Banks v Farmer

[2019] NZHC 53

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2016-404-0057

[2019] NZHC 53

BETWEEN

ADAM DAVID BANKS

Plaintiff

AND

WILLIAM ROBERT FARMER

First Defendant

SIMON MATHEW GAMBLE
Second Defendant

CHRISTOPHER JAMES MASSAM
Third Defendant

DOUGLAS LEROY FREDERICK

Fourth Defendant

Hearing:

3 August 2018

Appearances:

J W A Johnson and N G Lawrence for the Plaintiff and for the non-parties Caroline Banks and Leila Banks

R J Hollyman and A J Steel for the First Defendant T Homes for the Second to Fourth Defendants

Judgment:

1 February 2019

JUDGMENT OF ASSOCIATE JUDGE SMITH

This judgment was delivered by me on 1 February 2019 at 4.30pm], pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors / Counsel:

Wynn Williams, Christchurch Lodder Law, Auckland

R J Hollyman, Auckland A J Steel, Auckland

Vallant Hooker, Auckland

BANKS v FARMER [2019] NZHC 53 [1 February 2019]

TABLE OF CONTENTS

The applications  [1]

The parties  [2]
The pleadings — what Mr Banks and Mr Farmer say  [5]
The defences of Mr Gamble, Mr Massam and Mr Frederick (collectively,

"the other defendants")  [31]

THE UNLESS APPLICATION  [40]

The discovery orders  [40]
The issues on the Unless application  [44]
Steps taken by Mr Gamble and Mr Massam to comply  [45]

Counsel's submissions  [56]

Discovery by Mr Gamble and Mr Massam  [56]
Discovery by Mr Frederick  [67]

Discussion and conclusions on the Unless application  [77]

Applicable legal principles  [77]

Application of the principles in this case  [82] Summary of orders made on the unless application  [104] APPLICATION BY MR FREDERICK FOR PARTICULAR DISCOVERY AGAINST MR BANKS  [105]

What further documents is Mr Frederick asking for?  [107]

Why does Mr Frederick want these documents?  [117]

Mr Banks' opposition  [122]
The evidence in support  [124]

The evidence in opposition  [148]
Discussion and conclusions on Mr Frederick's particular discovery

application  [153]

Applications for particular discovery — legal principles  [153]

Categories (i) and (ii) — the tax returns  [155] Categories (iii) and (iv) — correspondence between Mr Banks and his legal advisers, and between Mr Banks and his financial advisers  [182]

Category (v) — documents held by Immigration New Zealand relating to
applications by Mr Banks for a temporary visa and/or residence class visa     [193]
Categories (vi) and (vii) — bank statements, and bank documents relating to
Mr Banks having control of any bank account  [203]
Category (viii) documents — documents recording any investment or

contemplated investment in any company between 1 January 2004 and 31 September 2016  [227]

Category (ix) documents — correspondence with Mrs Banks concerning loans

to Mako  [234]

Category (x) documents — documents in which Mr Banks communicated with his accountant or solicitor, Mrs Banks, RBS, the ICICI Bank, Santander Bank,

the trustees of the trusts, and/or directors of the relevant companies               [241]

Summary of orders made on Mr Frederick's particular discovery

application  [244]

APPLICATION BY MR FREDERICK FOR DISCOVERY AGAINST

NON-PARTIES  [245]

The application  [245]

Discovery sought from Mrs Banks  [246]

Discovery sought from the trustees of the Beta Trust, the Gamma Trust

and NLFT  [247]
Discovery sought from the directors of Beta Trustee Ltd, Gamma Trustee Ltd,
NLTL, and AT1 Ltd  [248]

Applicable legal principles  [249]

Notice of opposition  [252]
Evidence for Mr Frederick in support  [255]

Evidence in opposition  [265]
Counsel's submissions  [279]

Ms Homes  [279]
Mr Johnson and Mr Lawrence  [285]

Discussion and conclusions  [288]

Application for non-party discovery against Mrs Banks  [288]
Application for non-party discovery against the Beta Trust, the Gamma
Trust, and NLFT  [302]
Application for non-party discovery against the directors of NLTL, Beta

Trustee Ltd, Gamma Trustee Ltd and AT1 Ltd  [308]

Summary of orders on Mr Frederick's application for non-party

discovery  [310]

APPLICATIONS BY THE DEFENDANTS FOR SECURITY

FOR COSTS  [311]

Undertaking by NLTL to pay any costs award against Mr Banks                  [317]

Counsel's submissions  [319]

Mr Hollyman  [319]

Ms Homes  [326]
Mr Johnson  [333]

Discussion and conclusions on the security for costs application  [339]

Threshold question – is there reason to believe Mr Banks will be unable to
pay any costs award that may be made against him?  [339]

Discretionary considerations  [348]

FURTHER DIRECTIONS  [360]

The applications

[1]There are five applications before the Court:

(i)An application by the plaintiff ("the Unless application") for orders directing the second and third defendants to comply with a discovery order made by Peters J on 20 November 2017, and directing the fourth defendant to comply with a discovery order made by Moore J on     10 May 2017. The plaintiff asks for "unless" orders, under which the statements of defence of the second, third and fourth defendants would be struck out, and those defendants would be debarred from defending the proceeding, if they do not comply with the discovery orders within 5 working days. The application also asks for an order that, unless the fourth defendant pays certain costs awards made against him in this Court on 31 August 2017 and 3 May 2018 within 2 working days, the fourth defendant's applications for further discovery and non-party discovery (referred to at (ii) and (iii) below) be dismissed.

(ii)An interlocutory application by the fourth defendant that the plaintiff provide particular discovery within 28 days of the Court order.

(iii)An interlocutory application by the fourth defendant for non-party discovery orders against certain parties.

(iv)An interlocutory application by the first defendant for an order for security for his costs.

(v)An interlocutory application by the second, third and fourth defendants for orders for security for their costs.

The parties

[2]        The plaintiff (Mr Banks) is an unsecured creditor of a company, now in receivership and in liquidation, called Mako Networks Holdings Ltd (Mako).

[3]        The first, second and third defendants (respectively, Mr Farmer, Mr Gamble and Mr Massam) were at all material times directors of Mako. The fourth defendant,

Mr Frederick, says that he became a director of Mako on 9 December 2011.1

[4]The defendants are all shareholders in Mako.

The pleadings — what Mr Banks and Mr Farmer say

[5]        Mr Banks says that he lent Mako substantial sums of money which have now been lost. In broad terms, he contends that a number of aspects of Mako's business and/or financial position  were  misrepresented  to  him  by  Mr Farmer,  and  that  Mr Farmer and the other defendants failed to discharge their obligations as directors of Mako under the Companies Act 1993 (the Act) and the Securities Act 1978 (the SA).

[6]        Mr Banks says that he was approached by Mr Farmer about investing in Mako in late-2010. Discussions ensued, in the course of which Mr Farmer told Mr Banks that Mako  had  a  number  of  capital  raising  initiatives.  Mr Banks  alleges  that  Mr Farmer told him that Mako had no secured debts, and that money invested by   Mr Banks would be safe. He alleges that Mr Farmer told him in the course of these discussions that over the decade it had existed, Mako had never failed in its obligations to creditors.

[7]        On 22 December 2010 Mr Farmer emailed to Mr Banks a document described by Mr Banks as a "Capital Raising reported dated November 2010", and by Mr Farmer as a "private placement memorandum", for Mako. For convenience, I will refer to this document as "the Capital Raising Memorandum". Mr Banks said that the Capital Raising Memorandum showed projected pre-tax profit in the tens of millions of dollars for the years 2013 to 2015.

[8]        Mr Banks says that, in reliance on Mr Farmer's comments, he agreed in early-2011 to lend money to Mako.

1      There appears to be an issue over the date Mr Frederick became a director: a Capital Raising Memorandum for Mako, dated in November 2010, named him as a director at that time.

[9]        Mr Banks entered into a formal loan agreement with Mako on 4 February 2011 (Agreement 1). Agreement 1 provided that Mr Banks would lend GBP1,177,000 in three separate tranches:

(i)£130,000 on 10 March 2011 for a minimum of two years, with repayment on 6 months' notice.

(ii)£547,000 on 10 March 2011 for a minimum of two years, with repayment on 6 months' notice.

(iii)£500,000 on 10 March 2011 for a minimum of three months, with repayment on 3 months' notice.

[10]      Agreement 1 provided that Mako would not make any external bank borrowings, or give any security over its assets, other than in the ordinary course of business where the secured assets represented not more than 15 per cent of the net value of Mako, without first obtaining Mr Banks' consent or giving him the right to demand repayment of his advances.

[11]      Mr Banks says that he performed his obligations under Agreement 1 by advancing the three sums referred to. Mr Farmer denies that. He says that Mr Banks made loan payments to Mako (through its subsidiary in the United Kingdom) totalling only £1,047,000.

[12]      Mr Banks agreed to make further cash investments in Mako in May of 2013. In reliance on an alleged statement by Mr Farmer that converting debt to equity would be a good idea for Mr Banks, as Mako was "very likely to grow to over 10 times its size", Mr Banks agreed to convert his debt to equity in the event of a public listing. The further amounts advanced by Mr Banks in May of 2013 were £237,722.43, and

£24,779.14. A formal agreement was again entered into with Mako covering these further advances (Agreement 2). Agreement 2 recorded that Mako had indicated to Mr Banks that a further capitalisation programme had been initiated, and that Mako was likely to list on the New Zealand Stock Exchange. Mr Banks' debt would be converted to equity when that occurred.  As compensation for the transfer of his debt

to equity, and forgoing interest until the Stock Exchange listing, Mr Banks would receive a discount on the issue of shares of 15 per cent.

[13]      The public listing never went ahead, and there was no conversion of debt to equity.

[14]      Spark (then Telecom) provided financing for products and services provided to Mako through its subsidiary, Telecom Rentals Ltd (TRL). Over time, the arrangement evolved to the point where TRL was providing Mako with significant funding for working capital.

[15]      In June 2013 Mako, Spark and their respective subsidiaries agreed to a refinancing of the TRL leasing debt. A financing statement was registered against Mako in favour of Spark under the Personal Property Securities Act 1999 (the PPSA). The collateral was all of Mako's present and after-acquired personal property.

[16]By early-2014 the Spark debt stood at $26,876,372.92.

[17]      Mr Banks says that his consent was never sought for Mako taking on these secured borrowings. (Mr Farmer says that there was an urgent meeting of shareholders convened on 5 February 2014 to discuss a draft special resolution approving the restructuring of the Spark debt. He says that the email notifying Mako shareholders of the draft resolution was sent to Mr Banks. He also says that a majority of Mako shareholders voted in favour of the restructuring of the Spark debt.)

[18]      Mr Banks entered into a third agreement (Agreement 3) with Mako, on or about 24 April 2014. Under Agreement 3, which was an oral agreement, he advanced

$500,000 to Mako. The loan followed meetings between Mr Banks and Mr Farmer on 23 October and 29 November 2013. Mr Banks contends that Mr Farmer told him that he would be better off by 20 to 50 per cent if he waited until listing on the Stock Exchange occurred before converting his loans to shares. Mr Banks says that he was induced by representations from Mr Farmer, and promises by Mr Farmer of a discount on shares at the time of converting debt to equity, to enter into Agreement 3.

[19]      Mr Farmer denies that Mr Banks was induced to enter into Agreement 3 by any misrepresentation. He says that he explained in some detail to Mr Banks at the meeting of 29 November 2013 the very real challenges Mako was facing, and Mako's increasingly deteriorating financial position. He says that when Mr Banks agreed to advance the $500,000 he was aware that there was a significant risk, in particular the risk associated with the TRL/Spark debt.

[20]      Mr Banks pleads at length alleged representations said to have been made to him by Mr Farmer regarding the positive state of Mako in relation to growth plans, investor and customer interest, and Mr Banks' own investment. He contends that he relied on these representations when he entered into Agreements 1, 2 and 3, and also when he decided not to call up the advances he had made. He contends that at no stage did Mr Farmer bring to his attention that Mako's financial position was worse than that predicted in the Capital Raising Memorandum.

[21]      Mr Banks says that he made demand for repayment of his advances and interest at a meeting with Mr Farmer on 18 February 2015. He contends that Mr Farmer told him that he was not going to negotiate about anything, and that Mr Banks should wait to obtain a return on the equity he would receive in exchange for his advances (that would depend on Mako's capital raising efforts).

[22]      Mr Farmer accepts that this meeting took place. He says that Mr Banks' mother, Mrs Caroline  Banks  (Mrs Banks), also attended and spoke on behalf of   Mr Banks. He denies that Mrs Banks ever made formal demand on Mako. However, on 7 April 2015 a written request was made for repayment of the advances.

[23]      On 20 August 2015 Mako was placed into liquidation by its shareholders. The following day, Spark appointed receivers, pursuant to the General Security Agreement it held securing its debt. When it was placed into liquidation and receivership, Mako had liabilities totalling $30 million, including approximately $26 million of secured debt owing to Spark.

[24]      Mr Banks pleads four causes of action. First, he alleges breach of s 37 of the SA. He says that each of Agreements 1, 2 and 3 involved an allotment of a debt

security to the public, at a time when Mako had no registered prospectus. He contends that the allotments were made in contravention of s 37(1) (which required a registered prospectus before any allotment of a security could be made to the public), and were invalid and of no effect. He seeks orders under s 37(6) of the Securities Act directing that the defendants, as directors of Mako, are jointly and severally liable to repay his subscriptions to him in full, together with interest from the date of each advance.

[25]      Mr Farmer admits that the three Agreements each involved an allotment of a debt security, but he denies that the allotments were made to the public. He says that the offers of securities did not need to be accompanied by a prospectus  because    Mr Banks' principal business is the investment of money, and he habitually invests money in the course of and for the purpose of his business.2

[26]      Mr Banks' second cause of action was for alleged breach of the FTA. He contended that he was induced to enter into the Agreements by various misrepresentations allegedly made by the defendants (including by silence and omissions). However, Mr Banks accepted in the course of an interlocutory hearing on an application to set aside a protest to jurisdiction filed by Mr Frederick that the FTA claims could not proceed, at least against Mr Frederick.

[27]      Mr Banks' third cause of action is under s 301 of the Act. He alleges that the defendants breached their duties as directors of Mako in a number of respects, including recklessly causing or allowing Mako to take on financial commitments (including to Mr Banks) that it could not meet. Mr Farmer denies that there was any breach. He then pleads that, even if there was a breach of the directors' duties (denied), any payment of money ordered under s 301 of the Act would become part of the assets of Mako, to be distributed amongst the secured creditors. As Mr Banks is an unsecured creditor, he would not benefit from any such recovery.

2      Section 3(2) of the Securities Act 1978 provided that a number of offers of securities were not to be regarded as offers of securities to the public for the purposes of the Securities Act. One such category was "an offer of securities made to any or all of the following persons only … persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money" (Securities Act 1978, s 3(2)(a)(ii)).

[28]      Mr Banks' fourth and last cause of action is under s 55G of the SA.3 He says that he subscribed for the debt securities referred to above on the faith of advertisements (the Capital Raising Memorandum and other communications from Mr Farmer) that included a number of untrue statements (including as to the future growth and profitability of Mako, its existing financial position, its liability to Spark, and the projection of pre-tax profits in the tens of millions of dollars for the 2013 to 2015 financial years). He contends that the advertisements were issued by the defendants, and contained or referred to offers of securities to the public.

[29]These allegations are denied by Mr Farmer.

[30]      Mr Farmer pleads a number of affirmative defences, none of which are relevant to the determinations I have to make on the applications now before the Court.

The defences of Mr Gamble, Mr Massam and Mr Frederick (collectively, "the other defendants")

[31]      The other defendants all say that they had no knowledge of the statements said to have been made by Mr Farmer to Mr Banks before Mr Banks entered into Agreement 1. They acknowledge the existence of the Capital Raising Memorandum, (although Mr Frederick contends that was only a draft), but say that it was not a prospectus or investment statement, and was not issued to the public. They say it was an offer to qualified investors, and no representations or warranties were made in it. Any intended qualified investor should have taken their own advice on it.

[32]      Mr Frederick says that Mr Banks  subsequently  provided  information  to  Mr Farmer and Mako about his knowledge of financial matters and transactions, and

3      That section materially provides:

55G Compensation orders

(1) The Court may, on the application of the Commission or a subscriber, order a liable person to pay compensation to all or any of the persons who subscribed for any securities on the faith of an advertisement or registered prospectus that includes an untrue statement, for the loss or damage that the persons have sustained by reason of the untrue statement.

…

(3)A liable person is a person who is liable for compensation for the relevant civil liability event under any of sections 56 to 57A.

(4)The liable person must pay any compensation ordered under the compensation order.

taxation, leading the defendants to believe that he was a habitual and experienced investor.

[33]      The other defendants generally admit Agreement 1 and Agreement 2. They admit that Mr Banks advanced certain funds to Mako under Agreement 3, but otherwise they deny his allegations relating to Agreement 3.

[34]      The other defendants admit that Mako provided products and services to Spark, and that Spark provided internal financing for the products and services through TRL. They further acknowledge that, over time, the arrangement evolved to a point where TRL (and later Spark) was providing Mako with significant funding for working capital.

[35]      They admit that they did not give notice to Mr Banks that Mako would be giving Spark security over all of its present and after-acquired personal property, and say that Mr Banks' consent was not required. In the alternative, they say that he was given the opportunity to consent at a special meeting of shareholders. Generally, they deny any liability in respect of the Spark refinancing.

[36]They admit the liquidation and receivership of Mako.

[37]      The other defendants deny Mr Banks' allegations that they were guilty of mismanagement of Mako, and they deny that they are liable to him under the SA, the FTA, or the Act. Each of the other defendants pleads a number of affirmative defences, but I need only refer in any detail to two of them.

[38]      First, and in reference to Mr Banks' first cause of action under s 37 of the SA, the other defendants all plead that the offers of securities to Mr Banks did not need to be accompanied by a prospectus, because Mr Banks' principal business is the investment of money, and he had habitually invested money in the course of, and for the purpose of, his business.4 For convenience I will refer to this defence as "the habitual investor defence".

4      Mr Banks had in fact put this in issue himself, when he pleaded in his amended statement of claim that the relevant allotments were allotments to the public because (a) Mr Banks was not a relative

[39]      The second defence that I need to refer to is Mr Frederick's pleading that    Mr Banks received independent legal and financial advice before entering into the Agreements.

THE UNLESS APPLICATION

The discovery orders

[40]      There were three relevant discovery orders. The first two of them affected only Mr Farmer, Mr Gamble and Mr Massam — at the time those orders were made     Mr Frederick, who was living in the United States, had an unresolved protest to the New Zealand jurisdiction. It was not resolved until 5 April 2018.

[41]      The  first  discovery  order  was  made  by  Associate  Judge  Doogue  on    15 November 2016. The Associate Judge's Minute materially provided:

[2]        The defendants between them say that there needs to be a modified approach to discovery in this case. It is implicit in the approach of [counsel for Mr Farmer, Mr Gamble and Mr Massam] that they accept that the objective of discovery will be to locate adverse documents held by each side. However, they have a concern that because of the sheer mass of emails that will need to be searched, it is simply not practical for a manual review of all the emails to be carried out. They estimate there are in the vicinity of 150,000 items that would need to be checked. There is a further category of documents which are hard copies. [Mr Farmer, Mr Gamble and Mr Massam] accept that there is no practicable way of sorting and classifying this latter group other than by counsel reviewing them.

[3]        As to the email documents [Mr Farmer, Mr Gamble and Mr Massam] have proposed that there should be a search carried out using the means described in paragraph 3(2)(a)(ii) of Part of Schedule 9 to the High Court Rules.

[4]        [Counsel for Mr Banks] does not of course know whether the estimate of the volume of emails is accurate but he was not disposed to argue that because of the volume of emails that counsel have said they would need to check a manual review of them would be unworkable. Therefore [counsel] accepts that there will probably have to be some form of electronic searching carried out.

…

[6]        [Counsel for Mr Gamble and Massam] has proposed that as well as providing draft lists of issues, when counsel comply with their obligation to

or close business associate of Mako or any of its directors, and (b) "[Mr Banks'] principal business is not in investing money and he does not habitually invest money".

do that they should also forward to the opposing party/ies a schedule of proposed search terms. The result would be that by the close of business at 2016 the positions of the parties on both the issues in the case and the proposed search terms would have been recorded. I agree with that approach and also with the further suggestion that [counsel for Mr Gamble and Mr Massam] has made that the resolution of the agreement as to the terms of the search should not be required before, say, 10 February 2017. Therefore the target date would be 10 February 2017 by which the parties ought to have agreement on issues and search terms and I adopt that date accordingly.

[7]        Affidavits of documents are to be filed and served by 3 March 2017. The parties agree that all discoverable documents are to be disclosed. Disclosure is to be completed by 10 February 2017 by which date all discoverable documents will have to have been provided. The electronic documents do not require any further direction, however in regard to the hard copies, the Court direction is that these are to be scanned and provided in electronic pdf format.

[8]        In general, the default discovery and disclosure rules in Schedule 9 will generally apply to the extent that they are not inconsistent with the directions that have been set out in this minute.

(footnote omitted)

[42]      The second discovery order varied the orders made by Associate Judge Doogue. The variation orders, made by consent by Peters J on 20 November 2017, included the following:

5.The original discovery orders by Doogue AJ on 15 November 2016 and 7 September 2016 will be varied as follows:

5.1[Mr Gamble and Massam] will discover all documents in accordance with subparagraph 5.2 below from November 2009 until Mako's liquidation which are relevant to the following categories:

(a)correspondence the defendants and/or any other employee of Mako Networks Holdings Limited and its subsidiaries and related companies (Mako group) had with potential customers and investors;

(b)correspondence the defendants and/or any other employee of the Mako group had and any other documents that relate to the financial position of the Mako group and/or its solvency;

(c)correspondence the defendants and/or any other employee of the Mako group had and any other documents that relate to or mention [Mr Banks]; and

(d)all Board minutes and company documentation for the Mako group from 2009 until liquidation.

5.2[Mr Gamble and Mr Massam] will discover all such documents as a result of searching the following terms:

[a list of search terms followed]

5.3[Mr Gamble and Mr Massam] will discover all of the following Mako group documents from 2009 until liquidation:

(a)board minutes;

(b)financial statements and end of year accounts;

(c)internal and management accounts;

(d)board reports and supporting documents; and

(e)any other Mako group documents which relate to the financial position or decision making of each or all Mako group companie(s) other than [a list of documents followed, identified by their discovery numbers] already discovered in the affidavit of [Mr Massam] affirmed 26 May 2017.

5.4The above discovery will be due on or before 26 January 2018.

[43]      The third discovery order affected only Mr Frederick. By order made by Moore J on 10 May 2018, Mr Frederick was directed to complete discovery within four weeks (by 7 June 2018).

The issues on the Unless application

[44]      Some of the issues initially raised for Mr Banks were resolved at or before the hearing. The remaining issues fall to be decided:

(i)Did the discovery orders against Mr Gamble and Mr Massam require them to provide verified lists of documents in respect of non-hard copy documents (ie emails and attachments)?

(ii)Was Mr Frederick's verified list of documents deficient in failing to refer to the  discovery  order  under  which  the  affidavit  was  made (r 8.15(2)(a))?

(iii)Was Mr Frederick's verified list deficient in failing to properly list all relevant emails that are in his possession (the list simply said that these

documents had been previously discovered by other defendants, and that Mr Frederick had nothing to add)?

(iv)Does Mr Frederick's acknowledged practice of deleting emails on a regular basis constitute a failure to comply with his obligations under r 8.3 to preserve documents that are, or are reasonably likely to be, discoverable in the proceeding?

(v)What is the effect of Mr Frederick's failure to pay the costs awarded against him on 31 August 2017 and 3 May 2018?

Steps taken by Mr Gamble and Mr Massam to comply

[45]      An affidavit of documents was affirmed by Mr Massam on behalf of himself and Mr Gamble, on 26 May 2017. The documents listed were a significant portion of the hard copy company documents to be discovered.

[46]      A supplementary affidavit of documents was  affirmed  by  Mr Massam  on 20 October 2017. It listed the balance of the hard copy documents to be discovered.

[47]      Between January and April 2017, counsel conferred on appropriate search terms for the electronic documents. They came up with a list of 153 search terms.

[48]      Mr Gamble and Mr Massam then conducted searches using the 153 search terms. Their searches returned over 124,000 electronic documents. The volume of documents produced was such that Mr Gamble and Mr Massam sought to reduce the search parameters. An amended discovery proposal was then forwarded by counsel for Mr Banks. Further negotiations followed, but Mr Gamble and Mr Massam say there was no suggestion that an affidavit listing the electronic documents should be filed. The only proposal was that Mr Gamble and Mr Massam were to search using revised search terms, and then provide the resulting electronic documents.

[49]      The wording of the consent memorandum that preceded the making of the orders made by Peters J on 20 September 2017 mirrored an amended search proposal made by Mr Banks earlier that month.

[50]      Mr Gamble and Mr Massam completed further searches using the new agreed search terms, and they completed the exercise just prior to Christmas 2017. The result was a total of 26,330 electronic documents.

[51]      The solicitors for Mr Massam and Mr Gamble then reviewed those documents in their native (Apple) MBox format (that was the format because Mr Gamble and Mr Massam/Mako used Apple laptops or desktops).

[52]      The solicitors' review reduced the volume of electronic documents slightly, but there were still over 23,000 electronic documents to discover. Mr Massam listed in a table the number of resulting electronic documents with reference to each of the new agreed search terms, in his affidavit filed in opposition to the Unless application.

[53]      Mr Banks was provided with the first tranche of electronic documents on      2 February 2018, by way of a USB. The documents were provided to Mr Banks' solicitors in their native MBox format, along with an explanation about the format. The balance of the electronic documents were provided by way of USB on 29 March 2018.

[54]      Mr Banks' solicitors then asked  for  the  documents  in  PDF  format,  but  Mr Gamble and Mr Massam were not prepared to do that. They considered that the costs of getting a third party provider to convert the emails to PDF format was prohibitive, particularly given that Mr Gamble and Mr Massam had already paid for the third party provider (SLS) to compile the two previous lengthy affidavits of documents.

[55]      The failure to provide the electronic documents in PDF format remained an issue until shortly before the hearing. Mr Johnson told me at the hearing that this was no longer a cause for complaint, however, as Mr Banks and his advisers had managed to convert the documents into PDF (or other searchable format).

Counsel's submissions

Discovery by Mr Gamble and Mr Massam

[56]      Mr Johnson acknowledged at the hearing that Mr Banks has no remaining complaints over Mr Gamble and Mr Massam's discovery of hard copy documents. The issues shortly before the hearing were:

(i)no verified discovery list had been provided in respect of the electronic documents; and

(ii)of the 23,000 electronic documents supplied on USB sticks, not all search terms had been covered; and

(iii)Mr Banks and his advisers could not read the documents.

[57]      The second issue fell away during the hearing. Mr Johnson accepted that it was satisfactorily resolved by a table of search results produced by Mr Massam. The third issue (readability of the electronic documents) had been resolved before the hearing by the use of SysTools MBox Converter.

[58]      That left the issue over whether Mr Massam and Mr Gamble were required to provide a verified list of the electronic documents.

[59]      Mr Johnson pointed out, and Ms Homes acknowledged, that there has been no listing of privileged electronic documents. Ms Homes said the privileged documents are in individual "computer boxes", in accordance with each search term. She said that SLS would charge $420.00 to produce a list.

[60]Mr Johnson acknowledged that the debate is over the likely cost ($6,000 to

$10,000) to get all of the 26,000 documents into proper discovery format, with each document separately listed.

[61]      Ms Homes submitted that there has been no disregard of the discovery orders. She submitted that, in making the relevant discovery orders, separate "trajectories" were adopted for hard copy documents and electronic documents. She referred to the

wording of the Minute of Associate Judge Doogue, submitting that the statement that "all discoverable documents are to be disclosed", at paragraph [7] of the Associate Judge's Minute, related only to hard copy documents.

[62]      Ms Homes then referred to the September 2017 discovery proposal provided by Mr Banks' solicitors. The proposal was attached to an email dated 11 September 2017, and it attached the various search terms. She submitted that nothing in the email of 11 September 2017 or its attachment contemplated Mr Gamble and Mr Massam providing an affidavit of documents listing the electronic documents.

[63]      Ms Homes generally submitted that the application for unless orders is disproportionate, particularly as Mr Banks had other options, including applying for orders for inspection or further variation of the discovery orders.

[64]      In reply, Mr Johnson submitted that the consent orders made on 20 November 2017 did require an affidavit of documents. He noted that Mr Farmer has provided an affidavit of documents, and Mr Banks and his advisers found the search terms and affidavit provided by Mr Farmer workable. Mr Farmer has provided a list of each individual email, and in his list privilege has been dealt with in the usual way. It is clearly feasible for Mr Gamble and Mr Massam to produce a list in the required form.

[65]      Mr Johnson then referred to a further conference Minute of Associate Judge Doogue dated 16 March 2017, in which the Associate Judge referred to affidavits of documents that were required to be filed and served by 3 March 2017 (but had not been). The learned Associate Judge said:

[8] Because definition of the search terms will affect the process of discovery, obviously there will need to be a following period during which the parties complete their affidavits of documents. At the last conference the spacing that I directed there should be between the parties conferring on and agreeing search terms and the time for filing discoverable documents was some three weeks.  I am prepared to extend that out to four weeks so that   20 working days after the date for exchange of proposed search terms the parties are to complete their affidavits of documents. That is a period of seven weeks approximately from today's date.

[66]      Mr Johnson submitted that the parties' subsequent negotiations were concerned only with the search terms. Nothing in them relieved Mr Gamble and Mr Massam from the ordinary obligation to provide a verified list of documents.

Discovery by Mr Frederick

[67]      Mr Johnson acknowledged that one of the original bases for complaint, failure by Mr Frederick to provide a bundle of documents, has now been attended to. The remaining issues relating to Mr Frederick's discovery are issues (ii)-(v) set out in paragraph [44] of this judgment.

[68]      With respect to the alleged failure to properly list all relevant documents as required by Part 2 of Schedule 9, Mr Johnson submitted that Mr Frederick's discovery affidavit failed to list relevant emails. Mr Frederick claimed that all the emails in his possession  had  previously  been  discovered  by   Mr Farmer,   Mr Gamble   and  Mr Massam, and that he had no further documents to add. Mr Johnson submitted that, given the May 2018 discovery order made by Moore J was an order for standard discovery, Mr Frederick was obliged to discover all other relevant documents in his possession (besides correspondence already in Mr Banks' possession). That would include, for example, Mako board minutes or management accounts, or correspondence that Mr Banks did not have. That has not occurred. Further, because Mr Gamble and Mr Massam failed to provide a discovery list listing electronic documents in their possession, Mr Frederick could not rely on the affidavits filed by them (which related only to the hard copy documents).

[69]      Mr Johnson referred to Mr Frederick "attempting to argue" that the May discovery order was not a discovery order but a "direction", and that his affidavit of documents complies with his discovery obligations. He submitted that Mr Frederick also attempted to argue that he did not need to complete full discovery, because the other defendants already have. Mr Johnson submitted that there is no merit in any of those arguments.

[70]      On the issue of preservation of documents, Mr Frederick had said in his discovery affidavit that he had "only a limited number of emails as [he] deletes emails on a regular basis and therefore has very few emails". Mr Johnson submitted that such

action by Mr Frederick was a clear breach of his obligations under r 8.3 to take all reasonable steps to preserve documents that are, or are likely to be, discoverable in the proceeding. He referred to the specific obligation in r 8.3(2) for Mr Frederick to retain emails even if they would otherwise be deleted in the ordinary course of business.

[71]      Mr Johnson submitted that the threat of legal proceedings against Mr Frederick was reasonably contemplated on or about 14 August 2015, and he should have ceased deleting emails from that date at the latest.

[72]      In response, Ms Homes submitted that Mr Frederick had never had any direct contact with Mr Banks, and that he has no further documents to add to those already discovered by Mr Gamble and Mr Massam. Specifically, he has no other emails beyond those that have already been discovered by those defendants and Mr Farmer.

[73]      Ms Homes submitted that there was no need for Mr Frederick to refer to the discovery order made by Moore J on 10 May 2018, as there was no such "discovery order" made by the Judge that day. She submitted that His Honour "merely directed that [Mr Frederick] was to complete discovery within a three week time frame".

[74]      In response to the submission that Mr Frederick has failed to comply with the listing and exchange protocol by failing to properly list all relevant documents,     Ms Homes submitted that it was sufficient for Mr Frederick to refer to and rely on the two affidavits of documents filed by the other directors (Mr Gamble and Mr Massam). Those were comprehensive and lengthy affidavits of documents that listed the discoverable company hard copy documents, and Mr Banks has had copies of those documents for some time.

[75]      On the issue of the alleged failure to preserve documents, Ms Homes submitted that there is no basis for the submission. First, Mr Frederick was only a director of Mako from December 2011 onwards, and Mr Banks' initial investments occurred in February and March of 2011. Next, the relevant period set out in the consent orders made (as between Mr Banks and Mr Gamble and Mr Massam) on 20 November 2017 was November  2009  to  the  date  of  Mako's  liquidation  (20 August  2015).  If  Mr Frederick had any relevant documents, they would therefore only have been in the

period December 2011 to 20 August 2015. Mr Frederick has said that his usual practice was to delete emails as he went along. Therefore, by August 2015, he would have had limited emails given his usual practice. For all of those reasons, there was nothing sinister in the deletion of the emails.

[76]      More generally, Ms Homes submitted that there is simply no need for the orders sought.

Discussion and conclusions on the Unless application

Applicable legal principles

[77]Rule 7.48 of the High Court Rules materially provides:

7.48     Enforcement of interlocutory order

(1)If a party (the party in default) fails to comply with an interlocutory order or any requirement imposed by or under subpart 1 of Part 7 (case management), a Judge may, subject to any express provision of these rules, make any order that the Judge thinks just.

(2)The Judge may, for example, order—

(a)that any pleading of the party in default be struck out in whole or in part:

(b)that judgment be sealed:

(c)that the proceeding be stayed in whole or in part:

(d)that the party in default be committed:

(e)if any property in dispute is in the possession or control of the party in default, that the property be sequestered:

(f)that any fund in dispute be paid into court:

(g)the appointment of a receiver of any property or of any fund in dispute.

(3)An order must not be enforced by committal unless the order has been served personally on the party in default or that party had notice or knowledge of the order within sufficient time for compliance with the order.

[78]      In SM v LFDB the Court of Appeal noted the following broad propositions applicable to unless orders:5

(i)An unless order takes effect automatically if it is not complied with.

(ii)An unless order is of last resort. It is properly made only where there is a history of failure to comply with earlier orders.

(iii)An unless order should be clear as to its terms. It should specify clearly what is to be done, by when and what is the sanction for non-compliance. The sanction should be proportionate to the default.

(iv)The sanction will apply without further order if the party in default does not comply with the order by the time specified. However, the party in default may seek relief by application to the Court.

(v)Justice may require that the party in default be relieved of the consequences of the unless order where the Court is satisfied that the breach resulted from something for which the party should not be held responsible. The party should not assume that belated compliance will suffice.

(vi)Where the unless order has been deliberately breached, it is difficult to conceive of any situation where the interests of justice require granting the flouter relief from the sanction imposed, notwithstanding belated compliance with the order.

[79]      Mr Johnson also referred to Victoria Cottages Ltd v FMR Group Ltd, where Associate Judge Osborne set out specific considerations to guide the exercise of the Court's discretion in making unless orders.6 The Associate Judge referred to the significant consequences of a failure to comply with an unless order. Those

5      SM v LFDB [2014] NZLR 494, 22 PRNZ 253 at [31].

6      Victoria Cottages Ltd v FMR Group Ltd HC Blenheim CIV-2009-406-000038 at [9].

consequences will influence the question of when an unless order should properly be made.

[80]      The Associate Judge went on to note that an unless order may be justified where default is intentional or contumelious, or where there is substantial prejudice to the innocent party through inexcusable non-compliance. Prejudice will be substantial if the inexcusable delay gives rise to a substantial risk that a fair trial of the issues in the litigation will not be possible.

[81]      Where non-compliance with a timetable has been inexcusable but not intentional, and the consequences of an unless order are to be weighed, any sense of injustice to the defaulting party is a secondary consideration to any injustice to the innocent party or to the public interest in the administration of justice.

Application of the principles in this case

[82]      I do not consider Mr Banks has made out a case for unless orders in this case, against any of the other defendants.

[83]      In respect of Mr Gamble and Mr Massam, I note first that there appears to have been a genuine dispute over whether the provision of a formal affidavit listing the electronic documents was required. Secondly, Mr Banks does now have the electronic documents in readable form. And Mr Johnson acknowledged at the hearing that the table attached as exhibit B to Mr Massam's affidavit sworn on 8 June 2017 sufficiently confirmed that Mr Gamble and Mr Massam had addressed all of the required search terms. The only remaining issue is whether Mr Gamble and Mr Massam were required to provide a verified discovery list listing the electronic documents (including a listing of what appears to be a little over 3,000 documents which the solicitors for Mr Gamble and Mr Massam categorised as privileged).

[84]      The  starting  point  is  the  order  made  by  Associate  Judge  Doogue  on   15 November 2016.

[85]      Having given directions relating to the parties endeavouring to reach agreement on appropriate search terms by 10 February 2017, the Associate Judge directed that:

Affidavits of documents are to be filed and served by 3 March 2017. The parties agree that all discoverable documents are to be disclosed. Disclosure is to be completed by 10 February 2017 by which date all discoverable documents will have to have been provided.

[86]      The Associate Judge did then note that "the electronic documents do not require any further direction", but His Honour immediately then went on to address the manner in which the hard copy documents were to be provided to Mr Banks (they were to be scanned and provided in electronic PDF format).

[87]      To my mind, the first step under the order was that copies of all documents (hard copy and electronic) were to be provided to Mr Banks' solicitors by 10 February 2017. Recognising that search terms in respect of electronic documents might only have been agreed shortly before 10 February 2017, His Honour allowed a further three weeks for affidavits of documents to be filed and served, noting that the parties had agreed that all discoverable documents were to be "disclosed" (emphasis added). In my view the word "disclosed" meant "listed in the affidavits of documents to be filed and served", and the word "all" meant just that – both hard copy and electronic documents were to be listed.

[88]      The fact that His Honour went on to say that electronic documents did not require any further direction was in my view concerned not with whether or not electronic documents needed to be listed, and were somehow to be dealt with on a separate "track", but with the manner in which copies of them were to be provided to Mr Banks' solicitors. While there was a need for a direction that hard copy documents should be scanned and provided electronically, no such direction was required for  Mr Banks' solicitors to receive the emails and attachments in electronic format.

[89]      I think that view is entirely consistent with the wording of the Associate Judge's Minute dated 16 March 2017 – the date for filing and service of discovery lists was deliberately set back four weeks after the parties had agreed on the search terms, to enable the results of the electronic searches to be included in the discovery list or lists.

[90]      I do not believe that view is affected by the parties' subsequent negotiations, the consent memorandum dated 17 November 2017, or the orders made by consent by Peters J on 20 November 2017. The joint memorandum of 17 November 2017 recorded the parties' agreement that the discovery orders made by Associate Judge Doogue were to be "varied" in particular respects, but Mr Gamble and Mr Massam would still be required to "discover" the documents referred to in the joint memorandum. The "discovery" was said to be due by 26 January 2018.

[91]      I conclude that a verified list or lists of the electronic documents was and is required. That is not affected by the fact that Mr Banks and his advisers now have the electronic documents, in readable form. One reason for that is that there has been no listing of the privileged documents, and Mr Banks and his advisers are entitled to have the privileged documents listed so that they can assess whether any of the claims to privilege should be challenged.

[92]      All of that said, I do not think this is a case of contumelious disregard of the discovery orders, such as might justify the making of an unless order – the interpretation of the orders for which Ms Homes contended was not beyond reasonable argument. In those circumstances, I  decline to make  any  "unless"  orders against Mr Gamble or Mr Massam, but there will be an order that they provide verified lists of the electronic documents, including the privileged documents (with appropriate statements identifying the privilege relied upon) within 25 working days of the date of this judgment.

[93]      Turning to the position of Mr Frederick, I note first that Mr Johnson did not appear to rely on the unpaid costs orders in his written or oral submissions. The money is in fact held in the trust account of Mr Frederick's solicitors. I direct that the costs awards are to be paid within five working days of the date of this judgment, failing which Mr Banks may apply by memorandum to have the Unless application brought back on for hearing insofar as it relates to Mr Frederick. In that event, I will convene a telephone conference to hear from counsel, and then make such further orders or directions as may be appropriate.

[94]      I accept Mr Johnson's submission that Mr Frederick was technically in default of his obligations under r 8.15(2)(a), in that his affidavit of documents did not "refer to the discovery order under which the affidavit is made".   And I do not accept     Ms Homes' submission that what Moore J did on 10 May 2018 was make a "direction", as opposed to making an "order". I consider that there is no relevant distinction between the two terms in the context in which the "direction" was made. Furthermore, the Judge was clearly exercising his discretion under r 8.5 to make "a discovery order", and the exercise of that discretion was not affected by the use of the word "direct", rather than "order".

[95]      The breach of r 8.15(2)(a) is technical in the extreme, and Mr Banks could not have been prejudiced or misled by it in any way. In my view the breach does not call for the Court's intervention.

[96]      Mr Banks  makes  a  more  substantial  complaint   when  he   alleges   that Mr Frederick has failed to properly list all of the relevant documents, as required by Part 2 of Schedule 9 to the High Court Rules. The specific matters of complaint are that Mr Frederick has failed to list the particular emails that are in his possession; he has simply said that they have previously been discovered by the other defendants, and that he has nothing more to add.

[97]      Mr Johnson referred to r 8.16, which requires a litigant to list all relevant documents except for documents filed in Court, or correspondence that may reasonably be assumed to be in the possession of all parties.7 He submitted that, given that the May 2018 discovery order was for standard discovery, Mr Frederick was obliged to discover all relevant documents in his possession besides correspondence that Mr Banks already had. That would include, for example, Mako board minutes or management accounts, or correspondence that Mr Banks did not have in his possession.

[98]      Again, I accept that there has been a technical breach by Mr Frederick of his strict discovery obligations. That must be so, I think, because there has been no listing of the electronic documents (including those in respect of which Mr Gamble and

7      Rule 8.16(5).

Mr Massam claim privilege), and there was accordingly nothing on oath from them (relating to the electronic documents) on which Mr Frederick could reasonably have argued that he was entitled to rely. I also accept Mr Johnson's submission that the exception in the Rules relating to documents filed in Court and correspondence would not extend to cover documents such as Mako board minutes or management accounts.

[99]      I accept that Mr Frederick should comply with his strict discovery obligations, including in respect of the listing of relevant privileged documents in his possession or power (identifying the particular privilege relied upon in each case). But this is not a default that could possibly justify the making of an unless order. There is no apparent prejudice to Mr Banks that cannot be met by an appropriate order for costs, and it may be that Mr Banks and his advisers already have copies of all of the documents that are within Mr Frederick's control.

[100]   The final issue raised by Mr Johnson related to Mr Frederick's apparent practice of deleting emails on a regular basis.

[101]Rule 8.3 provides:

8.3      Preservation of documents

(1)As soon as a proceeding is reasonably contemplated, a party or prospective party must take all reasonable steps to preserve documents that are, or are reasonably likely to be, discoverable in the proceeding.

(2)Without limiting the generality of subclause (1), documents in electronic form which are potentially discoverable must be preserved in readily retrievable form even if they would otherwise be deleted in the ordinary course of business.

[102]   As will be noted, the obligation to preserve only arises as soon as a proceeding is reasonably contemplated. In this case, I do not consider I have sufficient information to conclude that Mr Frederick has deleted relevant emails or other documents after that point. Mr Johnson submitted that Mr Frederick should have contemplated the threat of legal proceedings by 15 August 2015, but Ms Homes submitted that any relevant emails he might have had would likely have been sent or received (and deleted) before that date (remembering that Mako was put into liquidation on 20 August 2015). I accept Ms Homes' submission on this point – in the

absence of evidence that relevant emails have been deleted after 15 August 2015, I do not see a basis for the making of the unless order sought by Mr Banks at paragraph 1(c) of the Unless application.

[103]   However, there will be an order that Mr Frederick file and serve a verified list of documents (including any electronic documents in his control) in accordance with the requirements of r 8.15, within 25 working days of the date of this judgment.

Summary of orders made on the unless application

[104]I make the following orders:

(i)Mr Gamble and Mr Massam are to file and serve verified lists of the electronic documents in their control, including privileged documents (with appropriate statements identifying the privilege relied upon), within 25 working days of the date of this judgment.

(ii)The application for unless orders against Mr Massam and Mr Gamble is dismissed.

(iii)If they have not already been paid, Mr Frederick is to pay the two outstanding cost orders within five working days of the date of this judgment, failing which Mr Banks may apply by memorandum to have the unless application brought back on for hearing insofar as it relates to Mr Frederick. In that event, I will convene a telephone conference to hear from counsel, and then make such further orders or directions as may be appropriate.

(iv)Mr Frederick is to file and serve a verified list of all documents (including any electronic documents) in his control, in accordance with the requirements of r 8.15, within 25 working days of the date of this judgment.

(v)Costs – with the exception of Mr Frederick's failure to pay the costs order, I do not consider the arguments for the defendants in opposition to

the Unless application were obviously unreasonable or untenable. And, of course, I have dismissed the application, at least insofar as it affected Mr Gamble and Mr Massam. But Mr Banks should not have been required to make the application, and he was successful on the principal issue of whether further verified lists were required. I make a single order for costs in favour of Mr Banks on a 2B basis, with disbursements as fixed by the registrar. As between them, Mr Gamble, Mr Massam and Mr Frederick will be jointly and severally liable to pay those costs.

APPLICATION BY MR FREDERICK FOR PARTICULAR DISCOVERY AGAINST MR BANKS

[105]   The consent orders of 20 November 2017 required Mr Banks to discover the following documents, covering the period from 1 February 2006 to 31 March 2014 (whether the documents related to Mr Banks alone or to Mr Banks jointly with some other person or entity, or whether they related to any entity controlled by him or of which he was a director, trustee or administrator):

(a)end of year financial accounts  and  "books  of  account"  in  both  New Zealand and UK whether signed by [Mr Banks] or not;

(b)documents showing active trading in equities;

(c)documents showing investments;

(d)all documents which [Mr Banks] completed (or an agent on his behalf completed) when he applied to Immigration New Zealand (or  the New Zealand Government) for a visitor, work or residence class visa to migrate from the UK to New Zealand; and

(e)entries on bank statements in respect of investments.

[106]   Mr Frederick says that Mr Banks has not listed in his discovery affidavit all the relevant documents he has in his control. He applies under r 8.19 for particular discovery of those documents.

What further documents is Mr Frederick asking for?

[107]Mr Frederick seeks discovery of the following categories of documents:

(i)[Mr Banks'] tax returns which [Mr Banks] has filed with the Inland Revenue Department in New Zealand or with HM Revenue & Customs in the United Kingdom for the period 1 January  2004 to  30 September 2016.

(ii)All tax returns which have been filed with the Inland Revenue Department in New Zealand or with HM Revenue & Customs in the United Kingdom which relate to companies in which [Mr Banks] is a beneficiary of the trust or  a trustee or  administrator  for the  period 1 January 2004 to 30 September 2016 including (but not limited to):

·     The Beta Trust, the New Life Family Trust and the Gamma Trust (together the "Trusts"); and

·     Beta Trustee Limited, New Life Trustee Limited, Gamma Trustee Limited and AT1 Limited (together the "Companies").

(iii)All correspondence between [Mr Banks] and [Mr Banks'] legal advisers relating to Mako, his investment in Mako and the agreements drafted in respect of the same.

(iv)All correspondence between [Mr Banks] and [Mr Banks'] financial advisers concerning [Mr Banks'] investments or investments by  [Mrs Banks].

(v)All documents held by Immigration New Zealand relating to an application by [Mr Banks] (and/or [Mr Banks'] agent) for a temporary visa and/or a residence class visa.

(vi)Statements of all bank accounts and term deposits  (whether  in  New Zealand or overseas) which are in [Mr Banks'] name or for which [Mr Banks] is a signatory or held in the name of any company or any trust for the period 1 January 2004 to 1 December 2016 including but not limited to all accounts held with Royal Bank of Scotland, ICICI Bank and Santander Bank.

(vii)All bank documents which relate to [Mr Banks] having control over the bank account of any bank account which is not in the name of [Mr Banks].

(viii)All documents which record any investment in or contemplated investment  in  a  company  for   the   period   1 January   2004   to 30 September 2016.

(ix)All documents in which [Mr Banks] corresponds with [Mrs Banks] concerning the loans to Mako.

(x)All documents in which [Mr Banks] communicates with the accountant or solicitor for [Mr Banks], [Mrs Banks], the Royal Bank of Scotland, ICICI Bank, Santander Bank, trustees of the Trusts and/or

directors  of  the  Companies,  for  the  period  1 January  2004  to  30 September 2016.

[108]   Mr Frederick's requests for the category (ii) and category (v) documents reflect the fact that Mr Banks, Mrs Banks and Mr Banks' sister (Leila Banks) had been living in the United Kingdom, and immigrated to New Zealand prior to Mr Banks' first involvement with Mr Farmer and Mako.

[109]   The three trusts referred to in category (ii) are family trusts established by Mrs Banks and/or by Mr Banks and/or Leila Banks.

[110]   The trustee of New Life Family Trust (NLFT) is a trustee company, New Life Trustee Ltd (NLTL), which was incorporated in December 2006. Mr Banks is a 50 per cent shareholder in NLTL, and he and Leila Banks are the two directors (although Leila Banks said that she is the one who administers and controls NLTL). Mrs Banks was a director until November 2010.

[111]   Mr Banks' evidence was that NLTL is the only company of which he is a shareholder or director. His evidence (supported by that of Leila Banks in her affidavit) was that NLFT was established to provide accommodation and financial support for the beneficiaries (one of whom is Mr Banks).

[112]   Mr Banks and Leila Banks said that NLFT owns five properties, four term deposits, a computer, furniture and a vehicle. Leila Banks said that NLFT has never owned anything besides interest-bearing deposits such as call accounts and term deposits and property. She also said that she does not keep records of all NLFT's term deposits. Such records as there are have been disclosed in Mr Banks' discovery affidavit sworn on 26 January 2018. Leila Banks said there is nothing more to show the defendants on NLFT.

[113]   The trustee of Beta Trust is Beta Trustee Ltd. Mrs Banks is a shareholder and director (she was appointed as a director on 18 June 2011). Mrs Banks said in her affidavit in opposition to the non-party discovery application that Beta Trust owns six term deposits, but otherwise has no significant assets.

[114]   AT1 Ltd is a company that was incorporated on 5 March 2017. The sole shareholder is Beta Trustee Ltd, and Mrs Banks is the sole director. Mrs Banks said that AT1 Ltd has no significant assets.

[115]   The trustee of Gamma Trust is Gamma Trustee Ltd, a company of which  Mrs Banks is the director. Mrs Banks said in her affidavit that Gamma Trust owns four term deposits and one property (being the property in which Mrs Banks resides).

[116]   Mrs Banks said in her evidence that the only purpose of the family trusts has been to provide accommodation and financial support for her, Mr Banks and Leila Banks. They have never been trusts which invest money in shares in the traditional corporate "investing" sense.

Why does Mr Frederick want these documents?

[117]   The application  is  primarily  directed  to  the  habitual  investor  defence.  Mr Frederick believes that discovery of these further categories of documents will help him establish at trial that Mr Banks (or possibly the person or persons, if any, on whose behalf Mr Banks made the loans to Mako) was indeed an habitual investor within the meaning of s 3 of the SA, and that no prospectus was therefore required. The application is also directed to obtaining evidence to help Mr Frederick establish that Mr Banks had financial and legal advice before he entered into the Agreements.

[118]   Broadly, the documents sought relate to Mr Banks' financial affairs, or the financial affairs of entities  or  third  parties  from  which  he  receives  a  benefit.  Ms Homes submitted that Mr Banks has not discovered documents relating to the nature of his financial and investment history, particularly the investment history leading up to the first tranche of money transferred to Mako in February/March 2011. There are simply blanket assertions from Mr Banks that he is "inexperienced [in] dealing with corporate or commercial matters" (in an affidavit by Mr Banks affirmed on 29 June 2018), and that he  "has  never  executed  an  investment  decision" (in Mr Banks' affidavit affirmed on 14 August 2017).

[119]   Ms Homes submitted that, where the amount of approximately $3.2 million invested in Mako by Mr Banks came from, how it had been invested on other

occasions and by whom, and what part Mr Banks played in such investments, were all relevant to the "principal business" and "habitual investor" issues.

[120]   She noted that there is little case law to assist the Court in considering the meaning of "habitual investor". In Lawrence v Registrar of Companies the Court of Appeal noted that the protections afforded by the SA were not considered necessary for persons whose principal business was the investment of money, or who were habitual investors, because they belong to a category of persons able to protect themselves because of their expertise; they were said to be treated by the SA as not being a part of the public who needed protection, and they were excluded accordingly.8

[121]   Ms Homes also referred to the judgment of John Hansen J in Robt. Jones Investments Ltd v Gardner,9 in which the Judge rejected Mr Gardner's portrayal of himself "merely as a farmer with no knowledge in business shares or the market" and concluded that Mr Gardner's commercial activities in 1985 and 1987 (purchase of a large number of shares, and statements that he was a share market trader and dealer) brought him within the category of person mentioned in s 3(2)(a)(ii) of the SA.10

Mr Banks' opposition

[122]   Mr Banks opposes the application in respect of all of the further documents sought. He says that he has complied with his discovery obligations as set out in the tailored discovery orders made by Associate Judge Doogue on 15 November 2016 and by Peters J on 20 November 2017. He further contends that Mr Frederick has not set out valid grounds for belief that  the  further  documents  sought  exist  and  are in Mr Banks' control. Nor has Mr Frederick explained or justified the relevance of the further documents. Mr Banks contends that the application has been filed as a delaying tactic, and/or that it is a fishing expedition. In either case, it is said to be an abuse of the Court process. In support of that contention, Mr Banks says that the application largely repeats a further discovery application made by Mr Gamble and Mr Massam that was resolved by the consent orders made on 20 November 2017.

8      Lawrence v Registrar of Companies [2004] 3 NZLR 37 at [32].

9      Robt. Jones Investments Ltd v Gardner No 2 (1993) 6 NZCLC 68,514, [1994] MCLR 97.

10     At [3], [5], [26], [27] and [39].

[123]   Mr Banks also says that he has already discovered many of the documents requested, in his affidavit of documents affirmed on 26 January 2018. Further, some of the documents sought are said to be privileged (a reference to category 3 of the further documents sought by Mr Frederick as set out at paragraph [107] of this judgment).

The evidence in support

[124]   Mr Frederick swore an affidavit in support on 12 June 2018. In it he referred to a letter dated 31 May 2018 (the 31 May letter) from his solicitors to Mr Banks' solicitors in which further discovery was sought. He noted that Mr Banks' solicitors had not responded to the 31 May letter.

[125]   Mr Frederick relied on the 31 May letter and particular documents (referred to in the 31 May letter) that Mr Banks had included in his discovery.

[126]   The 31 May letter, and a bundle of the documents referred to in it, were provided by Ms Susan Denning, a legal secretary employed by Mr Frederick's solicitors, in an affidavit sworn by her on 11 June 2018.

[127]   The 31 May letter asked for copies of Mr Banks' tax returns. Mr Frederick's solicitors then referred to an email from Mr Banks to Mr Farmer dated 22 December 2010, in which Mr Banks referred to a discussion with Mr Farmer earlier in the day. The email set out a number of enquiries made by Mr Banks, before saying:

Here is an idea re the logistics:

-     We put the money into one of your UK accounts.

-     When interest is generated (eg quarterly) a small amount will be transferred to me, Leila (my sister) and/or [Mrs Banks]. We will state the amounts to deposit.

-     They will depend on our tax situation at the time. … Spreadsheets or statements can be emailed to us.

-     When the debt is redeemed a single NZD payment (we shall convert using the midmarket rate) is made into a NZ account.

[128]   Mr Frederick's solicitors then sought discovery of legal advice obtained by Mr Banks on the wisdom of the investment (and documents showing whether he accepted the advice or ignored it). In support, the solicitors referred to an email from Mr Banks to Mr Farmer dated 17 January 2011, in which Mr Banks said that his lawyer had reviewed the contracts. Mr Banks said in the email that he had expected the lawyer to have only some minor adjustments to make, but unfortunately the lawyer had a lot of reservations. Mr Banks said that his solicitor thought that there was inadequate creditor protection.

[129]   In the email dated 17 January 2011, Mr Banks told Mr Farmer that his lawyer thought he should ask for a personal guarantee.   He also said that, once he and     Mr Farmer had agreed on terms, his lawyer would like to convert the contracts to deeds of debt.

[130]   In the 31 May letter, Mr Frederick's solicitors said that it was clear from the documents that the money came from the bank account of Mrs Banks. They asserted that it was also clear that Mrs Banks was involved in the transfer of a sum of money to Mako, and that Mr Banks structures his affairs in association with, or in connection with, Mrs Banks. The solicitors asserted that it was in fact a joint investment between Mr Banks and Mrs Banks, and they required full disclosure by Mrs Banks. In support of this assertion, the solicitors relied on an email from Mr Banks to Mr Farmer dated 12 January 2011, in which Mr Banks said:

Here are the latest contracts. Once we have polished them I'll run them past [Mrs Banks] (a stakeholder as she will eventually benefit from my returns).

[131]   Mr Frederick's solicitors next referred to dealings Mr Banks was said to have had with the Royal Bank of Scotland (RBS). In support, they referred to an email from Mr Banks to Mr Farmer dated 20 January 2011, in which Mr Banks said:

… RBS (current acc provider) are giving me a lot of hassle and will not let me empty the account and demand that I leave in £25k.

[132]   Mr Frederick's solicitors sought all documentation held by Mr Banks (in his name or with Mrs Banks) relating to RBS. The solicitors referred to further information disclosing that RBS still had funds in the bank after Mr Banks deposited

his money into Mako.  The  solicitors  also  referred  to  documents  showing  that Mr Banks had also had funds with ICICI Bank UK plc (ICICI). In particular, an email from Mr Banks to Mrs Banks dated 31 May 2013, in which Mr Banks referred to "about £28 left with RBS (as a result of emptying ICICI)". Mr Frederick's solicitors sought discovery of all documents relating to the investment with ICICI.

[133]   The solicitors then referred to an email from Mr Banks to Mr Farmer dated   3 February 2011, in which Mr Banks said:

I am definitely going to use the multiple accounts. …

The US plan sounds good. When investing in companies one thing I like to see is a creditor list something like this …

[134]   Mr Frederick's solicitors sought disclosure of documents showing what companies Mr Banks had considered investing in, and what companies he had actually invested in.

[135]   Next, Mr Frederick's solicitors asked for disclosure of all communications between Mr Banks and Mrs Banks relating to Mako and the investments, including any instructions he gave to Mrs Banks over the investment, or instructions she gave to him. They referred to an email dated 12 February 2011 from Mr Banks to Mrs Banks, in which Mr Banks asked Mrs Banks to remit a small sum of money from the RBS account to ICICI. He also asked Mrs Banks in the email to send an email to RBS asking if it would be ok for her to send a letter that instructed RBS to send £1m to Mako as soon as the money arrives in the account ("around a date that you will provide").

[136]   The next document referred to by Mr Frederick's solicitors, was an email dated 1 April 2011 from Mrs Banks to Mr Farmer, in which Mrs Banks referred to a "problem of getting the last money to you". She said that she was going to do that through her overseas account at RBS, but then they would close the account, and she needed to keep the amount in RBS. Mrs Banks referred to having had "great problems with Santander", and she asked Mr Farmer if he would  allow  her  to  pay  from New Zealand funds the equivalent of £25,000.

[137]   Mr Frederick's solicitors asked for disclosure of all communications to and from Santander.

[138]   Mr Frederick's solicitors then asked for disclosure of all documents relating to Beta Trustee Ltd. The request was supported by references to an email dated 13 April 2013 from Mr Banks to Mr Farmer describing this company as being a corporate trustee, with Mrs Banks as its director and shareholder, and an email to Mr Farmer dated 27 March 2014 (in connection with Agreement 3) in which Mr Banks described himself as the "administrator" of the trust.

[139]In a further email to Mr Farmer dated 9 September 2014, Mr Banks said:

… some immigrants have plenty of money to invest (some have to as a part of their immigration deal) and I'm going to contact a lawyer who deals with them.

I take it crowd funding would be too slow (?) …

[140]   Apparently in reliance on that email, Mr Frederick's solicitors said that they considered Mr Banks' obtaining immigration status in New Zealand to be a matter relevant to the investment of funds.

[141]   Mr Frederick's  solicitors  then  referred  to  an  email  from  Mr Banks  to  Mr Farmer dated 16 March 2014, in which Mr Banks referred to circumstances having changed. That appears to have been a reference to the abandonment of the proposal that Mr Banks would convert his debt to equity in Mako and obtain in exchange a share price discount. Mr Banks appeared then to be willing to accept an arrangement under which his debt would be converted to equity, but he said that he would "prefer shares to be in the name of Beta Trust and for my name to not appear anywhere public". Mr Frederick's solicitors asked Mr Banks to identify and produce and discover all other documents which relate to Mr Banks having other investments or property held in names other than his own.

[142]   In his affidavit, Mr Frederick drew attention to the following additional matters:

(a)In one of the documents disclosed by  Mr Banks in his discovery,    Mr Banks referred to a joint interest with Mrs Banks (and his sister Leila), using the collective pronoun "we" -  "we  invested …"  and  "… we put the money into one of your UK accounts", and to "our tax situation at the time". (emphasis added)

(b)In another document disclosed by him, Mr Banks referred to related entities "that handle money" for his benefit.

(c)In another document, Mr Banks referred to the Inland Revenue Department giving him a "tax exemption on foreign investments".

(d)Mr Banks said in another document that he wished to structure "the deal" so "that the return is non-income in nature".

[143]   The second affidavit relied upon by Mr Frederick in support was an affidavit by an immigration lawyer, Ms Dilrukshi Rajapakse. Ms Rajapakse provided this affidavit in response to part of an affidavit sworn by Mr Banks on 27 October 2017 on the application (then pending) by Mr Gamble and Mr Massam for variation of the discovery orders made by Associate Judge Doogue, and for further discovery. In that affidavit, Mr Banks had said that he entered New Zealand on a student visa, and not an investment visa as the defendants had claimed. Mr Banks attached a copy of an immigration application summary to this affidavit. It appears to show that he entered New Zealand on a student visa in January 2008. An immigration permit (student) lodged in March 2009 was later approved, and before it expired (in August 2010)  Mr Banks obtained a visitor permit to re-enter New Zealand. On 15 July 2010 he applied for a residence permit, but the summary document produced with his affidavit of 27 October 2017, which was undated, showed that the residence permit application was still pending.

[144]   In her affidavit, Ms Rajapakse noted the various classes under which a residency visa for New Zealand can be granted, as follows:

(a)skilled migrant category;

(b)residence from work category;

(c)special categories (which include marriage, refugees); and

(d)business category (which includes investment category).

[145]   Ms Rajapakse noted that it was not clear from Mr Banks' affidavit whether the application for a residence class visa had been approved.   Nor was it clear from    Mr Banks' evidence what category Mr Banks relied upon when he applied for a residence visa.

[146]   Ms Rajapakse referred to an earlier affidavit sworn by Mr Banks, in which Mr Banks stated that he held no diploma, degree or other qualification. Ms Rajapakse said that there is no category in the immigration instructions issued by the Immigration Minister which would enable a person to be granted a residence class visa simply as a result of study in New Zealand. Such a visa might subsequently be obtained after an immigrant had obtained an offer of employment in New Zealand, but in such case the grant of a residence class visa would follow from the employment, not from any earlier study in New Zealand. Ms Rajapakse concluded that, in the absence of any qualification obtained, and/or employment (or offer of employment) in New Zealand, it was most probable that Mr Banks obtained any residence class visa he may have through the business category.

[147]   There was one further affidavit in support, being a second affidavit sworn by Ms Denning on 23 July 2018. Ms Denning produced a copy of Mr Banks' further discovery affidavit affirmed on 26 January 2018, with a bundle of some of the documents listed by Mr Banks in that affidavit.

The evidence in opposition

[148]   In an affidavit affirmed on 29 June 2018, Mr Banks first noted that the documents requested by Mr Frederick appear to be almost exactly the same documents as had been requested by Mr Gamble and Mr Massam in their application for further discovery filed on 13 October 2017. That application was the subject of a half-day hearing before Peters J on 15 November 2017, and it was resolved between the parties

to the application after the hearing. Orders were then made by consent by the Judge in her minute of 20 November 2017.

[149]   Mr Banks said that he was not opposed to providing further discovery if     Mr Frederick could (i) show that the discovery sought was relevant, (ii) explain how his application  differs  from  the  earlier  further  discovery  application  filed  by  Mr Gamble and Mr Massam, and (iii) explain how the documents requested in the present application differ from documents already discovered by Mr Banks or addressed by him in his earlier affidavits.

[150]   Mr Banks asserted that Mr Frederick's application ignores the documents he has discovered and the statements he has made in previous affidavits. In particular:

(a)Mr Banks has said, in an affidavit affirmed on 27 October 2017, that he does not have any financial advisers.

42     Including in Mr Banks' affidavit of 29 June 2018.

43     Camelot Hotel Ltd v Square Holdings Ltd, above n 38, at [55].

Mr Johnson

[333]   In his written submissions, Mr Johnson submitted that Mr Banks is not impecunious, but even if he were, that would not provide an automatic ground for a security for costs order.

[334]   At the hearing, Mr Johnson made the acknowledgement set out at [317] of this judgment, and tendered the affidavit of Leila Banks referred to in that paragraph. He submitted that while Mr Banks might not personally have sufficient assets to meet a costs award, Courts are able to take into consideration the wealth of a plaintiff's family trusts and associated entities when deciding a defendant's application for security.44 He submitted that the undertaking given by Leila Banks on behalf of NLTL make any security order unnecessary.

[335]   If the Court considers that the threshold "unable to pay" test has been met,  Mr Johnson accepted that it would be difficult for the Court to form any view of the substantive issues in the case without full submissions and cross-examination of witnesses. Nevertheless, he submitted that the following factors favour Mr Banks' claims, and favour the view that no security should be ordered:

(a)The misleading representations made by the defendants are relevant to the claims irrespective of whether or not there are documents to the contrary.45 The misleading representations are well documented in emails set out in Mr Banks' amended statement of claim and discovered by him.

(b)The defendants have provided no evidence to support the defence under s 3 of the SA.

44 Referring to Hook v Gulf Harbour Town Centre Ltd (In liquidation) HC Auckland CIV-2002-404- 1931, 4 July 2006. See also the Court of Appeal decision in AS McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA), where the Court treated the plaintiff's "companies and trusts" as "the McLachlan interests" when considering its discretion to order security.

45     Section 4 of the SA generally precluded contracting out of the provisions of the SA, including     ss 37 and 55G.

(c)There is no evidence that Mr Banks has cherry-picked his claim (eg by selecting "favourable" emails while ignoring other documents); in any event, it would be impossible for the Court to determine that without proper discovery from the defendants.

(d)Given that Mako collapsed owing approximately $30 million, and the defendants continued to encourage Mr Banks to invest right up to near the end, the claims against the directors under the Companies Act should be regarded as strong.

(e)The defendants' applications for security for costs, based on the contention that Mr Banks is impecunious, are inconsistent with their contention that he was an habitual investor for the purposes of a business.

[336] Related to the submission at [335](e) above, Mr Johnson submitted that the defendants cannot "approbate and "reprobate" – on the one hand (for the purposes of establishing the SA defence) they characterise Mr Banks as a wealthy man, an "habitual investor", while on the other (in their security for costs applications) they say that Mr Banks will not be able to pay any costs order made against him. The defendants cannot have it both ways.

[337]   Turning to the conduct of the defendants, Mr Johnson submitted that none of the discovery orders made in the proceeding to date have been complied with by the defendants. He submitted that the defendants have delayed proceedings by claiming difficulties in meeting their discovery obligations since 2016 due to the volume of documents, and have continued to maintain that claim nearly two years later (despite having had over 18 months to review documents). Despite having consented to discovery orders a number of times, the defendants have then backtracked and failed to comply with earlier agreements. In addition, Mr Frederick has failed to pay the two outstanding costs awards.

[338]   On the issue of delay in filing the security applications, Mr Johnson submitted that the defendants could have assessed the issue of Mr Banks' impecuniosity after

they were served with his first discovery affidavit on 26 May 2017. They would have had an even better idea when they received his affidavit affirmed on 14 August 2017, and his further discovery affidavit affirmed on 26 January 2018. However, the applications were not made  until  22 June  and  12 July  2018.  In  the  meantime, Mr Banks has been forced to incur significant costs advancing his case, prejudicing his financial position even further. Mr Johnson submitted that the defendants have delayed their security applications in an effort to cause Mr Banks further costs in the proceeding. Particularly in those circumstances, the defendants' interest in having their costs position secured should be subordinated to Mr Banks' right to have unfettered access to the Court to pursue his case.

Discussion and conclusions on the security for costs application

Threshold question – is there reason to believe Mr Banks will be unable to pay any costs award that may be made against him?

[339]   Mr Banks has acknowledged through his counsel that his ability to meet any adverse costs award that might be made at trial is dependent on funds being made available to him by NLFT (or possibly one of the other family trusts). Leila Banks has provided an undertaking in her capacity as a director of NLTL, the corporate trustee of NLFT, to meet any such costs. The only real question on the "ability to pay" issue is the worth of that undertaking.

[340]   In Hook v Gulf Harbour Town Centre Ltd (In Liquidation), Associate Judge Abbott observed that the plaintiff could not be regarded as being unable to pay "if he can procure certain payment from another entity".46 The Associate Judge was satisfied in principle that Mr Hook had the ability to arrange for a family company to provide an undertaking to meet the defendants' costs. His Honour stated "If the undertaking is sufficiently certain and for adequate value, I accept that the defendants will not be able to meet the threshold test, and show that Mr Hook will be unable to meet any adverse award of costs".47

46     Hook v Gulf Harbour Town Centre Ltd (In Liquidation), above n 44, at [24].

47 At [25].

[341]   Mr Hook's counsel accepted that the Court would need to be satisfied as to the substance of the proposed undertaking, and counsel proposed as a term of the undertaking that the family company, which owned certain properties, would not sell those properties (nor increase the amount of debt secured over them). The defendants in Hook contended that the undertaking was insufficient, particularly having regard to non-compliance with security undertakings that had been given at an earlier stage of the proceeding. They also submitted that Mr Hook had been less than frank about his dealings with assets, and had chosen not to provide financial information to support the claimed strength of the proposed undertaking.

[342]   Associate Judge Abbott accepted the defendants' concerns, and was not satisfied that the undertaking offered was a sufficient surety for any costs that may be awarded. He accordingly concluded that Mr Hook would be unable to meet any adverse award of costs.48

[343]   The defendants relied on the decision of Associate Judge Osborne in Camelot Hotel Ltd v Square Holdings Ltd,49 in submitting that the proposed undertaking by Ms Banks was insufficient.

[344]   Associate Judge Osborne noted that, at most, an undertaking may provide a satisfactory means of security if there is no question as to the substance of the undertaking. His Honour went on to say:50

… It may be that, in some cases, the plaintiff will be able to provide compelling evidence that a personal undertaking will be of substance and would result in prompt payment of any costs award. The Judge or Registrar may find in such circumstances that a personal undertaking sufficiently protects the defendant's position. There may also be other situations involving issues of access to justice [sic] arise by reason of the plaintiff's limited access to financial support or where the defendant has contributed to the plaintiff's financial predicament. In such cases it may be appropriate for the Court to regard an undertaking, in the particular circumstances, as satisfactory. But any earlier practice (dating from the 1980's or thereabouts) whereby personal undertakings might more readily have been regarded as satisfactory security (and I am not convinced that such a practice existed) should not be assumed to retain validity. The financial crises from the late-1980's have involved the very abrupt elimination of some corporate and individual fortunes. Assets are readily moved internationally. Individuals can readily relocate. This Court

48 At [34].

49     Camelot Hotel Ltd v Square Holdings Ltd, above n 38.

50 At [55].

will recognise, when a defendant today seeks to protect its legitimate interests by an order for security for costs, that there is a substantial difference in the "security" provided by a personal undertaking and that provided by more traditional forms of security such as stakeholdings.

[345]   On the facts in Camelot, the Associate Judge considered that the plaintiff's evidence fell "well short" of satisfying him either that a more traditional form of security could not be offered, or that the personal undertaking offered by [the plaintiff's director and shareholder] would inevitably result in prompt payment of any costs award".51

[346]   I respectfully agree with the views on this point expressed by Associate Judge Osborne in Camelot. While an undertaking by a third party to meet a plaintiff's costs in the event of the plaintiff's failure at trial may be sufficient in some cases, much will turn on the quality of the evidence directed to the substance of the undertaking.

[347]   In this case, I do not consider that the undertaking of Leila Banks is sufficient to justify a finding that the defendants have failed to satisfy the threshold question of inability to pay a costs award. I think they have.52 But I think the undertaking can nevertheless be considered in the exercise of my discretion on the security application. Taking the undertaking with the other factors referred to below, I have come to the view that this is not a case where security should be ordered.

Discretionary considerations

[348]   The first factor that I think points against the making of orders for security is the defendants' delay in making the applications. As Associate Judge Osborne observed in Camelot, applications for security for costs made at a very late stage are often unsuccessful, and where an application is made very close to the hearing date, or where the applicant has stood by, allowing the plaintiff to incur considerable

51 At [56].

52 Among other considerations, the undertaking has been given by a company, NLTL, and no up-to-date financial statements have been provided for NLTL. No mortgage security has been proposed to support the undertaking, and (unlike Hook v Gulf Harbour Town Centre Ltd) there has been no undertaking on behalf of NLTL that NLFT's assets will not be sold or further encumbered. Valuation reports have not been provided to support the claimed values of the properties owned by NLFT, nor have letters or certificates been provided to substantiate the stated amounts secured over two of the five NLFT properties.

expense without even an informal request in relation to security, the application may well be unsuccessful.53

[349]   Mr Frederick may say that his protest to the New Zealand jurisdiction was not finally determined until Palmer J gave judgment on Mr Frederick's review application on 5 April 2018, and that he filed his application for security for costs (with Messrs Gamble and Massam) promptly enough thereafter (on 22 June 2018). However, the judgment of Associate Judge Doogue setting aside his protest to jurisdiction was given on 11 July 2017, and I do not consider Mr Frederick should be given some sort of "credit" on the delay issue because he elected to mount a fruitless challenge to Associate Judge Doogue's judgment, especially as Palmer J seems to have found little merit in the application for review.

[350]   The delay issue is even more acute with the other defendants. Mr Banks referred in his affidavit of 29 June 2018 to correspondence between the solicitors going back as far as August 2016 in which the question of security for costs was raised. On 17 August 2016 the  solicitors  then  acting  for  Mr Farmer,  Mr Gamble  and  Mr Massam54 wrote to Mr Banks' solicitors enquiring about Mr Banks' ability to pay the defendants' costs in the event that he was unsuccessful at trial. They said that, in the absence of satisfactory evidence as to Mr Banks' ability to pay, they believed there were grounds for the Court to order substantial security. They asked for evidence of Mr Banks' ability to pay.

[351]   The next letter produced by Mr Banks was a letter dated 28 October 2016 from the solicitors for Messrs Farmer, Gamble and Massam. It is evident from this letter that there was some further correspondence between the 17 August 2016 letter and the 28 October 2016 letter, but that correspondence was not produced. The 28 October 2016 letter included the following:

Mr Farmer understands that Mr Banks has virtually no assets himself, and he lives off his mother's money. Indeed the money that is the subject of this litigation is not even his (a matter that will be raised shortly in relation to discovery and the pleadings). So we invite Mr Banks to show that he has sufficient funds to meet a judgment, failing which Mr Farmer will consider seeking security for costs.

53 Above n 38, at [15].

54     Mr Frederick had not then been served with the proceeding.

[352]   Mr Johnson submitted that the defendants have since had ample opportunity to make an assessment of Mr Banks' ability to pay costs.   In an affidavit sworn by     Mr Banks on 14 August 2017, he said that he had no business interests, and was by no means an experienced business person or investor in any sense. He said that he was supported financially "by the generosity of my family".

[353]   It seems to me that the reality is that it has suited the defendants on the habitual investor issue to portray Mr Banks as a man of some substance and that, motivated at least in part by that consideration, they have delayed making the security for costs applications they eventually made.

[354]   In the end, the truth appears to be that Mr Banks' ability to pay costs has always been dependent on the continuing support of one or more of the family trusts, and the fate of any security for costs application has always been dependent on:

(i)whether an undertaking would be offered on behalf of one or more of the trusts; and

(ii)whether the Court would regard any undertaking by that trust as of sufficient substance that no security order should be made.

While it was not until the hearing itself that Mr Banks finally produced an undertaking by Leila Banks on behalf of NLTL, I accept Mr Johnson's submission that it must have been apparent to the defendants for up to two years (and at least since Mr Banks' served his 14 August 2017 affidavit, in which he said "I am supported financially by the generosity of my family") that grounds existed on which they might apply for security for their costs.

[355]   Turning to the merits, I accept Mr Johnson's submission that it is difficult for the Court to form anything but a preliminary impression of the case. That said, the defendants have accepted that there was an allotment of debt securities offered in Mako, and Associate Judge Doogue was satisfied on the evidence before him that  Mr Banks had raised a serious issue for trial on his claims against Mr Frederick.55 And

55     Banks v Farmer, above n 22, at [113].

on review, with some additional evidence produced, Palmer J considered that there was "a sufficiently plausible evidential foundation" that Mr Banks was not a habitual investor.56 Mr Farmer has raised in his defence the various qualifications in the Capital Raising Memorandum (and in subsequent communications from him to Mr Banks), but at trial it would appear that the defendants may need to overcome the contracting out provisions of s 4 of the SA if those qualifications are to form the basis of a good defence to the claims under s 37 of the SA. Of course they will not need to do that if they succeed on the habitual investor defence, but on the basis of the affidavits filed to date (and without the benefit of the further discovery I have ordered in this judgment) there is little more than some of Mr Banks' statements in the emails (and the fact that he proceeded with the Mako investments in the face of advice that the Capital Raising Memorandum was intended for qualified investors) to support the view that Mr Banks was an habitual investor before he made the investments in Mako. And the eventual collapse of Mako raises obvious questions under the Companies Act as to whether the directors fulfilled their duties. If they did not, any contributory negligence by Mr Banks might not provide a complete answer to his claims.

[356]   To the extent it is possible to form any impression on the merits (and recognising that the position may change with the further discovery and the evidence that may be adduced at trial), at this stage I think the "merits factor" tends to favour Mr Banks.

[357]   I doubt this is a case where an order for security should not be made because the defendants' (allegedly) wrongful acts have contributed to the plaintiff's impecuniosity.57 But as far as the evidence shows, Mr Banks never owned assets in his own right before he obtained the money to invest in Mako, and Mr Banks and Mrs Banks have both said that that money was Mr Banks' own property. It is clear that that money has been lost, and if Mr Banks succeeds at trial it would seem at least arguable on the evidence so far before the Court that the defendants' actions would have been a prime factor in taking Mr Banks from a "non-impecunious" state (taking account of the money received from his mother and/or the Beta Trust that he invested

56     Banks v Farmer, above n 11, at [2].

57 In Aerospace Developments Ltd v Altitude Aerospace Interiors Ltd [2012] NZHC 2723 at [30], Allan J said that "a clear link between alleged blameworthy conduct of a defendant, and the plaintiff's own impecuniosity" is required.

in Mako) to an impecunious state after Mako's collapse. That of course would depend on an assessment of the  merits  of the  case (and perhaps also  the basis on which  Mr Banks received the money from Mrs Banks and the Beta Trust — would he have been called upon to account to them anyway?), and I do not consider the evidence supports Mr Banks so strongly on this factor that it could provide a stand-alone basis for refusing the security applications.

[358]   The last factor I consider in the exercise of my discretion is the undertaking provided by NLTL. While the undertaking might not have been expressed in "cast iron" terms, it was given by the trustee of NLFT, and on Leila Banks' evidence NLFT does own property with an equity in excess of $3 million. It provides the defendants with some measure of security for their costs, and considered with the other matters I have mentioned I think it is sufficient.

[359]   Balancing the various factors, I conclude that the security for costs applications should be dismissed, and there will be orders accordingly. However, I do not consider this is a case where the successful party should receive an award of costs, at least at this stage. It was only at the hearing itself that Leila Banks' undertaking was produced, and if it had been offered far earlier the issue of security for the defendants' costs might have been readily resolved. Costs on the application are reserved.

FURTHER DIRECTIONS

[360]   Certain directions for trial were given by Associate Judge Osborne on 18 June 2018, including the setting of a close of pleadings date of 1 October 2018. By minute dated 14 September 2018 I revoked the order relating to the close of pleadings date, and indicated that I would set a new close of pleadings date in this judgment, taking account of the various orders made.

[361]   The timetable orders made by the Associate Judge on 18 June 2018 are accordingly varied and/or added to as follows:

(1)The close of pleadings date is fixed at 25 March 2019.

(2)The date for Mr Banks to serve his briefs of evidence, common bundle nomination and draft chronology is amended to 24 April 2019.

(3)The date for each set of defendants to serve their briefs of evidence, changes/additions to common bundle nominations (if any), and marked-up amended chronology (if any), is amended to 21 May 2019.

(4)The date for Mr Banks to serve any reply briefs is amended to 5 June 2019.

[362]   I am aware that the case is presently listed before the Duty Judge next week. Leave is reserved to the parties to apply at that hearing for any variations to the foregoing amended timetable orders that may be considered necessary or appropriate.

Associate Judge Smith