All Safe Scaffold Limited v Coastal Properties Limited
[2018] NZHC 608
•27 March 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-1375 [2018] NZHC 608
UNDER the Companies Act 1993 BETWEEN
ALL SAFE SCAFFOLD LIMITED
Plaintiff
AND
COASTAL PROPERTIES LIMITED
Defendant
Hearing: 27 March 2018 Appearances:
J M Skinner and K Lee for the Plaintiff
N H Malarao and E Egan for the Defendant
Judgment:
27 March 2018
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Skinners Law, Auckland, for the Plaintiff Meredith Connell, Auckland, for the Defendant
ALL SAFE SCAFFOLD LIMITED v COASTAL PROPERTIES LIMITED [2018] NZHC 608 [27 March 2018]
[1] Coastal Properties Ltd applies for further discovery by All Safe Scaffold Ltd under r 8.19 of the High Court Rules 2016. Under r 8.25, it applies for an order setting aside or modifying claims to confidentiality. It also seeks an order that documents for which privilege is claimed be sufficiently described under r 8.16. The case has a fixture for 16 and 17 April 2018. Coastal Properties Ltd says that because these other matters need attention, that fixture cannot stand and it seeks an adjournment. That involves restoring a ruling of Associate Judge Sargisson.
[2] In the substantive proceeding, All Safe Scaffold Ltd applies for a liquidation order. It says that it is a creditor of Coastal Properties Ltd for $61,668.60. That is based on the judgment in Coastal Properties Ltd v All Safe Scaffold Ltd under s 290 of the Companies Act.1 Coastal Properties Ltd applied in July 2016 to set aside a statutory demand for a debt of $54,332.00 for equipment leased by All Safe Scaffold Ltd to Coastal Properties Ltd. I upheld the statutory demand and ordered Coastal Properties Ltd to pay the amount of the debt by the end of January 2017.
[3] At the same time, I heard an application by All Safe Scaffold Ltd to set aside a statutory demand by Mr Brendan Coghlan, the director of Coastal Properties Ltd. Mr Coghlan’s statutory demand of July 2016 required repayment of shareholders’ advances of approximately $92,488. I set aside his statutory demand as I considered that the indebtedness to Mr Coghlan was subject to a substantial dispute.2
[4] The current director of All Safe Scaffold Ltd is Mr Mark Scheib. He is also the sole shareholder. Mr Brendan Coghlan was the sole director and shareholder of Coastal Properties Ltd. At one stage, Mr Coghlan was the sole director and shareholder of All Safe Scaffold Ltd but over time control passed to Mr Scheib. During 2014, both men were directors of All Safe Scaffold Ltd. Each held 50 per cent of the shares in the company. In February 2015, Mr Coghlan resigned and transferred his shares to Mr Scheib. The men were once on good terms: Mr Scheib’s wife and Mr Coghlan’s ex-wife are sisters. The relationship between the men has soured and
1 Coastal Properties Ltd v All Safe Scaffold Ltd [2016] NZHC 3107.
2 All Safe Scaffold Ltd v Coghlan [2016] NZHC 3106 at [15].
has led to court proceedings. As well as the statutory demands I have referred to, there has been another case: Coastal Scaffolding Ltd v Coghlan.3
[5] At the start of the hearing, I explored with counsel whether statutory demands and liquidation proceedings were necessarily the best way to resolve differences between these men. I appreciate that their affairs were tied in with each other in these companies and there was a trading relationship. I understand there are ongoing differences. I was advised that as well as this proceeding, pending three proceedings have been started in the North Shore District Court. While there have been without prejudice communications directed at trying to resolve differences, I understand that there have been difficulties. While I have to give a decision on the application by Coastal Properties Ltd today, and a decision will be required on the liquidation application, I encourage both Mr Scheib and Mr Coghlan to look beyond this immediate dispute to see if they can engage in constructive discussions with the assistance of their lawyers to resolve their differences overall. They must appreciate that they are spending a lot of money and time on litigation and that as businessmen there must be far better ways of spending their time and money than on lawyers and sitting in courthouses.
[6] As mentioned, in Coastal Properties Ltd v All Safe Scaffold Ltd, I ordered Coastal Properties Ltd to pay the amount of the statutory demand by 31 January 2017.4 I said that, in the absence of payment, All Safe Scaffold Ltd would be entitled to a bring a liquidation application against Coastal Properties Ltd. That was an order under s 291 of the Companies Act. Coastal Properties Ltd did not pay, but All Safe Scaffold Ltd did not immediately begin a liquidation application. Instead, it served a fresh statutory demand in May 2017. That required Coastal Properties Ltd to pay the debt of $61,668.60. That is the debt All Safe relies on in this proceeding. It is the amount of the statutory demand plus costs on the setting-aside application.
[7] Coastal Properties Ltd denies that it is a debtor of All Safe Scaffold Ltd. It says that its indebtedness has been extinguished. That is because Mr Coghlan assigned to Coastal Properties Ltd a debt that All Safe Scaffold Ltd owes him. The indebtedness
3 Coastal Scaffolding Ltd v Coghlan [2016] NZHC 751.
4 All Safe Scaffold Ltd v Coghlan [2016] NZHC 3106 at [15].
of All Safe Scaffold Ltd to Mr Coghlan is said to arise this way: the financial accounts for All Safe Scaffold Ltd for the year ending 31 March 2014 showed that Mr Coghlan was a creditor of the company for some $95,000. He made drawings from the company during the year ending 31 March 2015. Against that, he says that he is entitled to a salary credit for $164,902. When his drawings from the company and his salary credit are taken into account, he says that he is a creditor of the company for
$119,460. When that debt was assigned to Coastal Properties Ltd, it eliminated that company’s debt. Instead, Coastal Properties Ltd is a creditor of All Safe Scaffold Ltd. For the salary credit, Mr Coghlan relies on a resolution of September 2014 made by Mr Scheib and himself that the directors would take salaries “as deemed appropriate”. During that year the company’s accountant, a Mr Rogers, prepared draft accounts, which showed a salary credit to Mr Coghlan and Mr Scheib of $164,902 each. Coastal Properties Ltd says that on 16 May 2017, Mr Coghlan assigned the debt of
$119,460.00 to Coastal Properties Ltd. Coastal Properties Ltd’s lawyers gave notice of the assignment to All Safe Scaffold Ltd. That occurred during the period for complying with the statutory demand served by All Safe Scaffold Ltd. Coastal Properties Ltd accordingly says that it complied with the statutory demand and no presumption of insolvency arises. It also says that the debt the subject of the matter has now been extinguished and therefore All Safe Scaffold Ltd does not have standing as a creditor in the liquidation application.
[8] Coastal Properties Ltd applied to restrain advertising and for a stay of the proceeding. That was set down for hearing in December 2017. Both sides filed affidavits as to the merits of the defence. I was to hear the case. I directed that rather than dealing with the matter as a stay application, the court should decide the substantive merits of the liquidation application. I continued the restraint of advertising. That was with a view to allowing advertising later if I found in favour of All Safe Scaffold. I set the case down for hearing on 16 and 17 April 2018.
The application for further discovery
[9] On 8 December 2017, I gave directions in terms of a joint memorandum filed by counsel. They included an order for tailored discovery:
[a] The plaintiff is to provide the following tailored discovery of the categories of documents listed below, that are or have been in the plaintiff’s control, by way of an affidavit of documents complying with High Court Rules 8.15 and 8.16 and the listing and exchange protocol set out in Part 2 of Schedule 9 with the exception that email chains can be discovered as one document.
[b] The categories of documents are limited to documents that (1) the plaintiff relies upon, which adversely affect the plaintiff’s case, adversely affect the defendant’s case, or support the defendant’s case; and (2) are documents generated by or that came into the possession or control of the plaintiff in the period from 1 April 2013 until 9 September 2016 (upon which it was resolved by the plaintiff not to allocate a salary to Mr Coghlan); and (3) fall into one or more of the categories below:
(i)Printouts of profit and loss, aged debtors and creditors, balance sheets, and other similar documents that were generated for the purposes of fortnightly or monthly meetings between the directors and/or shareholders of the plaintiff and any advisers present at those meetings. In the event that the said records are not available, an electronic version of the data contained in the plaintiff’s accounting software.
(ii)Minutes of meetings (of directors and/or shareholders), certificates, resolutions and other such documents, other than where those documents were drafted by John Rogers Limited.
(iii)Correspondence (including emails) passing between BDO Auckland and the plaintiff; and documentation generated by BDO Auckland (including, for the avoidance of doubt, internal correspondence such as emails and file notes) in the course of its engagement with the plaintiff.
[10] All Safe Scaffold Ltd filed its affidavit of documents on 22 February 2018. Coastal Properties Ltd filed its application for further discovery on 27 February 2018. Prompted by that application, All Safe Scaffold Ltd filed a supplementary affidavit of documents on 20 March 2018. The parties proposed that the substantive hearing for 16 and 17 April 2018 be vacated to allow time to hear this application. I directed an earlier hearing of the discovery application as I was concerned to see if the substantive fixture could be maintained. I was concerned that this matter has been on foot since May 2017 and it is desirable to resolve liquidation applications promptly.
[11] The order for discovery of 8 December 2017 is for tailored discovery. Part (b) directs discovery in terms of the “adverse documents” test—that is documents that adversely affect the plaintiff’s case, adversely affect the defendant’s case, or support the defendant’s case. It is, therefore, not necessary to consider claims of relevance
based on the “line of enquiry” test or because they go to the background. Essentially, under the adverse documents test a document is relevant if it is capable of being used as evidence at trial or the information in it is capable of being used as evidence. Documents are discoverable under the order if they fall within each of the categories [b](1), (2) and (3). They must be relevant under the adverse documents test, they must fall within the dates in (2) and they must be documents under (3).
[12] Sub-category (3)(iii) refers to correspondence passing between BDO Auckland and All Safe Scaffold, and documents generated by BDO, including their internal correspondence such as emails and file notes. To that extent the order goes beyond what might be required under a normal discovery order. Typically, accountants’ working papers are under the control of accountants, not their clients, and are therefore not necessarily discoverable in the hands of the client. In this case, however, All Safe Scaffold Ltd has accepted that it is required to disclose working papers in the hands of its accountants.
[13] To determine relevance, it is necessary to have regard to the issues raised in the defence. The case for Coastal Properties Ltd and Mr Coghlan is that Mr Coghlan was entitled to a salary under the resolution made in September 2014, even though that resolution did not state the amount of the salary that would be paid to each director. Mr Coghlan contends that he was a director of the company from 1 April 2014 to February 2015, and that any salary should be divided equally between him and Mr Scheib. The draft accounts prepared by Mr Rogers showed just such a salary allocation. Mr Coghlan says that he is entitled to that salary credit, and he criticises the later decision by Mr Scheib, as sole director, that Mr Scheib alone should take a salary from the company. The scope of the inquiry is the original decision whether directors should take salaries, whether that established an entitlement enforceable at law, and whether that was broken by the later decision not to pay salary to Mr Coghlan.
[14] The decision not to pay Mr Coghlan was made in September 2016, apparently after Mr Scheib after conferred with his accountants. That means that it is not necessary to require discovery of a large number of financial documents, because there is really no challenge to the work of Mr Rogers in preparing the draft financial statements, except in one respect—the question of salary allocation and shareholders’
accounts. Initially, the application for discovery sought focused on matters such as financial statements and records of meetings between Mr Scheib and Mr Coghlan during 2015 and earlier periods. It is not necessary to direct discovery on such a wide basis.
[15] I am satisfied, however, that there is one respect in which the discovery has been insufficient. That is the non-disclosure of working papers of BDO relating to the salary credit issue. It is apparent from documents that I have been shown that BDO did confer with Mr Scheib on the salary credit question. These include an email sent by one of the accountants in BDO, which was initially directed to Mr Hill but was sent to Mr Scheib apparently by mistake. That points to the existence of other documents held by BDO on the salary credit issue. Documents appear to exist which ought to have been discovered but have not been discovered. The decision how the salary ought to be fixed for the year ending 31 March 2015 was taken after consultation with accountants. That became apparent in the hearing on All Safe Scaffold Ltd’s application to set aside Mr Coghlan’s statutory demand. There was late evidence that showed that the salary decision had only recently been made. That was an affidavit by Mr Hill, an accountant with BDO.
[16] Working papers by BDO on the salary credit question are relevant to the matter that the Court has to decide and ought to be disclosed. I do not regard it as disproportionate to require All Safe Scaffold Ltd to file a further affidavit disclosing those records.
Listing of privileged documents
[17] Coastal Properties Ltd criticised the affidavits of documents for bulk listing of documents for which privilege is claimed. Documents within Part 3 of both affidavits of documents make generalised claims to privilege without showing any start dates or finish dates. The descriptions are inadequate to allow Coastal Properties Ltd to assess whether privilege was properly claimed or not.
[18] I accept the submission for Coastal Properties Ltd that the description is inadequate under r 8.16. The matter arises in particular in relation to whether privilege
can be claimed for communications between Mr Scheib and All Safe Scaffold Ltd on the one hand, and its accountants, BDO, on the other. Privilege does not ordinarily attach to communications between a client and an accountant, but at a certain stage Mr Hill of BDO was retained to give evidence in the proceeding. His evidence may be expert evidence on accounting matters. A question of privilege may arise with advice that he may have given for litigation, not only this proceeding but also the earlier statutory demand proceedings. So that there can be clarity whether privilege has been properly claimed, I direct All Safe Scaffold Ltd to list afresh in its next affidavit of documents those documents for which it claims litigation privilege in its communications with its lawyers and with BDO.
[19] I am concerned, however, that there should not be further differences between the parties whether privilege has been correctly claimed or not. I explored with the parties whether some clarity could be given to reduce areas of dispute.
[20] Mr Coghlan served a statutory demand on All Safe Scaffold Ltd in July 2016. From the time of service of that demand, All Safe Scaffold Ltd would have contemplated litigation because it filed an application under s 290 Companies Act in response. It had also served a statutory demand on Coastal Properties Ltd at the same time. It is likely to have contemplated litigation when it served the statutory demand. In short, litigation may have been in reasonable contemplation from about July 2016. If All Safe Scaffold Ltd is to claim privilege earlier than that date, it should set out in its affidavit reasons why it claims privilege from a date earlier than July 2016. Privilege may be claimed only for documents where litigation was the dominant purpose of preparing those documents.
[21] There will also be a question of waiver. An important event is a meeting of 8 September 2016, where the decision was made to fix salaries for the year ending 31 March 2015. It seems inevitable that evidence will be given about that. Mr Hill, the accountant, is likely to give evidence about it. All Safe Scaffold Ltd and Mr Scheib are going to find it difficult to say that they fixed the salaries without also giving evidence about meetings and consultations with Mr Hill. Insofar as their case may have to rely on those consultations, there will be a waiver of any privilege that might otherwise attach to documents relating to that meeting.
Confidentiality claim
[22] In both affidavits of documents, All Safe Scaffold Ltd has listed certain documents, which it says are commercially sensitive. It recognises that those documents are not subject to privilege, but it wishes to restrict the people who may inspect those documents. It proposes that they be seen only by the lawyers for Coastal Properties Ltd, but not by Mr Coghlan. All Safe Scaffold Ltd professes that Mr Coghlan could not be trusted if he were to see those documents, and has claimed confidentiality as a result.
[23] I do not regard the confidentiality claim as giving good reason for preventing Mr Coghlan from inspecting the documents. Where the courts do impose greater restrictions on inspection, there is usually some heightened degree of confidentiality. In Port Nelson Ltd v Commerce Commission, the Court of Appeal gave examples such as detailed costings of products or services provided in a competitive market, marketing plans for a new product, a patent specification before the application has been accepted and made available for inspection.5 These matters fall well short of that. The documents seem to comprise communications between Mr Scheib and his accountants. Mr Scheib appears to have unburdened himself as to his grievances against Mr Coghlan. But those were not privileged occasions, and they were not privileged communications. The normal protections apply. Mr Coghlan is entitled to see those documents. I am sure that his lawyers will advise him and that he will appreciate that documents he sees on inspection can be used only for this proceeding and are not to be used for any other purpose. I make it clear to Mr Coghlan that if he were to use the documents for any other purpose, there will be consequences. His lawyers will be able to advise him as to those consequences.
[24] It is important to recognise that when restrictions are sought on the inspection of documents disclosed on discovery, it is necessary to consider the ability of the other party to conduct its case properly. Restricting inspection of documents only to legal advisers creates difficulties if those lawyers are not able to advise their client what they have seen. Ultimately it is the client’s choice as to how the case is to be
5 Port Nelson Ltd v Commerce Commission (1994) 7 PRNZ 344 (CA) at 347.
conducted, but the client is unable to make informed decisions without knowing about the documents disclosed on discovery. In short, I set aside all the claims for confidentiality made in both the affidavits.
Outcome
[25] It will be necessary, in the light of what I have decided, for All Safe Scaffold Ltd to file a further affidavit of documents disclosing the working papers of BDO, and relisting documents for which privilege has been claimed. The affidavit is to be filed and served by 10 April 2018.
[26]I give these directions:
[a]The plaintiff is to file and serve a further affidavit of documents in terms of this decision by 10 April 2018.
[b]The defendant is to file and serve any further evidence by 24 April 2018.
[c]The plaintiff is to file and serve any evidence in reply by 8 May 2018.
[d]The case will be heard for two days on 28 and 29 June 2018.
[e]Any notices to cross-examine witnesses are to be served by 14 June 2018.
[f]By 14 June 2018 the defendant is to file and serve a casebook, synopsis of submissions and list of authorities.
[g]By 29 June 2018 the plaintiff is to file a synopsis of submissions and list of authorities.
[27] Coastal Properties Ltd seeks costs on the application. Mr Skinner proposes they be reserved until the matter is finally determined. It is desirable that costs be fixed when an interlocutory application is decided. This matter was necessary because All Safe Scaffold Ltd’s discovery was inadequate in terms of its claims to confidentiality and for not having disclosed all relevant documents. It should pay the costs on the application: Category 2. I trust that counsel will be able to agree the costs, but if they cannot agree, memoranda may be filed.
……………………………….
Associate Judge R M Bell
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