Gulled by an apparent fraud, Basecorp Finance is turning on its head the company law ‘indoor management’ rule seeking to enforce a million dollar mortgage. If Basecorp is proved correct, a new fraud industry will develop hijacking corporates in a novel form of identity fraud.
Peter Chevin is alleged to have orchestrated a mortgage fraud after altering Companies Office records to get control of Auckland property company, Avon Parnell Ltd. Mr Chevin has been bankrupted four times. He has criminal convictions for dishonesty. It is alleged Mr Chevin acted without authority changing Companies Office records online in May 2019 naming Russell PKR Trustee Ltd as Avon Parnell’s new sole shareholder and also naming his associate Clark Valmont as sole director. On its 2015 incorporation, ultimate ownership of Avon Parnell lay with Auckland property developer Tim Edney.
The High Court was told Avon Parnell under its new ‘ownership’ borrowed one million dollars from Basecorp Finance Ltd with mortgage security given over Avon Parnell’s real estate in Auckland inner city suburb Parnell. Most of the money was quickly funnelled out of Avon Parnell’s control. Two months later, Mr Edney was back in control of the company with some $310,000 recovered and paid back to Basecorp. It threatened a mortgagee sale to recover the loan balance plus accrued interest. Basecorp said it was entitled to rely on the Companies Office public record; its mortgage against Avon Parnell assets was valid. The ‘indoor management’ rule meant it did not have to inquire into the authority of those purporting to act for Avon Parnell, it said.
A legal rule since the 1850s, the ‘indoor management’ rule makes companies liable for acts of agents acting within the scope of their apparent authority. To be liable, the company must have held out the person as having status as its agent; as director, manager, or employee. Basecorp argues the traditional rule has been overturned by Companies Act law changes made several decades ago.
Justice Muir ruled full legal argument was now needed on whether a person who through fraud appears to be director of a company, has authority to commit that company to contracts. Meanwhile, Basecorp was temporarily blocked from enforcing its mortgage. Justice Muir commented: the only likely solvent parties who will be left bearing losses from the alleged fraud are Avon Parnell Ltd, Basecorp Finance Ltd and Auckland lawyer Graeme Skeates who purported to act for Avon Parnell on the Basecorp loan agreement.
Avon Parnell Ltd v. Basecorp Finance Ltd – High Court (14.05.20)
20.081