Browse Petroleum Proprietary Limited v Cue Energy Resources Limited HC Wellington CP No. 37/01

[2001] NZHC 380

IN THE HIGH COURT OF NEW ZEALAND
WELLINGTON REGISTRY CP No. 37/01

BETWEEN BROWSE PETROLEUM PROPRIETARY LIMITED
Plaintiff

AND CUE ENERGY RESOURCES LIMITED AND OTHERS
Defendant

AND CP No. 83/01

IN THE MATTER OF THE SECURITIES AMENDMENT ACT 1988

BETWEEN CUE ENERGY RESOURCES LIMITED
Plaintiff

AND JAMES MAX DUDDINGTON WILLIS & OTHERS
Defendants

In Chambers:

Date of Hearing: 14 May 2001

Date of Judgment: 17 May 2001

Counsel: B.W.F. Brown QC for Plaintiff in CP 37/01 and Defendants in CP83/01
R.A. Dobson QC and D.G.C. Baker for Defendant in CP 37/01 and Plaintiff in CP 83/01

JUDGMENT OF DURIE J

Introduction

[1] This is an application by Cue Energy Resources Ltd, a New Zealand company involved in oil and gas exploration and production, for an order that Bell Gully be disqualified from continuing to act as legal counsel for Browse Petroleum Proprietary Limited and others in proceedings affecting Cue for whom Bell Gully had previously acted.

[2] Browse is incorporated in Australia and is a shareholder in Cue. As plaintiff in proceedings against Cue and its directors, Browse alleges that Cue failed to call a special general meeting when required so to do and that Cue’s proposed share rights issue is oppressive to Browse. In further proceedings, Cue in turn contends that Browse, Mr Willis of Bell Gully, and others who are all shareholders in Cue, have breached Security Act requirements over the aggregation of voting securities without notice for the purposes of a special general meeting of Cue on 30 March 2001. This application relates to those proceedings. It also relates to an enquiry by the Market Surveillance Panel of the New Zealand Stock Exchange in respect of issues arising from that special general meeting.

[3] More particularly, Mr Willis of Bell Gully had acted for Cue on an assumption or opinion that Cue complied with New Zealand Stock Exchange Listing Rules requiring at least two directors to be ordinarily resident in New Zealand for so long as alternate directors, provided for under Cue’s constitution, so resided. The problem is now that Mr Willis, both as a shareholder in Cue and adviser to other shareholders, is said to have led an attack against Cue and its current directors on the basis that Cue does not in fact comply with those rules, the constitutional arrangement for alternate directors being presented as a device to circumvent them. For its part Cue asserts that its vulnerability to challenge on the basis of its directors’ respective places of residence, is entirely due to Mr Willis’ own legal opinion.

[4] The matter came first before Wild J who dismissed Cue’s application upon the ground that the information that Mr Willis had, was not confidential information but was available from the public record. That decision was not appealed. However, Cue has since located or has come to possess further material that was not before Wild J. This is said to support the view that Mr Willis had advised Cue on its compliance with the relevant listing rule, and that Mr Willis had since conveyed a contrary view to the Stock Exchange in a concerted attack on Cue. As a result, a second application for disqualification has been brought.

[5] One question before me is whether in principle, this further material makes a difference. However the larger question is whether the Court’s supervisory jurisdiction to maintain standards of professional conduct should be exercised in this instance when to do so gives vent to the difficulties inherent in re-litigating at first instance.

Background I

[6] Listing Rule 3.3.1 of the New Zealand Stock Exchange provides that a listed issuer such as Cue must have at least three directors, two of whom are ordinarily resident in New Zealand.

[7] Bell Gully was said to have advised Cue, or to have led Cue to believe, that Cue would comply with the rule if at least two alternate directors were New Zealand residents.

[8] Following a directorship change Bell Gully ceased acting for Cue in March 2000. Since then Quigg Partners have been acting for Cue. Bell Gully has acted for Browse and others who are shareholders in Cue.

[9] In October 2000, upon calling an annual general meeting, Cue notified a proposal to raise capital by share placement in order to diversify. Empowering resolutions were included in the notice. Browse and other shareholding companies were opposed to this expansion and set about gaining proxies to vote against it. The annual general meeting was scheduled for 27 November.

[10] At about the same time the New Zealand Stock Exchange Market Surveillance Panel was informed that Cue might not in fact meet the requirements of Listing Rule 3.3.1.

[11] Compliance with the Listing Rule became an issue at the annual general meeting of 27 November. Mr Quigg of Quigg Partners has deposed that Mr Willis of Bell Gully confirmed to the meeting that Mr Willis had given advice to Cue on that matter. His words were to the effect “yes, I have advised Cue that New Zealand persons appointed as alternate directors satisfied Listing Rule 3.3.1 but I always wondered whether I was right”.

[12] During the course of the Annual General Meeting, the resolutions for raising capital were withdrawn by the Board when it appeared that there was insufficient shareholder support, but an alternative proposal for a pro rata rights issue appears to have been flagged. In addition, a resolution for the re-election of Mr Jermyn as a director was defeated.

[13] On 6 December the Market Surveillance Panel, noting various submissions from shareholders in Cue, advised its intention to enquire into two aspects of Cue’s compliance with the Listing Rule. First mentioned was that, following the failure to re-elect Mr Jermyn, Cue had only two directors other than alternate directors. The second was that alternate directors were not directors for the purpose of the residency requirement. The panel had so ruled. A censure was foreshadowed.

[14] Cue protested that it had acted on legal advice from Bell Gully, and subsequently, on legal advice from Quigg and Partners. The panel considered censure inappropriate in that circumstance, but when Cue was unable to produce a written copy of either legal opinion, the panel was moved to impose a censure, which it did, on 2 February 2001. Cue had written to Bell Gully but Bell Gully advised it was unable to locate any written legal advice. Mr Quigg thought that his advice must have been given orally too.

[15] Meanwhile on 1 November, soon after the annual general meeting, Browse and others had requisitioned a shareholders’ meeting setting out resolutions to remove and replace directors and so to test the Board’s mandate to proceed with alternative proposals. Some correspondence on the validity of a further resolution appears to have delayed the prospect of an early meeting.

[16] Then, on 16 February, Browse became aware that Cue’s directors had announced a pro rata rights issue. Browse then brought the current proceedings against Cue, on 22 February, alleging a failure to call the special general meeting as required, seeking that a meeting be called, claiming that the pro rata rights issue was oppressive, and seeking an interim injunction to constrain the rights issue meanwhile. Cue responded with its application, on 27 February, that Bell Gully be disqualified from acting for Browse.

[17] Those facts were all before Wild J when, on 1 March, he heard Cue’s application for disqualification and then Browse’s application for an interim injunction. In an oral judgment, Cue’s application was dismissed. An order for interim injunction was then made.

[18] Cue appealed against the order for interim injunction but did not appeal the dismissal of its application to disqualify Bell Gully. The appeal against the interim injunction was dismissed on 15 March.

[19] Then a special general meeting was held on 30 March. Some proxy gathering preceded that meeting. Cue then claimed that the exercise of voting rights attaching to the voting securities so given was void and of no effect for breaches of ss 20 and 21 of the Securities Amendment Act 1988. Seeking a declaration to that effect, on 3 April Cue filed proceedings against Willis, Browse and others who were involved.

Background II

[20] Some further background is required before considering the current application. In an oral judgment of 1 March, Wild J reviewed the law on disqualification and formed the view that the case most apposite was Russell McVeagh McKenzie Bartleet & Co v Tower Corporation [1998] 3 NZLR 641 (CA). He considered that case was more honed to commercial law realities and was thus more appropriate than Black v Taylor [1993] 3 NZLR 403 (CA) which derives from family law. He saw Russell McVeagh to pose three questions:

“(a) Is confidential information held which, if disclosed, is likely adversely to affect the interests of the client or former client?

(b) Is there a real or appreciable risk that the information would be disclosed?

(c) Recognising the significance and importance of the fiduciary relationship which gives rise to the duty of protection, should the Court’s discretionary power to disqualify be exercised?”

He found the answer to (a) was “no” which left nothing to be considered under (b). As to (c), in view of Russell McVeagh he was unable to see how, in the circumstances then before him, he could properly exercise his discretion so as to disqualify Bell Gully.

[21] However in the course of the judgment Wild J noted also an allegation, in addition to the grounds in the application, that Bell Gully had initiated the complaint to the panel. Wild J was not prepared to draw an inference that Bell Gully had taken that step but he went on to observe:

“If Bell Gully had earlier advised Cue that it was not in breach, as appears to be the case, and then subsequently did indeed inititate a complaint to the panel, then that could only be described as most infilicitous, indeed I think improper, step.”

[22] He added on paragraph [18] of the judgment:

“However I am concerned with the issue of the possibility of Bell Gully misusing information confided in it by Cue, in breach of Bell Gully’s fiduciary duty to Cue as its former solicitor.”

And at paragraph [19]:

“It has not been made clear to me what confidential information it is suggested was placed in Bell Gully’s hands by Cue for the purposes of Bell Gully advising on the listing rule point. And it seems improbable to me that any was. The identity and ordinary residence of Cue’s directors at any given time was a matter of public record, as were the terms of Cue’s constitution and requirements of the NZSE listing rules. The issue was a narrow and dry one of interpretation.”

[23] It was on that basis that Wild J answered in the negative the first question that I have mentioned.

[24] Cue did not leave matters there. Mr Dobson for Cue stressed that Cue had been stretched to gather all necessary material in time for the injunction hearing which was brought on promptly in the usual way. However subsequently, in a further search of its own records, Cue was able to locate correspondence of 1997 that was seen to demonstrate Bell Gully’s awareness of the listing rule. That was correspondence with an Australian enterprise on an unrelated matter. In the course of it Bell Gully had noted the requirements of the rule in a way that disclosed Bell Gully’s view that alternate directors with New Zealand residence could meet the rule’s requirements.

[25] Also located, from amongst Cue’s own records, was a letter from Mr Willis to Cue of 21 November in the lead-up to the contentious annual general meeting. In this Mr Willis noted that from a search of the company, four persons were named as directors with only one, Mr Quigg, being ordinarily resident in New Zealand, that person being an alternate director. He observed this did not comply with Listing Rule 3.3.1. The letter notified transmission of a copy to the New Zealand Stock Exchange. This was followed by a further letter to Cue of 23 November noting that since 21 November a solicitor in Mr Quigg’s law firm had been appointed as an alternate director. Mr Willis stated:

“We are concerned, that this use of alternate directors appears to be a blatant device to circumvent the spirit and intent of Rule 3.3.1.”

The letter then added:

“Accordingly our client has requested that we seek a ruling from the Exchange on this issue as well.”

[26] Finally, there had since been disclosed by Bell Gully certain communications between persons aligned to the Browse initiatives in the period shortly before the annual general meeting. These refer to a number of submissions to the Exchange having been made through Bell Gully and note “the substantial benefit of Bell Gully’s professional presentation to the NZSE”.

[27] The discovery of all this material prompted the second application for disqualification now before me.

Cue’s Arguments

[28] Mr Dobson for Cue, argued as follows:

(a) Process

The Court’s supervisory jurisdiction in respect of professional conduct should be exercised in this instance notwithstanding the lack of an appeal from the decision of Wild J or, Rules 264 and 265 constraining applications to vary interlocutory decisions or to bring a further application on the basis of additional evidence. The decision had proceeded on a less than fully informed basis, Mr Dobson argued. Mr Willis knew the true position on the level of his involvement in the attack on Cue, and Mr Willis, contrary to his duty to this Court, had remained silent.

(b) Critical Facts

Further information showed that Mr Willis had clearly advised Cue on compliance with the listing rule, that Cue had relied on that advice in appointing directors and that Mr Willis had advanced an alternative view, to the Stock Exchange contrary to Cue’s interests. This is a clear breach of New Zealand Law Society Rules of Professional Conduct, he submitted. He referred in particular to Rule 1.05:

“A practitioner must not act for a client against a former client of the practitioner when, through prior knowledge of the former client or of his or her affairs which may be relevant to the matter, to so act would be or would have the potential to be to the detriment of the former client or could reasonably be expected to be objectionable to the former client.”

(c) Confidentiality

Notwithstanding the availability of the information from the public record, Mr Willis was materially advantaged by the solicitor/client relationship. It gave him ready ammunition on matters not immediately apparent from the record. Further, Mr Willis had failed to confirm Cue’s reliance upon legal advice when Cue was challenged by the Stock Exchange as a result of Mr Willis’ representation.

(d) Impact of censure

Notwithstanding Browse’s willingness to withdraw reliance upon the Stock Exchange censure for the purpose of these proceedings, the taint of censure lingers and affects shareholders’ perceptions of the current Board’s competence to govern.

(e) Legal tests

More was to be had from Black v Taylor (supra) and Bolkiah v KPMG [1999] 1 All ER 517 to deal with the circumstances of this case and reliance upon Russell McVeagh alone was insufficient.

The Approach now Taken

[29] I am prepared to accept Mr Dobson’s submission that the Court’s supervisory jurisdiction in respect of professional conduct is such that notwithstanding the lack of appeal or the constraints in Rules 264 and 265, the further material should be considered. Mr Brown argued that Cue was estopped from bringing its second application citing the discussion on res judicata in Joseph Lynch Land Co v Lynch [1995] 1 NZLR 37; (1994) 7 PRNZ 605 (CA) (affirmed in Shearer and Ors v Krammer (CA 120/97 judgment 22 September 1997). That case more particularly considered that an interlocutory decision can also give rise to an issue estoppel where in the circumstances it is reasonable to regard the earlier decision as a final determination of the issue which one party wished to raise. While the Court of Appeal had warned that caution in an interlocutory context is required before a matter is said to give rise to an issue estoppel, Mr Brown argued that Wild J’s decision should be treated as a final determination of the issue. An application for disqualification is different from some other interlocutory proceedings, especially those where a lack of finality is apparent from the face of the record.

[30] I think the distinctive element in this case is that the application responded to a proceeding that itself sought interim relief in exigent circumstances calling for hasty disposal. There has since been time to gather evidence that might not reasonably have been compiled on short notice. Further, the obligation of a Court to take such steps as may be required to ensure the maintenance of ethical standards, in the disposal of a matter before it, is necessarily on-going.

[31] Having said that however, the integrity and coherence of the judicial disposal of business is itself compromised if matters can be re-argued without constraint. Those arguments cannot lead to a second judicial opinion on those aspects of the case that have already been determined, or challenge findings previously made unless those findings were clearly founded on materially incomplete evidence. Nor can the second application permit of new arguments that could have been canvassed earlier, and any alternative argument must be plainly founded on the new material itself.

The Status of a Possible Breach of Professional Rules - First Finding

[32] In his oral judgment of 1 March, Wild J observed that if Bell Gully had earlier advised Cue that it was not in breach of the Listing Rule requirements, and if it were indeed the case that Bell Gully had initiated a complaint to the panel, then that was, he considered, improper. As Mr Brown for Browse submitted however, the judgment effectively set that conclusion aside. The judgment said in effect that even were that the case the issue before the Judge was whether the information was confidential.

[33] In other words, as I see it, the possibility of past improper conduct of the sort described was not the issue. It might form the basis for some complaint elsewhere but the question before the Court concerned the status of the information that was used, was it confidential or was it a matter of public record, and accordingly how that affected the conduct of the case before the Court.

[34] It is not for me to agree or disagree with that conclusion. I must simply accept that position as correct. Though there is now further evidence which may tend to establish more clearly that Bell Gully proceeded on certain assumptions that the Listing Rule was complied with, as evidenced by correspondence of 1997, and although there is now more evidence that Bell Gully may have initiated a complaint to the Board, that evidence is not material at this point.

The Status of a Possible Breach - Second Finding

[35] The significance of the further material is more pertinent to the second finding on 1 March. The question was whether, recognising the significance and importance of the fiduciary relationship which gives rise to the duty of protection, the Court should exercise its discretionary power of disqualify. Wild J concluded that on the circumstances as then before him, he could not properly exercise his discretion so as to disqualify Bell Gully. Now, of course, the circumstances have been elaborated upon. I understood that it was on this second finding that Mr Dobson principally relied.

[36] In considering the exercise of discretion the following matters appear to be relevant:

(1) While the 1997 correspondence is “new material” it was at all times in Cue’s possession. So also were the letters of November 2000. I note Mr Dobson’s submissions that due to the environment of haste and pressure that applied to these proceedings it would be particularly harsh to exclude consideration of that material at this stage. I think that must apply in respect of the 1997 correspondence but that evidence does not amount to very much. It is simply further evidence of that which was plainly in evidence in the affidavits before Wild J, that while acting for Cue, Bell gully had considered the issue of compliance with Listing Rule 3.3.1. The evidence of November 2000 was current, was directly pertinent to the present grievance, and ought reasonably to have been included in the affidavits before Wild J.

(2) The further material is not conclusive on material matters. On 21 November Mr Willis notified Cue of his concerns about compliance with various of the Listing Rules and indicated, by copying his letter to the Stock Exchange, that he was making complaint about them. He did not raise the issue of alternate directors until 23 November, when the lacuna in the directorship was then filled by a solicitor in Mr Quigg’s office. Some further matters flow from that:

“(a) It is not entirely clear that the messages of November 2000, exalting Bell Gully’s representations to the Stock Exchange, specifically relate to representations about the use of alternate directors. There were other items of complaint.

(b) It is not entirely clear, from the new material, that Mr Willis had given unequivocal advice to Cue that Cue complied with the Listing Rules’ requirements, or, that any such advice was in mind when raising the matter on 23 November. It seems he had not raised it earlier. Given the absence of cross-examination in these cases, I must give full weight to Mr Willis’ own affidavit in that respect.

(c) While Cue complains that it structured its management in the light of legal advice that the use of alternate directors complied with the Rules, it cannot be said that the appointment of a further alternate director after 21 November, and which triggered Mr Willis to action, was due to Mr Willis’ own advice. Mr Quigg’s affidavit is clear, that Mr Quigg had also advised Cue that it complied with the Rule. I should think that the action taken after 21 November, to appoint one of Mr Quigg’s firm as an alternate director, was founded on Mr Quigg’s own assessment of the legal position and not that which Bell Gully may have given much earlier.

(d) The foregoing calls into serious doubt that Mr Willis was obliged to inform this Court, immediately after the 1 March decision, that the factual basis on which the Court had relied was incomplete.”

[37] In all I do not think the “new material” has the compelling force that Cue reads into it, or is such as would have made much difference had it all been before Wild J before making his second finding.

Overall Conclusion

[38] The proceedings are not to punish Bell Guy for some perceived transgression. The over-riding concern is the potential for detriment to Cue if Bell Gully continues to act for Browse and those aligned to the Browse position. The essential contention in the previous application, as in this, was that confidential information had been misused. The essential finding was that the information was not confidential. There is now nothing I can find in the further evidence that materially affects that conclusion. The 1997 correspondence does not affect it. The November correspondence tends to support it. Mr Willis asserted, on 21 November, that his concerns arose from the search of public records and he did not address the issue of alternate directors until, after 21 November, another alternate was appointed to fill a then lacuna. Nothing is added in this respect by the communications between supporters of the Browse initiatives. The communications note the benefits of Bell Gully’s representations but do not suggest that the representations relied upon confidential sources.

[39] I further consider the new material does not give grounds for an argument that could not have been canvassed previously. At most it might be used to contend that Mr Willis had taken a more pro-active role than was apparent from the affidavits earlier before the Court. But even were that so, what of it? It was always known that Mr Willis had taken a pro-active role in advancing matters for Browse before the Stock Exchange and that Mr Willis had never suggested otherwise. More particularly, adverting only to evidence before the Court on 1 March, and referring to appendages to Mr Knox’s affidavit then before the Court, I note that Mr Quigg had written to Mr Willis on 27 November expressing concern that Cue could be prejudiced by “Bell Gully acting for parties who are making allegations against the Company or acts of the Company”. Mr Willis replied the same day “We do not possess any relevant confidential information concerning the matters about which we have been expressing concerns to the New Zealand Stock Exchange . . .”.

[40] The overall conclusion is that the new material does not affect the principles on which Wild J reached a conclusion and does not give rise to arguments that could not have been canvassed before him at the time.

Decision

[41] The application is dismissed. The quantum of costs having previously been determined costs are awarded to Browse in the sum of $750.00.