Bi v Westcoast Mining Limited
[2020] NZHC 2505
•24 September 2020
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2019-418-000003
[2020] NZHC 2505
BETWEEN JIANTAO BI
Plaintiff
AND
WESTCOAST MINING LIMITED
First Defendant
AND
GOLDEN COAST HOLDING LIMITED
Second Defendant
AND
CHAO ZHANG
Third Defendant
AND
MINGHOU ZHANG
Fourth Defendant
Hearing: 9 September 2020 Appearances:
R A Hearn for Plaintiff
J V Ormsby for Third and Fourth Defendants
Judgment:
24 September 2020
JUDGMENT OF ASSOCIATE JUDGE PAULSEN
This judgment was delivered by me on 24 September 2020 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
BI v WESTCOAST MINING LTD [2020] NZHC 2505 [24 September 2020]
The applications
[1] In this proceeding the plaintiff applies for relief under s 174 of the Companies Act 1993 claiming the affairs of the first and second defendants have been conducted in a manner that is oppressive and unfairly prejudicial to him in his capacity as a shareholder.
[2]This judgment concerns two interlocutory applications as follows:
(a)an application by the third and fourth defendants that the plaintiff provide a more explicit pleading; and
(b)an application by the plaintiff that the third and fourth defendants provide particular discovery.
[3] Another application by the third and fourth defendants that the plaintiff provide particular discovery has been satisfied and is withdrawn subject to a ruling as to costs.
Background
[4] The plaintiff pleads that in November 2016 he made an oral agreement with the fourth defendant concerning the establishment and operation of the defendant companies (and subsidiary companies) for a goldmining enterprise. He says he was to contribute mining and exploration permits and his goldmining knowledge. In return he would be employed as the general manager and executive director of the companies and have a 20 per cent interest in them. The fourth defendant was to contribute
$20,000,000 in equity funding and have an 80 per cent interest in the defendant companies.
[5] The third and fourth defendants say there was no agreement between the plaintiff and the fourth defendant as alleged and the companies were established with the third defendant owning 80 per cent of the shares. They say that for cultural and family reasons it was understood the fourth defendant would not have any direct involvement in the enterprise until it was tested, and a relationship of trust had developed with the plaintiff.
[6] The mining operations were closed in September 2018 and the plaintiff was removed as a director of the companies in October 2018. The defendants then decided to issue further shares which the plaintiff says was to dilute his shareholding, or to place him under financial pressure.
[7] The plaintiff commenced this proceeding on 11 February 2019. He alleged three elements of prejudice, namely:
(a)his removal as a director;
(b)his exclusion from participation in the companies; and
(c)the issue of shares diluting the value of his shareholding.
[8] The original statement of claim sought no particular relief. It was amended a few days after filing to include a prayer for relief seeking an order that the third and fourth defendants be required to purchase the plaintiff’s shares and such other order as the court thinks fit.
[9] The plaintiff also sought without notice interim injunctions to restrain the resumption of mining operations, the disposal of assets and the issue of any further shares in the companies. Interim orders were initially made but were lifted following a hearing on 16 April 2019 before Cooke J.1
[10] On 29 October 2019, the court directed the parties to provide standard discovery and, without limiting that obligation, documents relevant to the following issues were to be discovered:
(a)The value of the companies’ assets, including their mining and exploration permits;
(b)The companies’ financial position and performance, including funds contributed by the parties;
(c)The terms of the arrangement between the plaintiff and the third/fourth defendant.
1 Bi v Westcoast Mining Ltd [2019] NZHC 860.
[11] Discovery was initially provided in February 2020, but disagreements arose as to whether the discovery was adequate. The defendants also raised a concern about the adequacy of the plaintiff’s pleading.
[12] The plaintiff filed a second amended statement of claim dated 10 July 2020. It added a claim for compensation under s 174(2)(b) of the Companies Act. As presently pleaded the plaintiff is seeking:
(a)an order under s 174(2)(a) that the third and/or fourth defendants purchase his shares at a price to be fixed by the court;
(b)an order under s 174(2)(b) that the third and/or fourth defendants pay him compensation in an amount the court thinks fit; and
(c)such other orders as the court thinks fit.
Application for more explicit pleading
The orders sought
[13] The third and fourth defendants seek an order the plaintiff file a more explicit pleading in these terms:
The plaintiff specify more precisely the relief sought and the sum of money claimed in prayer for relief b. In particular, the plaintiff should state:
(i)Whether the damages claimed are general damages or special damages (the third and fourth defendants apprehend they are special damages);
(ii)The amount claimed; and
(iii)The nature and particulars of any damages or where such damages are unable to be calculated precisely the amount claimed and the basis of the claim or methodology of calculation.
The Rules
[14] The application is made under r 5.21 of the High Court Rules 2016 pursuant to which the court may order a party to file a more explicit pleading.
[15]Relevantly, r 5.26 provides:
5.26 Statement of claim to show nature of claim
The statement of claim—
(a)must show the general nature of the plaintiff’s claim to the relief sought; and
(b)must give sufficient particulars of time, place, amounts, names of persons, nature and dates of instruments, and other circumstances to inform the court and the party or parties against whom relief is sought of the plaintiff’s cause of action;
…
[16] Rule 5.27(1) provides that a statement of claim must conclude by specifying the relief or remedy sought. Rule 5.31(1) provides the relief claimed must be stated specifically, either by itself or in the alternative. Rule 5.32 provides that a statement of claim seeking the recovery of a sum of money must state the amount as precisely as possible. Rule 5.33 provides that a plaintiff seeking to recover special damages must state their nature, particulars, and the amount in the statement of claim.
The principles to be applied
[17] A summary of the relevant principles to be applied is found in Body Corporate 74246 v QBE Insurance (International) Ltd where Associate Judge Osborne said:2
[18] I adopt as the principles applicable to consideration of an application for further and better particulars the following:3
(a)The primary purpose of pleadings is to define the issues and thereby to inform the parties in advance of the case they have to meet and so enable them to take steps to deal with it.
(b)The statement of claim should state the claim in each case so that the Court has sufficient clarity and detail to understand the issues it has to rule on, and the defendant knows the case which is to be met and is able to prepare for trial. The function of particularised pleading therefore includes:
2 Body Corporate 74246 v QBE Insurance (International) Ltd [2015] NZHC 1360 at [18] and [19] (footnotes included).
3 Adopting the principles as set out in Benmarroc Estates Ltd v Molyneux Management Ltd HC Dunedin CIV-2007-412-735, 23 June 2009 per Associate Judge Osborne at [8].
(i) limiting the scope of matters a party may put in issue of the trial (or in pre-trial settlement discussions);
(ii) enabling the other party to know the witnesses it will need to retain and to enable the party to start preparing ahead of the formal exchange of evidence; and
(iii) providing an opportunity for the other party to seek summary determination on the basis that the other party’s position is untenable.4
(c)Specifically required by r 5.26(b) High Court Rules are such particulars “ … of time, place, amounts, names of persons, nature and dates of instruments, and other circumstances as may suffice to inform the Court and the party or parties against whom relief is sought of the plaintiff's cause of action”.
(d)The pleading must set out the facts or circumstances relied upon as giving rise to each cause of action alleged and the relief claimed as a consequence.
(e)The nature and level of particulars will depend on the facts of the individual case. In complex cases, over-pleading may obscure rather than clarify the issues.5
(f)The distinction between particulars and interrogatories is important — particulars are matters of pleading, designed to make plain to the opposite party the case to be raised whereas interrogatories are sworn statements of fact, procured by the opposite party to assist that party in proving his or her case.
(g)A request for further particulars can be resisted if the request goes beyond the scope of particulars and probes for evidence.
(h)Questions which a Court can usefully ask itself are:
(i) Has sufficient information been provided to inform the other party of the case they have to meet and to enable them to take steps to respond?
(ii) Is there a real risk that the other party may face a trial by ambush if further particulars are not provided?
(iii) Is the request oppressive or an unreasonable burden upon the party concerned?
(i)In considering whether any party is likely to be taken by surprise, the Court is entitled to have regard to the fact that:
(i) If the particulars sought are within the knowledge or control of the requesting party an order for further
4 Platt v Porirua Council [2012] NZHC 2445 per Kós J at [19].
5 BNZ Investments Ltd v CIR (2008) 23 NZTC 21,821 (HC) at [45] per Miller J.
particulars may be declined pending the completion of discovery or other matters;
(ii) Case management is available to ensure each side is fairly informed of what is in issue, with the Court able to require leading counsel to agree a list of issues;6
(iii) Briefs of evidence will be exchanged well in advance of the hearing.7 The Court is also entitled to take into account its ability in cases with substantial evidence to provide for defendants to have extended periods of time to digest and respond to the evidence of the plaintiff.
(j)Particulars of pleading should be approached in a practical and not a theoretical, mechanical or pedantic manner.8
[19] By reason of r 5.33 High Court Rules, the requirements of the particularisation of a claim apply equally to the pleading of special damages. Rule 5.33 High Court Rules reflects the policy underlying r 5.26.9
The issue identified
[18] In his judgment on the plaintiff’s application for interim orders, Cooke J made the following comments on the relief that might be available to the plaintiff under s 174 if he is successful:10
The remedy that may be available under s 174 in these circumstances would be financial, and if the action is successful will most likely involve an order requiring the plaintiff’s shares to be acquired. The flexibility involved in the application of s 174 is relevant to the remedial orders that could be granted…
The remedy should accordingly correspond to the detriment. Here the market value of the plaintiff’s shares may be affected by the adverse financial performance of the business so far. The fact that the plaintiff would be only entitled to 20 percent of the shares may not be conclusive as to what is an appropriate award for his effective exclusion from the new venture, and the taking of the old venture’s assets. The point is illustrated by the fact that there be no business at all without the plaintiff’s mining permits and other assets. It is possible that the value of the permits alone is greater than a 20 percent share in the companies. But the plaintiff contributed the permits to the venture. It is arguable that such factors may need to be taken into account in the grant of relief under s 174, and may involve adjustment to the market value of the 20 percent, or alternatively additional compensation under s 174(2)(b) to ensure that the remedy corresponds to the true detriment suffered by the plaintiff. I do not have any view on the strength of such arguments. The factual disputes
6 At [45].
7 Petrocorp Exploration Ltd v New Zealand Refining Co Ltd (1992) 7 PRNZ 53 (HC).
8 Price Waterhouse v Fortex Group Ltd CA179/98, 30 November 1998.
9 McGechan on Procedure (online ed, Thomson Reuters) at [HR 5.33.01].
10 Bi v Westcoast Mining Ltd, above n 1, at [23]-[24].
prevent me from doing so at this point. But the key point is that the relief that can be granted is flexible enough to deal with these eventualities.
[19] When Cooke J issued his judgment, the plaintiff had not sought compensation under s 174(2)(b). On 14 April 2020, Mr Ormsby wrote to Mr Hearn recording the defendants’ understanding that it was accepted if the plaintiff could establish prejudicial conduct the questions to be determined at trial were the value of the plaintiff’s shareholding and, should any value be attributed to mining permits or other assets the plaintiff says he contributed to the enterprise.
[20] On 21 April 2020, Mr Hearn responded that it was the plaintiff’s intention to seek compensation “in addition or in substitution for” an order the defendants purchase his shares. The plaintiff’s position was that the relief was adequately addressed within the plaintiff’s existing pleading for further relief “as the court thinks fit” but that Mr Ormsby should confirm if the defendants required an amended claim incorporating this relief.
[21] Mr Ormsby replied on 5 May 2020, asserting that the plaintiff’s pleading was deficient as follows:
The pleading only seeks an order that your clients’ shares be purchased on terms the Court thinks fit. It is now clear your client is hedging his bets to argue a significant claim for compensation but has not specified in any way the nature of that compensation. It is disingenuous to say that is sufficiently pleaded by seeking “such other orders as the Court thinks fit”. Such a pleading only facilitates minor ancillary relief and cannot be used to obscure a significant separate claim for relief.
…
The pleading is wholly deficient. You must specify and set out clearly the entitlement, nature, and the amount of any additional compensation sought and whether or not such relief is pleaded in addition to existing relief or in the alternative. At some stage you will also have to provide particulars as to the alleged value of the shares.
[22] The plaintiff then filed his second amended statement of claim adding the claim for compensation but without specifying the basis for compensation or the amount sought.
Discussion
[23] The third defendant identifies the deficiency in the plaintiff’s statement of claim and the difficulties that poses for him and the fourth defendant in these terms:
I have been concerned from the commencement of this proceeding that neither myself nor the fourth defendant have any understanding of what the plaintiff is claiming or the basis on which he says the value of the shares ought to be calculated. It appears to be his position that the value of the shares should not be determined based on the accounts alone but we do not know what other value he says exists or the basis for his claim for any additional compensation. The position he adopted in his original application that he contributed $5 million in kind to the defendant companies is totally unsupportable. The purchase price of Gried Mining Limited which held three of the key consents was $300,000.00 and occurred after I had established and invested in the defendant companies (contrary to what I had been told at the time). The plaintiff’s company Gold Mining Service Limited [which held the other consents] had a negative equity of about $36,000 at the time it was acquired by the defendant companies …
As defendants we are now in the position of facing a significant claim for relief that appears to be beyond a claim for the purchase of the shares but we do not have any understanding of the basis for that further compensation, or how such compensation will be measured. I am unaware whether or not the compensation is related to an alleged value of mining permits that the plaintiff says were contributed, or are based on some other matter.
[24] The amended statement of claim refers to loss suffered by the plaintiff but in two particular respects. First, it is pleaded the plaintiff’s exclusion from the companies, the dilution of his shareholding and the fourth defendant’s failure to contribute the “agreed capital” have resulted in his “shareholding being diminished in value”. To the extent the plaintiff suffered loss due to these matters, it would be expected he will be compensated by the acquisition of his shares at an appropriate value determined by the court. Second, there is an allegation the termination of the plaintiff’s employment caused him financial loss. This matter is not within the jurisdiction of this court.11 There is no specific pleading stating what the plaintiff will seek compensation for under s 174(2)(b).
[25] Several arguments are advanced in opposition to the application. Mr Hearn argues the request for particulars is simply a response to the plaintiff’s request for further discovery. I reject that submission. It only became clear in correspondence
11 Employment Relations Act 2000, s 161.
between lawyers in April and May 2020 that the plaintiff and the defendants saw the issue of compensation differently and the defendants then immediately pursued particulars.
[26] Mr Hearn then submits that particularisation of the claim is “impossible, pointless and unnecessary” because the arrangement between the parties was unorthodox, there are factual disputes to be resolved, detailed valuation evidence will be given and the relief available under s 174 is “extraordinarily flexible” and discretionary. The argument appears to be the plaintiff cannot provide particulars of his compensation claim until the court has resolved factual disputes and valued the plaintiff’s shares. I do not accept this argument. This plaintiff is in no different a position than any other litigant seeking a discretionary remedy. While the court may, depending upon its findings of fact, decide to grant the plaintiff no remedy, or a remedy other than the one he seeks, that does not relieve him of his obligation to provide adequate particulars of the claim that he is advancing. It is that claim the defendants are required to answer.
[27] Mr Hearn also submits the particulars will not shape discovery, the evidence nor argument in the case. That submission is incorrect. The pleadings provide the framework for the litigation.12 The pleadings inform the defendants of the case they must meet, define the scope of discovery, limit the matters the plaintiff may put in issue, and enable the defendants to know what witnesses to call and start preparing evidence.13 The defendants cannot identify their witnesses and begin preparing evidence when the compensation claim is advanced on an unspecified basis and for an indeterminate sum.
[28] Particulars of pleadings also provide a basis for pre-trial settlement discussions.14 The plaintiff does not seek any further involvement in the mining enterprise. What is at stake is money. As things stand, the third defendant wishes to acquire the plaintiff’s shares but has no way of assessing what the plaintiff is actually
12 Hoyle v Hoyle [2016] NZHC 3120 at [60].
13 Platt v Porirua City Council, above n 4, at [19].
14 Milne v North Shore City Council HC Auckland M264/90, 9 November 1990 at 10.
seeking. As Mr Ormsby submits, the defendants are effectively locked into this litigation with no way of knowing what is required to potentially exit it.
[29] The final argument advanced is the technical one that the High Court Rules do not require the plaintiff to specify what relief is sought. Rule 18.14A provides that in a proceeding under s 174 the statement of claim is to be in form C 2. Form C 2 does not contain a prayer for relief. The forms in the rules must be adapted to the circumstances required in any particular case.15 The court may on its own initiative order the plaintiff to provide particulars under r 5.21(4). Here, it is necessary that the plaintiff particularise his compensation claim.
[30] The plaintiff’s amended statement of claim is defective. It is defective because it does not identify the basis upon which the plaintiff claims to be entitled to compensation.16 The most likely remedy the plaintiff will obtain if successful is an order requiring the purchase of his shares. If he obtains such an order, it is not clear what further detriment he claims to have suffered requiring the payment of compensation. If there is such detriment it should be clearly identified and pleaded. The amended statement of claim is defective also because it does not state the amount sought as compensation17 or whether the plaintiff is seeking compensation in addition or in the alternative to an order for the purchase of his shares.18
[31] It follows that the plaintiff should be ordered to provide particulars of his compensation claim. However, he is not in a position to do so as he has not obtained any expert evidence to support his claim. Generally speaking, an inability to provide particulars properly required is not an excuse.19 Mr Ormsby accepts, however, that practically the plaintiff should be given time to instruct an expert and provide the particulars. This will be accommodated in the orders that are made.
15 High Court Rules 2016, r 1.21.
16 Rule 5.26.
17 Rules 5.32 and 5.33.
18 Rule 5.31.
19 McGechan on Procedure, above n 9, at [HR5.21.06].
The application for particular discovery
The orders sought
[32] This application was reduced in scope. Originally further discovery was sought of seven categories of document but at the hearing Mr Hearn identified just four categories of document that are in issue as follows:
(a)correspondence between the third defendant, the fourth defendant and/or Judy Zhang relating to the operations of the companies;
(b)bank statements for the first defendant’s foreign currency account;
(c)bank statements showing the origin of funds that were deposited into the first and second defendants’ (and their subsidiaries) bank accounts; and
(d)documents relevant to the valuation of the companies’ machinery and equipment as at 30 September 2018 including the year, hours and warranty status for each item of machinery.
[33] Since the hearing counsel have managed to agree the third defendant will provide the documents in [32](b) and the plaintiff withdraws the request for discovery of the documents in [32](d). These concessions are made on the basis that they shall be irrelevant to the determination of costs on the plaintiff’s application.
The rules and the principles
[34] The parties were ordered to give standard discovery. This required them to disclose documents that are, or have been, in their control and that are documents upon which they rely, documents that adversely affect their case or documents that adversely affect another party’s case.20 The order required disclosure of documents of actual
20 High Court Rules, r 8.7.
and direct relevance.21 Relevance is usually to be assessed according to the pleadings.22
[35] A party must make a reasonable search for documents within the scope of a discovery order.23 What constitutes a “reasonable search” will vary according to context. Relevant factors are the nature and complexity of the proceeding, the number of documents, the ease and cost of retrieving them and their significance.
[36] In addition, discovery must be proportionate to the subject matter of the proceeding. Proportionality involves a balancing of the time and costs of making discovery against the potential value of discovery.24
[37] Rule 8.19 allows the Court to make a further order for particular discovery against a party where it appears there are grounds for believing that party has not discovered document(s) “that should have been discovered”. Rule 8.19 of the High Court Rules provides:
8.19Order for particular discovery against party after proceeding commenced
If at any stage of the proceeding it appears to a Judge, from evidence or from the nature or circumstances of the case or from any document filed in the proceeding, that there are grounds for believing that a party has not discovered 1 or more documents or a group of documents that should have been discovered, the Judge may order that party—
(a)to file an affidavit stating—
(i) whether the documents are or have been in the party’s control; and
(ii) if they have been but are no longer in the party’s control, the party’s best knowledge and belief as to when the documents ceased to be in the party’s control and who now has control of them; and
(b)to serve the affidavit on the other party or parties; and
21 McGechan on Procedure, above n 9, at [HR8.7.01].
22 Robert v Foxton Equities Ltd [2014] NZHC 726; [2015] NZAR 1351 at [8]; New Zealand Rail Ltd v Port Marlborough New Zealand Ltd [1993] 2 NZLR 641 (CA) at 644.
23 High Court Rules, r 8.14. McGechan on Procedure, above n 9, at [HR8.14.02] citing NSK Ltd v General Equipment Co Ltd [2015] 1979 at [24]; RHH Ltd v Anderson [2018] NZHC 2032 at [36] and Weir v Eini [2020] NZHC 465.
24 NSK Ltd v General Equipment Co Ltd, above n 23, at [21] citing Karam v Fairfax New Zealand Ltd [2012] NZHC 887 at [137]-[142].
(c)if the documents are in the person’s control, to make those documents available for inspection, in accordance with rule 8.27, to the other party or parties.
[38] As r 8.19 makes clear, there must be “grounds for believing” the documents exist and are in the party’s control. On an application of this kind the starting position is that the affidavits of documents filed are conclusive of the discoverable documents in a party’s control. The onus is on the party seeking particular discovery to show incompleteness.25 A party will not be required to embark on a search for documents that is likely to be hopeless and a waste of time.
[39]In Lighter Quay Residents’ Society Inc v Waterfront Properties (2009) Ltd,
Katz J stated the relevant principles applying to r 8.19 as follows:26
(a)Existence of the document does not have to be established on the balance of probabilities on a “more likely than not” basis. A lower threshold is required, which may vary given the relevance of the documents and issues of proportionality.
(b)While there is a presumption that affidavits of documents filed are conclusive, an application under r 8.19 is a proper way to circumvent the conclusiveness rule. The party seeking further discovery has to establish that the existing affidavit of documents is incomplete.
(c)Whether a document “should have been discovered” should be determined by reference to the “adverse documents” test in r 8.7, or any stricter test imposed under tailored discovery pursuant to r 8.8.
(d)A four‐stage approach is convenient:
(i)Are the documents relevant, and if so how important will they be?
(ii)What are the grounds, and what is the probative value of those grounds, for the belief that the documents sought exist?
(iii)Is discovery proportionate?
(iv)Weighing and balancing these matters, is an order appropriate?
[17] The applicants bear the burden of establishing that the relevant grounds exist. Associate Judge Bell explained this in the following terms in Plumpton v Terry:27
25 Peguero v Jess [2019] NZHC 3188 at [24].
26 Lighter Quay Residents’ Society Inc v Waterfront Properties (2009) Ltd [2017] NZHC 818 at [16]-
[17] and see also Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd [2015] NZHC 2760, [2018] NZAR 600.
27 Plumpton v Terry [2016] NZHC 988 at [26].
… there is no obligation on a party served with an application under r 8.19 to file any evidence in response. The burden remains on the applicant to make out its case that there are relevant grounds to believe under r 8.19.
Discussion
Category 1 - Correspondence between the third defendant, the fourth defendant and/or Judy Zhang
[40] The plaintiff asserts these documents are relevant to the roles played by the plaintiff and the third and fourth defendants in the mining enterprise. The third and fourth defendants say they have disclosed all relevant documents in this category that are in their control. They have provided explanations for what the plaintiff perceives to be incomplete discovery. I can see no reason to go behind the defendants’ affidavits.
[41] Mr Hearn modified the plaintiff’s position and asks for an order directing the defendants to explore reasonable options to recover WeChat messages including through the use of specialist software.
[42] WeChat is a messaging, social media and mobile payment application. The parties used WeChat. The plaintiff has disclosed WeChat messages. There has also been disclosure by the third defendant of WeChat messages between him and the fourth defendant, but the plaintiff says they are incomplete and some content of the messages, such as call records, has been deleted.
[43] The third defendant says he changed mobile phones twice between 2017 and 2019 which is why he has only been able to access the WeChat records produced. He does not believe there are other relevant messages in any event. The fourth defendant, however, says there may have been some messages relating to the establishment of the companies and in relation to funding issues, but he has not retained them.
[44] Mr Hearn raises the possibility that deleted WeChat messages are recoverable and therefore within the third and fourth defendants’ control. He argues that the third and fourth defendants should be required to take further steps to retrieve the WeChat
messages.28 However, in making the submission WeChat messages are recoverable Mr Hearn was simply conveying his client’s instructions. There is no evidence before me that there is any possibility of retrieving WeChat messages and, if so, how this would be done and whether requiring discovery on that basis would be proportionate. In the absence of such evidence, I do not make any order in respect to this category of document.
Category 3 - Bank statements showing the origin of funds that were deposited into the first and second defendants’ (and their subsidiaries) bank accounts
[45] The plaintiff seeks disclosure of documents of the third and fourth defendants showing the source of funds deposited into the companies’ bank accounts. The companies’ bank statements record around $5,000,000 was deposited by the third defendant. The plaintiff does not accept the bank statements show the “true source” of the funds. The plaintiff believes the funds were provided by the fourth defendant consistent with his case that his agreement was with the fourth defendant.
[46] Mr Hearn submits if the advances came from the third defendant he should be able to provide bank statements that he had $5,000,000 in funds in his account or showing receipt (and the source) of such funds. If he cannot then statements need to be provided showing where the funds came from.
[47] The third and fourth defendants consider the bank statements are irrelevant. Several matters are advanced in support of this stance. First, Mr Ormsby argues that as the plaintiff no longer wishes to participate in the defendant companies and the third defendant wishes to acquire his shares, all that is required of the court is to undertake a valuation exercise in relation to the plaintiff’s shares. Second, Mr Ormsby referred to the evidence of the fourth defendant, who does not deny he was involved in the venture. Third, he referred to the financial statements, bank statements, banking mandates and general ledgers of the companies that show the third defendant made the advances to the companies not the fourth defendant. He submits that as a director the plaintiff must be taken to have accepted the accuracy of the company records.
28 Inverness Medical Switzerland GMBH v MDS Diagnostics Ltd HC Auckland CIV 2007-404-748, 21 December 2007 at [37(9)].
Mr Ormsby also submits that the parties agreed to a corporate structure with the associated rights that attached to that structure and are reflected in the core constitutional documents, the financial statements, the share register, the bank transactions and the mandates. It is not, he submits, open to the plaintiff to circumvent that structure and it is not necessary to do so in the context of the case or the relief sought.
[48] It is necessary to identify the issues that arise on the pleadings and then to assess the relevance, or otherwise, of the documents to those issues.29 Pertinent are the following allegations in the amended statement of claim, all of which are denied by the defendants:
(a)the plaintiff’s agreement was with the fourth defendant;
(b)the fourth defendant nominated the third defendant to hold his shares and fulfil the role of director;
(c)the fourth defendant agreed to contribute $20,000,000 in equity funding to the venture; and
(d)the third defendant chose to close down operations, remove the plaintiff as a director and offer further shares for subscription all at the direction of the fourth defendant.
[49] Findings on these matters may have a bearing on the relief (if any) granted to the plaintiff and against whom such relief is granted. Bank statements showing the fourth defendant was the source of funds deposited into the companies’ bank accounts, albeit it may be indirectly through the third defendant, are connected, related or pertinent to the issues raised by the plaintiff’s pleadings and therefore relevant.
[50] Clearly the third defendant can be expected to be in control of bank statements showing the transfer of funds from his account to the companies. There is also context for the plaintiff’s allegations that the source of such funds was the fourth defendant.
29 McGechan on Procedure, above n 9, at [HR8.7.01].
The third defendant is a recent graduate and the fourth defendant a wealthy businessman. The plaintiff’s case is that the third defendant would not have
$5,000,000 to contribute to the companies. He also says the fourth defendant had to his knowledge transferred funds to the companies.
[51] Furthermore, the plaintiff has deposed that if the funds came from the third defendant’s bank account, the third defendant “would have received those funds initially from [the fourth defendant] via one of [his] companies in Hong Kong.” There is no direct denial of this allegation by the defendants.
[52] Applying the four stage approach in Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd:30
(a)the documents are relevant and, potentially, important for the reasons noted above;
(b)there is credible reason to believe that the documents exist and are in the control of the third or fourth defendant;
(c)the documents will be few in number and readily accessible to the third and fourth defendants; and
(d)balancing the potential relevance and importance of the documents to the plaintiff’s case against the relative ease with which they can be discovered, I consider the third and fourth defendants should be required to disclose any bank statement entries showing the source of the funds.
Result
[53] The third and fourth defendants’ application dated 24 July 2020 that the plaintiff provide particular discovery is withdrawn by leave.
30 Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd, above n 26.
[54] The third and fourth defendants’ application dated 24 July 2020 that the plaintiff is to provide further particulars of prayer for relief b of his second amended statement of claim is granted to the following extent. By 27 November 2020, the plaintiff is to file a further amended statement of claim providing the following further particulars of his claim:
(a)the nature and particulars of any compensation sought under s 174(2)(b) of the Companies Act 1993;
(b)as precisely as possible, the amount/s of compensation sought; and
(c)whether the claim for compensation is in addition or in the alternative to any other relief.
[55] In relation to the plaintiff’s application dated 17 July 2020 that the third and fourth defendant provide particular discovery I make the following orders:
(a)within 15 working days the third and fourth defendants are to file and serve supplementary affidavits stating whether they have in their control the following documents:
(i)bank statement entries relevant to the source of funds advanced to the first and/or second defendants either directly or indirectly by the third and/or fourth defendants in the period October 2016 to October 2018.
(b)if and to the extent that they have any such documents in their control, copies are to be made available to the plaintiff at the same time as the further supplementary affidavits are served. Where only part of any document is discoverable the third and fourth defendants may cover up any irrelevant parts of such documents disclosing only relevant entries.
(c)except to the extent stated in [55](a) above, the plaintiff’s application is dismissed.
[56] I reserve leave to apply to seek extensions to the dates in [54] and [55] above if those dates cannot be complied with. I note the potential in the present covid-19 environment for delays in the plaintiff obtaining an expert report and arising from the fact the fourth defendant resides in Hong Kong.
[57] Costs are reserved. Counsel should attempt to reach agreement on costs but if this is not possible they may file memoranda within 21 days.
O G Paulsen
Associate Judge
Solicitors:
Corcoran French, Christchurch RVG Law, Christchurch
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