Boaden v Mahoney
[2023] NZHC 1318
•30 May 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-413
[2023] NZHC 1318
BETWEEN DREW BOADEN
Plaintiff
AND
TIMOTHY MAHONEY
Defendant
Hearing: 12 May 2023 Appearances:
N G Lawrence for Plaintiff
T J P Bowler and G J Ryan for Defendant
Judgment:
30 May 2023
JUDGMENT OF ASSOCIATE JUDGE LESTER
Further and better discovery and application for stay
This Judgment was delivered by me on 30 May 2023 at 12:30pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
BOADEN v MAHONEY [2023] NZHC 1318 [30 May 2023]
[1] Mr Mahoney is the director of Civil Underground Limited (in liq) (Civil). Civil leased land from Mr Boaden. The parties have known each other for many years. It is not necessary to detail the previous arrangements between the parties in respect of Civil’s use of Mr Boaden’s land, as in June 2019 a written lease was entered into between Mr Boaden and Civil.
[2] Mr Boaden alleges that at the time Civil entered the lease, Civil was experiencing financial difficulties which Mr Mahoney omitted to disclose. Mr Boaden claims Mr Mahoney implicitly represented that Civil had the means to comply with the terms of the new lease, including the agreed rental and the obligation to return the leased land to its original state if the lease was terminated.
[3] The reference to returning the land to its original state is to the fact Civil stockpiled soil on the land it had excavated for its clients. The soil was stored until Civil could on-sell it to its clients. The lease gave each party the right to terminate the lease upon six months’ notice.
[4] As Mr Boaden needed to sell the land in January 2020 he gave Civil six months’ notice terminating the lease. Mr Boaden had sold the land to a third party in January 2020, that sale settling in July 2020 upon the termination of the lease.
[5] As part of Civil’s obligations to restore the land, it had to remove the stockpiled soil. Mr Boaden alleges Civil continued to add to the stockpile until June 2020; in doing so Civil would have generated income from its clients. On termination of the lease, the stockpiled soil remained on site. Mr Boaden had to pay for its removal ($55,000 plus GST). Mr Boaden says the removal of the soil took one and a half days, cutting across Mr Mahoney’s claim, bad weather and rain meant it was not possible to remove the soil by July 2020. Mr Mahoney would have known that the six month notice period expired in the middle of winter. Mr Mahoney claims his offers to remove the soil post termination were rejected.
[6] As to rental, Mr Boaden at Mr Mahoney’s request, agreed in April 2020 to defer the payment of rental to June 2020. No further rental was ever paid by Civil.
[7] In this proceeding, Mr Boaden, relying on s 301 of the Companies Act 1993 (the Act), brings a claim against Mr Mahoney for breach of director’s duties, saying that Mr Mahoney traded recklessly, took on liabilities, and agreed to a course of conduct that he knew Civil could not satisfy. Mr Boaden alleges Mr Mahoney delayed liquidating Civil even though Mr Mahoney knew it was insolvent. Mr Boaden says he was misled by Mr Mahoney as to Civil’s intention to meet its obligations in order to avoid Mr Boaden taking recovery steps to reduce his losses sounding in a separate cause of action under the Fair Trading Act 1986.
[8] After the expiry of the lease, Mr Boaden issued a statutory demand against Civil in July 2020. There was an application to set the demand aside which was set down for hearing on 12 October 2020. Mr Mahoney placed Civil in liquidation on 5 October 2020.
Mr Boaden seeks further and better discovery
[9] Mr Boaden is highly critical of Mr Mahoney’s list of documents. He seeks an order that Mr Mahoney provide further discovery of no less than some 16 categories.
[10] Counsel are agreed that the four staged test set out in Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd, governs this application.1 The four factors are:
(i)Are the documents sought relevant, and if so how important will they be? This is sometimes referred to as the “materiality” criterion.
(ii)Are there grounds for belief that the documents exist?
(iii)Is discovery proportionate?
(iv)Weighing and balancing these matters, is the exercise of the Court’s discretion under r 8.19 appropriate?
1 Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd [2015] NZHC 2760, [2018] NZAR 600.
[11] Mr Lawrence, counsel for Mr Boaden, asserts that at the heart of Mr Boaden’s claim is the true state of Civil’s financial position when the lease was entered into and when Mr Mahoney made decisions in respect of the deferred rental and his management of the soil stockpile.
[12] Mr Lawrence submits the true financial position of Civil will be relevant in assessing whether Mr Mahoney’s decisions were made in good faith and as to whether the business was carried out in a way that caused loss to its creditors or carried out in a reckless or misleading and deceptive manner.
[13] The theme of Mr Mahoney’s opposition is that Civil’s records have been provided to the liquidator. Accordingly, the issue is not so much whether the categories of documents sought by Mr Boaden exist, but whether they are within the control of Mr Mahoney. “Control” is defined in r 1.3 of the High Court Rules 2016 (the Rules) as:
control, in relation to a document, means—
(a)possession of the document; or
(b)a right to possess the document; or
(c)a right, otherwise than under these rules, to inspect or copy the document
[14] Upon liquidation of Civil, Mr Mahoney’s powers as director essentially came to an end. Section 248(1)(b) of the Act provides:2
(b) the directors remain in office but cease to have powers, functions, or duties other than those required or permitted to be exercised by this Part:
[15] Associate Judge Paulsen, in Eversons International Ltd (in liq) v Stewart, held that a director following liquidation no longer has power to require the company to provide company documents.3
2 Companies Act 1993, s 248(1)(b).
3 Eversons International Ltd (in liq) v Stewart [2022] NZHC 1651.
[16]The following categories of documents are sought:
(i)Civil’s monthly management accounts and/or internal accounts from 2015 onwards;
(ii)Civil’s annual financial statements from 2015 onwards;
(iii)monthly aged debtor and aged creditors’ list from 2018 onwards;
(iv)Civil’s bank statements from 2018 onwards;
(v)Civil’s correspondence with IRD from 2017 onwards;
(vi)Civil’s correspondence with BNZ or any other financial institution from 2018 onwards;
(vii)all demands for payments by creditors of Civil from 2018 onwards;
(viii)Civil’s contracts/agreements for services with customers from 2018 onwards;
(ix)correspondence from customers of Civil to Civil and/or to Mr Mahoney regarding defects or disputes relating to work completed;
(x)advice Civil and/or Mr Mahoney received from BDO and advice it received from all other financial advisors from 2018 onwards regarding or connected with Civil’s financial position;
(xi)Civil’s leases, agreements to lease and/or sub-leases, including any sub-lease of the McLeod Road premises;
(xii)any agreement relating to the dumping of waste and/or fill on the property and any invoices associated with that dumping;
(xiii)correspondence between the liquidator and Civil prior to the liquidator’s appointment;
(xiv)correspondence with TAG Agencies and A Beer Auctions; and
(xv)all documents concerning storage of items on the premises.
[17] In relation to each category, Mr Mahoney says he does not have access to his work email address and that Civil’s records are now with the liquidator.
[18]In relation to category XIV, he says he does not know who TAG Agencies are.
[19] In relation to A Beer Auctions, he says a search of his personal email produced so many emails “I have not had time to go through all of them …”.
[20] In respect of the category relating to complaints about Civil’s work, Mr Mahoney refers to a search he undertook in relation to the name Cavanagh. That name is in fact referred to by Mr Boaden in his affidavit in support in respect of the storage category. In any event, Mr Mahoney says he checked his emails and found three items with the name Cavanagh, which he has produced.
[21] Notwithstanding a consent order made in March, Mr Boaden has not inspected the documents held by the liquidator.
[22] The difficulty Mr Boaden faces in his discovery application is the presumption that Mr Mahoney’s affidavit of documents is accurate. Other than pointing to emails showing Mr Mahoney used both his company and personal email addresses, Mr Boaden cannot point to specific evidence that Mr Mahoney has any of the documents sought, save for categories (x) and (vi).
[23] Suspicions that further documents may be in Mr Mahoney’s emails is not enough to conclude that Mr Mahoney’s evidence that he provided all material to the liquidator is unreliable.
[24] However, the evidence set out at [33] below shows a proper review of Mr Mahoney’s emails is required. Mr Bowler, counsel for Mr Mahoney, resisted that review on the grounds that inspection of the liquidator’s documents may render examination of Mr Mahoney’s emails redundant. Such is not an answer to the fact Mr Mahoney has not properly reviewed his emails in the first place or, at least such evidence as there is as to the checks that have occurred, leave me with a real doubt on that issue. If a review of Mr Mahoney’s emails discloses significant discoverable documents, that will have costs implications for Mr Mahoney, both as to the review process and this application. The converse is true for Mr Boaden, if the review turns up little or anything of significance.
[25] As to Category (x) documents, Mr Mahoney’s claim is that the material is privileged. Mr Mahoney’s discovery of privileged documents is by category. I direct Mr Mahoney is to file an affidavit listing each individual document in his control that predates the present litigation for which he claims privilege.
[26] Mr Mahoney referred to other financial advice, other than from BDO in his affidavit in support of the application to set aside the statutory demand, served by Civil for unpaid rent. Mr Mahoney is to provide details of all parties he and/or Civil took financial advice from including when it was sought, who commissioned the advice, who paid for the advice, and identify all documents in relation to that advice.
[27] Further, in respect of Category (x), Mr Mahoney is to explain whether the privilege belongs to Civil or to him. If it belongs to Civil, he is to explain the basis upon which he can assert that in respect of documents in his control.
[28] As to Category (vii), there is reference to the shareholders of Civil (Mr Mahoney) offering personal (or perhaps Trust) assets to BNZ in support of banking facilities for Civil. Communications on this issue will not be company documents. Even if such communications are no longer in Mr Mahoney’s possession, he will in all likelihood be able to obtain copies of this personal information from the BNZ. I direct that this category is also to be addressed by Mr Mahoney in his further affidavit.
[29] As to the balance of the Categories, the review of Mr Mahoney’s emails may disclose some information relating to these categories, but fundamentally, it is for Mr Boaden to carry out inspection of the documents held by the liquidator. Mr Mahoney, with limited exceptions, has not claimed that the documents sought by Mr Boaden do not exist rather, he says they are held by the liquidator. If inspection of the liquidator’s material shows there are gaps, then that will have costs implications for Mr Boaden.
[30] I do not dismiss Mr Boaden’s application in respect of his application for further discovery but rather, it is adjourned until such time as Mr Boaden has completed his inspection of the liquidator’s documents which will allow evidence to be provided in response to Mr Mahoney’s evidence that he has handed over the documents to the liquidator.
[31]Mr Mahoney’s further affidavit, as directed above, is to be filed and served
within fifteen working days of the date of this judgment.
Inspection of Civil’s electronic devices
[32] Mr Boaden seeks an order for the inspection of Mr Mahoney’s computers, cell phones, email addresses and all messaging apps.
[33] Mr Mahoney’s evidence in relation to the searching of his email addresses is unsatisfactory. In his affidavit he says:
10.The issues the plaintiff raises with my discovery affidavit seem very technical to me. I have done my best including handing over my phone with Gmail account open to a young clerk at Neilsons who is more tech savvy than me. Together we searched using keywords relating to the plaintiff and disclosed the relevant results.
11.Now the plaintiff has raised further categories or names to look for I have started doing that. But I have 22,578 emails in my inbox and it will be a big job to look for the relevant ones and list them. For those where there were a small number of results I have annexed them to this affidavit, for example the 3 results for “Cavanagh”. But when I searched for “a beer auction” as requested by the plaintiff there were 3061 results. I do not know how to forward so many emails and I have not had time to go through all of them anyway to see which ones are relevant (most appear to be my Trademe auction updates).
[34] In respect of the application for inspection, the notice of opposition asserts there are no relevant text messages on Mr Mahoney’s cell phone other than those already disclosed and that reasonable efforts have been made to search those, including by Mr Mahoney’s solicitor’s law clerk.
[35]Mr Bowler’s written submissions do not address the inspection issue.
[36] Given the evidence set out at [33] above, the Court cannot be confident that Mr Mahoney has undertaken a proper search of his electronic devices.
[37] However, that does not mean Mr Boaden gains unfettered access to Mr Mahoney’s devices and email account, as no doubt they contain other personal and confidential information.
[38] The parties have been referred to Colville v Colville, as an example of the type of orders that might be put in place for an expert to conduct an independent examination of Mr Mahoney’s electronic devices, how the expert will report to the parties, and the costs of the same.4
[39] Counsel are to file within 15 working days of the date of this judgment, a joint memorandum with the form of orders that have been agreed for the inspection of Mr Mahoney’s electronic devices. If counsel cannot agree on all aspects of the order, they are to set out those aspects of the orders that they agree on and highlight the areas of disagreement and why they disagree and I will determine the scope of the order on the papers.
Mr Mahoney’s application for a stay of the proceedings
[40]Mr Mahoney applies for orders staying this proceeding until:
(i)the liquidator of Civil provides consent and/or brings the claim on behalf of the company; or
4 Colville v Colville [2022] NZHC 766 at [34](2)(a).
(ii)alternatively, the liquidator has provided discovery.
[41] The application does not state which of the High Court Rules are relied on. The application also seeks to invoke the Court’s inherent jurisdiction.
[42] In the application, Mr Mahoney says a stay is warranted because the liquidator has not consented to Mr Boaden bringing his proceeding, the proceeding is one that should properly be brought by the liquidator on behalf of Civil and the liquidator’s decision not to bring the proceeding is an indicator that it is weak. Mr Mahoney also says:
It would be an unnecessary duplication of resources and unfair to [him] to be required to defend this claim and provide further discovery until the liquidator either:
(i)consents and/or brings the claim on behalf of the company; or
(ii)provides discovery.
[43] Mr Mahoney’s original submissions in respect of the stay are contained in the following three paragraphs:
[8]It was held in Ng v Harkness Law Limited [2014] NZHC 1667 at [25] that creditors could not recover compensation under section 301 as the directors’ duties are owed to the company, rather than individual creditors, and so will normally only be able to be pursued by the company for its liquidators.
[9]There needs to be special circumstances where a creditor can bring a claim where a liquidator wrongfully refuses to bring a claim which is available to the company (see Ng v Harkness Law Limited at [30]). An example is a situation where a particular creditor has been defrauded by the director; see Marshall Futures Limited v Marshall [1992] 1 NZLR 316.
[10]Submit that there are no special circumstances applicable here which would justify the plaintiff bringing the claim, particularly when it appears as if the liquidators have not yet made a decision about whether or not they would bring their own claim against the defendant.
[44]Again, the Rule relied on is not identified.
[45] I do not consider Ng v Harkness Law Ltd, applies.5 In that case, the plaintiffs sought to sue the defendants for knowing assistance of breaches of fiduciary duties by the directors of a company. Associate Judge Bell concluded that an accessory (the defendants in the proceeding before him) cannot be answerable for wrongdoing to a greater extent than the principal:6
If the directors or de facto directors could not be sued by the creditors for breach of fiduciary duty, then similarly in my judgment, the defendants cannot be sued by creditors for giving dishonest assistance to those directors.
[46] His Honour did not consider s 301 of the Act was relevant to the claim the plaintiffs wished to bring against accessories rather than the directors themselves. Ng is therefore not relevant to this case where Mr Boaden sues Mr Mahoney as a director, not as an accessory to wrongdoing by a director.
[47] Under r 15.1 of the Rules, the Court can dismiss a proceeding that discloses no reasonably arguable cause of action is likely to cause prejudice or delay, is frivolous or vexatious, or otherwise an abuse of process of the Court.
[48] Under r 15.1(3), instead of striking out all or part of the proceeding, the Court may stay all or part of the proceeding on such conditions that it considers just.
Section 301 of the Act provides:
301 Power of court to require persons to repay money or return property
(1)If, in the course of the liquidation of a company, it appears to the court that a person who has taken part in the formation or promotion of the company, or a past or present director, manager, administrator, liquidator, or receiver of the company, has misapplied, or retained, or become liable or accountable for, money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company, the court may, on the application of the liquidator or a creditor or shareholder,—
(a)inquire into the conduct of the promoter, director, manager, administrator, liquidator, or receiver; and
(b)order that person—
5 Ng v Harkness Law Ltd [2014] NZHC 1667.
6 At [27].
(i)to repay or restore the money or property or any part of it with interest at a rate the court thinks just; or
(ii)to contribute such sum to the assets of the company by way of compensation as the court thinks just; or
(c)where the application is made by a creditor, order that person to pay or transfer the money or property or any part of it with interest at a rate the court thinks just to the creditor.
[50]In Morrisons Company Law, the authors state:7
Section 301 of the Act contemplates the possibility of actions being brought by a creditor or shareholder, as well as the liquidator. It may be appropriate to seek to stay proceedings other than those brought by a liquidator on the basis that the same relief is sought, or consolidate the proceedings.
[51] Company and Securities Law in New Zealand provides a detailed but succinct discussion of s 301 of the Act. The authors note that the scope of s 301 has been described as follows:8
Generally speaking it maybe said that any misconduct involving a breach of substantive rules of company law, which resulted in loss to the company and gave rise to a right of action against the wrongdoer, might be made the subject of proceedings.
[52] A breach of a duty that a director owes to the company, whether it arises under statute, common law or equity, falls within the ambit of s 301 of the Act.9
[53] Section 301 of the Act is clear that any of the company’s individual creditor’s or shareholders may apply for relief. Equally, s 301 does not create any new cause of action on the commencement of liquidation rather, it provides a summary way of examining and enforcing the claims within its ambit which could have been brought by the company prior to the commencement of its liquidation.10
[54] The liquidator of Civil is not required to consent to Mr Boaden having recourse to s 301 of the Act. No such requirement exists in s 301 or is referred to in the
7 Paranie Edirisuriya and others Morrison’s Company Law (online ed, Lexis Nexis) at [56.13(b)].
8 John Farrar and Susan Watson (eds) Company and Securities Law in New Zealand (2nd ed, Thomson Reuters, Wellington, 2013) at [31.7.2].
9 At [31.7.2].
10 At [31.7.2].
authorities or texts. Should the liquidator issue proceedings that duplicate in part the present proceedings, then as noted at [50] above, a stay may be appropriate.
[55] While the liquidator could have brought the director’s duty claim relied on by Mr Boaden, the liquidator has so far chosen not to do so. Whether that was because the liquidator did not have the funds to pursue the litigation or because the liquidator took the view that the proceeding was weak, is beside the point unless the merits of the proceeding are such that it is untenable which would warrant it being struck out. However, lack of merit is not the basis of the application for stay.
[56] The day prior to the hearing, Mr Bowler (without first having sought leave), filed further submissions on the s 301 issue. I granted leave for those submissions to come in given the brevity of the submissions in support of the stay that had already been made.
[57] Mr Bowler relying on Banks v Farmer, submitted Mr Boaden was not entitled to rely on s 301 to seek damages payable directly to him as opposed to Civil, for breach of director’s duties.11 I do not set out Moore J’s detailed analysis of the competing lines of authority as to whether a creditor can recover directly from a director for breach of director’s duties or whether any such recovery must be paid to the company. Strictly, I consider his Honour’s conclusions on this point to be obiter as his Honour concluded that relief was not available to the plaintiff (leaving causation issues to one side) under s 301 as the liquidation in that case had ended several years prior to judgment and the company had been removed from the Register.12
[58] Justice Fitzgerald in Dempsey Wood Civil Ltd v Gapes, had to deal with the same issue.13 Her Honour referred to the different lines of authorities and identified a number of cases where creditors have recovered directly from directors and to cases where it has been held creditors have been unable to do so.
11 Banks v Farmer [2021] NZHC 1922.
12 Banks v Farmer [2022] NZHC 458 at [3].
13 Dempsey Wood Civil Ltd v Gapes [2021] NZHC 2933.
[59]Fitzgerald J said in Dempsey Wood:14
In Madsen-Ries v Cooper (Debut Homes), the Supreme Court left the question of when an award pursuant to s 301 can be made to direct to a creditor for decision in a case in which that issue directly arose.15 The Court of Appeal in Mainzeal recently took a similar approach.16
[60] I remind myself that the threshold for a stay under s 15.1 of the Rules is that the proceeding would otherwise qualify for strike out. In order for Mr Boaden’s cause of action under s 301 to be struck out, and therefore qualify to be stayed, Couch v The Attorney General provides that the cause of action must be clearly untenable.17 Couch also tells us that the Court should be slow to strike out a claim in any developing area of the law.
[61] The reality is, with there being competing lines of authority, some supporting Mr Boaden’s claim and some against it, it cannot be said his cause of action is untenable. Justice Moore’s conclusion in Banks as to why s 301 was not available is not applicable in this case as the liquidation of Civil is ongoing.
[62] I note that even if the law was that any recovery by Mr Boaden had to be paid to Civil, such a conclusion may be something of an own goal for Mr Mahoney as Mr Boaden could amend his claim seeking orders that Mr Mahoney pay not only what is due to Mr Boaden, but what is due to other creditors of Civil.
[63] As to the discovery issue relied on in the application for stay as set out above, Mr Boaden has obtained orders by consent for the inspection of the liquidator’s documents. Mr Boaden has made his own discovery application subject to the first part of this judgment. The discovery issues raised by Mr Mahoney are no basis for a stay.
[64] The stay application is declined given, in my view, the threshold for a strike out which must be met before a stay is granted, is not met. Where there are authorities for and against Mr Boaden’s reliance on s 301 to obtain direct compensation, I do not consider his claim can be seen as untenable.
14 At [10].
15 Madsen-Ries v Cooper [2020] NZSC 100, [2021] 1 NZLR 43.
16 Yan v Mainzeal Property and Construction Limited (in liq) [2021] NZCA 99 at [255(d)] and [309].
17 Couch v The Attorney General [2010] NZSC 27, [2010] 3 NZLR 149.
[65] Mr Bowler, relying on Mitchell v Hesketh, submitted this proceeding should be stayed until Mr Boaden amends his prayer for relief to seek that any recovery be paid to the liquidator.18 That submission, however, assumes that s 301 is limited in the way described in Banks. Until there is appellate determination on that issue, in my view, it is not the foundation for a strikeout/stay.
Costs
[66]Costs on the applications are reserved.
Associate Judge Lester
Solicitors:
Holland Beckett Law, Tauranga (for Plaintiff) Neilsons Lawyers, Auckland (for Defendant)
Copy to counsel:
B Hollyman KC, Barrister, Auckland (for Plaintiff) N G Lawrence, Barrister, Auckland (for Plaintiff)
18 Mitchell v Hesketh, HC Dunedin, 19 December 1997, CP47/97.
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