The Supreme Court’s decision in McIntosh v Fisk has confirmed how the courts will deal with claw back claims under the voidable transactions regime in the context of Ponzi schemes. Liquidators’ recoveries will be limited to the fictitious profits for which there was no value given.

A copy of Chapman Tripp’s submission to the Insolvency Working Group regarding the voidable transactions regime and Ponzi schemes can be accessed here.

In 2007, Mr McIntosh entered into an agreement with Ross Asset Management Ltd (RAM) to manage his $500,000 investment portfolio. Unbeknownst to Mr McIntosh, RAM was operating as a Ponzi scheme. When an investor paid money to RAM under a management agreement, RAM would misappropriate the funds to a pool of cash and securities, which it used to pay other investors wishing to cash up their investments. The Ponzi scheme was not sustainable and eventually RAM collapsed.

Prior to RAM’s collapse, Mr McIntosh had decided to cash up his portfolio and withdraw the amount which, according to the fictitious reports he had received from RAM, totalled $954,047. RAM’s liquidators sought to claw back that entire payment under the voidable transaction provisions in the Companies Act 1993 and the Property Law Act 2007.

The majority of the Supreme Court affirmed the earlier decisions of the lower courts. Mr McIntosh was not entitled to retain the fictitious profits, and the liquidators could not claw back payment equivalent to Mr McIntosh’s initial investment. Mr McIntosh successfully argued that the fact that RAM’s fraudulent activity destroyed the value of the initial investment should not undermine the nature of the value given.

However, the Court rejected Mr McIntosh’s attempt to retain the fictitious profits, stating that the Court of Appeal was correct to confine the calculation of value to a sum that equalled the antecedent debt, where the antecedent debt was both quantified and fixed. The Court was concerned that if a payment exceeding the antecedent debt by nearly 100 per cent was defensible, what would not be?

The minority view

In the Court of Appeal’s judgment1, the majority expressly noted that, had they not felt bound by the Supreme Court’s ruling in Allied Concrete2 on the meaning of “gave value”, they would have agreed with the minority and required Mr McIntosh to pay back not just the fictional profits, but also the amount equivalent to his initial investment.

Justice Miller expressed the minority position. He disagreed that Allied Concrete applied because in that case:

  • trade creditors were recognised as a special class deserving greater protection for commercial utility reasons, and
  • there was no controversy on the measure of value exchanged between the debtor and creditor.

In conducting his own analysis on the application of the value defence Justice Miller said that, because RAM had stolen its investors’ funds, RAM was liable in restitution at any given time to repay all contributions and the scheme’s collapse was inevitable. As put by the Supreme Court of the United States in their decision on the original Ponzi scheme, “[h]e was always insolvent, and daily became more so, the more his business succeeded”.3 Justice Miller concluded that, because RAM was insolvent at all material times, RAM received no value from Mr McIntosh for the initial investment.

In the Supreme Court, Justice Glazebrook was in the minority with her view that the liquidators ought to have clawed back the entirety of the $954,047 paid to Mr McIntosh because no value was given. While Justice Glazebrook diverged from Justice Miller in conceding that Allied Concrete could apply beyond trade creditor situations to investment contracts, she agreed that the decision did not cover the present case. She gave five reasons for this view:

Mr McIntosh did not intend to give value

Rather, Mr McIntosh’s intention was for RAM to hold the funds on trust for his benefit. Conversely, in Allied Concrete, the intention of the trade creditors had been to provide goods and services for the debtors’ benefit.

The transaction delivered no value to RAM because of the trust relationship

RAM never had rights to the funds because even when the funds were misappropriated, the trust relationship continued. This trust relationship contrasts with the goods and services at issue in Allied Concrete.

In Allied Concrete, the goods and services supplied by trade creditors provided value by contributing to the asset base of the debtor companies. Conversely, the introduction of new money in Ponzi schemes “creates no value but merely delays and worsens the inevitable ruin”.4 Justice Glazebrook agreed with the liquidators that the defence did not stand, as value must be real, not illusionary.

Returns were based on the market, so there was no guarantee Mr McIntosh would receive his investment back. In Allied Concrete, had the debtor companies not been insolvent, then the full amounts of the debts would have been payable under the contracts for goods and services.

Two policy considerations:

  • an accident of timing as to when funds are withdrawn should not favour one defrauded investor over another, and
  • knowledge that the consequences of a Ponzi scheme will fall on investors equally may encourage more diligence and further inquiry on the part of investors.

The Insolvency Working Group’s second and final report, released last month, dealt with voidable transactions and Ponzi schemes (see our summary of the Report here).

A copy of Chapman Tripp’s submission to the Insolvency Working Group regarding the voidable transactions regime and Ponzi schemes can be accessed here.

Our thanks to Robert West for writing this article.

[1] McIntosh v Fisk [2015] NZCA 74. [2] Allied Concrete Ltd v Meltzer [2015] NZSC 7. [3] Cunningham v Brown 265 US 1 (1924) at 8. [4] McIntosh v Fisk [2017] NZSC 78 at [270] per Glazebrook J quoting Miller J’s Court of Appeal judgment.