Bunting v Buchanan

[2013] NZHC 1921

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2013-404-001150 [2013] NZHC 1921

UNDER  The Companies Act 1993

IN THE MATTER OF       an application to terminate the liqudiation of Silverdale Developments (2007) Ltd (In Liquidation)

BETWEEN  ANTHONY BUNTING AND GARY RAYMOND COOPER

Applicants

ANDJOHN BUCHANAN First Respondent

CALLUM MACDONALD Second Respondent

Hearing:                   26 July 2013

Appearances:           L J Turner for applicants

M Lenihan for first respondent
D P H Jones QC for second respondent

Judgment:                31 July 2013

JUDGMENT OF ASSOCIATE JUDGE ABBOTT

This judgment was delivered by me on 31 July 2013 at 5pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:

Whaley & Garnett, Greenlane
Parker Rhodes, Auckland

J Thompson, Auckland

Counsel:

L Turner, Auckland

G P Blanchard, Auckland

D P H Jones QC, Auckland

BUNTING v BUCHANAN [2013] NZHC 1921 [31 July 2013]

[1]      This  case  concerns  a  dispute  between  the  directors  and  shareholders  of Silverdale Developments (2007) Ltd (SD2007) over fees and disbursements charged in the liquidation of SD2007, now terminated, by the respondent liquidators.  That dispute is to be heard on 26 and 27 August 2013.

[2]      The proceeding is before the Court now because the applicant directors and shareholders have challenged a claim to privilege made by the first respondent in respect of legal advice he obtained in the course of litigation brought against SD2007 whilst in liquidation, and have applied for an order that the second respondent (who preceded the first respondent as liquidator) provide particular discovery of electronic data held on the second respondent’s computer system in relation to his time records for work undertaken in the liquidation.

The context

[3]      The  applicants  are  the  directors  and  shareholders  of  SD2007.    It  was incorporated   to   carry   out   a   commercial   property   development.      Following completion of the development the applicants placed SD2007 into liquidation.  They considered SD2007 to be solvent. The second respondent was appointed liquidator.

[4]      After  settlement  of  the  sales  of  the  five  units  in  the  development,  the purchasers of four of the units observed cracking in the concrete floors.  They made claims against SD2007 and various other parties involved in the construction, contending faulty design and construction and claiming substantial remedial costs, potentially exceeding SD2007’s assets.  SD2007 was in liquidation by the time the claims were made formally.   Up to that point the liquidation had appeared to be relatively straight-forward.    SD2007  defended  the  claims.    In  the  course  of  its defence it issued cross claims against other parties, including the applicant.

[5]      The unit purchasers’ claim was eventually settled without SD2007 having to contribute anything more than sums that it recovered from other defendants or third parties (essentially, the other parties contributed the settlement money).  Following settlement of that litigation (which left SD2007 as a solvent company subject to meeting  the  costs  of  the  liquidation)  the  applicants  sought  to  terminate  the liquidation.  The first respondent initially resisted because a substantial part of his

fees and expenses, and part of the fees of the second respondent, remained unpaid. Subsequently an agreement was reached under which the liquidation was terminated by consent, with the dispute over fees and disbursements charged by the liquidators reserved for separate determination (in this proceeding).

[6]      Over the course of the liquidation there were a series of other disputes, some of which involved contested litigation:

(a)      First, the second respondent (being the liquidator initially appointed) issued proceedings under the Companies Act 1993 with a view to obtaining  directions  on  the  unit  purchasers’ claim.    There  was  a dispute between the applicants and the second respondent over the way he conducted the liquidation, including his decision to seek directions from the Court.   This led to the second respondent withdrawing as liquidator and the first respondent being appointed in his place.

(b)Following   his   appointment,   the   first   respondent   withdrew   the application for directions, and instead took steps to defend the proceeding then commenced by the unit purchasers.  The applicants applied to terminate the liquidation so that they could defend the unit purchasers’ claims directly.   One of the factors that caused the applicants to seek termination of the liquidation was a concern over the on-going costs of the liquidation that might be charged by the first respondent.  They were already concerned about the costs charged by the second respondent (up to the point of his retirement) and in particular were contesting substantial legal fees incurred in bringing the  application  for  directions.  The  first  respondent,  as  liquidator,

opposed that application. The application was declined.1

(c)      More recently, there has been a dispute between the applicants and the first respondent over a proposal by the first respondent to sell the one

(substantial) asset in SD2007, an adjoining commercial property held

1 Bunting v Buchanan [2012] NZHC 766.

by a wholly owned subsidiary of SD2007. The realisable value of the property was estimated to be in the order of $1,340,000.

[7]      As a result of the settlement of the unit purchasers’ claim, SD2007 (still in liquidation) was left with its one substantial asset and no liabilities other than the unpaid portions of the costs of the two liquidators.  The first respondent had charged fees (both directly and indirectly) of about $386,000, the second respondent had charged fees of about $71,000, and the total costs of the liquidation including legal fees and expert’s costs were just under $1 million (around $300,000 has been paid).

Genesis of the application before the Court

[8]      Two disputes have arisen out of the parties’ discovery.  The first is that the applicants have challenged the authenticity of time records produced by the respondents and wish to obtain data from the respondents’ computer systems that may assist in establishing the date that the records were created.   Their forensic expert has been unable to determine the date from the electronic copies provided but considers it possible that the computers may contain this data.

[9]      The  second  dispute  is  over  a  claim  by  the  first  respondent  to  legal professional privilege in respect of correspondence and records of communication with his solicitors and the counsel he instructed in relation to the various issues that have arisen in the liquidation.

Electronic data evidencing date of creation of time records

[10]     The first respondent has discovered both handwritten and electronic time records.  The handwritten documents, in most if not all cases, are the original record. The information in the handwritten records has been entered subsequently into the first respondent’s computer systems to create the electronic records.   The second respondent has discovered printouts of his electronic records.

[11]     After comparing the first respondent’s handwritten and electronic records, and having looked at number sequencing in the electronic records, the applicants formed the view that the first respondent’s records are inaccurate, and have at least in

part been fabricated to support the level of fees that he has charged.  They say that their view is supported by forensic examination of the handwritten records which suggests that some handwritten records were created later than the date on which work was purportedly undertaken (according to the electronic record) and, in one case,  it  is  obvious  that  the  handwritten  record  (the  first  respondent’s  diary)  is patently wrong.

[12]     The applicants have sought discovery of electronic data from the respondents’ computer systems that records the date of entry of various records, as information that may help them advance their case.

[13]     The  first  respondent  strongly  refutes  any  fabrication,  saying  that  the applicants’ arguments are answered by the fact that the records were entered electronically in batches at a later date. Nevertheless he has agreed to allow an expert for  the  applicants  to  have  access  to  his  computer  systems  to  see  whether  data showing the time of creation of records can be extracted.   The applicants are not seeking any orders in respect of the first respondent.

[14]     The second respondent, however has taken even stronger exception to the applicants’ contention that his records were fabricated, and is unwilling to provide the applicants’ expert with access.  The applicants are pursuing this aspect of their application.

b)       Communications between the first respondent and his solicitor and counsel

[15]     The second aspect of the applicants’ application is their challenge to the first respondent’s claim in the course of discovery to privilege in respect of communications between himself and his solicitors or counsel2 over the course of the liquidation. Since filing their application they have limited their challenge to correspondence and documents generated in relation to the litigation with the purchasers of the units.  They are not challenging the claim to privilege in respect of

communications  over  their  application  to  terminate  the  liquidation,  or  over  the

2 Based on s 54 of the Evidence Act 2006.

dispute over fees and the related dispute over sale of SD2007’s indirectly held asset

(the adjoining commercial property).

[16]     The  applicants  say  that  any  solicitor-client  privilege  in  relation  to  the litigation between SD2007 and the purchasers belongs to SD2007. Therefore the first respondent cannot claim that privilege against them as SD2007’s directors.  The first respondent says that the privilege belongs to him.

The claim for particular discovery of electronic data

[17]     This aspect of the application is brought under r 8.19 of the High Court Rules, but the application seeks an order allowing the applicants’ forensic expert access to the second respondent’s computers, so as to take a copy of them which the forensic expert can then “interrogate” to establish the presence of, and extract, the data being sought.  Although advanced as an application for particular discovery, it could equally be regarded as an application under r 9.34 for inspection and the right

to take copies of data from the system, which is determined using a different test.3

This point was raised with counsel for the applicants at the start of the hearing.  He indicated his wish to continue the application as one for particular discovery of electronic data held by the first respondent.

[18]     The requirements for an order for particular discovery are set out in r 8.19:

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

3  Refer Gillespie v Guest [2013] NZHC 668 at [61] – [66] and the recent cases referred to in that judgment .

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

(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.

[19]     The party seeking an order has the onus of putting material before the Court from which the Court can come to the belief that the party against whom the order is sought has not discovered one or more documents that should have been discovered. This can be achieved by direct or indirect evidence, or from the nature and circumstances of the case including any document filed in the proceeding, and from inferences properly drawn from that material.4

[20]     To satisfy the requirement that the documents “should have been discovered”, an applicant for particular discovery must show that the documents are relevant to a matter in issue. Where an order for standard discovery has been made, relevance is to be assessed by reference to the “adverse documents” test, namely whether the documents adversely affect the discovering party’s case or support the applicant’s case5  (it can be assumed that the applicant does say that the other elements of that test apply, namely that they are documents on which the discovering party relies or that adversely affect the applicant’s case).

[21]     When exercising its discretion whether to order the particular discovery, the Court must consider whether it is in the interests of justice to do so in light of the matters at issue, and in particular the proportionality of the cost of the particular discovery.6

[22]     Counsel for the applicants submitted that the Court had jurisdiction to require

production  of  this  data  because  the  second  respondent’s  time  records,  and  in

particular a record for 15 February 2011, raised concerns about overcharging7 and of

4 AMP Society v Architectural Windows Ltd [1986] 2 NZLR 190 (HC) at 199.

5 High Court Rules, r 8.7.
6 Air National Corporate Ltd v Aiveo Holdings Ltd [2012] NZHC 2258 at [18].

7  A ground for requesting further information mentioned in Re Roslea Path Ltd (In Liq) [2013] 1

NZLR 207 (HC) at [48](c).

misconduct.8   He referred in particular to a record of exactly three hours of time on that day, coinciding with an identical amount of time recorded by the first respondent on the same day, and a handwritten diary record by the first respondent from which it was apparent that the first respondent was not in Auckland that day, making his electronic time record clearly incorrect.

[23]     Counsel also relied on the lack of any disclosed documents showing work which supported either that record, or records of significant blocks of time two weeks later which underlie further fees of $11,423 charged earlier this year to “update” his costs.

[24]     Counsel submitted that the description given for the second respondent’s record on 15 February 2011 “J Buchanan – review filed” allowed an inference that the second respondent’s records, as well as the first respondent’s record, was false, in that it referred to a meeting that did not occur.  He argued that the data potentially available on the second respondent’s computer system would help to establish the veracity of the time record, one way or the other.

[25]     Counsel said that the applicants sought electronic data in respect of time records generally, but in particular the record on 10 February 2011 carrying the description “File review”, which was in addition to the record on 15 February 2011, and three entries of significant time on 2 and 4 March 2011 and 6 April 2011 for which there were no records to show what work, if any, had been undertaken on those days.

[26]     He referred to the evidence of the applicants’ forensic expert that it was a relatively simple and quick process to take a clone and interrogate the system for this information. He said that the applicants were content either to have their own expert undertake that task or have it done by an independent expert, provided (in the latter case) that the information was produced in a form that could be verified by the

applicants’ expert.

8 A factor, which if established, could result in disallowance of fees in whole or in part: Galdonost

Dynamics (NZ) Ltd (In Liq) [1994] 2 NZLR 605 (HC).

[27]     The second respondent took the position that there was no material before the Court to justify a conclusion that any data that could be extracted was relevant to any matter in issue, so as to justify an otherwise unwarranted and unacceptable intrusion into the second respondent’s affairs (and potentially into material belonging to his clients).   He submitted that the applicants’ case incorrectly conflated the second respondent’s position with that of the first respondent, both in respect of the time record of 15 February 2011 and the substantive case of overcharging.  He pointed to the absence of any direct evidence to support the allegation of collusion between the second  respondent  and  the  first  respondent  in  respect  of  the  time  records,  and referred to affidavit evidence from the second respondent explaining that he undertook work on both dates.

[28]     The first point to determine is whether there is sufficient material before the Court on which to form a view that the electronic data being sought by the applicants exists.  Their forensic expert has filed two affidavits in support of the application. The expert refers to the records having been created in a software programme, but because of the way the programme was operated (or perhaps because of the version of it) the information cannot be obtained from the electronic record itself.  She says:

The only way to establish [the entry dates of the time billing data] would be by way of analysing a clone of the original computer or server into which the data was inputted.  With access to that, recovery of the entry dates could be attempted.

[29]     In her second affidavit the expert expands on this by describing the steps that would be needed to examine the computer containing the data, which would allow her to determine whether it was possible to identify exact dates on which entries were put into the computer.  She says:

...forensic examination of a clone of the original device will provide either precise date entry information, or information showing the period (day, week or month) during which particular time entries or batches of time entries were entered into the system.

[30]     The expert’s evidence is sufficient to satisfy me that there is reason to believe that electronic data exists that will help to establish the date that the second respondent’s electronic time records were created.  However, the Court must also go on to consider the relevance of that information.

[31]     The applicants say that the authenticity of the second respondent’s records is in issue, because they suspect that records have been fabricated.  If that allegation was established, it could be relevant to the fees charged because the fees were based, at least in part, on incorrect time records.  It is a serious allegation, tantamount to an allegation of fraud.  There must be some evidential basis for it.  I am not persuaded that that evidential basis has been shown:

(a)      The applicants rely solely on the coincidence of the time records for both  respondents  for 15  February 2011,  a day on  which  the  first respondent  clearly  did  not  undertake  any  work  (according  to  his diary).

(b)The applicants invite the Court to draw an inference of collusion in preparation of the records from the fact that the respondents worked out of the same premises (the second respondent is a former business partner of the first respondent), and the same amount of time (exactly three hours) was entered in each record.

(c)      I accept for the purpose of this application that there is “a cause for concern” over the first respondent’s record (although this is not a finding of fabrication in respect of that record as the first respondent may have an explanation which has not yet been put forward). However, the sharing of premises and coincidence of time are not sufficient, in my view, to warrant a possible inference of collusion on the second respondent’s part.

(d)I take into account the second respondent’s sworn evidence that he undertook work on both 10 February 2011 and 15 February 2011, and that the work on 10 February 2011 was in conjunction with the first respondent whereas the work on 15 February 2011 was by himself and  by way of  review  and  follow-up  to  matters  discussed  in  the meeting on 10 February 2011.

(e)      There is support for the authenticity of the 15 February 2011 record in the fact that that was the day on which the changeover of liquidators was to occur.  It is entirely plausible that the second respondent would have undertaken  work  that  day on  his  own,  to  give  effect  to  the changeover.

(f)      The reference to the first respondent’s name in the brief description given of that attendance is equivocal,  and  equally consistent with work in relation to the changeover to him.

(g)The  second  respondent  has  not  said  when  his  time  records  were created, so the date of creation of the record may be of marginal relevance in any event.

[32]     The applicants also rely on the absence of any documents supporting three time records for lengthy attendances in early March and early April 2011.  However, I accept the submission of counsel for the second respondent that that is a matter for cross-examination at the substantive hearing.  It is not evidence of fabrication of the records.

[33]     Ultimately, the Court must decide whether an order is in the interests of justice.  I cannot see that the interests of justice require the making of an order where the relevance is entirely conjectural, the order will involve a significant intrusion into the  affairs  of  the  affected  party,  and  the  nature  and  evidential  value  of  the information being sought is uncertain, at best.

The challenge to the claim to privilege

[34]     The essence of the dispute over the claim to privilege lies in the role of the first respondent in the litigation brought by the unit purchasers (in which SD2007 was the named party).

[35]     The applicants say that when he was conducting SD2007’s defence of that

claim he was an agent acting in its affairs in place of the directors, so that any

privilege belongs to SD2007 and the claim cannot therefore be sustained against them as its directors.

[36]     The first respondent accepts that he was an agent of the company, but says that the claim to privilege needs to be considered in light of the liquidator being a creature of statute, exercising statutory powers, and that the scope of the agency is limited by his principal statutory duty to protect and realise the assets of SD2007 for its creditors.9   He contends that it is inappropriately simplistic to say that because the claim was made against SD2007 privilege in any documents created in the course of the litigation necessarily belongs to SD2007, and that as the documents came into existence in the course of the exercise of his statutory functions,10 the privilege is his alone.

[37]     Counsel were unable to refer me to any authority directly on point, but each relied on authority which they argued applied by analogy:

(a)      The applicants relied on comments by the Supreme Court in Mana Property Trustee Ltd v James Developments Ltd11  when determining an application by a third party for costs against both the company in liquidation and the liquidators personally, following ultimate success12 on an application for summary judgment.   Before dismissing the application for costs against the liquidators personally, the Supreme Court stated:13

The party to the litigation is the company, not the liquidator, even in the case of a proceeding commenced against the company after it is in liquidation.  It was therefore James itself which was the successful appellant in the Court of Appeal and the unsuccessful respondent in this Court.  The liquidators were

9 Companies Act 1993, s 253.

10 Under these functions, he had to decide whether to continue to defend the claim, having regard to matters such as the chances of success, the possibility of an adverse costs award against him personally, and the likely quantum of a successful claim.

11 Mana Property Trustee Ltd v James Developments Ltd (No 2) [2010] NZSC 124, [2011] 2 NZLR

25 particularly at [9].

12  Judgment was given against James in the High Court, but overturned by the Court of Appeal and then reinstated by the Supreme Court.   James’ shareholder placed it into liquidation before the hearing in the Court of Appeal.  The liquidators continued the appeal in that court, and opposed the appeal in the Supreme Court.

13 At [9].

merely its agents in relation to the litigation, having taken over the conduct of its affairs from its director.

(b)The first respondent drew an analogy with the position of a receiver as analysed in the decision of the English Court of Appeal in Gomba Holdings UK Ltd v Minories Finance Ltd,14 where the issue was ownership of documents coming into existence in the course of the receivership.  The plaintiff companies had argued that all documents belonged to them because the receivers were their agents and the

documents were created in the course of that agency.  The Court held that whilst the receivers were technically agents of the companies, the agency of a receiver is not an ordinary agency because it involves a tri-partite relationship in which the receiver owed duties to both the

mortgagor company and the debenture holder.15     It determined the

dispute over ownership by assessing the purpose for which the documents were created – whether as performance of one of the duties (in which case the companies could only claim ownership when the documents were created in the course of performing the duty to them to  manage  their  affairs)  or  to  enable  them  to  carry  out  their professional duties as distinct from performance of a duty (in which case the documents were the property of the receivers).  Gomba has

recently been applied in Carey v Korda,16  a decision of the Court of

Appeal of the Supreme Court of Western Australia, where a director of a  group  of  companies  sought  orders permitting him  to  inspect documents held by receivers of the companies in which the receivers claimed legal professional privilege.   The court accepted that the receivers could be the clients of the solicitors providing the advice and therefore could have a claim to privilege in their own right, depending

on the nature of the retainer.17   Counsel also submitted that there was

an even closer analogy in the position of a statutory manager.

14 Gomba Holdings UK Ltd v Minories Finance Ltd [1988] 1 WLR 1231.

15 At 1234.
16 Carey v Korda [2012] WASCA 228.

17 See particularly [76]-[77] and [82].

[38]     I take as my starting point the applicants’ contention that all communications between the first respondent and his legal advisors in relation to the litigation, were as an agent for SD2007.  Although I do not accept that the analysis in Gomba of the different roles and duties of a receiver is directly analogous to this case, I accept that a liquidator is an agent for a company in some circumstances, including where he conducts litigation on its behalf (as is apparent from the Supreme Court’s decision in Mana). This is because the liquidator is acting in place of the directors.  However, that fact does not predetermine whether legal advice obtained by the liquidator is obtained for the company (on that agency basis) or in his own right.  A decision by a director to commence or defend litigation may well be considered part of the management of the affairs of a company, up to the time of liquidation.  However, the decision that a liquidator then takes to continue with the prosecution or defence of that litigation, or to bring proceedings or defend a proceeding commenced after liquidation, is more appropriately analysed as a performance of the liquidator’s duty to maximise recovery for creditors (and, if applicable, shareholders).

[39]     On that analysis, legal advice will be obtained either as performance of the liquidator’s statutory duty (as distinct from performance of a duty to the company), or to enable the liquidator to carry out that duty.  Either way, the privilege belongs to the liquidator and not to the company.  On this basis I find that privilege in the first respondent’s communications with his solicitors and counsel belongs to the first respondent.

[40]     This analysis means that the practical difficulty inherent in the applicants’ case, namely where to draw the line when there is a claim by the liquidator against directors (such as the cross-claim in the unit purchasers’ claim), does not arise.

[41]     Having come to this view, I do not need to address the first respondent’s argument that I should decline to make an order in any event because there is already sufficient information available to allow the Court to determine whether the fees charged are reasonable.

Decision

[42]     For the reasons I have given I find that the applicants have not made out a sufficient case for an order for particular discovery in respect of electronic data relating to the entry of time records into the second respondent’s computer systems, nor for challenging the first respondent’s claim to privilege in respect of his communications with his solicitors and counsel.

[43]     The application is dismissed accordingly.

[44]     Counsel did not address me on costs, or ask that costs be reserved.  As the successful parties, the respondents are entitled to costs on a scale 2B basis, together

with disbursements as fixed by the Registrar.

Associate Judge Abbott