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Torbay Holdings Limited v Napier [2015] NZHC 2477 (9 October 2015)

Last Updated: 20 November 2015

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-007660 [2015] NZHC 2477

_{JUDGMENT OF WOOLFORD J}

This judgment was delivered by me on Friday, 9 October 2015 at 2:30 pm pursuant to r 11.5 of the High Court Rules 1985.

Registrar/Deputy Registrar

_{..........................................}

TORBAY HOLDINGS LIMITED & ANOR v NAPIER & ORS [2015] NZHC 2477 [9 October 2015]

CRI-2013-404-001406

BETWEEN DUNCAN JOHN NAPIER, SARA ANN NAPIER AND CHRISTOPHER JOHN DAVIS AS TRUSTEES OF THE NAPIER FAMILY TRUST

Plaintiffs

AND SANDSPIT BAY HOLDINGS LIMITED Defendant

Solicitors: Sellar Bone & Partners, Auckland

Counsel: DPH Jones QC, Auckland

Copy to: Duncan Napier

INDEX

Paragraph Introduction ..........................................................................................................[1] Factual background .............................................................................................[9]

Credibility ...........................................................................................................[29]

Mr Napier’s employment contract ...................................................................[38] Mrs Napier’s employment contract ..................................................................[45] Declared income .................................................................................................[46] Reimbursement or payment of company expenses .........................................[53] Fruit and vegetable supplier ............................................................................[71] Whangaripo Valley Road property...................................................................[85] Indebtedness of Mr and Mrs Napier and Napier Family Trust ..................[107] Misappropriation of company funds ............................................................. [115] Quantum of losses ........................................................................................... [117] Tracing of the funds ........................................................................................[135] Salary overpayments ..................................................................................[135] Unauthorised payments ..............................................................................[137] Causes of action ................................................................................................[151] Breach of fiduciary duties ..........................................................................[152] Money had and received.............................................................................[163] Deceit .........................................................................................................[180] Knowing receipt..........................................................................................[183] Remedies – constructive trust.....................................................................[198]

(a) Is there a pre-existing equitable right to property?.................[205] (b) Can that right be traced into the claimed property? ...............[207] Negligence ..................................................................................................[233]

Counterclaim ....................................................................................................[239] Claim by Napier Family Trust against Sandspit Bay Holdings ...................[248] Result .................................................................................................................[262]

Introduction

[1] Torbay Holdings Limited and Torbay Rest Home Limited, the first and second plaintiffs in the first proceeding (CIV-2012-404-007660), were incorporated in 2001 to own and operate a rest home business. Torbay Holdings purchased the land and buildings, while Torbay Rest Home ran the business and paid rent to Torbay Holdings. The first defendants, Duncan Napier and his wife Sara Napier, were appointed as administration manager and nurse manager of the rest home respectively. Mrs Napier was a director of the companies from incorporation until 3

September 2012. Mr Napier was also a director of the companies between 27 June

2008 and 11 June 2012. The second defendants are Mr and Mrs Napier and an independent solicitor as trustees of the Napier Family Trust, which is a minority shareholder in both companies.

[2] Mr Napier and his wife effectively ran the rest home business. They had cheque signing authority over the companies’ bank accounts and day-to-day control of their finances. The other shareholders had very limited involvement in the business. They trusted Mr and Mrs Napier. There were no effective checks and balances.

[3] The first and second plaintiffs’ claim against the defendants is straightforward. They say that over the period 1 April 2005 to 30 April 2012, Mr and Mrs Napier treated the companies’ funds as their own and took in excess of

$1.9 million for their own purposes and the purposes of the Napier Family Trust. They say such payments were unauthorised. The statement of claim sets out seven different causes of action including breach of directors’ duties, monies had and received, knowing receipt of misappropriated monies and negligence.

[4] On the other hand, the defendants deny any impropriety and say that all cheque payments made by them were either to pay legitimate rest home expenses or to reimburse payments they had made on behalf of the rest home. The statement of defence includes a counterclaim for money the defendants say is owing to them.

[5] The trustees of the Napier Family Trust have brought a separate claim (CIV-

2013-404-001406) against Sandspit Bay Holdings Limited. The Trust is a minority

shareholder in Sandspit Bay Holdings, a company that purchased and developed a property in Grey Lynn in Auckland. The other shareholders in Sandspit Bay Holdings are also shareholders in Torbay Holdings and Torbay Rest Home. There is therefore a commonality of shareholding in the three companies.

[6] The Napier Family Trust made advances to Sandspit Bay Holdings, which are recorded in the company’s current account. The trustees now want their money back. Sandspit Bay Holdings resists returning the advances made by the Napier Family Trust because it says that the advances were made using funds misappropriated from Torbay Holdings and Torbay Rest Home.

[7] Evidence on behalf of Torbay Holdings, Torbay Rest Home and Sandspit Bay Holdings was given by Michael Single and Mark Kayes, the two remaining directors of the companies.

[8] Mr Napier represented himself during the four week hearing and cross- examined the other parties’ witnesses at some length. He also gave evidence and was subject to cross-examination himself. Mrs Napier did not make any appearance nor was she represented by counsel. She was also not called as a witness by her husband.

Factual background

[9] Mr Napier and his wife met Mr Single and his wife through a homebirth prenatal group in 1994. They became friends. In 1996, Mr Napier and his wife became directors of Henderson Toys Limited, which operated as a toy retailer in Henderson. The toy business encountered financial difficulties in about 2000. Henderson Toys ceased trading in April 2001 when the company’s landlord terminated its lease because the company could not meet its obligations. Mr Napier had guaranteed the lease in his personal capacity and the landlord sought payment from him.

[10] In 2002, at the suggestion of Mr Single, Mr Napier entered into a scheme of arrangement with his creditors by which seven cents in the dollar was paid to them. Mr Napier’s personal indebtedness was recorded at the time as $179,214. Mr Single

also introduced Mr Napier to the solicitor who put the scheme together and advanced funds to Mr Napier to cover the cost of the scheme.

[11] Mr Single has interests in a number of rest homes. In 2001, around the time that Henderson Toys ceased trading, Mr Single was looking to invest in another rest home business. Mr Napier introduced Mr Single to the owners of an existing rest home business in Torbay. The business was subsequently purchased by Mr Single and Mr Napier, as part of a group of investors. Two new companies, Torbay Holdings and Torbay Rest Home, were incorporated for the purposes of the purchase. The investors received shares in both Torbay Holdings and Torbay Rest Home in accordance with the amounts each had invested. Mr Single’s family trust was allocated 40 per cent of the shares. Mr Kayes’ family trust was allocated 20 per cent of the shares as was a trustee company associated with John Bell. The Napier Family Trust was also allocated 20 per cent of the shares. The Napier Family Trust contributed $120,000, of which $100,000 was borrowed from the ASB Bank and

$20,000 was borrowed from Fairleigh Lodge Holdings Limited (of which the Single family trust was a 70 per cent shareholder).

[12] Mr Single, Mr Kayes and Mrs Napier were all appointed directors of both Torbay Holdings and Torbay Rest Homes. Mr Napier was not initially appointed as a director because of his personal debts and the scheme of arrangement he was proposing for his creditors. A representative of Bell Trustees Limited was not appointed as a director because the company was a passive investor.

[13] When the rest home was purchased it was made up of 39 residential rooms and 13 units, which meant that the rest home had a capacity of 52 residents. The residential rooms were part of the assets of the rest home and comprised of a bedroom and separate bathroom, but no shower. The units were, however, owned by individual residents and had a bedroom, lounge, kitchenette and en-suite bathroom with shower. The residential room residents paid more because there was a rental component in their charges. The unit owners paid for their food and other amenities, but because they owned their units paid a lesser amount.

[14] Mr Napier was appointed as administration manager of the rest home, while Mrs Napier was appointed as nurse manager of the rest home. Mr Napier had no other employment, but Mrs Napier continued with her existing part-time work as a nurse tutor at UNITEC.

[15] Mr Napier remained administration manager from 2001 until the end of April

2012. During this period he had responsibility for the financial management of the rest home as well as its physical maintenance. He was also required to support his wife who was responsible for the physical wellbeing of the residents.

[16] Mr Napier was in charge of the rest home finances. He was responsible for calculating and paying its expenses, including staff wages, suppliers’ bills, and preparing and filing the monthly Pay As You Earn (PAYE) returns and bi-monthly Goods and Services Tax (GST) returns. He was also required to maintain the companies’ primary books of accounts. To do so, Mr Napier used Mind Your Own Business (MYOB), an accounting software package. Part of his role was to liaise with the companies’ accountant, Scott Williams, and provide him with all the necessary financial information for the end of year accounts and annual tax returns.

[17] Mrs Napier had signing authority on the bank accounts of Torbay Holdings and Torbay Rest Home from the outset. Before Mr Napier gained signing authority, she would sign blank cheques and give them to her husband. Mr Napier had signing authority from August 2008, after he became a director of the companies.

[18] The rest home had been operating for a number of years before it was purchased in 2001. Most of the staff remained and the same systems and processes continued. Bulk food supplies had been obtained from Gilmours who, under the previous owners, had delivered them to the rest home. Mr Napier, however, chose to do the food shopping for the rest home personally. Initially he also used Gilmours, but later changed to Pak n’ Save as well as various butchers. Mr Napier says that he begrudgingly used his personal credit card to purchase food for the residents on the day the business was taken over in June 2001 because no account had been opened at Gilmours. Thereafter, he says, Mr Single deliberately used him as a free funding

source for the business. He also says that he refused to give any personal guarantee to open supplier accounts because of lessons learnt in the failure of Henderson Toys.

[19] I reject any contention that Mr Single deliberately used Mr Napier as a free funding source for the business. If personal guarantees were required to set up accounts for trade suppliers, then Mr Napier should have raised the issue with the directors and sought their assistance. Mr Napier instead told one employee that Mr Single did not allow accounts. This claim is simply not credible. Accounts are preferable for ease of recording and managing business expenditure. I accept Mr Single’s evidence that it was always his preference that accounts were kept so that monthly invoices were rendered and accounts paid by cheque or direct credit.

[20] The rest home also operated a petty cash book, which had a float of $300. The total amount of petty cash deposited between 1 April 2005 and 30 April 2012 was $56,496. This equates to approximately $8,000 per annum or $160 per week. Petty cash was used for minor payments such as lawn mowing, stationery and diesel for the rest home van.

[21] In addition there was also a comfort ledger system for each resident by which small amounts of cash were kept in the rest home office for minor expenditure by residents. The cash was sourced from residents themselves or their families and was kept separate from the petty cash book.

[22] Each year Mr Napier was required to supply the companies’ accountant, Mr Williams, with the information needed to complete the annual accounts for Torbay Holdings and Torbay Rest Home. Mr Williams relied on the information supplied by Mr Napier to draft the annual accounts. He did not audit the accounts and only occasionally saw source documents (such as when a unit was sold). His was a compilation engagement only, and he was not required to check whether the information was correct or not. Mr Williams found Mr Napier to be disorganised. He says a pattern emerged each year – after much effort and many e-mails, Mr Napier would eventually supply him with the bare minimum of information that was necessary for him to draft the annual accounts. Mr Napier would blame his disorganisation on the fact that he did not have the latest version of MYOB.

[23] The annual accounts prepared by Mr Williams on information supplied by Mr Napier between 2005 and 2011 showed the rest home business generally breaking even. No dividends were paid to the shareholders of Torbay Rest Home.

[24] In September 2011, Mr Williams made contact with Mr Single to express concern that two Inland Revenue Department (IRD) payments had not been made in the financial year ended 31 March 2011. Mr Single arranged to meet with Mr Napier to discuss the issue, but the meeting did not take place until late November 2011. Mr Napier provided evidence that the payments had been made and explained that everything was in order. Mr Single was satisfied with Mr Napier’s explanation that the failure to make the IRD payments was a one-off mistake and would not be repeated. That was not correct. Mr Napier was hiding far more major problems.

[25] In April 2012 Mr Single received a telephone call from a distraught Mr Napier. He said he had “f...d up” by not filing the necessary returns with the IRD and the directors of the companies would be in trouble for unpaid PAYE and GST. Later that same day, Mr Single received a letter from the IRD at his home address advising him that payments of PAYE, GST, Kiwi Saver contributions and other employer deductions had not been made by either Torbay Holdings or Torbay Rest Home for over a year. The money that was owed was approximately $275,000, of which approximately $196,000 was core tax with the remainder being penalties and interest.

[26] Mr Single immediately took over the rest home finances and commenced a comprehensive investigation. Together Mr Single and Mr Williams made arrangements with the IRD to pay the core tax and interest on that sum by way of instalments. Mr Napier agreed to sell the shares owned by the Napier Family Trust in another company, Secret Squirrel Investments Limited, to Mr Single for $72,500 cash, which sum would be paid immediately to the IRD in partial satisfaction of the tax debts of Torbay Holdings and Torbay Rest Home. Mr Napier left his employment as administration manager within a month. He says he was unfairly dismissed, but he has not taken a personal grievance claim. Mrs Napier stayed on as nurse manager for another four months while investigations into the rest home

finances continued, but she too left in August 2012. Mr Napier says that she too was unfairly dismissed.

[27] As part of his investigations, Mr Single requested copies of all cheques drawn on the accounts of Torbay Holdings and Torbay Rest Home from 1 April 2005 to

30 April 2012, a period of just over seven years. He reviewed the cheques and identified what he considered to be suspect payments. These have all been set out in spreadsheets comprising one A3 page for Torbay Holdings and 28 A3 pages for Torbay Rest Home. The suspect payments totalled $71,830.78 for Torbay Holdings and $1,584,171.44 for Torbay Rest Home, making a grand total of $1,656,002.22. Mr Single also identified what he says are salary overpayments totalling

$281,086.93. He also analysed related company transactions seeking a complete picture of how the rest home business had been run by Mr Napier.

[28] As part of his investigations, Mr Single arranged for the financial accounts for the year ended 31 March 2012 to be completed. Using source documentation obtained by Mr Single, the 2012 accounts prepared by the companies’ accountant, Mr Williams, showed a loss of $319,332. According to Mr Williams, there has subsequently been a substantial turnaround in the business following Mr Napier’s departure. In 2013 the business made a profit despite substantial increases in building maintenance and legal costs. The 2014 accounts also show a healthy profit.

Credibility

[29] Before I proceed to deal with the essential issue whether there has been any misappropriation of the companies’ funds by Mr and Mrs Napier, I must record my assessment on questions of credibility. I have already made some reference to credibility when setting out the factual background.

[30] However, credibility assumes real importance in certain key areas. This is particularly the case where conflict arises between Mr Single and Mr Napier as to what had been discussed and agreed between them. Having given this matter careful consideration, I have no hesitation in concluding that Mr Single was an honest and reliable witness. His evidence accorded with the objective facts. He was careful and consistent in his approach.

[31] On the other hand, Mr Napier possesses a strong personality and is obviously a man of intelligence. However, he was inclined to perceive matters and events in a manner that was distorted so as to fit with his perception of what would suit his purposes.

[32] For example, he seized upon an unsigned and undated job description for his wife, apparently drafted in January 2010, to allege that she had “a $1,000 per day discretionary budget indicated in her employment agreement,” when the clause in the unsigned and undated job description merely stated “Authorised to purchase the requested product/service in order to maintain the current levels of daily care and resident well-being requirements up to a limit of $1,000.”

[33] Those who challenged or disagreed with him or propounded a different view were accused by Mr Napier of being duplicitous or dishonest. He accused Mr Single of covering up for serious tax evasion. He accused Mr Kayes of deliberately speaking to third parties in an attempt to reduce his access to funds so he would not be able to defend the proceeding. He accused Mr Williams of manipulating the companies’ financial statements and improperly reducing taxable income. He accused the companies’ lawyer, Luke Crawford, of abusing the summary judgment process by falsely making demand of his wife of a sum allegedly owed by her to Fairleigh Lodge Holdings.

[34] Some of Mr Napier’s evidence and explanations struck me as being contrived and not capable of belief. He acknowledged being responsible for filing Fringe Benefit Tax (FBT) returns for Torbay Rest Home, yet never did so. Although he claims he did not know what the FBT rules were, he must have known that extra benefits which he says were part of his employment package, such as gym membership, would have been subject to FBT. He had a working knowledge of PAYE and GST returns, which he filed on a regular basis as part of his financial responsibilities. Nonetheless, he says that the companies’ accountant told him that FBT returns were not required. If that was the case, he omitted to tell the companies’ accountant about the extras which he says were part of his employment package.

[35] Over the period from 2005 to 2012, Mr Napier wrote out 522 cash cheques totalling $509,341.62. The rest home is not, however, a cash business. I find Mr Napier’s evidence and explanations for the large number of cash cheques to be unconvincing and contrived. This reflects on his general credibility.

[36] Mr Napier criticises Mr Single for not engaging a suitably qualified accountant to conduct what he called a forensic audit of the rest home’s financial records. He claims that such an audit would exonerate him. This is disingenuous on Mr Napier’s part because he knows that without complete source documentation, such an audit cannot be completed. His own expert accountant, John Leonard, was clear that without the records Mr Napier says he prepared it is not possible to establish what expenses were being reimbursed. Mr Napier knows those records are not available.

[37] Where direct conflicts exist between critical parts of the evidence of Mr Napier, as opposed to that of Mr Single, Mr Kayes, Mr Williams (the companies’ accountant), and Mr Crawford (the companies’ lawyer), I am compelled to prefer the latter group’s evidence to that of Mr Napier.

Mr Napier’s employment contract

[38] Mr Napier says he agreed to take on the role of part-time administration manager for $41,500 per annum when the rest home was purchased in 2001, but never received a copy of his employment contract. He says that because he was working from home Mr Single had agreed that Torbay Rest Home would cover the cost of all power supplied to his home and the cost of all telephone accounts of himself and his wife. Mr Napier also says that a gym membership was paid for by Torbay Rest Home as part of his remuneration. As to the use of his private motor vehicle, Mr Napier says that it was initially agreed that he would be reimbursed by way of a mileage allowance as this was not subject to tax and was a deductible expense for Torbay Rest Home. Mr Napier says that after he completed the first two months’ claims, Mr Single realised how expensive this was to be for Torbay Rest Home and, accordingly, it was agreed that all Mr Napier’s motor vehicle expenses would be paid by Torbay Rest Home. Mr Napier also says that he soon found he was

working more than the agreed hours and therefore Mr Single agreed in 2002 that he would receive commission of five per cent on the sale of all units at the rest home. He says that these commissions formed part of his remuneration from April 2002.

[39] Mr Single, on the other hand, says that it was agreed that Mr Napier would only be entitled to reimbursement of reasonable telephone costs and motor vehicle expenses which related to the business of the rest home. Mr Single also acknowledged that Mr Napier was entitled to claim reasonable home office expenses such as stationery and computer costs, which may include a proportion of the power supplied to his home. Put simply, any expenses claimed by or payable to Mr Napier had to relate to legitimate rest home expenses. Mr Single specifically denies that it was agreed that any commission would be payable to Mr Napier on rest home units sales.

[40] There is a copy of a written employment contract between Torbay Rest Home Limited and Mr Napier. It is dated 11 December 2002. Mr Napier is described as an administration manager with flexible hours of employment of approximately six hours per day. His remuneration was an annual salary of $41,500 together with full reimbursement of vehicle expenses and other discretionary payments as mutually agreed between the parties. The agreement is signed by both Mr Single and Mr Napier.

[41] When questioned about the employment agreement, Mr Napier initially said he did not know whether he had actually ever signed it. He then said he thought the document should have been dated 11 December 2001: “I think that’s [2002] just a straight typo”. The agreement is a two-page document with the date 11 December

2002 on the first page. There is a facsimile record at the top of both pages which indicated that it was faxed on 13 December 2002.

[42] Mr Napier later in his evidence acknowledged that it was his signature on page 2 of the document, but continued to question its date. He also had doubts about its authenticity because the second page was not dated nor was it initialled on the first page. Mr Napier said he would love to see the version that he initialled, as he

was “pretty sure” he would have initialled it. Mr Napier therefore thought that there should be another employment agreement which Mr Single had not provided.

[43] I do not share Mr Napier’s doubts about the authenticity of the employment agreement signed by Mr Napier and Mr Single, which is dated 11 December 2002. It is the only contemporaneous document available. Mr Napier’s evidence consisted of initial denial, then obfuscation, and finally impugning others. The written employment contract does not specifically provide for Torbay Rest Home to pay all power accounts and telephone accounts of Mr Napier nor does it refer to gym membership. It does, however, provide for full reimbursement of motor vehicle expenses and other discretionary payments as mutually agreed between the parties. I accept that Mr Napier was therefore entitled to reimbursement of telephone costs and motor vehicle expenses incurred in the conduct of rest home business, together with limited home office expenses as agreed by Mr Single. Although the employment agreement refers to full reimbursement of vehicle expenses, it is an implied term of the agreement that those expenses must relate to rest home business. It cannot have been the intention of the parties that Torbay Rest Home would pay for the unlimited private use of a motor vehicle by Mr Napier.

[44] I am also of the view that there was no agreement for the payment of commission on the sale of rest home units as claimed by Mr Napier. He says that this agreement was reached with Mr Single in April 2002. If that agreement was reached with Mr Single in April 2002, it would undoubtedly have been specifically provided for in the employment contract dated 11 December 2002. It is not. The contract merely lists “management of apartment sales” as one of Mr Napier’s responsibilities. Mr Napier has not been able to point to any e-mail, document, settlement statement or invoice which supports his evidence that a commission was payable. I reject his evidence on this issue in its entirely.

Mrs Napier’s employment contract

[45] Mrs Napier chose not to give evidence, and there was no effective challenge by Mr Napier to Mr Single’s evidence about the terms of her employment contract. Although Mr Single has not been able to locate a copy of Mrs Napier’s written

employment contract, he says that Mrs Napier’s initial salary was $52,000 per annum, which reflected the fact that she was not working full-time at the rest home as she continued to be employed as a part-time nurse tutor at UNITEC. She also had the use of three different company cars over the relevant period, each of which was purchased new and in respect of which all servicing was paid for by Torbay Rest Home. Her reasonable petrol costs and other business related expenses such as her mobile phone were also paid by the company. Finally, Mr Single says that Mrs Napier’s salary was increased regularly over the relevant period by $2,000 increments, such that by 2012, the salary for her part-time role as nurse manager was

$60,000. There is no claim that Mrs Napier was entitled to any other payments, either as commission or otherwise.

Declared income

[46] Although Mr and Mrs Napier had been appointed on individual salaries, Mr Napier, who was responsible for the payment of the wages and salaries of all rest home employees, did not keep their own salary payments separate. Instead, it appears that Mr Napier combined their salary entitlements and then split payments between the Napier Family Trust, himself and his wife. For example, there were regular fortnightly payments coded as wages between 5 April 2006 and 13 December

_{2006 as follows:}

This is broadly consistent with a combined salary of $94,000, with tax deducted at the lowest tax rate of 19.5 per cent.

[47] However, in subsequent years the amounts paid by Mr Napier to the Napier Family Trust, himself and his wife varied considerably and increased substantially. For example, the following payments coded as wages were made in five consecutive fortnightly periods in 2011:

Occasionally, other payments made as wages were made, but not as part of the fortnightly payroll process.

[48] The substantially increased salary payments are, however, just part of the overall picture. For example, on 14 September 2011, when Mr Napier paid himself and his wife $6,019.56 coded as wages, he also wrote out a Torbay Rest Home cheque in the sum of $3,419.80. This was used to pay a personal expense, being an interior design consultant employed by Mr Napier and his wife in the construction of their new house at Whangaripo Valley Road. On the same day, Mr Napier also cashed two other cheques made payable to cash, drawn on the account of Torbay Rest Home in the sums of $1,240.91 and $1,595.00. In total therefore, on that one day, 14 September 2011, Mr Napier and his wife obtained the benefit of $12,275.27.

[49] Mr Napier did not explain the considerable variations in salary payments, but sought to justify the substantial increase in the amount of salary paid overall on the basis that Mr Single had agreed that Torbay Rest Home would pay five per cent commission on the sale of all units. He claims that this was part of his salary from April 2002 and was subject to PAYE. I have already rejected Mr Napier’s claim. As noted above, the fortnightly total paid as wages for the eight month period between April and December 2006 remained constant at $2,910.16. Yet within that same period, two units were sold for sums in excess of $100,000 each in August and September 2006. If Mr Napier’s claim is correct, then commission in excess of

$10,000 would have been paid or payable to Mr Napier. There is however no record of any such payment or any calculation of any amount owing or any change to the fortnightly total paid as wages.

[50] Torbay Rest Home has been able to obtain from the IRD monthly details of the income which Mr and Mrs Napier declared as having been received from Torbay Rest Home. Over the relevant seven year period, Mr and Mrs Napier declared the

receipt of a combined income of $975,753.59 from Torbay Rest Home. Mr Single has, however, calculated that based on their agreed salaries, Mr and Mrs Napier should only have received $694,666.58 or a little under an average of $100,000 per annum.

[51] For example, for the financial year ended 31 March 2010, Mr Napier declared income of $93,956.00, notwithstanding the salary shown on his employment contract of $41,500. The amounts declared by Mr Napier varied considerably from month to month in that year and ranged from $4,692.00 (January

2010) to $17,461.00 (August 2009). Mrs Napier declared income of $64,554.00 for the same financial year, which is also approximately $6,500 in excess of her agreed salary. These declared incomes do not reflect the actual amounts received by Mr Napier and his wife in the financial year ended 31 March 2010 because they were income splitting, that is, choosing to pay most of their income directly to the Napier Family Trust. The Napier Family Trust received $65,900 in the financial year ended

2010, after the deduction of income tax on Mr and Mrs Napier’s declared salaries.

[52] I find as a matter of fact that Mr Napier overpaid himself and his wife

$281,087.01 over the relevant seven year period. This is the sum of their income declared to the IRD, less their agreed salaries. This is also consistent with the total payments coded as wages which went to the Napier Family Trust, Mr Napier and Mrs Napier, less their agreed salaries as calculated by Mr Single.

Reimbursement or payment of company expenses

[53] Mr Napier explained the process he followed for the reimbursement of company expenses as follows. He listed the amounts that he had personally spent in cash or on his personal credit card on an A4 piece of paper with the appropriate expense account listed beside it, that is, food, motor vehicles, repairs and maintenance. He then totalled the expenses. If there were sufficient funds available in the Torbay Holdings or Torbay Rest Home bank account he would write out a cheque for the sum owed to him, which he then coded against a creditor account called National Bank. The cheques could be made out to cash or to himself

personally or to a third party creditor, such as the builder who was constructing a new house for him and his wife at Whangaripo Valley Road.

[54] If there were insufficient funds available in the Torbay Holdings or Torbay Rest Home bank account, he would then write the sum owed to him and yet to be reimbursed on another A4 piece of paper. This was an account that he balanced to reimburse himself for expenses incurred personally on behalf of Torbay Holdings or Torbay Rest Home when sufficient funds were available.

[55] Mr Napier says that he placed all receipts in bank coin bags and retained them in a cardboard storage box. The A4 pieces of paper were filed in two separate ring binders, which he says were handed to Mr Single. Mr Napier says he has not seen those ring binders since he handed them to Mr Single, nor have they been provided by the plaintiffs in the discovery process. He applied for further discovery, but no reimbursement schedules have been provided. He believes they are under the control of the plaintiffs.

[56] Mr Napier says that Mr Single had instigated this procedure and was fully aware of the process. He says no company credit card or company fuel card was ever issued to him and because retail stores and petrol stations would not accept cheques, he had “no choice from June 2001, but to follow this procedure”.

[57] I specifically reject Mr Napier’s claim to have handed the two separate ring binders containing the reimbursement schedules to Mr Single, if they ever existed. If they had been handed to Mr Single, he would have realised their significance in resolving the issues surrounding the very large number of suspect payments drawn on the Torbay Holdings and Torbay Rest Home bank accounts. Mr Napier attributes a malign motive to Mr Single in not disclosing the reimbursement schedules, but from the outset Mr Single clearly hoped that the missing money was all a mistake and not something more sinister. Mr Single wrote to Mr Napier on 7 May 2012:

It is my sincere hope that we are dealing with a gross dereliction of duty and some form of problem with MYOB. The magnitude of the problem is such that we must undertake a thorough review...

There is little doubt that the next month will be extremely stressful and as discussed I am concerned for you. We need to continue to work together to

resolve matters, but I ask “Duncan is there anything you wish to tell me that will help explain this situation”.

[58] As noted above, Mr Single requested copies of all company cheques over the relevant seven year period. He reviewed the cheques and identified what he considered to be suspect payments. He then requested bank traces on these suspect payments. These have all been set out in spreadsheets - comprising one A3 page for Torbay Holdings and 28 A3 pages for Torbay Rest Home. These were compiled by an accountant from Deloitte.

[59] As an example, in one six week period between 6 October 2011 and

21 November 2011, Mr Single identified 61 suspect cheque payments. These ranged from $44.70 to $6,454.12. The cheques totalled $97,616.49, or an average of $1,600 each. 38 of the 61 cheques were made out to cash and were cashed by Mr Napier. The cash cheques totalled $58,849.87. 10 of the 61 cheques were traced to Mr Napier’s bank account or a joint account of Mr Napier and his wife. The cheques made out to Mr Napier or to Mr Napier and his wife totalled $17,333.34. Finally, 13 of the 61 cheques were paid to third parties. The cheques made out to third parties totalled $21,433.28.

[60] Mr Napier claimed that all the cash cheques he wrote were either to reimburse himself for expenses he had paid on behalf of Torbay Rest Home or to pay third parties who had supplied goods and services to the rest home. He also claimed that the cheques traced to his bank account, or the joint bank account with his wife, were also reimbursements for expenses he had paid on behalf of Torbay Rest Home. Finally, Mr Napier claimed that the cheques traced as being paid to third parties were also either reimbursement for expenses which he had paid on behalf of Torbay Rest Home, or which were payable as part of his employment agreement, or which were to pay third parties who had supplied goods and services to the rest home.

[61] Mr Napier acknowledged that his primary means of paying third parties who had supplied goods and services to Torbay Rest Home was by using his personal ASB Visa credit card. Over the same six week period between 6 October 2011 and

21 November 2011, Mr Napier had used his card to make 188 separate purchases.

They ranged from $3.77 at New World Albany to $3,074 at Good Guys Wairau

Valley. The purchases totalled $31,824.50 or an average of $169.28 each.

[62] Mr Napier was asked in evidence to review all the cheques and the credit card statements for the same six week period. By comparing the date and amount of the cheques with entries on his credit card statements, Mr Napier was able to identify three of the 38 cash cheques. On 31 October 2011, he had cashed a cheque for

$1,113.49, which corresponded to a purchase, three days earlier on 28 October 2011, shown on his credit card statement of $1,113.49 from North Harbour Hyundai. He claimed that this was a legitimate expense of Torbay Rest Home. Also on

31 October 2011 he had cashed a cheque for $1,954.65, which also corresponded to a purchase three days earlier on 28 October 2011, shown on his credit card statement of $1,954.65 from a law firm, Armstrong Murray. Mr Napier could not recall if this was a personal expense or a rest home expense. If it was a personal expense, he claimed it was in reimbursement of an expense or expenses for the rest home which he could not now recall or reconstruct from the available records. Finally, on

3 November 2011, Mr Napier had cashed a cheque for $3,074 which corresponded to a purchase three days earlier on 30 October 2011, shown on his credit card statement of $3,074 from the Good Guys in Wairau Valley. He said this was for the purchase of two new fridges for the rest home prior to the Ministry of Health audit in November 2011.

[63] Mr Napier was not able to identify who received the cash sums totalling

$52,707.73 from the remaining 35 cash cheques which were cashed by him over the six week period, nor was he able to point to any receipts or entries on his credit card statements, which either singly or together may have been reimbursed by the cash cheques. He did explain however that because of the tight cash flow of Torbay Rest Home, he had saved up receipts until such time as the rest home was in a position to be able to reimburse him.

[64] Despite identifying three of the 38 cash cheques, Mr Napier was not able to point to any receipts or entries on his credit card statements which either singly or together might have been reimbursed by the 10 cheques totalling $17,333.34 which were traced to his account or the joint account of himself and his wife.

[65] As noted above, there were also 13 cheques totalling $21,433.28 traced as being paid to third parties. Of the 13 cheques, Mr Napier identified six as relating to expenses of Torbay Rest Home, three as being payable in terms of his employment contract and two as relating to the construction of the new house for him and his wife at Whangaripo Valley Road. He did not know whether the remaining two cheques represented personal or rest home expenses. Mr Napier claimed, however, that those cheques made out to third parties involved in the construction of his new house were in reimbursement of expenses he had incurred on behalf of the rest home.

[66] Mr Napier was also asked in evidence to review all 188 purchases shown on his credit card statements for the same six week period. Of the goods and services totalling $31,824.50 purchased by him, Mr Napier identified a total of $19,418.52 as relating to expenses of Torbay Rest Home and a total of $6,846.36 as personal expenses. He could not recall whether purchases of $5,559.62 represented personal or rest home expenses or a mixture of both.

[67] I certainly have my doubts about the accuracy of Mr Napier’s identification of a number of cheques payable to third parties and a number of purchases shown on his credit card statements as being likely rest home expenses. For example, cheques for $2,132.40 paid to Matakana Kitchens and Joinery Limited on 10 October 2011 and $5,124.54 paid to Crane Distribution NZ Limited, a plumbing wholesaler and retailer, on 7 November 2011 are more likely to be for goods and services supplied to Mr Napier in the construction of his new house, rather than rest home expenses. Mr Napier has not been able to provide any invoices or receipts for these amounts. Similarly, there are a number of purchases on Mr Napier’s credit card statements which are more likely to be his personal expenditure, rather than rest home expenses as claimed by him. These include a purchase of $440 from Mico Plumbing and Pipeline on 29 October 2011 and a payment of $500 to Mahurangi College, where Mr Napier’s sons went to school, on 4 November 2011. Again, Mr Napier has not been able to provide any invoices or receipts for these amounts.

[68] In these comments, I do not seek to impose any burden on Mr Napier. The plaintiffs retain the burden of proving their case, but the plaintiffs never had

possession of Mr Napier’s credit card receipts, notwithstanding Mr Napier’s claims

to the contrary.

[69] Even giving Mr Napier the benefit of every doubt and accepting his explanations in their totality, he is unable to account for approximately half (in excess of $48,000) of the total sum of $97,616.49 which he wrote out in company cheques, over a six week period. Those are simply the company cheques from that period which have been identified by Mr Single as suspect.

[70] Clearly, there is a substantial gap between the amounts which have been claimed as reimbursements and the actual, traceable expenditure by Mr Napier.

Fruit and vegetable supplier

[71] During the course of his investigations Mr Single became aware of an unpaid account for the supply of fruit and vegetables to the rest home for a sum of

$37,156.92, which had been unpaid for two and a half years. Mr Single was initially sceptical, thinking it simply could not be true, but the supplier was adamant their invoices had not been paid. Mr Single therefore checked the bank reconciliations and requested copies of the cheques which had been coded as payments to the fruit and vegetable supplier.

[72] In the bank reconciliations dated 12 December 2011, 19 December 2011 and

23 December 2011, Mr Napier had coded the following cheques as payments to the fruit and vegetable supplier:

[73] When copies of the cheques were obtained from the bank, it was ascertained

_{that the cheques had been written out by Mr Napier to the following payees:}

[74] Mr Napier had signed the rear of the cash cheques indicating that he had presented them at the bank and obtained the cash sums for which the cheques had been made out. CJS Builders were the builders who were constructing the new house for Mr Napier and his wife at Whangaripo Valley Road.

[75] When he ascertained this, Mr Single instructed his lawyers to write to Mr Napier’s lawyers seeking an explanation. Mr Crawford therefore wrote to Mr Napier’s lawyer by letter dated 14 September 2012. Mr Napier’s lawyer did not reply. At trial, Mr Napier said that Torbay Rest Home did not have a trade account with the fruit and vegetable supplier, but that he had paid the account monthly and “left the balance in the creditor file until I reimbursed myself”. In effect, Mr Napier said that the above cheques were reimbursements of accounts he had previously personally paid to the fruit and vegetable supplier.

[76] I do not accept Mr Napier’s explanation as credible. First, the average monthly account from the fruit and vegetable supplier was in the region of $2,500. The cheques coded as payments to the fruit and vegetable supplier in December 2011 totalled $28,979.68, or over 11 months supplies. Mr Napier says that he did not reimburse himself until there were sufficient funds in the Torbay Holdings or Torbay Rest Home bank account to do so. However, the debiting of cheque number 106603 on 19 December 2011 for $8,016.65 payable to CJS Builders brought the Torbay Rest Home account to $56,053.58 OD.

[77] The balance of the account on the 19^th of each of the previous 10 months was:

[78] The Torbay Rest Home bank account was therefore less overdrawn on the

19^th of each of previous ten months, which indicates to me that Mr Napier could easily have reimbursed himself earlier.

[79] Secondly, Mr Napier did not produce any receipts for the payments for which he said he was reimbursing himself. He did, however, provide two earlier receipts from the fruit and vegetable supplier dated 4 and 8 February 2010, which are consistent with the advice given to Mr Single by the supplier that he had not been paid since mid-2010.

[80] Thirdly, Mr Napier did not produce any reimbursement schedules he said he had completed at the time. I have already rejected Mr Napier’s explanation that he gave the reimbursement schedules to Mr Single.

[81] Fourthly, there is no rational explanation for writing three separate cheques for cash sums totalling $11,176.10 on the same day, 5 December 2011, if they were all for reimbursement of payments made by Mr Napier to the same fruit and vegetable supplier, unless it was to disguise the total cash sum withdrawn by Mr Napier on that day.

[82] Fifthly, if there truly were insufficient funds available to reimburse Mr Napier for legitimate rest home expenses, an honest administration manager would have raised the issue with his fellow directors and sought agreement from them on

measures to ensure that legitimate rest home debts were paid promptly. He did not do so.

[83] Sixthly, if Mr Napier had not been reimbursed for many months for legitimate rest home expenses which he had paid using his personal credit card, he would have been incurring interest costs on his credit card balance. He did not however claim such interest costs, which is inconsistent with his claims of delayed reimbursement.

[84] Mr Single subsequently made arrangements to pay the fruit and vegetable supplier from Torbay Rest Home funds by instalment over a number of months.

Whangaripo Valley Road property

[85] In 2009, Mr Napier and his wife purchased a 20.8 hectare lifestyle block of land at Whangaripo Valley Road, Wellsford. They paid $475,000 for the land using a loan for that amount from the ASB Bank. This was a year after Mr Napier became a director of Torbay Holdings and Torbay Rest Home, having successfully completed a scheme of arrangement with his creditors.

[86] Mr Napier and his wife then decided to build a new 382 m² house on the property and lodged plans with the Auckland Council in November 2010. Building consent was granted in February 2011 and construction started shortly after that. The new house was completed within a year. A Code Compliance Certificate was issued by the Council in January 2012.

[87] The plaintiffs instructed a quantity surveyor to estimate what it would have cost in 2011 to have built the house specified in plans lodged with Council. Their cost estimate was $1,425,904.71 or approximately $3,700/m².

[88] Mr Napier disputes the cost estimate. He says that the house cost half the quantity surveyor’s estimate or approximately $700,000. He says that the Napier Family Trust borrowed a further $640,000 from the ASB Bank to complete the construction of the house, so that the funds injected by him and his wife personally were minimal.

[89] Mr Napier produced little documentation at trial in support of his claims. The most relevant was an estimate from the builder, CJS Builders, dated 10 December

2010, which gave a total estimate of $688,094.13. The estimate specifically stated that no allowance was made for tanks or pumps, kitchen, floor coverings other than tiles, exterior paving, door hardware, handles etc. Mr Napier also produced two other documents, an invoice from Metalcraft Roofing for $34,231.28, showing a different specification for the roofing material from that specified in the plans lodged with the Council and an invoice from a blocklayer for $8,734.25.

[90] Mr Napier spent some time going through the builder’s estimate explaining what had and had not been changed. However, it would have been a simple matter for Mr Napier to have produced his complete building file in order for the house cost to be more accurately calculated. He chose not to do so, which is consistent with his approach of resisting discovery and disclosing only the minimum documentation which would suit his purposes. In the discovery process, Mr Napier only disclosed invoices totalling about $457,000, which were mainly from the builder and Timberworld, the supplier through which the builder sourced most of his materials. Mr Napier did not call the builder to give evidence at trial.

[91] Mr Single has identified the following cheques as having been written out by Mr Napier on the bank accounts of Torbay Holdings and Torbay Rest Homes, which he says were obviously used to pay in part for the construction of his new house at Whangaripo Valley Road:

[92] Mr Single identified two more cheques, payable to CJS Builders and S M Gravitt trading as Pakiri Builders, in April 2012 as being used to pay in part for the construction of the house at Whangaripo Valley Road, but Mr Napier was adamant that these payments were for work done at the rest home. I accept Mr Napier’s evidence on this point as the payments were made three months after Auckland Council issued a Code Compliance Certificate for the house.

[93] Mr Napier says that all these cheques were reimbursements to him for personally paying legitimate expenses of Torbay Rest Home. They amount to over

$100,000 in the 14 month period. These are in addition to the very large number of cash cheques or cheques made out to himself and/or his wife. Over the same period

(March 2011 to April 2012) cash cheques from Torbay Holdings and Torbay Rest Homes totalled $298,991.99, while cheques written out to himself and/or his wife totalled $104,750.15. These amount to over $500,000 or in excess of $8,400 per week. Mr Napier claims that these all represent legitimate rest home expenses which he has paid. His claim is just not credible. I accept that the $101,473.38 paid to third party suppliers using Torbay Holdings and Torbay Rest Homes cheques were payments for goods or services in relation to the construction of a new house on Mr and Mrs Napier’s property at Whangaripo Valley Road.

[94] Apart from the large number of cheques drawn on the account of Torbay Holdings and Torbay Rest Home and made payable to third parties involved in the construction of Mr and Mrs Napier’s new house at Whangaripo Valley Road, it is instructive to look more closely at Mr and Mrs Napier’s bank statements. As an example, on 6 October 2011 the balance of Mr and Mrs Napier’s joint bank account was $244.02. Four deposits totalling $10,766.70 were made on 11 and 12 October

2011. Then on 12 October 2011, a payment of $10,959.50 to CJS Builders was debited to the account. After the payment of $10,959.50 to CJS Builders, the balance of the account came back down to $101.22. The payment to CJS Builders had therefore, in effect, been funded by four deposits totalling $10,766.70 on 11 and

12 October 2011.

[95] The first deposit on 11 October 2011 was the sum of $3,980.50. On that day, Mr Napier had written two cash cheques on the account of Torbay Rest Home – one for $2,239.71 and the other for $1,740.81, together totalling $3,980.52. It appears that, having cashed the cheques, Mr Napier immediately deposited the same sum into the bank account of himself and his wife. As to the second deposit, Mr Napier arranged for the direct credit of the sum of $4,350 from the account of Torbay Rest Home into the bank account of himself and his wife, also on 11 October 2011. Mr Napier has coded the payment as wages even though the payment was outside the normal fortnightly payroll process. In fact, a further $3,653.95 was paid by direct credit from the account of Torbay Rest Home into the bank account of Mr Napier and his wife the very next day – 12 October 2011. This was also coded as wages, but was part of the normal fortnightly payroll process. This is in itself a

marked increase from the sum of $1,990.47 that Mr Napier had paid himself in the fortnightly payroll payment processed on 28 September 2011.

[96] The third and fourth deposits were the sums of $2,136.20 and $300 respectively, being a deposit and a transfer from another account of Mr and Mrs Napier on 12 October 2011. On that day, Mr Napier wrote another cash cheque drawn on the account of Torbay Rest Home for $2,486.15, $50 more than the sum of the two deposits. Mr Napier has not supplied copies of bank statements showing activity at the time on the account from which the $300 was transferred, but it can be inferred that the deposit of $2,136.20 was sourced from the cash cheque written out by Mr Napier on the same day.

[97] I am therefore of the view that of the payment of $10,959.50 to CJS Builders on 12 October 2011, $10,766.70 was directly funded by money sourced from Torbay Rest Home.

[98] As to the two cash cheques for $2,239.71 and $1,740.81 written out by Mr Napier on 11 October 2011, there does not appear to be any substantial purchases made by Mr Napier for the rest home on his personal credit card in the previous days which would warrant that level of reimbursement. Mr Napier’s purchases from

1 October 2011 are recorded as follows:

[99] Mr Napier acknowledged that the largest payment listed above, a purchase from Lighting Direct of $1,508.84 on 6 October 2011, was a personal expense relating to the construction of his new house at Whangaripo Valley Road, but unconvincingly claimed that a further purchase from Lighting Direct of $381.86 three days later, on 9 October 2011, was a rest home expense. Mr Napier also acknowledged that the purchases from Gilmours North Shore and New World Warkworth could be personal or a mixture of personal and rest home expenses. He claimed all expenditure at service stations was payable by Torbay Rest Home as part of his and his wife’s employment contracts.

[100] On the other hand, Mr Single acknowledged that the payment of $409.00 to Pak’n Save Albany on 5 October 2011 would have been a legitimate rest home expense, as would a proportion only of the petrol cost component of purchases from service stations dated 4 October (x 3), 7 October, 8 October and 10 October 2011.

[101] I have already rejected Mr Napier’s claim to be entitled to five per cent commission on the sale of all rest home units. The payment of $4,350 coded as wages on 11 October 2011 was therefore irregular, being outside the normal fortnightly payroll process and cannot be justified on any level. It was clearly an unauthorised payment.

[102] As to the cash cheque for $2,486.15 written out by Mr Napier on 12 October

2011, part of the sum appears to be justified as reimbursement of legitimate rest

home expenses, because on the same day Mr Napier used his credit card to purchase meat to the value of $985.96 from the Browns Bay Butchery. Mr Napier’s purchases

_{on 12 October 2011 are recorded as follows:}

[103] Mr Napier claimed that the three separate purchases at Shell Northcross and Shell Greville Road on 12 October 2011 were payable by Torbay Rest Home as part of his and his wife’s employment contracts. He also claimed that the expenditure at the Wine Box Café was a rest home expense, could not remember the Platter expense, but acknowledged that the purchases at New World Warkworth and the Village Bookshop on 12 October 2011 were personal expenses.

[104] I have recorded above that Mr Napier wrote out cash cheques for $2,239.71 and $1,740.81 on 11 October 2011 and $2,486.15 on 12 October 2011, which together with a wages payment of $4,350 on 11 October 2011, in effect, funded a payment to CJS Builders of $10,959.50 on 12 October 2011. However, he also wrote out cash cheques for:

(a) $600 on 5 October 2011;

(b) $1,969.00, $1,654.00 and $1,171.50 on 6 October 2011; (c) $1,971.60 and $1,869.50 on 7 October 2011; and

(d) $1,731.45 on 10 October 2011.

[105] Mr Napier also paid Dominator Rodney Limited $506.00 on 3 October 2011 and Matakana Kitchens and Joinery Limited $2,132.40 on 10 October 2011. Those

cheques were drawn on the account of Torbay Rest Home, as was a cheque made out to himself on 7 October 2011 in the sum of $1,260.00.

[106] Comprehensive evidence matching cash cheques with payments into the bank account of Mr and Mrs Napier has not been provided. Despite this, the analysis above highlights an example of a payment relating to the construction of Mr and Mrs Napier’s new house at Whangaripo Valley Road which was funded by money from Torbay Rest Home. I have found that $101,473.38 was paid directly to third party suppliers of goods and services relating to the construction of the new house at Whangaripo Valley Road using Torbay Holdings and Torbay Rest Homes cheques, and that a payment of at least $10,766.70 to the builder of the new house was sourced from cash deposits into the bank account of Mr and Mrs Napier.

Indebtedness of Mr and Mrs Napier and Napier Family Trust

[107] By the end of 2011, Mr and Mrs Napier and the Napier Family Trust had substantial debt levels. It is also obvious that Mr Napier and his wife were living well beyond their means. For instance in the month of December 2011, the Napier Family Trust made loan repayments of principal and interest totalling $10,399.80, while Mr and Mrs Napier made loan repayments of $4,500. Mr Napier and his wife also had three credit cards right at their credit limits, with one at $30,000 and two at

$21,300, in respect of which they paid interest of $1,175.94. In total, therefore, Mr and Mrs Napier and the Napier Family Trust paid $16,075.74 in respect of their various loans in December 2011 alone.

[108] Mr and Mrs Napier’s combined annual income at the time, according to their employment agreements with Torbay Rest Home, was $101,500 or a gross monthly income before tax of $8,458. In other words, Mr and Mrs Napier paid twice their gross monthly income in repayments of principal and interest in December 2011. However, as recorded above, Mr Napier overpaid his own and his wife’s salary. In December 2011, he paid himself and his wife and the Napier Family Trust a net

$12,575.91 after tax. But even that was insufficient to meet the repayments of principal and interest on their various loans in December 2011.

[109] Mrs Napier’s bank statement for the month of December 2011 is unavailable, but when she was teaching at UNITEC she received a net income of approximately

$1,500 a month. It is not known whether she received that sum in December 2011.

[110] In the month of December 2011, as identified above, Mr Napier also wrote out a number of cheques drawn on the Torbay Rest Home account, payable to suppliers of goods or services relating to the construction of his new house at Whangaripo Valley Road. These totalled $18,315.05.

_{[111] Mr Napier also wrote out 20 cash cheques as follows in December 2011:}

[112] As noted, Mr and Mrs Napier and the Napier Family Trust had substantial loans with the ASB Bank. On 15 December 2011, the Napier Family Trust’s bank account was due to be debited with repayments of principal and interest totalling

$3,466.60 in respect of five different loans, numbered 01, 02, 03, 06 and 07. The Trust’s account balance, however, stood at $42.39. Mr Napier therefore deposited the sum of $3,951.90 into the account on 15 December 2011. I infer that this was the cash cheque listed above in the sum of $3,951.89 drawn on the account of Torbay

Rest Home and cashed by Mr Napier on 15 December 2011. Also on the same day, Mr Napier arranged for a deposit of $300 into the account from Torbay Holdings. Then on 17 December 2011, Mr Napier arranged for a payment of $800 to his wife’s ASB Visa credit card, which was at its credit limit of $30,000. Once that payment was made the balance of the Napier Family Trust account came back down to

$27.69.

[113] A similar sequence of events occurred when substantial repayments of principal and interest were due on 29 December 2011. On 29 December 2011 the balance of the account was $27.69. On that day Mr Napier deposited the sum of

$4,000, having cashed a cheque in the sum of $4,430.98 drawn on the account of Torbay Rest Home on the same day. Again, I infer the deposit came from the cash cheque.

[114] In addition to the 20 cash cheques listed above, Mr Napier also wrote out the following cheques drawn on the Torbay Rest Home account, either to himself and to

_{himself and his wife, in December 2011:}

Misappropriation of company funds

[115] Coming to the key issue in this case, drawing on the close analysis I have done of the transactions above, I have no doubt that Mr Napier has misappropriated company funds to which he was not entitled. The following factors have all contributed to my conclusion:

(a) Mr Napier cashed a large number of cheques totalling $509,341.62, which are now impossible to trace or reconcile.

(b) If cash cheques were used by Mr Napier as reimbursements for rest home expenses, there would be no need to write out separate cash cheques all on the same day, and cash them separately. If these were for reimbursement, it would make more sense to total them and write one cheque.

(c) The number and amount of cheques cashed, made payable to Mr Napier or Mr Napier and his wife, and made payable to third parties increased substantially when Mr and Mrs Napier were building their new house at Whangaripo Valley Road. The increase in cash

_{cheques alone was as follows:}

Mr Napier says that the reimbursement process remained the same since the rest home was bought in 2001. The substantial increase in cash cheques suggests otherwise.

(d) The debts of Mr and Mrs Napier and the Napier Family Trust were unsustainable on the legitimate income earned by Mr and Mrs Napier from Torbay Rest Home.

(e) False coding was used in the MYOB accounts. For example, in a reconciliation report of 19 December 2011, Mr Napier coded a cheque, dated 19 December 2011 for $8,016.65 made payable to CJS Builders (the builders who were constructing his new house at Whangaripo Valley Road) as a payment to a fruit and vegetable supplier. If it was a reimbursement of company expenses, it should have been coded as such. In the same reconciliation report, two other cheques dated the same day for $1,155.96 and $834.00 made payable

to D Napier were also coded as payment to a fruit and vegetable supplier. Another example is a cash cheque for $381.96 dated

9 December 2011 coded to a meat supplier, but traced to the bank account of CJS Builders.

(f) Mr Napier’s claim that he was entitled to commission on the sale of rest home units is rejected. There is no evidence whatsoever to support it.

(g) The considerable variation and substantially increased amounts paid to Mr and Mrs Napier and the Napier Family Trust, coded by Mr Napier as salaries, are not consistent with proper regular and consistent salary payments.

(h) The mixing of personal and rest home expenses on Mr Napier’s personal credit card has made the reconciliation of expenses impossible. Mr Napier acknowledges that some purchases shown on his credit card statement, such as from New World Warkworth may have included purchases of food for his family as well as the rest home. An honest administration manager would have made every effort to separate out personal and business expenses.

(i) Mr Napier was very obstructive at the first meeting with Mr Single and his wife following the notification from the IRD in April 2012. Mr Napier refused to allow Mr Single to look at the company accounts on the computer or to take it away to be inspected. Mr Napier deliberately dropped company bank statements on the floor and shuffled them up with his hands. Mr Napier said he could not find other records. He blamed his predicament on the accounting software package, MYOB.

(j) Mr Napier has continued to be obstructive throughout the discovery process. In evidence, he acknowledged going to the rest home in June

2012 and removing box files of receipts, but says he left the all-

important reconciliation schedules behind. This is inconsistent with his claim in the brief of evidence he read to the Court, in which he said the folders containing the reconciliation schedules were handed to Mr Single. He claims that the plaintiffs must now be in possession of them and have failed to disclose them. I reject that claim. The plaintiffs would have disclosed them if they had them.

[116] Mr Napier was able to conceal the misappropriation of the companies’ funds for many years, initially by withdrawing money which would otherwise have been company profit. He also used a $130,000 loan facility, obtained from the bank to buy back a rest home unit, a purchase which did not proceed. Then Mr Napier curtailed legitimate rest home expenses. No wage increases were given to staff and maintenance was deferred. In the latter stages of the misappropriation, suppliers such as the fruit and vegetable supplier were not paid or were paid late, and tax payments were not made. It was the non-payment of substantial amounts of tax which finally lead to the misappropriation being exposed.

Quantum of losses

[117] Having determined that Mr Napier has misappropriated company funds to which he was not entitled, the issue then arises as to how to assess the quantum of the losses to Torbay Holdings and Torbay Rest Home. This assessment is separate from the calculation of salary overpayments.¹

[118] In Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd the plaintiff sought to recover money which had been paid to a company (TPL) on trust, where that money had been paid into another company (VTFL) and mixed with VTFL’s money, whose accounts were such a “black hole” and a “maelstrom” that the money was indistinguishable. The Master of the Rolls, Lord Neuberger of Abbotsbury MR (with whose judgment Richards and Hughes LJJ concurred) set out the traditional

_{law in such cases as follows:}²

¹ _{See [52].}

2. Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2011] 3 WLR 1153.

138. ... I do not doubt the general principle, reiterated by Lord Millett in Foskett [2000] UKHL 29; [2001] 1 AC 102, that, if a proprietary claim is to be made good by tracing, there must be a clear link between the claimant's funds and the asset or money into which he seeks to trace. However, I do not see why this should mean that a proprietary claim is lost simply because the defaulting fiduciary, while still holding much of the money, has acted particularly dishonestly or cunningly by creating a maelstrom. Where he has mixed the funds held on trust with his own funds, the onus should be on the fiduciary to establish that part, and what part, of the mixed fund is his property. Unless constrained by authority, I should therefore be very reluctant to accede to the defendants' case on this point. In fact, it seems to me that authority actually supports my view.

139. In Cook v Addison (1869) LR 7 Eq 466, 470 Stuart V-C said this:

"It is a well-established doctrine in this court, that if a trustee or agent mixes and confuses the property which he holds in a fiduciary character with his own property, so as that they cannot be separated with perfect accuracy, he is liable for the whole."

Ungoed-Thomas J considered and applied this principle in Re Tilley's Will

Trusts [1967] Ch 1179, saying this:

"The words in that passage 'so as that they cannot be separated with perfect accuracy' are an essential part of the Vice- Chancellor's proposition, and indeed of the principle of Lupton v. White. If a trustee mixes trust assets with his own, the onus is on the trustee to distinguish the separate assets, and to the extent that he fails to do so they belong to the trust."

...

141. It seems to me to follow from this that both principle and authority establish that, as Lewison J concluded, once it is shown that money held on trust for TPL was paid into a "maelstrom" account, the administrative receivers, representing VTFL for this purpose, bear the burden of showing that money in that account is not that of TPL. Both legal principle and fairness to other creditors of the defaulting fiduciary suggest that the extent of that burden should not be other than the normal civil standard of proof, namely the balance of probabilities. So, if, after considering the evidence, the court concludes that it is more probable than not that a particular sum of money held in the name of in VTFL is not attributable to any of the funds held by VTFL on trust for TPL or its identifiable substitute, then the court should refuse any tracing remedy in respect of such money.

(emphasis added)

[119] Although the major finding in Sinclair has been overruled,³ this summary of the law in this area has not been challenged on appeal in the United Kingdom. This

³ FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250 overruled Sinclair to the extent that Sinclair found that that beneficiaries were not entitled to trace profits made from bribes or secret commissions obtained by breaches of fiduciary trust.

approach would suggest that, if it could be shown that Mr Napier committed a breach of fiduciary duty, he would be obliged to prove that the money deposited into his bank accounts was the reimbursement of legitimate rest home expenses. If this could not be proved, the money would be treated as trust money.

[120] However, in a New Zealand context, the Privy Council has seen the principle as being slightly more limited. In Ryde Holdings Ltd v Rainbow Corporation Ltd, the Privy Council took a broad approach to assessing the profits which should be attributed to a breaching fiduciary.⁴ In that case, there was no ability to ascertain the actual amount of profit made through the breach. Lord Mustill said that the practical foundation of the rule in these cases was simply that “trustees should not be allowed to profit from a breach of their duties of fidelity.”⁵ His Lordship stated:⁶

If, through the trustee's own act, it is completely incapable of ascertainment, even to the extent of a rational approximation, so that the choice lies between holding a trustee liable for nothing and holding him liable for all, the latter course must be chosen. This is rough justice, applied for want of a better solution. But the doctrine cannot be pressed so far as to demand that in every case where precise arithmetical computation is impossible the whole of the mingled profits must be awarded to the beneficiary, for this would be, not rough justice but no justice at all. It would not only deprive the trustee of his unwarranted gains but would impose a fine as well: a fine which in the present case would amount to millions of dollars. No reported case has gone to this length

... careful analysis of the authorities ... demonstrates that if it is possible to tell with tolerable certainty that, whatever may be the amount of the trustee's profits, it cannot have exceeded a particular figure, then that figure and no more should be awarded.

[121] Dobson J in Re Service Foods Manawatu Ltd (in Rec and Liq) recently cited

Ryde with approval, and described the judgment as making:⁷

... a number of references to “rough justice”, and endeavours to reach an outcome that reflects the broad justice of the case. That is a softening of a harder line that has previously been applied to the misappropriation of trust property, to the effect that if the trustee’s own conduct has rendered an accurate apportionment from a larger fund impossible, then he may be liable to disgorge it all.

⁴ _{Ryde Holdings Ltd v Rainbow Corporation Ltd PC50/92, 15 November 1993.}

⁵ _{At 19.}

⁶ _{At 20 – 21.}

⁷ Re Service Foods Manawatu Ltd (in Rec and Liq) HC Wellington CIV-2007-485-1563, 20 June

2008 at [54].

[122] Dobson J applied the Ryde Holdings “rough justice” approach as a necessity due to the “messy” proceedings in that case. His Honour therefore took broad estimates of the amounts claimed, applying a balance of probabilities approach. Although that case was decided on the basis of a claim for compensation and contractual breach, Dobson J stated that he would have made the same findings if the matter had been determined as a claim for misappropriation of trust property.

[123] In Fletcher Steel v Nahal, as in the current case, “each deposit from the plaintiff into the first defendant’s accounts was likely to have contained money which was the result of legitimate billing as well as a substantial portion of illegitimate billing.”⁸ Cooper J was asked to find that 74 per cent of the money which had been paid to the defendant was wrongly paid. Without reference to case law, his Honour reduced that amount to 65 per cent. This was done on the basis of

factual findings that the extent of the over-billing was less than alleged, and that there were some amounts owing to the defendants. However, no precise calculations appear to have been adopted.

[124] I consider that these cases indicate that a significant discretion is available for judges to make a broad assessment of the sum misappropriated even where it is unable to be determinatively ascertained. While the “balance of probabilities” standard is applicable, evidence should be treated cautiously where civil claims essentially reflect criminal offending. In determining the precise amount which has been misappropriated judges have been willing to take a slightly rougher approach where the breach is clear and the only real uncertainty is the amount taken or the profit made. Fletcher Steel, in particular, is highly analogous to the current case, in which the specific deposits and transfers which involved breaches of trust are not clearly identifiable.

[125] I therefore have the discretion to make a broad assessment of the actual amount of unauthorised payments made by Mr Napier. However, I consider this

⁸ Fletcher Steel Ltd v Nahal Contractors Ltd HC Auckland CIV-2006-404-000498, 26 February

2008 at [189].

assessment should bear in mind the general principle as demonstrated in the cases

above that “nothing should be assumed in favour of [the defendant]”.⁹

[126] Mr Single was prepared to acknowledge that a proportion of what he initially claimed to be unauthorised expenditure was justified on the basis of receipts supplied by Mr Napier as part of the discovery process.

[127] For instance, Mr Single calculated that in terms of their employment contracts, Mr and Mrs Napier were entitled to be reimbursed for petrol expenses totalling approximately $50,750 over the seven year period at issue. Similarly, they were entitled to be reimbursed for all Pak’n Save receipts since 2006, totalling

$37,745.30, as being extra food supplies bought for rest home residents. Mr Single responsibly made such concessions even though no reimbursement schedules were available, nor was Mr Napier able to identify which cheques he had written out were in reimbursement of such expenses.

[128] In this way, using the receipts which have been discovered by Mr Napier, Mr Single has calculated that the sum of $217,691.16 (or 13 per cent) should be deducted from the original sum sought of $1,656,002.22, as being the total of suspect cheque payments from the Torbay Holdings ($71,830.78) and Torbay Rest Home ($1,584,171.44) bank accounts.

[129] It is, of course, now impossible to make an accurate assessment of the amount of the unauthorised payments. As noted by John Leonard, a former forensic accountant in the Serious Fraud Office who was called by Mr Napier to give evidence about average costs in the rest home industry, without the records Mr Napier says he prepared, it is not possible to establish what expenses were being reimbursed. He accepted that this was poor practice and should not have occurred, but said that the payments by themselves do not establish a loss to the companies.

[130] Nonetheless, it would be an injustice if judgment was denied to Torbay

Holdings and Torbay Rest Home because an entirely accurate figure cannot be established. The difficulty in establishing such a figure is, in my view, directly

⁹ Ryde Holdings v Rainbow, above n 4, at 20.

attributable to Mr Napier. He ran the rest home business for eleven years, having day to day control of its finances and record keeping. He chose to run the business in the way he did, which has made it impossible to properly reconstruct its records.

[131] Mr Leonard’s evidence is of limited assistance in making an assessment of the amount of the unauthorised payments. Mr Leonard obtained data relating to rest homes in 2013 from a Waikato University Benchmark study and compared the expenses of Torbay Rest Home as recorded in its financial statements for the financial years ending on 31 March 2005 to 31 March 2014 to those declared by the rest homes in the Waikato University study. Mr Leonard found that the Torbay Rest Homes expenses were considerably less than the average direct costs in the Waikato University study. Mr Leonard’s evidence is, however, of limited value because the Torbay Rest Home financial statements were prepared from information supplied by Mr Napier to the companies’ accountant and Mr Napier was not always accurate in his coding of expenses. Furthermore, there were only nine rest homes in the Waikato University study and Mr Leonard himself acknowledged that the small number of rest homes in the study “may not lend itself to a very reliable picture of this business activity”. No two rest homes are the same and their profitability can vary markedly depending on a wide range of factors.

[132] I prefer to use Mr Napier’s own evidence to assess the amount of the unauthorised payments. As noted earlier, Mr Napier was asked in evidence to review all the cheques and credit card statements for a six week period in the latest financial year at issue. As noted, I have my doubts about the accuracy of identification by Mr Napier of a number of cheques payable to third parties and a number of purchases shown on his credit card statements as being rest home expenses or possibly rest home expenses. However, I then calculated that, giving Mr Napier the benefit of every doubt and accepting his explanations in their totality, he cannot account for approximately half of the total sum written out by him in company cheques over that six week period as rest home expenses or the reimbursement of rest home expenses.

[133] The plaintiffs do, of course, only have to prove their case on the balance of probabilities, but here in effect they allege that Mr Napier is a thief. In those

circumstances, I take a strict view of the evidence, such that stronger evidence will be required to prove the issue to my satisfaction on the balance of probabilities.¹⁰

[134] The assessment I have made is that, at most, only 30 per cent of the suspect payments can be justified. In making that assessment, I have not accepted Mr Napier’s explanations in their totality, but I have more than doubled Mr Single’s assessment of what can be justified. I therefore find that the amount received by Mr and Mrs Napier and/or the Napier Family Trust as unauthorised payments over the seven year period at issue from Torbay Holdings and Torbay Rest Home amounts to $1,159,201.55. The sum of $281,087.01, being the overpayment of salaries, should be added to this total to make the total sum of the losses to Torbay Holdings and Torbay Rest Home $1,440,288.56.

Tracing of the funds

Salary overpayments

[135] The tracing of the salary overpayments is relatively straightforward. Over the relevant seven year period, Mr Napier paid the sum of $411,800 coded as wages into the bank account of the Napier Family Trust, the sum of $242,349.65 coded as wages into a joint bank account of himself and his wife and the sum of $51,364.29 coded as wages into a bank account in his wife’s name.

[136] These payments total $705,513.94 and are net of tax. Income tax on Mr and Mrs Napier’s declared gross income was paid by Torbay Rest Home directly to the IRD utilising the PAYE process. As earlier calculated, the total amount of salary overpayments was $281,087.01. That is the loss to Torbay Rest Home.

Unauthorised payments

[137] I have also calculated that Mr Napier made unauthorised payments using cheques drawn on the bank accounts of Torbay Holdings and Torbay Rest Home

_{totalling $1,159,201.55.}

10. Z v Dental Complaints Assessment Committee [2008] NZSC 55 at [49]- [55], [102], [105], [116], [145].

[138] Here the real difficulty is identifying just who received the money from these unauthorised payments. For instance, cheques totalling $509,341.62 were cashed by Mr Napier over the relevant period. I have found that, overall, only 30 per cent of all the suspect cheque payments can be justified. Mr Napier has clearly cashed the cheques, but the Court cannot be certain as to what then happened with the cash. It may have been banked into the joint account of Mr and Mrs Napier or been used to pay personal creditors of Mr Napier and/or Mrs Napier or to make investments on behalf of the Napier Family Trust, such as advances to Sandspit Bay Holdings or to fund loan repayments by the Trust.

[139] It may be thought to be clearer in the case of cheques made payable to Mr Napier or to Mr Napier and his wife or to third parties, which logically should have been deposited into the payee’s bank accounts. However, that is not necessarily the case. As one example, on 18 January 2012, Mr Napier wrote a cheque payable to himself in the sum of $2,435.19, drawn on the account of Torbay Rest Home, which he utilised on 27 January 2012 to reduce the amount owing on an ASB Visa credit card in the name of himself and his wife.

[140] As another example, on 26 January 2012, Mr Napier made a deposit of

$3,558.08 into the account of the Napier Family Trust. This consisted of five cheques, two of which were payable to himself ($2,497.35 and $309.45) and three of which were payable to cash ($214.58, $243.20 and $293.50).

[141] I have reached the view that Mr and Mrs Napier and the Napier Family Trust were financially interdependent and acted as one entity. For example, it was Mr and Mrs Napier who bought the bare land at Whangaripo Valley Road, but it was the Napier Family Trust which obtained loans from the ASB Bank to pay for the construction of the new house on the property. This had the effect of increasing the value of an asset owned by Mr and Mrs Napier, but the ASB loans were not recorded in the Napier Family Trust accounts as loans to them. Furthermore, the combined salaries of Mr and Mrs Napier were split with a substantial portion being paid directly from the rest home to the Napier Family Trust on a regular basis. Mr Napier was also the controlling mind of the Napier Family Trust.

[142] As to the cash cheques totalling $509,341.62, Mr Napier cashed them all and therefore had that money before dealing with it in some way. It is evident that Mr Napier was depositing at least some of the cash from cash cheques drawn on the account of Torbay Rest Home into credit cards in the joint name of himself and his wife. For example, on 27 May and 30 July 2010, cash cheques in the sum of

$519.44 and $182.36 respectively were cashed and deposited into a joint Westpac Visa Gold account. Similarly, on 5 October and 1 November 2010, Mr Napier cashed cheques in the sums of $995.77 and $1,115.62 respectively, which sums were then deposited into a joint Westpac Mastercard Gold account. However, no forensic analysis has been undertaken to establish the total cash sums deposited into the bank accounts of Mr and Mrs Napier and the Napier Family Trust. The lack of such an analysis, while understandable, hinders the extent to which the cash can be traced.

[143] Bank traces obtained by Mr Single disclose a variety of recipients of the other suspect cheque payments from the account of Torbay Rest Home (for example, the Matakana School Board of Trustees, Mighty River Power, and the New Zealand Police) but a substantial number of suspect payments were deposited into a Westpac bank account in the name of D J Napier. Bank statements for that account have not been disclosed by Mr Napier and no forensic analysis has been undertaken to establish the total sums deposited into that account.

[144] However, between 20 January 2006 and 27 March 2007 cheque payments totalling $148,161.82 from the account of Torbay Rest Home were traced into a Mastercard account in the name of D J Napier. Further, between 2 April 2007 and

3 April 2008 cheque payments totalling $120,247.20 from the account of Torbay Rest Home were traced into another credit card account, identified as 5462/8125, in the name of D J Napier.

[145] Similarly, bank traces also disclose that between 20 January 2006 and

8 March 2012 cheque payments totalling $176,553.10 drawn on the accounts of Torbay Holdings and Torbay Rest Home were deposited into a joint bank account of Mr Napier and his wife, identified as 3141-3591-00.

[146] In addition, between 14 April 2008 and 8 December 2008, cheque payments totalling $58,507.29 drawn on the account of Torbay Rest Home were traced into an ASB Mastercard account, identified as 5462/5104, in the joint names of Mr and Mrs Napier. Between 24 December 2008 and 26 June 2009, cheque payments totalling $69,155.37 from the accounts of Torbay Holdings and Torbay Rest Home were traced into an ASB Visa Platinum account, identified as 4617/8109, in the joint names of Mr and Mrs Napier. Then, between 20 July 2009 and 5 April 2012, cheque payments totalling $135,007.76 from the account of Torbay Rest Home were traced into a different ASB Visa Platinum account, identified as 4617/8117, in the joint name of Mr and Mrs Napier.

[147] As to the Napier Family Trust, traces also disclose that between 13 April

2006 and 26 January 2012 cheque payments totalling $9,167.70, drawn on the accounts of Torbay Holdings and Torbay Rest Home, were deposited into the bank account of the Napier Family Trust, identified as 12-3015-0556195-00. In addition, bank statements disclose seven cash deposits into the account of the Napier Family Trust between 17 October 2011 and 5 April 2012 totalling $17,816.37. I infer that these deposits were the proceeds of cash cheques drawn on the account of Torbay Rest Home because of cash cheques written out by Mr Napier on the same dates, which correspond with the deposits, sometimes exactly. For example, on 5 April

2012, Mr Napier cashed a cheque for $3,416.50. The exact same sum was then deposited into the account of the Napier Family Trust.¹¹

[148] Based on the above analysis, Mr Napier therefore personally received at least

_{$1,459,323.81, consisting of:}

¹¹ See also my analysis at [112] and [113].

_{[149] Similarly, Mrs Napier personally received at least $732,937.46, consisting of:}

_{[150] Finally, the Napier Family Trust received at least $438,784.07, consisting of:}

Causes of action

[151] As noted earlier, the statement of claim sets out seven different causes of action.

Breach of fiduciary duties

[152] The first cause of action alleges that Mr and Mrs Napier as directors of Torbay Holdings and Torbay Rest Home, owed duties to the companies as directors which included acting in good faith and in the companies’ best interests. The statement of claim alleges that Mr and Mrs Napier breached these duties, as a result of which the companies have suffered loss. As a consequence Mr and Mrs Napier are jointly and severally liable for the loss. The sixth cause of action alleges that Mr and Mrs Napier are also in breach of fiduciary duties owed to the companies, through breach of the “core” duties not to profit from the companies, not to misappropriate the companies’ assets and not to engage the companies in transactions which are a conflict of interest.

[153] I consider that these two causes of action are essentially the same claim. That is because in substance, the Companies Act duties reflect the fiduciary duties which directors were historically said to have to their companies, even prior to the passing of the Act.¹² In particular, the duty of loyalty as expressed in s 131 of the Companies Act (to act “in the best interests of the company”) is seen as one of the cornerstones of fiduciary duties.¹³ No difference in remedy will result from findings on the different causes of action. I therefore proceed to consider them together.

[154] Although Mrs Napier was a director of the companies at all relevant times, Mr Napier only became a director on 27 June 2008, over three years after the commencement of the relevant period on 1 April 2005. It is not pleaded by the plaintiffs that Mr Napier acted as a de facto director of the companies prior to

27 June 2008, or that he had a fiduciary relationship with the companies before that date. Therefore, Mr Napier cannot be found to have breached any fiduciary duties as a director between 1 April 2005 and 27 June 2008 because he was not then a director or in a fiduciary relationship with the companies.

[155] I am also of the view that Mr and Mrs Napier cannot, as a matter of course,

_{be jointly and severally liable for any loss caused by the other’s breach of his or her}

¹² _{Bristol & West Building Society v Mothew [1998] Ch 1 at 16 – 18.}

13. See the discussion in Sojourner v Robb [2006] 3 NZLR 808 (HC) at [100] – [[101] and FXHT Fund Managers Ltd (in liquidation) v Oberholster (2009) 10 NZCLC 264.562 (HC) at [18].

fiduciary duties as a director. Any liability for breach of fiduciary duties must primarily fall on the director who breached those duties. Liability may, however, also arise on the basis of knowledge of the breach of fiduciary duties by another director of the companies, but the liability of the second director would arise out of his or her own breach of fiduciary duty in failing to take any action to safeguard the interests of the company. Gross negligence in fulfilling director’s duties could also be evidence of mis-motivation, conveying the inference of a breach of the duty to act

in the best interests of the company.¹⁴ Much will depend on the actual

circumstances.

[156] It is clear that a director may breach his or her duty of good faith and loyalty to a company if the director puts his or her own personal interests ahead of the company’s interests.¹⁵ For example, in Victoria Street Apartments Ltd (In liq) v Sharma the defendant director was held liable for payments made by him that were not made for the purposes or benefit of the company.¹⁶ The Court held that such payments were either made in breach of trust or in breach of the duties of good faith and loyalty. The company was entitled to recover the total amount of the payments from the defendant.

[157] One of the payments was for $10,000, which the defendant claimed was for reimbursement of travel and other expenses incurred in connection with the apartment development. The Judge noted that he had provided no receipts or invoices to confirm that he had incurred such expenses. The defendant was ordered to repay a total of $423,541.98, which consisted of the sum of $190,406.00, representing advances made to him, and the sum of $233,135.98, representing advances to other persons from company funds in circumstances where the advances were not for the purposes of the company, were of no benefit to the company and

_{were in breach of his fiduciary duties of good faith and loyalty.}

¹⁴ See, for example, Extrasure Travel Insurances v Scattergood [2003] 1 BCLC 598 (CH D);

Motorworld Ltd (in liq) v Turners Auctions Ltd HC Auckland CIV-2007-404-6558, 17 February

_2010.

¹⁵ See Springfield Acres Ltd v Abacus (HK) Ltd [1994] 3 NZLR 502 (HC) at 509; FXHT Fund

_{Managers Ltd (In liq) v Oberholster [2010] NZCA 197 at [48].}

¹⁶ Victoria Street Apartments Ltd (In Liq) v Sharma HC Auckland CIV-2009-404-8397, 14 October

2014.

[158] In the present case, Mr Napier has used Torbay Holdings and Torbay Rest Home funds to pay his personal creditors, which clearly jeopardised the companies’ ability to pay their own debts. The use of such funds was not to the benefit of Torbay Holdings and Torbay Rest Home, both of which found themselves weeks away from liquidation in April 2012 because of unpaid tax liabilities. Mr Napier, therefore, is liable under the first and sixth causes of action for unauthorised payments since he became a director on 27 June 2008.

[159] The position of Mrs Napier is somewhat different. She did not give evidence and no particular allegations of impropriety were levelled against her, except that she signed the companies’ cheques before her husband became a director and was granted cheque signing authority.

[160] Four points can be made here. First, Mrs Napier’s practical role in the company was as nurse manager. She had no responsibility for financial management of the business, except a vague requirement to liaise with her husband as administration manager and assist him wherever necessary. Secondly, there is evidence that Mrs Napier signed blank cheques and gave them to her husband. This is bad business practice, but this action without more is, in my view, insufficient to establish a breach of fiduciary duty by Mrs Napier. Thirdly, the scale of unauthorised payments up to 27 June 2008, when her husband became a director, was substantially less than after her husband was granted cheque signing authority. The suspect payments identified by Mr Single in 2006 totalled $162,383.88. In 2011 the total was $405,577.80. Fourthly, none of the suspect payments were paid into her personal bank account. The only regular deposits into that account were her wages from her position as nurse manager for Torbay Rest Home and as nurse tutor at UNITEC. Because of the income splitting arrangement implemented by her husband for tax purposes, the variations in her pay would not necessarily have been a warning sign to Mrs Napier. In any event, Mr Napier arranged to pay her sums ranging from $40,236 to $73,590 on an annual basis (between 60 per cent and

110 per cent of her agreed salary). On the other hand, Mr Napier paid himself sums ranging from $62,504 to $93,956 on an annual basis (between 150 per cent and

230 per cent of his agreed salary).

[161] Mr Napier also acknowledged sole responsibility for making all the suspect payments. He said nothing about his wife’s role in the payments, except to point out that she had sought and obtained reimbursement from Torbay Rest Home for legitimate expenses after he had left his employment as administration manager. Mrs Napier did, however, provide receipts which clearly proved that the payments she had made were legitimate expenses. There is accordingly insufficient evidence that Mrs Napier knew of the unauthorised payments made by her husband in breach of his duties of good faith and loyalty.

[162] In those circumstances, Mrs Napier is not liable under the first or sixth cause of action for unauthorised payments while she was a director of the companies. It has not been proven that she had any role in, or indeed knew of, the unauthorised payments. The plaintiffs invited me to draw an adverse inference against Mrs Napier for not giving evidence, but I decline to do so in the circumstances of this case.

Money had and received

[163] The second cause of action alleges that Mr and Mrs Napier have had and received money, being the total sum of the salary overpayments and the unauthorised payments. The statement of claim alleges that the total sum of the salary overpayments and the unauthorised payments belonged to Torbay Holdings and Torbay Rest Home and is owed by Mr and Mrs Napier to them.

[164] A claim for monies had and received is a personal restitutionary remedy based on the concept of unjust enrichment.¹⁷ It requires only receipt of money by a defendant who has no right to retain it or who has improperly disposed of it. The claim does not depend on proof of any wrongdoing or impropriety on the part of the recipient,¹⁸ or on ongoing retention of the money or its value.¹⁹ The cause of action is complete when the money is received. Although based in the doctrine of unjust

_{enrichment, the claim is not the same as a cause of action for unjust enrichment.}

¹⁷ _{Worldtel NZ Ltd v Kim HC Auckland CIV-2009-404-001158, 30 September 2011 at [27].}

¹⁸ _{Agip (Africa) Ltd v Jackson [1990] Ch 265, [1989] 3 WLR 1367 at 1380.}

¹⁹ Martin v Pont [1993] 3 NZLR 25 at 30.

Unjust enrichment is simply a term for the underpinning doctrine of law behind various restitutionary remedies.²⁰

[165] For example, in General Distributors Ltd v Hilliard,²¹ an employee who defrauded approximately $400,000 from her employer through manipulating accounting procedures, banking arrangements and the provision of fictitious refunds was found liable in a summary judgment application for monies had and received. The Court found she had no defence to the claim. It was not her money.

[166] As noted above, a claim for money had and received does not depend on proof of any wrongdoing or fault on the part of the recipient. However, the underpinning of the claim for money had and received in unjust enrichment consequently requires some element of unjustness in the defendant retaining the

money he had received. This has been highlighted in other cases:²²

An action for money had and received is based on the receipt of money by a defendant who no longer has the right to retain it or has improperly disposed of it. Other than that, the claim does not depend on proof of any wrongdoing or fault on the part of the recipient.

[167] This dictum recognises that the action for money had and received is not a claim based in the personal conscience of the recipient. Instead, the unjustness assessment is focused on determining whether the retention of the money would unjustly enrich the defendant, who has no real right to the money. To this extent, the claim is complete when the money is received, if retaining the money would be unjust, as the defendant has no right to retain it. Heath J, in a recent case, saw some element of unconscionability or unjustness as being a key requirement to make out

money had and received claims.²³ This recognises the underlying focus of money

had and received claims, in unjust enrichment.

[168] The law recognises certain categories of cases in which it is considered to be unjust for the claimant to retain the benefit of the money.²⁴ In the case of a benefit

20. Lord Goff and Gareth Jones Goff & Jones The Law of Restitution (7^th edition, Sweet & Maxwell, London, 2007) at [1-013].

²¹ _{General Distributors Ltd v Hilliard HC Auckland CIV-2008-404-1057, 16 March 2009.}

²² _{Nimmo v Westpac Banking Corporation [1993] 3 NZLR 281 (HC) at 238.}

²³ _{Levin v Ikiua HC Auckland CIV-2007-404-6810, 24 July 2009 at [92].}

²⁴ Goff & Jones The Law of Restitution (7^th edition), above n 20, at [1-052].

obtained through wrongdoing, the wrongdoer’s enrichment at the expense of the claimant is clearly seen as unjust.²⁵ The unjust factor can be conceptualised as the transferring party’s ignorance of a transaction,²⁶ or the transferring party’s actions being outside of their authority, but on either view the taking of an asset without permission, and passing it on to a third party creates the necessary unjustness for an

_{unjust enrichment claim.}²⁷ _{Although liability in money had and received directly}

against the initial taker is unusual, a person who misappropriates money can also be liable in money had and received directly.²⁸

[169] Mr Napier is, therefore, liable under the second cause of action for most of the salary overpayments and the total amount of the unauthorised payments. That is because he received almost as much by way of salary as the total of the salary overpayments and more by way of cash and cheques than the total amount of the unauthorised payments.

[170] In the circumstances of this case, Mrs Napier and the trustees of the Napier Family Trust are also liable without proof of fault under the second cause of action for money had and received. The retention of any money received would be unjust, under the principles set out above. The issue which then arises is whether Mrs Napier and the Napier Family Trust are liable for the total amount of the unauthorised payments, or for some lesser amount.

[171] The cause of action requires a sum of money to have been identifiably received. The money deposited into the joint bank account of Mr and Mrs Napier must be capable of being traced to the cheques drawn on the accounts of Torbay Holdings and Torbay Rest Home, using common law tracing principles. Money

_{drawn out of the bank accounts using the cheques is the traceable substitute for the}

²⁵ _{Goff & Jones The Law of Restitution (7}^th _{edition), above n 20, at [32-002].}

²⁶ Andrew Burrows The Law of Restitution (3^rd edition, Oxford University Press, New York, 2011)

_{at 409 and 415.}

²⁷ Charles Mitchell, Paul Mitchell and Stephen Watterson (eds) Goff & Jones The Law of Unjust Enrichment (8^th edition, Sweet & Maxwell, London, 2011) at chapter 8 [Goff & Jones The Law of Unjust Enrichment].

²⁸ Neate v Harding [1851] EngR 360; (1851) 6 Exch. 349; 155 ER 577.

asset which had belonged to the companies.²⁹ Mr Napier received the money when he withdrew it as cash and used the cheques to his own benefit.

[172] However, in the case of the joint bank account of Mr and Mrs Napier and the Napier Family Trust bank account, money was received through direct deposits from the bank accounts of Torbay Holdings and Torbay Rest Home, from other accounts, and cash deposits by Mr Napier. Due to their interrelationship and mingling of funds across these accounts, are Mrs Napier and the Napier Family Trust also liable for all the money had and received by Mr Napier? If not, there is some difficulty in assessing the extent of their liability.

[173] For instance, because Mr Napier adopted a practice of income splitting for himself and his wife, he paid $51,364.29 to his wife and $411,800 to the Napier Family Trust coded as wages over the seven year period. I have found that overall Mr Napier overpaid himself and his wife the sum of $281,087.91 during this period. Should Mrs Napier and the Napier Family Trust be liable for the full amount they received as salary up to the total amount that was overpaid, or some proportion of that sum based on the proportion of the combined salaries of herself and her husband that was received?

[174] Furthermore, because of the way in which Mr Napier chose to run the rest home finances, it is now impossible to identify the total amount of the unauthorised payments which actually ended up in the possession or control of Mrs Napier or the Napier Family Trust, for the purposes of the claim for money had and received. Certainly a large proportion went into a joint bank account of Mr and Mrs Napier, while substantial amounts were paid into the Napier Family Trust bank account to help service the loans obtained to pay for the construction of the new house for Mr and Mrs Napier at Whangaripo Valley Road. Payments were also made directly to third party suppliers, which were of benefit to both Mrs Napier and the Napier Family Trust. The mixing of legitimately and illegitimately obtained funds makes

_{determining the proportions of each difficult.}

²⁹ Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548; Andrew Burrows The Law of

Restitution, above n 26, at 130.

[175] In the end, however, I have determined that Mrs Napier and the Napier Family Trust can only be liable for the money which Mr Napier paid directly into Mrs Napier’s account or their joint bank or credit card accounts, and into the bank account of the Napier Family Trust, directly from the bank accounts of Torbay Holdings and Torbay Rest Home. No complex questions of tracing arise where direct deposits have been used to transfer money, as there is no question of whether the physical asset has been mixed or altered at any point in the transfer.

[176] Typically, receipt into a joint bank account in the name of the defendant is considered sufficient for receipt.³⁰ Joint recipients are usually jointly and severally liable.³¹ Where the control of the bank account is in issue, this could potentially create further complications. However, in this case, nothing has been offered to suggest the situation is unlike any other situation in which funds paid into a joint

bank account are treated as the funds of both parties. Shared bank accounts are generally held as joint tenants and each party can use the funds within equally.³²

Regardless of her lack of knowledge, Mrs Napier received the money once it was deposited in the joint bank account.

[177] The sums of $51,364.29 and $411,800 were paid directly into Mrs Napier’s bank account and the Napier Family Trust’s bank account coded as wages. The sum of $242,349.65 was also paid directly into a joint account of Mr and Mrs Napier coded as wages. In addition to the sums coded as wages, in the case of Mrs Napier, the bank traces obtained by Mr Single show that the sum of $176,553.10 was paid directly into the joint bank account she shared with her husband. In addition, sums totalling $262,670.42 were paid directly into joint credit card accounts she shared with her husband between 14 April 2008 and 5 April 2012. In the case of the Napier Family Trust, the sum of $9,176.70 was also paid directly into its bank account, together with cash deposits of $17,816.37.

[178] Furthermore, when considering the separate cases of Mrs Napier and the

Napier Family Trust, I have determined that I cannot discount the various sums paid directly or jointly to Mrs Napier and to the Napier Family Trust, because a certain

³⁰ _{Goff & Jones The Law of Unjust Enrichment, above n 27, at [4–54].}

³¹ _{Goff & Jones The Law of Unjust Enrichment (8}^th _{edition), above n27, at [4–54].}

³² In Re Bishop [1965] 1 Ch 450 at 456; OEM PLC v Schneider [2005] EWHC 1072.

proportion of the salary payments (71.2 per cent) or the suspect cheque payments (30 per cent) were justified. In other words, I am entitled to take the view that the moneys paid to Mrs Napier and the Napier Family Trust were entirely salary overpayments or unauthorised payments. The restrictive rules on common law tracing in relation to mixing funds do not apply where the funds are mixed prior to

the payment which constitutes receipt of that money.³³ In this case, therefore, the

fact that the payments into Mrs Napier’s bank account or into the joint account with her husband may have been mixed with some legitimately received funds (e.g. for salary or reimbursements) does not preclude the conclusion that Mrs Napier received the misappropriated funds. However, I cannot impose a liability on Mrs Napier or the Napier Family Trust greater than the total salary overpayments, just as I cannot impose liability on Mr Napier greater than the total unauthorised payments, although he did receive more.

[179] Accordingly, Mr Napier is liable for the salary overpayments of $242,349.65 (the amount received in the joint account) and the total unauthorised payments of

$1,159,201.55, making a grand total of $1,401,551.20 for money had and received. Mrs Napier is liable for the total salary overpayments of $281,087.01 (Mrs Napier actually received more in her sole and joint accounts) and the portion of the unauthorised payments that she received, being $439,223.52, making a grand total of

$720,310.53 for money had and received. The Napier Family Trust is liable for the total salary overpayments of $281,087.01 (the Trust actually received more in its account) and that portion of the unauthorised payments that it received, being

$9,176.70 traced payments and $17,816.37 cash deposits, making a grand total of

$308,080.08 for money had and received.

Deceit

[180] The third cause of action alleges that the actions of Mr and Mrs Napier, individually and as trustees of the Napier Family Trust constitute deceit. This cause

_{of action was not developed further.}

³³ ASB Securities Ltd v Geurts [2005] 1 NZLR 484 (HC).

[181] The core of an action in deceit is that the defendant has been dishonest in that he or she has knowingly made a false statement intending the plaintiff to rely on it. The elements of that tort were set out by the Court of Appeal in Amaltal Corporation Ltd v Maruha Corp as follows:³⁴

(a) A false representation, either express or implied by conduct of a past or existing fact;

(b) Knowledge of untruthfulness of statements or recklessness as to its truth;

(c) Intention that the plaintiff should act in reliance on the statement and reliance in fact by the plaintiff;

(d) Damage suffered by the plaintiff as result of that reliance.

[182] In the present case, the plaintiffs have not specified the conduct by Mr and Mrs Napier which constituted a false representation or representations. Without further development of their case either in the pleadings or submissions, I am unable to give judgment against Mr and Mrs Napier, individually or on behalf of the Napier Family Trust under this cause of action. It is just too vague.

Knowing receipt

[183] The fourth cause of action alleges that Mr and Mrs Napier individually, and as trustees of the Napier Family Trust, are liable in knowing receipt for monies misappropriated from Torbay Holdings and Torbay Rest Home.

[184] Knowing receipt is made out where there is:³⁵

_{(a) Disposal of the plaintiffs’ assets in breach of a fiduciary duty;}

³⁴ _{Amaltal Corporation Ltd v Maruha Corp [2006] NZCA 112; [2007] 1 NZLR 608 (CA).}

³⁵ El Ajou v Dollar Land Holdings [1993] EWCA Civ 4; [1994] 2 All ER 685 at 700.

(b) The beneficial receipt of assets which are traceable as representing the assets of the plaintiff; and

(c) Knowledge on the part of the defendant that the assets received were traceable to a breach of fiduciary duty.

[185] The first two elements are relatively straightforward. However, establishing the necessary “knowledge” has been the subject of extended judicial and academic discussion. A long-established approach, followed at least in part by the New Zealand Court of Appeal, applied what were known as the Baden categories of knowledge, reflecting five types of knowledge which were sufficient to found

liability in knowing receipt.³⁶ Those categories were:

(a) Actual knowledge;

(b) Wilfully shutting one’s eyes to the obvious;

(c) Wilfully and recklessly failing to make such enquiries as an honest and reasonable person would make;

(d) Knowledge of circumstances which would indicate the facts to an honest and reasonable person; and

(e) Knowledge of circumstances which would put an honest and reasonable person on enquiry.

[186] These categories reflect both actual and constructive knowledge, although some doubt was cast over whether the lower levels of constructive knowledge would be sufficient in New Zealand.

[187] The need to strictly follow these categories has been doubted in more contemporary cases in the United Kingdom.³⁷ Recently in Worldtel v Kim,

_{Courtney J followed the modern approach of the UK Court of Appeal in determining}

³⁶ _{Westpac Banking Corporation v Savin [1985] 2 NZLR 41 (CA).}

³⁷ Bank of Credit and Commerce International (Overseas) v Akindele [2001] Ch 437.

that the primary assessment was of the effect on the receiver’s conscience, not a rigid categorisation of knowledge against set categories.³⁸ The test in New Zealand was said to be whether there was “knowledge that would make it unconscionable for the recipient to retain the benefit of the money received”.³⁹ In Worldtel, Courtney J found that the wife (also a shareholder and director of the company) of a director who had stolen from his company was not liable in knowing receipt for the money transferred into her bank account as a result of the unlawful acts.

[188] As against Mr Napier, his liability for breaching fiduciary and director’s duties to the companies is the act which gives rise to the knowing receipt claim. Evidently he had actual knowledge of his own breaches of fiduciary duty. Liability for knowing receipt would simply reflect findings as to the same actions, and would give rise to no different remedies or further liability. I therefore turn to the real focus of this pleading, on the liability of Mrs Napier, and Mr and Mrs Napier as trustees of the Napier Family Trust.

[189] Mrs Napier received the benefits of a breach of fiduciary duty, through the money received into her bank account and the joint bank and credit card accounts which was the result of Mr Napier’s unauthorised transactions. In the absence of any real evidence, there is no basis on which to conclude that she had actual knowledge of the breach. Whether she had constructive knowledge sufficient that it would be unconscionable for her to retain the sum received, therefore, is the key issue on which this cause of action turns.

[190] The amount of money in the joint bank account of Mr and Mrs Napier, and being spent by the couple, well exceeded their combined incomes. Knowledge of their actual salary levels, combined with the actual income being received, might constitute wilful blindness or wilfully recklessly failing to make enquiries, meaning it could be said to be unconscionable for the benefit of that money to be retained. At a lower standard, this could also constitute constructive knowledge, or knowledge of

_{facts that would have put an honest and reasonable person on enquiry, which may}

³⁸ _{Worldtel NZ Ltd v Kim, above n 17.}

³⁹ At [38].

also be sufficient to render the retention of any benefit obtained by Mrs Napier to be unconscionable.

[191] However, there is no evidence that Mrs Napier knew the actual level of remuneration paid to her or the Trust by her husband in their roles as administration manager and nurse manager. Further, even without evidence from Mrs Napier, the evidence clearly shows that Mr Napier took a dominant role in controlling and planning the family’s finances. No information has been provided which shows any instances of suspicion on Mrs Napier’s part, any evasiveness as to the source of the money, or even any information about Mrs Napier’s involvement with the companies' finances or knowledge of their legal entitlements from the Torbay companies and the various connected investment companies.

[192] While in retrospect the conclusion that the payments must have been misappropriated from Torbay Holdings and Torbay Rest Home seems obvious, nothing suggests any contemporary knowledge or suspicion on Mrs Napier’s part, because no evidence was brought in relation to Mrs Napier. The fact that Mr and Mrs Napier were receiving and spending significantly more than their legal entitlement from the Torbay companies cannot sustain an inference that Mrs Napier must have known or should have known that the money was not hers, in circumstances where it is not clear that she had any real control over the bank accounts or any real knowledge of her and her husband’s financial position. The fact that a finding of knowing receipt (essentially criminal conduct) will not be made without strong evidence, even on a balance of probabilities assessment, has been

made clear by the New Zealand courts in the past.⁴⁰ In light of the dearth of

evidence as to Mrs Napier’s knowledge of either where the money received came from, or even the extent of the money coming into the bank account of Mr and Mrs Napier, no claim for knowing receipt can be made out.

[193] The Napier Family Trust was settled by Mr and Mrs Napier, who along with an independent solicitor were also the trustees. Both Mr and Mrs Napier were also specified discretionary beneficiaries of the Trust. Payments coded as wages were

_{deposited into the bank account of the Napier Family Trust directly from Torbay}

⁴⁰ Kim v Park [2012] NZHC 375 at [50 ] – [56].

Holdings and Torbay Rest Home. The Trust also took out a number of loans in relation to the property at Whangaripo Valley Road. At times, when the Trust had imminent payments due, Mr Napier would deposit money into its account, which corresponded broadly with cash cheques drawn on the account of Torbay Rest Home.

[194] It is therefore clear that the Napier Family Trust received money, obtained through Mr Napier’s breaches of fiduciary duty. However, the Trust itself technically does not own money or bank accounts. Trustees own property legally on behalf of a trust. In this sense, unlike a company, a trust is not a legal person distinct from its trustees.⁴¹ The trustees therefore, as trustees for the Trust, were the loci for the receipt of money.

[195] In Ilion Technology Corp v Johannink, Venning J found the defendants liable in knowing receipt, as trustees. The trust in that case had received profits made in breach of fiduciary duty, where one of the trustees had directly facilitated the breach. That trustee’s knowledge was imputed to the trust, and the profits made were therefore able to be impressed with a trust in favour of the plaintiffs.⁴²

[196] In this case, Mr Napier’s knowledge can be similarly imputed to the Napier Family Trust. The Trust therefore knowingly received money to which it was not entitled. The actions of Mr Napier in transferring money directly to the Napier Family Trust cannot shield that money from recovery by the Torbay companies. A finding of knowing receipt against the Trust means that, if the money can be traced into new property purchased by the Trust, a constructive trust would exist over that new property. Although some cases in other context have doubted the validity of imposing a constructive trust over an express trust, the contexts of those cases have primarily been relationship property disputes in which an ex-partner made a claim to an established piece of trust property, rather than misappropriated property

transferred into a trust.⁴³ The theoretical problems which arise in those cases are less

_{applicable in relation to misappropriated property.}

⁴¹ _{NZHB Holdings v Bartell (2004) 5 NZCPR 506 (HC) at [46].}

⁴² _{Ilion Technology Corp v Johannink HC Auckland CIV-2004-404-3358, 3 February 2006.}

⁴³ See the discussion of the principles surrounding the imposition of constructive trusts over express trusts in a relationship property context in Vervoort v Spear [2015] NZHC 808 at [68] – [82].

[197] I therefore consider a claim in knowing receipt is made out against the Napier Family Trust, requiring the Trust to account to the plaintiffs for any money it received from the Torbay companies which was transferred in breach of Mr Napier’s duties as a director.

Remedies – constructive trust

[198] Directors have a personal liability to account to the company for any breaches of the no profit and no conflict rules. These rules are strictly enforced and require directors to completely disgorge any profit or benefit obtained at the company’s expense.⁴⁴ Mr Napier therefore has a personal liability to account for the salary overpayments and unauthorised payments from Torbay Holdings and Torbay Rest Homes in breach of his fiduciary duties and duties as a director.

[199] The main remedy for a claim in money had and received is also a personal liability to account for any money received. Mr Napier is therefore personally liable for that portion of the salary overpayments that he received and the total of the unauthorised payments made. Mrs Napier, also, is personally liable for the money directly transferred into their joint bank account and their joint credit cards, and received directly into her individual account. Mr and Mrs Napier as trustees will also personally be required to account for the money which was received by the Napier Family Trust.

[200] However, the fifth pleaded cause of action alleges that the property owned by Mr and Mrs Napier at Whangaripo Valley Road is subject to a constructive trust in favour of Torbay Holdings and Torbay Rest Homes, because the companies’ funds was used by Mr and Mrs Napier to acquire and/or improve the property. The property is said to be recoverable and traceable in equity, under the

Westdeutschebank principles.⁴⁵

[201] This cause of action is directed at the use of misappropriated funds to build, develop and maintain the Whangaripo Valley Road property and to service loans

⁴⁴ _{Regal Hastings v Gulliver [1967] 2 AC 134 (HL); Keech v Sandford (1726) Sel Cas Ch 61.}

45. Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] UKHL 12; [1996] AC 669, [1996] 2 All ER 961 (HL).

secured against the property.⁴⁶ Torbay Holdings and Torbay Rest Homes allege that unauthorised cheques were used to pay for goods and services necessary to build the new house on the land, giving rise to a constructive trust over the property to the value of those payments. It is also submitted that funds from Torbay Rest Home were used to service Mr and Mrs Napier’s mortgage on the property, giving rise to an equitable interest in the property to the extent of the contribution to the mortgage principal and interest.

[202] Constructive trusts arise over property where the legal owner is required to account to another person in equity for that property. For example, where a fiduciary or knowing recipient obtains an improper profit or other property from his or her fiduciary position, it is well-established that a constructive trust arises over that

profit or property in favour of the principal.⁴⁷ The principal has an equitable

proprietary interest in the property, which is not extinguished when the property is exchanged or transferred for new property.⁴⁸

[203] However, although constructive trusts do not require all the certainties of an express trust, there must still be certainty of subject-matter, or identifiable property to be the subject of the trust. Consequently, the rules of equitable tracing must be used to trace the equitable proprietary right in the existing property into subsequent exchanges or acquisitions.

[204] Hudson’s Equity and Trusts suggests that a constructive trust exists as the result of an equitable tracing claim where there is a pre-existing equitable interest to ground the tracing claim, identifiable property which can be the subject matter of the trust, and the defendant acted unconscionably in dealing with property, knowing that

_{he was acting unconscionably.}⁴⁹ _{The requirement that an existing right to property}

46. Submissions of counsel for the plaintiff, in response to the Minute issued 2 September 2015, dated 9 September 2015.

⁴⁷ _{Jessica Palmer “Constructive Trusts” in Andrew Butler (ed) Equity and Trusts in New Zealand}

₍₂^nd _{ed, Thomson Reuters, Wellington, 2009) 335 at 338.}

⁴⁸ Westdeutsche Landesbank v Islington Borough Council, above n 45, at 705; Shannon

_{Agricultural Consulting (in liq) v Shannon [2015] NZHC 1133.}

⁴⁹ Alastair Hudson Equity and Trusts (8^th ed, Routledge, Oxon, New York, 2015) at 923.

must first be established, and then traced into the asset over which the trust is asserted is also reflected in New Zealand case law and commentary.⁵⁰

(a) Is there a pre-existing equitable right to property?

[205] In Kim v Park, one joint venturer appropriated money from the joint venture bank account, deposited it into accounts in the name of an associate, and then used it to purchase properties.⁵¹ Although the evidence was unclear, it appeared that the breaching fiduciary had contributed around 50 per cent of the money in the account. The Court held that the plaintiffs clearly retained an interest in the portion of the money taken which represented the plaintiffs’ 50 per cent share.⁵²

[206] Similarly, Torbay Holdings and Torbay Rest Home clearly retain an interest in the money that was wrongly misappropriated from both companies. The transactions were unauthorised removals of Torbay money, done without the knowledge of the Torbay companies, and received by the Trust and into Mr Napier’s bank accounts with knowledge of their source in misappropriated funds. The companies had an ongoing equitable interest in the money, despite the transfers and withdrawals from the companies’ control.

(b) Can that right be traced into the claimed property?

[207] Tracing is a rule of evidence which allows the claimant to identify misapplied property or its proceeds.⁵³ Generally, if a sum of money which in equity belongs to the claimant is paid into a bank current account with a positive balance, that money can be traced into subsequent assets purchased from that account. Specific rules apply to tracing where the money obtained in breach of trust or duty has been mixed with the wrongdoer trustee’s money, as opposed to another innocent party’s.⁵⁴ Those

_{rules have been described as punitive, with mixed money being presumed to belong}

⁵⁰ Kim v Park, above n 40, at [44]. See also Jessica Palmer “Attempting Clarification of

_{Constructive Trusts” [2010] 24 NZULR 113 – 135.}

⁵¹ _{Kim v Park, above n 40.}

⁵² _{Kim v Park, above n 40, at [44].}

⁵³ _{John McGee (general ed) Snell’s Equity (32}^nd _{ed, Thomson Reuters, London, 2010) at 884.}

⁵⁴ _{James Every-Palmer “Equitable Tracing” in Andrew Butler (ed) Equity and Trusts in New}

Zealand (2^nd ed, Thomson Reuters, Wellington, 2009) 997 at 1009 – 1014.

to the innocent contributor until proven otherwise.⁵⁵ Because of the way in which payments were siphoned across the Napiers’ various bank accounts, and the fact that some of the payments made to Mr and Mrs Napier reflected legal entitlements either through salary or legitimate reimbursements, tracing rules in relation to mixed funds will be relevant insofar as the claim is for assets or contributions made from the bank accounts of Mr and Mrs Napier or the Napier Family Trust.

[208] However, the first claim to a constructive trust relates solely to the amount contributed by Torbay Holdings and Torbay Rest Homes to the construction of the house at Whangaripo Valley Road, through cheques which were used as payments to third party suppliers of goods and services. These cheques were written by Mr Napier and given directly to the various suppliers of goods and services. The

value of these cheques is quantified above as $101,473.38.⁵⁶ Although Mr Napier

has claimed that these represented the value of legitimate reimbursements which he was owed, I have found above that these did not represent money owed to Mr Napier. As such, no question of mixing of funds occurs – the cheques made to third party suppliers was solely money to which Mr Napier was not entitled.

[209] The value represented in the cheques, as a chose in action, can be traced directly to the various suppliers who received that money, and who in turn provided valuable consideration in the form of the construction of the house on the Whangaripo Valley Road property. In this way, the value from the Torbay cheques was used to facilitate the acquisition of a new property on the Whangaripo land, or in an alternate expression, the improvement of the land by way of building a new house on the site.

[210] I consider that the right which Torbay Holdings and Torbay Rest Homes had to the money which was misappropriated by Mr Napier can be traced into the property, giving it an equitable interest in the property. A constructive trust therefore

_{exists over the property up to the value of $101,473.38.}

⁵⁵ _{Snell’s Equity, above n 53, at 888.}

⁵⁶ See [91].

[211] However, the second way in which a constructive trust over the Whangaripo property is claimed is by way of contributions made by the Torbay companies to the loans which Mr and Mrs Napier and the Napier Family Trust took out to facilitate the purchase and construction of the new house on the Whangaripo Valley Road property. As analysed above, money was paid into various accounts operated by Mr Napier, including the Napier Family Trust bank account, and was then used to pay various debts as they fell due. This squarely raises the question of accounting for mixed funds.

[212] As noted above, different rules apply where the misappropriated money has been mixed with another innocent party’s money as opposed to solely with the wrongdoer’s money. Mrs Napier would be an innocent contributor, given her lack of knowledge as to the misappropriation, if she had made any personal contributions to the accounts of her and her husband or the Napier Family Trust. However, as the sole source of money into those accounts was from Mr Napier’s salary overpayments and unauthorised payments, the rules on tracing funds mixed solely with the wrongdoer’s money apply.

[213] In accounting for mixed funds between the wrongdoer’s money and their illegitimately acquired money, the approach which most benefits the innocent party is typically adopted. In In Re Hallett’s Estate, it was held that where money has been withdrawn and dissipated, any money remaining in the current account will be presumed to belong to the claimant and not the fiduciary.⁵⁷ This established rule, however, is subject to the ancillary principle of claiming only the lowest intermediate balance. This rule states that once the trust funds have been drawn on, the plaintiff cannot claim the balance of the trust account from later legitimate deposits.

[214] However, where the withdrawn money has been successfully invested in stock or in an asset, it has been presumed that the beneficiary can claim that asset. In Re Oatway, a trustee put trust money into his bank account and then used some of the funds from that bank account to buy shares.⁵⁸ The rest of the money in the

_{account was dissipated, and the shares were worth less than the trust money which}

⁵⁷ _{In Re Hallett’s Estate (1879) 13 Ch D 696.}

⁵⁸ Re Oatway [1903] 2 Ch 356.

had been misappropriated. The Court held that the trustee was not entitled to claim that it was the trust money which had dissipated and that the investment was made from the trustee’s own money. The investment was presumed to have been made with the trust’s money, meaning the trust could claim a proprietary interest in the shares. Here, evidently, the Re Oatway approach is more beneficial to the Torbay companies, as it suggests that money withdrawn from the bank accounts of Mr and Mrs Napier and the Napier Family Trust and put toward the Whangaripo Valley Road property can be attributed to Torbay monies.

[215] Applying Re Oatway, Ellis J in Kim v Park accepted an argument that money misappropriated from a joint venture bank account could be traced into a property, allowing a proportional share of that property to be claimed.⁵⁹ Ellis J found that there was a constructive trust over the new property proportionate to the contribution made by the plaintiffs to the purchase price. A 10 per cent share in the property was vested in the plaintiffs as tenants in common with the registered owner. In Herbert Equities v Mamfredos, Courtney J also placed a constructive trust over a property proportionate to the contribution to the purchase price made by the plaintiff’s funds.⁶⁰

[216] The classic case Foskett v McKeown primarily dealt with mixed funds between wrongdoers and innocent contributors. However, Millett LJ also discussed the broader principles applicable to tracing through mixed funds in different circumstances and summarised the general principles. Millet LJ stated:⁶¹

The simplest case is where a trustee wrongfully misappropriates trust property and uses it exclusively to acquire other property for his own benefit. In such a case the beneficiary is entitled at his option either to assert his beneficial ownership of the proceeds or to bring a personal claim against the trustee for breach of trust and enforce an equitable lien or charge on the proceeds to secure restoration of the trust fund. He will normally exercise the option in the way most advantageous to himself. If the traceable proceeds have increased in value and are worth more than the original asset, he will assert his beneficial ownership and obtain the profit for himself. There is nothing unfair in this. The trustee cannot be permitted to keep any profit resulting from his misappropriation for himself, and his donees cannot obtain a better title than their donor. If the traceable proceeds are worth less than the original asset, it does not usually matter how the beneficiary

⁵⁹ _{Kim v Park, above n 40.}

⁶⁰ _{Herbert Equities Ltd v Mamfredos HC Auckland CIV-2005-404-3679, 18 September 2009.}

⁶¹ Foskett v McKeown [2000] UKHL 29; [2001] 1 AC 102 at 130 -132.

exercises his option. He will take the whole of the proceeds on either basis. This is why it is not possible to identify the basis on which the claim succeeded in some of the cases.

Both remedies are proprietary and depend on successfully tracing the trust property into its proceeds. A beneficiary's claim against a trustee for breach of trust is a personal claim. It does not entitle him to priority over the trustee's general creditors unless he can trace the trust property into its product and establish a proprietary interest in the proceeds. ...

...

Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money. It does not matter whether the trustee mixed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments (whether simultaneously or sequentially) out of the differently owned funds to acquire a single asset.

...

There is a mixed substitution (with the results already described) whenever the claimant's property has contributed in part only towards the acquisition of the new asset. It is not necessary for the claimant to show in addition that his property has contributed to any increase in the value of the new asset. This is because, as I have already pointed out, this branch of the law is concerned with vindicating rights of property and not with reversing unjust enrichment.

...

Common to both [the equitable rules and the common law rules] is the principle that the interests of the wrongdoer who was responsible for the mixing and those that derive title under him otherwise than for value are subordinated to those of innocent contributors. As against the wrongdoer and his successors, the beneficiary is entitled to locate his contribution in any part of the mixture and to subordinate their claims to share in the mixture until his own contribution has been satisfied.

[217] Millett LJ’s exposition was reaffirmed more recently by the English Court of

Appeal in Serious Fraud Office v Lexi Holdings PLC (in administration).⁶²

[218] In Re Oatway, and the cases which have followed it in New Zealand, only a proportionate share of the value of the assets (the second scenario outlined by Millett

_{LJ) was attributable to trust money. In the current case equally, a new property was}

⁶² Serious Fraud Office v Lexi Holdings PLC (in administration) [2008] EWCA Crim 1443, [2009]

1 All ER 586.

not acquired exclusively with the misappropriated funds from Torbay Holdings and

Torbay Rest Home.

[219] The Whangaripo Valley Road property itself was in fact acquired through a loan of $475,000 taken out by Mr and Mrs Napier. The plaintiffs claim that payments of principal and interest on the $475,000 loan were funded by misappropriated Torbay funds. Statements for the joint bank account of Mr and Mrs Napier from between 15 April 2009 and 13 February 2010 are missing. The

$475,000 was borrowed at some point in this period. Consequently, no money from the joint bank account (no matter its source of origin) can be traced into paying off the loan between those dates, as no evidence has been provided as to the relevant transactions.

[220] The statements which have been provided cover the period from 14 February

2010 to 14 June 2012. However, in April 2012, Mr Napier ceased acting as administration manger of the Torbay companies, and the last suspect cheque payment which has been identified is dated 23 April 2012. As at that date, the amount of loan outstanding was $425,049.62. I have calculated that Mr and Mrs Napier paid at least $49,950.38 in principal and $57,297.58 in interest. In total, therefore, Mr and Mrs Napier paid $107,247.96 from their joint account toward the Whangaripo Valley Road loan over a period of just over two years.

[221] Another major loan was taken out in the name of the Napier Family Trust for the sum of $540,000 to fund construction of the new house at Whangaripo Valley Road. Statements for the Napier Family Trust bank account are only available from

25 July 2011, at which point $400,000 had already been drawn down. Over the period for which statements are available, $20,473 was paid in interest on the loan. Another smaller loan was also taken out in the name of the Napier Family Trust for

$100,000 on 13 October 2011. Interest and principal payments were made by the trust in the sum of $3872.34 from that date to April 2012.

[222] These are the only contributions to the Whangaripo Valley Road property which can be specifically identified. Although many other payments were

undoubtedly made, there is no evidence which specific payments from the account of

Mr and Mrs Napier of the Napier Family Trust relate directly to the property.

[223] Following Re Oatway, as applied in New Zealand above, I consider that the sums transferred out of the bank account of Mr and Mrs Napier and the Napier Family Trust can be attributed to the Torbay companies. There is no presumption, where only part of the money from a bank account is withdrawn, contributing to part of an asset, that the funds withdrawn are split in proportion to the contributions to the bank account. The funds withdrawn and sunk into the asset are considered to be

the money of the trust.⁶³

[224] In Fletcher Steel v Nahal, Cooper J dealt with various claims against Mr Nahal on the basis that he and his company had invoiced Fletcher Steel for cleaning and maintenance work that had never occurred.⁶⁴ This included a claim for constructive trusts over property purchased from the proceeds of the misappropriated money. That property was owned by two other companies run by Mr Nahal, and a trust operated by Mr Nahal. Analogously, Cooper J said:⁶⁵

In calculating the amount of the alleged over-billing, the plaintiff had to confront the fact that there was no way to tell on the face of the invoices that had been rendered, which invoices might have involved inflated hours or relate to work which had not been done and which invoices might be genuine and accurate.

[225] As in the current case, “each deposit from the plaintiff into the first defendant’s accounts was likely to have contained money which was the result of legitimate billing as well as a substantial portion of illegitimate billing.”⁶⁶ The plaintiff therefore claimed 74 per cent of the sums distributed to the first defendant. Cooper J reduced that amount to 65 per cent, on the basis of his findings as to the lesser extent of over-billing than alleged, and some amounts owing to the defendants.

[226] The fact that the sums of money that flowed in and out of the relevant bank accounts could not be clearly attributed to misappropriated or legitimate monies did

_{not prevent Cooper J from finding that, on making out knowing receipt, a}

⁶³ _{Kells v Still HC Palmerton North AP 138/87, 26 June 1990.}

⁶⁴ _{Fletcher Steel Ltd v Nahal Contractors Ltd, above n 8.}

⁶⁵ _{At [37].}

⁶⁶ At [189].

constructive trust could attach to the assets of the third defendant (one of the companies associated with Mr Nahal) on a pro-rata basis up to 65 per cent of the total. Similarly, a loan from the third defendant to the fourth defendant, which financed the purchase of a house gave rise to a constructive trust over that property in favour of Fletcher Steel for 65 per cent of the sum loaned.

[227] This case suggests that the lack of precision as to which specific payments were legitimate and which were misappropriated will not pose an impediment to tracing the wrongly obtained profit into other assets. That is confirmed by a very recent Privy Council case, The Federal Republic of Brazil v Durant International Corporation, in which the Court discussed the ability to trace the proceeds of stolen funds. The Court held that the strictness of the lowest intermediate balance rule and the ability only to trace so long as an asset has not dissipated were subject to the principle that “a court should not allow a camouflage of interconnected transactions

to obscure its vision of their true overall purpose and effect”.⁶⁷

[228] This allowed the Court to find that a number of payments were made as bribes, which were paid through various bank accounts, could be traced into a bank account in Jersey, despite the fact that the final payments into the first bank account which derived from bribes occurred after the relevant payments into Jersey. This was essentially backward tracing. Lord Toulson stated:⁶⁸

38. ... If the court is satisfied that the various steps are part of a coordinated scheme, it should not matter that, either as a deliberate part of the choreography or possibly because of the incidents of the banking system, a debit appears in the bank account of an intermediary before a reciprocal credit entry. The Board agrees with Sir Richard Scott V-C’s observation in Foskett v McKeown that the availability of equitable remedies ought to depend on the substance of the transaction in question and not upon the strict order in which associated events occur.

39. Similarly, in a case such as Agricultural Credit Corpn of Saskatchewan v Pettyjohn, the Board does not consider that it should matter whether the account used for the purpose of providing bridging finance was in credit or in overdraft at the time. An account may be used as a conduit for the transfer of funds, whether the account holder is operating the account in credit or within an overdraft facility.

67. The Federal Republic of Brazil v Durant International Corporation [2015] UKPC 35, [2015] WLR (D) 358 at [38].

⁶⁸ At [38] – [40].

40. The Board therefore rejects the argument that there can never be backward tracing, or that the court can never trace the value of an asset whose proceeds are paid into an overdrawn account. But the claimant has to establish a coordination between the depletion of the trust fund and the acquisition of the asset which is the subject of the tracing claim, looking at the whole transaction, such as to warrant the court attributing the value of the interest acquired to the misuse of the trust fund. This is likely to depend on inference from the proved facts, particularly since in many cases the testimony of the trustee, if available, will be of little value.

[229] In Agricultural Credit Corpn of Saskatchewan v Pettyjohn,⁶⁹ the Pettyjohns applied for loans to purchase cattle, and purchased the cattle before the loan was in place using a credit line with the bank. The credit corporation was granted security over the cattle. A major question in subsequent proceedings, following the unauthorised sale of the cattle, was whether the bank had any right to security over the cattle, given that they were purchased before the credit funds had been transferred. The Court took a broad view of whether the value from the credit corporation had been used to acquire the rights, saying it was “commercially unreasonable” to divide off the transaction so minutely: “the fact that the use of the value given was, due to the nature of the transaction, after the acquisition of rights

does not alter the conclusion that the value given was used to acquire those rights.”⁷⁰

This proposition appears to have been explicitly endorsed by the Privy Council.

[230] The loans in this case were also clearly acquired before the money necessary to make principal and interest payments was acquired, and even once it was acquired (gradually, over a period of years) the series of transactions across the accounts of Mr and Mrs Napier and the Napier Family Trust make it difficult to consistently track which deposits were used toward which payments, and whether at times the deposits into the accounts which were used to make principal and interest payments were legitimate or not. I am, however, of the view, based in part on my analysis of the principal and interest payments made on 15 December 2011 and 29 December

2011 in [112] and [113], that there is sufficient evidence of Mr Napier’s misappropriation of funds throughout the accounts to “establish a coordination between the depletion of the trust fund and the acquisition of the asset which is the

_{subject of the tracing claim, looking at the whole transaction, such as to warrant the}

⁶⁹ _{Agricultural Credit Corpn of Saskatchewan v Pettyjohn (1991) 79 DLR (4}^th_{) 22 (Sask CA).}

⁷⁰ At 38.

court attributing the value of the interest acquired to the misuse of the trust fund.”⁷¹

Republic of Brazil v Durant clearly endorses the ability to claim property rights in the property obtained using loans which were financed by misappropriated money, as occurred here. This is supported by New Zealand case law.⁷² This reflects that paying down the loan allowed the defendants to acquire a significant, valuable asset with less debt encumbrance. This is an increase in the value of the house to the Napiers.

[231] A constructive trust over Mr and Mrs Napier’s property at Whangaripo Valley Road exists, to the value of the sum of $101,473.38 (the amount of money paid directly to third party suppliers of goods and services), $107,247.96 (principal and interest paid on the initial loan of $475,000 using misappropriated funds), $20,473 (being the amount paid off the major loan of $540,000 taken out by the Napier Family Trust), and $3,872.34 (the amount paid off the minor loan of $100,000 taken out by the Napier Family Trust). This is $233,066.68 in total.

[232] It is likely that substantially more money was applied to paying off the Whangaripo property loans and constructing the new house on the property. However, the lack of evidence provided to the Court as to the sums of money entering and leaving each account and how those sums were applied, means that other than the transactions isolated above, attributing any other money toward the property would be guesswork. A substantial amount of reconciliation and accounting work would be required to advance the claim further.

Negligence

[233] The seventh cause of action alleges that Mr Napier had a duty of care to ensure that the tax obligations of Torbay Holdings and Torbay Rest Home were met, and that he was negligent in carrying out that duty, thereby causing loss to Torbay Holdings and Torbay Rest Home. The loss is said to include additional tax obligations accruing to Torbay Rest Home in relation to the salary overpayments, the

_{additional amounts payable to the IRD by way of interest on the unpaid core tax and}

⁷¹ _{Republic of Brazil v Durant, above n 67, at [40].}

⁷² Shannon Agricultural Consulting (in liq) v Shannon [2015] NZHC 1133.

the cost of negotiating and dealing with the IRD to assess the amounts involved and remedying the situation.

[234] Counsel relies on Pounamu Properties Ltd v Brons, in which Duffy J found that Pounamu’s manager and a gratuitous agent, Mr Brons, was liable to Pounamu for loss caused by carelessly and incompetently preparing and furnishing Pounamu’s GST and income tax returns.⁷³ Mr Brons was the only person in New Zealand who was responsible for managing the company’s affairs as the sole director was overseas. This created the requisite proximity to impose a duty of care. No policy

reasons militated against the imposition of tortious liability. Duffy J stated:

[222] ... I consider that Mr Brons was under a duty to recognise the limitations of his abilities and to act only when he could do so competently, and to advise Pounamu when he lacked the requisite competency. ...

[223] ... If Mr Brons could not competently deal with the tax affairs of Pounamu, I consider he was under a duty to Pounamu to make that clear from the outset. I consider that by assuming the burden of preparing and furnishing tax returns on Pounamu's behalf, he was undertaking to perform this task adequately. ...

[235] In Pounamu, a duty of care seems to have been necessary to secure liability for not adequately preparing tax returns because Mr Brons, although the only New Zealand manager and under fiduciary duties to Pounamu, was not a director. Directors such as Mr Napier are clearly liable under their Companies Act duties for failing to pay IRD debts and submit IRD returns.⁷⁴ However, breach of a Companies Act duty has not been pleaded here.

[236] In most cases in which a director takes on the responsibility of performing the company’s tax obligations, such as paying tax and organising the necessary tax compliance forms, the Companies Act duties will be sufficient to found liability. The duty of care found by Duffy J supplements that statutorily recognised duty in relation to managers in a fiduciary position who undertake to perform a company’s tax

_obligations.

⁷³ _{Pounamu Properties Ltd v Brons [2012] NZHC 590.}

⁷⁴ McGreal Floor Coverings Ltd (in liq) v McGreal [2014] NZHC 2884; Boutique Tanneries Ltd

(in liquidation) v Handley HC Auckland CIV-2006-404-2713, 24 July 2008.

[237] In this case, Mr Napier was both Torbay Holdings and Torbay Rest Home’s administration manager from the outset and additionally a director from 2008, with a responsibility over the payroll and tax. He undertook to perform those tasks and had a duty to the companies to notify the other directors if he was unable to do so, given the seriousness of the consequences for the Torbay companies. I am of the view that Mr Napier breached his duty of care to Torbay Holdings and Torbay Rest Home to ensure that the companies meet their tax obligations if he could do so competently, and to advise the other Torbay directors where that was not possible.

[238] As to alleged losses, Torbay Holdings and Torbay Rest Home did not lead any evidence of additional tax obligations accruing to the companies in relation to the salary overpayments. Nor did they lead evidence of the cost of negotiating and dealing with the Inland Revenue Department to assess the amounts involved and remedy the situation. The companies’ accountant, Mr Williams, estimated the additional amounts paid to the Inland Revenue Department by way of interest were between $18,000 and $20,000. I therefore find Mr Napier liable under this cause of action for the lesser amount of $18,000.

Counterclaim

[239] The defendants’ responses to the plaintiffs’ claims above was to deny any impropriety, and claim that all payments were either legitimate rest home expenses or reimbursement of payments made on behalf of Torbay Rest Home. In addition, the defendants counterclaim for $35,847.72, which they say is further expenditure which they are owed, as well as an unquantified sum for unpaid wages and

$15,708.10 for unpaid holiday pay. The defendants also claim another $212,345, as the current account balance apparently owing to the Napier Family Trust, and another $200 apparently owing to Mr Napier, according to the financial statements of Torbay Holdings.

[240] Finally, the defendants claim $66,300 (net), being an advance to Torbay Rest

Home from the Napier Family Trust.

[241] As to the sum of $35,847.72, which the defendants say is expenditure for which they are awaiting reimbursement, Mr Napier did not make any reference to

expenditure awaiting reimbursement in his brief of evidence, nor did he produce any documentation relating to the sum of $35,847.72. The defendants’ claim to this sum is therefore dismissed as unproven. The same applies to the claims for unpaid wages and holiday pay. These are also dismissed as unproven.

[242] The sum of $212,345, which the defendants say is the current account balance owing to the Napier Family Trust shown in the financial statements of Torbay Holdings, consists of an initial contribution by the Trust together with accrued interest and a fully imputed dividend declared to shareholders in the year ended 31 March 2008. The Trust’s initial contribution to the purchase of the business was largely funded by a bank loan. Although the plaintiffs say that the bank loan was only able to be repaid because of unauthorised payments from Torbay Holdings and Torbay Rest Home, the fact is no specific proof of this has been adduced, that the initial contribution was not made with any unauthorised payments from the companies, and no unauthorised payments have been used to subsequently increase the current account balance. The plaintiffs in their closing submissions conceded that, based on the books of account, this should be paid to the Trust. In those circumstances, the Trust is entitled to payment of its current account balance, it having sought and been refused payment. The sum of $212,345.00 can be offset against the sums I have found the Trust owes to Torbay Holdings and Torbay Rest Homes.

[243] The sum of $200 is also shown in the financial statements of Torbay Holdings as owing to Mr Napier. The plaintiffs say that the sum of $200 is a nominal credit balance in favour of Mr Napier brought about by the unauthorised payment of funds from Torbay Rest Home to Torbay Holdings to extinguish a debt of

$11,000, which he owed and still owed. I have, however, reached the view that Mr Napier is liable for 70 per cent of the suspect payments identified by Mr Single. In those circumstances, it is important not to double count Mr Napier’s liability and accordingly Mr Napier is entitled to payment of the sum of $200.

[244] Finally, the claim for $66,300, which is said to be an advance by the Napier Family Trust to Torbay Rest Home, arose out of Mr Napier’s failure to pay the companies’ tax obligations. An agreement was reached very soon after the problem

with the IRD became apparent between Mr Single, on behalf of the Single Family Trust, and Mr Napier, on behalf of the Napier Family Trust. It was agreed that the Single Family Trust would purchase the shares owned by the Napier Family Trust in Secret Squirrel Investments for the sum of $72,500. It was also agreed that the funds would be paid to the IRD to pay the arrears of PAYE and GST owing by Torbay Holdings and Torbay Rest Home as an advance to the companies on the following terms:

(a) Interest rate zero; and

(b) Term repayable upon sale of business currently in progress subject to abatement for penalties to be levied by IRD.

[245] The financial statements of Torbay Rest Home disclosed a current asset in the sum of $6,200 in the name of the Napier Family Trust so the net amount of the advance is $66,300, which is the amount specified in the counterclaim.

[246] Mr Napier submits that the word penalties in the agreement, signed on

20 April 2012, should not include use of money interest charged by the IRD. However, it is my view that the proper interpretation of the agreement, being the presumed common intention of the parties, is that the word penalties includes any sum of money charged by the IRD as a consequence of the failure to file tax returns and/or pay the assessed tax on time. There is no logical reason why the parties to the agreement should distinguish interest from standard penalties for non-filing of returns or from variable penalties for non-payment of assessed amounts.

[247] In any event, it was clearly the intention of the parties that the advance would not be payable until the business was sold. It has not been sold yet so the advance is not repayable. The defendant’s counter-claim for $66,300 is therefore dismissed.

Claim by Napier Family Trust against Sandspit Bay Holdings

[248] In the second claim heard in this trial (CIV-2013-404-001406), the Napier

Family Trust claims that on or about 20 January 2009, it advanced the sum of

$70,000 by way of loan to Sandspit Bay Holdings. The terms of the loan advanced

were recorded in a written Deed of Acknowledgement of Debt dated 20 January

2009. The loan advance of $70,000 was to remain outstanding as a debt, repayable by Sandspit Bay Holdings to the Trust on demand. There was also provision for the payment of interest on the debt. Finally, the debt was to include any further advances which may be made by the Trust to Sandspit Bay Holdings after the date of the deed.

[249] The Trust claims that between 20 January 2009 and 31 March 2012, it advanced additional amounts to Sandspit Bay Holdings which were recorded in the shareholders’ current account balances contained in the annual financial statements prepared by Sandspit Bay Holdings. As at 31 March 2012, the balance of the loan recorded in the shareholders’ current accounts was the sum of $96,479.00. Despite formal written demand, Sandspit Bay Holdings has failed to pay any sum to the Trust in breach of the loan agreement.

[250] Sandspit Bay Holdings admits that the Trust paid $70,000 to it between

6 December 2008 and 15 January 2009, but claims that the sums advanced were not the Trust’s money and no debt was therefore owed to the Trust. It says any funds advanced were illegitimately received from Torbay Holdings or Torbay Rest Home. Sandspit Bay Holdings also claims that execution of the Deed of Acknowledgement of Debt was obtained as a result of the Trust’s deception and the agreement is unenforceable.

[251] Sandspit Bay Holdings also admits the receipt of further funds from the Trust,

such that the current account balance in Sandspit Bay Holdings’ books as at

31 March 2012 was $96,479, but claims that no money is owing to the Trust because any credit balance in the shareholder’s current account is not beneficially held for the Trust or otherwise payable to it. Sandspit Bay Holdings claims that any such funds are impressed with a trust in favour of the Torbay companies. Finally, it claims it would be contrary to public policy to enable the Trust to recover such funds.

_{[252] The following advances are able to be identified:}

[253] The financial statements of Sandspit Bay Holdings for the year ended

31 March 2012 show the opening balance of the Napier Family Trust’s current account as at 31 March 2011 was $156,267, which represents the above advances plus a cheque clearance fee of $25 and some rounding of the payments. The Trust’s current account as at 31 March 2012 shows drawings of $59,788, which when subtracted from the figure of $156,267 leaves a closing balance of $96,479. This is the figure claimed by the Trust in this claim.

[254] Mr Single explained that the drawings were a book entry only and not a cash payment. All the shareholder current accounts were treated the same way. Sandspit Bay Holdings had an investment in Secret Squirrel Investments. In the year ended

31 March 2012, it was decided for tax reasons to transfer the investment in Secret Squirrel Investments from Sandspit Bay Holdings itself to the individual shareholders of Sandspit Bay Holdings personally. The drawings reflected that change of ownership.

[255] There were, therefore, 22 separate advances made by the Napier Family Trust to Sandspit Bay Holdings over approximately 18 months. Three of these advances were in the form of cheques written by Mr Napier on the Torbay Holdings bank

_account:

[256] The first cheque for $2,500 was deposited with cash of $750 to make up the deposit of $3,250 shown in the list of 22 advances above. The additional cash sum disguises the cheque amount, as only the total deposit sum appeared on the Sandspit Bay Holdings bank statement. Mr Napier claims that all three cheques are for reimbursement of legitimate expenses he paid on behalf of Torbay Holdings or Torbay Rest Home. He cannot, however, identify which particular expenses in respect of which the cheques are in reimbursement.

[257] The Trust’s claim is in substance similar to the cross-claim brought by the Trust against Torbay Holdings for an order that the Trust’s current account in the sum of $212,354 be repaid. This advance was also made possible by borrowing funds which were allegedly substantially paid off using misappropriated funds from the Torbay companies. Counsel for the Torbay companies conceded in closing submissions that the debt of $212,345 owing to the Trust was payable in that claim. The distinction between the obligation to pay that debt, and the debt in this case, is not entirely clear.

[258] Because of the intermingling of Mr Napier’s legitimate income and unauthorised payments, it is impossible to identify which advances are from legitimate income and which are from unauthorised payments. Mr Single claims that

Mr Napier and his wife were plainly unable to afford to make such advances without access to funds unlawfully taken from Torbay Holdings and Torbay Rest Home.

[259] Apart from the overpayment of salaries for Mr Napier and his wife over this period, Mr Single points to suspect payments to Mr Napier and/or his wife totalling

$249,341.56 and cash cheques totalling $62,531.10 over the same period. I have earlier found that 70 per cent of such payments cannot be justified, or in the case of this 18 month period, $218,310.86. This level of unauthorised payments was therefore sufficient to fund all the advances made by the Napier Family Trust to Sandspit Bay Holdings over this period of $156,239.46. However, although the transfers to Sandspit Bay Holdings from the Trust have been identified, no payments into the Trust’s account have been identified as corresponding to the transfers out.

[260] Further, unlike the cross-claim, the result of a finding that the money used to fund advances to Sandspit Bay Holdings was beneficially owned by Torbay Holdings and Torbay Rest Home would not be to allow Sandspit Bay Holdings to retain the cash advanced. Instead, it would lead to a finding that the proportion of the advance attributable to the Torbay companies was held on a constructive trust for them. A constructive trust has not been pleaded. Beneficial ownership by the Torbay companies does not remove the obligation on Sandspit Bay Holdings to account to the Napier Family Trust for money owed to it.

[261] Sandspit Bay Holdings did not elaborate on the defences it offered to the claim, other than to say that the requirement to account would be unjust. However, no legal basis was provided which would allow the money owing to the Napier Family Trust to be wiped. Again, it is important not to double count Mr Napier’s liability. In those circumstances, where it is clear that a debt is owing, I am obliged to find that Sandspit Bay Holdings must account to the Napier Family Trust for the sum of $96,479. This is consistent with the finding against Torbay Holdings in the first claim.

Result

[262] Mr Napier is personally liable for the portion of the salary overpayment that he received, being $242,349.65, and the total unauthorised payments of

$1,159,201.55, making a grand total of $1,401,551.20 for money had and received, to which $18,000 is to be added as damages for negligence in failing to complete and file tax returns for the plaintiffs. Finally, the sum of $200 is to be deducted for money shown as owing to Mr Napier in the financial statements of Torbay Holdings. There will accordingly be judgment against Mr Napier in favour of Torbay Holdings and Torbay Rest Home in the sum of $1,419,351.20. Although this judgment is given on the claim for money had and received, Mr Napier is also liable for breach of his director’s duties and associated fiduciary duties as well as knowing receipt of monies misappropriated from Torbay Holdings and Torbay Rest Home.

[263] Mrs Napier is personally liable for the total salary overpayments of

$281,087.01, and that portion of the unauthorised payments she received being

$439,223.52, making a grand total of $720,310.53 for money had and received. There will accordingly be judgment against Mrs Napier in favour of Torbay Holdings and Torbay Rest Home in the sum of $720,310.53. This judgment is only given on the claim for money had and received. Mrs Napier is not liable for breach of her director’s duties and associated fiduciary duties, nor is she liable for knowing receipt of monies misappropriated from Torbay Holdings and Torbay Rest Home.

[264] Mr and Mrs Napier and Mr Davis, as second defendants, are liable as trustees of the Napier Family Trust for the total salary overpayments of $281,087.01 and that portion of the unauthorised payments the trustees received, being $9,176.70 traced payments and $17,816.37 cash deposits, making a grand total of $308,080.08 for money had and received. The sum of $212,345.00 is to be deducted for money shown as owing to the Napier Family Trust in the financial statements of Torbay Holdings. There will accordingly be judgment against Mr and Mrs Napier and Mr Davis as trustees of the Napier Family Trust in favour of Torbay Holdings and Torbay Rest Home in the sum of $95,735.08. Although this judgment is given on the claim for money had and received, the trustees of the Napier Family Trust are also liable for knowing receipt of monies misappropriated from Torbay Holdings and Torbay Rest Home because Mr Napier’s knowledge is imputed to the Trust.

[265] Although I have given individual judgments against Mr and Mrs Napier and the Napier Family Trust, which in total amounts to $2,235,396.81 (because of the

joint receipt of money by Mr and Mrs Napier), Torbay Holdings and Torbay Rest Home are only entitled to recover up to the maximum sum of $1,458,288.56, being the total of the salary overpayments $281,087.01, the unauthorised payments of

$1,159,201.55 (70 per cent of the identified suspect payments) and $18,000 damages

for Mr Napier’s negligence.

[266] In addition, I declare that the property owned by Mr and Mrs Napier at Whangaripo Valley Road, Wellsford (Identifier 388817 North Auckland; Prior reference NA 107B/811; 20.8150 hectares being Lot 1 Deposited Plan 397416) is held on constructive trust for Torbay Holdings and Torbay Rest Home to the value of

$233,066.68. This declaration will give a means to Torbay Holdings and Torbay

Rest Home to enforce the judgment in their favour against both Mr and Mrs Napier.

[267] The cross claim against Torbay Holdings and Torbay Rest Home is allowed in part. Torbay Holdings owes $200 to Mr Napier and $212,345 to the Napier Family Trust, which sums have been deducted from money owing by Mr Napier and the Napier Family Trust to Torbay Holdings and Torbay Rest Home.

[268] In the second proceeding, the claim by the Napier Family Trust against Sandspit Bay Holdings is allowed. There will accordingly be judgment against Sandspit Bay Holdings in favour of the Napier Family Trust in the sum of

$96,479.00.

[269] Finally, as to costs, Torbay Holdings and Torbay Rest Home are entitled to costs on CIV 2012-404-007660, while the Napier Family Trust is entitled to costs on CIV 2013-404-001406. If the parties are unable to agree on costs, memoranda should be filed within 28 days of the date of this judgment.

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

Woolford J