Invalid asset transfers were in reality loans

Summary

There were loans owing from Silver Fern Trustees Ltd to Allen and Palmer. Certain assets were to be recorded as assets of Silver Fern Trustees Ltd and the Commissioner was directed to prepare amended financial statements for Silver Fern Trustees Ltd.

Impact of decision

This decision turns on the particular facts of this case. However, it shows the judicial consideration of loans purporting to the other transfers.

Facts

Following an investigation into the tax affairs of Mr Allen and Mr Palmer and subsequent assessments of tax, the Commissioner obtained judgment against Mr Allen (for $1,520,693) and Mr Palmer (for $1,519,618). The Commissioner asserted that there were debts owed to Mr Allen and/or Mr Palmer by Silver Fern Trustees Limited ("Silver Fern") and sought a court declaration to that effect.

Mr Allen and Mr Palmer are United States citizens who came to New Zealand on 16 August 1999. While in New Zealand they promoted an investment scheme supposedly involved in the purchase of offshore corporate structures, typically in Panama, through which high-yielding investments were to be made. The investment scheme was fraudulent, but unfortunately significant funds were paid over by unwitting investors.

On 16 April 2004, following a Serious Fraud Office investigation into his activities between August 1999 and August 2001, Mr Allen was found guilty of conspiracy to defraud members of the public and of using a document with intent to obtain a pecuniary advantage. Mr Allen was sentenced to a term of imprisonment and was subsequently paroled and deported in April 2007.

On 23 May 2003 Mr Palmer was convicted in the United States District Court on charges of conspiracy to defraud the Internal Revenue Service and the filing of false and fraudulent tax returns. Mr Palmer was sentenced to 9 years imprisonment and is not due for release until June 2010.

Neither Mr Allen nor Mr Palmer has taken steps to defend the proceedings brought by the Commissioner.

Silver Fern was incorporated on 27 April 2001 with Mr Allen and Mr Palmer as the initial shareholders and directors. By February 2002 the Companies Office records showed Mr Allen as sole shareholder and director. While there were later changes to the directors and shareholders, Mr Allen remained one of the directors and ultimate owner of the shares.

Silver Fern is the Trustee of the Silver Fern Trust ("the Trust") established by Mr Allen on 27 April 2001. The purposes of the Silver Fern Trust included settling the purchase of a property at 46 Puriri Drive, Whenuapai ("the Whenuapai property") to provide a home in New Zealand for Mr Allen's family while visiting or living in New Zealand. The beneficiaries of the Trust included Mr Allen and his family. In early May 2001 Silver Fern settled the purchase of the Whenuapai property.

The Commissioner obtained in April 2002 a charging order nisi on property other than land which included a number of motorcycles owned by Mr Allen and Mr Palmer and a Mareva injunction over various assets of Silver Fern (as well as Mr Allen and Mr Palmer) including the net proceeds of the sale of the Whenuapai property and additional motorcycles and motor vehicles.

The Commissioner sought to either enforce the judgment amounts against Silver Fern in the same manner as if he had judgment against that company, or issue a sale order to seize Mr Allen's and/or Mr Palmer's personal property, including debts owed to them by Silver Fern.

The Commissioner challenged three financial transactions purportedly recorded in the Silver Fern's financial statements which gave rise to the following issues.

Issue 1

Whether a sum of $200,000 paid by Mr Palmer by way of deposit for the purchase of a Whenuapai property was a loan to Silver Fern, and if so whether that loan has since been repaid.

Issue 2

Whether the balance of the purchase price paid to settle the purchase of the Whenuapai property was a loan from Messrs Allen and/or Palmer to Silver Fern as trustee of the Trust or a gift from a company in Panama known as Fortune Management.

Issue 3

Whether Silver Fern as trustee of the Trust owed any moneys to either Mr Allen, or to Mr Palmer, or to both of them, on account of certain motor vehicles and motorcycles that are shown in some versions of the financial accounts as being assets of Silver Fern.

Decision

Issue 1

Wylie J concluded that accounts for Silver Fern for the 2003 year and following should reflect that there was a debt owing by the Trust to Mr Palmer which included the sum of $200,000 paid by Mr Palmer as the deposit on the purchase of the Whenuapai property.

There was clear evidence that the $200,000 paid by Mr Palmer as a deposit on the purchase of the Whenuapai property was a loan. Assertions by Silver Fern that the money had been repaid in part or full were not borne out by any documentation or evidence.

Issue 2

The Commissioner asserted the balance of the consideration by Silver Fern, $1,932,340, for the purchase of the Whenuapai property was a loan to Silver Fern as trustee of the Trust from Messrs Allen and Palmer in proportion to their contributions, and that this loan remained unpaid.

Silver Fern contended that the balance of the consideration was received by Silver Fern as trustee of the Trust as a cash gift or settlement from an entity in Panama.

Wylie J found that the money originated from an entity known as Fortune Management which was based in Panama. While none of the evidence was decisive by itself, collectively they compelled the conclusion that Messrs Allen and Palmer and their financial affairs were inextricably intertwined with Fortune Management Services Inc and probably Fortune Development Services Inc.

There was nothing in evidence to suggest that there was any gift by Fortune Management Services Inc, or that it settled the money on the Trust. Given the absence of any commercial justification for a gift or a settlement and given the deep involvement of Messrs Allen and Palmer in the affairs of Fortune Management Services Inc, Wylie J found that the moneys were in effect a payment by Fortune Management Services Inc, to Messrs Allen and Palmer to enable them to meet their obligations under the agreement for sale and purchase. They in turn advanced the money to Silver Fern so that it could complete the purchase of the Whenuapai property on behalf of the Trust. The money should be treated as a joint advance to the Trust by both Mr Allen and Mr Palmer.

Issue 3

The Commissioner claimed that there was a debt owing by the Trust to Messrs Allen and Palmer in proportion to their contributions to the purchase of the motor vehicles and motorcycles which remains unpaid and can be attached to the net proceeds of the sale held in the name of Silver Fern.

Silver Fern denied that there had been any loan and that the motor vehicles and motor cycles were never properly transferred to Silver Fern and it held them as bare trustee.

The evidence was that the vehicles were either purchased in Mr Palmer's name or from money which came from him. Some of the vehicles had been transferred to the Trust on Mr Allen's instructions and in breach of the Court orders in existence at that time.

Wylie J found where the evidence supported authorisation or approval of the transfer of the motor cycles or motor vehicles to the Trust, the vehicles became an asset of the Trust with a debt created back as a result of the transfer. Without such supporting evidence his Honour concluded the particular asset could not be treated as an asset of the Trust, nor could there be a debt created by the transfer to the Trust.

Conclusion

This judgment was issued as an interim judgment. His Honour's finding means there will need to be alterations to the financial accounts to reflect those findings. The Commissioner was directed to prepare and file amended accounts together with a memorandum raising any further orders required. Silver Fern could then file its response. A final judgment will then be issued confirming the accounts and addressing any matters arising.