Aurora Fisheries Limited v Hozumi no.3 HC Nelson CIV-2010-442-000511

[2011] NZHC 1681

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

CIV-2010-442-000511

BETWEEN  AURORA FISHERIES LIMITED Plaintiff

ANDAKIRA HOZUMI Defendant

Hearing:         6 October 2011

Counsel:         M J Logan for Plaintiff

J M Fitchett for Defendant

Judgment:      28 October 2011

JUDGMENT (NO. 3) OF ASSOCIATE JUDGE MATTHEWS Application for Summary Judgment

[1]      This  is  an  application  for  summary  judgment  by  the  plaintiff.    In  the statement of claim the plaintiff pleads two causes of action against the defendant, who was a director of the plaintiff at material times.  First it is pleaded that by taking certain actions, he breached duties he owed to the plaintiff to act in good faith and in the best interests of the company, and to exercise skill and care.   Secondly it is pleaded that by taking the same actions the defendant breached fiduciary duties he owed to the plaintiff to act in the best interests of the plaintiff and not to take steps whereby his interests conflicted with those of the plaintiff.

[2]      The defendant opposes the entry of summary judgment, first on the basis that he has an arguable defence to the claims, and secondly on the basis that the Court should exercise its residual discretion not to enter summary judgment, in order to enable him to join as a third party to the proceedings a firm of solicitors which gave

him advice on certain matters, as I will shortly relate.

AURORA FISHERIES LIMITED V AKIRA HOZUMI HC NEL CIV-2010-442-000511 28 October 2011

[3]      The claim arises out of the actions of the defendant as a participant in a fraud perpetuated against the Ministry of Fisheries between March 2007 and December

2009.  At that time the plaintiff was the holder of annual catch entitlements to fish for certain species in certain quota management areas.   A company called Kanai Fisheries Company Limited owned 24.9 percent of the shares in the plaintiff and a fishing vessel, the Tomi Maru 87.  The plaintiff and Kanai entered a charter fishing agreement whereby the vessel would be used to fish pursuant to the plaintiff’s annual catch entitlement.  Kanai provided the crew for the vessel.  The defendant was at all relevant times a director of Kanai and the plaintiff, and held the position of general manager of the plaintiff.  For Kanai, he was in charge of new business development, and its overseas fishing fleet.

[4]      Under fisheries law the plaintiff was required to make catch returns to the Ministry of Fisheries.  During the period in respect of which charges were laid the returns filed were false.  In short, they recorded that certain quantities of permitted fish were caught in the areas for which fishing permits were held, whereas in fact the vessel caught some of those fish in those areas and some in other fishing areas for which permits were not held.   During the course of extensive investigations the Ministry of Fisheries ascertained that similar misreporting had occurred during fishing trips dating back to 2001 but limitation provisions in the Fisheries Act 1996 prevented charges being brought against those involved for offending prior to a period of two years before the charges were laid.

[5]      The defendant faced, and pleaded guilty to, eight charges of making false statements in fishing returns.  Kanai Fisheries Co Limited and Aurora faced identical charges  and  also  pleaded  guilty,  as  did  the Aurora  joint  venture  manager,  Koji Matsudate.

[6]      The defendant did not deny that he owed to the plaintiff the duties to which I have referred, nor that he breached those duties.  Indeed, in his amended notice of opposition he stated that in a statement of defence yet to be filed the following allegations in the statement of claim would be admitted:

1.    [The plaintiff] is a duly incorporated company having its registered office in Nelson and carrying on business as a fishing company.

2.    At all relevant times 75.1% of the shareholding in the Plaintiff was held by Solander Maritime Limited and 24.9% was held by Kanai Fisheries Co. Limited (Kanai), a company incorporated under the laws of Japan and having its registered office in Japan.

3.    The Defendant is a Japanese citizen presumed to be currently residing in Japan.

4.    For the period from 1992 to the 4th  April 2009 the Defendant was a director of the Plaintiff and throughout this period was also a director of Kanai.  At all relevant times during his directorship of the Plaintiff the Defendant was also employed as General Manager of the Plaintiff.

5.    Since 1992 the Plaintiff has chartered a fishing vessel from Kanai (the FV Tomi Maru 87) to fish under authority of a fishing permit held by the Plaintiff. All officers and crew on the vessel were Kanai employees.

6.    During the relevant time the Plaintiff employed a Mr Koji Matsudate as a manager.   The monitoring and auditing of the fish landed from the vessel  was  performed  by  Matsudate.     Matsudate,  however,  also remained an employee of Kanai during the relevant period.

7.    The Defendant was a director of Kanai.

8.    It was an express term of the Charter Agreement that the vessel lawfully comply with all New Zealand fisheries laws.

9.    Pursuant to fisheries legislation the Plaintiff is required to file statutory fishing returns known as TCEPRs, CLRs, and MHRs (the returns) with regard to all fish taken under authority of the Plaintiff’s permit.

10.  Senior Kanai personnel on the vessel were responsible for completing the TCEPRs and CLRs.  The Plaintiff’s personnel completed the MHRs based on information in the TCEPRs and CLRs.

11.  As a director of the Plaintiff and Kanai the Defendant was aware that:-

a.the Plaintiff placed considerable reliance on Kanai personnel to insert accurate information into the returns and to generally supply it with accurate information concerning the vessel’s fishing operations for the purposes of enabling the Plaintiff to complete and lodge lawful returns;

b.in the event that any information included in the returns was inaccurate or false, the Plaintiff was, inter alia, exposed to investigation and prosecution for serious fisheries offences which could result in considerable economic and financial consequences to the Plaintiff.

12.  Between 2007 and 2008 Kanai employees on the vessel inserted false data into the TCEPRs and CLRs.

13.  The Defendant ... took no steps to prevent the Plaintiff from filing

MHRs that he knew contained the false information.

14.  ...

15.  The Defendant did not tell any of the other directors of the Plaintiff or any of its employees that information in the false daily returns was false.

16.  The false information set out in the returns related to the areas in which certain species of fish were caught and occurred between 2001 and December 2008 (the misreporting).   The Ministry of Fisheries has estimated that 2,870 tonnes of fish were subject to the misreporting.

17.  The Defendant and Matsudate received daily and weekly catch reports from the vessel which provided a true record of the catch (the correct reports) and these reports were passed to Kanai head office in Japan.

18.  ...

19.  The Defendant knew that these daily reports were false.

20.  The Ministry commenced an investigation into the returns filed by the Plaintiff in December 2008.  Following the investigation charges were laid pursuant to sections 230 and 252 of the Fisheries Act against, inter alia, the Plaintiff, the Defendant, and Kanai alleging offences between March 2007 and December 2008.

21.  In  particular  eight  charges  were  laid  against  the  Plaintiff  and  nine against the Defendant.

22.  The charges were laid against the Plaintiff on the basis that through the Defendant  as  its  director,  and  Mr  Matsudate  as  its  Joint  Venture Manager, the Plaintiff was deemed under the Fisheries Act to have knowledge that the fishing returns contained false statements.

23.  ...

24.  On 28 July 2010 the Defendant pleaded guilty to the nine charges laid against him arising from the misreporting.

25.  As a director of the Plaintiff the Defendant owed a duty to act in good faith and in the best interests of the company.

26.  As a director of the company the Defendant also owed the Plaintiff a duty of care in exercising his powers and performing his duties as a director to exercise care, diligence, and skill that a reasonable director would exercise in the same circumstances.

[7]      It follows that apart from the specific defence raised in the amended notice of opposition, the plaintiff would be entitled to summary judgment on liability against the defendant, unless the Court exercised its residual discretion not to enter summary judgment for the reasons submitted by the defendant.

Principles of summary judgment

[8]      To succeed on an application for summary judgment the plaintiff must show that the defendant does not have an arguable defence to the claim.  The onus lies on the plaintiff throughout; nonetheless the defendant must go further than merely indicating the possibility of an arguable defence.  In Auckett v Falvey,[1] Eichelbaum J said:

[1] Auckett v Falvey HC Wellington CP 296/86, 20 August 1986, Eichelbaum J.

On a summary judgment application, the onus is on the plaintiff to show that there is no defence.  On the present facts, the plaintiffs are able to pass an evidential onus to the defendants by exhibiting the contract which on its face entitles them to the remedy they now seek.   The defendants are then in a position of having to demonstrate a tenable defence.  However, the overall position concerning onus on the application is that at the end of the day the question is whether the plaintiffs have satisfied the Court as to the absence of a defence.

[9]      Applying this to the present case, the plaintiff has passed the evidential onus to the defendant to demonstrate that he has a tenable defence.

[10]     Questions of law can be decided on applications for summary judgment, where appropriate – European Asian Bank AG v Punjab & Sind Bank,[2] Pemberton v Chappell,[3]  International Ore & Fertiliser Corp v East Coast Fertilizer Co Ltd.[4]

[2] European Asian Bank AG v Punjab & Sind Bank [1983] 2 All ER 508 at 654.

[3] Pemberton v Chappell [1987] 1 NZLR 1.

[4] International Ore & Fertilizer Corp v East Coast Fertiliser Co Ltd [1987] 1 NZLR 9.

Numerous other cases have applied this proposition; see generally McGechan, HR12.2.02.

[11]     This principle is directly apposite in this case.

Does the defendant have an arguable defence?

[12]     The  relevant  passage  from  the  amended  notice  of  opposition  is  in  the following terms:

he has a defence in respect of the several claims against him, such defence being that at all times relevant to the allegations in the Statement of Claim another director of the Plaintiff (namely Munemoto Nakayama) was fully aware that some of the information included in the [returns] was inaccurate

or false; and that other directors of the Plaintiff were aware (or should have been aware) that  some  of  the information included in the [returns]  was inaccurate or false.

[13]     The reference to “[returns]” in the above quote is substituted for the lengthy acronyms given for the various forms of fishing returns which were in issue in the prosecutions.

[14]     The defendant did not give any legal authority in support of this proposition in the notice of opposition.  As I noted in paragraph [35] of the judgment I issued in this case on 18 August 2011, the first notice of opposition also raised as a possible defence an argument that the plaintiff or its directors knew or ought to have known that the fraudulent activities were going on.  Again, in argument at that hearing, no authority was given for this proposition.  In paragraph [48] of the same judgment I observed:

[48]     Fourthly, it is not immediately clear that even if one or more of the other directors did know of some or all of the facts which gave rise to the fraud, that would necessarily provide a defence to the claim for breach of duty by this director.  No basis for that proposition was given, nor argument presented in support of it.   I observe that if it is to be submitted that the knowledge of the directors is the knowledge of the company, the company already has that knowledge because Mr Hozumi was a director. As recorded in paragraph [4] of this judgment, the plaintiff pleaded guilty to charges on the basis it had knowledge of the offending through Mr Hozumi’s directorship.  Mr Fitchett did not explain how knowledge on the part of any or all of the other directors of the plaintiff would provide a defence to the plaintiff’s claim which knowledge on the part of Mr Hozumi does not.

[15] In the judgment issued on 30 September 2011 it was necessary to refer to this again – paragraph [19].

[16]     The defence now relied upon by the defendant has therefore been put forward or, more recently, pleaded in one form or another since the first notice of opposition was filed.   Despite that, counsel for the defendant made no reference to any legal principles or authority in support of the proposition on which he and his client relied as an arguable defence.   Instead, his entire argument in support of there being an arguable defence consisted of an analysis of the factual material before the Court, seemingly on  the  assumption  that  the  legal  basis  for  the  defence  went  without saying.  When asked in argument whether he could provide any authority in support

of the proposition Mr Fitchett accepted that he could not.   His response to my inquiry was “I come ill prepared to argue this”.  Why that should be, in the context which I have set out, is obscure.

[17]     The defence amounts to a proposition that a director may escape liability for a breach of duty to the company if he can show that other directors of the company knew that the breach was occurring.  I am satisfied that there is no authority which supports this proposition.  The duties concerned are owed to the company and the fact that another director or directors knew of the breaches, or for that matter were themselves engaged in breaches of their own duties, cannot cancel out the breach of duty by the first director.  The company is a separate legal entity from its directors, and has the benefit of duties owed to it by its directors, and the right to enforce those duties against any director, or all directors, if those duties are breached.  A company is not exposed without remedy to the consequences of the unlawful actions of its directors just because all the directors are, in the same or various ways, in breach of their duties.

[18]     If  the  directors  of Aurora  apart  from  the  defendant  were  aware  of  the defendant’s  actions,  they  themselves  may  well  have  been  in  breach  of  their respective duties to Aurora to act in good faith and in the best interests of the company, if they did not pass on their knowledge to the company and then ensure, as directors, that the company acted to prevent the conduct concerned.

[19]     It  is  scarcely surprising  therefore  that  counsel  for  the  defendant  did  not produce to the Court any authority supporting the proposition he argued.

[20]     Mr Fitchett argued that where all the directors of a company are themselves shareholders in the company, or directors of other companies which are shareholders in the company, the company cannot sue because it cannot obtain authority.  That overlooks the point that if the company is sold, or placed in receivership, and it is then found by those who have assumed control that there has been an earlier fraud in which all directors were active participants, or of which, at least, all directors were aware, the company can then resolve to take action against those former directors.

[21]     It follows that the sole ground of defence put forward by Mr Fitchett on behalf of the defendant is without foundation in law.  It is not, therefore, necessary to canvass the factual material before the Court upon which the defendant relied as showing that the other directors of Aurora at relevant times were aware of the fraudulent activities in which he was involved.

Exercise of discretion

[22]     The defendant argued that the Court should exercise its discretion not to enter summary judgment.  The basis upon which the Court was asked to proceed in this way was  the  defendant’s  stated  intention  to  issue a  third party claim  against  a solicitor who advised him in the period leading up to his plea of guilty to the charges.  At this point the defendant has not issued third party proceedings against the solicitor concerned.

[23]     The  proposed  claim  is  based  on  written  advice  given  by  the  solicitor concerned to the defendant in relation to his entering pleas of guilty to the charges. It is in the following terms:

I have written to the Ministry confirming that I will accept service on your behalf of these nine charges.  I will then enter guilty pleas to those charges on your behalf on the basis that we have obtained a sentencing indication from the Judge dealing with this matter.  As I explained the indication given by the Judge is that he will impose fines totalling $840,000 on all six defendants.  That total sum will then be apportioned at the formal sentencing hearing, which will take place in a couple of months time.  I would expect that your share of those fines will be approximately $150,000-$200,000.  In that context I have confirmed with Toda san your understanding, based on your discussion with Nakayama san, that Kanai will pay any fines imposed on you so that you will have no actual financial liability.  I also confirm that once these charges have been disposed of you will be able to return to New Zealand at any time without worrying about any charges being served on you or the like.  It will bring the matter to an end.

[24]     The defendant maintains that this advice was wrong, or at least inadequate, because the solicitor concerned failed to advise him that there remained the prospect of a civil claim against him, and that the letter was inaccurate in advising that pleas of guilty would “bring the matter to an end”.  The argument advanced by Mr Fitchett is that Aurora through its solicitors had been orchestrating an overall outcome to the criminal prosecutions against all parties for a prolonged period of time, and was keen

that pleas of guilty should be entered by all parties including the plaintiff and the prosecutions brought to an end.  Thus there was an opportunity, Mr Fitchett argued, for a deal with the plaintiff to be struck by the defendant whereby pleas of guilty to the charges would result in a full and final settlement of all issues between him and the plaintiff with the plaintiff agreeing to forego any claim of personal liability for his breaches of duties as a director.  The opportunity for this to occur was lost by the solicitor then acting for Mr Hozumi giving him the advice quoted, rather than advising him to try to resolve both civil and criminal liability at the same time.

[25]     The basis for the residual discretion of the Court in relation  to entry of judgment is the provision in r 12.2 which provides that where the plaintiff satisfies the Court that a defendant has no defence, the Court “may give judgment”.   It is established that the residual discretion is to be restrictively applied: Dominion Breweries Ltd v Countrywide Banking Corp Ltd.[5]

[5] Dominion Breweries Ltd v Countrywide Banking Corp Ltd CA314/91, 18 August 1992.

[26]     The Court identified four circumstances where the residual discretion may be invoked in order to avoid oppression or injustice to the defendant.  First, it may be invoked where the proceeding involves the actions or possible liability of a third party  which  is  not  before  the  Court.    This  does  not  apply  in  this  case.    This proceeding involves the actions of the defendant, not the solicitor.  Liability arises, if at all, from advice given, or not given as the case may be, well after the conduct upon which this action  is based had been undertaken.

[27]     Secondly, the discretion may be invoked where the proceedings are such that the  opportunity  should   be  given  to   allow  discovery  or  other  interlocutory applications to be concluded.  Although the defendant has already claimed that he requires discovery of documents in order to properly present his defence, the subject of the judgment dated 18 August 2011, the rejection of the claimed defence of knowledge of other directors, as a matter of law, means that documents relating to that issue are irrelevant.   The defendant did not argue that there are interlocutory

issues which suggest that summary judgment should not be entered.

[28]     Thirdly, the discretion may be invoked where the circumstances of the case disclose very unusual features which lead the Court to conclude that the entry of summary judgment would be oppressive or unjust.  The defendant, of course, may bring proceedings against the solicitor concerned in a separate proceeding, but it was argued that entry of judgment for the plaintiff will result in the plaintiff selling, and receiving the proceeds from, the defendant’s sole asset in New Zealand leaving him unable to fund a separate proceeding.  He is not eligible for legal aid.

[29]     As earlier judgments record, the defendant’s sole asset in New Zealand is a house which is the subject of a freezing order in favour of the plaintiff. That freezing order has been varied to allow the defendant access to funding by way of borrowing against the house, to allow him to pay legal fees to date (and a variation has been declined on one occasion).  It is by no means certain that the freezing order would be varied again to allow the plaintiff access to funds to bring the third party claim which he now maintains he has.

[30]     The defendant’s liability to the plaintiff arises out of his fraudulent activities. This argument amounts to a suggestion that judgment for liability to the plaintiff should be deferred while the sole asset from  which judgment, when quantified, might be satisfied is diminished by legal fees expended in an attempt to recover damages against another party for a separate wrong at a later time.  This would in itself be manifestly unjust to the plaintiff.

[31]   The fourth situation where the discretion may be invoked is where a combination of complex issues of fact and law justifies the exercise of the discretion. That is of no application in this case.

[32]     Finally, there is in my view considerable doubt whether the defendant could, in any event, issue a third party proceeding against the solicitor concerned.  Third party proceedings are dealt with by Subpart 4 of Part 4 of the High Court Rules. Rule 4.4 sets out four circumstances where a third party claim may be brought.  The first is where the defendant is entitled to a contribution or an indemnity from a person who is not a party to the proceeding.  The claim the defendant wishes to bring is not a claim for a contribution or an indemnity within the terms of these rules.

There is a lengthy and helpful discussion of these concepts in McGechan on Procedure at paragraph 4.4.01, and consideration of the authorities referred to in that paragraph clearly leads to this conclusion.

[33]     Secondly, a third party claim may be brought where the defendant is entitled to  relief  or  a  remedy  related  to  or  connected  with  the  subject-matter  of  the proceeding from a third party and the relief or remedy is substantially the same as that claimed by the plaintiff against the defendant.   The subject-matter of the proceeding is the defendant’s fraudulent conduct over the period in question.  It is by no means clear that the proposed claim against the solicitor falls into this category.

In McAllister v Peat Marwick Management Consultants Ltd,[6] it was said at pp 6-7:

[6] McAllister v Peat Marwick Management Consultants Ltd HC Dunedin CP148/88 26 February 1991, Master Hansen.

... the defendant’s submissions seem to me to fall into a common trap and that is the simple equation of the damages claimed by plaintiff against defendant with what the defendant claims against the proposed third party. That, of course, in itself is not sufficient.  There must be similarity of facts, and  the  third  party  claim  must  be  designed  to  determine  whether  the defendant or the third party should ultimately bear the plaintiff’s loss. Although  superficially  there  would  appear  to  be  a  similarity  of  facts, different  matters  would  have  to  be  considered  between  plaintiff  and defendant and proposed third party.

[34]     It is not necessary to determine the point here, but there is real doubt that the proposed claim against the solicitor falls into this category.

[35]     Thirdly, a third party claim can be brought where a question or issue in the proceedings ought to be determined not only between the plaintiff and the defendant but  also  between  the  defendant  and  the  proposed  third  party.    This  is  of  no application in this case; the questions for determination in the two actions are completely separate.

[36]     The  fourth  category  is  where  there  is  a  question  or  issue  between  the defendant and the third party relating to, or connected with, the subject-matter of the proceeding, that is substantially the same as a question or an issue arising between the plaintiff and the defendant.   Again, the proposed claim does not fit into this

category.

[37]     Although it is unnecessary to make a final determination on the point, it is sufficient to record that there is, in my view, real doubt that the proposed claim against the solicitors could properly form the basis of a third party claim.

[38]     Because this point was not argued, however, and therefore as a matter of caution, I put it to one side in my consideration of an exercise of discretion, and make a determination solely on the basis of the other matters I have canvassed.  In my judgment there is not a sufficient basis to exercise my discretion against entering summary judgment for the plaintiff against the defendant in this case, for the reasons I have outlined.

Outcome

[39]     The  plaintiff  is  entitled  to  summary  judgment  against  the  defendant  on liability for the first and second causes of action in the statement of claim.   The plaintiff is also entitled to costs on this application for summary judgment, on a 2B

basis with disbursements to be fixed by the Registrar.

J G Matthews

Associate Judge

Solicitors:

Oceanlaw New Zealand (M S Sullivan), PO Box 921, Nelson for Plaintiff

(Counsel – Martin Logan. Email:  [email protected])

Rout Milner Fitchett, PO Box 580, Nelson for Defendant
(Counsel – John Fitchett. Email:  [email protected])