Orders setting aside dispositions of property made under section 348 of the Property Law Act 2007

Summary

The properties were disposed of without a reasonably equivalent value being received in exchange and as a consequence the debtors became insolvent. The dispositions were also made with the intent to prejudice the Commissioner of Inland Revenue as a creditor, and had the effect of hindering or delaying the Commissioner's recourse to those properties to satisfy the debt.

Facts

Hon and Ta Ly purchased a residential property in Taumaranui ("the Miriama St property") and a bakery business in Taumaranui ("the Taumaranui Bakery") in 1999. The Taumaranui Bakery was operated by the Hon and Ta Ly partnership.

In 2003, they also purchased a bakery business in Whakatane ("the Whakatane Bakery"). This business was operated by Hon Ly as a sole trader. Hon and Ta Ly also purchased a residential property in Auckland in April 2003 ("the Sunset Rd property") by way of loan assistance from friends and a mortgage from BNZ.

In 2006, Hon and Ta Ly, as trustees of the Hon and Ta Ly Family Trust, purchased the building from which the Taumaranui Bakery business was conducted ("the Hakiaha St building") with funding from The New Zealand Guardian Trust Company Ltd.

The Commissioner initiated an audit of both businesses in July 2008. As a consequence of that audit, assessments for PAYE, GST, Working for Families Tax Credits and income tax were made against Hon and Ta Ly. These assessments were not challenged by either Hon Ly or Ta Ly and constituted a debt owed to the Commissioner.

On 16 April 2009, Vandra Ly (Hon and Ta Ly's daughter) purchased the Miriama St and Sunset Rd properties for $120,000 and $430,000 respectively with a $50,000 deposit apportioned as $25,000 for each property. The balance owed for the Miriama St property was left owing to Hon and Ta Ly under an unsecured term loan and the balance for the Sunset Rd property was met partly by mortgage funding and the rest by an unsecured term loan from Hon and Ta Ly. No payments were made towards the term loans.

On 21 April 2009 both the Taumaranui Bakery and the Whakatane Bakery were sold to Vandra Ly Limited (a company established by Vandra Ly) for $35,000 and $113,000 respectively by way of a further term loan agreement. Both businesses were subsequently sold to unrelated third parties in 2010.

On 9 June 2009, Vandra Ly sold the Miriama St property to herself and Thiary Ly (Vandra Ly's sister) as trustees of the Vandra Ly Family Trust for $100,000. The Sunset Rd property was also transferred to the Vandra Ly Family Trust (the transfer was registered on 23 December 2010). Hon and Ta Ly remained in residence pursuant to an agreement to pay rent. However, no rent was paid.

On 10 June 2011, the Commissioner issued proceedings seeking judgment for the debt owed. The Commissioner also sought orders under section 348 of the Property Law Act 2007 ("PLA") in respect of the Miriama St and Sunset Rd properties on the basis these dispositions had prejudiced the Commissioner as creditor. Further, the Commissioner sought freezing orders in respect of those properties and the additional Hakiaha St building.

Freezing orders were granted albeit the Sunset Rd property was sold on 4 December 2011 (with the proceeds held by the Registrar of the High Court pending judgment).

Issues

The issues were whether:

• the dispositions were made with the intent to prejudice a creditor (section 346(1)(b) of the PLA);
• the dispositions did prejudice the Commissioner as creditor (section 348(1)(b) of the PLA);
• the respondents had made out any of the defences set out in section 349 of the PLA; and
• any further orders (compensation for Vandra Ly) could be made under section 350(3) of the PLA.

Decision

Andrews J stated there was no dispute that the transfers were dispositions (section 345(2) of the PLA) and that Hon and Ta Ly became insolvent as a consequence of those dispositions (section 346(2) of the PLA).

Her Honour was guided by the Supreme Court judgment in Regal Castings Ltd v Lightbody [2008] NZSC 87; [2009] 2 NZLR 433 and on the basis of a number of factors (in particular the fact only $50,000 had ever been paid for the properties, no rent had been paid by Hon and Ta Ly, the debt had been forgiven to the extent possible and the Commissioner had not been advised of the transfers) Andrews J considered the transfers were made without a reasonably equivalent value being received in exchange.

Andrews J also considered that the transfers were made with the intent to prejudice the Commissioner as creditor, particularly as Vandra Ly confirmed she was aware Hon and Ta Ly owed the Commissioner a substantial debt and that she wanted to preserve their assets and further that Hon and Ta Ly knew that by transferring the Miriama St and Sunset Rd properties they removed themselves from any ability to pay the debt. Her Honour was satisfied the transfers had the effect of hindering or delaying the Commissioner's recourse to those properties to satisfy the debt and therefore exposed the Commissioner to a significantly enhanced risk of not recovering the debt. Accordingly, Andrews J considered the transfers fell within subpart 6 of the PLA and therefore could consider whether orders should be made under section 348.

Despite counsel for the respondents submitting during the hearing there was no prejudice to the Commissioner as Vandra Ly could pay the outstanding loan balances, Andrews J did not accept there could be no prejudice to the Commissioner. Her Honour considered that the Commissioner had been hindered or delayed in the exercise of his right of recourse to the properties as he has had to apply for orders under section 348 and incur costs and delay in doing so.

Her Honour also considered that the available defences under section 349 of the PLA had not been made out by the respondents particularly given valuable consideration was not given for the properties and that Vandra Ly had knowledge of the fact these were dispositions to which subpart 6 of the PLA would apply.

While the respondents had sought an order for compensation to Vandra Ly for payments she has made to assist her parents, rent payable for the period her parents resided in the Sunset Rd property and the benefit of the increase in value of the Sunset Rd property since its transfer to Vandra Ly, Andrews J did not consider it appropriate that Vandra Ly benefit from retaining the properties.