Reclassifying
accounting entries to fraudulently disguise a $740,000 advance by failed Otago
property company James Developments Ltd to a family trust set up by its
controlling shareholder Chris James was brazenly admitted when he then
challenged the company’s liquidator ability to sue. James argued the money was not recoverable,
it was statute-barred.
The High Court was told Mr
James controlled James Developments.
Through a family trust, he borrowed $740,000 from his company in October
2006 to build a substantial family home at Jacks Point, in Queenstown. For his company, this loan was an asset –
money to be received in the future. For
trustees of the trust, this was a liability - money to be repaid in the future.
The future arrived when James
Developments went into liquidation in July 2009. Evidence was given that in the days prior to
liquidation Mr James met with his professional advisers to deal with the ticklish
question of the company’s $740,000 advance.
A liquidator would be expected to call in the loan promptly. A
lengthy company resolution with accompanying narrative was signed by Mr James
stating the $740,000 advance was not a loan, it was the repayment of monies
previously advanced to the company by himself and interests associated with
him. On the strength of this resolution,
Mr James’ accountant Mr Todd Miller then reclassified the transaction in the
financial statements of James Developments from a loan to repayment of earlier
advances. At the court hearing, two
lawyers present at the meeting said they had no recollection of discussions
about the proposed reclassification.
Justice Dunningham said Mr Miller who drafted the resolution knew it was
factually inaccurate.
While the company went into
liquidation in July 2009, Mr Grant Reynolds was not appointed liquidator until
November 2010. He replaced prior
liquidators who resigned. The court was
told Mr Reynolds had considerable difficulty getting explanations from Mr
Miller about company transactions.
Responses were dilatory, often sparse to the point of obscurity and
sometimes evasive. Both Mr Miller and Mr James were formally interviewed by the
liquidator in May 2012. The following
month, Mr Reynolds advised the trustees that he did not accept the “reclassification”
as being valid and demanded repayment to James Developments Ltd of the $740,000
advance. Litigation followed. Mr James family trust acknowledged the
reclassification was a fiction, but said it was too late to recover the money. Loans not recovered within six years of
falling due are statute barred: the Limitation Act prohibits any action for
recovery. The $740,000 loan was made in
October 2006. The family trust argued
time ran out in October 2012 and the liquidator could no longer sue. Justice Dunningham ruled the advance was an
on demand loan. Liability for repayment
does not arise until demand is made. Her
Honour further ruled that since the reclassification amounted to a fraud, time
does not start running until the liquidator could reasonably have been expected
to discover the fraud. She said the
fraud was actually identified in June 2012 when Mr Reynolds formally
interviewed the accountant, Mr Miller, and the fraud was not reasonably
discoverable before January 2011 when Mr Reynolds was having trouble
reconciling the conflicting financial information available. She ruled the six year time limit did not
start running until January 2011. The
liquidator took legal action within that time.
Trustees of the family trust
were ordered to repay $740,000 to James Developments Ltd. Mr Chris James is not a trustee of his family
trust.
Mr James, as director of James
Developments Ltd, was held to be in breach of his duties to the company by
orchestrating the fraud. No damages were
ordered. The company had not suffered a
loss; the accounting entries had been reversed and the loan was to be repaid.
Reynolds
v. Calvert – High Court (9.03.15)
15.015