DHC Assets Ltd v Arnerich
[2018] NZHC 1865
•26 July 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-307
[2018] NZHC 1865
BETWEEN DHC ASSETS LTD
Plaintiff
AND
ANTONY IVO ARNERICH
Defendant
Hearing: 28 June 2018 Appearances:
F J Thorp and L J Turner for the Plaintiff J McBride and A J Steel for the Defendant
Judgment:
26 July 2018
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 26 July 2018 at 11:00am
pursuant to Rule 11.5 of the High Court Rules.
…………………………………
Deputy Registrar
Solicitors:
Duthie Whyte, Auckland, for the Plaintiff Doug Cowan, Auckland, for the Defendant
Copy for:
F J Thorp and L J Turner, Auckland, for the Plaintiff
J D McBride and A J Steel, Auckland, for the Defendant
DHC ASSETS LTD v ARNERICH [2018] NZHC 1865 [26 July 2018]
TABLE OF CONTENTS
Background [3]
Application for further discovery and non-party discovery [22] 2011-2012 documents [24]
2013 documents [35]
Miscellaneous documents [42]
Challenge to privilege [44]
Outcome [49]
Costs [50]
[1] In a minute dated 29 June 2018 I gave rulings on DHC Assets Ltd’s application for further discovery under r 8.19 of the High Court Rules, its challenge to privilege under r 8.25 and its application under r 8.20 for discovery by non-parties, ANZ Bank and Martelli McKegg. I now give my reasons.
[2] Finding that it was in Mr Arnerich’s interest to disclose documents explaining payments made from the bank accounts of Vaco Investments (Lincoln Road) Ltd between 1 March 2013 and when it went into liquidation, I gave him the opportunity to file a further affidavit of documents. I reserved leave to apply for directions if Mr Arnerich had difficulty obtaining documents from the liquidator. That aside, I dismissed the application for further discovery and non-party discovery. I upheld the claim for privilege, also noting that only two of the challenged documents were relevant. I awarded costs to Mr Arnerich.
Background
[3] In 2012 Mr Arnerich, a property developer, had a commercial building erected at 288-290 Lincoln Road, Henderson, Auckland. The entity through which he undertook the development was Vaco Investments (Lincoln Road) Ltd.1 He is its director. It is the corporate trustee of the Vaco Investments Lincoln Road Trust, established under a trust deed of 4 November 2011. It settled the purchase of the site on 18 November 2011. The ANZ Bank provided finance for the development.2 Clearwater Construction Ltd had a design-and-build contract with Vaco Investments (Lincoln Road) Ltd but part way through construction, DHC Assets Ltd, a related company, was substituted for Clearwater. Under the contract, the engineer (in truth, a quantity surveyor) certified that payments were due. Mr Arnerich says that Vaco Investments (Lincoln Road) Ltd made all the payments certified due. DHC Assets Ltd says that it is entitled to further payments, which the engineer ought to have certified, for extensions of time and compensatable variations. Its total claims are about
$680,000. Mr Arnerich, on the other hand, contends that Vaco Investments (Lincoln
1 Vaco Investments (Lincoln Road) Ltd was originally incorporated on 15 April 2011 as Rawhiti Property Holdings Ltd.
2 I use the bank’s current name. Discovered documents refer to it as the ANZ National Bank.
Road) Ltd has a claim against DHC Assets Ltd for liquidated damages of about
$95,000 for delay in completion.
[4] Martelli McKegg is the law firm that acted for Mr Arnerich, his companies and trusts in the transactions in this case, as well as other transactions not in issue (for example, leases of the building).
[5] In April 2013, Vaco Investments (Lincoln Road) Ltd sold the Lincoln Road property profitably for $8.4 million. With the proceeds of sale, it repaid ANZ Bank loans and other liabilities, but paid nothing to DHC Assets Ltd. Instead, as trustee, it made substantial distributions to a discretionary beneficiary of the Vaco Investments (Lincoln Road) Trust – the trustees of the Kontusha Family Trust. These are associated with Mr Arnerich and his family.
[6] Retentions under the contract with DHC Assets Ltd were paid out to Vaco Investments (Lincoln Road) Ltd in May 2013. Again, there were no payments to DHC Assets Ltd. In July 2014, Mr Arnerich as shareholder resolved to put Vaco Investments (Lincoln Road) Ltd into liquidation. DHC Assets Ltd is the only creditor to claim in the liquidation. There are no funds available to meet its claim.
[7] In this proceeding, DHC Assets Ltd sues Mr Arnerich under s 301 of the Companies Act 1993 for breaches of duty as director of Vaco Investments (Lincoln Road) Ltd. There are two main questions:
(a)How much, if any, is payable to DHC Assets Ltd under the design-and- build contract?
(b)Did Mr Arnerich breach his director’s duty to the company when he arranged for distributions to beneficiaries of the Vaco Investments (Lincoln Road) Trust without paying the company’s creditor, DHC Assets Ltd?
[8] The matter has not, however, been straightforward. The liquidator has not been as sympathetic to DHC Assets Ltd as it would wish. Initially, she declined to say
whether she accepted its claim or not. It applied to the court for directions. She then rejected the claim. DHC Assets Ltd obtained leave to apply for adjudication under the Construction Contracts Act 2002.3 The adjudicator found for DHC Assets Ltd for
$360,768.12. That was only a partial success. DHC Assets Ltd says that it is entitled to more. It invoked the arbitration clause in the design-and-build contract but little progress has been made with the arbitration. Mr Arnerich wants the arbitrator to overrule the findings of the adjudicator and, in addition, to rule in favour of Vaco Investments (Lincoln Road) Ltd on the claim for liquidated damages for delay in completion. He says that that can be brought into account under s 310 of the Companies Act. In another proceeding, Mr Arnerich has sought directions as to what the liquidator should do in the arbitration. So far, he has not had much success.4
[9] DHC Assets Ltd’s causes of action in its second amended statement of claim allege breaches of duty as director by Mr Arnerich for:
(a)buying the Lincoln Road property at an over-value;
(b)arranging for Vaco Investments (Lincoln Road) Ltd to pay from the proceeds of sale distributions to interests associated with him when he knew of DHC Asset Ltd’s claim as a creditor;
(c)misapplying funds held as retentions; and
(d)reckless trading.
[10] For the discovery application, DHC Assets Ltd tendered a draft third amended statement of claim. It was not in final shape. DHC Assets Ltd used it to suggest permutations for an amended pleading to be finalised after discovery. The second, third and fourth causes of action are retained, but with some amendments. The first cause of action is entirely re-cast. The first cause of action in the second amended statement of claim alleged purchase at an over-value as the property was bought for
$3.2 million. Since then, Mr Arnerich has disclosed a report by a registered valuer
3 DHC Assets Ltd v Toon [2016] NZHC 140.
4 Arnerich v Vaco Investments (Lincoln Road) Ltd (in liq) [2017] NZHC 560.
showing a market value for the property at the time of purchase of $3.2 million. DHC Assets Ltd has learned through discovery that Mr Arnerich negotiated a purchase of the property for $1.325 million. There were intermediate transactions between the sale by the original owners and Vaco Investments (Lincoln Road) Ltd taking title. It bought at $3.2 million under a purchase from VDT Securities Ltd, another Arnerich company. In the draft third amended statement of claim, DHC Assets Ltd provides tentative pleadings that Mr Arnerich breached his duty as director to Vaco Investments (Lincoln Road) Ltd by arranging for it to buy at $3.2 million instead of $1.325 million.
[11] Mr Arnerich’s affidavit of documents is extensive. He has listed 6,170 documents. Many of the documents disclosed by Mr Arnerich were put in evidence. Many are evidence of transactions in issue. I have relied on them to say more about the transactions.
[12] On 5 November 2010, another Arnerich development company, Vaco Investments Ltd, entered into a conditional agreement with Mt Roskill Medical and Surgical Centre Ltd to buy the property at 288-290 Lincoln Road, Henderson, for
$1,400,000. There was a condition as to due diligence. There were variations on 5 May 2011 and 19 October 2011. Under the second variation, the price was changed to $1,325,000 plus GST. A settlement date was fixed for 18 November 2011. Vaco Investments Ltd was recorded as having nominated Vaco Investments (Lincoln Road) Ltd as purchaser.
[13] On 18 October 2011 Vaco Investments (Lincoln Road) Ltd entered into a development facility agreement with ANZ Bank Ltd for financing the development on 288-290 Lincoln Road. There were associated securities – a general security agreement, a first mortgage over the site and a guarantee by Mr Arnerich. The loan documents are silent as to any trusteeship of Vaco Investments (Lincoln Road) Ltd. The Vaco Investments Lincoln Road Trust was not established until 4 November 2011.
[14] On 18 November 2011, the sale by Mount Roskill Medical and Surgical Centre Ltd to Vaco Investments Ltd for $1,325,000 settled. On the same day, under a further agreement, the on-sale from Vaco Investments Ltd to VDT Securities Ltd for
$1,325,000 also settled. And again, on the same day, under a further agreement, VDT
Securities Ltd on-sold the Lincoln Road property to Vaco Investments (Lincoln Road) Ltd for $3.2 million. To support that price, Mr Arnerich says that there is a report by a registered valuer showing the market value of the property in November 2011 as
$3.2 million. To complete the sale, Vaco Investments (Lincoln Road) Ltd drew down
$1,381,842.95 from the ANZ Bank.5 Its payment of $1,335,410.30 to VDT Securities Ltd allowed that company to pay Vaco Investments Ltd which in turn settled with Mount Roskill Medical and Surgical Centre Ltd. Vaco Investments (Lincoln Road) Ltd took title without paying the full purchase price. A debt back to VDT Securities Ltd for $1,875,000 was recorded in the financial statements of Vaco Investments (Lincoln Road) Ltd as an unsecured liability. VDT Securities Ltd has not, however, claimed in the liquidation of Vaco Investments (Lincoln Road) Ltd.
[15] In February 2012, Vaco Investments (Lincoln Road) Ltd entered into a new facility agreement with the ANZ Bank to replace that made in November 2011. This time, the borrower was described as Vaco Investments (Lincoln Road) Ltd as trustee of the Vaco Investments Lincoln Road Trust. Another surety was added, Vaco Investments (Basque Road) Ltd as trustee of the Vaco Investments (Basque Road) Trust.
[16] On 3 July 2012 the construction contract between Clearwater Construction Ltd, DHC Assets Ltd and Vaco Investments (Lincoln Road) Ltd dated 18 October 2011 was novated with DHC Assets Ltd replacing Clearwater Construction Ltd.
[17] In April 2013, Vaco Investments (Lincoln Road) Ltd sold the Lincoln Road property for $8.4 million. $5,507,700.45 was repaid to the ANZ National Bank. There was a capital distribution of $2,312,761.14 from the Vaco Investments Lincoln Road Trust to discretionary beneficiaries, the trustees of the Kontusha Family Trust. The Kontusha Family Trust paid the funds to trustees of other trusts associated with Mr Arnerich and his family as interest-free loans:
(a)$1,026,518.45 to the trustees of the Arnerich Family Trust.
5 Some of the money drawn down was used to pay other fees charged by Mr Arnerich’s lawyers (not just fees incurred by Vaco Investments (Lincoln Road) Ltd) but those amounts are relatively inconsequential.
(b)$150,111.28 to the IA and J Arnerich Family Trust.
(c)$1,136,131.41 to the AI and AN Arnerich Family Trust.6
These loans were made to repay funds the trusts had borrowed from the ASB Bank. Martelli McKegg also made deductions for overdue fees, including for work done for other Arnerich entities.
[18] Financial statements for the Vaco Investments Lincoln Road Trust for the year ending 31 March 2014 show that VDT Securities Ltd was not repaid after the Lincoln Rd property was sold.
[19] ANZ Bank statements for Vaco Investments (Lincoln Road) Ltd show that on 20 May 2013 the account was credited with $561,916.32. DHC Assets Ltd says that that is in part retentions which it is entitled to. A statement for the month ending 31 July 2013 shows significant payments out to “Intnl Trade Fin”.
[20] Aside from what the documents showed, Mr Arnerich acknowledged during the hearing that:
(a)He was the sole director of Vaco Investments (Lincoln Road) Ltd at all material times.
(b)The company owned the Lincoln Road property as trustee of the Vaco Investments (Lincoln Road) Trust.
(c)As the sole director, he was responsible for approving the dispersal of the funds available from the proceeds of sale of the Lincoln Road property.
(d)The sale of the Lincoln Road property was profitable. After meeting some liabilities (but not any claims by DHC Assets Ltd) there were distributions to interests with which he was associated.
6 Martelli McKegg statement to the Kontusha Family Trust, 9 April 2013.
[21] He did not suggest that VDT Securities Ltd had made or would make any claim in the liquidation. It is also part of Mr Arnerich’s case that he believed in April 2013 that Vaco Investments (Lincoln Road) Ltd did not owe anything to DHC Assets Ltd, but that aspect does not require consideration in this decision. Whether he did or could have believed that is a matter for trial.
Applications for further discovery and non-party discovery
[22] The applications for further discovery and non-party discovery partially overlap and can be dealt with together. The ANZ Bank and Martelli McKegg did not appear. DHC Assets Ltd has proved service on them. Its application includes schedules with classes of documents it seeks from Mr Arnerich, the ANZ Bank and Martelli McKegg. While DHC Assets Ltd has not grouped its discovery requisitions this way, they come down to:
(a)documents relating to the acquisition of the Lincoln Road property and the arrangements for the development project in 2011-2012;
(b)documents relating to distributions in 2013; and
(c)miscellaneous documents.
[23] On applications under r 8.19 for further discovery, it is common to follow the four-stage approach Asher J set out in Assa Abloy New Zealand Ltd v Allegion (NZ) Ltd.7 For this case it is not necessary to work through every step. The focus is on relevance and proportionality. Standard discovery under r 8.7 of the High Court Rules was ordered for this case. By and large, that requires disclosure of documents, if they or the information in them could be admitted in evidence. Evidence is relevant if it has a tendency to prove or disprove anything in issue in a proceeding.8 The categories of documents in r 8.7 for standard discovery require disclosure of only those documents that support the case of any of the parties or adversely affect the case of any of the parties. If the documents or the information in them do not tend to prove
7 Assa Abloy New Zealand Ltd v Allegion (NZ) Ltd [2015] NZHC 2760, [2018] NZAR 600 at [14].
8 Evidence Act 2006, s 7(3).
or disprove an issue in the case, they are unlikely to be discoverable. Documents that are no more than background do not need to be disclosed under standard discovery.9 The pleadings show what is in issue and accordingly give a guide to relevance. The case of the party seeking discovery is assumed to be true. Generally, the court does not decide the merits of a party’s case when ordering discovery.10 But there are cases where it is obvious from the pleadings or the circumstances of the case that the party seeking discovery is pursuing an issue fruitlessly. While documents bearing on that issue may be technically relevant, it would be a waste of time to require the other side to disclose them. Requiring discovery in those circumstances would be disproportionate. There is no need for the court to order discovery when it will serve no useful purpose.11 Similarly where a party concedes a matter, it is no longer in issue and there is no need to require discovery of documents on that matter. These considerations apply equally to the applications for non-party discovery by the ANZ Bank and Martelli McKegg.
2011-2012 documents
[24] DHC Assets Ltd says that Mr Arnerich, the ANZ Bank and Martelli McKegg should disclose more documents dealing with the purchase of the Lincoln Road site in 2011. It is suspicious that the documents disclosed by Mr Arnerich do not tell the full story and refers to:
(a)evidence given by the liquidator at another hearing where she said that the profit on the development was less than appears from Mr Arnerich’s discovery;
(b)Martelli McKegg documents with notations suggesting that the documents were produced after the dates they were apparently signed;
9 Re Rototuna Primary School, Minister of Education v IT Architects Ltd [2014] NZHC 1541 at [15]–[16].
10 Cares Appliances Ltd v Smith City (Southern) Ltd [2014] NZHC 1979 at [19].
11 For examples of discovery being refused because the applicant could not hope to succeed on the merits, see McCullagh v Robert Jones Holdings Ltd [2015] NZHC 1462, (2015) 22 PRNZ 615 at
[30] and [44] – upheld on review in Robert Jones Holdings Ltd v McCullagh [2016] NZHC 2529 at [39] and [43]; and Oxygen Air Ltd v LG Electronics Australia Pty Ltd [2017] NZHC 1857 at [48]–[50].
(c)and an Inland Revenue review during 2012 which approximates with the supposed post facto creation of the documents.
It also wishes to probe Vaco Investments (Lincoln Road) Ltd’s ownership of the Lincoln Road property as trustee. Here, it refers to Associate Judge Doogue’s decision of 7 July 2017 dismissing its summary judgment application. He suggested that simply because the land was owned on trust does not mean that the assets held under the trust should be subject to DHC Assets Ltd’s claim as creditor of Vaco Investments (Lincoln Road) Ltd under the building contract.12
[25] For Mr Arnerich, the point was taken that the first cause of action in the second amended statement of claim was no longer sound because the purchase price of $3.2m was supported by a current market valuation by a registered valuer. The first cause of action in the draft third amended statement of claim was attacked as speculative. The discovery application was likened to an application for pre-commencement discovery under r 8.20 where the applicant does not know whether it has a claim or not (as opposed to difficulty in formulating a claim) and the application was made to obtain documents in the hope of finding a basis for a cause of action.13
[26] In my judgment, this part of DHC Asset Ltd’s discovery application is misdirected, because it is pursuing something that will get it nowhere. Even if the transactions were not what Mr Arnerich says they were, they have nothing to do with the alleged loss to the company that has led to the claim by DHC Assets Ltd. It is indisputable that Vaco Investments (Lincoln Road) Ltd became owner of the Lincoln Road site in 2011 and carried out a profitable development. How Mr Arnerich set matters up in 2011 does not matter because his conduct in 2013 when dealing with the profits of the development caused the alleged loss to the company – taking funds out with the result that it could not pay a putative creditor. Because the development returned a profit, there can be no suggestion that alleged undercapitalisation at the outset caused inevitable losses.
12 DHC Assets Ltd v Arnerich [2017] NZHC 1460 at [27]–[31].
13 Welgas Holdings Ltd v Petroleum Corp of NZ Ltd (1991) 3 PRNZ 33 (HC).
[27] The intermediate transactions before Vaco Investments (Lincoln Road) Ltd took title, with VDT Securities Ltd taking a profit on the immediate on-sale of the property, are irrelevant. Vaco Investments (Lincoln Road) Ltd drew down
$1.38 million for the purchase. VDT Securities Ltd has not claimed in the liquidation. If Mr Arnerich had intended it to be paid the $1.875 million it left in, he would have paid it out of the proceeds of sale in April 2013.
[28] The trusteeship is also irrelevant. DHC Assets Ltd’s rights as creditor are not defeated by Vaco Investments (Lincoln Road) Ltd owning the site as trustee. Clearwater Construction Ltd entered into the design/build contract with Vaco Investments (Lincoln Road) Ltd in October 2011 before the trust was established. The novation in 2012 under which DHC Assets Ltd replaced Clearwater says nothing about Vaco Investments (Lincoln Road) Ltd acting as a trustee. At a minimum, DHC Assets Ltd had all the common law rights given by the contract including the rights of an unpaid creditor of Vaco Investments (Lincoln Road) Ltd. That includes its rights as an unsecured creditor to require Vaco Investments (Lincoln Road) Ltd to apply its assets to satisfy the debt (enforceable by execution remedies or by liquidation). Vaco Investments (Lincoln Road) Ltd cannot use its trusteeship to defeat those rights. When it became owner of the Lincoln Road property, it had already made the contract with Clearwater for building on the site and held the land subject to the trust. Vaco Investments (Lincoln Road) Ltd and Mr Arnerich cannot plausibly say that the construction of the building was not for the trust. Mr Arnerich does not suggest otherwise. The assets of Vaco Investments (Lincoln Road) Ltd available to meet the claims of creditors included the Lincoln Road property and the proceeds of sale. The trusteeship makes a difference only in how a creditor may have recourse against the assets. If there is no trusteeship, an unsecured creditor may enforce its right to be paid by execution remedies against the debtor’s assets or by having the debtor put into insolvency administration (bankruptcy or liquidation). Where a trustee has incurred a debt as trustee, enforcement against assets held on trust is available through the trustee’s right of indemnity for liabilities incurred.14 The right of indemnity allows the trustee to recoup expenditure, to be exonerated from liability, to retain assets and to realise them. It is secured by an equitable lien, a property interest that ranks ahead of
14 Trustee Act 1956, s 38(2).
beneficiaries. It may be enforced by judicial sale or appointment of a receiver.15 By subrogation, an unsecured creditor for a liability incurred by a debtor as trustee is entitled to enforce the right of indemnity and the equitable lien.16 It is arguable that a trustee’s lien is extinguished on a distribution to beneficiaries and that an unsecured creditor is in no stronger position than the trustee to assert the lien against the beneficiary receiving the distribution.17 But that does not matter for this case because the claim is not against a beneficiary but against Mr Arnerich as director of Vaco Investments (Lincoln Road) Ltd. A director of a corporate trustee may come under duties to have regard to the interests of creditors in the same way as the director of any other company may.18 Whether or not Vaco Investments (Lincoln Road) Ltd owned the property as trustee, Mr Arnerich arguably breached his duties as director if he disposed of company assets, the proceeds of sale, without providing for its alleged creditor, DHC Assets Ltd.
[29] DHC Assets Ltd referred to Associate Judge Doogue’s decision dismissing its summary judgment application:19
…the circumstances in which these transactions occurred lend support to the view that the trust was to be the land-owning vehicle. It does not follow from this view that simply because the trust was going to own the land, it also thereby agreed to assume the liability under the building contract.
And:20
There is a tenable basis, in other words, for the claim that Vaco was free to distribute the proceeds of the sale of the property without regard to any claim by the plaintiff because the trust was never a debtor of the plaintiff.
15 Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344, (2008) 74 NSWLR 550 at 553–554; S and S Ltd v XYZ Ltd [2016] NZHC 26, (2016) 4 NZTR 26- 029 at [38]; LSF Trustees Ltd v Footsteps Trustees Company Ltd [2017] NZHC 2619, [2017] NZAR 1676 at [14]; and Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at 16.6.
16 Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at 16.6.7.
17 The basis for this is that when a trustee distributes an asset to a beneficiary, the equitable lien is discharged. It is otherwise when trust assets vest in a new trustee.
18 Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242 (CA); Sojourner v Robb [2007] NZCA 493, [2008] 1 NZLR 751.
19 DHC Assets Ltd v Arnerich [2017] NZHC 1460 at [28].
20 At [30]–[31].
A major component of the plaintiff’s submissions is that the defendant knew about the unsatisfied claims owed by Vaco under the construction contract at the time when the sale proceeds were distributed. Even if true, however, that contention does not overcome the key problem with the plaintiff’s case, which is establishing that the trust was the debtor of the plaintiff.
[30] As I understand him, the learned judge said that when Vaco Investments (Lincoln Road) Ltd contracted with DHC Assets Ltd it may not have done so as trustee of the Vaco Investments (Lincoln Road) Trust and therefore the assets held on trust could not be used to meet any liability under the building contract. That would require a misalignment of arrangements: Vaco Investments (Lincoln Road) Ltd made the design-build contract with Clearwater before it owned the land and before the trust was established, but the trust asset, the land improved under that contract, is out of reach of the contractor-creditor because the work carried out by the contractor was not for the purpose of the trust.
[31] With great respect to the learned judge, I am unable to accept that in those circumstances DHC Assets Ltd cannot require that the asset owned by Vaco Investments (Lincoln Road) Ltd, which was improved under the design-build contract, be applied to pay the costs of improvement. That would not make commercial sense. Building work could not start on the Lincoln Road site without Vaco Investments (Lincoln Road) Ltd’s agreement. As trustee of the Vaco Investments (Lincoln Road) Trust, it consented to the trust asset being improved under the design-build contract. The work was obviously for a trust purpose. Whatever may have been argued before Associate Judge Doogue, in the hearing for this decision Mr Arnerich did not support the learned judge’s reasoning. His counsel accepted that the trusteeship did not put the proceeds of sale out of reach of DHC Assets Ltd as a creditor of Vaco Investments (Lincoln Road) Ltd.
[32] None of the matters in paragraph [24] above change the position. Notwithstanding what the liquidator may have said in evidence on another occasion, there is clear evidence that Vaco Investments (Lincoln Road) Ltd distributed
$2,312,761.14 to the trustees of the Kontusha Family Trust after the sale in April 2013 and DHC Assets Ltd is the only creditor in the liquidation. Her understanding of any profit does not alter those facts.
[33] Some documents of Martelli McKegg dated in November 2011 have notations, of which one is “120723”, said to mean that the document was really created on 23 July 2012, about the time of an Inland Revenue review. Even accepting that to be the case, there are other documents showing the creation of the Vaco Investments (Lincoln Road) Trust, the amounts drawn down for the purchase of the property in November 2012, the debt back to VDT Securities Ltd and the funds available after the sale in April 2013. Any lack of authenticity of the documents with the notation does not give any grounds to probe Mr Arnerich for more documents in 2011-2012, because they will not make any difference to the case.
[34] In short there is no requirement for Mr Arnerich to depose as to further documents in that period because they are not relevant to DHC Assets Ltd’s case.
2013 documents
[35] DHC Assets Ltd seeks further discovery of documents showing the disposition of funds by Vaco Investments (Lincoln Road) Ltd between April 2013 and the start of liquidation in July 2014. There are two parts: the dispersal of the proceeds of sale in April 2013, and further payments between May 2013 and July 2014.
[36] For the dispersal of the proceeds of sale in April 2013, DHC Assets Ltd already has good information. In paragraph 38(a)–(n) of its draft third amended statement of claim it has pleaded particular payments and given references to the documents evidencing those payments. In most cases the payees are identified. Mr Arnerich accepts that the payments were made for interests associated with him and were not payments of liabilities incurred by Vaco Investments (Lincoln Road) Ltd.
[37] A statement prepared by Martelli McKegg shows distributions made by the Kontusha Family trustees. Other statements prepared by Martelli McKegg for Vaco Investments (Lincoln Road) Ltd show payments by the company. An apparent explanation for this is that while there was a distribution from Vaco Investments (Lincoln Road) Ltd as trustee to the trustees of the Kontusha Family Trust as beneficiary, funds passed to payees as beneficiaries or creditors of beneficiaries of the
Kontusha Family Trust. For this case, that is of little importance, because what really matters is that there were funds available which were not paid to DHC Assets Ltd.
[38] DHC Assets Ltd says that the discovery is insufficient, because it needs to know more about the identity of recipients of the funds. That is apparently with a view to taking further proceedings against the recipients. That discovery is not required for this proceeding. Mr Arnerich is sued for authorising the distribution of the proceeds of sale in April 2013. It is sufficient for DHC Assets Ltd's case that he made payments to interests associated with himself (a matter he acknowledges). Further probing as to the identity of payees and how they applied funds is not required for this proceeding and is disproportionate.
[39] For the period after May 2013, bank statements show further payments received by Vaco Investments (Lincoln Road) Ltd, especially a payment of
$561,916.32 on 20 May 2013. The bank statements show cheque payments after that date. It is not possible to tell from the bank statements in every case who received the payments and what they were for. DHC Assets Ltd says that further payments made into the company's bank account from May 2013 onwards gave Mr Arnerich fresh opportunity for Vaco Investments (Lincoln Road) Ltd to pay it. Even if he did not breach his duty in April 2013, when the proceeds of sale were dispersed (if, say, he did not have the requisite knowledge), there were further breaches when more funds were dispersed without paying it. The payments out of the company's bank account shown in the bank statements from May 2013 onwards give DHC Assets Ltd an argument that funds were available to pay it.
[40] If Mr Arnerich wants to say that the payments were for some other legitimate corporate purpose, for example, to pay other debts, he will need to disclose more documents to support that part of his case. If he does not do so, DHC Assets Ltd will be able to rely on the absence of disclosure to submit at trial that the payments could not have been for a legitimate corporate purpose. It is therefore in Mr Arnerich's interest to disclose documents showing the basis for the payments evidenced by entries in the bank statements from May 2013 to July 2014. Those documents could be cheque butts, invoices, GST returns, cashbooks, ledgers and other accounting materials. It is for Mr Arnerich to decide whether he makes further discovery under
this head. A failure to do so may lead to adverse inferences at trial as to the purpose of the payments.
[41] In my minute of 28 June 2018, I directed that he need not disclose documents for payments less than $1,000. I regard any such payments as de minimis for this case.
Miscellaneous documents
[42] Under this head, DHC Assets Ltd requires disclosure of income tax returns for 2012-2015, GST returns, final versions of financial statements and the minute books for Vaco Investments (Lincoln Road) Ltd and Vaco Investments (Lincoln Road) Trust. Although it is not included in the interlocutory application, in the schedule prepared for the hearing, DHC Assets Ltd also asked for the general ledgers from 2012-2015.
[43] Mr Arnerich has already disclosed documents relating to the establishment of the trust, the purchase of the Lincoln Road property, the sale of the property and how the proceeds of sale were applied. He has also produced bank statements for Vaco Investments (Lincoln Road) Ltd from April 2013 until liquidation. I have indicated above that it is in his own interests to disclose documents showing the purpose of payments from the accounts from May 2013 onwards. That aside, he has made adequate disclosure. Requiring disclosure of income tax returns will add nothing to the case. GST returns showing the purpose of payments from May 2013 onwards are for Mr Arnerich to disclose, if he wishes.21 Aside from that, there is no need for GST returns to be disclosed because they do not relate to any matter in issue. Mr Arnerich has already provided copies of some financial statements. They are relevant as showing that VDT Securities Ltd was recorded as a creditor of Vaco Investments (Lincoln Road) Ltd for $1.875m on the purchase of the Lincoln Road property. While statements showing that have been disclosed, financial statements are otherwise no more than background materials and as such do not need to be disclosed under standard discovery. Similarly, disclosure of any minute books is not required because the accounting records already disclosed show how the proceeds of sale were applied in April 2013. Given Mr Arnerich’s admission that the proceeds of sale were not applied to creditors of the company, but went to interests he is associated with, it is
21 See paragraph [38] above.
unnecessary to require minute books to be produced to see trustees’ or directors’ resolutions. I accordingly decline to order disclosure of any documents within the miscellaneous group.
Challenge to privilege
[44] In his affidavit of documents Mr Arnerich claimed privilege for communications with legal advisers under s 54 of the Evidence Act 2006 for a number of documents. Some of his discovered documents were redacted on the ground of legal privilege. DHC Assets Ltd challenged privilege claimed for three periods: 1 October 2011 to 28 February 2012, 22 June to 31 July 2012 and 25 March to 15 April 2013. In the hearing, it extended the last period to 30 June 2013. Its challenge to the privilege claimed by Mr Arnerich was that he was not the privilege holder. The relevant communications were between Martelli McKegg as the legal adviser and Vaco Investments (Lincoln Road) Ltd as client. Because Mr Arnerich was not the client and did not personally receive legal advice, he could not claim privilege for documents in his control which contained legal advice between Martelli McKegg and Vaco Investments (Lincoln Road) Ltd.
[45] One of Mr Arnerich’s responses was that he was also the client who received advice from Martelli McKegg and was accordingly entitled to claim privilege in his own right. That may raise difficult questions whether a director of a company may claim privilege in his own right for advice given by a lawyer to the company.22 In this case, it is not necessary to go further into that question. The matter can be decided on the basis that Vaco Investments (Lincoln Road) Ltd is the privilege-holder. The liquidator has control of the company and can waive privilege on behalf of the company. Mr McBride tendered an email dated 25 June 2018 from the liquidator in which she confirmed that privilege had not been waived.
[46] Martelli McKegg as legal adviser did communicate with Vaco Investments (Lincoln Road) Ltd as client in circumstances that attracted the privilege under s 54 of the Evidence Act. Mr Arnerich as director of the company knew of the
22 See for example R (on the application of Ford) v Financial Services Authority [2011] EWHC 2583 (Admin), [2012] 1 All ER 1238.
communications or was a party to them. Now that the company is in liquidation, he no longer has the power as director to waive its privilege. Like any other agent of the company he is required to maintain the company’s privilege for communications with legal advisers in documents that came into his control. A client’s privilege for communications with legal advisers cannot be sidestepped by requiring an agent of the client to disclose the documents in their control.
[47] At my request, Mr Arnerich provided copies of the privileged documents for the three periods in the application. All but two of the documents are irrelevant. While they are communications between lawyer and client and are privileged under s 54, they are about transactions to which DHC Assets Ltd is not a party and which are not relevant for this proceeding. Those documents have no bearing on the issues in this case. The only relevant documents are ARN.4513 and ARN.4635. These are communications between Martelli McKegg and Mr Prasad, the accountant for Vaco Investments (Lincoln Road) Ltd. They are in the nature of instructions by Mr Prasad, as agent of Vaco Investments (Lincoln Road) Ltd and other Arnerich entities, as to proposed transactions. The requirements of s 54(1) of the Evidence Act 2006 are satisfied. The communications were clearly intended to be confidential and made in the course of Martelli McKegg providing professional legal services for Vaco Investments (Lincoln Road) Ltd and other Arnerich-related entities. I am accordingly satisfied that the documents, while relevant, are subject to privilege under s 54 of the Evidence Act. Vaco Investments (Lincoln Road) Ltd holds the privilege. Other Arnerich entities (but not Mr Arnerich as director of Vaco Investments (Lincoln Road) Ltd) may also hold privilege in those documents. There is no evidence of waiver of privilege by any privilege-holder. Accordingly, I uphold the privilege claims for these two documents as well as the irrelevant documents.
[48] I was not provided with copies of privileged documents between 15 April and 30 June 2013, because DHC Assets Ltd only put them in issue in the hearing. Given that Mr Arnerich has claimed privilege appropriately for all the documents I have inspected, I am not suspicious that privilege has been wrongly claimed for this new period. I see no need to require them to be provided for inspection.
Outcome
[49]I confirm my directions in my minute of 29 June 2018 that:
(a)By 16 July 2018 Mr Arnerich may file and serve an affidavit of documents listing documents explaining payments from the bank accounts of Vaco Investments (Lincoln Road) Ltd between 1 May 2013 and the date of liquidation. If Mr Arnerich does not disclose those documents, at trial the plaintiff may submit that in the absence of documents showing any other purpose, the payments from the company’s bank accounts were for the benefit of Mr Arnerich and his interests. Mr Arnerich is not required to disclose documents for payments less than $1,000.
(b)Except as provided in (a), the application for further discovery against Mr Arnerich is dismissed.
(c)The application for discovery against Martelli McKegg and the ANZ Bank is dismissed.
(d)The application to set aside the claims for privilege for communications with legal advisers is dismissed.
Costs
[50] After I gave my minute of 29 June 2018, Mr McBride filed a memorandum seeking costs. In response Mr Thorp proposed that costs be held over until I gave my reasons for my decision. That is appropriate. I direct DHC Assets Ltd to file and serve its memorandum as to costs by 3 August 2018.
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Associate Judge R M Bell
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