Craig v Phrudan Holdings Limited HC Auckland CIV 2005-404-1935

[2008] NZHC 2546

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2005-404-1935

BETWEEN  MICHAEL BARRY CRAIG AND KATHERINE CILIA GRIGG Plaintiffs

ANDPHRUDAN HOLDINGS LIMITED Defendant

Hearing:         20 August 2008

Appearances: Mr D Smith for plaintiff

Mr A Hooker for defendant

Judgment:      29 August 2008 at 12 noon

JUDGMENT OF ASSOCIATE JUDGE DOOGUE

This judgment was delivered by me on

29.08.08 at  12 noon, pursuant to

Rule 540(4) of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Counsel:

Mr D Smith, P O Box 3799, Auckland

Turner Hopkins (A Hooker), P O Box 33-237, Takapuna, Auckland

CRAIG & ANOR V PHRUDAN HOLDINGS LIMITED HC AK CIV 2005-404-1935  29 August 2008

[1]      The plaintiffs have filed an application seeking to strike out this proceeding. The grounds upon which the application are made are these:

a)       The  representations  to  the  Court  on  7th   September  2007  and  7th December 2007 that counsel appeared for the liquidator were misrepresentations and have placed the receivers of Phrudan Holdings Limited in a position to which they are not entitled.   Had the misrepresentations not been made the plaintiff’s application for strike out in November 2007 would have succeeded.

b)The arrangements agreed by the liquidator and receiver are void for champerty.

c)       A liquidator cannot appoint an agent to do something the liquidator is able to do and the receiver is unable to continue the proceeding as agent for the liquidator.

[2]      The proceeding has a lengthy history.  It arises out of the plaintiff’s purchase of a house property from the defendant in May 2003.  A dispute occurred between the defendant, that was building the house, and the plaintiff over the price.   The defendant ceased work.  The property has been transferred to the plaintiffs and the defendant has a mortgage over it.   The plaintiffs started the proceedings seeking, apparently, a declaration as to what the amount was for which the house contract was to be completed.   They also brought claims again concerned with the price of the house based upon misrepresentation, estoppel and the Fair Trading Act.

[3]      The plaintiffs also claimed damages of $40,000 for alleged breaches of the contract to build, which related to the dimensions of the house and they also claimed

$1,000 because the house leaked.   The defendants counterclaimed for the amount outstanding for the construction of the house.  The proceeding came before Keane J in June 2006 and on 29 August 2006 he delivered a judgment.  He concluded that the defendant was entitled to judgment for the contract sum outstanding which he fixed at $192,298 subject to some adjustments that might be required in terms of his

judgment that the plaintiffs were entitled to $15,000.  The Judge adjourned matters so that there could be consideration of further aspects of the claim.

[4]      Thereafter the plaintiffs  increased  their  claim  for  defects  in  the  building (these being associated with alleged water ingress), to $30,000 and then later to the sum of $177,000.

[5]      Since Keane J part heard the matter, the proceeding has languished.  That has come about from a combination of causes.  One cause is that the plaintiffs have for part of the time represented themselves and there have been delays in getting their claim into a proper form.  A more significant problem that has emerged is that the defendant was placed in liquidation on 12 July 2007.   That in turn lead to further consequential delays.  The background to those is as follows.   A Mr Meuli was a managing director of the defendant.   A trust that he was associated with had a security over the company’s undertaking to secure money advanced to it.  The details of the security are unclear to me as no copy of it has been provided to the Court in evidence.  The relevance of the security is that it lead to receivers being appointed to the defendant on 9 July 2007.  Thereafter, on 12 July 2007 the company was placed in liquidation.

[6]      On 24 September 2007 the liquidators in a memorandum to the Court stated that the company was deeply insolvent and the liquidators held no funds in the name of the company.   The liquidators’ counsel said that the only known asset of the defendant company was the judgment of Keane J to which I have already made reference.   I interpolate that there may be some doubt whether Keane J actually entered   judgment   and   therefore   whether   classifying   the   outcome   of   those proceedings as an ‘asset’ is correct.  The memorandum continued that the liquidators did not intend to take any steps in the proceeding.   They noted that the receivers claimed ownership of the defendant company’s only known asset:

The enforcement of which is dependent upon the determination of these proceedings, [and] the liquidators have advised the receivers that they (that is the liquidators) will consent to the receivers acting in the name of the defendant company to defend these proceedings.   Such consent however dependent upon the receivers accepting certain conditions which protect the defendant company’s liquidated estate and its creditors.   As at the date of

this  memorandum,  the  receivers  have  not  advised  the  liquidators  as  to whether they agree to the conditions proposed.  (sic)

[7]      The question of the status of the proceedings and who it is that is managing them was a significant issue at the hearing before me.

[8]      Mr M Robinson was instructed by the receivers.   He appeared as counsel when the proceeding was called on several occasions from November 2007 on.  On one of these occasions he filed a memorandum which he signed as ‘counsel for defendant’ and in which he stated that negotiations would be concluded over the next few days which would result in an assignment of the rights of the defendant to the family trust.  The trust referred to is Mr Meuli’s trust which held the security over the company.

[9]      Again on 7 December Mr Robinson appeared.  I noted that he had appeared

‘for liquidator’.

[10]     On  29  January  2008  the  solicitors  for  the  liquidators  advised  in  a memorandum that the liquidators consented to the continuation of the proceedings and to the receivers acting in the defendant company’s name.

[11]     The next development was that an amended application to strike out was filed on 12 February 2008 and this is the application that was argued at the hearing before me.

[12]     At the hearing before me there were three grounds relied upon by Mr Smith. These were:

a)       That Mr Robinson had mislead the Court when he stated that he was appearing for the liquidators and that in combination with other facts had lead to an abuse of process which would justify the Court in striking out the proceeding.

b)The second issue that he raised concerned the fact that the receivers appeared to be acting as the agents of the liquidators and this was not permissible or legitimate.

c)       The third point was that such arrangements as there appeared to be between the liquidators and the receivers were tainted because they involved maintenance and champerty.

Court misled by counsel’s statement he was acting for liquidator

[13]     It is accepted for the defendant that Mr Robinson who appeared as counsel at some of the conferences may have unintentionally mislead the Court by stating that he appeared for the liquidators.  Mr Hooker for the defendant says that this statement was made in circumstances where the exact basis upon which Mr Robinson was appearing was unclear but that in any event it was always likely that ultimately the liquidators would approve in substance a continuation of the action so long as certain conditions were meet.  Mr Hooker points out that those conditions have now been meet and the defendant has the consent of the liquidator to continue the proceeding.

[14]     Mr Smith for the plaintiffs submitted that Mr Robinson’s action enabled the defendant to obtain  an  advantage  over  the  plaintiffs.    He  said  that  came  about because, had the plaintiffs known the truth, that Mr Robinson was not appointed by the liquidators, then in effect they would have appreciated that the proper party to be heard on behalf of the defendant company was not before the Court and they would have moved to strike out the proceeding.  They would have done so, Mr Smith said, on the footing that no steps had been taken to oppose the application up until 12

March 2008.

[15]     I do not accept the plaintiffs’ contentions advanced through their counsel. The decision to strike out a proceeding is a serious one.  It effectively bars a party from obtaining access to the Court.   Such an order should only be made on compelling grounds.   I have no doubt that even if the plaintiffs had been able to proceed in the way that they say they would have, then the Court would have made

further enquiries which may have exposed the ambiguity of Mr Robinson’s position and given the liquidators and receivers an opportunity to regularise the situation.

[16]     Our procedural law is in the end designed to achieve substantive justice. The outcome that Mr Smith said ought to have or would have followed does not seem to be a particularly just one.  As a last resort the Courts will strike out in cases where there has been an abuse of process.   However, it is undoubted that the Court will enquire into the broad justice of the situation.  No injustice is caused to the plaintiffs because they were deprived of an opportunity to, effectively, steal a march on the defendant.

[17]     In  any  event,  I  consider  there  was  considerable  force  in  Mr  Hooker’s submission that the Court in exercising its discretion would have regard to the fact that the plaintiffs also have received substantial leeway in this case where there have been admitted instances of non-compliance with the timetable orders in the case.

[18]     Beyond the supposed prejudice resulting from the loss of the opportunity to apply for a immediate strike out order (which I conclude would have been unlikely to have been made anyway – at least without further enquiry from the liquidators/receivers)  Mr  Smith  did  not  point  to  any  other  qualifying  prejudice caused to the plaintiffs.

[19]     In the end the matter is discretionary and I consider that the interests of justice would not be served by making the type of order that Mr Smith now seeks on behalf of the plaintiffs.

The receivers’ authority to continue the actions

[20]     The following statement regarding the right of a receiver to conduct legal proceedings after liquidation, appears in the Laws of New Zealand:, ‘Receivers’ at paragraph 69:

69.      Power to conduct legal proceedings after liquidation.

Upon liquidation a receiver continues to have the right to pursue the company's legal remedies, unless the Court orders otherwise. The receiver retains a right to bring and defend actions in the name of the company when it is necessary to satisfy the debenture holder's debt. Bringing  an  action  in  such  circumstances  is  an  incident  of  the general power of enforcement of the security. A Court-appointed receiver is not entitled to bring proceedings in his or her own name.

[21]     I regard the foregoing as being an accurate statement of the position.

[22]     Mr Smith said even if the powers were as stated in the passage from the Laws of New Zealand above, the fact of liquidation does not supplement or extend the receivers’ powers. Mr Smith asked what proof is there that the receivers are entitled to  bring  proceedings?    The  section,  he  submitted,  only  permits  the  receiver  to exercise powers that were possessed prior to the liquidation.   For that reason, he submitted, one should enquire what is the source of the receivers’ authority to take Court proceedings.  In this case, he says there has been no evidence put before the Court   establishing   the   source   of   the   receivers’   authority   to   conduct   legal proceedings.   I conclude that this submission does not, when properly analysed, involve abuse of process arguments which are the basis for seeking a strike out order, as I will now attempt to explain.   Rather it involves a submission that the plaintiff does not have a reasonable cause of action.

[23]     Mr Smith’s submissions proceeded on the basis that it was incumbent upon the receivers to affirmatively establish that they had power to bring the proceedings. I do not consider that is so.

[24]     If  there  is  any  substance  in  this  point,  it  will  have  to  be  raised  in  the pleadings.   That is because at some point, if the claim survives the present strike out application, the defendants will be required to file an amended counter-claim setting out the basis on which they are entitled to the relief that they seek.   The issue of authority to sue may be one that they are required to plead.   Assuming that the authority of the receivers became an issue and that the receiver’s authority was pleaded, was denied and the receivers were required to prove it, the question arises “Could the plaintiffs require the receivers to justify establish authority to act for the company by raising that issue in a strike out application?”   I consider the answer is in the negative.   That is because the issue of authority to sue is not one that it is

appropriate to go into on a strike out application.  I reach that conclusion by analogy with the principle that on a strike out the Court assumes that the facts pleaded in a statement of claim are true:  A-G v Prince and Gardner [1998] 1 NZLR 262 (CA), at p 267.

The champerty and maintenance point

[25]     The plaintiff asserted that there had been an assignment of the rights of the liquidators in right of the company to the receivers, those rights being a right to enforce the claim against the plaintiffs which has been the subject of findings by Keane J and which I refer to earlier in this judgment.  In fact, what emerged at the hearing before me from the submissions that Mr Hooker made was that an agreement has been reached between the receivers and the liquidators pursuant to which the receivers will pay counsel’s fees and there will be a division of the proceeds of any judgment in due course.   Even on that basis though, Mr Smith submitted the arrangement was champetious.

[26]     I do not agree with the plaintiff’s submissions.

[27]     The doctrine of maintenance and champerty was considered in a relatively recent judgment of Heath J, Auckland City Council as Assignee of Body Corporate

16113 v Auckland City Council and Others [2008] 1 NZLR 838. In that case a body corporate and individual unit holders sued a number of defendants for damages arising from loss caused by significant water ingress into an apartment building. The plaintiffs claimed $6,500,000. The Auckland City Council settled with the plaintiffs for an agreed sum of $3,000,000. In consideration of the payment the council took an assignment of the plaintiffs’ causes of action against the remaining defendants. The settlement was on the basis that the plaintiffs would assign to the Council all their rights of action and the Council would be able to carry on the litigation against the remaining defendants. Thereafter the council would receive the first $3,000,000 of any recovery made and the plaintiffs would receive any amount in excess of that amount.

[28]     An application was made to strike out the statement of claim on the basis that a bare right of action was not assignable on the principle that the law would not recognise any transaction savouring of maintenance or champerty.  Heath J reviewed a number of authorities including the case of Trendtex Trading Corporation v Credit Suisse [1982] AC 679 Heath J (at paragraph 29) then cited a passage from Trendtex:

29.Both Brownton and Citibank refer to and rely upon the House   of Lords' decision in Trendtex. Delivering the principal speech, Lord Roskill said at p 703:

The court should look at the totality of the transaction. If the assignment is of a property right or interest and the cause of action is ancillary to that right or interest, or if the assignee had a genuine commercial interest in taking the assignment and in enforcing it for his own benefit, I see no reason why the assignment should be struck down as an assignment of a bare cause of action or as savouring of maintenance." (Emphasis added)

Lord Wilberforce delivered a separate opinion. His Lordship's
opinion demonstrates that the case was dealt with primarily on the
proper law of the agreement and the need for a Swiss Court to
determine it.
30.	Lord Edmund-Davies, Lord Fraser and Lord Keith agreed with speeches delivered by both Lord Wilberforce and Lord Roskill.	the

[29]     Heath  J  then,  after  referring  to  the  judgment  of  Gault  J  in  First  City

Corporation Ltd v Downsview Nominees Ltd [1989] 3 NZLR 710, said:

28.After   discussing   a   number   of   authorities   on   the   topic (including   Trendtex Trading Corporation v Credit Suisse [1982] AC 679), Gault J took the view that if there were a sufficient commercial interest in taking the assignment, "no risk of encouraging speculation for profit in bare rights to litigate" and no public policy reason to justify court intervention on the grounds of champerty, the court should not intervene (see pp 756 - 758). The Judge also said, at p 755, that, in the twentieth century, "the law relating to maintenance has undergone considerable liberalisation . . . [i]n response to changing commercial circumstances". He cited the judgment of Danckwerts J in Martell v Consett Iron Co Ltd [1955] Ch

363 at p 382, where his Lordship said:

". . . unless the law of maintenance is capable of keeping up   with modern thought, it must die in a lingering and discredited old age."

45.I   agree   with   Gault   J,   in   First   City,   that   there   was "considerable  liberalisation"  of  this  area  of  law  in  the twentieth century. That trend is directly opposed to the narrow view of the recognised exception of a "genuine commercial interest" in Citibank. Based on the authority supporting that trend, I can see no reason to justify continued use of these defences in modern conditions. The court has ample jurisdiction to prevent an abuse of its processes to address perceived exploitation of the vulnerable, without recourse to such ancient remedies (see, generally, Lai v Chamberlains [2007] 2 NZLR 7 (SCNZ) at paras [61] - [64] per Elias CJ, Gault and Keith JJ, paras [162] - [167] per Tipping J and paras [219] - [221] per Thomas J and Goldsmith v Sperrings Ltd [1977] 2 All ER 566 (CA) at p 574 per Lord Denning MR, p

582 per Scarman LJ and p 586 per Bridge LJ).

46.To let maintenance and champerty fall into  disuse on  that basis would, in my opinion, be desirable. However, if I were wrong in that approach, I would prefer the wider notion of "genuine commercial interest" described in Brownton to those of Lindgren J in Citibank and the more narrow scope ("purity of justice" and "interests of vulnerable litigants") of the defences formulated in Giles v Thompson.

[30]     I respectfully adopt Heath J’s statement of the current state of the law of maintenance and champerty in New Zealand.

[31]     Reverting to the present proceeding, the first point to be made is that while it is not entirely clear what the arrangement is between the parties, there must be some doubt whether even on most traditional formulations of the doctrines of champerty and maintenance; that an arrangement such as the present one would qualify for inclusion in that category of cases.  But even if it does, I think Mr Hooker is correct when he said that the receivers had a genuine commercial interest in enforcing the claim against the plaintiffs.  The receivers are agents of a creditor of the defendant company.  The defendant company has no assets other than its rights of claim against the plaintiffs.  In those circumstances it is plain that the receivers have the required genuine commercial interest in the enforcement of the judgment.  I take the view that the existence of a genuine commercial interest is self-evident.  This is not the case of a party meddling in litigation which does not concern it.  There is therefore nothing in this ground.

The submission that liquidators not entitled to enter into arrangement with receivers

[32]     Mr Smith developed a further and rather different point when he said that if there is an agreement between the receivers and the liquidators to share the division of proceeds of any enforcement of judgment against the plaintiffs, such an arrangement must contravene the statutory provisions which give preference to certain creditors of the defendant.  In my view this submission is misconceived.

[33]     Such  proceeds  of  the  claim  as  are  received  by  the  liquidators  will undoubtedly have to be applied in accordance with the statutory rankings set out in s

312  Companies  Act  1993  which  favour  certain  preferred  creditors.     But  the liquidators must be entitled in their discretion to enlist the aid of third parties to assist them to enforce rights belonging to the company, including the enforcement of debts. Such a power must fall within the general empowering provisions of s 260 as being necessary to carry out the functions and duties of a liquidator.  Additionally, it would seem to be recognised in the powers of liquidators contained in Schedule 6 to the Act which includes:

(f)       Compromise  calls  and  liabilities  for  calls,  debts,  and  liabilities capable of resulting in debts, and claims, present or future, actual or contingent, or ascertained or not, subsisting or supposed to subsist between the company and any person and all questions relating to or affecting the assets or the liquidation of the company, on such terms as may be agreed, and take security for the discharge of any such call, debt, liability, or claim, and give a complete discharge:

[34]     Further, the following statement which appears in Brookers’ Company and Securities commentary to s 260 of the Companies Act 1993 would appear correct in principle when it states:

(4)      Compromises and arrangements

The  liquidator’s  powers  extend  to  compromising  claims made  against  the  company  and  claims  of  the  company against others. An effective compromise acted on by both parties cannot be repudiated or disregarded: Re Norske Lloyd Insurance Co Ltd [1928] WN 99.

[35]     I also  consider that the following part of the same part of the commentary which I have referred to in [34] is correct:

(3)      Carrying on business

…..

Debts incurred by the liquidator in the course of carrying on the business of the company rank in priority to the general debts and liabilities to the company as expenses of the liquidation: cl 1(a) of Schedule 7; Re S Davis and Co Ltd [1945] Ch 402.

[36]     If that is so it must also be a reflection of reality that they may have to pay a third party to assist them in the enforcement exercise.  That is no more objectionable than it is for liquidators to pay agents to collect and make arrangements for storage and preservation of assets of the liquidated company.

[37]     No doubt the liquidators have made a commercial judgment that it is in the overall interests of the creditors to obtain the assistance of the receivers to get in a fund which otherwise may never be recovered for the benefit of the creditors.  And if, to achieve that result, they have to accept an obligation to make a payment of part of the money recovered to the receivers then that is also a matter for their judgment as to what is in the best interests of the company.   They are entitled to make a judgment, as they apparently have, that it is more conducive to the interests of the creditors to recover a reduced proportion of a debt when the alternative is to get nothing.

[38]     For  these  reasons  I reject  the  point  that  Mr  Smith  has  made  under  this heading.

Conclusion

[39]     In my view the application to strike out must fail.  It is dismissed. The parties should be able to reach agreement on the issue of costs.  If they cannot they should file brief memoranda (not exceeding three pages) and I will hear them on the matter of costs at a convenient date.

[40]     This proceeding is well overdue to be completed.  In order for that to happen, it needs to go back before Keane J.   In my estimate, a further three days will be required to conclude the matter.  The Registrar is to refer the file to the judge for his

consideration of how the matter is to be progressed from this point.

J.P. Doogue

Associate Judge