Bannock v Monaco Management Limited

[2015] NZHC 502

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2013-409-001701 [2015] NZHC 502

BETWEEN

MICHAEL WILLIAM BANNOCK,

ANNE MARGARET BANNOCK and OXFORD STREET TRUSTEES (2010) LIMITED as trustees of the M & A BANNOCK FAMILY TRUST and ORS Plaintiffs

AND

MONACO MANAGEMENT LIMITED First Defendant

MONACO VILLAGE LIMITED

(In Receivership and In Liquidation) Second Defendant

SCOTT PATRICK SANDERS Third Defendant

Hearing:	16 March 2015
Appearances:	R A Edwards and R J Lynn for Plaintiffs A D Marsh for First and Third Defendants No Appearance for Second Defendants
Judgment:	17 March 2015

INTERIM JUDGMENT OF ASSOCIATE JUDGE MATTHEWS

on Application by Plaintiffs for Further and Better Discovery

[1]      This case is between 48 owners of separate units at the Monaco resort in Nelson, Monaco Management Limited (MML) which manages the Monaco resort and leases each of the properties owned by the plaintiffs, and Mr Sanders who is a director of MML.  The second defendant is now in receivership and liquidation.  It sold to the plaintiffs all their units.  Mr Sanders was the sole director of the second

defendant.

M BANNOCK, A BANNOCK & OXFORD STREET TRUSTEES (2010) LTD as trustees of the BANNOCK FAMILY TRUST & ORS v MONACO MANAGEMENT LTD [2015] NZHC 502 [17 March 2015]

[2]      Some of the units are in a building which is run as a hotel.   Others are in groups of units, as the property was developed progressively.  As a result there are eight unit titles under the Unit Titles Act.

[3]      All the units are used in the operation of the Monaco resort accommodation complex.

[4]      The plaintiffs seek further discovery of records relating to the running of this business.

[5]      The plaintiffs have concerns with the way MML and Mr Sanders are running the resort, and in particular with the way income from visitors is allocated, and expenses are debited.  In this proceeding they say that the entry into an agreement for sale and purchase of each leased unit, by each plaintiff, was a subscription for a security within the meaning of the Securities Act 1976.  They say that offers by the second defendant were not made in, or accompanied by, an authorised advertisement or  a  registered  prospectus  as  required  by s  33(1)  of  the Act,  that  no  statutory supervisor was appointed as required by s 33(3)(a), and there was no registered prospectus provided to any of the purchasers at the time of subscription for their respective securities, in breach of s 37(1).

[6]      Each plaintiff says that as a consequence the allotment of the securities was invalid and of no effect, pursuant to s 37(4) of the Act.   All the plaintiffs seek a refund of their subscription moneys from the third defendant, and an order under s

85 of the Land Transfer Act 1952 directing the Registrar to rectify the register by cancelling the memorial of lease entered on the certificate of title for each unit.

[7]      The plaintiffs say that the business of running tourist accommodation and the letting of their units to members of the public is conducted in such a way that there are eight separate businesses, which I assume are said to accord with the eight unit title plans.  It is said that the income generated from letting the units is pooled, and costs are shared.  It is said that the right of each plaintiff to participate and share in the earnings is a security in terms of the definition of s 2D of the Securities Act and,

in particular, is a “participatory security” being a share of a proportionate ownership scheme.

[8]      So far as units within the hotel are concerned, the defendants accept that income is pooled and expenses shared, but say that an exemption notice under the Act is held.  The issue, so far as those units are concerned, is whether the conditions relating to the exemption notice are being met or not. The discovery application now before the Court is not relevant to these units.

[9]      The leases relating to the remaining units do not contain an express income pooling provision.  In short, the plaintiffs say that the information they have shows that these units are being run in such a way that income which is generated and costs which are incurred are pooled in groups corresponding to each unit title plan.  MML and Mr Sanders say that they run the complex in such a way that each individual unit is run as a separate business and its income and expenditure accounted for to its owner on that basis. The plaintiffs do not accept this contention.

[10]     Broadly speaking there are four stages to the operation, the allocation of units to incoming guests, receipt of income, incurring of expenses and payment of income, if any, to unit owners.  The plaintiffs say that although MML and Mr Sanders have given discovery of documents in this proceeding, they have not discovered material which must be held, and which is relevant to each of these aspects of the operation.

[11]     In  the  period  leading  up  to  the  hearing  of  this  application  Mr Sanders presented an explanation of the way in which guests are allocated to the units.  The units are not identical.  They are different sizes, have different internal facilities, and different outdoor spaces.   Generally speaking allocations are made by reference to the specific requirements of visitors.  The first category of documents sought by the plaintiffs are those which are relevant to this aspect of the operation.  They do not accept Mr Sanders’ explanation at face value.  They say there must be documents which either support or contradict his contention.

[12]     Ms Edwards referred to  one document to demonstrate why the plaintiffs believe income and expenses are being pooled.   It is called “Job Profit and Loss

Statement” for the second quarter of 2008 for a block of units described as Summerhouse.   This shows one figure for income and then two separate sets of deductions.  The first are in a group described as cost of sales, and includes such items as gas charges of $3,597 and administration and reception charges for labour and expenses of just under $9,000.  The total cost of sales is over $24,000, but the total income is $28,000.

[13]     The  second  block  of  deductions  are  described  as  expenses.   These  total

$26,771.

[14]     The result is a net loss for the quarter of $23,656.  There is then reference to six investors, one with a 10 per cent share and five with a 20 per cent share.  Various calculations follow, and a resulting loss is shown for each investor of $2,244.

[15]     I agree with Ms Edwards that this has hallmarks of being a pooling of the income and expenditure for the units in the Summerhouse block.   Certainly, it is sufficient to demonstrate beyond question that there is a real issue before the Court, and one which requires full discovery of all relevant documents so it can be properly investigated.

[16]     Reference in argument to this document met with a response which, clearly, Ms Edwards was not expecting.  Mr Marsh told me that last week Mr Sanders had instructed him that the owners of the Summerhouse units, and owners of another block known as the Orchard units, had specifically requested that their income and expenditure be pooled, and that was the reason for accounting to those owners in that way.

[17]     As this proceeding has now been before the Court for over 16 months, the corresponding allegations in the statement of claim are clearly set out and are denied in the statement of defence, and this is, so far as I am aware, the first time this has been mentioned, I too expressed some surprise.   Mr Sanders was not of course present, let alone called to give evidence on this interlocutory application, so no explanation from him beyond that which Mr Marsh was able to put forward was before the Court.   Mr Marsh quite properly accepted that at the very least there

would need to be discovery of all documents relevant to the issue of whether or not the plaintiffs’ who own units in Summerhouse and Orchard did in fact give the instruction or authority as Mr Sanders contends.  The owners of those properties are, as I understand it, amongst the plaintiffs.

[18]     Mr Marsh referred me to another statement of income and outgoings for a single unit, which he says supports Mr Sanders’ contention that all the rest of the units are run as separate businesses, contrary to the plaintiffs’ assertion.

[19]     Sometime  prior  to  the  fixture  on  this  application  it  was  suggested  by Ms Edwards that the  expert forensic accountant  she has  retained  go to  Monaco Resort, meet Mr Sanders, and have a look at his records and computer systems so he can advise Ms Edwards with more precision the discovery which should be formally sought.  Indeed, I understand it was thought that such a visit might also lay to rest some of the plaintiffs’ concerns about how the business is run but that is, of course, an open point.  The request was declined.   It was met with an explanation by Mr Sanders of the way he runs the business, which he produced in evidence.

[20]     Ms Edwards pointed out, and I think fairly, that the problem the plaintiffs face is that they do not know what classes of documents they might expect the defendants to discover until they know more of the systems that are operated by Mr Sanders.  After presentation of some of the argument before me, it was agreed that the plaintiffs’ forensic accountant could proceed as I have outlined.  For this reason, I am issuing an interim judgment.   I expect, and counsel expect, that there will be more clarity on  the documents  to  be discovered  once this  assessment  has  been undertaken.

[21]     For the time being:

(a)    I direct that the first and third defendants will give discovery of all documents relevant to their contention that the owners of units in the Summerhouse and Orchard parts of the development instructed either the defendants or the previous owners of the resort to run the operation of  their  blocks  of  units  as  one  business,  instead  of  as  individual

businesses for each unit owner.  This discovery is to be given by way of an affidavit filed and served within 10 working days.

(b)I record my view that after consideration of the Job Profit and Loss statement, to which I have referred, there must be discovery of all documents for a representative period of 12 months for the Summerhouse properties which are relevant to the booking and allocation to guests of the units in that group, the income generated for those units, all classes of deductions whether described as cost of sales or expenses, and  division  of the net  profit/loss  among the relevant owners.    Counsel  stressed,  and  quite  correctly,  that  the  plaintiffs’ concern is as to methodology given that their claim is made on the basis of the Securities Act.  There is no specific challenge to the accuracy of any of the figures presented by MML.   However, it may be that provision of a primary level of records is necessary for the plaintiffs’ forensic accountant to undertake the analytical task ahead.   That will not be known until the inspection of the defendants’ systems has taken place.  Further, it is not known whether this discovery will be required until discovery has been given on the issue of authority to pool these units as one business, to which I have referred.

(c)    Subject to conclusions reached after the plaintiffs’ forensic accountant studies MML’s system, I am of the view that another representative sample of documents for one of the sets of units other than Summerhouse and Orchard should be made available by way of discovery for a similar representative period.

[22]     Accordingly,  a  final  position  in  relation  to  further  discovery  cannot  be reached until there has been an opportunity to further assess the recent contention by Mr Sanders in relation to Summerhouse and Orchard, and the analysis by the plaintiffs’ forensic accountant which will throw more light on the classes of documents he believes he should have access to.

[23]     Accordingly the application is adjourned for further consideration after these steps have been taken.  The Registrar is asked to arrange a telephone conference at

12 noon on 29 April 2015.  If, nearer to that date, counsel advise that the process for which the adjournment has been ordered is still underway, that conference will be vacated and a date allocated later.  Either way, counsel are asked to file either a joint memorandum, or separate memoranda, no later than three clear working days prior

to the conference.

J G Matthews

Associate Judge

Solicitors:

GCA Lawyers, Christchurch
Saunders Robinson Brown, Rangiora