Blossom Tradings Limited v Nair
[2024] NZHC 1190
•14 May 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-002219
[2024] NZHC 1190
BETWEEN BLOSSOM TRADINGS LIMITED
Plaintiff / Counterclaim Defendant
AND
SUNIL GOPALKRISHNAN NAIR
First Defendant
SHITAL NAIR
Second DefendantJASWINDER SINGH SETHI (a/k/a ROMY SETHI)
Third Defendant
SONIA SETHI
Fourth DefendantESSAAR HOLDINGS LIMITED
Fifth Defendant / Counterclaim Plaintiff
Hearing: 6 May 2024 Appearances:
L Ponniah for the Plaintiff
T Nelson for the Defendants
Judgment:
14 May 2024
JUDGMENT OF ASSOCIATE JUDGE GARDINER
This judgment was delivered by me on 14 May 2024 at 3.30 p.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date.......................................
Solicitors:
Boon Toh, Auckland
Patel Nand Legal, Auckland T Nelson, Auckland
L Ponniah, Auckland
BLOSSOM TRADINGS LTD v NAIR [2024] NZHC 1190 [14 May 2024]
Introduction
[1] In September 2021, Blossom Tradings Limited purchased two hospitality businesses, Bar 29 and Elsie’s Bar and Restaurant, from SRP Holdings 2015 Limited for $1.17 million.
[2] The first to fourth defendants were shareholders of SRP Holdings, and covenanted its performance of the agreement for sale and purchase. The fifth defendant was nominated as the vendor for a $700,000 loan to Blossom Tradings.
[3] SRP Holdings was subsequently placed into liquidation and later removed from the Companies Register.
[4] In this proceeding, Blossom Tradings alleges that the past profitability of the businesses were misrepresented, in that historic sales were inflated and wage expenses were under-reported.
[5] Blossom Tradings claims damages of $1.03 million based on an allegation that the businesses were only worth $136,000, not the $1.17 million it paid. It also claims that the loan agreements recording the vendor loan and associated general security agreements are invalid and unenforceable because of the absence of valuable consideration. Alternatively, Blossom Tradings seeks to set off its damages claim against the debt it owes to the fifth defendants.
[6] The defendants deny the misrepresentation. The fifth defendant counterclaims for payment of the remaining $600,000 of the vendor loan, plus interest and indemnity costs. It also pursues an alternative cause of action in estoppel based on the alleged deficiencies with the loans.
[7] This judgment determines the defendants’ interlocutory application for particular discovery of Blossom Tradings’ financial records.
Legal principles
[8] Under r 8.19 of the High Court Rules 2016, a Court may make an order for particular discovery after the proceeding has commenced, where:
…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…
[9] The Court usually follows a four-stage approach in considering applications under r 8.19.1 First, are the documents sought relevant to issues before the Court, and if so, how important will they be? Secondly, are there grounds for belief that the documents exist? This will often be a matter of inference. How strong is that evidence? Thirdly, would the time and cost of discovery be proportionate to its potential value? Fourthly, weighing and balancing these matters, and in the Court’s discretion, is an order appropriate?
[10] The starting point is that a document or class of documents will only be discoverable if relevant to the matters which will be at issue before the Court. Only then can it be said that, in terms of the rule, they “should have been discovered”.2
[11] Relevance is to be assessed according to the pleadings.3 In determining relevance, it is the case of the party seeking discovery that must be assumed to be true, not the party from whom discovery is sought.4 Further, there must be prima facie evidence that the documents sought exist, and are in the control of the party from whom they are sought (although the party seeking discovery does not have to prove that the documents actually exist).5
1 Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd [2015] NZHC 2760, [2018] NZAR 600 at [14]; and Jessica Gorman and others McGechan on Procedure (online ed, Thomson Reuters) at [HR8.19.03].
2 Robert v Foxton Equities Ltd [2014] NZHC 726, [2015] NZAR 1351 at [8(a)].
3 At [8(b)].
4 Kawarau Village Holdings Ltd v Yuen [2015] NZHC 1379 at [38].
5 Robert v Foxton Equities Ltd, above n 2, at [8(c)].
[12] The threshold embodied in “grounds for belief that the documents exist” is not high; all that is necessary is to show that there is some credible evidence which, assessed objectively, indicates that the documents that are sought exist.6
Defendants’ application
[13] The defendants applied for particular discovery in relation to six categories of documents. Prior to the hearing, the parties reached an agreed position on all but one category. That category is:7
Financial records regarding the plaintiff’s conduct of the businesses of Bar 29 and Elsie’s Restaurant, including revenue reports, weekly or monthly sales, and expense reports, all financial statements, GST returns and other tax returns, and timesheets.
Are the financial records relevant?
[14] This is the key issue. The defendants claim that the financial records are relevant to two issues. First, the value of the businesses at the transaction date. Blossom Tradings claims damages of $1.03 million, calculated as the purchase price ($1.17 million) less the alleged actual value of the businesses at the transaction date ($136,000). The defendants deny the alleged actual value.
[15] The defendants submit that later events can inform the actual value of a business at the transaction date, relying on four High Court authorities.8 The defendants say that later events can be especially relevant when pre-transaction events may not accurately reflect value, for example due to isolated events pre-transaction. Here, the settlement occurred in the heart of the COVID-19 pandemic and the lockdowns of 2020 and 2021.
[16] Second, the defendants plead as an affirmative defence that the businesses were subsequently, both at the date Blossom Tradings filed its claim and afterwards, worth at least $1.15 million. Therefore, Blossom Tradings has suffered no loss. They submit
6 Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd, above n 1, at [12].
7 Joint memorandum on scope of hearing on 6 May 2024 at [7].
8 Reynolds v Finnigan [2023] NZHC 48 at [55]-[56] and [60]-[61]; Wood v Wood [1985] 1 FRNZ 576 at 584; OHL Ltd v Johns [2021] NZHC 77 at [35]; and McCathie v Federal Commissioner of Taxation [1944] 69 CLR 1 at [16].
that while the date for assessing damages is normally the date of breach, the Court has the power to fix another date where that is required by the interests of justice.9 A plaintiff also cannot claim for loss that it has in fact avoided.10
[17] Blossom Tradings denies that evidence of how the businesses operated post-transaction is relevant to its damages claim. It relies on the general principle that misrepresentation is treated as a breach of contract, and that damages are intended to restore the plaintiff to the position they would have been in had the representations been true. Blossom Tradings says that consistent with that general principle, it claims damages calculated as the difference between the price it paid for the businesses and the actual value of the businesses at the date when the representation was relied on or the date of settlement.
[18] Blossom Tradings relies on the case of AAM Ltd v Exotica Enterprise Ltd, where Lang J assessed a purchaser’s damages award for a vendor’s breach of turnover warranty by determining the price the purchaser would have been prepared to pay had they been aware of the true position regarding the turnover and net profit of the business they bought.11 Blossom Tradings says that its damages calculation at [24(c)] of its statement of claim is broadly consistent with the approach in Exotica, in that it seeks to determine the true value of the businesses at the date of purchase.
[19] Blossom Tradings submits that only evidence relating to the past performance of the businesses is relevant to the businesses’ true value at the date of purchase. It emphasises that it does not claim for loss of future income or profit, and therefore the businesses’ future operations and profitability are irrelevant to its claim.
[20] I do not consider that it is possible to be confident at this stage that the financial performance of the businesses post-transaction will be irrelevant to the assessment of whether Blossom Tradings suffered loss because of the alleged misrepresentations, and if it did suffer such loss, the appropriate measure of damages.
9 Stirling v Poulgrain [1980] 2 NZLR 402 (CA) at 420 and 424.
10 British Westinghouse Electric and Manufacturing Company Limited v Underground Electric Railways Company of London Limited [1912] AC 673 (HL) at 689-690.
11 AAM Ltd v Exotica Enterprise Ltd [2019] NZHC 1482 at [123]-[139].
[21] Blossom Tradings has taken a particular approach to its calculation of damages at [24(c)] of its statement of claim, but it is not necessarily the appropriate approach. As Lang J observed in Exotica, whether restitutionary, reliance, or expectation damages are appropriate in a particular case is complicated and depends on the specific facts.12 He settled on the approach taken because of the factual circumstances of that case.
[22] I note that an important point of distinction from the Exotica case is that the agreement for sale and purchase of the business in that case contained a warranty that the business had achieved a particular turnover in the prior financial year. Lang J found that there was a clear breach of this turnover warranty, and his approach to damages followed that finding, relating the purchase price to historic profitability.
[23] There are features of Blossom Tradings’ evaluation of damages that require further examination. First, it assumes that the price paid for the businesses equates to the businesses’ value had the representations been true. Yet it is unclear whether the businesses’ represented profitability played any part in the value Blossom Tradings attributed to and paid for the businesses. The agreement for sale and purchase records that the purchase price was made up of $250,000 of tangible assets, intangible assets of $900,000, and stock in trade of $20,000. There is no clear evidence relating the purchase price to historic profitability at this stage.
[24] Second, Blossom Tradings has assessed the “actual value” of the businesses at the transaction date by calculating the correct net profit of the businesses for the prior years and multiplying that figure by 2.66. It calculates the correct net profit by deducting 40 per cent from the reported sales figures for 2020, reducing “purchases’ by a corresponding 40 per cent and adding in the unaccounted staff expenses. It then assesses its loss from the misrepresentation as the difference between the price paid and this alleged actual value.
[25] At this stage, it is unclear that this approach will be accepted at trial. The defendants explicitly challenge this methodology and advance a different approach. I cannot discount that, where Blossom Tradings’ assessment of the actual value of the
12 At [125].
businesses is based on a multiple of net profit, the Court might consider the businesses’ post-transaction net profit to be relevant to assessing the alleged actual value at the transaction date. That is especially so when the pre-transaction sales might not be a good indicator of the businesses’ true value because they were affected by the COVID-19 pandemic.
[26] Furthermore, Blossom Tradings’ second cause of action is for misleading and deceptive conduct in breach of s 9 of the Fair Trading Act 1986. The law is clear that the remedy for a breach of ss 9 of the FTA is reliance damages, not expectation damages. As Kós P noted in Gavigan v Eichelbaum:13
As a related point, a majority of a Full Court of this Court in Cox & Coxon Ltd v Leipst stated expectation damages are not recoverable under the FTA as they may be in contract. The FTA's remedial provisions make available a remedy for loss occasioned by the representation, but not for loss of the expected position had the misrepresentation been true. The measure of the loss relates to harm caused by engaging in misleading conduct rather than requiring a defendant to honour an expectation or promise made to a plaintiff
… But that is an expectation loss and Mr Eichelbaum is not entitled to it under ss 9 and 43 of the FTA simply on the basis that he expected to share in the Project Management Fee in that way. Instead, he must point to and prove the particular loss that he has suffered by reason of the misrepresentations both pleaded and proved on the evidence.
(emphasis added)
[27] Therefore, for the FTA cause of action, Blossom Tradings will need to prove that the alleged misrepresentation caused it to sustain a particular loss, which again may require an evaluation of its profitability after it acquired the businesses.
Are there grounds to believe that the documents sought exist? Is the discovery proportionate?
[28] Blossom Tradings ran and still runs the businesses. The financial records sought are standard financial records that can be assumed to exist. Blossom Tradings does not dispute that they exist.
[29] Blossom Tradings submits that the category is too wide and onerous. It has not, however, indicated the expected time or cost involved in providing the discovery.
13 Gavigan v Eichelbaum [2017] NZCA 412 at [39].
[30] I consider that the discovery sought is proportionate. The records are standard financial records spanning a two-to-three-year period. It will not be unduly difficult or expensive to extract the documents from the businesses’ information systems.
[31] The exception is weekly sales and expense reports. Weekly reports for two businesses over a two-to-three-year period will involve a considerable volume of material and are unnecessary in my view. Monthly sales and expense reports will suffice.
Result
[32] I enter judgment for the defendant on its interlocutory application for orders requiring particular discovery on the following terms.
[33]Blossom Tradings must, within 10 working days, file an affidavit stating:
(a)whether any documents that fall within the following class are or have been in its control:
Financial records regarding the plaintiff’s conduct of the businesses of Bar 29 and Elsie’s Restaurant, including revenue reports, monthly sales, and expense reports, all financial statements, GST returns and other tax returns, and timesheets.
(b)if documents within the class have been but are no longer in its control, its best knowledge and belief as to when the documents ceased to be in its control and who now has control of them; and
(c)the specific documents or groups of documents that have been “lost or destroyed” (per Part 4 of the Schedule to its affidavit of documents affirmed 9 October 2023) and its best knowledge and belief as to when and how the documents came to be “lost or destroyed”.
[34] Blossom Tradings is also required, within 10 working days, to serve the affidavit on the defendants and to make the documents listed in the affidavit, to the extent they are in its control, available for inspection by the defendants in accordance with r 8.27.
[35] As to costs I am of the preliminary view that, having succeeded, the defendants are entitled to costs, and on a 2B basis. If costs cannot be agreed, then the parties are to file written submissions within 14 days.
Associate Judge Gardiner
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