Yuan Fu Capital Markets Ltd (“the pool of assets”).

(c) The liquidators are not required to investigate whether any monies paid by a particular creditor can be traced to any money and/or shares held by Yuan Fu Capital Markets as at the date of liquidation, until such time as that particular creditor has made a creditor’s claim.

(d) If a potential creditor fails to make a claim in the liquidation prior to any interim distribution being made, that creditor’s claim shall be subrogated to the extent of the interim distribution made.

  1. Yuan Fu Capital Markets Ltd carried on business in both New Zealand and Australia – all its investors were Chinese.

(e) If a potential creditor fails to make a claim in the liquidation prior to the final distribution being made to Yuan Fu Capital Markets’ creditors, any monies and/or shares otherwise traceable from that particular creditor are to form part of the pool of assets.

Distribution to Creditors

(f) The liquidators may, at their discretion, exclude any creditor whose dividend will be less than the cost of making payment of that dividend to that creditor from the distribution collectively (the “uneconomic distribution”).

(g) Any payments made by Yuan Fu Capital Markets Ltd to creditors before the company was placed into liquidation are to be treated as payments of principal and are to be off-set against the total amount owing to that creditor.

(h) The following are available for distribution in accordance with the provisions of ss 312 and 313 of the Companies Act 1993:

(i) The pool of assets;

(ii) The interest earned on any trust monies held by Yuan Fu

Capital Markets Ltd;

(iii) The uneconomic distribution; and

(iv) Any funds traceable from:

1 Run Chen Wang;

2 Anna Bai (aka Yan Bai);

3 Any trust of which Run Chen Wang or Anna Bai

(aka Yan Bai) is a trustee or beneficiary; and

4 Any company of which Run Chen Wang or Anna

Bai (aka Yan Bai) is a director or shareholder.

(the “distribution funds”)

(i) The funds are to be distributed on a pari passu basis to those unsecured creditors of Yuan Fu Capital Markets whose claims have been accepted by the applicants.

[6] The liquidators later filed a further application to allow them to be paid their remuneration from assets held by the company.

[7] In her submissions of 2 September 2013, counsel for the liquidators sought amended orders:

(a) That any creditor or investor who has not yet claimed in Yuan Fu’s liquidation be excluded from any distributions made by the liquidators;

(b) A declaration that the net funds held at SaxoBank, the value of the shares held at SaxoBank, and the funds held in Yuan Fu’s various investment-related accounts in Australia and New Zealand as at the date of liquidation are all held by the liquidators on trust for the benefit of Yuan Fu’s investors (“Trust Funds”);

(c) A declaration that Anna Bai (aka Yan Bai) is not entitled to a distribution as an investor of Yuan Fu;

(d) That the shares held by Yuan Fu be sold and the net proceeds be pooled with the trust funds;

(e) That the liquidators are entitled to be remunerated from the trust funds for steps they have taken acting as trustees for the investors; and

(f) That the net amount held by the liquidators (after deducting their remuneration) on trust be distributed to all of Yuan Fu’s investors on a pro rata basis in accordance with the value of their accepted claims.

[8] Two significant differences between the original application for directions and the orders sought in counsel’s final submissions are that assets are to be distributed on the basis that they are held on trust for investors, rather than for creditors generally, and that the earlier proposal to recognise tracing by individual investors to particular assets has been abandoned in favour of a pari passu distribution of all assets among investors. The proposal not to make “uneconomic distributions” has also been dropped.

Background

[9] Yuan Fu Capital Markets Ltd was incorporated on 11 July 2007. It had two shareholders – Run Chen Wang and Yan Bai (also known as Anna Bai). Originally they were both directors but Yan Bai resigned in February 2010. On 30 September

2010 the shareholders passed a resolution that the company be put into liquidation. Boris van Delden and Peri Finnigan were appointed liquidators.

[10] Yuan Fu operated a trading platform through accounts held at SaxoBank, a Danish global investment bank. Yuan Fu’s accounts with SaxoBank were with its Singapore branch. Investors could place money with Yuan Fu which would enable

them to trade in foreign exchange contracts, options, futures, derivative contracts, shares, securities and deposits. Yuan Fu earned commission on investors’ transactions. It operated at a loss. It went into liquidation because it was insolvent. There are not enough assets to meet all claims.

Other Yuan Fu companies

[11] Yuan Fu Capital Markets Ltd was not the only Yuan Fu company. M M W Consulting Ltd was put into liquidation with other liquidators and has now been struck off. Goldmine Group Ltd (formerly Yuan Fu Group Ltd) and Yuan Fu International Financial Service Ltd have been struck off. Yuan Fu International Financial Services Pty Ltd is an Australian company. So far, the liquidators have not taken any steps to investigate the affairs of those other companies. Pragmatically they believe that any investigation or recovery action may be fruitless.

Summary of position at liquidation

[12] At the date of liquidation the assets held by Yuan Fu were funds in bank accounts and shares in listed companies. The bank accounts were with the Commonwealth Bank of Australia (in various currencies), the ANZ Bank in New Zealand (in various currencies) and SaxoBank in Singapore (in Euros). The shares were recorded in SaxoBank records as being held in the names of some of Yuan Fu’s investors.

[13] In August 2013 total assets held by Yuan Fu comprising both shares and funds had an estimated value of NZ$1,064,318.

[14] The liquidators have received claims totalling NZD1,775,827.43 as follows:

67 investors NZ$1,763,362.82

3 preferential creditors for wages NZ$ 11,196.00

Accident Compensation NZ$ 1,268.61

NZ$1,775,827.43

[15] The liquidators do not propose to accept all the claims in their entirety. They intend to reject some in part. If their decisions to reject some of the claims in part stand, they say that adjusted claims would total NZ$1,630,450.00 for investors.

[16] At this stage it is possible that creditors may wish to challenge decisions by the liquidators. Because the liquidators have still to give their decisions as to the claims by creditors, and creditors who wish to challenge the decision of the liquidators have not yet been given the opportunity to do so, I cannot in this decision decide the merits of particular claims by creditors. Instead, this decision will give directions generally as to distributions, without considering the claims of individual investors or other creditors.

Employees’ preferential claims

[17] Three employees have claimed as preferential creditors: Ke Qi Li, Chee Kong Wong, and Wen Lin. Chee Kong Wong also claimed as an investor. The liquidators maintain that these employees also received post-liquidation payments from another company within the Yuan Fu group. Payments they received were roughly half the total amount claimed as owing to those employees at the date of liquidation. The employees are said to have claimed for the last week’s wages, plus holiday pay and redundancy pay, but the liquidators say that the employment agreements made no provision for payment of redundancy compensation. The liquidators say that when all of those matters are taken into account, two of the employees were overpaid, and one of them was left with a very small claim -

$135.00.

[18] Given that the amounts of the overpayments are relatively small, the liquidators do not propose to take any action to recover them from the former employees. Later in this decision I hold that the vast bulk of the assets is held on trust for investors and will not be available for other creditors including the former employees. It is not certain whether there will be any funds available for other creditors. Even so, the liquidators will still be required to advise the employees of their decisions on their claims. The employees will have the opportunity to decide

whether to challenge those decisions. This decision does not deal with the merits of

the employees’ individual claims.


Claim by Yan Bai/ Anna Bai

[19] Yan Bai had been a director of Yuan Fu but resigned on 26 February 2010. She has filed a claim in the liquidation as an investor for US$70,908.00 (roughly NZ$96,003.00). The liquidators say that the SaxoBank records show that she had an investor sub-account with investments totalling USD70,908.00. They also say that they consider that her investment is more appropriately treated as a capital advance to the company, even though it was invested using SaxoBank’s trading platform. They propose to treat her as a non-investor creditor, whose claim ranks below investor claims, preferential claimants and unsecured creditors.

[20] The liquidators also say that they would make claims against Yan Bai for breach of duty under a number of heads:

(a) Breach of trust and dishonest assistance; (b) Breach of her duties as director; and

(c) Breach of s 300 of the Companies Act as to keeping books and records.

[21] The liquidators do not have any information as to any significant assets held by Yan Bai in New Zealand and do not know of any assets held by her overseas. At present the liquidators do not regard it as worthwhile to take proceedings against Yan Bai because they will not be cost-effective. Instead, they propose to reject her claim.

[22] The liquidators have yet to inform Yan Bai of their decision to treat her claim as being one ranking below all other creditors, and as being subject to set-offs for claims that the company is entitled to bring against her. Once the liquidators advise Yan Bai of their decision, she will have the opportunity to decide whether to challenge the liquidators’ decision. This decision is not intended to prevent her

challenging the liquidators’ decision by applying under s 284(1)(b) of the Companies

Act 1993 if she should wish to do so.


How Yuan Fu was intended to operate

[23] Yuan Fu operated in both Australia and New Zealand. In Australia it held an Australian Financial Services licence. As an entity registered with the Australian Securities and Investments Commission, it was required to disclose information and operate in accordance with Australian legislation. While it also operated in New Zealand, there was no comparable legislation in New Zealand requiring it to be registered and hold a licence to carry on its business. Information published on its website included a Finance Service Guide and a Risk Disclosure Statement. These provided information and set out terms and conditions on which investors placed money with Yuan Fu. While the Finance Service Guide indicates that Yuan Fu would provide general advice on investments in various products, including derivatives, foreign exchange contracts and securities, more importantly it gave investors the means to deal in various classes of financial products. The Finance Service Guide says that money paid to Yuan Fu will be held in one or more segregated client trust accounts complying with Australian Corporations Act requirements.

[24] The Risk Disclosure Statement sets terms and conditions on which investors can use Yuan Fu’s facilities to trade, clear and settle securities. Yuan Fu used different application forms in Australia and New Zealand. The liquidators make the point that both Australian and New Zealand investors were referred to Yuan Fu’s websites: www.yuanfucm.com and www.goldminemarkets.com. Documents on the websites advised investors:

Money paid to Yuan Fu by you will be held in one or more segregated Client Trust Accounts complying with Australian Corporations Act requirements.

It is important to note that holding money in one or more segregated Client Trust Accounts may not afford you absolute protection. The purpose of a segregated Client Trust Account is to separate client funds from those of Yuan Fu. Within the client Trust Account all client funds are [pooled] together and so an individual client balance

may not be protected if there is a default in the overall Trust Account balances.

Your securities, assets and possessions will be commingled (sic)

with those of other customers of Yuan Fu.

[25] The New Zealand application form refers to the terms on the website. The application form says:

Before completing the form, please make sure you have read and understood all information regarding your Yuan Fu trading account, including the General Business Terms, the risk of disclosure statement, as well as any other business terms or policies governing the client relationship (which are available on Yuan Fu’s website).

[26] While the documents and terms of business shown on the website appear tailored for investors in Australia, investors in New Zealand were intended to be subject to the same terms.

[27] The way by which Yuan Fu allowed investors who placed money with it to trade in securities was by way of an internet-based trading platform made available by SaxoBank. Yuan Fu had two agreements with SaxoBank: a White Label Trading System Agreement of 14 September 2007 and an Institutional Trading Agreement of the same date. There were a number of amendments and addenda to the White Label Trading System Agreement.

[28] When an investor filled out a client application form and deposited funds with Yuan Fu, Yuan Fu would bank the funds into bank accounts in either Australia or New Zealand (HSBC at first, later CBA in Australia, ANZ in New Zealand). Yuan Fu would then set up a sub-account with SaxoBank in the name of the investor. It would enter a credit in the sub-account, acknowledging receipt of the investor’s funds. It would give the investor viewing access to the sub-account, and give the investor the ability to control and invest the funds in the sub-account through the trading platform at SaxoBank. Yuan Fu used the sub-account at SaxoBank to record investor funds it received and paid out. These arrangements allowed Yuan Fu to open sub-accounts for investment at SaxoBank using funds advanced by SaxoBank and at the same time keep the deposits received from investors in bank accounts other than at SaxoBank. SaxoBank could require Yuan Fu to deposit funds to cover

its advances made. The liquidators have identified a number of lump sum payments

Yuan Fu made to SaxoBank.

[29] The liquidators have established that SaxoBank allowed Yuan Fu to maintain management accounts at SaxoBank. These management accounts included:

(a) Collateral accounts – accounts used for SaxoBank to advance funds to

Yuan Fu to cover investor positions at SaxoBank.

(b) Interest accounts – accounts into which interest earned by Yuan Fu on

its investors’ investments was paid.

(c) Commission account – an account where commissions earned by

Yuan Fu on investor trading at SaxoBank were paid.

(d) Block accounts – the liquidators are uncertain as to the purpose of these accounts, but on liquidation they were found to have only small balances.

[30] The liquidators say that if the management accounts had been run properly, and bank accounts held by Yuan Fu had been used only for their intended purpose, then the amounts held in Yuan Fu’s segregated bank accounts would have been no less than the amounts held in the collateral accounts. The commission accounts would have held company funds, would not have been used to meet investor withdrawals, and should not have been overdrawn. The interest accounts should have held company funds, should not have been used to meet investor withdrawals, and should not have been overdrawn.

[31] It is also to be noted that the bank accounts in Australia and New Zealand into which investors’ funds were made up of pooled investors’ funds. Yuan Fu did not have separate sub-accounts for individual investors for those Australian and New Zealand bank accounts.

Yuan Fu’s actual operations

[32] Given that Yuan Fu is insolvent on having gone into liquidation, it is not surprising that the company did not operate as intended. Yuan Fu used the balances in the investor sub-accounts at SaxoBank to record investors’ investments. Yuan Fu did not set up an adequate accounting system of its own to record how it was holding funds on trust for multiple investors.

[33] Yuan Fu would earn its income by commissions on transactions investors entered into and by interest on investors’ funds. Even though it encouraged its investor clients to make frequent short-term trades, it did not generate enough business to meet its commitments. The company ran at a loss.

[34] Within the Yuan Fu group of companies, funds were transferred from one company to another according to which company had funds available and which company needed funds. The funds transferred were company funds, related company funds or investor funds.

[35] In some cases, funds paid by investors to Yuan Fu were not recorded as having any corresponding sub-account at SaxoBank.

[36] While Yuan Fu had a funding facility and a facility limit with SaxoBank, it was not required to pay investors’ funds to SaxoBank within any specified period of time after an investor’s sub-account had been opened with SaxoBank. When SaxoBank did require Yuan Fu to place funds with it to meet commitments under the funding facility, Yuan Fu would transfer funds to SaxoBank from any account held by the Yuan Fu group of companies. For example it did not ensure that funds transferred from Yuan Fu’s Australian accounts were used solely to cover investments made by Australian investors. Similarly, it did not ensure that funds transferred from Yuan Fu’s New Zealand accounts were used solely to cover investments made by New Zealand investors. SaxoBank apparently did not require Yuan Fu to distinguish where money paid to it came from.

SaxoBank

[37] The liquidators have considered the position of SaxoBank. They say that their investigations have not shown anything to suggest that SaxoBank had any relationship with or owed any obligations to Yuan Fu’s investors, that SaxoBank was responsible to or owed any duties to Yuan Fu’s investors, or that SaxoBank was in breach of or operating outside the terms of the White Label Agreement or the Institutional Trading Agreement.

[38] At liquidation SaxoBank’s New Zealand sub-account (46100) was overdrawn

by €170,111.07. SaxoBank’s Australian sub-account (46110) was in credit by

€192,604.53. The liquidators accept that SaxoBank is entitled to combine those accounts and leave a balance payable to Yuan Fu of €22,493.46.

[39] The liquidators note that the contract between Yuan Fu and SaxoBank is governed by Danish law, and that any claim against SaxoBank would have to be brought in Denmark. While the liquidators do not appear to have obtained any legal advice as to the applicable Danish banking law, the agreements between Yuan Fu and SaxoBank are in English. Pragmatically, the liquidators have taken the position that as SaxoBank seems to have operated within the terms and conditions of the agreements with Yuan Fu, it would not be worthwhile making further enquiries whether any claim could be mounted against SaxoBank.

Difficulties of investigation

[40] Reports made by the liquidators to creditors have mentioned difficulties they have in investigating the affairs of the company. Factors they have identified are:

(a) Limited co-operation from directors;

(b) Insufficient and incomplete books and records;

(c) No details on withdrawals or explanations for transactions in general;

(d) Incomplete information in respect to clients’ names, addresses, email

contacts and investments;

(e) No accounting for the client segregated trust accounts, with many deposits not narrated.

(f) No hard copy records relating to original agreements, authorisations and the like;

(g) Limited advice on how the company managed the Commonwealth

Bank of Australia and SaxoBank accounts;

(h) Limited information on New Zealand clients, and no evidence of funds transfers from the New Zealand bank account to SaxoBank;

(i) Discrepancies between amounts owed and funds held; (j) No details of bonds held;

(k) No transaction listings to support withdrawals from Commonwealth

Bank of Australia;

(l) Clients have claimed to have lodged deposits but the company has no record at SaxoBank of these stock purchases; and

(m) Clients have funds recorded at SaxoBank but SaxoBank have never been paid.

[41] On 1 July 2013, representatives of the liquidators interviewed Yan Bai and obtained some documents from her afterwards. But even so, that limited information has not assisted the liquidators in completely unravelling matters.

Questions of illegality not relevant

[42] In Waipawa Finance Company Ltd2 the court had to decide how funds sourced from investors were to be distributed when the company in liquidation had operated in breach of the Securities Act. In this case, the liquidators say that they are satisfied that Yuan Fu Capital Markets Ltd did not operate in breach of the Securities Act. They also say that the distribution of the assets of the company does not have to be determined according to whether the company breached any relevant legislation. I will deal with the case on the basis that even if Yuan Fu did breach any relevant legislation, that does not affect the approach to be applied in distributing its assets.

What is the status of the assets held by Yuan Fu?

[43] The effect of the terms on which Yuan Fu received funds from investors was that Yuan Fu was to hold those funds on trust for the investors. The documents on its website made that clear. Those documents were required to comply with relevant Australian law. Australian investors can properly claim that, having placed funds with the company on that basis, Yuan Fu held their funds on trust for it. New Zealand investors can also claim the benefit of those provisions, because the application forms signed by New Zealand investors incorporated the terms and conditions on the website.

[44] Moreover, the nature of the arrangements shows that the relationship between Yuan Fu and its investors was something more than a creditor-debtor relationship. While Yuan Fu held funds paid by investors, investors still had the right to control those funds by directing that they be used to make investments, transfer or dispose of investments, and generally carry on trading activities on the trading platform facility provided by Yuan Fu. The investors retained a beneficial interest in the funds they paid to Yuan Fu. Yuan Fu was accordingly the trustee of the funds paid to it by its investors.

[45] The assets held by Yuan Fu at liquidation comprise shares and funds in bank accounts. The shares are recorded as being held for named investors. On the other

2 Re Waipawa Finance Company Ltd [2011] NZCCLR 14 (HC).

hand, the funds are not recorded as being held for any particular investor. As to the funds, the fact that contributions from various investors have been combined in various bank accounts does not prevent the investors having a claim to those funds. In Eaton v LDC Finance Ltd, Fogarty J stated established law when he said:3

[72] If all the beneficiaries’ entitlements are mixed in one fund which contains no other funds in respect to which there are claims by other persons, then equity has no difficulty in allowing the beneficiaries to wind up the trust and make a direct claim to those assets. ... This remedy is available even though no individual beneficiary can identify his or her deposit in the mixed fund. Where funds are mixed particularly with the wrongdoer trustee’s assets, then there are various methods deployed by equity all designed to give the beneficiary a remedy. Mixing is not fatal.

He also recorded the position where a trustee mixed funds held on trust with his own personal money:4

[75] So far as other contributions to the fund are concerned, the position is clear. Re Hallett’s Estate5 provides that where money held on trust is mixed with the trustee’s personal money, the whole of the resulting fund is treated as trust property and can, following a successful tracing exercise, be claimed by the trust beneficiaries. The trustees are presumed to act honestly where personal funds and trust funds are mixed, and when there is a shortfall, the trustee is presumed to intend to deplete their own funds first.

[76] There is no difficulty with beneficiaries forming a class and claiming as a class against a mixed fund. ...

[46] As the funds held by Yuan Fu are not enough to meet all the claims of all the investors, under the principle in Hallett’s case it cannot be open to Yuan Fu as trustee to say that it has a beneficial interest in any of the funds held in the bank accounts. It is presumed to have spent funds in the bank accounts on its own expenses first, before using funds subject to a trust. That finding means that the assets held at liquidation are all subject to a trust in favour of investors and are not available for

other creditors.








3 Eaton v LDC Finance Ltd (in rec) [2012] NZHC 1105 at [72].

4 At [75] and [76].

5 Re Hallett’s Estate (1879) 13 Ch D 696 (CA).

Non-trust assets

[47] It is necessary to add one qualification. The liquidators have identified assets that will not be subject to the trust in favour of investors. They have treated interest income from bank accounts as not subject to claims by investor clients because Yuan Fu’s terms of business did not provide for Yuan Fu to pay them interest on their funds. They also note that when the shares held by Yuan Fu are sold, the company will be able to charge commission on the sales because that was one of Yuan Fu’s sources of income. That will provide a fund to meet the part of the liquidators’ remuneration that will not be paid out of trust assets and might be available for other non-trust creditors and for investors to the extent that they are not paid out of trust assets.

How should the assets be distributed amongst the investors?

[48] The liquidators contend that the appropriate distribution after paying their remuneration is to distribute the trust assets pari passu amongst the investors, again after taking into account the liquidators’ decisions on the acceptance or rejection of particular claims by investors. In these cases, pari passu distribution tends to be the default solution – the one ordered when no better arrangements seem appropriate. Because it tends to be the default solution, it is necessary to enquire whether there is some other distribution more appropriate to the circumstances of this case.

Clayton’s Case

[49] In Re Registered Securities Ltd,6 the Court of Appeal rejected the application of the rule in Clayton’s case,7 in a case similar to the present. In that case, the company operated as a contributory mortgagee company. It held uninvested cash plus mortgage advances. Together, they ought to have satisfied the sum of

investments but on the facts they did not. The Court of Appeal noted that the rule in

Clayton’s case had been applied when a trustee mixed the funds of more than one beneficiary, and there was a subsequent shortage. Under the rule, the money of the


6 Re Registered Securities Ltd (in liq) [1991] 1 NZLR 545 (CA).

7 Devaynes v Noble (Clayton’s Case) [1815] EngR 77; (1816) 1 Mer 572, 35 ER 781.

first beneficiary paid in was the first drawn out. However, the Court of Appeal held that the automatic application of the rule in Clayton’s case as between beneficiaries did not, in its view, withstand scrutiny.8 The rule was founded on presumed intention. Where it was in truth a fiction, the rule could not be allowed to work an injustice. Further, as it was based on presumed intention, it must give way to an express contrary intention or to circumstances that point to a contrary conclusion.

[50] Similarly, in Eaton v LDC Finance Ltd Fogarty J referred to Re Registered

Securities Ltd and said:9

...Inasmuch as Clayton’s Case and other like rules are founded on presumed intention, they cannot be applied to a trust which is expressly founded on a different intention, or to a constructive trust which imposes fiduciary obligations on the holder of a mixed fund, incompatible with such rules. The correct approach in equity is to select such rules consistent with the trust being enforced, and which rules will achieve equity as between the beneficiaries.

[51] The liquidators also submit that there are particular factors in this case that go against applying the rule in Clayton’s Case:

(a) The lack of records held by Yuan Fu would make it unworkable to apply the rule;

(b) Applying the rule will lead to arbitrary results. It will not be straightforward to apply the rule when the liquidators will need to work out whether to take into account just the deposits and withdrawals into and out of Yuan Fu’s trading bank accounts or also deposits in and withdrawals from SaxoBank; and

(c) If the Saxobank deposits and withdrawals are to be taken into account, there is the added complication of the advances from SaxoBank and the mixed sources of the funds to cover those advances.

[52] All these factors count against applying the rule in Clayton’s Case.



8 At 553.

9 At [61].

The North American method

[53] There is a useful description of the North American method in Re International Investment Trust.10 I gratefully adopt it without repeating it. It is a rolling charge approach under which the value of each investor’s funds is calculated each time Yuan Fu undertook a transaction affecting the total value of the assets. It would require considerable analysis to recalculate each investor’s share after each transaction. The process would be time-consuming and expensive. What makes it inappropriate for this case is the absence of adequate accounting records.

Dividing assets between Australian and New Zealand investors

[54] In my minute of 6 December 2012 I floated the approach of allocating funds in Australian bank accounts to Australian investors, funds in New Zealand accounts to New Zealand investors and dividing funds held in SaxoBank according to the proportions derived from Australia and New Zealand respectively. The liquidators have investigated transactions by Yuan Fu to see how that would work. They have established that Yuan Fu did not keep its investor funds separate according to the country they came from. In particular, they found a number of fund transfer requests by Yuan Fu to SaxoBank for funds held in SaxoBank’s 46100 New Zealand account to be transferred to Australian bank accounts. These funds transfer requests totalled US$432,000. The liquidators tried making adjustments for these fund transfer requests but could not come up with any result that came anywhere close to common sense. They have satisfied me that the idea I floated is not feasible.

Claim by Australian investors to funds in Australian bank accounts and all assets held in SaxoBank

[55] In June 2011 Aequitas VTS Lawyers, a Sydney law firm instructed by some Australian investors, proposed to the liquidators that all the funds held in the Yuan Fu CBA bank accounts in Australia and all the funds and assets held by SaxoBank be paid to their Australian clients, leaving the New Zealand investors to take only the funds in the New Zealand bank accounts. The basis for excluding New Zealand

investors from the non-New Zealand accounts was the assumption that funds from

10 Re International Investment Unit Trust (in stat man) [2005] 1 NZLR 270 (HC) at [29]–[35].

New Zealand investors had not gone to those accounts. The liquidators’ investigations have shown that that assumption is wrong. Funds from New Zealand investors did go into SaxoBank and funds in the New Zealand SaxoBank account were paid into Australian bank accounts. The finding that Yuan Fu did not keep investors’ funds separated according to the country they came from stands in the way of adopting this proposal.

Allocating proceeds of shares to those named as holding them

[56] The Saxobank records show shares held in the names of particular investors. The liquidators put them into schedules as at the date of liquidation and as at July

2013.11 The value of the shares at liquidation was €367,600.96 before closing

costs.12 The liquidators propose to sell those shares that have not been realised since liquidation and to pool the proceeds with the funds. That involves a departure from their initial proposal to allow claims where investors can trace the funds they have invested to a particular asset, such as a parcel of shares. The liquidators now say that such tracing is not possible because the purchases of those shares were funded by advances from SaxoBank and the advances by SaxoBank were paid from investors generally, not from the particular money paid in by that investor.

[57] At first sight that position seems strange. A shareholding investor is likely to argue as follows. The investor paid money into Yuan Fu, whereupon an account was opened for the investor on the trading platform. The investor operated the account and, as they were entitled to, used funds in the account to buy shares. Obviously the investor owns the shares and should not have to share the proceeds with other investors. It is beside the point that the particular funds the investor paid to Yuan Fu cannot be traced to the investor’s particular sub-account. The payment of the investor’s money funded Yuan Fu generally and enabled it to provide the trading platform through which the investor purchased the shares. The records showing the investor’s shareholding are Yuan Fu’s acknowledgement that the investor owns the shares. It cannot matter that exact tracing is not possible. The result intended by the

parties’ contract has been achieved. The maxim that equity regards that as done

11 Exhibits U and V of Daniel Zhang’s second affidavit.

12 Approximately NZ$735,512.

which ought to be done stands in the way of Yuan Fu asserting that the investor does not own the shares because it used the investor’s funds for another purpose. If Yuan Fu were not insolvent, no court would have any time for an argument by Yuan Fu that the investor does not really own the shares which the investor bought using the system set up by Yuan Fu. As the investor has established their ownership of the shares, it should not matter that Yuan Fu is insolvent and has gone into liquidation.

[58] There is however authority against that argument. It is the Court of Appeal’s decision in Re Registered Securities Ltd. As already mentioned, that was a contributory mortgage case. A number of investors were allocated certificates showing that their funds had been invested in specific mortgages. In most cases the company was authorised to choose in which mortgage to place investors’ funds but the evidence shows that in some cases the investor had a say. I do not regard that aspect as a distinguishing feature. What that case and this case have in common is that under the contractual arrangements, specific assets held by the company had been designated as being held beneficially for the investor. At first instance in Re Registered Securities Ltd Barker J had held that those investors to whom certificates had been allocated were entitled to the proceeds of those mortgages and did not have

to share them with other investors. He was overruled on appeal. The Court said:13

These considerations are, we think, sufficient to give a prima facie validity to the allocations made by RSL in this case as evidenced by its computer records and the mortgage investment certificates. It was these features which in the end persuaded Barker J that the mortgages were held for the persons to whom they had been allocated.

But, of course, no one has a right to property which does not belong to him and if money of the person to whom a certificate was given was never available to be applied to the mortgage in question the expressed intentions of RSL will not convey any proprietary interest. Ordinarily it is for a claimant to trace his money. Here the allocations have sufficient apparent validity to require those disputing their effect to disprove the title evidenced by RSL's records. The question is whether the evidence adduced by the liquidators is sufficient to displace the certificates. The liquidators do not seek to set aside just one or several of the certificates but to establish that the system as it was in fact operated by RSL is such as to demonstrate that most, if not all, certificates falsely represent the facts or that, at the least, all are so tainted that subject to particular claims to the contrary that may be established, the proprietary interests they purport to evidence may safely be ignored. In order to discharge this burden it is not enough to show that the investors' moneys cannot positively be traced to allocated mortgages. It has

13 At 554.

to be affirmatively shown either that they were not so invested, or that the probability they were not is sufficiently strong to justify the pro rata distribution favoured by the liquidators.

[59] The allocations in the certificates were not conclusive. They had only prima facie validity. The Court went on to show from some representative cases that investors’ funds did not go into the mortgages for which they had been allocated certificates. Because the system was so tainted the Court held that a division of assets related to the contribution of each investor was the only rational mode of distribution of sums allocated to mortgages.14

[60] It is worth considering why the Court insisted on a strict tracing approach and would not allow the allocations by certificates to apply conclusively. The Court would not have taken the strict tracing approach if Registered Securities Ltd had been solvent. The Court must therefore have intended to apply some insolvency principle but it did not say what that was. It seems to me that the relevant principle lies in the different effects insolvency has on personal and property rights. Property rights are preserved when an entity goes into insolvency administration, be it liquidation, bankruptcy or otherwise. On the other hand personal rights are

converted into a right to claim a dividend.15 The principle is a general one. There

seems to be no reason not to apply it to the distribution of mixed trust funds when all claimants cannot be satisfied. Under the Court of Appeal’s approach in Re Registered Securities Ltd, arguments about entitlements under mortgage certificates were at best personal rights. Those basing their claims only on the certificates had to share with others.

[61] That characterisation is relevant here. The argument I have put in the mouth of a shareholding investor in [57] above is for a personal right. Under the approach of the Court of Appeal in Re Registered Securities Ltd it is not an argument for a property right. A property right will arise only if the investor can trace their funds

through to the shares in their name.


14 At 558.

15 See Roy Goode Principles of Corporate Insolvency Law (4th ed, Sweet & Maxwell, London,

2005) at 100–101. For liquidations under the Companies Act 1993, see the bar on pursuing personal rights on liquidation under s 248(1)(c) and the saving of rights of secured creditors under ss 248(2) and 305.

[62] It is still necessary to apply the rest of the Court of Appeal’s approach. The records of the investors’ shareholdings have prima facie validity. The onus is on the liquidators to show that notwithstanding those records Yuan Fu’s system was so tainted that it would not be safe to accept that funds paid in by investors were applied to the purchase of shares in their names.

[63] The liquidators rely on the way that Yuan Fu funded the trading platform activities. When a sub-account was opened in the name of an investor with a credit to a certain amount, the immediate source of the funding was an advance by SaxoBank. Admittedly the sub-account was opened upon the investor paying Yuan Fu, but Yuan Fu did not use the investor’s funds directly for the sub-account. Instead it held the funds in the account of one of its trading banks. Yuan Fu used those funds for its general purposes. Those purposes included meeting calls by SaxoBank to provide funding to cover its advances, but there was no particular link in time between an investor making a payment to Yuan Fu and Yuan Fu meeting a call by SaxoBank. The liquidators have identified only twelve transfer payments by

Yuan Fu to SaxoBank.16 There can be no confidence that a particular payment by an

investor to Yuan Fu would have gone to that investor’s sub-account at SaxoBank.

[64] That is reinforced by the absence of adequate accounting records. As the

Court of Appeal noted in Re Registered Securities Ltd:17

There will be cases where an attempt to trace will involve enormous effort and where, on the material known to exist, is not likely to produce a reliable result.

This is one of them. The liquidators carried out flow of funds analyses of Yuan Fu’s bank accounts. These showed activities that went beyond the normal handling of funds held on trust for investors. Funds were transferred among accounts. Nearly

$20 million had gone through the ANZ Bank current account. Other accounts showed payments of expenses of Yuan Fu International as well as Yuan Fu’s own general expenses. This also counts against being able to trace particular payments

made by investors.



16 Daniel Zhang’s first affidavit at paragraph 10.

17 At 555.

[65] Another impediment to tracing is that at various times, some accounts were in overdraft. Tracing through an overdrawn account is not possible.18 Other accounts were in credit, but accounts cannot be consolidated to prove tracing.19

[66] Even if Yuan Fu had managed to operate in a manner close to what it had held out to its investors, any tracing claim would face difficulties because Yuan Fu made it clear in the documents on its website that investors’ funds would be mingled with the funds of other investors. That created the “global trust” Barker J had in mind in Re Mortgage Management Ltd:20

A global trust will be created where the document creating the trust requires the trustee to hold an undivided fund for the benefit of more than one person. The essence of such a trust is that the trust property is held for all the contributors.

[67] The liquidators have done enough to displace the presumption in favour of tracing. On the materials available to the liquidators and by reason of the way Yuan Fu set up sub-accounts for investors, it is not possible to trace funds from individual investors to particular shareholdings.

[68] In dealing with cases where tracing would not produce a reliable result the

Court of Appeal said in Re Registered Securities Ltd:21

In them the Court must give such directions as will do substantial justice between the parties. That will commonly mean that the fund will be distributed in proportion to the amounts contributed by the claimants on it.

I follow the Court of Appeal in finding that a pari passu distribution of funds and of the proceeds of shares is appropriate. Alternatives have been considered and rejected. I also follow the Court in holding that that finding is subject to qualifications: that nothing that has been settled or agreed should be disturbed; and that individual investors still retain the right to try to prove tracing of their funds to a

particular parcel of shares.22

18 Re Registered Securities Ltd at 554.

19 Box v Barclays Bank plc [1998] Lloyd's Rep Bank 185 at 202, Shalson v Russo [2005] Ch 281at

[139].

20 Re Mortgage Management Ltd [1978] 1 NZLR 494 (SC) at 509.

21 Re Registered Securities Ltd at 555.

22 Re Registered Securities Ltd at 558.

Remuneration of liquidators

[69] The liquidators applied for an order approving their remuneration to

16 August 2013 in the sum of $239,846.97 (including GST), comprising

$202,331.75 for their fees, $4,515.22 for disbursements and $33,000 for legal fees. On 6 September 2013 I made an interim order approving their remuneration in the sum of $150,000 plus GST plus disbursements on the basis that I would give a final decision in this judgment. The matters to be considered are the basis for allowing the liquidators to recover their fees and expenses, the reasonableness of the fees and expenses, and where the burden should lie.

[70] Ordinarily the liquidators are entitled to recover their remuneration under s

276 of the Companies Act. Their remuneration and expenses take highest priority under the 7th Schedule.23 That will not help the liquidators in this case, because almost all the assets of the company are held on trust with little left to meet their fees and expenses. The courts have recognised that liquidators and similar insolvency administrators required to deal with assets held on trust by the insolvent entity have a right to be paid out of the assets held on trust. Relevant cases include Re Francis

James Nominees Ltd (in liq), Re Secureland Mortgage Investments Ltd (No 2), Re Newsmakers International Ltd (in liq) and McKenzie v Alexander Associates Ltd (No 1).24 They establish the following:

(a) The court will order payment of remuneration out of trust assets independently of any agreement or of any power under the Companies Act, but in its inherent jurisdiction. There may also be power to award remuneration under ss 38 and 72 of the Trustee Act 1956;

(b) There is a preference to impose the charge on sums recovered rather than invested;




23 Companies Act 1993, Schedule 7, cl 1(1)(a).

24 Re Francis James Nominees Ltd (in liq) (1988) NZCLC 64,279 (HC), Re Secureland Mortgage Investments Ltd (No 2) (1988) 4 NZCLC 64,266 (HC), Re Newsmakers International Ltd (in liq) HC Napier M153/87, 24 February 1994, and McKenzie v Alexander Associates Ltd (No 1) (1991) 5 NZCLC 67,030 (HC).

(c) While particular costs may relate to particular claims and be chargeable accordingly, the courts will not require liquidators to apportion general time to separate claims by investors;

(d) The right to remuneration is for work related to the trust assets, not to the conduct of the liquidation generally. Some apportionment is required; and

(e) An application ought to be made for approval of the remuneration.

[71] As to reasonableness, the liquidators have provided the information which they normally provide on applications for retrospective approval of remuneration. They have provided a full print-out of tasks undertaken recording for each entry the task, the person, the time taken and the charge. They have also provided time and cost analyses. Their rates of remuneration are standard and are typical of those approved by the court when making liquidation orders. Total time on the liquidation from appointment to mid-August 2013 came to 927 hours. The bulk of the work was carried out by an insolvency accountant, but more senior staff and partners have supervised and assisted.

[72] I recognise that administering the trust assets was far from straightforward. Yuan Fu’s business was unusual. The arrangements for the use of SaxoBank’s trading platform were not common. The company had carried on business in both Australia and New Zealand but the trading platform was run by a Danish bank out of a Singapore branch. The owners of the business and its customers were Chinese. Fortunately the insolvency accountant who did the bulk of the work is Chinese and fluent in the language, which must have helped. There were difficulties because Yuan Fu had kept poor records and its directors gave only slight assistance. Because assets were held on trust, the liquidators could not go by the Companies Act alone. Clearly investigation and analysis was required and it would take time. The evidence assembled for this application reflects considerable effort. There is nothing I have found in the liquidators’ records that stands out as out of order. In particular I do not regard the time spent on the job as excessive. Overall I am satisfied that the remuneration sought to be approved is reasonable.

[73] As to apportionment, the vast bulk of the liquidators’ work has been on the trust side of the liquidation. There has been work on non-trust creditors, but that has been relatively insignificant. The liquidators have not attempted any exact apportionment. In the absence of any better method I direct that the remuneration up to the date of this decision be apportioned between trust creditors and other creditors according to the face value of their claims, before any adjustments by the liquidators. That means adopting the figures in [14] above. I leave the liquidators to calculate the apportionment.

Ranking of claims of former employees

[74] As noted above the liquidators intend to reject the greater part of the claims of former employees. If there is no challenge to their decisions, the point now being made may be academic. Under Schedule 7 of the Companies Act they have preferential claims that rank below the liquidators’ claim for fees and expenses. Their claims are met out of assets that are not held on trust and that have not been consumed by the costs of liquidation. They rank ahead of the Accident Compensation Corporation, an unsecured creditor. In this I follow the approach of

Justice McPherson in his essay, “The Insolvent Trading Trust”.25


Barring possible tracing claims by investors and further claims by all creditors

[75] Before the liquidators can complete distributions on a pari passu basis to investors they will need to be satisfied that they will not face tracing claims from shareholding investors. In Re Registered Securities Ltd the Court of Appeal noted that s 75 of the Trustee Act was available to liquidators wishing to bar claims by investors if they were not started within appropriate time.26 If tracing claims are launched, the liquidators may be able to make interim distributions.

[76] The liquidators have already advertised for claims in the liquidation. They are entitled to proceed from now on, on the basis that the classes of creditors are


25 BH McPherson “The Insolvent Trading Trust” in PD Finn (ed) Essays in Equity (Law Book Co Ltd, Sydney, 1985) 142 at 154–155, rejecting Re Suco Gold Pty Ltd (in liq) (1983) 7 ACLR 873 and Re ADM Franchise Pty Ltd (1983) 7 ACLR 987.

26 At 558.

closed. Anyone who has not yet made a claim is now excluded from any distributions.

[77] As the liquidators have abandoned their proposal not to make “uneconomic distributions”, I do not need to make an order on that aspect.

Outcome

[78] I make these orders:

(a) The time for making claims in the liquidation is now closed;

(b) The assets held by Yuan Fu Capital Markets Ltd at the date of liquidation, including funds and shares at SaxoBank and funds held in Australian and New Zealand bank accounts, are all held on trust for those who have proved in the liquidation as investors, but this does not apply to interest earned on those funds since the date of liquidation or to commission the liquidators earn on the sales of shares;

(c) The shares held by Yuan Fu Capital Markets Ltd are to be sold and the net proceeds are to be pooled with the other funds held on trust. In case any investor later succeeds in a tracing claim for a parcel of shares, the liquidators are to keep records of the sales of each parcel of shares and the proceeds of each sale and to retain funds available to meet any tracing claim if it should succeed.

(d) I make no decision on the claims by Yan Bai or the former employees, as that should await any challenge any of them make to a decision by the liquidators under s 284(2)(b) of the Companies Act.

(e) I approve the liquidators’ remuneration from the date of liquidation until 16 August 2013 in the sums set out in their application. Their remuneration is to be apportioned as provided in [73] above. The trust share of their remuneration may be paid from trust assets before any

distributions to investors. The liquidators may charge for further remuneration and expenses, including legal fees, on the same basis for ongoing work.

(f) After payment of liquidators’ fees and expenses, the assets held on trust by Yuan Fu Capital Markets Ltd are to be distributed to all investors who have claimed on a pro rata basis according to the value of their accepted claims, but this is subject to any claim by an investor who may succeed in a tracing claim to shares held by Yuan Fu Capital Markets Ltd.

(g) Any remaining assets are to be distributed under the Companies Act

1993. To the extent that investors are not satisfied out of trust assets, they rank with other non-preferential unsecured creditors.

(h) Leave is reserved to apply for further directions.





...........................................

Associate Judge R M Bell

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